Published by the Caribbean Centre for Money and Finance
From the document:
This study aims to provide reliable information to financial markets about the objective limits to Caribbean Governments' ability to service their debt.
In Chapter 1 we introduce a forecasting model which shows the impact on the balance of external payments of Government debt servicing and the financing of the Government deficit. The model is fully articulated in Chapter 4. The channels through which the fiscal deficit will principally affect the balance of payments are via the servicing of the external debt, and the impact of fiscal expansion and domestic financing on aggregate expenditure and imports. In Chapter 1 we explain that there may be several reasons why fiscal consolidation and the reform of Government operations may be warranted, even when the fiscal strategy is sustainable. These reasons include the desire to achieve greater efficiency of the delivery of Government services, and/or a national consensus that the size and scope of Government activities are inappropriate.
Chapter 2 reviews the literature on debt and fiscal sustainability, illustrating the diversity of theoretical and empirical approaches to the subject. The available methodologies are all flawed in one way or another, and they are inconsistent with each other. At the end of the review no
unambiguous concept of fiscal sustainability emerges, and no indicator, suite of indices, or methodology can be identified as offering the most reliable guidance. The approaches all
involve judgments, sometimes about things which are non-economic in nature, such as a government's willingness to meet its payment obligations. In addition some methodologies
require conceptually troubling assumptions, such as intergenerational equity, and arbitrary choice of sensitive parameters such as rates of discount of future payments obligations.
Chapter 3 reviews the fiscal experience of several Caribbean countries in the last one and a half to four decades, depending on the country. The finances of all the countries included in the study have weakened over time, and debt levels have been on the increase, relative to GDP. The 2008 international economic recession aggravated the situation, and fiscal consolidation is underway in all the economies analysed for this study. Four of 15 countries in the Caribbean Community (CARICOM) and the Dutch Caribbean (the group covered by our studies) had exchanged or restructured government debt since 2008.
Chapter 4 is the core of the study, where we describe the methodology for determining fiscal sustainability in the small open economy, and use it to evaluate the fiscal strategy of several Caribbean countries. We identify periods of past unsustainability for each country, assess the current fiscal situation, and conduct stress tests to show how far distant is the current fiscal situation from the point of fiscal unsustainability.