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International Monetary Fund. Western Hemisphere Dept.
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Publication Date:
29 Jul 2022
eISBN:
9798400216794
ISBN:
9798400216794
Language:
English
Keywords:
ECCU consumer price aggregate; ECCU member; climate risk resilience; ECCU team; ECCU jurisdiction; Monetary unions; COVID-19
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IMF Country Report No. 22/253

Abstract

IMF Country Report No. 22/253

Copyright Page

IMF Country Report No. 22/253

EASTERN CARIBBEAN CURRENCY UNION

2022 ARTICLE IV CONSULTATION WITH MEMBER COUNTRIES ON COMMON POLICIES OF THE EASTERN CARIBBEAN CURRENCY UNION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE EASTERN CARIBBEAN CURRENCY UNION

July 2022

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 2022 Article IV consultation with member countries forming the 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 July 27, 2022 consideration of the staff report.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on July 27, 2022, following discussions that ended on May 31, 2022, with the officials of the ECCU on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 7, 2022.

  • An Informational Annex prepared by the IMF staff.

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

The documents listed below have been or will be separately released.

  • Selected Issues

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

Washington, D.C.

© 2022 International Monetary Fund

Press Release

PR22/279

IMF Executive Board Concludes 2022 Article IV Consultation on Common Policies of Member Countries of the Eastern Caribbean Currency Union

FOR IMMEDIATE RELEASE

Washington, DC – July 29, 2022: On July 27, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the 2022 Article IV consultation on common policies of member countries of the Eastern Caribbean Currency Union (ECCU).1

With ECCU economies slowly emerging from the pandemic with scars, the impact of the war in Ukraine is a setback to the nascent recovery. Higher food and energy prices, amid ongoing supply disruptions and intra-regional transportation bottlenecks, are raising inflation, eroding income, lowering output growth, worsening fiscal and external positions, and threatening food and energy security. As a result, inflation is expected to hover over 5½ percent in 2022. Real GDP is projected to grow by 7½ percent in 2022, leaving output still well below the pre- pandemic level. Fiscal deficits are projected to remain sizable, given continued pandemic- and disaster-related spending and temporary support to address rising living costs, thereby keeping gross financing needs and public debt at elevated levels in the near term. The financial system has remained broadly stable so far, with adequate capital and liquidity buffers, but nonperforming loans remain high and could rise further following the expiration of the ECCB’s loan moratoria program. The outlook is subject to large downside risks, primarily from further increases in commodity prices and new COVID variants amid vaccine hesitancy, in addition to the ever-present threat of natural disasters.

Executive Board Assessment2

Executive Directors welcomed the Eastern Caribbean Currency Union (ECCU) and national authorities’ response to the pandemic that contributed to a nascent economic recovery in 2021. Directors noted that ECCU economies have been scarred by the COVID-19 pandemic and that spillovers from the war in Ukraine have compounded supply disruptions and transportation bottlenecks, fueling inflationary pressures. They recognized that the recovery will be gradual and uneven and that downside risks to the outlook remain significant. In that context, Directors stressed the need to focus policies on ensuring a resilient and inclusive recovery. They also highlighted the role that Fund engagement, including capacity development, and the international community could play in supporting these objectives.

Directors stressed the importance of maintaining fiscal prudence, while protecting the vulnerable, given the lingering pandemic, heightening inflation pressures, and the tightening of global financial conditions. They agreed on the need for temporary targeted transfers and called f or efforts to improve the coverage and targeting of social safety nets. Directors saw merit in allowing a gradual pass-through of international energy and food prices to the domestic economy and phasing out generalized subsidies.

Directors underscored the importance of medium-term fiscal consolidation, supported by revenue mobilization, expenditure rationalization, fiscal structural ref orms, and reliance on concessional financing. While noting the recent progress, Directors emphasized the need to accelerate the adoption of well-designed rule-based fiscal frameworks to support consolidation ef f orts and preserve the credibility of the regional debt target. They agreed that the impact of natural disasters should be internalized in these frameworks to enhance their effectiveness and credibility.

