Caribbean Countries F

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized A WORLD BANK COUNTRY STUDY Caribbean Countries F Economic Situation, Regional Issues, and Capital Flows RaJagopadErnv VisvaiiLhean X \ \ S.DoW.i 505 ECOrs~~~6

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3 A WORLD BANK COUNTRY STUDY Caribbean Countries Economic Situation, Regional Issues, and Capital Flows The World Bank Washington, D.C., U.S.A.

4 Copyright (C) 1988 The World Bank 1818 H Street, N.W. Washington, D.C , U.S.A. All rights reserved Manufactured in the United States of America First printing October 1988 World Bank Country Studies are reports originally prepared for intemal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published informally with the least possible delay for the use of governments and the academic, business and financial, and development communities. Thus, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Any maps that accompany the text have been prepared solely for the convenience of readers. The designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates, or its Board or member countries concerning the legal status of any country, territory, city, or area or of the authorities thereof or conceming the delimitation of its boundaries or its national affiliation. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to Director, Publications Department at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to photocopy portions for classroom use is not required, though notification of such use having been made will be appreciated. The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list and indexes of subjects, authors, and countries and regions; it is of value principally to libraries and institutional purchasers. The latest edition of each of these is available free of charge from the Publications Sales Unit, Department F, The World Bank, 1818 H Street, N.W, Washington, D.C , U.S.A., or from Publications, The World Bank, 66 avenue d'iena, Paris, France. Library of Congress Cataloging-in-Publication Data Caribbean countries. (World Bank country study) 1. Caribbean Area--Economic conditions Caribbean Area--Economic policy. 3. Investments, Foreign--Caribbean Area. 4. Public investments--caribbean Area. I. International Bank for Reconstruction and Development. II. Series. HC151.C ' ISBN

5 PREFACE i. This Report was prepared for the June 1988 meeting of the Caribbean Group for Cooperation in Economic Development (CGCED). Its objective was to focus attention on the performance, problems, prospects and needs of the Caribbean countries. ii. Part I provides an overview of the progress and outlook of fifteen economies in the Region. This section of the Report takes a regional perspective on selected macroeconomic policy and sector issues, particularly those pertaining to the need for adjustment and the accompanying policies necessary to ensure its success, including those affecting exports, cost and quality of maritime transportation, and agricultural diversification. iii. Part II examines both the flow of external resources to the region since 1981 and the external financing requirements to support the Public Sector Investment Program (PSIP) in the various countries during These requirements are still relatively substantial on a per capita basis. In a large number of countries, particularly those undertaking or intensifying the needed economic adjustment, there is a need for balance of payments and current budgetary support, and this in addition to the external financing necessary for public sector investments. Funds with concessional terms continue to be essential for the member countries of the Organization of Eastern Caribbean States (OECS). The "tighter" consultative group arrangement holds out the prospect for possibly augmenting such concessional assistance to countries that implement stabilization and structural/sector adjustment programs. iv. Part III updates information on some of the regional and subregional programs which complement individual country programs of the CGCED. For some of the programs, additional donor assistance is required for their continuation. v. Finally, the Country Profiles included in Annex I highlight country-specific policy issues and project priorities. The Country Profiles incorporate economic data which became available and, where applicable, major policy developments since April 1988, when the report was first prepared for the June meeting of the CGCED. - iii -

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7 Table of Contents Page No. I. OVERVIEW OF THE CARIBBEAN ECONOMIES... 1 A. INTRODUCTION... 1 B. SELECTED ECONOMIC POLICY ISSUES... 3 The Need for Adjustment... 3 Major Export Markets... 5 Cost and Quality of Maritime Transportation Agricultural Diversification in the Island Economies... 9 C. CONCLUSIONS II. EXTERNAL FINANCING A. INTRODUCTION B. NET RESOURCE FLOWS, C. FINANCING REQUIREMENTS, D. COUNTRY ANALYSIS E. CONCLUSIONS III. REGIONAL AND SUBREGIONAL PROGRAMS A. INTRODUCTION B. PROGRESS REPORT ON ACTIVITIES UNDER THE "TIGHTER CONSULTATIVE GROUP" C. STRUCTURAL ADJUSTMENT IN THE CARICOM COUNTRIES D. CARIBBEAN EXPORTS: PREFERENTIAL MARKETS AND PERFORMANCE E. CARIBBEAN COOPERATION IN HEALTH F. ENVIRONMENTAL ISSUES IN THE CARIBBEAN G. CARIBBEAN PROJECT DEVELOPMENT FACILITY H. SUBREGIONAL PROGRAMS IN THE OECS COUNTRIES Agricultural Diversification Project/Program Training of Technical and Support Staff in the OECS Countries Aid Information System for the OECS Countries Development of Manufacturing Sector in the OECS Countries I. CGCED ACTIVITIES v -

8 Page No. ANNEX I: COUNTRY PROFILES ANTIGUA AND BARBUDA THE BAHAMAS BARBADOS BELIZE DOMINICA DOMINICAN REPUBLIC GRENADA GUYANA HAITI JAMAICA ST. KITTS AND NEVIS ST. LUCIA ST. VINCENT AND THE GRENADINES SURINAME TRINIDAD AND TOBAGO ANNEX II: STATISTICAL APPENDIX Table 1.1 Growth of GDP, Public Sector Savings, Balance of Payments Current Account, Tourism Receipts, Tourism Arrivals, Value of Sugar Exports, Volume of Sugar Exports, Value of Banana Exports, Volume of Banana Exports, Value of Bauxite Exports, Volume of Banana Exports, Value of Alumina Exports, Volume of Alumina Exports, External Resource Flows, vi -

9 I. OVERVIEW OF THE CARIBBEAN ECONOMIES A. INTRODUCTION 1.1 External and domestic factors continued to influence the economic performance of the individual Caribbean countries in 1986 and Overall, compared to other regions of the world and despite the inherent vulnerability which characterizes small economies, the Caribbean countries' economic performance was good. Several favorable external developments enhanced export and overall performance in a large number of the countries: Antigua and Barbuda, The Bahamas, Belize, Dominica, Dominican Republic, Grenada, Jamaica, St. Lucia and St. Vincent and the Grenadines. These included the improved economic performance of the OECD countries, particularly in 1987, and the fall in the value of the US dollar vis-a-vis the currencies of the major US trading partners. The Region's overall terms of trade improved during these two years. In particular, real increases in the world prices of sugar, bananas, bauxite, alumina and nickel, together with the drop in the world prices of petroleum and coal, more than offset the fall in the international prices of coffee, cocoa and tobacco. However, in Trinidad and Tobago, the only oil exporter in the Region, falling oil prices have continued to contribute to significant income and output losses. Overall in the Caribbean region, a boom in tourist arrivals and receipts also occurred. The expansion in tourism supported the diversification efforts away from traditional export crops in many countries. In 1987 tourist arrivals exceeded three million in The Bahamas, one million in Jamaica and reached close to one million in the Dominican Republic, thanks in part to the rapidly expanding hotel capacity. Tourist arrivals and receipts also rose sharply in Antigua and Barbuda, Barbados, Belize, Grenada, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines and in Trinidad and Tobago. In addition, another favorable external development was the decrease in real international interest rates which mostly benefitted those economies with relatively large outstanding commercial debt. 1.2 These positive external developments partly offset successive reductions in the US sugar quota for Barbados, the Dominican Republic, Jamaica, and Trinidad and Tobago, which averaged 45% in 1985/86 and 42% in 1986/87. The quotas of Haiti and St. Kitts and Nevis were cut by 36% in 1986/87, after having been augmented by 34% in 1985/86. In the Dominican Republic, the new quota allocation reduced sugar exports to the US by 17,200 short tons in and 154,300 in 1986/87, the largest decrease in the region. 1.3 Countries with a viable macroeconomic framework in place or which had been undertaking or commencing adjustment of their economies mostly through relatively tighter fiscal and monetary policies were able to: (a) maintain adequate public sector savings (The Bahamas) or even to increase them (Belize, Dominica, Dominican Republic, Jamaica, St. Kitts and Nevis, and St. Vincent and the Grenadines); (b) reduce the current account deficit of the balance of payments to a level commensurate with net external flows; (c) maintain domestic inflation largely in line with that - 1 -

10 -2- of their major trading partners (except for the Dominican Republic where a rapid expansion in aggregate demand overheated the economy); and (d) take advantage of favorable external developments to further export diversification. In countries where macroeconomic adjustment policies were combined with export diversification efforts (Belize and St. Kitts and Nevis), the economic structure is strengthening the country's export potential. In countries where the use of the exchange rate instrument was able to change relative prices through a real depreciation of the currency, a decrease in protection (Jamaica) or a simulated free trade regime (export processing zones in the Dominican Republic and Jamaica), non-traditional manufactured exports to non-regional markets expanded sharply. In Trinidad and Tobago, the real depreciation of its currency, combined with improved world market conditions for its petrochemical exports, expanded these exports to OECD countries. 1.4 On the other hand, problems related to public sector management continue (Guyana). In some instances the size of the public sector determines the magnitude of these problems. The external debt remains a problem in the heavily indebted countries of the region (Antigua and Barbuda, Guyana, Jamaica); arrears have increased in some cases. Debt rescheduling has become an issue which needs to be tackled urgently in some of the countries (Dominican Republic, Guyana, Trinidad and Tobago). The management of the public finances has improved in a large number of countries as reflected by the improvement in public sector savings as a percentage of GDP. However, in some countries, further increases in real wages and salaries took place in ; this remains a key area where restraint is necessary. Unemployment continues to be a critical issue common to all countries in the Caribbean which needs to be addressed. 1.5 The outlook for 1988 is promising, particularly for tourism. In the Caribbean, as a whole, tourism will continue to be the leading sector and a key area of growth. Large hotel capacity expansion in the Dominican Republic and Jamaica place these countries in a position to capture a significant share of the rapidly growing tourism market. Ongoing hotel capacity expansion in Antigua and Barbuda, Belize and St. Kitts and Nevis may enable these countries also to take advantage of the current boom, provided the quality of the tourism product is maintained. Prospects for oil prices to stabilize at about US$16 per barrel in 1988 may contribute to the improvement of the external balance of most Caribbean countries. On the other hand they would render Trinidad and Tobago's capacity to achieve a recovery after five years of economic deterioration more difficult. In 1988, prospects for good world prices for a large number of the region's traditional commodity exports are reasonable, including coffee, sugar, and bananas; aluminum, bauxite, and nickel markets also appear promising; this should offer the opportunity for income gains and output growth. Cocoa prices, however, are expected to drop to their lowest level in recent years. 1.6 A key factor in the growth of the Caribbean economies has been the provision of external financing sufficient to permit adjustment with growth. And increasing utilization of this financing for high priority investment projects that assist in the diversification of the respective economies has rendered growth-oriented structural adjustment smoother and less painful. Net resource flows, however, to the region were dramatically reduced in recent years making most countries' efforts even more laudable.

11 1.7 The medium- and long-term prospects of the Caribbean economies are linked to their ability to penetrate extra-regional markets. On the other hand, the Caribbean economies have not taken full advantage of the preferential market arrangements available to them. Actions to achieve this, together with continued donor support to diversify the economies and strengthen the economic and social infrastructure, would improve longerterm prospects significantly. In addition, more favorable external market conditions suggest that for countries which have been following sound economic policies, real GDP growth rates of about 4% per year on average and increases in real per capita consumption of 1-2.5% per year are attainable over the medium term. The Need for Adlustment B. SELECTED ECONOMIC POLICY ISSUES 1.8 The Caribbean economies traditionally have been exceptionally vulnerable to unfavorable external circumstances. Sharp declines in their terms of trade, in the growth performance of the world economy and unfavorable weather conditions (particularly in the island-based economies) have had an adverse effect on economic growth. The domestic policy response in some instances has been inadequate or counter-productive. Reliance on few traditional exports (sugar, bananas, coffee, cocoa, tobacco, bauxite, alumina) has raised their vulnerability to external shocks. Some countries, however, have undertaken significant steps to adjust their economies to changing external circumstances and have been successful in reducing their vulnerability to these changes by introducing incentives for exports, improved resource allocation, increased savings and investment, a variety of sector-level reforms and redirect public investment priorities. Countries which have introduced these policy reforms (Jamaica, Belize, Dominica, St. Vincent and the Grenadines) have increased the returns from external financing. At times adjustment programs have been initiated in crisis conditions (Jamaica). Medium-term programs, however, have been introduced mostly without the pressure of external crisis conditions (Dominica, St. Vincent and the Grenadines, St. Kitts and Nevis, and most recently St. Lucia). As regards external policies, emphasis on strengthening the outward orientation through export promotion, elimination of the anti-export bias, and import liberalization have expanded non-traditional exports and rendered production more efficient. On the domestic policy front, better price signals are essential to the supply response along with developing the requisite infrastructure, institutional support and information channels. 1.9 The broad goal of adjustment in the Caribbean should be to further raise the growth rate of the economies over the medium term, to return some of them to their potential path from which they may have diverged and to facilitate an expansion of the growth potential itself to the extent that this can be achieved through diversification of the production structure. To achieve this will require stabilization policies in certain countries. Stabilization needs to be complemented by supply side adjustment policies. Policies supported by stabilization programs and structural adjustment efforts tend to overlap and consistency among them is necessary. Viable medium-term economic programs require attention to expenditure policies associated with stabilization, as part of any effort to promote expenditure

12 - 4 - switching and to improve resource allocation, strengthen the structure of production and induce resource mobilization, and promote better investment allocations and sectoral responses. The time frame for adjustment programs to work, however, needs consistency between policy actions and external financing. Adjustment policies may require as long as five years to show tangible results (Jamaica) The main areas of structural adjustment are trade, fiscal, financial and investment, sectoral and institutional reforms. Trade policy is fundamental for efficient resource allocation. Recent empirical studies support the conclusion that developing economies with outward orientation achieve better growth performance than those with high protection. Evidence also has been accumulating on the benefits of lower tariffs and fast growing exports on the one hand, and on the costs of pervasive controls and restrictions on the other Combinations of currency depreciation and trade polices that promote exports foment the production of tradeables. One focus in such policy change is the reduction of trade barriers which favor investment in inefficient production activities and create an anti-export bias such as is being undertaken in Jamaica and Haiti. Specific actions include attractive real effective exchange rates and reduction of tariff and non-tariff barriers, freer access to imported inputs for use in export production and the strengthening of export marketing and support institutions Appropriate resource mobilization and use is a second element of macroeconomic viability. By encouraging savings and investment, and by creating channels for more efficient deployment of public and private savings in investment activities, productivity can be increased. The policies target reform of government expenditures and taxation, including measures for government revenue enhancement. The latter has been pursued in Barbados, Belize, Dominican Republic, Haiti and Jamaica. The development of capital markets and elimination of interest rate controls and distortions is another important aspect of adjustment policies. Financial sector reforms increasingly have been necessary to support other adjustment policies (Jamaica). Rationalization of policies affecting resource mobilization often includes removal of particular taxes and subsidies, cost recovery through user charges (including the social sectors) and the phasing out of price and quantity controls A third component is investment reallocation, particularly of public investment. It is here that the most progress has been achieved in a large number of Caribbean countries. Institutional reforms that improve the organization and management of Government as well as the activities of public enterprises are also necessary in this connection, but progress on this front has been less satisfactory. The size, extent and function of public enterprises often are related to government subsidization policy, state enterprise pricing and the availability of current and capital transfers. Thus, rationalization in resource mobilization and government investment also implies restraint on the level of public enterprise activity and improvement in the quality and direction of their investment programs. These are related to improvements sought in pricing and institutional policies at the sectoral level.

