Public Information Notice: IMF Concludes Discussion on the Eastern Caribbean Currency Union

March 28, 2003

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the discussion on the Eastern Caribbean Currency Union is also available.

On January 27, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the discussion of regional surveillance on the Eastern Caribbean Currency Union.1


After growing at an average annual rate of 3½ percent in the 1990s, real GDP in the region grew by 2½ percent in 2000 but fell by 1½ percent in 2001, an unprecedented decline since 1976. This fall reflected a confluence of events: The September 11 terrorist attacks in the United States and their impact on tourism, steep declines in traditional products (notably bananas and sugar), natural disasters, and the global economic slowdown. Inflation remained subdued, with consumer prices rising on average by less than 3 percent per year. Unemployment appears to be high, although the data are very weak. There is also evidence of a loss of competitiveness in tourism and external trade. Economic activity in 2002 remained depressed as the impact of these factors have persisted, in addition to that of tropical storm Lili in September 2002.

The fiscal position of the governments in the region has deteriorated sharply in recent years, resulting in public sector dissavings, marked increases in public debt, and arrears in some cases. Higher spending was mostly on wage bills, capital projects, and interest payments, while widespread tax concessions lowered revenues. The combined central government deficit widened from 5½ percent of GDP in 2000 to around 7 percent of GDP in 2001, and is estimated to have remained broadly unchanged in 2002. The combined stock of public sector debt grew to about 80 percent of GDP in 2001 and grew further in 2002; the debt stock of the countries in the region ranged between 40-135 percent of GDP at end-2001.

Gross international reserves of the ECCB have continued to rise and have remained at comfortable levels in recent years, despite the large current account deficits and declining external competitiveness. This reflects continued robust capital inflows, mainly direct investment to finance construction and imports for large projects but also public sector borrowing. However, with the slowdown in tourism and the weakening economy, travel receipts, imports and also exports fell sharply in 2001 and the current account deficit narrowed slightly to an estimated 15 percent of GDP.

Monetary aggregates grew strongly in 2000, with increased lending to governments and an increase in foreign currency deposits, but slowed in 2001 and 2002 as governments relied more on external borrowing, economic trends worsened and bank liquidity increased. The soundness of the domestic banking sector varies markedly among members, and the current weak economic conditions are causing the banking system to come under increased stress. In the offshore financial sector, efforts in the region have focused on strengthening the supervisory and regulatory framework, following the inclusion in 2000 and 2001 of four countries in the region in the Financial Action Task Force's (FATF) listing of noncooperative areas for inadequate anti-money laundering policies, and earlier listings by the Financial Stability Forum and the OECD. Since then two of these countries have been removed from the FATF's list.

Executive Board Assessment

Directors observed that the region has recently faced a series of adverse shocks, including natural disasters, the events of September 11, 2001 and the global economic slowdown. In particular, the weakness of the tourism sector has contributed to an unprecedented overall decline in GDP in both 2001 and 2002. Directors noted with concern that these developments have exacerbated the region's difficult economic challenges, and underscored the urgency of addressing these challenges with determination. Priority will need to be given to correct the deepening fiscal imbalances, in particular to safeguard the stability of the currency board arrangement and of the financial system, while structural reforms should aim at strengthening the region's competitiveness and growth potential.

Directors noted that efforts at fiscal consolidation and stabilizing public debt ratios will need to involve a range of actions. Expenditure measures should include wage restraint, improved public expenditure management (informed by World Bank public expenditure reviews), and greater focus on public sector investment projects that are geared to growth and poverty reduction and funded largely by grants and concessional loans. To strengthen the revenue effort, Directors urged an early reduction in tax exemptions and discretionary concessions, and a broadening of the tax-base, preferably on a regional basis and through the introduction of a VAT-type tax and reduced reliance on trade tariffs. Strengthened public debt management will also play a crucial part in improving fiscal outcomes and lessening vulnerabilities.

