IMF Executive Board Concludes 2006 Article IV Consultation with St. Kitts and Nevis

Public Information Notice (PIN) No. 07/42
March 27, 2007

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 January 17, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with St. Kitts and Nevis.1

Background

In July 2005, the sugar industry—the historical mainstay of the economy—closed after more than 300 years. The industry had incurred substantial losses—on the order of 3-4 percent of GDP annually in the last several years—even before the announced further cut in preferential access to the EU market. The closure has required the government to service the debt of the sugar company (about 29 percent of GDP). Public debt, accumulated as a result of exogenous shocks (including three hurricanes in the second half of the 1990s) and an accommodative policy stance, reached 190 percent of GDP at end-2005.

Despite the closure of the sugar industry, economic growth has accelerated. In 2006, the economy is estimated to have recorded its third consecutive year of strong growth, projected at 4½ percent in 2006, with good prospects for 2007 due to the combination of ongoing construction projects and activity related to the Cricket World Cup. While the current account deficit remains large (at 25 percent of GDP in 2005), it has been mainly financed by foreign direct investment, and competitiveness appears to be improving—partly owing to the depreciation of the U.S. dollar against major currencies. Large adjustments in the regulated prices for petroleum and electricity prices in response to the higher global prices for petroleum, created a temporary spike in inflation during 2005-06.

Fiscal imbalances have improved significantly, reflecting both policy adjustments and continued growth. The central government primary surplus is estimated at 6 percent of GDP in 2006, a significant turnaround from the small primary deficit recorded in 2004. Policy adjustments include increasing revenue effort based on administrative reforms that enhanced compliance and containing noninterest expenditures.

Despite the fiscal adjustment, public sector debt remains at a very high level. While the central government accounts have strengthened significantly, public enterprises are contracting significant debt. The large gross financing needs of the government have been met by increased reliance on domestic financing sources.

Monetary aggregates have continued to grow in line with economic growth. Private credit has rebounded, rising by about 8 percent in 2005, and is projected to increase by more than 10 percent in 2006. The approval of the revisions to the uniform Banking Act has strengthened the regulatory basis for the banking system. Further progress has also been made in improving the supervision and the regulation of the Anti-Money Laundering/Combating the Financing of Terrorism framework to reflect ongoing changes in the financial system.

Executive Board Assessment

Directors welcomed the improvement in economic outcomes and prospects achieved over the last few years, with recent growth driven largely by tourism and construction. To develop more sustainable sources of growth, Directors recommended strengthening the business and investment climate and improving competitiveness, including by enhancing the efficiency and reliability of public utilities.

The authorities' ambitious fiscal consolidation program has already resulted in the central government achieving a strong primary surplus. Nevertheless, greater efforts to prioritize and control government expenditure are needed to sustain the fiscal adjustment. The transparency, accountability, monitoring, and oversight of public enterprises need to be improved, to ensure that the central government's fiscal consolidation is not undermined by the poor financial performance of public entities. Directors welcomed the authorities' commitment to reform the tax system to improve its efficiency, but emphasized that for the reform to be successful it will need to be supported by improvements in administrative capacity.

Even with full implementation of the authorities' consolidation strategy, the public debt stock will remain very high for many years. Directors emphasized the importance of exploring options for a more rapid reduction of the debt-to-GDP ratio, including by accelerating the pace of asset sales and strengthening debt management. They stressed that a social consensus in favor of fiscal consolidation needs to be nurtured and strengthened, even as expenditure pressures related to population aging grow.

Reducing financial sector risks, including in nonbank financial institutions, needs to be given high priority. Directors called for additional progress in making effective the single regulatory unit and in approving supporting legislation.

Directors observed that St. Kitts and Nevis's high vulnerability to natural disasters and shocks to tourism highlights the importance of precautionary measures and contingency planning.

Directors welcomed the recent enhancements in the statistical database, but called for further efforts to improve the reliability and timeliness of key data, including on tourism, debt, and public enterprises.