13 -5- Major Export Markets 1.14 From 1980 to 1986, the US dollar value of total world trade did not rise. Major declines in the prices of petroleum and many other primary products were offset by continued growth in the value of manufactures trade. During this period, the US-EEC-Canada markets were the most buoyant. They increased their share of world imports from 64% to 72%, due mostly to increased imports of manufactures in the US, which rose at an annual average of over 12%. Caribbean countries benefitted little from this growth. In spite of preferential programs offered by all three markets, they lost approximately 20% of their share of these markets. Part of the reason was their greater dependence on price-depressed commodities; part was the impact of US sugar quota reduction; part was the fact that the preferential treatment accorded only to the Caribbean countries was minor, except for the Lome commodity agreements. Finally, some Caribbean countries followed policies that hindered export growth The US Market. Although US demand for non-fuel imports grew by an average of over 12% a year between 1980 and 1986, US imports from the Caribbean countries increased by less than 3% annually. Losses in earnings were most severe for sugar, bauxite and alumina. Lower US import quotas for sugar have had a devastating impact on the Caribbean. In , the US imported about 5 million short tons of sugar from abroad; by 1987, these imports were only about 1 million short tons. The effect on the Caribbean was to reduce their share of sugar export earnings from 29% to 8%, with a concomitant decline in export earnings of more than 50%. Another severe loss for the Caribbean was the downturn of the bauxite and alumina market, as a result of which export earnings declined by almost 18% yearly from 1980 to 1986, and the Caribbean's share of the US bauxite and alumina import market dropped from 40% to 20% These losses were partly offset by gains from manufactured exports. The increase in the US demand for clothing had the greatest single positive impact on the Caribbean. US imports from the world and the Caribbean grew at 17% and 18% per annum, respectively, between 1980 and By 1986, clothing accounted for over one-third of the Caribbean's earnings from manufactured exports. Although the US encouraged voluntary export restraints (under the umbrella of the Multi-Fiber Arrangement -- MFA) on some clothing items from four Caribbean countries (Barbados, Dominican Republic, Haiti and Jamaica) in the 1980s, these quotas were not restrictive. Most of the clothing imports from the Caribbean enter the US under its 807 program, which exempts US inputs in the finished product from tariffs. A new aspect of US trade policy is the "super 807", which gives negotiated guaranteed access levels for clothing if there is a bilateral MFA restraint in place on a given item for a Caribbean country, and if the clothing is made of US components. This guaranteed access is limited to the Caribbean Basin Initiative (CBI) beneficiary countries The US CBI, which became effective in 1984, grants duty free entry for all products except textiles and clothing, footwear and leather manufactures, petroleum and its products, and a few other items. However, most Caribbean exports were already included in the US Generalized System of Preferences (GSP), which only allows duty free entry from 114 independent countries plus 27 non-independent countries and territories. Although only seven items accounted for over 90% of the few CBI (non-gsp) duty free entries, the export value of these items doubled since 1983.

14 - 6 - Exports of beef and veal, pharmaceuticals, ethyl alcohol, and iron and steel products did particularly well. By 1986, over a tenth of US purchases from Caribbean countries were of items which received duty free status exclusively as a result of the CBI The EEC Market. The EEC market for non-fuel imports grew very little between 1980 and Annual imports from all countries grew at about 2%; those from the Caribbean declined by about the same rate. Over half the imports from the Caribbean were bauxite and alumina, sugar, and bananas; manufactures were only a fifth of imports. The most serious loss in the EEC market was in bauxite and alumina. In 1980, these commodities comprised over one-fourth of the non-fuel exports of the Caribbean, but due to the depressed world market, by 1986 earnings declined to less than 15% of exports. Sugar, the second most important export to the EEC, declined in value by an average of 1% each year. Nevertheless, this compares favorably with a 3% decline in EEC imports from all sources. The EEC has import quotas under its ACP Sugar Protocol with prices fixed at high levels for sugar from Barbados, Belize, Guyana, Jamaica, St. Kitts and Nevis, and Trinidad and Tobago. In the past, some countries have had difficulty using their entire quota and have purchased sugar on the world market for reexport to the EEC About 60% of the value of alumina/bauxite and sugar losses were compensated by increased exports of bananas, which by 1986 had become the largest single earner of foreign exchange for the Caribbean in the EEC. Within the framework of the EEC's Lome Banana Protocol, France, Italy, and the UK, may give absolute preferences, at high prices, to their traditional suppliers. Since Caribbean bananas are not competitive, they are exported only to these limited markets; 98% went to the UK, at an average annual increase in value of 16%. Preferential arrangements such as the Sugar and Banana Protocols were quite valuable to several of the Caribbean countries. Other important commodities benefitting from preferences included coffee, rice and alumina. Between 1980 and 1987, US$1 billion in resource transfers as a result of these preferences accrued to the Caribbean countries, 70% of which was channeled via sugar and bananas, with the largest single beneficiaries being Guyana and Jamaica. EEC imports of manufactures from the Caribbean increased from less than 10% of earnings in 1980 to 20% in Important items were ferro-nickel from the Dominican Republic, which showed no growth; and ammonia, urea and steel from Trinidad and Tobago, which combined increased more than seven times in value between 1980 and The Canadian Market. Whereas the Canadian market for non-fuel imports increased by 7% per year on average, the value of Canada's imports from the Caribbean increased by 10% yearly. This growth stemmed mainly from an average expansion of over 20% of alumina imports from Jamaica, which accounted for over 40% of Caribbean foreign exchange earnings in Canada from 1980 to Other commodities had such a small share of the Caribbean export composition, that sectoral gains and losses had little effect on total earnings. However, there has been diversification in the Canadian market. Not only have Caribbean exports of manufactures climbed from 16% to 28% as a share of their exports to Canada, but their composition gradually has become more diversified as well. New exports to Canada include items such as urea, tools, small machinery and parts, and electronics. Effective June 1980, Canada offered the Commonwealth Caribbean countries duty free access for all exports except textiles and clothing, footwear, leather garments, luggage and handbags, methanol and

15 - 7 - certain oils. Prior to the inception of this preferential program, known as CARIBCAN, over 90% of Canada's imports from these countries already entered duty free Difficulties in Expanding Exports. Part of the reason the Caribbean economies have not been able to respond more to trade preferences stems from the nature of domestic policies. Most important was the exchange rate regime. Because most Caribbean countries peg their currency to the US dollar, they experienced -- along with the dollar -- a real appreciation during the early 1980s against virtually all other export markets. This reduced their profitability, not only in their export markets, but also compared to their competitors. As the dollar began to depreciate in 1985, many of the Caribbean competitors who remained pegged to the US dollar in real terms retained this relative edge vis-a-vis the US market over most Caribbean exporters. Only the Dominican Republic and Jamaica, however, undertook real devaluations of their currencies, and the rapid growth of their manufactured exports thereafter confirms the key role the exchange rate plays in export promotion. The adjustment process is usually swift, and the effect of changed nominal rates could be reduced rapidly if accompanied by strong complementary actions. As a result, changes in the real exchange rate usually occur when lack of policy action has overvalued the exchange rate to financially unsustainable levels or when external events -- an export price boom or rapid increase in aid flows -- intervene. The rapid changes in developed country exchange rates and major commodity prices during the 1980s has made the position of small countries all the more difficult. Given this difficulty, however, there is all the more reason for them to follow prudent demand management and supply generating policies. The impact of supply distortions is spotlighted by the success of the Caribbean's export processing zones; zones that free entrepreneurs of the multitude of anti-export biases incorporated in their trade regimes The success of both 807 and export processing zone exports (often the same exports) and wage comparisons indicate that in general Caribbean wages are not significantly out of line with competitors. This, however, is not the case for all countries. For example, average hourly wages in manufacturing in Antigua, Barbados, and Trinidad and Tobago are over five times higher compared to those in selected low-wage Asian countries (average of China, Philippines, Sri Lanka, Thailand). Finally, low productivity per worker is a major issue which needs to be addressed, together with the elimination of the anti-export bias of trade and investment regimes. Cost and Quality of Maritime Transportation 1.23 CIF freight costs are about twice as high for services to most of the island countries in the Caribbean compared with similar services to the mainland countries. Poor quality and high costs of maritime transport continue to be perceived as major constraints to improved export opportunities in the Region, particularly in the smaller islands. To a large extent, this is the result of the small and fluctuating volume of trade generated by each country in a world environment characterized by the economics of containerization which favor large ships, mechanized terminals and few ports of call The contributing factors to the problems of maritime transport/ shipping in the Caribbean are: (i) the Region is extremely heterogeneous with disparate market size. However, it is characterized by many countries

16 - 8 - still having strong ties with the UK, France and The Netherlands, and WITASS (West Indian Trans-Atlantic Steam Ship Lines) -- covering the European/Caribbean trades -- split into distinct operating sections, partly reflecting the above. This fragmentation results in poor use of the available capacity serving the Region and in less frequent services and the consequent inability to provide a service which suits the markets' demands; (ii) government stipulations that exports must go on national shipping lines and the fostering of inefficient publicly-owned ones. In some instances the publicly-owned national shipping lines operate old vessels which are slow, poorly geared, consume excessive quantities of fuel, and are over crewed and poorly managed by over staffed head offices. Privately owned companies could be designated national carriers if a Government's interest is to participate in shipping conferences; (iii) the tendency by some importers and producers to channel cargos on vessels chartered specifically for particular needs and which shuttle only partly laden between a country and major load centers such as Miami, the US Gulf Coast ports (Houston, New Orleans and Galveston) or San Juan. In many cases, a very high price is paid for the convenience and security of the service; (iv) inability of many smaller ports to store and handle refrigerated containers for exports of fruits, flowers and vegetables; and (v) lack of effective communication between countries and ports, and a centrally maintained point from which to gain information on available shipping opportunities, current cargo movements, vessels, routes and capacities A major development over recent years has been the introduction of containers and particularly refrigerated containers (reefers) which provide small producers an opportunity to enter a viable export market. However, this market only can be reached if the appropriate infrastructure and maritime transport are in place. In particular, reefers enable fruits and other agroproducts to arrive at their final destination in near perfect condition and to command the top market prices. Liquid reefers enable fruit juices to be exported in small quantities, which previously was not possible. With the rapidly growing development of the container shipping industry, the traditional shipping conferences -- such as WITASS -- are threatened. In 1987 one of the five 1,275 TEU vessels was withdrawn by CAROL lines Load centers, or transhipment ports, have developed in the Region with major centers at Kingston (Jamaica) and San Juan (Puerto Rico), and lesser centers at Castries (St. Lucia), St. Croix and Trinidad. To gain additional business, these load centers have attempted to set up feeder services to and from other islands and territories to enhance their throughput, but these services have not been rationally planned. The San Juan center is a major port with excellent services to the US east coast and US Gulf Coast ports -- some of the links are tug and multi-deck barge operations. Kingston, in Jamaica, is a growing center with some major world lines as clients -- Evergreen, Zim, Sealand and recently added Barber Blue Sea. Recent developments in Panama have helped increase the importance and use of Kingston. If the latter port is able to demonstrate continued efficient services, it will gain additional business over the longer-term. Its success, so far, has been largely the result of efficient management under a management contract with private sector operators The effects of the 1984 US Shipping Act introduced to break-up existing agreements and introduce competitive pricing have resulted in the restructuring of many of the shipping services to the east coast of South

17 - 9 - America which pass through the Caribbean. The repercussions have not been realized fully, but the potential for the Caribbean to be able to develop its transhipment centers is clear. Moreover, of particular interest is the rapidly increasing trade between Brazil and the Caribbean, and the opportunities to tranship Brazilian cargo destined to the Far East and Europe The Caribbean Shipping Association, a body formed from 15 national shipping associations and over 75 individual members, comprising the Region's port authorities, shipping agents and lines, freight forwarders and other related interests, highlighted at its 1988 Annual General Meeting in Cartagena the poor quality of maritime transport for many of its member territories and encouraged the formation of improved shipping services to the smaller islands with the objective of helping to develop trade The following issues need to be resolved if Caribbean maritime transport is to be improved: (i) the present systems of cargo reservation and the fostering of national shipping lines should be abandoned; (ii) the load centering concept should be extended and developed especially for the eastern and southern Caribbean. Countries should concentrate on encouraging the development of efficient short haul feeder services to the load center ports in their vicinity so as to gain from the cheaper ocean rates offered by the long haul carriers. The smaller island countries should aim at jointly chartering vessel capacity; (iii) port facilities in the smaller islands should be improved for low-cost maritime transportation to load and discharge containers easily, and for reefers to be stored in the port areas; (iv) cold storage facilities should be available when justified and agile custom clearance procedures are needed; and (v) some form of Caribbean-wide central information network is required to provide shippers with information on shipping services, routes, rates, space available and timings on a day-to-day basis. Agricultural Diversification in the Island Economies 1.30 The agricultural potential of the island economies of the Caribbean is quite small, except for the Dominican Republic and Haiti. The land resources which can be used for agricultural development are limited and most of the good agricultural lands are already used to produce mainly traditional export crops. In addition to the small physical resource base, the other major constraint to agricultural development is poor market prospects for the traditional products. The domestic markets are also too small to absorb significant increases in production and the export markets are highly competitive for the high cost Caribbean producers The principal source of agricultural growth in the Region has been the production of traditional export crops of mainly bananas and sugar exported to the preferential UK market for bananas and sugar, and the US one for sugar. Prospects for the continued expansion of markets for the traditional exports are not good. There are likely to be increasing pressures on lowering prices of bananas in the UK market due to an expected oversupply of bananas, and there is considerable uncertainty as to what will happen to the protected banana market in the UK when the current Lome Convention (under which banana exports from the Region receive preferential treatment) expires in If there were to be changes in the protected banana market, these should not take place abruptly but should be gradual and avoid shocks to the economies of the banana exporting countries.

