Eastern Caribbean Faces Fiscal Challenges

by Phillip Morton, Investors Offshore.com

28 January 2011

The International Monetary Fund has published recommendations for governments in the Eastern Caribbean Currency Union (ECCU) – Antigua and Barbuda, Dominica, Grenada, St Kitts and Nevis, St Lucia and St Vincent and the Grenadines - in respect of the fiscal challenges they face from the protracted global recession, and the fall in tourism receipts.

The Fund’s report notes that ECCU countries have been hit hard by the global economic donwturn and face a protracted recovery. Real regional gross domestic product (GDP) contracted by 6% in 2009, reflecting a collapse in tourist arrivals and Foreign Direct Investment- financed construction activity.

This has presented significant pressure on countries’ budgets, with the IMF identifying, in its discussions with the region, further downside risks going forward.

“The overall fiscal deficit of ECCU countries has increased sharply, while extremely high and rising regional public debt in the context of a regional currency board arrangement has exacerbated the region’s vulnerability to shocks,” the IMF said.

“Recession-induced fiscal revenue losses, increases in public spending in most ECCU members aimed at mitigating the impact of the downturn, as well as higher debt servicing costs raised the region’s overall fiscal deficit to 8% of GDP in 2009 from 3.5% of GDP in 2008.”

“The regional public debt jumped to above 100% of GDP at end 2009, from an average of 93% of GDP in 2006-08, reverting earlier gains in debt reduction.”

“Reflecting in large part the fiscal adjustments envisaged under Fund-supported programs with Antigua and Barbuda and Grenada, the fiscal deficit for the region is projected to decline, but remain elevated at close to 4.5% of GDP for 2010–15, while public debt will stay above 100% of GDP through 2015.”

In its recommendations, the IMF said that countries must strive to deal with weaknesses exposed by the financial crisis. “The growing fiscal deficits, unsustainable debt levels, and stress in the financial sector need to be addressed forcefully to maintain confidence in the currency union and the currency board.”

The Board said that the urgent challenge facing the region is fiscal consolidation. The IMF emphasized that the currency union needs to be supported by consistent fiscal policies across all its members, buttressed by an appropriate institutional framework for policy coordination.

The Board welcomed the authorities’ decision to translate the current debt target of 60% of GDP by 2020 into annual primary surplus targets, and stressed that implementation will be key. “The required surpluses will vary by country, depending on the member’s initial conditions. Prioritizing public investment and implementing measures to enhance expenditure efficiency and contain current spending while protecting the poor and vulnerable will be important elements of the consolidation,” the IMF said.

Concluding, the IMF underscored the importance of safeguarding financial sector stability, in view of the anticipated slow economic recovery and large government exposure of some banks. The IMF said along with fiscal consolidation, the authorities must strive to reduce public financing from the domestic banking system, enhance crisis preparedness and establish frameworks to implement pre-emptive actions where indigenous banks show weakness.

The regulation and supervision of the non-bank financial sector will also need to be strengthened, the IMF said, recommending that financial sector legislation be harmonized, and single regulatory units be established in the region.

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