Debt Sustainability in Caribbean Countries: An Exploration of Alternative Methodologies

Transcription

1 SOCIAL AND ECONOMIC RESEARCH UNIT ECONOMIC DEPARTMENT CARIBBEAN DEVELOPMENT BANK Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies By Ankie Sco-Joseph Augus 2006

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3 Table of Conens LIST OF FIGURES LIST OF TABLES 1. INTRODUCTION CONCEPTS AND DEFINITION MEASURES OF DEBT SUSTAINABILITY Accouning Approaches Primary Balance Gap Indicaor Tax Gap Indicaor Ne worh Indicaor Criique The Economeric Approach Criique Sudden Sop Approach Criique The Probabilisic model of Mendoza and Oviedo Criique Human Developmen Approach Criique ORIGIN OF DEBT BURDENS IN SELECTED MEMBER COUNTRIES 4.1 Guyana Jamaica S. Kis and Nevis Dominica Summary Daa Mehodology and Resuls Analysis 5.1 Model 1: Economeric approach Daa Source...25

4 5.1.3 Empirical resuls (i) Analyses for S. Kis and Nevis...25 (ii) Analysis for Dominica...26 (iii) Analysis for Guyana (iv) Analysis for Jamaica Model 2: The Primary Gap Approach Resuls Summary of Resuls...31 Policy Recommendaion...31 Conclusion...31 Appendix References

5 LIST OF FIGURES FIGURE 1: Toal Public Secor Deb o GDP 2005 FIGURE 2: Toal Public Deb in Guyana (% GDP) FIGURE 3: GDP real Growh Rae (Guyana) FIGURE 4: Fiscal Defici (% GDP) Guyana FIGURE 5: Composiion of Guyana s Domesic Deb FIGURE 6: Composiion of Guyana s Exernal Deb FIGURE 7: Public Secor Deb-GDP (Jamaica) FIGURE 8: Composiion of Jamaica s Domesic Deb FIGURE 9: Composiion of Jamaica s Exernal Deb FIGURE 10: Annual Growh rae (Jamaica) FIGURE 11: Fiscal Defici/Surplus (% GDP) Jamaica FIGURE 12: Toal Public Deb S. Kis and Nevis (% GDP) FIGURE 13: Composiion of S. Kis and Nevis Exernal Deb FIGURE 14: GDP Real Growh S. Kis and Nevis FIGURE 15: Overall Fiscal Balance (% GDP) S. Kis and Nevis FIGURE 16: FIGURE 17: FIGURE 18: FIGURE 19: FIGURE 20: FIGURE 21: FIGURE 22: FIGURE 23: FIGURE 24: The Economeric Approach Real GDP Growh & Ineres Rae (Dominica) Real GDP Growh & Ineres Rae (S. Kis and Nevis) Real GDP Growh & Ineres Rae (Guyana) Real GDP Growh & Ineres Rae (Jamaica) Primary Gap Indicaor (S. Kis and Nevis) Primary Gap Indicaor (Dominica) Primary Gap Indicaor (Guyana) Primary Gap Indicaor (Jamaica)

6 FIGURE 25: FIGURE 26: FIGURE 27: FIGURE 28: FIGURE 29: FIGURE 30: FIGURE 31: FIGURE 32: FIGURE 33: FIGURE 34: FIGURE 35: FIGURE 36: Raio of Expendiure o GDP in Levels (SKN) Raio of Revenue o GDP in Levels (SKN) Firs Differenced Series (SKN) Firs Differenced Series (DOM) Raio of Expendiure o GDP in Levels (DOM) Raio of Revenue o GDP in Levels (DOM) Raio of Expendiure o GDP in Levels (JAM) Raio of Revenue o GDP in Levels (JAM) Firs Differenced Series (JAM) Firs Differenced Series (GUY) Raio of Expendiure o GDP in Levels (GUY) Raio of Revenue o GDP in Levels (GUY) LIST OF TABLES TABLE 1: TABLE 2: TABLE 3: TABLE 4: TABLE 5: TABLE 6: TABLE 7: Uni roo es for Fiscal Variables (SKN) Tes for Coinegraion beween revenue and expendiure (SKN) Uni roo es for Fiscal Variables (Dominica) Uni roo es for Fiscal Variables (Guyana) Tes for Coinegraion beween revenue and expendiure (Guyana) Uni roo es for Fiscal Variables (Jamaica) Tes for Coinegraion beween revenue and expendiure (Jamaica) LIST OF BOXES BOX 1: BOX 2: The Millennium Developmen Goals (MDGs) IMF World Bank & HIPC Iniiaive

7 CURRENCY EQUIVALENTS (as of December 31 s 2005) US$ 1 = EC$ 2.70 US$ 1 = GA$ US$ 1 = JA$ 65 i) The EC$ is pegged o US$ since 1979 ii) The exchange rae used o deermine he dollar equivalen of Guyana and Jamaica is he end of he period rae ABBREVIATIONS ADF Augmened Dickey-Fuller BMCs Borrowing Member Counries BOP Balance of Paymen CRC Credible Repaymen Commimen CDB Caribbean Developmen Bank DOD Disbursed ousanding deb DOM Dominica DSA Deb Susainabiliy Analysis ECCB Easern Caribbean Cenral Bank ECCU Easern Caribbean Currency Union EXPD Governmen Expendiure GDP Gross Domesic Produc GUY Guyana HIPC Heavily Indebed Poor Counries IDA Inernaional Developmen Associaion IDB Iner-American Developmen Bank IFS Inernaional Financial Saisics IFI Inernaional Financing Insiuions IMF Inernaional Moneary Fund JAM Jamaica LDCs Less Developed Counries LHS lef hand side MDG Millennium Developmen Goals MO Mendoza and Oviedo NPG No Ponzi Game NPV Ne Presen Value OECD Organizaion for Economic Co-operaion and Developmen OPEC Organizaion of he Peroleum Exporing Counries PP Phillips Perron PVBC Presen Value Budge Consrain RER Real Exchange Rae Regime REV Governmen Revenue RHS Righ hand Side SKN S. Kis and Nevis SSMC S. Kis Sugar Manufacuring Corporaion ToT Terms of Trade

8 DEBT SUSTAINABILITY IN CARIBBEAN COUNTRIES: AN EXPLORATION OF ALTERNATIVE METHODOLOGIES by Ankie Sco-Joseph * Social and Economic Research Uni Economic Deparmen Caribbean Developmen Bank P.O. Box 408, Wildey, S. Michael, Barbados W.I. ABSTRACT This paper reviews alernaive mehodologies for measuring deb susainabiliy. I surveys recen lieraure wih emphasis on developing counries. In his sudy, we apply he economeric approach and he gap analysis approach o fiscal daa of S. Kis and Nevis, Dominica, Jamaica and Guyana o analyze susainabiliy during he period We find ha he economeric approach is a useful approach ha addresses issue of long-erm susainabiliy. On he oher hand, he gap analysis is more flexible and can be used o address shor, medium and long-erm susainabiliy. Also, i is more easily applied and provides concree policy suggesions. The empirical resuls sugges ha counries in he sample face serious issues of fiscal susainabiliy. Keywords: Fiscal Susainabiliy, Deb, PVBC, Primary Gap, governmen expendiure, revenue, uni roo, co-inegraion. * This research was done while on a hree-monh work aachmen wih he Social and Economic Research Uni of he Caribbean Developmen Bank. The projec was concepualized by he head of he uni, Julie Melville, who provided iniial supervision. The exercise was compleed in close collaboraion wih Parick Kendall, Research Economis wih SERU, who made an invaluable conribuion o he presenaion, analysis and inerpreaion of he findings. Exensive commens from boh provided useful insighs.

9 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies 1. INTRODUCTION In many Caribbean economies, oupu growh in recen years has been relaively low and economic aciviy has no been vibran enough o generae sufficien revenue o enable budge surpluses. Insead, hese economies have been consisenly regisering relaively high budge deficis. Since oday s defici adds o omorrow s expendiure o service new deb, deficis and deb reducion should be win arges of any governmen. Deb burdens are problemaic when fuure expor and oupu growh would no be sufficien o enable counries o mee curren and fuure domesic and exernal obligaions wihou resoring o rescheduling. This is clear indicaion of unsusainable deb. Susainabiliy analysis seeks o address he issue as o wheher governmen is headed owards excessive deb accumulaion based on curren policy. In he Region, indebedness in recen years has been on he rise. Therefore, a clear analyical framework for assessing deb susainabiliy is essenial. Very few counries are unaffeced by deb issues. Reviewing approaches o deb susainabiliy analysis (DSA) would help Caribbean economies undersand he elemens ha underline DSA and help hem assess he susainabiliy of heir deb. The main aim of his paper is o review he differen approaches o deermining fiscal and deb susainabiliy. In his regard a comprehensive review of he heoreical framework of alernaive mehodologies is presened in order o idenify and develop he mos appropriae approach o assessing susainabiliy in he Caribbean Developmen Bank s Borrowing Member Counries. The main analyical apparaus used in his sudy are he Economeric Approach and he Accouning Approach. The remainder of his sudy is srucured as follows. Secion 2 discusses definiions of deb and fiscal susainabiliy. Secion 3 is a comprehensive review of he heoreical framework of alernaive mehodologies focusing on he Accouning, Economeric, Sudden Sop, Probabilisic and he Human Developmen approaches of measuring fiscal and deb susainabiliy. Secion 4 highlighs he presen and hisorical developmen of deb and budgeary deficis in Dominica, Guyana, Jamaica and S. Kis and Nevis. Secion 5 presens resuls of he economeric and accouning approaches. The policy recommendaions and conclusion are discussed in Secion CONCEPTS AND DEFINITION Governmens, and he public secor as a whole, no only have o service heir exernal deb obligaions, bu all heir deb obligaions, including hose conraced domesically. Public deb is he indebedness of a cenral governmen, sauory bodies and coningen liabiliies and comprises domesic and exernal deb. Domesic deb is owed o lenders wihin he counry. The deb creaed is in he form of reasury bills, debenures, savings cerificaes or savings bonds. On he oher hand, exernal deb is ha par of he governmen deb which is owed o crediors ouside he counry. This deb includes money owed o privae commercial banks, bond holders, oher governmens, or regional and inernaional financial insiuions such as he IDB, CDB, IMF and World Bank. Boh domesic and foreign crediors play an imporan role in financing public developmen expendiures and he overall budge defici. 1

10 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Governmens may borrow o mee emporary needs, when esimaed revenue falls below or is exceeded by expendiures. Many governmens incur deb because of an unwillingness o limi spending or increase axes for fear of he poliical consequences. They may borrow o finance public programmes which do no generae revenue. Addiionally, hey may borrow o buffer unexpeced expenses occurring as a resul of naural disasers such as hurricanes, volcanic erupions and earhquakes. When naural disasers arise, i is difficul o finance he exended aciviies of he governmen by new or increased axes. Public deb has an expansionary effec on employmen and producion during imes of high unemploymen. However, projecs (boh jusifiable and unjusifiable) may be underaken and governmen's demands may become so large ha he ineres rae on governmen bonds rises o he poin where money is divered from privae enerprise. Too grea a deb may induce currency depreciaion or defaul on obligaions. Rising ineres raes will make borrowing more expensive and overime hese paymens will absorb much of governmen s revenue and evenually deb would become unsusainable. Deb susainabiliy is he abiliy of a debor counry o manage is deb coninuously so ha i does no expand beyond is conrol. The IMF and World Bank (2001) define deb susainabiliy as a counry s abiliy o service is borrowing, exernal and domesic, public and publicly guaraneed, privae non-guaraneed, including boh shor-erm and long-erm deb, wihou compromising is long-erm developmen goals and objecives and wihou resoring o deb rescheduling or accumulaion of arrears. In he public secor conex, a susainable posiion is ofen viewed as one where he governmen (or public secor) is solven. Solvency implies ha he presen value of governmen expendiure (including ineres paymens, and non-ineres expendiure) should no exceed he presen value of revenues. Alernaively saed, he presen value of primary balances should a leas be sufficien o cover he exising public deb. IMF (2002) suggess ha solvency is only a necessary condiion for susainabiliy because solvency could be accomplished wih very large and cosly fuure adjusmens. According o Blanchard (1990), susainabiliy is fundamenally abou wheher, based on he curren policy, governmen is headed owards excessive deb accumulaion. Blanchard (1990) furher saes han an economy is said o have achieved fiscal susainabiliy when he raio of public secor deb o GDP is saionary, and consisen wih he overall demand boh domesic and foreign, for governmen securiies. This sudy likewise defines fiscal susainabiliy as governmens abiliy o repay curren and fuure deb. 3. MEASURES OF DEBT SUSTAINABILITY There are a variey of mehodologies for defining and assessing he susainabiliy of fiscal programs. These include he Accouning approach, he Economeric approach, he Probabilisic model {Mendoza & Oviedo (2003)}, he Sudden Sop approach and he Human Developmen approach. These approaches use various indicaors o show how fiscal policy expands and signals when i is likely ha deb servicing would become increasingly difficul. 2