18 There is also a sharply declining trend in the quota granted by the US for the sugar exports from the Region. There is, thus, an urgent need to diversify agricultural production and exports In recognition of the dangers of dependence on traditional exports, the Governments of the countries of the OECS are giving top priority to agricultural diversification. As a first step, the Governments should identify a select number of crops with good market prospects and prepare a program to develop them. The countries also should review the incentive regime, support services (research, extension, credit) and policy framework to promote the production and marketing of non-traditional crops. In particular, the private sector should play the lead role in production as well as marketing. Crops that have promising potentials for diversification include mangoes, plantain, breadfruit, avocado, soursop, carambola, cashew, papaya, pineapple, and selected spices and vegetables. C. CONCLUSIONS 1.33 Over the last two years, the economic performance of most Caribbean countries was good and the outlook for the medium-term looks promising, provided that the countries are able to rapidly expand and diversify exports to extra-regional markets. The Bank's analysis suggests that most of these economies could grow rapidly enough for real consumption per capita to increase. Real GDP growth rates of about 4% per year are attainable in the light of projected improvements in the terms of trade and of efforts currently ongoing or to be initiated in adjusting the respective economies. There is need, however, to strengthen the competitiveness, fiscal, monetary, wage and investment policies. In particular, efforts for restraint in public sector expenditures, especially wages, aimed at further increasing savings merit serious attention. Productivity needs to be rapidly increased to enable the countries to improve their competitiveness, increase output and exports, and reduce their high levels of unemployment and debt burden The tourism potential should continue to be exploited. However, the economies should step-up efforts at diversifying in the direction of manufactured exports and non traditional agriculture, and to take advantage of the opportunities that existing trade preferences grant them. Also, in view of the uncertainties regarding the market for sugar and banana exports, the need for diversification is even more critical The anti-export bias at extra-regional trade and investment needs to be eliminated if the countries are to take advantage of their potential export markets The Caribbean economies require the provision of external financing sufficient to permit adjustment with growth while cushioning the impact of such adjustment on the social sectors. The focus of such financing should increasingly be for high-priority investments that assist in the diversification of the respective economies and render growthoriented structural adjustment smoother The problems of maritime transportation need to be addressed if transport costs are to be significantly reduced and the frequency of services increased.

19 II. EXTERNAL FINANCING A. INTRODUCTION 2.1 External finance has been and remains an important resource needed to promote the economic development of the Caribbean Region. There are, at present, no less than sixteen bilateral and ten multilateral agencies providing official assistance to various countries of the Region. In addition, private suppliers and banks have been providing credits for projects and trade finance. Furthermore, in Haiti for example, nongovernmental organizations constitute a valuable source of finance, especially for small-scale development activities in the poorer and more remote parts of the country. 2.2 Countries receiving external assistance for development as well as their donors and creditors always have viewed such assistance as a supplement to the savings and investment efforts of the developing countries themselves. Indeed, for any developing country, an orderly transition towards less reliance on external aid indicates positive economic performance and growing economic strength. The acquisition of such strength on a sustainable basis, however, can be much enhanced with adequate and stable external support during the transition. Such support, moreover, needs to be coordinated carefully and devoted to the implementation of policies and projects with high payoffs. 2.3 A country that has reduced reliance on external assistance may find itself strapped financially by external shocks and in need for exceptional support during an adjustment period. Incidents like this are particularly likely to affect the Caribbean countries, with the small size of their economies and depending mostly on a few volatile sources of savings, exports and economic growth. 2.4 The savings, export and growth performances of the Caribbean Region in recent years were reviewed in Chapter I of this report, and data for individual countries are provided in the Statistical Appendix. The present chapter first examines the trend in external resource flows to the Region in recent years ( ), and then presents estimates of assistance needed during Regional aggregation of the outcome in 1987 has not been possible since data have not been compiled yet for all the countries. B. NET RESOURCE FLOWS, Net flows are defined as grants disbursed plus gross loans disbursed less amortization paid (net loans). Net transfers are defined as gross loan disbursements plus grants minus amortizations minus interest payments. Table 1 below provides the aggregate picture of net flows to the CGCED countries from all sources, including the IMF. 2.6 While interest payments followed an upward trend, Table 1 shows a sharp decrease in aggregate net flows, from about US$1.5 billion in 1981 to US$0.6 billion in 1986, notwithstanding significant increases in bilateral grants in 1985 and This decrease was almost entirely on account of declining net flows from multilateral and bilateral creditors. Among private creditors, commercial banks more or less maintained annual net

20 12 - flows in the range of US$ million, the only exception being 1984, when a drop of US$123 million in net flows from commercial banks to Trinidad and Tobago, the principal borrower, occurred. Net transfers to the Region turned negative for the first time in 1986 when Caribbean countries paid their creditors US$96 million more than what they received from them (Table 1.14 Statistical Appendix). Table 1: NET EXTERNAL CAPITAL FLOWS TO CGCED COUNTRIES, a/ (in USS million at current prices) Official Donors/Creditors Bilaterals Grants Net Loans Multilaterals Grants Net Loans Private Creditors Suppliers Banks and Other Total All Sources I/ Includes: Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. Source: Statistical Appendix, Table However, Table 1 does not incorporate the large build-up of unconsolidated interest and/or repayment arrears in various years, especially by the Dominican Republic, Guyana and Jamaica. If arrears were counted as involuntary flows to the debtor countries concerned, the net flows would be correspondin 6 ly higher. Such analysis is complicated, however, because, in Jamaica for example, arrears in earlier years were subsequently consolidated in rescheduling arrangements, while, in Guyana, some arrears were rescheduled and some not. But complete information on the treatment of arrears by all the countries and their creditors is not available. In addition, the aggregate data is dominated by certain large inflows, which constitute statistical exceptions. These exceptions can be separated to obtain an alternative quantification of the underlying trend. The major exceptions hidden in Table 1 are: (i) the large grants from the Netherlands to Suriname in ; and (ii) the large transactions of the Dominican Republic and Jamaica with the IMF. 2.8 The grants from the Netherlands to Suriname in accounted for 40% of grants from bilaterals to all CGCED countries combined in those two years. But from 1983 onwards the grants from the Netherlands to Suriname were suspended. Thus, by including the Dutch grants to Suriname, Table 1 starts with a high value for bilateral grants, which distorts the trend. Net credits from the IMF to the CGCED countries were positive and large during , comprising 40% to 55% of total multilateral net flows; thereafter, as repurchases of earlier credits were made, net IMF credits declined rapidly, and turned negative by US$155

21 _ 13 - million in Among the CGCED countries, the Dominican Republic and Jamaica were by far the dominant debtors to the IMF during These two countries together accounted for nearly 80% of annual net credits from the IMF to all the CGCED countries. Hence, the inclusion of the transactions of the Dominican Republic and Jamaica with the IMF also distorts the trend of net flows from multilateral agencies to the Region as whole. The large amount of undisbursed funds in many of the countries of the CGCED, together with low project execution, also affect the net flows to the CGCED countries. An estimate of their effects, however, has not been made. 2.9 Table 2 below, therefore, shows the net flows during after abstracting from the Netherlands grants and net IMF flows to the Dominican Republic and Jamaica. Nevertheless, Table 2 still indicates a declining trend in aggregate net flows to the CGCED countries but it is somewhat less dramatic, and the flows are still relatively high on a per capita basis. As noted in paragraph 2.6 above, with the exceptional cases included, net flows dropped from about US$1.5 billion in 1981 to about US$0.6 billion in 1986; with the exceptional cases excluded, net flows dropped from about US$1.2 billion in 1981 to about US$0.7 billion in Bilateral and multilateral sources also show less dramatic drops when adjustments are made for the exceptional cases. A notable contrast is a more than twofold increase of bilateral grants between 1981 and 1986, and a sharp decrease in bilateral net loans. Table 2: NET EXTERNAL CAPITAL FLOWS TO CGCED COUNTRIES, ADJUSTED FOR EXCEPTIONAL CASES a/ (in US$ million at current prices) _ 1988 Official Donors/Creditors Bilaterals Grants Net Loans Multilaterals Grants Net Loans Private Creditors Suppliers Banks and Other Total All Sources a/ Includes: Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. Source: Statistical Appendix, Table Declining levels of external capital inflows would not constrain development so long as they are sufficient to finance viable current account deficits and loan repayments while enabling recipients also to hold international reserves necessary to provide adequate import coverage.

22 Since the current account deficits relative to GDP of most of the CGCED countries improved between 1981 and 1986 (Statistical Appendix Table 1.3), net external capital requirements also declined. The issue, then, is whether the reductions of the current account deficits occurred as a result of export growth or growth retarding import compression. While, in , earnings from banana exports (Statistical Appendix Table 1.8) and tourism (Statistical Appendix Table 1.4) clearly grew for almost all the countries concerned, earnings from sugar (Statistical Appendix Table 1.6) stagnated or declined and those from bauxite (Statistical Appendix Table 1.10), alumina (Statistical Appendix Table 1.12) and oil dropped sharply. At the same time, interest payments and capital repayments climbed. Some countries in the Region (notably, Guyana, Jamaica and Trinidad and Tobago) cut the quantity of imports, thereby reducing economic growth The issues and policies for adjustment to promote exports and economic growth in the Caribbean countries were discussed in Chapter I above. As experience in the Caribbean and elsewhere has shown, the implementation of adjustment measures needs to be supported with adequate and sustained external assistance. The following section presents the financing requirements for the period, and some concluding observations based on data of recent years are made at the end of this chapter. C. FINANCING REQUIREMENTS, Tables 3 through 6 (attached to this Chapter) indicate the external financing requirements in for individual countries for which estimates could be prepared at the time this report was compiled. The total requirements of the countries in Tables 3 to 5 are estimated at about US$1.4 billion in 1988, US$1.2 billion in 1989 and about US$1.1 billion in Of these annual totals, 70% (US$2.6 billion) are expected to be realized from sources already identified; the remaining 30% (US$1.1 billion) would need to come from additional commitments The large annual financing requirements are explained mainly by the ongoing medium-term reforms and investments recently worked out by Jamaica and endorsed at a special meeting of the Jamaica Sub-group held in December 1987 and the financing to implement possible proposed medium-term reforms and recovery programs in the Dominican Republic and Guyana, respectively The estimates of financing requirements have been based on the rates of growth projected in the most recent country economic reports prepared by the World Bank. The country analysis section, which follows, spells out the major assumptions underlying the financing requirements for each country. In case this level of financing is not realized, public investment would have to be curtailed unless additional savings can be mobilized For the countries covered in Tables 3 to 6, the realized capital inflows in 1985 and 1986 and the requirements for on a per capita basis are shown below:

23 Realized Capital Inflows Capital Requirements Per Capita (US$) Per Capita (USS) Barbados Belize Dominican Republic Guyana Haiti NA NA NA Jamaica Antigua and Barbuda Dominica , , Grenada St. Kitts and Nevis St. Lucia St. Vincent and the Grenadines NA Suriname NA NA NA Trinidad and Tobago NA: Not available. Source: World Debt Tables, IBRD International Finance Division, and staff estimates and projections. D. COUNTRY ANALYSIS 2.16 Total capital expenditure of the consolidated public sector of Barbados is estimated to have increased by 28% in 1987 over that of 1986, with foreign savings providing some 50% of the financing. The proposed public sector investment program (PSIP) amounts to about US$138 million, representing a 4% decline in nominal terms from its 1987 level. External funding for the period is estimated to account for US$88.1 million or 64% of the total. The external financing already secured for the PSIP totals US$42.9 million, leaving a gap of US$45.2 million still to be financed for projects in agriculture, industry, transportation, education, health and housing. With some improvement in public savings projected for the period, the local cost financing requirements for the most part will be met. However, substantial balance of payments support, i.e., about US$180 million during the period, will be required in view of sharply escalating debt service payments, which will peak in The PSIP for Belize is consistent with the stated development objectives of the Government, which emphasizes economic infrastructure. There are provisions for the rehabilitation and upgrading of highways to facilitate transportation of agricultural products, and for improving the electricity supply -- the two major constraints to economic development. The PSIP for amounts to US$104 million, of which US$90 million represents the external financing requirement. Disbursements from existing commitments will amount to US$59 million, leaving a financing gap for the PSIP of US$31 million for projects in health, transportation, energy, communications, education, housing and public safety. Although there has been a remarkable improvement in public sector savings over the last two years, there is some concern over the availability of local currency counterpart funds in the event that significant amounts of US Economic Support Funds (ESFs) were to be sharply reduced Project external financing requirements for the Dominican Republic are based on government implementation of a Medium-Term Economic Framework. The Government is currently in the process of preparing a medium-term public sector investment program. Moreover, given the low level of

24 existing external commitments and the substantial loan repayments the country faces, balance of payments financing gaps of US$182 million, US$205 million and US$207 million would need to be filled in 1988, 1989 and 1990, respectively, for a total of US$594 million during The magnitude of these gaps is manageable, both in terms of the size of the economy and the external support from multi- and bilateral donors that may be expected to materialize, provided the authorities implement the reforms growthoriented structural adjustment calls for and are able to reschedule the nation's commercial bank and Paris Club obligations. Thus, rescheduling of 100% of principal due to commercial banks and 90% of amortization payments due to Paris Club lenders would cover about 54% of the 1988 financing gap, 65% of the 1989 one and 75% of the 1990 one. This would reduce the balance of payments financing gap to US$83.3 million in 1988, US$73.6 million in 1989 and US$53.7 million in External capital flows to Guyana in 1987 amounted to US$35 million or about 35% below the level attained in 1986 and substantially below the peak level of US$167 million in All inflows went to support the PSIP. For the next three years ( ), Guyana's financing requirements are estimated at US$617 million. This assumes that about US$1.1 billion in external payment arrears could be rescheduled. About US$93 million of the required resources are already available from existing commitments. The remaining financing gap of US$524 million consists of US$101 million of additional project financing and US$423 million of balance of payments support; US$249 million is needed to finance the 1988 gap Over the past five years, external financing flows to Jamaica have been dominated by balance of payments support to assist in the country's structural adjustment program. Over this period (FY1983/84 to FY1987/88), gross balance of payments support accounted for US$1.2 billion, or about 54% of total gross flows of US$2.2 billion, excluding the International Monetary Fund. Estimates of capital requirements for FY1988/89 to FY are based on Government adherence to the various parameters and reform measures outlined in the medium term economic framework paper presented to the donors in December 1987, and are exhibited below: (USS Mi li ion) FY87/88 FY88/89 FY89/90 FY90/91 (Provisional) Total a/ Proijct b/ Non Project c/ Rescheduling Private Capital Inflows Ex-ante Financing Gap a/ Based upon projected current account deficit, external amortizations, IMF repurchases and desirable changes in reserves. b/ Includes suppliers credits. c/ Includes IMF purchases Antigua and Barbuda's public sector investment program involved major projects in 1986 and 1987 for hotel construction, public utilities and transportation infrastructure. As a result, public sector capital outlays increased substantially as a proportion of GDP (36% compared to 7% in the preceding three-year period). With their completion in 1988, capital expenditure should revert rapidly to the lower historical ratio. The Government intends to formulate a PSIP in the context of a proposed five-year development plan for the country. As of now, the list of

