United Kingdom-Anguilla-British Overseas Territory
Staff Report for the 2011 Article IV Consultation

The downturn has accentuated strains on the financial system of Anguilla. The 2011 Article IV Consultation highlights that the growth outlook is improving with major tourism projects getting back on course, although a slow recovery is only expected to begin in 2012. Executive Directors have emphasized that a new fiscal framework is needed with an appropriate balance between current and capital expenditure and in line with the resources available. Fiscal policy should be designed to meet the combined objectives of debt sustainability, deficit reduction, and long-term economic growth.


The downturn has accentuated strains on the financial system of Anguilla. The 2011 Article IV Consultation highlights that the growth outlook is improving with major tourism projects getting back on course, although a slow recovery is only expected to begin in 2012. Executive Directors have emphasized that a new fiscal framework is needed with an appropriate balance between current and capital expenditure and in line with the resources available. Fiscal policy should be designed to meet the combined objectives of debt sustainability, deficit reduction, and long-term economic growth.


1. Anguilla’s per capita GDP is well above the average for the Caribbean region. The island has been able to turn its small size and population (16 thousand), natural beauty, relative inaccessibility, and stability as a British overseas territory to its advantage by establishing a reputation as an upscale and exclusive tourist destination. It has also developed a relatively large financial sector in comparison to the size of its economy. However, these features also greatly magnified the boom-bust cycle associated with the global crisis and have contributed to a persistent hangover.1

2. Several large resort projects fueled a FDI boom which doubled nominal GDP during 2003-08. The boom affected every aspect of the economy, with construction becoming the main driver of activity. Tax revenue of a transitory nature—particularly on real estate transactions, FDI-related imports, and imported labor—increased sharply. Private sector wages jumped, while the construction industry imported labor on a large scale. The government wage bill more than doubled, as salaries increased by two thirds, and headcount increased by 45 percent to meet law enforcement, education, and other needs. In addition, a greater proportion of government expenditure was devoted to transfers. The size of the banking system doubled, with a portfolio concentrated in real estate lending.


Real GDP growth

(In percent)

Citation: IMF Staff Country Reports 2012, 008; 10.5089/9781463930523.002.A001


Private Sector Credit Growth

(In percent)

Citation: IMF Staff Country Reports 2012, 008; 10.5089/9781463930523.002.A001

3. The bust has been nearly as dramatic as the boom it followed. One of the two major FDI projects stalled in 2008 after running out of financing.2 With the onset of the global crisis in 2009, real GDP fell by 17 percent and the fiscal situation deteriorated sharply. Revenue collapsed while expenditure remained elevated after the increases during the boom years. Despite drastic cuts in capital spending in 2009 and a reduction in salaries of about 7 percent on average, the overall deficit grew to 8 percent of GDP, financed largely by expensive short-term overdraft facilities, arrears, and a temporary advance from the Eastern Caribbean Central Bank (ECCB).

4. Economic activity and government revenue continued to slow in 2010, despite a recovery of the high-end tourism sector. To stabilize the fiscal accounts, the new government that took office in early 2010 introduced revenue measures, further reduced average salaries by 3.5 percent and froze salary increments, curtailed goods and services spending, and cut capital spending further to an extremely low level. These measures and an European Union grant of over 4 percent of GDP reduced the overall deficit by 6 percentage points of GDP.

5. The reduction in the overall balance in 2010 reflected in part financing constraints. Overall public debt had increased sharply to 25 percent of GDP at end-2010—relatively high for a small undiversified economy (but not high by regional standards). Commercial banks which faced tight liquidity called in loans to government. In addition, the UK Government determined that it was unable to permit disbursement of a US$18 million (6 percent of 2009 GDP) Caribbean Development Bank (CDB) loan approved in 2008 to upgrade the ferry port because the authorities did not deliver a business case demonstrating Anguilla’s ability to repay the expected loan costs and remain within the official borrowing guidelines.3 The government refinanced most of its debt in mid-2010 through a US$55 million (18 percent of GDP) Policy Based Loan from the CDB and borrowed EC$ 50 million from the Social Security Board as of the end of 2010.


