ECCB Monetary Council Predicts Sustained Economic Growth

Member states of the Eastern Caribbean Currency Union (ECCU) can look forward to sustained economic growth for the rest of this year and into 2007.

That’s according to a communiqué issued by the St. Kitts – Nevis based Eastern Caribbean Central Bank (ECCB) following the 57th Meeting of the Monetary Council which met  under the chairmanship of St. Vincent and the Grenadines Prime Minister and Minister of Finance, Dr. the Hon. Ralph Gonsalves.Council noted the developments during the year to July 2006 in the variables which define the monetary and credit conditions in the ECCU and the factors contributing to these developments.

It was observed that inflows of foreign direct investment associated with tourism related construction activity were primarily responsible for the strong growth observed in deposits.

This, in large measure, contributed to an above average rate of growth of 11.3 percent in the broad money supply, comprising currency held by the public and private sector deposits.

Council said that more favourable lending terms and conditions from commercial banks as well as the upsurge in construction activity in preparation for Cricket World Cup (CWC) 2007 and other tourism related activity were reflected in a sizeable increase of 16.4 percent in domestic credit.

The easing of the banks’ terms of credit was evident in the fall in the weighted average lending rate of commercial banks as commercial banks borrowed from abroad and drew down on their external assets to finance credit demand the net foreign assets of the banking system fell.

The Monetary Council said that the acceleration in the rate of growth of domestic credit led to a decrease in commercial bank liquidity.

“With regard to monetary and credit conditions, it was noted that the demand for credit by both the private and public sectors is expected to remain robust, though growth should slow as projects related to the CWC near completion.  Council observed that liquidity was still at a high level and is expected to remain adequate to meet the credit needs for maintaining the growth momentum,” said the communiqué.

Council agreed that given the recent developments and the outlook, that the monetary and credit conditions were favourable for sustaining the economic expansion and maintaining exchange rate stability. In these circumstances Council agreed to maintain the Central Bank’s administered rates at their current levels, namely: The regulated minimum rate of interest on savings deposits at 3.0 percent and the Central Bank’s discount rate at 6.5 percent.

The Monetary Council was cognisant of the link between financial sector stability and monetary stability and reviewed the key performance indicators of the ECCU financial system and concluded that the system remained stable.

“Council was however aware of the need to put measures in place to mitigate any threats to the stability of the system and accordingly agreed to recommend that member governments establish and effectively operationalise the single regulatory units in each member state, issue the Capital Adequacy Regulations and pass the Uniform Banking Act in those countries where it has not yet been done, mminimise credit concentration risks in the banking system by limiting their borrowing from any single bank and review the existing foreclosure legislation for realising real estate pledged as security for loans/mortgages, which would reduce the high level of non-performing loans, thus enhancing financial sector stability.

According to the communiqué, the Eastern Caribbean Monetary Council members supported the view that the adoption of a credible fiscal policy framework was critical in supporting the monetary policy stance of the ECCU and agreed that the Central Bank should continue consultations with member governments on implementation of the necessary structural reforms and fiscal consolidation measures to attain the agreed fiscal benchmarks.

Council noted the critical importance of timely, accurate and relevant statistics to the process of credible policy formulation and agreed to recommend to member governments the development of a statistical system in the currency union by making resources available for the strengthening of the structure and institutional arrangements for the delivery of statistical services.

In the area of money and capital market development, the Monetary Council was conscious of the link between finance and economic development and agreed that the further development of money and capital markets in the ECCU was critical to meet the current and impending challenges facing the region.

The Council agreed to reiterate to member governments the need for legal reform as it relates to the expeditious passage of all outstanding legislation to support the continued development of money and capital markets.

Council, which is comprised of the Ministers of Finance from Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines agreed to recommend to member governments that in order to achieve uniform financial legislation throughout the ECCU, the framework setting out a consultative process among major stakeholders be adopted and a standard legislative drafting manual for use by all governmental legislative drafting offices in the ECCU be undertaken.

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