## Fitting Fiscal Frameworks to Country Characteristics

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### Recent macroeconomic context and challenges
- Growth and shocks:
  - Regional GDP growth: 3.4 percent in 2016; fell to 1.4 percent in 2017.
  - Hurricanes Irma and Maria (September 2017) had catastrophic effects, with estimated damages ranging from 226 percent of GDP (Dominica) and 103 percent of GDP (Anguilla) to 9.8 percent of GDP (Antigua and Barbuda) and 3.3 percent of GPD (St. Kitts and Nevis).
  - Tourist arrivals declined in late 2017 in affected countries; remained strong elsewhere in first half of 2018.
  - Core inflation remained subdued with sharp increases in food and medication prices in hurricane-struck countries in first half of 2018.

- Fiscal position and public debt:
  - Combined ECCU fiscal surplus declined markedly in 2017.
  - Underlying fiscal deficit (excluding CBI programs and bank resolution operations) expected to increase to about 3½ percent of GDP in 2018.
  - Public debt declined by about 1 percent to an estimated 72 percent of GDP in 2017, reflecting debt relief in some countries.

- Financial sector dynamics:
  - Bank credit growth: 0 percent in September 2018.
  - NPL ratio in locally incorporated banks: 15.2 percent in September 2018; 24.8 percent in majority government-owned banks.
  - Reclassification of debt-land-swap to fixed assets requires a 100 percent risk weight and decreased capital adequacy in a majority government-owned bank in one jurisdiction (still above regulatory minimum).
  - Credit unions and building & loan societies: rapid lending growth but rising fragility in some countries; Dominica’s sector is systemic, accounting for assets totaling 55 percent of GDP.
  - Insurance sector: catastrophic events led to an estimated 90 percent decline in net income in 2017; a domestic company in one jurisdiction unable to honor many obligations after the latest hurricane.
  - Correspondent banking relationships (CBRs): decline stabilized but maintaining CBRs remains more challenging and costly; some banks transact via non-U.S. intermediaries at costs between 40 and 100 percent higher.
  - Foreign bank retrenchment: First Caribbean International Bank to close Anguilla operations as of January 2019; Republic Financial Holdings Limited announced intention to acquire Bank of Nova Scotia’s operations in seven ECCU jurisdictions.

- External sector:
  - Combined current account deficit: estimated 8 percent of GDP in 2017 (broadly unchanged since 2016).
  - Conditions favorable to tourism due to supportive prospects in source countries, new direct airline routes, and increased capacity.

### Outlook and risks
- Growth and inflation projections:
  - Growth projected to gain strength in 2018 and 2019, supported by favorable external conditions, recovery from natural disasters, and gradual resumption of bank lending.
  - Growth converging to potential of 2 percent in the longer term.
  - Inflation expected to return to low levels, not exceeding 2 percent.

- Fiscal and external medium-term projections:
  - Without significant fiscal adjustment, fiscal balance will deteriorate due to reconstruction-related capital spending in short term and lower revenues and higher interest payments longer term.
  - Only Grenada and St. Vincent and the Grenadines are on track to reach the ECCU target of 60 percent of GDP public debt by 2030.
  - Current account deficit projected to worsen in next few years before stabilizing at about 7.0 percent of GDP in the medium term.

- Major risks (tilted to the downside):
  - Adverse confidence effects from trade disputes and faster-than-expected monetary tightening could make the net growth impact of U.S. policy shocks negative.
  - Global risks: security risks, unsustainable macroeconomic policies in systemic countries, cyberattacks and related financial instability.
  - Specific risks: increased frequency and intensity of natural disasters; further decline of CBRs; lingering financial sector problems (banks unable to resume lending, stress in non-bank segment, contingent fiscal liabilities from banking sector).
  - Upside fiscal risk: Petrocaribe debt restructuring could reduce public debt levels.
  - Energy supply risk: cost of petroleum imports could increase with closure of Trinidad and Tobago’s Petronin refinery.

### Need for decisive action and policy priorities
- Core challenges: low growth, weak fiscal performance, vulnerable financial system, low competitiveness, and insufficient preparedness for natural disasters.
- Required policy directions:
  - Durably improve the fiscal position.
  - Build resilience to natural disasters.
  - Strengthen the financial sector.
  - Address supply bottlenecks.
  - Enhance policy credibility and regional integration to attract international support.

### Fiscal framework design elements and recommendations
- Umbrella structure:
  - Adopt an umbrella fiscal framework that leaves countries flexibility to adapt operational solutions to their circumstances.

- Debt anchor:
  - Public debt target: 60 percent of GDP by 2030 as a common anchor/ceiling.
  - Convergence to the target is an overriding goal; for some countries, tighter operational debt objectives may be appropriate.
  - Staff recommends: (i) calibrating targets to gross debt; and (ii) using a broad general government definition to limit loopholes.

- Operational targets:
  - An underlying budget balance target could be the main common element at least through 2030, given its strong link to debt dynamics.
  - Targets could be set on fiscal balances (either primary or overall balance depending on country-specific circumstances) net of volatile elements such as CBI inflows; calibrated to achieve the 60 percent of GDP debt ratio before or in 2030.
  - Supplementary expenditure targets are strongly recommended to ensure savings in good times and could replace budget-balance targets beyond 2030 if debt sufficiently reduced.
  - Special sub-targets can help right-size the wage bill and incentivize public investment, particularly for resilience-related projects.
  - Individual countries should avoid complexity and limit themselves to a narrow subset of options best suited to their circumstances.

- Fiscal buffers:
  - Targets need country-specific calibration to achieve both optimal buffer coverage (including insurance against natural disasters) and the 60 percent of GDP debt target by 2030.
  - Reducing debt and increasing buffers have mutually reinforcing benefits and need to proceed in parallel.
  - Staff identified a financing gap that could be bridged by concessional financing.

- Flexibility for shocks and “tail events”:
  - Include mechanisms that preserve credibility while providing flexibility, such as:
    - Precise escape clauses with verifiable triggers and corrective mechanisms for truly large shocks.
    - Allowances for relief/reconstruction spending financed with fiscal buffers.
    - Hurricane clauses allowing cash flow relief as per recent experiences in Grenada and Barbados.

- Supporting institutions:
  - Priority institutional improvements include:
    - Robust accounting procedures for debt, deficits, CBI inflows, and full recording of non-guaranteed public debt and contingent liabilities.
    - Improved fiscal projections, particularly by including the average cost of natural disasters.
    - Effective independent fiscal oversight and accountability procedures (e.g., Grenada’s new fiscal responsibility oversight committee that is unconnected to the government).

- Rule design note:
  - Overall balance-based rule (used in Jamaica) has the advantage of closer link to debt sustainability and more control over financing.
  - Primary balance-based rule (used in Grenada) should better facilitate compliance.
  - In the ECCU, the difference between the two options would not be large given the limited volatility of the interest cost of debt.

### Building ex-ante resilience to natural disasters: rationale and benefits
- Rationale:
  - Natural disasters recurrently affect the ECCU, causing human loss, infrastructure destruction, and large fiscal costs.
  - Near-term fiscal pressures: unanticipated social protection and rehabilitation expenditures, coinciding with revenue declines.
  - Long-term fiscal pressures: disasters contribute to increases in public debt.
  - Disaster risk expected to increase in intensity and frequency with climate change.
  - Current approach: limited investment in resilience and heavy reliance on ex-post recovery; insurance uptake is low for public and private sectors.
  - CCRIF is valuable but countries’ risk ceding remains below needs due to perceived high cost, concerns over payouts, and competing development needs.
  - Cat-bonds and other innovative risk-sharing tools have not been issued due to complexity, high setup costs, and capacity/regulatory constraints.

- Simulation outcomes (staff dynamic general equilibrium model assumptions preserved):
  - Potential output increases by about 3-11 percent in ECCU countries.
  - Implies 0.1-0.4 percent higher GDP growth per year in ECCU countries.
  - Additional annual savings of 0.7-2.7 percent of GDP from reduced damages and losses.
  - Fiscal balance improves by 0- 3 percent of GDP in the long term (higher tax revenues more-than-offset higher resilient investment costs).
  - Near-term: transition has upfront fiscal costs; returns materialize later.
  - If countries undertake sufficient fiscal adjustment aimed at meeting the 60 percent of GDP debt target by 2030, public debt would exceed its target by 4-20 percentage points of GDP in 2030 owing to the higher cost of resilient capital (only about half of the public capital stock would be resilient by 2030 at current investment rates) without concessional financing.

### Near-term financing gaps from resilience and insurance
- Resilience financing gap:
  - Staff’s illustrative simulations show resilience costs create financing gaps of 0.4-1.5 percent of GDP or about US$60 million for the ECCU annually (minimum estimate).
  - To close the gap, concessional financing from the international community, including climate funds, could play a key role.

- Insurance financing gap:
  - Reducing annual insurance costs to the value of expected payouts would create an additional fiscal gap of at least 0.2-1.1 percent of GDP or US$40 million for the region annually.
  - In the long term, as structures become more resilient, insurance needs and fiscal costs would decline; insurance requirements for same coverage could decline to about 1/4 of current needs.

- Combined financing gap:
  - Staff simulations indicate additional costs of resilient investment and actuarially-fair insurance would create a financing gap of about US$100 million per year for the region (noted as a lower bound).
  - Staff estimates indicate the cost of all resilient projects and full insurance would be about US$350 million per year for the region, implying a financing gap in the range of US$100-350 per year for the region.

### Natural disaster insurance layering — proposed three-layer strategy and costs
- Proposed three-layer strategy:
  - Layer 1: Establish a saving fund as self-insurance of 6-12 percent of GDP sufficient to cover 90-95 percent of disasters’ fiscal costs (small and medium-sized disasters), with CBI resources financing startup costs where available.
  - Layer 2: Purchase maximum access under CCRIF, with estimated expected coverage of 2-17 percent of GDP (larger disasters).
  - Layer 3: Issue CAT bonds (state-contingent debt) with debt service relief of 2- 5 percent of GDP (extreme events).

- Results:
  - To cover 99 percent of fiscal costs related to natural disasters, ECCU countries would need coverage amounting to 15-30 percent of GDP.
  - This coverage would imply annual fiscal costs in the range of 0.5-1.8 percent of GDP.
  - At least part of these costs could be covered by donors to make insurance more affordable.

- Operational notes:
  - A saving fund would need strong institutional framework, annual saving contributions, and clear verifiable disbursement criteria.
  - IMF and World Bank staff are working on sovereign insurance options and state-contingent debt features (hurricane clauses, etc.).

### Fiscally sustainable strategy to build ex-ante resilience
- Integration and outcomes:
  - Full integration of fiscal responsibility frameworks with resilient investment and insurance would help ECCU achieve a sustainable fiscal position while improving disaster resilience, provided sufficient external support and strong policy implementation.
  - Country-specific frameworks based on holistic diagnostics are required.
  - If ECCU countries undertake fiscal adjustment and phase in resilient investment and insurance buffers with international support, public debt trajectory would decline faster than in a pure fiscal consolidation scenario without building resilience.
  - Benefits amplify beyond 2030 as growth and fiscal benefits continue while resilience costs decline.

- Institutional and policy actions recommended:
  - Support initiatives to pool resources in regional institutions with accreditation to access climate funds.
  - Address information and legislative gaps and small economies of scale: assess preparedness, prepare costed investment projects and risk financing plans, use regional coordination to set standards and facilitate peer review.
  - Integrate resilience building with macroeconomic planning: include expected costs of natural disasters and costs/benefits of resilience strategy in macroeconomic frameworks; develop strategies to enhance access to donor grants.
  - Coordinate resilience building with fiscal responsibility legislation: FRLs to underpin fiscal adjustment, include minimum insurance coverage and annual saving needs for sustainability of saving funds, and review/tighten anchor upon achieving the 60 percent of GDP target.

### Financial sector reform progress and key recommendations
- Achievements and ongoing actions:
  - Initial capitalization of the Eastern Caribbean Asset Management Company (ECAMC) to reduce high NPLs.
  - Issuance and implementation of the collateral valuation standard.
  - Implementation of risk-based supervision (RBS).
  - Completion of on-site examinations of all banks within the three-year cycle established in the Banking Act 2015.
  - Passage of law to establish credit bureau framework in four member countries and selection of an operator for licensing.
  - ECCB published the first Financial Stability Report.
  - MOU signed for a blockchain technology project aimed partly at alleviating risks of CBR withdrawal.
  - Consultative paper issued on consolidation of indigenous banks.
  - Transfer of AML/CFT supervision for banks to the ECCB has been initiated.
  - Monetary Council considered a paper on establishing a Deposit Insurance Fund.

- Remaining vulnerabilities and regulatory actions:
  - Capitalization is above regulatory standards, but provisioning by indigenous banks against legacy NPLs (as old as 15 years) is not adequate.
  - Implementation of IFRS 9 and new ECCB prudential standards likely to increase provisioning requirements and may require major capital augmentation and/or resolution measures, with possible fiscal costs.
  - ECAMC status and risks:
    - As of November 2018, no NPLs purchased; ECAMC Board approved NPL Acquisition Proposal on November 29, 2018.
    - ECAMC has information on a prospective portfolio of commercial NPLs of EC$400 million or 29 percent of total NPLs.
    - Timeline to acquire a critical mass by the statutory July 2019 deadline is very tight; risk of slippage is real.
    - IMF staff recommends acquisition of critical mass at realizable market values by July 2019; absent adequate progress, downscale to receivership or wind up ECAMC operations.

