up of the ministers of finance from the eight countries. as council members, they provide directives and guidelines to the bank on monetary and credit policy issues. as elected representatives, accountable to the people and with cabinet and legislative responsibilities in their respective countries, the ministers spearhead implementation of the requisite legislative arrangements and fiscal policies to ensure that the financial system remains safe and the ec dollar remains stable. it is within this framework that the operations of the bank are conducted, with due consideration being given to various factors in the economies of the member states, as well as in the wider external environment. the external environment major considerations during the course of the year were : • first, the sharp upturn in the prices of fuel and petroleum products, with accompanying hikes in the costs of transportation, electricity, imported building materials as well as domestically produced goods and services. this resulted in an increase in the inflation rate in eccu countries to 4 per cent in 2005, up from 2. 6 per cent in 2004. • second, growth in the currency union of approximately 5 per cent, compared with 3. 9 per cent in 2004, driven largely by increased construction activity, in preparation for the cricket world cup 2007. • third, a weakening in the tourism sector in 2005, and • fourth, the rising interest rate environment existing in the united states. against this backdrop, let us now look at the performance of the bank during the 2005 / 2006 financial year. the bank ’ s performance i am happy to report that the bank achieved its main objectives of monetary and financial sector stability. the exchange rate peg of the ec dollar was maintained, and the foreign reserve backing of the currency stood at 96 per cent at 31 march 2006, well above the statutory requirement of 60 per cent. in the area of financial sector stability among the initiatives undertaken were : • the drafting of new prudential guidelines and regulations, aimed at strengthening its regulatory capacity and financial sector risk management in the eastern caribbean currency union ; • refinement of the risk assessment model used as the basis for an early warning system. the model is used to stress - test institutions and the financial system, and • reducing the vulnerability of banks to credit risk by mandating the reduction in the tolerable limit for non - performing loans from 10 percent to the international benchmark of 5 per cent. recognising, however, the existence of gaps within the regulatory infrastructure, the bank continues to collaborate with member governments to establish single regulatory units in each member

economy, the oecs as a bloc has to do the following : ( i ) restructure our external economic relations policies to access resources from the rest of the world on terms favourable to ourselves. we need to organise trade agreements, development aid, foreign investment, new tourism markets, and the transfer of technology as critical elements of this new policy. ( ii ) realignment with new centres of global growth such as china, india and brazil, while adjusting to the new circumstances of our traditional trading partners. ( iii ) raising the bar for our economic performance through increased competitiveness, flexibility in production and the rebranding of the oecs as a collective economic entity. this will have to be underpinned by : ( a ) the optimal use of the wider economic space ; ( b ) the significant lowering of the unit costs of production ; and ( c ) better policies and their effective implementation. we have developed two models, one for an explanation of the current economic underperformance and the other to provide a possible answer to a high growth regime. the first model is referred to as the input, consumption, default model. in very short summary, this is explained as follows : we have concentrated on inputs, mainly in the form of finances in both public and private sector projects. the money spent has not been matched by commensurate increases in output. the economies have been largely consumption oriented, a characteristic facilitated by the sophistication of the import infrastructure for consumer goods and the proliferation of wholesale and retail traders in the economy. policies and sectors have continued in existence by default, long after their positive contributions to the economy have ended. the model which looks to the future is the aggregation, coordination, output model which is epitomised by the new economic union. the aggregation of the resources of the member countries can be outlined in terms of both economic theory and economic geography. bis central bankers ’ speeches with respect to economic theory, this involves the incremental addition of the resources of each country starting from the smallest and recording with each, the easing of the constraint of small size. in the case of economic geography, it would be working with the countries in close proximity to each other to see the effects of the easiest way to combine resources. the coordination of policies is the defining feature of an economic union and gives the state the opportunity to plan and guide economic activities. output must be looked at from both the starting point and the end point. we must identify rates