by Kevon Browne
St. Kitts and Nevis (WINN): At the end of 2022, the Eastern Caribbean Currency Union saw a decline in fiscal deficits – that is, according to the Chairman and Prime Minister of St. Lucia, Hon. Phillip J Pierre, during his presentation of the Communique of the 104th Meeting of the Monetary Council of the ECCB.
“The economic recovery from 2021 supported revenue growth in the ECCU and led to reductions in overall fiscal deficits.
Alongside the economic recovery, there was some progress toward the regional debt target. The ECCU governments continue to commit to reducing debt levels to 60.0 percent of GDP by 2035. At the end of 2022, the ECCU average was 78 percent, down from 88 percent at the end of 2020.”
The decrease in the fiscal deficits indicated that the region is moving further along the path to recovery and economic stability; however, as seen over the last three years, exogenous shocks (COVID-19, food shortages, supply chain issues, rising interest rates, inflation, the war in Ukraine, etc.) could still pose a considerable threat to the financial standing of the region.
Governor of the ECCB, Timothy N.J. Antoine, credits the ECCU’s standing amid the exogenous shocks to the financial buffers the bank has in place backed by the ECCU’s strong exchange rate, monetary union and foreign reserves.
“The banks went into the pandemic with higher levels of liquidity. In fact, sometimes we say we need to see the banks lend more money, make more loans, so they were very liquid. Secondly, adequate levels of capital and capital is important because what capital does is the capacity to absorb shocks, even losses and still remain a going concern and still remain stable and strong. And so the banks went into the pandemic with those buffers. The fact of the matter is that no bank, no licensee came or has come to the Central Bank for liquidity support during this period. That is a testament to the stability of our financial system. And even in the challenge with the moratorium, as we’ve heard from the Chairman, most of those have not ended, and people have resumed payments, or they will restructure based on the current circumstances, and a new payment regime has been agreed upon.”
While the foreign reserves remain strong at the moment, a question was raised about the ability of the reserves to stand up against any other shock that may threaten global financial markets.
The ECCB Governor said that based on the present recovery, reserves are currently growing, and thus they are not overly concerned about shocks that may decrease the reserves.
“At the start of the pandemic, we were just over 10; we came all the way down to around 90. Now, remember the law says the minimum is 60, so we are aware of the legal requirements. Today we are at 91 we are starting to see it actually going back up. So I think we’re in good shape… You know, in the global financial crisis, you had significant credit shocks in the system. We did not see that even with high inflation, we have not seen massive credit shock events where you have liquidity dries up.”
What the Governor said concerns the region and the global financial systems is debt.
“As interest rates rise, some emerging markets – not so much the ECCU because we have very limited access to the capital markets – but some of the bigger developing countries are going to come into serious debt difficulties and debt distress because all of a sudden they’re debt servicing has significantly increased because of high-interest rates. That is something we have to watch very carefully. Just by the way, as the Chairman indicated in this report – his statement – the debt to GDP ratio in the currency union is actually coming down. So at the end of 2020, the first year the pandemic, it rose to 88 per cent – from 66, it jumped to 88. Last year it came down to 78 per cent, and this year it would fall even further because the growth is coming back. So the reserves are in good shape, the exchange rate regime is stable and strong, but we have to look at the global issues, and that’s why I mentioned the debt issue, which is a big concern for the international community.”
Despite concerns about debt and continuing increases in interest rates and inflations, economic growth in the ECCU had strengthened to an estimated 8.9 percent in 2022, a 3.1 percentage-point improvement over the previous year when it was recorded at 5.8 percent.
According to the 104th Communique, the economic recovery of the “ECCU is being driven by Tourism, but ongoing challenges with air connectivity remain a binding constraint to faster recovery. A sustainable recovery and faster progress for all requires strong support for initiatives at the regional level and accelerated implementation of reforms at the national level.”
Innovation, financial inclusion, energy security, digital transformation, and increased investments in building resilience are critical to the region’s continued recovery.