Directors noted that the financial sector remains broadly stable so far. However, they underscored the need to closely monitor asset quality and provisioning buffers, given elevated nonperforming loans, following the exit from loan moratoria. To support private sector credit growth, Directors recommended accelerating reforms to address long-standing lending and credit constraints. They noted that risks to correspondent banking relationships can be mitigated by strengthening the region’s financial integrity, AML/CFT, governance, and offshore taxation frameworks. Directors called for efforts to reduce fragmentation in the non-bank supervision framework and expedite legislation to govern digitalized financial services. They welcomed recent steps by the ECCB to integrate climate risks in supervisory and regulatory frameworks and recommended that they also be integrated in crisis management plans. Noting the potential benefits and risks related to DCash, Directors urged the ECCB to raise public awareness and improve communication with end-users, reinforce capacity, and fully implement safeguard measures.

Directors encouraged further progress on structural policies to build climate resilience, strengthen competitiveness, and ensure food and energy security. They highlighted the importance of further investing in resilient infrastructure and insurance for natural disasters and accelerating the shift to renewables. Directors recommended upgrading intra-regional transportation infrastructure, enhancing regional integration, and investing in skills development.

Directors agreed that the views they expressed today will form part of the Article IV consultation discussions with individual ECCU members.

ECCU: Selected Economic and Financial Indicators, 2019–23 1/

article image
Sources: Country authorities; and IMF staff estimates and projections.

Includes all eight ECCU members unless otherwise noted. ECCU consumer price aggregates are calculated as weighted averages of individual country data. Other ECCU aggregates are calculated by adding individual country data.

Growth rates of data for 2020 and 2021 also reflect the impact of methodological changes.

Projections include expected fiscal costs of natural disasters.

Excludes Anguilla and Montserrat.

Title page

EASTERN CARIBBEAN CURRENCY UNION

STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION WITH MEMBER COUNTRIES ON COMMON POLICIES OF THE EASTERN CARIBBEAN CURRENCY UNION

July 7, 2022

KEY ISSUES

With ECCU economies slowly emerging from the pandemic with scars, the impact of the war in Ukraine is a setback to the nascent recovery. Higher food and energy prices, amid ongoing supply disruptions and intra-regional transportation bottlenecks, are raising inflation, eroding income, lowering output growth, worsening fiscal and external positions, and threatening food and energy security. As a result, inflation is expected to hover over 5½ percent in 2022. Real GDP is projected to grow by 7½ percent in 2022, leaving output still well below the pre-pandemic level. Fiscal deficits are projected to remain sizable, given continued pandemic- and disaster-related spending and temporary support to address rising living costs, thereby keeping gross financing needs and public debt at elevated levels in the near term. The financial system has remained broadly stable so far, with adequate capital and liquidity buffers, but nonperforming loans remain high and could rise further following the expiration of the ECCB’s loan moratoria program. The outlook is subject to large downside risks, primarily from further increases in commodity prices and new COVID variants amid vaccine hesitancy, in addition to the ever -present threat of natural disasters.

Key policy recommendations to address these challenges include:

  • Maintaining fiscal prudence while protecting the vulnerable through health spending and temporary targeted transfers and enhanced social safety nets to cope with rising living costs. Adopting well-designed rule-based fiscal frameworks would help achieve fiscal consolidation, enhance resilience to shocks such as natural disasters, and preserve the credibility of the regional debt target.

  • Addressing pandemic legacies in the financial sector, reinvigorating private credit growth, and reinforcing resilience to climate-related risks.

  • Supporting resilient and inclusive growth, with investment in skills development, climate resilience building, investment in renewable energy sources, and a strong framework for the central bank digital currency.

Approved By

James Morsink (WHD) and Natalia Tamirisa (SPR)

The mission team comprised Sònia Muñoz (head), Varapat Chensavasdijai, Nan Geng, Huidan Lin (all WHD), and Gayon Hosin (MCM). During May 3–31, 2022, the mission visited virtually all eight ECCU jurisdictions (Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines), Barbados, and Trinidad and Tobago. The team met with the Prime Ministers/Premiers and Ministers of Finance, Financial/Permanent Secretaries, and Financial Services Authorities of the eight-member jurisdictions, the Governor of the Eastern Caribbean Central Bank (ECCB) and other senior officials, the Organization of Eastern Caribbean States (OECS), the Caribbean Development Bank (CDB), and a wide range of private sector representatives. Alexandre Chailloux and Joana Pereira attended the meetings with the Prime Ministers of St. Kitts and Nevis and Dominica, respectively. Marcello Miccoli (MCM), and Herve Tourpe and Arvinder Bharath (both ITD) attended the meetings on DCash. Rosamund Edwards (OED) attended some meetings. Philip Jennings and Paul Mooney (both OED) participated in the concluding meeting. ECCU individual country teams participated in their respective country meetings and WHDC1 staff also presented in the research seminar at the ECCB.

