## 1eccea2022001 ## Source details **Canonical URL:** [1eccea2022001](https://www.imf.org/-/media/files/publications/cr/2022/english/1eccea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1eccea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1eccea2022001.pdf.json) --- ### Key issues and outlook - ECCU economies scarred by the COVID-19 pandemic with spillovers from the war in Ukraine compounding supply disruptions and transportation bottlenecks, fueling inflationary pressures. - Recovery characterized as gradual and uneven with significant downside risks. - Inflation: - Expected to hover over 5½ percent in 2022. - Headline inflation projected to peak in 2022 above 5½ percent from 1½ percent in 2021; rising to 5–7 percent (year-on-year) in March–April in several countries. - Real GDP and growth: - Real GDP projected to grow by 7½ percent in 2022. - ECCU GDP estimated to have expanded by 5 percent in 2021, after a contraction of 17½ percent in 2020. - Growth converging to around 2¼ percent over the medium term; staff baseline assumes tourism returns to 2019 level only in 2024. - Fiscal and debt: - Overall fiscal deficit estimated to have narrowed to 3¼ percent of GDP in 2021 (improvement of about 2¼ percentage points from 2020). - Overall underlying deficit (net of CBI revenues) about 9½ percent of GDP in 2021 (11 percent in 2020). - Overall public debt around 85 percent of GDP in 2021; estimated to have risen from about 66 percent of GDP in 2019 to 85¼ percent of GDP in 2021. - Aggregate fiscal stance (overall deficit net of CBI revenues) in 2022 budget plans expected to remain accommodative at about 8 percent of GDP (compared to 4½ percent of GDP during 2016–19). - External sector: - Current account deficit around 16¾ percent of GDP in 2021. - ECCB international reserves equivalent to 5 months of imports of goods and services in 2022. - Currency backing ratio under quasi-currency board at 95.4 percent at end-February 2022 (95.8 percent at end-2021 in other sections). - REER depreciated by 5 percent in 2021. - Financial sector: - Broadly stable with adequate capital and liquidity buffers. - NPLs elevated at nearly 12 and 7 percent of total loans of banks and credit unions respectively at end-2021. - ECCB introduced provisioning guidance effective January 2022 with initial coverage ratio of 60 percent of all NPLs; provisioning strengthened to 58 percent of NPLs at end-March 2022. - Loan moratoria expired end-March 2022; NPLs could rise further. - Risks: - Downside risks include higher commodity prices, new COVID variants, natural disasters, slower tourism from tightening in advanced economies, shipping cost spikes, cancellation of CBI programs, cyber-attacks, and CBR curtailments. - Upside: faster-than-assumed relaxation of COVID protocols could speed tourism recovery. ### Scarring effects and human capital - Scarring (hysteresis) significant due to severe output contractions, suggesting potential long-term loss of trend output. - Key scarring channels: - High exposure to tourism and other high-contact services. - Limited fiscal space to counteract shocks. - Losses in human capital from prolonged school closures between March 2020 and October 2021. - Staff empirical results: high tourism exposure and low economic diversification correlated with output losses during 2020–22 (measured as downward revisions to growth forecasts). ### Inflation drivers and shipping-cost analysis - Headline inflation driven by rising food, fuel, and transportation prices; the war in Ukraine aggravated supply-chain disruptions. - Local projection method (LPM) findings: - A 50 percent increase in oil price drives up inflation of global-factor-sensitive (GFS) components by around 2.5 percentage points, implying an impact on headline inflation of around 1.7 percentage points; dissipates by end of second year. - An increase in shipping costs has a more persistent impact on inflation. - Shipping-cost simulation (assuming shipping costs stay at end-2021 level in 2022): - Inflation of GFS components would increase by around 3.3 percentage points. - Headline inflation would increase by 2.2 percentage points. - Aggregate implication: headline inflation in 2022 will be around 3.9 percentage points higher than otherwise (subject to government measures and possible decline in shipping costs). ### Fiscal policy, consolidation, and frameworks - Near-term priority: maintain fiscal prudence while protecting the vulnerable through health spending and temporary targeted transfers. - Policy recommendations: - Maintain fiscal prudence while protecting the vulnerable through health spending and temporary targeted transfers. - Improve coverage and targeting of social safety nets; centralize and digitalize beneficiary information and payment systems (while protecting recipients with limited IT access). - Allow gradual pass-through of international energy and food prices and phase out generalized subsidies (fuel price caps, tax exemptions) over time. - Pursue medium-term fiscal consolidation via revenue mobilization, expenditure rationalization, fiscal structural reforms, and reliance on concessional financing. - Accelerate adoption of well-designed rule-based fiscal responsibility frameworks (FRFs) to support consolidation and preserve credibility of the regional debt target. - Internalize natural-disaster impacts in FRFs; consider disaster-mitigating financial buffers. - Fiscal rule findings and options: - For highly disaster-exposed small open economies with elevated debt, primary balance rules may be preferable to expenditure rules to achieve faster debt convergence. - Operational targets must be tailored to country circumstances (exposure to disasters, initial debt, openness). - Corrective trigger example: when cumulative difference between actual primary balance and target > 2 percent of GDP, corrective action to reduce difference to zero within 3 years with at least one third in first year. ### Financial sector stability, reform priorities, and credit - Financial sector status: - Adequate capital and liquidity but elevated NPLs and provisioning needs as moratoria end. - System liquidity: around half of total deposits and 60 percent of GDP held as liquid resources; over half invested in overseas deposits and traded securities. - Reinvigorating private credit growth: - Policies: establish regional credit bureau and registry; modernize insolvency laws; support collateral solutions and partial credit guarantee schemes; pilot movable collateral registration; revisit 2 percent minimum household savings deposit rate; pass pending securities legislation to deepen capital markets. - Data: credit union sector credit growth 10 percent in 2020 and slightly under 9 percent in 2021. - Supervision and integrity: - Accelerate reforms to address lending and credit constraints. - Mitigate CBR risks by strengthening AML/CFT, governance, and offshore taxation frameworks; regional coordination and transparency for CBI programs. - Reduce fragmentation in non-bank supervision; propose Regional Standards Setting Body (RSSB) to harmonize non-bank regulation; expedite Virtual Assets Business legislation; finalize ECCB Technology Risk Standard. - Asset quality and provisioning: - Moratoria unwound to end-March 2022; banks generally have sufficient capital buffers but require intensified monitoring for relapses in loan performance. - ECCB’s phased increase of provisioning ratio to reach 100 percent for long-standing NPLs by 2024 noted; TIAS prudential standard implemented January 2022 includes initial minimum 60 percent provision to NPLs ratio and criteria for write-offs. - ECAMC bolstering capacity but funding constraints remain for further NPL acquisitions. ### DCash (CBDC) operational issues and recommendations - DCash pilot launched March 2021, rolled out in all ECCU countries with a cap of EC$10 million on issuances (less than one percent of cash in circulation). - Uptake slow; extended outage between January and March 2022 due to operational management of digital certificates disrupted transactions and onboarding. - Recommendations: - Raise public awareness and improve communication with end-users. - Reinforce capacity, project governance, staffing, contingency planning, and clear division of operational, oversight and risk management responsibilities between central bank and vendors. - Fully implement safeguard measures covering financial integrity and cybersecurity. - Consider benchmarking DCash against international standards for financial market infrastructures and adopt targeted cybersecurity frameworks. ### Climate resilience, supervision, and financing - Supervisory priorities: - Integrate physical climate risks into supervisory frameworks; tailor stress tests to more intense/frequent storms and critical infrastructure resilience. - Develop regulatory measures for climate risk-aware lending, exposure diversification, adequacy of prudential buffers, and ex-post asset recovery. - Box 3 findings: - Historical resilience aided by high reinsurance cessions, insured collateral requirements, limited direct bank exposure to tourism and agriculture, and relatively speedy post-disaster tourism recovery. - Insurance penetration tends to increase after major disasters; financial deepening could boost insurance uptake. - Stress tests show intense storm damages or consecutive storms could materially affect bank asset quality. - Financing resilience: - Prioritize long-term concessional financing such as IMF’s Resilience and Sustainability Trust (RST). - Examples: Disaster Resilience Strategy in Dominica and Grenada; updated national adaptation plans in several countries. - Energy transition and competitiveness: - Accelerate shift to renewables and energy efficiency to reduce high electricity costs from imported diesel. - Regulatory improvements: update energy policies, relax caps on solar/wind production, establish independent energy regulators, adopt tariff and procurement regulations, incentivize small-scale solar and energy efficiency in building codes. - Statistical and capacity needs: - Improve timeliness and quality of data dissemination; ECCB established Research, Statistics and Data Analytics Department in April 2022. - Implement IMF Statistics Department and CARTAC TA recommendations on national accounts, price, and external sector statistics. ### Tourism shock, sectoral vulnerability, and simulation evidence - Tourism dependence: - Regional average share of hotel sector value added cited as 11.9 percent, ranging from more than 20 percent for Anguilla and St. Lucia to below 2 percent for Dominica and Montserrat. - Tourism recovery patterns: - 2021 tourist arrivals underperformed regional peers; recovery uneven across ECCU members (e.g., Antigua and Barbuda regained over 50 percent of pre-pandemic levels; St. Kitts and Nevis less than 15 percent). - Regression for ECCU: y = -5.21x -23.12, R² = 0.47 (Tourists Arrivals Growth (2021 vs. 2019) vs. Month in 2021 when quarantine restrictions ended). - Natural disasters and bank NPL simulations: - Baseline: a 20 percent single-year decline in stayover arrivals leads to simulated NPLs peaking just under three percentage points above pre-disaster level for an average ECCU country; impacts concentrated in tourism and construction. - Severe disruption scenario (e.g., St. Maarten after Irma) can produce several-fold larger NPL increases. ### Country and territory highlights - Anguilla: - Tourism exports 37 percent of GDP; population ~15,000. - Real GDP growth 2.1 percent in 2021 after 29.9 percent contraction in 2020. - Public debt 67.5 percent of GDP in 2021; current account deficit widened to 39.6 percent of GDP in 2021. - NPL ratio 21 percent in 2021; CAR 8.5 percent in 2021. - Montserrat: - Population ~4,990; working population ~2,000. - Public debt 5.1 percent of GDP in 2021. - Current account deficit 17 percent of GDP in 2021; real GDP expected to expand about 4 percent in 2022 after 8 percent growth in 2021. - Renewable energy targets: aim for only renewable energy by 2035; existing 1-megawatt and 750-kilowatt solar plants and 3 geothermal wells. - Provisions exceed 100 percent of NPLs at end-March 2022. ### Risk Assessment Matrix (selected high/medium risks and policy responses) - Rising and volatile food and energy prices (High) - Responses: targeted transfers, gradual pass-through of international prices, phase out generalized subsidies, shift to renewables, improve social safety nets, enhance regional integration. - COVID-19 variants (Medium) - Responses: ensure access to essentials, targeted relief, prioritize health spending, credible medium-term fiscal plan, vaccine education. - De-anchoring of advanced-economy inflation expectations (Medium) - Responses: strengthen fiscal frameworks, structural reforms, monitor financial institutions. - Cyberattacks (Medium) - Responses: crisis management plans, strengthen regulation, prudent financial innovation stance. - More frequent natural disasters (Medium) - Responses: rule-based fiscal frameworks internalizing disaster exposure, national adaptation plans, ex ante financing for resilience. - Higher NPLs and market risk (Medium) - Responses: monitor asset quality, ensure provisioning, strengthen non-bank regulatory frameworks. - CBI program scrutiny and potential phase-out (Medium) - Responses: enhance oversight and transparency, diversify fiscal revenues, engage with EU/US counterparts. - Curtailment of CBRs (Medium) - Responses: strengthen AML/CFT and tax transparency, complete ECCB designation as AML/CFT supervisory authority. ### Institutional, mission, and operational notes - Mission visited virtually all eight ECCU jurisdictions during May 3–31, 2022. - Report approved by James Morsink (WHD) and Natalia Tamirisa (SPR); report date: July 7, 2022. - ECCB and member authorities to continue work on DCash safeguards, provisioning standards, FRFs, and structural reforms. - CARTAC and IMF provided extensive CD across supervision, statistics, debt management, and macro forecasting; ECCB established a Research, Statistics and Data Analytics Department in April 2022. *Source: EASTERN CARIBBEAN CURRENCY UNION STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (July 7, 2022).