Saint Lucia’s Debt Journey: A Blueprint

By Darius Spearman (africanelements)

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Debt-to-GDP: Understanding the Basics

Many governments, especially in developing nations and small states, are facing increasing debt-to-GDP ratios. This rise is due to increased spending to boost economies, respond to rising food and energy prices, and the phasing out of financial support related to the pandemic (thecommonwealth.org). The debt-to-GDP ratio is a key indicator of a country’s financial health. It shows the total government debt as a percentage of its Gross Domestic Product (GDP). A higher ratio suggests that a country is less likely to pay back its debt. This can impact its ability to borrow money and its overall economic stability (thecommonwealth.org).

The increase in these ratios is partly because governments spent more to boost their economies and deal with rising food and energy prices. This happened as they phased out financial support that was put in place during the pandemic (thecommonwealth.org). During the pandemic, many governments provided significant financial support to lessen the economic impact of COVID-19. This support included increased public spending, subsidies, and other aid to businesses and individuals. The phasing out of this support means governments are no longer incurring these specific expenses. However, the accumulated debt from these programs remains, contributing to higher debt-to-GDP ratios (thecommonwealth.org).

The Impact of Interest Rates and the US Dollar

Developing countries are also struggling with higher interest rates and a strong US dollar. These factors undermine their economic and financial stability (thecommonwealth.org). Higher interest rates make it more expensive for developing countries to borrow money and pay off their existing debts. This makes it harder to manage current debt and get new loans (thecommonwealth.org). A strong US dollar makes this problem worse. Dollar-denominated debt becomes more expensive to repay for countries with weaker local currencies. This further harms their economic and financial stability (thecommonwealth.org). High capital costs, often linked to interest rates, increase debt service payments and discourage important investments (drgr.org).

This situation makes it harder for governments to fund development goals and access markets. This impacts their populations (thecommonwealth.org). Rising government debt can severely impact populations by limiting a government’s ability to fund essential public services and development goals. This can lead to reduced spending on critical areas such as healthcare, education, infrastructure, and social safety nets (thecommonwealth.org). For everyday life, this might mean poorer quality public services, fewer job opportunities, increased taxes, and a general decline in living standards. Governments prioritize debt repayment over public welfare (undp.org).

The Role of Tax Revenue and SDGs

Tax revenue is vital for governments, especially for Commonwealth small states. It funds essential services, public infrastructure, and social programs. It also allows investment in climate-resilient infrastructure (thecommonwealth.org). A healthy tax base empowers these nations to pursue the Sustainable Development Goals (SDGs) (thecommonwealth.org). The Sustainable Development Goals (SDGs) are a collection of 17 interconnected global goals. They are designed to be a “blueprint to achieve a better and more sustainable future for all.” Established by the United Nations in 2015, they address global challenges. These include poverty, hunger, health, education, climate change, gender equality, water, sanitation, energy, environment, and social justice. Countries aim to achieve these goals by 2030 (undp.org).

For low-income Commonwealth countries, addressing revenue gaps and finding additional income sources is crucial. Many are dealing with unsustainable public debt levels or are close to debt distress (thecommonwealth.org). Revenue gaps in government budgets happen when public spending is more than the income generated through taxes and other sources. These gaps can be caused by various factors. These include insufficient tax collection, tax evasion, economic downturns, reliance on unstable commodity prices, or a narrow tax base (thecommonwealth.org). To address these gaps, viable additional income sources could include improving tax administration and compliance, broadening the tax base, introducing new forms of taxation (for example, environmental taxes), using natural resources more effectively, or attracting foreign direct investment (thecommonwealth.org).

Supporting Small Island Developing States (SIDS)

The Commonwealth Secretariat is actively supporting Small Island Developing States (SIDS) in addressing their serious challenges. These challenges include economic vulnerability, climate action, and reform, all aimed at achieving the Sustainable Development Goals (thecommonwealth.org). SIDS are a distinct group of developing countries that face unique social, economic, and environmental vulnerabilities. These include small populations and economies, limited resources, remoteness, susceptibility to natural disasters, and high dependence on international trade and tourism (undp.org). Their small size and geographic characteristics make them particularly vulnerable to the impacts of climate change, such as sea-level rise and extreme weather events. These can make their debt burdens even worse (iied.org).

The Commonwealth Climate Finance Access Hub has unlocked over $350 million for the most vulnerable SIDS (thecommonwealth.org). Additionally, the Meridian Debt Management System assists 50 countries in managing a combined public debt portfolio of $2.5 trillion (thecommonwealth.org). The Meridian Debt Management System is a software solution designed to support sound debt management practices for countries. It acts as a comprehensive data repository for debt, helping maintain an updated debt position for borrowers (thecommonwealth.org). The system makes crucial debt operations easier, including debt service payments, monitoring new borrowings, and a range of analytical functions. This promotes greater efficiency in debt management operations (thecommonwealth.org).

