## cr17150

## Source details

**Canonical URL:** [cr17150](https://www.imf.org/-/media/files/publications/cr/2017/cr17150.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2017/cr17150.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2017/cr17150.pdf.json)

---

### Potential Growth — recent developments, outlook, and policy priorities
- Recent developments (2016):
  - GDP growth fell from 2.6 percent in 2015 to an estimated 2 percent in 2016.
  - Stay-over tourist arrivals grew by 3 percent.
  - Tourism receipts were virtually flat despite higher arrivals.
  - Revenues from Citizenship-By-Investment (CBI) programs decelerated, weakening construction activity in St. Kitts and Nevis and, to a lesser extent, in Antigua and Barbuda.
  - Declining commodity and food prices and a negative output gap continued to exert downward pressure on inflation.
  - Regional current account deficit estimated to have worsened from 10 percent of GDP in 2015 to about 11.9 percent of GDP in 2016.
  - FDI inflows financed the deficit at 12.1percent of GDP.
  - International reserves rose by 8.3 percent to almost $1.7 billion, equivalent to 6.5 months of current year imports of goods and services.
  - Regional fiscal deficit of central governments rose from 0.7 percent of GDP in 2015 to 1.9 percent of GDP in 2016.
  - Public sector debt declined marginally from 81 percent of GDP in 2015 to 79.8 percent of GDP in 2016.
  - Non-performing loans (NPLs): 15.1 percent of total loans for indigenous banks and 9.2 percent for foreign banks.
  - Provisioning at 46 percent of NPLs.
  - Private sector credit fell by 5.9 percent year-on-year in December 2016.
- Outlook and growth projections:
  - Growth expected to rise to 2½ percent in the near term before converging to potential at around 2 percent.
  - Staff estimates indicate potential growth will remain low, in the range of 1.5-2.5 percent without significant policy changes.
  - Improvement underpinned by a recovery in tourism, and sizable investment projects in public infrastructure and in the tourism industry.
- Key risks:
  - U.S. policy rebalancing: two-sided — upside from expansionary U.S. fiscal policy but downside from a stronger U.S. dollar and higher interest rates.
  - Tighter U.S. immigration policy could affect CBI demand depending on visa-free access outcomes.
  - Lack of progress on reducing public debt, strengthening the banking sector, and boosting productivity could undermine confidence.
  - Recurrent natural disasters present a major risk for ECCU countries.
- Box 1 — growth accounting findings:
  - Total factor productivity was negative in the last decade, with important differences across countries.
  - Contributing factors to historically low growth: out-migration (especially of skilled workers), natural disasters affecting physical capital, financial sector weaknesses, and high public debt.
- Policy priorities (high level):
  - Use CBI revenues and elevated deposits to reduce debt, build buffers, and finance priority projects in disaster-resilient infrastructure.
  - Improve prioritization of government spending and step up policy implementation to restore confidence.
  - Implement structural reforms to improve the business environment, training in the hospitality sector, and contain labor and energy costs.
  - Strengthen AML/CFT and international tax cooperation frameworks; promote bank consolidation; enhance transparency in CBI programs.
  - Build a framework for disaster resilience, ex ante financing, and contingent financing plans.
  - Diversify export and tourism markets and improve tourism sector capacity.

### Fiscal rigidities, public debt targets, and fiscal rules
- Fiscal targets and scenarios:
  - ECCU public debt target: 60 percent of GDP by 2030.
  - On current policies (passive scenario), region is not expected to reach the debt target by 2030.
  - Baseline scenario (current policies cannot be fully financed): still not expected to reach the debt target by 2030.
  - Recommendation: where possible, large deposits from CBI inflows should be used to reduce debt.
  - Adoption of appropriately designed fiscal rules recommended to anchor fiscal adjustment (active scenario).
- Fiscal rules design guidance:
  - Fiscal rules should be flexible and include escape clauses for large-scale natural disasters.
  - Operational target recommended: the primary balance floor (rationale: fully controlled by government, simple to understand, leads to lasting reduction in public debt, and verifiable).
  - Definition of government should cover statutory bodies and government enterprises.
  - Primary balance rule should exclude most exceptional non-tax revenue such as receipts from CBI programs.
  - Fiscal rules need escape clauses with a clear return procedure; effective PFM; credible medium-term fiscal plans; adequate statistics; and independent monitoring and public reporting by a technically capable institution.
- Natural disaster fiscal management:
  - Shift focus from disaster response to disaster preparation.
  - Integrate disaster risk assessments into investment, debt, and public financial management frameworks.
  - Arrange disaster financing before events via fiscal buffers, contingent financing plans, and risk transfer arrangements.
  - Medium-term fiscal framework should internalize estimated fiscal costs of natural disasters; escape clauses limited to exceptional disasters.
- Government wage bills and pensions:
  - Wage bills have increased in most countries over the last decade; regional median wage bill is 10.2 percent of GDP.
  - Public pension increments often linked to wage increases, magnifying spending impact.
  - Reforms require improved wage negotiation frameworks, composition and distribution of staff adjustments, and adequate social safety nets.
  - Country-specific actions: Dominica, Antigua and Barbuda, St. Kitts and Nevis taking steps; Grenada developed a public service management reform strategy for 2017-2019.

### Financial sector: stability, consolidation, and market functioning
- Banking sector health and credit:
  - NPLs remained high: aggregate NPL ratio 12 percent at end-2016 (noting differing figures: 15.1 percent indigenous banks, 9.2 percent foreign banks).
  - Provisioning increased but overall provisioning remains low (46 percent of NPLs).
  - Near-zero profitability restricts banks’ ability to raise provisioning.
  - Private sector credit contracted: decline evident across multiple years (private sector credit fell by 5.9 percent y/y in December 2016).
  - Withdrawal of correspondent banking relationships (CBRs) hit the offshore sector more; onshore indigenous banks overall not significantly affected.
  - Due diligence costs and correspondent bank fees increased, reducing profitability and restricting some services (trade finance, check-clearing).
- Bank consolidation (Box 4 findings):
  - Consolidation of indigenous banks could strengthen capital positions and increase financial stability.
  - Simulations indicate consolidation enhances resilience via greater portfolio diversification and reduces loan concentration risk; market concentration rises only slowly.
  - Risk: ECCB should monitor potential "too big to fail" outcomes.
- Regional Government Securities Market (RGSM) and public debt service:
  - Member governments spend on average 3 percent of GDP in interest.
  - RGSM constraints: lack of depth, low competition, limited information, inefficient auction operations; high use of OTC issuance; secondary market underdeveloped.
  - Recommendation: improve RGSM efficiency, adopt more active debt issuance policy to yield savings supporting fiscal consolidation and the 2030 debt target.
- Minimum Saving Rate (MSR):
  - MSR reduced from 3.0 percent to 2.0 percent in 2015.
  - Lending rates declined on average by only 25 basis points in 2016; impact on credit growth muted.
  - MSR distorts credit markets and increases government financing costs; staff recommends MSR removal to facilitate financial deepening.
- AML/CFT, CBRs, and credit unions:
  - Monetary Council decided ECCB to assume AML/CFT regulation for Banking Act licensed institutions.
  - Full compliance with 2012 FATF and tax transparency standards remains incomplete.
  - Recommendations: strict AML/CFT enforcement, harmonization of legislation, improved communication between respondent and correspondent banks, and bank consolidation to lower compliance costs.
  - Credit unions face weak regulatory standards; draft harmonized legislation includes penalties, annual licensing, maximum three years to comply with minimum capital, cap on mortgage loans at 45 percent of total loans, membership rules, fit-and-proper requirements, minimum shared capital thresholds.

### Citizenship-By-Investment (CBI): competition, volatility, and fiscal treatment
- Recent program changes and competition:
  - Dominica lowered government fee for real estate option; St. Lucia eased program requirements (removed US$3 million wealth requirement; reduced contribution from US$200,000 to US$100,000 for single applicants; removed cap of 500 citizenships per year; administrative fee of USD50,000 for bond option).
  - Increased regional competition reducing requirements, lowering revenue per citizenship, and an increasing share of receipts are not recorded on budget.
  - Number of applications stable but revenue per citizenship falling in some jurisdictions.
- Volatility and risks:
  - Demand for CBI programs susceptible to exogenous shocks; volatile and unpredictable revenues.
  - Changes in advanced countries’ migration policies could reduce passport appeal and CBI demand.
- Benefits of a regional approach:
  - Reduce costs via economies of scale (e.g., centralizing background checks).
  - Increase revenues by preventing a “race to the bottom.”
  - Reduce reputational risks by centralizing safeguards and eliminating incentives to loosen governance standards.
  - OECS asked to provide a framework to readjust and recalibrate individual CBI programs.
- Fiscal recording and recommended uses:
  - CBI inflows should be fully recorded on budget and integrated in medium-term fiscal frameworks.
  - Priority uses: debt reduction; saving funds for natural disasters with strong institutional frameworks; key infrastructure investment.
- Dominica case (FY2015/16 detailed impacts):
  - CBI-generated revenues (gross) reached an estimated 19 percent of GDP in FY2015/16.
  - Of CBI revenues generated in FY2015/16:
    - 7 percent of GDP was used (total spending of ECP revenues in FY2015/16 -- EC$ 99 mln (7 percent of GDP)).
    - 12 percent of GDP was deposited in the government’s bank accounts.
  - Of the amount spent:
    - Only 5 percent of GDP utilized in FY2015/16 was reflected in the central government budget.
    - 2 percent of GDP accrued directly to state-owned enterprises.
  - Composition of spending:
    - Debt amortization and interest payments: 3.2 percent of GDP.
    - Public works (post-Erika): 1.8 percent of GDP.
    - Employment programs: 0.7 percent of GDP.
  - Disaster context: Tropical Storm Erika (August 27, 2015) caused estimated damage of US$483 million or 96 percent of GDP; 65 percent attributed to public-sector reconstruction costs.

### External sector assessment, REER, reserves, and competitiveness
- External position and current account:
  - Regional current account deficit estimated to have worsened from 10 percent of GDP in 2015 to about 11.9 percent of GDP in 2016 (BPM5).
  - Exports of goods declined by about 10 percent year-on-year in 2016 (noted elsewhere as about 12 percent for goods in a regional context reflecting one-off factors).
  - Most of the deficit financed by FDI at 12.1 percent of GDP (1996-2016 average 12 percent of GDP).
  - Revised BPM6 statistics expected to present smaller external deficits; preliminary BPM6 estimates for 2014 show a current account deficit on average 10 percent of GDP lower than BPM5-based estimates.
- REER misalignment:
  - EBA-Lite REER analysis suggests an exchange rate overvaluation ranging from 2.3 percent to 21.4 percent in 2016 (BPM5).
  - INS-based REER appreciation: about 7.6 percent over three years to December 2016.
  - Customer-based REER maintained close to its 30-year average.
  - Competitor-based REER appreciation: 2 percent over the last three years.
  - EBA-Lite 2016 REER misalignment selected figures:
    - ECCU simple average: REER GAP 21.4; REER GAP (alternative/index) 2.3.
    - Country examples: Antigua and Barbuda: REER GAP 12.2; REER GAP (alternative/index) -6.0. Dominica: REER GAP 50.0; REER GAP (alternative/index) 5.3.
- Reserve adequacy:
  - End-2016 gross international reserves: EC$4.5 billion, covering about 6.1 months of prospective imports, exceeding 3-month benchmark.
  - End-year gross reserves of the ECCB (US$ millions): 926 (2010), 1,008 (2011), 1,125 (2012), 1,169 (2013), 1,411 (2014), 1,560 (2015), 1,690 (2016), projected 1,782 (2017), 1,873 (2018), 1,977 (2019), 2,147 (2020), 2,312 (2021), 2,440 (2022).
- Competitiveness and structural constraints:
  - Sluggish productivity key reason for low growth.
  - Investment affected by recurrent natural disasters, inadequate public infrastructure, financing and capacity constraints.
  - Labor contribution weakened by outward migration; labor concentrated in low-productivity sectors; wage rigidities and skills mismatches.
  - Average annual cost of disasters: for small states almost 2 percent of GDP; for ECCU microstates 3.4 percent of GDP.
- Policy implications:
  - Implement structural reforms to lower cost of doing business, increase labor productivity, improve access to credit and insolvency frameworks, and deepen regional integration.
  - Improve Balance of Payments statistics via BPM6 migration and updated surveys to reduce uncertainty in external position assessments.

