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St. Kitts and Nevis and the IMF

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Public Information Notice (PIN) No. 03/131
November 4, 2003
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2003 Article IV Consultation with St. Kitts and Nevis

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On October 24, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with St. Kitts and Nevis.1

Background

During the early- to mid-1990s, the economy of St. Kitts and Nevis was able to record real GDP growth of about of 5½ percent annually, which was interrupted in 1998 by Hurricane Georges, followed by Hurricanes Lenny and Jose in 1999. Post-hurricane reconstruction led to a temporary resumption of growth in 2000 and before September 11, 2001, but contributed to widening the fiscal deficit despite already high public indebtedness. Fiscal and debt problems have been exacerbated by large and persistent losses of the government sugar company.

Real GDP growth in 2002 decelerated to 0.8 percent (from 2.3 percent in 2001), owing to significant declines in tourism, manufacturing, and construction, which were only partly offset by a strong sugar crop and an expansion in the retail trade and transportation sector. Inflation has remained low (less than 2 percent in 2002), reflecting the openness of the economy and the peg of the Eastern Caribbean (E.C.) dollar to the U.S. dollar, while the real effective exchange rate of the E.C. dollar, as measured for St. Kitts and Nevis, depreciated by about 4 percent in 2002.

The overall fiscal deficit including grants rose to 16 percent of GDP in 2002, mainly due to higher capital expenditure, net lending to public enterprises, and higher interest payments. Primary expenditure out-stripped revenue growth by 5 percent of GDP, increasing the primary deficit to around 9 percent of GDP. To meet its financing needs, the government borrowed from regional commercial banks and issued paper in the Regional Government Securities Market. This allowed it to remain current on all obligations to domestic and external creditors and suppliers. Public debt rose by around 18 percentage points in 2002, to nearly 160 percent of GDP, reflecting the deficits of the St. Kitts central government and the Nevis Island Administration, the losses of the sugar company (3-4 percent of GDP annually) and of other public enterprises.

The Eastern Caribbean Central Bank, which had previously reduced its discount rate (from 8 to 7 percent, in October 2001), lowered the minimum mandatory rate on savings deposits from 4 to 3 percent in September 2002. These measures, combined with weak credit demand, led to a decline in lending and deposit rates (by 70 and 40 basis points, respectively) since October 2001. The ratio of nonperforming to total loans increased by about 1 percentage point to 12¾ percent in 2002, partly due to weak activity.

Considerable progress has been made in strengthening the regulatory and supervisory framework for the offshore financial sector. St. Kitts and Nevis was removed in 2002 from the list of jurisdictions that meet the Organization for Economic Cooperation and Development's tax haven criteria and from the Financial Action Task Force's list of non-cooperative countries and territories. A self-assessment of the regulatory regime for the offshore financial sector (Module 1) has been completed and anti-money laundering legislation has been strengthened—inter alia by providing for exchange of information with other jurisdictions, increasing penalties for money laundering, and establishing a Financial Intelligence Unit to investigate suspicious financial activity. The Caribbean Financial Action Task Force commenced a mutual evaluation of St. Kitts and Nevis in parallel with the Eastern Caribbean Currency Union-wide Financial Sector Assessment Program.

The external current account deficit widened to 33½ percent of GDP in 2002. This was largely due to low tourist receipts and high imports for private sector projects in the tourism sector. The current account deficit was fully financed by official capital inflows and foreign direct investment. Public and publicly guaranteed external debt rose by 9 percentage points in 2002, to 70½ percent of GDP.

Progress with structural reform has been slow. No concrete steps have yet been taken to address the problem of the St. Kitts Sugar Manufacturing Corporation, though its losses (3-4 percent of GDP per year) have long been a heavy drain on the budget.

Executive Board Assessment

Directors noted that although a larger sugar crop and some resurgence in tourism had secured a mildly positive increase in GDP in 2002/03, growth in St. Kitts and Nevis remains relatively weak, and below the rate achieved in the early to mid-1990s. Directors considered that a strengthening of growth will depend crucially on a prudent fiscal policy—in order to reduce the very high level of public debt—and further progress in structural reforms. Directors observed that the country's membership in the Eastern Caribbean Currency Union (ECCU) continues to serve it well by maintaining price stability.

Directors welcomed the sizeable fiscal adjustment contained in the 2003 budget, which is to be achieved through expenditure cuts and revenue enhancements. In the period ahead, the authorities are encouraged to intensify their focus on fiscal consolidation measures, with a view to regaining debt sustainability over the medium term and fostering faster growth.

