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International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper focuses on scarring effects of the pandemic on the Eastern Caribbean Currency Union’s (ECCU). Assessing the extent of the scarring effects is essential for the conduct of future economic policy in the ECCU. A better understanding of the factors affecting the scarring effects and their fiscal implications could help inform the discussions on policies needed to overcome them, especially for economies with limited economic diversification and high vulnerability to frequent shocks and natural disasters such as the ECCU countries. The significant output contraction would generate scarring effects in the ECCU countries. The degree of scarring could vary with countries’ economic structure and policy responses to the pandemic. ECCU countries need to balance difficult tradeoffs to mitigate scaring effects of the pandemic, other recent shocks, and limited fiscal policy space. In the short term, the priorities are to continue health spending to cope with the pandemic and use effective social transfers to cope with rising living costs. In the medium term, moving from income support and job retention measures to adopting active labor market policies would facilitate the reallocation of workers and resources to their most productive uses and help foster productivity growth.
International Monetary Fund. Western Hemisphere Dept.
The fallout from the COVID-19 crisis is hitting ECCU economies hard. Tourism receipts (accounting for nearly 40 percent of GDP) have dried up, as tourist arrivals have come to a grinding halt. The authorities successfully contained the spread of the virus at the onset of the pandemic by largely closing the borders, but a reopening of the economies since the summer has led to a surge in COVID cases. The ECCU economy is projected to contract by 16 percent in 2020 and by a further near ½ percent in 2021. Fiscal positions have deteriorated sharply, and public debt is projected to reach near 90 percent of GDP in 2021 and remain at an elevated level for years to come. Headline indicators suggest the financial system is relatively sound with ample liquidity buffers, but nonperforming loans are expected to rise significantly. The outlook is clouded by exceptionally high risks, including from the uncertainty concerning the evolution of the pandemic.