## 1. Tax Incentives in the ECCU: High Costs, Limited Benefits ## Source details **Canonical URL:** [1. Tax Incentives in the ECCU: High Costs, Limited Benefits](https://www.imf.org/-/media/files/publications/cr/2020/english/1eccea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1eccea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1eccea2020001.pdf.json) --- ### Recent developments: macro, fiscal, financial, and external - Growth and prices - GDP growth accelerated from ¾ percent in 2017 to 3¾ percent in 2018. - Stay-over tourism arrivals rose by 15 percent in 2019. - Inflation muted at 0.3 percent y/y in June 2019. - Fiscal outcomes - Overall fiscal deficit rose from ½ to 1¼ percent of GDP in 2018. - Public debt fell by 2 points to about 70 percent of GDP in 2018. - Underlying deficit (net of CBI inflows) was elevated at 5 percent of GDP. - Some countries built sizable fiscal deposit buffers and contingency funds. - ECCU initiative launched in March 2019 to harmonize CBI programs’ due diligence. - Banking and financial sector - Bank lending to the private sector was flat in 2018. - Low bank profitability (RoA of below 1 percent since 2010) prompted overseas investment. - NPLs were 10 percent of total loans in June 2019 and were thinly provisioned. - ECAMC deadline extended to October 2020 (original: July 2019); CDB financing held back by reluctance to provide sovereign guarantees. - ECCB upgraded impaired assets classification and provisioning standard expected to come into effect by January 2020. - Non-bank financial institutions - Credit unions: lending growth of 10 percent annually; NPLs about 7 percent of total loans. - Insurance sector recovered in 2018 but remains undersized and vulnerable; high premia contribute to under-insurance and public contingent liabilities. - Harmonized regional regulation prepared but not yet passed in most jurisdictions. - Correspondent banking and payments - Active correspondent banks declining though most ECCU banks still have more than one active correspondent. - ECCB signed contract in March 2019 with Bitt Inc. to pilot a digital currency EC dollar (DXCD); pilot deployed in two phases with development/testing through March 2020 and roll-out in four pilot countries from April to September 2020. - External sector - Staff estimates current account deficit widened to 8.4 percent of GDP in 2018. - Net FDI inflows estimated at 9.1 percent of GDP in 2018. - REER appreciated 2.1 percent during 2018 due to U.S. dollar strengthening. ### Outlook and risks - Growth and inflation outlook - GDP growth projected to gradually ease to 2¼ percent by 2025. - Inflation expected to stabilize at around 2 percent. - Baseline incorporates average annual fiscal cost of natural disasters ranging from 0.5 to 1.5 percent of GDP. - External and fiscal outlook - Current account deficit expected to narrow as reconstruction-related import demand wanes. - Moderation in CBI inflows would widen fiscal deficits and halt ECCU-wide downward public debt dynamics. - Downside risks (Annex III) - Global: a 1 percent fall of activity in tourism-source countries could reduce real GDP by 0.5 percentage point (staff VAR estimate). - Other global risks: sharp rise in risk premia, cyberattacks, large swings in energy prices. - Region-specific risks: increased frequency/intensity of natural disasters, significant decline of CBRs, further exit of foreign banks. - Financial sector vulnerabilities: systemic spillovers involving banks and non-banks; potential sovereign/financial adverse feedback loops. - Upside risks: further upward surprises in CBI inflows, conditional on good management. ### Empirical findings on tax incentives and policy implications - Empirical findings (Box 1) - Sample: eleven tourism-based Caribbean countries (including the six independent ECCU states). - An increase in foregone revenue by 1 million EC dollars is associated with an increase in the number of hotel rooms by 0.2 percent, controlling for other macro-level factors. - Tax incentives do not seem to impact overall FDI, GDP growth, or employment. - FDI to the Caribbean is positively correlated with the stock of public infrastructure, especially when countries experience natural disaster shocks. - Fiscal costs and distributional impacts - Foregone tax revenue estimated to have averaged 5.8 percent of GDP in 2010-18 annually in the region, or 21 percent of total revenue. - The cost of tax incentives is equivalent to as high as $2,500 per job in the formal sector. - Footnote: Fiscal costs are estimated at about one-fifth of government revenues on average in the region. - Recommended policy principles for tax incentives - Provide explicit rationale for market failures incentives aim to address, with well-defined targets, costs, and sunset clauses. - Re-balance incentives toward better-designed instruments (e.g., investment allowances instead of tax holidays). - Broaden the tax base while reducing tax rates to enhance investment attractiveness. - Reduce scope for discretion toward a rules-based system. - Design incentives as part of a sustainable fiscal framework and incorporate them in the budget. - Strengthen tax administration and enforcement with periodic assessments to reduce leakages and distortions. - Adopt a coordinated regional approach (e.g., harmonization for the tourism industry) to overcome collective action problems. ### Regional Stabilization Fund (RSF): rationale, simulations, and governance - Rationale and simulation results (Box 2) - Similar structures and shock exposures produce co-movements but significant asymmetries imply gains from risk pooling. - For a probability of RSF depletion at 1 percent, estimated RSF would be about 5 percent of regional GDP vs. sum of individual countries’ funds near 10 percent. - A RSF is estimated to be about ½ of the size of the sum of individual countries’ stabilization funds for the same saving/withdrawal profile. - Staff simulations indicate benefits from faster recovery after natural disasters can outweigh RSF opportunity costs; increased public investment could raise long-term output, consumption, and labor income. - Macroeconomic impacts - Simulations indicate RSF could increase private investment, employment, output, and wages; Monte Carlo results quantify increases in output, consumption, labor income, and employment. - Preconditions and governance for RSF - RSF operations should be fully financed by all governments and reflected in national fiscal accounts. - RSF authority could be granted by acts of parliament; fiscal responsibility and MTFFs, with improved PFM, are prerequisites for RSF qualification. - ECCB should not be involved in RSF governance; clear saving and investment rules and transparent triggers for disbursement are essential. ### Fiscal sustainability, public debt, and resilience-building priorities - Key priorities - Achieve debt sustainability and build resilience to natural disasters through improved national frameworks. - Accelerate implementation of credible country-specific fiscal responsibility frameworks to reach regional 60 percent of GDP public debt target. - Establish frameworks for saving (national saving funds), resilient public investment, and disaster insurance to complement debt-sustainability efforts. - Continue upgrading fiscal institutions and PFM practices. - Piloting of comprehensive country-specific Disaster Resilience Strategies in Dominica and Grenada. - Fiscal statistics and targets - Authorities reaffirm commitment to meeting the "60 percent of GDP" debt target. - Staff appraisal: challenge of achieving the "60 percent of GDP" target while building resilience to natural disasters for most countries. ### Financial sector vulnerabilities and reform priorities - Banking sector strengths and vulnerabilities - Liquidity and capital ratios broadly strong; aggregate NPL ratios generally improving but asset quality concerns persist. - Sizable impaired assets under-provisioning in some indigenous banks; market risks increased as banks invest in riskier portfolios abroad. - Entry of new regional banks could heighten competition and associated risks. - Non-bank sector vulnerabilities - Credit unions: rapid growth with limited capital buffers and fragmented supervision; systemic importance in some jurisdictions. - Insurance sector: undersized with high premia and vulnerabilities; harmonized regional regulation not yet implemented in most jurisdictions. - Regulatory and supervisory sequencing - Short-term actions - Reduce bank NPLs / activate ECAMC. - Strengthen bank regulation and supervision. - Implement treatment of impaired assets standards and establish realistic plans to reduce NPLs below 10 percent by mid-2020 and meet the 5-percent benchmark by end-2023. - Mandate credible provisioning and NPL resolution plans; require prompt disposal of non-banking assets within statutory timelines. - Use ECCB statutory powers to raise capital as necessary. - Absent substantive ECAMC operationalization three months before revised deadline, downscale ECAMC to receivership or wind up. - Macroeconomic stress testing and modernize insolvency law; ease restrictions on non-citizen property ownership to maximize NPL recovery. - Phase out the Minimum Saving Rate (MSR) over time; address its social objectives via fiscal policies. - Medium-term governance actions - Review ECCB governance to increase operational autonomy vis-à-vis the ECCB Board and Monetary Council while preserving regional consultation. - Limit governments’ involvement to exchange rate policies and fiscal backstopping. - Establish hierarchy between objectives (price stability primary, financial stability secondary). - Review deposit-taking institutions’ governance to protect lending from special-interest influence (e.g., ensure most Board members are independent for indigenous banks with government ownership). - Financial safety net and resolution - Preconditions: banks’ balance sheet repair and credible fiscal backstopping before deposit insurance/resolution funds based on industry contributions. - Model after preconditions met: - (i) Least-cost resolution funding for non-systemic banks supported by DI funds. - (ii) Regional resolution fund for systemic banks after soundness and governance issues addressed and funding accumulated. - Benefits: broader risk diversification, access to more resources, DI to reduce deposit runs, liquidity facility to mitigate pressures. - Constraints: must be tailored to ECCU quasi-currency board; current LOLR/ELA scope limited and requires unanimous Monetary Council approval. ### Payments efficiency, digital payments, and the ECCB digital currency pilot - Payment landscape and initiatives - Cash and checks estimated to account for about 80 percent of total payments. - Credit card merchant fees typically 4-6 percent per transaction (vs. 1-2 percent globally). - ECCB initiatives: ECACH check imaging (first phase completed 2015); EFT system launched March 2018; DXCD pilot launched March 2019; pilot deployment in Spring 2020 in a controlled environment. - Digital currency pilot design features and safeguards (Box 3) - ECCB sole issuer and redeemer; maintains two-tier system where private sector handles AML/CFT/KYC. - About 15 financial institutions in four ECCU member economies (Antigua and Barbuda, Grenada, St. Kitts and Nevis, and St. Lucia) to participate. - Digital currency use: peer-to-peer, B2B, B2C; wallet holding and transaction limits; no interest; no FX use; tourists excluded. - Issuing process: financial institutions request DXCD from ECCB; ECCB sends DXCD via blockchain; institutions distribute to clients in exchange for deposits or cash; clients have no direct central bank accounts. - Data access: ECCB observes transactions anonymously (no identities/purposes); financial institutions observe identity/purpose for their customers and maintain client databases. - AML/CFT implication: primary responsibility on financial institutions for monitoring and due diligence; ECCB supervisory role. - Risks and mitigation priorities - Financial intermediation: disintermediation risk mitigated by ample excess liquidity but uncertain under stress; depositors sensitive to opportunity cost; liquidity stress testing and coordination between ECCB and supervisors recommended. - Financial integrity: operational guidelines and regulations need review and upgrades to address new AML/CFT risks. - Cybersecurity: ECCB exposed to operational/financial risks from cyberattacks; improvements needed in proactive cybersecurity operations, IT resilience, third-party/cloud risk management, and supervisory expertise. - Data and privacy governance: establish frameworks to protect financial/personal data. - Post-pilot actions - Thorough review of pilot results; further tests, cybersecurity and AML/CFT strengthening, legal/regulatory updates; comprehensive cost-benefit analysis of the new digital currency ecosystem recommended. - Policy recommendation - The ECCB’s digital currency project should proceed cautiously and fully implement embedded safeguard measures; pilot used to assess risks for financial intermediation, financial integrity, and cybersecurity. ### External position, competitiveness, and structural reforms - Staff finding: EBA–lite current account and REER models suggest external position in 2018 was weaker than consistent with fundamentals, implying an exchange rate overvaluation in 2018. - Key statistics and projections (selected) - Real GDP: 0.7 (2017); 3.7 (2018); 3.7 (2019); projections: 3.4 (2020), 3.0 (2021), 2.6 (2022), 2.4 (2023), 2.3 (2024), 2.2 (2025). - Current account balance: -7.3 (2017); -8.4 (2018); -7.6 (2019); projections: -8.6 (2020), -7.9 (2021), -6.8 (2022), -6.6 (2023), -6.3 (2024), -6.2 (2025). - ECCB holdings of external assets (international reserves) end-year: US$1,747 million (2018); US$1,802 million (2019); projections: US$1,959 million (2020) ... US$2,428 million (2025). - Reserves in months of current year imports: 5.3 (2017); 4.7 (2018); 4.7 (2019); projections: 4.8 (2020–2025). - Total public sector debt: 72.4 (2017); 70.5 (2018); 69.2 (2019); projections: 68.9 (2020), 68.4 (2021), 68.0 (2022), 67.6 (2023), 67.7 (2024), 67.8 (2025). - Policy recommendations to enhance competitiveness and sustainability - Implement fiscal consolidation. - Advance structural reforms: strengthen investment and business climate; improve public sector efficiency; reduce energy and transportation costs and tariffs; advance labor market reforms and regional