THE CARIBBEAN HAS traditionally been economically dependent on agriculture and tourism. However, in recent years the financial services sector has become increasingly important.
Through a combination of economic stability and a favourable tax structure, the Caribbean's sophisticated financial centres now attract large capital inflows. However, with tax avoidance and money laundering on the increase, many countries have become a target for international legislation. In July 2005, the implementation of the EU Tax Savings Directive and, later, the Third EC Money Laundering Directive might change the dynamics of offshore banking in the Caribbean.
The Caribbean's largest economies are Trinidad and Tobago, Barbados, and Jamaica, each with its own currency. Since 1983 the Eastern Caribbean States (Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines) have shared the Eastern Caribbean dollar.
Much of the Caribbean's economic success has been achieved through regional integration. Formally Carifta, the Caribbean Community and Common Market (Caricom) was established in 1973 as a Free Trade Association and now plays a central role for its 14 member states. Members include the Eastern Caribbean States, Jamaica, Barbados, and Trinidad and Tobago. Recently, the association restored ties with Haiti, after temporary suspension by the interim government.
Caricom has established the Caricom Single Market and Economy (CSME), which will enable members to trade as one market, freeing up barriers to entry and local rules, and providing an extra boost to economic growth. The Caribbean countries boast the highest gross national income per capita of all developing countries.
Barbados is one of the most stable economies. However, declining tourism revenues and increased public spending have led to a fiscal deficit of 5.6%. This year, the island expects to halve the deficit to 2.5% of GDP, which stands at US$2.6 billion, aiming to increase growth to 3% in 2004. Despite this, Standard & Poor's has lowered the long-term foreign currency ratings, although it has maintained a stable outlook. Warrick Ward, banking analyst at the Central Bank of Barbados, explains that the rise in spending is a result of "the government embarking on a substantial investment programme in the country's infrastructure".
In August this year, the IMF gave a positive review of the Jamaican economy when it released its Article IV Consultation. For the first time in 10 years, GDP reached a healthy US$7.8 billion in 2003 and this year the economy has grown by 3.3%. Inflation and interest rates, although still high at 9% and 8% respectively, have dropped. The currency also stabilized in 2003. More challenging for the Jamaican government is the public debt to GDP ratio, which, at 145%, needs urgent reduction.
This year, Jamaica has issued two bonds: a government registered bond at a fixed rate of 16.85%, maturing in 2006 and a government variable rate investment bond at 1.5% above base rate, maturing in 2009/10.
In Trinidad and Tobago, Fitch reported a strengthening economy, with GDP in 2003 reaching US$10 billion.
The smaller anglophone countries in the Caribbean, the Organization of the Eastern Caribbean (OECS) with a total population of less than a million, have unified to create a common central bank and currency (ECCU). It operates under the Uniform Banking Act, and the Offshore Banking Acts. It allows for varying degrees of participation, particularly in the cases of Dominica, Nevis, and St Vincent and the Grenadines. The ECCU has enabled the Caribbean countries to develop highly successful financial centres.
Much of this success springs from the efforts of the Eastern Caribbean Central Bank (ECCB). Established in the 1990s, the ECCB has stabilized the region's economy, held inflation low and established a sound banking system.
ECCB governor Sir K Dwight Venner states that the region needs to "maintain a common currency, to establish a common central bank with powers to issue and manage that currency, to safeguard its international value, promote monetary stability and a sound financial structure and to further economic development of territories of participating governments".
In 2001 and 2002, respectively, the ECCB set up the Eastern Caribbean Securities Market (ECSM) and the Regional Government Securities Market (RGSM). So far this year, 11 bonds have been issued, the most recent being in August 2004. St Vincent issued a 91-day EC$16 million (US$7 million) treasury bill, which was heavily oversubscribed.
Capital inflows
Stable economies and an attractive financial climate with a sophisticated capital market structure have resulted in a continuous flow of capital into the region. Most of this is legitimate, but some of the increase might be related to international money laundering and tax avoidance.
One organization charged with countering the money-laundering problem is the Financial Action Task Force set up by the G-7 Summit in 1989. Its 29 member states have set out a blueprint for action against money laundering that covers the criminal justice system and law enforcement; the financial system and its regulation; and international co-operation.
The FATF has set up a regional Caribbean task force and meets regularly with the IMF and other international organizations to keep abreast of the situation.
The EU is making a concerted effort to crack down on tax evasion. Having been delayed by six months because of intense negotiations with Switzerland, in July 2005, the Savings Tax Directive will be implemented. Although it covers the tax affairs of individuals and not companies, banks cannot rest easy. They will be obliged to establish the identity and residence of the beneficial owner and there will be specific guidelines, including the submission of tax residence certificates.
There has been sustained concern for many years about the issue of information exchange. In 1992 the Basle Committee on Banking Supervision established in its main principles the need for information access. The aim of the directive is to increase the automatic exchange of information about interest and other income from savings between EU member states.
To soften the blow, there is the option of applying a withholding tax. From 2005, withholding tax rates will begin at 5%, rising to 20% in 2008 and 35% in 2010. Bermuda is not included as it is not in the list of third party jurisdictions. Although technically not in the Caribbean, it might well be incorporated, but the directive does extend to all EU dependent territories.