Debt Sustainability in the Caribbean

http://www.scribd.com/doc/61998937/Debt-Sustainability-in-the-Caribbean

One interesting issue in development economics is the effect of debt service costs on the effectiveness in terms of economic programs and poverty alleviation, as well as the fiscal health of a government. All too often, the debt service costs of a developing country consume a massive share of budgetary revenues. Additionally, because of inflated risk premiums, debt service costs are particularly brutal in many developing countries.

While sovereign debt reduction is primarily a fiscal matter, it is vitally necessary to due everything possible to minimize the pressure of debt service costs on fiscal budget revenues. In this area, a lot of progress can be made. Active Debt-Management Policies (ADMP) aim to achieve just that. In particular, developing country policies often fail to take advantage of bond markets. 

In bond markets, the sovereign risk premium can be reduced via a series of ADMP measures, thereby reducing debt-service costs. These measures include staggering the maturity dates, retiring foreign-currency demonimated sovereign debt issues, and the transition to coupon bonds.

In the Caribbean region, we have seen a virtuous-circle ADMP trend whereby several countries have issued increasing sophisticated sovereign debt bonds, thereby decreasing the risk-premium. The revenues from these bonds has then been used to retire riskier, less sophisticated sovereign bonds, some of which were issued in foreign currency such as US Dollar of British Pound. 

This paper is a draft case-study about ADMPs in the Caribbean region conducted at the Inter-American Development Bank. Policy recommendations on ADMP sovereign debt policy are also outlined. 

Abstract:

This paper examines debt sustainability in the Caribbean region in general given the emerging market status, and small size of Caribbean economies. Particular emphasis is given to six countries within the region with respect to debt sustainability techniques and policies. The size, scope and effects of sovereign indebtedness are also discussed. Policy options and recommendations for ensuring debt sustainability and reducing indebtedness are examined herein.

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About the Authors:

-Desmond Thomas is the Chief Economist for Barbados at the Caribbean Country Department of the Inter-American Development Bank at the Inter-American Development Bank.
-Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.