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HomeNewsCaribbean NewsIMF staff statement of the 2024 Article IV Mission - ECCU

IMF staff statement of the 2024 Article IV Mission – ECCU

The Eastern Caribbean Currency Union (ECCU) has undergone a strong rebound, led by tourism and investment, and supported by policies that helped moderate the impact from successive external shocks.

With output having recovered to its pre-pandemic level, economic policies should shift toward addressing structural constraints to sustainable and resilient growth and supporting continued robustness of the quasi-currency board, which has served the currency union well.

Priorities include safeguarding macroeconomic stability and fiscal space for growth-enhancing physical and social investments, strengthening balance sheets and oversight in the financial sector, supporting local private sector development and investment, and improving the labor market. Strengthening data collection, quality, and transparency is critical to informing a well-calibrated policy design.

USA / THE CARIBBEAN – The ECCU has recorded a strong recovery from successive pandemic and commodity price shocks. Led by a rebound in tourism and investment by public and private sectors, real GDP is estimated to have grown on average by nearly 7 percent per year over 2021-23 and has surpassed pre-pandemic levels. Inflation has moderated to around 4 percent in 2023 from a commodity price driven peak of 5½ percent in 2022. The economic recovery, high inflation, along with the withdrawal of temporary fiscal measures to ease the social impact of the pandemic and other shocks led to an improvement in fiscal positions. Nevertheless, overall public debt remains elevated and generally well-above the regional 2035 debt ceiling of 60 percent of GDP.

The financial system remains highly liquid and, supported by the since expired loan moratoria, appears to have weathered the recent successive shocks without a major impact. However, it continues to face long-standing asset quality weaknesses and growing vulnerabilities in the non-bank financial sector in the context of uneven regulation and oversight. Wide post-pandemic current account deficits are narrowing, albeit slowly. The ECCB’s currency backing ratio remains high, supporting confidence in the currency union.

Capacity constraints increasingly weigh on the region’s outlook. GDP growth is projected to moderate toward pre-pandemic averages, as tourism performance nears full capacity and continued restoration of public and private sector balance sheets narrows the space for home-grown investment. The region’s growth and fiscal outlooks are heavily dependent on uncertain Citizenship-by-Investment (CBI) inflows which continue to be subject to international scrutiny. As small economies dependent on imports, tourism, and foreign direct investment, ECCU countries also remain highly susceptible to volatility in commodity prices and an abrupt growth slowdown in major tourism source countries. Climate-related disasters remain a recurrent threat with potentially devastating impact.

A. Protecting fiscal space for sustained growth-enhancing physical and social investment

Rebuilding fiscal buffers while protecting the fiscal space for infrastructure and social investments remains a regional policy priority. Amid slowing growth and elevated risks, pursuing a steady reduction in public debt in countries where it is well-above the regional ceiling is critical to maintain macro stability and safeguard the currency board against future shocks. At the same time, fiscal policy space is needed to finance growth and resilience-promoting fiscal spending. To help manage these competing objectives, continued withdrawal of temporary measures that responded to the cost-of-living crisis is advisable as is the adoption of fuel price pass-through frameworks to protect tax revenue, stabilize demand, and promote green transformation, supported by better coverage and targeting of transfers to the most vulnerable.

In addition, reviving a regional initiative to agree on common benchmarks for streamlined tax exemptions would help avoid a “race-to-the-bottom” tax dynamics and help lift revenue closer to international peers. Finally, pooling of regional resources and expertise can help reduce impediments and costs to qualify for and access international climate finance.

Continued efforts to strengthen fiscal institutions and structural reforms are key to underpin efforts to restore fiscal buffers. Building on the success of countries with national fiscal responsibility frameworks (FRFs), ECCU-wide adoption of national FRFs, designed with well-defined country-specific operational rules and escape clauses to deliver a consistent decline in debt, would strengthen the credibility of the regional debt ceiling. The calibration should include a cushion to provide fiscal space to respond to shocks.

