Seigniorage, a result of monetary issues and reserve management, is widely distributed according to the size of the member countries. Seigniorage is derived from the use of money in the local economy and comes from two sources. The first is pure seigniorage, which reflects the difference between the value of goods and services that can be purchased by money and their cost of production. The cost of producing the currency is negligible in relation to its value. Seigniorage also comes from the investment of these resources and the free reserves of banks in national and international financial markets. The distribution of profits is largely proportional to the circulation of national currencies in different regions. Antigua and Barbuda receives the largest share of the distribution of profits, followed by St. Lucia, which reflects the relative size of the two economies of the regional economy (Nicholls, 2000). The Monetary Council has decided to retain some of the distributed profits as budgetary reserves for loans to countries with difficult economic conditions (Fiscal Tranche II)8, as agreed by the Monetary Council in 2002, access to these resources depends on the signing of a Memorandum of Understanding with the IMF for the implementation of a programme to correct the fiscal imbalance. Another part is maintained by the ECCB in order to compensate for cyclical fluctuations in profit distribution and thus to ensure some predictability of government revenues from this source. The discount rate is one of the monetary policy instruments available to the ECCB to influence credit conditions.
This interest rate, set at 6.5% (since 2003), refers to the interest rate calculated by the ECCB on loans to commercial banks and Member States. As in other economies, liquidity management at the OECS/ECCU proved to be a critical issue after the 2008-09 global economic and financial crisis, particularly in 2009/2010. As noted above, the requirement to hold at least 60% of its foreign exchange reserve application commitments limits the ECCB`s ability to provide cash assistance in the event of a systemic crisis within the region. As a result, banks are encouraged to seek resources through other market channels before going to the ECCB. However, if this is not possible – or in the event of a systemic shock when all institutions are tied to the funds – the ECCB may be obliged to provide cash assistance to the banks concerned, which will put increased pressure on reserve hedging and the exchange rate. Recognizing this possibility, the ECCB has developed a number of mechanisms to help banks manage their liquidity without resorting to central bank facilities. The ECCB provides its governments and commercial banks operating within the ECCU with a loan at the discount rate. The Council took note of the adjustment of the share of fiduciary endowments to member state governments, recently approved by the Board of Directors. This adjustment will increase the amount of short-term loans available to Member State governments by USD 138.1 million. In general, monetary policy has been less distorted and thrifty, reflecting the limited ability to influence economic activity, which is accompanied by a fixed exchange rate and an open financial balance sheet.
The uniform requirement for reserve requirements was set at 6% throughout the ceCB`s existence and the discount rate was changed only four times during this period. The deposit interest rate floor, set at a high level with the maintenance of interest rate spreads, was introduced in 1985 and has been lowered only once. Although the ECCB has in principle most of the instruments available to central banks to conduct monetary policy, active monetary policy is limited by the fixed exchange rate system, which serves as a nominal anchor, and the level of development of its financial markets.