Kittivisian Life

COMMONWEALTH OF DOMINICA 10 JULY 2009

The Monetary Council of the Eastern Caribbean Central Bank (ECCB) held its 65th meeting at the Fort Young Hotel in the Commonwealth of Dominica on 10 July 2009, under the chairmanship of the Honourable Roosevelt Skerrit, Prime Minister and Minister of Finance, Commonwealth of Dominica.The meeting was preceded by a handing-over ceremony to mark the change in chairmanship from the Honourable Harold Lovell, Minister of Finance, Antigua and Barbuda whose tenure of office as chairman had expired.

Chairmanship is rotated among the eight member countries on an annual basis as dictated by the established protocol observed by the Monetary Council.The Eastern Caribbean Central Bank Agreement 1983 mandates that “the Council shall meet not less than twice each year to receive from the Governor, the Bank’s report on monetary and credit conditions and to provide directives and guidelines on matters of monetary and credit policy to the Bank, and for such other purposes as are prescribed under this Agreement”.

Accordingly, Council was apprised of the recent monetary and credit conditions in the Eastern Caribbean Currency Union (ECCU) and the factors which contributed to those conditions, many of which emanated from the continuing global economic slump and financial market turmoil. Council noted that monetary and credit conditions in the currency union were negatively affected by conditions in the real sector which had deteriorated markedly in recent times. Following a slowdown in economic activity in 2008 to 2.2 percent from 5.7 percent in the previous year, the impact of the global crisis intensified in the first four months of 2009 and was evidenced by a 3.9 per cent decline in the GDP index relative to the same period in 2008. The fall in the index resulted from declines in activity in the hotels and restaurants, construction, mining and quarrying, manufacturing and wholesale and retail trade sectors. In addition, inflows of foreign direct investment and remittances were estimated to have contracted, business confidence fell and unemployment levels increased.

1.0 Monetary and Credit Conditions

Council was updated on developments during the year to April 2009 in the variables which define the     monetary and credit conditions in the ECCU and the factors contributing to these developments. Council accordingly noted the following:

• Deposits in the banking system slowed to a growth rate of 1.2 percent from a rate of 9.4 percent in the corresponding period of the previous year, reflecting the weak economic and financial conditions experienced during the current period.

• Credit extension to the private sector showed a declining trend, with commercial bank credit to that sector decelerating to 7 percent from 15.6 percent during the corresponding period of 2008; while credit to central governments accelerated to13.9 percent in contrast to the 3.3 percent increase in the previous year.

• Commercial bank liquidity fell during the period, strongly influenced by declines in tourism receipts reflecting the contraction in stay over arrivals; and reduced inflows of foreign direct investment (FDI), particularly those related to construction projects.

• The Central Bank’s net foreign assets position continued to be strong and was consistent with the requirements for maintaining the peg; however compared with April 2008 a decline of 3.7 percent was observed, reflecting in part the reduced FDI inflows and gross travel receipts.

• Consumer prices continued to fall during the period under review, reflecting lower international prices for oil and other commodities as a result of weak global demand.

Council further noted that, in light of the outlook for the global economy which continues to be shrouded in an exceptional degree of uncertainty, economic activity in the ECCU is projected to contract by 2 percent in 2009. This is based on expected declines in most of the major sectors of the economy including the hotels and restaurant sector, the wholesale and retail trade sector and construction activity. With regard to monetary and credit conditions, it was noted that the downward trends are expected to persist, reflecting the contraction in growth in the domestic economy.

2.0 Monetary Policy Assessment

Council, having assessed the recent developments and the outlook agreed that, in the current environment, the key policy imperative was to protect the stability of the financial system and maintain the credibility of the currency in order to support the economic recovery when it begins. Council therefore agreed that policies geared towards alleviating the unfolding liquidity squeeze must take account of the need to preserve the integrity of the domestic currency by maintaining a sufficiency of foreign reserves to keep the currency peg credible. Council therefore recommended that current efforts should be focused on addressing the issues within the financial system to ensure stability as changes in the Central Bank’s statutory rates were not likely to be effective at this time.

Council accordingly directed that the Central Bank’s administered rates be maintained at their current levels, namely:

(i) The regulated minimum rate of interest on savings deposits at 3.0 per cent.
(ii) The Central Bank’s discount rate at 6.5 per cent.

3.0 Financial Sector Stability

Council was updated on the major financial sector stability challenges and risks facing the ECCU in the context of the recent global and regional developments. Council noted that the recent events in the regional and international markets had underscored the importance of the adoption of a coordinated regional strategy for maintaining financial sector stability, and a well developed and integrated regulatory framework to handle the complex nature of modern financial institutions and in particular the increased prevalence of conglomeration. In recognition of the Bank’s mandate to preserve the soundness of the financial system,Council agreed to recommend to member governments the following:

(i) Support for the actions required to address the immediate risks to financial sector stability.

(ii) Continued support for the implementation of an effective regulatory framework,with particular emphasis on the roles of the critical stakeholders including the Monetary Council, the ECCB Board of Directors, the Regulatory Oversight Committee, Financial Sector Associations, those involved in overseeing corporate governance matters and the public.

(iii) Support for measures to improve cross-border coordination between the different regulatory agencies in the ECCU, and encourage cooperation and coordination with CARICOM and international counterparts in order to mitigate any future financial fallout stemming from the operations of financial conglomerates.

