IMF Executive Board Concludes 2007 Article IV Consultation with St. Vincent and the GrenadinesPublic Information Notice (PIN) No. 08/33
March 13, 2008
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 February 4, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with St. Vincent and the Grenadines.1
The economy is enjoying its second year of vigorous economic growth. Output grew at close to 7 percent in 2006, the highest in the last decade and well above potential (estimated at 4¼ percent). Economic activity was sustained by construction and government services. In 2007 growth remained strong, despite disappointing tourism arrivals, due largely to tourism-related investments and government capital expenditure. Inflation has risen, mostly reflecting the higher international oil and food prices, and is expected to reach 8.2 percent by end-2007.
The current account deficit is expected to remain high in 2007-08 on account of higher imports for various tourism-related projects, and capital spending by the government. Credit to the private sector expanded by 14¼ percent in 2006, attributable to the Cricket World Cup (CWC) and tourism-related activities.
Financial sector indicators have strengthened, but balance sheet vulnerabilities remain. Asset quality and capital adequacy have improved, with unsatisfactory assets (non-performing loans) down to 3 percent of total loans, well below the Eastern Caribbean Central Bank's target of 5 percent. Increasing competition from nonbank financial institutions and recent rapid credit growth could result in weaknesses in loan classification and problem loans down the road, especially in the event of a large adverse shock. An update of a 2004 Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) assessment will take place in early 2009, at the request of the authorities.
The fiscal position has strengthened. The primary deficit has narrowed by around 2 percent of GDP during 2005-07 reflecting both higher revenues and current spending restraint. Revenues benefited from the growth dividend (higher stamp taxes related to land sales), more frequent pass-through of oil prices, as well as the introduction of a VAT in May 2007. Wage restraint helped contain spending despite an increase in capital expenditure.
An agreement with Italy to write-off a debt obligation has reduced St. Vincent and the Grenadines' public debt stock by about 10 percent of GDP. The loan had been serviced by the Italian export agency, due to perceived malfeasance by the private builder-operator. The write-off, formalized in October 2007, will lower the debt to-GDP ratio to around 68 percent by end-2007.
Executive Board Assessment
Directors welcomed St. Vincent and the Grenadines' recent strong macroeconomic performance, marked by robust economic growth, fiscal consolidation, and declining debt levels. Directors noted that the potential upside risks to inflation, the high current account deficit, and the still-high public debt require continued efforts to maintain macroeconomic stability. They welcomed the authorities' commitment to diversifying the economy, further developing the tourist industry, lowering the cost of doing business, and reducing the vulnerability to economic shocks to address these medium-term challenges.
Directors stressed that continued fiscal consolidation is needed to lower the public debt-to-GDP ratio, and create room to raise social spending. They welcomed the recent introduction of a value-added tax (VAT) and encouraged the authorities to resist pressures to change the VAT rates and the exemption structure. They supported the early introduction of market valuation-based property taxes, the reduction of tax concessions, and the timely pass-through of international oil price changes. Spending restraint will also be important, particularly through control of the wage bill and prioritization of capital expenditure.
Directors noted the authorities' plan to accelerate investment in tourism-related infrastructure, in particular the ongoing construction of a new international airport. While the higher investment is expected to raise the economy's growth potential and planned land sales could help to fill the financing gap, Directors encouraged the authorities to undertake an updated study of the financing structure, and to seek additional grant and concessional financing to contain the potential impact on the country's debt position.
While the real effective exchange rate is broadly in line with fundamentals, Directors considered that maintaining St. Vincent and the Grenadines' external competitiveness will require continued fiscal consolidation along with growth-enhancing reforms. They expected the current account deficit, which is mainly financed by grants and foreign direct investment, to decline over the medium term in line with the fall in infrastructure and tourism investment.
Directors welcomed the authorities' ongoing efforts to reform the National Insurance Services, including through increases in the contribution rate, and encouraged the authorities to integrate the civil service pension system with the National Insurance Services. Directors also welcomed the amendments to the Banking Act and encouraged the establishment of a single regulatory unit to supervise non-bank financial institutions.
Directors welcomed the authorities' efforts to improve the quality of statistics, and encouraged the authorities' further efforts to improve the coverage and timeliness of data.