St. Kitts and Nevis: Selected Economic Indicators

        Est. Proj. Proj.
  2002 2003 2004 2005 2006 2007

(Annual percentage change; unless otherwise specified)

National income and prices

           

Real GDP (factor cost)

-0.3 -1.2 7.3 4.1 4.6 6.0

Consumer prices, end-of-year

1.8 2.9 1.7 7.2 5.0 1.5

Real effective exchange rate (end-of-period) 1/

-3.3 -7.5 -6.9 -2.0 ... ...
             

Banking system

           

Net foreign assets 2/

10.2 13.6 -7.5 -2.0 3.2 8.0

Net domestic assets 2/

-3.9 -6.7 29.2 6.7 6.9 -0.5

Of which

           

Credit to public sector 2/

1.6 -10.8 17.9 9.6 1.8 -4.7

Credit to private sector 2/

-2.1 3.4 6.7 5.2 7.6 6.0

Broad money

6.4 6.9 21.7 4.7 10.0 7.4

Of which

           

Money

12.9 11.0 25.0 -1.6 7.0 7.4

Quasi-money

5.4 6.2 21.1 5.9 10.5 7.4

Weighted average deposit rate (in percent per year) 3/

3.8 4.1 3.6 4.1 ... ...

Weighted average lending rate (in percent per year) 3/

10.4 12.0 9.9 9.8 ... ...
             
(In percent of GDP)

Public sector 4/

           

Primary balance

-11.2 -1.2 -0.4 4.2 6.1 5.7

Overall balance

-18.5 -8.7 -7.3 -3.9 -3.0 -2.9

Total revenue and grants

34.8 33.3 34.1 39.3 40.1 38.8

Total expenditure and net lending

53.3 42.0 41.5 43.3 43.1 41.6

Foreign financing

10.9 14.3 1.5 -3.2 -1.3 -1.6

Domestic financing

8.0 -5.6 5.8 7.1 4.3 3.0

Sale/purchase of assets

-0.4 0.0 0.0 0.0 0.0 1.5

Total public debt (end-of-period)

161.0 179.3 192.1 190.2 183.4 172.1

Of which

           

Central government

107.3 118.0 119.2 117.8 110.0 103.7

Public enterprises

53.7 61.3 72.9 72.4 73.4 68.3
             

External sector

           

External current account balance

-37.9 -34.4 -25.2 -25.5 -28.2 -27.5

Trade balance

-32.2 -32.3 -29.1 -28.7 -29.9 -30.3

Services, net

3.3 7.6 12.9 11.6 10.2 11.4

Of which

           

Tourism receipts

16.1 20.6 25.3 24.2 22.9 23.8

Transfers, net

4.6 5.1 4.5 4.1 3.9 3.6

Net capital inflow 5/

40.7 34.1 28.5 24.2 31.0 28.9

FDI (net)

22.5 20.6 11.4 13.6 14.5 15.0

External public debt (end-of-period)

75.0 87.5 84.2 72.9 67.8 61.5
             
(In percent of exports of goods and nonfactor services)
             

External public debt service

20.7 25.4 26.4 24.0 22.8 27.2

External public debt (end-of-period)

173.8 194.1 177.2 160.3 157.9 140.1
             
(In millions of U.S. dollars; unless otherwise specified)
             

Gross international reserves of the ECCB, end-of-period

504.8 539.9 632.4 600.8 651.7 711.3

In percent of ECCU broad money

20.2 19.8 20.5 17.9 17.7 17.6

Sources: St. Kitts and Nevis authorities; and IMF staff estimates and projections.

1/ Weights given by the average trade share during 1999-2003. Depreciation (-).

2/ In relation to broad money at the beginning of the period.

3/ End of period. Weighted by the size of the loans or deposits. There was a break in the average interest rate series in June 2003.

4/ Federal government unless otherwise noted.

5/ Includes errors and omissions.

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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