Kelvin Dalrymple Chief Research Economist

The Commodity Price Boom and the Caribbean XXVII Meeting of the Latin American Network of Central Banks and Finance Ministries Inter-American Development Bank 8-9 May 2008 Kelvin Dalrymple Chief Research Economist

Background • For the purposes of this presentation Caribbean is comprised of countries that CDB monitors: • Barbados, Belize, Guyana, Jamaica, Trinidad & Tobago • Organisation of Eastern Caribbean States (OECS) (independent states) • Antigua & Barbuda, Dominica, Grenada, St. Kitts & Nevis, St. Lucia, St. Vincent & the Grenadines, • British overseas territories • Anguilla, British Virgin Islands, Cayman Islands, Montserrat, Turks & Caicos • Haiti

Introduction • Commodity price boom can be divided into two parts • Fuel • Non-fuel • The price of oil has been increasing very rapidly • Almost all of the Region are net energy importers • Trinidad & Tobago – the region’s only oil producer • All of the Region has a trade deficit (imports much more than it exports) • Food is a large proportion of imports both for domestic consumption as well for use in the tourism industry • Spill over effects of a possible recession in the US are inevitably • May impact on tourism from US

Objective • To provide a broad overview of the • impact of the commodity price boom • the policy responses to the commodity price boom • The Caribbean will be treated as a group hence there will no analysis in the presentation at the country level

Introduction (2) • Huge debt overhang • Policy reactions have been mixed • Policy prescriptions need to be appropriate

Oil prices • The price of oil has almost doubled in the last year (from $65 a barrel to $125 a barrel in 2008) • Increases due to geopolitical uncertainty as well as global demand • Impact felt in many areas • Transport (both domestic as well as international) • Food prices

Food prices • Food prices have risen by approximately 45% globally over the last nine (9) months • Wheat prices have increased • Steady increase in the price of bread and associated food products

Food prices (2) • There is a global shortage of rice • Decline in production by major rice countries- Bangladesh, Thailand, Vietnam • Some speculate that significant weather changes even climate change may be responsible for destruction of crops due to unseasonable weather

Overall imports • The value of overall imports has increased significantly over the last year • In each category of imports • Primary • Intermediate • Final

Impact on poverty • High food prices have particularly adverse effects on the poor • Food account for a disproportionate amount of expenditure (40%) • Prior to the commodity boom, the incidence of poverty in the region has been high • This has been exacerbated by the boom • More people are becoming ‘working poor’

Impact on wages and salaries • As a result of high prices trade unions are agitating for significant increases in wages and salaries (of the order of double digits) • This will result in an increase in the government wage bill which will increase the fiscal deficit and reduce the already limited fiscal space available for governments to manoeuvre • The private sector will also be asked to follow the lead of government and also increase wages and salaries • If they follow: the effects will be felt in increased cost of goods • If they not do follow: they could be a contraction of business leading to possible reduction of scale of operations, reduction in hours of work for employees or layoffs

Impact on tourism • The current commodity price boom has resulted in significant spill over effects on the Caribbean • The cost of air travel has increased due to the rapid increase in oil prices • A possible US recession could harm tourism prospects for travel from the US • The converse in true for Canada and Europe with appreciating currencies in relation to the United States dollar, tourism could increase significantly • Overall impact on tourism –slightly down

Impact on inflation • High prices over time results in inflation • Traditionally many of the Caribbean countries OECS, Barbados, Bahamas and Belize are fixed exchange rate countries and inflation was largely imported US inflation • Recently high prices have been compounded by other factors – high demand for basic commodities such as rice, wheat etc…

Impact on balance of payments • High imports in the context of low exports has resulted in higher deficits • Value of the imports have increased • Increased Foreign Direct Investment (FDI) leads to higher imports that feed into the current account deficits of the Balance of Payments (BOP)

Impact on debt • Debt levels are very high (most countries have debt stock to GDP of greater than 60%) • Many Caribbean countries have debt stock to GDP ratios that exceed 100% • Six Caribbean countries rank among the most indebted countries

Policy responses to the price boom • The ability to respond is largely determined by: • The extent of fiscal space a country possesses • Loss of revenue, through subsidization by the state creates stress with the budget • The extent to which such subsidization may cause distortions • The extent to which socio-economic stability may be threatened • Failure to respond with a credible policy for alleviating the suffering of citizens, there is the likelihood of civil disorder, riots e.g. Haiti • Policy reactions have ranged from interventionist to allowing the market to act • These are based on experiences in country: interventionist (subsidies) or market solutions (passing on costs to consumers)

Policy response to high oil prices • Conservation – plans have been devised by countries to conserve energy at the household level • Using energy conserving appliances • Using energy conserving bulbs • Using energy conserving vehicles e.g. diesel vehicles • Tax incentives have been provided to encourage participation in these schemes • Alternative sources of oil from Venezuela under the PetroCaribe agreement • This is designed to cushion the impact of high oil prices • by reducing the cost of oil to countries and the difference between the market rate and the buyer’s rate reflected as a soft loan • Facilitating storage of oil • Some countries absorb a significant amount of increase in the price of oil by reducing taxes • Others pass on the increases directly to consumers

Policy response to price oil increases (2) • Alternative energy uses is on the agenda again • Solar • Wind • Geo-thermal • Hydroelectric • Though the cost of production of alternative energy is high, it is declining rapidly • The region has to move on this agenda to build on the gains of the past and to use sustainable energy sources to reduce dependence on fossil fuels • Barbados is self sufficient in solar water heating • Barbados is now exporting technology to St. Lucia, Jamaica and Nigeria

Policy responses to high food prices • Focus on local production of food • To enhance food security • To offset the rising costs of food • Create new relationships and business linkages • Local • Intra CARICOM e.g. Agriculture & Jagdeo Initiative • Focus on alternative sourcing of imported food • Latin America especially Brazil & Colombia are important new sources for the Caribbean • Pushed by private sector consumers are being encouraged to alter taste and lose their brand loyalty

Concluding remarks • Policy prescriptions need to be appropriate to circumstance • Ability to respond to the price boom in the Caribbean is variable • Absence of traditional macroeconomic policies due to fiscal space • Short-term policies: focus on conservation of energy; saving money on food • Long-term polices: change in attitude and structural behaviour: growing more food, alternative energy

Kelvin Dalrymple Chief Research Economist