* ### 2021. Directors noted that ECCU economies have been scarred by the COVID-19 pandemic ### 1eccea2022001 - 2021. Directors noted that ECCU economies have been scarred by the COVID-19 pandemic ### Key issues and outlook - Directors noted that ECCU economies have been scarred by the COVID-19 pandemic and that spillovers from the war in Ukraine have compounded supply disruptions and transportation bottlenecks, fueling inflationary pressures. - Recovery characterized as gradual and uneven with significant downside risks. - Inflation is expected to hover over 5½ percent in 2022. - Real GDP is projected to grow by 7½ percent in 2022, leaving output still well below the pre-pandemic level. - ECCU GDP is estimated to have expanded by 5 percent in 2021, following a sharp contraction of 17½ percent in 2020. - Fiscal deficits are projected to remain sizable in the near term, keeping gross financing needs and public debt at elevated levels. - The financial system remains broadly stable so far, with adequate capital and liquidity buffers, but nonperforming loans remain high and could rise further following the expiration of the ECCB’s loan moratoria program. - The outlook is subject to large downside risks, primarily from further increases in commodity prices and new COVID variants amid vaccine hesitancy, in addition to the ever-present threat of natural disasters. ### Scarring effects and human capital - Scarring (hysteresis) is significant: severe output contractions suggest potential long-term loss of trend output. - Key channels for scarring in the ECCU: - High exposure to tourism and other high-contact service sectors. - Limited fiscal space to mitigate the pandemic’s effects. - Losses in human capital due to prolonged school closures between March 2020 and October 2021, with potential negative long-term impacts. - Staff’s empirical results: high tourism exposure and low economic diversification are correlated with the output losses during 2020–22 in the ECCU (measured as downward revisions to growth forecasts). ### Fiscal policy, consolidation, and frameworks - Directors stressed the importance of maintaining fiscal prudence while protecting the vulnerable, given the lingering pandemic, heightening inflation pressures, and tightening global financial conditions. - Policy recommendations: - Maintain fiscal prudence while protecting the vulnerable through health spending and temporary targeted transfers. - Improve coverage and targeting of social safety nets. - Allow a gradual pass-through of international energy and food prices to the domestic economy and phase out generalized subsidies. - Pursue medium-term fiscal consolidation supported by revenue mobilization, expenditure rationalization, fiscal structural reforms, and reliance on concessional financing. - Accelerate adoption of well-designed rule-based fiscal frameworks to support consolidation efforts and preserve the credibility of the regional debt target. - Internalize the impact of natural disasters in fiscal frameworks to enhance effectiveness and credibility. - Fiscal effects of the pandemic noted: reduced economic activity, need to provide support, contraction in tax revenues, widened fiscal deficits, and higher public debt leading to smaller fiscal space and increased share of revenues allocated to interest payments. ### Financial sector stability and reforms - Financial sector status: - Remains broadly stable with adequate capital and liquidity buffers. - Elevated nonperforming loans; provisioning buffers and asset quality need close monitoring post-moratoria. - Directors’ recommendations: - Accelerate reforms to address long-standing lending and credit constraints to reinvigorate private sector credit growth. - Mitigate risks to correspondent banking relationships by strengthening financial integrity, AML/CFT, governance, and offshore taxation frameworks. - Reduce fragmentation in the non-bank supervision framework. - Expedite legislation to govern digitalized financial services. - Integrate climate risks in supervisory and regulatory frameworks and in crisis management plans. - For DCash (central bank digital currency): raise public awareness and improve communication with end-users, reinforce capacity, and fully implement safeguard measures. ### Structural policies, resilience, and competitiveness - Directors encouraged progress on structural policies to: - Build climate resilience. - Strengthen competitiveness. - Ensure food and energy security. - Specific recommendations: - Invest in resilient infrastructure and insurance for natural disasters. - Accelerate the shift to renewables. - Upgrade intra-regional transportation infrastructure and enhance regional integration. - Invest in skills development. ### Mission and coverage - Mission dates and participation: - The mission visited virtually all eight ECCU jurisdictions during May 3–31, 2022. - Report approved by James Morsink (WHD) and Natalia Tamirisa (SPR). - Report date: July 7, 2022. *Source: EASTERN CARIBBEAN CURRENCY UNION STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (July 7, 2022).* ### 4. Headline inflation increased strongly ### 4. Headline inflation increased strongly ### Inflation dynamics and drivers - Headline inflation increased strongly across the region, driven by rising food, fuel, and transportation prices. - The war has compounded existing supply chain disruptions and transportation bottlenecks, driving inflation in several countries to 5–7 percent (year-on-year) in March–April. - Differences in headline inflation across countries reflected varying degrees of reliance on imported food and fuel as well as pass-through of international prices to domestic prices that can be heavily influenced by policy measures to mitigate the impact of rising living costs. - Staff estimates that the impact of high shipping cost on the ECCU could persist in 2022. - Inflation is expected to peak in 2022 above 5½ percent from 1½ percent in 2021, reflecting also increases in food and fuel prices, as the war in Ukraine and pandemic linger, that are partly offset by measures such as fuel price caps in Grenada and St. Lucia and government price controls on utilities and transport in St. Kitts and Nevis. ### Macroeconomic context and near-term outlook - Real output is projected to grow by 7½ percent in 2022 and reach the 2019 level by 2024, with its growth converging to around 2¼ percent over the medium term. - Staff’s baseline scenario assumes a gradual return of tourism to the 2019 level only in 2024. - Staff analysis shows that the war in Ukraine affects the ECCU economies mainly through higher inflation (averaging over 2 percentage points) and lower GDP growth (averaging over 1 percentage point). - With the expiration of loan moratoria in March 2022, nonperforming loans could increase further. ### Fiscal developments and vulnerabilities - ECCU’s overall fiscal deficit is estimated to have narrowed to 3¼ percent of GDP in 2021, an improvement by about 2¼ percentage points from 2020, largely reflecting buoyant Citizenship-by-Investment (CBI) revenues, particularly in Dominica and St. Kitts and Nevis. - The overall underlying deficit (net of CBI revenues) is estimated to have remained sizable at about 9½ percent of GDP in 2021 (11 percent in 2020). - Taking into account moderate overall deficits and higher growth, the overall public debt in 2021 is estimated to stay broadly the same as in 2020, at around 85 percent of GDP. - As a result of the pandemic, the overall public debt is estimated to have risen from about 66 percent of GDP in 2019 to 85¼ percent of GDP in 2021—well above peer averages and the 60 percent of GDP ECCU debt ceiling. - The aggregate fiscal stance (as measured by overall deficit net of CBI revenues) embedded in ECCU countries’ 2022 budget plans is expected to remain accommodative at about 8 percent of GDP (compared to the average of 4½ percent of GDP during 2016–19). - The ECCU region received SDR allocations totaling SDR 89.6 million (about US$126 million) in August 2021, which have been mainly used to bolster reserves. ### External sector and exchange rate - The current account deficit rose further to around 16¾ percent of GDP in 2021, as higher goods imports offset the improvement in services balance. - The ECCB’s stock of international reserves remained stable around the pre-pandemic level, equivalent to 5 months of imports of goods and services in 2022. - The currency backing ratio under the quasi-currency board mechanism stood at 95.4 percent at end-February 2022. - The real effective exchange rate (REER) depreciated by 5 percent in 2021, mainly reflecting a stronger increase in trading partners’ inflation. ### Financial sector conditions - The ECCU financial system has remained broadly stable up to end-2021, with financial institutions maintaining stable capital and ample liquidity. - NPLs remain elevated at nearly 12 and 7 percent of total loans of banks and credit unions respectively at end-2021. - The ECCB introduced more stringent provisioning guidance in effect from January 2022; as of the first quarter of 2022 most banks were compliant with the required initial coverage ratio of 60 percent of all NPLs. - Banking system provisioning subsequently strengthened to 58 percent of NPLs at end-March 2022. - Loan moratoria programs expired end-March 2022; the moratoria were part of a suite of pandemic response measures including a temporary loan impairment classification freeze. - The sale of Royal Bank of Canada (RBC)’s regional operations to a group of local banks in April 2021 increased the local banks’ share of total system assets to two-thirds. ### Digital currency and operational issues - In March 2021, the ECCB launched the pilot program of its Central Bank Digital Currency (CBDC), DCash. It was rolled out in all ECCU countries and is limited in scale with a cap of EC$10 million on issuances, less than one percent of cash in circulation. - The uptake so far has been generally slow; between January and March 2022 DCash experienced an extended outage on account of a problem with the system’s operational management processes of digital certificates, disrupting new transactions and on-boarding of new users. ### Risks and scenarios - Downside risks to the outlook are significant: - Further escalation of sanctions arising from the war in Ukraine would result in higher food and energy prices, adding to inflationary pressures and eroding income and demand. - Slowing growth in advanced economies due to tighter monetary policy would dampen tourism in the ECCU. - Additional disruptions of supply chains and higher shipping and raw materials costs would hold back construction activity. - Outbreaks of new COVID variants would hamper the tourism recovery and delay fiscal adjustments. - Cancellation of CBI programs would eliminate a major source of fiscal revenues in several ECCU countries and could have a negative impact on correspondent banking relationships (CBRs). - Cyber-attacks on critical digital infrastructure could trigger financial instability or disruptions in socio-economic activities. - Recurrent natural disasters pose an ever-present risk. - On the upside, further relaxation of COVID-related health protocols globally could prompt a faster tourism recovery than envisaged. ### Policy recommendations - Near-term priority: maintain fiscal prudence while protecting the vulnerable through health spending, temporary targeted transfers, and enhanced social safety nets. - Adopt well-designed rule-based fiscal frameworks to help achieve fiscal consolidation, withstand shocks including natural disasters, and preserve the credibility of the regional debt target. - Allow a gradual pass-through of international energy and food prices to domestic prices, while committing to phase out generalized subsidies (such as fuel price caps and tax exemptions) in the coming years to help reduce fiscal cost, avoid adverse distributional impact, and promote green transformation. - Expedite efforts to enhance coverage and targeting of social safety nets, including centralizing and digitalizing beneficiary information and payment systems (while protecting recipients with limited IT access) to reduce duplication and omission. - Countries facing large near-term gross financing needs should seek longer-term arrangements with IFIs, including IMF-supported programs that can help catalyze donor support, and minimize the reliance on the ECCB credit line to safeguard the quasi-currency board. - Over the medium term, policies should shift focus towards supporting resilient and inclusive growth, with climate resilience building, investment in renewables, enhanced regional integration, and a strong framework for the central bank digital currency. - Financial sector policies should aim to address pandemic legacies, reinvigorate private credit growth, and reinforce resilience to climate-related shocks. *Source: 4. Headline inflation increased strongly — Eastern Caribbean Currency Union (IMF regional report content).