Press Release No. 24/128

IMF Executive Board Concludes 2024 Article IV Consultation on Common Policies of Member Countries of the Eastern Caribbean Currency Union

April 25, 2024

Washington, DC: On April 12, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with member countries on common policies of the Eastern Caribbean Currency Union. The Board considered and endorsed the staff appraisal without a meeting.

The economies of the Eastern Caribbean Currency Union (ECCU) have registered a strong recovery after successive external shocks—first, the pandemic and later higher commodity prices after Russia’s invasion of Ukraine. Led by a rebound in tourism and investment by public and private sectors, the region’s real GDP is estimated to have grown by 4.8 percent in 2023, and output has surpassed its pre-pandemic levels. Inflation has moderated to around 4 percent in 2023 from its recent commodity price driven peak. Fiscal and external balances have improved, but public debt and current account deficits remain high. The financial system has been stable and liquid, although continues to be confronted by asset quality weaknesses and rising risks in the non-bank financial sector.

Longstanding structural challenges affecting private investment and employment create a drag on growth going forward as the ECCU economies approach full export and production capacity. Economic growth is projected to moderate to 4.8 percent in 2024 and decelerate further toward pre-pandemic averages over the medium-term. Inflation is projected to moderate gradually in line with international trends and stabilize at around 2 percent in 2026. The high current account deficits are similarly projected to gradually narrow to pre-pandemic levels as pressures from import-intensive capital investment abate and countries with slower tourism recovery catch up with their peers.

The region’s outlook is heavily dependent on uncertain Citizenship-by-Investment (CBI) inflows, and susceptible to volatility in commodity prices, a slowdown in major tourism source countries, and the recurrent threat of natural disasters.

Executive Board Assessment^[2]

The ECCU has experienced a strong recovery from successive pandemic and commodity price shocks, but capacity constraints and elevated risks increasingly weigh on the outlook. Tourism rebound and investment have lifted real GDP above pre-pandemic levels, and inflation has moderated with easing of commodity price pressures. The more benign economic environment has supported an improvement in external and fiscal balances, although public debt remains high in many ECCU members and the ECCU’s overall external position weaker than the level implied by fundamentals and desirable policies. As tourism performance nears full capacity amidst continued post-pandemic restoration of public and private balance sheets, GDP growth is projected to moderate toward pre-pandemic averages over the medium term. The region’s growth and fiscal outlooks are heavily dependent on uncertain CBI inflows which remain under close international scrutiny. Other key risks include the high susceptibility to commodity price volatility, slowdown in major tourism source countries, rising vulnerabilities in the ECCU non-bank financial system, and the recurrent threat of natural disasters.

Policies should focus on addressing structural constraints to sustainable, inclusive, and resilient growth and reduce fiscal and external imbalances to support continued robustness of the quasi-currency board. Priorities include preserving macro-financial stability and fiscal space for growth-enhancing physical and social investment, strengthening financial sector balance sheets and oversight, fostering local private sector development and investment, and improving the labor market.

Continued rebuilding of fiscal buffers while ensuring space for growth-supporting investment remains critical for the currency union’s macroeconomic stability and shock-resilience. Balancing these competing objectives can be supported by the continued withdrawal of the temporary measures that responded to the cost-of-living crisis and the adoption of fuel price pass-through frameworks, while strengthening the targeting and coverage of transfers to the most vulnerable. Reviving a regional initiative to streamline tax exemptions under common benchmarks would help lift fiscal revenue. Pooling of regional resources and expertise can help reduce impediments and costs to access international climate finance. Maintaining recent pension reform momentum would address the large longer-term contingent fiscal liabilities and improve the pension systems’ fairness and equity.

ECCU-wide adoption of national FRFs would help underpin a consistent decline in public debt and enhance credibility of the regional public debt ceiling. Guiding operational rules should be tailored to each member country, with calibration and escape clauses ensuring a fiscal cushion to respond to shocks. Operationalizing regular ECCB Monetary Council peer reviews of member efforts toward the regional debt target would support union-wide fiscal discipline and accountability. Parallel reforms to strengthen fiscal institutions are essential for the FRFs’ effective implementation.

