## Eastern Caribbean Currency Union: Staff Report for the 2004 Regional Surveillance (_cr04299) ## Source details **Canonical URL:** [Eastern Caribbean Currency Union: Staff Report for the 2004 Regional Surveillance (_cr04299)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04299.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04299.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04299.pdf.json) --- ### Executive Summary — Main Findings - Growth and debt trends - Growth decelerated from nearly 5 percent during 1980–95 to 2¼ percent since 1996. - Public debt rose from 61 percent of GDP at end-1997 to 103 percent of GDP at end-2003. - 2003 outcomes - Growth recovered to 2½ percent in 2003. - Overall fiscal balances strengthened significantly; current balance improved by 1½ percent of GDP on average but remains in deficit. - Key policy challenge - Reinvigorate growth while restoring public debt sustainability in an orderly fashion. - Policy priorities - Remove impediments to growth, enhance institutional capacity, strengthen the underlying fiscal stance, address the debt stock, and reduce vulnerabilities to contagion risks and natural disasters (particularly hurricanes). - Currency board and financial sector - The Eastern Caribbean dollar has been pegged at EC$2.70=US$1.00 since 1976. - The currency board coverage ratio is in excess of 95 percent (de facto), well above the legal requirement of 60 percent. - Foreign banks hold more than half of banking system assets; several locally incorporated banks have large exposures to the public sector and relatively high ratios of nonperforming loans. - Institutional and statistical weaknesses - Need to strengthen fiscal management (expenditure control, tax administration, budgeting practices) and introduce more binding fiscal rules. - Statistics are weak in international trade, labor markets, debt, and quasi-fiscal liabilities. ### Recent Economic Developments and Near-Term Prospects - Growth and external balances (selected exact values) - Real GDP: 2.8 (2000); -1.3 (2001); 0.2 (2002); 2.4 (2003); 2.5-3.5 (2004 projection). - External current account: -15.5 (2000); -16.7 (2001); -19.6 (2002); -19.5 (2003); -19.1 (2004). - Travel receipts: 28.2 (2000); 26.2 (2001); 24.7 (2002); 27.3 (2003); 27.8 (2004). - Prices and exchange rate - CPI, end-of-year: 3.1 (2000); 2.0 (2001); 0.8 (2002); 1.5 (2003); 1.5 (2004). - Real effective exchange rate (depreciation -): 4.3 (2000); 1.8 (2001); -5.7 (2002); -9.6 (2003). - Reserves and coverage - Gross international reserves of ECCB (US$mn): 384 (2000); 446 (2001); 505 (2002); 540 (2003); 560 (2004). - Currency backing ratio, in percent: 88 (2000); 93 (2001); 97 (2002); 95 (2003); 95 (2004). ### Fiscal Balances, Debt Dynamics, and Outlook - Fiscal outcomes and drivers - Overall central government balance: -6.4 (2000); -7.8 (2001); -10.5 (2002); -5.9 (2003); -5.4 (2004). - Revenue and grants: 27.0 (2000); 26.4 (2001); 27.9 (2002); 28.6 (2003); 28.4 (2004). - Expenditure and net lending: 33.4 (2000); 34.2 (2001); 38.4 (2002); 34.5 (2003); 33.8 (2004). - Root causes of debt accumulation - Public debt rose by an average of 7½ percent of GDP a year in 1998–2003, after falling by 0.5 percent of GDP per year in 1990–97. - Contributions to debt accumulation (period averages, percent GDP, per year): public debt accumulation: -0.4 (1990–97) versus 7.6 (1998–2003); primary balance (net of grants): -0.4 versus 2.7; accumulation of foreign assets: 0.8 versus 1.2; debt service: 3.0 versus 3.8; output growth: -1.7 versus -1.3; real exchange rate growth: -0.3 versus 0.2; others: -1.8 versus 1.0. - Heterogeneity and outlook - Public debt to GDP ratio ranges from 66 percent (St. Lucia) to 162 percent (St. Kitts and Nevis). - For Antigua and Barbuda, Dominica, Grenada, and St. Kitts and Nevis existing debt levels exceed 100 percent of GDP, making debt reduction through fiscal adjustment alone unlikely. - Debt to GDP ratio increased to 103 percent in 2003 and is likely to remain at that level in 2004. - Overall deficit for the region projected to improve only modestly in 2004—by less than ½ percent of GDP—driven by a reduction in noninterest expenditures. ### Financial Sector, Currency Board, and Liquidity Risks - Currency board and reserves - Currency peg: EC$2.70=US$1.00 (since 1976). - Coverage ratio (de facto): in excess of 95 percent (end-2003); legal requirement: 60 percent. - Reserve coverage at end-December 2003: 95.3 percent implying maximum ECCB liquidity support of US$333 million (13 percent of private sector deposits in the banking system). - Ratio of international reserves to broad money: 20 percent. - Banking sector structure and risks - Foreign banks account for 58 percent of banking sector assets. - Locally incorporated banks have nonperforming loans over 20 percent and large exposures to housing market and public sector in some cases. - Private sector credit growth: 2 percent (2002); 1 percent (2003). - Typical interest rates: domestic lending rates about 13 percent; deposit rates about 4¾ percent. - Regional Government Securities Market (RGSM) - Launched November 2002; allowed countries to place local currency debt regionally on better terms. - Treasury bill placement interest rates: second half of 2003 issues: 4.8 and 4.9 percent; February 2004 issue: 3.9 percent; prior to RGSM: 6.6 percent. - FSAP findings and recommendations (high level) - Weaknesses: high NPLs, uncertain capital quality in some indigenous banks, regulatory forbearance, deficiencies in data. - Recommendations: strengthen ECCB supervision, develop risk-based supervision, strengthen prudential regulations, enhance crisis management capacity, strengthen supervision of offshore and nonbank institutions. ### Growth, Structural Constraints, and Reform Priorities - Growth drivers and constraints - Services (including tourism) share rose from 78 percent in 1990 to 86 percent in 2003. - Agriculture’s share fell from 12 percent to 7 percent during the same period but still employs about one-fifth of the labor force. - Output remains below potential in most countries; large output gaps (in excess of 4 percent) in Dominica, Grenada, St. Kitts and Nevis, and St. Lucia. - Recent growth driven largely by tourism rebound; growth in 2004 anticipated to continue led by tourism and tourism-related services. - Policy measures to reinvigorate growth - Increase value added from tourism, strengthen linkages to the rest of the economy, reduce labor market rigidities, improve competitiveness, pursue public enterprise reform. - Accelerate regional integration plans and increase labor market flexibility. - Tax policy reforms: reduce tax concessions early, broaden the tax base, move to a VAT or similar broad-based sales tax (Dominica: July 2005; Grenada: January 2006). - Trade-preference shocks (selected estimates) - If new trade agreements imply a 40 percent loss of preference margins, equivalent reductions in export unit values: 9.8 percent (St. Lucia); 8.9 percent (St. Kitts and Nevis); 5.5 percent (Dominica); 3.4 percent (St. Vincent and the Grenadines). ### Labor Markets, Public Sector, and Social Policy - Labor market constraints - Private sector wages estimated to have increased by more than 25 percent in 1998–2003 versus the 1990–97 average. - Public sector wage bill rose by almost 1 percent of GDP to 13 percent. - Local unemployment rates appear high, ranging between 10–25 percent. - Minimum wages revision dates: Antigua and Barbuda (1981); Dominica (1989); Grenada (2002); St. Kitts and Nevis (1996); St. Lucia (1985); St. Vincent and the Grenadines (2003). - Social policy and safety nets - Staff recommends strengthening and better-targeting social safety nets to smooth transitions away from traditional agriculture and mitigate hardship in case of crisis or restructuring. - Suggested temporary benefits to displaced workers and support for job search and new business creation. ### Natural Disaster Vulnerability and Preparedness - Historical exposure and impacts - Since 1970, 44 natural disasters recorded in the region, of which 34 were hurricanes. - Typical event effects (available data suggest): affected 1,800 people; caused damage equivalent to 10 percent of annual GDP; induced sharp drop in GDP growth, collapse of agricultural production, surge in current account and fiscal imbalances, and jump in public debt. - Preparedness recommendations - Strengthen zoning and building code legislation and enforcement. - Improve insurance legislation and regulatory oversight to increase insurance penetration. - Build up contingency funds and increase fiscal self-insurance, potentially at regional level. ### Policy Discussions and Recommendations — Priority Actions - Fiscal consolidation and debt strategy - Adopt ambitious front-loaded macroeconomic adjustments now. - Ensure effective expenditure controls; broaden the tax base; raise collection rates; strengthen transparency and fiscal data timeliness. - Reduce debt to sustainable levels via fiscal savings, privatization, deeper structural reforms, asset sales, and an active debt strategy. - Design country-specific comprehensive strategies in highly indebted countries combining fiscal adjustment, growth-enhancing structural reforms, asset sales, and a debt strategy. - Institutional and regional coordination - Introduce more binding fiscal rules to align national policies with the CBA. - Strengthen ECCB supervision of locally incorporated banks and enhance cross-border regulatory cooperation. - Promote greater regional cooperation within the OECS and CARICOM to achieve economies of scale, coordinate tax incentives, and free labor and goods markets. - Financial sector stability and crisis contingency - Strengthen banking supervision, contingency planning, and crisis management capacity acknowledging limited ECCB lender-of-last-resort resources. - Develop contingency plans for unanticipated adverse events; likely policy responses include expenditure reductions and postponements, emergency revenue measures, and protection of social safety nets. - Growth-enhancing reforms - Improve competitiveness through wage restraint tied to productivity, public enterprise reform, improved utilities, and stronger linkages between tourism and domestic production. - Encourage VAT adoption and tax administration reforms; halt discretionary tax concessions and undertake cost-benefit analysis of existing concessions. ### Key Statistics and Indicators (selected exact values from source) - Currency peg: EC$2.70=US$1.00 (since 1976). - Coverage ratio (de facto): in excess of 95 percent (end-2003); legal requirement: 60 percent. - Public debt (total, percent of GDP): 103 (end-2003). - Public debt range across ECCU: 66 percent (St. Lucia) to 162 percent (St. Kitts and Nevis). - Real GDP: 2.8 (2000); -1.3 (2001); 0.2 (2002); 2.4 (2003); 2.5-3.5 (2004 projection). - Overall central government balance: -6.4 (2000); -7.8 (2001); -10.5 (2002); -5.9 (2003); -5.4 (2004). - Total public debt time series (selected years): 78 (2000); 84 (2001); 101 (2002); 103 (2003); 103 (2004). - Gross international reserves of ECCB (US$mn): 384 (2000); 446 (2001); 505 (2002); 540 (2003); 560 (2004). - Currency backing ratio, in percent: 88 (2000); 93 (2001); 97 (2002); 95 (2003); 95 (2004). - Reserve coverage at end-December 2003: 95.3 percent. - Maximum ECCB liquidity support implied: US$333 million (13 percent of private sector deposits in the banking system). - Ratio of international reserves to broad money: 20 percent. - Private sector credit growth: 2 percent (2002); 1 percent (2003). - Domestic lending rates: about 13 percent; deposit rates: about 4¾ percent. - VAT introduction announced: Dominica: July 2005; Grenada: January 2006. - Trade-preference shock illustrative impacts (40 percent loss of preference margins): 9.8 percent (St. Lucia); 8.9 percent (St. Kitts and Nevis); 5.5 percent (Dominica); 3.4 percent (St. Vincent and the Grenadines). - OFC sector: fee income accounted for, on average, 5.8 percent of central government current revenues at end-2000; net revenue contribution averaged 2.3 percent after supervisory and business costs. ### Timing, Follow-up, and Institutional Support - Proposed next regional discussions: in 12 months, with an update of regional developments in six months. - CARTAC activities and outcomes: CARTAC established November 2001; provided tax policy and administration support, public finance management diagnostics, SATAP assistance, financial sector supervision support, and statistical capacity-building. - World Bank and CDB roles: ongoing support in public sector reform, disaster mitigation, education, utilities, and financial sector reforms; CDB approvals 1970–2003 to OECS: US$869.5 million. *Prepared by the Western Hemisphere Department; Approved by José Fajgenbaum and Matthew Fisher; April 14, 2004. Source: IMF staff report content provided in the supplied PDF excerpt.