The International Monetary Fund (IMF) is warning the Eastern Caribbean to brace for even hard times because of the pandemic, which has caused tourism activity to remain subdued.

As a result of this, the strength of these small economies in the Eastern Caribbean Currency Union (ECCU) to recover will remain pressured by COVID-19. The ECCU is made up of the small Eastern Caribbean islands of Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines.

In its latest Article IV consultation report on the ECCU last Friday, the IMF highlighted that, “the COVID-19 pandemic has taken a heavy toll on the ECCU economy. Tourism receipts have dried up as visitor arrivals have come to a halt. GDP is estimated to have contracted by 16 per cent in 2020, with negative inflation and stagnant credit growth.”

Explaining that the anticipated recovery will be protracted and depend on how quickly the COVID-19 pandemic is brought under control, the IMF stated that growth in 2021 is projected to be weak.

The funding agency declared that 2020-21 tourism season will continue to be depressed due to travel restrictions and the renewed surge in COVID-19 cases in the northern hemisphere and Europe.

Baseline recovery scenario

Accordingly, the IMF’s baseline scenario assumes that “the pace of recovery in tourism will be gradual, with tourist arrivals in the Caribbean projected to return to the pre-pandemic level only in 2024. Risks to the outlook are skewed to the downside, primarily because it could take longer-than-expected for the pandemic to wane and because of the existential threat of natural disasters in the Caribbean.”

The IMF pointed to the sizable revenue losses and spending pressures, aimed at limiting the socio-economic impact of the pandemic, noting that fiscal positions have deteriorated significantly, thus raising public debt sharply. As for the current account deficit, this is estimated to have widened sharply due to the decline in tourism exports.

Nonetheless, the ECCB’s foreign asset position has held up relatively well, partly reflecting increased official financing. However, the economic impact of the COVID-19 pandemic has differed widely across countries, largely reflecting the size of the tourism sector and the severity of lockdown measures.

Opining that the near-term policy imperative is to protect lives and livelihoods and limit potential scarring, the Washington based multilateral funding agency is encouraging that the medium-term debt remains sustainable with strengthened fiscal frameworks and maintaining financial system stability. This is with a view to safeguarding the quasi-currency board system within the ECCU.

According to the IMF, “once the post-pandemic recovery takes hold, policies should focus on resuming fiscal consolidation, further strengthening the financial system, and accelerating other structural reforms to make the economy more competitive and resilient.”

Risk to financial system increasing

Risks to the financial system have been observed to be “gradually increasing,” with the IMF acknowledging that the swift and coordinated introduction of loan moratoria led by the ECCB and national authorities’ fiscal response measures to the pandemic have helped smooth the immediate impact of the pandemic on asset quality.” Also financial system liquidity remains ample thus far.

The IMF underscored that “the persistence of the crisis is expected to undercut the ability of borrowers to service their debt and may also start eroding banks’ and credit unions’ deposit-based funding as the existing support initiatives expire. Sizeable pre-pandemic capital and liquidity buffers in most ECCU financial institutions provide substantial cover against these risks.”

However, the pandemic is expected to leave them with thinner margins against any other shocks, particularly those entities with concentrated asset exposures. Cash-constrained countries are encouraged to rationalise non-essential spending and rely largely on concessional borrowing, when necessary, to safeguard medium-term sustainability.

This is critical to maintain the credibility of the regional debt anchor given that the regional public debt target of 60 percent of GDP by 2030 has served as an important fiscal anchor for the ECCU.

“However, given the demands and constraints imposed by the pandemic, meeting the target is no longer feasible for several countries in the region without drastic fiscal consolidation, which would be ill-advised as it would both slow the recovery from the pandemic and constrain long-term growth prospects through scarring,” the IMF assessed.”

As such, postponing the debt target by five years could balance the creation of near-term fiscal space needed to support the economic recovery with the confidence-boosting effects of a firm fiscal anchor.