Capital spending

(In percent of GDP)

Citation: IMF Staff Country Reports 2012, 008; 10.5089/9781463930523.002.A001


(In percent of GDP)

Citation: IMF Staff Country Reports 2012, 008; 10.5089/9781463930523.002.A001

6. The 2011 budget represents a determined fiscal effort by the government to meet its commitment to the UK to balance the overall budget by the start of 2013. The UK delayed approval of the original budget to allow for an assessment by external consultants, whose recommendations were taken to double the customs surcharge and to increase the specific gasoline tax at the import stage.4 These and other approved measures are aimed at increasing tax revenue by EC$ 21 million (2.7 percent of GDP). The consultants recommended additional revenue measures in 2012 to balance the budget in that year.

7. The global crisis has placed pressure on the financial sector. There are 2 indigenous banks and 2 foreign banks operating in the jurisdiction. Total assets amount to 276 percent of GDP, with a market share for indigenous banks of 75 percent. The asset portfolio of the banking system, which is concentrated in construction, tourism, and personal loans, deteriorated during the downturn, with the ratio of nonperforming to total loans increasing to 36 percent by end-June 2011 in the indigenous banks. The liquidity situation also remains tight.

8. The pickup in inflation due to higher global food and fuel prices is not expected to persist. Reflecting upward pressure from prices of imported food and fuel, inflation is expected to rise further to 5 percent in 2011 before reverting, given the anchor of the currency peg.

9. Despite a number of encouraging developments, the staff’s outlook for growth is cautious. One major tourism project has exited receivership into ownership by an established investment group which is well placed to enhance operations. A bid has also been made for another major project, which had been stalled since 2008 before construction was complete. Furthermore, Anguilla’s share of ECCU and of Caribbean stayover arrivals is recovering, and the resilience of its high-end tourism sector notwithstanding high unemployment in source countries is an advantage. However, the tepid global outlook will still weigh on the economy. Staff forecast an additional contraction in 2011 reflecting the drag of fiscal policy and lower FDI, and a modest recovery in 2012. Going forward, the growth outlook depends on a recovery of capital spending, implementation of the ferry port project and the pace of global economic recovery.


The key policy challenges facing Anguilla are addressing financial sector weaknesses, rebalancing fiscal policy, and enhancing growth prospects.

A. Addressing Financial Sector Vulnerabilities

10. The downturn has significantly affected the banking system. The system was already suffering before the crisis from a concentrated portfolio which grew rapidly during the boom period. The indigenous commercial banks and their offshore subsidiaries have weak financial positions. They have lending and equity linkages to other ECCU banks which provide a potential channel for contagion. The NPLs of foreign banks have increased sharply in 2011, with low provisioning, but these are backed by the foreign parent.5

11. The most pressing issue is how to deal preemptively with weak banks since a failure of one institution could trigger a generalized loss of confidence in the region. Furthermore, given the expected slow recovery, the banking system will continue to be under stress. The recent intervention in the largest indigenous bank in Antigua and Barbuda underscores the importance of prompt and preemptive resolution.

12. Staff emphasized that a comprehensive regional approach to problems in the ECCU’s banking system is needed. The authorities are encouraged to support the work of a joint regional task force being formed to determine the size of the liquidity and capital shortfalls in indigenous banks, assess direct and indirect linkages, and develop resolution strategies. Supervision is fragmented, with the parent banks supervised by the ECCB and their offshore bank subsidiaries by the Financial Services Commission (FSC) under the UK-appointed Governor of Anguilla. Recent efforts to improve coordination have had limited success due to limited sharing of information, attributed to confidentiality restrictions. An action plan for addressing financial sector vulnerabilities should therefore also spell out the respective roles of the Eastern Caribbean Central Bank, the Anguillan government, and the FSC of Anguilla.

13. The authorities concurred that action is overdue to shore up the banking system. They agreed that a regional approach was needed, and given fragmented supervision that greater coordination as required, with a clear delineation of roles.

14. The resolution of the failed BAICO and CLICO insurance companies has been a source of continuing uncertainty, and regional efforts to resolve these companies are still ongoing. Banks have made progress in provisioning for their exposures. A regional strategy is being pursued aimed at maintaining BAICO as a going concern, and a judicial manager has been appointed for BAICO Anguilla as in other ECCU members. In the case of CLICO, Anguilla is relying on the judicial manager appointed in Barbados, the home jurisdiction.

