Eastern Caribbean Currency Union
2009 Discussion on Common Policies of Members Countries: Staff Report; and Public Information Notice on the Executive Board Discussion
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
02 Jun 2009
eISBN:
9781451811735
Language:
English
Keywords:
ISCR; CR; deficit; OECS-Education Development Project; Grenada; asset; ECCU bank; foreign currency; current account; exchange rate; U.S. dollar; Caribbean; Global
Download PDF (1 MB)

The Eastern Caribbean Currency Union (ECCU) countries financial system has increasingly come under stress particularly through weakly supervised nonbank and offshore financial sectors with knock-on effects to domestic banks. The staff report focuses on ECCU’s 2009 discussion on common policies of member countries on economic development and policies. In response, ECCU authorities have accelerated the establishment of national Single Regulatory Units and the passage of harmonized legislation to strengthen then regulation and supervision of nonbanks and offshore institutions.

Abstract

The Eastern Caribbean Currency Union (ECCU) countries financial system has increasingly come under stress particularly through weakly supervised nonbank and offshore financial sectors with knock-on effects to domestic banks. The staff report focuses on ECCU’s 2009 discussion on common policies of member countries on economic development and policies. In response, ECCU authorities have accelerated the establishment of national Single Regulatory Units and the passage of harmonized legislation to strengthen then regulation and supervision of nonbanks and offshore institutions.

I. Brief Perspective

1. The ECCU—a regional currency board arrangement—consists of eight small, open, tourism-dependent island economies that are highly vulnerable to external shocks (Figures 1 and 2).1 The ECCU is the world's only currency union in which members pool their foreign reserves, and the level of the exchange rate peg has not been changed in more than three decades. The exchange rate stability has helped foster a highly monetized and stable financial system.

Figure 1.
Figure 1.

ECCU: Key Characteristics

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: IMF, WEO; World Bank, WDI; EM-Dat; ECCB; and Fund staff calculations.1/ The sample contains 190 countries. Simple unweighted averages are used for country groupings. Rankings are in descending order, with “1” indicating the most exposed to natural disasters.Note: Antigua and Barbuda (ATG), The Bahamas (BHS), Barbados (BRB), Belize (BLZ), Dominica (DMA), Dominican Republic (DOM), Grenada (GRD), Guyana (GUY), Haiti (HTI), Jamaica (JAM), Montserrat (MTS), St. Kitts and Nevis (KNA), St. Lucia (LCA), St. Vincent and the Grenadines (VCT), Suriname (SUR), Trinidad and Tobago (TTO).
Figure 2.
Figure 2.

ECCU: Overview

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: ECCB; World Bank; and Fund staff estimates.1/ Simple average of The Bahamas, Barbados, Belize, Dominican Republic, Guyana, Haiti, Jamaica, and Trinidad and Tobago.2/ A larger value indicates greater income inequality.Note: Antigua and Barbuda (ATG), Barbados (BRB), Dominica (DMA), Dominican Republic (DOM), Grenada (GRD), Guyana (GUY), Jamaica (JAM), St. Kitts and Nevis (KNA), St. Lucia (LCA), St. Vincent and the Grenadines (VCT), Trinidad and Tobago (TTO).

2. While social indicators are favorable, the region's deteriorating macroeconomic performance, poverty and crime remain concerns. ECCU countries rank high on the United Nation's Human Development Index relative to other countries with similar income levels, with improving governance indicators (Figure 3). However, in the face of a series of negative shocks since the mid-1990s, including erosion of trade preferences, declining aid flows, adverse terms of trade movements, and natural disasters, governments have eased fiscal stances repeatedly to buffer these shocks, resulting in large fiscal deficits and very high public debt levels (Figure 4). Pockets of poverty, along with rising criminal activity, threaten both social consensus and prospects for the important tourism sector.

Figure 3.
Figure 3.

ECCU: Governance Indicators 1/

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Source: World Bank.1/ The units in which governance indicators are measured follow a normal distribution with a mean of zero and a standard deviation of one in each period. Changes of the indicators over time for individual countries indicate changes in individual countries' relative positions in the sample.2/ Initial year for ATG (1998), DMA (1998) and KNA (2003).3/ Initial year for ATG (1998).4/ Initial year for ATG (1998).Note: Organisation for Economic Co-operation and Development (OECD), Antigua and Barbuda (ATG), Dominica (DMA), Grenada (GRD), St. Kitts and Nevis (KNA), St. Lucia (LCA), St. Vincent and the Grenadines (VCT).
Figure 4.
Figure 4.

ECCU: External Environment, 1995–2008

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: World Bank, World Development Indicators; IMF, International Financial Statistics; IMF, World Economic Outlook; OECD, International Development Statistics; ECCB; and Fund staff calculations.

ECCU: Social Indicators

article image
Sources: ECCB; Fund staff estimates and projections; United Nations, Human Development Report 2008; and the World Bank, WDI 2007.

Percentage of population living below each country's locally-defined poverty line in 2000.

II. Recent Developments

3. Following a period of strong growth, the region is facing a volatile and weakening external environment. GDP growth moderated slightly from a decade high of 6⅓ percent in 2006 to about 5 percent in 2007, reflecting the unwinding of the Cricket World Cup (CWC)-related construction boom, declining stayover tourist arrivals, and the impact of Hurricane Dean. For 2008 growth declined further to 1.8 percent, given a sharply slowing global economy, declining tourist arrivals, the global financial crisis, and elevated world commodity prices.2 ECCU members have also displayed an uneven pace of growth deceleration (Figure 5).

Figure 5.
Figure 5.

ECCU: Central Government Actual and Structural Budget Balances, 2002–10 1/

(In percent of potential GDP)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: Country authorities; ECCB; and Fund staff estimates.1/ Actual balance is the overall balance (revenue and grants less expenditure), and is expressed as a percentage of actual output. Actual output is measured as gross domestic product (GDP) at factor cost.2/ The output gap is actual output less potential output, as a percent of potential output.3/ Structural balance is expressed as a percent of potential output. The structural balance is the budgetary position (overall balance) that would be observed if the level of actual output coincided with potential output.
A01ufig01

ECCU: Contribution to Real GDP Growth by Sector, 2002–08

(In percent)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: ECCB; and Fund staff projections.1/ Includes wholesale and retail trade, hotel and restaurant, air transport, and half of local transport.2/ Includes mining and quarrying.

4. In response to large shocks to tourism receipts and FDI, most ECCU countries have expressed interest in Fund financing. Despite positive growth in the first half of 2008, stayover tourist arrivals fell by 5 percent in the second half, reflecting the impact of the global downturn and reduced airlift (Figure 6). This trend has continued into 2009. Beginning in the last quarter of 2008, construction of some tourism accommodation projects has been slowed or placed on hold, owing to financing difficulties and sluggish sales. To help mitigate the balance of payments impact of the downturn in tourism and FDI, St. Vincent and the Grenadines, Dominica and St. Lucia have requested financing under the Rapid-Access component of the Exogenous Shocks Facility; Grenada has requested an augmentation under its PRGF program; and St. Kitts and Nevis has requested a purchase under the Emergency Assistance for Natural Disasters Facility, in the wake of Hurricane Omar's destruction of tourism infrastructure.

Figure 6.
Figure 6.

ECCU: Stayover Arrivals, 2005–08

(Annual percentage change)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: ECCB; and Fund staff calculations.
A01ufig02

ECCU: Stayover Arrivals, 2005–08

(Annual percentage change)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: ECCB; and Fund staff estimates.

5. Following a strong acceleration during the first three quarters, inflation eased toward end-2008. Inflation spiked due in large part to the global commodity price shock and the depreciation of the U.S. dollar against major currencies, which raised import prices of food and fuel (Figure 7). Inflation rose to 9 percent in the year to September 2008, compared with an annual average of 2–3 percent for the prior two decades. The ECCU authorities sought to mitigate the social implications of higher inflation, which has a disproportionately adverse impact on the poor. Temporary ameliorative measures included: the suspension of import duties and other taxes on basic consumer items; controls on retail markups and profit margins; and limited commodity price subsidies to vulnerable groups. Inflationary pressures eased toward end-2008, as world commodity prices retreated from record highs amid slowing global growth.

Figure 7.
Figure 7.

ECCU: Inflation Developments, 2001–08

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: IMF, Direction of Trade Statistics; Haver; ECCB; and Fund staff calculations.1/ Tradables are defined to include food, alcoholic beverages and tobacco, fuel and light, clothing and footwear, and household and furniture equipment.2/ Nontradables are defined to include housing and utilities, transportation and communication, medical care and expenses, education, personal services, and miscellaneous.
A01ufig03

ECCU: Contribution to Inflation, 2002–08 1/

(Percent change)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: ECCB; and Fund staff calculations.1/ Tradables in the ECCU comprise food, alcoholic drink and tobacco, fuel and light, clothing and footwear, household and furniture equipment; non tradables include medical care and expenses, education, personal services, housing and utilities, miscellaneous and transportation and communication.

6. Growth of monetary aggregates decelerated markedly in 2008 (Figures 8 and 9). Led by expansion in lending to the tourism, consumer durables, and construction sectors, private sector credit grew by 20 percent in 2007. By end-2008 credit growth had halved, in the context of tighter lending terms and conditions established by ECCU banks (particularly foreign-owned banks) and sluggish credit demand. As broad money growth decelerated amid the economic slowdown, both foreign and local banks relied on drawdowns of their net foreign assets to finance domestic credit provision. In particular, from September 2008 local banks picked up their pace of drawdown significantly, while foreign banks' drawdowns slowed. Despite some moderate loss of foreign reserves, reserve coverage of demand liabilities (mainly currency in circulation plus commercial banks' reserves at the ECCB) remained at about 100 percent at end-2008.

Figure 8.
Figure 8.

ECCU: Monetary Developments, 2001–08

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: ECCB; and Fund staff calculations.1/ There was a break in the interest rate series in 2003Q2.2/ Excess reserves is defined as the excess of bank reserves (cash holdings and deposits of commercial banks with the ECCB) over required reserves. The current reserve requirement is 6 percent of deposits.
Figure 9.
Figure 9.

ECCU: Private Sector Credit Growth, 2001–08

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: ECCB; and Fund staff calculations.1/ Includes interbank float, reserves held with the ECCB, and other unclassified assets.2/ Includes tourism, entertainment, and half of transport, distributive trade and professional services.

ECCU: Selected Monetary Indicators, 2004–09

article image
Source: ECCB.

Twelve–month change in percent of broad money at the beginning of the period.

Defined as ratio of the ECCB's gross foreign reserves to demand liabilities.

ECCU: Deceleration of Monetary Growth in 2008

(Percentage change)

article image
Sources: ECCB; and Fund staff estimates.

7. While prudential indicators remain strong, signs of pressure have recently emerged (Figure 10). ECCU banks appear to be reasonably capitalized and profitable. Nevertheless, the trend of improving prudential indicators began to reverse in 2008. In particular, with moderation of credit growth in a rapidly-slowing economy, banks' nonperforming loans (as a share of total loans) have crept up, while profitability, loan loss provisioning, and capital adequacy ratios have declined moderately. More worrisome is the marked decline in banks' liquidity (Figure 11). In addition, banks' government exposures remain high, and are concentrated in several state-owned local banks (Figure 12).

Figure 10.
Figure 10.

ECCU: Banking System Vulnerabilities, 2002–08 1/

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: ECCB; and Fund staff calculations.1/ Prudential indicators are reported by commercial banks, with infrequent onsite verification by the ECCB.
Figure 11.
Figure 11.

ECCU: Bank Liquidity, 2002–08

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Source: ECCB.
Figure 12.
Figure 12.

ECCU: Decomposition of Commercial Banks' Exposure to the Public Sector, 2004–08

(In percent of public sector exposure)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: ECCB; and Fund staff calculations.

ECCU Banking System: Financial Soundness Indicators, December 2008

(In percent)

article image
Source: ECCB.

Local banks.