11 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies 3.1 Accouning Approaches Primary Balance Gap Indicaor The primary gap is a simple indicaor of deb susainabiliy. I is based on compuaion of he primary balance needed o sabilize he deb-o-gdp raio, and is he difference beween he deb sabilizing primary balance and he acual primary balance. A posiive gap is an indicaion ha fiscal policy is causing deb accumulaion, and, wih unchanged policy, ha deb can become unsusainable over ime, given ha he deb-o-gdp raio canno grow wihou limi. The relaionship beween governmen s curren deb, he las period s deb, he ineres rae and he primary surplus can be expressed by he following budge consrain: where B = B (1 + r ) S 1 (1) S is he primary surplus and r is he real ineres rae. To derive he susainabiliy condiion, equaion (1) is reformulaed in erms of raios o GDP. B Y 1+ r = 1+ g B. Y 1 1 S Y (2) where g corresponds o he real growh rae of he economy, Y = ( 1+ g ) Y 1 and Y denoes GDP. 1+ r or b = b +1 s (3) 1+ g Using equaion (3) he change in b equals: b = b b 1+ r = b b g s (4) r g = b 1 1+ g s (5) When r > g here is increasing pressure on he deb/gdp raio. The reverse is rue when r < g. In oher words, when real ineres rae is higher han real growh, he deb-o-gdp raio will rise unless compensaed for by he primary surplus. The fiscal sance is considered susainable if i generaes a consan deb/gdp raio. Therefore, fiscal susainabiliy implies ha he b = 0. Thus, using equaion (5) he primary balance needed o sabilize he public deb is: r g s (6) * = b 1 1+ g 3

12 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies The primary gap indicaor is hen: r g * s s = s + b 1 (7) 1+ g * This is he difference beween he required primary surplus s and he acual primary surplus s. A negaive gap suggess ha he required primary surplus is lower han he acual primary surplus, implying downward pressure on he deb-o-gdp raio. If he indicaor is posiive, hen he required primary surplus is higher han he acual primary surplus, suggesing ha governmen mus embark on fiscal adjusmen programs o ensure ha he deb-gdp raio does no increase Tax Gap Indicaor Blanchard (1993) also defines susainabiliy as sabiliy in he deb o GDP raio and suggess a number of indicaors (shor, medium and long-erm) ha can be used o evaluae he susainabiliy of fiscal programmes implemened by governmen. Blanchard looked a he change in policies required o mainain he deb o GDP raio consan. In his regard, he proposed he applicaion of a ax-gap indicaor. The ax gap indicaes he increase in ax raio (ax effor and/or he cu in expendiure) required for public deb susainabiliy. The permanen ax o oupu raio necessary o sabilize he deb raio is given by: _ = G ( g r ) b (8) where G is he raio of governmen non-ineres spending o oupu, is he ax o oupu raio, r is he real ineres rae, g is he real growh rae of GDP and b denoes he curren deb sock. Adding o boh sides of equaion (8) yields he ax gap indicaor: _ = + ( g r ) b G Equaion (9) measures he difference beween he permanen ax raio and he curren ax raio. A posiive indicaor shows ha curren axes are oo low o sabilize he deb raio, given curren spending policies and ha fiscal policy is hus unsusainable. (9) Ne worh Gap Indicaor Buier (1985) suggesed a somewha differen indicaor of susainabiliy and defined a susainable policy as one capable of keeping he raio of public secor ne worh o oupu a is curren level. Ne worh (NW) = Asses (Real + Financial) Liabiliies (Financial) where Asses (A) = Fixed Capial + Financial Asses (Shares ec.) and Financial Liabiliies (L) = General Governmen Deb (Gross Ousanding Deb). 4

13 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies However, his indicaor is hard o apply since he governmen ne worh is very difficul o measure. Noneheless, he argues ha a susainable fiscal policy should keep he raio of public secor ne worh o oupu consan. He calculaed he permanen adjusmen required o achieve his objecive as: F = R( S W ) (10) where, F is he raio of he required adjusmen (or long-erm defici) o GDP, W is he raio of ne worh o GDP, R he real long-erm ineres rae and S he presen value of governmen spending Criique The gap approach relies on accouning indicaors, and usually ses a consan deb-o-gdp raio as a benchmark for he susainabiliy of fiscal policies. The gap approach, however, does no idenify he level of deb which migh be considered susainable. I merely seeks o sabilize he deb raio. Addiionally, he exclusive emphasis which his approach pus on he relaionship beween GDP growh and increases in deb does no capure he imporan role ha lenders ulimaely play in deermining wha deb sraegies are susainable. Furhermore, he absence of any reference o he srucure of he deb and paricularly he exisence of exernal deb and he possible impac of exchange rae movemens are oher weaknesses of many gap approaches. The inerpreaion of gap indicaors is quie sraighforward and simple. However, Chalk and Hemming (2000) argue ha despie he simpliciy and ease of inerpreaion associaed wih his approach, hese indicaors do no disinguish beween counries wih varying degrees of indebedness and fiscal imbalance, and are herefore more useful in he case of counries characerized by high deb and primary deficis. Chalk and Hemming (2000) also sae ha he gap mehodology can be applied o he majoriy of counries bu for counries which are wellendowed wih non-renewable resources, he usual approach can ofen give a misleading impression abou fiscal susainabiliy, since financial wealh differs from resource wealh. 3.2 The Economeric Approach The economeric approach assumes ha he susainabiliy of fiscal policy depends ulimaely on wha level of fiscal defici can be financed. Empirical implemenaions of his approach involve economeric esing of a se of ime series daa o deermine saionariy and he possible exisence of co-inegraion beween revenue and expendiure. The governmen budge consrain for period can be wrien as follows: B = B (1 + i ) ( R G ) (11) 1 where B denoes governmen deb, i he nominal ineres rae, G represens governmen expendiure (excluding ineres paymens), R governmen revenues and R G is he primary surplus. See Cuddingon (1996). 5

14 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Solving forward o a erminal period s from an iniial period 0, he budge consrain can be represened as follows: B s s s s = (1 + i) B ( R G )(1 + i) = 1 1 (12) s Dividing hroughou by ( 1+ i), rearranging o solve for B 1 and leing s yields he governmen iner-emporal budge consrain: Bs R G B 1 = lim + (13) s s (1 + i) (1 + i) Since in he limi, he firs erm on he RHS in equaion (13) equals zero, hen he governmen s fiscal sance is susainable only if he sock of ousanding deb B 1 equals he discouned value of fuure governmen surpluses, given he assumpion ha a he end of he period nohing will be owed o crediors nor will debors owe anyhing o governmen. Hence for susainabiliy: = 1 = 1 Rr G B 1 = (14) (1 + i) The firs condiion is ofen called he No Ponzi Game (NPG) condiion. I implies ha governmen canno indefiniely accumulae deb by borrowing new money o pay back old liabiliies including ineres paymens. Once his condiion holds, hen he governmen budge consrain is fulfilled. The NPG condiion consrains he public deb from growing faser han he ineres rae. From he iner-emporal budge consrain, various ess of fiscal susainabiliy can be derived using he concep of co-inegraion. Following Hakkio and Rush (1991), equaion (13) can be reexpressed as follows: R G B 1 (15) (1 + i) (1 + i) + s + s + G s + ib ) R = Σ + lim s= 0 + s s + s ( Where he las erm goes o zero and G and R are assumed o be non-saionary so ha he R and G are saionary. The resul is ha he RHS is saionary. This implies ha he LHS of he equaion mus also be saionary {i.e. ( G + ib ) R mus be saionary}. ( G + ib 1 ) R can be saionary only if ( G + ib 1) and R are co-inegraed wih he co-inegraing vecor being (1, -1). The es of co-inegraion herefore is a es of fiscal susainabiliy. Jha (2001) used he economeric approach o conduc susainabiliy ess for a sample of low and middle income counries for he period The resuls showed ha in all counries boh governmen expendiure and governmen revenue were non-saionary and no co-inegraed. Jha (2001) herefore concluded ha he fiscal deficis for boh middle and low income counries in his sample were no susainable in he long-run. 6

15 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Criique The economeric approach involves economeric esing of a se of hisorical ime series daa on governmen spending and revenue, o deermine he exisence of co-inegraion. However, hese require long ime series, a requiremen ha may be unrealisic in many developing counries, since daa is relaively poor and limied wih respec o ime span and accuracy. Also, his echnique capures only long-erm susainabiliy and does no capure problems of shor and medium erm susainabiliy. Cuddingon (1996) suggess ha raher han using ime series echniques o describe consan fiscal regimes, one can specify fiscal rules ino he foreseeable fuure based on counry-specific informaion on fiscal arges. The economeric approach does no rule ou large primary deficis or high deb. Governmen is simply required o run adequae primary surpluses in he fuure. Moreover, he resricive condiion only consrains he deb from growing faser han he ineres rae. Addiionally, i assumes ha in he long run he counry will be able o mainain access o financing. 3.3 Sudden Sop (SS) Approach Edwards (2004) defines a sudden sop o be a period in which a counry s ne capial inflows (he financial accoun balance) decline by a leas 5% of GDP in one year. However, here are various definiions of sudden sop. Mos are cenered on a sharp increase in he curren accoun deficis, accompanied by a sharp decrease in he financial accoun balance. A subsanial curren accoun defici raises a quesion abou he counry's capabiliy of coninually financing such an imbalance. This can rigger a panic ha induces a sudden sop. Sudden Sops in capial flows force abrup adjusmens of he curren accoun defici. A fall in he financing of he curren accoun defici implies ha he counry mus follow a forced adjusmen in is absorpion of radable goods. Since he consumpion of non-radable goods is a complemen o he consumpion of radable goods, a fall in he laer will imply a fall in he former, leading o a decrease in non-radable prices. Since, in a small open economy radable prices are aken as a given, i implies ha he real exchange rae (RER) mus adjus. This adjusmen will generae valuaion effecs on he deb-o-gdp raio, which, in urn, affec fiscal susainabiliy. (Calvo, Izquierdo, and Talvi, 2003). Empirical analysis of his approach was conduced by Calvo e. al (2003). They considered he effecs of a depreciaion of he RER of 50 percen on deb valuaion and fiscal susainabiliy for Argenina, Brazil, Chile, Columbia and Ecuador for he year They found ha he RER depreciaion had a subsanially negaive effec on Argenina s fiscal performance. Mendoza and Smih (2002) define hree key feaures of sudden sops. Firs, a sharp reversal in he curren accoun, riggered by he sudden loss of access o world credi markes. Second, a severe recession wih large declines in domesic oupu, consumpion and invesmen. Third, large relaive price swings, wih a collapse in domesic asse prices and he price of nonradable goods relaive o radables, and a sharp increase in he relaive price of inermediae goods. 7

16 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies The SS approach proposed by Calvo, Izquierdo and Talvi (2003) akes ino consideraion he effecs of real exchange rae depreciaion on fiscal susainabiliy. In his regard hey propose an indicaor which incorporaes he currency composiion of he deb and GDP. They consider he case of a small open economy experiencing a curren accoun defici before a sudden sop akes place. By definiion: CAD = A* +S * - Y* (16) where CAD is he curren accoun defici, A* is absorpion of radable goods, S* represens ne non-facor paymens o foreigners, and Y* is he supply of radable goods. If financing of he curren accoun defici is sopped, he full amoun of ha imbalance would have o be cu, and herefore he curren accoun balance mus be adjused abruply. Furher, hey considered a ypical susainabiliy calculaion, where he size of he primary surplus necessary o keep a consan raio of deb o GDP is compued, given a cos of funds, and a growh rae for he economy. The equaion is given by: b + 1 = b (1 + r) s (1 + θ ) (17) where b is he deb o GDP raio, ime period, r is he real ineres rae on deb, θ is he GDP growh rae, and s is he primary surplus as a share of GDP. To obain a consan deb o GDP _ raio ( b ), r and θ are assumed o be consan and he required primary surplus mus saisfy he following: + = (1 r) s b 1 (18) (1 + θ ) This defines he seady sae of deb. I is a radiional deb susainabiliy calculaion, bu Calvo e. al poin ou ha i hides he rue composiion of he deb-o-gdp raio b ; because of his, deb is decomposed in erms of radables and non-radables. _ b p B + B B + e B * * = = (19) * * py + Y Y + ey where ( e ) is he real exchange rae (defined as he price of radables relaive o nonradables), p is he inverse of he real exchange rae, B is deb payable in erms of nonradables, * B * is * deb payable in erms of radables, Y is oupu of non-radables, and Y is oupu of radables. 8