- ECCB-prescribed actions to address NPLs and bank resilience:
  - Establish and enforce a realistic plan for banks to reduce NPLs to no more than 10 percent by end-2019 and attain the 5-percent benchmark for NPLs by end-2023.
  - Require banks to submit credible, time-bound action plans to improve provisioning and resolve NPLs, dispose of non-core assets within statutory timelines.
  - Promptly issue and implement prudential standards on the treatment of impaired assets.
  - Monitor bank progress and utilize statutory powers to ensure compliance, enhance risk management and strengthen capital.
  - Accelerate consolidation of indigenous banks to attain sustainable critical mass and act quickly with undercapitalized banks.

- Non-bank and CBR-related reforms:
  - Modernize insolvency and foreclosure laws and ease restrictions on non-citizen property ownership to maximize NPL recovery and minimize fiscal costs.
  - Finalize harmonized, strengthened laws on credit unions, insurance, pension, and securities subsectors.
  - Strengthen and harmonize regulatory and AML/CFT oversight; complete national risk assessments; designate ECCB as AML/CFT Supervisor where pending.
  - Finalize strategies to minimize risks from decline in CBRs, including monitoring, intensified information sharing, engagement with correspondent banks and oversight authorities, and enhanced governance of CBI programs.
  - Consider elimination, or gradual phase-out, of the ECCU minimum saving deposit rate (MSR).

### Competitiveness, external position, and structural reforms
- External assessment and REER:
  - REER in 2017 overvalued by about 5.9 percent on average.
  - REER depreciation of 4.2 percent in 2017 due to weakening U.S. dollar; model still shows overvaluation in 2017.
  - REER overvaluation would increase to 14.6 percent if CBI flows were excluded.
  - Since 2017, the REER appreciated slightly through November 2018.

- Structural constraints and priorities:
  - Structural constraints: high costs of electricity, trading, and unit labor; labor skill mismatches; unfavorable business climate (insolvency, credit); public-sector inefficiencies.
  - Tourism: ECCU tourism’s global market share has declined; staff analysis indicates relaxing supply-side constraints could increase ECCU market share by 40 percent.
  - Priority reforms: foreclosure/insolvency and credit bureau legislation; accelerate renewable energy investment; tariff cuts under CARICOM and further regional integration; technical and vocational skills programs; public sector efficiency improvements; climate resilience.

### Projections and key macro-financial statistics (selected)
- Regional real GDP growth (ECCU average, 2014–24):
  - 2014: 3.6
  - 2015: 2.1
  - 2016: 3.4
  - 2017: 1.4
  - 2018: 2.2
  - 2019 (proj.): 3.9
  - 2020 (proj.): 3.1
  - 2021 (proj.): 2.5
  - 2022 (proj.): 2.3
  - 2023 (proj.): 2.2
  - 2024 (proj.): 2.1

- Consumer prices, average:
  - 2014: 1.1
  - 2015: -0.8
  - 2016: -0.8
  - 2017: 1.1
  - 2018: 1.8
  - 2019 (proj.): 1.9
  - 2020 (proj.): 1.7
  - 2021 (proj.): 1.8
  - 2022 (proj.): 1.9
  - 2023 (proj.): 1.9
  - 2024 (proj.): 1.8

- ECCU nonperforming loans to total gross loans:
  - 2010: 10.5
  - 2011: 12.5
  - 2012: 15.0
  - 2013: 18.1
  - 2014: 17.6
  - 2015: 16.7
  - 2016: 10.9
  - 2017: 12.0
  - 2018Q3: 11.4

- Provisions to nonperforming loans:
  - 2010: 23.8
  - 2011: 29.0
  - 2012: 31.6
  - 2013: 38.5
  - 2014: 46.8
  - 2015: 44.2
  - 2016: 45.6
  - 2017: 45.3
  - 2018Q3: 44.4

- ECCU total public debt (end-of-period, percent of GDP):
  - 2014: 80.9
  - 2015: 76.2
  - 2016: 73.8
  - 2017: 72.1
  - 2018: 71.1
  - 2019 (proj.): 70.3
  - 2020 (proj.): 69.5
  - 2021 (proj.): 69.7
  - 2022 (proj.): 70.3
  - 2023 (proj.): 70.8
  - 2024 (proj.): 71.1

- Current account balance, US$ millions:
  - 2014: -336
  - 2015: -282
  - 2016: -532
  - 2017: -567
  - 2018: -645
  - 2019 (proj.): -692
  - 2020 (proj.): -765
  - 2021 (proj.): -741
  - 2022 (proj.): -688
  - 2023 (proj.): -663
  - 2024 (proj.): -651

- ECCB gross reserves (end-year, US$ millions):
  - 2014: 1,411
  - 2015: 1,560
  - 2016: 1,690
  - 2017: 1,745
  - 2018: 1,852
  - 2019 (proj.): 1,953
  - 2020 (proj.): 1,970
  - 2021 (proj.): 1,996
  - 2022 (proj.): 2,077
  - 2023 (proj.): 2,204
  - 2024 (proj.): 2,323
  - In months of current year imports of goods and services:
    - 2014: 4.7
    - 2015: 5.3
    - 2016: 5.4
    - 2017: 5.4
    - 2018: 5.4
    - 2019 (proj.): 5.3
    - 2020 (proj.): 5.2
    - 2021 (proj.): 5.1
    - 2022 (proj.): 5.1
    - 2023 (proj.): 5.3
    - 2024 (proj.): 5.4

### Authorities' views and consensus points
- Authorities broadly agreed with staff’s assessment of the economic outlook and risks, but estimated growth around 3.0 percent in 2018 and 2019.
- Authorities emphasized the continuing multi-year decline in the public debt ratio and noted gradual improvement in banking sector metrics.
- Authorities agreed on the primacy of the 2030 debt target and strategies to achieve it; medium-term fiscal frameworks consistent with the 60 percent of GDP target have been prepared in the six ECCU countries.
- Views on legally-binding fiscal responsibility frameworks (FRLs) varied; most countries were weighing formal FRLs while some authorities preferred non-binding government or parliamentary declarations.

### Staff appraisal: concise summary
- Growth is gradually recovering in 2018 following the adverse economic impact of natural disasters in 2017.
- A paradigm shift from post-disaster recovery to building ex-ante resilience should be a key policy priority.
- Fiscal sustainability is a necessary precondition for shifting to ex-ante resilience.
- Investment in resilient public capital has significant impact on growth: staff estimates of potential output increase of 3– 11 percent and annual growth-dividend of 0.1–0.4 percent in ECCU countries.
- Resilient investment and insurance are costly and create an initial financing gap; concessional financing from the international community, including climate funds, is key to improve resilience while adhering to the ECCU debt target of 60 percent of GDP by 2030.
- Completion and prompt implementation of the financial sector reform agenda is critical to preserve financial stability.

*Source: IMF staff — "Fitting Fiscal Frameworks to Country Characteristics" (content unit 1eccea2019001).*

### 1. Fitting Fiscal Frameworks to Country Characteristics ___________________________________________ 9

### 1. Fitting Fiscal Frameworks to Country Characteristics

### Recent macroeconomic context and challenges
- Growth and shocks:
  - Regional GDP growth: 3.4 percent in 2016; fell to 1.4 percent in 2017.
  - Hurricanes Irma and Maria (September 2017) had catastrophic effects, particularly on Dominica and Anguilla; estimated damages range from 226 percent of GDP (Dominica) and 103 percent of GDP (Anguilla) to 9.8 percent of GDP (Antigua and Barbuda) and 3.3 percent of GPD (St. Kitts and Nevis).
  - Tourist arrivals declined in late 2017 in affected countries; remained strong elsewhere in first half of 2018.
  - Core inflation remained subdued with sharp increases in food and medication prices in hurricane-struck countries in first half of 2018.

- Fiscal position and public debt:
  - Combined ECCU fiscal surplus declined markedly in 2017.
  - Underlying fiscal deficit (excluding CBI programs and bank resolution operations) expected to increase to about 3½ percent of GDP in 2018.
  - Public debt declined by about 1 percent to an estimated 72 percent of GDP in 2017, reflecting debt relief in some countries.

- Financial sector dynamics:
  - Bank credit growth: 0 percent in September 2018.
  - Nonperforming loan (NPL) ratio in locally incorporated banks: 15.2 percent in September 2018; 24.8 percent in majority government-owned banks.
  - Reclassification of debt-land-swap to fixed assets requires a 100 percent risk weight and has decreased capital adequacy in a majority government-owned bank in one jurisdiction (still above regulatory minimum).
  - Differences across countries: Grenada’s NPL ratio declining rapidly; St. Kitts and Nevis’ NPL ratio increasing.
  - Credit unions and building & loan societies: rapid lending growth but rising fragility in some countries; Dominica’s sector is systemic, accounting for assets totaling 55 percent of GDP.
  - Insurance sector: catastrophic events led to an estimated 90 percent decline in net income in 2017; a domestic company in one jurisdiction unable to honor many obligations after the latest hurricane.
  - Correspondent banking relationships (CBRs): decline stabilized but maintaining CBRs remains more challenging and costly; some banks transact via non-U.S. intermediaries at costs between 40 and 100 percent higher; no successful applications reported for CBRs with large U.S. banks.
  - Foreign bank retrenchment: First Caribbean International Bank to close Anguilla operations as of January 2019; Republic Financial Holdings Limited announced intention to acquire Bank of Nova Scotia’s operations in seven ECCU jurisdictions.

- External sector:
  - Combined current account deficit: estimated 8 percent of GDP in 2017 (broadly unchanged since 2016).
  - Conditions favorable to tourism due to supportive prospects in source countries, new direct airline routes, and increased capacity.

### Outlook and risks
- Growth projections and inflation:
  - Growth projected to gain strength in 2018 and 2019, supported by favorable external conditions, recovery from natural disasters, and gradual resumption of bank lending.
  - Growth converging to potential of 2 percent in the longer term.
  - Inflation expected to return to low levels, not exceeding 2 percent.

- Fiscal and external medium-term projections:
  - Without significant fiscal adjustment, fiscal balance will deteriorate due to reconstruction-related capital spending in short term and lower revenues and higher interest payments longer term.
  - Only Grenada and St. Vincent and the Grenadines are on track to reach the ECCU target of 60 percent of GDP public debt by 2030.
  - Current account deficit projected to worsen in next few years before stabilizing at about 7.0 percent of GDP in the medium term.

- Major risks (tilted to the downside):
  - Adverse confidence effects from trade disputes and faster-than-expected monetary tightening could make the net growth impact of U.S. policy shocks negative.
  - Global risks: security risks, unsustainable macroeconomic policies in systemic countries, cyberattacks and related financial instability.
  - Specific risks: increased frequency and intensity of natural disasters; further decline of CBRs; lingering financial sector problems (banks unable to resume lending, stress in non-bank segment, contingent fiscal liabilities from banking sector).
  - Upside fiscal risk: Petrocaribe debt restructuring could reduce public debt levels.
  - Energy supply risk: cost of petroleum imports could increase with closure of Trinidad and Tobago’s Petronin refinery.

### Need for decisive action and policy priorities
- Core challenges: low growth, weak fiscal performance, vulnerable financial system, low competitiveness, and insufficient preparedness for natural disasters.
- Required policy directions:
  - Durably improve the fiscal position.
  - Build resilience to natural disasters.
  - Strengthen the financial sector.
  - Address supply bottlenecks.
  - Enhance policy credibility and regional integration to attract international support.

### Box: Fitting fiscal frameworks to country characteristics — key design elements and recommendations
- Umbrella structure:
  - Adopt an umbrella fiscal framework that leaves countries flexibility to adapt operational solutions to their circumstances.

- Debt anchor:
  - Public debt target: 60 percent of GDP by 2030 as a common anchor/ceiling.
  - Convergence to the target is an overriding goal; for some countries, tighter operational debt objectives may be appropriate.
  - Staff recommends: (i) calibrating targets to gross debt; and (ii) using a broad general government definition to limit loopholes.

- Operational targets:
  - An underlying budget balance target could be the main common element at least through 2030, given its strong link to debt dynamics.
  - Targets could be set on fiscal balances (either primary or overall balance depending on country-specific circumstances) net of volatile elements such as CBI inflows; calibrated to achieve the 60 percent of GDP debt ratio before or in 2030.
  - Supplementary expenditure targets are strongly recommended to ensure savings in good times and could replace budget-balance targets beyond 2030 if debt sufficiently reduced.
  - Special sub-targets can help right-size the wage bill and incentivize public investment, particularly for resilience-related projects.
  - Individual countries should avoid complexity and limit themselves to a narrow subset of options best suited to their circumstances.

- Fiscal buffers:
  - Targets need country-specific calibration to achieve both optimal buffer coverage (including insurance against natural disasters) and the 60 percent of GDP debt target by 2030.
  - Reducing debt and increasing buffers have mutually reinforcing benefits and need to proceed in parallel.
  - Staff identified a financing gap that could be bridged by concessional financing (see subsequent sections).

- Flexibility for shocks and “tail events”:
  - Include mechanisms that preserve credibility while providing flexibility, such as:
    - Precise escape clauses with verifiable triggers and corrective mechanisms for truly large shocks.
    - Allowances for relief/reconstruction spending financed with fiscal buffers.
    - Hurricane clauses allowing cash flow relief as per recent experiences in Grenada and Barbados.

- Supporting institutions:
  - Priority institutional improvements include:
    - Robust accounting procedures for debt, deficits, CBI inflows, and full recording of non-guaranteed public debt and contingent liabilities.
    - Improved fiscal projections, particularly by including the average cost of natural disasters.
    - Effective independent fiscal oversight and accountability procedures (e.g., Grenada’s new fiscal responsibility oversight committee that is unconnected to the government).

- Rule design note:
  - Overall balance-based rule (used in Jamaica) has the advantage of closer link to debt sustainability and more control over financing.
  - Primary balance-based rule (used in Grenada) should better facilitate compliance.
  - In the ECCU, the difference between the two options would not be large given the limited volatility of the interest cost of debt.

*Source: IMF staff — "Fitting Fiscal Frameworks to Country Characteristics" (content unit 1eccea2019001).*

### 13.      Fiscal frameworks need to be tailored to specific country characteristics, with a few

### 13.      Fiscal frameworks need to be tailored to specific country characteristics, with a few common elements across the region

### Fiscal framework recommendations and expected benefits
- Framework elements (common across the region):
  - Consistent with the ECCU’s debt target of 60 percent of GDP by 2030.
  - Based on a tailored operational target as a medium-term compass.
  - Supportive of the need to build resilience to natural disasters.
  - Compatible with the institutional capacity of ECCU countries.
  - Strong and broad-based political commitment is essential.
- Staff analysis suggests implementation would:
  - Substantially improve debt sustainability.
  - Reduce policy pro-cyclicality.
  - Create fiscal space to build resilience and bolster potential growth.
  - Improve efficiency of public services and public investment outcomes.
  - Enhance transparency and predictability, facilitating union-level coordination and improving the region’s ability to secure donor funding, including from climate funds.

### Building Ex-Ante Resilience to Natural Disasters — rationale
- Natural disasters recurrently affect the ECCU, causing human loss, infrastructure destruction, and large fiscal costs.
- Near-term fiscal pressures: unanticipated social protection and rehabilitation expenditures, coinciding with revenue declines.
- Long-term fiscal pressures: disasters contribute to increases in public debt.
- Disaster risk expected to increase in intensity and frequency with climate change.
- Current approach: limited investment in resilience and heavy reliance on ex-post recovery; insurance uptake is low for public and private sectors.
- CCRIF is valuable but countries’ risk ceding remains below needs due to perceived high cost, concerns over payouts, and competing development needs.
- Cat-bonds and other innovative risk-sharing tools have not been issued due to complexity, high setup costs, and capacity/regulatory constraints.

### Benefits of resilient investment (Box 2) — staff simulation assumptions and outcomes
- Model setup and assumptions:
  - Dynamic general equilibrium model calibrated to all ECCU countries.
  - Expected losses estimated using historical data for various disaster types.
  - Resilient infrastructure is a perfect substitute for standard infrastructure but is 25 percent more expensive.
  - Keeping physical amount of public investment unchanged, countries allocate 80 percent of investment to resilient capital until the stock reaches 80 percent.
- Simulation outcomes:
  - Potential output increases by about 3-11 percent in ECCU countries.
  - Implies 0.1-0.4 percent higher GDP growth per year in ECCU countries.
  - Additional annual savings of 0.7-2.7 percent of GDP from reduced damages and losses.
  - Fiscal balance improves by 0- 3 percent of GDP in the long term (higher tax revenues more-than-offset higher resilient investment costs).
  - Near-term: transition has upfront fiscal costs; returns materialize later.
  - If countries undertake sufficient fiscal adjustment aimed at meeting the 60 percent of GDP debt target by 2030, public debt would exceed its target by 4-20 percentage points of GDP in 2030 owing to the higher cost of resilient capital (only about half of the public capital stock would be resilient by 2030 at current investment rates) without concessional financing.

### Near-term financing gaps from resilience and insurance
- Resilience financing gap:
  - Staff’s illustrative simulations show resilience costs create financing gaps of 0.4-1.5 percent of GDP or about US$60 million for the ECCU annually (minimum estimate).
  - To close the gap, concessional financing from the international community, including climate funds, could play a key role.
- Insurance financing gap (summary based on staff simulations):
  - Reducing annual insurance costs to the value of expected payouts would create an additional fiscal gap of at least 0.2-1.1 percent of GDP or US$40 million for the region annually.
  - In the long term, as structures become more resilient, insurance needs and fiscal costs would decline; insurance requirements for same coverage could decline to about 1/4 of current needs.
- Combined financing gap:
  - Staff simulations indicate additional costs of resilient investment and actuarially-fair insurance would create a financing gap of about US$100 million per year for the region (noted as a lower bound).
  - Staff estimates indicate the cost of all resilient projects and full insurance would be about US$350 million per year for the region, implying a financing gap in the range of US$100-350 per year for the region.

### Natural disaster insurance layering (Box 3) — proposed three-layer strategy and costs
- Proposed three-layer insurance strategy (stochastic model):
  - Layer 1: Establish a saving fund as self-insurance of 6-12 percent of GDP sufficient to cover 90-95 percent of disasters’ fiscal costs (small and medium-sized disasters), with CBI resources financing startup costs where available.
  - Layer 2: Purchase maximum access under CCRIF, with estimated expected coverage of 2-17 percent of GDP (larger disasters).
  - Layer 3: Issue CAT bonds (state-contingent debt) with debt service relief of 2- 5 percent of GDP (extreme events).
- Results:
  - To cover 99 percent of fiscal costs related to natural disasters, ECCU countries would need coverage amounting to 15-30 percent of GDP.
  - This coverage would imply annual fiscal costs in the range of 0.5-1.8 percent of GDP.
  - At least part of these costs could be covered by donors to make insurance more affordable.
- Operational notes:
  - A saving fund would need strong institutional framework, annual saving contributions, and clear verifiable disbursement criteria.
  - IMF and World Bank staff are working on sovereign insurance options and state-contingent debt features (hurricane clauses, etc.).

### Fiscally sustainable strategy to build ex-ante resilience
- Full integration of fiscal responsibility frameworks with resilient investment and insurance would:
  - Help ECCU achieve a sustainable fiscal position while improving disaster resilience, provided sufficient external support and strong policy implementation.
  - Require country-specific frameworks based on holistic diagnostics (e.g., Climate Change Policy Assessment used for St. Lucia).
- Staff scenario analysis:
  - If ECCU countries undertake fiscal adjustment and phase in resilient investment and insurance buffers with international support, public debt trajectory would decline faster than in a pure fiscal consolidation scenario without building resilience.
  - Benefits amplify beyond 2030 as growth and fiscal benefits continue while resilience costs decline.
- Institutional and policy actions recommended:
  - Support initiatives to pool resources in regional institutions with accreditation to access climate funds.
  - Address information and legislative gaps and small economies of scale:
    - Assess general preparedness, including legislation, budgeting, and public investment management.
    - Prepare costed investment projects and risk financing plans.
    - Use regional coordination to set standards, facilitate peer review, and create economies of scale.
  - Integrate resilience building with macroeconomic planning:
    - Include expected costs of natural disasters and costs/benefits of resilience strategy in macroeconomic frameworks.
    - Develop strategies to enhance access to donor grants.
  - Coordinate resilience building with fiscal responsibility legislation:
    - Fiscal responsibility laws to underpin fiscal adjustment, fill financing gaps, and ensure long-term sustainability of resilience financing.
    - Public investment projects at risk of disasters should be resilient, appropriately designed, and costed.
    - Upon achieving the 60 percent anchor, review and tighten it to minimize probability of exceeding the 60 percent of GDP ceiling given expected disaster fiscal costs.
    - Fiscal responsibility could incorporate minimum insurance coverage and annual saving needs for sustainability of saving funds.

### Financial sector reform progress (brief)
- Recent regional financial sector reforms and progress include:
  - Initial capitalization of the Eastern Caribbean Asset Management Company (ECAMC) to reduce high NPLs.
  - Issuance and implementation of the collateral valuation standard.
  - Implementation of risk-based supervision (RBS).
  - Completion of on-site examinations of all banks within the three-year cycle established in the Banking Act 2015.
  - Passage of law to establish credit bureau framework in four member countries and selection of an operator for licensing.
  - ECCB published the first Financial Stability Report.
  - MOU signed for a blockchain technology project aimed partly at alleviating risks of CBR withdrawal.
  - Consultative paper issued on consolidation of indigenous banks.
  - Transfer of AML/CFT supervision for banks to the ECCB has been initiated.
  - Monetary Council considered a paper on establishing a Deposit Insurance Fund.

*Source: International Monetary Fund (content unit 1eccea2019001).*

### 24.      However, unresolved weaknesses in the banking sector magnify vulnerabilities. Despite

### 1eccea2019001 - 24.      However, unresolved weaknesses in the banking sector magnify vulnerabilities. Despite

### Banking sector vulnerabilities and legacy NPLs
- Capitalization is above the regulatory standards, but provisioning by indigenous banks against legacy NPLs (as old as 15 years) is not adequate.
- The impending implementation of IFRS 9 and the new ECCB prudential standards on valuation of collateral and treatment of impaired loans will likely result in larger provisioning requirements that may require major capital augmentation and/or resolution measures, with possible fiscal costs.
- The replacement of global CBRs with a few, smaller correspondent banks suggests increased counterparty and concentration risks.
- The pending exit of foreign banks might heighten vulnerability of the affected countries in terms of CBR access and costs and may increase withdrawal risks in some jurisdictions; related mergers could raise concentration risks in some member jurisdictions.
- Some banks are actively exploring opportunities for improved earnings from overseas placements and/or investments.

### ECAMC (Eastern Caribbean Asset Management Corporation) progress and risks
- ECAMC was set up in July 2017 with the dual mandate to acquire bad assets from banks and other approved financial institutions (AFIs), and to act as the receiver of failed financial institutions.
- As of November 2018, no NPLs have been purchased and funding modalities are yet to be finalized.
- The ECAMC Board approved the NPL Acquisition Proposal on November 29, 2018.
- The ECAMC has received information of a prospective portfolio of commercial NPLs to acquire of EC$400 million or 29 percent of total NPLs.
- The timeline for acquiring a critical mass of commercial NPLs by the statutory July 2019 deadline is very tight and the risk of slippage is real.
- Recent capacity augmentation: hiring of an expert consultant and ECCB follow-up increased information sharing with banks.

### Non-bank financial sector risks (credit unions, insurance, other NBFIs)
- Credit union assets represent only 9 percent of financial assets, but their lending growth has increased in recent years.
- Some credit unions have been de-risked by banks applying know your customer’s customer (KYCC) practices.
- Credit unions’ market share is significant in Dominica and large in Grenada, St Vincent and the Grenadines, and St. Lucia.
- The insurance sector is relatively small (7 percent of financial assets) and was hit hard by the 2017 hurricanes.
- Concentration risk in insurance: two financial conglomerates represent almost half of the total insurance assets in the Caribbean.
- Spillovers to banks through credit unions’ and insurance companies’ bank deposits and credit exposures are a concern with potential sources of fiscal liability.
- Regulatory oversight and supervision of credit unions, insurance companies, building and loan societies, offshore bank and non-bank financial institutions is undertaken by national authorities that acknowledge deficiencies: fragmented supervisory frameworks, inadequate resources given the scope of oversight responsibilities, weak enforcement powers, and data gaps.
- A healthy private insurance sector is critical in the region to support risk sharing for natural disasters.

### Recommendations to operationalize ECAMC and legal/institutional reforms
- Complete acquisition of a critical mass of commercial NPLs at realizable market values by the July 2019 deadline; note potential fiscal implications if government guarantees are required (the ECAMC Act contemplates government guaranteed bonds would be used to fund the acquisition of NPLs).
- Absent adequate progress to meeting the deadline, IMF staff recommends ECAMC’s operations should be promptly downscaled to receivership or wound up—with the receivership operations returned to individual receivers.
- Urgently modernize insolvency and foreclosure laws and ease restrictions on non-citizen property ownership to help maximize NPL recovery and minimize potential fiscal costs.
- Establish and implement resolution plans for weak non-bank institutions by country authorities in collaboration with the ECCB, supported by effective coordination among relevant agencies and governments and appropriate crisis management and resolution measures, including:
  - intervention of problem entities;
  - management of system impact (e.g., liquidity);
  - communications.
- Specific focus on establishing and enforcing appropriate risk mitigation standards and practices for insurance (e.g., minimum investment criteria and reinsurance standards) given large impact of natural disasters on insurance firms.

### ECCB-prescribed actions to address NPLs and bank resilience
- The ECCB should:
  - (i) establish and enforce a realistic plan for banks to reduce NPLs to no more than 10 percent by end-2019 and attain the 5-percent benchmark for NPLs by end-2023;
  - (ii) require banks to submit credible, time-bound action plans to improve provisioning and resolve NPLs, especially large CBI-related NPLs in one territory, and dispose of non-core assets within statutory timelines;
  - (iii) promptly issue and implement its prudential standards on the treatment of impaired assets;
  - (iv) closely monitor banks’ progress to plans and appropriately utilize statutory powers to ensure banks adhere to their NPL resolution plans, fully comply with prudential standards on collateral valuation and provisioning, enhance risk management and strengthen capital;
  - (v) accelerate the consolidation of indigenous banks to attain sustainable critical mass and act quickly with any undercapitalized banks.
- The ECCB should also focus on assessing and mitigating risks that may arise from institutions seeking better returns overseas.

