Prepared fay Robert Price, PDR.
The benchmarks are a subset of a broader group of guidelines—termed “Corridors of Normality”—developed by the ECCB, that include corridors for exchange rate variables (inflation, real effective exchange rate); foreign reserves (reserve cover and import cover); credit (to government and to commercial banks); and liquidity variables (loans to deposits, delinquency and solvency ratios), in addition to the fiscal corridors.
The method used by ECCB staff to develop the levels for the fiscal benchmarks are laid out in two papers. See “The Targeted Public Sector Savings in the Member Countries of the ECCB” (undated, unpublished) and “Developing Sustainable Debt Indicators for the ECCB” (July 2001, unpublished).
Including the rest of the public sector, raises the public sector savings requirement to between 6 and 7 percent of GDP, however, the ECCB’s benchmarks focus on the central government only, partly owing to lack of full data on public enterprise accounts.
During the transitional period from the date of entry into force of the pact to December 31, 2002, member countries were to prepare three-year convergence programs, with the annual objectives of gradually ensuring compliance with these criteria.
St. Kitts and Nevis became the first debt issuers on the RGSM in November 2002, when it sold EC$75 million 10-year bonds at 7.5 percent at par. St. Vincent and the Grenadines is expected to follow with its own issue.
In WAEMU the mechanism of sanctions is specified in the WAEMU Treaty. It ranges from moral suasion (publication of findings) to the withdrawal of financial support from regional institutions, including the withdrawal of West African Development Bank (BOAD) financing and the outright suspension of central bank financing. If the key criterion is not being satisfied, a penalty procedure will be initiated, unless otherwise dictated by extraordinary circumstances. The penalty procedure is initiated only in cases of noncompliance observed during the assessment of results at end-December in the convergence phase. Noncompliance is determined when progress on the key criterion relating to the basic fiscal balance is deemed unsatisfactory. During the stability phase, programs will be assessed on the basis of structural change in respect of the key criterion, after correction for changes in economic conditions. (See Box 2. in West African Economic and Monetary Union—Recent Economic Developments an Regional Policy Issues in 2000, SM/01/246, August 6, 2001.)
Although not actively used as an instrument, ECCB lending to governments under the “partial” currency board arrangement, is restricted to no more than 40 percent of currency and other demand liabilities. As specified in the ECCB charter, temporary lending is further restricted to 5 percent of a government’s recurrent revenue; treasury bill holdings (with a maximum term of 91 days) by the ECCB are limited to 10 percent of recurrent revenue; and long-term bond holdings are limited to 5 percent of currency and other demand liabilities. Because the total of these amounts may exceed the allocation available under the backing ratio (i.e., the 40 percent), in practice the ECCB allocates credit to individual member governments based on the ratio of each government’s recurrent revenue to the total recurrent revenue for all member countries. This allocation scheme is an ECCB operating procedure that is not specified in the charter.
East Caribbean Central Bank Agreement Act, 1983, Article 55.
WAEMU’s Convergence, Stability, Growth and Solidarity Pact provides that sanctions will not be initiated in exceptional circumstances, defined as a temporary recession equivalent to a GDP decline of 3 percentage points from the average of the three preceding years. A recent paper in the context of WAEMU convergence argues further that both the growth performance and the terms of trade need to be taken into account in assessing countries’ progress toward convergence targets. See Paul Masson and Ousmane Doré, Experience with Budgetary Convergence in the WAEMU, IMF WP/02/108, June 2002.
Kufa, Pellechio, and Rizavi (Fiscal Developments and Policy Issues in the East Caribbean Currency Union, forthcoming working paper) analyze fiscal sustainability of ECCU members using the simple budget constraint model, targeting stabilizing the public debt ratio. They question the focus of the current benchmarks on generating public savings to support a high level of public investment, which does not necessarily achieve a strong rate of economic growth. They conclude that the debt-stabilizing primary balance varies considerably across countries, and the aggregate public sector primary surplus should be around 4 percent of GDP for the ECCU to achieve sustainability.