## 1. Tourism Sector Reopening Strategies and Access to Vaccines

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### Pre-COVID-19 conditions
- Real GDP per capita in the ECCU had barely exceeded the pre-global financial crisis peak when the COVID-19 pandemic struck; growth picked up around 2014 supported by stronger global growth and tourism demand.
- Policy direction: authorities pursued a pro-growth strategy including strengthening human capital, improving investment climate, and building infrastructure; progress in reforms slower than desired but broadly in line with past staff recommendations (Annex I).
- Structural vulnerabilities:
  - Micro-states vulnerable to natural disasters with significant socio-economic implications.
  - High public debt in several countries prior to COVID-19, with Antigua and Barbuda and Dominica at around 80–90 percent of GDP.
  - Dependence on uncertain Citizenship-by-Investment (CBI) revenues, prone to sudden stops.
  - Financial sector large with persistent loan quality weaknesses.

### Health impact and immediate economic fallout
- Initial containment and measures:
  - Inbound travel restrictions and strict lockdown measures led to very low infection rates by early summer 2020; reopening borders later coincided with a sharp uptick in cases in early 2021.
  - Three quarters of cases were concentrated in St. Lucia and St. Vincent and the Grenadines.
- Fiscal, liquidity, and financial measures announced in March–April 2020:
  - Announced discretionary fiscal measures ranged between 2 and 5½ percent of GDP.
  - Measures included increased health spending; cash payments to vulnerable households; income support for displaced workers; infrastructure projects; tax and import duty deferrals.
  - ECCB and ECCU Bankers’ Association announced loan repayment moratoria and waivers for up to six months in March 2020; extended in September 2020 in a more targeted manner for up to 12 months.
  - By late-2020 nearly a third of banks’ loan portfolios remained under extended moratoria.
  - Temporary supervisory flexibility included a classification freeze for loans under moratoria.
  - ECCB reduced the discount rate from 6.5 to 2 percent in April 2020 and the long-term credit interest rate from 6.5 to 3.5 percent in February 2021.

### Economic contraction and public finance impact
- Output and prices:
  - ECCU GDP estimated to have contracted by 16 percent in 2020 (down from 2¾ percent growth in 2019).
  - Country variation in 2020 GDP: -4¼ percent (St. Vincent and the Grenadines) to -27¾ percent (Anguilla).
  - Inflation weak at 0.2 percent y/y in December 2020.
- Fiscal outcomes in 2020:
  - Total revenue collection estimated to have declined by 16.7 percent in 2020.
  - Total expenditure across the region declined by 7.2 percent in 2020.
  - ECCU overall deficit estimated to have widened to 5.3 percent of GDP (up from 2.0 percent of GDP in 2019).
  - Overall public debt estimated to have risen from 67 percent of GDP in 2019 to 84 percent of GDP in 2020.

### Financial sector effects and liquidity
- Loan moratoria and near-term outcomes:
  - Loan moratoria contained immediate asset quality deterioration but risk a large uptick in NPLs upon expiration in September 2021.
  - Moratoria may have contributed to modest pickup in banks’ private sector credit; credit union high credit growth moderated.
  - By late-2020 direct bank credit to governments increased alongside rising fiscal needs.
- Systemic liquidity and support:
  - Financial system deposits remained stable; financial system liquidity around 40 percent of total assets.
  - No immediate adverse effects observed on correspondent banking relationships, though acquiring new CBRs has become more challenging.
  - IMF Rapid Credit Facility emergency financing: SDR 48.08 million (about US$65.6 million) approved in April 2020 for Dominica, Grenada, and St. Lucia; SDR 11.7 million (about US$16 million) approved in May 2020 for St. Vincent and the Grenadines.
  - Additional support from World Bank and Caribbean Development Bank; Dominica, Grenada, and St. Lucia benefitted from DSSI cash flow relief.
  - Governments relied on ECCB and commercial bank deposits, CBI inflows, financing from the Regional Government Securities Market (RGSM), and ECCB credit facility where needed.

### External sector and reserves
- Current account and financing:
  - Staff estimates the current account deficit more than doubled to 15¼ percent of GDP in 2020.
  - Net FDI inflows weakened; increased official flows helped finance the widened current account deficit.
- Reserves and exchange rate:
  - ECCB foreign asset position held up relatively well; currency backing ratio under the quasi-currency board stood at 96 percent at end-January 2021.
  - REER depreciated by nearly 3½ percent in 2020 due to weakening of the U.S. dollar.

### Tourism sector reopening strategies and access to vaccines (Box 1 findings)
- Reopening approaches and entry requirements:
  - Antigua and Barbuda and St. Lucia reopened in summer 2020 with mixed results; St. Kitts and Nevis reopened only at end-October 2020; St. Vincent and the Grenadines never closed borders.
  - CARICOM regional “travel bubble” agreed mid-September 2020 but Dominica, Grenada, St. Kitts and Nevis, and St. Vincent and the Grenadines opted out amid COVID spikes.
  - Entry requirements: depending on source country, visitors must submit proof of negative tests before arrival and quarantine in approved accommodations upon arrival.
- Vaccine access and implications:
  - All ECCU-6 countries (ECCU-8 excluding Anguilla and Montserrat) are members of the COVAX Facility.
  - Four ECCU-6 countries (Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines) are eligible for COVAX Advance Market Committee support (cost-sharing).
  - Anguilla and Montserrat (UK overseas territories) are receiving vaccines through the UK Government.
  - COVAX interim distribution forecast suggests ECCU-6 countries are expected to receive doses enough to vaccinate about 20 percent of the population.
  - Demographics: young population means nearly 100 percent of the population 55 years and older could be vaccinated if doses distributed from oldest age groups.
  - Expected doses too small to vaccinate 60–70 percent of the population (authorities’ intended goal) and to achieve herd immunity.
  - ECCU countries have made bilateral agreements to obtain additional doses, including with India and Russia.
  - Donations: Antigua and Barbuda, Dominica, St. Lucia, St. Kitts and Nevis, and St. Vincent and the Grenadines received donations of the COVID-19 vaccine (20,000–70,000 doses per country) from the Serum Institute of India in late February–early March 2021.
  - In practice, authorities are prioritizing vulnerable groups (like health sector workers).

### Outlook and risks
- Baseline recovery assumptions and projections:
  - Vaccines broadly available in 2021Q4 assumed.
  - Current tourism season (December 2020–May 2021) expected to remain very weak.
  - Tourists expected to remain cautious; hotels to take time to reinstate capacity.
  - Number of tourists projected to return to 2019 level only in 2024.
  - Economy projected to shrink by nearly ½ percent in 2021 and rebound by 9 percent in 2022.
  - Medium-term growth projected to decelerate to around 2¼ percent.
  - Persistent output loss (scarring) of over 12 percent of GDP through 2025 relative to pre-COVID projection.
- Public finances and debt trajectory:
  - After deterioration in 2020–21, fiscal deficits projected to narrow over the medium term as growth rebounds and fiscal adjustment measures are implemented.
  - ECCU public debt ratio expected to peak in 2021.
  - Achieving regional debt target of 60 percent of GDP by 2030 challenging for all countries except Grenada and St. Kitts and Nevis.
  - ECCB Monetary Council in February 2021 extended the debt target date to 2035 and encouraged member countries to enact fiscal responsibility or fiscal resilience frameworks.
  - Persistently high debt ratio would constrain fiscal space for resilience investments and inclusive growth.
- Financial sector risks:
  - Ongoing tourism shock projected to almost triple bank NPLs in the next three years, weighing on credit activity and raising fiscal contingent liability risks.
- Elevated downside risks (Annex II):
  - Primary downside risk: longer and more widespread global pandemic and sharper-than-anticipated contraction in trading partners.
    - A deeper and longer recession would further strain public finances and financial institutions, potentially undermining confidence, triggering liquidity pressures and capital outflows, reducing ECCB international reserves, and creating potential pressure on the currency.
    - Ripple effects from global financial market instability could transmit negative growth impulses over two consecutive years (Box 2).
    - Recurrent natural disasters, cyber-attacks, and loss of CBRs remain significant risks.
  - Upside risks: faster dissemination of an effective vaccine boosting confidence and activity; CBI capital flows surprising on the upside.

### Box 2 — Impact on the ECCU of Global Financial Instability under the COVID-19 Crisis (summary)
- Global transmission channels:
  - Global easing of monetary and financial conditions contributed to record-high asset prices and low interest rates; recurrent bursts of instability and fly-to-quality reallocations affect ECCU through exchange rates, commodity prices, remittances, and tourism demand.
- Estimated macro impacts of increased global risk aversion:
  - A two standard deviation positive shock to the VIX index above the median produces:
    - a negative growth impulse to the ECCU of -0.6 percent and -1.0 percent over two consecutive years, respectively;
    - negative pressure on ECCU inflation of around -0.5 percent from lower commodity prices;
    - appreciation of the EC dollar of 0.8 percent (larger in more tourism-dependent countries).
  - Balance of payments worsens with a one-year lag.
- Methodology:
  - Two-step procedure estimating joint dynamics of global financial variables and applying multivariable shocks to country-specific VARs to estimate impacts on output, consumer prices, competitiveness, NIR, and external current account.
- Policy implications and recommendations:
  - Near-term priorities: protect lives and livelihoods (enhance testing, tracing, treatment; maximize vaccine access; maintain support for the vulnerable).
  - Financing and adjustment: cash-constrained countries should rationalize non-essential spending and rely largely on concessional borrowing; countries unable to secure gross financing should consider longer-term IFI arrangements.
  - Minimize reliance on ECCB credit line to safeguard quasi-currency board integrity.
  - Regional debt target postponement: postponing the 60 percent of GDP debt target by five years could create near-term fiscal space but requires credible supporting frameworks; staff analysis indicates meeting the target by 2030 is no longer feasible for several countries without drastic fiscal consolidation (a cumulative fiscal adjustment effort of 6 percent of GDP for the ECCU, with a cost to growth of 0.6–0.7 percent).
  - Strengthen fiscal anchor and frameworks: regional common standards, regional fiscal oversight entity, incentive mechanisms, well-sequenced national fiscal framework improvements, upgrade public investment management, SOE oversight, internal audit, fiscal reporting; consider state-contingent debt instruments.
  - Safeguard financial stability: balance supervisory flexibility with measures to preserve capital and liquidity, address legacy NPLs, strengthen supervision of non-banks, and enhance ECAMC funding options.

### Box 5 — COVID-19 Tourism Shock’s Impact on ECCU Banking Sector’s Asset Quality (summary)
- Simulated NPL and loss projections:
  - Staff simulations indicate the ongoing tourism shock could result in near tripling of banking sector NPLs to almost 30 percent of total loans, with the full impact materializing with significant lag.
  - At their peak, the simulated NPLs could imply loan losses of 8½ percent of ECCU GDP.
  - Staff’s loss estimates apply a uniform provisioning rate of 60 percent across sectoral projections.
  - Estimated capital shortfalls in local banks based on pre-pandemic capitalization would be more modest (around 1 percent of GDP), but the sector on aggregate would be left with only thin capital adequacy margins.
- Near-term supervisory guidance:
  - Balance supervisory flexibility with support to institutions; allow loan moratoria to expire end-September 2021 as announced by the ECCB.
  - Encourage restructurings with realistic repayment terms; use ECCB standard on treatment of impaired assets; encourage capital conservation; allow temporary breaches with credible corrective plans; rapidly address non-bank supervision gaps.
- Crisis management and resolution:
  - Formalize crisis management plans (CMPs) at regional and national levels; ECCB to review liquidity assistance tools and resolution framework; coordinate home-host arrangements and inter-agency MoUs.
- Troubled-asset resolution strategies:
  - Begin planning credible strategies for NPL reduction; revisit sustainable funding options for ECAMC and alternatives; address rigidities in legal frameworks for asset recovery.
- Financial sector reform priorities:
  - Complete reforms on credit reporting and insolvency frameworks, centralized AML/CFT supervision for banking system, harmonized legislation for co-operative societies.
  - Develop regional macroprudential framework; transition toward Basel II/III, timing to avoid undue burden; consider regional deposit insurance with prerequisites considered.
- Links to competitiveness:
  - Maintain robust ECCB backing ratio (95–100 percent; staff analysis notes backing ratio at 96 percent can be considered adequate).
  - Immediate priority: strengthen health capacity and vaccination distribution to reduce tourist concerns; later focus on structural reforms to repair scarring and boost competitiveness.
- Data and statistics:
  - Lack of timely macroeconomic indicators hinders monitoring; ECCB recently added staffing in its statistical department.
- Authorities’ perspectives:
  - ECCB estimated GDP contracted by 15 percent in 2020 but projects a faster rebound to 4 percent in 2021 under a V-shaped recovery assumption; tourism recovery assumed gradual with tourists returning to 2019 level in 2023.
  - Authorities favor postponing the regional debt target from 2030 to 2035 with supporting fiscal reforms.

