A. Introduction

1. ECCU countries have increased public debt in the last 20 years from already high levels. Total public debt of the six independent ECCU countries² has been over 60 percent of the regional GDP since 1990, increasing to more than 100 percent in the wake of the recent global crisis. This contrasts with the generally declining debt ratios in emerging and developing economies³, and greatly exceeds the average public debt ratios associated with episodes of sovereign debt default in emerging markets over the past 30 years.⁴ To provide some insight into the sources of these high debt ratios, this chapter provides some brief background about public debt in the ECCU, then discusses the factors that contributed to the surge in debt, examines how governments were able to continue to borrow, and offers some provisional conclusions.

B. Overview of Public Debt in ECCU

2. ECCU countries are among the world’s most highly indebted. All six independent ECCU countries rank within the 15 most indebted emerging markets and developing countries, of which three (Antigua and Barbuda, Grenada, and St. Kitts and Nevis) have a public debt-to-GDP ratios of over 100 percent. All six countries exceed the ECCU’s target debt-to-GDP ratio of 60 percent.

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Public Sector Debt in Selected Emerging Markets / Developing Countries, end 2009

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 032; 10.5089/9781455213894.002.A002

Sources: IMF, World Economic Outlook; and Fund staff calculations.1/ Selected emerging and developing economies.

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3. About half of the regional debt is owed to domestic creditors. Reliance on domestic sources is high, particularly in Antigua and Barbuda (63 percent of total public debt) and St. Kitts and Nevis (66 percent). St. Vincent and the Grenadines’ share of domestic debt is in line with the regional average of about 50 percent. About 10 percent of the regional debt is in arrears, concentrated in Antigua and Barbuda. Of the external debt, about 19 percent is multilateral.

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ECCU 6: Composition of Public Debt

(percent of total, end-2009)

Citation: IMF Staff Country Reports 2011, 032; 10.5089/9781455213894.002.A002

Sources: Country authorities and Fund staff calculations.

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Composition of Debt

(as of end 2009)

Sources: ECCB and Fund staff calculations.

^1/As of end 2008

^2/Aggregate of six countries.

Composition of Debt

(as of end 2009)

			Antigua and Barbuda	Dominica 1/	Grenada	St. Kitts and Nevis	St. Lucia	St. Vincent and the Grenadines	ECCU-6 2/
			(In percent of GDP)
Public debt			115.3	84.9	122.3	184.7	74.7	75.0	108.0
		Central government	106.9	69.1	106.9	143.4	68.8	57.7	93.3
		Public corporations	8.4	15.9	15.4	41.3	5.9	17.3	14.7
			(Share of total)
External			37.4	69.4	71.6	34.3	51.6	50.3	48.0
	of which:
		Multilateral	3.4	45.5	25.5	11.6	32.6	31.7	19.0
		Bilateral	21.2	10.2	11.7	6.4	4.1	8.1	11.6
		Commercial banks	12.9	11.0	26.5	4.1	14.7	8.5	12.9
		Other	0.0	2.6	7.9	10.8	0.0	2.0	4.1
		Arrears	0.0	0.0	0.0	1.3	0.0	0.0	0.3
Domestic			62.6	30.6	28.4	65.7	48.4	49.7	52.0
	of which:
	by creditor
		ECCB	2.6	0.2	0.2	0.9	0.2	0.0	1.0
		Commercial banks	19.1	9.3	8.3	40.5	20.7	31.2	22.9
		Nonbank financial institutions	1.2	0.0	3.0	3.0	0.0	6.9	2.2
		Insurance funds	0.0	12.6	4.5	9.9	0.0	3.3	4.1
		Other	9.0	8.6	9.9	11.4	25.3	8.3	12.2
		Arrears	30.5	0.0	2.3	0.0	0.0	0.0	9.3
	by instruments
		Loans (excl. overdraft)	21.7	3.7	3.4	40.3	4.7	17.9	18.6
		Overdraft	0.0	0.0	2.2	4.2	0.0	7.3	2.0
		T-bills	1.8	5.5	4.9	14.2	2.4	5.2	5.8
		Medium-long term securities	0.6	15.4	9.4	5.8	30.8	17.6	10.6
		Other	7.8	6.1	6.1	1.1	8.4	1.7	5.4
		Arrears	30.5	0.0	2.3	0.0	0.0	0.0	9.3
Memorandum items:
	Public debt (in EC$ mn)		3,571	833	2,030	2,779	1,975	1,156	12,344
	Nominal GDP (in EC$ mn)		3,097	981	1,660	1,505	2,645	1,542	11,430

Sources: ECCB and Fund staff calculations.

