North Carolina Journal of International Law

"Connecting North Carolina to the World of International Law"

Natural Disaster and IMF Debt: The Caribbean During Hurricane Season

By: Lenore Livingston

 

 

 

 

 

 

Hurricane Irma was devastating; “[n]o other hurricane has matched the strength of Irma’s winds so far east in the Atlantic.[1]  “At its peak, Irma sustained 185mph winds.”[2]  The fact that this is thus far the largest storm as of the 2017 hurricane season[3][4] and has caused significant destruction and damage to the Caribbean[5] raises the issue: what international assistance can small countries with low gross domestic product[6] turn to following a natural disaster? Although most storms do not rival the intensity of Irma, how do these countries use agencies such as the International Monetary Fund (IMF) to assist in economic stability with continual seasonal weather impacts? Building economic stability in the Caribbean countries requires both financial assistance and long term institutional planning to ensure their diverse economies can be self-sustaining when natural disasters threaten the country.

Caribbean Vulnerabilities

The Caribbean is one of the most disaster prone regions in the world — the majority of those natural disasters taking the form of tropical cyclones.[7]  The annual cost of natural disasters in smaller countries is calculated to be two percent of their Gross Domestic Product (GDP) — more than four times as much impact than on larger countries.[8] The increases in natural disasters and limited capacity to rebuild after a diaster in smaller countries has often resulted in lower investment, lower GDP per capita, and higher poverty.[9]

The Caribbean countries also tend to be impacted by significant global economic shocks.  The Caribbean states have diverse and relatively small economies that are open to international trade.[10]  These countries can be categorized as service based or commodity exporters, with their main economic revenue coming from tourism and financial services.[11] These countries frequently have large amounts of public debt, which has discouraged private investment and caused high interest rates on loans.[12]  Furthermore, many of the service based economies that were significantly impacted by the 2008 financial crisis continue to struggle with rebuilding tourism opportunities.[13]  Until the Caribbean states can resolve their high public debt, the Caribbean will struggle to be key players in international trade, and it will be difficult for these countries to maintain a stable monetary system.[14]

International Monetary Fund and the Caribbean

A small country can look to an international financial agency such as the IMF to help finance rebuilding efforts after a disaster, but seasonal impacts often result in significant recurring debt in a struggling economy.

The IMF is an organization that was formed from United Nations member states with the goals of working together to “foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”[15]  The core responsibility of the IMF is to assist a member country by providing loans to help countries continue to pay for imports and restore financial conditions to create strong economic growth.[16]  The IMF does not lend money for specific projects, but instead takes on projects that correct and assist systemic financial problems which would preclude a country from meeting its international payments to other countries and lenders.[17]

The IMF lends to a country upon request by a member country and requires that country to enter into an “arrangement” that allows the IMF to specify economic policies and measures the country must implement to resolve their balance of payments problems.[18] The IMF also establishes plans for “crisis lending,” specifically for low income countries following a natural disaster.[19] Furthermore, the IMF helps member countries to “design and implement economic policies that foster stability and growth by strengthening their institutional capacity and skills.”[20]

The IMF has identified significant public debt impacted countries and set up debt-restructuring programs in the Caribbean states of Antigua and Barbuda, Jamaica, and St. Kitts and Nevis.[21]  Despite the IMF assistance, Antigua and Barbuda still have debt levels at 90 percent of GDP and Jamaica’s debt at 140 percent of GDP.[22]  The IMF has provided monetary assistance to these countries in the forms of loans to assist with the debt.

Specifically, in 2010, following the global financial crisis, the IMF approved a loan for $117.8 million for Antigua and Barbuda to help recover from government debt, weak economic growth, and the effects of the financial crisis.[23]   After Hurricane Irma destroyed the island of Barbuda in September 2017, resulting in an estimated $150 million in damage and leaving it 90% uninhabitable, news reports suggested the IMF was refusing to put a moratorium on Barbuda’s sovereign debt.[24] Before Irma wrecked the island, Antigua and Barbuda owed close to $3 million to the IMF (Fund).[25] Supporters of a moratorium suggested that money could go immediately into rebuilding and not to reimburse loan payments to the Fund.[26]  As individuals wrestle with how to rebuild  an island destroyed by a category five hurricane with low GDP and a struggling economy before the storm, new policies will need to be established to repay the Fund.

