## 1. Risk Assessment Matrix (_cr16333)

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### Recent economic developments
- Growth and tourism
  - ECCU regional growth decelerated from 2.9 percent y/y in 2014 to an estimated 1.9 percent in 2015.
  - Stay-over tourist arrivals growth slowed from 6 percent y/y in 2014 to about 2.4 percent in 2015, driven mainly by a sharp decline in arrivals from Canada.
- Inflation and reserves
  - Inflation in the region turned negative due to declining commodity and subdued food prices.
  - Gross international reserves rose to an estimated 6 months of imports of goods and services in 2015.
- Fiscal outcomes and public debt
  - Regional public debt declined to 81.7 percent of GDP in 2015, down from the peak of 86 percent in 2012.
  - Headline primary surplus narrowed from 1.4 percent of GDP in 2014 to an estimated 0.8 percent in 2015, largely due to bank resolution costs in Antigua and Barbuda.
  - Underlying primary balance (excluding one-off items and CIP) improved from negative 1.5 percent of GDP in 2014 to an estimated negative 0.2 percent of GDP in 2015 (excludes Anguilla and Montserrat).
- Citizenship-by-Investment Program (CIP) inflows (2015)
  - St. Kitts and Nevis: 17.4 percent of GDP.
  - Antigua and Barbuda: 7.9 percent of GDP.
  - Dominica: 3.6 percent of GDP.
  - St. Lucia launched its CIP in early 2016; St. Vincent and the Grenadines remained without a CIP among the six independent ECCU countries.
- External sector
  - Regional current account deficit estimated to have narrowed to 12.8 percent of GDP in 2015 from 14.5 percent in 2014 (estimates based on BPM5 methodology).
  - Over 80 percent of the current account deficit was financed through FDI inflows.
  - FDI inflows at 11.6 percent of GDP in 2015, below the peak of 22 percent of GDP in 2007.
  - Revisions from BPM6/external sector statistics suggest much smaller current account deficits; preliminary ECCB 2014 data show current account deficits about 10 percentage points of GDP lower than BPM5 data.

### Banking sector and financial stability
- Recent actions and structural metrics
  - Authorities strengthened the bank resolution framework and resolved three insolvent banks.
  - The good assets of the former ABI Bank along with deposits up to EC$500,000 were acquired by the Eastern Caribbean Amalgamated Bank via a purchase and assumption (P&A) agreement.
  - Deposits above EC$500,000 were transferred to a Depositor Trust Fund backed by a EC$157 million (4.5 percent of GDP) government bond, to be paid off over 10 years as the bond is amortized.
  - Two insolvent banks in Anguilla were resolved in late April 2016: deposits up to EC$2.8 million threshold transferred to a new government-owned bridge bank; deposits above EC$2.8 million (including EC$265 million, 29.9 percent of GDP, of Social Security) transferred to Deposit Protection Trusts backed by bonds amortized over 10-25 years.
- Asset quality and liquidity
  - Non-performing loans ratio remains elevated at 17 percent of total loans.
  - NPL provisioning at an inadequate 44 percent of non-performing loans.
  - Private sector credit fell by 4.2 percent y/y in February 2016—the third consecutive year of decline.
  - Banks have built record amounts of excess liquidity, much held as reserves at the central bank; many banks are actively discouraging savings deposits, including turning away new such deposits.
- Supervisory findings and recommendations
  - Asset quality reviews (AQRs) and viability assessments identified capital shortfalls in some indigenous banks and an overbanked system.
  - Fund technical assistance identified weaknesses in the bank supervision process.
  - Staff recommended:
    - Move quickly to operationalize the Eastern Caribbean Asset Management Company (ECAMC); ECCB targeted June 2016 for opening.
    - ECAMC expected to catalyze recovery of bad assets, take over receiverships in Antigua and Anguilla, and purchase NPLs from other indigenous banks.
    - ECCB should order corrective actions, including capital calls, from undercapitalized-but-viable banks; banks must submit sound capitalization plans; non-compliant banks may need to merge or be acquired; non-viable banks should exit orderly.
    - Reform alien land holding laws in some jurisdictions to facilitate ECAMC asset sales.
    - Implement TA recommendations to enhance supervisory processes: loan classification, collateral valuation, on- and off-site inspections, and implementation of Basel II.
    - Operationalize ECAMC, strengthen supervisory processes, increase capital of indigenous banks, and promote consolidation of the banking system.

### ECCB safeguards, MSR, and monetary policy
- Safeguards and core indicators
  - 2016 Safeguards Assessment: ECCB maintained sound external audit arrangements and transparent financial reporting; recommended Board Audit Committee maintain access to an external financial expert.
  - Internal audit function falls short of international standards due to extensive IAD involvement in operations compromising independence.
  - Ratio of international reserves to money base was 96 percent at end-2015 (statutory mandate 60 percent).
  - Discount rate has remained at 6.5 percent since July 2003.
- Minimum saving deposit rate (MSR)
  - MSR introduced in 1985 at 4 percent; most recent change in May 2015 reduced MSR from 3 percent to 2 percent.
  - MSR prevents decline in deposit rates in context of excess liquidity, undercutting banks’ profitability and impeding reduction in lending rates.
  - Staff analysis:
    - Reducing the saving deposit floor by 1 percentage point (ppt) would lower deposit rates by 0.7 ppts, while lending rates would decline by about 0.4 ppts.
    - Survey found pass-through of the May 2015 100 bps MSR decline to prime consumer mortgage rates between 10 to 80 bps.
    - Lower MSR expected to improve profitability, expand scope for higher NPL provisioning and faster write-offs, reduce NPLs, and increase credit and growth.
  - Staff recommendation: Immediate elimination of the MSR or restricting its applicability to small saving deposits.
  - Authorities' position: ECCB and country authorities open to considering further reduction or elimination but concerned about smaller pass-through as registered by official statistics; ECCB requested additional empirical evidence.

### Withdrawal of correspondent banking relationships (CBRs)
- Extent and effects
  - Offshore banking sector most negatively affected; loss or inability to obtain CBRs led to revoking of some licenses and decline in offshore banking license applications.
  - Survey of 10 indigenous commercial banks and 5 regional offshore banking regulators: none of indigenous banks completely lost all CBRs at time of discussions; about half reported losing CBRs or receiving unofficial notifications.
  - Median number of correspondent banking relationships currently stands at about four.
  - Region has seen a significant increase in CBR fees for the onshore sector, which on average almost doubled, and in some cases tripled over the last 2 years.
  - Some banks reported difficulties establishing USD lines with other correspondent banks.
- Drivers and policy responses
  - Drivers include increased AML/CFT compliance costs and regulatory pressures; incidence negatively correlated with client institution size.
  - Staff recommendations:
    - Strengthen AML/CFT and international tax cooperation frameworks.
    - Accelerate BASEL II implementation and risk-based supervision.
    - Increase information sharing with correspondent banks and consider short-run solutions (smaller banks paying larger banks a fee to process international transactions).
    - Pursue bank consolidation to create larger institutions better able to maintain CBRs.
  - Authorities’ actions:
    - CARICOM technical task force established; coordinated political strategy being developed.
    - Exploring feasibility of establishing a Caribbean non-deposit taking financial institution in the United States for U.S. transactions.

### Outlook, projections, and key risks
- Growth and external projections
  - ECCU growth projected to converge to its long-term average of about 2.5 percent over the medium-term.
  - Favorable conditions in the United States and the United Kingdom expected to support tourism recovery.
  - Growth in Canada expected to regain momentum by 2017 as commodity prices recover gradually.
  - Greater pass-through of lower international oil prices to consumers in 2016 expected to stimulate retail sales and boost domestic demand without generating inflation pressures.
  - External current account deficit projected to narrow to about 11.8 percent of GDP (using the BPM5 series).
  - Import coverage of gross international reserves projected to increase from 5.4 months in 2014 to 6.4 months in 2017.
- Risk assessment (overall risks to the baseline are balanced)
  - Important downside risk: withdrawal of correspondent banking relationships (CBRs) by international banks with serious negative implications.
  - Governments could face significant cash flow challenges if CIP inflows were to dry up.
  - Upside risks: larger-than-projected CIP flows, stronger commodity price declines benefiting consumers, and large infrastructure and FDI projects (e.g., international airport in St. Vincent and the Grenadines; large hotel projects under consideration in Antigua and Barbuda, Grenada, and St. Vincent and the Grenadines).

### Box 1 — Risk Assessment Matrix (main risks, likelihood, impact, recommended policy responses)
- Persistent banking sector weaknesses
  - Relative likelihood: High.
  - Expected impact: Medium.
  - Recommended policy response: Require banks to increase capital; operationalize the ECAMC; promote bank consolidation.
- Continued negative credit growth and renascent risk of banking system instability
  - (Linked to above; policy responses as above.)
- Reduced financial services by global/regional banks ("de-risking") — loss of correspondent banking services
  - Relative likelihood: Medium.
  - Expected impact: Medium to High.
  - Recommended policy response: Strengthen AML/CFT and international tax cooperation frameworks; promote bank consolidation; affected banks should explore paying larger unaffected banks a fee to carry out cross-border transactions on their behalf.
- Persistently lower energy prices (supply factors reversing only gradually)
  - Relative likelihood: High.
  - Expected impact: Low.
  - Recommended policy response: Diversify export and tourism markets.
- Natural disasters (hurricanes and floods)
  - Relative likelihood: Medium.
  - Expected impact: Medium to High.
  - Recommended policy response: Explicitly account for natural disaster in macroeconomic policy programming; build fiscal buffers, including using CIP revenues.
- Opening of U.S.-Cuba tourism following regularization of diplomatic relations
  - Relative likelihood: High.
  - Expected impact: Low.
  - Recommended policy response: Adopt a comprehensive approach to raise competitiveness; build regional synergy.
- Fall/Increase in citizenship-by-investment (CIP) receipts
  - Relative likelihood: Medium.
  - Expected impact: High.
  - Recommended policy response: Use CBI revenues to reduce debt, build buffers, and finance large infrastructure projects; strengthen due diligence and oversight to reduce financial integrity and international security risks.
- Spread of Zika virus
  - Relative likelihood: Medium.
  - Expected impact: Medium.
  - Recommended policy response: Enhance eradication and protection actions; implement public education campaign.

### Policy discussions and recommended actions
- Banking system
  - Operationalize the ECAMC; ECCB targeted June 2016 for opening and was confirming new directors, obtaining capital contributions from ECCU member jurisdictions, and hiring staff.
  - Funded TA (CDB-funded) to help operationalize ECAMC.
  - ECCB to order corrective actions, including capital calls, and pursue consolidation and mergers where appropriate.
  - Reassign internal audit operational duties to other departments to address IAD independence concerns.
- Fiscal frameworks, CIPs, and disaster resilience
  - Pass national fiscal responsibility legislation to enshrine the regional debt target of 60 percent of GDP by 2030 and specify fiscal rules; articulate medium-term fiscal adjustment strategies in budgets focused on primary balance target excluding CIP revenues.
  - Internalize expected costs of natural disasters in macro-fiscal frameworks and build fiscal buffers:
    - Assuming half of total natural disaster costs fall on government, ECCU governments would need to save approximately 1 percent of GDP per year to pay for its share of damages from the most expensive disaster.
    - Include escape clauses in fiscal rules to allow temporary suspension in event of a natural disaster.
  - Improve PFM frameworks and seek Fund TA for design and management of public sector investment programs (PSIP).
  - Record all CIP revenues and related expenditure on budget; press for comprehensive and consistent reporting of CIP revenues in external and fiscal accounts.
  - Save a significant portion of CIP resources in a fund for natural disaster shocks and resilient infrastructure:
    - Countries would need saving fund stocks in the range of 6-12 percent of GDP to self-insure against natural disasters.
    - Annual savings in years with no natural disaster of 0.4-1.9 percent of GDP to ensure fund sustainability with low probability of depletion.
  - Use CIP windfalls to reduce public debt, build precautionary buffers and support strategic public investment where appropriate; ensure rigorous project evaluation and sufficient resources to complete projects to limit contingent liabilities.
- Structural reforms and competitiveness
  - Prioritize resilience-enhancing infrastructure financed by CIP-funded saving funds and strengthened PSIP.
  - Continue energy policy reforms and support renewable energy projects.
  - Advance regional collaboration: harmonized border management for multi-destination tourism; implement single regional regulatory authority for non-banks (starting with insurance).
  - Reduce unit labor costs and boost employment: align real wage growth with productivity, increase labor market flexibility, control public sector wage growth, strengthen labor-training programs for youth and displaced agricultural workers.
  - Improve macroeconomic statistics and ensure consistent treatment of CIP flows with BPM6.

### Banking-sector resolution case specifics and supervisory gaps
- ABI Bank resolution (Antigua and Barbuda)
  - Good assets and deposits up to EC$500,000 acquired by Eastern Caribbean Amalgamated Bank via P&A.
  - Deposits above EC$500,000 transferred to a Depositor Trust Fund backed by a EC$157 million (4.5 percent of GDP) government bond amortized over 10 years.
  - Bad assets and remaining liabilities transferred to receivership.
- Anguilla bank resolutions (late April 2016)
  - Deposits up to EC$2.8 million transferred to a new government-owned bridge bank with good assets and some NPLs.
  - Deposits above EC$2.8 million (including EC$265 million, 29.9 percent of GDP, Social Security) transferred to Deposit Protection Trusts backed by new bonds amortized over 10-25 years.
  - Non-performing assets and offshore placements put in receivership.
- Supervisory gaps and TA
  - AQRs and dynamic modeling identified capital shortfalls and overbanking.
  - Fund TA identified weaknesses in supervision; recommended corrective actions and Basel II implementation.

### Non-Performing Loans (NPLs): determinants and macroeconomic impact (Annex V)
- NPL context and concentrations
  - NPL ratios are well above the prudential guideline of 5 percent in all ECCU jurisdictions; median NPL ratio 12.8 percent in 2015 (range: 4.5 percent to 24.8 percent).
  - Sectoral composition of loans at end-2015: Personal loans 43 percent; Construction 18 percent; Tourism 18 percent.
  - Foreign banks held 47 percent of total banking system assets (or 109 percent of GDP) and 40 percent of total deposits (or 79 percent of GDP) as of end-2015.
- Bank-level panel regression findings (1996Q1-2015Q4)
  - Persistent dynamics: NPLs t-1 coefficients around 0.679***, 0.662*** in baseline regressions; NPLs t-2 coefficients around 0.20 (e.g., 0.207***).
  - Macroeconomic determinants:
    - Advanced Economy Growth t-2: negative and significant (e.g., -0.010**), indicating spillovers from advanced-economy growth lower ECCU NPLs.
    - Tourism Growth t-2: positive and significant (e.g., 0.002***), indicating tourism-sector dynamics raise NPLs.
    - Time dummy 2008–2015: positive and significant (e.g., 0.130***), consistent with structural increase in NPLs since global financial crisis.
  - Bank-level determinants:
    - Real Loan Growth t-1: negative and significant (e.g., -0.003***).
    - Return on Assets t-1: negative and significant (e.g., -0.030**).
    - Household Loans/Total Loans t-1: positive (e.g., 0.030*).
    - Construction and Tourism Loans/Total Loans t-1: positive (e.g., 0.022*).
    - Foreign bank dummy: negative and significant (e.g., -0.072***; -0.103***), indicating foreign banks have systematically lower NPLs than indigenous banks.
- Panel VAR macro-financial feedbacks
  - A shock to NPL growth leads to negative effects on real GDP growth, CPI inflation, and FDI growth; strongest statistical significance for FDI.
  - In industry quarterly models, deterioration in asset quality leads to statistically significant declines in credit to tourism, agriculture, construction, and manufacturing.
  - Variance decomposition: over a 5-year horizon about 7 percent of NPLs is explained by economic performance variables; NPL growth explains about 1 percent of real GDP growth over the medium term.
- Policy implications
  - Improving asset quality is essential to reverse credit contractions and support sustained economic growth.
  - FDI has a strong positive effect on economic growth and helps moderate macro-financial feedback loops.
  - Prioritize restoring credit supply and asset quality to tourism, construction, agriculture, and manufacturing.

### Citizenship-by-Investment Programs (Annex I) — macroeconomic role and governance
- Diffusion and program design
  - CIPs proliferated: Antigua and Barbuda, Grenada and St. Lucia launched CIPs over 2013-2015; St. Kitts and Nevis and Dominica programs date to 1984 and 1993 respectively.
  - Structure commonly includes: lump sum contribution to a National Development Fund (NDF) or redeemable investment in private sector (typically real estate or business), plus government fee. St. Lucia includes investment in government securities for 5 years.
- Demand drivers and competition
  - Demand driven by high net-worth individuals (China, Middle East, Russia, advanced countries) seeking visa facilitation, travel documents, safe havens, estate and tax planning.
  - As of 2016, Dominica, Grenada and St. Lucia citizens became eligible for visa-free travel to the Schengen area.
  - Competitive pressures: price competition, visa/regulatory actions (e.g., Canada reintroduced visa for St. Kitts and Nevis in November 2014; FinCEN Advisory May 2014), competition from Malta and European residency schemes.
- Macroeconomic significance and vulnerabilities
  - St. Kitts and Nevis: cumulative CIP inflows over 2013-2015 = 45 percent of GDP; inflows to the budget peaked at 14 percent of GDP in 2014.
  - Antigua and Barbuda: inflows to the public sector in 2015 in excess of an estimated 7½ percent of GDP.
  - Reliance on CIP inflows to finance recurrent expenditure risks painful fiscal adjustment in a sudden stop.
- Reporting and governance recommendations
  - Record all CIP-related revenues and expenditures on budget; comprehensive and consistent reporting in external and fiscal accounts.
  - Use CIP windfalls to reduce public debt, build precautionary buffers, and finance strategic public investment; save a share in funds for natural disaster shocks.
  - Governance safeguards: rigorous due diligence, full-fledged AML/CFT framework, transparency and exchange of tax information, public disclosure of number of citizenships granted, revenues earned, and their use.

### Natural disaster self-insurance and saving funds (Annex VIII and Appendix 1)
- Main quantitative recommendations and simulation outputs
  - Estimated SF (saving fund) stock needs: in the range of 6-12 percent of GDP.
  - Required budget savings (annual contributions) for sustainability: in the range of 0.5-1.9 percent of GDP per year (Annex summary gives 0.5-1.9 percent; Appendix 1 reports 0.4-1.9 percent range elsewhere).
  - Monte-Carlo simulations (1000 simulations per country, 2016-2030 horizon) calibrated to historical volatility and ND frequency produce probabilistic public debt and SF depletion metrics.
- Country-specific calibrated fund statistics (Government Saving Funds for Natural Disasters; percent of GDP)
  - Antigua and Barbuda (ATG)
    - Fund size: 12.00
    - Annual budget saving if no ND: 1.90
    - Probability of fund depletion, units: 0.05
    - Annual expected use of the fund if ND: 8.7
    - Average fiscal cost of simulated ND 1/: 57.9
  - Dominica (DMA)
    - Fund size: 10.00
    - Annual budget saving if no ND: 1.50
    - Probability of fund depletion, units: 0.08
    - Annual expected use of the fund if ND: 5.9
    - Average fiscal cost of simulated ND 1/: 29.3
  - Grenada (GRD)
    - Fund size: 6.00
    - Annual budget saving if no ND: 0.35
    - Probability of fund depletion, units: 0.04
    - Annual expected use of the fund if ND: 3.0
    - Average fiscal cost of simulated ND 1/: 29.7
  - St. Kitts and Nevis (KNA)
    - Fund size: 10.00
    - Annual budget saving if no ND: 1.90
    - Probability of fund depletion, units: 0.07
    - Annual expected use of the fund if ND: 4.8
    - Average fiscal cost of simulated ND 1/: 19.3
  - St. Lucia (LCA)
    - Fund size: 8.00
    - Annual budget saving if no ND: 1.05
    - Probability of fund depletion, units: 0.06
    - Annual expected use of the fund if ND: 3.4
    - Average fiscal cost of simulated ND 1/: 13.7
  - St. Vincent and the Grenadines (VCT)
    - Fund size: 8.00
    - Annual budget saving if no ND: 0.95
    - Probability of fund depletion, units: 0.03
    - Annual expected use of the fund if ND: 2.6
    - Average fiscal cost of simulated ND 1/: 12.9
  - Note: 1/ Includes the estimated average decline in revenues and increase in primary expenditures in the simulations, net of the expected increase in donor grants.
- Sensitivities and public debt implications
  - Raising the ND probability one notch increases required annual budget savings by around 0.2 percent of GDP for Grenada, St. Lucia, and St. Vincent and the Grenadines and around 0.5 percent of GDP for Antigua and Barbuda, Dominica, and St. Kitts and Nevis.
  - Lowering the proposed SF stock by 2 percent of GDP would increase probability of depletion to about 10 percent or higher.
  - Under calibrations, in expected terms public debts generally decline toward the regional target of 60 percent of GDP by 2030, but there is significant probability the 60 percent target is missed if NDs are more frequent/harder than expected.
- Institutional design recommendations
  - Unambiguous budget contribution and disbursement rules; triggers based on verifiable criteria; clearly-stated objective; strict information disclosure requirements.

### External spillovers from Trinidad and Tobago (Annex III)
- 2015 Trinidad and Tobago impacts
  - Oil and gas output down by 4.9 percent (y/y); aggregate GDP declined by 2.1 percent.
  - External current account shifted from a surplus of 4.6 percent of GDP in 2014 to a deficit of 5.4 percent in 2015.
  - Banking sector NPLs below 3½ percent of total loans; banks remained liquid with relatively high capital buffers.
- Transmission to ECCU
  - Empirical GVAR model (annual data 1980-2014; 23 countries) suggests a positive 1 percent shock to Trinidad and Tobago GDP raises ECCU GDP by about 0.12 percentage points.
  - Heterogeneity: Grenada (tourism exposure), Dominica and St. Vincent and the Grenadines (trade exposure) more affected; St. Kitts and Nevis and St. Lucia negligible in model.
  - Financial spillovers limited in short term due to Trinidadian banking sector resilience; tourism and trade channels present more significant risks for specific ECCU members.

### Energy investment and fiscal sustainability
- Investment scale
  - Regional average cost in the order of 7 percent of estimated 2015 GDP to implement countries’ energy strategies.
- Fiscal considerations
  - Public financing feasible only where debt dynamics are sustainable; energy investments need to be high-yielding to be self-financing.
  - Greater private sector role (including PPPs) recommended to alleviate sustainability pressures.
- Country example
  - St. Vincent and the Grenadines geothermal project scheduled to come online in 2018: would increase energy mix to 80 percent renewables from 12 percent and reduce electricity costs to consumers to US$0.20 per kilowatt hour from US$0.40 in 2015.
- Policy measures
  - Facilitate IPPs, net-metering/net-billing, establish independent energy regulators, national energy efficiency standards, and targeted EE initiatives (solar water heaters, grid loss reduction, street lighting retrofit).

### Labor markets and unemployment (Box 2 / Annex IX)
- Unemployment levels and patterns
  - Official unemployment rates very high in some ECCU countries (Grenada 23 percent; St. Lucia 24 percent; St. Vincent and the Grenadines 22 percent; Antigua and Barbuda 10.2 percent; St. Kitts and Nevis 11 percent).
  - Youth unemployment in St. Lucia about 41 percent; women 27 percent, men 20 percent.
  - Aggregate employment stagnant since the global financial crisis; private sector employment declined significantly.
- Key drivers identified
  - Disconnect between wages and productivity: average public sector real wage increased by 20 percent over past decade while productivity stagnated.
  - Strong labor union activity and collective bargaining, especially in public sector, contribute to wage-productivity disconnect.
  - High reservation wages driven by tourism and public sector pay differentials.
  - Long-term sectoral declines (e.g., agriculture) and natural disasters contributed to structural unemployment.
- Policy implications
  - Foster wage moderation and productivity growth; contain public sector wage bill; increase labor market flexibility; strengthen training programs; improve investment climate and reduce energy costs.

### Institutional capacity building and TA (CARTAC and statistical improvements)
- CARTAC role and ECCU uptake
  - CARTAC provides TA in revenue administration, PFM, macroeconomic programming, financial sector stability, and statistics; ECCU accounts for just over 40 percent of CARTAC TA.
  - ECCU focus areas: financial sector supervision (49 percent), PFM (45 percent), macroeconomic programming and analysis (44 percent).
- Achievements and ongoing priorities
  - VAT implementation support; model Tax Administration Procedure Act (TAPA) drafted; SIGTAS enhancements and audit outcomes noted.
  - PFM legal framework drafts advanced across several countries; SOE reforms in Grenada; strategic/program budgeting piloted.
  - Financial stability: stress-testing program; Basel II adoption commitments; RBS TA; crisis management and resolution training.
  - Statistics: BOP/IIP improvements under BPM6; preliminary aggregated 2014 BOP and IIP statistics produced; national accounts and visitor expenditure improvements across countries.

*Source: _cr16333 - IMF staff report excerpts provided.*

### 1. Risk Assessment Matrix __________________________________________________________________________7

### 1. Risk Assessment Matrix

### Recent economic developments
- ECCU regional growth decelerated from 2.9 percent y/y in 2014 to an estimated 1.9 percent in 2015.
- Stay-over tourist arrivals growth slowed from 6 percent y/y in 2014 to about 2.4 percent in 2015, driven mainly by a sharp decline in arrivals from Canada.
- Inflation in the region turned negative due to declining commodity and subdued food prices.
- Overall fiscal performance improved in 2015.
  - Regional public debt declined to 81.7 percent of GDP in 2015, down from the peak of 86 percent in 2012.
  - The headline primary surplus narrowed from 1.4 percent of GDP in 2014 to an estimated 0.8 percent in 2015, largely due to bank resolution costs in Antigua and Barbuda.
  - The underlying primary balance (excluding one-off items and CIP) improved from negative 1.5 percent of GDP in 2014 to an estimated negative 0.2 percent in 2015 (excludes Anguilla and Montserrat).
- Citizenship-by-Investment Program (CIP) inflows in 2015:
  - St. Kitts and Nevis: 17.4 percent of GDP.
  - Antigua and Barbuda: 7.9 percent of GDP.
  - Dominica: 3.6 percent of GDP.
- St. Lucia launched its CIP in early 2016; St. Vincent and the Grenadines remained without a CIP among the six independent ECCU countries.
- External sector performance in 2015:
  - Regional current account deficit estimated to have narrowed to 12.8 percent of GDP from 14.5 percent in 2014 (estimates based on BPM5 methodology).
  - Over 80 percent of the current account deficit was financed through FDI inflows.
  - FDI inflows at 11.6 percent of GDP in 2015, below the peak of 22 percent of GDP in 2007.
  - Gross international reserves rose to an estimated 6 months of imports of goods and services in 2015.
- Revisions from BPM6/external sector statistics suggest much smaller current account deficits for ECCU members; preliminary ECCB 2014 data show current account deficits about 10 percentage points of GDP lower than BPM5 data.

### Banking sector and financial stability
- Authorities strengthened the bank resolution framework and resolved three insolvent banks.
- Financial sector weaknesses persist:
  - Non-performing loans ratio remains elevated at 17 percent of total loans.
  - NPL provisioning at an inadequate 44 percent of non-performing loans.
  - Private sector credit fell by 4.2 percent y/y in February 2016—the third consecutive year of decline.
  - Banks have built record amounts of excess liquidity, much held as reserves at the central bank.
  - Many banks are actively discouraging savings deposits, including turning away new such deposits.
- Constraints on balance sheet clean-up include debtor-friendly foreclosure regulations and low profitability limiting provisioning.

### Outlook and risks
- Growth projection: ECCU growth projected to converge to its long-term average of about 2.5 percent over the medium-term.
- External assumptions and projections:
  - Favorable conditions in the United States and the United Kingdom expected to support tourism recovery.
  - Growth in Canada expected to regain momentum by 2017 as commodity prices recover gradually.
  - Greater pass-through of lower international oil prices to consumers in 2016 expected to stimulate retail sales and boost domestic demand without generating inflation pressures.
  - External current account deficit projected to narrow to about 11.8 percent of GDP (using the BPM5 series).
  - Import coverage of gross international reserves projected to increase from 5.4 months in 2014 to 6.4 months in 2017.
- Risk assessment: overall risks to the baseline are balanced.
  - Important downside risk: withdrawal of correspondent banking relationships (CBRs) by international banks with serious negative implications.
  - Governments could face significant cash flow challenges if CIP inflows were to dry up.
  - Upside risks include larger-than-projected CIP flows, stronger commodity price declines benefiting consumers, and large infrastructure and FDI projects (e.g., international airport in St. Vincent and the Grenadines; large hotel projects under consideration in Antigua and Barbuda, Grenada, and St. Vincent and the Grenadines).

### Box 1 — Risk Assessment Matrix (RAM): main risks, likelihood, impact, and recommended policy responses
- Persistent banking sector weaknesses.
  - Relative likelihood: High.
  - Expected impact: Medium.
  - Recommended policy response: Require banks to increase capital; operationalize the ECAMC; promote bank consolidation.
- Continued negative credit growth and renascent risk of banking system instability.
  - (Linked to above; policy responses as above.)
- Reduced financial services by global/regional banks ("de-risking") — loss of correspondent banking services.
  - Relative likelihood: Medium.
  - Expected impact: Medium to High.
  - Recommended policy response: Strengthen AML/CFT and international tax cooperation frameworks; promote bank consolidation; affected banks should explore paying larger unaffected banks a fee to carry out cross-border transactions on their behalf.
- Persistently lower energy prices (supply factors reversing only gradually).
  - Relative likelihood: High.
  - Expected impact: Low.
  - Recommended policy response: Diversify export and tourism markets.
- Natural disasters (hurricanes and floods).
  - Relative likelihood: Medium.
  - Expected impact: Medium to High.
  - Recommended policy response: Explicitly account for natural disaster in macroeconomic policy programming; build fiscal buffers, including using CIP revenues.
- Opening of U.S.-Cuba tourism following regularization of diplomatic relations.
  - Relative likelihood: High.
  - Expected impact: Low.
  - Recommended policy response: Adopt a comprehensive approach to raise competitiveness; build regional synergy.
- Fall/Increase in citizenship-by-investment (CIP) receipts.
  - Relative likelihood: Medium.
  - Expected impact: High.
  - Recommended policy response: Use CBI revenues to reduce debt, build buffers, and finance large infrastructure projects; strengthen due diligence and oversight to reduce financial integrity and international security risks.
- Spread of Zika virus.
  - Relative likelihood: Medium.
  - Expected impact: Medium.
  - Recommended policy response: Enhance eradication and protection actions; implement public education campaign.

### Policy discussions and recommendations
- Key policy topics discussed with authorities:
  - Steps beyond resolving intervened banks to strengthen the banking system and facilitate resumption of credit.
  - Efficacy of eliminating the minimum saving deposit rate.
  - Threat of withdrawal of correspondent banking relationships (CBRs).
  - How to optimize use of citizenship program inflows and manage sudden-stop risks.
  - Policies to improve resilience to natural disasters and regional approaches to increasing competitiveness and potential growth.
- Recommended banking-system actions:
  - Operationalize the Eastern Caribbean Asset Management Company (ECAMC).
  - Strengthen supervisory processes.
  - Increase capital of indigenous banks.
  - Promote consolidation of the banking system.
- Legislative and institutional actions already taken:
  - New Banking Act strengthens bank resolution framework, increases ECCB's regulatory powers, raises minimum bank capitalization, and prioritizes small depositors’ interests in liquidation.
  - ECAMC Act provides legal authority for ECAMC with comprehensive powers to expedite collection of NPLs or their collateral.
  - Resolution of the insolvent bank in Antigua and Barbuda was completed in November.

*Source: _cr16333 - 1. Risk Assessment Matrix (IMF staff report content provided)._*

### 2015. The good assets of the former ABI Bank along with deposits up to EC$500,000 were

### _cr16333 - 2015. The good assets of the former ABI Bank along with deposits up to EC$500,000 were 

### Banking sector resolutions, ECAMC, and supervisory gaps
- Findings:
  - The good assets of the former ABI Bank along with deposits up to EC$500,000 were acquired by the Eastern Caribbean Amalgamated Bank via a purchase and assumption (P&A) agreement.
  - Deposits above EC$500,000 were transferred to a Depositor Trust Fund backed by a EC$157 million (4.5 percent of GDP) government bond. These depositors will be paid off over 10 years as the bond is amortized.
  - The bad assets and remaining liabilities were transferred to a receivership.
  - Two insolvent banks in Anguilla were resolved in late April 2016 with a structure similar to Antigua and Barbuda:
    - Deposits up to a EC$2.8 million threshold were transferred to a new government-owned bridge bank along with the good assets and some non-performing loans.
    - Deposits above EC$2.8 million, including those of the Social Security system amounting to EC$265 million (29.9 percent of GDP), were transferred to Deposit Protection Trusts backed by the issue of new bonds, which will be amortized over 10-25 years.
    - Non-performing assets and placements by offshore subsidiaries in the parent banks were put in receivership.
  - Asset quality reviews (AQRs) and viability assessments (dynamic modeling, DM) identified capital shortfalls in some indigenous banks and an overbanked system.
  - Fund technical assistance (TA) identified weaknesses in the bank supervision process.
- Staff policy recommendations:
  - Move quickly to operationalize the ECAMC; ECCB targeted June 2016 for opening and was confirming new directors, obtaining capital contributions from ECCU member jurisdictions, and hiring staff.
  - Fund will provide technical assistance, funded by the CDB, to help operationalize the ECAMC.
  - ECAMC expected to catalyze recovery of bad assets, take over receiverships in Antigua and Anguilla, and purchase NPLs from other indigenous banks.
  - Reform alien land holding laws in some jurisdictions (e.g., Anguilla) to facilitate ECAMC asset sales.
  - ECCB should order corrective actions, including capital calls, as soon as possible from undercapitalized-but-viable banks identified in the AQRs.
  - Banks must submit sound capitalization plans and follow through; non-compliant banks may need to merge or be acquired; non-viable banks should exit orderly.
  - Reform process should aim to consolidate the number of indigenous banks; ECCB exploring merger options and commissioned World Bank TA to study optimal consolidation strategies.
  - Implement TA recommendations to enhance supervisory processes: loan classification, collateral valuation, on- and off-site inspections, and implementation of Basel II.
  - Reassign internal audit operational duties to other departments to address IAD independence concerns (Safeguards Assessment finding).

### ECCB safeguards, monetary policy, and the minimum saving deposit rate (MSR)
- Findings:
  - 2016 Safeguards Assessment concluded ECCB maintained sound external audit arrangements and transparent financial reporting; governance provides for independent oversight; recommended Board Audit Committee maintain access to an external financial expert.
  - Assessment concluded internal audit function falls short of international standards due to extensive IAD involvement in operations compromising independence.
  - ECCB maintained stability of the EC dollar; ratio of international reserves to money base was 96 percent at end-2015 (statutory mandate 60 percent).
  - Discount rate has remained at 6.5 percent since July 2003.
  - Minimum saving deposit rate (MSR) introduced in 1985 at 4 percent; most recent change in May 2015 reduced MSR from 3 percent to 2 percent.
  - MSR prevents decline in deposit rates in context of excess liquidity, undercutting banks’ profitability and impeding reduction in lending rates, reinforcing weak loan demand and excess liquidity.
- Staff recommendations and analysis:
  - Immediate elimination of the MSR or restricting its applicability to small saving deposits.
  - Staff analysis suggests that reducing the saving deposit floor by 1 percentage point (ppt) would lower deposit rates by 0.7 ppts, while lending rates would decline by about 0.4 ppts.
  - Survey of regional banks found pass-through of the May 2015 100 bps MSR decline to prime consumer mortgage rates between 10 to 80 bps.
  - Lower MSR expected to improve profitability, expand scope for higher NPL provisioning and faster write-offs, reduce NPLs, and increase credit and growth (Annex 5).
  - Urged implementation of structural reforms: reduce time and cost of resolving problem loans and securing collateral (regional foreclosure recommendations), and establish a regional credit bureau to reduce asymmetric information and lower interest rate spreads.
- Authorities’ views:
  - ECCB and country authorities open to considering further reduction or elimination of the MSR but concerned about smaller pass-through as registered by official statistics.
  - ECCB requested additional empirical evidence on benefits of eliminating MSR.
  - Some authorities concerned elimination would limit availability of financial instruments to the public in absence of fully functioning capital market.

### Global withdrawal of correspondent banking relationships (CBRs)
- Findings:
  - Global withdrawal of CBRs is a risk to regional financial stability and cross-border payments systems; availability of CBRs is crucial given openness of ECCU countries.
  - Offshore banking sector most negatively affected to date; loss of or inability to obtain CBRs led to revoking of some licenses and a decline in offshore banking license applications.
  - Survey (10 indigenous commercial banks and 5 regional offshore banking regulators): none of indigenous banks completely lost all CBRs at time of discussions; about half reported losing CBRs or receiving unofficial notifications, but replacements often found with smaller banks.
  - Effects so far mainly rising correspondent banking fees (in some cases doubled or tripled) and increased resources devoted to due diligence and data reporting.
  - Risk of loss of CBRs negatively correlated with bank size.
- Staff recommendations:
  - Strengthen regulatory frameworks: strong governance of CIPs and effective implementation of AML/CFT standards and CIP governance (CIP governance abbreviated as CIP).
  - Accelerate CARTAC-supported BASEL II implementation and risk-based supervision in banking and non-banking sectors.
  - Increase information sharing with correspondent banks despite costs to ease “know your customer’s customer” concerns.
  - Bank consolidation would mitigate CBR risk by creating larger institutions with higher volumes and capacity to handle due diligence; in short run, smaller institutions should explore paying larger banks a fee to process international transactions.
- Authorities’ views and actions:
  - Authorities concerned withdrawal of CBRs could undermine macroeconomic and financial stability; actively addressing issue in AML/CFT and tax areas.
  - CARICOM technical task force led by Central Bank of Barbados established to research and engage advanced country regulators; IMF staff contributing.
  - Coordinated political strategy being developed, led by Prime Minister of Antigua and Barbuda, to sensitize advanced country authorities.
  - Exploring feasibility of establishing a Caribbean non-deposit taking financial institution in the United States for U.S. transactions.

### Fiscal policy, natural disasters, Citizenship-by-Investment (CIP) revenues, and fiscal frameworks
- Findings:
  - ECCU highly vulnerable to natural disasters: probability of an ECCU country being hit this year by a natural disaster is close to 25 percent, with damages of about 26 percent of GDP (average damage per disaster for ECCU countries over the period 1980-2015).
  - CCRIF average payout is less than 0.5 percent of GDP because relatively little coverage purchased.
  - Banks require hurricane insurance for mortgage borrowers; local insurers required to re-insure 75 percent of exposure with international companies.
  - ECCB Monetary Council established regional debt target of 60 percent of GDP to be achieved by 2030 and mandated medium-term fiscal adjustment plans; some countries (Antigua and Barbuda, Grenada, Dominica) outlined fiscal programs; St. Lucia and St. Vincent and The Grenadines yet to elaborate programs.
  - CIP inflows offer opportunity for debt reduction and buffers but face increased competition (e.g., Malta) and risks (suspension of visa-free travel by international community).
- Fiscal adjustment scenarios (selected ECCU countries) — staff estimates:
  - Antigua and Barbuda: Primary balance end-2015 = 3; Primary balance target = 1.2; Debt target of 60% of GDP reached by 2021.
  - Dominica: Primary balance end-2015 = 3; Primary balance target = 2.8; Debt target reached by 2035.
  - Grenada: Primary balance end-2015 = 2.2; Primary balance target = 3.5; Debt target reached by 2020.
  - St. Kitts and Nevis: Primary balance end-2015 = 3; Primary balance target = -4.7; Debt target reached by 2017 (baseline).
  - St. Lucia: Primary balance end-2015 = 0.3; Primary balance target = 3.9; Debt target reached by 2030.
  - St. Vincent and the Grenadines: Primary balance end-2015 = -0.1; Primary balance target = 3.3; Debt target reached by 2030.
  - Notes: Primary balances exclude CIP revenues and large one-off revenues or expenses; Grenada under an IMF program (ECF); some active scenarios consider impact of recurrent natural disasters.
- Staff recommendations:
  - Pass national fiscal responsibility legislation to enshrine the regional debt target and specify fiscal rules; articulate medium-term fiscal adjustment strategies in budgets focused on primary balance target excluding CIP revenues.
  - Internalize expected costs of natural disasters in macro-fiscal frameworks and build fiscal buffers:
    - Assuming half of total natural disaster costs fall on government, ECCU governments would need to save approximately 1 percent of GDP per year (i.e., target a higher primary surplus by this amount) to pay for its share of damages from the most expensive disaster.
    - Include escape clauses in fiscal rules to allow temporary suspension in event of a natural disaster.
  - Improve public financial management (PFM) frameworks and seek Fund TA for public sector investment program (PSIP) design and management.
  - Accounting practices: adopt a broader fiscal perimeter; record all CIP revenues and related expenditure on budget; press for comprehensive and consistent reporting of CIP revenues in external and fiscal accounts.
  - Save a significant portion of CIP resources in a fund for natural disaster shocks and resilient infrastructure:
    - Countries would need saving fund stocks in the range of 6-12 percent of GDP to self-insure against natural disasters.
    - Annual savings in years with no natural disaster of 0.4-1.9 percent of GDP to ensure fund sustainability with low probability of depletion.
    - Staff urged using CIP windfalls to reduce public debt, build precautionary buffers and support strategic public investment where appropriate; ensure rigorous project evaluation and sufficient resources to complete projects to limit contingent liabilities.
  - Improve capacity to design and manage PSIPs to access donor funds for renewable energy and climate resilience projects.
  - Develop regionally accepted principles and code of conduct for CIPs, rigorous due diligence, transparency on number of citizenships granted, revenues earned, and use (amounts saved, spent, or invested) with financial audits.
- Authorities’ views:
  - Authorities reiterated commitment to the debt target but not ready to endorse staff’s proposal to adopt fiscal rules (though ECCB governor supported it).
  - Agreement on need for fiscal buffers; Dominican authorities plan a Vulnerability Resistance Fund using portion of CIP revenues; St. Kitts and Nevis establishing a Growth and Resiliency Fund.
  - General support for enhancing CIP management and establishing common principles for regional CIPs.

