ECCB persuades states to relax fiscal stance

The Eastern Caribbean Central Bank has successfully recommended that the eight island states it serves loosen their fiscal restraints to deal with the Covid-19 pandemic.

The ECCB’s monetary council accepted a recommendation from the central bank governor that the eight members postpone the date for achieving their targeted “fiscal anchor”. ECCB members will now aim to reduce their total debt to 60% of collective GDP by 2035 rather than by 2030, the council announced on February 12. The move was supported by a staff statement from the International Monetary Fund.

The ECCB is the central bank for the eight members of the Eastern Caribbean Currency Union, and has been led by governor Timothy Antoine since February 2016. Antoine succeeded Dwight Venner, who had held the role from 1989 to 2015.

Six ECCU members are countries: Antigua and Barbuda, Dominica, Grenada, Saint Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines. The other two, Anguilla and Montserrat, are British Overseas Territories. Between them, the ECCU members have a population of approximately half a million.

The ECCB’s monetary council is made up of the finance minister from each of the eight ECCU member states. The monetary council said the ECCB had recommended shifting the date “in the face of the largest growth shock, on record, occasioned by the Covid-19 pandemic”.

The council also agreed to cut one of its three policy rates, lowering the long-term credit rate from 6.5% to 3.5%. It decided to keep the minimum saving rate at 2% and the discount rate at 2%.

This is the second time the ECCU has agreed to relax the “fiscal anchor”. The ECCU first adopted the measure in 2003, aiming to achieve the target ratio of 60% by 2020. It then postponed that date to 2020 in February 2015 to help deal with the recession that followed the global financial crisis.

“Fiscal anchor”

On the same day as the decision, the IMF took the unusual step of publicly supporting the relaxation of the “fiscal anchor”. The IMF said in a staff statement that the 60% ratio had “served as an important fiscal anchor for the ECCU”.

But the statement warned that “meeting the target is no longer feasible for several countries in the region without drastic fiscal consolidation”. This “would be ill-advised as it would both slow the recovery from the pandemic and constrain long-term growth prospects through scarring”, the IMF statement said.

But it cautioned that the move “puts the onus on countries in the ECCU to further enhance their fiscal responsibility frameworks to boost market confidence”. The IMF statement also warned that “financial system risks are gradually increasing” in the ECCU.

The IMF warned of increasing risks for the ECCU’s financial sector, after praising the handling of the pandemic’s initial impact by the ECCB and national authorities. The pandemic was expected to reduce borrowers’ ability to service debt.

The pandemic could “start eroding banks’ and credit unions’ deposit-based funding as the existing support initiatives expire”, the IMF staff said. Most ECCB-based banks had “sizeable pre-pandemic capital and liquidity buffers”, but these were likely to be worn down by the pandemic, especially for institutions with concentrated asset exposures.

IMF warns of vulnerability

The IMF statement called for reforms to how ECCU countries handle fiscal decisions, “given the ECCU’s vulnerability to external shocks”. The region is heavily dependent on tourism for foreign currency earnings and has been severely affected by hurricanes.

ECCU countries should create common standards and arrangements for national fiscal responsibility frameworks and regional fiscal oversight bodies, the IMF said. It noted that some ECCU members had “accelerated progress toward adopting a full-fledged rules-based fiscal framework”.

The IMF said authorities needed to support these measures by improving their budget processes, fiscal forecasting and debt sustainability analysis.

They also needed to create “national disaster resilience strategies” to be able to better cope with the economic impact of climate-related shocks. The IMF also recommended that the ECCU members develop sovereign debt instruments to support their fiscal sustainability.