17 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Calvo e. al (2003) emphasize ha deb composiion, as well as oupu composiion, maer a grea deal for susainabiliy analysis, because mismaches beween deb and oupu composiion can lead o subsanial differences in valuaion of he deb/gdp raio following real exchange rae * depreciaion. For example, if b = e B / Y, all valuaion effecs ake place only on deb. This is he wors case scenario in which RER depreciaion has a subsanially negaive impac on fiscal * * susainabiliy. On he oher hand if ( B / e B ) /( Y / ey ) = 1 he composiion of deb and oupu are perfecly mached. When his condiion holds, RER depreciaion has no effec on fiscal susainabiliy. A value of 1 would indicae a perfec mach and a value of zero would indicae he highes degree of mismach Criique Sudden Sops are modeled as large, unexpeced shocks. One canno ell wheher he predicions of paricular models are robus o changes allowing agens o ac on expecaions of sudden sops. Addiionally, precauionary savings heory suggess ha his can be a flaw because, when faced wih possible caasrophic evens, agens build a buffer sock of savings o lower he long-run probabiliy of hese oucomes. Also, using he deb-o-gdp raio o deermine susainabiliy, he heory is implicily assuming ha resources can easily be direced from he res of he economy o he radable goods secor o generae he required foreign exchange. Ofen he majoriy of public deb is denominaed in foreign currency The Probabilisic model of Mendoza and Oviedo (MO) (2003) The Probabilisic model is a new approach o assessing fiscal susainabiliy proposed by Enrique G. Mendoza and Pedro Marcelo Oviedo (2003). The guiding principle of he model is ha of Credible Repaymen Commimen (CRC). Mendoza and Oviedo (2003) define deb susainabiliy as one in which he governmen is able o repay is deb and mainain he credi relaionship. This implies ha he governmen canno accumulae more deb han i can service. The probabiliy model deermines a hreshold deb level, and produces esimaes for he number of periods i will ake o hi he deb hreshold. Mendoza and Oviedo (2003) develop a complee dynamic sochasic general equilibrium model where he behavior of uiliy-maximizing individuals and profi-maximizing firms deermines governmen revenues endogenously, all of his in a conex where radable and non-radable goods are produced. These assumpions lead o a simple formulaion of he CRC, where he hreshold value for he deb-o-gdp raio saisfies he following condiion: b min min * e 1 b = (20) r g 9

18 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies where b* represens he hreshold value for he deb-o-gdp raio, min is he lowes possible realizaion of he raio of governmen revenues o GDP, r ineres rae, g GDP growh and min e is he minimum level of he governmen expendiure-o-gdp raio ha can be susained if a counry were o ener a fiscal crisis in which ax revenue reaches and says a min and pushes b above b*. 1 The approach also capures he sock of deb ha governmen is willing o repay if lenders choose r so ha b* reflecs a deb raioning level ha enforces he governmen s paricipaion consrain (i.e. consrain under which he governmen always finds i preferable o repay and mainain a relaionship wih crediors). This implies ha he governmen canno accumulae more deb han i can service if i were o ener a fiscal crisis. There will be a deb limi above which no addiional borrowing can ake place. The model incorporaes volailiy of fiscal variables in deermining abiliy o repay. Mendoza and Oviedo assume ha he volailiy in governmen revenues can be raced back o fundamenals such as erms-of-rade (ToT) shocks, sudden sops, inernaional ineres raes or produciviy. The Mendoza and Oviedo s probabilisic model requires informaion regarding he volailiy of governmen revenue, average levels of revenue and expendiure, he size of poenial adjusmen in expendiure ha would be needed if governmen were o fall ino a sae of crisis, an esimae of he risk-free ineres rae on governmen deb and a growh rae for he economy Criique Unlike he sandard approach which defines a policy arge (i.e. expressed as he primary balanceo-gdp) needed o sabilize he economy, Mendoza and Oviedo s model defines he maximum deb level and no a arge deb level (o be achieved hrough policy adjusmen). The maximum deb level is no he equilibrium or opimal deb level. Therefore, he ask of governmen is o srenghen fundamens so ha he probabiliy of hiing he upper limi of governmen deb remains low. However, he deb level limi does no imply ha governmens wih he deb levels a or below he limi are defaul-free. The possibiliy of defaul can sill occur in he case where he inabiliy o pay arises due o large unexpeced shocks o eiher governmen revenues or oulays. Secondly, for any given average revenue-o-gdp raio, governmens ha have a less volaile revenue base will have higher min and hence hey will be able o susain higher levels of deb. Addiionally, acual value of expendiure adjusmen ha can be announced is no as criical as he value of min ha can be credibly announced. Counries which can commi o large adjusmens in expendiure can susain higher deb-o-gdp raios and may never be asked o ac on hese commimens. The focus on governmen deb misses fragile deb posiions in he privae secor ha can subsequenly become liabiliies of he public secor. Ofen here is a domino effec when here is bankrupcy in he privae secor. Noe ha b* is he susainable deb raio in he long run. 10

19 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies 3.5. Human Developmen Approach A recen paper by Jeffrey Sachs summarizes he inconsisency of he approaches discussed, noing ha "i is perfecly possible, and indeed is currenly he case, for a counry or region o have a 'susainable deb' (and significan deb servicing) according o IMF macroeconomic crieria, while millions of people wihin he counry are dying of hunger or disease". One of he key principles of his approach is ha human developmen is imperaive and should ake precedence over deb paymens. As a consequence, developing counries should be able o se aside as much fiscal revenues as is needed o reach hese goals and only hen use he remainder o pay deb service. Deb susainabiliy here is linked o he achievemen of he millennium developmen goals The underlying principle of Sachs (2002) approach is based on he inadequacy of he IMF deb susainabiliy analysis o deliver deb susainabiliy in he presence of imperaive human developmen needs. Therefore, raher han arbirarily seing susainable raios of deb o revenue and oher arbirary sub-crieria, he human developmen approach akes as is core he amoun of revenue which a governmen can realisically be expeced o raise afer deducions of necessary funds for basic human needs have been made. The approach is based on four assumpions. Firsly, i is no reasonable o levy ax on income below he inernaional absolue povery line which is deermined by he World Bank o be $1 per person per day a purchasing power pariy a 1985 prices. Secondly, axaion of greaer han 25% on incomes (i.e. adjused GDP), will give rise o excessive disorions in he economy and hus hinder economic developmen. Thirdly, measuremens of wha counries can afford in erms of deb-servicing are considered afer minimum levels of governmen spending have been se aside o mee arges for he mos basic level of human developmen. Human developmen expendiure is limied here o basic healh and primary educaion. Lasly, only a limied amoun of any remaining revenue should be allocaed owards deb service, in order o leave resources for oher essenial governmen expendiure. Servicing demands above his level would be inconsisen wih debor governmens' abiliy o mee heir counries developmen needs. The proposed human developmen approach involves hree seps. Sep 1, Deermining he Resource Envelope. This includes all available resources o Governmen and is defined as fiscal revenue, including grans. Including grans may cause overesimaion because grans end o flow irregularly as disbursemens are subjec o delays and dependen upon adherence o cerain condiionaliies. Addiionally, he amoun of income or GDP below he inernaional absolue povery line is subraced from he axable income base. In oher words, earnings below he povery line are no subjec o axaion. This can be expressed as a percenage of GDP. The second sep involves, cosing he human developmen expendiure; he approach is based on he assumpion ha resources available o Highly Indebed Poor Counries (HIPC) governmens mus firs be used for essenial expendiures ha are necessary o eradicae povery. These expenses include hose for social secor developmen (healh, educaion, ec.), and basic infrasrucure. Esimaing he social coss relies on he resource requiremens necessary o aain MDGs. see Box 2 for he MDGs 11

20 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies The final sep enails, deermining he ne revenue available for all oher expendiures. Ne revenue available for all oher expendiures, including recurren expendiure, personal emolumens, exernal deb service, ec. is obained by deducing he oal human developmen expendiure (in Sep 2) from oal available revenue (in Sep 1). In a siuaion where ne revenue is below zero, i would mean ha deb service is unsusainable, warraning oal deb cancellaion and increased gran aid. If he amoun is above zero, hen one would proceed o assess exernal deb agains ne revenue Criique There are limis o he human needs approach. Firsly, i is no designed for all counries bu specifically for hose economies which are highly impoverished and so arguably will have limied applicabiliy o CDB s BMCs wih he excepion Haii. Secondly, i does no pay adequae regard o domesic deb nor privae secor deb. Privae secor liabiliies can become governmen deb if guaraneed by governmen. Thirdly, he mehodology allows counries o pursue heir mos basic human developmen needs in erms of healh and educaion. However, essenial needs for human developmen are no limied o hese wo areas. Brief summary on he various approaches In brief, he Accouning approaches (primary gap, ax gap and ne worh gap indicaors) are based on susainabiliy which concerns he behaviour of he borrower counry and is willingness and abiliy o mee curren and fuure deb obligaions. Secondly, he Economeric approach is an approach which analyzes wheher a governmen can manage is budge defici in he long-run. The Sudden Sop approach looks a wheher curren policies can cause a sudden cessaion of capial inflows. Lasly, he Probabilisic model is one which analyzes governmen s abiliy o credibly commi o repay is deb while mainaining is credi relaionship wih is lenders. The above-menioned heories build on he governmen budge consrain, which links ogeher he fiscal defici, public deb, economic growh, inflaion, ineres rae and he balance of paymen. The mehodologies do no indicae wha level of deb is susainable. Insead, hey indicae wheher given policies can lead o upwards rends in he deb-o-gdp raio and ascerain when fiscal adjusmen is required. Addiionally, hese approaches consider financial susainabiliy. However, DSA should also consider economic susainabiliy since a counry should no only be able o generae enough resources o serve is deb obligaion bu also o improve is economic performance. Unlike he above-menioned approaches, he Human Developmen approach akes ino accoun he amoun of resources needed by debor counries o reach specific arges of governmen expendiure and povery reducion (as defined by he Millennium Developmen Goals). In some ways, i is more complex han he oher approaches. I is paricularly useful for very poor counries, because a high level of deb absorbs resources and causes monies o be divered from growh and developmen. 12

21 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies 4. ORIGIN OF DEBT BURDENS IN SELECTED MEMBER COUNTRIES In he 1950s and 1960s, growh raes were ypically high and ineres raes were low. In conras, during he 1970s and early 1980s, as a resul of he oil supply shock and foreign exchange disress, growh raes fell, making i difficul for counries o service exising deb. As a resul, economies resored o new deb which worsened heir deb saus. Meanwhile, ineres paymens on loans mouned and so counries in he Caribbean were caugh in he vicious cycle of large deficis, large deb service paymens and subsanial deb accumulaion. Figure 1: Toal Public Secor Deb o GDP Raio % 150% 100% 50% 0% Guyana S. Kis & Nevis Jamaica Dominica Source: ECCB Deb Saisics Diges, Bank of Jamaica Annual Repor & Bank of Guyana Annual Repor In 2003, 14 ou of 15 Caribbean counries were among he op 30 of he world s mos highly indebed counries {Sahay 2004}. During 2005, deb-o-gdp raios remained relaively high in he Region. Among he highly indebed counries in he Region, are Guyana (183%), S. Kis and Nevis (181%), Jamaica (125%) and Dominica (97%). Given he high levels of deb of hese member counries, i is useful o examine he hisorical rends of deb. This will help in deermining he facors which are accounable for he curren and pas levels of high indebedness. 4.1 Guyana One of he major consequences of Guyana's economic difficulies in he lae 1970s was he incapaciy o service is exernal indebedness. This resuled in an accumulaion and capialisaion of arrears. Wih limied access o inernaional financing, and wih low levels of expor earnings and depleed foreign exchange reserves, he sock of exernal deb ballooned o abou US$2.1 billion a he end of 1992 and oal deb o GDP hiked o 575%. Guyana s sock of ousanding and disbursed oal deb was esimaed a US$1.4 billion a he end of December This is a decrease of approximaely US$683 million in sock from US$2,118 million recorded a he end of December In 1992, domesic deb accouned for 7.1% of oal ousanding public deb and exernal deb amouned o 92.9%. In comparison, domesic deb in 2005 represened 23.6% while exernal deb accouned for 76.4% of oal ousanding deb. ** Figure 2. Toal Public Deb in Guyana (% GDP) ** See figure 2 13

22 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Domesic Public Deb Exernal Public Deb Toal Deb-GDP Source: Inernaional financial Saisics (2000& 2004Year Book The oal deb sock as a raio of GDP declined subsanially o 183% in 2005 from 575% a he end of he Guyana s oal naional deb over he period averaged 260% of GDP. Trends in Guyana s deb siuaion can be subdivided ino hree phases: (i) deb naionalizaion ( ), (ii) deb rescheduling ( ); and (iii) he deb arrears period (1983 presen). From 1971 hrough o 1977, he governmen underook ownership and conrol of asses of companies such as he Demerara Bauxie Company (Co.), Reynolds Mining, Sprosons Engineering Co. and he Demerara Sugar Indusry. Paymen for hese companies ogeher wih ineres of beween 6% and 8.5%, caused an increase of exernal deb by US$145.8 million. By 1978, he governmen of Guyana resored o deb rescheduling. Deb service paymens were deferred and he payback period of he original loan was sreched over a longer period. During his period, deb increased by 408%. Borrowings were made o suppor he balance of paymens and long-erm developmen. By 1980, Guyana had significan inflows in he form of concessionary loans from bilaeral and mulilaeral agencies. A significan amoun was from he Trinidad and Tobago Oil Faciliy, while oher sources were he IMF, World Bank, IDB and OPEC. Figure 3 GDP GROWTH RATE GDP GROWTH RATE Source: Bank of Guyana, Annual repors (various issues ) 14

23 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Average GDP growh was esimaed a -3.3% per annum beween 1982 and 1990 (see figure 3), and per capia income declined from US$600 o US$350 in he same period. Addiionally, real ineres raes were generally negaive, gross inernaional reserves were depleed and Guyana increasingly relied on suppliers credi o finance is exernal rade. As economic difficulies mouned and exernal and inernal balances deerioraed, he counry was unable o mee deb service obligaions, leading o he cessaion of suppor from he Inernaional Financial Insiuions (IFI). This furher deepened he economic crisis, depressing invesmens, employmen and growh. Figure 4 Fiscal Defici (% of GDP) % of GDP fiscal defici Source: Bank of Guyana Annual Repors (various issues) In 1985 Guyana was ineligible o draw on IMF funds, since i defauled on repaymen. As a resul, Guyana was unable o secure exernal assisance in he form of loans during he period By he end of 1987, he defici on he balance of paymen had already amouned o US$85.4 million (60% of GDP) and Ne Inernaional Reserves were a a level of US$ million. Fiscal policy had been severely consrained by he high inernal and exernal deb burden. Wih oal domesic and scheduled exernal deb services esimaed a 61.2% of curren revenues in 1996, very lile revenue was available for expendiures on he social secor. From 1995 o 1997, he Governmen ook aggressive seps o secure deb relief of US$600 million hrough direc negoiaions wih is official bilaeral crediors. These negoiaions were held under he auspices of he Paris Club, he Unied Kingdom, and Trinidad and Tobago. Figure 5 Composiion of Guyana's Domesic Deb % of domesic deb Securiies Bonds Loans Source: Bank of Guyana Annual Repor 15

24 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Mos of Guyana s domesic deb was conraced mainly hrough reasury bills and debenures i.e. securiies. Treasury bills accouned for 73% of domesic deb in he 1990s and 80% during he years On average loans represen 1% of oal domesic deb. Mulilaeral and bilaeral loans and suppliers credi consiue he governmen of Guyana s oal exernal deb. In 2005, obligaions o mulilaeral crediors amouned o 89.1% of ousanding deb, wih indebedness o he Caribbean Developmen Bank esimaed a US$100.3 million and he IMF US$90.9 million. On average during he period bilaeral credi accouned for 9% of oal exernal deb. (See Figure 6). Figure 6 % oal exernal deb Composiion of Guyana's Exernal Deb Bilaeral Mulilaeral Commerical Bank Ohers Bonds Source: Bank of Guyana Annual Repor In 1999, hrough he Paris Club and he Heavily Indebed Poor Counries (HIPC) iniiaive, Guyana managed o negoiae US$256 million in deb forgiveness. Some improvemens have been made bu he deb burden is sill subsanial. In 2005, oal exernal deb ousanding was US$1.4 billion. In 2006, he IMF is expeced o exend 100 percen deb relief o Guyana oaling US$322 Million under he Mulilaeral Deb Relief Iniiaive. 4.2 Jamaica Jamaica s iniial deb problems can also be raced back o he oil crises in he 1970s. During his period, he economy experienced wo oil shocks which riggered a reducion in he demand for heir expor commodiies, and deepened he need for borrowing o pay for increased oil bills as hese rapidly led o a deerioraion of Jamaica s curren accoun balances. The Paris Club is an informal group of financial officials from 19 of he world's riches counries, which provides financial services such as deb resrucuring, deb relief, and deb cancellaion o indebed counries and heir crediors. Debors are ofen recommended by he Inernaional Moneary Fund afer alernaive soluions have failed. 16

25 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Figure Public Secor Deb-GDP Jamaica (%) oal deb domesic exernal Source: The Bank of Jamaica Annual Repors (various issues) In 1977, Jamaica s oal ousanding exernal deb mouned o US$926.2 million (48% of GDP). During he 1970s, balance-of-paymens shorfalls were financed increasingly hrough very large capial inflows in he form of concessional loans from mulilaeral and bilaeral lending agencies. The IMF was he larges source of suppor. In July 1977, Jamaica sough help from he Inernaional Moneary Fund (IMF) and concluded an agreemen under which he governmen underook o replenish he counry's foreign reserves, reduce he fiscal defici, resric domesic credi expansion and limi foreign borrowing. Unforunaely, Jamaica did no pass he December 1977 IMF performance es. Hence he agreemen was abrogaed. A hree-year Exended Fund Faciliy (EFF) agreemen was signed in he lae 1970s wih he IMF ha called for exchange rae unificaion and devaluaion, increased axes, curailmen of governmen expendiure and he ighening of domesic credi. The governmen did no adhere o all he IMF condiions, and negoiaions were broken off in March To add o is economic hardship, in Sepember 1988, Hurricane Gilber hi Jamaica and disruped producion in mos economic secors. Throughou he 1980s, public deb increased rapidly. On average i amouned o 176% of GDP. However, Jamaica s oal ousanding deb as a raio of GDP decreased significanly o 125% in 2005 from 235% a he end of he 1984 (see figure 7). Disbursed ousanding deb was esimaed a US$13.5 billion a he end of December This represened an increase of approximaely US$6 billion in sock from US$7.6 billion recorded a he end of December Addiionally, during 1984, domesic deb accouned for 26.5% of oal ousanding public deb and exernal deb for 73.5%. In comparison, domesic deb in 2005 accouned for 57.8% while exernal deb accouned for 42.2%. Figure 8 17

26 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Composiion of Jamaica's Domesic Deb % of domesic deb Securiies Bonds Loans Source: The Bank of Jamaica Annual Repors (various issues) On average for he period domesic deb represened 73% of oal ousanding deb. Similar o Guyana, mos of Jamaica s domesic deb was conraced mainly in he form of reasury bills and debenures i.e. securiies (see figure 8). Figure 9 Composiion of Jamaica's Exernal Deb % of exernal deb Bilaeral Mulilaerial Commerical Bank Ohers Bonds Source: The Bank of Jamaica Annual Repors (various issues) In 2005, abou 24% of he oal exernal deb was owed o mulilaeral insiuions, 15 % o bilaeral crediors, 4 % o commercial banks, 54 % in bonds and 3% o oher crediors (figure 9). A sharp increase in ineres paymens, consisen wih he move owards more commercial borrowing and a decline in he exchange rae of Jamaica s currency conribued o he deerioraion in he deb siuaion beween 1990 and In fac, ineres paymens rose o US$312.3 million in Exogenous facors such as he slowing of world rade, high levels of inflaion, rade shocks and he decline in direc foreign invesmen also conribued o growh of Jamaica s exernal deb. see Sahay (2005) 18

27 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Figure 10 Annual growh rae (Jamaica) (2.00) (4.00) (6.00) (8.00) Annual growh rae Source: Annual Saisical Diges, Jamaica (various issues) High levels of deb were accompanied by declining economic growh. During he economy experienced mainly negaive real growh bu regisered posiive growh from 1986 o 1997 (figure 10). In general, Jamaica has run persisen fiscal deficis, wih he average defici beween 1970 and 2005 being 6 % of GDP. In he 1970s, he fiscal defici averaged 9% of GDP (see figure 11). During his period he economy was affeced by increases in oil prices. By 1980, oal deb sood a US$3.2 billion. During he period 1987 o 1995, deficis were lower as he governmen embarked on policies o foser improved growh hrough increases in foreign exchange earnings hrough ourism and he expor of goods. As a resul, deficis dropped o an average of 2 % of GDP. Figure 11 fiscal defici/surplus (% GDP) (20) (40) fiscal defici/surplus Source: Annual Saisical Diges & Bank of Jamaica Annual repor (various issues) Beween 1990 and 2000 he fiscal balance improved. A subsanial increase in expor of goods and services, driven in par by he devaluaion in he Jamaican currency, was one of he causes for improvemens boh in growh and fiscal performance. The exchange rae depreciaed from JA$7.184 US$ 1 in 1990 o JS$42 US$ 1 in

28 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies 4.3 S. Kis and Nevis In he 1970s he deb o GDP raio averaged 35%. Toal naional deb grew from US$2.9 million (9%) in 1970 o US$16 million (41% GDP) in 1979 (see figure 12). Public deb began o increase moderaely in he 1980s bu by he 1990s, ousanding deb was exacerbaed by large and persisen losses of he governmen s sugar company and devasaing effecs caused by hree hurricanes - Hurricane Georges in 1998, Lenny in 1999 and Jose in By 2005, oal deb ousanding was esimaed a US$795 million or 181% of GDP (see figure 12). Figure 12 Toal Public Deb in S. Kis & Nevis (% GDP) Domesic Public Deb Exernal Public Deb Toal Public Deb Source: Annual Saisical Diges, Inernaional Financial Saisics & he ECCB Annual Saisics In Sepember 1998, Hurricane Georges devasaed S. Kis and Nevis causing damages amouning o approximaely US$167 million. In he agriculural secor, here was US$2.5 million worh of damages, and 50% of he following year s sugar harves was desroyed. Oher infrasrucure damages included 80% of homes damaged and 20% compleely desroyed while many schools, waer and elecrical faciliies, commercial businesses, and public buildings were also damaged. As a resul, by he end of 1998, disbursed ousanding deb was US$313 million (110% GDP), of which domesic deb represened 60% of GDP. Mos of he domesic deb was in he form of reasury bills. On he oher hand, he mulilaeral crediors which include CDB, he European Union, IDA, OPEC and he inernaional bank accouned for close o 50% of GDP in oal ousanding deb (see figure 12). 20

29 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Figure 13 Composiion of S. Kis & Nevis Exernal Deb % of exernal deb Bilaerial Mulilaeral Oher Source: ECCB Lenny sruck in I had a negaive impac on he economy as i resuled in approximaely US$2.7 million in damages. Laer in 1999 hurricane José sruck he island. I caused severe damages and weakened he counry s infrasrucure and is producive capaciy. Borrowing o sabilize he S. Kis and Nevis economy afer he passage of he above-menioned hurricanes is one he cenral causes of S. Kis and Nevis s high public deb. On July 30 h 2005 he sugar crop facory was closed. A ha poin oal deb owed by S. Kis Sugar Manufacuring Corporaion (SSMC) o he S. Kis-Nevis-Anguilla Naional Bank and he Developmen Bank was US$129 million. Borrowing by he Nevis Island Adminisraion, he SSMC and he oher public corporaions placed upward pressure on he deb accumulaion of S. Kis and Nevis. In 2005, exernal deb declined by 6.2% while domesic deb increased by 17.2%, bu he reconsrucion of he economy afer repeaed naural disasers and increasing ineres raes carried oal public secor deb o US$795 million or 181% of GDP a he end of he year. Figure 14 GDP Real Growh (%) GDP Real Growh Source: Annual Saisical Diges & he ECCB Annual Saisics (various issues) 21