25 identified projects for envisages expenditures of US$65.3 million, of which US$44.8 million represents the external financing requirements. Of this amount, US$25.8 million already is secured, leaving a financing gap of US$19 million for the three-year period. Major projects for which the government is seeking financing are hotel construction, livestock development and housing. While a continual improvement in the public sector savings performance is projected for the period, the country will need further external assistance, particularly in the form of debt rescheduling, to help bring the servicing of its external debt obligations to manageable levels In Dominica, the FY1988/89 - FY1990/91 PSIP amounts to US$80.9 million and emphasizes support for directly productive activities and rehabilitation of economic infrastructure. Major components of the program are hydropower expansion; feeder and farm access roads, and water supply and sewerage improvements. Project-related external financing requirements would account for about US$75.9 million in FY1988/89-FY1990/91 of which US$32.8 million already has been secured. The remaining financing gap is estimated at US$43.1 million. Program-type financing of about US$8.7 million is also needed over this period, of which about US$1.0 million is still to be secured Grenada's PSIP amounts to about US$59 million for the period, of which US$47 million represents the external financing requirements which are fully financed in the PSIP. Balance of payments support required for the period is estimated at US$41.8 million The PSIP for St. Kitts and Nevis totals US$47.5 million during , of which US$43.6 million represents the external financing requirement. Expenditures are expected to nearly double in 1988, largely because of construction of the Southeast Peninsula Road, extension of water supply to to the Southeast Peninsula, increased expenditures for social sector projects, and the drawdown of CDB and EIB lines of credit to the Development Bank. The composition of the PSIP reflects a marked shift in emphasis toward infrastructure, and is consistent with the Government's development strategy of strengthening infrastructure to attract private investment, foment economic diversification and exports. Nearly 50% of the external financing requirement for the PSIP, US$20.1 million, has been secured. The remaining US$23.5 million represents the financing gap. The Government's fiscal position has improved substantially since 1985, largely because of new revenue measures and restrictions on expenditure St. Lucia's PSIP amounts to US$109 million for the 1987/ /90 period, of which US$79 million (72%) would be mobilized externally. Sources have been identified for roughly US$53 million or 67% of the external financing needs. Funds for the remaining US$26 million will be sought essentially for new projects, such as the Hewanorra Airport Improvement, West Coast Road from Anse la Raye to Soufriere, Vieux Fort Port and Castries Port expansion, and the Industrial Estates VII Project. The composition of the PSIP is consistent with the Government's development objectives St. Vincent and the Grenadines's PSIP amounts to US$44.5 million for , of which US$31.9 million would be mobilized from external sources. About 45% of the external resources (US$14.2 million) are

26 available from approved loans and grants. The remaining (US$17.7 million) has to be formalized with the identified agencies who expressed interest during the December 1987 Sub-group meeting on St. Vincent and the Grenadines. The composition of the PSIP is consistent with the Government's development objectives External financing requirements for projects for Trinidad and Tobago would be based on government implementation of a medium-term public sector investment program which the Government is currently preparing. Moreover, given the low level of existing external commitments and the substantial loan repayments the country faces, balance of payments financing gaps of US$225 million per year during are required after rescheduling the country's bilateral and commercial bank obligations. E. CONCLUSIONS 2.28 First, even excluding the exceptional cases, net external capital flows to the CGCED countries declined sharply by about 45% in nominal terms between 1981 and The declining trend of net capital inflows was to be expected, given that, in the same period, the external current account deficits of most recipient countries were being contained, in several cases due to deliberate adjustment efforts. In certain recipient countries, however, the adjustment process entailed compression of essential imports, and hence economic growth. External assistance should be better programmed to allow adjustment with growth to take place Second, close examination of any of the resource flow tables above shows that, within the period of six years, there were fluctuations in the various components, and hence in net flows. While, for various reasons, some degree of fluctuation is inevitable, it is important to minimize the changes from year to year so as to attain some reasonable assurance of resource availability, especially for economies undertaking wide-ranging economic adjustments Third, recent experience in the Caribbean has demonstrated that it takes several years of sustained effort to witness the results of major policy adjustments. The process of adjustment can be facilitated with upfront commitments of the requisite net financial flows covering the mediumterm period and commensurate, of course, with recipient countries' programs of policy reforms and development expenditures. When sufficient resources are committed, it is important for the recipient countries as well as donors and creditors to ensure that policy and project execution take place without major slippages. Otherwise, committed funds remain undisbursed and serve only to augment the aid pipeline rather than actually supporting development. The "Tighter Consultative Group" (TCG) approach has helped in this endeavour Finally, not only the volume but also the quality of assistance sought and provided should be considered in promoting sustained development. This means that external financing needs to be concentrated on development policies and expenditures that become economically and financially viable during the period when any debt incurred has to be serviced. Only then would the stream of future benefits be sufficient to service external debt and/or provide investible surpluses for other development activities.

27 Table 3: EXTERNAL FINANCING REQUIREMENTS FOR THE PUBLIC SECTOR INVESTMENT PROGRAM AND BALANCE OF PAYMENTS/BUDGETARY SUPPORT FOR 1988 / (USS Million) OTHER DEVELOPMENT ASSISTANCE REQUIRMENTS (Balance of Payments FINANCIAL Financina of PSIP and Budgetarv SuooortoI REQUIREMENTS (A) (B) (C) (D) (E) (F) (G) (H) (I) Of Which Disbursements Of Which Of Which Public Sector External from Not Yet Total Not Yet Investment Local Financing Existing Gap Identified Required Identified Program Contribution Reouirements Commitments (C)-(D) Total (G3D) (C)+(F) (E)+(G) BARBADOS BELIZE DOMINICAN REPUBLIC NA NA NA NA 83.3 NA NA GUYANA JAMAICA NA TRINIDAD AND TOBAGO NA NA NA NA NA NA NA OECS (Total) ANTIGUA AND BARBUDA DOMINICA k/ GRENADA ST. KITTS AND NEVIS ST. LUCIA ST. VINCENT AND THE GRENADINES TOTAL a/ PSIP and balance of payments requirements for Haiti and Suriname are not yet available. k/ Fiscal year. NA: Not available. Source: World Bank staff estimates.

28 Table 4: EXTERNAL FINANCING REQUIREMENTS FOR THE PUBLIC SECTOR INVESTMENT PROGRAM AND BALANCE OF PAYMENTS/BUDGETARY SUPPORT FOR 1989 v/ (USS Million) OTHER DEVELOPMENT ASSISTANCE REQUIRMENTS (Balance of Payments FINANCIAL Financinc of PSIP and Bud etary Supoortl REQUIREMENTS (A) (B) (C) (D) (E) (F) (G) (H) (I) Of Which Disbursements Of Which Of Which Public Sector External from Not Yet Total Not Yet Investment Local Financing Existing Gap Identified Required Identified Procram Contribution Reauirements Commitments,Total IC)-(D (Gap) (C!+(F) (E)+(G) BARBADOS BELIZE DOMINICAN REPUBLIC NA NA 86.0 NA NA 73.6 NA NA o GUYANA JAMAICA NA TRINIDAD AND TOBAGO NA NA NA NA NA NA NA,OECS (Total ANTIGUA AND BARBUDA DOMINICA _/ GRENADA ST. KITTS AND NEVIS ST. LUCIA ST. VINCENT AND THE GRENADINES TOTAL a/ PSIP and balance of payments requirements for Haiti and Suriname are not yet available. _/ Fiscal year. NA: Not available. Source: World Bank staff estimates.

29 Table 5: EXTERNAL FINANCING REQUIREMENTS FOR THE PUBLIC SECTOR INVESTMENT PROGRAM AND BALANCE OF PAYMENTS/BUDGETARY SUPPORT FOR 1990 v/ (USS Million) OTHER DEVELOPMENT ASSISTANCE REQUIRMENTS (Balance of Payments FINANCIAL Financina of PSIP and Budgetary Support) REQUIREMENTS (A) (B) (C) (D) (E) (F) (G) (H) (I) Of Which Disbursements Of Which Of Which Public Sector External from Not Yet Total Not Yet Investment Local Financing Existing Gap Identified Required Identified Procram Contribution Requirements Commitments (C)-(D! Total (Gap) (C)+(F) (E)+(G) BARBADOS BELIZE DOMINICAN REPUBLIC NA NA 72.0 NA NA 53.7 NA NA GUYANA JAMAICA NA TRINIDAD AND TOBAGO NA NA NA NA NA NA NA OE (Total) IS ANTIGUA AND BARBUDA DOMINICA _/ GRENADA ST. KITTS AND NEVIS ST. LUCIA ST. VINCENT AND THE GRENADINES NA NA NA NA NA NA NA NA NA TOTAL / PSIP and balance of payments requirements for Haiti and Suriname are not yet available. _/ Fiscal year. NA: Not available. Source: World Bank staff estimates.

30 Table e: EXTERNAL FINANCING REQUIREMENTS FOR THE PUBLIC SECTOR INVESTMENT PROGRAM AND BALANCE OF PAYMENTS/BUDGETARY SUPPORT FOR / (US: Million) OTHER DEVELOPMENT ASSISTANCE REQUIRMENTS (Balance of Payments FINANCIAL Financina of PSIP and Budgetary Suoport _ REQUIREMENTS (A) (B) (C) (D) (E) (F) (G) (H) (I) Of Which Disbursements Of Which Of Which Public Sector External from Not Yet Total Not Yet Investment Local Financing Existing Gap Identified Required Identified Proaram Contribution Reauirements Commitments {C!-(D) Total 2±CaJ. ( F)+F (E)+(G) BARBADOS BELIZE DOMINICAN REPUBLIC NA NA NA NA NA NA GUYANA JAMAICA TRINIDAD AND TOBAGO NA NA NA NA NA NA NA QECS (Total) ANTIGUA AND BARBUDA DOMINICA k/ GRENADA ST. KITTS AND NEVIS ST. LUCIA ST. VINCENT AND THE GRENADINES s/ TOTAL a/ PSIP and balance of payments requirements for Haiti and Suriname are not yet available. F/ fiscal year. c/ Only includes figures for St. Vincent and the Grenadines. NA: Not available. Source: World Bank staff estimates.

31 III. REGIONAL AND SUBREGIONAL PROGRAMS A. INTRODUCTION 3.1 This part describes progress made on Regional and Subregional Programs since they were reviewed at the Ad Hoc Advisory Committee meeting in Kingston, Jamaica on December 8, The agreements reached at that meeting were recorded in Report CGCED 88-2, dated March 14, This part also describes briefly some of the main activities carried out by the CGCED Group during the 15 months preceding April As pointed out in the following sections, the main activities were discussed in various fora during the June 1988 meeting of the CGCED. The outcome of those discussions is recorded in the Chairman's Report of Proceedings of the Ninth Meeting of the CGCED (forthcoming, September/October, 1988). B. PROGRESS REPORT ON ACTIVITIES UNDER THE "TIGHTER CONSULTATIVE GROUP" 3.2 The "Tighter Consultative Group" (TCG) is an approach whereby a Government formally commits itself to an appropriate program of stabilization and structural adjustment, and, in response, donors consider favorably the scope for providing additional financial resources to support the country's efforts. The essential elements in the concept are of "reciprocal commitment" and "discipline," on both recipient and donor sides. If a country decides to implement with external assistance needed stabilization and structural adjustment measures and has protracted balance of payments problems, it can request IMF and World Bank assistance in the formulation of an appropriate program to restore macroeconomic viability. Following confirmation of eligibility and agreement on the program, the country can make use of the IMF's Structural Adjustment Facility and, possibly, Bank/IDA quick disbursing, policy based lending. Alternatively, if the macroeconomic framework is considered appropriate, the Government may request Bank/IDA assistance to finance investment projects to improve its creditworthiness. In either case the three-years financing needs -- both for balance of payments support and project lending -- are presented to donors at a TCG meeting. 3.3 Dominica was the first country to which the "TCG" concept was applied. The preparation of the Policy Framework Paper (PFP) and the associated PSIP was the culmination of the collaboration between the Government, the IMF, IDA and several donors. The PFP and PSIP were presented to the donor community at a special subgroup meeting held under the aegis of the CGCED in January In collaboration with the Government of Jamaica and in close coordination with the IMF, the World Bank assisted the Government in the preparation of its Medium Term Policy Framework Program (MTFP) and PSIP. The MTFP and PSIP were presented to the donor community at a special subgroup meeting of the CGCED in December Donor response has been overwhelmingly positive. It is expected that the initially identified financing gaps during the period should be closed once bilateral discussions are concluded. The World Bank also reviewed the Jamaica Social

32 Sectors Initiative prepared and presented by the Government. This initiative also received full support, in principle, from the donor community. It was presented for financing at Jamaica's Subgroup Meeting in June The World Bank was invited to review the agricultural sectors of both St. Vincent and the Grenadines and St. Kitts and Nevis where adjustment programs have been undertaken and viable macroeconomic frameworks put in place. The Bank has assisted the Government of St. Vincent and the Grenadines with the sectoral analyses and the identification of priority investments over the next three years. The Government's PSIP and the Development Plan were presented to the donor community at the December 1987 subgroup meeting. It is expected that the financing gap over the period will be closed when bilateral discussions are concluded. Future plans for St. Kitts and Nevis call for the same approach. In addition, it is expected that a similar approach, but for the water and sewerage sector, will be followed for St. Lucia, which also has adopted adequate macroeconomic policies. 3.6 The World Bank is currently exploring the possible use of the TCG approach for the Dominican Republic and Suriname. C. STRUCTURAL ADJUSTMENT IN THE CARICOM COUNTRIES 3.7 The CARICOM Secretariat was asked to prepare detailed regional action programs to implement the Nassau Understanding on Structural Adjustment. The programs fall into two categories: (i) (ii) those aimed at defining investment and infrastructural/ support opportunities. The implementation of several of these programs requires external assistance; and programs designed to clarify policy options and change the existing arrangements. The implementation of these proposals depends on their acceptance by all the Member States. 3.8 During the CGCED Ad Hoc Advisory Committee Meeting of December 1987, the CARICOM Secretariat reported on the significant progress made since the January 1987 meeting of the CGCED. Several subsectoral studies have been completed and others are well-advanced. The New Marketing Arrangements for Primary Agricultural Products were implemented by Member States in In particular, policy studies such as a revised Scheme for the Harmonization of Fiscal Incentives to Industry, a Review of the Common External Tariff (CET), Exchange Rate Policy, and a Draft Proposal on the Regional Agricultural Sector either have been completed and circulated to Member States or are nearing completion. All these studies were to be reviewed by the concerned authorities As recommended at the July 1986 CARICOM Heads of Governments meeting in Guyana, a CARICOM Export Credit Facility, now named CXB, has been formed and will be operational in the near future.

