Eastern Caribbean Currency Union: Staff Report for the 2018 Discussion on Common Policies Of Member Countries

December 20, 2018


December 20, 2018


December 20, 2018

Key Issues

The Eastern Caribbean Currency Union (ECCU) is gradually recovering following the catastrophic impact of Hurricanes Irma and Maria in 2017. Tourism is slowly picking up in hurricane-stricken countries and has remained strong elsewhere in the ECCU. Conditions remain favorable to growth, but risks are increasing. The fiscal balance for the region as a whole—which is particularly important in a quasi-currency board arrangement—worsened in 2017, reflecting lower inflows from citizenship-by-investment programs and higher reconstruction and current spending. While public debt has declined, helped by debt relief operations in some countries, the ECCU debt target of 60 percent of GDP by 2030 remains elusive for most countries. Important progress has been made in financial sector reforms, but long-standing weaknesses and emerging risks weigh on growth prospects and may entail fiscal costs. External deficits remain large, highlighting low competitiveness. Natural disasters are becoming more frequent and intense, compounding these vulnerabilities.

Main Policy Recommendations:

  • Shift focus from the current emphasis on recovery from natural disasters to building ex-ante resilience based on: (i) boosting resilient investment and insurance protection to enhance preparedness to natural disasters and climate change; and (ii) a robust fiscal framework that would both support the shift towards building resilience and help anchor the much-needed fiscal adjustment to break the vicious cycle of high debt and low growth.

  • Intensify decisive and timely actions to resolve weaknesses in the financial sector, including longstanding problems in the banking sector and emerging risks in the non-banking sector.

  • Undertake structural reforms to enhance competitiveness and boost growth, focusing on energy policies, the business climate, trade liberalization, public sector efficiency, regional integration, labor market, and education.

Approved By

Krishna Srinivasan (WHD) and Johannes Wiegand (SPR)

Mission Team: Sònia Muñoz (head), Leo Bonato, Alejandro Guerson, Bogdan Lissovolik, Manuk Ghazanchyan (all WHD), and Gayon Hosin (MCM) held policy discussions with the eight ECCU jurisdictions (Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and The Grenadines), the ECCB, the OECS Secretariat, and the CDB. Mike Sylvester (OED) participated in the closing meetings and Ann Marie Wickham (local economist, WHD) joined some meetings in Bridgetown. The team met with the Prime Ministers of five of the eight-member jurisdictions, Financial/Permanent Secretaries of six-member jurisdictions, Financial Services Authorities of the eight member jurisdictions, the ECCB Governor and other senior officials, the Organization of Eastern Caribbean States (OECS), the Caribbean Development Bank (CDB), and a wide range of private sector representatives.

Mission Dates: October 24-November 2 and November 12–20, 2018. Contributors: ECCU team. Additional analytical input was provided by Marika Santoro and Mauricio Vargas. Steve Brito and Vivian Parlak provided research assistance and Malika El Kawkabi provided editorial assistance.



