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

International Monetary Fund. Western Hemisphere Dept.

doi:10.5089/9781513572925.002.A002

Author: International Monetary Fund. Western Hemisphere Dept.

Publication Date:: 04 May 2021

eISBN:: 9781513572925

Language:: English

Keywords:: ECCU country; debt target; IMF staff calculation; backing ratio; reaction function; COVID-19; Caribbean

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1. Real GDP per capita in the ECCU had barely exceeded the pre-global financial crisis peak when the COVID-19 pandemic struck. Following the global financial crisis, the ECCU had several years of lackluster growth, due to structural frictions and weak price competitiveness. Growth finally took off around 2014, supported by strong global growth and increased tourism demand. The authorities pursued a pro-growth strategy that included a strengthening of human capital, improving investment climate, and building infrastructure. Although progress in implementing reforms has been slower than desired, the governments’ policy direction has been broadly in line with past staff recommendations (Annex I).

Abstract

Pre-Covid-19 Conditions

1. Real GDP per capita in the ECCU had barely exceeded the pre-global financial crisis peak when the COVID-19 pandemic struck. Following the global financial crisis, the ECCU had several years of lackluster growth, due to structural frictions and weak price competitiveness. Growth finally took off around 2014, supported by strong global growth and increased tourism demand. The authorities pursued a pro-growth strategy that included a strengthening of human capital, improving investment climate, and building infrastructure. Although progress in implementing reforms has been slower than desired, the governments’ policy direction has been broadly in line with past staff recommendations (Annex I).

2. The ECCU’s tourism-dependent economies have various vulnerabilities. All countries are micro-states that are vulnerable to natural disasters with significant socio-economic implications. Prior to the COVID-19 shock, many countries were already highly indebted, led by Antigua and Barbuda and Dominica with debt levels at around 80–90 percent of GDP. Several are highly dependent on uncertain Citizenship-by-Investment (CBI) revenues, which could complement domestic revenue but are also prone to sudden stops. The financial sector also poses a major vulnerability due to its large size and persistent loan quality weaknesses.

Key Vulnerabilities of ECCU Countries, 2019

Sources: ECCU authorities and IMF staff estimates.

Key Vulnerabilities of ECCU Countries, 2019

	Tourism dependence (stay-over tourists, ‘000, 2019)	Natural disaster risk	Public debt (in percent of GDP; 2019)	Dependence on CBI revenue (in percent of GDP, 2019)	Banking sector soundness (NPLs in percent of total loans)
ATG	301	H	82	3.2	5.3
DMA	89	H	91	9.9	12.2
GRD	163	H	60	2.9	2.2
KNA	117	H	56	15.4	24.0
LCA	424	H	61	0.5	8.2
VCT	80	H	75	NoCBI	6.4
H	High risk	MH	Medium high risk
M	Medium risk	L	Low risk

Sources: ECCU authorities and IMF staff estimates.

Key Vulnerabilities of ECCU Countries, 2019

	Tourism dependence (stay-over tourists, ‘000, 2019)	Natural disaster risk	Public debt (in percent of GDP; 2019)	Dependence on CBI revenue (in percent of GDP, 2019)	Banking sector soundness (NPLs in percent of total loans)
ATG	301	H	82	3.2	5.3
DMA	89	H	91	9.9	12.2
GRD	163	H	60	2.9	2.2
KNA	117	H	56	15.4	24.0
LCA	424	H	61	0.5	8.2
VCT	80	H	75	NoCBI	6.4
H	High risk	MH	Medium high risk
M	Medium risk	L	Low risk

Sources: ECCU authorities and IMF staff estimates.

COVID-19 Impact and Policy Response

3. The health impact of COVID-19 in the ECCU was initially well-contained, but the situation deteriorated following a reopening of borders, with a sharp uptick in cases in early 2021. At the onset of the pandemic, ECCU countries moved quickly to restrict inbound travel and imposed strict lockdown measures.^¹ By early summer, the spread of the virus had been under control, with very low infection rates. Subsequently, some authorities relaxed containment measures and reopened their borders, following which COVID-19 cases rose along with an increase in mortalities. A sharp increase took place in early 2021, reflecting the renewed global wave, the increase in regional visitors during Christmas holidays, and uneven compliance with quarantine protocols. Three quarters of the cases were concentrated in St. Lucia and St. Vincent and the Grenadines.

4. To mitigate the socio-economic impact of the pandemic, the authorities swiftly announced policy response measures.

Fiscal support. In March-April 2020, authorities announced fiscal measures to mitigate the impact of the COVID-19 shock. The size of the announced discretionary fiscal measures ranged between 2 and 5½ percent of GDP, broadly in line with those in Emerging Market economies. The measures included: (i) an increase in health care spending; (ii) cash payments to vulnerable households; (iii) income support for displaced workers in the tourism and other sectors; (iv) infrastructure projects to support local employment; and (v) tax and import duty deferrals (including on health products).
Liquidity and financial sector support. In March 2020, the ECCB and the ECCU Bankers’ Association announced broad-based loan repayment moratoria and waivers of late fees and charges for eligible borrowers for up to six months. In September 2020, the measures were extended in a more targeted manner for up to 12 months, based on banks’ assessment of borrowers’ financial conditions (by late-2020 nearly a third of banks’ loan portfolios remained under such extended moratoria). The moratoria were accompanied by supervisory flexibility regarding specified regulatory requirements, including a temporary classification freeze for loans under moratoria.^² National supervisors (who supervise and regulate the non-bank financial system) introduced similar guidance to credit unions and extended the grace periods for insurance premium payments, although practices and degree of supervisory guidance varied by country. To ease liquidity conditions, the ECCB also reduced the discount rate from 6.5 to 2 percent in April 2020 and the long-term credit interest rate from 6.5 to 3.5 percent in February 2021.

5. The pandemic has, however, taken a heavy toll on the economy. Containment measures and a slump in travel, starting in Spring 2020, led to a collapse in tourism-related activity and large economic losses, and a sharp increase in unemployment.^³ In response, some ECCU economies moved to gradually ease lockdown measures and open their borders using different strategies (Box 1). Nonetheless, tourist arrivals have remained far below pre-COVID-19 levels. ECCU’s GDP is estimated to have contracted by 16 percent in 2020, down from a positive growth of 2¾ percent in 2019. There is considerable variation across countries, ranging from -4¼ percent (St. Vincent and the Grenadines) to -27¾ percent (Anguilla), largely reflecting the share of the tourism sector in the economy and the severity of lockdown measures. Inflation remains weak (0.2 percent y/y in December) in line with subdued CPI in key trading partners.

6. Fiscal positions deteriorated sharply in 2020. The size of revenue losses varied across countries, reflecting differences in countries’ reliance on revenues from the tourism sector and CBI programs—the latter proved more resilient than other types of revenues. Total revenue collection in the ECCU is estimated to have declined by 16.7 percent in 2020. On the expenditure side, despite their efforts to boost COVID-19 related spending, many countries cut overall spending in nominal terms due to financing constraints, and total expenditure across the region declined by 7.2 percent in 2020. The ECCU’s overall deficit is estimated to have widened to 5.3 percent of GDP (up from 2.0 percent of GDP in 2019). Rising deficits coupled with a contraction of economic activity has led to a reversal of the declining trend of public debt over the past decade, with the overall public debt estimated to have risen from 67 percent of GDP in 2019 to 84 percent of GDP in 2020.

^{Box 1.}

Tourism Sector Reopening Strategies and Access to Vaccines

While early in the pandemic countries in the ECCU saw merit in a coordinated strategy to allow visitors, in practice, country-specific approaches prevailed during the first re-opening phase. Antigua and Barbuda and St. Lucia reopened during the summer of 2020 with mixed results due to a recurrence of cases, St. Kitts and Nevis did so only at end-October 2020, and St. Vincent and the Grenadines never closed its borders. In mid-September 2020, CARICOM countries agreed to strengthen the regional approach by instituting a regional “travel bubble.” However, four countries announced soon after that they would opt out of the initiative (Dominica, Grenada, St. Kitts and Nevis, and St. Vincent and the Grenadines) amid COVID spikes. ECCU countries require visitors, depending on their source country, to submit proofs of negative tests before arrival and, upon arrival, stay in approved accommodations for quarantine.

Securing access to vaccines is critical to return to normalcy. All ECCU-6 countries (i.e., ECCU-8 excluding Anguilla and Montserrat) are members of the COVAX Facility, which has been securing supply contracts with several major vaccine manufacturers. Four of the ECCU-6 countries (Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines) are eligible for COVAX Advance Market Committee support (i.e., cost-sharing). As part of UK overseas territories, Anguilla and Montserrat are receiving vaccines through the UK Government. The COVAX Facility’s interim distribution forecast suggests that ECCU-6 countries are expected to receive doses enough to vaccinate about 20 percent of the population. The young demographic structure of the region would be advantageous. If vaccines are distributed from the oldest age groups, all or nearly 100 percent of the population 55 years and older could be vaccinated.^¹ Nonetheless, the expected number of doses is too small to vaccinate 60–70 percent of the population (the authorities’ intended goal) and to achieve herd immunity. Accordingly, ECCU countries have made bilateral agreements to obtain additional doses, including with India and Russia.^²

Vaccinations in the ECCU under the COVAX Facility

Source: COVAX Facility interim distribution forecast as of 3 February, 2021.

^{^1/}Each person should receive two doses.

^{^2/}Assuming doses distributed from oldest age groups to youngest.

^{^3/}Pending final evaluation of vaccine request submitted.

Vaccinations in the ECCU under the COVAX Facility

	Doses	% of population % covered ^{^1/}	of above 55+ population ^{^2/}
ATG	40,800	20.8	100
DMA	28,800	20.4	90
GRD ^{^3/}	45,600	20.9	98
KNA	21,600	18.9	100
LCA ^3/	74,400	20.6	100
VCT	45,600	20.7	100

Source: COVAX Facility interim distribution forecast as of 3 February, 2021.

^{^1/}Each person should receive two doses.

^{^2/}Assuming doses distributed from oldest age groups to youngest.

^{^3/}Pending final evaluation of vaccine request submitted.

Vaccinations in the ECCU under the COVAX Facility

	Doses	% of population % covered ^{^1/}	of above 55+ population ^{^2/}
ATG	40,800	20.8	100
DMA	28,800	20.4	90
GRD ^{^3/}	45,600	20.9	98
KNA	21,600	18.9	100
LCA ^3/	74,400	20.6	100
VCT	45,600	20.7	100

Source: COVAX Facility interim distribution forecast as of 3 February, 2021.

