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Journal Issue

Eastern Caribbean Currency Union: Staff Report for the 2005 Regional Discussions

International Monetary Fund
Published Date:
August 2005
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I. A Brief Perspective

1. The ECCU economies are small middle-income countries with strong social indicators, but living standards differ across the islands. Despite the close ties from sharing a common currency, there is considerable divergence in per capita incomes. Moreover, reflecting limited regional integration, the cross-country dispersion of per capita GDP, GNP, and GNDI (gross national disposable income, which includes net current transfers from abroad) has increased through time.1 Recorded poverty levels are relatively high, but this may reflect in part the use of nationally-defined poverty lines that are high by international standards, as well as weaknesses in available data.

ECCU: Standard Deviations of Real GDP, Real GNP and Real NDI Per Capita, 1980-2003

ECCU Countries: Social and Demographic Indicators
Antigua &St. KittsSt.St. Vincent &
BarbudaDominicaGrenada& NevisLuciathe Grens.ECCU
Population (thousands) in 2003, estimate797110447161106567
Poverty headcount index, 2000 1/12333231253829
HDI rank (2004), rank out of 177 countries559593397187
Life expectancy (years), 200375777372747374
Adult illiteracy rate (percent), 20011346210118
Mortality rate, infant (per 1000 live births), 200311121819162317
GDP at market prices, 2004 (in US$ million)8152824374047624043,105
Share in nominal GDP, 200426.
GDP per capita (US$) in 2004, estimate10,3753,9624,2058,6474,7483,8015,473

Percentage of population living below each country's locally-defined poverty line in 2000.

Percentage of population living below each country's locally-defined poverty line in 2000.

2. A strong emphasis on social outcomes is a reflection of the political landscape, where most parties have their roots in the pre-independence labor movements. Democracy is deep-rooted in the region, with elections typically held every 4–5 years and active opposition parties in most countries. Political mandates, irrespective of the party in power, are heavily tilted towards achieving social goals—reducing unemployment and raising living standards.

3. Economic growth has declined since the start of the 1990s as the region struggled to cope with a series of shocks. Shocks of a more permanent nature included the erosion of trade preferences for traditional exports (bananas and sugar) and the decline of offshore financial sectors in 2000, after the inclusion of most ECCU countries in FATF’s list of “noncooperative jurisdictions.” In addition, the region suffered a steep decline in world tourism following the events of September 11, 2001. Longstanding structural rigidities, notably in the labor market, and continued disruptions in the aftermath of hurricanes and other natural disasters also served to constrain growth.

ECCU: Real GDP Growth, 1980-2004

(Annual percentage change, 3-year moving average)

Sources: Eastern Caribbean Central Bank; and Fund staff estimates.

4. The economies of ECCU countries are now dominated by services—particularly government, tourism and financial. The share of agriculture in GDP declined from 15 percent of GDP in the mid-1980s to about 6½ percent at end-2004, reflecting the effects of the erosion of trade preferences. Tourism and financial services have grown, but so has the government sector, which has often served as the employer of last resort during economic downturns.

ECCU: Share in total GDP by Sector, 2004

Sources: Eastern Caribbean Central Bank; and Fund staff estimates.

5. The ECCB operates a quasi-currency board arrangement (CBA) that has preserved exchange rate and price stability and fostered financial development, despite external shocks and domestic policy slippages. The ECCB has operated with a high degree of independence in managing the CBA: lending to member jurisdictions has been kept well within statutory limits and external reserve coverage is substantially in excess of the legal floor of 60 percent of demand liabilities. There have been no obvious periods of pressure on the EC dollar, and inflation remains in the low single digits, reflecting the very high import content of the consumption basket. The financial sector is deep relative to other countries at similar levels of economic development. Reflecting the confidence in the CBA, foreign currency deposits are very low.

6. The confidence engendered by the regional CBA and the development of domestic financial markets have enabled the region to increase their access to capital markets and use fiscal policy to temper economic downturns. With the exception of Antigua and Barbuda, where access to capital markets has been restricted for many years, the countries in the region have been able to borrow during economic downturns and thereby limit the procyclical nature of fiscal policy that is common in most developing and emerging market economies.2

ECCU: Fiscal Policy Procyclicality 1/

Source: ECCU--Selected Issues, Chapter II.

1/ Calculated as the difference between average annual growth of central government real expenditure in good times (real GDP growth above median) and bad times (growth below median). Higher values are thus associated with greater procyclicality.

7. Absent an enforceable fiscal discipline mechanism, the regional CBA has induced a free-rider problem that is exacerbated by spending associated with election cycles.3 In effect, the costs of fiscal slippages—in the form of anticipated future inflation, higher interest costs or pressures on the currency board—are being deferred to the future or shared with member governments. Indeed, fiscal outcomes have steadily deteriorated relative to the benchmarks approved by the ECCB’s Monetary Council in 1998 (to be achieved by 2007), with just two countries meeting only one of the four benchmarks in 2004. Governments have granted wage increases, expanded civil service employment, and extended more concessions to both the public and the private sector in the run up to elections.

ECCU Countries: Election Calendar
Last electionScheduled date of next electionCorrelation between primary balance and closeness to election 1/
Antigua and BarbudaMarch-042009-0.15
St. Kitts and NevisOctober-042009-0.08
St. LuciaDecember-012006-0.17
St. Vincent and the GrenadinesMarch-012006-0.39
Other Caribbean countries:
Fixed exchange rate regimes 2/0.00
Flexible exchange rate regimes 2/0.12

Based on elections since 1990.

The number of Caribbean countries with fixed and flexible exchange rate regimes are three and nine, respectively.

Based on elections since 1990.

The number of Caribbean countries with fixed and flexible exchange rate regimes are three and nine, respectively.

8. Public debt to GDP ratios throughout the region are amongst the highest in the world. Four of the six countries feature in the ten most indebted emerging market countries, with public debt in the region averaging more than 100 percent of GDP since end-2002.

9. While many of the challenges faced by the ECCU countries are similar to those of other Caribbean countries, they face additional constraints because of their small size. The erosion of trade preferences has impacted traditional producers of sugar and bananas throughout the region. Natural disasters—hurricanes, earthquakes, tropical storms, floods, and crop diseases afflict many countries in the region. With the slowing down of growth in recent years, several countries have attempted to stimulate their economies through large public sector investments that have resulted in very high public debt to GDP ratios. However, the extremely small size of the ECCU economies limit the scope of economic diversification, raise the cost of providing government services, and magnify the effect of natural disasters more than in other Caribbean countries.

10. The Fund has stepped up its work on the ECCU in response to the challenges facing the region. There are three key elements to this approach. First, the analytical basis of staff's advice has been deepened, as reflected in the Selected Issues papers accompanying the regional discussions for 2004 and 2005. Second, to increase policy coordination, common regional themes are developed and discussed with senior policymakers in each of the countries, as well as with key regional institutions. This approach is strengthened by staff visits to individual countries during budget preparations and the annual Article IV consultation discussions. Finally, several types of outreach activities are ongoing to help build ownership of reforms—a conference on the Caribbean region co-organized last year by the Central Bank of Trinidad and Tobago and the Fund received wide attention.4

ECCU: Compliance With Proposed Central Government Fiscal Guidelines 1/(In percent of GDP, unless otherwise indicated)
Status of Implementation of Guidelines in 2004 by Country
Convergence CriteriaAntigua and BarbudaDominicaGrenadaSt. Kitts and NevisSt. LuciaSt. Vincent and the Grenadines
Current balance (saving)-3.10.4-2.4-
(guideline: 4 to 6 percent of GDP)
Overall balance-4.6-2.5-2.8-11.5-4.7-3.4
(guideline: greater than or equal to -3 percent of GDP)
Government and government guaranteed debt
outstanding 2/99.4115.0129.4178.770.578.9
(guideline: less than or equal to 60 percent of GDP)
Debt service payments 3/126.438.040.434.018.619.3
(guideline: less than or equal to 15 percent of current revenue)
Number of guidelines met in 20040110002
Number of guidelines met in 20030100023
Number of guidelines met in 20020000011
Number of guidelines met in 20010000224
Number of guidelines met in 20000030328
Number of guidelines met in 19990130318
Number of guidelines met in 199801313311

Excludes Anguilla and Montserrat.

Includes external arrears.

Excludes domestic debt amortization.

Excludes Anguilla and Montserrat.

Includes external arrears.

Excludes domestic debt amortization.

Public Sector Debt in Highly-Indebted Emerging Market Countries, end-2004

(In percent of GDP)

Sources: IMF, World Economic Outlook; and Fund staff estimates.

II. Recent Economic Developments and Near Term Prospects

11. Economic activity has accelerated since mid-2003—despite an active hurricane season in 2004—and, given the positive world economic outlook, near-term growth prospects appear strong. Growth has been driven by construction and a rapid expansion in tourism, with most economies in the region now running at or close to potential (Figure 1). The impact of Hurricane Ivan on Grenada was severe (Box 1), but because damage to other ECCU countries was limited, growth in the region was just above 3 percent compared to a pre-Ivan projection of 4 percent. Given the positive outlook in the region’s major tourism markets (the United States and the United Kingdom) and ongoing construction projects ahead of the 2007 Cricket World Cup, growth is likely to remain strong, at 3–3½ percent in 2005.

Figure 1.ECCU: Central Government Actual and Structural Budget Balances 1/

(In percent of potential GDP)

Sources: ECCU country authorities; Eastern Caribbean Central Bank; and Fund staff estimates.

1/ Actual balance is the overall balance (revenue and grants less expenditure), and is expressed as a percentage of actual output. Actual output is measured as gross domestic product (GDP) at factor cost.

2/ The output gap is actual output less potential output, as a percent of potential output.

3/ Structural balance is expressed as a percent of potential output. The structural balance is the budgetary position (overall balance) that would be observed if the level of actual output coincided with potential output. Structural balances also incorporate one-time expenditure adjustments.

Box 1.Grenada: Impact of Hurricane Ivan

On September 7, 2004, Hurricane Ivan—one of the strongest storms ever in the Caribbean—passed directly over Grenada causing extensive destruction. Damage was estimated at US$900 million, or more than 200 percent of GDP. Nearly 90 percent of the housing stock was damaged or destroyed, all education facilities had to be closed, and the electricity supply was significantly disrupted. The economy was also hit hard as most tourism facilities suffered considerable damage, and nutmeg plantations, which produce the principal export commodity, were largely destroyed. GDP growth which had been projected to reach over 4 percent in 2004 is now estimated at −3 percent, while the unemployment rate increased by at least 8 percentage points to more than 20 percent in the immediate aftermath of the hurricane. The banking system has proven to be resilient—deposits have risen as households received insurance payments and transfers from abroad—but profitability has declined significantly as loan loss provisioning rose sharply.

Grenada Real GDP Growth, 1998-2004

(In percent)

With external help, the government quickly stabilized the economic and social situation. Security and utilities were restored early and schools reopened gradually. Emergency relief supplies and reconstruction support were provided by the regional and international community and bilateral donors, as well as by nongovernment organizations.

The reconstruction effort is underway, but the arduous task of recovering fully from the shock will persist over the medium term. An Agency for Reconstruction and Development has been established to help in the recovery and reconstruction. At two donors’ conferences last year in Washington, D.C. and Grenada respectively, pledges of US$150 million (one-third of GDP), including over US$25 million in budgetary support, were marshaled. Grenada also purchased SDR 2.93 million (25 percent of quota) in November 2004 under the Fund’s emergency assistance policy for natural disasters (IMF Country Report 04/405: Reconstruction of schools and the housing stock, and revitalizing agriculture, are ongoing. However, continued fiscal adjustment and further support from donors and creditors will be needed over the medium term to reconstruct the economy and close the large projected financing gaps.

ECCU: Selected Economic Indicators, 2001-2005
National income and prices 1/(Annual percentage change)
Real GDP-
Consumer prices, end period1.
Real effective exchange rate 1/,2/1.5-5.5-8.8-3.6
Public sector 1/(In percent of GDP)
Overall central government balance-7.8-10.9-5.6-4.9-7.1
Primary central government balance-4.2-6.7-1.0-0.4-2.5
Total public debt (end-of-period)89109109106108
(In percent of GDP)
External current account balance-18.1-20.4-21.4-17.3-19.4
Stayover tourist visitors (annual percentage change)-
Gross international reserves of the ECCB
(In U.S. dollar, millions)446505540632679
External reserve coverage (in percent of monetary demand liabilities)92.997.195.396.2

Excludes Anguilla and Montserrat.

End-of-period (depreciation -), 1990=100.

Excludes Anguilla and Montserrat.

End-of-period (depreciation -), 1990=100.

ECCU: Contribution to Real GDP Growth by Sector 1/

(In percent)

Sources: Eastern Caribbean Central Bank; and Fund staff projections.

1/ Excludes Anguilla and Montserrat.

2/ Includes wholesale and retail trade, hotel and restaurant, air transport, and half of local transport.