  • A. Recent Developments

  • B. Outlook and Risks


  • A. Robust Frameworks to Support Fiscal Consolidation

  • B. Building Ex-Ante Resilience to Natural Disasters

  • C. Strategy for Stability and Resolving Problems in the Financial Sector

  • D. Competitiveness and Growth




  • 1. Fitting Fiscal Frameworks to Country Characteristics

  • 2. The Benefits of Resilient Investment

  • 3. Natural Disaster Insurance Financing


  • 1. Real Sector Developments

  • 2. Tourism Developments

  • 3. Monetary Developments

  • 4. Financial Soundness Indicators

  • 5. Credit Developments

  • 6. Doing Business Indicators


  • 1. Selected Economic and Financial Indicators, 2014–24

  • 2. Selected Economic Indicators by Country, 2014–24

  • 3. Selected Central Government Fiscal Indicators by Country, 2014–24

  • 4. Selected Public Sector Debt Indicators by Country, 2014–24

  • 5. Monetary Survey, 2014–24

  • 6. Summary Balance of Payments, 2014–24

  • 7. Selected Labor Force Indicators

  • 8. Financial Structure, end-2017

  • 9. Financial Soundness Indicators of the Banking Sector 2010–2018

  • 10. Selected Financial Soundness Indicators by Country, 2010–2018


  • I. Implementation of Previous Staff Advice

  • II. Risk Assessment Matrix

  • III. External Assessment

  • IV. Real and Financial Cycles in the ECCU

  • V. Impact of US Shocks on the ECCU

  • VI. Competitiveness in Tourism Markets

  • VII. United Kingdom Overseas Territories—Anguilla and Montserrat

The Recovery is Underway, but Risks are Looming

A. Recent Developments

1. Growth is gradually recovering in 2018 following the adverse economic impact of natural disasters in 2017. In September 2017, Hurricanes Irma and Maria hit the region with catastrophic effects on some countries, particularly Dominica and Anguilla.1 Tourist arrivals declined in late 2017 in the affected countries, but they remained strong elsewhere in the first half of 2018. Reflecting these events, regional GDP growth fell to 1.4 percent in 2017 from 3.4 percent in 2016. With output still below potential, core inflation remained subdued, but sharp increases in the prices of food and medication were experienced by hurricane-struck countries in the first half of 2018.

ECCU: Real GDP Growth

(In percent)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Source: World Economic Outlook database.

ECCU: Total Stayover Arrivals (2001–2018)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Sources: ECCB, Caribbean Tourism Organization (CTO), and IMF staff calculations.

2. The fiscal balance deteriorated in 2017 and the first half of 2018, but debt relief in some countries eased the overall region’s public indebtedness. The combined ECCU fiscal surplus declined markedly in 2017, largely reflecting lower inflows from citizenship-by-investment (CBI) programs in Dominica and St. Kitts and Nevis and increases in current expenditure. The fiscal balance is projected to decline further in 2018, while the underlying fiscal deficit (excluding revenues from CBI programs and bank resolution operations) is expected to increase to about 3½ percent of GDP in 2018. Public debt, however, declined by about 1 percent to an estimated 72 percent of GDP in 2017, largely reflecting debt relief in some countries.2

ECCU Overall Balance

(In percent of GDP)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Sources: Country authorities and IMF staff estimates and projections.

ECCU-6: Public Debt, Baseline Scenarios

(In percent of GDP)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Source: Country authorities and IMF staff estimates and projections.

3. Recovery in credit provided by banks is weak after four consecutive years of decline, and banking sector risks are increasing. While the business cycle turned in 2011, the credit cycle has lagged (Annex IV). Even now, amid signs of recovery, bank credit growth continues to be subdued (0 percent in September 2018) despite ample bank liquidity, due to low levels of bankable loans. Natural disasters and emerging problems in CBI-related loans raised the nonperforming loan (NPL) ratio to 15.2 percent in locally incorporated banks in September 2018—24.8 percent in majority government-owned banks—while provisioning against such impairment remains low. The reclassification of the debt-land-swap from financial to fixed assets— which requires a risk weight of 100 percent—has decreased the capital adequacy ratio of majority government-owned banks in one jurisdiction, but it remains above the regulatory minimum. Differences exist among ECCU countries, with Grenada’s NPL ratio declining rapidly and St. Kitts and Nevis’ increasing.3

Credit to Private Sector

(In percent, year over year growth, monthly)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Sources: ECCB and IMF staff calculations

Nonperforming Loans

(In percent of total loans)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Source: ECCB and IMF staff calculations.

4. Although relatively small, lending by credit unions has increased rapidly in recent years. Signs of fragility in credit unions and building and loan societies are increasing in some countries that suffer from high NPLs and low capitalization, including in Dominica, where the sector is systemic accounting for assets totaling 55 percent of GDP. Catastrophic events heavily affected the insurance sector, leading to an estimated 90 percent decline in net income in 2017,4 with a domestic company in one jurisdiction being unable to honor many of its obligations after the latest hurricane.

5. The decline of correspondent banking relationships (CBRs) across the region has stabilized, but maintaining CBRs is more challenging and costly. A few banks, with no direct CBRs with the U.S., are transacting through a non-U.S. bank at significantly increased costs—ranging between 40 and 100 percent higher—and no bank has reported a successful application for CBRs with large U.S. banks. Some banks only have one relationship, which exposes them to withdrawal risk. Those that have more relationships are under pressure by correspondent banks to increase the volume of transactions. Non-bank financial institutions, including credit unions, money services business, and off-shore institutions, are also being impacted by domestic banks exiting certain services and/or banking relationships. In several instances, recently approved off-shore and domestic institutions have been unable to commence business after failing to establish banking relationships with overseas and/or domestic banks, because of which some licenses have been revoked.

