CARIBBEAN-FINANCE-Monetary conditions in Eastern Caribbean remain “accommodative.”

BASSETERRE, St. Kitts, The Monetary Council of the Eastern Caribbean Central Bank (ECCB) has been told that monetary conditions in the sub-region remain accommodative and that monetary and credit conditions improved despite the weakness in the global macro economy during the first half of 2022.

The situation was outlined in Governor’s Report on Monetary, Credit, and Financial Conditions in the Eastern Caribbean Currency Union (ECCU) for the period January to September 2022 that had been submitted to the Council during its meeting over the last weekend.

A statement issued by the ECCB said that the virtual conference received the report that focused on the ongoing economic recovery both globally and within the ECCU, as well as on the impact that the increased uncertainty in the global environment is having on this recovery.

According to the ECCB, while the report indicated that the International Monetary Fund (IMF) had revised the forecast for global growth downwards to 3.2 percent, “inflation is weighing heavily on the economic outlook, as lower disposable incomes reduce aggregate demand, thereby negatively impacting economic activity.

“At the ECCU level, economic activity continues to recover tepidly. Inflation continues to rise and broaden in the ECCU, reflecting widespread cost pressures. While global inflationary pressures are expected to ease by the end of 2022 …the overall price level is expected to be substantially higher than it was pre-COVID pandemic.”

The ECCU groups the islands of Antigua and Barbuda, Anguilla, Dominica, Grenada, St. Kitts- Nevis, St. Lucia, St. Vincent, and the Grenadines and Montserrat.

“The ECCU’s stock of international reserves continues to provide stable support to the exchange rate regime. The region’s stock of international reserves expanded to a level 11.8 percent higher than pre-pandemic levels (February 2020), helping to maintain the stability of the financial and external sectors. The current backing is 90 percent. To put this in context, the statutory requirement is sixty (60.0) percent. “said the ECCB, which serves as a Central Bank for the ECCU member countries.

The statement issued following the meeting said that having considered the state of monetary, financial, and credit conditions in the ECCU, the Monetary Council decided to: maintain the minimum savings deposit rate at two percent and maintain the Central Bank’s discount rate at two percent for short-term credit and 3.5 percent for long-term credit.

It said the Minimum Savings Rate (MSR) is the lowest rate that commercial banks can offer on savings deposits. The Central Bank’s Discount Rate is the rate at which the ECCB lends to governments and commercial banks.

The Monetary Council was also informed that the banking sector has remained stable and resilient in the face of economic headwinds. Moreover, financial stability is expected to be maintained for the remainder of 2022.

The banking system maintained its high degree of liquidity, and capital buffers remained at robust levels.

“Council was apprised that activity on the Regional Government Securities Market (RGSM) continues to improve. This is a welcome sign as the market continues to recover from the effects of the COVID-19 pandemic. The RGSM currently utilizes the platform of the Eastern Caribbean Securities Exchange (ECSE) to issue Treasury bills and bonds. The Regional Government Securities Market began operating in November 2002.”

The meeting was also informed that the number and amount of moratoria loans have continued to trend downward.

“At present, these loans are less than 1 percent of the total loan portfolio. This is an important signal from the banking sector, likely reflecting improving confidence and diminishing uncertainty surrounding the economic recovery. “

The Council also received a Report on the Challenges and Opportunities for the ECCU in Adjusting to Volatile Oil Prices that was prepared by the ECCB to facilitate dialogue among member governments that would be instrumental in designing fiscal reform policies.

“An escalation in global oil prices and the resultant subsidization of fuel prices by ECCU member governments have occurred against the following backdrop. The expansionary fiscal measures implemented in the wake of the COVID-19 pandemic have contributed to a build-up in the ECCU debt levels and reduced the fiscal space for responding to other potential shocks.

“Public sector debt to GDP (gross domestic product) increased significantly from 65.9 percent in 2019 to 88.9 percent in 2020 before falling to 87 percent in 2021. The ECCU governments continue to commit to reducing debt levels to 60 percent of GDP by 2035.

“The ECCB is supportive of subsidies and targeted social assistance, contingent upon them being reversed when the global situation improves, given member countries’ lack of fiscal space and debt overhang.

The meeting was told that economic growth for the region is forecasted to be strong in 2022 at 6.4 percent, moderating to 5.9 percent in 2023. However, the forecast is subject to downside risks in light of the challenging global economic situation.

“Despite higher fuel prices and weakening global economic growth, Tourism in the ECCU is relatively resilient. Although tourism arrivals (stayovers) are still below pre-pandemic levels, the tourism industry is expected to continue strengthening.

“Prospects for further growth in tourism will be contingent upon the impact of any new COVID-19 variants, as well as on any further slowdowns in source markets. Construction activity is being bolstered by capital investment from member governments and domestic home construction.”

The ECCB said that with the further easing of COVID-19 protocols by major cruise lines and ECCU member countries, cruise arrivals are expected to continue increasing in 2022 and 2023.

“Recovery has firmed in the ECCU, but the region will continue to grapple with the effects of high inflation and the challenges related to air and sea connectivity.”