Estimated Exposure to CLICO and BAICO 1/

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Source: Data provided by country authorities.

As of June 2011

15. The insurance sector appears healthy apart from the difficulties of CLICO and BAICO. However, the authorities are encouraged to continue progress toward strengthening insurance industry regulation and to enact harmonized insurance legislation now under consideration.

16. Anguilla is considering expanding its offshore financial sector as part of efforts to diversify the economy. Recent research has confirmed that strong governance attracts offshore business, and that a well-regulated offshore sector can contribute to growth. However, the economic benefits of expanding the offshore sector will need to be carefully weighed against the associated regulatory costs. While the authorities have made progress in strengthening the anti-money laundering and combating the financing of terrorism regime, they need to implement fully the recommendations made in the June 2010 Caribbean Financial Action Task Force assessment report. In this respect, the plan to review the governance of the company registry is welcome and should aim at preventing the unlawful use of legal persons, and particularly International Business Companies, by money launderers.

17. The authorities supported the regional approach to resolving the CLICO/BAICO issue. They noted that Anguilla was among the first in the region to set up a single regulatory unit for the nonbank sector, and were making progress toward enacting modern insurance legislation. Their strategy for the offshore financial sector is still being defined.

B. Rebalancing Fiscal Policy

18. A fundamental rebalancing of fiscal policy is needed, beginning with the 2012 budget. If not for windfall stamp duty from the sale of a major project, the fiscal outturn for the first half of 2011 indicates revenue would fall EC$ 12 million short of budgetary projections for the full year, due primarily to a weak outturn for taxes on international transactions. The staff projects an overall deficit of EC$ 20 million for 2012 assuming a conservative estimate for the stamp duty revenue, a constant wage bill, and the return of capital spending to the historical average, which the staff recommend. This would imply that the additional revenue measures of EC$ 8 million that were recommended by external consultants would not be sufficient to achieve an overall balance.

19. Reversing some of the sharp growth in the wage bill will be necessary to balance the budget in 2012, as foreseen by the authorities. After the increase of two thirds during 2005-08, salary reductions in 2009-10 lowered the wage bill by about 10 percent. Furthermore, the wage cuts took the form of temporary salary suspensions which do not affect pensions and with the prospect of eventual partial or full reimbursement of suspended salaries. Because full reimbursement has been granted to all retirees since 2009, this has become perceived as an entitlement creating potential future budget pressures.


Salary level

2004 = 100

Citation: IMF Staff Country Reports 2012, 008; 10.5089/9781463930523.002.A001


Established Posts

Citation: IMF Staff Country Reports 2012, 008; 10.5089/9781463930523.002.A001

20. An overall balance could be achieved in 2012 through a combination of revenue and expenditure measures. On the revenue side, the Tax Reform Working Group has recently finalized its recommendations in time for incorporation in the 2012 budget. Making progress with tax reform would be preferable to implementing further ad hoc measures. On the expenditure side, the 2012 budget should begin reining in the wage bill and reflect the findings of the OECS Public Expenditure Review Commission to be published in the near future. While these measures would be a drag on growth, the momentum from major tourism projects is expected to sustain a recovery.

21. Given financing restrictions and economic vulnerabilities, Anguilla needs to put in place a fiscal framework in line with the resources available and with an appropriate balance between current and capital spending. An adequate framework would build buffers in good times to allow for countercyclical spending when needed and incorporate a system of tax policy and administration that would yield sufficient revenue to meet established priorities. An illustrative medium-term projection (Table 6) which holds the nominal wage bill constant while increasing capital expenditure to its long run average underscores that restoring sustainability is feasible but only if there is also early action as discussed above. However, there are significant downside risks if the external environment deteriorates or tourism projects lose momentum.

22. The official borrowing guidelines by themselves are not sufficient as a fiscal framework. A broader Framework for Fiscal Responsibility under discussion with the UK would shift emphasis toward developing a Medium-Term Fiscal Plan as a context for annual budgets, with improved project appraisal and evaluation, more transparent procurement, and stricter management of actual and contingent liabilities. The approach would be embodied in a new public financial management law.

