Eastern Caribbean Currency Union: 2019 Discussion on Common Policies of Member Countries—Press Release; Staff Report; and Statement by the Executive Director for the Eastern Caribbean Currency Union

International Monetary Fund. Western Hemisphere Dept.

doi:10.5089/9781513536224.002.A001

Author: International Monetary Fund. Western Hemisphere Dept.

Publication Date:: 05 Mar 2020

eISBN:: 9781513536224

Language:: English

Keywords:: ISCR; CR; authority; ECCB authority; e-government platform; ECCU price aggregate; article IV consultation discussion; ECCU region; ECCU country; ECCU work program; Digital currencies; Natural disasters; Tax incentives; Credit bureaus; Caribbean; Global; central bank; ECCB digital currency; governance framework; ECCB data; demand deposit

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2019 Discussion on Common Policies of Member Countries-Press Release; Staff Report; and Statement by the Executive Director for the Eastern Caribbean Currency Union

Abstract

2019 Discussion on Common Policies of Member Countries-Press Release; Staff Report; and Statement by the Executive Director for the Eastern Caribbean Currency Union

Calmer Headwinds

A. Recent Developments

1. Growth rebounded strongly in 2018 and has remained robust so far in 2019. ECCU’s GDP growth accelerated from ¾ percent in 2017 to 3¾ percent in 2018, reflecting buoyancy in the tourism sector, sizable CBI inflows, and a recovery from the 2017 hurricanes in Anguilla and Dominica, which were supported by large public investments in reconstruction. The increased stay-over tourism was facilitated by additional direct flights from major cities in North America. Growth momentum has remained strong in 2019, with stay-over tourism arrivals rising by 15 percent and no significant new hurricanes. Inflation remains muted (0.3 percent y/y in June) with a stronger US dollar, weaker global oil prices, and subdued CPI growth in key trading partners.

2. Fiscal deficits increased in 2018–19, but they have remained moderate. The region’s revenues were supported by CBI flows. However, the overall fiscal deficit rose from ½ to 1¼ percent of GDP in 2018 due to higher current outlays and reconstruction investment in Dominica, which was significantly financed by CBI inflows. Reflecting still-moderate deficits and higher growth, public debt fell by 2 points to about 70 percent of GDP in 2018. Nonetheless, the underlying deficit (net of CBI inflows) has been elevated at 5 percent of GDP. Countries’ efforts to improve their public finances have largely been limited to ad-hoc steps, with one country (St. Lucia) considering the adoption of a fiscal rule (in addition to the fiscal responsibility framework in Grenada). Some countries have built sizable fiscal deposit buffers (often CBI resources) and made progress in establishing contingency funds for natural disasters (including Grenada and St. Vincent and the Grenadines). In March 2019, the ECCU launched an initiative to harmonize the CBI programs’ due diligence processes.

3. Bank lending to the private sector was flat in 2018, with increased credit by indigenous banks being offset by continued retrenchment of foreign banks. Insufficient bankable projects, weaknesses in contract and collateral enforcement, and gaps in borrower information limit banks’ willingness to lend, reducing the credit contribution to growth. With low profitability (RoA of below 1 percent since 2010), some banks have expanded foreign investment portfolios (including risky equity) in search for yield (Figure 6). NPLs remain high (10 percent of total loans in June 2019) and thinly provisioned. Efforts to reduce NPLs through purchases by the Eastern Caribbean Asset Management Corporation (ECAMC) have so far been unsuccessful. The ECAMC was granted an extended deadline date of October 2020 for the acquisition of NPLs.¹ However, the requested financing from the Caribbean Development Bank (CDB) has been held back because of the hesitation of several governments to provide sovereign guarantees. The ECCB’s upgraded impaired assets classification and provisioning standard that would incentivize write-offs is now expected to come into effect by January 2020.

4. Non-banks, particularly credit union and insurance sectors, continue to grow, but their fundamentals are fragile. High liquidity, lighter regulatory requirements (relative to banks), and lower fees have underpinned the strong lending growth of credit unions (10 percent annually), with several having systemic importance. NPLs amount to about 7 percent of total loans and capital buffers are often limited. The insurance sector’s profitability recovered in 2018 despite higher post-hurricane loss expenses, but it remains undersized and vulnerable, given recurrent shocks and limited diversification.² High insurance premia result in considerable under-insurance, especially for the vulnerable, adding to public sector contingent liabilities. Non-banking sectors, including pensions, remain subject to relatively weaker regulation, data, governance, and technical capacity.³ Harmonized regional regulation has been prepared but remains to be passed in most jurisdictions.

5. The continued divestment by global financial groups adds to concerns about correspondent banking relationships (CBR). After 10 months from the announcement, the acquisition of Scotiabank’s operations by Republic Holdings from Trinidad and Tobago received the regulator’s approval in all ECCU countries, but Antigua and Barbuda.⁴ In addition, the agreement for sale of majority shares in First Caribbean International Bank to a group controlled by a Colombian investor was announced in November 2019, and Royal Bank of Canada announced the proposed sale of its Eastern Caribbean banking operations to a consortium of indigenous banks in the ECCU in December 2019. The number of active correspondents has been declining and pressures remain as the smaller local players are less connected and more heavily burdened with increased costs, including with a shift to second- and third-tier correspondent banks. Although CBR concentration risk has increased, most ECCU banks continue to have more than one active correspondent. Still, transaction volumes continue to grow, suggesting that the macroeconomic impact from increased costs of international payments and transfers is contained.

6. The ECCB has launched a pilot study for a central bank digital currency to address the payment system inefficiencies and high costs. In March 2019, the ECCB signed a contract with a Barbados-based fintech company, Bitt Inc., to pilot a digital currency EC dollar (DXCD) in the ECCU.⁵ The initiative has been prompted by the high cost and low efficiency of payments-related banking services and slow adoption of new technologies by the private sector.

7. The external deficit is estimated to have widened in 2018. Staff estimates that the current account deficit increased by about 1 percentage point to 8.4 percent of GDP in 2018, essentially reflecting Dominica’s large hurricane-related reconstruction imports.⁶ Net FDI inflows (9.1 percent of GDP) are estimated to have more than financed the deficit. The real effective exchange rate (REER) appreciated 2.1 percent during 2018, due to the U.S. dollar strengthening.

B. Outlook and Risks

8. Growth is projected to moderate. GDP growth is expected to gradually ease to 2¼ percent by 2025, a long-term historical average for the region. In the near term, activity would be supported by reconstruction investment in the hurricane-hit countries, tourism investment, and agribusiness projects in some countries. A moderation of FDI-related CBI inflows would temper activity. Weak conditions for bank credit to the private sector would also weigh on the growth outlook. Inflation would stabilize at around 2 percent (in line with US), while the current account deficit is expected to narrow as higher import demand for reconstruction wanes. The moderation in CBI inflows would also widen the fiscal deficits and contribute to a cessation of the recent downward public debt dynamics at the ECCU-wide level, with substantial heterogeneity across countries.⁷

9. Risks remain mostly on the downside (see Annex III). Adverse confidence effects from rising protectionism and the impact of US and global growth shocks would be negative for the ECCU. Staff’s estimates, using a vector autoregressive analysis, suggest a potential decline of real GDP by 0.5 percentage point in response to a 1 percent fall of activity in tourism-source countries. Other global risks include a sharp rise in risk premia, cyberattacks, and large swings in energy prices. Region-specific risks comprise natural disasters increasing in frequency and intensity due to climate change, a significant decline of CBRs, and a further exit of foreign banks. Lingering problems in the financial sector present strong concerns, including possible systemic spillovers involving both banks and non-banks, as well as potential sovereign/financial adverse feedback loops. Upside risks stem from further upward surprises in CBI inflows, if these are well-managed.

Policy Discussions: Leveraging Regional Integration

The ECCU faces multiple challenges that are compounded by large external shocks and lack of economies of scale. Advancing regional integration can catalyze capacity and resources for better policy responses if it is well sequenced and includes proper risk-management safeguards. There is scope for practical steps to increase fiscal and financial integration while exploring ways to solidify the currency union by raising payments’ efficiency through, but not limited to, cautiously piloting a digital currency. Some of the integration proposals would require strong preconditions and are only suggested for the medium-to-long term. The practical steps would have interrelated positive spillover effects: fiscal integration could strengthen government backstopping to advance the banking union, while a more robust financial system would in turn help raise payments’ efficiency.

10. There is scope for increasing ECCU’s economic and institutional integration. While the level of the ECCU’s economic and institutional integration, as measured by the respective indexes, is higher than in other Caribbean countries, substantial gaps remain, which contribute to policy distortions and suboptimal outcomes.⁸ A significant portion of the gaps relates to fiscal and financial sector policies.

A. Fiscal Integration

11. The ECCU countries’ overriding problems remain fiscal sustainability challenges and policy procyclicality. Recurring natural disasters and global shocks—against the background of small size, precarious revenue and financing base, and limited fiscal frameworks—cause large swings in output and government revenues that are further amplified by large and volatile CBI flows. Government consumption rises in good economic times, while in bad times social and political pressures make it downward-inflexible, with limited fiscal and financing resources constraining public investment. As a result, over-the-cycle, public investment falls, with an adverse impact on growth and resilience-building.

