## _cr1130 ## Source details **Canonical URL:** [_cr1130](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1130.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1130.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1130.pdf.json) --- ### Executive summary — context and key findings - Context - The ECCU comprises eight small, open, tourism-dependent island economies sharing a common currency pegged to the U.S. dollar under a regional currency board arrangement. - Real regional GDP: 1.9 percent in 2008; −6.2 percent in 2009; average 3.2 percent during 2000–07. - Stayover tourist arrivals: −12 percent in 2009; +2.6 percent yoy in 2010 Q1. - Construction and FDI-financed construction collapsed and remain on hold in many cases. - Major vulnerabilities identified - Surging fiscal deficits, lack of institutional arrangements for fiscal consolidation, unsustainable debt levels, and stress in the financial sector threatening the currency union and currency board. - Regional public debt: 97.9 percent of GDP (2006); 91.1 (2007); 89.2 (2008); 103.1 (2009); 108.0 (2010 proj.). - Region’s overall fiscal deficit: 3.6 percent of GDP in 2008; 8.3 percent of GDP in 2009. - Net liquid assets as a percentage of deposits declined from about 26 percent in January 2008 to 20 percent at end 2009 (recovered marginally in early 2010). - ECCB’s reserve coverage of demand liabilities: declined below 100 percent in early 2009; averaged about 95 percent in the first half of 2010; adjusted reserve coverage including SDR holdings about 104 percent of demand liabilities as of end-June 2010. - Nonperforming loans: 9.6 percent of total loans as of June 2010; provisioning covered less than 30 percent of total NPLs. - Commercial banks’ gross exposure to the public sector increased by 82 percent over 2003–2009, reaching close to 30 percent of regional GDP. - Fund engagement and financing provided in 2009–10 (figures preserved as in source) - RAC-ESFs: Dominica (40 percent of quota), St. Lucia (45 percent of quota), St. Vincent and the Grenadines (45 percent of quota). - ENDA for St. Kitts and Nevis (25 percent of quota). - ECF augmentation (37.5 percent of quota) and a successor three-year ECF (75 percent of quota) to Grenada. - Three-year SBA (600 percent of quota) for Antigua and Barbuda. ### Key policy recommendations - Fiscal policy - Need consistent fiscal policies across all member countries to support the currency union. - Translate debt target of 60 percent of GDP by 2020 into annual primary surplus targets; implementation and compliance are the challenge. - Rationalize public expenditure to address fiscal weaknesses and improve efficiency and effectiveness of public spending. - Financial sector - Crisis preparedness and prompt actions, including preemptive resolution of weak banks and measures to safeguard financial system stability. - For failed insurance companies: progress on BAICO noted; the risk of fallout from CLICO calls for a more proactive and coordinated regional approach. - Step up regulation and supervision of the nonbank financial sector; operationalize SRUs and strengthen information exchange and collaboration between ECCB, SRUs and other regulators. - External competitiveness - REER appears broadly in line with current fundamentals, but necessary fiscal adjustments will imply equilibrium REER depreciation in the near term. - Given the peg, adjustments in relative prices are required and call for constraints in real wage growth or reductions in nominal wages, notably in the public sector. ### Context and recent developments — selected details and metrics - Growth and tourism - Real regional GDP: −6.2 percent in 2009; 1.9 percent in 2008; average 3.2 percent in 2000–07. - Stayover arrivals: −12 percent in 2009; +2.6 percent yoy in 2010 Q1. - Fiscal indicators (selected ECCU, percent of GDP) - Revenues: 27.6 (2006), 28.3 (2007), 28.4 (2008), 27.1 (2009), 28.1 (2010 proj.). - Overall balance: −5.1 (2006), −4.0 (2007), −3.6 (2008), −8.3 (2009), −6.6 (2010 proj.). - Public sector debt: 97.9 (2006), 91.1 (2007), 89.2 (2008), 103.1 (2009), 108.0 (2010 proj.). - Monetary and reserve metrics - Broad money twelve-month change: 11.6 (2006), 9.7 (2007), 9.0 (2008), 1.9 (2009), 0.8 (2010 proj.). - Private sector credit twelve-month change: 14.6 (2006), 17.3 (2007), 14.3 (2008), 2.3 (2009), 2.9 (2010 proj.). - ECCB reserve coverage: below 100 percent in early 2009; averaged about 95 percent in first half of 2010. ### Financial sector vulnerabilities and systemic risks - Credit, liquidity, and asset quality - Private sector credit growth slowed sharply in 2008–09. - Interbank market interest rate edged up since H2 2008. - Net liquid assets to deposits ratio declined by 10 percentage points for some indigenous banks from end 2007 to end 2009. - Bank run example: Stanford debacle triggered a bank run on the Bank of Antigua. - NPLs: rose to 9.6 percent of total loans (June 2010), with provisioning covering less than 30 percent of total NPLs. - Headline capital adequacy may mask weaknesses in some indigenous banks. - Public sector exposure and contagion risk - Commercial banks’ gross exposure to the public sector increased by 82 percent over 2003–2009; indigenous banks’ public sector exposure was 24 percent of total assets at end 2009. - Sovereign fiscal distress could impair bank liquidity and solvency and threaten the currency board arrangement. ### CL Financial Group collapse and insurance-sector fallout - CL Financial collapsed in January 2009; combined exposure of CLICO and BAICO to policy and deposit holders in the ECCU amounts to about 17 percent of ECCU GDP. - BAICO resolution: regional strategy adopted; BAICO strategy predicated on ability to receive US$100 million from Trinidad and Tobago; planned steps include establishing a new company to take over ECCU operations of BAICO and establishing a Medical Claims Support Fund. - CLICO: staff urged a regional approach in close coordination with Barbados; authorities prohibited writing of new policies and planned appointment of judicial managers. - Staff recommended minimizing fiscal cost through revision of existing terms, extension of tenor, and possible conversion of some liabilities into equity; banks should provision for potential write-offs. ### Institutional and regional policy issues - Strengthen institutional underpinnings of the ECCU: consistent fiscal frameworks across members and operationalizing SRUs for the nonbank sector. - Crisis preparedness and resolution: contingency planning, preemptive bank resolution, and coordinated regional approach to failed insurance companies. - Regional integration: signing of the OECS Economic Union Treaty (to be ratified by member countries by January 2011) to facilitate free movement and transfer of legislative powers in five areas to the OECS Authority. ### Policy discussions — fiscal consolidation and targets - Monetary Council’s 2006 debt-to-GDP target of 60 percent for 2020 has been largely ineffective; staff urged mechanisms for collective fiscal discipline short term and consideration of a fiscal union medium term. - Authorities agreed to adopt annual primary surplus targets consistent with attaining the medium-term debt-to-GDP target; targets to be published to increase transparency and enhance peer review. - Staff-recommended targeted primary surpluses: - Dominica: about 2 percent of GDP implemented under current policies. - Antigua and Barbuda and Grenada: about 4 percent of GDP envisaged under current economic programs. - St. Lucia and St. Vincent and the Grenadines: roughly 3 percent of GDP. - St. Kitts and Nevis: close to 10 percent of GDP; announced policy measures still leave a residual financing gap averaging close to 4 percent of GDP in 2011–15. - Expenditure-side reforms: reduce the wage bill (including attrition and wage freezes), rationalize statutory bodies, pension reform, strengthen public financial management. - Debt management: ECCB’s DMAS Unit funded by CIDA (CAD$ 7.2 million) supporting national debt strategies and expansion of the Regional Government Securities Market (RGSM). ### Financial-sector resolution, recapitalization, and contingency planning - Preemptive resolution measures welcomed: removal of impaired assets from banks’ balance sheets; consolidation and amalgamation of indigenous banks. - Institutional steps: Ministerial Sub-committee on Banking; ECCB Recapitalization Committee (RECAP) established in 2009; intention to establish a Resolution Trust registered in St. Kitts with licenses to operate in all ECCU territories. - Staff recommendations: - Perform bank-specific diagnostics without delay. - Consider equity participation from strong regional/foreign banks. - Design resolution strategies that include burden sharing by all parties. - ECCB operational rules and lending limits: - Statutory foreign reserve requirement: 60 percent of ECCB’s demand liabilities. - Operational target: global lending limits based on 20 percent of average demand liabilities during the previous year, of which 60 percent for member governments and 40 percent to financial institutions. ### Non-bank financial sector: supervision and regionalization - Urgent need to complete establishment of SRUs in all ECCU members and enact/harmonize insurance legislation and the Cooperative Societies Act. - SRUs: legal frameworks exist in Anguilla, Dominica, Grenada, Montserrat and St. Kitts and Nevis; SRUs operational so far in Grenada and Dominica. - Number of non-bank institutions: 58 credit unions and more than 150 insurance companies. - Short-run recommendation: transfer supervision of systemically important credit unions to the ECCB. - Medium-term considerations: merger of smaller institutions, centers of excellence pooling regulatory expertise, and possible regional non-bank regulator/supervisor. ### External stability, exchange rate, and competitiveness - REER assessment - Equilibrium REER approaches indicate an undervaluation of about 2 percent (equilibrium real exchange rate approach). - Macro balance approach estimates current account norm ranges between −17 and −20 percent of GDP; staff project medium-term current account deficit around 19 percent of GDP. - Large fiscal adjustments would reduce the equilibrium current account deficit, implying a depreciation of equilibrium REER; under the peg, this requires relative price adjustments and moderation of real wage growth or lower nominal wages. - Tourism and growth - Tourism remains viable; some countries shifted toward higher tourism expenditure per visitor. - Empirical evidence suggests countries with high public debt-to-GDP ratios grow slower than peers; reducing high fiscal deficits and public debt levels is critical to foster growth. ### Outlook, risks, and scenarios (from Appendix Table 1 and staff analysis) - Macroeconomic outlook - Economic activity expected subdued through 2010 and likely to recover slowly in 2011; 2011 likely to remain challenging with downside risks. - Inflation: average 0.8 percent in 2009; expected to revert to about 2 percent in the long run. - Baseline public sector debt dynamics (percent of GDP, 2005–2015) - Public sector debt 2/: 100.5, 97.9, 91.1, 89.2, 103.1, 108.0, 109.1, 108.0, 105.9, 103.8, 102.1 - o/w foreign-currency denominated: 53.9, 50.8, 46.0, 44.0, 49.8, 54.4, 54.5, 52.9, 50.3, 48.0, 46.1 - Identified debt-creating flows and components (percent of GDP) - Primary deficit: 0.5, 1.2, 0.4, 0.2, 3.6, 2.1, −0.3, −0.6, −1.0, −1.1, −0.9 - Automatic debt dynamics: −5.1, −4.8, −4.4, −2.3, 9.0, 2.7, 0.7, −0.7, −1.2, −1.5, −0.8 - Scenario outcomes (selected projection outcomes, debt percent of GDP) - Historical averages scenario: 108.0, 110.3, 111.9, 113.5, 115.4, 117.0; debt-stabilizing primary balance: −0.3 - No policy change (constant primary balance) 2010–2015: 108.0, 111.5, 113.0, 113.9, 114.8, 116.0; debt-stabilizing primary balance: −0.9 - Natural disaster scenario: 108.0, 112.4, 116.7, 121.8, 121.8, 122.2; debt-stabilizing primary balance: 0.9 - Key macro assumptions (real GDP growth, percent, 2005–2015) - 5.4, 6.6, 5.6, 1.9, −6.2, −0.4, 1.5, 2.8, 3.4, 3.7, 3.7 - Gross financing need (percent of GDP, 2005–2015) - 9.9, 13.6, 10.6, 7.8, 13.8, 11.6, 9.5, 9.5, 9.6, 10.3, 10.3 ### Fund engagement, technical assistance, and capacity building - IMF support in 2009/10 - Fund provided financing to all six ECCU Fund members beyond SDR allocations. - Recent use of IMF lending facilities (2006–2010) preserved exactly as in source (selected entries): Antigua and Barbuda: SBA Jun-10 — 8.11 (in millions of SDRs); 17.86 (in millions of US$); Dominica: ENDA Feb-08 — 2.13 (in millions of SDRs); 3.32 (in millions of US$); ESF-RAC Jul-09 — 3.35 (in millions of SDRs); 5.14 (in millions of US$); Grenada: ECF Apr-06 — 16.42 (in millions of SDRs); 4.41 (in millions of US$); etc.; Total: 124.3 (in millions of SDRs); 183.7 (in millions of US$). - Technical assistance (CARTAC and Fund) - Major TA areas: tax and customs reform; macro-fiscal support; public expenditure and debt management; financial sector supervision; economic and financial statistics; balance of payments. - CARTAC supported rebasing GDP and revising CPI; both expected to be released in October 2010. - CARTAC funding: CIDA provides over 50 percent; DMAS Unit funded by CIDA (CAD$ 7.2 million). - Capacity constraints - Region faces administrative capacity constraints hampering implementation of reforms and Fund-supported programs. - Fund stands ready to step up bilateral and regional surveillance, foster policy coordination among ECCU members, and provide additional financing for strong adjustment programs. ### Bank–Fund and multilateral cooperation - World Bank Group engagement summarized (OECS RPS July 2009–June 2014) with planned support including new commitments totaling up to about $120 million on IBRD terms and up to $73 million of IDA financing for four IDA-blend OECS members. - Cooperation focuses on building resilience, protecting human capital, strengthening climate resilience, strengthening domestic financial sectors, and improving the business environment. ### Implementation and next steps - Immediate priorities - Translate debt target into enforceable annual primary surplus targets and ensure publication for transparency and peer review. - Undertake bank-specific diagnostics without delay; design resolution strategies that minimize fiscal costs and include burden sharing. - Complete establishment and operationalization of SRUs and harmonize nonbank financial sector legislation. - Strengthen public financial management, civil service reform, pension reform, and rationalization of statutory bodies. - Continue and scale up technical assistance from CARTAC, IMF, and development partners. - Proposed follow-up - Next discussion on ECCU common policies proposed to take place in 12 months. *Italic source attribution: IMF staff report excerpt and appendices from the provided PDF content unit.