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© 2011 International Monetary Fund
January 2011
IMF Country Report No. 11/30
Eastern Caribbean Currency Union: 2010 Discussion on Common Policies of Members Countries—Staff Report; Informational Annex, and the Public Information Notice on the Executive Board Discussion
This staff report on common policies of member countries of the Eastern Caribbean Currency Union (ECCU) was prepared by a staff team of the International Monetary Fund in the context of the periodic regional surveillance of the ECCU. The regional perspective of such discussions is intended to strengthen the bilateral discussions that the IMF holds with members in the region under Article IV of the IMF’s Articles of Agreement. The following documents have been released and are included in this package:
The staff report for the 2010 Discussion on Common Policies of Member Countries, prepared by a staff team of the IMF, following discussions that ended on August 27, 2010 with the officials of the ECCU on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on September 17, 2010. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
Informational Annex
A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its September 27, 2010 discussion of the staff report.
The document listed below will be separately released.
Selected Issues
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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Front Matter Page
INTERNATIONAL MONETARY FUND
EASTERN CARIBBEAN CURRENCY UNION (ECCU)
Staff Report for the 2010 Discussion on Common Policies of Member Countries
Prepared by the Staff Representatives for the 2010 Discussion with the Eastern Caribbean Currency Union
Approved by Rodrigo Valdés and Jan Kees Martijn
September 17, 2010
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Executive Summary
Context. The ECCU has been hard hit by the global economic downturn and is faced with a protracted recovery. Reflecting a collapse in tourist arrivals and FDI-financed construction activity, real regional GDP contracted sharply in 2009 and growth is expected to remain subdued in 2010–11. Surging fiscal deficits, the lack of institutional arrangements for fiscal consolidation, unsustainable debt levels, and stress in the financial sector are threatening the underpinnings of the currency union and the currency board.
Key recommendations:
Fiscal policy. The currency union needs to be supported by consistent fiscal policies across all member countries. Reducing high fiscal deficits and public debt levels are also critical for fostering growth. The authorities’ decision to translate the current debt target of 60 percent of GDP by 2020 into annual primary surplus targets is an important step in the right direction, but the challenge will be to ensure implementation and compliance. Rationalizing public expenditure will have to be an important element in addressing fiscal weaknesses and improving the efficiency and effectiveness of public spending.
Financial sector. Safeguarding financial system stability calls for crisis preparedness and prompt actions including a preemptive resolution of weak banks. On the failed insurance companies, while some progress has been made in the resolution of BAICO, the risk of fallout from CLICO calls for a more proactive and a continued coordinated regional approach. Regulation and supervision of the nonbank financial sector also needs to be stepped up, including in the near term, by making operational the SRUs and strengthening the information exchange and collaboration between the ECCB, SRUs and other regulators.
External competitiveness. While the REER appears broadly in line with current fundamentals, the necessary fiscal adjustments will imply equilibrium REER depreciation in the near term. In light of the peg, this implies adjustments in relative prices and calls for constraints in real wage growth or even a reduction in nominal wages.
Discussions. The 2010 Common Policies discussions took place during June–August 2010 and the mission comprised A. Schipke (Head), Y. Wong, the ECCU regional resident representative W. Samuel, and M. Mrkaic (all WHD). J. Rolle (OED) participated as well. The mission held policy discussions with all eight ECCU members of the ECCU (Fund-member countries Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines; and the two U.K. territories, Anguilla and Montserrat) and the ECCB. Also, the key common policy issues were discussed at the first ECCU/OECS-IMF meeting held on June 24–25 in St. Kitts, which brought together the prime ministers, ministers of finance, financial secretaries, the ECCB governor, Executive Director T. Hockin (OED), DMD Mr. Portugal, and staff (FAD, MCM, and WHD).
Fund Relations. To mitigate the impact of the global financial crisis and idiosyncratic shocks, the Executive Board approved financing requests to all ECCU Fund members in 2009–10. These include the RAC-ESFs for Dominica (40 percent of quota), St. Lucia (45 percent of quota), and St. Vincent and the Grenadines (45 percent of quota); ENDA for St. Kitts and Nevis (25 percent of quota); ECF augmentation (37.5 percent of quota) and a successor three-year ECF (75 percent of quota) to Grenada; as well as a three-year SBA (600 percent of quota) for Antigua and Barbuda.
