Fiscal Policy in the Eastern Caribbean Currency Union

Copyright © 2021 by Laurel Theresa Bain

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Dedication

Dedicated to my father Jerome Bain and my mother Agatha Bain for their tremendous sacrifice for the family.¹ I pay tribute to my sister Janice Bain for the dedicated care of our father and mother during their golden years and to all my supportive sisters and brothers.

Thanks to my caring and understanding son Ezannas Godfrey Prince Moses for his constant advice even at a very tender age. He stood by me throughout, providing technological support and caring advice.

My appreciation to the late Sir K Dwight Venner, past Governor of the Eastern Caribbean Central Bank, who I had the privilege of working with for twenty-six years. He was an inspiration to me in his provision of professional guidance and paternal support. Sir K Dwight Venner was a visionary leader, a dedicated professional and a strong advocate for regional integration in the Eastern Caribbean Currency Union.

I pay tribute to the late Ms Alison Phills, who was a sister and best friend. Ms Phills provided professional service to the Eastern Caribbean as an employee of the ECCB for over 30 years. Her selfless service extended beyond her employment at the ECCB to families, friends and members of organisations and communities.

I extend thanks to my inspirational friends: Dr Juliet Melville, Ms Lucilla Lewis, Ms Maria Barthelemy and Dr Emefa Sewordor.

My appreciation to Dr Roxanne Brizan-St Martin and Ms Cedrina Carr for their meticulous review of the early manuscript; and to Ms Reneé Lewis for her notable contribution in finalizing the manuscript in preparation for the publishing of the book.

I publish this book under the theme: Knowledge is power and experience is the greatest teacher, motivated by the advice of the late Sir K Dwight Venner and the late Sir Alister Mc Intyre while in the service to the Eastern Caribbean Currency Union.

1 See Appendix 1: Dedication.

Table of Contents

Preface

Section 1: Introduction

Section 2: The Changing Governance Structure and Emerging Fiscal Responsibility in the Countries of the ECCU