* ### 15. Over the medium term, fiscal consolidation should resume with the composition of ### 15. Over the medium term, fiscal consolidation should resume with the composition of ### Fiscal consolidation and composition of spending - High-debt countries should proceed with fiscal consolidation by: - mobilizing domestic revenues and rationalizing lower-priority spending; - relying largely on low-cost financing to safeguard debt sustainability. - Move from income support and job retention measures to implementing active labor market policies (ALMPs) to facilitate reallocation and training. - ALMPs definition provided: government programs that intervene in the labor market to keep workers employed, bring them into employment, increase their productivity and earnings, and improve the functioning of labor markets. ### Creating fiscal space for productive investment and resilience building - Critical actions: - further progress on ongoing revenue administration reforms and rationalization of tax expenditures to broaden the tax base, enhance compliance, and reduce leakages (including from the informal economy). - enhance efficiency of spending; ECCU countries spend more on wages than the regional average in terms of GDP, squeezing room for public investment. - strengthen public investment management to support effective planning, allocation, and implementation and mitigate fiscal costs and risks. - Existing social assistance note: existing programs include means-tested benefits and social pensions; improving targeting can use information on household size and composition or welfare correlates such as location. - Examples of recent policy adjustments: Antigua and Barbuda and St. Lucia have started to increase domestic fuel prices to contain fiscal costs. ### Fiscal responsibility frameworks (FRFs) and preserving the regional debt target - Recommendation: accelerate adoption or reactivation of well-designed rule-based country-specific FRFs to achieve fiscal consolidation and preserve credibility of the regional debt target. - Context and recent history: - ECCU adopted a debt rule relatively early, but the regional policy framework had limited effect due to lack of an operational target and enforceability (Annex VI). - Several ECCU countries adopted rule-based FRFs: Anguilla (2013), Grenada (2015), St. Vincent and the Grenadines (2020), Antigua and Barbuda (2021), Dominica (2021). - Implementation of rules suspended since 2020 due to the pandemic; some countries are revisiting rules to address design weaknesses and recalibrate parameters given pandemic-related surge in debt and sizable disaster resilience investment needs. - Rationale: adopting or reactivating FRFs is more pressing given potential increase in external borrowing costs and elevated debt. ### Incorporating natural disasters into FRFs (Box 2 summary) - Principle: FRFs should internalize the impact of natural disasters to enhance effectiveness. - International experience: FRFs are more effective when having medium-term fiscal anchors (typically targeting gross public debt) supported by operational targets, escape clauses, and independent fiscal oversight councils. - Staff simulations (Grenada and St. Vincent and the Grenadines) using a fiscal rule calibration toolkit indicate: - greater exposure to natural disasters warrants setting lower country-specific debt ceilings than the regional ceiling (red relative to blue bars). - disaster mitigating financial buffers would allow for higher debt ceilings (green bars). - Box 2 findings: - debt ceilings should be set lower, the larger the exposure to natural disasters, unless there are disaster mitigating financial buffers such as self-insurance, insurance policies, disaster clauses in debt securities, access to grants conditional on disasters, and robust private self-insurance. - for small open economies with high exposure to natural disasters and elevated initial debt, primary balance rules could be preferable to expenditure rules. - two operational rule types simulated for Grenada and St. Vincent and the Grenadines: - (i) expenditure rules constraining public spending to ensure debt convergence within ten years following a natural disaster shock; - (ii) primary balance rules set to achieve a primary balance target consistent with long-term debt stability. - Staff results: primary balance rules perform better for countries with high public debt where speed of convergence to the debt target is more important than counter-cyclicality; primary balance rules that adjust untargeted transfers are relatively more favorable for more open countries because fiscal multipliers are generally lower. ### Operational targets and trade-offs - Operational targets must be tailored to: - country circumstances, including exposure to natural disasters, initial level of debt, and degree of openness. - Trade-off: - expenditure rules facilitate countercyclical fiscal policy (reducing GDP volatility); - primary balance rules assure a swifter return to the debt ceiling. - Implication: ECCU countries with debt more elevated relative to their debt ceiling may favor primary balance rules, provided the primary balance rule is achieved by adjusting revenue or expenditure components with low multipliers on growth (e.g., untargeted transfers). ### Strengthening fiscal institutions - Key institutional reforms to underpin FRFs: - improve the budget process and government statistics; - strengthen the role of national fiscal councils and state-owned enterprise (SOE) oversight; - enhance medium-term fiscal frameworks and public investment management. - Additional measures: robust common standards and arrangements to guide national fiscal policies and a regional fiscal oversight entity to ensure timely implementation and limit spillovers from unsustainable public finances. ### Asset quality, provisioning, and monitoring after moratoria exit - Moratoria unwound over the two-year period to end-March 2022 via resumption of repayments, loan restructuring case-by-case, and transition to NPLs where restructuring not feasible. - Banks and credit unions on aggregate have sufficient capital buffers to absorb additional losses, but: - intensified monitoring against relapses in loan performance is warranted given ongoing high NPLs and likely continued borrower fragilities. - emergence of new uncertainties, including the war in Ukraine, increases risks. - Supervisory priorities: - ECCB and national regulators should ensure provisioning accurately reflects balance sheet risks and losses, and intensify scrutiny of weaker institutions with high NPLs and lagging provisioning compliance. - ECCB’s recent provisioning guidance has improved engagement to dispose of NPLs, but resolving problem loans remains constrained by ineffective foreclosure processes in some jurisdictions and the need for further progress on pricing to attract funding given ECAMC’s limited resources. - Monitoring recommendation: intensified monitoring of banks with large overseas investments due to vulnerability to global financial market volatility. ### Reinvigorating private credit growth - Situation: - bank lending remains sluggish despite some recovery; - deposit growth has been robust. - system holds a large pool of liquid resources (around half of total deposits and 60 percent of GDP). - more than half of these assets are invested in overseas deposits and traded securities, elevating market risk and making the ECCU banking system a net foreign creditor. - increased competition compressed local lending rates and bank margins. - Policy measures to improve credit access and channel resources to local investment: - Establishment of a regional credit bureau and registry (passage of relevant legislation pending in some jurisdictions) and modernization of national insolvency laws to facilitate out-of-court settlement and clarify creditor rights. - Support development-partner-backed initiatives to address collateral constraints for MSMEs, including the recently launched regional partial credit guarantee scheme (Eastern Caribbean Partial Credit Guarantee Corporation) and a pilot program in St. Lucia to facilitate use and registration of movable collateral. - Revisit the 2 percent minimum (household) savings deposit rate (over 40 percent of total deposits) which likely weakens credit affordability, hinders local capital market development and encourages overseas investment in search for compensating yield, contributing to the private sector savings-investment imbalance. - Passage of relevant securities legislation where pending to deepen capital markets and improve financing opportunities for local investment needs. - Data points: - credit union sector credit growth rate: 10 percent in 2020 and slowed to slightly under 9 percent in 2021 (based on Caribbean Confederation of Credit Unions, country authorities, and Fund calculations). - ECCU liquidity: around half of total deposits and 60 percent of GDP held as liquid resources. ### Protecting local bank CBRs and financial integrity - Risk drivers: - Recent EU and U.S. proposals to phase out CBI programs could intensify scrutiny of compliance risks and increase CBR risks for local banks that are becoming systemic with the exit of international banks. - Recent exit of global banking groups increased systemic significance of local banks; proposed sale of CIBC-FCIB’s banking operations will result in local banks’ share of system assets swelling to over 70 percent, three jurisdictions having two or less banks, and a yet larger share of customers reliant on local banks’ CBRs. - Recommendations: - address remaining shortfalls in financial integrity, AML/CFT, governance, and offshore taxation frameworks; - pursue regional coordination—including minimum standards—of oversight and transparency of CBI programs; - tackle issues identified in national CFATF mutual assessments; - ensure consistency with global taxation standards; - complete designation of the ECCB as the competent AML/CFT authority over institutions licensed under the Banking Act in the three pending jurisdictions. ### Non-bank supervision, oversight reforms, and emerging risks - Progress reported on an ambitious agenda of oversight reforms, but complementary efforts needed to resolve fragmented non-bank supervision. - The proposed new regional standards setting body (RSSB) can help move ECCU non-banks under a common regulatory rulebook, but parallel efforts required to: - advance consolidated supervision of financial conglomerates operating across the region; - strengthen risk-based insurance supervision and risk-mitigation standards; - address notable data gaps. - Emerging issues: - increasing unregulated operations (e.g., crypto cash) require expedited passage and implementation of Virtual Assets Business legislation and bolstering resources and capacity of national supervisory authorities. - the proposed ECCB’s Technology Risk Standard can support uniform mitigation of cyber threats, identified by banks as a key risk area. *Source: Eastern Caribbean Currency Union — IMF staff report excerpt (provided content).* ### 25. Strengthening supervision, reporting and regulatory frameworks against climate ### 25. Strengthening supervision, reporting and regulatory frameworks against climate ### Supervisory, reporting, and regulatory priorities for climate risks - Incorporate physical climate risks increasingly in regional and national supervisory frameworks, supported by reporting structures that allow for more granular monitoring of different risk transmission channels, including sovereign and insurance counterparty risks. - Tailor risk assessments and stress tests to scenarios that account for: - more intense or frequent storms, and - resilience of critical infrastructure. - Develop regulatory measures to support: - climate risk-aware lending practices, - exposure diversification (e.g., excessive concentration to single insurer, sector or sovereign), - adequacy of prudential risk buffers (e.g., for systemic institutions), and - ex-post asset recovery. - Note: The ECCB’s advanced work in these areas is welcome. The ECCB has launched an ambitious program to integrate climate risks in supervisory and regulatory frameworks and, in collaboration with international agencies, has commenced a technical assistance project to build capacity in ECCU regulators and financial institutions. ### Box 3 — Climate Risk Resilience of the ECCU Financial System: key findings - Historical resilience drivers: - high share of insurance obligations ceded to reinsurance, - significant (insured property) collateral requirements, - limited direct bank exposures to most vulnerable sectors such as tourism and agriculture, - relatively speedy post-disaster recovery of the tourism sectors. - Potential increases in direct climate risk exposures as private sector scales up adaptation investment using local financial services. - Staff analysis findings: - insurance penetration tends to increase after major natural disasters, implying demand for private insurance in the ECCU is likely to increase as frequency and intensity of disasters go up; - financial deepening and inclusion could have a positive impact on insurance penetration in response to rising climate risks (Annex VII). - Indirect risk channels and amplifiers: - intensified indirect physical risks through the broader economy due to high dependency on tourism; - financial institutions’ significant exposures to public sector entities whose balance sheets may be stretched by disasters; - concentrated counterparty risks to regional insurers; - abrupt changes to reinsurance pricing (historical example: extreme tightening of the reinsurance market in 1993–94; led to creation of CCRIF in 2007). - Stress-test / simulation evidence: - simulations illustrate that more intense storm damages to critical tourism infrastructure or large consecutive storms could result in pronounced effects on bank asset quality (Annex VIII). - Historical average and range drawn on 16 major storm-events in the period of 2000-2019. - Baseline simulation draws on the historical average stayover arrival shock of 20 percent cumulatively in the first year after the largest hurricane events 1989-2019. - The downside simulation assumes cumulative 80 and 40 percent stayover arrivals shocks in the first and second post-disaster years respectively. ### Building climate resilience and enhancing competitiveness (selected findings and priorities) - External position and competitiveness: - The ECCU’s external position in 2021 is assessed to be moderately weaker than the level implied by fundamentals and desirable policies. - Based on the EBA-Lite model, the current account gap was -1.6 percent of GDP (implying an exchange rate overvaluation). - As the pandemic recedes, fiscal consolidation and a recovery in tourism exports should help narrow the current account deficit. - Over the medium