### Real sector, monetary dynamics, and selected macro-fiscal indicators
- Real GDP growth (ECCU aggregate annual):
  - -3.3 (2010), -0.3 (2011), 0.3 (2012), 1.8 (2013), 3.2 (2014), 2.6 (2015), 2.0 (2016), projected 2.4 (2017), 2.3 (2018), 2.2 (2019–2022).
- Country 2016 real GDP growth highlights:
  - Anguilla 3.8; Antigua and Barbuda 3.7; Dominica 1.0; Grenada 2.0; Montserrat 3.6; St. Kitts and Nevis 2.9; St. Lucia -0.6; St. Vincent and the Grenadines 1.8.
- Tourism:
  - Almost ¾ of tourists come from North America and the U.K.
  - Travel receipts (services, US$ millions): 927.1 (2010), 994.8 (2011), 1,005.4 (2012), 1,032.3 (2013), 1,108.8 (2014), 1,142.0 (2015), 1,165.5 (2016), projected 1,175.1 (2017), 1,213.1 (2018), 1,259.5 (2019), 1,330.9 (2020), 1,403.2 (2021), 1,479.3 (2022).
- Monetary developments:
  - Net foreign assets (ECCU, end-period, EC$ millions): 2,148 (2010), 2,053 (2011), 2,865 (2012), 3,481 (2013), 4,960 (2014), 6,533 (2015), 7,400 (2016), projected 7,950 (2017), 8,435 (2018).
  - Broad money (M2, EC$ millions): 12,400 (2010), 12,762 (2011), 13,574 (2012), 13,910 (2013), 15,045 (2014), 15,658 (2015), 15,782 (2016), projected 16,109 (2017), 16,554 (2018).
  - Private sector credit (real terms): 9,067 (2010), 8,890 (2011), 9,034 (2012), 8,722 (2013), 8,234 (2014), 7,878 (2015), 7,472 (2016), projected 7,543 (2017), 7,518 (2018).
  - ECCB policy rate: 6.50 (2010–2016).
  - US policy rate: 0.125 (2010–2015), 0.13 (2016), 0.38 (2017).
- Public finances (percent of GDP, ECCU aggregates):
  - Total revenues and grants: 27.3 (2010), 27.0 (2011), 26.0 (2012), 27.4 (2013), 27.7 (2014), 29.0 (2015), 29.1 (2016), projected 28.2 (2017), 27.5 (2018), 27.0 (2019), 26.7 (2020), 26.5 (2021), 26.3 (2022).
  - Total expenditure and net lending: 30.9 (2010), 30.3 (2011), 29.3 (2012), 30.1 (2013), 29.3 (2014), 29.6 (2015), 31.0 (2016), projected 28.8 (2017), 28.1 (2018), 27.5 (2019), 27.2 (2020), 27.0 (2021), 27.0 (2022).
  - Overall central government balance: -3.6 (2010), -3.3 (2011), -3.3 (2012), -2.7 (2013), -1.5 (2014), -0.7 (2015), -1.9 (2016), projected -0.6 (2017–2019), -0.5 (2020–2021), -0.7 (2022).
  - Total public debt (end-of-period): 84.7 (2010), 85.7 (2011), 86.2 (2012), 85.7 (2013), 84.3 (2014), 81.0 (2015), 79.8 (2016), projected 76.6 (2017), 74.3 (2018), 72.3 (2019), 70.2 (2020), 68.1 (2021), 66.4 (2022).
- Financial soundness indicators:
  - NPLs declined to 12 percent at end-2016 (aggregate FSI); provisioning increased and profitability improved in 2016 partly due to lower MSR.
  - Excess liquidity boosted banks’ liquidity ratios; capital adequacy improved slightly.

### Implementation of previous staff advice and capacity building (Annex I)
- ECAMC operationalization:
  - Opening expected in short order; six of eight jurisdictions paid capital contributions.
  - Board confirmed and met twice; CFO, head of assets, and legal officer recruited; CEO recruitment under way.
  - Board received IMF and World Bank orientation in early April 2017.
- Asset quality reviews and recapitalization:
  - Section 44 (1) of new Banking Act requires minimum capital of EC$20 million for commercial banks (up from EC$5 million).
  - Non-compliant banks working toward compliance; capital augmentation plans submitted.
- Supervisory and regulatory progress:
  - Draft Treatment of Assets Standards being finalized; target implementation December 2017.
  - Collateral valuation adoption targeted by 2018Q1.
  - Enhanced risk-based supervisory framework expected by end-June 2018.
  - ECCB receiving CARTAC TA on Basel II implementation; roadmap and Prudential Standards circulated.
- Deposit rate policy and reforms to improve credit access:
  - Minimum savings deposit rate reduced from 3.0 percent to 2.0 percent in 2015.
  - Regional foreclosure bill recommendations submitted; credit bureau legislation parliamentary approval expected by September 2017.
- CARTAC capacity building (as of March 30, 2017):
  - In FY2017 ECCU accounted for just over 24 percent of TA to CARTAC membership.
  - Focus areas: revenue administration, PFM, macroeconomic programming and analysis, financial sector stability and supervision, and statistics.
  - Support provided across tax administration, customs, PFM, macroeconomic programming, financial stability, and statistics improvements.

*International Monetary Fund. Eastern Caribbean Currency Union: Selected Issues, “cr17150.”*

### 1. Potential Growth _________________________________________________________________________________9

### 1. Potential Growth

### Recent developments
- Economy activity decelerated in 2016:
  - GDP growth fell from 2.6 percent in 2015 to an estimated 2 percent in 2016.
  - Stay-over tourist arrivals grew by 3 percent (mostly from the U.S.; visitors from the U.K. continued to decline).
  - Tourism receipts were virtually flat despite higher arrivals.
  - Revenues from Citizenship-By-Investment (CBI) programs decelerated, weakening construction activity in St. Kitts and Nevis and, to a lesser extent, in Antigua and Barbuda.
  - Declining commodity and food prices and a negative output gap continued to exert downward pressure on inflation.

- CBI program fiscal receipts:
  - The number of applications has been stable, but increased competition among countries is reducing requirements, lowering revenue per citizenship, and an increasing share of receipts are not recorded on budget.
  - Revenue in St. Kitts and Nevis dropped sharply after its 2014 peak.
  - Dominica’s lower cost and more aggressive marketing increased its regional market share.
  - St. Lucia made its program more competitive after a disappointing launch in 2016.

- External sector (2016):
  - Regional current account deficit is estimated to have worsened from 10 percent of GDP in 2015 to about 11.9 percent of GDP in 2016.
  - Deterioration driven by repatriation of hotel profits and lower exports of goods (exports declined by about 12 percent, reflecting one-off factors in St. Lucia and Dominica).
  - The deficit continues to be financed mostly through FDI inflows, at 12.1percent of GDP (aligned with the 20-year average of 12 percent of GDP).
  - International reserves rose by 8.3 percent to almost $1.7 billion, equivalent to 6.5 months of current year imports of goods and services.

- Fiscal developments and public debt (2016):
  - Regional fiscal deficit of central governments rose from 0.7 percent of GDP in 2015 to 1.9 percent of GDP in 2016.
  - Drivers include: costs of bank resolution in Anguilla; declining CBI receipts in St. Kitts and Nevis; reconstruction expenditure in Dominica following tropical storm Erika; and fiscal policy easing in St. Lucia.
  - Public sector debt declined marginally from 81 percent of GDP in 2015 to 79.8 percent of GDP in 2016, remaining well above the 2030 regional target of 60 percent of GDP.
  - Increasing financing pressures evidenced by deposit drawdowns in Antigua and Barbuda and capital spending compression in St. Vincent and the Grenadines.

- Banking sector and credit:
  - Non-performing loans (NPLs) remain high: 15.1 percent of total loans for indigenous banks and 9.2 percent for foreign banks.
  - Provisioning remains low at 46 percent of NPLs.
  - Near-zero profitability restricts banks’ ability to raise provisioning.
  - Private sector credit fell by 5.9 percent year-on-year in December 2016 — the fourth consecutive year of decline — restraining growth.
  - Withdrawal of correspondent banking relationships (CBRs) has mostly hit the offshore sector; onshore indigenous banks overall have not experienced significant loss of CBRs.
  - Due diligence costs and fees charged by correspondent banks have increased, reducing already low profitability when only partly passed to customers; some clients (including money business services) were denied CBR services; trade finance and some check-clearing services have been restricted or discontinued in some cases.

### Outlook and risks
- Growth projections:
  - Growth is expected to rise to 2½ percent in the near term before converging to its potential at around 2 percent.
  - Over the longer term, staff estimates indicate potential growth will remain low, in the range of 1.5-2.5 percent without significant policy changes.
  - The expected improvement in growth is underpinned by a recovery in tourism, and sizable investment projects in public infrastructure and in the tourism industry.

- Risk assessment (broad balance of risks):
  - U.S. policy rebalancing: Two-sided effect — upside from expansionary U.S. fiscal policy but downside from a stronger U.S. dollar lowering ECCU competitiveness and higher interest rates.
  - Tighter U.S. immigration policy could increase short-term demand for CBI programs, but demand may fall if visa-free access for CBI passport holders is reduced.
  - Lack of progress on reducing public debt, strengthening the banking sector, and boosting productivity could undermine confidence and hold back growth.
  - Recurrent natural disasters present a major risk for ECCU countries.

### Box 1 — Potential Growth (key findings)
- Historical context:
  - Growth in the ECCU has been historically low and well below that of the rest of the world over the last decade.
  - Contributing factors: out-migration (especially of skilled workers), natural disasters affecting physical capital, financial sector weaknesses, and high public debt.

- Growth accounting findings:
  - Staff estimates based on a growth accounting framework — which account for the impact of natural disasters on physical capital and of migration on labor and human capital — show that total factor productivity was negative in the last decade, with important differences across countries.
  - Without stronger policies to enhance the business environment and labor market functioning, annual potential growth is expected to be in the 1.5-2.5 percent range for the region.

### Policy recommendations and priorities
- Fiscal policy and public debt:
  - Use CBI revenues and elevated deposits to reduce debt, build buffers, and finance priority projects in disaster-resilient infrastructure.
  - Improve prioritization of government spending.
  - Stepping up policy implementation to restore confidence and support growth.

- Competitiveness and structural reforms:
  - Buttress competitiveness by implementing structural reforms to improve the business environment, including implementation of standards and training staff in the hospitality sector.
  - Contain labor and energy costs.
  - Strengthen productivity and competitiveness to offset potential appreciation from U.S. policy shifts.

- Financial sector and AML/CFT:
  - Continue to strengthen AML/CFT and international tax cooperation frameworks.
  - Promote bank consolidation.
  - Further enhance transparency in CBI programs.
  - Explore alternative options to existing arrangements for correspondent banking services.

- Disaster resilience and contingency planning:
  - Build a consistent framework with investment in resilience and appropriate ex ante financing, including fiscal buffers.
  - Prepare contingent sources of financing in case external financing arrangements (e.g., PetroCaribe) deteriorate or end abruptly.

- Tourism and market diversification:
  - Diversify export and tourism markets.
  - Implement measures to improve the business environment and tourism sector capacity.

_International Monetary Fund. Eastern Caribbean Currency Union: Selected Issues, “1. Potential Growth.”_

### 9.      Policy responses to the global financial crisis have increased rigidities in government

### 9.      Policy responses to the global financial crisis have increased rigidities in government budgets which will be best addressed by medium-term structural reforms.

### Government wage bills and public pensions
- Wage bills absorb a large share of budgetary resources and "have increased in most countries over the last decade."
- Public pension increments are often linked to wage increases, magnifying their impact on government spending.
- Reversing these trends requires:
  - Well-designed programs to reform institutions and policies.
  - Improved frameworks for wage negotiations, the composition and distribution of government staff, addressing shortages and overstaffing.
  - Adequate social safety nets to de-link public employment policies from social welfare objectives.
- Country actions noted:
  - Dominica, Antigua and Barbuda, St. Kitts and Nevis are taking steps in this direction.
  - Grenada has developed a public service management reform strategy to be implemented over 2017-2019 (Annex III).