### Authorities’ views on fiscal policy, debt sustainability, and resilience
- Authorities stressed strong fiscal discipline at national level is key to regional debt sustainability.
- Near-term plans: adopt full-fledged fiscal resilience frameworks in line with best practice.
- Objectives for frameworks:
  - Guide consolidation toward the reframed regional debt anchor with flexibility for external shocks.
  - Improve public debt structure by lengthening maturity and lowering borrowing costs.
  - Call for greater international support for resilience against natural disasters and climate change.
- ECCU decision: extend regional debt target date from 2030 to 2035; support required via strengthened regional and national fiscal frameworks to safeguard credibility.
- Recommended regional actions to safeguard credibility:
  - Institute regional common standards and arrangements to guide national fiscal policy frameworks.
  - Establish a regional fiscal oversight body.
  - Develop incentive mechanisms to ensure compliance and lower government borrowing costs.
- Country-level advice for constrained states:
  - Rationalize non-essential spending; rely largely on concessional borrowing, including IMF-supported programs.
  - Near-term public finance priorities: enhance testing, contact tracing and treatment capacity; strengthen enforcement of public health protocols; maximize COVID-19 vaccine access; maintain support to the vulnerable.

### Financial stability, supervision, and crisis management (authorities’ consensus)
- Authorities agreed with staff that pandemic fallout poses gradually rising financial stability risks; credit risk is key near-term risk given expected weakness beyond moratoria.
- Supervisory guidance and actions:
  - Limit extensions of loan moratoria within ECCB-announced time frame; encourage realistic restructurings; track strengthened credit loss provisioning; encourage capital conservation; allow temporary regulatory breaches only with credible corrective plans.
  - Rapidly address non-bank supervision gaps and strengthen stress-testing.
- ECCB measures:
  - ECCB not considering further extension of moratoria; monitoring restructured loans for appropriate classification and reporting.
  - ECCB issued Treatment of Impaired Assets Standard in January 2021 with three-year phased implementation to commence in January 2022.
  - ECCB maintained backing ratio in range of 95–100 percent by strictly limiting credit provision.

### Strengthening oversight of nonbanks and structural/technical reforms
- Regional regulatory cooperation:
  - Deepened through the Regulatory Oversight Committee chaired by the ECCB; Optimal Regulatory Framework aims to address infrastructure gaps and finalize regional macroprudential framework.
- Resolution and crisis management framework:
  - Proceed toward fuller frameworks after banks’ balance sheets strengthened and fiscal backstop functional.
- Payments modernization and digital currency:
  - Continue modernization of payment system; ECCB launched Phase II of digital currency project in March 2021.
- Structural reform agenda:
  - Continue action plans under the ECCB Program of Action for Recovery, Resilience and Transformation.
- Statistical improvements: continue to improve ECCU area statistics (status: limited progress).

### Risk Assessment Matrix — financial sector highlights (selected)
- Unexpected shift in the Covid-19 pandemic: Relative Likelihood: Medium (Downside); Impact: recovery in tourism delays, corporate distress, protracted joblessness; Policy: extend COVID-19 related discretionary measures; monitor institutions; review CMP.
- Higher frequency/severity of climate-related natural disasters: Relative Likelihood: Medium (Downside); Impact: reduce growth and worsen fiscal/external positions; Policy: build Disaster Resilience Strategy with investment in resilience and ex ante financing.
- Financial sector risks (High NPLs, market risk, non-bank distress): Relative Likelihood: Medium (Downside); Impact: financial instability disrupts activity; Policy: implement ECCU strategy to strengthen banks; enhance non-bank frameworks; reinforce fiscal position.

### External sector — key figures and assessments
- Tourism exports account for nearly 40 percent of GDP.
- Current account:
  - Staff expect current account deficit to have more than doubled to 15¼ percent of GDP for the ECCU in 2020 (and 14½ percent of GDP for the ECCU excluding Anguilla and Montserrat).
  - Current account deficit for the ECCU-6 countries estimated at 14.4 percent of GDP in 2020.
  - After adjustments, the adjusted current account deficit was 8.2 percent of GDP; current account norm estimated at -6.8 percent of GDP, indicating a current account gap of -1.4 percent of GDP.
  - Policy gaps contribute 1.1 percentage points to the gap, domestic component of policy gap was -3.4 percent of GDP reflecting higher-than-desirable fiscal deficit.
- Real exchange rate:
  - Nominal effective exchange rate index appreciated by 2½ percent during first five months of 2020 but thereafter depreciated by 4 through end-2020.
  - At end-December 2020, the real effective exchange rate was 3½ percent weaker than end-2019 level.
  - IMF’s EBA-lite model suggests an undervaluation of 2.6 percent in 2020; applying semi-elasticity of 0.4 yields an overvaluation of 4.1 percent.
- Public debt and reserves:
  - ECCU public debt estimated to have risen from 67 percent of GDP in 2019 to 84 percent of GDP in 2020 (external public debt about 55 percent).
  - Public debt ratio expected to peak in 2021 but remain high, well above 60 percent of GDP for extended periods.
  - International reserves at end-2020: US$1.7 billion, equivalent to 7½ months of total imports, 29 percent of broad money, and 58 percent of total external debt.
  - Reserve adequacy metrics (end-2020): In billions of US dollar: 1.7; Percent of GDP: 26.4; Percent of demand liabilities: 96.0; In months of total imports: 7.5 (Benchmark: 3.0); Percent of broad money: 28.6 (Benchmark: 20.0); Percent of total external debt: 57.9.
  - ECCB maintained reserve backing ratio at 96 percent.

### State-Contingent Sovereign Debt Instruments (SCDIs)
- Rationale and benefits:
  - SCDIs can automatically reschedule repayments or trigger financing when large shocks occur, facilitating speedier and less-costly debt restructuring.
  - Past use: Grenada (2015) and Barbados (2018) included natural disaster clauses.
- Model properties:
  - SCDIs optimal when sovereign cannot credibly pre-commit to service debt under extreme shocks.
  - For large negative shocks, creditors optimally extend new loans; optimal stock of debt lower than with no default commitment; borrowing interest rates close to international risk-free rates in the model.
- Practical constraints:
  - Issuance limited due to investors’ reluctance to accept complex instruments and valuation uncertainty; if issued at scale for verifiable events, interest rates could decline.

### Country snapshots and selected statistics (samples)
- Anguilla:
  - Tourism exports ≈ 37 percent of GDP; population about 15,000.
  - COVID-19 cases: total of 18 as of February 28, 2021, with zero deaths.
  - GDP contracted by 27¾ percent in 2020; inflation -1 percent.
  - Distribution of vaccines began in February aiming to rapidly inoculate 70 percent of Anguillans.
  - GDP expected to contract by 2 percent in 2021.
  - Current account deficit estimated at 60 ½ percent of GDP in 2020.
  - International reserves: EC $142.6 million at end-2020 (2.3 months of total imports).
  - U.K. provided conditional emergency financial aid of EC $41 million in 2020 and expected EC $40 million in 2021.
  - Fiscal balance: overall balance fell from surplus of 3¼ percent of GDP in 2019 to deficit of ¾ percent in 2020.
  - Public debt rose from 48 percent of GDP in 2019 to 68 percent of GDP in 2020.
  - Banking sector: capital adequacy ratio 10 percent in 2020 (down from 11 percent in 2019); regulatory benchmark 8 percent. Non-performing loan ratio around 25 percent.
- Antigua and Barbuda:
  - Economy averaged 4½ percent growth in 2014–19.
  - Economy estimated to have contracted by 17.3 percent in 2020.
  - Real GDP expected to contract by 3 percent in 2021; tourism activity returning to pre-pandemic levels by 2024.
  - Government secured COVID-19 vaccines for about 40 percent of the population.
  - Current account deficit projected to have surged from 6¾ percent of GDP in 2019 to 12¾ percent of GDP in 2020.
  - Public finances: overall fiscal deficit widened from 4 percent of GDP in 2019 to 5¾ percent of GDP in 2020; public debt rose from 81¾ percent of GDP in 2019 to 103 percent of GDP in 2020; projected public debt 112 percent of GDP in 2021.
  - Gross financing needs estimated about 17½ percent of GDP.
  - MTFS (January 2021) targets: increase tax-to-GDP ratio to 18 percent by 2023 and 20 percent over medium term (from 16¼ percent in 2020); if fully implemented, public debt could fall under 70 percent of GDP by 2030.
- Dominica:
  - Tourism accounts for over 70 percent of total exports and 20 percent of GDP.
  - Real GDP projected to contract by 10.5 percent in 2020.
  - Current account deficit projected to reach 19 percent of GDP in 2020.
  - Public debt projected to have reached 90 percent of GDP at end-2020.
  - IMF RCF financing: SDR 10.3 million.
  - Banks’ NPLs increased by 3 percentage points to 15 percent of total loans; credit union sector over 60 percent of financial sector assets and remains undercapitalized.
  - Medium-term fiscal policy: structural measures targeting fiscal savings of 6 percent of GDP cumulatively over 5 years, phased once recovery takes hold.
- Grenada:
  - Real GDP expanded about 5 percent per annum 2014–19; public debt declined from 108 percent of GDP in 2013 to 59 percent in 2019.
  - Real GDP estimated to have contracted by 13.5 percent in 2020.
  - Unemployment surged to 28 percent in 2020Q2 (from 15 percent in 2019Q2) then fell to 21 percent in Q3.
  - IMF RCF purchase SDR 16.4 million (about US$22.4 million) approved April 2020.
  - Primary balance in 2020 estimated around 2 percent of GDP (surplus); public debt increased to 70 percent of GDP at end-2020.
  - Projected financing needs in 2021: US$74 million.
- St. Vincent and the Grenadines:
  - COVID-19 cases surged early 2021: 1,435 new cases in first two months of 2021 (compared to 121 total cases in 2020).
  - Expected to receive 45,600 doses through COVAX (about 20 percent of population).
  - La Soufrière volcanic risks heightened contingency planning.
  - GDP estimated to have fallen around 4 percent in 2020; projected zero growth in 2021, accelerate to 5 percent in 2022 conditional on pandemic subsiding and other projects.
  - Fiscal: total revenues and grants 32½ percent of GDP in 2020; total expenditure 38¼ percent of GDP in 2020; overall deficit widened from 3 percent of GDP in 2019 to 5¾ percent of GDP in 2020; public debt rose from 75 percent of GDP in 2019 to 87 percent in 2020.
  - IMF RCF approved SDR11.7 million (about US$16 million) in May 2020.

### Financial sector and monetary developments (additional highlights)
- On 31 March 2021, the ECCB launched ‘DCash’ — digital currency pilot (Phase II launched March 2021).
- Financial sector conditions relatively sound with ample liquidity buffers; major risks include pandemic duration and prolonged regulatory forbearance masking weaknesses.
- ECCB recommends limiting credit provision to preserve backing ratio and credibility of quasi-currency board.
- Correspondent banking relationships remain a concern; no new terminations reported but acquisition of new CBRs has become more challenging.
- Payments modernization, digital transformation, and structural reforms remain policy priorities.

### Capacity development and technical assistance (CARTAC and IMF)
- CARTAC delivered substantial virtual capacity building since May 2020 across tax administration, customs, PFM, financial stability, Basel II/III Pillar 1 QIS, national accounts, price statistics, debt management, and macro-fiscal forecasting.
- Key timelines and standards preserved:
  - ECCB’s Treatment of Impaired Assets Standard issued in January 2021 with three-year phased implementation to commence in January 2022.
  - ECCU decision to extend regional debt target date from 2030 to 2035.