### Structural reforms, competitiveness, energy, and regional collaboration
- Findings:
  - REER: Despite appreciation since H2 2014, ECCU REER has not changed much over six years; competitor-based REER is only 4 percent higher than its low point in 2012 and 0.6 percent below its 10-year average.
  - Non-price indicators point to weak competitiveness: declining market share in Caribbean tourism, worsening investment climate rankings, labor market rigidities, weak productivity, rising unit labor costs relative to the United States.
  - High energy costs and lack of resilience to natural disasters contribute to growing infrastructure gaps.
  - Example: St. Vincent and the Grenadines geothermal project scheduled to come online in 2018, would increase energy mix to 80 percent renewables from 12 percent and reduce electricity costs to consumers to US$0.20 per kilowatt hour from US$0.40 in 2015.
  - Staff research indicates successful implementation of countries’ energy plans (at an average cost of 7 percent of 2015 GDP) could raise real GDP by 4 percent without jeopardizing public debt sustainability (Annex 10).
- Staff recommendations:
  - Prioritize resilience-enhancing infrastructure financed by CIP-funded saving funds and strengthened PSIP.
  - Continue energy policy reforms; support renewable energy projects (example metrics stated above for St. Vincent and the Grenadines).
  - Advance regional collaboration: develop a single domestic space for harmonized border management to facilitate multi-destination tourism; implement single regional regulatory authority for non-banks (starting with insurance).
  - Reduce unit labor costs and boost employment: align real wage growth with productivity, increase labor market flexibility, control public sector wage growth, strengthen labor-training programs for youth and displaced agricultural workers.
  - Improve macroeconomic statistics: support Statistics Canada-led TA for labor market statistics; offer CARTAC and STA TA for BOP revisions and ensure consistent treatment of CIP flows with BPM6; explore feasibility of a regional statistical agency to optimize scarce human resources.
- Authorities’ views:
  - Strong commitment to growth-enhancing reforms and initiatives to reduce cost of business.
  - Optimistic about energy sector reforms; working with CDB to ensure well-designed projects.

*Source: IMF staff report excerpt (text provided).*

### Box 2. Explaining High Unemployment in the ECCU

### Box 2. Explaining High Unemployment in the ECCU

### Labor market overview and trends
- Labor market data in the ECCU are scarce but indicate relatively high unemployment levels in some countries especially in the years following the global financial crisis.
- Unemployment is very high in Grenada, St. Lucia, and St. Vincent and the Grenadines.
- Aggregate employment in the ECCU has remained stagnant since the global crisis, while private sector employment has declined significantly.
- The Job Opening and Labor Turnover Survey (JOLTS), which collects data on jobs, separations, hires, separations, and vacancies, has been piloted in three countries and is seen as providing invaluable input for designing labor market policies.

### Key explanatory factors identified
- Disconnect between wages and productivity
  - There is a large disconnect between continued real wage growth and stagnant productivity in Grenada and St. Lucia.
  - This disconnect is likely a contributory factor to very high unemployment rates in those countries.
  - Strong labor union activity and negotiation through collective bargaining, especially in the public sector, could contribute to this disconnect.
  - Quantitative evidence from Grenada’s employment data indicates that raising public sector wages contributes to raising labor costs across sectors through demonstration effects, as private sector unions often negotiate wages using public sector wages as a benchmark.
- Reservation wages and sectoral wage differentials
  - Relatively higher salaries in the tourism and public sector have increased the reservation wage.
- Long-term sector trends and natural disasters
  - The labor-intensive agriculture sector has been affected by natural disasters and a trend contraction, notably since the decline of the banana industry.
  - These developments may have increased structural unemployment, particularly in Grenada.
- Other factors
  - High reservation wages, long-term sector trends, and natural disasters may also contribute to structural unemployment and require further analysis.

### Implications for policy and analysis
- The pilot of JOLTS in three countries is valuable for designing labor market policies and improving labor market data.
- Further analysis is required to disentangle the roles of public sector wage-setting, union negotiation dynamics, reservation wages, sectoral shifts (notably tourism and agriculture), and natural disaster impacts in creating structural unemployment.

*Box 2. Explaining High Unemployment in the ECCU — _cr16333*

### Annex I. Citizenship-by-Investment Programs in ECCU

### Annex I. Citizenship-by-Investment Programs in ECCU

### Overview and recent developments
- Citizenship-by-Investment Programs (CIPs) have proliferated across the region in recent years, with Antigua and Barbuda, Grenada and St. Lucia launching CIPs over 2013-2015.
- St. Kitts and Nevis and Dominica programs date back to 1984 and 1993, respectively.
- The structure of regional CIPs is fairly similar and features at least two investment options: i) a lump sum contribution to a National Development Fund (NDF); or ii) redeemable investment in the private sector (typically real estate or a business venture), in addition to some government fee.
- St. Lucia’s CIP (newly launched) features a fourth option that involves investment in government securities for a period of 5 years.

### Demand drivers and competitive pressures
- Demand largely driven by the significant rise in the number of high net-worth individuals, notably from China and the Middle East, and to a lesser extent Russia and some advanced countries.
- Motivations include easing visa restrictions, acquiring alternative travel documents, securing potential safe havens from economic and political turmoil, and estate and tax planning.
- As of 2016, citizens of Dominica, Grenada and St. Lucia became eligible for visa-free travel to the Schengen area, reducing previously distinguishing privileges of Antigua and Barbuda and St. Kitts and Nevis.
- Competition factors increasing downside risks:
  - Price competition within a homogenous market.
  - Visa and regulatory actions: Canada reintroduced visa requirements for citizens of St. Kitts and Nevis in November 2014; FinCEN Advisory in May 2014 affected St. Kitts and Nevis.
  - Competition from outside the region, particularly Malta’s CIP and residency-by-investment schemes in Europe (France, Greece, Hungary, Ireland, Portugal, Spain) that offer EU travel/residency/work privileges.
- Program appeal also depends on processing speed and applicant-origin restrictions (examples noted for St. Kitts and Nevis; Antigua and Barbuda).

### Macroeconomic importance and vulnerability
- CIP inflows underpin growth and fiscal performance in several ECCU countries; their volatility creates critical macroeconomic implications.
- St. Kitts and Nevis: estimated cumulative CIP inflows reached 45 percent of GDP over 2013-2015; inflows to the budget peaked at 14 percent of GDP in 2014.
- Antigua and Barbuda: program attracted inflows to the public sector in excess of an estimated 7½ percent of GDP in 2015 (includes total contributions to the National Development Fund in 2015, and updated staff estimates of government processing fees not reported on budget).
- Reliance on CIP inflows to finance recurrent expenditure risks painful fiscal adjustment in a sudden stop; cessation of CIP-related private investments can generate boom-bust cycles.
- Dominica is becoming increasingly reliant on CIP inflows; Dominica is expected to revise its CIP investment requirements upwards in 2H2016.
- A sudden stop would also sharply deteriorate external positions for countries with large CIP inflows.

### Fiscal reporting, transparency, and recommended fiscal treatment
- A broader fiscal perimeter is needed: all CIP-related revenues and expenditures should be recorded on budget to analyze the true fiscal stance.
- Current reporting gaps cited:
  - In St. Kitts and Nevis, contributions to the Sugar Industry Diversification Foundation (SIDF)—the country’s NDF—are not reported on budget.
  - In Antigua and Barbuda, only NDF resources are managed on budget; CIP Unit surplus from application fees are managed at Cabinet’s discretion, outside the budget framework.
  - Similar information gaps exist in Dominica.
- Staff recommendation: comprehensive and consistent reporting of CIP revenues in external and fiscal accounts and monitoring of the underlying fiscal position net of CIP revenues to the public sector.

### Policy guidance and recommended uses of CIP inflows
- Use CIP revenue windfalls to reduce public debt, build precautionary buffers, and support strategic public investment, where appropriate.
- In particular, accumulate a share of public CIP resources in a fund to address costly natural disaster shocks and finance disaster resilient infrastructure.
- Funding capital projects with CIP resources requires rigorous project evaluation and selection and securing sufficient resources in advance to finance projects to completion to limit contingent liabilities to government.
- Regulate pace of private sector investments when inflows are large to prevent boom-bust cycles.

### Governance, safeguards, and transparency to mitigate risks
- A comprehensive governance framework is crucial to mitigate increased risks facing CIPs, including:
  - Rigorous due diligence for applicants.
  - Full-fledged AML/CFT framework.
  - Regulations ensuring transparency and exchange of tax information.
- Public disclosure: the number of citizenships granted, revenues earned, and their use—including amounts saved, spent or invested—should be made public with the budget documents and be subject to financial audits.
- Country-specific restrictions noted:
  - St. Kitts and Nevis’ CIP does not accept applications from nationals of Iran and Afghanistan, irrespective of place of domicile.
  - Antigua and Barbuda imposed restrictions on nationals of Afghanistan, Iran, Iraq, North Korea, Somalia, and Yemen (except lawful permanent residents in the US, the UK or Canada); in March 2016 Antigua and Barbuda eased this restriction by accepting applications from Iranian and Iraqi nationals, irrespective of their place of domicile.

### Key statistics and program parameters (selected)
- St. Kitts and Nevis: cumulative CIP inflows over 2013-2015 = 45 percent of GDP.
- St. Kitts and Nevis: inflows to the budget peaked at 14 percent of GDP in 2014.
- Antigua and Barbuda: inflows to the public sector in 2015 in excess of an estimated 7½ percent of GDP.
- Estimated 2015 inflows breakdown (Figure 4 categories): public sector inflows and private investment inflows discussed qualitatively; country-specific shares shown in source figures.
- Minimum holding period for most redeemable investment options: 5 years (assets may be eligible for resale to future applicants under the CIP).
- Dominica: planned upward revision of investment requirements in 2016H2.
- Processing fee practices and NDF treatment vary by country (examples: St. Kitts and Nevis retains about 25 percent of contribution as budgetary fees in NDF option; Antigua and Barbuda had a limited-time processing fee offer of USD100,000 for a family of four valid through end-April 2016).

*Prepared by Ahmed El Ashram — Annex I. Citizenship-by-Investment Programs in ECCU.*

### Annex III. Spillovers from Trinidad and Tobago to ECCU

### Annex III. Spillovers from Trinidad and Tobago to ECCU

### Overview
- This annex assesses how the slowdown of real economic growth in Trinidad and Tobago, instigated by the oil price decline, may generate negative spillovers and feedback effects to the ECCU through trade, tourism, and financial linkages.
- Empirical evidence points to a mixed effect across ECCU countries: spillovers estimated to be significant for Grenada, Dominica, and St. Vincent and the Grenadines, and likely limited for other ECCU members.

### Impact on Trinidad and Tobago (2015)
- Falling energy prices are estimated to have resulted in:
  - a drop in oil and gas output by 4.9 percent (y/y).
  - a decline in aggregate GDP by 2.1 percent.
- Fiscal and external sector effects:
  - External current account shifted from a surplus of 4.6 percent of GDP in 2014 to a deficit of 5.4 percent in 2015.
  - Lower energy prices drove the overall fiscal balance further into deficit.
- Banking sector (through end-2015):
  - NPLs below 3½ percent of total loans.
  - Banks’ balance sheets remained liquid, with relatively high capital buffers and profitability, despite some declines in returns.
- Reported market frictions:
  - Some authorities reported foreign exchange shortages in Trinidad and Tobago created delays in remittance transfers and payments for exports.

### Transmission channels and exposures to ECCU
- Main linkages: trade in goods, tourism, and financial sector interconnectedness.
- Financial linkages:
  - Market participants report that Trinidadian investors may be holding about 5 to 10 percent of ECCU government securities in the regional government securities market (RGSM).
  - No significant withdrawal of Trinidadian institutional investors from the RGSM had been observed through end-2015.
  - Given the relatively strong health of the Trinidadian banking sector, negative spillovers through banking are likely to be contained in the short term; Trinidadian banks are unlikely to be forced to sell RGSM holdings given sufficient capital and liquidity buffers. However, a protracted slowdown may dampen demand for RGSM securities.
- Tourism linkages:
  - A slowdown in Trinidadian economic activity is likely to restrain Trinidadian travel to the ECCU.
  - Example: about 11 percent of tourists to Grenada are from Trinidad and Tobago.
  - Spillovers via tourism would be more pronounced for islands receiving a significant portion of tourists from Trinidad and Tobago.
- Trade linkages:
  - The magnitude of trade spillovers varies by country; Dominica and St. Vincent and the Grenadines export a significant portion of their exports to Trinidad and Tobago, making them more exposed through the trade channel.