term, supply-side reforms to reduce the cost of energy and build resilience to natural disasters should increase competitiveness and strengthen the external position. - Financing resilience: - Building resilience to natural disasters and climate change should continue to be a priority and could rely on long-term concessional financing such as the IMF’s Resilience and Sustainability Trust (RST). - Implementation examples: Disaster Resilience Strategy (Dominica and Grenada); updates to national adaptation/disaster plans (Antigua and Barbuda, Grenada, St. Lucia, and St. Vincent and the Grenadines). - The RST can complement traditional UCT programs, catalyze concessional financing and mobilize private sector investment. - Energy transition and efficiency: - Accelerating shift to renewables and investing in energy conservation would strengthen competitiveness and energy security. - High electricity costs due to heavy reliance on imported diesel hamper competitiveness. - Progress underway: investments in solar, wind and geothermal; various tax incentives for renewables. - Regulatory environment improvements needed: updates to national energy policies, changes to energy efficiency acts, relaxing existing cap on solar or wind energy production, establishing independent energy regulators, promulgation of tariff and competitive procurement regulations. - Opportunity to incentivize small-scale solar on new buildings and add energy efficiency to building codes. - Other competitiveness measures: - Upgrades to transportation infrastructure, investment in skills development, and further regional integration to help ensure food security. - Remove trade barriers to ease supply disruptions and facilitate trade; better integrate local agriculture with tourism. - Address skills mismatch by strengthening linkages between academic institutions and firms. - Continued investment in broadband to reduce the digital divide and foster inclusive growth. ### DCash, operational resilience, and safeguards - DCash benefits and risks: - DCash has potential to increase economic efficiency and foster financial inclusion. - ECCB needs to raise public awareness and improve communication with end-users to boost confidence and uptake. - Safeguards and operational recommendations: - Fully implement safeguard measures to contain risks related to financial intermediation, financial integrity, and cybersecurity. - Mitigation notes: - Financial disintermediation risk is mitigated by ample excess liquidity and DCash design as a non-interest retail instrument with holding limits. - Cybersecurity risks are mitigated at the pilot stage by limited system integration, but will rise as growth and risks evolve. - Actions recommended: - Closely analyze liquidity and funding conditions of financial institutions, including through liquidity stress testing. - Consider benchmarking against international standards for financial market infrastructures and adopt targeted cybersecurity frameworks and standards. - Enhance operational resilience and business continuity plans, including contingency planning and increasing staffing and skills. - Clearly divide operational, oversight, and risk management responsibilities between the central bank and technology providers, and establish a project management governance framework. - Establish a clear exit plan from the pilot project in case of major issues with any vendor. ### Statistical issues - Timeliness of data dissemination should be further enhanced to inform government and private sector decisions. - Institutional change: ECCB established the Research, Statistics and Data Analytics Department in April 2022, incorporating teams from the Research Department and the Statistics Department. - Progress is being made to implement Technical Assistance recommendations from IMF Statistics Department and CARTAC on national accounts, price, and external sector statistics. - Challenges: pandemic-related delays in compilation and dissemination of external sector statistics. - Recommendation: ensure adequate staffing levels and invest in training to improve data quality and timeliness. ### Authorities' views (summary of paragraphs 32–38) - Outlook and risks: - Authorities agree with staff’s outlook of a gradual and uneven economic recovery. - Noted scarring effects from the pandemic on tourism, transportation (especially air travel), and human capital. - Identified downside risks: war in Ukraine exacerbating supply disruptions, fueling inflation pressures, threatening food and energy security; further increases in commodity prices; new COVID variants; natural disasters. - Social and fiscal policy stance: - Authorities concur with maintaining fiscal prudence while prioritizing near-term policy to protect the vulnerable, to the extent feasible. - Emphasized food and fuel price controls and temporary tax exemptions/reductions to alleviate higher living expenses, acknowledging fiscal costs. - Agreed in principle on gradually shifting to better targeted transfers, but expect continued reliance on generalized subsidies temporarily due to inadequate coverage/targeting of social safety nets. - Debt target and fiscal frameworks: - Authorities remain committed to meeting the regional debt target (60 percent of GDP by 2035) and see benefits of rule-based fiscal frameworks, including operational targets. - Many noted challenges reaching the 60 percent of GDP debt target by 2035 given large pandemic-related increases in debt-to-GDP, impact of the war in Ukraine, and public capital spending needs for development and resilience. - Bank asset quality and NPLs: - Authorities agreed on need to closely monitor post-moratoria asset quality amid continued high NPLs. - Strategies to mitigate risks from unwinding moratoria include intensified scrutiny of weaker institutions. - ECCB plans a phased increase of banks’ minimum provisioning ratio to reach 100 percent for long-standing NPLs by 2024; technical requirements to be articulated in the ECCB’s 2022 review of the Treatment of Impaired Assets Standard. - Authorities committed to supporting asset recovery, including reforming foreclosure legislation where needed. - Some jurisdictions indicated inability to issue debt to finance ECAMC’s acquisition of legacy NPLs, but agreed on enabling ECAMC to activate special asset recovery powers. - Reforms to support private sector credit: - Need to advance reforms: pass pending laws such as the Credit Reporting Bill to facilitate a regional credit bureau/registry. - ECCB emphasized modernizing insolvency, collateral and asset recovery frameworks; address collateral constraints. - Most ECCU authorities invested in the Eastern Caribbean Partial Credit Guarantee Corporation to improve MSME access to finance and MSME capacity building. - Concerns on CBI revenue and integrity: - Concerns about potential loss of CBI revenues following EU and US proposals to restrict visa-free access to third countries with CBI programs. - Revenues viewed as critical for essential investments including resilience building; difficult to offset potential losses. - Authorities willing to collaborate with European and U.S. counterparts to provide reassurances about integrity of CBI programs. - Commitments to strengthen financial integrity frameworks and complete designation of the ECCB as banks’ AML/CFT supervisory authority. - Concerns that implementation of global minimum corporate tax would affect ability to attract foreign direct investment. - Nonbank oversight, cyber and digital risks: - Authorities view tightened regulatory oversight of nonbank financial institutions as key to addressing potential systemic risks. - ECCB Monetary Council approved establishment of a Regional Standards Setting Body (RSSB) to harmonize regulations for non-bank financial institutions; some authorities worry RSSB will not solve fragmented supervision of non-banks. - ECCB will reinforce regulatory collaboration to address risks from non-centralized and non-consolidated supervision of large cross-border insurance conglomerates. - Strengthening frameworks to respond to cyber threats and govern digitalized financial services (including crypto activities) is a priority. - Planned actions: finalize and implement ECCB’s Technology Risk standard, country capacity building to respond to cyber threats, and passage/implementation of the Virtual Assets Business Bill where pending. *Source: 25. Strengthening supervision, reporting and regulatory frameworks against climate (ECCU Regional Consultation Report content).* ### 39. The authorities recognized the importance of building fiscal and financial sector ### 39. The authorities recognized the importance of building fiscal and financial sector resilience to climate risks ### Climate and disaster resilience; fiscal implications - Authorities agreed natural disaster risks could warrant a national debt target lower than the regional ceiling, but noted this may not be practical in the current environment given the back-to-back shocks. - Projections include expected fiscal costs of natural disasters. - Building resilience to natural disasters and climate change should continue to be a priority: - Build on progress in investing in resilient infrastructure and insurance for natural disasters. - Accelerate the shift to renewables and invest in energy conservation, supported by an enabling regulatory environment, to improve competitiveness, encourage private sector involvement, and ensure energy security. - The ECCB’s program to incorporate climate risks in supervisory and regulatory frameworks should integrate physical climate risk scenarios in the authorities’ financial system crisis management plans to ensure adequacy of policy intervention frameworks. ### Energy transition and financing - Authorities stressed the importance of securing low-cost longer-term financing for climate adaptation and welcomed the Resilience and Sustainability Trust. - Rising fuel prices exacerbated by the war in Ukraine heightened the urgency to accelerate the shift to renewables to improve competitiveness and ensure energy security. - Authorities reported progress with investments in solar, wind, and geothermal energy but noted large investments are required to transition from fossil fuels, thus necessitating private sector involvement. ### Food security, transport, and human capital - Authorities underscored the urgency to ensure food security, upgrade intra-regional transportation infrastructure, and strengthen human capital. - To achieve CARICOM’s goal of reducing the regional food import bill by 25 percent by 2025, authorities are developing an action plan to enhance regional integration and ensure food and nutrition security, including by removing trade barriers. - Intra-regional transportation infrastructure is identified as an impediment to economic recovery and regional integration and will require public-private collaboration to mitigate supply disruptions, facilitate trade, and support tourism. - To minimize the pandemic’s scars on human capital and potential growth, authorities considered necessary continued investment in skills development and broadband technology, and facilitation of worker and resource reallocation to more productive uses. ### Digital currency (DCash) adoption and cybersecurity - ECCB agreed raising public awareness and reinforcing capacity are key to boosting use of DCash and containing risks. - Authorities viewed cybersecurity as the main risk associated with DCash. - ECCB plans: - Strengthen staffing and skill capacity of its IT department. - Emphasize educational marketing campaigns once the pilot is launched in Anguilla. - Hire a project manager and establish a project management governance framework. - Explore options with member governments for incorporating DCash into e-government reforms. - Reinforcing capacity and fully implementing safeguard measures are key for viability of DCash: - Step up efforts to raise public awareness of DCash and improve communication with end-users. - Invest in contingency planning and staffing. - Clearly divide operational, oversight, and risk management responsibilities between the central bank and technology providers. - Establish a project management governance framework. - ECCB’s Technology Risk standard needs timely finalization and implementation to strengthen frameworks and capacity to respond to cyber threats. ### Economic outlook and near-term policy priorities - ECCU economy is on a gradual recovery path but faces challenges: - Pandemic left scars on tourism, transportation, and human capital; strained fiscal and external balances. - War in Ukraine exacerbates supply disruptions, fuels inflation, and threatens food and energy security. - Recovery likely to be uneven across countries, driven by varying pace of tourism rebound and domestic activity. - Downside risks remain significant: further increases in commodity prices due to the ongoing war, outbreaks of new COVID variants, and natural disasters. - Near-term policy priority: maintain fiscal prudence while protecting the vulnerable: - Provide temporary targeted transfers through existing social assistance programs to alleviate rising living costs on vulnerable households. - Allow a gradual pass-through of international energy and food prices to the domestic economy. - Commit to phase out generalized subsidies such as fuel price caps and tax exemptions in the coming years to contain fiscal cost of support measures and avoid adverse distributional impact. - Expedite efforts to improve adequacy and efficiency of social safety nets. ### Medium-term fiscal strategy and fiscal responsibility frameworks (FRFs) - Over the medium term, fiscal policy should shift toward fostering resilient and inclusive growth: - Fiscal consolidation supported by mobilizing domestic revenues, rationalizing lower-priority spending, and advancing fiscal structural reforms. - Rely on low-cost long-term financing to safeguard debt sustainability. - Move fiscal policy from income support and job retention measures to those that facilitate