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The Eastern Caribbean Central Bank (ECCB) welcomes the publication of “Eastern Caribbean Currency Union – Staff Report on the 2022 Common Policy Discussion of Member States“ from the International Monetary Fund (IMF).
In May 2022, the IMF held discussions with stakeholders across the Eastern Caribbean Currency Union (ECCU) and with the ECCB and member governments.
This year’s discussions focused on the impact of the legacy of the COVID-19 pandemic and the effects of the war in Ukraine on the economies of the ECCU countries. Special attention was paid to the following policy areas:
Strengthening the sustainability of fiscal frameworks;
Strengthening the sustainability of the financial sector;
Increasing competitiveness and fostering a resilient and inclusive recovery.
The IMF’s findings from the regional consultations were presented to the Fund’s Executive Board for discussion on July 27, 2022.
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The ECCB agrees with the IMF’s recommendations on what should be the policy priorities for member governments in the short and medium term to address the damaging effects of the pandemic and the rising cost of living exacerbated by the war in Ukraine.
Based on IMF estimates, real GDP in the ECCU grew by 5.0 percent in 2021 after a sharp contraction of 17.5 percent in 2020 during the COVID-19 pandemic.
Member countries’ economies are expected to gradually build momentum in their post-pandemic recovery in 2022. The ECCB provisionally estimates real GDP growth of 6.2 percent for the ECCU in 2022, with output remaining below pre-pandemic levels.
The recovery in 2021 was driven by a strong return of the tourism industry in some countries, while other countries experienced increased activity in the construction sector. The recovery is expected to continue as countries relax restrictions and fully reopen their economies.
The situation, however, remains fluid as new variants of COVID-19 emerge. Growing uncertainty related to the war in Ukraine, as well as transportation and supply chain constraints and climate-related risks continue to pose significant threats to growth prospects and the outlook. Member countries are implementing key policy measures to reduce the impact of risks on domestic economies.
The IMF has done a commendable job of highlighting the key downside risks facing the ECCU region at the moment and provides important insights and recommendations as articulated in the Report. The ECCB provides some further insights into the issues and policy actions required to provide relief and spur an economic recovery.
1. Strengthening the Resilience of Fiscal Frameworks
Member governments have continued efforts to address the ongoing effects of the COVID-19 pandemic on the fiscal deficits and debt positions of their respective economies. The response to the pandemic required substantial spending on health spending and social transfers to ensure that the most vulnerable were not marginalized.
This has resulted in widening deficits and escalating debt levels. The region’s overall fiscal deficit more than doubled during the first year of the pandemic, moving from $442.4 million (2.1 percent of GDP) to $958.1 million (5.6 percent of GDP) and then falling to 573.4 million dollars (3.1 percent of GDP). in 2021.
The pandemic reversed the 7-year downward trajectory of the debt-to-GDP ratio and resulted in a sharp increase of this ratio by 22.3 percentage points to 88.2 percent at the end of 2020. Total debt for ECCU remained elevated in 2021. despite the decline marginal at 87.3 percent of the debt to GDP ratio.
As the impact of the pandemic continues to subside and economic activity has resumed, there have been some improvements in government finances. However, the negative effect of the ongoing war in Ukraine on oil prices and the cost of food are significant threats to further improvements. The ECCB, in its role as advisor to member governments on fiscal and debt sustainability, has advocated for the adoption of fiscal responsibility frameworks (FRFs) to achieve fiscal consolidation and achieve the regional debt-to-GDP target of 60 per percent until 2035.
2. Strengthening the sustainability of the financial sector
The ECCB continues to closely monitor the implications of the COVID-19 pandemic for the stability of the banking sector. The anticipated rise in non-performing loans (NPLs) over the course of the pandemic did not materialize and liquidity positions continued to be strong in 2021.
The NPL ratio peaked at 11.8 percent in June 2021 and has remained stable at 11.7 percent since September 2021.
However, as the loan deferment program has ended, banks are undertaking loan restructuring and an increase in the NPL ratio is expected.
In light of the increase in non-performing loans and credit risk, the Bank has taken measures to improve its supervisory monitoring under its risk-based supervision framework. Two new standards were recently introduced: the Treatment of Impaired Assets Standard (TIAS), which provides guidance for restructured and renegotiated loans, came into force on 1 January 2022 and the Consolidated Supervision Standard came into force on 1 April 2022.
Work continues on the phased implementation of the Basel II/III framework, which will strengthen the Central Bank’s supervisory capacity as a regulator and address gaps in the current Basel I framework.
Also, the Bank is in the process of developing a Climate Risk Framework, which will support the integration of climate-related risks in financial stability monitoring and micro-supervision.
The ECCB continues efforts to mitigate new risks through ongoing cooperation with the Single Regulatory Units. This partnership includes strengthening the regulatory oversight of non-bank financial institutions, through the creation of a standard regulatory framework for non-banks, under the auspices of a Regional Standard Setting Body, approved by the Monetary Council.
Work is progressing on the framework for this Regional Standard Setting Body.
See also
The Bank continues to advocate for the urgent adoption of reforms to strengthen the stability of the financial sector. This includes the adoption of Credit Reporting legislation in all member countries and the consolidation of anti-money laundering and anti-terrorist financing Supervision of AML/CFT under the responsibility of the Central Bank. The draft Deposit Insurance Policy is being amended to take into account crisis resolution funding, after which the amended deposit insurance bill will go through a consultation process.
3. Increasing competitiveness and fostering a resilient and inclusive recovery
The ECCB recognizes the need to empower private sector growth and address long-term constraints on lending and access to credit. This will require the urgent implementation of reforms to address gaps in credit infrastructure and increase access to credit. As many of the ECCU economies are hurt by the recent loss in manufacturing, the new focus is on elevating the region’s growth trajectory.
The ECCB recognizes that one of the key tools to increase competition and accelerate growth will be access to credit.
Support for the productive sectors of the economy remains a priority through the growth of small and medium enterprises and the expansion of entrepreneurship.
Therefore, in the effort to transform our region while building sustainability, a credit bureau is indispensable. In this regard, a license has been issued to Creditinfo ECCU Ltd, which has started work on implementing the solution for ECCU.
gratitude
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, as well as the interventions of other IMF Executive Directors.
The Bank uses this opportunity to express its commitment to continue the engagement and productive cooperation with the IMF on key policy issues for the region.
The IMF’s “Eastern Caribbean Currency Union – Staff Report for the 2022 Discussion on Common Policies of Member Countries” is available on the IMF website.
Source: Eastern Caribbean Central Bank
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