Sir K Dwight Venner: The ECCU economy in 2004 and prospects for 2005 and
beyond
Presentation by Sir K Dwight Venner, Governor of the Eastern Caribbean Central Bank, St. Kitts,
25 January 2005.
* * *
Introduction
Good Evening, Ladies, Gentlemen, and Fellow Citizens of the Eastern Caribbean Currency Union.
On behalf of the Monetary Council, Board of Directors, Management and Staff of the Eastern
Caribbean Central Bank, I bring you greetings and best wishes for the New Year.
I welcome this opportunity to address you on the economic performance of the CURRENCY UNION in
2004, as well as to share with you the Bank's views on the prospects we face in the year 2005 and
beyond.
We live in a fast changing environment characterised as the INFORMATION AGE. The political, social
and economic development of the international community, and the nations which belong to this
community, are influenced by the access to information. Information, because of the revolution in
information technology and telecommunications, is now potentially more accessible to the public in its
various forms, namely print, audio or video. The means of communication have also been expanded
by way of methods such as newspapers, radio and television, the internet, and public and private
meetings.
This new environment requires certain reciprocal responsibilities in a democratic society. Information
made available to the public must be TIMELY, ACCURATE, and COMPREHENSIVE and every citizen
must be sufficiently literate and motivated to access and make use of this information. This must be
the case if we are to expand our range of choices, and make suitable decisions involving our own
welfare.
Central Banks, and the ECCB is no exception, have the responsibility, given their position in the
economic system, to provide economic and financial information of the highest quality so that their
governments, business enterprises, trade unions and individuals can make well-informed decisions,
which can facilitate economic growth and socio-economic development.
On this note, I would like to make an appeal to governments, the private sector and the public, to work
together to develop our statistical services so that we can have at our disposal, the kind and quality of
information which will facilitate our development. In the case of the governments, this means allocating
the necessary financial and human resources, so that timely, accurate and comprehensive statistics
can be available, to enhance policy-making. In the case of the private sector and individuals, it implies
providing the information required from them by the statistical services, in a timely and accurate
manner, and supporting the call for the timely publication of this data.
I conclude these opening remarks by stating simply that, information is the OXYGEN of all modern
economies.
The domain of the Eastern Caribbean Currency Union
As essential background to this presentation, it is necessary to identify the DOMAIN of the Eastern
Caribbean Currency Union. It comprises eight countries, which have in common, the use of the EC
dollar as their currency. These countries have a combined area of 1,163 square miles, with a
population of approximately 600,000 people. The total output, measured by the Gross Domestic
Product (GDP) of the Union for 2004, was estimated at $8.8 billion, with a capita income of $14,844.
The total exports of goods and services for 2004 was $4.5 billion. Of this total, commodities
contributed twelve per cent, and tourism services sixty-three percent.
The foreign exchange reserves of the ECCB provide a 96 per cent cover for the currency, well above
the requirement of 60 per cent stipulated in the ECCB Agreement, 1983.
The currency in circulation at the end of December 2004 was $663 million, while the commercial
banking system held deposits of approximately $12 billion, and loans of over $8 billion.
It is important to portray the concept and inclusiveness of the currency union through the aggregates I
have highlighted, since these serve to illustrate that the whole is greater than the sum of its individual
parts. One of the concrete and beneficial manifestations of this fact has been our ability to maintain the
value of our currency at EC$2.7 to the US dollar, for the last twenty-eight years, despite the many
difficulties faced by our member countries individually.
It is against this background that we examine the economic performance of the currency union in
2004.
The economic performance of the Currency Union in 2004
Growth
The currency union experienced positive growth for 2004 estimated at 4.1 per cent. This can be
attributed to the performance of the tourism industry, which recorded a significant increase in both
stay-over and cruise-ship arrivals. Our analysis indicates that the performance of this sector was due
to increased buoyancy in the economies of our major tourist markets, namely the United States of
America, the United Kingdom and Europe; the depreciation of the US dollar relative to sterling and the
euro; intensified marketing efforts; and increased airlift.
Banana output rebounded during the year, but one has to take into consideration the major fall in
output in the previous year. The factors which contributed to this improved performance were: an
increase in the acreage under cultivation, favourable weather, and investment targeted at improving
quality and productivity. The other major agricultural export commodities had varying fortunes, as the
output of nutmeg and cocoa increased, but sugar production fell.
The construction sector was buoyant in 2004 as investments in both the public and private sectors
increased. These investments covered such projects as airport construction, road building, residential
and commercial buildings, hotel construction and refurbishment, and activities related to the tourism
industry.
The manufacturing sector continued the sluggish trend it has been experiencing over the last few
years, as the sector continued to face competition from lower cost producers in other countries.
Inflation
Inflation, as measured by the change in the Consumer Price Index, showed increases in all member
countries in 2004. These were triggered by higher prices for fuel, and the increasing scarcity of major
commodities such as cement and building materials, as the China effect, that is, the rising demand for
commodities by that country, impacted global price structures.
Central governments' fiscal operations
With respect to the Central Governments' fiscal operations, a current account deficit of $47 million was
recorded at the end of November 2004, in contrast to a deficit of $61 million in the corresponding
period of 2003.
Based on preliminary data, the total outstanding debt of the combined public sectors in the currency
union continued to increase in 2004, reflecting higher external borrowings by central governments.
Debt service payments have risen significantly, and increasing debt to GDP ratios require resolute
action by governments, to bring them back in line with the agreed benchmarks set by the Monetary
Council.
