Tax incentives to lure investors costly -IMF tells Caribbean

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Tax incentives to lure investors costly -IMF tells Caribbean
Stabroek News, Monday, October 8th 2007

Caribbean policymakers should weigh carefully the costs and benefits of
tax exemptions, consider reducing them if possible, make remaining tax
incentives cost effective and step up efforts to improve other
determinants of investment.

This is according to the International Monetary Fund (IMF) in a Public
Information Notice (PIN) on Caribbean countries on Friday. The PIN was
prepared by the IMF's External Relations Department and the country
authorities sourced for the study included The Bahamas, Barbados,
Belize, The Dominican Republic, Guyana, Haiti, Jamaica, Trinidad and
Tobago and Suriname.

Directors of the IMF noted that while the Caribbean countries' heavy
reliance on tax incentives may help attract investors, they are costly
in terms of foregone revenues. "Directors observed that other efforts
to attract investment may be more effective for the region as a whole,
and pointed in this connection to factors such as institutional
quality, infrastructure and governance, as important determinants of
FDI (Foreign Direct Investment)," the IMF said.

It added that overall macroeconomic performance in the Caribbean has
been favourable in recent years and that regional economic growth which
had fallen after the September 11, 2001 attacks has rebounded strongly,
expanding by 5 ½ per cent on average in 2006.

According to the IMF, the Executive Board met and discussed selected
regional issues in the Caribbean. The discussions centred on the key
policy issues emerging from the ongoing economic integration of the
Caribbean countries, both among themselves and with the global economy.
The policy issues reviewed focus on financial integration, tax
incentives and foreign direct investment, and the sharp erosion of
trade preferences for Caribbean countries.

The PIN said that most of the countries took advantage of the economic
cycle early on to strengthen fiscal balances. On average, it said,
overall budgets improved by four percentage points of GDP during 2002 -
2005.

But the IMF cautioned that significant risks remain. "The Caribbean
region is vulnerable to fluctuations in external demand and damage from
hurricanes.

As a result, economic growth and overall macroeconomic performance have
been volatile, and with current account deficits mostly in double
digits, the region remains highly dependent on external financing," the
PIN said.

It said too that public debt has remains very high, exceeding 100 per
cent of GDP in come cases. "While debt levels have fallen modestly in
recent years, fiscal deficits deteriorated in some countries in 2006,"
IMF said.

The PIN said that the Caribbean region has consistently been among the
most open in the world, with relatively high social indicators. It said
too that Caribbean countries have long recognised the benefits that
economic integration brings, but they are also keenly aware of some of
the risks.

The PIN said that regional cooperation is an integral part of their
strategy to adapt to, and make the most of globalisation. "The current
favourable economic environment presents an opportunity to reinvigorate
those efforts and advance the necessary reforms, to ensure a smooth
integration process with maximum payoffs for sustained rapid growth and
social progress," the IMF said.

The IMF Directors also noted that the erosion of preferential access to
European markets for bananas and sugar means significant losses for
several Caribbean countries.

"As the implied annual transfer from the preferential schemes was very
large in some cases, the inferred output and revenue costs of its
erosion is considerable… Depending on country circumstances, the
strategy to address this difficult challenge will need to involve
carefully targeted social safety nets", the PIN said.

Raising the efficiency of banana and sugar industries and moving into
new economic activities in countries where production would still be
uncompetitive regardless of investment would also have to be pursued,
the IMF said.