* ### 2004. The views expressed in the staff report are those of the staff team and do not ### INTERNATIONAL MONETARY FUND — EASTERN CARIBBEAN CURRENCY UNION: Staff Report for the 2004 Regional Surveillance ### Executive Summary — Main Findings - Growth and debt trends - Growth decelerated from nearly 5 percent during 1980–95 to 2¼ percent since 1996. - Public debt rose from 61 percent of GDP at end-1997 to 103 percent of GDP at end-2003. - 2003 outcomes - Growth recovered to 2½ percent in 2003. - Overall fiscal balances strengthened significantly; current balance improved by 1½ percent of GDP on average but remains in deficit. - Key policy challenge - Reinvigorate growth while restoring public debt sustainability in an orderly fashion. - Policy priorities - Remove impediments to growth, enhance institutional capacity, strengthen the underlying fiscal stance, address the debt stock, and reduce vulnerabilities to contagion risks and natural disasters (particularly hurricanes). - Currency board and financial sector - The Eastern Caribbean dollar has been pegged at EC$2.70=US$1.00 since 1976. - The currency board coverage ratio is in excess of 95 percent (de facto), well above the legal requirement of 60 percent. - Foreign banks hold more than half of banking system assets; several locally incorporated banks have large exposures to the public sector and relatively high ratios of nonperforming loans. - Institutional and statistical weaknesses - Need to strengthen fiscal management (expenditure control, tax administration, budgeting practices) and introduce more binding fiscal rules. - Statistics are weak in international trade, labor markets, debt, and quasi-fiscal liabilities. ### Background — Economic and Social Context - ECCU composition and arrangements - ECCU comprises six Fund members: Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines; and two British territories, Anguilla and Montserrat. - All six Fund members have accepted the obligations of Article VIII, Sections 2, 3, and 4. - ECCU members participate in the Fund’s General Data Dissemination System (GDDS), with need for improvement in key areas. - Dominica is the only ECCU country with a Fund-supported program. - Structural characteristics - Services (including tourism) share rose from 78 percent in 1990 to 86 percent in 2003. - Agriculture’s share fell from 12 percent to 7 percent during the same period but still employs about one-fifth of the labor force; over half the ECCU population lives in rural areas. - Social indicators and labor - Infant mortality: about 18 per 1,000 live births. - Life expectancy at birth: over 70 years. - Local unemployment rates appear high, ranging between 10–25 percent. - The region experiences a constant brain drain and concern over HIV/AIDS prevalence (Caribbean region has the world’s second highest rate of infection after Africa). ### Recent Economic Developments and Near-Term Prospects - Growth and external balances - Real GDP: 2000 = 2.8; 2001 = -1.3; 2002 = 0.2; 2003 = 2.4; 2004 projection = 2.5-3.5. - External current account: -15.5 (2000), -16.7 (2001), -19.6 (2002), -19.5 (2003), -19.1 (2004). - Travel receipts: 28.2 (2000), 26.2 (2001), 24.7 (2002), 27.3 (2003), 27.8 (2004). - Prices and exchange rate - CPI, end-of-year: 3.1 (2000), 2.0 (2001), 0.8 (2002), 1.5 (2003), 1.5 (2004). - Real effective exchange rate (depreciation -): 4.3 (2000), 1.8 (2001), -5.7 (2002), -9.6 (2003). - Fiscal and public debt indicators - Overall central government balance: -6.4 (2000), -7.8 (2001), -10.5 (2002), -5.9 (2003), -5.4 (2004). - Revenue and grants: 27.0 (2000), 26.4 (2001), 27.9 (2002), 28.6 (2003), 28.4 (2004). - Expenditure and net lending: 33.4 (2000), 34.2 (2001), 38.4 (2002), 34.5 (2003), 33.8 (2004). - Total public debt: 78 (2000), 84 (2001), 101 (2002), 103 (2003), 103 (2004). - Of which external: 49 (2000), 53 (2001), 65 (2002), 69 (2003), 68 (2004). - Reserves and coverage - Gross international reserves of ECCB (US$mn): 384 (2000), 446 (2001), 505 (2002), 540 (2003), 560 (2004). - Currency backing ratio, in percent: 88 (2000), 93 (2001), 97 (2002), 95 (2003), 95 (2004). ### Key Surveillance Issues and Diagnostics - Root causes of debt accumulation - Public debt rose by an average of 7½ percent of GDP a year in 1998–2003, after falling by 0.5 percent of GDP per year in 1990–97. - Contributions to debt accumulation (period averages, percent GDP, per year): public debt accumulation: -0.4 (1990–97) versus 7.6 (1998–2003); primary balance (net of grants): -0.4 (1990–97) versus 2.7 (1998–2003); accumulation of foreign assets: 0.8 versus 1.2; debt service: 3.0 versus 3.8; output growth: -1.7 versus -1.3; real exchange rate growth: -0.3 versus 0.2; others (valuation changes, debt relief, public assumption of private sector debt): -1.8 versus 1.0. - Fiscal slippages and increased current and capital expenditures were principal drivers of rapid debt accumulation during 1998–2003. - Heterogeneity across countries - Public debt to GDP ratio ranges from 66 percent (St. Lucia) to 162 percent (St. Kitts and Nevis). - For four countries—Antigua and Barbuda, Dominica, Grenada, and St. Kitts and Nevis—existing debt levels are in excess of 100 percent of GDP, making debt reduction through fiscal adjustment alone unlikely. - Vulnerabilities - High external current account deficits throughout 1990–2003 (10–20 percent of GDP). - Exposure to natural disasters (hurricanes) and near-term contagion risks. - Banking sector risks from locally incorporated banks with large public sector exposures and high nonperforming loans. ### Policy Discussions and Recommendations - Restoring fiscal sustainability - Design comprehensive strategies in highly indebted countries incorporating fiscal adjustment, growth-enhancing structural reforms, asset sales, and a debt strategy. - Dominica is advanced in implementing such a strategy; other countries are pursuing gradual approaches to target medium-term sustainability. - Introduce more binding fiscal rules to ensure national fiscal policies are consistent with regional obligations. - Revenue and expenditure management - Strengthen expenditure control, tax administration, and budgeting practices. - Reduce tax concessions early and broaden the tax base. - Improve public debt management. - Growth and structural reforms - Reinvigorate growth by increasing value added from tourism, strengthening linkages to the rest of the economy, reducing labor market rigidities, improving competitiveness, and pursuing public enterprise reform. - Accelerate regional integration plans and increase labor market flexibility to overcome constraints from small market size. - Financial sector and disaster preparedness - Strengthen banking supervision to reduce risks from banks with large public sector exposures and high nonperforming loan ratios. - Increase preparedness for natural disasters and develop timely response mechanisms. - Institutional capacity and statistics - Further progress in institution building and governance is needed. - Improve statistical systems, especially for international trade, labor markets, debt, and quasi-fiscal liabilities. ### Key Statistics and Indicators (selected exact values from source) - Currency peg: EC$2.70=US$1.00 (since 1976). - Coverage ratio (de facto): in excess of 95 percent (end-2003); legal requirement: 60 percent. - Public debt (total, percent of GDP): 103 (end-2003). - Public debt range across ECCU: 66 percent (St. Lucia) to 162 percent (St. Kitts and Nevis). - Real GDP: 2.8 (2000); -1.3 (2001); 0.2 (2002); 2.4 (2003); 2.5-3.5 (2004 projection). - Overall central government balance: -6.4 (2000); -7.8 (2001); -10.5 (2002); -5.9 (2003); -5.4 (2004). - Total public debt time series (selected years): 78 (2000); 84 (2001); 101 (2002); 103 (2003); 103 (2004). - Gross international reserves of ECCB (US$mn): 384 (2000); 446 (2001); 505 (2002); 540 (2003); 560 (2004). - Currency backing ratio, in percent: 88 (2000); 93 (2001); 97 (2002); 95 (2003); 95 (2004). *Prepared by the Western Hemisphere Department; Approved by José Fajgenbaum and Matthew Fisher; April 14, 2004.* ### 8. Following weak growth in 2001-02, ### _cr04299 - 8. Following weak growth in 2001-02, ### Growth and external environment - Region’s economies picked up strength in 2003 and are likely to grow moderately faster in 2004. - Contributing factors to strengthened outcomes in 2003 and improved prospects for 2004: - Revival of tourism as the global economy continues to recover. - Depreciation of the U.S. dollar against major currencies. - Absence of natural disasters. - Reserve coverage of the currency board has continued to increase well beyond the statutory level of 60 percent. - Inflation remains very low. ### Output gaps and tourism-led rebound - Output remains well below potential despite the 2003 pick up. - In 2003, output is estimated to be below potential in all countries except St. Vincent and the Grenadines. - Large output gaps—in excess of 4 percent of potential output—in Dominica, Grenada, St. Kitts and Nevis, and St. Lucia. - Recent growth has largely stemmed from a rebound in tourism as new facilities have opened and security concerns from September 11, 2001 have diminished. - Growth in 2004 is anticipated to continue to be driven by tourism and tourism-related services. ### Fiscal balances, structural deficits, and one-off factors - Fiscal balances for the region strengthened significantly in 2003, in part due to one-off factors, but structural balances remain in large deficit. - Overall deficit for the ECCU region is estimated at 6 percent of GDP in 2003, an improvement of close to 5 percentage points over the previous year. - Notable one-off factors: - Grenada: one-off payment in 2002 of 11½ percent of GDP to terminate a number of leasing arrangements. - St. Kitts and Nevis: adjustment largely due to completion of projects to repair hurricane damage to key tourism infrastructure. - Focusing on the current balance (not affected by one-off factors), the adjustment is more modest—by 1½ percent of GDP to a current deficit of ¾ percent of GDP. - Current-balance improvements occurred in all countries except St. Lucia; Antigua and Barbuda’s improvement stemmed from ad hoc expenditure compression in response to lack of available financing. - Structural deficits remain large throughout the region, with the exception of St. Vincent and the Grenadines. ### Revenues, tax policy, and reform efforts - Fiscal revenues mostly flat despite activity pick up and policy efforts. - Average revenues (including grants) have remained almost constant at 26–28 percent of GDP over the last few years. - Significant variation across countries: - Antigua and Barbuda: average of about 20 percent of GDP. - St. Lucia: 26 percent of GDP. - The other four countries: more than 30 percent of GDP. - In 2003, total revenues and grants rose markedly only in Dominica and Grenada. - Lack of buoyancy reflects concentration of rebound in tourism, which is fairly lightly taxed because many large operators enjoy extensive tax concessions. - A review by FAD and CARTAC in October–December 2002 led to a Tax Reform and Administration Commission drafting a strategy for tax reform; the Commission is developing country implementation schedules. - Most countries have accepted the objective of moving to a VAT or similar broad-based sales tax, though timeframes and implementation schedules are still being developed with assistance from CARTAC. - VAT introduction announced: - Dominica: July 2005. - Grenada: January 2006. ### Debt dynamics and fiscal outlook for 2004 - Debt to GDP ratio increased to 103 percent in 2003 and is likely to remain at that level in 2004. - Overall fiscal balance for the region projected to improve only modestly in 2004—by less than ½ percent of GDP—driven by a reduction in noninterest expenditures. - Approved 2004 budget in St. Kitts and Nevis foresees significant fiscal strengthening based on expenditure reduction and increased revenues from administrative improvements implemented in 2003 and ending some tax breaks to a major new hotel. - Fiscal stance in other countries (notably Antigua and Barbuda) is highly uncertain following political changes. - Even with adjustments, the overall deficit for the region would remain at around 5½ percent of GDP in 2004, and debt to GDP ratios would not decline. ### Public debt composition and regional securities market - Commercial creditors (principally private domestic and foreign-owned banks) were the largest holders of total public debt at end-2002. - Commercial creditors held around 40 percent of external debt; the remainder split equally between bilateral and multilateral lenders. - Private domestic banks held half of domestic debt at end-2002; the rest held by various creditor groups depending on the country. - Launch of the Regional Government Securities Market (RGSM) in November 2002 allowed countries to place local currency debt with ECCU region banks on better terms than local markets. - Grenada, St. Kitts and Nevis, and St. Vincent and the Grenadines have been most active in this market. - St. Vincent and the Grenadines accessed the market at steadily declining interest rates. - Treasury bill placement interest rates: - Second half of 2003 issues: 4.8 and 4.9 percent. - February 2004 issue: 3.9 percent. - Prior to RGSM: 6.6 percent. ### External current account and reserves - External current account deficit estimated to have remained at 19½ percent of GDP in 2003, despite fiscal adjustment and a large real depreciation of the Eastern Caribbean dollar. - Eastern Caribbean dollar depreciated (in real effective terms) by over 15 percent during 2002 and 2003, largely due to sharp depreciation of the U.S. dollar against major currencies since the second half of 2002. - Increase in export receipts (including tourism) was offset by a rise in imports, in part due to a sharp increase in capital imports related to direct foreign investment inflows (mainly in construction, hotels, and telecommunications) to about 13 percent of GDP. - Despite large current account deficits, the overall balance of payments position remained in surplus, reflecting large direct foreign investment inflows and portfolio investment inflows as governments placed debt instruments on international markets. - Gross international reserves of the ECCB increased by US$35 million, reaching US$540 million (4½ months of imports) at end-2003. ### Monetary aggregates and banking sector health - Monetary aggregates expanded rapidly relative to output growth despite pressures on banking system health. - Broad money (M2) grew in real terms by 5½ percent in 2002 and by 8 percent in 2003. - Deposits with the banking sector rose despite reduction in minimum savings deposit rate from 4 percent to 3 percent in September 2002. - Net lending to the public sector contracted sharply as governments increased external borrowing and government social security funds built deposits with the banking system. - Private sector credit growth (principally housing loans) declined to 2 percent in 2002 and to 1 percent in 2003, as interest rates did not adjust to excess liquidity and banks accumulated foreign assets. - Despite high interest rate spread, rate of return on bank assets is low. - Typical interest rates: - Domestic lending rates are about 13 percent in the ECCU region. - Deposit rates are about 4¾ percent. ### Policy discussions: strategic considerations and near-term risks - Two broad themes identified for regional policy response: - Address fundamental economic problems: ensure long-run debt and fiscal sustainability, and regional coherence in economic policies to support growth and preserve the currency board arrangement. - Face near-term risks: take immediate measures to reduce vulnerabilities and increase preparedness to respond to negative events. - Authorities attributed deterioration since mid-1990s to unfair global trading practices and a series of negative shocks: dismantling of preferential trade arrangements, adverse weather including hurricanes, crop diseases, reduced external concessional assistance, and the September 11, 2001 terrorist attack affecting tourism. - Authorities also noted abrupt shutdown of offshore financial centers following Financial Action Task Force (FATF) rules as a severe setback. - Staff recommendations emphasized opportunities from globalization and proposed a two-pronged approach: - Continue to confront inequities in trade practices in coordination with other developing countries via the WTO, pushing for freer and fairer trade. - Pursue regional and national strategies to take advantage of the global environment, with priority opportunities in tourism, adapting education and health skills to regional needs, and developing new agricultural export products for regional and world markets. ### Trade-preference shocks (Box 1 highlights) - Dismantling of preferential trade arrangements (bananas and sugar) reduced competitiveness of traditional agricultural crops. - If new trade agreements imply a 40 percent loss of preference margins, the shock would be equivalent to reductions in export unit values of: - 9.8 percent in St. Lucia. - 8.9 percent in St. Kitts and Nevis. - 5.5 percent in Dominica. - 3.4 percent in St. Vincent and the Grenadines. - EU-related timetable noted: - Banana regime: move to tariff-only regime for dollar bananas as of January 1, 2006; tariff preference for ACP bananas to remain until 2008. - EU sugar regime dismantling implies Caribbean sugar industries will face international competition by 2007. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04299.pdf* ### Box 2: The Re-emergence of Offshore Financial Centers in ECCU Economies ### Box 2: The Re-emergence of Offshore Financial Centers in ECCU Economies ### OFC activity and fiscal contribution (end-2000 baseline) - OFC employment at end-2000 ranged from about 8 percent of the labor force in Antigua and Barbuda to only one-half of one percent of the labor force in Dominica. - Income from fees accounted for, on average, 5.8 percent of central government current revenues, ranging from about 7 percent in Antigua and Barbuda to 0.7 percent in Dominica. - A majority of the fee income was generated from international business companies (IBCs) and, in Antigua and Barbuda, from internet gaming companies. - Net revenue contribution from the sector averaged only 2.3 percent, after taking into account the business and supervisory cost of maintaining an OFC. ### FATF listing, regulatory overhaul, and contraction (mid-2000 to 2003) - Four ECCU countries—Dominica, Grenada, St. Kitts and Nevis, and St. Vincent and the Grenadines—were listed by the Financial Action Task Force (FATF) as “noncooperative” starting in mid-2000. - The listing generated an overhaul in the regulatory framework and resulted in a sharp contraction in offshore activities: - The number of offshore banks fell drastically, with many folding voluntarily as supervision tightened. - Adverse publicity negatively affected other offshore institutions such as IBCs and trust companies. - Data for St. Vincent and the Grenadines indicate the total number of IBCs fell by about 13 percent in 2002 and a further 23 percent during 2003. ### De-listing and re-emergence (2003–2004) - By June 2003, all four countries had been de-listed by the FATF. - The strengthened and more reputable environment enabled the re-emergence of OFCs: - Remaining offshore banks expanded their assets between 2001 and 2003 (based on partial data). - In St. Lucia, a new offshore bank will begin operation in 2004. - In St. Vincent and the Grenadines (the only country with recent OFC revenue data in the source): - Fee income from insurance companies tripled in 2003. - Fee income from offshore banks increased marginally as authorities charged offshore banks new fees to cover strengthened due diligence and on-site inspection. - Fee income generated from the IBCs declined by 35 percent in 2003, but the number of IBCs has begun to increase in 2004. ### Implications and link to broader ECCU policy concerns - The FATF episode demonstrated the sensitivity of OFC-related revenues and employment to international regulatory assessments and reputational effects. - Even when fee income contributions were sizable at the margin of government revenues (see figures above), net contributions were materially reduced after supervisory and business costs (net average 2.3 percent). - Re-emergence of OFC activity after regulatory strengthening highlights the role of credible supervision and due-diligence fees in restoring market confidence. *Source: Box 2, “The Re-emergence of Offshore Financial Centers in ECCU Economies,” IMF staff report content.