Caribbean Economy Lecture 8: The Debt Challenge - Why Caribbean Countries Owe So Much
Caribbean Economy Lecture 8: The Debt Challenge - Why Caribbean Countries Owe So Much
Dr. Jeneshia Jarrett
University of the West Indies, Mona
November 13, 2025
Objectives of the Lesson
Discuss the growing concern over national debt in Caribbean countries.
Understand the historical, economic, and external factors contributing to high debt levels.
What is Public Debt?
Definition: Public debt is the total amount borrowed by the government, inclusive of both domestic and external debt.
Domestic debt is owed to local lenders, while external debt is owed to foreign lenders.
Historical Context:
Public debt in the Caribbean increased from US$ 19 billion in 2000 to US$ 63 billion in 2022.
Although this total is modest in a global context, it poses significant challenges for small economies in terms of sustainable development.
Debt-to-GDP Ratio
The debt-to-GDP ratio is a measure used to assess the size of a country's debt in relation to its economic output.
In 2015, several Caribbean countries had the following external debt-to-GDP ratios:
Antigua & Barbuda: 104% of GDP
Barbados: 105% of GDP
Jamaica: 122% of GDP
St. Vincent and the Grenadines: 79% of GDP
Trend: The average debt-to-GDP ratio in the Caribbean rose from 56% in 2000 to 66% in 2016, saw a decline to 61% in 2019, and increased to 80% in 2020 due to the pandemic effects, before decreasing to 69% by 2022.
Risks Associated with Public Debt Management
1. Market Risk
Definition: Risks arising from fluctuations in market prices such as interest rates, exchange rates, commodity prices, and the costs associated with servicing government debt.
Short-duration debt (short-term or floating-rate) is generally more risky than long-term, fixed-rate debt.
Foreign currency denominated debt increases volatility in debt servicing costs due to exchange rate changes.
2. Rollover Risk
Definition: The risk of needing to refinance or “roll over” existing debt at maturity, which can occur at unfavorable interest rates.
Extreme cases may prevent governments from refinancing, reducing access to capital markets—especially critical for emerging market countries.
3. Liquidity Risk
Two types:
Investor's liquidity risk: Cost incurred to exit a position due to low market activity.
Borrower's liquidity risk: Diminishing liquid assets due to unanticipated cash flow demands making it challenging to raise cash quickly.
4. Credit Risk
Definition: Risk of non-performance by borrowers on loans or financial assets, or by a counterparty in financial contracts.
5. Settlement Risk
Definition: Risk that a counterparty fails to deliver a security after a payment has already been made.
6. Operational Risk
Encompasses transaction errors, inadequacies or failures in internal controls, reputation and legal risks, security breaches, and natural disasters affecting debt management activities.
Debt to GDP Ratio in the Caribbean
Higher ratios can indicate difficulty in meeting debt obligations and increase vulnerability to external shocks.
High external debt can lead to debt servicing challenges, while excessive domestic debt can crowd out private investment.
Case Reference: Japan has over 90% domestic debt with a debt-to-GDP ratio exceeding 200% (238% in 2014).
Is Debt a Bad Thing?
In striving to achieve Sustainable Development Goal (SDG) 8, countries are obligated to invest in areas like AI, machine learning, and human capital.
Without such investments, economic growth may stagnate, and countries risk falling behind.
Debt As a Tool for Growth
Significant investments in critical areas require substantial funds, leading to public borrowing in countries lacking domestic or international investments.
Borrowing is a necessary aspect of economic management; excessive debt is often criticized but can be essential for growth, especially in developing regions.
Developed nations can sustain high debt levels more easily due to factors such as lower interest rates and stronger tax bases.
For developing countries, high debt-to-GDP ratios often entail substantial debt service payments, constraining fiscal flexibility and investment capacity.
Keynesian Perspective on Debt
According to Keynesian economics, government borrowing can stimulate demand by injecting liquidity into the economy to create jobs and promote growth.
Debt is necessary for funding infrastructure such as roads, schools, and healthcare that enhance productivity and support long-term growth (Aschauer, 1989).
Role of Debt in Development
In developing nations, access to capital markets is restricted, necessitating borrowing for economic growth projects, e.g., renewable energy initiatives.
Relationship Between Debt and Growth
General acceptance suggests development depends on borrowing for necessary technology and capital; however, the relationship may be non-linear, potentially hindering growth at specific debt levels.
Conditions for Beneficial Borrowing
Debt becomes beneficial when the returns on investments exceed the cost of servicing the debt.
Favorable conditions like low-interest rates aid in managing debt effectively.
Debt and Growth in the Caribbean
As of 2015, Caribbean countries (excluding T&T, Haiti, Guyana, and Suriname) had debt-to-GDP ratios above 60%.
Jamaica and Barbados exceeded 100% ratios; most of Barbados' debt is domestic.
Large public debts pose risks to macroeconomic stability, notwithstanding gradual reductions.
When Debt Becomes a Challenge
High ratios signal potential fiscal distress; excessive borrowing can raise interest rates, limiting private investment and economic growth.
Significant external debt exposes countries to currency fluctuation risks; depreciation increases servicing costs of foreign debt, straining fiscal resources.
External shocks can worsen debt situations, escalating borrowing costs and limiting market access.
Factors Influencing Caribbean Debt
Public debt dynamics are affected by various economic variables, including:
Economic Growth: Strong growth can help manage debt, while slow growth increases ratios.
Interest Rates: Low rates ease borrowing, while high rates raise servicing costs.
Inflation Rate: Moderate inflation decreases real debt value, but high inflation causes instability.
Fiscal Policy: The government's spending and tax collection policies directly influence debt levels.
Debt in the Caribbean
Studies show the region spends approximately 57% of export earnings on debt service.
The Debt Service Suspension Initiative (DSSI) allowed some Caribbean countries to pause bilateral debt payments during the COVID-19 crisis, but many were ineligible due to not being classified under the World Bank's IDA.
Average General Government Debt Ratio
The Caribbean has had the highest average general government debt ratio among all developing regions since 2010.
Only North America and the Euro area had higher ratios during the same period.
Post-pandemic, rising monetary policy rates in developed countries elevate external debt costs for borrowers.
Trends Between 2020-2022
Although public debt increased overall, the experience varied across nations.
Some countries achieved reductions in debt ratios, while others faced increases, indicating unsustainable debt ratios in some cases.
Central Government Debt by Country
Recent analysis shows significant declines in central government debt for Jamaica (from 132% to 84% of GDP by 2022) and Saint Kitts and Nevis (from 90% to 41%).
Suriname experienced the most considerable increase, with debt growing from 28% of GDP in 2010 to 118% by 2022.
Case Study: Jamaica
Jamaica's debt issues trace back to the domestic financial crisis in the 1990s, leading to the establishment of the Financial Sector Adjustment Company (FINSAC) to handle distressed financial institutions, which transferred a substantial debt to the central government.
Significant reforms followed, including agreements with the IMF, launching the Jamaican Debt Exchange (JDX) for domestic debt restructuring in 2010, aimed at reducing interest without reducing principal.
Outcomes included extending debt maturity and reducing coupon rates, resulting in a notable annual interest payment reduction.
An IMF Stand-by Arrangement (SBA) and Extended Fund Facility (EFF) followed, focusing on fiscal consolidation, institutional reforms, and improving debt management.
Notably, recurrent expenditure fell from 30.1% of GDP in 2010 to 26.6% in 2022, indicating successful debt management at the cost of stunted economic growth and persistent socio-economic challenges.
Future Impact of Debt
Rising public debt will burden current and future generations with higher costs and taxes, limiting investment potential and imposing economic challenges.