From Jamaica Observer

WASHINGTON, United States (CMC) – Caribbean countries where fiscal vulnerabilities remain acute, like Antigua and Barbuda, Dominica and St Lucia, are not well-positioned to finance energy investments through public resources, since these might derail necessary fiscal adjustment efforts and increase risks of debt distress over the medium term, according to a new study released in Washington.

The study titled “Public Investment Scaling-up and Debt Sustainability: The Case of Energy Sector Investments in the Caribbean,” is part of the Working Papers undertaken by the Western Hemisphere Department of the Washington-based International Monetary Fund (IMF).

In it, the author Ahmed El-Ashram, noted that countries like Dominica and St Lucia have a high probability of debt distress, given their high debt to gross domestic product (GDP) ratio and unsustainable debt trajectories.

In Barbados, the public debt ratio is projected to remain above 100 per cent till 2026 if energy sector investments are financed through public resources.

“Hence, in these countries, getting the private sector to undertake the bulk of the investments would ease financing constraints imposed by the need to avoid increasing public debt, and would also provide risk sharing—which could be particularly critical when the renewable resource potential remains uncertain or the energy market outlook is highly uncertain.

“The favourable impact on the debt trajectory from the better growth outlook would help improve debt sustainability,” the paper argued, noting that countries in an adjustment process to reduce public debt to sustainable levels could choose to finance high-yielding investments, as long as the economy can demonstrate strong structural preconditions.

It said preconditions would need to include high returns on public capital, high public investment efficiency and high collection rates.

“In Jamaica, energy investments, estimated at 6.2 per cent of GDP, do not materially alter the debt path but could impose additional strain on fiscal resources if projected cost savings fall short of the cost of financing, particularly if financing terms are unfavourable or crowd out other investments.

“In countries where commercial losses are high or the power utility has low collection rates, transition problems could emerge if the costs of financing cannot be covered without fiscal adjustment. This could aggravate fiscal challenges if the baseline required fiscal adjustment is already high, as in Antigua and Barbuda, Grenada, or Jamaica.”

But the Working Paper notes that energy investments in the Caribbean are an example where public investment projects could generate tangible cost savings to both cover financing costs and support long-run growth.

It said a sustained reduction in the energy bill would deliver measurable long run competitiveness and growth benefits, with favourable impact on public debt sustainability across most Caribbean economies.

“The estimated impact on long-run GDP following the pass-through of cost savings, net of debt service, yields a more favourable debt trajectory than the baseline in all Caribbean countries. The path remains sensitive to the overall cost of financing, the extent of the estimated growth impact, and projected changes in the relative cost of alternative energy sources to fuel oil.” But it noted that for public financing of energy investments to be feasible, the baseline debt trajectory needs to be sustainable.

“Although the public debt trajectory under the investment scenario converges with the baseline on or before 2030 for all countries in the sample, countries where fiscal vulnerabilities remain acute, like Antigua & Barbuda, Dominica and St Lucia, are not well-positioned to finance investments through public resources, since these might derail necessary fiscal adjustment efforts and increase risks of debt distress over the medium term.

“Even if the debt trajectory is not explosive, relying entirely on public investment financing in such highly indebted states would increase vulnerability to large macro shocks, including natural disasters, by reducing available fiscal space and capacity to borrow.

“Hence, securing private sector financing of energy investments, where possible, would significantly improve the public debt path over the long run through reducing the initial rise in public debt load while retaining the long-run growth enhancing impact, provided that a significant share of the cost savings is reinjected into the economy—for instance, passed on to consumers in the form of lower electricity tariffs,” the paper noted.

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