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.
Search for other papers by International Monetary Fund. Western Hemisphere Dept. in
Current site
Google Scholar Close
Publication Date:
29 Jul 2022
eISBN:
9798400216794
Language:
English
Keywords:
IMF staff calculation; ECCU consumer price aggregate; ECCU member; ECCU authorities; ECCU economy; Natural disasters; COVID-19; Caribbean
Download PDF (4.1 MB)

1. Prior to the war in Ukraine, the pandemic had inflicted large output losses in the Caribbean, particularly for tourism-dependent economies such as the ECCU. The severity of the output contraction due to COVID-19 in the Caribbean and the ECCU was greater than during the global financial crisis and in the rest of the world. Staff’s analysis suggests that large output losses can be explained by the sectoral composition of output (with tourism being a high-contact service sector) and the availability of fiscal space (Box 1 and Selected Issues Paper). Severe transportation bottlenecks, especially intra-regional air travel, could worsen scarring effects, if left unaddressed.1

Abstract

1. Prior to the war in Ukraine, the pandemic had inflicted large output losses in the Caribbean, particularly for tourism-dependent economies such as the ECCU. The severity of the output contraction due to COVID-19 in the Caribbean and the ECCU was greater than during the global financial crisis and in the rest of the world. Staff’s analysis suggests that large output losses can be explained by the sectoral composition of output (with tourism being a high-contact service sector) and the availability of fiscal space (Box 1 and Selected Issues Paper). Severe transportation bottlenecks, especially intra-regional air travel, could worsen scarring effects, if left unaddressed.1

A Setback to Recovery from the Pandemic

1. Prior to the war in Ukraine, the pandemic had inflicted large output losses in the Caribbean, particularly for tourism-dependent economies such as the ECCU. The severity of the output contraction due to COVID-19 in the Caribbean and the ECCU was greater than during the global financial crisis and in the rest of the world. Staff’s analysis suggests that large output losses can be explained by the sectoral composition of output (with tourism being a high-contact service sector) and the availability of fiscal space (Box 1 and Selected Issues Paper). Severe transportation bottlenecks, especially intra-regional air travel, could worsen scarring effects, if left unaddressed.1

uA001fig01

Output Losses

(Percentage difference from precris is WEO)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Source: IMF staff calculations.Note: Bars show the percent difference in real GDP after the crisis and anticipated GDP for the same year prior to the crisis for the indicated group. For the COVID-19 crisis, it compares the forecasted GDP levels from WEO Jan 2022 for 2020 and 2021 versus the ones from the WEO Oct 2019 (prior to the pandemic). For the global financial crisis, it compares the level from WEO Apr 2007 for 2012 versus the observed 2012 GDP.
uA001fig02

Fiscal Adjustment Needs in 2022

(Difference between primary balance and debt stablizing primary balance in 2022; Percent of fiscal year GDP)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Source: IMF staff estimates.Note: The debt-stabilizing primary balance was estimated using the Jan 2022 WEO projections for long-term growth, implied interest rates, and 2022 debt.

2. The pandemic also led to significant losses of human capital. In addition to unprecedented output losses and increased fiscal adjustment needs, the ECCU countries suffered prolonged nationwide school closures between March 2020 and October 2021, with potential negative long-term impact on human capital (Box 1 and Selected Issues Paper). Vaccination played a role in containing hospitalizations and deaths amid four waves of COVID-19 outbreaks, but the share of the fully vaccinated population in the ECCU is relatively low due to vaccine hesitancy.

uA001fig03

COVID-19 Pandemic Impact on Labor Force

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: UNESCO global dataset, Max Planck Institute for Demographic Research, and IMF staff calculations.Note: The LHS shows the average number of weeks in the region that schools were closed between March 2020 and October 2021.The RHS shows the percentage of young COVlD-19 deaths registered until March 2022.
uA001fig04

People Vaccinated

(In percent of total population as of June 28, 2022)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Oxford’s “Our World in Data” project from Haver, World Economic Outlook database, and IMF staff calculations.1/ SA refers to South America and M EX refers to Mexico.2/ CAPDR refers to Central America, Panama and the Dominican Republic.3/ Other Caribbean includes BHS, BLZ ERB, GUY. HTI, JAM, SUR and HO.

Scarring Effects of the Pandemic in the ECCU

Scarring effects occur when the economic damages induced to the factors of production during recessions prevent economies from recovering to their pre-pandemic trend, also called hysteresis. Forecast revisions across WEO vintages before, during, and after a particular shockare used to measure the extent of the unexpected losses. The severity of the output contraction in ECCU countries from the ongoing pandemic suggests a significant potential for scars.

The exposure to high-contact sectors, the lack of fiscal space, and human capital losses explain where the scars might come from in the ECCU.Countries with significant importance of high-contact sectors, such as tourism, or limited fiscal space to mitigate the pandemic, like those in the ECCU, are expected to suffer the most. After controlling for restrictions on mobility and other variables, staffs empirical results show that high tourism exposure and low economic diversification are correlated with the output losses during 2020–22 in the ECCU, measured as downward revisions to growth forecasts. The impact of the pandemic on the quality of human capital, induced by school closures and young deaths, has the potential to have the largest negative long-term consequences.

uA001fig05

ECCU: Real GDP

(2019=100)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Source: IMF staff calculations.
uA001fig06

GDP Losses in 2022 and Tourism Intensity

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: World Travel & Tourism Council and IMF staff calculations.Note: The y-axis shows the real GDP loss in 2022 due to the COVlD-19 pandemic, estimated comparing the Oct 2019 WEO and Jan 2022 WEO forecats.
uA001fig07

GDP Losses and Economic Complexity

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Harvard Growth Lab and IMF staff calculations.Note: The x-axis shows the countries‘ Economic Complexity Index. Countries improve their complexity indicator by increasing the number and complexity of the products exported; the index was normalized to range between 0 and 42, with 0 representing least complexity.

The fiscal effects of the pandemic are evident. With a reduction in economic activity, the need to provide support, and the contraction in tax revenues, fiscal deficits widened and public debt soared. Most ECCU countries now have a smaller fiscal space, and some need to allocate a larger share of revenues into interest payments. This suggests that the governments’ ability to invest in projects with a higher fiscal multiplier, such as infrastructure, will be reduced in the coming years. In other words, the impact of the pandemic on the fiscal accounts will also affect long-term growth and can be another potential sourceof hysteresis in the region.

uA001fig08

EMDEs: Fiscal Implications of Scarring Effects

(In Percent of FY GDP)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Source: IMF staff calculation;.Note: The y-axis represent: the difference between the primary balance sustainability gap (debt stabilizing primary balance – primary balance) estimated with data from WEO 2022 and WEO 2019; the debt stabilizing primary balance was estimated using each WEO projections for long term growth, implied interest rates and 2022 debt. The x-axis shows the difference between January 2022 WEO Interest Payments Projections and October 2019 WEO Projections for 2022.

3. Economic recovery in 2021 was slow and the war in Ukraine constituted a setback for early 2022. ECCU GDP is estimated to have expanded by 5 percent in 2021, following a sharp contraction of 17½ percent in 2020. Strong tourism rebound led the recovery in some countries (such as Antigua and Barbuda, and St. Lucia), while activity in other sectors, particularly construction, helped cushion the drag from a slower tourism revival in others (such as Dominica and Grenada). Tourism performance can be explained by differences in pent-up demand, quarantine restrictions, flight connectivity, and luxury hotels among countries (Annex IV). High frequency indicators in the first quarter of 2022 pointed to continued pick-up in domestic activity, while there are early signs of construction activity being affected by increases in material prices and logistical difficulties. The labor market remained weak with high unemployment, although there were signs of improvement.2

uA001fig09

ECCU Real GDP Growth By Economy

(In percent)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities and IMF staff calculations.
uA001fig10

Caribbean: Stayover Tourist Arrivals

(In percent change relative to the same month in 2019)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources Caribbean Tourism Organization, ECCB, and IMF staff calculations.1/ Does not include HTI and SUP as no CTO data are available for these countries.

4. Headline inflation increased strongly across the region, driven by rising food, fuel, and transportation prices. The war has compounded existing supply chain disruptions and transportation bottlenecks, driving inflation in several countries to 5–7 percent (year-on- year) in March-April. Differences in headline inflation across countries reflected varying degrees of reliance on imported food and fuel as well as pass-through of international prices to domestic prices that can be heavily influenced by policy measures to mitigate the impact of rising living costs.

uA001fig11

ECCU Inflation and Global Prices

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB, World Economic Outlook database, and IMF staff calculations.1/ GDP-weighted CPI inflation. Inflation in St. Kitts and Nevis is markedly lower than the ECCU average due to a combination of factors, including government controls on utility and transport prices, tax reductions on food and fuel imports, and NEER appreciation since 2021.

5. Fiscal policies in 2021 and early 2022 remained supportive as priority spending continued. ECCU’s overall fiscal deficit is estimated to have narrowed to 3¼ percent of GDP in 2021, an improvement by about 2¼ percentage points from 2020, largely reflecting buoyant Citizenship-by-lnvestment (CBI) revenues, particularly in Dominica and St. Kitts and Nevis. Nonetheless, the overall underlying deficit (net of CBI revenues) is estimated to have remained sizable at about 9½ percent of GDP in 2021 (11 percent in 2020), given continued pandemic-related health outlays and fiscal support to households and firms in hard-hit sectors, as well as volcanic eruption-related spending (for St. Vincent and the Grenadines).3 Dominica and Grenada also increased capital spending to support the recovery and climate resilience building. Meanwhile, some highly indebted countries have resumed fiscal consolidation to restore debt sustainability (e.g., Antigua and Barbuda and St. Lucia). Taking into account moderate overall deficits and higher growth, the overall public debt in 2021 is estimated to stay broadly the same as in 2020, at around 85 percent of GDP. Preliminary fiscal data in early 2022 suggest continued supportive stance as most countries introduced temporary exemptions on taxes, customs service charges, and electricity surcharges to alleviate the impact of higher food and fuel prices, besides fuel price caps in some countries.

uA001fig12

Discretionary Fiscal Measures: 2020–2021

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities and IMF staff calculations.
uA001fig13

Overall Balance

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities and IMF staff calculations.
uA001fig14

CBI Revenues

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities and IMF staff estimates.

6. Fiscal financing relied mostly on external sources. In addition to the emergency financing disbursed in 2020, the IMF Executive Board approved emergency financing in July 2021 for St. Vincent and the Grenadines under the Large Natural Disaster Window of the Rapid Credit Facility (RCF), totaling SDR 8.17 million (about US$11.6 million), following the La Soufriere volcanic eruption.4 The ECCU region received SDR allocations totaling SDR 89.6 million (about US$126 million) in August 2021, which have been mainly used to bolster reserves. The region continued to receive significant financial support from the World Bank and the Caribbean Development Bank. Governments also relied on their deposits at the ECCB and commercial banks.5

uA001fig15

External Official Financing, 2020–21

(In millions of US dollars)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities and IMF staff calculations.1/ Includes bilateral financing.
uA001fig16

ECCB Claims on General Government 1/2/

(Cumulative changes from January 2020; in millions of EC dollars)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB and IMF staff calculations.1/ Security holdings.2/ ECCB currently holds no claims on GRD or MSR. Changes in amounts for DMA, KNA and VCT include real location of their available credit from the ECCB in benefit of other member states.

7. The ECCU financial system has remained broadly stable so far, despite lingering legacy weaknesses. Financial institutions have maintained stable capital and ample liquidity up to end- 2021. Banks have mostly retained positive profitability despite the burden of additional provisioning, buoyed by strong overseas investment returns in some banks. However, intensified competition has compressed bank lending margins and the pandemic further constrained credit growth. In addition, the stepped-up global financial market volatility, since early 2022, has adverse implications for earnings of institutions with large overseas investment portfolios, which are predominantly held in U.S. traded securities. The two-year loan moratoria that expired end-March 2022 could have deferred pandemic-related earning losses and therefore lead to an uptick in nonperforming loans (NPLs).6 Moreover, NPLs remain elevated at nearly 12 and 7 percent of total loans of banks and credit unions respectively at end-2021.7 To support adequate loan loss provisioning, the ECCB has introduced more stringent provisioning guidance in effect from January 2022, and as of the first quarter of 2022 most banks were compliant with the required initial coverage ratio of 60 percent of all NPLs.8The loan moratoria programs for credit unions introduced by the national supervisors also expired and provisioning improved marginally to 54 percent at end-2021. The sale of Royal Bank of Canada (RBC)’s regional operations to a group of local banks in April 2021 increased the local banks’ share of total system assets to two-thirds. Insurance sector capital and liquidity have also remained relatively stable across the region.

uA001fig17

ECCU: Net Earnings before Taxes 1/

(Relative to corresponding 2019 period, in percent)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB and IMF staff calculations.1/ Montserrat (not depicted) reported negative net earnings over the pandemic.
uA001fig18

ECCU: Bank Asset Quality Indicators

(In percent of total loans)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB and IMF staff calculations.
uA001fig19

ECCU: Bank Loans Under Moratoria by Country

(In percent of total ECCU loan stock)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB and IMF staff calculations.