33 Export promotion programs were not forthcoming in 1987 as a consequence of lack of funding. However, considerable progress has been made on the preparation of the Trade and Development Perspective Study in the Region to the year 2000, which was considered by the CARICOM Common Market Council, the Conference of Heads of Government and the regional public in July The December 1987 meeting commented on the structural adjustment program managed by CARICOM, noting that the program should focus on trade liberalization and export promotion but take into account the social aspects of adjustment. A progress report was made by the CARICOM Secretariat at the June 1988 CGCED meeting. D. CARIBBEAN EXPORTS: PREFERENTIAL MARKETS AND PERFORMANCE 3.12 The Caribbean area benefits from a series of preferential trade arrangements. In addition to the industrialized countries' Generalized Systems of Preferences (GSP) which are applicable to most developing countries, there are some special arrangements to promote exports from the Caribbean countries -- the Caribbean Basin Initiative (CBI) of the United States, CARIBCAN of Canada, and the much older Lome Conventions of the European Communities. Yet, in spite of this preferential treatment, Caribbean export performance has been less satisfactory than that of the developing countries as a whole A report, produced by the World Bank with partial funding from UNDP, examines Caribbean export trends in the 1980s in some detail and analyzes possible reasons for the relatively poor performance. It is limited to merchandise exports of CGCED members to the US, the EEC, and Canada. It covers major import policies in the three markets that affect Caribbean exports, as well as supply issues in the Caribbean that have affected export growth. It concludes with suggestions for improving the growth rate of Caribbean exports to these markets. A draft copy of the report was presented at the CGCED Donors' Meeting in May 1988 and the final version presented to the CGCED meeting in June E. CARIBBEAN COOPERATION IN HEALTH 3.14 The Caribbean Cooperation in Health (CCH) initiative is being developed and promoted jointly by PAHO and CARICOM on behalf of the CARICOM Ministers of Health. The objective of CCH is to mobilize the necessary resources to develop a comprehensive approach to the priority health problems of the Caribbean Region, including AIDS. A progress report was presented at the June 1988 CGCED. F. ENVIRONMENTAL ISSUES IN THE CARIBBEAN 3.15 CIDA is financing a study entitled "Integrating Environmental Concerns into Caribbean Programming", the purpose of which is to effect a more coherent, effective and sustainable strategy for environmental programming in the Caribbean Region. A list of recommended opportunities for donor involvement would be included, together with broad project outlines. This issue was discussed at the June 1988 CGCED.

34 G. CARIBBEAN PROJECT DEVELOPMENT FACILITY 3.16 The demand for the services of the Caribbean Project Development Facility (CPDF) has increased fairly consistently since its inception. In its first three years the CPDF completed an average of seven project proposals each year. Over the past three years it has averaged almost 20 projects per year. For more than half, representing a total investment in excess of US$70 million, financing has been secured by financial institutions In 1987, 18 project proposals were completed involving 12 countries (Barbados 3, Anguilla 2, Antigua and Barbuda 2, Montserrat 2, St. Kitts 2, and Bahamas, Belize, Dominica, Dominican Republic, Haiti, Jamaica, Trinidad and Tobago one each) with a total investment cost of approximately US$35 million. At the end of 1987, five of those projects had been approved by lending agencies and eight others were still under consideration. Since its inception in 1981, the CPDF has completed proposals for 76 projects involving total investment costs in excess of US$200 million. In addition, CPDF has provided a wide range of non-project assistance to a host of public and private, national and regional institutions and individuals in the Caribbean. H. SUBREGIONAL PROGRAMS IN THE OECS COUNTRIES A2ricultural Diversification Proiect/Program 3.18 On March 1-2, 1988, a meeting to examine agricultural diversification in the OECS sub-region took place under the Chairmanship of the Rt. Hon. John G.M. Compton, the Prime Minister of St. Lucia. The meeting was attended by the Prime Ministers of Dominica and St. Vincent and the Grenadines, the Ministers of Agriculture of Grenada and Montserrat, and representatives of the Government of St. Kitts and Nevis. Also present were representatives of the Governments of Canada, the UK, France and the US and seven major international and regional donor agencies, including the World Bank and CDB The meeting agreed that a select number of crops with good market prospects should be identified and a program prepared to develop them. It was ready for review at the 13th meeting of the OECS Prime Ministers held during May 30 - June 3, The decision reached at the above meeting formed the basis for discussions at the CGCED meeting held in Washington in June The meeting also agreed that a medium- to long-term strategy should be prepared to promote agricultural diversification with the full participation of domestic and foreign private sector investors The Caribbean Development Bank (CDB) and the Inter-American Institute for Cooperation on Agriculture (IICA) were selected to coordinate preparation of a work plan for the above program. They would liaise with the OECS Secretariat as the link agency to the OECS Ministers of Agriculture and to the OECS Prime Ministers as the central decision-making unit for agricultural diversification. CDB and IICA also would liaise with regional and extra-regional donor agencies as well as private sector organizations.

35 Training of Technical and Support staff in the OECS Countries 3.22 An analysis of the situation, together with a training proposal, was prepared by the OAS for discussion at the June 1988 CGCED. This took into account the training activities that had taken place or were under implementation. Aid Information System for the OECS Countries 3.23 The UNDP is updating the data management capability of the Aid Information System (AIS) to expedite the analysis of available data. UNDP also was given the mandate during the December 1987 CGCED to continue assisting the OECS countries in strengthening their institutional capacity for maintaining and updating information on their technical assistance programs. Development of Manufacturing Sector in the OECS Countries 3.24 CDB is coordinating an Industry Advisory and Action Committee to monitor the industrial climate and identify constraints to the development of the manufacturing sector, and ultimately, make recommendations including specific action programs. CDB provided a progress report to the CGCED meeting in June I. CGCED ACTIVITIES 3.25 To further the aid coordination objective of the CGCED, there were two meetings of the expanded Steering Committee (May 1987 and September 1987), one meeting of the Steering Committee (April 1988), an informal subgroup meeting for Haiti (August 1987), one meeting of the Ad Hoc Advisory Committee (Kingston, Jamaica, December 8, 1987) followed by sub-group meetings for St. Vincent and the Grenadines and for Jamaica (Kingston, Jamaica, December 9, 1987). Also, the approved Work Program (December 1, 1986 to July 1, 1988, dated October 17, 1986) carried out a number of priority activities as indicated in the preceding section. The Work Program for the next 18 months was submitted for consideration and approved at the June 1988 CGCED.

36 I I I I

37 COUNTRY PROFILES ANNEX I

38 I I I I

39 ANTIGUA AND BARBUDA Population: 82,400 (mid-1987) GNP per capita: US$2,570 (1987 Atlas methodology) Most Recent Bank Economic Mission: September 1987 The Economy 1. Real growth in the Antigua and Barbuda economy averaged over 7% during , boosted by the impact on tourism of steady growth in the world economy. Public and private sector projects to expand hotel capacity, together with the supporting infrastructure, stimulated double digit annual growth in the construction and related mining and quarrying sectors. The Central Government's fiscal performance, which improved in 1985 and 1986, reverted to a deficit position in 1987 mainly because of a 20% pay increase granted to government employees. The public enterprises, by contrast, registered annual increases in their operating surplus, contributing to consolidated public sector surpluses averaging 5% of GDP in 1985 and in However, the expanding operations of the public utilities caused a downturn in their savings performance in Debt management continues to be problematic. Arrears on external debt service increased by US$8 million in 1987, bringing total arrears outstanding to the equivalent of 16% of GDP. The rapid accumulation of commercial debt over the last two years to finance major public sector projects will raise the debt service burden in the short term to unmanageable proportions, assuming no rescheduling. At the end of 1987, the external debt had risen to US$245 million, equivalent to 95% of GDP and 111% of exports of goods and services. The debt service to exports ratio reached 12% in 1987 and the debt service to central government revenues about 31% in Policy Issues 2. The main policy issues are as follows: (a) the reduction of cumulative arrears on principal and interest is the most immediate issue facing the Government. Further efforts are needed to formally reschedule past external debt obligations; (b) the Government's own debt servicing capacity will have to be improved by introducing more revenue-raising measures and by increases in utility tariffs. At the same time, current expenditures will need to be kept under tight control. Meanwhile, the program of divestiture of Government assets in the tourism and other sectors could help to reduce the extent of the projected debt problems; (c) the Government should avoid further additions to external debt on commercial terms until it has become clear that existing debt service obligations can be met; and

40 (d) the buoyant economic conditions have given rise to labor market pressures, raising the prospect of an upward pressure on wages that could affect adversely the country's international competitiveness if allowed to go unchecked. The Government might consider liberalizing its policies on immigrant labor. Government Policy 3. The Government recognizes the need for additional revenue-raising measures. Given the country's single sector dependence on tourism, fiscal policy needs to reflect the likely wide variations in year-to-year economic growth. This implies tight control on expenditure levels with particular emphasis on the recurrent cost implications of capital expenditures. Project Priorities 4. The Government intends to formulate a public sector investment program in the context of a proposed five-year development plan. The focus of the present set of projects is on the directly productive sectors. However, this focus possibly could be subject to change once the development plan is completed.

41 THE BAHAMAS Population: 241,000 (mid-1987) Most Recent Bank Economic Mission: May 1985 GNP per capita: US$10,320 (1987 Atlas methodology) The Economy 1. Following a real GDP decline in 1981 resulting from the stagnation of tourism, real GDP in The Bahamas is estimated to have increased at about 5% per year during as a result largely of an expansion in tourism. Activities in construction, especially residential investment, also contributed to the upturn of the economy. In line with the trends of main trading partners, the country's annual inflation rate was maintained at 5% during After deteriorating during , the financial position of the public sector (which comprises the Central Government, The National Insurance Board and the non-financial public enterprises) improved substantially and the current account surplus stood at 6% of GDP in Following a significant deterioration during , the deficit on the current account of the balance of payments declined in recent years, on the strength of the upturn of tourism. The medium- and long-term debt outstanding and disbursed of The Bahamas stood at 7% of GDP at end The debt service remains low, i.e., at less than an estimated 4% of exports of goods and services. Policy Issues 2. Notwithstanding the improved economic performance in recent years, there are a number of issues facing The Bahamas: (a) the need to ensure that the cost competitiveness of the country's leading sectors is not eroded. This will require continued efforts to moderate wage increases; (b) greater attention needs to be focused on the regional distribution of future growth. The infrastructural requirements and economic opportunities available in the Family Islands (the islands other than New Providence and Grand Bahama) require special attention; (c) given the high percentage of the population under sixteen years of age and the projected volume of school leavers, job creation and training should be a high priority objective; and (d) continual upgrading of the operating efficiency of the public administration is needed, with emphasis on expediting administrative procedures, enhancing coordination in policy making and implementation, and strengthening project preparation and appraisal systems.

42 Government Policy 3. The development strategy of the Government is to continue to promote sound investments and growth of tourism. Over the longer term, the Government also intends to diversify the economy, by encouraging viable agricultural and industrial investments, and establishing linkages between these and the tourism sector. Proiect Priorities 4. Project priorities continue to be the adequate maintenance and improvement of the supporting infrastructure, particularly water distribution and storage and general transportation. Vocational training and technical assistance to strengthen public sector institutions are also emphasized.

43 BARBADOS Population: 253,600 (mid-1987) GNP per Capita: US$5,330 (1987 Atlas Methodology) Most Recent Bank Economic Mission: January 1988 Recent Economic Performance 1. Barbados' economy practically stagnated in 1985 as a result of a sharp drop in tourist arrivals, trade restrictions in CARICOM and stagnating sugar production. The economy rebounded in 1986 and real GDP growth reached 4.7%, owing mainly to a turnaround in tourist arrivals. The slowdown in average growth in recent years has pushed up unemployment from 11% in 1981 to about 18% in 1987, due largely to job losses in the manufacturing sector following a number of plant closures, including two major foreign firms engaged in electronics and manufacture of garments. The 1986 recovery faltered in 1987, when real GDP growth fell to about 2%. While growth was registered in the wholesale and retail sectors, the sugar industry experienced a significant decline because of prolonged dry weather, and manufacturing was hurt by plant closures. After recording a small surplus in 1985, in 1986, the current account of the balance of payments turned into a deficit of US$3.4 million, equivalent to 0.3% of GDP, as exports declined more sharply than imports. The position changed little in 1987; however, capital inflows, including borrowings from commercial banks, increased the import coverage of the country's gross official reserves to the equivalent of 1.8 months. Central Government current revenues fell marginally from 26.3% of GDP in FY1985/86 to 25.7% of GDP in FY1986/87, while current as well as total expenditures increased, resulting in a rise in the overall deficit to 5% of GDP in FY1986/87, and to an estimated 7.6% of GDP in 1987/88. At the end of 1987, Barbados' external debt amounted to 34% of GDP. The debt service ratio to exports of goods and travel receipts in that year amounted to 18%. The debt service to central government revenues was about 23% in Policy Issues 2. The economy needs to adjust to its potential growth path and to reduce its rising unemployment. The main policy issues are as follows: (a) competitiveness: The Barbados dollar has appreciated by about 18% (as of September 1987) in real terms vis-a-vis its major trading partners in relation to its 1980 level; (b) fiscal policy: In April 1987 a number of tax measures were introduced to compensate for the tax losses resulting from the tax concessions provided by the July 1986 budget. Improved collection of existing taxes and more reliance on direct taxes are needed to increase revenues and improve tax equity. Concurrently, a more determined effort to operate public enterprises on a commercial footing is required;

44 (c) wage policy: Between 1983 and 1986 wage hikes exceeded domestic inflation by significant margins. Pay raises moderated in 1987; the average wage increase of 3% was about the same as the domestic inflation rate. Unless undue wage increases are checked, international competitiveness, particularly in manufacturing and tourism, will decline further; (d) manufacturing: Barbados' lack of competitiveness is particularly evident in the manufacturing sector. Cost reductions, greatly improved marketing capabilities and penetration of extra regional markets as well as an improvement in the relative price of tradeables are warranted; (e) tourism: Barbados has been losing its share of Caribbean tourism. Upgrading and refurbishing of tourist facilities are called for so that services will be commensurate with the rates charged; alternatively, prices should be lowered. Equally, there is a need for improved managerial skills and more targeted marketing. (f) agriculture: Non-sugar agriculture and related agro-industries need special attention so as to broaden the economic base. In the sugar sector, diversification and productivity improvements must continue; and (g) unemployment: The sharp rise in the unemployment rate (currently 18%), even though the economy has grown, suggests the need for an overhaul of policies affecting employment. A lasting solution is dependent on resuscitation of the leading sectors of the economy. Government Policy 3. The Government is targeting higher technology industries and activities and development of up-market tourism. In this strategy, a greater role is assigned to the private sector, with the public sector playing a supportive role. Project Priorities 4. In addition to ongoing projects, the Government has put together a list of new projects to be undertaken during the period. These projects cover a broad field with the major investments proposed in the agriculture, transportation and health sectors.