### Econometric analysis (GVAR) and results
- Methodology:
  - Staff used a variant of the global vector autoregressive model (GVAR) to assess spillovers from Trinidad and Tobago to the ECCU.
  - Model estimators are based on annual data from 1980 to 2014.
  - The sample includes 23 countries and the estimation comprises 23 VARX individual models.
  - Each VARX model includes endogenous variables (GDP, Inflation, Short term Interest Rate, and Real Exchange Rate); exogenous “relative-to-trading-partners” counterparts; and two global variables: an oil price index and an index of price of raw materials.
  - The model assumes transmission channels including effects through trading partners’ GDP, trading partners’ REER, trade, and tourism.
- Key quantitative result:
  - The impulse response functions suggest that a positive shock of 1 percent to the GDP of Trinidad and Tobago would increase ECCU GDP by about 0.12 percentages points.
- Heterogeneity of impact:
  - The magnitude of the effect varies by country:
    - Grenada may experience a greater shock to its GDP (driven largely by tourist arrivals).
    - Dominica and St. Vincent and the Grenadines are likely to experience stronger effects driven by high shares of exports to Trinidad and Tobago.
    - St. Kitts and Nevis and St. Lucia show negligible effects in the model.
- Robustness:
  - While the GVAR does not provide analytical confidence intervals, the sign of the effect is robust to model specification.

### Key findings and implications
- Direct financial spillovers to the ECCU are likely limited in the short term due to the relative robustness of the Trinidadian banking sector and the absence of large-scale withdrawals from the RGSM.
- Tourism and trade channels present more significant risks for specific ECCU members:
  - Grenada: vulnerable via tourism (about 11 percent of tourist arrivals from Trinidad and Tobago).
  - Dominica and St. Vincent and the Grenadines: vulnerable via trade (high share of exports going to Trinidad and Tobago).
- A protracted slowdown in Trinidad and Tobago could reduce demand for RGSM securities and exacerbate remittance and payment delays through foreign exchange shortages.

*Source: Annex III. Spillovers from Trinidad and Tobago to ECCU.*

### Annex V. Non-Performing Loans in the ECCU: Determinants and

### Annex V. Non-Performing Loans in the ECCU: Determinants and Macroeconomic Impact

### Key findings and context
- NPL ratios are well above the prudential guideline of 5 percent in all ECCU jurisdictions.
- The deterioration in asset quality reflects both macroeconomic factors (prolonged recession after the global financial crisis and slow recovery) and bank-specific factors.
- Sectoral composition of loans at end-2015: Personal loans accounted for 43 percent of total loans, Construction 18 percent, Tourism 18 percent.
- Dispersion across banks in 2015: median NPL ratio 12.8 percent; lowest 4.5 percent; highest 24.8 percent.
- Ownership and scale: as of end-2015, foreign banks held 47 percent of total banking system assets (or 109 percent of GDP) and 40 percent of total deposits (or 79 percent of GDP).

### Determinants of NPLs (bank-level panel evidence)
- Data and specification:
  - Quarterly panel covering 1996Q1-2015Q4; sample includes 2359 observation: 34 banks, six countries (Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines); 80 periods (1996Q1-2015Q4).
  - Dependent variable: logit transformation of the NPL ratio for bank i in country j at time t.
  - Baseline regression controls: lagged NPLs, global variables, country-specific macro variables, bank-level variables, foreign-bank dummy, country dummies; estimation by random effects (RE) and fixed effects (FE).
- Persistent dynamics:
  - NPLs t-1 coefficients (selected baseline estimates): 0.679*** (Table 1, column 1), 0.662*** (Table 2), 0.662*** (Table 3). NPLs t-2 coefficients around 0.20 (e.g., 0.207*** in Table 1).
- Macroeconomic determinants:
  - Advanced Economy Growth t-2: negative and significant (e.g., -0.010** in Table 1), implying spillovers from advanced-economy growth lower ECCU NPLs.
  - Tourism Growth t-2: positive and significant (e.g., 0.002*** in Table 1), indicating tourism-sector dynamics raise NPLs even when controlling for lending concentration.
  - Time dummy for 2008–2015: positive and significant (e.g., 0.130*** in Table 1), consistent with a structural increase in NPLs since the global financial crisis.
- Bank-level determinants:
  - Real Loan Growth t-1: negative and significant (e.g., -0.003*** in Table 1), suggesting lagged credit growth mechanically reduces the NPL ratio via the denominator effect.
  - Return on Assets t-1: negative and significant in baseline (e.g., -0.030** in Table 1), indicating more profitable banks have lower NPLs.
  - Household Loans/Total Loans t-1: positive (e.g., 0.030* in Table 1), higher household loan share associated with higher NPLs.
  - Construction and Tourism Loans/Total Loans t-1: positive (e.g., 0.022* in Table 1), higher exposure to these sectors associated with higher NPLs.
  - Foreign bank dummy: negative and significant (e.g., -0.072*** in Table 1; -0.103*** in Table 3), indicating foreign banks have systematically lower NPLs than indigenous banks.
- Non-significant factors in baseline:
  - Expense-to-income ratio, loans-to-assets, loans-to-deposits, interest rates, capital/equity (in the full sample including branches) were not significant determinants.

### Ownership differences (indigenous vs foreign banks)
- Foreign banks show lower NPLs on average, and interaction models indicate differences in responsiveness:
  - Interaction results (Table 2 and Table 3) show foreign banks’ asset quality is more responsive to macroeconomic developments and to banks’ profitability.
  - Return on Assets t-1 interaction for foreign banks: coefficient for interaction is -0.111*** (Table 3), implying greater sensitivity of foreign-bank NPLs to profitability improvements.
  - For indigenous banks, the link between profitability and NPLs is weaker or not evident.
- Sector-sensitivity differences:
  - Foreign banks’ NPLs are more responsive to household-lending concentration in some specifications (interaction coefficient 0.040** in Table 2 for foreign banks).
  - Indigenous banks’ NPLs show stronger association with construction-sector exposure in some estimates, consistent with differences in lending portfolios by ownership type.
- Interpretation:
  - Differences may reflect institutional features: due diligence, risk management, NPL recovery strategies, and scale of operations (indigenous banks operate on very small scale; foreign banks are mostly branches/subsidiaries of large Canadian banks).

### Dynamics and macro-financial feedback (panel VAR results)
- Model and variables:
  - Panel VAR with endogenous variables: ∆npl, ∆credit (private sector), ∆FDI, ∆GDP (real GDP growth), ∆CPI (annual CPI inflation).
  - Exogenous controls include advanced economies’ real GDP growth, FDI, and a natural-disaster dummy.
  - Annual panel for six independent ECCU economies over 1996–2015 (120 observations); complementary quarterly industry-specific VARs for 2004Q1-2015Q4.
- Impulse-response findings:
  - A shock to NPL growth leads to:
    - Negative effect on real GDP growth, CPI inflation, and FDI growth in the aggregate model; statistical significance strongest for the negative effect on FDI growth.
    - Decline in credit in the aggregate model (response not statistically significant).
    - In quarterly industry models, deterioration in asset quality leads to a statistically significant decline in credit to tourism, agriculture, construction, and manufacturing; weaker negative relationship for personal loans and trade.
  - Shocks to GDP growth:
    - Stronger economic performance leads to a statistically significant decline in NPL growth, driven largely by personal and tourism industries.
  - Credit effects:
    - Aggregate model: increase in credit has a positive but statistically insignificant effect on economic activity.
    - Quarterly models: credit increases have a statistically significant positive effect on economic activity in agricultural and construction industries.
- Variance decomposition:
  - Over a 5-year horizon about 7 percent of NPLs is explained by economic performance variables.
  - NPL growth explains about 1 percent of real GDP growth over the medium term.
- Policy-relevant implications:
  - The results emphasize strong macro-financial feedback loops in the ECCU: deteriorating asset quality reduces credit (especially to productive sectors) and can suppress growth; conversely, stronger GDP growth reduces NPL growth, particularly in personal and tourism sectors.
  - FDI plays an important moderating role: FDI has a strong positive effect on economic growth, stronger than that of domestic credit, thereby helping to moderate macro-financial feedback loops.

### Conclusions and policy implications
- The deterioration in asset quality in the ECCU over the last decade is attributable to both macroeconomic conditions (global and domestic) and bank-specific factors.
- Key drivers of higher NPLs: weak macroeconomic environment (including the legacy of the global financial crisis), higher lending concentration to households and construction/tourism, and lower bank profitability.
- Foreign-owned banks systematically exhibit lower NPLs than indigenous banks, suggesting institutional and scale-related differences that affect due diligence, risk management, and recovery strategies.
- To break adverse macro-financial feedback loops:
  - Improving asset quality is essential to reverse credit contractions and support sustained economic growth.
  - Stronger economic growth (including via FDI) is imperative to strengthen asset quality and financial stability, given the sizable role of economic performance in explaining NPL dynamics (about 7 percent over 5 years).
- Sectoral focus:
  - Policies to restore credit supply and asset quality should prioritize tourism, construction, agriculture, and manufacturing given the significant credit declines to these productive sectors following NPL shocks and the potential for improved asset quality to boost GDP through agriculture and construction.

*Prepared by Kimberly Beaton, Alla Myrvoda, and Hanlei Yun (all IMF) and Shernnel Thompson (Eastern Caribbean Central Bank).*

### Annex VI. Impact of the Withdrawal of Correspondent Banking

### Annex VI. Impact of the Withdrawal of Correspondent Banking Relationships (CBRs) on the ECCU

### Drivers of "de-risking" and withdrawal of CBRs
- International banks, faced with sizeable fines for AML/CFT violations, have sought to limit exposure to perceived risk — a practice referred to as “de-risking”.
- Stricter regulations and increased fines have raised compliance costs and the consequences of errors; even with a low probability of a fine, many international banks exit markets where potential profits cannot match possible fines.
- This behavior has typically manifested as banks ceasing to provide correspondent banking and trade finance services to banks or customers, typically in developing countries.
- A World Bank survey (2015) found banking authorities in Latin America and the Caribbean report the largest decline of correspondent accounts, with the trend more apparent in the Caribbean than in Latin America.
- The incidence of withdrawal of CBRs is negatively correlated with client institution size: smaller commercial banks face greater difficulty maintaining CBRs due to low volumes relative to perceived risk.
- Correspondent banks cite additional drivers for terminating CBRs: pressures from the correspondent’s own regulator, perceptions of the Caribbean as high risk, and cost efficiency incompatible with compliance costs.

### Survey evidence and key statistics (ECCU-specific)
- Staff conducted a survey of 10 indigenous onshore commercial banks and 5 regional offshore banking regulators to assess extent of CBR withdrawal in the ECCU.
- The sampled onshore indigenous banks together constitute about 55 percent of the locally incorporated banks’ assets.
- Five banks reported either having lost a CBR in the last 2 years, or receiving an unofficial notification that a CBR termination may be forthcoming.
- The low volume of operations was given as the primary reason for CBR loss in many cases.
- Most interviewed onshore banks indicated they either replaced lost CBRs or, in rare occasions, did not actively seek a replacement given a sufficient number of other existing CBRs.
- Median number of correspondent banking relationships currently stands at about four.
- The region has seen a significant increase in CBR fees for the onshore sector, which on average almost doubled, and in some cases tripled over the last 2 years.
- Some banks reported difficulties establishing USD lines with other correspondent banks.
- Some banks reported terminating operations with certain business types, such as money services entities; foreign-owned banks are shedding riskier businesses, shifting the burden to indigenous banks and making them less attractive to correspondent banks. Some indigenous banks also discontinued money services operations due to “de-risking” concerns.

### Impact on the offshore banking sector
- Withdrawal of CBRs has been experienced in both offshore and onshore sectors, with more severe consequences in the offshore sector.
- Offshore banks unable to maintain or obtain CBRs have expressed intentions to relocate to other jurisdictions or to terminate licenses due to inability to establish a CBR.
- Number of new applications for establishment of offshore banks has declined significantly over the last few years.
- Some provisional licenses granted to offshore banks pending evidence of a CBR had to be revoked.
- While many offshore banks have been able to replace lost CBRs, in some instances the prolonged search placed the sustainability of the institution at risk.
- The trend has severely restricted the pool of offshore banking license applications in ECCU territories; some jurisdictions have not received a viable offshore bank licensing application in years.

### Linkages that make USD correspondent banking important for ECCU
- ECCU has substantial linkages with the United States through goods trade, tourism inflows, foreign direct investment, financial sector linkages, and remittances.
- These linkages justify the need for USD transactions and correspondent banking relationships with foreign banks; withdrawal of CBRs would impair the ability to conduct business in ECCU.

### Regulatory and regional policy responses
- CARICOM has set up a Committee of Ministers of Finance on Correspondent Banking—chaired by Antigua and Barbuda’s Prime Minister—with support from the Committee of Central Bank Governors (CCBG), the Caribbean Association of Banks (CAB) and the Caribbean Financial Action Task Force (CFATF).
- CARICOM-level exploratory measure: feasibility and practicality of establishing a Caribbean-owned non-deposit taking financial institution in the United States, through which banks from Caribbean countries would make pre-vetted payments.
- ECCU authorities are strengthening regulatory frameworks, including AML/CFT and international tax cooperation.
- All ECCU countries are committed to international certification processes of the Financial Sector Assessment Program (FSAP), Caribbean Financial Action Task Force (CFATF), the Global Forum, and the Foreign Account Tax Compliance Act (FATCA).
- The latest CFATF reports indicate ECCU economies have made significant progress toward compliance with FATF’s 2003 AML/CFT recommendations.
- The next round of CFATF evaluations will assess compliance against the revised 2012 FATF standard and will include evaluation of the effectiveness of AML/CFT frameworks.
- According to the 2015 Report by the Global Forum on Transparency and Exchange of Information for Tax Purposes:
  - All jurisdictions in ECCU have undergone phase 1 and 2 reviews, with the exception of Dominica, which had undergone phase 1 review and whose legal framework was judged adequate to permit commencement of phase 2 review in 2015.
  - For phase 2 countries, Grenada, Montserrat, St. Kitts and Nevis, and St. Vincent and the Grenadines were largely compliant with the requirements.
  - Anguilla, Antigua and Barbuda, and St. Lucia were classified as partially compliant.