### Fiscal targets, scenarios, and the need for fiscal effort
- ECCU public debt target: 60 percent of GDP by 2030.
- Assessment of policy scenarios:
  - On current policies (passive scenario), the region is not expected to reach the debt target by 2030.
  - Even in a more realistic scenario where current policies cannot be fully financed (baseline scenario), the region is not expected to reach the debt target by 2030.
- Policy options and recommendations:
  - Where possible, large deposits from CBI inflows should be used to reduce debt.
  - Adoption of appropriately designed fiscal rules would provide governments with a commitment device to anchor fiscal adjustment strategies (active scenario) and safeguard them from pressures to deviate from that path.
  - Build on reforms under way to adopt or refine medium-term fiscal frameworks and strengthen public financial management, including in design and implementation of public investment programs (Annex IV).

### Fiscal rules and natural disaster preparedness
- Fiscal rules design guidance (Box 3 highlights):
  - Fiscal rules should be flexible and include escape clauses for large-scale natural disasters to allow timely response.
  - The operational target recommended: the primary balance floor.
    - Rationale: fully controlled by government, simple to understand, leads to lasting reduction in public debt, and verifiable.
  - The definition of government should cover statutory bodies and government enterprises.
  - The primary balance rule should exclude most exceptional non-tax revenue such as receipts from CBI programs.
  - Fiscal rules need: escape clauses with a clear return procedure; effective PFM; credible medium-term fiscal plans; adequate statistics (including from public enterprises); and independent monitoring and public reporting by a technically capable institution.
- Natural disaster fiscal management:
  - Shift focus from disaster response to disaster preparation.
  - Integrate disaster risk assessments into investment, debt, and public financial management frameworks.
  - Arrange disaster financing before events via fiscal buffers, contingent financing plans, and risk transfer arrangements.
  - The medium-term fiscal framework should fully internalize estimated fiscal costs of natural disasters; escape clauses should be limited to exceptional disasters.
- Legal precedents and benchmarks:
  - Jamaica (2014) and Grenada (2015) adopted fiscal responsibility laws while undertaking IMF-supported fiscal adjustment, benefiting from commitment strategies.
  - Anguilla’s Fiscal Responsibility Act includes ceilings for net debt contracted and debt service (80 percent and 10 percent of recurrent revenue, respectively).

### Regional collaboration on Citizenship by Investment (CBI) programs
- ECCU countries are exploring strengthened regional collaboration on CBI programs due to fiscal, macroeconomic, and reputational externalities.
- OECS Commission asked to provide a framework to readjust, reposition, and recalibrate individual CBI programs, including external representation.
- Potential advantages of a regional approach:
  - (i) Reduce costs via economies of scale from concentrating functions (e.g., background checks).
  - (ii) Increase revenues by preventing a “race to the bottom” that lowers conditions for citizenship.
  - (iii) Reduce reputational risks by centralizing safeguards and eliminating incentives to reduce governance standards.

### Authorities’ view — fiscal
- ECCU countries plan to focus on forward-looking fiscal policies to attain the 2030 debt target.
- In the July session of the ECCB’s Monetary Council, member countries will discuss interim targets for 2020 and 2025, expected to be underpinned by well-articulated fiscal frameworks.
- Most member countries appreciate the importance of adopting fiscal responsibility legislation; the ECCB stands ready to provide technical support.
- The ECCB emphasizes allocating some resources from CBI programs to a fund covering fiscal costs of natural disasters and financing climate-resilient infrastructure, while noting that building buffers may strain some countries without significant CBI resources or facing immediate fiscal challenges.

### Strengthening the financial sector — overview
- Key priorities:
  - Finalize the regional strategy to strengthen the banking sector and complete final steps to establish the ECAMC to collect distressed assets under one roof and provide a vehicle for disposal of bad assets.
  - Ease restrictions on non-citizen property ownership to support sale of collateral.
  - Develop a new macro-prudential framework to provide additional tools to the ECCB.
  - Modernize foreclosure and insolvency frameworks to maximize recovery of bad assets, minimize fiscal costs, and improve bank resolution.
  - Adopt harmonized collateral appraisal guidelines and new provisioning regulations (with Fund TA) to improve credit decisions and reduce NPL losses.
  - Consider bank consolidation to address capital needs and potentially enhance efficiency and resilience (Box 4).

### Bank consolidation findings (Box 4)
- Observations:
  - ECCU banks with relatively high NPLs show higher loan portfolio concentration across sectors and countries.
- Staff simulations indicate:
  - Consolidation of existing indigenous banks could strengthen capital positions and increase financial stability.
  - Consolidation can enhance resilience to shocks by increasing portfolio diversification across sectors and countries.
  - To some extent, gains can be achieved with limited impact on market power, but the ECCB should monitor the risk that a large bank becomes too big to fail.
- Empirical relationships highlighted:
  - As the number of amalgamated banks increases, loan concentration risk falls and the likelihood of bank failure (measured by an increasing Z-score) declines, while market concentration rises only slowly, implying a trade-off between financial stability and competition would arise only at high levels of concentration.

### Regional Government Securities’ Market (RGSM) and public debt service
- Member governments spend on average 3 percent of GDP in interest, reflecting high public debt and servicing costs.
- RGSM constraints:
  - Lack of depth, low competition, limited information, and inefficient auction operations increase reliance on over-the-counter issuance and limit development of RGSM, both in volumes and yield reduction.
  - These shortcomings prevent development of a secondary market, which is key for effective primary market functioning.
- Recommendation:
  - Improve efficiency of RGSM operations and adopt a more active debt issuance policy to yield savings that support fiscal consolidation and the 2030 debt target (Annex V).

### Minimum Saving Rate (MSR)
- The MSR distorts credit markets and increases the cost of government financing.
- Drawbacks of MSR:
  - By setting a floor to the remuneration of excess liquidity, it raises the interest rate on government securities when markets are very liquid and discourages the development of a secondary market.
- Evidence:
  - The MSR significantly impacts credit markets; the 2015 reduction of the MSR was passed on fully to deposit rates, while transmission to observed lending rates was partial.

### AML/CFT, correspondent banking relationships (CBRs), and credit unions
- AML/CFT and regulatory strengthening:
  - Full compliance with international AML/CFT standards, stronger regulatory and supervisory frameworks, and bank consolidation would reduce the risk of further withdrawal of CBRs.
  - Authorities have made significant efforts; consolidation of AML/CFT supervision with the ECCB and harmonization of AML/CFT legislation are welcome, but more progress is needed to comply with the 2012 FATF and tax transparency standards.
  - Implementation of the Basel Capital Accord based on updated asset quality assessments and adoption of risk-based supervision in bank and non-bank sectors would improve perceptions by international banks.
  - Improve communication and information sharing between respondent and correspondent banks; bundling correspondent banking services with other products can generate economies of scale and lower fixed compliance costs.
  - Bank consolidation could lower compliance costs, promote sharing of best practices, and generate sufficient volumes for large foreign correspondent banks.
- Credit union regulatory gaps and reforms:
  - Credit unions are significant in some ECCU countries, especially St. Vincent and the Grenadines, Dominica, and St. Lucia.
  - The sector faces weak regulatory standards, insufficient enforcement, and low profitability; local regulators are constrained by insufficient resources and weak enforcement powers.
  - Draft harmonized legislation under review includes:
    - Specific penalties for noncompliance and requirement of annual license registration.
    - Maximum of three years to comply with minimum capital requirements.
    - Cap on mortgage loans of 45 percent of total loans.
    - Allowing membership of companies, not just natural persons.
    - Minimum capital contribution to serve as a volunteer (applies to Board members).
    - Minimum threshold of shared capital of 20 percent of total capital.
    - Fit-and-proper requirements for management, including minimum education requirements for Board members, cap on number of volunteers and immediate family members.
  - Harmonized legislation may be a first step toward unification of credit union regulation.
  - Strengthening regulation is important given close links between credit unions and banks (mainly through deposits).

### Authorities’ view — financial sector
- ECCB notes progress:
  - Intensified on-site supervision supported stronger regulatory enforcement and identification of emerging capital needs.
  - All banks now comply with minimum capital adequacy ratios and are expected to conform with the minimum capital requirement within the 450-day deadline established by the new Banking Act.
  - Authorities agree on the importance of timely transfer of receiverships to the ECAMC and expect it to be fully operational soon.
  - Efforts ongoing toward fully implementing a consolidated supervisory framework.
  - Fund and World Bank TA deployed in 2016 and 2017 to improve credit unions’ data reporting quality and consistency, and to develop stress testing capacity among local regulators and supervisors.
  - The ECCB is developing capacity to monitor credit unions and mitigate related risks for banks.

*Source: cr17150 - 9.      Policy responses to the global financial crisis have increased rigidities in government (IMF).*

### 23.      AML/CFT supervision was strengthened, but maintaining CBRs is challenging. The

### 23.      AML/CFT supervision was strengthened, but maintaining CBRs is challenging. The

### AML/CFT supervision and correspondent banking relationships (CBRs)
- The Monetary Council decided for the ECCB to assume responsibility for AML/CFT regulation of all institutions licensed under the Banking Act.
- Risks to CBRs stem mostly from the small scale of business of respondent banks relative to high penalties imposed by foreign regulators on correspondent banks, which in some cases make CBRs unprofitable.
- Bank consolidation may help alleviate CBR unprofitability.
- Staff recommendation: strict enforcement of AML/CFT requirements, harmonization of AML/CFT legislation, and improved communications between respondent and correspondent banks to reduce the risk of losing CBRs.
- The transfer of AML/CFT supervisory powers from national agencies to the ECCB is described as welcome and should be complemented by harmonization and full compliance with the 2012 FATF standards and tax transparency standards.

### Minimum Savings Rate (MSR)
- Authorities maintained reservations on eliminating the MSR.
- Observed effects:
  - Lending rates declined only slightly after the recent reduction in the MSR.
  - The impact on credit dynamics and credit growth has been muted.
  - Additional bank fees on savings accounts have reduced the effective MSR to almost zero or negative in some instances.
- Authorities’ view: Without saving and investment alternatives, the MSR is an instrument to incentivize private saving and support households' income.
- Future decisions on the MSR will be influenced by recurrent assessment of monetary and credit conditions in the ECCU and an ongoing review of the impact of the reduction in the MSR.
- Authorities welcome joint research on the MSR.
- Staff recommendation: the MSR remains an obstacle to efficient credit markets and should be removed to facilitate financial deepening and provide alternative instruments for small savers.

### External position and REER developments
- The EC dollar has remained near its long-term average in real effective terms, in line with the de-facto peg.
- INS-based REER appreciation: about 7.6 percent over three years to December 2016.
- Customer-based REER: maintained close to its 30-year average due to the de-facto peg and lower inflation.
- Competitor-based REER appreciation: 2 percent over the last three years.
- Estimates of REER misalignment show an overvaluation ranging between 2.3 percent and 21½ percent.
- Record excess liquidity, mostly held at the central bank, has boosted gross international reserves assessed to be adequate against several benchmarks.

### Growth constraints, vulnerabilities, and disaster costs
- Sluggish productivity is the key reason for low growth, entrenched after the global financial crisis.
- Investment is impacted by recurrent natural disasters, inadequate public infrastructure, financing and capacity constraints.
- Labor contribution weakened by significant outward migration, particularly of skilled workers.
- Labor is concentrated in low-productivity sectors; labor market rigidities and skills mismatches contribute to structural unemployment.
- Average annual cost of disasters:
  - For small states: almost 2 percent of GDP (over fourfold that for larger countries).
  - For ECCU microstates: 3.4 percent of GDP.
- Macroeconomic implications of disasters: lower investment, increased poverty, reduced fiscal space, and more permanent effects due to financial and capacity constraints.
- Staff recommendation: prepare plans for investment in climate adaptation, financing, and risk management integrated into macroeconomic and fiscal frameworks; enforce building and zoning codes; mobilize private investment and concessional financing.