integration. - Improve connectivity and Fintech to reduce business costs and enhance efficiency. - Improve statistics and transparency: harmonize public debt statistics, back-cast BPM6-consistent data, timelier BoP releases, upgrade private external debt data. ### Implementation, technical assistance, and capacity building - CARTAC and Fund support areas and progress - Tax administration: VAT implementation largely complete; LMTU and DPMU implementation progressing. - Data analytics and risk-based compliance: regional program deployed; capacity constraints remain. - PFM and resilience: PEFA assessments and draft PFM legislation advanced; Disaster Resilience Strategy pilots in Dominica and Grenada. - Financial stability TA: development of MPIs and SRIs; financial stability report published; stress-testing and FSIs for banks, insurance, and credit unions progressed. - Legislative and regulatory TA: Basel II/III roadmap, insurance/pension draft bills, credit reporting harmonization. - Payments and digital currency: technical assistance on digital currencies, FinTech governance, and legal frameworks ongoing. ### Staff appraisal and prioritized recommendations (concise) - Macroeconomic summary - Growth rebounded in 2018-19; fiscal deficits increased; public debt ratio continued to decline. - External position assessed as weaker than implied by medium-term fundamentals. - Policy prescription: fiscal consolidation and structural reforms to enhance competitiveness and sustainability. - Regional integration and fiscal frameworks - Use regional coordination to complement national policies (e.g., coordinate tax incentives and CBI due diligence). - Build national fiscal responsibility frameworks, buffers, and Disaster Resilience Strategies. - Financial sector priorities - Accelerate ECCB’s reform agenda: repair bank balance sheets, implement impaired assets standard expected by January 2020, modernize insolvency frameworks, review governance, expedite AML/CFT legislation, advance consolidated supervision, monitor CBRs and cybersecurity. - Payments modernization - Continue modernizing payment systems; examine integrating credit unions into core payment system with equivalent prudential oversight; advance e-government and early digital ID introduction. - Preconditions for deeper financial integration - Address near-term priorities (balance sheet repair, fiscal backstopping) before moving toward deposit insurance, regional resolution framework, and fuller banking union. *International Monetary Fund — EASTERN CARIBBEAN CURRENCY UNION chapter (excerpts).* ### 1. Tax Incentives in the ECCU: High Costs, Limited Benefits ______________________________________ 13 ### 1. Tax Incentives in the ECCU: High Costs, Limited Benefits ### Recent developments - Growth - GDP growth accelerated from ¾ percent in 2017 to 3¾ percent in 2018, driven by buoyant tourism, sizable CBI inflows, and recovery from the 2017 hurricanes in Anguilla and Dominica supported by large public reconstruction investment. - Stay-over tourism arrivals rose by 15 percent in 2019 (momentum remained strong). - Inflation muted at 0.3 percent y/y in June 2019. - Fiscal outcomes - Overall fiscal deficit rose from ½ to 1¼ percent of GDP in 2018 because of higher current outlays and reconstruction investment (significantly financed by CBI inflows). - Public debt fell by 2 points to about 70 percent of GDP in 2018 (reflecting still-moderate deficits and higher growth). - Underlying deficit (net of CBI inflows) was elevated at 5 percent of GDP. - Some countries have built sizable fiscal deposit buffers (often CBI resources) and established contingency funds for natural disasters (including Grenada and St. Vincent and the Grenadines). - In March 2019, the ECCU launched an initiative to harmonize the CBI programs’ due diligence processes. - Banking and financial sector - Bank lending to the private sector was flat in 2018; increased credit by indigenous banks was offset by retrenchment of foreign banks. - Low bank profitability (RoA of below 1 percent since 2010) has led some banks to expand overseas investment portfolios (including risky equity). - Non-performing loans (NPLs) were 10 percent of total loans in June 2019 and were thinly provisioned. - Eastern Caribbean Asset Management Corporation (ECAMC) deadline extended to October 2020 for acquisition of NPLs (original deadline was July 2019). Caribbean Development Bank (CDB) financing held back because several governments hesitated to provide sovereign guarantees. - ECCB upgraded impaired assets classification and provisioning standard expected to come into effect by January 2020. - Non-bank financial institutions - Credit unions have grown strongly with lending growth of 10 percent annually; several have systemic importance. - Credit union NPLs about 7 percent of total loans; capital buffers often limited. - Insurance sector profitability recovered in 2018 despite higher post-hurricane loss expenses but remains undersized and vulnerable; high premia contribute to under-insurance and public sector contingent liabilities. - Non-banking sectors (including pensions) face weaker regulation, data, governance, and technical capacity; harmonized regional regulation prepared but not yet passed in most jurisdictions. - Correspondent banking and payments - Continued divestment by global financial groups has raised concerns about correspondent banking relationships (CBR); number of active correspondents declining though most ECCU banks still have more than one active correspondent. - Transaction volumes continue to grow, indicating contained macroeconomic impact from increased international payments costs. - ECCB launched a pilot study for a central bank digital currency: contract signed in March 2019 with Bitt Inc. to pilot a digital currency EC dollar (DXCD) to address payment inefficiencies and high costs. - ECCB pilot deployed in two phases: (i) development and testing (through March 2020); and (ii) roll-out in four pilot countries (from April to September 2020). - External sector - Staff estimates current account deficit widened to 8.4 percent of GDP in 2018, largely reflecting Dominica’s hurricane-related reconstruction imports. - Net FDI inflows estimated at 9.1 percent of GDP in 2018, estimated to have more than financed the current account deficit. - Real effective exchange rate (REER) appreciated 2.1 percent during 2018 due to U.S. dollar strengthening. ### Outlook and risks - Growth projection - GDP growth is projected to gradually ease to 2¼ percent by 2025 (a long-term historical average for the region). - Near-term support from reconstruction investment in hurricane-hit countries, tourism investment, and agribusiness projects; moderation of FDI-related CBI inflows would temper activity. - Weak bank credit conditions expected to weigh on the growth outlook. - Inflation expected to stabilize at around 2 percent (in line with US). - Current account deficit expected to narrow as reconstruction-related import demand wanes. - Moderation in CBI inflows would widen fiscal deficits and halt recent ECCU-wide downward public debt dynamics, with substantial heterogeneity across countries. - Baseline incorporates average annual fiscal cost of natural disasters ranging from 0.5 to 1.5 percent of GDP. - Downside risks (see Annex III) - Global: adverse confidence effects from rising protectionism, US and global growth shocks; staff VAR estimates suggest a potential decline of real GDP by 0.5 percentage point in response to a 1 percent fall of activity in tourism-source countries. - Other global risks: sharp rise in risk premia, cyberattacks, large swings in energy prices. - Region-specific risks: increased frequency/intensity of natural disasters due to climate change, a significant decline of CBRs, further exit of foreign banks. - Financial sector vulnerabilities: systemic spillovers involving banks and non-banks; potential sovereign/financial adverse feedback loops. - Upside risks: further upward surprises in CBI inflows, provided they are well-managed. ### Policy discussions: leveraging regional integration - Rationale - Multiple challenges compounded by large external shocks and lack of economies of scale; advancing regional integration can catalyze capacity and resources for better policy responses if well sequenced with proper risk-management safeguards. - Substantial gaps remain in fiscal and financial sector policies despite higher measured economic and institutional integration relative to other Caribbean countries. - Sequencing and interlinkages (near-, medium-, and long-term) - Near term - Reduce bank NPLs / activate ECAMC. - Strengthen bank regulation and supervision. - Review ECCB governance. - Financial safety net measures and fuller resolution framework. - Cautiously pilot a central bank digital currency (CBDC) and upgrade traditional payment systems, including fast payments and private e-money. - Fiscal measures: fiscal rules / MTFF / PFM improvements; build structural and social resilience to natural disasters. - Medium term - Achieve financial resilience with insurance layering including national saving funds. - Achieve 60 percent of GDP public debt target. - Peer-reviews of fiscal performance. - Coordinate CBI and tax incentives. - Optional regional stabilization fund. - Review banks’ and credit unions’ governance; harmonize non-bank regulation; consolidate financial oversight. - Upgrade retail payments and review options for enhancing retail payments. - Long term - Consolidation of financial oversight and deeper financial integration measures. - Expected spillovers - Fiscal integration could strengthen government backstopping to advance a banking union. - A more robust financial system would help raise payments efficiency. - Cautious piloting of a digital currency is one pathway to improve payments, subject to preconditions and risk management. *International Monetary Fund — EASTERN CARIBBEAN CURRENCY UNION chapter (excerpts).* ### 11. The ECCU countries’ overriding problems remain fiscal sustainability challenges and ### 11. The ECCU countries’ overriding problems remain fiscal sustainability challenges and policy procyclicality ### Fiscal challenges and policy dynamics - Recurring natural disasters and global shocks, combined with small size, precarious revenue and financing base, and limited fiscal frameworks, cause large swings in output and government revenues that are amplified by large and volatile CBI flows. - Government consumption rises in good economic times and is downward-inflexible in bad times, constraining public investment and resulting in over-the-cycle declines in public investment with adverse impacts on growth and resilience-building. - Staff estimates (based on authorities' data) underpin the assessment of procyclicality in government consumption and public investment responses to output. ### Debt sustainability and resilience-building priorities - Achieving debt sustainability and building resilience to natural disasters through improved national frameworks are the region’s fiscal policy priority. - Progress in implementing credible country-specific fiscal responsibility frameworks to reach the regional 60 percent of GDP public debt target should be accelerated. - Establishment of frameworks for saving (building on progress to startup saving funds), supporting public investment in resilient infrastructure, and insurance for natural disasters would complement debt-sustainability efforts. - Continued upgrading of fiscal institutions and Public Financial Management (PFM) practices is needed (2018 ECCU staff report). - Comprehensive country-specific disaster resilience strategies, currently piloted in Dominica and Grenada, would provide roadmaps for strengthening resilience and facilitating donor coordination and support. ### ECCB regional role and safeguards - The ECCB has engaged in harmonizing fiscal data, improving debt management, and coordinating medium-term fiscal framework discussions to benchmark progress toward the regional debt target. - The ECCB has explored proposals to manage and finance “regional projects,” but staff emphasize protecting the integrity of the quasi-currency board arrangement by safeguarding the ECCB’s operational independence and ringfencing its reserves, drawing instead on national government funding. ### Practical steps to leverage regional integration for fiscal sustainability - Regional coordination of tax incentives: - The ECCU economies have extensively used tax concessions to attract FDI, producing a race to the bottom. - Staff empirical analysis suggests large fiscal costs while economic benefits appear marginal: tax incentives do not meaningfully impact overall FDI, GDP growth, or employment. - FDI to the Caribbean is positively related to the stock of public infrastructure, implying a policy tradeoff between granting tax incentives and attracting FDI through better public infrastructure financed from higher revenues. - Recommendation: streamline and re-balance tax incentives, supplemented by regional agreements, drawing on best practices and trends in global taxation. - Regional coordination of CBI revenues: - CBI inflows are large and subject to significant uncertainty, reflecting another race to the bottom among ECCU countries. - Protection of programs’ financial integrity provides rationale for collective action to address transparency standards and perceptions of abuse. - Implementation of the March initiative to harmonize CBI due diligence processes could help sustainability of revenues and support financial stability. - For the medium term, staff suggest exploring CBI program coordination on pricing and the use of quotas to support revenues over time. - Regional Stabilization Fund (RSF): - An RSF could be used, in the long term, as a fiscal buffer of pooled resources against natural disasters, CBI revenue uncertainty, tourism, and global financial shocks. - Staff’s stochastic simulations indicate substantial scope for regional fiscal risk sharing: cross-country cyclical asymmetries imply resource savings with a RSF of about one-half of the sum of individual countries’ funds for the same stabilization effect. - With responsible national policies, a RSF could reduce public expenditure procyclicality and increase public investment by saving resources in good times and financing investment in bad times. - Simulations indicate that saving of resources historically used to finance government consumption booms can increase public investment by 0.5–1.5 