Category Archives: CBI

Future CARICOM-US Trading Relations Beyond the Caribbean Basin Initiative

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Alicia Nicholls

A bipartisan bill (HR 991) was recently introduced in the United States (US) House of Representatives proposing to extend the Caribbean Basin Trade Partnership Act (CBTPA), one of the key pieces of legislation comprising the Caribbean Basin Initiative (CBI), to the year 2030. The benefits under the CBTPA are currently due to expire on September 30, 2020, unless extended by a subsequent Act of Congress.

The CBI has generally been regarded by successive US administrations as being mutually beneficial to both the US and CBI beneficiary countries. However, the current US administration’s greater insistence on reciprocity in its dealings with external trading partners and the on-going re-examination of its current trading arrangements mean that the extension of the CBTPA should not be taken for granted as a fait accompli.

While this article posits that CARICOM countries should indeed lobby for the CBTPA’s extension, it also proposes that, in the long-term, the region should think strategically beyond the CBI by considering a future CARICOM-US trading relationship which best enhances bilateral trade between the US and CARICOM to foster sustainable and inclusive development.

The Status Quo: The Caribbean Basin Initiative

Since 1983, preferential trade between CARICOM countries and the region’s largest trading partner, the US, has been governed largely by the CBI – a unilateral preference scheme of the US government which confers to eligible beneficiary countries non-reciprocal preferential access to the US market for a wide range of goods.

The CBI was first announced by then US President Ronald Reagan during an address before the Organisation of American States (OAS) on February 24, 1982, to facilitate the economic development and export diversification of Caribbean Basin countries, while also advancing US strategic economic and geopolitical interests in its “backyard”.

In 1983, the Caribbean Basin Economic Recovery Act (CBERA) was finally signed into law, coming into effect the following year. In 2000, after much lobbying by Caribbean countries, the CBTPA was passed and granted enhanced preferences for eligible textile and apparel from CBI countries on par with those enjoyed by Mexico under the North American Free Trade Agreement (NAFTA). While the CBERA was made permanent in 1990, the CBTPA is scheduled to expire on September 30, 2020.

Seventeen Caribbean countries and territories are currently CBERA beneficiaries, while seven are eligible for the enhanced CBTPA preferences. Haiti also receives additional benefits for its apparel and textiles under the Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act of 2006, the Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE II) Act of 2008, and the Haiti Economic Lift Program (HELP) Act of 2010, which are scheduled to expire in September 2025.

Data in the United States Trade Representative’s Twelfth Report to Congress on the Operation of the Caribbean Basin Economic Recovery Act (December 2017) illustrated that for the years 2012-2016, on average about half of US total imports from CBI countries entered the US market otherwise duty-free. This was followed by imports under CBI tariff preferences which accounted on average for less than a quarter of US total imports from CBI countries. Trinidad & Tobago, Haiti and Jamaica were the top three sources of total US imports from CBI countries.

CBI: Possible Headwinds

The USTR report noted a 24% decrease in US consumption imports from beneficiary countries in 2016 compared to 2015, and down 58% from 2006. This decline was attributed to lower petroleum prices and an increase in US domestic petroleum production. US imports from CBI countries declined from 0.5% of total US imports from the world in 2012 to 0.2% of total US imports from the world in 2016. Energy products accounted for 39.3% of US imports under CBI in 2016 and textiles and apparel (primarily Haitian apparel) accounted for 34.9%.

In an article I wrote on this topic a couple of years ago, I outlined some of the structural deficiencies with the CBI as currently operated which I argued circumscribe its effectiveness at promoting economic development and diversification in beneficiary economies. One of those deficiencies is that the CBI preferences apply to goods only, which over time has arguably lessened its value given the increasing contribution of services trade to Caribbean economies.

Besides the structural issues inherent in the CBI, its continuation faces some possible political headwinds. The CBERA’s incompatibility with the World Trade Organisation (WTO) rules on non-discrimination and its ineligibility for the ‘enabling clause’ exception mean that the US must seek a waiver from the WTO which must be approved by WTO members. The US’ current WTO waiver for CBERA (inclusive of the CBPTA) is due to expire on December 31, 2019. Given this administration’s greater insistence on reciprocity with its trading partners, as articulated in the 2018 Trade Policy Agenda, it should not be taken for granted that the US will seek a new waiver for CBERA. Moreover, the strong opposition made by some developing WTO members the last time the US sought a waiver means that approval of yet another waiver by the WTO is also not a fait accompli.

Additionally, the current mercantilist tenor of US trade policy has occasioned a greater insistence on reciprocity and enhanced scrutiny of its trade agreements with countries with which the US has a trade deficit. It is this policy shift which hastened the renegotiation of NAFTA and its renaming to the USMCA. While reports do not indicate that the CBI is under the microscope, the programme’s unilateral nature means that preferences thereunder may be unilaterally varied or ended at any time. This adds some uncertainty for Caribbean exporters.

One element which might be keeping the CBI out of the current administration’s cross-hairs is that the CBI had immediately led to a spike in US domestic exports to CBI countries (then including other Caribbean Basin economies), peaking at $26 billion in 2005. Although US exports to CBI countries have declined since 2005, the US still enjoys a wide trade surplus with CBI countries – the total value of US exports to CBI countries in 2016 was $10.5 billion, while the total value of US imports to CBI countries in that same year was only $5.3 billion, leading to a US merchandise surplus with CBI countries of $5.1 billion in 2016.

