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IMF Country Report No. 21/86

EASTERN CARIBBEAN CURRENCY UNION

2021 DISCUSSION ON COMMON POLICIES OF MEMBER COUNTRIES—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE EASTERN CARIBBEAN CURRENCY UNION

May 2021

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2021 Article IV consultation with ECCU, the following documents have been released and are included in this package:

  • A Press Release summarizing the views of the Executive Board as expressed during its April 26, 2021 consideration of the staff report.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on April 26, 2021, following discussions that ended on February 9, 2021, with the officials of the Eastern Caribbean Currency Union on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on March 29, 2021.

  • An Informational Annex prepared by the IMF staff.

  • A Statement by the Executive Director for the Eastern Caribbean Currency Union.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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International Monetary Fund

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© 2021 International Monetary Fund

Title Page

EASTERN CARIBBEAN CURRENCY UNION

STAFF REPORT FOR THE 2021 DISCUSSION ON COMMON POLICIES OF MEMBER COUNTRIES

March 29, 2021

Key Issues

The fallout from the COVID-19 crisis is hitting ECCU economies hard. Tourism receipts (accounting for nearly 40 percent of GDP) have dried up, as tourist arrivals have come to a grinding halt The authorities successfully contained the spread of the virus at the onset of the pandemic by largely closing the borders, but a reopening of the economies since the summer has led to a surge in COVID cases. The ECCU economy is projected to contract by 16 percent in 2020 and by a further near ½ percent in 2021. Fiscal positions have deteriorated sharply, and public debt is projected to reach near 90 percent of GDP in 2021 and remain at an elevated level for years to come. Headline indicators suggest the financial system is relatively sound with ample liquidity buffers, but nonperforming loans are expected to rise significantly. The outlook is clouded by exceptionally high risks, including from the uncertainty concerning the evolution of the pandemic.

Main Policy Recommendations:

The ECCU faces the difficult challenges of protecting lives and livelihoods, ensuring medium-term fiscal sustainability, and safeguarding financial stability and the quasi-currency board. Staff recommend a near-term strategy to tackle the crisis, limit permanent scarring, and protect the vulnerable based on:

  • Maintaining fiscal support by accommodating critical COVID-related spending and strengthening regional and national fiscal frameworks to safeguard the credibility of the regional debt target of 60 percent of GDP, which has been extended by 5 years to 2035.

  • Supporting financial institutions’ capacity to weather the near-term pandemic impact and preparing comprehensive crisis management plans at the regional and national levels.

  • Keeping a robust backing ratio to safeguard the quasi-currency board.

Once a post-pandemic recovery is entrenched, policies should focus on resuming fiscal consolidation, strengthening the financial system, and implementing other structural reforms to achieve resilient growth.

Approved By

Krishna Srinivasan (WHD) and Chad Steinberg (SPR)

Mission Team: Sònia Muñoz (head), Ding Ding, Alejandro Guerson, Janne Hukka, and Kotaro Ishi (all WHD), and Gayon Hosin (MCM). The mission visited virtually all eight ECCU member jurisdictions (Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and The Grenadines) and Barbados.

The team met with the Prime Ministers/Premiers and Ministers of Finance of the eight-member jurisdictions, Financial/Permanent Secretaries of eight-member jurisdictions, Financial Services Authorities of the eight-member jurisdictions, the ECCB Governor and other senior officials, the Organization of Eastern Caribbean States (OECS), the Caribbean Development Bank (CDB), and a wide range of private sector representatives. Messrs. Bakker, Lissovolik, and Chensavasdijai attended the meetings with the Prime Ministers of St. Kitts and Nevis, Grenada, and Antigua and Barbuda, respectively. Ms. Edwards (OED) attended some meetings. Mr. Srinivasan (WHD) and Ms. Levonian (OED) participated in the concluding meeting.

ECCU individual country teams participated in their respective country meetings and in the research seminar at the ECCB. Virtual Mission Dates: January 13–February 3 and February 9, 2021. Contributors: ECCU team. Additional analytical input was provided by Bogdan Lissovolik, Dirk Muir, Carlo Pizzinelli, Gonzalo Salinas, Yannick Timmer, and Mauricio Vargas. Raadhika Vishvesh also provided research assistance. Anahit Aghababyan provided administrative assistance.

Contents

  • PRE-COVID-19 CONDITIONS

  • COVID-19 IMPACT AND POLICY RESPONSE

  • A SOMBER OUTLOOK WITH UNPRECEDENTED RISKS

  • A. Protracted Pace of Economic Recovery

  • B. Elevated Downside Risks

  • POLICY DISCUSSIONS: BALANCING SUPPORT FOR THE ECONOMY WITH LONGER-TERM SUSTAINABILITY

  • A. Supporting the Economy and Re-Anchoring the ECCU’s Fiscal Framework

  • B. Safeguarding Financial Stability

  • C. Safeguarding the Quasi-Currency Board and Strengthening Competitiveness

  • D. Statistical issues

  • AUTHORITIES’ VIEWS

  • STAFF APPRAISAL

  • BOXES

  • 1. Tourism Sector Reopening Strategies and Access to Vaccines

  • 2. Impact on the ECCU of Global Financial Instability under the COVID-19 Crisis

  • 3. Assessing Benefits of the ECCU’s Fiscal Anchor

  • 4. Importance of a Credible Postponement of the Regional Debt Target

  • 5. COVID-19 Tourism Shock’s Impact on the ECCU Banking Sector’s Asset Quality

  • 6. Assessing Currency Crisis Risk in the ECCU: Macroeconomic Perspective

  • FIGURES

  • 1. External Sector Developments

  • 2. Monetary Developments

  • 3. Financial Sector Developments

  • TABLES

  • 1. Selected Economic and Financial Indicators, 2017–21

  • 2. Selected Economic Indicators by Country, 2018–26

  • 3. Selected Central Government Fiscal Indicators by Country, 2018–26

  • 4. Selected Public Sector Debt Indicators by Country, 2018–26

  • 5. Summary Balance of Payments, 2018–26

  • 6. Selected Vulnerability Indicators, 2016–20

  • 7. Financial Structure, 2019

  • 8. Financial Soundness Indicators of the Banking Sector, 2016–20

  • 9. Financial Soundness Indicators of the Banking Sector by Country, 2016–20

  • ANNEXES

  • I. Implementation of the Past Policy Advice

  • II. Risk Assessment Matrix

  • III. External Sector Assessment

  • IV. Using State-Contingent Sovereign Debt Bonds to Strengthen Debt Sustainability

  • V. The Role of Dominant Currency Pricing in the Tourism Market in Small States

  • VI. Recent Developments in ECCU Countries