percent of GDP per year, with significant stabilization effects and increases in private investment, employment, output and wages. - A RSF could supplement individual-country self-insurance against natural disasters. ### Preconditions and governance for regional arrangements and the RSF - Success of regional coordination arrangements, and particularly the RSF, hinges on strong fiscal governance pre-conditions: - RSF operations should be fully financed by all governments and reflected in national fiscal accounts. - RSF authority could be granted by acts of parliament. - Fiscal responsibility and medium-term fiscal frameworks, together with improved PFM procedures, are prerequisites for monitoring and enforcing RSF qualification requirements. - Governance of the RSF should envision no involvement of the ECCB and be transparent, with clear saving and investment rules to address misappropriation risks and clarify sovereign ownership and net asset positions vis-à-vis the RSF. - Triggers for disbursement should be objective, transparent, and automatic. ### Boxed findings: Tax incentives (Box 1) - Empirical findings: - For a sample of eleven tourism-based Caribbean countries (including the six independent ECCU states), an increase in foregone revenue by 1 million EC dollars is associated with an increase in the number of hotel rooms by 0.2 percent, controlling for other macro-level factors. - Tax incentives do not seem to impact overall FDI, GDP growth, or employment. - FDI to the Caribbean is positively correlated with the stock of public infrastructure, especially when countries experience natural disaster shocks. - Fiscal costs and distributional impacts: - Foregone tax revenue is estimated to have averaged 5.8 percent of GDP in 2010-18 annually in the region, or 21 percent of total revenue. - The cost of tax incentives is equivalent to as high as $2,500 per job in the formal sector. - Footnote: Fiscal costs are estimated at about one-fifth of government revenues on average in the region. - Policy principles recommended for tax incentives: - Provide explicit rationale for market failures incentives aim to address, with well-defined targets, costs, and sunset clauses. - Re-balance incentives toward better-designed instruments (e.g., investment allowances instead of tax holidays). - Broaden the tax base while reducing tax rates to enhance investment attractiveness. - Reduce scope for discretion toward a rules-based system. - Design incentives as part of a sustainable fiscal framework and incorporate them in the budget. - Strengthen tax administration and enforcement with periodic assessments to reduce leakages and distortions. - A coordinated regional approach (e.g., harmonization for the tourism industry) is necessary to overcome collective action problems. ### Boxed findings: Regional Stabilization Fund (Box 2) - Rationale and simulation results: - Similar economic structures and shock exposures produce co-movements, but significant asymmetries (tourism market niches, asymmetric natural disasters, agricultural weight) imply gains from risk pooling. - A RSF can harness cross-country asymmetries to cushion shocks if strong fiscal governance and country mandates address moral hazard and legal/enforcement risks. - Simulation result example: For a probability of RSF depletion at 1 percent, the estimated RSF would be about 5 percent of regional GDP, while the sum of individual countries’ stabilization funds is near 10 percent. - A RSF is estimated to be about ½ of the size of the sum of individual countries’ stabilization funds for the same level of saving contribution and withdrawal. - Staff simulations using a dynamic general equilibrium model indicate benefits from faster recovery after natural disasters are likely to outweigh RSF opportunity costs (including distortionary taxation to service additional public debt). - The possible increase in public investment obtained in Monte Carlo simulations would raise long-term output, consumption, and labor income. - Macroeconomic impacts reported: - The RSF would increase private investment, employment, output, and wages; simulation metrics include changes in output, consumption, labor income, and employment (quantified in model results). ### Financial integration and sector vulnerabilities - Banking sector strengths and vulnerabilities: - Banking sector liquidity and capital ratios are broadly strong, and aggregate NPL ratios have generally been improving, but asset quality remains a concern. - Sizable impaired assets under-provisioning in some indigenous banks masks heterogeneity and intensifying problems in some banks with financial-fiscal linkages. - Market risks are increasing as some banks invest in riskier portfolios abroad; reduced presence of global banks may weigh on costs and quality of financial services, including availability of CBRs. - Entry of new regional banks could heighten competition and associated risks. - Non-bank sector vulnerabilities: - Pockets of vulnerability exist in the non-bank sector, notably credit unions regulated by fragmented and looser supervisory frameworks. ### Financial-sector reform priorities and sequencing - Authorities are pursuing multipronged reforms (ECCB and national authorities), but progress is often slowed by country-level delays. - Key reform areas and targets: - Strengthen banks’ balance sheets via prompt supervisory enforcement and implementation of standards. - Review ECCB and deposit-taking institutions’ governance frameworks to increase operational autonomy and compliance. - Short-term regulatory and supervisory actions: - ECCB should strengthen supervisory requirements for market and operational risk (including cybersecurity), with time-bound plans. - Implement treatment of impaired assets standards and establish realistic plans for all banks to reduce NPLs below 10 percent by mid-2020 and meet the 5-percent benchmark by end-2023. - Mandate credible plans to improve provisioning and resolve NPLs by selling to the ECAMC or fully provisioning as required by regulation, and require prompt disposal of non-banking assets (e.g., land) within statutory timelines. - ECCB statutory powers should be used to raise capital as necessary. - Consistent with IMF TA advice, absent substantive operationalization of the NPL acquisition mandate prior to three months of the revised deadline, the ECAMC’s operations should be downscaled to receivership or wound up. - Macroeconomic stress testing of financial institutions would strengthen supervision. - Modernize insolvency law (including the e-conveyancing framework) and ease restrictions on non-citizen property ownership to maximize NPL recovery. - Phase out the Minimum Saving Rate, which distorts the credit market; its social objectives could be addressed through fiscal policies. - Medium-term governance actions: - Review ECCB governance frameworks to provide greater operational autonomy to ECCB management vis-à-vis the ECCB Board and the Monetary Council to increase compliance and enforcement while preserving regional consultation. - Limit governments’ involvement to exchange rate policies and fiscal backstopping. - Establish a hierarchy between objectives (price stability as primary, financial stability as secondary) to help enforcement when objectives conflict. - Review deposit-taking institutions’ governance to protect lending from special-interest influence (e.g., ensure most Board members are independent for indigenous banks with government ownership). *Source: Staff estimates based on authorities' data.* ### 19. Further measures to manage risks from CBRs should be advanced promptly, while ### 19. Further measures to manage risks from CBRs should be advanced promptly, while ### Strengthening monitoring and regulation of CBRs and non-banks - The ECCB should fully implement the toolkit based on IMF technical assistance to strengthen monitoring of banks’ CBRs. - Remaining countries should expedite legislation to update the regulatory and AML/CFT oversight frameworks, including for non-banks. - ECCB initiative to establish a common platform for indigenous banks’ back-office risk and compliance functions through a shared-services model is expected to: - Reduce operational costs. - Mitigate indigenous banks’ limited size. - Stronger oversight of nonbanks to support balance sheet repair: - National authorities should provide adequate resources, improve enforcement, and address data gaps for credit unions and insurance companies. - Realistic and urgent plans are needed for resolution of weak non-banking institutions. - Insurance industry: adopt strengthened risk mitigation standards and practices (e.g., for market and liquidity risk and minimum reinsurance) and finalize the harmonized regulatory framework on insurance, pension, and deposit-taking non-bank sectors. - Enhanced ECCB monitoring of large credit unions is positive and could be deepened. - Advance consolidated supervision of financial groups, including off-balance sheet operations (e.g., management of pensions and other investment funds). - Effective consolidation of regional financial sector oversight recommended: ECCB to have supervisory responsibility for all deposit-taking institutions and another agency to supervise the non-deposit taking financial sector. ### Progressing toward a fuller banking union and resolution framework - Preconditions and sequencing: - Banks’ balance sheet repair and a credible fiscal backstopping should be preconditions to deposit insurance/resolution funds based on industry contributions, adjusted for participating institutions’ size and risk. - An operational fiscal backstop would be necessary initially while resolution funds are accumulated. - Suitable model for resolution and crisis management after preconditions met: - (i) Least-cost resolution funding for non-systemic banks supported by DI funds. - (ii) A regional resolution fund for systemic banks, after addressing bank soundness and governance issues and accumulating a critical mass of funding. - Supporting reforms needed to implement bank resolution and crisis management framework: - Advance reform in resolution funding of systemic banks. - Develop regional crisis management plans (including non-banks). - Consolidate broad financial sector oversight. - Adopt a macroprudential framework. - Establish a regulatory regime for systemic institutions. - Benefits of a regional financial safety net: - Broader risk diversification and access to more resources. - A DI scheme could reduce the risk of deposit runs where implicit national guarantees are insufficient. - An effective liquidity facility can mitigate liquidity pressures on solvent banks and contain systemic spillovers. - Constraints and design considerations: - Financial safety net must be tailored to ECCU quasi-currency board constraints. - Current regulations envision very limited scope for LOLR/ELA; any revision must be consistent with the quasi-currency board arrangement and solvency requirement to qualify for liquidity assistance. - Stronger credit union performance, regulation, and supervision are prerequisites for their participation in the financial safety net. - Current LOLR facility requires unanimous approval of the Monetary Council, limiting central bank discretion to assist illiquid but solvent banks. ### Payments efficiency, digital payments, and the ECCB digital currency pilot - Retail payment landscape: - Cash and checks estimated to account for about 80 percent of total payments. - Credit card merchant fees typically carry charges of 4-6 percent per transaction, compared to 1-2 percent globally. - Checks are inefficient due to settlement time; mobile subscription is high but digital payment uptake is underutilized. - ECCB initiatives and timeline: - Eastern Caribbean Automated Clearing House project initiated in 2009; first phase (check imaging clearing system) completed in 2015. - Electronic Funds Transfer (EFT) system launched in March 2018 to improve interoperability across financial institutions. - Digital currency pilot project using blockchain launched in March 2019 to reduce reliance on cash and cheques and improve retail payment efficiency. - The digital currency pilot will be deployed in Spring 2020 in a controlled environment. - Empirical findings and expected benefits: - Staff’s empirical analysis suggests use of digital payment technology is associated with higher labor productivity growth in recent years. - Encouraging competition and integrating credit unions into core payment systems should be examined, subject to equivalent prudential oversight. - Advancing e-government initiatives and early introduction of the digital ID are desirable to increase digital payment volume and support the digital economy project. - Digital currency pilot design features and safeguards (Box 3): - General scheme: - ECCB has sole authority to issue and redeem the digital currency and can fully control its supply. - ECCB preserves a “two-tier system”: private sector interacts with customers and handles AML/CFT/KYC; central bank provides trust and manages the scheme. - About 15 financial institutions in four ECCU member economies (Antigua and Barbuda, Grenada, St. Kitts and Nevis, and St. Lucia) will participate in the pilot. - The digital currency can be used for peer-to-peer, business-to-business, and business-to-customer transactions. - The size of holding and transaction values per wallet is limited, with no interest accrued and no use for foreign exchange transactions. - Tourists will not be allowed to use the digital currency. - Process of issuing digital currency: - Financial institutions request the digital currency from the ECCB. - ECCB sends the digital currency to them using the blockchain network. - Financial institutions distribute it to clients upon request in exchange for deposits or cash. - This scheme implies that clients do not have direct access to central bank accounts. - Access to transaction data: - ECCB can observe each transaction data (but anonymously) and the outstanding stock in each digital wallet; ECCB does not see identities or purposes of transactions. - Financial institutions can fully observe identity and purpose for transactions involving their own customers and are responsible for maintaining their clients’ databases. - Implication for AML/CFT: - Main responsibility for transaction monitoring and client due diligence falls on financial institutions; ECCB’s role is supervisory to ensure compliance with the AML/CFT framework. - Risks and mitigation priorities for the pilot: - Financial intermediation: - Ample excess liquidity would mitigate disintermediation risk, but effects on payment instrument choice and funding are uncertain, especially under stress. - Staff analysis suggests depositors are sensitive to opportunity cost of holding deposits; demand for a default-risk-free digital currency could rise in times of banking stress or low interest rates. - ECCB and national supervisors should coordinate on liquidity and funding analysis, including liquidity stress testing for banks and credit unions. - Financial integrity: - Current AML/CFT framework will be broadly maintained, but operational guidelines and regulations need thorough review and upgrades to address new risks. - Cybersecurity: - ECCB could be exposed to operational and financial risks from malfunctioning due to cyberattacks. - Areas for improvement: - Develop proactive cybersecurity IT operations within the ECCB (e.g., “real-time 24/7” monitoring). - Strengthen IT resilience and operations (e.g., IT asset, configuration, and vulnerability management). - Improve third party and cloud risk management. - Allocate more supervisory resources to ensure effective supervisory expertise and coordination for cybersecurity at financial institutions. - Data and privacy governance: - Establish data and privacy governance frameworks to protect sensitive financial and personal data. - Post-pilot actions: - ECCB plans a thorough review of pilot results. - Additional work may be warranted to further test the system, strengthen cybersecurity and AML/CFT operations, and update legal and regulatory frameworks. - Authorities are encouraged to conduct a comprehensive cost and benefit analysis of the new digital currency ecosystem. *Source: Fund staff.