12. The rebound in tourism helped to narrow the external current account deficit in 2004, but it remained large—at 17 percent of GDP—financed mostly by foreign direct investment (FDI). In the past two years, tourist arrivals have increased sharply with the easing of the global security concerns, the rebound in growth in the world economy, and the depreciation of the U.S. dollar against major currencies that has improved competitiveness in European markets. Imports continued to increase in relation to GDP, partly reflecting an increase in current transfers (largely to Grenada), which more than offset a modest decline in FDI flows. The external current account deficit is likely to widen marginally to 19 percent of GDP in 2005, mostly financed by capital inflows to finance investment, particularly construction activity.

13. Fiscal outcomes strengthened modestly in 2004. After a sharp adjustment in 2003, central government primary balances in the region improved modestly by ½ percent of GDP, but remained marginally in deficit. This reflected significant increases in primary balances in both Antigua and Barbuda—as the new administration attempted to contain fiscal imbalances—and in Grenada—where public sector investment was curtailed sharply. Fiscal positions were eased in the rest of the region, notably in St. Kitts and Nevis ahead of the elections. The pace of fiscal consolidation has been relatively slow and structural deficits have widened in four countries (see Figure 1).

14. Significant fiscal reforms are underway in several countries, but fiscal positions are likely to weaken in 2005, particularly if approved budgets are fully implemented. Approved budgets—even assuming that the implementation rate for capital expenditures will be at historical levels—would imply a deterioration of about 2 percent of GDP in fiscal outcomes for the region as a whole. However, important measures are being introduced in a number of countries that will strengthen fiscal positions over the medium term—civil service retrenchments and the overhaul of the tax system in Antigua and Barbuda, the ongoing fiscal consolidation in Dominica, efforts to strengthen revenues in Grenada, and the announced closure of the sugar industry in St. Kitts and Nevis. Both St. Lucia and St. Vincent and the Grenadines are due to hold elections no later than 2006, and the approved budgets suggest easing of fiscal stances, particularly in St. Lucia.5 The deterioration in the primary balance could be contained to ½ percent of GDP if additional measures, recommended during bilateral discussions with country authorities, are adopted.

15. Public debt remains at a very high level—at an average of 106 percent of GDP at end-2004—although progress has been made in reaching agreements with creditors on debt restructuring in three countries (Box 2). The strengthened fiscal outcomes and the revival of growth in 2003–04 have not been sufficient to steer public debt to GDP ratios on a downward path. Going forward, the public debt to GDP ratio in St. Lucia and St. Vincent and the Grenadines—countries with relatively lower debt levels—can be expected to rise in 2005, as fiscal policies are relaxed in anticipation of the elections. On the other hand, successful implementation of the ongoing debt restructuring in Antigua and Barbuda, Dominica, and Grenada will help bring down the regional debt burden. In St. Kitts and Nevis, the authorities anticipate substantial privatization proceeds over the next few years from the disposition of large holdings of government assets, including sugar lands which cover a wide area of St. Kitts.

Box 2.Public Debt Restructuring in ECCU Countries

Antigua and Barbuda. After taking office in March 2004, the newly elected government initiated a dialogue with creditors with a view to regularizing relations—most loans have been in arrears for many years. A major step included an agreement with the Italian Government to clear US$196 million debt (one-third of external debt) through a bullet payment of US$18.5 million. A Debt Coordinating Committee was formed in mid-2005, with representatives from the public and private sectors, to facilitate this process.

Dominica. The authorities embarked on a cooperative restructuring strategy in late-2003. A debt exchange was launched in April 2004 and, as of end-May 2005, creditors—official and private—holding over 70 percent of eligible debt have agreed to the restructuring. The authorities continue to make good faith efforts to reach understandings with creditors who have not yet agreed to participate in the restructuring, and have committed to making payments into escrow accounts on restructured terms for such creditors.

Grenada. Following Hurricane Ivan, the authorities announced in early October 2004 their difficulty in servicing their debt in full and their intention to seek a cooperative solution with creditors. Following missed interest payments on external bonds in December 2004, Grenada was downgraded to “selective default” by Standard and Poor’s. The government is maintaining a dialogue with creditors. Financial and legal advisors are assisting the government in designing its strategy and a creditor committee has been formed. The official creditors are also being contacted but the process has become complicated with the severance of diplomatic relationship between Grenada and its largest official creditor, Taiwan Province of China.

16. Inflation has been stable and monetary aggregates have been expanding rapidly, reflecting continued growth in the demand for money and confidence in the banking system and the CBA. Broad money grew 9½ percent in 2003 and 13½ percent in 2004, but inflation remained at around 2 percent. The modest uptick in inflation from the early 2000s (when inflation was about 1½ percent) can be largely traced to the direct and indirect effects of rising global energy prices. External reserve coverage of monetary demand liabilities at the ECCB has risen to over 96 percent.

17. The brisk growth of deposits and weak credit growth, particularly to the private sector, has left the banking system highly liquid. Deposit growth has been driven by the strengthening economy, continued large social security surpluses, the floor established by the ECCB on the savings deposit rate (set at 3 percent since September 2002), and a lack of alternative savings instruments. Liquidity has been increasingly channeled into government securities, with typically substantial oversubscription for issues floated in the Regional Government Securities Market (RGSM). Private sector credit growth has been slow, with the bulk of new loans related to real estate.

18. Progress continues to be made in strengthening the institutional framework for financial sector supervision and in developing broader capital markets. The ECCB has prepared revised prudential guidelines on capital adequacy, risk-based supervision, and corporate governance standards in line with some of the recommendations of the ECCU regional FSAP completed in 2004, though needed amendments to the Uniform Banking Act have not been enacted in any country.6 Capital markets have continued to develop, particularly the RGSM which has become a key regional market—only Antigua and Barbuda and Dominica have yet to place issues.7 The number of equities listed on the Eastern Caribbean Securities Exchange has continued to increase, but trading activity remains low. The ECCB has also supported the development of the Eastern Caribbean Home Mortgage Bank, the Eastern Caribbean Unit Trust, and the Eastern Caribbean Enterprise Fund.

III. Policy Discussions

A. Overview

19. In the past year, regional and country authorities have increasingly recognized the difficulty of their economic situation, which has weakened further by new shocks. As underscored in previous regional and Article IV consultation discussions with individual countries, the region is facing many external and domestic challenges. In addition, the region was hard hit by natural disasters during 2004: in September, Hurricane Ivan inflicted widespread destruction in Grenada and, to a lesser extent, St. Vincent and the Grenadines; and Dominica experienced an earthquake in November that registered 6.0 on the Richter scale. For Grenada and St. Vincent and the Grenadines, damage inflicted by Hurricane Ivan amounted to over 200 and about 5 percent of 2003 GDP, respectively; for Dominica, the estimated damage caused by the 2004 earthquake was about 7 percent of 2004 GDP. Moreover, oil prices have risen sharply and are expected to rise further.

20. The dialogue between Fund staff and the regional and national authorities has deepened, with the most indebted countries taking distinct steps to confront their challenges. The authorities agreed that reducing debt levels was a top priority for the region: progress is being made in Dominica under the ongoing PRGF arrangement; in Grenada in designing the reconstruction and macroeconomic stabilization strategy; in Antigua and Barbuda in addressing the deep fiscal and macroeconomic imbalances; and in St. Kitts and Nevis with the announcement of the closure of the sugar industry.8 However, the longstanding macroeconomic stability under the CBA has made it difficult to instill a sense of urgency in the public of the need for substantial policy adjustments, and there is a clear sense of complacency that such stability will continue going forward.

21. The Fund is increasingly viewed as a valued advisor and a catalyst for donor support in the region, but the appetite for formal Fund-supported programs remains limited. The authorities throughout the region appreciated the increased emphasis given to regional issues as well as the focus on growth and vulnerabilities—particularly high public debt levels, natural disasters, and repercussions of declining official assistance. They indicated that the long-term Fund engagements in Guyana and Jamaica were seen in a negative light by their populations, making it politically difficult for countries to request formal Fund arrangements. Staff noted that implementing and sustaining good policies with public support would be key to success, with or without a Fund-supported program.9

22. Ensuring the sustainability of ongoing reforms and initiating new ones will require further strengthening of outreach efforts with civil society. Staff noted the active discussions on political and social topics in the media, but expressed concern about the relative paucity of informed debates on economic issues. Many countries in the region are stepping up their outreach efforts through town hall meetings, public policy debates, regional conferences, and press conferences, including by the ECCB and at the conclusion of Fund missions.10 Indeed, recent elections in the region have focused on economic issues—fiscal management in Antigua and Barbuda, the IMF program in Dominica, and debt in St. Kitts and Nevis. Regarding the staff’s outreach efforts, the authorities took note of the recent initiatives, but pointed out that the Fund was still behind the World Bank in terms of the resources devoted to such activity.

23. Discussions focused on a wide range of policy challenges, embracing three broad themes:

  • Adjusting to a changing world environment and reinvigorating growth: in particular, confronting continued erosion of trade preferences and declining official development assistance flows, raising competitiveness, changing the role of the public sector, removing labor market rigidities, adapting the investment climate and maximizing the benefits of migration flows to support new growth opportunities, and regional cooperation and integration;
  • Addressing fiscal imbalances and the large stock of public debt, through fiscal consolidation, active debt management, and divestment of public assets; and
  • Managing the region’s high vulnerability to shocks, in particular: natural disasters, a narrow export base, and potential contagion through the financial system.

B. Adjusting to a Changing World Environment and Reinvigorating Growth

The changing world environment

24. Preferential trading arrangements that support traditional sectors—bananas and sugar—have been steadily eroding since the 1990s. While these sectors have long since ceased to be a key contributor to value added or export earnings, they continue to be a vital source of rural employment in the banana-producing countries—Dominica, St. Lucia, and St. Vincent and the Grenadines—and in St. Kitts and Nevis, which has traditionally produced sugar. The staff noted that the countries face substantial costs of maintaining the sectors going forward, while the annual income transfers derived from quota rents (stemming from the sale of bananas and sugar at above world market prices) will continue to decline. Staff supported the temporary use of measures to facilitate the transition away from these sectors—such as income transfers to farmers, and retraining programs. Following the closure of the loss-making sugar industry, the Government of St. Kitts and Nevis has established a committee, with donor support, to design a transition strategy including a land use management plan, land sales, and retraining programs for labor shed from the industry. The authorities in the banana-growing countries, however, saw opportunities for a continuation of the sector, although they acknowledged that continued support would be needed to enhance the efficiency of producers. They also expressed concern about the uncertainty created by the announcement of impending changes in the banana regime by the European Union.

Windward Islands Banana Exports, 1990-2004

(In Tonnes)

Source: Windward Islands Banana Development and Export Company.

Banana-Producing Windward Islands: Assistance from the European Union, 1993-2004

(In millions of euros)

Source: European Union, Delegation of the European Commission in Barbados and the Eastern Caribbean.

25. Foreign aid flows to ECCU countries have fallen sharply in recent years. While aid from OECD countries has waxed and waned with the timing of natural disasters in the region, overall official assistance has remained roughly constant in U.S. dollar terms since the mid-1970s, implying a significant decline in real terms and relative to GDP. The authorities noted that the reduced availability of grants—as well as, in some cases, the loss of access to concessional financing sources—had significantly impacted the economies and contributed directly to the rising public debt burdens seen throughout the region.

ECCU: Total Official Development Assistance Flows(In percent of GDP)
Average 1977-1997Average 1998-2003
Antigua and Barbuda3.01.7
St. Kitts and Nevis6.83.2
St. Lucia5.73.2
St. Vincent and the Grenadines10.33.7
Sources: Organization for Economic Cooperation and Development; Eastern Caribbean Central Bank; and Fund staff estimates.
Sources: Organization for Economic Cooperation and Development; Eastern Caribbean Central Bank; and Fund staff estimates.

26. Indicators of competitiveness present a mixed picture, but with the depreciation of the U.S. dollar since 2002, the economies have become more competitive (Figure 2). While real wages in some countries have grown rapidly, traditional measures of the real effective exchange rate (REER) have fallen sharply since end-2001, and are currently below the level of the early 1990s. Both customer-based (reflecting demand-side influences) and competitor-based (reflecting supply-side factors) measures of the REER have declined recently.11 Indeed, tourist arrivals—both in absolute terms and as a share of the Caribbean Common Market (CARICOM)—have increased sharply since 2002.

Figure 2.ECCU: External Competitiveness, 1990–2004

Sources: Eastern Caribbean Central Bank; Caribbean Tourism Organization;

ECCU country authorities; ECCU National Insurance Schemes; and Fund staff estimates.

1/ An increase (decrease) indicates an appreciation (depreciation).

2/ The sharp movements in the competitor-based real exchange rate in 2002-04 were largely driven by the Dominican Republic's peso.

3/ Total tourist arrivals of CARICOM in 2003 does not include those of Haiti and Suriname.

27. The authorities agreed that competitiveness needed strengthening, but stressed that this should be achieved through fiscal and structural reforms. The authorities noted that there was full confidence in the exchange rate peg, which had contributed substantially to macroeconomic stability. They observed that the peg had withstood natural disasters, the erosion of trade preferences, the September 11 shock to tourism, political cycles, the fiscal deterioration and debt build-up, and the slowing down of growth. The underlying challenge was viewed as one of raising productivity levels, and that this should not be addressed through a change in the exchange rate peg. The staff broadly concurred with this assessment. An adjustment to the peg would be unlikely to yield significant benefits, due to the high level of pass-through of imported prices to domestic ones, the significant foreign currency component of public debt, the potential weakening of the financial sector, and the low price elasticity of demand for tourism services. However, staff pointed out that maintaining the peg would require determined efforts to bring fiscal and debt positions to more sustainable levels, and to increase the flexibility of labor and product markets.