* ### 2010. The views expressed in the staff report are those of the staff team and do not ### INTERNATIONAL MONETARY FUND — EASTERN CARIBBEAN CURRENCY UNION (ECCU): Staff Report for the 2010 Discussion on Common Policies of Member Countries ### Executive summary — context and key findings - Context - The ECCU comprises eight small, open, tourism-dependent island economies sharing a common currency pegged to the U.S. dollar under a regional currency board arrangement. - Real regional GDP contracted by about 6.2 percent in 2009, after growing 1.9 percent in 2008 and an average of 3.2 percent during 2000–07. - Stayover tourist arrivals fell by about 12 percent in 2009; stayover arrivals grew by 2.6 percent yoy in 2010 Q1. - The contraction reflected the collapse of tourism and FDI-financed construction, and construction activity remains on hold in many cases. - Major vulnerabilities identified - Surging fiscal deficits, lack of institutional arrangements for fiscal consolidation, unsustainable debt levels, and stress in the financial sector threatening the currency union and currency board. - Regional public debt rose to above 100 percent of GDP at end 2009, from an average of 93 percent of GDP in 2006–08. - The region’s overall fiscal deficit rose to 8.3 percent of GDP in 2009 from 3.6 percent of GDP in 2008. - Liquidity tightened: net liquid assets as a percentage of deposits declined from about 26 percent in January 2008 to 20 percent at end 2009 (recovered marginally in early 2010). - The ECCB’s reserve coverage of demand liabilities declined below 100 percent in early 2009 and averaged about 95 percent in the first half of 2010. - Nonperforming loans increased to 9.6 percent of total loans as of June 2010; provisioning covered less than 30 percent of total NPLs. - Commercial banks’ gross exposure to the public sector increased by 82 percent over 2003–2009, reaching close to 30 percent of regional GDP. - Fund engagement and financing provided in 2009–10 - RAC-ESFs: Dominica (40 percent of quota), St. Lucia (45 percent of quota), St. Vincent and the Grenadines (45 percent of quota). - ENDA for St. Kitts and Nevis (25 percent of quota). - ECF augmentation (37.5 percent of quota) and a successor three-year ECF (75 percent of quota) to Grenada. - Three-year SBA (600 percent of quota) for Antigua and Barbuda. ### Key policy recommendations (as stated) - Fiscal policy - The currency union needs consistent fiscal policies across all member countries. - Reducing high fiscal deficits and public debt levels is critical for fostering growth. - Authorities’ decision to translate the current debt target of 60 percent of GDP by 2020 into annual primary surplus targets is an important step; implementation and compliance are the challenge. - Rationalizing public expenditure should be an important element of addressing fiscal weaknesses and improving efficiency and effectiveness of public spending. - Financial sector - Safeguarding financial system stability requires crisis preparedness and prompt actions, including preemptive resolution of weak banks. - For failed insurance companies: progress on BAICO noted, but the risk of fallout from CLICO calls for a more proactive and continued coordinated regional approach. - Regulation and supervision of the nonbank financial sector needs stepping up, including near-term actions to operationalize the SRUs and strengthen information exchange and collaboration between the ECCB, SRUs and other regulators. - External competitiveness - The REER appears broadly in line with current fundamentals, but necessary fiscal adjustments will imply equilibrium REER depreciation in the near term. - Given the peg, this implies adjustments in relative prices and calls for constraints in real wage growth or even a reduction in nominal wages. ### Context and recent developments (selected details) - Growth and tourism - Real regional GDP: −6.2 percent in 2009; 1.9 percent in 2008; average 3.2 percent in 2000–07. - Stayover arrivals: −12 percent in 2009; +2.6 percent yoy in 2010 Q1. - Fiscal developments - ECCU selected fiscal indicators (2006–10, percent of GDP): Revenues 27.6 (2006), 28.3 (2007), 28.4 (2008), 27.1 (2009), 28.1 (2010 proj.); Overall balance −5.1 (2006), −4.0 (2007), −3.6 (2008), −8.3 (2009), −6.6 (2010 proj.); Public sector debt 97.9 (2006), 91.1 (2007), 89.2 (2008), 103.1 (2009), 108.0 (2010 proj.). - Monetary and reserve metrics - Broad money twelve-month change: 11.6 (2006), 9.7 (2007), 9.0 (2008), 1.9 (2009), 0.8 (2010 proj.). - Private sector credit twelve-month change: 14.6 (2006), 17.3 (2007), 14.3 (2008), 2.3 (2009), 2.9 (2010 proj.). - Currency backing ratio defined as ratio of ECCB's gross foreign reserves to demand liabilities; adjusted reserve coverage including SDR holdings would amount to about 104 percent of demand liabilities as of end-June 2010. - ECCB reserve coverage: below 100 percent in early 2009; averaged about 95 percent in first half of 2010. ### Financial sector vulnerabilities and systemic risks - Credit and liquidity - Private sector credit growth slowed sharply in 2008–09 due to tighter lending standards and subdued demand. - Interbank market interest rate edged up since H2 2008. - Net liquid assets to deposits ratio declined by 10 percentage points for some indigenous banks from end 2007 to end 2009. - The Stanford debacle triggered a bank run on the Bank of Antigua, contributing to flight to quality. - Asset quality and capitalization - NPLs rose to 9.6 percent of total loans (June 2010), with heterogeneity across countries (some up to +8 percentage points since end-2008). - Provisioning for loan losses covered less than 30 percent of total NPLs. - Headline capital adequacy may mask weaknesses in some indigenous banks. - Public sector exposure - Commercial banks’ gross exposure to the public sector increased by 82 percent over 2003–2009; public sector exposure of indigenous banks was 24 percent of total assets at end 2009. - ECCU commercial banks’ public sector exposure (December 2009, in percent of assets and loans) shows substantial cross-country variation (selected figures provided in Financial Soundness Indicators). ### Institutional and regional policy issues discussed - Strengthening institutional underpinnings of the ECCU: - Need for consistent fiscal frameworks across members to support the currency union. - Importance of operationalizing Single Regulatory Units (SRUs) and enhancing regional coordination among ECCB, SRUs, and other regulators. - Crisis preparedness and resolution: - Emphasis on contingency planning, preemptive bank resolution, and coordinated regional approach to failed insurance companies. - Engagement and coordination with the IMF: - 2010 Common Policies discussions held June–August 2010; mission participants and stakeholders listed. - The Fund approved multiple financing packages in 2009–10 to ECCU members to mitigate crisis impact. ### Tables, boxes and figures referenced (content highlights) - Contents include detailed chapters: I. Context and Recent Developments; II. Outlook and Risks; III. Policy Discussions (A–E); IV. Staff Appraisal. - Boxes include analyses on Public Debt in ECCU Countries; Collapse of the CL Financial Group; Establishment of an Economic and Monetary Union; Improving Public Expenditure Efficiency; Banking Sector Sensitivity Analysis; Crisis Preparedness and Management; Exchange Rate Assessment; Growth; Technical Assistance; Features of Rebasing GDP and Revised CPI. - Tables and figures provide extensive country-level indicators (Selected Economic and Financial Indicators 2005–11; Fiscal and debt projections by country 2005–15; Monetary survey; Balance of payments; Vulnerability indicators; Banking exposures; Stayover arrivals; External competitiveness; Doing Business indicators; and Appendix debt sustainability frameworks). *Approved by Rodrigo Valdés and Jan Kees Martijn; September 17, 2010 — International Monetary Fund staff report.* ### 6. The collapse of the Trinidad and Tobago-based CL Financial Group in ### 6. The collapse of the Trinidad and Tobago-based CL Financial Group in ### Financial-sector shock and regional spillovers - CL Financial collapsed in January 2009, exposing weaknesses in the region’s regulatory framework for nonbanks and highlighting cross-border and bank–nonbank spillover risks. - CL Financial’s insurance subsidiaries operating in the ECCU—CLICO Life Insurance (CLICO) and British American Insurance (BAICO)—offered fixed-term deposit-like products with yields far in excess of commercial banks and also served as investment vehicles for some indigenous banks. - The combined exposure of CLICO and BAICO to policy and deposit holders in the ECCU amounts to about 17 percent of ECCU GDP. - ECCU countries committed to a regional solution aimed at avoiding system risk and protecting depositors and investors as far as practicable. ### External position and financing - External current account deficit: rose marginally to 37 percent of GDP in 2008; preliminary estimates indicate it narrowed substantially to about 27 percent of GDP in 2009. - Drivers of the 2009 narrowing: lower imports more than offset continued weak tourism—largely due to the decline of FDI-financed construction-related imports and weak domestic demand. - Financing of the current account deficit in 2009: predominately by FDI inflows, together with some public sector long-term loans and the drawdown of net foreign assets by commercial banks. - Outlook for 2010: current account deficit projected to remain broadly unchanged from 2009, financed mostly by FDI inflows (albeit at much lower levels than during the FDI-boom years in 2006–08) and public sector long-term borrowing; deficits expected to narrow over the medium term with a gradual recovery in tourism receipts and fiscal consolidation. ### Macroeconomic outlook and risks - Economic activity: expected to remain subdued throughout 2010 and likely to recover only slowly in 2011; weak labor markets in advanced economies will continue to weigh on tourism. - Inflation: declined sharply to an average of 0.8 percent in 2009 and is expected to gradually revert to its long run average of about 2 percent, given the anchor of the currency peg. - Fiscal prospects: region’s overall fiscal deficit projected to narrow in 2010 but remain elevated; projected regional fiscal deficit about 4.4 percent of GDP for 2010–15, while public debt will stay above 100 percent of GDP through 2015. - Key downside risks: - A slower global recovery, including a double-dip recession in the United States, would further undermine tourism demand and remittance flows. - A lower than expected recovery in FDI flows would pressure the current account and growth prospects. - Without remedial fiscal action, governments’ payment capacity may be threatened in countries with dire fiscal imbalances, adversely affecting bank liquidity and solvency where banks have large public sector exposures. - The ECCU banking system is likely to be under stress for some time due to slow economic recovery and lagged recession effects, potentially eroding confidence in the banking