IT might be a good time for Caribbean countries, occupied with mitigating the consequences of the global financial crisis on their economies, to also devote some time to look at how they can put their economies in better shape to withstand any future shocks to the global financial system.

Globalization and the interwoven nature of the world economy has shown its down side where stresses in one of the major economies or in a region can create a destructive ripple effect, leaving financial carnage in its wake.

The Caribbean has been dealt a severe blow by the global crisis which began in the United States and which has presented significant economic and social development challenges for our small countries.

Weak global demand for commodities and falling prices have led to lower export and tax revenues for many of our countries, while those heavily dependent on services such as tourism have seen a significant dwindling of foreign exchange.

Expenditure plans by governments have had to be shelved or reduced as the budget deficit continues to widen while more people have been thrown on the bread line.

Trinidad and Tobago’s energy-based economy, perhaps the richest in the Caribbean and most diversified with a large domestic manufacturing sector is facing its first decline in GDP in 16 years and possibly zero growth by the end of 2009.

Several Caribbean countries, including St. Lucia, St Vincent and the Grenadines, Dominica and St. Kitts and Nevis have had to seek funds from the IMF under the rapid-access component of the Exogenous Shocks Facility (ESF) for some much needed resources.

Grenada, still recovering from the impact of Hurricane Ivan in 2004 that devastated their economy has requested a continuation of a poverty reduction scheme while Jamaica, one of the hardest hit countries of the two-year crisis resumed a borrowing relationship with the IMF.

Jamaica’s re-engagement with the IMF allows the country to access US$300 million of Special Drawing Rights (SDRs) and up to US$1.2 billion in standby loans.

Antigua and Barbuda, also reeling from a double whammy – the impact of the collapse of the business empire built by Texas billionaire Allen Stanford, now facing fraud charges in the U.S. and decline in the tourism sector – has received a desperately-needed US$50 million from the Bolivarian Alliance for the Peoples of Our America (ALBA) to help pay back wages of public employees, a month after joining the organisation.

Governor of the Eastern Caribbean Central Bank (ECCB), Sir Dwight Venner painted a dismal picture of the economic outlook for the nine-member Organisation of Eastern Caribbean States (OECS).

Projected decline in tourism and construction is estimated over 14 per cent in 2009 and slightly lower in 2010. The current revenue of the governments is projected to fall by approximately 12.9 per cent in 2009.

Travel receipts fell by 2.5 per cent (US$29.7 million) in 2008, compared to a three per cent increase in 2007. Foreign direct investment decreased by 29.1 per cent to US$851 million consistent with the slow-down in direct investment-related construction activity in some member countries.

By contrast, an increase of 14.6 per cent was recorded in FDI inflows for 2007. These inflows have accounted for, on average 27.5 per cent and 22.5 per cent of GDP respectively from 2005 – 2008.

Barbados, also affected by a decline in tourism, last month secured US$120 million to boost its foreign reserves and help finance its capital works programme.

The money was raised by Scotiatrust & Merchant Bank Trinidad and Tobago Limited, from a cross-section of investors in the wider Caribbean region.

Barbados is also planning to draw down special funds from the IMF.

Guyana which in 2008 achieved their third consecutive year of positive growth now sees its economy threatened by an external environment that has resulted in critical foreign direct investment projects being delayed, lingering adverse price conditions for some key exports such as bauxite, and the onset of trade conditions that might more likely retard, rather than promote growth.

While the attention is naturally focused on recovery and stability, it would also be wise if economists and finance planners could also come up with policies that can help countries be better prepared to face any future global crises.

The OECS also seems to be on the right track with this as it plans to implement an eight point programme which includes fiscal reform and debt management.

Edwin M. Truman of the Peterson Institute for International Economics, in a recent speech during a conference in Guatemala, remarked that being better prepared has two broad consequences.

First, a country will be better off in the face of a global crisis if its own vulnerability is limited, for example, if its fiscal affairs are reasonably stable, if its inflation rate is low, its internal and external debt position is sustainable, and if its exchange rate is flexible.

Second, a country will be better off if it has preserved the room to maneuver to respond to external shocks through the use of domestic policy instruments, primarily fiscal and monetary policies.

Countries should self-insure against future crises by putting in place as best as they can robust economic and financial policy frameworks.

One approach, he suggested, is countries build up a war chest of foreign exchange reserves as a buffer against future financial winds, although there is a danger in officials having a false sense of security while potentially distorting the functioning of the global economy and financial system.

This rings true for Trinidad and Tobago when government officials boasted about their stock of foreign reserves which stands at US$8.5 billion, providing the country with more than eleven full months of import cover of goods and services and the US$2.8 billion Heritage and Stablisation Fund (HSF) reserves and assuring the population that the country would not be affected by the global crisis.

Closer home, in a 1998 address to the Caribbean Association of Indigenous Banks in Georgetown, CARICOM Secretary-General Edwin Carrington, against the backdrop of the Asian financial crisis, called on member states to accelerate the process of improving the competitiveness and diversification of their production and exports, strengthening their domestic financial systems and increasing their reliance on domestic savings and the regional financial market as sources of investment capital for regional investment and development.

That advice still holds for today’s situation.