8. The current account deficit remained elevated. Staff estimates that the current account deficit rose further to around 16¾ percent of GDP in 2021, as higher goods imports offset the improvement in services balance. The ECCB’s stock of international reserves remained stable around the pre-pandemic level, equivalent to 5 months of imports of goods and services in 2022. The currency backing ratio under the quasi-currency board mechanism stood at 95.4 percent of at end-February 2022.9 The real effective exchange rate (REER) depreciated by 5 percent in 2021, mainly reflecting a stronger increase in trading partners’ inflation.

uA001fig20

ECCB Currency Board Backing Ratio 1/

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB and IMF staff calculations.1/ Defined as foreign assets divided by demand liabilities.

9. In March 2021, the ECCB launched the pilot program of its Central Bank Digital Currency (CBDC), DCash. It was rolled out in all ECCU countries and is limited in scale with a cap of EC$10 million on issuances, less than one percent of cash in circulation.10 The uptake so far has been generally slow, largely due to the lack of marketing and public awareness as well as resource constraints faced by financial institutions and merchants in the context of increased burden posed by the pandemic and acquisitions and mergers following the exit of several foreign banks from some ECCU countries. Between January and March 2022 DCash experienced an extended outage on account of a problem with the system’s operational management processes of digital certificates. While leaving the Distributed Ledger Technology and existing data and transactions intact, the outage disrupted new transactions and on-boarding of new users.

Challenging Outlook

10. The recovery is expected to remain gradual and uneven, driven by the varying pace of tourism rebound and domestic activity across countries. Staffs baseline scenario assumes a gradual return of tourism to the 2019 level only in 2024. The impact of tighter global financial market conditions on domestic interest rates and financial stability will be limited, given regional banks’ excess liquidity and non-reliance on external borrowing. Nevertheless, a more appreciated Eastern Caribbean dollar against non-U.S. dollar currencies as a result of higher U.S. interest rates will weaken ECCU competitiveness, especially in the tourism sector. At the same time, the baseline assumes that once the recovery is on a solid footing, most countries (i.e., Antigua and Barbuda, Dominica, Grenada, and St. Vincent and the Grenadines) would resume the implementation of their fiscal consolidation plans to reach the ECCU regional debt target of 60 percent of GDP by 2035. Real output is projected to grow by 7½ percent in 2022 and reach the 2019 level by 2024, with its growth converging to around 2¼ percent over the medium term.11

uA001fig21

Real GDP Index

(2019=100)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources Country authorities, I’VEO database, and IMF staff calculations.1/ Includes Guyana, Surinarne, and Trinidad and Tobago.
uA001fig22

ECCU-6: Public Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities, WEO database, and IMF staff calculations.

11. Rising inflation pressures underpin the cautious outlook for recovery. Staff estimates that the impact of high shipping cost on the ECCU could persist in 2022 (Annex V). Inflation is expected to peak in 2022 above 5½ percent from 1½ percent in 2021, reflecting also increases in food and fuel prices, as the war in Ukraine and pandemic linger, that are partly offset by measures such as fuel price caps in Grenada and St. Lucia and government price controls on utilities and transport in St. Kitts and Nevis. With the expiration of loan moratoria in March 2022, nonperforming loans could increase further.

uA001fig23

Impact on Inflation of the Shipping Cost Kept at December 2021 level

(In percentage point)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities, Haver, and IMF staff calculations.

12. Downside risks to the outlook are significant. A further escalation of sanctions arising from the war in Ukraine would result in higher food and energy prices, which would add to inflationary pressures, in turn further eroding income and weighing on demand, including from key tourism source markets. Slowing growth in advanced economies due to tighter monetary policy would also dampen tourism in the ECCU. Additional disruptions of supply chains and associated higher shipping and raw materials costs would hold back construction activity—a key contributor to the recovery for many ECCU countries. Outbreaks of new COVID variants would hamper the tourism recovery, put additional strain on pandemic-related spending, and delay fiscal adjustments. A cancellation of CBI programs in response to pressure exerted by the EU and U.S. would eliminate a major source of fiscal revenues in several ECCU countries and could have a negative impact on correspondent banking relationships (CBRs).12 Cyber-attacks on critical digital infrastructure could trigger financial instability or disruptions in socio-economic activities. Recurrent natural disasters pose an ever-present risk. On the upside, further relaxation of COVID-related health protocols globally could prompt a faster tourism recovery than envisaged (Annex II).

Policy Discussions: Ensuring a Resilient and Inclusive Recovery

With the lingering pandemic, heightened inflation pressures exacerbated by the war in Ukraine, and the tightening of global financial conditions, the near-term policy priority should be to maintain fiscal prudence while protecting the vulnerable through health spending, temporary targeted transfers, and enhanced social safety nets. Adopting well-designed rule-based fiscal frameworks would help achieve fiscal consolidation, withstand shocks including natural disasters, and preserve the credibility of the regional debt target. Over the medium term, policies should shift focus towards supporting resilient and inclusive growth, with climate resilience building, investment in renewables, enhanced regional integration, and a strong framework for the central bank digital currency. Financial sector policies should aim to address pandemic legacies, reinvigorate private credit growth, and reinforce resilience to climate-related shocks.

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

13. The pandemic has aggravated the ECCU countries’ long-standing fiscal sustainability problems, further exacerbating vulnerabilities to shocks. ECCU countries have high public debt, largely reflecting earlier procyclical policy and susceptibility to large shocks, particularly natural disasters, relative to their small size.13 As a result of the pandemic, the worsening of the fiscal position 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 about 66 percent of GDP in 2019 to 85¼ percent of GDP in 2021—well above peer averages and the 60 percent of GDP ECCU debt ceiling. This will, in turn, constrain the fiscal space (through higher adjustment needs and interest bills) to deal with future natural disasters, including spending on ex-ante disaster preparedness, hampering growth prospects thus generating scarring effects.14

uA001fig24

ECCU: Public Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities and IMF staff calculations.
uA001fig25

Damage From 50 Largest Natural Disasters

(1980–2020; damage in percent of GDP)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: EM-DAT, WEO, and IMF staff calculations.

14. Near-term policy should focus on maintaining fiscal prudence while protecting the vulnerable. The aggregate fiscal stance (as measured by overall deficit net of CBI revenues) embedded in ECCU countries’ 2022 budget plans is expected to remain accommodative at about 8 percent of GDP (compared to the average of 4½ percent of GDP during 2016–19).15 The limited fiscal space necessitates balancing difficult trade-offs, giving priority to health spending and support to cope with rising living costs. Given the concerns with food and energy security and the less developed safety nets, temporary price subsidies can be considered and targeted transfers could be provided to the vulnerable by expanding the most effective existing social assistance programs. Countries should allow a gradual pass-through of international energy and food prices to domestic prices, while committing to phase out generalized subsidies (such as fuel price caps and tax exemptions) in the coming years to help reduce fiscal cost, avoid adverse distributional impact, and promote green transformation.16 This should be accompanied by expedited efforts to enhance coverage and targeting of social safety nets, including by centralizing and digitalizing beneficiary information and payment systems (while protecting recipients with limited IT access) to reduce duplication and omission. Countries facing large near-term gross financing needs should seek longer-term arrangements with IFIs, including IMF-supported programs that can help catalyze donor support, and minimize the reliance on the ECCB credit line to safeguard the quasi-currency board.

uA001fig26

Fiscal Revenue Loss of Fuel Price Relief

(Estimates; in percent of GDP)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities and IMF staff calculations.1/ The estimated foregone consumption tax reflects the increase in domestic fuel prices in March 2022 and the government’s monthly tax collection target,2/ The government removed the customs service charge on fuel imports and introduced a subsidy. The cost is estimated for two months of FY2021 and six months of FY2022 (FY = July – June)3/ Fiscal cost of the cap on fuel prices in 2022 is calculated assuming the cap is removed in June.4/ The estimated foregone revenue includes a reduction of excise tax on fuel imports from ECS2.25 per gallon to ECS0.95 per gallon from April through September 2022.5/ Foregone excise tax is calculated against the target of ECS4 per gallon (FY= April – March).6/ Foregone revenue is estimated based on a temporary reduction of excise taxes and customs service charges on fuel for three months, effective from May 2022.
uA001fig27

ECCU-6: Public Gross Financing Needs

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources.: Country authorities and IMF staff calculations.

15. Over the medium term, fiscal consolidation should resume with the composition of spending shifting to boost growth. High-debt countries should proceed with fiscal consolidation efforts by mobilizing domestic revenues and rationalizing lower-priority spending, and rely largely on low-cost financing to safeguard debt sustainability. Moving from income support and job retention measures to implementing active labor market policies (ALMPs) would facilitate reallocation and training.17

16. Creating fiscal space for productive investment and resilience building will be critical to support a resilient and inclusive recovery. This will require further progress on ongoing revenue administration reforms and rationalization of tax expenditures18 which can help broaden the tax base, enhance compliance, and reduce leakages, including from the informal economy. There is also scope for enhancing the efficiency of spending. For instance, a comparison with other countries in the region reveals that ECCU countries spend more on wages than the average in terms of GDP, squeezing the room for public investment. In addition, ECCU countries’ ongoing efforts to strengthen public investment management will support effective planning, allocation, and implementation and mitigate fiscal costs and risks.19

uA001fig28

Estimated Size of Informal Economy1’

(In percent of total economic activity, average 2011—19)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Source: IMF staff estimates.1 Estimates from multiple indicator mulitple cause (MIMIC) model that relates the latent unobserved variable (the informal economy) to its possible drivers (tax rate, size of agriculture and tourism, regulatory quality) and observable variables (employment rate, real GDP growth). The analysis suggests that the t>urden of taxation increases the size of the shadow economy, while a larger tourism sector and better government regulatory quality decrease it.
uA001fig29

Wage Bill

(In percent of GDP; latest available)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities and IMF staff calculations.

17. ECCU countries should accelerate the adoption or reactivation of well-designed rule-based country-specific fiscal responsibility frameworks (FRFs) to help achieve fiscal consolidation and preserve the credibility of the regional debt target. While the ECCU adopted a debt rule relatively early, particularly compared to countries with similar characteristics, the regional policy framework for reaching the agreed debt ceiling has had a limited effect on fiscal outcomes due to lack of an operational target and enforceability (Annex VI). To support the regional rule at national levels and consistent with past staff advice, several ECCU countries have adopted rule-based FRFs, including Anguilla (2013), Grenada (2015), St. Vincent and the Grenadines (2020), Antigua and Barbuda (2021), and Dominica (2021). However, due to the impact of pandemic, the implementation of the rules has been suspended since 2020 and some countries are revisiting the existing rules with a view to addressing some design weaknesses and recalibrating parameters considering the pandemic-related surge in debt and sizable disaster resilience investment needs. In this context, the need to adopt or reactivate well-designed FRFs has become more pressing to signal credible medium-term fiscal plans, given the potential increase in external borrowing costs due to tighter global financial conditions and elevated debt.

uA001fig30

Number of Countries with Fiscal Rule

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: FAD Fiscal Rule database, and IMF staff calculations.Note: “ECCU peers” include small states with large exposures to natural disasters.
uA001fig31

Debt Improvement with Fiscal Rule

(Change of 5 year average post and pre FR adoption)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: WEO, FAD Fiscal Rule database, and IMF staff calculations.Note: “ECCU peers” include small states with large exposures to natural disasters.

18. When setting up or amending their FRFs, ECCU countries should internalize the impact of natural disasters to enhance their effectiveness. International experience suggests that FRFs are generally more effective when having medium-term fiscal anchors (typically targeting gross public debt) supported by operational targets. Avoiding excessive restrictions that ultimately impinge on capital expenditure is particularly important, to allow for much needed climate resilient investment,20 as well as having well-defined escape clauses and independent fiscal oversight councils. The framework should also aim to provide a cushion to the vicious circle between large government debt and low economic growth following large natural disasters. Staffs simulations using a fiscal rule calibration toolkit for Grenada and St. Vincent and the Grenadines show that greater exposure to natural disasters warrants setting lower country-specific debt ceilings (red relative to blue bars) than the regional ceiling. Disaster mitigating financial buffers (green bars) would allow for higher debt ceilings (Box 2 and Selected Issues Paper).

uA001fig32

Debt Target Without and With Natural Disasters (NDs)

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities and IMF staff calculations.

Fiscal Rules in the Presence of Natural Disasters

Natural disasters suggest more conservative country-specific debt targets and ex-ante operational target paths. Using the IMF’s fiscal rule calibration toolkit modified to explicitly account for natural disasters in Grenada and St. Vincent and the Grenadines, staff found that debt ceilings should be set lower, the larger the exposure to natural disasters to assure sustainability (Selected Issues Paper). The debt ceiling, however, will also depend on whether countries have disaster mitigating financial buffers, such as self-insurance, insurance policies, disaster clauses in debt securities, access to grants conditional on disasters, and robust private self-insurance. Moreover, in the event of a natural disaster, a country whose debt is above its chosen ceiling and aims to return to the ceiling in a certain number of years, needs to set operational targets conservatively to reach the ceiling while supporting the economy. Staff analysis illustrates that countries need to build and preserve fiscal space in the face of climate-related shocks.

uA001fig33

Stylized Example for Grenada Assuming Debt Target is Reached in 2027 Under a Hypothetical Natural Disaster

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: FAD operational tool, country authorities” data, and IMF staff calculations.