Monetary aggregates
Monetary liabilities, namely currency in circulation and private sector deposits, rose during 2004 to
over $8 billion at the end of December, reflecting the expansion in economic activity in the currency
union.
Domestic credit also increased during the year reflecting growth of six per cent in loans to the private
sector. Liquidity in the commercial banking system remained at high levels during the course of the
year.
Notable events in 2004
Three notable events affected our member countries during 2004. In Dominica, which is currently
under an IMF programme, there are signs of significant improvement in the fiscal accounts, and a
return to positive economic growth. In Antigua and Barbuda, a change of government after almost
three decades, has been accompanied by an apparent change in stance towards fiscal policy and
debt management.
In Grenada, the devastation wrought by Hurricane Ivan has reversed what had been a very robust
growth performance of over five per cent. There has, however, been a very focused approach to
reconstruction, with the assistance of both the regional and international communities. This should
bear fruit in the coming years.
All in all, 2004 can be described as a year of moderate growth, despite the major set back in Grenada.
Prospects for 2005 and beyond
Looking to 2005 and beyond, one has to make certain assumptions about the prospects and
possibilities, given two alternative scenarios. In the first scenario, we can continue on our present path
with the same policies and hope, that as in 2004, we will have favourable outcomes. The alternative
scenario would be to pursue more active policies to lock in the gains from 2004, and to build on these
to achieve some critical development objectives.
Using the first scenario, the prospects are that growth will continue to be positive, based on a
favourable international economic environment, and continued growth in tourism and construction
activity. The prospects for the tourism industry look very promising, with increased activity in both the
stay- over and cruise sectors.
There are also a number of projects in both the public and private sectors that are linked to the tourism
sector directly, or are derived secondarily from activities in this industry.
There is, however, an urgent need for the alternative scenario to be seriously considered, as the
currency union is faced with major challenges from both external and domestic factors, which could
threaten the continuation of growth.
The external factors which could affect us would include: high oil prices, an increase in international
interest rates, the impact of changes in trade regimes such as those connected with the WTO, the
FTAA, the European Union, and the CSME, and the performance of the US dollar against other
international currencies.
The domestic factors would be the fiscal and debt issues, and the need for increased productivity and
competitiveness.
The countries of the ECCU need to revisit the five objectives set by the OECS Authority in November
2002. These are -
•
A growth rate of six per cent;
•
A reduction in unemployment levels to at least six per cent;
•
A reduction in poverty levels to at least six per cent;
•
The maintenance and improvement of their Human Development Indices; and
• The transformation of the economies into highly productive, adaptable and competitive
entities.
The Authority identified a number of policy instruments which were available to facilitate the
achievement of these objectives. They included-
•
Monetary and Fiscal Policies;
• Incomes and Structural Policies; and
• Trade and International Economic Relations Policies.
The OECS Authority has also agreed that its member countries should -
•
Increase the levels of functional cooperation;
•
Move to higher levels of economic integration, through the establishment of an economic
union; and
• Facilitate these two processes by revising the Treaty of Basseterre, to establish closer
political union among the member countries.
These matters raise interesting challenges for our countries to become and remain competitive in a
rapidly globalising world in which countries and regions are discussing and entering into closer
economic and functional cooperation arrangements. Such trends towards closer cooperation have
manifested themselves in the European Union, between the major states of West Africa, in Latin
America and in Asia.
The countries of the currency union and the OECS have already achieved a high level of integration
with a common judiciary, a common currency and central bank, joint foreign representation, a common
directorate of civil aviation, pharmaceutical procurement, telecommunications regulation, banking
regulation, and close collaboration in health, education and security matters.
The point, which is being made here, is that most countries have realised the necessity for some form
of closer collaboration in addressing the global challenges which lie ahead. Our countries, which are
among the smallest in the international community, and which have already made substantial progress
in this area, must increase the level of collaboration significantly. They must then use the increase in
size and critical mass as a platform for maintaining the current rate of growth, addressing the pressing
fiscal and debt problems, and restructuring the economies to make them more competitive so that they
are capable of sustaining high rates of growth over long periods of time.
The achievement of a consistent level of real growth at the six per cent level would be critical for
increasing income levels, lowering unemployment and reducing poverty.
Under the umbrella of a wider economic and financial space within the currency union, it would be
easier to effect public sector reform, financial sector reform, and private sector development.
Significant investments could be made in the health and education sectors and social safety nets. The
tourism industry would seem to be the major catalyst for growth, which would be most effective if the
linkages could be made with agriculture and light manufacturing. Finance, and information and
communication technology will be critical sectors, representing high technology activities, which would
complement and be supportive of the traditional sectors.
Conclusion
In conclusion, one could state that the prospects for 2005 and beyond are challenging, but quite within
the capabilities of our countries, if we apply the appropriate version of the alternative scenario.
However, it is necessary for our progress, that all sections of our community - the government, private
sector and citizens - accept their specific responsibilities in this regard. The governments have the
responsibility for providing the environment in which economic and social development can take place,
and the rights of individuals are protected. The private sector, particularly in this new era, to produce
goods and services, which are internationally competitive. The citizens, to participate in political, social
and economic activities, which lead to the development of the society.
There are two particular examples I would want to bring to your attention. First, in the demands made
by citizens on governments, we must be aware of the fact that these are financed by taxation on the
public. Second, in the case of loans made by banks, we must realise that these are made out of the
deposits of other citizens.
We need to have a knowledgeable and responsible community which, in the face of the challenging
domestic and external environment, makes judicious and objective choices, to achieve our ultimate
goal which is the welfare of our people.