Public debt sustainability in the Caribbean

This paper analyses public debt in the most indebted Caribbean countries – i.e. Barbados,
Belize, Guyana, Jamaica, Antigua and Barbuda, Dominica, Grenada, and St. Kitts and Nevis –
from the standpoint of its sustainability. A level of debt is deemed to be sustainable when the debt-to-GDP ratio remains constant or declines. The concept of sustainability is closely linked to
that of solvency. A government is solvent if the net present value of its future primary balances
(i.e. that excludes interest payments) is equal to or greater than the present value of public debt
stock. It can be demonstrated that if the debt-to-GDP ratio is not on an explosive path, that it
either stable or decreasing, the solvency condition holds.
It is worth noting that the concept of fiscal sustainability addressed in this paper differs
from that of optimality of public debt. The analysis that follows is intended to determine whether
the service of the current debt levels is consistent with the fiscal stance. Therefore, it does not set
out to identify the target debt level based on any optimality criteria.
The next section presents the main features of different theoretical approaches to analyse
public debt sustainability.1 Section II discusses the situation of public debt in the Caribbean
countries showing different indicators; Section III analyses debt sustainability in countries with
access to market financing; Section IV does the same in Guyana – a country dependent on
concessional financing and, as such, included in the Highly Indebted Poor Countries (HIPC)
Initiative – and the countries of the Eastern Caribbean Currency Union (ECCU). Sections V and
VI go beyond debt levels as determinants of fiscal sustainability, highlighting the importance of
the currency composition of debt and the variability of fiscal revenue. The last section concludes.