The Monetary Council of the Eastern Caribbean Central Bank (ECCB) has decided to maintain its key policy rates, despite inflation ravaging the subregional grouping.

“Having considered the state of monetary, financial and credit conditions in the ECCU, the Monetary Council decided to maintain the minimum savings deposit rate at 2.0 per cent; and maintain the central bank’s discount rate at 2.0 per cent for short-term credit and 3.5 per cent for long-term credit,” a release from the Eastern Caribbean Currency Union (ECCU) said.

The minimum savings rate (MSR) is the lowest rate that commercial banks can offer on savings deposits. The central bank’s discount rate is the rate at which the ECCB lends to governments and commercial banks. The decision was made at the entity’s 102nd meeting held at the Golden Grove Ballroom, Harbor Club Hotel, Gros Islet, Saint Lucia, “in the context of an accommodative stance for continued economic growth”.

Under the chairmanship of Philip J Pierre, prime minister and minister for finance of Saint Lucia, the council received the Governor’s Report on Monetary, Credit and Financial Conditions in the Eastern Caribbean Currency Union (ECCU) for the period January to June 2022.

The report focused on the ongoing economic recovery both globally and within the ECCU, as well as on the impact that the war in Ukraine and associated economic sanctions are having on this recovery.

The report indicated that global economic recovery, which took hold in 2021, has slowed in 2022, with economic growth estimated at 3.6 per cent for this year. Economic sanctions on Russia coupled with Ukraine’s role as both a major agricultural producer and manufacturer of key inputs into the automobile industry have led to higher levels of inflation globally.

The war in Ukraine and associated economic sanctions have resulted in increased prices for fuel and other commodities such as wheat. As a consequence, member countries of the ECCU have taken several policy actions including subsidising fuel prices, resulting in a loss of revenue, in an effort to limit the impact of rising costs on citizens and residents.

These actions come as ECCU member countries recover slowly from the pandemic, and amid the continuation of some policy interventions they introduced to help mitigate the impact of COVID-19.

However, the report said overall monetary conditions in the ECCU remain accommodative. Monetary and credit conditions improved during the first half of 2022, with growth in private sector credit being positive.

The ECCU’s stock of international reserves expanded to a level 12.1 per cent higher than pre-pandemic levels (February 2020). At the end of June 2022, the total foreign exchange reserves of the ECCB amounted to $5.3 billion. From the period March 2020 to June 2022, the average monthly foreign reserves backing ratio was 96.4 per cent. To put this in context, the statutory requirement is sixty (60.0) per cent.

Banking system stable

The Monetary Council was advised that the banking system remained stable, with overall credit extension to the private sector exhibiting resilience throughout the pandemic. Moreover, the banking system maintained its high degree of liquidity and capital buffers remained at robust levels.

The non-performing loans ratio increased marginally to 11.8 per cent, this is well above the 5.0 per cent regulatory minimum requirement.

Council was apprised that activity on the Regional Government Securities Market (RGSM) showed notable improvement during the first half of the year (Jan – Jun 2022). New investment flows into the market increased by 23.4 per cent (EC$102.3 million) when compared with the corresponding period (Jan – Jun 2021). This is a welcome sign as the market continues to recover from the effects of the novel coronavirus pandemic.

Council was also apprised that the number and amount of moratoria loans have continued their steady decline. This is an important signal from the banking sector, likely reflecting improving confidence.

As at March 31, 2022 (the end date of the ECCB’s regulatory waivers for the COVID-19 Loan Moratoria Programme), commercial banks had 1,150 loans on moratoria, with total outstanding balance of $741.1 million representing 5.4 per cent of total loans. This compared favourably to about 40 per cent in September 2020 with a value of $5.2 billion. The COVID-19 loan repayment deferral programme created the necessary space for financial institutions and borrowers to restructure loan facilities without incurring defaults.

Growth

Council was informed that the recovery is spreading — albeit slowly — throughout various sectors of the ECCU’s economy. Cruise ship arrivals and stay-over levels have increased relative to the end of December 2021, and ECCU member countries have opened with minimal restrictions for travellers. Cruise arrivals rose to 656,011 at the end of March 2022 and is expected to continue increasing in 2022, as COVID-19 protocols continue to ease. The recovery in tourism is hampered by ongoing challenges with air connectivity in the region. The construction sector also continues to recover, bolstered by capital investment by member governments.

However, it was noted that economic activity in 2022 is being adversely impacted by higher levels of inflation due to the war in Ukraine and associated economic sanctions, higher energy prices, supply chain disruptions and low air transport connectivity. For example, stay-over arrivals from the Caribbean — which averaged 20.0 per cent of total stay-over arrivals in 2019 — averaged only 6.5 per cent in March 2022. This lower level of arrivals from the Caribbean is indicative of the air connectivity challenge within the ECCU.

The ECCU consists of eight countries which use the Eastern Caribbean dollar — Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines.