| Currency Management Functions of the ECCB
The Eastern Caribbean Central Bank (ECCB) is the sole institution
authorised to issue and manage the EC currency. In carrying
out its currency management functions, the ECCB’s principal
focus is to maintain the value and stability of the EC currency.
A key element in maintaining the value and stability of the
currency is the ECCB’s management of the region’s
pool of foreign reserves, which comprise foreign cash and
bank balances held abroad and foreign securities such as treasury
bills and bonds. These reserves back the EC Currency.
Currency Backing
In everyday language we use the term “backing”
to identify the support that one item gives to another. In
a similar fashion, when we speak about foreign reserves backing
the EC currency, we are in effect stating that the region’s
stock of foreign assets support the EC currency. That is to
say, the EC currency derives its strength from the level of
support given by the regional pool of foreign assets.
The minimum required holding of foreign reserves that the
ECCB must maintain on behalf of the region is specified in
the ECCB Agreement 1983, the legal framework that governs
the operations of the ECCB. The Agreement prescribes that
the ECCB should maintain, at a minimum, foreign reserves equivalent
to 60 per cent of the EC notes and coins in circulation and
other demand liabilities (that is deposits and other accounts
placed with the ECCB by governments, commercial banks and
other institutions).
To illustrate the foreign reserves guidelines as specified
in the Agreement, let us say that if all of the EC notes and
coins in circulation plus the ECCB’s other demand liabilities
totaled 100 million dollars, the ECCB would be required to
hold, at a minimum, the equivalent of 60 million dollars in
foreign assets as reserves to back the currency. The current
foreign reserves backing of the EC currency is in excess of
98%, which is significantly higher than the statutory 60 per
cent requirement.
It is as a result of the significant level of foreign reserves
that back the EC currency and the stability shown by the maintenance
of the exchange rate at EC $2.70 to US$1.00 since 1976, that
the EC dollar is regarded as a strong currency locally, regionally
and internationally. A strong EC dollar benefits the individual
in that it is one of the factors that contribute to the achievement
of a person’s economic and financial goals by removing
the uncertainty which results from fluctuations in the value
of the currency.
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