IV Recent Economic Developments
Author:
Mrs. Ruby Randall
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Mr. Jorge Shepherd
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Mr. Frits Van Beek
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Mr. J. R. Rosales
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Ms. Mayra Rebecca Zermeno
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Language:
English
Print Publication Date:
11 Aug 2000
Keywords:
OP; member government; government; CARICOM state; market; ECCB Area; trade-weighted index; tariff quota; ratio of St. Kitts and Nevis; factor cost; Public sector; Tariffs; Imports; Caribbean
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Abstract

The growth of real GDP in the OECS region declined from 3 percent in 1997 to a little more than 2 percent in 1998, with real GDP per capita growing at just over 1 percent (Table 9). The utilities and construction sectors registered strong gains (Table 10), supported by substantial public sector investment and private residential construction in most countries in the region. Tourism activity in 1995–96 suffered from the damage caused by hurricanes in the fall of 1995, but the number of stayover visitors and cruise ship passengers increased markedly in 1997–98, aided by improvements in port facilities, visits by larger cruise ships, and greater marketing efforts.

Output, Employment, and Prices

The growth of real GDP in the OECS region declined from 3 percent in 1997 to a little more than 2 percent in 1998, with real GDP per capita growing at just over 1 percent (Table 9). The utilities and construction sectors registered strong gains (Table 10), supported by substantial public sector investment and private residential construction in most countries in the region. Tourism activity in 1995–96 suffered from the damage caused by hurricanes in the fall of 1995, but the number of stayover visitors and cruise ship passengers increased markedly in 1997–98, aided by improvements in port facilities, visits by larger cruise ships, and greater marketing efforts.

Table 9.

ECCB Area: Output and Population Growth

(Annual percentage changes)

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Sources: Eastern Caribbean Central Bank, and IMF staff estimates.

Data refer to growth of GDP at factor cost.

Table 10.

ECCB Area: Rate of Growth of Gross Domestic Product by Economic Activity, at Factor Cost, in Constant Prices1

(Percent)

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Source: Eastern Caribbean Central Bank.

The area includes Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.

As tourism and other services have gained importance, the structure of the economy has continued to shift away from agriculture and manufacturing. The contribution of agriculture to GDP declined from 10 ½ percent in 1990–95 to about 8 ½ percent in 1996–98, while that of manufacturing remained at around 6 percent of GDP (Table 11). Agricultural production has been affected by high unit costs and bad weather, with banana output also hampered by quality problems and, mainly in Grenada, pests. More stringent quality requirements for export and the uncertain prospects for continued preferential access to the EU market have recently accelerated the exit of farmers from the banana industry (see below). Performance in other key crops (sugarcane, nutmeg, and cocoa) has been mixed. High production costs have also hindered the manufacturing sector, with increased competition from lower cost countries in export markets and the persistent decline in the demand for inputs from banana exporters recently affecting output adversely.

Table 11.

ECCB Area: Contribution of Gross Domestic Product by Economic Activity, at Factor Cost, in Current Prices1

(Percent)

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Sources: Eastern Caribbean Central Bank, and IMF staff estimates.

The area includes Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St Lucia, and St. Vincent and the Grenadines.

Official estimates indicate that the unemployment rate has been declining in most countries in recent years, but it remains high in some. Analyzing the severity of this problem is hampered by the lack of statistics on unemployment and wages. The information on wages that is readily available points to wage increases to government employees that outpaced inflation in most countries during 1996–98.

A slight deterioration in public sector saving accompanied by an expansion in public sector investment contributed to the widening of the external current account deficit during 1996–98. While gross national saving is estimated to have eroded markedly during this period, gross domestic investment has remained broadly unchanged at 31–32 percent of GDP (Table 12). Reported high investment rates in most countries may reflect inefficiencies, in part associated with large capital outlays in relation to the scale of operations required in small island economies, as well as statistical inaccuracies.

Table 12.

ECBB Area: Saving and Investment

(Percent of GDP)

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Sources: Eastern Caribbean Central Bank, and IMF staff estimates.

Inflation was relatively low during 1996–98. with the 12-month rate of increase in the consumer price index estimated at about 2 ½ percent in 1998 (Table 13), and about 2 percent in 1999. The moderate inflation reflects the slow rate of increase in import prices in recent years and the stability of the Eastern Caribbean dollar. Sporadic deviations from price stability have been temporary and largely associated with policy changes. Such was the case of St. Kitts and Nevis in 1997, when the rate of inflation rose temporarily following changes in tax policy. More recently, concerns have arisen that large public investment programs in certain countries and large increases in compensation for government employees in others, may be contributing to a less favorable price performance than that warranted by external conditions.

Table 13.

ECCB Area: Consumer Prices

(Annual percentage change)

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Sources: Eastern Caribbean Central Bank.

Banana Sector

The Windward Islands (Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines) have been exporting bananas to the United Kingdom since the early 1950s, and by the early 1960s bananas had become the most important economic activity. Banana production and exports from the Windward Islands, however, declined sharply after 1990. Output fell by half, from about 280,000 tons in 1990 to under 145,000 tons in 1998.28 The decline was most severe in Grenada (Table 14).

Table 14.

Windward Islands: Selected Banana Sector Indicators

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Sources: Windward Island Banana Development and Export Company (WIBDECO).