* ### 30. To ensure external sustainability and boost potential growth, ECCU authorities should ### 1eccea2020001 - 30. To ensure external sustainability and boost potential growth, ECCU authorities should ### External position, competitiveness, and structural reform - Staff finding: "Both the EBA–lite current account and real effective exchange rate models suggest that the external position in 2018 was weaker than that consistent with fundamentals, implying an exchange rate overvaluation in 2018." - Recommended policy actions to enhance competitiveness, sustainability, and non-tourism exports: - Implement fiscal consolidation. - Advance structural reforms, including: - Strengthening investment and business climate. - Improving public sector efficiency. - Reducing energy and transportation costs and tariffs. - Advancing labor market reforms and regional integration. - Improve connectivity and Fintech to reduce business costs and enhance efficiency (see Annex II and Figure 7). ### Statistics, data, and transparency - ECCB priorities to improve ECCU area statistics: - Further harmonization of public debt statistics. - Back-casting of BPM6-consistent data. - More timely publication of BoP releases. - Upgrading private external debt data. - Note: Debt portal launched in mid-2019. ### Authorities’ macroeconomic views and targets - Authorities broadly agreed with staff’s macroeconomic outlook. - ECCB staff projection: ECCU GDP growth to ease to "3¼ percent in 2019, with a slight uptick of 3.5 percent in 2020." - Key risks identified by authorities: natural disasters, a global economic slowdown, a further loss of CBRs, and cyber threats. - Debt target commitment: authorities reaffirmed commitment to meeting the "60 percent of GDP" debt target, while noting substantial disaster risks and the importance of growth. - Authorities’ fiscal strategy comments: - Some plan to advance elements of their own fiscal responsibility frameworks and to build national saving funds and resilient infrastructure. - Argued for stepping up international grant financing given their high cost. - Views on revenue-side coordination and tax incentives: - Mostly in favor of coordinating revenue-side measures, but concerns about enforcement across sovereign countries. - Some authorities stressed retaining flexibility on tax incentives to attract FDI and urged a nuanced view of tax incentives. - Views on CBI and transparency: - Committed to advancing cooperation to strengthen transparency and integrity of CBI programs; some saw merit in retaining competition with country differentiation. - Regional stabilization fund: - Some authorities saw potential merits; others skeptical about practical implementation. - Most pointed to insufficient resources to finance initial capital unless provided through international funding. - Other obstacles: differences in economic fundamentals, development levels, policy views, and fiscal sustainability challenges. - Some authorities prefer prioritizing national saving funds until credible safeguards for pooled resources exist. ### Financial stability, bank balance sheets, and regulatory reforms - Authorities largely agreed with staff on financial stability risks and challenges: - Concerns about departure of global banks (loss of CBRs) and both risks and opportunities from consolidation of indigenous banks. - Risks from rapid credit unions’ growth, including from domestically systemic institutions and softer loan qualification requirements. - Emphasis on harmonized regional regulation to address risks. - Concerns about limited size of indigenous banks, elevated market and operational risks, but noted declining NPL levels with improved provisioning in most countries. - Expectation that IFRS 9 should facilitate broad provisioning for aged NPLs, resulting in a reduction in NPLs. - Authorities’ reform agenda highlights: - Phased upgrade to Basel II/III standards. - Project to consolidate back-office risk and compliance functions of indigenous banks. - Upcoming issuance of the treatment of impaired assets standard. - Pending corporate governance standards with strengthened fit and proper requirements. - Commitment to the ECAMC strategy; deadline extension deemed necessary; expectation of initiating NPL purchases in 2020. - Concern that extension of government guarantees to facilitate CDB financing for NPL acquisitions may be difficult given already high public debt levels. - ECAMC capacity constraint concerns due to shallow real estate markets. - Initiatives to advance collateral realization and review insolvency legislation to facilitate loan recovery. - Need to step-up monitoring of bank investment portfolios for compliance with statutory limits. - Governance and ECCB autonomy: - Most authorities consider current legislation provides appropriate autonomy to the ECCB. - ECCB governance framework with Ministers of Finance at the Monetary Council and government representatives at the Board viewed as appropriate. - Delays in implementing financial reforms attributed mainly to national parliamentary processes rather than insufficient ECCB autonomy. - Long-term banking union and deposit insurance: - Authorities welcomed staff proposals for a deeper banking union in the long term, agreeing on preconditions. - Preconditions include addressing bank and non-bank balance sheet weakness and establishing solid financial fundamentals to enable industry-funded deposit insurance. - A project geared towards establishing a DI scheme is currently being developed. - Staff advice: emergency liquidity and resolution funding frameworks require strong fiscal fundamentals and financial soundness and should be tackled later. ### Payments, digital currency, and FinTech - ECCB stressed central bank leadership in testing digital payments in the ECCU. - ECCB is exploring the feasibility of a central bank digital currency. - Rationale: in the ECCU with multiple islands, payments are slow and costly, and lack of economies of scale constrains private sector solutions. - Digital currency pilot to be conducted in a controlled environment; ECCB will conduct a thorough review after the pilot. - Traditional payment system improvements: - By 2025, aim to increase the use of credit and debit cards and electronic transfers by "40-60 percent." - Exploring options to integrate credit unions in core payment systems to enhance competition. - Lack of legislation has deterred FinTech and non-bank payment service development; authorities plan to review the legal framework. - ECCB welcomed technical assistance on governance and legal frameworks for FinTech. - Early introduction of a digital ID is needed to support payment and e-government initiatives. ### Staff appraisal and prioritized recommendations - Macroeconomic summary: - "Growth has rebounded in 2018-19, fiscal deficits have increased, and the public debt ratio has continued to decline." - Outlook: growth expected to gradually ease, with downside risks from natural disasters and continued pressures of CBRs. - Challenge: achieving the "60 percent of GDP" debt target while building resilience to natural disasters for most countries. - External position assessed as weaker than implied by medium-term fundamentals and desirable policies. - Policy prescription: implementing fiscal consolidation and structural reforms to enhance competitiveness and sustainability. - Regional integration and fiscal frameworks: - Greater regional integration can complement national policies and mitigate risks. - Robust national fiscal responsibility frameworks and buffers to natural disasters are key, including Disaster Resilience Strategies currently being piloted in Dominica and Grenada. - Well-sequenced regional integration can catalyze resources for better policy responses. - Fiscal coordination and pooling: - Fiscal integration through regional coordination of selected revenue policies could create fiscal space for ECCU public investment. - Scope to cooperate on tax incentives and CBI program conditions, including financial integrity, to limit the "race to the bottom" and create fiscal space while making FDI more attractive via better infrastructure. - Over the longer term, regional pooling of fiscal resources can support macroeconomic stabilization and resilience building, requiring strong governance and financing by national budgets to protect ECCB’s international reserves and the credibility of its quasi-currency board arrangement. - Financial sector priorities: - Accelerate ECCB’s reform agenda within a holistic and well-sequenced plan. - Short-term: step up efforts to repair bank balance sheets, including via sales to the Eastern Caribbean Asset Management Company. - Implement the new treatment of impaired assets standard, "now expected by January 2020," without delay. - Modernize insolvency frameworks to facilitate loan recovery. - Review ECCB’s and deposit-taking institutions’ governance frameworks and expedite passage of critical legislation, including AML/CFT, to increase compliance and enforcement. - Advance consolidated supervision of financial groups. - Urgent measures to monitor and address market and operational risks, including from correspondent banking relationships and cybersecurity. - Preconditions for deeper financial integration: - Provided critical near-term priorities are addressed, long-term steps toward a fuller banking union could include: - (i) enhancing the financial safety net with a robust deposit insurance scheme; and - (ii) establishing a regional resolution and crisis management framework. - Both require operationalizing credible fiscal backstopping. - Improved regulation of systemic institutions, regional consolidation of non-bank financial sector oversight, and progress in establishing a macroprudential mandate and toolkit will help address region-wide systemic risk. - Payments modernization to solidify the monetary union: - Continue modernizing the payment system and review the legal framework to allow FinTech and nonbank e-payment services to operate and innovate. - Examine integrating credit unions into the core payment system alongside establishing equivalent prudential oversight. - Advance e-government to increase digital payments and support private sector opportunities. - Early introduction of a digital ID is needed to support these initiatives. *https://www.imf.org/-/media/files/publications/cr/2020/english/1eccea2020001.pdf* ### 49. The ECCB’s digital currency project should proceed cautiously. To contain vulnerabilities, ### The ECCB’s digital currency project should proceed cautiously ### Policy recommendation on the digital currency - The ECCB’s digital currency project should proceed cautiously. - To contain vulnerabilities, the authorities should fully implement the safeguard measures embedded in the design of the digital currency. - The pilot will provide the opportunity to examine the various risks of the digital currency—including for financial intermediation, financial integrity, and cybersecurity—and assess policy gaps. - 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 and growth outlook - Regional growth picked up strongly in 2018, reflecting buoyant construction, trade, and transport sectors. - All economies grew positively over the past two years, with a remarkable recovery in AIA, DMA, and MSR, but their per capita GDP has yet to recover to 2016 levels. - Key growth and price indicators (Table 1, selected): - Real GDP: 0.7 (2017); 3.7 (2018); 3.7 (2019); projections: 3.4 (2020), 3.0 (2021), 2.6 (2022), 2.4 (2023), 2.3 (2024), 2.2 (2025). - GDP deflator: 1.7 (2017); 1.6 (2018); 1.6 (2019); projections: 2.1 (2020), 2.0 (2021), 1.9 (2022–2024), 2.0 (2025). - Consumer prices, average: 1.1 (2017); 1.4 (2018); 1.4 (2019); projections: 1.9 (2020–2021), 2.0 (2022–2025). - Region’s output has just recovered to its potential; inflation pressures are muted in part due to lower fuel and commodity prices. ### External sector and reserves - Current account and external financing (Table 1 and Table 6, selected): - Current account balance: -7.3 (2017); -8.4 (2018); -7.6 (2019); projections: -8.6 (2020), -7.9 (2021), -6.8 (2022), -6.6 (2023), -6.3 (2024), -6.2 (2025). - Trade balance: -29.9 (2017); -33.6 (2018); -33.1 (2019); projections: -32.8 (2020), -32.3 (2021), -31.7 (2022). - Services, incomes and transfers (percent of GDP): 22.5 (2017); 25.2 (2018); 25.5 (2019); projections: 24.2 (2020), 24.4 (2021), 24.9 (2022), 25.5 (2023), 27.2 (2024), 26.8 (2025). - Travel share of services (percent of GDP): 38.4 (2017); 39.9 (2018); 40.6 (2019); projections: 40.9 (2020), 41.9 (2021), 42.2 (2022), 43.1 (2023), 45.5 (2024), 46.7 (2025). - International reserves and coverage: - ECCB holdings of external assets (international reserves) end-year (Table 6 memorandum): US$1,747 million (2018); US$1,802 million (2019); projections: US$1,959 million (2020), US$2,056 million (2021), US$2,132 million (2022), US$2,232 million (2023), US$2,323 million (2024), US$2,428 million (2025). - Reserves in months of current year imports of goods and services: 5.3 (2017); 4.7 (2018); 4.7 (2019); projections: 4.8 (2020–2023), 4.8 (2024), 4.8 (2025). - ECCB reserve cover remains close to 100 percent of reserve money (Table 7: ECCB reserve cover 95.2 (2014); 96.7 (2015); 97.1 (2016–2017); 97.8 (2018)). ### Monetary and banking sector developments - Monetary aggregates and credit (Table 1 and Table 5, selected): - Net foreign assets (percent of broad money path in Table 1): 15.6 (2017); 2.2 (2018); 6.5 (2019); projections: 6.3 (2020), 4.7 (2021), 3.4 (2022), 3.9 (2023), 3.8 (2024–2025). - Net domestic assets: -7.3 (2017); 3.7 (2018); 5.3 (2019); projections: 4.6 (2020), 5.4 (2021), 5.9 (2022), 4.9 (2023), 4.6 (2024–2025). - Broad money (M2) annual growth: 3.4 (2017); 2.9 (2018); 5.9 (2019); projections: 5.5 (2020), 5.0 (2021), 4.6 (2022), 4.4 (2023), 4.2 (2024–2025). - Private sector credit (annual change): -0.1 (2017); 0.0 (2018); 2.9 (2019); projections: 2.6 (2020–2021), 2.8 (2022), 2.7 (2023), 2.9 (2024), 9.7 (2025) — note the large 9.7 figure for 2025 in Table 1. - Monetary conditions and liquidity: - Excess reserves remain elevated in most jurisdictions, but started declining recently in foreign banks. - Deposit growth continued; mild credit recovery shifting towards public administration and utilities. - Interest rates: average deposit rates fell below the minimum savings rate. ### Financial soundness and banking-sector vulnerabilities - Nonperforming loans and provisioning (Figure 4 and Table 9): - NPLs stopped declining in locally incorporated banks, particularly in public banks. - Provisions to nonperforming loans increased significantly especially in some foreign incorporated banks. - Nonperforming loans to total gross loans (ECCU, Table 9): 10.9 (2016); 12.0 (2017); 11.3 (2018); 11.1 (2019Q1) and 10.1 (2019Q3). - Provisions to nonperforming loans (ECCU): 46.8 (2014); 44.2 (2015); 45.6 (2016); 45.3 (2017); 44.0 (2018); 45.8 (2019Q3). - Profitability and capital: - Profitability has recovered but remains very low: Return on average assets (ROA) 0.2 (2014); 0.8 (2015); 0.8 (2016); 0.7 (2017); 1.1 (2018). - Capital is above regulatory standards: Regulatory capital to risk-weighted assets (CAR) (ECCU, Table 9) 11.1 (2014); 13.4 (2015); 16.5 (2016); 18.7 (2017); 19.1 (2018); 20.6 (2019Q3). - Liquidity and funding: - Excess liquidity may have peaked, including cash reserves. - Liquid assets to total assets: 30.2 (2014); 33.1 (2015); 34.4 (2016); 36.2 (2017); 36.4 (2018); 38.7 (2019Q3). - Gross loans to deposits declined from 88.6 (2010) to 58.8 (2018), reflecting conservative lending relative to deposit base. ### Fiscal sector and public debt dynamics - Central government fiscal indicators (Table 1 and Table 3, selected): - Total revenue and grants (percent of GDP): 27.8 (2017); 27.9 (2018); 26.6 (2019); projections: 24.9 (2020), 24.3 (2021), 23.9 (2022–2024), 23.7 (2025). - Total expenditure and net lending (percent of GDP): 28.4 (2017); 29.1 (2018); 27.7 (2019); projections: 27.0 (2020), 26.2 (2021), 26.0 (2022), 26.3 (2023), 26.7 (2024), 26.5 (2025). - Overall balance (percent of GDP): -0.6 (2017); -1.2 (2018); -1.0 (2019); projections: -2.0 (2020), -1.8 (2021), -2.1 (2022), -2.4 (2023), -2.9 (2024), -2.8 (2025). - Excluding Citizenship by Investment Programs: -4.1 (2017); -5.1 (2018); -4.5 (2019); projections: -4.0 (2020), -3.5 (2021), -3.3 (2022), -3.5 (2023), -3.8 (2024), -3.7 (2025). - Primary balance: 1.9 (2017); 1.1 (2018); 1.2 (2019); projections: 0.2 (2020), 0.4 (2021), 0.0 (2022), -0.3 (2023), -0.7 (2024), -0.6 (2025). - Public sector debt: - Total public sector debt (percent of GDP): 72.4 (2017); 70.5 (2018); 69.2 (2019); projections: 68.9 (2020), 68.4 (2021), 68.0 (2022), 67.6 (2023), 67.7 (2024), 67.8 (2025). - Expected fiscal cost of natural disasters (Table 1 memorandum): 0.8 (2020–2024), 0.7 (2025) (percent of GDP). ### Structural and sectoral notes - Tourism: stayover tourist arrivals fell sharply in Anguilla and Dominica; tourists from Canada have been growing fast recently. - Doing Business indicators: rankings shown across multiple ECCU members with cautionary note on interpretation due to limited respondents and standardized assumptions. *Source: Country authorities; ECCB; and Fund staff calculations and projections as reported in the provided content.* ### Annex I. Implementation of Previous Staff Advice ### Annex I. Implementation of Previous Staff Advice ### Recommendations from the 2018 Common Policies Discussion — Financial sector: decisive and timely actions - Policy objective: 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. - Status: - Issue of the Treatment of Impaired Assets standard, including recent industry feedback, is now expected for January 2020. - Improved NPLs ratio of seven countries at end-2018, with five within the 10 percent target, was largely offset by increased NPLs in one. - 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. - Requirements imposed based on off- and on-site review findings, including discussions with Board and executive management of bank with large CBI-related NPLs and non-core assets. - Promptly issue and implement prudential standards on the treatment of impaired assets. - Issuance is now expected for January 2020 with implementation to commence during Q1. - Closely monitor banks’ progress to plans and utilize statutory powers to ensure adherence to NPL resolution plans, collateral valuation and provisioning standards, enhanced risk management and strengthened capital. - Close monitoring via off-site reviews, including quarterly stress tests of NPLs and provisioning impact on capital, with follow-up at on-site examinations. - Accelerate consolidation of indigenous banks to attain sustainable critical mass and act quickly with any undercapitalized banks. - A shared services platform for indigenous banks to cover AML/CFT compliance and other back office functions is being introduced as an initial step. ### ECAMC (Eastern Caribbean Asset Management Corporation) and NPL recovery - Policy actions called for: Complete acquisition of a critical mass of commercial NPLs at realizable market values by the July 2019 deadline. - Status: - Not achieved by July 2019. - Five AFIs signed Letters of Intent for NPL transactions and negotiations with others in progress. - In October 2019 MC extended the deadline to October 2020 to allow CDB funding arrangements and NPL acquisitions to be completed. - ECAMC deadline extended to October 2020; absent adequate progress, recommended downscale to receivership or wound up. - Legal/institutional reforms to support recovery: - Complete modernization of insolvency and foreclosure laws and ease restrictions on non-citizen property ownerships to maximize NPL recovery and minimize fiscal costs. - Status: No progress on insolvency laws. E-conveyancing project initiated to address real estate collateral recovery challenges. ### Non-bank institutions, insurance, and consolidated oversight - Adopt plans for resolution of weak non-bank institutions: design and implement plans for intervention, systemic impact management, and communications. - Quarterly meetings of the Regional Oversight Committee (ECCB, national regulatory and supervisory authorities and the ECSRC) share information and coordinate action. - Establish and enforce risk mitigation standards in the insurance sector (minimum investment criteria and reinsurance standards). - National regulatory and supervisory authorities collaborate directly and through regulatory colleges. - Financial sector reform agenda: finalize harmonized legislation on credit unions and insurance sector and the insurance, pension, and securities subsectors; extend to building societies. - Yet to be finalized. Leader of SIPMP coordinating office resigned; Antigua and Barbuda’s Financial Secretary now coordinating. - Consolidated regional oversight: - Undertake effective consolidation with the ECCB having supervisory responsibility for all deposit taking institutions and another agency for non-deposit taking sector. - Status: Work in progress; model for consolidated regional oversight being considered, including approach for ECCB oversight of systemic non-bank institutions. - Near-term: provide adequate resources to country financial regulatory authorities for effective non-bank oversight. - A few individual authorities report improved staff resources. - Eliminate the ECCU minimum saving deposit rate, or phase it out gradually. - No development. ECCB advises eventual phase out tied to fundamental reforms including deposit insurance. ### Mitigating risks from potential decline in correspondent banking relations (CBRs) - Specific monitoring of banks’ CBRs, using IMF reporting template. - IMF TA (CARTAC and MCM) on CBR Monitoring template done in 2019 – to be implemented as part of ECCB monitoring framework. - Intensify information sharing and relationship building with current and prospective correspondent banks and their oversight authorities; involve ECCB at appropriate levels. - Banks indicate regular interactions with CBs; some confirm visits to overseas CBs and agencies for information sharing. - Strengthen and harmonize regulatory and AML/CFT oversight framework, including urgent passage and implementation of legislation designating the ECCB as Supervisory Authority for AML/CFT for banks by all remaining territories. - Still only 3 territories with enabling legislation. St Lucia’s laws permit ECCB to audit but this does not fulfill designation requirement. - Timely completion of national risk assessments (NRAs). - Some countries completed NRA, others at varying stages. - Enhance governance, qualifying criteria, transparency, due diligence and penalties/sanctions relating to any abuse of CBI programs. - Some progress; March 2019 initiative to coordinate financial integrity issues of the region’s CBI schemes. ### Fiscal frameworks: adopt robust frameworks to support fiscal consolidation and ex-ante resilience - Pass national fiscal responsibility legislation (FRLs) tailored to country characteristics, incorporating common ECCU elements. - Existing fiscal rules in Grenada and Anguilla; St. Lucia considering adopting a fiscal rule. - Key recommended elements: - Debt anchor: treat target of 60 percent of GDP by 2030 as a common ceiling with lower targets for some countries. - While de-facto progress on reducing public debt ratios in 2017-18, no significant institutional steps to lock in progress. - Operational targets based on a budget balance net of CBI inflows, with country-specific supplementary operational targets. - Operational targets are part of MTFFs discussed with ECCB, but discussions are informal. - Fiscal buffers: self-insurance and insurance against natural disasters as integral parts of fiscal frameworks. - Individual countries making progress; planned implementation of a DRS in Grenada and Dominica could mark major progress. - Escape clauses and favorable treatment of reconstruction spending to provide flexibility to shocks. - No new developments. - Supporting institutions: robust accounting procedures (including for CBI inflows, non-guaranteed public debt and contingent liabilities); improved fiscal projections; effective independent fiscal oversight (including fiscal councils). - Some progress: creation of the ECCB’s debt portal; March 2019 initiative to coordinate financial integrity issues of CBI schemes. ### Build resilience to natural disasters — shift from ex-post relief to ex-ante preparation - Adopt credible fiscal plans that accommodate and plan for resilient investment; ensure public investment projects are resilient and appropriately designed and costed. - Significant regional consensus on need to invest in physical resilience; some countries condition resilient investment on availability of concessional financing. - Develop a comprehensive insurance strategy against natural disasters, including disaster risk financing, insurance, and self-insurance layering. - All countries purchasing insurance from the Caribbean Catastrophe Insurance Facility. Most building saving funds for self-insurance and have PFM legislation amendments as needed. Coverage remains insufficient. - Develop strategies to enhance access to donor grants and concessional financing by pooling resources in regional institutions with accreditation to climate funds. - Some countries improving administrative capacity; mixed success accessing funding. Caribbean Development Bank has achieved accreditation; overall results mixed. - Address information, legislation gaps, and small economies of scale; assess preparedness to identify priorities in budgeting and public investment management, costed investment projects and risk financing plans; increase regional coordination. - Some countries advancing PFM Act amendments for saving funds and working with CARTAC to enhance procurement legislation and transparency. - Integrate resilience building with macroeconomic planning; include expected costs of natural disasters in macro frameworks and evaluate fiscal space needed. - At Caribbean Forum in October 2019, governments expressed strong interest in a Disaster Resilience Strategy (DRS) with Fund staff support to integrate cost and returns of resilient investment. The framework includes three pillars: physical, financial and social resilience, and identifies financing gaps. - Dominica and Grenada confirmed interest in becoming DRS pilot cases in February 2019; Both DRS are currently at an advanced stage. - Coordinate resilience building with fiscal responsibility legislation: incorporate minimum insurance coverage and annual saving needs for sustainability of saving funds. - Country authorities committed to fiscal sustainability, but no country passed fiscal responsibility legislation in the past year. Countries are making progress in submitting fiscal plans to the ECCB to reach regional public debt ceiling of 60 percent of GDP by 2030, as committed in a Memorandum of Understanding at the ECCB Monetary Council. ### Enhance competitiveness and potential growth - Priority areas: business climate, tariffs and regional integration, labor markets and education, public-sector efficiency. - Specific recommendations and status: - Accelerate