Constraints to growth

28. Growth rates in the region in the past decade have been disappointingly low, relative to the high spending on physical and human capital (Box 3). Robust growth in the 1980s was driven by high public investment financed by official assistance, preferential access for traditional exports, and the emerging tourism sector. In the 1990s, official assistance began to dry up, preferential access to markets started to erode, and the high initial growth spurt in tourism abated. With the slowdown of growth, ECCU governments responded by increasing public investments—financed by accessing external capital markets and tapping the fast-growing domestic financial sector—yet with disappointing growth outcomes.

Box 3.Are Growth Rates in the ECCU Too Low?

Simulation analyses show that the per capita real GDP growth rates in the ECCU have been lower than expected based on cross country comparisons. Barro (1991) uses variations in initial per capita income, human capital and government consumption to explain growth rates across a wide number of countries. Levine and Renelt (1992) use, in addition to Barro’s variables, investment and population growth as additional determinants of growth. Table 1 presents predicted per capita growth rates for the ECCU countries using these models and compares them to the actual experience. The results are striking—with one exception; realized growth rates are lower than predicted by either model for any of the ECCU countries. Overall, the ECCU growth rates forecast by the Levine-Renelt equation are much higher (and consequently the difference with the realized rates larger) than those predicted by Barro’s equation—highlighting the fact that investment, which is very high in the ECCU, has not been productive.1/

Table 1.Actual and Predicted Annual Per Capita Growth Rates (1990-2003)
St. Kitts and Nevis2.74.69.5
St. Lucia0.93.54.2
St. Vincent and the Grenadines3.12.05.8
1/ Barro, R. J., 1991, “Economic Growth in a Cross-Section of Countries,” Quarterly Journal of Economics, Vol. 106, pp. 407–443. Levine, R. and D. Renelt., 1992, “A Sensitivity Analysis of Cross-Country Growth Regressions,” American Economic Review, Vol. 82, pp. 942–963.
1/ Barro, R. J., 1991, “Economic Growth in a Cross-Section of Countries,” Quarterly Journal of Economics, Vol. 106, pp. 407–443. Levine, R. and D. Renelt., 1992, “A Sensitivity Analysis of Cross-Country Growth Regressions,” American Economic Review, Vol. 82, pp. 942–963.
1/ Barro, R. J., 1991, “Economic Growth in a Cross-Section of Countries,” Quarterly Journal of Economics, Vol. 106, pp. 407–443. Levine, R. and D. Renelt., 1992, “A Sensitivity Analysis of Cross-Country Growth Regressions,” American Economic Review, Vol. 82, pp. 942–963.

29. Higher public investment in recent years has not succeeded in raising growth rates. Indeed, public investments rose at the same time that growth rates declined—this pattern was particularly visible in the 2000s. Moreover, since the mid-1990s, public expenditure has been reoriented away from economic infrastructure towards social sectors and general public services.12 Country authorities indicated that much of the public investment had been either to replace capital or protect the population following the series of natural disasters that hit the region in the second half of the 1990s, or to put in place needed infrastructure—such as international airports—without which tourism could not have expanded.

30. Public projects in recent years have been adopted with little oversight by governments, donors, or financing agencies. Staff recommended that large public investment programs be cutback or reprioritized towards those that are complementary to private sector development. In addition, an overhaul of the legislation and systems governing the contracting, management, and disclosure of public investment and debt, including contingent liabilities, should be undertaken. The process of strengthening public sector investment programs has begun with the help of CARTAC and, at the initiative of the ECCB, debt management workshops have been held at the Fund and in St. Kitts and Nevis.

31. Realizing the region’s growth potential will require a paradigm shift away from the public sector as the main engine of growth toward strengthening the investment climate. While the authorities agreed that the private sector should take the lead in stimulating growth, they expressed disappointment at the lack of initiative by local entrepreneurs. Staff pointed out that the private sector faced several hindrances, in particular labor market rigidities, skill shortages, a distortionary tax regime, a weak regulatory environment in several areas, and limited regional integration, and stressed the role of the public sector in addressing these hindrances.

ECCU: Central Government Investment and GDP Growth

(3-year moving average)

Sources: Eastern Caribbean Central Bank; and Fund Staff estimates.

32. Labor market rigidities in the ECCU are high and are reflected in relatively high wages in the face of high unemployment. Wage rates across different categories of skills in the ECCU are significantly higher than in other Caribbean countries and upper middle income countries. While data are scanty, available evidence points to skill mismatches relative to the needs of the region, low access to tertiary education and job training, high unemployment, predominance of public sector, strong labor unions, significant cost in hiring and firing workers, and relatively low intra-regional mobility.

Indices of Labor Market Flexibility 1/
Rigidity ofDifficulty ofDifficulty ofFiring Costs
Organization of Eastern Caribbean States22234059
Other Micro States78515
Upper Middle Incomes States28272238

Index range is from 0 to 100, higher values indicate greater rigidity.

Index range is from 0 to 100, higher values indicate greater rigidity.

Selected Wage Rates, 2002

(Annual Wage in Thousands of US Dollars)

Source: Towards a New Agenda for Growth: Organization of Eastern Caribbean States, World Bank, (2005).

33. Shortages in skilled labor are reported by both public and private sectors as the key constraint to enhancing efficiency and competitiveness throughout the region. Staff recommended raising the quality of education, reorienting education and training programs to better suit the needs of the region, undertaking civil service reform, introducing performance and productivity based wage increases, and allowing freer movement of labor among islands. While the authorities generally agreed with these recommendations, some pointed out that labor codes precluded introducing procedures to link wages to performance, and productivity could not be measured accurately owing to data constraints. Several countries are setting up new training centers in hospitality services to better serve the tourism sector.

34. To attract FDI, the ECCU region has relied primarily on costly fiscal incentives (or tax concessions). In the authorities’ view, tax concessions had contributed strongly to growth. Staff noted that while FDI had remained significant, it had come at the expense of large fiscal losses (forgone customs revenue alone equivalent to 4–12 percent of GDP) and a distorted, nontransparent, and administratively burdensome investment regime (Box 4). Moreover, a World Bank survey of firms operating in the region indicated that fiscal incentives were given a low weight in attracting FDI, ranking 16th of the 40 identified determinants of the investment climate.

Box 4.Tax Concessions in the ECCU 1/

Tax concessions have been used extensively by ECCU member countries in an attempt to promote private investment and support social objectives.

Concessions for investment in sectors such as tourism and light manufacturing, have generally been provided through tax holidays and import duty exemptions. Agriculture and fisheries have often been exempted from taxes on investment and inputs. Also benefiting from concessions have been the government, statutory bodies, utilities, and nongovernmental organizations, such as churches.

Considerable discretion has been applied in the granting of concessions. Available data from Dominica and St. Vincent and the Grenadines show that investment-related concessions account for nearly 50 percent of total customs duty concessions, whereas concessions granted by discretionary Cabinet decisions account for about 20 percent.

Revenue losses from concessions are large, and have increased significantly in two countries.

Estimated effective corporate income tax rates are about 40 percent of the statutory rates, and account for revenue losses of 3–6 percent of GDP per year.

Effective import-related tax rates are about 60 percent of the statutory rates, and account for revenue losses of 4–12 percent of GDP per year. In Antigua and Barbuda and in St. Kitts and Nevis, concessions rose sharply over the past decade.

The benefits in terms of increased foreign direct investment (FDI) appear to have been limited. While FDI as a share of GDP remained significant or even rose in some countries, the FDI performance of the ECCU countries relative to the rest of the world, declined sharply in the mid- to late-1990s. A preliminary empirical analysis suggests that tax concessions played a very limited role in attracting FDI. Instead, the key factors attracting FDI are good governance, a generally low and broad-based corporate tax regime, and the absence of FDI restrictions.

ECCU: Statutory and Effective Corporate Income Tax Rates

ECCU: Statutory and Effective Import-related Tax Rates

Table. ECCU: FDI Performance Index 1/
1979-831984-881989-93 1994-981999-2003
Antigua and Barbuda24.112.311.43.52.6
St. Kitts and Nevis12.316.419.27.08.4
St. Lucia37.410.812.14.92.3
St. Vincent and the Grenadines3.05.07.714.54.0
Small island economies7.
Latin America and the Caribbean1.
Developing countries1.

Performance index is the share of a country's FDI inflow in the world's FDI inflow, divided by the share of the country's GDP in the world's GDP.

Performance index is the share of a country's FDI inflow in the world's FDI inflow, divided by the share of the country's GDP in the world's GDP.

1/ This box is based on “Tax Concessions and Foreign Direct Investment in the ECCU” by J. Chai and R. Goyal, Chapter V in Eastern Caribbean Currency Union—Selected Issues.

35. While all country authorities voiced their concerns regarding the pressures they faced from neighboring countries in granting concessions, opinions differed on where to draw the line. Some considered that the investment climate should be strengthened in other ways and tax concessions reined in to protect tax bases and reduce distortions facing domestic investors. Others considered the existing system of tax incentives to be broadly appropriate, arguing that in their absence investment—and, therefore, employment and tax revenues—would be significantly lower. Staff noted that regardless of where the line was drawn, there was room for improving transparency (by eliminating the granting of discretionary concessions and publishing the cost of all concessions granted in a tax expenditure annex to the budget), and limiting the size, duration, and scope of statutory concessions.13 To encourage investment, tax credits for investment, accelerated depreciation, and loss carrying forward provisions could be considered.

36. Staff recommended additional steps to strengthen the investment climate:

  • Revamping the regulatory framework. Complex and cumbersome laws and amendments in tax and custom administration preclude the effective monitoring and collecting of taxes. Greater efficiency can be achieved by stepping up e-government, reducing trade barriers, and allowing greater competition in domestic markets, including by eliminating remaining state monopolies for distribution of imported goods. The regulatory framework for utilities, energy, and transport services need to be strengthened to attract private investment and promote competition and efficiency.
  • Improving infrastructure. While access to basic infrastructure to the general population is high, the reliability, quality, and costs to the productive sector need to be improved further. Maritime transportation is irregular, vessels are in poor condition, and freight and port costs are high.
  • Building private sector capacity. Private sector activity can be encouraged by donor financing of feasibility studies, providing information on best practices, supporting business incubators, and creating the right incentives for firms to train and innovate. In addition, governments could pool resources for seminars and roundtable discussions with foreign and local businesses for exchanging ideas, information, hearing concerns and attracting investments.

Growth opportunities

37. Notwithstanding the lackluster growth performance in the past decade, considerable growth potential exists in the ECCU region. A recent World Bank study identifies significant growth potential in niche products based on the geographical location, natural beauty, the rich culture, and the English-speaking population.14 These areas include diversification of tourism activities, increasing interlinkages between tourism and the agriculture and other sectors of the economy, offshore education, information and communications technology (ICT) enabled products and services, health and wellness activities, and offshore financial services.

38. High migration from the region has created a large diaspora that represents a potential source for investment and entrepreneurial skills.15 Staff noted that emigration rates were among the highest in the world—during 1970–2000, between 40 and 70 percent of the skilled labor force had emigrated.16 This large-scale emigration has produced a steady flow of remittances, but it is unclear if emigration has been a net benefit as it has drastically lowered domestic stocks of human capital and entrepreneurial skills. The authorities agreed that high emigration rates had contributed to the shortage of skills, but noted that it was inevitable given the limited range of opportunities available on small islands. Staff recommended that contacts with the diaspora be enhanced in order to build networks for trade, investment promotion, and tourism. Some countries are already tapping the diaspora—Dominica, for example, is trying to formulate an explicit diaspora strategy based on input from Dominicans living abroad.

Percent of Skilled Labor Force that has Migrated to the OECD, 1970-2000

(Top 20 countries in the world, ranked by emigration rates) 1/

Source: Eastern Caribbean Currency Union—Selected Issues, Chapter VI.

1/ Skilled are defined as having more than 12 years of completed schooling.

39. While several initiatives in regional cooperation have met with success, there remains substantial scope for furthering this process (Table 7).17 Successes and ongoing initiatives include the stability provided by the common CBA, the broadening and deepening of regional capital markets, the common judiciary, centralized procurement of pharmaceuticals, the common diplomatic missions at the World Trade Organization (WTO), greater competition and cost reduction in telecommunications under the auspices of the Eastern Caribbean Telecommunications Authority, and addressing security issues under the Directorate of Civil Aviation. At the same time, staff pointed out that there remained considerable room for expanding collective provision of government services—for example in tax administration, debt management, evaluation of public investment projects, procurement, security, and regulatory environment for transport, energy and infrastructure.