_International Monetary Fund — Eastern Caribbean Currency Union (chapter: Tourism Sector Reopening Strategies and Access to Vaccines) — content unit 1eccea2021001._

### 1. Tourism Sector Reopening Strategies and Access to Vaccines  __________________________________8

### 1. Tourism Sector Reopening Strategies and Access to Vaccines

### Pre-COVID-19 conditions
- Real GDP per capita in the ECCU had barely exceeded the pre-global financial crisis peak when the COVID-19 pandemic struck; growth picked up around 2014 supported by stronger global growth and tourism demand.
- Policy direction: authorities pursued a pro-growth strategy including strengthening human capital, improving investment climate, and building infrastructure; progress in reforms slower than desired but broadly in line with past staff recommendations (Annex I).
- Structural vulnerabilities:
  - Micro-states vulnerable to natural disasters with significant socio-economic implications.
  - High public debt in several countries prior to COVID-19, with Antigua and Barbuda and Dominica at around 80–90 percent of GDP.
  - Dependence on uncertain Citizenship-by-Investment (CBI) revenues, prone to sudden stops.
  - Financial sector large with persistent loan quality weaknesses.

### Health impact and immediate economic fallout
- Initial containment: inbound travel restrictions and strict lockdown measures led to very low infection rates by early summer 2020; reopening borders later coincided with a sharp uptick in cases in early 2021.
- Case concentration: three quarters of cases were concentrated in St. Lucia and St. Vincent and the Grenadines.
- Fiscal, liquidity, and financial measures announced in March–April 2020:
  - Announced discretionary fiscal measures ranged between 2 and 5½ percent of GDP.
  - Measures included increased health spending; cash payments to vulnerable households; income support for displaced workers; infrastructure projects; tax and import duty deferrals.
  - ECCB and ECCU Bankers’ Association announced loan repayment moratoria and waivers for up to six months in March 2020; extended in September 2020 in a more targeted manner for up to 12 months.
  - By late-2020 nearly a third of banks’ loan portfolios remained under extended moratoria.
  - Temporary supervisory flexibility included a classification freeze for loans under moratoria.
  - ECCB reduced the discount rate from 6.5 to 2 percent in April 2020 and the long-term credit interest rate from 6.5 to 3.5 percent in February 2021.

### Economic contraction and public finance impact
- Tourism slump and containment measures led to:
  - ECCU GDP estimated to have contracted by 16 percent in 2020 (down from 2¾ percent growth in 2019).
  - Country variation in 2020 GDP: -4¼ percent (St. Vincent and the Grenadines) to -27¾ percent (Anguilla).
  - Inflation weak at 0.2 percent y/y in December 2020.
- Fiscal outcomes in 2020:
  - Total revenue collection estimated to have declined by 16.7 percent in 2020.
  - Total expenditure across the region declined by 7.2 percent in 2020.
  - ECCU overall deficit estimated to have widened to 5.3 percent of GDP (up from 2.0 percent of GDP in 2019).
  - Overall public debt estimated to have risen from 67 percent of GDP in 2019 to 84 percent of GDP in 2020.

### Financial sector effects and liquidity
- Loan moratoria contained immediate asset quality deterioration but risk a large uptick in NPLs upon expiration in September 2021.
- Moratoria may have contributed to modest pickup in banks’ private sector credit; credit union high credit growth moderated.
- Direct bank credit to governments increased alongside rising fiscal needs.
- Financial system deposits remained stable; financial system liquidity around 40 percent of total assets.
- No immediate adverse effects observed on correspondent banking relationships, though acquiring new CBRs has become more challenging.
- Regional market and financing actions:
  - IMF Rapid Credit Facility emergency financing: SDR 48.08 million (about US$65.6 million) approved in April 2020 for Dominica, Grenada, and St. Lucia; SDR 11.7 million (about US$16 million) approved in May 2020 for St. Vincent and the Grenadines.
  - Additional support from World Bank and Caribbean Development Bank; Dominica, Grenada, and St. Lucia benefitted from DSSI cash flow relief.
  - Governments relied on ECCB and commercial bank deposits, CBI inflows, financing from the Regional Government Securities Market (RGSM), and ECCB credit facility where needed.

### External sector and reserves
- Current account: staff estimates the current account deficit more than doubled to 15¼ percent of GDP in 2020.
- Net FDI inflows weakened; increased official flows helped finance the widened current account deficit.
- ECCB foreign asset position held up relatively well; currency backing ratio under the quasi-currency board stood at 96 percent at end-January 2021.
- REER depreciated by nearly 3½ percent in 2020 due to weakening of the U.S. dollar.

### Tourism sector reopening strategies and access to vaccines (Box 1 findings)
- Reopening approaches varied by country during first re-opening phase:
  - Antigua and Barbuda and St. Lucia reopened in summer 2020 with mixed results; St. Kitts and Nevis reopened only at end-October 2020; St. Vincent and the Grenadines never closed borders.
  - CARICOM regional “travel bubble” agreed mid-September 2020 but Dominica, Grenada, St. Kitts and Nevis, and St. Vincent and the Grenadines opted out amid COVID spikes.
  - Entry requirements: depending on source country, visitors must submit proof of negative tests before arrival and quarantine in approved accommodations upon arrival.
- Vaccine access and implications:
  - All ECCU-6 countries (ECCU-8 excluding Anguilla and Montserrat) are members of the COVAX Facility.
  - Four ECCU-6 countries (Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines) are eligible for COVAX Advance Market Committee support (cost-sharing).
  - Anguilla and Montserrat (UK overseas territories) are receiving vaccines through the UK Government.
  - COVAX interim distribution forecast suggests ECCU-6 countries are expected to receive doses enough to vaccinate about 20 percent of the population.
  - Demographics: young population means nearly 100 percent of the population 55 years and older could be vaccinated if doses distributed from oldest age groups.
  - Expected doses too small to vaccinate 60–70 percent of the population (authorities’ intended goal) and to achieve herd immunity.
  - ECCU countries have made bilateral agreements to obtain additional doses, including with India and Russia.
  - Donations: Antigua and Barbuda, Dominica, St. Lucia, St. Kitts and Nevis, and St. Vincent and the Grenadines received donations of the COVID-19 vaccine (20,000–70,000 doses per country) from the Serum Institute of India in late February–early March 2021.
  - In practice, authorities are prioritizing vulnerable groups (like health sector workers), too.

### Outlook and risks
- Baseline recovery assumptions:
  - Vaccines broadly available in 2021Q4 assumed.
  - Current tourism season (December 2020–May 2021) expected to remain very weak.
  - Tourists expected to remain cautious; hotels to take time to reinstate capacity.
  - Number of tourists projected to return to 2019 level only in 2024.
  - Economy projected to shrink by nearly ½ percent in 2021 and rebound by 9 percent in 2022.
  - Medium-term growth projected to decelerate to around 2¼ percent.
  - Persistent output loss (scarring) of over 12 percent of GDP through 2025 relative to pre-COVID projection.
- Public finances and debt trajectory:
  - After deterioration in 2020–21, fiscal deficits projected to narrow over the medium term as growth rebounds and fiscal adjustment measures are implemented.
  - ECCU public debt ratio expected to peak in 2021.
  - Achieving regional debt target of 60 percent of GDP by 2030 challenging for all countries except Grenada and St. Kitts and Nevis.
  - ECCB Monetary Council in February 2021 extended the debt target date to 2035 and encouraged member countries to enact fiscal responsibility or fiscal resilience frameworks.
  - Persistently high debt ratio would constrain fiscal space for resilience investments and inclusive growth.
- Financial sector risks:
  - Ongoing tourism shock projected to almost triple bank NPLs in the next three years, weighing on credit activity and raising fiscal contingent liability risks.
- Elevated downside risks (Annex II):
  - Primary downside risk: longer and more widespread global pandemic and sharper-than-anticipated contraction in trading partners.
    - A deeper and longer recession would further strain public finances and financial institutions, potentially undermining confidence, triggering liquidity pressures and capital outflows, reducing ECCB international reserves, and creating potential pressure on the currency.
    - Ripple effects from global financial market instability could transmit negative growth impulses over two consecutive years (Box 2).
    - Recurrent natural disasters, cyber-attacks, and loss of CBRs remain significant risks.
  - Upside risks: faster dissemination of an effective vaccine boosting confidence and activity; CBI capital flows surprising on the upside.

*Source: IMF — Eastern Caribbean Currency Union (chapter: Tourism Sector Reopening Strategies and Access to Vaccines).*

### Box 2. Impact on the ECCU of Global Financial Instability under the COVID-19 Crisis

### Box 2. Impact on the ECCU of Global Financial Instability under the COVID-19 Crisis

### Global transmission and key external-sector channels
- Global easing of monetary and financial conditions contributed to record-high asset prices in global financial centers and low interest rates.
- Recurrent bursts of instability and sharp fly-to-quality portfolio reallocations affect ECCU external fundamentals despite limited financial integration, including:
  - exchange rates across major global currencies and depreciation of emerging countries’ currencies (affecting tourism demand);
  - key import commodity prices including oil and food items;
  - foreign remittances.
- Increase in sovereign spreads, interest rates, and currency depreciation in emerging markets relative to the US dollar under those conditions weaken ECCU external competitiveness, including of key ECCU tourism competitors such as Jamaica, Mexico, and the Dominican Republic with more flexible exchange rate regimes.

### Estimated macroeconomic impacts of increased global risk aversion
- A two standard deviation positive shock to the VIX index above the median produces:
  - a negative growth impulse to the ECCU of -0.6 percent and -1.0 percent over two consecutive years, respectively;
  - negative pressure on ECCU inflation of around -0.5 percent from lower commodity prices;
  - appreciation of the EC dollar of 0.8 percent (larger in more tourism-dependent countries).
- The balance of payments worsens with a one-year lag, explained by reaction lags.

### Methodology underpinning the estimates
- Two-step procedure:
  1. Estimate joint dynamics of: S&P500, VIX index, commodity prices (oil, food, gold), Fed Funds rate, major currencies’ exchange rates, 10-year US Treasury Bill yield, and EMBI sovereign spreads.
     - Shocks to the VIX are shown to jointly worsen transmission channels to the ECCU: tourism demand, imported food and oil prices, foreign remittances, and imports.
  2. Apply resulting multivariable shocks to country-specific VARs to estimate impacts on:
     - output,
     - consumer prices,
     - competitiveness,
     - NIR,
     - external current account.