### Strategies to address correspondent banking relationships (CBRs), AML/CFT, and CBI program risks
- Finalize and implement strategies to minimize risks from a potential decline in CBRs, de-risking of downstream financial institutions by banks, and exit of foreign banks, including:
  - (i) specific monitoring of banks’ CBRs, considering the reporting template developed by the IMF;
  - (ii) intensified information sharing and relationship building with current and prospective correspondent banks and their oversight authorities, including involvement of the ECCB at appropriate levels;
  - (iii) strengthening and harmonization of the regulatory and AML/CFT oversight framework for banks and non-bank financial institutions, including urgent passage and implementation of legislation designating the ECCB as Supervisory Authority for AML/CFT for banks by all remaining territories (to date only three-member countries have enabling legislation in place and named the ECCB as AML/CFT Supervisor);
  - (iv) timely completion of national risk assessments;
  - (v) enhanced governance, qualifying criteria, transparency, due diligence and penalties/sanctions relating to any abuse of CBI programs.
- Strategies should also address banks’ size and scale to maintain CBR minimum transaction thresholds.

### Financial sector reform agenda and supervisory architecture
- Prompt finalization of harmonized, strengthened laws on credit unions (and building and loan institutions) and the insurance, pension, and securities subsectors is needed to improve the regulatory framework for non-banks.
- Effective consolidation of regional financial sector oversight is recommended: ECCB having supervisory responsibility for all deposit taking institutions and another agency mandated to supervise the non-deposit taking financial sector to maximize cohesive coverage and mitigate resource and skills constraints.
- In the interim, country financial regulatory authorities need to be adequately resourced to allow for effective non-bank financial sector oversight.
- The ECCU minimum saving deposit rate (MSR) should be eliminated, or at least gradually phased out, given its distortionary nature (the MSR increases lending rates and reduces banks’ profitability, slowing capitalization and NPL reduction prospects). Authorities have argued the MSR was set for a social objective to stimulate savings and provide additional income to households.

### Competitiveness, external position, and structural reforms
- External position and REER:
  - The external sector assessment indicates that the real effective exchange rate (REER) in 2017 was overvalued by about 5.9 percent on average.
  - Despite a REER depreciation of 4.2 percent in 2017 on account of a weakening U.S. dollar, the REER model still shows an overvaluation in 2017.
  - The external assessment also shows that the REER overvaluation would increase to 14.6 percent if CBI flows were excluded.
  - Since 2017, the REER appreciated slightly through November 2018.
- Structural constraints and competitiveness challenges:
  - Large current account deficits and high unemployment indicate low competitiveness.
  - Structural constraints include high costs of electricity, trading, and unit labor; labor skill mismatches; an unfavorable business climate, particularly difficulties in resolving insolvencies and getting credit; and public-sector inefficiencies.
- Tourism and market share:
  - Despite proximity to North-American markets, ECCU tourism’s global market share has declined.
  - Staff analysis indicates tourist inflows are price sensitive and the product is relatively expensive globally; relaxing supply-side constraints could increase the ECCU market share by 40 percent.
- Priority structural reforms:
  - Business climate: faster progress on legislation on foreclosure, insolvency and credit bureaus to improve ease of getting credit.
  - Electricity and renewables: accelerate implementation of investment strategies in renewable energies to lower electricity costs and attain Paris accord emission targets.
  - Tariffs and regional integration: tariff cuts under CARICOM and further regional integration to enhance competition and reduce high import prices.
  - Labor markets and education: implement technical and vocational skills programs to better align skills supply with economy needs.
  - Public sector: introduce new technologies to enhance efficiency.
  - Climate resilience: implement strategy to build resilience to climate change and natural disasters for positive spillovers on competitiveness and growth.

### Authorities' views
- Authorities broadly agreed with staff’s assessment of the economic outlook and risks, but saw more upside to near-term momentum, estimating growth around 3.0 percent in 2018 and 2019.
- They emphasized the continuing multi-year decline in the public debt ratio as a positive signal, noting temporary factors in some countries.
- They noted banking sector metrics were gradually improving, reflected in a positive rate of growth of bank credit to the private sector as of mid-2018, driven by solid loan growth to private businesses.
- Authorities agreed with the primacy of the 2030 debt target and strategies to achieve it; medium-term fiscal frameworks consistent with reaching the 60 percent of GDP target had been prepared in the six ECCU countries, with some frameworks tabled in parliament and others ongoing.
- Views were mixed on legally-binding fiscal responsibility frameworks (FRLs):
  - Most countries were weighing the merits of adopting formal FRLs to solidify progress and build fiscal resilience and were consulting with Grenadian authorities about FRL implementation experience.
  - One country authority considered that, in the absence of extensive punitive sanctions for non-compliance in most existing FRLs, these were not suitable for codification in legal norms but could be adopted as government or parliamentary declarations.
  - Several country authorities stressed the need for FRLs to be compatible with promoting growth opportunities and expressed concern that implementation could de-facto constrain public investment.

*Source: IMF (content unit 1eccea2019001).*

### 41.      The authorities expressed broad agreement on the need for resilient investment and

### 1eccea2019001 - 41.      The authorities expressed broad agreement on the need for resilient investment and

### Resilience investment and insurance: findings
- Authorities expressed broad agreement on the need for resilient investment and higher insurance coverage.
- Fiscal sustainability and competing developmental needs imply significant opportunity costs for ex-ante resilience strategies.
- Staff estimates for self-insurance were deemed insufficient in some countries given the increasing frequency of non-catastrophic events due to climate change.
- CCRIF is highly valued for immediate liquidity for catastrophic events, but parametric instruments were recognized as imperfect.
- CCRIF and market insurance instruments are considered expensive.
- Most authorities support creating saving funds for natural disasters but are concerned about the size needed to insure against large and recurrent disasters.
- CBI programs are being undermined by their inclusion in the OECD published list of schemes susceptible to facilitating tax evasion and illicit financial flows.
- All authorities called on the international community to provide more financial assistance for implementation of ex-ante resilience strategies.

### Resilience investment and insurance: policy recommendations
- Develop integrated national resilience strategies including detailed projects, execution timeline, and costing.
- Consider a layering framework to ensure liquidity for relief and reconstruction while protecting public finances, including:
  - creating saving funds for self-insurance as soon as feasible–with CBI resources financing startup costs where available;
  - maximizing CCRIF coverage;
  - considering state-contingent sovereign debt for extreme disasters.
- As structures become more resilient, insurance needs would decline in the long-term to about 1/4 of the current level.
- Concessional financing from the international community, including climate funds, is a key option to enable resilience improvements while adhering to debt targets.

### Fiscal sustainability, debt target, and public investment
- Public debt in most countries is on an upward trend, diverging from the ECCU target of 60 percent of GDP by 2030.
- Robust fiscal responsibility frameworks are needed to underpin the region’s debt target while improving economic performance and enabling resilience building.
- Framework elements:
  - Anchor by ECCU public debt target of 60 percent of GDP by 2030.
  - Country-specific flexibility to select operational and institutional elements codified in national norms.
  - Medium-term fiscal balance target excluding volatile items such as CBI inflows.
  - Precise escape clauses and simple medium-term expenditure targets to contain pro-cyclicality.
  - Key supporting institutions and strong political commitment.
- Staff analysis: resilient infrastructure would raise potential output by 3– 11 percent, with an annual growth-dividend of 0.1–0.4 percent in ECCU countries.
- Upfront costs of resilient infrastructure would make it difficult to attain the ECCU debt target of 60 percent of GDP by 2030 without concessional external financing.

### Grants, climate funds, and donor interaction
- Governments noted onerous administrative requirements for grant and climate fund financing; application and disbursement procedures are complicated and often not commensurate with small states’ human resource and capacity constraints.
- Neglect of vulnerability as a criterion for ODA accessibility penalizes middle-income Caribbean states.
- Authorities requested technical assistance to address reasonable gaps and urged simplification of grant financing administrative burden and disbursement processes.
- Authorities called for inclusion of vulnerability among eligibility criteria for concessional financing.

### Financial sector risks: findings
- Principal areas of risk to financial sector stability include:
  - slow resolution of high NPLs and insufficient provisioning, particularly in indigenous banks;
  - de-risking pressures and lack of access to replacement global CBRs, linked to lack of “critical mass” to meet minimum transaction thresholds;
  - emerging risks in the near-bank and non-bank financial sector (inclusive of the credit union and insurance sectors) where oversight arrangements have not kept pace with rapid growth.
- Authorities emphasized urgent collaboration for realistic solutions to de-risking to be agreed and supported by all international stakeholders.

### Financial sector policy recommendations and actions
- ECCB should:
  - establish and enforce a realistic plan for banks to reduce NPLs—especially large CBI-related NPLs—and dispose of non-core assets within statutory timelines;
  - promptly issue prudential standards on the treatment of impaired assets;
  - use ECCB’s statutory powers to ensure banks adhere to mandated prudential standards and enhance risk management, including measures to strengthen capital.
- Funding for NPL acquisitions by ECAMC should be premised predominantly on private sector options; issuance of government guarantees is inconsistent with the debt target.
- Intensify efforts to operationalize ECAMC’s mandate; acquisition of a critical mass of commercial NPLs at realizable market values should be completed by the July 2019 deadline. Absent adequate progress, ECAMC’s operations should be downscaled to receivership or wound up.
- Modernize insolvency and foreclosure laws and ease restrictions on non-citizen property ownerships to maximize NPL recovery and minimize potential fiscal costs.
- Promptly finalize harmonized laws on credit unions (and savings and building institutions) and the insurance, pension, and securities subsectors.
- Establish plans for resolution of weak non-bank institutions and an effective consolidation of regional financial sector oversight for banking and non-banking financial sectors.
- Consider elimination, or at least gradual phase-out, of the ECCU minimum saving deposit rate given its distortionary nature.
- ECCB to focus on assessing and mitigating risks from institutions seeking better returns overseas and finalize strategies to minimize risks from potential decline in CBRs, de-risking of downstream institutions, and exit of foreign banks.

### Structural competitiveness and growth
- Authorities agreed on the need to bolster competitiveness under the quasi-currency board arrangement.
- High ECCU tourism prices reflect quality considerations, but the region’s cost structure is relatively high compared with other tourist destinations, which may explain declining ECCU share in global tourism.
- Structural bottlenecks identified:
  - need for enhanced connectivity;
  - a regional credit bureau;
  - modern land and property registries;
  - harmonized border regulations.
- ECCB efforts to improve ECCU countries’ Ease of Doing Business Index ranking with an aspiration to break into the top fifty in the next three years.
- Fintech and issuance of digital fiat currency seen as potential to increase financial inclusion, competitiveness, reduce transaction costs, and mitigate AML and governance issues.
- Recommended structural reforms: investment and business climate, public sector efficiency, reducing energy and transportation costs and tariffs, labor market reforms, and regional integration.

### Staff appraisal: key summary points
- Growth is gradually recovering in 2018 following the adverse economic impact of natural disasters in 2017; growth declined substantially in 2017 mainly owing to Hurricanes Irma and Maria.
- The growth outlook is favorable in the near term but subject to increasing risks from more frequent and intense natural disasters.
- A paradigm shift from post-disaster recovery to building ex-ante resilience should be a key policy priority.
- Fiscal sustainability is a necessary precondition for shifting to ex-ante resilience.
- Investment in resilient public capital has significant impact on growth: staff estimates of potential output increase of 3– 11 percent and annual growth-dividend of 0.1–0.4 percent in ECCU countries.
- Resilient investment and insurance are costly and create an initial financing gap; concessional financing from the international community, including climate funds, is key to improve resilience while adhering to the ECCU debt target of 60 percent of GDP by 2030.
- Completion and prompt implementation of the financial sector reform agenda is critical to preserve financial stability.

*Source: https://www.imf.org/-/media/files/publications/cr/2019/1eccea2019001.pdf*

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

### 1eccea2019001 - 59. The discussion with the ECCU authorities will be on the 12-month cycle in accordance with Decision No. 13655-(06/1), as amended.

### Real sector developments
- Regional real GDP growth (ECCU average, 2014–24):
  - 2014: 3.6
  - 2015: 2.1
  - 2016: 3.4
  - 2017: 1.4
  - 2018: 2.2
  - 2019 (proj.): 3.9
  - 2020 (proj.): 3.1
  - 2021 (proj.): 2.5
  - 2022 (proj.): 2.3
  - 2023 (proj.): 2.2
  - 2024 (proj.): 2.1
- Output and inflation:
  - ECCU output remained below potential (output gap series shown).
  - Consumer prices, average:
    - 2014: 1.1
    - 2015: -0.8
    - 2016: -0.8
    - 2017: 1.1
    - 2018: 1.8
    - 2019 (proj.): 1.9
    - 2020 (proj.): 1.7
    - 2021 (proj.): 1.8
    - 2022 (proj.): 1.9
    - 2023 (proj.): 1.9
    - 2024 (proj.): 1.8
- Sectoral contributions to growth shown for Construction, Trade, Hotels and restaurants, Real estate, Transport, Other.
- Noted shocks:
  - Strong impact from the global financial crisis.
  - Large output contractions in small countries hit by Hurricanes Irma and Maria (noted for 2017).

