Public Information Notice No. 07/134

Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with St. Vincent and the Grenadines

November 13, 2007

On January 17, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with St. Vincent and the Grenadines.¹

Background

Economic activity has rebounded, with real GDP growing by over 4 percent in 2006, and further acceleration expected in 2007. The improved performance in 2006 was largely driven by a pick up in construction and tourism-related services, as well as a rebound in weather-affected agricultural production. However, fiscal imbalances continued in 2005 and 2006, with the overall deficit of the central government reaching 5½ and 4¼ percent of GDP, respectively. Persistent fiscal imbalances have engendered a sharp increase in the stock of public debt, rising from 68 percent of GDP in 2000 to reach about 85 percent of GDP in 2006.

The external current account deficit narrowed in 2005, yet is likely to expand in 2006. The contraction in 2005 was driven by a slowdown in imports due to the weakening of GDP growth, which more than offset a fall in agricultural exports. In 2006, the current account deficit is expected to widen slightly (to about 24½ percent of GDP), mainly on account of continued high oil imports and imports related to private construction and public capital expenditure, despite a rebound in banana exports.

The continued depreciation of the U.S. dollar against major currencies has bolstered external competitiveness, particularly since 2002. Real wage increases have remained modest, and St. Vincent and the Grenadines has steadily increased its share of stayover tourism visitors to the Eastern Caribbean Currency Union and the wider Caribbean. Nonetheless, with rising oil prices and flat export prices, the terms of trade has deteriorated in recent years.

Broad money (M2) growth remained strong in 2005, as bank deposits were used to fund both a surge in net lending to the central government and an expansion in private credit. In 2006, public sector credit increased, due mainly to the funding of several large infrastructure projects.

While prudential indicators of the financial sector and disaster preparedness have both improved in recent years, vulnerabilities remain. Although high government exposures and deposits in the state-owned local bank remain a potential source of vulnerability, asset quality and capital adequacy in the country's commercial banks have risen since 2003. St. Vincent and the Grenadines is one of the world's most disaster-prone countries, yet has made good strides in enhancing disaster preparedness and mitigation, including by development of a National Emergency Response Plan, introduction of a National Building Code, and participation in regional risk pooling.

There has been some progress in implementing broad structural reforms. The authorities continue in their efforts to diversify farm production into non-banana agriculture (through the Agriculture Diversification Program). In order to raise the contribution of tourism to economic activity, the authorities intend to upgrade the country's air transportation infrastructure over the medium term, with construction of an international airport (on St. Vincent) and a jetport (in the Grenadines). The erosion of trade preferences for the country's important banana exports has adversely affected the incomes of rural households, and the authorities have attempted to bolster the country's social safety net to alleviate poverty. On fiscal issues, the authorities intend to enhance revenue raising by the introduction of a value added tax (in May 2007) and a market-valuation based property tax in 2008.

Executive Board Assessment

Directors welcomed signs that growth has accelerated, but stressed that the challenge remains to develop new sources of growth without compromising fiscal and debt sustainability. The country's fiscal position is of concern, and a front-loaded fiscal adjustment is needed to place the debt ratio on a more sustainable path, increase the scope to address social needs, and enable the economy to respond to adverse shocks. Directors stressed the importance of undertaking major infrastructure investments, including in the air transport sector, only if they are judged viable, and financing them with grants or highly concessional loans.

Directors welcomed the improvements in tax policy and administration, including the planned adoption of the VAT. They called for steps to curb tax concessions and to introduce a flexible retail fuel pricing mechanism to help maintain revenue buoyancy and ensure that the tax system promotes new investment. Directors emphasized that, despite the boost in revenues, stricter spending discipline is needed, through better prioritization of capital spending, limits on civil service employment, and reform of the social security scheme.

Directors welcomed that the financial sector's vulnerability to adverse shocks has been reduced. They supported the ongoing efforts to improve the balance sheet of the state-owned National Commercial Bank and strengthen financial sector supervision.

Directors supported the efforts made to bolster national disaster mitigation and preparedness. They called for further efforts, including in the context of regional pooling of catastrophe risk insurance.

Directors considered that the erosion of trade preferences for bananas is placing considerable pressure on rural households, which increases the importance of developing a reform program-including well-targeted and temporary safety nets-to ease the transition away from bananas and elicit donor support. In this vein, Directors urged donors to accelerate disbursements to the country of promised aid and grants.

Directors agreed that data with respect to areas central to surveillance are adequate.
At the same time, they encouraged the authorities to continue their efforts to improve the coverage, timeliness, and dissemination of statistics, including with technical assistance support from donors and CARTAC.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.