12. Achieving debt sustainability and building resilience to natural disasters through improved national frameworks remain the region’s fiscal policy priority. Progress in implementing credible country-specific fiscal responsibility frameworks to reach the regional 60 percent of GDP public debt target should be accelerated. Establishment of frameworks for saving (building on the progress to startup saving funds) and supporting public investment in resilient infrastructure and insurance for natural disasters would complement those efforts. This needs to be matched by continued upgrading of fiscal institutions and Public Financial Management (PFM) practices (2018 ECCU staff report). Progress would be bolstered by comprehensive country-specific disaster resilience strategies—currently being piloted in Dominica and Grenada—that provide a roadmap for strengthening resilience and facilitating donor coordination and support.

13. The ECCB has taken the lead in supporting this task at the regional level. It has usefully engaged in harmonizing fiscal data, improving debt management, and coordinating discussion of the countries’ medium-term fiscal frameworks to benchmark progress to the regional debt target. The ECCB has also been exploring proposals to be involved in managing and financing “regional projects.” While these initiatives remain to be fully fleshed out, staff pointed to the need to protect the integrity of the quasi-currency board arrangement by safeguarding the ECCB’s operational independence and ringfencing its reserves, drawing instead on national government funding.

14. The following practical steps to leverage regional integration could support fiscal sustainability:

Regional coordination of tax incentives. The ECCU economies have extensively used tax concessions to attract FDI, leading to a race to the bottom. Staff’s empirical analysis (see Box 1 and Selected Issues Paper (SIP)) suggests that this entails large fiscal costs⁹ while economic benefits appear to be marginal: tax incentives do not meaningfully impact overall FDI, GDP growth or employment. Also, with FDI to the Caribbean being positively related to the stock of public infrastructure, a policy tradeoff emerges between granting tax incentives and attracting FDI through better public infrastructure financed from higher revenues. Drawing on best practices and trends in global taxation, ECCU countries would benefit from streamlining and re-balancing their tax incentives, supplemented by regional agreements.
Regional coordination of CBI revenues. CBI inflows have become large and are subject to significant uncertainty, exemplifying another race to the bottom among the ECCU countries. Protection of the programs’ financial integrity offers an additional rationale for collective action, including to dispel concerns relating to the tax rate on offshore income and residency period and other aspects of transparency standards to lower perceptions of abuse of CBI programs. Accordingly, implementation of the March initiative to harmonize CBI due diligence processes could help the sustainability of the revenue flows and support financial stability. For the medium term, staff’s analysis also suggests a case for exploring CBI program coordination on pricing and the use of quotas to support these revenues over time.
A regional stabilization fund (RSF). In contrast to proposals to finance regional projects, the RSF could be used, in the long term, as a fiscal buffer of pooled resources against natural disasters, CBI revenue uncertainty, tourism, and global financial shocks. Staff’s stochastic simulations suggest a substantial scope for regional fiscal risk sharing. Cross-country cyclical asymmetries imply resource savings with a RSF of about one-half of the sum of individual countries’ funds for the same stabilization effect, with cross-country transfers reducing the amount of funds required regionally. With responsible national policies, a RSF could also reduce public expenditure procyclicality and increase public investment, by saving resources in good times and financing investment in bad times. The simulations indicate that saving of resources that have historically been used to finance government consumption booms can increase public investment by 0.5–1.5 percent of GDP per year, with significant stabilization effect and increase in private investment, employment, output and wages (Box 2 and SIP). Such a RSF could supplement individual-country self-insurance against natural disasters.

^{Box 1.}

Tax Incentives in the ECCU: High Costs, Limited Benefits

Tax incentives are popular tools for tourism-dependent Caribbean economies to attract FDI. Over the last two decades, amid intensified competition for the region’s tourism market, countries have increased their use of tax incentives, including longer tax holidays and loss carry-forward years, higher investment tax allowances, and lower statutory corporate income tax (CIT) rates. Generous tax concessions are also granted at customs for import duties, VAT, and excise taxes. This pervasive use of tax incentives could lead to a harmful race to the bottom—countries feel compelled to offer incentives packages to investors out of the fear that otherwise potential investment would move to a competing destination in the region.

The benefits of tax incentives appear to be marginal. Empirical analysis for a sample of eleven tourism-based Caribbean countries (including the six independent states in the ECCU) suggests that tax incentives have some positive impact on the tourism sector. For instance, an increase in the foregone revenue by 1 million EC dollars is associated with an increase in the number of hotel rooms by 0.2 percent, controlling for other macro-level factors. But tax incentives do not seem to have an impact on overall FDI, GDP growth, or employment. The analysis also shows that FDI to the Caribbean is positively correlated with the stock of public infrastructure especially when countries experience natural disaster shocks, indicating a policy tradeoff between granting tax incentives and raising revenue to finance infrastructure investment.

However, the use of tax incentives entails large fiscal costs for the ECCU countries. The foregone tax revenue is estimated to have averaged 5.8 percent of GDP in 2010–18 annually in the region, or 21 percent of total revenue, creating large revenue loss when the countries are already under pressure to cope with the infrastructure investment gap and the rising fiscal cost of natural disasters and climate change. The cost of tax incentives is equivalent to as high as $2,500 per job in the formal sector. In addition, tax incentives are also associated with tax fraud and evasion, which may cause both real and reputational damages to the ECCU countries.

Regional coordination on tax incentives can be mutually beneficial for the ECCU countries. Efforts are needed to streamline and re-balance tax incentives based on clear principles consistent with international best practices. These principles include (i) providing an explicit rationale for market failures that incentives aim to address, with well-defined targets, costs in terms of forgone revenue, and sunset clauses; (ii) re-balancing tax incentives towards those that are better designed (investment allowances instead of tax holidays that tend to mainly generate ex-post windfall gains with little effect on incentivizing investment); (iii) broadening the tax base, while reducing tax rates to enhance attractiveness of investments; (iv) reducing the scope for discretion toward a rules-based system; (v) designing tax incentives as part of a sustainable fiscal framework and incorporating them in the budget; and (vi) strengthening tax administration and enforcement, with periodic assessments to reduce leakages and distortions. A coordinated regional approach, such as a regional agreement on harmonization of fiscal incentives for the tourism industry, is necessary to overcome the collective action problem that could undermine national reform efforts.

15. The success of the regional coordination arrangements, and particularly the RSF, would hinge on strong fiscal governance pre-conditions. Given the primary role of national fiscal policies, RSF’s operations should be fully financed by all governments and reflected in national fiscal accounts. Its authority could be granted by acts of parliament. Fiscal responsibility and medium-term fiscal frameworks, together with improved PFM procedures, would be pre-requisites for monitoring and enforcing compliance with RSF qualification requirements. The governance framework of the RSF should envision no involvement of the ECCB and be transparent, with clear saving and investment rules to address risks of misappropriation and clarify sovereign ownership and each sovereign’s net asset position vis-à-vis the RSF. Triggers for disbursement should be objective, transparent, and automatic.

^{Box 2.}

Enhancing Fiscal Integration through a Regional Stabilization Fund

If implemented carefully over the long term, a RSF could have important benefits in the ECCU. While similar economic structures and shock exposure across ECCU countries result in substantial cyclical co-movements, significant asymmetries remain. These include different size and market niche of tourism sectors; natural disasters affecting countries asymmetrically in timing, strength, and frequency; and different weight of the agriculture sector. A RSF can help cushion shocks, taking advantage of cross-country asymetries. Strong fiscal governance and country mandates would be a pre-requisites, which should be aimed to address moral hazard and legal and enforcement risks among sovereign ECCU countries.

A RSF could result in significant savings from risk pooling. Simulation results indicate that a RSF is about ½ of the size of the sum of individual countries’ stabilization funds (SF), for the same level of saving contribution and withdrawal. The result is based on a Monte Carlo experiment replicating historical patterns of variation in output, revenue, and expenditure in response to shocks. For example, for a probability of RSF depletion at 1 percent, the estimated RSF would be about 5 percent of the regional GDP, while the sum of individual countries’ SF is near 10 percent.

Size Requirement of Regional and Individual Country Stabilization Funds

(In percent of Regional GDP)

Source: ECCB data, WEO, and IMF staff calculations.

^{^1/}Stochastic simulations for targeted probabilities of Stabilization Fund depletion.

Size Requirement of Regional and Individual Country Stabilization Funds

(In percent of Regional GDP)

	Prob. Depletion = 0.1		Prob. Depletion = 0.05		Prob. Depletion = 0.01		Prob. Depletion = 0.001
	Country 1	Regional ^1/	Country 1	Regional ^1/	Country 1	Regional ^1/	Country 1	Regional ^1/
Antigua and Barbuda	1.79	0.90	269	1.33	4.75	229	6.83	3.12
Dominica	0.54	0.17	0.49	0.24	0.71	0.34	0.90	0.41
Grenada	0.39	0.20	0.56	028	0.93	0.45	1.35	0.62
St Kitts and Nevis	0.46	0.23	0.66	0.33	1.09	0.53	1.55	0.71
St. Lucia	0.59	0.30	0.90	0.44	1.55	0.75	213	0.97
St.Vincent and if the Grenadin	023	0.11	0.32	0.16	0.52	0.25	0.71	0.32
ECCU	3.79	1.90	5.63	2.78	9.55	4.61	13.46	6.15

Source: ECCB data, WEO, and IMF staff calculations.

^{^1/}Stochastic simulations for targeted probabilities of Stabilization Fund depletion.

