Statement by an IMF Mission on ECCU Policies: Discussions with St. LuciaPress Release No. 07/257
November 14, 2007
Mr. Paul Cashin, head of an International Monetary Fund (IMF) staff mission to the Eastern Caribbean Currency Union (ECCU) countries, issued the following statement today after the conclusion of the mission:
"An IMF mission is visiting the Eastern Caribbean Currency Union countries during October and November to conduct the Fund's 2007 discussions on ECCU policies. This mission augments the work of the individual country Article IV consultation discussions and covers the issues that cut across the region. The mission team will visit the six IMF-member countries of the ECCU—Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines—and key regional institutions, including the Caribbean Development Bank, the Eastern Caribbean Central Bank (ECCB), and the Organization of Eastern Caribbean States (OECS). In this context, the IMF mission visited St. Lucia during October 25-27, 2007.
"The regional discussions will focus on the economic prospects, opportunities, and challenges facing the ECCU. A concluding statement that outlines the policy recommendations will be presented in November for consideration by the member countries of the ECCU. A report reflecting these discussions will be prepared subsequently and presented to the IMF's Executive Board. The reports for 2005 and 2006 are publicly available on the IMF website.
"Economic activity in the ECCU region was buoyant in 2006, with real GDP growth reaching over 6 percent, the highest in more than 15 years. Activity was driven by construction spending for the 2007 Cricket World Cup (CWC), and a significant expansion in tourism capacity. While inflationary pressures have emerged due to the strong economic activity and higher world oil prices, inflation has remained in the low single digits, anchored by the regional monetary arrangement at the ECCB. Despite higher revenues, fiscal positions deteriorated in 2006 largely due to CWC-related capital spending, and the regional debt ratio remained above 105 percent of GDP.
"The forecast is for a soft landing of the ECCU economy in 2007, but risks are tilted to the downside. While private construction is showing continuing strength, growth is decelerating in the region, reflecting disappointing tourism arrivals, hurricane-damaged agricultural production, and ongoing problems with tourist airlift. Difficulties in U.S. asset markets and global growth could also weaken the outlook in the tourism and construction sectors. Sustaining rapid growth through reforms to improve the investment climate, including greater labor market flexibility, financial market development, and continuing regional integration will be key to maintaining and further improving living standards in the region.
"Restructuring agreements reached with creditors by Dominica and Grenada have assisted in stabilizing regional debt. Despite these efforts, debt remains at very high levels and large debt servicing burdens in the region hinder greater expenditure on poverty reduction and social programs. Strengthening the currency union will require establishing and meeting annual fiscal targets that can credibly achieve the ECCB's public debt to GDP target of 60 percent by 2020. Although important reforms to place fiscal balances on a firmer footing are underway in many countries—including through the introduction of value added taxes—improved fiscal positions will require an overhaul of government expenditures, focused on enhancing efficiency of capital spending and civil service reform.
"Financial sector reforms are proceeding—ECCU member governments have passed the uniform Banking Act and the ECCB has implemented several new prudential guidelines. However, recent rapid expansion in private sector credit could end up in higher non-performing loans if tourism growth does not keep up with expectations or real estate prices decline. There is a need to strengthen the enforcement of the revised regulatory framework for banks, as well as supervision of the nonbank financial sector.
"It is in this context that the mission is discussing policy options with national and regional authorities. Since 2001, a revival in tourism-related services and construction activity has led to an acceleration in real GDP growth in St. Lucia, with growth reaching 5 percent in 2006. The authorities are continuing their efforts to introduce reforms to place the ratio of public debt to GDP firmly on a downward path, while maintaining macroeconomic stability and strengthening growth. Their plans to overhaul the tax system are encouraging—including the introduction of a market-valuation based property tax in 2008 and a VAT in 2009—and efforts are also ongoing to control expenditures. Natural disasters and the erosion of trade preferences for bananas have reduced the incomes and employment prospects for poor rural households, and the authorities have taken steps to bolster the country's social safety net and alleviate poverty. The IMF team would like to thank the authorities of St. Lucia for the constructive discussions held during their visit. In particular, the IMF team met with Prime Minister and Minister for Finance Stephenson King, Director of Finance Isaac Anthony, Director General Dr. Len Ishmael and the Secretariat of the Organization of Eastern Caribbean States, as well as representatives of the financial sector. We wish the government and people of St. Lucia every success in their efforts to achieve sustained rapid growth and social progress."