system and the currency board arrangement. - Any new shock could trigger a downward spiral given heightened vulnerabilities. ### Policy framework and coordinated response - ECCU authorities signed the Eight-point Stabilization and Growth Program in December 2009 focusing on: - A stabilization package: financial programs, fiscal reforms, debt management; - A stimulus package: public sector investment programs (PSIP) and social and financial safety nets; - Structural package: amalgamation of some indigenous banks and reform of the insurance sector. - Regional integration: renewed efforts including signing the OECS Economic Union Treaty (to be ratified by respective member countries by January 2011) to pave the way toward free movement of people, goods, services, and capital and transfer of legislative powers in five areas to the OECS Authority; fiscal policy remains under national governments’ purview. ### Policy discussions: main themes and recommendations - Five focal themes for supporting the common currency: A. Strengthening the institutional underpinnings of the ECCU B. Restoring fiscal and debt sustainability C. Ensuring resilience of the financial system, including crisis preparedness and management D. Enhancing external stability, growth and competitiveness E. Enhancing ECCU and Fund engagement - Institutional and fiscal coordination: - Monetary Council’s 2006 debt-to-GDP target of 60 percent for 2020 has largely been ineffective; staff urged mechanisms for collective fiscal discipline short term and consideration of a fiscal union medium term. - Authorities agreed to adopt annual primary surplus targets consistent with attaining the medium-term debt-to-GDP target; these targets will be published to increase transparency and enhance peer review. - Fiscal consolidation and debt sustainability: - Strong fiscal adjustments are critical to ensure sustainable debt dynamics and to sustain the common currency/peg. - Targeted primary surpluses: about 2 percent of GDP implemented under current policies in Dominica; about 4 percent of GDP envisaged under current economic programs in Antigua and Barbuda and Grenada. - Staff-recommended fiscal adjustments for other countries: roughly 3 percent of GDP for St. Lucia and St. Vincent and the Grenadines, and close to 10 percent of GDP for St. Kitts and Nevis. - St. Kitts and Nevis policy measures announced include introduction of VAT, elimination of tax exemptions, increase in social service levy, freeze in wages and hiring, and prioritization of capital spending; even with measures, a residual financing gap remains (averaging close to 4 percent of GDP in 2011-15). - Expenditure-side reforms: - Emphasize containing current expenditure, prioritizing public investment spending, and enhancing expenditure efficiency. - Focus areas: reducing the wage bill (including attrition and wage freezes), rationalization of statutory bodies, pension reform, and strengthening public financial management to minimize fiscal slippages including off-budget activities. - Authorities established a Public Expenditure Commission; FAD technical assistance findings point to wage bill, statutory bodies, pensions, and PFM as reform priorities. - Debt management and technical support: - Staff encouraged strengthening debt management capacity and formulation of a clear medium-term debt strategy. - ECCB’s Debt Management Advisory Service (DMAS) Unit, funded by CIDA (CAD$ 7.2 million), is supporting national debt strategies, expansion of the Regional Government Securities Market (RGSM), and capacity building. ### Financial system resilience and banking-sector vulnerabilities - Banking sector vulnerabilities: - Indigenous banks’ large exposures to highly indebted governments and rising private sector NPLs threaten financial stability and could lead to regional spillovers. - Fiscal distress (government payment capacity impairment) could impair banks’ liquidity and solvency, potentially triggering a banking crisis and generalized loss of confidence. - Liquidity risks are significant due to government financing difficulties, build-up of arrears, and high rollover risk. - A sovereign debt crisis could trigger banking system contagion via payment systems, capital flight, and undermine the currency peg. - Institutional recommendations for financial stability: - Prompt efforts to address fiscal problems, resolve weak institutions, enhance crisis preparedness and contingency plans, and strengthen regulation and supervision. - Fiscal consolidation and reduction in government exposure are paramount; authorities were urged to change public sector financing models in countries relying heavily on bank financing. - Authorities reiterated commitment to fiscal adjustments and to seeking ways to reduce or limit bank exposures to the government. - Currency board context: - Statutory foreign reserve requirement: 60 percent of ECCB’s demand liabilities; ECCB has functioned as a full-fledged currency board involving minimal lending while achieving a currency backing ratio of about 100 percent. *Source: IMF staff report excerpt on the ECCU regional outlook and policy discussions.* ### 26. Staff welcomed the authorities’ intention to engage in a preemptive resolution of ### _cr1130 - 26. Staff welcomed the authorities’ intention to engage in a preemptive resolution of ### Banking-sector resolution and recapitalization - Staff welcomed the authorities’ intention to engage in a preemptive resolution of weak indigenous banks, noting that liquidity problems can quickly become solvency issues and that confidence can erode rapidly (example: Bank of Antigua). - Preemptive actions that could minimize fiscal costs and reduce vulnerability: - Possible removal of impaired assets from banks’ balance sheets. - Consolidation of the sector, including amalgamation of a number of indigenous banks. - Institutional steps: - Appointment of the Ministerial Sub-committee on Banking of the Monetary Council to provide strategic guidance and oversight. - ECCB established a Recapitalization Committee (RECAP) in 2009 to (i) facilitate preparation of contingency plans of watch-listed banks and (ii) propose alternatives for a new structure of the banking sector in the ECCU. - Intention to establish a Resolution Trust, to be registered in St. Kitts with licenses to operate in all the ECCU territories. - Staff cautioned that headline NPLs and capital numbers may not fully reveal banking system health and that the size of the capital shortfall could be large. - Staff recommendations: - Perform bank-specific diagnostics without delay. - Consider seeking equity participation from strong regional/foreign banks to share burden and improve governance. - Design resolution strategies that include burden sharing by all parties. - Staff offered technical assistance; authorities were open to foreign/regional strategic investors but no final decision yet. ### Contingency planning, supervision, and ECCB actions - Contingency planning needs enhancement with clearly defined institutional responsibilities for crisis events. - Crisis management and contingency planning should include: - Strengthening the ECCB’s monitoring capacity for early detection of bank stress. - Capacity to provide liquidity support with appropriate safeguards to contain bank runs and protect the central bank’s balance sheet. - Increased scope and frequency of on-site inspections and enforcement of remedial measures on identified weak banks. - Staff encouraged keeping the SDR allocations as a shared liquidity buffer and considering strengthening this buffer further. - As of note: St. Vincent and the Grenadines has drawn some 90 percent of its SDR allocations; Dominica, Grenada, and St. Lucia indicated they would keep the SDR allocations as a liquidity buffer. - Authorities are considering using part of the SDR allocations for the capitalization of BAICO and/or to provide capital to newly created resolution trust. - ECCB monitoring steps welcomed by staff: - ECCB conducting bank stress tests; as a result, some indigenous banks have been put on a watch list. - Establishment of a Liquidity Watch Group (LWG) to follow liquidity conditions in individual banks based on daily bank-by-bank data. - Strengthened monitoring and coordination of ECCB credit facilities to governments and banks and the interbank market. - ECCB operates under a statutory requirement to maintain at least 60 percent of its monetary liabilities backed by reserve assets; the residual 40 percent could in principle be used for discretionary lending operations to governments and banks. - At the beginning of each fiscal year (April 1), the ECCB determines global limits of its lending based on an operational target of 20 percent of average demand liabilities during the previous year, of which 60 percent is for member governments (allocated in proportion of each government’s share of total regional recurrent revenue less all outstanding balances and arrears) and 40 percent to financial institutions (no distribution of limits to individual banks or other credit institutions). - Legal and supervisory gaps highlighted by the Bank of Antigua intervention (bank run week beginning February 16, 2009; ECCB assumed control on February 20, 2009): - Need to review respective national laws; an amendment transcription error left regional inconsistencies. - Need to strengthen consolidated supervision by the ECCB of offshore bank affiliates of some indigenous banks. - Encourage uniform implementation of revised regulatory guidelines on the treatment of nonperforming public sector obligations (risk-weighted at 20 percent) and on capital adequacy ratios to reflect risks faced by banks. - Staff encouraged further enhancement of risk-based bank supervision. - Banking regulation was passed in all ECCU territories, except Antigua and Barbuda and St. Kitts and Nevis, stipulating a higher level of capital based on bank’s risk profile. The ECCB is revising its capital computation to include elements of market risks. ### Non-bank financial sector: resolution, supervision, and regionalization - BAICO and CLICO resolution: - Authorities adopted a regional strategy toward BAICO resolution; progress modest. - Staff supported announced steps including establishment of a new insurance company but raised concerns about ability to raise necessary capital. - BAICO’s current resolution strategy predicated on the ability of the ECCU countries to receive US$100 million from Trinidad and Tobago. - For CLICO, staff urged a regional approach in close coordination with Barbados; authorities prohibited writing of new policies and planned appointment of judicial managers for all ECCU countries. - Total exposure of the ECCU to the two companies is 17 percent of regional GDP. - Staff reiterated need to minimize fiscal cost through revision of existing terms, extension of tenor, and possible conversion of some liabilities into equity; banks should be required to make appropriate provisions given potential write-offs. - Strengthening non-bank regulation and supervision: - Urgent need to complete establishment of independent single regulatory units (SRUs) for the non-bank sector in all ECCU members and enact outstanding legislation governing the non-bank sector. - Remaining work includes enacting/harmonizing new insurance legislation and the Cooperative Societies Act, and establishing statutory funds for insurance companies to back up local liabilities. - Legal frameworks for SRUs exist in Anguilla, Dominica, Grenada, Montserrat, and St. Kitts and Nevis; SRUs operational so far in Grenada and Dominica. New insurance laws have been enacted in Antigua and Barbuda, Grenada, St. Kitts and Nevis, and St. Lucia. - Regional Oversight Committee (ROC) established in 2009 comprising all financial sector regulators in the ECCU, the ECCB, the SRUs, and the Eastern Caribbean Securities Regulatory Commission as a positive step for discussion and information exchange. - Staff recommended institutionalizing coordination through complete memoranda of understanding (MOUs) and further steps to strengthen supervision of nonbank institutions. - Credit unions and non-bank consolidation: - Large number of non-bank financial institutions: 58 credit unions and more than 150 insurance companies, making effective supervision difficult. - Short-run recommendation: transfer supervision of systemically important credit unions to the ECCB. - Medium-term recommendations: - Merger of smaller institutions. - Creation of centers of excellence via pooling regulatory and supervisory expertise across countries. - Possibly establish a regional non-bank regulator/supervisor (merger of national SRUs). - Continued technical assistance from IFIs, regional and development partners needed. - Authorities noted political constraints in creating a regional non-bank supervisor and transferring large credit unions to the ECCB; some mergers already taking place (example: Roseau Cooperative Credit Union announced plan to merge with four other credit unions in