Reflections on Economic Adjustment and Reform in Antigua and Barbuda: Some Key Lessons. Remarks. Dr. Justine A. Ram

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1 Reflections on Economic Adjustment and Reform in Antigua and Barbuda: Some Key Lessons Remarks by Dr. Justine A. Ram Director Economics Department Caribbean Development Bank at the Antigua and Barbuda s Pre-Budget Forum Antigua December 2, 2013

2 - 2 - Good morning. I am very happy to be here this morning, participating in Antigua and Barbuda s Annual Pre- Budget Forum. I wish to say a special thank you to the Prime Minister for graciously hosting me and to the Minister of Finance for inviting me to speak. Budgeting and planning are perhaps the two most important activities in which any Government can engage. Indeed, Benjamin Franklin, one of the founding fathers of the United States of America, said it best. He stated that: By failing to prepare, you are preparing to fail. When the Government engages in its annual budgeting and planning exercise, it is seeking to avoid failure and to create, instead, a solid framework for continuous improvement in Antigua and Barbuda s fiscal health. Since 2010, the National Economic and Social Transformation (NEST) Plan has provided the framework for the budget exercise. The core of the Plan is fiscal consolidation to address fiscal and debt difficulties; stimulate economic growth and bring relief to the less fortunate members of the society. It provides a roadmap of Antigua and Barbuda s response to the global financial crisis and the global recession. As you begin the 2014 budget exercise and the final year of the NEST Plan, it is useful to take stock of where you are in relation to where you were back in Today we are seeing encouraging signs that the important policy actions of the past three years are beginning to pay dividends. Despite considerable challenges, reasonably good progress toward restoring fiscal and debt sustainability and macroeconomic stability, in general, has been made. The key economic indicators are moving in the right direction: Growth of 1.6% was recorded in 2012, following three consecutive years of contraction. Government reduced its overall fiscal deficit to only 1% of Gross Domestic Product (GDP), from 18% of GDP in 2009, with significant strides made in cutting expenditures. Debt was reduced to more manageable levels from 103% of GDP to only 89%. Public debt arrears also fell to 10% of GDP from over 50% of GDP The significance of these indicators is better understood when placed against the backdrop of the recent global economic and financial crises. The crises posed significant challenges for all of our Region s small open and extremely vulnerable economies. The dampening effect of these developments on visitor arrivals; on tourism earnings; on foreign direct investment; on employment and indeed on overall economic activity in Antigua and Barbuda was swift, and it was deep. The impact was further exacerbated by an already fragile fiscal and debt situation. As well, problems in the financial sector mounted following the collapse of the Stanford Group and of the CL Financial Group, two financial institutions with significant presence in Antigua and Barbuda.

3 - 3 - The recent improvements in performance of the key macroeconomic indicators, therefore, speak to the continuing recovery in the global economy and the spin-off effects on the tourism and construction sectors. Probably more significant, at this stage, is that the performance is the result of the deliberate policy and other initiatives that the Government has been pursuing under the umbrella of its NEST Plan, The indications are that the Government s actions, over the past three years, have planted the seeds for robust and sustainable economic growth over the medium term and have started to create conditions that will better insulate Antigua and Barbuda from future economic shocks I am pleased to say that the Caribbean Development Bank (CDB) was one of the key development partners to provide financial and technical support to the Government as it embarked on its reform journey. In December, 2009, the Board of Directors approved a USD30 million policy-based loan (PBL) to support reforms in the areas of macroeconomic management; expenditure and debt management; revenue enhancement; and social transformation. We also have a solid history of working collaboratively with the Government and people of Antigua and Barbuda for more than 40 years, in pursuit of social and economic development. The Bank therefore has an extremely good perspective of the development challenges facing Antigua and Barbuda. We have also maintained a keen interest in the progress of its macroeconomic adjustment programme. In my brief remarks this morning, I want to share with you my own reflections on the Government s experience with implementing its reform programme and some of the important lessons as we move forward. My core message today is that the adjustment was absolutely necessary for economic recovery and ultimate sustainability of the domestic economy. Admittedly, the Government was required to make some very tough decisions and the medicine was difficult to swallow. But, inaction was also not an option. The challenge that the Government now faces is to remain committed to its reform agenda and to continue to engage the social partners in actively supporting and implementing the programme. Therein, I believe, rests the key to avoiding a reversal of fortunes and for securing sustainable and balanced growth over the medium term Let us examine this message more closely. Why was adjustment necessary? This is a question that has been asked many times. It is a valid question that every citizen, every private investor, every lender and every social partner should ask; and it requires an honest response. In periods of crisis, decisive action and a comprehensive strategic response are imperatives for the restoration of macroeconomic stability and the resurgence of economic growth. The decisive fiscal reforms that underpinned the Government s adjustment programme have helped Antigua and Barbuda to weather the storm of the global crisis. Fiscal discipline provides an important anchor for programme credibility and securing investor confidence. The improvements that we are now seeing in the macro-fundamentals are directly correlated with these efforts.