23. The new framework could specify a clear fiscal anchor in the form of a target for public sector debt as a percent to GDP.6 Given that Anguilla has a small non-diversified economy subject to natural disasters and other shocks, it would be appropriate to set a target which is significantly lower than the 60 percent of GDP target set by the ECCU Monetary Council to be achieved by 2020 by ECCU members. The ECCU Common Policies Discussions Staff Report presents the case that an appropriate target for the region would be toward the lower end of the 25-45 percent range identified in the literature. With a clear fiscal framework in place, Anguilla could consider asking the CDB to reappraise the ferry port loan (6 percent of GDP).

24. A comprehensive tax reform is needed to restructure the current inefficient and inequitable tax system (Box 2). Currently, only about 40 percent of imports bear positive rates of duty, while 20 percent of imports enjoy duty concessions. The tax reform should simplify the tariff structure; impose excise taxes on fuel, alcohol, tobacco and other goods with inelastic demand; and introduce a VAT/GST and a permanent income tax to broaden the tax base and to minimize distortions.7

25. Significant efforts have been made to improve tax administration. Inland Revenue began to impose penalties for late filing in late 2010, which have already increased compliance. There has also been progress in reducing tax arrears. To upgrade the technology platform for customs administration, Anguilla introduced a pilot site for ASYCUDA World in December 2010. Priority areas for further improvement include moving towards an organization based on function and taxpayer size (rather than tax type), strengthening audit capacity, and upgrading the IT systems.

26. Anguilla has made some progress in improving public financial management through several ongoing initiatives, but further work is needed. CARTAC is assisting in a review of the budget process to improve fiscal discipline and the reliability of the budget. In addition, it is providing assistance in improving macroeconomic forecasting and assessing the budget implications of new policy initiatives. Finally, there is an effort to implement commitment-based accounting and to improve expenditure control and the monitoring of expenditure arrears.

27. There is significant scope to improve the quality of expenditure. One important step would be to implement performance-based salary increments based upon a pilot project under way. There is also a need to enact legislation that has been drafted to create a centralized procurement function with transparent procedures for tenders. The targeting of social programs to the truly vulnerable can be improved, drawing upon the nearly finalized Country Poverty Assessment. There is a need to establish a reliable capital program with a multi-year horizon based upon cost-benefit analysis within an overall economic strategy. Public private partnerships could be considered for projects where risks are shouldered by the private sector.

28. Statutory bodies rely heavily on central government subsidies. The government should work on a medium-term plan to reduce the dependence of statutory bodies (about 4 percent of GDP) on subsidies by eliminating duplicated functions and charging adequate fees for services.

29. Social Security Board (SSB) reserves will last until around 2040. The SSB has an asset base of EC$ 250 million (33 percent of GDP), including EC$ 11 million claims on the failed British American Insurance Company (BAICO). There is some scope for the SSB to shift its portfolio from liquid assets which bear little or no interest toward higher yielding investments abroad and carefully selected domestic investments.

30. The authorities shared the staff’s concern about fiscal imbalances. They noted their efforts to restore fiscal sustainability in the last two budgets, while pointing to their limited room for maneuver given financing constraints, the weak economy, and the difficulty of rolling back entitlements.

C. Enhancing Growth Prospects

31. Although the growth outlook has improved, a number of serious concerns remain. Access to the island needs to be improved, for instance, by upgrading ferry port and extending the runway to accommodate larger jets. The market for villas, which has a significant impact on construction activity, is still recovering from the global crisis.

32. In addition, the unbalanced and procyclical fiscal policy has created an environment which is not conducive for growth. Capital spending during the last 1½ years has been only 0.4 percent of GDP at an annual rate. The right to draw the CDB ferry port loan expired earlier this year. A fiscal environment that is supportive to economic growth, including through adequate public investment, will be essential.

33. Some features of the labor market are also an obstacle to growth. Anguilla became a high labor cost environment during the boom period driven by increasing government salaries and by private sector demand for labor. However, private and public sector labor productivity did not improve in tandem, and there is a shortage of skilled labor. A call center recently relocated from Anguilla due in part to high labor costs. More importantly, the top echelon resorts operating in Anguilla will require a volume of highly skilled talent difficult to satisfy without sharply improved training and greater flexibility to import talent while domestic capacity is being developed.