Size Requirement of Regional and Individual Country Stabilization Funds

(In percent of Regional GDP)

	Prob. Depletion = 0.1		Prob. Depletion = 0.05		Prob. Depletion = 0.01		Prob. Depletion = 0.001
	Country 1	Regional ^1/	Country 1	Regional ^1/	Country 1	Regional ^1/	Country 1	Regional ^1/
Antigua and Barbuda	1.79	0.90	269	1.33	4.75	229	6.83	3.12
Dominica	0.54	0.17	0.49	0.24	0.71	0.34	0.90	0.41
Grenada	0.39	0.20	0.56	028	0.93	0.45	1.35	0.62
St Kitts and Nevis	0.46	0.23	0.66	0.33	1.09	0.53	1.55	0.71
St. Lucia	0.59	0.30	0.90	0.44	1.55	0.75	213	0.97
St.Vincent and if the Grenadin	023	0.11	0.32	0.16	0.52	0.25	0.71	0.32
ECCU	3.79	1.90	5.63	2.78	9.55	4.61	13.46	6.15

Source: ECCB data, WEO, and IMF staff calculations.

^{^1/}Stochastic simulations for targeted probabilities of Stabilization Fund depletion.

The RSF would increase private investment, employment, output, and wages. Staff simulations, based on a dynamic general equilibrium model of the six ECCU economies, show that the benefits from a faster recovery from natural disasters is likely to outweight the RSF’s opportunity costs (including distortionary taxation to service additional public debt). Moreover, the possible increase of public investment (as obtained in the Monte Carlo simulations) would substantially increase long-term ouput, consumption, and labor income.

B. Financial Integration

16. Notwithstanding strong banking sector liquidity and capital ratios and improvements in the NPL ratio, financial sector vulnerabilities are building up in both the bank and non-bank sectors. Banking sector liquidity and capital ratios are broadly strong, but asset quality remains a concern and an obstacle to a healthy provision of credit and economic growth. While the aggregate NPL ratios have been generally improving, sizable impaired assets under-provisioning in some indigenous banks masks significant heterogeneity and an intensification of problems in some banks and their effects through financial-fiscal linkages. Market risks are increasing with some banks investing in riskier portfolios abroad to search for yield. Reduced presence of global banks, which have larger and more diversified balance sheets than other banks, may weigh on the costs and quality of financial services, including availability of CBRs. At the same time, the entry of new regional banks seeking increased market share would likely heighten a competitive environment. There exist pockets of vulnerability in the non-bank sector. In particular, credit unions, including systemic ones, continue to be regulated by fragmented and looser supervisory frameworks.

17. To address these problems, the authorities are pursuing multipronged reforms of the financial oversight, but progress is often slowed by country-level delays.¹⁰ The ECCB and national authorities have advanced a range of reforms to modernize banking supervision and accounting practices including banks’ implementation of IFRS 9, accelerate NPL resolution, develop systemic risk monitoring, harmonize regulation for non-banks, and enhance AML/CFT frameworks and supervisory technology. The interaction of national and regional authorities has improved and systemically important financial institutions (SIFIs) are being identified. Key reforms under consideration include a deposit insurance (DI) scheme, creation of a single supervisor/regulator for non-banks, and operationalization of a credit bureau. However, progress has been slowed by delays in the passage of legislation by individual countries or lack of regional consensus.¹¹ Due to delayed and fragmented reform implementation, financial sector weaknesses remain and require prompt policy action.

18. The reform agenda needs to be prioritized within a holistic and well-sequenced plan, identifying key short and medium-term actions. The focus should be placed on (i) strengthening banks’ balance sheets, including through prompt supervisory enforcement of measures and implementation of standards, and (ii) a review of ECCB and deposit-taking institutions’ governance frameworks:

Regulation and supervision. In the short term, the ECCB should (i) strengthen supervisory requirements for market and operational risk (including cybersecurity), with time-bound plans; (ii) implement the treatment of impaired assets standards and establish realistic plans for all banks to reduce NPLs below 10 percent by mid-2020 and meet the 5-percent benchmark by end-2023, (iii) mandate credible plans to improve provisioning and resolve NPLs by selling to the ECAMC or fully provisioning as required by regulation, and (iv) require prompt disposal of non-banking assets (e.g., land) within statutory timelines.¹² ECCB statutory powers should then be used to raise capital as necessary. Consistent with IMF TA advice, absent substantive operationalization of the NPL acquisition mandate prior to three months of the revised deadline, the ECAMC’s operations should be downscaled to receivership or wound up. Macroeconomic stress testing of financial institutions would strengthen supervision and help identify points of weakness. In addition to supervisory actions, the modernization of the insolvency law—including the implementation of the e-conveyancing framework—and the easing of restrictions on non-citizen property ownership will help maximize NPL recovery. Phasing out the Minimum Saving Rate, which distorts the credit market, could support NPL reduction, while its social objectives could be addressed through fiscal policies.
Governance. In the medium term, ECCB’s governance frameworks should be reviewed to provide greater operational autonomy to ECCB management, vis-a-vis the ECCB Board and the Monetary Council. Adequate allocation of functions to ECCB’s management could help increase compliance and enforcement, without precluding consultation with national authorities for regional consensus building.¹³ Governments’ involvement could be limited to exchange rate policies and fiscal backstopping. Establishing a hierarchy between different objectives (price stability as primary objective and financial stability as secondary objective) could also help regulation enforcement, especially in case of conflicting objectives. Deposit-taking institutions’ governance frameworks should also be reviewed to protect lending from special interests’ influence, especially for indigenous banks with government ownership, by ensuring that most of Board members are independent.

19. Further measures to manage risks from CBRs should be advanced promptly, while mobilizing other related reforms. The ECCB should further strengthen the monitoring of banks’ CBRs by fully implementing the toolkit based on IMF technical assistance, and remaining countries should expedite legislation to update the regulatory and AML/CFT oversight frameworks, including for non-banks. These reforms would be supported by implementation of the recent ECCB initiative to establish a common platform for indigenous banks’ back-office risk and compliance functions through a shared-services model, which is also expected to reduce operational costs and mitigate indigenous banks’ limited size.

20. Stronger oversight of nonbanks should contribute to balance sheet repair. While credit unions and insurance companies remain in the purview of national authorities, the latter should provide adequate resources, improve enforcement, and address data gaps. Realistic and urgent plans are needed for resolution of weak non-banking institutions. For the insurance industry, strengthened risk mitigation standards and practices (e.g. for market and liquidity risk and minimum reinsurance) should be adopted—supported by prompt finalization of the harmonized regulatory framework on insurance, pension, and deposit-taking non-bank sectors. Enhanced ECCB monitoring of large credit unions is a positive step and could be deepened. Consolidated supervision of financial groups, including off-balance sheet operations such as management of pensions and other investment funds, should be advanced. Effective consolidation of regional financial sector oversight, with the ECCB having supervisory responsibility for all deposit-taking institutions and another agency mandated to supervise the non-deposit taking financial sector will maximize coverage and mitigate resource and skills constraints.

21. Provided the critical short and medium-term priorities are addressed, steps toward a fuller banking union could take place in the long term. Components of a common financial safety net, including a DI scheme and Emergency Liquidity Assistance (ELA), and a bank resolution and crisis management framework need to be appropriately assessed and sequenced given the risk of mutualization of fiscal costs and possible low appetite for risk sharing across jurisdictions. Further progress in addressing financial sector pockets of weakness is needed to incentivize regional funding and resource sharing, which could otherwise trigger moral hazard and risky lending. Establishment of a regional financial safety net and resolution funds would require sovereign agreements on burden sharing of possible losses from bank failures, for which progress towards fiscal integration is needed (see section A). Banks’ balance sheet repair and a credible fiscal backstopping should be preconditions to deposit insurance/resolution funds based on industry contributions, adjusted for participating institutions’ size and risk—building on the authorities’ steps to identify SIFIs. Initially, an operational fiscal backstop would be necessary while the funds for resolution are built.

22. After banks’ balance sheets are strengthened and the fiscal backstop is functional, the ECCB could proceed toward a fuller resolution and crisis management framework. A suitable model includes (i) least-cost resolution funding for non-systemic banks supported by DI funds, and (ii) a regional resolution fund for systemic banks, after bank soundness and governance issues have been addressed and a critical mass of funding accumulated. The activation of a fiscal back-stop, under clear conditions, would reduce the risk of a crisis spreading from systemic bank failures. Supporting the bank resolution and crisis management framework requires advancing reform in key areas affecting resolution funding of systemic banks; regional crisis management plans (including non-banks); consolidation of broad financial sector oversight; a macroprudential framework; and a regulatory regime for systemic institutions.

23. A regional financial safety net comprising DI and LOLR/ELA frameworks can support financial stability more efficiently. A regional framework enables broader risk diversification and access to more resources, increasing credibility. A DI scheme could reduce the risk of deposit runs as implicit national guarantees are insufficient if the sovereign has fiscal sustainability challenges. An effective liquidity facility can mitigate the risk of liquidity pressures on solvent banks that trigger fire sales, thereby containing systemic spillovers.

24. A financial safety net would need to be comprehensive and tailored to the constraints of the ECCU quasi-currency board. Current regulations envision very limited scope for LOLR or ELA and any revision would need to be consistent with the quasi-currency board arrangement and the requirement of solvency to qualify for liquidity assistance.¹⁴ Stronger credit union’s performance, regulation, and supervision are necessary prerequisites for their participation in the financial safety net.