### Policy recommendations and international community guidance
- Supervisors should ensure that banks follow risk-based supervision, which requires institutions to determine risk level of customers and take appropriate action to reduce risk.
- ECCU regulators of the banking (onshore and offshore) and non-banking sectors are working on timely and effective implementation of risk-based supervision and the BASEL II framework.
- Supervisors and other authorities are encouraged to ensure effective implementation of international AML/CFT standards.
- A clear explanation from supervisors of the extent of due diligence on the customer’s customers (KYCC obligations) would clarify banks’ obligations.
- Better information flow and sharing between correspondent and respondent banks would limit uncertainty.
- Authorities should collect information on the evolving status of correspondent banking in their jurisdictions; more comprehensive statistics would aid in addressing vulnerabilities at the global level.

### References and analytical sources cited in the annex
- World Bank, "Withdrawal from Correspondent Banking: Where, Why, and What to Do About It", November, 2015.
- World Bank, “Report on the G20 Survey on De-Risking Activities in the Remittance Market”, October, 2015.
- Warden, S., “De-risking and its Consequences for Global Commerce and the Financial System”, Milken Institute, Center for Financial Markets, July, 2015.
- Warden, S., “Climate Fix?”, Milken Institute Review, A Journal of Economic Policy, June, 2015.

*Prepared by Alla Myrvoda.*

### Annex VIII. Assessing Government Self-Insurance Needs against

### Annex VIII. Assessing Government Self-Insurance Needs against Natural Disasters: An Application to the ECCU

### Key findings and summary results
- Estimated SF (saving fund) stock needs: in the range of 6-12 percent of GDP.  
- Required budget savings (annual contributions) for financial sustainability of SFs: in the range of 0.5-1.9 percent of GDP per year.  
- These results are based on a Monte-Carlo experiment that simulates natural disaster (ND) shocks and their impact on output and government finances.

### Introduction and motivation
- Tropical storms and other NDs repeatedly affect the ECCU, causing human loss, infrastructure destruction, and fiscal costs.  
- Proposal: create SFs for ND financed with resources from Citizenship by Investment programs (CIPs).  
- Exception: St. Vincent and the Grenadines does not have a CBI; for that country, setting up a SF may require debt issuance.  
- Rationale for using CIP flows:
  - CIPs have generated a surge in budget revenues and are macroeconomically significant.
  - CIP revenues are volatile, hard to predict, and may be subject to sudden stops and reputational spillovers across the region.
  - Allocating CBI flows to SFs would reduce the use of an unreliable revenue source for recurrent expenditures and reduce the need to issue debt after ND shocks.

### Why a saving fund (SF) for self-insurance against NDs?
- Market and external insurance options are limited and costly:
  - Vulnerable populations are generally uninsured or under-insured, leaving governments to cover significant private losses and public reconstruction.
  - Caribbean Catastrophic Risk Insurance Fund (CCRIF) coverage is costly and limited.
  - CAT bonds have high costs (coupons of Libor plus spreads in the range of 3-20 percent; maturities of less than 3 years) and imperfect correlation between triggers and actual losses.
- Advantages of SFs:
  - Provide immediate financing for expenditure needs, rehabilitation, and reconstruction.
  - Support fiscal sustainability by reducing the need to issue debt post-disaster and by imposing recurrent saving discipline.
- Practical constraints to ex-post borrowing:
  - Rapid access to external or official financing is often not available for small ECCU countries.
  - Grant disbursement and official loan changes require lengthy processes.
  - Domestic financing could be limited if financial institutions and deposits are affected by the ND.
- Existing public funds in the region:
  - Sugar Industry Diversification Fund (St. Kitts and Nevis) and Grenada’s National Transformation Fund exist but are not specifically targeted to ND fiscal costs.

### Methodology (model and simulation approach)
- Empirical model: country-specific Vector Auto-regression Model (VAR) for each ECCU country.  
  - Endogenous variables: cyclical components of GDP; government revenues excluding grants; grants; current primary expenditures; capital expenditures.  
  - Cyclical components calculated as ratios to estimated trend; GDP cycle estimated using Hodrick-Prescott filter on 1990-2015 annual data. All variables in real terms using the GDP deflator. Shocks identified via Choleski decomposition.
- Controls included in VAR to isolate ND shocks:
  - U.S. real effective exchange rate, oil price, cyclical component of U.S. output, and a dummy for the September 2001 shock.
  - Residuals orthogonal to these controls are interpreted as containing ND and remaining smaller shocks.
- Monte-Carlo experiment:
  - Time horizon: 2016-2030.  
  - Number of simulations: 1000 simulations per country.  
  - Random shocks drawn from probability density functions estimated from model residuals, assumed normally-distributed.  
  - Simulated series mimic historical volatility, persistence, and co-movement; projections expressed as percent of GDP using a deterministic trend with all trends growing at the same rate as GDP.
- Public debt and interest expenditure projection:
  - Interest expenditures computed by multiplying prior year debt stock by an implicit interest rate path (interest expenditures / public debt stock), a calibration parameter.
  - Debt dynamics computed with the debt accumulation identity expanded to include SF budget financing flows.
- ND identification within simulations:
  - An algorithm identifies NDs as the largest X percent fiscal deteriorations in the distribution of the sum of year-on-year changes in: (i) non-grant revenue (negative sign), (ii) grant revenues, (iii) current primary expenditure, and (iv) capital expenditure.
  - Calibration of the probability threshold X determines ND frequency (example: if ND occurs every 5 years historically, set probability at 0.2).
- SF financing rules (in simulations):
  - In non-ND years: budget generates an additional overall balance surplus that is deposited in the SF. Annual budget contributions modeled as a fixed parameter percent of previous year GDP and calibrated to achieve low probability of fund depletion and financial sustainability.
  - In ND years: SF disburses to the budget an amount equal to:
    + Gap of non-grant revenues below trend (captures decline in tax and non-tax revenues).  
    - Gap of grant revenues above trend (donor support reduces financing need).  
    + Gap of current primary expenditure above trend (captures higher social support and rehabilitation); plus an additional fixed percent of GDP to capture below-trend reprioritization of spending.  
    + Gap of capital expenditure above trend (captures higher public investment); plus an additional fixed percent of GDP to capture below-trend reprioritization of spending.  
  - SF disbursements continue until each indicator returns below its pre-disaster level.
- Re-prioritization accounted for:
  - Post-disaster fiscal space is partly obtained by postponing or cancelling pre-ND allocations; example documented for Dominica after Tropical Storm Erika (reconstruction expenditures offset by re-prioritized public investment).
- Initial SF stock (start-up cost) is assumed funded from existing CBI assets and is not added to the debt stock at the projection start (end-2015).

### Calibration details used in simulations
- Macroeconomic parameters aligned with staff macro frameworks for each ECCU country:
  - Potential GDP growth rate (applied to trend growth of all simulated endogenous fiscal indicators).  
  - Implicit interest rate (interest payments / debt stock).  
  - Fiscal consolidation targets in percent of GDP, allocated across the four simulated endogenous fiscal variables in line with WEO macro frameworks.
- Sample used for estimation: 1990-2015.

### Simulation outputs and use
- Simulations produce probabilistic projections for each endogenous fiscal variable by year and allow computation of:
  - Probability density functions for revenues, grants, current primary expenditures, capital expenditures, and cyclical GDP.  
  - Probabilistic public debt trajectories incorporating SF budgeting rules (contributions in non-ND years; SF financing in ND years).
- Policy-use implications:
  - Calibrated SF saving rates and initial stocks should be set to achieve an acceptably low probability of fund depletion over the policy horizon.  
  - Using CBI flows for SF start-up and recurrent funding can reduce post-disaster borrowing and limit the use of volatile CIP revenues for recurrent spending, reinforcing fiscal sustainability.

*Prepared by Alejandro Guerson. Source: Annex VIII. Assessing Government Self-Insurance Needs against Natural Disasters: An Application to the ECCU.*

### Appendix 1 shows the specific parametric calibrations used in the simulations for each country.

### _cr16333 - Appendix 1 shows the specific parametric calibrations used in the simulations for each country.

### Calibration approach and assumptions
- Parameters affecting the SF are calibrated to achieve its long-term financial sustainability with a low probability of depletion.
- ND probability threshold:
  - Set consistent with the historical frequency of ND.
- Initial size of the Fund stock:
  - Set to obtain a probability of depletion within the next ten years that is at most of 10 percent.
- Budget saving flows into the SF in years with no ND:
  - Set to ensure that the SF stock of assets does not increase or decrease in expected terms.
- SF disbursements after a ND:
  - SF disburses financing equivalent to the gap between simulated non-grant revenues, current primary expenditures, and capital expenditures and their trends (net of the simulated increase in grants above trend).
  - Additional parameter for capital and current primary expenditures allows specifying an extra gap above the gap with respect to the estimated trend.
  - Financing flows continue during the years after a ND for as long as simulated spending is higher than the level registered before the ND (SF finances the spending “hump” above the calibrated “base” levels).
- If the SF is depleted in a simulation:
  - Assumed financing gap is covered with debt issuance.

### Key simulation results and recommended ranges
- Under proposed parameter calibrations:
  - SF stocks needed to self-insure against ND: 6-12 percent of GDP.
  - Annual savings in years with no ND required for sustainability with a low probability of depletion: 0.4-1.9 percent of GDP.
- Sensitivity to ND probability threshold:
  - Raising the ND probability one notch increases required annual budget savings deposited in the SF by:
    - around 0.2 percent of GDP (Grenada; St. Lucia; St. Vincent and the Grenadines)
    - around 0.5 percent of GDP (Antigua and Barbuda; Dominica; St. Kitts and Nevis)
- Probability of depletion versus SF size:
  - Lowering the proposed stock of assets in the SF by 2 percent of GDP would result in a probability of depletion of about 10 percent or higher.

### Fund statistics (table values extracted)
- Government Saving Funds for Natural Disasters (ND) in the ECCU (In percent of GDP unless otherwise indicated)
  - ATG (Antigua and Barbuda)
    - Fund size: 12.00
    - Annual budget saving if no ND: 1.90
    - Probability of fund depletion, units: 0.05
    - Annual expected use of the fund if ND: 8.7
    - Average fiscal cost of simulated ND 1/: 57.9
  - DMA (Dominica)
    - Fund size: 10.00
    - Annual budget saving if no ND: 1.50
    - Probability of fund depletion, units: 0.08
    - Annual expected use of the fund if ND: 5.9
    - Average fiscal cost of simulated ND 1/: 29.3
  - GRD (Grenada)
    - Fund size: 6.00
    - Annual budget saving if no ND: 0.35
    - Probability of fund depletion, units: 0.04
    - Annual expected use of the fund if ND: 3.0
    - Average fiscal cost of simulated ND 1/: 29.7
  - KNA (St. Kitts and Nevis)
    - Fund size: 10.00
    - Annual budget saving if no ND: 1.90
    - Probability of fund depletion, units: 0.07
    - Annual expected use of the fund if ND: 4.8
    - Average fiscal cost of simulated ND 1/: 19.3
  - LCA (St. Lucia)
    - Fund size: 8.00
    - Annual budget saving if no ND: 1.05
    - Probability of fund depletion, units: 0.06
    - Annual expected use of the fund if ND: 3.4
    - Average fiscal cost of simulated ND 1/: 13.7
  - VCT (St. Vincent and the Grenadines)
    - Fund size: 8.00
    - Annual budget saving if no ND: 0.95
    - Probability of fund depletion, units: 0.03
    - Annual expected use of the fund if ND: 2.6
    - Average fiscal cost of simulated ND 1/: 12.9
- Note on average fiscal cost line:
  - 1/ Includes the estimated average decline in revenues and increase in primary expenditures in the simulations, net of the expected increase in donor grants.

### Public debt implications
- Under calibrations, in expected terms public debts generally decline toward the regional target of 60 percent of GDP by 2030.
- Results account for financing flows between the government budget and the SF depending on ND occurrence.
- Figure-based findings:
  - Figure 3: public debt would decline to around 60 percent of GDP or lower by 2030 in expected terms in all countries.
  - There is significant probability that the 60 percent target is missed if ND hit ECCU countries more frequently and/or harder than expected.
  - Higher vulnerability particularly noted for Dominica and St. Kitts and Nevis.
- Examples of assumptions used in fan-chart scenarios (as labelled in figures):
  - Assumes a probability threshold of natural disasters of 15 percent and annual budget savings of 1.9 percent of GDP in years with no ND.
  - Assumes a probability threshold of natural disasters of 20 percent, and annual budget savings of 1.5 percent of GDP in years with no ND.
  - Assumes a probability threshold of natural disasters of 25 percent, which requires annual budget contributions of 1.9 percent of GDP for the sustainability of the Fund.
  - Assumes a probability threshold of natural disasters of 10 percent and budget savings of 0.5 percent of GDP in years with no ND.
  - Assumes a probability threshold of natural disasters of 20 percent, annual budget savings of 1.3 percent of GDP in years with no ND.
  - Assumes a probability threshold of natural disasters of 25 percent and annual budget savings of 1.05 percent of GDP in years with no ND.

### Institutional design recommendations
- A strong institutional setup is critical to avoid political pressures for spending or opportunistic appropriations.
- Recommended design elements:
  - Unambiguous budget contribution and disbursement rules.
  - Triggers based on verifiable criteria.
  - A clearly-stated objective for the SF.
  - Strict information disclosure requirements to ensure transparency of operations.

