IMF Forum Discusses Proposals on Energy Provision, Taxation, and Financial Sector to Raise Growth in the Caribbean

MONTEGO BAY, Jamaica – Caribbean economic officials and the International Monetary Fund (IMF) discussed possible improvements in energy provision, tax regimes, and the financial sector in an effort to boost economic prospects in the region. The proposals were discussed during a high-level forum on “Unlocking Economic Growth” by finance ministers, central bank governors, academics, and private sector representatives from the Caribbean and officials from the IMF, the World Bank, the Inter-American Development Bank, and the Caribbean Development Bank, at a two-day forum jointly organized with Jamaica’s Ministry of Finance and Planning that concluded today (Oct. 24th) in Montego Bay, Jamaica.

“The Caribbean forum has been an important platform for collaboration and for advancing solutions to the difficult challenges the region faces. This year we focused squarely on three key issues that pose challenges to greater competitiveness and growth: inefficient and costly energy provision, ineffective tax regimes for investments, and fragilities in the financial sector,” said Mr. Min Zhu, Deputy Managing Director for the IMF.

Enhancing energy provision

Participants called for a comprehensive energy strategy for the Caribbean, highlighting that high energy costs in the region – where on average electricity costs are four times as high as in the US – are a major obstacle to competitiveness and higher growth. With a view to diminishing costs and reducing energy dependence, participants considered that the development of renewable energy should be encouraged by increasing the share of renewable energy in the overall energy mix. Nonetheless, there was recognition that oil/gas based electricity generation will continue to dominate for some time yet. Finally, given the limited fiscal space in many Caribbean countries, participants concurred that there is an urgent need to reexamine strategies to reduce transmission losses and improve production efficiency, with the support of the private sector and Multilateral Institutions. Moreover, energy subsidies, where they still exist, should be gradually wound down and targeted to the most vulnerable segments of the population.

Reforming tax regimes for investment

Participants agreed that private sector investment is key for economic growth and that finding the right balance between attracting foreign investment and raising revenues should be the guiding principle in determining tax regimes. At present however, the tax incentives regimes in the Caribbean have become increasingly costly, and have eroded the tax base for much needed social spending. While debate continues about the scope and usefulness for tax incentives, there was consensus that tax incentives alone cannot deliver much needed foreign direct investment. There is a need to reexamine the effectiveness and usefulness of these incentives, and determine a more optimal tax regime. Moreover, there was recognition that tax competition can be costly to the entire region, and that greater cooperation to limit harmful intra-regional tax competition is desirable.

Building a more resilient financial sector

Participants stressed the need for a robust financial sector that safeguards financial stability, ensures strong financial institutions and plays the financing role the real economy needs. In that sense, there was widespread agreement that the priority should be put on strengthening the framework for financial regulation and supervision. This would enable a financial sector with solid legislation and healthy balance sheets. In addition, participants agreed on the need to strengthen resolution regimes to achieve the orderly exit of unviable banks and provide the tools to restructure weak banks and rebuild capital buffers – without disrupting the system or imposing unfair costs on taxpayers. Finally, cross- border collaboration should be promoted to limit the dangers of spillovers.

“I am encouraged by the commitment of Caribbean officials to find meaningful reforms to strengthen the effectiveness of these important levers for growth. The IMF looks forward to continuing its collaboration with the Caribbean on tax and financial issues, including helping the authorities operationalize these into a clear policy agenda,” Mr. Zhu added. “But a main take-away from the discussions is that development of the energy sector faces both challenges and potentially high rewards; it is clear that this is a top priority for the region. If our Caribbean partners agree, the IMF will put the macro-energy nexus at the center of our work agenda for the coming year, so that we can continue to support regional priorities in cooperation with other international agencies.”