Statement by Dr. The Honourable Kenny D Anthony
Governor for Saint Lucia to the Forty-Second Annual Meeting of the Board of Governors of the Caribbean Development Bank
“Walking a Tight Rope Between Stimulation and Financial Prudence”
A Test for the Future
In a previous incarnation, I served as Prime Minister and Minister of Finance in Saint Lucia for some nine and a half years. I am therefore curious to find out what has changed in the years of my purgatory.
Sadly, I have returned to find some of the old problems of the past. Some of these problems seem to defy solutions and repeat themselves as recurring decimals on our financial landscape.
But some things have changed. We now seek to survive or cope, as the case may be, in a financial crisis of unprecedented magnitude. Perhaps, for the very first time since the establishment of the Bank, we have an opportunity to measure the Bank, to test its rules, practices and procedures against a crisis of untold severity.
Through no fault of our own, we find ourselves in the aftershock of the worst economic crisis since the Great Depression. Most of our economies are burdened with high unemployment, high fiscal deficits, high debt ratios, nagging inflation and persistent poverty. Yet, we are not bereft of ingenuity. Our challenge remains to findviable solutions, both individually at the country level and collectively within the CDB family.
Saint Lucia: Performance and Prospects
Chairman, despite the comparative resilience of Saint Lucia, economic expansion has been slow in recent years. We experienced sluggish growth of 1.0 percent in 2011, following an even lower rate of 0.6 percent in 2010.
Tourism, in terms of both the number of visitors and their spending in the local economy, contracted in 2011 by 3.9 percent and 7.4 percent respectively. In agriculture, banana production fell by 55 percent owing to the impact of Hurricane Tomas, rising input costs, loss of farmer confidence, limited access to affordable finance and the outbreak of Black Sigatoka. Production of non-banana crops rose, but the performance of the livestock subsector was mixed. Construction and manufacturing activity grew modestly by 2.1 percent and 1.6 percent respectively.
The fiscal operations of the government deteriorated sharply in 2011/2012, with significant growth in capital spending of 34.8 percent leading to record capital expenditure and giving rise to a widening of the overall fiscal deficit. As a consequence, the total debt to GDP ratio rose from 62.2 percent at the end of 2010 to 68.5 percent at the end of 2011.
Given our recent performance and the current state of the Saint Lucia economy, we have identified three strategic priorities for economic recovery:-
- Creating jobs which we intend to achieve through the implementation of short to medium term projects and measures that will stimulate the productive sectors, while providing essential support for the government’s social agenda;
- Expanding construction activity with targeted measures designed to encourage investment in housing and construction, which will restore the social and economic infrastructure of the country and have the knock-on effect of creating additional jobs in a virtuous circle;
- Consolidating government’s fiscal account by implementing measures to improve the revenue base, reduce the deficit and strengthen government finances.
One of our major initiatives this year is the introduction of Value Added Tax aimed at expanding the tax base, improving the efficiency of tax collections, reducing the burden on the productive sectors, encouraging investment and providing a more equitable and robust environment for economic growth.
I have presented a synopsis of Saint Lucia’s economic performance in order to indicate the magnitude of the task facing us as well as the main elements of our plan for economic recovery, and to outlineour expectations of CDB with respect to improving its effectiveness.
CDB is the main development finance institution in the Region and as our economic and social programmes unfold, we expect the Bank to evolve, become more flexible, attend to the development imperatives facing us and improve its delivery mechanisms.
The Bank did some things well in 2011 and in recent years, but there are also key areas in need of attention.
CDB: Performance and Future Direction
In keeping with the recession and its prolonged effect on member countries, the recent performance of CDB, perhaps understandably, has been modest. Yet, precisely because of the role of CDB as a development bank, it must find creative strategies for intervening effectively when its borrowing members are affected by adversity. During crises it must be more, not less responsive. Approvals of loans, grants and equity in 2011 were just 55.4 percent of the amount approved in 2010, while disbursements in 2011 amounted to 51.3 percent of the level in 2010.
The economic downturn which spread to most of the region within the last two years, undoubtedly had an adverse effect on the demand for the resources of CDB in 2011. However, a more proactive approach by the Bank in devising creative ways to make resources available to its borrowing members for development, engaging the countries more effectively in designing recovery strategies and improving its procurement and delivery mechanisms, might have been helpful. The Bank must make every attempt to develop more effective strategiesin order to maintain the growth momentum of its members, achieved in the years preceding the recession.
While we support the Policy-based Intervention of the Bank through its Policy-based Loan programme, it is necessary to raise the commitment ceiling and authorize the Bank to extend the programme. Under the programme, loans are approved and their progress monitored once a mutually acceptable mix of policy actions is agreed between the Bank and the country concerned. Given the new economic reality following the global recession, and despite the recent review by CDB, it is necessary to explore the feasibility of making the programme more flexible in the kinds of policy action required, as well as in their timing.