* ### 28. The authorities noted that reforms consistent with these objectives were already ### _cr04299 - 28. The authorities noted that reforms consistent with these objectives were already ### Tax concessions and revenue loss - Staff and authorities agreed that granting of concessions had significantly eroded the tax base; tax revenues lost due to concessions range from 5–9 percent of GDP. - Some country authorities argued concessions were essential to attract FDI and create employment. - Staff recommendation and views: - Undertake a careful cost-benefit analysis of existing concessions. - If new concessions are granted, grant them in a transparent manner, halt the granting of discretionary concessions, and strictly limit any new incentives in both magnitude and duration. - Example policy action noted: - Dominica’s planned public sector reform envisages a 10 percent reduction in the wage bill (5 percent in each of fiscal years 2004/05 and 2005/06), through the retrenchment of civil servants. ### Fiscal benchmarks, institutional arrangements, and implementation - Finding: Countries have moved progressively further from the ECCU’s fiscal and debt benchmarks (introduced in 1998 to be met by 2007). - Measured compliance: - The number of guidelines observed by the countries declined from 11 in 1998 (out of a maximum possible of 24) to just 3 in 2003. - Only one country—St. Vincent and the Grenadines—is currently meeting any of the fiscal benchmarks recommended by the ECCB. - Staff emphasis: Fiscal discipline and debt sustainability are essential to preserve the CBA. - Views on binding fiscal rules: - Limited support among authorities for introducing more binding fiscal rules, such as Fiscal Responsibility Laws. - Mission view: More binding fiscal rules could depoliticize the budgetary process and reduce ad hoc discretionary spending. - Counterviews: Some authorities believed legislation would not constrain irresponsible governments; others feared such laws might unduly tie the hands of democratically-elected governments. - Staff minimum recommendations: - Enhance the effectiveness of existing benchmarks by introducing incentives for meeting targets. - Identify realistic but ambitious time paths for convergence. ### ECCU fiscal guideline and benchmark indicators (selected points) - Current balance (saving) guideline: 4 - 6 percent of GDP. - Overall balance guideline: > or = -3 percent of GDP. - Government and government guaranteed debt outstanding guideline: < or = 60 percent of GDP. - Debt service payments guideline: < or = 15 percent of current revenue. - Number of guidelines met: - Total number of guidelines met in 2003: 0 0 0 0 0 3 3 (table format in source). - Number of guidelines met in 2002: 0 0 0 0 0 2 2. - Number of guidelines met in 2001: 0 0 0 2 2 4. - Number of guidelines met in 2000: 0 0 2 0 4 2 8. - Number of guidelines met in 1999: 0 1 2 0 3 2 8. - Number of guidelines met in 1998: 0 1 3 1 3 3 11. - Sources: ECCU member country authorities; and Fund staff estimates. - Notes from source: - 1/ Excludes Anguilla and Montserrat. - 2/ Includes external arrears. - 3/ Excludes domestic debt amortization. ### Debt strategy and payment record - Authorities’ expressed objective: Preserve good payments history and avoid recourse to debt restructuring. - Country-specific notes: - Dominica has already approached its creditors. - Antigua and Barbuda has a history of arrears to certain creditors. - St. Kitts and Nevis is the country with the highest debt to GDP ratio; authorities committed to bringing down the debt burden gradually over the medium term. - Debt management actions and risks: - Some countries (Grenada, St. Kitts and Nevis, St. Lucia) have refinanced more expensive debts into lower interest longer maturity instruments, taking advantage of low global interest rates. - In several cases, conversion of local currency debt into foreign exchange denominated instruments increased balance sheet mismatches. - Staff caution: Avoid distress or poorly structured debt operations that increase vulnerabilities. ### Asset sales / privatization - Options differ markedly across countries. - Example: In St. Kitts and Nevis, projected proceeds from land sales are viewed as a significant element in the strategy to reduce debt. - Staff cautionary findings: - International experience with large-scale privatization was not very encouraging—net privatization receipts (except in the unique case of transition economies) had rarely exceeded 5 percentage points of GDP in any given year. - Distress sales had often led to low returns or corrupt insider deals. ### Growth strategies: agriculture, tourism, and competitiveness - Overarching objective: Authorities unanimous that the key economic objective going forward is to raise economic growth to strengthen fiscal balances, reduce debt ratios, and create employment. - Agriculture: - Most countries face further significant declines in traditional agriculture crops; new crops are slow to emerge. - Erosion of preferential trading arrangements and unequal global trading practices contributed to the decline of traditional crops. - Traditional crops are main livelihoods for many small-scale farmers in some countries. - Policy measures in St. Vincent and the Grenadines: facilitate creation of a more efficient traditional sector and greater diversification through retirement of unproductive growers (by offering pension-like arrangements) and agricultural input subsidies. - Staff view: Input subsidies preferable to output subsidies because they do not require continued production of declining industries; however, input subsidies should be temporary to avoid permanent misallocation and to contain fiscal impact. - Governments can facilitate moves into new agricultural products via training and agricultural extension services. - Decline in traditional commodity production could release scarce land for new agricultural products, tourism, agro-tourism, and housing. - Tourism: - Tourism has enormous potential; significant scope exists for increasing its contribution to the rest of the economy. - Constraints: low linkages to domestic economy and large tax concessions yielding modest budgetary revenues from the sector. - Strengthening linkages between tourism and agriculture would help reduce imports and provide rural livelihoods. - Competitiveness and exchange rate considerations: - Indicators of competitiveness are mixed; evidence of loss of competitiveness in tourism over time. - Traditional REER measures do not fully indicate a loss of competitiveness; recent depreciation of the U.S. dollar meant the E.C. dollar appeared close to its equilibrium value as of 2003. - Alternative REER measures (customer-based and competitor-based) do not fully explain tourism competitiveness losses. - Nonprice factors, including low quality of service and stickiness of tourism prices in U.S. dollars, may explain observed loss of tourism shares to other Caribbean markets. - Tourism performance and statistics: - Over 1990–2002, correlation between real economic growth and growth in stayover tourist arrivals: nearly 80 percent. - Correlation between real economic growth and tourism receipts: 75 percent. - Caribbean stayover arrivals growth (average 1990–1999): 4.7 percent. - Caribbean tourism receipts growth (average 1990–1999): 7.8 percent. - World stayover arrivals growth (average 1990–1999): 4.3 percent. - World tourism receipts growth (average 1990–1999): 7.7 percent. - ECCU’s market share of Caribbean tourist arrivals declined from 5.4 percent in 1990 to 4.6 percent in 2002. - ECCU’s share of Caribbean tourism receipts declined from 6.8 percent in 1990 to 4.8 percent in 2002. - ECCU tourist arrivals declined by 4.9 percent in 2001; world and Caribbean tourist arrivals contracted by 0.5 percent and 3.3 percent, respectively. ### Real exchange rate, devaluation risks, and macro implications - Long-run (equilibrium) real exchange rate analysis (regional, 1979–2003) suggests a cointegrating relationship between reer and fundamentals (terms of trade, net foreign liabilities proxied by public sector external debt, and government size measured as ratio of government expenditure to GDP). - Cointegrating equation (coefficients are semi-elasticities and elasticity as presented in source): - LN(reer_t) = 2.40 + 1.39*LN(tot_t) + 0.07*(government size_t) - 0.015*(net foreign liabilities_t). - Interpretation and findings: - Estimated signs are consistent with theory. - Analysis suggests the E.C. dollar experienced overvaluation starting in 1998; recent depreciation of the U.S. dollar corrected the previous overvaluation—by 2003 actual real exchange rate was very close to equilibrium. - Caveat: Long-run determinants vary by country; for some ECCU countries no long-run relationship was found. - Devaluation costs and effects: - Pass-through of foreign to domestic prices can be substantial given openness; import ratio about 50 percent of GDP. - A devaluation would likely have modest impact on tourism because tourism receipts appear relatively inelastic to price developments. - Given that majority of public liabilities are denominated in foreign currency, a devaluation would cause debt to surge—by almost 20 percent of GDP for a 50 percent devaluation, on average. - While faster growth and reduced real public sector wages could improve fiscal balances, increase in debt would take years to unwind even in optimistic scenarios. - Any exchange rate adjustment would need to be accompanied by measures to ensure continued soundness of the banking system. - The currency board arrangement could become severely strained if decisive actions to strengthen public finances and bring public debt to sustainable levels are not pursued aggressively. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04299.pdf* ### 38. High labor costs and labor market inflexibility are important obstacles to ### _cr04299 - 38. High labor costs and labor market inflexibility are important obstacles to ### Labor market constraints and developments - Private sector wages are estimated to have increased by more than 25 percent in the 1998–2003 period as compared to the average for 1990–97. - The public sector wage bill as a share of GDP rose by almost 1 percent of GDP to 13 percent. - The absence of sustained high growth since the mid-1990s indicates that wage costs have risen in relation to productivity. - Persistently high levels of unemployment suggest rigidities in labor markets; given the rigidity of the CBA, flexibility of wages and labor mobility are needed to reduce unemployment and allow adjustment. - Staff urged the authorities to develop productivity measures and to adopt wage policies that were linked to labor productivity. - Labor code: - All countries have labor laws protecting workers’ rights and setting standards on leave, health-related issues, pensions, hiring, and firing procedures. - Several countries are planning to update their labor laws to establish a modern comprehensive Labor Code. - All six countries are members of the ILO. - Labor unions: - Unionization varies from about 10 percent of the labor force in St. Vincent and the Grenadines to about 50 percent in Grenada. - Minimum wages: - Legislated in all six countries for certain sectors and occupations; revised infrequently. - Latest revisions: Antigua and Barbuda in 1981; Dominica in 1989; Grenada in 2002; St. Kitts and Nevis in 1996; St. Lucia in 1985; St. Vincent and the Grenadines in 2003. - Wage negotiations and recent agreements: - Wages generally set through enterprise-level negotiations, typically covering three to four years. - Grenada: four-year agreement in September 2003 awarding government workers a 14 percent wage increase by end-2005. - St. Vincent and the Grenadines: two-year agreement in December 2003 awarding government workers a 7 percent increase by end-2005. - Country-specific labor actions: - St. Vincent and the Grenadines: government negotiated a public sector wage freeze after 2001 deceleration; wage freeze ended and a two-year agreement was concluded in December 2003. - St. Kitts and Nevis: except for one year since 1995, government granted end-year bonus or ~10 percent increase; interrupted after September 11, 2001, with no bonuses or increases through 2003. - Dominica: introduced a 4 percent payroll tax in August 2002 (reduced to 3 percent in July 2003) and a 5 percent across-the-board cut in government wages; legal challenge remains. - Tripartite bodies and social security: - Four countries (Antigua and Barbuda, Dominica, Grenada, and St. Kitts and Nevis) have ratified the ILO’s convention on tripartite consultation. - Discussions on wage increases based on productivity have begun in St. Vincent and the Grenadines and St. Lucia. - All countries have public social insurance schemes financed by payroll taxes; concern exists about long-term viability given aging and fiscal crises. ### Utilities, public enterprises, and investment constraints - Price and quality of utilities are potential constraints on investment; public enterprise reform is needed to enhance efficiency of service provision. - Telecommunications reforms in several countries produced beneficial effects; water and power supply reforms are needed in several countries. - Hotel operators in St. Lucia reported inadequate water and sewerage infrastructure and high electricity costs as severe constraints. - Public investment and fiscal stance: - Authorities view direct government intervention, including high public investment, as essential to generate