labor reallocation and training. - Adopting well-designed rule-based FRFs is key to achieve fiscal consolidation and preserve credibility of the regional debt target: - Accelerate adoption or reactivation of fiscal frameworks to signal credible medium-term fiscal plans and boost market confidence. - When setting up or amending FRFs, internalize impact of natural disasters to enhance effectiveness: - Greater exposure to natural disasters would warrant setting a lower country debt ceiling than the regional ceiling, unless disaster mitigating financial buffers are readily available. - Choice of operational target must be tailored to country circumstances; for small open economies with high exposure to natural disasters and elevated initial level of debt, primary balance rules could be preferable to expenditure rules. ### Financial sector risks, supervision, and reforms - Asset quality and provisioning buffers warrant continued close monitoring as NPLs remain elevated: - With expiration of loan moratoria and likely continued borrower fragilities, ECCB and national regulators should closely monitor against relapses in loan performance, ensure provisioning accurately reflects balance sheet risks, and intensify scrutiny of weaker institutions. - Complementary efforts needed to address asset recovery constraints, including at the ECAMC, to reduce legacy NPLs. - Renewed attention to reinvigorate private sector credit growth is critical: - Accelerate reforms: establish a regional credit bureau and registry, modernize insolvency frameworks, and address collateral constraints to credit access by MSMEs. - In the context of compressed bank lending margins, ECCB could consider revisiting the 2 percent minimum savings deposit rate. - Passage of relevant securities legislation where pending is important to deepen local capital markets and increase financing opportunities. - Protect local bank CBRs amid greater scrutiny of region’s CBI programs: - Address remaining shortfalls in financial integrity, AML/CFT, governance and offshore taxation frameworks. - Pursue regional coordination of oversight and transparency of CBI programs; tackle issues identified in national CFATF mutual assessments; ensure consistency with global taxation standards; complete designation of the ECCB as the banks’ AML/CFT supervisory authority. - Resolve fragmented non-bank supervision framework and address potential systemic risks: - Proposed RSSB can help harmonize regulations for non-banks. - Advance consolidated supervision of large cross-border financial conglomerates, strengthen risk-based insurance supervision and risk-mitigation standards, and address notable data gaps. - Expedite passage and implementation of the Virtual Assets Business legislation to govern digitalized financial services including crypto assets. ### Financial sector contingency actions and recent supervisory measures - Loan moratoria program: - Extended a second time at end-September 2021 for six months, and expired at end-March 2022. - Treatment of Impaired Assets (TIAS) prudential standard implemented January 2022: - Includes guideline for an initial minimum 60 percent provision to NPLs ratio to induce building of adequate provisioning buffers for legacy NPLs. - Includes criteria for write-off of long-standing NPLs. - With compliance, banks will be better placed to dispose of NPLs at realistically realizable values. - ECAMC is bolstering its capacity but is yet to obtain funding to support further NPLs acquisitions. - Some banks are engaging in discussions with ECAMC and a private sector distressed asset entity that had acquired NPLs in the region previously. ### Operational and procedural notes - The discussion with the ECCU authorities will be on the 12-month cycle in accordance with Decision No. 13655-(06/1), as amended. *Source: IMF staff appraisal and annex text provided in the content unit.* ### 6. Maintain broader financial ### 6. Maintain broader financial sector reform momentum ### Financial sector reform progress and gaps - Progress achieved, albeit slower than targeted: - Monetary Council’s approval of the ECCB’s proposal to establish a regional standards setting body to harmonize standards for non-bank financial sector oversight. - Passage of the Credit Reporting Bill by more member countries (Anguilla, Montserrat, and St. Lucia remain outstanding). - More member countries’ passage of legal amendments and designation of the ECCB as AML/CFT supervisory authority for banks (Anguilla, Montserrat, and St. Kitts and Nevis remain outstanding). - Limited progress: - Reforms to modernize insolvency frameworks remain limited. - Shortfalls persist in the region’s management of compliance and financial integrity risks, with implications for CBR risk. - Additional reform advances: - Passage by three countries of the Virtual Assets Bill developed by the ECCB in 2021 to cover digitalized financial services including crypto asset activities. - Efforts toward consistency with global minimum corporation tax standards, ranging from formation of a working group on international tax treaties in one case to repeal of the offshore registry regime and transition to registration under the Companies Act in another. - ECCB work toward integrating climate risks in financial supervisory and regulatory frameworks. ### Safeguarding the quasi-currency board - Backing ratio developments: - Backing ratio ranged from 94.6 to 96.9 percent during May 2021–February 2022 (compared to an average of 96.8 percent during 2001-19). - Backing ratio was 95.4 percent as of end-February 2022. - Policy guidance: - Keep the backing ratio at a robust level. - Enhance monitoring of foreign exchange movements and prepare scenario-based policy responses (not considered a priority given pandemic developments). ### Structural reforms - Payment system and digitalization: - A new Payment System and Services Act (PSSA) is being drafted to broaden regulated activities, introduce a comprehensive licensing regime, strengthen consumer protection, promote confidence in e-payments, and promote safety and efficiency in the ECCU payment system. - Caribbean Digital Transformation Project (Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines, and Organization of Eastern Caribbean States) and blue economy project (Grenada, St. Lucia, St. Vincent and the Grenadines) underway with World Bank support. - Renewable energy and regulatory changes: - Geothermal exploration: Dominica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines. - Expansion of solar and wind capacity: Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines. - Regulatory changes: Dominica, Grenada, St. Kitts and Nevis, St. Lucia. ### Statistical issues and institutional change - Data shortcomings: - Response rates to external sector surveys remain low. - Delays in availability of administrative data; granularity can be improved. - Issues raised by the CARTAC external sector statistics mission (December 2021). - Institutional response: - ECCB established the Research, Statistics and Data Analytics Department in April 2022, incorporating teams previously in the Research Department and the Statistics Department to promote timely delivery of key outputs and leverage data analytics capabilities. ### Risk Assessment Matrix — key risks, likelihood, impact, and policy responses - Rising and volatile food and energy prices (High) - Impact: Inflation pressures intensify, eroding income, dampening demand, widening fiscal and trade deficits, threatening food and energy security. - Policy response: Provide temporary and targeted transfers to the vulnerable; allow a gradual pass-through of international prices and phase out generalized subsidies; expeditiously improve coverage and targeting of social safety nets; accelerate the shift to renewables; enhance regional integration to ensure food security. - Outbreaks of lethal and highly contagious COVID-19 variants (Medium) - Impact: Tourism recovery stalled and domestic activity disrupted, deepening scarring effects and worsening fiscal and external positions. - Policy response: Ensure adequate access to essential items; extend targeted pandemic relief; prioritize health spending; adopt credible medium-term fiscal plan; continue public education campaign to address vaccine hesitancy. - De-anchoring of inflation expectations in the U.S. and/or advanced European economies (Medium) - Impact: Domestic currency appreciates given U.S. dollar peg, weakening competitiveness; higher borrowing costs add fiscal strains. - Policy response: Strengthen fiscal frameworks to rebuild buffers and communicate credible medium-term fiscal plan; implement structural reforms to improve competitiveness; intensify monitoring of financial institutions. - Cyberattacks on critical physical or digital infrastructure (Medium) - Impact: Payment and financial systems are disrupted, hurting confidence. - Policy response: Prepare crisis management plans; strengthen financial sector regulation and supervision; pursue a prudent approach to financial innovation. - More frequent natural disasters related to climate change (Medium) - Impact: Reduce growth and worsen fiscal and external positions. - Policy response: Design rule-based fiscal frameworks that internalize exposure to natural disasters; adopt national adaptation plans with investment in structural and financial resilience and appropriate ex ante financing. - Higher NPLs and market risk in indigenous banks and non-banks (Medium) - Impact: Financial sector instability disrupts economic activity. - Policy response: Monitor asset quality and ensure adequate loan loss provisioning; enhance regulatory and supervisory frameworks for non-banks. - CBI programs subject to increased scrutiny and phased out (Medium) - Impact: Worsen fiscal and external positions, reducing growth prospects. - Policy response: Enhance oversight and transparency of CBI programs; closely collaborate with EU and U.S. counterparts; diversify from CBI revenues over time. - Curtailment of correspondent banking relationships (Medium) - Impact: Fees of cross-border payments rise, raising business costs and reducing remittance inflows. - Policy response: Strengthen compliance with AML/CFT and tax transparency standards; complete designation of ECCB as AML/CFT supervisory authority for banks in all jurisdictions. ### External Sector Assessment — 2021 overview and implications - Overall assessment: - The ECCU’s external position in 2021 was moderately weaker than the level implied by fundamentals and desirable policies; assessment subject to a wide margin of error due to lack of data for external accounts and pandemic impact uncertainties. - Current account highlights: - Staff expects the current account deficit to have widened to 16¾ percent of GDP for the ECCU in 2021. - The current account deficit for the ECCU-6 countries (excluding Anguilla and Montserrat) was estimated at 16.6 percent of GDP in 2021. - Adjustments: - Cyclical contributions: (-)1.0 percent - COVID-19 adjustor: (-)8.0 percent - Additional temporary/statistical factors: (-)1.5 percent - Natural disasters and conflicts: 0.2 percent - Adjusted current account deficit: 8.2 percent of GDP - CA norm: -6.6 percent of GDP - Current account gap: -1.6 percent of GDP - Policy gaps jointly contribute 3.3 percentage points to the current account gap: - Domestic policy gap: 0.8 percentage points - Fiscal policy gap: -1.3 percentage points - Real exchange rate (REER) assessment: - Nominal effective exchange rate index appreciated by 2.8 percent between December 2020 and December 2021. - Real effective exchange rate was 2.8 percent weaker than the December 2020 level in December 2021. - IMF EBA-lite REER model suggests an undervaluation of 0.2 percent in 2021. - Using the CA-gap and a staff-estimated semi-elasticity of 0.33 yields an overvaluation of 5.3 percent. - Elasticity: 0.33 - REER gaps: 5.3 percent (CA-reference) and -0.2 percent (REER model) - Capital and financial accounts and net IIP: - FDI inflows remained moderate in 2021. - Concessional financing and the SDR allocation in August 2021 supported an increase in international reserves. - Fiscal position: - Overall deficit narrowed from 5.6 percent of GDP in 2020 to 3.3 percent in 2021. - Overall public debt edged up from 84.9 percent of GDP in 2020 to 85.2 percent of GDP in 2021 (external public debt accounted for 56 percent). - Public debt expected to have peaked in 2021 but remain high, well above the regional debt target of 60 percent of GDP for an extended period. - Net international investment position: - Net IIP at end-2021: -105.5 percent of GDP (marginally worsened from -104.6 percent at end-2020). - FX intervention and reserves: - International reserves at end-2021: US$2.0 billion. - Reserves equivalent to: - 4.9 months of prospective year imports of goods and services (above the benchmark of three months). - 29 percent of broad money (above the benchmark of 20 percent). - 57.3 percent of total external debt. - ECCB reserve backing ratio at end-2021: 95.8 percent. - Assessment: Continue limiting provision of credit to the economy (including fiscal authorities and banks) to support credibility of the quasi-currency board and maintain backing ratio. ### Policy implications and recommended near-term actions - Protect the vulnerable and support recovery, especially given rising global commodity prices from the war in Ukraine. - Strengthen fiscal frameworks to sustain fiscal consolidation and safeguard debt sustainability while making space for resilience-building investment. - Foster renewable energy generation, enhance regional integration, and continue investment in skills development to improve competitiveness and strengthen the external position. - Enhance monitoring of foreign exchange movements and prepare scenario-based policy responses, including estimation of financing needs and sources of concessional financing. - Complete designation of ECCB as AML/CFT supervisory authority for banks in all jurisdictions to strengthen correspondent banking relationships. *Source: IMF staff report — "6. Maintain broader financial" (chapter/section content).