Mark Lee

About Mark Lee

Editor, author and writer with career spanning print, radio, television and new media.

Caribbean economies are among the most tourism-dependent in the world. For most countries, tourism is the main source of economic growth, employment, and foreign exchange earnings. Of the top 20 tourism-dependent countries, ranked by average travel receipts in percent of GDP during 1980-2007, 10 are from the Caribbean region.

Tourism receipts in Antigua and Barbuda, the most tourism-dependent country, have averaged almost 50 percent of GDP over the past three decades. The employment impact of the tourism sector is considerable. In addition, Caribbean countries benefit from tourism-related construction in terms of employment and economic growth, with the associated foreign direct investment supporting balance of payments inflows. In Barbados and The Bahamas, tourism-related construction accounted for an estimated 4-5 percent of GDP during 2003-07.

The still-unfolding economic downturn in advanced countries is dampening tourism activity, with significant economic consequences for Caribbean countries. Historically, tourism arrivals have been closely correlated with economic activity in tourism-source countries. Caribbean tourism arrivals fell by a cumulative 8.6 percent during the

2001 recession and by 2.9 percent during the 1981 recession. After an up tick in the first half of 2008, stay-over tourists to the Caribbean are estimated to have fallen by about 5 percent during the second half of the year. Tourism receipts are expected to continue falling in 2009-on average by 15 percent, even though the decline in stay-over arrivals may be more modest, as hotel operators are currently offering heavily discounted prices. Reflecting the weak tourism performance, real GDP is projected to decline by an average of ½ percent this year.

The slowdown in visitor arrivals and tourism-related development projects is reducing foreign exchange inflows. To some extent, the negative impact on the external current accounts of the Caribbean countries will be dampened by a decline in imports amid sluggish domestic activity and sharply lower oil import prices. Nevertheless, with a projected fall-off in capital flows, including to tourism-related construction projects, pressure will increase on international reserve levels and/or currencies, as many countries in the region have pegged exchange rates. Increasing layoffs and reduced profit margins in the tourism sector will also pressure fiscal positions in many Caribbean countries.

Some Caribbean countries have introduced policy measures to soften the shock to the tourism industry. A number of governments (e.g., Antigua and Barbuda, Jamaica, St. Kitts and Nevis, and St. Vincent and the Grenadines) are providing short-term tax relief to hotels and other tourism operators, along with reduced charges for electricity, water, and other inputs to tourism services, in some cases on condition that proactive measures are taken to preserve employment, increase operating efficiency, and reduce operating costs. Many governments are also supporting aggressive marketing efforts, including major advertising campaigns (e.g., The Bahamas, Barbados, Jamaica, St. Lucia, St. Vincent and the Grenadines). In Jamaica, in particular, the advertising campaign and discounted vacation packages appear thus far to have been successful, as stay-over arrivals are up about 3 percent for the first two months of 2009 compared with a year ago.

Macroeconomic policy options may be limited. The scope for countercyclical fiscal policies in response to the global economic downturn is constrained by the already-high debt levels in many Caribbean countries. Even in cases where an expansionary policy would not jeopardize fiscal sustainability, the deterioration in tourism earnings, and associated fiscal revenue, may require a tightening of macroeconomic policies in order to sustain the fixed exchange rate pegs that characterize many Caribbean countries-especially if capital inflows remain low. Although the regional financial

systems weathered the global shocks well initially, given recent local shocks (CL Financial in Trinidad and Tobago, and Stanford Group in Antigua and Barbuda), it will be important to closely monitor developments in the financial system. A prolonged global downturn could lead to further unemployment, financial strain, and bankruptcies in the tourism sector, which could have adverse spillovers onto the banking system and hinder a recovery during the cyclical upturn.

In response to the downturn in tourism receipts, several Caribbean countries have sought IMF financial assistance. St. Vincent and the Grenadines (followed shortly thereafter by Dominica and St. Lucia) is the first country in the Western Hemisphere to request a drawing under the Fund’s Exogenous Shock Facility, responding to the transitory fall in its tourism receipts. Similarly, Grenada has requested an augmentation of its Poverty Reduction and Growth Facility to help absorb the shock to its balance of payments position arising from the downturn in tourist receipts. Belize has received assistance through the IMF’s emergency assistance for natural disasters (ENDA) to mitigate the adverse effects of recent floods on international reserves. St. Kitts and Nevis is also requesting assistance through ENDA to help cope with the adverse balance of payments impact of a hurricane.

Reproduced from the Regional Economic Outlook: Western Hemisphere report of the International Monetary Fund (IMF) May 2009.