Operationalizing regular ECCB Monetary Council peer reviews of member states’ policy strategies and progress toward meeting the regional debt target would help strengthen fiscal discipline. The effective implementation of the rules will require further progress in strengthening revenue administration, public investment and debt management, as well as enhancing medium-term fiscal frameworks and state-owned enterprise oversight. In addition, despite some reform efforts, the impact of the pandemic and other shocks, coupled with rapid population ageing, raises the urgency of comprehensive pension reforms to address the looming large contingent fiscal liabilities and improve the fairness and equity of pension systems.

Establishing regional standards for CBI programs would help safeguard this critical source of income in the face of persistent international scrutiny. Building on the landmark 2023 US-Caribbean Roundtable Agreement, deepening regional cooperation remains important to safeguarding the CBI programs. This would benefit from common standards on due diligence and enhanced program transparency and disclosure. A regional CBI framework could also include minimum pricing benchmarks to avoid a revenue-erosive race-to-the-bottom competition and common principles on revenue allocation towards building fiscal buffers and growth-enhancing investment.

B. Strengthening financial system balance sheets and reviving private investment

Continued enforcement of the impaired asset standards is an opportunity to address the banking system’s long-standing asset quality challenges. Banks are working toward the required full loan loss provisioning against long-overdue loans by end-2025, which form the bulk of the region’s high non-performing loans (NPLs). All loan loss allowances should be made in the form of provisions to ensure banks’ capital strength is appropriately recorded. Adoption of similar standards for credit unions would support national supervisors’ efforts to strengthen provisioning adequacy and reduce risks associated with uncertainty over property collateral valuations.

Streamlining costly foreclosure and collateral sale processes and strengthening the capacity of the Eastern Caribbean Asset Management Company would facilitate disposal of impaired assets. Risk management of foreign security investments and high local sovereign exposures among some banks warrant continued supervisory focus.

The authorities recognize that the oversight of non-bank financial institutions (NBFIs) must be stepped up amidst rising risks. The immediate policy priority is to ensure that all national supervisors have adequate powers, staffing capacity, and data reporting to monitor and assess credit union and insurance sector risks and enforce corrective action where necessary. Effective oversight of system-wide risks also calls for strengthening data and information exchange between the ECCB and national supervisors, particularly in the insurance sector given the prominence of large cross-border institutions.

In parallel, the planned introduction of common minimum regulatory standards for NBFIs needs to be pursued expeditiously to mitigate rising arbitrage risks in a segmented regulatory space. In this context, the rapid growth of open-platform credit unions, including increasingly beyond their traditional market space, calls for closer alignment of their regulations and supervisory standards with banks. Centralization of the currently fragmented and uneven NBFI supervision under a model that leverages national supervisors’ local presence and expertise would improve its resource efficiency, support early identification of vulnerabilities, and further move the ECCU region toward a unified financial space.

Climate change risks emanating through the general insurance sector warrant strengthened monitoring. With high prevalence of collateralized lending in the region, evolving assessment of climate risks by global reinsurers and consequent pressures on property insurance premia can adversely affect borrower repayment capacity, give rise to underinsured assets, and weaken insurance and credit affordability and access. The risks of a dampening effect on economic activity and amplification of indirect transmission channels of natural disasters underscore a need to strengthen insurance sector data collection and regional supervisory cooperation. Deeper assessment of insurance-banking interlinkages would help inform ongoing efforts to integrate climate change risks in the authorities’ supervisory and stress testing frameworks and support management of system-wide risks.

A more comprehensive umbrella strategy could help leverage ongoing efforts to support private investment, credit, and local enterprise development.  

Operationalization of the credit reporting bureau across both bank and non-bank lending institutions can over time significantly improve efficiency and quality of credit provision. The partial credit guarantee program and development of movable collateral frameworks help address credit access constraints but require complementary supporting programs to strengthen small-business record-keeping, business planning, and financial literacy.