C. Solidifying the Currency Union by Raising Payments’ Efficiency

25. ECCU’s retail payments are dominated by cash and checks. These are estimated to account for about 80 percent of total payments. The costs of cash usage, including transportation, storage, and security for both the central bank and the private sector are high, and so are fees for credit or debit cards and account transfer services charges for customers.¹⁵ Checks are also inefficient as settlement takes time. Technology is actually available—mobile subscription is high— but is underutilized. Private sector initiatives to adopt more advanced payment technologies, such as mobile payment services, have until recently been limited, as such investment is costly, particularly due to the lack of economies of scale.¹⁶

26. The ECCB has launched several initiatives to reform the payment system. The authorities are concerned that the inefficient payments system adds to the costs of doing business, especially for small and medium-sized enterprises, dampening productivity. Staff’s empirical analysis based on cross-country panel data suggests that the use of digital payment technology is associated with higher labor productivity growth in recent years (see SIP). The ECCB initiated the Eastern Caribbean Automated Clearing House project in 2009, and its first phase, the check imaging clearing system, was completed in 2015. In March 2018, the Electronic Funds Transfer (EFT) system was launched, aiming to improve the interoperability across financial institutions. In March 2019, the ECCB launched a digital currency pilot project using blockchain technology to reduce excessive reliance on cash and cheques, improve the efficiency of the retail payment system, and—by reducing financial frictions—support economic development (Box 3).

27. Building on the successful launch of the EFT, the ECCB, national authorities, and financial institutions should continue concerted efforts to modernize the payment system. Since the introduction of the EFT, some banks have begun to develop and offer various electronic payment services (including mobile payments). To encourage competition, options to integrate credit unions in the core payment systems should also be examined, in the context of establishing an equivalent prudential oversight framework. The ongoing review of the legal and regulatory framework for the payment system is also critical to allow emerging Fintech and nonbank e-payment services to operate and innovate. Advancing e-government initiatives would also help increase the volume of digital payments to alleviate small-economy constraints and enhance the business opportunities for the private sector. In this context, the authorities’ digital economy project, which is currently in its preparatory phase, would contribute to the transformation of key public services. Early introduction of the digital ID is desirable to support these initiatives.

28. The digital currency pilot project, launched by the ECCB, should proceed cautiously as planned. The digital currency pilot will be deployed in Spring 2020 in a controlled environment. The ECCB is developing success criteria for the pilot to evaluate the effects and merits of the digital currency. To contain risks, some safeguard measures are embedded in the design of the digital currency: the size of its holding and transaction values is limited, with no interest accrued and no use for foreign exchange transactions.¹⁷ Nonetheless, the digital currency could expose the ECCB and the financial system to various (and not fully known) risks—including those related to financial intermediation, financial integrity, and cybersecurity. The pilot will provide the opportunity to examine these risks and assess policy gaps. More specifically:

Financial intermediation. Ample excess liquidity in the system would mitigate possible financial disintermediation risk. However, the effects of the digital currency on the choice of payment instruments and financial institutions’ funding are uncertain, especially under stress. Staff’s empirical analysis suggests that depositors are sensitive to the opportunity cost of holding deposits, implying that in times of banking sector stress or low interest rates, demand for the digital currency (which is default risk free) could rise (see SIP). Accordingly, the ECCB and the national supervisors should closely coordinate on analyzing the liquidity and funding conditions of each bank and credit union, including through liquidity stress testing.
Financial integrity. The current AML/CFT framework will be broadly maintained, as the regulated financial institutions continue to take the key role in ensuring AML/CFT compliance. To fully reap the benefits of the new technology and address new risks, AML/CFT operational guidelines and regulations need to be thoroughly reviewed and upgraded.
Cybersecurity. The ECCB could be exposed to operational and financial risks from malfunctioning of the digital applications, platforms, or infrastructure, due to cyberattacks. The ECCB is identifying cybersecurity threats and exploring risk mitigation measures as important pre-requisites to the digital currency. Areas for further improvements include: (i) developing proactive cybersecurity IT operations within the ECCB, for example by instituting a “real-time 24/7” monitoring system to prevent, detect, and recover from cybersecurity breaches; (ii) further strengthening IT resilience and operations (e.g., IT asset, configuration, and vulnerability management) at the ECCB; and (iii) further improving third party and cloud risk management. In addition, more supervisory resources could be allocated to ensure effective supervisory expertise and coordination practices for cybersecurity policy and practice at financial institutions.
Data and privacy governance. The data and privacy governance frameworks should be established to ensure that sensitive financial or personal data is protected.

29. After the pilot, the ECCB is planning to thoroughly review its results. More work may be warranted, especially to further test the digital currency system, strengthen cybersecurity and AML/CFT operations, and update legal and regulatory frameworks. The authorities are also encouraged to conduct a comprehensive cost and benefit analysis of the new digital currency ecosystem.

^{Box 3.}

The Key Design Aspects of the ECCB Digital Currency for the Pilot¹

General scheme. The ECCB will have the sole authority to issue and redeem the digital currency and will be able to fully control its supply. The ECCB will preserve a “two-tier system” to fully utilize the comparative advantage of (i) the private sector to interact with customers and carry out the relevant AML/CFT requirements, including the necessary customer due diligence measures, and (ii) the central bank to provide trust and manage the digital currency scheme in line with its payment system policies. About 15 financial institutions in four ECCU member economies (Antigua and Barbuda, Grenada, St. Kitts and Nevis, and St. Lucia) will participate in the pilot. The digital currency can be used for financial transactions including peer-to-peer, business-to-business, and business-to-customer. The size of its holding and transaction values per wallet is limited, with no interest accrued and no use for foreign exchange transactions. The ECCB has no intention to eliminate the use of physical cash, because it has its own convenience.

Process of issuing digital currency. Financial institutions request the digital currency from the ECCB. In response, the ECCB sends the digital currency to them using the blockchain network. Then, financial institutions in turn distribute it to their clients upon their request in exchange for deposits or cash.²

Access to transaction data:

The ECCB can observe each transaction data (but anonymously) and the outstanding stock of the digital currency in each digital wallet. The ECCB does not see detailed information about digital currency transactions (e.g., the identity/name of payers and payees and the purpose of transaction).
Financial institutions can fully observe the identity of payers and payees and the purpose of transaction (e.g., the goods or services payers bought from payees), if either payers or payees are their own customers. They are responsible for maintaining its own clients’ database.

Who Can See What Information?

^{^1/}All data including identity of payers and payees involved in transactions.

Who Can See What Information?

	Transaction data related to clients of:
	Bank A	Bank B	Nonbank A
ECCB	Only anonymous transaction data
Bank A	Full data related to transaction of own customers ^1/
Bank B		Full data related to transaction of own customers1/
Nonbank A			Full data related to transaction of own customers1/

^{^1/}All data including identity of payers and payees involved in transactions.

Who Can See What Information?

	Transaction data related to clients of:
	Bank A	Bank B	Nonbank A
ECCB	Only anonymous transaction data
Bank A	Full data related to transaction of own customers ^1/
Bank B		Full data related to transaction of own customers1/
Nonbank A			Full data related to transaction of own customers1/

^{^1/}All data including identity of payers and payees involved in transactions.

Implication for AML/CFT management. Because individual financial institutions have access to information pertaining to their clients’ transactions, they have the obligation and responsibility to monitor the legitimacy of each transaction and maintain their clients’ database. Accordingly, the main responsibility of AML/CFT monitoring falls on these financial institutions. The ECCB is not expected to be directly involved in monitoring of each individual transaction. Instead, its main role is to supervise financial institutions to ensure that they are compliant with the AML/CFT regulatory framework.

¹ Based on the information staff obtained during the mission. The ECCB was still developing the design of the digital currency.² This scheme implies that clients do not have direct access to central bank accounts.

D. Other Issues

30. To ensure external sustainability and boost potential growth, ECCU authorities should continue efforts to advance the structural reform agenda and foster private sector activity beyond tourism. Both the EBA–lite current account and real effective exchange rate models suggest that the external position in 2018 was weaker than that consistent with fundamentals, implying an exchange rate overvaluation in 2018. Implementing fiscal consolidation and structural reforms would help enhance competitiveness, sustainability, and boost non-tourism exports. Key structural reforms include strengthening investment and business climate, improving public sector efficiency, reducing energy and transportation costs and tariffs, and advancing labor market reforms and regional integration. In addition, further improving connectivity and Fintech have the potential to reduce business costs, enhance efficiency, thereby improving competitiveness (see Annex II and Figure 7).

31. The ECCB should continue to improve the ECCU area statistics. Following the useful launch of the debt portal in mid-2019, several priorities remain, including further harmonization of public debt statistics, back-casting of BPM6-consistent data, more timely publication of BoP releases, and upgrading private external debt data.

Authorities’ Views

32. The authorities broadly agreed with staff’s macroeconomic outlook. ECCB staff also projected ECCU GDP growth to ease, to 3¼ percent in 2019, with a slight uptick of 3.5 percent in 2020. They also agreed with the key risks being natural disasters, a global economic slowdown, a further loss of CBRs, and cyber threats.

33. The authorities reaffirmed their commitment to meeting the 60 percent of GDP debt target. However, they underscored substantial risks posed by natural disasters and saw economic growth as a critical factor, calling for the need for debt sustainability strategies to accommodate their development spending needs. Some of the authorities indicated plans to advance elements of their own fiscal responsibility frameworks and to build national saving funds and resilient infrastructure, while arguing for the need to step up international grant financing given their high cost.

