Eastern Caribbean Currency Union: IMF Staff Concluding Statement of the 2024 Article IV Mission on Common Policies of Member Countries
IMF News, February 14, 2024
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- Published: February 14, 2024
Overview and headline findings
- The ECCU has undergone a strong rebound, led by tourism and investment, and supported by policies that helped moderate the impact from successive external shocks.
- Real GDP is estimated to have grown on average by nearly 7 percent per year over 2021-23 and has surpassed pre-pandemic levels.
- Inflation has moderated to around 4 percent in 2023 from a commodity price driven peak of 5½ percent in 2022.
- Overall public debt remains elevated and generally well-above the regional 2035 debt ceiling of 60 percent of GDP.
- The financial system remains highly liquid and appears to have weathered the recent successive shocks without a major impact, supported by the since expired loan moratoria, but continues to face long-standing asset quality weaknesses and growing vulnerabilities in the non-bank financial sector.
- Wide post-pandemic current account deficits are narrowing, albeit slowly.
- The ECCB’s currency backing ratio remains high, supporting confidence in the currency union.
- Strengthening data collection, quality, and transparency is critical to informing a well-calibrated policy design.
Risks and macroeconomic outlook
- Capacity constraints increasingly weigh on the region’s outlook.
- GDP growth is projected to moderate toward pre-pandemic averages as tourism performance nears full capacity and continued restoration of public and private sector balance sheets narrows the space for home-grown investment.
- The growth and fiscal outlooks are heavily dependent on uncertain Citizenship-by-Investment (CBI) inflows which continue to be subject to international scrutiny.
- ECCU countries remain highly susceptible to volatility in commodity prices and an abrupt growth slowdown in major tourism source countries.
- Climate-related disasters remain a recurrent threat with potentially devastating impact.
A. Protecting fiscal space for sustained growth-enhancing physical and social investment
Findings:
- The recovery, high inflation, and withdrawal of temporary fiscal measures led to an improvement in fiscal positions, but public debt remains elevated.
Policy recommendations:
- Pursue a steady reduction in public debt in countries where it is well-above the regional ceiling to maintain macro stability and safeguard the currency board.
- Continue withdrawal of temporary measures that responded to the cost-of-living crisis.
- Adopt fuel price pass-through frameworks to protect tax revenue, stabilize demand, and promote green transformation, supported by better coverage and targeting of transfers to the most vulnerable.
- Revive a regional initiative to agree on common benchmarks for streamlined tax exemptions to avoid a "race-to-the-bottom" and help lift revenue closer to international peers.
- Pool regional resources and expertise to reduce impediments and costs to qualify for and access international climate finance.
Institutional reforms:
- ECCU-wide adoption of national fiscal responsibility frameworks (FRFs) with well-defined country-specific operational rules and escape clauses to deliver a consistent decline in debt, including a cushion to provide fiscal space to respond to shocks.
- Operationalize regular ECCB Monetary Council peer reviews of member states’ policy strategies and progress toward meeting the regional debt target.
- Strengthen revenue administration, public investment and debt management, enhance medium-term fiscal frameworks, and improve state-owned enterprise oversight.
- Accelerate comprehensive pension reforms to address looming large contingent fiscal liabilities and improve fairness and equity of pension systems.
CBI-specific measures:
- Establish regional standards for CBI programs, including common standards on due diligence, enhanced transparency and disclosure, minimum pricing benchmarks, and common principles on revenue allocation toward fiscal buffers and growth-enhancing investment.
B. Strengthening financial system balance sheets and reviving private investment
Banking sector asset quality:
- Banks are working toward the required full loan loss provisioning against long-overdue loans by end-2025, which form the bulk of the region’s high non-performing loans (NPLs).
Recommendations:
- Ensure all loan loss allowances are made in the form of provisions to appropriately record banks’ capital strength.
- Adopt similar impaired asset standards for credit unions.
- Streamline foreclosure and collateral sale processes and strengthen the capacity of the Eastern Caribbean Asset Management Company to facilitate disposal of impaired assets.
- Maintain supervisory focus on risk management of foreign security investments and high local sovereign exposures among some banks.
Non-bank financial institutions (NBFIs):
- Immediate priority: ensure national supervisors have adequate powers, staffing, and data reporting to monitor and assess credit union and insurance sector risks and enforce corrective action.
- Strengthen data and information exchange between the ECCB and national supervisors, particularly in the insurance sector given large cross-border institutions.
- Introduce common minimum regulatory standards for NBFIs expeditiously to mitigate arbitrage risks.
- Align regulations and supervisory standards for open-platform credit unions with banks as their activities expand beyond traditional market space.
- Consider centralizing fragmented NBFI supervision under a model leveraging national supervisors’ local presence to improve resource efficiency and early vulnerability identification.
Insurance and climate risk:
- Strengthen insurance sector data collection and regional supervisory cooperation to monitor climate change risks that can increase property insurance premia, underinsurance, and affect borrower repayment capacity.
- Undertake deeper assessment of insurance-banking interlinkages and integrate climate change risks into supervisory and stress testing frameworks.
Promoting private investment and credit:
- Operationalize the credit reporting bureau across bank and non-bank lending institutions.
- Complement partial credit guarantee programs and movable collateral frameworks with programs to strengthen small-business record-keeping, business planning, and financial literacy.
- Implement region-wide insolvency framework reforms and creditor rights enhancements to reduce cost-disincentives to private credit provision.
- Coordinate efforts with regional capital market development, investor and borrower education initiatives, and completion of related pending legislative processes in all jurisdictions.
Supervisory capacity and safety nets:
- Rollout of the Basel II/III prudential standards and formalization of ECCB’s system-wide oversight authority will support stability but place demand on limited supervisory resources.
- Align national supervisors’ capacity with NBFIs’ increasing systemic significance.
- Consider a regional bank deposit insurance once legacy bank vulnerabilities are reduced; extension to credit unions should be conditional on a more unified oversight framework.
AML/CFT:
- Continue strengthening AML/CFT frameworks to address CFATF Mutual Evaluation recommendations and complete long-pending designation of the ECCB as the AML/CFT supervisor for banks.
Digital payments:
- Review lessons from the recently concluded Cash pilot to assess complementarities with other payment solutions and ensure interoperability across domestic and international platforms.
C. Addressing constraints to employment
Findings:
- Longstanding labor market frictions: rigidities in hiring and firing, high informality, emigration of skilled workers, skills mismatches, and high youth unemployment.
- Employment recovery lags the strong post-pandemic uptick in economic activity.
Policy recommendations:
- Recalibrate employment protection laws, including alignment of lengthy redundancy notice periods and generous severance regimes toward international peers to reduce disincentives to new hiring.
- Introduce targeted and actuarially sound unemployment insurance schemes to reduce fiscal costs of untargeted ad hoc interventions.
- Design minimum wage frameworks to avoid disrupting labor allocation efficiency, employment opportunities and regional competitiveness; emphasize targeted social protection frameworks for the most vulnerable.
- Review education programs with development partner expertise to support youth employability, reduce skills mismatches, and increase vocational training focus in sectors with labor shortages.
- Explore targeted policies (e.g., extension of parental and elderly care leave) to narrow gender gaps in labor force participation and wages, aligned with fiscal objectives.
- Tailor social programs to tackle barriers to employment, including low education and school dropout among young males.
D. Strengthening data provision
Findings:
- Significant data gaps constrain policy design: labor market, household incomes and indebtedness, property markets, private sector insurance costs and coverage, and foreign direct investment.
Recommendations:
- Strengthen region-wide data collection, processing, and transparency to support calibration of economic policies.
- Increase data transparency for CBI inflows, tax exemptions, and medium-term fiscal projections to support regional coordination and public accountability.
- Strengthen resources at national statistics units to improve accuracy, timeliness, and frequency of key economic data and reduce long lags and frequent revisions.
Implementation and institutional coordination
- ECCU-wide adoption of national FRFs, ECCB Monetary Council peer reviews, strengthened national supervisory capacity, and regional cooperation on CBI and climate finance are highlighted as critical implementation avenues.
- The IMF team thanks the authorities for their warm hospitality and insightful and constructive discussions.
IMF Staff Concluding Statement of the 2024 Article IV Mission on Common Policies of ECCU Member Countries (February 14, 2024).