A more systematic region-wide approach to national legislative reforms to strengthen insolvency frameworks and creditor rights would help reduce cost-disincentives to private credit provision. These efforts could be coordinated with a renewed focus on regional capital market development to support redirecting system liquidity toward local investment needs, including through investor and borrower education initiatives and completing the related pending legislative processes in all jurisdictions.

Strengthening supervisory resources would support continued advancement of the financial system reform agenda. The authorities have made important progress toward clearing a backlog of financial sector legislative initiatives and advancing modernization of regulations and supervisory processes. Rollout of the Basel II/III prudential standards and formalization of ECCB’s system-wide oversight authority will support stability of the ECCU financial system, yet also place additional demand on limited supervisory resources.

Capacity at the national supervisors also needs to be aligned with the NBFIs’ increasing systemic significance. A regional bank deposit insurance would fill a gap in current financial system safety nets, yet it is important to align its introduction with parallel progress in reducing legacy bank vulnerabilities. Its extension to credit unions should be considered only under a more unified oversight framework for all deposit taking institutions.

Continued strengthening of AML/CFT frameworks remains important to address perceptions of regional risk, protect the ECCU region’s thin correspondent banking relationships, and prevent opportunities for illicit actors to exploit the ECCU financial sector. Priorities include addressing the Caribbean Financial Action Task Force (CFATF) Mutual Evaluation recommendations and completing long-pending designation of the ECCB as the AML/CFT supervisor for banks.

The recently concluded Cash pilot offers important lessons for the next phase.  This includes reviewing the potential to complement other existing and emerging payment solutions and ensure interoperability across domestic and international platforms.

C. Addressing constraints to employment

Longstanding ECCU labor market frictions have constrained labor market outcomes to the detriment of long-term growth. Structural impediments include rigidities in hiring and firing, high degree of informality, emigration of skilled workers, and skills mismatches that have weakened the growth contribution from human capital. High youth unemployment remains a particular drag on the region’s growth potential. Recent shocks have potentially compounded labor market challenges as the recovery of employment continues to lag the strong post-pandemic uptick in economic activity.

Addressing the structural labor market weaknesses requires a multipronged effort. A recalibration of employment protection laws, including alignment of some countries’ lengthy redundancy notice periods and generous severance regimes toward international peers, could reduce disincentives to new hiring and support labor market turnover. Such reforms can be supported by the wider introduction of targeted and actuarially sound unemployment insurance schemes, which would also reduce fiscal costs of untargeted ad hoc interventions following economic shocks. Minimum wage frameworks should avoid disrupting labor allocation efficiency, employment opportunities and regional competitiveness, including by giving greater emphasis to the development of targeted social protection frameworks to support the most vulnerable and advance equity objectives.

Leveraging expertise from development partners, education programs could be reviewed to support youth employability and reduce skills mismatches in the labor market, including with greater focus on vocational training in sectors with labor shortages. The role of targeted policies, such as the extension of parental and elderly care leave, to narrow gender gaps in labor force participation and wages should be explored, albeit in alignment with underlying fiscal objectives. Social programs could be better tailored to tackle barriers to employment, including low education and school dropout among young males.

D. Strengthening data provision

Concerted region-wide efforts to strengthen data collection, processing, and transparency are essential to support the calibration of economic policies. Significant data gaps in key policy areas such as the labor market, household incomes and indebtedness, property markets, private sector insurance costs and coverage, and foreign direct investment constrain the design of policies to support inclusive growth, efficient use of public resources and contingency plans against external shocks. Increasing data transparency in areas such as CBI inflows, tax exemptions, and medium-term fiscal projections would also support more effective regional policy coordination and public accountability over economic policies. Strengthening resources at national statistics units would also help improve accuracy, timeliness, and frequency of existing key economic data, reducing current long lags and frequent revisions to historical series.

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