The International Monetary Fund (IMF) is heaping praise on the economic turnaround being experienced in the Eastern Caribbean Currency Union (ECCU) countries.
In its 2019 Article IV Consultation Report at the end of its annual review, the IMF said growth has recovered strongly in 2018-19 but is set to moderate. However, the review team argued that, “the outlook is clouded by downside risks.”
The review team points out that, “individual ECCU countries have continued to advance their reform agendas but progress needs to be accelerated.” The currency union comprises the islands of Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St Kitts-Nevis, St Lucia, and St Vincent and the Grenadines.
According to the IMF, “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:
“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.”– The International Monetary Fund team
Growth rebounded in 2018 and has remained robust in 2019. Gross Domestic Product (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. In its post Article IV assessment statement yesterday the IMF says the growth momentum remained strong in 2019, while inflation has been muted.
The IMF statement notes that, “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 (foreign direct investment) FDI flows. Bank credit to the private sector remains weak despite substantial excess liquidity.”
Going forward, growth is set to moderate, and risks remain mostly on the downside. According to the IMF assessment team, “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.”
Increasing Fiscal Integration
The IMF team underscored the need for increasing fiscal integration, which could create fiscal space for ECCU’s public investment. The IMF points to the ongoing “race to the bottom” in competing for tax incentives and CBI program conditions, which it says limit 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,” the IMF argues.
Over the longer term, the IMF contends that 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.
Accelerated progress on the Eastern Caribbean Central Bank (ECCB) reform agenda, the IMF explains will help address financial system vulnerabilities noting that the bank in its capacity of a region-wide bank supervisor and regulator has continued to advance essential reforms. These reforms include strengthening the financial system stability function with deepened interaction with regional regulatory authorities, identifying regionally-systemic financial institutions, and improvement to its Financial Stability Report.
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.
“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.”– The International Monetary Fund
Despite improvements in Non-Performing Loans (NPLs) in most jurisdictions, it was highlighted that 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 (ii) requiring banks’ disposal of non-banking assets (including land); and (iii) strictly enforcing exposure limits and market risk management.
The IMF recommends that the ECCB’s and deposit-taking institutions’ governance frameworks should be reviewed and passage of critical legislation, including Anti-Money Laundering (AML)/Counter Terrorism Financing (CFT), should be expedited by remaining countries to increase compliance and enforcement.
In addition consolidated supervision of financial groups should be advanced.
Digital Economy Project
Turning to the Digital Economy Project, the IMF is recommending that the digital currency pilot project, launched by the ECCB, should proceed cautiously as planned. To contain vulnerabilities in the project, observes that 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 eliminating foreign currency transactions.
However, the IMF assessment team argues that 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 team notes that 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.