* ### 11.9 percent, ranging from more than 20 percent for ### 1eccea2022001 - 11.9 percent, ranging from more than 20 percent for ### Tourism shock and importance of hotel sector - The drop in tourism in the Caribbean during the pandemic was “unprecedentedly large” relative to prior global shocks such as the global financial crisis and the September 11, 2001 terror attack in the U.S. - The contagious nature and global spread of the virus severely affected travel and high-contact service sectors worldwide. - Share of value added (hotel sector) and value added per stayover arrival (EC$) were reported for ECCU members, with a regional average share cited as 11.9 percent, “ranging from more than 20 percent for Anguilla and St. Lucia to below 2 percent for Dominica and Montserrat.” - Sources cited: Country authorities, CTO, Haver analytics; tourism data for Caribbean countries refer to stayover arrivals, while those of other countries are usually tourist/foreign tourist arrivals. ### Tourism recovery patterns (2020–2021) - Tourist arrivals growth in 2021 underperformed regional peers (Mexico, Dominican Republic). - Tourist arrivals remained below pre-pandemic levels across countries in the Caribbean and other tourism-dependent countries, including for arrivals from the U.S., U.K., and Canada. - Within ECCU, the 2021 recovery varied across countries: - Antigua and Barbuda gained back more than 50 percent of pre-pandemic tourist levels. - St. Kitts and Nevis reached less than 15 percent of pre-pandemic tourist levels. - Tourism performance is associated with quarantine end dates for vaccinated incoming travelers — countries removing restrictions earlier fared better. - Existing vulnerabilities, such as limited flight connectivity, could amplify negative performance. - Some countries appear to have benefitted from faster recovery in luxury travels. ### Empirical relationships and indicators - Charts and indices referenced: - Tourist Arrivals (Index, 2019=100) for ECCU, Caribbean excl. ECCU, Dominican Republic, Mexico for 2018–2021. - Total Tourist Arrivals: Percent change of 2021 compared to 2019 for a broad set of countries (list included in source). - Tourist Arrivals from US / UK / Canada: Percent change of 2021 compared to 2019 for listed countries. - Regression reported for ECCU (Tourists Arrivals Growth (2021 vs. 2019) vs. Month in 2021 when quarantine restrictions ended): y = -5.21x -23.12, R² = 0.47. - Note: Month = 0 for March 2020 (current), September 2001 (9/11) and September 2008 (GFC). Charts show the average of individual country growth (compared to the same month in pre-shock year) in the relevant groups. “Rest of the world” refers to 15 countries with high international tourism revenue as a share of GDP. ### Inflation dynamics in the ECCU: external cost shocks and propagation - ECCU economies are highly exposed to external cost shocks given heavy reliance on imported goods: imports-to-GDP ratio was on average 64.3 percent in 2019, compared with a global average of 27.7 percent (weighted by GDP in USD). - Despite price stabilization mechanisms, large and persistent swings in external costs can significantly impact living costs and drive strong co-movements in inflation between ECCU economies and major trading partners such as the United States. - External cost shocks have salient policy implications given the exchange rate peg: targeted fiscal policy plays a major role in mitigating external cost shocks. Persistence of inflation is an important parameter for calibrating policy measures. - Global-factor-sensitive (GFS) CPI components (food, housing, transportation) constitute around two-thirds of the total CPI weight. - Correlation of inflation between GFS components and the rest is low: 0.03 between 2001 and 2021. ### Local projection method (LPM) analysis and quantitative impacts - Method: LPM quantifies the response of year-on-year change of component CPI (GFS vs. rest) to month-on-month changes in three external cost measures: world oil prices, commodity food price index, and the Baltic Dry Index. Controls include world output gap and lags of inflation and external cost measures. Sample period: 2001M12–2019M12. Country fixed effects included. - Key LPM findings: - A 50 percent increase in oil price (consistent with oil price change during 2021–22 considering the impact of the war in Ukraine) drives up inflation of GFS components by around 2.5 percentage points, implying an impact on headline inflation of around 1.7 percentage points. This effect would dissipate by the end of the second year. - An increase in shipping costs has a more persistent impact on inflation; results are robust to restricting the sample to post-2010. - Simulation exercise for shipping costs (2019M1–2021M12 impact on 2022): - Procedure: - Step 1: compute yt = Σk βk ΔBDI_{i,t-k} (additive impact of change in shipping cost), where βk are coefficients from equation (V.1). - Step 2: compute Zt = Σi (ρ)^i y_{t-i} where ρ captures persistence of the impact. ρ assumed equal to historical inflation persistence of GFS components ≈ 0.83 at monthly frequency. - Simulation results under assumption that shipping costs stay at end-2021 level in 2022: - Inflation of GFS component in the ECCU would increase by around 3.3 percentage points. - Headline inflation would increase by 2.2 percentage points. - If shipping costs stay at end-2021 level in 2022, month-on-month changes of shipping cost would be zero in 2022, creating no additional impact on inflation from shipping costs in 2022. If shipping costs decline from 2021 highs to low levels in 2022, the inflationary impact would be smaller. - Aggregate implication: - The exercises suggest headline inflation in 2022 will be around 3.9 percentage points higher than otherwise. - The practical effect may be dampened by government responses (including caps on fuel prices in Grenada and St. Lucia) and by any decline in shipping costs from end-2021 levels. - Caveats: - Estimates do not consider new government measures to mitigate rising shipping costs or nonlinearity in pass-through behavior. Nonlinearity may arise if importing firms are cautious in passing spikes in shipping costs to customers anticipating reversal; this may explain large confidence bands in LPM estimates and anecdotal evidence (e.g., importers in Grenada reluctant to pass rising shipping costs to the public, partly because they are SOEs). - Shipping costs moderated in the last months of 2021, suggesting potential reversal, but significant uncertainty remains, especially given potential oil price effects on shipping costs. - Component-level note: - Only GFS components are significantly affected by U.S. inflation drivers. While strong U.S. inflation can be a concern, the relationship of GFS inflation to U.S. inflation has been more muted recently. ### Lessons from fiscal rule experiences (Annex VI) - Event-study evidence: fiscal rules are more effective in lowering public debt when: - (i) debt and operational targets are combined; and - (ii) the rules are enforceable. - Combining debt and operational targets: - Many countries adopt multiple fiscal rules—often a debt ceiling supported by operational rules. Among ECCU peers, Mauritius adopted a debt rule only; others adopted budget balance and other operational targets in addition to a debt rule. - Enforceability matters: - EMDEs have improved FRFs via stronger legal basis and enhanced enforcement mechanisms. - Among ECCU peers, Anguilla and Grenada are the only countries with a fiscal rule supported by formal enforcement mechanisms and approved as legislation. - Some peers (The Bahamas, Cabo Verde, Maldives) have legally backed fiscal rules but lack formal enforcement mechanisms. - Antigua and Barbuda and St. Vincent and the Grenadines lack a strong legal basis for their FRFs. - ECCU supranational rule status: - ECCB Monetary Council set targets in 1998 on overall deficit and debt of 3 and 60 percent of GDP, respectively, to be reached by 2020. The deficit target was abandoned in 2006; the debt target was delayed to 2030 in 2015 and then to 2035 due to the pandemic. - Several ECCU countries have persistently carried public debts well above the ECCU ceiling even before the pandemic. - Table 1 (summary of fiscal responsibility frameworks across members) highlights heterogeneity in legal status, introduction/implementation dates, medium-term debt anchors, operational targets, escape clauses and triggers, government-level coverage, and fiscal responsibility mechanisms. Specific country entries and parameters are presented in the source table (not reproduced here per overlay rules). *Prepared by Swarnali Ahmed Hannan, Chao He, Hugo Tuesta, Huilin Wang; Weicheng Lian (Annex V); Isabela Duarte, Emilio Fernandez-Corugedo, Marie Kim, Weicheng Lian, Rui Mano, Camila Perez Marulanda, Manuel Rosales Torres (Annex VI).* ### 2. When the cumulative difference between the ### 2. When the cumulative difference between the ### Fiscal rules and targets (selected ECCU notes) - Corrective trigger: when the cumulative difference between the actual primary balance and the target is greater than 2 percent of GDP, a corrective action needs to be taken to reduce the difference to zero within 3 years, with at least one third of the adjustment made in the first year. - Expenditure rule components: - current spending growth does not exceed nominal GDP growth; - wage bill does not exceed 12.5% of GDP from 2022. - Country-specific notes: - Dominica: Fiscal Responsibility Framework (FRF), enacted by Parliament on November 30, 2021. - Grenada: Expected to reach 55 percent of GDP by 2025 (NFPS). - St. Vincent and the Grenadines: A parliamentary resolution, approved in January 2020. Not yet operationalized. - Central government: Fiscal Responsibility Act, enacted by Parliament on August 25, 2015 and implemented since 2016, with escape clause triggered for 2020-22. ### Insurance penetration and natural disasters (Annex VII) - Role of private insurance: - Private insurance can reduce ECCU economies’ reliance on financial aid from public sources after a disaster. - Insurance penetration positively affects a country’s recovery rate after a disaster; low-insurance countries take longer to achieve economic recovery compared to high-insurance countries. - Insurance penetration by income group (estimates cited): - developed countries: about 40 percent of direct losses from natural disasters is insured; - middle-income countries: 10 percent; - low-income countries: below 5 percent (Carpenter et al., 2020). - Empirical approach: - Method: difference-in-differences (DD) using annual panel dataset for most countries in the world. - Treatment variable: total damages as percent of GDP from EM-DAT; assigned value 1 when total damage is equal to or higher than 10 percent of GDP (close to two standard deviations). - Panel: limited availability of insurance-penetration data yields 15 natural disasters considered treatments. - Covariates: GDP per capita, GDP growth, public debt, financial depth measures (share of bankable population, bank deposits, broad money, stock market capitalization), and others from IMF WEO, World Bank WDI, Penn World Tables. - Robustness: cluster-robust and bootstrapped standard errors; results remained stable. - Findings: - Trends in non-life insurance penetration in treated vs control groups are parallel before disasters; in most cases insurance penetration increases after natural disasters. - Insurance penetration tends to increase after major natural disasters. - Positive correlation between insurance penetration and financial development indicators such as bank deposits. - Implication: financial deepening and inclusion could enhance insurance penetration in response to rising climate risks. - Literature consistency: echoes Hodula et al. (2021) and Feyen et al. (2011) on non-life premiums co-moving with business cycle and being positively related to more developed financial systems and availability of private credit. *Prepared by Camila Perez Marulanda, Dmitry Vasilyev, and Raadhika Vishvesh.* ### Natural disaster impact on the ECCU banking system (Annex VIII) - Overall historical impact: - Natural disasters have historically had a relatively modest impact on the ECCU banking system; even large hurricanes such as Maria (2017) in Dominica resulted in only modest deterioration in asset quality. - Mitigating factors: mandated insurance of loan collateral; lenders’ modest exposures to the most vulnerable sectors (such as agriculture); ample system-wide liquidity. - Risks intensifying with climate change: - Bank asset quality may become increasingly affected by disasters’ indirect transmission channels as disasters intensify. - ECCU economies’ heavy reliance on tourism makes them susceptible to prolonged travel disruptions (experience from COVID-19). - Empirical approach for banking-sector impact: - Method: local projection methods (Jordà, 2005) to compute sector-specific NPL impulse response functions and simulate an average cumulative NPL path for the region for a given tourism shock scenario. - Data: cross-country panel of quarterly bank-level sectoral loan data for 2010Q3-2019Q4; controls and bank fixed effects. - Dependent variable: a logistic transformation of the NPL ratio. - Tourism shock: year-on-year percent changes in stayover tourism arrivals for a given country and quarter. - Controls include: bank profitability, credit growth, lending rates, inflation, import growth (proxy for non-tourism economic conditions), and a natural disaster dummy. - Simulation calibration and scenarios: - Sample for ECCU: 30 major tropical storm events over the past three decades; half are hurricanes category 3 or higher on the Saffir-Simpson scale. - For category 3+ hurricanes, stayover arrivals declined on average by a fifth in the year following the disaster but tended to revert to pre-disaster levels when not followed by another major storm in the next year. - Notable outlier: St. Maarten after Irma (2017) — an 80 percent drop in the year after impact and only partial recovery (to 40 percent below pre-disaster levels in the following year) due to long-lasting airport capacity constraints. - Simulation results and implications: - Baseline scenario: a 20 percent single-year decline in stayover arrivals leads to simulated NPLs peaking just under three percentage points above their pre-disaster level for an average ECCU country; impacts concentrated in tourism and construction sectors. - Severe disruption scenario (similar to St. Maarten 2017): can result in a several-fold larger increase in NPLs. - Country-specific outcomes depend on: degree of tourism-dependency, bank credit composition, policy response (proactive loan restructurings), fiscal and monetary policy responses (including temporary loan moratoria), and tightening of bank lending standards since the global financial crisis. - Other amplifying factors: successive storms becoming more frequent, fiscal strain under stretched public sector balance sheets heightening risks for banks with large sovereign exposures, and rising private-sector demand for adaptation financing increasing banks’ direct exposure to climate risks. *Prepared by Janne Hukka.