34. The authorities were mostly in favor of coordinating revenue-side measures, although there was some heterogeneity in views on several specific aspects. They were wary of practical difficulties to enforce coordination among sovereign countries. On tax incentives, some authorities stressed the need for retaining flexibility to attract foreign direct investment given the limited options to improve competitiveness. They also argued for a nuanced view of the different tax incentives and pointed to their extensive use worldwide. On the CBI programs, they were committed to advancing ongoing cooperation initiatives to strengthen transparency and integrity. Some, however, saw merit in retaining a degree of competition with country differentiation.

35. They saw the potential merits of a regional stabilization fund, but some authorities were skeptical about practical implementation. Most authorities pointed to insufficient resources to finance the initial capital of the fund, unless these were provided through international funding. Other obstacles include substantial differences in the countries’ economic fundamentals, level of development, diversity of policy views, and fiscal sustainability challenges. Some authorities indicated they would be prioritizing national saving funds until credible safeguards for managing pooled resources are created at the regional level.

36. The authorities agreed with staff on the financial stability risks and challenges. They shared the concern about the departure of global banks but saw both risks (such as loss of CBRs) and opportunities (such as consolidation of indigenous banks). While recognizing the risk of rapid credit unions’ growth—including from domestically systemic institutions—and softer loan qualification requirements, they emphasized that progress towards harmonized regional regulation should help address the risks. They were concerned by the possibility of further CBRs losses and stressed the role of the international community in containing those risks. They also noted the region’s strong cooperation to address remaining gaps on AML/CFT and international taxation despite capacity constraints. They shared concerns about the limited size of indigenous banks, elevated market and operational risks, but pointed to declining NPL levels with improved provisioning in most countries. They noted that IFRS 9 should also facilitate broad provisioning for aged NPLs, which would result in a reduction in NPLs.

37. The authorities highlighted the ample scope of their reform agenda. They noted the phased upgrade to Basel II/III standards, the project to consolidate back-office risk and compliance functions of indigenous banks, the upcoming issuance of the treatment of impaired assets standard, and the pending corporate governance standards with strengthened fit and proper requirements. They confirmed commitment to the ECAMC strategy and explained the deadline extension was necessary, noting the expectation of initiating the NPL purchases in 2020. However, they noted that the extension of government guarantees to facilitate CDB financing for NPL acquisitions may be difficult for some jurisdictions given already high public debt levels. They also pointed out that the ECAMC may not have the capacity to acquire all impaired assets due to shallow real estate markets. They highlighted ongoing initiatives to advance collateral realization subject to real estate market conditions and to review insolvency legislation to facilitate loan recovery. They concurred with staff on the need to step-up monitoring of bank investment portfolios for compliance with statutory limits.

38. Most authorities consider that the current legislation provides appropriate autonomy to the ECCB. In their view, the ECCB governance framework with Ministers of Finance at the Monetary Council and government representatives at the Board is appropriate in the ECCU context. They noted the need for consensus building for reform implementation, with financial stability also being dependent on growth and development. The majority of authorities pointed to national parliamentary processes as the main reason for delayed implementation of financial reforms, as opposed to insufficient ECCB autonomy.

39. The authorities welcomed staff proposals to progress towards a deeper banking union in the long term and agreed on the preconditions. They concurred on the need to address remaining bank and non-bank balance sheet weakness as priority—with solid financial fundamentals as a key stepping stone towards industry-funded deposit insurance—and noted that a project geared towards establishing a DI scheme is currently being developed. They took note of staff advice that emergency liquidity and resolution funding frameworks require strong fiscal fundamentals, in addition to financial soundness, and should be tackled at a later stage.

40. The ECCB stressed the need for central bank leadership in testing digital payments in the ECCU. As other central banks, the ECCB is exploring the feasibility of a central bank digital currency. In the ECCU with its multiple islands, payments are slow and costly, and the lack of economies of scale constrains private sector solutions. Therefore, developing more efficient intra-regional payment systems is critical. The ECCB stressed that the digital currency pilot would be conducted in a controlled environment, thereby minimizing the risks. After the pilot, the ECCB will conduct a thorough review on the results of the pilot.

41. In parallel with the digital currency pilot, the authorities are making efforts to improve the traditional payment system. By 2025, they aimed to increase the use of credit and debit cards and electronic transfers by 40–60 percent. Currently, they are exploring options to integrate credit unions in the core payment systems to enhance competition. They concurred with staff that the lack of legislation has deterred the development of FinTech and non-bank payment services and are planning to review the legal framework. In this context, the ECCB welcomed the opportunity to receive technical assistance on governance and legal frameworks for FinTech.

Staff Appraisal

42. Growth has rebounded in 2018–19, fiscal deficits have increased, and the public debt ratio has continued to decline. Going forward, growth is expected to gradually ease, and the outlook is clouded by downside risks, particularly natural disasters and continued pressures of CBRs. In this context, achieving the 60 percent of GDP debt target while building resilience to natural disasters would remain challenging for most countries. The external position is weaker than implied by medium-term fundamentals and desirable policies. Implementing fiscal consolidation and structural reforms would help enhance competitiveness and sustainability.

43. Greater regional integration can complement national policies in improving the outlook and mitigating risks. Robust national fiscal responsibility frameworks that ensure public debt sustainability and buffers to natural disasters—including through Disaster Resilience Strategies currently being piloted in Dominica and Grenada—remain key to improving economic performance. In addition, well-sequenced regional integration can catalyze resources for better policy responses.

44. Fiscal integration through regional coordination of selected revenue policies could create fiscal space for ECCU’s public investment. There is scope for the ECCU countries to cooperate on tax incentives and CBI program conditions, including on their financial integrity to improve their governance, to limit the “race to the bottom” and create fiscal space, while achieving the objective of making FDI more attractive also through better infrastructure.

45. Over the longer term, a regional pooling of fiscal resources can support macroeconomic stabilization and resilience building. This entails limiting excessive growth of public consumption in good times to create scope for resilience building and other growth- enhancing investment in bad times. Such an arrangement would require a strong governance framework and should be financed by national budgets to protect ECCB’s international reserves and the credibility of its quasi-currency board arrangement.

46. Accelerated progress on the ECCB’s reform agenda will help address financial system vulnerabilities. The agenda needs to be prioritized and implemented within a holistic and well-sequenced plan. Efforts to repair bank balance sheets, including via sales to the Eastern Caribbean Asset Management Company, should be stepped up in the short term. The new treatment of impaired assets standard, now expected by January 2020, should be implemented without delay. Progress in modernizing insolvency frameworks would facilitate loan recovery. ECCB’s and deposit-taking institutions’ governance frameworks should be reviewed and passage of critical legislation, including AML/CFT, should be expedited by remaining countries to increase compliance and enforcement. Consolidated supervision of financial groups should be advanced. Urgent measures are also needed to monitor and address market and operational risks, including from correspondent banking relationships and cybersecurity.

47. Provided the critical near-term priorities are addressed, financial integration through steps toward a fuller banking union could take place in the long term. These would involve: (i) enhancing the financial safety net with a robust deposit insurance scheme and (ii) establishing a regional resolution and crisis management framework. Both these steps require operationalizing credible fiscal backstopping as a key precondition. Improved regulation of systemic institutions, regional consolidation of non-bank financial sector oversight, and progress in the establishment of a macroprudential mandate and toolkit will help address region-wide systemic risk.

48. The ECCB, national authorities, and financial institutions should continue efforts to modernize the payment system to solidify the monetary union. The ongoing review of the legal framework for the payment system is critical to allow emerging Fintech and nonbank e-payment services to operate and innovate. Integrating credit unions in the core payment system could be examined, in the context of establishing an equivalent prudential oversight framework. Advancing e-government would also help increase the volume of digital payments to address small-economy constraints and enhance business opportunities for the private sector. Early introduction of a digital ID is needed to support these initiatives.

49. The ECCB’s digital currency project should proceed cautiously. To contain vulnerabilities, the authorities should fully implement the safeguard measures embedded in the design of the digital currency. The pilot will provide the opportunity to examine the various risks of the digital currency— including for financial intermediation, financial integrity, and cybersecurity—and assess policy gaps.

The discussion with the ECCU authorities will be on the 12-month cycle in accordance with Decision No. 13655-(06/1), as amended.

Table 1.

ECCU: Selected Economic and Financial Indicators, 2017–25 ^1/

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

^{^1/}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 by adding individual country data.

^{^2/}Debt relief has been accorded to: (i) Grenada under the ECF-supported program in 2017; and (ii) St. Vincent and the Grenadines in 2017 under the Petrocaribe arrangement.

Table 1.