Dominica). - Offshore financial sector: - Pressure to comply with international standards to reduce tax and regulatory havens could adversely affect FDI inflows. - Staff welcomed signing of the necessary twelve Tax Information Exchange Agreements (TIEAs) by all ECCU member countries, allowing removal from the OECD grey list. - Staff urged authorities to develop capacity to respond to the forthcoming peer review process. - Authorities may want to consider the cost and benefit of the offshore sector and, if analysis warrants, consider exiting the sector. ### External stability, growth, and competitiveness - External stability and REER: - The equilibrium real exchange rate approach indicates an undervaluation of about 2 percent. - The macro balance approach estimates the current account norm ranges between -17 and -20 percent of GDP, broadly in line with staff projections of a medium-term current account deficit for the ECCU of around 19 percent of GDP. - Large fiscal adjustments are recommended that would go beyond baseline projections and would reduce the equilibrium current account deficit, implying a depreciation of the equilibrium REER. - Given the peg, this will require an adjustment in relative prices to maintain output close to potential; staff highlighted urgent need to moderate real wage growth or even lower wages, especially in the public sector. - Growth and competitiveness: - Growth slowed significantly since the 1990s following dismantling of trade preferences for agricultural products; tourism helped offset some decline. - Prior to recent decline, growth primarily driven by capital and productivity gains; during past two decades, contribution of productivity has fallen significantly. - Tourism-led growth remains viable, especially for lower income per capita countries that entered tourism more recently. - ECCU countries have experienced a decline in market share; in some countries lower tourist arrivals were offset by higher tourism expenditure, suggesting a move toward high-end tourism. - Staff cautioned authorities to focus on improving the business climate rather than picking winners and losers, and to encourage private sector–led efforts to accelerate tourism growth. - Empirical evidence suggests countries with high public debt-to-GDP ratios grow slower than peers; reducing high fiscal deficits and public debt levels is critical to foster growth. - Output volatility: - Despite decline in output linked to the United States, staff emphasized that an active regional diversification strategy is not called for given historically low output volatility of large and diversified advanced economies such as the United States. - Analysis indicates ECCU’s output volatility is not greater than in other low income member countries eligible for the Fund’s concessional financing, despite frequent natural disasters. - Authorities’ views: - Broad consensus that boosting economic growth is a key challenge; tourism will continue as main driver of growth. - Reducing wage costs, especially in the public sector, seen as critical for competitiveness. - Authorities acknowledged high debt levels hinder growth and that government expenditure needs constraint, but noted political/economic difficulties given large government role and lack of a vigorous private sector. - Recent signing of the new OECS Treaty opens opportunities for a regional marketing strategy offering multi-country destinations to attract more tourists, especially from fast growing non-traditional markets. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 41. Given intensified vulnerabilities, the Fund is further enhancing its engagement ### 41. Given intensified vulnerabilities, the Fund is further enhancing its engagement with the ECCU ### Fund engagement, technical assistance, and surveillance - During 2009/10, the Fund provided financing to all of the six ECCU Fund members beyond the SDR allocations. - The Fund will continue to offer significant technical assistance to the region either directly from HQ or through CARTAC to: - foster the institutional capacity for policy analysis and implementation; and - further improve the collection and dissemination of statistical data (Box 9). - The region faces administrative capacity constraints hampering implementation and progress of necessary reforms and ongoing Fund-support programs. - With significant support from CARTAC, the authorities have rebased the GDP series and revised the CPI, both expected to be released in October 2010 (Box 10). - The newly established regional resident representative office should strengthen the dialogue between the authorities and the Fund in the region. - The Fund stands ready to: - step-up both bilateral and regional surveillance; - provide assistance in fostering policy coordination among ECCU members; and - provide additional financing in support of strong adjustment programs. ### Lending modalities, coordination, and regional dimensions - Staff stressed that lending into a regional pool is not an option at this juncture—programs would continue to take place on a country-by-country basis—but coordination among programs is possible. - The Fund’s lending to all ECCU countries concurrently would help foster policy coordination and strengthen the currency union. - Coordination could include, in addition to country specific budget support: - Fund financing of country programs for strengthening the lender-of-last-resort (LOLR) capacity of the ECCB; and - facilitating a joint bank resolution strategy for some indigenous banks. - Notation from the text: - A change in the Articles of Agreement would be needed for the Fund to be able to lend into a regional pool. - The Fund’s financial assistance to Euro zone members takes place on a country-by-country basis using existing lending instruments. ### Recent use of IMF lending facilities to ECCU (2006–2010) — figures preserved as in source - Antigua and Barbuda: SBA Jun-10 — 8.11 (in millions of SDRs); 17.86 (in millions of US$); 00 (in percent of quota) [note: values preserved exactly as presented]. - Dominica: ENDA Feb-08 — 2.13 (in millions of SDRs); 3.32 (in millions of US$); 5 (in percent of quota). ESF-RAC Jul-09 — 3.35 (in millions of SDRs); 5.14 (in millions of US$). - Grenada: ECF Apr-06 — 16.42 (in millions of SDRs); 4.41 (in millions of US$); 40 (in percent of quota). ECF Apr-10 — 8.81 (in millions of SDRs); 3.37 (in millions of US$). - St. Kitts and Nevis: ENDA May-09 — 2.23 (in millions of SDRs); 3.42 (in millions of US$). - St. Lucia: ESF-RAC Jul-09 — 6.91 (in millions of SDRs); 10.74 (in millions of US$). - St. Vincent and the Grenadines: ESF-RAC May-09 — 3.75 (in millions of SDRs); 5.74 (in millions of US$). - Total: 124.3 (in millions of SDRs); 183.7 (in millions of US$). - Lending facilities key: ECF: Extended Credit Facility; ENDA: Emergency Assistance for Natural Disaster; ESF-RAC: Exogenous Shocks Facility (Rapid Access Component); and SBA: Stand-By Arrangement. - Footnote: The ECF arrangement in an amount equivalent to 90 percent of quota was approved in April 2006. The first ECF augmentation (12 percent of quota) was approved in July 2008 and the second augmentation (38 percent of quota) was approved in June 2009. ### Staff appraisal — macroeconomic and fiscal outlook - The ECCU is at crossroads: the currency board arrangement remains an appropriate exchange rate regime, but the global financial and economic crisis exposed pockets of significant weaknesses. - Key threats: surging fiscal deficits, lack of institutional arrangements for fiscal consolidation, unsustainable debt levels, and stress in the financial sector. - Real regional GDP contracted by 6.2 percent in 2009, reflecting a collapse in tourist arrivals and FDI-financed construction activity. - 2011 is likely to remain a very challenging year; risks to the outlook continue to be on the downside. ### Fiscal consolidation: targets and requirements - The authorities decided to translate the current debt target of 60 percent of GDP by 2020 into annual primary surplus targets. - To put debt on a sustainable downward trajectory, most countries require a primary surplus of 2 to 4 percent of GDP over the next few years depending on initial conditions. - In the case of St. Kitts and Nevis, the primary surplus target needs to be significantly larger given the more adverse initial conditions. - Political consensus, stronger fiscal governance, and enhanced debt management capacity are needed to secure consolidation. ### Public expenditure and governance reforms - Rationalizing public expenditure is central to addressing fiscal weaknesses and improving public spending efficiency. - Key actions recommended: - comprehensive civil service reform to reduce the overall size of government and improve service delivery; - rationalization of statutory bodies; - pension reform; - strengthening public financial management. - These reforms would create fiscal space for growth-enhancing capital spending. - The establishment of the Public Expenditure Commission is noted as an important first step. ### Financial sector stability and bank resolution - Fiscal and debt sustainability are intertwined with banking system stability and confidence in the currency peg. - Large government exposures have left some banks facing significant challenges, including tightening of liquidity. - Possible impairment of government payment capacity could cause further liquidity and solvency problems. - Given expected slow recovery and lagged impact on loan quality, the banking system is likely to continue facing high liquidity and credit risk. - Authorities have strengthened contingency and crisis management frameworks and are reviewing options for preemptive resolution of weak banks. - Concerns exist that headline NPLs and capital adequacy ratios may not fully reflect the state of the banking system; the cost of resolution could be significantly higher than currently envisaged. - Recommendations: - undertake bank-specific diagnostics without delay; - any resolution strategy should minimize fiscal cost through burden sharing and consider involving strong regional/international strategic partners. ### BAICO and CLICO: resolution challenges - Progress on BAICO resolution has been made, but risks of rising fiscal costs and possible fallout from CLICO call for a more decisive and stepped-up regional approach. - Authorities have defined a resolution strategy for BAICO, but concerns remain about raising necessary capital; for CLICO, a resolution strategy still needs to be defined. - Fiscal costs should be minimized and coordination with Trinidad and Tobago and Barbados (home supervisory authorities of BAICO and CLICO, respectively) is warranted. - For BAICO, planned regional strategy elements include: - establish a new company to take over ECCU operations of BAICO (deposit-like liabilities and traditional insurance business); - transfer the property insurance portfolio to an existing insurance company; - establish a Medical Claims Support Fund. - CARTAC is providing TA related to the creation of the new company. - Fund staff recommended BAICO resolution adhere to three principles: - (i) limiting the risk of systemic spillovers; - (ii) minimizing the fiscal costs to the extent possible; and - (iii) ensuring equitable treatment of claimants, including giving priority to all claims up to a low threshold. - Noted financing elements: a US$50 million contribution from Trinidad and Tobago’s Petroleum Fund; ECCU governments will almost certainly need to inject capital; fiscal costs should be limited through revision of existing terms including lowering interest rates, extension of tenor, and possible conversion of some liabilities into equity. - For CLICO (Barbados), staff recommended continued close monitoring. ### Nonbank financial sector supervision - Urgent priorities: - completing the establishment of SRUs in the remaining countries; - making further progress in enacting or harmonizing financial sector legislation covering insurance, credit union and money services; - transferring supervisory responsibility for systematically important credit unions to the ECCB; - strengthening information exchange and collaboration between the ECCB, SRUs and other regulators. - In the medium term, consider creation of a regional non-bank supervisory institution and consolidating the number of smaller nonbank institutions. ### Exchange rate, competitiveness, and tourism - The REER appears broadly in line with current fundamentals (based on standard CGER methodologies). - However, the necessary fiscal adjustments will imply equilibrium REER depreciations in the near term. - Given the peg, this implies adjustments in relative prices and calls for constraints in real wage growth or reductions in nominal wages to facilitate adjustment; public sector wages should take the lead given signaling effects. - Tourism remains a viable growth sector but cost reductions are critical to ensure competitiveness. - Following dismantling of trade preferences for agricultural products, growth slowed significantly; tourism has offset some decline and is a key growth driver. - An active regional diversification strategy is not called for given historically low output volatility of large and diversified advanced economies such as the United States. ### Capacity building and next steps - Further progress in capacity building is needed to improve policy analysis and implement necessary structural reforms. - Continued sizable support through technical assistance from IFIs, regional and development partners will be required. - It is proposed that the next discussion on ECCU common policies take place in 12 months. *IMF staff report excerpt: “41. Given intensified vulnerabilities, the Fund is further enhancing its engagement with the ECCU.”