2.1 The historical and political context of fiscal policy in the ECCU

Section 3: Five Decades of Fiscal Policy: 1950 to 2010

3.1. Constitutional Reforms and Financial Management of the 1950s and 1960s

3.1.1 The Constitutional Reforms of the 1950s and 1960s

3.1.2 Emerging Fiscal Responsibilities of the 1950s and 1960s

3.1.3 Fiscal Policy and the Tax System

3.2 The Pursuit of Independent Fiscal Policy: 1970s to 1980s

3.2.1 The Constitutional Reform of the 1970s and 1980s

3.2.2 The Economy in the 1970s and 1980s

3.2.3 Independent Fiscal Policy: 1970s to 1980s

3.2.3.1 Strengthening Monetary Policy

3.2.3.2 Fiscal Policy and Regional Integration

3.2.3.3 Taxation Policy

3.2.3.4 Fiscal Adjustment Programmes

3.2.3.5 The Tax System and the Expenditure Structure

3.2.3.6 Growth in Debt Financing

Section 4: Fiscal Policy as an Instrument of Economic Management 1990s to 2020

4.1 Fiscal Policy as an Instrument of Economic Management 1990s and the decade of 2000

4.1.1 Emerging Economic Trends in the 1990s and the decade of 2000

4.1.1.1 The Impact of Trade Liberalisation

4.1.1.2 The Changing Structure of the Economy

4.1.1.3 The Granting of Tax Concessions

4.1.1.4 Weak Tax Administration

4.1.1.5 Rising and rigid expenditure structures

4.1.1.6 High debt obligations

4.1.1.7 The Frequency of Natural Disasters

4.1.1.8 Coordinating Fiscal and Monetary Policies

4.1.2 Fiscal Reform Policies and Growth Strategy in the 1990s

4.1.2.1 Reform of the Revenue System

4.1.2.2 Rationalisation of Public Expenditure

4.1.2.3 Development of Debt Strategy

4.1.2.4 Growth through Financial Sector Development and Integration in a Single Financial Space

4.2 Fiscal Policy as an Instrument of Economic Management in the decade of 2000

4.2.1 Financial Sector Development and Integration in a Single Financial Space

4.2.2 Institutional Arrangements for the Coordination of Fiscal and Monetary Policies

4.2.3 Addressing Growth and Competitiveness through Regional Integration

4.2.4 The Economic Context of the decade of 2000

4.2.5 Fiscal Reform Policies

4.2.6 Financial Sector Rationalization and Development

Section 5: Economic Recovery with Fiscal Policy 2010 to 2020

5.1 The Economic Context of the Recovery Decade of 2010

5.1.1 Economic Recovery

5.1.2 Financial Sector Reforms

5.1.3 Debt Restructuring

5.2 Fiscal Policy and Debt Restructuring

5.3 Fiscal Policy and the Covid-19 Crisis

5.3.1 The Covid-19 Crisis

5.3.2 Economic Recovery and Fiscal Policy

5.3.2.1 Stabilisation Recovery and Fiscal Policy

Section 6: The Challenges of Fiscal Policy in a Currency Union: Comparison of Fiscal Policy Frameworks in the European Union and the Eastern Caribbean Currency Union

6.1 The Fiscal Frameworks: Comparisons of Currency Unions

6.2 The Federal Arrangements in the ECCU and the EU

6.2.1 The Federal Arrangements in the ECCU

6.2.2 Macro Economic Coordination and Fiscal Policy in the European Union

6.2.3 Challenges of Fiscal Management in Currency Unions: the ECCU and the EU

6.2.3.1 Challenges to the Eastern Caribbean Currency Union: Monetary and Fiscal Stability

6.2.3.2 Challenges to the European Union: The Greece Debt Crisis

6.3 The Fundamental Issue of Economic Integration

Section 7: Scope for strengthening the fiscal policy for Macro Economic Stability in the Eastern Caribbean Currency Union

7.1 Coordinating Fiscal Policy

7.2 Institutional Strengthening

7.3 Fiscal Policy Coordination in the ECCU

7.4 Achieving Economic Growth

Section 8: Conclusion

Appendix

Appendix 1: Dedication

Appendix: Regional Integration – CARICOM

Appendix: The operation of the European Union Legislative:

Statistical Appendix

Table 1: Direct Taxes as a Percentage of Total Tax Revenue

Table 2: Customs Duties as a Percentage of Total Tax Revenue

Table 3: Sources of Financing Government Operations

Table 4: Constitutional Reform: Date of Independence from the United Kingdom

Table 5: Tax Burden – EC$ Per Capita

Table 6: Direct Taxes as a Percentage of Total Tax Revenue

Table 7: Structure of Government Current Expenditure as a Percentage of Current Expenditure – Economic Classification

Table 8: Structure of Government Current Expenditure as a Percentage of Current Expenditure – Functional Classification

Table 9a: Current Account Surplus/Deficit (in Millions of EC Dollars)

Table 9b: Current Account Surplus/Deficit (in Millions of EC Dollars)

Table 10: External Grants: EC$M

Table 11: External Debt: As a Percentage of GDP

Table 12: Growth Rates for the ECCU in the 1990s compared with the 1980s

Table 13: Contribution to Gross Domestic Product by Economic Activity in Constant (2006) prices

Table 14: Revenue Loss from Tax Concessions as a Percentage of the Potential Revenue (1991) (EC$M)

Table 15: The Dispersion Index

Table 16: St Vincent and the Grenadines: Lags in Personal Income Tax (Part 1) – Mean

Table 17: St Vincent and the Grenadines: Lags in Personal Income Tax (Part 2) – Mean

Table 18: Dominica: Procedural Lags in Personal Income Tax – Mean

Table 19: Debt-to-GDP Ratio for the ECCU: 1990 to 1999

Table 20: Terms of Contracting External Debt

Table 21: Natural Disasters in the 1990s

Table 22: Growth Rates for the ECCU: 2000 to 2010

Table 23: Trend in Government Expenditure for the ECCU as a Percentage of GDP: 2000 to 2010

Table 24a: Fiscal Balances for the ECCU as a Percentage of GDP: 2000 to 2010

Table 24b: Fiscal Balances for the ECCU in EC$M: 2000 to 2010

Table 25: Public Sector and Central Government Debt-to-GDP Ratio for the ECCU: 2000 to 2010

