©2000 International Monetary Fund

August 11, 2000

Order Information

O C C A S I O N A L   P A P E R     
The Eastern Caribbean Currency Union
Institutions, Performance, and Policy Issues

Frits van Beek, José Roberto Rosales, Mayra Zermeño, Ruby Randall, and Jorge Shepherd

List of Abbreviations
I   Overview
II   The Financial System

ECCB Institutional Framework
ECCB Monetary Instruments
Financial Institutions
Regulatory Framework
II   The Financial System

ECCB Institutional Framework
ECCB Monetary Instruments
Financial Institutions
Regulatory Framework
III   Money and Capital Market Development Initiatives
IV   Recent Economic Developments

Output, Employment, and Prices
Banana Sector
Public Finances
Money and Banking
External Sector
V   Main Regional Policy Issues

The Currency Union Arrangement
Fiscal Policy
Monetary Issues
External Policy
VI   Conclusions
   1.   Statistical Note
   2.   Antecedents of the ECCB
   3.   Currency Backing and Limits on Credit to Member Governments
   4.   Prudential Requirements for Commercial Banks
   5.   The EU Banana Regime
   6.   Government Lease-to-Own Liabilities: The Case of Grenada
   7.   Fiscal Reform Objectives and Measures Proposed by the ECCB
   8.   Stabex Grants to the Windward Islands
   1.   ECCB Area: Exchange Rate Developments, 1981–99
   1.   ECCB Area: Selected Economic Indicators
   2.   ECCB Area: Allocation of ECCB Credit to Member Governments, 1998/99
   3.   ECCB Area: Detailed Monetary Survey
   4.   ECCB Area: Condensed Balance Sheet and Backing Ratio
   5.   Selected ECCB and International Interest Rates
   6.   ECCB Area: List of Commercial Banks by Territory
   7.   ECCB Area: Weighted Commercial Bank Interest Rates
   8.   ECCB Area: Selected Current and Capital Account Restrictions
   9.   ECCB Area: Output and Population Growth
   10.   ECCB Area: Rate of Growth of Gross Domestic Product by Economic Activity, at Factor Cost, in Constant Prices
   11.   ECCB Area: Contribution of Gross Domestic Product by Economic Activity, at Factor Cost, in Constant Prices
   12.   ECCB Area: Saving and Investment
   13.   ECCB Area: Consumer Prices
   14.   Windward Islands: Selected Banana Sector Indicators
   15.   EU: Duty-Free Banana Import Quotas for ACP Countries
   16.   EU: Comparison of Quota/Tariff Structure Under the Previous and Current Banana Import Regimes
   17.   Windward Islands: Banana Growers Profile
   18.   Windward Islands: Banana Recovery Plan
   19.   Caribbean Region: Stayover Tourist Arrivals
   20.   ECCB Area: Stayover Tourist Arrivals by Country of Origin
   21.   Caribbean Region: Number of Hotel Rooms
   22.   Caribbean Region: Cruise Passenger Arrivals
   23.   Caribbean Region: Visitor Expenditure
   24.   ECCB Area: Selected Public Sector Indicators by Country
   25.   ECCB Area: Public Sector Operations
   26.   ECCB Area: Selected Central Government Indicators by Country
   27.   ECCB Area: Central Government Operations
   28.   ECCB Area: Central Government Expenditure Indicators by Country
   29.   ECCB Area: Central Government Revenue Indicators by Country
   30.   ECCB Area: Average Import Duties and Customs Surcharges
   31.   ECCB Area: Banking System Credit to the Public Sector
   32.   ECCB Area: Public Sector Debt
   33.   ECCB Area: External Arrears
   34.   ECCB Area: Selected Banking System Indicators by Country
   35.   ECCB Area: Sectoral Distribution of Commercial Banks' Loans and Advances
   36.   ECCB Area: Commercial Banks' Overdrafts and Loans by Maturity
   37.   ECCB Area: Selected Monetary Indicators
   38.   ECCB Area: Effective Exchange Rates
   39.   CARICOM: Implementation of Scheduled Reductions in the Maximum Rate of the Common External Tariff
   40.   CARICOM: Common External Tariff Rates
   41.   ECCB Area: Statutory Tax Rates on International Trade and Transactions
   42.   ECCB Area: Summary Balance of Payments
   43.   ECCB Area: Current Account by Country

I.  Overview

Eastern Caribbean countries institutionalized political and economic cooperation through the establishment of the Organization of Eastern Caribbean States (OECS) with the Treaty of Basseterre in 1981. Two years later they set up the Eastern Caribbean Central Bank (ECCB), which replaced the Eastern Caribbean Currency Authority. The eight member countries and territories of the ECCB are Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, which are independent states and members of the IMF, and Anguilla and Montserrat, which are territories of the United Kingdom.1 The six independent OECS states and Montserrat are also members of the Caribbean Common Market, CARICOM, established in 1973.