^{^1/}Each person should receive two doses.

^{^2/}Assuming doses distributed from oldest age groups to youngest.

^{^3/}Pending final evaluation of vaccine request submitted.

^¹ In practice, however, authorities are prioritizing other vulnerable groups (like health sector workers), too.^² Antigua and Barbuda, Dominica, St. Lucia, St. Kitts and Nevis, and St. Vincent and the Grenadines received donations of the COVID-19 vaccine (20,000–70,000 doses per country) from the Serum Institute of India in late February–early March 2021.

7. The impact of the pandemic on the financial sector has so far been limited. The broad and persistent uptake on loan moratoria has contained immediate deterioration in asset quality but also points to a potentially large uptick in NPLs upon their expiration in September 2021. The moratoria may have also contributed to a modest pickup in banks’ private sector credit stock, while high credit growth in credit unions in recent years appears to have moderated. At the same time, direct bank credit to governments has increased alongside rising fiscal financing needs. Financial system deposits have so far remained remarkably stable, likely reflecting disparate impact of the tourism shock across different economic and population segments, significant ‘’belt-tightening” among households and businesses, as well as postponed outlays due to the moratoria. Accordingly, financial system liquidity remains at high pre-pandemic levels (around 40 percent of total assets).^⁴ The pandemic has so far not had adverse effects on correspondent banking relationships (CBRs), although the added uncertainty has made acquiring new ones more challenging and suppressed business volumes at a time when foreign banking groups’ reduced regional presence leaves a larger share of customers reliant on local banks’ relationships. The ECCB recently approved the previously proposed sale of RBC’s regional operations to a consortium of indigenous banks, while the Trinidad-based Republic Group completed the acquisition of most of Scotia group’s operations in November 2019. The proposed sale of CIBC-FCIB to GNB Financial Group did not receive the required approval from the Caribbean regulators.

8. The authorities moved promptly to secure financing, including emergency financing from multilateral and bilateral donors. The IMF Executive Board approved emergency financing for Dominica, Grenada, and St. Lucia under the Rapid Credit Facility (RCF), totaling SDR 48.08 million (about US$65.6 million) in April 2020, while the request of St. Vincent and the Grenadines for emergency financing assistance under the RCF of SDR 11.7 million (about US$16 million) was approved in May 2020. The RCF disbursements provided immediate relief at the outset of the pandemic, financing urgent external needs for health spending and catalyzing financing from other development partners. The region received substantial COVID-19 related financial support from other international financial institutions including the World Bank and the Caribbean Development Bank, with Dominica, Grenada, and St. Lucia also benefitting from cash flow relief under the G-20 Debt Service Suspension Initiative (DSSI). Governments also relied on their deposits at the ECCB and commercial banks, CBI inflows, and financing from the Regional Government Securities Market (RGSM) which remained relatively stable. In addition, countries that faced more intense financing difficulties have tapped the ECCB’s credit facility.

9. The current account deficit is estimated to have widened sharply in 2020. Staff estimates that the current account deficit more than doubled to 15¼ percent of GDP in 2020, reflecting lower tourism receipts partially offset by reduced imports. While net FDI inflows weakened, increased official flows helped finance the widened current account deficit, and the ECCB’s foreign asset position held up relatively well.^⁵ The currency backing ratio under the quasi-currency board mechanism stood at 96 percent at end-January 2021.^⁶ The real effective exchange rate (REER) depreciated by nearly 3½ percent in 2020, due to the weakening of the U.S. dollar.

A Somber Outlook with Unprecedented Risks

A. Protracted Pace of Economic Recovery

10. A recovery will likely only begin after the COVID-19 pandemic is brought under control. Staff’s baseline scenario is based on the assumption that vaccines will become broadly available in 2021Q4. As a result, the current tourism season (December 2020–May 2021) would remain very weak, as travel restrictions and consumers’ general fear of contagion and the new wave of COVID-19 cases in the northern hemisphere and Europe keep arrivals very low.^⁷ The baseline projection also assumes that even after vaccines become available, tourists would remain cautious about leisure travel and hotels will take time to reinstate capacity. Accordingly, the pace of recovery in tourism is assumed to be gradual, with the number of tourists returning to the 2019 level only in 2024. The economy is projected to shrink by nearly ½ percent in 2021 and rebound by 9 percent in 2022. Over the medium term, growth will gradually decelerate to around 2¼ percent. The loss of economic activity and postponement of investments could result in scarring and a persistent output loss of over 12 percent of GDP through 2025, relative to the pre-COVID projection.

11. The pandemic will have a long-lasting impact on public finances in the ECCU. After a considerable deterioration in 2020–21, fiscal deficits are projected to narrow over the medium term as growth rebounds and fiscal adjustment measures are implemented, and the ECCU public debt ratio is expected to peak in 2021. Nonetheless, achieving the regional debt target of 60 percent of GDP by 2030 would be challenging for all countries, except Grenada and St. Kitts and Nevis. In this regard, the ECCB Monetary Council decided in February 2021 to extend the debt target date to 2035 and encouraged member countries to enact fiscal responsibility or fiscal resilience frameworks to support fiscal efforts in the post-pandemic period. The persistently high debt ratio would constrain the ECCU’s fiscal space, limiting the authorities’ ability to invest in resilience and implement policies to achieve dynamic and inclusive growth. The limited buffers and potential financial contingent liabilities would also constrain authorities to implement counter-cyclical policies.^⁸

12. Weak conditions in the financial sector would add to recovery challenges. The ongoing tourism shock is projected to almost triple bank NPLs in the next three years (see policy section), weighing on credit activity and raising fiscal contingent liability risks. These could be amplified by shocks to other asset exposures or materialization of operational risks.

B. Elevated Downside Risks

13. The outlook is subject to exceptionally high downside risks (Annex II):

The primary downside risk is a longer and more widespread global pandemic and a sharper-than-anticipated contraction in trading partners. A deeper and longer recession would put additional strain on the public finances (as revenue collection weakens and needs for health spending and income transfers increase) and financial institutions (as NPLs rise, profitability falls, and so-far-benign liquidity conditions reverse). In a tail scenario this combined weakening of the real, fiscal, and financial sectors’ fundamentals could undermine confidence, trigger liquidity pressures and capital outflows, and result in a loss of ECCB international reserves and potential pressure on the currency. Moreover, the ECCU is subject to the ripple effects of instability in global financial markets related to the COVID-19 pandemic. Staffs estimates suggest that an increase in global risk aversion would result in a negative growth impulse to the ECCU over two consecutive years (Box 2). Recurrent natural disasters, cyber-attacks, and the loss of CBRs remain significant risks.
On the upside, recovery from the pandemic could be faster than expected due to the swift dissemination of an effective vaccine that boosts confidence and economic activity Capital flows under CBI programs may also continue to surprise on the upside.

^{Box 2.}

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

The ECCU is subject to the rippling effects of instability in global financial markets. The decisive and sizeable easing of monetary and financial conditions worldwide has thus far contributed to record-high asset prices in global financial centers and low interest rates. However, in light of the significant pandemic uncertainty, global financial markets show recurrent bursts of instability and sharp fly-to-quality portfolio reallocations. Despite ECCU not being financially integrated, these global investment dynamics affect key ECCU external sector fundamentals, including exchange rates across major global currencies and also depreciation of emerging countries’ currencies (affecting tourism demand), key import commodity prices including oil and food items, and foreign remittances. In addition, increase in sovereign spreads, interest rates, and currency depreciation in emerging markets relative to the US dollar under those conditions weaken the ECCU external competitiveness, including of key ECCU tourism competitors such as Jamaica, Mexico, and the Dominican Republic with more flexible exchange rate regimes.

Recurrent bursts of global financial instability related to the pandemic would result in lower growth and further balance of payments pressures in the ECCU. An estimation of the global financial cycle around a stochastic trend shows that an increase in global risk aversion (a two standard deviation positive shock to the VIX index above the median) results in a negative growth impulse to the ECCU of -0.6 percent and -1.0 percent over two consecutive years, respectively. Lower commodity prices put negative pressure on ECCU inflation of around -0.5 percent, and appreciation of the EC dollar of 0.8 percent (larger in more tourism-dependent countries). The balance of payments worsens with a one-year lag, explained by reaction lags.

These estimates are based on a two-step procedure. First, an estimate of the joint dynamics of stock market prices (S&P500), global risk aversion (VIX index), commodity prices (oil, food, gold), the US monetary policy stance (Fed Funds rate), major currencies’ exchange rates, long-term risk-free international interest rates (10-year US Treasury Bill yield), and emerging markets’ sovereign spreads (EMBI). Shocks to the VIX are shown to worsen jointly key external sector transmission channels to the ECCU, including tourism demand, imported food and oil prices, foreign remittances, and imports. Second, the resulting multivariable shocks are applied to country specific VARs to estimate the impact on output, consumer prices, competitiveness, NIR, and the external current account.

Policy Discussions: Balancing Support for the Economy with Longer-Term Sustainability

The ECCU faces the difficult challenge of combating a deep and prolonged recession and ensuring fiscal and external sustainability. The near-term imperative is to protect lives and livelihoods and limit potential scarring, while ensuring medium-term debt sustainability with strengthened fiscal frameworks and maintaining financial system stability, with a view to safeguarding the quasi-currency board system. Once the post-pandemic recovery takes hold, policies should focus on resuming fiscal consolidation, further strengthening the financial system, and accelerating other structural reforms to make the economy more competitive and resilient.

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

14. The ECCU countries face immense fiscal challenges to address the immediate health and socio-economic impact of the pandemic and its potentially long-lasting scarring effects. Most ECCU governments’ fiscal deficits have been de-facto capped by the availability of financing resources, forcing pro-cyclical expenditure cuts in some cases as governments had to prioritize public spending needs. These near-term financing constraints, if not addressed, could severely affect governments’ abilities to reopen the economy while ensuring public health and security. At the same time, looming debt sustainability concerns for some ECCU countries would require proactive planning for medium-term adjustment measures and structural reforms. Well-sequenced and calibrated fiscal policy responses are imperative for the ECCU countries to limit the economic scarring of the pandemic, restore macro-fiscal sustainability in a credible manner, and raise long-run growth.