* ### Box 2. Collapse of the CL Financial Group (Cont’d) ### Box 2. Collapse of the CL Financial Group (Cont’d) ### Key findings and implications - The CL Financial experience prompted ECCU authorities to accelerate plans to strengthen supervision of the nonbank financial sector. - Country experience shows that good supervision matters: the stronger framework Jamaica put in place after the crisis in the 1990s successfully insulated the country from the CL Financial crisis. - Concerns include cross-jurisdictional financial institutions spanning multiple ECCU jurisdictions and the need for a regional supervisory structure to manage fallout from failures that affect multiple countries. ### Priority measures being taken in the ECCU - Establishing single regulatory units (SRUs) for the nonbank financial sector with supporting legislation, adequate staffing, and capacity building. - So far SRUs are only operational in Dominica and Grenada while legal frameworks exist or draft legislation has been prepared in most other ECCU jurisdictions. - Enacting a new harmonized Insurance Act. - New Insurance Acts have been passed in Antigua and Barbuda, Grenada, and St. Kitts and Nevis, and—in its first reading in St. Lucia—although amendments will be required to harmonize these. - Requiring insurance companies to create statutory funds with sufficient assets under trusteeship to cover local insurance liabilities. - Establishing a regional regulatory and supervisory institutional structure, with a College of Regulators to oversee regional financial institutions that span multiple jurisdictions. - The core technical committee, created to deal with the fallout from CL Financial, could be converted into a permanent regional forum to deal with ECCU non-banking sector issues. ### Estimated Exposure to CLICO and BAICO (as presented in source) - Headline line (labels combined with raw figures as in source): - Anguilla Antigua and BarbudaDominicaGrenadaMontserrat St. Kitts and NevisSt. Lucia St. Vincent and the GrenadinesECCU Total 89.2504.4194.9404.387.9256.8188.3384.82110.6 - Of which: Commercial banks45.70.037.47.225.75.30.05.4126.7 - Of which: Credit unions0.08.827.99.46.66.40.024.783.8 - CLICO 1/18.4216.0119.7158.847.5105.7149.3174.0989.4 - Of which: Commercial banks17.00.037.40.021.91.50.05.483.2 - Of which: Credit unions0.01.914.72.60.00.00.08.327.5 - BAICO 2/48.7288.473.8245.223.6129.038.5204.01051.3 - Of which: Commercial banks6.60.00.07.23.80.00.00.017.6 - Of which: Credit unions0.06.911.86.50.66.40.015.647.8 - Other 3/22.10.01.40.316.822.10.56.870.0 - Of which: Commercial banks22.10.00.00.00.03.80.00.025.9 - Of which: Credit unions0.00.01.40.36.00.00.00.88.5 - Percent of GDP presentation (as in source): - Total 15.316.319.924.462.517.17.225.017.4 - CLICO 1/3.27.012.29.633.87.05.711.38.2 - BAICO 2/8.39.37.514.816.88.61.513.28.7 - Other 3/3.80.00.10.011.91.50.00.40.6 - Notes appended in source: - Source: Data provided by country authorities. - 1/ As of end-2008, except for Dominica, which is as of March 2010. - 2/ As of end-June 2009, according to the November 2009 judicial managers' report. - 3/ Includes Clico Investment Bank, CMMB, and the CL Financial Group. - 4/ GDP estimates for 2009. *Source: Data provided by country authorities.* ### Box 8. Growth in the ECCU ### Box 8. Growth in the ECCU ### Growth trend and adverse shocks - Growth in the ECCU countries has been on a declining trend since the 1990s, with the current global slowdown exacerbating this trend. - The ECCU region has been buffeted by a series of adverse exogenous shocks over time, including: - the erosion of trade preferences; - the decline in official foreign assistance; - periodic recessions in the developed countries, the main source of tourism and FDI for the region; - frequent natural disasters. - Relaxation of the fiscal stance, partly reflecting accommodation to these shocks, has led to a rapid build-up of public debt in the region. ### Main findings on growth drivers - Low factor productivity has been the main factor dragging growth down. - Following strong productivity growth in the 1970s and 1980s, TFP growth declined leading to a decline in growth despite strong capital accumulation. - The decline in TFP could reflect a drop in efficiency with which other factors of production are being used, perhaps due to lack of complimentary structural framework, weak institutions and lack of technological innovation. - Tourism has contributed positively to economic growth. - Panel regressions using an augmented growth equation that includes tourism in addition to standard growth determinants such as education, health, openness of the economy and prudential fiscal policy indicate that tourism has been a significant factor in long-term growth in the ECCU countries. - Improvements in competitiveness could further enhance the contribution of the tourism sector. - The share of stay-over arrivals in the Caribbean (as percent of total visitors in the world) fell from 2.7 percent during 1990–95 to 2.2 percent during 2005–08. - ECCU countries’ share within the Caribbean fell from 5.7 percent to 5.1 percent over the same period, in particular because of the decline in shares by Antigua and Barbuda and Grenada. The rest of the ECCU countries have either gained by small margins or maintained their shares. - High debt has reduced growth in the ECCU. - Empirical evidence for the ECCU countries suggests that during periods of declining debt (even though debt levels were high) average growth rates almost doubled compared to periods when debt was high and rising, suggesting that debt crowds out private investment, and acts as a tax on future investment. ### Box 9. ECCU: Technical Assistance from the Fund in 2009 and 2010 ### Overview - The ECCU has been an intensive user of CARTAC (backstopped by the Fund) and Fund technical assistance (TA) in 2009–10. - Major support provided or envisioned in 2009–10 covered tax and customs reform, macro-fiscal support, public expenditure, public debt management, public finance management, regional financial and capital markets, financial sector supervision, economic and financial statistics, and balance of payments statistics. ### Tax and customs reform - Post value-added tax (VAT) support in Antigua and Barbuda, Dominica, Grenada, and St. Vincent and the Grenadines to strengthen VAT implementation and assistance with near-term implementation of VAT in St. Kitts and Nevis, and St. Lucia (CARTAC, FAD, LEG). - A comprehensive revenue mobilization TA to Antigua and Barbuda. - Assistance with customs reforms and modernization in all ECCU countries. - Strengthening tax administration training provided to Grenada, St. Kitts and Nevis, and St. Vincent and the Grenadines (all CARTAC). ### Macro-fiscal and public expenditure - Assistance to ECCU members to establish macro-fiscal policy units to house the financial programming exercise. - Support for public sector pension plan reform in Montserrat and a public pension reform conference delivered jointly with the ECCB in June 2009 (all CARTAC). - TA on options for public expenditure rationalization completed in St. Lucia and Antigua and Barbuda and to be implemented in all ECCU countries by end 2010; recommendations would be key inputs for the ECCU Public Expenditure Commission (FAD). ### Public debt management and public finance management - Assistance to strengthen debt management capacity and develop medium-term debt strategy provided to St. Lucia and St. Kitts and Nevis in 2008, Dominica in 2009, and Grenada in 2010 (MCM). - PEFA assessment finalized in Montserrat and delivered in Antigua and Barbuda. - PFM reform action plan updated in Dominica, Grenada and St. Lucia, and implemented in St. Vincent and the Grenadines (all CARTAC). - Extensive implementation of TA to Antigua and Barbuda (CARTAC and DFID). - Strategic budgeting to Cabinet and Permanent Secretaries in Antigua and Barbuda (CARTAC, CARICAD, and Financial Secretary of Dominica). ### Regional financial and capital market, and financial sector supervision - Assistance to facilitate the establishment of an overnight repo facility and the functioning of the interbank market; payments and settlements (both MCM). - Assistance for review and preparation of new securities regulations (CARTAC). - Ongoing assistance (since 2003) to ECCU member countries in the development of Single Regulatory Units (SRUs) based on the specific needs of each SRU. - Nonbank regulatory reporting forms created and nonbanks are to begin reporting on these forms quarterly in September 2010. - Revision of insurance laws and designing of regulatory insurance reporting forms. - Development of law, and training for the supervision of credit unions. - Development of credit bureaus in the region. - On-site examination and development of capital requirement for international banks in St. Vincent and the Grenadines; on-site examination of insurance companies in Anguilla. - First College of Regulators held for two large regional insurance companies; assistance in the restructuring of BAICO in the ECCU (all CARTAC). - Ongoing development of a regional financial stability framework (CCMF/CARICOM/CARTAC). ### Economic and financial statistics; balance of payments - Ongoing assistance in rebasing national accounts (completed in most ECCU countries); compiling supply and use tables; rebasing and revising consumer price index based on the recent Household Expenditure Surveys; and developing export-import price indexes in all ECCU countries (all CARTAC). - Assistance in the development of tourism satellite accounts (CARTAC; CARICOM Secretariat; CDB; and OECS Secretariat). - Provided monetary and financial statistics (MFS) TA to the ECCB and assistance in the development of a regional statistics network (STA). - Ongoing assistance in revising forms for compiling external sector statistics, in particular to implement the Balance of Payments and Investment Position Manual (BPM6) in 2009 (CARTAC; OECS Secretariat; STA). *Source: IMF staff compilation from Box 8 and Box 9 of the provided content.* ### Box 10. Features of the Rebased GDP and Revised CPI ### Box 10. Features of the Rebased GDP and Revised CPI ### Rebased GDP: changes and quantitative findings - Base year changed from 1990 to 2006 for national accounts series of the ECCU member states. - Improvements made by using a wider range of data sources (including economic surveys and administrative data), applying improved methodology, and better extrapolation and deflation techniques for the GDP constant price series. - New inclusions in the rebased GDP series: - financial intermediation services indirectly measured, - activities of offshore universities, - output of owner-occupied housing. - Impact on levels: - Rebasing is expected to make the rebased current and constant price GDP series appreciably larger than old counterparts. - Preliminary data for countries with completed exercises suggest increases in nominal GDP series of between [20 and 35 percent]. - Example: current price annual GDP in Dominica over the period 2000–2008 revised up by 32.6 percent. - Impact on growth series (constant prices): - Average annual GDP revision is 2.9 percent (2001–2008) with the new base year. - Under the 1990 base year, the average annual revision is 1.0 percent. - Implications for ratios and policy: - Rebasing will alter key ratios, e.g., public debt-to-GDP and gross external debt-to-GDP ratios, with nontrivial implications for economic policies. - On the current debt target of 60 percent of GDP by 2020, the mission recommended the authorities consider moving towards a debt ratio of 25–40 percent of GDP that is more commensurate for emerging markets and countries with a hard peg in the medium term. - Sectoral composition: - Relative contributions of industries in rebased GDP will change. - Real estate, renting, and business activities likely to record the largest revisions due to incorporation of owner-occupied housing estimates. ### Revised CPI: methodological updates and content changes - Market basket updated using results from Household Income and Expenditure Surveys. - Improvements in classification structure, methods, and procedures to align with the CPI Manual, 2004. - Expanded geographic coverage makes the revised CPI more representative of entire countries rather than capital-city-only indices. - Items added to the CPI basket reflecting updated spending patterns and new products: - college tuition, - cell phones, - MP3 players, - computers, - health insurance, - auto insurance. - Classification and conceptual alignment: - Old regional classification structures replaced by the Classification of Individual Consumption by Purpose (COICOP), the international standard recommended in the CPI Manual, 2004. - Revised CPI made conceptually consistent with the System of National Accounts by incorporating the owner’s equivalent rent. - Statistical and calculation changes to reduce bias: - Geometric averaging is used rather than arithmetic averaging to reduce biases from arithmetic averages of prices and price relatives. - Missing prices are now imputed using price changes of related products rather than carrying forward last reported prices as in the old index. ### Implementation, timing, and technical assistance - Both the rebased GDP and revised CPI series were expected to be announced simultaneously in all ECCU countries via a comprehensive outreach strategy in October 2010. - ECCU members received substantial technical assistance from CARTAC in the GDP and CPI revisions: - CARTAC helped countries develop their market basket. - CARTAC assisted in introducing the Price Index Processor System software to enable statistical offices to implement the improved CPI methods described in the CPI Manual. *Source: Box 10, "Features of the Rebased GDP and Revised CPI," from the supplied IMF document.