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By Claude C. Samuel

I recently read the communique published after the 94th meeting of the Monetary Council of the Eastern Caribbean Central Bank (ECCB) held in October, and I was somewhat surprised to read that the foreign currency reserve backing ratio was almost 100%. The reason for that surprise stems from an article in The Searchlight of Nov. 17, 2017, titled “ECCB considers using portion of foreign reserve for economic development”. That story made me feel then that — at long last — the ECCB would be fully embracing its true role as a regional development institution. So when the recent communique stated that the foreign reserve currency backing was 99.3%, I was disappointed.  The communique made no mention of the status of the proposed 2017 initiative — and it all left me wondering whether the matter is still “under consideration” or whether it was just “talk”!

The problem is: this is not a new issue.  Way back in 1988 (31 years ago), I published an article in the then-popular (but now defunct) regional newspaper EC News to address this very issue.  The piece, entitled “The Crux of Protective Policies” referred to an address by Dr D.  Budhoo to the Grenada Chamber of Commerce in which he “accused the ECCB of not fulfilling its developmental role in the East Caribbean” and that it “was probably the only Central Bank in the world which had 100% of its reserves in foreign deposits”. 

My 1988 article gave a brief history of the Sterling Exchange Standard, the monetary framework of the British colonial system. Under this standard the currencies issued in the various colonies had as their backing (up to 110 percent) securities of the UK or other commonwealth countries, but not of the countries themselves.  With the end of the second world war came a renewed interest in the development of the British Colonies and an increased scrutiny of the colonial monetary and financial machinery.  “The main criticism of the [monetary] system”, I wrote, “relates to the mobilisation of a colony’s reserves in the required 100 percent reserve backing. The essential feature of the sterling exchange system was that the reserves corresponding to the consumption foregone in order for a country to increase its holding of currency, were not retained within the same economy. The requirement that the UK government or other Commonwealth government securities be held against issues of currency notes meant, in effect, that those reserves were lent to overseas governments.  

“It was not surprising therefore that in searching out sources of finance for economic development in countries operating this currency system, attention was given to modifying the system in a way that would enable some of the resources locked up in currency reserves to be used for its own development.  The question as to what proportion was to be backed by local securities that is lent to the government itself was to be based on that part of the currency issue that would never be presented for conversion.”

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So, it was a logical and sensible provision for the ECCU to make, when in Article 42 of the ECCU Agreement (1976) a minimum foreign currency reserve backing requirement of 60 percent was set.  The rationale being that this would allow, in the words of Mr. Antoine, “the Central Bank to play the role of financier of economic development.”  But in the same sentence (as quoted) he went on to point out that “this has never been done”. And he noted that the provision has been included in the bank’s strategic plan.  So the question is: is it going to be done?  The rationale for doing it is clear and present. Or, is this all just talk?

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