40. Regional integration initiatives in the ECCU have had limited impact in promoting trade and growth. Many regional initiatives, such as free movement of labor and a free trade regime in services, are yet to be implemented, and a number of important exceptions to free trade in goods remain.18 In addition, while the average tariff rate of CARICOM’s Common External Tariff (CET) is fairly low at around 10 percent, effective protection for certain products is much higher due to the presence of exemptions in the regime as well as nontariff barriers—given the virtual absence of a manufacturing sector in the ECCU, the CET serves to support the larger CARICOM economies at the expense of consumers in the ECCU region. While intra-regional travel is permitted for limited duration or by those with specified skills, considerable barriers exist in most occupations, serving to reduce the aggregate pool of labor supply and magnify skill mismatches.

41. The staff urged the speedy implementation of initiatives to foster closer economic integration both within the OECS and CARICOM. The Caribbean Single Market and Economy (CSME), Free Trade Area of the Americas (FTAA), and the WTO offer opportunities for ECCU countries to integrate with the regional and global economy, and the staff encouraged the authorities to pursue regional integration vigorously as a stepping stone to greater integration at the global level. The authorities’ views on the prospects for deeper regional integration of labor markets were mixed—some considered this a key mechanism for obtaining needed skills and, in many cases, formalizing the unofficial labor flows that already occur. Others expressed concern about higher local unemployment and the increased fiscal burden of providing social services to non-nationals—education, health, and social security.

42. Increased regional cooperation could reduce tax competition and strengthen the region’s negotiating position in dealings with large multinationals, but would be difficult to enforce. In the area of concessions, a regional cooperative approach could prevent a “race to the bottom” as potential investors played off the islands against each other. Some regional agreements are already in place for statutory concessions—for example, the Harmonization of Fiscal Incentives to Industry Act which establishes similar statutory concessions in each island. However, the authorities noted that this is used as the starting point in negotiations by multinationals, with large investors insisting on more generous packages. The authorities also stressed that even if the ECCU countries coordinated their approach, they would face stiff competition from other neighboring islands. More generally, the authorities noted that their small size placed them at a significant disadvantage in negotiations with large multinational companies, which also had the support of strong lobbying groups in their home countries—a case in point is cruise ship tourism, where the cruise ship owners have been able to get the islands to compete against each other resulting in the bulk of the proceeds from this trade accruing to the cruise ship companies.

43. To give regional integration renewed vigor, at the initiative of senior policymakers, a new treaty on economic union of the OECS countries was being considered. The regional authorities noted that in view of the changing global environment and their desire to integrate within the OECS before integrating within the CARICOM, the current treaty needed to be revamped. This treaty would allow for a common approach to policymaking and institution building. Common legislative framework would be drafted for consideration by individual parliaments. So far, all national constitutions had been reviewed and needed amendments identified.

C. Fiscal Consolidation and Reduction of Public Debt

44. Public debt levels in the region are very high, and in two countries, there still appears to be a lack of urgency in addressing the debt situations. In St. Lucia and St. Vincent and the Grenadines, the two countries with lower public debts but with elections due during 2006, the approved budgets target a significant expansion in public sector investment. The authorities in St. Lucia and St. Vincent and the Grenadines view such investment as necessary to support growth, and they maintain that their fiscal imbalances are not worrisome given their relatively low levels of debt. The staff argued that there was no room for complacency as debt levels throughout the region—even in the lower debt countries—are significantly above the levels at which other countries had experienced either financial or exchange rate crises. The authorities noted that levels of debt tolerance in small economies appeared to be different from larger emerging market economies. They pointed to their excellent record (with the long-time exception of Antigua and Barbuda) of servicing their debt and continued access to capital markets as evidence of the markets’ confidence. They also contended that unlike other highly indebted countries, large public debts had not discouraged FDI flows.

Public Debt Ratios at Which Countries Experienced Crises

Note: Figures for the ECCU countries are public debt ratios as a percent of GDP in 2004. The remaining bars list middle income countries that underwent an adverse credit event during 1970-2001, as identified by Reinhart, Rogoff, and Savastano (2003), “Debt Intolerance,” NBER Working Paper No. 9908, with the figures referring to public debt as a percentage of GNI in the year of the event.

45. Staff noted that the continued access to capital markets enjoyed by most countries in the region, despite high and rising debt levels, reflected in part financial market distortions. Demand for EC dollar assets—both bank deposits and government paper—appears to have been buttressed by the ECCB mandated floor on savings deposit rates and implicit restrictions on the asset portfolios of social security schemes. While this has resulted in lower debt service costs for some governments—in St. Vincent and the Grenadines, the interest spread has declined to only 100 basis points over U.S. treasury bills—this has been achieved at the expense of higher borrowing costs for the private sector. The artificially high levels of liquidity have also served to mitigate the potential role of the RGSM as a fiscal disciplining device. While interest rates do vary by creditor, with those countries with lower debt levels generally securing lower interest rates, the overall level of interest rates may not fully reflect the underlying riskiness of the securities.19

RGSM Auction Results, 2003-2005 1/ by type of instrument
Average yield Oversubscription
(in percent) (in millions of EC)
91 day treasury bill5.2104
365 days treasury bill20046.04
91 day treasury bill5.2167
365 days treasury bill5.323
5 year bond5.826
6 year bond6.05
10 year bond20057.062
91 day treasury bill4.2165
365 days treasury bill4.524

Data for 2005 are through end-April.

Data for 2005 are through end-April.

St. Vincent and the Grenadines: Interest Rate, 91-Day Treasury Bills, 2003-05

(In percent)

Sources: Eastern Caribbean Regional Government Securities Market; and U. S. Federal Reserve.

1/ March and May 2004 rates for St. Vincent and the Grenadines are interpolated.

2/ U. S. rate is interest rate on 13-week Treasury bills.

  • Floor on savings deposit rates. While initially introduced to protect depositors from a perceived lack of competition amongst deposit-taking institutions, the legislated floor on savings deposit rates may no longer be needed. Indeed, staff noted that the floor has limited the responsiveness of lending rates to changing liquidity conditions, thereby slowing the growth of private sector credit and discouraging locally-funded private sector investment. Staff encouraged the authorities to gradually remove the floor on deposits to reflect the true cost of funds and thereby eliminate the distortionary effect it has on the financial system. The authorities agreed that the floor could be withdrawn once financial markets were sufficiently well-developed, hence the question was just one of timing.
  • Concentration of the investment portfolios of the social security schemes in government securities. Staff noted that large exposures to national and regional government securities imply a concentration of risk that should be reduced by greater diversification of the asset portfolios of social security schemes into instruments held outside the region. The authorities commented that in some countries there were no formal restrictions on the asset portfolios of the national social security schemes, and viewed the development of the RGSM as providing significant opportunities for risk diversification, particularly given the high rates of return available.

46. The fiscal benchmarks approved by the ECCB’s Monetary Council have not, to date, been sufficient to ensure the consistency of national fiscal policies with the CBA. While the benchmarks are only to be achieved by 2007, staff noted that they appear to have had little impact on fiscal policies as fiscal outcomes have increasingly diverged from the targets since their introduction in 1998. The authorities argued that the deviations from the benchmarks had been deliberate policy decisions in response to shocks. Thus, the targets had not been ignored, but rather overtaken by other priorities. However, the authorities acknowledged that most benchmarks would not be achieved by the target date.

47. Despite the large deviations, the authorities were unanimous that the fiscal benchmarks should not be eliminated. However, opinions differed as to whether the targets needed to be modified: some country authorities saw moral hazard in changing the targets at this stage, while others saw benefit in revisiting the specification of the targets to ensure that they were realistic and corresponded to the needs and risks faced by the region. Several authorities believed that setting annual benchmarks that could differ across countries, depending on their starting conditions, could facilitate the achievement of targets, albeit at different points in time. In this context, staff recommended that the definition of debt should be clarified to include all public and publicly-guaranteed debt, rather than solely central government and government-guaranteed debt, as it would provide a more meaningful indicator of the magnitude of liabilities that the budget may have to sustain. In addition, the national authorities were encouraged to publish and widely disseminate performance relative to the established benchmarks on a quarterly or annual basis.

48. There is little appetite for creating a supra-national authority to enforce the fiscal benchmarks. The country authorities were uniformly opposed to any loss of sovereignty over national fiscal policies that would be implied by the creation of a supra-national body. They also pointed to the experience in the Euro Area, where ensuring compliance with the fiscal targets remained a challenge despite the existence of such a supranational body. Going forward, they considered that the most effective means for ensuring compliance would be peer pressure at the level of meetings of the prime ministers. At the technical level, they pointed out, mechanisms have recently been established with assistance from CARTAC—the SATAP (Structural Adjustment and Technical Assistance Project) program—to enable policymakers to set, monitor, and achieve the benchmarks. However, effective feedback from the SATAP units to the policymakers needs to be substantially strengthened.

49. In light of the large public debt positions, staff urged that substantial fiscal consolidations be pursued on the basis of broadening the tax base, streamlining expenditures, and strengthening fiscal institutions. Notwithstanding the authorities’ efforts at restructuring their debt in an orderly manner, staff stressed that debt restructuring should not be viewed as a substitute for fiscal consolidation. Regarding specific measures, as statutory tax rates are already fairly high in the region, measures to broaden the tax base should be implemented, including reducing tax concessions, enhancing tax compliance, strengthening tax and customs administration, assessing property at market value for tax purposes, and introducing a broad-based consumption tax (or VAT). Consideration could be given to lowering the high marginal tax rate in the medium term, concurrent with the phasing out of tax concessions. On the expenditure side, staff emphasized civil service reforms to reduce the wage bill and over-employment in the public sector, but at the same time, allowing for greater wage differentiation to reflect skills and performance. In addition, there is a need to strengthen expenditure management systems, improve debt management, and reprioritize and monitor overly ambitious public sector investment programs. While many of these measures are already underway, civil service and tax concession reforms are not yet on the priority list—with the notable exceptions of Antigua and Barbuda and Dominica.

D. Living with the Region’s High Vulnerability to Shocks

50. The ECCU region faces significant vulnerabilities—many beyond the control of regional policymakers—posing challenges to economic management. There are three principal sources of vulnerabilities:

  • Natural disasters. Measured in terms of natural disasters per square mile, all the ECCU countries rank in the top ten in the world. The region is located in the Atlantic Basin hurricane belt that experienced 9 hurricanes and 14 tropical storms during 2004, with a similar number expected this year.20 The region is also located on a geological fault line, producing occasional earthquakes—most recently in Dominica in November 2004.
  • Global economy. The significance of tourism in the economies makes the region particularly vulnerable to the world business cycle and shocks to global security. The region also imports all its oil and, given the very high debt levels, is susceptible to global capital market conditions.
  • Domestic or regional shocks. Financial sectors have proven resilient to a broad range of shocks. However, the sources and nature of possible shocks are constantly evolving as financial sectors develop and cross-border linkages deepen, raising the risk of contagion.

Natural disasters

51. Natural disasters are a fact of life in the region, and efforts to both mitigate the impact of disasters and facilitate recovery should be stepped up. While ECCU countries have invested in disaster risk mitigation activities (such as strengthening building codes) and in national and regional disaster response agencies, staff recommended that these efforts, and their enforcement, should be enhanced. Existing national and regional disaster contingency funds are inadequate, and traditional insurance markets in the Caribbean are characterized by relatively concentrated coverage, high prices and low-risk transfer (see the Annex).21 Staff encouraged the authorities to work with multilateral agencies—particularly the World Bank and the Commonwealth Secretariat—in developing new schemes, such as regional insurance pools. The authorities noted that the devastation caused by Hurricane Ivan in Grenada had refocused their attention on these issues. In some cases, the coverage of publicly-insured infrastructure was being increased, but full coverage was not possible given the fiscal challenges facing the region. Several countries urged the international donor community to take a more proactive role by providing an ex ante pool of disaster relief funds to be used in an emergency, as well as grant financing for insurance of public infrastructure.

Global economy

52. The emergence of tourism as the dominant sector in the region has created a significant dependency on the world business cycle and global security developments. Growth in each of the countries is highly correlated with world output and, as seen in the aftermath of the September 11, 2001 attacks, a downturn in world output or world security could induce a recession throughout the region. The authorities were well aware of the risks stemming from the tourism sector, noting that the dependence is much greater now than when the economies were based on traditional agricultural sectors. Staff cautioned that options for diversification away from tourism and related linkages are limited, but ensuring diversity in the source country of tourists—through, for example marketing campaigns in various regions of the world as well as regionally—could reduce risks.

ECCU: Correlation Between Domestic Output and World Output

Source: Eastern Caribbean Currency Union—Selected Issues, Chapter I.

53. The ECCU countries are heavily dependent on oil and energy imports, with some countries now exploring alternative energy sources. The small size of the economies prevents the emergence of a competitive market in oil products, so that oil prices are tightly regulated throughout the region. In most countries, there is an explicit formula linking the retail price of oil to the imported price, but the retail price is adjusted only infrequently and in the past few years has been used to shield consumers from the full increase in oil prices. The infrequent price adjustments have served to limit the impact of oil price fluctuations on domestic output, but the cost is born by the budget in the form of reduced tax revenues as well as through a loss of efficiency in production, consumption, and distribution services. The staff urged increased flexibility in oil pricing—as in Dominica where oil price fluctuations are fully passed through to domestic prices. The authorities agreed that the fiscal burden of maintaining artificially low oil prices was substantial, but expressed concern about the social and growth consequences of permitting full pass-through. Several countries are examining options to harness alternative energy sources, such as geothermal energy.

