IMF Executive Board Concludes 2005 Article IV Consultation with St. Vincent and the Grenadines

Public Information Notice (PIN) No. 06/60
June 2, 2006

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 July 13, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with St. Vincent and the Grenadines.1


St. Vincent and the Grenadines' economy grew rapidly during the 1980s, but has slowed significantly since the early 1990s. Factors inhibiting the growth performance over the past decade include a series of adverse shocks—the erosion of trade preferences, poor weather and natural disasters, the September 11 2001 attack which had a negative impact on the important tourism sector, and the decline in overseas development assistance. In order to accelerate growth, the authorities began in the late 1990s to implement expansionary fiscal policies, leading to persistent public sector imbalances. As a result, the stock of public debt rose from less than 50 percent of GDP in 1997 to almost 80 percent of GDP in 2004.

Economic activity has strengthened, with real GDP growing by 4.3 percent in 2004, and further acceleration expected in 2005. This improved performance was underpinned by a supportive external environment, strong growth in tourism, and a rebound in construction and agriculture sectors. However, fiscal imbalances expanded in 2004, with the primary balance of the central government deteriorating by ⅓ of one percent of GDP to reach almost 1 percent of GDP in 2004. The approved budget for 2005 is likely to lead to a significant further deterioration in the fiscal accounts, mainly due to a large increase in discretionary spending (particularly on wages and capital spending), despite an increase in revenues. This is likely to lead to a further rise in public debt levels, reaching almost 81 percent of GDP in 2005.

The external current account deficit widened substantially in 2004 to about 26 percent of GDP, and is likely to deteriorate further in 2005. The large rise in the current account deficit in 2004 was driven by a decline in exports, and a general rise in imports, especially of energy products and building materials. In 2005 the current account is expected to continue to deteriorate, mainly on account of higher imports due to additional public capital expenditure and rising oil import costs, despite a rebound in banana export earnings.

Reflecting the continued recovery in economic activity, monetary liabilities and domestic credit have rebounded. Broad money (M2) growth accelerated in 2004, as deposits with the banking sector rose strongly. While net lending to the central government continued to decline in 2004, credit to the private sector rose marginally. Net foreign assets of the banking system surged, as both commercial banks' net foreign assets and St. Vincent and the Grenadines' implicit reserves at the ECCB increased substantially.

Financial sector indicators have improved in recent years. Supervision and regulation of the offshore sector has strengthened, assisted by the adoption of the International Bank Act in 2004. Prudential indicators point to weaknesses in the domestic banking sector, although efforts are ongoing to improve bank balance sheets. Indigenous banks suffer from a number of weaknesses, including total capital-to-risk-weighted assets that are considerably below the ECCU average, a large portfolio of nonperforming loans, and high public sector exposures.

Progress has been made in broader structural reforms. With the support of the European Union, the authorities have continued in their efforts to diversify production into non-banana agriculture (under the Agricultural Diversification Program). Progress has also occurred in domestic pricing of energy inputs and in tax administration, as well as in efforts to improve labor skills through training programs. A one-stop shop for foreign investment enquiries and facilitation has been created with the establishment of the National Investment Promotions Incorporated. The authorities have restated their intention to bolster revenue-raising by the introduction of a value-added tax and market valuation-based property taxation in 2007.

Executive Board Assessment

Executive Directors noted that economic activity has strengthened in 2004, despite the impact of Hurricane Ivan, and welcomed the prospects for accelerated growth in 2005. The improved performance has been aided by sustained activity in construction and a favorable external environment. The tourism sector has expanded rapidly with the increase in stay-over arrivals during 2004. Prospects for further expansion in the sector, including tourism-related services and associated construction activity, appear strong and are likely to underpin economic growth for the next several years. Directors saw the main challenges going forward to be to accelerate growth and reduce poverty, while restoring fiscal and external viability and reducing the debt burden. They also underscored the importance of further regional cooperation so as to help the country reap the full potential benefits of the ECCU.

While traditionally among the most fiscally prudent of the ECCU countries, Directors noted that St. Vincent and the Grenadines' public debt has increased significantly in recent years, in substantial part due to the assumption of a large private external loan by the government. They also observed that the fiscal outlook for 2005 is quite difficult, and urged the authorities to address the weakening fiscal situation by implementing appropriate measures to reduce public borrowing. They noted that, in the absence of a strong effort to address the growing fiscal imbalances, the public debt could be placed on an unsustainable path. Directors stressed that such a high debt level raises the risk from adverse shocks, and acts to constrain the government's future ability to engage in counter-cyclical fiscal policy. In light of these considerations, Directors underscored the need for strong fiscal action to reduce debt sustainability risks, while making room for social and other priority outlays. Pointing to the need to strengthen infrastructure and poverty alleviation, some Directors supported the need for strategic investments that would entail a short-term increase in the fiscal deficit.

Directors welcomed the government's plans to improve tax policy and administration in order to broaden the tax base and reduce concessions. They regarded the planned adoption of a value added tax and market-based property taxation as steps in the right direction. They cautioned, however, that more needs to be done, particularly in the area of tax concessions. Directors advised the authorities to seek greater regional cooperation, in order to have a common approach to tax concessions, and thereby avoid region-wide tax competition. The importance of improving the transparency of concessions was also noted.

