By E. Benito Wheatley
The [British] Virgin Islands’ (VI) economic recovery from COVID-19 will be very different from its economic bounce back after Hurricanes Irma and Maria and the public must prepare for a challenging economic period ahead.
Following the devastation of the two category five hurricanes in September 2017, the economy eventually recovered on the back of a reconstruction boom that ran from 2018 to mid-2019. The boom was driven by nearly $435 million in insurance payouts, and to a much lesser extent, the injection of millions of dollars of capital into the economy by the Government, international and private donors, businesses and private citizens. The Government’s public finances were sustained during the crisis period and the first year of recovery by revenue from the financial services sector as firms continued to operate externally under business continuity plans.
The GDP numbers tell the tale of the VI’s recovery from Irma and Maria. By the end of 2017, GDP had declined to 1.286 billion, slightly down from $1.290 billion in 2016. In 2018, following an initial contraction of the economy caused by the storms, then a sustained economic expansion driven by rebuilding, GDP levelled off at $1.234 billion. By the end of 2019, GDP grew to $1.300 billion as the economy recovered lost ground from the hurricanes, led by the strong recovery of tourism and continued construction activity.
Drastic measures
Importantly, the dynamics of the coronavirus global pandemic are different from those of the hurricanes of September 2017, which will have an impact on the shape of the VI’s economic recovery from the current crisis. The global outbreak of the coronavirus has required the VI Government, like other governments around the world, to take drastic measures to safeguard the health and safety of the public and prevent unnecessary deaths, which have had an adverse impact on the local economy. These include a cruise ship ban, lockdown and border closure.
The tourism industry has been particularly hard-hit with businesses such as hotels, yacht charter companies, tour operators, taxi operators and restaurants either shutting down operations completely or remaining partially open. This has resulted in mass layoffs that are having knock-on effects on other sectors. Many persons who remain employed have been placed on reduced hours or taken a salary cut. A full recovery of the tourism sector is highly unlikely before the 2021 tourist season as the COVID-19 crisis continues and international borders remain closed. The global uncertainty around tourism will be a drag on the VI’s economic recovery.
Unlike the situation after Hurricanes Irma and Maria, businesses are not insured against a global pandemic and there will not be a flood of insurance payouts to rebuild damaged properties that will stimulate the economy and drive economic growth for an extended period.
Reserve Fund
In the current circumstances, it is the Government primarily that must provide the economic stimulus to achieve these objectives, which can be supplemented by private investment and donations. The heavy burden of keeping the economy afloat, assisting the vulnerable and sustaining Government operations will be largely borne by the public sector.
The dilemma, however, is that the Government cannot completely deplete its Reserve Fund of $80 million, some of which must be retained for contingencies such as hurricanes, additional emergency health funding or another emergency. It is also not prudent for the Government to pursue a level of borrowing and financial support from the Social Security Board that would ultimately compromise the long-term solvency of the fund. Exhausting these financial resources is a last resort. Their current use must be managed very carefully and deployed strategically as the COVID-19 crisis persists.
As the Government proceeds with its economic response, policymakers’ concerns about the potential risks of the VI being penalised in the future by the United Kingdom (UK) if the Reserve Fund drops below a certain level should be assuaged by the UK. The UK Government can provide official written assurances directly to the VI Government to confirm that the VI will not be penalised for breaching reserve requirements stipulated in the Protocols for Effective Financial Management (Protocols) if additional monies are drawn down from the Reserve Fund to help meet the cost of the health, social, economic and fiscal response to COVID-19.
Protocols
Furthermore, the UK should demonstrate flexibility on a higher debt threshold for the VI on a permanent basis, particularly given the recent substantial increase in borrowing and debt by Governments to rescue their economies from the damage inflicted by the coronavirus, including the UK. Notably, the VI’s debt-to-GDP ratio stood at 18% at the end of 2019. The UK and other developed economies will average a debt-to-GDP ratio of 120% by 2021 as a result of the COVID-19 crisis, according to the International Monetary Fund (IMF).
It is only reasonable that the VI be able to take on and carry additional debt at a threshold appreciably higher than 18% of GDP or the upper limit of 26% if the Government were to use its remaining borrowing headroom of $110 million to respond to the current crisis or any unforeseen circumstances that may arise. A permanent higher debt threshold would be in line with the current fiscal trend by Governments around the world in terms of borrowing to respond to COVID-19 and in turn carrying a much higher level of debt over time. A permanent adjustment of this kind should feature in VI-UK discussions on the Protocols and VI Government borrowing to help fund its economic response to COVID-19 which will be presented in a forthcoming economic stimulus package.
As a practical matter, the Government is not going to be in a financial position to rescue the entire economy in terms of a comprehensive bailout of the private sector or long-term economic relief and social assistance to all affected parties. More economic losses and social dislocations are inevitable in the months ahead. However, a Government economic stimulus package can stabilise the economy and begin the process of economic recovery in earnest. A package should be modest in scope with due consideration for the continued global spread of COVID-19 throughout 2020 and the weak recovery of the world economy which will not pick up pace until the latter half of 2021.
An affordable stimulus plan
An affordable stimulus could include a suite of measures that cover immediate economic relief and social assistance on a case-by-case basis to those persons recently affected by the economic impact of COVID-19, short-term relief and economic support to small businesses aimed at retaining workers and modifying business models, and a medium to long-term programme of projects to boost economic activity across the economy for the next 18 months that creates jobs. These measures can be implemented in stages and paid for through a combination of commercial loans, development finance, domestic capital, private investment and donations.
Alongside the Government’s economic response, its excellent work in keeping COVID-19 under control must continue in order to allow the VI’s internal market for goods and services to continue to function. This is critical to sustaining business activity, retaining jobs and the operation of core elements of the financial services industry which remains the Government’s primary source of revenue.
The VI must continue to prepare for the challenging economic period ahead in which economic recovery will require sacrifices by everyone. A genuine community effort will be needed to get through the next 12 to 18 months. The recent memory of Hurricanes Irma and Maria can give the public confidence that the society has the wherewithal to recover from a catastrophic event. By taking the necessary steps, the economy will eventually bounce back from COVID-19 and the VI will be more resilient because of it.
E. Benito Wheatley is a Policy Fellow at Centre for Science and Policy at the University of Cambridge. He can be contacted at benitowheatley@gmail.com.