ECCU: Correlation Between Domestic Output and Crude Oil Price

Source: Eastern Caribbean Currency Union—Selected Issues, Chapter I.

54. The high debt ratios of ECCU countries make them particularly vulnerable to capital market conditions. During the last year there has been a shift away from external financing towards increased reliance on domestic sources, in part reflecting the low interest rates available on the RGSM. Many of these placements have been at fairly short maturities, raising concerns as to rollover risk. Given that global interest rates appear likely to rise over the medium term, staff urged the authorities to prepare in advance for these adverse prospects through improved debt management as well as the implementation of fiscal reforms to reduce debt levels.22

Domestic or regional shocks

55. Financial markets have shown remarkable resilience to the many large shocks that have hit the region, but this resilience cannot be taken for granted going forward. While banking systems in each country remain highly liquid and with reported capital positions above prudential norms, exposures to the government are high and NPLs are rising, pointing to the existence of significant vulnerabilities as confirmed by stress tests on the banking system (Box 5).

Box 5.Banking System Vulnerabilities

Financial soundness indicators provide a mixed picture of the health of the banking system. While measures of capital adequacy appear strong, nonperforming loans (NPLs) and exposure to the government are very high in some countries. Moreover, weaknesses in the legal frameworks in some countries for property disposal and lengthy court procedures contribute to persistently high NPL levels, for instance in Dominica and St. Lucia.

ECCU Banking System: Financial Soundness Indicators, December 2004 1/(In percent)
Capital adequacy 2/
NPLs/Total loans 2/24.641.
Gross government exposure/Total assets12.011.411.327.613.020.7
Loans to households/Total loans41.852.159.438.147.855.1
(Pre-tax) return on average assets1.
Liquid assets/Total assets32.545.538.438.922.736.0
Total loans/Total deposits75.057.557.675.680.771.2

ATG (Antigua and Barbuda), DMA (Dominica), GRD (Grenada), KNA (St. Kitts and Nevis), LCA (St. Lucia), and VCT (St. Vincent and the Grenadines).

Indigenous banks.

ATG (Antigua and Barbuda), DMA (Dominica), GRD (Grenada), KNA (St. Kitts and Nevis), LCA (St. Lucia), and VCT (St. Vincent and the Grenadines).

Indigenous banks.

Banking system vulnerabilities appear to be concentrated in locally incorporated banks. The exposure of local banks to the government amounted to 21 percent of total assets in 2004, about three times the level at foreign banks. While the capital adequacy ratio of locally incorporated banks was more than double the 8 percent prudential requirement, potential underprovisioning and sovereign risks could reduce that amount.

ECCU: Financial Soundness Indicators, end-2004(In percent)
Adequacy 1/Total Loans 2/NPLs 2/Total Loanson Assetson Equity
Aggregated banking system12.
Foreign branches7.941.23.22.1
Locally incorporated17.315.631.34.91.513.9

The foreign branches have consolidated capital positions with their parent banks in Canada and Barbados.

Non-performing loans.

The foreign branches have consolidated capital positions with their parent banks in Canada and Barbados.

Non-performing loans.

The financial sector has been remarkably stable, despite the buildup in banking sector exposure to the government, high public debt levels, and the regular occurrence of natural disasters. The stability appears to reflect the continued confidence in the currency peg, the credibility of the ECCB in the region, and the lack of any major banking crises in the past.

However, adverse shocks such as a major hurricane or a sudden stop of tourism arrivals, could lead to insolvency of some systemically important banks in the region. The banks in the region appear particularly vulnerable to shocks that disrupt tourism and/or trigger government sector defaults. For example, an adverse shock that results in an additional 5 percent of total loans in loan losses and a 10 percent nonrepayment on government obligations could lead to the undercapitalization of about half of the local banks. While the impact would be more severe in some countries than others, the undercapitalized banks account for on average one-third of total deposits, and could trigger a more general confidence effect in the region. The stability of the banking sector in Grenada (which had among the strongest prudential indicators in the region prior to the hurricane) in the face of an even larger shock suggests that additional factors—such as the possibility of capital injections for foreign banks—also need to be considered.

56. Cross-border linkages are low but rising as regional capital markets develop. As the volume of activity on the RGSM and other regional markets increases, the linkages among financial systems in the region will strengthen, potentially raising contagion risks. These linkages are currently small: holdings of other ECCU government securities are no more than 3½ percent of bank assets in any country; claims on other ECCU banks are higher as a share of assets but appear to be dominated by cross-border deposits between banks operating in different countries but sharing the same parent bank. Trade linkages are also very low.

ECCU: Cross Border Linkages
Financial 1/Trade /2
Gross Claims on

other ECCU

Public Sectors
Net Claims on

other ECCU Banks
Exports of

goods to ECCU
(in percent of bank assets)(percent of GDP)
Antigua and Barbuda0.6-0.70.4
St. Kitts and Nevis1.9-5.90.4
St. Lucia1.41.11.1
St. Vincent and the Grenadines3.48.53.8

December 2004

Average, 1998-2004

December 2004

Average, 1998-2004

57. Enhancing the effectiveness of financial sector supervision will be key to containing potential risks. While acknowledging the progress made in revising the ECCB’s prudential regulations and in strengthening supervision over offshore financial centers, staff expressed concern that the enhanced prudential regulations were not fully effective, and that the number of on-site banking inspections conducted each year—an average of four institutions per year during 2000–04—should be raised. The authorities noted that the needed legislation to strengthen prudential regulations was proceeding through national parliaments but that this was a time-consuming process. In terms of the frequency of on-site inspections, the authorities argued that they conduct off-site inspections frequently and had sufficiently detailed information on banks and substantial contacts with those banks to be able to identify at an early stage any emerging problems. Regarding the regional FSAP’s recommendation to transfer the power to revoke bank licenses from the national authorities to the ECCB, several country authorities vehemently opposed it, arguing that it would impinge on national sovereignty.

Crisis management

58. Contingency planning for a crisis scenario should form a key part of prudent macroeconomic management. While every possible attempt should be made to prevent a crisis, the possibility of a crisis cannot be ruled out. Consequently, the staff encouraged the ECCB and country authorities to develop a contingency plan to deal with that possibility, including a clear delineation of the responsibilities of the ECCB and of the national governments.

E. Statistics

59. Efforts are underway to improve the quality, timeliness, and dissemination of statistical series in the region to permit more effective policy monitoring. Staff welcomed the emphasis placed by the ECCB on urging national authorities to strengthen the availability and quality of statistics throughout the region. In view of the need for more comprehensive data on the household sector, it was disappointing that more use had not been made of the data from the census conducted in 2001. The authorities indicated that there had been technological problems with the processing of census returns, so that the results were not yet available in all countries.

IV. Staff Appraisal

60. The ECCU countries are facing several challenges. With the erosion of preferential access to markets in bananas and sugar and the decline in official development assistance, the external environment worsened considerably in the last decade. Natural disasters have been frequent, often inflicting substantial damage to the economies, and the September 11 attacks on the United States clearly demonstrated the vulnerability of the economies to shocks to tourism. In the past few years, the ECCU countries have also faced a sharp increase in petroleum import prices. The resultant deceleration of growth since the early 1990s, combined with the relaxation in fiscal stances, has considerably weakened domestic economic conditions and produced a rapid accumulation of public debt.

61. There is increasing recognition of the difficulty of the current economic position and bold steps are being taken in several countries to address these challenges. The importance of responding to the economic challenges has been highlighted by the prominence given to economic issues in recent electoral campaigns in Antigua and Barbuda, Dominica, and St. Kitts and Nevis. Staff welcomes the key measures now underway in the more highly indebted countries to tackle the economic difficulties: in Antigua and Barbuda, Dominica, and Grenada, determined actions to strengthen fiscal positions and reduce debt levels are being undertaken; and in St. Kitts and Nevis, the authorities have announced the closure of the long-time loss-making sugar industry which should significantly enhance fiscal and growth prospects in the coming years.

62. While progress towards fiscal consolidation was made in 2003–04, a more rapid adjustment is needed to place debt on a clearly downward path. In view of the positive global growth outlook in the near and medium term, and strong prospects for tourism-dominated economies, the present time is opportune for a more forceful fiscal adjustment. Other means of addressing the fiscal imbalances—such as reducing debt by seeking a cooperative solution with creditors and privatization—will not be sufficient to achieve debt sustainability. Fiscal institutions, tax systems, budget processes, expenditure management, public debt management, and public sector investment programs need to be strengthened in tandem to preclude fiscal slippages in the future.

63. Ensuring the consistency of fiscal policies with the CBA needs to be assured if macroeconomic stability is to be maintained. The CBA has delivered a long period of exchange rate and price stability even in the presence of frequent large adverse shocks, fiscal indiscipline, and rigid labor markets. However, this stability has been maintained by the governments’ ability to borrow by remaining current on debt obligations and tapping the captive social security surpluses. Moreover, liquidity in the banking system has been sustained at a high level by attracting deposits through the imposition of a floor on savings rates. This situation cannot continue indefinitely. Preserving the exchange rate peg—which is uniformly supported by the wider population in the region—will require individual governments to make good on their commitments to policy coordination by achieving the fiscal benchmarks approved by the ECCB’s Monetary Council. Staff urge the setting of interim annual targets and a broader dissemination of performance relative to the benchmarks as a means of generating discipline and building ownership of fiscal positions.

64. Raising productivity is key for maintaining competitiveness and supporting the exchange rate peg. Growth rates since the 1990s have been much lower compared to countries with similar levels of spending on human and physical capital, pointing to a low level of efficiency in investment. Enhancing labor market flexibility will be important for unlocking the economy’s growth potential, and ensuring that the economy adjusts to shocks. The depreciation of the U.S. dollar in the last few years has provided some breathing room, but going forward competitiveness can only be sustained if wages are kept in line with productivity growth.

65. Several key steps can be taken to provide a supportive investment climate for the private sector to flourish. The distortionary, nontransparent, and costly tax concessions regime should be reformed. The regulatory environment in utilities, energy, and transportation should be improved. Importantly, the skill level in the region needs to be raised, and education and training programs reoriented to better serve the needs of the region. In view of the high migration rates of skilled labor, the Caribbean diaspora should be tapped more aggressively to support private investment in home countries.

66. Realizing the growth potential will require redefining the role of the public sector. The public sector should focus on creating a conducive investment climate, rather than attempting to create employment and generate growth by further expansions. Public sector investment programs that are critical for private sector development should be implemented only after careful project evaluation and prioritization, with continuous oversight and monitoring during the implementation phase. More generally, the institutional capacity of the public sector should be enhanced in order to facilitate the needed fiscal reforms and assure higher quality of public services.

67. The potential benefits from regional integration and cooperation are extremely high and should be exploited. Given the small size of the economies, and the high fixed costs of providing government services, there is tremendous scope to increase the collective provision of select government services both to cut costs and achieve efficiencies. Steps need to be taken towards further integration of markets, particularly goods and labor, to benefit from economies of scale and to lower product and labor costs.

68. High public debt levels limit the ability of the ECCU governments to use fiscal policy to respond to external shocks, underscoring the need for measures to reduce the region’s vulnerabilities. Natural disasters occur regularly, so that disaster mitigation and preparedness efforts need to be stepped up, even as better insurance mechanisms are sought. Given the increasing dependence of the countries on tourism and tourism-related products, diversification can be achieved by attracting tourists from a larger group of customer countries and increasing interlinkages between tourism and other sectors, particularly agriculture.

69. Further action to enhance the effectiveness of financial sector supervision is needed to contain potential risks. As regional capital markets deepen, financial sector linkages are likely to rise and any adverse event in one country will likely affect neighboring ones, underscoring the need to constantly strengthen financial sector supervision. An increase in the frequency of banks’ on-site inspections was needed, as recommended by the FSAP. Amendments to the Uniform Banking Act, the ECCB Act, and the prudential guidelines, should be enacted soon.

70. Contingency planning for an untoward event should be undertaken by both country and regional authorities. While every possible attempt should be made to prevent a crisis, the possibility of a crisis cannot be ruled out. Preparing in advance, irrespective of the likelihood of the event, could significantly reduce the financial and output costs associated with such events.

71. While the quality and depth of the dialogue between Fund staff and the authorities has intensified in the past year, a further strengthening of statistics and outreach activities are warranted. Staff welcomes the stepped up efforts in most countries to increase transparency and generate public consensus on reforms. However, in view of the far-reaching reforms that need to be implemented, greater debate on economic issues and outreach activities is recommended. To facilitate better policymaking and permit regular monitoring of the impact of reforms on living standards, it is imperative that statistics in all areas be improved, but particularly on labor markets, poverty, and other social indicators.

72. It is proposed that the next regional discussions with the ECCU take place in 12 months, with an update of regional developments in about six months time.

