WASHINGTON, CMC—The International Monetary Fund (IMF) said Wednesday that the Eastern Caribbean Currency Union (ECCU) has been providing a strong anchor for macroeconomic stability in a shock-prone region. This was demonstrated most recently by Hurricane Beryl, which devastated Grenada, St. Vincent, and the Grenadines.
The ECCU comprises Antigua and Barbuda, Dominica, Grenada, St. Kitts-Nevis, St. Lucia, St. Vincent and the Grenadines, Montserrat and Anguilla.
A statement issued following an IMF staff mission on “Common Policies for Member Countries” noted that the recovery from successive external shocks has been strong, driven by a rebound in tourism. ECCU economies are expected to converge to modest pre-pandemic average growth rates over the medium term.
“To effectively manage downside risks while supporting long-term inclusive growth and the continued robustness of the quasi-currency board, policies should address supply-side bottlenecks, build resilient fiscal frameworks to support fiscal sustainability, and continue to enhance financial system resilience and intermediation.”
The IMF said leveraging regional data collection and processing synergies could help strengthen data provision and evidence-based policymaking.
The ECCU has achieved a strong rebound from successive adverse shocks. A strong tourism season and continued infrastructure investments supported robust growth in 2024.
The Washington-based financial institution said inflation has moderated with global trends from a more than nine percent post-pandemic peak to less than two percent.
“Nevertheless, public debt remains high and generally well above the regional 2035 debt ceiling of 60 percent of gross domestic product (GDP). Meanwhile, Citizenship-by-Investment (CBI) revenues have shown signs of slowing amidst heightened international scrutiny and regulatory tightening.”
Under the CBI, some countries, namely Antigua and Barbuda, Dominica, Grenada, St. Kitts-Nevis, and St. Lucia, give citizenship to foreign investors in return for making a substantial investment in the socio-economic development of these countries.
The IMF said the financial system remains stable, partly due to a prolonged period of cautious bank lending. It said despite persistently elevated current account deficits, the Eastern Caribbean Central Bank’s (ECCB) reserve position has remained stable, and the currency backing ratio is high, supporting confidence in the currency union.
GDP growth is said to moderate going forward, and risks remain mainly on the downside.
“As most parts of the region approach full tourism capacity, average growth in the region is expected to slow from 6.5 percent in 2021-24 to around 2.5 percent in the medium term amid weak productivity growth and investment, a shrinking labor force, and reduced fiscal space.
“Moreover, given the region’s long-standing vulnerabilities of high dependence on energy imports, exposure to natural disasters (NDs), persistently high public debt, and some economies’ heavy reliance on uncertain CBI revenues, the outlook is subject to significant downside risks.”
The IMF said that the ECCU economies have exhibited a trend slowdown in growth due to structural factors.
It said supporting strong, resilient, and inclusive growth is key to reducing fiscal and external imbalances and raising living standards.
“An updated growth accounting analysis finds that potential growth has dropped in recent decades, reflecting declines across all growth components, notably total factor productivity (TFP). These trends reflect a series of persistent structural impediments to economic efficiency, such as impediments to credit growth, burdensome administrative and licensing processes, and labor force skills gaps and mismatches.
“Recurring NDs also impair productive infrastructure and hinder human capital formation, limiting TFP growth. Against this backdrop, the regional “Big Push” effort that calls for a doubling of ECCU GDP in the coming decade is a welcome aspirational initiative, both in sensitizing the membership to key growth impediments and in helping to build a regional consensus on a roadmap for reform.”
The IMF recommended a multipronged and coordinated set of policies that build on ongoing efforts to alleviate major structural impediments to growth. Improving labor market outcomes requires a renewed effort to attune human capital to economic needs and development priorities.
It said this involves expanding vocational training and modernizing education systems, supplemented by policies to alleviate youth and gender employment gaps, such as active labor market policies and greater access to child and elderly care.
“Coordinated regional efforts to accelerate the green energy transition (GET), safeguard and optimize the CBI funding model, and strengthen capital stock disaster preparedness could support enhanced efficient and resilient capital investment.
“Regional mechanisms such as the ECCB’s Renewable Energy Infrastructure Investment Facility (REIIF) hold the potential to scale up countries’ access to finance that can be usefully supported through regional frameworks to pool procurement and harmonize modern regulatory standards.”
The IMF said that last year’s regional agreement to buttress the integrity of CBI regimes through enhanced regulatory, information exchange, and pricing frameworks is a welcome step to safeguard critical investment inflows.
It said the planned regional CBI regulator provides an opportunity to address gaps in institutional reporting and strengthen accountability frameworks to ensure the productive allocation of all CBI inflows.
“Fallout from Hurricane Beryl highlights a potential role for common building standards across the region and the importance of prioritizing resilient infrastructure investment. Finally, policies to enhance the business environment—such as by digitalizing key services, streamlining cumbersome licensing and administrative processes, and improving financial intermediation—are essential to boost productivity and growth potential.”
The IMF said that rebuilding fiscal buffers, reducing public debt levels consistent with the regional debt anchor, and improving budgetary resilience to shocks remain regional priorities.
It said fiscal resilience is essential for macro stability and continuing to protect the quasi-currency board.
“The region’s high vulnerability to recurring NDs and periodic procyclical fiscal policies are key drivers of the ECCU’s ongoing fiscal sustainability challenges. With 2035 only a decade away, sizable efforts are needed in some countries to achieve the regional debt target. Fiscal space is also needed to guard against risks and finance social spending and growth- and resilience-enhancing investment.”
The IMF said this calls for a region-wide establishment of robust national fiscal resilience strategies and frameworks.
“Strong national medium-term fiscal frameworks (MTFFs) that incorporate well-designed country-specific fiscal rules, supported by specific fiscal measures and plans and strong fiscal institutions, will help instill prudence and create policy space.
“While many ECCU members have continued to upgrade their MTFFs, there is a need to enhance effective operational frameworks and underpinning fiscal policy and contingency plans that link fiscal operations with longer-term objectives.
“In addition, comprehensive ex-ante resilience strategies to enable resilient investment and adequate insurance against NDs would support debt sustainability and resilient growth.”
The IMF said integrating green budget tagging and a pipeline of projects into MTFFs will help anchor sustainable multi-year climate-resilient investment plans and unlock global concessional financing.
It said expediting efforts to adopt a disaster risk financing strategy with self-insurance, contingent debt financing plans, and risk transfer arrangements will support liquidity for relief and reconstruction while safeguarding public finances.
“The relevant authorities should also consider frameworks with clear provisions for using CBI revenue to avoid budget overreliance on these revenues given their potential volatility and to complement efforts with buffer and resilience building.”
The Washington-based financial institution said that regional coordination and oversight of these efforts would help reinforce fiscal discipline and the credibility of the regional debt ceiling.
It said to ensure the success of regional fiscal policy coordination, a strong governance framework to provide independent macroeconomic and budgetary projections and transparently assess fiscal plans, the implementation of fiscal rules, and fiscal sustainability would be beneficial.
“These efforts could be supported by national and/or regional independent fiscal oversight entities. International experience suggests that these entities have played an increasingly significant role in strengthening fiscal frameworks. A helpful first step could be operationalizing regular ECCB Monetary Council peer reviews of members’ fiscal strategies and progress toward the regional debt target.”
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