### Structural reform progress and competitiveness
- Energy: All ECCU members are rebalancing energy mix towards renewable energy; delays and regulatory impediments (including restrictions on reselling solar power back to the grid) are reducing benefits.
- Connectivity and transport:
  - Some members strengthening connectivity: St. Lucia adding new international flights; Antigua and Barbuda completed its new airport terminal; St. Vincent and the Grenadines opened its new international airport.
  - Extra-regional routes account for 82 percent of the air traffic in the region.
  - Interisland air travel cost is raised by diseconomies of scale, labor rigidities, taxation and fees; service quality is highly variable.
  - Operationalizing the OECS Air Services Agreement would enable smaller airlines to field less profitable routes and concentrate regional airline service on key routes.
- Tourism and human resources: members adopting tourism development plans, strengthening regulations, reviewing frameworks to encourage FDI, and developing a regional strategy for human resource development focused on country-specific training needs.
- Business climate: members are working to reduce costs of doing business and improve the business climate (examples: St. Lucia reforms under the Caribbean Growth Forum; Grenada and St. Vincent and the Grenadines developing on-line search facilities for deeds and property titles).
- Regional integration: draft bills on free circulation of goods throughout the OECS are under review; standards for agriculture health and food safety are being upgraded; initiatives to ship agriculture goods are being implemented; regional education strategy is being implemented in St. Lucia, Dominica, Grenada and St. Vincent and the Grenadines; work underway to upgrade training and skills in tourism and hospitality.
- Staff recommendation: further regional integration in goods and labor markets, connectivity, and financial regulation is essential to boost competitiveness; a single jurisdiction for businesses and harmonized border controls would facilitate cross-border commercial opportunities and multi-destination tourism.

### Fiscal policy, public sector, and CBI programs
- Short-term outlook: favorable support from steady tourism demand, low oil prices, and robust FDI inflows (partly related to CBI programs), but vulnerabilities to external shocks, policy slippages, and natural disasters persist.
- Credible medium-term fiscal frameworks are necessary for debt sustainability.
  - ECCB’s Monetary Council decision to discuss interim targets towards the 2030 regional benchmark at its July 2017 meeting is a positive step.
  - Adoption of fiscal responsibility legislation would strengthen adherence to medium-term consolidation plans; Grenada’s Fiscal Responsibility Act is noted as a potential model.
  - Countries with large deposits from CBI programs should use them to lower debt where possible.
- Managing the wage bill:
  - Wage bills present major budgetary rigidity; public sector wage negotiations often ignore fiscal and productivity considerations.
  - Authorities should follow a three-pronged approach: wage moderation; employment attrition; and a functional review of the civil service.
  - Part of gradual savings could fund well-targeted social safety nets and reduce governments acting as employers of last resort.
- Citizenship by Investment (CBI) programs:
  - A formal regional framework is needed to strengthen integrity, reduce risks, and preserve revenue-generating capacity.
  - Regional coordination would create economies of scale in due diligence, enhance transparency, and avoid a race to the bottom on program terms.
  - CBI inflows should be fully recorded on budget and integrated in medium-term fiscal frameworks.
  - CBI revenues should be prioritized for debt reduction, saving funds for natural disasters with strong institutional frameworks, and key infrastructure investment.
  - The decision to establish a Partial Credit Guarantee Facility jointly with the World Bank is expected to facilitate lending to SMEs.

### Financial sector reform and supervision
- Key fragilities and recommendations:
  - More progress needed to address financial sector fragilities; strict enforcement of prudential requirements is critical.
  - Updated asset quality reviews based on international best practices are necessary for guidance on provisioning and capital needs for indigenous banks.
  - Strict enforcement of the 2015 Banking Act and new regulation on asset classification would prompt recognition of losses and provisioning of capital to undercapitalized banks.
  - Strong governance and risk-management frameworks should be implemented to avoid further losses; strict enforcement promotes a level playing field, healthy competition, and sector consolidation.
- Legislation and institutions:
  - New financial sector legislation should be finalized promptly.
  - Activating the ECAMC should not be further delayed; it needs a clearly defined role, full independence of operations, and adequately experienced staff.
  - Harmonized legislation on asset quality, foreclosure and insolvency, credit unions, insurance, and building societies should be finalized to strengthen non-bank financial sectors and facilitate NPL reduction and credit market dynamism.
  - Draft laws should improve frequency of financial reporting, specify sanctions for non-compliant entities, clarify capital definitions, and specify procedures to address NPLs.
- Market functioning:
  - Measures to remove financial market distortions would promote financial deepening.
  - The functioning of the RGSM could be improved by simplifying issuance procedures and reviewing brokers’ fee structures to help reduce government borrowing costs.

### Statistics and surveillance
- Data quality varies across ECCU countries; capacity needs strengthening in balance of payments, labor markets, and government finance.
- Removing legal impediments to the use of fiscal information would help supplement the external sector survey when response rates are low.

*Source: IMF staff report excerpt (cr17150).*

### 43.      The discussion with the ECCU authorities will be on the 12-month cycle in accordance

### cr17150 - 43.      The discussion with the ECCU authorities will be on the 12-month cycle in accordance

### Real sector developments
- Regional real GDP growth moderated in 2016, broadly in line with trading partners.
- Output gap remained negative in 2016; negative inflation occurred in 2016, influenced by a negative output gap and declining global commodity and food prices.
- Country-level real GDP growth (selected items from figures and tables):
  - ECCU aggregate Real GDP (annual): -3.3 (2010), -0.3 (2011), 0.3 (2012), 1.8 (2013), 3.2 (2014), 2.6 (2015), 2.0 (2016), projected 2.4 (2017), 2.3 (2018), 2.2 (2019–2022).
  - Notable country 2016 estimates (Real GDP growth): Anguilla 3.8; Antigua and Barbuda 3.7; Dominica 1.0; Grenada 2.0; Montserrat 3.6; St. Kitts and Nevis 2.9; St. Lucia -0.6; St. Vincent and the Grenadines 1.8.
- Sector contributions to ECCU Real GDP growth highlighted increased contribution from construction and continued roles for trade, hotels and restaurants, real estate, transport, and other sectors.

### Tourism
- Tourism is a key component of ECCU exports; travel receipts as percent of total exports (2016) vary by country (figure lists: e.g., St. Kitts and Nevis, Montserrat, St. Vincent and the Grenadines, Antigua and Barbuda, Dominica, St. Lucia, Grenada, Anguilla).
- Almost ¾ of tourists come from North America and the U.K.
- Trends:
  - Tourism demand increased in source markets, but the ECCU’s share of travel spending has continued to fall.
  - Tourist inflows picked up slightly in 2016, largely because of U.S. travelers.
  - Dependence on North American markets has increased in the last decade.
- Travel receipts (aggregate indicators):
  - ECCU travel receipts share and imports of travel services trends shown; ECCU share of travel spending (US$ billion) featured in figures.

### Monetary developments
- Excess reserves remained elevated in most jurisdictions and reached historically high levels in 2016.
- 2016 monetary dynamics:
  - Positive overall deposit growth alongside deeper credit contraction in 2016.
  - Money multiplier continued to fall in conditions of excess liquidity and strong base money creation.
  - Monetary policy described as passive; average deposit rates fell below the minimum saving deposit floor rate.
- Selected monetary aggregates and rates (from Table 5 and figures):
  - Net foreign assets (ECCU, end-period, EC$ millions): 2,148 (2010), 2,053 (2011), 2,865 (2012), 3,481 (2013), 4,960 (2014), 6,533 (2015), 7,400 (2016), projected 7,950 (2017), 8,435 (2018).
  - Broad money (M2, EC$ millions): 12,400 (2010), 12,762 (2011), 13,574 (2012), 13,910 (2013), 15,045 (2014), 15,658 (2015), 15,782 (2016), projected 16,109 (2017), 16,554 (2018).
  - Private sector credit (real terms): 9,067 (2010), 8,890 (2011), 9,034 (2012), 8,722 (2013), 8,234 (2014), 7,878 (2015), 7,472 (2016), projected 7,543 (2017), 7,518 (2018).
  - ECCB policy rate: 6.50 (2010–2016).
  - US policy rate: 0.125 (2010–2015), 0.13 (2016), 0.38 (2017).

### Financial soundness indicators
- Nonperforming loan (NPL) ratios declined to 12 percent at end-2016.
- NPL provisioning increased overall but rose particularly among foreign banks.
- Profitability improved in 2016, partially reflecting the lower minimum savings deposit rate.
- Capital adequacy improved slightly.
- Excess liquidity boosted banks’ liquidity ratios, especially among foreign banks.
- Selected FSI values (from Figure 4):
  - NPLs (in percent of total loans) trend: upward earlier years, decline to 12 percent at end-2016.
  - Provisions to NPLs increased, with foreign banks showing higher provisioning rates.
  - Return on average assets improved in 2016.
  - Total capital/Risk-weighted assets: showed slight improvement; regulatory adjustments illustrated (50%, 75%, 100% NPL provisioning scenarios).

### Business environment (Doing Business indicators)
- ECCU countries exhibit large disparities in ease of doing business despite relative economic similarity.
- While starting a business is relatively easy in most ECCU countries, several economies lag behind in other Doing Business metrics.
- Doing Business rankings (World Bank 2016 indicators, 1/ note):
  - 2016 rankings are across 189 countries; smaller numbers represent greater ease.
  - ECCU countries have seen a worsening of their Doing Business ranking over 2013–2017.

### Selected economic and fiscal indicators (tables 1–4 highlights)
- Population and health (Table 1):
  - Total population (2013, thousands): 613.7.
  - Physicians (latest weighted avg.): 0.7 per 1,000 people.
  - Hospital beds (2011 weighted avg.): 2.7 per 1,000 people.
  - Life expectancy at birth (years): 74.1.
- ECCU GDP and prices (Table 1):
  - GDP (2015, nominal US$ millions): 5,900; Per capita US$9,614.
  - Real GDP (ECCU aggregate annual series shown above under Real sector).
  - Consumer prices (average): 2.6 (2010), 3.4 (2011), 2.7 (2012), 0.8 (2013), 1.0 (2014), -0.8 (2015), -0.3 (2016), projected 1.7 (2017), 1.6 (2018), 1.9 (2019–2022).
- Public finances (Table 3 highlights, percent of GDP):
  - Total revenues and grants (ECCU): 27.3 (2010), 27.0 (2011), 26.0 (2012), 27.4 (2013), 27.7 (2014), 29.0 (2015), 29.1 (2016), projected 28.2 (2017), 27.5 (2018), 27.0 (2019), 26.7 (2020), 26.5 (2021), 26.3 (2022).
  - Total expenditure and net lending (ECCU): 30.9 (2010), 30.3 (2011), 29.3 (2012), 30.1 (2013), 29.3 (2014), 29.6 (2015), 31.0 (2016), projected 28.8 (2017), 28.1 (2018), 27.5 (2019), 27.2 (2020), 27.0 (2021), 27.0 (2022).
  - Overall central government balance (percent of GDP): -3.6 (2010), -3.3 (2011), -3.3 (2012), -2.7 (2013), -1.5 (2014), -0.7 (2015), -1.9 (2016), projected -0.6 (2017–2019), -0.5 (2020–2021), -0.7 (2022).
  - Total public debt (end-of-period, percent of GDP): 84.7 (2010), 85.7 (2011), 86.2 (2012), 85.7 (2013), 84.3 (2014), 81.0 (2015), 79.8 (2016), projected 76.6 (2017), 74.3 (2018), 72.3 (2019), 70.2 (2020), 68.1 (2021), 66.4 (2022).
- External sector and balance of payments (Table 6 highlights, US$ millions and percent of GDP):
  - Current account (US$ millions): -1,054.1 (2010), -972.9 (2011), -954.3 (2012), -963.0 (2013), -821.4 (2014), -626.5 (2015), -761.2 (2016), projected -916.5 (2017), -965.1 (2018), -1,009.2 (2019), -991.0 (2020), -1,024.6 (2021), -1,066.5 (2022).
  - Trade balance (US$ millions): -1,765.0 (2010), -1,803.2 (2011), -1,783.1 (2012), -1,880.7 (2013), -1,919.5 (2014), -1,758.8 (2015), -1,872.4 (2016), projected -2,022.1 (2017), -2,108.1 (2018), -2,183.8 (2019), -2,237.7 (2020), -2,324.9 (2021), -2,424.2 (2022).
  - Travel receipts (services, US$ millions): 927.1 (2010), 994.8 (2011), 1,005.4 (2012), 1,032.3 (2013), 1,108.8 (2014), 1,142.0 (2015), 1,165.5 (2016), projected 1,175.1 (2017), 1,213.1 (2018), 1,259.5 (2019), 1,330.9 (2020), 1,403.2 (2021), 1,479.3 (2022).
  - End-year gross reserves of the ECCB (US$ millions): 926 (2010), 1,008 (2011), 1,125 (2012), 1,169 (2013), 1,411 (2014), 1,560 (2015), 1,690 (2016), projected 1,782 (2017), 1,873 (2018), 1,977 (2019), 2,147 (2020), 2,312 (2021), 2,440 (2022).
  - ECCU GDP at market prices (US$ millions): 5,362 (2010), 5,486 (2011), 5,569 (2012), 5,714 (2013), 6,045 (2014), 6,279 (2015), 6,415 (2016), projected 6,687 (2017), 6,959 (2018), 7,251 (2019), 7,555 (2020), 7,873 (2021), 8,203 (2022).