45 BELIZE Population: 175,000 (1987) GNP per Capita: US$1,250 (1987 Atlas methodology) Most Recent Bank Economic Mission: January 1988 The Economy 1. While real GDP in Belize is estimated to have grown at an average annual rate of about 5% in the 1970s, economic performance in the first half of the 1980s has been much weaker, averaging about 1.2% per year. In 1984 the Government initiated an adjustment program which has been a success. Preliminary data indicates that the economy has performed well in 1987, with real GDP growth expanding by about 5%, as a result of good economic policies and favorable external developments. In agriculture, output grew by more than 10% and in industry it rose by about 8%. The deficit of the current account of the balance of payments which was 12% of GDP in 1984, declined to 2.9% in 1986 and increased to 8.4% in On the fiscal side, marked improvements were obtained: the level of public savings increased to 6.9% of GDP in 1986 from 3.6% in 1984 and a deficit of 2.2% in In 1987 public sector savings increased to 7.9% of GDP. At the end of 1987 Belize's debt to GDP ratio was estimated at 43%, its debt service ratio at 11% and its debt service to central government current revenues ratio at 22%. Policy Issues 2. The main policy issues are as follows: (a) although there has been a remarkable turnaround in the public sector's savings, the Central Government cannot compete with the private sector and some non-financial public enterprises for skilled labor. Actions to put central government wages on a competitive footing with the rest of the economy would reduce public sector savings by about two percentage points of GDP in the absence of additional fiscal measures; (b) public investment has declined in real terms since FY1982/83 and is below levels warranted by the infrastructure needs of the economy. While the Public Sector Investment Program envisages investments of BZ$67.7 million in FY1988/89 and BZ$90.2 in FY1989/90, these may not be realized if public savings fail to reach anticipated levels; and (c) the main constraints to development are the high cost of electricity and inadequate transportation. The first constraint is related to the overall size of the market, lack of a national grid and, until recently, to poor management by the Belize Electricity Board. The transportation constraint reflects inadequate public sector investment in roads, seaports and airports.

46 Government Policies 3. The Government is aware of the variety of policy issues outlined above. In particular, it favors a greater role for private investment, and has divested the public sector's land holdings in the banana sector. Also, it has initiated a program to improve the efficiency of the Belize Electricity Board and the Belize Marketing Board. Prolect Priorities 4. Further development of the economic infrastructure remains the major focus of project activity. The authorities have listed five projects on which they intend to concentrate over the next two years: the Hummingbird Highway, the Belize City Hospital, the Airport Terminal, a World Bank-financed agriculture project, and a World Bank-financed road project.

47 DOMINICA Population: 80,000 (mid-1987) GNP per capita: US$1,440 (1987 Atlas methodology) Most Recent Bank Economic Mission: May 1987 The Economy 1. Strong growth in banana output propelled real GDP growth by 6.8% in 1986 and a further 4.6% in An increasingly favorable exchange rate between the EC$ and the sterling has been the main incentive to higher banana production. Tourism and construction were also important contributors to overall economic growth. Annual increases in the consumer price index, however, have more than doubled, from 2% in 1985 to 4.8% in In 1986, the Government, with the assistance of the IMF, CDB and IDA, embarked on a three-year structural adjustment program aimed at raising real economic growth, strengthening the fiscal and balance of payments positions and containing the public external debt within manageable proportions. In 1987 the Government introduced a tax reform aimed at simplifying and consolidating indirect taxes, and easing the steep progressivity of the income tax. Substantial pressures still exist on the fiscal system as a result of recent wage increases in the public sector. The balance of payments current account deficit, which was 21% of GDP in 1985, narrowed to about 9% of GDP in Dominica's development efforts in the last few years involved a rapid accumulation of external debt. In 1987, the debt outstanding and disbursed represented 51% of GDP, albeit the external debt service was 10.5% of exports (goods and services) and 16% of government revenue. Policy Issues 2. The main policy issues are as follows: (a) the need to increase public sector savings. Further rationalization of the operations of the Central Government and governmental agencies is needed to strengthen the public finances; and (b) the need to develop a diversified and competitive economic structure, given the uncertainties regarding the continuation of the EEC preferential market for bananas beyond Government Policy 3. The Government's development strategy addresses these issues. In particular, the Government is carrying out a structural adjustment program with external assistance from the CGCED donors.

48 Proiect Priorities 4. The Goverrment's investment priorities are: (i) execution of agricultural sector projects aimed at agricultural diversification; (ii) expansion of its hydroelectric facilities; and (iii) development of supporting infrastructure to expand agriculture, manufacturing and tourism.

49 DOMINICAN REPUBLIC Population 6.7 million (mid-1987) GNP Per Capita US$730 (1987 Atlas Methodology) Most Recent Bank Economic Mission: July 1988 The Economy 1. After registering annual real GDP growth of 1% per year during , or considerably less than half the rate of population growth, in 1987 the economy rebounded sharply, as real GDP increased 8% on the strength of a massive increase in public sector investment, financed partly through deep cuts in current central government outlays, which increased public sector savings from 2% of GDP in 1986 to 7% in However, inflation and external imbalance intensified markedly. Inflation escalated to 25% between December 1986 and December 1987 from 6% in the previous twelve month period, while the current account balance of payments deficit rose to 5% of GDP in 1987 from 2% in 1986, with the import coverage of gross international reserves falling from three months to one month. These adverse trends mainly reflected the surge in monetary growth between August 1986 and December 1987, derived from a sharp upturn in lending to both the private and public sector, the twofold expansion of public sector capital expenditures and a foreign debt strategy that foreclosed expeditious access to available sources of foreign financing. Net voluntary loan disbursements turned negative in 1987, as the accumulation of arrears on bilateral debt amounted to 1.5% of GDP. The consolidated public sector deficit remained above 5% of GDP in 1987, and the lion's share of it was financed through creation of credit by the monetary authorities. The abandonment of the free market exchange regime in mid-1987 also exacerbated the loss of official reserves. In addition, the virtual collapse of electricity service led to an increase of 28% in the volume of subsidized petroleum imports. A 17% deterioration in the terms of trade also heightened external imbalance. 2. In November 1987, the Government unified the official and parallel market exchange rates and enacted a number of measures to increase fiscal revenues and curb monetary growth. Nevertheless, the economy remained seriously overheated. The initial policy response to the further depletion of official foreign exchange reserves, exchange rate escalation and inflationary surge successively involved the curtailment of commercial bank lending; introduction of new foreign exchange controls; reductions of some basic consumer product prices; an increase in public sector minimum wages; the announced postponement of new public sector investment projects; a one year ban on the import of luxury items, and an increase in the surcharge on imports. Over the course of the first semester of 1988, the recovery of economic activity decelerated sharply and inflation increased. At the end of 1987, the Dominican Republic's debt to GDP ratio was 84% and to debt service ratio 43%.

50 Government Policy 3. Against this background, in late May the Government agreed to pursue a medium term economic program, prepared with Bank assistance, to surmount the obstacles that are checking the recovery of the economy and to foster growth-oriented structural change. This program sets out the Government's policy agenda for the next five years and identifies the economy's external financing requirements. A number of policy reforms that will increase public savings, reduce the incidence of domestic price distortions and ease inflationary pressures already have been implemented in the fiscal and monetary areas. The Government presented its medium term economic program to the CGCED. Initial donors' response to the Government's medium term economic program was positive: they indicated willingness to provide both balance of payments support and project financing, provided the Government enters into an IMF arrangement, reschedules its Paris Club debt and prepares a three year Public Sector Investment Program (PSIP) with Bank assistance. Policy Issues 4. The fundamental development issue facing the country is to create the foundation upon which genuine growth can be achieved on a sustained basis over the medium and longer-term. At the same time the country needs to address the following issues: (i) a severe structural unemployment problem; (ii) the domestic savings effort needs to be stepped up; (iii) the domestic financing gap needs to be eliminated; (iv) fiscal and monetary policies need to be coordinated; (v) the balance of payments needs to be strengthened; and (vi) both the external debt as a percentage of GDP and the external debt service ratio need to be reduced. In particular: (a) the real effective exchange rate should be maintained at a level high enough to expand exports and bring equilibrium to the balance of payments; (b) public sector savings should be increased to about 7% of GDP from 2% in 1987, on the basis of a major turnaround in the financial operations of the largest state enterprises; (c) overall public sector expenditure should be reduced to a level consistent with public sector savings and external finance. Expenditure should be reallocated from subsidies for middle and upper income consumers and from unproductive employment creation and capital outlays with low productivity, to investment in social infrastructure for the poor and capital formation that promotes the production of tradeables; (d) monetary policy should be geared to the provision of an adequate supply of credit at competitive real interest rates and directed credit should be phased-out; (e) import tariff levels should be slashed, dispersion of nominal protection progressively narrowed, and import exemptions and explicit export restrictions eliminated;

51 (f) price controls and subsidies, especially those affecting petroleum products, need to be removed; and (g) commercial bank and Paris Club debt need to be rescheduled and bilateral and multilateral sources of finance accessed.

52 GRENADA Population: 100,000 (mid 1987) GNP per Capita: US$1,340 (1987 Atlas methodology) Most Recent Bank Economic Mission: March 1986 The Economy 1. Since 1984, the economy of Grenada has maintained a real growth rate averaging about 5.5% per year. This reflects strong tourism performance and an up turn in distributive trades, construction activity, and public utilities. Tourism was boosted by the opening of the new airport and an increase in hotel facilities. The small manufacturing sector has expanded because of tax incentives, improved infrastructure, and increased access to the US market; manufacturing sector growth averaged 12% per year in However, agricultural output appears to be constrained, mainly because of poor management practices, low producers' prices, and the adverse impact of land acquisition policies of previous governments. Public finances have been dominated by the operations of the Central Government. After shifting to a small surplus in 1984, the overall balance of the public sector moved back to a deficit of 3% of GDP in 1986, as external grants (mainly from the United States) fell and delays occurred in the implementation of tax reforms - which hampered revenue collection. In addition, current expenditures continued to increase, in part owing to slow progress in the civil service retrenchment program. Meanwhile, the current account of the balance of payments (before grants) has averaged about 24% of GDP, largely reflecting a rising trend of imports relative to export earnings. Increased external borrowing to finance these deficits caused the external debt to rise from US$58.4 million in 1986 to US$69.4 million in 1987, equivalent to 46% of GDP. Policy Issues 2. The main policy issues are as follows: (a) restoration of fiscal balance through implementation of the new tax system and the civil service retrenchment program; (b) improvement of producer incentives in agriculture through the removal of price controls on beef, fish, and on a number of imported items; elimination of government monopolies for the import of bulk rice, sugar and bulk milk powder; and improvement of marketing arrangements for fruits and vegetables; (c) upgrading of the tourist product by eliminating the pollution and erosion of beaches through the completion of the Sewerage Project; comprehensive land use planning; and strengthening of the Tourist Board and its promotional efforts;

53 (d) the manufacturing sector is constrained by the lack of bank finance and shortages of skilled manpower. Addressing these issues requires ceilings on public sector borrowing to make credit available to the private sector; increased manpower training; and strengthening the Industrial Development Corporation in project processing and monitoring; and (e) the Government needs to implement its proposals to privatize 11 enterprises, starting with the Grenada Commercial Bank and the National Bank. Government Policy 3. Government medium-term economic objectives are to achieve a sustainable rate of economic growth, reduce unemployment, and improve the standard of living of the country's inhabitants. These are to be pursued through policies that would strengthen the fiscal and balance of payments positions, contain public external debt within manageable limits, and build up a cushion of reserves. Government strategy envisages that the thrust of economic growth should come from private sector activities. The role of the public sector largely is to create conditions for private sector activities through provision of adequate infrastructural and institutional support, and of incentives for savings and investment. Project Priorities 4. Grenada's Public Sector Investment Program (PSIP) is broadly consistent with the stated objectives of supporting private sector activity. Accordingly, the largest share (70%) has been allocated to expand and rehabilitate physical infrastructure, mainly roads, telecommunications, electricity, water supply and sewerage. It also includes an industrial estates project to support export-oriented manufacturing and a model farm project aimed at improving agricultural productivity.

54 GUYANA Population: 807,000 (mid-1987) Most Recent Bank Economic Mission: April 1987 GNP Per Capita: US$380 (1987 Atlas) methodology) The Economy 1. Since the late 1970s, Guyana has experienced a continuous deterioration in all aspects of the economy. In the period , real GDP declined by some 3% per annum and there was virtually no growth in Public sector finances continued to be weak, particularly because of the underutilization of capacity in the main public sector corporations and the compounding of interest payments. The overall deficit of the public sector increased from the equivalent of 43% of GDP in 1981 to 57% in 1986, but declined to 43% in 1987 mostly because of improvements of the Guyana Mining Industry and the Guyana Sugar Corporation. The balance of payments current account deficit declined from 32% of GDP in 1981 to 30% in The deficit has been financed through the accumulation of external payments arrears equivalent to close to 400% of exports in Guyana's scheduled debt service thus stood at 93% of exports and at about 209% of central government revenues in Policy Issues 2. In order to redress the existing domestic and external imbalances and restore the economy's export competitiveness, the following policy issues should be tackled: (a) improvements in incentives - exchange rate policy, domestic pricing policies, monetary and credit policies, liberalization of exchange and trade restrictions and the promotion of competition as a means of increasing economic efficiency; (b) improvements in fiscal policy, including needed reforms in the public sector, covering both the Central Government and public enterprises and a review of the public sector investment program; and (c) improvements in the overall performance of the productive sectors in agriculture, forestry and fisheries, mining and manufacturing. Government Policy 3. In the policy memorandum submitted to the Bank in May 1986 and updated in September 1987, the Government has initiated a number of policies to address these issues: (a) institution of a basket of currencies in order to monitor the value of the G$ relative to the US$ and established defacto multiple exchange rate regime (a differential buying rate for gold and diamond);

55 (b) exploration of additional revenue sources, especially avenues for taxing the informal sector, and the restructuring of the maturities of domestic debt; (c) organizational restructuring of the public enterprises into supervisory councils, and the decision to close non-viable enterprises; and (d) development of institutional changes to review of investment incentives and import licensing legislation and procedures. In addition, the Government has developed a comprehensive Policy Framework Paper as a basis for economic stabilization and recovery over the medium term. Proiect Priorities 4. Because of the uncertainty surrounding resource inflows, the PSIP is restricted to ongoing projects with identified external support and short-term programs of major domestic importance. Agriculture remains the main thrust of the ongoing PSIP. The Government is actively seeking external support for its petroleum and hydro-power development programs and for the rehabilitation of the bauxite sector.

