Caribbean Region Current Situation, Issues and Prospects

Transcription

1 Public Disclosure Authorized Report No CRG Caribbean Region Current Situation, Issues and Prospects Otober 17, 1986 Latin Americ and the Caribbean Regional Office FOR OFFICIAL USE ONLY U Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the Ubrld Bank This document has a restrictedistribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank atithorization.

2 FOR OMCIL Use ONLY PREFACE This Report has been prepared for the Caribbean Group for Cooperation and Economic Development (CGCED). Its prime objective is to focus attention on the performance, problems, prospects and the needs of the Caribbean countries. Part I, Overview of the Caribbean Economies, provides a synopsis of the prcgress and the outlook of the 15 economies in the region. While the Bank's updating econonic reports prepared for the CGCED have essentially a country focus, this section of the Report aims at providing a regional perspective on selected economic policy and sector issues, particularly issues in the traditional export sectors, in employment, public finance, exchange rate policy, foreign debt, private sector and state enterprises. Part II examines the external financing requirements for each country in Three points are noteworthy. First, on a per capita basis, these requirements are quite substantial. Second, in nearly all countries there is now a need for balance of payments or budgetary support in addition to external financing of public sector investment. And third, for the OECS member countries, funds on concessional terms continue to be essential. The "tighter' consultative group arrangement holds out the prospect of possibly augmenting such concess.ional assistance for countries undertaking programs of structural adjustment. Part III updates information on some of the regional and subregional programs which complement individual country programs of the CGCED. For some programs, additional donor assistance is required for their continuation. Comprehensive reports on the regional and subregional piograms are to be distributed prior to the January 1987 CGCED meeting. Finally, the Country Profiles included in Annex I highlight country-specific policy issues, project priorities, creditworthiness and the Bank's own program of assistance. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be diselosed without World Bank authorization.

3 TABLE OF CONTENTS Pate No. I. OVERVIFW OF THE CARIBBEAN ECONO!.IES... 1 II. EXTERNAL FINANCING III. REGIONAL AND SUBREGIONAL PROGRAMS... Q. 27 ANNEX It Country Profiles ANNEX II: Statistical... 71

4 I. OVERVIEW OF THE CARIBBEAN ECONOMIES A. INTRODUCTION 1. The recent performance of individual Caribbean economies continues to reveal their sensitivity to developments in the regional and international economies. With the slowing of growth in the US, Canada and several European countries, the recovery most Caribbean economies registered in 1984 was not sustained in 1985; indeed several of the larger economies registere declines instead (Annex II Table 1.1). In Trinioad and Tobago, the only oil exporter in the region, falling oil prices have resulted in a significant drop in output and employment, with real '.DP falling by 4% in 1985, following declines of 7% in 1984 and 6% in Depressed international markets for bauxite and aluminum have continued to affect the Jamaican, Guyanese and Surinamese economies. In Jamaica, real output fell by 5.0% in 1985, following a decline of 0.5% in the previous year, and real domestic investment and real consumption expenditures are estimated to have fallen as well. Tourism in Barbados experienced a good winter season, but because of a bad summer and depressed international markets for electronic components, combined with the continued trading problems in the CARICOM, growth in real output slackened to 0.32, down from 3.5% in The economy of the Dominican Republic contracted by 1% in 1985 because of the impact of declining sugar export volume, diminished capital inflows and the effects of stabilization efforts. 2. The smaller tourism-based economies of the Caribbean fared much better than the larger ones in In most of the former, real GDP increased, with Antigua and Barbuda topping the list with its second consecutive year of growth at a rate of over 6%. The Bahamas, Grenada, and St. Lucia are estimated to have grown by 3% or more in In the smaller territories, tourism and a generally high level of public sector investment were key factors in the favorable performance of Continued increases in banana production concomitant with a weakening of the US dollar also helped. The latter factor may have influenced the rise in the number of European visitors to the English-speaking Caribbean. 3. The outlook for 1986 is that the Caribbean economies will again be influenced significantly by external developments. The slide in oil prices in the early part of the year - from US$28 per barrel to US$15 - has further hurt Trinidad and Tobago, ushering in another year of recession. Oil revenues in the first half of 1986 amounted to TT$614 million compared with TT$668 million in the same period of 1985, as a result of which government capital ex enditures have had to be cut by 47% in that period; imports from CARICOM partners fell by TT$17 million. In varying degrees on the other hand, the oil price slump and fall in interest rates could help stimulate the other economies, which are oil importers. Jamaica is expected to register a positive rate of growth, after a decline of 5% in 1985, and the fall in oil prices could affect GDP positively in other countries such as Barbados, The Bahamas and the Dominican Republic. Likewise, the decline of the US dollar in most of 1986, to which most region1 currencies are pegged, will make regional exports to Europe and I/ CARICOM does not cover Suriname, tle Dominican Republic and Haiti.

5 - 2 - Canada more competitive. Increased access to the US market through the Caribbean Basin Initiative could further benefit several states, particularly Jamaica, Belize, the Dominican Republic and Haiti. 4. In the Caribbean as a whole, tourism will continue to be the leading growth industry. Tourist arrivals have already increased by 2% in thle first sim months of 1986 as compared with the first half of In contrast the indications are that, in a number of countries, traditional export ccuomdities have declined. The price of bananas remains depressed, and the earnings of the bauxite/alumina sector have fallen off. On the other hand, sugar prices have risen, coffee prices more so, trends that could help the recovery in Jamaica and in the Dominican Republic. 5. Given the heavy import orientation of the Caribbean economies, a key factor in their growth is the availability of foreign exchange, whether it comes from exports or capital inflows. In the smaller territories, grants and concessionary loans have played a significant role in maintaining a high level of public sector investment in the absence of significant government savings. In both the smaller islands and the larger territories, diversification of production and exports is recognized as a major development objective In strengthening the beies of these economies. In this connection, there is a need for policies that could direct foreign exchange resources, wherever available, into productive uses rather than into consumption. 6. Despite the vicissitudes of dependence on a very limited range of activities, the economies of the Caribbean countries (with the exception of Guyana and Jamaica) have grown over the last 10 years as a whole, as has the average per capita income. Only two countries - Haiti and Guyana - have a GNP per capita of less than US$800. In ten countries GNP per capita ranges from US$800-3,000 and in the remaining three - the Bahamas Barbados and Trinidad and Tobago - income levels range from US$4,000 to about US$7,000. The social indicators also show clear signs of progress. Life expectancy at birth is now higher in mdst countries than it was in the early 1970s, and infant mortality has fallen. Nevertheless, important social and economic problems remain. Although there is little information on the distribution of income, tentative studies in certain cases indicate it is relatilrely ekewed. In several countries, malnutrition and illiteracy still exist, as bealth care and education are yet inadequate. 7. The medium to long-term prospects of the Caribbean economies, with their heavy dependence on international markets, are linked closely to growth in the economies of Niorth America and Europe. (Country-specific issues are set out in a later section of this report in Annex I). At the same time, the responses of the Caribbean economies to both opportunities and challenges will also determine how well they fare. The Bank's individual country assessmentsuggest that, assuming no new external shocks, rates of GDP growth in excess of the rates of population increase are feasible, despite the small size of some economies, so that income per capita could rise. In some countries, GDP growth rates of 4X and over are attainable. Realization of these levels will hinge, on the part of donors, on continued adequate levels of external assistance and, on the part of the Caribbean nations, on sustained levels of investment, on better exploitation of their preferential access to the markets of North America and the EEC; further development of tourism, rehabilitation and structural

6 - 3 - adjustment of their economies to g.,nerate adequate savings (Annex II Table 1.2), to reduce the current account balance of payments deficits (Annex II Table 1.3) and to render their economies more diversified and competitive through the provision of appropriate incentives for the private sector, by reducing the involvement of the public sector in economic activities, by introducing and maintaining appropriate wage policies and real exchange rates. B. SELECTED ECONOMIC POLICY ISSUES EMPLOYMENT AND WAGES 8. Unemployment continues to be one of the most serious social problems afflicting the region. In some countries (for example, Grenada, Jamaica, Suriname and Guyana), the number of unemployed as a proportion of the labor force is estimated to be around 252 or more. In 1985, the situation worsened in states that had been making good progress in reducing unemployment. In Trinidad and Tobago, for example, the unemployment rate is estimated to have increased from 132 in 1984 to 152 in In Barbados, the unemployment situation also deteriorated as a result of the problems facing its main exports in the CARICOM and international markets. The unemployment rate there is estimated to have increased from 112 in 1981 to a;most 202 in 1985 and is likely to increase further in 1986 with the closure of the largest plants in electronics and textiles. 9. While the increase in unemployed in many cases reflects a loss of jobs, new entrants into the labor market are also a significant factor. Unemployment has been exacerbated by the movement of people (particularly the young people) from the rural to urban areas in search of jobs that are considered to be more prestigious or offer higher remuneration. In many countries, high unemployment exists side-by-side with a shortage of agricultura labor. Young people often prefer to be unemployed than to accept the low wages of the agricultural sector. In recent years, real wages in some countries as in Suriname and Trinidad and Tobago, have tended to rise despite high unemployment., and the movement of wa,es has outstripped the growth of productivity. 10. Given the financial problems facing the government sector and the need to increase competitiveness.in the face of unsatisfactory balance of payments performance, greater attention needs to be directed to the issue of productivity. Wage differentials among sectors is a question that also has to be addressed. Some sectors can afford to pay high wages because of higher levels of income and' productivity. The tendency for other sectors to emulate that remuneration can, however, create problems. To deal with this issue, policies and programs are needed that raise productivity and income levels in the low-wage activities, particularly agriculture, which is still a large important sector in Caribbean economies. This could reduce wage differentials. 11. In reorganizing agriculture to provide greater incentives, more attention has to be paid to the problems relating to land tenure, land use and its distribution, marketing, provision of technical assistance, provision of infrastructure, availability of credit, the application of

7 -4- modern technology, etc. That is, there is need for action on several fronts. The model farm concept used in St. Lucia and now being tried in Grenada and in St. Vincent and the Grenadine seems to offer a useful approach for dealing with output and employment at the same time. On the matter of credit, there is a need for interest rate policies that encourage borrowing for productive investment. In some cases, too high a proportion of credit is used for consumption. 12. Failure of the private sector to create jobs in the region at the desired pace has encouraged the growth of public sector employment far beyond what is advisable. In some cases public sector wages and salaries account for more than half of current expenditures. Given the financial problems facing central governments and parastatal agencies, the strategy is not only to freeze public sector employment, but also to prune the work force in order to increase the effectiveness of the public service. This process, of course, will increase the number of unemployed if programs are not put in place to provide greater opportunities for self-employment or if investors are not encouraged to accelerate the rate of job creation. 13. There have been complaints by the private sector about the lack of adequately trained workers and people with required skills. To deal with this problem, there clearly has to be greater coordination between the private sector and government in reorganizing school curricula and training programs. The private sector can play a more active role in developing a skilled work force by cooperating with state agencies and providing on-thejob training. TOURISM 14. Tourism (Annex II Tables 1.4 and 1.5) continues to be the leading growth industry in the Caribbean and has taken over from agriculture as the main foreign exchange earner in a number of countrias in the region. The number of tourist arrivals to the Caribbean as a whole in 1985 was some 4% higher than in 1984, although not all countries had such a favorable record. Among those where tourists increased were the Dominican Republic, The Bahamas and most of the countries in the Organization of Eastern Caribbean States (OECS). In Barbados, on the other hand, real output in the tourism sector declined by 3% as a result of a 2% fall in arrivals and a 5X decrease in the average length of stay. The number of arrivals also fell in Trinidad and Tobago and Jamaica. A favorable development in 1985 was the increase in visitors from Europe after four years of decline; the weakening of the US dollar vis-a-vis the major European currencies was a contributory factor. In the first half of 1986, tourist arrivals in the Caribbean grew a further 2% over the same period in One of the largest increases has been in Jaaaica where stopover visitors in the first half of 1986 were about 10% higher than in the same period of 1985, and in August 1986 were 22% more than in August 1985 and 28% more than in August In the Dominican Republic tourism revenues are expected to increase by more than 152 in With tourism picking up in the traditionally slower summer months, tourism in several countries is now becoming a year round activity.

8 Although the tourism sector is becoming increasingly important in the region, it is still underdeveloped and in many cases disorganized. A lack of planning for this activity is one reason. A failure to implement needed policies or strategies in certain key areas has nct only minimized the benefits, but has contributed to certain structural weaknesses in the industry that have put it at a disadvantage relative to competing tourism destinations. 16. Generally, appropriate targets for tourism growth are not wellconceptualized, perhaps because this sector is poorly integrated with national planning objectives and has weak linus to the other sectors of the economy. There is controversy in certain countries over which segment of the market to target. Indeed, one of the paradoxes of Caribbean tourism appears to be that the more expensive destinations, where hotel rooms typically cost over US$250 a night, often have higher average occupancy rates than do others that charge, say, US$50. Consequently, some officials have expressed a desire to focus on 'quality' tourism although the modalities of realizing this objective have often not been thought through. Simply providing high-priced hotel rooms without accompanying facilities and services may only result in lower occupancy rates at a time when a large number of hotels in the Caribbean are reported to be experiencing financial difficulties. C 17. For the industry as a whole, reducing costs should be a major objective, particularly now with the lower cost of energy. It appears that costs at certain resorts not only have increased sharply, but there has also been overexpansion. At others that have not yet developed their tourism product, further expansion is feasible. This dichotomy raises the issue of planning mentioned earlier in terms of the size of the industry that should be aimed at, the pace of development and the kind of tourism desired. Within this framework, consultation between governments and the private sector could lead to better decisions with respect to the size of hotels and numbers of rooms required each year. 18. Notwithstanding the growth in visitors experienced by some resorts in the region, there is concern about how much financial return some resorts are getting from tourism, given the preva:-nce of packaged tours. Greater numbers of visitors are not a fair indicator of benefits. Other critical questions relate to the quality of the tourist product being offered with regard to: beaches, hotel rooms, service, access to historical sites, shopping facilities and restaurants, availability of direct flights or reliable connections, and domestic transportation. Since tourism is an increasingly competitive business, these issues need to be attended to. Hoteliers and promotion agencies often complain that not enough money is being spent on promoting particular resorts. Larger promotional budgets are, however, likely to yield results only if reinforced by the advance publicity that results when guests are sold a product of acceptable quality. 19. It has long been recognized that there is a need for new approaches to marketing, not only in terms of costs, but also of putting together more attractive packages. In this connection, the idea of selling several resorts in the Caribbean as a single destination has often been raised, although little progress has been made in this direction.

9 -6- SUGAR 20. In the Dominican Republic, the largest sugar producer in the region, sugar output declined in Although total sugar production in CARICOM countries in 1985 increased by 6% over 1984 levels, in recent years production as a whole has generally shown a strong downward trend. In 1985, Guyana and Jamaica registered increases in production despite industrial unrest and adverse weather conditions. In Jamaica, in particular, improvementin the rate of sugar extraction contrlbuted to enhanced performance. In Trinidad and Tobago, the volume of sugar produced in 1985 was about 162 greater than that of 1984, although it was still 28% lower than that of In Barbados, the 1985 figure was almost the same as the previous year but some 36,000 tons less than the 1980 production level. 21. The increased sugar production and exports are not necessarily reflected in greater export earnings (Annex II Tables 1.6 and 1.7). Suriname and the CARICOM producers have some guurantees with respect to prices and volumes of exports to the EEC market. The US also buys some Caribbean sugar. The rest is sold on the world market, where prices hit a new low in The appreciation of the US dollar vis-a-vis major European currencies during the early part of 1985 served to reduce the dollar earnings of Caribbean producers. 22. As far as 1986 and beyond are concerned, the prospects for sugar do not appear particularly bright, although dollar prices have turned upwards with the depreciation of the US dollar vis-a-vis the European currencies. Cane sugar production for the open market will remain uneconomic so long as beet-sugar production is subsidized by the EEC and corn sweeteners continue to benefit from the domestic US sugar program. As a result of the increased production of alternative sweeteners, there has been a further tightening of US quota restrictions in 1985/ Sugar remains an important export crop and a large number of people are dependent on the industry for survival. Where unemployment is high or increasing, a major rapid contraction of the sugar industry would worsen the situation. 24. A principal problem faced by the industry is the fact that costs are not only high, but they also tend to exceed the prices received. Where the industry is privately ow=n.-d, the companies have been experiencing financial problems, although less than those owned by Governments, and there are indications that more factories will be closed in On the other hand, where the industry is owned by the state, subsidization has become a major issue in light of the fiscal problems facing Caribbean governments. 25. Programs to streamline the industry and to make it more efficient are underway as in Jamaica, St. Christopher and Nevis, and in Belize. In certain cases, yield per acre, as well as the sucrose content of the cane, have been increased. Some leading producers are looking at alternative uses for sugar cane. World market prices are also expected to continue to recover over the medium term. Even if production trends were to be

10 reversed however, the prospects are that Caribbean sugar exporters, once having satisfied EEC quota requirements will have to sell an increasing proportion of their production on the open world market at prices that bear little relationship to the costs of production. For instance, in Barbados the cost of production in 1985 was about US 28 cents a pound, which is even higher than the preferential EEC market price of US 17 cents; the average world price in 1985 was US 4 cents a pound. Thus, questions facing Caribbean countries do not relate simply to reducing or increasing production. In light of present trends, they will have to decide to what extent they can continue to produce sugar under existing organizations and arrangements, if at all. Alternative land uses need to be explored, and policies adopted to diversify production as is being successfully done in Antigua and Barbuda and in St. Vincent and the Grenadines. Efforts to increase the level of production of domestic food crops in order to reduce the food import bill should be intensified. In this regard, national and regional research institutions have a vital role to play. BANANAS 26. Regional banana production has recovered from the destruction wrought by the hurricanes of the and quality has also improved. One reason is the greater volume of field-packing and attention to pests and disease control. As a result of the greater production and improved quality, Caribbean producers are regaining the share of the market lost to other countries in the United Kingdom, where they enjoy a preferred position. Jamaica and the Windward Islands 'St. Lucia, Dominica and St. Vinccnt and the Grenadines) registered increases in However, banana production fell in Belize and Grenada. 27. Earnings in most cases increased in 1985 not only as a result of the greater volume of exports, but also the higher sterling prices and the appreciation of sterling agaixisthe US dollar over the year (Annex II Tables 1.8 and 1.9). Bananas are an attractive cash crop, and plans are underway to increase productivity. As such, the region is geared to achieving a significant increase in production, assuming no adverse weather conditions. The tropical storm which hit St. Vincent std the Grenadines in early September 1986 and wiped out more than one-half of the country's banana industry serves as a reminder of the vulnerability of the industry to adverse weather conditions. Bec-use of their high cost of production, however, Caribbean producers will find it difficult to export outside the protected UK market, which, however, they still seem to be a long way from satisfying. 28. Sterling prices over the short term could hold at a level that will enable farmers to make a profit or at least cover costs. However, favorable movements in exchange rates cannot be taken for granted. If production is to be encouraged, the disincentiveffects created by the appreciation of the US dollar against sterling ought to be compensated for by either a reduction in costs or by the introduction of appropriate exchange rate strategies.

11 - 8 - THE MANUFACTURING SECTOR (AND CARICOM) 29. The manufacturing sector in the Caribbean has been facing serious problems in recent years. In Trinidad and To'ago, real output in the sector declined by 11% in 1984 and an estimated 16% in In Jamaica, the real value-added in 1984 was about 25% below the level of In Barbados, manufacturing output grew at an average annual rate of 8% between 1974 and 1980 but then fell by some 5% between 1980 and 1984, and there was a steeper fall of 9% in In the OECS, the sector experienced some growth in the 1970s and early 1980s but has tended to stagnate or decline in recent years. 30. Manufacturing activities have accounted for a relatively small proportion of real GDP in the Caribbean - in most cases less than 12%, a level that has fallen in a number of countries recently. A salient feature of the sector is its concentration around a few activities such as food and beverage processing, garments and footwear, assembly-type operations, furnit.re and a few light manufactured goods. The range of activities tends to be even more confined in the smaller territories. This concentration makes the sector vulnerable to adverse deselopments affecting any one of the major categories. Dependence on a few markets adds to the vulnerability. 31. Manufactured exports in the region, because they are critically dependent on the CARICOM market, have been hurt by economic difficulties and trade restrictions in the major member countries. Even if these restrictions were removed, the buoyancy of regional trade in the 1970s and early 1980s is unlikely to return in the near future, given the economic situation of key member states. The economy of Trinidad and Tobago, besides experiencing three years of consistent decline since 1983 had a cumulative overall balance of payments deficit of TT$5,335 million (US$2,223 million) between 1982 and Barbados and the OECS s *tes have been particularly hard hit by the restrictions Trinidad and T,bago imposed on imports of garments to protect its own industry in the face of falling employment levels and high production costs in the sector. The fact that the CARICOM Multilateral Clearing Facility is still inoperative has not helped. The difficulties that have bogged down intra-caricom trade have prompted official statements to the effect that Caribbear 1 manufacturers ought to look more to other markets and should explore with greater effect the opportunities piovided by the US/CBI and the EECIAC? Lome Convention. A promising development is the "twin plant" program, under which sizeable resources on soft terms are to be used in the Caribbean Basin under section 936 of the US Internal Revenue Service code to promote manufacturing industries producing components for Puerto Rican companies, for products which could be exported duty-free to the US under the CBI or to EEC under the Lome Convention. The CARIBCAN arrangement offered by the Canadian government could also anhance existing trade opportunities. Prospects will hinge on whether Caribbean labor costs and productivity can be kept competitive with compet_.ng offshore manufacturing destination such as Mexico, Singapore, Republic of Korea and Philippines. 32. In light of the economic problems facing individual member states there is a temptation to yield to pressures by various groups for renewed protection or to retaliate as a way of getting even with other member

12 stites perceived to be using discriminatory trade practices. One of the aims of the CARICOM is to provide a framework for some competition that will sharpen the competitive spirit and help to develop an entrepreneurial class that can then explore opportunities in the wider world. A return to inward-looking policies and the institution of measures that can undermine the limited competition offered within the Agreement will work against the interests of the region. Many industries have been protected for too long and this has contributed to their inability to compete abroad. There is an urgent need to reform the CARICOM tariff structure with the view towards gradually reducing protection and to removing the biases against exports where they exist. These measures could perhaps be accomplished if CARICOM problems were seen as part of the larger trade and development issues and if a regional approach to problem-solving were pursued. BAUXITE AND ALUMINA 33. The bauxite sector in the Caribbean continues to feel the effects of the high prices of oil of the 1970s and the depressed aluminum markets. Because the bauxite sector is a major foreign exchange earner in Jamaica, Guyana and Suriname, the impact of declining production and depressed prices on the availability of foreign exchange is a critical factor in the problems these countries face. In 1985, bauxite production in Jamaica is estimated to have declined by 28% and alumina by 14%. Exports also fell sharply (Annex II Tables 1.10 and 1.11). This development follows the fulfillment of a contract between the Government of Jamaica and the US for 3.6 million tons of bauxite. One mining company terminated its activities during the year, while another reduced its shipments of bauxite. Alumina production and exports (Annex II Tables 1.12 and 1.13) were affected by the closure of two sompanies, although one resumed operations with the Government leasing the facility until Guyana fared differently, with a 14% increase in the production of high grade bauxite and a 15% increase in exports. Production and export levels were, however, still below those of the 1970s. In Suriname earnings of the bauxite sector have declined since The structure of the industry has changed since the 197Cs following the rise in energy costs and the tendency for governments to nationalize foreign undertakings or increase tax revenues. Some of the major companies have reorganized their operations, and even thaugh energy costs have fallen, a return to the situation prevailing prior to 1973 is unlikely. At the moment, there is a world oversupply of both aluminaproducing capacity and alumina. Expansion or new plants which are more energy efficient are being established outside of the Caribbaan where mineral reserves are latger to justify such investments. Normally, this situation should lead to a substitution of aluminum for other metals; however, other metals are also experiencing cost reductions. Further, plastics are increasingly being used for traditional materials. If the bauxite-alumina industry in the region is to survive the issue now is to!mprove its cost competitiveness through increased efficiency, adequate provision for spare parts, better management and cost reduction controls.

13 PUBLIC FINANCE 35. In the context of the problems confronting the Caribbean states, a number of questions are being raised about the size and role of the public sector and the effectiveness of certain state instruments and policies. Are tax rates too high? Are the existing rate structures having a disincentiv effect on productivity and investment? Are governments taking too high a proportion of GDP in the form of tax revenues? Is the cuieent level of spending too high? Does the quality of government services justify the level of taxes? Is the public debt too large? Is the private sector being crowded out as a result of government activities? These are only a few of the questions being asked. 36. The public sector has generally grown in response to socioeconomic considerations rather than to ideological dogma. In many cases, public spending has risen at a pace that cannot be supported by the revenue base. As in many other countries, many of the tax systems in the Caribbean have evolved more as a function of raising revenue and of convenience than of achieving the other features that are desirable in a tax system, such as equity and efficiency. As a result, the burden has not always been equitably shared, a situation that encourages evasion and often discourages investrient. Many tax syst#nms are more progressive in theory than in practice. Over time, the ratio of tax revenue to GDP for some countries has increased. 37. Too high a proportion of the resources transferred to the public sector is being used for consumption rather than for investment. One point to which frequent attention is drawn is the tendency to increase the public sector employment above what is warranted and to grant wage and salary increases that existing levels of productivity or inflation do not justify. In many cases public consumption has been maintained by borrowing both locally and abroad and the servicing of this debt has amounted to a significant proportion of current expenditure. Transfers to keep inefficient and poorly organized public corporations in operation have also taken a toll on the revenues of the central governments. 38. In 1985, the tendency for tax revenues to grow at -a slower rate than current spending resulted (for example, Barbados, Jamaica, Suriname and the Dominican Republic) in an increase in the ratio of the current account deficit to GDP or in a decline in the current savings ratio. In certain instances, this situation has been precipitated by developments in the external sector that have affected public revenues. The declining prices for oil undoubtedly have had and will have a different impact on the region: largely because of lower oil prices, nominal recurrent revenues for Trinidad and Tobago are estimated to have fallen by about 10% between 1982 and 1985, while current expenditures rose by 3%. The drop in 1986 is expected to be even more significant. The changed revenue situation in Trinidad and Tobago has not only affected CARICOM trade but also that country's assistance to other CARICOM states. With respect to the oilimporting Caribbean countries, the oil price decline is expected to have positive effects. Where governments have been subsidizing petroleum, reductions in the operating costs of government-owned utilities may reduce the need for this assistance. And to the extent that lower oil prices can stimulate economic activity, it should have a favorable effect on the revenue position.

14 Given the current account imbalances, public sector investment in nearly all cases (except for The Bahamas and Trinidad and Tobago) has depended a great deal on the availability of foreign funds. In the case of Trinidad and Tobago, it has been able to finance a significant part of its public capital investment from public sector savings and domestic borrowings, although this situation is likely to change now. In the OECS countries, foreign grants and concessionary loans average over 85% of public sector investment. While some of these resources have been channeled into productive sectors, a significant prcportion has gone into social services and infrastructure. Governments have seen these investments as essantial to the stimulation of priva:e sector investment, which generally has not been of the desired or expece:ed level. Often, however, the need for proper maintenance of infrastracture (roads, etc.) has not been adequately recognized. EXCHANGE RATh POLICY 40. Except for Guyana, Jamaica and the Dominican Republic, all the Caribbean countries have chosen to peg their currency to the US dollar. Pegging a currency when major currencies are floating is quite different from doing so when they are internationally fixed, the situation prior to While the managed float system has brought a measure of stability to the international monetary system, che frequent changes in the relationship between the US dollar and other major currencies have had an immediate impact on the economic positions of the Caribbean states in terms of import and export prices, foreign exchange earnings and debt servicing. 41. The direction of the change in the US dojlar has often not been desirable from the perspective of the Caribbean economies, which have often found themselves buffeted by circumstances over which they have had little control. Between December 1980 and February 1985 when the US dollar grew stronger, the East Caribbean dollar, for instance, appreciated by 54% against the pound sterling. This situation impaired the competitiveness of those Caribbean countries whose economies were based on exports to the UK, and also raised the cost to European tourists of a Caribbean holiday. This has been partially reversed by the decline of the US dollar since March Nevertheless in the period December June 1986 the appreciation of the East Caribbean dollar against the pound sterling remains at 36%. 42. Traditionally, Caribbean countries have not viewed exchange rate policy as an instrument of adjustment or development. Exchange controls and import restrictions have been used widely to support unrealistic axchange rates. Because it is difficult to tell precisely at what point a particular exchange rate becomes over-valued, such rate can remain in effect for too long a period, leading eventually to a substantial devaluation that can be disruptive. 43. In several economies of the region, the traditional reluctance to alter rates even when basic conditions have changed has had undesirable effects on resource allocation. Transactions have been driven outside of official channels and have eroded the revenue base, as in Suriname and Guyana. Overvalued rates have tended to make imports artificially cheap

15 and exports excessively expensive and have encouraged travel abroad by residents while inflating costs for foreign visitors. To curb travel abroad some governments have imposed taxes on purchases of foreign exchange and on travel tickets. In the interest of employment, competing goods have been protected against imports by quantitative restrictions and tariffs. The persistent unemployment problem has tended to encourage overprotection, particularly for manufactured products and the emergence of employment in the export sector has been stifled. Domestic agricultural production has also suffered because of the absence of adequate price incentives. Increased domestic costs stemming in some instances from a fall in productivity have been reflected in lessened ability to compete and has affected external performance. Clearly, more attention has to be paid to the exchange rate in the efforts of the countries of the region to become more competitive. In the OECS countries, which share a common currency, any modification of the exchange rate is rendered more difficult by the need for unanimity among the member states. 44. The exchange rate question could become a major issue in the context of the CARICOM. In an effort to effect external adjustments, both the Guyanese dollar and the Jamaican dollar have been devalued in recent years. In Jamaica, since the unification of the official and parallel foreign exchange markets in November 1983, there was a depreciation of the currency of about 45% up to the third quarter of Faced by a worsening balance of payments, in December 1985 the Trinidad and Tobago government decided to change the value of its dollar from TT$2.40 to $S US to TT$3.60 to $1 US - a 33% devaluation. However, to keep the cost of living down, the old rate applies to a range of food, drugs, agricultural inputs and school books with imports of fruits and vegetables from the smtller islands excluded. The hope is that with the devaluation in place, the Trinidad and Tobago government will remove the restrictions placed on imports from all CARICOM states. There is a need for intensive discussions on the exchange rate issue as part of the larger dialogue taking place with respect to intraregional trade restrictions, and in the context of developing structural adjustment programs for the Caribbean economies. THE FOREIGN DEBT 45. The foreign debt situation varies widely among the countries of the region. In at least two cases, - Guyana and Jamaica - the outstanding debt in recent years has been substantially more than 100% of annual GDP. For Trinidad and Tobago, however, the estimated ratio for 1985 was in the region of 11% although that level exceeds the 5% of 10 years earlier. Among the OECS countries, these ratios are on the order of 20% to 40%. 46. While expressing debt outstanding as a proportion of total output gives some indication of size, from a servi2ing point of view the more relevant indicators are the fraction of current revenue and exports of goods and non-factor services respectively that go for debt servicing. As a result of increasing debt service payments, poor balance of payments performance and inadequate revenue growth, both these ratios have tended to rise rapidly in most of the countries of the region..

16 With respect to the external debt service ratio (i.e., interest and amortization payments as a proportion of foreign exchange earnings), the actual figures, as indicated, do not always reflect the true debt servicing position, given the build-up of arrears in certain cases. The debt service ratio for Jamaica has averaged over 351 in recent years, (before rescheduling it has averaged ), as compared to 19X for Guyana over tie period The figure for most of the other Caribbean countries is less than 101, and in some cases less than 52 mainly due to the highly concessionary nature of capital inflows. 48. Failure to mobilize enough concessionary funds to finance proposed public sector investment programs may tempt countries, particularly those with low debt service ratios, to increase their borrowing on commercial terms. The debt service ratio is a very poor guide fcr gauging the level of public debt, since it says nothing about government finance. The instability of export earnings that characterizes these countries and unpredictable changes in interest rates can lead to a rapid fluctuation in this ratio, with serious consequences for debt servicing. In formulating their borrowing programs explicit recognitioneeds to be given to a wide range of factors, not the least of them being the structure of existing and proposed debt levels and the terms on which such loans were made. Lack of constant monitoring and appraisal of the public debt often contributes to servicing problems. With respect to the OECS countries, the present state of their finances and the structure of their exports should discourage them from undertaking significant borrowing on commercial terms, even though their debt service ratios at the moment generally tend to be low. The emphasis on infrastructural development means that in the short to medium term there may be no significant expansion in the productive and exportearning capacity of these countries. In such circumstances, debt cumulates easily since resort to commercial loans often gives rise to further borrowing merely to service these loans. The situation is worse if the funds are borrowed for consumption or for prestige projects, since in this case not even basic infrastructural facilities benefit. In any decision to incur commercial debt, projects and programs have to be chosen carefully in terms of economic and financial rates of return and should be self liquidating. 49. With regard to the OECS countries, their access to the private capital markets is limited. They need assistance in strengthening their fiscal positions to the point where they can finance a significant proportion of their capital programs from local savings. In this connection, there is need for instruments and mechanisms that can mobilize greater private savings, coupled with policies that increase private sector activities. Increasing the savings ratio is an integral part of economic development. Much more effort needs to be undertaken in this area. 50. There are lessons to be learned from the regional and international foreign debt experience of recent years. Even when funds are easily accessible, borrowing not only has to be related to need, but also ability to repay which can only be sustained through appropriate growth.

17 POLICIES TOWARD THE PRIVATE SECTOR 51. The private sector in the Caribbean has not played the risk-taking role envisaged for it and is still dominated by traditionct commercial activities. To encourage its growth, governments have used Incentive such as tax holidays, industrial estates, factory sholls, exemption from import duties on raw materials and equipment, tax rebate on export related profits, accelerate depreciation allowances, freedom to repatriate profit and capital (in the case of foreign concerns) and protection from competition. These incentives have been aimed largely at encouraging the growth of manufacturing which very early on was targeted as the main growth sector. Hanufacturing9s performance in most cases has been disappointing when viewed against objectives, however, particularly in the areas of exports and employment creation. 52. The revenue constraints on the expansion of government activities havo given rise to a need to find new ways to encourage private sector investment. The heavy emphasis placed on import substitution is being A.,oked at critically in the context of the desire to diversify exports and increase foreign exchange earnings. It is increasingly being recognised that indiscriminate protection interferes with proper resource allocation and discourages export development. In this connection, new incentives are being devised to encourage exports, particularly in light of the opportunities offered by the US Caribbean Basin Initiative, CARIBCAN, and, for some countries, the EECIACP Lomi Convention. 53. The hope in promoting private sector development has been to broaden the sector beyond the traditional commercial groups and to accelerate growth so that the fruits of development could be shared more broadly. In pursuing this objective, public policy has shown in some cases a certain ambivalence with respect to private foreign capital. This ambivalence has been reinforced particularly in the early post-independence years, by an uncertain policy toward the role of foreign private investment in development. 54. A clearer policy toward foreign cap'tal has emerged, however, in many states in recent years. It has evolved in a response not only to the need for foreign exchange but also to the recognition that foreign investors bring in not only capital but also management skills, market connections and modern technology that can, with appropriate policies make the local private sector more dynamic. There is now also a feeling among some governments that their greater knowledge and experience, make them more capable of negotiating appropriate terms with foreign investors and transnational corporations. 55. In response to criticism about its performance, local private sectors in the region have often complained strenuously about certain public policies. A frequent target is the tax system which is viewed as having disincentiveffects on initiative and investment including reinvestment. In response, some countries (e.g., Grenada, St. Christopher and Nevis and Antigua and Barbuda) have reformed their tax structures. Others (e.g., Trinidad and Tobago and Jamaica) are reviewing them. Criticism has also been leveled at government red tape in reloasing foreign exchange or approving applications of various kinds. Again, some

18 governments (a. g., Jamaica, Trinidad and Tobago, St. Lucia end Grenada) have set up 'one-stop* departments to facilitate decision-making. Another problem that is often singled out is the slow pace of development of the local money and capital markets and the unavailability of sufficient risk capital. To deal with this Issue some countries (e.g., Grenada) have proposed a merchant bank where such an institution does not already exist. STATE ENTERPRISES 56. In recent years, a great deal of criticism has been directed at the performance of certain public sector enterprises in a number of Caribbean countries. One reason has been the deterioration in the services some public utilities have offered and their lack of profitability. This situation is often the result of one or more of the following: poor mnagement, inadequate maintenance of equipment, insufficient expansion to cope with increasing demand, low productivity combined with unduly high wages, constraints placed by government with respect to rates or prices in the face of increesing costs, and the failure of governments to pay their arrears to the enterprises, particularly troublesome as they are often the largest customor of certain utilities. The lack of profitability in a large number of state enterprises means that they either have to rely on the central government for subsidies or borrow for both operational purposes and expansion. The debt servicing to which the latter gives rise ha increased expenditures in subsequent years. Where subsidies have been forthcoming, they have put pressure on the central government's revenue position. 57. Two factors require a critical examination of government-owned enterprises. One is the inereasing inability on the part of central governments to subsidize losses. The other is the fact that utility services are essential to development. Where non-utility companies are concerned, there is a strong case for either outright sale to the private sector or shared ownership in an arrangementhat does not permit governmental interference in day-to-day operations. With respect to utilities such as air and seaports, electricity and water, governments pref;er to retain their ownership because of their nature. However, some utilities can be privatized provided a suitable regulatory environment exists. In this way governmonts could realize their assets and save themselves whatever subsidies these utilities now require. 58. In some cases reorganization has been attempted through the mechanism of the statutory body, which permits a certain degree of autonomy, but the determination of rates has tended to rest with the central administration. Often the aim has been to ensure that the bodies do not abuse their power to change rates in situations where the service is below acceptable levels. Utilities often argue that services tend to be poor because the rates are too low to allow for adequate maintenance or expansion. To resolve this dilemma an independent commission, as exists in some cases, free from political control can review requests for rate changes and objections to these requests in a rational framework. If governments were to pay their debt promptly, as they may be required to do under a privatized arrangement, and rates were to be reviewed more frequently, the utilities might be able to obtain a degree of financial viability that would enable them to undeitake the maintenance, training and expansion required to improve their operations.

19 CONCLUSION 59. Though the recovery in most of the Caribbean economias in 1984 was not kept up in 1985, the outlook for the near to medium-term is promising. The Bank's analysis suggests that most of the regional economies could grow fast enough for per capita incomes to continue to rise. For several tourism-based economies, real GDP growth rates of over 4% are considered feasible. Attainment of these levels of growth is contingent on sustained recovery in the economies of North America and Europe, an adequate level of donor support as well as a prolonged effort by the Caribbean nations to structurally adjust their economies and address key economic issues most of which have been highlighted above. These include the need tot (i) further develop and render more cost efficient the region's tourism industry; (ii) increase traditional and non-traditional exports through improved efficiency, appropriate investment, and targeted marketing. In this regard there is an urgent need to rationalize production and productivity of traditional exports and reduce production costs; (iii) enhance export competitiveness by (a) introducing policies for the establishment of appropriate real wages and real exchange rates; (b) rationalizing the import tariff structures with a view toward gradually reducing protection; and (c) introducing appropriate incentives for intra and extra regional exports; (iv) provide the necessary incentives and infrastructure for the private sector to become the engine of economic growth which would in turn reduce unemployment; (v) put greater emphasis on the education and vocational training of youth to meet the demand for new skills; (vi) improve targeting of food aid and welfare programs to the lowest income groups which in turn would help reduce prevailing fiscal deficits while avoiding any possible adverse effects on agriculture; (vii) increase public savings, particularly through current expenditure restraints, but also through improved financial performance of the public sector enterprises; (viii) use public expenditure for improving the necessary economic infrastructure which is conducive to mobilizing private - local and foreign - productive investments rather than for consumption; and (ix) follow a prudent borrowing policy and limit borrowings on nonconcessionary terms to productive and self-liquidating investments.

20 II. EXTERNAL FINANCING 60. In several countries public sector savings declined in 1985 (Annex II Table 1.2). Even in countries where savings have been positive, these have been modest; as a result external financing was and still is the key determinant of the feasible level of public sector investment. Where public sector savings have been negative external resources are required to finance not only the entire public sector investment but provide some budgetary support as well. This trend must bt reversed in view of the increasing signals by the major bilateral donors that the very high aid flows to the countries of the region is bound over the medium term, at best, to level off if not gradually decrease. There is therefore an urgent need to undertake the appropriate stabilization and structural adjustments which would result in increased export revenue and public savings needed for investment if growth is to be realized. 61. In all countries, with the possible exception of Guyana and Suriname) external financing has been available for projects identified as priority in the investment program. The binding constraints on the size of each country's public sector investment program have been rather the shortage of local counterpart financing, inadequate project preparation, and problems in project implementation linked to the lack of technical staff, shortage of construction materials, and in some cases, to donor administrative delays. 62. Tables 1-3, which follow, show the external financing requirements for individual countries in Jamaica is not included as fmf/world Bank negotiations on a possible program of assistance are ongoing and detailed estimates of financing requirements cannot be made until these negotiations are concluded. Similarly these tables do not provide data on Guyana, Haiti and the Dominican Republic as there is no firm basis at present on which financing requirements can be determined. 63. The total requirements of the countries in Tables 1-3 of US$366 million in 1986, of US$364 million in 1987 and of US$299 million in 1988 compare with realized inflows of US$179 million in 1985 and US$153 million in 1984; of the external financing requirements in , the amounts still unfinanced are US$69 million for 1986, US$141 million for 1987 and US$181 million for The sharply increased financing requirements for reflect a combination of several factors, viz: (i) extraordinary commercial borrowings by Antigua and Barbuda in 1986 and 1987 for hotel development, desalinationlpower plant, runway resurfacing and telecommunication upgrading; (ii) increased capital inflow in linked to the large Cumberland Hydroelectric project in St. Vincent and the Grenadines; (imi) almost a doubling in Barbados of the borrowings on nonconcessional terms for budgeting support; and (iv) resumption of capital inflows to Suriname assuming that the Government would adopt appropriate structural adjustment programs.

21 Table 1 - External Financing Requirements for the Pubitc Sector Investment Progrea and Balance of Payments/Budgetary Support (US 8 aillion) for Calonder Year 1986 Financins of PSIP Other Dev.lopment Assistance Requirements (Balance of Payments Financial Requirements and Budgetary Support) I(A) (B) (C) (D) (E) (F) (C) I 1(H) (I) Country Public Sec- Local Wx ernal Of Which Gap Total Of which Total Of Which tor Invest- Contri- Financing Disburseent Not Yet Not Yet moet Pro- bution Requirement from Existing (C)-(D) Identified Requtred Identified gram Comitments (Gap) (C).(F) (E)e(G) Barbados J e 44.0 O 76. C.9 belizs C.8 Suriname O ' 6.8 8U.4 OECS (Total) Antigusa/Srbuda t Dominica O Qr,n.: St. Christopher and Nwls Z St. Lucia St. Vincent a the Grenadinee & Total Source: Staff eatest. 3/ Assuming no change in arroars position.

22 Tabl- 2 - External Financing Requirements for tho Pubitc Sector Investment Prognro *nd Balance of Paymenta/Budgetary Support (US S million) for Calender Year 1907 Other Devolopmnnt Assistance Requirements (ebalanc of Payments Financial RequIroments nd Budgetary Support) Financing of PSIP I (A) (B) (C) () (E) I (F) (a) I j) (I) Country Pubitc Sec- Local External Of Which Cap Total Of Which Total Of Which tor Invest- Contri- Financing Diaburoemnt Not Yet Nt Yet Dent Pro- bution Reqsents from Existing (C)-(D) Identitfid RequIred Identifled orpm Comitment (4ap) (C)+,() (E)+(G) Barbados Bsllz S Suriname ?2.S OECS (Totol) Antigua/Baerbude e Deoitnca i i1.6 Creneda St. Christopher and Nevis WS St. Lucia St. Vincent a the Grenadin e Li. Total Sourc : Staff estimates. XJ Assuming no change in arrears position.

23 Table S - External Financing Requirement* for the Public Sector Investeent Program &.nd Balance of Paymonto/Budg.tory SupPort (US 8 million) for Calendar Year 188 Financina of PSIP Other Developoent Assi stance Requiremets (Balance of Paymente Financial Requirement. and Budgetary Support) I(A) (9) (C) (D) (E) (F) (a) I I(H) (I) Country Public Sec- Locai External Of Which Cap Total Of Which Total of Which tor Invet- Contri- Financing biabursem.nt Not Yet Not Yet ment Pro- bution Roquirementu froe Existing (C)-(D) Identifled RequIred Identified gram Commitmont - (Cap) (C).(F) (E).(0) Barbados ao.o setize Suriname DECS-(Total) B Antigue/Barbuda ? Dotinica S.8 renada St. Christopher and Nevis o St. Lucia St. Vincent & the Grenadines Total Source: Staff estimates. y Assuming no change in arrears position.

24 The estimates of financing requirements have been based on the needs of the regional economies to attain the rates of growth projected and also assume that in most cases there will be improvements in national economic management. More is said in the country analysis that follows on the assumptions underlying 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 generated. 65. For the countries covered by Tables 1-3, the realized capital inflows in 1984 and 1985 and the requirements for (column H) on a per capita basis, work out as follows: Realized Capital Inflows per capita (US$) - Capital Requirements per capita (US$) Barbados Belize Suriname OECS (average) Per capita requirements are considerable, though for Barbados, Belize and Suriname, commitments are likely to be on less concessional terms than for the OECS countries. The decline in the requirements of the OECS countries in 1988 is to be explained largely by the extraordinary increase in the financing secured for public sector projects in Antigua and Barbuda in 1986 and Another noteworthy feature of the estimates in Tables 1-3 is that, with the considerable borrowings on conventional terms in the recent past, net transfers are expected to turn negative in two countries: in Barbados from 1987 and in Antigua and Barbuda in Presented below is a brief analysis of the external financing needs of each of the countries: Country Analysis 68. In accordance with the new Barbados Government's policy of assigning a greater role for the private sector, the public sector investment program (PSIP) has been significantly reduced. This reduction, which will also help control the fiscal deficit in the short term,is being carried out principally througi a re-phasing of implementation schedules of projects (mainly locally funded) over longer time periods and by moving out of physical infrastructure (roads, ports) to more directly productive areas of activity (e.g. irrigation). The PSIP for (both on-going and new projects) amounts to US$207.1 million, of which US$102.3 million represents the external financing requirements. Disbursements from existing commitments would amount to about US$84.3 million, leaving a financing gap for the period of about US$18 million. 69. External financing requirements for budgetary support are estimated to increase significantly in the short term, owing to increasing fiscal deficits, principally as a result of the wide range of tax