6. Some foreign banks are retrenching from the Caribbean region. First Caribbean International Bank (of the Canadian Imperial Bank of Commerce group) will close its Anguilla operations as of January 2019, due to lack of viability in terms of profitability and scale. Republic Financial Holdings Limited from Trinidad and Tobago has announced its intention to acquire Bank of Nova Scotia’s operations in seven ECCU jurisdictions, as well as Guyana and St. Maarten. Bank of Nova Scotia indicated that its decision is based on a refocus on markets of size and scale. Additionally, Bank of Nova Scotia’s subsidiaries in Jamaica and Trinidad and Tobago have agreed to sell their insurance operations to Barbados-based Sagicor Financial Corporation Limited, which would be acquired by a Toronto-based special purpose acquisition corporation.

7. Large external imbalances persisted in 2017. The combined current account deficit of the ECCU reached an estimated 8 percent of GDP in 2017, broadly unchanged since 2016.5 In most countries, conditions remained favorable to tourism, owing to supportive economic prospects in source countries, the addition of direct airline routes, and increased capacity.

ECCU: Current Account Balance

(In percent of GDP)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Sources: ECCB and IMF estimates.

B. Outlook and Risks

8. Growth is projected to gain strength in 2018 and 2019. Growth will be supported in the short term by favorable external conditions, recovery from natural disasters, and a gradual resumption of bank lending (Annex IV).6 U.S. policy shocks will have a considerable impact on the ECCU, mostly through the tourism channel (Annex V). The positive effect from the U.S. fiscal impulse will be partially offset by monetary policy normalization and trade policies. Tourist arrivals are expected to remain strong in countries unaffected by hurricanes and gradually pick up in Anguilla and Dominica as the reconstruction advances. Several projects, related to both rebuilding and new tourism-related FDI, are expected to boost construction activity.

9. Fiscal and external vulnerabilities will weigh on longer-term prospects. Growth will converge to its potential of 2 percent. Following the temporary acceleration caused by natural disasters, the expected stabilization of oil and commodity prices will cause inflation to return to low levels, not exceeding 2 percent. In the absence of significant fiscal adjustment, the fiscal balance will deteriorate, reflecting reconstruction-related capital spending in the short term, and lower revenues and higher interest payments in the longer term. Against this background, only Grenada and St. Vincent and the Grenadines are on track to reach the ECCU target of 60 percent by 2030. With higher imports needed for rebuilding and FDI-related hotel construction, the current account deficit is projected to worsen in the next few years before gradually stabilizing at about 7.0 percent of GDP in the medium term, reflecting persistent competitiveness problems. Reserves appear adequate in the context of the quasi-currency board arrangement, even after taking into account the exposure of the region to natural disasters (Annex III).

10. Risks are titled to the downside. Adverse confidence effects from trade disputes and faster-than-expected monetary tightening could make the net growth impact of US policy shocks negative for the ECCU (Annex V). Other risks include global factors, such as security risks, unsustainable macroeconomic policies in systemic countries, cyberattacks and related financial instability (Annex II). Specific risks include natural disasters increasing in frequency and intensity, a further decline of CBRs, and lingering problems in the financial sector, with banks unable to resume lending, stress in the non-bank segment, and contingent fiscal liabilities from the banking sector. Upside fiscal risks stem from Petrocaribe debt restructuring, which could reduce public debt levels. The cost of petroleum imports, a key influence for the ECCU owing to its high dependence on hydrocarbon fuels, could increase with the closure of the Trinidad and Tobago’s Petronin refinery, a supplier to the ECCU.

Macrofinancial Policy Discussions

The ECCU is facing multiple challenges: low growth, weak fiscal performance, a vulnerable financial system, and low competitiveness. This is compounded by insufficient preparedness for natural disasters. Decisive action to durably improve the fiscal position, build resilience to natural disasters, strengthen the financial sector, and address supply bottlenecks is needed to enhance policy credibility, boost regional integration, and attract the necessary support from the international community.

A. Robust Frameworks to Support Fiscal Consolidation

11. ECCU’s fiscal performance has been characterized by high debt and strong pro-cyclicality. Progress in approaching the region’s 60 percent of GDP public debt target has been insufficient, despite debt relief operations and periodic revenue windfalls, particularly from CBI programs. While natural disasters and external economic shocks have played an important role, domestic policies have displayed an expansionary bias, sometimes driven by political cycles, although there is substantial heterogeneity in individual country positions. In the absence of a strong fiscal anchor, clear commitments, and adequate financing, policies have had a strong pro-cyclical bias in most countries. While many ECCU countries have continued to upgrade their medium-term fiscal frameworks,7 they still lack effective operational frameworks and procedures that link short-term and long-term objectives.