Building economic self-sufficiency in the Caribbean

The Caribbean states must develop proactive domestic policies to respond to the seasonal hurricanes that may increase in intensity in the future.[27] Caribbean countries should seek to reduce debt, increase investment and improve public financial management. [28] Some ways the Caribbean countries could be proactive in reforming domestic policies are: 1) improving access to global climate finance; 2) addressing long-term financial instability; and 3) establishing crisis management response structures within the governments and among the Caribbean states.[29]

Climate change has been correlated  to an increase in the strength of hurricanes in the Atlantic Ocean.[30] Under the Paris Agreement, Article 9, developed countries commit to “provide financial resources to assist developing countr[ies].”[31] The IMF specifically plans to continue to work with the Caribbean states to advise countries on carbon taxation, energy subsidy reform, and other policies to mitigate emissions which will improve their access to global climate finance.[32]  Access to additional finance and energy efficient resources will assist in further developing these small countries and aid in addressing global climate change objectives.

Second, the Caribbean has experienced losses in the banking and financial sectors that have increased the amount of government debt.  The financial sector suffered from a reduction in correspondence banking services.[33] In some countries this has led to a rise in the cost of processing international transactions.[34] Stabilization of the financial sector is essential to proactively limit damages occurring from a natural disaster.

Furthermore, the commodities based economies in the Caribbean are often negatively impacted when these countries are forced to reduce their output when natural disaster strikes. Fiscal incentives by investors and the IMF should focus on supporting drought resistant crops, protecting forests, and preserving water resources.[35] Caribbean countries must also be continually looking for new ways to develop sources of income to grow their economies, concentrating on the benefits of access to the sea and oceans to enhance their economic sustainability.[36]

Finally, crisis management public policies should be established to address adequate fiscal levels determined to address seasonal hurricane impacts.[37] Although the regional institution of the Caribbean Disaster Emergency Management Agency (CDEMA) helps coordinate regional responses to natural disaster, each Caribbean country should ensure a sufficient annual savings account to address seasonal hurricane impacts.[38]  These contingency funds should keep these savings in an account earmarked for disaster relief and unspent funds should transfer over to the next year if not used to increase the savings available to respond to a category four or five storm that may impact the island in the future.[39]   In order to finance these risk management strategies, the Caribbean nations must collect taxes and develop an efficient way to administer the collection and allocation of funds in the public sector.[40]

Way forward

The small states in the Caribbean face challenging economic situations and are prone to natural disaster from tropical cyclones.  As a result of these circumstances, the Caribbean states must continue to work together regionally and individually to develop proactive approaches to reduce debt, increase investment and streamline internal domestic policies. Continued support from the international community and agencies such as the IMF will help these small countries proactively respond to hurricanes.  When storms such as Irma destroy infrastructure, the strength of public institutions will help rebuild and recover following disaster.

 

 

[1]Gregor Aisch, Adam Pearce & Karen Yourish, Strongest Storms in History, The New York Times (Sept. 9, 2017), https://www.nytimes.com/interactive/2017/09/09/us/hurricane-irma-records.html?mcubz=1 [https://perma.cc/6BJ6-FF2G].

[2] Brian Resnick, Hurricane Irma: How the Storm Got So Big, Intense, and Scary, Vox, (Sept. 10, 2017), https://www.vox.com/science-and-health/2017/9/7/16267826/hurricane-irma-2017-florida-miami-dade-broward-keys-georgia-carolina-meteorology [https://perma.cc/3V7K-5X9Q].

[3] Hurricane season begins on June 1 and ends on November 30.  See What is a Hurricane?, National Oceanic and Atmospheric Administration, https://oceanservice.noaa.gov/facts/hurricane.html [https://perma.cc/E8B5-E7AF]

[4] As of this writing there have been other powerful hurricanes such as Hurricaine Jose, Maria, and Lee who have also left lasting damage and impacts on the Caribbean.

[5] See Hurricane Irma: Caribbean Counts the Cost of Deadly Storm, BBC (Sept. 8, 2017), http://www.bbc.com/news/business-41192158 [https://perma.cc/Q2W6-NKPC] (noting that there is a $10 billion estimate in damages to the Caribbean, which does not include damages to Cuba or the Dominican Republic).