For small open economies with high exposure to natural disasters and elevated initial level of debt, primary balance rules could be preferable to expenditure rules. Two types of rules were considered in the IMF’s GIMF model to simulate different operational rules for Grenada and St. Vincent and the Grenadines: (i) expenditure rules that constrain public spending to ensure debt convergence within ten years following a natural disaster shock; and (ii) primary balance rules set to achieve a primary balance target that is consistent with long-term debt stability. Staff results show that primary balance rules perform better for countries with high levels of public debt, where the speed of convergence to the debt target may be a relatively more important concern than counter-cyclicality. For the same reason, primary balance rules that adjust untargeted transfers are also relatively more favorable for countries that are more open because fiscal multipliers are generally lower (Selected Issues Paper for more details).

uA001fig34

Under Natural Disasters, Using Low-multiplier Adjusters is Even More Important

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Source: IMF staff estimates.Note: Absolute standard deviations such that lower numbers imply less volatility in GDP and the debt- to-GDP ratio.

19. Operational targets must be tailored to country circumstances, including exposure to natural disasters, initial level of debt, and the degree of openness. Natural disasters increase the volatility of both output and debt (the black arrows point northeast). The choice of the operational target would need to balance the trade-off between counter-cyclicality and the speed of debt convergence to target. Staff analysis finds that expenditure rules have the advantage of facilitating countercyclical fiscal policy (reducing GDP volatility), while primary balance rules assure a swifter return to the debt ceiling. Hence, ECCU countries whose debt is more elevated compared to their debt ceiling may favor primary balance rules. Provided the primary balance rule is achieved by adjusting revenue or expenditure components with low multipliers on growth (e.g., untargeted transfers), a primary balance rule can closely match the benefit of expenditure rules (Box 2 and Selected Issues Paper).

20. Strong fiscal institutions are key to underpin the effective implementation of country specific FRFs. The success of FRFs also relies on fiscal institutional reforms, including improving the budget process and government statistics, strengthening the role of national fiscal councils and state-owned enterprise (SOE) oversight, and enhancing medium-term fiscal framework and public investment management. Robust common standards and arrangements to guide national fiscal policies and a regional fiscal oversight entity would also help ensure timely implementation of the necessary fiscal adjustment measures and limit spillovers from unsustainable public finances.21

uA001fig35

Operational Rules under Natural Disasters: Expenditure Versus Primary Balance Rules

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Source: IMF staff estimates.Note: Absolute standard deviations such that lower numbers imply less volatility in GDP and the debt-to-GDP ratio.

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

21. Asset quality and provisioning buffers should remain underdose monitoring following the exit from loan moratoria. Moratoria loans have been unwound over the two-year period to end-March 2022 through a mix of resumption of normal loan repayments, loan restructuring based on lenders’ case-by-case assessments, and transition to NPLs where borrower conditions cannot support restructuring.22 While banks and credit unions on aggregate have sufficient capital buffers to absorb additional losses, intensified monitoring against relapses in loan performance is warranted given ongoing high NPLs, likely continued fragilities in borrower balance sheets, and emergence of new uncertainties, including the war in Ukraine.23The ECCB and national regulators should continue to ensure that provisioning accurately reflects balance sheet risks and losses, and intensify scrutiny of weaker institutions with high NPLs and lagging provisioning compliance. With improved provisioning buffers based on compliance with the ECCB’s recent provisioning guidance, more banks are engaging in negotiations to dispose of NPLs. However, resolving problem loans remains constrained by ineffective foreclosure processes in some jurisdictions and the need for further progress on pricing to attract funding, given ECAMC’s limited resources.24 Complementary efforts are therefore needed to address these asset recovery constraints. In the context of acknowledged vulnerabilities to emergent global financial market volatility, intensified monitoring of banks with large overseas investments is also warranted.

22. The protracted recovery from the pandemic calls for renewed emphasis to support private sector credit growth. Despite some recovery in recent years, bank lending remains sluggish even as deposit growth has proven robust.25 The system consequently sits on a large pool of liquid resources (around half of total deposits and 60 percent of GDP). More than half of these assets are invested in overseas deposits and traded securities, elevating the banking sector’s market risk profile and making the ECCU banking system a net foreign creditor, despite significant local investment needs. Increased competition has resulted in the compression of local lending rates and bank margins. Local banks have started to selectively engage in limited syndication of large regional loans within their risk appetite. To better target otherwise scarce regional resources to support the post-pandemic recovery, the ECCU would benefit from renewed focus on measures to address longstanding lending and credit access constraints, including:

  • Establishment of a regional credit bureau and registry, where passage of relevant legislation remains pending in some jurisdictions, and modernization of national insolvency laws to facilitate out-of-court settlement and clarify creditor rights that can help streamline lending processes and encourage prudent risk-taking.

  • Ongoing development-partner-backed initiatives to address collateral constraints to access credit by micro-, small- and medium-sized enterprises (MSME), including the recently launched regional partial credit guarantee scheme (Eastern Caribbean Partial Credit Guarantee Corporation) that also aims to support MSME capacity building, and the pilot program in St. Lucia to facilitate use and registration of movable collateral.

  • Revisiting the 2 percent minimum (household) savings deposit rate (over 40 percent of total deposits), which likely weakens credit affordability, hinders local capital market development and encourages overseas investment in search for compensating yield, thereby contributing to the growing private sector savings-investment imbalance in the region.

  • Passage of relevant securities legislation by jurisdictions where these remain pending, to strengthen the framework that will help deepen capital markets and improve opportunities for financing of local investment needs.

uA001fig36

ECCU: Bank Deposits and Resident Private Credit

(In billions of EC dollars)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB and IMF staff calculations.
uA001fig37

Selected ECCU Bank Interest Rates

(Weighted average rate, in percent)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB and IMF staff calculations.

23. Decisive steps should be taken to protect already limited local bank CBRs. Recent EU and U.S. proposals to phase out CBI programs could intensify the scrutiny of compliance risks in the ECCU financial system, thereby increasing CBR risks for the local banks that are becoming systemic with the exit of international banks.26 This makes addressing any remaining shortfalls in the region’s financial integrity, AML/CFT, governance and offshore taxation frameworks of critical importance. ECCU members should pursue regional coordination—including minimum standards—of oversight and transparency of CBI programs, tackle issues identified in the national CFATF mutual assessments, ensure consistency with global taxation standards, and complete designation of the ECCB as the competent AML/CFT authority over institutions licensed under the Banking Act in the three pending jurisdictions.

24. The regional authorities are progressing on an ambitious agenda of oversight reforms, but complementary efforts are needed to resolve the currently fragmented non-bank supervision framework. The proposed new regional standards setting body (RSSB) can help move the ECCU non-banks under a common regulatory rulebook, but more resolute parallel efforts are needed to advance consolidated supervision of financial conglomerates that operate across the region, strengthen risk-based insurance supervision and risk-mitigation standards, and address notable data gaps.27 With increasing unregulated operations, such as crypto cash, the authorities should expedite the passage (where pending) and implementation of the Virtual Assets Business legislation and bolster the resources and capacity of national supervisory authorities in task with this new oversight mandate. The proposed ECCB’s Technology Risk Standard can support uniform mitigation of cyber threats, identified by banks as a key risk area.28

25. Strengthening supervision, reporting and regulatory frameworks against climate change risks can help further build financial system resilience. The ECCU financial system has been remarkably resilient to natural disasters in the past. However, such risks may increase with climate change (Box 3). Key steps to mitigate risks should include:

  • Increasingly incorporating physical climate risks in regional and national supervisory frameworks, supported by reporting structures that allow for more granular monitoring of different risk transmission channels, including also sovereign and insurance counterparty risks.

  • Tailoring risk assessments and stress tests to scenarios that account for not only more intense or frequent storms, but also resilience of critical infrastructure.

  • Developing regulatory measures to support climate risk-aware lending practices, exposure diversification (e.g., excessive concentration to single insurer, sector or sovereign), adequacy of prudential risk buffers (e.g., for systemic institutions), and ex-post asset recovery.

The ECCB’s advanced work in these areas is welcome.29 Efforts should extend to integrating physical climate risk scenarios in the authorities’ financial system crisis management plans to ensure adequacy of policy intervention frameworks.

Climate Risk Resilience of the ECCU Financial System

The ECCU financial system has been remarkably resilient to the impact of natural disasters. The modest impact of natural disasters in the financial system is due to high share of insurance obligations ceded to reinsurance, significant (insured property) collateral requirements, limited direct bank exposures to most vulnerable sectors such as tourism and agriculture, and relatively speedy post-disaster recovery of the tourism sectors.

uA001fig38

Banking System Credit Exposure to Vulnerable Sectors

(In percent of total loans; latest available)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: National authorities; World Bank, World Travel and Tourism Council; and IMF staff calculations.Note: Anguilla’s and Montserrat’s GDP contribution data are not available. El Salvador Guatemala. Haiti. Honduras. Nicaragua, and Panama’s tourism credit exposure data are not available. Information by country regarding exposure range from Dec 2019 to May 2021.

Direct climate risk exposures may nonetheless increase going forward to the extent the private sector scales up adaptation investment by use of local financial services. Staff analysis suggests that insurance penetration tends to increase after major natural disasters, implying that demand for private insurance in the ECCU is likely to increase as the frequency and intensity of disasters go up. Staff analysis also finds that financial deepening and inclusion could have a positive impact on insurance penetration in response to rising climate risks (Annex VII).

uA001fig39

Insurance Penetration Relative to Average Climate-Related Damages

(In percent of GDP; latest available)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: EM-DAT database; World Bank, October 2019 Global Financial Development database; and IMF staff calculations.Note: Insurance penetration represents the latest available annual data of nonlife insurance for each country. Average climate-related damages is for the period 1950–2020.

Climate change may also intensify indirect physical risks through the broader economy, which may be heightened by the ECCU economies’high dependency on the tourism sector. Staff simulations illustrate that more intense storm damages to critical tourism infrastructure or large consecutive storms could result in pronounced effects on bank asset quality (Annex VIII).1 Such risks may be amplified where financial institutions hold significant exposures to public sector entities that may see their balance sheets stretched by disasters, or concentrated counterparty risks to regional insurers. Indirect risk transmission channels may also include abrupt changes to reinsurance pricing.2

uA001fig40

ECCU: Historical and Simulated NPLs after Hurricane Events

(In percent of total loans, pre-disaster quarter Q-1 =0) 1/

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB, EM-DAT database. National Oceanic and Atmospheric Administration (NOAA) and IMF staff calculations.1/ Historical average and range drawn on 16 major storm-events in the period of 2000–2019. Baseline simulation draws on the historical average stayover arrival shock of 20 percent cumulatively in the first year after the largest hurricane events 1989–2019. The downside simulation assumes cumulative 80 and 40 percent stayover arrivals shocks in the first and second post-disaster years respectively.
1 The simulations employ the stress testing methodology used to assess the potential asset quality impact of the COVID-19 pandemic in the 2021 ECCU Regional Consultation Report, IMF Country Report No. 21/86. 2 The Caribbean experienced extreme tightening of the reinsurance market in 1993–94 with series of hurricanes in prior years leading to sharp price increases and refusal by some service providers to extend coverage to the Caribbean. The crisis required CARI COM intervention and led to the establishment of the Caribbean Catastrophe Risk Insurance Facility (CCRIF)in2007.

C. Building Climate Resilience and Enhancing Competitiveness

26. The ECCU’s external position in 2021 is assessed to be moderately weaker than the level implied by fundamentals and desirable policies. Based on the EBA-Lite model, the current account gap was -1.6 percent of GDP, implying an exchange rate overvaluation (Annex III). As the pandemic recedes, fiscal consolidation in the region and a recovery in tourism exports should help narrow the current account deficit. Over the medium term, supply-side reforms to reduce the cost of energy and build resilience to natural disasters should increase competitiveness and strengthen the external position.

27. Building resilience to natural disasters and climate change should continue to be a priority for the region, given its vulnerability and impact on tourism, and could rely on long-term concessional financing such as the IMF’s Resilience and Sustainability Trust (RST).30 Efforts are ongoing with implementation of the Disaster Resilience Strategy (by Dominica and Grenada) and the preparation of updates to national adaptation/disaster plans (Antigua and Barbuda, Grenada, St. Lucia, and St. Vincent and the Grenadines).31 The IMF’s RST can complement traditional UCT programs that focus on resolving balance-of-payments difficulties in supporting the implementation of ECCU countries’ resilience-building strategies, and help catalyze concessional financing from the international community, including climate funds, as well as mobilize private sector investment.

uA001fig41

Impact of Natural Disasters on Number of Stayover Visitors

(In percent of pre-shock level)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB, EM-DAT and IMF staff calculations.Note: The dots represent the point estimates of a difference-in-difference event study. Vertical lines represent 90 percent confidence intervals.

28. Accelerating the shift to renewables and investing in energy conservation would help strengthen competitiveness and ensure energy security. High electricity costs in most of the region, due to heavy reliance on imported diesel, hampers competitiveness and makes the region vulnerable to swings in international fuel prices. Progress is under way with investments in solar, wind and geothermal energy across countries, along with various tax incentives for renewables. The dated electricity generation assets (that also contribute to significant technical and transmissional losses) point to an opportunity to accelerate the switch to renewable sources. This will require putting in place a more favorable regulatory environment—including through updates to national energy policies, changes to energy efficiency acts, relaxing the existing cap on solar or wind energy production, establishing independent energy regulators, and promulgation of tariff and competitive procurement regulations (such as tariff cuts under the CARICOM regime)—which will also foster private sector involvement to help with the associated large investments.32

uA001fig42

Domestic Electricity Tariffs: 2021

(In USct/kWh)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Source: Cable Co UK.

29. Competitiveness can be further improved through upgrades to transportation infrastructure, continued investment in skills development, and further regional integration that can also help ensure food security. Upgrades to intra-regional transportation infrastructure are urgently needed and will require public-private sector collaboration. Ensuring food security for the region will entail enhancing regional integration, including through removing trade barriers, which will ease supply disruptions and facilitate trade. This will help better integrate the local agriculture sector with tourism. To address the long-standing skills mismatch in many economies, efforts can be stepped up to provide training programs and improve their effectiveness by strengthening the integration between academic institutions and firms and facilitating the transition to employment. Continued investment in broadband technology can reduce the digital divide and foster inclusive growth.

30. Continued efforts to reinforce capacity and fully implement safeguard measures are needed to reap the benefits of DCash and contain risks. DCash has the potential to increase economic efficiency and foster financial inclusion, but the ECCB will need to further raise public awareness and improve communication with end-users to boost confidence and uptake. As outlined in the Selected Issues Paper of 2019 ECCU Regional Consultation Report, staff advised that the authorities fully implement safeguard measures to contain various risks to the ECCB and the financial system, including those related to financial intermediation, financial integrity, and cybersecurity. While financial disintermediation risk is mitigated by the ample excess liquidity in the system and the design of DCash as a non-interest retail instrument with holding limits, the ECCB and national supervisors should closely analyze liquidity and funding conditions of financial institutions, including through liquidity stress testing. Cybersecurity risks are mitigated at the pilot stage by limited scope of system integration, but as growth and risks evolve, authorities should consider benchmarking against international standards for financial market infrastructures as well as adopting more targeted cybersecurity frameworks and standards. The DCash outage experience underscores the need to enhance the ECCB’s operational resilience and business continuity plans, including through contingency planning and increasing staffing and skills. The ECCB should also clearly divide the operational, oversight, and risk management responsibilities between the central bank and technology providers, and establish a project management governance framework. In addition, a clear exit plan from the pilot project is needed, in case of major issues with the any of its vendors.33

D. Statistical Issues

31. Timeliness of data dissemination should be further enhanced to help inform government and private sector decisions. To promote timely delivery of key outputs, the ECCB established in April 2022 the Research, Statistics and Data Analytics Department, incorporating the teams previously in the Research Department and the Statistics Department. The ECCB and national statistical offices authorities are making progress to implement Technical Assistance recommendations from the IMF’s Statistics Department and the Caribbean Regional Technical Assistance Center (CARTAC) on national accounts, price, and external sector statistics. While data provision is broadly adequate for surveillance, the pandemic has added to further delays in the compilation and dissemination of external sector statistics. Ensuring adequate staffing levels and investing in training will be essential to improve data quality and timeliness.

Authorities’ Views

32. The authorities agreed with staff’s outlook of a gradual and uneven economic recovery. They observed the scarring effects from the pandemic, notably on the tourism and transportation sectors (especially air travel), and on human capital as a result of extended school and business closures. While optimistic about tourism prospects, the authorities noted that the war in Ukraine is exacerbating supply disruptions, fueling inflation pressures, and threatening food and energy security. They saw further increases in commodity prices as a key downside risk, in addition to new COVID variants amid vaccine hesitancy and the ever-present threat from natural disasters.

33. The authorities concurred with staff on maintaining fiscal prudence while prioritizing near-term policy to protect the vulnerable, to the extent feasible. They stressed the need for food and fuel price controls and temporary tax exemptions or reductions to alleviate the impact of higher living expenses on households, while acknowledging the fiscal costs of these measures, even as pandemic stimulus programs are being wound down. The authorities agreed in principle with the desirability of gradually shifting to better targeted transfers to the vulnerable but, given the inadequate coverage and targeting of existing social safety nets, noted that they will continue to mainly rely on generalized subsidies at least temporarily.

34. The authorities remain committed to meeting the regional debt target and saw the benefits of adopting rule-based fiscal frameworks, including operational targets. Nevertheless, many underscored the challenges of reaching the 60 percent of GDP debt target by 2035 given the large increases in the debt-to-GDP ratio due to the pandemic, impact of the war in Ukraine on the nascent recovery and fiscal position, and public capital spending needs to achieve development goals and resilience to natural disasters. A few authorities emphasized that the calibration of parameters of the fiscal frameworks should take into account social and development needs.

35. The authorities agreed with the need to closely monitor post-moratoria asset quality, amid continued high NPLs. The authorities’ strategies to mitigate potential risks from unwinding of the moratoria program will include intensified scrutiny of weaker institutions. The technical requirements for the planned phased increase of banks’minimum provisioning ratio, to reach 100 percent for long-standing NPLs by 2024, will be articulated in the ECCB’s 2022 review of the Treatment of Impaired Assets Standard. The authorities are committed to completing the necessary work to support asset recovery, including reforming the foreclosure legislation in some jurisdictions. Although several authorities have indicated inability to issue debt to finance the ECAMC’s acquisition of legacy NPLs, they concurred on the need to enable the ECAMC to activate its special asset recovery powers to help reduce regional NPLs. Market risk will continue to be closely monitored, particularly given the implications of recent stepped-up global financial market volatility for institutions with large overseas asset portfolios.

36. The authorities confirmed the need to advance key reforms to support private sector credit growth. Some authorities expressed the intention to pass and implement laws that remain pending, such as the Credit Reporting Bill to facilitate establishment of a regional credit bureau/registry The ECCB also emphasized the need for countries to expedite modernizing insolvency, collateral and asset recovery frameworks; and addressing collateral constraints. Based in large part on World Bank funding, most of the ECCU authorities have invested in the recently launched Eastern Caribbean Partial Credit Guarantee Corporation, which they viewed as instrumental in activating improved MSME access to finance and MSME capacity building in their countries.

37. There were concerns about the potential loss of CBI revenues following the EU and US proposals to restrict visa-free access to third countries with CBI programs. Some countries viewed these revenues as critical funding for essential economic and social investments including resilience building to natural disasters, and it will be difficult to find offsetting revenue measures. The authorities are willing to collaborate with European and U.S. counterparts to provide reassurances about the integrity of their CBI programs. At the same time, given that the intensified scrutiny of CBI programs may impact correspondent banking relationships of local banks, the authorities are committed to strengthening financial integrity frameworks and completing designation of the ECCB as banks’AM L/CFT supervisory authority. Some authorities are concerned that the implementation of global minimum corporate tax would affect the region’s ability to attract foreign direct investment.

38. The authorities viewed tightened regulatory oversight of nonbank financial institutions as key to addressing potential systemic risks and maintaining financial system stability. The ECCB Monetary Council has approved the establishment of a Regional Standards Setting Body (RSSB) to harmonize regulations for non-bank financial institutions. However, some authorities are concerned that the RSSB will not address the fundamental issue of fragmented supervision of non-banks. The ECCB will reinforce regulatory collaboration to help address the risks of non-centralized and non-consolidated supervision of large cross-border insurance conglomerates. Strengthening frameworks to respond to cyber threats and govern digitalized financial services including crypto activities is seen as priority since unregulated operations, such as crypto cash, are increasing in the region. These risks will be addressed through the finalization and implementation of the ECCB’s Technology Risk standard, country capacity building to respond to cyber threats, and passage and implementation of the Virtual Assets Business Bill where pending.

39. The authorities recognized the importance of building fiscal and financial sector resilience to climate risks. The authorities agreed that natural disaster risks could warrant a national debt target lower than the regional ceiling, but they pointed out that this may not be practical in the current environment given the back-to-back shocks. The ECCB has started a program to integrate climate risks in supervisory and regulatory frameworks and, in collaboration with international agencies, commenced a technical assistance project to build capacity in ECCU regulators and financial institutions.

40. The authorities stressed the importance of securing low-cost longer-term financing for climate adaptation and welcomed the Resilience and Sustainability Trust. Building structural and financial resilience to natural disasters remains a priority, but it is a challenge due to limited fiscal space. The authorities noted that rising fuel prices exacerbated by the war in Ukraine heightened the urgency to accelerate the shift to renewables, which will help improve competitiveness and ensure energy security. While encouraged by progress with their investments in solar, wind, and geothermal energy, the authorities noted that large investments are required to transition from fossil fuels, thus necessitating private sector involvement.

41. The authorities underscored the urgency to ensure food security, upgrade intra-regional transportation infrastructure, and strengthen human capital. In an effort to achieve CARICOM’s goal of reducing the regional food import bill by 25 percent by 2025, the authorities are developing an action plan to enhance regional integration and ensure food and nutrition security, including by removing trade barriers. The authorities agreed that intra-regional transportation infrastructure should be addressed, as it is now an impediment to economic recovery and regional integration, which will require public-private collaboration. They saw this as critical to help mitigate supply disruptions, facilitate trade, and support tourism. To minimize the pandemic’s scars on human capital and potential growth, the authorities considered it necessary to continue investment in skills development and broadband technology, as well as to facilitate the reallocation of workers and resources to their most productive uses.

42. The ECCB agreed that raising public awareness and reinforcing capacity are key to boosting use of DCash and containing risks. The authorities viewed cybersecurity as the main risk associated with DCash. The ECCB plans to strengthen staffing and skill capacity of its IT department as well as put more emphasis on educational marketing campaigns once the pilot is launched in Anguilla. The ECCB has also hired a project manager and is working toward establishing a project management governance framework. In addition, the ECCB has been exploring options with member governments for incorporating DCash into their e-government reforms.

Staff Appraisal

43. The ECCU economy is on a gradual recovery path, but challenges loom ahead. The pandemic had left scars on key economic sectors such as tourism and transportation and on human capital, while straining countries’ fiscal and external balances. The war in Ukraine is exacerbating supply disruptions, fueling inflation, and threatening food and energy security. Looking forward, the recovery is likely to be uneven across countries, driven by the varying pace of tourism rebound and domestic activity. Downside risks to the outlook remain significant and stem primarily from further increases in commodity prices due to the ongoing war, in addition to outbreaks of new COVID variants and the threat of natural disasters.

44. The near-term policy priority should be to maintain fiscal prudence while protecting the vulnerable. To alleviate the impact of rising living costs on vulnerable households, temporary targeted transfers could be provided through existing social assistance programs. Countries should allow a gradual pass-through of international energy and food prices to the domestic economy, while committing to phase out generalized subsidies such as fuel price caps and tax exemptions in the coming years, which would help contain the fiscal cost of support measures and avoid adverse distributional impact. At the same time, efforts should be expedited to improve the adequacy and efficiency of social safety nets.

45. Over the medium term, fiscal policy should shift toward fostering resilient and inclusive growth. Fiscal consolidation could be supported by mobilizing domestic revenues, rationalizing lower-priority spending, and advancing fiscal structural reforms, with reliance on low-cost long-term financing to safeguard debt sustainability. Meanwhile, fiscal policy should move from income support and job retention measures to those that facilitate labor reallocation and training.

46. Adopting well-designed rule-based fiscal responsibility frameworks (FRFs) is key to achieve fiscal consolidation and preserve the credibility of the regional debt target. Given the potential increase in public sector borrowing costs, accelerating the adoption or reactivation of fiscal frameworks would signal credible medium-term fiscal plans and boost market confidence.

47. When setting up or amending their FRFs, ECCU countries should internalize the impact of natural disasters to enhance their effectiveness. Greater exposure to natural disasters would warrant setting a lower country debt ceiling than the regional ceiling, unless disaster mitigating financial buffers are readily available. The choice of the operational target must be tailored to country circumstances. For small open economies with high exposure to natural disasters and elevated initial level of debt, primary balance rules could be preferable to expenditure rules.

48. Asset quality and provisioning buffers warrant continued close monitoring as NPLs remain elevated. With the expiration of the loan moratoria program and given likely continued borrowers’ fragilities, the ECCB and national regulators should closely monitor against relapses in loan performance, ensure that provisioning accurately reflects balance sheet risks, and intensify scrutiny of weaker institutions. Complementary efforts are also needed to address asset recovery constraints, including at the ECAMC, to reduce legacy NPLs.

49. A renewed attention to reinvigorate private sector credit growth is critical to support the recovery. Key reforms should be accelerated to address long-standing lending and credit constraints, including establishing a regional credit bureau and registry, modernizing insolvency frameworks, and addressing collateral constraints to credit access by MSMEs. In the context of compressed bank lending margins, the ECCB could consider revisiting the 2 percent minimum savings deposit rate. In addition, passage of relevant securities legislation where these remain pending is important to deepen local capital markets and increase financing opportunities.