Spending Policy Pro-cyclicality in ECCU-6, 1998–2017

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Source: IMF staff calculations.

ECCU Public Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Sources: Country authorities and IMF staff estimates.1/ Counterfactual scenario assuming absence of historical CBI fiscal inflows that would have required debt issuance in the same amount.

ECCU Countries: Actual vs. Debt Stabilizing Fiscal Balances, 2011–17 Average

(In percent of GDP)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Source: Country authorities and IMF staff estimates.1/ Overall fiscal balances consistent with long-term debt stabilizing at 60 percent of GDP level using country-specific estimates of long-term potential growth.

12. Fiscal responsibility frameworks can usefully bolster ECCU’s fiscal performance and help reduce debt. Recent evidence indicates that such frameworks (i) can be effective in correcting a deficit bias; (ii) could enhance economic stabilization; and (iii) are proving workable for small countries, including in the Caribbean (e.g., Grenada and Jamaica). Fiscal responsibility frameworks, however, are not a panacea and need to be well-tailored and supported by adequate institutions and specific fiscal consolidation measures. Large shocks and capacity gaps call for robust design and implementation strategies in ECCU countries.

Fitting Fiscal Frameworks to Country Characteristics

Umbrella structure, leaving countries to adapt operational solutions to their circumstances.

Debt anchor. The public debt target of 60 percent of GDP by 2030 provides a reasonable common anchor or ceiling. With only two countries on track to reach the target, convergence would be an overriding goal. For some individual countries, tighter operational debt objectives may be appropriate based on their specific characteristics, including specific buffers against shocks. Staff argues for: (i) calibrating the targets to gross debt; and (ii) using a broad general government definition to limit the scope for loopholes.

Operational targets. An underlying budget balance target could be the main common element, at least through 2030, due to its strong link to debt dynamics. The targets could be set on fiscal balances (either primary or overall balance depending on the country-specific circumstances)1 net of volatile elements such as CBI inflows to be calibrated for each country to achieve the debt ratio of 60 percent of GDP before or in 2030. The option of supplementary expenditure targets would be strongly recommended given the critical need to ensure savings in good times and could potentially replace the budget balance targets beyond 2030 if debt is sufficiently reduced. Finally, special sub-targets could be used for key components of expenditure, to help right-size the wage bill (as in Grenada and Jamaica) and incentivize public investment, particularly for resilience-related projects. Within the above, individual countries need to avoid complexity and limit themselves to a narrow subset of options best suited to their own circumstances.

Counterfactual Simulation of Selected Fiscal Responsibility Frameworks, ECCU-6 1/

(overall balance, percent of GDP)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

1/ Counterfactual scenarios were calibrated for each country based on (i) targeting a prudent overall balance on average; and (ii) capping primary current expenditure growth at levels not exceeding potential growth.Source: IMF staff estimates.

Counterfactual Simulation of Fiscal Responsibility Frameworks, ECCU-6 1/

(public debt, percent of GDP)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

1/ Counterfactual scenarios were calibrated for each country based on (i) targeting a prudent overall balance on average; and (ii) capping primary current expenditure growth at levels not exceeding potential growth.Source: IMF staff estimates.

Fiscal buffers. The targets will need to be calibrated on a country-specific basis to achieve both the optimal buffer coverage (including insurance against natural disasters, as discussed in Box 3) and the 60 percent of GDP debt by 2030. Due to mutually reinforcing benefits of reducing debt and increasing buffers, these would need to proceed in parallel. Based on the assessment of the appropriate size of the buffers and debt target, staff has identified the financing gap that could be bridged by concessional financing (see next sub-section).

Flexibility to shocks and “tail events.” Mechanisms could be included to provide flexibility while preserving the credibility of the framework, including: (i) precise escape clauses with verifiable triggers and corrective mechanisms in the event of truly large shocks (for which the envisioned buffers do not provide sufficient protection); (ii) allowances for relief/reconstruction spending financed with fiscal buffers; and (iii) hurricane clauses allowing cash flow relief as per recent experiences in Grenada and Barbados.

Supporting institutions. Priority areas include: (i) robust accounting procedures (for debt, deficits, CBI inflows, and full recording of non-guaranteed public debt and contingent liabilities); (ii) improved fiscal projections, particularly by including the average cost of natural disasters; and (iii) effective independent fiscal oversight and accountability procedures, such as Grenada’s new fiscal responsibility oversight committee that is unconnected to the government.