### Policy implications and recommendations for the ECCU
- Near-term priorities:
  - Protect lives and livelihoods by: (i) enhancing testing, contact tracing and treatment capacity, and strengthening enforcement of public health protocols; (ii) maximizing COVID-19 vaccine access in collaboration with international and regional partners; and (iii) mitigating socio-economic impact by maintaining support for the vulnerable.
  - Cash-constrained countries should rationalize non-essential spending and rely largely on concessional borrowing to safeguard medium-term sustainability.
  - Strong fiscal transparency and accountability to keep borrowing within safe limits and give confidence to donors and other stakeholders.
- Financing and adjustment:
  - Without additional concessional financing, several ECCU countries may need substantial policy adjustment to close near-term financing gaps, which would be a significant headwind to recovery.
  - Countries unable to secure gross financing should consider seeking longer-term arrangements with the IFIs, including IMF supported-programs, to address near-term financing needs, catalyze donor financing, and anchor medium-term adjustment.
  - Governments should minimize reliance on the ECCB credit line to safeguard the integrity of the quasi-currency board.
- Regional debt target postponement:
  - Postponing the 60 percent of GDP debt target by five years would create near-term fiscal space needed to support recovery.
  - Staff analysis indicates meeting the target by 2030 is no longer feasible for several countries without drastic fiscal consolidation (a cumulative fiscal adjustment effort of 6 percent of GDP for the ECCU, with a cost to growth of 0.6–0.7 percent), which would slow recovery and constrain long-term growth.
  - Postponement could balance creation of near-term fiscal space with confidence-boosting effects if accompanied by a firm and credible new target date.
  - Credibility is critical: if perceived as not credible, a potential spike in sovereign risk premia would hurt growth.
- Strengthening the fiscal anchor and frameworks:
  - Regional common standards and arrangements to guide national fiscal responsibility frameworks, with flexibility for idiosyncratic shocks.
  - A regional fiscal oversight entity to champion fiscal transparency, vet adjustments to the anchor, support peer reviews, institutionalize good fiscal policies, and assist members develop legislation and procedures for fiscal transparency; placement suggested within the ECCB monetary council’s secretariat, supported by CARTAC.
  - Incentive mechanisms to ensure compliance and reap benefits from lower government borrowing costs; differentiated targeted debt paths and interim targets for high-debt countries during peer reviews.
  - Well-sequenced improvements to national fiscal frameworks: accelerate adoption of full-fledged rule-based fiscal frameworks and independent assessment institutions, prioritize better annual budget processes and macro-fiscal forecasting, and anchor MTFFs to achieve the revised debt target.
  - Upgrade public investment management, oversight for SOEs, internal audit function, fiscal reporting, and capacity to assess debt sustainability; continue TA from CARTAC and the IMF.
  - Consider National Disaster Resilience Strategies and state-contingent debt instruments triggering automatic amortization rescheduling and refinancing after large shocks (including natural disasters or pandemics).
- Safeguarding financial stability:
  - Financial system risks are gradually increasing as the crisis persists; deep contraction and protracted recovery raise credit risk and may test liquidity buffers.
  - Pandemic shock will compound banks’ legacy NPL problem; several banks carry large portfolios of longstanding and insufficiently provisioned NPLs.
    - Regional NPL reduction efforts via ECAMC hampered by funding constraints; initial ECAMC NPL acquisitions funded by a mix of ECAMC capital and selling institutions’ financing, insufficient for scaled-up acquisitions.
    - High share of deferred loans and staff stress testing suggest new NPLs could rise well above levels reached after the global financial crisis.
    - Estimated loan losses, if realized, would leave much of the ECCU banking sector with thin capital adequacy margins and could result in capital shortfalls in some banks.
    - Credit union sector credit risks may be exacerbated by earlier rapid lending growth, less stringent lending standards, and limited loan diversification.
  - Liquidity pressures may emerge as the crisis lingers:
    - Expiration of loan moratoria and limited capacity of public authorities to maintain support may necessitate greater draw-down of private sector savings.
    - Pre-pandemic liquidity buffers were significant, but prolonged belt-tightening may increase depositors’ shock-sensitivity.
    - Some banks’ liquidity buffers face pressures from public sector deposit withdrawals and risk of fair-value losses on overseas investments.
    - Rising receivables in the insurance sector warrant close monitoring.
  - Sovereign-financial linkages are strong in some segments; banks’ regional cross-border government debt holdings are limited, but some banks have high risk concentrations to their local sovereign exposures.

*Source: Box 2, "Impact on the ECCU of Global Financial Instability under the COVID-19 Crisis."*

### Box 5. COVID-19 Tourism Shock’s Impact on the ECCU Banking Sector’s Asset Quality

### Box 5. COVID-19 Tourism Shock’s Impact on the ECCU Banking Sector’s Asset Quality

### Simulated impact on nonperforming loans (NPLs) and timing
- Staff simulations indicate the ongoing tourism shock could result in near tripling of banking sector NPLs to almost 30 percent of total loans, although the full impact would materialize with a significant lag.
- Simulations use a panel of quarterly bank-level sectoral loan data with macroeconomic controls and local projection methods to compute sector-specific NPL impulse responses.
- The cumulative NPL path is derived from repeated tourism shocks that mimic the path of expected arrivals, accounting for:
  - the sectoral composition of banks’ pre-pandemic loan portfolios, and
  - their respective economies’ relative tourism dependency (overall contribution to GDP).

### Estimated losses and capital implications
- At their peak, the simulated NPLs could imply loan losses of 8½ percent of ECCU GDP.
- Staff’s loss estimates apply a uniform provisioning rate of 60 percent across the sectoral projections, while also accounting for persistent under-provisioning of pre-existing NPLs whose resolution is further impeded by the crisis.
- Estimated capital shortfalls in local banks based on their pre-pandemic capitalization would be more modest (around 1 percent of GDP), but:
  - the sector on aggregate would be left with only thin capital adequacy margins against further losses.

### Near-term supervisory guidance and regulatory measures
- Recommended supervisory approach:
  - Carefully balance near-term supervisory flexibility with measures to support financial institutions’ capacity to weather the crisis.
  - Allow loan moratoria to expire at end-September 2021 as announced by the ECCB.
  - Encourage banks and credit unions to ensure any subsequent restructurings follow realistically achievable repayment terms.
  - Use the recently issued ECCB standard on treatment of impaired assets to limit overreliance on loan collateral and guide provisioning against expected credit losses.
  - Encourage capital conservation until the full impact of the pandemic is clear.
  - As necessary, allow temporary breaches from minimum regulatory requirements provided the institution has a credible corrective action plan.
  - Rapidly address remaining gaps in supervision of non-banks and continue strengthening stress-testing coverage and practices.

### Crisis management planning and coordination
- Crisis management plans (CMPs) need to be formalized expeditiously at regional and national levels to contain system-wide risks.
- CMPs should:
  - consider a prioritized menu of readily implementable policy options,
  - clearly identify responsible agents, coordination requirements, intensified monitoring arrangements and enforcement mechanisms,
  - assess scope and modalities (including triggers) of any intervention or stability measure and consistency with sound practices and international standards,
  - ensure adequacy of requisite legal powers.
- At the regional level, the ECCB should:
  - complete its review of the adequacy of its tools for liquidity assistance to banks and the bank resolution framework and strategies, taking into account funding constraints,
  - have a key coordination role for national CMPs and review whether existing resolution regimes for non-banks remain appropriate given increased financial system significance,
  - lay out necessary home-host cooperation arrangements for cross-border financial groups and enhance inter-agency coordination and MoUs for information exchange (including stress tests, risk assessments, and policy developments).

### Strategies to address expected rise in NPLs and troubled-asset resolution
- In anticipation of a sharp increase in NPLs, authorities should begin planning credible strategies to support reduction of troubled assets now.
- Key considerations:
  - NPLs in the ECCU remain slow to resolve due to rigidities in legal frameworks for asset recovery and fragmented real estate markets.
  - Uncertain and costly asset recovery can constrain credit supply and limit the financial system’s longer-term ability to support regional economies.
  - Authorities need to revisit sustainable funding options for the ECAMC and/or explore alternative troubled asset resolution strategies, while addressing long-standing deficiencies in national legal frameworks.

### Broader financial sector reform priorities and pacing
- Maintain momentum on the financial sector reform agenda, with attention to near-term implications and supervisory capacity:
  - Complete long-standing reforms, including on credit reporting and insolvency frameworks, centralized AML/CFT supervision for the banking system, and harmonized legislation for co-operative societies.
  - Continue work towards the Optimal Regulatory Framework for the ECCU financial sector, ensuring the regional standards-setting plans do not dilute existing standards and that adequate capacity exists at each level of the regional supervisory framework.
  - Develop a regional macroprudential framework and transition toward Basel II/III regulatory regimes, while timing implementations to avoid unduly burdening supervised institutions.
  - Considerations over a regional deposit insurance should account for the oversight framework, financial stability conditions, and prerequisites for covered entities, given the pandemic’s still highly uncertain balance sheet implications across banks.

### Links to broader macro-financial issues and competitiveness
- The ECCB should keep a robust backing ratio by continuing to strictly limit credit provision:
  - The backing ratio has remained in the range of 95–100 percent, above the legislative requirement of 60 percent and the operational benchmark of 80 percent.
  - Staff’s analysis suggests the ECCB’s backing ratio, currently at 96 percent, can be considered adequate.
- Policy priorities to support competitiveness and recovery:
  - Immediate priority: strengthen hospital, ICU, testing capacity, vaccination distribution, and health and hygiene protocols to reduce tourist concerns and support quicker tourism rebound.
  - As health crisis abates, shift focus to repairing scarring from the pandemic via structural reforms: investment in human and physical capital, lowering cost of doing business (regulatory burden, energy, transportation), payments modernization and digital transformation, and resilience to natural disasters.
  - Advance regional integration to catalyze capacity and resources and maximize economies of scale.

### Data, statistical, and authorities’ perspectives relevant to policy
- Data and statistics:
  - Lack of timely compilation of macroeconomic indicators (particularly external sector statistics) hinders monitoring and policymaking.
  - Timeliness is affected by understaffing at the ECCB and national statistics offices and survey collection delays; ECCB has recently added staffing in its statistical department.
- Authorities’ views and fiscal considerations:
  - The authorities broadly agreed with staff’s outlook of a protracted economic recovery dependent on control of the COVID-19 pandemic.
  - ECCB estimated GDP contracted by 15 percent in 2020 but projects a faster rebound to 4 percent in 2021, assuming a V-shaped recovery and full reopening and return of international flights and cruise ships by the fourth quarter of 2021.
  - Tourism recovery is assumed gradual, with the number of tourists returning to the 2019 level in 2023.
  - Authorities stressed limits to repeating earlier fiscal stimulus without additional external support and called for greater access to concessional financing and more rapid global vaccine distribution.
  - Authorities favored postponing the regional debt target from 2030 to 2035 with supporting fiscal framework reforms to preserve credibility and fiscal resilience.

*International Monetary Fund — Box 5 from content unit 1eccea2021001*

### 32. The authorities stressed that strong fiscal discipline at the national level is key to

### 1eccea2021001 - 32. The authorities stressed that strong fiscal discipline at the national level is key to

### Fiscal policy, debt sustainability, and resilience
- Authorities stressed that strong fiscal discipline at the national level is key to regional debt sustainability.
- Some authorities indicated near-term plans to adopt full-fledged fiscal resilience frameworks in line with best practice in the region.
- Such rules-based frameworks would:
  - guide countries’ consolidation process toward the reframed regional debt anchor with sufficient flexibility regarding future external shocks.
- Authorities noted the need to improve public debt structure by lengthening the maturity and lowering borrowing costs.
- Authorities called for greater financial support from the international community to build resilience against natural disasters and climate change.
- The ECCU’s decision to extend the regional debt target date from 2030 to 2035 should be supported by strengthening regional and national fiscal frameworks to safeguard the credibility of the revised debt anchor.
- To safeguard credibility of the debt anchor, recommended regional actions include:
  - instituting regional common standards and arrangements to guide national fiscal policy frameworks;
  - establishing a regional fiscal oversight body;
  - developing incentive mechanisms to ensure compliance and lower government borrowing costs.
- National authorities should accelerate progress toward adopting full-fledged rules-based fiscal frameworks to guide the pace and composition of the medium-term consolidation toward the debt target.
- Countries under near-term financing constraints should:
  - rationalize non-essential spending;
  - rely largely on concessional borrowing, including IMF-supported programs, to safeguard medium-term sustainability.
- Near-term public finance priorities to protect lives and livelihoods:
  - enhancing testing, contact tracing and treatment capacity;
  - strengthening the enforcement of public health protocols;
  - maximizing COVID-19 vaccine access;
  - maintaining support to the vulnerable.

### Financial stability risks, credit risk, and supervision
- Authorities agreed with staff that the economic fallout from the pandemic poses gradually rising financial stability risks.
- Authorities viewed credit risk as the key near-term risk, given expected weakness of the economic outlook beyond the extended loan moratoria and national pandemic support measures.
- Authorities acknowledged other risks related to concentration of asset exposures that need monitoring.
- Authorities noted that the financial system took important steps to address vulnerabilities and build buffers in the pre-pandemic period.
- At this time, authorities did not see any near-term liquidity risks, albeit acknowledging increasing receivables among insurance companies.
- The authorities have not seen the pandemic affect CBRs.
- Supervisory guidance and actions recommended:
  - limit extensions of loan moratoria within the time frame announced by the ECCB;
  - encourage banks and credit unions to ensure subsequent restructurings follow realistically achievable repayment terms;
  - track strengthened credit loss provisioning in line with recently issued standards;
  - encourage capital conservation until the full impact of the pandemic is clear;
  - as necessary, allow for temporary breaches from minimum regulatory requirements provided the concerned institution has a credible corrective action plan.
- It is essential to rapidly address remaining gaps in the supervision of non-banks and continue strengthening their stress-testing.

