Dark clouds on the economic horizon for the Caribbean
Tuesday, August 31, 2004
LONDON, England: There are more than 20
offshore financial centres (or tax havens) in the Caribbean and Central
America and, according to a report by Tax-News, some commentators are arguing
that their day in the sun is nearly done. The
list of adverse factors is certainly daunting: first of all, the gradual
reduction in tariff barriers worldwide has undermined the Caribbean islands'
reliance on subsidized exports of sugar and bananas.
Second, the attacks by the USA, the FATF and other bodies on money laundering
and terrorist financing have forced the offshore financial centres to eschew
many of their traditional clientele. The OECD
is pressing for harmonized onshore and offshore regimes; and to cap it all, a
majority of the offshore financial centres are dependent territories of the
UK, and have been forced to adopt the EU Savings Tax Directive.
It's this last problem that may turn out to be the most disastrous, at least
in the short term, as investors shy away from the EU's spotlight. Perhaps not
coincidentally, the British Virgin Islands saw a drop in revenue from IBC
registrations of 20% last year.
With such a wide choice of offshore
financial centres available world-wide, the uncomfortable demonstration that
Britain's dependencies had no choice but to knuckle under to the FCO can
hardly have helped them. An Economist report
last week pointed out that all 14 of the independent countries in the
Caribbean Community (CARICOM) are among the 30 most heavily indebted
emerging-economy governments, and seven of them are in the top ten.
Ratna Sahay, of the IMF's Western Hemisphere
Department, suggested in a recent report that a continuation of current
policies would endanger the Caribbean's macroeconomic stability. The IMF says
that the Caribbean economies have managed an average growth rate of barely
2.5% in the last 25 years. Still, the gloom
and doom may be overdone, at least in many cases. The BVI still managed to
grow last year, helped on by tourism, increased business in financial
services, and substantial asset flows from booming China.
Many other jurisdictions in the region have
been reporting increased business, and most of them are well aware that they
have to change their fiscal models, if for no other reason than that regional
integration is undermining tariff revenues, which underpin budgets in most
cases.
Ratings agencies have had hard words for
Belize and Barbados (disputed in the case of Barbados) but have complimented
the Cayman Islands; and the IMF has been mostly favourable in its regional
assessments.
The dark cloud of the Savings Tax Directive
may not persist: in reality, it is easy to escape the Savings Tax in a number
of perfectly legal ways, and the convenience of the Caribbean for US and
European investors may outweigh their concerns once the dust has settled.
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