Via IMF (Den Internationale Valutafond)

Eastern Caribbean Currency Union: IMF Staff Concluding Statement of the 2019 Discussion on Common Policies of Member Countries

January 7, 2020

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Growth has recovered strongly in 2018-19 but is set to moderate, with
the outlook clouded by downside risks. The Eastern Caribbean Central
Bank (ECCB) and individual Eastern Caribbean Currency Union (ECCU)
countries have continued to advance their reform agendas, but progress
needs to be accelerated. While robust national fiscal frameworks remain
key to the region’s policy priorities, well-sequenced steps to regional
integration can catalyze capacity and resources. This would include (i)
increasing fiscal integration, (ii) enhancing financial integration,
and (iii) solidifying the monetary union by raising payment’s
efficiency through—but not limited to—cautiously piloting a digital

1.  Growth rebounded in 2018 and has remained robust so far in

ECCU’s GDP growth accelerated to 3¾ percent in 2018, reflecting
buoyant tourism and sizable Citizenship-by-Investment (CBI)
inflows, which helped support Dominica’s reconstruction-led
recovery from the 2017 hurricane. Growth momentum has remained
strong in 2019, while inflation has been muted. The region’s fiscal
deficits have been edging upwards in 2018-19 despite continued
strength in CBI inflows, but with the deficits remaining moderate,
the public debt ratio declined in 2018 and is set to fall further
in 2019. While the region’s external deficits are high, they are
amply financed by FDI flows. Bank credit to the private sector
remains weak despite substantial excess liquidity.

2.  Going forward, growth is set to moderate, and risks remain
mostly on the downside.

GDP growth is expected to gradually ease to 2¼ percent, a long-term
historical average for the region. CBI inflows are also projected
to moderate. In the near term, economic activity would be supported
by further post-hurricane reconstruction, tourism investment, and
some agribusiness projects. Achieving the 60 percent of GDP debt
target would remain challenging for most countries. Global risks,
such as adverse confidence effects from rising protectionism and
weaker US growth, could weigh on the outlook.
Region-specific risks include natural disasters, increasing banks’
foreign exposures, continuing exit of global banks, and continued
pressures on corresponding banking relationships (CBRs) against the
backdrop of elevated non-performing assets. Positive surprises in
CBI inflows, if well-managed, constitute potential upside risks.

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3.  Greater regional integration can substantially complement
robust national policies in improving the outlook and
mitigating risks.

ECCU’s challenges are compounded by large shocks and lack of
economies of scale. Robust national fiscal responsibility
frameworks that ensure public debt sustainability and buffers are
crucial for improving the ECCU growth potential. ECCB’s advocacy
for achieving the 60 percent of GDP debt target by 2030 through
national fiscal responsibility frameworks and its efforts to
improve debt management have supported this process. In addition,
IMF staff analysis suggests that well-sequenced steps toward
regional integration can catalyze resources for better policy
responses, as elaborated below.

A. Increasing Fiscal Integration

4.  Regional coordination of selected revenue policies could create
fiscal space for ECCU’s public investment.

The ongoing “race to the bottom” in competing for tax incentives
and CBI program conditions limits the potential to raise revenue
that could be channeled to productive spending, including
resilience building. This highlights scope for the ECCU countries
to coordinate tax incentives and CBI program conditions, while
achieving the objective of making FDI more attractive through
better infrastructure. In this context, the authorities’ ongoing
collaboration on CBI programs’ financial integrity to improve their
transparency and governance could help lower negative perceptions
about the use of CBI programs. Such collaboration could support
region-wide sustainability of these flows and financial stability.

5.  Over the longer term, a regional pooling of fiscal resources
can complement national fiscal buffers to build resilience
against natural disasters and other shocks at a lower cost.

While individual ECCU countries face similar risks, natural
disasters put them in different economic conditions at a given
time. The regional pooling of resources saved by limiting excessive
growth of public consumption in good times could support
macroeconomic stabilization and create scope for resilience
building and other growth-enhancing investment in bad times. Staff
calculations suggest that the size of a pooled fund would be about
one-half of the sum of individual countries’ funds for the same
stabilization effect. Such an arrangement would require a strong
governance framework and should be financed by national budgets to
protect ECCB’s international reserves and the credibility of its
quasi-currency board arrangement. This pooling of resources could
complement national insurance strategies against natural disasters,
a key pillar of the Disaster Resilience Strategies currently being
piloted in Dominica and Grenada.