8. Liquidity conditions are tightening. Commercial banks' excess reserves at the ECCB dropped and interbank interest rates increased toward the end of 2008. Since banks usually account for about 50 percent of the value of bids, oversubscription in the Regional Government Securities Market (RGSM) also declined sharply.3 Nevertheless, interest rates on the RGSM have only risen slightly. In contrast, spreads on ECCU sovereign bonds in the over-the-counter repo market spiked to an unprecedented level at end-2008, signaling that ECCU governments, particularly those with high debt levels, are facing higher financing costs. In addition, as of March 2009, the Eastern Caribbean Stock Exchange index had declined by 16 percent from its peak in late 2007.

A01ufig04

ECCU: Sovereign Bond Spreads in Trinidad and Tobago 1/

(In basis points)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: Bloomberg; Caribbean Money Market Brokers; and Fund staff calculations.1/ Spreads are computed relative to U.S. bonds of comparable maturities.

9. The failure and subsequent intervention of Trinidad and Tobago-based CL Financial Group in January 2009 has had adverse effects on the Caribbean financial sector, through its extensive cross-border insurance, investment, and banking linkages, and exposed weaknesses in the region's regulatory framework for nonbanks. An important source of financing for the rapid expansion of CL Financial in recent years was the offer of fixed-term deposit-like financial products through the group's insurance subsidiaries operating in the ECCU—CLICO Life Insurance (CLI) and British American Insurance (BAI). These deposit accounts yielded annual interest rates far in excess of those offered by commercial banks, and not only undermined the client base for the domestic commercial banking system but, as now revealed, the higher interest rates reflected the far riskier investment activities in which their principal (CL Financial) was engaged. The collapse of CL Financial prompted ‘deposit runs’ on CLI and BAI branches operating in the ECCU. The combined exposure of CLI and BAI to policy and deposit holders in the ECCU amounts to about EC$2 billion (about 15 percent of ECCU GDP), against which ECCU governments would probably not be able to provide credible guarantees. 4

10. The ECCU's offshore financial sectors have also been adversely affected by increased scrutiny from advanced economies. In February 2009, fraud charges were levied by the U.S. Securities and Exchange Commission (SEC) against Sir Allen Stanford and the Stanford International Bank (SIB), an offshore bank based in Antigua and Barbuda. This action also triggered a run on deposits on the Stanford-owned Bank of Antigua (BOA), a domestic commercial bank. The ECCB's initial policy response to the deposit run comprised moral suasion and the provision of emergency liquidity. Later, the ECCB intervened under its “special emergency powers” and on February 23 arranged a consortium of ECCU domestic banks and governments to form a new entity (Eastern Caribbean Amalgamated Financial Company Limited) to manage the operations of BOA, thereby ending the run on deposits.

11. External imbalances remain elevated. The current account deficit surged to 35 percent of GDP in 2007, financed almost fully by nondebt-creating foreign direct investment (Figure 13). The current account deficit is estimated to have remained at a similar level during 2008, as slowing construction-related imports offset falling tourism receipts and higher fuel and food imports. Reflecting sluggish private capital inflows (largely FDI), gross international reserves declined by about US$5 million to US$760 million by end-2008 (equivalent to about 3½ months of imports).

Figure 13.
Figure 13.

ECCU: Trade and Capital Account, 1996–2008

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: Country authorities; ECCB; and Fund staff estimates.1/ A positive (negative) number indicates borrowing from (lending to) foreigners.

ECCU: Selected External Indicators, 2004–09

article image
Sources: ECCB; and Fund staff estimates.

12. Limited progress has been made in fiscal consolidation. Tax revenues have increased, benefiting from strengthened tax administration and broader tax bases (particularly owing to the introduction of VATs and market-valuation-based property taxes). Capital expenditure peaked in 2006, reflecting CWC and tourism-related investment, but has since declined, and current expenditure remained high. As a result, some fiscal consolidation was achieved during 2007, although no major progress was made in 2008.

ECCU: Selected Fiscal Indicators, 2004–09

article image
Sources: Country authorities; and Fund staff estimates.

13. Some success has been achieved in winding back public debt burdens, yet more needs to be done to lower vulnerabilities. Strong economic growth since 2001, along with debt restructurings (Dominica and Grenada) and debt writedowns (Antigua and Barbuda and St. Vincent and the Grenadines) has lowered the regional debt ratio from its high of 107 percent of GDP in 2004 to 91 percent of GDP in 2008. Nonetheless, Anguilla and Montserrat are the only ECCU members with public debt levels that are currently below the ECCB's debt-to-GDP benchmark of 60 percent (to be achieved by 2020).

ECCU: Selected Indicators of Central Government Debt Burden, 2004–09

article image
Sources: Country authorities; and Fund staff estimates.

Includes only external amortization.

For 2005 and 2007, the debt service incorporates amortization in relation to debt relief received by Antigua and Barbuda and St. Vincent and the Grenadines from Italy.

14. Regional integration initiatives continue at varying speeds. Economic integration in the Eastern Caribbean continues to gain traction. Public consultations on a draft OECS Economic Union Treaty, approved by OECS member states in May 2007, started in several jurisdictions during 2008.5 The Economic Union is expected to be formally in place by end-2009. In November 2008 OECS Heads of Government agreed to Trinidad and Tobago joining the Economic Union by 2011. In contrast, progress in implementing the CARICOM Single Market and Economy (CSME) has been limited, partly because the participation of OECS countries is predicated on the establishment of a US$250 million Caribbean Development Fund (CDF) to support their development needs, which has not yet been made fully operational.6 In October 2008 CARIFORUM countries, including all eight ECCU members, signed an Economic Partnership Agreement (EPA) with the European Union, the first among ACP regions. 7 The EPA replaced unilateral preferential access with phased-in reciprocal free trade (Box 1). CARICOM countries are also in negotiation with Canada on a Trade and Development Agreement.

III. Outlook and Risks

15. The ECCU region is expected to fall deeper into recession in 2009.

  • Real GDP is expected to contract by about 2½ percent, as the tourism and construction sectors are being hit hard by the global economic downturn. A slow recovery is projected for 2010 and the medium term, predicated on a rebound of the global economy, increasing tourism demand, and utilization of the region's enhanced accommodation capacity. Compared with the 2001–02 recession, this recession is expected to be deeper and more prolonged, with the region expected to remain in recession for four years beginning in 2008.

  • Inflation is expected to return to its long-run average of 2–3 percent per year, as the regional output gap widens and world food and energy prices retreat alongside the slowing global economy.

  • External current account deficits are projected to narrow markedly in 2009, with weaker demand for imports (owing to slowing FDI and domestic demand) and favorable movement in the region's terms of trade (underpinned by falling commodity import prices) more than offsetting the impact of continued lackluster tourism performance and declines in remittances and exports. However, the balance of payments is expected to post a larger deficit, as capital inflows are projected to decline by more than the current account deficit. Accordingly, growth of monetary aggregates is expected to continue to slow. Since the region's fiscal position is expected to deteriorate markedly in 2009, the balance of payments adjustment will reflect sharp declines in private investment and consumption (as a share of GDP).

A01ufig05

The recession will be deeper and longer this time around.

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: IMF, International Financial Statistics; World Economic Outlook; and Fund staff estimates.1/ Recession is defined as growth falling below historical average minus one standard deviation.
A01ufig06
Source: Fund staff estimates.

16. The outlook is subject to large uncertainties and downside risks. The length and depth of the recession is particularly difficult to predict. Key influencing factors include: (i) the length and depth of the global slowdown, and the magnitude of spillovers to the ECCU region; (ii) the availability and cost of external financing for both the public and private sectors; and (iii) the severity of financial stress amid the global storm. Should these downside risks materialize, the ECCU region, as with other countries with large external and internal imbalances and limited scope for countercyclical policy responses, would be vulnerable to a much deeper and longer local recession.

17. A deeper and more prolonged global downturn would weigh heavily on the region's growth outlook. Staff analysis suggests that both trend growth and business cycles in the region have been heavily influenced by the U.S. in the past—a 1 percent negative shock to the U.S. growth rate is found to translate into a decline of ½ percent in the ECCU region's growth within the first year (Box 2).8 Potential transmission channels of slower growth in advanced economies include: (i) declining tourism receipts, particularly those derived from the U.S., which is the source of one third of the stayover tourists to the region; (ii) the region's dependence on growth-affected remittance flows; and (iii) sluggish property sales, which in turn leads to construction of tourism accommodation (hotels, condominiums and villas) being delayed or even terminated.

A01ufig07

Growth is expected to decline further in 2009, with risks on the downside…

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Source: Fund staff estimates.
A01ufig08

…while inflation is expected to moderate, with risks titled slightly to the downside.

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

18. A sudden stop or abrupt reversal of external capital flows poses another source of risk. Private capital flows have financed tourism construction (particularly FDI), and supported the rapid expansion of domestic credit (such as funding from foreign parent banks to local branches). A sudden stop or abrupt reversal of private capital flows would lead to a credit squeeze in the region, dampening growth further and affecting current account sustainability. With its external borrowing largely sourced on commercial terms, the ECCU public sector is also vulnerable to global credit strains, through heightened rollover risks and elevated interest costs. This vulnerability could have serious implications for fiscal and debt sustainability. Moreover, as local banks have very high government exposures, difficulties in governments' debt servicing capacity could threaten bank stability, and adversely affect the level of international reserves needed to sustain the currency board arrangement.

A01ufig09

Caribbean: Capital Inflows and Domestic Credit Growth, 2006–08

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: IFS, WEO, and Fund staff estimates.

19. Banking systems in the region have a strong presence of Canadian banks, which has helped limit the local impact of the global financial crisis. In comparison with other developed-country peers, Canadian banks remain resilient due to strong supervision and regulation, stringent capital requirements, and more conservative lending practices. Nevertheless, Canadian financing conditions have tightened, with similar implications for the branches of Canadian banks operating in the ECCU.

20. Severe financial stress would further dampen economic activity. The region has many foreign financial institutions, including branches of foreign banks, insurance companies, and offshore banks. The recent CL Financial and Stanford Group events demonstrated that external financial shocks can be quickly transmitted to the region through such financial institutions. Furthermore, the presence of financial conglomerates and complicated ownership structures within the Caribbean increase the contagion risk across different types of financial institutions as well as across borders. Lastly, the region's social security systems have provided a stable source of deposits to banks. Should there be major impairment of social security systems' investment portfolios amid the financial storm, banking system stability could be threatened.

ECCU: The Importance of Foreign Banks

(As of end-2008; in EC$ millions)

article image
Sources: ECCB; and Fund staff calculations.

Including domestic loans, advances, and investments.

ECCU: Cross Border Linkages of the Banking System

article image
Sources: ECCB; and Fund staff estimates.

IV. Policy Discussions9 10

21. Against this background, policy discussions focused on assessing and managing near-term risks while continuing to address the region's fundamental economic issues. Discussions with the national and regional authorities focused on four related themes:

  • Ensuring the resilience of the financial system;

  • Maintaining external stability and bolstering competitiveness;

  • Enhancing fiscal and debt sustainability; and

  • Boosting crisis preparedness and capacity building.

22. The authorities broadly agreed with the mission's assessment on economic outlook and risks. To address the challenges facing the region, the mission stressed that the balance of adjustment versus financing needs to tilt heavily toward adjustment. The region has built up high public debt over the last decade—primarily through commercial borrowing—in the face of a series of external shocks, including the erosion of trade preferences and the decline of official development assistance. With its large public debt burden and tightened global liquidity, the ECCU region now has to rely more on fiscal adjustment to navigate though the current economic downturn. While agreeing on the importance of adjustment, the authorities noted that small states (such as ECCU members) warrant differentiated treatment from the international community, as adverse global developments often have disproportionate effects on them. The mission encouraged the authorities to seek more concessional resources and contingent financing lines from multilaterals and bilateral partners, in order to prepare for possible crisis scenarios.

A. Resilience of the Financial System

23. The ECCB's limited lender-of-last-resort (LOLR) role under a currency board arrangement and the absence of a deposit insurance framework highlight the critical importance of closely monitoring banking risks. The recent deposit run on the Bank of Antigua illustrated that acute liquidity problems can quickly develop, and potentially trigger bank insolvency. Waning economic growth after a period of rapid private credit growth poses another major risk to the stability of the ECCU banking system, through the deterioration of banks' asset quality. The recent deterioration in several prudential indicators does raise concerns. Stress tests confirm that key risks remain, including high government exposures, credit risk, and liquidity risk, with some local banks being particularly vulnerable (Box 3). Cross-border bank linkages in the region are relatively weak, but are increasing, particularly through common ownership structures, pointing to potential cross-country contagion risks.

A01ufig10

ECCU: Banking Sector NPLs and Loan Loss Provisions, 1996–2008

(In percent of total loans)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Source: ECCB.
A01ufig11

ECCU: Liquidity and Profitability in the Banking System, 1996–2008

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Source: ECCB.

24. The ECCB has stepped up efforts in banking regulation and supervision, but more needs to be done.

  • The ECCB completed 12 on-site inspections in 2008, compared with a total of four in 2007. Progress continues to be made in improving legislation, issuing prudential guidelines, and providing training in supervision. In particular, the harmonized legislation on minimum capital requirements, which empowers the ECCB to raise capital based on bank-specific risk profiles, has been passed in several ECCU jurisdictions. With CARTAC assistance, work on developing a risk-based supervisory framework, to better target on-and off-site inspection of vulnerable banks, is expected to be completed in the first half of 2009. Importantly, beginning in January 2009, all foreign bank branches are required to submit their own audited financial statements to the ECCB. Given the increasing presence of financial conglomerates in the Caribbean, the ECCB also intends to strengthen consolidated supervision (both cross-functional and cross-border). It has requested CARTAC assistance in developing a framework of consolidated supervision and had received some initial training. Lastly, the ECCB has been pursuing better cross-border regulatory cooperation and information sharing with other Caribbean central banks.11

  • The mission urged the ECCB to increase further the scope and frequency of on-site inspections and remain vigilant on banks' liquidity and credit risks, as well as high government exposures. The ECCB also needs to strengthen follow-up and enforce remedial measures—a corrective action framework for identified weak banks should be initiated. Given banks' indirect exposure to exchange rate risk (e.g., through foreign currency loans offered to domestic residents), regulation and monitoring of foreign exchange risk should be further developed.

25. The authorities are moving forward with strengthening regulation and supervision of the nonbank financial sector, in the wake of the CL Financial shock.

  • Anguilla, Grenada, and Montserrat are the three ECCU jurisdictions that have established single regulatory units (SRU) for nonbanks. Using these SRUs as a model, all other ECCU jurisdictions have committed to establishing national SRUs in the first half of 2009. An SRU Implementation Committee has been established at the ECCB to facilitate this process.

  • The authorities are also committed to accelerating the passage of enabling harmonized legislation, including SRU Acts, Money Services Acts, Cooperatives Acts, Building Society Acts, and Insurance Acts, and to ensuring adequate staffing and training. SRUs, when fully functioning, are expected to improve supervision of the nonbank financial sector by bringing various nonbank financial entities under one supervisory umbrella. The authorities noted an urgent need for capacity building at the level of national regulators, and have sought CARTAC assistance.

  • The mission welcomed ongoing efforts to develop prudential forms for gathering data from nonbank financial institutions, with a view to develop a comprehensive financial sector survey over the medium term. More generally, it is important to enhance the disclosure of information (covering both on and off-balance sheet exposures) by all financial institutions.

  • The mission also recommended that SRUs and the ECCB bolster regulation and supervision of nonbank liabilities, to avoid further instances of regulatory arbitrage such as those exemplified by the bank-deposit-like ‘annuity products’ offered by domestic insurance companies. The mission welcomed the close collaboration of ECCU governments and the ECCB with their counterparts throughout the region in seeking a prompt and sustainable solution to the CL Financial issue, and urged them to move quickly with their proposed intervention, to help prevent asset stripping and any further deterioration of the deficits in the insurance statutory funds. The IMF has provided (and will continue to provide) technical assistance on resolution options for both traditional insurance policyholders and for investors in insurance deposit-like products.

26. Actions have been taken against unregulated investment schemes (UIS) operating in the ECCU. It has been determined that the Eastern Caribbean Securities Regulatory Commission (ECSRC) has the jurisdiction to act against UIS seeking to operate in the ECCU region. Following requests from both the Grenada and Dominica financial services regulators, in mid-2008 the ECSRC issued “cease and desist” orders against a UIS operating in Grenada and Dominica (which was subsequently made public) and against another UIS seeking to operate in Grenada. Other national regulators have also been investigating if similar UIS exist in their respective jurisdictions. The ECSRC is fully prepared to proceed accordingly, at the request of national regulators. The authorities noted that the fallout from domestic investment in UIS on the ECCU financial system had been very limited, as this issue had been confronted at an early stage. 12

27. The region's offshore financial sectors are facing serious challenges as developed country regulatory authorities move to heighten scrutiny and regulation. While several ECCU countries have enhanced supervision of their offshore financial sectors, there has been little progress in aligning the prudential regimes of offshore banks with those of domestic banks, as recommended by the 2004 ECCU FSAP.13 In the wake of the global financial crisis, offshore financial services are under increasing pressure as regulators in advanced economies are moving to curtail their activities through more stringent regulation.14 Revenue from offshore financial sectors is particularly important for Nevis, Anguilla, and Antigua and Barbuda. In terms of AML/CFT compliance, a new round of CFATF mutual assessment is ongoing, with the assessments for Antigua and Barbuda, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines completed in June 2007, September 2008, October 2008, and March 2009, respectively. Assessments for two other ECCU jurisdictions (Anguilla and Montserrat) are scheduled for 2009. The mission urged that the enforcement of AML/CFT frameworks for offshore financial services continue to be enhanced.

28. The mission welcomed the recent establishment of a Regional Oversight Committee (ROC), comprised of the ECCB, ECSRC, and national financial regulators (SRUs). The Committee, which meets on a monthly basis starting from 2009, provides a high-level forum for ECCU regulators to share information, discuss regulatory reforms, and coordinate responses to threats to financial stability. The mission enquired about plans for the ECCB to take the lead responsibility in supervising systemically-important near banks (credit unions and building societies) and to be closely involved in supervising offshore banks which have domestic bank affiliates, as recommended by the 2004 ECCU FSAP. The authorities indicated that regulation and supervision of nonbanks and offshore banks falls under national regulators, not the ECCB. However, the ROC will serve to enhance information exchange and cooperation among ECCB and national regulators, and close gaps in regulation and supervision of the region's financial institutions. The mission recommended that the ECCB continue to be the focal point of ensuring financial stability, taking the lead role within the ROC, and that sufficient resources be allocated to all financial regulators and supervisors.

29. Given tightened global liquidity, careful international reserve management is critical to sustain the region's currency board arrangement. Functioning very much as a traditional currency board, the ECCB has been involved in minimal lending to member governments and banks, and has built up foreign reserve coverage over the years. Fund staff support this conservative approach, which has served the region well in maintaining exchange rate and price stability, and has limited any potential systemic impact arising from past episodes of banking stress. The ECCB agreed that an active monetary policy (including altering its limited LOLR capacity) runs the risk of undermining the region's hard-earned price and exchange rate stability (Box 4). In this context, the ECCB and commercial banks have been working on arrangements to resolve fragmentation of the interbank market (between local and foreign banks) and enhance interbank market efficiency. The mission enquired about plans to augment reserve coverage, as the ECCB's potential LOLR capacity is limited by the amount of reserves in excess of the minimum 60 percent requirement for backing of demand liabilities.15 While the authorities deemed the current level of international reserves to be broadly adequate, they shared the staff's concern that reserves could be placed under pressure in an extreme scenario of large-scale bank runs and capital flight.16 Given the need to prepare better for adverse events, the authorities agreed on the need to further explore options with multilaterals, development partners and regional central banks on the establishment of contingent lines of credit to boost reserves in any future crisis situation.

A01ufig12

ECCU: Optimal Level of Reserves, 1996-2008

(In percent of GDP)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Source: Fund staff calculations.
A01ufig13

Foreign Reserve Coverage of Monetary Liabilities, 2008

(In percent)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: Country authorities; and Fund staff calculations.

30. Interest rate rigidities should be addressed to cope better with the current downturn. The region has a floor rate which guarantees a minimum return of 3 percent on savings deposits held with commercial banks.17 Staff commented that this floor represents a distortion that introduces a wedge on the cost of capital. Even though near banks (such as credit unions) are not subject to this floor, competition for deposits would make them similarly affected. The mission recommended that the floor be either removed or lowered to reduce the cost of borrowing during the current economic downturn—with a view to phasing out the floor over time. The authorities noted that the floor was instituted as a means to protect returns to small depositors, and was strongly supported by the community. They also expressed concerns about the potential adverse impact on the level of foreign reserves of removal of the deposit rate floor.

31. The ECCB and national regulatory authorities continue to move forward with policy initiatives to deepen the region's capital markets. Despite recent growth, both the RGSM and ECSE remain thin, illiquid, and highly segmented (Figures 14 and 15). The ECCB is keen to establish repo and secondary securities markets, but faces significant obstacles such as insufficiency of dematerialized (paperless) government securities. The ECCB's efforts thus far have focused on improving market infrastructure for securities trading and enhancing the payments and clearing system. The mission suggested formulating a medium-term market development strategy—involving the sequencing and prioritization of reforms—on the basis of coordinated efforts on demand, supply, and market infrastructure. Key areas for reform include: (i) obtaining credit ratings for sovereign bonds issued by all ECCU governments, to assist in establishing pricing benchmarks and yield curves; (ii) reducing ECSE trading costs and strengthening disclosure requirements for listing on the ECSE; (iii) enhancing private credit information and markets for collateral; and (iv) simplifying the foreclosure process. The authorities noted that it would take time to deepen capital markets, especially given the lack of market makers and the predominance of a “buy and hold” mentality of investors in the region. In light of the recent liquidity crunch faced by many countries around the globe, the authorities intend to fast track the development of a repo market to enhance liquidity management in the ECCU.

Figure 14.
Figure 14.

Eastern Caribbean Securities Exchange

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: Eastern Caribbean Securities Exchange (ECSE); Caribbean Trade and nvestment Report 2005; and Fund staff estimates.1/ Size of bubble indicates country GDP in millions of U.S. dollars.
Figure 15.
Figure 15.

ECCU: Regional Government Securities Market, 2002–08

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: ECCB and ECSE.1/ Interest rates on 3-month treasury bills by St. Vincent and the Grenadines. Interpolated rates for March and May 2004.2/ Spreads on St. Vincent and the Grenadines 3-month treasury bills over U.S. interest rate on 13-week treasury bills.

B. External Stability and Competitiveness

32. High external current account deficits remain a source of concern. These deficits, compounded by very high public debt, render the region vulnerable to external shocks and could jeopardize the sustainability of the long-lived currency board arrangement. Key factors mitigating the concern about the sustainability of the ECCU's external position were the following:

  • FDI, a historically stable source of external flows, continues to finance the bulk of the current account deficits. Tourism sector investment, particularly for hotel construction, remains overwhelmingly financed by FDI. Foreign borrowing (public or private) has not played and is not expected to play a major role in financing the region's current account imbalances. FDI-financed current account deficits are generally more sustainable than debt-financed deficits, and tend to adjust more gradually than deficits financed by debt or portfolio flows. As recently observed, while an adverse shift in investor sentiment may lead to a sharper than envisaged decline in foreign investment, such a decline will be reflected pari-passu in a lower current account deficit (given the high import content of construction and tourism-based activities).

  • The level of the real exchange rate appears appropriate. Analysis by Fund staff suggests that the actual real exchange rate is broadly in line with its equilibrium level, reflecting the depreciation of the U.S. dollar against major currencies since 2002. Moreover, the real exchange rate (measured relative to tourism competitor-based markets) is currently at its lowest level in almost 20 years. Despite recent U.S. dollar appreciation, other measures of the real exchange rate (relative to either trade-weighted or customer-based markets) remain well below the levels seen during the 1990s and early 2000s. The equilibrium real exchange rate has also declined in recent years, reflecting the fall in the terms of trade, increased government consumption spending, and the accumulation of net foreign liabilities.18

  • Debt sustainability analysis indicates that the ECCU's external public debt to GDP ratio will increase moderately over the medium term (Appendix Figures 1 and 2).

A01ufig14

ECCU: Actual and Equilibrium REER, 1980–2008 1/

(Index 2000=100)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: IMF, Information Notice System; and Fund staff estimates.1/ The dotted lines around the equilibrium exchange rate represent 90 percent confidence intervals of the prediction.
A01ufig15

ECCU: Contributions to Changes in Equilibrium Exchange Rates, 1982–2008

(In percent)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: IMF, Information Notice System; and Fund staff estimates.

33. Medium-term current account deficits in the ECCU are broadly in line with the estimated equilibrium levels. Using the macroeconomic balance approach, Fund staff estimates put the equilibrium current account deficit under current policies (the current account ‘norm’) at around 19 percent of GDP. The ECCU's projected medium-term (2014) deficit of about 20 percent of GDP is within one standard deviation of the estimated current account norm.19 This implies that despite their numerical high levels, medium-term current account imbalances in the ECCU—largely financed by private capital flows (particularly FDI)—appear sustainable. While deficits are projected to remain in excess of estimated equilibrium levels for several years, which would raise vulnerabilities, they are expected to narrow over the medium term as tourist arrivals pick up and tourism-based investment opportunities decline (implying smaller FDI flows). The authorities agreed with this assessment, noting the large import content of FDI inflows. They pointed out that high external imbalances reflect the region's gradual transition from agricultural-based to tourism-based economies, and that investment in the tourism sector is expected to improve the region's growth prospects and eventually help reduce future current account imbalances.

A01ufig16

ECCU: Current Account Deficit, Actual and Estimated Norms 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Source: Fund staff estimates and projections.1/ In computing the norms, medium-term values of the fiscal balance, oil-balance, output growth, and relative income are drawn from staff projections. Band is ±1 standard error of the prediction. CARICOM sample includes ECCU countries and The Bahamas, Barbados, Belize, and Jamaica. Full sample includes 24 tourism-dependent economies as defined by Bayoumi and others (2005).2/ Based on Fund staff estimates. Medium-term is 2014.
A01ufig17

ECCU: Contributions to Current Account/GDP Norm, 1979-2008

(In percent)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Source: Fund staff estimates and projections.

34. Notwithstanding the above, large external imbalances do pose risks that warrant careful monitoring. These include:

  • Maintaining competitiveness will be key. Since 2004 the region's share of stayover arrivals in the Caribbean has remained stagnant and the terms of trade has deteriorated by a cumulative 32 percent (Figures 16 and 17). Fiscal consolidation, critical to bolster competitiveness and assist in maintaining external stability, is to face serious tests during the current economic downturn. Moreover, given the exchange rate peg with the U.S. dollar, large movements of exchange rates among major currencies would have implications for the competitiveness of the EC dollar. Indeed, the U.S. dollar has appreciated against major currencies since August 2008.

  • Slowing capital flows in a deteriorating external environment could undermine the region's external stability. Reflecting deleveraging, sizeable private capital flows intermediated through commercial banks in recent years are expected to retreat in 2009. This, together with slowing FDI flows (cumulatively by about 40 percent in nominal terms during 2008–09), are projected to result in a moderate loss of ECCB foreign reserves (about 1½ percent of GDP), despite a much smaller current account deficit projected for 2009. The authorities viewed FDI—the dominant source of external flows—as a sustainable and reliable source of capital flows, but shared the mission's concern that a sharp drop of capital inflows could raise pressure on foreign reserves and the exchange peg. They agreed with the need to closely monitor private sector capital flows and the ECCU's net asset position, and improve statistics in this area.20

Figure 16.
Figure 16.

ECCU: External Competitiveness, 1990–2008

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: ECCB; Caribbean Tourism Organization; Country authorities; World Travel and Tourism Council; and Fund staff estimates.Note: Antigua and Barbuda (ATG), Barbados (BRB), Belize (BLZ), Dominica (DMA), Dominican Republic (DOM), Grenada (GRD), Jamaica (JAM), St. Kitts and Nevis (KNA), St. Lucia (LCA), and St. Vincent and the Grenadines (VCT).1/ An increase (decrease) indicates an appreciation (depreciation).2/ The sharp movements in the competitor-based real exchange rate in 2002–04 were largely driven by the Dominican Republic's peso.3/ A value below 1 indicates that the country's tourism sector is less productive than that of The Bahamas.
Figure 17.
Figure 17.

Tourism Performance

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: Country authorities; ECCB; and Fund staff estimates.1/ Grenada's infrastructure was damaged in 2004 due to Hurricane Ivan.Note: Antigua and Barbuda (ATG), Aruba (ABW), Bahamas (BHS), Barbados (BRB), Belize (BLZ), Cayman Islands (CYM), Croatia (HRV), Cyprus (CYP), Dominica (DMA), Dominican Republic (DOM), Fiji (FJI), Grenada (GRD), Jamaica (JAM), Maldives (MDV), Malta (MLT), St. Kitts and Nevis (KNA), St. Lucia (LCA), St. Vincent and the Grenadines (VCT), Seychelles (SYC), Trinidad and Tobago (TTO), Vanuatu (VUT).

35. The authorities stressed their commitment to maintain the currency board arrangement and the exchange rate peg with the U.S. dollar. Noting that the EC dollar is close to its equilibrium value, they argued that the potential benefits from changing the parity were unlikely to be significant and the costs likely to be potentially substantial. Given the ECCU's high import dependence, competitiveness gains from a devaluation would be limited. In the authorities' view, the exchange rate peg has offered a strong anchor for price expectations, which have contributed to financial deepening and economic development in the region. Moreover, as public external debt is mainly denominated in U.S. dollars, a devaluation would further strain the region's already difficult debt-servicing position.

36. In this context, structural reforms are crucial to enhance competitiveness and ensure that the recent investment boom will translate into sustainable growth. Noting the risks posed by a slowing world economy and turbulent financial conditions, the authorities were concerned about growth prospects. Measures that could enhance competitiveness and growth potential include:

  • Improving the business climate. Regulatory, administrative, and legal reforms are needed to help lower the cost of doing business. Indeed, most countries in the region have seen some worsening of their doing business rankings in the past few years (Figure 18). The 2008 Doing Business Indicators identified several areas of consistent weakness, including difficulties in accessing credit and credit information; weak contract enforcement; high firing costs; and difficulties in closing businesses. The authorities indicated that the Eastern Caribbean Enterprise Fund (ECEF), an independent regional entity with a goal of capitalization of EC$100 million, is expected to be established in 2009 to provide market rate-based financing to small- and medium-sized enterprises.

  • Deepening regional integration and coordination. Significant gains can be expected from the promulgation of the OECS Economic Union (planned for end-2009), which envisages the creation of a single economic and financial space, and strengthened cooperation in many areas to attain economies of scale. This should enhance factor, goods, and labor market flexibility in the region. Work is also ongoing to establish a regional transportation and distribution entity, to help reduce regional transportation costs. The authorities viewed regional harmonization of tax incentives as impractical, but agreed with the staff that incentives should be granted in a nondiscretionary and transparent manner based on appropriate cost-benefit analysis.

Figure 18.
Figure 18.

ECCU: Doing Business Indicators, 2008 1/

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: World Bank, 2009 Doing Business Indicators (2008); and Fund staff calculations.1/ Smaller numbers represent greater ease in doing business. The 2008 rankings are across 181 countries.Note: Antigua and Barbuda (ATG), Dominica (DMA), Grenada (GRD), St. Kitts and Nevis (KNA), St. Lucia (LCA), and St. Vincent and the Grenadines (VCT).

C. Fiscal Consolidation and Debt Sustainability

37. The very high levels of public debt and debt servicing leave little room for counter-cyclical fiscal policy in the current economic downturn. Disappointingly, regional progress in fiscal consolidation and debt reduction was limited in the recent (2003–07) economic upturn. Adverse external sector developments (particularly declines in tourist arrivals and imports) during the still-unfolding recession will lead to fiscal revenue losses. Under current policies, the region's overall fiscal position is expected to deteriorate markedly in 2009 and to improve only moderately over the medium term; public debt would therefore rise from about 91 percent of GDP at end-2008 to about 110 percent of GDP by 2014. The staff urged the authorities to minimize fiscal slippages in the current downturn and stay on track with efforts to contain and prioritize expenditures, sustain revenue reforms, and strengthen debt management. Larger fiscal adjustment will be required in the medium term to stabilize and eventually reduce the public debt-to-GDP ratio. Any sizeable fiscal deterioration could place public sector debt back on an upward spiral, undermining the sustainability of the currency board arrangement.

38. The authorities noted their plans to carry through with proposed revenue reforms. Enhanced tax administration and tax reforms have led to increasing tax revenue in recent years (Figure 19). VATs have been successfully introduced in Dominica (March 2006), Antigua and Barbuda (January 2007), and St. Vincent and the Grenadines (May 2007). With CARTAC and Fund technical assistance, preparations are ongoing for introduction of VATs in Grenada (early 2010), St. Lucia (mid-2010), and St. Kitts and Nevis (late 2010). The mission stressed that, given the erosion of the corporate tax base by tax concessions, preserving the integrity of the VAT—by limiting the number of zero-rated and exempt items—is a top priority. In addition, actions need to be taken to ensure successful post-VAT implementation, including: (i) strengthening audit capability and minimizing VAT noncompliance; (ii) facilitating the absorption of VAT units into mainstream domestic tax operations; and (iii) establishing semiautonomous revenue authorities, and implementing customs reforms. Flexible fuel pricing mechanisms, which have been established in all but two (Antigua and Barbuda and St. Lucia) ECCU jurisdictions, will help preserve taxation of petroleum products and promote energy conservation (Figure 20).

Figure 19.
Figure 19.

ECCU: Fiscal Revenue, 1996–2008

(In percent of GDP)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: ECCB; Country authorities; and Fund staff calculations.
Figure 20.
Figure 20.

ECCU: Effective Gasoline Tax Rate, Gasoline Import and Retail Prices, 2003–08

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: ECCB; and Fund staff estimates.

39. Measures aimed at containing expenditures and enhancing their efficiency are critical. Despite recent progress with revenue reforms, public expenditure remains large and inefficient (Figure 21). The staff welcomed the establishment of an OECS Public Expenditure Commission, which will follow the model of the successful OECS Tax Reform Commission, and try to forge a regional consensus on expenditure priorities and the appropriate role of government in the OECS. However, the authorities pointed to mounting social and development needs that ECCU governments are obliged to meet. The mission stressed that, with very high public debt, the governments have little fiscal leeway to maintain the role of “employer of last resort” in the current economic downturn. Instead, should fiscal revenue decline, the staff argued that ECCU governments need to be prepared to reduce expenditures, including prioritizing public investment spending and containing wage bills, to minimize fiscal slippages. Within this framework, the mission supported well-targeted social spending to mitigate the hardship caused by the economic downturn on vulnerable groups. The mission also noted that some ECCU countries have widened the coverage of social programs to ameliorate the recent effects of rising unemployment, such as the introduction of unemployment insurance in Antigua and Barbuda, higher public assistance payments in Grenada, and increases in conditional cash transfer programs in St. Lucia.

Figure 21.
Figure 21.

ECCU: Fiscal Expenditure

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: World Economic Outlook; Country authorities; and Fund staff calculations.Note: Anguilla (AIA), Antigua and Barbuda (ATG), Bahamas (BHS), Barbados (BRB), Belize (BLZ), Dominica (DMA), Dominican Republic (DOM), Grenada (GRD), Guyana (GUY), Haiti (HTI), Jamaica (JAM), Montserrat (MTS), St. Kitts and Nevis (KNA), St. Lucia (LCA), St. Vincent and the Grenadines (VCT), Suriname (SUR), Trinidad and Tobago (TTO).

