USA / BASSETERRE – The Eastern Caribbean Currency Union (ECCU) has been providing a strong anchor for macroeconomic stability in a shock-prone region, demonstrated most recently by hurricane Beryl with its devastating impact on Grenada and Saint Vincent and the Grenadines. The recovery from successive external shocks has been strong, driven by a rebound in tourism, with ECCU economies 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 aim to address supply-side bottlenecks, build resilient fiscal frameworks to support fiscal sustainability, and continue to enhance financial system resilience and intermediation. Greater leveraging of synergies in regional data collection and processing could help strengthen data provision and thereby 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. Inflation has moderated in tune with global trends from a post-pandemic peak of more than 9 percent to less than 2 percent. Nevertheless, public debt remains high and generally well above the regional 2035 debt ceiling of 60 percent of GDP. Meanwhile, Citizenship-by-Investment (CBI) revenues have shown signs of slowing amidst heightened international scrutiny and regulatory tightening. The financial system remains stable, partly due to a prolonged period of cautious bank lending. Despite persistently elevated current account deficits, the ECCB’s reserve position has remained stable and currency backing ratio high, supporting confidence in the currency union.
Going forward, GDP growth is set to moderate, and risks remain mostly on the downside. As most parts of the region approach full tourism capacity, average growth in the region is expected to slow from 6½ percent in 2021-24 to around 2½ 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.
Addressing supply-side bottlenecks to enhance growth
The ECCU economies have exhibited a trend slowdown in growth due to structural factors. 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 components of growth, 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, placing additional limits on 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.
A multipronged and coordinated set of policies that build on ongoing efforts is recommended 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. 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.
Enhancing efficient and resilient capital investment could be supported by coordinated regional efforts to accelerate the green energy transition (GET), safeguard and optimize the CBI funding model, and strengthen disaster preparedness of the capital stock. Regional mechanisms such as the ECCB’s Renewable Energy Infrastructure Investment Facility (REIIF) hold potential to scale up countries’ access to finance that can be usefully supported through regional frameworks to pool procurement and harmonize modern regulatory standards. 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.
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.
Building resilient fiscal frameworks to support fiscal sustainability and inclusive growth
The regional priority remains to rebuild fiscal buffers, reduce public debt levels consistent with the regional debt anchor, and improve fiscal resilience to shocks. Fiscal resilience is essential for macro stability and continuing to protect the quasi-currency board. The region’s high vulnerability to recurring NDs, coupled with 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.
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.
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. 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 use of CBI revenue to avoid budget overreliance on these revenues given their potential volatility and to complement efforts with buffer and resilience building.
Regional coordination and oversight of these efforts would help reinforce fiscal discipline and the credibility of the regional debt ceiling. 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 to operationalize regular ECCB Monetary Council peer reviews of members’ fiscal strategies and progress toward the regional debt target.
Safeguarding financial stability and supporting private investment
Banks’ legacy balance sheet weaknesses warrant continued policy focus. Close monitoring of agreed timelines and action plans for all extensions of implementing regional provisioning standards is important, and timely interventions should be made where necessary. Transitioning from reserve-based regulatory loan loss allowances to loss-bearing provisions would ensure appropriate recording and treatment of banks’ capital positions. Streamlining costly foreclosure and collateral sale processes and strengthening the capacity of the Eastern Caribbean Asset Management Company would support impaired asset disposal. Risks from rising overseas investments and some banks’ elevated local sovereign exposures warrant close monitoring.
Stepped-up regional coordination would help mitigate non-bank financial system vulnerabilities. The continued rapid expansion of credit unions warrants strengthening provisioning standards, monitoring of forbearance measures, and enhancing supervisory capacity, including through greater sharing of best practices. The planned common minimum regulatory standards for non-bank financial institutions (NBFIs) under the recently endorsed Eastern Caribbean Financial Standards Board (ECFSB) represent an important opportunity to establish a more level regulatory playing field between credit unions and banks. More centralized NBFI supervision would support more efficient and effective region-wide financial stability monitoring and is more acutely needed for consolidated oversight of pan-ECCU insurance companies.
The ECCU’s high dependence on global property reinsurance makes it vulnerable to the evolving reassessment of climate liability risks. The risk of more sustained hardening of the reinsurance market could worsen existing underinsurance by driving up costs and reducing capacity. Strengthening monitoring of reinsurance coverage, including through more targeted data collection, would support policy preparedness to manage these risks and narrow protection gaps.
A more systematic approach is needed to strengthen financial intermediation and private investment. Slow bank lending growth, particularly in business credit, has long limited growth-supporting investment. Notwithstanding some recovery in construction and real estate credit, much of the high system liquidity is invested overseas and the unmet credit demand has partly fueled growth of the more risk-tolerant credit unions. The region has taken important steps to address credit access constraints through the ongoing rollout of the Credit Bureau and more demand-tailored products under the Eastern Caribbean Partial Credit Guarantee Corporation.
Closer coordination of these regional initiatives and national MSME development policies would support development of regional best practices in enhancing small businesses’ bankability. This would also allow more efficient scaling up of active outreach programs to foster business formalization. Competing lending programs under national development banks should closely consider their risk-bearing capacity. Strengthening the collateral infrastructure through modernized foreclosure and insolvency frameworks, development of market-based real estate indices, and reviewing any policy impediments to secondary property market liquidity can help derisk local lending opportunities and reduce credit costs. The potential credit pricing distortions from the minimum savings rate should be reviewed alongside the ongoing efforts to encourage regional retail investment and capital market development.
Strengthening of AML/CFT frameworks remains crucial amidst the scrutiny of CBI programs and thin correspondent banking relationships. This includes completing the long-pending designation of the ECCB as the AML/CFT supervisor for banks and centralization of AML/CFT regulatory standards under the ECFSB.
Strengthening data provision
Greater leveraging of synergies in regional data collection and processing could help address persistent resource and capacity gaps. Regional data provision has some shortcomings that somewhat hamper surveillance. While continued IMF/CARTAC technical assistance has proven valuable in improving data timeliness and quality, progress is often impeded by persistent staffing shortages and high turnover. A regional framework with centralization of data compilation and analysis could limit processing overlaps, enhance cross-country comparability, and better leverage the limited staffing resources.
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