ECCB says Saint Lucia Weathering OECS Economic Storm

August 15, 2001 - The Eastern Caribbean Central Bank (ECCB) has found that despite the general economic slowdown affecting most member-states of the sub-regional monetary union, St. Lucia has been able to weather the economic storm facing the OECS a little better than others.

The bank reports an improvement in the overall fiscal position of Central Government and says the island’s debt ratios continue to remain within sustainable limits, now standing at the lowest among ECCB member-states.

The ECCB also finds that when it comes to fiscal consolidation to ensure debt sustainability, St. Lucia stands out as one of the few OECS countries currently within the parameters established.

Those were the main findings of the 42^nd Meeting of the Monetary Council of the Eastern Caribbean Central Bank, which took place on July 24, 2001 in Dominica.

The most significant item on the agenda was the Governor's Report on monetary and credit conditions in the Monetary Union during the first quarter (January - March) of 2001, which was presented by Sir Dwight Venner.

The Governor's Report alluded to the marked reduction in the level of economic activity in the entire OECS region during the first quarter of the year. It noted that contraction experienced was associated with a decline in the tourism industry occasioned by the slowdown in growth of the United Kingdom and the United States, the region's largest markets.

According to the report, these adverse developments resulted in a deterioration of the fiscal position of most governments.

The ECCB Governor noted that the United States has, without a doubt, become the dominant economy in the international system and the cyclical influences of its economic performance has a marked effect on the rest of the world.

It is in this context that the recent performance of the US economy and those of the other leading industrial economies, as well as many emerging economies, is cause for concern.

The bank reported that US economy grew by 1.2% in the first quarter of 2001 and fell to 0.7% in the second quarter. This second quarter performance contrasts quite dramatically with the 5% recorded last year. Growth rates are also falling in Britain and the Euro Zone. In emerging markets, Singapore, one of the leading economies, is now officially acknowledged to be in recession. Its GDP fell by 11.3% in the first quarter of this year and 10.1% in the second quarter. Argentina is also experiencing a dramatic downturn in fortunes.

Growth has been correspondingly slow or stagnant in the CARICOM region, particularly the OECS, which recorded average growth of 2.6%. The prospects for 2001 are not as rosy, given the marginal growth of 0.7% experience during the first quarter of 2001.

The tourist industry and foreign investment are directly affected by the declining economic performance of our main trading partners. This has been exacerbated by the uncertainty caused by the changes in preferential arrangements for our main agricultural exports, bananas and sugar.

Beset by these adverse external occurrences, the St. Lucia economy was equally affected. The fall in stay over visitor arrivals and the decline in banana production impacted negatively on overall economic activity, due to the associated reduction in foreign exchange earnings and consequently the money supply.

Performance in the manufacturing sector continues to be weak. Consequent on the slowdown in the US economy, output and exports in garments and electronic products experienced declines.

The decline in economic activity resulted in a contraction in revenue collected, which severely hampered the capacity of the government to provide for the substantial increase in the demand doe social services.

More specifically, banana export earnings fell by 47.6% to $12.8 million, while gross visitor expenditure was estimated at $202.4 million, 2.3% below the total for the corresponding period last year.

In St. Lucia’s case, the Central Bank noted during the review period, the overall fiscal position of Central Government improved. However, the level of current savings declined, as current expenditure grew due to increased wages and salaries associated with the 1.0% general wage hike awarded to Civil Servants.

The ECCB also noted, however, that St. Lucia's debt ratios continue to remain within sustainable limits. For example, St. Lucia's debt to GDP ratio of 34.6% was the lowest amongst ECCB countries and compared favourably with ratios of 86.2% for Antigua and Barbuda, 81.7% for Dominica, 91.1% for St. Kitts and Nevis and 64.5% for St. Vincent and the Grenadines.

A key recommendation emanating out of the ECCB Governor's Report was the need for fiscal consolidation to ensure debt sustainability. It has been noted, however, that St. Lucia stands out as one of the few OECS countries currently within the parameters established, and the government is committed to ensuring that this position is sustained.

The government will, via its capital program and in particular the Road Development Project, seek to inject liquidity into the system to reverse these negative developments.

The Government is confident that the intensification of the capital works program will mitigate existing conditions, resulting in an upward turn in economic activity.

It is expected that the decline in banana production will be reversed as farmers benefit from the inputs credit provided by the government.

In addition, the government intends to carefully examine the possibilities available to quickly reverse the slide in tourism arrivals, including the ensuring of adequate airlift and re-evaluation of the marketing campaign.

The issue of interest rates was also discussed. After intense debate it was decided that interest rates would remain unchanged for the time being, though the feasibility of reducing the rates will be examined further.

Preliminary research undertaken by the Eastern Caribbean Central Bank proved highly inconclusive as to the effect of an interest rate change on the foreign exchange generating sectors of the regional economy. Furthermore, as the cases of America and especially Japan illustrate, simply altering the interest rates is not an automatic cure for economic ills, especially when there exist structural deficiencies.

In addition, it was noted that the measure -- which the Central Bank can institute -- is not guaranteed to entice commercial banks to reduce interest rates. Thus it was strongly recommended that the governments institute the necessary legislation to hasten the establishment of the OECS securities market. This would provide alternative and competing financing instruments to the private sector and probably encourage a reduction in the cost of credit.

The Prime Minister and Minister of Finance is expected to address Parliament on the economic challenges facing St. Lucia in greater detail at its next sitting.

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