### Labor market and social indicators
- Total population (2013): 613.7 thousand; annual growth rate 2000–2013: 1.9 percent.
- Unemployment rates (selected, percent): Antigua and Barbuda 8.4 (2001), 4.1 (2008), 14.1 (2015 note); Grenada 9.9 (2001), 24.9 (2008), 22.9 (2015 note); St. Lucia 16.5 (2001), 15.8 (2008), 24.1 (2015 note); St. Vincent and the Grenadines 21.1 (2001), 18.8 (2008), 22.6 (2015 note).
- Wages (annual average, EC$): examples include Antigua and Barbuda 24,734 (2001), 29,351 (2008), 29,980 (2014); St. Lucia 12,779 (2001), 18,491 (2008), 21,281 (2014).

*Source: IMF staff and ECCB data compiled in cr17150; https://www.imf.org/-/media/files/publications/cr/2017/cr17150.pdf*

### Annex I. Implementation of Previous Staff Advice

### Annex I. Implementation of Previous Staff Advice

### Further Improve the Health and Stability of the Financial System — Operationalize the ECAMC
- The opening of the ECAMC is now expected in short order.
- Six of the eight jurisdictions have paid their capital contributions.
- The Board of Directors is confirmed and has met twice.
- A CFO, head of assets and legal officer have been recruited; recruitment of a CEO is under way.
- The board received an orientation workshop by the IMF and World Bank in early April 2017.
- Reform alien land holding laws: Limited progress; ECAMC Law does not provide for exclusion from the Alien Landholding Law due to constitutional issues. Grenada: OECS citizens purchasing land must obtain a non-citizen land holding license (no license fee) but pay a property transfer tax of 10 percent of the property’s market value. St. Kitts and Nevis: cabinet swiftly and frequently approves alien land holding.

### Banking sector recapitalization and AQRs
- Recommendation: Order corrective actions, including capital calls, for undercapitalized-but-viable banks identified in the asset quality reviews.
- i. Update the 2014 asset quality reviews — No direct action has been taken.
- ii. Undercapitalized but viable banks to submit sound capitalization plans to the ECCB; unviable banks to exit orderly:
  - Section 44 (1) of the new Banking Act requires a minimum capital of EC$20 million for commercial banks (up from EC$5 million under previous Act).
  - Non-compliant banks continue working towards compliance by statutory deadlines. Capital augmentation plans were submitted by banks, as required.
- iii. Banks carry out their plans by a fixed deadline — Banks have implemented or altered plans to satisfy stipulated capital requirements following commencement of the Banking Act.
- iv. Noncompliant viable banks merge with or be acquired — These remain options and will be pursued if required.
- v. ECCB to explore bank merger options to reduce concentration and liquidity risks while improving profitability — Capital adequacy, corporate governance, concentration and liquidity risks, and profitability will be assessed prior to approving mergers.

### Enhance supervisory processes
- Loan classification:
  - Drafting of the Treatment of Assets Standards commenced in 2014 with IMF and CARTAC TA; updated with industry comments and being finalized for submission to the Institute of Chartered Accountants of the Eastern Caribbean and bankers’ associations. Targeted date for implementation is December 2017.
- Collateral valuation:
  - Project plan at advanced stage; proposal to Monetary Council at July 2017 meeting; adoption and implementation targeted by 2018Q1. Bank examiners to receive training in collateral valuation.
- On- and off-site inspections:
  - Enhanced risk based supervisory framework being developed with IMF TA, including streamlined onsite examination process and supervisory manuals. Completion expected by end-June 2018.
- Implementation of Basel II:
  - ECCB receiving CARTAC TA including technical advice, training and mentoring. Initial roadmap being finalized; draft Prudential Standards submitted to banking sector for comments by August 2016 and are being finalized.

### Safeguards and internal governance
- Reassign internal audit department’s operational duties to address conflict of interest:
  - Roles of Compliance and Risk Management removed from Internal Audit in June and September 2015, respectively.
  - Compliance now in Accounting Department.
  - Office of Risk Management established in Governor’s Immediate Office; Chief Risk Officer appointed on 1 September 2015.
  - Internal Audit now focused on Assurance per revised work program.

### Deposit rate policy and access to credit
- Minimum savings deposit rate:
  - Monetary Council reduced the minimum savings rate from 3.0 percent to 2.0 percent in 2015.
  - Lending rates declined on average by only 25 basis points in 2016; impact on credit growth muted as banks maintained tighter credit standards.
  - Eliminating the minimum savings rate is not currently being considered by the ECCB.
- Structural reforms to improve credit access and reduce lending rates:
  - Regional foreclosure bill: ECCB commissioned report recommending reforms in land registration and foreclosure; recommendations submitted to member governments. St Vincent and the Grenadines, Antigua and Barbuda, Grenada, Dominica, and Anguilla have approved recommendations. Legislative drafting consultant identified; World Bank assistance sought.
  - Regional credit bureau: Under way. Monetary Council endorsed credit reporting legislative package; parliamentary approval in member territories expected by September 2017. Once legislation is in effect, operator will be selected and bureau operationalized. Authorities receiving TA from the IFC.

### Mitigating correspondent banking relationship risk and AML/CFT
- Strengthen regulatory frameworks and governance of CBI programs: Regional vetting policy and procedures being discussed by a committee of regional institutions charged by the OECS Authority. ECCB encouraged publication of program information (as in Grenada); publication templates submitted.
- Effective implementation of AML/CFT standards:
  - ECCB to assume AML/CFT responsibilities for all institutions licensed under the Banking Act, as decided July 2016 Monetary Council.
  - ECCB receiving TA from U.S. Department of the Treasury; needs assessment completed in March 2017.
  - Pending legislative transfer, ECCB and national regulators commenced efforts to establish MoUs for cooperation in information sharing and AML/CFT assessments.
- Accelerate CARTAC-supported Basel II implementation and risk-based supervision: ECCB established a financial stability team in June 2016 to conduct macro-prudential surveillance and provide bi-annual financial stability assessments.
- Increase information sharing with correspondent banks: Regional national banks have registered on the SWIFT KYC Registry Portal, accessible by correspondent banks.

### Fiscal policy and public financial management
- Pass national fiscal responsibility legislation (FRA):
  - Only Grenada and Anguilla have FRA. ECCB encouraging other member states to adopt FRA.
- Medium-term fiscal strategies:
  - ECCU finance ministers agreed to present medium-term fiscal frameworks and discuss interim debt targets for 2020 and 2025 at the ECCB’s Monetary Council on July 2017.
- Internalize costs of natural disasters:
  - Provide for savings of 1 percent of GDP per year to buffer natural disasters — Most countries (Dominica) have set up saving funds or are in process (St. Kitts and Nevis).
  - Include escape clauses in fiscal rules to suspend rules temporarily in event of natural disaster — Only Grenada has an escape clause.
- Improve PFM framework:
  - Broader fiscal perimeter accounting — Limited progress.
  - Save significant portion of CBI resources to a fund for disaster shocks and resilient infrastructure — Most countries (Dominica) have set up or are setting up saving funds.
  - Funding capital projects using CBI resources requires rigorous project evaluation and sufficient financing to completion — Limited progress; Dominica’s Public Sector Investment Plan explicitly accounts for use of available CBI deposits and resilience against natural disasters.
  - Improve capacity to design and manage PSIPs — Limited progress.
- Governance framework for CBI programs:
  - Regionally accepted principles and code of conduct — Regional vetting policy and procedures being discussed.
  - Rigorous due diligence — All countries with CBI programs use independent regional and international service providers.
  - Publish and subject to financial audits: number of citizenships granted; revenue earned; and use — Grenada publishes program information; ECCB encouraged other countries in October 2016 and provided publication templates.

### Enhance Competitiveness and Potential Growth; Regional integration
- Energy diversification:
  - Progress made but delays relative to national targets. Dominica and St. Vincent and the Grenadines investing in geothermal electricity to replace diesel generation; projects targeted for completion by end-2018.
- Regional collaboration:
  - Single domestic space: Agreement on guidelines for free circulation of goods regime; draft bill under review by OECS member states; OECS nationals free to work in any ECCU country without work permits and given indefinite stay. Next steps: portability of social security benefits and implement OECS contingent rights policy.
  - Harmonized border management: Limited progress.
  - Free movement of visitors: Limited progress.
  - Regional airline: OECS Economic Affairs Council approved a Regional Air Services Agreement in November 2016; to be considered by Heads of government.
  - Single regional regulatory authority for non-banks: Eastern Caribbean Financial Services Commission completed initial stage including public consultations on draft legislation; revised plan for next phases expected soon.
- Labor and productivity:
  - Align wage growth with productivity — Limited progress.
  - Improve labor market flexibility — Some attempts in hotels and port operations.
  - Control public wage growth — Grenada developed a public service reform strategy for 2017-2019; wage freezes and attrition policies still in effect in some countries.
  - Strengthen labor-training programs — Some programs being revaluated and reformed (e.g., St. Kitts and Nevis).
- Macroeconomic statistics:
  - Strengthen labor market statistics — St. Vincent and the Grenadines published results of its 2015 Labour Market Survey.
  - Ensure consistency of CBI flows with BPM6 — A BPM6 survey form is administered in each country for BOP compilation; entities use it to report receipts and payments of CBI flows.

### Annex II — Citizenship-By-Investment (CBI) Programs: summary findings and policy priorities
- Recent surge in CBI programs driven by soaring demand for secondary citizenships; increased reliance by some small island states on volatile and unpredictable CBI revenues.
- Intensified regional competition has led to pressure to ease conditions and a potential “race to the bottom.”
- Priority recommended uses of volatile CBI receipts: debt reduction, investment in key infrastructure and climate change adaptation, and building fiscal buffers.

Key observations and country examples:
- Launch of new programs increased competition; demand peaked in 2014 for St. Kitts and Nevis and began weakening thereafter; Antigua and Barbuda demand started declining in 2016.
- Dominica experienced a surge in CBI inflows owing to competitive conditions and extensive outreach; Dominica’s promotion, marketing, and outreach during FY2015/16 amounted to 1.1 percent of GDP.
- Most of Dominica’s CBI inflows were recorded off-budget and transferred to budget only as needed.
- Grenada: total inflows held up in 2016 though share of NTF applicants exceeded real estate applicants.
- St. Lucia’s new program met limited success in first year due to high pricing and election-year political uncertainty.

Uses of CBI revenues to date:
- Antigua and Barbuda: used for debt servicing and general financing; portion (largely off-budget) used to support social security system and SOEs.
- Grenada: funds used to pay budgetary arrears, accumulate savings in the Contingency Fund, and investment projects.
- St. Kitts and Nevis: revenues contributed to broad expenditures including social programs and grants; a large part (about 38% of GDP) was saved in bank deposits to establish the Growth Resilience Fund, as recommended by staff.
- Dominica: CBI receipts largely used to service and consolidate debt, finance infrastructure rehabilitation after Tropical Storm Erika, and fund employment programs.

Dominica — detailed fiscal impacts of CBI (FY2015/16)
- CBI-generated revenues (gross of CBI-related expenses) reached an estimated 19 percent of GDP in FY2015/16.
- Of CBI revenues generated in FY2015/16:
  - 7 percent of GDP was used (total spending of ECP revenues in FY2015/16 -- EC$ 99 mln (7 percent of GDP)).
  - 12 percent of GDP was deposited in the government’s bank accounts.
- Of the amount spent:
  - Only 5 percent of GDP utilized in FY2015/16 was reflected in the central government budget.
  - 2 percent of GDP accrued directly to state-owned enterprises.
- Composition of spending (shares and selected amounts):
  - Debt amortization and interest payments: 3.2 percent of GDP.
  - Public works (emergency infrastructure, Douglas Charles Airport, roads and bridges post-Erika): 1.8 percent of GDP.
  - Employment programs: 0.7 percent of GDP.
  - Remaining funds used on social services, agriculture, tourism, housing, and commercial.
- Disaster context: On August 27, 2015, Tropical Storm Erika caused estimated damage of US$483 million or 96 percent of GDP, of which 65 percent are attributed to the public-sector reconstruction costs.