growth, but there is little evidence this has been successful recently. - Since the second half of the 1990s, authorities responded to negative shocks with expansionary fiscal policies, including creating public sector employment. - Fiscal imbalances narrowed significantly in 2003, but fiscal stances in 2004 remain expansionary in most cases. - Only in Antigua and Barbuda and St. Kitts and Nevis are fiscal balances projected to improve significantly in 2004. - Staff noted the relationship between public investment and growth turned negative after about 1998. ### Private sector environment and financial sector issues - Staff argued government role should be limited to providing an enabling environment for private sector development. - Recommended actions: - Harmonize business procedures and regulations to improve investor perceptions and attract investment. - Withdraw government support for loss-making sectors (e.g., traditional agricultural crops) to free up scarce land for productive uses. - Create a more efficient financial sector to lower cost of capital for private investment. - Banking sector composition and lending patterns: - Nearly half of ECCU banking system loans are for personal consumption (real estate and consumer loans). - Staff encouraged assessment whether failure of interest rates to decline, despite continued high levels of excess liquidity, was due to monopoly rents or the 3 percent floor on the savings deposit rate. - Removing legal impediments to foreclosure and liquidation of collateral would enhance lending environment and reduce delinquency. ### Regional cooperation and integration - Building high-quality regional institutions is underway; deeper regional cooperation could help overcome small-size constraints. - Key OECS successes: financial sector (Eastern Caribbean Central Bank and Eastern Caribbean Securities Exchange), judiciary (Eastern Caribbean Supreme Court), telecommunications (Eastern Caribbean Telecommunications Authority), transportation (Directorate of Civil Aviation). - Progress in implementing CARICOM initiatives has been slow; some authorities worry deep regional integration could impinge on island uniqueness and sovereignty. - Areas for regional cooperation identified by staff: - Freeing labor and goods markets: remove non-tariff barriers and implement free movement of workers to improve labor market efficiency and shock adjustment under CBA. - Education reform: standardize curricula regionally and reorient skills toward new growth sectors, particularly tourism. - Coordination of tax incentives and holidays: adopt coordinated regional approach to reduce tax competition and concession-related revenue losses. - Coordination in provision of government services: identify additional areas where services could be provided regionally to achieve cost savings. - Financial market supervision: strengthen ECCB supervision over locally incorporated banks and enhance cross-border regulatory cooperation for financial conglomerates. ### Financial sector vulnerabilities and FSAP findings - FSAP main findings: - Continued confidence in the financial system despite macro pressures, supported by strong foreign banks and relatively developed financial institutions. - Financial sector showed signs of stress: high levels of nonperforming loans (NPLs), uncertain capital quality in a few indigenous banks, practice of taking accrued interest on government debt arrears into income in some banks, and zero risk-weights applied to public sector debt in arrears. - Stress tests indicated indigenous banks were more at risk of insolvency or severe capital impairment if their governments default. - Additional weaknesses: ECCB’s lack of enforcement powers, incidents of regulatory forbearance, deficiencies in quality/timeliness/availability of key data, weak supervision of nonbank financial sector. - FSAP recommendations focused on: - Enhancing effectiveness of supervision: reprioritize ECCB resources; develop risk-based supervision; strengthen prudential regulations and minimum capital; revise guidance on accruals of interest; provide adequate ECCB powers; improve financial sector governance. - Building crisis management capacity: enhance monitoring and contingency planning acknowledging limited ECCB lender-of-last-resort resources and fiscal constraints. - Strengthening supervision of offshore banks: issue and enforce comprehensive prudential guidelines and uniform reporting. - Strengthening supervision of nonbank financial institutions: transfer lead supervision for systemically important near-banks to the ECCB; increase cross-border regulatory cooperation; strengthen supervision of smaller credit unions and near banks; independent supervision for development banks. - Financial sector statistics and risks: - Foreign banks account for 58 percent of banking sector assets. - Locally incorporated banks have nonperforming loans over 20 percent and large exposures to housing market and public sector. - Cross-border financial and trade linkages currently very low but likely to increase; risks of faster transmission of shocks. - Partial data suggest most countries appear to have sufficient flexibility in budget execution to withstand a temporary disruption in access to financing, but problems could mount beyond that. - ECCB identifies “weak banks” and requires corrective measures via a Memorandum of Understanding but rarely sets timetables or can impose penalties. ### Natural disaster vulnerability and preparedness - The ECCU countries are among the most vulnerable in the world to natural disasters. - Since 1970, 44 natural disasters recorded in the region, of which 34 were the result of hurricanes. - Available data suggest a typical event: - Affected 1,800 people, - Caused damage equivalent to 10 percent of the country’s annual GDP, - Induced a sharp drop in GDP growth in the year of the event, a collapse of agricultural production, a rapid surge in current account and fiscal imbalances, and a jump in public debt stocks. - Insurance and preparedness issues: - Private “all-peril” insurance usually required for mortgage borrowers, but many low-income households without mortgages lack coverage. - Government insurance take-up is limited; crop insurance not always available. - World Bank, Caribbean Development Bank (CDB), and bilateral donors have provided significant help, but initiatives remain insufficient. - Staff urged authorities to: - Increase preparedness by strengthening zoning and building code legislation and enforcement. - Improve insurance legislation and regulatory oversight to increase insurance penetration. - Build up contingency funds to facilitate effective and speedy response to disasters. *Source: _cr04299 - 38. High labor costs and labor market inflexibility are important obstacles to* ### 47. Every possible attempt should be made to prevent a crisis. While the coverage ### _cr04299 - 47. Every possible attempt should be made to prevent a crisis. While the coverage ### Crisis prevention, reserve coverage, and liquidity risk - The coverage ratio of the CBA (the ratio of international reserves to base money) is well in excess of the legal norms and close to 100 percent. - The ratio of international reserves to broad money is only 20 percent, reflecting the depth and breadth of the financial sector in the region. - Consequence: pressures that trigger runs on deposits and capital flight could quickly deplete ECCB reserves (if liquidity support is provided to local banks) and could ultimately force a country to impose restrictions on deposit withdrawals or on convertibility. - Legal reserve requirement: The ECCB is legally required to maintain international reserves equal to 60 percent of demand liabilities. - At end-December 2003, reserve coverage was 95.3 percent implying that the ECCB could extend a maximum of US$333 million (13 percent of private sector deposits in the banking system) in liquidity support to banks. ### Contingency planning and the ECCB’s operational role - Authorities endorsed the recommendation to draw up contingency plans for a crisis event, despite considering crisis probability to be fairly low. - Staff advice to preserve the CBA: - Limit the role of the ECCB to providing technical support and moral suasion. - Stop short of extending liquidity support because the amount that could be provided was modest and could have a very damaging impact on confidence in the CBA. - Responsibility for crisis response rests with governments through emergency fiscal and other measures. - Possible fiscal policy responses in a crisis: - Combination of expenditure reductions and postponements. - Emergency revenue measures. - Social protection note: To mitigate hardship on the poor in the event of a crisis, the adequacy of social safety nets needs to be ensured. ### Natural disasters and historical shocks - The region has experienced multiple natural disasters (hurricanes, droughts, floods) and other shocks (dismantling of preferential trade agreements, closing of offshore financial centers, September 11, 2001 terrorist attack) that have affected growth and fiscal positions. - Since 1979, the IMF has approved emergency assistance related to natural disasters for: Grenada (2003); St Kitts and Nevis (1998); St Lucia (1980); St Vincent and the Grenadines (1980); and Dominica (1979). - Natural disasters affecting multiple ECCU countries are documented in the source figures and tables. ### Statistical issues and data weaknesses - Serious inadequacies were noted in data on: - Labor markets. - Domestic and external debt and debt servicing. - National accounts. - Ongoing weaknesses in coverage, timeliness and quality of data on: - Consumer prices. - Fiscal outcomes. - Balance of payments. - Balance of trade. - Mission recommendations: - National authorities should improve quality, timeliness and coverage of statistical data and database management. - ECCB should continue efforts to address coverage and timeliness in statistical areas under its responsibility. - Constructive role of CARTAC in technical assistance for national accounts, price statistics, and balance of payments statistics was noted and supported. ### Staff appraisal: vulnerabilities, debt, and policy priorities - Economic context and vulnerabilities: - Average public debt at nearly 103 percent of GDP at end-2003. - GDP growth decelerated sharply in the 1990s after relatively high growth in the 1980s. - Growth began to pick up in 2003, but public debt stocks in all six member countries continued to rise; on current policies reversal appears difficult in four countries. - Vulnerabilities include unanticipated global deterioration, terrorism threats affecting tourism, spillovers from neighboring countries’ fiscal and financial developments, crop diseases, and frequent natural disasters. - Other constraints: inflexibility of the currency board arrangement, labor market rigidities, weaknesses in the domestic financial system. - Political economy constraints: - Lack of consensus at the highest political levels on the need for concerted fiscal action. - Elections due in three countries between early 2004 and early 2005; Dominican fiscal adjustment ahead of the January 2005 elections noted as a key test of regional debt-resolution strategy. - Recommended policy priorities: - Adopt ambitious front-loaded macroeconomic adjustments now. - Integrate home-grown structural adjustment programs into domestic policy making at the highest levels. - Fiscal and debt measures: - Ensure effective expenditure controls. - Broaden the tax base and raise collection rates. - Strengthen transparency and ensure timely and comprehensive fiscal data. - Reduce debt to sustainable levels through fiscal savings, privatization, deeper structural reforms to stimulate growth, and an active