[6] Gross Domestic Product (GDP) is an indicator of a country’s economic activity. See Nominal GDP, Bankrate, http://www.bankrate.com/glossary/n/nominal-gdp/ [https://perma.cc/SFR7-6Y5L]. The nominal gross domestic product represents the total value at current prices goods and services produced within that country divided by the average population for the same year. Id. The Caribbean and Latin America have a nominal GDP of 8.71 thousand (U.S. dollars per capita), as compared to advanced economies [countries such as The United States, Australia, United Kingdom, Spain, Denmark, Portugal, etc.] with a nominal GDP of 44.05 thousand (U.S. dollars per capita). See Nominal GDP per capita, International Monetary Fund, http://www.imf.org/external/datamapper/NGDPDPC@WEO/ADVEC/OEMDC/WEOWORLD, [https://perma.cc/U2XK-8MP2].

[7] Id.

[8] IMF, Small States’ Resilience to Natural Disasters and Climate Change, Staff Report at 2 (Nov. 7, 2016), available at https://www.imf.org/external/np/pp/eng/2016/110416.pdf [https://perma.cc/H7JX-L54D].

[9] Id.

[10] IMF, Caribbean Small States: Challenges of High Debt and Low Growth, Staff Report at 6 (Feb. 2013), available at https://www.imf.org/external/np/pp/eng/2013/022013b.pdf [https://perma.cc/5G36-2EH2] [hereinafter Small State Challenges].

[11] Id. at 1.

[12] Id. at 16.

[13] Id.

[14] Id. at 18.

[15] About the IMF, International Monetary Fund, https://www.imf.org/en/About [https://perma.cc/E5Q5-FPMN] [hereinafter About the IMF].

[16] IMF Lending, International Monetary Fund (May 25, 2017), https://www.imf.org/en/About/Factsheets/IMF-Lending [https://perma.cc/5RSM-SENV].

[17] Id.

[18] Id.

[19] IMF Crisis Lending, International Monetary Fund (June 8, 2017), http://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/18/48/Crisis-Lending [https://perma.cc/Q9PF-KCHC].

[20]About the IMF, supra note 14.

[21] Small state challenges, supra note 9, at 17.

[22] Id. at 18.

[23] IMF Survey: IMF Approves $117.8 Million Loan for Antigua and Barbuda, International Monetary Fund (June 8, 2010), https://www.imf.org/en/News/Articles/2015/09/28/04/53/socar060810a [https://perma.cc/ZNQ3-PEV6] [hereinafter IMF Survey].

[24] Ben Chu, Hurricane Irma: IMF is resisting a moratorium on Barbuda’s sovereign debt repayments, Independent (Sept. 11, 2017, 14:38 BST), http://www.independent.co.uk/news/business/news/irma-imf-barduda-debt-repayments-moratorium-hurricane-caribbean-island-a7941176.html [https://perma.cc/5QKE-FZFC].

[25] Id.

[26] Id.

[27] Geophysical Fluid Dynamics Laboratory, Global Warming and Hurricanes, National Oceanic and Atmospheric Administration (Aug. 30, 2017), https://www.gfdl.noaa.gov/global-warming-and-hurricanes/ [https://perma.cc/63Y9-USUC] [hereinafter GFDL].

[28] Leo Bonato, Caribbean Vulnerabilities to Natural Disasters and Climate Change, Caribbean Corner (IMF Newsletter for the Caribbean Region, Washington D.C.), Mar. 2017, at 10, available at, http://www.imf.org/external/region/caribbean/newsletter/2017/01/newsletter0317.pdf [https://perma.cc/9JS2-J8SC][hereinafter Caribbean Corner].

[29] Id.

[30] GFDL, supra note 26.

[31] The Paris Agreement, art. 9, Nov. 4, 2016, U.N.T.S. No. 54113.

[32] Caribbean Corner, supra note 27, at 12.

[33] See Caribbean Corner, supra note 27, at 5.  Correspondent banking services refers to an agreement between a foreign and a domestic bank where a correspondent account is established at one bank for the other bank.  See J.B. Maverick, What role does a correspondent bank play in an international transaction?, Investopedia (July 17, 2015, 10:12 AM), http://www.investopedia.com/ask/answers/071715/what-role-does-correspondent-bank-play-international-transaction.asp, last visited [https://perma.cc/QB45-ATRP].This allows banks to handle international financial transactions that would normally require a foreign currency exchange. Id.

[34] Caribbean Corner, supra note 27, at 5.

[35] Small State Challenges, supra note 9, at 24.

[36] Id.

[37] Id. at 26.

[38] Id.

[39] Id.

[40] IMF Survey, supra note 22 (noting that the IMF loan to Barbuda in 2011 highlighted ways to reform and provide sustainable policies included addressing: tax policy; the public sector; and public financial reforms.).

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