### Tourism developments
- Importance of tourism:
  - Travel receipts as a share of total exports (2017) illustrated across ECCU members (figure).
  - Inbound source markets (2017): USA, Canada, UK, Caribbean, Other Countries (shares shown).
- Market trends:
  - Almost 3/4 of tourists come from North America and the U.K.
  - Dependence on North American markets has increased over the last decade.
  - Tourism demand increased in source markets (particularly the US), but the ECCU’s share of these markets has continued to fall.
  - Stayover arrivals decelerated in 2017; only Canadian and Caribbean travelers showed growth.
- Travel as percent of GDP / services:
  - Travel (share of services/income in Table 6): 40.2 (2014), 38.9 (2015), 37.3 (2016), 37.3 (2017), 37.9 (2018), 38.3 (2019 proj.), 38.5 (2020 proj.), 38.5 (2021 proj.), 38.6 (2022 proj.), 38.7 (2023 proj.), 38.7 (2024 proj.).

### Monetary and credit developments
- Monetary aggregates (annual percentage change, Table 5 & Table 1):
  - Liabilities to the private sector (M2) growth:
    - 2014: 8.2
    - 2015: 4.1
    - 2016: 0.8
    - 2017: 4.6
    - 2018: 4.0
    - 2019 (proj.): 5.0
    - 2020 (proj.): 4.5
    - 2021 (proj.): 4.4
    - 2022 (proj.): 4.2
    - 2023 (proj.): 4.1
    - 2024 (proj.): 4.2
  - Net foreign assets (NFA), percent contribution and levels:
    - NFA (percent of broad money / as percent rows): 42.5 (2014), 31.7 (2015), 13.3 (2016), 15.6 (2017), 5.8 (2018), 4.0 (2019 proj.), 1.8 (2020 proj.), 4.4 (2021 proj.), 6.8 (2022 proj.), 7.0 (2023 proj.), 7.5 (2024 proj.)
- Private sector credit (annual percent change, Table 1 and Table 2):
  - ECCU total private sector credit:
    - 2014: -4.6
    - 2015: -4.3
    - 2016: -6.5
    - 2017: -0.1
    - 2018: 0.6
    - 2019 (proj.): 1.3
    - 2020 (proj.): 1.2
    - 2021 (proj.): 1.6
    - 2022 (proj.): 1.8
    - 2023 (proj.): 1.9
    - 2024 (proj.): 2.0
- Money and interest rates (Table 5):
  - ECCB policy rate: 6.50 (2014), 6.50 (2015), 6.50 (2016), 6.50 (2017).
  - US policy rate series shown (2014: 0.125; 2015: 0.135; 2016: 0.386; 2017: 0.972).
  - Average lending rate (level series shown in figures; deposit and lending rate spreads shown).

### Financial soundness and banking sector
- Nonperforming loans (NPLs) and provisioning (Table 4, Table 9):
  - ECCU nonperforming loans to total gross loans:
    - 2010: 10.5
    - 2011: 12.5
    - 2012: 15.0
    - 2013: 18.1
    - 2014: 17.6
    - 2015: 16.7
    - 2016: 10.9
    - 2017: 12.0
    - 2018Q3: 11.4
  - Provisions to nonperforming loans:
    - 2010: 23.8
    - 2011: 29.0
    - 2012: 31.6
    - 2013: 38.5
    - 2014: 46.8
    - 2015: 44.2
    - 2016: 45.6
    - 2017: 45.3
    - 2018Q3: 44.4
- Profitability and capital:
  - Return on assets (ROA):
    - 2010: 1.2
    - 2011: 0.7
    - 2012: 0.7
    - 2013: -0.1
    - 2014: 0.2
    - 2015: 0.8
    - 2016: 0.8
    - 2017: 0.7
    - 2018Q3: 1.0
  - Regulatory capital to risk-weighted assets (locally incorporated banks only):
    - 2010: 21.6
    - 2011: 17.9
    - 2012: 18.2
    - 2013: 14.0
    - 2014: 11.1
    - 2015: 14.8
    - 2016: 18.3
    - 2017: 20.6
    - 2018Q3: 20.2
- Liquidity:
  - Liquid assets to total assets:
    - 2010: 20.0
    - 2011: 22.9
    - 2012: 24.5
    - 2013: 26.5
    - 2014: 30.2
    - 2015: 33.1
    - 2016: 34.5
    - 2017: 36.3
    - 2018Q3: 36.6
- Observations noted in figures/text:
  - NPLs stopped declining in locally incorporated banks, particularly in public banks.
  - Provisioning increased significantly only in foreign incorporated banks.
  - Profitability has recovered but remains very low.
  - Capital is above regulatory standards.
  - Excess liquidity may have peaked, particularly in foreign banks.

### Fiscal and public debt indicators
- Central government fiscal balances (percent of GDP, Table 1):
  - Primary central government balance (incl. natural disasters):
    - 2014: 1.4
    - 2015: 3.1
    - 2016: 4.3
    - 2017: 2.5
    - 2018: 2.4
    - 2019 (proj.): -1.3
    - 2020 (proj.): -0.9
    - 2021 (proj.): -0.8
    - 2022 (proj.): -0.8
    - 2023 (proj.): -1.0
    - 2024 (proj.): -1.1
  - Overall central government balance (incl. natural disasters):
    - 2014: -1.4
    - 2015: 0.5
    - 2016: 1.8
    - 2017: 0.1
    - 2018: -0.2
    - 2019 (proj.): -3.5
    - 2020 (proj.): -3.2
    - 2021 (proj.): -3.2
    - 2022 (proj.): -3.3
    - 2023 (proj.): -3.6
    - 2024 (proj.): -3.8
- Total public debt (end-of-period, percent of GDP, Table 1 and Table 4):
  - ECCU total public debt:
    - 2014: 80.9
    - 2015: 76.2
    - 2016: 73.8
    - 2017: 72.1
    - 2018: 71.1
    - 2019 (proj.): 70.3
    - 2020 (proj.): 69.5
    - 2021 (proj.): 69.7
    - 2022 (proj.): 70.3
    - 2023 (proj.): 70.8
    - 2024 (proj.): 71.1
  - External public debt (end-of-period, percent of GDP):
    - 2014: 44.0
    - 2015: 41.0
    - 2016: 40.0
    - 2017: 38.5
    - 2018: 38.0
    - 2019 (proj.): 37.1
    - 2020 (proj.): 36.3
    - 2021 (proj.): 35.9
    - 2022 (proj.): 35.2
    - 2023 (proj.): 34.6
    - 2024 (proj.): 33.7
- Debt service and interest:
  - External debt service, percent of goods and nonfactor services:
    - 2014: 6.3
    - 2015: 3.5
    - 2016: 5.1
    - 2017: 5.9
    - 2018: 5.5
    - 2019 (proj.): 5.1
    - 2020 (proj.): 6.0
    - 2021 (proj.): 4.3
    - 2022 (proj.): 4.3
    - 2023 (proj.): 4.2
    - 2024 (proj.): 4.1
- Fiscal composition (percent of GDP, Table 3 highlights country heterogeneity):
  - Total revenue and grants (ECCU):
    - 2014: 26.7
    - 2015: 28.4
    - 2016: 29.3
    - 2017: 28.1
    - 2018: 28.0
    - 2019 (proj.): 25.9
    - 2020 (proj.): 24.9
    - 2021 (proj.): 24.5
    - 2022 (proj.): 24.3
    - 2023 (proj.): 23.9
    - 2024 (proj.): 23.8
  - Total expenditure and net lending (ECCU):
    - 2014: 28.0
    - 2015: 27.9
    - 2016: 27.5
    - 2017: 28.1
    - 2018: 28.2
    - 2019 (proj.): 28.5
    - 2020 (proj.): 27.2
    - 2021 (proj.): 26.8
    - 2022 (proj.): 26.6
    - 2023 (proj.): 26.6
    - 2024 (proj.): 26.6

### External sector and reserves
- Current account balance, US$ millions (Table 6):
  - 2014: -336
  - 2015: -282
  - 2016: -532
  - 2017: -567
  - 2018: -645
  - 2019 (proj.): -692
  - 2020 (proj.): -765
  - 2021 (proj.): -741
  - 2022 (proj.): -688
  - 2023 (proj.): -663
  - 2024 (proj.): -651
- Trade balance and components (US$ millions, Table 6):
  - Trade balance (2014–24 series): -1,949 (2014), -1,877 (2015), -2,010 (2016), -2,131 (2017), -2,397 (2018), -2,475 (2019 proj.), -2,558 (2020 proj.), -2,631 (2021 proj.), -2,687 (2022 proj.), -2,768 (2023 proj.), -2,850 (2024 proj.)
  - Exports (2014–24 series): 380, 334, 286, 263, 274, 289, 305, 319, 337, 354, 372
  - Imports (2014–24 series): 2,329, 2,211, 2,296, 2,394, 2,671, 2,764, 2,863, 2,949, 3,024, 3,121, 3,223
- ECCB gross reserves (end-year, US$ millions, Table 6):
  - 2014: 1,411
  - 2015: 1,560
  - 2016: 1,690
  - 2017: 1,745
  - 2018: 1,852
  - 2019 (proj.): 1,953
  - 2020 (proj.): 1,970
  - 2021 (proj.): 1,996
  - 2022 (proj.): 2,077
  - 2023 (proj.): 2,204
  - 2024 (proj.): 2,323
  - In months of current year imports of goods and services:
    - 2014: 4.7
    - 2015: 5.3
    - 2016: 5.4
    - 2017: 5.4
    - 2018: 5.4
    - 2019 (proj.): 5.3
    - 2020 (proj.): 5.2
    - 2021 (proj.): 5.1
    - 2022 (proj.): 5.1
    - 2023 (proj.): 5.3
    - 2024 (proj.): 5.4

### Credit developments and financial inclusion indicators
- Country-level private credit growth series presented (Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Vincent and the Grenadines, St. Lucia) for 2010–2017 showing large heterogeneity (figures and Table 2).
- Doing Business indicators and distance-to-frontier scores presented for ECCU members (figures), with 2013–2018 Doing Business rank series by country.

*Sources: Country authorities; ECCB; and Fund staff calculations.*

### Annex I. Implementation of Previous Staff Advice

### Annex I. Implementation of Previous Staff Advice

### Further Improve the Health and Stability of the Financial System
- Recommendation: Order corrective actions, including capital calls, as soon as possible from undercapitalized-but-viable banks identified in the asset quality reviews.
- Actions and findings:
  - 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 the market in an orderly fashion.
    - Section 44 (1) of the new Banking Act requires a minimum capital of EC$20 million for commercial banks (augmentation from EC$5 million under the previous Banking Act).
    - Non-compliant banks continue working towards compliance by the statutory deadlines.
    - Capital augmentation plans were submitted by banks as required; several have since received capital injections that support their compliance.
  - iii. Banks carry out their plans by a fixed deadline
    - Following commencement of the Banking Act, banks have implemented or altered plans to satisfy stipulated capital requirements.
    - Further capital raising may be required to address capital shortfalls that may arise based on implementation of IFRS 9 and the ECCB’s new prudential standards on collateral valuation (issued December 2017 and implemented June 2018) and treatment of impaired assets (for issue by end 2018 and implementation Q1 2019).
    - The ECCB is assessing potential capital shortfalls to inform corrective measures to be required of affected institutions.
  - iv. Noncompliant viable banks merge with or are acquired by other banks
    - These remain options and will be pursued if required.
  - v. ECCB to explore bank merger options that would reduce concentration and liquidity risks while improving profitability prospects.
    - Capital adequacy, corporate governance, concentration and liquidity risks, and profitability of resulting institution(s) will be assessed prior to applying/approving merger options.

### Operationalize the ECAMC
- Mandate and status:
  - ECAMC operating since July 2017, with a chief executive, its own staff, and a Board of Directors.
  - Dual mandate by law: (i) conduct asset management business, including purchase, dealing with, managing and/or disposing of assets or liabilities from/of approved financial institutions (AFIs); and (ii) be the receiver for failed financial institutions (currently receiver for one of the three previous failed banks in the region).
- Progress and constraints:
  - Progress to full operationalization of asset management mandate requires coordinated efforts by ECAMC, ECCB, and stakeholder governments on funding modalities and banks willing to sell NPLs at realistic values.
  - ECCB not advocating government bond issuance to fund ECAMC due to capacity constraints; territories with previously failed banks prepared to provide more funding if necessary.
  - If ECAMC fails to identify sufficient workable (largely private sector) funding options and progress adequately towards acquiring a critical mass of NPLs within the statutory deadline of July 2019, IMF TA will be suspended and policy makers may decide ECAMC should limit activities to a single mandate as a receiver.
  - Recommendation: Reform alien land holding laws in some jurisdictions (e.g., Anguilla) to facilitate ECAMC’s sale of assets.
  - Limited progress on alien landholding reforms:
    - Due to constitutional issues, ECAMC Law does not provide for exclusion from the Alien Landholding Law as originally intended.
    - In Grenada, OECS citizens purchasing land must obtain a non-citizen land holding license (no license fee) and pay a property transfer tax of 10 percent of the property’s market value.
    - In St. Kitts and Nevis, cabinet swiftly and frequently approves alien land holding.

### Harmonized Legislation for Cooperatives, Credit Unions, Insurance, and Building Societies
- Recommendation: Finalize harmonized legislation on credit unions and insurance sector. Extend it to building societies. Improve frequency of financial reporting. Specify sanctions for non-compliant entities. Clarify definition of capital and procedures to address NPLs.
- Status:
  - A Harmonized Co-operative Societies Act was enacted between 2010 and 2012 by all but 2 countries, but implementation remains outstanding as regulations continue to be consulted and revised among national regulators.
  - Final responsibility and structure for oversight of financial cooperatives being considered by the ECCB and ECCU governments.

