OECS economies to contract by 0.5 percent this year

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WASHINGTON– The International Monetary Fund (IMF) Tuesday said that the fall-out from the coronavirus (COVID-19) pandemic is hitting hard, the economies of the member countries of the Eastern Caribbean Currency Union (ECCU) and is predicting a 0.5 percent contraction this year.

The ECCU member states are Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts-Nevis, St. Lucia, and St. Vincent and the Grenadines.

The IMF said that its executive board has just completed the 2021 discussion on the common policies of the ECCU in the context of the Article IV consultations with member countries.

It said that the fallout from the COVID-19 crisis is hitting ECCU economies hard. Accounting for nearly 40 percent of gross domestic product (GDP), tourism receipts have dried up, as tourist arrivals have come to a grinding halt.

“The authorities successfully contained the spread of the virus at the onset of the pandemic by largely closing the borders, but a reopening of the economies since the summer has led to a surge in COVID cases.”

The IMF predicts that the ECCU economy will contract by 16 percent in 2020 and a further near 0.5 percent this year.

“Fiscal positions have deteriorated sharply, and public debt is projected to reach 90 percent of GDP in 2021 and remain at an elevated level for years to come. Headline indicators suggest the financial system is relatively sound with ample liquidity buffers, but nonperforming loans are expected to rise significantly. The outlook is clouded by exceptionally high risks, including from the uncertainty concerning the evolution of the pandemic,” the IMF said.

The Washington-based financial institution said that emergency financing and other financial institutions provided to the sub-region helped some economies in the region cope with the fallout from the pandemic.

It said that the executive board agreed that the near-term policy priority is to protect lives and livelihoods, including through continued support to the vulnerable and efforts to maximize COVID-19 vaccination.

“Noting that the region’s growth outlook is subject to considerable risks, Directors recognized that careful balancing, as well as continued engagement with international institutions, including the Fund, is important to ensure sustainable, inclusive growth while safeguarding macro-fiscal sustainability.”

The executive board has noted the postponement of the regional debt target date by five years and emphasized that this should be complemented by further enhancing regional and national fiscal frameworks to ensure that the target continues to serve as an important fiscal anchor for the region.

“In this regard, they welcomed the progress made by several countries on adopting rules-based fiscal frameworks. Efforts are needed at both regional and national levels to strengthen fiscal policies and institutions further to safeguard the credibility of the revised debt anchor.”

The board also noted that measures by the regional and national authorities have effectively helped soften the immediate financial stability impact of the pandemic.

“In the future, near-term supervisory flexibility should be balanced with measures to support financial institutions’ capacity to weather the crisis, including limiting moratoria extensions within the time frame announced by the ECCB (Eastern Caribbean Central Bank), ensuring loan restructurings follow realistically achievable repayment terms, and encouraging capital conservation until the full impact of the pandemic is clear.”

The IMF board said that to ensure system-wide risks can be effectively contained, it encourages the authorities to expeditiously formalize readily implementable crisis management plans at regional and national levels, clearly identifying the necessary coordination, enforcement, and legal requirements.

“To ensure the financial system’s longer-term ability to provide credit and support the regional economy, Directors encouraged the authorities to start considering credible and sustainably funded strategies to support the reduction of non-performing loans, which are expected to increase from their already elevated pre-pandemic levels.

“They also agreed that the ECCU’s broader financial sector reform momentum should be maintained while ensuring implementation timelines avoid unduly burdening supervised institutions in the post-pandemic environment.”

The IMF is also stressing the importance of addressing gaps in the supervision of nonbanks, improving anti-money laundering and combating the financing of terrorism (AML/CFT) framework, and further mitigating corresponding banking relations (CBR) risk.

The IMF said it is supportive of the ECCB’s prudent practice to keep the backing ratio at a robust level, which is critical to safeguard the quasi-currency board arrangement.

“The heightened external risks call for enhanced monitoring of foreign exchange movements and preparation of policy responses to downside risks,” the IMF said, encouraging “the authorities’ continued pursuance of structural reforms to make the ECCU economies more competitive and resilient, including through digital transformation.”.

It called for continued efforts to build resilience to climate-related shocks.

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