On the expenditure side, Directors emphasized the need to control the wage bill, which has increased rapidly in recent years due to an increase in civil service employment. They recommended the adoption of a wide-ranging civil service reform, in order to ensure that expenditure consolidation can be achieved without impinging on the quality of service provision. At the same time, Directors recommended that the authorities undertake cost-benefit analyses and prioritization of the extremely high level of proposed public investment projects.

Directors were encouraged by the good progress made by the authorities in boosting their disaster mitigation and preparedness, through the drafting of a national disaster plan, and implementation of a national building code. They recommended that the authorities undertake greater efforts to transfer disaster risk, including through regional insurance pools, enhanced insurance of public buildings and infrastructure assets, and better enforcement of building codes.

Directors observed that the financial sector remains vulnerable to adverse shocks. They urged that measures be taken to strengthen the effectiveness of financial sector supervision, such as through the approval of amendments to the Uniform Banking Act and development of a broad supervisory framework to regulate all nonbank financial intermediaries (including insurance companies, credit unions and other near banks). Given the systemic importance of the state-owned National Commercial Bank, the government was encouraged to continue its efforts to address management and asset quality weaknesses. Directors welcomed the authorities' efforts to enhance supervision of the offshore sector, and encouraged them to continue to ensure the consistency of the regulatory and supervisory frameworks with international best practices.

Directors noted the need to strengthen the quality, coverage, timeliness, and frequency of the statistical database to facilitate policymaking and effective surveillance. They encouraged the authorities to address these data problems, and stressed that improvements are particularly needed in the coverage of the national accounts, in data used to monitor labor market and poverty developments, and in the financial data of public enterprises and statutory bodies.

Directors commended the government's efforts at increasing opportunities for public discussion of policy choices, especially through the formation of the National Economic and Social Development Council. They welcomed the home-grown Interim Poverty Reduction Strategy Paper, as it encapsulates the desire of the government to build a public consensus behind the key objective of reducing poverty, and the need for greater transparency. Directors commended the authorities for their efforts in tackling the problems associated with the erosion of trade preferences for the banana industry, and welcomed the government's hosting of the International Conference on prospects for the sector. Directors noted that increased efforts to disseminate and explain economic developments and policy choices would also deepen the public's understanding of, and support for, structural reforms.

St. Vincent and the Grenadines: Selected Economic Indicators, 2000-2005

        Est. Proj.


2000 2001 2002 2003 2004 2005

  (Annual percentage change, unless otherwise specified)

Output and prices


Real GDP at factor cost

2.0 -0.1 3.2 3.4 4.3 4.9

Nominal GDP (market prices)

1.5 3.1 5.8 3.9 6.4 6.0

Consumer prices, end of period

1.4 -0.6 0.4 2.7 1.7 2.3

Consumer prices, period average

0.2 0.8 0.8 0.2 3.0 2.6

Banking system


Net foreign assets 1/

11.2 -4.1 2.9 5.7 16.0 3.9

Net domestic assets 1/

-1.7 7.2 5.4 -3.9 -3.6 2.1

Of which:


Net credit to the public sector 1/

1.9 0.3 4.8 -4.0 3.3 2.0

Credit to private sector 1/

8.0 2.1 4.3 0.6 0.2 2.0

Broad money 1/

9.5 3.0 8.3 1.9 12.4 6.0

Average deposit interest rate (in percent per annum)

4.6 4.5 4.5 4.5 3.3 ...

Average lending interest rate (in percent per annum)

11.8 11.9 11.5 11.5 9.5 ...
  (In percent of GDP, unless otherwise specified)

Public sector


Central government finances


Total revenue and grants

29.4 30.7 31.7 31.6 30.3 31.7

Total expenditure and net lending

31.4 32.8 34.0 34.9 33.7 35.8

Current expenditure

26.6 27.7 28.0 26.9 26.4 27.5

Capital expenditure

3.9 5.0 6.4 8.0 7.3 8.3

Overall balance (cash basis) 2/

-2.0 -2.1 -4.2 -3.4 -3.4 -4.1

Primary balance (after grants)

0.8 0.5 -1.6 -0.6 -0.9 -0.5

Central government debt 3/

63.6 65.5 68.3 68.2 70.9 70.8

Public sector finances


Public sector overall balance 4/

-4.2 -0.6 -5.8 -3.0 -6.4 -5.2

Gross public sector debt 3/ 4/

67.5 68.2 70.5 72.8 78.9 81.2

External sector


External current account

-6.8 -10.5 -11.3 -19.9 -25.5 -27.6

Stayover arrivals (percentage change)

6.7 -3.0 9.8 1.2 10.4 ...

Public sector external debt (end of period)

47.8 49.1 46.5 51.3 54.7 56.4

External public debt service


In percent of exports of goods and services

5.7 6.7 6.5 7.4 10.6 11.5

Real effective exchange rate (- = depreciation, in percent)

5.1 0.5 -6.7 -8.3 -5.0 ...

External terms of trade (- = deterioration, in percent)

-3.3 2.9 2.1 -4.2 -3.4 -3.2







Sources: Eastern Caribbean Central Bank, Ministry of Finance and Planning; Banana Growers' Association, and Fund staff estimates and projections.

1/ Annual changes relative to the stock of broad money at the beginning of the period.

2/ Includes the difference between the overall balance as measured from above the line and from below the line (i.e. financing), which may include float and unidentified discrepancies.

3/ Net of intra-public sector debt (mainly central government debt to the NIS).

4/ The consolidated public sector includes the central government, the National Insurance Scheme (NIS), Kingstown Board, and 10 nonfinancial public enterprises.

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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