White sand beaches, clear blue water, palm trees and the pure feeling of tranquility, today we are doing a summertime layover in a piece of paradise – the Caribbeans. And yet this paradise is in peril. Climate emergencies, over-indebtedness, and financing problems – are some of the many issues that affect the region’s economies and that we will delve into in this new edition of EcoTV Week.
The Caribbean community comprises more than 700 islands divided between 13 sovereign states and 17 overseas territories with ties to France, the United Kingdom, Holland and the United States.
The economies of the area have three main engines of growth:
- Tourism
- Specialized offshore financial services
- Agriculture and Fisheries
But some economies also boast a sizeable industrial sector:
- This is the case of Puerto Rico, which harbors an important manufacturing sector especially in pharmaceuticals
- It is also the case of Trinidad and Tobago which as an oil-producing country and a large exporter of liquefied natural gas also has industries in energy.
- The IMF estimates that the economic impact of climate change in the area is 6 times greater than in other parts of the world.
The countries in the region have contributed comparatively little to global CO2 emissions (at less than 1%) but have been amongst the most vulnerable to the impact of climate change.
Hurricanes represent some of the most severe threats to the region’s economies, capable of wiping out the equivalent of one year worth of GDP in a matter of hours – a problem that is all the more acute given that i/ the area is 7 times more vulnerable to these types of events than other parts of the world and that ii/ hurricanes are becoming more intense.
To take stock of the climate emergencies that these economies are confronted with, one can project forward the scenarios for global warming:
- If global temperatures rise anywhere between +1.5 and +4 degrees celsius, water levels could rise in a range of about 3 to 10 metres over the next few centuries – thereby posing an existential threat to many islands in the region especially given that 65% of the population lives less than 3 km from the coastline and about 1/3 lives less than 10 metres above sea level.
- Rising sea levels, besides their effects on coastal erosion, will also gradually lead to the infiltration of salt water into groundwater causing, in addition to the effects of droughts, a lack of fresh water for the inhabitants and agricultural irrigation.
Already, the Association of Caribbean States fears that millions of people in the area will become climate refugees by 2050.
To adapt to climate change and increase the resilience of their economies, the countries in the Caribbean need to make significant investments estimated at some USD 100 billion by the IMF.
The issue though, is that their financial capacities tend to be severely constrained by:
- Relatively shallow local capital markets.
- Weak and often erratic growth patterns with economic recoveries often truncated by repeated climate events.
- This situation weighs adversely on public debt dynamics in a region that is already overly indebted – complicating further access to global financial markets.
- Currently 6 of the 10 most indebted countries in the world relative to the size of their economies are in the Caribbean – and Covid-19 has only exacerbated debt problems as regional economies have on average experienced economic contractions 3 times larger than the rest of the world.
So what sources of financing will these economies be able to rely on?
- One option would be to increase the availability of funding from international and regional financial institutions. At present, though these sources remain insufficient despite the rolling out of the new financing programs (e.g IMF Resilience and Sustainability trust).
- Furthermore, many Caribbean countries are not eligible for concessional low-cost financing because of their middle-income status.
2. Other financing options based on the enhancement of North-South solidarity mechanisms were the subject of intense discussions at the summit for a new global financial pact held in Paris last June
- Some of solutions proposed include new debt relief mechanisms, an increase in development assistance from rich countries, a reallocation of IMF special drawing rights and also possibly new taxes (for example on Co2 emissions in aviation or maritime transport, on financial transactions or on the extraction of fossil fuels)
3. Finally, other innovating options have come from debt markets – and we have seen some promising solutions emerge in recent years – taking advantage of investors' appetite for ESG-type investments.
- For instance, Belize and Barbados in 2021 and 2022 used debt-for-nature swap to redirect funds that would have otherwise gone to servicing debt to support instead sustainable development projects and marine conservation.
- Other economies have relied on the issuance of blue bonds backed in part by supranational organizations. The Bahamas used this instrument in June 2022 with a partial guarantee from the Inter-American Development Bank (IDB) helping the country access market finance at more affordable costs.
- Barbados and Grenada, during their debt restructurings in 2015 and 2019 have managed to implement suspensive clauses allowing them to delay debt repayment in the event of natural disasters or the materialization of pandemic risks
- Jamaica in 2021, has meanwhile, leveraged the World Bank to issue a CAT bond, or catastrophe bond, to help enhance its financial resilience against hurricane risks for a period of 3 years.
- Finally, another instrument that could provide financing is the sale of blue carbon credits. Many countries have mangroves and seagrass beds that can capture and store hundreds of millions of tons of greenhouse gases much more efficiently than rainforests can. By mapping these underwater meadows via satellite images, some countries could soon be in a position to sell blue carbon credits with three main objectives: 1) raise funding to invest in their own resilience 2) enable countries to offset their carbon footprint 3) have the necessary funds to protect this marine flora that unfortunately is disappearing every year. This market, which is not yet operational and is somewhat controversial has recently been estimated at over USD 50 bn in the Bahamas.