15. Protecting lives and livelihoods remains the near-term policy priority. This includes: (i) enhancing testing, contact tracing and treatment capacity, and strengthening the enforcement of public health protocols; (ii) maximizing COVID-19 vaccine access in collaboration with international and regional partners; and (iii) mitigating the socio-economic impact by maintaining support for the vulnerable. Cash-constrained countries should rationalize non-essential spending and rely largely on concessional borrowing to safeguard medium-term sustainability. Strong fiscal transparency and accountability would be crucial to keep borrowing within safe limits and give confidence to donors and other stakeholders.^⁹

16. Without additional concessional financing, several ECCU countries may need substantial policy adjustment to close the near-term financing gaps. Such adjustment would become a significant headwind to economic recovery. In this regard, countries that have difficulty in securing sources for gross financing needs should consider seeking longer-term arrangements with the IFIs, including IMF supported-programs, which could help address near-term financing needs and smoothen the adjustment, catalyze donor financing to support priority spending, and serve as an anchor for the necessary medium-term adjustment to restore debt sustainability. Given tight financial conditions, debt refinancing may also be needed in some countries. Governments should minimize reliance on the ECCB credit line to safeguard the integrity of the quasi-currency board.

17. The ECCU’s decision to postpone the regional debt target date by five years would create the near-term fiscal space needed to support the economic recovery. The 60 percent of GDP debt target has served as an important fiscal anchor for the region. Staff analysis indicates that ECCU countries’ fiscal reaction functions have improved since the target was adopted in 1998 (Box 3). However, given the substantial growth and public finance impact of the pandemic, meeting the target by 2030 is no longer feasible for several countries in the region without drastic fiscal consolidation (a cumulative fiscal adjustment effort of 6 percent of GDP for the ECCU, with a cost to growth of 0.6–0.7 percent), that would both slow the recovery from the pandemic and constrain long-term growth prospects through scarring. The postponement of the debt target by five years could balance the creation of near-term fiscal space needed to support the economic recovery with the confidence-boosting effects of a firm fiscal anchor. Staff’s illustrative analysis suggests that postponing the meeting of the debt objective, notably by announcing a firm and credible new target date, coupled with increased public investment (including for building resilience to natural disasters) that is embedded in a growth-friendly fiscal consolidation strategy, would have significant growth benefits. On the contrary, if the revised target date is perceived as not being credible, a potential spike in sovereign risk premia would hurt growth (Box 4).^¹⁰

^{Box 3.}

Assessing Benefits of the ECCU’s Fiscal Anchor

The regional debt target plays an important role in anchoring the fiscal policies of the ECCU countries, considering the region-specific characteristics including: (i) high externalities—the ECCU’s quasi-currency board arrangement requires clear national fiscal plans and buffers to mitigate the propagation of shocks, given the limited regional circuit-breakers in the form of the ECCB credit allocations; (ii) dependence on external support— donors, including IFIs, in order to provide continued financing, seek ex-ante clarity provided by fiscal rules that offer comprehensive and clear benchmarks for fiscal sustainability and accountability; and (iii) still-unfavorable differential between (market-based) interest rates on public debt and growth (r-g): a favorable evolution of this differential in other countries has been cited as weakening the need for primary surpluses and fiscal rules; however, the differential has been stable in the ECCU and positive if only market-based debt interest rates were considered.

Panel and Time Series Regression Estimates for Selected ECCU Countries, 1998–2019

Source: IMF staff estimates.Note: t-statistics in italics; ***,**, and * denote statistical significance at 0.01, 0.05, and 0.1 level respectively.

Panel and Time Series Regression Estimates for Selected ECCU Countries, 1998–2019

Dependent Variable:	GLS panel	FE panel	OLS	OLS	OLS
Primary balance	ECCU-6	ECCU-6	Dominica	Grenada	St. Kitts and Nevis
Lagged CG debt	0.02*	0.03	0.32**	0.07**	0.11***
	1.78	1.62	2.32	2.13	4.07
Key other controls	output gap	output gap	output gap	real growth natural disaster	output gap CBI revenue
Number of observations	128	128	22	22	22
R-squared	0.38	0.51	0.25	0.64	0.68

Source: IMF staff estimates.Note: t-statistics in italics; ***,**, and * denote statistical significance at 0.01, 0.05, and 0.1 level respectively.

Panel and Time Series Regression Estimates for Selected ECCU Countries, 1998–2019

Dependent Variable:	GLS panel	FE panel	OLS	OLS	OLS
Primary balance	ECCU-6	ECCU-6	Dominica	Grenada	St. Kitts and Nevis
Lagged CG debt	0.02*	0.03	0.32**	0.07**	0.11***
	1.78	1.62	2.32	2.13	4.07
Key other controls	output gap	output gap	output gap	real growth natural disaster	output gap CBI revenue
Number of observations	128	128	22	22	22
R-squared	0.38	0.51	0.25	0.64	0.68

Source: IMF staff estimates.Note: t-statistics in italics; ***,**, and * denote statistical significance at 0.01, 0.05, and 0.1 level respectively.

Empirical analysis suggests that the adoption of the 60 percent of GDP fiscal anchor in 1998 has been associated with improved ECCU countries’ reaction functions. Panel (GLS) regressions for ECCU-6 and OLS time series regressions for the individual countries suggest there has been a shift from largely negative coefficients for primary balance on lagged debt in an earlier sample to mostly positive coefficients for the 1998–2019 period sample—when the 60 percent of GDP anchor was in place throughout. The coefficients are positive and statistically significant in Dominica, St. Kitts and Nevis, and Grenada. A more detailed regression analysis suggests that improved fiscal reaction functions were associated with good times (recently associated with increased CBI receipts), with the debt anchor potentially incentivizing fiscal savings in such episodes.

Well-designed rule-based fiscal frameworks can contribute to address a key source of uncertainty related to natural disaster for the region (see 2019 ECCU consultation). They need to be embedded within disaster resilience strategies that contain integrated long-term macro-fiscal plans supported by concessional donor financing within the ex-ante constraints of credible fiscal anchors.

18. It is critical that the extension of the target date is supported by further strengthening of fiscal policy frameworks to preserve the credibility of the revised fiscal anchor. The package of reforms to credibly reframe the fiscal anchor should consider the following:

Regional common standards and arrangements to guide national fiscal responsibility frameworks. Meeting the revised target would still be challenging for many countries in the region given the high probability of the materialization of contingent liabilities (including in the financial sector) and unusually large long-term primary surpluses that would be required to reach the target by 2035. In this regard, having robust common standards and arrangements to guide national fiscal policies would ensure timely implementation of the necessary fiscal adjustment measures, limit spillovers from unsustainable public finances, and provide a platform for effective coordination and surveillance of the fiscal policies of member countries. Flexibility is also needed to accommodate countries facing idiosyncratic shocks or starting from a less favorable fiscal position.
A regional fiscal oversight entity. Such an institution would champion fiscal transparency, vet any further adjustments to the anchor, support peer reviews of members’ fiscal responsibility or resilience frameworks, assess options for further reforms and operational rules, institutionalize good fiscal policies and practices, and assist members develop new legislation and/or procedures for fiscal transparency. The institution could be supported by assistance from CARTAC and placed in the ECCB monetary council’s secretariat, in accordance with the ECCB’s advisory role to member governments and similar to the existing arrangement where the ECCB is providing technical support to Grenada’s fiscal responsibility oversight committee. This would have the advantage of maximizing available professional capacity, data availability, and convening power.^¹¹ Finally, the effectiveness of a regional fiscal oversight entity crucially depends on its ability to undertake independent fiscal assessments, communicate with the public, and provide recommendations.
Incentive mechanisms to ensure compliance and reap the benefits from lower government borrowing costs. Countries where it remains feasible to achieve the target earlier would reap payoffs from meeting debt sustainability benchmarks due to reputational benefits on borrowing costs and improved recourse to concessional funding. Furthermore, during peer reviews, the targeted debt paths would be differentiated by time horizons and pace according to their initial debt levels and macro shocks (interim targets could also be set for high-debt countries). Reputational costs for deviations or non-compliance would be raised by requiring governments to explain deviations and specify concrete corrective policies.

^{Box 4.}

Importance of a Credible Postponement of the Regional Debt Target

To illustrate the importance of postponing the debt target in a credible way, we use the IMF’s Global Integrated Monetary and Fiscal model (GIMF), calibrated to the ECCU, to conduct forward-looking scenarios. GIMF is an annual, multi-region, micro-founded dynamic stochastic general equilibrium model of the global economy that has been used extensively by IMF staff to conduct policy analysis (Kumhof and others, 2010 and Anderson and others, 2013). We design alternative scenarios to simulate the macro-fiscal impact of different consolidation paths and compare them to the benchmark scenario of meeting the 60 percent debt target by 2030.

Compared to the benchmark scenario, delaying the target year to 2035 can create policy space for public investment, leading to long-run growth benefits. We introduce public infrastructure investment stimulus from 2021 to 2025 at 2 percent of GDP per year and a permanent amount of 0.4 percent of GDP per year afterwards to maintain the increase in the infrastructure capital stock. There is also fiscal consolidation from 2022 to 2035, with more adjustment after 2025 as the main public investment stimulus comes to an end. Compared to the benchmark scenario, the investment stimulus will bring long-run growth benefits more than enough to offset the negative growth impact from the consolidation, but it will take five more years to bring the debt to GDP ratio to the 60 percent target.

However, without a strong policy framework to ensure the credibility of long-run consolidation, sovereign risk premium could rise, offsetting the growth gains from delaying the consolidation process. An increase of the sovereign risk premium by 100 basis points would have a persistent negative impact on growth that would more than offset the growth benefits from the public investment stimulus. These results highlight the importance of a credible fiscal policy framework as the ECCU countries choose a new long-term adjustment path toward the regional debt target.

19. Well sequenced improvements to national fiscal frameworks and rules are key to the success of the reframed regional anchor. The national authorities, with continued technical assistance (TA) from IFIs, should accelerate progress toward adopting full-fledged rule-based fiscal frameworks and independent assessment institutions, as in Grenada.^¹² However, these steps would be successful only if they are well-tailored and supported by improved capacity and resources. Priority should be placed on better annual budget processes and macro-fiscal forecasting, with a focus of anchoring the medium-term fiscal frameworks (MTFFs) to achieve the revised debt target^¹³ In parallel, the authorities should upgrade their public investment management, oversight for SOEs, internal audit function, fiscal reporting, and capacity to assess debt sustainability, on which they are currently receiving TA from CARTAC and the IMF. National Disaster Resilience Strategies would be an additional tool to internalize climate-related and potentially other shocks. State-contingent debt instruments triggering automatic amortization rescheduling and refinancing after large shocks, including natural disasters or pandemics, could further support fiscal sustainability (Annex IV).

