Devaluation is not an option on the table. The current global financial crisis and recession are having an impact on the real economy through their limiting effect on inflows such as tourism receipts and foreign direct investment. They are also having an impact on liquidity in the banking system, with some institutions reporting tightening liquidity. However, these developments have not compromised the reserve position of the Central Bank, which serves as the basis for currency convertibility and, in turn, upholds the fixed exchange rate regime. As at end December 2008, the backing for the EC dollar stood at over 102 per cent, which means there is more than a sufficiency of reserves to ensure full convertibility at the current fixed rate. Devaluation is a policy that is considered by countries which may have depleted their reserves by engaging in unsound monetary policy practices, such as imprudent lending to domestic economic agents. This has not been the experience in the ECCU, due in large measure to the legal constraints on lending imposed by the ECCB Agreement, which have been, to this date, strictly adhered to by the Eastern Caribbean Central Bank. top ^

If you have any questions arising from the discussion, you may e-mail them to the ECCB at info@eccb-centralbank.org. Kindly specify your country of residence. Every effort will be made to respond to your questions as the earliest possible time.

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Survey: Microsoft WORD format ; PDF

2. With Employees conscious of rising costs of living, and Employers trying to save their businesses from closure, how does the ECCB see requests for "Pay Rises" when some businesses are already cutting wages? - Mr Joe Sheridan, St Vincent and the Grenadines

As the Governor’s address during the 2008 ECCU Economic Review mentioned, “citizens of the region must be prepared to make sacrifices for the good of their country, and all segments of the population, including public servants, the private sector, and trade unions, among others have their part to play in ensuring that the region as a whole weathers the current crisis” (paraphrased). It is understandable that workers would demand pay rises in a booming economy where productivity is increasing, and also if the environment is characterized by rising cost of living. However, the current economic environment is characterized by low/falling commodity prices, rapidly decelerating growth, rising unemployment and tight fiscal space. These do not create the optimal conditions for businesses and/or governments to acquiesce to demands for higher pay. In fact, now may be the time for the full operationalisation of Tripartite agreements between workers, employers and governments. In these agreements the issues of productivity, wages, prices and distribution of gains can be appropriately addressed. With credit market conditions tightening both globally and domestically, it would become increasingly difficult for businesses and governments to secure financing to continue their operations. Understanding and cooperation from employees in these difficult times would be key to ensuring the viability of many businesses in the region. top ^

3. Would you advocate counter cyclical fiscal policy as a strategy in dealing with the impact of the external shocks that we are witnessing in tourism and the dry up in capital inflows?  How feasible is this strategy given the high debt to GDP ratios and the possibility that tax relief measures advocated during the joint meeting of the OECS Authority and ECCB Monetary Council could become permanent, thereby further eroding the narrow tax base of the countries? - Embert St Juste, Saint Lucia

Given the ongoing developments in world financial markets and the current recessionary times in which we live, counter cyclical fiscal policies would be a very appropriate response by our member governments. However, due to the limited fiscal space and the existing high debt-to-GDP ratios of our member countries, the extent to which counter cyclical fiscal policies can be pursued is severely limited. In addition, taking on new debt in an environment of tight liquidity and high risk aversion would result in even higher debt servicing burdens for the people of the ECCU. The sustainability of member government debts, which is already an issue, would be further questioned and it is unlikely that significant new debt issues would be successfully secured.

Governments, therefore, would have to reprioritise their public sector investment programmes and focus on those programmes that would deliver the maximum economic benefit. In addition, governments would have to ensure that the appropriate checks and balances are in place in order to reduce wastage and improve the delivery of services. On the tourism front, joint approaches towards marketing and product development should be pursued to the full extent possible so as to benefit from the economies of scale to be derived from such an arrangement. In addition, governments would have to ensure that well targeted social safety nets are in place in order to soften the impact on those most affected by the economic downturn.

Governments would also have to be forward looking and ensure that the appropriate institutional arrangements are in place so as to facilitate the future growth of small and medium size enterprises. The rationalisation of government procedures and the eradication of institutional red tape would go a long way in attracting the establishment of businesses. This can also be applied to boosting the region’s potential to attract much needed foreign capital. top ^