Directors considered that a strengthening of the fiscal consolidation, especially on the expenditure side, will also be essential in order to provide a cushion for possible weather-related exogenous shocks. They noted that, because large capital-intensive infrastructure and tourism-related projects have now been completed, there is room to reduce capital expenditures more vigorously. In this vein, future expenditures should be limited to already-initiated or concessional, externally-financed projects.

Directors urged the authorities to take firm steps toward restructuring or liquidating the loss-making state-owned sugar company. Such an action would eliminate a major drain on the budget, but should be pursued with due regard to the social impact. In line with the practice of the last two years, the authorities should refrain from granting the one-month salary bonus, and restrict new hiring to only essential positions. Directors encouraged the authorities to implement the recommendations of recent World Bank reports on public expenditure and procurement policies.

To strengthen the revenue side, Directors urged the authorities to lay the groundwork for introducing a VAT-type tax on a regional basis, in line with recent recommendations by the IMF. Additional measures to enhance tax compliance, and a moratorium on the granting of new tax exemptions, are also needed.

Directors agreed that budgetary and debt management measures will contribute to mitigating the debt problem, but in order to achieve lasting debt sustainability additional measures, aimed directly at reducing the debt stock, will also be required, including using the proceeds from the planned large-scale privatizations to pay down the debt. They encouraged the authorities to identify supplemental revenue sources to lower the debt stock in the event the projected level of privatization proceeds does not materialize.

Directors viewed acceleration of structural reforms, including the privatization of some state-owned companies, as essential for reinvigorating growth and enhancing competitiveness. They welcomed the authorities' decision to begin due diligence to prepare some assets for privatization. At the same time, they encouraged the authorities to seek technical assistance from the competent international institutions in the design of the privatization program, to reduce downside risks. Directors also urged the authorities to give the Social Security Board greater independence in selecting its investments, and to reduce its stake in the National Bank.

Directors welcomed the progress made in strengthening the regulatory and legal framework of the offshore financial sector, which has permitted St. Kitts and Nevis to be recorded in good standing regarding financial regulation and reporting under the criteria of the Financial Action Task Force. Directors commended the authorities for participating in the ECCU-wide FSAP, and encouraged them to quickly implement any resulting recommendations. Directors urged the authorities to persevere with measures to strengthen enforcement and sanctions to counter money-laundering and the financing of terrorism.

Directors considered that the exchange rate regime and monetary arrangements under the Eastern Caribbean Central Bank have served St. Kitts and Nevis well in maintaining price stability, investor confidence, and economic growth. Nevertheless, they emphasized that sustainable fiscal and debt policies, a sound and well-regulated financial system, and productivity-enhancing structural reforms are indispensable to safeguard the stability of the regional arrangements.

Directors commended the authorities for the improvement achieved in data provision, in particular concerning the central government finances. They encouraged the authorities to address the remaining weaknesses, especially in the areas of private capital flows and debt, the finances of the public enterprises, and labor statistics.


St. Kitts and Nevis: Selected Economic Indicators


 

1999

2000

2001

2002


(Annual percentage change)

Real economy

       

Real GDP

3.7

6.2

2.3

0.8

GDP deflator

2.5

3.7

1.3

1.4

Consumer prices, end of year

2.1

3.1

2.6

1.8

Consumer prices, period average

3.4

2.1

2.1

2.1

(In percent of GDP)

Public finances

       

Central government overall balance

-11.2

-14.5

-12.4

-16.2

Revenues and grants

31.7

29.9

29.0

33.3

Expenditure and net lending

42.9

44.4

41.4

49.6

Total public sector debt, end of period 1/

99.6

122.0

138.9

157.5

(In percent of GDP, unless otherwise indicated)

External sector

       

Current account balance

-21.7

-19.8

-28.9

-33.5

Trade balance

-29.6

-36.8

-32.4

-31.8

Net capital inflows 2/

22.6

18.5

32.1

36.1

Export volume 3/

8.0

20.2

8.8

11.2

Import volume 3/

4.4

27.8

-0.3

2.7

Tourism receipts 3/

-10.8

-13.8

6.0

-10.1

Real effective exchange, index 1990=100 4/

1.7

4.4

1.8

-3.9

External public sector debt

50.1

48.8

61.3

70.4

(Percentage change in relation to broad money at the beginning of the period)

Money and credit

       

Net foreign assets

-13.9

8.8

10.9

9.7

Net domestic assets

25.2

19.0

-8.7

-3.3

Credit to public sector

14.2

11.8

1.2

1.7

Credit to private sector

8.5

11.6

-0.7

-2.1

Broad money

11.3

27.9

2.3

6.4


Sources: Data provided by the authorities, and IMF staff estimates.

1/ Public sector debt excluding owed to the Social Security Board.

2/ Includes errors and omissions.

       

3/ Percentage change.

       

4/ Index at end-of-period.

       

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.




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