56 HAITI Population: 6.2 million (mid-1987) Most Recent Bank Economic Mission: April-May 1988 GNP Per Capita: US$360 (1987 Atlas methodology) The Economy 1. In 1986 and most of 1987, Haiti undertook many basic changes focussed first on macroeconomic stabilization and, second, on improvement of resource allocation through reform of taxes, public expenditures, public enterprises, the trade regime and agricultural pricing. Unfortunately, civil disturbances during the latter half of 1987 led to setbacks (see paragraph 2). But before that, the policy changes had begun to stabilize and restructure the economy in In those two years: the overall deficit of the general government budget averaged an equivalent of 5.6% of GDP, compared to 8% in ; the external current account deficit averaged 5% of GDP, compared to 8% in ; the rate of inflation was brought down to 2% per year, compared to 8% per year in ; and the real exchange rate improved by 13%, compared to a 40% deterioration between 1980 and The debt-to-gdp ratio in FY1986/87 was about 33%, the debt service to exports ratio 15%, and debt service as a percent of central government revenues was 26%. Also, increased capital inflows through September 1987, coupled with lower current account deficits, enabled the country to accumulate some gross reserves and improve import coverage to about two and a half weeks of imports at the end of September 1987, compared to less than one-and-a-half weeks at the end of September Economic growth in averaged slightly under 1% per year, marred by the collapse of coffee export earnings and, in the latter half of 1987, by civil disturbances. Domestic agriculture and industry, already under expected stress from trade liberalization had to endure added competition from contraband. While such developments entailed localized hardships, they brought about greater availability of basic goods, lower consumer prices, and the opening-up of economic and employment opportunities in the trade and transport sectors. Policy Issues 2. Since the latter half of 1987, the civil unrest associated with the electoral process and political instability -- including two changes of government -- have created an atmosphere of uncertainty. These events have impeded economic performance, and have led to a loss of momentum in economic reforms, development activities and the flow of external aid. Thus far in 1988, the economy has deteriorated. Economic growth, if any, is expected to be negligible; inflation has picked up; and the public sector budget deficit has already led to borrowing from the Central Bank. With external aid in 1988 almost 25% below 1987, Haiti's balance of payments is now under severe pressure, and payments arrears have been incurred.

57 Up to now Haiti has maintained the basic economic reforms referred to in paragraph 1. It will be important for the country to continue to do so and, as the political situation is redressed, to focus more on improving the economic situation. The main issues are as follows: (a) in the short term, Government policy will need to focus on mobilizing adequate resources to maintain basic public services and meet essential import requirements. Beyond that, Haiti will need to consolidate and advance the export and growth-oriented policy reforms which it had been pursuing most recently, and thereby begin to resolve the severe unemployment problem afflicting the country; and (b) in a longer-term perspective, Haiti needs to address its many pressing development problems, notably its critical situation in health and nutrition, undeveloped human resources, poor agricultural performance, and deteriorating natural environment. Moreover, these problems must be approached with a due sense of innovation and urgency; otherwise, they will become unmanageable. Project Priorities 4. Important criteria guiding the public investment program are to complete high priority projects already under execution; to seek concessional aid in financing projects within Haiti's absorptive capacity; and to select projects that principally support agricultural production, exports and the improvement of human capital.

58 JAMAICA Population: 2.4 million (mid-1987) GNP per capita: US$960 (1987 Atlas methodology) Most Recent Bank Economic Mission: April/May 1988 The Economy 1. Over the past eighteen months, Jamaica's economic performance has improved considerably. In FY86/87, real GDP increased by 3.7% as a result of a 20% increase in tourist stopover visitors and the reopening of an alumina smelter. In addition, the fall in the price of oil and of international interest rates also proved of major benefit to the economy. The current account deficit narrowed to 4.3% of GDP from over 14% in the previous year and all external arrears were eliminated. Non-traditional exports increased by 17.2% in FY This overall economic recovery was sustained in FY87/88, with preliminary indications of real GDP growth of about 5%. Tourism growth continues to be robust; 1987 estimates indicate that total visitor arrivals exceeded one million. In addition, nontraditional export growth has accelerated still further to about 35%. In the latter part of 1987, unemployment fell to 22%, the lowest level in 10 years, and inflation declined to about 7%. The more rapid pace of GDP growth, however, has been accompanied by a significant increase in imports, as a result of which the current account deficit of the balance of payments widened to about 7% of GDP in However, increased private and public capital inflows more than compensated for the increase in imports, and the increase in net international reserves in FY87/88 was over 3 times that recorded in FY86/87. These overall economic accomplishments originated from improvements in the longstanding fiscal imbalances. The overall public sector deficit fell to 6.6% of GDP in FY86187 from over 16% in the previous year, and is expected to decline further to about 5% of GDP in FY This has resulted in part from a stronger revenue performance, reflecting both the rapid pace of economic activity and tax measures introduced in 1986 and Under the 15 month IMF Stand-By Arrangement approved in March 1987, all quantitative performance criteria have been met. Discussions are ongoing for a further arrangement that would start in the early Fall of At the end of FY1986/87, the ratio of debt outstanding and disbursed to GDP was 133% and the debt service ratio 48%. Policy Issues 2. In December 1987, the Government presented to a special Subgroup meeting of the CGCED a Medium Term Economic Policy Framework Paper (MTEFP), that sets out the policy reform agenda over the next three years. With implementation of this agenda, it is projected that real GDP growth can be maintained at 3.5-4% per annum on the basis of the ongoing expansion investments in the tourism sector and continued development of nontraditional exports. With continued fiscal prudence and further declines in the overall fiscal deficit to about 2.7% of GDP by FY90/91, it is projected that the current account deficit of the balance of payments should decline to about 3.4% of GDP in the same year. The main policy issues are as follows:

59 (a) balance of payments constraints will continue to be severe, in part because of the country's large external debt (about 120% of GDP at the end of FY87/88) and the resultant debt service obligations. Sustained improvement in the external current account will hinge critically on continued development of tourism and non traditional exports and strict control on the growth of aggregate demand. First, this will require maintenance of international competitiveness. The present maintenance of the J$5.50 to US$1.00 for the exchange value of the Jamaican dollar has been facilitated by the depreciation of the U.S. dollar against other major currencies; the Jamaica dollar has depreciated in real effective terms by about 6% in May 1988 as compared to December For future growth to be realized it will be essential to pursue a flexible exchange rate policy that avoids any significant appreciation in the real effective value of the local currency. In addition, it will be crucial to maintain public wage policy guidelines consistent with the growth in domestic productivity. Second, there will be continued need for improvement in public finances to reduce the overall fiscal deficit and adherence to a cautious monetary policy; (b) a critical component of the medium-term economic program is the development of a viable external debt management strategy. The challenge is to maintain the present growth momentum with lower levels of external public sector borrowing. Additional rescheduling will be necessary on the existing stock of debt, as well as innovative solutions to extend or reduce debt service obligations. The Government should actively continue the debt/equity conversion program already initiated. With regard to future external financial requirements, emphasis must be placed on utilization of highly concessionary funding and further improvement in the incentive systems and business environment to attract inflows of private capital and direct foreign investment; (c) additional import tariff reform measures will be necessary, together with appropriate exporter incentive programs, in order to maximize the growth of nontraditional exports and ensure efficient resource allocation; (d) the tax reform program needs to be expanded to encompass all indirect taxes, via a consolidation and simplification of the present system of excise taxes and consumption duties; (e) the need for cautious fiscal management will put pressure on the PSIP. It will be crucial to ensure that the PSIP is targeted efficiently and executed in a manner flexible enough so that high priority projects, particularly those involving external donor support, are maintained and implemented in a timely manner; and (f) further efforts will be necessary to eliminate the need for Central Government transfers and continue with a rationalization, where appropriate, of the public enterprise sector.

60 Project Priorities 3. Over the next three to four years, the PSIP will focus primarily on economic infrastructure, particularly upon those elements that would support growth in the leading export earning sectors. In addition, increased emphasis will be placed on social infrastructure, especially education and health. This PSIP is considered appropriate.

61 ST. KITTS AND NEVIS Population: 47,000 (mid-1987) Most Recent Bank Economic Mission: February 1988 GNP per capita: US$1,700 (1987 Atlas methodology) The Economy 1. The real GDP of St. Kitts and Nevis averaged 4% annually from 1982 to Weak agricultural performance originating from adverse weather was more than compensated by strong tourism growth. The fiscal accounts improved markedly in 1986 and 1987 after having come under severe pressures in 1985 because of the sugar industry's outstanding deficit and the need to meet the industry's outstanding obligations to the former owners of sugar lands. The Government took corrective measures, raising taxes and cutting expenditures. The government current account surplus was 2.6% of GDP in 1986 compared with a deficit of 3.7% of GDP in In 1987, strong growth in revenues from international trade transactions contributed to further strengthening of the fiscal position, and the government current surplus reached 4% of GDP. The 1986 merger of the field and factory operations of the sugar industry under a single management has brought some efficiency gains. The acquisition in 1988 of two mechanical harvesters is expected to yield further operational improvements. However, the uncertainties surrounding the EECIUS preferential markets for sugar warrant the country's continued pursuit of viable agricultural activities other than sugar. External debt in 1987 was about US$23.6 million, equivalent to 26% of GDP. External debt service in 1987 was about 3% of exports of goods and nonfactor services. However, including the interest on domestic debt, the ratio to government revenues approached 16%. Policy Issues 2. The main policy issues are as follows: (a) the recent growth of tourism and prospects for continuing development of the sector offer increasing opportunities for attractive employment outside the traditional sectors. Competition among sectors for labor would result in wage and cost pressures. The authorities face the challenge of managing wage increases so as to avoid eroding the country's international competitiveness; and (b) the solution of the land tenure problem, which would enable the Government to undertake a long-term agricultural diversification program. Government Policy 3. The Government's development strategy is to continue promoting growth in the tourism sector, particularly by granting incentives for further development in the Frigate Bay area and by development of the

62 Southeast Peninsula which has strong tourism potential. The Government also is committed to improving the efficiency of the sugar industry and diversifying agricultural production. Proj ect Priorities 4. The main project priorities are the expansion of the sewerage system in Frigate Bay and the development of the Southeast Peninsula, including the penetration road and accompanying infrastructure.

63 ST. LUCIA Population: 143,000 (mid-1987) GNP per Capita: US$1,370 (1987 Atlas Methodology) Most Recent Bank Economic Mission: November 1987 The Economy 1. The economy of St. Lucia recovered from the devastating effects of two hurricanes in , with real GDP growth averaging 4% per year during and accelerating to nearly 6% per year in This recovery is mainly attributable to a steady increase in banana output, the country principal export, a significant growth in tourism, and an upsurge in construction activity. But in 1987, the economy witnessed a slowdown owing to a drought which affected banana production. Real GDP grew by only 2.1%. Favorable growth in the economy in recent years, however, has not made a significant impact on reducing unemployment, estimated at over 20% of the labor force. Domestic investment remained relatively high at around 37% of GDP during , largely reflecting infrastructure and hotel construction. Meanwhile, domestic savings and public savings stood at 24% and 11% of GDP in 1987 and financed substantial shares of public investment. The current account deficit of the balance of payments narrowed dramatically from about 27% of GDP in 1982 to about 3% in 1986, reflecting increased earnings from banana exports and tourism. But in 1987, the current account deficit climbed to 14% of GDP, owing to the marked drop (25%) in banana exports. The country's external debt situation has remained manageable. As of end 1986, the external debt stood at 16.7% of GDP, and the external debt service ratio at 2.1% of exports of goods and nonfactor services, both having declined from previous years. The debt service to central government revenues ratio was 4.2% in Policy Issues 2. The main policy issues are as follows: (a) the favorable level of public savings already attained is likely to be eroded unless the wage bill, accounting for 52% of central government current expenditure, is kept under control. Maintaining public savings at the present level is crucial for financing of new investments and hence creating new employment; (b) wage restraint is needed to help control production costs and maintain external competitiveness in the short term; (c) in view of the uncertainties of the preferential UK market for bananas in the 1990s, the country needs to: rapidly diversify agriculture; improve productivity in banana-producing areas with potential for international competitiveness; (d) hotel capacity has to be expanded and the quality of its tourist product needs to be improved by strengthening the Tourist Board, increasing promotional efforts, and improving infrastructure and manpower; and

64 (e) the growth potential of the manufacturing sector needs to be realized by more effective investment promotion, streamlined investment approval procedures, and training of skilled manpower. Government Policy 3. The Government is committed to a development strategy based on the private sector, with the public sector playing a supportive role. The strategy focuses on export promotion and employment generation in agriculture, tourism and industry. In agriculture, the Government's objective is to restore production of traditional export crops to prehurricane levels while increasing output of nontraditional exports. In tourism, the PSIP would provide the infrastructure required to support increased private investment. In manufacturing, the Government's objective is to encourage investment through the provision of factory shells, lines of credit through the St. Lucia Development Bank, and supportive infrastructure including water, electricity and roads. Project Priorities 4. The composition of the PSIP is consistent with the Government's development objectives. About two-thirds of the PSIP is for infrastructure development and about 10% for agriculture. New projects amount to roughly 25% of the total. Key projects include: the Power Project consisting of the construction of a new power station and the installation of three 5 MW diesel sets, the Roseau Dam Project aimed at meeting the demands of potable water for domestic, commercial and industrial consumption, the West Coast Road from Castries to Soufriere, the Vieux Fort Port Expansion Project, and the Hewanorra Airport Improvement Project.

65 ST. VINCENT AND THE GRENADINES Population: 112,000 (mid-1987) Most Recent Bank Economic Mission: August 1987 GNP Per Capita: US$1,070 (1987 Atlas methodology) The Economy 1. Real GDP in St. Vincent and the Grenadines grew at an average rate of 5.7% a year during , mainly because of the strong recovery of agriculture, following two major natural disasters, and the expansion of transport and communications as well as wholesale and retail trade sectors. During , the rate of growth of real GDP moderated to 2.3% per year as a result of the adverse effect of a tropical storm on agricultural production and a decline in export manufacturing following weak regional demand. Public sector finances have improved substantially in recent years and public savings stood at 8% of GDP in The improvement resulted largely from the good financial performance of the Central Government, which compensated for the weak financial performance of the public enterprises. Substantial improvements in the balance of payments also occurred; the current account shifted from a deficit of 23% of GDP in 1980 to a surplus of 3% in 1985 as exports doubled. However, this is projected to deteriorate during as imports of capital goods are expected to increase substantially because of the ongoing large PSIP. St. Vincent and the Grenadines' outstanding external public debt decreased only marginally from 27% of GDP in 1981 to 25% in 1986; while the debt service ratio stood at 2.6% and the debt service as a percentage of central government revenues at 7.0% in Policy Issues 2. The main policy issues are as follow: (a) maintenance of export competitiveness. Restraint on public sector expenditures, particularly wages, should be an important component in any strategy aimed at preserving the country's competitive position; (b) the existence of price controls on some agricultural commodities and fishery products and of export taxes on some agricultural commodities hinder diversification. The Government should eliminate these distortions; and (c) unemployment of 25-35% of the labor force and a high fertility rate among the years age group which accounts for over 60% of the unemployed. To supplement ongoing initiatives, the Government should: (i) develop a self-employment scheme, (ii) revise the fiscal incentive scheme to support employment creation, and (iii) intensify the awareness of responsible parenthood at the elementary school level.