* ### Appendix Table 1. ECCU: External Debt Sustainability Framework, 2005-15 ### Appendix Table 1. ECCU: External Debt Sustainability Framework, 2005-15 ### Baseline public sector debt dynamics (percent of GDP unless indicated) - Baseline: Public sector debt 2/ (2005–2015): 100.5, 97.9, 91.1, 89.2, 103.1, 108.0, 109.1, 108.0, 105.9, 103.8, 102.1 - o/w foreign-currency denominated (2005–2015): 53.9, 50.8, 46.0, 44.0, 49.8, 54.4, 54.5, 52.9, 50.3, 48.0, 46.1 - Change in public sector debt (2005–2015): -6.6, -2.5, -6.8, -1.9, 13.9, 4.9, 1.1, -1.2, -2.1, -2.1, -1.7 - Debt-stabilizing primary balance 1/: -0.8 (for the last projection year shown) ### Identified debt-creating flows and components (percent of GDP) - Identified debt-creating flows (4+7+12) (2005–2015): -4.6, -, 3.5, -4.0, -2.1, 12.6, 4.8, 0.4, -1.3, -2.2, -2.6, -1.7 - Primary deficit (2005–2015): 0.5, 1.2, 0.4, 0.2, 3.6, 2.1, -0.3, -0.6, -1.0, -1.1, -0.9 - Revenue and grants (2005–2015): 30.1, 31.2, 30.6, 31.5, 31.0, 31.7, 31.2, 30.9, 30.8, 30.8, 30.7 - Primary (noninterest) expenditure (2005–2015): 30.6, 32.5, 31.1, 31.7, 34.6, 33.7, 30.9, 30.3, 29.8, 29.7, 29.8 - Automatic debt dynamics 3/ (2005–2015): -5.1, -4.8, -4.4, -2.3, 9.0, 2.7, 0.7, -0.7, -1.2, -1.5, -0.8 - Contribution from interest rate/growth differential 4/ (2005–2015): -5.1, -4.8, -4.4, -2.3, 9.0, 2.7, 0.7, -0.7, -1.2, -1.5, -0.8 - Of which contribution from real interest rate (2005–2015): 0.3, 1.2, 0.7, -0.7, 3.2, 2.3, 2.3, 2.1, 2.3, 2.2, 2.9 - Of which contribution from real GDP growth (2005–2015): -5.3, -6.0, -5.1, -1.6, 5.8, 0.4, -1.6, -2.9, -3.5, -3.6, -3.7 - Contribution from exchange rate depreciation 5/ (2005–2015): 0.0, 0.0, 0.0, 0.0, 0.0, ... - Other identified debt-creating flows (2005–2015): 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0 - Privatization receipts (negative) (2005–2015): 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0 - Recognition of implicit or contingent liabilities (2005–2015): 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0 - Other (specify, e.g. bank recapitalization) (2005–2015): 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0 - Residual, including asset changes (2-3) 6/ (2005–2015): -2.1, 1.0, -2.8, 0.2, 1.4, 0.1, 0.7, 0.1, 0.1, 0.4, 0.1 ### Ratios and financing needs - Public sector debt-to-revenue ratio 2/ (2005–2015): 334.2, 313.8, 297.3, 282.8, 332.6, 341.1, 349.9, 349.8, 344.0, 337.4, 332.8 - Gross financing need 7/ (percent of GDP, 2005–2015): 9.9, 13.6, 10.6, 7.8, 13.8, 11.6, 9.5, 9.5, 9.6, 10.3, 10.3 - Gross financing need (in billions of U.S. dollars, 2005–2015): 0.4, 0.6, 0.5, 0.4, 0.6, 0.5, 0.5, 0.5, 0.5, 0.6, 0.6 ### Scenario outcomes (selected) - Scenario with key variables at their historical averages 8/ (debt percent of GDP, projection years shown): 108.0, 110.3, 111.9, 113.5, 115.4, 117.0; debt-stabilizing primary balance: -0.3 - Scenario with no policy change (constant primary balance) in 2010-2015 (debt percent of GDP): 108.0, 111.5, 113.0, 113.9, 114.8, 116.0; debt-stabilizing primary balance: -0.9 - Scenario with natural disaster 9/ (debt percent of GDP): 108.0, 112.4, 116.7, 121.8, 121.8, 122.2; debt-stabilizing primary balance: 0.9 ### Key macroeconomic and fiscal assumptions underlying baseline - Real GDP growth (in percent, 2005–2015): 5.4, 6.6, 5.6, 1.9, -6.2, -0.4, 1.5, 2.8, 3.4, 3.7, 3.7 - Average nominal interest rate on public debt (in percent) 10/ (2005–2015): 3.8, 4.2, 4.0, 3.9, 5.1, 4.5, 4.3, 4.4, 4.6, 4.9, 5.2 - Average real interest rate (nominal rate minus change in GDP deflator, in percent) (2005–2015): 0.5, 1.5, 0.9, -0.7, 3.3, 2.3, 2.2, 2.1, 2.3, 2.3, 3.0 - Nominal appreciation (increase in US dollar value of local currency, in percent) (2005–2015): 0.0, 0.0, 0.0, 0.0, 0.0, ... - Inflation rate (GDP deflator, in percent, 2005–2015): 3.4, 2.7, 3.0, 4.7, 1.8, 2.3, 2.1, 2.3, 2.3, 2.6, 2.2 ### Primary balance and related fiscal assumptions (additional series) - Primary deficit (alternate listing, 2005–2015): 8.9, 13.8, 1.5, 2.9, 2.4, -2.8, -6.9, 0.8, 1.6, 2.7, 4.0 - Primary deficit (repeat of baseline series, 2005–2015): 0.5, 1.2, 0.4, 0.2, 3.6, 2.1, -0.3, -0.6, -1.0, -1.1, -0.9 ### Selected methodological and scenario notes (footnotes excerpted verbatim) - 1/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year. - 2/ Defined as gross debt of nonfinancial public sector. Information on private sector external borrowing is not available. - 3/ Derived as [(r - π(1+g) - g + αε(1+r) ]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar). - 4/ The real interest rate contribution is derived from the denominator in footnote 3/ as r - π(1+g) and the real growth contribution as -g. - 5/ The exchange rate contribution is derived from the numerator in footnote 3/ as αε(1+r). - 6/ For projections, this line includes exchange rate changes. - 7/ Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period. - 8/ The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP. - 9/ Assuming that a hurricane hits half of ECCU countries, increasing their primary deficit by three percent of GDP for 20011-13 and reducing growth to zero. - 10/ Derived as nominal interest expenditure divided by previous period debt stock. *International Monetary Fund — Appendix Table 1. ECCU: External Debt Sustainability Framework, 2005-15* ### Appendix II. OECS: Relations with the World Bank Group ### Appendix II. OECS: Relations with the World Bank Group ### World Bank Group Strategy - The Bank Group actively supports the 6 Bank Members of the 8 members of the Eastern Caribbean Currency Union (ECCU). The Bank Group provides lending, grants, and technical assistance to its members. Additionally all ECCU members are invited to participate in training sessions and technical meetings organized by the Eastern Caribbean Central Bank (ECCB) in conjunction with the World Bank. - The Organization of the Eastern Caribbean States (OECS) Regional Partnership Strategy (RPS) was presented to the World Bank’s Board of Directors on June 8, 2010. The RPS covers the five year period July 2009–June 2014. - The RPS sets forth engagement terms of IBRD, IDA and IFC with OECS countries and partners to pursue strategic objectives: - (a) building resilience; and - (b) enhancing competitiveness and stimulating growth over the medium term. - To build resilience the Bank Group will support interventions aimed at: - promoting fiscal and debt sustainability; - protecting and improving human capital―particularly social safety nets, education and health; - strengthening climate resilience. - To enhance competitiveness and stimulate sustainable growth the Bank Group will focus on: - strengthening the countries’ domestic financial sectors; - improving access to and quality of services to create more competitive business environments. - The Strategy will provide urgent remedial measures to address the effects of the global and regional crises, while supporting key policy reforms for medium-term growth. - Planned program of support: - new commitments totaling up to about $120 million on IBRD terms (that is up to $20 million for each of the six Bank members of the OECS); - up to $73 million of IDA financing for the four IDA-blend Bank members of the OECS (Dominica, Grenada, St. Kitts and Nevis, and St. Lucia). ### Bank–Fund Collaboration and Technical Assistance - The World Bank Group and the IMF continue to collaborate on: - the medium-term structural reform agenda; - technical assistance on macroeconomic management issues jointly with the Caribbean Regional Technical Assistance Center (CARTAC). - Canadian International Development Agency is providing significant financing to support Bank and Fund efforts to strengthen economic management in the Pan-Caribbean region from which the ECCU will benefit directly. - Given the impact of the financial crisis on the financial sector, the Bank and the IMF have stepped up collaboration providing on-demand technical assistance on non-banking financial sector issues and are jointly supporting the ECCU in defining a strategy for strengthening the banking sector. - The Bank and the IMF will continue to collaborate on supporting OECS countries in preparing their Poverty Reduction Strategies (PRS). ### Current Portfolio — Key Emerging and Ongoing Challenges - Identified challenges over short, medium and long term: - (1) Improving fiscal and debt management; - (2) Protecting and improving human capital; - (3) Reducing vulnerability to natural disasters and strengthening environmental management; - (4) Enhancing competitiveness and stimulating sustainable growth; - (5) Strengthening institutional and organizational capacity; - (6) Reducing crime and enhancing security. - Programming summarized by four thematic areas: Promoting Fiscal and Debt Sustainability - OECS countries continue to have high levels of public debt, constraining public expenditures and fiscal space. - Bank support includes Technical Assistance Credits for Dominica and Grenada to improve public service delivery in tax, customs, investment promotion, land and company registries. - The OECS E-government for Regional Integration Project focuses on harmonizing ICT platforms to improve service delivery regionally. - Economic and Social Development Policy Loans (DPLs) for St. Lucia and Grenada support policy reforms in governance, public expenditure management, financial sector regulatory reform and improved economic management. Protecting Human Capital - Bank support to design and implement reform action plans under Economic and Social DPLs, the Dominica Growth and Social Protection Technical Assistance Credit, and the regional Social Safety Nets Non-Lending Technical Assistance. - OECS Skills for Inclusive Growth Projects in Grenada and St. Lucia and OECS Education Development Projects in Grenada and St. Vincent and the Grenadines aim to increase the skilled labor pool. - Skills Projects seek to increase employability of youth through public/private partnerships for demand-driven technical and life skills training. - HIV/AIDS Prevention and Control projects in St. Lucia and St. Vincent and the Grenadines aim to develop sustainable organizational and institutional frameworks for long-term epidemic management. Strengthening Climate Resilience - Disaster risk mitigation and environmental management are high priorities due to weather hazards and rising sea levels. - Existing interventions include: - St. Lucia Disaster Management II Project; - GEF Grant OECS Protected Areas and Associated Livelihoods Project; - GEF Grant Implementation of Adaptation Measures. - The Bank facilitated OECS participation in the Caribbean Catastrophe Risk Insurance Facility (CCRIF). Enhancing Competitiveness and Stimulating Sustainable Growth - High cost of doing business in the OECS motivates reforms to improve delivery and cost of key services. - Telecommunications & ICT Development Project aims to improve access, quality, and use of telecommunications and ICT services. - Economic and Social Development DPLs for St. Lucia and Grenada support policy reforms for investment climate, regulatory environment, and strengthening the insurance sector. - Active grants and NLTA projects focused on the financial sector include the BAICO NLTA addressing the collapse of BAICO. ### Economic and Sector Work - Recent, ongoing and planned analytical and advisory activities include: - “Towards a New Agenda for Growth”—an OECS Private Sector Financing