An International Monetary Fund (IMF) working paper says since growth in the current global economic environment is "virtually non-existent", significant fiscal consolidation is inevitable in the region.
The paper, dubbed 'The Challenges of Fiscal Consolidation and Debt Reduction in the Caribbean', examines debt dynamics in the Caribbean and discusses policy options for reducing the high debt levels.
Based on empirical studies of factors underlying global large-debt reduction episodes, the paper says "important policy lessons" are drawn for the Caribbean.
The analysis shows that major debt reductions are associated with strong growth and decisive and lasting fiscal consolidation efforts.
It says better control of the public wage bill, increasing public-sector efficiency and tackling transfers are the obvious targets to reduce spending.
On revenue, the working paper says there is "ample room" to reduce tax expenditures, eliminate distortions while broadening the tax base.
"Fiscal consolidation needs to be complemented by a comprehensive debt-reduction strategy, including tax policy reforms and structural reforms to boost competitiveness," the paper urges.
It states that Caribbean economies face high and rising debt to gross domestic product (GDP) ratios that "jeopardise prospects for medium-term debt sustainability and growth".
DEBT BURDEN WORSENED
The working paper points out that the global financial crisis "worsened the already-high debt burdens in the Caribbean", adding that the crisis and subsequent slow recovery in advanced countries had a "significant adverse effect undermining growth in the largely tourism-dependent Caribbean, exposing balance sheet vulnerabilities built up over many years".
As a result, the working paper says the ratio of public debt to GDP increased by about 15 percentage points between 2008 and 2010.
It was noted that Caribbean commodity exporters rebounded rapidly after the crisis, buoyed by high commodity prices, stating that their debt ratios have stabilised "relatively low".
The working paper says several countries have made attempts at reducing debt, mainly through "ad hoc restructuring or fiscal consolidation".
The IMF working paper also pointed to the region's small size and geographical location which makes it "highly vulnerable to a host of frequent shocks, against which it is costly to insure.
"As a result, Caribbean economies have had a silent debt crisis for the past two decades, contributing to a high debt-low growth trap."
The IMF working paper says Caribbean countries can draw lessons from successful fiscal consolidation efforts in other regions to guide their fiscal-consolidation efforts.