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B. Enhancing Financial Integration

6.  Accelerated progress on the ECCB’s reform agenda will help
address financial system vulnerabilities.

The ECCB in its capacity of a region-wide bank supervisor and
regulator has continued to advance essential reforms, including
strengthening its financial system stability function with deepened
interaction with regional regulatory authorities, identifying
regionally-systemic financial institutions, and improvement to its
Financial Stability Report. The implementation of risk-based
supervision, phase-in of Basel II/III standards, technology
upgrades for supervisory operations, and enhanced AML/CFT
frameworks continue to build supervisory effectiveness. Additional
reforms are currently being pursued, such as establishing a shared
services platform for indigenous banks; developing a deposit
insurance scheme; implementing an e-conveyancing regime for
collateral realization as part of the initiative to modernize
insolvency frameworks; harmonizing non-bank financial laws;
operationalizing a credit bureau; and preparing guidelines for the
treatment of impaired assets. Authorities are also considering a
macro-prudential framework for financial sector stability including
the Lender of Last Resort (LOLR) function; and a framework for
optimal regulation of the financial sector.

7.  The reform agenda needs to be prioritized with key short-term

Despite improvements in Non-Performing Loans (NPLs) in most
jurisdictions, efforts to repair bank balance sheets should be
stepped up by (i) adopting effective plans for all banks to reduce
NPLs below the 5-percent benchmark by end-2023, including via sales
to the Eastern Caribbean Asset Management Company (ECAMC); (ii)
requiring banks’ disposal of non-banking assets (including land);
and (iii) strictly enforcing exposure limits and market risk
management. ECCB’s and deposit-taking institutions’ governance
frameworks should be reviewed and passage of critical legislation,
including AML/CFT, should be expedited by remaining countries to
increase compliance and enforcement. Consolidated supervision of
financial groups should be advanced. Urgent measures are also
necessary to monitor and address operational risk, including due to
CBRs and cybersecurity. The new treatment of impaired assets
standard, now expected by January 2020, should be implemented
without delay.

8.  Provided the critical short-term priorities are addressed,
steps toward a fuller banking union could take place in the
long term.

These would involve: (i) enhancing the financial safety net with a robust deposit insurance
scheme and (ii) establishing a regional resolution and crisis management framework. Both these
steps require operationalizing credible fiscal backstopping as a
key precondition, based on minimum regional fiscal responsibility
commitments entrenched in national laws. Other reforms that should
be implemented include: (i) advancing the regulatory regime for systemic institutions (including non-banks) to minimize
regulatory gaps and shock propagation; (ii)

consolidation of regional non-bank financial sector oversight

to enhance coverage, address sector-specific risks, reduce
compliance costs, and mitigate resource constraints; and (iii)
progressing the establishment of a macroprudential mandate and toolkit to address region-wide
systemic risk.

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C. Solidifying the Currency Union by Raising Payment System’s Efficiency

9.  Building on the successful launch of the Electronic Funds
Transfer, the ECCB, national authorities, and financial
institutions should continue efforts to modernize the payment

Major banks have recently begun to offer various electronic payment
services. The authorities are also examining options to integrate
credit unions in the core payment systems. This would help
competition, but it should be considered in the context of
establishing an appropriate prudential oversight framework. The
ongoing review of the legal framework pertaining to the payment
system is also critical to allow emerging Fintech and nonbank
e-payment services to operate and innovate. Advancing e-government
initiatives would also help increase the volume of digital payments
to help address small-economy constraints and enhance the business
opportunities for the private sector. In this context, the Digital
Economy Project, which is currently in its preparatory phase, would
support digital transformation of key services provided by ECCU
Governments. Early introduction of a digital ID is needed to
support these initiatives.

10.  The digital currency pilot project, launched by the ECCB,
should proceed cautiously as planned.

The authorities view the digital currency as an option to reduce
excessive reliance on cash and cheques; improve the efficiency of
the retail payment system; and support economic development by
reducing financial frictions. To contain vulnerabilities, important
safeguard measures are embedded in the design of the digital
currency, such as the limited size of its holding and transaction
values, no interest accrued; and does not include foreign currency
transactions. That said, the digital currency could expose the ECCB
and the financial system to various risks, including those related
to financial intermediation, financial integrity, and
cybersecurity. The pilot will provide the opportunity to examine
these risks, test the design of the digital currency, and assess
any policy gaps. After the pilot, the ECCB is planning to
thoroughly review its results, and more work may be warranted,
especially to further test the digital currency system, strengthen
cybersecurity and AML/CFT operations, and update legal and
regulatory frameworks.

The IMF team would like to thank the authorities and private sector
counterparts for their warm hospitality and constructive dialogue.

IMF Communications Department

PRESS OFFICER: Randa Elnagar

Phone: +1 202 623-7100Email: