Russia–Ukraine War and Caribbean Economies

by Kari Grenade, PhD Regional Economist and Macroeconomic Advisor

The effects of Russia’s invasion of Ukraine are reverberating across the world.

Economic impacts for Caribbean countries will flow through four main transmission channels — prices, public finances, business confidence, and economic activity. Already, international prices of essential commodities such as energy and wheat, as well as production inputs such as fertilisers and metals have skyrocketed. International price hikes are pushing up domestic prices in Caribbean countries, which were already elevated owing to global supply chain challenges that began in 2021.

Rising inflation could trigger social tensions across the Caribbean, particularly in countries where: unemployment is high; job opportunities are scarce; social services and social protection systems are inadequate; public finances are weak that constrain governments’ ability to respond appropriately; and where the relationship and trust between the State and citizens have been eroded.

Policies to cushion the impact of high and rising prices are the most urgent short-term priority for Caribbean governments. Providing targeted transfers to the poorest and most vulnerable must be integral to governments’ short-term policy responses. Governments can also consider providing targeted and temporary reductions in taxes on certain imported items such as fuel, healthy foods, inputs for agricultural and manufacturing production, and hurricane supplies (as the hurricane season approaches). Consideration can also be given to temporarily expanding the list of food items that are exempted from the VAT. Furthermore, selected and targeted price controls can be introduced on a temporary basis with strict supervision and punitive costs for noncompliance.

The reality is, fiscal measures to contain inflation would put pressure on public finances, especially for the oil-importing countries of the Caribbean, there is no escaping this. The extent and magnitude of pressures on public finances will depend on the fiscal space available. It is reasonable to assume that Caribbean governments may need to increase national budgets by at least 20% to 25% in 2022 as new expenditure priorities arise and prior macroeconomic assumptions adjusted in light of the new realities. In the context of rising inflation, fiscal policy must be deployed to meet one of its key objectives, which is economic (including price) stability. However, as deficits and debts inevitably increase in the short term as fiscal policies respond to cushion the impacts of the current economic shock, it would be important for governments to develop and communicate credible medium-term fiscal plans and strategies to underscore their firm commitment to fiscal and debt sustainability in the medium term.

Alongside fiscal policies, monetary policies will also be needed. Central banks in the region with an inflation-targeting mandate may eventually have to raise interest rates to tame inflation and anchor inflation expectations. Even those central banks without an inflation-targeting mandate may also eventually have to increase interest rates to make their monetary policies consistent with that of the US, to whose currency, their respective currencies are pegged.

Regarding economic activity, while rising commodity prices may provide a fillip to commodity-dependent economies, temporarily at least, on the whole, economic growth will be adversely affected in the short term given reduced business/investor confidence amid greater uncertainties, higher cost of production, lower disposable incomes, and tighter monetary and financial conditions (in other words, higher interest rates on loans) for example. Furthermore, the tourism sector, which is just beginning to hobble out of the pandemic could be knocked down again as travel costs rise, threatening the growth prospects of tourism-dependent economies.

Indeed, a delicate balance will have to be struck between containing inflation and supporting the nascent economic recovery. Regular assessments of macroeconomic risks by central banks and country authorities and clear communication about risks and credible mitigation measures should help businesses and investors make more informed strategic and operational decisions that would ultimately be positive for economic growth. Furthermore, governments must ramp up public investments, especially climate-resilient infrastructure that can simultaneously spur economic activity in the short term and contribute to meeting countries’ long-term sustainable development priorities.

In closing, the current situation provides yet another opportunity for regional governments to address food/nutrition and energy security in a serious and ambitious manner. Indeed, there is a need for the region to move swiftly and at scale in this regard. The essentiality of accelerating the region’s transition to food/nutrition and energy resilience and security to better support socioeconomic security and sustainable development more broadly, cannot be over-emphasised.