Directors welcomed the ongoing work coordinated by the Eastern Caribbean Central Bank (ECCB) in the tax, expenditure, and debt management areas. They commended the ECCB for its efforts to support fiscal reforms in the region, particularly in the context of stabilization programs, and saw the fiscal benchmarks being developed as a useful commitment mechanism to improve fiscal performance. Directors stressed that the fiscal authorities need to take full ownership of these regionally coordinated initiatives, and that their full and determined implementation will be key to ensuring fiscal sustainability. Regular monitoring of the performance of all members against the benchmarks will therefore be important to encourage peer review of poor performers within the Union, and to help ensure that all members achieve—at a minimum—the proposed benchmarks over the medium-term. Directors also underscored the need to improve fiscal transparency and governance in the region, and suggested that fiscal ROSCs for the members of the ECCU would be helpful in this regard.

Directors noted the mixed assessment of the health of the financial systems in the member countries, and called for measures to ensure bank soundness going forward. They welcomed plans to strengthen the domestic bank supervisory and regulatory regime in accordance with Basel Core Principles as well as the amendments to the Banking Act and the ECCB Agreement Act, and looked forward to their early enactment. Directors underscored the urgency of establishing uniform agencies in each jurisdiction to regulate non-bank financial institutions and the offshore sector. Problem banks need to reduce their non-performing loans and will, in some cases, have to be recapitalized.

Directors welcomed recent progress towards strengthening regulation and supervision in the offshore financial sector. However, prospects remain dim for sustaining a vibrant offshore industry over the medium term in the region. While efforts to raise supervision to international standards need to continue, it will also be important to work towards mechanisms that prevent the cost of supervision from outweighing the overall economic benefits of the sector. Directors encouraged the authorities to keep up the momentum in their efforts to strengthen the mechanisms to combat money laundering and the financing of terrorism. They supported the provision of Fund technical assistance for this purpose, and looked forward to the FSAP, to be conducted later this year.

Directors considered that the monetary and exchange rate system operated by the ECCB has generally served the region well in the past, and noted the ECCB's high currency backing ratio and comfortable level of international reserves. They cautioned, however, that preserving the exchange rate peg going forward will require sustained fiscal consolidation and a decline in public sector debt, a sound and well-regulated financial sector, and strengthened efforts to increase the region's competitiveness. Some Directors encouraged the authorities to keep the merits of the modalities of the currency peg under review. The authorities were also encouraged to abolish the floor on savings deposit rates to increase the responsiveness of interest rates to liquidity conditions.

Directors underscored the importance of determined efforts to strengthen external competitiveness and achieve sustainable growth. This will require strong wage restraint, and efforts to increase the flexibility of the labor market and enhance the skill-composition of the labor force. Directors also highlighted the benefits that the region would obtain from deeper structural reforms to improve efficiency, as it advances towards greater regional and global integration. They supported the goal to create an economic union by 2007, and encouraged the authorities to accelerate integration plans that would position the region to take full advantage of the anticipated Free Trade Area of the Americas and facilitate adjustment to the prospective loss of EU trading preferences for key agricultural products. Directors also recommended stronger efforts towards privatization, trade liberalization, civil service and public sector reforms-including pension reform—and improvements in the business environment. They noted that the region will need appropriate technical assistance to support its integration efforts.

Directors underscored the importance of strengthening economic statistics and addressing remaining weaknesses which hamper the quality of economic analysis. Improvement is most urgent in the national accounts and labor statistics, while further efforts are also required to improve the quality, transparency, and timeliness of economic data.

Eastern Caribbean Currency Union: Selected Economic Indicators







Real Sector (Annual percentage change)

Real GDP






GDP deflator






Consumer prices, end of year







Public Finances (in percent of GDP)

Central government overall balance






Revenues and grants






Expenditure and net lending






Total public sector debt 2/






External Sector (in percent of GDP, unless otherwise indicated)

Current Account balance






Trade balance












Export volume 2/






Import volume 2/






Stayover visitors 2/






Money and Credit (percentage change)

Net foreign assets 3/






Net domestic assets 3/






Broad money






Sources: Data provided by the authorities, and IMF staff estimates.

1/ Excludes Anguilla and Montserrat.

2/ Annual percentage change.

3/ In relation to broad money at the beginning of the period.

1 The regional perspective of such discussions is intended to strengthen the bilateral discussions that the IMF holds with the members in the region under Article IV of the IMF's Articles of Agreement. A staff team staff team visits the region, collects economic and financial information, and discusses with officials of the regional institutions the region's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarized the views of Executive Directors, and this summary is transmitted to the country authorities in the region.


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