40. The authorities saw strengthening public debt management as a priority. They were concerned about the impact of heightened rollover risks and rising interest rates on their already difficult fiscal positions. Several ECCU countries (Antigua and Barbuda, Dominica, St. Kitts and Nevis, and St. Lucia) have received debt management technical assistance from external debt managers and/or the Fund's MCM Department, and further Fund technical assistance will be forthcoming to other ECCU countries. Enhanced debt management would allow the authorities to more closely monitor all existing public debt (including contingent liabilities of the public sector), conduct risk assessments, formulate debt strategies, and reduce debt servicing costs by retiring more expensive debt.21

41. Further efforts are required to ensure the sustainability of social security systems. Traditionally, governments in the region have used national social security funds as a captive source of financing (at below market rates of interest), which has exacerbated the impact of rapid population ageing and high emigration on the viability of the systems. As a consequence, the region's social security systems have large unfunded liabilities, which may have also been exacerbated by the systems' holdings of CIL and BAI “deposit-like” insurance products.22 Parametric adjustments to social security schemes (e.g., increasing the retirement age and contribution rates, changing the benefits formulae), as well as greater portfolio diversification of scheme assets, are essential to ensure the long-term viability of social security systems. Staff welcomed parametric reforms already enacted in Dominica, St. Lucia, and St. Vincent and the Grenadines to bolster the sustainability of their schemes, and encouraged the authorities to address the issue of noncontributory double pensions for civil servants in several ECCU countries. The mission also noted the progress made by the OECS Social Security Commission (established by the ECCB Monetary Council in July 2008) in examining the viability of social security systems.

42. To provide adequate discipline, the ECCB's revised fiscal benchmarks should be made operational. In mid-2006 the ECCB Monetary Council approved revised fiscal benchmarks that require governments to achieve a public debt-to-GDP ratio of 60 percent by 2020, by integrating annual budget objectives with medium-term goals. However, there have been disappointingly few demonstrations of commitment to the revised benchmarks by ECCU member countries, with most countries continuing to increase their public debt (as a share of GDP). Analysis by Fund staff confirms that the region's fiscal policy is generally procyclical, with higher public expenditures during good years. In light of the ECCU's observed inability to achieve (or even move toward) the ECCB's fiscal benchmarks, staff urged the national and regional authorities to promptly establish a formal mechanism to ensure consistency between national fiscal policies and the fiscal benchmarks, in order to preserve confidence in the currency board arrangement. The mechanism should involve annual national budget targets (for the public sector overall or primary balance), placed within multiyear macroeconomic frameworks which would ensure consistency with the 2020 public debt targets. The annual budget targets should be published (to enable a comparison with actual fiscal outcomes), and allow for adverse shocks by aiming for stronger fiscal consolidation in periods of above-average growth. The mission also raised the option of enacting national Fiscal Responsibility Laws to help enforce the revised fiscal benchmarks. The authorities continued to demonstrate little appetite for an enforcement mechanism based on some system of economic penalties to assist in achieving the benchmarks. Instead, they preferred peer pressure and greater transparency of fiscal outcomes to provide credibility for the mechanism.

A01ufig18

ECCU: Fiscal Cycles, 1983-2006

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Source: J. Araujo, “Fiscal Cycles in the Caribbean”, forthcoming IMF Working Paper.Note: Antigua and Barbuda (ATG), Dominica (DMA), Grenada (GRD), St. Kitts and Nevis (KNA), St. Lucia (LCA) and St. Vincent and the Grenadines (VCT).

43. The authorities pointed out that in the current downturn, it was necessary to strike a balance between achieving fiscal adjustment and debt sustainability, and mitigating the social pressures affecting ECCU populations with government spending. Many of the national authorities perceived the magnitude of fiscal adjustment required to achieve the ECCB benchmarks as daunting, and neither socially nor politically feasible in their present economic circumstances. They explained that while many fiscal measures had been undertaken in ECCU countries in recent years, natural disasters, trade preference erosion, and infrastructure requirements had created social and capital spending needs that could not be deferred or curtailed (Box 5).23 To address the debt situation, they considered that the region would need to flesh out medium-term debt strategies, seek assistance from debt advisors to conduct comprehensive reviews and management of their debt stock, as well as avail themselves of debt relief wherever possible. However, the authorities agreed with the Fund staff that fiscal adjustment must play a key role in any comprehensive debt reduction strategy.

D. Crisis Management

44. Crisis management and preparedness are top priorities for the region. The authorities agreed with the mission that the region's vulnerability to shocks, exacerbated by high public debt, narrow fiscal space, and the ECCB's limited role as a lender of last resort, highlights the urgency of carefully managing risks and developing national and regional contingency plans to prepare for potential future crises.24 Main themes of these discussions were:

  • Recognizing the disruptive nature of financial crises under a currency board arrangement, the authorities noted that efforts have been focused on crisis prevention and development of early warning systems. The mission encouraged the authorities to further strengthen monitoring capacity to ensure early detection and intervention, and to enhance information on macroeconomic-financial linkages.

  • The ECCB has formulated contingency plans for dealing with weak and troubled banks, as evidenced by its successful leadership of the region's response to the recent run on the Bank of Antigua. The mission encouraged the authorities to expand their plans to cover banks and systemic nonbanks (such as credit unions) and to deal with systemic contingencies. The plans should be carefully communicated to the public, to help boost confidence in the financial system. Furthermore, plans should be endorsed by all ECCU members and explicitly address the issue of burden sharing (responsibilities of depositors, shareholders, national governments, and the ECCB) in the event of future financial crises.

  • To ensure the sustainability of the currency board arrangement, the mission recommended focusing the ECCB's role in crisis resolution on technical assistance and moral suasion, rather than extending liquidity support to banks, nonbanks, and governments. Nevertheless, in the current environment of heightened financial risks, the mission agreed that the ECCB could continue to provide very limited LOLR support, as in the recent case of Bank of Antigua, but should establish firm limits to avoid being drawn into liquidity operations that could compromise the currency board arrangement.

  • Given the difficult fiscal position of most ECCU governments, any formal guarantee of bank deposits runs the risk of being ineffective due to a lack of credibility. Moreover, given the fixed exchange rate regime, tools for containing bank runs would have to be mostly administrative in nature (e.g., early intervention of insolvent banks, deposit securitization, forced maturity extension, deposit freezes, and bank mergers). The mission also recommended that the authorities examine the efficacy of temporarily imposing capital controls in the event of large-scale capital flight.

  • The burden of response to any financial sector crisis rests with national governments through the adoption of emergency fiscal and other measures. Possible fiscal responses could include a combination of expenditure cuts and deferments (including reductions in civil service wages and greater prioritization of public investment spending) and emergency revenue measures (including higher indirect taxes). Targeted social safety nets, such as use of food stamps, unemployment benefits, and public assistance payments, are needed to mitigate the hardship borne by vulnerable groups in the event of a crisis.

E. Capacity Building

45. Led by the ECCB, commendable progress has been made in improving the quality of economic and financial statistics and enhancing institutions.

  • A monetary ROSC was completed in 2007, and many of its recommendations have been implemented. In addition, balance of payments forms are being revised and tested to better capture trade in services (tourism), and follow the revised BPM6 methodology. The revised forms will be used for the compilation of balance of payments data, beginning in 2010. Significant progress has also been made on: rebasing the national accounts (to a common 2006 base year), to be completed by end-2009; and developing new national and regional CPI indices (based on latest household budget surveys), to be completed by end-2010. The national and regional authorities have established a data release calendar in 2009, to ensure the regular dissemination of statistical data. Work is ongoing to develop harmonized reporting by all nonbanks, including credit unions and insurance companies.

  • With support from the Fund, the authorities continue to implement their initiative to establish a Regional Statistical System over the medium term. It is envisaged that the system will be established in three phases: (i) transforming Central Statistical Offices (CSOs) into statutory bodies with clearly defined functions; (ii) developing effective support to the CSOs through technical assistance and training; and finally (iii) establishing a Regional Statistical Bureau (RSB) linked to the CSOs at the national level.

46. Further progress in capacity building is needed to improve policy analysis and design, and will require sizeable support through technical assistance. While welcoming the progress achieved thus far, the mission noted several longstanding areas of data and institutional weakness, including: public finance and debt statistics; labor market and social indicators; public expenditure (particularly public sector investment planning); nonbank financial sector data; measures of private sector capital flows; and debt management. The mission urged the national and regional authorities to continue to work to improve statistical practices and data management, and to bolster budgetary resources devoted to these tasks. The authorities expressed their appreciation for the technical assistance provided thus far by the Fund, development partners, and particularly CARTAC (Box 6). They agreed that data and institutional deficiencies have compromised the quality of past policy analysis and design, and requested that technical assistance be continued to assist their endeavors in overcoming such deficiencies.

V. Staff Appraisal

47. A sharply-slowing economy in the face of a hostile external environment presents major policy challenges. Led by construction and tourism, the region enjoyed an average annual growth of about 4½ percent during 2003–07. However, the global downturn amid regional and international financial shocks in 2008 has taken a toll on economic activity, with the region expected to sink further into recession in 2009 and 2010. Key near-term risks include a deeper and more protracted global slowdown, increasing financial stress, and large retrenchment of capital inflows. To navigate through the current economic downturn and high global volatility, the authorities need to carefully manage these risks while staying on track to address fundamental issues, particularly fiscal and debt sustainability.

48. Safeguarding financial stability in the wake of the global crisis requires further and prompt efforts in strengthening regulation and supervision of banks and nonbanks. The recent shocks of CL Financial Holdings and the Stanford Group highlight the urgency to bring the nonbank and offshore financial sectors under effective regulation and supervision. Credit risk, high government exposures, and liquidity risk pose major threats to the stability of the banking system. It is, therefore, crucial to intensify oversight of banks for early detection of vulnerabilities and strengthen enforcement of remedial measures. Supervision of the nonbank financial sector should also continue to be bolstered, through the planned rapid establishment of national single regulatory units in all eight ECCU jurisdictions. In addition, the increasing presence of financial conglomerates in the Caribbean underscores the need for consolidated supervision, both cross-border and cross-functional. The recent establishment of a Regional Oversight Committee, under the leadership of the ECCB, is a welcome development, which enables all ECCU financial regulators to coordinate responses to threats to financial stability.

49. The longstanding currency board arrangement and exchange rate peg, to which the authorities remain committed, have contributed to external stability. Staff analyses indicates that the EC dollar is close to its equilibrium level. The large ECCU current account deficit will decline over the medium term, and will continue to be largely financed by FDI. Sustained fiscal consolidation is not only fundamental to supporting external stability, but also necessary to underpin the currency board arrangement. The ECCB's approach of a nonactivist monetary policy remains appropriate, even during the current period of economic and financial difficulties. Instead, greater flexibility in interest rates should be sought to increase banks' efficiency and lower the cost of capital.

50. Given the region's high vulnerability, crisis management and contingency planning remain top priorities. Full-fledged contingency plans should clearly define responsibilities of relevant institutions and stakeholders—including the ECCB's limited lender-of-last-resort role—in the event of a crisis and be carefully communicated to the public. Possible fiscal responses could include a combination of expenditure cuts and postponements, and emergency revenue measures. Targeted social safety nets are needed to mitigate hardship on vulnerable groups in the event of a crisis. The authorities are also encouraged to further explore contingent financing with multilaterals and development partners, to better prepare for possible crisis scenarios.

51. Fiscal consolidation and debt reduction should remain at the center of the region's policy agenda. With very high public debt, there is little room for counter-cyclical fiscal policy and every effort should be made to minimize slippages during the economic downturn. Key fiscal initiatives include:

  • Revenue reforms. The staff welcomes the progress made in revenue mobilization and encourages the remaining jurisdictions to move quickly to adopt VATs and institute more flexible mechanisms for domestic fuel pricing. The integrity of VATs needs to be preserved, by limiting exemptions and concessions.