30 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Real economic growh was esimaed a 10.3% in 1988 compared wih -0.9% in By 2005, real growh reached 6.4% (see figure 14). Economic growh was driven mainly by rapid expansion of ourism and relaed services as well as increased aciviies in he consrucion secor. The fiscal defici in 1981 amouned o US$2.6 million; here was a persisen worsening in he fiscal balance up o he year 2005 (see figure 15). Figure 15 overall fiscal balance (% GDP) (10) (20) % overall fiscal balance Source: Annual Saisical Diges, Inernaional Financial Saisics & he ECCB Annual Saisics In 2005, he governmen agreed o ener ino an arrangemen wih he S. Kis-Nevis-Anguilla Naional Bank whereby he deb would be serviced and reired over a 25-year period from proceeds of he sale of lands. Oher sraegies o reduce he public deb include coninued and inensified fiscal consolidaion, improved asse managemen including privaizaion and commercializaion, liabiliy managemen, and enhance economic growh. 4.4 Dominica The Dominican economy depends on agriculure, primarily bananas and remains highly vulnerable o weaher condiions, naural disasers and inernaional economic developmens. The combined impac of Hurricane David in 1979, he oil crisis which occurred in 1979, he poliical difficulies in he immediae pos-independence period, he impac of Hurricane Frederick and hen Hurricane Allen in 1980, were devasaing. This was refleced boh in he scale of physical damage and in disrupion caused in an economy which was already weak. As a resul, real GDP declined by 17% in 1979, whils income from he agriculural secor fell by 32% and non-agriculural oupu declined by 8.3%. In 1994, he agriculural secor collapsed afer crops were desroyed by a series of ropical sorms. The island has nine acive volcanoes wih he mos recen aciviy being an explosion in he Valley of Desolaion in In 2004, he island experienced devasaion from a series of earhquakes, which infliced significan damage on is fragile infrasrucure. During ha year, earhquake damages in Dominica were esimaed a US$33.3 million. These severe muliple shocks also brough inensified budgeary pressures from increasing expendiure on relief and capial coss of reconsrucion. 22

31 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies The economy declined by 4.2 percen in 2001, 4.7 percen in 2002, and did no grow in The economic conracion was accompanied by rising public deb and deb service obligaions. Also, during 2002, revenues were low and access o domesic and exernal financing were a high ineres raes. The main reasons for fiscal deerioraion were a combinaion of large unproducive invesmen projecs and a shorfall in revenues since Due o he weakening of he fiscal posiion, he governmen borrowed more exensively. The addiional borrowing came mainly from exernal crediors on commercial erms. By 2003, Dominica's oal deb sock was over 100% of he counry's Gross Domesic Produc (GDP), a level ha is unsusainable given he economic circumsances of he counry. A decision was aken by he IMF's Execuive Board o approve a hree-year US$11.4 million credi in lae Addiionally, The World Bank approved a US$3 million srucural adjusmen loan. In 2004, he counry's exernal deb servicing was 11% of expors while ineres paymens accouned for 20% of is revenues. As a resul of he significan decrease in banana oupu, Dominica's foreign currency earnings conraced by 54% (o US$3.8 million) in Decreasing preferenial access o he EU marke for bananas and hurricane-relaed crop damages made i difficul for Dominica s banana indusry. Banana expors fell by 38.5% o a record low of 10,563 ons in In 2004, Dominica s governmen pursued deb resrucuring. The IMF conduced a review of is economic performance o ensure compliance wih he Leer of Inen. A comprehensive resrucuring of he economy was carried ou. This included he eliminaion of price conrols, privaizaion of he sae banana company, and ax increases, reduced civil service wages, improved public secor operaions, increased revenues hrough a sales ax on ravel ickes and an increase in cusom service charges hrough an emergency budge so as o address Dominica's economic crisis and o mee IMF arges. In 2005, Venezuela pledged o forgive Dominica's deb of US$1.5 million. Addiionally, a gran of US$10.1 million was offered for airpor improvemens, including building a new erminal and parking lo and o ligh and lenghen he runway a Melville Hall airpor. 4.5 Summary Evidenly, hese Caribbean economies are faced wih a serious deb problem. Some of hese counries increasingly resor o new borrowing simply o service deb [IMF (2000)]. The inernaional communiy was slow o recognize he exernal deb problems of hese economies, mos of which owed a significan percenage of heir deb o official crediors and mosly on concessional erms. Mulilaeral and bilaeral lenders have placed much emphasis on measures o deal wih he problem of excessive indebedness, hrough he Heavily Indebed Poor Counries (HIPC) Iniiaive as well as more recen proposals for addiional relief for low-income counries and new Paris Club arrangemens for middle-income counries. *** Meanwhile, deb burdens of oher Caribbean economies as well remain criical.. The Easern Caribbean Cenral Bank's benchmark is 60% *** In 1996, and as par of a new approach owards povery reducion, he World Bank and he Inernaional Moneary Fund developed a Highly Indebed Poor Counries (HIPC) deb relief iniiaive. 23

32 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies 5. Daa Mehodology and Resuls Analysis This secion applies he wo main approaches used o assess fiscal and deb susainabiliy, namely he economeric approach and he Primary Gap Indicaor. The sudy will examine fiscal daa o analyze he shor, medium-erm (Model 2) and long-run (Model 1) fiscal and deb susainabiliy in seleced counries. This secion oulines he models and mehodologies, describes he daa and analyzes he resuls. 5.1 Model 1: Economeric Approach Mehodology The paper uilizes ime series daa on public secor deb, governmen revenue and governmen expendiure inclusive of ineres paymens. The analysis involves he applicaion of economeric echniques o deermine he presence of uni roos and co-inegraion. The following regression equaion is esimaed: R = α + β ( G + ib 1 ) + ε (21) where 0 > β > 1. The necessary and sufficien condiion for susainabiliy is ha he series in equaion (21) mus be co-inegraed wih vecor β ( 1 1). If only one of he series is I(1), while he oher is I(0), he wo series will diverge, and equaion (21) will no hold, implying ha public deb is no susainable. Therefore he esimaion follows a wo-sage procedure. In he firs sage, using uni roo ess, daa are examined o deermine if governmen expendiures and revenues follow a saionary process. The second sage involves esing for he exisence of co-inegraion beween governmen revenues and governmen expendiures. Two separae ess for he order of inegraion are used in his paper - he augmened Dickey- Fuller (1981) es and he Phillips-Perron ess. The null hypohesis of hese ess saes ha he respecive series are characerized by a uni roo and are herefore non-saionary, while he alernaive saes ha he series are saionary. The second sage involves assessing fiscal policy susainabiliy hrough he co-inegraion es. The sudy uilizes he procedure of Johansen (1988) and Johansen and Juselius (1990). Johansen e al. (1990) es he exisence of he co-inegraion relaionship among variables in a Vecor auoregression (VAR) represenaion, and provide wo likelihood raio ess: (i) he maximal eigen value es; and (ii) he race-es for he number of co-inegraing vecors. The null hypohesis is ha here is no co-inegraion. If he null hypohesis is rejeced, hen he series is co-inegraed. Several possible conclusions may be esablished: (i) here is no coinegraion, ha is, he fiscal defici is no susainable; (ii) here is co-inegraion wih β = 1, ha is, defici is susainable and (iii) here is co-inegraion, wih β < 1, ha is, governmen expendiures grow faser han governmen revenues, and he defici may no be susainable. Hamilon and Flavin (1986) firs used hese procedures. See also Trehan and Walsh (1991) and Hakkio and Rush (1991). See Hakko and Rush (1991) and Trehan and Walsh (1991) 24

33 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Daa Source The counries in he sample are S. Kis and Nevis, Dominica, Jamaica and Guyana. Their choice has been dicaed by heir curren level of deb o GDP and by he availabiliy of daa. The daa are annual from and are obained from he IMF Inernaional Financial Saisics of he IMF, S. Kis and Nevis Annual Esimaes, he Bank of Guyana Annual Repor, Bank of Jamaica and ECCB Annual Economic and Financial Saisics, he ECCB Diges of Exernal Deb and he CDB Economic and Social Indicaors. All variables are expressed as a percenage of GDP a curren marke prices. A graphical represenaion of he series is displayed in he Appendix. Definiion and deails of all daa are deailed in he Appendix Empirical resuls (i). Analysis for S. Kis and Nevis: The iniial sep of he analysis requires esing for uni roo in he series. The Augmened Dickey- Fuller es (ADF es) and he Phillips-Perron es (PP es) were applied o he revenue (REV) and expendiure (EXPD) variables and he resuls are presened in able 1 below. The graphs in he appendix indicae ha boh variables have been growing over ime; herefore, he es for he uni roo hypohesis is conduced wih he inclusion of a rend (wih a consan). If he uni roo hypohesis is rejeced, he variables are rend saionary. The Akaike Informaion Crieria (AIC) was used o selec he opimal lag lengh. Table 1. Uni roo es for fiscal variables raios o GDP : (SKN) Specificaion specificaion ADF -sa PP -sa Criical value Conclusion REV Level Uni Roo 1s difference * Saionary EXPD Level Uni Roo 1s difference -4.91* -9.26* Saionary *significan a he 1% level The ADF and PP ess indicae ha boh revenue and expendiure are non-saionary in levels, bu saionary in firs differences. In oher words, REV and EXPD are I(1) variables. Therefore he analysis proceeds o invesigaion of co-inegraion. Table 2. Tess for coinegraion beween revenue and expendiure (% GDP): (SKN) Hypohesized Trace 1 percen Eigenvalue No. of CEs Saisic Criical Value None A mos Trace es indicaes no coinegraing equaion a he 1% significance level Hypohesized Max-Eigen 1 percen Eigenvalue No. of CEs Saisic Criical Value None A mos Max-eigenvalue es indicaes no coinegraing equaion(s) a he 1% level Noes. The esimaions were obained assuming a linear rend in he levels of he daa, and only an inercep in he coinegraion equaions. The Johansen es resuls are based on a lag lengh of hree (p=3) for he VAR in levels (p=3), i.e. using lags 1 2 in EViews 4.0. The lag lengh was chosen using he Akaike informaion crieria for he period

34 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies The Johansen es for coinegraion was applied, and he resuls are summarized in able 2. The resuls indicae ha he null of no coinegraion canno be rejeced. Hence, here is no coinegraing relaionship among he variables. This indicaes ha S. Kis and Nevis fiscal policy has been unsusainable over he period (ii). Analysis for Dominica: The graph of REV suggess i may be saionary. Resuls for he ADF and PP es confirm his as boh ess indicae ha REV is in fac saionary wih -sas of and respecively. However, he EXPD series conains a uni roo. Given ha REV is I(0) and EXPD is (1), he conclusion is ha fiscal policy in Dominica has been unsusainable during he period Table 3. Uni roo es for fiscal variables raios o GDP : (Dominica) Specificaion specificaion ADF -sa PP -sa Criical value Conclusion REV Level -5.39* -5.44* Saionary EXPD Level Uni Roo 1s difference -3.78* * Saionary *significan a he 1% level (iii) Analysis for Guyana: During he period , governmen expendiure (including ineres paymens) increased rapidly. On he oher hand, governmen revenue flucuaed during ha period. Based on he resuls from he ADF and PP ess in able 4, boh revenue and expendiure are saionary a he 1% level only afer firs differencing, indicaing ha boh variables are I(1). Since boh variables are I(1), he analysis proceeds by esing for coinegraion. Table 4. Uni roo es for fiscal variables raios o GDP : (Guyana) Specificaion specificaion ADF -sa PP -sa Criical value Conclusion REV Level Uni Roo 1s difference -4.46* -9.31* Saionary EXP Level Uni Roo 1s difference -4.24* -8.30* Saionary *significan a he 1% level According o Table 5 boh he maximum eigenvalue and race es indicae no co-inegraion a he 1% significan level. This implies ha for Guyana fiscal policy was unsusainable over he sample period. Table 5. Tess for coinegraion beween revenue and expendiure (% GDP): (Guyana) Hypohesized Trace 1 percen Eigenvalue No. of CEs Saisic Criical Value None A mos Trace es indicaes no coinegraing equaion a he 1% significance level Hypohesized Max-Eigen 1 percen Eigenvalue No. of CEs Saisic Criical Value None A mos Max-eigenvalue es indicaes no coinegraing equaion(s) a he 1% level 26