Indeed, in the statement released by US Representative Terri Sewell (D-AL), one of HR 991’s co-sponsors (the other is Brad Wenstrup (R-OH)), the congresswoman noted, inter alia, that “Extending the U.S. Caribbean Basin Trade Partnership Act will expand the United States’ trade with Caribbean basin countries and increase our nation’s economic growth”.

CBI: Next Steps

Let me note that even if the CBTPA is not extended, this does not necessarily affect other components of the CBI programme which in the case of the CBERA is currently ‘permanent’ and with regard to the Haiti-specific preferences are due to expire in September 2025.

Nonetheless, this is not to diminish the importance of retaining the CBTPA tariff preferences, which still account for an important share of US imports from CBI countries. In 2016, the value of US imports under CBERA was $479 million and $252 million under the CBTPA. For this reason, the best immediate option is for CARICOM countries to step up their lobbying for an extension of the CBTPA. This lobbying effort should, of course, be done in collaboration with the regional private sector, the Caribbean diaspora and friends of the Caribbean in the US Congress. It is in this vein that the closure of the US-based Caribbean Central American Action (CCAA), which did excellent work on behalf of the region in the US, leaves a void which will need to be filled.

Another issue will be finding ways to increase the rate of utilization by CBI exporters of the CBERA/CBTPA preferences. This is a catch-22, of course, as the current wide US surplus with the region is perhaps the reason why CBI has been outside of the current administration’s crosshairs.

Nevertheless, US foreign policy has recognised that an economically prosperous Caribbean is in the US’ best interests. The Multi-Year US Strategy for Engagement in the Caribbean, pursuant to the US-Caribbean Strategic Engagement Act of 2016, recognizes this by outlining several broad proposals for improving the trade and investment climate between the US and Caribbean. The mechanism of the US-CARICOM Trade and Investment Council, as provided for under the Trade and Investment Framework, should be used as a forum to discuss the implementation of these proposals and ways to improve CBI beneficiaries’ utilization of the preferences with the view to enhancing their economic development.

Let me hasten to say, however, that underutilization of the CBI is not simply a product of the structural problems of the initiative, but is symptomatic of the chronic under-utilisation by regional firms of current trade agreements in place between CARICOM and its trade partners. This speaks to wider structural issues prohibiting regional exporters from converting market access into market penetration. For one, navigating the myriad of requirements for exporting to the US under the CBI and other trade preference programmes is not easy for businesses, especially MSMEs which lack scale and have limited resources to interpret and meet the legal and other requirements under these arrangements.

Beyond CBI: Options for Future CARICOM-US Trading Relations

Given the CBI’s inherent structural problems and the possible political headwinds which may face the CBTPA’s renewal, CARICOM should seriously consider options beyond the CBI for its future trading relations with its most important partner.

An appropriate policy response should be evidence-based, that is, backed by sound data, as well as broad-based stakeholder consultations on the way forward. However, at least four options are readily apparent.

  • Trading under WTO MFN conditions

This is not an attractive (or real) option for CARICOM countries as it would result in regional exporters paying WTO Most Favoured Nation (MFN) rates for goods currently benefiting from CBI tariff preferences, thereby reducing what little margin of competitiveness they currently enjoy in the US market.

  • Trading under the US Generalised System of Preferences (GSP)

The US GSP was created in 1974 and provides duty-free, non-reciprocal access to the US market for a number of goods from 131 designated beneficiary countries, including 44 Least Developed Countries (LDCs). In March 2018 President Trump signed legislation to renew it to March 2020. Similar to the CBI, the GSP’s unilateral nature still adds an element of uncertainty for traders. The rules of origin under the GSP are also stricter than those under the CBI.

While some US imports from CBI countries do enter the US market under the GSP, these are much less than those entering otherwise duty-free, under CBI and HOPE Act tariff preferences and under WTO Most Favoured Nation (MFN) terms. Additionally, not all CBI countries are GSP designated countries. For example, Antigua & Barbuda, Barbados and Trinidad & Tobago were graduated and are no longer eligible for preferences under the GSP.

  • Acceding to CAFTA-DR FTA

Acceding to an existing US FTA, such as the CAFTA DR, may be another possible option. Under Article 22.6 (Accession) of the CAFTA-DR, any country or group of countries may accede to the Agreement “subject to such terms and conditions as may be agreed between such country or countries and the Commission and following approval in accordance with the applicable legal procedures of each Party and acceding country.”

Acceding to CAFTA-DR would create market access openings for CARICOM exporters not only to the US, but to the other CAFTA-DR parties: Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, as well as enhanced market access to the Dominican Republic (with which CARICOM already has an FTA).

Conversely, there are considerations to be borne in mind. Are the commitments under the CAFTA-DR ones that CARICOM Member States are prepared to undertake and capable of implementing? What would be the possible impact of these market access openings on CARICOM’s most sensitive industries?

There are also political considerations. With the USMCA signed (but still awaiting ratification by all three governments), the current administration is said to be looking closely at the CAFTA-DR, which means that a possible renegotiation of that agreement at some point cannot be ruled out.

  • Negotiation of a CARICOM-US Free Trade Agreement

The fourth and perhaps best long-term scenario is the eventual conclusion of a CARICOM-US Free Trade Agreement. As noted in the latest USTR Report on CBERA, eight countries (including the Dominican Republic) are no longer CBERA beneficiaries due to being party to FTAs with the US. Indeed, the aim was for the US to conclude an FTA with CBERA beneficiaries as soon as possible.