  • Expenditure restraint. Capital expenditures need to be better prioritized, along with implementation of civil service reform to contain the size of wage bills. These measures will create room for strengthening and focusing expenditure on social safety nets.

  • Debt management. Ongoing efforts by the authorities to strengthen debt management capacity will be critical in seeking to enhance debt sustainability.

  • Fiscal benchmarks. A strong and transparent link needs to be established between the setting of national fiscal policies and achievement of the ECCB's fiscal benchmarks. Such links will help strengthen fiscal discipline at the national level and boost public confidence in the sustainability of the currency board arrangement.

52. Structural reforms need to be carried through to enhance competitiveness. The planned OECS Economic Union provides an important opportunity to further enhance regional coordination and integration, and promote factor and product market mobility. Other priorities include improving the national and regional business climate, and increasing the flexibility of labor and product markets.

53. Efforts to further advance the region's capacity building are well placed. The region has made commendable progress in improving statistics on the national accounts, consumer prices, monetary aggregates, and the balance of payments, and efforts in these areas should be continued. The initiative to establish a regional statistical system is also welcome. Data deficiencies, however, continue to compromise the quality of policy analysis and design. The staff encourages the authorities to continue their efforts in capacity building—supported by technical assistance—and urges improvements in the data on the nonbank financial sector, noncentral government fiscal accounts, and debt stocks.

54. It is proposed that the next discussion on ECCU common policies takes place in 12 months.

The Economic Partnership Agreement Between the Caribbean and European Union

The Economic Partnership Agreement (EPA) between the European Union (EU) and individual CARIFORUM countries (CARICOM and the Dominican Republic) was signed on October 15, 2008. This comprehensive agreement, the first between the EU and an ACP region, can yield significant benefits to participating Caribbean countries, but would require countries to improve their trade policy frameworks, including accelerating regional integration initiatives, to take advantage of the available opportunities. The EU would also need to commit to providing significant assistance to help overcome the constraints that Caribbean countries face in accessing their markets.

The EPA is a WTO plus reciprocal agreement that encompasses free trade in goods, trade in services, and provisions on Singapore issues. The trade in goods agreement envisages the immediate elimination of import duties and quotas on 98.5 percent of Caribbean goods entering the EU, while the duties of CARIFORUM countries would be reduced in phases starting in 2011, which would result in the removal of duties on 87 percent of European goods entering the Caribbean countries by 2033. Caribbean bananas are allowed immediate duty- and quota-free access to the EU market. The agreement on services proposes the liberalization of 94 percent of services sectors in the EU, while covering 65 percent of services sectors in the ECCU, 75 percent in the rest of CARICOM and 80 percent for the Dominican Republic. The agreement covers all four modes of supply of services—cross border (1 and 2), commercial presence (3), and movement of natural persons (4)—and contains potentially significant opportunities for Caribbean service providers in Europe. The agreement also includes WTO plus provisions on investment measures, government procurement, intellectual property rights, trade and customs facilitation as well as a dispute settlement mechanism.

The most significant benefits would likely come from the agreement on services. A joint study by the World Bank and OAS estimates that full implementation of the service access provisions under the EPA could result in an increase in GDP of about 2½ percent above the baseline and an increase in export supply of about 6½ percent, mainly as a result of productivity increases that would be generated by entry of European service providers in the Caribbean market. The trade agreement on the other hand is estimated to result in a marginal rise in GDP from the baseline, and an increase in export demand of about ¾ of 1 percent, particularly in vegetables, fruits, and nuts.

Estimated Benefits of the EPA for Caribbean Countries

article image
Source: World Bank and OAS, Caribbean Accelerating Trade Integration.

What needs to be done for the Caribbean to take advantage of the agreement? There is an urgent need to improve competitiveness in the region by reducing labor market rigidities, lowering the cost of doing business (particularly transportation costs), improving customs procedures, strengthening the legal framework, and developing a competition policy. The framework for trade policy also needs to be strengthened to make national trade policy more coherent. Accelerated implementation of many of the provisions of the revised CARICOM treaty, which have languished, like the free movement of capital, rights of establishment, and the provisions of the trade in services regime, would better equip regional firms to take advantage of opportunities under the EPA. Enhancing trade policy along with internalizing other adjustment cost could prove to be prohibitive for many Caribbean countries, particularly the ECCU, and would require significant financial assistance from the EU which could be supported under a comprehensive aid for trade package.

Business Cycle Linkages between the ECCU and Major Trading Partners

Given the ECCU's currency board arrangement and its hard peg to the U.S. dollar, the vulnerability of the ECCU to external shocks remains a serious concern. The global financial crisis of 2008 has already adversely affected tourist arrivals to the ECCU, and slowed investments and remittances, thereby reducing prospective growth outcomes for the ECCU in the near term. Additional downside risks remain in view of the declining prospects for global growth in 2009, especially for the United States and Canada. As such, the dependence of the ECCU on its major trading partners remains an important issue.

Spillovers from major trading partners to the ECCU can be estimated using the structural vector-auto regression (SVAR) methodology of Rigobon (2003).1/ In contrast to existing SVAR approaches, this methodology estimates the size of spillovers by exploiting changes in the variability of the external shocks, a feature that is particularly ideal for the ECCU region. The estimated SVAR allows real growth in the United States, the United Kingdom, and Canada to influence the growth rate of the ECCU directly. It also constrains the ECCU to have no spillover effects on these countries, which seems sensible given that the ECCU is composed of small open economies. The model is estimated using annual real growth data for 1965–2008.

The preferred parameter estimates suggest that the United States is the main driver of ECCU growth. Specifically, after one period (year “T+1”), a 1 percentage point increase in U.S. growth increases growth in the ECCU by approximately 0.5 percentage points on average. By contrast, a similar shock to either Canadian or United Kingdom growth does not produce economically meaningful or statistically significant effects on the ECCU growth rate.

A01ufig19

Response of ECCU Growth to a Percentage Point Shock in Real Growth

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Source: Fund staff estimates.

OECS member states have set themselves the goal of forming an OECS Economic Union by 2009, and Trinidad and Tobago is expected to become a member by 2011. Reformulating the SVAR to include Trinidad and Tobago and the United States, Canada and the United Kingdom as a group yields little evidence that Trinidad and Tobago is a key growth driver of the ECCU. This result probably reflects the services-oriented nature of ECCU exports and the limited consumption of these services by Trinidad and Tobago during 1965–2008.

A01ufig20

Response of ECCU Growth to a Percentage Point Shock in Trinidad and Tobago Real Growth

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Source: Fund staff estimates.
1/ Rigobon, R. (2003), “Identification through Heteroskedasticity,” Review of Economics and Statistics, Vol. 85.

Stress Testing the ECCU Banking System

The ECCU banking system remains well capitalized, yet local banks are burdened by persistent high government exposures and are vulnerable to credit risks. As of end-2008, locally incorporated banks' gross government exposures accounted for about one fifth of their total assets, more than triple the ratio of foreign branches. Local banks' capital adequacy ratio (CAR) stood at 20 percent, far exceeding the ECCB's 8 percent prudential requirement. However, their capital adequacy may be overstated given potential underprovisioning, as reflected in local banks' relatively low provisioning-to-NPL ratio.

ECCU: Financial Soundness Indicators, December 2008

(in percent)

article image
Source: ECCB.

The foreign branches have consolidated capital positions with their parent banks.

Non-performing loans.

Stress tests on 20 locally-incorporated banks, which have their own capital bases, reveal several major risks. Foreign branches are excluded from the stress tests as they do not have their own capital bases.

  • Credit risk and high government exposures pose the most significant challenge to the stability of the ECCU banking system. NPLs are expected to rise in a slowing economy. Even with just a 1 percent increase of total loans in loan losses (Scenario 1), 1 of the 20 local banks would become insolvent. The number of insolvent banks rises to 3 with an additional 5 percent of total loans in loan losses. Under Scenario 2, where loan losses are compounded by a 10 percent nonrepayment in government obligations, the number of insolvent banks increases to 2 for a 1 percent rise of total loans in loan losses and 5 for a 5 percent rise of total loans in loan losses. To account for possible underprovisioning, it is further assumed that recovery rates will be lower than provisioning by 10 percent of NPLs (Scenario 3). This would lead to the insolvency of 6 local banks under the worst-case scenario.

  • Liquidity risk is another major risk to banking system stability. As of end-2008, local banks overall had net liquid assets of 34 percent of deposits, above the ECCB's 20 percent prudential requirement. However, 8 out of the 20 local banks had net liquid assets below 20 percent of deposits, with net liquid assets of two local banks being negative. With a 20 percent deposit loss, the number of local banks with net liquid assets ratios below the ECCB's prudential requirement increases to 13, 8 of which have negative net liquid assets. For the 20 local banks as a whole, the net liquid assets ratio falls by half to 17 percent. Impairment of foreign investments, which, on average, account for about 40 percent of banks' liquid assets, will also reduce local banks' liquidity and solvency. With a 50 percent loss of foreign investments, 12 banks will have net liquid asset ratios fall below the 20 percent prudential requirement, and 6 banks will become insolvent.

  • While local banks' direct foreign exchange risk is small, indirect risk could potentially be sizeable. As of end-2008, all but two local banks had net positive open positions in foreign exchange, suggesting that most local banks would benefit from a potential EC dollar devaluation. However, a devaluation could affect banks' balance sheets indirectly through its impact on borrowers' capacity to service loans. About half of the region's public debt is external debt (mostly denominated in U.S. dollars). A large devaluation could hurt the public sector's capacity to repay, with knock-on effects to local banks which have large government exposures. Moreover, ECCU banks offer foreign currency loans to residents. To the extent that those residents cannot repay the foreign currency loans in the event of a devaluation, banks are exposed indirectly to foreign exchange risk. As information on borrowers' net open positions in foreign exchange is hard to come by, a close look is taken at the composition of foreign currency loans versus deposits in ECCU banks. For the banking system as a whole, foreign currency loans and deposits roughly match each other. Nevertheless, as of end-2008, private business' foreign currency deposits were less than half of their foreign currency loans, suggesting that potential foreign exchange risk faced by private business may indirectly affect ECCU banks.

  • The risk of pure interbank contagion is found to be limited, reflecting the limited interbank market among local banks. However, there could be indirect effects should an individual bank's insolvency lead to a loss of confidence in the banking system.

A01ufig21

Sensitivity Analyses, Local Banks, end-2008

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Note: Scenario 1 models the impact of increased loan losses (in percent of total loans); scenario 2 adds the non-repayment of 10 percent of government exposure to scenario 1; scenario 3 incorporates the impact of underprovisioning of 10 percent of NPLs to scenario 2.

Foreign Currency Deposits and Loans of Residents in the ECCU Banks 1/

(In millions of EC$)

article image
Sources: ECCB, and Fund staff estimates.

Including both foreign and local banks.

The ECCB's Monetary Instruments and Facilities

The ECCB Act (1983) stipulates that the EC dollar is pegged at EC$2.70 to US$1 and requires the ECCB to hold external reserves for its members of no less than 60 percent of its demand liabilities. However, the policy norm for the minimum reserve cover is 80 percent and has been maintained at about 100 percent in recent years. The ECCB is permitted to provide credit to its members under strictly specified limits and within the reserve cover requirements. At the beginning of its fiscal year, the ECCB allocates its global limit on domestic assets, currently 20 percent of demand liabilities, to credit to commercial banks and the participating governments (40 percent and 60 percent of the fiduciary issue, respectively) with each government having its own limit.

A01ufig22

ECCB: Lending to Governments, 1993–2008

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Source: ECCB.

The ECCB's monetary instruments and facilities are:

  • Reserve requirement. Set at 6 percent on all deposits. Reserves are unremunerated, in local currency and are based on the average level of deposits for the week.

  • Rediscount facility for treasury bills. The ECCB may sell to banks treasury bills it has purchased in the primary market and which can be rediscounted before their maturity date. However, the ECCB no longer sells treasury bills to banks, as this facility is being phased out. Instead, banks are encouraged to utilize the RGSM secondary market.