B. Safeguarding Financial Stability

20. Financial system risks are gradually increasing as the crisis persists. In particular, the depth of the economic contraction and the likely protracted pace of a recovery will significantly raise credit risk and may eventually test financial institutions’ liquidity buffers.

The pandemic shock will compound banks’ legacy NPL problem. Several banks still carry large portfolios of longstanding and insufficiently provisioned NPLs.^¹⁴ Regional efforts to reduce NPLs through purchases by the Eastern Caribbean Asset Management Corporation (ECAMC) have been hampered by funding constraints, and the ongoing crisis will further challenge recovery and resolution.^¹⁵ Meanwhile, the high share of deferred loans and staffs stress testing suggest new NPLs could rise well above levels reached after the global financial crisis (Box 5). If the estimated loan losses materialize, it would leave much of the ECCU banking sector with thin capital adequacy margins against further losses and could result in capital shortfalls in some banks. Credit risks for the credit union sector may be further exacerbated by their earlier rapid lending growth on the back of less stringent lending standards, as well as typically limited loan diversification. In general, credit institutions’ loss-susceptibility depends heavily on their respective economies’ degree of tourism dependency as well as the sectoral composition of their loan portfolios.
Liquidity pressures may also emerge as the crisis lingers. Beyond the delayed recovery, the expiration of loan moratoria and limited capacity of public authorities to maintain economic support may necessitate greater draw-down of private sector savings. Although pre-pandemic liquidity buffers were significant, prolonged belt-tightening may increase depositors’ shock-sensitivity, while some banks’ liquidity buffers also face pressures from public sector deposit withdrawals and risk of fair-value losses on overseas investments. Rising receivables in the insurance sector also warrants close monitoring.
Sovereign-financial linkages are strong in some segments. Banks’ regional cross border government debt holdings are limited, but some have high risk concentrations to their local sovereign. Pre-pandemic, two-thirds of such total gross exposures comprised direct lending.^¹⁶ Credit unions’ sovereign exposures are smaller due to their membership-focused lending mandates, although local sovereign securities form part of their liquidity reserves. In contrast, insurance and pension companies have long been significant investors in the region’s government securities, given statutory provisions restricting exposures outside the ECCU or CARICOM as well as limited alternative investment opportunities in the region.

^{Box 5.}

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

Staff simulations suggest that the ongoing tourism shock could result in near tripling of banking sector NPLs to almost 30 percent of total loans, although the full impact would materialize with a significant lag.^¹ The simulations employ a panel of quarterly bank-level sectoral loan data with macroeconomic controls and local projection methods to compute sector-specific NPL impulse responses. The cumulative NPL path is derived from repeated tourism shocks that mimic the path of expected arrivals, taking into account the sectoral composition of banks’ pre-pandemic loan portfolios and their respective economies’ relative tourism dependency (overall contribution to GDP).

At their peak, the simulated NPLs could imply loan losses of 8½ percent of ECCU GDP. Staff’s loss estimates apply a uniform provisioning rate of 60 percent across the sectoral projections, while also accounting for the persistent under-provisioning of pre-existing NPLs whose resolution is further impeded by the crisis. Estimated capital shortfalls in local banks based on their pre-pandemic capitalization would be more modest (around 1 percent of GDP), but the sector on aggregate would be left with only thin capital adequacy margins against further losses.

^¹ The dynamic is broadly consistent with international banking crisis experience, see Ari, M. A., Chen, S. & Ratnovski, M. L., “The dynamics of non-performing loans during banking crises: a new database” (IMF WP/19/272).

21. Supervisors should carefully balance near-term supervisory flexibility with measures to support financial institutions’ capacity to weather the crisis. Loan moratoria should be allowed to expire at end-September 2021 as announced by the ECCB, and banks and credit unions should be encouraged to ensure that any subsequent restructurings, if necessary, follow realistically achievable repayment terms. The recently issued ECCB standard on treatment of impaired assets will help limit long-standing overreliance on loan collateral and serve as an important guide for provisioning against expected credit losses. At the same time, supervisors should encourage capital conservation until the full impact of the pandemic is clear and, as necessary, allow for temporary breaches from minimum regulatory requirements provided the concerned institution has a credible corrective action plan in place. It is also essential to rapidly address remaining gaps in the supervision of non-banks as well as continue strengthening stress-testing coverage and practices.

22. Crisis management plans (CMPs) need to be formalized expeditiously at regional and national levels to ensure system-wide risks can be effectively contained. The current state of crisis preparedness relies largely on the authorities’ experience from historical crisis episodes, with limited operational plans to guide policy responses to alternative scenarios. CMPs should consider a prioritized menu of readily implementable policy options and clearly identify the responsible agents, coordination requirements, intensified monitoring arrangements and enforcement mechanisms. The scope and modalities, including relevant triggers, of any intervention or stability measure should be assessed, including consistency with sound practices and international standards, while ensuring the adequacy of the requisite legal powers.^¹⁷ At the regional level, the ECCB should complete its review of the adequacy of its tools for liquidity assistance to banks as well as the bank resolution framework and strategies, taking into account funding constraints. With mandate for regional oversight, the ECCB should also have a key coordination role for national CMPs. These should, among other things, assess whether existing resolution regimes for non-banks remain appropriate given their increased financial system significance, and lay out the necessary home-host cooperation arrangements for cross-border financial groups. Inter-agency coordination should be enhanced by reviewing relevant memorandum of understanding (MoU) in relation to the nature and timing of information exchange, including stress tests, risk assessments, and policy developments such as designation of systemically important financial institutions.^¹⁸

23. In anticipation of a sharp increase in NPLs, considerations for credible strategies to support reduction of troubled assets should start now. NPLs in the ECCU remain slow to resolve. This reflects rigidities in some ECCU jurisdictions’ legal frameworks for asset recovery, as well as in the region’s real estate markets owing to natural impediments of small scale and geographic fragmentation. Uncertain and costly asset recovery, particularly in the face of a new wave of loan losses, can constrain credit supply and thereby limit the financial system’s longer-term ability to support the regional economies. The authorities therefore need to revisit sustainable funding options for the ECAMC and/or explore alternative troubled asset resolution strategies, while also addressing long-standing deficiencies in national legal frameworks.

24. Momentum on broader financial sector reform agenda should be maintained, although their pacing should pay due regard to near-term implications. National authorities should complete long-standing financial sector reforms, including on the credit reporting and insolvency frameworks, centralized AML/CFT supervision for the banking system, and harmonized legislation for co-operative societies.^¹⁹ Ongoing work towards the Optimal Regulatory Framework for the ECCU financial sector will be important to address previously identified infrastructure gaps, but the recent plan to establish a regional standards setting body should not dilute existing standards and ensure adequate capacity at each level of the regional supervisory framework. The pandemic has also highlighted the importance of developing a regional macroprudential framework and transitioning toward Basel II/III regulatory regimes. However, implementation timelines should avoid unduly burdening supervised institutions. Considerations over a regional deposit insurance need to pay due regard to the oversight framework, financial stability conditions, and all covered entities meeting the necessary prerequisites; particularly given the pandemic’s still highly uncertain balance sheet implications across banks.

C. Safeguarding the Quasi-Currency Board and Strengthening Competitiveness

25. The ECCB should keep a robust backing ratio by continuing to strictly limit credit provision. The backing ratio has remained in the range of 95–100 percent, above the legislative requirement of 60 percent and the operational benchmark of 80 percent. This prudent practice has lent credibility to the quasi-currency board arrangement. Staff’s analysis looking at past crisis episodes suggests a strong link between the backing ratio and crisis likelihood and that the ECCB’s backing ratio, currently at 96 percent, can be considered adequate (Box 6). Given the uncertainty concerning the evolution of the pandemic, the authorities should also enhance the monitoring of foreign exchange movements and prepare scenario-based policy responses, including estimation of financing needs and sources of concessional financing.

26. The COVID-19 shock has put significant pressure on output and employment, while exchange rate depreciation in neighboring economies could add to ECCU’s external competitiveness challenges over time. The EBA–lite current account model suggests that the external position in 2020 (adjusted for the COVID impact) is estimated to be moderately weaker than what is consistent with fundamentals, implying an exchange rate overvaluation (Annex III). Staff’s empirical analysis also found that smaller tourism economies (such as the ECCU countries) benefit less from exchange rate flexibility in the short run, likely due to dominant currency pricing (Annex V), but external competitiveness challenges may arise over the medium term.

^{Box 6.}

Assessing Currency Crisis Risk in the ECCU: Macroeconomic Perspective

The ECCB and its predecessors have maintained the fixed exchange regime for more than 70 years, uninterruptedly. The ECCB manages a common pool of reserves and can extend credit to governments and banks, up to a limit determined both by the reserve coverage and by individual country limits. Under the ECCB Agreement Act (1983), the ECCB must keep the backing ratio (defined as ECCB foreign assets as percent of its demand liabilities) at minimum 60 percent, but operationally, targets 80 percent. In practice, the backing ratio has been maintained at 95–100 percent over the past two decades. This mechanism has served to limit the risk of a currency crisis.

To verify the importance of the backing ratio in safeguarding the currency board, we revisited past currency crisis episodes in the world. We built a large panel dataset of currency crises and macroeconomic indicators by adding a small-country sample to Laeven and Valencia (2020)’s database.^¹ We then run a binomial logit model following Caggiano et al. (2016). The dependent variable is a binary indicator for the occurrence of a currency crisis. The explanatory variables include domestic and global macro-financial indicators, and as key explanatory variable of interest, the “backing ratio.”

The empirical results confirm the strong link between the backing ratio and crisis likelihood. The results are broadly consistent across several specifications (models 1–3). Key results are: (i) a higher backing ratio is associated with a lower likelihood of a currency crisis (the marginal effect at mean indicated that approximately, a 10 percentage point increase in the ratio reduces the likelihood of a crisis by 0.25–0.38 percent);^² (ii) the exchange regime per se is not correlated with crisis likelihood (model 2), and (iii) the correlation is larger for small states (model 3).

Logit Model of Currency Crises

(Cross-sectional relationship between currency crises and macroeconomic fundamentals in preceding year)

Sources: Laeven and Valencia (2020), Haver Analytics, WEO, IFS, GFD, WDI databases, and IMF staff calculations.Note: Robust standard errors in parentheses: *** p<0.01, ** p<0.05, * p<0.1. Marginal effects are muliplied by 100.