1 An overall balance-based rule (used in Jamaica) has the advantage of a closer link to debt sustainability and more control over financing, while a primary balance-based rule (used in Grenada) should better facilitate compliance with the rule. In the ECCU, the difference between the two options would not be large in ECCU countries given the limited volatility of the interest cost of debt.

13. Fiscal frameworks need to be tailored to specific country characteristics, with a few common elements across the region (Box 1). The frameworks would be (i) consistent with the ECCU’s debt target of 60 percent of GDP by 2030; (ii) based on a tailored operational target as a medium-term compass; (iii) supportive of the need to build resilience to natural disasters; and (iv) compatible with the institutional capacity of ECCU countries. Strong and broad-based political commitment would be essential to underpin those efforts.

14. Staff analysis suggests that the proposed framework would contribute to better fiscal outcomes. Counterfactual simulations and scenario analysis suggest that the implementation of the new framework would: (i) substantially improve debt sustainability; (ii) reduce policy pro-cyclicality; and (iii) create fiscal space to build resilience (see next sub-section) and bolster potential growth. The proposed institutional improvements would be highly beneficial regardless of whether formal fiscal responsibility frameworks were adopted, as they would enhance the efficiency of public services, improve public investment outcomes, and contribute to a better and more broad-based public debate on fiscal policy issues. Finally, by enhancing transparency and predictability of fiscal policy, the framework can gradually facilitate union-level coordination and improve the region’s clout in securing donor funding, including from climate funds.

B. Building Ex-Ante Resilience to Natural Disasters

Shifting the Paradigm: Preparing Ex-Ante for Natural Disasters and Climate Change

15. Natural disasters recurrently affect the ECCU, resulting in human loss, destruction of infrastructure, and large fiscal costs. Natural disasters put pressure on government’s finances in the near and long term. In the near term, pressures arise from unanticipated needs for immediate social protection and rehabilitation expenditures, at a time when revenues typically decline. In the long term, the costs of natural disasters contribute to the increase of public debt. The ECCU is subject to larger and more frequent disasters that affect the entire economy. With climate change, the intensity and frequency of disasters is expected to increase.

Damage and frequency of natural disasters in the ECCU

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Sources: Staff calculations based on EM-DAT and authorities data.Note: EM-DAT contains essential core data on the occurrence and effects of over 22,000 mass disasters in the world from 1900 to the present day.

16. The ECCU currently invests little in resilience-building and relies heavily on ex-post recovery efforts. Limited global financing that falls well short of adaptation needs and inadequate capacity to meet the complex access requirements of climate funds are key obstacles to investing in resilient structures or setting aside dedicated funds. Insurance uptake is also low, for both public and private sectors. The Caribbean Catastrophe Risk Insurance Facility (CCRIF), to which all ECCU countries have access, has been a valuable instrument, but most countries’ risk ceding remains below needs, mainly because of the perceived high cost, concerns that significant damages may not trigger payouts, and competing developmental needs. Innovative risk-sharing tools such as cat-bonds have not been issued by the ECCU jurisdictions reflecting their complexity, high setup costs, and capacity/regulatory constraints.

17. Building ex-ante resilience to natural disasters and climate change should be a key policy priority. Staff recommends a paradigm shift from post-disaster recovery to building ex-ante resilience. A framework to support fiscal sustainability is a necessary precondition for a shift in strategy. Sustainable improvements in the fiscal position are necessary to create fiscal space and enhance opportunities to access concessional finance for resilience building.

The Benefits of Resilient Investment

Staff simulations are based on a dynamic general equilibrium model calibrated to all ECCU countries. Expected losses from natural disasters are estimated based on historical data for various types of disasters. The model assumes that resilient infrastructure (such as durable roads, bridges, and sea walls) is a perfect substitute for standard infrastructure but is 25 percent more expensive. Keeping the physical amount of public investment unchanged, countries are assumed to allocate 80 percent of investment in resilient capital, thereby gradually increasing the stock of resilient public capital until it reaches 80 percent. The outcome in terms of output and fiscal performance is then compared with a situation where no resilient capital is in place.

Potential GDP with increase in resilience to 30 percent

(percent change relative to no resilience)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Source: Model simulations on authorities’ data.

Under these assumptions on resilient public investment, potential output increases by about 3–11 percent in ECCU countries. This implies 0.1–0.4 percent higher GDP growth per year in ECCU countries. Additional annual savings of 0.7–2.7 percent of GDP come from reduced damages and losses from natural disasters.

