Interest pain

Government is likely to continue facing higher than normal debt repayment costs because the
much-anticipated lowering of global interest rates has not yet materialised.

That is the assessment of experts at the Inter-American Development Bank’s (IDB) Caribbean country department in their new quarterly report Risks And Opportunities For Caribbean Economies In A Diverging World.

IDB country economist for Barbados, Cloe Ortiz de Mendivil, said that with global interest rates still high, interest payments “continue to represent an elevated burden on public finances” in Barbados.

“Interest payments represented 16.5 per cent of total revenue in fiscal year 2022/23, significantly below the 27 per cent figure prior to debt restructuring, but twice the 8.4 per cent level of fiscal year 2019/20,” she stated.

“Sustained global high interest rates are further increasing the cost of financing for the Government. Interest rate increases in the United States (US) do not necessarily lead to higher interest rates in Barbados due to capital controls, but they impact debt servicing of loans with variable interest rates, such as those of international financial institutions,” de Mendivil added.

The Caribbean country department team, including regional economic adviser David Rosenblatt and economics consultant Khamal Clayton, also addressed the high interest rates challenge for Barbados, The Bahamas, Guyana, Jamaica, Suriname, and Trinidad and Tobago.

“The US economy is performing more strongly than expected, with inflation stuck above the two per cent target. This is leading to the possibility that the US Federal Reserve will further delay reducing the policy interest rate,” they said.

“Meanwhile, in the United Kingdom (UK), the euro area, and Japan, economic growth is weaker and inflation is converging towards the target level. In those cases, interest rate reductions may come sooner and stronger than in the US.”

The economists explained that “the evolution of these rate changes will eventually have an impact on external financing costs for Caribbean countries”.

“In addition, if US interest rates remain high – 5.3 per cent federal funds rate as of May – while other major central banks cut interest rates, then the US dollar will likely strengthen relative to other major currencies. This could imply real exchange rate appreciation for Caribbean economies with fixed exchange rates tied to the dollar,” they added.

“For example, with more robust growth and more persistent inflation in the US, as compared to Europe, the US Federal Reserve may delay rate reductions, while the European Central Bank and Bank of England may lower rates this summer. This could lead to appreciation of the dollar against the euro and the pound.”

The IDB team argued that “for those Caribbean economies with currencies tied to the dollar, this could lead to a real exchange rate appreciation, with possible competitiveness implications for those countries”.

“For example, for tourism-based economies such as Barbados that have a significant share of arrivals sourced in the UK, the cost of a vacation in British pounds could rise, thus hampering the recovery of its tourism sector.”

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