25 concessions offered by the July 1986 budget. External assistance for budgetary support for the period is estimated at around US$100 million. Of this, US$70 million has been identified for 1986 and 1987, leaving a gap of US$30 million for This financing gap, however, should be considered as tentative since the extent of external borrowing for the budget would largely depend on new revenue measures in 1988 and current expenditure controls. 70. The PSIP for Belize is consistent with the economic and social goals of the country, with particular emphasis on economic infrastructure. Furthermore, the investment program for the period is designed to forestall the declining ta'znd in public capital expenditure that has occurred over the past three to four years. To a large extent, this is being assisted by the steady improvement in public sector savings that has occurred in Belize in FY1984/85 and FY1985/86, reaching 3.52 and 5.72 of GDP respectively. This improvement is expected to be maintained, or, in the case of the public enterprises, to be improved, with the result that budgetary support should not be necessary. 71. External capital flows to Guyana in 1985 amounted to US$27.5 million, about the same level as 'n 1984, but substantially be_ow the peak level of US$167 million in All inflows went to support the PSIP. Guyana's PSIP is formulated on a yearly basis because of the uncertainty of resource flows. For 1986, the budgeted expenditures for the PSIP were US$161.5, of which about US$88 million were expected from external sources. On the basis of external inflows of only US$11.4 mi-lion during January- June 1986, it is projected that expenditures on the PSIP for the full year will amount to US$99 million of which US$45 million would be from external sources. About US$17 million of the projected external inflows would be for the purchase of an aircraft for the Guyana Airways; thus the remaining external inflows for 1986 would be almost at the same level as of the previous year. 72. Since 1983, external financial flows to Jamaica have been dominated by budgetary and balance of payments support. Over the past three years (1984 to 1986), it is estimated that of a total of US$1.33 billion in new money flows, about US$351.4 million, or 26.42, was explicitly for project activity. Since 1984, however, the composition of the budgetary support has changed, with a general decline in this form of external flows from bilateral and multilateral donors and an increase in other sources of funding such as advance sales of bauxite and alumina. Preliminary estimates of capital requirements for FY1986/87 and FY pending agreement upon an appropriate macroeconomic framework and final definition of the public investment program are as follows: FY1985/86 FY FY (Actual) Total Project Non-project Rescheduling ex ante financing gap

26 The non-project assistance for FY 1986/87 includes a required reserve improvement of about US$140 million. 74. For Suriname, the external financing requirements are based on a balance of payments projection which assumes that the Government would adopt appropriate stabilization and structural adjustment programs. In that case, a modest measure of economic recovery can be expected with nominal growth in merchandise exports at an average annual rate of 6.5Z. On these assumptions gross external financing requirements on the public account could amount to US$268.5 million during Disbursements from credit lines and project-related assistance already arranged by the Government (Including Lome III indicative amounts) would provide about US$88.3 million of the total requirements. The remainder of US$161 million represents the financing gap. US$59.3 million of the gap would be required in the form of project-related financing for the foreign exchange costs of a proposed core PSIP. The remaining US$125.9 million would be aequired in the form of balance of payments support. 75. The massive increase in Antitua and Barbuda's PSIP in 1986 and 1987, for hotel development, the water desalinization/power plant, runway resurfacing and telecommunications upgrading, in addition to other normal sectoral investment, will impose a significant burden on fiscal resources. The four large projects noted above have been financed from commercial sources, on commercial terms, with the result that the country's debt service burden has increased considerably, particularly for 1987 and While a continual improvement in the public sector savings performance is projected for the period 1986 to 1988 (improving from 1.41 of GDP in 1985 to 4.7% of GDP by 1987), the country will need further external resources particularly for budgetary support. 76. In Dominica, public sector investment has emphasized support for directly productive activities and economic infrastruc ure. This focus will continue over the medium term as the economic diversification efforts proceed and investments are directed at meeting the infrastructural requirements. In addition, efforts are to be intensified to improve Dominica's administrative capability so that it can reduce the heavy dependence on external assistance in the management of the PSIP. Discussions at the subgroup meeting for Dominica chaired by the World Bank in St. Lucia in March 1986 indicated that Dominica's development efforts would need to be supported by program-type assistance over the next three years. Indications are that US$12 million in nonproject external assistance would be needed over the three-year period. Discussions are in progress with the World Bank for a structural adjustment credit for about US$3 million from IDA and with the IMF for SDR 1.9 million under the Structural Adjustment Facility. The World Bank is already considering cofinancing of the proposed hydro-power project with IDA funds of US$3 million. These operations could also serve to attract financing from other sources. 77. The PSIP of St. Christopher and Nevis for amounts to US$36 million. Three-quarters of this program has identified external financing either as grants or loans. Of the remaining quarter, about US$5 million would come from domestic sources, leaving a financing gap of nearly US$4 million. The Federal Government may need substantial budgetary/balance of

27 payments support in the medium term of US$22 million. The Federal Government's domestie debt and interest payments almost doubled in 1986 with the assumption of the sugar debts of the National Agricultural Corporation. Consequently, the current account deficit of the Federal Government is expected to rise from 7% of GDP in 1985 to about 10% of GDP in Strong adjustment measures are urgently required, but the Government may still need budgetary support to Cover part of this deficit in Amortlzation payments are particularly high in 1986 because of a US$3 million loan that was contracted tvo years ago to meet part of the payments to former estate owners for the sugar lands. A similar loan of US$1.5 million will have to be repaid in External inflows to St. Lucia amounted to US$11.6 million in 1985, of which US$8.4 million was on grant basis. Of the proposed PSIP for amounting to US$45 million, the Government expects to mobilize US$35.8 million or 80% of the needed resources from external sources, US$19.5 million of which is expected on grant basis. About t3$22 million of the required resources are already committed, leaving US$13.8 million for which confirmation of donor commitments is needed. Besides the resources needed to support the PSIP, balance of payments resources of about US$4 million would be needed for budgetary support, mainly to offset St. Lucia's external payments arrears. 79. There was a substantial inflow of external resources into St. Vincent and the Grenadines in 1985 because of the ongoing PSIP which included the large Cumberland Hydroelectric project, estimated at US$33.8 million. Capital grants amounted to US$7.5 million, and net foreign borrowings, US$3.9 million. External inflows are expected to continue at these levels through Of the proposed public sector investment expenditures, which amount to US$54 million for , the Government expects to mobilize about US$48.0 million, or 90% of the total outlay, from external sources. About 63% of the external inflows is expected on grant basis. US$36.8 million is already committed, leaving US$11.2 million for which confirmation of donor commitments is needed. Besides the resources needed to support the ongoing PSIP, balance of payments resources of US$7 million will be needed during to support rehabilitation efforts following the damage to agriculture and property resulting from the tropical storm in September Grenada received considerablexternal assistance in , mostly from USAID. Total grants were about US$55 million in these two years, more than twice the annual average of Moreover, nearly one-third of the grants (US$17 milion) were provided as direct budgetary support. These grants allowed the Government to cut sharply its domestic and external borrowing and make substantial repayments to the ECCB and IMF. The PSIP for amounts to US$82 million, of which US$53 million have identified external financing either as grants or loans. One-half of the remaining US$29 million is expected to come from local sources, leaving a financing gap of nearly US$15 million. However, the gap may be larger if the local contribution is lower. This is not unlikely, considering that all the local counterpart funds for the 1985 PSIP (10% of the total) consisted of budgetary support provided by USAID. The estimates of budgetary support required for are linked to the likely revenue shortfall with the implementation of the revised tax system and of the Government's reorganization plan to cut current expenditures.

28 OECS 81. Aggregate external financing requirements of the OECS countries (not including Montserrat) are estimated at!ts$167 million for 1986, US$176 million for 1987 and is then projected to decline to US$116 million in This decline is to be explained largely by the drop in the public sector investment program of Antigua and Barbuda from the extraordinarily high levels reached in 1986 and Ax noted, on a per capita basis, the required capital inflows for the OECS average US$304 in 1986, US$319 in 1987 and US$219 in Most of the funds should continue to be on concessional terms. 82. The World Bank Group's own lending strategy for the OECS is determined by a Board decision of Deccmber 1985 that the Bank can best assist the OECS countries (other than Antigua and Barbuda because it is not IDA eligible and Montserrat because it is not a member of the World Bank Group) by providing limited access to IDA financing (to be determined in light of historical lending levels to these countries) possibly blended with some IBRD financing (the amount would be determined as a result of the Bank's creditworthiness assessment) over the medium term if these countries adopt suitable programs of policy reforms which would strengthen their creditworthiness for borrowing on conventional terms by the end of the decade. The prospect of mobilizing the additional resources needed has also been improved with the agreement reached between donor and recipient countries during the meeting of the CGCED Ad Hoc Advisory Committee in St. Lucia in March 1986 to move towards a "tighter" consultative group mechanism for these countries which commit themselves to undertake a meaningful medium-term adjustment program. Prospects for the donors to continue their special efforts for these countries appear promising. In this respect it should be noted that for those countries where IDA operations we approved during FY84-86, commitments to OECS countries averaged US$17 r capita per annum, compared to US$12 per capita per annum committed to ot nall member countries Bank-wide. These levels of commitments to O;WS countries do not include IDA financing also made available by way of operations approved for the CDB. In addition, the World Bank allocates substantial staff resources to Caribbean countries in its economic and sector work programs. Thus in FY85-86, the average staff weeks per capita devoted to work on Caribbean countries was about 15 and 3 times higher than the average staff weeks, per capita devoted, for instance, to Brazil and Colombia, respectively. 83. The 'tighter' consultative group arrangement is intiended to replace the Eastern Caribbean Development Fund which was proi)osed by the OECS countries during the June 1985 CGCED meeting but failed to materialize. In that proposal, the OECS countries expressed their willingness to adopt programs of structural adjustment and requested donors to provide resources, over and above existing aid programs, to help participatin governments cover their budgetary needs including local cost financing for capital projects and to close balance of payments gaps. The 'tighter" consultative group mechanism is to be implemented where possible, and should Governments request it, within the framework of IDA/Bask lending and the Structural Adjustment Facility of the IMF. Donors where possible,

29 are expected to support the programs by providing resources to meet budgetary and balance of payments needs. Donors unable to provide assistance in this form could dovetail the projects financed by them, and/or their commodity and technical assistance programs, to close the financing gap in each of the participating countries. So far the Bank has been approached by the Governments of Dominica, Grenada and St. Christopher and Nevis for assistance in fortaulating such comprehensive structural adjustment programs. In parallel, as a follow-up to the request made by the Government of St. Vincent and the Grenadlnes, the Bank is considering the possibility of presenting for donor support a three-year public sector investment program focusing on agriculture that would complement the structural adjustment measures being implemented in that country.

30 Ill. REGIONAL AND SUBREGIONAL PROGRAMS A. INTRODUCTION 84. This section describes progress made on Regional and Subregional Programs since they were reviewed at the Ad Hoc Advisory Committee meeting in St. Lucia on March 12-13, The agreements reached at that meeting were recorded in Report CGCED 86-6, dated June 6, Also, this section describes briefly some of the main activities carried out by the CGCED Group during the past 15 months. B. STRUCTURAL ADJUSTMENT IN THE CARICOM COUWNRIES 85. The CARICOM Secretariat was entrusted with the responsibility of preparing detailed action programs for regional level action in implementing the Nassau Understanding on Structural Adjustment. The programs fall essentially into two categories, viz: (i) programs aimed at defining investment and infrastructural/support opportunities. The implementation of several of these programs requires some external input; and (ii) programs designed to clarify policy options or effect changes to existing arrangements. The implementation of these program proposals depends on acceptance by all Member States and agreement on specific actions. 86. The CARICOM Secretariat reported that significant work has taken place since the last meeting of the Caribbean Group for Cooperation in Economic Development (CGCED). Several studies have been advanced or completed in a number of sub-sectors and the export-oriented industries study has been completed. Several of the follow-u program activities are shown as requiring external funding support. 87. The studies designed to clarify policy options, namely the studieb on the review of the Common External Tariff (CET), the regime of fiscal incentives and exchange rates have either been completed and circulated to Member States or are nearing completion. The recommendations of the CET, fiscal incentives study, and the study on exchange rates would be reviewed by the concerned authorities over the next couple of months. 88. The CARICOM Secretariat has also reported that at the July 1986 CARICOM heads of governments meeting held in Guyana it was decided to implement the CARICOM treaty desling with external trade and industrial policy. As a result, a Regional Export Credit Facility is to be created to provide pre- and post-shipment credit for regional manufactures, excluding sugar, bauxite and oil. On industrial policy, the decision was to introduce an "operational regime for industrial programming" by the end of Finally, the Secretariat reported that intra-regional trade figured less prominently than at earlier summits as progress had already been made

31 by member states in implementing the 1984 Nassau accord on dismantling obstacles to trade and harmonizing external tariffs. The July 1986 summit agreed to continue with the progress made, particularly through eliminating stamp duties on imports and removal of all non-tariff barriers to intraregional trade to the extent possible within existing foreign exchange management policies. An updating report on progress on structural adjustment in raricom is expected to be made by the CARICOM Cacretariat at the January 1987 CGCED meeting. C. REGIONAL ENERGY 89. To strengthen energy sector coordination, the CDB organized, with World Bank assistance, a two-day meeting of recipients and donors' representatives on March 10-11, 1986 in St. Lucia. The meeting discussed recent developments in the energy sector in the Caribbean region, and identified priority areas for action. The meeting recommended the initiation of two studies and c review of the Regional Energy Action Program (REAP); it also reviewed progress of the Common Services Study initiated by CIDA. The deliberations of the said meeting are recorded in the *Report on the Caribbean Energy Sector Meeting, March 10-11, 1986", dated March 12, 1986, which was distributed to the Ad Hoc Advisory Committee Meeting on March 13. The following summarizes the follow up actions taken as a result of the above mentioned energy neetingt 90. Since the energy meeting, the World Bank has initiated the following two studies which are financed from the UNDP Caribbean Petroleum Exploration Promotion Project (see chapter D. below): (a) the Least Cost Petroleum Products Procurement Study; and (b) a review of Alternative Energv Pricing Policies. The consultants work on the Petroleum Procurement Study, commenced in early August The study is intended to recommend ways for reducing cost of delivery of petroleum to the Caribbean countries. The countries participating in the study are: Antigua & Barbuda, Dominica, Grenada, Montserrat, St. Christopher & Nevis, St. Lucia, St. Vincent & the Grenadines, Barbados, Guyana, Turks and Caicos, and the British Virgin Islands. The draft consultants report is expected by end October At the request of the Governments of Barbados, Belize, Dominica, Grenada and St. Vincent and the Grenadines, the World Bank, in cooperation with CDB appointed a consultan to carry out a review of the alternative energy pricing policies which the above mentioned countries could pursue in responding to the weakening international oil prices. The final draft consultant report is due late October 1986 for review by the participating Governments. 92. The energy meeting in St. Lucia agreed that the REAP program should be reviewed to determine whether the programs proposed in REAP, prior to the recent changes in world oil prices, were still a priority. The REAP Coordinating Committee, chaired by CARICOM has met since and reviewed progress in the implementation of REAP. The Committee recommended that the country specific energy assessments which formed the basis for th- REAP be updated. Depending on the outcome of the needs assessment, the REAP would be adjusted accordingly. In the meantime, CDB intends to review some elements of the REAP program with GTZ--the German Technical Cooperation Agency--and agree on a technical assistance program for implementing the relevant components.