50. Decisive steps should be taken to protect local bank CBRs amid greater scrutiny of the region’s CBI programs. It will thus be critical to address any remaining shortfalls in the region’s financial integrity, AML/CFT, governance and offshore taxation frameworks. ECCU members should also pursue regional coordination of oversight and transparency of CBI programs, tackle issues identified in the na tio nal CFATF mutua l assessments, ensure consistency with global taxation standards, and complete designation of the ECCB as the banks’ AML/CFT supervisory authority.

51. Efforts are needed to resolve the currently fragmented non-bank supervision framework and address potential systemic risks. While the proposed RSSB can help harmonize regulations for non-banks, it will be essential to advance consolidated supervision of large cross-border financial conglomerates, strengthen risk-based insurance supervision and risk-mitigation standards, and address notable data gaps. With increasing unregulated operations, the authorities should expedite passage and implementation of the Virtual Assets Business legislation to govern digitalized financial services including crypto assets.

52. The ECCB could further reinforce financial sector resilience to climate shocks. The ECCB’s newly launched program to incorporate climate risks in supervisory and regulatory frameworks should integrate physical climate risk scenarios in the authorities’ financial system crisis management plans to ensure adequacy of policy intervention frameworks. Strengthening frameworks and authorities ‘ capacity to respond to cyber threats , including through timely finalization and implementation of the ECCB’s Technology Risk standard, is also critical.

53. Building resilience to natural disasters and climate change should continue to be a priority. The authorities should build on progress in investing in resilient infrastructure and insurance for natural disasters. Accelerating the shift to renewables and investing in energy conservation, supported by an enabling regulatory environment, can help improve competitiveness, encourage private sector involvement, and ensure energy security.

54. Structural policies should also focus on removing transportation bottlenecks, enhancing regional integration, and strengthening human capital. This will require urgently upgrading intra-regional transportation infrastructure through public-private collaboration and enhancing regional integration, including by removing trade barriers to ensure food security. In addition, continued investment in skills development and broadband technology can foster inclusive growth.

55. Reinforcing capacity and fully implementing safeguard measures are key for the viability of DCash. The ECCB should step up efforts to raise public awareness of DCash and improve communication with end-users, while investing in contingency planning and staffing. The ECCB should also clearly divide operational, oversight, and risk management responsibilities between the central bank and technology providers, and establish a project management governance framework.

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

Figure 1.
Figure 1.

ECCU: External Sector Developments

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB, IMF Information Notification System, and IMF staff calculations.
Figure 2.
Figure 2.

ECCU: Monetary Developments

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB and IMF staff calculations.
Figure 3.
Figure 3.

ECCU: Financial Sector Developments—Credit Risk Impact of the Pandemic

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB and IMF staff calculations.
Figure 4.
Figure 4.

ECCU: Financial Sector Developments—Business Impact of the Pandemic

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB and IMF staff calculations.
Table 1.

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.

Table 2.

ECCU: Selected Economic Indicators by Country, 2019–27

(Annual percentage change, unless otherwise indicated)

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

The weighted average inflation using nominal GDP to assign weights.

Projections include expected fiscal costs of natural disasters.

Table 3.

ECCU: Selected Central Government Fiscal Indicators by Country, 2019–27 1/

(In percent of GDP)

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

Fiscal years for Dominica, Montserrat, and St. Lucia.

Projections include expected fiscal costs of natural disasters.

Table 4.

ECCU: Selected Public Sector Debt Indicators by Country, 2019–27 1/

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

Fiscal years for Dominica, Montserrat, and St. Lucia.

Table 5.

ECCU: Summary Balance of Payments, 2019–27

article image
Sources: Country authorities; and IMF staff estimates and projections.
Table 6.

ECCU: Selected Vulnerability Indicators, 2016–21

(Annual percentage change, unless otherwise indicated)

article image
Sources: Country authorities and IMF staff estimates.

Excludes Anguilla and Montserrat.

Defined as current account deficit plus external debt amortization.

Foreign assets as share of demand liabilities.

Table 7.

ECCU: Financial Structure, 2021

(In millions of EC dollars, unless otherwise indicated)

article image
Sources: National Authorities, Eastern Caribbean Central Bank, and IMF staff calculations.

Data for Anguilla, Antigua and Barbuda, and St. Kitts and Nevis reflect end-2020 numbers that are currently available.

For money service companies, mostly data on number of transactions and institutions are reported, not on assets.

Reflects currently available information for a subset of funds; does not include all private sector pension funds.

Reflects data for non-bank broker dealers.

IBCs are International Business Companies, LLCs are Limited Liability Companies, MFs are Multiform Foundations, and TCSPs are Trusts and Corporate Service Providers.

Table 8.

ECCU: Financial Soundness Indicators of the Banking Sector, 2016–22

(In percent)

article image
Sources: Eastern Caribbean Central Bank (ECCB); and IMF staff calculations.

Data available only for locally incorporated banks.

Indicator not included in standard FSIs. Provisions do not reflect allocations to prudential loan loss reserve made in accordance with the ECCB’s new guidelines implemented in January 2022.

Table 9.

ECCU: Financial Soundness Indicators of the Banking Sector by Country, 2016–22

(In percent)

article image
Sources: Eastern Caribbean Central Bank (ECCB); and IMF staff calculations. 1/ Data available only for locally incorporated banks. 2/ Indicator not included in standard FSIs. Provisions do not reflect allocations to prudential loan loss reserve made in accordance with the ECCB’s new guidelines implemented in January 2022.

Annex I. Implementation of Past Fund Policy Advice

article image
article image

Annex II. Risk Assessment Matrix1

article image

Annex III. External Sector Assessment

article image
article image
article image
article image

The external sector assessment is based on staff’s estimates.

Due to lack of sufficient data for Anguilla and Montserrat, the EBA-lite model-based assessment excludes these two overseas territories of the United Kingdom.

The temporary impact of the COVID-19 crisis on the current was calculated by (i) splitting the decline in the travel balance (as a percent of GDP) between temporary and permanent components; and (ii) multiplying the temporary component by 0.5. The adjustment was required because the “cyclical contributions” component does not fully reflect the COVID-19 crisis-related shock to tourism, which explains the large deterioration in the current account balance in 2021 compared to its pre-pandemic level. The COVID-19 shock is expected to affect the tourism balance differently across countries. While in Dominica and St. Kitts and Nevis, net tourism balance is projected to recover to the pre-pandemic trend only partially by 2025, the pandemic is projected to have only temporary impacts on the net tourism balance of other countries, with the balance projected to return to the pre-pandemic trend in 2022 for St. Lucia, in 2023 for Antigua and Barbuda, in 2024 for Grenada, and in 2025 for St. Vincent and the Grenadines.

Annex IV. Tourism in the ECCU: The Path of Recovery1

1. Tourism in the ECCU region was hit hard by the pandemic. The region is heavily dependent on tourism with international tourism revenues comprising 33 percent of GDP during 2018 (average of nine countries), and above 60 percent of GDP in Antigua and Barbuda. Just the hotel sector share of gross value added in ECCU is relatively high at 11.9 percent, ranging from more than 20 percent for Anguilla and St. Lucia to below 2 percent for Dominica and Montserrat. The contagious nature and the global spread of the virus severely affected travel and high-contact service sectors worldwide. The magnitude of the drop in tourism in the Caribbean region, like in other tourist-dependent countries, was unprecedentedly large relative to other global shocks like the global financial crisis and the September 11, 2001 terror attack in the U.S. The drop in the value added in the hotel sector in ECCU during the pandemic was also sharper than these past episodes.

uA001fig43

Importance of Hotel Sector, 2019

(Share of value added and value added per stay)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB, CTO and IMF staff calculations.
uA001fig44

Tourism After Past Shocks Compared to the Current Pandemic: The Caribbean

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities, CTO, Haver analytics.Note: Month = 0 for March 2020 (current), September 2001 (9/11) and September 2008 (GFC). The charts show the average of individual country growth (compared to the same month in pre-shockyear) in the relevant groups. Rest of the world refers to 15 countries with high international tourism revenueas a shareof GDP.
uA001fig45

Tourism After Past Shocks Compared to the Current Pandemic: Rest of the World

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities, CTO, Haver analytics.Note: Month = 0 for March 2020 (current), September 2001 (9/11) and September 2008 (GFC). The charts show the average of individual country growth (compared to the same month in pre-shockyear) in the relevant groups. Rest of the world refers to 15 countries with high international tourism revenueas a shareof GDP.

2. Tourism to the ECCU recovered but remained below pre-pandemic levels in 2021. Tourist arrivals growth in 2021 underperformed regional peers (Mexico, Dominican Republic). Tourist arrivals remained below pre-pandemic levels across countries in the Caribbean and other tourism-dependent countries, including— where data are available—for tourist arrivals from destinations like the U.S., U.K., and Canada, which reflects the effects of recurrent COVID-19 waves and the mobility restrictions imposed to fight the pandemic.

uA001fig46

Tourist Arrivals

(Index, 2019=100)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities, CTO, Haver analytics.
uA001fig47

Total Tourist Arrivals

(Percent change of 2021 compared to 2019)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

uA001fig48

Tourist Arrivals from US

(Percent change of 2021 compared to 2019)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

uA001fig49

Tourist Arrivals from UK

(Percent change of 2021 com pared to 2019)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

uA001fig50

Tourist Arrivals from Canada

(Percent change of 2021 compared with 2019)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities, CTO and Haver Analytics.

3. The recovery within the ECCU region varies across countries. Though the drop in tourist arrivals in 2020 was across the board owing to the pandemic, the speed of recovery in 2021 varied across countries, with Antigua and Barbuda gaining back more than 50 percent of pre-pandemic tourist levels, but St. Kitts and Nevis reaching less than 15 percent of pre-pandemic levels. The tourism performance is associated with the quarantine end dates for vaccinated incoming travelers, with countries removing these restrictions earlier faring better. Existing vulnerabilities, such as limited flight connectivity, could amplify the negative performance. In addition, some countries seem to have benefitted from faster recovery in luxury travels.

uA001fig51

Tourist Arrivals in the Caribbean

(2019 = 100)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities and CTO.
uA001fig52

Tourists Arrival Growth and Entry Quarantine Restrictions in ECCU

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: Country authorities, CTO and IMF staff calculations.

Annex V. Inflation Dynamics in the ECCU: External Cost Shocks and Propagation1

1. ECCU economies are highly exposed to external cost shocks, given the heavy reliance on imported goods. The imports-to-GDP ratio of ECCU economies was on average 64.3 percent in 2019, substantially higher than the global average of 27.7 percent.2 Despite price stabilization mechanisms implemented by ECCU governments, large and persistent swings in external costs can have a significant impact on living costs. Such fo rces ar e b ehind the strong co-movements in inflation between ECCU economies and their major trading partners such as the United States, which can also be driven by common demand shocks.

uA001fig53

Strong Inflation Comovements

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB, Haver Analytics and IMF staff calculations.
uA001fig54

Global Factors Driving Some Components

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB, Haver Analytics and IMF staff calculations.

2. External cost shocks have salient policy implications. Given the exchange rate peg, targeted fiscal policy plays a major role in mitigating external cost shocks. As such policies need to strike a balance between protecting vulnerable households and assisting general population in alleviating the consequence of rising living costs, the persistence of inflation is an important parameter in calibrating policy measures and gauging the macroeconomic impact. The current juncture sees significant risks of persistently high inflation, given strained global shipping and upward pressure on food and energy prices, which are amplified by geopolitical conflicts.

3. Food, housing, and transportation are more sensitive to global shocks than other CPI components and referred to as global-factor-sensitive (GFS) components. GFS components constitute around two-thirds of the total weight. The correlation of inflation between GFS components and the rest is low, merely 0.03 between 2001 and 2021.

uA001fig55

Oil Prices

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB, Haver Analytics, and IMF staff calculations.Note: Dashed lines represent 90-percent confidence bands.
uA001fig56

Food Prices

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB, Haver Analytics, and IMF staff calculations.Note: Dashed lines represent 90-percent confidence bands.

4. A local projection method (LPM) analysis confirms that external costs have a large impact on the inflation of GFS components. The exercise quantifies the response of year-on-year change of the component CPI (aggregated into the global-factor-sensitive part and the rest) to month-on-month changes in three external cost measures (i.e., world oil prices, commodity food price index, and the Baltic Dry Index). Following Jorda (2005), the exercise controls for o ther variables that can influence the outcome variable. In the current exercise, they include world output gap and the lags of inflation and external cost measures.

uA001fig57

Shipping Costs

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB, Haver Analytics, and IMF staff calculations.Note: Dashed lines represent 90-percent confidence bands.

The following specification is estimated for ECCU economies for the period between 2001M12 and 2019M12:

πi,t+h−πi,t−1=f(ΔBDIi,t,...,ΔBDIi,t−12,ΔOilpt,...,ΔOilpt−12,ΔFoodpt,...,ΔFoodpt−12ΔWorld output gapt,ΔWorld output gapt−3,...,ΔWorld output gapt−9,αi),(V.1)

where f is a linear function, ΔXi,t = Xi,t – Xi,t-1, and αt refers to country-fixed effects.3

A key reason of using the LPM is that one does not need to assume inflation persistence, which may not be stable over time given the policy intervention.