35 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies (iv) Analysis for Jamaica: Resuls in able 6 sugges he presence of a uni roo in REV and EXPD. The null hypohesis canno be rejeced a he 1% level. Table 6. Uni roo es for fiscal variables raios o GDP : (Jamaica) Specificaion specificaion ADF -sa PP -sa Criical value Conclusion REV Level Uni Roo 1s difference Saionary EXP Level Uni Roo 1s difference Saionary *significan a he 1% level For he period he Johansen es (see able 7) finds ha here is no co-inegraion a he 1% level of significance. Hence he fiscal policy in Jamaica also has been unsusainable during he sample period. Table 7. Tess for co-inegraion beween revenue and expendiure (% GDP): (Jamaica) Hypohesized Trace 1 percen Eigenvalue No. of CEs Saisic Criical Value None A mos Trace es indicaes no co-inegraion equaion a he 1% significance level Hypohesized Max-Eigen 1 percen Eigenvalue No. of CEs Saisic Criical Value None A mos Max-eigenvalue es indicaes no co-inegraion equaion a he 1% level 27

36 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies 5.2 Model 2: The Primary Balance The one-period primary gap is an indicaor of shor-run fiscal policy. The primary balance measures how he curren fiscal policy sance affecs he ne indebedness of he public secor. Tha is, since ineres paymens are he resul of pas deficis, excluding hem from he fiscal balance provides a clearer picure of curren behaviour. The primary balance is herefore a useful indicaor of he susainabiliy of he fiscal sance. Primary Gap Analysis (Buier e al, 1993) The governmen budge ideniy is defined as follows: B d X B ( r B r X B S (22) * d * * + = 1+ ) 1 + (1 + ) 1 d Where B : domesic currency denominaed deb * B : foreign currency denominaed deb X : curren period exchange rae r : ex pos ineres rae on domesic currency denominaed deb r 1 * 1 r : ex pos ineres rae on foreign currency denominaed deb S : primary surplus of he cenral governmen The domesic and foreign currency denominaed deb in his equaion can be expressed in domesic currency by he following equaion: B = B + X B (23) d * where B is he oal deb measured in domesic currency. Equaion (23) can be rewrien as: B ( 1+ r ) B r X B S (24) d * 1 + (1 + ) * 1 Le Y denoe real GDP, and P he GDP deflaor. Equaion (24) can be wrien as: B PY d * B 1 * X B 1 S ( 1+ r + + ) (1 r ) (25) PY PY PY Denoing g as he real growh rae of GDP, π as he rae of inflaion; γ as he rae of appreciaion of he exchange rae { ( X X 1 ) / X 1 } for period and using P P 1(1 + π ), Y Y (1 + g ) and X = (1 + γ ) in equaion (25) gives he following: 1 X 1 28

37 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies B PY (1 + i ) B g (1 + π )(1 + ) P 1Y d * * 1 (1 i )(1 γ ) ( X 1 B 1) (1 + π )(1 + g ) P 1 Y 1 S PY r (26) Applying lowercase leers, equaion (26) becomes: b (1 + i ) (1 + i )(1 + γ ) * d * = b 1 + b 1 (1 + π )(1 + g ) (1 + π )(1 + g ) s (27) b = oal public secor deb as a percenage of GDP d b = domesic deb as a percenage of GDP * b = exernal deb as a percenage of GDP s = primary cenral governmen surplus as a percenage GDP Using he following definiion of he real marke rae r, ha is, b b b equaion (27) becomes : d * 1 = 1 1 (1 + i ) 1+ r = and also (1 + π ) b (1 + r ) (1 + i )(1 + γ ) (1 + i ) * * = b + b g g 1 1 (1 + ) (1 + π )(1 + ) s (28) where he brackeed expression is an adjusmen facor accouning for he overesimae of ineres applied o he exernal deb sock as a resul of he firs expression on he RHS. There he domesic real ineres rae is applied o he enire deb sock. Le us call he brackeed erm A. Simplifying equaion (28) using Buier s definiion of he augmened primary surplus o GDP: ~ s s Ab (29) * = 1 where s is he raio of he acual primary surplus o GDP and insering equaion (29) for he augmened primary surplus o GDP raio ino equaion (28) gives: 1+ r = (30) b b ~ 1 s 1+ g Assuming he desire o mainain unchanged a given level of indebedness, i.e. ha b = b 1 = b +2 ec, = b0 equaion (31) becomes: 1+ r b b ~ 0 = 0 s (31) 1+ g 29

38 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Solving for s ~ gives: ~ r g s = b0 1 g (32) + where b 0 is he consan deb o GDP raio. Thus he augmened surplus raio is ha required o mainain a sable deb-o-gdp raio. Hence he one period primary gap indicaor, which is he difference beween he required augmened surplus raio o GDP and he acual augmened surplus raio o GDP, is an indicaor of fiscal susainabiliy. (Blanchard, 1990; Buier, 1995) Of course, he primary gap indicaor can be esimaed also for he medium (3 o 5 years) and he long-erm (more han 10 years). In calculaing he medium and long-erm gaps, one can assume consan real ineres and growh raes in he absence of more ime specific forecass. Only for Jamaica was he medium erm gap esimaed, given he availabiliy of he forecass for he relevan variables Resuls Table 8 shows he esimaed primary gap for he period 1991 o The esimaes are also displayed graphically in he Appendix. The resuls show ha he gap for Dominica was posiive from 1991 o These are consisen wih hose of he co-inegraion analysis and sugges he need for furher fiscal adjusmen. The resuls for S. Kis and Nevis indicae ha he primary gap is posiive hroughou he sample period excep for hree years. During hose years 1993, 1997 and 2004, inflaion and he real ineres rae declined and real GDP growh increased. Like Dominica, he resuls are consisen wih hose of he co-inegraion analysis, suggesing ha he fiscal sance is unsusainable and hence he need for adjusmen. Wih regards o Guyana, he gap was posiive for nine ou of he fifeen years examined. During he years in which he gap was negaive and 2002, GDP increased significanly, he ineres rae on foreign deb declined and inflaion also declined significanly. The resuls sugges ha while Guyana s fiscal adjusmen programme which go on he way in he early 1990s has been beneficial, Guyana s fiscal sance is sill unsusainable. From 1992 o 2003 Jamaica had posiive one-period primary gaps. In 2004 and 2005 he gap was negaive 4% and 8% respecively. In 2004 he real ineres rae and domesic ineres rae decreased while in 2005 he acual primary surplus increased by 27%. The medium erm forecas of he gap, however, suggess ha, given he projeced deb dynamics including for example, coninued depreciaion of he exchange rae, ighened ineres raes and moderae or low growh raes, during , he gap would be posiive. A gap of 2% is projeced for 2006 o In 2009 he one period gap is expeced o be 1%. 30

39 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies 5.3 Summary of Resuls The empirical findings sugges ha Dominica, S. Kis and Nevis, Jamaica and Guyana have no been on a susainable fiscal pah during he sample period. These findings are consisen wih he overall conclusion of Sahay (2004) who noed ha deb and budge deficis in several Caribbean counries were unsusainable and emphasized he need for fiscal adjusmens. 6. Policy Recommendaions There are several possible sraegies o successfully reducing public deb o more susainable levels. These include fiscal consolidaion, sable moneary policies, pruden deb managemen sraegies, asse sales/privaizaion, reducing vulnerabiliies o exogenous shocks, and growhenhancing srucural reforms. Given he excepionally high levels of deb in some of hese counries, a combinaion of all hese elemens is needed ogeher perhaps wih deb resrucuring. 7. Conclusion In his sudy, a comprehensive review was conduced on lieraure of fiscal susainabiliy wih emphasis on developing counries. The research also examined hisorical rends of deb, real growh raes and fiscal balances in seleced BMCs o deermine he main facors responsible for he curren and pas levels of high indebedness. In his regard we found ha he oil supply shocks, naural disasers, high ineres raes, low growh raes and bad governance are significan conribuors. The economeric approach is an approach which looks a long-run susainabiliy and is well grounded in heory. I ells us wheher or no here is susainabiliy. However, i does no indicae wha level of adjusmen should ake place; on he oher hand, he gap analysis addresses his shor coming. Addiionally, i is simple and easy o apply. Therefore, given his and he fac ha Caribbean economies are faced wih a severe problem of daa qualiy and availabiliy, i is proposed ha CDB adop he primary gap indicaor as he main indicaor for assessing he fiscal sance of BMCs, bu paricularly he medium erm indicaor, given ha limiaions of he oneperiod gap analysis. The resuls in his paper suppor he proposiion ha he coninuaion of he curren fiscal sance of S. Kis and Nevis, Dominica, Jamaica and Guyana is unsusainable, and needs o be alered o preven an adverse response from lenders. This conclusion is based on a ime series analysis of governmen revenue and expendiure daa. Empirical analysis found evidence of non-saionariy and lack of co-inegraion of governmen revenue and expendiure. The gap analysis also suppored he conclusion ha he fiscal sance in he sample counries is unsusainable. Hence, he general conclusion of he analysis is ha all four counries need o make fiscal adjusmens o ascerain susainabiliy. To he exen ha here are off-balance shee projecs, ha is, projecs for which he cos is no included in he fiscal accouns, he valuaions of public secor deb have been underesimaed. Therefore, he fiscal adjusmens required would be higher han hose which have been esimaed in his paper. 31

40 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Table 8 Primary Gap Indicaor of Fiscal Susainabiliy Seleced Member Counries Primary Gap Indicaor of Fiscal Susainabiliy Seleced Member Counries Guyana Acual primary surplus - GDP raio 5% 2% 7% 10% 10% 7% 6% 3% 3% 4% 0% -4% 3% -3% -2% -10% Augmened primary balance-gdp raio n/a -391% 0% 29% -14% 27% 18% -18% -19% -10% -1% -1% -2% -12% -11% -15% Required one-period primary surplus - GDP raio n/a -207% 12% 5% -31% 17% -4% -30% 21% 1% 12% 8% -4% -3% -7% -2% One-period primary gap n/a 184% 12% -24% -18% -10% -21% -12% 41% 11% 13% 9% -2% 10% 4% 13% S. Kis and Nevis Acual primary surplus - GDP raio 2% -1% 1% 0% 0% -4% -1% -1% -3% -2% -10% -9% -7% 0% 0% n/a Augmened primary balance-gdp raio n/a -1% 1% 1% 0% -4% -1% -2% -4% -3% -11% -9% -8% 0% -1% -2% Required one-period primary surplus - GDP raio n/a 0% 1% 0% 0% 0% -1% -7% 2% -1% -2% 2% 8% 10% -2% -5% One-period primary gap n/a 1% 0% -1% 0% 4% 0% -6% 6% 2% 8% 11% 15% 10% -1% n/a Dominica Acual primary surplus - GDP raio n/a -12% -6% -5% -4% -4% -2% 0% -1% -2% -8% -3% -7% -5% -2% -3% Augmened primary balance-gdp raio n/a -6% -5% -2% -2% 0% 1% 0% 0% -7% -2% -7% -3% 0% -2% n/a Required one-period primary surplus - GDP raio n/a 0% 0% 3% 3% 3% 2% 2% 2% 3% 4% 9% 13% 7% 2% n/a One-period primary gap n/a 6% 5% 5% 5% 3% 1% 2% 2% 9% 6% 15% 16% 7% 4% n/a Jamaica Acual primary surplus - GDP raio n/a n/a 13% 13% 13% 11% 5% 1% 5% 10% 12% 8% 7% 13% 12% 13% Augmened primary balance-gdp raio n/a n/a -111% 17% -6% 17% 14% 13% 12% 11% 12% 7% 6% 2% 8% 9% Required one-period primary surplus - GDP raio n/a n/a 9% 22% 24% 21% 25% 22% 22% 14% 15% 9% 13% 4% 5% 1% One-period primary gap n/a n/a 119% 5% 30% 3% 12% 9% 10% 3% 3% 2% 7% 2% -4% -8% 32

