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WorldMarch 4 2015

Caribbean Development Bank president looks to more diverse, recession-free future

Slowly but surely, the Caribbean is emerging from a long and painful recession. The president of the Caribbean Development Bank, Warren Smith, explains how diversifying the region's economy beyond tourism and establishing a renewable energy sector will help protect against future crises. 
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Caribbean Development Bank president looks to more diverse, recession-free future

The Caribbean Development Bank estimates that the region's real gross domestic product (GDP) growth in 2014 was lower than in the previous 12 months, at 1.3% against 1.7% in 2013. However, the bank’s president, Warren Smith, is optimistic that 2015 will see an improvement, with most countries predicted to grow by between 1% and 3%.

Tourism and construction will likely provide the backbone of this growth, with some improvement in commodity exports also anticipated. In its recent forecast, published at the end of February, the Caribbean Development Bank suggested that governments would place greater emphasis on fiscal consolidation in a bid to address the high indebtedness that is afflicting many countries.

Mr Smith says that sustained growth, even at low rates, marks a turning point from the economic recession that hit the region in 2009, when it saw its GDP growth contract to -3.6%. “It is very good to see a continuous trend of growth in 2014, even if it was not as robust as we would have liked,” he says. “We’re seeing a very encouraging performance for economies that [had their] worst difficulties in the early parts of the recession: the tourism and services-dependent countries in the region.”

Tourism push

The strongest growth rates in 2014 were witnessed in the most tourism-dependent economies in the region. Saint Kitts and Nevis and the Turks and Caicos Islands, for example, experienced growth of 4.2% and 4%, respectively, thanks largely to their respective tourism sectors. Almost all regional destinations recorded increased visitor arrivals, according to the Caribbean Development Bank. This, however, did not always translate into overall economic growth. In Barbados, for example, the strong performance of the tourism sector was not enough to compensate for declines in the manufacturing and agriculture sectors, which resulted in flat economic growth of just 0.3% in 2014.

More can be done at a regional level to further boost the tourism sector, according to Mr Smith, who is keen to improve the Caribbean's international appeal so that it can expand beyond the traditionally dominant source markets of North America and western Europe. He also believes that the Caribbean would benefit by promoting its cultural offerings, as the region's tourism market is largely based on its reputation for offering sun, sea and sand.  

“The Caribbean countries have a rich history, a strong culture and we don’t exploit it enough, we don’t integrate sufficiently our culture into [the tourism] industry. It would help us become more resilient. Asia is a growing tourism market, but that in itself doesn’t mean that we should be at a disadvantage – people from Asia also want to come to the Caribbean,” says Mr Smith. The problem, he adds, is often about getting visitors to the region.

Air connections are an issue, even for those travelling from nearby South America, with visitors from these countries usually having to fly via the US to get to the Caribbean. Mr Smith is confident that this could soon change, however, as countries are starting to make efforts to tailor holiday packages to the South American market. By targeting this market, the hope is that soon there will be enough interest to warrant the introduction of regular air connections. 

Capital potential 

To support local businesses, the Caribbean Development Bank plans to launch a fund to channel capital towards small and medium-sized enterprises (SMEs). Limited access to capital and an over-reliance on bank loans currently characterises the local SME market, which can hinder growth. Mr Smith hopes that the fund, which will be launched in May, will see this situation change.

There is a targeted focus on SMEs at a country level as well, with many of the region's economies prioritising the creation of equity pools for small businesses. Trinidad and Tobago, for example, which boasts the region’s largest banking sector, still lags behind on a global scale when it comes to capital markets. The development of its financial sector would help boost the economy as well as diversify it away from the oil and gas sector. The country accounts for about one-third of the Caribbean's GDP, but was badly hit by falling oil prices in 2014, resulting in national output expanding by just 0.5%.

The Caribbean Development Bank is also working to develop a renewable energy industry, as part of its wider goal of diversifying the local economy. These efforts also complement the bank's 'community disaster risk reduction trust fund', which provides capital to support disaster risk reduction and climate adaption projects.  

Furthermore, the bank has applied to be accredited as an intermediary for both the UN’s adaptation fund and its green climate fund, says Mr Smith. If it could tap into the resources available through these funds, it would add to the $50m that the region has already received from the European Investment Bank to help it offset some of the problems resulting from natural disasters.

“Climate [events] represents an existential threat to all of our countries. It also puts us in a position where it undermines our infrastructure – we have to rebuild it every time there’s a natural disaster. We now build infrastructure in a climate-resilient manner, and with low-cost financing,” says Mr Smith.

New energy

Supporting the production of alternative energy is aiding the formation of a new sector in the region, one that is showing early signs of success. As an example of this, Mr Smith points to Barbados, where the Caribbean Development Bank is based, and where panels for solar energy are already highly visible right across the island. “In Barbados, we have an intense utilisation of solar water heating – if you drive around you see solar water heating on virtually every rooftop. A lot of these are produced in Barbados, and installed by local firms.”

Another interesting trend is emerging in Belize, where the residue from the production of sugar cane – bagasse – is being used to create energy. The energy is currently being used to power the sugar cane industrial plant where it originates, as well as being sold to the national grid. Sugar has traditionally been the largest contributor to the GDP of Belize, which is a member of the Caribbean Development Bank.

“We believe that traditional industries can be diversified,” says Mr Smith. “Take sugar, for example. In Belize, you increasingly see sugar being used as a source of energy, through bagasse. Late last year, there was news of state-owned Guyana Sugar Corporation coming to Belize. The company has a proposal to produce electricity from bagasse and to resell it to [Belize’s] national grid."

Another sector traditionally associated with the Caribbean is the offshore financial centre industry. Here, too, there is room for further development according to Mr Smith, especially as countries start to tighten their international tax rules and put offshore centres under increasing scrutiny. Suspicions of money laundering and accusations of there being lax oversight have long hampered the Caribbean hubs. But, with the appropriate rules in place, Mr Smith believes that well-regulated offshore centres can continue to play a crucial role in the region. 

“The international movement of money and cyber crime are big risks in the financial sector; finding ways to regulate and manage these risks is an ongoing process. But I think that the Caribbean has a right and the capability to be a player in this area,” says Mr Smith. “I don’t think there is any value in the Caribbean to operate outside what are now becoming internationally accepted norms for this type of business. I see this remaining an important industry for the Caribbean [but] when you have changes in governments in the first world, there still are risks because you don’t know what approaches they are going to take to offshore financial centres.”

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Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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