### Risk management, provisioning, and ECCB measures
- Timely reinforcement of risk management is key to support financial institutions’ capacity to weather the crisis and exit from temporary pandemic responses.
- The ECCB is not considering any further extension of the announced moratoria time frame and is monitoring restructured loans to ensure appropriate classification and reporting.
- The phased introduction of the ECCB’s recently issued standard on the treatment of impaired assets will support timely credit loss provisioning, and a few SRUs are adopting similar guidance for credit unions.
- Stress testing is being further strengthened both at regional and national levels.
- Authorities have taken steps to encourage near-term capital conservation, although existing legal frameworks do not permit blanket prohibition of shareholder distributions.
- The ECCB agreed on the importance of continuing to safeguard the currency board with a strong backing ratio and continues to be guided by the legal requirements surrounding credit provision to maintain a robust backing ratio.
- By strictly limiting credit provision, the ECCB has maintained the backing ratio in the range of 95–100 percent, which has lent credibility to the quasi-currency board arrangement.
- Given uncertainty concerning the evolution of the pandemic, authorities agreed on preparing scenario-based policy responses and closely monitoring foreign exchange movements.
- Authorities concurred on the need to improve timely dissemination of external sector statistics and requested further TA in the matter.

### Crisis management, resolution frameworks, and non-performing loans (NPLs)
- Authorities confirmed the need for expedited formalization of crisis management plans at regional and national levels.
  - Plans should be readily implementable with prioritized policy responses to identifiable contingency scenarios.
  - Plans need to clearly identify responsible agents, coordination requirements and enforcement mechanisms while ensuring adequacy of requisite legal powers.
  - Plans should include the scope and modalities of any ECCB or government interventions and, for non-banks, resolution options consistent with sound practices.
- Authorities are reviewing how best to address rising financial system NPLs.
  - Broad agreement on discussing NPL resolution in a regional context.
  - Some national authorities saw the ECAMC as able to serve an important function; others saw a need to review alternatives, including complementary private sector solutions.
  - National authorities noted financing constraints to supporting NPL resolution with fiscal resources and stressed the importance of adequate capital buffers and supervision as pre-emptive measures.
- Credible strategies to support reduction of troubled assets should be started now.
  - Authorities need to revisit sustainable funding options for the Eastern Caribbean Asset Management Company and/or explore alternative troubled asset resolution strategies.
  - Address long-standing deficiencies in national legal asset recovery frameworks.

### Financial sector reform, supervisory architecture, and structural reforms
- Authorities underscored the need to maintain financial sector reform momentum, given long implementation times.
- The financial stability pillar of the ECCB Program of Action for Recovery, Resilience and Transformation of the ECCU Economies highlights continued roll-out of key and long-outstanding reforms to support navigating the crisis, mitigating risks and strengthening financial system stability.
- Ongoing work highlighted as essential:
  - An Optimal Regulatory Framework for the Financial Sector of the ECCU to address gaps in infrastructure and supervisory framework for non-banks and ensure supervision follows common standards.
  - Work on deposit insurance should proceed apace given expected duration of establishing the enabling legal framework.
- National reforms to complete:
  - credit reporting and insolvency frameworks;
  - centralized AML/CFT supervision for the banking system;
  - harmonized legislation for co-operative societies.
- Pandemic highlighted importance of:
  - developing a regional macroprudential framework;
  - transitioning toward Basel II/III regulatory regimes;
  - reducing infrastructure gaps and regulatory fragmentation;
  - further mitigating CBR risk.
- Implementation timelines should avoid unduly burdening supervised institutions.
- The ECCB stressed the importance of vigorously pursuing structural reforms during the pandemic to improve competitiveness and boost growth.

### Key figures, dates, and standards preserved from source
- ECCU decision: extend regional debt target date from 2030 to 2035.
- ECCB’s Treatment of Impaired Assets Standard issued in January 2021 with three-year phased implementation to commence in January 2022.
- ECCB backing ratio maintained in the range of 95–100 percent.

*Source: IMF staff report text as provided in the content unit.*

### 6. Further strengthen oversight of nonbanks

### 6. Further strengthen oversight of nonbanks

### Regional regulatory cooperation and supervisory strengthening
- Regional intra-regulatory collaboration and cooperation has been deepened through the financial sector Regulatory Oversight Committee (comprising national and regional regulatory authorities, chaired by the ECCB).
- The Optimal Regulatory Framework for the ECCU financial sector includes work to:
  - address previously identified infrastructure gaps,
  - finalize and strengthen a regional macroprudential framework,
  - harmonize standards of financial supervision.
- Some SRUs are adopting guidance for credit unions similar to the ECCU’s treatment of impaired assets standard.
- Status: In progress.

### Resolution and crisis management framework
- Recommendation: After banks’ balance sheets are strengthened and the fiscal backstop is functional, proceed toward a fuller resolution and crisis management framework.
- Ongoing actions:
  - The financial stability pillar of the Program of Action for Recovery, Resilience, and Transformation highlights continued roll-out of key and long-outstanding reforms.
  - Other proposed framework reforms, including for a regional deposit insurance scheme, are set out in the Monetary Council’s recent Optimal Regulatory Framework for the ECCU financial sector.
- Status: In progress.

### Payments system modernization
- Recommendation: Building on the successful launch of the Electronic Funds Transfer, the ECCB, national authorities, and financial institutions should continue concerted efforts to modernize the payment system.
- Ongoing actions:
  - Legislation to strengthen the payment system legal framework is under preparation.
- Status: In progress.

### Digital currency pilot project
- Recommendation: Proceed cautiously with the digital currency pilot project, as planned.
- Ongoing actions:
  - The ECCB launched Phase II of its digital currency project (pilot issuance of digital currency within the controlled environment) in March 2021.
- Status: In progress.

### Structural reform agenda
- Recommendation: To ensure external sustainability and boost potential growth, continue efforts to advance the structural reform agenda and foster private sector activity.
- Ongoing actions:
  - The ECCB issued Program of Action for Recovery, Resilience and Transformation which includes action plans for structural reforms.
- Status: In progress.

### Statistical improvements
- Recommendation: Continue to improve the ECCU area statistics.
- Status: Limited progress.

---

### Financial sector risk highlights (from the Risk Assessment Matrix)
- Source and direction of risks and staff-assessed relative likelihood / impact and policy responses:
  - Unexpected shift in the Covid-19 pandemic.
    - Relative Likelihood: Medium (Downside)
    - Impact: A recovery in tourism delays, dipping growth and resulting in long-run scarring effects, with corporate distress and protracted joblessness.
    - Policy response: Extend COVID-19 related discretionary fiscal and financial sector measures; monitor financial institutions; review crisis management plan.
  - Faster-than-expected recovery from the pandemic.
    - Relative Likelihood: Medium (Upside)
    - Impact: Domestic and external (especially tourism) pick up, boosting economic activity and employment.
    - Policy response: Gradually withdraw support measures to entrench recovery.
  - Widespread social discontent and political instability.
    - Relative Likelihood: High (Downside)
    - Impact: Economic activity is disrupted; political instability weakens policymaking and confidence.
    - Policy response: Maintain expansionary fiscal stance until recovery; ensure fiscal measures protecting the vulnerable are well targeted.
  - Cyber-attacks on critical infrastructure and financial systems.
    - Relative Likelihood: Medium (Downside)
    - Impact: Payment and financial systems disrupted, raising financial sector stability risk.
    - Policy response: Prepare crisis management plans; strengthen financial sector regulation and supervision; pursue prudent financial innovation.
  - Higher frequency and severity of climate-related natural disasters.
    - Relative Likelihood: Medium (Downside)
    - Impact: Reduce growth and worsen fiscal and external positions.
    - Policy response: Build Disaster Resilience Strategy with investment in resilience and appropriate ex ante financing, including fiscal buffers.
  - Financial sector: High NPLs, increasing market risk in indigenous banks, and distress in non-bank financial sector.
    - Relative Likelihood: Medium (Downside)
    - Impact: Financial sector instability disrupts economic activity.
    - Policy response: Promptly implement remaining elements of the ECCU strategy to strengthen indigenous banks; enhance regulatory and supervisory frameworks for non-banks; reinforce fiscal position to provide credible backstop.
  - CBI flows may surprise on upside.
    - Relative Likelihood: Medium (Upside)
    - Impact: Improve fiscal and external positions.
    - Policy response: Improve management and oversight of the CBI inflows through creating regional and national saving/stabilization funds.
  - Correspondent banking relationship deterioration.
    - Relative Likelihood: Medium (Downside)
    - Impact: Fees of cross border payments rise, raising costs and reducing remittance inflows.
    - Policy response: Strengthen compliance with AML/CFT and tax transparency standards; strengthen CBRs monitoring and supervisory standards for banks; finalize arrangements for the ECCB to assume AML/CFT supervisory duties.

### External sector assessment — key findings and figures
- Overall: The ECCU’s external position in 2020 was moderately weaker than the level implied by fundamentals and desirable policies in 2020, with an unusually wide margin of error due to data limitations and COVID-19 impacts.
- Current account:
  - Background: Tourism exports account for nearly 40 percent of GDP.
  - Staff expect the current account deficit to have more than doubled to 15¼ percent of GDP for the ECCU in 2020 (and 14½ percent of GDP for the ECCU excluding Anguilla and Montserrat), reflecting lower tourism receipts partially offset by reduced imports.
  - The current account deficit for the ECCU-6 countries was estimated at 14.4 percent of GDP in 2020.
  - After adjusting for cyclical contributions (-1 percent), the temporary impact of the COVID-19 crisis on the current account (+7.3 percent), and natural disasters (-0.1 percent), the adjusted current account deficit was 8.2 percent of GDP.
  - The current account norm was estimated at -6.8 percent of GDP, indicating a current account gap of -1.4 percent of GDP.
  - Policy gaps contribute 1.1 percentage points to the gap, of which the domestic component of the policy gap was -3.4 percent of GDP, reflecting a higher than desirable level of the fiscal deficit.
- Real exchange rate:
  - The nominal effective exchange rate index appreciated by 2½ percent during the first five months of 2020 but thereafter depreciated by 4 through end-2020.
  - At end-December 2020, the real effective exchange rate was 3½ percent weaker than the end-2019 level.
  - IMF’s EBA-lite Index-Real Effective Exchange Rate model suggests an undervaluation of 2.6 percent in 2020.
  - Applying a staff-estimated semi-elasticity of 0.4 to the CA model gap yields an overvaluation of 4.1 percent.
- Capital and financial accounts and net IIP:
  - Pre-COVID-19, FDI inflows financed a large part of the current account deficit.
  - ECCU public debt is estimated to have risen from 67 percent of GDP in 2019 to 84 percent of GDP in 2020 (of which, external public debt accounted for about 55 percent).
  - The public debt ratio is expected to peak in 2021 but remains high, well above the regional debt target of 60 percent of GDP, for an extended period in many countries.
  - Net IIP likely deteriorated from a deficit of over 80 percent at end-2018.
  - Assessment: Large current account deficit is expected in 2021; authorities should enhance monitoring of foreign exchange movements and prepare scenario-based policy responses, including estimation of financing needs and sources of concessional financing.
- FX intervention and reserves level:
  - At end-2020, international reserves stood at US$1.7 billion, equivalent to 7½ months of total imports of goods and services, 29 percent of broad money, and 58 percent of total external debt.
  - The ECCB maintained a reserve backing ratio at 96 percent.
  - Reserve adequacy metrics (end-2020 vs. benchmarks):
    - In billions of US dollar: 1.7
    - Percent of GDP: 26.4
    - Percent of demand liabilities: 96.0
    - In months of total imports: 7.5 (Benchmark: 3.0)
    - Percent of broad money: 28.6 (Benchmark: 20.0)
    - Percent of total external debt: 57.9
  - Assessment: To ensure credibility of the quasi-currency board arrangement, the ECCB has limited the provision of credit to the economy; this practice should continue.

### Using State-Contingent Sovereign Debt Instruments (SCDIs) to strengthen debt sustainability
- Rationale:
  - ECCU countries’ reliance on tourism export revenue and import needs make them disproportionately affected by recurrent natural disasters and the COVID-19 pandemic.
  - Sovereign debt contracts can be set to automatically reschedule repayments and/or trigger financing from creditors when large shocks (specified ex-ante and verified ex-post) occur.
- Benefits and precedents:
  - SCDIs can facilitate speedier and less-costly debt restructuring by tying payments to future economic outcomes (e.g., GDP, exports, commodity prices).
  - SCDIs can provide additional creditor compensation in good times and debtor relief in bad times, avoiding protracted valuation disputes, enabling quicker agreements, restoring debt sustainability, and aiding return to market access.
  - Past use: Grenada (2015) and Barbados (2018) included natural disaster or “hurricane” clauses to provide cash flow relief after natural disaster events.
- Theoretical model results and properties of optimal SCDIs:
  - SCDIs emerge as optimal when a sovereign cannot credibly pre-commit to service debt under extreme negative shocks affecting a large share of the economy.
  - Properties:
    - For non-extreme shocks, borrowing dynamics are the same as in the pre-commitment case: sovereign debt acts as a shock absorber with net borrowing during recessions and net repayment during expansions.
    - When a large negative shock creates incentives to default:
      - Creditors extend new loans optimally, keeping the borrower engaged and containing pressure to reduce concurrent spending to avoid default.
      - Governments agree to some pro-cyclical downward expenditure adjustment to contain debt accumulation; this adjustment is smaller than would be needed to avoid default under non state-contingent debt.
    - The optimal stock of debt is lower than in an economy that can commit to never default, providing space for additional borrowing in future extreme shocks.
    - Borrowing interest rates are close to international risk-free rates because automated rescheduling reduces default in equilibrium, increasing welfare.