*Annex I. Implementation of Previous Staff Advice.*

### 3.      There are early signs of a “race to the

### cr17150 - 3.      There are early signs of a “race to the

### Citizenship-by-Investment (CBI): recent changes and risks
- Dominica amended its CBI program requirements by lowering the government fee of the real estate investment option.
- St. Lucia substantially eased accessibility to the citizenship program. Main changes to St. Lucia’s CBI program include:
  - removal of a minimum personal wealth requirement (US$3 million);
  - reduction of required contribution from US$200,000 to US$100,000 for single applicants (with a similar reduction in fees for applicants with dependents);
  - removal of the cap of 500 citizenships per year;
  - bond option discouraged with a new administrative fee of US$50,000.
- Authorities expect these changes will improve the appeal of St. Lucia’s program and boost applications and revenues.
- Assessment: While aligning St. Lucia’s program with Dominica’s may generate additional demand, it is unlikely that CBI revenues in St. Lucia will become as important a source of revenue as in Dominica owing to the much larger size of the St. Lucian economy.

### Volatility and exogenous risks to CBI inflows
- The demand for citizenship programs is susceptible to exogenous shocks independent of governments’ control, making CBI inflows volatile and unpredictable.
- Key risk driver: changes in advanced countries’ migration policies could reduce the appeal of the passport and the demand for CBI programs.
- Implication: heightened uncertainty in the current global political and economic environment makes budget planning more difficult.

### Benefits of a regional approach to CBI
- Authorities are considering a regional approach to CBI programs to:
  - reduce costs via economies of scale (joint management of CBI applications);
  - increase revenues by preventing a race to the bottom;
  - reduce reputational risks through stronger regulatory frameworks and improved due diligence.
- Institutional developments:
  - Citizenship-by-Investment Programs Association formed in 2015 to promote collaboration on due diligence.
  - ECCU authorities granted the Organization of Eastern Caribbean States (OECS) the mandate to coordinate regional cooperation on CBI programs.
- Expected outcomes: adoption of best practices across the region, information sharing and transparency, and prevention of applicants who fail due diligence in one country from applying elsewhere.

### Investment requirements and scale implications (high-level points from table and notes)
- Table-derived observations (preserve presented figures and qualifiers):
  - St. Lucia: required contribution to the Economic Fund reduced from USD200,000 to USD100,000 for single applicants; from USD250,000 to USD190,000 for a family (applicant with a spouse and up to two dependents); cap of 500 citizenships per year removed; administrative fee of USD50,000 introduced for the bond option. The remaining two options were left unchanged.
  - Dominica amended program requirements effective December 2016: changes include higher age limit of young dependents, and lower government fees for real estate investment option.
  - Notes on program mechanics: for most programs, a minimum holding period of 5 years is required for redeemable investment options; assets may be eligible for resale to future applicants under CIP.
- Chart insight (text): “Number of Main Applicants Needed to Generate Inflows Equivalent to 1 Percent of GDP” varies across Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, and St. Lucia and by option (NDF option, Real estate option).

### Central government wage bills: scale, recent responses, and reform needs
- Regional context:
  - Wage bills absorb a large share of ECCU countries’ budgets; in some countries they are nearly half of current outlays or tax revenues.
  - Regional median wage bill is 10.2 percent of GDP.
- Post-crisis responses:
  - Many governments increased public sector employment and/or wages after the global financial crisis, reducing budget flexibility and fiscal space.
  - Countries without an IMF program had more flexibility to increase public employment and wages post-crisis (examples cited: St. Lucia, Dominica, St. Vincent and the Grenadines). St. Kitts and Nevis increased both to honor pre-dated commitments.
- Fiscal consolidation actions taken to contain the wage bill included:
  - salary freezes (Dominica in 2001 and 2003; Antigua and Barbuda 2010-12; St. Kitts and Nevis 2011-14; Grenada 2014-17; St. Lucia 2014/15 and 2015/16);
  - attempts to alter workforce size and composition (Antigua and Barbuda’s 2010-13 plan; attrition policies in Grenada and St. Lucia);
  - compensation reforms modifying pay and benefits (Dominica 2004-2006; St. Vincent and the Grenadines 2007; Antigua and Barbuda 2013).
- Need for medium-term structural civil service reforms:
  - functional reviews to address skill gaps and overstaffing;
  - enhanced HR information systems;
  - reviews of HR policies and processes;
  - legal reforms for internal civil service procedures;
  - reforms of compensation systems and wage setting mechanisms to internalize fiscal sustainability objectives.
- Case example: Grenada’s "Public Sector Management Reform Strategy" four pillars:
  - (i) re-engineering the public service to make it more efficient;
  - (ii) strategic human resource management;
  - (iii) wage bill reform;
  - (iv) an integrated ICT platform.
  - Timeline: includes consultation, finalization of reforms, and implementation by 2019.
- Social safety nets:
  - Strengthening social safety nets is critical to de-link public employment policies from social welfare objectives.
  - Grenada merged cash transfer programs and improved targeting while enhancing technical vocational and educational training.
  - Over the medium term, authorities should consider setting up a broader safety net, including unemployment insurance schemes.

### Public Investment Management: diagnostics and priorities
- Rationale: public investment should address significant infrastructure needs (roads, electricity, access to water); social infrastructure indicators (secondary teachers, hospital beds) give a relatively stronger picture.
- Constraints: high indebtedness, limited fiscal space, and sluggish growth raise concerns about financing infrastructure while maintaining fiscal and debt sustainability.
- PIMA preliminary findings:
  - Scores range from 1.54 to 2.30 (average of 1.8) out of a top score of 3.
  - Shortcomings identified in:
    - planning sustainable levels of investment across the public sector;
    - allocating investment to the right projects, use of multiyear budgeting, project appraisal and selection;
    - implementing projects on time and budget via appropriate funding, monitoring, execution, and protection of investment through adequate maintenance.
- PFM progress: countries at different stages of implementing modern Public Financial Management frameworks:
  - Grenada revised its new PFM legislation and adopted associated regulations;
  - final draft legislation ready in Antigua and Barbuda, St. Lucia, Anguilla, and Dominica;
  - St. Vincent and the Grenadines has an initial draft PFM law under review.
- Recommended focus: targeted program to address planning and implementation shortcomings to improve quality, focus, and return on public investment.

### Regional Government Securities Market (RGSM): performance, inefficiencies, and reform options
- Background and performance:
  - RGSM established in 2002 to provide cost-effective financing and greater risk diversification.
  - Issuance has increased significantly over the years, particularly for short-term instruments (T-bills).
  - Investor base remains limited to banks and public pension funds; most governments continue to place securities over the counter (OTC).
  - Only St. Lucia and St. Vincent and the Grenadines, and to a lesser extent Grenada, issue significant volumes on the primary market. Volumes traded on the secondary market are very small.
- Market mechanics and issues:
  - Primary market activity for T-bills dominated by two of the six licensed brokers, who subscribed 84 percent of securities auctioned in 2016.
  - Single-price competitive auctions with a reserve price take place on the Eastern Caribbean Security Exchange platform; DMOs have no access to the platform.
  - Interest rates are capped, with caps set in advance for the entire year; in many auctions the final yield equals the cap, frustrating price discovery.
  - “Top-up” option allows raising the initial amount offered; when used, DMOs typically use it entirely and become price takers.
  - Open auctions give brokers an informational advantage as they can adjust bids in real time.
  - These practices can raise issuance costs substantially (by as much as 200 basis points).
  - Bond issuance is more limited; fixed-price subscriptions and “first-come, first-served” allocations are common.
- Possible measures to enhance market efficiency and reduce costs:
  - establish competitive auctions as the only issuance method;
  - enable DMOs to observe auctioned amounts and yields to determine cut-off prices and final amounts within the communicated range;
  - reduce incentives to issue OTC by simplifying RGSM issuance procedures and reviewing brokers’ fee structures (which vary across countries);
  - modify top-up allocation rules to improve cost effectiveness;
  - consider structural reforms such as introducing multi-price auctions, removing interest rate caps, and assessing preconditions for a primary dealership.

*Italic: International Monetary Fund staff analysis as presented in cr17150*

### Annex VI. External Sector Assessment

### Annex VI. External Sector Assessment

### External position and current account (ECCU)
- The ECCU external position is weaker than implied by fundamentals and desirable policies.
- The regional current account deficit is estimated to have worsened from 10 percent of GDP in 2015 to about 11.9 percent of GDP in 2016. (Based on the BPM5 methodology.)
- The 2016 deterioration was largely driven by lower exports of goods, which declined by about 10 percent year-on-year in 2016, mostly because of delayed fuel re-exports in St. Lucia and a soap factory closure in Dominica.
- Most of the current account deficit continues to be financed by FDI inflows, which — at 12.1 percent of GDP — remain well below the peak of 22 percent of GDP in 2006 and 2007, but largely in line with the 1996-2016 average of 12 percent of GDP.
- Revised BPM6 statistics are expected to present smaller external deficits throughout the region. Preliminary BPM6 estimates for 2014 released in 2015 show a current account deficit on average 10 percent of GDP lower than in previous BPM5-based estimates.
- BPM6 changes reflect updated visitor expenditure data and expanded coverage (for example, offshore universities), and regional authorities continue revising and improving Balance of Payments statistics.

### REER misalignment (EBA-Lite)
- EBA-Lite REER analysis suggests an exchange rate overvaluation ranging from 2.3 percent to 21.4 percent in 2016 (BPM5), but the assessment remains sensitive to data revisions.
- REER series behavior:
  - INS-based REER shows an appreciation of 7.6 percent over three years between end-2013 and end-2016.
  - Customer-based REER has remained broadly in line with historical averages; observed appreciation is relatively low given the fixed nominal exchange rate to the U.S. dollar.
  - Competitor-based REER shows limited misalignment as some competitors’ currencies are also linked to the US dollar.
- Methodology and data revisions substantially affect estimated REER misalignment figures. For example:
  - Current account-based regressions point to an average overvaluation of about 21 percent in 2016.
  - Regressions based on index REER indicate an overvaluation of 2.3 percent on average, with wide variation among countries.
- EBA-Lite 2016 REER misalignment (selected figures from Table 1; 2016 assessment, September 2016 WEO vintage):
  - Antigua and Barbuda: REER GAP 12.2; REER GAP (alternative/index) -6.0
  - Dominica: REER GAP 50.0; REER GAP (alternative/index) 5.3
  - Grenada: REER GAP 21.8; REER GAP (alternative/index) -11.1
  - St. Kitts and Nevis: REER GAP 18.4; REER GAP (alternative/index) 8.2
  - St. Lucia: REER GAP 4.4; REER GAP (alternative/index) 7.8
  - St. Vincent and the Grenadines: REER GAP ...; REER GAP (alternative/index) 9.9 (Estimate for St. Vincent and Grenadines excluded from CA regression to avoid biasing the regional average due to poor model fit caused by high FDI flows related to airport construction.)
  - ECCU simple average: REER GAP 21.4; REER GAP (alternative/index) 2.3
- Poor model fit in some regressions partly reflects the impact of natural disaster shocks and the characteristics of small tourist-dependent economies.