Logit Model of Currency Crises

(Cross-sectional relationship between currency crises and macroeconomic fundamentals in preceding year)

	Dependent variable: occurrence of a currency crisis 1982–2017
	(1)	(2)	(3)
Foreign/Total CB Assets t-1	-0.0297***	-0.0290***	-0.0257***
Fixed Exch. Rate t-1		-0.198
Fixed Exch. Rate * Foreign/Total CB A		0.000
Small State			1.544*
Small State * Foreign/Total CB Asset			-0.0345*
Marginal Effect at Mean	-0.0271***	-0.0262***	-0.0297***
Observations	3,139	3.139	3,046
Pseudo R-squared	0.164	0.164	0.167

Logit Model of Currency Crises

(Cross-sectional relationship between currency crises and macroeconomic fundamentals in preceding year)

	Dependent variable: occurrence of a currency crisis 1982–2017
	(1)	(2)	(3)
Foreign/Total CB Assets t-1	-0.0297***	-0.0290***	-0.0257***
Fixed Exch. Rate t-1		-0.198
Fixed Exch. Rate * Foreign/Total CB A		0.000
Small State			1.544*
Small State * Foreign/Total CB Asset			-0.0345*
Marginal Effect at Mean	-0.0271***	-0.0262***	-0.0297***
Observations	3,139	3.139	3,046
Pseudo R-squared	0.164	0.164	0.167

There is evidence that the distribution of the backing ratio in crisis cases differs from that in non-crisis cases. The distribution of the crisis cases is skewed left, while the distribution of the non-crisis case is skewed right. This implies that lower foreign assets ratios are correlated with a higher crisis probability (the arrow indicates theoretical direction of increasing crisis probability). Today, the ECCB still maintains a high level of the backing ratio (96 percent), which can be considered to be in a “safe zone.”

^¹ The sample is an unbalanced panel of 173 countries for annual data 1982–2017.^² Calculated at the sample mean (across all countries and periods).

27. Going beyond the near term, the authorities should continue to make concerted efforts to make the economy more competitive and resilient.

The immediate priority is to strengthen hospital, ICU, testing capacity, vaccination distribution, and health and hygiene protocols that reduce concerns of potential tourists and support a quicker rebound on tourism.
As the health crisis abates, policy focus should increasingly shift towards repairing the scarring caused by the pandemic. This will require accelerating the implementation of structural reforms to make the economic structure more competitive and resilient. This includes investment in human and physical capital and further efforts to lower the cost of doing business by easing the regulatory burden and reducing energy and transportation costs. The ECCB initiative to modernize the payment systems and promote digital transformation would also be important to improve the overall business environment, while building resilience to natural disasters remains essential for sustainable growth. Advancing regional integration is also critical to catalyze capacity and resources for better policy responses and maximize economies of scale.^²⁰

D. Statistical issues

28. The lack of timely compilation of macroeconomic indicators hinders the effectiveness of external sector assessments and sound policymaking. The compilation and dissemination of external sector statistics (and to a lesser extent, national accounts) have been substantially delayed, hampering the monitoring of economic developments, macroeconomic risk assessment, and sound policy formulation. Timely data dissemination is affected by several issues, including understaffing at the ECCB and national statistics offices and delays in collecting survey data. The ECCB has recently moved to add staffing at its statistical department. To improve timeliness, however, it is important to dedicate permanent resources to external sector statistics at the national and regional levels.

Authorities’ Views

29. The authorities broadly agreed with staff’s outlook of a protracted economic recovery that would depend on how quickly the COVID-19 pandemic is brought under control. The ECCB estimated GDP to have contracted by 15 percent in 2020 but projects a faster rebound to 4 percent in 2021, assuming a V-shaped recovery in tourism source markets based on a full reopening and return of international flights and cruise ships by the fourth quarter of 2021. Nonetheless, the economic outlook for the region remains highly uncertain and the pace of recovery in tourism is assumed to be gradual, with the number of tourists returning to the 2019 level in 2023. The recent spike in the number of confirmed COVID-19 cases in key source markets and some member countries undermines the prospects for recovery of tourism and growth in the ECCU, although the start of the vaccine rollout is positive development.

30. The authorities concurred with staff on the need for protecting lives and livelihoods but underscored the challenges of prioritizing public spending needs under financing constraints. While they agreed that fiscal support to the vulnerable population should continue, it is no longer feasible for the ECCU countries to repeat the fiscal stimulus measures implemented during the first wave of the pandemic without additional external support. In this regard, the authorities called for greater access to concessional financing for small island countries on the basis of their vulnerability to external shocks and more rapid and equal global distribution of COVID-19 vaccines. They also noted that more efforts on revenue collection, including through the Citizenship-by-Investment programs, and greater efficiency in public spending are needed to alleviate near-term financing pressures.

31. In light of the large fiscal policy support required during the pandemic, the authorities were mostly in favor of postponing the regional debt target from 2030 to 2035 with supporting fiscal framework reforms to strengthen the credibility of the revised debt anchor and enhance fiscal resilience. They noted that while most ECCU countries were on their way to meet the 2030 debt target before the pandemic, the sharp increase in the public debt to GDP ratios across the region and the expected slow recovery in tourist arrivals would render the original target unattainable, except for Grenada and St. Kitts and Nevis. They noted that postponing the target by five years would allow them to maintain policy support in the near term and begin the consolidation process when the economic recovery is firmly entrenched. The authorities also agreed that further strengthening of the fiscal framework is key to preserve the credibility of the regional fiscal anchor and market confidence. In this context, they saw the merits of developing regional standards and arrangements to guide the national fiscal policy frameworks, especially on issues related to natural disaster clauses and state-contingent debt instruments. They also noted that establishing a regional fiscal oversight body would require legislative approval and the focus now should be given to strengthening national oversight mechanisms instead.

32. The authorities stressed that strong fiscal discipline at the national level is key to regional debt sustainability. Some of the authorities indicated their near-term plans to adopt full-fledged fiscal resilience frameworks in line with best practice in the region. Such rules-based frameworks would guide countries’ consolidation process toward the reframed regional debt anchor with sufficient flexibility regarding future external shocks. The authorities also noted the need to improve public debt structure by lengthening the maturity and lowering borrowing costs and called for greater financial support from the international community to build resilience against natural disasters and climate change.

33. The authorities agreed with staff that the economic fallout from the pandemic poses gradually rising financial stability risks. They viewed credit risk as the key risk in the near-term, given the expected weakness of the economic outlook beyond the extended loan moratoria and national pandemic support measures. The authorities also acknowledged other risks related to concentration of asset exposures that need monitoring. The authorities noted, however, that the financial system took important steps to address vulnerabilities and build buffers in the pre-pandemic period. At this time, the authorities did not see any near-term liquidity risks, albeit acknowledging increasing receivables among insurance companies. The authorities have not seen the pandemic affect CBRs.

34. The authorities agreed that timely reinforcement of risk management is key to support financial institutions’ capacity to weather the crisis and exit from temporary pandemic responses. The ECCB is not considering any further extension of the announced moratoria time frame and is monitoring restructured loans to ensure appropriate classification and reporting. The phased introduction of the ECCB’s recently issued standard on the treatment of impaired assets will support timely credit loss provisioning, and a few SRUs are adopting similar guidance for credit unions. At the same time, stress testing is being further strengthened both at regional and national levels, and the authorities have taken steps to encourage near-term capital conservation, although existing legal frameworks do not permit blanket prohibition of shareholder distributions

35. The authorities confirmed the need for expedited formalization of crisis management plans at regional and national levels. The authorities noted their experience of successfully managing past crisis episodes but acknowledged the need to adopt formal crisis management plans that would support timely and coordinated policy responses. The ECCB is also in the process of reviewing the adequacy of its crisis tools and frameworks. The authorities also noted other reform initiatives that should complement these efforts, including the finalization of the region’s draft frameworks for optimal regulatory oversight, macroprudential supervision, and crisis resolution.

36. The authorities are reviewing how best to address rising financial system NPLs. There was broad agreement on the merits of discussing the matter of NPL resolution in a regional context. Some national authorities agreed the ECAMC can serve an important function in the process, while others saw a need to also review alternatives, including complementary private sector solutions. National authorities noted financing constraints to supporting NPL resolution with fiscal resources and stressed the importance of adequate capital buffers and supervision as pre-emptive measures.

37. The authorities underscored the need to maintain financial sector reform momentum, given long implementation times. They noted that the financial stability pillar of the ECCB Program of Action for Recovery, Resilience and Transformation of the ECCU Economies highlights continued roll-out of key and long-outstanding reforms to support safely navigating the crisis, mitigating risks and strengthening financial system stability. They pointed to ongoing work towards An Optimal Regulatory Framework for the Financial Sector of the ECCU as essential to ensure that gaps in the infrastructure and supervisory framework for non-banks are addressed, and supervision follows common standards. While recognizing staff’s concerns, the authorities also considered it important that work on deposit insurance should proceed apace given the expected duration of establishing the enabling legal framework.

38. The ECCB agreed on the importance of continuing to safeguard the currency board with a strong backing ratio. The ECCB continues to be guided by the legal requirements surrounding credit provision to maintain a robust backing ratio and would continue to be guided by its legal and operational framework. Given the uncertainty concerning the evolution of the pandemic, the authorities also agreed on preparing scenario-based policy responses and closely monitoring foreign exchange movements. They concurred on the need to improve timely dissemination of external sector statistics and requested further TA in the matter.

39. The ECCB stressed the importance of vigorously pursuing structural reforms during the pandemic—not waiting for its end, to improve competitiveness and boost growth. In this light, the above-mentioned ECCB Program of Action for Recovery, Resilience and Transformation will provide guidance to regional policymakers on a structural reform agenda, aiming to enhance regional integration and solidarity, financial stability, fiscal and debt sustainability, sustainable and innovative financing, inclusive growth, and innovation and competitiveness.

Staff Appraisal

40. The COVID-19 pandemic has taken a heavy toll on the ECCU economy. The ECCU’s economy has entered a deep recession, and with sizable revenue losses and spending pressures, fiscal positions have deteriorated significantly, with public debt rising. The current account balance has deteriorated, but the ECCB’s foreign asset position has held up relatively well, partly reflecting increased official financing. Going forward, the recovery will be protracted and depend on how quickly the COVID-19 pandemic is brought under control. Policymakers need to carefully navigate through this challenging time, especially because the outlook is clouded by exceptionally high risks, including from the uncertainty concerning the evolution of the pandemic.