^1/As of end 2008

^2/Aggregate of six countries.

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Composition of Debt

(as of end 2009)

			Antigua and Barbuda	Dominica 1/	Grenada	St. Kitts and Nevis	St. Lucia	St. Vincent and the Grenadines	ECCU-6 2/
			(In percent of GDP)
Public debt			115.3	84.9	122.3	184.7	74.7	75.0	108.0
		Central government	106.9	69.1	106.9	143.4	68.8	57.7	93.3
		Public corporations	8.4	15.9	15.4	41.3	5.9	17.3	14.7
			(Share of total)
External			37.4	69.4	71.6	34.3	51.6	50.3	48.0
	of which:
		Multilateral	3.4	45.5	25.5	11.6	32.6	31.7	19.0
		Bilateral	21.2	10.2	11.7	6.4	4.1	8.1	11.6
		Commercial banks	12.9	11.0	26.5	4.1	14.7	8.5	12.9
		Other	0.0	2.6	7.9	10.8	0.0	2.0	4.1
		Arrears	0.0	0.0	0.0	1.3	0.0	0.0	0.3
Domestic			62.6	30.6	28.4	65.7	48.4	49.7	52.0
	of which:
	by creditor
		ECCB	2.6	0.2	0.2	0.9	0.2	0.0	1.0
		Commercial banks	19.1	9.3	8.3	40.5	20.7	31.2	22.9
		Nonbank financial institutions	1.2	0.0	3.0	3.0	0.0	6.9	2.2
		Insurance funds	0.0	12.6	4.5	9.9	0.0	3.3	4.1
		Other	9.0	8.6	9.9	11.4	25.3	8.3	12.2
		Arrears	30.5	0.0	2.3	0.0	0.0	0.0	9.3
	by instruments
		Loans (excl. overdraft)	21.7	3.7	3.4	40.3	4.7	17.9	18.6
		Overdraft	0.0	0.0	2.2	4.2	0.0	7.3	2.0
		T-bills	1.8	5.5	4.9	14.2	2.4	5.2	5.8
		Medium-long term securities	0.6	15.4	9.4	5.8	30.8	17.6	10.6
		Other	7.8	6.1	6.1	1.1	8.4	1.7	5.4
		Arrears	30.5	0.0	2.3	0.0	0.0	0.0	9.3
Memorandum items:
	Public debt (in EC$ mn)		3,571	833	2,030	2,779	1,975	1,156	12,344
	Nominal GDP (in EC$ mn)		3,097	981	1,660	1,505	2,645	1,542	11,430

Sources: ECCB and Fund staff calculations.

^1/As of end 2008

^2/Aggregate of six countries.

C. What Contributed to the Debt Accumulation?

4. A simple analysis of the sources of debt accumulation shows that both the primary deficit and residual “other factors” have been key, while the differential between real interest rates and growth rates has played a minor role but in 2009.⁵ Central government primary deficits (excluding grants) contributed heavily to the rise in debt ratios in ECCU countries, accounting for over half of the total increase during that period. However, the size of the contributions from “other factors”—despite debt restructuring in Dominica (2004) and Grenada (2005)—suggest that public sector deficits may have been underestimated. This could reflect not only data limitations related to nongovernment public sector operations (including off-budget operations), but also contingent liabilities such as the granting of debt guarantees to public corporations.

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ECCU 6: Contribution to changes in public debt per year

(in percent of GDP)

Citation: IMF Staff Country Reports 2011, 032; 10.5089/9781455213894.002.A002

Sources: Country authorities and Fund staff calculations.