There are possible positives to concluding a CARICOM-US FTA, including gaining preferential access to the US market for CARICOM services providers, and the prospect of negotiating a mutually beneficial and binding trading agreement which provides certainty for exporters from both sides.

However, there are also some potential downsides. An FTA is reciprocal and binding which means CARICOM Member States will be required to make market access concessions to the US as well. CARIFORUM countries are already struggling to implement commitments made under the CARIFORUM-EU Economic Partnership Agreement which has been provisionally applied since 2008. Some CARICOM governments may also worry about the further erosion of tariff revenue.

It is also doubtful whether the current US administration (or any future one) would agree to the generous level of special and differential treatment as CARIFORUM was able to negotiate with the European Union (EU) under the CARIFORUM-EU EPA. Negotiating a CARICOM-US FTA will also necessitate reconciling differing levels of ambition and competing interests among CARICOM Member States due to asymmetric development levels and capacity for undertaking commitments.

Nonetheless, of the four future scenarios presented, this is likely to be the most beneficial option for CARICOM. Any post-CBI CARICOM-US trading arrangement should at the very least be reciprocal (not unilateral), provide for special and differential treatment and development assistance, include gender and environmentally sensitive provisions, include an investment chapter which incorporates recent best practices in investment treaty rule-making which seek to ensure a proper balance between investor rights and States’ regulatory rights, and mandate on-going review and monitoring of the agreement to ensure that it is achieving its objectives. These could be best captured in an FTA.

Conclusion

In conclusion, the best immediate option for CARICOM at this moment should be lobbying for the CBTPA’s extension. However, given the flaws inherent in the CBI and the possible headwinds facing the programme’s future continuation, CARICOM policymakers would be advised to keep one eye on lobbying for an extension of CBTPA with the other on a longer term view of what its next steps should be regarding the region’s future trading partnership with its most important trading partner.

Alicia Nicholls, B.Sc., M.Sc., LL.B., is an international trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

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Golding Commission concerned about Caribbean Citizenship by Investment Programmes

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Alicia Nicholls

The CARICOM Review Commission, whose report was tabled in the Jamaica Parliament last week, has expressed concern about the administration of Citizenship by Investment programmes (CIPs) currently operated by five CARICOM Member States, and has called for the establishment of a CARICOM framework agreement on their operation.

CIPs were among the many diverse issues examined by the Commission whose mandate was to review Jamaica’s relations within CARICOM and CARIFORUM. CIPs are currently operated by five CARICOM Member States: namely, Antigua & Barbuda,  Dominica, Grenada, St. Kitts & Nevis and St. Lucia, and have been the subject of much scrutiny regionally and internationally.

Though recognising the economic importance of CIPs to these countries, the Commission, chaired by former Jamaica Prime Minister Bruce Golding, raised several issues with their current administration:

  • The programmes are driven more by short-term revenue benefits than long term investment gains
  • The lack of a minimum period of residency
  • The lack of a regional agreement on the operation of such programmes, especially given the national security and other implications for non-CIP operating CARICOM territories
  • While referrals to the CARICOM Implementing Agency for Crime and Security (IMPACS) are made, the State is not obligated to accept the advice of IMPACS
  • Concerns raised by third States (namely the US and Canada) about Caribbean CIPs and the fact that two CIP-operating Member States (St. Kitts & Nevis and Antigua & Barbuda) have already lost visa-free access to Canada due to these concerns
  • Cases of persons granted citizenship under these programmes who were later found to be less than savoury characters
  • The risks to the Community in light of ever more sophisticated trans-national crime
  • The alleged issuance of diplomatic passports to some new citizens
  • Varying due diligence procedures used by CIP-operating Member States

As such, one of the thirty-three recommendations made by the Commission in its Report is for the establishment of “an agreed framework with appropriate protocols and safeguards regarding the terms, conditions, qualifications and restrictions in relation to the operation of Citizenship by Investment programmes including prior consultations or sharing of information with other Member States”.

The full report of the Golding Commission may be viewed here.

Alicia Nicholls, B.Sc., M.Sc., LL.B., is an international trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

 

IMF Staff Recommend St Lucia CIP Revenues be used Primarily to Reduce Debt

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Alicia Nicholls

In the  Concluding Statement of their 2017 Article IV Mission to St. Lucia released February 6, 2017, International Monetary Fund (IMF) Staff recommended that revenues from the island’s Citizenship by Investment Programme (CIP)  be used primarily to reduce the island’s high public debt and that limits  be placed on the amount of CIP revenues used to finance high-priority expenditure. The recommendations were based on a country mission undertaken by IMF Staff during January 16-27, 2017 pursuant to Article IV of the IMF’s Articles of Agreement. The IMF’s Concluding Statement outlines the preliminary findings made by IMF Staff during their mission.

In their commentary on St. Lucia’s macroeconomic performance, IMF Staff noted that although tourism activity was weak,  unemployment continued to fall. The Staff highlighted the economic reforms programme currently in the process of being rolled out by the Government. The Staff expect positive but moderate short-term growth. However, they cautioned that the island’s high public debt, which currently stands at 82% of GDP, and its “delicate fiscal situation”, require prompt attention. They also made suggestions on how the fiscal package  announced could better achieve its targets.

