Public Information Notices
St. Vincent and the Grenadines and the IMF
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On May 5, 2004 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with St. Vincent and the Grenadines.1
Following stagnation in 2001, a moderate recovery started in 2002. The economy is estimated to have grown 3½ percent in 2003. Growth has been supported by a rebound in agricultural production and expansionary fiscal policies, including large public sector investments, while private sector activity has been weak. Inflation has remained in the low single digits, reflecting the monetary discipline of the currency union. The 12-month inflation rate was 2.7 percent in November 2003. Unemployment has remained high (estimated at about 21 percent).
The overall fiscal stance in 2002-03 was relaxed, with the fiscal stimulus coming through a strong increase in investment partly offset by a higher current surplus of the central government due to a rise in revenue. The overall deficit of the Non-Financial Public Sector (NFPS) doubled to 4 percent of GDP a year over this period as capital spending - by public enterprises on power and water projects as well as by the central government - increased by an average of nearly 2 percentage points of GDP. As a consequence, public sector debt increased from about 69 percent of GDP in 2001 to more than 73 percent at end-2003. In 2002-03, central government current revenue rose sharply while current expenditure was held under close control. One-off factors have contributed to the increase in revenue - notably around 1 percent of GDP from duty collections on the large imports of cell phones during 2003 following the liberalization of the telecommunications sector - but there have also been significant improvements in broadening the tax base, removing tax concessions, and strengthening tax administration. At the same time, government wages were kept frozen and non-wage expenditure was kept under tight control to maintain current expenditure largely unchanged.
The external current account deficit widened sharply in 2003 (to 16 percent of GDP from about 9½ percent in 2002) driven by a temporary spike in investment-related imports as well as the impact of higher international petroleum prices. About three quarters of the current account deficit during 2000-03 was financed by direct investment, while the remainder was financed by public sector borrowing. Merchandise exports and tourism receipts increased only marginally in 2003.
Regulation and supervision of the offshore sector continued to be strengthened. As a result, St. Vincent and the Grenadines was removed from the Financial Action Task Force (FATF) list of non-cooperative countries and territories (NCCTs) in June 2003 (it had been removed from the OECD's list of tax havens in 2002). The short-term consequence of strengthened regulation and supervision has been a sharp reduction in the number of offshore banks (which stood at 11 as of end-September 2003, compared with 44 at end-December 2001), although the reduction in government revenue from the sector has been modest because of an upward revision of fees.
The government has made some progress on structural reforms. Steps have been taken to diversify the economy and enhance its external competitiveness, attract foreign investment, improve the budgetary process, and strengthen the regulation of the financial sector.
Executive Board Assessment
Directors commended the authorities for the successful maintenance of macroeconomic stability despite a difficult economic environment. Directors noted that real growth in 2002-03 was above the average for the Eastern Caribbean Currency Union (ECCU) as a whole, supported by a rebound in agricultural production and expansionary fiscal policy. However, unemployment continued to be high and private sector activity remained weak.
Directors welcomed the substantial improvement in current revenue collections, which reflected not only one-off factors but also continued improvements in broadening the tax base, reducing tax concessions, and strengthening tax administration. The authorities were also commended for their efforts at containing current expenditure, particularly through the wage freeze in 2002-03 and tight control over outlays on other goods and services. Directors noted with some concern, however, the pursuit of a counter-cyclical fiscal policy, with a strong increase in investment expenditure, which had resulted in a weaker-than-expected fiscal outturn for 2003.
Directors stressed the need to ensure fiscal discipline going forward. They encouraged the authorities to implement vigorously the envisaged tax reform measures, in particular the planned introduction of a value-added tax. Continued control over current expenditure, including through a prudent wage policy and civil service reform, will also be essential. Directors underlined that public sector investment should focus on key priority projects aimed at enhancing the economy's growth potential and should be financed largely on concessional terms. Continued efforts will also be necessary to strengthen the financial position of the public enterprises and improve their efficiency. Given uncertainties in the tourism sector and other potential exogenous shocks, Directors welcomed the authorities' commitment to pursue a cautious debt management strategy.
Directors noted that the key challenge over the medium term is to reinvigorate private sector-led growth and diversification of the economy, while preserving macroeconomic stability and ensuring fiscal sustainability. The development of a vibrant private sector should be promoted by addressing structural constraints to growth and competition in the economy. To this end, Directors underscored the importance of increased labor market flexibility and strengthened institutional capacity.
Directors commended the authorities for their ongoing efforts to strengthen the regulatory and supervisory framework of the financial system, including the offshore sector, as recommended by the Financial Sector Assessment Program (FSAP) for the ECCU. Nevertheless, they considered that more should be done to reduce risks. In particular, they saw an urgent need to develop and implement a clear strategy for restructuring the state-owned National Commercial Bank.
Directors noted that weaknesses in the statistical base hamper the quality of economic analysis and surveillance. They encouraged the authorities to address the data problems, including those related to the national accounts, balance of payments, and labor market.
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.
IMF EXTERNAL RELATIONS DEPARTMENT