### Non-price competitiveness indicators
- Non-price indicators point to weak competitiveness, driven by labor market rigidities and high costs of doing business.
- Labor productivity and wages:
  - Wages increased over the last decade while productivity has continued to decline since the onset of the financial crisis, contributing to rising unit labor costs and weakening competitiveness.
- Labor market characteristics:
  - Persistently high levels of unemployment, particularly among the youth.
  - Long-term decline in agricultural employment (following banana industry downsizing) not fully absorbed by the public sector or tourism in some countries, leading to high structural unemployment.
  - Evidence of high public sector and tourism wages increasing reservation wages and of prevalent skills mismatches.
  - Strong and politically influential unions add rigidity to the wage-setting process.
  - The increase in unemployment since the global financial crisis has a significant cyclical component; unemployment rose most significantly in St. Lucia, Antigua and Barbuda, and St. Vincent and the Grenadines, while employment programs in St. Kitts and Nevis helped contain unemployment.
  - Youth unemployment is considerably higher than the overall unemployment rate in all ECCU countries, though the ratio of youth to total employment is similar to other regions, including Latin America and other Caribbean countries.
- Business environment constraints:
  - Difficulties accessing credit and weak insolvency frameworks are major impediments to doing business.
  - World Bank Doing Business Indicators show access to credit and insolvency resolution in all member states remain well below LAC and OECD averages.
  - Ease of trading across borders, registering property, and paying taxes are in line with LAC averages but well below advanced economies.
  - The ECCU ease-of-doing-business distance-to-frontier (DTF) scores show variation across indicators such as Starting a Business, Dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Protecting Minority Investors, Paying Taxes, Trading Across Borders, Enforcing Contracts, Resolving Insolvency.

### Reserve adequacy
- The ECCU’s reserve position further improved in 2016, reaching an all-time high.
- At EC$4.5 billion at end-2016, gross international reserves covered about 6.1 months of prospective imports, well exceeding the 3-month cover benchmark.
- Reserve coverage in 2016 was also:
  - Well above 20 percent of broad money.
  - Well above 100 percent of foreign currency deposits.
- Over the medium term, reserve accumulation is expected to decelerate reflecting the recovery of domestic activity.

### Policy implications and recommended reforms (drawn from assessment)
- Boosting competitiveness will require a swift implementation of structural reforms aimed at:
  - Lowering the cost of doing business.
  - Increasing labor productivity.
  - Further integrating ECCU economies.
- Specific areas for reform highlighted by the assessment:
  - Labor market reforms to address rigidities, skills mismatches, and high structural unemployment.
  - Improvements to access to credit and insolvency frameworks to reduce barriers to business development.
  - Continued improvements in Balance of Payments statistics (migration to BPM6, updated surveys) to reduce uncertainty in external position assessments.

### Country notes: Anguilla (selection)
- Real GDP grew by 3.8 percent in 2016; hotels and restaurants value added grew by 10 percent; tourism accounts for about 35 percent of the Anguillan economy.
- Resolution of two insolvent banks in April 2016 led the government to issue a new bond and contract a loan from the Caribbean Development Bank totaling EC$325 million, raising public debt-to-GDP to 47 percent in 2016 from 24.6 percent in 2015.
- With a 75 percent NPLs recovery (which may be optimistic), to return public debt to its pre-resolution level by 2022, the primary fiscal surplus should increase from an average of 2.2 percent of GDP in the last 5 years to 4.3 percent over the next 5 years.
- Fiscal measures in the FY2016/17 budget are expected to raise the primary surplus to 6.2 percent of GDP in 2017.
- Capital revenue projected to rise from 0.5 percent of GDP in 2016 to 6 percent of GDP in 2017, primarily because of EDF funds, U.K. government grants, and the sale of ANGLEC shares.
- Growth is expected at 2¾ percent in the medium term, contingent on tourism growth, banking system normalization, and fiscal consolidation.
- U.K. grants (e.g., EC$20 million for Road Bay Jetty) will be instrumental for tourism infrastructure; strong revenue turnaround is needed to avoid cash flow constraints given heavy amortization linked to the bank resolution.

### Country notes: Montserrat (selection)
- Real GDP is estimated to have grown by 3.6 percent in 2016, up from 0.3 percent in 2015, driven by sharply accelerating construction activity and robust tourism (visitors +4 percent; cruise ship passenger arrivals +40 percent).
- Consumer price inflation turned negative for the fourth year in a row in 2016.
- Fiscal balance deteriorated to -0.3 percent of GDP in 2016 on the back of lower grants.
- Public debt remains very low at 5.3 percent of GDP in 2016.
- Credit to private sector increased by 3.9 percent in 2016; deposit accumulation remained flat.
- The current account deficit increased to 9.8 percent of GDP in 2016, mainly because of large data revisions.
- Medium-term growth is projected to average about 2.2 percent of GDP, contingent on implementation of government projects in tourism, energy, and construction and continued social and human development programs.
- Authorities target total independence from fossil fuels by 2020 through solar, wind, and geothermal energy exploitation to reduce exposure to volatile oil prices and lower energy costs.

*Prepared by IMF staff — Annex VI. External Sector Assessment.*

### 1.      Membership Status:  Not Applicable

### 1.      Membership Status:  Not Applicable

### Exchange Arrangement
- The Eastern Caribbean Currency Union (ECCU) comprises six Fund members: Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines; and two territories of the United Kingdom, Anguilla and Montserrat.
- The eight ECCU members have a common currency, monetary policy, and exchange system.
- The common currency, the Eastern Caribbean (EC) dollar, has been pegged to the U.S. dollar at the rate of EC$2.70 per U.S. dollar since July 1976.
- The common central bank, the Eastern Caribbean Central Bank (ECCB), has operated like a quasi-currency board, maintaining foreign exchange backing of its currency and demand liabilities of close to 100 percent.

### Safeguards Assessment
- The 2016 updated safeguards assessment found that the ECCB continues to maintain a governance framework that provides for independent oversight.
- Transparency in financial reporting has been maintained and the external audit mechanism is sound.
- The ECCB is taking steps to restructure the internal audit and risk management functions to align them with leading international practices.

### CARTAC: Capacity Building in the ECCU (As of March 30, 2017)
- CARTAC was established in November 2001 to provide technical assistance (TA) and training to beneficiary countries, currently 21, and to the ECCB.
- CARTAC is financed by development partners, its members, and by the IMF, and is hosted by the Government of Barbados.
- On January 1, 2017 CARTAC entered its fifth phase of operations.
- CARTAC’s core areas of TA and training include revenue administration, public financial management (PFM), macroeconomic programming and analysis, financial sector stability and supervision, and economic and financial statistics.

Key statistics and coverage
- In FY2017 the ECCU region accounted for just over 24 percent of TA to the CARTAC membership, with a particular focus on financial sector supervision, revenue administration and statistics.
- Dominica, St. Lucia and St. Vincent and Grenadines are the most intense users of CARTAC TA amongst the ECCU countries.
- TA measurement note: Measured in mission weeks, including time spent supporting countries from CARTAC.

### Tax Administration and Revenue Management
- VAT implementation in ECCU countries is largely complete.
- Tax program focus areas:
  - (i) organizational restructuring to include strengthening and establishing a large taxpayer operation,
  - (ii) strategic performance management;
  - (iii) capacity building in core functions (taxpayer service, audit, collections enforcement, data analysis and risk management),
  - (iv) building of a robust headquarters function.
- Implementation progress:
  - Management of taxpayers through segmentation and the establishment of Large and Medium Taxpayers Units (LMTUs) and Design, Planning and Monitoring Units (DPMUs) are progressing well in Dominica, St. Lucia, St. Kitts and Nevis, Grenada, and St. Vincent and the Grenadines.
- Country highlights:
  - St. Lucia – CIT regime reviewed; a presumptive tax was designed for implementation in FY17 – awaiting the tabling of the 2017 budget; the VAT threshold was increased to EC$400,000 effective on February 1, 2016 and the VAT standard rate was reduced to 12.5 percent in February 2017. LMTU and HQ functions were established and received TA for compliance risk management, taxpayer service strategy and performance management.
  - Dominica – the VAT threshold was increased to EC$250,000 in September 2016. Discussions are ongoing with stakeholders on the CIT regime and implementation of a presumptive tax.
  - Grenada – reformed its tax incentives regime and the supporting legislation is now fully implemented.
  - Anguilla – joint tax policy/tax administration mission provided recommendations on reforming indirect taxation and tax administration.
  - St. Kitts and Nevis – advice provided on implementing and managing a tax incentive regime. Several legislative amendments passed including strengthening collections enforcement provisions; new organizational structure and staff appointments approved and implemented.
- Regional initiatives:
  - A standardized regional approach to compliance and data analysis is being rolled-out as a ‘regional initiative’ to build analytical skills in planning, monitoring and program design and audit units to improve data matching and data mining.
  - In FY2017 the data analysis program was delivered in St. Kitts and Nevis, Dominica, St. Lucia, and Grenada, and is to be rolled out in St. Vincent and the Grenadines in early FY2018.
- IT and reporting:
  - St. Lucia and Grenada are now producing timely and more accurate reporting due to SIGTAS enhancements.
  - IT enhancement support assisted automation of the new TAPA in Grenada including revised interest and penalty regimes.
  - An integrated IT solution and development of a taxpayer identification numbering system has been recommended for Montserrat.
- Capacity building and regional workshops in FY2017:
  - (a) International Survey of Revenue Administration (ISORA) sensitization sessions,
  - (b) Tax Administration Diagnostic Assessment Tool (TADAT) guidance,
  - (c) Leadership Symposium (CARTAC Leadership Initiative),
  - (d) Institutionalizing Performance Management in Tax Administration.

### Customs Administration
- Focus areas: (i) leadership, management and governance; (ii) strategic planning; (iii) human resource development; (iv) trade facilitation; and (v) compliance.
- Regional initiatives: support to CARICOM and the OECS in harmonization of procedures, economic integration and free circulation of goods regime; partnership with CCLEC delivering leadership and management training.
- Achievements:
  - TA provided to St. Kitts and Nevis and St. Vincent and the Grenadines to prepare corporate business and strategic plans; all now have some form of corporate plan in use.
  - In Anguilla CARTAC experts conducted organizational structure reviews and workload assessments.
  - Risk management frameworks prepared in St. Vincent and the Grenadines and Anguilla to identify, categorize and prioritize risks and propose risk treatments.
- Post Clearance Audit (PCA) and compliance outcomes:
  - TA, mentoring and training on PCA delivered to St. Kitts and Nevis, St. Lucia, and Dominica; approximately 20 officers received training.
  - Dominica: approximately $700,000 in additional duties and taxes was assessed by the PCA unit in 2015.
  - St. Kitts and Nevis: 13 audits were carried out in 2014/2015 with assessments of approximately $100,000 being made.
- Valuation and classification training:
  - Valuation guidance provided in Grenada; tariff classification training provided in Dominica, Antigua and Barbuda, and St. Vincent and the Grenadines.
  - Grenada: additional duties and taxes assessed in relation to classification and valuation increased from US$25,000 in 2012 to US$120,000 in 2014. Training was provided to about 83 officers.
- OECS free movement of goods regime:
  - CARTAC delivered a study and workshop to analyze trade and revenue data; initiated work on revenue management options for the free circulation regime.
  - Due to data limitations the exercise was not completed but provided adequate information for OECS member governments to press forward with the free circulation plan.
  - CARTAC to undertake a study at OECS request to provide options to harmonize customs service charges.
- St. Vincent and the Grenadines airport:
  - CARTAC provided advice on customs procedures to safeguard against smuggling and facilitate processing of tourists and other travelers; training in risk assessment and control techniques was provided.