*Source: 6. Further strengthen oversight of nonbanks (chapter/section content) — EASTERN CARIBBEAN CURRENCY UNION, INTERNATIONAL MONETARY FUND.*

### 6. The results above imply that SCDIs are found to be optimal from the creditor

### 6. The results above imply that SCDIs are found to be optimal from the creditor perspective outside of debt restructurings, given creditor’s interest to prevent asset loss in a sovereign default

### Findings on State-Contingent Debt Instruments (SCDIs)
- SCDIs are optimal from the creditor perspective outside of debt restructurings, given creditor’s interest to prevent asset loss in a sovereign default.
- Issuance of SCDIs are optimal at all times, good and bad, not just during debt restructurings.
- In practice, issuance has been limited due to sovereign bond investors’ reluctance to accept complex instruments of difficult valuation and uncertain payout, which would be reflected in excess risk premia.
- If SCDIs are issued in sufficient critical mass and for specific and verifiable extreme negative events, interest rates could decline — in the model SCDIs pay the risk-free international interest rate because creditors have no loss in equilibrium.
- Suggested implementation: a coordinated switch to the issuance of SCDIs in the regional bond market could be implemented in the ECCU context and Caribbean more broadly.

*Annex V. The Role of Dominant Currency Pricing in the Tourism Market in Small States*

### Dominant Currency Pricing (DCP) and Tourism
- The quasi-currency board arrangement has served as the nominal anchor for the ECCU since the start of the currency union, limiting the role of the exchange rate as a shock-adjustment mechanism.
- Dominant currency pricing (DCP): exporters use the US dollar (rather than local currency) to set prices for international trade.
- Previous research indicates DCP is less pronounced for services trade (such as tourism) than for goods, suggesting exchange rate flexibility may play a larger shock-absorbing role for tourism-dependent countries (Adler et al., 2020 and Li and Meleshchuk, 2020).

### Empirical evidence using the IMF’s week at the beach index (w@tb)
- Hotels prices in smaller countries are less sensitive to the bilateral exchange rate against the US dollar, suggesting a larger degree of DCP for smaller tourism destinations, potentially due to higher import content in their tourism exports.
- When hotels prices are set in the US dollar, for non-US tourists the US dollar exchange rate matters more for hotel cost than the bilateral exchange rate.
- Bilateral exchange rate may matter more for services invoiced in local currency, such as taxi and local tours.
- DCP can dampen the reaction of tourism demand to bilateral exchange rate fluctuations.

### Cross-country regression results on exchange rate elasticity of tourism
- A 10 percent bilateral depreciation can be associated with a 2 percent increase in tourist arrivals for economies above the median of the sample.
- The elasticity is 1.5 for economies below the median of the sample.
- If measured by population:
  - Elasticity is 2.3 for countries with a population above the sample median.
  - Elasticity is 1.3 for countries with a population below the sample median.

*Annex VI. Recent Developments in ECCU Countries*

### Anguilla — Key developments and statistics
- Anguilla is an overseas territory of the United Kingdom and is not a Fund member; it is a member of the ECCU and the Organization of Eastern Caribbean States.
- Tourism exports account for approximately 37 percent of GDP.
- Population: about 15,000.
- COVID-19 cases: total of 18 as of February 28, 2021, with zero deaths.
- Borders closed from March to November 2020.
- GDP contracted by 27¾ percent in 2020, with negative inflation (-1 percent).
- Distribution of vaccines began in February with the aim to rapidly inoculate 70 percent of Anguillans.
- GDP expected to contract by 2 percent in 2021.
- Current account deficit estimated at 60 ½ percent of GDP in 2020 (from 39¾ percent of GDP in 2019).
- International reserves: EC $142.6 million at end-2020 (equivalent to 2.3 months of total imports), down by EC$16 million from 2019.
- U.K. provided conditional emergency financial aid of EC $41 million in 2020 and is expected to disburse an additional EC $40 million in 2021.
- Fiscal balance: overall balance fell from a surplus of 3¼ percent of GDP in 2019 to a deficit of ¾ percent in 2020.
- Public debt rose from 48 percent of GDP in 2019 to 68 percent of GDP in 2020.
- Fiscal reform: in 2022, a single GST will replace an existing mix.
- Banking sector: capital adequacy ratio was 10 percent in 2020 (down from 11 percent in 2019), regulatory benchmark is 8 percent.
- Non-performing loan ratio: around 25 percent.
- Noted event: Republic Bank Ltd. acquired Scotiabank’s operations in Anguilla in November 2019; overall capital ratio declined from 16.5 percent in 2019-Q3 to 9.7 percent by 2020-Q4.
- Formal vesting of the bridge bank and its sale of NPLs to ECAMC are yet to be finalized.

### Antigua and Barbuda — Key developments and statistics
- Economy averaged 4½ percent growth in 2014–19.
- Tourism: stayover tourist arrivals and cruise ship visits fell by about 60 percent in 2020.
- Economy estimated to have contracted by 17.3 percent in 2020.
- Inflation averaged 1.1 percent in 2020.
- Real GDP expected to contract by 3 percent in 2021, with tourism activity returning to pre-pandemic levels by 2024.
- Local confirmed COVID-19 cases rose from 159 at end-2020 to 992 by mid-March 2021.
- Government secured COVID-19 vaccines for about 40 percent of the population.
- Current account deficit projected to have surged from 6¾ percent of GDP in 2019 to 12¾ percent of GDP in 2020.
- Ratio of international reserves to prospective imports: around 5 months in 2019 and estimated 5½ months in 2020.
- Antigua and Barbuda has exhausted its credit allocation at the ECCB.
- Financial sector: at end-2019, NPLs were 5.5 percent of total loans (below ECCU average of 10.1 percent). NPLs rose to 6.3 percent by end-2020 (compared with ECCU average of 11.4 percent).
- Temporary loan moratoria in context of the pandemic are set to end in September 2021.
- Public finances:
  - Overall fiscal deficit widened from 4 percent of GDP in 2019 to 5¾ percent of GDP in 2020.
  - Public debt rose from 81¾ percent of GDP in 2019 to 103 percent of GDP in 2020.
  - Fiscal deficit projected to stay at 5¾ percent of GDP in 2021.
  - Public debt projected to increase to 112 percent of GDP in 2021.
  - Gross financing needs estimated to be about 17½ percent of GDP.
- Medium-Term Fiscal Strategy (MTFS) announced January 2021:
  - Target to increase tax-to-GDP ratio to 18 percent by 2023 and 20 percent over the medium term (from 16¼ percent of GDP in 2020).
  - Measures include broadening property and sales tax bases, reduction in tax concessions and exemptions, introduction of a tourism accommodation levy.
  - Maintain wage freeze for most of 2021–25, limit new hiring, strengthen oversight of SOEs, bring public procurement legislation into force.
  - Plan to facilitate clearance of domestic and external arrears through cash payments, bonds, and land swaps with domestic creditors.
  - If fully implemented, MTFS could put public debt on a downward path to under 70 percent of GDP by 2030.

### Dominica — Key developments and statistics
- COVID-19 cases: limited to 156 with no deaths (prompt border closure and contact tracing).
- COVAX targeted 20 percent of the population; access to vaccines has been difficult.
- Tourism: accounts for over 70 percent of total exports and 20 percent of GDP.
- Real GDP projected to contract by 10.5 percent in 2020.
- Current account deficit projected to reach 19 percent of GDP in 2020, supported by financing from CBI deposits and official loans.
- Fiscal balance projected to reach -2.2 percent of GDP in 2020, owing to a decline in tax revenues of 14 percent, increased health expenditure, and income transfers.
- Public debt projected to have reached 90 percent of GDP at end-2020.
- External current account deficit projected to peak in 2021 at 26 percent of GDP.
- Financing: Dominica received IMF financing under the Rapid Credit Facility (SDR 10.3 million, equivalent to 89.4 percent of quota) and used the G-20 DSSI initiative.
- Financial sector:
  - No liquidity pressures observed; credit risk is the main threat.
  - Banks’ NPLs increased by 3 percentage points since the pandemic outbreak, to 15 percent of total loans.
  - NPLs expected to grow further once the loan service moratorium expires in September 2021.
  - Credit union sector accounts for over 60 percent of financial sector assets and remains undercapitalized.
- Medium-term fiscal policy:
  - Authorities intend to strengthen fiscal sustainability with structural measures targeting fiscal savings of 6 percent of GDP cumulatively, phased over 5 years, set to start once recovery takes hold.
  - Plans include adoption of a fiscal rule consistent with regional commitments, and improvement of Public Financial Management and Public Procurement.
  - Government approved a comprehensive development plan to build resilience to natural disasters.
- Risks to outlook:
  - Intensity and duration of the global pandemic.
  - Recurrent natural disasters.
  - Citizenship by investment (CBI) revenue has shown a declining trend and remains a source of upside and downside risk.
  - Delays in fiscal consolidation and materialization of downside risks could open fiscal and external financing gaps.

*International Monetary Fund — Eastern Caribbean Currency Union (excerpts from chapter content provided)*

### 19. In the years preceding the COVID-19 pandemic, Grenada enjoyed rapid growth and

### 19. In the years preceding the COVID-19 pandemic, Grenada enjoyed rapid growth and 

### Pre-pandemic growth and fiscal/financial buffers
- Real GDP expanded at around 5 percent per annum between 2014–19, significantly above the average of 2 percent during 2000–14.
- Growth benefited from structural reforms implemented between 2014–17, supported by an IMF ECF arrangement addressing vulnerabilities in fiscal, financial, business climate, and governance areas.
- Public debt declined steadily from 108 percent of GDP in 2013 to 59 percent in 2019.
- Primary balance reached 7 percent of GDP in 2019.
- Financial sector buffers at end-2019: capital adequacy ratio at 15 percent and NPLs at 2 percent; banks’ capital and liquidity ratios were above regulatory norms.

### Health response to the pandemic
- Authorities implemented stringent containment measures including a border closure to international visitors and a local curfew, with judicious relaxation and reimposition in response to developments.
- Result: around 150 cases and only one fatality.

### Economic impact of COVID-19
- Tourism accounts for over 80 percent of exports and came to a standstill since 2020Q2.
- Temporary closure of St. George’s University (may not resume in-person classes until late-2021) further stressed the hospitality sector.
- Real GDP is estimated to have contracted by 13.5 percent in 2020.
- Unemployment rate surged to 28 percent in 2020Q2 (from 15 percent in 2019Q2) and then fell to 21 percent in Q3.
  - Male unemployment: from 26 to 15 percent.
  - Female unemployment: from 31 to 29 percent.
- Inflation turned negative in 2020, reflecting declining fuel prices.
- Tourism arrivals further contracted in 2020Q4; a quick rebound in 2021 is unlikely.
- With the loss of the high tourism season, GDP is projected to contract by 1.5 percent in 2021.
- Persistent loss in the tourism sector may create scarring effects in the long term.

### Fiscal response and measures
- Government invoked the FRL’s escape clause to provide fiscal support.
- Relief package components (2020 fiscal cost totaled around 2 percent of GDP):
  - (i) increased health sector expenditures
  - (ii) support for hospitality workers
  - (iii) overhaul of development bank lending facilities
  - (iv) unemployment benefits
  - (v) reduction and deferral of taxes
- Regional and local financial regulators encouraged lenders to provide loan moratoria for six months.