Table 1.ECCU: Selected Economic and Financial Indicators, 2000–2005
(Annual percentage change)
National income and prices 1/
Real GDP2.9-
GDP deflator1.
Consumer prices, end of year1.
Monetary sector
Liabilities to the private sector (M2)
Net foreign assets-7.240.825.832.420.016.5
Net domestic assets15.2-
Of which
Private sector credit10.
Credit to central government35.61.4-1.5-13.9-15.3-11.9
(In percent of GDP)
Public sector 1/
Primary central government balance-1.8-4.2-6.7-1.0-0.4-2.5
Overall central government balance-5.2-7.8-10.9-5.6-4.9-7.1
Total revenue and grants27.726.228.129.328.831.0
Total expenditure and net lending32.934.039.034.933.738.1
Foreign financing2.
Domestic financing including arrears2.
Central government current account balance-0.3-2.0-2.2-0.2-0.1-1.9
Total public debt (end-of-period)83.289.4108.7108.7105.5107.5
(Annual percentage change)
External sector
Exports, f.o.b8.6-14.2-
Imports, f.o.b3.1-8.10.412.78.45.0
Stayover visitors-0.6-
Nominal effective exchange rate 1/
(1990 =100) end-of-period (depreciation -)5.91.9-4.8-8.1-4.7
Real effective exchange rate 1/
(1990 =100) end-of-period (depreciation -)4.31.5-5.5-8.8-3.6
(In percent of GDP)
External current account balance-16.1-18.1-20.4-21.4-17.3-19.4
Trade balance-37.7-35.3-34.8-38.4-39.2-39.0
Services, incomes and transfers21.617.214.417.021.919.5
Of which
Capital and financial accounts 2/16.620.322.522.720.120.7
Of which
Foreign direct investment10.911.110.716.914.615.1
External public debt (end-of period) 1/46.852.965.268.261.663.1
External debt service, in percentage of goods and non-factor services5.
Of which
End-year gross foreign reserves of the ECCB
In U.S. dollar million383.7446.0504.8539.9632.4678.7
In months of imports3.
In percent of broad money17.419.120.219.820.420.1
Currency backing ratio, in percent 3/88.392.997.195.396.2

Excludes Anguilla and Montserrat. ECCU aggregates are calculated as weighted averages of individual country data; ratios to GDP are then calculated by dividing this sum by the aggregated GDP of the region.

Includes errors and omissions.

ECCB's foreign assets as a ratio of its demand liabilities.

Excludes Anguilla and Montserrat. ECCU aggregates are calculated as weighted averages of individual country data; ratios to GDP are then calculated by dividing this sum by the aggregated GDP of the region.

Includes errors and omissions.

ECCB's foreign assets as a ratio of its demand liabilities.

Table 2.ECCU: Selected Central Government Indicators by Country, 2000–2005 1/(In percent of GDP)
2000200120022003Prel. 2004Proj. 2005
Total revenues and grants27.726.228.129.328.831.0
Antigua and Barbuda21.719.221.720.921.421.9
St. Kitts and Nevis29.929.034.833.134.938.2
St. Lucia26.825.427.028.027.428.5
St. Vincent and the Grenadines29.430.731.731.630.331.8
Current expenditure25.226.527.826.926.828.4
Antigua and Barbuda24.625.627.525.723.825.0
St. Kitts and Nevis34.032.934.033.735.336.1
St. Lucia20.822.223.924.724.025.7
St. Vincent and the Grenadines26.627.728.026.926.429.3
Of which
Interest payments3.
Antigua and Barbuda4.
St. Kitts and Nevis5.
St. Lucia1.
St. Vincent and the Grenadines2.
Saving (current revenue less current expenditure)-0.3-2.0-2.2-0.2-0.1-1.9
Antigua and Barbuda-6.8-6.9-7.1-5.0-3.1-4.5
St. Kitts and Nevis-5.2-4.9-2.9-1.4-1.2-1.1
St. Lucia5.
St. Vincent and the Grenadines1.
Primary balance-1.8-4.2-6.7-1.0-0.4-2.5
Antigua and Barbuda-0.3-6.8-6.8-4.1-0.8-3.6
St. Kitts and Nevis-9.5-6.7-11.2-1.1-4.1-0.2
St. Lucia0.2-1.8-5.0-0.9-1.3-4.1
St. Vincent and the Grenadines0.80.5-1.6-0.6-0.9-2.7
Overall balance-5.2-7.8-10.9-5.6-4.9-7.1
Antigua and Barbuda-5.0-11.1-11.0-8.8-4.6-6.8
St. Kitts and Nevis-14.4-12.4-18.5-8.9-11.5-7.8
St. Lucia-1.4-4.1-7.6-3.8-4.7-8.1
St. Vincent and the Grenadines-2.0-2.1-4.2-3.4-3.4-6.5
Government and government guaranteed debt stock
Total public sector debt83.289.4108.7108.7105.5107.5
Antigua and Barbuda125.4123.6139.2132.099.4100.0
St. Kitts and Nevis122.2138.8161.0172.6178.7178.1
St. Lucia44.751.164.364.170.573.4
St. Vincent and the Grenadines67.568.270.572.878.983.9
External debt 2/46.852.965.268.261.663.1
Domestic debt36.536.443.540.543.944.4

Excludes Anguilla and Montserrat. Fiscal years for Dominica and St. Lucia.

Includes external arrears.

Excludes Anguilla and Montserrat. Fiscal years for Dominica and St. Lucia.

Includes external arrears.

Table 3.ECCU: Summary Balance of Payments, 2000–2005
(In millions of U.S. dollars)
Current account-455.6-514.2-594.8-655.1-567.6-674.9
Trade balance-1069.9-1004.7-1013.9-1176.0-1286.4-1354.3
Services and income449.0377.3308.9393.5486.7539.6
Other services-17.1-66.9-101.7-108.6-84.8-94.9
Current transfers165.3113.1110.2127.5232.0139.8
Capital and financial account471.2578.4655.4696.0660.2721.1
Capital transfers (net)122.3133.9132.9131.3104.2189.4
Financial account348.9444.5522.5564.7556.0531.7
Direct investment309.2316.3311.2518.3477.4525.8
Portfolio investment68.055.5153.0162.548.851.7
Public sector long term33.382.348.018.235.957.7
Other public sector capital0.
Commercial banks26.3-89.8-86.2-168.2-101.8-50.8
Other capital 1/-88.077.995.333.995.7-52.7
Overall balance15.664.260.640.992.546.3
(In percent of GDP)
Current account-16.1-18.1-20.4-21.4-17.3-19.4
Services, incomes and transfers21.617.214.417.021.919.5
Of which
Current transfers5.
Capital and financial account16.620.322.522.720.120.7
Of which
Direct investment10.911.110.716.914.615.1
Overall balance0.
(Annual percentage change)
Travel, net1.1-7.3-3.318.213.411.0
Memorandum items:
End-year gross reserves of the ECCB, US$ millions383.7446.0504.8539.9632.4678.7
In months of current year imports3.
ECCU GDP at market prices, EC$ millions7,662.17,687.77,868.28,273.18,858.19,384.8

Includes errors and omissions.

Includes errors and omissions.

Table 4.ECCU: Summary Accounts of the Banking System, 2000–2005(In millions of Eastern Caribbean dollars)
I. Monetary Survey (Consolidated Banking System)
Net foreign assets1,024.81,442.61,814.12,401.82,882.03,357.0
Net domestic assets4,943.84,877.14,920.44,975.45,479.05,766.9
Net credit to the public sector-97.7-69.1-87.2-217.4-230.5-327.8
Central government645.2654.5644.7554.8470.1414.4
Nonfinancial public enterprises 1/-742.9-723.6-731.9-772.3-700.6-742.2
Credit to private sector5,842.85,979.16,090.86,222.36,615.87,034.2
Liabilities to private sector (M2)5,968.66,319.66,734.57,377.18,361.29,123.8
Money (M1)1,211.71,246.01,319.21,505.71,884.42,026.1
II. Eastern Caribbean Central Bank
Net foreign assets1,018.81,192.21,355.11,449.11,702.91,828.0
Net domestic assets-631.9-818.7-961.9-1,022.0-1,219.4-1,285.9
Net position with banks and other institutions-646.9-830.6-910.9-1,005.9-1,161.7-1,140.1
Credit to government29.532.71.931.5-39.0-120.2
Liabilities to private sector386.9373.4393.2427.1483.5542.0
Currency issued536.0537.5558.7605.7660.3734.6
Currency held by banks-149.1-164.1-165.4-178.6-176.8-192.6
III. Commercial Banks
Net foreign assets6.0250.4459.0952.61179.11,529.0
Net claims on ECCB632.2833.2902.5948.91158.11,136.6
Net domestic credit4,943.54,862.74,979.85,048.65,540.35,916.2
Net credit to the public sector-127.3-101.9-89.1-248.9-191.4-207.6
Central government615.7621.8642.8523.3509.2534.6
Rest of the public sector-742.9-723.6-731.9-772.3-700.6-742.2
Credit to private sector5,842.85,979.16,090.86,222.36,615.87,034.2
Liabilities to the private sector5,581.75,946.26,341.36,950.07,877.68,581.8
Memorandum items of the consolidated banking system:
(Percentage growth compared to M2 at the beginning of the year)
Net foreign assets-
Central bank0.
Commercial banks-
Net domestic assets12.1-
Of which
Net credit to the public sector2.80.5-0.3-1.9-0.2-1.2
Credit to the private sector10.
(Annual percentage change)
Liabilities to the private sector (M2)
Private sector credit10.
Income velocity of broad money1.
Private sector credit/GDP (percent)76.377.877.475.274.775.0
Broad money/GDP (percent)77.982.285.689.194.497.2
Foreign currency deposits/GDP (percent)10.010.411.711.813.313.7

Includes the national insurance schemes.

Includes the national insurance schemes.

Table 5.ECCU: Creditor Composition of Public Debt at end-2004 1/(Share of total)
AntiguaSt. Vincent
andSt. Kittsand the
Barbuda 2/Dominica 3/Grenadaand NevisSt. LuciaGrenadines
External debt100100100100100100
Central government877879758394
Official bilateral2417127613
Arrears, total22000
Other public sector13212125176
Domestic debt100100100100100100
Central government948881598787
Private domestic banks21304036
Nonbank financial institutions000
Insurance funds44098
Arrears, total3000
Other public sector61219411313
Memorandum items:
Public debt (end-2004, percent of GDP)99.4124.1129.4178.770.478.9
Of which
External debt46.688.395.078.146.454.7
Public debt (end-2004, U.S. dollars)822.2333.4565.8709.2520.7318.7
Of which
External debt385.2237.3415.6310.1343.3220.9

Excludes Anguilla and Montserrat.

Public debt data for Antigua and Barbuda includes principal and interest arrears, which account for 36.4 percent of total public debt

Dominica data are for the consolidated public sector.

Excludes Anguilla and Montserrat.

Public debt data for Antigua and Barbuda includes principal and interest arrears, which account for 36.4 percent of total public debt

Dominica data are for the consolidated public sector.

Table 6.ECCU: Selected Vulnerability Indicators, 2000–2005
Key economic and market indicators
Real GDP growth 1/2.9-
CPI inflation, end of year in percent1.
Interbank interest rate6.86.36.0
Exchange rate, NC/US$ (end of period)
External sector
Current account balance (percent of GDP)-16.1-18.1-20.4-21.4-17.3-19.4
Net FDI inflows (percent of GDP)10.911.110.716.914.615.1
Export growth (f.o.b)8.6-14.2-
Terms of trade (12-month percentage change) 2/-
Real effective exchange rate (1990=100) 1/112.5115.0113.1104.299.8
Gross international reserves in US$ billion 3/0.3840.4460.5050.5400.6320.679
Net international reserves in US$ billion 3/0.3770.4420.5020.5370.6310.677
Total gross external public debt in percent of GDP46.852.965.268.261.663.1
Gross external financing requirement (in US$ billion) 4/0.5090.5560.6720.7300.8280.774
(In percent of GDP)
Consolidated public sector 1/
Overall central government balance-5.2-7.8-10.9-5.6-4.9-7.1
Primary central government balance-1.8-4.2-6.7-1.0-0.4-2.5
Central government current account balance-0.3-2.0-2.2-0.2-0.1-1.9
Public sector gross debt (end-of-period)83.289.4108.7108.7105.5107.5
(In percent)
Public and private financial sector
Capital adequacy ratio (indigenous banks, Tier I capital over risk weighted assets)14.715.817.516.416.4
NPLs/total loans11.513.113.713.912.0
Indigenous banks16.717.417.418.215.6
Foreign banks5.
Loan loss provision/NPLs28.628.929.730.034.3
Indigenous banks25.627.027.926.131.3
Foreign banks38.033.433.639.141.2
Loans to agricultural sector/total loans3.
Loans to tourism sector/total loans7.
Loans to household sector/total loans45.946.646.448.447.4
Gross government claims/total assets15.215.015.314.415.3
Government deposits/total deposits18.518.017.617.217.0
FX deposits/total deposits15.715.015.715.415.4
Contingent liabilities/capital (indigenous banks)74.862.359.765.777.3
(Pre-tax) return on average assets2.
Memorandum items
ECCB reserve cover 5/88.392.997.195.396.2
ECCB gross reserves/broad money17.419.120.219.820.420.1

Excludes Anguilla and Montserrat.

Excludes Anguilla, Antigua and Barbuda, and Montserrat.