### Enhance Supervisory Processes
- Recommendation areas and actions:
  - i. Loan classification
    - ECCB’s draft prudential standard on treatment of impaired assets (developed with IMF and CARTAC TA) being finalized for issue by year end 2018 and implementation in Q1 2019.
  - ii. Collateral valuation
    - ECCB prudential standard on collateral valuation issued December 2017 and implemented June 2018.
    - Bank examiners to continue receiving training; 2018/2019 pilot on-site examinations using new risk based supervisory approach incorporate a compliance review.
  - iii. On- and off-site inspections
    - Enhanced risk based supervisory framework being further developed with IMF TA, including risk-based supervision approach, streamlining onsite examination process, surveillance and onsite examination reports, and supervisory manuals.
    - Pilot RBS on-site examinations commenced in Q4, 2018.
    - Findings and required actions from on-site examinations are shared with Boards of licensed financial institutions, respective Ministers of Finance, and country representatives on the ECCB Board.
  - iv. Implementation of Basel II
    - ECCB receiving TA from CARTAC including technical advice, training and mentoring, and assistance with enhancements to risk-based supervisory framework and Basel II implementation.
    - With CARTAC assistance, an initial roadmap for implementation is being finalized.
    - A suite of draft Prudential Standards were submitted to the banking sector for comments by August 2016; those not yet issued are being reviewed for finalization.

### Eliminate Minimum Saving Deposit Rate or Restrict Applicability
- Action and finding:
  - Monetary Council reduced the minimum savings rate from 3.0 percent to 2.0 percent in 2015.
  - Impact on credit growth has been muted; banks continue to limit risk exposure with tighter credit standards.
  - Eliminating the minimum savings rate will be considered only when a deposit insurance system is in place.

### Structural Reforms to Improve Access to Credit and Reduce Lending Rates
- i. Draft regional foreclosure bill to reduce time and cost of resolving problem loans and securing collateral
  - ECCB commissioned a comprehensive report recommending reforms in land registration systems and foreclosure practices; submitted for member government consideration and approval.
  - Governments of St Vincent and the Grenadines, Antigua and Barbuda, Grenada, Dominica, and Anguilla have approved recommendations.
  - ECCB identified a legislative drafting consultant and contacted the World Bank for assistance; finalization and implementation outstanding.
- ii. Establish a regional credit bureau
  - Following passage of credit reporting legislation in 2018, an operator was selected and is to be licensed by the first half of 2019.
  - Operationalization of the oversight framework supported with TA from the IFC.
- Improve functioning of the RGSM by simplifying issuing procedures, reviewing auction mechanisms and brokers’ fee structures
  - No significant steps have been taken.

### Mitigate the Risk of Withdrawal of Correspondent Banking Relationships
- Strengthen regulatory frameworks:
  - i. Strong governance of CBI programs
    - Regional vetting policy and procedures being discussed by a committee of regional institutions charged with the issue by the OECS Authority.
    - In line with October 2016 Monetary Council decision, ECCB encouraged other ECCU countries to publish information on their programs as in Grenada; publication templates were submitted to countries.
  - ii. Effective implementation of AML/CFT standards, including full compliance with the 2012 FATF standards and tax transparency standards
    - ECCB assumed responsibilities as Competent Authority for AML/CFT for all institutions licensed under the Banking Act (decision by Monetary Council in July 2016).
    - ECCB receiving TA from the U.S. Department of the Treasury; a needs assessment completed in March 2017.
    - Pending legislative transfer of authority for AML/CFT to ECCB by all member territories, ECCB and national regulators commenced efforts towards establishment of a Memorandum of Understanding for cooperation in information sharing and conduct of AML/CFT assessments for institutions licensed under the Banking Act.
  - iii. Accelerate CARTAC-supported Basel II implementation and risk-based supervision in banking and non-banking sector
    - In 2018, ECCB piloted examinations of 3 banks using risk-based supervision methodology.
  - iv. Increase information sharing with correspondent banks
    - Regional national banks have registered on the SWIFT KYC Registry Portal, accessible by correspondent banks.
  - v. Bank consolidation
    - ECCB engaged 12 indigenous banks at Board and CEO levels and published a consultation paper on consolidation in the Union.
    - In 2018, indigenous banks are considering approaches for shared costs and services, and functional cooperation in support services such as audit and compliance.
    - Some consolidation/building market share may also result from exit of foreign banks from certain jurisdictions.

### Strengthen Fiscal Policy
- Recommendation: Pass national fiscal responsibility legislation (FRA) to enshrine the regional debt target and specify fiscal rules.
- Status:
  - Only Grenada and Anguilla have FRA. ECCB encouraging other member states to adopt FRA.
  - i. Include escape clauses in fiscal rules to suspend the rules temporarily in the event of a natural disaster
    - Only Grenada has an escape clause for natural disasters.
  - ii. Articulate medium-term fiscal adjustment strategies in the 2017 budgets, focused on primary balance targets excluding CBI revenues.
    - 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 expected costs of natural disasters in macro fiscal frameworks, including building necessary buffers
    - Limited progress. Being considered in some jurisdictions.

### Improve the Overall PFM/PIMA Framework
- i. Accounting practices to include a broader fiscal perimeter
  - Limited progress.
- ii. Funding capital projects using CBI resources requires rigorous project evaluation and selection and sufficient resources to finance the project until completion (to avoid contingent liabilities for the government)
  - Limited progress in some countries (Annex IV).
  - In Dominica, the Public Sector Investment Plan explicitly accounts for use of available CBI deposits as a source of financing, including in a three-year projection. Projects account for resilience against natural disasters.
- iii. Improve capacity to design and manage PSIPs
  - Limited progress.
- Adopt a comprehensive governance framework to mitigate increased risks from CBI programs
  - i. Develop a regionally accepted set of principles and code of conduct that would set regional standards
    - Regional vetting policy and procedures being discussed by a committee of regional institutions.
  - ii. Use CBI resources to reduce debt where possible
    - (No specific implementation detail provided in source.)

### Build Resilience to Natural Disasters
- Shift from ex-post relief to ex-ante preparation:
  - i. Prepare plans for investment in climate change adaptation, financing, risk management
    - St. Lucia: undertaken a Climate Change Policy Assessment (CCPA) pilot, finalized a National Adaptation Plan; costing needs to be completed.
    - Grenada: finalizing a comprehensive strategy and about to undertake a CCPA pilot.
  - ii. Save a significant portion of CBI resources to a fund to address natural disaster shocks and finance disaster resilient infrastructure.
    - Some countries are considering setting up saving funds for natural disasters or are in the process of doing it.
  - iii. Enforce building codes
    - Limited progress.

### Enhance Competitiveness and Potential Growth
- Implement national plans to diversify energy sources
  - Progress made but delays relative to national targets.
  - Dominica and St. Vincent and the Grenadines investing in geothermal electricity to replace all or most diesel generation; projects targeted for completion by end-2018.
- Continue regional collaboration:
  - i. Develop a single domestic space
    - Agreement reached on guidelines for the free circulation of goods regime; draft bill on free circulation of goods being reviewed by OECS member states.
    - OECS nationals free to work in any ECCU country without work permits and given indefinite stay, Revised Treaty of Chaguaramas (RTC).
    - Market integration strategy includes Integrated labor market/movement of persons, common market for goods, strengthening ICT systems, harmonizing taxes and administrative procedures, single jurisdiction for business, common market for services, establishment of the OECS Competitiveness Business Unit (CBU), policy harmonization on agriculture, tourism, education, human, social and environment.
  - ii. Identify systems for harmonized border management
    - Is part of the newly adopted regional integration strategy. On-going.
  - iii. Visitors to move freely within the region
    - On-going.
  - iv. Address issues with the regional airline
    - In November 2016, the OECS Economic Affairs Council approved a Regional Air Services Agreement on harmonization of air services in the OECS. Agreement approved by Third meeting of the Economic Affairs Council.
  - v. Implement single regional regulatory authority for non-banks
    - Eastern Caribbean Financial Services Commission completed initial stage of process, including public consultations on draft legislation. A revised plan for the next phases is expected to be approved soon.
- Adopt policies to reduce unit labor costs and boost employment:
  - i. Better align wage growth with productivity growth
    - Limited progress.
  - ii. Improve labor market flexibility
    - Some attempts to introduce personnel shifts in hotels and port operations.
  - iii. Control public wage growth, including by implementing civil service reform
    - Grenada developed a public service reform strategy to be implemented in 2017-2019. Wage freezes and attrition policies are still in effect in some countries.
  - iv. Strengthen labor-training programs
    - Some programs being revaluated and reformed (e.g., St. Kitts and Nevis). Grenada has implemented several well operationalized training programs.

### Improve Macroeconomic Statistics
- Strengthen labor market, balance of payments, and government finance statistics:
  - i. Remove legal obstacles to the use of fiscal information to supplement business survey data when response rate is low
    - Limited progress.
  - Ensure consistency of CBI flows with BPM6
    - A survey form prepared for BPM6 is administered in each country for compilation of the BOP, which entities use to report on receipts and payments of CBI flows.

*Annex I. Implementation of Previous Staff Advice — Eastern Caribbean Currency Union, INTERNATIONAL MONETARY FUND*

### Annex III. External Assessment

### Annex III. External Assessment

### Overview
- The external position of the ECCU in 2017 was weaker than implied by medium-term fundamentals and desirable policies.  
- EBA-Lite analysis indicates that the REER for the union is overvalued.  
- In 2018, the current account deficit is projected to widen as recovery in hurricane-hit countries continues.  
- Imbalances at the national level remain sizeable and considerable policy adjustments are needed, especially on the fiscal front.  
- Structural competitiveness indicators point to a need to raise productivity and competitiveness mainly through improving business indicators, reducing energy and unit labor costs.

### 1. Foreign asset and liability position
- NIIP of the ECCU reached -83 percent of GDP in 2016, with an improvement of about 4 percent of GDP since 2015.  
- Gross foreign positions in 2016:  
  - Assets: about 92 percent of GDP (US$6.3 billion, mostly debt and foreign exchange reserves).  
  - Liabilities: about 175 percent of GDP (US$12 billion, mostly FDI and debt).  
- Net external liabilities remain high in almost all countries, especially in Grenada and St. Vincent and Grenadines.  
- The region’s overall NIIP financing vulnerabilities appear to be high, especially in the outer years of the projected period when large FDI projects fade away.  
- Note: The ECCB will publish the 2017 IIP position for the union in March 2019.

### 2. Current account
- Revised BPM6 statistics (September 2018) show slightly widened current account deficits compared to the June release for all years, but still smaller external deficits throughout the region compared to BPM5 estimates.  
- The current account in 2016 is now largely negative; most of the revision is explained by services (updated travel expenditure surveys and inclusion of some offshore university activities).  
- ECCU aggregated current account outcomes and EBA-Lite results:  
  - The current account (CA) deficit reached an estimated 8.0 percent of GDP in 2017, slightly up from 7.7 percent in 2016.  
  - The current account deficit is projected to worsen in 2018 due to increased construction imports to Dominica and Antigua and Barbuda.  
  - In the medium term, the deficit should stabilize around 6.7 percent of GDP.  
  - EBA-Lite CA norm: -5.2 percent of GDP (excluding volatile CBI flows) and -3.1 percent of GDP (including CBI flows).  
  - Implied CA gap: -6.0 percent of GDP (excluding CBI flows) and -2.4 percent of GDP (including CBI flows).  
  - Implied REER overvaluation: 14.6 percent (excluding CBI flows) and 5.9 percent (including CBI flows).  
- Fiscal policy adjustment is needed in many countries to reduce overvaluation in the context of the quasi-currency board.  
- The EBA-Lite analysis covers eight members: Anguilla, Antigua and Barbuda, Dominica, Grenada, Monserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines; assessments treat the union as a single country and also via GDP-weighted averages with similar results.

### 3. Real exchange rate
- The CPI-based real effective exchange rate depreciated by about 4.2 percent in 2017, mostly reflecting the weakening of the U.S. dollar and low inflation levels in the ECCU.  
- The EBA-Lite index REER model points to a misalignment of less than 1 percent, reflecting the recent REER adjustment.  
- Large differences exist in individual country REER gaps, but most countries show an overvaluation.

### 4. Capital and financial accounts
- The 2017 CA deficit is largely financed by FDI inflows, capital transfers and other investment, particularly commercial bank financing.  
- In the medium term, FDI inflows will be substantially reduced following the completion of construction projects, particularly in hurricane-hit countries.

### 5. Reserve adequacy
- Relevant statistic for a quasi-currency board is reserves in percent of broad money, which are adequate at 28.5 percent.  
- Applying Mwase (2012) revised metric for small states (accounting for exports and short-term debt in addition to broad money), staff finds ECCB’s reserves adequate at 100 percent of the proposed threshold.  
- For the medium term, with some deterioration owing to large current account deficits in Dominica and Antigua and Barbuda, reserves position in months of imports is expected to be slightly lower than the 2017 levels.

*Source: Annex III. External Assessment (IMF staff calculations and ECCB data).*

### 4.       Relaxing supply-side constraints and bottlenecks would improve ECCU’s competitiveness on

### 4.       Relaxing supply-side constraints and bottlenecks would improve ECCU’s competitiveness on

### Key empirical finding on tourism competitiveness
- Using a time fixed-effects model for 1995-2016, staff analyzes the impact of supply-side factors (doing business and governance indicators, tariffs, crime and security, and natural disasters) while controlling for GDP, FDI, and the REER and comparing results with tourism destinations included in the Week-at-the-Beach index.
- Improving on doing business and governance indicators to the sample average would increase the ECCU’s global market share by 40 percent.