4 - 4 - On the other hand, failure to act decisively would have worsened an already weak fiscal and debt situation. Unlike Antigua and Barbuda, several countries in our Region have delayed taking corrective action in anticipation of an early recovery from the global crisis. These countries are not showing similar improvements; and the cost of procrastination is mounting. Economic growth is either negative or flat; the fiscal space has been eroded; public debt is burgeoning and arrears have reached chronic levels; unemployment is rising; foreign investments are either being delayed or redirected; Government s capital programmes are being chopped; and social services are being severely undermined. I must sound a warning. Antigua and Barbuda cannot sit back and bask in the glory of its recent achievements. Decisive action is an imperative but commitment to reform is equally vital and must be sustained. You should not interpret the quick wins as a call to relax the vigour with which the macroeconomic agenda is pursued. In fact, you should be very mindful that global growth remains subdued and is still very fragile. Given Antigua and Barbuda s extreme vulnerability to external shocks, the domestic situation also remains fragile; and expectations for higher levels of economic growth must be tempered. Change does not happen overnight. Fiscal adjustment programmes are medium-term programmes. The resulting successful revenue recovery and increase in economic performance are likely to be realised in the medium term. In Antigua and Barbuda, revenue collections have yet to be restored to pre-crisis levels. This has to be a priority if Government to rely less on expenditure cuts to meet programme targets and begin to make much needed investment in social and economic infrastructure. More effort is required if Government is to reach its debt target of 60% of GDP by 2020 and to eliminate public sector arrears. An appropriate institutional and regulatory machinery, that is conducive to the private sector doing business in Antigua and Barbuda and to economic growth, still needs to be in place. These are interconnected elements that will help to safeguard the programmes outcomes; restore normalcy within the shortest possible time; and provide much needed buffer against future crises. The journey is far from over. This is a race that you must be prepared to be in for the long haul. In the words of Benjamin Disraeli, a former British Prime Minister: The secret to success is constancy of purpose. The journey can be made that less tedious if the macroeconomic programme is designed and owned by the Government and people of Antigua and Barbuda. Underpinning this concept is the sense of ownership and the sense that key players are unified around shared goals. Widespread consultation can ignite the social partners with the desire to see the programme succeed and secure their commitment to attainable programme goals. I must compliment the authorities for starting consultation with the social partners, including the private sector and civil society, some four years ago. The challenges facing Antigua and Barbuda demand a national response. Your presence here today is testament to the process having become an integral part of the annual budget exercise.

5 - 5 - May I suggest that the benefits of consultation can be further extended if a broad-based private sector-led committee is charged with monitoring the implementation of the specific policy reforms and other actions included in the adjustment programme. The appeal is that fiscal transparency, through its association with improved fiscal discipline, accountability, and governance can foster even greater confidence in and commitment to reforms. May I also add that sufficient attention be placed on the changing climate, to account for the risks that this poses on your economy and subsequent fiscal reforms. Special attention should also be placed on building the asset base of the economy such as human capital and infrastructure, since economic growth and returns is a function of the size and quality of this asset base. Our goal must be the creation of wealth. My final point, before closing, is that to succeed, many home-grown adjustment programmes require financial and technical support from development partners, like CDB. Promoting sound macroeconomic policies continues to be an important part of the Bank s support to its Borrowing Member Countries. There is often a fear of engaging multilateral financial institutions in a country s adjustment programme. The main concern relates to the view that this association will involve harsh conditionalities, with dire social and political consequences. Contrary to that popular view, the association of home-grown adjustment programme with ownership and commitment to implement has special appeal and can lead to good outcomes. Indeed, it was these factors that cleared the way for multilateral lending institutions and the development agencies to resume assistance to Antigua and Barbuda and provide financial and other much needed assistance for the adjustment programme. Let me assure you that CDB remains a committed partner as you continue along this journey. As recently as October 2013, our Board of Directors approved a loan of USD13.4 million to the Government of Antigua and Barbuda to increase secondary school capacity and to design an Early Childhood Model Centre, as well as a grant of USD114,000 to assist with the financing of a citizens security intervention. We too are here for the long haul. We will continue to engage the Government in constructive policy dialogue and to use our financial and technical assistance to provide a platform for further improvements in overall performance. Thank you. I extend best wishes for a constructive and productive Forum.

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