### IMF and external support
- Grenada received IMF financing under the Rapid Credit Facility (RCF) and used the G-20 DSSI initiative.
- Request for purchase of SDR 16.4 million (about US$22.4 million), equivalent to 100 percent quota or 2.1 percent of GDP under an RCF, was approved in April 2020.
- The RCF disbursement and debt service suspension under the DSSI helped contain the pandemic and its socioeconomic fallout.

### Macroeconomic resilience and financial sector condition in 2020
- Estimated primary balance in 2020: around 2 percent of GDP (surplus).
- Public debt increased to 70 percent of GDP at end-2020.
- Limited signs of external sector pressures; net foreign assets remained stable due to import compression, robust remittances inflows, and continued FDI.
- Financial sector as of September 2020:
  - NPLs edged up to 2.6 percent (rise would be stronger without loan moratoria).
  - Capital-to-asset ratio at 22 percent.
  - Capital and liquidity ratios significantly above regulatory thresholds.

### Financing needs and reserve developments
- Projected financing needs in 2021: US$74 million, largely driven by amortization and interest payments.
- World Bank’s US$25 million Development Policy Credit would cover around one-third of it.
- Government deposits rose by US$67 million from January to October 2020, building significant reserves by late-2020.
- Reserve buffer was run down in December 2020 due to a one-off payment of US$60 million to a US investor (to settle an ICSID decision regarding the repurchase of shares in Grenlec).

### Policy framework and reform priorities
- Once the COVID-19 crisis wanes, the government is mandated to return to FRL targets to allow sustained debt reduction toward the 55 percent of GDP debt threshold.
- Authorities, jointly with the ECCB, plan to continue upgrading financial oversight.
- Further progress on structural reforms and advancement of the pilot disaster resilience strategy should solidify Grenada’s growth.

*International Monetary Fund staff report (extract).*

### 46. COVID-19 cases surged at the beginning of 2021. Amid the second wave of contagion in

### 46. COVID-19 cases surged at the beginning of 2021. Amid the second wave of contagion in

### COVID-19 epidemiology and vaccines
- 1,435 new cases in the first two months of 2021 (compared to 121 total cases in 2020).
- Authorities tightened containment measures; more recently, COVID-19 cases have fallen to pre-holiday levels.
- Vaccine allocations and sourcing:
  - Expected to receive 45,600 doses through the COVAX Facility (covering about 20 percent of the population).
  - Authorities are exploring additional doses from the U.K., Cuba, India, and Russia.

### Volcanic risk (La Soufrière)
- Event timeline and response:
  - La Soufrière awakened in the last week of 2020 after four decades of slumber, releasing magma and creating a lava dome.
  - Authorities strengthened monitoring capacity with assistance from regional and international partners (e.g., University of the West Indies Seismic Research Centre, Caribbean Disaster Emergency Management Agency, and the U.K.).
  - National Volcano Emergency Plan updated and scenario-based financing needs simulated.
- Evacuation and historical economic impact:
  - Authorities estimate around 20,000 people (about 20 percent of the population) would need to evacuate in a worst-case scenario.
  - In the 1979 eruption, total economic loss (including agriculture, animals, and property) was estimated at US$150 million in today’s value (about 20 percent of GDP).

### Growth outlook and risks
- GDP performance and projections:
  - GDP is estimated to have fallen by around 4 percent in 2020.
  - GDP is projected to register zero growth in 2021 but accelerate to 5 percent in 2022, conditional on the COVID-19 pandemic subsiding, tourists returning, the port project reaching full swing, and new hotel/resort construction boosting demand.
- Main downside risks:
  - A more protracted pace of tourism recovery than currently anticipated.
  - A potential explosive volcanic eruption.
  - Severe rainfalls and hurricanes.

### Fiscal performance and public debt
- 2020 fiscal outcomes:
  - Total revenues and grants reached 32½ percent of GDP, up 2½ percentage points of GDP from 2019.
  - Total expenditure increased by 4¾ percentage points to 38¼ percent of GDP in 2020 due to COVID-19 response measures.
  - Overall deficit widened from 3 percent of GDP in 2019 to 5¾ percent of GDP in 2020.
  - Public debt rose from 75 percent of GDP in 2019 to 87 percent of GDP in 2020.
- Fiscal measures and IMF support:
  - On April 7, 2020, the government approved a fiscal package equivalent to 3.6 percent of GDP, of which, effectively, EC$54 million (2.5 percent of GDP) were distributed in 2020. Main measures included increased health spending, waiving of VAT and duties on health and hygiene products, relief to hardest-hit sectors, expansion of social safety net programs, and deferred payment of personal income taxes and various license fees.
  - IMF Executive Board approved emergency financing under the RCF equivalent to 100 percent of St. Vincent and the Grenadines’ quota (SDR11.7 million or about US$16 million) in May 2020. In its Letter of Intent, the government committed to publish procurement documentation including beneficial ownership information, report monthly on COVID-related expenditures, and undertake a full ex-post financial and operational audit of COVID-19 spending.
  - Authorities have honored these commitments, although publication of information on beneficiary owners was delayed and the annual audit for the 2020 financial operation (by Supreme Audit Institution) is expected to take place later this year.
- 2021 budget and outlook:
  - The authorities published the 2021 Budget on February 1, 2021.
  - The budget envisages widening of the overall deficit to 13¾ percent of GDP, driven by a substantial increase in capital outlays (from 8¼ percent of GDP in 2020 to 14¼ percent of GDP in 2021).
  - Historically, capital budgets have been ambitious but implemented prudently; staff expect the overall deficit to be contained at around 6 percent of GDP.
  - Public debt is expected to stay high at around 90 percent of GDP over the next few years as the primary deficit remains elevated reflecting construction of the new port.

### Financial sector stability
- Banking sector indicators (Q2 2020):
  - Capital ratio: 21 percent.
  - Liquid assets to total assets ratio: 42 percent.
  - Nonperforming loan ratio: 7¼ percent (above the 5 percent regulatory benchmark).
- Supervisory and sectoral measures:
  - ECCB measures to safeguard banking system stability.
  - Financial Services Authority (FSA) implemented measures including loan moratoria and waiver of late fees and charges to eligible customers to support credit unions and other non-bank financial institutions.

### CARTAC capacity building and technical assistance highlights (as of March 26, 2021)
- Delivery context:
  - Despite the pandemic, CARTAC delivered substantial capacity building over the past 15 months, shifting to virtual delivery from May 2020 onwards.
- Tax administration priorities and progress:
  - VAT implementation largely complete across ECCU countries.
  - Anguilla relaunched GST implementation using a three-phased approach: Interim Goods Tax from October 2019; partial GST intended for January 2021; full GST including services originally for 2023. Authorities decided to combine phases 2 and 3 and implement a full GST in 2022.
  - Tax program focus areas: (i) organizational restructuring and large taxpayer operations, (ii) strategic management frameworks (SMF), (iii) capacity building in core functions (taxpayer service, audit, collections enforcement, data analysis and risk management), (iv) building a robust program management (headquarters) function, (v) modernizing tax legislation, and (vi) strengthening IT systems.
  - St. Vincent and the Grenadines pursued a new Tax Administration Act and training for staff; Montserrat and St. Lucia received TA on preparing a Tax Administration Act.
  - Regional standardized data analytics and cross-matching program institutionalized for audit and compliance in most countries (St. Kitts and Nevis, Dominica, St. Lucia, Grenada, St. Vincent and the Grenadines).
  - TADAT: Dominica received a TADAT assessment; post-TADAT workshop planned before the end of April 2021. Other countries expressed interest: St. Lucia (FY22), Grenada and St. Kitts and Nevis (FY23).
  - Six regional initiatives in FY2020/21 including Effective Revenue Management, Strengthening Business Continuity Strategy—Disaster Preparedness, COVID-19 Board Room Virtual Discussions, Internal Audit, and ISORA participation.
- Customs administration TA:
  - Focus on risk management, leadership/management/governance, trade facilitation, and compliance.
  - TA provided to Grenada, Dominica, St. Vincent and the Grenadines, and Anguilla to prepare risk frameworks.
  - Post clearance audit (PCA) TA delivered to St. Vincent and the Grenadines and Dominica; about 35 officers trained.
  - TA on customs management of petroleum imports provided to St. Vincent and the Grenadines; further regional TA planned.
  - TA to Anguilla for Interim Goods Tax (IGT) customs aspects and revenue modelling.
- Public Financial Management (PFM) and internal audit:
  - PFM TA focused on pandemic-related issues through regional webinars on cash management, PFM functionality, incorporating pandemic spending into budgets, and health budget challenges.
  - Since November 2020, a series of workshops supported Internal Audit functions focusing on auditing pandemic-related and disaster relief expenditures; over 50 attendees per workshop with representatives from all ECCU countries. Five additional workshops planned for 2021.

*Prepared by Western Hemisphere Department (March 29, 2021).*

### 20. Following a request from St. Vincent and the Grenadines, TA was provided on

### 1eccea2021001 - 20. Following a request from St. Vincent and the Grenadines, TA was provided on

### Strengthening fiscal frameworks and public financial management (PFM)
- TA provided to St. Vincent and the Grenadines on operationalizing the Fiscal Responsibility Framework with recommendations to:
  - further enhance the fiscal responsibility framework;
  - improve the annual budget preparation process;
  - improve the medium term economic and fiscal outlook statement;
  - improve transparency and accountability.
- Implementing a modern and consistent PFM legal framework across the Caribbean including ECCU countries remains a key focus; the impact of Covid-19 highlighted concerns around rules, emergency processes, and recording transactions during a pandemic.
- Despite the pandemic, countries continued budget preparation reforms; support provided for strategic budget reform methodology with focus on:
  - Medium-Term Expenditure Framework (MTEF) process;
  - strategic plans;
  - development of Key Performance Indicators (KPIs) and reporting.
- CARTAC completed a PEFA Assessment in Anguilla (pre-pandemic) and is planning a follow-up virtual mission focusing on a PEFA Action Plan.

### Financial stability TA and activities
- Scope of TA in financial stability comprises:
  - stress-testing various aspects of the financial system;
  - preparing financial soundness indicators (FSIs) for deposit-taking institutions and financial stability and health indicators (FSHIs) for the non-deposit taking segments;
  - developing macro-prudential and systemic risk indicators (MPIs and SRIs);
  - assisting the ECCB in preparing the financial stability report for ECCU member territories.
- Post-COVID-19 engagement:
  - June 2020 regional workshop on COVID-19 stress testing for the insurance sector to develop pandemic stress scenarios, supervisory top-down stress testing implementation plans, and communication with insurers.

### Financial sector supervision and Basel II/III implementation
- CARTAC collaboration with ECCB on Basel II/III Pillar 1:
  - June 2020: reviewed ECCB’s Revised Draft Guideline on “Definition of Capital and Capital Calculations under Pillar 1” and developed draft capital adequacy reporting templates; walk-through exercises conducted, similar exercise planned for April 2021.
  - ECCB commenced quantitative impact study (QIS) of Pillar 1 implementation across a sample of institutions before the full QIS scheduled from April 5 to May 14, 2021.
  - Implementation of Pillar 1, assuming no further revision to their implementation timetable, is possible by April 2022.
  - It is highly unlikely that Pillars 2 and 3 will be implemented before April 2024.
  - ECCB contemplating implementing capital conservation buffer, leverage ratio, and liquidity coverage ratio (LCR).
  - Follow-up Basel II/III implementation mission planned for late April 2021.
- Risk-based supervision (RBS) for non-bank supervisors:
  - Regional workshop July 2019 and bilateral TA in 2019–2020.
  - Implementation progress varies across territories; two of eight exhibited strong commitment to transition to RBS.
  - 2020 TA to St Lucia and St. Vincent and the Grenadines focused on RBS success factors, feedback on risk-based assessments of credit unions and insurance companies, and two-year action plans with targeted milestones.
  - Similar TA planned for Grenada in mid-March 2021; follow-up TA planned by end-April 2022 subject to evidence of progress.
  - St Lucia, Anguilla, and Antigua and Barbuda expressed interest in TA on a risk-based solvency regime for insurance companies.
- Securities and credit-union supervision capacity building:
  - Fall 2020: workshop for staff and Commissioners of the Eastern Caribbean Securities Regulatory Commission on on-site supervision and international standards (IOSCO; OECD Principles for Corporate Governance).
  - February 2021: Anguilla Financial Services Commission staff participated in a CARTAC virtual 2-week workshop on regulation and supervision of credit unions; A-FSC to revise draft Cooperative Societies Act to clarify required capital sections.
  - Late 2020: TA to Montserrat FSC on organizational structure and staffing recommendations to prepare FY 22 budget estimates and fulfill legislative mandate.
  - 2020: IMF MCM reviewed St. Vincent and the Grenadines FSA legislative amendments (in resolution) to incorporate recovery and resolution powers and strengthen regulatory powers for resolution of credit unions and building societies.
- Regional workshops and webinars (2019–2021):
  - Insurance and bank supervisors participated in regional workshops/webinars; FY21 workshops on stress testing and building resilience against climate risk, incorporating pandemic plus natural catastrophe scenarios.
  - March 2021: workshop on supervisory review of actuarial liabilities of life insurance companies.
  - May–July 2020 remote round-tables on “Cybersecurity of Remote Work During the Pandemic” and “Regulatory and Supervisory Response to Deal with Coronavirus Impact”.