* ### United Kingdom Overseas Territories—Anguilla and Montserrat (Annex IX) - Anguilla - Profile: member of the ECCU and OECS; UK overseas territory and not a Fund member; tourism exports account for 37 percent of GDP; population about 15,000. - COVID-19 and tourism: total cases of 3,294 and 9 deaths; vaccination rate 69 percent of population fully vaccinated (top of ECCU). In 2021, total stayover arrivals increased by 12 percent; real GDP growth 2.1 percent after a 29.9 percent contraction in 2020. Tourism arrivals remain 70 percent below their pre-pandemic level. - Fiscal: overall balance moved from a surplus of 1.3 percent of GDP in 2020 to a small deficit of 0.1 percent in 2021. Public debt 67.5 percent of GDP in 2021. - External accounts: current account deficit widened to 39.6 percent of GDP in 2021 (from 22.3 percent of GDP in 2020). International reserves: EC$151.9 million in 2021 with U.K. support of EC$40 million. Current account deficit projected to widen further in 2022. - Financial sector: CAR 8.5 percent in 2021 (from 8.6 percent in 2020), above the 8 percent regulatory benchmark. NPL ratio declined to 21 percent in 2021 (from 25 percent in 2020), but remains well above prudential benchmark. - Policy focus: shift towards clean energy (solar and wind); implementation of goods and services tax in July 2022 expected to raise government revenues; international borrowing space limited with U.K. grants as major funding source. - Montserrat - Profile: member of ECCU and OECS; UK overseas territory and not a Fund member; working population 2,000 out of total population around 4,990; main activities: construction, government services, tourism. - COVID-19 and tourism: around 1,000 COVID-19 cases and 8 deaths; 35 percent of population fully vaccinated. Borders closed until October 2021; stayover tourism virtually at a standstill in 2020 and 2021. Remote Worker Stamp Program launched to attract long-term visitors; cruise ship activity resumed. - External accounts and growth: current account worsened from a surplus of 8 percent of GDP to a deficit of 17 percent of GDP in 2021; real GDP expected to expand by about 4 percent in 2022 after 8 percent growth in 2021. Current account balance expected to improve in 2023 and over the medium term. - Fiscal: fiscal balance improved in 2021 due to grant revenues exceeding 50 percent of GDP, supporting a small overall fiscal surplus. Public debt 5.1 percent of GDP in 2021 and projected to remain low and stable in the medium term. ### 4. The authorities strive to switch to renewables amid rising global fuel prices. With local ### 4. The authorities strive to switch to renewables amid rising global fuel prices. With local ### Renewable energy transition and energy infrastructure - Local fuel prices soaring to US$6 per gallon. - Montserrat aims to use only renewable energy by 2035 through the construction of solar, wind and geothermal power plants. - Current renewable energy assets: - A large 1-megawatt solar power plant. - A recently completed 750-kilowatt solar plant. - 3 geothermal wells. ### Energy pricing and policy stance - Authorities are allowing international prices to pass-through to domestic consumers. ### Financial sector stability and credit conditions - The financial sector comprises one bank, one credit union, and a limited insurance sector. - Nonperforming loans (NPLs) are low at 5 percent, with liquidity and provisioning buffers. - Lending margins are between 4.5 and 5 percent. - Provisions exceed 100 percent of NPLs at end-March 2022, which is above the ECCB’s mandated 60 percent minimum. - The credit union’s financial position has improved somewhat, and no insurance sector issues have been reported. - The population is cash-driven; low local demand for credit motivates the bank and the credit union to lend to diaspora. ### Medium-term fiscal and growth prospects - Over 63 percent of Montserrat’s recurrent budget is financed by the U.K. government. - Medium-term prospects depend on continued budget support and the construction outlook. - A large port development project expected to bolster employment and construction growth is under way, along with renewable energy projects. ### ECCU institutional and technical assistance context (selected points) - The Eastern Caribbean (EC) dollar has been pegged to the U.S. dollar at the rate of EC$2.70 per U.S. dollar since July 1976. - The Eastern Caribbean Central Bank (ECCB) has operated like a quasi-currency board, maintaining foreign exchange backing of its currency and demand liabilities of close to 100 percent. - An update safeguards assessment of the ECCB (finalized in August 2021) found strong external audit and financial reporting practices and recommended legal reforms to strengthen operational autonomy; issuance of DCash introduces new risks requiring additional controls and oversight. - CARTAC delivered substantial technical assistance across tax administration, customs, public financial management, and financial sector supervision, including support for VAT/GST implementation, TADAT diagnostics, budget process reform, treasury operations, internal audit, PIMA/CPIMA, and Basel II/III Pillar 1 implementation efforts. - On Basel II/III Pillar 1 implementation: - CARTAC reviewed and provided feedback on the ECCB’s Revised Draft Guideline on “Definition of Capital and Capital Calculations under Pillar 1” and developed draft capital adequacy reporting templates. - In February 2022, CARTAC provided follow-up TA on Supervisory Review Process (SRP) of banks’ ICAAP and commenced TA on Liquidity Coverage Ratio (LCR) implementation. - Results of a Quantitative Impact Study (QIS) on Pillar 1 revealed inconsistencies in market risk data reporting at some larger banks; ECCB advised to seek clarification. - Importance of finalizing Pillar 1 reporting templates to meet the scheduled September 2022 effective implementation date was emphasized. *Prepared by Western Hemisphere Department (as presented in the STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX, July 7, 2022).* ### 26. CARTAC provided follow-up bilateral CD missions on the implementation of risk-based ### 26. CARTAC provided follow-up bilateral CD missions on the implementation of risk-based ### Risk-based supervision (RBS) for non-bank supervisors - CARTAC conducted bilateral CD missions during FY20 to FY22 following the regional workshop on RBS implementation for non-bank supervisors from the member the member territories of the ECCU in July 2019. - Target jurisdictions with follow-up missions: Grenada, St. Lucia, and St. Vincent and the Grenadines. - Progress and needs: - The non-bank supervisory agencies or the Single Regulatory Units (SRU) in all three countries have made progress on the implementation of RBS. - Further CD assistance will be needed to fully implement RBS operational processes and procedures and achieve agreed milestones. - The SRUs in the other member territories of the ECCU have not expressed interest for follow-up TA on the implementation of RBS during last three fiscal years. - Additional activity: - A bilateral workshop on insurance supervision and conducting on-site reviews at the Anguilla Financial Services Commission in April 2022 included a risk-based supervisory focus. ### Insurance supervision and solvency regime - Requests: - St. Lucia and Antigua and Barbuda have expressed interest in receiving TA on the implementation of a risk-based solvency regime for insurance companies. - Conditionality: - The timing and delivery of TA on the development of a risk-based solvency regime for insurance companies in the ECCU is dependent on the enactment of the harmonized legislation for insurance across the ECCU. ### Eastern Caribbean Securities Regulatory Commission (ECSRC) - Legislative and regulatory assistance: - In FY20–21, CARTAC reviewed and updated the Securities Bill and Investment Funds Bill to align with international standards. - The Securities Bill has been enacted in five of the eight ECCU member countries. - The Investment Funds Bill has been enacted in four territories. - In late 2020, CARTAC provided training on understanding the risks of the industry for purposes of conducting adequate supervision. - In 2022, follow-up assistance was provided on finalizing the regulations for both the Securities Bill and Investment Funds Bill. - International recognition: - Following revisions to the suite of legislation to govern activities in the Eastern Caribbean Securities Market (ECSM), the ECSRC’s application for Associate Membership in the International Organization of Securities Commissions (IOSCO) was successful and the commission became an Associate Member in February 2022. ### Credit unions and cooperative legislation - Anguilla: - In February 2021, members of staff from the Anguilla Financial Services Commission (A-FSC) participated in a CARTAC-sponsored virtual 2-week workshop on the regulation and supervision of credit unions. - Anguilla has two credit unions, one of which is dormant. - Resulting action: The A-FSC will revise its draft Cooperative Societies Act to clarify sections related to required capital in credit unions. ### Organizational review and legal framework reviews - Montserrat: - In late 2020, CARTAC responded to the Financial Services Commission of Montserrat (FSC) request for TA to review the organizational structure of the FSC; recommendations included staffing to facilitate preparation of budget estimates for FY22. - St. Vincent and the Grenadines: - In 2020, at the request of the St. Vincent and Grenadines Financial Services Authority (FSA), the IMF Monetary and Capital Markets Department (MCM) reviewed legislative amendments related to recovery and resolution powers; feedback aligned with international best practices to strengthen regulatory powers for resolution of credit unions and building societies. - Nevis: - The legal framework for the supervision and regulation of International Banks in Nevis was reviewed in FY22 by the IMF’s Legal Department (Financial and Fiscal Law Unit), which also drafted legislative amendments to the International Banking Ordinance 2014 (NIBO). ### Regional capacity building for supervisors (banking and non-bank) - FY21 activities: - Representatives from insurance supervisory agencies participated in regional workshops on stress testing and building resilience against climate risk; workshops incorporated pandemic and natural catastrophe (e.g., hurricane) stress scenarios. - March 2021: regional workshop on supervisory review of the actuarial liabilities of life insurance companies. - 2020: IMF-CARTAC remote roundtable/webinars on “Cybersecurity of Remote Work During the Pandemic” and “Regulatory and Supervisory Response to Deal with Coronavirus Impact” — well attended by banking and insurance supervisors. - FY22 activities: - Banking supervisors from the ECCB participated in the IMF-CARTAC regional workshop on supervisory review of cyber risk management practices at banking institutions, and webinar on “Unwinding COVID-19 Policy Interventions for Banking Systems”. - Insurance supervisors from all member territories participated in a 7-week workshop on IFRS 17 implementation from February to April 2022. - Cross-cutting: - Both banking and non-bank supervisors participated in the IMF-CARTAC webinar on “Climate Risk” in October 2021; webinar raised awareness of the Network for Greening the Financial System (NGFS) Guide for Supervisors and solicited feedback on future CD needs in climate risk supervision. ### Real and external sector statistics — national accounts and price statistics - Period covered: December 2019–April 2022. - Focus areas: improving external sector, national accounts, and price statistics in the ECCU countries; coordination with other TA providers including PRASC (Statistics Canada) and ECCB. - National accounts progress: - Good progress by Anguilla, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines in expanding range and improving quality of annual national accounts, including developing supply and use tables (SUT). - Rebased or re-referenced estimates of GDP to 2018 prices supported in Anguilla, Grenada, Montserrat, St. Kitts and Nevis, and St. Vincent and the Grenadines. - Missions to St. Lucia in February 2019 and January 2020 supported development of an SUT for 2016 and subsequent rebasing of GDP to 2016 prices, including backcasting the series to 2000. - CARTAC and PRASC helped finalize SUTs for 2018 in St. Vincent and the Grenadines, used to rebase GDP estimates. - Development of SUT in Grenada in early 2022 will provide the basis for publication of rebased estimates later in 2022. - Price statistics: - Progress in Grenada and St. Kitts and Nevis: assistance to build institutional capacity, improve CPI compilation