Highlights of CDB's Activities in 2004 and Economic Background and ProspectsPart A - Economic Review and Prospects1. International Economic DevelopmentsThe pace of recovery in the international economy accelerated and broadened in 2004. Unlike 2003, where growth was led predominantly by the US, global activity in 2004 was more wide-spread, with Asia, particularly China and to a lesser extent Japan, as well as the Eurozone area and Latin America making notable contributions to world output. In the US, a surge in private domestic demand provided the main impetus for growth, while in Asia, rising private consumption and business investment fuelled activity. Reflecting rising external demand and a smaller increase in domestic demand, activity in the Eurozone area, which had stagnated over the past two years, accelerated for the first time since 2000. Similarly, Latin America, buoyed by rising external demand from its main markets in the US and Asia, was also able to record some gains. Consequently, global growth was estimated at around 5% in 2004, compared to 3.9% in 2003, and represents the highest growth rate for the decade. A constraining factor during the year, however, was the rise in oil prices, brought on by a higher than expected global demand for oil and by increased uncertainty surrounding potential disruptions in oil supplies, which coincided with a period of particularly low excess capacity. This notwithstanding, the pass-through effects of rising oil prices were relatively limited, resulting in global inflation of just above 2%, compared with 1.8% in 2003. The overall increase in economic activity fed-through to the labour market, with a general decrease in the rate of unemployment and a pick-up in employment growth. Employment growth however, has been less than anticipated, and is likely reflective of the lagged response of employers to make adjustments given that growth exceeded expectations. There was some tightening of monetary policy in 2004, as most developed countries attempted to contain inflationary pressures amidst rising growth. The most notable of these actions took place in the US, where the Federal Reserve system raised its indicative rate four times, and in China, where fears of an overheating economy prompted a rise in interest rates, the first since 1995. Similar policy measures also took place in Canada and the UK. The European Central Bank, however maintained its accommodative stance, leaving rates unchanged at June 2003 levels, in its continuing efforts to encourage growth. Similarly in Latin America, the emphasis was on stimulating output, as central banks for the most part lowered interest rates further in the wake of subdued inflationary and exchange rate pressures. Fiscal policy in some developed economies remained expansionary, particularly in the Eurozone area and the US, where the trend of widening deficits continued into 2004. In the US, this largely represented a continuation of the effects of the tax cuts approved in 2003, and additional defense-related spending, while in the Eurozone area, continued public spending, the absence of an area-wide comprehensive reform strategy and data issues have been blamed for the deterioration, as more countries approached the 3% deficit limit of the EU's Stability and Growth Pact. In Asia and Latin America, however, there were signs of fiscal consolidation, particularly in Latin America, where economies were able to combine rising revenues from the growth in output with measures to increase accountability and transparency to improve public finances. II. Regional Economic DevelopmentsOverviewRegional economic activity is estimated to have accelerated in 2004, despite the passage of hurricanes Frances, Ivan and Jeanne, which affected some of CDB's Borrowing Member Countries (BMCs). Most BMCs were able to capitalise on the strengthening global economy, with most showing higher real rates of growth when compared to 2003. Tourism was the main driving force, supported by Construction and to a lesser extent financial services, manufacturing and agriculture. These developments occurred within the context of only slightly higher inflation levels, as the effects of rising oil prices appeared to have been limited. Concomitant with the rise in real sector activity, was an increase in Government revenue, and this coupled with relatively slower current expenditure growth led to an increase in savings. The overall position of public finances, was, however, mixed, as some countries engaged in expansionary capital works programmes leading to widening overall deficits.. The rise in domestic demand was also reflected in the financial sector in a pick-up in broad money supply and credit growth, which led to some reduction in excess liquidity levels. Despite this, regional central banks lowered indicative rates in a further attempt to stimulate growth and reduce the levels of unused funds in the system. Real OutputThe pace of real sector activity picked up in 2004, with most economies registering an increase over 2003, despite the damage caused by the hurricanes. Preliminary estimates suggest the economies recording the highest growth rates were Anguilla (12%), Trinidad and Tobago (6.7%), Antigua and Barbuda (5.1%) and Belize (between 4% and 5%). Notwithstanding the relatively strong performances of these economies, rates in Trinidad and Tobago, Antigua and Barbuda and Belize were lower than in the previous