debt strategy. - Regional coordination: - Adopt a coordinated regional approach to ensure consistency of national fiscal policies with the CBA. - Consider introducing more binding fiscal rules at the national level. - Promote greater regional cooperation within the OECS and CARICOM to achieve economies of scale and specialization. - Growth and competitiveness: - Reinvigorate private sector growth by providing an enabling environment and reducing reliance on public sector investment. - Enhance competitiveness through wage restraint and deepening structural reforms to raise productivity in traded and non-traded goods sectors. - Note: large real depreciation of the Eastern Caribbean dollar since 2002 has allayed concerns about exchange rate competitiveness. - Social policy: - Strengthen and better target social safety nets to smooth transition away from traditional agriculture to non-traditional agriculture and services. - Provide temporary benefits to those who lose jobs or who start new businesses or search for employment in emerging sectors. - Disaster preparedness and fiscal self-insurance: - Strengthen institutional capacity to deal with natural disasters. - Increase self-insurance via contingency funds, perhaps at the regional level, by generating fiscal surpluses in good times. - Short-run contingency guidance: - Develop contingency plans for unanticipated adverse events given large and varied regional risks. - Policy responses would likely include expenditure reductions and postponements, and emergency revenue measures. - Ensure social safety nets are adequate to mitigate hardship on the poor. ### Key statistics and dated items (as reported in source) - Ratio of international reserves to broad money: 20 percent. - Legal reserve requirement (ECCB): 60 percent of demand liabilities. - Reserve coverage at end-December 2003: 95.3 percent. - Maximum ECCB liquidity support implied: US$333 million (13 percent of private sector deposits in the banking system). - Average public debt: nearly 103 percent of GDP at end-2003. - Growth began to pick up in 2003. - Elections due in three countries between early 2004 and early 2005. - Dominican elections referenced: January 2005. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 63. It is proposed that the next discussions with ECCU regional institutions take ### _cr04299 - 63. It is proposed that the next discussions with ECCU regional institutions take ### Timing and follow-up - It is proposed that the next discussions with ECCU regional institutions take place in 12 months, with an update of regional developments in six months time. ### ECCU: Selected Economic and Financial Indicators — key aggregates and projections - Real GDP: 4.0, 4.1, 2.8, -1.3, 0.2, 2.4, 2.5 - 3.5 - GDP deflator: 2.5, 1.8, 1.3, 1.8, 1.0, 1.0, 1.5 - Consumer prices, end-of-year: 0.9, 2.1, 3.1, 2.0, 0.8, 1.5, 1.5 - Liabilities to private sector (M2): 12.9, 10.6, 10.6, 5.9, 6.6, 9.7, 6.5 - Net foreign assets: 52.9, -11.0, -7.2, 40.8, 25.8, 33.6, 8.5 - Net domestic assets: 5.7, 10.6, 15.2, -1.3, 0.9, 0.9, 5.5 - Private sector credit: 8.0, 10.3, 10.4, 2.3, 1.9, 1.1, 4.8 - Credit to central government: 1.1, 14.4, 35.6, 1.4, -1.5, -9.7, 3.1 - Overall central government balance (percent of GDP): -2.9, -4.8, -6.4, -7.8, -10.5, -5.9, -5.4 - Total revenue and grants: 28.3, 27.6, 27.0, 26.4, 27.9, 28.6, 28.4 - Total expenditure and net lending: 31.3, 32.3, 33.4, 34.2, 38.4, 34.5, 33.8 - Foreign financing: 3.1, 2.7, 1.5, 5.6, 9.6, 5.6, 2.9 - Domestic financing including arrears: -0.2, 2.1, 4.9, 2.1, 0.9, 0.3, 2.5 - Central government current account balance: 1.7, 1.1, -0.6, -1.9, -2.3, -0.7, -0.1 - Total public sector debt, end-of-period: 67.5, 71.7, 77.7, 84.0, 101.2, 102.8, 103.1 - External sector (annual percentage change) - Exports, f.o.b.: 6.0, 3.6, 9.7, -15.6, 2.4, -5.6, 11.0 - Imports, c.i.f.: 4.2, 6.5, 3.1, -8.1, 0.4, 8.2, 4.5 - Stayover visitors: 1.5, -0.7, 0.2, -5.1, 2.1, 7.5, 5.3 - Nominal effective exchange rate (1990=100) end-of-period (depreciation -): 2/ -2.2, 4.0, 6.0, 1.9, -4.8, -8.8 ... - Real effective exchange rate (1990=100) end-of-period (depreciation -): 2/ -1.0, 3.4, 4.3, 1.8, -5.7, -9.6 ... - External current account balance (percent of GDP): -14.1, -16.4, -15.5, -16.7, -19.6, -19.5, -19.1 - Trade balance: -37.7, -38.5, -37.6, -35.4, -34.5, -37.3, -36.6 - Services and transfers: 23.7, 22.1, 22.2, 18.7, 14.9, 17.8, 17.5 - Travel: 31.1, 29.1, 28.1, 26.2, 24.7, 27.3, 27.8 - Capital and financial accounts: 16.1, 17.5, 16.1, 19.0, 21.6, 21.0, 19.7 - External public debt (end-of-period): 42.1, 45.7, 48.6, 53.1, 65.4, 69.1, 68.4 - External debt service, in percentage of GNFS: 5.2, 5.3, 7.7, 9.3, 11.4, 9.1, 9.1 - Interest component: 2.7, 2.4, 3.6, 3.3, 4.2, 4.0, 3.9 - End-year gross reserves of the ECCB (US$ millions): 357.6, 364.6, 383.7, 446.0, 504.8, 539.9, 559.9 - In months of imports: 3.3, 3.2, 3.2, 4.1, 4.6, 4.6, 4.5 - In percent of broad money: 19.8, 18.2, 17.4, 19.1, 20.2, 19.7, 19.2 - Currency backing ratio, in percent: 4/ 90.9, 88.0, 88.3, 92.9, 97.1, 95.3, 95.3 Sources noted in the tables: Eastern Caribbean Central Bank; and Fund staff estimates and projections. - Notes in source: 1/ regional ratios constructed from consolidated data treating intra-ECCU transactions as resident transactions; 2/ excludes Anguilla and Montserrat; 3/ includes errors and omissions; 4/ ECCB’s foreign assets as a ratio of its demand liabilities. ### Central government indicators by country — selected items (percent of GDP) - Total revenues and grants (ECCU aggregate): 28.3, 27.6, 27.0, 26.4, 27.9, 28.6, 28.4 - Current expenditure (ECCU aggregate): 23.7, 24.5, 25.6, 26.6, 27.9, 27.1, 26.7 - Interest payments (ECCU aggregate): 2.1, 2.5, 3.7, 3.6, 4.3, 4.4, 4.4 - Saving (current revenue less current expenditure) (ECCU aggregate): 1.7, 1.1, -0.6, -1.9, -2.3, -0.7, -0.1 - Primary balance (percent of GDP, ECCU aggregate): -0.8, -2.3, -2.7, -4.2, -6.2, -1.4, -1.0 - Overall balance (percent of GDP, ECCU aggregate): -2.9, -4.8, -6.4, -7.8, -10.5, -5.9, -5.4 - Total public sector debt (percent of GDP, country highlights end-of-period): - Antigua and Barbuda: 92.6, 96.1, 105.4, 106.1, 114.7, 112.8, 114.8 - Dominica: 72.1, 77.3, 86.2, 92.7, 111.4, 121.9, 125.3 - Grenada: 55.3, 55.2, 57.0, 64.7, 112.3, 108.9, 110.2 - St. Kitts and Nevis: 100.7, 113.8, 120.7, 133.7, 158.5, 162.1, 155.8 - St. Lucia: 42.0, 38.9, 43.6, 50.1, 62.3, 66.3, 68.2 - St. Vincent and the Grenadines: 49.1, 65.8, 67.6, 69.3, 71.5, 71.1, 67.2 - External debt (percent of GDP, ECCU aggregate): 42.1, 45.7, 48.6, 53.1, 65.4, 69.1, 68.4 - Domestic debt (percent of GDP, ECCU aggregate): 25.4, 26.0, 29.1, 30.8, 35.9, 33.7, 34.7 (Note: budget data for Dominica and St. Lucia are for fiscal years; external debt includes external arrears.) ### Creditor composition and public debt structure (end-2002 highlights) - Public debt (end-2002, percent of GDP) — memorandum: - Antigua and Barbuda: 113.8 - Dominica: 103.4 - Grenada: 107.1 - St. Kitts and Nevis: 157.5 - St. Lucia: 59.3 - St. Vincent and the Grenadines: 74.0 - Total ECCU: 99.1 - Of which external debt (end-2002, percent of GDP): - Antigua and Barbuda: 74.6 - Dominica: 75.5 - Grenada: 64.5 - St. Kitts and Nevis: 72.3 - St. Lucia: 38.0 - St. Vincent and the Grenadines: 48.8 - Total ECCU: 60.6 - Public debt (end-2002, U.S. dollars): - Antigua and Barbuda: 820.4 - Dominica: 262.4 - Grenada: 430.0 - St. Kitts and Nevis: 560.9 - St. Lucia: 398.8 - St. Vincent and the Grenadines: 267.3 - Total ECCU: 2,739.9 - Of which external debt (end-2002, U.S. dollars): - Antigua and Barbuda: 537.5 - Dominica: 191.6 - Grenada: 259.0 - St. Kitts and Nevis: 257.5 - St. Lucia: 255.4 - St. Vincent and the Grenadines: 176.2 - Total ECCU: 1,675.4 ### Balance of payments and external financing (selected items, US$ millions) - Current account: -450.4, -438.3, -475.6, -570.6, -592.2, -606.5 - Trade balance: -1,055.8, -1,066.3, -1,006.8, -1,004.8, -1,130.8, -1,162.4 - Exports: 327.4, 359.2, 303.1, 310.4, 292.9, 325.2 - Imports: -1,383.2, -1,425.5, -1,309.9, -1,315.2, -1,423.7, -1,487.5 - Services and income: 472.4, 463.9, 417.8, 325.0, 420.9, 435.9 - Services: 642.4, 671.3, 594.9, 526.8, 641.1, 664.2 - Travel: 798.1, 799.6, 743.0, 718.6, 828.1, 884.1 - Income: -170.0, -207.4, -177.1, -201.8, -220.2, -228.3 - Current transfers: 133.0, 164.0, 113.4, 109.2, 117.6, 120.0 - Capital and financial account: 475.7, 453.9, 539.7, 630.1, 635.6, 626.5 - Direct investment: 335.2, 306.8, 281.0, 316.3, 392.6, 410.2 - Portfolio investment: 48.4, 68.0, 48.7, 167.7, 123.0, 50.0 - Public sector long term: 48.9, 23.3, 77.3, 30.3, 71.6, 70.0 - Overall balance: 25.3, 15.6, 64.2, 59.5, 43.4, 20.0 - Memorandum: - End year gross reserves of the ECCB, US$ millions: 364.6, 383.7, 446.0, 504.8, 539.9, 559.9 - In months of current year imports (months): 3.2, 3.2, 4.1, 4.6, 4.6, 4.5 - ECCU GDP at market prices, EC$ millions: 7,396.2, 7,647.1, 7,671.5, 7,863.4, 8,187.8, 8,584.7 ### Banking system and monetary accounts — summary (selected items) - Consolidated banking system (M millions, Eastern Caribbean dollars) - Net foreign assets: 1,104.7, 1,024.8, 1,442.6, 1,814.1, 2,424.3, 2,631.6 - Net domestic assets: 4,292.1, 4,943.8, 4,877.1, 4,920.4, 4,964.4, 5,236.3 - Net credit to the public sector: -249.4, -97.7, -69.1, -87.2, -169.0, -172.2 - Credit to private sector: 5,293.4, 5,842.8, 5,979.1, 6,090.8, 6,160.2, 6,458.8 - Liabilities to private sector (M2): 5,396.8, 5,968.6, 6,319.6, 6,734.5, 7,388.8, 7,867.9 - Money (M1): 1,191.0, 1,211.7, 1,246.0, 1,319.2, 1,507.9, 1,576.1 - Quasi-money: 4,205.8, 4,757.0, 5,073.6, 5,415.3, 5,880.8, 6,291.7 - ECCB (selected) - Net foreign assets: 975.9, 1,018.8, 1,192.2, 1,355.1, 1,449.1, 1,503.1 - Net domestic assets: -586.9, -631.9, -818.7, -961.9, -1,022.0, -1,060.2 - Liabilities to private sector: 388.9, 386.9, 373.4, 393.2, 427.1, 443.0 - Currency issued: 572.7, 536.0, 537.5, 558.7, 605.7, 647.9 - Commercial banks (selected) - Net foreign assets: 128.8, 6.0, 250.4, 459.0, 975.2, 1,128.4 - Net claims on ECCB: 628.7, 632.2, 833.2, 902.5, 955.8, 992.0 - Net domestic credit: 4,250.3, 4,943.5, 4,862.7, 4,979.8, 5,030.6, 5,304.5 - Liabilities to the private sector: 5,007.9, 5,581.7, 5,946.2, 6,341.3, 6,961.6, 7,424.9 - Growth ratios and indicators - Liabilities to private sector (M2) growth: 10.6, 10.6, 5.9, 6.6, 9.7, 6.5 - Private sector credit growth: 10.3, 10.4, 2.3, 1.9, 1.1, 4.8 - Private sector credit/GDP (percent): 71.6, 76.4, 77.9, 77.5, 75.2, 75.2 - Broad money/GDP (percent): 73.0, 78.1, 82.4, 85.6, 90.2, 91.7 - Foreign currency deposits/M2 (percent): 7.5, 10.0, 10.4, 11.7, 11.9, 12.2 ### Selected vulnerability and market indicators (highlights) - Key economic and market indicators (selected) - Real GDP growth (in percent): 2.8, -1.3, 0.2, 2.4 - CPI inflation (12-month cumulative, in percent): 3.1, 2.0, 0.8, 1.5 - Interbank interest rate: ... , 6.8, 6.2, 5.3 - Exchange rate NC/US$ (end of period): 2.7, 2.7, 2.7, 2.7 - Current account balance (percent of GDP): -15.5, -16.7, -19.6, -19.5 - Net FDI inflows (percent of GDP): 10.8, 9.9, 10.9, 12.9 - Export growth (f.o.b.): 9.7, -15.6, 2.4, -5.6 - Terms of trade (12-month percentage change): -2.8, 1.9, 0.5, -1.8 - Real effective exchange rate (1990 = 100): 112.0, 114.5, 112.6, 103.4 - Gross international reserves (GIR) in US$ billion: 0.38, 0.44, 0.46, 0.50, 0.54, 0.40 - Net international reserves (NIR) in US$ billion: 0.37, 0.44, 0.50, 0.50, 0.53, 0.37 - Total gross external public debt in percent of GDP: 48.6, 53.1, 65.4, 69.1 - Total gross external public debt in percent of exports of GNFS: 79.4, 94.8, 122.0, 124.5 - Gross external financing requirement (in US$ billion): 0.651, 0.665, 0.779, 0.820 - Financial sector indicators (end-September for 2003 unless noted) - Capital adequacy ratio (Indigenous banks): 16.6, 17.7, 18.9, 19.1 - NPLs/total loans: 11.7, 13.5, 13.7, 12.0 - Indigenous banks: 16.7, 17.4, 17.4, 16.8 - Foreign banks: 6.3, 9.1, 9.3, 6.5 - Loan loss provision/NPLs: 28.0, 28.1, 29.7, 34.0 - Indigenous banks: 25.6, 27.1, 27.9, 27.7 - Foreign banks: 35.0, 30.3, 33.6, 52.5 - Loans to household sector/total loans: 45.9, 46.6, 46.4, 47.4 - Gross government claims/total assets: 15.2, 15.0, 15.1, 15.2 - Government deposits/total deposits: 18.6, 18.1, 17.8, 18.2 - FX deposits/total deposits: 15.7, 15.0, 15.7, 15.3 - FX deposits/gross international reserves: 129.1, 113.3, 112.9, 107.2 - ECCB reserve cover: 4/ 88.3, 92.9, 97.1, 95.3 - ECCB gross reserves/M2: 17.4, 19.1, 20.2, 19.7 ### CARTAC: Capacity building in the ECCU — activities and outcomes - CARTAC established November 2001 (regional resource based in Barbados) to provide technical assistance and training to 20 Caribbean countries; multi-donor project with IMF as executing agency. - ECCU countries highly active participants; CARTAC fielded more than 200 missions to ECCU countries in a little more than two years. - Tax policy and administration support: - Comprehensive review of OECS tax systems and administrations conducted by CARTAC and FAD; some countries implementing recommendations. - Grenada and Dominica have begun work to introduce a VAT. - Training in customs valuation provided to three OECS countries in coordination with CCLEC and Canadian and US Customs agencies. - Assistance in estimation of VAT and excise tax revenue yields for Anguilla, Antigua and Barbuda, Grenada, St. Kitts and Nevis, and St. Lucia. - Support to establish an Inland Revenue Department in Anguilla; training in audit techniques to Antigua and Barbuda; arrears collection streamlining in Dominica; UNIX and ASYCUDA customs training in Dominica, Grenada, St. Kitts and Nevis, and St. Vincent and the Grenadines; assistance preparing for revenue authority in St. Lucia. - Public finance management: - CARTAC and ECCB assisted all ECCU countries in diagnostic exercises under the Fiscal Machinery Project to draw up action plans addressing public expenditure management weaknesses. - Focus on improving cash management and budgeting procedures with seminars and short-term missions. - CARTAC supported establishment of the Caribbean Public Finance Management Association (CaPFA). - Stabilization and Adjustment Technical Assistance Program (SATAP): - Established in response to ECCU request for “home grown” adjustment programs with common targets by 2007. - CARTAC consultants worked with country teams in six independent ECCU countries to prepare macroeconomic projections (baseline and active scenarios), identify imbalances and corrective measures, and develop monitoring frameworks with quarterly targets. - Active scenarios completed for all countries except Antigua and Barbuda. - CARTAC supports setting up a Coordinating and Monitoring Unit within the ECCB (with DFID assistance) to track and monitor adjustment programs. - Financial sector supervision: - Assistance on establishing single supervisory units (covering banking and non-banking sectors): feasibility studies in four countries and draft legislation in two countries. - Development of international banking acts, capital adequacy regulation, guidelines on risk management, money transmitters legislation, and prudential guidelines with CARTAC assistance at country and ECCB level. - Helped develop standardized on-site inspection procedures and off-site monitoring; provided seminars, workshops, conferences, and regional/international attachments for supervisory staff. - Corporate governance seminars held for industry representatives in four ECCU countries. - Economic and financial statistics: - Projects to improve national accounts (supply and use tables, rebasing), balance of payments (address gaps in financial flows and services coverage, align to international standards), price statistics (incorporate 1999 household budget survey results), and development of import/export price indices (pilot in St. Lucia with planned expansion). *Sources: Eastern Caribbean Central Bank; and Fund staff estimates and projections.* ### APPENDIX II ### APPENDIX II — Caribbean Development Bank: Overview of Activities in the OECS ### CDB mandate and regional focus - Core mandate: mobilisation of resources to finance projects and programmes for development of 17 borrowing member countries. - 1970–2003 approvals to borrowing member countries: US$2.4 billion. - OECS share (1970–2003): approximately 37 percent, or US$869.5 million. - Main orientation of interventions: - Physical and social infrastructure: on average 56.2 percent of overall lending to the sub-region; focus on upgrading transportation and communication, educational services, power and energy, and housing. - Productive sectors: 25.9 percent of total activity; focus largely on manufacturing and agriculture. - Multi-sectoral interventions (institutional strengthening, feasibility studies, assessment and implementation of transactions-based taxes): 17.9 percent of total interventions to the sub-group. ### Country-level approvals and focus (1970–2003) - St. Lucia - Approvals: US$225.6 million (27.5 percent of OECS approvals). - Disbursements to date: US$158.0 million. - Ongoing projects: water supply improvement, road rehabilitation, natural disaster mitigation, solid waste management (part of wider OECS programme). - Productive sector involvement: tourism and banana production recovery. - Dominica - Approvals: US$149.2 million (17.1 percent of OECS approvals). - Disbursements to date: US$112.1 million. - Ongoing projects: education sector enhancement, natural disaster management, waste management, eco-tourism site upgrading. - Additional support: stabilisation/structural adjustment loans for economic reconstruction. - St. Kitts and Nevis - Approvals: US$140.5 million (16.2 percent of OECS approvals). - Disbursements to date: US$94.7 million. - Ongoing projects: disaster rehabilitation and natural disaster management, education service improvements, waste management enhancement. - Grenada - Approvals: US$133.5 million (15.4 percent of OECS approvals). - Disbursements to date: US$93.2 million. - Ongoing projects: bridge and road improvement, school rehabilitation, waste management improvement, natural disaster management. - St. Vincent and the Grenadines - Approvals: US$127.6 million (approximately 14.7 percent of OECS approvals). - Disbursements to date: US$92.3 million. - Ongoing projects: road rehabilitation, basic education, solid waste management, natural disaster management. - Antigua and Barbuda - Approvals: US$40.0 million (4.6 percent of OECS approvals). - Disbursements to date: US$24.1 million. - Recent focus: education sector enhancement; security improvements to air and sea ports. - Anguilla - Approvals: US$23.1 million (2.6 percent of OECS approvals). - Disbursements to date: US$20.2 million. - Ongoing projects: predominantly natural disaster management. - Montserrat - Approvals: US$16.3 million (1.9 percent of OECS approvals). - Disbursements to date: US$10.6 million. - Ongoing projects: education sector enhancement. ### CDB operations in the OECS — summary table (In millions of U.S. dollars) - Anguilla: Approvals 1970-2003: 23.1; Disbursements 1970-2003: 20.2; Approvals 2003: 0.0; Disbursements 2003: 2.5 - Antigua and Barbuda: Approvals 1970-2003: 40.0; Disbursements 1970-2003: 24.1; Approvals 2003: 1.5; Disbursements 2003: 4.2 - Dominica: Approvals 1970-2003: 149.2; Disbursements 1970-2003: 112.1; Approvals 2003: 8.4; Disbursements 2003: 9.3 - Grenada: Approvals 1970-2003: 133.5; Disbursements 1970-2003: 93.2; Approvals 2003: 7.0; Disbursements 2003: 7.9 - Montserrat: Approvals 1970-2003: 16.3; Disbursements 1970-2003: 10.6; Approvals 2003: 0.0; Disbursements 2003: nil - St. Kitts and Nevis: Approvals 1970-2003: 140.5; Disbursements 1970-2003: 94.7; Approvals 2003: 13.3; Disbursements 2003: 6.0 - St. Lucia: Approvals 1970-2003: 239.4; Disbursements 1970-2003: 158.0; Approvals 2003: 8.6; Disbursements 2003: 20.1 - St. Vincent and the Grenadines: Approvals 1970-2003: 127.6; Disbursements 1970-2003: 92.3; Approvals 2003: 5.3; Disbursements 2003: 2.4 - OECS Sub-region total: Approvals 1970-2003: 869.5; Disbursements 1970-2003: 119.0; Approvals 2003: 44.1; Disbursements 2003: 52.4 --- ### APPENDIX III — OECS: Relations with the World Bank Group (As of March 16, 2004) ### World Bank Group strategy and objectives - Program focus: structural reforms to raise international competitiveness and help manage volatility at macroeconomic and household levels. - Public sector reform leadership with emphasis on: efficiency of public spending, social expenditures (including safety nets), disaster mitigation, and environmental management. - Joint Bank-Fund work: issues concerning the financial sector, both domestic and offshore. ### Eastern Caribbean Sub-Region Country Assistance Strategy (CAS) - CAS presented June 28, 2001; covers FY 2002–06. - Proposed new commitments: around US$110 million for five borrowing OECS members (Dominica, Grenada, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines). - Amount already committed (as of document): US$59 million. - Main CAS goals: build human and institutional capacity; most new projects under sub-regional umbrella mechanism and close collaboration with sub-regional organizations and external partners. - A new CAS to be prepared during FY05. ### Strategic priorities and instruments - Increasing international competitiveness: - Policy foci: broaden tax base, streamline and increase transparency of investment incentive regime, improve public sector performance and public investment efficiency, reduce transaction costs by strengthening regulation and efficiency of public utilities and sea/air transport, promote education and skills development. - Support instruments: analytical work on Growth and Competitiveness in the OECS, Public Expenditure Reviews, OECS Telecom Reform project, pilot St. Lucia Water Sector Reform Project, technical assistance in power and energy sectors, new Education Development program, proposed Caribbean Knowledge and Learning Network. - Planned Bank support: Public Sector Reform program in FY05. - Managing volatility: - Natural disasters identified as major cause of income insecurity and high poverty rates. - Disaster Management: shift from reactive to proactive responses; Bank support via OECS Disaster Management Programs I and II. - Safety Nets: unemployment estimated between 5-20 percent; poverty levels ranging 12-38 percent. - Issues: plethora of uncoordinated programs, weak targeting, inadequate coverage. - Ongoing/support actions: public expenditure reviews examining safety nets; financial support for a Poverty Reduction Fund in St. Lucia (piloted community procurement); Social Protection Review for Dominica; IDF grant to strengthen poverty measurement in the OECS. - Caribbean Regional HIV/AIDS program approved June 2001: includes Barbados; projects for Grenada and St. Kitts and Nevis (ongoing), St. Lucia and St. Vincent and the Grenadines in FY04, Dominica in FY05. - A review of Health Financing programmed for FY05. ### Bank-Fund collaboration - Fiscal management: Bank assistance to improve public spending management, including Public Expenditure Reviews, a Financial Accountability Assessment, Procurement Assessment Report, and country-specific work (Dominica Public Sector Investment Program). Regional products to feed into Public Sector Reform program scheduled for FY05. - Dominica: recent disbursement of US$3.1 million IDA adjustment credit supporting economic recovery (focus on public expenditure and financial management, financial sector reforms, and improving private investment climate). - Financial sector reforms: Bank