Table 26: Growth Rates for the ECCU: 2010 to 2020

Table 27: Estimated Cost of Hurricanes from 2010 to 2017

Table 28: Growth Rate of the Countries of the ECCU: 2010–2020

Table 29a: Fiscal Balances for the ECCU as a Percentage of GDP: 2010 to 2020

Table 29b: Fiscal Balances for the ECCU in EC$M: 2010 to 2020

Table 30a: Public Sector Debt-to-GDP Ratio: 2010 to 2020

Table 30b: Public Sector Debt-to-GDP Ratio for the ECCU: 2010 to 2020

Table 31: GDP in EC$M: 2010 to 2020

Bibliography

About the Author The Motivation for the Book

Preface

This book provides a comprehensive analysis of the fiscal policy pursued in the Eastern Caribbean Currency Union (ECCU) as the countries have experienced political, social and economic changes over the past several decades.¹

Fiscal policy pursued by the countries of the ECCU evolved from their colonial status. The phases in the development of fiscal policy cover the pre-emancipation period when fiscal policy was virtually non-existent as the countries were administered directly by the British Government. In the immediate post-emancipation period and until the 1940s, fiscal policy was passive, that of raising revenue by the most convenient means to finance limited social services. During the 1950s and 1960s, fiscal policy became the most important policy instrument for effecting economic and social changes in the economies. However, the direct administration of the countries by the British Government limited the scope for independent fiscal policy. The constitutional reforms of the late 1960s to the 1980s allowed the governments of the ECCU to be more directly involved in fiscal policy.

With the economic challenges of the 1990s, the governments pursued more active fiscal policy, greater coordination of fiscal and monetary policies and more active regional integration. The financial and economic crisis, which began in 2007, prompted the countries of the ECCU to be more deliberate in their fiscal policy and to accelerate the regional integration process. This agreement, in principle, was manifested by the signing of the Draft Revised Treaty of Basseterre and the Eight Point Stabilisation and Growth Programme in December 2009. The Revised Treaty of Basseterre was formalised on 18 June 2010. This development provided the foundation for strengthening the coordination of fiscal and monetary policies and for the establishment of the Organisation of Eastern Caribbean States (OECS) Economic Union.

During the decade after 2010, the economies of the ECCU were recovering from the financial and economic crisis. This period provided the opportunity for the countries to implement the protocols of the Revised Treaty of Basseterre, thereby firmly establishing the OECS Economic Union. The deepening of this regional integration did not occur before the economies of the ECCU were plunged into another recession brought about by the Covid-19 global crisis. In response, active fiscal policy was pursued in the ECCU as the countries implemented stimulus packages to halt the decline in GDP.

Fiscal policy will continue to be the most important policy instrument for stabilising the economies, addressing income disparity and unemployment, and placing the economies on the path of development and transformation.

1 The countries of the Eastern Caribbean Currency Union (ECCU) are Anguilla, Antigua and Barbuda, The Commonwealth of Dominica, Grenada, Montserrat, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines.

Section 1

Introduction

In the latter part of the decade beginning in 2000 and, in particular, with the onset of the financial and economic crisis in 2007 and the accompanying depressed economic growth, fiscal and debt sustainability became fundamental issues, affecting both developed and developing countries. In advanced countries, the fiscal issues eventually led to the impending fiscal cliff in the United States of America (USA), the debt crisis in the Eurozone and the fiscal challenges in the United Kingdom (UK). In some of the developing economies, the fiscal situation tightened and debt levels remained elevated. This was particularly evident in the small open economies of the Eastern Caribbean Currency Union (ECCU), which experienced a contraction in economic activity. Resuscitating growth and the required fiscal reform became paramount on the national and international agendas. In the ECCU, the signing of the Revised Treaty of Basseterre and the Eight Point Stabilisation and Growth Programme by the governments of the ECCU signalled the approach to resuscitating economic growth and transforming the economies.

The countries therefore emerged from the financial and economic crisis with a platform for stronger regional integration, including the harmonisation of fiscal policy.

The importance of fiscal policy as an instrument for economic management was also brought to the forefront during the Covid-19-induced economic recession in 2020. The global economy contracted, and unemployment soared. Countries applied expansionary monetary and fiscal policies to halt the decline in GDP and to address the high unemployment.

The economies of the ECCU recorded a sharp decline in GDP, reflecting the collapse of the tourism industry. This had a knock-on effect in the economies, reducing the demand for other goods and services thereby leading to an overall decline in economic output and related income and employment. Government revenue plummeted at a time when expenditure was necessary to sustain health, education and other social services and to provide income support to stabilize the economy. The contraction of the economy and the accompanying deterioration of the fiscal balances led to higher debt obligations.

Beyond the economic implications, there were direct social