5. External costs have an economically significant impact on GFS components. A 50 percent increase in oil price, which is in line with the oil price change during 2021–22 considering the impact of the war in Ukraine, drives up the inflation of GFS components by around 2.5 percentage points, which implies an impact on the headline inflation of around 1.7 percentage points. Such an effect would dissipate by the end of the second year. By contrast, an increase in shipping costs has a more persistent impact. The results are robust to restricting the sample period to post-2010 (the shipping costs declined to lower levels in this period relative to previous episodes).

6. A simulation exercise is conducted to estimate the impact of changes in shipping costs in 2019M1 -2021M12 on inflation in 2022. It consists of two steps. The first step calculates yt = Σk=1,...,23 βkBDIi,t-k to get the “additive” impact of a change in shipping cost (captured by ΔBDIi,t-k), where βk is the coefficient of ΔBDIi,t estimated in equation (V.1) when the dependent variable is πi,t+k – πi,t-1. The second step calculates the overall impact of changes in shipping costs as Zt = Σi=1,...,I(ρ)iyt-i, where ρ captures the persistence of the impact. ρ is assumed to be equal to the historical inflation persistence of GFS components and around 0.83 at the monthly frequency4

uA001fig58

Shipping Costs: 2019M1 – 2021M12

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB, Haver Analytics and IMF staff calculations.
uA001fig59

Impact of Changes in Shipping Costs on Headline Inflation: 2019M1 – 2022M12

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB, Haver Analytics and IMF staff calculations.

7. The simulation results suggest that if shipping costs stay at the end-2021 level in 2022, inflation of GFS component in the ECCU would increase by around 3.3 percentage points, and accordingly headline inflation by 2.2 percentage points. Despite significant uncertainty regarding global shipping costs in 2022, part of its reversal in October-December 2021 reflected seasonality.

8. These quantitative estimates suggest that the ECCU would experience significantly higher inflation than historical average. The exercises described above do not consider new measures introduced by the governments to mitigate rising shipping costs during the COVID-19 pandemic or nonlinearity that is not captured fully by the exercises. 5 They imply that the headline inflation in 2022 will be around 3.9 percentage points higher than otherwise. While the effect in practice is likely to be dampened by the response of ECCU governments to the inflationary pressure (including the cap on fuel prices currently in place in Grenada and St. Lucia) and further reduced if the shipping cost declines in 2022 from the end-2021 level, the estimation conducted here clearly suggests a sizable impact of external cost shocks in 2022 that calls for policymakers to pay close attention to the underlying sources and their persistence.

9. Inflation in the ECCU can be further influenced by other US inflation drivers. A component-level analysis suggests that only GFS components are significantly affected by U.S. inflation drivers. While strong US inflation can be a concern, one mitigating factor to consider is that while the inflation of GFS components used to rise strongly whenever U.S. inflation picked up, the relationship was more muted recently.

Annex VI. Lessons for the ECCU and Its Members from Countries’ Experience with Fiscal Rule1

1. An event study suggests that fiscal rules are more effective in lowering public debt when: (i) debt and operational targets are combined and (ii) the rules are enforceable.

  • Combining debt and operational targets. Increasingly more countries have adopted multiple fiscal rules to guide fiscal policy— often using a debt ceiling or anchor supported by operational rules. Among ECCU peers,2 Mauritius adopted a debt rule only, while all others adopted budget balance and other operational targets in addition to the debt rule.

  • Enforceability. EMDEs notably improved their FRFs over the last decade through stronger legal basis and enhanced enforcement mechanisms (WB, 2020 and Davoodi and others, 2022). So far, Anguilla and Grenada (Table 1) are the only countries among ECCU peers which have a fiscal rule both supported by formal enforcement mechanisms and approved as legislation. Similar to Dominica, a few ECCU peers have legally backed fiscal rules but lack formal enforcement mechanisms (The Bahamas, Cabo Verde, and Maldives). Meanwhile, the FRFs of Antigua and Barbuda and St. Vincent and the Grenadines still lack a strong legal basis.

uA001fig60

Development of Fiscal Rules

(Number of countries with fiscal rule)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: IMF [2022] and IMF staff calculations.
Table 1.

ECCU: Summary of Fiscal Responsibility Frameworks Across the Members

article image
Note: The medium-term debt anchor of all countries is consistent with the ECCU’s debt target of reaching 60 percent of GDP by 2035. Sources: Country authorities and IMF staff.

General Principles

Fiscal rules should be:

Simple: avoid too many operational targets

Flexible: appropriately defined escape

clauses and clarity on plans to return to the

FRF’s targets after triggering

Enforceable:

  • Inscribing the framework in law and designating an independent fiscal council

  • Anchored on a medium-term debt ceiling and supported by an operational target

2. While the ECCU is an early adopter of fiscal rules, its current supranational rule lacks operational targets and enforceability. In 1998, the ECCB Monetary Council set targets on the overall deficit and debt of 3 and 60 percent of GDP, respectively, to be reached by 2020. However, the deficit target was abandoned in 2006 and the debt target was delayed twice, first to 2030 in 2015, and then to 2035 due to the pandemic. Several ECCU countries have persistently carried public debts well above the ECCU ceiling, even prior to the pandemic.

References

  • Davoodi, Hamid R., Paul Elger, Alexandra Fotiou, Daniel Garcia-Macia, Xuehui Han, Andresa Lagerborg, W. Raphael Lam, and Paulo A. Medas, 2022, “Fiscal Rules and Fiscal Councils: Recent Trends and Performance during the COVID-19 Pandemic,” IMF Working Paper No. 22/11.

    • Search Google Scholar
    • Export Citation

  • World Bank, 2020, “Fiscal Rules and Economic Size in Latin America and the Caribbean,” Latin American Development Forum, Washington, DC: World Bank.

    • Search Google Scholar
    • Export Citation

Annex VII. Insurance Penetration and Natural Disasters1

1. Private insurance can reduce the ECCU economies’ reliance on financial aid from public sources after a disaster. In addition, insurance penetration positively affects a country’s recovery rate after a disaster. On average, disaster cases in low insurance countries take longer to achieve economic recovery compared to those in high-insurance countries. However, insurance penetration tends to be low in lower-income countries—it is estimated that about 40 percent of direct losses from natural disasters is insured in developed countries, compared to 10 percent in middle-income countries, and below 5 percent in low-income countries (Carpenter et al., 2020).

2. The difference-in-differences (DD) approach was used to determine the effect of natural disasters on nonlife insurance penetration, using an annual panel dataset consisting of most countries in the world. The treatment variable is constructed using total damages as percent of GDP from EM-DAT (the Emergency Events Database). The regressions included additional covariates from the IMF’s World Economic Outlook dataset, the World Bank’s World Development Indicators database, and the Penn World Tables, such as GDP per capita, GDP growth, public debt, financial depth measured by the share of bankable population, bank deposits, broad money, stock market capitalization, etc. to obtain an unbiased estimator. The additional covariates did not significantly affect the treatment coefficient. In addition to cluster-robust standard errors staff also estimated bootstrapped standard errors, and the results remained stable.

The basic idea of the DD estimator is the following:

y=β0+β1dD+δ0d2+δ1d2⋅dB+u,(1)

where y is insurance penetration. dD is equal to 0 for countries not affected by natural disasters and is equal to 1 for countries that were hit by natural disasters. d2 is equal 0 before the ND and 1 after the ND. We are interested in δ1:

δ1=(yB,2¯−yB,1¯)−(yA,2¯−yA,1¯).(2)

3. The treatment variable is constructed using total damages as percent of GDP. We assign it to 1 when total damage is equal to or higher than 10 percent of GDP, that is, close to two standard deviations. Due to the limited availability of data on insurance penetration, our panel data has 15 natural disasters that will be considered treatments.

Summary of the Treatment Variable

article image
Sources: EM-DAT and IMF staff calculations.

List of Treatments 1/

article image
Sources: EM-DAT and IMF staff calculations.

Includes disaster events causing damage of 10 percent of GDP or more that have insurance penetration data for the disaster year.

4. Trends in non-life insurance penetration in the treated group (the countries affected by large natural disasters) are parallel to trends in the control group before the natural disasters. In most cases, insurance penetration increases after natural disasters. The similarity of trends before the treatment is an important requirement of the DD method. The analysis in our case is complicated by the data availability and missing values. At the same time, DD allows us to include country and time fixed effects (FEs) that we have not included in the charts. Controlling for FEs improves similarity in trends.

uA001fig61

Grenada, 2004

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: WEO, EM-DAT, WB Financial Development Database, IMF staff calculations1/ BHS and QRD both had a natural diaster which caused damage exceeding 10 percent of GDP in 2004.
uA001fig62

St. Vincent and the Grenadines, 2013

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: WEO, EM-DAT WB Financial Development Database, IMF staff calculations.

5. The results show that insurance penetration tends to increase after major natural disasters. The results imply that demand for private insurance in vulnerable countries like the ECCU is likely to increase as the frequency and intensity of disasters rise. The analysis also found a positive correlation between insurance penetration and other financial development indicators such as bank deposits, indicating that financial deepening and inclusion could have a positive impact on enhancing insurance penetration in response to rising climate risks. This indicates that financial deepening could stimulate insurance penetration in countries with sizeable climate risks. Our findings echo the observations by Hodula et al. (2021), who identify that non-life premiums co-move with the business cycle and are positive related to more developed financial systems, and Feyen et al. (2011) who find that the non-life insurance sector is driven by the availability of private credit and financial institutions in the economy.

Main Results

article image
Notes Standard errors in parentheses. * p<0.1, ** p<0.05, *** p<0.01 Model 1: Treated variable is nonlife insurance premium in percentage of GDP Models 2 through 5: Treated variable is change in nonlife insurance premium in dollars. Model 6: Treated variable is change in nonlife insurance premium in dollars. Treatment variable is inserted with a lag.

Annex VIII. Natural Disaster Impact on the ECCU Banking System Asset Quality1

1. Natural disasters have historically had a relatively modest impact on the ECCU banking system. Despite large-scale economic damages, even the largest hurricane events such as Maria (2017) in Dominica resulted in only modest deterioration in asset quality.2 Key mitigating factors include mandated insurance of the loan collateral, as well as lenders’ modest exposures to the most vulnerable sectors (such as agriculture), in part reflecting their internalization of the region’s susceptibility to natural disasters. The loans portfolio impact would also depend on the banks’ and the country authorities’ policy response (e.g., in Dominica large citizenship-by-investment revenues supported the government’s capacity to respond to recent disasters). Bank funding risks are mitigated by ample system-wide liquidity.3

2. Bank asset quality may nonetheless become increasingly affected by disasters’ indirect transmission channels as they intensify with climate change. Importantly, as evidenced by the experience with the COVID-19 pandemic, the ECCU economies’ heavy reliance on tourism makes them susceptible prolonged travel disruptions.4 As in the 2020 ECCU Regional Consultation, we investigate the potential impact of stayover tourism arrival shocks on bank asset quality by use of local projection methods (Jordà, 2005) to compute sector-specific nonperforming loan (NPL) impulse response functions, which in turn are used to simulate an average cumulative NPL path for the region for a given tourism shock scenario.5 Specifically, drawing on a cross-country panel of quarterly bank-level sectoral loan data for the period 2010Q3–2019Q4 with a range of controls and bank fixed effects, the analysis considers the following impulse response system of equations:

yi,j,t+h=αh+βhshockj,ttourism+Σs=1Sϑshshockj,t−stourism+Σk=1Kθkhyi,j,t−k+Σc=1CδchControlsc,i,j,t−1+γhNatDisj,t+μi+cubic trendt+εi,j,t+h(1)

where the subscripts i, j and t denote bank, country and quarter, respectively. The superscript h = 0,…,20 denotes the time horizon (number of quarters after t) being considered. The dependent variable yi,j,i,t+h, measures credit quality and takes the form of a logistic transformation of the NPL ratio common in literature.6 The tourism shock consists of year- on-year percent changes in stayover tourism arrivals for a given country and quarter. Considered controls include bank profitability, credit growth, lending rates, inflation, import growth as proxy for non-tourism economic conditions and a natural disaster dummy. Estimating the specification for each credit sector and collecting the βh coefficients, representing the cumulative impact of the tourism shock on the NPL ratio after h quarters, as well as the corresponding standard errors, allows for construction of sector-specific impulse response functions (Annex VIII Figure 1).

Figure 1.
Figure 1.

Response of Sectoral NPL Ratios to a Percentage Point Drop in Tourism Growth

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: IMF staff estimates.