Gross reserves defined as the foreign assets of ECCB. Net reserves defined as net foreign assets of ECCB.

Defined as external current account deficit plus external amortization.

Foreign assets as a percentage of demand liabilities.

Excludes Anguilla and Montserrat.

Excludes Anguilla, Antigua and Barbuda, and Montserrat.

Gross reserves defined as the foreign assets of ECCB. Net reserves defined as net foreign assets of ECCB.

Defined as external current account deficit plus external amortization.

Foreign assets as a percentage of demand liabilities.

Table 7:Status of Implementation of Key Elements of the CARICOM Single Market and Economy 1/
Key ElementsOriginal DeadlineNew DeadlineStatusAction Required
Treaty establishing the Single Market: To encourage competition20002005All 12 countries to which it applies have signed and ratified the revised TreatyAll countries except Barbados, Belize, St. Lucia and Suriname to enact Treaty
Free movement of goods: Removal of unauthorized import and export duties on goods of regional origin and removal discriminatory internal fiscal charges19962005Belize, St. Kitts Nevis and Nevis, and St. Vincent and the Grenadines apply duties on a limited range of imported goods; Suriname on export of lumber; environmental taxes apply in some countriesCountries to remove duties and discriminatory charges
Free movement of services: Removal of restrictions on the provision of services20022005List of existing restrictions ratified in 2000; none of the countries have removed all restrictionsLegislative and administrative actions to remove remaining restrictions
Free movement of persons: Provides for free movement of university graduates, media workers, musicians, sports persons, and self-employed service providers.2002200510 countries have enacted legislation and put administrative arrangements in place for first three categories; Jamaica and St. Vincent and the Grenadines for the last categoryAntigua and Barbuda and St. Kitts and Nevis to amend legislation, Other countries to take necessary action for the last category
Free movement of capital: Removal of restriction on the movement of capital within CARICOM and cross- and trading listing on stock exchanges2002200510 countries have liberalized capital account; List of restrictions notified by all members in 2000 and schedule of commitments for removal approved in February 2002Legislative and administrative action to be taken by all countries.
Intra-regional double taxation agreement1998200511 countries have signed and ratified the agreement and 9 have enacted the legislationMontserrat and Suriname to sign and ratify and enact laws; Grenada and St. Kitts and Nevis to enact laws
Rights of establishment: The removal of restrictions on CARICOM individuals and firms to set up business in other CARICOM countries20022005List of restrictions notified in 2002; schedule of commitments for removal approved in February 2002. Jamaica has taken action toward meeting requirementLegislative and administrative action to be taken by all member states
Common external tariff (CET): Implementation of four phases of the CET, and implementation of revised structure based on 2002 HS1998200510 countries have implemented the 4th phase of CET, and Jamaica and Trinidad and Tobago have implemented the revised structureAntigua and Barbuda and St. Kitts and Nevis to implement CET; countries except Jamaica and Trinidad to implement revised structure
Competition Law: To provide a level playing field for doing business2005Draft Law approved; Barbados, Jamaica, and St. Vincent and the Grenadines have taken actionOther countries to enact legislation
Implementation of harmonized customs legislation, regulation and forms20052005The draft law is being finalizedEnactment of the law
Memorandum item:
OECS economic union: Initiatives under the CSME plus free movement of labor20062006Most countries have passed legislation for movement of persons under the CSMEAction under the CSME; permit free movement of labor

CARICOM consist of 15 member countries, Antigua and Barbuda, Barbados, Belize, The Bahamas, Dominica, Grenada, Guyana, Haiti, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname and Trinidad and Tobago, but the revised Treaty does not apply to The Bahamas, Haiti, and Montserrat. Montserrat is awaiting entrustment from the U.K. and has been granted a two- year derogation on implementation

CARICOM consist of 15 member countries, Antigua and Barbuda, Barbados, Belize, The Bahamas, Dominica, Grenada, Guyana, Haiti, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname and Trinidad and Tobago, but the revised Treaty does not apply to The Bahamas, Haiti, and Montserrat. Montserrat is awaiting entrustment from the U.K. and has been granted a two- year derogation on implementation

Annex: Government Responses to Natural Disasters1

At the government level, there are three main responses to the economic volatility induced by natural disasters, and in obtaining needed post-reconstruction funds:

• Risk identification and risk reductionfocus on reducing the effects of a disaster should one occur. Proper risk identification occurs through hazard data collection and vulnerability assessments. Similarly, risk reduction activities can reduce vulnerabilities through disaster mitigation and preparedness, such as by strengthening and relocating structures, retrofitting, and enforcing land use codes and building standards. Such activities are important as they reduce disaster risk exposure, and assist in lowering insurance costs by reducing the underlying structural risk of physical assets.

• Self-insuranceinvolves the attainment of economy-wide insurance through the intertemporal transfer of national resources. A typical example might involve creating a precautionary saving fund (based on actuarial probabilities) to draw down upon in the event of a disaster. For many developing countries, the first response involves the diversion of development expenditure to disaster relief and reconstruction; other forms of self-insurance involve borrowing and tapping remittance flows.

• Risk transferinvolves the transfer of resources across states of nature. There are several types of risk transfer mechanisms: external assistance, through sovereign debt relief and official development assistance; market insurance and reinsurance, which can provide coverage for public and private assets beyond the capacity of self-insurance; insurance risk pooling, whereby geographical or cross-industry pooling lowers the high cost of disaster risk insurance; capital-market based risk transfer instruments, such as catastrophe bonds or options, or weather-related derivatives; contingent lines of credit, which typically are available to insurers and banks on the basis of an annual commitment fee; and changes in the structure of public borrowing to promote risk-sharing between debtors and creditors.

The mix of financing options for post-disaster expenditure can usefully be arrayed as a graduated response to increasing levels of natural disaster risk.

First, proper vulnerability assessments and actions to mitigate disaster risk and enhance post-disaster response are key to reducing immediate catastrophe risk.

Second, lower level risk layers could be covered by the establishment of ex ante funding approaches, including the creation of taxpayer-funded national disaster contingency funds, emigration and remittance flows, and traditional insurance mechanisms for key public assets. While self-insurance will not provide the full cost of disaster reconstruction, it is important that sufficient funds be available to meet the immediate costs of a disaster.

Third, for higher risk layers, greater recourse could be made to risk transfer mechanisms such as regional insurance pools for catastrophe insurance of public and private assets. Where insurance markets are underdeveloped (as in the Caribbean), this may involve spreading risk through the establishment of a regional catastrophe insurance pool, potentially supported by reinsurance and catastrophe bonds, and require mandatory insurance policies and stringent risk mitigation initiatives.

Fourth, for extremely high risk layers, provision could be made for access to contingent lines of credit.

Fifth, funding of post-disaster expenditures would remain important. Funding would include the continuing provision by IFIs and bilateral donors of concessional loans and grants designed to finance post-disaster mitigation and reconstruction costs, focusing on disaster relief and the rehabilitation of low-income households. Such funds should be made at least partly contingent on the undertaking of ex ante risk mitigation activities, so as not to encourage excessive moral hazard.

Appendix I: CARTAC: Capacity Building in the Eccu

The Caribbean Regional Technical Assistance Center (CARTAC) was established in November 2001 as a regional resource, based in Barbados, to provide technical assistance and training to 20 Caribbean countries in core areas of economic and financial management. It is a multi-donor project with the IMF as executing agency.1 An active Steering Committee consisting of representatives from participating countries, donor agencies, CARICOM, and the CDB provides strategic guidance and ensures ownership and commitment.

The ECCU countries have been among the most active participating countries in requesting technical assistance and training in all of CARTAC’s core areas. In the little more than three years since it began, CARTAC has fielded more than 200 missions to the ECCU countries, in addition to numerous regional seminars and workshops. This level of technical assistance support has represented a significant additionality to the Fund’s technical assistance to the ECCU region. Some examples and highlights of CARTAC’s technical assistance to the ECCU countries in the various core areas are provided below.

Tax policy and administration. CARTAC and FAD conducted a comprehensive review of the OECS tax systems and administrations. Some countries have started to implement the recommendations of the review. Antigua and Barbuda, Dominica, and Grenada have begun work to introduce a VAT, St. Vincent and the Grenadines will begin soon, and others are expected to follow. Training has been provided in customs valuation to three OECS countries in coordination with CCLEC and support from the Canadian and U.S. Customs agencies. CARTAC has assisted the ECCB in the estimation of VAT and excise tax revenue yields for Anguilla, Antigua and Barbuda, Grenada, St. Kitts and Nevis, and St. Lucia. CARTAC has also: helped establish an Inland Revenue Department in Anguilla; provided training in audit techniques to Antigua and Barbuda, Dominica, and St. Kitts and Nevis; aided the streamlining of procedures for collection of arrears in Dominica; trained customs officers in UNIX and ASYCUDA in Dominica, Grenada, St. Kitts and Nevis, and St. Vincent and the Grenadines; and provided training and other assistance to prepare for the establishment of a revenue authority in St. Lucia. More recently, CARTAC has assisted Antigua and Barbuda with the reintroduction of a personal income tax.

Public finance management. CARTAC and the ECCB assisted all ECCU countries in diagnostic exercises as part of the Fiscal Machinery Project to develop action plans to address public expenditure management weaknesses. Following up on these diagnostic assessments, CARTAC has focused on improving cash management and budgeting procedures in the ECCU countries with both seminars and short-term missions. In order to support a coordinated regional approach to public finance reform, CARTAC has assisted with the establishment of the Caribbean Public Finance Management Association (CaPFA), in which the ECCU countries have been active. At the individual country level, CARTAC has provided, or is in the process of providing assistance with cash management (Antigua and Barbuda, Dominica, St. Kitts and Nevis, and St. Lucia), budget development (Dominica and St. Lucia), public sector investment (Antigua and Barbuda and St. Kitts and Nevis) and accounting systems (Dominica and St. Lucia).

Stabilization and Adjustment Technical Assistance Program (SATAP). Not foreseen when CARTAC first began, SATAP was set up in response to a request from the ECCB, following a meeting of their Monetary Council, in which they agreed that all member countries would seek to implement “home grown” adjustment programs to achieve a set of common targets by 2007. CARTAC consultants have worked with small teams set up in the six independent ECCU countries to prepare macroeconomic projections under a baseline scenario, identify imbalances and measures to address these imbalances, prepare projections for an active scenario, and finally to develop a monitoring framework for the financial program based on quarterly targets for key indicators. Work is at various stages of progress in the six countries, with active scenarios completed for all countries except Antigua and Barbuda. CARTAC is currently supporting (with special assistance from DFID) the setting up of a Coordinating and Monitoring Unit within the ECCB to work with the country teams in tracking and monitoring the adjustment programs.

Financial sector supervision. CARTAC has provided technical assistance to the ECCU in two main areas—the strengthening of the supervisory infrastructure and capacity building of supervisory staff. To improve the efficiency and effectiveness of financial sector supervision in the ECCU, CARTAC has assisted in the preparatory work to establish single supervisory units (covering the banking and nonbanking financial sectors), sponsored feasibility studies in four countries and drafted legislation in two of these countries. Strengthening the legislative framework has been addressed in the individual countries and at the ECCB. International Banking Acts, an Insurance Act, capital adequacy regulation, guidelines on the management of risk, money transmitters legislation, and other prudential guidelines are being developed with CARTAC assistance in the ECCU. Assistance has also been provided in the development of standardized on-site inspection procedures and off-site monitoring and supervision. Regarding training of supervisory staff, CARTAC has provided seminars, workshops, conferences, and regional and international attachments. For example, corporate governance seminars have been held for industry representatives in four ECCU countries. The Financial Sector Advisors have provided on-the-job training and guidance during the conduct of on-site inspections at offshore banks in St. Vincent and the Grenadines and at credit unions in Dominica. On-site assistance to insurance inspectors in St. Lucia is planned.

Economic and financial statistics. The project has focused on four areas. To improve national accounts, CARTAC has assisted ECCU countries in the development of supply and use tables to identify data gaps and to help rebase the national accounts. In balance of payments statistics, CARTAC is working with the ECCU countries particularly to address gaps in financial flows and the coverage of services, and more generally to bring the data collection systems up to international standards. Assistance in price statistics was provided to incorporate the results of a household budget survey completed in 1999. The development of import/export price indices has begun with a pilot project in St. Lucia, and expansion to Dominica and St. Vincent and the Grenadines has already begun.

Appendix II: Caribbean Development BAnk: Overview of Activities in the Oecs

The Caribbean Development Bank (CDB) has as one of its core mandates the mobilization of resources to finance projects and programs that contribute to the development of its 17 borrowing member countries. In this regard, the CDB has played an important role in the development of the eight countries in the OECS sub-region. Over the period 1970–2003, CDB approved US$2.4 billion to its borrowing member countries, with the OECS as a whole accounting for approximately 37 percent. To date, most of CDB’s interventions in the OECS have been directed towards infrastructural development, and is in part directly related to the incidence of natural disasters in the region, and the need to ensure adequate infrastructural support for investments in tourism and other productive sectors. Resources approved for physical and social infrastructure have, on average, accounted for 56 percent of overall lending to the sub-region, and focused mainly on upgrading transportation and communication, educational services, power and energy, and housing. Interventions in directly productive sectors account for 26 percent of total activity, and have focused largely on manufacturing and agriculture—the two sectors most severely impacted by developments in the external environment. Multi-sectoral interventions, which may take the form of inter alia institutional strengthening of government departments, feasibility studies, and the assessment and implementation of transactions-based taxes, have also been an important element of the CDB’s activities in the OECS, representing 18 percent of total interventions to the OECS.