### Public Financial Management (PFM)
- CARTAC undertook a comparative review of PFM practices in ECCU member countries against characteristics of a “core PFM” framework as defined in the IMF Good Practice Note on ‘Sequencing PFM Reform’ (Diamond, 2013).
- PEFA assessments:
  - Analysis derived from PEFA assessments conducted from 2013-2016 in Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat and St. Kitts and Nevis. Dominica and St. Kitts assessments while finalized were yet to be peer reviewed.
  - New PEFA assessments completed in Grenada and Dominica in 2016; St. Lucia scheduled for assessment during the summer of 2017.
  - Following PEFA assessments CARTAC works closely with assessed countries to develop PFM Action Plans.
- PFM legal framework and legislation:
  - Implementation of a modern and consistent PFM legal framework across the ECCU is progressing.
  - Antigua and Barbuda (implemented by IMF Headquarters with European Union funding), St. Lucia (under the Financial Management in the Caribbean program), Anguilla and Dominica have final draft legislation for legislative consideration.
  - A FAD led TA Mission to Dominica on the establishment of a Vulnerability, Risk and Resilience Fund (VRRF) provided amendments to Draft PFM Legislation governing the creation, operation and management of the VRRF Fund.
  - Montserrat and St. Vincent and the Grenadines have initial PFM drafts under review.
  - Grenada passed revisions to its new PFM legislation and has adopted revised regulations (FMC).
- State-owned enterprises (SOE) reforms:
  - Anguilla, Montserrat, and St. Vincent and the Grenadines received diagnostic assessments and training in implementation of the CARTAC SOE/SB ownership manual (bringing to seven the number of countries implementing the manual).
  - A small workshop in early 2016 facilitated sharing of experiences; Grenada presented achievements and shared reporting templates.
- Budget preparation reform:
  - St. Lucia’s budgets prepared according to strategic budget reform methodology and presented in revised program budgeting format including non-financial performance information.
  - St. Vincent and the Grenadines completed a pilot exercise in 2016 and tabled 2017 Estimates of Revenue and Expenditure containing ministerial priorities and output and outcome information.
  - New comprehensive budget manuals developed for St. Lucia and St. Vincent and the Grenadines; bringing to nine the number of CARTAC countries with comprehensive budget preparation manuals. The manuals include a gender budgeting perspective.
- IPSAS compliance:
  - Annual IPSAS cash basis workshop repeated during the year to evaluate compliance with the new exposure draft.
  - Anguilla and St. Kitts and Nevis were self-assessed as fully compliant; further work needed to improve notes to cash basis financials as countries move to modified cash and prior to accrual basis.
  - A mission to Dominica reviewed Treasury Functions and IPSAS cash management improvements.
- Internal audit:
  - In FY17 Grenada and Dominica received diagnostics to further develop internal audit function for compliance with international standards.
  - The annual regional workshop in FY17 covered risk management and the role of internal audit as independent assurance for management.

### Macroeconomic Programming and Analysis
- The ECCU has been a major recipient of TA in macroeconomic analysis and programming.
- Focus of TA and training: strengthening institutional structures for policy making and core training in macroeconomic and fiscal forecasting.
- Two regional workshops delivered: one on macroeconomic forecasting and another on revenue forecasting and tax policy analysis.
- Implementation outcomes:
  - Improved macroeconomic forecasting capabilities within ECCU Ministries of Finance.
  - Grenada, St. Lucia, St Kitts and Nevis, and Anguilla are using CARTAC-designed frameworks for forecasting.
  - Missions conducted in Anguilla, Dominica and St. Vincent and the Grenadines to strengthen medium-term fiscal frameworks to underpin annual Budget processes.

### Financial Stability and Supervision
- CARTAC TA in financial stability centers on: (i) stress-testing; (ii) preparing financial soundness indicators (FSIs) for deposit-taking institutions, and financial stability and health indicators (FSHIs) for the non-deposit taking segments; (iii) developing macro-prudential and systemic risk indicators (MPSIs and SRIs); (iv) assisting countries to refine financial stability reports in some instances.
- Stress-testing work:
  - Efforts dominated CARTAC’s financial stability work plan during FY16.
  - Conducted an extensive dynamic modeling and stress-testing exercise of seven domestic and four international banks across the ECCU region (Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, Montserrat, St. Lucia, and St. Vincent and the Grenadines).
  - Major focus: help the ECCB assess the financial situation of key banks and enhance staff capacity to conduct regular stress tests of the ECCU banking system.
  - The multi-country TA project complemented a larger project undertaken by the IMF, the World Bank and the Caribbean Development Bank (CDB).
  - Specialized internal seminars on stress-testing and macro-prudential indicators were delivered for around 20 regulatory staff of the ECCB and for the Grenada Authority for the Regulation of Financial Institutions (GARFIN).

*International Monetary Fund*

### 32.      During FY17, work on stress testing and dynamic modeling was consolidated

### 32.      During FY17, work on stress testing and dynamic modeling was consolidated

### Stress testing and dynamic modeling
- Further stress tests conducted of the nine indigenous banks.
- Some work begun on stress testing non-bank financial institutions, starting with credit unions.
- CARTAC and MCM completed a scoping mission with the ECCB to assess financial stability needs in the ECCU region and to co-ordinate TA efforts.
- A roadmap of programs and agreed outcomes with the ECCB include:
  - (a) risk monitoring (stress-testing the NBFIs, development of macro-prudential and systemic risk indicators and financial soundness indicators for the non-banks)
  - (b) macro-prudential policy framework (including legal mandate and toolkit)
  - (c) financial crisis management planning at an ECCU-wide level
  - (d) consolidated supervision
  - (e) analysis of financial sector interconnectedness
  - (f) quality assurance of onsite examinations
  - (f) methodology for SIFIs in non-banks
  - (g) Basel Implementation

### Crisis management and resolution frameworks
- Focused activities:
  - (i) training GARFIN staff on crisis management and resolution frameworks
  - (ii) improving capacity of regulators across the financial system on crisis prevention, preparedness/management, and resolution frameworks
- CARTAC training and events:
  - CARTAC conducted training on financial crisis management for GARFIN regulatory staff.
  - In conjunction with the Central Bank of Barbados, CARTAC hosted a three-day Conference in March 2016 on “Building Resilience to Financial Crises in the Caribbean: The Role of Crisis Management Policies, Metrics and Plans.”
  - The Conference brought together 74 stakeholders from national regulatory authorities, regional regulatory associations and key international bodies (including the IMF, World Bank and the FSB).
  - Drawing on new information presented at the Conference, some ECCU members (Grenada and St. Vincent and the Grenadines) requested TA to strengthen national financial sector crisis preparedness plans and resolution frameworks.
- Medium-term focus:
  - Develop crisis management plans at a national level across ECCU territories as precursors to an ECCU-wide plan.
  - Headquarters arranged for a long-term expert on financial supervision at the ECCB.

### Financial reporting and stability reporting
- CARTAC worked with the ECCB to train staff on financial stability reporting.
- CARTAC reviewed and strengthened the first draft of the ECCU financial stability report.

### Basel II/III implementation and supervisory frameworks
- Eighteen of the 20 CARTAC member countries are now fully on board to implement the standardized approach to Basel II in the Caribbean.
- During FY16, the ECCU adapted the revised Basel reporting forms and the following Basel Guidelines:
  - (i) credit risk
  - (ii) operational risks
  - (iii) market risks
  - (iv) interest rate risk in the banking book
  - (v) supervisory review process (pillar II)
  - (vi) disclosure and transparency (pillar III)
- TA to implement Basel II for the off-shore banking sector was provided to Antigua and Barbuda, St. Vincent and the Grenadines, St. Lucia, and St. Kitts and Nevis.
  - Antigua and Barbuda have already submitted the revised reporting forms and guidelines to their off-shore banking industry for comments and feedback.

### Risk-based supervision (RBS) and non-bank oversight
- TA recipients for building capacity in RBS and developing risk profiles:
  - Antigua and Barbuda, Dominica, Montserrat, St. Lucia, St. Vincent and the Grenadines, and St. Kitts and Nevis.
- Objectives and outputs:
  - (i) building capacity/training in risk-based supervision
  - (ii) documenting and formalizing approaches to risk-based supervision
  - (iii) developing risk profiles for credit unions, insurance companies, pension funds and securities firms
- RBS guidelines reviewed to include:
  - (i) assessment of risk profiles in financial institutions
  - (ii) assessment of inherent risks such as credit, market, operational, strategic and reputational risks
  - (iii) assessment of corporate governance oversight and governance functions, supervisory interventions, and impact of risks on capital, profitability and liquidity
- Implementation:
  - The RBS framework for Antigua and Barbuda is published on the authority’s website.
  - Authorities have incorporated the RBS framework in onsite reviews of banks and non-banks and in offsite surveillance and monitoring.

### Regional workshops and training outreach (FY16)
- Three regional workshops for non-bank sectors (insurance, pensions and securities):
  - Insurance workshop: 88 persons representing 18 of 20 CARTAC member countries.
    - Focus: cross border supervision, capital adequacy, solvency and stress testing, and conduct and disclosure.
  - Pensions workshop: 69 participants representing 17 of 20 CARTAC member countries.
    - Focus: crisis management, risk based supervision, managing investments and offsite surveillance.
  - Securities workshop (April 20 – 22 in The Bahamas): approximately 40 participants.
    - Focus: capital markets development, payment and settlement systems, risk-based supervision, and crisis preparedness.
- Follow-up indicated authorities have incorporated training content into onsite review and offsite monitoring of licensed financial institutions.
- CARTAC and CACS regional credit union training workshop:
  - Theme: “Strengthening Credit Union Supervision and Regulation in the Caribbean.”
  - Training covered credit risk/loan review, risk weighted capital adequacy requirements, risk assessment and stress testing, supervisory intervention and corporate governance.
  - Key challenges discussed:
    - (i) inordinate delays in promulgating regulations for credit union supervision in the ECCU
    - (ii) challenges in passing legislation in some countries
    - (iii) transition from self-regulated organizations (SROs) such as credit union leagues to independent regulators such as the central bank
    - (iv) poor credit quality evidenced by high levels of non-performing loans

### Regional financial sector strategic meeting and financial stability workshop
- First CARTAC regional financial sector strategic meeting topics:
  - (a) regional financial sector supervision and stability issues, challenges and TA responses
  - (b) financial sector reform
  - (c) macro prudential surveillance
  - (d) crisis management
  - (e) Basel II/III implementation
  - (f) risk-based supervision
- Joint financial strategic workshop:
  - 59 participants from banking, insurance, pension, credit union, and capital market regulatory authorities in 17 CARTAC member countries.
  - Financial stability objectives:
    - (a) provide training in macro-prudential policy formulation and macro-prudential indicators and systemic risk measures
    - (b) identify weaknesses in member states’ financial stability frameworks
    - (c) gauge the ongoing impact of the new financial stability program

### Economic and financial statistics improvements (2015-16)
- Focus areas: external sector, national accounts and prices statistics in ECCU countries.
- National accounts progress:
  - Comprehensive review of national accounts completed for Anguilla with a detailed action plan for improvements.
  - For St. Lucia, methodological improvements were implemented and revised annual GDP by economic activity (GDP-P) estimates compiled for 2006-2015.
  - Improved methodologies for GDP by expenditure (GDP-E) estimates developed for Grenada and St. Kitts and Nevis.
  - Improved annual GDP-E estimates released for St. Vincent and the Grenadines.
- Quarterly national accounts:
  - Grenada and St. Lucia now produce quarterly GDP-P estimates at both current and constant prices.
  - Quarterly constant price GDP-P estimates are being compiled for St. Vincent and the Grenadines.
- Prices statistics:
  - Staff trained and improved prices data collection (including a new rents’ survey) implemented for Antigua and Barbuda.

### Coordination with other TA providers
- CARTAC coordinated with:
  - Project for the Regional Advancement of Statistics in the Caribbean (PRASC) delivered by Statistics Canada on improving data sources and compiling national accounts and prices statistics.
  - ECCB assistance in reviewing annual national accounts of its member states.
  - Consultants engaged by the Caribbean Community Secretariat during 2015 and 2016 advising on implementing the 2008 System of National Accounts (2008 SNA).

### External sector statistics and balance of payments / IIP
- ESS objectives: improve measurement of external transactions (BOP) and positions (IIP) through adoption of good practices and latest guidelines.
- ECCU outputs:
  - ECCU’s BOP data reviewed and IIP data produced for the first time.
  - Preliminary aggregated 2014 BOP and IIP statistics following the BPM6 methodology were produced and released by the ECCB in coordination with national statistics offices for the eight ECCU members and the ECCU in January 2016.
  - ECCB plans to publish comprehensive 2014 and 2015 balance of payments and IIP data soon.
  - Estimates benefited from CARTAC TA to develop and administer new surveys, and train data compilers and survey respondents.
  - CARTAC continued assisting ECCU members in reviewing recent revisions and identifying BOP components needing further improvement.

### Visitor and student expenditure data
- Improvements in visitor and student expenditure data across ECCU economies:
  - Estimates of visitor expenditure (travel services exports in the balance of payments) now based on recent visitor surveys.
  - Correct inclusion of tuition fees and other education-related travel services provided by offshore universities (OUs) to nonresident students introduced in the updated methodology.
  - A specific ESS survey form for OUs has been implemented and administrative data used as complementary sources.
  - In Antigua and Barbuda, over 450 students were surveyed in collaboration with the former office of the IMF’s Resident Representative for the ECCU region.

*Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17150.pdf*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17150.pdf_