IMF OFFERS PRAISE AND WARNINGS TO CARIBBEAN GOVERNMENTS

UNCLAS SECTION 01 OF 02 PORT OF SPAIN 000494

SIPDIS

SENSITIVE
SIPDIS

COTONOU FOR PAS JOHN CUSHING

E.O. 12958: N/A
TAGS: EFIN EINV ECON ECIN PGOV PREL TD
SUBJECT: IMF OFFERS PRAISE AND WARNINGS TO CARIBBEAN GOVERNMENTS


1. (U) SUMMARY: While commending strong Caribbean growth and
responsible fiscal and monetary policies, visiting IMF officials
urged regional governments to adopt proactive measures to reduce
current account deficits and public debt while economies are strong.
They also recommended eliminating tax incentives for foreign
investors as a region and advocated a strategic approach to economic
diversification in order to ensure future Caribbean economic
success. T&T is in an especially strong position to adopt many of
these recommendations; whether this will happen in an election year
remains to be seen. END SUMMARY.


2. (U) International Monetary Fund (IMF) Deputy Director of the
Western Hemisphere Department Markus Rodlauer and IMF Trinidad and
Tobago (T&T) Mission Chief Max Alier offered both praise and
warnings to Caribbean governments as they publicly launched the
IMF's April 2007 World and Regional Economic Outlook publications at
the T&T Central Bank in Port of Spain May 7.

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The Good - Fiscal and Monetary Policy
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3. (U) Despite a U.S. economic slowdown, Caribbean countries
experienced robust eight percent growth in 2006, led by T&T's
region-topping 12 percent real GDP growth. The IMF predicts T&T
will continue to drive Caribbean growth with 6.5 to 7 percent growth
in 2007 as new production comes onstream. The IMF economists
praised Caribbean governments for implementing robust monetary and
fiscal policies, which have helped to keep inflation low in many
countries despite the pressures of booming economies and rising fuel
prices. Even in countries, like T&T, which experienced double-digit
inflation in 2006, Alier reported that indicators of core inflation
are down. They also commended Caribbean governments for policy
successes in the past decade, including tax system modernization,
reform of social security schemes, closure of loss-making industries
like sugar and bananas, disaster mitigation policies like the
Caribbean Catastrophic Risk Insurance Fund, and debt restructuring.

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The Bad - Current Account Deficits and Debt
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4. (U) Despite positive growth rates and high remittances,
especially in times of natural disasters, the IMF found that current
account deficits in the Caribbean (other than T&T) have increased to
an average of 15% of GDP, as global energy prices have increased
more than non-fuel commodities since 2002. Some Caribbean countries
have tried to use improved growth to strengthen their fiscal
position, but they remain among the most indebted emerging market
economies, due in part to the frequency and high costs of natural
disasters. Rodlauer pointed out that "unsafe" levels of public debt
are costing the Caribbean both in interest expenditures and lost
investment.

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Policy Challenges and Recommendations
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5. (U) The erosion of trade preferences in banana and sugar,
coupled with declining Official Development Assistance (ODA) from
traditional donors, aging populations and vulnerability to costly
natural disasters, are a few of the ongoing challenges for Caribbean
governments highlighted by the IMF. The economists urged Caribbean
governments to adopt proactive measures to address these issues
while economies are performing well, to avoid future sharp
adjustments. They also noted that given the region's vulnerability
to natural disasters, governments needed "fiscal room" to respond
flexibly - another reason to reduce public debt.


6. (U) The IMF also provided policy recommendations, such as
eliminating costly and ineffective tax incentives for foreign
investors throughout the Caribbean. The economists pointed to the
Caribbean's ten-year 10.8% estimated tax gap (the difference between
what statutory tax rates should yield and what is actually
collected) and noted that in the Caribbean, the business climate and
macroeconomic factors play a larger role in attracting FDI than tax
incentives. They deemed tax holidays particularly harmful and
recommended using depreciation allowances instead. Saying that the
"only road to success was through regional integration" and
promoting CSME, Rodlauer urged Caribbean governments to work
together on this issue. He also encouraged strengthening the
investment climate by improving human capital and the health and
legal systems, as the Caribbean performed worse than other
developing regions in global competitiveness and in ensuring that
contracts are enforced.


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7. (U) While both T&T Central Bank Deputy Governor Shelton Nicholls
and Dave Seerattan from the Caribbean Centre for Monetary Studies
(CCMS) advocated economic transformation and diversification into
new industries to moderate the effect of commodity price
fluctuations, Rodlauer promoted more limited, strategic
diversification. He noted that small open economies historically
find success in niche markets, supported by government policies that
allow flexibility for labor and investment to shift sectors nimbly
as market conditions dictate.


8. (SBU) COMMENT: As one of the few Caribbean countries with a
current account surplus and comparatively low public debt, Trinidad
& Tobago is in the economic position both to implement proactive
policies that address the challenges the IMF highlighted, like a
recently approved Heritage and Stabilization Fund, and to lead on
regional integration. However, in this election year for T&T,
further moves toward fiscal discipline and reducing public debt seem
improbable. Neither do we anticipate that GOTT leaders will heed
the IMF's suggestion to scale back ambitions for wholesale
diversification and focus on strategic niche industries. The GOTT
is well down the road with a series of new energy-based industrial
projects in petrochemicals, steel, and aluminum, at the same time
promoting seven non-energy industries in an effort to reduce
dependence on the energy sector. END COMMENT.

AUSTIN