34. Given the island’s high dependence on tourism, greater diversification is needed. Improving the business environment, for instance by establishing a one-stop shop for foreign investors, would support these efforts. Further development of the offshore financial sector has some promise, but there are important tradeoffs to consider as discussed above.

35. Global fuel and food price shocks are placing upward pressure on prices in 2011, particularly affecting the most vulnerable. Anguilla is vulnerable to such shocks, as was seen during 2007-08. The authorities should encourage full passthrough of changes in international prices, in accordance with a 2008 ECCB Monetary Council decision, while buffering the impact on vulnerable groups through targeted assistance.

36. There are some indications that the exchange rate is overvalued (Box 1). The equilibrium real exchange rate approach suggests that the exchange rate is in line with fundamentals, while the macroeconomic balance and external sustainability approaches imply the rate is overvalued. Any assessment must be highly qualified given the significant data limitations.

37. The authorities shared the assessment that the policy environment was not conducive for growth. In particular, they agreed that fiscal policy was not sufficiently supportive, and that additional public investment was urgently needed, which would facilitate diversification. They underscored their desire to build the domestic skills base to maximize backward linkages from FDI to the local economy.


38. Anguilla is recovering from severe boom-bust cycle related to the global financial and economic crisis. This has accentuated weaknesses in the financial sector, undermined the fiscal position, and pushed the island into recession. Urgent action is needed to improve the health of the financial sector, to stabilize public finances, and to increase the potential for long-run economic growth.

39. Close cooperation will be needed to address financial sector vulnerabilities, particularly those related to the indigenous banks. A preemptive response as part of a regional strategy led by a joint task force being formed could minimize costs and risks. The strategy will need to strengthen the banks’ capital and clean up their balance sheets. An action plan should spell out the respective roles of the ECCB, the Anguillan government, and the FSC of Anguilla.

40. A new fiscal framework is needed with an appropriate balance between current and capital expenditure and in line with the resources available. Fiscal policy should be designed to meet the combined objectives of debt sustainability, deficit reduction, and long-term economic growth. Given financing constraints and economic vulnerabilities, the government needs to accumulate buffers during good times to allow for countercyclical spending during slowdowns. As part of the new framework, the 2012 budget should restore capital spending to historical levels, cut current spending including wages, while ensuring adequate revenue given financing constraints.

41. In this context, the inefficient and inequitable tax system needs to be reformed. A comprehensive tax reform should simplify the tax structure and broaden the tax base. A general consumption-based tax such as a VAT/GST and a permanent income tax would attain both objectives. The complex system of customs duties and exemptions should be replaced with a tariff with few rates and limited exemptions.

42. The tourism sector, the driver of the economy, has begun to recover, benefiting from its high-end focus. Prospects have brightened now that the two major tourism projects are getting back on track. However, air and sea access to the island needs to be improved.

43. A fundamental course change is needed to increase the potential for long-term GDP growth and reduce its volatility. The short-run policy priorities should be to increase capital spending, improve the business environment including through a one-stop shop, and address skills shortages through improved training and greater labor mobility. In the longer run, the focus should be on improving access to the island and enhancing diversification, which would reduce the volatility of real GDP growth rates. There are some indications that the exchange rate is overvalued, but the evidence is not conclusive, and there are significant data limitations.

Exchange Rate Assessment

The customer- and competitor-based real effective exchange rates (REERs) have recently been on a broadly declining trend. Following a sharp appreciation in 2008 corresponding to global food and fuel price increases, the customer-based real effective exchange rate has been depreciating, reflecting U.S. dollar depreciation against the major customer currencies, while the competitor-based real effective exchange rate has broadly been on a declining trend since 2007.

The assessment of the exchange rate using CGER methodologies is constrained by significant data limitations.

The fundamentals-based equilibrium real exchange rate approach suggests that the actual real effective exchange rate has been close to its long-run equilibrium value in recent years.1 The actual rate has been converging toward its equilibrium from 2004 onwards.