The decline in production and exports was caused by several factors. Low productivity and fruit quality have been persistent problems. More recently, there has been the uncertainty arising from the prospects of a less favorable EU banana import regime following the emergence of a single European market in 1993 and the legal challenges brought against this regime by Latin American producers and the United States in 1995 (Box 5). As a result, farmers have left the industry and planted acreage has declined. The price of bananas in the United Kingdom (the green market price) also fluctuated sharply during the 1990s, while the British pound depreciated against the U.S. dollar and hence, the EC dollar (Table 14). In addition, output was affected by periodic natural disasters (droughts, tropical storms, and hurricanes) and strikes by growers (St. Lucia) or by port workers (St. Vincent and the Grenadines).

To address product quality problems, the Windward Islands Banana Growers Associations and WIBDECO29 implemented a certified farmer program in 1996–97, with the technical and financial help of the EU. The objective is to certify a pool of farmers as capable of producing, processing, and packaging bananas to meet the requirements of the United Kingdom supermarket trade. By the end of 1997, almost one third of the farmers in Dominica and St. Lucia, and 17 percent of banana farmers in St. Vincent and the Grenadines had been certified, and the Windward Islands’ score on the quality index for exported bananas had improved to 84 from 76 in 1996 (on a scale of 100, with a score of 80 or more generally considered acceptable). At the same time, efforts were undertaken to reduce production and marketing costs through the introduction of a new carton-purchasing system, usage of pallets (as opposed to boxes) in shipping, and irrigation projects (especially in St. Vincent and the Grenadines). In part due to these efforts, output increased somewhat in 1998 (St. Vincent and the Grenadines registered an increase of about 30 percent).

Tourism

Tourism, as noted, has become an increasingly important sector in the economies of the ECCB region. The number of stayover arrivals30 increased at an average annual rate of nearly 4 percent during 1990–98 (Tables 19 and 20), while the number of hotel rooms expanded at an average annual rate of 15 percent (Table 21), and employment almost doubled to over 14,500. St. Lucia registered the fastest growth in stayover arrivals during the period (average annual growth rate of about 8 percent), followed by Dominica (around 5 percent). In contrast, stay over arrivals in Antigua and Barbuda grew at an average rate of only 1 ½ percent a year during the same period. As a result, by 1995 St. Lucia had become the number one destination, replacing Antigua and Barbuda.

Table 15.

EU: Duty-Free Banana Import Quotas for ACP Countries

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Source: European Union Council Regulation 404/93.
Table 16.

EU: Comparison of Quota/Tariff Structure Under the Previous and Current Banana Import Regimes

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Source: European Union Council Regulations 404/93 and 1637/98.

Defined as the bananas from 12 specific ACP countries (the traditional ACP countries) within a country-specific quota.

By definition, any amount outside of a country-specific quota falls into the category of “nontraditional ACP bananas.”

Defined as both any quantities in excess of traditional quantities supplied by traditional ACP countries and any quantities supplied by nontraditional ACP countries.

Defined as all other bananas.

Table 17.

Windward Islands: Banana Growers Profile1

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Source: Windward Islands Banana Industry-Production Recovery Plan, July 1998.

Windward Islands banana growers are classified in five groups according to their productivity (output per acre).

Table 18.

Windward Islands: Banana Recovery Plan1

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Source: Windward Islands Banana industry-Production Recovery Plan, July 1998.

Production levels expected to reduce the dead freight cost and help sustain the guaranteed price to farmers as envisaged in the Banana Recovery Plan.

Table 19.

Caribbean Region: Stayover Tourist Arrivals

(In thousands, unless otherwise indicated)

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Sources: Caribbean Tourism Organization, World Tourism Organization.

Includes Barbados, Belize, Bermuda, Cayman Islands, Guyana, Trinidad and Tobago, Turks and Caicos Islands, Aruba, Bonaire, Curaçao, Saba, St. Eustatius, St. Maarten, Guadeloupe, Martinique, Haiti, Suriname and U.S. Virgin Islands.

Table 20.

ECCB Area: Stayover Tourist Arrivals by Country of Origin

(Thousands)

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Source: Caribbean Tourism Organization.

Data estimated for 1990.

Table 21.

Caribbean Region: Number of Hotel Rooms1

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Source: Caribbean Tourism Organization.

Includes apartments, villas, and guest houses.

Includes, Barbados, Belize, Bermuda, Cayman Islands, Guyana, Trinidad and Tobago, Turks and Caicos Islands, Aruba, Bonaire, Curaçao, Saba, St. Eustatius, St. Maarten. Guadeloupe, Martinique, Haiti, Surinam, and U.S. Virgin Islands.

The Caribbean is the most important destination in the world for the cruise industry, accounting for more than 50 percent of world cruise ship passengers. Cruise tourism expanded rapidly in the ECCB region as well as in the rest of the Caribbean during the 1990s (Table 22). In particular, cruise ship tourist arrivals increased at an annual average rate of 10 ½ percent during 1990–98 in the ECCB region. Dominica had the largest annual average increase in cruise ship tourist arrivals (56 percent) during this period (from a very low base), followed by St. Kitts and Nevis and St. Lucia (21 percent and 18 percent). In contrast, the number of cruise ship tourist arrivals to St. Vincent and the Grenadines declined sharply.

Table 22.

Caribbean Region: Cruise Passenger Arrivals

(Thousands)

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Source: Caribbean Tourism Organization.

