Dating back to the 1990’s works of leading economic minds such as University of Malta’s Professor Lino Briguglio, it has been understood that small developing economies are often more vulnerable to what economists dub “exogenous shocks”. Essentially, economies, as explained in the earlier works of Birguglio, are deemed vulnerable given their high levels of trade openness, export concentration, and reliance on strategic imports (vulnerability indicators). Using those indicators, it was possible to generate a Vulnerability Index, on which Caribbean countries like Barbados, Belize, Jamaica, and Trinidad and Tobago scored fairly high (see Briguglio et al, 2009).
Over the last decade, the concept and its associated measures have been advanced, with the Caribbean Development Bank (CDB) commissioning a working paper on the subject as recent as last year. Entitled “Measuring Vulnerability: A Multidimensional Vulnerability Index for the Caribbean”, the document builds upon previous works by calculating contemporary vulnerability indices for the CDB’s Borrowing Member Countries (BMCs). While the foundational indicators remain similar to earlier works, the 2019 research logically added a few new variables such as “reliance upon external finance” and “natural hazards and climate change”.
The multi-dimensional vulnerability index (MVI) methodology, based on 2017 data, showed that Trinidad was the least vulnerable (MVI score at 0.34), while Haiti (MVI at 0.71) was undoubtedly the most vulnerable BMC. Other countries with relatively high MVIs at or above 0.55 include countries such as St. Kitts and Nevis, Guyana, The Bahamas, Belize and Jamaica.
Debt and the Pandemic
Establishing a means to quantify the unsurprising fact of these economies’ vulnerabilities has always had great implications for the way in which they are treated on the international scene, a longstanding vantage point that recently received a powerful endorsement from United Nations Secretary General António Guterres. Speaking at the 41st regular meeting of the Conference of Heads of Government of the Caribbean Community (CARICOM), held on Thursday, October 29th, the UN Secretary General shared:
“As you [Caricom leaders] have long advocated, the world must look beyond incomes and factor in the vulnerabilities of countries. The private sector, including the credit rating agencies, also must be engaged in relief efforts.”
The Secretary General went on to advise that such considerations for the realities faced by vulnerable economies could be achieved via “existing facilities or innovative facilities of concessional financing,” adding, “I have called for the exploration of creative approaches, such as debt swaps and to cancel or restructure debt, to unlock resources for the Sustainable Development Goals and climate action. …In this respect, we are working with the Caribbean Development Bank to craft a multidimensional vulnerability index that will help CARICOM countries make a more evidence-informed case to international financial institutions.”
This case is largely one that advocates for the international financial institutions (IFIs) to move beyond their reliance on income-based criteria when assessing countries’ eligibility for debt relief in favor of a system that is more in line with each country’s “structural characteristics”. At present, for example, to qualify for the zero- to –low interest loans from the World Bank Group’s International Development Association (IDA) countries need to have a Gross National Income (GNI) per capita of less than US$ 1,185. In the Caribbean, only Dominica, St. Vincent, Grenada, Guyana, Haiti, and Saint Lucia satisfy that standard. To make matters worse, this eligibility criterion was also extended to other facilities such as the International Monetary Fund (IMF)’s Catastrophe Containment Relief Trust (CCRT).
It is in this backdrop that we find the UN Secretary General’s endorsement for a shift towards the likes of vulnerability indices, as the Coronavirus Disease 2019 (COVID 19) and climate related challenges have pushed some CARICOM economies’ debt levels even higher. As it stands, the IMF estimates debt levels for countries like Barbados, Belize and Suriname to climb above 130% of GDP in 2020, and remaining above 100% of GDP for at least the next few fiscal years.
At the same time of elevated debt, however, it is widely acknowledged that governments must continue to provide financial support to businesses and households as their economies experience significant declines in output that are, in some instances, more than -13%. Countries with heavy direct and indirect reliance on tourism were hit the hardest, with economies like Belize and St. Lucia looking at contractions of about to 16%, and St. Kitts and Nevis as high as 18%.
Compounding matters is the large external debt owed by countries like Belize, for which tourism accounted for at least 40% of foreign exchange (FOREX) inflows. Additionally, the country depends on agricultural export earnings, but these are likewise down due to the impacts of recent drought conditions as well as the minor ramifications of Hurricane Nana. These additional strains on Belize’s balance of payment position have led to commercial banks effectively rationing Forex in an effort to avoid rapid depletion, and had also served as the impetus for the Government to request interest capitalization from the holders of its US Dollar-denominated 2034 bond.