Contents
I. Context and Recent Developments
II. Outlook and Risks
III. Policy Discussions
A. Strengthening the Institutional Underpinnings of the ECCU
B. Fiscal Consolidation and Debt Sustainability
C. Resilience of the Financial System
D. External Stability, Growth and Competitiveness
E. Enhancing ECCU and Fund Engagement
IV. Staff Appraisal
Boxes
1. Public Debt in ECCU Countries
2. Collapse of the CL Financial Group
3. Moving Forward with the Establishment of an Economic and Monetary Union
4. Improving the Efficiency of Public Expenditure in the ECCU
5. ECCU Banking Sector Sensitivity Analysis
6. ECCU Banking System: Crisis Preparedness and Management
7. Exchange Rate Assessment
8. Growth in the ECCU
9. Technical Assistance from the Fund in 2009 and 2010
10. Features of the Rebased GDP and Revised CPI
Tables
1. Selected Economic and Financial Indicators, 2005–11
2. Selected Economic Indicators by Country, 2005–15
3. Selected Central Government Fiscal Indicators by Country, 2005–15
4. Selected Public Sector Debt Indicators by Country, 2005–15
5. Monetary Survey, 2005–11
6. Summary of Balance of Payments, 2005–15
7. Selected Vulnerability Indicators, 2005–11
8. Creditor Composition of Public Debt at End-2009
Figures
1. Overview
2. External Environment, 1995–2009
3. Fiscal Revenue, 1997–2009
4. Fiscal Expenditure, 1997–2009
5. Monetary Developments, 2001–June 2010
6. Private Sector Credit Growth, 2004–June 2010
7. Bank Liquidity, January 2008–June 2010
8. Banking System’s Gross Exposure to the Public Sector, 2003–09
9. Decomposition of Commercial Banks’ Exposure to the Public Sector, 2004–09
10. Banking System Vulnerabilities, 2004–June 2010
11. Regional Government Securities Market (RGSM), 2002–10
12. Eastern Caribbean Securities Exchange
13. External Sector Developments, 1997–2009
14. Stayover Arrivals, 2006–10
15. External Competitiveness, 1990–2009
16. Doing Business Indicators, 2009
Appendix Tables
1. External Debt Sustainability Framework, 2005–15
2. Public Sector Debt Sustainability Framework, 2005–15
Appendix Figures
1. External Debt Sustainability: Bound Tests
2. Public Debt Sustainability: Bound Tests
Acronyms
| AML/CFT | Anti-Money Laundering/Combating the Financing of Terrorism |
| CARICOM | Caribbean Community |
| CARIFORUM | CARICOM countries and the Dominican Republic |
| CARTAC | Caribbean Regional Technical Assistance Centre |
| CBA | Currency Board Arrangement |
| CDB | Caribbean Development Bank |
| CDF | Caribbean Development Fund |
| CFATF | Caribbean Financial Action Task Force |
| CIDA | Canadian International Development Agency |
| CSME | CARICOM Single Market and Economy |
| CTO | Caribbean Tourism Organization |
| EC | Eastern Caribbean |
| ECCB | Eastern Caribbean Central Bank |
| ECCU | Eastern Caribbean Currency Union |
| ECF | Extended Credit Facility |
| ECSE | Eastern Caribbean Securities Exchange |
| ECSRC | Eastern Caribbean Securities Regulatory Commission |
| ENDA | Emergency Natural Assistance for Natural Disaster |
| ESF-RAC | Exogenous Shocks Facility (Rapid Access Component) |
| EU | European Union |
| FAD | Fiscal Affairs Department |
| FDI | Foreign Direct Investment |
| FSAP | Financial Sector Assessment Program |
| LEG | Legal Department |
| LOLR | Lender of Last Resort |
| MCM | Money and Capital Markets Department |
| NBFI | Nonbank Financial Institution |
| NPL | Nonperforming Loan |
| OECD | Organization for Economic Cooperation and Development |
| OECS | Organization of Eastern Caribbean States |
| PRGF | Poverty Reduction and Growth Facility |
| PSIP | Public Sector Investment Program |
| ROC | Regional Oversight Committee |
| ROSC | Report on the Observance of Standards and Codes |
| REER | Real Effective Exchange Rate |
| RGSM | Regional Government Securities Market |
| SBA | Stand-By Arrangement |
| SRU | Single Regulatory Unit |
| STA | Statistics Department |
| VAT | Value Added Tax |
| WHD | Western Hemisphere Department |
| WTO | World Trade Organization |
Front Matter Page
INTERNATIONAL MONETARY FUND
EASTERN CARIBBEAN CURRENCY UNION (ECCU)
Staff Report for the 2010 Discussion on Common Policies of Member Countries
Informational Annex
Prepared by the Western Hemisphere Department
September 16, 2010
Contents
Appendices
I. ECCU: Relations with the Fund
II. OECS: Relations with the World Bank Group
III. Caribbean Development Bank: Overview of Activities in the OECS
IV. CARTAC: Capacity Building in the ECCU
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Public Information Notice (PIN) No. 11/7
FOR IMMEDIATE RELEASE
January 21, 2011
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