Includes Barbados, Belize, Bermuda, Cayman Islands, Trinidad and Tobago, Aruba, Bonaire, Curaçao, St. Maarten, Guadeloupe, Martinique, and U.S. Virgin Islands.

Reflecting the increase in total arrivals, tourism earnings of the ECCB region increased at an average annual rate of about 6 percent during 1990–98 (Table 23). St. Vincent and the Grenadines had the highest average annual growth rate of receipts from tourism, followed by St. Lucia and Dominica. Nevertheless, and despite the 1995 hurricanes, Antigua and Barbuda continued to be one of the two largest recipients of tourism earnings (along with St. Lucia), reflecting its concentration in the high end of the market. The share of the ECCB region in the total tourism receipts of the Caribbean has remained in the range of 6–7 percent, performance that was due in part to the large proportion of visitors who arrive aboard cruise ships, as spending by these visitors is comparatively small.

Table 23.

Caribbean Region: Visitor Expenditure

(Millions of U.S. dollars)

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Sources: Eastern Caribbean Central Bank, Caribbean Tourism Organization, and IMF staff estimates.

Includes Barbados, Belize, Bermuda, Cayman Islands, Guyana, Trinidad and Tobago, Turks and Caicos Islands, Aruba, Bonaire, Curaçao, Saba, St. Eustatius, St. Maarten, Guadeloupe, Martinique, Haiti, Suriname, and U.S. Virgin Islands.

Public Finances

Most of the ECCB member countries maintained fairly sound fiscal policies in the 1990s, but there were noticeable differences in performance. St. Lucia and St. Vincent and the Grenadines attained substantial public saving and moderate public sector surpluses or relatively small deficits during most of the period, while Antigua and Barbuda showed persistent negative public saving and a public sector deficit averaging 5 percent of GDP over 1990–98 (Table 24). In Dominica and Grenada, countries that undertook largely successful adjustment efforts in the 1980s with IMF support, performance has been unsteady, with public sector balances deteriorating in 1997–98, although in Grenada the public sector deficit narrowed in 1999. In the case of St. Kitts and Nevis, the condition of the public finances weakened markedly in 1998, mainly as a result of the damage inflicted by Hurricane Georges, and again in 1999 when reconstruction got under way.

Table 24.

ECCB Area: Selected Public Sector Indicators by Country

(Percent of GDP)

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Sources: National authorities, and IMF staff estimates.

Includes privatization proceeds.

While the consolidated public sector deficit of the region was generally small in the 1990s, there was a noticeable increase in 1997–98 (Table 25) that appears to have persisted in 1999. This weakening was associated mostly with a deterioration in the finances of the central governments (Table 26), as the rest of the public sector has continued to register small surpluses, largely because of the strong financial position of the social security agencies. The surpluses of these agencies reflect the comparatively small number of pensioners. The rest of the public sector includes local governments, which have remained dependent on central government transfers; public enterprises, the number of which has continued to be reduced through privatization; and export boards (mainly involved in the banana business), which have required substantial transfers from central governments because of competitiveness problems.

Table 25.

ECCB Area: Public Sector Operations1

(Percent of GDP)

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Sources: National authorities, and IMF staff estimates.

The Area excludes Anguilla and Montserrat.

Includes privatization proceeds.

Table 26.

ECCB Area: Selected Central Government Indicators by Country

(Percent of GDP)

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Sources: National authorities; and IMF staff estimates.

Includes privatization proceeds.

The consolidated overall balance of the central governments showed deficits that averaged 2 ½ percent of GDP a year over the period 1990–98 (Table 27). The deficits increased markedly in 1997–98. reaching an estimated 4 percent of GDP in 1998. While the hurricane damage in St. Kitts and Nevis and in Antigua and Barbuda in 1998 played a role in this increase, there also has been a tendency for current spending to rise since 1991.

Table 27.

ECCB Area: Central Government Operations1

(Percent of GDP)

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Sources: National authorities, and IMF staff estimates.

The Area excludes Anguilla and Montserrat.

Includes privatization proceeds.

Government saving fell from an average of 2 percent of GDP in 1990–96 to 1 percent of GDP in 1997, and further to around ½ percent of GDP in 1998. This was largely the result of the growing rise in current expenditure that began in 1994, While this tendency was evident throughout the region, it was most pronounced in St. Kitts and Nevis, where government current expenditure rose from an average of 25 percent of GDP in 1990–96 to 30 ½ percent of GDP in 1997–98 (Table 28). The rise in current expenditure took place in both government wage bills and spending on goods and services, and it also reflected higher interest obligations, reducing the scope for short-term flexibility in fiscal policy. For the region as a whole, government wage and interest obligations stood at 15 percent of GDP in 1997–98, or the equivalent of 70 percent of tax revenue. In the cases of Antigua and Barbuda, Dominica, and St. Kitts and Nevis, these obligations amounted to the equivalent of 77–80 percent of tax revenue in 1997–98.31

Table 28.

ECCB Area: Central Government Expenditure Indicators by Country

(Percent of GDP)

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Sources: National authorities, and IMF staff estimates.