year, potentially representing a return to a more sustainable growth path in these economies. Anguilla, the fastest growing economy, benefitted from heightened Tourism activity and Construction output, while output in Trinidad and Tobago continued to be dominated by petroleum and petrochemicals operations. Tourism also contributed to the improved performances in Antigua and Barbuda and Belize. However, in the former, this was accompanied by increased activity in the transportation and distribution sectors, while in Belize, increased output of bananas, sugar and shrimp also contributed to growth. Real GDP in St. Kitts and Nevis expanded by 3.9% reflecting strong performances in Tourism, transportation and communication, while in Barbados real activity (up 3.4%) was bolstered by gains in Tourism and the non-traded sectors. Likewise output also grew in St. Lucia (3.4%) and Dominica (2.6%), due to improvements in agriculture and Tourism. However, in Dominica, this was also supported by higher activity levels in the Construction and manufacturing sectors. The British Virgin Islands also turned in a creditable performance in 2004 with GDP rising by 2% on the basis of strong growth in Tourism and financial services, while Guyana, which registered a contraction in 2003, recovered in 2004 with output expanding by 1.5%, as a result of higher sugar production and an increase in services output. Activity levels in St. Vincent and the Grenadines, Turks and Caicos Islands, and Montserrat, also improved relative to 2003. In St. Vincent and the Grenadines, Tourism and agriculture were the main contributors to growth, while in the Turks and Caicos Islands, Tourism and Construction boosted activity. Similarly, in Montserrat, Tourism and Construction spurred production, but were also accompanied by a strong increase in the provision of government services. During the year, economic activity was constrained in the Cayman Islands and Grenada, as these countries were severely impacte d by the passage of Hurricane Ivan. The hurr icane, which passed over the islands in September, wreaked havoc on the economies, resulting in the loss of life, and in significant damage to productive capacity and to economic and social infrastructure. Preliminary estimates suggest that the Cayman Islands was, nevertheless, able to post some growth over the year as a whole, reflecting gains made in Tourism prior to the passage of Hurricane Ivan. At the start of 2004, activity growth in the Cayman Islands had been projected at around 3%, compared with 2003's actual outturn of 2%; damage caused by Hurricane Ivan was estimated at $3.4 bn, or about 180% of GDP. Grenada was also devastated by the hurricane, with activity contracting by 3.2%, after an encouraging 2003 performance, when growth was a strong 5.7%. Grenada, prior to the passage of Hurricane Ivan, was on track to achieving a growth rate of between 4% and 5%; however, the destruction caused by the storm system, estimated at $890 mn (in excess of 212% of GDP), eliminated any gains that could have been made in 2004. In Jamaica, output was affected by Hurricanes Charley and Ivan, which caused downward revisions to growth rates. Prior to the hurricanes, growth was projected at 2.5%, a slight improvement over 2003; however, the damage caused by the hurricanes resulted in a growth rate of less than 2%. The Bahamas was substantially affected by Hurricanes Frances and Jeanne. Consequently, growth for The Bahamas, estimated at around 2.5% in 2004, was lower than the expected 3%, but still managed to surpass the 1.9% recorded for 2003. Overall Sectoral Performance TourismRegional Tourism turned in a generally good performance in 2004, although the hurricane systems slowed growth in the latter part of the year. Excluding the Cayman Islands and Grenada, data on the 15 remaining BMCs showed an increase in long-stay arrivals for all countries. With respect to Grenada and the Cayman Islands, while statistics are not yet available, much of the gains made prior to the passage of Hurricane Ivan were eroded. Source market information for 12 countries indicated that growth was broad-based growth. The main markets of the US, Canada and Europe all showed improvement compared to the previous year. With respect to the US and Canadian markets, all countries recorded improvement over 2003 arrivals, whereas in the European market, all, with the exception of Belize, registered expansion. Cruise Tourism, which has been expanding at a rapid pace over the last few years, continued its strong performance into 2004, and, with the exception of Trinidad and Tobago, rose in the other 10 countries for which data are available. The strengthening global economy, particularly of the source markets, the increased purchasing power of European and other currencies consequent on depreciation of the US dollar, and the perception of the Caribbean as a safe destination, all contributed to the improved performance of Tourism. At the domestic level, countries benefitted from enhanced marketing efforts, from increased airlift both in terms of increased flight frequency of established carriers and the addition of new carriers, as well as from an increase in room capacity.AgricultureAgricultural production, which has been declining in recent years, showed improvement in 2004, largely on the basis of an expansion in the production of the Region's main commodities, namely sugar and bananas. Regional