Deepening regional cooperation on CBI programs would help safeguard this important source of revenue. Building on the already established principles, cooperation would benefit from common due diligence, transparency, and disclosure standards. A regional CBI framework could also include minimum pricing benchmarks to mitigate revenue-erosive competition. Common principles on CBI revenue allocation would contain undue fiscal reliance on the programs, support rebuilding of fiscal buffers, and help ensure space for growth-enhancing investment and social protection.

Persistent vulnerabilities require efforts to strengthen financial sector balance sheets and oversight. While the financial system remains stable and highly liquid, addressing underlying asset quality vulnerabilities calls for continued enforcement of bank provisioning regulations, adoption of similar standards for credit unions, and reforms to facilitate disposal of impaired assets. Rising risks in the NBFI sector demands stepped up oversight, with immediate priority to ensure all national supervisors have adequate powers, staffing and data to undertake corrective actions where necessary. The planned introduction of common minimum regulatory standards under the RSSB needs to be pursued expeditiously to mitigate rising arbitrage risks in the current segmented regulatory space. Eventual centralization of NBFI oversight under a model that leverages national supervisors’ local presence should be the ultimate goal to safeguard the region’s financial stability.

Rising private sector insurance affordability challenges necessitate early preparation for potential future mitigating actions. The evolving assessment of climate risks by global reinsurers may imply sustained pressures on property insurance premia with spillovers to financial system credit and asset quality. The risks to economic activity and indirect transmission of natural disasters underscore a need to step up insurance sector data collection, regional supervisory cooperation, and assessment of insurance-banking interlinkages to support monitoring and management of system-wide risks. This would also facilitate assessment of fiscal contingent liability risks from widespread private sector underinsurance.

Greater coordination can support ongoing efforts to foster private investment, credit, and local enterprise development. The credit reporting bureau, the partial credit guarantee program, and development of movable collateral frameworks are important advances to revive private sector credit. These would benefit from coordinated complementary programs to support small businesses’ ability to meet financing requirements and reforms to strengthen insolvency frameworks, creditor rights, and regional capital market development.

Strengthening supervisory resources would support the continued advancement of the financial system reform agenda. The rollout of the Basel II/III prudential standards, the formalization of ECCB’s system-wide oversight authority, and the ongoing strengthening of AML/CFT frameworks are important advances toward further modernizing regulations and supervisory processes. It is important for regional and national supervisory capacity to keep pace with growing demands and NBFIs’ increasing systemic importance. The introduction of a regional bank deposit insurance system should be aligned with parallel progress in reducing legacy bank vulnerabilities. Its extension to credit unions should be considered only under a more unified oversight framework for all deposit taking institutions.

Labor markets in the ECCU have been recovering in tandem with the post-pandemic economic rebound, but longstanding bottlenecks constrain labor supply and growth potential. Labor market institutions should achieve an effective balance between efficiency and equity objectives and a recalibration may be warranted, particularly as unemployment insurance schemes are introduced into benefit frameworks. Reforms in this context should be supported by targeted active labor market policies to help reduce informality, decrease skills and competency mismatches, raise participation rates, and ease gender and youth gaps in labor outcomes.

Concerted region-wide efforts to strengthen data collection, processing, and transparency are essential to help improve the calibration of economic policies. Data compiled and disseminated by the ECCB are broadly adequate for surveillance of common policies. However, addressing current data gaps in core economic sectors and improving transparency would support the design, effective regional coordination and public accountability over economic policies. Strengthening resources at national statistics offices would improve accuracy, timeliness, and frequency of key economic data.

The discussion with the ECCU authorities will be on the 12-month cycle in accordance with Decision No. 13655-(06/1), as amended.

[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of these bilateral Article IV consultation discussions, staff hold separate annual discussions with the regional institutions responsible for common policies in four currency unions—the Euro Area, the Eastern Caribbean Currency Union, the Central African Economic and Monetary Union, and the West African Economic and Monetary Union. For each of the currency unions, staff teams visit the regional institutions responsible for common policies in the currency union, collects economic and financial information, and discusses with officials the currency union’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis of discussion by the Executive Board. Both staff’s discussions with the regional institutions and the Board discussion of the annual staff report will be considered an integral part of the Article IV consultation with each member.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.