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Ebola scare could cut T&T’s GDP by 0.6 per cent

Thursday, December 18, 2014
Nine-year-old Nowa Paye is taken to an ambulance after showing signs of the Ebola infection in the village of Freeman Reserve, about 30 miles north of Monrovia, Liberia. AP Photo

The potential economic impact of an Ebola scare on T&T, during this country’s “high season” for tourism, could mean a 0.6 per cent contraction in gross domestic product (GDP), and a 0.7 per cent growth in unemployment, Inter-American Development Bank (IDB) researchers have said in a policy brief released on Tuesday. 

T&T’s GDP was approximately US$24.64 billion in 2013, and was last projected by the Central Bank of T&T, on December 1, to grow by 0.5 per cent in 2014. T&T’s latest available unemployment rate, as at the end of the first quarter of 2014, was 3.2 per cent.

The IDB policy brief presents simulations of an Ebola scare in the Caribbean, in the three highly tourism-dependent economies of The Bahamas, Barbados, and Jamaica; and in the non-tourism-dependent economies of Guyana, Suriname, and T&T. Authors of the policy brief, Juan Pedro Schmid and Xavier Malcolm of the IDB’s Caribbean Country Department said Guyana, Suriname, and T&T depend less on tourism but “they still have an important number of visitors each year and have been growing their tourism industry.”

On the basis of the experience of Mexico in 2009 with swine flu, the researchers simulate a short but sharp drop in tourist arrivals resulting from tourists’ worries about Ebola. The Caribbean is special in that tourism contributes directly and indirectly up to half of its GDP, the brief said. The simulations indicate that the volatility of tourism combined with that dependence creates significant vulnerability for the region.

“Under the worst case scenario, a noticeable impact could be expected even in countries with a smaller dependence on tourism. In addition, declines could also be expected for employment and revenues,” the brief said.

However, pandemic scares can be short-lived and the simulations indicate that the Caribbean would be able to absorb a short tourism drop. The intensity and duration of the outfall in tourism would depend on the real and perceived preparedness of the affected countries, highlighting that Caribbean countries need to not only avoid or minimize any Ebola cases but also ensure that tourists perceive these countries as safe places, the brief said.

There are countries with highly vulnerable economies, even if they manage to remain without any cases of the disease, or manage to contain them rapidly, the brief said. Among those are the three tourist-dependent Caribbean countries: The Bahamas, Barbados, and Jamaica.

The brief said tourism makes countries especially vulnerable for a pandemic such as the one that Ebola can become. It implies that there is a disproportionately high flow of people into the country, it said. In the case of Jamaica, Barbados, and The Bahamas, the equivalent of 80, 190, and 450 per cent of the population visit the islands every year, respectively. If cruise passenger arrivals are included, the same numbers are 120, 400, and 1,700 per cent, respectively. The brief said the ratios are much smaller in Guyana (23 per cent), Suriname (45 per cent), and T&T (31 per cent).

The former three countries’ dependence on tourism also makes them economically vulnerable, because tourism in these countries contributes up to 10.9 per cent directly and up to 46 per cent indirectly to GDP, exluding potential effects on human life or costs for containing the disease, the brief said.

Reflecting the importance of tourism for these small island economies, direct employment from tourism represents up to 28.5 per cent of employment, whereas indirect employment represents more than half in The Bahamas.

“To depend so strongly on tourism can present a challenge because tourism can be adversely affected by fears of a pandemic,” the brief said.

Caribbean can absorb shock

For the Caribbean simulations, the researchers assumed an event that would trigger fear of the Ebola virus and thus a sharp drop in tourism arrivals for three months. The researchers said they concentrated their analysis on three months to focus on the effect of a small scare. This could be the case of adverse news that someone in the Caribbean has contracted the disease, the brief said.

