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Caribbean Countries Urged to Fully Develop Energy Sector

Washington, United States (CMC) — Caribbean countries have been told that reducing energy costs will help the region improve growth and strengthen competitiveness.

But at the same time, regional policymakers face conflicting objectives. On the one hand, investment in an effective energy reform strategy would have long-term benefits, while on the other, few countries have fiscal space to embark on ambitious investments to reform the energy sector.

The situation confronting the region in its energy sector is discussed in a paper titled “Caribbean Energy: Marco Related Challenges’ written by a number of financial experts including the prominent Grenadian-born economist, Arnold McIntyre, and released by the International Monetary Fund (IMF).

They argue that the substantial decline in oil prices since mid-2014 does not obviate the need for energy sector reform.

 “The impact of the oil price decline is global, so it has not improved relative prices for the Caribbean compared with its trade partners. Moreover, competitiveness challenges are escalating, with the appreciation of the US dollar (expected to continue over the next few years with the normalization of US monetary policy) and the potential opening of Cuba to US tourism and trade.

“Hence, any gains from recent oil price declines should be seen as a temporary breathing space that gives the English speaking Caribbean some time to catch up with the cost reductions needed to compete successfully in a more open region,” they wrote in the paper.

They said that the case for Caribbean energy sector reform rests on two pillars. These are the current poor state of the energy sector, with infrastructure and institutional frameworks needing upgrades to eliminate high-cost inefficiencies and enable diversification; and the fact that the macro-impact of current large energy bills remains significant, even since the recent oil price decline.

The study notes that the cost of electricity in the Caribbean has been persistently high over the past two decades, and has eroded competitiveness.

“This is largely due to serious inefficiencies in the power sector and dependence on expensive imported petroleum products. In turn, these problems have contributed to the region’s high cost of doing business, have increased external sector vulnerabilities, and have undercut growth in many Caribbean economies.”

They said that while Caribbean countries have very high access to electricity, other than in Haiti, the countries use expensive off-grid supply to compensate for deficiencies in utilities.

According to World Bank indicators, Caribbean countries have, on average, above 90 per cent electrification rates. However, off-grid self-generation is commonly used by large hotels and some commercial establishments, given low reliability of utilities and frequent power outages.

The authors say the single most important cost problem is the region’s heavy dependence on expensive imported fossil fuels.

“As in the U.S., the cost of using petroleum to produce electricity is several times higher than alternative fuels. Except for Trinidad and Tobago, the only net exporter of oil and natural gas, all other Caribbean countries are net oil importers.

“For importers other than Suriname, around 87 per cent of primary energy consumed is in the form of imported petroleum products. Imports are mostly diesel fuel for electricity generation, gasoline for transportation and liquefied petroleum gas (LPG) used as cooking gas in households.”

They said of the net-oil importing countries, only Barbados has installed capacity that uses natural gas for electricity generation, which has partly contributed to its higher efficiency rates.

“Hydroelectric power, harnessed through facilities in Suriname, Belize, Dominica and St. Vincent and the Grenadines, supplies about six per cent of regional electric energy consumption. Excluding Haiti, biomass represents around 11 per cent of Caribbean energy supply, mostly concentrated in Jamaica.”

The paper argues that cutting Caribbean energy costs could materially improve the region’s macroeconomic performance.

It notes that empirical analysis suggests that oil price movements influence real growth and the real exchange rate, although other factors may have been more important in explaining the region’s recent low-growth performance).

“Strategies to reduce exposure to oil price movements can help improve growth and competitiveness over the short and medium term, and alleviate pressures on the region’s external accounts. In the long run, improvements in energy efficiency are shown to support higher sustainable growth. Hence, measures to conserve energy and to diversify the energy mix toward cheaper sources should be a high priority for regional reform efforts.”

But the authors note that Caribbean countries with unsustainable debt dynamics and or a high initial debt load are not in a position to pursue large energy investments that may significantly worsen their sustainability.

They said augmenting the IMF’s Debt Sustainability Analysis of Caribbean economies with Inter-American Development Bank (IDB) based estimates of energy investment needs would not materially alter the public debt trajectory of most countries.

“However, countries where the baseline debt path is not sustainable 46 and/or fiscal vulnerabilities remain acute, are not well-positioned to finance significant investments through public resources.

“In addition, countries where structural conditions are weak, featuring low returns on public capital, low public investment efficiency and low collection rates of user fees, are likely to face higher risks to fiscal and debt sustainability from large scale public sector energy investments.”

The authors are encouraging Caribbean countries to pursue private financing of energy investments, particularly in projects that involve significant upfront capital injection.

“Public-private partnerships are one modality for private sector participation; however, strong institutional arrangements and an appropriate legislative framework are crucial to ensure successful implementation in line with best practice and to limit contingent liability risks to the fiscal sector, including these related to the specific terms of the Power Purchase Agreement.”

The IMF said that it would continue to support the region’s efforts by providing greater attention to energy policy in regular Article IV surveillance work.

“IMF country teams will continue evaluating the impact of energy costs on growth, the cost of investments in energy infrastructure and the implications of both for public debt sustainability. Country teams will also work with authorities and collaborate with other IFIs in monitoring the implementation of country strategies.

“The Fund will encourage country authorities to pay greater attention to improving the overall business environment, to facilitate private sector investment in the economy, including the energy sector,” the Washington-based financial institution added.


Category/ies:Barbados News, Belize News, Dominica News, Grenada News, Hydropower Tech, Jamaica News, News, Regional News, St Vincent and the Grenadines News, Suriname News, Trinidad and Tobago News.
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