Fiscal performance also is strengthened in the long term. Higher tax revenues more-than-offset the higher cost of resilient investment, improving the overall fiscal balance by 0- 3 percent of GDP. In the near term, however, the transition from standard to resilient capital has upfront fiscal costs, with returns materializing only at a later stage. Fiscal consolidation is already required in most ECCU countries to reach the regional debt target of 60 percent of GDP by 2030 (see previous sub-section). Assuming countries undertake sufficient fiscal adjustment aimed at meeting the debt target, simulations indicate that public debt would exceed its target by 4–20 percentage points of GDP in 2030 owing to the higher cost of resilient capital (only about half of the public capital stock would be resilient by 2030 at the current investment rates), without concessional financing.

Public Debt with Resilient Investment

(ratio of GDP)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Source: Model simulations based on authorities’ data.

18. Resilient investment for natural disasters can enhance long-term macroeconomic performance. The shift to resilient public infrastructure reduces expected losses from natural disasters and raises returns to private investment, employment, and output. Resilient public capital reduces private investors’ output losses in the event of a natural disaster, therefore expected returns to private investment are higher relative to non-resilient investment. Higher capital also increases returns to labor and wages, increasing domestic employment, and reducing outward migration, which is generally high in countries prone to natural disasters.8 Staff simulations indicate that the effects of resilient investment on potential output and fiscal performance would be significant (Box 2), with GDP growth higher by 0.1–0.4 percent per year in ECCU countries.

Transitional Increase in Output Growth with Resilience Investment

(Average increase in annual growth, in percent)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Source: Staff calculations based on Authorities’ data. Assumes public investment in resilience increases to 80 percent.

19. The additional near-term fiscal costs would open a transitional financing gap. The additional costs of resilient investment would make it difficult to attain the ECCU debt target of 60 percent of GDP by 2030. On top of an accumulated fiscal adjustment of 0–7 percent by ECCU countries to meet the debt target, staff’s illustrative simulations show that resilience costs would create financing gaps of 0.4–1.5 percent of GDP or about US$60 million for the ECCU annually (blue bar in text chart) to enable countries adhere to the debt target. However, these estimated financing gaps for resilient investment should be interpreted as a minimum.9 To close the financing gap, concessional financing from the international community, including climate funds, could play a key role.

Financing Gaps from Resilient Investment and Insurance Costs 1/

(Annual flows, percent of GDP)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

1/ Capital spending to maintain observed public investment rates with costlier resilient structures.2/ Calculated to achieve neutral fiscal impact (equivalence between insurance cost and expected payouts).Source: IMF staff calculations based on authorities’ data.

20. ECCU countries should also develop a comprehensive insurance strategy against natural disasters, which would add to the financing gap. Resilient structures mitigate destruction and losses from natural disasters, but do not eliminate them. To ensure liquidity for relief and reconstruction while protecting public finances, a comprehensive disaster risk financing strategy should be prepared. Insurance layering can be engineered to cover most natural disasters’ fiscal costs, but near-term fiscal costs would be significant (Box 3). However, the immediate availability of financing for relief and reconstruction would have significant output payoffs.10 Based on staff’s simulations, reducing annual insurance costs to the value of expected payouts would create an additional fiscal gap of at least 0.2–1.1 percent of GDP or US$40 million for the region annually (orange bar in the text chart above). In the long term as structures become more resilient, insurance needs and fiscal costs would decline significantly. Simulations indicate that insurance requirements for same coverage could decline to about 1/4 of the current needs.

Natural Disaster Insurance Financing

Appropriate size and costs of the three insurance layers is calculated using a stochastic model that replicates output and fiscal performance observed in the historical data after natural disaster shocks. Variables included are tax revenues, expenditures, and grants. Capacity and financing constraints, and re- prioritization of expenditures (reconstruction largely replaces pre-existing projects) are considered. The simulations assume that ECCU countries adopt a three-layer strategy1/ as follows: (i) establishing a saving fund as self-insurance of 6–12 percent of GDP sufficient to cover 90–95 percent of disasters’ fiscal costs (small and medium-sized natural disasters),2/ with CBI resources financing startup costs where available; (ii) purchasing maximum access under CCRIF, with estimated expected coverage of 2–17 percent of GDP (larger disasters); and (iii) issuing CAT bonds, a state-contingent debt instrument, with debt service relief of 2- 5 percent of GDP (extreme events).3/ The insurance instruments are layered according to their incremental costs.

Natural Disaster Insurance Layering

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Source: IMF staff calculations based on CCRIF and authorities’ data.

The results indicate that, to cover 99 percent of the fiscal costs related to natural disasters, ECCU countries would need coverage in the amount of 15–30 percent of GDP. This coverage would imply annual fiscal costs in the range of 0.5–1.8 percent of GDP. At least part of these costs could be covered by donors to make insurance more affordable.

1/ The World Bank has developed a risk-layered framework for optimizing disaster risk financing, which has been applied to some ECCU countries. See World Bank, “Advancing Disaster Risk Finance in Saint Lucia”, 2018; World Bank, “Advancing Disaster Risk Finance in Grenada”, 2018.2/ A saving fund would need to be supported by a strong institutional framework, establishing annual saving contributions and clear verifiable criteria for disbursements after natural disasters.3/ IMF and World Bank staff is working on two options for further developing state-contingent debt instruments that could help countries better manage their debt-service payments at times of natural disasters. The first relates to sovereign insurance against natural disasters, where insurance is purchased to cover a specified amount of debt service payments following catastrophic disasters. The second option broadens the concept of “hurricane clauses” already used in two debt restructurings (Grenada and Barbados), where state-contingent features built into the debt contract allow for maturity extensions following disasters.

Fiscally Sustainable Strategy to Build Ex-Ante Resilience to Natural Disasters

21. Full integration of fiscal responsibility frameworks with resilient investment and insurance mechanisms would help the ECCU achieve a sustainable fiscal position while improving resilience to natural disasters, provided there is sufficient external support and strong policy implementation. The country-specific frameworks need to be based on a holistic diagnostic. The Climate Change Policy Assessment (CCPA) has been a valuable tool for St. Lucia to identify the needs and costs of building resilience.11 Staff scenario analysis suggests that if ECCU countries undertake fiscal adjustment and phase in resilient investment and insurance buffers with support with the international community, the ECCU’s public debt trajectory would decline at a faster pace than in a pure fiscal consolidation scenario without building resilience. The benefits would be further amplified beyond 2030, as the growth and fiscal benefits would continue while the costs of building resilience would decline. Ongoing initiatives to pool resources in regional institutions with accreditation to access climate funds should be supported and pursued in the near term. As mentioned above, staff simulations indicate that the additional costs of resilient investment and actuarially-fair insurance would create a financing gap of about US$100 million per year for the region,12 with concessional financing, including from climate funds, being a key option.

ECCU-6 Public Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

1/ Fiscal adjustment is to be supported by a fiscal responsibility frameworkand calibrated to achieve 60 percent of GDP target by 2030.2/ It is assumed that external concessional funding covers all resilience and insurance related costs, except that there is a delay in the provision of 50 percent of concessional funding by 2 years.

22. Countries should also continue advancing institutional fiscal reforms that would help with due diligence requirements of donor funds. This will require:

  • Addressing information, legislation gaps, and small economies of scale. An assessment of general preparedness is necessary to identify priorities, including legislation and processes, such as budgeting and public investment management. Costed investment projects and risk financing plans are needed for an assessment of the overall financing needs. Regional coordination would help accelerate the process by setting standards, facilitate peer review, and create economies of scale.

  • Integrating resilience building with macroeconomic planning. Expected costs of natural disasters should be included in macroeconomic frameworks, as well as costs and benefits of the resilience strategy, to evaluate the fiscal space needed for the implementation. Developing strategies to enhance access to donor grants will be crucial to making ex-ante resilience building sustainable.

  • Coordination of resilience building with fiscal responsibility legislation. Fiscal responsibility legislation would underpin the necessary fiscal adjustment to ensure a credible overall strategy, fill financing gaps, and ensure the long-term sustainability of resilience financing. Public investment projects at risk of natural disasters should be resilient and appropriately designed and costed. Upon achieving the 60 percent anchor, it could be reviewed and tightened in line with minimizing a probability of exceeding the 60 percent of GDP ceiling given the expected fiscal costs of natural disasters. Fiscal responsibility could also incorporate minimum insurance coverage, effectively helping internalize expected fiscal costs of future disasters, and annual saving needs for the sustainability of the saving funds.