41. Protecting lives and livelihoods remains an imperative to limit the socio-economic impact of the pandemic. Near-term policy priorities include enhancing testing, contact tracing and treatment capacity, strengthening the enforcement of public health protocols, maximizing COVID-19 vaccine access, and maintaining support to the vulnerable. Countries under near-term financing constraints should rationalize non-essential spending and rely largely on concessional borrowing, including IMF-supported programs, to safeguard medium-term sustainability.

42. The ECCU’s decision to extend the regional debt target date from 2030 to 2035 should be supported by strengthening regional and national fiscal frameworks to safeguard the credibility of the revised debt anchor. Postponing the debt target by five years would create near-term fiscal space needed to support the economic recovery while maintaining confidence in a firm regional fiscal anchor, given that the original target is no longer feasible for several countries in the region. To safeguard the credibility of the debt anchor, the authorities should strengthen policy frameworks at the regional level including by instituting regional common standards and arrangements to guide national fiscal policy frameworks, establishing a regional fiscal oversight body, and developing incentive mechanisms to ensure compliance and lower government borrowing costs. National authorities should accelerate progress toward adopting full-fledged rules-based fiscal frameworks to guide the pace and composition of the medium-term consolidation toward the debt target.

43. Supervisors should carefully balance near-term supervisory flexibility with measures to support financial institutions’ capacity to weather the crisis. Extensions of loan moratoria should be limited within the time frame announced by the ECCB, and banks and credit unions should be encouraged to ensure that any subsequent restructurings follow realistically achievable repayment terms. Supervisors should track strengthened credit loss provisioning in line with recently issued standards, encourage capital conservation until the full impact of the pandemic is clear and, as necessary, allow for temporary breaches from minimum regulatory requirements provided the concerned institution has a credible corrective action plan. It is also essential to rapidly address remaining gaps in the supervision of non-banks and continue strengthening their stress-testing.

44. Crisis management plans need to be formalized expeditiously at regional and national levels to ensure system-wide risks can be effectively contained. These should be readily implementable with prioritized policy responses to identifiable contingency scenarios. They also need to clearly identify the responsible agents, coordination requirements and enforcement mechanisms while ensuring the adequacy of the requisite legal powers. The plans should also include the scope and modalities of any ECCB or government interventions and, in the case of non-banks, resolution options consistent with sound practices.

45. Credible strategies to support reduction of troubled assets should be started now. The pandemic is expected to increase significantly already elevated levels of non-performing loans in the financial system, which may constrain lending and thereby limit the financial system’s longer-term ability to support the regional economies. The authorities therefore need to revisit sustainable funding options for the Eastern Caribbean Asset Management Company and/or explore alternative troubled asset resolution strategies, while also addressing long-standing deficiencies in national legal asset recovery frameworks.

46. The broader financial sector reform momentum should be maintained at a balanced pace. National authorities should complete long-standing financial sector reforms, including on the credit reporting and insolvency frameworks, centralized AML/CFT supervision for the banking system, and harmonized legislation for co-operative societies. The pandemic has also highlighted the importance of developing a regional macroprudential framework, transitioning toward Basel II/III regulatory regimes, reducing infrastructure gaps and regulatory fragmentation, and further mitigating CBR risk. However, implementation timelines should avoid unduly burdening supervised institutions.

47. The ECCB should maintain the current prudent practice of keeping a robust backing ratio. By strictly limiting credit provision, the ECCB has maintained the backing ratio in the range of 95–100 percent, which has lent credibility to the quasi-currency board arrangement. Given the uncertainty concerning the evolution of the pandemic, the authorities should enhance monitoring of foreign exchange movements and prepare scenario-based policy responses. Bringing back the economy to a strong and sustainable recovery path quickly is also critical to ensure macroeconomic stability. To this end, the authorities should continue to make concerted efforts to implement structural reforms to make the economic structure more competitive and resilient.

^{Table 1.}

ECCU: Selected Economic and Financial Indicators, 2017–21 ^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/}Data for 2020 and 2021 are not reported: due to methodological changes, annual growth numbers are not available.

^{Table 1.}

ECCU: Selected Economic and Financial Indicators, 2017–21 ^1/

					2017	2018	2019	Est. 2020	Proj. 2021
					(Annual percentage change)
Output and prices
	Real GDP				1.2	3.8	2.6	-16.0	-0.2
	GDP deflator				1.4	0.7	1.7	-0.6	1.4
	Consumer prices, average				1.1	1.2	0.7	-0.6	1.6
Monetary sector ^2/
	Net foreign assets				14.6	5.8	5.1	...	...
				Central bank	3.3	-1.1	-2.8	...	...
				Commercial banks (net)	34.1	15.1	14.1	...	...
	Net domestic assets				-6.0	-0.2	0.5	...	...
				Of which: private sector credit	-0.1	0.0	0.5	...	...
	Broad money (M2)				3.4	2.9	2.9	...	...
Public finances					(In percent of GDP; unless otherwise specified)
	Central government
		Total revenue and grants			26.8	27.8	27.0	26.7	27.2
		Total expenditure and net lending			27.7	29.5	29.0	32.0	32.2
			Overall balance		-0.9	-1.7	-2.0	-5.3	-5.0
				Excl. Citizenship by Investment Programs	-3.6	-4.0	-3.6	-6.6	-5.8
			Primary balance		1.6	0.6	0.4	-2.8	-2.4
	Total public sector debt				72.1	69.6	67.1	83.9	88.8
External sector
	Current account balance				-7.5	-11.9	-6.5	-15.3	-21.6
	Trade balance				-29.7	-34.3	-32.3	-25.0	-24.9
				Exports, f.o.b. (annual percentage change)	-5.7	-14.6	2.5	-24.3	12.2
				Imports, f.o.b. (annual percentage change)	3.2	17.4	-1.4	-34.6	1.6
	Services, incomes and transfers				22.3	22.4	25.8	9.7	3.3
			Of which: travel		37.4	36.9	39.7	15.4	8.4
	External public debt				37.0	35.9	34.5	45.5	51.0
	External debt service (percent of goods and nonfactor services)				9.7	9.4	9.9	28.1	28.7
	International reserves
			In millions of U.S. dollars		1,750	1,747	1,698	1,747	1,717
			In months of current year imports of goods and services		5.3	4.7	4.5	7.5	7.6
			In percent of broad money		29.0	28.1	26.5	28.6	27.8
	REER (average annual percentage change)
			Trade-weighted		-0.6	-1.9	1.2	-1.9	…

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

^{^2/}Data for 2020 and 2021 are not reported: due to methodological changes, annual growth numbers are not available.

^{Table 1.}

ECCU: Selected Economic and Financial Indicators, 2017–21 ^1/

					2017	2018	2019	Est. 2020	Proj. 2021
					(Annual percentage change)
Output and prices
	Real GDP				1.2	3.8	2.6	-16.0	-0.2
	GDP deflator				1.4	0.7	1.7	-0.6	1.4
	Consumer prices, average				1.1	1.2	0.7	-0.6	1.6
Monetary sector ^2/
	Net foreign assets				14.6	5.8	5.1	...	...
				Central bank	3.3	-1.1	-2.8	...	...
				Commercial banks (net)	34.1	15.1	14.1	...	...
	Net domestic assets				-6.0	-0.2	0.5	...	...
				Of which: private sector credit	-0.1	0.0	0.5	...	...
	Broad money (M2)				3.4	2.9	2.9	...	...
Public finances					(In percent of GDP; unless otherwise specified)
	Central government
		Total revenue and grants			26.8	27.8	27.0	26.7	27.2
		Total expenditure and net lending			27.7	29.5	29.0	32.0	32.2
			Overall balance		-0.9	-1.7	-2.0	-5.3	-5.0
				Excl. Citizenship by Investment Programs	-3.6	-4.0	-3.6	-6.6	-5.8
			Primary balance		1.6	0.6	0.4	-2.8	-2.4
	Total public sector debt				72.1	69.6	67.1	83.9	88.8
External sector
	Current account balance				-7.5	-11.9	-6.5	-15.3	-21.6
	Trade balance				-29.7	-34.3	-32.3	-25.0	-24.9
				Exports, f.o.b. (annual percentage change)	-5.7	-14.6	2.5	-24.3	12.2
				Imports, f.o.b. (annual percentage change)	3.2	17.4	-1.4	-34.6	1.6
	Services, incomes and transfers				22.3	22.4	25.8	9.7	3.3
			Of which: travel		37.4	36.9	39.7	15.4	8.4
	External public debt				37.0	35.9	34.5	45.5	51.0
	External debt service (percent of goods and nonfactor services)				9.7	9.4	9.9	28.1	28.7
	International reserves
			In millions of U.S. dollars		1,750	1,747	1,698	1,747	1,717
			In months of current year imports of goods and services		5.3	4.7	4.5	7.5	7.6
			In percent of broad money		29.0	28.1	26.5	28.6	27.8
	REER (average annual percentage change)
			Trade-weighted		-0.6	-1.9	1.2	-1.9	…

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

^{^2/}Data for 2020 and 2021 are not reported: due to methodological changes, annual growth numbers are not available.

^{Table 2.}

ECCU: Selected Economic Indicators by Country, 2018–26

(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, 2018–26

(Annual percentage change, unless otherwise indicated)

					Est.	Proj.
			2018	2019	2020	2021	2022	2023	2024	2025	2026
			(Annual percentage change; unless otherwise indicated)
Real GDP			3.8	2.6	-16.0	-0.2	9.3	4.9	3.9	2.6	2.3
	Anguilla		8.4	5.1	-27.8	-2.0	19.8	9.3	7.2	2.2	2.2
	Antigua and Barbuda		7.0	3.4	-17.3	-3.0	11.9	6.3	5.9	3.9	3.0
	Dominica		0.5	7.6	-10.4	-0.4	5.3	3.9	2.9	2.4	1.5
	Grenada		4.1	1.9	-13.5	-1.5	5.2	5.1	3.6	2.7	2.7
	Montserrat		4.0	5.9	-8.0	-2.5	4.6	3.3	2.2	2.2	2.2
	St. Kitts and Nevis		2.9	2.8	-18.7	-2.0	10.0	8.0	5.5	2.7	2.7
	St. Lucia		2.6	1.7	-18.9	3.1	10.7	3.2	2.4	1.8	1.4
	St. Vincent and the Grenadines		2.2	0.3	-4.2	-0.1	4.9	3.3	3.1	2.7	2.7
CPI (end of period) ^1/			1.5	-0.1	0.2	1.5	1.7	2.0	2.0	2.0	2.0
	Anguilla		-0.4	0.7	-1.0	1.0	2.0	2.0	2.0	2.0	2.0
	Antigua and Barbuda		1.7	0.7	2.8	2.0	2.0	2.0	2.0	2.0	2.0
	Dominica		4.0	0.1	1.7	2.0	2.0	2.0	2.0	2.0	2.0
	Grenada		1.4	0.1	-0.8	1.3	1.7	1.9	1.9	1.9	1.9
	Montserrat		1.8	-0.5	-2.8	1.0	2.0	2.0	2.0	2.0	2.0
	St. Kitts and Nevis		-0.7	-0.8	-1.2	-0.8	-0.8	2.0	2.0	2.0	2.0
	St. Lucia		2.2	-0.7	-0.4	2.2	2.0	2.0	2.0	2.0	2.0
	St. Vincent and the Grenadines		1.4	0.5	-1.0	1.4	2.1	2.1	2.0	2.0	2.0
Current account (percent GDP)			11.9	6.5	15.3	21.6	12.5	9.7	6.5	-6.0	6.0
	Anguilla		-62.0	-39.7	-60.5	-67.0	-36.7	-30.1	-14.9	-14.4	-13.3
	Antigua and Barbuda		-14.5	-6.8	-12.7	-25.0	-15.1	-11.1	-9.2	-7.7	-6.5
	Dominica		-44.9	-26.7	-18.8	-28.0	-18.5	-15.3	-11.4	-10.5	-9.7
	Grenada		-15.9	-15.9	-17.2	-23.4	-15.8	-16.2	-12.6	-12.2	-11.9
	Montserrat		-2.9	0.3	-10.8	-22.2	-9.2	-8.5	-4.1	-2.3	-1.5
	St. Kitts and Nevis		-5.7	-2.1	-8.1	-9.9	-8.7	-8.0	-8.0	-8.0	-8.0
	St. Lucia		2.2	4.8	-16.3	-19.8	-6.8	-2.7	1.8	1.9	1.7
	St. Vincent and the Grenadines		-12.0	-9.6	-13.7	-15.9	-12.9	-10.4	-9.3	-9.1	-3.9
Overall balance (percent of GDP) ^2/			-1.7	2.0	5.3	-5.0	3.3	2.0	0.9	0.2	0.2
		Anguilla	0.4	2.9	-0.9	-2.1	-0.9	1.9	2.3	4.4	8.0
		Antigua and 8arbuda	-3.2	-4.0	-5.7	-5.8	-4.6	-3.0	-1.8	-1.1	-0.6
		Dominica	-20.0	-9.8	-3.7	-2.2	0.0	0.8	1.7	2.6	3.2
		Grenada	4.6	5.0	-0.1	-0.9	1.4	2.2	2.3	8.0	3.4
		Montserrat	-0.5	-12.7	-13.8	-6.5	-5.1	0.0	0.0	0.0	0.0
		St. Kitts and Nevis	1.2	-1.1	-4.5	-5.3	-3.4	-0.4	2.3	0.9	1.1
		St. Lucia	-1.0	-3.5	-9.7	-7.1	-5.3	-4.1	-3.3	-2.7	-2.2
		St. Vincent and the Grenadines	-0.9	-3.0	-5.7	-6.0	-4.9	-6.0	-3.7	-2.2	-1.9
Public sector debt (percent of GDP)			69.6	67.1	83.9	88.8	84.9	82.7	79.5	75.8	72.9
		Anguilla	60.7	48.1	67.7	70.1	58.0	49.6	42.4	36.2	29.7
		Antigua and Barbuda	92.4	81.8	103.1	111.8	103.1	98.1	92.7	88.7	84.4
		Dominica	79.7	91.0	97.1	96.4	91.5	87.7	82.6	77.3	71.3
		Grenada	64.4	59.7	70.6	74.5	73.4	69.1	64.9	58.8	52.7
		Montserrat	7.3	6.4	20.5	23.9	10.4	8.6	5.4	6.8	7.0
		St. Kitts and Nevis	55.5	56.3	66.4	72.1	67.6	64.1	61.1	55.5	56.4
		St. Lucia	60.0	61.3	84.4	88.4	87.6	89.9	89.4	88.9	88.2
		St. Vincent and the Grenadines	75.6	75.1	87.2	91.8	90.2	90.9	89.7	87.6	84.8

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, 2018–26

(Annual percentage change, unless otherwise indicated)

					Est.	Proj.
			2018	2019	2020	2021	2022	2023	2024	2025	2026
			(Annual percentage change; unless otherwise indicated)
Real GDP			3.8	2.6	-16.0	-0.2	9.3	4.9	3.9	2.6	2.3
	Anguilla		8.4	5.1	-27.8	-2.0	19.8	9.3	7.2	2.2	2.2
	Antigua and Barbuda		7.0	3.4	-17.3	-3.0	11.9	6.3	5.9	3.9	3.0
	Dominica		0.5	7.6	-10.4	-0.4	5.3	3.9	2.9	2.4	1.5
	Grenada		4.1	1.9	-13.5	-1.5	5.2	5.1	3.6	2.7	2.7
	Montserrat		4.0	5.9	-8.0	-2.5	4.6	3.3	2.2	2.2	2.2
	St. Kitts and Nevis		2.9	2.8	-18.7	-2.0	10.0	8.0	5.5	2.7	2.7
	St. Lucia		2.6	1.7	-18.9	3.1	10.7	3.2	2.4	1.8	1.4
	St. Vincent and the Grenadines		2.2	0.3	-4.2	-0.1	4.9	3.3	3.1	2.7	2.7
CPI (end of period) ^1/			1.5	-0.1	0.2	1.5	1.7	2.0	2.0	2.0	2.0
	Anguilla		-0.4	0.7	-1.0	1.0	2.0	2.0	2.0	2.0	2.0
	Antigua and Barbuda		1.7	0.7	2.8	2.0	2.0	2.0	2.0	2.0	2.0
	Dominica		4.0	0.1	1.7	2.0	2.0	2.0	2.0	2.0	2.0
	Grenada		1.4	0.1	-0.8	1.3	1.7	1.9	1.9	1.9	1.9
	Montserrat		1.8	-0.5	-2.8	1.0	2.0	2.0	2.0	2.0	2.0
	St. Kitts and Nevis		-0.7	-0.8	-1.2	-0.8	-0.8	2.0	2.0	2.0	2.0
	St. Lucia		2.2	-0.7	-0.4	2.2	2.0	2.0	2.0	2.0	2.0
	St. Vincent and the Grenadines		1.4	0.5	-1.0	1.4	2.1	2.1	2.0	2.0	2.0
Current account (percent GDP)			11.9	6.5	15.3	21.6	12.5	9.7	6.5	-6.0	6.0
	Anguilla		-62.0	-39.7	-60.5	-67.0	-36.7	-30.1	-14.9	-14.4	-13.3
	Antigua and Barbuda		-14.5	-6.8	-12.7	-25.0	-15.1	-11.1	-9.2	-7.7	-6.5
	Dominica		-44.9	-26.7	-18.8	-28.0	-18.5	-15.3	-11.4	-10.5	-9.7
	Grenada		-15.9	-15.9	-17.2	-23.4	-15.8	-16.2	-12.6	-12.2	-11.9
	Montserrat		-2.9	0.3	-10.8	-22.2	-9.2	-8.5	-4.1	-2.3	-1.5
	St. Kitts and Nevis		-5.7	-2.1	-8.1	-9.9	-8.7	-8.0	-8.0	-8.0	-8.0
	St. Lucia		2.2	4.8	-16.3	-19.8	-6.8	-2.7	1.8	1.9	1.7
	St. Vincent and the Grenadines		-12.0	-9.6	-13.7	-15.9	-12.9	-10.4	-9.3	-9.1	-3.9
Overall balance (percent of GDP) ^2/			-1.7	2.0	5.3	-5.0	3.3	2.0	0.9	0.2	0.2
		Anguilla	0.4	2.9	-0.9	-2.1	-0.9	1.9	2.3	4.4	8.0
		Antigua and 8arbuda	-3.2	-4.0	-5.7	-5.8	-4.6	-3.0	-1.8	-1.1	-0.6
		Dominica	-20.0	-9.8	-3.7	-2.2	0.0	0.8	1.7	2.6	3.2
		Grenada	4.6	5.0	-0.1	-0.9	1.4	2.2	2.3	8.0	3.4
		Montserrat	-0.5	-12.7	-13.8	-6.5	-5.1	0.0	0.0	0.0	0.0
		St. Kitts and Nevis	1.2	-1.1	-4.5	-5.3	-3.4	-0.4	2.3	0.9	1.1
		St. Lucia	-1.0	-3.5	-9.7	-7.1	-5.3	-4.1	-3.3	-2.7	-2.2
		St. Vincent and the Grenadines	-0.9	-3.0	-5.7	-6.0	-4.9	-6.0	-3.7	-2.2	-1.9
Public sector debt (percent of GDP)			69.6	67.1	83.9	88.8	84.9	82.7	79.5	75.8	72.9
		Anguilla	60.7	48.1	67.7	70.1	58.0	49.6	42.4	36.2	29.7
		Antigua and Barbuda	92.4	81.8	103.1	111.8	103.1	98.1	92.7	88.7	84.4
		Dominica	79.7	91.0	97.1	96.4	91.5	87.7	82.6	77.3	71.3
		Grenada	64.4	59.7	70.6	74.5	73.4	69.1	64.9	58.8	52.7
		Montserrat	7.3	6.4	20.5	23.9	10.4	8.6	5.4	6.8	7.0
		St. Kitts and Nevis	55.5	56.3	66.4	72.1	67.6	64.1	61.1	55.5	56.4
		St. Lucia	60.0	61.3	84.4	88.4	87.6	89.9	89.4	88.9	88.2
		St. Vincent and the Grenadines	75.6	75.1	87.2	91.8	90.2	90.9	89.7	87.6	84.8

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, 2018–26 ^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, 2018–26 ^1/

(In percent of GDP)

