The Eastern Caribbean Central Bank (ECCB) welcomes the publication of the “Eastern Caribbean Currency Union – Staff Report for the 2019 Discussion on Common Policies of Member Countries” by the International Monetary Fund (IMF).
Over the period October to November 2019, the IMF held consultations with stakeholders across the Eastern Caribbean Currency Union (ECCU) and with the ECCB. Those discussions informed the IMF’s Staff Report and were centered on the following three themes:
- Fiscal integration;
- Financial integration; and
- Strengthening the monetary union.
The IMF’s findings from the regional consultations were presented to the Fund’s Executive Board for discussion on 3 February 2020.
The IMF’s assessment of the macroeconomic performance of the ECCU economies is broadly in line with that of the ECCB. The ECCB underscores the strong growth performance for 2018, which was supported by robust activity in the tourism sector. The Bank’s preliminary growth figures for 2019 indicate that this strong performance continued in 2019, with the ECCU economy estimated to have expanded by 3.2 per cent. The recent positive economic performance in the ECCU has been undergirded by the macroeconomic framework, which is anchored in a stable monetary policy framework. Continued progress on the region’s reform agenda has also been supportive of the growth performance. The reform agenda is geared towards further strengthening the financial sector, addressing structural weaknesses and building resilience in order to elevate the region’s growth trajectory. The Bank thanks the IMF for highlighting the significant policy actions taken by the ECCB and the ECCU country authorities to make progress on this broad and deep reform agenda.
The ECCB provides some further insights into the issues and progress made in prosecuting the reform agenda, under the rubric of the Bank’s strategic priorities for effecting the socio-economic transformation of the region:
The ECCB’s monetary policy stance has been to maintain a strong reserve backing to support the fixed exchange rate parity at EC$2.70 to US$1.00. Over the last five years, the Central Bank has maintained an average backing of 97.6 per cent - far exceeding the minimum statutory benchmark of 60 per cent and the Bank’s operational target of 80 per cent. As at the end of 2019, the backing ratio stood at 99.1 per cent. The ECCB is committed to safeguarding the exchange rate peg to create a stable monetary environment that is conducive to economic activity.
Financial Sector Stability
The Bank continues its two-pronged approach to enhancing the financial sector to perform its financial intermediation role. The first prong relates to the ECCB’s mandate to ensure financial sector stability. In that regard, the Bank continues its efforts to enhance its regulatory and supervisory oversight of the financial sector. Work is currently ongoing to design an appropriate regulatory architecture with a view to ensuring complete regulatory coverage of all segments of the financial sector, including such burgeoning areas as the credit union sector. Further, in the wake of the recent exit of the Canadian banks from the ECCU financial space, the Bank views the move by the indigenous banks towards a shared services platform with more urgency. The shared services initiative is necessary for positioning the indigenous banks to efficiently provide financial services to residents of the ECCU. Additionally, in light of the region’s vulnerability to climate-related phenomenon, the Bank is exploring the development of a supervisory framework for climate change risk.
The second prong aims at developing the financial sector by enhancing the legal framework and establishing the requisite institutions. This includes the recently launched Eastern Caribbean Partial Credit Guarantee Corporation (ECPCGC), which is intended to improve access to credit for underserved segments of the market, such as small and medium-size enterprises (SMEs). A regional secured transactions reform project is under development, with assistance from the World Bank, to assist with unlocking access to finance. Another key initiative in this regard is the establishment of a credit bureau for the region, which is at an advanced stage, with a credit bureau operator having been identified.
Fiscal and Debt Sustainability
Despite the recent fiscal challenges that resulted from the need to respond to the two devastating category 5 hurricanes in 2017, the ECCU region has made significant progress towards achieving the debt-to-GDP ratio target of 60 per cent by 2030. As at September 2019, four of the eight ECCU member governments were below the debt target. The ECCB continues to call for a strengthening of fiscal governance and supports the move towards embedding disaster-linked clauses in new loan contracts to safeguard these gains and make progress towards the debt target. The Bank further encourages judicious use of windfall revenues such as inflows from Citizenship by Investment (CBI) Programmes. Some options for prudent use of these inflows include paying down debt to create fiscal space and building climate resilience by investing in resilient infrastructure. The ECCB also advocates the establishment of a regional growth and resilience fund.
Growth, Competitiveness and Employment
Following the strong recovery from the 2017 hurricanes, growth in the ECCU is projected to remain robust in 2020. However, this forecast is subject to developments in both the domestic and external spheres. Downside risks to the growth forecast include the potential impact of the unfolding international public health emergency associated with COVID-19 (the novel coronavirus) on global growth. In the domestic sphere, the ECCU has embarked on a digital transformation agenda that seeks to leverage technology to increase the region’s growth potential. The first component of the digital transformation agenda is the Digital Transformation project with the World Bank. The second component is the ECCB’s Digital EC Dollar (DXCDCaribe) project, an important piece in the Bank’s broader payments system reform thrust. The project seeks to address the frictions in the payments system. Its goals are to contribute to financial inclusion and greater efficiency in payments transactions, which could enhance the region’s competitiveness. The ECCB’s value proposition with the DXCDCaribe is to provide the fastest, cheapest and safest way to send and receive money anywhere in the ECCU. The DXCDCaribe pilot will be rolled out in Antigua and Barbuda, Grenada, St Kitts and Nevis and Saint Lucia over the period June to December 2020.
The Bank expresses its gratitude to the IMF staff who participated in the regional consultations, and prepared the Staff Report and accompanying documents. The ECCB also appreciates the support provided by the Office of the Executive Director for Canada, Ireland and the Caribbean, and for the interventions of other Executive Directors of the IMF. The Bank takes this opportunity to express its commitment to continuing the productive engagement and collaboration with the IMF on the key policy issues for the region.
The IMF’s “Eastern Caribbean Currency Union—Staff Report for the 2019 Discussion on Common Policies of Member Countries” is available on the IMF website.