Question

Develop arguments FOR OR AGAINST the following moot: Multilateral financial institutions remain relevant and are umbilical to the development of small-island Caribbean states.

Answer 1

Q.) Develop arguments FOR OR AGAINST the following moot: Multilateral Financial Institutions remain relevant and are umbilical to the development of small island Caribbean States.

An multilateral financial institution (MFI) is a financial institution that has been established by more than one country, and hence are subjects of international law. They have large memberships including both developed donor countries and developing borrower country.These countries provides financing and professional advising for the purpose of development.Few such MFI are World Bank , European Investment Bank,Asian Development Bank,Asian Infrastructure Investment Bank. There are also several "sub-regional" multilateral development banks. Their membership typically includes only borrowing nations. The banks lend to their members, borrowing from the international capital markets. Because there is effectively shared responsibility for repayment, the banks can often borrow more cheaply than could any one member nation. These banks include:Carribean Development Bank,East African Development Bank.

Several small island developing States (SIDS) present special, and in some cases longstanding, debt sustainability challenges. High levels of debt are especially evident in the Caribbean. The problem is severe but is often overlooked, due in part to the higher per capita incomes enjoyed by many SIDS when compared to other developing nations. Income indicators mask, however, these countries inherent fragility and vulnerability to a range of external shocks such as extreme weather events, climate change and terms of trade shocks.
Within the Caribbean, the countries of the Eastern Caribbean Currency Union (ECCU) are more severely indebted again. Elsewhere in the Caribbean, Jamaica’s debt situation is also critical. In 2014, it had an estimated public debt to GDP ratio of 140%. Barbados comes in at an estimated 92%. Current account deficits are common in developing countries, but SIDS in particular have larger than average current account deficits. In 2014, SIDS ran current account deficits of, on average, 8% of GDP as compared to 6% for developing countries as a whole.

There are multiple factors which explain higher levels of debt in many small island economies relative to other developing countries. These include vulnerability to shocks such as extreme weather events and terms of trade shocks, as well as weaker revenue bases and poor institutional and debt management capacities. For example, SIDS were more heavily impacted by the 2007/2008 concurrent food-fuel-financial crises – and have been slower to recover – than many other developing countries. Robust and sustained economic growth is vital to reduce public debt levels. Yet economic growth across many small island developing States has been slow and volatile when compared to other developing and emerging economies.

Sources of Debt Accumulation : Caribbean growth rates have been sluggish and this has meant a lower capacity to generate revenues for debt service. Slow growth has been the result of lower tourism receipts in the case of the service producers, and more recently lower commodity prices in respect to the commodity producers. In addition, FDI flows to the region have also been declining and only a few sectors have been able to attract significant FDI inflows. This has impacted negatively on production, employment and consumption resulting in overall meagre growth, which cannot significantly reduce the debt burden over the medium term.

WHAT IS THE “DE-RISKING” PROBLEM? One of the most critical challenges faced by financial institutions in the Caribbean over the last few years has been an increasingly apparent trend being adopted by large global banks that serve as correspondent banks to local financial institutions to sever limit or terminate their correspondent banking relationships (CBRs) with these local or regional banks (respondent banks). In general, this practice is considered to be a form of “de-risking”, which typically describes situations where financial institutions terminate or restrict business relationships with clients or categories of clients considered “high-risk”. Based on preliminary surveys conducted by the World Bank, the Caribbean region is among the most severely affected by the strategy of de-risking.

WHY IS DE-RISKING A PROBLEM FOR THE CARIBBEAN? This “de-risking strategy” has come at a cost for many Caribbean countries, affecting both clientele and certain classes of business. So far, FIs in The Bahamas, Barbados, Belize, The Eastern Caribbean Currency Union (ECCU), Guyana, Jamaica and Trinidad and Tobago have reported the termination of CBRs. Indeed, the International Monetary Fund (IMF), as of May 2016, recorded at least 16 banks in the region across five countries as having lost all or some of their CBRs. The correspondent banks are located primarily in the United States, Canada, and to a lesser degree, Europe and the Caribbean.

Seeing all the above problems faced by the Carribean States ,the picture is very much clear ,they require help from financial institutions for their development.

Caribbean financial systems are relatively well developed for their size, but financial inclusion could be improved. Some countries have deep markets as a result of government debt while others have developed offshore financial centers with some positive—but limited—spillovers to domestic markets and smaller clients. Financial development has the potential to unleash new growth sources, help countries reap the benefits of globalization, and make the transition to higher income levels

Financial development could be improved. There is scope for financial development, but care should be taken to safeguard financial stability There is no silver bullet. There are trade-offs between growth, inequality, and financial stability; all should be considered when policies are designed.

We can conclude by saying that for Caribbean states , Multilateral Financial Institution. remain relevant and are umbilical to the development.

                                Reference - IMF