IMF Executive Board Concludes 2006 Article IV Consultation with St. Kitts and Nevis
Public Information Notice (PIN) No. 07/42March 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.