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WorldAugust 1 2014

CDB president prepares for future storms

The financial crisis hit the Caribbean hard, with the region only recently starting to recover. Now that the worst is over, the president of the Caribbean Development Bank is looking to build a more sustainable future, encouraging projects that minimise the effects of natural disasters and develop the region's renewable energy potential.
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CDB president prepares for future storms

As economic conditions begin to improve in parts of the region, the Caribbean Development Bank (CDB) is adapting its products to the different needs of its 19 borrowing members, offering both state aid and economic stimulus tools. It is also broadening its policies to help countries mitigate the effects of natural disasters and improve infrastructure, both for transport and energy.

“Over the past couple of years, our focus has shifted from dealing with crises to looking at [growth potential],” says Warren Smith, president of the CDB. “But, we still need to do some of that work [dealing with the economic downturn], as we’re just coming out of that phase.”

Carrot and stick

While commodity exporters such as Suriname, which has one of the world’s largest reserves of bauxite, are enjoying strong economic growth thanks to buoyant international prices (Suriname recorded 4.4% gross domestic product [GDP] growth in 2013), many of the region's tourism-dependent economies continue to struggle.

Visitors from the US and Europe are not yet back to pre-crisis levels, despite an improvement in economic conditions in their home countries. Barbados is one example of a country where a sluggish tourism sector is adversely affecting the fragile macroeconomic picture: analysts expect its 11% fiscal deficit to rise and the debt-to-GDP ratio to surpass 100% this year. Another struggling economy that Mr Smith singles out is Grenada, which will likely have to restructure its external debt in the short term.

If this happens, CDB will provide technical assistance as well as certain guarantees to debtors to facilitate a possible swap of their claims. One of the instruments the CDB can use to help Grenada, and other Caribbean countries, is a policy-based loan, designed to ease debt burdens and, at the same time, put in motion much-needed reforms, says Mr Smith. This bodes well with both the CDB’s crises mandate and its renewed focus on promoting economic growth in the region. The CDB has channelled a total of $208m through such loans since its creation in 2009, and Mr Smith thinks they will become increasingly popular.

“We use policy-based loans as a carrot and stick,” he says. “[When countries] run fiscal deficits, which need to be financed, they tend to borrow from domestic financial institutions; increasing the exposure of those banks to the government. To a certain extent, that’s not healthy. Governments have to achieve certain reforms before they get a disbursement [from our policy-based loan programme].”

Climate control

More recently, the CDB has strengthened its commitment to improving the region's defences against natural events, which can have a catastrophic effect on an economy. The effects of the devastating earthquake that hit Haiti in 2010 are still being felt, while hurricanes and floods are a seasonal occurrence.

“The Caribbean is extremely vulnerable to climate events; we estimate that there is a 10% to 24% chance of one or more [of our] countries suffering a major event, such as a hurricane, every year,” says Mr Smith. “We are looking at possible losses, on average, of about 1% of [the region’s] GDP every year. This is a big problem for us. You build infrastructure today, and next year, the country still has to repay the loan [that financed it], but large parts of the infrastructure have been damaged or need to be replaced completely.”

It is currently estimated that the total cost of modernising the region’s infrastructure is $30bn, including transport, energy and telecommunication networks. But, as countries try to limit their spending and improve public finances, they are less inclined to borrow and, therefore, less likely to embark upon development projects.

To help the situation, the CDB is working on two fronts. It is changing the regulatory environment to attract foreign investors to such ventures and it has created specific financial products to fund natural disaster prevention and rehabilitation, and renewable energy projects. These loans impose lighter terms on borrowers so that governments can invest in infrastructure without weighing too heavily on their already high debt burdens. Softer-term loans would typically be used to build convex-shaped roads, for example, that help drain heavy rain fall away more easily, or sea defences that block mounting tides and mitigate the effects of flooding. The initiative aims to help reduce governments’ future borrowing needs to replace damaged roads or buildings.

Electric charge

The CDB is also making funds available to local communities for projects that mitigate natural disaster risks or aid climate change adaptation, with individual grants ranging from $400,000 to $650,000. The ultimate aim of tackling climate change means that loans can also be directed towards renewable energy projects, which help reduce carbon dioxide emissions and create greater energy independence. The CDB has teamed up with another multilateral lender, the European Investment Bank (EIB), to fund such initiatives, and has a $60m credit line in place as a result.

“We’ve signed a line of credit with the EIB that allows us to provide subsidised loans to countries [that want to] invest in a climate change project. We’re also allowed to use these loans for renewable energy projects such as solar, wind and geothermal energy projects,” says Mr Smith.

As well as the environmental advantages, the focus on renewable energy is also motivated by the high prices that most Caribbean countries pay for electricity. With the exception of oil- and gas-rich Trinidad and Tobago, electricity prices across the Caribbean are about four times those in the US, according to the CDB. This is because of high import costs, price volatility and inefficient generating plants, which are a product of the relatively small size of these countries, and consequently smaller demand for electricity, which has led to the use of smaller, less efficient plants.

On the other hand, the region has great alternative energy potential. Beside the more obvious solar and wind sources, volcanic islands could easily produce geothermal power. The CDB wants to combine renewable sources with the development of more efficient plants. For some countries, this goal is within reach in the medium term, says Mr Smith, who names Dominica as one such example.

Hot topic

New technology, which has expanded the area where geothermal power generation is possible – previously it was limited to areas close to tectonic plates – is proving particularly beneficial to Dominica. Investigations into harnessing geothermal power started in the country more than five years ago, with initial funds provided by both domestic and international sources, including Dominica’s government, the regional councils of Guadeloupe and Martinique – French overseas regions – and the EU.

“Dominica is in a fairly advanced phase of preparation to start producing electricity from geothermal sources. To be able to optimise that energy, it has to be able to export some of it. The country is fortunate as its located not too far from [Martinique] and Guadeloupe, which are much more developed countries and have much greater demand for electricity.”

The CDB is not involved in the development of Dominica’s geothermal energy project, as it is mainly financed though private sector investors, says Mr Smith, but the country is the perfect poster boy for the bank’s climate change goals, as it shows others what can be achieved. Dominica can not only slash its high energy costs, it can further improve its economy by becoming an energy exporter. The country will also reduce its carbon footprint along the way.

“If Dominica can size its plants so that they can meet its own domestic needs, with the use of undersea cables it can sell [excess] electricity to Martinique and Guadeloupe; then Dominica becomes an energy exporter, earns foreign exchange, is able to bring down the cost of its own electricity and is emitting fewer greenhouse gasses,” says Mr Smith.

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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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