“We simulate two scenarios with declines of 25 per cent and 75 per cent. A 25 per cent drop in arrivals in one country seems reasonable if a short-lived outbreak occurs that the authorities credibly contained, whereas 75 per cent could happen if a country experiences a more intense outbreak with questionable containment. A recovery could happen quickly even from a 75 per cent drop if the outbreak is quickly controlled,” the brief said.

Caribbean tourism arrivals depend strongly on the season, with peaks in spring, summer, and Christmas. 

“We combine this information with estimates of contribution of tourism to GDP to calculate monthly tourism GDP for each month. We then apply shocks to these monthly GDP values, varying the time in the year when the shock starts to differentiate the high from the low season,” the authors said.

For fiscal effects, the authors assume that the shock to revenues is proportional to the shock to overall GDP. For employment, they assumed that employment reacts proportionately to the decline in arrivals.

Results vary substantially depending on the season and the size of the shock, they said. Among the three tourism countries, the average cost in GDP from a 25 per cent drop in arrivals would be between 0.6 per cent and 1 per cent, depending on the season. For the larger drop in arrivals of 75 per cent, GDP would decline on average between 1.75 per cent and 2.9 per cent, the brief said.

Among the non-tourism-dependent countries (Guyana, Suriname, and T&T), the maximum average shock would trigger a fall in GDP of 0.6 per cent, according to the brief. The average fall in GDP for the smaller shock would be between 0.1 per cent and 0.2 per cent for the low and high seasons respectively.

Even though these values include only the effect of a fall in tourism for three months, the brief said tourism-dependent countries could experience falls in GDP that are not too far off recent simulations (World Bank 2014) for the loss in GDP of a high Ebola scenario for Guinea (2.3 per cent of GDP), Liberia (11.7 per cent of GDP), and Sierra Leone (8.9 per cent of GDP), highlighting the vulnerability in countries with a high dominance of the tourism sector.

The decline in tourism would affect not only GDP but also revenues, fiscal targets, and employment, the brief said. 

“It is clear that a scare could have important socio-economic consequences on tourism-dependent economies. While the effect of a scare should be contained to a short period, it would add stress on economies that are ­already in a vulnerable position, lowering GDP growth and revenues while increasing debt and unemployment,” the brief said.

The average effect of the worst-case scenario reflects a sharp decline in tourist arrivals during the high season, delaying an already-weak recovery with accompanying adverse socioeconomic and fiscal effects, the brief said.

The document also indicates, the authors said, that “even the tourism-dependent countries would be able to absorb a short shock to tourism. An important conclusion from the 2009 swine flu epidemic, the researchers said, is how fast tourism numbers recovered as it became obvious that the epidemic had been contained.

As could be expected, the economic impact on non-tourism-dependent countries like T&T would be contained, especially the smaller one with a 25 percent decline, the brief said.

The simulations considered only the direct effect of tourism on GDP. Indirect and induced contributions of tourism to GDP are less susceptible to short-term fluctuations because they include activities such as investment, food production, housing, and government spending on tourism that would not stop immediately, the brief said. Although it would be more difficult to simulate these effects, it is important to keep in mind that tourism is linked to the rest of the economy, the brief said. “A prolonged fall as opposed to a short scare would do substantial harm to these economies,” it said.

The lower scenario with a fall in arrivals of 25 per cent in the low season would decrease direct contribution to GDP of tourism on average by 0.6 per cent. 

In the worst-case scenario of a 75 per cent drop in the high season, average GDP could decline 2.9 per cent. Similar declines could be expected for employment and revenues, the brief said.

A worst-case scenario, which could be triggered by a short outbreak of Ebola in any of these countries, would also have a noticeable effect on non-tourism dependent countries.

“In light of the potential damage, recent efforts to establish emergency procedures and infrastructure have to be continued,” the brief said.

The researchers said: “It is important to note that the simulations did not include any potential effects on human life or costs for containing the disease. While extremely important, we wanted to show that even if Caribbean countries are successful in avoiding the Ebola virus itself, they remain at risk of losing one of their main sources of income.”


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