Study (2008); - OECS Tourism Backward Linkages Study (2008); - “Caribbean—Accelerating Trade Integration: Policy Options for Sustained Growth, Job Creation and Poverty Reduction” (2008); - CARICOM study on Managing Nurse Migration (ongoing); - preparatory study for a Caribbean-wide Regional Energy Strategy (ongoing); - Debt Management Performance Assessment Tools (ongoing and planned). ### Planned Lending or Large Grant Operations - Potential operations within thematic areas: - Debt and fiscal sustainability: Debt Sustainability DPLs. - Human capital development: Strengthening Social Safety Nets Projects/SWAp and Education Sector SWAps using results-based sector-wide approaches. - Climate Resilience: - OECS Disaster Vulnerability Risk Reduction project to enhance understanding of vulnerability of key structures and increase resilience of critical public infrastructure; - Pilot Program for Climate Resilience (PPCR) to mainstream climate resilience across sectors in the four IDA-blend OECS countries; - GEF-financed Sustainable Financing of Marine Areas project to support ecosystem-based adaptation, and establish a regional endowment fund and national trust funds. - Enhancing competitiveness and growth: - OECS Financial Sector Strengthening and Regulation Project; - OECS Regional Energy Regulator Program to establish a regional electricity regulator; - Caribbean Regional Communications Infrastructure Program (CARCIP) to increase availability, use and development impact of regional broadband communications infrastructure. - Interventions expected to be complemented by grants and technical assistance for capacity–building, technical analysis, constituency building, and knowledge sharing. ### Financial Relations — Regional Projects (In millions of U.S. dollars) - Regional projects summary (Original Principal / Disbursed / Undisbursed): - OECS-Telecom. and ICT Development Project (DMA,GRD,LCA,KNA,VCT): 2.70 / 1.34 / 1.3 - OECS-HIV/AIDS Prevention and Control (VCT): 7.00 / 2.97 / 2.39 - OECS-Education Development Project (GRD,VCT): 16.1 / 10.59 / 4.67 - OECS-Catastrophe Insurance (DMA,GRD, LCA, VCT): 14.20 / 12.71 / 2.38 - OECS E govt. for Regional Integration Project (DMA,GRD,LCA, VCT): 9.50 / 0.69 / 8.31 - Total (regional projects): 49.5 / 28.3 / 19.05 - Total (all projects): 73.31 / 40.94 / 30.37 - Country breakdown (Original Principal / Disbursed / Undisbursed): Dominica - OECS-Catastrophe Insurance: 4.50 / 3.79 / 0.71 - Growth and Social Protection Technical Assistance Credit: 1.45 / 1.42 / 0.08 - OECS-Telecommunications and ICT Development Project: 0.54 / 0.30 / 0.29 - OECS E govt. For Regional Integration Project: 2.40 / 0.17 / 2.08 - Total: 8.89 / 5.68 / 3.16 Grenada - OECS-Telecommunications and ICT Development Project: 0.54 / 0.27 / 0.26 - OECS-Education Development Project: 9.90 / 7.54 / 1.33 - OECS-Catastrophe Insurance: 4.50 / 4.42 / 0.95 - Public Sector Modernization Technical Assistance Credit: 3.50 / 0.99 / 2.77 - Grenada Technical Assistance Credit: 1.86 / 0.98 / 0.83 - OECS E govt. For Regional Integration Project: 2.40 / 0.17 / 2.08 - OECS Skills for Inclusive Growth: 3.00 / 0.38 / 2.78 - Total: 25.7 / 14.75 / 11.00 St. Lucia - OECS-Catastrophe Insurance: 4.50 / 3.82 / 0.70 - OECS-Skills for Inclusive Growth: 3.50 / 0.61 / 3.00 - OECS-Telecommunications and ICT Development Project: 0.54 / 0.27 / 0.26 - Disaster Management Project II: 10.50 / 8.26 / 1.86 - OECS E govt. For Regional Integration Project: 2.40 / 0.17 / 2.08 - Total: 21.44 / 13.13 / 7.9 St. Kitts and Nevis - OECS-Telecommunications and ICT Development: 0.54 / 0.23 / 0.23 - Total: 0.54 / 0.23 / 0.23 St. Vincent and the Grenadines - OECS-Catastrophe Insurance: 0.70 / 0.68 / 0.02 - OECS-Telecommunications and ICT Development Project: 0.54 / 0.27 / 0.26 - OECS-Education Development Project: 6.20 / 3.05 / 3.34 - OECS-HIV/AIDS Prevention and Control: 7.00 / 2.97 / 2.39 - OECS E govt. For Regional Integration Project: 2.30 / 0.18 / 2.07 - Total: 16.74 / 7.15 / 8.08 - Note: DMA denotes Dominica, GRD denotes Grenada, KNA denotes St. Kitts and Nevis; LCA denotes St. Lucia, and VCT denotes St. Vincent and the Grenadines. - Footnote: 1/ Amounts may not add up to Original Principal due to changes in the SDR/US dollar exchange rate since signing. ### Disbursements and Debt Service (In millions of US dollars, fiscal year ending June 30) - Data as of July 15, 2010. - Annual totals (Total disbursements / Repayments / Net disbursements / Charges and fees) by year: - 2000: - Total disbursements: 8.84 - Repayments: 0.73 - Net disbursements: 8.11 - Charges and fees: 0.05 - 2001: - Total disbursements: 6.08 - Repayments: 1.10 - Net disbursements: 4.97 - Charges and fees: 0.72 - 2002: - Total disbursements: 9.43 - Repayments: 1.23 - Net disbursements: 8.20 - Charges and fees: 1.44 - 2003: - Total disbursements: 26.56 - Repayments: 2.27 - Net disbursements: 24.29 - Charges and fees: 2.01 - 2004: - Total disbursements: 13.75 - Repayments: 3.06 - Net disbursements: 10.69 - Charges and fees: 2.22 - 2005: - Total disbursements: 15.25 - Repayments: 3.64 - Net disbursements: 11.62 - Charges and fees: 2.52 - 2006: - Total disbursements: 20.72 - Repayments: 4.72 - Net disbursements: 16.00 - Charges and fees: 2.70 - 2007: - Total disbursements: 31.14 - Repayments: 6.38 - Net disbursements: 24.73 - Charges and fees: 3.04 - 2008: - Total disbursements: 20.98 - Repayments: 8.6 - Net disbursements: 12.37 - Charges and fees: 3.54 - 2009: - Total disbursements: 12.28 - Repayments: 9.25 - Net disbursements: 3.02 - Charges and fees: 3.16 - 2010: - Total disbursements: 10.01 - Repayments: 9.59 - Net disbursements: 0.49 - Charges and fees: 2.65 - 2011*: - Total disbursements: 1.24 - Repayments: 0.09 - Net disbursements: 1.15 - Charges and fees: 0.01 *Note: 2011* entry included in table as provided. *Italic source attribution:* Appendix II. OECS: Relations with the World Bank Group (As of July 15, 2010) ### 3.0 percent of total approvals, reflecting the limited role played by CDB in that country in the ### _cr1130 - 3.0 percent of total approvals, reflecting the limited role played by CDB in that country in the ### CDB financing and country-specific approvals (Antigua and Barbuda, Anguilla, Montserrat) - Antigua and Barbuda: - CDB approvals in 2009: US$30.3 million. - December 2009: PBL approved in the amount of US$30 million to support the National Economic and Social Transformation Plan. - Purpose of PBL: support restoration of fiscal and debt sustainability through reforms in macroeconomic management, expenditure and debt management; revenue enhancement and social transformation. - Remainder of 2009 approvals (to total US$30.3 million): CCRIF support. - Anguilla: - Cumulative approvals since 1970: US$53.3 million. - Share of ECCU approvals: 4.0 percent. - Share of total approvals since 1970: 1.5 percent. - 2009 approvals: US$657,000, mainly for natural disaster management response to Hurricane Omar and CCRIF support. - 2009: CDB received a request for a PBL. - Montserrat: - Total funding since 1970: US$18.7 million. - Share of sub-region approvals: 1.4 percent. - Share of total approvals: 0.5 percent. - Recent interventions: education sector improvements, CTCS and BNTF grant assistance. - Total approvals for 2009: US$288,000 (grant resources). ### CDB Operations — approvals and disbursements (Loans, Contingent Loans, Equity and Grants; Net, in millions of U.S. dollars) - Approvals and disbursements, 1970–2008 and 2009 (net of cancellations): - Anguilla: Approvals 1970–2008: 52.7; Disbursements 1970–2008: 32.5; Approvals 2009: 0.7; Disbursements 2009: 0.5 - Antigua and Barbuda: Approvals 1970–2008: 71.8; Disbursements 1970–2008: 58.4; Approvals 2009: 30.3; Disbursements 2009: 2.9 - Dominica: Approvals 1970–2008: 187.2; Disbursements 1970–2008: 154.4; Approvals 2009: 13.0; Disbursements 2009: 5.2 - Grenada: Approvals 1970–2008: 199.5; Disbursements 1970–2008: 167.1; Approvals 2009: 20.5; Disbursements 2009: 11.7 - Montserrat: Approvals 1970–2008: 18.4; Disbursements 1970–2008: 15.3; Approvals 2009: 0.3; Disbursements 2009: 0.7 - St. Kitts & Nevis: Approvals 1970–2008: 183.1; Disbursements 1970–2008: 144.6; Approvals 2009: 6.9; Disbursements 2009: 7.6 - St. Lucia: Approvals 1970–2008: 310.1; Disbursements 1970–2008: 247.2; Approvals 2009: 20.8; Disbursements 2009: 20.0 - St. Vincent and the Grenadines: Approvals 1970–2008: 186.9; Disbursements 1970–2008: 153.2; Approvals 2009: 25.7; Disbursements 2009: 23.4 - Total: Approvals 1970–2008: 1,209.7; Disbursements 1970–2008: 972.6; Approvals 2009: 118.2; Disbursements 2009: 72.0 - Note: All figures are net of cancellations. - Footnote on PBL: The PBL in the amount of US$55 million was approved by CDB’s Board of Directors at their July 22, 2010 meeting. ### CARTAC: capacity building in the ECCU — scope, activities, and key outcomes - Establishment and mandate: - CARTAC established in November 2001, based in Barbados, providing technical assistance (TA) and training to 20 beneficiary countries. - Core TA areas: public financial management (tax policy and administration, public expenditure management), macroeconomic management and financial programming, financial sector supervision, capital markets development, and economic and financial statistics. - Multi-donor project with IMF as executing agency. - Funding and governance: - CIDA provides over 50 percent of CARTAC’s total funding; CDB, EU, Ireland, IMF, UNDP, the World Bank, and CARTAC member countries contribute the remainder. - Active Steering Committee includes representatives from participating countries, donor agencies, CARICOM and the CDB. - Tax and customs policy and administration: - 2003: CARTAC and FAD conducted comprehensive review of OECS tax systems and administrations. - Full revenue assessment missions to Dominica, St. Lucia, St. Vincent and the Grenadines, and St. Kitts and Nevis. - 2008: CARTAC assisted development of corporate strategic business plans for tax and customs departments in Grenada, St. Vincent and the Grenadines and Dominica. - VAT introductions and status: - Dominica: introduced VAT in 2006. - Antigua and Barbuda: introduced VAT in 2007. - St. Vincent and the Grenadines: introduced VAT in 2007. - Grenada: introduced VAT in February 2010. - St. Kitts and Nevis: actively working to introduce a VAT (November 2010). - CARTAC delivered pre- and/or post-VAT TA in 2010 to Dominica, St. Vincent and the Grenadines, Grenada, St. Lucia, and St. Kitts and Nevis. - CARTAC undertook a comprehensive revenue mobilization TA program in Antigua and Barbuda in 2010. - Public Financial Management (PFM) activities (2009 focus): - Five key areas of delivery: - Undertaking PFM diagnostics and supporting development of PFM action plans (PFM Reform Action Plans in Dominica and St Vincent and the Grenadines in 2009). - European Union funding support for St. Vincent and the Grenadines PFM Reform Action Plan: €500,000 for a period of two years commencing January 1, 2009 (access delayed until August 2009). - Support included diagnostic report development, redesign of the budget call (circular), strategic budgeting workshop, bank reconciliation process design, accounting improvements, mapping chart of accounts to GFS 2001 and CoFOG, and a PFM Information Technology Plan. - Support for internal and external audit, proposal for implementation of a new Internal Audit Department to be included in the 2010 budget. - Montserrat requested CARTAC support for a PEFA assessment, commenced in late 2009; CARTAC convened a PEFA workshop for the region in November 2009 attended by all ECCU countries. - Strengthening the Accountant General’s institution: - Anguilla: assistance implementing a cash management and forecasting model and developing annual financial statements in accordance with IPSAS. - St. Kitts and Nevis: support refining cash management and forecasting model. - Strengthening budget preparation process: - Support in delivering Strategic Budgeting presentations to Cabinet and permanent secretaries: Anguilla; Grenada; St Kitts and Nevis. - Building stronger audit capacity: - Support for internal and external audit in St. Vincent and the Grenadines in 2009. - Developing sustainable capacity building in the region: - Support to Caribbean Public Finance Association (CaPFA); Mr. Isaac Anthony, Finance Secretary, St Lucia, chairs the Board. - CARTAC sponsored three CaPFA meetings in 2009. - New PFM workshop launched in 2009: - One-week workshop delivered five times in four countries: Anguilla; Grenada; St Kitts and Nevis (once each) and St Vincent and the Grenadines. - Involves mentoring and train-the-trainer component; six officials can now deliver these workshops and will form an expert group. - Regional conferences in 2009: - PEFA workshop in November 2009; PFM conference in Barbados (theme: consolidation of budget preparation and execution); FMIS conference in Belize in September 2009. - CARTAC participated in ECCU events, including the ECCU boot camp in June 2009, and six-monthly video conferences with senior PFM