Contributors: ECCU team. Additional analytical inputs were provided by Swarnali Ahmed Hannan, Olusegun Akanbi, Michal Andrle, Isabela Duarte, Emilio Fernandez-Corugedo, Roberto Garcia-Saltos, William Gbohoui, Alejandro Guerson, Chao He, Janne Hukka, Salma Khalid, Marie Kim, Weicheng Lian, Rui Mano, Beatriz Nunes, Camila Perez Marulanda, Manuel Rosales Torres, Dmitry Vasilyev, Raadhika Vishvesh, and Huilin Wang. Raadhika Vishvesh also provided research assistance. Anahit Aghababyan provided administrative assistance.

Contents

  • A SETBACK TO RECOVERY FROM THE PANDEMIC

  • CHALLENGING OUTLOOK

  • POLICY DISCUSSIONS: ENSURING A RESILIENT AND INCLUSIVE RECOVERY

  • A. Strengthening Fiscal Frameworks to Withstand Shocks and Safeguard Debt Sustainability

  • B. Addressing Pandemic Legacies, Reinvigorating Private Credit Growth, and Reinforcing Financial Sector Resilience to Shocks

  • C. Building Climate Resilience and Enhancing Competitiveness

  • D. Statistical Issues

  • AUTHORITIES’ VIEWS

  • STAFF APPRAISAL

  • BOXES

  • 1. Scarring Effects of the Pandemic in the ECCU

  • 2. Fiscal Rules in the Presence of Natural Disasters

  • 3. Climate Risk Resilience of the ECCU Financial System

  • FIGURES

  • 1. External Sector Developments

  • 2. Monetary Developments

  • 3. Financial Sector Developments—Credit Risk Impact of the Pandemic

  • 4. Financial Sector Developments—Business Impact of the Pandemic

  • TABLES

  • 1. Selected Economic and Financial Indicators, 2019–23

  • 2. Selected Economic Indicators by Country, 2019–27

  • 3. Selected Central Government Fiscal Indicators by Country, 2019–27

  • 4. Selected Public Sector Debt Indicators by Country, 2019–27

  • 5. Summary Balance of Payments, 2019–27

  • 6. Selected Vulnerability Indicators, 2016–21

  • 7. Financial Structure, 2021

  • 8. Financial Soundness Indicators of the Banking Sector, 2016–21

  • 9. Financial Soundness Indicators of the Banking Sector by Country, 2016–21

  • ANNEXES

  • I. Implementation of Past Fund Policy Advice

  • II. Risk Assessment Matrix

  • III. External Sector Assessment

  • IV. Tourism in the ECCU: The Path of Recovery

  • V. Inflation Dynamics in the ECCU: External Cost Shocks and Propagation

  • VI. Lessons for the ECCU and Its Members from Countries’ Experience with Fiscal Rule

  • VII. Insurance Penetration and Natural Disasters

  • VIII. Natural Disaster Impact on the ECCU Banking System Asset Quality

  • IX. United Kingdom Overseas Territories—Anguilla and Montserrat

1

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of these bilateral Article IV consultation discussion, staff hold separate annual discussions with the regional institutions responsible for common policies in four currency unions—the Euro Area, the Eastern Caribbean Currency Union, the Central African Economic and Monetary Union, and the West African Economic and Monetary Union. For each of the currency unions, staff teams visit the regional institutions responsible for common policies in the currency union, collects economic and financial information, and discusses with officials the currency union’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis of discussion by the Executive Board. Both staff’s discussions with the regional institutions and the Board discussion of the annual staff report will be considered an integral part of the Article IV consultation with each member.

2

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm

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Cover IMF Staff Country Reports
Eastern Caribbean Currency Union: 2022 Article IV Consultation with Member Countries on Common Policies of the Eastern Caribbean Currency Union-Press Release; Staff Report; and Statement by the Executive Director for the Eastern Caribbean Currency Union
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2022: Issue 253
Publisher:
International Monetary Fund
ISBN:
9798400216794
ISSN:
1934-7685
Pages:
91
DOI:
https://doi.org/10.5089/9798400216794.002