ECCU: Selected Economic and Financial Indicators, 2017–25 ^1/

							Projections
					2017	2018	2019	2020	2021	2022	2023	2024	2025
					(Annual percentage change)
Output and prices
	Real GDP				0.7	3.7	3.7	3.4	3.0	2.6	2.4	2.3	2.2
	GDP deflator				1.7	1.6	1.6	2.1	2.0	1.9	1.9	1.9	2.0
	Consumer prices, average				1.1	1.4	1.4	1.9	1.9	2.0	2.0	2.0	2.0
Monetary sector
	Net foreign assets				15.6	2.2	6.5	6.3	4.7	3.4	3.9	3.8	3.8
				Central bank	3.3	-1.1	3.1	8.8	4.9	3.7	4.7	4.1	4.5
				Commercial banks (net)	35.2	6.2	10.2	3.6	4.4	3.1	3.0	3.6	3.0
	Net domestic assets				-7.3	3.7	5.3	4.6	5.4	5.9	4.9	4.6	4.6
				Of which: private sector credit	-0.1	0.0	2.9	2.6	2.6	2.8	2.7	2.9	9.7
	Broad money (M2)				3.4	2.9	5.9	5.5	5.0	4.6	4.4	4.2	4.2
Public finances					(In percent of GDP; unless otherwise indicated)
	Central government
		Total revenue and grants			27.8	27.9	26.6	24.9	24.3	23.9	23.8	23.8	23.7
		Total expenditure and net lending			28.4	29.1	27.7	27.0	26.2	26.0	26.3	26.7	26.5
		Overall balance			-0.6	-1.2	-1.0	-2.0	-1.8	-2.1	-2.4	-2.9	-2.8
				Excl. Citizenship by Investment Programs	-4.1	-5.1	-4.5	-4.0	-3.5	-3.3	-3.5	-3.8	-3.7
		Primary balance			1.9	1.1	1.2	0.2	0.4	0.0	-0.3	-0.7	-0.6
	Total public sector debt ^2/				72.4	70.5	69.2	68.9	68.4	68.0	67.6	67.7	67.8
	Expected fiscal cost of natural disasters				…	…	…	0.8	0.8	0.8	0.8	0.8	0.7
External sector
	Current account balance				-7.3	-8.4	-7.6	-8.6	-7.9	-6.8	-6.6	-6.3	-6.2
	Trade balance				-29.9	-33.6	-33.1	-32.8	-32.3	-31.7	-32.1	-33.4	-33.0
				Exports, f.o.b. (annual percentage change)	-0.7	1.7	3.8	5.8	5.7	5.8	5.0	5.4	4.9
				Imports, f.o.b. (annual percentage change)	3.3	16.5	3.8	4.7	3.6	3.0	5.8	8.1	3.0
				Services, incomes and transfers	22.5	25.2	25.5	24.2	24.4	24.9	25.5	27.2	26.8
		Of which: travel			38.4	39.9	40.6	40.9	41.9	42.2	43.1	45.5	46.7
	External public debt				37.9	36.6	36.0	36.5	36.5	36.4	35.8	35.4	35.8
	External debt service (percent of goods and nonfactor services)				9.9	8.9	9.6	9.3	8.0	8.9	8.9	7.9	9.7
	International reserves
			In millions of U.S. dollars		1,750	1,747	1,802	1,959	2,056	2,132	2,232	2,323	2,428
			In months of current year imports of goods and services		5.3	4.7	4.7	4.8	4.9	4.9	4.9	4.8	4.8
			In percent of broad money		29.0	28.1	27.4	28.2	28.2	27.9	28.0	28.0	28.1
	REER (average annual percentage change)
			Trade-weighted		-0.7	-2.0	…	…	…	…	…	…	…
			Competitor-weighted		0.3	0.8	…	…	…	…	…	…	…
			Customer-weighted		0.4	-1.9	…	…	…	…	…	…	…

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

^{^2/}Debt relief has been accorded to: (i) Grenada under the ECF-supported program in 2017; and (ii) St. Vincent and the Grenadines in 2017 under the Petrocaribe arrangement.

Table 1.

ECCU: Selected Economic and Financial Indicators, 2017–25 ^1/

							Projections
					2017	2018	2019	2020	2021	2022	2023	2024	2025
					(Annual percentage change)
Output and prices
	Real GDP				0.7	3.7	3.7	3.4	3.0	2.6	2.4	2.3	2.2
	GDP deflator				1.7	1.6	1.6	2.1	2.0	1.9	1.9	1.9	2.0
	Consumer prices, average				1.1	1.4	1.4	1.9	1.9	2.0	2.0	2.0	2.0
Monetary sector
	Net foreign assets				15.6	2.2	6.5	6.3	4.7	3.4	3.9	3.8	3.8
				Central bank	3.3	-1.1	3.1	8.8	4.9	3.7	4.7	4.1	4.5
				Commercial banks (net)	35.2	6.2	10.2	3.6	4.4	3.1	3.0	3.6	3.0
	Net domestic assets				-7.3	3.7	5.3	4.6	5.4	5.9	4.9	4.6	4.6
				Of which: private sector credit	-0.1	0.0	2.9	2.6	2.6	2.8	2.7	2.9	9.7
	Broad money (M2)				3.4	2.9	5.9	5.5	5.0	4.6	4.4	4.2	4.2
Public finances					(In percent of GDP; unless otherwise indicated)
	Central government
		Total revenue and grants			27.8	27.9	26.6	24.9	24.3	23.9	23.8	23.8	23.7
		Total expenditure and net lending			28.4	29.1	27.7	27.0	26.2	26.0	26.3	26.7	26.5
		Overall balance			-0.6	-1.2	-1.0	-2.0	-1.8	-2.1	-2.4	-2.9	-2.8
				Excl. Citizenship by Investment Programs	-4.1	-5.1	-4.5	-4.0	-3.5	-3.3	-3.5	-3.8	-3.7
		Primary balance			1.9	1.1	1.2	0.2	0.4	0.0	-0.3	-0.7	-0.6
	Total public sector debt ^2/				72.4	70.5	69.2	68.9	68.4	68.0	67.6	67.7	67.8
	Expected fiscal cost of natural disasters				…	…	…	0.8	0.8	0.8	0.8	0.8	0.7
External sector
	Current account balance				-7.3	-8.4	-7.6	-8.6	-7.9	-6.8	-6.6	-6.3	-6.2
	Trade balance				-29.9	-33.6	-33.1	-32.8	-32.3	-31.7	-32.1	-33.4	-33.0
				Exports, f.o.b. (annual percentage change)	-0.7	1.7	3.8	5.8	5.7	5.8	5.0	5.4	4.9
				Imports, f.o.b. (annual percentage change)	3.3	16.5	3.8	4.7	3.6	3.0	5.8	8.1	3.0
				Services, incomes and transfers	22.5	25.2	25.5	24.2	24.4	24.9	25.5	27.2	26.8
		Of which: travel			38.4	39.9	40.6	40.9	41.9	42.2	43.1	45.5	46.7
	External public debt				37.9	36.6	36.0	36.5	36.5	36.4	35.8	35.4	35.8
	External debt service (percent of goods and nonfactor services)				9.9	8.9	9.6	9.3	8.0	8.9	8.9	7.9	9.7
	International reserves
			In millions of U.S. dollars		1,750	1,747	1,802	1,959	2,056	2,132	2,232	2,323	2,428
			In months of current year imports of goods and services		5.3	4.7	4.7	4.8	4.9	4.9	4.9	4.8	4.8
			In percent of broad money		29.0	28.1	27.4	28.2	28.2	27.9	28.0	28.0	28.1
	REER (average annual percentage change)
			Trade-weighted		-0.7	-2.0	…	…	…	…	…	…	…
			Competitor-weighted		0.3	0.8	…	…	…	…	…	…	…
			Customer-weighted		0.4	-1.9	…	…	…	…	…	…	…

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

^{^2/}Debt relief has been accorded to: (i) Grenada under the ECF-supported program in 2017; and (ii) St. Vincent and the Grenadines in 2017 under the Petrocaribe arrangement.

Table 2.

ECCU: Selected Economic Indicators by Country, 2017–25

(Annual percentage change; unless otherwise indicated)

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

^{^1/}The weighted average inflation using nominal GDP to assign weights.

^{^2/}For projections, includes expected fiscal costs of natural disaster hazards.

Table 2.

ECCU: Selected Economic Indicators by Country, 2017–25

(Annual percentage change; unless otherwise indicated)