32 CIDA has initiated a study to determine the feasibility for establishing a Common Services for the Power Utilities Companies in the OECS. The study is expected to be ready in October Background D. THE CARIBBEAN REGIONAL PETROLEUM EXPLORATION PROMOTION PROJECT 94. The Bank signed on April 11, 1983 the UNDP P::oject Document RL/82/026/A/73/42 accepting the responsibility as the gxecuting Agency for the above project. The UNMP provided US$500,000 and the Bank contributed US$200,000. Nine Caribbean countries are recipients from the project. 95. The project, which is still ongoing, is two years behind its original completion date of January 1985, due mainly to delays in processing the UNDP Project Document which was finally approved in February 1984 during the Caribbean Group meeting that year. The consultants, ECL of England, were appointed in December 11, The project is designed to help the participating Governments to evaluate geological and geophysical data, to upgrade their petroleum legislation, to introduce improved contractual arrangements for exploration, to train technical and legal personnel in the legal aspects of petroleum exploration contracts, and to investigate known, but underdeveloped, hydrocarbon resources. Status of the Exploration Prolect Component 96. Further to the World Bank's progress report for the 12 months ending December 31, 1985, a series of visits were made during August 1986 to nine of the participating countries with the purpose of either defining or finalizing the corresponding service programs. Jointly with ECL, Bank staff visited Barbados, Grenada, Antigua, BVI and The Bahamas. Separate visits were made by ECL to St. Christopher and Nevis and Montserrat and by the Bank to Belize and the Dominican Republic. The status of the country specific and the subregional programs is summarized below. Country Programs 97. The Bahamas. Indexing and data selection for reproduction and interpretation were being carried out. The geologic evaluation report, including recent exploration data from Tenneco, will be completed in January Barbados. A visit by ECL specialists occurred in September 1986 to review exploration and oil/gas production data and field operation practices; they are expected to prepare exploration/development programs. The study will be completed in October Belize. Two issues have been clarified: (i) due to the UNDP separately funded petroleum exploration project in Belize no special evaluation studies are required under the Regional Project except for the digitilization of shot-point base maps to achieve a common seismic scale data base; (ii) the Finistry of Natural Resources (MNR) requested a log reproducing machine and a minicomputer for technical calculations and establishing a basic data base. Total estimated cost of this assistance would be about US$12,000, and UNDP approval will be

33 sought under a revised project proposal. Dominican Republic. A tentative exploration program was defined. Due to ECL's previous involvement in the Dominican Republic, the geological evaluation and diagnosis report is expected to be finalized by December Guyana and Jamaica. Will not participate in the study since specific country assessments have been made under Bank Group sponsored projects. Haiti. Awaiting the Government's response to ECL recommendations regarding Haiti's possible participation in this project. Suriname. A mission to define a service program, is tentatively scheduled for October Antitua and Barbuda. ECL specialists visited Antigua and Barbuda in August 1986 and defined an action plan. British Virgin Islands. Data retrieval, indexing and s'lection are completed. Data analysis, including well information and the interpretation and promotion report will be completed by December Cayman Islands. The authorities have stated no interest at present due to the ongoing contract negotiations with oil companies. Grenada. Long missing seismic data (shot by Westrans) has been recovered from Elf. Data interpretation and the geologic evaluation report will be finalized by December Status of the Trainina Component 99. During the above mentioned visits to the countries, it was observed that most of the Government agencies concerned lacked the technical staff with either geological or petroleum engineering background. Consequently, the envisaged on-the-job training by ECL staff would not be feasible. It is recommended therefore that a seminar for high-level Government officials should be organized; such a seminar would be financed under the abovementioned UNDP project and would cover petroleum exploration issues, general petroleum geology, development and economic aspects, as well as legal contractual matters. It would also include a presentation of the general results of the regional studies and visits to oil fields. E. CARIBBEAN PROJECT DEVELOPMENT FACILITY 100. The Facility had another very productive period from November 1, 1985 to August 31, 1986, as demonstrated by the steady increase in the number of projects prepared. In addition, the Facility has been able to secure financing for about 63% of the project proposals prepared. In mid- 1985, the Facility started to charge sponsors a fee equivalent to 2.5X of the funds that it succeeded raising for a project Prom November 1, 1985, to August 31, 1986, 18 project proposals have been completed in 12 countries (Antigua 1, Bahamas 1, Barbados 1, Belize 2, British Virgin Islands 1, Cayman Islands 1, Dominica 1, Dominican Republic 4, Grenada 1, Guyana 2, Haiti 2 and Jamaica 1) for a total investment cost of US$55.5 million bringing the total of proposals since the Facility commenced operations in October 1981 to 55 for a total investment cost of about US$133 million. Details of the projects completed and under review would be indicated in CPDF's report to be issued separately.

34 F. CIVIL AVIATION 102. In spite of repeated attempts, it has not been possible to secure financing for the establishment of training centers in the region to upgrade the quality of airport operations and maintenance. The proposed project, submitted by the International Civil Aviation Organization (ICAO), would be dropped from active consideration by the CGCED. It may be reintroduced in the CGCED agenda in the event that the prospects for financing improve. (1) Tourism G. SUBREGIONAL PROGRAMS IN THE OECS COUNTRIES 103. In October 1985, Donors' representatives interested in the proposed tourism project met in Barbados with representatives from the Caribbean Tourism Research and Development Center (CTRC) to review the revised project document. CDB has also organized a meeting with the main donors and CTRC, for November 4, 1986, to determine the interest of donors to finance the propo-sed tourism project. CDB is expected to report on the outcome of this meeting at the next CGCED meeting in late January 1987, at which time a decision would need to be made as to whether or not to retain this project on the active list of the CGCED Work Program (December 1, 1986 to July 1, 1988). (2) The Inter-Agency Resident Mission 104. The work of the Inter-Agency Resident Mission (IAM), which will cease operating on December 31, 1986, has been guided during the last eighteen months by a work plan approved by the CGCED at its meeting in Washington in June Some modifications in the work plan were made in response to the reduced level of staffing, and changing needs The work plan for 1985/86 envisaged the phasing out of the IARM by the end of 1986 and emphasized activities to facilitate the orderly transfer of functions to various regional institutions as follows: (a) the preparation of the Public Sector Investment Programs (PS;P) for the OECS member countries and the related monitorinz- will be continued by the Caribbean Development Bank. CDB will once again hold regular coordination meetings with donor representatives in Barbados; (b) the setting ap, maintenance, and coordination of Debt Management and Reporting systems in the OECS member states will be carried by the Eastern Caribbean Central Bank (ECCB); (c) certain aspects of aid coordination activity involving the preparation of lists of technical and capital assistance projects and the preparation of technical cooperation programs will be carried by the office of the Regional Representative of the UNDP in Barbados; and

35 (d) economic advisory, statistical, and training functions, formerly undertaken by IARM, will be trried by a suitably strengthened Economic Affairs Secretariat of the OECS (EAS) In light of the above, the IARM included CDB economists in the PSIP missions undertaken during 1986, and prepared manuals on PSIP preparation and related monitoring functions. The IARM participated in joint missions and other preparations with the ECCB and the Commonwealth Fund for Technical Cooperation for the establishment of debt management functions at ECCB. Joint Technical Cooperation Programming missions were undertaken with UNDP (Barbados) and UNDP personnel was trained in the preparation of the Technical and Capital Assistance compendium. The IARM has involved personnel from the EAS to help prepare national development plans for certain OECS countries, and to organize training courses in "Information Systems for Economic Development." Shortage of staff in OECSIEAS has impeded the effective transfer of IARM economic advisory and training functions to that organization. Unfortunately, the recommendations included in the Report entitled Assistance to Strengthening Economic Management of the OECS/EAS a&.d its Member States (dated May 8, 1985) which was considered at the Donors Meeting in Paris in May 1985, have not been implemente due to inadequate donor support. As a result, the previously observed weaknesses in the EAS continue. However, under the Public Management and Policy Planning Project, supported by USAID, it has been possible to provide direct assistance to several of the OECS member countries in the areas of economic and financial policy matters. (3) Agricultur>'& Diversification Project/Program 109;. CIDA is financing the Agricultural Diversification Study as agreed under the Work Program. The consultants have been appointed and their report should be available before the end of Their report is expected to be distributed for decisions at the January 1987 CGCED meeting in Washington. H. CGCED ACTIVITIES 108. As part of the efforts to strengthen the aid coordination of the CGCED, there were three meetings of the expanded Steering Committee (September 1985, March 1986 and June 1986), one meeting of the Ad Hoc Advisory Committee (St. Lucia, March ) and a special meeting of the main donors to discuss the concept and approach of the "Tighter' Consultative Group mechanism (Stptember 19, 1986). Also, the Work Program (July 1, 1985 to November 30, 1986) dated November 1985, has been approved and wo-k has started on a number of priority programs listed in the said document. The Work Program for the next 18 months is under preparation and would be submitted for consideration at the next CGCED meeting in January 1987.

36 ANNEX I COUNTRY PROFILES

37 ANTIGUA AND BARBUDA Populations 80,300 (mid-1985) IflRDIIDA Lendings See below GNP per Capita: US$2030 (1985 Most Recent Atlas Methodology) Economic Mission: March 1986 The Economy 1. Real growth in the economy of Antigua and Barbuda averaged 6.5S between 1983 and Tourism provided the main thrust for this rapid rate of expansion, which should continue in 1986, although at a slightly slower pace. A steady rise in hotel occupancy rates, from 55.4X in 1983 to in 1985, reflects both the increase in visitor arrivals and an increase in the average length of stay. Tourists were spending more per day in the islands and net receipts on the tourism account of the balance of payments doubled between 1982 and 1985* contributing to a sharp reduction in the current account deficit. For the sucond year running, there was a small overall balance of payments surplus in Meanwhile, the improvement in the Government's fiscal performance continued, and revenue measures introduced in late 1985 and early 1986 were expected to lead to further increases in tax receipts. Current expenditures were kept under control, leaving a surplus on public sector current account equivalen to 3.1S of GDP in compared with 0.92 in However, the Government was unable to prevent a further buildup in arroars on existing foreign and domestic debt. In addition, new public sector borrowing abroad rose sharply in the latter half of 1985 on account of four major development projects. These were mainly financed on commercial terms with very short repayment periods. By end 1987, when these projects should have been completed, the Government's external debt (excluding accumulated arrears) will have risen to about 922 of GDP, from 42.8% at end 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. The Government has recently engaged the services of a merchant bank to assist in this effort. (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 size of the projected fiscal gap. (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.

38 (d) A strengthening of the institutional framework for project identification and development is required. The pace of project implementation, particularly where specific policy actions are required, would be improved by the establishment of a public debt monitoring system. Government Policy 3. The Government recognizes the need for additional revenue raising measures, and for strengthening institutional support for agriculture and tourism. 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. Prolect Priorities 4. Improvement of the water distribution and storage system is a major infrastructural priority as manifested in the USAID financed water supply expansion project to be completed in 1986 and the desalinization/power plant turnkey project now underway. Technical assistance is required to improve the water authority's operating efficiency with donors as yet unidentified. 5. Three other major projects, the Deep Bay Hotel project, resurfacing of the airport runway and telecommunications improvements are due to be completed by end Together with the desalinization plant and some smaller projects they will increase the Government's external debt by US$110 million. Creditworthiness 6. To improve creditworthiness, the Government needs to seek further revenue raising measures, control current expenditure, continue divesting Government assets in tourism and other sectors, and achieve considerable progress in eliminating arrears on outstanding external obligations. No lending is currently envisaged by IBRD. Additional Capital Reauirements (US$ million): Additional external financing required fort Public Sector Investment Program Balance of Payments/Budgetary Support TOTAL

39 THE BAHAMAS Population: 230,000 (mid-1985) IBRDIIDA Lendina: See below GNP per capita: US$7,150 (1985 Atlas Most Recent methodology) Economic Mission: May 1985 The Economy 1. The Bahamas in 1985 registered yet another year of positive economic growth, and healthy current surplus in the public budget. The major sources of a 3% growth in real GDP were, once again, tourism and related services. Public sector current surplus in 1985 amounted to nearly B$120 million (equivalento 62 of GDP), reflecting slower gtowth in current expenditures; furthermore, loans and advances to public corporations romained low as a result of continued improvements in the performance of non-financial public enterprises. The balance of payments current account recorded a deficit of US$62 million in 1985, but the overall balance had a surplus of tfl$20 million, permitting net additions to international reserves. International reserves at the end of 1985 amounted to US$166 million, equivalent to about 4 months of morchandise imports. Policy Issues 2. The economy of The Bahamas has performed well in recent years and the near term outlook is quite positive, based on the dynamic tourism and financial services sectors. The country is, however, hea"ily dependent on these two sectors. Hence economic policy needs to focus on sustaining the advantages and attractions of these sectors while attempting, over the medium to long term, to diversify the economic base, and to spread the potential and the benefits of further growth to the Family Islands; i.e., beyond New Providence and Grand Bahamas. (a) As regards the existing growth sectors and centers, there is a need to effect improved overall profitability of the tourism sector by raising hotel capacity utilization and containing cost increases. In the area of offshore banking, recent efforts towards establishing appropriate framework and rules for information flows should be kept up. (b) Looking ahead, greater attention needs to be devoted to regional distribution of future growth and the infrastructure and economic opportunities available in the Family Islands. The promotion of economic growth in the other islands will, of course, make demands on the country's financial and administrative resources. (c) Domestic resource mobilization by means of a broader tax base, and improved assessment and collection of taxes and user fees, would seem to be essential.

40 (d) Continual upgra4ing 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. Government Policy 3. The development strategy of the Government is to continue to promote sound investments and growth of tourism. For the longer term, Government also intends to pursue diversification of the economic base, by encouraging viable agricultural and industrial investments, and establishing linkages between these and the tourism sector. Proiect Priorities 4. Project prioritias continue to be 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 required. Creditworthiness 5. The Bahamas is considered creditworthy for IBRD borrowing. IBRD Program 6. Bank Group operati*)ns in The Bahamas have included three IBRD loans: a Water and Seweraget project (US$10 million) in 1976, a Vocational and Technical Education pro ect (US$7 million) in 1981, and an Urban Development pcoj3ct (US$5.8 million) in A Second Water and Sewerage project is cur.ently in the FY87 lending program of the IBRD. Also, preparation for a Second Education Project would begin soon.

41 BARBADOS Population: 252,700 (mid-1985) IBRD/IDA Lendings See below GNP per Capita: US$4680 (1985 Most Recent Atlas Methodology) Economic Mission: September 1986 The Economy 1. Barbados' economy witnessed a slowdown in 1985, recording a GDP growth of only about 0.3% as compared with 3.5% in Sugar production declined marginally, while tourism and manufacturing declined significantly by 3% and 9.5% respectively. The manufacturing sector continued to suffer from trade restrictions in the CARICOM market. These declines, however, were offset by growth in mining and quarrying and in construction. Meanwhile, unemployment increased from about 17% in 1984 to 19% in 1985 and is likely to increase further in 1986, following the recent decisions by a few major firms to close operations in Barbados. The slowdown in the economy in 1985 led to a lower trade gap, which in combination with increased net services, resulted in a current account surplus equivalent to 41 of GDP. External reserves increased by about US$25 million in 1985; gross reserves at the end of 1985 stood at the equivalent of 1.9 months of import cover (excluding CMCF). Fiscal performance also suffered a setback in 1985; although current revenues increased significantly owing to improved tax collections, higher wages and salaries led to a steeper increase in current expenditure, causing the current account surplus to decline to the equivalen to 0.8% of GDP. Competitiveness of Barbados' production for international markets continues to be the most critical issue. While the recent decline of the US$, to which the BDS$ is pegged, has brought about some improvement, Barbados remains a relatively costly destination for tourism and source of manufactures. In the sugar industry, costs remain high on an international basis. These developments highlight critical imbalances in the cost/price structures of the tourism, and manufacturing industries, which have experienced rapid wage increases in recent years. With a view to improving competitiveness and accelerating economic growth, the new Government has introduced, through its July 1986 budget proposals, a wide range of tax concessions, principally to the hotel industry, manufacturing and businesses. Policy Issues 2. The main policy issues are as follows: (a) Fiscal Policys The tax concessions offered by the July 1986 budget are bound to result in a major revenue loss in the short term. This loss needs to be compensated by revenue increases, possibly in consumption taxes, and by current expenditure control. Failure to do so will weaken domestic resource mobilisation efforts - much needed to finance public investment. (b) Wate Policys Wage rates have increased more rapidly than productivity gains in recent years. Unless wage increases are restrained, international compotitiveness, particularly in manufacturing and tourism, are bound to decline further.