Loans approved in 2011 amounted to just 53.5 percent of the amount in 2010, while disbursements in 2011 were 48.0 percent of the 2010 figure. What is instructive is that lending to the public sector in 2011 accounted for allof the loans. The failure of CDB to engage effectively with the private sector which accounts for the largest share of economic activity in our Region, is a matter of grave concern. This is one of the recurring decimals to which I referred to in my introductory remarks. The Bank must address this deficiency going forward.
On the other hand, the Bank must be commended for making steady progress in some of its longer term initiatives, including those associated with:
- Catastrophe Risk Insurance for Micro-enterprise;
- Facilitating access by micro, small and medium enterprises to technical assistance through the Caribbean Technological Consultancy Services Network (CTCS);
- The Caribbean Aid for Trade Project (CARTFund);
- Helping to reduce poverty through the Basic Needs Trust Fund (BNTF) which focused on the inclusive development of rural and under-served communities in 2011; and
- Improving the application of Gender Equity modalities as a cross-cutting theme.
Response to Disaster
Mr. Chairman, I want now to turn my attention, albeit briefly, to the issue of the Bank’s response to disasters and natural calamities.
We live in an earthquake and hurricane zone and must pay close attention to disaster risk management, mitigating the effects of climate change, disaster rehabilitation and developing strategies for environmental sustainability. In general, the programmes and interventions of CDB in this regard, are commendable, particularly in the area of direct disaster rehabilitation on which US$72.7 million were approved for the Region in 2011.
It would be remiss of me if I did not express my gratitude and that of all Saint Lucians to the Bank, for the loan of US$17.96 million to assist in financing the reconstruction and rehabilitation of infrastructure, following the passage of Hurricane Tomas.
However, it is imperative that CDB responds much more quickly to the needs of its members, particularly in the aftermath of natural disasters. The interruption to economic life can be abrupt and catastrophic and countries simply cannot wait for lengthy periods to commence reconstruction. The Bank must re-examine its procurement and other approval, disbursement and delivery mechanisms, if it is to provide timely and relevant assistance to countries following natural disasters. Nothing short of a new regime governing the approval process for reconstruction and rehabilitation to address the fallout from natural disasters will do. I intend to recommend to international organizations which provide resources for post-disaster relief and rehabilitation, that they undertake similar reforms.
In that context, Mr. Chairman, we continue to sympathize with Haiti. In its drive to eliminate poverty and put the economy on the path to sustained growth, Haiti continues to face special challenges which have been compounded by the effects of the recent earthquake. We support the suite of projects designed with the direct assistance of international donorsto target poor communities, the fledgling business sector, catastrophe insurance and the economy as a whole.
CDB’s Credit Rating
Chairman, we have come to rely on the financial and operational strength of CDB over the years. As the Regional economy recovers and economic growth gathers pace, it is important that the Bank remain a cornerstone of our development.
The Bank has, for many years, maintained an international credit rating of “Triple A” with Moody’s Investment Service and Standard and Poors.We are, understandably, very concerned by the downgrading of the Bank by Moody’s to “Aa1” with a negative outlook, earlier this month.
Some of the underlying reasons for the downgrade were somewhat surprising. The reliance in recent years on borrowing with bullet maturities,has evidently caused the payment profile of the Bank’s debt to be heavily front loaded, thereby increasing its exposure to refinancing risk. In addition, the Bank’s non-compliance with its own liquidity policy for the last five years, is a matter of great concern. The inevitable question is this: Were Directors and Governors explicitly informed?
In the opinion of Moody’s, those shortcomings are inconsistent with the standards associated with “Triple A” rated banks and reflect deficiencies in the management of the Bank’s assets and liabilities and in its financial planning.
On the positive side, CDB’s ability to service its debt in a timely manner appears not to have been compromised. Nevertheless, the Bank must move quickly to create a dedicated risk management function, adopt comprehensive asset-liability management policies and carry out other necessary reforms to ensure that all its fundamentals get back on track and are sustained.
Other areas underlying the downgrade are CDB’s weak capital adequacy ratio despite the recent general capital increase, and the high degree of risk associated with its 55 percent loan concentration in its four top borrowers. The Bank must examine all available strategies to address those concerns with the relevant stakeholders, including its non-borrowing and borrowing members.
The Bank must make every effort to stabilize and prevent further erosion in its credit rating, reverse the negative outlook and return to the higher rating threshold.
These continue to be trying times and there are few signs of positive change in the near future. The Bank, like member countries, must become adept at walking a tightrope between flexibility, expansion, financial stimulation of the economy and social support on the one hand, and financial prudence, forbearance and economizing on the other. It is not one or the other, but both, with judicious sequencing and with the active involvement of the people and institutions of our Region. We have the personnel and the capacity and withtimely assistance from the international community, we will also be in a better position to obtain therequired resources. The time to act is now.