					Projections
			2017	2018	2019	2020	2021	2022	2023	2024	2025
Real GDP (ECCU-8)			0.7	3.7	3.7	3.4	3.2	2.8	2.5	2.4	2.4
	Anguilla		-6.6	10.9	6.3	4.9	1.7	1.7	1.7	1.7	1.7
	Antigua and Barbuda		3.1	7.4	5.0	3.7	3.3	2.5	2.5	2.5	2.5
	Dominica		-9.5	0.5	9.6	4.7	4.7	3.3	2.8	1.7	1.5
	Grenada		4.4	4.1	3.1	2.8	2.7	3.2	3.2	3.0	2.7
	Montserrat		-3.8	4.0	2.2	2.2	2.2	2.2	2.2	2.2	2.2
	St. Kitts and Nevis		-2.0	2.9	3.5	3.5	3.0	2.7	2.7	2.7	2.7
	St. Lucia		2.6	0.9	1.5	3.2	3.0	2.4	1.5	1.5	1.5
	St. Vincent and the Grenadines		1.0	2.2	2.3	2.3	2.3	2.3	2.3	2.3	2.3
CPI (end of period) ^1/			1.7	1.3	1.7	2.0	2.0	2.0	2.0	2.0	2.0
	Anguilla		1.3	-0.4	1.6	2.0	2.0	2.0	2.0	2.0	2.0
	Antigua and Barbuda		2.4	1.7	1.6	2.0	2.0	2.0	2.0	2.0	2.0
	Dominica		1.4	1.4	1.8	1.8	2.0	2.0	2.0	2.0	2.0
	Grenada		0.5	1.4	1.0	2.0	2.0	2.0	2.0	2.0	2.0
	Montserrat		1.6	2.4	1.3	1.7	2.0	2.0	2.0	2.0	2.0
	St. Kitts and Nevis		0.8	-0.7	2.0	2.0	2.0	2.0	2.0	2.0	2.0
	St. Lucia		2.0	2.2	2.1	2.2	2.0	2.0	2.0	2.0	2.0
	St. Vincent and the Grenadines		3.0	1.4	1.8	2.0	2.0	2.0	2.0	2.0	2.0
Current account (percent GDP)			-7.3	-8.4	-7.5	-8.8	-8.5	-7.6	-7.8	-7.6	-7.5
	Anguilla		-7.8	-42.1	-48.2	-34.2	-33.0	-33.2	-33.6	-34.2	-36.7
	Antigua and Barbuda		-8.8	-7.0	-6.4	-5.7	-5.6	-5.5	-5.4	-5.3	-5.2
	Dominica		-12.7	-45.4	-32.3	-26.6	-19.8	-15.0	-12.5	-11.8	-9.8
	Grenada		-12.0	-11.4	-11.7	-10.7	-8.9	-9.1	-10.1	-9.9	-10.4
	Montserrat		-9.7	-2.0	-1.8	-5.4	-4.3	-4.1	-4.0	-3.8	-3.7
	St. Kitts and Nevis		-11.0	-7.2	-6.1	-15.6	-15.0	-14.8	-14.6	-12.8	-11.5
	St. Lucia		1.5	3.0	3.0	-1.5	-2.6	-0.1	0.8	1.0	1.0
	St. Vincent and the Grenadines		-12.0	-12.2	-11.3	-10.4	-9.5	-9.0	-8.9	-8.9	-8.9
Overall balance (percnet of GDP) ^2/			-0.6	-1.7	-0.8	-2.2	-2.5	-3.0	-3.3	-3.8	-3.9
		Anguilla	0.9	0.4	0.9	2.6	-0.2	-0.6	1.8	2.0	3.2
		Antigua and Barbuda	-2.8	-3.1	-3.1	-2.7	-2.7	-2.8	-2.9	-3.0	-3.4
		Dominica	0.3	-19.7	-11.7	-7.6	-4.0	-2.7	-3.4	-2.2	-1.5
		Grenada	3.0	4.5	3.8	4.3	4.5	2.8	0.9	-2.2	-2.2
		Montserrat	1.2	-6.5	-1.5	3.0	0.9	0.9	0.0	0.0	0.0
		St. Kitts and Nevis	0.5	1.1	6.2	-4.9	-4.8	-7.0	-7.3	-7.7	-7.0
		St. Lucia	-2.4	-1.1	-3.2	-3.5	-3.4	-2.8	-2.8	-2.8	-2.9
		St. Vincent and the Grenadines	-0.4	-1.1	-2.2	-1.6	-1.4	-1.3	-1.3	-1.2	-1.0
Total public sector debt (percent of GDP)			72.1	70.4	69.5	69.5	69.9	70.6	71.3	72.4	73.6
		Anguilla	65.0	61.0	54.8	47.9	45.6	44.3	40.6	36.9	32.3
		Antigua and Barbuda	90.9	89.7	88.1	86.7	83.9	83.0	83.7	84.3	84.9
		Dominica	76.9	78.4	83.0	86.4	86.3	85.6	86.2	85.9	85.3
		Grenada	70.1	63.5	59.2	54.4	51.7	49.4	46.1	46.0	46.0
		Montserrat	8.1	7.3	8.0	4.7	3.7	2.8	2.7	2.7	2.6
		St. Kitts and Nevis	60.8	58.7	55.6	56.4	57.4	60.5	63.8	67.4	70.5
		St. Lucia	65.5	64.3	65.5	69.1	72.6	73.7	74.1	74.1	74.1
		St. Vincent and the Grenadines	73.5	73.9	72.2	70.7	69.1	67.8	66.6	65.7	64.7

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

^{^1/}The weighted average inflation using nominal GDP to assign weights.

^{^2/}For projections, includes expected fiscal costs of natural disaster hazards.

Table 2.

ECCU: Selected Economic Indicators by Country, 2017–25

(Annual percentage change; unless otherwise indicated)

					Projections
			2017	2018	2019	2020	2021	2022	2023	2024	2025
Real GDP (ECCU-8)			0.7	3.7	3.7	3.4	3.2	2.8	2.5	2.4	2.4
	Anguilla		-6.6	10.9	6.3	4.9	1.7	1.7	1.7	1.7	1.7
	Antigua and Barbuda		3.1	7.4	5.0	3.7	3.3	2.5	2.5	2.5	2.5
	Dominica		-9.5	0.5	9.6	4.7	4.7	3.3	2.8	1.7	1.5
	Grenada		4.4	4.1	3.1	2.8	2.7	3.2	3.2	3.0	2.7
	Montserrat		-3.8	4.0	2.2	2.2	2.2	2.2	2.2	2.2	2.2
	St. Kitts and Nevis		-2.0	2.9	3.5	3.5	3.0	2.7	2.7	2.7	2.7
	St. Lucia		2.6	0.9	1.5	3.2	3.0	2.4	1.5	1.5	1.5
	St. Vincent and the Grenadines		1.0	2.2	2.3	2.3	2.3	2.3	2.3	2.3	2.3
CPI (end of period) ^1/			1.7	1.3	1.7	2.0	2.0	2.0	2.0	2.0	2.0
	Anguilla		1.3	-0.4	1.6	2.0	2.0	2.0	2.0	2.0	2.0
	Antigua and Barbuda		2.4	1.7	1.6	2.0	2.0	2.0	2.0	2.0	2.0
	Dominica		1.4	1.4	1.8	1.8	2.0	2.0	2.0	2.0	2.0
	Grenada		0.5	1.4	1.0	2.0	2.0	2.0	2.0	2.0	2.0
	Montserrat		1.6	2.4	1.3	1.7	2.0	2.0	2.0	2.0	2.0
	St. Kitts and Nevis		0.8	-0.7	2.0	2.0	2.0	2.0	2.0	2.0	2.0
	St. Lucia		2.0	2.2	2.1	2.2	2.0	2.0	2.0	2.0	2.0
	St. Vincent and the Grenadines		3.0	1.4	1.8	2.0	2.0	2.0	2.0	2.0	2.0
Current account (percent GDP)			-7.3	-8.4	-7.5	-8.8	-8.5	-7.6	-7.8	-7.6	-7.5
	Anguilla		-7.8	-42.1	-48.2	-34.2	-33.0	-33.2	-33.6	-34.2	-36.7
	Antigua and Barbuda		-8.8	-7.0	-6.4	-5.7	-5.6	-5.5	-5.4	-5.3	-5.2
	Dominica		-12.7	-45.4	-32.3	-26.6	-19.8	-15.0	-12.5	-11.8	-9.8
	Grenada		-12.0	-11.4	-11.7	-10.7	-8.9	-9.1	-10.1	-9.9	-10.4
	Montserrat		-9.7	-2.0	-1.8	-5.4	-4.3	-4.1	-4.0	-3.8	-3.7
	St. Kitts and Nevis		-11.0	-7.2	-6.1	-15.6	-15.0	-14.8	-14.6	-12.8	-11.5
	St. Lucia		1.5	3.0	3.0	-1.5	-2.6	-0.1	0.8	1.0	1.0
	St. Vincent and the Grenadines		-12.0	-12.2	-11.3	-10.4	-9.5	-9.0	-8.9	-8.9	-8.9
Overall balance (percnet of GDP) ^2/			-0.6	-1.7	-0.8	-2.2	-2.5	-3.0	-3.3	-3.8	-3.9
		Anguilla	0.9	0.4	0.9	2.6	-0.2	-0.6	1.8	2.0	3.2
		Antigua and Barbuda	-2.8	-3.1	-3.1	-2.7	-2.7	-2.8	-2.9	-3.0	-3.4
		Dominica	0.3	-19.7	-11.7	-7.6	-4.0	-2.7	-3.4	-2.2	-1.5
		Grenada	3.0	4.5	3.8	4.3	4.5	2.8	0.9	-2.2	-2.2
		Montserrat	1.2	-6.5	-1.5	3.0	0.9	0.9	0.0	0.0	0.0
		St. Kitts and Nevis	0.5	1.1	6.2	-4.9	-4.8	-7.0	-7.3	-7.7	-7.0
		St. Lucia	-2.4	-1.1	-3.2	-3.5	-3.4	-2.8	-2.8	-2.8	-2.9
		St. Vincent and the Grenadines	-0.4	-1.1	-2.2	-1.6	-1.4	-1.3	-1.3	-1.2	-1.0
Total public sector debt (percent of GDP)			72.1	70.4	69.5	69.5	69.9	70.6	71.3	72.4	73.6
		Anguilla	65.0	61.0	54.8	47.9	45.6	44.3	40.6	36.9	32.3
		Antigua and Barbuda	90.9	89.7	88.1	86.7	83.9	83.0	83.7	84.3	84.9
		Dominica	76.9	78.4	83.0	86.4	86.3	85.6	86.2	85.9	85.3
		Grenada	70.1	63.5	59.2	54.4	51.7	49.4	46.1	46.0	46.0
		Montserrat	8.1	7.3	8.0	4.7	3.7	2.8	2.7	2.7	2.6
		St. Kitts and Nevis	60.8	58.7	55.6	56.4	57.4	60.5	63.8	67.4	70.5
		St. Lucia	65.5	64.3	65.5	69.1	72.6	73.7	74.1	74.1	74.1
		St. Vincent and the Grenadines	73.5	73.9	72.2	70.7	69.1	67.8	66.6	65.7	64.7

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

^{^1/}The weighted average inflation using nominal GDP to assign weights.

