- Debt reduction has advanced across the Caribbean overall: Barbados and Jamaica have cut debt sharply since 2019, The Bahamas has reduced it from its pandemic-era peak, and Guyana remains a low-debt outlier as oil revenues expand.
- Even under a negative growth shock, most Caribbean countries would remain on a downward debt path, as highlighted in the latest Caribbean Economics Quarterly.
- More efficient tax systems and stronger institutions can help countries build fiscal buffers, support investment and long-term growth, and reduce reliance on indirect taxes.
The Caribbean has spent the last several years doing something many thought would be very difficult. After absorbing unprecedented shocks from COVID-19, hurricanes, inflation, and commodity prices, several countries have managed to reduce public debt while maintaining stability, as discussed in the latest Caribbean Economics Quarterly, “Fiscal Resilience, Debt Reduction, and Domestic Resource Mobilization in the Caribbean.”
Yet the next challenge is emerging. Even without a significant increase in investor concerns about Caribbean sovereigns, governments are refinancing debt in a higher-interest-rate environment. Borrowing costs have changed little over the last five years, as the narrowing of sovereign spreads in emerging markets has been offset by persistently high U.S. Treasury yields (Figure 1). These tight global financial conditions raise borrowing costs and leave governments with less room to respond when the next shock arrives.
The Good News: Debt Reduction Is Possible
Despite these tougher conditions, the region has important success stories. Barbados and Jamaica have cut debt sharply since 2019, while Guyana remains a low-debt outlier thanks to rapidly expanding oil revenues. The Bahamas has also reduced debt from its pandemic-era peak, supported by the tourism recovery and stronger fiscal balances (Figure 2).
The lesson is encouraging, but this progress is not automatic. Countries that reduced debt most decisively did so through fiscal discipline, credible frameworks, and sustained institutional reform. These efforts matter because they help governments stay the course when growth slows or external conditions worsen.
Environmental and Growth Shocks Still Matter
A debt ratio can look manageable until a shock changes the arithmetic. As the latest Caribbean Economics Quarterly shows, a negative growth shock would still leave most Caribbean-6 countries on a downward debt path, although debt-reduction targets would be delayed (Figure 3).
That matters for a region exposed to hurricanes, tourism cycles, imported inflation, and swings in energy and commodity prices. Fiscal resilience is therefore not only about lowering debt. It is about creating buffers before they are needed.
Why Tax Reform Is the Next Frontier
The first stage of post-pandemic adjustment benefited from reopening, the recovery in tourism, commodity-price effects, and the withdrawal of emergency support. The next stage will be harder, requiring governments to build revenue systems capable of financing debt reduction, environmental resilience measures, infrastructure, and social priorities at the same time.
The Caribbean collects less tax revenue relative to GDP than OECD economies and relies heavily on indirect taxes such as sales and value-added taxes, excises, and import duties. While these taxes can be efficient and easier to administer in small open economies, they need to be protected from excessive exemptions and paired with targeted social spending. At the same time, stronger direct taxes—especially property, income, corporate, and resource-related taxes, where feasible—can improve fairness and diversify the revenue base.
How Can Fiscal Progress Be Made Durable?
The Caribbean fiscal story since the pandemic may be better than many observers expected, but the region cannot rely on recovery alone. The fact that borrowing costs remain high, while environmental risks and development needs continue to demand resources, points to the need for stronger fiscal foundations. That means strengthening revenue administration, rationalizing tax incentives, and improving taxpayer services, while making greater and better use of digital technologies and linking new revenues more clearly to better public services and resilience.
Having already shown that progress is possible, the region now faces a different challenge: making that progress durable by building systems strong enough to absorb the next shock when it arrives, without losing sight of development priorities.