Public Information Notice: IMF Concludes Article IV Consultation with St. Vincent and the Grenadines
November 13, 2000
|Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.|
On October 27, the Executive Board concluded the Article IV consultation with St. Vincent and the Grenadines.1
In the mid-1990s the government launched an economic diversification program and strengthened measures to deal with the decline in the banana sector. This initiative was supported by major public investments in the agriculture, transport, education, and health sectors and the introduction of a wide range of fiscal incentives. Reflecting some success from the efforts, real GDP growth—which averaged 2½ percent a year during 1993−97 with significant volatility—surged to 5 percent a year during 1998−99. Inflation has been between ½ and 2 percent a year in the last three years. Labor market data are unavailable; the last census in 1991 estimated the unemployment rate at 19 percent, however, the perception is that unemployment remains substantial.
The external current account deficit widened in recent years, reaching 23 percent of GDP in 1998 and narrowing only slightly to 20 percent of GDP in 1999. The widening mainly reflected rapid import growth associated with the implementation of large public and private sector projects. Accordingly, the deficit was financed by inflows of foreign direct investment and concessional borrowing by the government. External public debt, after declining to about 30 percent of GDP in 1997, rose to 48½ percent of GDP in 1999 following the assumption of some private debt.
The performance of the consolidated public sector improved in recent years, with the overall position moving from a deficit of about 1½ percent of GDP in 1997 to an average of near balance during 1998-99. At the same time, public sector savings (current balance before grants plus capital revenue) were maintained at about 8½ percent of GDP a year. The improvement reflected mainly some strengthening in central government operations and continued large surpluses of the National Insurance Scheme. The central government deficit (after grants) was reduced from about 4½ percent of GDP in 1997 to slightly more than 1½ percent of GDP a year in 1998–99. This improvement reflected a sharp increase in grants to support capital projects, strengthened tax administration, and completion of some major capital projects in 1999. Grants rose from the equivalent of 1½ percent of GDP in 1997 to about 5 percent of GDP in 1998 before returning to about 1½ percent of GDP in 1999.
The offshore sector has grown rapidly in recent years following the revision in 1996 of laws governing these activities. The sector has 11,400 registered entities, of which 28 are banks, 608 are trusts, and the rest are international business companies. It is estimated that the offshore sector contributed EC$30 million (3½ percent of GDP) in 1999 in fees, employment, rentals, and use of utilities. However, recent reports cited St. Vincent and the Grenadines as a noncooperative jurisdiction, with inadequate legal infrastructure and supervisory practices for offshore activities, as well as a tax haven.
Executive Board Assessment
Directors noted that St. Vincent and the Grenadines’ economic performance in the recent period has been broadly satisfactory, with reasonable real GDP growth, low inflation, and continued strong public savings and a strong overall fiscal position. However, they expressed concern that unemployment appears to remain high despite variations in the estimates, with a severe incidence on youth and women.
Directors endorsed the broad strategy that the government has adopted to enhance economic diversification for faster output growth and the creation of employment opportunities. However, they urged the authorities to strengthen certain aspects of the strategy in order to spur growth for a more robust impact on unemployment and to reduce the vulnerability of the economy to external shocks. Directors recommended that the authorities consider increasing public savings to permit higher public investment in human capital and physical infrastructure. They stressed that the tax base should be broadened to capture more of the relatively large informal sector, and that the system of tax incentives should be re-examined with a view to reassessing their costs and benefits. In this context, Directors suggested that St. Vincent and the Grenadines seek further technical assistance from the Fund to examine the feasibility of introducing a value-added tax.
Directors observed that the domestic banking system appears to be sound, particularly after recent measures to strengthen the operations of the government-owned National Commercial Bank and to reduce the level of nonperforming loans.
With respect to the offshore financial sector, Directors noted the concern of the authorities regarding recent reports about noncooperation and weak supervision, but urged them to adhere to international best practices and to ensure that the firewall in place would safeguard against financial system vulnerability. They welcomed recent measures intended to strengthen the supervisory and regulatory framework for offshore activities—including the increase in staff, the amendments to existing laws, and the closure of banks and insurance companies for noncompliance with regulations. Directors took note of the authorities’ decision to collaborate with the Eastern Caribbean Central Bank (ECCB) to regulate and supervise offshore financial institutions, and to participate in the CARICOM initiatives in this area. They noted the authorities’ commitment to comply with international standards and support the ECCB’s request for an FSAP-type assessment of financial sector vulnerabilities. They welcomed the participation of St. Vincent and the Grenadines in the recent IMF outreach meeting, at which progress was made toward the determination of a priority schedule for such assistance. They supported the provision of appropriate Fund technical assistance in this area.
Directors were encouraged by the authorities’ recent efforts to expedite the normal reporting of data to the Fund but noted that deficiencies in economic statistics continue to hamper the government’s ability to assess economic developments as well as the conduct of surveillance. They urged the authorities to explore strategies to upgrade the country’s economic statistics, including through technical assistance.
Directors welcomed the authorities’ request that the staff report be published by the Fund after the Executive Board completes its discussion.