new legislation on foreclosure, insolvency and credit bureaus. - In progress. Harmonized Credit Reporting Bill developed to establish credit bureaus; five jurisdictions have passed the bill. New foreclosure legislation being developed. - Implement investment strategies in renewable energies with private sector. - Ongoing. Several jurisdictions (e.g., Montserrat, St. Vincent and the Grenadines) developing geothermal power plans with private sector. - Cut tariffs under the CARICOM regime to enhance competition and reduce import prices. - Limited progress. - Pursue regional integration to address small internal markets and high costs. - Limited progress. - Implement comprehensive technical and vocational skills programs. - Ongoing; national authorities implementing employment programs for young people. - Introduce new technologies in the public sector to enhance efficiency (e-government). - Ongoing with international assistance; many jurisdictions exploring e-government approaches. ### Annex II. External Sector Assessment — key findings - Overall assessment: The ECCU’s external position remains weaker than implied by medium-term fundamentals and desirable policies. Implementing fiscal consolidation and structural reforms to strengthen external competitiveness would help ensure external sustainability. - 2018 current account and components: - Staff estimates current account deficit increased by 1 percentage point to 8.4 percent of GDP in 2018. - Service account surplus nearly 30 percent of GDP (up from 27 percent of GDP in 2017), due to increased tourism receipts. - Balance on goods deteriorated from 30 to 34 percent of GDP, mainly due to increased imports of construction materials for rehabilitation and reconstruction projects in Dominica following Hurricane Maria in 2017. - Net FDI inflows (about 9 percent of GDP) estimated to have more than financed the current account deficit. - Note: Excluding citizenship-by-investment fiscal revenues (about 4 percent of GDP), the current account deficit was estimated at 12.4 percent of GDP in 2018. - Exchange rates and competitiveness: - The nominal effective exchange rate index appreciated about 13 percent between 2014 and 2016; appreciation pressures eased temporarily but began to rise again since early 2018. - The real effective exchange rate today exceeds its post-global financial crisis period average by about 2¼ percent. - The ECCB has maintained the fixed exchange rate system (pegged at EC$2.7 per U.S. dollar) since July 1976. - Net international investment position (IIP) and reserves: - Staff estimated net IIP reached a deficit of over 80 percent of GDP in 2018, up from 76 percent of GDP in 2017. Over one-half of external liabilities are FDI. - ECCB international reserves: US$1.8 billion at end-2018, equivalent to 4¾ months of total imports (above benchmark of three months), 28 percent of broad money (above benchmark of 20 percent), and three times the stock of short-term external debt—appears adequate. - More recently, reserves decreased slightly to US$1.7 billion; reserve backing ratio remains close to 100 percent. - Reserve Adequacy Metric, end 2018: - End-2018: 1.7 (In billions of US dollar) - Percent of GDP: 23.5 - Percent of demand liabilities: 97.8 - In months of total imports: 4.7 (Benchmark: 3.0) - Percent of broad money: 28.1 (Benchmark: 20.0) - Percent of short term external debt: 319.6 - Mwase (2012) metrics: international reserve position about 70 percent of threshold in 2018 (using total exports); about 100 percent if using exports of goods. - EBA-lite assessment and implied overvaluation: - IMF’s EBA-lite current account models suggest an exchange rate overvaluation of around 9 percent in 2018. - Cyclically-adjusted current account balance estimated at -8½ percent of GDP in 2018. - Mutually consistent cyclically-adjusted current account norm was -5 percent of GDP. - This implies a current account gap of -3½ percent of GDP, of which ½ percent of GDP was attributed to policy gaps (domestic and world). - Domestic component of policy gap (-1¼ percent of GDP) was mostly due to higher than desirable ECCU fiscal deficit in 2018 (-1 percent of GDP). - Aggregate masks large variation across economies: current account gaps range from nearly -30 percent of GDP in Dominica to 5 percent of GDP in St. Lucia. *Source: Annex I. Implementation of Previous Staff Advice (and Annex II. External Sector Assessment) — IMF staff documents included in the provided content unit.* ### 6. IMF’s EBA-lite Index-Real Effective ### 6. IMF’s EBA-lite Index-Real Effective ### EBA-lite Index – REER model results - Model indicates an exchange rate undervaluation of about 3¾ percent in 2018. - The result partly reflects cyclical depreciation of the real effective exchange rate in 2017-2018 (by 3 percent). - Caution: the model has limitations to capture recent volatility in the exchange rate. ### Overall assessment and policy implications - Overall assessment: - Based on the current account model, the ECCU’s external position is assessed as weaker than its level consistent with medium-term fundamentals and desirable policies. - Policy implications and recommended reforms: - External position is expected to gradually improve over the medium term. - Imports of construction materials for reconstruction and rehabilitation activity following the 2017 Hurricanes are expected to taper off, contributing to narrowing the trade deficit. - Robust growth in tourism receipts would help sustain a large surplus in the service account. - Authorities should continue efforts to advance the structural reform agenda and consider fostering private sector activity beyond tourism. - Implement structural reforms in: - investment and business climate, - public sector efficiency, - reducing energy and transportation costs and tariffs, - labor market reforms, - regional integration. - Fintech has the potential to reduce business costs, enhance efficiency, and boost potential growth. - Fiscal consolidation should be pursued vigorously to ensure macroeconomic stability while helping close the current account gap. ### Current Account and Real Exchange Rate Assessments (2018, in percent of GDP; unless otherwise indicated) - CA Actual: -8.4 - Cyclically adjusted CA: -8.3 - Mutually consistent cyclically adjusted CA norm: -4.8 - CA Gap: -3.5 - O.w.: Policy gap: 0.6 - (Domestic policy gap): -1.2 - O.w.: Fiscal policy: -0.3 - (Domestic policy gap): -1.0 - Real exchange rate gap: 1 - CA Model I - REER Model annotation: 9.1-3.8 - Note: Positive numbers indicate an overvalued REER. - Source: IMF staff estimates. - 1/ In percentage points. ### Annex II Box 1 — Diversifying Exports in the ECCU: findings - Exports concentration and comparative performance: - Exports of ECCU countries are heavily concentrated in tourism. - Excluding raw commodities and tourism, per capita exports in ECCU countries are lower than the average in other small states and considerably below the average of manufacturing-intensive regions (Central America and East Asia Emerging Markets). - Some small states (e.g., Mauritius) and ECCU’s St. Kitts and Nevis (KNA) have per capita non-commodity and non-tourism exports as high as CAM and EAEM averages. - Determinants associated with export complexity and diversification: - High-quality education, strong institutional development, trade policy openness, good infrastructure, and moderate unit labor costs are associated with export complexity and diversification. - Mauritius excels in most of these factors and exports significant non-commodity and non-tourism products despite remoteness and limited natural resources. - Policy and sectoral options for ECCU: - Use sectoral policies where horizontal policies are weak (example: Mauritius’ Export Processing Zones in the 1970s). - Diversify vertically within tourism by offering tourism-related goods and services (e.g., agricultural products to hotels and restaurants, medical tourism). ### Determinants of Export Diversification and Complexity (selected indicators, 2017) - Governance, Education, Infrastructure, Tariffs (values as presented): - East Asia Emerging Markets: -0.10; 0.60; 4.40; 6.1 - ECCU: 0.56; 0.66; n.a.; 11.4 - Mauritius: 0.81; 0.76; 4.59; 2.1 - Other Small States: 0.11; 0.64; 4.11; 10.9 - Notes: - Governance is the overall Worldwide Governance Indicator. - Education is the Education Subindex of the Human Development Index. - Infrastructure is the 12th Pillar of the Global Competitiveness Index. - Tariffs is the simple average tariff from the World Integrated Trade Solution. ### Annex III — Risk Assessment Matrix (selected risks, likelihood, impact/time horizon, and policy responses) - Rising protectionism and retreat from multilateralism (↓) - Relative Likelihood: High - Impact/Time Horizon: High/ST, MT - Policy response: Reduce external and fiscal vulnerabilities; accelerate fiscal adjustment; implement structural reforms to diversify and improve competitiveness. - Sharp rise in risk premia (↓) - Relative Likelihood: High - Impact/Time Horizon: High/ST - Policy response: Pursue fiscal adjustment and create buffers; properly regulate and supervise banks’ exposure to market risks. - Further build-up of financial vulnerabilities - Relative Likelihood: High - Impact/Time Horizon: High/MT - Policy response: Fiscal adjustment to reduce financing risks and create buffers; properly regulate and supervise banks’ exposure to risks. - Higher frequency and severity of natural disasters (↓) - Relative Likelihood: Medium - Impact/Time Horizon: High/ST, MT - Policy response: Build a consistent framework with investment in resilience and appropriate ex ante financing, including fiscal buffers, within a Disaster Resilience Strategy. - Weaker-than-expected global growth (↓) - Relative Likelihood: Medium/High - Impact/Time Horizon: High/MT - Policy response: Reduce external and fiscal vulnerabilities; strengthen the fiscal position; implement structural reforms. - Large swings in energy prices (↓↑) - Relative Likelihood: Medium - Impact/Time Horizon: High/ST, MT - Policy response: Address high dependence on hydrocarbon fuels and high energy prices; improve fiscal and financial buffers. - Cyber-attacks (↓) - Relative Likelihood: Low - Impact/Time Horizon: Medium/ST, MT - Policy response: Prepare crisis management plans; strengthen financial sector regulation and supervision; pursue a prudent approach to financial innovation. - Financial sector risks (↓) — High NPLs, market risk in indigenous banks, exit of foreign banks, non-bank distress - Relative Likelihood: High - Impact/Time Horizon: High/MT - Policy response: Implement remaining elements of the ECCU strategy to strengthen indigenous banks; enhance regulatory and supervisory frameworks for non-banks; reinforce the fiscal position. - CBI flows (↑) - Relative Likelihood: Medium - Impact/Time Horizon: Medium/ST, MT - Policy response: Improve management of CBI inflows through regional and national saving/stabilization funds. - Correspondent banking relationships (↓) - Relative Likelihood: Medium - Impact/Time Horizon: Medium/ST, MT - Policy response: Strengthen compliance with AML/CFT and tax transparency standards; promote bank consolidation; enhance transparency in CBI programs; implement IMF TA on CBRs monitoring and improve supervisory standards. ### Annex IV — United Kingdom Overseas Territories: Anguilla (selected findings) - Status and population: - Anguilla is an overseas territory of the U.K., not a Fund member; member of the ECCU and OECS. - Current population: about 15,000. - Economy is de facto dollarized. - Growth and inflation: - Growth rebounded from -6½ percent in 2017 to 11 percent in 2018, boosted by reconstruction after Hurricane Irma. - Stayover tourist arrivals picked up from -20 percent in 2018 to about 4 percent for the first six months of 2019. - Economy expected to expand by 6 percent in 2019. - Medium-term GDP growth to moderate to about 2 percent. - Inflation: 0.4 percent year on year for the first 6 months of 2019. - External sector: - Current account deficit increased from 8 percent of GDP in 2017 to 42 percent of GDP in 2018, largely financed by official grants. - Current account deficit expected to remain elevated in 2019 before narrowing over the medium-term as reconstruction completes. - Fiscal and public debt: - Fiscal balance: surplus of 1 percent of GDP in 2017 to 0.5 percent in 2018; expected to go back to 1 percent of GDP in 2019. - Public debt projected to decrease gradually to below 40 percent of GDP over the medium term. - Financial sector vulnerabilities: - Banking sector capital adequacy ratio in Q2 2019: 16 percent (regulatory benchmark 8 percent). - Non-performing loan ratio around 22 percent. - Strategy includes sale of NPLs to the ECAMC to reduce NPLs within the 5 percent benchmark. - Banking sector profitability: return on assets ranging from 0-1 percent over the last two years. - First Caribbean International Bank (branch) ceased operations in Anguilla in January 2019. - Key table highlights (selected indicators, 2017-25): - Population (thousands, estimate): 14.9 - GDP per capita (US$): 18,983 - GDP at market prices (US$ million): 322.4 - Real GDP (annual % change): 2017 -6.6; 2018 10.9; 2019 6.3; 2020 4.9; 2021 1.7; 2022 1.7; 2023 1.7; 2024 1.7; 2025 1.7 - Consumer prices, average: 2017 1.5; 2018 0.1; 2019 1.6; 2020 2.0; 2021 2.0; 2022 2.0; 2023 2.0; 2024 2.0; 2025 2.0 - Total public debt (end-of-period): 2017 65.0; 2018 61.0; 2019 54.8; 2020 47.9; 2021 45.6; 2022 44.3; 2023 40.6; 2024 36.9; 2025 32.3 - External current account balance (percent of GDP): 2017 -7.8; 2018 -42.1; 2019 -50.4; 2020 -39.2; 2021 -37.5; 2022 -36.5; 2023 -35.7; 2024 -35.2; 2025 -36.6 - Travel (net, percent of GDP): 2017 53.4; 2018 35.3; 2019 42.1; 2020 40.6; 2021 40.2; 2022 40.1; 2023 40.1; 2024 40.0; 2025 38.7 ### Annex IV — United Kingdom Overseas Territories: Montserrat (selected findings) - Status and population: - Montserrat is an overseas territory of the U.K., not a Fund member; member of the ECCU and OECS. - Population today: 5,300. - Growth and recovery: - GDP growth rebounded from – 3¾ percent in 2017 to 4 percent in 2018, due to recovery in construction, hotels, and restaurants. - Stayover visitors grew by around 16 percent in 2018. - GDP growth estimated to moderate to 2¼ percent in 2019; medium-term projection around 2¼ percent. - Current account and fiscal: - Current account deficit declined from nearly 10 percent of GDP in 2017 to 2 percent of GDP in 2018. - Overall balance turned from a surplus of 1¼ percent of GDP in 2017 to a deficit of 6½ percent of GDP in 2018 (largely due to a decline in grants). - Public debt around 8 percent of GDP in 2018. - Overall balance expected to improve to a deficit of 1½ percent of GDP in 2019. - Energy and infrastructure policy: - Aim to replace fossil fuels with 100 percent renewable energy in electricity and transport sectors. - A new 250KW solar power plant commissioned in 2018 providing 10 percent of peak electricity demand. - A 750KW solar plant project to provide 40 percent of peak electricity demand is in progress. - Key table highlights (selected indicators, 2017-25): - Population (thousands, estimate): 5.3 - GDP per capita (US$), estimate: 11,794.4 - GDP at market prices (US$ mln): 62.1 - Real GDP (annual % change): 2017 -3.8; 2018 4.0; 2019 2.2; 2020 2.2; 2021 2.2; 2022 2.2; 2023 2.2; 2024 2.2; 2025 2.2 - Consumer prices, average: 2017 1.2; 2018 1.5; 2019 1.2; 2020 1.7; 2021 2.0; 2022 2.0; 2023 2.0; 2024 2.0; 2025 2.0 - Total public debt (end-of-period): 2017 8.1; 2018 7.3; 2019 8.0; 2020 4.7; 2021 3.7; 2022 2.8; 2023 2.7; 2024 2.7; 2025 2.6 - External current account balance (percent of GDP): 2017 -9.7; 2018 -2.0; 2019 -1.8; 2020 -5.4; 2021 -4.3; 2022 -4.1; 2023 -4.0; 2024 -3.8; 2025 -3.7 - Travel (net, percent of GDP): 2017 14.0; 2018 17.9; 2019 18.2; 2020 18.5; 2021 18.9; 2022 19.2; 2023 19.6; 2024 20.0; 2025 20.4 *Source: IMF staff estimates and projections as presented in the chapter.