Over the period 1970–2004, St. Lucia has been the largest recipient of CDB activity in the OECS, accounting for 25½ percent of approvals to the OECS. Of total approvals, US$195 million has been disbursed. Most of the projects currently ongoing in St. Lucia are in the areas of physical and social infrastructure development, with interventions to improve the water supply, road rehabilitation, natural disaster mitigation and solid waste management, which forms part of a wider OECS solid waste management programme. Within the productive sectors, CDB has been involved mainly in tourism and stimulating the recovery of banana production.

The CDB has also played an extremely critical role in assisting Dominica to pursue its development objectives. During the period 1970–2004, US$163 million has been approved, representing 17 percent of resources to the sub-region. Disbursements totalled US$141 million. Projects underway in Dominica are in the areas of education sector enhancement, natural disaster management, waste management and the upgrading of ecotourism sites. In addition to the CDB’s usual capital project-related interventions, the Bank has actively assisted Dominica in its economic reconstruction effort through the provision of stabilization/structural adjustment loans.

Approvals to St. Vincent and the Grenadines amounted to US$167 million over the period 1970 to 2003, accounting for 17½ percent of CDB’s approvals to the OECS, while disbursements totalled US$106 million. The main areas of CDB ongoing involvement are in road rehabilitation, basic education, solid waste management, and natural disaster management.

St. Kitts and Nevis has been another significant beneficiary of CDB’s activities since 1970, with US$109 million disbursed from US$149 million approved (15½ percent of OECS resources). Ongoing activities in St. Kitts and Nevis are mainly in the areas of disaster rehabilitation and natural disaster management, with some emphasis on improving the provision of education services and enhancing the waste management function.

Resources approved to Grenada account for 15½ percent or US$146 million of all approvals to the sub-region with disbursements to date amounting to US$111 million. The development of physical infrastructure has been the main focus of ongoing activities in this island, with significant emphasis being placed on bridge and road improvement, the rehabilitation of schools, waste management improvement, and natural disaster management.

Activity in Antigua and Barbuda has been small by comparison, with approvals to this island accounting for only 4½ percent or US$41 million of total approvals, with US$30 million disbursed. Education sector enhancement has been the main focus of recent interventions, along with security improvements to the air and sea ports.

Activity in Anguilla is also relatively small, representing 2½ percent or US$23 million of total approvals since 1970, while US$22½ million was disbursed. Ongoing projects in Anguilla are predominantly in natural disaster management.

Approvals to Montserrat have also been minimal amounting to US$16 million or 1½ percent of total approvals to the sub-region over 1970–2004, of which US$13½ million was disbursed. Education sector enhancement is the main intervention ongoing in Montserrat.

CDB Operations in the OECS(In millions of U.S. dollars)
Antigua and Barbuda40.730.00.05.6
St. Kitts and Nevis148.9108.86.47.0
St. Lucia242.4194.95.529.4
St. Vincent and the166.7105.536.24.6
OECS Sub-region947.3727.572.679.1
Appendix III: OECS: Relations with the World Bank Group

(As of May 31, 2005)

World Bank Group Strategy

The World Bank’s program focuses on structural reforms aimed at raising international competitiveness and helping to manage volatility at the macroeconomic and household levels. The Bank will also take the lead on public sector reforms with a particular focus on the efficiency of public spending, social expenditures (including safety nets), disaster mitigation, and environmental management. The Bank and the Fund work jointly on issues concerning the financial sector, both domestic and offshore.

The World Bank’s management presented to its Board an Eastern Caribbean Sub-Region Country Assistance Strategy (CAS), on June 28, 2001. The CAS, which covers FY 2002–06, proposed new commitments of around US$107 million for the five borrowing member states of the OECS—Dominica, Grenada, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines. The main goals of the strategy are to build human and institutional capacity to meet the challenging economic and social environment facing these small states. Most new projects are being provided under a sub-regional umbrella mechanism, and in close collaboration with sub-regional organizations and external partners. During the first four years of the CAS, a total of US$113.3 million was committed. The nonprogrammed projects include five post-September 11 emergency projects. The World Bank is currently preparing a new Country Assistance Strategy (CAS) for the Eastern Caribbean (OECS) sub-region including Dominica. This CAS will cover FY 2006–09.

Increasing international competitiveness. In addition to stabilizing macroeconomic conditions and redressing high fiscal deficits and public debt levels, the OECS countries are focusing on (i) improving the investment climate by broadening the tax base, streamlining the investment incentive regime and making it more transparent; (ii) improving public sector performance, by raising the efficiency of public investment and improving service delivery; (iii) reducing transaction costs, by strengthening regulation and efficiency of public utilities, and sea/air transport; and (iv) promoting appropriate education and skills development to take advantage of new opportunities in the global environment. The OECS authorities also are targeting to expand their positive experiences with sub-regional functional cooperation (e.g., common central bank, telecommunications regulation, pharmaceutical procurement) to other areas as a way of better allocating the region’s scarce human and financial resources.

The Bank is supporting these efforts through a comprehensive series of analytical studies related to fiscal and debt sustainability, growth and competitiveness, the financial sector, public sector management and social protection and a number of ongoing projects. The OECS Telecom Reform project, a pilot St. Lucia Water Sector Reform Project, and technical assistance in the power and energy sectors are expected to serve as a basis for future work on Regulatory Reform for other utilities. A new Education Development program is addressing secondary education outcomes and a proposed Caribbean Knowledge and Learning Network, which aims to strengthen the provision of tertiary education, in part through improvements in sub-regional collaboration and connectivity will be followed by Bank support for a Public Sector Reform program.

Managing volatility. Recent analytical work on macroeconomic vulnerabilities has shown that the frequent natural disasters in the OECS are a major cause of income insecurity and high poverty rates in the sub-region, as households cycle in and out of poverty in tandem with these events.

Disaster Management. Despite the regularity of natural disasters, the authorities in the OECS have generally pursued reactive policy responses rather than mitigation measures. Given declining aid flows and limited institutional capacity, the countries need to move to proactive responses with greater cooperation between governments, donors and civil society at both the national and the sub-regional levels. The Bank is working to strengthen mitigation and response planning through the OECS Disaster Management Programs I and II. In addition, the Bank is undertaking a feasibility study of catastrophe risk insurance for the Caribbean.

Safety Nets. Despite relatively high per capita incomes, unemployment (estimated between 5–20 percent) and poverty levels (ranging 12–38 percent) are quite high in the OECS. However, current safety nets suffer from a plethora of uncoordinated programs, which lack appropriate targeting mechanisms and adequate coverage. These will need to be improved to address the impact of eroding trade preferences on the rural sector, emerging problems with youth-at-risk, an aging population, continued vulnerability to external shocks, and new vulnerabilities arising from the HIV/AIDS epidemic. Improvements to the efficiency and targeting of social safety nets were examined under the public expenditure reviews. The Bank has provided financial support for a Poverty Reduction Fund in St. Lucia, which has piloted community procurement, a Social Protection Review for Dominica, and an IDF grant to strengthen poverty measurement in the OECS. A Caribbean Regional HIV/AIDS program, including Barbados, was approved in June 2001, which includes projects for Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.

Bank-Fund Collaboration in Specific Areas

Fiscal management. The Bank is helping to improve the management of public spending in the OECS, through the dissemination of the recently completed Public Expenditure Reviews for individual member states; a Financial Accountability Assessment and Procurement Assessment Report; and additional country specific work on the Dominica Public Sector Investment Program. The regional products will be critical inputs into the ongoing Public Sector Reform.

Dominica. The Bank has recently disbursed a US$3.1 million IDA adjustment credit in support of Dominica’s program of economic recovery. The main focus of this operation was improvements in public expenditure and financial management, financial sector reforms, and actions aimed at improving the climate for private investment.

1See “Macroeconomic Fluctuations in the Eastern Caribbean Currency Union” by P. Cashin and P. Wang, Chapter I in Eastern Caribbean Currency Union—Selected Issues.
2See “Islands of Stability? Determinants of Macroeconomic Volatility in the ECCU” by T. Rasmussen and G. Tolosa, Chapter II in Eastern Caribbean Currency Union—Selected Issues.
3The free rider problem is discussed in “Fiscal Policy in a Regional Currency Union” by R. Duttagupta and G. Tolosa, Chapter IV in Eastern Caribbean Currency Union—Selected Issues.
4The paper “Stabilization, Debt, and Fiscal Policy in the Caribbean,” presented by staff at the conference was widely covered by the media and its key messages cited in budget speeches and parliamentary debates. This paper was subsequently issued as an IMF Working Paper (WP/05/26).
5The approved 2005/06 budget in St. Lucia foresees a primary deficit of 8.8 percent of GDP, a deterioration of 7.5 percent of GDP relative to the projected outcome for 2004/05. The loosening in the fiscal position is driven by a doubling of public sector investment to 16 percent of GDP as well as an across-the-board reduction in tax receipts and increases in current expenditures.
6Progress on approving the draft amendments to the Uniform Banking Act has varied: they have been gazetted in St. Kitts and Nevis and the first reading has taken place in the Parliament in Antigua and Barbuda. In Grenada and Dominica, the first reading is expected to take place soon. Little progress has been made in the remaining two countries. The FSSA for the ECCU region is available at:
7At end-May 2005, debt securities valued at US$134 million (4 percent of 2004 regional GDP) were listed on the RGSM, of which half were issued by St. Lucia.
8A few months prior to the announcement of the closure of the sugar industry, the authorities had organized a conference, widely attended by the private sector, trade unions, and the media, on the future of the industry. Fund staff presented a macroeconomic analysis of the industry, quantifying the losses, examining the impact on the fiscal and debt positions, and highlighting the opportunities foregone of sustaining the sector.
9The staff has been collaborating closely with the World Bank in elaborating the reform agenda, as well as with CARTAC, which continues to provide extensive technical assistance in implementing key reforms.
10For the first time, a joint press conference at the conclusion of the ECCU regional discussions was held at the ECCB and was livecast simultaneously to the press in all eight ECCU member jurisdictions (including Anguilla and Montserrat, the two non-Fund member territories of the United Kingdom). In addition, drafts of Selected Issues papers prepared in the context of the ECCU regional discussions were presented in every country and were actively discussed by the authorities and the wider public in some countries.
11The customer-based real effective exchange rate index is a weighted average of CPI in a common currency, with the weights being the country-specific share of tourists arriving from each ECCU country’s three largest country sources (in most cases, the United States, the United Kingdom, and Canada). The competitor-based real effective exchange rate index is a weighted average of CPI in a common currency, with the weights being the share of tourist arrivals to the specific competitor country (for example, the Dominican Republic). The derivation of these series is described in P. Cashin, P. Njoroge and P. Rodriguez (2004), “Competitiveness in the ECCU: Measures of the Real Exchange Rate,” Eastern Caribbean Currency Union—Selected Issues, IMF Country Report No. 04/335.
12See World Bank (2005), Towards A New Agenda for Growth: Organization of the Eastern Caribbean States.
13In Dominica, the Cabinet has decided to publish tax concesssions granted from July 2005 onwards.
14Towards A New Agenda for Growth: Organization of the Eastern Caribbean States, The World Bank (2005).
15See “Emigration and Brain-Drain: Evidence from the Caribbean” by P. Mishra, Chapter VI in Eastern Caribbean Currency Union—Selected Issues.
16Some authorities noted that emigration in certain categories (teachers and nurses) was particularly high because of active recruitment efforts by some industrial country agencies.
17The current status of regional integration initiatives, and labor and product market rigidities, are discussed in “Integration and Growth in the Eastern Caribbean” by M. Mlachila and W. Samuel, Chapter VII in Eastern Caribbean Currency Union—Selected Issues.
18For example, the so-called less developed countries in CARICOM, including those of the OECS, are allowed to impose licensing requirements and/or tariffs on products such as beer and flour.
19The infrequent issuance of securities by most countries and the lack of secondary market trading prevents the analysis of individual country risk premia.
20Professor William Gray, Colorado State University, USA.
21The annex is based on “Government Responses to Natural Disasters in the Caribbean” by P. Cashin and P. Dyczewski, Chapter III in Eastern Caribbean Currency Union—Selected Issues.
22The ECCB organized at end-April 2005 a seminar on debt management including both public and private sector participants from throughout the region that produced draft guidelines for debt management. A follow-up seminar on technical aspects of debt management is to be hosted by CARTAC later this year.
1This annex is based on “Government Responses to Natural Disasters in the Caribbean” by P. Cashin and P. Dyczewski, Chapter III in Eastern Caribbean Currency Union—Selected Issues.
1CIDA and DFID provide over 50 percent of CARTAC’s total funding, with EU, IDB, Ireland, IMF, UNDP, U.S., the World Bank, and the CARTAC member countries contributing the remainder.

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