42 (c) Exchange Rates Cumulatively, the real effective exchange rate has appreciated by about 252 (as of December 1986) in relation to the 1980 base. This is one of the factors responsible for Barbados' loss of international competitiveness. This issue needs to be addressed in the short term. (d) Unemployment: The currently high unemployment rate of around 191 highlights the urgency of introducing incentives to promote labor intensive industries. (e) Manufacturin:s The main task is to design measures and incentives, strengthen marketing capability and promote joint ventures for encouraging exports to extra-regional markets with appropriate marketing research. Also, manpower development efforts need to be intensified. (f) Tourisms The critical issus here is the competitiveness of the tourist product. The recent tax concessions to the tourist industry need to be reflected in upgraded and refurbished tourist facilities in line with hotel rates charged. Concurrently, there is a need to improve managerial efficiency, accounting practices and marketing strategies. (g) Agriculture: In the sugar sector, the use of land and other resources need to be rationalized, productivity h&s to be improved and measures have to be devised to deal with the accumulate debt of growers and of the Barbados Sugar Industries, Ltd. In the nonsugar agriculture, major efforts are needed to encourage crops for the domestic market, and with potential links to food processing and the tourism industry. Government Policy 3. The new Government is committed to an economic strategy based on export-led growth and a greater role for the private sector. Accordingly, more emphasis is being placed on export marketing and stimulating domestic investment via tax concessions and lower interest rates. The public sector is expected to play a supportive role and to attain higher levels of operational efficiency. Proiect Priorities 4. There is no significant change in the structure of the public sector investment program in the short term, i.e., during fiscal years and 1987/88, but the size of the program has been reduced. In the medium term, however, the Government intends to move away from the physical infrastructure (e.g. roads, port facilities) to more directly productive areas such as irrigation, technical assistance and credit. Creditworthiness 5. The Government of Barbados continues to demonstrate its ability for good economic management, reliance on markets and private sector

43 participation and a strong com itment to improve the standard of llving of the Barbadian population. Barbados is considered creditworthy for IBRD lending. IBRD Program 6. Consistent with the 1984 decisions on graduation, the lending program includes projects in agriculture, industry, vocational training and roads. IBRD's program is expected to include institution-strengthening and related technical assistance. IBRD Lending (US$ million) Loan Year Borrower Purpose Bank Share 1642-BAR 1979 Barbados Education BAR 1979 Barbados Tourism BAR 1980 Barbados Industry BAR 1981 BLPC Power BAR 1982 Barbados Technical Assistance BAR 1983 Barbados Industrial Credit /1-BAR 1984 Barbaods Education Supplement BAR 1984 Barbados Road Main. & Rehab TOTA' Additional Capital Requirements (US$ million): Additional External Financing Required for: Pub. Sec. Invest. Program Balance of Payments/Budgetary Support TOTAL

44 BELIZE Population: 166,200 (1985) GNP per Capitas US$1130 (1985) IBRD Lendints See below Most Recent Economic Mission: June 1986 The Economy 1. While real GDP in Belize is estimated to bhve grown at an average annual rate of about 5% in the 1970., economic performance in the first half of the 1980s has been much weaker, averaging about 1.2% real growth. The reasons for this are various, but include the effects of international recession in the early and an almost continual deterioration in the country's terms of trade as a result mainly of falling sugar prices abroad. There was a temporary improvement in this overall performance in 1984, due to a large increase in construction activities and an improvement in the terms of trade because of a recovery in sugar prices. This was not sustained in Partly as a result of the general stagnation of the economy, the public sector's financial performance deteriorated, with negative public savings in both FY1982/83 and FY , and an overall fiscal deficit (before external grants) that reached 14.3Z of GDP in FY1982/83 and 12.7% of GDP in P11983/84. In addition, the public sector accumulated external payments arrears during this period on debt service to foreign suppliers and multilateral and bilateral agencies. To remedy this situation, in mid-1984, the Government adopted an adjustment program which resulted in a substantial improvement in fiscal performance. By PY1985J86, public savings had improved to a positive 5.71 of GDP and the overall deficit had declined to 5.11 of GDP. In particular, the improvement in the public enterprises has been substantial, moving from an overall deficit of BZ$4.4 million in FY1983/84 to a surplus of BZ$12.3 million in FY Reflecting these adjustment efforts, the external situation of Belize has also improved, with an improvement in the current account deficit from -11.6% of GDP in 1983 to -8.7% in Early indication suggest that this improvement in the balance of payments should persist throughout On the fiscal side, the level of public savings is expected to decline somewhat, due to the public sector salary increases of about 12% granted in July Policy Issues 2. The main policy issues are as follows: (a) While there has been an imprcvement in fiscal performance, the outlook for FY1986/87 is not so clear. The Government's budget envisages a large increase in public sector expenditures (about 4% of GDP), to be met by the sale of special bonds to non-residents. This program is very uncertain and if the bond sales do not materialize in the number envisaged, then public savings are expected to decline, with the result that the demands on the domestic banking system will increase.

45 (b) The level of public investment has remained static since FY (or declined in real terms), and is not at levels that are warranted by the infrastructure needs of the economy. While there has been a budgeted increase in FY to about BZ$45.9 million, this may not be realized if the public savings performance is lower than anticipated. (c) In the medium to long term, tax reforms will be necessary and in W.he interim, further improvements in procedure and administration could do much to enhance public sector revenues. (d) The key development strategy is to expand and diversify the country's exports, to reduce the instabilities caused by an almost total reliance on sugar. While some progress has been made (most notably in citrus), further efforts need to be mide for other crops such as cocoa, bananas, shrimp and beef production. Constraints on this diversification are the infrastructure, particularly the road network, availability of medium term credit for farmers, and a comprehensive agricultural extension and research service. A final constraint is the system of price controls, quantitative restrictions and import licenses, and the tariff structure. (e) There is still concern over the weakening of the public sector's administrative capacity, the shortages of higher level manpower skills and the need for organizational restructuring. Government Policies 3. The present Government is aware of the variety of policy issues outlined above and has recently completed a Five Year Macro-Economic Plan for Belize (1) ), that seeks to address these issues. In particular, the Government favors a greater role for private investment in order to achieve growth, and has, for example, divested the public sector's land holdings in the banana sector. A program to improve the efficiency of the Belize Electricity Board and the Belize Marketing Board has already been initiated. Prolect Priorities 4. Further development of the economic Infrastructure remains the major focus of project activity. Investments are required in roads, water, sewerage, telecommunications, airport development and electricity. In addition, :n order to hasten the diversification of the economy, directly productive assistance in the agricultural sector designed to assist "nontraditional' crops, will be necessary. Creditworthiness 5. The country should be considered creditworthy for limited borrowing on conventional terms, provided measures introduced to improve public finances are continued and that a major part of future external financial assistance continues to be provided on concessional terms.

46 IBRD Lending 2273-BEZ Road Maintenance and Rehabilitation Project Approveds May 13, 1983 Amounts US$5.3 million 2749-BEZ Power Development Project Approved: August 5, 1986 Amount: US$7.5 million Additional Capital Requirements (US$ millions) Public Sector Investment Program

47 DOMINICA Populations million (mid-1985) IBRDIIDA Lendinat See below G"P per capita: US$1,160 (1985 Atlas Most Recent methodology) Economic Mission: May 1986 The Economy 1. Annual GDP growth averaged 2.3X in , then climbed to 62 in Expenditures for reconstruction and rehabilitation have been the driving force behind this growth performance. Productive sectors' performance fell below potential. Banana production, the traditional mainstay of the economy, is still below prehurricane levels and the manufacturing sector experienced several closures in the last two years. Growth slowed in 1985 to 1.1X, reflecting completion of the major roads project and a decline in agricultural output. The Govermnent has implemented stabilization programs supported by financial arrangements from the IMF, and the public finances improved markedly since The Government's budget showed a small surplus equivalent to 0.9% of GDP in 1985/86. However the current account of the balance of payments widened in 1984 and 1985 as investment-related imports increased and exports faltered. Policy Issues 2. The main policy issues are: (a) Promotion of Public Sector Savings. Further rationalization of the operations of the Central Government as well as the public enterprises is needed to strengthen the public finances. (b) Increased production and erports. It is necessary to improve the incentive environment for export agriculture and manufacturing, sectors in which performance has faltered recently. (c) Public Sector Investment. Improved programming and monitoring of the public sector investment is required. Government Policy 3. The Government's development strategy is consistent with the above. In particular, the Government is pursuing external assistance in the context of the 'tighter' consultative group for project and program financing of its structural adjustment pl2gram. Proiect Priorities 4. The Goverment's investment priorities are in agricultaral sector projects aimed at agricultural diversification, expansion of Its hydroelectric facilities; and supporting infrastructure to expand agriculture, manufacturing and tourism.

48 Creditworthiness 5. Despite past improvements, Dominica's fiscal and balance of payments positions have to be strengthened further. The projected debt service obligations in the medium term suggest that Dominica can only be considered marginally creditworthy for borrowing on nonconcessional terms; therefore, it should continue to rely on highly concessional capital flows for most of its development financing. Bank Group Strategy 6. The Bank Group's strategy is to: (a) Continue channeling resources to Dominica (as to other OECS countries), mainly through the CDB. (b) Process the Dominica Power Project. (c) Support the Government'structural adjustment efforts and strengthen creditworthiness. (d) Maintain a policy dialogue on macroeconomic issues and assist the Government in mobilizing external financing, project and nonproject. Bank Group Lending Credit 1^21-DOM - Road Maintenance and Rehabilitation Project, US$5.0 million; approved April 1, A proposed hydroelectric power project, for which a credit of US$3.0 million is contemplated, was appraised in October 1986 and is currently scheduled for Board presentation in FY Additional Capital Requirements (US$ millions): FY86/87 FY87/88 FY88/89 Additional external financing required fors Public Sector Investment Program Budgetary Support

49 DOMINICAN REPUBLIC Populationt 6.4 million IBRD Lendines See below GNP per capita: US$990 (1984 Atlas Most Recent methodology) Economic Missions April 1985 The Economy 1. The economy contracted by 1.2X in 1985 because of the Impact of declining sugar export volumes, contracted capital inflows, and the effects of stabilization efforts. In January 1985, the Government agreed to enter ilto an IMF standby arrangement, which took effect in March; under that program, among other things, the Government limited net credit to the public sector, reduced some subsidies and introduced an export tax to help close fiscal gaps. The Government also rescheduled its private commercial debt worth US$286 million and Paris Club obligations of US$240 million. The private commercial debt agreement calls also for a serial rescheduling affecting payments; maturities falling due in that period will automatically be rescheduled provided that the country has an internationally supported financial program in place. The country successfully met the objectives of the IMF program, which expired in March Despite these accomplishments, the subsequent elimination of the export surcharges and increased spending in the first half of 1986 eroded most of the stabilization gains by the time the new Government took office in August The fiscal deficit doubled as a percent of GDP from 2.7 to about 5 percent. This, together with further contractions in the Dominican sugar quota in the United States, pulled down Central Bank reserves and put pressure on the peso exchange rate. Tourism continues to be the bright spot on the horizon with revenues up by more than 15 percent in Policy Issues 2. The main issues are as follows: (a) Tax reform to replaee the lost fiscal revenues and modernize the revenue base of the public sector and the abolition of non-economic pricing of state enterprises, with the objective of increasing public savings; (b) Reform of public investment management to increase the amount and productivity of public investment; (c) Reform the financial system to help mobilize private savings and facilitate the reallocation of investment to high-growth sectors; (d) Reform the tariff system to promote internationally competitive industries and activities by channeling investment into the most productive sector; (e) Implement sectoral reforms in agriculture, industry, and tourism to realize the full potential in these potentially high-growth sectors;

50 - 47 _ (f) Introduce policy reforms In health and nutrition that are necessary to Improve the productivity of Dominican worker. Creditworthines 3. The now Government in office has to establish a record of timely debt servicing which will markedly enhance the country's creditworthiness for IBRD landing. Government Policy 4. As of this writing the Government has not made public its development program. Future IBRD Operations 5. One project is under Immediate consideration, the Power I Project, to rehabilitate and improve electric transmission. Anotber is also under consideration, the financing of the Haina coal terminal. Following the Bank's mission to discuss policy issues and lending program with authorities in October 1986 the eventual program should become clearer. Bank Lendn (s inlce 1979) W - Niaao Irrigation (1979)(IS$27.0m) Ongoing 1699-DO - Second Puerto Plata Tourism (1979)(US25.0) 1760-DO - Sugar Rehabilitation (1980)(US$35.0m) 1782-DO - Urgent Import Requirements (1980)(US$25.0O) 1783-DO - Emergency load Projects (1980)(US$25.0m) 1784-DO - Second Highways (1980)(US$35.0m) 2023-DO - Cocoa and Coffee Development Proj. (1981)(US$24.0m) n 2104-DO - Sites and Services (1982)(US$25.4m) 2369-DO - Coal Terminal & Power Engineering (US$3.8m) 2558-DO - Third Highwy Reconstruct. & Maintenance (US$35.8m) 2609-DO - Vocational Education (US$5.8m)

51 GRENADA Population: 96,000 (mid 1985) IBRD/IDA Lendint: See below GNP per capita: US$970 (1985 Atlas Most Recent methodology) Economic Mission: March 1986 The Economy 1. The Grenadian economy performed better than expected in Real GDP grew by an estimated 3.7%, after falling by nearly 3% in 1983 and rising by 2Z in The leading sectors in this recovery were tourism and, to a lesser extent, manufacturing. On the other hand, productirc. in agriculture, the largest sector of the economy, fell because of the poor performance of traditional crops. 2. In 1985, the current acco.at of the Central Government had a small surplus as a result of higher than budgeted revenues, mainly derived from import taxes. The overall deficit of the public sector, excluding budgetary grants, increased from 25% of GDP in 1984 to 28% of GDP in 1985, following a rise in capital expenditures. These deficits were covered totally by external grants, 80% of which came from USAID. A comprehensive tax reform was introduced in 1986, whereby most existing taxes, including the income tax, were repealed. The foundation of the new system is a new 20% value added tax (VAT). However, difficulties in setting up the new system and additional exemptions granted by the Government may result in a revenue shortfall and a substantial budgetary deficit in Grenada's balance of payments did not change substantially in 1985, after Improving significantly in due to a drop in investmentrelated imports and an increase in tourism receipts. External grants more than doubled to US$25 million in 1984, and reached nearly US$30 million in 1985, allowing Grenada to cut sharply its extert.al borrowing and make substantial repayments to the ECCB and others. The estimated outstanding debt at the end of 1985 was US$47.5 million (92% of imports) and the debt service payments amounted to US$8.3 million (16% of exports and 22% of current revenues). Arrears at the end of 1985 are estimated at US$3 million. Policy Issues 4. The main policy issues are the followings (a) Make the new tax system fully operational and revise it, if needed, in order to increase revenue collection. (b) Reorganize the public sector by cutting nearly 20% of the workforce (O & M Study) to reduce current expenditure. (c) Proceed with the Model Farm project to hand over Government land to agricultural workers. (d) Lower the restrictions on international trade and reduce domestic price controls to improve efficiency and promote private investment.

52 Government Policy 5. In recent years, the Government has attempted to increase private sector participation in the economy through: (a) Revision of the investment code. (b) Approving, in November 1985, a comprehensive plan for divesting most public enterprises. (c) Relaxation of the controls on interest rates, prices and foreign exchange transactions. (d) A major tax reform, announced in February 1986, that repeals the income tax, company tax, export duty, stamp duty, excise duty, consumption tax and hotel occupancy tax. The new tax system is based on a 20% value added tax aimed at reducing the distortions associated with the old tax structure. Prolect Priorities 6. In order for the Government to meet its goals of increased private sector investment and higher economic growth, it is essential that it continuies expanding and strengthening the economic infrastructure. Significant improvements have been made in electricity supply, the main roads network and the construction of industrial estates. However, additional effort is required in the expansion of feeder roads, water supply and the sewerage system and telecommunications. In addition, strengthening of sectoral institutions, successful implementation of various projects covering rehabilitation of cocoa and bananas, diversification of agriculture and upgrading of support services are critical to the Government's goal of revitalizing agriculture. Creditworthiness 7. The Grenadian economy is vulnerable to external shocks, particularly sharp changes in the prices of traditional exports and revenues from tourism. However, domestic policies can affect the way in which the economy deals with these shocks. Based on recent export performance, debt service as a percentage of total exports of goods and non-factor services could decrease from 162 in 1985 to an average of 7.5% in Once the new tax system is fully in place and government revenues pick up, Grenada could service some amount of foreign borrowing on non-concessional terms in the medium term. Therefore it should continue to rely on highly concessional assistance for most of its investment program. Bank Group Strategy 8. The Bank plans to: (a) Continue channeling resources to Grenada (as to other OECS countries) mainly through CDB. (b) Support the Government'structural adjustment efforts and strengthen creditworthiness.