* ### 1. Membership Status: Not Applicable ### 1. Membership Status: Not Applicable ### Exchange Arrangement - The Eastern Caribbean Currency Union (ECCU) comprises six Fund members: Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines; and two territories of the United Kingdom, Anguilla and Montserrat. - The eight ECCU members have a common currency, monetary policy, and exchange system. - The common currency, the Eastern Caribbean (EC) dollar, has been pegged to the U.S. dollar at the rate of EC$2.70 per U.S. dollar since July 1976. - The common central bank, the Eastern Caribbean Central Bank (ECCB), has operated like a quasi-currency board, maintaining foreign exchange backing of its currency and demand liabilities of close to 100 percent. ### Safeguards assessment - The 2016 updated safeguards assessment found that the ECCB continues to maintain a governance framework that provides for independent oversight. - Transparency in financial reporting has been maintained and the external audit mechanism is sound. - The ECCB restructured the internal audit and risk management functions to align them with leading international practices. - In accordance with the Safeguards Policy which requires regional central banks to be assessed every four years, the ECCB will be subject to an update assessment in 2020. ### CARTAC: Capacity Building in the ECCU (As of November 30, 2019) — Overview - Highlights of CARTAC’s technical assistance (TA) and training to the ECCU countries are provided across core areas: tax administration; data analytics and compliance; information technology; regional integration and audit; customs administration; disaster resilience; public financial management (PFM); state-owned enterprise (SOE) reforms; macroeconomic and financial programming; and financial stability. ### Tax administration — progress and priorities - VAT implementation in ECCU countries is largely complete. - The tax program continues to focus on: - (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, and - (vi) strengthening IT systems. - Implementation of taxpayer 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. - Legislative progress: - St. Kitts and Nevis secured legislation that mandates the filing of VAT and CIT tax returns. - Anguilla has a modern Inland Revenue Department Act defining the Comptroller’s powers. - St. Vincent and the Grenadines are strengthening legal framework with implementation (possibly before the end of 2019) of a new Tax Administration Act. - Regional legal strengthening to meet international standards was supported for Dominica and St. Vincent and the Grenadines; Anguilla, Antigua and Barbuda, Montserrat, St. Lucia, St. Kitts and Nevis have either strengthened legislation and/or taken steps to address harmful taxation. ### Data analytics, risk-based compliance, and performance management - The standardized regional data analytics and cross-matching program has made significant progress; beneficiaries include St. Kitts and Nevis, Dominica, St. Lucia, Grenada, and St. Vincent and the Grenadines; program introduced to Antigua and Barbuda’s audit unit. - The program focused on building analytical skills in planning, monitoring and program design and audit units to improve data matching and data mining for stronger compliance management. - Outcomes from the data analytics program included improved Excel skills, better identification of errors and data quality issues, sharper risk identification in registration, on-time filing and payments, and improved accuracy of taxpayer reporting through cross-matching and industry benchmarking. - Progress on standardized regional risk-based compliance improvement has been limited due to insufficient data quality and capacity constraints; TA to develop risk-based compliance management frameworks benefited St. Kitts and Nevis, Dominica, St. Lucia, Grenada, and St. Vincent and the Grenadines. - Performance management strengthened through capacity building/mentoring of officers in planning and monitoring units in St. Lucia, Antigua and Barbuda, St. Kitts and Nevis, and St. Vincent and the Grenadines. ### Tax administration information technology (IT) - Regional peer-to-peer support for tax administration IT systems is ongoing. - IT enhancement support provided to St. Lucia, Grenada, and St. Vincent and the Grenadines with enhancements to SIGTAS. - Montserrat: property tax system enhanced to facilitate timely production of notices of assessments; a system to administer CIT was recently implemented. - St. Lucia and St. Vincent and the Grenadines received TA in strengthening IT operational, security procedures, and business continuity plans. - Countries seeking new/replacement tax IT systems: St. Kitts and Nevis, St. Lucia, Grenada, St. Vincent and the Grenadines. - Anguilla commenced implementation of a new system; Antigua and Barbuda is upgrading its system. - Antigua and Barbuda, St. Lucia, St. Vincent and the Grenadines participated in a study-tour of Tax Administration Jamaica (TAJ) to understand TAJ’s IT support and processes. ### Regional integration, audit teams, and workshops - All ECCU member countries benefited from three regional workshops in FY2018/19: - (a) International Survey of Revenue Administration (ISORA) sensitization sessions led by FAD, - (b) Effectively Managing Audit Programs, - (c) an inter-regional seminar between CARTAC and PFTAC with all ECCU countries participating. - A FAD-led initiative to establish a “Regional Tax Audit Team (RTAT)” includes Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines; Phase II underway with four workshops conducted and training sessions focused on auditing the financial sector. The program will shift to implementation mode with actual audits to commence in multiple jurisdictions. ### Core tax administration functions and disaster resilience - Core functions strengthened: - Dominica received support enhancing taxpayer service delivery. - Dominica, St. Vincent and the Grenadines, and St. Lucia received training in audit techniques for taxpayers without adequate books and records. - Disaster preparedness and business continuity: - In June 2019, a joint regional seminar on Disaster Preparedness for Tax and Customs was held; all ECCU customs and tax administrations participated. - Seminar partners included UNCTAD and the Caribbean Disaster and Emergency Management Agency (CDEMA); participants learned best practices and shared experiences from hurricanes Irma and Maria. ### Customs administration and risk management - Customs administration focus: strengthening risk management and managerial skills to ensure leadership, management and governance; trade facilitation; and compliance. - Regional initiatives include continued support to CARICOM in harmonization of customs procedures. - Risk management TA provided to Grenada, Anguilla, Dominica, St. Kitts and Nevis, and St. Vincent and the Grenadines, with frameworks prepared to identify, categorize, prioritize risks, and propose treatment techniques. - Post Clearance Audit (PCA): - TA, mentoring and training on PCA delivered to St. Vincent and the Grenadines and Dominica; approximately 20 officers trained. - Result: capacity to initiate significant PCA programs and strengthen compliance and trade facilitation. - PCA has been a significant TA area since FY14 to Antigua and Barbuda, Dominica, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. - Training capacity: - TA to Grenada to develop training modules in core customs skills and prepare a cadre of trainers. - Anguilla: - TA to prepare for implementation of the Interim Goods Tax (IGT), including a detailed prioritized action plan for customs aspects and assistance to extract customs data for revenue modelling in collaboration with FAD TP. ### Public Financial Management (PFM) and resilience to climate shocks - CARTAC reviewed post-hurricane PFM Response in Dominica and Anguilla and planned reviews for Antigua and Barbuda; results will be aggregated into a Caribbean report to improve hurricane preparedness. - PEFA assessments: - Completed in Grenada and Dominica in 2016 and in St Lucia in 2017; follow-up PFM Action Plans developed. - CARTAC conducting a PEFA Assessment of Anguilla as of late-2019. - Implementation of modernized and more consistent PFM legal frameworks is progressing: - Draft legislation finalized for Antigua and Barbuda, St. Lucia, Anguilla, and Dominica. - A FAD-led TA mission to Dominica on establishment of a Vulnerability, Risk and Resilience Fund (VRRF); CARTAC provided amendments to Draft PFM Legislation governing VRRF. - Montserrat and St. Vincent and the Grenadines prepared initial PFM drafts under review. - Grenada passed revisions to its new PFM legislation and adopted revised regulations (FMC) and a Fiscal Responsibility Act. - St Lucia tabled a new PFM Act which was not passed in time during the last session. - Given most ECCB countries still have legislation in draft form, accelerating submission to respective Parliaments is important. ### SOE/SB ownership reforms and budget preparation - Anguilla, Montserrat, and St. Vincent and the Grenadines received diagnostic assessments and training in implementing the CARTAC SOE/SB ownership manual (bringing total implementing countries to seven). - A small workshop gathered reforming countries to share experiences; Grenada presented achievements and shared reporting templates. - Regional budget preparation reform: - St. Lucia’s budgets prepared according to strategic budget reform methodology and presented in revised program budgeting format including non-financial performance information. - New comprehensive budget manuals developed for St. Lucia and St. Vincent and the Grenadines; total of nine CARTAC countries now have comprehensive budget preparation manuals, which include a gender budgeting perspective. - Montserrat engaged a private consultant for developing a medium-term fiscal framework and programme budgeting. ### IPSAS compliance and treasury functions - Compliance with International Public Sector Accounting Standards (IPSAS) has made significant progress. - Annual IPSAS cash basis workshop repeated to evaluate compliance with the new exposure draft. - Anguilla and St. Kitts and Nevis self-assessed as fully compliant (work remains on notes to cash basis financials to move toward modified cash). - Missions to Dominica and Grenada reviewed Treasury Functions and IPSAS cash management. - January 2019 mission to assist Anguilla with COA reform and transition to GFS2014. ### Macroeconomic and financial programming support - CARTAC’s TA in macroeconomic and financial programming analysis in 2019 included four country missions: Anguilla, Antigua and Barbuda, Montserrat, and Saint Lucia. - Anguilla: assistance to update Medium Term Economic and Fiscal Plan (MTEFP) as required by the British Government for budget approval and Caribbean Development Bank loan drawdown for post-hurricane rehabilitation. - Antigua and Barbuda: capacity building in Ministry of Finance for developing the Medium-term Fiscal Framework (MTFF) to underpin medium term budgets starting with the 2020 budget. - Montserrat: capacity enhancement in Ministry of Finance and updating MTFF. - Saint Lucia: training requested on Market Access Debt Sustainability Analysis template (MAC DSA) in light of expected large increase in public debt over the medium term from international airport reconstruction and extensive road works; 15 persons trained including 2 from ECCB. - Regional workshops in 2019: - Macroeconomic Diagnostics course in Barbados (July) attended by 21 participants (6 from ECCU). - Customized debt sustainability analysis course in St. Kitts and Nevis (September 2019) with 27 participants (9 from ECCB). - Fiscal Sustainability course in Jamaica in October including 3 persons from the ECCU. - Expected outcome: enhanced capacity for structured macroeconomic forecasting, regular MTFF updates, and more systematic budgeting and policy making. ### Financial stability technical assistance - CARTAC TA in financial stability includes: - (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, - (iii) developing macro-prudential and systemic risk indicators (MPIs and SRIs) to bolster financial sector risk management, - (iv) assisting the ECCB in preparing the financial stability report for ECCU member territories. - During FY18, CARTAC provided TA to the ECCB on upgrading its financial stability function: - Development of MPIs and SRIs, - Development of 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 assessing systemic risks and vulnerabilities in the ECCU region and featuring MPIs and SRIs provided by CARTAC TA. *International Monetary Fund — Eastern Caribbean Currency Union (excerpt).