3. The simulation scenarios are calibrated based on new staff event-analysis of historical For the ECCU the sample considers 30 major tropical storm events, of which half comprises of hurricanes of category 3 or higher on the Saffir-Simpson scale.7 For the latter group stayover arrivals declined on average by a fifth in the year following the disaster but tended to revert to pre-disaster levels in all instances where the initial shock was not followed by another major storm in the following year. The lack of significant and persistent damage to critical transport infrastructure may have been an important factor to the speed of tourism recovery. Outside of the ECCU, St. Maarten’s experience in the aftermath of Irma (2017), where storm damage substantially constrained the airport terminal’s passenger capacity years after impact, offers perspective of the potential downside risks: following an 80 percent drop in the year after impact, stayover arrivals recovered only to 40 percent below the pre-disaster levels in the following year and had not fully recovered before the COVID-19 pandemic.

uA001fig63

ECCU: Hurricane Impact on Stayover Arrivals

(Major events 1989–2020, index year T-1 =100) 1/

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources: ECCB, EM-DAT database, CTO, National Oceanic and Atmospheric Administration(NOAA)and IMF staff calculations.1/ Fifteen hurricane events of category 3 or larger in Saffir-Simpson scale.
uA001fig64

ECCU; Impact of Hurricanes on Tourism Arrivals

(30 major events 1989–2020; in percent)

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

Sources; ECCB, EM- DAT database, CTO, National Oceanic and Atmospheric Administration (NOAA) and IMF staff calculations

4. The simulation results illustrate potential downside risks from prolonged disruptions to tourism flows by climate change. Under the baseline 20 percent single-year decline in stayover arrivals the simulated NPLs would peak just under three percentage points above their pre-disaster level for an average ECCU country and be mostly concentrated in the tourism and construction sectors. However, a more significant tourism disruption in scale similar to St. Maarten in 2017 can result in a several-fold larger increase.8 The country specific impact would depend on its relative degree of tourism-dependency, bank credit composition and policy response (proactive loan restructurings), as well as the policy response by the fiscal and monetary authorities (including extension of temporary loan moratoria such as in the case of the 2021 volcanic eruption of La Soufrière in St. Vincent and Grenadines). Tightening of bank lending standards since the aftermath of the global financial crisis may also attenuate potential losses.

uA001fig65

ECCU: Historical and Simulated NPLs after Hurricane Events

(In percent of total loans, pre-disaster quarter Q-1 = 0) 1/

Citation: IMF Staff Country Reports 2022, 253; 10.5089/9798400216794.002.A001

1/ Historical average and range drawn on 15 majorstorm-events in the period of 2000–2019, Baseline simulation draws on the historical average stayover arrival shock of 20 percent cumulatively in the first year after the largest hurricane events 1989–2019. The downside simulation assumes cumulative 80 and 40 percent stayover arrival? shocks in the first and second post-disaster years respectively.Sources; ECCB, EM-DAT database, National Oceanic and Atmospheric Administration (NOAA) and IMF staff calculations.

5. Other factors may also accentuate asset quality risks from natural disasters. Even in absence of major infrastructure damage countries’ tourism flows may face prolonged disruptions from successive storms that may become more frequent with climate change. The fiscal impact of large natural disasters under already stretched public sector balance sheets can heighten risks to banks with large sovereign exposures. Banks’ more direct exposure to climate change risks may also rise over time to the extent private sector demand for adaptation financing increases.

Annex IX. United Kingdom Overseas Territories—Anguilla and Montserrat

Anguilla

1. Anguilla—a member of the ECCU and the Organization of Eastern Caribbean States—is an overseas territory of the United Kingdom and not a Fund member. The economy is highly dependent on tourism—with tourism exports accounting for 37 percent of GDP—and grants from the U.K. Anguilla’s population is about 15,000.

2. A gradual recovery from the pandemic is under way. The authorities have contained COVID-19 cases at relatively low levels with total cases of 3,294 and 9 deaths, with the vaccination rate at top of ECCU (69 percent of population fully vaccinated). In 2021, total stayover arrivals increased by 12 percent, supporting a real GDP growth rate of 2.1 percent after a 29.9 percent contraction in 2020. Nonetheless, tourism arrivals remain 70 percent below their pre-pandemic level. American tourists are expected to continue increasing supported by new daily direct flights by American Airlines from the U.S. since December 2021, although Anguilla’s stricter and longer-lasting entry restrictions add uncertainties to the tourism outlook.

3. Fiscal policies focused on providing relief to the unemployed, health sector, and vulnerable households to cope with rising fuel and food prices. The overall balance decreased slightly (from a surplus of 1.3 percent of GDP in 2020 to a small deficit of 0.1 percent in 2021), reflecting higher pandemic-related expenditures and subsidies on food and energy sectors. The authorities are committed to improving employment and providing social safety net to the vulnerable with the COVID-19 financial aid from the U.K., including an expansion of the unemployment assistance program that covers people who have not contributed to Social Security. Public debt remained low at 67.5 percent of GDP in 2021 due to the tight borrowing space.

4. The current account deficit worsened amid rising import prices. The current account deficit widened to 39.6 percent of GDP in 2021 (from 22.3 percent of GDP in 2020). A significant increase of imports—primarily due to the soaring global food and fuel prices—outweighed the slight recovery in tourist receipts. Despite the significant BOP shock, international reserves stood at EC$151.9 million in 2021 with the support of COVID-19 disbursement from the U.K. (EC$40 million). The current account deficit is projected to widen further in 2022.

5. The financial sector remains stable but there are pockets of vulnerability. The capital adequacy ratio (CAR) declined marginally to 8.5 percent in 2021 (from 8.6 percent in 2020), still above the 8 percent regulatory benchmark. The NPL ratio declined to 21 percent in 2021, from 25 percent in 2020, reflecting the recovery in tourism-related employment and business as well as ongoing efforts to dispose of NPLs. However, it remained well above the prudential benchmark and an upward tick in post-moratoria NPLs is likely. The credit union established three years ago has been growing rapidly. The authorities joined the DCash pilot project in June 2022.

6. Medium-term economic prospects continue to depend on the tourism recovery and U.K. grants while the authorities are shifting towards clean energy. With 85 percent of the economy directly or indirectly related to tourism sector, the economic outlook remains highly dependent on the speed of tourism recovery. Government revenues will likely rise following the implementation of the goods and services tax in July 2022. Nonetheless, the international borrowing space for Anguilla will remain very limited with U.K. grants being the major source of funding. The authorities are pressing ahead with switching to renewable energy, especially solar and wind, to lessen the reliance on fuel imports. The blue economy, which includes fishery, vessel industry, cruise tourism, and related education, remains the focus in the authorities ‘ medium-term work plan.

Montserrat

1. Montserrat—a member of the ECCU and the Organization of Eastern Caribbean States—is an overseas territory of the United Kingdom and not a Fund member. It has a working population of 2,000 people out of a total population of around 4,990. Montserrat’s main economic activities include construction, government services, and tourism.

2. A gradual recovery is under way. Although there have been around 1,000 COVID-19 cases, deaths have been limited to 8 people. The authorities set up a testing center and widely distributed vaccines, but only 35 percent of the population is fully vaccinated due to vaccine hesitancy. The economy is not as tourism dependent as the rest of the ECCU. The authorities closed their borders until October 2021 to limit COVID cases, which had led to a virtual standstill of stayover tourists in both 2020 and 2021. Due to an unprecedented decline in tourism receipts, high import prices, and a fall in official transfers, the current account worsened from a surplus of 8 percent of GDP to a deficit of 17 percent of GDP in 2021 and is projected to remain large in 2022. The authorities later launched the Remote Worker Stamp Program to attract long-term visitors. Cruise ship activity has resumed, with two new ships expected to begin operations this year. Real GDP is expected to expand by about 4 percent in 2022 after 8 percent growth in 2021, supported by recovery in tourism, transport, public administration, and construction sectors. Given the anticipated recoveries in these sectors, the current account balance is expected to improve in 2023 and over the medium term.

3. The fiscal balance improved in 2021 reflecting strong grant revenues and a moderation in expenditure. The fiscal outlook depends on U.K. budget support. Grant revenues exceeded 50 percent of GDP in 2021, supporting a small overall fiscal surplus. Public debt was the lowest in the ECCU at 5.1 percent of GDP in 2021 and is projected to remain low and stable in the medium term.

4. The authorities strive to switch to renewables amid rising global fuel prices. With local fuel prices soaring to US$6 per gallon, the island is also making great strides towards achieving its goal of becoming a climate-smart economy, while allowing international prices to pass-through to domestic consumers. Montserrat aims to use only renewable energy by 2035 through the construction of solar, wind and geothermal power plants. The government currently has a large 1-megawatt solar power plant and recently completed construction on another 750-kilowatt solar plant, and 3 geothermal wells.

5. The financial sector remains broadly stable, but credit demand has dwindled. The sector comprises one bank, one credit union, and a limited insurance sector. NPLs are low at 5 percent, with liquidity and provisioning buffers. Lending margins are between 4.5 and 5 percent, and provisions exceed 100 percent of NPLs at end-March 2022, which is well above the ECCB’s mandated 60 percent minimum. The credit union’s financial position has improved somewhat, and no insurance sector issues have been reported. The population is cash-driven, but there is a low local demand for credit, motivating the bank and the credit union to lend to diaspora.

6. Medium-term prospects depend on budget support and the construction outlook. With over 63 percent of its recurrent budget financed by the U.K. government, Montserrat’s prospects rely largely on continued budget assistance. A large port development project expected to bolster employment and construction growth is under way, along with renewable energy projects.
1

Intra-regional transportation bottlenecks have worsened following the insolvency of regional airline LIAT in 2020. The airline is currently under administration and other regional airlines are unable to cover all destinations, forcing passengers to transit via Miami for intra-island travel within the ECCU and raising air fares significantly.

2

For instance, unemployment in Grenada fell to 16.6 percent in 2021: Q2 (from 28.4 percent in 2020: Q2). The participation rate increased to 67 percent (from 60.9 percent), returning to pre-pandemic levels, with female participation recovering slower due to weaker recovery in the hospitality sector that relies significantly on female workers. Youth unemployment remained high at 38.6 percent even with a low participation rate (47 percent). In St. Lucia, unemployment edged down to 23 percent in 2021: Q2 (from 24 percent in 2020: Q2). Youth and female unemployment remained high at 42 and 25 percent respectively (compared to 35 and 18 percent in 2019: Q2). In Antigua and Barbuda, the number of active jobs and reported earnings declined by 6V2 percent in 2021 from a year earlier,although there was some pick-up in employmentin the construction and financial services sectors.

3

The authorities implemented forceful and timely fiscal measures to limit the socio-economic impact of the pandemic as well as the volcanic eruption in St. Vincent and the Grenadines. In 2020–21, discretionary fiscal packages related to the pandemic averaged about 3 percent of GDP, below those in emerging market economies. Some of these measures are being gradually phased out as more persons return to work.

4

The IMF Executive Board approved emergency financing for Dominica,Grenada, and St. Lucia under the RCF, totaling SDR48.08 million (about US$65.6 million) in April 2020, and for St. Vincent and the Grenadines SDR 11.7 million (about US$16 million) in May 2020. During 2020–21, total emergency financing from the Fund amounted to US $93 million, equivalent to 111 percent of quota (weighted average) among the four receiving countries.

5

While ECCU countries saw stable rollovers of government securities, there have been limited new funds raised from regional capital markets given banks’ and pension funds’ prudential limits on investment in sovereign bonds.

6

The moratoria were part of a suite of pandemic response measures, including a temporary loan impairment classification freeze (see 2021 ECCU Regional Consultation Report, IMF Country Report No. 21/86). The ECCB extended the moratorium program for the second time in September2021 and any new NPLs will be evidenced 90 days after the end-March 2022 expiration date. The ECCB has kept its discount and long-term credit interest rates unchanged at 2 and 3.5 percent respectively.

7

At end-2021 two ECCU countries’ banking sector NPLs exceeded 20 percent of total loans with provisioning coverage below30 percent. Banking system provisioning subsequently strengthened to 58 percent of NPLs at end-March 2022.

8

The technical requirements for the planned phased increase of banks’ minimum provisioning ratio to 100 percent for long-standing NPLs by 2024 are currently being reviewed by the ECCB based on industry consultations, and the revised guidance is due to be formally articulated in the ECCB’s 2022 review of the Treatment of Impaired Assets Standard (TIAS).

9

The backing ratio is defined as the ratio of foreign assets to demand liabilities atthe ECCB.

10

Following its initial launch in March 2021 in Antigua and Barbuda, Grenada,St. Kitts and Nevis, and St. Lucia, the DCash pilot project was extended to St. Vincent and the Grenadines in August 2021, to Dominica and Montserrat in December 2021, and to Anguilla in June 2022. The amendment to the ECCB Agreement to define and explicitly provide for a digital currency has been ratified and implemented by all ECCU countries, making DCash a legal tender.

11

Staff analysis shows that the war in Ukraine affects the ECCU economies mainly through higher inflation (averaging over 2 percentage points) and lower GDP growth (averaging over 1 percentage point), as they rely heavily on food and fuel imports. In addition to worsening sup ply chain disruptions in the region, higher travel costs would weaken tourism demand and compound the decline in GDP growth, which in turn would further strain fiscal and external balances.

12

Recommendations to restrict visa-free access to third countries with CBI programs were made separately in March 2022 by the European Parliament and U.S. Congress, to support abolishment of such schemes on security grounds. Both proposals are yet to be brought into force. As CBI revenue can be uncertain and volatile,they should be used to enhance existing saving funds for self-insurance against natural disasters,debt reduction,and public investment.

13

See Selected Issues for 2018 ECCU Regional Consultation Report. IMF Country Report No. 19/63.

14

The persistently high debt ratio has co-existed with low and declining growth in the region, with some research (e.g., Greenidgeet al. (2012)) suggesting that the high debt beyond the threshold of 55–56 percent of GDP is associated with lower economic growth.