methodology, and update expenditure weights. - 2021: CARTAC supported initiation of work to develop a Producer Price Index for services in Antigua and Barbuda. - Training: - No regional training workshops during 2020–21, but CARTAC introduced short learning modules on national accounts themes: six modules held to date, topics included introduction to measuring GDP for new staff, a workshop for senior national accounts staff to improve analytical skills, and a four-day review of administrative data use in national accounts. Representatives from all ECCU countries and ECCB staff attended. ### Balance of payments and IIP dissemination and compilation - Since 2017, ECCB and ECCU’s NSOs have jointly disseminated enhanced annual BOP and IIP statistics following BPM6 guidelines; data for 2014 onwards are available on the ECCB’s website and re-disseminated in the IMF’s BOPSY and IFS. - CARTAC assistance areas: - Strengthening compilation framework of the ESS, improving timeliness, coverage, methodology, and quality of prioritized balance of payments components. - Incorporating wider variety of data sources to supplement business surveys. - Encouraging NSOs access to relevant tax information at inland revenue departments. - Increasing the number of NSOs and/or tourism authorities conducting visitor expenditure surveys (VES). - Footnote: Antigua and Barbuda, Dominica, Grenada, St. Lucia and St. Vincent and the Grenadines conduct face-to-face VES at airports (stayover visitors) and seaports (cruise visitors) on an ongoing basis and results are incorporated in their balance of payments. VES were suspended due to the COVID-19 pandemic but since 2022 countries are progressively restarting them. - Assisting in addressing compilation issues aggravated by COVID-19, developing backcasting techniques to address significant breaks for years prior to 2014, and assisting production of flash balance of payments indicators in advance of preliminary figures. - Coordinating with debt management offices and ECCB to post aggregated data on outstanding central government and public sector external debt on ECCB website. - Ongoing medium-term program: compilation and dissemination of quarterly BOP and IIP, addressing merchandise trade statistics, the Coordinated Direct Investment Survey, and the compilation of public and private external debt in line with international standards. ### Macroeconomic forecasting and analysis - Primary focus: tools to analyze debt dynamics. - February 2022 workshop: - Hands-on workshop with participants from 7–8 ECCU member countries to develop customized versions of the IMF Institute for Capacity Development’s (ICD) ‘Public Debt Dynamics Tool’ (DDT) with country MOF and ECCB staff. - Participants demonstrated strong knowledge via presentations of analysis and risk scenarios for their own countries, including climate change scenarios. - Follow-up support provided to Anguilla and Dominica for adoption of the tool. - Anguilla medium-term projections: - Support provided to refine medium-term macroeconomic and fiscal projections; July 2021 mission focused on linking projections across production sectors to tourism arrivals and high-frequency indicators. - British Government noted its appreciation of CARTAC’s involvement in Anguilla’s projection process for annual budget approval. - Regional events and courses: - Webinars attended by ECCB and ECCU staff covered fiscal multipliers in small developing states; gender inequality in COVID-19 recovery; natural disasters and scarring effects; macroeconomic effects of structural reforms in Latin America and the Caribbean; and role of dominant currency pricing in international tourism. - Courses (jointly with ICD) offered in fiscal policy analysis and fiscal frameworks. - Future engagements: - Focus on ‘nowcasting’ and developing capacity on medium-term macroeconomic frameworks. - Joint support with ICD on near-term forecasting techniques linking high-frequency variables to in-year real-sector forecasts. - Subsequent focus on macroeconomic frameworks that generate consistent projections across real, fiscal, external, and monetary sectors and alternative/risk scenarios (including relating to climate change, and fiscal consolidations). ### Debt management program activities - Program launch: late 2020. - Key issues identified: - Nearly all countries develop medium-term debt management strategies, but strategies do not always consistently guide individual borrowing decisions. - Pandemic forced higher-than-usual financing while avoiding exacerbation of debt sustainability vulnerabilities. - Transparency of debt stocks and flows generally low; published reports often have limited coverage, uneven data quality, and lengthy delays between reporting and public release. - CARTAC engagement has been at multi-country level; bilateral TA priorities discussed with several countries. - CARTAC capacity-building activities targeted at ECCU and ECCB: - June 2021 workshop: translating debt management strategy into realistic annual borrowing plan and issuance calendar for domestic securities. - August 2021 seminar: interpreting fiscal financing gaps and working systematically through debt management issues related to closing them. - Caribbean-wide activities with ECCU participation: - October 2021 webinar: implications for government debt managers assessing and raising financing, sourcing market information, and recording debt from transition from Libor to new reference rates for floating-rate debt instruments. - February 2022 workshop: fundamentals of debt reporting and monitoring. - April 2022 webinar: debt-for-climate swaps as an instrument for mobilizing or redirecting financing for climate-related objectives while keeping debt at sustainable levels. *Source: CARTAC and IMF staff report content, December 2019–April 2022 period coverage as provided in the chapter.* ### 2020. Economic activity has been largely uneven across the currency union with robust rebound ### 2020. Economic activity has been largely uneven across the currency union with robust rebound ### Macroeconomic outlook and inflation - Early indications: ECCU economies could grow by 7½ percent in 2022 and converging to around 2¼ percent over the medium term. - Inflation trajectory: - Expected to peak in 2022 to above 5½ percent. - Reaching as high as 7 percent in some countries. - Compared to 1½ percent in 2021. - Drivers of price increases: rising food, fuel, and transportation prices. - Current account: estimated deficit of 16¾ percent of GDP in 2021 as stronger imports more than offset tourism receipts. - International reserves remain stable; currency backing ratio stood at 95.4 percent as at end-February 2022. - Major risk: inflationary shock of uncertain duration posing fiscal challenges and threatening growth prospects and social outcomes. ### Fiscal policy and public debt - Fiscal deterioration: revenues declined due to pandemic mitigation measures while expenditure increased for health, employment support, protection of the vulnerable, and cushioning rising food and fuel prices. - Debt level: overall public debt in 2021 is estimated at around 85 percent of GDP. - Debt target: authorities remain committed to achieving the 60 percent debt to GDP ratio by the target date of 2035. - Fiscal consolidation: recognition that stronger fiscal consolidation efforts are required; countries have begun enhancing fiscal frameworks including establishment of fiscal rules. - Governance concerns and measures: - Authorities concerned about risks associated with Citizenship by Investment (CBI) Programs; steps taken to strengthen governance and willingness to collaborate with European and U.S. counterparts. - Measures adopted for the pandemic and Russia’s invasion of Ukraine are viewed as necessary; unwinding not expected prematurely but a gradual reset is acknowledged as recovery takes hold. - Public financial management: continued focus on improving efficiency in delivery of government services to reduce discretionary expenditure and create fiscal space for vulnerable support, health, and capital program acceleration. - Concessional financing for resilience: - A substantial part of ECCU debt was contracted to respond to climatic events. - Authorities welcome establishment of the Resilience and Sustainability Trust (RST) but are concerned that relatively high debt levels may preclude access. - Expectation that the RST will catalyze access to other climate funds; Fund assistance is crucial. ### Financial and monetary sector developments - Financial sector broadly stable, but non-performing loans (NPLs) remain high and require attention. - As at end March 2022, moratoria on loans granted at the start of the pandemic have been unwound; this may increase NPLs in the near term. - Asset quality and provisioning will remain in focus in line with the ECCB’s new provisioning guidelines. - Regulatory coordination: - Authorities accept benefits from improved coordination on regulation and supervision. - Proposed Regional Standards Setting Body (RSSB) intended to help ECCU non-banks operate under a common regulatory rulebook. - Climate risk in finance: - Support for initiatives to strengthen supervision, reporting, and regulatory frameworks against climate change risks. - ECCB launched a program to integrate climate risks into supervisory and regulatory frameworks, including a technical assistance project. - Reference to Annex VIII assessment on “Natural Disaster Impact on the ECCU Banking System Asset Quality” for guidance. - Exchange rate and reserves: - Exchange rate parity with the US dollar has remained fixed; fixed exchange rate policy continues. - Foreign reserves remain high; no change in the exchange rate anticipated. - AML/CFT and correspondent banking: - Continued reforms to improve the AML/CFT framework and to prevent further loss of correspondent banking relationships (CBRs) by adopting global regulatory standards. - Loss of CBRs remains a concern and risk to financial stability. - Credit and inclusion measures: - Implementation of measures to increase credit will be pursued with ECCB guidance and Monetary Council approval, including legislation for a credit bureau, foreclosure, and solvency. - Participation in the Eastern Caribbean Partial Credit Guarantee Corporation to address collateral constraints for MSMEs and provide capacity development. - Introduction of D-Cash (central bank digital currency) with safeguards to increase economic efficiency and foster financial inclusion; ECCB will intensify public education. - Formalization of crisis management plans is work in progress. ### Achieving sustained and inclusive growth; structural priorities - Tourism recovery: - COVID-19 mandates removed to boost arrivals; arrivals have increased but remain well below pre-pandemic levels with uneven distribution across member countries. - Inter-regional travel is important; diminished service by the regional airline LIAT has not been fully addressed and poses a major challenge requiring urgent action. - Investment priorities: agriculture, physical infrastructure, renewable energy, and digitalization; but supply chain and transportation constraints could threaten timeliness and success. - Climate change and resilience: - Adoption of comprehensive adaptation programs focusing on resilient housing and climate-proofing public infrastructure (schools, health facilities, roads). - Authorities expect to fulfill nationally determined contributions. - Continued advocacy for concessional financing and grants to finance resilience building and for different treatment of debt accumulated to respond to climatic events. - Human capital and social investment: - Need to regain lost human capital through investments in education to address fallout from school closures and remedial opportunities for those left behind by online learning. - Retooling displaced workers, investing in skills development and broadband technology. - Continued support to the health sector to minimize future COVID-19 impacts and increase vaccination coverage. - Pledge to ensure gender equity and benefits for youth in reform implementation. - Structural reforms to enhance competitiveness and reduce costs: - Greater investments to address increasing food and fuel costs. - Participation in an initiative to increase food production in the wider Caribbean to reduce imports from outside the Region. - Acceleration of plans to transition to renewable energy—investments in wind, solar and geothermal energy systems—to address inflationary concerns and climate goals. ### Capacity development and technical assistance - Capacity development required at country and institutional levels to support ECCU recovery plans. - Authorities open to varying modalities for delivery of technical assistance. - Appreciation for Fund’s area and functional departments and CARTAC for facilitating capacity building. - Given the expanding policy agenda (climate change, digitalization, data analytics), replenishment of CARTAC is important to support member countries’ policy reforms. - Expectation of continued strong support for CARTAC’s work. ### Conclusion and commitments - Authorities express appreciation to the Fund and the Western Hemisphere Department staff for support and advice. - Despite significant challenges and downside risks, authorities will: - Address immediate high food and fuel prices and protect the vulnerable. - Pursue long-term goals: addressing climate change, fiscal and debt sustainability, and inclusive and sustainable growth. - Advance a development agenda under regional integration, building on demonstrated regional cooperation. - Enhance the quality of National Statistics for accurate reporting to underpin quality advice. - Authorities anticipate continued support from the international community, including the Fund, in pursuing development goals. *Source: 1eccea2022001 - 2020. Economic activity has been largely uneven across the currency union with robust rebound* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1eccea2022001.pdf_