53 -so - (c) Maintain a policy dialogue on macroeconomic Issues and assist the Government in mobilising external financing, project and nonproject. Bank Group Lendina 9. In March 1985, IDA approved a US$5 mallion credit for Agricultural Rehabilitation and Crop Diversification, which is currently being implemented. The CDB is providing funds for the credit complement of these projects. Additional Caital Reauirements (US$ million)t Additional External Financing Required fort Public Sector Investmen: Program Balance of Payments and Budgetary Assistance " TOTAL

54 GUYANA Population: 791,000 (mid-1985) IBRDIIDA Lendint: See below. GNP Per Capita: US$570 (1985 Atlas Most Recent methodology) Economic Mission: September 1986 The Economy 1. Following three years of rapid decline in GDP, Guyana's economic performance improved somewhat in 1984 and Compared to the cumulative 20% decline during , GDP grew by 2% in 1984 and 1% in The main factor behind the positive growth was the improved performance of the bauxite sector, especially in Despite the positive growth in GDP, Guyana continues to experience low levels of output and severe domestic and external imbalances. The public sector finances continues to be weak, particularly because of the continued underutilization of capacity in the main public sector corporations, increases in public sector wages and the compounding of domestic interest payments. In 1985, the overall public sector deficit was over 60% of GD?. Similarly, Guyana's balance of payments' situation remains precarious. The current account continued to deteriorate in 1985, financed largely by the build-up of external arrears. As of June 1986, Guyana's external payments arrears stood at US$820 million, partly as a result of its inabilitiy to service its outstanding public debt. Actual public debt service as a percentage of exports was about 12% in 1985, compared to scheduled of 44% (excluding interest accrued on debt in arrears). Policy Issues 2. The main policy issues are as follow:t (a) Implementation of a substantial exchange rate adjustment, aimed at arresting the rapidly deteriorating foreign exchange situation and integrating the parallel market into the official market. (b) Reduction in the size of the public sector deficit, mainly through expenditure reductions at the Central Government level and improved productivity of public enterprises. (c) Reduction of price distortions through liberalization of domestic prices by removing controls especially on sugar and rice, as done for non-traditional commodities. (d) Prioritization of resources for rehabilitation in the medium term in order to restore the economy's productive capacity which has been substantially reduced by the foreign exchange shortage. (e) Simplification of the export and import licensing system to grant equal access to foreign exchange to both the public and private sectors. (f) Upgrading of the fiscal and non-fiscal incentive system in terms of physical and institutional support infrastructure, especially the establishment of a one-stop clearing house for foreign investment and the promulgation of an investment code.

55 Gov..rnment Policy 3. In the Government's policy memorandum submitted to the Bank in May 1986, the Government has initiated a number of policies to tackle the above issues: (a) Institution of a currency basket to monitor the value of the G$ relative to the US$ and the establishment of a defacto multiple exchange rate regime (a differential buying rate for gold and diamond). (b) Exploration of additional revenue sources, especially avenues for taxing the informal sector; and the restructuring of the maturities of domestic debt. (c) Organizational restruc.uring of the public enterprises into supervisory councils, and the decision to close non-viable enterprises. (d) Development of institutional changes with respect to (i) a review of investment incentives and import licensing legislation and procedures, and (ii) new initiatives with respect to gold, petroleum and other export commodities. 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. Creditworthiness 5. Given the size of Guyana's external arrears and its debt servicing problems, it cannot be considered creditworthy for non-concessional financing. Bank Group Strate t 6. The Bank Group proposes to: (a) Support the Government's effort in a comprehensive manner to address critical internal and external imbalances through a structural adjustment program if it so desires; (b) Should the Government undertake to implement the needed comprehensive stabilization and structural adjustment programs, assist it in its efforts to mobilize the necessary external financing; (c) Explore suitable arrangements that could constitute the basis for rehabilitation of the bauxite sector.

56 Bank Group Lending (Since 1978) IBD IDA GUA - Import Program Approved: October 10, 1978; Closeds June 30, 1979 (US$5.0 m) GUA - Upper Demerara Forestry Approved: October 10, 1978; Ongoing (Supplemental financing approved March 7, 1985) (US$10 m) GUA - Technical Assistarce for Power Development Approveds October 7, 1980; Closeds June 30, 1984 (US$8.0 m) GUA - Structural Adjustment Loan Approveds February 3, 1981; Closeds December 31, 1983 (US$14 m) GUA - Second Technical Assistance Approved: February 3, 1981; Closed: December 31, 1984 (US$1.5 m) GUA - Import Program Approved: October 10, 1978; Closeds June 30, 1979 (SDR 5.0 m) GUA - Structural Adjustment Credit Approvedt February 3, 1981; Closedt December 31, 1983 (SDR 6.3 m) GUA - Petroleum Exploration Promotion Approveds February 16, 1982; Ongoing (SDR 1.7 m) - -QUA- Technical Assistance for the Bauxite Approved: Auust 66, 1986 but not yet signed.

57 HAITI Populations 5.5 million (mid-1985) IBRDIIDA Lending: See Below GNP per capita: US$350 (1985 Atlas Most Recent Economic Mission: methodology November 1985 The Economy 1. The economy of Haiti has stagnated since In part, this is due to external factors: export receipts from coffee were affected by low world prices and hurricanes; the assembly industry, while successfully weathering the North American recession, has suffered badly from the recent difficulties in the U.S. computer industry; the only bauxite mine wab closed in 1982, when its deposits were exhausted, and tourism has also suffered severely. 2. Internal factors also contributed to the stagnation: in agriculture the key problem has been population pressure on limited natural resources, which have led to severe erosion, declining marginal productivity and increasing poverty for the rural peasants; public policies, especially inappropriate pricing incentives and diffused and unfocused agricultural investment and credit policies, have compounded this; and with the exception of investments in the Artibonite valley, rural development projects do not seem to have led to production increases. 3. Further, the incentive system toward local industry did not encourage exports. The high protection led to the saturaition of the local market and an industry unable to compete in world markets. Employment in this local industry has stagnated around 25, Fiscal discipline weakened during the 1980s. The budget deficit averaging 10 percent of GDP was financed by external concessional aid (67 percent), Ceitral Bank credit (28 percent) and foreign commercial borrowing (5 percent). Public expenditure was very poorly allocated; waste and inefficiency were endemic; extra-budgetary spending was frequently out of control; public savings were inadequate. This lack of fiscal discipline and the inappropriate use of public funds led to a decline in net aid flows, from seven to five percent of GDP, during The above factors led to the deep financial disequilibrium that has gripped Haiti this decade. That part of the public sector deficit financed through monetary creation spilled over into the balance of payments. Net reserves had fallen to minus US$86 million by the end of FY85 and gross reserves were essentially nonexistent. The dollar premium on the parallel market rose from about 8 percent in January 1985 to 23 percent by January New Government's Response 6. Very tight fiscal controls were introduced soon after the February 1986 change of government and, as a result, public sector operations--net

58 of expenditure financed with external concessional loans, showet a surplus through August 10, 1986, as compared to a very large deficit during the same period of the previous year. The tight fisual policies should bring about an overall balance of payments surplus of some US$20 million. The discount for the Gourde in the parallel market has declined to about 5 percent. 7. Also, the transitory Government is embarked on a far reaching, courageous program of economic reforms that seeks to promote economic expansion through export led growth and improved agricultural performace. To achieve these objectives the Government is removing impediments to efficient resoutce allocation and is striving to rebuild the confidence of private investors and the donor agencies. In addition to tightening of fiscal and monetary policies, the Government is closing or divesting itself of major money losing and uneconomic public enterprises, exposing private and public monopolies to competition from imports and breaking up import monopolies. 8. In terms of trade liberalization, so far the list of products subject to import quotas were reduced from 111 to 35 and by the end of 1986 the law that established the import quota and licensing schemes will have been abolished. By that time, all goods will be traded freely except for the prohibition to import used newspapers and used clothing and the temporary--until late import licensing--without quotas--of a few agricultural products (vegetable oil, rice, maize, millet, beans and pork meat). Policy Issues 9. Following is a more comprehensive list of the issues that the Government has addressed and will continue to address over the next 15 months. (a) Fiscal Policy: Improved revenue collection (by improving customs valuation, customs procedures, value added tax collection and income tax collection, and eliminating petty taxes); improved allocation of expenditures (by avoiding extra-budgetary spending, reinforcing expenditure controls and public sector accounting, limiting public sector employment and wage bill, reallocating current expenditures toward health, education, agriculture). (b) Public Enterprises: Eliminate real resource losses (end budgetary transfers, audit enterprises, liberalize cement market, restructure public sector enterprises); and limiting employment increeses and eliminating public sector arrears among public utilities. (c) Public Investmerts Greater emphasis on priority needs of productive sectotrs and human capital (complete ongoing priority projects, improve external aid coordination and

59 coordination with NGOs, prepare series of small employment generating productive projects). (d) Competition Policy: Improve allocation of resource (eliminate import quotas, reduce tariff to average 20 percent level). (a) Agricultural Policy: Improve producer incentive (progressive elimination of export taxes, replace grain import quotas with tariffs, raise rentals on State lands and tax large landholdings); improve public services and credit to farmers (strengthen extension services, emphasize irrigation rehabilitation, operations and maintenance, replace existing agricultural credit institutions with new bank). (f) Industrial Policy: Promote private investment (consistent application of 1985 investment code, improve customs administration, encourage private industrial parks). (g) Social Development: Improve human capital (improve efficiency of public health and education ministries, emphasize family planning, continue basic educational reform). Project Priorities 10. The priority for public sector investment projects should be to support the expansion of private enterprises in agriculture, industry and services, especially for export. Socially-oriented projects should be subject to systematic least cost solutions. In agriculture the focus should be irrigation rehabilitation and the provision of essential infrastructure (like rural roads) in high potential irrigated and rainfed areas. The priority in industry is also infrastructure (i.e., power). Bank Group Strategy 11. During its FY87, IDA proposes to extend to Haiti a credit to support the Transport VII project (US$20 million), an Economic Rehabilitation Credit (amount yet to be determined) and a Technical Assistance Credit. A credit to support the expansion and restructuring of industrial firms is under consideration for early FY Finally, IDA will make the effective coordination of Haiti's investment program the focus of its general assistance to the country. IDA Financing 22 credits (of which 12 are fully disbursed) Total committed: US$256.4 million

60 JAMAICA Populations 2.2 million (1985) IBRD/IDA Lendint: See below GNP per Capita: US$890 (1985 Atlas Most Recent methodology) Economic Missions July 1986 The Economy 1. The Jamaican economy continues to suffer from internal and external imbalances. In the last two years, 1984 and 1985, real GDP has declined (by-0.5% and -5.0% respectively), predominantly as a result of a dramatic decline in the bauxite and alumina sector. Gross export proceeds from mining declined by US$153.7 million in 1985 or by about 35% over the preceeding year and some 62% lower than receipts in Other export performance in 1985 was also disappointing. Tourism revenues were static, sugar receipts were down by 24.6%, with other agricultural products only showing modest improvement. Clothing continued to exhibit strong growth (an increase of 10%), however, other manufactured exports declined. As a result of these developments, the currrent account of the balance of payments deteriorated by US$5.0 million in 1985 to reach a deficit equivalent to about 9.5% of GDP. From January to October 1985, the official exchange rate for the Jamaican dollar vis a vis the US dollar continually depreciated from about J$5.040 to US$1.00 to about J$ Since then, however, the nominal rate has appreciated to J$5.50, at which level it has remained. The overall public sector deficit for FY1985/86 was 13.8% of GDP, representing a marginal improvement over the of GDP in FY1984/85. The outlook for the economy in 1986 has improved. Tourism has improved significantly in the first half of 1986, and it is projected that overall stopover visitor arrivals could increase by about 10%. Furthermore, the decline in the bauxite/alumina sector has stabilized and a modest improvement in both alumina and bauxite production can be expected. As a result of these developments, together with considerably lower import levels, the current account of the balance of payments has shown considerable improvement in the first half of 1986, compared to the same period in Provisional estimates suggest a surplus of US$13.2 million for January-June 1986, compared to a US$148.8 million deficit for the same period in On the other hand the overall fiscal deficit remains stagnant. Estimates for the first few months of this fiscal year (FY1986/87) indicate a deficit of 4.9% of GDP compared to 4.8% of GDP for the same four month period in FY Policy Issues 2. The main policy issues facing the Government are as follows: (a) Despite some of the positive indications in the balance of payments for 1986, a fundamental disequilibrium in the external accounts continues to exist, due in part to the large debt service obligations. It is estimated that Jamaica needs a reserve improvement of about US$140.0 million in FY1986/87. The balance of payments constraints on the economy are still severe, and further adjustment efforts will be necessary.

61 (b) Since the stabilization of the nominal exchange rate in October 1985, the Jamaican dollar has appreciated by between 102 to 151 in real effective terms (depending upon the base period for measurement and comparison). While domestic inflation has fallen (12.22 on an annual basis at the end of July 1986, compared to at the end of July 1985), nominal wage adjustments have been in the region of 10% to 152, with the result that a real danger exists that the competitiveness of the country's non-traditional export sector may be eroded. (c) There is urgent need to reduce the overall fiscal deficit and reduce the public sector's demands upon domestic credit, to the detriment of credit availability to the private sector. (d) In addition to the tourism sector, non-traditional exports will be the main source of future growth, supplemented in part by efficient import substitution production. To achieve this goal, further reforms are necessary in trade and incentive policy, particularly with respect to the tariff system. The coverage of the present system needs to be broadened and the dispersion of tariff rates narrowed. (e) The need for further fiscal austerity will put great pressure on the public sector investment program. Therefore, there is great need to ensure that this program is efficiently targeted and concentrates upon those infrastructure needs necessary to support growth in the leading export sectors. (f) While improvements have been made in the performance of the public enterprise sector, efforts must continue to eliminate the need for any Central Government transfers. In this regard, an appropriate food pricing policy needs to be developed that offers appropriate incentives to domestic agriculture, and more efficiently focused subsidies or support for the lowest income groups need to be put in place. Proiect Priorities 3. The difficult fiscal and balance of payments issues over the next few years suggest that the public investment program should focus upon further rehabilitation of the supporting economic infrastructure (such as utilities) end the provision of credit to foster private investment in appropriate activities in agriculture and industry. Creditworthiness 4. There is an urgent need to eliminate the current level of external payments arrears and to reschedule commercial and Paris Club members debt. Bank/IDA Financing: 40 loans (of which 28 are fully disbursed) Total outstanding and committed - US$556.0 million.