St. Lucia’s CIP

In January 2016, St. Lucia became the fifth Caribbean country to offer a CIP as an alternative tool for attracting foreign direct investment (FDI), joining fellow Caribbean CIP countries: Antigua & Barbuda, Dominica, Grenada and St. Kitts & Nevis. St. Lucia’s CIP offers four investment options: a monetary contribution to the National Economic Fund (NEF), a real estate investment, a Government bond investment or an Enterprise Project Investment, with qualifying investment amounts set for each type of investment. In an effort to add exclusivity to the programme, the number of applications which could be approved by the Board had been capped at 500.

This was the IMF Staff’s first Article IV country mission to St. Lucia since the CIP’s first full year in operation. In their 2017 Concluding Statement, the IMF staff noted that the island received “relatively few applications in 2016” and that “the [St Lucian] authorities expect that the recent easing in the requirements and lowering of the costs to qualify for this program will encourage an increase in revenues.”

Changes to St. Lucia’s CIP Regulations – 2017 

Effective January 1, 2017, an Amendment to the Citizenship by Investment Regulations No. 89 of 2015  introduced several sweeping changes to St. Lucia’s CIP in an effort to boost its competitiveness. This includes, inter alia, a reduction in the qualifying contributions required, making it the most affordable programme in the Caribbean and the removal of the 500-application cap. A summary of the regulatory changes may be found on CIP St. Lucia’s website here.

However, while the Government’s desire to make its CIP more competitive is understandable, some have legitimately argued that these changes may undermine the programme’s exclusivity and may lead to a “race to the bottom” in terms of competition on price and ease of accessibility among Caribbean CIPs. Indeed, with the number of CIPs in the Caribbean now at five and several other countries around the world also offering CIPs or some form of immigrant investor programme, Caribbean CIPs face stiff competition both inter se and abroad.

As such, as I have argued before, increased cooperation among Caribbean CIP countries will be needed to ensure that high standards are maintained and that countries do not undercut each other in terms of price and robustness of their programmes. There seems to be some support for the need for greater cooperation, as St. Lucia’s Prime Minister, Allen Chastanet, earlier this year called for a joint OECS approach to CIPs.

Moreover, while I strongly believe that CIPs can be legitimate tools for development once managed well through raising revenue, encouraging FDI, infrastructural development, job creation and attracting  High Net Worth Individuals (HNWIs), they should be used as an adjunct and not the main propeller for economic growth and development.

IMF Recommendations

In the Concluding Statement, the IMF Staff made several recommendations aimed at minimising St. Lucia’s risk of fiscal dependence on its CIP revenues, which can be volatile, and to reduce the impact of the global rise in interest rates. These recommendations included:

  • Using CIP revenues primarily to reduce the high debt.
  • Using a capped amount of CIP revenue for investment projects of primary importance
  • The importance of “transparency, appropriate governance, and careful due diligence” to reduce risks of sudden stops in CIP revenue inflows.

More detailed information will be known when the full Staff Report is produced and released at a later date.

The full IMF Staff Concluding Statement may be viewed here.

Alicia Nicholls, B.Sc., M.Sc., LL.B., is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

Citizenship by Investment receipts help power economic recovery in Eastern Caribbean Countries

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Alicia Nicholls

Receipts from citizenship by investment programmes (CIPs) continue to be a major contributor to economic recovery in the Eastern Caribbean Currency Union (ECCU). This is according to the International Monetary Fund’s latest Staff Report on the ECCU released this month (October 2016).

CIPs have been an important development tool in Eastern Caribbean countries. In January 2016 St. Lucia became the 5th ECCU country to institute a CIP. The other ECCU countries which run CIPs are St. Kitts & Nevis, Grenada, Dominica and Antigua & Barbuda.

According to the IMF, most ECCU governments continued to rely on CIP inflows to fund their budgets in 2015. CIP inflows were highest in St. Kitts and Nevis, which has the world’s longest running CIP. In that country, CIP revenues to the public sector were at 17.4 percent of GDP. The report also noted that inflows reached 7.9 percent of GDP in 2015 in Antigua and Barbuda and 3.6 percent in Dominica.

However, the IMF did mention several potential downsides to the sustainability of the CIPs, including the increased competition ECCU CIPs face not only amongst themselves but from other CIPs and residency programmes worldwide, including Malta’s. Other risks the IMF mentioned include rising global migration pressures, elevated security concerns and geopolitical tensions which may trigger adverse actions by the international community, including suspension of visa-free travel for citizens of CIP countries.

In order to improve the sustainability of the programmes, the IMF also encouraged authorities to “develop a strong, regionally accepted set of principles and guidelines for citizenship by investment programs in order to enhance their sustainability” The staff suggested that the authorities share due diligence information on clients to prevent citizenship shopping in cases where an application is rejected by one jurisdiction.

The IMF cited the need to improve the management of the programmes and cautioned against over-reliance on CPI revenues for funding recurrent budgetary operations. Mindful of the threat posed by natural disasters, the IMF posited that CIP countries save the bulk of the CPI revenues in a well-managed fund to address natural disaster shocks and to fund disaster resilient infrastructure.

Arguing that a comprehensive governance framework is crucial to mitigating increased risks facing CIPs, IMF also recommended more transparency by making data on the programmes public and subject to financial audits.

The full IMF Staff Report for the ECCU may be viewed here.

Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

Are Citizenship by Investment programmes sustainable?

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Alicia Nicholls

The International Monetary Fund (IMF) in its end of mission press release following its recently concluded Article IV Consultation mission in St. Kitts & Nevis highlighted that strong construction activity, driven in part by large real estate projects funded under the island’s Citizenship by Investment (CBI) programme, had contributed significantly to the island’s five percent economic growth in 2015. Although the Article IV report itself has not been made available, the end of mission press release noted as follows:

“The outlook for 2016 is positive, but remains dominated by developments in CBI inflows. Growth is expected to moderate to 3.5 percent in 2016 and 3 percent, on average, over the medium term, reflecting a tapering of construction activity associated with a potential slowdown in the pace of new CBI applications, given the increased competition from new CBI programs [emphases are this Author’s].”

Two main things are clear from this paragraph and indeed from the entire press release. Firstly, St. Kitts & Nevis’ CBI programme, which has been in existence since 1984 and was the first of its kind, has contributed significantly to the island’s recent macroeconomic performance at a time when some Caribbean countries are still seeing sluggish GDP growth. Secondly, the IMF has concerns about the sustainability of this  CBI-led growth. This is reflected in the lower GDP growth rate projected for 2016 and for the medium term. It raises the question of how sustainable a role can CBI programmes play in fostering growth and development in the host country.

Citizenship by investment programmes or jus pecuniae (economic citizenship) remain a controversial topic in the Caribbean. Despite this,  given the high level of indebtedness of many Caribbean countries, the need for economic diversification, the fickle nature of foreign direct investment inflows and limited access to concessional borrowing, Caribbean countries are increasingly considering their attractiveness. In January this year, St. Lucia recently joined four other Caribbean countries (Antigua & Barbuda, Dominica, Grenada and St. Kitts & Nevis) as the fifth Caribbean state currently operating a CBI programme. Each of these programmes differs in terms of fees, types of qualifying investment and admission and other qualification criteria.

If managed well, CBI programmes can be an important source of targeted foreign direct investment and other foreign exchange inflows. They can also be alternative means of financing infrastructure projects which might be otherwise unattractive to most private investors. As an example, the Government of Dominica recently announced that its West Bridge project under the Roseau Enhancement Project will be financed through its CBI programme. Without private sector-led involvement, such projects would require use of government’s tax coffers, borrowing or public-private partnerships. Construction activity pursuant to these projects, where provided for, contributes to economic activity and generates employment. High Net Worth Individuals (HNWIs) and their families  also bring with them expertise, contacts and know-how to the businesses which they establish. CBI programmes can to some extent contribute to poverty reduction by creating employment and creating infrastructure in rural communities.

Growing global demand for Second Passports

There is also no disputing that global demand for second passports is increasing. Contrary to popular belief, this demand is not fuelled in the main by nefarious purposes but by HNWIs either fleeing political or economic instability in their home countries or seeking the greater mobility a less restrictive passport could bring. Caribbean passports, for example, rank among some of the least restrictive passports outside those of metropolitan countries.

A growing and increasingly mobile Chinese, Russian, Middle Eastern and African HNW class, and continued instability in the Middle East, are two of the major developments to watch. Turning to this hemisphere, Fortune reports  that 2015 was the third straight year in which a record number of US citizens renounced their US citizenship. Besides the onerous reporting requirements under the Foreign Account Tax Compliance Act (FATCA), the main factor is that under US law,  American citizens or resident aliens living or travelling outside the  US are mandated to file taxes in the US in the same way as those resident in the US. Moreover, if media reports are to be believed, that number may jump depending on the outcome of the presidential election this fall! It is therefore no surprise that citizenship planning is a multibillion dollar global industry.

Sustainability issues

While it is unlikely that global demand for second passports will abate anytime soon, there are concerns about the sustainability of these programmes not just because of the inherent reputational risks to the host countries if applicants are not thoroughly vetted, the implications for loss of visa-free access with third states, but also the security implications in the context of the free movement of persons as envisioned under the CARICOM Single Market and Economy. For example, St. Kitts & Nevis had to revamp its programme after the US and Canada raised concerns. The latter revoked visa-free access  to Kittitian nationals. I have touched on these issues in previous articles so my main focus here is on issues of economic development.

Like all inflows, CBI  revenue inflows are not guaranteed and could leave a country in the lurch if there is a sudden drop in inflows due to competition from other CBI programmes globally. It is a concern that the IMF rightly raised  in its Article IV end of mission press release in regards to St. Kitts & Nevis. Even so, market and size constraints mean there is only so much real estate and tourism construction activity which can take place in a small country at once, and concerns have been raised that increased demand for luxury real estate could drive up the general price of real estate, making it unaffordable to ordinary persons.

The CBI programmes in the Caribbean are direct citizenship programmes, which means that once all fees are paid and due diligence requirements met, a qualifying investor is granted citizenship on the basis of a one-time qualifying investment and is not required to be resident in the country for any period of time prior to applying for citizenship or afterwards. A slight exception is that under Antigua & Barbuda’s CBI programme  an investor may lose citizenship if he fails to spend at least 5 days in Antigua & Barbuda during the period of five calendar years after having obtained citizenship. Five days out of a possible 1,826 days is hardly any time and only applies after citizenship is obtained.

This may be contrasted with residence-to-citizenship programmes, such as the US’ EB-5 programme, which require a period of residency before an investor may apply for citizenship. The lack of a residency requirement means there is no incentive for the investor to reside in the new country of citizenship or contribute through expenditure, tax paying or otherwise once he receives citizenship.

Some countries seek to address this by establishing a relationship with their new citizens. In this article on the Government of Dominica’s website, the Prime Minister of Dominica is reported to have visited and addressed several new citizens of Dominica in Europe, Asia, Dubai and the Arab Emirates and “impressed upon them the importance of their contributions for the development and modernization of [their] country.”

Another option could be to do like Malta did and introduce a one-year residency requirement. A drawback is that this would increase the waiting time for the potential investor, making such a programme less competitive.  While one could argue that this has not hurt Malta which is currently  ranked as the top global residency and citizenship programme on Henley & Partners’ Global Residence and Citizenship Programs 2016 report, I believe that its  visa-free access to 168 countries, including EU citizenship, offsets any negative fall-out from having a residency requirement.

Conclusion

To go to the heart of the question posed in this article,  CBI programmes have their benefits. The revenue  inflows and the economic activity generated make the macroeconomic fundamentals of a country look good. However, they should not be relied on exclusively as an engine of inclusive growth and sustainable development.

Careful planning is needed to ensure that investment under CBI programmes is steered towards targeted growth areas and sectors which can boost economic diversification and growth. To some extent we are already seeing this being done. CBI-funded projects in St. Kitts & Nevis are adding to the appeal of the island’s tourism product. St. Lucia is using its programme in order to develop its luxury tourism and real estate sectors. However, this should be done in a sustainable way in order to boost development and at the same time having a minimal adverse human and environmental impact.

The IMF has also made a very interesting suggestion in its above-mentioned press release that the categories for qualifying investments under the Citizenship by Investment regulations be broadened to include renewable energy, education and health. This merits consideration by policy makers. However, promoting investment in these sectors would require more marketing as their profitability for investors may not be immediately apparent.

The IMF also recommended the need for a prudent framework that “would help build resilience to a sudden stop in CBI inflows, and facilitate the accumulation of fiscal buffers necessary to address natural disaster shocks and absorb unforeseen financing needs if tax performance disappoints after a slowdown in CBI inflows”. The Fund also emphasised that a Growth and Resilience Fund using savings from the CBI programme should be established which could be used as a contingency buffer in the case of natural disasters.

Besides these very timely suggestions, it would be useful if Caribbean countries released more data about the operation of their programmes. For example, periodic impact assessments should be done on the operation of the programmes and made publicly available, highlighting their contributions, challenges and whether they have met their targets. Such an exercise would not only assist policy makers in their policy planning but also show the public that CBI programmes are not a cloak used by unsavoury characters to conceal their illegal activity but are a policy tool to assist in development. I would also add that countries should continuously evaluate and monitor, and where necessary, revise their due diligence frameworks, to ensure the integrity of their programmes.

Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

St Lucia’s Citizenship by Investment programme officially opens for business

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Alicia Nicholls

As of January 1st of this year, St. Lucia’s Citizenship by Investment programme is officially open and taking applications by interested investors. Late last year, Prime Minister, The Hon. Dr. Kenny Anthony formally launched the programme at the Global Citizen Forum held in Monaco. St. Lucia joins St. Kitts & Nevis, Grenada, Antigua & Barbuda and Dominica to become the fifth Caribbean State to offer a citizenship by investment programme.

A citizenship by investment programme (CbI) offers qualifying investors (as well as their spouse and dependents once they meet certain criteria) citizenship in exchange for an investment in a qualifying activity, for instance, investment in real estate, a special fund or government bonds. In a world of dwindling access to financial resources, a growing number of States internationally are currently offering some form of citizenship by investment programme as a way to raise much needed finance, including for development objectives.

This phenomenon is not limited to developing countries. Several metropolitan countries such as the US and its EB-5 Immigrant Investor Programme, offer some form of citizenship by investment scheme. Other States offer residency by investment programmes, which grant the qualifying investor certain residency benefits. A Caribbean example is Barbados’ Special Entry and Reside Permit (SERP), while Spain’s Golden Visa is an international example.

The market for second passports is growing and is an attractive option for high net worth individuals (HNWIs), particularly business persons who come from countries  whose passports are subject to visa restrictions, making it difficult to travel to, and conduct business in major markets unimpeded. For HNWIs from those few countries like the US where personal income tax is levied based on nationality as opposed to residency,  renouncing one’s citizenship and obtaining citizenship of another State through a CbI programme is also increasingly seen an attractive option.

Some quick facts about St. Lucia’s programme

Basic Eligibility Requirements

  • Age Limit: Under the Citizenship by Investment Act No. 14 of 2015, a person who is 18 years or over may apply for citizenship of St. Lucia.
  • Dependents: Qualifying dependents include a spouse and a child and/or parent of the applicant or of his/her spouse once the child or parent meets certain criteria provided for in the Act.
  • Net worth: The applicant must have financial resources of at least US 3,000,000

In addition to these basic requirements, the applicant must fill out an application form, accompanied by the requisite information, documentation and fees and is subjected to due diligence checks.

All of this will be explained by the Authorised Agent. Authorised agents are licensed by the St. Lucia Financial Services Regulatory Authority and are authorised to act on the applicant’s behalf  in relation to the application for citizenship by investment.