officials. - Macroeconomic and fiscal management: - CARTAC and ECCB delivered a 3-day pension reform conference in St. Kitts and Nevis. - Strategic Budgeting workshops delivered to senior officials or ministers in several ECCU states. - At ECCB request, CARTAC assisted ECCU member countries in developing home-grown programs aimed at achieving fiscal/debt targets. - Assistance provided in preparation of medium-term fiscal frames in Grenada, Montserrat and St. Vincent and the Grenadines. - Assistance in preparation of Debt Sustainability Assessments (DSAs) planned following regional IMF-WB workshop in July 2010. - Review of internal and external audit functions performed in Anguilla in 2007. - Quantitative pension reform workshops delivered in St. Kitts and Nevis and in Turks and Caicos. - Assistance to strengthen oversight and governance of statutory bodies provided to Montserrat, St. Kitts and Nevis and St. Vincent and the Grenadines. - Original fiscal/debt targets replaced in 2006 by a ceiling on the public sector debt/GDP ratio of 60 percent by 2020. - Macroeconomic programming and analysis (MAC): - CARTAC response to ECCB request (2002) to help member countries develop home-grown programs to achieve fiscal/debt targets. - Activities: build capacity for macroeconomic projections, identify imbalances, quantify policy measures, prepare monitoring framework for quarterly targets. - 2009 activities: follow-up missions to update macroeconomic frameworks; local teams and ECCB economists attended formal training programs including "Macroeconomic Statistics for Economists: An Introduction to Macroeconomic Statistical Systems" and the joint IMF Institute/CARTAC "Macroeconomic Management and Fiscal Policy Issues" courses. - Financial sector supervision: - Focus on nonbanking sector and development of single regulatory units in each of the eight ECCU countries; resolution of a failed insurance company. - Achievements: passage of laws to enact single regulatory units; development and passage of laws pertaining to insurance, credit unions, and money services businesses. - Nonbank regulatory reporting forms created for all nonbanks in the ECCU; quarterly reporting to begin in September, 2010. - Significant TA in insurance supervision: framework for on-site examination training, off-site analysis, licensing, and dealing with problem institutions. - Off-shore banking supervision TA for three of the eight ECCU countries, including on-site examinations, reporting, and off-site analysis. - Single regulatory units are functioning at a relatively high level for nonbank supervision; infrastructure, policies, procedures, and functional systems are in place. - CARTAC assistance at ECCB on banking supervision: development of a market risk capital charge and a mechanism to risk-profile banks; no results obtained in these two projects. - Economic and financial statistics: - 2009 concentration on national accounts and price statistics; regional training in government finance, monetary and financial, and international investment statistics. - National accounts activities: - Rebasing national accounts to update constant price GDP estimates; completion expected in 2010 with alignment to 1993 SNA. - Training staff in national accounting methods and procedures. - Price statistics: - Development of new CPI market baskets in ECCU countries except Montserrat (to start in 2010). - Two CPI workshops: a two-week CPI compilers workshop on the Consumer Price Index Manual, 2004; a one-week workshop for countries introducing the Price Index Processor System. - In Anguilla: assistance developing export-import price indexes (XMPIs): development of weights, identification of sample enterprises and commodities, and provision of software. - Statistics advisers coordinated with ECCB, CARICOM and the Standing Committee of Caribbean Statisticians to review work plans and coordinate TA. ### IMF Executive Board Public Information Notice (PIN No. 11/7) — ECCU common policies discussion (January 21, 2011) - Context and macroeconomic outcomes: - Executive Board concluded the 2010 Discussion on Common Policies of Member Countries of the Eastern Caribbean Currency Union on September 27, 2010. - Real regional Gross Domestic Product (GDP) contracted by 6 percent in 2009. - Inflation averaged 0.8 percent in 2009. - Inflation expected to revert gradually to about 2 percent (long run average) given the anchor of the currency peg. - Recession-induced fiscal revenue losses, increases in public spending, and higher debt servicing costs raised the region’s overall fiscal deficit to 8 percent of GDP in 2009. - Outlook: - Growth expected to remain subdued in 2010 and recover only slowly in 2011. - Risks to the outlook are tilted on the downside. - Note on Article IV context: - The Board discussion is part of Article IV consultation procedures involving staff reports and Board summings-up; the Managing Director summarizes views of Executive Directors at conclusion. *Italic: Content derived from the IMF staff report and appendices in the supplied PDF content unit.* ### 3.5 percent of GDP in 2008. The regional public debt jumped to above 100 percent of GDP at ### _cr1130 - 3.5 percent of GDP in 2008. The regional public debt jumped to above 100 percent of GDP at ### Fiscal developments and debt outlook - Regional fiscal deficit projected to decline but remain elevated at close to 4.5 percent of GDP for 2010–15. - Public debt will stay above 100 percent of GDP through 2015. - Regional public debt jumped to above 100 percent of GDP at end 2009, from an average of 93 percent of GDP in 2006-08, reverting earlier gains in debt reduction. - Authorities translated the current debt target of 60 percent of GDP by 2020 into annual primary surplus targets; required surpluses will vary by country depending on initial conditions. - Emphasized measures: - Prioritizing public investment. - Enhancing expenditure efficiency. - Containing current spending while protecting the poor and vulnerable. ### Financial sector weaknesses and risks - Weaknesses aggravated by contraction of economic activity and the collapse of the Trinidad and Tobago-based CL Financial Group on insurance companies, BAICO and CLICO operating in the ECCU. - Private sector credit growth slowed sharply in 2008–09. - Liquidity in the ECCU banking system, particularly for some indigenous banks, tightened significantly. - Non-performing loans (NPLs) increased to 9.6 percent of total loans as of June 2010 in the banking system, reflecting deterioration in tourism and mortgage loan portfolios. - Some indigenous banks’ gross exposure to the government sector has been substantial, mirroring rising public sector debt in the ECCU. - Despite high capital adequacy ratios, application of stricter classification for NPLs and provisioning might unveil further weaknesses. - Policy and regulatory priorities: - Enhanced crisis preparedness and preemptive resolution of weak indigenous banks. - Strengthening regulation and supervision of the nonbank financial sector. - Enacting and harmonizing financial sector legislation and setting up single regulatory units. - Minimize fiscal costs in resolution strategies for insurance-sector failures (BAICO, CLICO); take a decisive regional approach for CLICO in cooperation with home supervisory authorities. ### External sector and exchange rate considerations - Current account developments: - Current account deficit narrowed to about 27 percent of GDP in 2009 from 37 percent of GDP in 2008. - Current account deficit in 2010 projected to remain elevated at similar level to 2009 but to narrow over the medium term with gradual recovery in tourism receipts and fiscal consolidation. - Financing of the current account deficit: - Predominantly by FDI inflows, some public sector long-term loans, and drawdown of net foreign assets by commercial banks. - ECCB reserves and coverage: - ECCB reserve coverage of demand liabilities declined below 100 percent in early 2009 — averaged about 95 percent in the first half of 2010 — but remained well above the legally-mandated floor of 60 percent. - Real Effective Exchange Rate (REER): - REER appears broadly in line with current fundamentals. - Required fiscal adjustment would be associated with a depreciation of the equilibrium REER; given the currency peg, this implies adjustments in relative prices and will require restraint in real wage growth or even a reduction in nominal wages. - Improving productivity and enhancing the business climate are critical to maintaining competitiveness. - Further strengthening regional integration is important. ### Policy response: Eight-point Stabilization and Growth Program and regional integration - The Eight-point Stabilization and Growth Program (signed December 2009) is the basis for a coordinated regional response; it focuses on: - A stabilization package covering financial programs, fiscal reforms, and debt management. - A stimulus package with public sector investment programs and social and financial safety nets. - A structural package comprising amalgamation of some indigenous banks and reform of the insurance sector. - Regional integration steps: - Authorities stepped up efforts to deepen regional integration by signing the Organization of Eastern Caribbean States (OECS) Economic Union Treaty. - The new OECS Treaty, to be ratified by the respective member countries by January 2011, would pave the way for free movement of people, goods, services, and capital among participating countries and strengthen the institutional setup of a full-fledged economic and monetary union. ### Executive Board Assessment (summarized views) - ECCU region hit hard by the global downturn and faces a protracted recovery. - Global crisis exposed significant weaknesses despite prior reforms. - Urgent challenge: fiscal consolidation supported by consistent fiscal policies across currency union members and an appropriate institutional framework for policy coordination. - Directors welcomed authorities’ commitment to comprehensive measures to stabilize fiscal and financial sectors and put ECCU economies on a more sustainable growth path. - Directors emphasized safeguarding financial sector stability, reducing public financing through the banking system, strengthening supervision of nonbank financial sector, and minimizing fiscal costs of resolutions. - Directors agreed that the currency board arrangement remains an appropriate exchange rate regime. ### Selected economic and financial indicators, 2006–10 (highlights from table) - Real GDP (annual percentage change): 2006: 6.6; 2007: 5.6; 2008: 1.9; 2009: -6.2; 2010 Prel./Proj.: -0.4 - GDP deflator (annual percentage change): 2006: 2.7; 2007: 3.0; 2008: 4.7; 2009: 1.8; 2010: 2.3 - Consumer prices, average (annual percentage change): 2006: 4.0; 2007: 3.3; 2008: 6.7; 2009: 0.8; 2010: 2.3 - Primary central government balance (In percent of GDP): 2006: -1.2; 2007: -0.4; 2008: -0.2; 2009: -3.6; 2010: -2.1 - Overall central government balance (In percent of GDP): 2006: -5.1; 2007: -4.0; 2008: -3.6; 2009: -8.3; 2010: -6.6 - Total revenue and grants (In percent of GDP): 2006: 31.2; 2007: 30.6; 2008: 31.5; 2009: 31.0; 2010: 31.7 - Total expenditure and net lending (In percent of GDP): 2006: 36.3; 2007: 34.6; 2008: 35.1; 2009: 39.3; 2010: 38.3 - Total public debt (end-of-period, In percent of GDP): 2006: 97.9; 2007: 91.1; 2008: 89.2; 2009: 103.1; 2010: 108.0 - Current account balance (In percent of GDP): 2006: -30.9; 2007: -35.4; 2008: -36.9; 2009: -26.7; 2010: -25.4 - Trade balance (In percent of GDP): 2006: -45.3; 2007: -46.8; 2008: -47.6; 2009: -35.8; 2010: -35.4 - Travel receipts (In percent of GDP): 2006: 24.3; 2007: 22.5; 2008: 20.4; 2009: 19.3; 2010: 20.0 - Exports, f.o.b. (annual percentage change): 2006: -2.5; 2007: 4.8; 2008: 23.7; 2009: -9.8; 2010: 1.3 - Imports, f.o.b. (annual percentage change): 2006: 18.7; 2007: 11.7; 2008: 10.4; 2009: -25.3; 2010: 0.9 - Stayover visitors (annual percentage change): 2006: 2.8; 2007: -1.9; 2008: -0.3; 2009: -11.9; 2010: 0.0 - End-year gross foreign reserves of the ECCB (In millions of U.S. dollars): 2006: 696.0; 2007: 764.5; 2008: 759.0; 2009: 800.8; 2010: 760.8 - End-year gross foreign reserves of the ECCB (In months of imports): 2006: 3.8; 2007: 3.7; 2008: 3.4; 2009: 4.7; 2010: 4.5 - End-year gross foreign reserves of the ECCB (In percent of broad money): 2006: 18.6; 2007: 18.6; 2008: 17.0; 2009: 17.6; 2010: 16.5 - External public debt (end-of-period, In percent): 2006: 50.8; 2007: 46.0; 2008: 44.0; 2009: 49.8; 2010: 54.4 - Money and credit (Percentage change): - Net foreign assets 4/: 2006: 2.0; 2007: -1.5; 2008: -6.8; 2009: -2.9; 2010: -0.4 - Net domestic assets 4/: 2006: 9.6; 2007: 11.2; 2008: 15.8; 2009: 4.8; 2010: 1.2 - Broad money: 2006: 11.6; 2007: 9.7; 2008: 9.0; 2009: 1.9; 2010: 0.8 *Source: IMF staff estimates and projections, ECCU country authorities, and Eastern Caribbean Central Bank as presented in the original document.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1130.pdf_