Effective Debt Management and International Credibility

Effective debt management is crucial for financial resilience and poverty reduction. It also helps with international credibility for borrowing funds (undp.org). The Bahamas has made significant progress in establishing effective debt management with support from the Commonwealth Secretariat (undp.org). Investors require a proven framework for managing debt. This demonstrates fiscal responsibility and a strong legislative framework (undp.org).

The Commonwealth Finance Ministers are exploring various financial instruments and initiatives to address global crises. These include debt and climate change (thecommonwealth.org). These include debt-for-nature swaps to provide fiscal space and promote climate-resilient projects (thecommonwealth.org). The introduction of new climate-related levies to mobilize domestic revenue for development needs is also being considered (thecommonwealth.org). Blue and green bonds, domestic revenue mobilization, and blue finance are important for addressing climate change and biodiversity loss (thecommonwealth.org). There is a recognized need to review Debt Sustainability Analysis (DSA) frameworks. This is to include climate vulnerability and reflect the impact of climate-related investments on debt sustainability (thecommonwealth.org).

Debt Sustainability Analysis (DSA) and Climate Vulnerability

Debt Sustainability Analysis (DSA) is a framework used to assess a country’s ability to meet its current and future debt obligations without unduly harming economic growth. It typically involves projecting a country’s debt trajectory under various scenarios. It also evaluates its capacity to service that debt (iied.org). The call to include climate vulnerability in DSAs suggests a need to integrate the financial risks posed by climate change into these assessments. These risks include the costs of natural disasters or climate adaptation (iied.org).

Debt sustainability through a layered approach to debt management aims to create fiscal space for SIDS. This enables them to redirect resources towards sustainable development and climate resilience (iied.org). Future protection measures, such as insurance products and funding mechanisms, provide financial protection against climate-related losses. This ensures quick recovery from disasters without making debt situations worse (iied.org).

Policy Responses to Rising Debt

Governments and international bodies are pursuing various policy measures to address rising debt. These include debt restructuring initiatives, such as the G20’s Common Framework for Debt Treatment. This framework aims to help countries restructure their debt and restore macroeconomic stability (drgr.org). The Common Framework builds on the Debt Service Suspension Initiative (DSSI). The DSSI provided temporary and partial standstill on external debt payments for the poorest countries (drgr.org).

Other measures involve promoting sound debt management practices, providing technical assistance, and exploring innovative financial instruments. These include concessional financing and insurance products to protect against climate-related losses (iied.org). The Commonwealth Secretariat supports sound debt management practices through software and technical assistance. This promotes greater efficiency in debt operations (thecommonwealth.org).

Saint Lucia’s Success Story

Saint Lucia, a beautiful Caribbean nation, has faced similar challenges to other Small Island Developing States (SIDS). These include climate impacts, economic volatility, and external shocks. In 2020, Saint Lucia’s public debt-to-GDP ratio was over 90 percent. This was partly due to the effects of the coronavirus pandemic. By 2024, this ratio was reduced to 74.5 percent. This significant reduction has freed up funds. These funds can now be invested in projects that encourage growth and improve the lives of Saint Lucians.

Saint Lucia’s government is taking even bolder steps for financial stability. They are receiving technical support from the Commonwealth Secretariat. In March 2024, the Commonwealth Secretariat and Saint Lucia’s Ministry of Finance worked together. They developed a reform plan for the country. This started with a thorough review of the public borrowing framework. Saint Lucia is now putting this framework into action. It has recommended specific and practical interventions.

Modernizing Debt Management

A significant result of the Commonwealth team’s technical assistance was the review of Saint Lucia’s Public Debt Management Act. This act has now been passed. The revised law provides a stronger legal framework for debt operations. It has also prepared the way for publishing a formal debt management strategy and annual debt reports. This improves transparency and accountability.

Technology has also played a key role in modernizing Saint Lucia’s debt management practices. They adopted the Commonwealth Meridian system. Launched in 2019, the Commonwealth Meridian debt management system is currently used by 43 countries worldwide. The Meridian system allows for real-time tracking of borrowing, automated reporting, and better analysis of liabilities. These upgrades have helped integrate technology into the core of Saint Lucia’s debt operations. This improves both strategic planning and investor communications.

Capacity Building and International Recognition

Through technical workshops, mentoring, and regional training sessions, Saint Lucia’s debt management team has grown in both skill and confidence. This ongoing support has empowered staff members to apply best practices and promote transparency. They have become more proactive and capable in managing their debt portfolio.

These reforms have been noticed by the international financial community. Improved transparency and consistent reporting have increased confidence among lenders and investors. This has allowed Saint Lucia to access concessional financing. This financing fuels their sustainable and resilient development. Saint Lucia’s story is not unique. Other Caribbean countries, such as The Bahamas, are also advancing sustainable debt management practices in the region. Since 2021, The Bahamas has partnered with the Commonwealth Secretariat to strengthen its public debt management framework and develop a government bond market. This project has been supported by the India–UN Development Partnership Fund.

ABOUT THE AUTHOR

Darius Spearman has been a professor of Black Studies at San Diego City College since 2007. He is the author of several books, including Between The Color Lines: A History of African Americans on the California Frontier Through 1890. You can visit Darius online at africanelements.org.