### Improving non-price indicators: doing business and governance
- Critical Doing Business areas identified: access to credit and insolvency resolution.
- Rankings in ease of trading across borders, registering property, and paying taxes are largely in line with regional peers but well below advanced economies.
- Progress since 2010 in these areas has been marginal.
- Governance indicators lag peers in: government effectiveness, regulatory quality, and rule of law.
- Governance indicator context: WGI captures perceptions of the extent to which public power is exercised for private gain; rankings reflect relative performance and are subject to uncertainty around the point estimate.

### Electricity, transportation costs, and renewable energy potential
- Energy costs remain very high despite some tariff reductions; drivers include:
  - Dependence on imported petroleum products.
  - Inefficiencies in the power sector linked to lack of economies of scale and difficult terrain.
  - Slow progress in renewable energies.
  - Weak institutional capacity at national and regional levels related to energy efficiency standards.
  - Deficiencies in regulatory frameworks.
- Direct consumer impact: average monthly electricity bill three times bigger than in the U.S. and double that in most Latin American countries.
- Potential benefits of renewables (Implied Effects of Renewable Energy Targets, as presented):
  - Antigua and Barbuda — Renewable Target of Electricity: 15% ; Implied reduction in oil imports: 8% ; Implied reduction in electricity tariffs: 3% ; Implied impact on long-term GDP level: 1%
  - St. Kitts and Nevis — 20% ; 15% ; 11% ; 4%
  - St. Lucia — 30% ; 19% ; 14% ; 6%
  - St. Vincent and the Grenadines — 60% ; 20% ; 22% ; 9%
  - Dominica — 100% ; 33% ; 31% ; 13%
  - Grenada — 100% ; 49% ; 49% ; 20%
- Sources supporting renewables assessments: CARICOM Caribbean Sustainable Energy Roadmap, Costalia Report, IDB, WEO, IMF staff estimations.
- Domestic electricity tariffs (2017) are reported in US ₵/kWh and show ECCU tariffs above the United States and other Caribbean averages (chart referenced).

### Labor markets and human capital
- Wages in public sector and tourism lead other sectors regardless of productivity developments.
- Public wages in the majority of ECCU countries are higher than the median public wage in small states (in terms of expenditure and revenue).
- Minimum wages in the services sector are higher than in most comparable tourist destinations globally, although lower than in other Caribbean countries.
- Skill mismatches stem from the shift from agricultural employment toward public sector and tourism.
- The de-link between wages and productivity, together with large skill mismatches, contributes to high structural unemployment, particularly among youth.
- Policy implication: enhancing education and vocational training should alleviate skills mismatches; regional integration would help address small internal markets and high costs.

### Tariffs, shipping costs, and import costs
- Import costs are high compared to other countries worldwide, critical because tourism requires substantial imported intermediate goods.
- Elevated shipping costs and tariffs reduce business profitability.
- Data points and notes:
  - Tariff and shipping cost scatter referenced (sources: World Bank Doing Business 2014 and WDI).
  - Tariffs for Dominica, Grenada, and St. Vincent and the Grenadines correspond to 2015.
  - Note: chart excludes three countries with shipping costs above $6,000/container.
- Comparative indicators presented:
  - Median tariff rate and median cost to import plotted for ECCU and all countries (visual referenced).

### Country vignettes and illustrative macro indicators

- Anguilla
  - Real GDP declined by 7.7 percent in 2017.
  - Tourism inflows fell by 15.5 percent in the last part of 2017.
  - Hotels and supporting infrastructure damage led to value added in hotels and restaurants falling by 16 percent.
  - Broader sector declines included mining, construction, manufacturing, financial, and utilities.
  - Growth expected to rise to 4 percent in 2018; medium-term growth to settle at around 3 percent.
  - Overall fiscal balance was 0.6 percent of GDP in 2017; expected to worsen to -0.2 percent of GDP in 2018 due to additional needs arising from debt obligations of two SOEs.
  - Bank resolution details:
    - Purchase and Assumption Agreement (P&AA) transferred certain assets and all liabilities (except deposits of off-shore subsidiaries and customers’ deposit balances placed in the Depositor Trust) of two intervened legacy commercial banks to a bridge bank (NCBA) in 2016.
    - Depositor Trust holds deposit balances over EC$2.8 million with repayments to be effected by the government over a ten year period at low interest rates.
    - NCBA recapitalized in mid-2018 with loan proceeds from the CDB following a put back agreement; ECCB to appoint an independent valuator to value the pool of assets subject to exchange; losses on valuation under the put back arrangement to be borne by the receiverships.
  - Banking market: exit of FCIB and announced intended exit of Scotiabank will shrink market from three to two banks, reducing competition; remaining franchises currently hold equal market share of 45 percent each.

- Montserrat
  - Real GDP fell by 2.8 percent in 2017.
  - Tourism, agriculture, and construction weak; banking sector showed signs of recovery with private sector credit increasing by 1.3 percent.
  - Tourism inflows picked up in first half of 2018; growth projected at 2.4 percent in 2018.
  - Fiscal position improved in 2017 after a grant from the UK; public debt at 6.6 percent of GDP.
  - Current account deficit reached 43.9 percent of GDP in 2017; expected to decline gradually.
  - Medium-term growth projected to average about 2.2 percent of GDP, contingent on financing key infrastructure and completing ongoing projects, notably improving connectivity via Little Bay port development, expanding airlift, promoting tourism, and improving access to the Exclusion Zone.
  - Authorities target total independence from fossil fuels by 2020; plans to exploit solar, wind, and geothermal potential to reduce exposure to volatile oil prices and lower high energy costs.

### Policy implications and recommendations (implicit from analysis)
- Improve Doing Business and governance metrics toward sample averages to boost tourism market share (quantified: 40 percent increase in global market share if achieved).
- Prioritize reforms in: access to credit, insolvency resolution, government effectiveness, regulatory quality, and rule of law.
- Accelerate renewable energy deployment to reduce oil imports, lower electricity tariffs, and raise long-term GDP (country-specific implied effects presented).
- Reduce import costs by addressing tariffs and shipping cost inefficiencies to support tourism-sector supply chains.
- Strengthen vocational training and education to address skill mismatches and reduce structural unemployment, especially for youth.
- Promote regional integration to offset small domestic market size and achieve economies of scale in energy and transportation.

*Source: IMF staff report excerpt (Eastern Caribbean Currency Union, Staff Report for the 2018 Discussion on Common Policies of Member Countries—Informational Annex).*

### 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.
- As recommended by the assessment, the ECCB has restructured the internal audit and risk management functions to align them with leading international practices.

### CARTAC: Capacity Building in the ECCU — Overview (As of November 30, 2018)
- Highlights of CARTAC’s TA and training to the ECCU countries are organized by core areas below.

### Tax administration: implementation and institutional strengthening
- VAT implementation in ECCU countries is largely complete.
  - Footnote list of VAT/GST introduction dates as provided in the source:
    - Dominica (March 2006)
    - Antigua and Barbuda (January 2007)
    - St. Vincent and the Grenadines (May 2007)
    - Grenada (February 2010)
    - St. Kitts and Nevis (November 2010)
    - St. Lucia (October 2012)
    - Anguilla: CARTAC support in 2012 for Goods and Services Tax preparations for 2014; government considering a broad-based GST/VAT possibly implemented in two phases – Limited VAT in 2021 and full VAT in 2023/4.
- Ongoing tax program focus areas:
  - (i) organizational restructuring to include strengthening and establishing a large taxpayer operation,
  - (ii) strategic management frameworks (SMF),
  - (iii) capacity building in core functions (taxpayer service, audit, collections enforcement, data analysis and risk management),
  - (iv) building of a robust program management (headquarters) function,
  - (v) modernizing tax legislation,
  - (vi) strengthening IT systems.
- Implementation progress:
  - Management of taxpayers through segmentation and establishment of Large and Medium Taxpayers Units (LMTUs)/programs and Design, Planning and Monitoring Units (DPMUs) are progressing well in Antigua and Barbuda, Dominica, St. Lucia, St. Kitts and Nevis, Grenada, and St. Vincent and the Grenadines.
- Country-specific tax reforms and measures:
  - Antigua and Barbuda: organizational structure reviewed.
  - St. Lucia: VAT threshold increased to EC$400,000 effective on February 1, 2016; VAT standard rate reduced to 12.5 percent in February 2017.
  - Dominica: VAT threshold increased to EC$250,000 in September 2016.
  - Grenada: reformed tax incentives regime; supporting legislation now fully implemented.
  - St. Kitts and Nevis: CARTAC provided advice on implementing and managing a tax incentive regime.
- Legislation implementation:
  - St. Kitts and Nevis secured legislation that mandates the filing of VAT and CIT tax returns.
  - Anguilla adopted a modern Inland Revenue Department Act providing the legal framework for the Comptroller’s office and powers to collect tax.
- Data analytics and risk-based compliance:
  - A standardized regional data analytics and cross-matching program has made significant progress; beneficiaries include St. Kitts and Nevis, Dominica, St. Lucia, Grenada, St. Vincent and the Grenadines, and introduction to Antigua and Barbuda’s audit unit.
  - Progress on standardized regional approach to risk-based compliance improvement has been limited due to poor data quality and capacity limitations; St. Kitts and Nevis, Dominica, St. Lucia, Grenada and St. Vincent and the Grenadines benefited from preliminary TA; work restarting as administrations improve data capabilities.
- Performance management and IT:
  - Performance management strengthened through capacity/mentoring in planning and monitoring units in St. Lucia, Antigua and Barbuda, St. Kitts and Nevis and St. Vincent and the Grenadines.
  - Tax administration IT systems: regional peer-to-peer support; IT enhancements to SIGTAS provided to St. Lucia, Grenada and St. Vincent and the Grenadines; Montserrat property tax system enhanced for timely production of notices of assessments.
  - St. Lucia and St. Vincent and the Grenadines received TA on IT operational, security procedures and business continuity plans.
- Regional workshops and initiatives:
  - All ECCU member countries benefited from three regional workshops in FY2018/19: (a) ISORA sensitization sessions led by FAD; (b) Effectively Managing Audit Programs; (c) inter-regional seminar between CARTAC and PFTAC.
  - Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines are participating in a FAD-led initiative to establish a “Regional Tax Audit Team (RTAT)”. Phase II underway; two workshops conducted; third workshop (sector specific — financial) planned for November 2018 in the Dominican Republic. Following training, program will shift to implementation with actual audits in multiple jurisdictions in a selected sector potentially the financial sector.

### Customs administration and trade facilitation
- Focus areas: strengthening risk management and management to ensure (i) leadership, management and governance; (ii) trade facilitation; and, (v) compliance.
- Regional initiatives include support to CARICOM in harmonization of customs procedures.
- Risk management:
  - TA provided to Grenada, Anguilla, Dominica, St. Kitts and Nevis, St. Vincent and the Grenadines; frameworks prepared to identify, categorize and prioritize risks and propose risk treatments; systems developed to identify compliant traders and facilitate them.
- Post clearance audit (PCA):
  - TA, advice, mentoring and training on PCA delivered to St. Vincent and the Grenadines and Dominica; approximately 20 officers received training.
  - As a result, customs in these member countries now have capacity to initiate significant PCA programs.
  - PCA has been a significant TA area since FY14 in Antigua and Barbuda, Dominica, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines.
- Training capacity:
  - TA to Grenada to strengthen training capacity; development of training modules in core customs skills and preparation of a cadre of trainers.
- Anguilla Interim Goods Tax (IGT) preparation:
  - TA provided to Anguilla to prepare for IGT implementation planned to come into operation in January 2019 and levied initially on imported goods.
  - TA included preparation of prioritized action plan for customs aspects and assistance to extract customs data to assist in revenue modelling for the new tax.

### Public Financial Management (PFM)
- CARTAC undertook a comparative review of PFM practices in ECCU member countries against a “core PFM” framework as defined in the IMF Good Practice Note on ‘Sequencing PFM Reform’ (Diamond, 2013). Findings informed allocation of CARTAC resources.
- New PEFA assessments:
  - New PEFA assessments completed in Grenada and Dominica in 2016 and in St Lucia in 2017.
  - CARTAC works with assessed countries to develop PFM Action Plans following each PEFA assessment.
- PFM legal framework modernization:
  - Implementation of a modern and consistent PFM legal framework 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.
  - In September a FAD led TA Mission to Dominica supported establishment of a Vulnerability, Risk and Resilience Fund (VRRF) to mitigate financial shocks from severe weather events; CARTAC provided amendments to Draft PFM Legislation for the VRRF.
  - 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) and a Fiscal Responsibility Act.
- SOE/SB ownership and reform:
  - 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 experience sharing; Grenada showcased achievements and materials.
  - Another SOE mission planned for St Lucia in the new year.
- Budget preparation reform:
  - Regional budget preparation reform strengthened; St. Lucia prepared budgets according to strategic budget reform methodology and revised program budgeting format including non-financial performance information.
  - St. Vincent and the Grenadines completed a 2016 pilot and tabled their 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; nine CARTAC countries now have comprehensive budget preparation manuals. Manuals include a gender budgeting perspective.
- IPSAS compliance:
  - Compliance with International Public Sector Accounting Standards (IPSAS) has made great progress.
  - Annual IPSAS cash basis workshop evaluated compliance with the new exposure draft.
  - Anguilla and St. Kitts and Nevis were self-assessed as fully compliant; work remains to improve the notes to cash basis financials as countries move to modified cash prior to accrual basis.
  - Missions to Dominica and Grenada reviewed Treasury Functions and IPSAS cash management.
- Internal audit:
  - During FY18, Grenada, Dominica, St Vincent and the Grenadines and St Lucia received TA to develop internal audit functions for compliance with international standards.
  - Annual regional workshop in FY17 covered risk management and the role of internal audit as independent assurance for management.

