VZCZCXRO9470
PP RUEHGR
DE RUEHSP #0494/01 1381037
ZNR UUUUU ZZH
P 181037Z MAY 07
FM AMEMBASSY PORT OF SPAIN
TO RUEHC/SECSTATE WASHDC PRIORITY 8209
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHUB/USINT HAVANA 0042
RUEHCO/AMEMBASSY COTONOU 0012

UNCLAS SECTION 01 OF 02 PORT OF SPAIN 000494 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
COTONOU FOR PAS JOHN CUSHING 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON ECIN PGOV PREL TD
SUBJECT: IMF OFFERS PRAISE AND WARNINGS TO CARIBBEAN GOVERNMENTS 
 
¶1. (U) SUMMARY:  While commending strong Caribbean growth and 
responsible fiscal and monetary policies, visiting IMF officials 
urged regional governments to adopt proactive measures to reduce 
current account deficits and public debt while economies are strong. 
 They also recommended eliminating tax incentives for foreign 
investors as a region and advocated a strategic approach to economic 
diversification in order to ensure future Caribbean economic 
success.  T&T is in an especially strong position to adopt many of 
these recommendations; whether this will happen in an election year 
remains to be seen.  END SUMMARY. 
 
¶2. (U) International Monetary Fund (IMF) Deputy Director of the 
Western Hemisphere Department Markus Rodlauer and IMF Trinidad and 
Tobago (T&T) Mission Chief Max Alier offered both praise and 
warnings to Caribbean governments as they publicly launched the 
IMF's April 2007 World and Regional Economic Outlook publications at 
the T&T Central Bank in Port of Spain May 7. 
 
------------------------------------- 
The Good - Fiscal and Monetary Policy 
------------------------------------- 
 
¶3. (U) Despite a U.S. economic slowdown, Caribbean countries 
experienced robust eight percent growth in 2006, led by T&T's 
region-topping 12 percent real GDP growth.  The IMF predicts T&T 
will continue to drive Caribbean growth with 6.5 to 7 percent growth 
in 2007 as new production comes onstream.  The IMF economists 
praised Caribbean governments for implementing robust monetary and 
fiscal policies, which have helped to keep inflation low in many 
countries despite the pressures of booming economies and rising fuel 
prices.  Even in countries, like T&T, which experienced double-digit 
inflation in 2006, Alier reported that indicators of core inflation 
are down.  They also commended Caribbean governments for policy 
successes in the past decade, including tax system modernization, 
reform of social security schemes, closure of loss-making industries 
like sugar and bananas, disaster mitigation policies like the 
Caribbean Catastrophic Risk Insurance Fund, and debt restructuring. 
 
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The Bad - Current Account Deficits and Debt 
------------------------------------------- 
 
¶4. (U) Despite positive growth rates and high remittances, 
especially in times of natural disasters, the IMF found that current 
account deficits in the Caribbean (other than T&T) have increased to 
an average of 15% of GDP, as global energy prices have increased 
more than non-fuel commodities since 2002.  Some Caribbean countries 
have tried to use improved growth to strengthen their fiscal 
position, but they remain among the most indebted emerging market 
economies, due in part to the frequency and high costs of natural 
disasters.  Rodlauer pointed out that "unsafe" levels of public debt 
are costing the Caribbean both in interest expenditures and lost 
investment. 
 
------------------------------------- 
Policy Challenges and Recommendations 
------------------------------------- 
 
¶5.  (U) The erosion of trade preferences in banana and sugar, 
coupled with declining Official Development Assistance (ODA) from 
traditional donors, aging populations and vulnerability to costly 
natural disasters, are a few of the ongoing challenges for Caribbean 
governments highlighted by the IMF.  The economists urged Caribbean 
governments to adopt proactive measures to address these issues 
while economies are performing well, to avoid future sharp 
adjustments.  They also noted that given the region's vulnerability 
to natural disasters, governments needed "fiscal room" to respond 
flexibly - another reason to reduce public debt. 
 
¶6. (U) The IMF also provided policy recommendations, such as 
eliminating costly and ineffective tax incentives for foreign 
investors throughout the Caribbean.  The economists pointed to the 
Caribbean's ten-year 10.8% estimated tax gap (the difference between 
what statutory tax rates should yield and what is actually 
collected) and noted that in the Caribbean, the business climate and 
macroeconomic factors play a larger role in attracting FDI than tax 
incentives.  They deemed tax holidays particularly harmful and 
recommended using depreciation allowances instead.  Saying that the 
"only road to success was through regional integration" and 
promoting CSME, Rodlauer urged Caribbean governments to work 
together on this issue. He also encouraged strengthening the 
investment climate by improving human capital and the health and 
legal systems, as the Caribbean performed worse than other 
developing regions in global competitiveness and in ensuring that 
contracts are enforced. 
 
 
PORT OF SP 00000494  002 OF 002 
 
 
¶7. (U) While both T&T Central Bank Deputy Governor Shelton Nicholls 
and Dave Seerattan from the Caribbean Centre for Monetary Studies 
(CCMS) advocated economic transformation and diversification into 
new industries to moderate the effect of commodity price 
fluctuations, Rodlauer promoted more limited, strategic 
diversification.  He noted that small open economies historically 
find success in niche markets, supported by government policies that 
allow flexibility for labor and investment to shift sectors nimbly 
as market conditions dictate. 
 
¶8. (SBU) COMMENT: As one of the few Caribbean countries with a 
current account surplus and comparatively low public debt, Trinidad 
& Tobago is in the economic position both to implement proactive 
policies that address the challenges the IMF highlighted, like a 
recently approved Heritage and Stabilization Fund, and to lead on 
regional integration.  However, in this election year for T&T, 
further moves toward fiscal discipline and reducing public debt seem 
improbable.  Neither do we anticipate that GOTT leaders will heed 
the IMF's suggestion to scale back ambitions for wholesale 
diversification and focus on strategic niche industries.  The GOTT 
is well down the road with a series of new energy-based industrial 
projects in petrochemicals, steel, and aluminum, at the same time 
promoting seven non-energy industries in an effort to reduce 
dependence on the energy sector.  END COMMENT. 
 
AUSTIN