				Est.	Proj.
		2018	2019	2020	2021	2022	2023	2024	2025	2026
Total revenues and grants		27.8	27.0	26.7	27.2	26.5	26.5	26.4	26.3	26.5
	Anguilla	27.1	24.5	32.9	31.0	25.1	24.3	23.1	24.1	24.0
	Antigua and Barbuda	19.8	18.9	20.0	23.2	21.7	22.6	22.6	22.7	22.7
	Dominica	46.7	40.8	35.7	33.1	31.7	32.1	32.4	32.7	32.8
	Grenada	26.9	26.8	26.6	26.4	26.6	26.8	26.6	26.5	26.5
	Montserrat	79.0	71.4	77.2	87.0	81.9	81.1	79.0	79.3	79.3
	St. Kitts and Nevis	39.3	38.9	33.7	33.7	31.6	32.4	32.4	30.5	32.1
	St. Lucia	22.0	21.5	20.4	21.2	21.5	21.1	21.4	21.4	21.3
	St. Vincent and the Grenadines	29.1	30.5	32.5	32.4	34.6	33.1	32.3	32.3	32.2
Current expenditure		23.9	24.0	26.8	27.1	25.1	24.4	23.6	22.9	22.7
	Anguilla	23.8	20.5	32.5	32.6	25.8	22.2	20.2	19.5	18.8
	Antigua and Barbuda	21.1	21.0	22.9	24.5	22.1	21.5	20.4	19.7	19.3
	Dominica	40.8	39.3	31.9	28.3	26.2	26.3	25.2	24.7	24.2
	Grenada	19.6	19.2	23.0	23.3	22.1	21.5	21.0	20.8	20.7
	Montserrat	77.4	75.3	79.7	87.3	81.2	78.9	77.0	76.7	76.7
	St. Kitts and Nevis	27.0	27.5	31.5	32.1	29.3	27.5	26.7	24.6	25.8
	St. Lucia	20.1	21.3	24.1	22.7	21.8	21.6	21.2	20.6	20.1
	St. Vincent and the Grenadines	26.2	26.9	30.0	31.5	29.8	29.6	29.1	28.9	28.6
Capital expenditure		5.6	5.0	5.1	5.1	4.6	4.1	3.8	3.6	3.6
	Anguilla	3.0	0.9	1.1	0.3	0.0	0.0	0.0	0.0	0.0
	Antigua and Barbuda	1.9	1.9	2.8	4.5	4.1	4.1	4.0	4.1	4.1
	Dominica	25.9	9.9	6.0	5.5	4.0	4.0	4.0	4.0	4.0
	Grenada	2.8	2.6	3.7	4.1	3.1	3.1	2.3	2.7	2.4
	Montserrat	8.0	3.3	11.4	6.2	5.3	2.2	2.1	2.7	2.7
	St. Kitts and Nevis	11.1	12.5	0.0	7.0	5.4	5.0	5.0	4.7	4.9
	St. Lucia	3.0	3.6	6.0	4.9	4.3	2.9	2.9	2.9	2.9
	St. Vincent and the Grenadines	3.3	6.5	3.2	7.0	9.7	9.5	6.9	5.7	5.5
Primary balance ^2/		0.6	0.4	-2.8	-2.4	-0.7	0.6	1.6	2.3	2.6
	Anguilla	2.6	4.9	1.5	0.1	0.9	3.4	4.0	5.4	5.9
	Antigua and Barbuda	-0.7	-1.2	-3.2	-3.5	-2.3	-0.7	0.5	1.2	4.4
	Dominica	-18.0	-7.3	-2.0	-0.6	1.3	2.0	3.4	4.1	4.6
	Grenada	6.6	6.9	2.0	1.1	3.3	4.6	5.0	5.1	5.3
	Montserrat	-6.5	-12.6	-13.8	-6.4	-5.0	0.3	0.4	0.8	0.0
	St. Kitts and Nevis	2.6	0.1	-3.0	-3.9	-1.4	1.6	2.4	2.7	3.0
	St. Lucia	-.9	-0.5	-6.1	-2.9	-1.2	-0.1	0.3	1.4	1.9
	St. Vincent and the Grenadines	1.5	-0.5	-3.3	-3.0	-1.7	-2.5	-0.2	1.1	1.3
Overall balance^2/		-1.7	-2.0	-5.3	-5.0	-3.3	-2.0	0.9	0.2	0.2
	Anguilla	0.4	2.9	-0.9	-2.1	-0.9	1.9	2.3	4.4	5.0
	Antigua and Barbuda	-3.2	-4.0	-5.7	-5.8	-4.6	-3.0	-1.8	-1.1	-0.6
	Dominica	-20.0	-9.8	-3.7	-2.2	0.0	0.3	1.7	2.6	3.2
	Grenada	4.6	5.0	-0.0	-0.9	1.4	2.2	2.3	3.0	3.4
	Montserrat	-6.5	-12.7	-13.8	-6.5	-5.1	0.0	0.0	0.0	0.0
	St. Kitts and Nevis	1.2	1.1	-4.5	-5.8	-3.4	-0.4	0.3	0.9	1.1
	St. Lucia	-1.0	-3.5	-9.7	-7.1	-5.3	-4.1	-3.3	-2.7	-2.2
	St. Vincent and the Grenadines	-0.9	-3.0	-5.7	-6.0	-4.9	-6.0	-3.7	-2.2	-1.9

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, 2018–26 ^1/

(In percent of GDP)

				Est.	Proj.
		2018	2019	2020	2021	2022	2023	2024	2025	2026
Total revenues and grants		27.8	27.0	26.7	27.2	26.5	26.5	26.4	26.3	26.5
	Anguilla	27.1	24.5	32.9	31.0	25.1	24.3	23.1	24.1	24.0
	Antigua and Barbuda	19.8	18.9	20.0	23.2	21.7	22.6	22.6	22.7	22.7
	Dominica	46.7	40.8	35.7	33.1	31.7	32.1	32.4	32.7	32.8
	Grenada	26.9	26.8	26.6	26.4	26.6	26.8	26.6	26.5	26.5
	Montserrat	79.0	71.4	77.2	87.0	81.9	81.1	79.0	79.3	79.3
	St. Kitts and Nevis	39.3	38.9	33.7	33.7	31.6	32.4	32.4	30.5	32.1
	St. Lucia	22.0	21.5	20.4	21.2	21.5	21.1	21.4	21.4	21.3
	St. Vincent and the Grenadines	29.1	30.5	32.5	32.4	34.6	33.1	32.3	32.3	32.2
Current expenditure		23.9	24.0	26.8	27.1	25.1	24.4	23.6	22.9	22.7
	Anguilla	23.8	20.5	32.5	32.6	25.8	22.2	20.2	19.5	18.8
	Antigua and Barbuda	21.1	21.0	22.9	24.5	22.1	21.5	20.4	19.7	19.3
	Dominica	40.8	39.3	31.9	28.3	26.2	26.3	25.2	24.7	24.2
	Grenada	19.6	19.2	23.0	23.3	22.1	21.5	21.0	20.8	20.7
	Montserrat	77.4	75.3	79.7	87.3	81.2	78.9	77.0	76.7	76.7
	St. Kitts and Nevis	27.0	27.5	31.5	32.1	29.3	27.5	26.7	24.6	25.8
	St. Lucia	20.1	21.3	24.1	22.7	21.8	21.6	21.2	20.6	20.1
	St. Vincent and the Grenadines	26.2	26.9	30.0	31.5	29.8	29.6	29.1	28.9	28.6
Capital expenditure		5.6	5.0	5.1	5.1	4.6	4.1	3.8	3.6	3.6
	Anguilla	3.0	0.9	1.1	0.3	0.0	0.0	0.0	0.0	0.0
	Antigua and Barbuda	1.9	1.9	2.8	4.5	4.1	4.1	4.0	4.1	4.1
	Dominica	25.9	9.9	6.0	5.5	4.0	4.0	4.0	4.0	4.0
	Grenada	2.8	2.6	3.7	4.1	3.1	3.1	2.3	2.7	2.4
	Montserrat	8.0	3.3	11.4	6.2	5.3	2.2	2.1	2.7	2.7
	St. Kitts and Nevis	11.1	12.5	0.0	7.0	5.4	5.0	5.0	4.7	4.9
	St. Lucia	3.0	3.6	6.0	4.9	4.3	2.9	2.9	2.9	2.9
	St. Vincent and the Grenadines	3.3	6.5	3.2	7.0	9.7	9.5	6.9	5.7	5.5
Primary balance ^2/		0.6	0.4	-2.8	-2.4	-0.7	0.6	1.6	2.3	2.6
	Anguilla	2.6	4.9	1.5	0.1	0.9	3.4	4.0	5.4	5.9
	Antigua and Barbuda	-0.7	-1.2	-3.2	-3.5	-2.3	-0.7	0.5	1.2	4.4
	Dominica	-18.0	-7.3	-2.0	-0.6	1.3	2.0	3.4	4.1	4.6
	Grenada	6.6	6.9	2.0	1.1	3.3	4.6	5.0	5.1	5.3
	Montserrat	-6.5	-12.6	-13.8	-6.4	-5.0	0.3	0.4	0.8	0.0
	St. Kitts and Nevis	2.6	0.1	-3.0	-3.9	-1.4	1.6	2.4	2.7	3.0
	St. Lucia	-.9	-0.5	-6.1	-2.9	-1.2	-0.1	0.3	1.4	1.9
	St. Vincent and the Grenadines	1.5	-0.5	-3.3	-3.0	-1.7	-2.5	-0.2	1.1	1.3
Overall balance^2/		-1.7	-2.0	-5.3	-5.0	-3.3	-2.0	0.9	0.2	0.2
	Anguilla	0.4	2.9	-0.9	-2.1	-0.9	1.9	2.3	4.4	5.0
	Antigua and Barbuda	-3.2	-4.0	-5.7	-5.8	-4.6	-3.0	-1.8	-1.1	-0.6
	Dominica	-20.0	-9.8	-3.7	-2.2	0.0	0.3	1.7	2.6	3.2
	Grenada	4.6	5.0	-0.0	-0.9	1.4	2.2	2.3	3.0	3.4
	Montserrat	-6.5	-12.7	-13.8	-6.5	-5.1	0.0	0.0	0.0	0.0
	St. Kitts and Nevis	1.2	1.1	-4.5	-5.8	-3.4	-0.4	0.3	0.9	1.1
	St. Lucia	-1.0	-3.5	-9.7	-7.1	-5.3	-4.1	-3.3	-2.7	-2.2
	St. Vincent and the Grenadines	-0.9	-3.0	-5.7	-6.0	-4.9	-6.0	-3.7	-2.2	-1.9

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 4.}

ECCU: Selected Public Sector Debt Indicators by Country, 2018–26 ^1/

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

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

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

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About

Resources

Abstract

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