Qualifying Investments: On approval of the application, the potential investor will be required to make the qualifying investment proposed in his or her application. Under Schedule 2 of the Citizenship by Investment Regulations Statutory Instrument No. 89 qualifying investments are:

  • Investment in the St. Lucia National Development Fund, with the level of minimum investment required depending on whether the applicant is applying alone, with a spouse and/or with dependents. For an applicant applying alone, the minimum threshold is US$ 200,000.
  • Investment in an approved real estate project. The minimum threshold is US$300,000.
  • Investment in an approved enterprise project. The minimum investment required depends on whether it is one or more than one applicant investing. For an applicant applying alone, the minimum investment is US$ 3,500,000 (plus no less than 3 permanent jobs).
  • Investment by purchasing Investment by purchase of non interest bearing Government bonds (5 years holding bond). For an applicant applying alone, the minimum threshold is US$ 500,000.

Benefits of St. Lucia Citizenship

  • St. Lucia allows for dual citizenship which means the investor is not forced to renounce his or her citizenship of another State.
  • The Citizenship by Investment Board is only allowed to grant a maximum of 500 applications annually which adds an element of exclusivity.
  • A St. Lucia passport allows for visa-free travel to over 90 countries, including the Schengen Area (26 European countries), as well as visa-free travel within the Caribbean Community (CARICOM) and the  other rights of which CARICOM nationals benefit under the Revised Treaty of Chaguaramas.

For further information on St. Lucia’s Citizenship by Investment programme, please contact the St. Lucia Citizenship by Investment Unit.

For a general overview of CbI programmes across the Caribbean, please feel free to read my earlier article: Economic Citizenship by Investment Programmes in the Eastern Caribbean: A Brief Look.

DISCLAIMER: Please note that the information presented in this Article is for general information only and is not intended to be, nor should it be construed as, investment or legal advice. The Author is in no way affiliated with the St. Lucia Citizenship by Investment programme or any of the relevant authorities. The information is taken from sources deemed to be accurate at the time of publication and the Author of this article accepts no liability or responsibility for any errors which may be contained herein or any actions suffered as a result of reliance on the information presented.

Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

 

 

2015 Year in Review for Caribbean Region: Triumph, Tragedy and Hope

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Alicia Nicholls

2015 has been a year of both triumph and tragedy for the countries which make up the Caribbean region. This article reviews some of the major political, diplomatic and socio-economic challenges and gains experienced by the Region in 2015, many of which would have been covered on this blog throughout the year. It also speaks to the prospects for 2016.

Political/Diplomatic issues

General elections led to changes of government in St. Kitts & Nevis, Guyana and Trinidad & Tobago, while voters in the British Virgin Islands, Belize and St. Vincent and the Grenadines bestowed the incumbent governments with a fresh mandate.  In October Haiti held its first round of presidential elections, as well as local elections and the second round of legislative elections. The second round of presidential voting which was slated to occur on December 27, was postponed indefinitely in December.

On the international stage, the election of Prime Minister Justin Trudeau in Canada was widely welcomed in the Caribbean Region as possibly heralding a new era in Caribbean-Canadian relations. However, the electoral defeat of President Nicolas Maduro’s United Socialist Party of Venezuela (PSUV) in the Venezuelan legislative elections in December has caused concern in the Caribbean about the future of Petrocaribe, a legacy of the late President Hugo Chavez under which Venezuela provides oil to participant Caribbean States on preferential terms.

In international diplomacy, the Region had two major triumphs. The first was the historic election of Dominica-born Baroness Patricia Scotland as the first female Secretary-General of the Commonwealth of Nations.  The second was the conclusion by 196 parties of an international climate change agreement in Paris, which though not perfect, paid consideration to the interests and needs of small states.

The catastrophic human and economic devastation inflicted by Tropical Storm Erika in Dominica in August and Hurricane Joaquin in the Bahamas in September-October, and the prolonged drought and water shortages being experienced across the Region are sharp reminders that climate change is an existential threat to the Region’s survival. Access to climate change finance will be critical in financing Caribbean countries’ mitigation and adaptation strategies. Despite the triumph of small states at Paris, this is only just the beginning and a major hurdle will be the ratification of the Agreement by all parties, critically the US.

Caribbean low tax jurisdictions’ battle against the tax haven smear made by metropolitan countries continued in 2015 after several Caribbean countries were included in blacklists by the European Union and the District of Columbia. At the 8th meeting of the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes held in Barbados in October, there was acknowledgement made that the Global Forum was the “key global body competent to assess jurisdictions as regards their cooperation on matters of transparency and exchange of information for tax purposes”. However, the fight is not over.

On the international front, the border disputes between Guyana and Venezuela and Belize and Guatemala remain unresolved.  The Guyana-Venezuela dispute came to a boiling point after the announcement that Exxon Mobil Corp had discovered large oil and gas deposits in waters of the disputed region pursuant to a contract made with the Government of Guyana. While CARICOM countries have pledged their support of Guyana’s sovereignty, Venezuela’s more aggressive diplomatic engagement of the region in recent months has raised questions about where CARICOM states’ loyalties will truly reside; with a fellow CARICOM state or with a major financier. To further complicate matters, Suriname, a fellow CARICOM State, has restated its claim to a portion of Guyana’s territory. Indeed, the expeditious and peaceful settlement of both disputes will be important for the economic future of Guyana.