62 There are currently six Bank projects, including two sector adjustment loans that are presently under preparation. These include Education IV, Sugar Rehabilitation II, Population and Health, Power IV# Trade and Finance Sector Adjustment and Public Enterprise Sector Adjustment. Additional Capital Requirementst (US$ million) Estimates for FY1986/87 and FY are preliminary pencding agreement upon an appropriate macroeconomic framework and final definition of the public investment program. FY FY1986/87 PY1987/88 (Actual) Total Project Non-project Rescheduling ex ante financing gap

63 ST. CHRISTOPHER AND NVIS Population: 43,200 (end 1984) IBRD/IDA Lendint: See below GNP per capita: US$1,390 (1984 Atlas Most Recent methodology) Economic Mission: August 1986 The Economy t Real GDP at factor cost increased by only 1% in 1985, following a decline of nearly 22 in 1983 and an increase of 3.42 in Adverse weather conditions brought about a drop in sugarcane production of more than 10X in 1985, while difficulties in CARICOM trade that affected mainly the garment and shoe industries resulted in a decline of manufacturing output of nearly 10. These negative effects were partially offset by higher growth rates in construction, tourism and the distributive trades. However, the average annual growth rate was less than 12 in versus more than 52 in The current account deficit of the Federal Government More than doubled to 72 of GDP in 1985, while the overall deficit of the public sector increased fivefold to 182 os GDP. In the first half of 1986, the Government assumed the EC$53 million debt of the National Agricultural Corporation (NACO), which was merged into the St. Kitts Sugar Manufacturing Corporation (SSMC) to consolidate the sugar industry. Consequently, the domestic debt of the Federal Government would amount to roughly EC$120 million (about 652 of GDP) in The resulting higher debt service payments coupled with a higher wage bill could push the Government current account deficit to 102 of GDP in The current account of the balance of payments improved significantly in 1984, when the deficit was cut by one third to US$11.5 million, and it did not change in In both years there was a steep increase in tourism revenues, but this positive effect was offset in 1985 by a drop in sugar exports. The current account deficit is projected to decline further in 1986 because of a higher than expected sugar production and continuous tourism growth. The estimated outstanding external debt at the end of 1985 was US$20 million, nearly 30% of GDP. Debt service amounted to less than 42 of total exports or 92 of the current revenue of the Federal Government. Total debt (domestic and external) would amount to about EC$175 million (952 of GDP) in Policy Issues 4. (a) The narrow revenue base of the Federal Government; current revenues declined from 332 of GDP in 1981 to 252 of GDP in (b) The huge domestic debt of the Federal Government, which doubled to roughly EC$120 million in 1986, and imposes a heavy burden on the fiscal budget. (c) The situation of the sugar industry, where production has been declining since 1979.

64 (d) The solution of the land tenure issue, which would enable the Government to obtain clear title to sugar lands. Settlement of this issue will enable the Government to undertake a long-term agricultural diversification program. Government Policy 5. 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 the new development of the Southeast Peninsula, which has the strongest tourism potential in the island. The Government is also committed to improving the efficiency of the sugar industry and diversifying agricultural production by handing over land to farmers and expanding irrigation. 6. The Government is aware of the difficult fiscal situation, which would not change unless expenditures are curbed and alternative sources of revenues identified in order to reduce tde current deficit and achieve positive public savings. Prolect Priorities 7. The main project priorities are the expansion of the sewerage system in Frigate Bay and the development of the Southea,t Peninsula, Including the penetration road and accompanying infrastructure. The PSIP for amounts to US$36 million. About 75% of this program has identified external financing either as grants or loans. Of the remaining 25Z, about US$5 million would come from domestic sources, leaving a financing gap of nearly US$4 million. Creditworthiness 8. Notwtthstanding the relative low debt service to exports ratio, the difficult fiscal situation in St. Kitts and Nevis and in particular the large domestic debt of the Federal Government makes the country only very marginally creditworthy for borrowing on non-concessional terms. Therefore, it should continue to rely on highly concessional capital flows for most of its investment program. Bank Group Strategv 9. The Bank plans to: (a) Continue channeling resources to St. Christopher and Nevis (as to other OECS countries) mainly through CDB. (b) Support the Government'structural adjustment efforts and strengthen creditworthiness. (c) Maintain a policy dialogue on macroeconomic issues and assist the Government in mobilizing external financing, project and nonproject.

65 Additional Capital Recauir.m.nts (USS million)s Additional External Financing Required for: Public Sector Investment Program Balance of Payments and Budgetary Support TOTAL

66 ST. LUCIA Pouulgtion: 136,771 (mid-1985) IBRDIIDA Lendint: See below. GNP Rer cavitat US$1210 (1985 Atlas Most Recent methodology) Economic Missiont June 1986 The Economy 1. In 1985, St. Lucia experienced a real growth rate of GDP of almost 62, the highest since 1980 following the devastation of Hurricane Allen that year. The strong economic performance in 1985 is attributable mainly to the substantial expansion in banana proauttion and construction activities. While the current account of the public sector finances improved substantially in 1984S85, that of the Central Government continued to be weak. Public savings in relation to GDP rose from 1.3% in 1983 to 3.92 in 1985; nevertheless the Central Government current account deficit stood at 1S of GDP. The Central Government fiscal problems result from inadequate revenue sources, weak expenditure controls and the failure to make adequate provision for the recurrent budget implications of its investment program. St. Lucia's balance of payments has strengthened significantly in recent years and the current account has narrowed from the annual average of 34% of GDP during to 12% in St. Lucia's external public debt outstanding, at the end of December 1985, stood at US$28.7 million or 17% of GDP. Because of the concessional terms of the outstanding debt, the debt service ratio is below 5% of exports of goods and non-factor services. Policy Issues 2. The main policy issues are as follows: (a) The need to implement a program to arrest the build-up of domestic and external arrears as well as to further improve public savings. This would require financial reforms in the public enterprises, improved revenue mobilization and expenditure rationalization in the Central Government, and overall reform of the administrative structure of the public sector. (b) The need to pursue efforts at export market diversification (essentially in manufacturing) in an effort to reduce the country's heavy dependence on the CARICOM market. In this connection, there needs to be a greater focus on issues relating to local value added, quality, price, market intelligence, etc. (c) The need to introduce restraint in the granting of high wage and salary increases to the public sector. Government Policy 3. The Government's developmen thrust aims at strengthening the three main sectorss agriculture, tourism, and manufacturing, as well as diversifying the economy. With respect to agriculture, the broad objective Is to restructure the sector, through the adoption of meth-mods to increase

67 productivity, in an effort to improve farm income and standards of living. The strategy for tourism focuses on increased local value added and less leakage of foreign exchange. Finally, the active encouragement of manufacturing is part of the Government's export diversification and promotion strategy. The Government's development strategy is basically sound but the supporting policies and measures need to be articulated more clearly. Proiect Priorities 4. The composition of the public sector investment program (PSIP) is heavily geared in favour of the infrastructure necessary to support private sector activities in the three main sectors: agriculture, tourism, and manufacturing. The PSIP for 1986/ /89 is projected to reach approximately EC$40 million a year. A large part of the program aims at completing ongoing projects. With regard to new projects, expenditures have only been projected for those that are in a sufficiently advanced stage of preparation and for which donors have been identified. Creditworthiness 5. From a creditworthiness point of view, St. Lucia should continue *:o rely on concessional financing for most of its development needs. Bank Group Strategy 6. The Bank plans to: (a) Continue channelling resources to St. Lucia (as to other OECS countries), mainly through the CDB. (b) Support the Government, shall it so wish, to address the country's domestic and external economic imbalances in an effort to help the country move towards creditworthiness. (c) Maintain a policy dialogue on macroeconomic issues and assist the Government in mobilizing external financing, project and nonproject. Additional Capital Requirment (US$ million): For PSIP Balance of Payments Support Total

68 ST. VINCENT AND THE GRENADINES Population: 110,000 (mid-1985) IBRD1IDA Leading: See below. GNP Per Capita: US$840 (1985 Atlas Most Recent methodology) Economic Mission: July 1986 The Economy 1. Following two major natural disasters--a volcanic eruption in 1979 and a hurricane in economic activity rebounded, and real GDP grew at an average rate of 6% p.a. during , mainly because of the strong recovery of agriculture and expansion in transport and communications. The growth rate, however, returned to the normal trend of 3% p.a. during , since the expected growth in new sectors such as manufacturing failed to materialize and public investment contracted substantially in 1984 though it recovered in Public sector finances improved significantly during the past four years, with public savings increasing from 1% of GDP in 1982 to 6% in This improvement resulted largely from the good financial performance of the Central Government and the rest of the general Government, which compensated for the poor financial performance of the public enterprises. Substantial improvements in the balance of payments also occurred, and the deficit on the current account narrowed from 212 of GDP in 1980 to 5% in St. Vincent and the Grenadine's outstanding external public debt declined steadily from 27% of GDP in 1981 to 23% in 1984, but increased to 28% in As a result of the concessional terms, debt service remained at a modest 42 of exports of goods and non-factor services in Policy Issues 2. The main policy issues are as follows: (a) In the agricultural sector, solution to the marketing problem of the arrowroot industry; early action is needed to (i) dispose of the existing stock at the best possible price obtainable and thereby reduce the industry's debts and the cost of holding stock, and (ii) lower the price paid to the farmer to a level at which the Arrowroot Industry Association would incur no losses. (b) In the context of the public enterprises, continue efforts to improve the finances of the non-financial public enterprises, especially in that of the Central Water and Sewerage Authority. (c) In manufacturing, speedy solution to the issue relating to infrastructure development for the proposed industrial estates in an effort to promote enclave manufacturing. Government Policy 3. The Government is in the process of finalizing its three-year Development Plan, which outlines the main development objectives, strategies and policies for The objective of the Government, which is basically sound, is to generate, over the medium term, conditions

69 conducive to the continued improvement of the economy. This it hopes to achieve through increasing exports and employment based on growth in agriculture, manufacturing and tourism. The Government Intends to broaden the productive base of the economy through crop diversification in agriculture, continued emphasis on industrial estate development and the promotion of specialized tourism. Proiect Priorities 4. As part of its three year Development Plan, the Government has put together a public sector investment program (PSIP) covering 1985/ /88. The PSIP is projected to amount to EC$144 million for the three year period, 59X of which is accounted for by the Cumberland hydroelectric project. A large part of the PSIP aims at completing ongoing projects. With regard to new projects, expenditures have only been projected for those that are in a sufficiently advanced stage of preparation and for which donors have been identified. Creditworthiness 5. Despite the substantial strengthening of both public sector finances and the balance of payments, as well as the Government's improved ability to servie its external debt, St. Vincent and the Grenadines should continue to rely on concessional capital flows for the major part of its investment program in the medium term; it could be considered marginally creditworthy for limited amounts of non-concessional assistance. Bank Group Strategy 6. The Bank Group strategy is to: (a) Continue channelling resources to St. Vincent and the Grenadines (as to other OECS countries) mainly through the CDB, (b) Assist the Government in its efforts to restructure the agricultural sector; and (c) Maintain a policy dialogue on macroeconomic issues and assist the Government in mobilizing external financing, project and nonproject. Bank Group Lending (Since 1978) 7. IDA Credit 1479-STV and Special Credit SF-21STV (SDR 5 million) for Power Project -- approved May 24, Additional Capital Requirement (USS million): For PSIP Balance of Payments Support Total

70 SURINAME Populations 393,000 (mid-1985) IBRD/IDA Lending: See below. GNP per Capita: US$2,570 (1985 Atlas Most Recent methodology) Economic Mission: February 1986 The Economy 1. Suriname's economic performance deteriorated substantially during GDP declined at about 2S a year; the Central Government's current deficits rose from 2% of GDP to 191 of GDP; and the foreign exchange reserves were depleted. Continued weakness in the bauxite market and the suspension of development aid from The Netherlands are the principal adverse external developments. Domestic policies have been Inappropriate to cope effectively with the foreign exchange and financing problems. 2. The main policy issues confronting the Government ares (a) Fiscal Policy. Fiscal policy continues to be expansionary despite the scarcity of resources, leading to continued dependence on the Central Bank. The Government needs to implement a tightly monitored fiscal program of expenditure reductions and revenue increases. (b) Administrative Controls. Exchange controls have been expanded and a restrictive import licensing system has been introduced. These administrative controls and regulations on price and employment need to be relaxed. (c) Foreign Exchange Reserves, which exceeded four months of imports during , became negative in 1984 and the Government accumulated external payment arrears in 1984 and The Government will have to formulate ar, adjustment program to gain international donor support to bolster the foreign exchange position, including adopting an appropriate policy for adjusting real wages and the real exchange rat.e. (d) Bauxite Sector Competitiveness. The sector's contribution to the domestic economy has declined substantially, and its share of the international market has declined. The industry is seeking to make adjustments in certain cost elements, the wage bill and the bauxite levy, in order to stay competitive. A fruitful dialogue between the Government and the bauxite companies would have to be pursued. (e) Agriculture and other sectors. Agriculture, especially rice, has the best prospects for growth in the medium term. However, these prospects depend critically on full utilization of the Multipurpose Corantijn irrigation project and on reduction of

71 Government's direct involvement in the sector, specifically marketing, input supply and price controls. Problems that are common to all sectors are relatively high wage costs, regulations on pricoing and employment and the foreign exchange shortage which is causing underutilization of plant capacity and plant shutdowns. Government Policy 3. A new cabinet was installed in July The Government has yet to formulate its development strategy. Proiect Priorities 4. Suriname has made large investments in irrigation infrastructure for the rice sector, particularly the construction of the Corantijn canal. It is Important that the distribution works and empoldering necessary for full utilization of the irrigation water be carried out. Decisions must also be made about the feasibility of alternativenergy sector projects for substituting for imported fuel in electricity generation. Creditworthiness 5. The recent accumulation of arrears on external payments represent a marked deterioration of Suriname's external debt position. Moreover, the economic outlook is not favorable without stabilization and growth-oriented policies. It is urgent that the Government formulate a stabilization and structural adjustment program that could gain the support of the international community and improve the country's creditworthiness for conventiona lending. Bank Group Strategy 6. The Bank intends to maintain a dialogue on policy issues with the Government of Suriname. Lending by the IBRD could only be considered following restoration of Suriname's creditworthiness.

72 TRINIDAD AND TOBAGO Populations 1,187,000 (mid-1985) IBRD Lendints See below GNP per capita: US$6,050 (1985 Atlas Most Recent methodology) Economic Mission: May 1982 The Economy 1. The economy of Trinidad and Tobago has experience declining output, employment and revenues in recent years owing to a levelling off in crude oil production and weak world oil prices, 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 also face weak international markets, and the erosion of competitiveness in other manufactured exports. Favorable producer pricing policies and Increased availability of labor helped the growth of agriculture for the domestic market in 1985; however, this being a relatively small sector of the economy (4X of GDP), its positive growth could not offset the declines elsewhere. Conforming to the trend which began in 1982, real GDP in 1985 fell by 4%, unemployment rose from 132 of the labor force in 1984 to 15% in 1985, and central administration revenues declined by 4Z in With petroleum accounting for two-thirds of Trinidad and Tobago's exports of goods and services, the weakening oil market led to a steady decline of total export receipts, from a peak of US$3.4 billion in 1981 to US$2.7 billion in Despite cuts in imports and increased foreign borrowing, Trinidad and Tobago has had to draw down its international reserves annually since Net reserves at the end of 1985 stood at US$1.1 billion (equivalento 8 months' imports), compared to US$3.4 billion at the beginning of During , Government response to the financial difficulties included substantial 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. Thus, comparing 1982 and 1985, the public sector budget deficit was reduced from 132 of GDP to 7%; the external current account deficit, from 10 of GDP to 0.4%; and domestic inflation, from 14% to 7%. While this outturn represents successful adjustment, the prospects for 1986 indicate continuing difficulties, leading to a deterioration of the above performance indicators, and hence pointing to a need for further policy adjustments. Policy Issues 3. At present, the major policy issues confronting the Government are the maintenance of short-termacroeconomic stability, and promotion of wider, structural reforms towards a stage of limited dependence on petroleum. In this contexts (a) Public finances need to be strengthened by greater mobilization of nonpetroleum revenues te*g*, through a general sales tax and phasing out exemptions) and by reductions of current expenditures

73 (especially transfers to public utilities and enterprises, which need to enhance cost recovery efforts). Together with appropriate monetary management, such fiscal effort would be necessary to attain a viable balance of payments. (b) The balance of payments, moreover, needs to be strengthened with an incentives framework designed to promote the growth of nonpetroleum exports, efficient import substitutes and tourism over the medium term. This would call for an active exchange rate policy, an appropriate tariff policy, and concommitant removal of trade licences and controls. (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 the investments in place. (d) The high level of unemployment will need to be addressed through a realistic real wages policy, provision of relevant training, and policies to expand opportunities for productiv employment in the private sector. Bank Group Operations 4. Recent Bank Group activities in Trinidad and Tobago have included an IFC investment in the Trinidad Nitrogen Co., Ltd., approved during FY85, and a Joint UNDP/World Bank Energy Sector Assessment Report prepared this year.