  • Discount rate. This is the applicable rate at the discount window, but the ECCB has used it more to signal its views about interest rate movements. This was lowered in July 2003 to 6.5 percent.

  • The minimum savings deposit rate. This is the only remaining interest rate control imposed by the ECCB under its general power to establish a schedule of interest rates and credit limits. It was lowered in September 2002 from 4 percent to 3 percent.

  • Lombard facility (discount window). The ECCB may provide emergency liquidity assistance to a bank that is in distress, once the bank has exhausted other liquidity sources, for up to 90 percent of the face value of treasury bills or other securities. This facility has been used very rarely.

As in the case of Bank of Antigua, the ECCB can also exercise special emergency powers based on its judgment that a financial institution is in serious stress. The operation of these instruments is reviewed regularly by the ECCB's Monetary Council.

Trade Preference Erosion and Donor Assistance

The continued erosion of trade preferences for ECCU exports to European markets, compounded by the decline in development assistance, has adversely affected the region's rural populations. Going forward, increased international competition is expected to lead to further contraction of the traditional banana sector. There is a need to continue to develop targeted social safety nets for displaced farmers and agricultural workers, involving time-bound measures such as income transfers and retraining programs, and to diversify agricultural production to meet local demand from the tourism sector.1/

Fund technical assistance reviewed the impact of preference erosion on poverty in the Windward Islands, through a FAD Poverty and Social Impact Analysis completed in early 2009. A major finding is that social programs in ECCU countries have evolved over time in a piecemeal fashion, which is both expensive and inefficient in targeting the needs of the most vulnerable. The mission urged the national fiscal authorities to sharpen the focus and coherence of poverty reduction initiatives, to ensure they are linked to social development programs in national budgets, consistent with overall macroeconomic and fiscal objectives.

ECCU countries continue to be frustrated with the slow disbursal of pledged assistance by traditional development partners. The authorities were particularly concerned about the EU's nondisbursal of previously committed development funds, aimed at mitigating the adverse impact of trade preference erosion and facilitating the transition out of agriculture. The mission encouraged the authorities to continue to work closely with the EU to quickly release undisbursed financial assistance (particularly from SFA sources). In a welcome development, the EU has recently disbursed long-awaited sugar transformation funds to St. Kitts and Nevis (receiving the first of two installments in December 2008), and continues to disburse from its European Development Fund (EDF) resources, with St. Kitts and Nevis, Antigua and Barbuda, St. Lucia, Dominica, and Grenada receiving grants in 2008.2/

ECCU: Status of EU Banana Support (Special Framework of Assistance), End-2008

article image
Source: Delegation of the European Commission, Barbados.
1/ Donors (principally the European Union (EU) and Caribbean Development Bank (CDB)) have offered assistance to facilitate the social and economic transformation of the ECCU economies away from (banana and sugar) agriculture, under the Special Framework of Assistance (SFA), designed for the period 1999-2008. See also M. Mlachila, P. Cashin and J. Gold, “The Macroeconomic Impact of Trade Preference Erosion on the Caribbean,” Chapter III of The Caribbean: Enhancing Economic Integration, Bauer, Cashin, and Panth (eds.), IMF 2008. 2/ The CDB also extended policy-based loans to St. Kitts and Nevis and St. Lucia in 2007 and 2008, respectively.

ECCU: Technical Assistance from the Fund in 2008 and 2009

The ECCU has been an intensive user of CARTAC (backstopped by the Fund) and Fund technical assistance (TA). The following major support has been provided or envisioned in 2008–09:

Tax and customs reform: Follow-up assistance in St. Vincent and the Grenadines, Antigua and Barbuda, and Dominica to strengthen value-added tax (VAT) implementation and improve the organization and operations of tax and custom administration (FAD, CARTAC). Assistance with near-term implementation of VAT in St. Lucia, St. Kitts and Nevis, and Grenada (CARTAC, FAD, LEG). Assistance with custom reforms in Grenada, St. Vincent and the Grenadines, and St. Lucia (CARTAC). Revenue administration assessments for St. Kitts and Nevis, and St. Vincent and the Grenadines; and revenue administration follow-up assistance to Dominica (CARTAC).

Public debt management: Assistance to strengthen debt management capacity and develop medium-term debt strategy has been provided to St. Lucia and St. Kitts and Nevis in 2008, and will be extended to Dominica in the first half of 2009 (MCM).

Public finance management: Advanced internal audit training conducted for St. Vincent and the Grenadines and Grenada; revenue modeling and forecast training conducted for St. Vincent and the Grenadines, Grenada, and Montserrat; and pension reviews conducted for Montserrat, and St. Kitts and Nevis (all CARTAC).

Regional financial and capital market: Assistance to facilitate the establishment of an overnight repo facility and the functioning of the interbank market; payments and settlements (both MCM); assistance for review and preparation of new securities regulations (CARTAC).

Financial sector supervision: Assistance (since April 2008) to ECCU member countries in the development of Single Regulatory Units (SRUs) based on the specific needs of each SRU; revision of insurance laws and designing of regulatory insurance reporting forms; development of law, changes in legal framework, and training for the supervision of credit unions; development of credit bureaus in the region; and launching of a financial literary web site (all CARTAC).

Preference erosion: A Poverty and Social Impact Analysis (PSIA) of banana-exporting ECCU countries was completed in early 2009, to identify the most vulnerable groups and assist in the design of a transition strategy (FAD).

Economic and financial statistics: Ongoing assistance in compiling supply and use tables in all ECCU countries; rebasing consumer price index and national accounts (all CARTAC); assistance in the development of tourism satellite accounts (CARTAC; CARICOM Secretariat; CDB; and OECS Secretariat); and assistance in the development of a regional statistics network (STA).

Balance of payments statistics: Ongoing assistance in revising forms for compiling external sector statistics, in particular to implement the Balance of Payments and Investment Position Manual (BPM6) in 2009 (CARTAC; OECS Secretariat; STA).

Other capacity building: Completed a Regional IT Study in areas of tax, customs, treasury, expenditure and budget at the request of CIDA (CARTAC); regional training courses on IT accounting system, unregulated investment schemes, and the CARICOM Tax Treaty; a regional workshop on tax administration IT applications and systems to address the Caribbean region's medium-term needs (CARTAC, ECCB, and CARICOM); continued work in the establishment of a regional customs (ASYCUDA IT-based) service center in St. Lucia (CARTAC, and CARICOM); and review of revenue administration and public expenditure IT system (CIDA, CARTAC).

Table 1.

ECCU: Selected Economic and Financial Indicators, 2004–10 1/

article image
Sources: Country authorities; and Fund staff estimates and projections.

Includes all eight ECCU members unless otherwise noted. ECCU price aggregates are calculated as weighted averages of individual country data. Other ECCU aggregates are calculated as sum of individual country data; ratios to GDP are then calculated by dividing this sum by the aggregated GDP.

Excludes Anguilla and Montserrat.

Includes errors and omissions.

ECCB's foreign assets as a ratio of its demand liabilities.

Table 2.

ECCU: Selected Economic Indicators by Country, 2004–14

article image
Sources: Country authorities; and Fund staff estimates.
Table 3.

ECCU: Selected Central Government Fiscal Indicators by Country, 2004–14 1/

(In percent of GDP)

article image
Sources: Country authorities; and Fund staff estimates.

Fiscal years for Dominica and St. Lucia.

Table 4.

ECCU: Selected Public Sector Debt Indicators by Country, 2004–14 1/

article image
Sources: Country authorities; and Fund staff estimates.

Fiscal years for Dominica and St. Lucia.

The decline of public debt in 2008 reflects debt write-down by the Banco do Brazil and two statutory bodies.

Includes external arrears.

Table 5.

ECCU: Monetary Survey, 2004–10

(In millions of Eastern Caribbean dollars)

article image
Sources: ECCB; and Fund staff estimates.

Includes the national insurance schemes.

Table 6.

ECCU: Summary Balance of Payments, 2004–14

article image
Sources: ECCB; and Fund staff estimates and projections.

Includes errors and omissions.

Table 7.

ECCU: Selected Vulnerability Indicators, 2004–10

article image
Sources: Country authorities; and Fund staff estimates and projections.

Excludes Anguilla and Montserrat.

Defined as external current account deficit plus external amortization.

Foreign assets as a percentage of demand liabilities.

Table 8.

ECCU: Creditor Composition of Public Debt at End-2008 1/

(Share of total)

article image
Sources: ECCB; and Fund staff estimates.

Excludes Anguilla and Montserrat.

No creditor breakdown is available for restructured and unrestructured domestic bonds.

Appendix Table 1.

ECCU: Public Sector Debt Sustainability Framework, 2004–14

(In percent of GDP, unless otherwise indicated)

article image

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Gross central government and government-guaranteed debt.

Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as - g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Assuming that a hurricane hits half of ECCU countries, increasing their primary deficit by three percent of GDP for 2009–11 and reducing growth to zero.

Derived as nominal interest expenditure divided by previous period debt stock.

Appendix Table 2.

ECCU: External Debt Sustainability Framework, 2004–14

(In percent of GDP, unless otherwise indicated)

article image

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Defined as nonfinancial public sector debt. Information on private sector external borrowing is unavailable.

Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both noninterest current account and nondebt inflows in percent of GDP.

Natural disaster impacting half of the ECCU countries, increasing the regional CA deficit by 4 percent of GDP in 2009–11, and reducing growth by an average of 1.6 percentage points for the same period. These parameters are taken from the median impact of 12 large natural disasters in the ECCU (Rasmussen, WP/04/224).

Appendix Figure 1.
Appendix Figure 1.

ECCU: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: Country Authorities; and Fund staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also show n.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).
Appendix Figure 2.
Appendix Figure 2.

ECCU: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2009, 175; 10.5089/9781451811735.002.A001

Sources: Country Authorities, and Fund staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.3/ One-time real depreciation of 30 percent occurs in 2010.

Annex I. Summary of Appendices

The full appendices to this report are issued as a supplement.

Fund relations. The Eastern Caribbean Currency Union consists of eight members that have a common currency, monetary policy, and exchange system. The common currency, the EC dollar, has been pegged to the U.S. dollar at the rate of EC$2.70 since July 1976. The region has a common central bank, the Eastern Caribbean Central Bank (ECCB), which has operated like a quasi-currency board, maintaining foreign exchange backing of its currency and demand liabilities at close to 100 percent. The exchange system is free of restrictions on the making of payments and transfers for current international transactions. A safeguards assessment was completed in 2007, and concluded that the ECCB continues to have appropriate control mechanisms in place.

Relations with the World Bank Group. The Eastern Caribbean Sub-Region country assistance strategy (CAS) for FY 2006-09 supports the region's development through: (i) stimulating growth and improving competitiveness; and (ii) reducing vulnerability. Efforts in the area of growth are focused on a series of analytical and advisory activities. On reducing vulnerability, the Bank has facilitated the establishment and participation of OECS countries in the Caribbean Catastrophic Risk Insurance Facility. It has also provided financial support for improvements in the efficacy and targeting of social safety nets in the OECS. The FY 2006–09 CAS proposes a total lending envelope of US$103 million. The CAS for FY 2010-13 is expected to be presented to the Board of the World Bank in early 2010.

Relations with the Caribbean Development Bank (CDB). Between 1970–2008, the CDB approved loans of US$1,209 million to the ECCU, of which US$915 million has been disbursed as of end-2008. Most of the CDB's interventions in the OECS have been directed toward infrastructural development, related to the incidence of natural disasters in the region as well as the need to ensure infrastructure improvements for productive investments. In 2006, the CDB expanded its range of instruments to include policy-based lending, to support policy reforms and/or institutional changes at the macroeconomy-wide or sectoral level. St. Kitts and Nevis (2007) and St. Lucia (2008) have received policy-based loans in support of their reform programs.

Relations with the Caribbean Regional Technical Assistance Center (CARTAC). CARTAC's core areas of technical Assistance (TA) include public financial management, which includes tax policy and administration; public expenditure management; macroeconomic management and financial programming; financial sector supervision (including supervision of nonbanks); and economic and financial statistics. ECCU countries continue to be among the most active Caribbean countries in requesting TA and training in all of CARTAC's core areas. As in previous years, the largest areas of CARTAC involvement in the ECCU countries have been in value-added tax implementation and in building capacity to undertake improved macroeconomic management. This TA support continues to represent a significant addition to the Fund's TA to the ECCU region.