While the US embargo of Cuba remains despite an overwhelming United Nations vote (191 to 2) yet again in favour of ending it, the United States and Cuba made significant advancements in 2015 in the quest towards “normalization” of relations. These included the easing of several travel and trade restrictions, the mutual re-opening of embassies in August and the announcement in December of an agreement to resume commercial flights between Cuba and US for the first time in more than half a century. The future resumption of air links between Cuba and the US is a welcomed development and instead of simply fearing the impact this will have on their US arrivals, Caribbean States should see this as an impetus to increase their marketing efforts in the US market and to improve the competitiveness of their tourism product.

Socio-economic issues

Lower oil and commodities prices have had a mixed impact on the region. They have been a blessing for services-based, import-dependent Caribbean countries struggling to overcome the lingering effects of the global economic crisis on their economies by slightly reducing their import bills and narrowing their current account deficits somewhat. For commodities exporting Caribbean states, however, the impact has been negative. Low oil prices have had a deleterious impact on the Trinidad & Tobago economy which is dependent on the export of oil and petrochemicals and was recently confirmed to be in recession after four consecutive quarters of negative growth.

The tourism industry, the lead economic driver for most Caribbean countries, saw a strong rebound in 2015 with several Caribbean countries, including Barbados, registering record long-stay and cruise ship arrivals, buoyed by increased airlift and cruise callings and stronger demand from major source markets and lower fuel prices.

However, the Caribbean continues to confront an uncertain global trade and economic climate. As recently as December, Managing Director of the International Monetary Fund (IMF), Christine Lagarde, was quoted as stating that global growth for 2016 will be “disappointing” and “uneven”. Another arena Caribbean countries must watch is the troubled Canadian economy and the depreciation of the Canadian dollar as Canada is one of the major tourism source markets for Caribbean countries and an important market for Caribbean exports.

According to an Inter-American Development Bank (IDB) report released in December, Caribbean exports are estimated to decline 23% in 2015, with Trinidad & Tobago accounting for the bulk of the decline. A bright spark is that St. Lucia, Grenada and Guyana signed on to the World Trade Organisation (WTO)’s Trade Facilitation Agreement, joining Trinidad & Tobago and Belize. The on-going reforms being made by these countries pursuant to the Trade Facilitation Agreement should help facilitate and increase the flow of trade in these countries. Barbados, Guyana and Haiti underwent their WTO trade policy reviews in 2015.

The Caribbean region continues to be one of the most indebted regions in the world. Aside from high debt to GDP ratios, several Caribbean countries continue to face high fiscal deficits, wide current account deficits and sluggish GDP growth. Regional governments will have to continue measures to lower their debt, broaden their exports and lower their import bills.

In September, the world agreed to the 2030 agenda for sustainable development in the form of the 17 ambitious sustainable development goals and their 169 targets. A critical factor for achieving these goals will be access to financing for development. Caribbean countries already face several challenges in accessing development finance owing to declining inflows of official development assistance, unpredictable foreign direct investment inflows and limited access to concessionary loans due to their high GDI per capita. Caribbean States should continue to vocalize their objection to the use of GNI/GDP per capita as the sole criterion for determining a country’s eligibility for concessionary loans.

The alarming rise in crime across the Region remains an issue which Caribbean countries must tackle with alacrity not just for the safety of their nationals but for the preservation of the Region’s reputation as a safe haven in a world increasingly overshadowed by terrorist threats. 2015 was a year marked by an escalation in terrorism, with deadly attacks in Egypt, Kenya, Paris and Beirut capturing international headlines. Moreover, the news of recruitment of some Caribbean nationals by ISIL (Daesh as ISIL calls itself in Arabic) is an issue which Caribbean States must confront.

The growing threat of terrorism has caused some concern about the security and robustness of the Economic Citizenship Programmes offered by some Caribbean countries. St. Kitts & Nevis revamped its programme and in light of the Paris attacks, the Kittitian Government announced in December that Syrian nationals will be immediately suspended from its programme. However, the fact that St. Lucia has forged ahead with the establishment of its own programme, accepting applications from January 1st 2016, shows that some regional governments strongly believe the gains outweigh any potential risks.

High unemployment and youth unemployment rates continue to be major social issues threatening the sustainability of the Region, with consequential implications for crime and poverty reduction and political engagement.

Prospects for 2016

Without doubt there are several issues and challenges which confronted the Region in 2015 and will continue to do so in 2016. Moreover, since the “pause” taken years ago, CARICOM continues to face the threat of regional stagnation and fragmentation. While Dominica must be applauded for signing on the appellate jurisdiction of the Caribbean Court of Justice, it is only the fourth out of fifteen  CARICOM States to have done so nearly fifteen years after the Court’s establishment.

However, in spite of these challenges the Caribbean Region has several factors still going in its favour, including high levels of human development, well-educated populations, political stability and a large diaspora. These are factors which it should continue to leverage but should not take for granted. No doubt a critical success factor will be the ability of regional governments, individually and together, to formulate effective and innovative solutions to the challenges faced, working towards the achievement of the SDGs, and their ability to mobilize domestic and international resources to finance these solutions. Let us also hope that 2016 will be the year where there will be a greater emphasis on increasing the pace of implementation of the Community Strategic Plan 2015-2019. The unity displayed by CARICOM during the Paris negotiations should be a reminder that the Caribbean is at its strongest when united.

Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. Please note that the views expressed in this article are solely hers. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

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