Addressing the main development challenges and opportunities of the Caribbean will require the mobilisation of substantial amounts of financial resources, both public and private, domestic and international. This chapter explores the need to strengthen tax collection, make the taxation system more progressive and rationalise tax exemptions while fighting tax evasion. It argues these steps are essential to spur public investment, finance key policy reforms and improve the quality of public services. It also analyses how managing debt sustainably and strengthening fiscal frameworks will be critical in countries with high levels of debt. To that end, it points to emerging opportunities on the back of new debt instruments that can be linked to green, social and blue development objectives. The chapter also examines the need to develop financial markets to facilitate access to finance.
Caribbean Development Dynamics 2025
Abstract
Caribbean countries need to mobilise substantial financial resources to face their development challenges and seize emerging opportunities. The region’s climate vulnerability imposes significant economic and social costs, necessitating considerable investment in adaptation strategies and resilient infrastructure. Furthermore, climate-related risks contribute to higher financing costs for Caribbean nations, which already face difficulties in mobilising sufficient domestic financial resources, partly due to their small economic size. Beyond climate considerations, Caribbean countries confront pressing economic, social, and institutional challenges that require substantial funding. At the same time, the region has significant potential to unlock development opportunities, such as those linked to its rich biodiversity and natural resources. However, realizing this potential will also depend on the successful mobilization of financing.
This chapter examines ways to mobilise both domestic and international resources, from public and private sources. It underscores the need for tax reform, advocating for enhanced tax collection, a more progressive taxation system, the rationalisation of tax exemptions while fighting tax evasion. The chapter also emphasizes the importance of sustainable debt management and robust fiscal frameworks, particularly for countries facing high debt levels. In the context, this chapter explores the emerging potential of innovative debt instruments linked to green, social, and blue development objectives, where Caribbean countries have been pioneers. Finally, the chapter analyses the need to develop financial markets to improve access to finance across the region.
Tax-to-GDP ratios are, on average, below OECD and Latin American levels, though with high heterogeneity across Caribbean countries
In 2022, average tax revenues in the Caribbean region were 21% of gross domestic product (GDP), slightly below the 22.4% of GDP in Latin America and significantly lower than the OECD average of 34% (Figure 5.1, Panel A). The Caribbean average includes The Bahamas, Barbados, Belize, Dominican Republic, Guyana, Jamaica, Saint Lucia, and Trinidad and Tobago, the eight Caribbean countries for which comparable data are available (OECD et al., 2024[1]).
Heterogeneity is large across Caribbean economies. Tax revenues as a share of GDP varied greatly from Barbados (31.9%) to the Dominican Republic (14.5%) and Guyana (10.6%) (Figure 5.1, Panel B) (OECD et al., 2024[1]). Average tax-to-GDP ratios in the Caribbean fell below the Latin American average in 2022, in large part due to the evolution of specific countries. Guyana experienced the most pronounced decline in the region in the tax-to-GDP ratio, with a loss of 10.7 percentage points since 2020. It was followed by Barbados and Saint Lucia, each with a loss of 2.9 percentage points. Guyana's substantial GDP growth in recent years (an increase of 83% in nominal GDP and 63% in real terms) resulted from strong growth in oil production and high oil prices. This growth, combined with a slower increase in nominal tax revenue (only 15%), contributed to the large decreases (OECD et al., 2024[1]).
Note: Panel A: Simple averages. “Latin America” category includes Argentina, the Plurinational State of Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru and Uruguay. The Caribbean includes The Bahamas, Barbados, Belize, the Dominican Republic, Guyana, Jamaica, Saint Lucia, and Trinidad and Tobago. Data for Africa in 2022 are not available.
Source: (OECD et al., 2024[1]; OECD, 2023[2]).
In Barbados, tax-to-GDP ratios are still the highest in the Caribbean, but there has been a decline in tax revenues primarily due to a slower recovery in the tourism sector. This slower recovery has led to reduced revenues from value-added tax (VAT) and lower excise tax revenues. Additionally, the decrease in tax revenues is also attributed to reduced imports, including fuel, lower domestic sales and increased tax refunds (The Barbados Advocate, 2021[3]; Ministry of Finance of Barbados, 2024[4]).
There is space to improve the structure of taxation systems to make them more efficient and equitable
The tax structure in the region is characterised by a low contribution of direct taxes, notably personal income taxes (PIT) and social security contributions (SSCs), alongside a high reliance on indirect taxes. This structure is similar to the average of Latin American countries and contrasts with OECD countries (Figure 5.2).
As a percentage of total tax revenues, indirect taxes (VAT plus other taxes on goods and services) accounted for an average of 55% in the Caribbean. This was higher than the Latin American average of 48%. It was also significantly above the OECD average of 32%.
Corporate income tax (CIT) represented a larger share for the Caribbean than for the OECD, although with heterogeneity across countries. On average, CIT revenues represented 17.5% of total tax revenues in the Caribbean, compared to 12% in the OECD average. As a share of GDP, CIT revenues represented 3.6% in the Caribbean and 3.9% in the OECD averages (OECD et al., 2024[1]). In Trinidad and Tobago, CIT revenues accounted for 12.2% of GDP, while in the Dominican Republic, these represented 2.2%, and in The Bahamas, 0%.
Note: The Latin America average excludes Venezuela due to data issues. Due to data quality issues, Ecuador is excluded from the Latin America average for PIT and CIT revenues. The OECD average represents the unweighted average of the 38 OECD member countries. Chile, Colombia, Costa Rica and Mexico are also part of the OECD (38).
Source: (OECD et al., 2024[1]).
Improving the collection levels of direct taxes, particularly PIT, can increase revenues while enhancing the redistributive impact of the tax system in some Caribbean countries. Recognising the heterogeneity in PIT collection is key in this region. Countries like Jamaica, Barbados, and Trinidad and Tobago have collection levels exceeding 3% of GDP. Conversely, the Dominican Republic has a level as low as 1.4%, while some countries, like Antigua and Barbuda and The Bahamas, do not have PIT at all.
Enhancing and re-assessing PIT design for some countries with low levels of PIT collection but high collection of indirect taxes holds promise for increasing progressivity and revenue generation. Factors contributing to low PIT collection in the region include: i) high levels of tax relief; ii) a narrow tax base of mostly formal-sector wages; and iii) high rates of tax evasion (Núñez and Lasso, 2023[5]). For instance, re‑assessing PIT in the region could favour targeted tax relief measures over more general tax benefits.
Re-assessing the design of PIT must also be accompanied by a re-evaluation of indirect taxes. In many countries, indirect taxes are regressive, placing a disproportionate burden on low-income populations. Eliminating or phasing out inefficient VAT exemptions can improve the progressivity of the tax system in the region. VAT-targeted tax benefits should be more precise, and VAT exemptions should benefit poor households and vulnerable populations through effective and well-targeted compensation mechanisms.
To further increase revenues, Caribbean countries can also consider other untapped revenue sources, including non-tax revenues
Non-tax sources of revenue play an important role in several Caribbean countries. Non-tax revenues include non-tax income, capital income and grants. Similar to tax revenue trends in the region, revenues from these sources vary significantly across Caribbean countries, highlighting substantial differences between service exporters and natural resource exporters. In 2023, non-tax revenues accounted, on average, for 6.7% of GDP in 12 Caribbean countries (ECLAC, 2024[6]).1
Citizenship-by-investment programmes are a major source of non-tax revenues in some Caribbean countries. These government-run programmes grant foreign investors citizenship and a passport in exchange for contributing to the economy through approved investment channels. Receipts from citizenship-by-investment programmes represent an important share of non-tax revenues in some Caribbean countries. In Saint Kitts and Nevis, for example, receipts from such programmes amounted to 20.9% of GDP in 2023, although this was a drop from 25.5% of GDP in 2022. For its part, Grenada saw the revenue generated from these programmes grow from 2.2% of GDP in 2022 to 9.9% of GDP in 2023 (ECLAC, 2024[6]). However, there are several risks associated with these programmes. First, potential policy changes in source countries, such as increased exit taxes for those renouncing citizenship or new visa restrictions, can raise costs and reduce the attractiveness of citizenship-by-investment programmes. Second, there are financial crime risks due to the misuse of these programmes, often exacerbated by inconsistent risk mitigation measures (FATF/OECD, 2023[7]). Effective oversight and adherence to best practices, such as those outlined by the Financial Action Task Force (FATF), can be crucial to preventing illicit activities, including money laundering (FATF/OECD, 2023[7]).
Among natural resource-exporting countries, non-tax revenues increased from 6.4% of GDP in 2022 to 7.3% in 2023. This was mainly due to withdrawals from the National Resource Fund by the government of Guyana. In Trinidad and Tobago, higher oil royalty payments boosted non-tax revenue sources (ECLAC, 2024[6]).
Some Caribbean countries could benefit from environmentally related taxes, but these should be approached with caution. Many countries in the region are fuel importers. Consequently, such taxes can increase price pressures on vulnerable populations. When relevant, these taxes should be accompanied by protections like cash transfers, in-kind support, active labour market policies, and entrepreneurship programmes to cushion social costs and strengthen social protection systems.
Environmentally related tax revenues (ERTR) vary significantly across the Caribbean. ERTR in the Caribbean average 0.8% of GDP, which matches the Latin American average but is below the OECD average of 1.8% (Figure 5.3). ERTR range from 1.7% of GDP in the Dominican Republic to 0.1% in Belize.
Most Caribbean countries rely on transport taxes for ERTR, in contrast with the energy taxes prevalent in the OECD and Latin America. The Dominican Republic and Barbados are exceptions, primarily relying on energy tax revenues at 1.3% and 0.7% of GDP, respectively (Figure 5.3).
Most environment-related tax policy instruments include motor vehicle and travel-related taxes. These are followed in popularity by fuel/hydrocarbon taxes. Only the Dominican Republic and Guyana directly impose environmental or carbon taxes.
Note: The Caribbean average represents the unweighted average of nine Caribbean countries. The figure does not include Jamaica’s revenues from the special consumption tax on petroleum products (estimated to be more than 2.0% of GDP in 2018), as the data are unavailable. The OECD average represents the unweighted average of 37 OECD member countries, excluding Costa Rica.
Source: Panel A: (OECD et al., 2024[1]).
Caribbean countries can further explore and develop explicit carbon pricing mechanisms such as carbon credits, which can help increase revenues in the Latin American and Caribbean (LAC) region. On average, such instruments could raise revenues to 2% of GDP in the region (OECD et al., 2022[8]). A carbon credit allows the permit holder to emit one metric tonne of carbon dioxide or its equivalent. Earned through activities that reduce emissions, these credits can be traded or used to offset emissions, helping meet reduction targets. Establishing a carbon credit market can also open new avenues for taxation, such as taxes on transactions or administrative fees for registering and transferring credits.
The Dominican Republic, through the World Bank’s Forest Carbon Partnership Facility, is set to receive payments of up to USD 25 million for verified reductions in carbon emissions from forest carbon until 2025 as part of its emissions reduction programme. In 2022, The Bahamas took a significant step towards credit market development by publishing a Carbon Credit Trading Bill, which establishes a regulatory framework for trading carbon credits within the country (KPMG, 2023[9]). In the same year, Guyana entered the carbon market through a USD 750 million deal with Hess Corporation, which will be disbursed between 2022 and 2032 (Government of Guyana, 2022[10]). The funds will be allocated to community- and village-led sustainability programmes for Indigenous peoples and local communities and initiatives for renewable energy, land titling, canal repairs, and climate change protection (Government of Guyana, 2022[10]). These initiatives align with global efforts to establish a market for carbon credits, highlighting the importance of achieving balanced emissions reductions (DGB Group, 2023[11]).
Rationalising tax expenditures can contribute to stronger and fairer tax systems in the Caribbean
Revenues forgone due to tax expenditures are significant for some Caribbean countries, although there is great heterogeneity. In 2022, despite a decline since 2016, tax expenditures in the Dominican Republic averaged 4.6% of GDP, equivalent to 32.5% of general government tax revenues (Redonda, von Haldenwang and Aliu, 2024[12]). In the same year, tax expenditures in Jamaica averaged 3.3% of GDP, equivalent to 11.8% of general government tax revenues (Redonda, von Haldenwang and Aliu, 2024[12]). In Barbados, the government, with technical assistance from the International Monetary Fund (IMF), has modernised procedures for granting and managing duty and tax exemptions (IMF, 2023[13]). Key provisions include: i) exemptions must be “in the public interest”; ii) the Minister of Finance or Cabinet must approve exemptions above a certain threshold; and iii) recipients must repay if they breach the laws of Barbados (IMF, 2023[13]). IMF authorities also expect that rationalising the exemption framework will gradually increase public revenue over the medium term.
Some countries in the region have made progress in estimating the revenues forgone due to tax expenditures. Other countries are not so advanced and should make efforts to adopt this practice.
The estimate of revenues forgone to tax expenditures requires a thorough assessment of overall benefits and costs. Such assessments should consider the real impact of tax incentives, including increased revenues from new investments and their associated social benefits. They should also consider the costs associated with revenues that would have been received even without the tax incentives. Additionally, they should account for the increased costs of tax administration, potential abuse of incentives leading to tax evasion, economic distortions, distributional effects and the impact of such abuse on macroeconomic variables (ECLAC, 2023[14]).
International tax co-operation in the Caribbean will be essential for addressing high levels of tax evasion, increasing transparency and enhancing domestic resource mobilisation
To increase revenues while developing a fairer tax system, it is also crucial to address high levels of tax evasion and tax avoidance in some Caribbean countries by adopting and implementing key international tax standards and supporting multilateral efforts for combating tax evasion and avoidance in the region. Multinational enterprises sometimes use tax planning strategies to avoid paying taxes, eroding the tax base by artificially shifting profits to low or no-tax jurisdictions. This has an important impact internationally in terms of lost revenue, estimated by the OECD to be USD 100-240 billion per annum. Financial secrecy allows taxpayers to conceal wealth and income from tax auditors. Over the past 15 years, significant improvements to the international tax framework have helped tax administrations enforce tax compliance more effectively, improving their ability to make sure corporations pay taxes where their profits are earned and re-imagined key rules to ensure they pay a minimum level of taxes, bringing an end to the race to the bottom on competition for foreign direct investment.
Tax transparency
To address tax transparency, the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) has been providing capacity-building on the implementation and effective use of the internationally recognised transparency and exchange of information standards to fight tax evasion and other illicit financial flows and mobilise sustainable domestic resources. Today, 23 Caribbean jurisdictions participate in the work of the Global Forum, including all CARICOM members but Suriname. They benefit from an extensive capacity-building programme supported by the Standard on Transparency and Exchange of Information on Request, the Standard on Automatic Exchange of Financial Account Information, and the newly established Crypto-Asset Reporting Framework. This is done by providing knowledge tools (e.g. toolkits, guidance, e-learning), delivering virtual and in-person training and workshop events, and implementing bilateral jurisdiction-specific technical assistance programmes. For instance, in 2023, 15 Caribbean jurisdictions benefitted from technical assistance supporting legal and regulatory changes, including beneficial ownership and supervisory efforts; 347 officials participated in Global Forum’s training events.
In addition, Caribbean jurisdictions have also benefitted from other Global Forum’s capacity-building initiatives, such as the Women Leader in Tax Transparency Programme, which aims at supporting female development and gender equality in tax authorities. A dedicated Train the Trainer programme, which aims at building a sustainable knowledge-development capacity in tax authorities to ensure effective use of the tax transparency tools to tackle tax evasion, was also launched in 2024 with the participation of 14 officials from 6 Caribbean jurisdictions. The Global Forum is also working with the CARICOM Secretariat, an observer of the Forum’s work, to assist its members in implementing and benefiting from the tax transparency standards (Box 5.1).
Since 2009, through the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum), global work has been carried out to ensure that the international tax transparency standards, being exchange of information on request (EOIR) and automatic exchange of information (AEOI), are consistently implemented to promote a level playing field, combat tax evasion and other illicit financial flows, and assist in domestic revenue mobilisation. Caribbean jurisdictions have a long history of working on the issues of tax transparency through their membership in the Global Forum. The active participation and progress of 23 Caribbean jurisdictions have been key to the global success of the tax transparency initiatives, especially the end of bank secrecy.
Advancements have been identified in the Caribbean region in the implementation of tax transparency standards; however, there is still room for improvement, particularly in terms of effectiveness in practice.
For the implementation of the EOIR standard, which includes strengthened requirements on availability of beneficial ownership, the peer review results have been quite satisfactory with 71% of reviewed Caribbean jurisdictions having received a satisfactory rating (i.e. largely compliant). However, there is still room for improvement in the remaining 29% of the jurisdictions.
The Caribbean region is also making progress in implementing the AEOI standard, as highlighted in the effectiveness review published at the end of 2022. Caribbean jurisdictions are highly committed, with room for further improvement.
Looking ahead, Caribbean jurisdictions need to swiftly improve their legal framework and/or its effectiveness in practice to ensure their compliance with the tax transparency standards.
In the current demanding and evolving environment, the Caribbean region would benefit from further identifying tax transparency opportunities and challenges for the region and seeking opportunities and solutions to collectively address any deficiencies in the implementation of the tax transparency standards. Capacity building from the Global Forum has been available to help Caribbean jurisdictions implement the tax transparency standards and benefit from them for domestic revenue mobilisation. Bilateral technical assistance has been provided to put in place or amend the legal framework and ensure an effective supervision of the legal obligations in practice. Toolkits and other tools are made available to Caribbean jurisdictions, and they participate in the various training and workshop events organised in person or virtually. The Global Forum can further assist these jurisdictions in their commitment to implement and benefit from the tax transparency standards.
Source: (OECD, 2023[15]) (OECD, 2023[16]).
Protecting the corporate tax base from base erosion and profit shifting
The OECD and the G20 have been working with more than 140 jurisdictions globally under the Inclusive Framework on BEPS (Base Erosion and Profit Shifting) to implement measures to tackle international tax avoidance, improve the coherence of international tax rules, and ensure a more transparent tax environment. Members of the Inclusive Framework have committed to implementing the BEPS measures, including minimum standards on Harmful Tax Practices, countering tax treaty abuse, exchanging country-by-country reports for risk assessment and mutual agreement procedures. The Inclusive Framework includes 19 members from the Caribbean.2
In addition to the BEPS measures, the Inclusive Framework is in the final stages of completing its Two‑Pillar Solution to address the tax challenges arising from the digitalisation of the economy. The Two‑Pillar Solution is a modernisation of the international tax rules that:
re-allocates taxing rights over a portion of the residual profits of the largest and most profitable multinational enterprises (MNEs)
provides a simpler approach by applying transfer pricing rules in certain types of cases, taking into account the needs of low-capacity countries
establishes a global minimum corporate tax (GMT) of 15%; and
provides for a Subject to Tax Rule (STTR), which allows source jurisdictions to “tax back” where defined categories of intra-group covered income are subject to nominal corporate income tax rates below the STTR minimum rate of 9% and domestic taxing rights over that income have been ceded under a treaty.
These transformations in international taxation have – and will continue to have – implications for Caribbean economies. The GMT will be of particular significance, as it is expected to generate increased CIT revenues of USD 155-192 billion annually (6.5-8.1% of global CIT revenues). The GMT is already in effect in around 40 jurisdictions, with many more set to implement in 2025. It will have a profound impact by neutralising tax planning through investment hubs, which is highly relevant for the Caribbean region. It will also create opportunities for governments in the region to re-evaluate tax incentives that are impacted by the GMT, since MNEs that benefit from these regimes will now be required to pay the minimum tax either in the source country or another jurisdiction where the MNE has activities. Given this, jurisdictions in the region need to assess the possibility of imposing that tax themselves rather than allowing it to be collected elsewhere. The OECD launched a series of pilot programmes to help developing countries assess the impact of the GMT and evaluate policy options, including a pilot programme in Jamaica.
Other tax policy options for domestic resource mobilisation
Beyond the work on tax transparency and BEPS, a range of other international tax issues are relevant for governments in the region and can support domestic resource mobilisation. This includes the work on VAT, given the strong reliance on VAT among Caribbean jurisdictions, and digitalisation of tax administrations as many jurisdictions are modernising their systems to improve compliance and efficiency and transfer pricing, where several jurisdictions are contemplating bringing transfer pricing rules into place.
Tax morale – the intrinsic willingness to pay tax – can greatly assist governments in designing and administering tax policies, particularly in developing countries with low compliance rates (OECD, 2019[17]). Improving tax morale could significantly reduce tax evasion levels across many Caribbean countries. Over the past decade, tax morale has fluctuated in Latin America and the Caribbean, but recent trends indicate a deterioration (Latinobarometro, 2023[18])). For instance, in 2023, approximately 18.1% of respondents in the Dominican Republic viewed tax evasion as justifiable. This represents the highest rate among 18 Latin American countries.3
Support implementation through capacity building
Many Caribbean jurisdictions receive technical assistance from the OECD Secretariat to help implement the BEPS standards and issues such as transfer pricing and value added tax. Other Caribbean jurisdictions participate in OECD tax projects and publications. For instance, nine jurisdictions in the region are included in the Revenue Statistics in Latin America and the Caribbean and in the Global Revenue Statistics Database, and Jamaica contributed to the VAT Digital Toolkit for Latin America and the Caribbean and to a publication on Taxpayer Education (OECD et al., 2021[19]; OECD, 2021[20]) As noted above, Jamaica participates in a pilot programme on Tax Incentives and the GMT. Going forward, it would be important to have more Caribbean jurisdictions participating in the Revenue Statistics Database and other tax projects and publications. This participation can enhance regional data collection, improve policy making, and promote a deeper understanding of Caribbean tax systems and revenue trends.
The OECD has organised several regional Caribbean conferences with a focus on BEPS and other strategic issues, as well as different rounds of regional consultations on international tax developments, with an emphasis on the Two-Pillar Solution. These meetings have ensured that Caribbean developing states, whether members or not of the Inclusive Framework, keep up to date with international tax developments and actively contribute to the agenda of the Inclusive Framework. In addition to existing bilateral programmes, ad-hoc assistance on specific issues has been provided to several islands.
At a political level, the OECD has been active at the Ministerial meetings of the CARICOM Council for Finance and Planning (COFAP), where CARICOM member states have noted the advice from the OECD on international and regional tax matters and have agreed on updating regional instruments to ensure they comply with the international tax standards.
Public debt levels have grown significantly in most Caribbean economies in the last decade (Chapter 1). In 2022, central government total public debt averaged 78.8% of GDP (well above the average for Latin America, at 52.9%), more than 10 percentage points higher than in 2012, when it stood at 69.2% of GDP.
High debt levels reduce fiscal space and limit social expenditure
High debt principal and interest payments are depleting domestic resources for public investment and social spending. Besides, it limits fiscal flexibility to face economic shocks and affects the sustainability of public finance. Debt service is indeed high in many Caribbean countries. The Caribbean average debt service to tax revenue ratio reached 12.9% in 2022, above the average levels in Latin America (11.5%) and much higher than those of the OECD (4.8%). Although significant, the level in the Caribbean is lower than a decade earlier, when it reached 14.1%. (Figure 5.4).
Some Caribbean countries have been more successful in reducing tax-debt ratios than others. Countries such as Jamaica, Saint Kitts and Nevis, Grenada, Barbados, and Guyana have significantly reduced their tax-debt ratio. Jamaica is a notable case due to its adoption of a well-designed fiscal rule and a partnership agreement that ensured the equitable distribution of adjustment burdens among creditors (Arslanalp, Eichengreen and Blair, 2024[21]). In other countries, notably the Dominican Republic, The Bahamas and Suriname, the share of debt service as a percentage of tax revenues has increased.
Source: Authors’ elaboration based on (IMF, 2023[22]) and (OECD et al., 2024[1]).
Debt management must be strengthened to reduce financial vulnerabilities of Caribbean economies
The composition of public debt differs across countries in terms of the currency of denomination and the external-domestic legislation under which it is issued. For instance, Suriname, Jamaica and the Dominican Republic have mainly external debt, comprising 63-71% of their total debt. In contrast, countries such as Trinidad and Tobago, Barbados, The Bahamas, and Haiti exhibit figures ranging between 34% and 46% (IDB, 2021[23]).
Foreign and domestic currency denominated debt have advantages and drawbacks, underscoring the importance of a balanced approach to debt composition in Caribbean countries. Foreign currency issuances are significant for some Caribbean economies, which therefore face greater exposure to exchange rate fluctuations. Suriname, the Dominican Republic and Jamaica hold sizeable shares of their debt in foreign currency (63-80%). In contrast, Haiti, Guyana, The Bahamas, and Trinidad and Tobago mostly have domestic currency debt, representing 55-64% of their total debt (IDB, 2021[23]).
Maturity of public debt in many Caribbean economies is oriented to the long term, thus reducing the vulnerability associated with potential domestic fiscal pressures or volatility in financial markets. Longer amortisation profiles are associated with less exposure to financial market fluctuations, especially in interest rates. However, some countries have short- and medium-term obligations requiring attention and rigorous debt management (Figure 5.5). Countries such as Suriname and The Bahamas have sizeable shares of debt obligations maturing over the next five years, representing about 40% of their GDP.
Note: Short term refers to a remaining maturity of less than one year, medium term comprises one to five years, and long term exceeds five years.
Source: Authors’ elaboration based on the Standardized Public Debt Database (IDB, 2021[23]).
External debt in the Caribbean is mainly held with bilateral and multilateral creditors, reflecting constrained access to financial markets. On average, the creditor structure is composed of multilateral banks (59%), bonds held by private investors (22%) and bilateral creditors (19%) (Figure 5.6). Countries such as Jamaica and the Dominican Republic, which have had better access to international capital markets, have mainly raised funds by issuing bonds. Conversely, economies like Haiti, Saint Vincent and the Grenadines and Dominica mainly rely on debt financed by multilateral and bilateral creditors.
Note: Caribbean, low middle-income (LMI), upper middle-income (LMI) and Latin America are weighted average figures.
Source: Authors’ calculations based on World Bank International Debt Statistics (World Bank, 2022[24]).
Fiscal frameworks are essential to support fiscal and debt sustainability while protecting investment
Fiscal frameworks are an essential tool to preserve medium- and long-term stability. They establish rules that can help fiscal policy to be countercyclical, reduce discretionary public spending and guarantee debt sustainability. They can also help protect public investment that is essential to transform production. In episodes of fiscal consolidation, for example, governments tend to reduce capital expenditures because this may have lower political costs than reducing current spending (Ardanaz and Izquierdo, 2022[25]). However, reducing capital spending affects both long-term growth and economic recovery. Protecting investment during the fiscal consolidation period can mitigate economic contraction and, in some cases, lead to an expansion (Ardanaz and Izquierdo, 2022[25]; OECD et al., 2023[26]).
Fiscal rules are a central component of the fiscal framework. They are designed to solve the temporal inconsistency of public finances and mitigate debt accumulation by establishing debt limits (Andrian et al., 2022[27]). By decoupling spending from the business cycle, fiscal rules prevent spending from rising during economic upturns and protect public investment during downturns. Moreover, fiscal rules help stabilise debt-to-GDP ratios, ensuring long-term fiscal stability. Additionally, they have the potential to alleviate the perception of sovereign risk (Gomez-Gonzalez, Valencia and Sánchez, 2024[28]).
The mere existence of fiscal rules is not sufficient to ensure sustainability. Quality and compliance are key. Quality rules are supported by institutions and comprise robust legal frameworks, flexibility against economic shocks, and monitoring and enforcement mechanisms. High-quality fiscal rules stabilise debt growth and reduce its volatility (Galindo and Izquierdo, 2024[29]). Compliance is crucial since periods of adherence correlate with fewer events of debt acceleration, lower bond spreads and higher credit ratings (Ardanaz, Ulloa-Suarez and Valencia, 2023[30]).
Caribbean economies have implemented various fiscal rules to enhance economic stability and reduce public debt. Jamaica introduced a Fiscal Responsibility Framework (FRF) in 2014. It includes a balanced budget rule and a debt rule, accompanied by a well-designed escape clause for emergencies such as natural disasters or severe economic downturns. The FRF also imposes a ceiling on the public wage bill to control current expenditures (Rosenblatt et al., 2023[31]; Arslanalp, Eichengreen and Blair, 2024[21]). In Grenada, the Fiscal Responsibility Act (FRA) of 2016 mandates a primary surplus of 3.5% of GDP and targets a debt-to-GDP ratio of 60%. It also restricts the growth of primary expenditures and the public wage bill to maintain fiscal sustainability. The legislation permits suspension of fiscal rules in the event of natural disasters, severe economic contractions or financial crises, allowing three years for corrective actions (Wright, Grenade and Scott-Joseph, 2017[32]). Similarly, The Bahamas enacted its own FRA in 2018, establishing fiscal rules such as a budget deficit ceiling of 0.5% of GDP, a cap on the annual growth rate of current expenditures, and a government debt ceiling of 50% of GDP expected to be met by 2025. In addition, it includes an escape clause for unexpected external shocks (Rosenblatt et al., 2023[31]).
Fiscal rules must be flexible enough to accommodate exogenous shocks. In economies with no fiscal rules or rigid ones, a fiscal consolidation of 2% of GDP is associated with a reduction of 10% in public investment. By contrast, in countries with flexible fiscal rules, investment is not affected during fiscal consolidation periods (Ardanaz et al., 2021[33]). This flexibility can take the form of cyclically adjusted fiscal targets, well-defined escape clauses or differential treatment of investment expenditures.
Innovative debt financing mechanisms can help mobilise financial resources and connect them to areas where Caribbean countries have important financing gaps. Among these instruments, green, social, sustainability, sustainability-linked and blue (GSSSB) bonds have been gaining prominence worldwide. These instruments can bring financing to key development objectives, including promoting renewable energy and marine conservation projects, enhancing adaptation and resilience to climate change, and contributing to debt sustainability or significant debt reduction across the region. Similarly, other financing mechanisms like catastrophe bonds, natural disaster clauses and debt-for-nature swaps are particularly relevant for Caribbean economies, given their combination of high levels of debt, high exposure to climate risks, and rich natural capital.
GSSSB bonds are emerging as a powerful tool for financing sustainable initiatives in the Caribbean region
The international GSSSB bonds market in the Caribbean has expanded in recent years. Between 2019 and November 2024, the GSSSB international bond market in the Caribbean reached a cumulative value of USD 1.5 billion (Figure 5.7, Panel A). Green bonds lead the way with USD 804 million, followed by blue bonds at USD 385 million and sustainability-linked bonds (SLBs) at USD 300 million. Corporate issuers account for 45% of total issuances, sovereigns make up 33%, and quasi-sovereign issuers comprise the remaining 22% (Figure 5.7, Panel B). The gradual shift towards sustainable debt securities over conventional bonds indicates a growing investor appetite for sustainable projects. This trend can help both private and public issuers meet their sustainability goals. These bonds, driven by increasing investor interest in thematic and sustainable investments, offer Caribbean countries a significant avenue for funding sustainable development and promoting economic progress (OECD, 2024[34]).
Note: GSSSB = Green, social, sustainability, sustainability-linked, and blue bonds. Quasi-sovereign issuers are defined as companies with full or partial government ownership.
Source: Authors’ elaboration based on official figures (Núñez, G., H. Velloso and F. Da Silva, 2022[35]; ECLAC, 2023[36]; OECD et al., 2023[26]).
Blue bonds can help safeguard oceans and nurture sustainable “blue economies”
Blue bonds are emerging as a powerful tool in the region for financing initiatives aimed at safeguarding oceans and nurturing sustainable “blue economies” – economic activities that depend on or affect the use of coastal and marine resources (Chapter 3). In 2021, BB Blue, a Special Purpose Vehicle created to manage Barbados' debt-for-nature swap, issued two blue bonds totalling USD 71.6 million, allowing Barbados to buy back USD 77.6 million worth of Eurobonds due in 2029 at a discounted price. BB Blue was backed by Credit Suisse and received guarantees from the Inter-American Development Bank (IDB) and The Nature Conservancy (TNC), enabling BB Blue to issue these two bonds with strong credit ratings. This setup demonstrated a unique blended finance approach, facilitated by financial institutions such as CIBC FirstCaribbean and Credit Suisse (The Nature Conservancy, 2023[37]). In the same year, a TNC subsidiary, Belize Blue Investment Company, LLC (BZBIC), backed by Credit Suisse, arranged blue bonds that funded a USD 364 million loan to Belize to repurchase a USD 553 million “superbond”. This superbond represented the government's entire external commercial debt, equivalent to 30% of GDP (Owen, 2022[38]). In 2022, The Bahamas issued two blue bonds totalling USD 385 million, which attracted high demand in the international debt market (ECLAC, 2023[39]).
Blue bonds offer a promising avenue to unlock the untapped financial potential of blue economies in the Caribbean, presenting opportunities for larger and longer-term financing. They can also enhance investor diversification, broadening funding sources and potentially mitigating risks associated with bond demand fluctuations (ADB/IFC, 2023[40]).
Sustainability-linked bonds and social bonds are also gaining traction in the region
SLBs raise capital for climate-related or environmental projects, reflecting a growing trend towards sustainable investing. In 2019, Williams Caribbean Capital, based in Barbados, issued the region's first green bond valued at USD 2 million. This was followed by another issuance in 2021, amounting to USD 7 million. Both bonds were earmarked for solar energy projects and certified under the Climate Bonds Standard Solar Energy Criteria (Climate Bonds Initiative, 2022[41]). In 2020, the Dominican Republic’s Banco Popular Dominicano issued a USD 45 million green bond aimed at financing renewable energy, electro-mobility and eco-efficiency projects (Garcia, 2022[42]). In 2021, the Dominican Republic's quasi-sovereign issuer, Empresa Generadora de Energía Haina, issued an SLB of USD 100 million. Regarding social bonds, Trinidad and Tobago issued a USD 44.2 million social bond in 2020 by the local financial institution Home Mortgage Bank. This bond supports the country's subsidised housing programmes. It aims to tackle inequalities and poverty, promote sustainable cities, create decent work opportunities, and advance climate action goals (HMB, 2020[43]).
Technical assistance and capacity building to develop sustainable, bankable project pipelines are essential for helping Caribbean countries gain access to and effectively utilise green/sustainable funds (OECD et al., 2022[8]; Piemonté, Kim and Cattaneo, 2024[44]). This assistance is particularly relevant for GSSS and other sustainable finance instruments, which can only work effectively if a pipeline of bankable sustainable projects is developed. Even if regulatory frameworks are established and investment appetite is high, effective project feasibility planning is essential for efficient resource allocation (OECD, 2024[34]). Helping countries create a pipeline of projects, including those focused on the green transition, to present to potential international investors seeking business opportunities could help bridge the information gap that hinders matching supply with demand. Such an initiative could attract new capital to Caribbean economies (Piemonté, Kim and Cattaneo, 2024[44]). Enhancing project governance and implementation, technical assistance, and capacity building can reduce disbursement delays and ensure the effective allocation of resources (Piemonté, Kim and Cattaneo, 2024[44]).
Catastrophe bonds present a unique opportunity for Caribbean countries to expand their external borrowing capacity to fund natural disaster responses
Catastrophe (CAT) bonds can be useful for countries with a higher risk of being struck by natural disasters. A higher level of risk leaves such countries more vulnerable to defaulting on their debt obligations and, in turn, higher capital costs or lack of access to financial markets. This is the case for the Caribbean, a region with tight fiscal constraints and high vulnerability to natural catastrophes. CAT bonds can offer an innovative insurance-linked risk transfer mechanism to fund natural disaster responses in the Caribbean. CAT bonds can also provide countries in the region with flexibility and price stability.
Globally, the CAT bond market has grown steadily. In 2021, CAT bond issuances peaked at USD 12.7 billion, slightly decreasing to USD 10 billion in 2022 (Figure 5.8, Panel A). Advanced economies dominate these issuances. Among countries and regions with emerging economies, the Caribbean (2.1%) is covered more frequently than many others (OECD, 2024[45]) (Figure 5.8, Panel B).
Note: Panel A: Only 144A CAT bonds or similar are included; 144A CAT bonds are privately placed CAT bonds under Rule 144A of the US Securities Act. Panel B: Only 144A CAT bonds or similar issued in 1996-2022 are included. “Others” include Chile, the People’s Republic of China, Cyprus, Colombia, El Salvador, Guatemala, Israel, New Zealand, Peru, the Philippines and Chinese Taipei. Some percentages involve multiple counting; this applies to a CAT bond transaction that covers multiple countries or regions.
CAT bonds present Caribbean countries with a unique opportunity to expand their external borrowing capacity (OECD et al., 2022[8]). They are financial instruments that use securitisation processes to transform natural disaster risks into tradeable assets (OECD, 2024[45]). These bonds typically last three years and are fully collateralised with high-quality securities to mitigate counterparty default risk (OECD, 2024[45]).
In 2014, the World Bank issued its first CAT bond in a USD 30 million deal to provide hurricane and earthquake reinsurance protection to the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which comprises 16 member island nations.4 The main investors in this issuance were specialists in insurance-linked securities funds, CAT funds, hedge funds and other investment companies (Artemis, 2014[47]).
In 2021, the World Bank issued a USD 185 million CAT bond for Jamaica, providing coverage for 3 hurricane seasons. This bond addressed Jamaica's financing gap and made it the first small island state to independently sponsor a CAT bond (World Bank, 2024[48]). In 2024, the World Bank announced the renewal of this CAT bond for USD 150 million. Through this mechanism, Jamaica stands to receive vital funds should future storms surpass predefined intensity thresholds. Jamaica’s experience underscores the significance of collaboration with international financial institutions throughout the pre-issuance and issuance stages of CAT bond transactions.
Multi-country CAT bonds can provide a strategic solution for Caribbean nations that cannot issue such bonds independently. By enabling multiple countries to pool their resources, these bonds can offer regional benefits and collective risk mitigation against natural disasters (World Bank, 2013[49]). Efforts are underway, supported by the World Bank, to develop a regional CAT bond for the Caribbean, mirroring successful initiatives like the Pacific Alliance CAT bonds. These bonds streamline transaction costs and attract a broader investor base. This, in turn, leads to lower premium rates and bolsters resilience against catastrophic events across borders (OECD, 2024[45]). They enable multiple sovereign nations to enter the CAT bond markets independently, without the need for a risk pooling (OECD, 2024[45]).
Natural disaster clauses can significantly enhance fiscal resilience in the region
Natural disaster clauses in debt contracts allow for the temporary suspension of payments when a country is affected by a disaster. Natural disaster clauses have emerged as crucial components in debt contracts in the Caribbean. At present, they cover losses of up to USD 30 million.
In 2024, in a world first, Grenada was able to pause debt repayment due to a hurricane debt suspension clause after Hurricane Beryl, saving the country USD 28 million. In 2015, Grenada pioneered the inclusion of a natural disaster clause in its debt restructuring (Ho and Fontana, 2021[50]). Grenada’s bonds, due in 2030, allow deferring principal and interest payments for the next semi-annual payment date if a tropical cyclone results in USD 15-30 million in losses (Ho and Fontana, 2021[50]). If losses exceed USD 30 million, payments can be deferred for the next two semi-annual dates.
In 2018 and 2019, Barbados introduced innovations to debt restructuring contracts by expanding the range of trigger events – specific natural disasters that activate clauses for the suspension of debt payments – to include earthquakes and excess rainfall while lowering the loss threshold required to activate these measures to USD 5 million (Ho and Fontana, 2021[50]). In 2019, a transparency mechanism was added, allowing bondholders holding half of the principal to block deferrals within 15 days of notice. This veto right addressed bondholders’ concerns about potential opportunistic or abusive triggering of the clause by the issuer.
For both Grenada and Barbados, conditions of their natural disaster clauses are linked to their insurance policies from the CCRIF. The Facility offers coverage for hurricanes, earthquakes and excess rainfall in Caribbean and Central American countries (Ho and Fontana, 2021[50]).
Multilateral Development Banks can also play a key role in helping Caribbean countries access innovative financial solutions to provide coverage for natural disaster events. For instance, financial mechanisms such as Principal Payment Options (PPO) allow Caribbean countries to defer principal repayments for two years following an eligible natural disaster and repay those amounts in future amortisation instalments (IDB, 2024[51]). The IDB was the first to offer a PPO to three Caribbean countries – Belize, The Bahamas and Barbados. These countries have activated the option for loans totalling over USD 1.1 billion (IDB, 2024[51]).
However, disaster clauses may carry a cost as they incentivise governments to borrow more and pay higher yields. Introducing disaster clauses exposes investors to the risk of delayed repayments and the need to be compensated accordingly through higher spreads. However, recent analyses suggest that borrowing terms generally improve with the introduction of these clauses. Evidence shows that governments take advantage of the better borrowing terms. Specifically, they expand their borrowing up to the point that default risk reaches levels such as those observed in the economy without disaster clauses. Since governments expect to postpone repayments, the expected cost of servicing debt declines even when spreads increase due to the risk of delay (OECD et al., 2022[8]).
For richly biodiverse and highly indebted countries, debt-for-nature swaps can serve as important sustainable financing instruments
A debt-for-nature swap is a liability management exercise where the country issues a guaranteed instrument (loan or bond) at more favourable terms and then uses the proceeds to buy back outstanding, more expensive sovereign debt, generating savings on the interest rate coupon and/or the principal. These savings will be used to finance nature conservation and/or climate change mitigation/adaptation activities. Debt-for-nature swaps offer a dual advantage for Caribbean countries: refinancing part of their external debt under more favourable terms while advancing their commitments to the Global Biodiversity Framework and the Nationally Determined Contributions under the Paris Agreement. Such swaps are particularly relevant for enhancing debt sustainability in highly biodiverse countries.
To date, the Caribbean region has executed four debt-for-nature swaps amounting to more than USD 400 million destined for marine conservation. In 2022, Barbados conducted a USD 150 million debt-for-nature conversion, resulting in USD 50 million allocated to marine conservation initiatives (Box 5.2) (Savage, 2023[52]). In July 2024, the EIB and IDB approved USD 300 million in guarantees for an innovative debt-for-climate-resilience swap, structured as a sovereign sustainability-linked loan. This initiative will save USD 125 million for new resilience investments and marks the first such loan tied to a sovereign water security project (European Investment Bank, 2024[53]; IDB, 2024[54]). In November 2024, the Bahamas launched a new debt conversion project that is expected to save an estimated USD 124 million over the next 15 years and enable improvements in ocean conservation and the management of the Bahamas Protected Areas System (IDB, 2024[56]). The project, supported by the IDB, The Nature Conservancy’s Nature Bonds Program, and others, enabled the Bahamas to buy back USD 300 million in debt using proceeds from a new USD 300 million loan arranged by Standard Chartered Bank (IDB, 2024[55]). In 2021, The Nature Conservancy and the government of Belize finalised a USD 364 million debt conversion aimed at protecting 30% of Belize’s ocean. This initiative reduced Belize’s debt by 8.7% of GDP and generated an estimated USD 178 million for marine conservation (Green Finance Institute, 2021[56]).
In late 2022, Barbados completed a debt-for-nature conversion backed by a USD 100 million guarantee from the Inter-American Development Bank (IDB) and USD 50 million guarantee from The Nature Conservancy (TNC) that enhanced a loan provided to Barbados (blue loan), allowing the country to reduce borrowing costs and use the proceeds to buy back existing debt. The transaction enabled Barbados to replace relatively expensive pre-existing debt (7.2% average cost) with significantly lower all-in cost of financing (4.9%), generating USD 50 million in savings that will be used to fund a Conservation Trust Fund (CTF) and finance marine conservation activities over a 15-year period.
As part of the transaction, Barbados committed to the following specific marine conservation milestones: i) completing an ocean-wide Marine Spatial Plan (MSP) using global best practices to protect up to 30% of Barbados’ Exclusive Economic Zone and promote ocean sustainability, ii) designing and implementing legal, regulatory, and institutional frameworks to effectively implement the MSP and manage Barbados’ ocean, and iii) complete and adopt comprehensive management plans for all protected areas.
To continue advancing the sustainability agenda, in July 2024, the IDB and the European Investment Bank approved guarantees totalling USD 300 million to support a debt-for-climate-resilience operation in Barbados. The debt conversion will create the fiscal space that allows the government to make water resilience investments that would not be otherwise possible given the current fiscal limitations. The operation will provide Barbados with the resources for infrastructure investments, including the South Coast sewage treatment plant, which will increase the island's water security in the context of climate change impacts and improve sanitation services. A monitoring mechanism will ensure that sustainability targets, focused on the volume and quality of reclaimed water from the upgraded plant, are met. If the targets are not achieved, the government will incur a financial penalty, which will be directed to the Barbados Environmental Sustainability Fund, a specialised trust for environmental investments.
