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A busy street in Bridgetown, the capital of Barbados, before the onset of the coronavirus pandemic. (File photo)

Caribbean “particularly sensitive” to external shocks – IMF Working Paper

A busy street in Bridgetown, the capital of Barbados, before the onset of the coronavirus pandemic. (File photo)

A Working Paper by the International Monetary Fund (IMF) has established that the Caribbean is “particularly sensitive” to external shocks because of the region’s size and dependence on large trading partners.

The IMF said the region is sensitive because of its size and dependence on large trading partners.

The IMF Working Paper applied the case studies of changing international oil prices and an increase in the gross domestic product (GDP) of the United States to make its conclusions.

It confirmed that countries within the region tend to benefit positively from a reduction in oil prices and an increase in the GDP of the US once variables such as a fluctuating exchange rate and overall price changes are taken into account.

“Notwithstanding, a strong degree of integration poses additional risks to small open economies that may suffer disproportionately from shifting economic conditions in the largest economies of the globe…”

– IMF Working Paper

The paper, prepared by Mauricio Vargas and Daniela Hess, uses data from the period 1980 to 2017 and was published for feedback and discussion, not as the official views of the IMF.

Caribbean countries are acutely exposed to global spillovers, the paper noted, citing their lean towards open trade and financial liberalisation, which can be beneficial but also have negative impacts. “Notwithstanding, a strong degree of integration poses additional risks to small open economies that may suffer disproportionately from shifting economic conditions in the largest economies of the globe, as they are less able to diversify away from the sectors in which they have comparative advantages,” said Vargas and Hess.

Most of the Caribbean is tourism dependent, said the IMF Working Paper.

They note that the region is primarily integrated into the global economy through their dependence on tourism and exports. The paper categorised most of the region as “tourism dependent” but noted some are further affected by external conditions because of the size of their trade in goods.

“Within our sample of 15 Caribbean economies, we classify Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Dominican Republic, Grenada, Jamaica, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines as tourism-dependent countries, while Haiti, Guyana, Suriname, and Trinidad and Tobago are classified as goods exporters.”

Haiti, Guyana, Suriname and Trinidad and Tobago are considered goods exporters.

To combat the ill-effects of the world’s largest economies on the Caribbean, the paper suggests that the region could benefit from suggested preventative measures “such as increasing competitiveness, diversifying their economies and reducing their dependence on critical commodities and services, namely, oil-based energy and tourism. These policies might reduce exposure to external imbalances and, at the same time, promote economic growth.”