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 Bank8-9 May 2008

• 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

Background

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

• Huge debt overhang • Policy reactions have been mixed • Policy prescriptions need to be appropriate

Introduction (2)

• 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

Oil 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

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

• The value of overall imports has increased significantly over the last year

• In each category of imports– Primary– Intermediate – Final

Overall imports

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

• 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 tourism

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

• 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

Policy responses to high food prices

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