### Macroeconomics and programming analysis
- CARTAC macroeconomic and programming TA resumed in 2018 after absence of a Macroeconomic Adviser for much of 2017.
- Country missions during the 9 months ending November 2018:
  - Anguilla: assisted Ministry of Finance update Macro Fiscal Framework and prepare Debt Management Strategy required by the British Government as pre-condition for budget approval and drawdown on a Caribbean Development Bank loan for post-hurricane rehabilitation; objectives successfully achieved.
  - Dominica and St Vincent and the Grenadines: focus on developing capacity of Ministry of Finance staff to forecast macro fiscal accounts and update Macro Fiscal Framework (MTFF); training expected to enhance capacity for structured forecasting and systematized approach to budgeting and policy making.
- Regional workshops:
  - Macroeconometric Forecasting workshop held in Jamaica in May 2018 attended by representatives from Montserrat, St Lucia and Grenada.
  - Inclusive Growth workshop held in St Lucia in October 2018 attended by representatives from Antigua and Barbuda, Dominica, Montserrat, St Kitts and Nevis, St Lucia and St Vincent and the Grenadines.

### Financial stability: stress-testing and indicators
- CARTAC financial stability TA focuses on:
  - (i) stress-testing various aspects of the financial system;
  - (ii) preparing financial soundness indicators (FSIs) for deposit-taking institutions, and financial stability and health indicators (FSHIs) for the non-deposit taking segments of the financial sector;
  - (iii) developing macro-prudential and systemic risk indicators (MPIs and SRIs respectively);
  - (iv) assisting the ECCB in preparing the financial stability report for ECCU members.
- Banking sector stress testing:
  - FY16: extensive dynamic modeling and stress-testing exercise of seven domestic and four international banks across the ECCU (Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, Montserrat, St. Lucia, and St. Vincent and the Grenadines).
  - Project aimed to help ECCB assess financial situation of key banks and enhance staff capacity to conduct regular stress tests.
  - Specialized internal seminars on stress-testing and macro-prudential indicators delivered for around 20 regulatory staff of the ECCB and for GARFIN (Grenada Authority for the Regulation of Financial Institutions).
- FY17 consolidation and roadmap:
  - Further stress tests of nine indigenous banks.
  - CARTAC and MCM completed a scoping mission with the ECCB to assess financial stability needs and coordinate TA.
  - Roadmap outcomes agreed with ECCB include:
    - (a) risk monitoring (stress-testing the NBFIs, development of MPIs and SRIs and FHSIs for the non-banks),
    - (b) development of a macroprudential 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, and
    - (g) Basel Implementation.
  - Initiation of work on stress testing non-bank financial institutions, starting with credit unions; TA on stress-testing methodologies and capabilities provided to Grenada for the credit union sector.

*International Monetary Fund — Content unit: 1eccea2019001*

### 26. In the area of building financial resilience (by developing effective crisis management

### 1eccea2019001 - 26. In the area of building financial resilience (by developing effective crisis management

### Building financial resilience and crisis management capacity
- Training and events:
  - CARTAC trained GARFIN staff on crisis management and resolution frameworks.
  - CARTAC, in conjunction with the Central Bank of Barbados, hosted a three-day Conference on the theme “Building Resilience to Financial Crises in the Caribbean: The Role of Crisis Management Policies, Metrics and Plans” in March 2016.
  - The Conference brought together 74 stakeholders from national regulatory authorities, regional regulatory associations and international bodies (including the IMF, World Bank and the FSB).
- Follow-up technical assistance (TA) and national planning:
  - Grenada and St. Vincent and the Grenadines requested CARTAC TA to strengthen national financial sector crisis preparedness plans and resolution frameworks following the Conference.
  - Medium-term work will focus on developing national crisis management plans in ECCU territories as precursors to an ECCU-wide plan.
  - In FY18, CARTAC assisted St. Vincent and the Grenadines in the development and implementation of its national and agency crisis management plan.
  - CARTAC undertook a mission to assist authorities in developing a contingency plan to mitigate medium-term financial-sector spillovers from Hurricane Maria (a category 5 hurricane) which devastated Dominica during September 2017.

### Macroprudential framework, financial stability reporting, and ECCU institutional arrangements
- ECCB upgrades and outputs:
  - In FY18, CARTAC provided TA to ECCB to upgrade its financial stability function, including developing MPIs and SRIs and a macroprudential institutional and surveillance framework for the ECCU region.
  - The recommended macroprudential institutional and surveillance framework was endorsed by the ECCB Board of Directors.
  - A proposal based on CARTAC TA is being finalized for presentation to the ECCU Monetary Council to formalize the ECCU’s financial stability institutional framework.
  - The ECCB prepared and published on its website the inaugural Financial Stability Report, which assessed systemic risks and vulnerabilities in the ECCU region and featured the MPIs and SRIs provided by CARTAC TA.

### Insurance sector and credit union prudential indicators and stress testing
- Insurance sector:
  - A comprehensive list of financial health and soundness indicators with accompanying methodologies was developed for insurance sector regulators in the ECCU region.
  - Follow-up TA on developing stress-testing frameworks for ECCU insurance regulators was provided to Antigua and Barbuda, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines and to FSU staff in the ECCB in FY19.
  - Antigua and Barbuda and St. Vincent and the Grenadines have developed Reinsurance Guidelines for feedback from their respective industries following CARTAC training and action plans.
  - A similar stress testing TA program will be provided in FY20 for the remaining insurance sector regulators in the ECCU region.
- Credit union sector:
  - A set of FHSIs with accompanying methodologies were developed for credit union sector regulators in Anguilla, Antigua and Barbuda, Dominica, St. Kitts and Nevis and for FSU staff in ECCB.
  - A similar stress testing TA program will be provided in FY20 for other credit union sector regulators in the ECCU region.
  - Dominica received CARTAC TA on credit union stress testing which led to:
    - Issue of Stress Test Guidelines to the credit union sector (bottom-up stress testing program).
    - Establishment of an annual credit union sector meeting to review sector-wide stress testing exercises.
    - Amendments to reporting forms to allow reporting on loan and deposit concentrations per CARTAC TA recommendations.

### Supervision, Basel II/III, and regulatory reform
- Basel II/III implementation:
  - CARTAC reviewed and provided feedback on the ECCB’s draft Basel II/III implementation plan for the ECCU and assisted with time-bounded action plans and milestones to achieve Basel II/III implementation objectives.
  - The ECCB has established a Basel II/III implementation team and has commenced consultation with institutions subject to Basel II/III reporting.
- Risk-based supervision and on-site/off-site practices:
  - CARTAC provided TA on implementation of risk-based supervision across bank and non-bank financial institutions during FY18, including:
    - Grenada - Risk-Focused Examination of Retail Lending at Credit Unions.
    - St. Vincent and the Grenadines, and Grenada - Review of Reinsurance Treaties, and Actuarial Reports of Insurance Companies.
    - Dominica - Supervisory intervention plan for Credit Union and insurance sectors.
    - Antigua and Barbuda – guidelines on bottom-up stress testing for credit unions.
  - Follow-up TA facilitated improvements in processes and practices for conducting onsite and offsite supervision in St. Vincent and the Grenadines, Grenada, Antigua and Barbuda, and Anguilla.
- Legislative and market-structure reforms:
  - TA was provided to review draft legislation on Securities and Investment Funds to replace the current Securities Act and collective investment schemes legislation enacted in 2001; the draft Bill was submitted to IOSCO for preliminary assessment of ECSRC eligibility and finalized for public consultation.
  - TA addressed deficiencies in the ECCU’s Uniform Insurance and Pension Bill to advance the establishment of a Single Market for Insurance and Pension (SIPM); recommendations are being incorporated into the Uniform Bill to align with international regulatory and market conduct standards.

### Capacity building, disaster response, and supervisory missions
- Regional workshops and topics (FY17 and FY18) included:
  - Strengthening regulatory and supervisory oversight across bank and non-bank sectors (pension, insurance, securities, and credit unions).
  - Systemic risk surveillance, implementation of IFRS 9, risk-based capital framework for insurance companies, consolidated supervision, digital currencies and potential regulatory response.
- Dominica-specific engagement:
  - CARTAC provided TA to Dominica on developing supervisory intervention plans for the credit union and insurance sectors.
  - A joint mission by the Financial Stability and Financial Sector Supervision programs assessed resilience of some financial institutions in Dominica in early 2018 following Hurricane Maria in late 2017.

### Economic and financial statistics improvements
- National accounts and prices:
  - During 2017-18 CARTAC concentrated on improving external sector, national accounts and prices statistics in ECCU countries.
  - Comprehensive reviews of national accounts concepts, data sources, compilation and dissemination methods were conducted for Dominica and Montserrat; 5-year action plans to rebase GDP and expand national accounts were prepared.
  - Progress in St. Lucia included compiling the SUT for 2016.
  - Quarterly national accounts efforts: Grenada, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines have commenced disseminating quarterly GDP by economic activity (QGDP-P) estimates. TA was provided to Antigua and Barbuda to build staff capacity and commence development of quarterly GDP-P compilation worksheets.
- Prices statistics improvements:
  - For St. Kitts and Nevis, data collection and compilation methodologies for producing the PPI and export and import price indices have been developed; further advice provided on rebasing the CPI.
- External sector statistics (ESS) and BPM6 adoption:
  - CARTAC’s ESS work focuses on improving methodologies and compilation practices for BOP and IIP through adoption of BPM6 guidelines.
  - Since July 2017, the ECCB disseminates comprehensive annual BOP and IIP data for the eight ECCU members and the ECCU in BPM6 format; ECCB resumed data reporting to STA in October 2017.
  - ECCB posted aggregated annual data on outstanding central government and public sector external debt on its website in coordination with debt offices.
  - CARTAC assisted NSOs and tourism authorities to implement sound visitor expenditure surveys (VES) and to incorporate a wider variety of sources (including administrative data) for prioritized BOP components.
  - Visitor and student expenditure data improved: estimates of visitor expenditure (travel services exports) are now based on recent surveys; correct inclusion of tuition fees and other education-related travel services provided by offshore universities (OUs) to nonresident students is a significant methodological change. A specific ESS survey form of 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.

### Authorities’ policy perspectives, priorities, and targets (Statement by ECCU authorities)
- Strategic framework and vision:
  - The Monetary Council-endorsed vision (2016) remains the guiding framework; ECCB Strategic Plan 2017-2021 identifies five strategic goals: (i) maintain a strong and stable EC dollar; (ii) ensure a strong, diversified, and resilient financial sector; (iii) be the advisor of choice to member countries in pursuit of fiscal and debt sustainability; (iv) actively promote economic development of member territories; (v) enhance organizational effectiveness.
- Real sector outlook and risks:
  - Authorities estimate growth at around 3.0 percent for 2018 versus staff’s projection of 2.2 percent.
  - Over the medium term, growth is expected to average around 3.0 percent.
  - Authorities underscore significant downside risks from natural disasters and external shocks and emphasize continued reforms to improve business climate, diversify economies, invest in renewable energy, strengthen connectivity, remove labor market rigidities, and pursue technological innovation.
- Disaster resilience:
  - Building resilience to natural disasters and climate change is a priority; authorities welcome staff technical work on ex ante resilience (resilient investment and insurance protection) and call for greater concessional financing and donor support and consideration of vulnerability as a criterion for ODA accessibility.
- Fiscal policy, debt targets, and governance:
  - Overall fiscal balance deteriorated in 2017 due to one-off disaster-related spending; preliminary 2018 estimates indicate fiscal position strengthened reflecting revenue recovery.
  - Public indebtedness continued its downward path in 2017, aided by debt relief in some countries.
  - Authorities are determined to reach the ECCU target of 60 percent of GDP by 2030 and have prepared medium-term fiscal frameworks consistent with this commitment, including medium-term deficit targets and interim public debt targets for 2020 and 2025.
  - Some members are considering legally-binding fiscal responsibility frameworks (FRLs) with attention to compatibility with robust, inclusive, and sustainable growth, and investments in climate resilient infrastructure.
- Citizenship-By-Investment (CBI) program governance:
  - Authorities will continue to strengthen governance, credibility and integrity of CBI programs via increased collaboration, information sharing, vetting, and harmonization of due diligence processes involving regional and international institutions.
- Financial sector priorities:
  - Authorities note improvements in financial soundness indicators: capital adequacy, profitability, and non-performing loans (NPLs) trending favorably; credit growth recovering slowly.
  - ECCB will press ahead with NPL resolution strategy, intensify efforts to operationalize the Eastern Caribbean Asset Management Corporation (ECAMC), and implement strategies to mitigate risks related to loss of CBRs, AML/CFT, and weaknesses in supervision and regulation—particularly in the non-bank sector.
  - ECCB will support reforms to improve solvency, access to credit, and credit quality.
- Engagement with Fund and development partners:
  - Authorities value the Fund’s and CARTAC’s TA and seek continued strong support and coordination with regional and international institutions.

*Italic: Source — Content unit 1eccea2019001 (CARTAC / ECCU program summary and authorities’ statement).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1eccea2019001.pdf_