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5. ECCU countries’ debt-to-GDP ratios declined from a peak of 112 percent of GDP in 2004 to 95 percent in 2008, but the global financial crisis prompted a sharp reversal. During 2005–08 the contribution of primary surplus, growth and grants supported an average reduction in the debt ratio of about 4½ percent per year. With the global downturn, however, the public debt ratio increased by about 13 percent of GDP to 108 percent in 2009 and is projected to rise marginally further to 112 percent in 2010, due continued declines in economic activity and the deterioration in fiscal balances. The primary deficit including grants deteriorated to 3.4 percent of GDP in 2009 from a small deficit of 0.5 percent of GDP in 2005–08.

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Change in Public Debt and Primary Balance

(in percent of GDP)

Citation: IMF Staff Country Reports 2011, 032; 10.5089/9781455213894.002.A002

Source: Country authorities.

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6. These findings highlight the importance of fiscal consolidation, but also reveal that the need for complementary measures to place the debt on a firmly downward trajectory. Given different initial conditions in the ECCU countries, the required fiscal targets would vary by country. Targeted primary surpluses between 2.3 and 3.7 percent of GDP (including grants), envisaged under the current economic programs in Antigua and Barbuda and in Grenada, and as a policy objective in Dominica would put the debt dynamics in these countries on a sustainable path. However, without considerable adjustments in the other ECCU countries, the currency union and peg will be at risk.⁶ In the case of St. Vincent and the Grenadines as well as St. Lucia additional fiscal adjustments ranging from about 2 to 3 percent of GDP in comparison to the passive scenarios would be needed to ensure debt sustainability. Reflecting the very large public-debt-to GDP ratio, the adjustment in St Kitts and Nevis will have to be close to 10 percent of GDP. As pursued by Antigua and Barbuda, an accompanying collaborative debt restructuring could support the fiscal adjustment. The debt composition analysis, however, also reveals that additional measures need to be put in place to keep government activities from being transferred to off-budget operations (see Chapter III on public expenditure).

D. How was the High Debt Sustained?

7. Captive financial markets have supported the high and growing levels of debt in some countries. Within the banking sector, the exposures of indigenous banks to the public sector tend to be higher than those of foreign-owned banks. The heavy exposure of publically owned indigenous banks in St. Kitts and Nevis stands out, followed by that in St. Vincent and the Grenadines. The liquidity provided to the banks by the deposits from the national insurance schemes is critical for this arrangement, suggesting that the countries have been relying on captive financial markets.⁷ While the national insurance schemes in some countries are in surplus at the moment, changes in investment policy and demographics will likely limit the availability of such funding to banks going forward.

Banking Sectors’ Exposure to the Public Sector (Dec 2009)

^1/Including Anguilla and Montserrat.

Source: ECCB.

Banking Sectors’ Exposure to the Public Sector (Dec 2009)

			Antigua and Barbuda	Dominica	Grenada	St. Kitts and Nevis	St. Lucia	St. Vincent and the Grenadines	ECCU 1/
			(Percent)
Indigenous banks
	Gross government exposure/total assets		29.0	18.8	14.7	45.0	9.9	37.8	23.6
		of which: loans/total assets	25.1	3.2	9.8	36.2	2.3	22.5	16.3
	General government loans/total loans		37.6	7.0	13.8	70.1	3.7	31.7	26.8
Total banking sector
	Gross government exposure/total assets		12.5	10.8	12.3	26.5	8.9	19.0	14.1
		of which: loans/total assets	10.7	2.2	6.3	20.5	4.5	10.9	9.5
	General government loans/total loans		19.7	4.6	9.0	40.4	6.2	17.5	15.8
Indigenous banks’ share in total banking sector
	Asset		38.9	52.3	18.3	52.8	40.3	37.1	43.6
	Gross government exposure		90.2	91.0	21.8	89.7	44.7	73.6	72.8

^1/Including Anguilla and Montserrat.

Source: ECCB.