Annex II. ECCU: Analytical Work

Analytical work by Fund staff has contributed to strengthening public dialogue on key issues in the Eastern Caribbean Currency Union (ECCU).25 Recent ECCB Monetary Council and national policy discussions have drawn on input from Fund staff, including on the response to preference erosion, monetary policy initiatives, regulation of nonbank financial institutions, and social security reform.26 The authorities have appreciated the increased emphasis given to regional issues as well as the focus on growth and vulnerabilities—particularly high public debt levels, optimal reserves, and lender-of-last-resort activities of the central bank.

Ongoing Analytical Work (to be published as 2009 ECCU Selected Issues chapters and IMF Working Papers in 2008 and 2009):

  • A Risk Analysis of Public Debt in the ECCU: A Fan-Chart Approach (2009 ECCU Selected Issues chapter)

  • Insurance Against Natural Disasters in the Caribbean (2009 ECCU Selected Issues chapter)

  • Ponzi Schemes in the Caribbean (IMF WP/09/95)

  • Assessing Exchange Rate Competitiveness in the Eastern Caribbean Currency Union (IMF WP/09/78)

  • Optimal Reserves in the Eastern Caribbean Currency Union (IMF WP/09/77)

  • ECCU Business Cycles: Impact of the United States (IMF WP/09/71)

  • Financing Universal Health Care: Lessons for the Eastern Caribbean and Beyond (IMF WP/09/61)

  • Can the ECCU Afford to Grow Old? (IMF WP/09/38)

  • The Caribbean: Enhancing Economic Integration (2008 IMF book)

  • What Attracts Tourists to Paradise? (IMF WP/08/277)

  • Tax Concessions and Foreign Direct Investment in the ECCU (IMF WP/08/257)

  • The ECCB: Challenges to an Effective Lender of Last Resort (IMF WP/08/214)

  • Measuring the Informal Economy in Latin America and the Caribbean (IMF WP/08/102)

  • The Anatomy of Banking Crises (IMF WP/08/93)

  • Price Dynamics in the Eastern Caribbean (IMF WP/08/90)

  • Corporate Income Tax Competition in the Caribbean (IMF WP/08/77)
1

The Eastern Caribbean Currency Union (ECCU) comprises six Fund members: Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines; and two territories of the United Kingdom, Anguilla and Montserrat. Fund relations are summarized in the Informational Annex.

2

The estimated growth rate would mark a regional recession in 2008, as it was less than 2.2 percent per annum, which is the growth rate that is one standard deviation below the ECCU mean rate of economic growth (4.6 percent) over the period 1965–2008.

3

The RGSM is a regional, auction-based system for marketing government securities of ECCU members. The market has been in operation since November 2002, and market capitalization has grown to almost EC$922 million (7 percent of regional GDP) at end-2008.

4

In April 2009 Ministers of Finance and central banks of the ECCU, Trinidad and Tobago and Barbados announced that a US$80 million Liquidity Support Fund will be established, designed to support the liquidity position of BAI operations in the ECCU.

5

The Organization of Eastern Caribbean States (OECS) comprises Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, with Anguilla and the British Virgin Islands as associate members.

6

The CDF, which officially started operations on November 1, 2008, is headquartered in Barbados and managed by a Board of Directors drawn from CARICOM members. CARICOM member states have contributed US$67 million, with an additional contribution of US$53 million due by mid-2009.

7

All ECCU members (with the exception of Anguilla) are eligible to export goods covered under the Caribbean Basin Economic Recovery Act (CBERA) to the U.S. duty free. In March 2009 the World Trade Organization approved a waiver request of the U.S. on CBERA, extending trade preferences for exports of CARICOM countries to 2014.

8

See also Y. Sun and W. Samuel (2009), “ECCU Business Cycles: Impact of the United States,” IMF Working Paper 09/71.

9

This report covers regional topics, highlighting the common policy issues of members of the currency union, and provides a regional perspective on economic policies relevant for Fund surveillance for which responsibility lies at the national level. Analysis of the developments and prospects of individual ECCU countries, with a focus on national fiscal and structural policies, can be found in bilateral Article IV staff reports.

10

Discussions took place during January–March 2009 and the mission comprised, at various stages, P. Cashin (Head), K. Nassar, C. Pattillo, R. Perrelli, W. Samuel, Y. Sun, N. Wagner, and Y. Wong (all WHD). M. Savastano (WHD), M. Horgan, M. O'Sullivan, and M. Morgan (all OED) participated in key meetings. The mission visited each of the six Fund-member countries and two U.K. territories of the ECCU, and met with Prime Ministers, Chief Ministers, Ministers of Finance, senior government officials, representatives of the agricultural, financial and tourism sectors, and senior officials at the ECCB, the Caribbean Development Bank (CDB), the Caribbean Regional Technical Assistance Center (CARTAC), and bilateral donors.

11

The ECCB signed the Multilateral Memorandum of Understanding of CARICOM Central Banks in 2008.

12

See also A. Carvajal, H. Monroe, C. Pattillo, and B. Wynter (2009), “Ponzi Schemes in the Caribbean,” IMF Working Paper 09/95.

13

For example, St. Kitts and Nevis is moving ahead quickly with passage of its Tax Cooperation Act, which will allow for the exchange of information with relevant countries to prevent the evasion of taxes by their residents through the use of local offshore companies.

14

As of April 2009, the OECD has listed all eight ECCU members as tax havens which have committed to the internationally-agreed tax standard developed by the OECD, but have not yet substantially implemented the standard. In addition, the Stop Tax Haven Abuse Bill is awaiting passage in the U.S. Congress, and aims to restrict the use of offshore tax havens and abusive tax shelters. All ECCU members except Montserrat are on the list of offshore secrecy jurisdictions in that Bill.

15

At end-2008, the ECCB's excess reserves (reserves exceeding the minimum requirement of backing for 60 percent of demand liabilities) amounted to about EC$850 million. Reflecting the deep monetization of the ECCU, this international reserve coverage is small relative to the banking system's private sector deposit liabilities (close to EC$11 billion).

16

For additional details see M. Dehesa, E. Pineda, and W. Samuel (2009), “Optimal Reserves in the ECCU,” IMF Working Paper 09/77.

17

The floor was last lowered in September 2002, from 4 to 3 percent.

18

Time series models linking the real effective exchange rate (REER) to measures of the ECCU region's fundamentals (productivity differentials, terms of trade, government consumption and net foreign assets) suggest that there is little evidence of overvaluation of the EC dollar. For additional details see E. Pineda, P. Cashin, and Y. Sun (2009), “Assessing Exchange Rate Competitiveness in the Eastern Caribbean Currency Union,” IMF Working Paper 09/78.

19

The panel regression (for the period 1979–2008) includes sample sets consisting of 10 CARICOM and 24 tourism-dependent countries—see E. Pineda, P. Cashin, and Y. Sun (2009).

20

Data on the ECCU's overall net external asset position, and the level and structure of the stock of external assets and liabilities, are not available.

21

For additional details see “A Risk Analysis of Public Debt in the ECCU: A Fan Chart Approach,” by K. Nassar and C. Pattillo, Chapter V in Eastern Caribbean Currency Union—2009 Selected Issues (www.imf.org).

22

See H. Monroe (2009), “Can the ECCU Afford to Grow Old?,” IMF Working Paper 09/38.

23

See “Insurance Against Natural Disasters in the Caribbean,” by Y. Wong, A. Lemus, and N. Wagner, Chapter VI in Eastern Caribbean Currency Union—2009 Selected Issues (www.imf.org).

24

See M. Dehesa and P. Druck (2008), “The ECCB: Challenges to an Effective Lender of Last Resort,” IMF Working Paper 08/214.

25

Outreach activities traditionally include the presentation of staff's preliminary analytical work to the authorities, civil society, academics and the general public in each of the six Fund-member ECCU countries, the Eastern Caribbean Central Bank (ECCB), and at academic conferences and workshops held in the region.

26

All Fund papers (published since 2004) on each of the six Fund-member ECCU countries are available on the ECCB website. The link is http://www.eccb-centralbank.org/Publications/imfpapers1.asp.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Eastern Caribbean Currency Union: 2009 Discussion on Common Policies of Members Countries: Staff Report; and Public Information Notice on the Executive Board Discussion
Author:
International Monetary Fund
Volume/Issue:
Volume 2009: Issue 175
Publisher:
International Monetary Fund
ISBN:
9781451811735
ISSN:
1934-7685
Pages:
95
DOI:
https://doi.org/10.5089/9781451811735.002
Figure 1.

ECCU: Key Characteristics
Figure 2.

ECCU: Overview
Figure 3.

ECCU: Governance Indicators 1/
Figure 4.

ECCU: External Environment, 1995–2008
Figure 5.

ECCU: Central Government Actual and Structural Budget Balances, 2002–10 1/

(In percent of potential GDP)

ECCU: Contribution to Real GDP Growth by Sector, 2002–08

(In percent)
Figure 6.

ECCU: Stayover Arrivals, 2005–08

(Annual percentage change)

ECCU: Stayover Arrivals, 2005–08

(Annual percentage change)
Figure 7.

ECCU: Inflation Developments, 2001–08

ECCU: Contribution to Inflation, 2002–08 1/

(Percent change)
Figure 8.

ECCU: Monetary Developments, 2001–08
Figure 9.

ECCU: Private Sector Credit Growth, 2001–08
Figure 10.

ECCU: Banking System Vulnerabilities, 2002–08 1/
Figure 11.

ECCU: Bank Liquidity, 2002–08
Figure 12.

ECCU: Decomposition of Commercial Banks' Exposure to the Public Sector, 2004–08

(In percent of public sector exposure)

ECCU: Sovereign Bond Spreads in Trinidad and Tobago 1/

(In basis points)
Figure 13.

ECCU: Trade and Capital Account, 1996–2008

The recession will be deeper and longer this time around.

Growth is expected to decline further in 2009, with risks on the downside…

…while inflation is expected to moderate, with risks titled slightly to the downside.

Caribbean: Capital Inflows and Domestic Credit Growth, 2006–08

ECCU: Banking Sector NPLs and Loan Loss Provisions, 1996–2008

(In percent of total loans)

ECCU: Liquidity and Profitability in the Banking System, 1996–2008

ECCU: Optimal Level of Reserves, 1996-2008

(In percent of GDP)

Foreign Reserve Coverage of Monetary Liabilities, 2008

(In percent)
Figure 14.

Eastern Caribbean Securities Exchange
Figure 15.

ECCU: Regional Government Securities Market, 2002–08

ECCU: Actual and Equilibrium REER, 1980–2008 1/

(Index 2000=100)

ECCU: Contributions to Changes in Equilibrium Exchange Rates, 1982–2008

(In percent)

ECCU: Current Account Deficit, Actual and Estimated Norms 1/

(In percent of GDP)

ECCU: Contributions to Current Account/GDP Norm, 1979-2008

(In percent)
Figure 16.

ECCU: External Competitiveness, 1990–2008
Figure 17.

Tourism Performance
Figure 18.

ECCU: Doing Business Indicators, 2008 1/
Figure 19.

ECCU: Fiscal Revenue, 1996–2008

(In percent of GDP)
Figure 20.

ECCU: Effective Gasoline Tax Rate, Gasoline Import and Retail Prices, 2003–08
Figure 21.

ECCU: Fiscal Expenditure

ECCU: Fiscal Cycles, 1983-2006

Response of ECCU Growth to a Percentage Point Shock in Real Growth

Response of ECCU Growth to a Percentage Point Shock in Trinidad and Tobago Real Growth

Sensitivity Analyses, Local Banks, end-2008

ECCB: Lending to Governments, 1993–2008
Appendix Figure 1.

ECCU: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)
Appendix Figure 2.

ECCU: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)