### Real and external sector statistics improvements
- December 2019–February 2021 CARTAC focus: external sector, national accounts, and price statistics; coordination with PRASC (Statistics Canada) and ECCB.
- National accounts progress:
  - Good progress by Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines in expanding/improving annual national accounts and developing supply and use tables (SUT).
  - Grenada: five-year action plan agreed; February 2020 mission assessed input data for planned SUT and recommended ways to address data gaps.
  - St. Kitts and Nevis: April 2019 mission assessed input data for SUT; compilation of SUT industry and product balances commenced.
  - St. Lucia: February 2019 and January 2020 missions supported SUT development for 2016 and rebasing GDP to 2016 prices, including backcasting to 2000; quarterly estimates updated in line with 2016 benchmark.
  - St. Vincent and the Grenadines: February 2021 CARTAC/PRASC finalized an SUT for 2018 to be used as basis for rebasing GDP estimates in March 2021.
- Price statistics:
  - Grenada April 2020 assistance to build capacity, improve CPI compilation methodology, review 2018/19 Household Budget Survey consumption data, and update CPI expenditure weights.
- Training and dissemination:
  - No regional training workshops in 2020; introduced short learning modules on national accounts—first held February 2021 with staff from Anguilla, Antigua and Barbuda, Dominica, Montserrat, St. Kitts and Nevis, St. Lucia, and ECCB; nine further sessions planned.
  - Since 2017, ECCB and ECCU NSOs have disseminated enhanced annual balance of payments and IIP statistics following BPM6; data for 2014 onwards available on ECCB’s website and re-disseminated in IMF BOPSY and IFS.
  - CARTAC assisting to enhance coverage, methodology, and quality of prioritized balance of payments components, incorporate wider data sources, and develop back-casting techniques to address breaks prior to 2014.
  - ECCB posted aggregated data on outstanding central government and public sector external debt on its website; CARTAC supporting compilation of public and private external debt in line with international standards.
- Visitor Expenditure Surveys (VES):
  - Antigua and Barbuda, Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines conduct face-to-face VES at airports and seaports on an ongoing basis and incorporate results in balance of payments; VES are currently suspended due to COVID-19 which severely affected inbound tourism; historic travel services exports were largely underestimated given lack of up-to-date VES indicators.

### Macroeconomic forecasting and analysis
- CARTAC provided TA on macroeconomic and macro-fiscal forecasting despite COVID-19 disruptions:
  - Engagement with Anguilla (Fall 2020) focused on refining medium-term macroeconomic and fiscal projections amid sharp tourism decline; role was to review assumptions underpinning forecasts—British Government appreciates CARTAC involvement for Anguilla’s annual budget approval.
  - TA to St. Kitts and Nevis (June 2020) focused on refining medium-term macro-fiscal framework with Ministry of Finance and ECCB participants.
- Virtual seminars initiated December 2020 covering:
  - forecasting tourism arrivals (December 2020);
  - the role of COVID testing in fostering economic recovery and reducing inequality (February 2021);
  - impact of climate change on disaster-prone countries (forthcoming in March 2021).

### Debt management capacity-building
- CARTAC debt management capacity-building program commenced October 2020, funded by the Canadian government, supporting Caribbean countries including ECCU in achieving strategic objectives:
  - (i) raise financing and manage public debt at low cost subject to a prudent level of risk;
  - (ii) increase financing choices in domestic, regional, and international capital markets, including climate-resilient debt instruments;
  - (iii) enhance government capacity for effective debt recording, reporting, and monitoring.
- Program features: demand-driven work plan developed with country authorities and IMF staff; activities include TA missions, regional workshops, and seminars with several activities from March 2021.
- Key challenges and priorities identified:
  - implementing realistic debt management strategies that consistently guide borrowing decisions;
  - raising higher-than-usual volumes of financing during the pandemic without exacerbating near-term refinancing risk;
  - better coordination of debt management operations and management of government cash balances;
  - improving transparency of debt policy, debt operations, and debt portfolio composition for governance and accountability;
  - reforms to the ECCU regional government securities market to reduce cost and risk and improve financing availability.

### ECCU economic impact and recovery framework (Statement excerpts)
- Pandemic impact on ECCU:
  - GDP for the Currency Union estimated to have contracted by 16 percent in 2020, with steeper declines in more tourism-dependent economies.
  - Inflation contained at 0.2 percent year on year in December (consumer price index in key trading partners).
- Early policy responses (as early as March 2020) included:
  - increased health care spending;
  - cash payments to vulnerable households;
  - income support for displaced workers in tourism and other sectors;
  - tax and import duty deferrals;
  - accelerating public sector investment programs to boost employment where possible.
- ECCB and banking sector measures:
  - regulatory forbearance and moratoria on loan repayments by commercial banks and replication in non-bank sector (dominant credit unions).
  - ECCB reduced the discount rate from 6.5 to 2 percent and the long-term credit interest rate from 6.5 to 3.5 percent to ease access to Central Bank credit for member governments and licensed financial institutions.
- ECCB Program of Action for Recovery, Resilience and Transformation (PARRT):
  - endorsed by the Monetary Council of the ECCB in October 2020;
  - expected implementation over a three-year period;
  - consists of proposed national and regional policy actions built on four pillars (pillars listed in the source beyond excerpt).

*Source: Statement by Ms. Levonian, Executive Director, and Ms. Edwards, Advisor to the Executive Director, on Eastern Caribbean Currency Union, April 26, 2021.*

### 1.   Financial

### 1.   Financial stability

### Financial and Monetary Sector Developments
- On 31 March 2021, the ECCB launched ‘DCash’ — a digital currency that became the world’s first retail central bank digital currency (CBDC) to be publicly issued within a formal currency union.
- Financial sector conditions are relatively sound with ample liquidity buffers and a stable deposits base, but several downside risks remain.
- Major risks:
  - Uncertainty about the duration of the pandemic.
  - Prolonged regulatory forbearance could mask weaknesses in the sector.
- Exchange rate and reserves:
  - Maintaining a strong currency is a major policy objective.
  - Despite economic challenges and external uncertainties, the exchange rate parity with the US dollar has remained fixed.
  - Foreign reserves remain high and no change in the exchange rate is anticipated.
- Financial stability objectives under the PARRT:
  - Prepare comprehensive crisis management plans at regional and national levels.
  - Maintain stability across the entire financial system while stimulating economic growth.
  - Ensure the non-bank financial system operates within applicable guidelines provided by single regulatory units of individual governments.
  - Require licensed financial institutions to operate within prudential benchmarks and relevant guidelines issued by the ECCB.
  - Support recapitalization, effective resolution strategies, optimal liquidity management, and improved information exchange.
- Data and assessment improvements:
  - The ECCB will work with Governments to build databases to enrich the quality of banking sector assessments.
  - These assessments will help identify institutions which pose high systemic risk, especially those with very elevated NPL levels.
- Nonperforming loans:
  - The tourism shock is projected to almost triple banks’ NPLs.
  - Regional efforts to reduce NPLs will continue, including potential purchases by the Eastern Caribbean Asset Management Corporation (ECAMC) or via private sector asset management companies.

### Correspondent Banking Relationships (CBRs)
- The loss of CBRs remains a concern and poses a risk to financial stability.
- Although there have been no new terminations of CBRs, recent legislative changes in the U.S. could increase the cost of compliance, affecting correspondent banks’ decisions.
- Market structure changes:
  - With two foreign banks exiting the market in the last 18 months, domestic banks now serve close to two-thirds of the market.
- Policy responses:
  - Authorities will pursue initiatives to prevent further loss of CBRs by adopting global regulatory standards, implementing reforms to improve the AML/CFT framework, and improving governance in financial transactions.
  - Enhancing capacity to address changing AML/CFT standards remains a priority.
  - Authorities seek technical support from the Fund and other multilateral institutions to enhance the AML/CFT framework and leverage digital tools for transaction monitoring.

### Fiscal Policy and Debt Management
- Pandemic impacts:
  - The pandemic has worsened the fiscal situation of ECCU member states.
  - Largely as a result of steep declines in GDP, the ECCB has recommended that member countries delay the achievement of the fiscal anchor of 60 percent debt to GDP ratio from 2030 to 2035.
  - Public debt levels are high and increasing in several countries as new debts were incurred to finance the pandemic response.
- Fiscal commitments:
  - Authorities are committed to making well-focused and concerted efforts to improve fiscal performance and achieve debt reduction goals across the ECCU.
  - Stronger fiscal consolidation efforts are needed to attain the debt targets by the revised date of 2035.
  - The pace at which the target will be achieved will vary from country to country.
  - ECCU member states are committed to prioritizing fiscal discipline, including through the adoption of fiscal rules.
  - Well-articulated fiscal frameworks and comprehensive recovery plans are necessary along with the ECCB PARRT.
- Revenue and financing measures:
  - Measures to enhance revenue administration and collection are necessary.
  - ECCU member states will need assistance from development partners in raising financing to close the fiscal gap.
  - Increasing domestic revenues will complement external financing; technical support is vital.
  - For states relying heavily on resources from Citizenship by Investment Programs, strengthening governance of these programs will be undertaken to ensure greater sustainability.
- Climate and resilience:
  - Authorities welcome the Fund’s preparation of a comprehensive climate change strategy, including plans to include climate change issues in surveillance and the preparation of a climate change dashboard.
  - ECCU countries are ranked among the most natural disaster-prone countries worldwide and are barely able to build buffers because of the frequency of climatic events and other natural hazards.
  - The ongoing eruption of the La Soufriere volcano in St. Vincent and the Grenadines is evidence of the risks faced.
  - Building resilience is critical and access to funding for resilience building is essential.
  - Authorities continue to advocate for special consideration to be given to Small Development States (SDSs), including those of the ECCU, and urge the Fund to work with other multilateral institutions to address this matter.

### Achieving Sustained and Inclusive Growth
- Reopening and vaccination:
  - The road to returning to pre-pandemic GDP levels could be long and protracted if the pandemic is not contained.
  - Authorities will focus on ensuring the population is fully vaccinated in tandem with tourism source markets to fully reopen the tourism industry as soon as possible.
  - The Fund should continue its advocacy for vaccine equity among all countries.
- Diversification and investment:
  - Authorities continue to make investments in agriculture, physical infrastructure, renewable energy, and digitalization to lay the foundations for sustained and inclusive growth.
- Business environment and human capital:
  - Authorities remain committed to removing obstacles to doing business that impact growth outcomes.
  - Investments in education and continued support to the health sector will improve the quality of the labor force.
  - New legislation to provide for the establishment of a credit bureau and simplifying foreclosure processes are intended to encourage private sector investment.
- Coordination:
  - The ECCU will pursue these developments in a coordinated manner and within the context of the OECS Economic Union framework.

### Capacity Development
- Technical support is central to successful implementation of ECCU recovery plans.
- Authorities express gratitude to the Fund’s area and functional departments and the Caribbean Regional Technical Assistance Centre (CARTAC) for facilitating capacity building and look forward to continued strong support.

### Conclusion
- Authorities acknowledge substantial work remains to achieve the long-term vision for the ECCU.
- Despite numerous challenges, authorities are determined to rebuild after the pandemic.
- Strengthening integration and greater collaboration among member states will make development efforts more effective.
- Support from the international community, including the Fund, and technical and financial assistance are critical to preserving macroeconomic stability, developing sound financial systems, and ensuring sustainable, inclusive growth.

*Source: 1.   Financial*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1eccea2021001.pdf_