(iii) Support for a structured approach to liquidity management by instituting programmes that would improve their fiscal capacity to provide financial assistance to the system, if required to do so; and by more active participation in the Regional Government Securities Market, which would assist in alleviating the liquidity pressures across the currency union

4.0 ECCU Eight-Point Stabilisation and Growth Programme

Council noted the following underlying trends in the ECCU:

• The generalized downward trend in the ECCU’s GDP growth since the 1990’s, except for a sharp growth spurt during 2005-2007 resulting from a boom in the construction sector as the region prepared for the Cricket World Cup 2007.

• The surge in public sector deficits and debt since the mid-1990’s.

• The substantial international commodity price shocks beginning in 2004 and reaching historic highs in July 2008 and the repercussions for government expenditures as they sought to cushion the impact on household incomes.

• The substantial gaps in the regional non-bank supervisory framework highlighted by the recent experiences with CLICO, British American Insurance Ltd, and the Stanford Financial Group.

Council emphasized the need for the speedy implementation of the ECCU Eight-Point Stabilisation and Growth Programme, agreed to by the OECS Authority and the ECCB Monetary Council in addressing the current challenges and underlying trends; with immediate attention to be given to the implementation of financial programmes, fiscal reform programmes and debt management programmes. Council stressed the importance of these in providing the basis for discussions with the international community in seeking financial and technical assistance to implement the public sector investment programmes and the social safety net programmes of member countries; as well as the financial safety net programmes to restructure and rationalise the banking and insurance sectors

5.0 OECS Economic Union

Council reiterated the importance of accelerating the movement towards completion of the requirements for the establishment of the OECS Economic Union in order to respond effectively to the growth challenges facing the region. Council noted that the Economic Union would facilitate the creation of an OECS-wide private sector, with the appropriate development and investment architecture, as well as allow for the effective coordination of international economic relations, and fiscal, trade, incomes and development policies.

6.0 Policy Arrangements to facilitate the growth and transformation objectives of the ECCU

Council agreed to recommend to member governments a re-commitment to the implementation of the recommended Policy Making Framework and Architecture for the ECCU, in order to strengthen the linkages between the regional and national policy making structures which would facilitate the achievement of the goals of economic integration and transformation of the member countries. Council noted that such a policy making framework will facilitate the identification of national and regional issues and best options and allow for wide-ranging consultation and collaboration with stakeholders in government, the private sector, civil society and regional and international institutions.

7.0 Communication Strategies

Council agreed to recommend to member governments that strong support be given to the regional policy authorities in developing and implementing appropriate communication strategies to inform the population of:

• The current state of the economy and the implications for households, firms and governments;

• The role households, firms, trade unions and other civic sectors can play in responding to the crisis; and

• The role of national governments and regional institutions in responding to the crisis.

Council agreed to the holding of an interactive video conference with the public across the ECCU involving the OECS Authority, the Monetary Council, and the Economic Union Task Force on 23rd July 2009 to discuss the above.

8.0 CLICO/British American Insurance Company Limited

The Council noted that member governments, in dealing with the CLICO/British American issue, had agreed to four guiding principles:

(i) To keep British American as a going concern in a form to be determined;

(ii) To craft a solution which is regional in nature;

(iii) To protect, as far as practicable, the interests of depositors and investors;

(iv) To ensure that British American does not become a systemic risk to the ECCU
financial system.

Council noted the actions which were being taken by the Ministerial Sub-committee of the Monetary Council and the Committee of Insurance Regulators set up by the Monetary Council. Council agreed that:

• Extreme urgency was required in bringing the matter to a successful conclusion;

• The Memorandum of Understanding between the ECCU Member Governments and the Governments of Barbados, Trinidad and Tobago and the Bahamas needed to be finalized in the shortest possible time to provide the basis for moving forward;

• A judicial manager would be appointed to manage the affairs of British American in the interim;

• A firm of consultants would be engaged to perform the technical work required in bringing into existence a new company to take over the operations of British American.

9.0 Exemption of Income from Interest and Dividends from Personal Income Tax

The Monetary Council agreed to recommend to member governments adherence to the recommendation of the Tax Reform and Tax Administration Commission which was approved by the Monetary Council, that income on “interest, capital gains and dividends” be exempted from personal income tax as an incentive to the development of capital markets in the ECCU.

10.0 Date and Venue of the next meeting of the Monetary Council

Council agreed that the next meeting of the Monetary Council would be held in St Kitts
and Nevis on Friday 16 October 2009.

ATTENDANCE
Council members attending the meeting were:
• Honourable Roosevelt Skerrit, Prime Minister and Minister of Finance, Commonwealth of Dominica (Chairman)

• Honourable Victor F. Banks, Minister of Finance, Anguilla

• Honourable Harold Lovell, Minister of Finance, Antigua and Barbuda

• Honourable Nazim Burke, Minister of Finance, Grenada

• Dr the Honourable Lowell Lewis, Chief Minister and Minister of Finance, Montserrat

• Dr the Honourable Timothy Harris, Minister of Finance, St Kitts and Nevis

• Honourable Stephenson King, Prime Minister and Minister of Finance, Saint Lucia

• Dr the Honourable Ralph Gonsalves, Prime Minister and Minister of Finance, St Vincent and the Grenadines

JULY 2009

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