15

The improvement of about 1½ percentage points compared to 2021 largely reflects the gradual phasing out of temporary emergency spending.

16

Existing social assistance programs include means-tested benefits and social pensions. Where social safety nets are deemed inefficient, information on household size and composition (or other welfare correlates such as location) can be used to vary benefit levels across households and improve targeting. Antigua and Barbuda and St. Lucia have already started to increase domestic fuel prices to contain the fiscal costs.

17

ALMPs are government programs that intervene in the labor market to keep workers em ployed, bring them into employment, increase their productivity and earnings, and improve the functioning of labor markets.

18

See 2019 ECCU Regional Consultation Report, IMF Country Report No. 20/70. In addition, the October 2021 global agreement on international corporate taxation provides an opportunity to rationalize tax expenditure and to harmonize future efforts to attract investment among member countries. Generous tax concessions at customs for import duties could also be curbed, for exam pie through adopting an annual aggregate cap for duty exemptions/concessions (Norregaard etal, 2015). Finally, efforts should also be made to strengthen the recurrent property tax and improve VAT levied on online purchases.

19

Including through support by the IMF Public Investment Management Assessment with the climate module.

20

Taking Grenada’s fiscal rules as an example, the ceiling on the growth rate of real primary expenditure could perpetuate the impact of transitory shocks (e.g., the under-execution of public investment projects in previous years). In addition, the focus on containing expenditure reduces the incentive for revenue mobilization, precluding high-valued spending even if revenues were to increase.

21

See 2021 ECCU Regional Consultation Report. IMF Country Report No. 21/86.

22

A few lenders (mostly credit unions) have granted limited extension of moratoria for up to six months post-March 2022, based on assessment of positive borrower prospects.

23

Moreover, the ECCB’s 2022 review of the TIAS should include strengthening the definitions applicable to restructured distressed loans, including restructured moratoria loans, and ensuring sufficiently robust criteria to govern reclassification of such loans to performing status so as to mitigate risk build-up.

24

The Eastern Caribbean Asset Management Corporation (ECAMC) was established in 2017 with the dual mandate for acting as the receiver for failed banks and acquiring NPLs from approved financial institutions including banks and has been granted special powers to facilitate NPL resolution. However, there have not been NPL transactions beyond the initial asset purchases finalized in September 2021, financed from its own capital.

25

Based on data from the Caribbean Confederation of Credit Unions, country authorities, and Fund calculations, credit growth rate in the credit union sector was 10 percent in 2020 and slowed to slightly under 9 percent in 2021.

26

The recent exit of global banking groups from the region has increased the systemic significance of local banks that rely fully on a local deposit funding pool and has limited CBRs in the region. Implementation of the proposed sale of CIBC-FCIB’s banking operations in four jurisdictions to a consortium of indigenous banks will result in local banks’ share of system assets swelling to over 70 percent, three jurisdictions having two or less banks, and a yet larger share of customers reliant on local banks’ CBRs.

27

Lack of consolidated oversight of insurance companies and pension management providers operating throughout the region was a factor in the level and impact of the BAICO and CLICO failures in the ECCU. In several member countries material reporting delays and gaps for these two sectors remain. The fragmented decision-making and approval processes and timelines also hamper the effectiveness of insurance conglomerates and their ability to introduce new products designed to improve market penetration within the ECCU.

28

There are plans to advance other reform initiatives including Basel II/III and the macroprudential framework and toolkit. Careful prioritization and pacing of the financial sector reform agenda, including implementation of the RSSB, remain important, and should take due note of limited resources as well as pre-existing challenges to enacting needed legislative changes at the national level.

29

The ECCB has launched an ambitious program to integrate climate risks in supervisory and regulatory frameworks and, in collaboration with international agencies, has commenced a technical assistance project to build capacity in ECCU regulators and financial institutions.

30

See 2018 ECCU Regional Consultation Report (IMF Country Report No. 19/62) and Western Hemisphere Regional Economic Outlook (October 2021).

31

Investing in structural resilience requires significant upfront costs, but it would reduce damage and losses from disasters, promote private investment and generate job opportunities. Similarly, building financial resilience, notably through insurance, would ensure liquidity for relief and reconstruction while protecting public finances from the impact of disasters. In this context, Grenada and St. Vincent and the Grenadines enrolled in the World Bank’s Catastrophe Deferred Drawdown Option (CAT DDO) in 2020 and St. Vincent and the Grenadines received a disbursement in 2021.

32

Moreover, changes to construction standards (e.g., incentivizing small-scale solar on new buildings and adding energy efficiency to building codes) can be explored.

33

This would establish oversight expectations and requirements, as appropriate, as well as provide further guidance on managing general business and operational risks,including from critical service providers.

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

1

Prepared by Swarnali Ahmed Hannan, Chao He, Hugo Tuesta, and Huilin Wang. The tourism data for Caribbean countries refer to stayover arrivals, while those of other countries are usually tourist/foreign tourist arrivals.

1

Prepared by Weicheng Lian, with data support from Beatriz Nunes and Raadhika Vishvesh.

2

Weighted by GDP in USD.

3

World output gap has three lags because it is only available at the quarterly frequency. Output gap is not controlled for two reasons: (i) it is hard to estimate; (ii) HP-filtered output gap is not a significant factor in the Phillips curve estimation for ECCU countries.

4

The exercise further assumes that the shipping cost of 2022 would be the same as the level in end-2021. Under this assumption, the month-on-month changes of the shipping cost would be zero in 2022, creating no additional impact on inflation from shipping costs in 2022. By contrast, if this assumption does not hold and if the shipping cost declines from its historical high levels in 2021 to a low level in 2022, the inflationary impact of shipping costs on inflation in 2021 would obviously be smaller than the estimated value here.

5

The nonlinearity may come from importing firms being more cautious than usual in passing a spike in shipping costs to customers if they anticipate a reversal later. This may stand behind the large confidence band in the LPM estimate for the shipping costs effects on inflation and consistent with some anecdotal evidence (in Grenada, for example, food importers recently indicated their reluctance to pass rising shipping costs to the public, partly because they are SOEs). Moreover, data suggest that shipping costs have already moderated in the last few months of 2021, suggesting a potential reversal. However, there is significant uncertainty on this issue, especially given the potential impact of oil price on shipping costs. Here, it is important not to confuse between the direct oil price effect on the ECCU inflation through energy being part of the production of consumption goods and an indirect effect of oil price on the ECCU inflation through the impact of energy price on shipping costs.

1

Prepared by Isabela Duarte, Emilio Fernandez-Corugedo, Marie Kim, Weicheng Lian, Rui Mano, Camila Perez Marulanda, and Manuel Rosales Torres.

2

At the supranational level, WAEMU adopted FRFs in 2000, CEMAC in 2002 and EAMU in 2013. Among small states, Cape Verde (1998) is the only other country that adopted a fiscal rule before 2000. Other peers that introduced FRFs in the 2000s include: Maldives (2006), Mauritius (2008), Andorra (2014), and The Bahamas (2018).

1

Prepared by Camila Perez Marulanda, Dmitry Vasilyev, and Raadhika Vishvesh.

1

Prepared by Janne Hukka.

2

The observation is consistent with econometric studies of the region such as Brei et.al. (2019) and Beaton et.al. (2017) that found no signs of loan defaults or deterioration in bank capital as a result of past hurricane strikes.

3

Analysis by Brei et.al. (2019) focusing on earlier periods point to potential deposit withdrawal risks in the event of natural disaster shocks.

4

Similar to Beaton et.al. (2016), tourism arrivals may thereby be considered a high-frequency proxy for domestic economic activity in absence of sub-annual data on GDP or employment.

5

Aggregation of the sectoral cumulative NPL paths considers the sectoral composition of banks’ credit portfolios as well as their respective counties’ relative degree of tourism dependency as measured by the sector’s contribution to GDP.

6

See for instance Ghosh (2015), Klein (2013) and IMF (2019).

7

The storm events are selected by dual criteria of their vicinity to the country (employing historical hurricane tracks from the US National Oceanic and Atmospheric Administration’s (NOAA) database) and its reported impact (EM-DAT international disaster database complemented with other online sources).

8

The actual impact on St. Maarten banking system’s NPLs was more modest, see IMF Country Report No. 20/94.

Other IMF Content

Other Publishers

  • Collapse
  • Expand
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

Output Losses

(Percentage difference from precris is WEO)

Fiscal Adjustment Needs in 2022

(Difference between primary balance and debt stablizing primary balance in 2022; Percent of fiscal year GDP)

COVID-19 Pandemic Impact on Labor Force

People Vaccinated

(In percent of total population as of June 28, 2022)

ECCU: Real GDP

(2019=100)

GDP Losses in 2022 and Tourism Intensity

GDP Losses and Economic Complexity

EMDEs: Fiscal Implications of Scarring Effects

(In Percent of FY GDP)

ECCU Real GDP Growth By Economy

(In percent)

Caribbean: Stayover Tourist Arrivals

(In percent change relative to the same month in 2019)

ECCU Inflation and Global Prices

Discretionary Fiscal Measures: 2020–2021

(In percent of GDP)

Overall Balance

(In percent of GDP)

CBI Revenues

(In percent of GDP)

External Official Financing, 2020–21

(In millions of US dollars)

ECCB Claims on General Government 1/2/

(Cumulative changes from January 2020; in millions of EC dollars)

ECCU: Net Earnings before Taxes 1/

(Relative to corresponding 2019 period, in percent)

ECCU: Bank Asset Quality Indicators

(In percent of total loans)

ECCU: Bank Loans Under Moratoria by Country

(In percent of total ECCU loan stock)

ECCB Currency Board Backing Ratio 1/

Real GDP Index

(2019=100)

ECCU-6: Public Debt

(In percent of GDP)

Impact on Inflation of the Shipping Cost Kept at December 2021 level

(In percentage point)

ECCU: Public Debt

(In percent of GDP)

Damage From 50 Largest Natural Disasters

(1980–2020; damage in percent of GDP)

Fiscal Revenue Loss of Fuel Price Relief

(Estimates; in percent of GDP)

ECCU-6: Public Gross Financing Needs

(In percent of GDP)

Estimated Size of Informal Economy1’

(In percent of total economic activity, average 2011—19)

Wage Bill

(In percent of GDP; latest available)

Number of Countries with Fiscal Rule

Debt Improvement with Fiscal Rule

(Change of 5 year average post and pre FR adoption)

Debt Target Without and With Natural Disasters (NDs)

(In percent of GDP)

Stylized Example for Grenada Assuming Debt Target is Reached in 2027 Under a Hypothetical Natural Disaster

(In percent of GDP)

Under Natural Disasters, Using Low-multiplier Adjusters is Even More Important

Operational Rules under Natural Disasters: Expenditure Versus Primary Balance Rules

ECCU: Bank Deposits and Resident Private Credit

(In billions of EC dollars)

Selected ECCU Bank Interest Rates

(Weighted average rate, in percent)

Banking System Credit Exposure to Vulnerable Sectors

(In percent of total loans; latest available)

Insurance Penetration Relative to Average Climate-Related Damages

(In percent of GDP; latest available)

ECCU: Historical and Simulated NPLs after Hurricane Events

(In percent of total loans, pre-disaster quarter Q-1 =0) 1/

Impact of Natural Disasters on Number of Stayover Visitors

(In percent of pre-shock level)

Domestic Electricity Tariffs: 2021

(In USct/kWh)
Figure 1.

ECCU: External Sector Developments
Figure 2.

ECCU: Monetary Developments
Figure 3.

ECCU: Financial Sector Developments—Credit Risk Impact of the Pandemic
Figure 4.

ECCU: Financial Sector Developments—Business Impact of the Pandemic

Importance of Hotel Sector, 2019

(Share of value added and value added per stay)

Tourism After Past Shocks Compared to the Current Pandemic: The Caribbean

Tourism After Past Shocks Compared to the Current Pandemic: Rest of the World

Tourist Arrivals

(Index, 2019=100)

Total Tourist Arrivals

(Percent change of 2021 compared to 2019)

Tourist Arrivals from US

(Percent change of 2021 compared to 2019)

Tourist Arrivals from UK

(Percent change of 2021 com pared to 2019)

Tourist Arrivals from Canada

(Percent change of 2021 compared with 2019)

Tourist Arrivals in the Caribbean

(2019 = 100)

Tourists Arrival Growth and Entry Quarantine Restrictions in ECCU

Strong Inflation Comovements

Global Factors Driving Some Components

Oil Prices

Food Prices

Shipping Costs

Shipping Costs: 2019M1 – 2021M12

Impact of Changes in Shipping Costs on Headline Inflation: 2019M1 – 2022M12

Development of Fiscal Rules

(Number of countries with fiscal rule)

Grenada, 2004

St. Vincent and the Grenadines, 2013
Figure 1.

Response of Sectoral NPL Ratios to a Percentage Point Drop in Tourism Growth

ECCU: Hurricane Impact on Stayover Arrivals

(Major events 1989–2020, index year T-1 =100) 1/

ECCU; Impact of Hurricanes on Tourism Arrivals

(30 major events 1989–2020; in percent)

ECCU: Historical and Simulated NPLs after Hurricane Events

(In percent of total loans, pre-disaster quarter Q-1 = 0) 1/