^{^2/}For projections, includes expected fiscal costs of natural disaster hazards.

Table 3.

ECCU: Selected Central Government Fiscal Indicators by Country, 2017–25 ^1/

(In percent of GDP)

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

^{^1/}Fiscal years for Dominica, Montserrat (since 2010) and St. Lucia.

^{^2/}Projections include expected natural disaster costs.

Table 3.

ECCU: Selected Central Government Fiscal Indicators by Country, 2017–25 ^1/

(In percent of GDP)

				Projections
		2017	2018	2019	2020	2021	2022	2023	2024	2025
Total revenues and grants		27.8	28.2	26.7	24.9	24.3	23.8	23.8	23.8	23.6
	Anguilla	29.1	26.8	25.0	25.1	19.8	19.8	21.6	21.6	21.8
	Antigua and Barbuda	20.7	19.8	18.3	18.1	18.0	17.9	17.8	17.6	17.2
	Dominica	55.2	45.9	38.4	34.8	31.7	29.9	29.2	29.5	29.1
	Grenada	25.6	26.5	25.6	25.5	25.4	25.3	25.1	24.9	24.8
	Montserrat	86.0	79.0	82.8	80.1	77.7	77.7	77.7	77.7	77.7
	St. Kitts and Nevis	29.2	39.3	37.6	27.3	26.1	24.1	23.9	23.8	23.2
	St. Lucia	23.0	23.5	23.0	22.6	22.5	22.5	22.4	22.4	22.4
	St. Vincent and the Grenadines	30.0	29.1	27.9	28.9	28.9	28.9	28.9	28.9	28.9
Current expenditure		23.4	24.2	23.2	23.1	22.6	22.6	22.6	22.6	22.4
	Anguilla	25.5	23.6	22.5	21.4	19.9	19.3	18.7	18.6	17.6
	Antigua and Barbuda	21.7	20.9	19.8	19.0	18.9	18.9	18.9	18.8	18.7
	Dominica	32.0	40.1	32.6	28.9	25.8	25.1	25.2	25.2	25.2
	Grenada	19.9	19.3	19.0	18.8	18.5	19.0	19.1	19.1	19.2
	Montserrat	73.3	77.4	73.4	71.6	69.5	69.5	69.5	69.5	69.5
	St. Kitts and Nevis	24.0	27.0	25.8	27.1	26.7	26.9	27.1	27.3	26.1
	St. Lucia	20.8	21.4	21.5	21.0	20.9	20.7	20.7	20.7	20.7
	St. Vincent and the Grenadines	26.4	26.2	26.4	26.6	26.4	26.3	26.3	26.2	26.1
Capital expenditure		5.0	5.7	4.3	4.0	4.1	4.2	4.5	5.0	5.0
	Anguilla	2.7	2.8	1.4	0.9	0.0	0.9	0.9	0.8	0.8
	Antigua and Barbuda	1.9	1.9	1.6	1.7	1.8	1.8	1.8	1.9	1.9
	Dominica	23.0	25.5	16.0	12.0	8.5	6.0	6.0	5.0	4.0
	Grenada	2.7	2.7	2.8	2.5	2.4	3.5	5.1	8.0	7.9
	Montserrat	11.5	8.0	10.8	5.5	7.4	7.4	8.3	8.3	8.3
	St. Kitts and Nevis	4.7	11.1	5.3	4.8	3.9	3.9	3.9	3.9	3.8
	St. Lucia	4.5	3.2	4.0	4.4	4.4	3.9	3.9	3.9	3.9
	St. Vincent and the Grenadines	4.1	4.0	3.6	3.9	3.9	3.9	3.9	3.9	3.9
Primary balance ^2/		1.9	0.6	1.3	-0.1	-0.4	-0.9	-1.2	-1.7	-1.8
	Anguilla	3.0	2.6	3.0	4.5	1.6	1.1	3.2	3.3	4.3
	Antigua and Barbuda	-0.1	-0.6	-0.7	-0.8	-0.8	-0.8	-0.9	-0.9	-1.2
	Dominica	2.4	-17.7	-10.3	-6.0	-2.3	-1.0	-1.7	-0.5	0.1
	Grenada	5.7	6.5	5.9	6.2	6.3	4.5	2.5	-0.7	-0.7
	Montserrat	1.2	-6.5	-1.5	3.0	0.9	0.9	0.0	0.0	-0.1
	St. Kitts and Nevis	2.0	2.5	7.4	-3.5	-3.2	-5.3	-5.5	-5.6	-4.8
	St. Lucia	0.8	2.1	0.7	0.3	0.4	1.0	1.0	0.9	0.9
	St. Vincent and the Grenadines	1.9	1.3	0.1	0.8	0.9	1.0	1.1	1.1	1.1
Overall balance ^2/		-0.6	-1.7	-0.8	-2.2	-2.5	-3.0	-3.3	-3.8	-3.9
	Anguilla	0.9	0.4	0.9	2.6	-0.2	-0.6	1.8	2.0	3.2
	Antigua and Barbuda	-2.8	-3.1	-3.1	-2.7	-2.7	-2.8	-2.9	-3.0	-3.4
	Dominica	0.3	-19.7	-11.7	-7.6	-4.0	-2.7	-3.4	-2.2	-1.5
	Grenada	3.0	4.5	3.8	4.3	4.5	2.8	0.9	-2.2	-2.2
	Montserrat	1.2	-6.5	-1.5	3.0	0.9	0.9	0.0	0.0	0.0
	St. Kitts and Nevis	0.5	1.1	6.2	-4.9	-4.8	-7.0	-7.3	-7.7	-7.0
	St. Lucia	-2.4	-1.1	-3.2	-3.5	-3.4	-2.8	-2.8	-2.8	-2.9
	St. Vincent and the Grenadines	-0.4	-1.1	-2.2	-1.6	-1.4	-1.3	-1.3	-1.2	-1.0

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

^{^1/}Fiscal years for Dominica, Montserrat (since 2010) and St. Lucia.

^{^2/}Projections include expected natural disaster costs.

Table 3.

ECCU: Selected Central Government Fiscal Indicators by Country, 2017–25 ^1/

(In percent of GDP)

				Projections
		2017	2018	2019	2020	2021	2022	2023	2024	2025
Total revenues and grants		27.8	28.2	26.7	24.9	24.3	23.8	23.8	23.8	23.6
	Anguilla	29.1	26.8	25.0	25.1	19.8	19.8	21.6	21.6	21.8
	Antigua and Barbuda	20.7	19.8	18.3	18.1	18.0	17.9	17.8	17.6	17.2
	Dominica	55.2	45.9	38.4	34.8	31.7	29.9	29.2	29.5	29.1
	Grenada	25.6	26.5	25.6	25.5	25.4	25.3	25.1	24.9	24.8
	Montserrat	86.0	79.0	82.8	80.1	77.7	77.7	77.7	77.7	77.7
	St. Kitts and Nevis	29.2	39.3	37.6	27.3	26.1	24.1	23.9	23.8	23.2
	St. Lucia	23.0	23.5	23.0	22.6	22.5	22.5	22.4	22.4	22.4
	St. Vincent and the Grenadines	30.0	29.1	27.9	28.9	28.9	28.9	28.9	28.9	28.9
Current expenditure		23.4	24.2	23.2	23.1	22.6	22.6	22.6	22.6	22.4
	Anguilla	25.5	23.6	22.5	21.4	19.9	19.3	18.7	18.6	17.6
	Antigua and Barbuda	21.7	20.9	19.8	19.0	18.9	18.9	18.9	18.8	18.7
	Dominica	32.0	40.1	32.6	28.9	25.8	25.1	25.2	25.2	25.2
	Grenada	19.9	19.3	19.0	18.8	18.5	19.0	19.1	19.1	19.2
	Montserrat	73.3	77.4	73.4	71.6	69.5	69.5	69.5	69.5	69.5
	St. Kitts and Nevis	24.0	27.0	25.8	27.1	26.7	26.9	27.1	27.3	26.1
	St. Lucia	20.8	21.4	21.5	21.0	20.9	20.7	20.7	20.7	20.7
	St. Vincent and the Grenadines	26.4	26.2	26.4	26.6	26.4	26.3	26.3	26.2	26.1
Capital expenditure		5.0	5.7	4.3	4.0	4.1	4.2	4.5	5.0	5.0
	Anguilla	2.7	2.8	1.4	0.9	0.0	0.9	0.9	0.8	0.8
	Antigua and Barbuda	1.9	1.9	1.6	1.7	1.8	1.8	1.8	1.9	1.9
	Dominica	23.0	25.5	16.0	12.0	8.5	6.0	6.0	5.0	4.0
	Grenada	2.7

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Calmer Headwinds

A. Recent Developments

B. Outlook and Risks

Policy Discussions: Leveraging Regional Integration

A. Fiscal Integration

B. Financial Integration

C. Solidifying the Currency Union by Raising Payments’ Efficiency

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