* ### 28. A comprehensive list of financial health and soundness indicators with accompanying ### 28. A comprehensive list of financial health and soundness indicators with accompanying methodologies ### Financial-sector tools, methodologies, and stress-testing TA - A comprehensive list of financial health and soundness indicators (FHSIs) 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 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 industries. - A similar stress testing TA program scheduled for December 2019 for remaining insurance sector regulators in the ECCU region. ### Credit unions: FHSIs, stress testing, and outcomes - 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 scheduled for St. Lucia in October 2019. - Dominica: CARTAC TA on credit union stress testing led to: - Implementation of a ‘bottom-up’ stress testing program via issued Stress Test Guidelines to the credit union sector. - Establishment of an annual credit union sector meeting to review yearly sector-wide stress testing results. - Amendments to reporting forms to allow reporting on loan and deposit concentrations to facilitate prescribed stress testing exercises. ### Correspondent banking relationships (CBRs) monitoring and systemic risk surveillance - CARTAC training to help ECCB implement the correspondent banking relationships (CBRs) monitoring toolkit (developed in the Monetary and Capital Markets Department) to enhance systemic risk surveillance of ECCU cross-border payment flows. - The CBRs toolkit was used for analysis of payments data collected from 84 percent of ECCU respondent banks covering the period 2014 to 2017. - Expectation that the ECCB will routinely update the data set for continued application of the toolkit to guide strategy for minimizing the risk of CBR withdrawals. ### Basel II/III implementation support for the ECCU - CARTAC reviewed and provided feedback on the ECCB’s draft Basel II/III implementation plan and assisted with time-bounded action plans and milestones. - The ECCB has established a Basel II/III implementation team and commenced consultations with institutions subject to Basel II/III reporting. - The ECCB submitted a third iteration of their Basel II/III implementation roadmap to CARTAC. - Implementation timing stated: - Implementation of Pillar 1, assuming no further revision to their implementation timetable, is possible by the end of FY21. - It is highly unlikely that Pillar 2 will be implemented by the end of FY 22. - Pillar 2 implementation requires at least 12 to 18 months. - Authorities expressed a preference for either a Resident Advisor or Peripatetic Advisor for Basel II/III implementation. ### Risk-based supervision (RBS) training and TA across banks and non-banks - CARTAC provided RBS training/TA during FY18 and follow-up assistance to improve onsite and offsite supervision in a risk-based supervisory environment in St. Vincent and the Grenadines, Grenada, Antigua and Barbuda, and Anguilla. - Specific FY18 TA examples: - 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. - Workshops and events: - In March 2019, a 2.5-day (March 4-6, 2019) workshop on implementation and application of RBS across Foreign Bank Branches (FBBs) in the ECCU; attended by 24 staff members from the Bank Supervision Department of the ECCB. - In July 2019, follow-up RBS methodology training and TA to senior managers supervising Credit Unions and Insurance companies across ECCU member territories; attended by 31 senior supervisors from national regulatory agencies and representation from the ECCB. - Following the July regional workshop, the Financial Services Regulatory Authority (FSRA) of St Lucia requested follow-up TA to implement RBS; FSRA developed draft action plans to transition to RBS and implement a risk-based solvency regime for insurance companies; an upcoming mission in late October 2019 will focus on RBS implementation. ### Legislative and regulatory reform TA - FY18: CARTAC provided TA to facilitate review of draft legislation on Securities and Investment Funds to replace the current Securities Act and collective investment schemes legislation enacted in 2001; draft Bill submitted to IOSCO for preliminary assessment of ECSRC eligibility for membership; draft Bill finalized for public consultation. - FY18: CARTAC provided TA to address deficiencies in the ECCU’s Uniform Insurance and Pension Bill as a step toward establishing a Single Market for Insurance and Pension (SIPM); recommendations finalized and being incorporated into the Uniform Bill to align with international regulatory and market conduct standards. ### Capacity building, workshops, and thematic TA (FY18–FY20) - Continued regional workshops in FY18, FY19, and FY20 covering: - Strengthening regulatory and supervisory oversight across bank and non-bank sectors (pension, insurance, securities, and credit unions). - Systemic risk surveillance, implementation of IFRS 9 and IFRS 17, risk-based capital framework for insurance companies, consolidated supervision, digital currencies, and FinTech. - September 30-October 4, 2019: Regional training workshop to strengthen technical capacity of price statisticians from ECCU countries and the ECCB to review HBS/SLC household consumption expenditure data, aggregate and quality adjust the data to produce updated expenditure weights for the CPI basket, improve CPI methodology, and compile rebased CPI series. - September 2019: CARTAC facilitated bank and non-bank supervisors from the ECCB and ECCU member countries to attend a regional workshop on Consolidated Risk-based Supervision of Banking Groups and Financial Conglomerates in Kingston, Jamaica. ### Support after natural disasters and supervisory intervention planning - TA provided to Dominica on developing supervisory intervention plans for the credit union and insurance sectors. - Joint mission by Financial Stability and Financial Sector Supervision programs to Dominica in early 2018 to assess resilience of some financial institutions in the aftermath of hurricane Maria of 2017. ### Economic and financial statistics improvements (2017–18 and ongoing) - CARTAC program concentrated on improving external sector, national accounts, and price statistics in ECCU countries during 2017-18. - Good progress by Grenada, St. Kitts and Nevis, and St. Vincent and the Grenadines in expanding and improving annual national accounts, including developing supply and use tables (SUT). - SUT for St. Lucia finalized and work commenced to compile rebased GDP estimates. - Comprehensive review for Grenada of national accounts concepts, data sources, compilation, and dissemination; a 5-year action plan to rebase GDP and expand national accounts prepared. - Increased efforts to develop or improve quarterly national accounts estimates: - Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines commenced disseminating quarterly GDP by economic activity (QGDP-P) estimates. - Price statistics improvements: - Assistance provided to build institutional capacity, improve CPI compilation methodology, review HBS/SLC household consumption expenditure data, and update CPI expenditure weights for St. Vincent and the Grenadines. - CARTAC supports regional coordination with other TA providers, including PRASC by Statistics Canada and ECCB assistance in reviewing annual national accounts. ### Balance of payments, IIP, and external debt dissemination and methodology - Since 2017, supported by CARTAC, the ECCB and ECCU NSOs have jointly disseminated enhanced annual balance of payments and international investment position (IIP) statistics for each ECCU member and the ECCU region following BPM6 guidelines. - Data for 2014 onwards available on the ECCB’s website and re-disseminated in the IMF’s BOPSY and IFS. - CARTAC assists ECCU countries in strengthening ESS compilation frameworks and dissemination, enhancing coverage, methodology, and quality of prioritized balance of payments components by incorporating wider data sources to supplement business surveys. - NSOs of most ECCU member countries have access to tax information from inland revenue departments. - CARTAC supported increased number of NSOs and/or tourism authorities to conduct visitor expenditure surveys (VES). - Antigua and Barbuda, Dominica, Grenada, St Lucia and St Vincent and The Grenadines conduct VES on an ongoing basis and results are incorporated in their balance of payments. - St Kitts and Nevis conducted a VES in 2016 and its indicators are updated every year to compile visitor expenditure estimates in the balance of payments. - Noteworthy: tourism expenditure compiled in travel services exports was largely underestimated in former balance of payments statistics of most ECCU members due to lack of up-to-date VES indicators. - Recent CARTAC missions assisting in developing backcasting techniques to address significant breaks in balance of payments for years prior to 2014. - In coordination with ministries’ debt management offices, the ECCB has posted aggregated data on outstanding central government and public sector external debt on its website. - CARTAC is supporting ECCB and NSOs to compile public and private external debt in line with international standards. ### Authorities’ statement highlights (Statement by Ms. Levonian and Mr. Sylvester — February 3, 2020) - Commitment to building strong, resilient, and inclusive economies and appreciation for Fund engagement during 2019 regional consultations on common policies. - Leverage regional integration: - Authorities see merit in greater fiscal integration (e.g., CBI program due diligence) but note challenges harmonizing tax incentives across sovereign states. - Potential merits of regional buffers, including a regional stabilization fund, but tradeoffs with limited fiscal space and external support. - Some authorities have established national savings funds; ECCB has a small regional “rainy day” fund and seeks support to enhance it, including external donor support. - Progress on NPL resolution, crisis management frameworks, and plans to introduce deposit insurance (DI). - Modernization of payment systems: introduction of Eastern Caribbean Automated Clearing House (ECACH) and Electronic Funds Transfer (EFT); plans to introduce a digital version of the EC dollar. - Central bank digital currency (DXCD): - Authorities strongly believe a digital EC dollar (DXCD) will support economic transformation, make payments more resilient and efficient, and reduce reliance on cash and cheques. - ECCB launched a DXCD pilot in March of 2019 to inform development and implementation; authorities approaching reform with safeguards including cybersecurity and AML/CFT requirements. - Real sector growth: - After growing by less than 1 percent in 2017 due largely to Hurricanes Irma and Maria, real GDP grew strongly by 3.9 percent and 3.2 percent in 2018 and 2019, respectively, driven by tourism and construction. - Authorities expect growth to hover around 3.5 percent on the medium term but note considerable downside risks (natural disasters, global slowdown, further loss of CBRs, cyber threats). - Resilience to natural disasters and climate change: - Authorities prioritize resilience building, participation in CCRIF SPC, adopting building standards, and investing in climate-resilient infrastructure. - Call on Fund and partners to increase access to reliable and affordable financial and technical support and promote disaster-linked clauses in debt instruments. - Fiscal and debt policy: - Authorities note improvement in the overall fiscal deficit in 2019 following the 2018 spike due to disaster-related spending and note a positive downward movement of the public debt ratio. - Authorities reaffirm commitment to prudent fiscal and debt management and to reaching the 60 percent of GDP debt target by the 2030 timeline, while noting challenges of limited fiscal space and need for critical investments. - ECCB will promote fiscal discipline, including rules-based fiscal resilience frameworks; Grenada and Anguilla have fiscal rules in place; authorities unlikely to agree on uniform fiscal frameworks but open to common minimum fiscal anchors. - Financial sector developments and reform priorities: - Banking sector liquidity and capital ratios remained strong; NPLs continued to decline but NPL ratio remains above regulatory standard and credit growth is weak. - Authorities share concerns about exit of global banks, growing credit union sector, and ongoing pressures from CBR losses. - Commitment to accelerate NPL resolution, harmonize regulation for non-banks, develop systemic risk monitoring, and enhance AML/CFT framework. - Authorities do not support phasing out the minimum savings rate (MSR) at this time and will consider removal in conjunction with other reforms, including introduction of deposit insurance. - CBR concerns: - Authorities remain concerned about possible further CBR losses; while CBR losses have stabilized somewhat, further withdrawals remain a major concern. - ECCB will press ahead with efforts to harmonize and strengthen AML/CFT supervision regionally. - Growth, inclusion, and structural reforms: - Authorities will pursue structural reforms to promote sustainable and inclusive growth: improving business climate, diversifying economic structure (including renewable energy), developing regional capital market, addressing labor market rigidities via education and training. - Regional initiatives like the World Bank-supported Eastern Caribbean Partial Credit Guarantee Corporation to support SMEs. - Authorities see potential for Fintech to boost growth and are investing in high-speed fiber-optic broadband and e-government platforms; request Fund TA to support Fintech development. - Engagement with the Fund and development partners: - Authorities value the Fund’s policy advice, CARTAC TA, and technical exchanges (e.g., Garfield T. Riley Seminar Series) and look forward to continued strong support. *Source: IMF — Eastern Caribbean Currency Union chapter (PDF).* ### Conclusion ### Conclusion ### Near-term outlook and risks - While growth has rebounded strongly and the near-term outlook remains favorable, the economic landscape in the ECCU region remains fragile in the face of daunting risks and challenges. ### Authorities' commitment and support needs - Our authorities are acutely aware of the difficult road ahead and remain committed to confronting the many challenges, with the support of its partners. - In this regard, the continued flow of TA and financial support to the region and the effective coordination of ECCU work programs with regional and international institutions are critical in helping our authorities tackle these challenges in a steady and sustained manner. *Source: 1eccea2020001 - Conclusion* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1eccea2020001.pdf_