The International Monetary Fund (IMF) has warned tourism activity will remain subdued across the Eastern Caribbean Currency Union (ECCU) as the COVID-19 crisis has hit hard across the subregion.
“The near-term policy imperative is to protect lives and livelihoods and limit potential scarring, while ensuring medium-term debt sustainability with strengthened fiscal frameworks and maintaining financial system stability, with a view to safeguarding the quasi-currency board system,” said the Washington-based financial institution in a concluding statement of the 2020 discussion on common policies of member countries in the ECCU.
“Once the post-pandemic recovery takes hold, policies should focus on resuming fiscal consolidation, further strengthening the financial system, and accelerating other structural reforms to make the economy more competitive and resilient,” it added.
The IMF said the COVID-19 pandemic has taken a heavy toll on the ECCU economy, stating that tourism receipts “have dried up as visitor arrivals have come to a halt.”
It estimated that gross domestic product (GDP) has contracted by 16 per cent in 2020, with negative inflation and stagnant credit growth.
“With sizable revenue losses and spending pressures, aimed at limiting the socio-economic impact of the pandemic, fiscal positions have deteriorated significantly, raising public debt sharply,” the IMF said.
“The current account deficit is estimated to have widened sharply due to the decline in tourism exports,” it continued.
Nonetheless, it said the Eastern Caribbean Central Bank’s (ECCB) foreign asset position has “held up relatively well”, partly reflecting increased official financing.
The IMF said the economic impact of the COVID-19 pandemic has differed widely across countries, largely reflecting the size of the tourism sector and the severity of lockdown measures.
The recovery will be protracted and depend on how quickly the COVID-19 pandemic is brought under control, the bank said.
It said growth in 2021 is projected to be weak, with the 2020-21 tourism season continuing to be depressed due to travel restrictions and the renewed surge in COVID-19 cases in the northern hemisphere, including Europe.
The IMF said while the roll-out of vaccines offers hope, the challenging logistics of mass distribution and vaccination are causing delays globally.
More generally, the IMF said tourism activity is “likely to remain subdued until the pandemic is brought firmly under control.”
Accordingly, it said the baseline scenario assumes that the pace of recovery in tourism will be gradual, with tourist arrivals in the Caribbean projected to return to the pre-pandemic level only in 2024.
“Risks to the outlook are skewed to the downside, primarily because it could take longer-than-expected for the pandemic to wane and because of the existential threat of natural disasters in the Caribbean,” the IMF said.
It warned that financial system risks are gradually increasing, adding, however, that the swift and coordinated introduction of loan moratoria led by the ECCB and national authorities’ fiscal response measures to the pandemic have helped smooth the immediate impact of the pandemic on asset quality, “and financial system liquidity remains ample thus far.”
But the IMF said persistence of the crisis is expected to undercut the ability of borrowers to service their debt and may also start eroding banks’ and credit unions’ deposit-based funding as the existing support initiatives expire.
The IMF said sizeable pre-pandemic capital and liquidity buffers in most ECCU financial institutions provide substantial cover against these risks.
“However, the pandemic is expected to leave them with thinner margins against any other shocks, particularly those entities with concentrated asset exposures,” it said.
The IMF said protecting lives and livelihoods remains the near-term policy priority, which should include enhancing testing, contact tracing, treatment capacity and strengthening the enforcement of public health protocols; maximising COVID-19 vaccine access and affordability in collaboration with international and regional partners; and mitigating the socio-economic impact by maintaining support for the vulnerable.
The bank recommended that cash-constrained countries rationalise non-essential spending and rely largely on concessional borrowing, when necessary, to safeguard medium-term sustainability.
The IMF said it is critical to maintain the credibility of the regional debt anchor, noting that the regional public debt target of 60 per cent of GDP by 2030 has served as an important fiscal anchor for the ECCU.
But it cautioned that, given the demands and constraints imposed by the pandemic, meeting the target is no longer feasible for several countries in the region without drastic fiscal consolidation, “which would be ill-advised as it would both slow the recovery from the pandemic and constrain long-term growth prospects through scarring.”
“Postponing the debt target by five years could balance the creation of near-term fiscal space needed to support the economic recovery with the confidence-boosting effects of a firm fiscal anchor,” the IMF said. “The pushing out of the debt target, however, puts the onus on countries in the ECCU to further enhance their fiscal responsibility frameworks to boost market confidence.”
In particular, the IMF said the adjustment of the regional debt target should be supported with a package of reforms, including regional common standards and arrangements to guide national fiscal responsibility frameworks, a regional fiscal oversight body, peer reviews, and incentive mechanisms to ensure compliance and reap the benefits from lower government borrowing costs.
The international financial institution said well-sequenced improvements to national fiscal frameworks are key to the success of the modified regional anchor.
It said several countries have accelerated progress toward adopting full-fledged rules-based fiscal frameworks to guide the pace and composition of the medium-term consolidation.
The IMF said these efforts should be supported by improved capacities and mechanisms in areas such as the annual budget processes, macro-fiscal forecasting, and debt sustainability analysis.
It said national disaster resilience strategies are an additional tool to internalise the macro-fiscal impact of climate-related shocks.
Developing State-contingent debt instruments would further support fiscal sustainability, the IMF said.
It said supervisors should carefully balance near-term supervisory flexibility with measures to support financial institutions’ capacity to weather the crisis.
“Extensions of loan moratoria should be limited within the time frame announced by the ECCB, and banks and credit unions should be encouraged to ensure that any subsequent restructurings, if necessary, follow realistically achievable repayment terms,” the IMF said.