The EU Banana Regime

The Windward Islands (Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines) have been exporting bananas to the United Kingdom since 1953. From the beginning, these exports have been critically dependent on preferential duty-free access. Until 1993, France and Italy had similar arrangements for their ex-colonies; Germany imported all bananas duty free; Ireland, Denmark, Belgium, and the Netherlands imposed a common external tariff of 20 percent and imported bananas almost exclusively from Latin America (“dollar bananas”); and Spain was supplied domestically from the Canary Islands and effectively prohibited banana imports. These arrangements ended in 1993 when the unified European Union (EU) banana regime began. The main features of the regime that was applied until December 31, 1998 included:

  • A system of country-specific banana allocations for the 12 African, Caribbean, and Pacific countries (ACP)1 that had traditionally supplied the EC market. These bananas were imported duty free and the total of these allocations was 857,000 tons annually (Tables 15 and 16).

  • A basic tariff quota of 2.2 million tons for nontraditional ACP bananas and third-country bananas. Nontraditional ACP bananas were defined as both any excess over traditional quantities (above their individual country ceiling) supplied by traditional ACP countries and any quantities supplied by those ACP countries not considered traditional suppliers to the EU, such as the Dominican Republic. Third-country bananas were all other, including Latin American, bananas. In addition, a supplementary quota of 353,000 tons annually was introduced in 1995 to accommodate the expansion of EU membership incorporating Austria, Finland, and Sweden. Out of the total quota of 2.553 million tons, the nontraditional ACP bananas were reserved a share of 90,000 tons, divided into country-specific allocations. The tariff rate was zero for this 90,000 tons of nontraditional ACP bananas, ECU 75 per ton for third-country bananas, ECU 693 per ton for any nontraditional ACP bananas above 90,000 tons, and ECU 765 per ton for any third-country bananas above the 2.553 million ton quota.

  • An import licensing system under which importers of bananas from EU territories or traditional ACP countries were entitled to 30 percent of the licenses for the importation of the 2.553 million tons mentioned above.2

  • A system of financial support and restructuring schemes for bananas produced within the EU territories (including Guadeloupe, Martinique, Canary Islands, and Madeira).

From the beginning this EU banana regime was controversial with Latin American banana producers and with some EU countries, such as Germany. Belgium, and the Netherlands, and thus was subject to several legal challenges at the GATT as well as at the European Court of Justice. The last challenge was launched by four Latin American banana-exporting countries. (Mexico, Honduras, Guatemala, and Ecuador) and the United States. These countries filed a joint complaint against the EU at the WTO in September 1995.

In May 1997 the WTO Dispute Settlement Panel ruled that some aspects of the current EU banana regime, including the licensing system, are inconsistent with the WTO rules. The EU promptly appealed against the ruling. However, the Appellate Board of the WTO upheld the ruling in September 1997 and the European Union was given until January 1, 1999 to change its import regime.

In response, on July 20, 1998, the EU issued a new council regulation (1637/98) with the expectation of satisfying the WTO ruling. The main features of the regulation are: (i) a global duty-free allocation of 857,700 tons annually for traditional ACP banana producers; (ii) a tariff quota of 2.2 million tons annually at the reduced duty of ECU 75 per ton for third-country bananas and tariff-free for nontraditional ACP bananas; (iii) an additional quota of 0.353 million tons annually with a duty of ECU 75 per ton applicable beyond the above bound tariff quota for third-country bananas and tariff-free for non-traditional ACP bananas; (iv) a reduction of ECU 200 in the tariff for nontraditional ACP bananas beyond the quota: (v) a proposed system for subdividing the tariff quota and, if the situation arises, the traditional ACP quantity, using a single criterion for determining those producer states with a substantial interest in the supply of bananas; and (vi) a single license system for bananas of any origin.

Nevertheless, the WTO dispute panel issued a report on April 12, 1999 finding that the EU banana quota and licensing system discriminated against U.S. marketing companies and Latin American suppliers. However, it stated that the EU could still grant preferential duty-free entry to bananas from the ACP countries under the Lome Convention, which benefits from a WTO rule waiver.

A subsequent EU proposal to reform its banana regime (announced by the European Commission on November 10, 1999) has been opposed by the United States and Latin American producers. The proposal aims at the abolition of import quotas by January 1, 2006, following an interim period involving a system of quotas subject to tariffs, in which bananas from ACP countries would pay a preferential tariff.

1 The traditional ACP countries in the Caribbean are Belize, Jamaica, Suriname and the Windward Islands. 2 The so-called “Category B” operators, defined as those who have marketed bananas from the EU territories and/or traditional ACP countries, were entitled to licenses to import 30 percent of the 2.553 million ton quota. The allocation of 30 percent among the Category B operators was based on a complicated formula. A Category B operator could sell its licenses to any other operator.

After growing faster than GDP over 1990–96. government current revenue stayed at 25 percent of GDP in 1997–98. The upward trend in the ratio of government current revenue GDP registered during most of the 1990s arose mainly from a marked increase in nontax current revenue associated largely with the relative success of efforts to promote offshore businesses in some countries, most notably in St. Kitts and Nevis and Dominica.32 Tax revenue was broadly stable at a little over 21 percent of GDP during the 1990s. Revenue from taxes on goods and services averaged about 9½ percent of GDP. remaining the largest source of government revenue, followed by collections from taxes on international trade. A high proportion of the collections on domestic transactions, however, is actually derived from the levying of consumption taxes on imports. Despite the virtual elimination of the personal income tax in Grenada in 1996, income tax collections in the region remained largely unchanged subsequently at about 5 percent of GDP, as the fall in collections in Grenada coincided with improvements in St. Kitts and Nevis and in St. Vincent and the Grenadines.

While the average tax ratio in the region is high relative to other countries in the Western Hemisphere, there are important differences across countries. Dominica and St. Vincent and the Grenadines have maintained the strongest tax effort, with tax ratios that averaged nearly 24 percent of GDP in 1990–98, whereas Antigua and Barbuda exhibited the lowest effort with an average tax ratio of close to 18 percent of GDP (Table 29). Differences are sharp in income tax collections, which averaged 7 percent of GDP in St. Vincent and the Grenadines and only 2 percent of GDP in Antigua and Barbuda, where there is no personal income tax.33 The contrast is also marked in taxes on goods and services, as collections averaged 12 percent of GDP in Dominica and Grenada and only 8 percent of GDP in Antigua and Barbuda. Similarly, dependence on taxes on international trade and transactions has been highest in Antigua and Barbuda, and St. Kitts and Nevis where it averaged about 7–7½ percent of GDP in 1990–98, whereas in Dominica and St. Vincent and the Grenadines, it only brought in the equivalent of around 4 ½ percent of GDP.

Table 29.

ECCB Area: Central Government Revenue Indicators by Country

(Percent of GDP)

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Sources: National authorities, and IMF staff estimates.

Includes consumption tax on imports.

Includes import duties, customs charges, foreign exchange tax, guest and hotel taxes, and cruise passenger tax.

In spite of the regional trade liberalization that began in 1993, collections from taxes on international trade and transactions remained broadly unchanged in most countries (see Table 29). There has been some decline in average import duty rates and duty collections relative to GDP (Table 30) as a result of the implementation of reductions in the common external tariff (CET) under the CARICOM Agreement. This was offset by improvements in collections from other taxes levied on imports (mainly customs service charges), visitors, and foreign exchange transactions.

Table 30.

ECCB Area: Average Import Duties and Customs Surcharges

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Sources: Eastern Caribbean Central Bank, and IMP staff estimates.

Import duty collections as percent of merchandise imports.

Revenue from import duty and custom charges as percent of merchandise imports.

Public sector investment in the region averaged about 8 percent of GDP over the period 1990–98, and public saving helped fund about half of it (see Table 25). Most of the public sector investment (around three-fourths) has been undertaken by the central governments, with the remainder implemented by the public enterprises. In 1997–98, due to a decline in public saving and a rise in public investment, to over 9 percent of GDP, public saving covered slightly less than 40 percent of investment. The investment of public enterprises has been largely aimed at improving water and sewerage infrastructure, and has been partly financed with loans on favorable terms from the CDB. Net external financing of public enterprise operations averaged about 1 percent of GDP in the period 1990–98. To help cover related debt service obligations and bring water rates to economic levels, some countries have recently acted to ensure adequate metering and to raise charges by linking them more closely to consumption levels.

There are sharp contrasts in public saving and investment performance in the region. Large interest obligations in Antigua and Barbuda (at about 7½ percent of GDP) contributed to negative public saving of close to 2 percent of GDP a year in 1990–98, As a result, Antigua and Barbuda has persistently recorded the lowest public investment in the region (only about 4 percent of GDP on average). The substantial decline in saving in Grenada in 1997–98 coincided with marked increases in public investment financed through domestic commercial borrowing and privatization proceeds. The same combination of low public saving and high public investment in St. Kitts and Nevis resulted in part from the effects of Hurricane Georges in 1998. St. Lucia has funded a comparatively larger share of its public investment effort with public saving in recent years.

For most countries in the region, recent declines in saving have aggravated a key fiscal problem—the lack of sufficient resources to fund public sector investment programs (PSIPs). While investment plans are large and expanding throughout the region, external grant receipts have not grown as fast. Some countries are resorting to other sources to fund selected investment projects. In Grenada, for example, the government entered into lease-to-own arrangements with the private sector for the construction of a stadium and a ministerial complex (Box 6). St. Lucia entered into a similar arrangement for a ministerial building. In Antigua and Barbuda concessions to build, own, operate, and transfer have been arranged for a thermal power plant and a government office complex. These arrangements have involved costly commercial borrowing that is likely to raise the average interest rate on external debt in the years ahead.

Against this background, the financing of the overall public sector deficits has continued to come largely from external sources. External financing averaged 2½ percent of GDP a year in 1990–98 (see Table 25), and about 65 percent of this financing was secured on concessional terms, with the average annual interest rate estimated at 3½ percent, and the CDB remaining the main creditor. Domestic financing has been negative in most countries, mainly because the substantial accumulation of financial assets by the social security agencies has continued to exceed increases in net domestic debt by the rest of the public sector. Only about half the financing of central government deficits has been provided by external creditors, with the remainder coming largely from the social security agencies and the domestic banking system.

Low or declining saving has led to comparatively greater reliance on domestic financing for the governments of Antigua and Barbuda. Dominica, and Grenada. For these governments domestic financing averaged over 2½ percent of GDP in 1990–98, with privatization proceeds also being of key importance for Grenada in recent years. The stock of net domestic bank credit to governments in the region has remained at 6½-8 percent of GDP recently (Table 31).

Table 31.

ECCB Area: Banking System Credit to the Public Sector

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Sources: Eastern Caribbean Central Bank, and IMF staff estimates.

Includes the central government; nonfinancial public enterprises; and social security systems.

Includes loans and advances, treasury bills, debentures, and other securities.

Includes fixed deposits, call accounts, and sinking funds.

The region’s gross public debt in relation to GDP is estimated to have remained broadly unchanged. By end-1998 gross public debt stood at 63 percent of GDP (Table 32), with external debt at some 45 percent of GDP, about half of it denominated in U.S. dollars. There are sharp differences in the external debt burden across the region, with Antigua and Barbuda accounting for a little over one third of the regional external debt. Recently concluded bilateral rescheduling agreements will help reduce Antigua and Barbuda’s debt service, while substantial borrowing to fund investment projects has resulted in marked increases in the external debt to GDP ratio of St. Kitts and Nevis, and to a lesser extent, of St. Lucia. Debt forgiveness extended by the British government to Dominica and Grenada helped reduce the regional stocks of external debt in 1997.34

Table 32.

ECCB Area: Public Sector Debt

(Percent of GDP; end of period)

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Sources: Eastern Caribbean Central Bank, and IMF staff estimates.

Includes external arrears.

Data refer to the financial system’s gross credit to the public sector.

External arrears have been a major problem for only a few of the countries. Antigua and Barbuda, which accounted for nearly 95 percent of the regional total in 1998 (Table 33), managed to reduce external arrears to bilateral creditors through rescheduling agreements, but the total stock outstanding remained quite high and was mostly due to private creditors.

Table 33.

ECCB Area: External Arrears

(Millions of U.S. dollars)

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Sources: Eastern Caribbean Central Bank, and IMF staff estimates.

Money and Banking

The stock of broad money doubled during the period 1990–98, from a little more than half a percent of GDP to almost three-fourth’s (see Table 3). This increase, together with sizable foreign borrowing by commercial banks, helped finance an equally strong rise in outstanding bank credit to the private sector. The fastest growth in credit in the private sector was recorded in Grenada (153 percent) and the slowest in Dominica (94 percent) and in Anguilla and Montserrat (40 percent) (Table 34). During 1999, the stocks of both broad money and credit to the private sector grew by around 10 percent, similar to the rates recorded during 1997 and 1998. At the regional level, the expansion in private sector credit was concentrated in service industries including entertainment and catering and professional and other services, as well as personal loans to individuals, mainly for the acquisition of property (Table 35). The rise in bank mortgage lending was reflected in the maturity structure of banks’ loan portfolios, as the share of loans with a maturity of five years or more rose sharply, to almost 50 percent at end-1998 (Table 36).

Table 34.

ECCB Area: Selected Banking System Indicators by Country

(Millions of Eastern Caribbean dollars)

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Source: Eastern Caribbean Central Bank.

Country aggregates exclude balances held with other ECCB territories for the purpose of area-wide consolidation.

Table 35.

ECCB Area: Sectoral Distribution of Commercial Banks’ Loans and Advances

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Source: Eastern Caribbean Central Bank.

Does not Include Montserrat as breakdown is not available. Therefore, total loans and advances and overdrafts will not match that of the balance sheet for the ECCB area.

Includes mining and quarrying.

Table 36.

ECCB Area: Commercial Banks Overdrafts and Loans by Maturity

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Source: Eastern Caribbean Central Bank.

Does not include Montserrat as breakdown is not available. Therefore, total loans and advances and overdrafts will not match that of the balance sheet for the ECCB area.

The stock of net bank credit to the public sector declined over this period, as the increase in net credit to governments was more than offset by deposits from the region’s social security schemes (see Table 31). However, during 1999, these deposits declined slightly, while net bank credit to governments increased sharply (by over 12 percent), the stock of net credit from the ECCB to member governments actually fell during 1990–98, as both gross ECCB credit to governments declined and governments’ deposits at the ECCB rose, notably in 1998.

The region’s official net international reserves rose by almost US$160 million during the period, to over US$350 million at end-1998 (see Table 3), and were roughly unchanged during 1999. The foreign exchange backing ratio was maintained at an average of about 95 percent (see Table 4). At the same time, commercial banks reduced their net foreign assets somewhat, to help finance domestic credit expansion. The banks’ net external borrowing was particularly heavy in 1996 and 1997 when credit expanded rapidly in most countries. New borrowing was negligible in 1998, but was heavy once again in 1999; in both years the banks added substantially to their gross foreign assets. The rise in the commercial banks’ liquidity needs was also reflected in a marked decline in bankers’ fixed deposits at the ECCB (see Table 4). These deposits are callable in U.S. dollars and carry an interest rate linked to LIBOR.

Currency held by the public as a share of bank liabilities to the private sector fell from 10 percent at end-1990 to 7 percent at end-1998 (Table 37), reflecting a decline in currency demand associated with technical change in the banking industry. The composition of quasi-money also changed, with a rising share of savings and foreign currency deposits and a falling share of time deposits. The decline in the demand for time deposits is attributable to an anomaly in the yield curve, as interest rates on many short-term time deposits were reportedly below the statutory minimum of 4 percentage points set on passbook savings. As most foreign currency deposits are held by businesses, the rise in the share of foreign currency deposits may be related to attempts by a growing number of companies to economize on foreign exchange transaction costs.35 The proportion of foreign currency deposits held by nonresidents increased from 17 percent at end-1990 to over 23 percent at end-1998.

Table 37.

ECCB Area: Selected Monetary Indicators

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Source: Eastern Caribbean Central Bank.

There is considerable variation in deposit and lending interest rates across countries, reflecting the influence of market imperfections that have hindered arbitrage (see Table 7). In 1998, for instance, the average spread between lending and deposit rates ranged from a high of 8 percentage points in Grenada, to a low of 6.4 percentage points in St. Kitts and Nevis. The scarcity of investment alternatives during this stage of development of the financial system contributed to low deposit rates. On the other hand, regulatory distortions, the high unit cost of the banks, imperfect competition in the industry, and capital account restrictions hindered the equalization of factor returns and led to relatively high lending rates.

Interest rate spreads are wide in the ECCB area. The production cost elasticity of deposits in the area has been estimated at 1.35 for the period 1991–96. suggesting the presence of short-run scale diseconomies in commercial banking.36 A little more than one half of the interest rate spread during this period was attributable to operational costs and provisions for loan losses. Reserve requirements accounted for an additional 6 percent of the interest rate spread, and the remaining 41 percent of the spread was estimated as the implicit equity return (equivalent to nearly 3 percentage points). The 4 percent statutory minimum deposit rate was estimated to add significantly to the cost of bank intermediation, which also reflected high fixed costs, including those stemming from capital controls (largely invariant over the period), and high operating costs.

External Sector

With the fixed exchange rate and the openness of the island economies, movements in the real effective value of the Eastern Caribbean dollar closely mirror the behavior of the U.S. dollar vis-a-vis other major currencies. Differential trading patterns and relative price behavior in the countries in the region play an important role in the evolution of the real effective exchange rates calculated for the individual countries (Table 38 and Figure 1). During 1990–98, the Eastern Caribbean dollar appreciated in real effective terms in all countries by about 11 percent, except for Dominica (7 ½ percent) and Grenada (over 5 percent).37 In 1999, there was a further real appreciation of some 5 percent in St. Lucia and about 2 percent in both Antigua and Barbuda and St. Kitts and Nevis, but virtually no change in the other countries.

Table 38.

ECCB Area; Effective Exchange Rates

(1990 = 100)

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Source: IMF information Notice System.

Data refer to the period January-October 1999.

Figure 1.
Figure 1.

ECCB Area: Exchange Rate Developments, 1981–99

(1990 = 100)

Source: IMF Information Notice System.1 IMF trade-weighted index of nominal exchange rates deflated by seasonally-adjusted relative consumer prices; increase means appreciation.2 Seasonally adjusted.

Government Lease-to-Own Liabilities: The Case of Grenada

In 1997 the government signed two lease-to-own contracts with private investors for the construction of a ministerial complex and a stadium to be financed by domestic banks and a foreign bank. Under these arrangements, the two facilities were to be built over a period of two to three years and subsequently leased to the government for a period of 15 years. Although legal ownership of the facilities is to be transferred to the government only at the end of the lease period, an effective transfer of ownership will take place when the facilities are completed and made available to the government. At that time, all the risks and rewards of ownership will be transferred from the legal owners to the user of the facilities. The investors have set up resident corporations to arrange the construction of these facilities, their financing, and leasing to the government.

  • In the case of the stadium, the total construction cost is estimated at US$28.6 million. Financing is being provided by the CLICO Investment Bank of Trinidad and Tobago, with an initial disbursement (US$4.6 million) made at the time of the signing of the agreement (May 9, 1997), and the balance (US$18.4 million) disbursed on a quarterly basis over the estimated construction period (1998–2000). The capital cost will be repaid by means of interim bonds and permanent 15-year maturity bonds (for the balance of the principal) issued in favor of the foreign bank by the private resident company, the National Stadium Project Corporation (NSPC). Interest would be at a rate of 11 percent per annum on the interim bonds of the initial advance, and at a floating market rate for the permanent bonds, and would be paid (together with the amortization amounts) in semiannual installments. Rent paid by the government (charged against the Budget’s Consolidated Fund) to the NSPC would be used to pay off the amortization and interest owed to the foreign bank, which would receive rental payments directly in case of a default by the NSPC. Imports of equipment and machinery for the project were exempted from all taxes, and remittances due to the foreign bank are free of withholding tax.

  • Construction of the ministerial complex was completed in 18 months (March 1999) at a cost of US$13 million. Financing was provided by three domestic banks and the National Insurance Scheme through loans made to the private company created to manage the operation. After completion, the complex was transferred to the government under an arrangement that requires semiannual lease payments over a 15-year period at an implicit interest rate of 11 percent.

The government did not incur any cash payments before the completion of the two facilities, but will make substantial rental payments, amounting to US$2.1 million in 2000, and about US$5.9 million annually in subsequent years. In the government accounts, these payments could be divided into interest charges and debt repayments, with the latter reducing the value of the claim of the lessor on the lessee. In the year 2002, for example, projected rental payments will raise government debt service by 1.4 percent of GDP.

Trade has been liberalized with the implementation of the Common External Tariff (CET) under the CARICOM Agreement of 1992, which committed the signatories to reduce import tariffs to a maximum of 20 percent over six years starting in 1993.38 All countries in the region reduced the maximum tariff to 35 percent in 1993, but since then progress in this area has proceeded at differing paces, with St. Vincent and the Grenadines adhering strictly to the timetable for phased reductions and Antigua and Barbuda and St. Kitts and Nevis lagging the most (Table 39). The slow progress has been related mostly to concerns about the effect of tariff reductions on government revenue and on certain domestic activities.

Table 39.

CARICOM: Implementation of Scheduled Reductions in the Maximum Rate of the Common External Tariff1

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Source: CARICOM Secretariat.

The CET excludes agricultural products, which are subject to a rate of 40 percent.

Belize has been granted permission to implement each phase with a two-year lag.

For phase I, the maximum rate was lowered to 30 percent. For phase II, the maximum rate was lowered to 25 percent.

Joined the Caribbean Common Market in 1996.

While the scheduled tariff reductions are considerable, their impact on tax collections and on the level of protection is lessened by the prevalence of a broad range of exemptions, which are set out in four lists. List A allows protection at the national level for goods that are not considered import-competing (that is, when production in the region does not account for 75 percent of regional demand). List B exempts certain goods that are sensitive to the cost of living in the OECS territories and Belize. List C includes goods to which minimum rates apply, including alcoholic beverages, tobacco products, petroleum products, jewelry, watches, and clocks. List D applies to petroleum products in Belize, to rice in Antigua, Dominica, and Jamaica, and to medicines in the OECS and Belize. There are also conditional duty exemptions (CDEs), which are end-use defined and apply to machinery, equipment, and materials for food processing, almost all inputs for industrial activities, nearly all agricultural and mining inputs, and all inputs required for the initial establishment and extension of hotels. Each CARICOM member state can at its own discretion determine the range of exempted activities to be incorporated in its national tariff schedule and the extent of the duty exemption. In most cases, nearly all eligible activities are exempted and full duty exemption is granted. In addition to the regional provisions of the CDEs, most CARICOM countries exempt public sector enterprises from paying duty on imported inputs.

Nontariff barriers are widespread in the region. In particular, import licenses are widely used, as Article 56 of the CARICOM Agreement allows protection of domestic production from competition by more advanced CARICOM countries.39 In addition, countries maintain licensing requirements to import a broad range of products from outside CARICOM. There are still some import quotas in place, including on beer in St. Kitts and Nevis. In all, trade restrictiveness effectively appears to be moderate in most of the countries (Table 41).

Table 40.

CARICOM: Common External Tariff Rates

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Source: Caricom Secretariat.
Table 41.

ECCB Area: Statutory Tax Rates on International Trade and Transactions

(as of December 1999)

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Sources: Eastern Caribbean Central Bank, Inter-American Development Sank, and IMF staff estimates.

Consistent with the CARICOM agreement, agricultural inputs are duty free and agricultural products are subject to duties of up to 40 percent.

Defined as the simple average of the statutory rates.

The index value ranges between one and ten, with one representing the least restrictive trade regime. The index has been calculated on the basis of numerous factors including the minimum and maximum tariff rates, the number of bands, the allocation of individual items to the bands, existence of “exceptional” rates that lie outside the basic tariff structure, any other duties and charges (such as differential races of excise or VAT taxes on imports, import surcharges, and statistical fees), and the extent of customs duty exemptions. It also takes into account the production or trade coverage of nontariff barriers.

Countries in the region traditionally have run large current account deficits, compared to other, larger developing countries. The combined current account deficit of the region averaged 13 ½ percent of GDP during 1990–98 (Table 42), with certain countries recording deficits of 20 percent of GDP or higher on occasion (Table 43). Preliminary information points to a combined deficit of around 16 percent in 1999, little changed from the 1997–98 level. Apart from periodic changes in countries’ current account deficits caused by hurricanes and other natural disasters, public and private investment projects (construction of hotels, public utilities, roads, and other infrastructure) tend to raise imports to very high levels for short periods. Such additional imports are financed from the accompanying flows of direct investment or loans and grants to the public sector.

Table 42.

ECCB Area: Summary Balance of Payments1

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Sources: Eastern Caribbean Central Bank, and IMF staff estimates.

The area includes Anguilla and Montserrat.

Includes insurance financial, other business, and government services, and storage and bunkers.

Table 43.

ECCB Area: Current Account by Country

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Sources: Eastern Caribbean Central Bank, and IMF staff estimates.

The persistent problems affecting the banana sector (described above) have contributed to the recent deterioration in the region’s export performance. As banana export volume fell by half from 1990 to 1998, regional banana export earnings declined by about 50 percent and the share of banana exports in total merchandise exports dropped markedly. In relation to total exports of goods and services, the decline in banana exports (from 13 percent to 4½ percent) was broadly offset by the rise in tourism earnings.

Capital flows into the region during 1990–98 were sufficient to finance the deficits on current account and to permit an accumulation of official reserves held by the ECCB (see Table 42). Direct investment is the single largest source of capital inflows to the region, averaging US$195 million a year during 1990–98 (or about 9½ percent of the regional GDP). Direct investment in individual countries shows considerable variation over time, as major projects are undertaken or completed. Grants and loans to the public sector are the other major source of long-term capital, averaging just above US$100 million a year during 1990–98.

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Cover The Eastern Caribbean Currency Union
The Eastern Caribbean Currency Union
Institutions, Performance, and Policy Issues
ISBN:
9781557758941
ISSN:
0251-6365
Publication Date:
11 Aug 2000
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557758941.084
Pages:
65
  • Figure 1.
    View in gallery
    Figure 1.

    ECCB Area: Exchange Rate Developments, 1981–99

    (1990 = 100)

Figure 1.

ECCB Area: Exchange Rate Developments, 1981–99

(1990 = 100)