Strong, independent institutions seen as key to avoid Caribbean shocks

Pension reform and strengthening central bank independence are key to prevent post-pandemic financial instability in the Caribbean, experts said.

“These are very small, open economies. Extremely vulnerable to shocks, internal shocks or external shocks. These countries are prone to hurricanes, tropical storms, earthquakes and other natural disasters,” Moises Schwartz (pictured), a development manager at the Inter-American Development Bank (IDB), told BNamericas. 

And at the Caribbean Economic Forum, organized by Barbados’ central bank, Schwartz said “the whole point of having strong institutions is giving you a framework on how to react.”

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This framework focuses on reducing poverty, boosting economic growth, safeguarding financial institutions, and public finance management. Experts at the online forum agreed the Caribbean must do more on these matters. 

As 2020 GDP in Latin America and the Caribbean fell an average 7.7% year-over-year, according to the UN’s Economic Commission for Latin America and the Caribbean (Eclac), which estimated an extreme poverty rate of 12.5%, with over 33% of the population affected by poverty, 22mn more than in 2019. 

“Doing the right thing in terms of technical institutions didn’t happen for a long time. The political will and more broadly public will wasn’t there so a deep crisis brought the opportunity,” Brian Wynter, former governor of Jamaica’s central bank said during the webinar. 

Wynter referred to Jamaica’s 2013 crisis caused by falling tourism numbers, resulting in soaring debt, but which prompted deep financial reform.

Pensions

Schwartz said that 20% of the Caribbean population will be at least 65 by 2050, compared to 9% currently. The ageing population will pressure those pension systems that rely on a young working population.

To confront the problem, Schwartz said governments need to raise the retirement age, increase employee and employer contributions, and adjust civil servant pensions.

“It’s not as if you’re going to have a crisis because of pensions a year or two years from today. We’re simply trying to alert policymakers and say, 'Well, you shouldn’t be kicking the can down the road for the future,'” Schwartz told BNamericas.

But high labor informality in the Caribbean poses a problem for increasing savings and reforms, although a fruitful debate is underway in Jamaica.

Taxation

Technology could help strengthen institutions, for example by implementing a “complete and accurate tax registry and database,” Schwartz said. Simplifying tax matters and creating effective auditing systems would improve trust, enhance fiscal policy and fairness and result in more tax collection.

Digitization could also help focus investigations into tax evasion.

"The technology is there, it’s not something that doesn’t exist," Diether Beuermann, IDB lead economist for the Caribbean told BNamericas. "It's exploiting data and technology to make [the] auditing and tax collection processes more effective because resources are limited. You cannot audit everyone."

Beuermann added that using utility payments and national insurance scheme databases could also detect tax evasion.

Fiscal reform

The panelists said more fiscal councils and sovereign wealth funds are needed to ensure institutional independence.

Fiscal councils would allow more politicians and the public to get involved in budget oversight. 

Beuermann said that “those countries that rely on natural resources, non-renewable natural resources like Guyana, Suriname, or Trinidad and Tobago … have to have sovereign wealth funds.” Especially Trinidad and Tobago’s fund stands out as the oldest in the Caribbean and because of its high transparency standard.

Outlook

Wynter wants to equalize access to finance. While the Caribbean’s financial systems are well developed, they are sometimes too rigid, he said. 

“The regulatory systems need to do a lot, the governments have a lot to do to improve dramatically access to finance,” Wynter said during the webinar. 

According to Wynter, for some Jamaicans it has been easier to leave the country, migrate, get access to finance abroad and then return to Jamaica than it has for many groups to access finance within the local system.

“For results to actually take place in my view it’s not only amending regulations, amending laws ... It’s actually a change in the culture that needs to take place,” Schwartz told BNamericas.

Photo credit: IDB