Exchange rate still a source of strength, ECCU Monetary Council agrees to measures to maintain safety and soundness of the financial system

BASSETERRE, ST. KITTS, FEBRUARY 14TH 2012 (CUOPM) – The Eastern Caribbean Central Bank (ECCB) has examined the three pillars – exchange rate, fiscal stability and financial sector stability of the Eastern Caribbean Currency Union (ECCU), which inform the analysis of money and credit conditions.

“Council was informed that the exchange rate pillar continued to be a source of strength and this was expected to be maintained in the short term. Council recognised the deterioration in the fiscal stability pillar which resulted in lower government revenues causing fiscal imbalances,” said the ECCB,” said Central Bank Governor, Sir K. Dwight Venner in the communiqué issued at the end of the 72nd Meeting of the Monetary Council.

Eastern Caribbean Central Bank (ECCB) Governor, Sir K. Dwight Venner; Hon. Nazim Burke,Minister of Finance, Grenada; Chairman, Premier and Minister of Finance of Montserrat,Hon. Reuben T Meade; Prime Minister and Minister of Finance of St. Vincent and the Grenadines, Dr. the Hon. Ralph Gonsalves; Prime Minister and Minister ofFinance of St. Kitts and Nevis, the Rt. Hon. Dr. Denzil Douglas; ChiefMinister and Minister of Finance of Anguilla, the Hon. Hubert Hughes; the Hon.Harold Lovell, Minister of Finance of Antigua and Barbuda; Mr. Isaac Anthony,Monetary Council Alternate, St. Lucia and Hon. Roosevelt Skerrit, PrimeMinister and Minister of Finance, Commonwealth of Dominica. Photo courtesy of the ECCB

Council received the Governor’s Report on Monetary and Credit Conditions in accordance with Article 7(2) of the Eastern Caribbean Central Bank Agreement1983.

The report outlined monetary and credit conditions in the ECCU over the quarter ended December 2011, against the backdrop of global economic and financial developments and provided an outlook for the near to medium term.

Council was apprised that the macroeconomic and financial conditions of the ECCU economy continued to be impacted by the slow economic recovery in the advanced economies. Consequently, as small open economies, the ECCU remained vulnerable to these external shocks.

According to the communiqué, Council was apprised that the financial sector stability pillar improved marginally during the last quarter of 2011,but inherent weaknesses in the system persisted. Developments in this area are being monitored closely and ongoing measures being undertaken to strengthen the financial sector should help to stabilise the system over time and mitigate some of the risks.

“Council was informed of the liquidity conditions at some indigenous banks tightened, commercial banks continued to accumulate high levels of excess reserves, credit growth to the business sector remained below historical norms as the decline in economic activity and the uncertainty of future economic prospects had seemingly lowered the demand for credit. However, since the third quarter, there has been a notable concentration of commercial bank credit in the household sector, particularly mortgages,” said the communiqué, which stated also that public sector credit is estimated to have declined by 2.1 percent compared to a contraction of 7.4 percent in 2010.

“This was mainly due to an increase in loans and advances to member governments as they sought to close their financing gaps. The ratio of gross foreign assets to demand liabilities (the backing ratio for the EC dollar) declined marginally to 95.4 percent at the end of December 2011 from 96.3 percent at the end of December 2010. It however, remained well above the statutory level of 60.0 percent and the operational target of 80.0 percent,” said the communiqué.

According to the communiqué, Council intensified their discussion on the use of the ECCB’s administered rates as a tool for stimulating economic growth. However, having also considered the uncertainty and volatility in the regional and global economic and financial environment, Council agreed to maintain the savings deposit rate at 3.0 percent; and the Central Bank’s discount rate at6.5 percent. Council however emphasised the need for the continued close monitoring of these rates.

The Monetary Council was apprised that while the financial sector is expected to remain stable, the ECCU would continue to face challenges in the external environment. In light of this, Council underscored the urgent need to act with caution to limit any unforeseen impact on the region’s financial system and reiterated the importance of exploring and implementing greater options for promoting sustainable and balanced growth in the ECCU.

“With respect to promoting sustainable and balanced growth, the Council agreed to (1) Re-activate the Joint Committee of the Monetary Council and the OECS Authority to discuss growth and development issues; (2) Immediately begin the preparation of Medium Term Economic Strategy Papers (MTESP) where none currently exists; (3) Through the OECS Authority and in the context of the requirements of the Revised Treaty of Basseterre, request that the OECS Commission and the Eastern Caribbean Central Bank meet on a quarterly basis to facilitate work programme coordination, particularly with respect to the Growth and Development Agenda,” the communiqué said.

With respect to growth and development of the ECCU, the Monetary Council identified the period of adjustment as January 2012 to December 2014 and the transformation of the economies and the creation of a fully functional economic space as January 2015 to December 2020.

With regard to fiscal and debt sustainability, the Council agreed to (1) Confirm and publish fiscal targets (primary balance and the debt to GDP ratio)for 2012; (2) Reconfirm the agreement at the special meeting of the Monetary Council in Antigua and Barbuda on 14 January 2012, for the exchange of information and close collaboration in resolving the debt problem in the ECCU.

In an effort to maintain the safety and soundness of the ECCU financial system, the Monetary Council agreed to (1) Implement measures that would make the ECCU financial system more resilient to shocks. (2) Accelerate the process for the passage of the relevant legislation to facilitate the establishment of the single financial space and (3) Expedite efforts for improving the efficiency of the Single Regulatory Units (SRUs) by strengthening supervisory capabilities; adopting standardised reporting formats; and developing in-house information gathering and processing and dissemination capabilities.