Saturday, February 13, 2021

Eastern Caribbean holds key rates, cuts long-term rate

     The Eastern Caribbean Central Bank (ECCB) kept its key interest rates steady but temporarily lowered its interest rate for long-term credit, saying the economic outlook is uncertain as the recent spike in the number of COVID-19 cases in key source markets is undermining the prospects for a recovery of tourism and economic growth.
     The ECCB, the monetary authority for eight islands in the Eastern Caribbean, kept its minimum savings rate at zero percent and the discount rate at 2.0 percent but cut the long-term term credit rate temporarily by 300 basis point to 3.5 percent.
      In April 2020 the ECCB cut its discount rate by 450 basis points to the current 2.0 percent, the first cut to its key interest rate since 2003.
     "The economic outlook for the region is uncertain," the ECCB said after a meeting of its monetary council on Feb. 12 via videoconference, pointing to the rise in COVID-19 cases in some of the countries most important to its tourism industry, such as the United States, Canada and Europe.
     "That said, the rollout of vaccines in these source markets and the arrival of vaccines in the ECCU member countries are positive developments," it added.
     The ECCU estimated the economy of the eight nations in the Eastern Caribbean Currency Union (ECCU) contracted by 15 percent in 2020, slightly better than a 16.2 percent contraction forecast in October but down from a pre-pandemic projected expansion of 3.2 percent.
     It estimated that tourism, the regions dominant economic sector, shrunk 75 percent last year.
     The ECCB's policy statement came the same day the International Monetary Fund (IMF) said the region's gross domestic product (GDP) was estimated to have contracted 16 percent in 2020 with a drying up of tourism receipts leading to a significant deterioration of fiscal positions, raising public debt sharply.
     "Growth in 2021 is projected to be weak," the IMF said, adding the 2020-21 tourism season will remain depressed due to travel restrictions and the renewed surge in COVID-19 cases in the northern hemisphere and Europe.
     While the rollout of vaccines offers hope, the IMF said the challenge of mass distribution and vaccinations were causing delays globally and tourism activity is likely to remain subdued until the pandemic is firmly under control, forecasting that tourism arrivals in the Caribbean will first return to pre-pandemic levels in 2024.
     ECCB forecast economic growth this year of 4.0 percent, below the previous forecast of 5.1 percent, adding monetary and financial conditions were generally stable though credit conditions had deteriorated last year and domestic credit was estimated to have declined last year compared with 2019.
     As of Nov. 30, 2020 commercial banks were providing deferral on 16,834 loans with a total outstanding balance of $4.3 billion, representing 32.0 percent of loans.
     At its meeting, the monetary council also approved extending the target date for member countries to reach a fiscal anchor of 60 percent debt to GDP by five years to 2035.
     The ECCB originally adopted simplified fiscal benchmarks in 2003 to guide the fiscal operations of its member countries and set a target for a debt-to-GDP ratio of 60 percent in 2020. 
     But in February 2015, following the Global Financial Crises, the council extended this target to 2030.
     On Feb. 12 the IMF said the 60 percent debt target served as an important fiscal anchor for the region but given the demands and constraints imposed by the pandemic, meeting this target is no longer feasible for several countries without "drastic fiscal consolidation, which would be ill-advised as it would slow both the recovery from the pandemic and constrain long-term growth prospects through scarring."
      The IMF proposed postponing the debt target by 5 years to help create fiscal space needed to support the economic recovery with the confidence-boosting effects of a firm fiscal anchor.
      ECCB was set up in 1983 to maintain the stability of the ECCU region and the banking system in its members: Anguilla, Antigua and Barbuda, the Commonwealth of Dominica, Grenada, Montserrat, St. Kitts and Nevis, Saint Lucia, and St. Vincent and the Grenadines.
    Members of ECCU use the East Caribbean Dollar as their common currency, and it has been pegged to the U.S. dollar at 2.70 since 1976. EC$ has existed since 1965.



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