In response to the financial crisis in 2008 the Caribbean Development Bank focused increasingly on policy based lending to support borrowing member countries in addressing fiscal reform and debt sustainability. Some $300 million in policy based loans were approved between 2008 and 2010.
In the absence of other sources of financing, CDB’s policy based loans became an important financial lifeline to member countries, said Juliet Melville, director, Economics at the CDB.
Ms Melville provided an overview of the measures taken by the bank after 2008 and the challenges going forward at the Standard and Poor’s breakfast meeting during the 42nd Annual Meeting of the Caribbean Development Bank last week.
She said the crisis manifested at a time when many CDB member countries were not in a robust position to withstand the fallout from the global events. At the time, countries were already struggling to come to terms with the loss of preferential trade arrangements and a more open international treaty environment. Worrisome debt levels also left little room for increasing expenditure to stimulate the economy.
Following the crisis most countries experienced two to three years, and some countries even four years, of consecutive negative growth, exacerbating the fiscal situation in many member countries. At the height of the financial crisis members therefore needed budgetary support rather than project financing and the debt sustainability of member countries became a priority, Ms Melville said.
Policy based loans were an important instrument to provide not only financing but also the momentum to governments’ reform efforts to enhance fiscal and debt sustainability. The loans usually require credible reform programmes and are accompanied by a package of CDB finance and technical assistance to support the implementation of reforms, she said.
Most members have embarked on such programmes to address their fiscal situation. There may be debate whether this was done adequately, but the important point is, she said, there is now recognition among member countries that an adjustment must take place. Although further improvement is needed, positive results are already apparent in the countries that were in the worst fiscal shape, she noted.
Some of the policy based loans were pre-emptive. In the case of St. Vincent and St. Lucia, policy based loans were given to tackle the worst effects of the crisis before they could develop. Other beneficiaries in the context of IMF and other programmes were Jamaica, Grenada and Antigua, countries with the highest level of indebtedness and the worst fiscal situation. The CDB also supported the financial sector in St. Vincent with a financial sector stabilisation loan, as one local financial institution was hit by the crisis.
In St. Kitts and Nevis, CDB’s financial assistance supported a debt restructuring exercise that included revenue enhancement and expenditure reduction measures. In addition the bank supported the conversion of outstanding loan balances to special fund sourced loans.
By reducing interest rates and improving borrowing terms, the refinancing of debt gives countries some breathing space, Ms Melville said.
The bank has reached its policy limit for PBLs, but there is a recommendation to increase this limit, given the demand from member countries.
Other measures
Apart from policy based loans, the CDB has also adjusted its counterpart financing requirements for its investment loans. Counterpart financing is the portion of the total project costs which beneficiary governments are required pay in CDB-funded projects. In May 2009, the CDB board approved a proposal to reduce the financing requirements from 30 per cent to 20 per cent for a period of two years.
This enabled the countries to implement projects that would otherwise not have been possible, Ms Melville said.
In other cases, the CDB has allowed countries to reallocate resources. For example, countries that were impacted by natural disasters approached the bank to use previously allocated resources for a different purpose.
Future measures
Caribbean countries are only just emerging from the crisis and support of the economy is still required. Ms Melville noted, above all, growth is vital for countries to develop a degree of resilience, but support remains often a balancing act between dealing with the debt situation and the need to stimulate the economy.
Despite the success of policy based loans, in hindsight it was often not the most appropriate instrument given that disbursement was tied to the implementation of an agreed reform programme, Ms Melville said. As a result, many borrowing members who needed liquidity support during the time of extreme stress were not able to access CDB resources.
“It is one of the areas we need to devote some attention to,” she said, adding that ongoing research may identify new instruments to supplement the existing investment and policy based loans.
Countries where the government is a main employer need to look at the issue of safety nets to backstop a crisis. Effective social safety nets and ensuring a social protection architecture will minimise the effect of shocks at the community or economic level, she said.
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