66 Government Policy 3. The Government has published a three-year rolling Development Plan ( ) which states its development strategy for the period. The policies outlined in the Plan reaffirm the Government's objective of providing basic infrastructure to support private sector activities to increase exports and employment on the basis of growth in agriculture, manufacturing and tourism; while taking advantage of opportunities for import substitution when a clear competitive advantage exists. Proiect Priorities 4. To support the development program, the Government has put together a medium-term PSIP, the revised expenditures amounting to EC$180.6 million (US$66.9 million) for , for which EC$ million (US$48.9 million) would be mobilized from external sources. Following a Consultative Meeting in December 1987, the project financing needs for are expected to be closed when bilateral discussions are concluded. The composition of the PSIP is consistent with the Government's development objectives; it places heavy emphasis on the expansion of energy, agriculture and transportation which together constitute about 60% of the total proposed expenditures.

67 SURINAME Population: 411,000 (mid-1987) GNP per Capita: US$2,360 (1987 Atlas methodology) Most Recent Bank Economic Mission: April 1988 The Economy 1. Suriname's economic performance has deteriorated steadily since Real GDP has declined at an average rate of about 3.5% per year in Initially the economy was affected by a weakening in the world market for bauxite and its derivatives, which account for about 70% of Suriname's export earnings. The problem was compounded by the suspension of aid from The Netherlands. These setbacks were accompanied by a inadequate policy response and a rapid increase in government current expenditure. The fiscal deficit (before grants) climbed steadily from the equivalent of 19% of GDP in 1983 to 27% of GDP in The financing of these deficits through the Central Bank led to severe pressures on Suriname's foreign exchange reserves. Meanwhile, sluggish export volumes of bauxite and its derivatives and declining volumes of rice, wood and lumber exports caused the export value of goods and nonfactor services to decline from 51% of GDP in 1982 to 34% of GDP in This forced a cutback on imports, resulting in shortages of inputs and machinery needed for the productive sectors. The balance of payments current account deficit averaged about 8% of GDP during Suriname's real exchange rate had appreciated by 44% in 1986 relative to Meanwhile, the country's external debt climbed steadily from the equivalent of 3% of GDP in 1983 to about 19% of GDP in Likewise, the debt service ratio has risen steadily from under 1% in 1985 to nearly 6% in Debt service obligations amounted to about 8% of central government revenues in As of end 1987, external payment arrears stood at US$88 million, or about 9% of GDP. In response to emerging internal and external imbalances, the authorities resorted to controls on prices and foreign exchange combined with tight import licensing procedures. Policy Issues 2. The main policy issues are as follows: (a) the fiscal deficit needs to be reduced to a sustainable level through current expenditure controls, including wage restraint, and revenue increases; (b) a realistic exchange rate has to be adopted to provide adequate incentives to the export sector. It would also help reduce the fiscal deficit through its effects on foreign trade taxes; (c) price controls and import licensing procedures need to be relaxed with a view to improving producer incentives and stimulating private sector activity;

68 (d) the operational efficiency and the financial viability of the bauxite sector needs to be improved by allowing it to adopt more realistic employment and wage policies, and through a realistic exchange rate; (e) performance in agriculture needs to be improved by a reduction of government intervention in the sector; and (f) a core program of economically viable public sector investments should be formulated in order to support production and export growth. Government Policy 3. The new Government, which assumed office in January 1988, is committed to a comprehensive program of economic reform aimed at removing internal and external imbalances and reviving the economy through private sector activity. Proiect Priorities 4. The immediate task before the Government is to bring into full operation some of the major public investments in the past and the palm oil processing projects. A core program of new public investments which are economically viable needs to be carefully formulated.

69 TRINIDAD AND TOBAGO Population: 1.2 million (mid-1987) GNP per capita: US$4,220 (1987 Atlas methodology) Most Recent Bank Economic Mission: October 1987 The Economy 1. The economy of Trinidad and Tobago has experienced declining output, employment and revenues since 1982 owing to a levelling off in crude oil production and weak world oil prices. It has also been affected by the completion of large construction projects, the inherent lag between completion and full production of the major export-oriented energy-based industries (liquefied ammonia, fertilizers, methanol) -- which face weak international markets -- and the erosion of competitiveness in other manufactured exports. Real GDP declined by 6.4% in 1986 and is estimated to have fallen by a further 2.3% in The only growth in 1986 occurred in agriculture, manufacturing and refining. Petroleum production declined by 4% following the collapse in oil export prices. With the reduction in public investment, the service and construction sectors also contracted. A further fall in oil production has been the dominant factor in the continued decline of the economy in Domestic inflation in 1986 remained at 7.7%, but accelerated to over 10% in 1987 following the unification of the exchange rate in December The overall public sector deficit rose from 7.5% of GDP in 1984/85 to 9% of GDP by 1986, primarily due to a fall in revenue collections with the downturn in oil prices. Export earnings plummeted by 30% in 1986, principally because of a decline in both the volume and prices of petroleum products. The balance of payments current account deficit grew from 1% of GDP in 1985 to 12% in International reserves dwindled from US$3.2 billion in 1982 (13 months' imports) to about US$81 million in 1987 (less than one month of imports). 3. During , the Government response to the financial difficulties included increases in public utility rates, containment of current expenditure growth, cuts in capital spending, credit controls, restriction of imports and a devaluation of the Trinidad and Tobago dollar. However, with the collapse in oil prices in 1986, further policy adjustments became necessary. The new Government has focused on expenditure restraint and reduced marginal income tax rates to improve incentives to the private sector. The operations of state enterprises have been reviewed with the objective of increasing their efficiency and reducing their dependence on the central government. Public spending is to be monitored closely to cut down waste, and the Government has committed itself to greater public accountability and more effective use of national resources. Policy Issues 4. The major policy issues confronting the Government are to arrest the prolonged decline in the economy and to achieve medium-term growth through structural reforms. In this context:

70 (a) oil remains the country's most important foreign exchange earner and thus holds the key to short-term recovery efforts. Government tax and incentive policies must be aimed not only at encouraging enhanced output, but also at sustaining a high level of exploration and drilling; (b) in the medium- to longer-term, the Government faces the task of reorienting the manufacturing sector from import substitution to export, and promoting tourism. This would call for a flexible exchange rate policy, further reform of industrial incentives and liberalization of the protective trade system; (c) particular attention needs to be directed towards efficient management of the energy-based heavy industries now on stream to ensure realization of the benefits expected from them; (d) public finances need to be strengthened by reducing the Government's wage bill, eliminating subsidies to public utilities, reform of state enterprises and through improved cost recovery. A comprehensive rescheduling of external debt needs to be pursued to facilitate financing of the adjustment program; (e) the overall domestic financing gap needs to be progressively eliminated, and with it, public sector recourse to Central Bank credit; and (f) the high level of unemployment will need to be addressed through a realistic wage policy, provision of relevant training, and policies to expand opportunities for productive employment in the private sector.

71 STATISTICAL APPENDIX ANNEX II

72 I

73 Table 1.1: CARIBBEAN COUNTRIES--GROWTH OF GDP, (Constant market prices) _ p/ ANTIGUA a/ p/ 7.0 BAHAMAS BARBADOS BELIZE b/ DOMINICA a/ DOMINICAN REPUBLIC GRENADA GUYANA HAITI ON JAMAICA ST. KITTS c/ ST. LUCIA c/ ST. VINCENT SURINAME TRINIDAD a/ _-_- - - a/ 1986 and 1987 at factor cost. b/ Series revised beginning c/ At factor cost. p/ Preliminary... Not available. Source: IBRD Economic Memoranda.

74 Table 1.2: CARIBBEAN COUNTRIES--PUBLIC SECTOR SAVINGS, a/ p/ (USt Million) ANTIGUA BAHAMAS BARBADOS a/ BELIZE DOMINICA a/ DOMINICAN REPUBLIC GRENADA GUYANA HAITI JAMAICA b/ ST. KITTS b/ ST. LUCIA ST. VINCENT SURINAME TRINIDAD 7S (As percent of GDP) ANTIGUA BAHAMAS BARBADOS BELIZE DOMINICA a/ DOMINICAN REPUBLIC GRENADA GUYANA HAITI JAMAICA b/ ST. KITTS b/ ST. LUCIA ST. VINCENT SURINAME TRINIDAD a/ Fiscal year. b/ Central Government. p/ Preliminary... Not available. SOURCE: IBRD Economic Memoranda ,

75 Table 1.3: CARIBBEAN COUNTRIES--BALANCE OF PAYMENTS CURRENT ACCOUNT, p/ (USS Million) ANTIGUA p/ BAHAMAS BARBADOS BELIZE DOMINICA DOMINICAN REPUBLIC GRENADA GUYANA HAITI JAMAICA ST. KITTS ST. LUCIA ST. VINCENT SURINAME TRINIDAD (As percent of GDP) ANTIGUA BAHAMAS BARBADOS BELIZE DOMINICA DOMINICAN REPUBLIC GRENADA GUYANA HAITI JAMAICA ST. KITTS ST. LUCIA ST. VINCENT SURINAME TRINIDAD p/ Preliminary. Not available. SOURCE: IBRD Economic Memoranda.

76 Table 1.4: CARIBBEAN COUNTRIES--TOURISM RECEIPTS, (USS Million) p/ ANTIGUA a/ BAHAMAS BARBADOS BELIZE DOMINICA DOMINICAN REPUBLIC GRENADA HAITI JAMAICA ST. KITTS ST. LUCIA ST. VINCENT TRINIDAD a/ Series revised beginning p/ Preliminary... Not available. SOURCE: IBRD Economic Memoranda.

77 Table 1.5: CARIBBEAN COUNTRIES--TOURIST ARRIVALS, (thousands) p/ ANTIGUA BAHAMAS 1, , , , , , , , BARBADOS BELIZE DOMINICA DOMINICAN REPUBLIC GRENADA HAITI JAMAICA 3s ST. KITTS ST. LUCIA ST. VINCENT TRINIDAD a/ Series revised beginning p/ Preliminary... Not available. SOURCE: IBRD Economic Memoranda.

78 Table 1.8: CARIBBEAN COUNTRIES--VALUE OF SUGAR EXPORTS, (USS Million) p/ BARBADOS a/ BELIZE DOMINICAN REPUBLIC a/ GUYANA HAITI JAMAICA ST. KITTS TRINIDAD a/ Includes sugar, and molasses. p/ Preliminary... Not available. SOURCE: IBRD Economic Memoranda.

79 Table 1.7: CARIBBEAN COUNTRIES--VOLUME OF SUGAR EXPORTS, ('000 long tons) p/ BARBADOS a/ BELIZE DOMINICAN REPUBLIC a/b/ 1, , , , , , , , GUYANA HAITI b/ JAMAICA ST. KITTS TRINIDAD a/ Includes sugar, and molasses. b/ Metric tons. p/ Preliminary... Not available. SOURCE: IBRD Economic Memoranda.

80 Table 1.8: CARIBBEAN COUNTRIES--VALUE OF BANANA EXPORTS, (USS Million) - _ - _ p/ - -_- -_ BELIZE DOMINICA GRENADA JAMAICA ST. LUCIA ST. VINCENT SURINAME _ -_ p/ Preliminary... Not available. SOURCE: IBRD Economic Memoranda.

81 Table 1.9: CARIBBEAN COUNTRIES--VOLUME OF BANANA EXPORTS, ('000 tons) p/ BELIZE DOMINICA GRENADA JAMAICA ST. LUCIA ST. VINCENT SURINAME p/ Preliminary... Not available. SOURCE: IBRD Economic Memoranda.

82 Table 1.10: CARIBBEAN COUNTRIES--VALUE OF BAUXITE EXPORTS, a/ (US3 Million) p/ DOMINICAN REPUBLIC GUYANA HAITI JAMAICA SURINAME e a/ Includes calcined bauxite p/ Preliminary. (-) Indicates nil. Not available. SOURCE: IBRD Economic Memoranda.

83 Table 1.11: CARIBBEAN COUNTRIES--VOLUME OF BAUXITE EXPORTS, a/ ('000 tons) p/ DOMINICAN REPUBLIC GUYANA 1, , , , , , , , , , ,410.0 HAITI JAMAICA 8, , , , , , , , , , ,711.4 SURINAME 2, , , , , , a/ Includes calcined bauxite p/ Preliminary. (-) Indicates nil. Not available. SOURCE: IBRD Economic Memoranda.

84 Table 1.12: CARIBBEAN COUNTRIES--VALUE OF ALUMINA EXPORTS, (USS Million) p/ GUYANA JAMAICA SURINAME p/ Preliminary. Not available. SOURCE: IBRD Economic Memoranda.

85 Table 1.13: CARIBBEAN COUNTRIES--VOLUME OF ALUMINA EXPORTS, ("'OOO tons) p/ GUYANA JAMAICA 2, , , , , , , , , , ,464.2 SURINAME 1, , , , , , , , , , p/ Preliminary... Not available. SOURCE: IBRD Economic Memoranda. -I

86 -78- Table 1.14: CARIBBEAN COUNTRIES -- EXTERNAL RESOURCE FLOWS, (in millions of USS) Net Int. Net Int. Net Int. Net Int. Net Int. Net Int. Flows Paid Flows Paid Flows Paid Flows Paid Flows Paid Flows Paid OFFICIAL CREDITORS MULTILATERAL LOANS CDB f EDF EIB EEC IBRD/IDA IDB IFAD IMF TRUST FUND IMF CREDITS IMF SAF OPEC BILATERAL LOANS BRAZIL CANADA of which: CIDA EDC CHINA FRANCE GERMANY JAPAN MEXICO NETHERLANDS SPAIN TAIWAN TRINIDAD & TOBAGO UK USA of which: AID CCC EXIMBANK VENEZUELA OTHERS GRANTS UNDP MULT. OTHERS CANADA FRANCE p GERMANY ITALY JAPAN NETHERLANDS UK USA BILAT. OTHERS PRIV. ORGANIZ PRIVATE CREDITORS SUPPLIERS BANKS & OTHERS e ALL CREDITORS Source: IBRD International Finance Division.

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