This document discusses challenges facing small Caribbean economies and strategies to address debt and growth issues. It identifies that countries face common challenges like natural disasters, poverty, and vulnerability to external shocks. However, these challenges can be overcome with appropriate macroeconomic policies and structural reforms that increase productivity, diversify exports, and create resilience funds. Successful examples from countries like Mauritius demonstrate that tax reform through a flat tax without exemptions can increase revenue. The document also notes that structural reforms are better than stimulus packages for countries with little fiscal space, and that successful debt resolution addresses both debt and the underlying policy and structural factors contributing to high debt.

1. The Macroeconomic Perspective
Objective of the session

To identify and discuss how debt and growth challenges in small economies can be successfully
addressed through conducive macroeconomic policies and structural reforms to promote sustained
growth, enhance competitiveness and economic diversification, and reduce debt burdens in a
sustainable manner.
Key messages to the participants and key take aways from the participants' interaction

Caribbean countries face many common challenges, such as frequent natural disasters, high poverty
rates, a small size and lack of economies of scale, as well as vulnerability to external shocks.
However these challenges can be successfully overcome through appropriate macroeconomic
policies and structural reforms. Policies should support an increase in domestic productivity,
generation of additional high value product/export niches, diversification of export markets, and the
creation of mechanisms for enhanced resilience such as sovereign ‘Resilience Funds’.

While there is no blueprint for reforms, the experience of successful small island economies within
and outside the Caribbean are informative. On tax reform, for example, a key message from the
session is that Mauritius in the mid 2000s was able to sustain economic growth and fiscal
sustainability without raising taxes and cutting public services. In fact, Mauritius cut tax rates and got
more revenue. Mauritius eliminated all tax exemptions, implemented a flat tax of 15 per cent on both
personal income and corporate earnings, near zero import duties and a uniform rate of GCT of 15 per
cent. By having no differential between corporate and personal income tax, Mauritius avoided people
setting up companies to reduce their taxes. Taxes became both reasonable, and above all
predictable. Tax collection improved.

Another key message from both Mauritius and the Seychelles is that the longer a country waits for
undertaking key structural reforms and sound macroeconomic policies, the more painful is the reform
process for the population. Furthermore, structural reforms to unlock growth may be a better option in
countries which lack fiscal space, compared to stimulus packages that have a negative impact on the
fiscal and debt position.

Successful debt resolution does not only tackle the debt itself, but includes comprehensive policies
that address the policy and structural factors that contribute to high debt, such as low and volatile
growth, loose fiscal policy, weak debt management, and protection against the fiscal and economic
impact of natural disasters and other exogenous shocks.