Source: (IDB, 2022[57]; IDB, 2024[58]; IDB, 2024[54]).
Scaling up debt-for-nature swaps through concerted multilateral efforts in the region offers new opportunities for enhancing sustainable financing. In 2018, Antigua and Barbuda, Saint Lucia, and Saint Vincent and the Grenadines began negotiating with creditors for debt swaps to reduce their debt-to-GDP ratio. Reducing the debt-to-GDP ratio by at least 12.2 percentage points for each country could lead to a minimum of a 1% increase in economic growth. This boost would raise the average growth rate of these three countries back to levels seen before the global financial crisis (ECLAC, 2018[59]).
Countries in the region must assess the requirements of debt-for-nature swaps before engaging in them. These swaps alone cannot structurally reduce debt or improve sovereign creditworthiness (Caballero, Gonzalez and Nieto, 2024[60]). It is important to establish robust verification systems and legal frameworks to ensure the fulfilment of long-term conservation commitments and to mitigate the risk of green/blue washing. The extended duration of environmental commitments and their potential vulnerability to political changes make it essential to develop Conservation Commitment Agreements that address these risks. Such agreements should include legal and financial incentives, as well as penalties for non-compliance, to ensure the fulfilment of commitments. For this reason, effective enforcement of climate contracts is crucial for debt-for-nature swaps (Caballero, Gonzalez and Nieto, 2024[60]). Moving forward, robust governance structures, effective monitoring and oversight mechanisms, and a long-term, integrated approach aligned with national development plans will be essential (Fuller et al., 2018[61]).
Enhanced regulation and oversight play pivotal roles in ensuring the efficacy of sustainable finance instruments while mitigating associated risks
Establishing robust, sustainable finance frameworks is essential for enhancing transparency and attractiveness in regional markets while mitigating risks. Given the vulnerability of many Caribbean countries to climate change, transparent, sustainable frameworks are crucial to ensure investment and promote innovation across various fronts (UNDP, 2023[62]). This requires developing and refining various mechanisms, including taxonomies, standards, guidelines, policies, international co‑operation initiatives and regulations. These mechanisms may be created by the public sector, the private sector or through collaboration between both.
Frameworks often follow three key objectives: integrating economic, social and governance principles into financial sector operations; climate risk management; and sustainability financing. The diverse components of these frameworks make a unified definition challenging, requiring enhanced co‑ordination. Greater efforts in the Caribbean region are needed to foster more consolidated sustainable finance frameworks, ensuring comparability, certainty, credibility, integrity and transparency in the market.
While the Dominican Republic remains the only Caribbean country to have put in place a green taxonomy, other nations in the region are advancing in the design of sustainable finance frameworks (Figure 5.9). Efforts focus on green protocols, surveys and climate risk guidelines involving diverse stakeholders. In 2018, the Stock Exchange of the Dominican Republic took a pioneering step by establishing the Green Finance Segment, followed by the issuance of the Green Bond Guide in 2019. In June 2024, it published the first green taxonomy in the Caribbean and the Framework for Green, Social, and Sustainable Bonds through the Ministry of Finance. This aimed to help investors, companies and other market participants more easily identify strategic investment opportunities that align with the country’s environmental objectives, such as those outlined in the Paris Agreement.
In 2022, Jamaica published a report on climate-related financial risks and conducted surveys to enhance its sustainable finance framework. By 2024, the country developed a framework for green bond issuance with support from the IMF Resilience and Sustainability Facility programme and technical assistance from the IDB (IMF, 2024[63]). That same year, Eastern Caribbean states launched a three-year pilot programme to green the Eastern Caribbean Currency Union (ECCU) financial system. The participating states comprised Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, Saint Lucia, Saint Vincent and the Grenadines, and Saint Kitts and Nevis. In 2024, the Eastern Caribbean Central Bank also developed regional frameworks for climate stress testing and green finance, including a Regional Renewable Energy Infrastructure Investment Facility.
Note: *Eastern Caribbean States include Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, Saint Lucia, Saint Vincent and the Grenadines, and Saint Kitts and Nevis. DOM=Dominican Republic; JAM=Jamaica. IMF SRF=International Monetary Fund's Resilience and Sustainability Facility.
Source: Authors’ elaboration based on (SBFN, 2024[64]).
It is crucial for public and private issuers in the region to establish clearer and more binding standards and taxonomies. In June 2023, in a significant step towards this direction, the UN system in LAC launched the first Common Framework of Sustainable Finance Taxonomies in the region through the Working Group on Taxonomies of Sustainable Finance. This regional framework is intended as a voluntary guide for actors in the region developing or intending to develop taxonomies. The framework also provides guidance for the interoperability of taxonomies within LAC and globally. Harmonising the methodologies behind the different taxonomies will increase trust among investors and reduce transaction costs (OECD et al., 2023[26]).
The development of financial markets differs significantly across Caribbean economies, and more efforts are needed to improve their role in effectively channelling financial resources towards sustainable and inclusive development. Specifically, it is useful to look at four aspects: “depth”, which measures the size of financial markets; “access”, which examines the extent to which individuals can use these markets; “efficiency”, which evaluates the system's effectiveness in delivering services, and “stability”, which refers to the ability of the system to manage risks and absorb shocks.
Financial depth in the Caribbean has been historically low, constraining households and business participation in the financial system
Domestic credit to the private sector as a percentage of GDP – the standard measure of financial depth – stood at an average of 42% for the Caribbean in 2022, lagging behind the averages in Latin America (55%) and OECD countries (149%) (Figure 5.10, Panel A). Although most countries in the Caribbean are classified as high or upper middle-income, the financial depth of the region remains comparatively low within these groups of countries.
The level of financial depth differs across countries in the region. Measured by domestic bank credit to GDP, two high-income countries – Barbados and Saint Kitts and Nevis – demonstrate the highest levels of financial depth, at 73% and 64%, respectively. Bank deposits relative to GDP in these two countries remain at 111% and 105%, respectively. Conversely, Guyana and Haiti exhibit the lowest levels, with 12% and 8% for domestic bank credit and 36% and 24% for bank deposits (Figure 5.10, Panel B). Financial depth in the Caribbean reflects both common challenges and country-specific characteristics. For instance, high levels of government debt have limited private credit and financial development in some countries, resulting in significant crowding out of private financing (Beck and Mooney, 2021[65]).
Note: Panel A – OECD and upper middle-income belong to World Bank data classification. Panel B – Figures for bank deposits as percentage of GDP correspond to 2021 due to data availability.
Source: Authors’ elaboration based on World Development Indicators (World Bank, 2022[66]).
Financial access in many Caribbean countries is low, highlighting the importance of enhancing financial inclusion
In 2022, the number of deposit accounts with commercial banks per 1 000 adults stood at 1 162 for the Caribbean average, showing lower levels than Latin America (1 750) and the OECD (3 000) (Figure 5.11). Access to formal financial services enables households to manage their finances, smoothing consumption more effectively over time and facilitating wealth accumulation. This, in turn, reduces economic vulnerability. With enhanced access to high-quality financial products and services, households can increase their savings, manage consumption more effectively, and invest in housing, education, and health. These measures can lead to improved living standards and reduced poverty.