Public Investment Management Heatmap1/

Antigua & Barbuda
St. Kitts & Nevis
St. Lucia
St. Vincent & the Grenadines
ECCU Average
Source: Country Authorities and IMF Staff Assessments
1 The scoring system reflects the alignment with good Public Investment Management practices. The assessment is based on the IMF’s 2015 Public Investment Management Assessment template for assessing infrastructure governance over the invesment cycle.
article image

C. Strategy for Stability and Resolving Problems in the Financial Sector

23. There has been important progress on the regional financial sector reform agenda. This includes: (i) initial capitalization of the Eastern Caribbean Asset Management Company (ECAMC) as part of the ECCU’s financial stability strategy for reducing high NPLs; (ii) issuance and implementation of the collateral valuation standard; (iii) implementation of risk-based supervision (RBS); and (iv) completion of on-site examinations of all banks within the three-year cycle established in the Banking Act 2015. In addition, the law to establish a credit bureau framework was passed in four member countries13 and an operator was selected for licensing, the ECCB published the first Financial Stability Report, and an MOU was signed for a blockchain technology project which is targeted to, among other things, alleviate the risks of CBR withdrawal. A consultative paper on the consolidation of indigenous banks has been issued, the transfer of AML/CFT supervision for banks to the ECCB has been initiated, and the Monetary Council has considered a paper on the establishment of a Deposit Insurance Fund.

Nonperforming Loans to Total Gross Loans

(In percent)

Citation: IMF Staff Country Reports 2019, 062; 10.5089/9781498300056.002.A002

Source: ECCB.

24. However, unresolved weaknesses in the banking sector magnify vulnerabilities. Despite recent progress in resolving banks,14 outstanding problems are becoming more acute. Capitalization is above the regulatory standards, but provisioning by indigenous banks against legacy NPLs (as old as 15 years) is not adequate. The impending implementation of IFRS 9 and the new ECCB prudential standards on valuation of collateral and treatment of impaired loans will likely result in larger provisioning requirements that may require major capital augmentation and/or resolution measures, with possible fiscal costs. The replacement of global CBRs with a few, smaller correspondent banks suggest increased counterparty and concentration risks for banks in the region. The pending exit of foreign banks might heighten vulnerability of the affected countries in terms of CBR access and costs. It may also increase withdrawal risks in some jurisdictions, while the related mergers could raise concentration risks in some member jurisdictions. Reportedly, some banks are also actively exploring opportunities for improved earnings from overseas placements and/or investments.

25. The region’s strategy to address the chronic NPL situation within the rapidly closing timeline is at risk. The ECAMC, set up in July 2017 with the dual mandate to acquire bad assets from banks and other approved financial institutions (AFIs), and to act as the receiver of failed financial institutions, is operating, but progress towards acquisition of a critical mass of NPLs by the statutory July 2019 timeline has been slow. As of November 2018, no NPLs have been purchased and funding modalities are yet to be finalized.15 The pace has improved materially with the ECAMC’s recent hiring of an expert consultant and other capacity augmentation measures, as well as with the ECCB’s instrumentality in following up with banks in sharing information with the ECAMC. The ECAMC has received information of a prospective portfolio of commercial NPLs to acquire of EC$400 million or 29 percent of total NPLs. However, the timeline is very tight and the risk of slippage is real.

26. The rapid increase of credit union lending and natural disasters has increased risks in the non-bank financial sector. While credit union assets represent only 9 percent of financial assets (Table 8), their lending growth has increased in recent years. Additionally, some credit unions have been de-risked by banks that apply know your customer’s customer (KYCC) practices.16 Their market share is significant in Dominica and large in Grenada, St Vincent and the Grenadines, and St. Lucia. The insurance sector, which is also relatively small (7 percent of financial assets) in a region exposed to catastrophic events, was hit hard by the 2017 hurricanes. The sector is also exposed to concentration risk—with two financial conglomerates representing almost half of the total insurance assets in the Caribbean.17 Spillovers to banks through credit unions’ and insurance companies’ bank deposits and credit exposures are also a concern with potential sources of fiscal liability.

Table 1.

ECCU: Selected Economic and Financial Indicators, 2014–24 1/

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

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

Debt relief has been accorded to: (i) Grenada under the ECF-supported program in 2017; and (ii) St. Vincent and the Grenadines in 2017 and Antigua and Barbud in 2018 under the Petrocaribe arrangement.

Table 2.

ECCU: Selected Economic Indicators by Country, 2014–24

article image
Sources: Country authorities; and Fund staff estimates and projections.
Table 3.

ECCU: Selected Central Government Fiscal Indicators by Country, 2014–24 1/

(In percent of GDP)

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

Fiscal years for Dominica, Montserrat (since 2010) and St. Lucia.

Includes imputed natural disaster costs.