After the Hurricane: A Tourism Economy Chooses

The hurricane hits both sides of the economy.

Aggregate demand falls because:

• Tourist arrivals drop by 70%, so hotels, restaurants, tour operators and taxis sell less. Consumption and investment fall.
• Hotel owners postpone rebuilding, reducing investment spending.
• Remittances fall by an estimated part of 8% of GDP, cutting household incomes.
• Government revenue falls just when spending needs rise, so public demand may also weaken.

The aggregate supply curve shifts left because:

• 40% of hotel rooms are unusable, so capital is destroyed.
• The airport closure and damaged roads raise transport and production costs.
• Workers may be displaced or unable to travel to work.

The result is a contraction in real output with upward pressure on some prices, a form of stagflation. Unemployment rises from 9% to 22% because tourism is labour-intensive and many jobs are seasonal or casual. A 70% fall in arrivals does not destroy all jobs immediately, but hotels cut staff, and the multiplier reduces demand in local services. The 13-percentage-point rise is consistent with a collapse in tourism employment spreading through the rest of the economy.

Option A, EC$120 million of public works, injects spending directly into the economy. If the multiplier is about 1.2, output could rise by roughly EC$144 million. It creates jobs quickly and repairs infrastructure. But it is financed by borrowing at 9%, adding about EC$10.8 million a year in interest. With debt already at 95% of GDP, this raises the debt ratio and may alarm lenders. The opportunity cost is the schools, health services or tax reductions that the same borrowing could fund.

Option B, EC$80 million of tax cuts for hotels and airlines, has a smaller direct effect. Hotels may save the money rather than spend it, especially if they expect weak demand. The multiplier is likely below 1. It helps preserve businesses and may prevent further job losses, but it is poorly targeted at unemployed workers. It also reduces government revenue when the budget is already under strain.

Recommendation: a scaled-down public works programme focused on repairing roads and the airport, combined with targeted wage subsidies for displaced tourism workers. This keeps the multiplier effect but limits new borrowing. The minister should seek concessional finance and avoid a large VAT increase during the slump. The judgement is that option A is too large, option B is too weak on job creation, and a hybrid protects both demand and debt sustainability.

St. Auria's currency is pegged to the US dollar, and reserves cover only 2.1 months of imports. A devaluation would mean abandoning the peg or realigning it. With low reserves, the central bank could not defend a new rate if confidence fell. Devaluation would also raise the local cost of imports, including fuel, food and building materials, which would worsen inflation just as households are hit by the hurricane. The government therefore rules it out.

Without the exchange rate, adjustment must come through internal costs. Wages and prices must fall relative to trading partners to restore competitiveness, or the country must borrow and receive aid. This is painful: lower wages reduce demand further, and the IMF option (C) would impose a wage freeze and higher VAT. The constraint means fiscal policy must do more of the work, but debt limits how much it can do. The minister faces a trade-off between short-term relief and long-term solvency, not a free choice among instruments.