Caribbean countries encounter geographical challenges that hinder access to financial services. Countries in the region face common obstacles among Small Island Developing States, such as inadequate physical and digital infrastructure. Deficient roads and transportation networks hinder the expansion of financial services to remote communities. Additionally, unreliable electricity and costly digital connectivity impede efforts to promote digital financial inclusion (UNSGSA, 2024[67]).
Financial literacy remains a significant barrier to achieving financial inclusion. In the five member countries of the Eastern Caribbean Currency Union (ECCU, comprising Antigua and Barbuda, Dominica, Grenada, Saint Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines), only one in two adults meet the minimum target score of five out of seven for financial knowledge. Financial literacy scores ranged from 12.7 in Antigua and Barbuda to 11.7 in Saint Vincent and the Grenadines (ECCB, 2023[68]).
Note: Deposit accounts with commercial banks per 1 000 adults denote the total number of deposit accounts held by resident non-financial corporations and individuals from the household sector at commercial banks for every 1 000 adults in the country.
Source: Authors’ elaboration based on the Financial Access Survey (IMF, 2022[69]).
The banking system remains concentrated and shows high profitability, wide interest rate margins and high operational costs, thus limiting access to credit
The banking system in the Caribbean exhibits high profitability and net interest margins. In 2021, the average Return on Assets – measuring a bank’s net income relative to its total assets – stood at 1.7% in the Caribbean. This was similar to Latin America (1.6%) and higher than the OECD average of 0.9% (Figure 5.12). High profitability is often associated with low revenue diversification, high concentration and market power. For similar reasons, the Net Interest Margin – showing the difference between interest income from assets and interest paid to depositors for savings – stood at 4.8% in 2021, well above the OECD average of 1.7%. A high credit spread limits access to credit, making it costly for individuals and businesses and discouraging savings.
High banking costs are prevalent in the region. In 2021, banks in the region faced an overhead cost to total assets ratio of 3.3%, higher than the OECD average (1.4%) and lower than in Latin America (3.8%). This indicator evaluates the operational efficiency of a bank by quantifying operating expenses relative to total assets. High costs may be attributed to premiums associated with greater underlying macroeconomic risks, tighter regulatory requirements and the absence of strong competitive pressures within the banking sector. High overhead costs in banks can lead them to charge higher fees or offer less favourable terms to businesses and households. Additionally, they may limit the ability of banks to invest in new technologies and services that could benefit users.
Note: ROA=Return on Assets (ROA); Costs=Overhead Costs to Assets; NIM=Net Interest Margin.
Source: Authors’ elaboration based on Global Financial Development Database (World Bank, 2022[66]).
The banking system maintains solid capitalisation and liquidity levels, enhancing stability and resilience, but asset quality remains a potential risk for some countries
Recurring natural disasters and volatile commodity prices are challenges to achieving economic growth and resilience in the Caribbean. Sound financial systems contribute to mitigate these risks, ensuring stability amid economic shocks (Rojas-Suarez and Zegarra, 2021[70]). Banks with robust capital and liquidity buffers play a vital role in maintaining credit flows during crises, supporting effective capital allocation, risk management, and sustained growth (World Bank, 2016[71]).
In 2022, the capital adequacy ratio of banks in the region stood at 17%, slightly below the 19% observed in OECD countries and above the regulatory minimum of 8% stipulated by Basel (BIS, 2020[72]). This indicates a robust capital position that provides a buffer against financial shocks and supports lending activities through the business cycle. The liquid assets to deposits and short-term funding ratio remained robust at 48%, in line with the OECD average of 50% (Figure 5.13). High liquidity levels reflect the ability to meet short-term obligations and cover unexpected liquidity shocks.
Note: Capital adequacy data are shown on the primary axis, while liquid assets to deposits and short-term funding ratio are on the secondary one.
Source: Authors’ elaboration based on Financial Soundness Indicators (IMF, 2022[73]).
Banks with high ratios of non-performing loans (NPLs) to gross loans represent a potential risk to financial stability in the region. In 2022, the NPL ratio in the region stood at 9.3%, above Latin America and OECD figures of 2.3% and 2.2%, respectively. This indicator assesses the percentage of unpaid, delayed and unlikely-to-be-repaid loans within a bank's total portfolio. As such, the level of NPLs provides insight into credit quality and potential credit risks that could threaten the institution’s stability. Additionally, low levels of NPLs indicate increased lending capacity, as more funds are available for loans rather than to cover potential losses.
This chapter has examined challenges, opportunities and strategies for mobilising domestic and international resources, from both public and private sources, to finance the reforms needed to boost development in the Caribbean. Box 5.3 provides actionable recommendations based on the analysis presented, offering guidance to Caribbean countries in shaping their policy initiatives. Given the region's diverse socioeconomic characteristics, challenges, and opportunities, tailored approaches are essential for each country. However, certain overarching considerations can orient countries in designing effective "policy menus" and achieving an optimal policy mix.
Enhance collection and progressivity of tax systems
Rethink the structure of tax systems to move towards a larger relative contribution of direct taxes in the region.
Work further in assessing the overall benefits and costs of revenues forgone due to tax expenditures to determine the effectiveness of certain incentives and exemptions.
Continue the implementation of key international tax guidelines, including the OECD/G20 Inclusive Framework on BEPS, to combat tax evasion more effectively.
Enhance analysis and data on tax morale to foster a stronger taxpaying culture.
Promote and scale‑up debt tools to channel resources to specific goals while managing debt pressures
Scale up GSSSB bonds, in particular blue bonds, by enhancing the domestic debt market, issuing bonds in local currency and fostering digital and technological advances.
Support expansion and improvement of innovative structures for SLBs, as they offer an opportunity to redirect capital flows towards high-impact socio-environmental projects.
Participate in debt-for-nature swaps to finance the green transition, scaling up through improved governance, oversight, and a whole-of-government participatory approach, and promote natural disaster clauses in debt contracts to link repayment to risk exposure.
Foster resilient debt management and support implementation of sustainable finance frameworks
Enhance debt management strategies to reduce the vulnerability associated with external and foreign currency-denominated debt.
Consider the establishment of fiscal rules to support debt sustainability, including rules for spending and balanced budgets and debt, coupled with improved monitoring, evaluation and compliance mechanisms for fiscal rules.
Expand and enhance regulatory tools (e.g. sustainability, green or transition bonds standards and taxonomies) to boost sustainable investments and avoid greenwashing.
Promote financial inclusion and financial markets development
Develop National Financial Inclusion Strategies and financial education initiatives to enhance financial literacy among individuals and businesses.
Support digital infrastructure development to facilitate mobile banking and digital financial services, particularly in remote areas.
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← 1. The 12 Caribbean countries covered in the analysis are Saint Kitts and Nevis, Suriname, Barbados, Trinidad and Tobago, Antigua and Barbuda, The Bahamas, Belize, Saint Lucia, Jamaica, Guyana, and Grenada (ECLAC, 2024[6]).
← 2. Anguilla, Antigua and Barbuda, The Bahamas, Barbados, Belize, British Virgin Islands, Cayman Islands, Curacao, Dominica, Dominican Republic, Grenada, Haiti, Jamaica, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Trinidad and Tobago, and Turks and Caicos Islands.
← 3. The Latinobarómetro survey comprises 18 Latin American countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela (Latinobarometro, 2023[18]).
← 4. The 16 current members of the CCRIF are: Anguilla, Antigua and Barbuda, The Bahamas, Barbados, Belize, Bermuda, Cayman Islands, Dominica, Grenada, Haiti, Jamaica, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Trinidad and Tobago, and Turks and Caicos Islands.