The OECS members share a common currency, the Eastern Caribbean dollar, which has been pegged to the U.S. dollar since 1976 at EC$2.70=US$1, and was pegged to the British pound at EC$4.80=£1 from 1950 to 1976. Prior to the recent inception of the European Central Bank, the ECCB was one of only three common central banks in the world and the only one where the member countries have pooled all their foreign reserves, the convertibility of the common currency is fully self-supported, and the parity of the exchange rate has not been changed.

This occasional paper reviews recent developments, policy issues, and institutional arrangements in the member countries of the Eastern Caribbean Currency Union (ECCU), and looks at the ECCB's institutional arrangements, the financial system and its supervision, and the central bank's initiatives to establish a single financial space.

Two aspects of the ECCU economies stand out--their very small size and their vulnerability to shocks. Geographic barriers complicate the functioning of a single market, and even taken as a whole, the ECCU is a very small economy. The total population is approximately half a million and combined gross domestic product (GDP) was estimated at US$2.6 billion in 1998, or about $4,500 per capita, which is relatively high in the Caribbean. Per capita GDP varies from a high of nearly US$9,000 for Antigua and Barbuda to a low of about $2,800 for St. Vincent and the Grenadines (Table 1). Indivisibilities and high unit costs are barriers to many forms of economic activity: the market is so small that importing is sometimes unprofitable, and production even more so. The independent states range in size from St. Kitts and Nevis, with 269 sq. km., to Dominica, with 750 sq. km., and populations range from 41,000 in St. Kitts and Nevis to 140,000 in St. Lucia (Anguilla and Montserrat are even smaller). The OECS economies are exposed to natural disasters--particularly hurricanes, and less frequently drought and volcanic eruption. Because of their small size, the impact of a natural disaster can be far more devastating than for a larger economy where the damage is localized.2

Table 1. ECCB Area: Selected Economic Indicators1
1990 1991 1992 1993 1994 1995 1996 1997 1998

(Annual percentage change)
Real GDP at factor cost2 4.7 0.7 3.9 2.6 3.0 0.7 2.7 3.1 2.3
Real per capita GDP2 3.7 1.4 2.5 0.9 1.9 0.0 2.8 2.7 2.9
Export volume –0.4 –11.8 8.7 –6.0 –10.4 6.6 –5.4 –6.2 10.9
Import volume 0.8 0.1 –4.5 8.8 –3.5 –2.2 5.7 14.7 4.8
Terms of trade n.a. 1.9 –3.1 –1.0 1.2 –3.9 –3.1 3.7 4.6
Consumer prices (end of period) 5.1 4.3 3.6 2.5 2.2 2.1 2.1 2.6 3.1
 (Percent of GDP)
Overall fiscal balance –2.4 –2.5 –1.1 –0.7 –2.0 –0.6 –0.6 –3.8 –2.8
Government tax revenue 21.5 21.1 20.9 21.4 21.1 21.4 21.5 21.4 21.3
External current account balance2 –16.9 –16.6 –10.6 –10.7 –11.0 –9.7 –14.4 –16.0 –15.8
Gross national saving3 16.7 14.2 16.7 18.8 17.8 22.2 17.5 15.9 15.3
   Public saving 3.6 3.8 4.0 4.7 4.0 4.0 4.0 3.3 3.8
   Private saving 13.1 10.4 12.7 14.1 13.8 18.1 13.5 12.6 11.6
Gross domestic investment 33.6 30.8 27.3 29.4 28.8 31.9 31.9 32.0 31.2
   Public investment 8.7 9.1 7.0 8.0 8.4 7.2 7.3 4.3 9.6
   Private investment 24.9 21.7 20.3 21.4 20.4 24.7 24.6 22.7 21.6
Gross foreign assets, ECCB 12.0 12.4 14.6 13.5 12.3 14.2 12.6 12.6 13.7
Public external debt (end of period)4 42.6 49.8 49.2 48.4 49.3 50.5 47.9 45.7 45.1
(U.S. dollars)
Per capita GDP 3,145 3,312 3,508 3,592 3,789 3,882 4,087 4,291 4,538
   Anguilla 6,262 6,200 6,548 6,911 7,471 7,280 7,429 7,450 7,631
   Antigua and Barbuda 6,139 6,425 6,551 6,959 7,530 7,301 7,876 8,459 8,976
   Dominica 2,328 2,535 2,679 2,750 2,912 2,995 3,184 3,229 3,376
   Grenada 2,334 2,527 2,600 2,578 2,685 2,805 2,979 3,165 3,348
   Montserrat 5,652 5,117 5,390 5,907 6,118 5,673 6,186 10,754 10,822
   St. Kitts and Nevis 3,802 4,013 4,261 4,557 5,151 5,298 5,812 6,502 6,814
   St. Lucia 3,103 3,293 3,601 3,555 3,634 3,815 3,869 3,876 4,138
   St. Vincent and the Grenadines 1,872 1,995 2,172 2,183 2,214 2,387 2,504 2,631 2,810
Memorandum items:
Total GDP of the region, at market prices (US$ m)2 1,674 1,769 1,898 1,970 2,099 2,176 2,295 2,415 2,579
Total population of the region (thousands of inhabitants)2 532 534 541 548 554 561 562 563 568