### Appendix 1: Selected country parameter calibrations (excerpted numeric values)
- Antigua and Barbuda (selected values)
  - GDP potential growth, percent (2016–2022-35): 2.7 2.7 2.7 2.7 2.7 2.7 2.7
  - Implicit interest rate on public debt, percent: 3.3 2.6 2.1 2.1 2.1 2.1 2.1
  - Cumulative fiscal consolidation, percent of GDP: 2.9 2.9 2.9 2.9 2.9 2.9 2.9
  - Government Fund:
    - Initial Fund stock / GDP: 12.00
    - Inflows into the Fund from the budget, percent of GDP:
      - Non-grant revenue t-1: 1.90
      - Grant revenue t-1: 0.00
    - Outflows parameters:
      - Storm probability threshold: 0.150
      - Base capital expenditure level / GDP: 0.016
      - Capital expenditure trend / GDP trend: 0.026
      - Year average capital expenditure on reconstruction / GDP: 0.010
      - Base current primary expenditure / GDP: 0.190
      - Current primary expenditure trend / GDP trend: 0.200
      - Year average current expenditure social support and rehabilitation / GDP: 0.010
- Dominica (selected values)
  - GDP potential growth, percent: 1.7 (annual sequence 2016–2022-35: 1.7 ...)
  - Implicit interest rate on public debt, percent: 2.5 (annual sequence)
  - Cumulative fiscal consolidation, percent of GDP: -0.4 -0.3 1.3 2.9 4.5 5.0 5.5
  - Government Fund:
    - Initial Fund stock / GDP: 10.00
    - Inflows:
      - Non-grant revenue t-1: 1.500
      - Grant revenue t-1: 0.000
    - Outflows:
      - Storm probability threshold: 0.200
      - Base capital expenditure level / GDP: 0.064
      - Capital expenditure trend / GDP trend: 0.084
      - Year average capital expenditure on reconstruction / GDP: 0.020
      - Base current primary expenditure / GDP: 0.190
      - Current primary expenditure trend / GDP trend: 0.230
      - Year average current expenditure social support and rehabilitation / GDP: 0.040
- Grenada (selected values)
  - GDP potential growth, percent: 2.5 (annual sequence)
  - Implicit interest rate on public debt, percent: 3.5
  - Cumulative fiscal consolidation, percent of GDP: -4.2 -4.4 -2.7 -2.6 -0.8 1.1 1.1
  - Government Fund:
    - Initial Fund stock / GDP: 10.0
    - Inflows:
      - Non-grant revenue t-1: 1.9
      - Grant revenue t-1: 0.0
    - Outflows:
      - Storm probability threshold: 0.3
      - Base capital expenditure level / GDP: 0.0
      - Capital expenditure trend / GDP trend: 0.1
      - Year average capital expenditure on reconstruction / GDP: 0.0
      - Base current primary expenditure / GDP: 0.2
      - Current primary expenditure trend / GDP trend: 0.2
      - Year average current expenditure social support and rehabilitation / GDP: 0.0
- St. Kitts and Nevis (selected values)
  - GDP potential growth, percent: 2.7 (annual sequence)
  - Implicit interest rate on public debt, percent: 3.6 3.5 3.4 3.3 3.3 3.3 3.3
  - Cumulative fiscal consolidation, percent of GDP: 0.8 1.5 1.7 1.8 1.8 1.8 1.8
  - Government Fund:
    - Initial Fund stock / GDP: 6.0
    - Inflows:
      - Non-grant revenue t-1: 0.4
      - Grant revenue t-1: 0.0
    - Outflows:
      - Storm probability threshold: 0.1
      - Base capital expenditure level / GDP: 0.1
      - Capital expenditure trend / GDP trend: 0.1
      - Year average capital expenditure on reconstruction / GDP: 0.0
      - Base current primary expenditure / GDP: 0.2
      - Current primary expenditure trend / GDP trend: 0.2
      - Year average current expenditure social support and rehabilitation / GDP: 0.0
- St. Lucia (selected values)
  - GDP potential growth, percent: 3.0
  - Implicit interest rate on public debt, percent: 3.3
  - Cumulative fiscal consolidation, percent of GDP: 0.5 1.3 2.1 2.9 3.7 3.7 3.7
  - Government Fund:
    - Initial Fund stock / GDP: 8.0
    - Inflows:
      - Non-grant revenue t-1: 1.0
      - Grant revenue t-1: 0.0
    - Outflows:
      - Storm probability threshold: 0.2
      - Base capital expenditure level / GDP: 0.0
      - Capital expenditure trend / GDP trend: 0.0
      - Year average capital expenditure on reconstruction / GDP: 0.0
      - Base current primary expenditure / GDP: 0.2
      - Current primary expenditure trend / GDP trend: 0.2
      - Year average current expenditure social support and rehabilitation / GDP: 0.0
- St. Vincent and the Grenadines (selected values)
  - GDP potential growth, percent: 2.0
  - Implicit interest rate on public debt, percent: 2.9
  - Cumulative fiscal consolidation, percent of GDP: 0.4 0.5 0.6 0.7 0.8 0.8 0.8
  - Government Fund:
    - Initial Fund stock / GDP: 8.0
    - Inflows:
      - Non-grant revenue t-1: 1.05
      - Grant revenue t-1: 0.00
    - Outflows:
      - Storm probability threshold: 0.25
      - Base capital expenditure level / GDP: 0.07
      - Capital expenditure trend / GDP trend: 0.08
      - Year average capital expenditure on reconstruction / GDP: 0.01
      - Base current primary expenditure / GDP: 0.18
      - Current primary expenditure trend / GDP trend: 0.19
      - Year average current expenditure social support and rehabilitation / GDP: 0.01

*Source: Staff calculations and Appendix 1 parameter tables in the provided document.*

### Annex IX. Explaining High Unemployment in the ECCU

### Annex IX. Explaining High Unemployment in the ECCU

### Overview
- Official unemployment rates in some ECCU countries are very high by international standards, with rates above 20 percent in Grenada, St. Lucia, and St. Vincent and the Grenadines even using a strict definition of unemployment.
- Factors identified as likely contributors include: a rigid wage-setting environment, high reservation wages, the prevalence of natural disasters, sectoral shifts, and strong labor union activity.

### Labor market patterns and recent trends
- Labor market data are scarce and from heterogeneous sources; however, recent labor force surveys and social security statistics indicate:
  - Unemployment rates increased significantly following the global financial crisis.
  - Total employment has remained stagnant since the global crisis; private sector employment has significantly declined.
- Reported unemployment rates:
  - Grenada: 23 percent
  - St. Lucia: 24 percent
  - St. Vincent and the Grenadines: 22 percent
  - Antigua and Barbuda: 10.2 percent
  - St. Kitts and Nevis: 11 percent
- Demographic disparities:
  - Youth unemployment (ages 15-29) in St. Lucia: about 41 percent.
  - Unemployment in St. Lucia by gender: women 27 percent, men 20 percent.
- Data availability note: St. Lucia provides the most comprehensive consistent time series of labor market statistics among ECCU countries since the mid 1990s.

### Wage-productivity disconnect
- Key observation: a disconnect between continued real wage growth and stagnant (or declining) productivity, especially since the global financial crisis.
- Evidence:
  - Average real wages in ECCU countries have grown over the past decade, especially in the public sector, where the average real wage has increased by 20 percent.
  - Productivity showed virtual stagnation over the same period, with moderate growth before the global crisis turning negative afterwards, increasing unit labor costs.
  - Grenada and St. Lucia drive the divergence: real wages increased despite a substantial decline in productivity, including in the private sector.
- Implication: the growing gap between real wages and productivity since the global crisis could have contributed to the increase in unemployment in St. Lucia, and may have prevented an expected decline in unemployment in Grenada following Hurricanes in 2004 and 2005.

### Role of labor unions and public sector wages
- Strong labor union activity in Grenada and St. Lucia is identified as a significant factor behind the wage-productivity divergence.
  - Wages are generally set through collective bargaining; unions are particularly influential in the public sector.
  - Public sector employment shares (2013): St. Lucia 29 percent; Grenada 37 percent (based on NIS data including Public Administration and Social Security, Education, and Health).
  - Unions are also active in large private sectors: financial, manufacturing, tourism, and privately run utilities.
  - Legislation in these countries promotes union membership through direct or indirect requirements (e.g., as requisite to access benefits such as medical insurance).
- Demonstration effect:
  - Public and private sector wages increased considerably since 2008 despite the economic slowdown.
  - Growth in the average public sector wage has been faster than in the private sector, particularly in St. Lucia, suggesting public wage growth may have boosted private sector wage growth by serving as a benchmark.
- Empirical evidence for Grenada:
  - VAR regression and conditional Granger causality tests find bi-directional causality between public and private wages, indicating both “signaling” and “competition” effects between sectors.
  - Past wages (t-1) in both public and private sectors have strong predictive power for current wages (t), evidencing nominal wage stickiness.
  - CPI and productivity do not seem to affect nominal wages in either sector, consistent with the observed disconnect between real wages and productivity.
  - Contextual note: annual data and limited time series mean the lag length is set to 1 in the regression; Y_t = C + ∑_(j=1)^p B_j Y_(t-j) + ε_t with Y_t = (wPub, wPrv, P, A).

### Natural disasters, sectoral shifts, and structural unemployment
- Natural disasters and sectoral shifts have increased temporary and structural unemployment in Grenada:
  - Hurricanes: Hurricane Ivan (2004) and Hurricane Emily (2005) considerably affected the labor-intensive agricultural industry.
  - Long-term sectoral decline: agriculture has trended downward since the mid 1990s, partly due to the decline in the banana industry.
  - Formal agricultural employment (NIS statistics) halved between 2001 and 2008; agriculture accounted for 12 percent of total employment in 2001.
- Variation across countries:
  - Not all natural disasters have the same employment impact (e.g., Hurricane Thomas in 2010 in St. Lucia did not significantly affect employment due to smaller severity and a smaller agricultural employment share).

### Other potential contributors to high unemployment
- High reservation wages:
  - High-paid jobs in tourism and the public sector may raise reservation wages, reducing job search intensity.
  - NIS statistics (2013): in Grenada the average salary in the tourism and public sector was 63 percent and 90 percent higher than in formal agriculture; in St. Lucia tourism and public sector salaries were 50 percent and 63 percent higher than in formal agriculture.
  - Seasonal high wages in tourism may discourage employment search or entrepreneurship during the low tourism season.
  - Preliminary probit analysis on the 2015 Labor Force Survey in Grenada indicates a positive link between having a head of household working in tourism or the public sector and having a household member unemployed and not searching for a job (weak statistical significance).
- Remittances:
  - High remittance levels could raise reservation wages. According to Grenada’s 2015 Labor Force Survey, 14 percent of Grenadian households receive remittances from abroad.
  - Preliminary probit analysis finds a positive though statistically weak correlation between remittance receipts and the probability of being unemployed; further testing with larger samples and controls for reverse causality is needed.

### Policy implications and recommendations
- Primary strategy: foster wage moderation and productivity growth to reduce high unemployment.
  - With unemployment aggravated by widening wage-productivity gaps and possible high reservation wages, the most effective and socially acceptable approach is to boost productivity growth while restraining wage growth.
- Fiscal policy advice:
  - Contain the public sector wage bill to support employment growth in the private sector.
- Measures to foster productivity and reduce unemployment:
  - Increase economies of scale in small islands through measures to increase international and intraregional integration.
  - Improve the investment climate.
  - Lower the cost of energy through investment in renewable sources.
  - Set up labor training programs and align the education system with labor market demand.

*Source: Annex IX. Explaining High Unemployment in the ECCU (Excerpts from the provided IMF document).*

### 4.      The upfront investment costs associated with countries’ energy strategies are

### 4.      The upfront investment costs associated with countries’ energy strategies are

### Investment scale and timing
- Broad‑brush efforts suggest a regional average cost in the order of 7 percent of estimated 2015 GDP to implement countries’ energy strategies.
- Investment horizon reflected in Table 4: Energy Sector Investment Needs in the Caribbean (2018-2023) (in millions of USD).
- Source cited for investment estimates: IDB and IMF staff estimates.

### Fiscal sustainability and public financing
- Public financing of energy investments is likely to be feasible only in countries with sustainable debt dynamics and reasonably low risk of debt distress.
- ECCU countries with serious fiscal vulnerabilities must ensure that undertaking energy investments does not alter their long‑run public debt trajectory or derail necessary fiscal adjustment efforts over the medium term.
- To be fiscally manageable, energy investments need to be high‑yielding—to provide a sufficient rate of return to be self‑financing.
- Figure 6 presents scenarios for public debt paths under: Baseline Scenario; Public Investment Scenario; Private Investment Scenario.

### Role of the private sector and project implementation
- A bigger role for the private sector, including through public‑private partnerships, would alleviate sustainability pressures from energy investment.
- A strong operational and institutional framework is a prerequisite to safeguard against contingent liability risks and ensure that project implementation follows best practices.

### Regulatory, institutional, and efficiency measures
- Policymakers should put in place the regulatory and legislative reforms needed for an enabling policy environment.
- Specific measures identified include:
  - Facilitate the introduction of alternative energy sources through clear procedures for licensing Independent Power Producers (IPPs) and integrating them in the power sector through net‑metering and net‑billing schemes.
  - Strengthen institutional capacity by creation of independent national and/or regional energy sector regulators to promote a predictable and transparent regulatory environment.
  - Establish national energy efficiency standards (e.g., energy labeling and energy efficient building codes) to encourage adoption of energy‑efficient technologies by households and businesses, particularly hotels.
- Energy Efficiency and Conservation Initiatives referenced include: solar water heaters, grid loss reduction, street lighting retrofit and smart fund for EE projects.

### Country examples and relevant numeric indicators (as reported)
- Anguilla:
  - Growth in 2015 was 2.2 percent, underpinned by a growth in tourism arrivals of 5.2 percent.
  - 2016 winter season stay‑over arrivals rose by 7.7 percent compared with the previous year.
  - Bank credit declined by almost 4 percent (fourth consecutive year of credit contraction).
  - The gross fiscal cost of the bank resolution—some 40 percent of GDP in new government debt—required a waiver of fiscal rules.
  - Net fiscal cost of bank resolution is estimated to be either 31 percent of GDP (if offshore placements are ruled to have been deposits) or 25 percent of GDP (if not).
  - Staff’s medium‑term projections assume implementation of the authorities’ plan; growth projected to gradually rise to 2.7 percent in the medium term.
  - Total fiscal measures of close to 3 percent of GDP are envisaged over 2016‑17, raising the primary surplus from 3.2 percent of GDP in 2015 to 5.9 percent in 2020.
  - In the 2016‑17 budget, fiscal measures of 2½ percent of GDP were enacted.
  - Planned general sales tax at 15 percent (expected yield 7.5 percent of GDP).
  - Expected U.K. capital grants close to US$60 million (20 percent of GDP) to fund infrastructure.
- Montserrat:
  - Real GDP growth in 2015 is estimated to have slowed to ½ percent year‑on‑year due to reprioritization of capital investments.
  - Public debt remains well below international averages at 7.7 percent of GDP.
  - Credit to private sector growth had recovered, reaching 7.2 percent in February 2016.
  - Medium‑term growth projected to average about 2.2 percent of GDP.
  - Authorities’ new energy policy aims for 100 percent renewable energy generation by 2020; in FY2016‑17 authorities plan to continue advancing toward geothermal energy by drilling a third well.