plans to support implementation of FSAP recommendations with a Financial Sector operation in FY 2005. --- ### APPENDIX IV — Main Political Parties in ECCU Countries - Antigua and Barbuda - ALP Antigua Labour Party - UPP United Progressive Party - Dominica - DFP Dominica Freedom Party - DLP Dominica Labour Party - PLM People Labour Movement - UWL United Workers Party - Grenada - GULP Grenada United Labour Party - NDC National Democratic Congress - NNP New National Party - St. Kitts and Nevis - PAM People’s Action Movement - SKLP St. Kitts-Nevis Labour Party - St. Lucia - NA National Alliance - SLP St. Lucia Labour Party - UWP United Workers Party - St. Vincent and the Grenadines - NDP New Democratic Party - PPM People’s Progressive Movement - ULP Unity Labour Party - SYLP St. Vincent Labour Party --- ### Public Information Notice (PIN) No. 04/101 — IMF Concludes Discussion on the Eastern Caribbean Currency Union (September 7, 2004) ### Background and macroeconomic assessment - Regional surveillance discussion concluded May 5, 2004. - Growth trends: - Growth of real GDP slowed from an average annual rate of nearly 5 percent during 1980–95 to about 2¼ percent since then. - Economic activity picked up in 2003 due to a favourable external environment as tourism and the global economy strengthened, and benefits from the recent depreciation of the U.S. dollar. - Inflation: consumer prices rising on average by less than 2 percent per year. - Fiscal developments: - Fiscal position deteriorated sharply in recent years due to adverse exogenous shocks and policy slippages. - Increase in public sector debt. - Overall balance of the central government for the ECCU as a whole widened from a deficit of 3 percent of GDP in 1998 to 10½ percent of GDP (period end not specified in the excerpt). *Source: _cr04299 - APPENDIX II (excerpts provided).* ### 2002. The overall deficit narrowed sharply in 2003 to about 6 percent of GDP, primarily as a ### _cr04299 - 2002. The overall deficit narrowed sharply in 2003 to about 6 percent of GDP, primarily as a ### Fiscal developments and public debt - Overall deficit narrowed sharply in 2003 to about 6 percent of GDP, primarily as a result of a reduction in capital spending due to one-off factors such as the completion of some large projects. - The current balance improved by 1½ percent of GDP in 2003, but remained in deficit. - Consequently, public sector debt grew rapidly to 103 percent of GDP in 2003. - The debt stocks of the countries in the region ranged between 66–163 percent of GDP in 2003. - Table (selected fiscal ratios, in percent of GDP): - Central government overall balance: -6.4 (2000), -7.8 (2001), -10.5 (2002), -5.9 (Prel. 2003), -5.4 (Proj. 2004) - Revenues and grants: 27.0 (2000), 26.4 (2001), 27.9 (2002), 28.6 (Prel. 2003), 28.4 (Proj. 2004) - Expenditure and net lending: 33.4 (2000), 34.2 (2001), 38.4 (2002), 34.5 (Prel. 2003), 33.8 (Proj. 2004) - Total public sector debt: 77.7 (2000), 84.0 (2001), 101.2 (2002), 102.8 (Prel. 2003), 103.1 (Proj. 2004) ### External sector and reserves - The external current account deficit remained at 19½ percent of GDP in 2002 and 2003. - Tourism receipts strengthened in 2002 and 2003 but were offset by a rise in imports, in part due to a sharp increase in imports for construction, hotels and communication. - Foreign direct investment grew sharply in 2003. - A positive overall external balance was recorded as overall capital inflows remained robust. - Gross international reserves of the Eastern Caribbean Central Bank (ECCB) rose to US$540 million at end-2003 and have remained at comfortable levels in recent years. - Table (selected external-sector ratios, in percent of GDP or annual percentage changes): - Current account balance: -15.5 (2000), -16.7 (2001), -19.6 (2002), -19.5 (Prel. 2003), -19.1 (Proj. 2004) - Trade balance: -37.6 (2000), -35.4 (2001), -34.5 (2002), -37.3 (Prel. 2003), -36.6 (Proj. 2004) - Travel: 28.2 (2000), 26.2 (2001), 24.7 (2002), 27.3 (Prel. 2003), 27.8 (Proj. 2004) - Exports, f.o.b. (annual % change): 9.7 (2000), -15.6 (2001), 2.4 (2002), -5.6 (Prel. 2003), 11.0 (Proj. 2004) - Imports, c.i.f. (annual % change): 3.1 (2000), -8.1 (2001), 0.4 (2002), 8.2 (Prel. 2003), 4.5 (Proj. 2004) - Stayover visitors (annual % change): 0.2 (2000), -5.1 (2001), 2.1 (2002), 7.5 (Prel. 2003), 5.3 (Proj. 2004) ### Monetary aggregates, banking sector, and supervision - Broad money growth: 10.6 percent (2000), 5.9 percent (2001), 6.6 percent (2002), 9.7 percent (Prel. 2003), 6.5 percent (Proj. 2004). - Net foreign assets (in relation to broad money at the beginning of the period): -1.5 (2000), 7.0 (2001), 5.9 (2002), 9.1 (Prel. 2003), 2.8 (Proj. 2004). - Net domestic assets (in relation to broad money at the beginning of the period): 12.1 (2000), -1.1 (2001), 0.7 (2002), 0.7 (Prel. 2003), 3.7 (Proj. 2004). - Broad money grew by 6½ percent in 2002 and by 9½ percent in 2003, as deposits with the banking sector rose despite a reduction in the minimum savings deposit rate from 4 percent to 3 percent in September 2002. - Net lending to the public sector contracted sharply as governments increased recourse to external borrowing and government social security funds built up deposits with the banking system. - Private sector credit growth declined to 2 percent in 2002 and to 1 percent in 2003. - Despite high interest rate spreads, the rate of return on bank assets is low. - Efforts focused on strengthening supervisory and regulatory regimes in both the domestic banking sector and the offshore financial sector. - As a result, none of the countries are now included on the Financial Action Task Force’s (FATF) listing of noncooperative areas for inadequate anti-money laundering policies in the offshore financial sector. ### Executive Board assessment — key findings - Since the mid-1990s the region faced lackluster economic growth associated with adverse shocks: natural disasters, dismantling of preferential trade agreements in bananas and sugar, decline in offshore financial centers activity, weaknesses in the global economy, and effects of September 11. - ECCU countries pursued expansionary fiscal policies in response, generating growth and employment but leading to rapid increases in debt levels and weak fiscal positions in many countries. - Directors welcomed the pick up in economic activity in 2003 and urged upfront comprehensive measures to strengthen fiscal positions and bring down debt rapidly while undertaking reforms to reinvigorate growth. ### Executive Board recommendations and priorities - Fiscal consolidation: - Adopt prompt and significant fiscal consolidation together with improved debt management to reduce risks to the currency union. - Expenditure restraint and effective spending control—particularly over wages and capital projects. - Broaden the tax base by reducing a wide range of tax concessions through a concerted, regional approach and improve tax administration. - Consider introducing a value-added tax. - Enhance transparency and the quality and timeliness of fiscal data. - In the most highly-indebted countries, additional measures may be required—including asset sales and growth-enhancing structural reforms. - Fiscal policy consistency with the currency board arrangement: - Ensure national fiscal policies align with the ECCB’s fiscal benchmarks; governments should make credible commitments to align fiscal policies and targets with the requirements of the currency board arrangement. - Support for home-grown stabilization programs under the Structural Adjustment and Technical Assistance Project (SATAP) with CARTAC technical assistance. - Financial sector and supervision: - Preserve the currency board arrangements by maintaining sustainable fiscal and debt positions and a sound, effectively regulated financial sector. - Implement Financial Sector Assessment Program recommendations and strengthen the role of the ECCB, particularly with respect to domestic banks. - Continue full implementation of AML/CFT measures by all ECCU member countries. - Vulnerability reduction and institutional capacity: - Decrease reliance on traditional agriculture. - Strengthen underlying fiscal positions and enhance the effectiveness of financial sector supervision. - Strengthen institutional capacity to mitigate natural disasters and develop contingency plans for sudden deterioration in the global or regional environment. - Data and statistics: - Strengthen coverage, timeliness, and quality of statistical data and data-management practices, particularly in fiscal and debt areas, national accounts, external sector, and labor markets. ### Regional statement by Charles X. O’Loghlin and Richard Campbell (May 5, 2004) — summary highlights - Recovery in growth to 2½ percent in 2003 underpinned by a revival in tourism; travel receipts rose by 15 percent in 2003. - International reserves rose again—keeping pace with rising imports. FDI inflows and capital transfers almost fully financed the region’s current account deficit. - Authorities expressed confidence that economic growth in 2004 may be closer to the upper end of the staff’s range, and that fiscal consolidation could trigger a virtuous cycle of improving fiscal balances and easing debt. - Noted fiscal reorientation in 2003: - Central government current balances improved by 1.6 percent of GDP. - Non-interest current spending/GDP ratio declined by 1 percent of GDP. - A considerable reduction in net capital spending. - Overall fiscal balances improved by 4.6 percent of GDP across the ECCU area (discounting a once-off impact noted in a footnote). - Debt dynamics: - Over 1998-2002 the average ECCU-member’s debt/GDP ratio rose annually by more than 8 percentage points of GDP; in 2003 the increase in the stock of ECCU-wide government and government-guaranteed debt was held to 1½ percentage points. - Authorities recognized the need for further fiscal consolidation in several member-states to place debt-ratios on a downward path. - SATAP and tax reform: - SATAP initiative (ECCB/CARTAC-assisted) continues; Policy Units in Ministries of Finance are developing “home grown” adjustment programs focusing on fiscal consolidation. - Preparatory work on VAT introduction has commenced in three member-countries. - Financial sector observations: - Authorities agreed that the ECCU financial system is relatively well developed and that there has been sustained monetary and financial stability since at least 1976. - Some divergence with FSSA language on perceived threats to financial stability; authorities argue that specific characterizations (e.g., “uncertain quality of capital” or “unacceptably high levels of nonperforming loans”) do not reflect the mitigating context of provisioning, the relative size of affected banks, or available ECCB powers under the Agreement establishing the ECCB (including “Special Emergency Powers of the Bank”). - Authorities endorsed staff-suggested opportunities and strategies, including: - Private sector initiatives to complement public measures to create an enabling investment environment. - Concerted regional action to reduce fiscally-based vulnerabilities, including the possibility of more binding fiscal rules. - Deeper structural reforms, greater regional cooperation within the OECS and CARICOM, enhanced competitiveness and diversification, social safety nets to facilitate restructuring, and strengthened institutional capacity to deal with natural disasters. - Authorities committed to giving these strategies fullest consideration and noted anticipation of a forthcoming World Bank study on growth and competitiveness in the Caribbean. *Source: _cr04299 - 2002. The overall deficit narrowed sharply in 2003 to about 6 percent of GDP, primarily as a* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04299.pdf_