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Banking Sectors’ Exposure to the Public Sector (Dec 2009)

			Antigua and Barbuda	Dominica	Grenada	St. Kitts and Nevis	St. Lucia	St. Vincent and the Grenadines	ECCU 1/
			(Percent)
Indigenous banks
	Gross government exposure/total assets		29.0	18.8	14.7	45.0	9.9	37.8	23.6
		of which: loans/total assets	25.1	3.2	9.8	36.2	2.3	22.5	16.3
	General government loans/total loans		37.6	7.0	13.8	70.1	3.7	31.7	26.8
Total banking sector
	Gross government exposure/total assets		12.5	10.8	12.3	26.5	8.9	19.0	14.1
		of which: loans/total assets	10.7	2.2	6.3	20.5	4.5	10.9	9.5
	General government loans/total loans		19.7	4.6	9.0	40.4	6.2	17.5	15.8
Indigenous banks’ share in total banking sector
	Asset		38.9	52.3	18.3	52.8	40.3	37.1	43.6
	Gross government exposure		90.2	91.0	21.8	89.7	44.7	73.6	72.8

^1/Including Anguilla and Montserrat.

Source: ECCB.

National Insurance Schemes’ Exposure to the Public Sector (Dec 2009)

^1/Excluding Anguilla and Montserrat.

Source: ECCB.

National Insurance Schemes’ Exposure to the Public Sector (Dec 2009)

		Antigua and Barbuda	Dominica	Grenada	St. Kitts and Nevis	St. Lucia	St. Vincent and the Grenadines	ECCU 1/
		(Percent)
NIS deposit/total deposit
	Indigenous banks	2.3	14.2	14.0	33.6	13.7	14.1	15.8
	Total banking sector	1.1	7.2	6.5	17.9	12.2	5.8	8.8
		(In percent of GDP)
Direct and indirect exposure of NIS to the public sector
	Direct lending to the public sector	--	10.7	5.6	18.3	--	2.5	4.5
	Deposit in banking sector	1.3	9.4	9.2	35.5	15.5	5.3	11.5

^1/Excluding Anguilla and Montserrat.

Source: ECCB.

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National Insurance Schemes’ Exposure to the Public Sector (Dec 2009)

		Antigua and Barbuda	Dominica	Grenada	St. Kitts and Nevis	St. Lucia	St. Vincent and the Grenadines	ECCU 1/
		(Percent)
NIS deposit/total deposit
	Indigenous banks	2.3	14.2	14.0	33.6	13.7	14.1	15.8
	Total banking sector	1.1	7.2	6.5	17.9	12.2	5.8	8.8
		(In percent of GDP)
Direct and indirect exposure of NIS to the public sector
	Direct lending to the public sector	--	10.7	5.6	18.3	--	2.5	4.5
	Deposit in banking sector	1.3	9.4	9.2	35.5	15.5	5.3	11.5

^1/Excluding Anguilla and Montserrat.

Source: ECCB.

8. Looking forward, the public sector financing model in those countries that rely heavily on financing from the banking system should be changed. In this context, the banking sector regulatory framework should reduce the incentives for banks to favor lending to government over lending to the private sector. In addition, further development and deepening of the Regional Government Securities Market (RGSM) over the medium term could also help to reduce the exposure of banks to the public sector, to the extent that the RGSM attracts more regional and international investors to invest in T-bills and bonds issued by the ECCU governments.

E. Conclusion

9. ECCU countries have sustained high levels of public debt and remain among the most highly indebted in the world. About half of the regional debt is owed to domestic creditors, and the reliance is particularly high in Antigua and Barbuda and St. Kitts and Nevis, which have limited access to concessional external financing. High debt levels are in part the result of captive markets. Both the indigenous banking sector and national social security systems have played major roles in providing credit to the public sector.

10. A public debt decomposition shows that both primary deficits and other factors have contributed to the build-up of debt. Central government primary deficits were a key determinant of the build-up of public debt. While a number of countries are pursing primary surplus targets of 2–4 percent of GDP to put debt on a firmly downward trajectory, others still have follow suit. Depending on initial conditions, the required adjustments would range from 2 to almost 10 percent of GDP in comparison to the respective passive scenarios. The debt composition suggests that fiscal adjustments need to be complemented by measures to prevent the transfer of government activities to off-budget operations. Given the currency board arrangement and peg to the U.S. dollar, the implementation of fiscal reforms by all members simultaneously is paramount to avoid spillovers from the weakest member, which in turn can undermine confidence in the currency.