Sources: Eastern Caribbean Central Bank, and IMF staff estimates.
1The area includes Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines; except otherwise indicated.
2Also includes Anguilla and Montserrat.
3Defined as the gross domestic investment plus the external current account balance.
4Includes external arrears.

Until the 1950s, the Eastern Caribbean countries were overwhelmingly agricultural--mainly specializing in either bananas or sugar. There has since been a steady shift, accelerating in the 1980s, away from agriculture and toward tourism. In general, the countries in which income has risen most are those where this shift has proceeded the furthest. Overall, tourism today accounts for 10 percent of GDP and agriculture 8 percent. Manufacturing remains relatively small (less than 6 percent) and consists largely of food processing and enclave industries such as garments and small assembly plants. Construction is significant (around 10½ percent), much of it serving the needs of tourism.

The economies in the region are very open: merchandise imports averaged 53 percent of GDP during 1990–98; merchandise exports 16½ percent of GDP; and the surplus in the nonfactor services balance, 24 percent of GDP. Also, the sum of current and capital transfers has been very large, averaging close to 8 percent of GDP over the same period. Foreign direct investment (over 9 percent of GDP) and loans to the public sector help cover the current account deficit. Most of the region's trade is with the United States and the European Union, both of which grant trade preferences; Japan and other Caribbean countries are also important trading partners.

Despite difficult fundamentals, economic performance in the region was strong in the late 1970s and 1980s and has remained broadly satisfactory in the 1990s. Real GDP growth averaged 6 percent a year during 1977–89, but slowed to an average of 2½ percent a year during 1990–98; partial information suggests that real GDP grew by around 3 percent in 1999. Given the openness of the economies and the exchange rate peg, inflation has been in line with that in the major trading partners, averaging about 3 percent a year during 1990–98; in 1999, inflation was less than 2 percent. This outcome was facilitated by the "strong EC dollar policy" pursued by the ECCB and the generally sound fiscal policies followed by most countries.

In the course of the 1990s, however, the slowdown in growth was accompanied by a weakening of the fiscal positions in several countries, and the medium-term outlook has changed. The availability of concessional foreign financing has been declining, as some countries have "graduated" and donors have shifted priorities; the European Union's (EU) banana regime is being opened to competition; sugar production, even for export to the protected markets,3 is of questionable viability; and there are indications that the light manufacturing sector is losing ground to lower wage areas.4

On the brighter side, the region has seen a marked increase in tourist arrivals in recent years. At the same time, some diversification is taking place, with moderate growth in nontraditional agriculture and the emergence of firms involved in data processing and informatics, and in offshore financial and gaming services.

1Anguilla did not join the ECCB until 1987. The British Virgin Islands are an associate member of the OECS, but not of the ECCB.
2For a discussion of vulnerability and other aspects of the economies of small states, see Small States: Meeting Challenges in the Global Economy, Report of the Commonwealth Secretariat/World Bank Joint Task Force on Small States, April 2000.
3St. Kitts and Nevis produces some 20,000 tons of sugar a year for export under quotas to the United States and the European Union. The state-owned sugar company incurs a loss of some EC$18 million a year.
4There is some evidence that firms have left the region for Mexico to benefit from the NAFTA arrangement.