41 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Table 9 Daa and Calculaions for One-Period Primary-Gap Indicaor of Fiscal Susainabiliy for Jamaica (US$'000') Ousanding Exernal Deb 4,722,326 6,686,282 3,556,225 4,832,690 3,683,186 3,909,442 3,099,475 3,387,417 3,361,531 3,208,109 3,575,015 Raio deb o GDP 111% 181% 106% 115% 77% 67% 47% 45% 43% 41% 45% Domesic Deb 1,296, , , ,118 1,246,706 1,695,464 2,093,314 2,862,708 3,281,934 4,501,762 4,362,355 Raio o GDP 31% 22% 24% 22% 26% 29% 32% 38% 42% 58% 55% oal deb 6,019,291 7,492,018 4,352,253 5,776,808 4,929,892 5,604,906 5,192,790 6,250,125 6,643,466 7,709,871 7,937,370 raio o GDP 142% 202% 130% 137% 103% 97% 80% 84% 86% 100% 101% Consolidaed cenral governmen flow variables Tax Revenue Toal revenue & Grans n.a. 1,026,024 1,347,313 1,347,887 1,666,846 1,699,504 1,876,291 2,027,146 2,316,807 2,351,796 n.a. n.a. Toal expendiure 887,892 1,202,333 1,203,013 1,558,528 2,102,686 2,463,434 2,551,663 2,639,069 2,425,583 n.a. n.a. Ineres Paymens 299, , , , , , ,350 1,070, ,474 n.a. n.a. Toal Exp. (excluding Ineres Paymen) 588, , ,196 1,047,140 1,367,761 1,769,625 1,605,313 1,568,894 1,427,109 Primary Surplus n.a. n.a. 437, , , , , , , , ,687 Acual primary surplus - GDP raio n.a. n.a. 13% 13% 13% 11% 5% 1% 5% 10% 12% (1+i*)(1+e)-(1+i) n.a. n.a. 97% -5% 20% -11% -15% -25% -16% -4% 0% (1+&)*(1+g) n.a. n.a. 142% 133% 128% 129% 116% 108% 107% 108% 107% n.a. n.a. 68% -4% 16% -8% -13% -23% -15% -4% 0% Correcion facor for ineres differenials n.a. n.a. 124% -4% 18% -7% -9% -11% -7% -2% 0% Augmened primary balance-gdp raio n.a. n.a. -111% 17% -6% 17% 14% 13% 12% 11% 12% Exchange rae (E - E-1)/E-1 25% 69% 90% 9% 33% 6% 6% -5% 3% 7% 10% Ineres raes real ineres rae 2% -46% 6% 20% 19% 23% 26% 26% 25% 18% 16% On Domesic deb 32% 34% 46% 50% 46% 49% 42% 35% 33% 25% 22% On Foreign deb 7% 7% 7% 5% 5% 6% 6% 5% 6% 6% 5% GDP a curren marke price 4,247,996 3,703,004 3,355,889 4,207,483 4,786,463 5,799,861 6,525,717 7,451,929 7,743,160 7,737,470 7,888,955 Real GDP growh 6% 1% 1% 2% 1% 3% 0% -1% -1% 1% 1% inflaion rae 30% 80% 40% 30% 27% 26% 16% 9% 8% 7% 6% Required one-period primary surplus - GDP raio n.a. n.a. 9% 22% 24% 21% 25% 22% 22% 14% 15% One-period primary gap n.a. n.a. 119% 5% 30% 3% 12% 9% 10% 3% 3% 33

42 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Table 9 Con Daa and Calculaions for One-Period Primary-Gap Indicaor of Fiscal Susainabiliy for Jamaica (US$'000') Projecion Ousanding Exernal Deb 4,272,585 4,576,794 4,401,079 5,156,670 5,375,500 n.a. n.a. n.a. n.a. Raio deb o GDP 53% 54% 54% 58% 53% 57% 55% 52% 49% Domesic Deb 6,417,197 7,251,873 7,236,353 7,303,657 7,355,676 n.a. n.a. n.a. n.a. Raio o GDP 79% 86% 88% 83% 72% n.a. n.a. n.a. n.a. oal deb 10,689,782 11,828,667 11,637,431 12,460,327 12,731,176 n.a. n.a. n.a. n.a. raio o GDP 132% 140% 142% 141% 125% 113% 107% 100% 91% Consolidaed cenral governmen flow variables Toal revenue & Grans 2,230,370 2,356,733 2,595,975 2,803,070 3,146,154 n.a. n.a. n.a. n.a. Tax Revenue 1,969,045 2,125,934 2,789,519 2,458,972 2,807,692 n.a. n.a. n.a. n.a. Toal expendiure 2,691,625 3,078,096 3,095,412 3,259,763 3,146,154 n.a. n.a. n.a. n.a. Ineres Paymens 1,109,014 1,283,059 1,526,984 1,516,156 1,347,692 n.a. n.a. n.a. n.a. Toal Exp. (excluding Ineres Paymen) 1,582,612 1,795,037 1,568,428 1,743,607 1,798,462 n.a. n.a. n.a. n.a. Primary Surplus 647, ,697 1,027,547 1,059,464 1,347,692 n.a. n.a. n.a. n.a. Acual primary surplus - GDP raio 8% 7% 13% 12% 13% 13% 13% 13% 13% (1+i*)(1+e)-(1+i) 3% 1% 23% 8% 9% 13% 12% 12% 11% (1+&)*(1+g) 110% 108% 117% 115% 117% 111% 109% 109% 108% Correcion facor for ineres differenials 3% 1% 20% 7% 7% 12% 11% 11% 10% 1% 1% 11% 4% 4% 6% 6% 6% 5% Augmened primary balance-gdp raio 7% 6% 2% 8% 9% 7% 7% 7% 8% Exchange rae (E - E-1)/E-1 7% 5% 19% 6% 6% 10% 10% 10% 10% Ineres raes real ineres rae 11% 11% 5% 4% 5% 7% 8% 8% 9% On Domesic deb 20% 18% 19% 18% 18% 18% 18% 17% 17% On Foreign deb 7% 7% 7% 6% 7% 9% 9% 9% 9% GDP a curren marke price 8,115,586 8,471,022 8,190,130 8,825,367 10,157,000 11,967,497 3,447,155 15,089,431 16,829,268 Real GDP growh 2% 1% 2% 1% 4% inflaion rae 9% 7% 14% 14% 13% 11% 9% 9% 8% Required one-period primary surplus - GDP raio 9% 13% 4% 5% 1% 9% 9% 9% 9% One-period primary gap 2% 7% 2% -4% -8% 2% 2% 2% 1% 34

43 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Table 10. Daa and Calculaions for One-Period Primary-Gap Indicaor of Fiscal Susainabiliy for Dominica (US$'000') Ousanding Exernal Deb 84,720 92,855 95,928 93,100 99, , ,857 89,291 91,223 Raio deb o GDP 49% 50% 50% 46% 46% 47% 44% 36% 36% Domesic Deb 41,283 43,433 36,371 35,348 38,541 42,236 42,665 46,333 54,630 Raio o GDP 24% 23% 19% 17% 18% 19% 18% 19% 21% oal deb 126, , , , , , , , ,852 raio o GDP 72% 73% 69% 63% 64% 66% 62% 55% 57% Consolidaed cenral governmen flow variables Toal revenue & Grans 46, , , , , , , , , Tax Revenue 41, , , , , , , , , Toal expendiure 68, , , , , , , , , Ineres Paymens 2, , , , , , , , , Toal Exp. (excluding Ineres Paymen) 66, , , , , , , , , Primary Balance (20,296.30) (10,777.78) (10,185.19) (8,185.19) (8,592.59) (4,629.63) (888.89) (1,370.37) (4,407.41) Acual primary surplus - GDP raio -12% -6% -5% -4% -4% -2% 0% -1% -2% (1+i*)(1+e)-(1+i) n.a. 0% 0% -4% -5% -4% -4% -2% -4% 108% 108% 104% 102% 103% 105% 104% 104% 0% 0% -4% -5% -4% -3% -2% -4% Correcion facor for ineres differenials 0% 0% -2% -2% -2% -2% -1% -1% Augmened primary suprlus - GDP raio -6% -5% -2% -2% 0% 1% 0% 0% Apprecia of Exchange rae (E - E-1)/E-1 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Ineres raes real ineres rae 4% 2% 2% 6% 8% 6% 6% 5% 7% On Domesic deb (check esimaes for Dominica) 8% 8% 8% 8% 8% 8% 8% 8% 8% On Foreign deb 2% 2% 2% 2% 2% 2% 2% 3% 3% GDP a curren marke price 73, , , , , , , , , Real GDP growh 6% 2% 3% 2% 2% 2% 3% 2% 3% inflaion rae 3% 6% 6% 2% 0% 1% 2% 2% 1% Required one-period primary surplus - GDP raio 0% 0% 3% 3% 3% 2% 2% 2% One-period primary gap 6% 5% 5% 5% 3% 1% 2% 2% 35

44 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Table 10 con Daa and Calculaions for One-Period Primary-Gap Indicaor of Fiscal Susainabiliy for Dominica (US$'000') Ousanding Exernal Deb 132, , , , , , ,351 Raio deb o GDP 49% 55% 66% 79% 83% 73% 73% Domesic Deb 74,852 76,222 91,556 93,889 6,704 62,593 69,521 Raio o GDP 28% 28% 34% 37% 29% 22% 24% oal deb 206, , , , , , ,872 raio o GDP 77% 83% 100% 116% 112% 95% 97% Consolidaed cenral governmen flow variables Toal revenue & Grans 76, , , , , , n.a. Tax Revenue 63, , , , , , n.a. n.a. Toal expendiure 106, , , , , , n.a. Ineres Paymens 7, , , , , , n.a. Toal Exp. (excluding Ineres Paymen) 98, , , , , , Primary Balance (22,222.22) (9,296.30) (19,666.67) (13,629.63) (5,962.96) (9,555.56) n.a. Acual primary surplus - GDP raio -8% -3% -7% -5% -2% -3% n.a. (1+i*)(1+e)-(1+i) -4% -2% -1% -3% -3% -1% -2% 103% 102% 98% 95% 102% 106% 107% Correcion facor for ineres differenials -4% -2% -1% -4% -2% -1% -2% -1% -1% -1% -2% -2% -1% -1% Augmened primary suprlus - GDP raio -7% -2% -7% -3% 0% -2% n.a. Apprecia of Exchange rae (E - E-1)/E-1 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Ineres raes real ineres rae 6% 7% 6% 7% 6% 5% 4% On Domesic deb (check esimaes for Dominica) 8% 8% 8% 8% 8% 8% 8% On Foreign deb 2% 4% 4% 4% 3% 4% 2% GDP a curren marke price 267, , , , , , , Real GDP growh 2% 1% -4% -5% 0% 3% 3% inflaion rae 1% 1% 2% 0% 2% 3% 4% Required one-period primary surplus - GDP raio 3% 4% 9% 13% 7% 2% 1% One-period primary gap 9% 6% 15% 16% 7% 4% n.a. 36

45 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Table 11. Daa and Calculaions for One-Period Primary-Gap Indicaor of Fiscal Susainabiliy for S. Kis (US$'000') Ousanding Exernal Deb 39,880 41,778 44,074 46,741 51,645 55,071 61, , ,866 Raio deb o GDP 26% 25% 24% 24% 23% 24% 25% 39% 43% Domesic Deb 59,005 61,635 63,487 92, , , , , ,704 Raio o GDP 39% 37% 35% 47% 63% 66% 73% 66% 66% oal deb 98, , , , , , , , ,570 raio o GDP 65% 63% 59% 70% 86% 89% 98% 105% 109% Consolidaed cenral governmen flow variables Toal revenue & Grans 39,333 35,037 40,037 45,778 49,704 67,037 75,148 82,111 88,000 Tax Revenue 26,519 25,481 28,148 32,630 36,111 47,667 52,778 60,333 65,000 Toal expendiure 40,222 41,148 42,370 49,593 55,370 80,741 85,259 91, ,296 Ineres Paymens 4,593 5,037 4,111 4,741 4,889 4,963 7,370 7,741 9,148 Toal Exp. (excluding Ineres Paymen) 35,630 36,111 38,259 44,852 50,481 75,778 77,889 84,037 97,148 Primary Surplus 3,704 (1,074) 1, (778) (8,741) (2,741) (1,926) (9,148) Acual primary surplus - GDP raio 2% -1% 1% 0% 0% -4% -1% -1% -3% (1+i*)(1+e)-(1+i) 2% 0% -1% -1% 1% -1% 4% 2% 107% 106% 107% 107% 107% 108% 115% 105% 1% 0% -1% -1% 0% -1% 4% 2% Correcion facor for ineres differenials 0% 0% 0% 0% 0% 0% 1% 1% Augmened primary suprlus - GDP raio -1% 1% 1% 0% -4% -1% -2% -4% Exchange rae (E - E-1)/E-1 0% 0% 0% 0% 0% 0% 0% 0% 0% Ineres raes real ineres rae 3% 3% 4% 5% 5% 4% 4% -2% 3% On Domesic deb 7% 7% 7% 7% 7% 7% 7% 7% 7% On Foreign deb 4% 4% 4% 4% 4% 4% 4% 3% 5% GDP a curren marke price 152, , , , , , , , ,111 Real GDP growh 3% 2% 3% 5% 5% 3% 6% 6% 1% inflaion rae 4% 5% 3% 2% 1% 3% 2% 8% 4% Required one-period primary surplus - GDP raio 0% 1% 0% 0% 0% -1% -7% 2% One-period primary gap 1% 0% -1% 0% 4% 0% -6% 6% 37

