IMF Executive Board Concludes 2022 Article IV Consultation with Saint Lucia

November 18, 2022

Washington, DC: On September 7, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Saint Lucia and endorsed the staff appraisal.

St. Lucia has been severely affected by the Covid-19 pandemic and the increase in import prices due to the war in Ukraine. After a collapse in 2020, tourist arrivals have rebounded significantly in 2021–22, but the recovery remains incomplete. The public balance sheet remains under considerable strain, with a sizeable fiscal deficit and a significant increase in public debt since 2019. Inflation has picked up with the surge in commodity prices—somewhat mitigated by price controls and energy subsidies. The financial sector has remained stable, but nonperforming loans have risen during the pandemic.

Output is projected to gradually recover to the pre-pandemic level by 2024, slowed by the impacts of the war in Ukraine and the tightening of global financial conditions. Public and private investments are constrained by weak balance sheets, as well as higher input costs and supply constraints. Inflation is projected to rise to 6.4 percent in 2022. The fiscal outlook is challenging due to high public debt and large refinancing needs which lead to financing constraints. Without additional policy measures, public debt is projected to stabilize around 90 percent of GDP in the medium term, limiting the space for public infrastructure and social investments. The current account deficit is projected to gradually narrow with the recovery of tourism. Bank credit to the private sector is expected to remain anemic due to concerns about weak corporate balance sheets and structural impediments, such as the lack of a credit registry and a weak insolvency framework. Downside risks dominate, mainly from higher global food and energy prices, global inflation and tightening of financial conditions, supply bottlenecks, and the ongoing pandemic. The natural disaster risk remains a near-term challenge and is expected to intensify with climate change.


Executive Board Assessment [2]

Executive Directors noted that St. Lucia’s tourism-dependent economy was severely hit by the pandemic, and while there was a significant rebound in tourism in 2021, the recovery remains incomplete as the surge in import prices and high inflation following the war in Ukraine weigh on economic growth. Directors noted significant challenges ahead as the public balance sheet remains under pressure, with a sizeable fiscal deficit, high rollover needs, and a sharp increase in public debt, as well as the looming threat of natural disasters. Against this backdrop, they emphasized the need to address fiscal and financial constraints to public and private investment to foster a sustainable and inclusive recovery.

Directors concurred that, in the near-term, fiscal policy should focus on protecting the most vulnerable from food and fuel price increases. Given financing constraints, they encouraged the authorities to prioritize spending and to increase the pass-through of global energy prices while supporting vulnerable households with targeted transfers.

As the recovery takes hold, Directors called for pursuing a credible and growth-friendly fiscal consolidation to strengthen fiscal sustainability, create space for social and infrastructure investment, build buffers against natural disasters, and put debt on a downward path. Adopting a medium-term fiscal responsibility framework, a debt management strategy, and a fiscal rule to support debt sustainability would be important.

Directors highlighted the role of the financial sector to unlock private sector growth. They encouraged facilitating access to credit and boosting financial intermediation, including by modernizing the insolvency and foreclosure legislation and establishing the credit bureau and a movable collateral framework, as well as strengthening the non-bank financial sector. Directors noted the expansion of the credit union segment and welcomed the Financial Services Regulatory Authority’s plan to conduct an asset quality review of credit unions. They urged the authorities to address remaining AML/CFT deficiencies to protect correspondent banking relationships.

Directors called for tackling structural challenges to support growth and boost productivity, including by addressing labor market skill mismatches, building energy independence, and increasing economic diversification. They encouraged enhancing structural and financial resilience to natural disasters through a long-term integrated strategy 2 in a comprehensive macroeconomic framework within debt-sustainable bounds. Investment in resilient infrastructure would support growth and enhance fiscal sustainability. Directors noted the importance of developing a strong disaster insurance strategy while structural resilience is built.


Table. St. Lucia: Selected Economic and Financial Indicators, 2019–23

Projections

2019

2020

2021

2022

2023

(Annual percentage change, unless otherwise specified)

Output and prices

Real GDP (at market prices)

-0.7

-24.4

12.2

9.1

5.8

Consumer prices, period average

0.5

-1.8

2.4

6.4

2.7

Output gap (percent of potential GDP)

-1.4

-19.1

-10.0

-4.3

-2.5

Unemployment rate (% annual average)

16.8

21.7

21.9

…

…

Nominal GDP (EC$ millions) 1/

5,654

4,093

4,566

5,325

5,814

Public finances

(In percent of GDP, unless otherwise specified)

Central government 2/

Revenue

21.6

22.1

23.7

23.1

22.5

Expenditure

25.1

34.0

30.1

28.9

24.8

Natural disaster (ND) annualised cost

0.0

0.0

0.0

0.7

0.7

Primary balance, incl. ND cost

-0.5

-8.0

-2.9

-3.1

0.5

Overall balance, incl. ND cost

-3.5

-11.9

-6.5

-6.4

-2.9

Central government debt

58.7

91.6

86.5

81.9

78.5

Total public sector debt 3/

62.1

96.9

92.2

90.1

88.3

Domestic

32.3

50.4

44.2

39.1

36.6

External

29.8

46.4

48.0

51.0

51.7

Money and credit, end of period (annual percent change)

Broad money (M2)

3.2

-6.6

14.9

8.0

4.5

Credit to private sector (real)

-2.4

4.5

-2.4

-5.4

-2.3

Credit to private sector (nominal)

-1.9

2.7

-0.1

0.6

0.3

External sector

Current account balance, o/w:

5.7

-15.7

-11.0

-6.4

-0.9

Exports of goods and services

57.7

29.4

43.0

56.3

58.2

of which : tourism

50.8

22.4

36.2

49.7

51.8

Imports of goods and services

-46.2

-44.4

-53.0

-59.2

-54.8

Capital account balance

1.6

1.6

1.4

1.5

1.0

Financial account balance

0.9

-9.1

-9.6

-4.9

0.1

External debt (gross) 4/

61.6

79.5

78.2

76.9

75.4

Public

29.8

46.4

48.0

51.0

51.7

Net imputed international reserves

Months of imports of goods and services

4.5

3.0

3.6

3.4

3.5

Percentage of demand liabilities

88.7

88.3

92.6

90.9

90.9

Real effective exchange rate

(annual average, depreciation -)

103.3

99.7

95.1

…

…

Sources: St. Lucia authorities; ECCB; UNDP HDI; and Fund staff estimates and projections.

1/ GDP historical series was rebased to 2018 base year in 2020. This increased nominal GDP figures by about 9 percentage points.

2/ Fiscal year (April–March) basis. Fiscal balances do not include the airport project, which is implemented by a public corporation.

3/ Public sector debt includes payables and overdrafts/ECCB advances.

4/ Comprises public sector external debt, foreign liabilities of commercial banks and other private debt.

[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 of discussion by the Executive Board.

[2] 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. An explanation of any qualifiers used in summing up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm

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