sugar production rose by approximately 1.9% in 2004, on the basis of increased output in Belize, Jamaica, and Guyana, while production contracted in Barbados, St. Kitts and Nevis and Trinidad and Tobago. The general improvement in production can be attributed to a successful replanting programme and improved factory and field efficiencies, while those countries with lower levels of output suffered from a variety of factors such as adverse weather conditions, a reduction in the acreage under cultivation, labour disputes and mechanical problems. Banana production in the OECS rose by approximately 18.9% over the period January to November, and by 11.8% in Belize In contrast, production contracted by 13.6% in Jamaica for the first ten months of the year. Favourable weather conditions, better irrigation, the use of tissue culture plants and improved management of planting density all contributed to the rise in production, while in Jamaica, output was affected by the passage of Hurricane Ivan. Agricultural production was also boosted by an increase in livestock and marine production, with increased output levels recorded for mutton, beef, poultry, dairy, lobster and conch. ManufacturingManufacturing output, which has been trending downwards in the Region as a whole, posted growth in 2004 on the basis of improved performances in electronic components, chemicals, electrical and corrugated paper products, food and beverages. The outturn for manufacturing was driven largely by more favourable global economic conditions, as well as by increased demand from intra-regional markets. At the same time the manufacturing sector in BMCs continues to face significant competition from other countries both within and outside the Caribbean. ConstructionConstruction activity in the Region rose in 2004, with the expansion of both public and private sector operations. Within the public sector, greater emphasis was placed on building transportation infrastructure, which resulted in resources being directed towards road Construction and rehabilitation as well as the expansion and upgrading of airports. Other areas to which funds were directed were the provision of low-cost housing and the upgrading of Government offices. Within the private sector, Tourism-related projects dominated, with several hotels adding rooms to capitalise on favourable prospects for Tourism, and there was some increase in residential Construction. Mining and EnergyThe Region's mining and energy sector turned in a mixed performance in 2004, as growth in the energy sector was coupled with a mixed performance in mining. Trinidad and Tobago's energy sector grew by approximately 10.5% in 2004, following extraordinary growth of 31.2% in 2003. This performance was mainly attributed to good outturns in the exploration, production, refining and petrochemicals subsectors. Exploration and production rose by 9.1% on account of rising oil prices in 2004 and 2003, which encouraged operators to expand exploration activities, while increased natural gas production reflected the expansion of Atlantic LNG facilities in 2003. Mining activity varied in 2004, as Guyana and Jamaica, the Region's principal non-petroleum mining economies, recorded different fortunes. In Jamaica, real value-added in bauxite and alumina production is estimated to have increased in 2004, as production rose largely in response to heightened global demand; while in Guyana, the mining sector contracted for the fifth consecutive year with declines in both gold and bauxite production. Gold production decreased by approximately 7.7% and mainly reflected the winding down of operations in the firm that has dominated the industry since 1993. Similarly bauxite production contracted (15%) due to industrial action at a major bauxite company, excessive rainfall, and unreliable power suppliesFinancial ServicesThe financial services sector also performed well in 2004, with most jurisdictions showing a pick-up in the number of company registrations, as regional economies were able to capitalise on the strengthening global economy. Within jurisdictions, there were continuing efforts to enhance the operational environment both from a legislative and supervisory perspective. In the BVI, the new Business Companies Act which essentially removes the distinction between "offshore" and domestic companies is scheduled to come into effect from 2005. In addition, Government has announced plans to increase registration fees, while the new payroll tax to replace corporate and personal income taxes comes into effect in January 2005, and will be payable by all companies, thus eliminating the existence of "ring-fencing." In Anguilla, the Financial Services Commission was established to improve supervision within the jurisdiction, and two new acts, the Mutual Funds Act, and the Protected Cell Company Act were passed. St. Vincent and the Grenadines, though not making legislative changes, streamlined its registration process and made enhancements to its fee structure to increase its attractiveness. ProspectsThe outlook for the Region is positive going into 2005, as the global recovery is expected to continue, although at a slightly slower pace. Tourism will continue to play a major role in the economic performance of the Region. There is also likely to be a continuation of the trend in Construction activity, with further growth projected in 2005, as both public and private sector