The macroeconomic balance approach points to an overvaluation of the exchange rate. This approach indicates that the current account (CA) norm is minus 18.9 percent of GDP against the underlying CA of minus 25.7 percent. Closing the gap between the norm and the actual CA in the medium term would require a depreciation of 22.9 percent.

The external sustainability approach indicates an overvaluation of 58.4 percent.2 The net foreign asset stabilizing CA is minus 8.3 percent of GDP while the underlying CA is minus 25.7 percent difference of about 17 percentage points, reflecting in part the projection of increasing FDI.


Anguilla: External Competitiveness, 2003–2011 (July)

Citation: IMF Staff Country Reports 2012, 008; 10.5089/9781463930523.002.A001

Sources: Fund staff estimates.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.

Anguilla: Actual and Equilibrium REER, 2004–2010 1/

(Index 2005=100)

Citation: IMF Staff Country Reports 2012, 008; 10.5089/9781463930523.002.A001

Sources: IMF, Information Notice System; and Pineda, Cashin and Sun (2009), “Assessing Exchange Rate Competitiveness in the ECCU,” IMF Working Paper 09/78 (Washington: International Monetary Fund).1/ The dotted lines around the equilibrium exchange rate represent 90 percent confidence intervals of the prediction.

The estimation takes into account productivity differentials in the tourism sector (using per capita tourist arrivals instead of per capita GDP), terms of trade for tourism, government consumption, and net foreign assets. For more details see: Pineda, Cashin and Sun, 2009, “Assessing Exchange Rate Competitiveness in the ECCU,” IMF Working Paper 09/78 (Washington: International Monetary Fund).


Unlike the standard CGER methodology, capital account transfers including grants were included in the estimation for the ECCU region, as they represent an important source of financing.

The Tax System in Anguilla

Anguilla’s tax revenue is disproportionately concentrated in a few volatile and transitory revenue sources. The largest revenue source in 2011 is stamp duty (EC$ 51 million), accounting for nearly 29 percent of total recurrent revenue, mostly from a single property transaction. This amount is three times the level in 2010. Three of the largest revenue items, stamp duty, import duty on items other than fuel and alcohol, and work permits, are particularly volatile due to the cyclical nature of their tax bases. The extreme volatility of the major revenue sources is an obstacle to undertaking multi-year capital projects.

The tax system is inefficient and inequitable with a narrow tax base. Taxes on imports, a crucial revenue source, are imposed unevenly and narrowly. It is estimated that approximately 40 percent of import duty revenue is lost due to concessions and exemptions. The inefficiency of taxation is aggravated by the fact that similar products can be subject to different rates of import duties, leading to distortions.


(In millions of EC dollars)

Citation: IMF Staff Country Reports 2012, 008; 10.5089/9781463930523.002.A001

The tax system is also overly complex. This reflects in part an accumulation of ad hoc measures. Furthermore, there are a large number of fees and licenses, as well as a number of nuisance taxes. It is hoped that the Tax Reform Working Group will propose a simpler, more efficient, and more equitable tax system that is more buoyant and less volatile.

Table 1.

Anguilla: Selected Indicators, 2006–12

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Sources: Authorities; and Fund staff estimates and projections.

Estimates are for the year 2010, except where noted.

Excludes central government debt to the Social Security Board.

Table 2a.

Anguilla: Central Government Operations. 2006–13

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Includes cash payments, social security contributions and medical benefit contributions.

Excludes central government debt to the Social Security Board

Table 2b.

Anguilla: Central Government Operations, 2006–13

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Includes cash payments, social security contributions and medical benefit contributions.

Excludes central government debt to the Social Security Board

Table 3.

Anguilla: Summary Balance of Payments, 2006–16

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Sources: Eastern Caribbean Central Bank, Authorities; and Fund staff estimates and projections.
Table 4.

Anguilla: Monetary Survey, 2006–12

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Sources: Eastern Caribbean Central Bank; and Fund staff estimates and projections.
Table 5.

Anguilla: Vulnerability Indicators 2005–11

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Sources: Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

All banks include indigenous and foreign banks.

As of June, 2011.

Table 6.

Anguilla: Medium Term Macro Framework, 2006–16

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Sources: Authorities; and Fund staff estimates and projections.