46 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Table 11. Con Daa and Calculaions for One-Period Primary-Gap Indicaor of Fiscal Susainabiliy for S. Kis (US$'000') Ousanding Exernal Deb 152, , , , , , ,057 Raio deb o GDP 50% 49% 62% 76% 86% 82% 77% Domesic Deb 175, , , , , , ,000 Raio o GDP 58% 65% 70% 77% 78% 97% 104% oal deb 327, , , , , , ,057 raio o GDP 107% 114% 132% 152% 164% 179% 181% Consolidaed cenral governmen flow variables Toal revenue & Grans 93,037 95, , , , ,000 n.a. Tax Revenue 68,000 69,630 72,074 78,556 86, ,407 n.a. Toal expendiure 110, , , , , ,963 n.a. Ineres Paymens 11,741 15,778 19,407 24,778 27,593 28,185 n.a. Toal Exp. (excluding Ineres Paymen) 98, , , , , ,778 n.a. Primary Surplus (5,741) (34,222) (29,407) (24,778) 926 1,222 n.a. Acual primary surplus - GDP raio -2% -10% -9% -7% 0% 0% n.a. (1+i*)(1+e)-(1+i) 2% 0% 0% 1% 1% 2% 2% 107% 109% 104% 102% 101% 109% 111% 2% 0% 0% 1% 1% 2% 2% Correcion facor for ineres differenials 1% 0% 0% 0% 0% 1% 2% Augmened primary suprlus - GDP raio -3% -11% -9% -8% 0% -1% -2% Exchange rae (E - E-1)/E-1 0% 0% 0% 0% 0% 0% 0% Ineres raes real ineres rae 3% 4% 5% 6% 5% 5% 4% On Domesic deb 7% 7% 8% 8% 8% 8% 8% On Foreign deb 5% 5% 6% 6% 6% 7% 6% Gross Domesic Produc GDP a curren marke price 305, , , , , , ,296 Real GDP growh 4% 7% 2% 0% -1% 6% 7% inflaion rae 3% 2% 2% 2% 2% 2% 4% Required one-period primary surplus - GDP raio -1% -2% 4% 8% 10% -2% -5% One-period primary gap 2% 8% 13% 15% 10% -1% 38

47 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Table 12. Daa and Calculaions for One-Period Primary-Gap Indicaor of Fiscal Susainabiliy for Guyana (US$'000') Ousanding Exernal Deb 1,226,730 1,112,190 1,967,200 1,953,500 1,999,500 2,058,300 1,537,025 1,513,020 1,210,924 Raio deb o GDP 309% 330% 534% 442% 370% 331% 218% 202% 169% Domesic Deb 264, , , , , , , , ,218 Raio o GDP 67% 34% 41% 51% 43% 38% 38% 32% 33% oal deb 1,491,077 1,225,516 2,117,558 2,177,923 2,230,227 2,292,472 1,805,388 1,751,860 1,449,142 raio o GDP Consolidaed cenral governmen flow variables Toal revenue & Grans 190, , , , , , , , ,349 Tax Revenue 127,618 99, , , , , , , ,244 Toal expendiure 276, , , , , , , , ,580 Ineres Paymens 106,114 88,708 91,178 77,552 88,184 60,796 62,120 72,033 69,753 Toal Exp. (excluding Ineres Paymen) 170, , , , , , , , ,827 Primary Surplus 20,078 6,725 27,226 45,972 55,178 40,471 39,934 20,041 23,522 Acual primary surplus - GDP raio 5% 2% 7% 10% 10% 7% 6% 3% 3% (1+i*)(1+e)-(1+i) 247% 3% -4% 7% -6% -4% 12% 11% (1+&)*(1+g) 194% 123% 117% 126% 114% 113% 122% 99% Correcion facor for ineres differenials 127% 2% -3% 5% -5% -4% 10% 11% 393% 7% -19% 24% -20% -12% 21% 23% Augmened primary balance-gdp raio -391% 0% 29% -14% 27% 18% -18% -19% Ineres raes real ineres rae -46% -52% 12% 9% 2% 9% 7% -6% 7% On Domesic deb 30% 31% 26% 17% 18% 18% 11% 9% 8% On Foreign deb 6% 4% 2% 1% 2% 2% 2% 4% 4% Exchange Rae (G$) % 45% 183% 12% 4% 6% 1% 1% 2% 14% GDP a curren marke price 396, , , , , , , , ,531 Real GDP growh -3% 6% 8% 8% 9% 5% 8% 6% -2% GDP inflaion rae 76% 83% 14% 8% 16% 8% 5% 15% 1% Required one-period primary surplus - GDP raio -207% 12% 5% -31% 17% -4% -30% 21% One-period primary gap % 184% 12% -24% -18% -10% -21% -12% 41% 39

48 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Table 12. Con Daa and Calculaions for One-Period Primary-Gap Indicaor of Fiscal Susainabiliy for Guyana (US$'000') Ousanding Exernal Deb 1,193,183 1,193,183 1,197,301 1,246,660 1,092,003 1,078,748 1,095,800 Raio deb o GDP 172% 167% 168% 173% 147% 137% 140% Domesic Deb 233, , , , , , ,535 Raio o GDP 34% 37% 39% 39% 44% 42% 43% oal deb 1,427,057 1,456,533 1,474,975 1,528,747 1,415,171 1,410,820 1,434,335 raio o GDP Consolidaed cenral governmen flow variables Toal revenue & Grans 234, , , , , , ,832 Tax Revenue 186, , ,310 Toal expendiure 248, , , , , , ,994 Ineres Paymens 41,561 55,332 43,014 37,887 30,536 22,572 21,685 Toal Exp. (excluding Ineres Paymen) 206, , , , , , ,309 Primary Surplus 27,908 2,463 (25,272) 23,451 (22,264) (15,537) (75,477) Acual primary surplus - GDP raio 4% 0% -4% 3% -3% -2% -10% (1+i*)(1+e)-(1+i) 10% 1% -2% 3% 6% 6% 4% (1+&)*(1+g) 111% 104% 104% 107% 104% 107% 105% Correcion facor for ineres differenials 9% 1% -2% 3% 5% 6% 4% 14% 2% -3% 5% 9% 9% 6% Augmened primary balance-gdp raio -10% -1% -1% -2% -12% -11% -15% Ineres raes real ineres rae 3% 4% 6% -1% -2% -2% -4% On Domesic deb 11% 10% 8% 5% 3% 4% 4% On Foreign deb 2% 3% 2% 1% 2% 2% 0% Exchange Rae (G$) % 10% 2% 3% 1% 2% 2% 0% Gross Domesic Produc GDP a curren marke price 694, , , , , , ,060 Real GDP growh 3% -1% 2% 1% -1% 2% -3% GDP inflaion rae 8% 6% 2% 6% 5% 6% 8% Required one-period primary surplus - GDP raio 1% 12% 8% -4% -3% -7% -2% One-period primary gap % 11% 13% 9% -2% 10% 4% 13% 40

49 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies APPENDIX I DATA DESCRIPTION All daa have been derived from various official sources and are annual in frequency. Governmen revenue (REV) is defined as he sum of revenue receips including recurren and non-recurren revenue including exernal grans in local currency convered o US$. Daa were aken from S. Kis and Nevis s Economic Repor 1985 and he ECCB Annual Diges of Saisics from Guyana s were complied from various issues of he Bank of Guyana Annual Repor and Saisical Bullein; Jamaica s from he Bank of Jamaica Annual Repor and Saisical Bullein. Dominica s daa were exraced from various issues of he annual esimaes from and from he ECCB Annual Saisics hereafer. Governmen Expendiure (EXPD) is he aggregaed disbursemens of recurren and non-recurren expendiure including capial oulays, loans and ineres paymens. The overall fiscal posiion is he fiscal defici/surplus of cenral governmen and is calculaed as he excess of EXPD over REV. I is financed boh by exernal borrowing and domesic borrowing. Boh exernal and domesic borrowings are componens of he oal public deb (DEBT). Here real deb and deb normalized by GDP are considered. Daa on domesic deb are no available for all years for Dominica. Publicaions on exernal Public Deb are readily available for Jamaica and Guyana. However, publicaions on domesic and exernal public deb for counies of he ECCU are unavailable before he 1980 s herefore deb daa prior o he 1980 were compiled using yearly publicaions of Domnica s and S. Kis and Nevis annual esimaes. GDP represens gross domesic produc a he curren marke price in local currency. The daa for each counry were aken from he IFS yearbook and various issues of he Saisical Bullein. The ineres rae considered herein for each counry is he effecive ineres rae (r). Tha is ineres paymens divided by he deb sock. To ensure efficien use of he saisical ess carried ou in he analysis, all daa are expressed as a percenage of GDP and each currency has been convered o US$. Guyana GA$ and Jamaica JA$ are convered using he year averages of marke exchanges raes. 41

50 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Figure 16 The Economeric Approach REV is I(0) & EXPD I(1) REV is I(1) & EXPD I(0) Unsusainable Uni Roo Tess REV is I(0) & EXPD I(0) Susainable REV is I(1) & EXPD I(1) Co-inegraion Tess REV is I(1) & EXPD I(1) are no co-inegraed Unsusainable REV & EXPD are co-inegraed b=1 Susainable Co-inegraing Vecor 0<b<1 Weakly Susainable b=0 Unsusainable 42

51 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Figure 17. Real GDP Growh & Ineres Rae (Dominica) 10% 8% 6% 4% 2% 0% % -4% -6% Year real ineres rae Real GDP growh Figure 18. Real GDP Growh & Ineres Rae (S. Kis & Nevis) 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% % -3% Figure 19. real ineres rae year Real GDP growh 43

52 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Real GDP growh and Ineres Rae (Guyana) 20% 10% 0% % -20% -30% -40% -50% -60% year real ineres rae Real GDP growh RATE Figure 20. Real Growh & Ineres Rae Jamaica 40% 30% 20% 10% 0% % -20% -30% -40% -50% Figure 21. year Real GDP growh RATE real ineres rae 44

53 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Primary Gap Indicaor (S. Kis & Nevis) 20% 15% 10% 5% 0% % -10% year Required primary surplus One-period primary gap Figure 22. Primary Gap Indicaor (Dominica) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% Year Figure 23. One-period primary gap Required primary surplus 45

54 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies One-Period Primary Gap Indicaor (Guyana) 250% 200% 150% 100% 50% % of GDP 0% -50% % -150% -200% -250% year Required surplus One-period primary gap Figure 24. One-Period Primary Gap Indicaor 140% 120% 100% 80% % of GDP 60% Requried Primary Surplus Primary Gap 40% 20% 0% % Year 46

55 Deb Susainabiliy in Caribbean Counries: An Exploraion of Alernaive Mehodologies Figure 25. Figure 26. Raio of Expendiure o GDP in levels (SKN) Raio of Revenue o GDP in levels (SKN) Figure 27. Firs differenced Series (SKN) Figure 28. Firs differenced Series (DOM) DREV DEXPD Figure 29. Figure 30. Raio of Expendiure o GDP in levels (DOM) Raio of Revenue o GDP in levels (DOM) EXPD REV 47