investment activity continues. In financial services, growth is also expected to continue as international economies strengthen. The acceleration of the processes of regional integration, through the CSME, presents opportunities for the Region over the medium-term, particularly as it relates to efficiency and productivity gains through the more effective sourcing and utilisation of inputs. This becomes even more critical as the Region competes not only in already established markets, but also as it seeks to carve out niches in an increasingly competitive environment.The Region continues to have significant levels of underutilised resources: natural, financial, labour and entrepreneurial. It needs to find ways of bringing these resources together, to identify market opportunities, and to engage in sustainable production operations which respond to the increasing demand flexibility that now characterises the global economic environment.The main downside risks to regional growth are from a slowdown in the international economy, either from escalating geopolitical tensions or a deterioration in macroeconomic fundamentals, both of which would reduce visitors' propensity to travel. The depreciation of the US dollar was an important contributor to regional Tourism performance in 2004, although there were also associated price increases for imports to the Region sourced from non-dollar areas. Prospects for the dollar are uncertain, although it is clear that continued strong US growth and high levels of public and private spending will contribute to further deterioration. Monetary policy action is already being taken to reduce the potential for overheating, and to increase the attractiveness to investors of holding the currency. Rising oil prices could also constrain growth in the Region, pushing up the cost of international travel, and reducing the competitiveness of regional goods. On-going concerns relate to the rising level of public sector indebtedness and debt servicing requirements, which reduce the degree of manoeuvrability Governments have in making necessary economic adjustments. Significantly enhanced attention to fiscal management, and public debt management in particular; more focussed attention on matching public sector investment programmes with critical development challenges; greater transparency and efficiency in public sector operations; and substantial improvement in governance in both the private and public sectors are critical areas for attention in the Region going forward. In addition, the need for enhanced policy and programme coordination between the members of CARICOM, leading to the convergence which is critical for smooth and effective economic and social integration, has never been greater. Most important, there is a need for urgency in dealing with these issues because of the time pressure associated with the Region's own commitments to reducing the barriers which currently exist not only between BMCs, but also between the Region and the rest of the world. The threat of natural disasters also cannot be overlooked, in light of the damage and destruction caused by hurricanes and earthquakes in 2004. These developments have served to underscore the vulnerability of the Region, and the ability of a single event, in a few hours, to eliminate decades of growth and development Managing the Region's resources effectively and efficiently in order to achieve the stated objective of sustained improvement in the quality of life of Caribbean people continues to feature as the Region's main challenge. Part B - CDB's Performance 2004ApprovalsGross loan approvals in 2004 were USD 113.3 mn compared with USD 192.4 mn in 2003. Loan cancellations in 2004 amounted to USD 15.7 mn compared with USD 7.7 mn in 2003, while net loan approvals (after cancellations) totaled USD 97.6 mn compared with USD 184.7 mn in 2003. Approvals to the LDCs were $74.3 mn or 66% of gross approvals for the year.For 2004, loan approvals from soft (SFR) resources accounted for 23% of gross loan approvals, compared with 22% in 2003.A total of 12 new project loans were approved for 8 countries, compared with 23 new project loans to 12 countries in 2003 (including CCJ loans to 11countries).Fifty (50) grants and one equity investment amounting to USD 10.3 mn were approved during 2004 compared with 56 grant operations for a total value of USD 4.5 mn in 2003.DisbursementsTotal disbursements (loans and grants) in 2004 were USD 229.1 mn (including CCJ $100 mn) compared with USD 122.6 mn in 2003. Cumulative loan disbursements to the end of 2004 amounted to USD 1,960.6 mn. Disbursements to the LDCs amounted to $99.1 mn or 45% of total disbursements.The ratio of cumulative loan disbursements to cumulative loan approvals increased to 78% in 2004 compared with 72% at the end of 2003.Cumulative grant financing at the end of 2004 stood at USD 208.2 mn of which USD 169.6 mn was disbursed.Of the USD 6.6 mn in grant funds disbursed in 2004, USD 4.9 mn was to the Less Developed Countries (LDCs).The LDCs continued to get the larger share of funds disbursed to date, receiving 56% of all disbursements and 67% of all concessionary funds disbursed out of CDB's Special Funds Resources, compared with 58% and 71%, respectively, for 2003.Operating PerformancePreliminary estimates indicate that CDB¬πs OCR net income from its ordinary operations for 2004 would approximate USD 19.0 mn compared with USD 21.9 mn in 2003.