*Source: IDB and IMF staff estimates.*

### Annex XII. External Assessment in the ECCU

### Annex XII. External Assessment in the ECCU

### Current account–based REER misalignment (EBA-Lite: Current Account Model)
- Recent migration from BPM5 to BPM6 methodology substantially affected external sector statistics, partly due to a significant increase in measured tourism receipts.
- Preliminary BPM6 based estimates present major improvements in current account balances in all countries in the region in 2104 (as shown in Table 1).
- The weighted average ECCU current account deficit was revised down from 13 to 3 percent of GDP, materially affecting current account–based REER assessments.
- Comparative EBA-Lite outcomes:
  - Using BPM5 data: average REER undervaluation around 32 percent (ECCU, weighted average: 32.2; ECCU, simple average: 32.9).
  - Using provisional BPM6 data: average REER undervaluation of 8.8 percent (ECCU, weighted average: -8.8; ECCU, simple average: -8.8).
- Country-level current account and REER indicators (selected values from Table 1, preserving source precision):
  - BPM5 Current Account (Actual CA, CA Norm, Policy C.A., Gap, Residual, Exchange Rate Elasticity, REER Gap/Misalignment)
    - Antigua and Barbuda: -14.5, -3.1, 1.5, -12.9, -0.3, 42.6
    - Dominica: -13.1, -27.9, 0.9, 14.0, -0.3, -72.9
    - Grenada: -15.5, -6.8, 1.7, -10.4, -0.2, 51.0
    - St. Kitts and Nevis: -7.6, -6.9, 8.5, -9.2, -0.2, 2.8
    - St. Lucia: -6.7, -5.0, 8.5, -2.1, -0.3, 6.3
    - St. Vincent and the Grenadines: -29.6, -7.3, 2.8, -25.0, -0.1, 167.5
    - ECCU, simple average: -14.5, -9.5, 4.0, -7.6, -0.2, 32.9
    - ECCU, weighted average: -12.7, -7.1, 4.2, -7.8, -0.2, 32.2
  - BPM6 Current Account (Provisional)
    - Antigua and Barbuda: -1.7, -3.1, 1.5, -0.1, -0.3, -5.3
    - Dominica: -6.8, -27.9, 0.9, 20.2, -0.3, -103.3
    - Grenada: -7.8, -6.8, 1.7, -2.7, -0.2, 5.8
    - St. Kitts and Nevis: 3.0, -5.6, 7.2, 1.4, -0.2, -36.3
    - St. Lucia: 7.2, -5.0, 7.2, 11.7, -0.3, -43.8
    - St. Vincent and the Grenadines: -24.6, -7.3, 2.8, -20.0, -0.1, 129.9
    - ECCU, simple average: -5.1, -9.3, 3.5, 1.8, -0.2, -8.8
    - ECCU, weighted average: -3.0, -6.9, 3.6, 1.8, -0.2, -8.8
- Footnotes and metrics:
  - The reserve adequacy metric for small islands (based on IMF WP/12/205) takes into account the higher precautionary motive of these countries due to several factors including natural disasters.
  - The ratio of reserves to the 12-month forward-looking debt service plus the current account deficit is 1.63.

### Index-based REER assessment (EBA-Lite: REER Index Model)
- The index-based EBA-Lite assessment (cross-country regressions using estimated REER as dependent variable) implies only moderate REER misalignments in most ECCU countries.
- This methodology points to a moderate REER undervaluation on average, with a narrower range across countries than the current account–based approach.
- Country-level REER Index Model estimates from Table 2 (REER Gap, Policy Gap, Residual):
  - Antigua and Barbuda: -9.6, -0.7, -9.0
  - Dominica: -12.1, -0.4, -11.7
  - Grenada: -7.1, 0.2, -7.2
  - St. Kitts: 11.7, -0.3, 12.1
  - St. Lucia: 3.0, -2.1, 5.1
  - St. Vincent: 2.8, -0.5, 3.2
  - ECCU, simple average: -1.9, -0.6, -1.3
  - ECCU, weighted average: -1.4, -0.7, -0.7
- Extremes in the Index Model:
  - Most overvalued REER: St. Kitts (11.7 percent REER Gap; 12.1 percent Residual)
  - Most undervalued REER: Grenada (-7.1 percent REER Gap; -7.2 percent Residual)

### CARTAC: Capacity building, technical assistance (TA), and reforms in the ECCU
- CARTAC background and scope:
  - Established in November 2001 as a joint IMF-UNDP initiative, based in Barbados.
  - Became one of the IMF’s network of Regional Technical Assistance Centres in 2011.
  - Core TA and training areas: revenue administration, public financial management (PFM), macroeconomic programming and analysis, financial sector stability and supervision, economic and financial statistics.
  - On January 1, 2017 CARTAC will enter its fifth phase of operations.
- ECCU share of CARTAC TA:
  - The ECCU region accounts for just over 40 percent of all TA to the CARTAC membership.
  - Within ECCU TA focus areas: financial sector supervision (49 percent), PFM (45 percent), macroeconomic programming and analysis (44 percent).
  - Grenada, St. Lucia, and St. Kitts and Nevis are the most intense users of CARTAC TA among ECCU countries.
- Revenue administration and tax reform highlights:
  - VAT implementation chronology: Dominica (March 2006), Antigua and Barbuda (January 2007), St. Vincent and the Grenadines (May 2007), Grenada (February 2010), St. Kitts and Nevis (November 2010), St. Lucia (October 2012). Anguilla received support in 2012 in preparation for a GST in 2014.
  - Tax administration capacity and outcomes:
    - St. Kitts and Nevis: revenue performance increase of 16 percent for 2015 over 2013 for the LMTU segment.
    - Dominica: proposals for VAT threshold increase and CIT review.
    - St. Lucia: VAT threshold increased to EC$400,000 effective Feb.1, 2016; presumptive tax designed for implementation in FY17.
    - Grenada: enacted tax incentive reform legislation (implementation ongoing).
  - A model Tax Administration Procedure Act (TAPA) drafted for the region; Grenada enacted TAPA (effective May 2016); Antigua and Barbuda enacted TAPA but delayed implementation of garnishment provision.
  - SIGTAS enhancements delivered to St. Lucia, Grenada, and St. Vincent and the Grenadines; recommendation for integrated IT/taxpayer identification for Montserrat.
  - Targeted training and results:
    - Dominica: approximately $700,000 in additional duties and taxes assessed by PCA unit in 2015.
    - St. Kitts and Nevis: 13 audits in 2014/2015 with assessments of approximately $100,000.
    - Grenada: additional duties and taxes from classification/valuation increased from US$25,000 in 2012 to US$120,000 in 2014.
- Customs administration and trade facilitation:
  - TA emphasis: leadership, strategic planning, human resource development, trade facilitation, compliance, risk management, post clearance audit (PCA).
  - PCA training delivered to St. Kitts and Nevis, St. Lucia, and Dominica (approximately 20 officers trained).
  - Support for OECS free movement/free circulation of goods regime: study and workshop on trade and revenue data; further study planned on harmonizing customs service charges.
  - Preparatory advice for the new international airport in St. Vincent and the Grenadines to ensure customs readiness.
- Public Financial Management (PFM) and SOE reforms:
  - Comparative review of PFM practices using PEFA assessments (2013–2016) against the IMF Good Practice Note on ‘Sequencing PFM Reform’ (Diamond, 2013).
  - Progress on modern, consistent PFM legal frameworks:
    - Antigua and Barbuda, St. Lucia, Dominica: final draft legislation for legislative consideration.
    - Anguilla, St. Vincent and the Grenadines: initial drafts under review.
    - Grenada: passed revisions to new PFM legislation and adopted revised regulations (FMC).
  - SOE reform traction in Grenada: operational turnarounds and reorganizations (e.g., Gravel and Concrete generating cash profits; Housing Authority reorganized into profit centers).
  - Strategic budgeting and program budgeting piloted/implemented: St. Lucia, St. Vincent and the Grenadines, Grenada; nine CARTAC countries now have comprehensive budget preparation manuals (including gender budgeting perspective).
  - IPSAS compliance: Anguilla and St. Kitts and Nevis assessed as fully compliant (annual IPSAS cash basis workshop).
  - Diagnostics for internal audit: St. Kitts and Nevis, St. Lucia.
- Macroeconomic programming and forecasting:
  - CARTAC supported ad hoc analytic requests (e.g., Dominica—Tropical Storm Erika; Anguilla—medium-term fiscal strategy for the United Kingdom’s Foreign and Commonwealth Office requirements).
  - Improved macroeconomic forecasting capacity in Grenada, St. Lucia, St. Kitts and Nevis, Anguilla; CARTAC-designed frameworks in use.
  - FY16 workshop to produce medium-term fiscal strategies consistent with the 60 percent debt to GDP target by 2030; all ECCU members submitted formal reports to their Cabinets.
- Financial stability, supervision, and crisis preparedness:
  - FY16 stress-testing program: dynamic modeling and stress-testing of seven domestic and four international banks across Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, Montserrat, St. Lucia, St. Vincent and the Grenadines.
  - Specialized seminars on stress-testing and macro-prudential indicators for ~20 regulatory staff of the ECCB and GARFIN.
  - Training on crisis management and resolution frameworks for GARFIN; three-day conference in March 2016 with 74 stakeholders on building resilience to financial crises.
  - Follow-up requests from ECCU members (Grenada and St. Vincent and the Grenadines) for assistance to strengthen national crisis preparedness plans and resolution frameworks.
  - Financial reporting: training for ECCB staff and review of the ECCU financial stability report draft.
  - Basel II adoption: eighteen of 20 CARTAC member countries committed to implement the standardized approach to Basel II; ECCU adapted revised Basel reporting forms and guidelines on credit risk, operational risks, market risks, interest rate risk in the banking book, supervisory review process (pillar II), and disclosure and transparency (pillar III).
  - TA on Basel II implementation for offshore banking requested/provided to Antigua and Barbuda, St. Vincent and the Grenadines, St. Lucia, St. Kitts and Nevis.
  - Risk-based supervision (RBS) TA provided to Antigua and Barbuda, Dominica, Montserrat, St. Lucia, St. Vincent and the Grenadines, St. Kitts and Nevis; Antigua and Barbuda published its RBS framework on the authority’s website.
  - Regional workshops in FY16: insurance workshop (88 participants from 18 of 20 CARTAC member countries), pensions workshop (69 participants from 17 of 20 CARTAC member countries), securities workshop (~40 participants).
  - Regional credit union training in collaboration with CACS: focus on credit risk/loan review, risk-weighted capital adequacy, stress testing, supervisory intervention, corporate governance; identified challenges include regulatory delays, legislative challenges, transition from SROs to independent regulators, and high levels of non-performing loans.
  - Additional regional meetings and workshops: financial sector strategic meeting (coverage: financial sector supervision and stability, macro-prudential surveillance, crisis management, Basel II/III, RBS) and a financial strategic workshop with 59 participants from 17 CARTAC member countries.
- Economic and financial statistics:
  - Focus areas: external sector, national accounts, prices statistics.
  - National accounts improvements:
    - Grenada: improved annual GDP by expenditure (GDP-E) estimates compiled using the commodity flow approach (to be released by December 2016).
    - St. Vincent and the Grenadines: improved annual GDP-E estimates released in May 2016.
    - Methodologies for GDP-E developed for St. Kitts and Nevis.
    - Comprehensive reviews of national accounts concepts/sources/methods completed for Antigua and Barbuda, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines.
    - Supply and use table (SUT) frameworks developed for Antigua and Barbuda, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines.
  - Quarterly national accounts:
    - Dominica: strengthened capacity to compile quarterly GDP-P estimates.
    - Methodologies for quarterly GDP-P developed for St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines.
  - Prices statistics:
    - New reweighted CPI series for Montserrat released in September 2015.
    - New Federal CPI being compiled for St. Kitts and Nevis.
  - Coordination with other TA providers: PRASC (Statistics Canada), ECCB reviews, Caribbean Community Secretariat consultants on 2008 SNA implementation.
- External sector statistics (ESS) and BOP/IIP improvements:
  - ECCU’s BOP data reviewed and IIP data produced for the first time.
  - Preliminary aggregated 2014 BOP and IIP statistics following BPM6 were produced and released by the ECCB in coordination with national statistics offices for the eight ECCU members and the ECCU.
  - ECCB plans to publish comprehensive BOP and IIP data by the end of 2016.
  - Improvements benefited from CARTAC TA to develop and administer new surveys and to train data compilers and survey respondents.
  - Visitor and student expenditure data improvements:
    - Antigua and Barbuda, St. Lucia, Dominica, St. Kitts and Nevis: improved visitor and student expenditure data.
    - Antigua and Barbuda and St. Lucia: visitor expenditure estimates now based on the current survey of departing passengers.
    - Antigua and Barbuda: over 450 students surveyed to better account for nonresident student transactions.
    - Dominica: collected data on tuition fees received from nonresident students via a specific ESS survey form for offshore universities.
    - May 2016: St. Kitts and Nevis conducted visitor expenditure surveys to compile enhanced estimates for visitor expenditure in the balance of payments.

*Source: IMF staff estimates and calculations; IMF staff report content as provided in the annex.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16333.pdf_