IMF Executive Board Concludes 2007 Article IV Consultation with St. Kitts and Nevis

Public Information Notice (PIN) No. 08/42
April 1, 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. Kitts and Nevis.1


The closure in 2005 of the sugar industry—the historical mainstay of the economy—set the stage for a new economic course. Indeed, despite the closure, growth remained strong in 2006, with output increasing by 4 percent, driven by tourism, construction, and communications. Some slowdown is expected for 2007, with growth projected at 3.3 percent. Medium-term prospects look promising, with a number of high-end foreign investment tourism projects in the pipeline.

Large adjustments in retail fuel prices and a new fuel surcharge for electricity created a temporary inflation spike in 2006, but inflation has since decelerated as these one-off effects dissipated. Reflecting strong construction-related imports, the current account deficit increased to around 30 percent of GDP in 2006/07, but has been largely financed by tourism-related foreign direct investment (FDI).

Considerable progress has been made in strengthening the fiscal accounts. The government achieved a sizable primary surplus in 2006 for the second year in a row. A buoyant economy, the electricity surcharge, strengthened tax administration, and wage restraint have contributed to this improvement. However, expenditure management remains a challenge. The primary surplus is projected to decline to 2 percent of GDP in 2007 (from around 4½ percent in 2006), largely because of a sharp increase in net lending in St. Kitts and a near-tripling of capital expenditure in Nevis, with major road projects underway.

Despite the fiscal improvement, public debt remains high—at about 185 percent of GDP at end-2006—leaving little room for maneuver in the event of an adverse shock. Facing tightened external borrowing conditions, the government has relied mainly on domestic sources to meet its financing needs. There also continues to be insufficient financial information on public enterprises, whose share in public debt reached 38 percent by end-June 2007.

Monetary and financial developments have been largely favorable, although the high and rising public sector exposure of the banking system is a concern. Credit to the private sector rebounded on the back of buoyant economic activity and, partly reflecting this, the nonperforming loans ratio declined. However, the banking system's holdings of public debt had risen to 44 percent as of end-June 2007. The nonbank sector has been growing rapidly, while progress in establishing an appropriate supervisory and regulatory framework for this sector has been limited so far.

Executive Board Assessment

Executive Directors commended the authorities of St. Kitts and Nevis for their efforts to strengthen macroeconomic performance, with growth rebounding and fiscal balances improving markedly. Directors observed, however, that the country's high public debt leaves little room for maneuver in the event of adverse shocks. Sustained fiscal consolidation, backed up with the development of a contingency plan to respond to economic shocks, would help mitigate the risks associated with the high debt stock.

Directors welcomed the important steps that have been taken towards strengthening fiscal performance, including the improvement of tax administration and the adoption of an automatic pass-through of fuel prices. They encouraged the authorities to continue their efforts to achieve their medium-term fiscal goals and put debt on a solid downward trajectory. Expenditure restraint, including comprehensive civil service reform, will be key. Plans to broaden the tax base, improve the oversight and transparency of public enterprises and strengthen debt management capacity will also support these goals. Directors noted that public debt would remain elevated throughout the medium term, and encouraged the authorities to explore options for a more rapid debt reduction, including by accelerating the pace of asset sales, which could also promote private sector-led growth.

Directors noted that the real effective exchange rate does appear broadly in line with fundamentals. Further fiscal consolidation would support external competitiveness and underpin the regional currency arrangement. Directors also encouraged the authorities to accelerate the implementation of planned structural reforms aimed at improving the business climate and strengthening the economy's flexibility and resilience. Directors noted that the country's large external current account deficit, mainly financed by foreign direct investment, although likely to remain high over the medium term, could be expected to decline as investment in infrastructure and tourism projects taper off.

Directors noted that financial sector risks need to be carefully monitored. They called for further progress in mitigating risks, including through enhancing supervision of vulnerable banks and reducing the large government exposure. They welcomed the authorities' plan to establish a single regulatory unit for the nonbank financial sector.

Directors also welcomed the progress made in improving the quality and coverage of fiscal data, and looked forward to similar progress in other areas.

St. Kitts and Nevis: Selected Economic Indicators
        Prel. Proj. Proj.1/
  2003 2004 2005 2006 2007 2008
(Annual percentage change; unless otherwise specified)

National income and prices


Real GDP (factor cost)

-1.2 7.3 4.4 4.0 3.3 3.5

Consumer prices, end-of-year

2.9 1.7 6.0 7.9 4.0 2.5

Real effective exchange rate (end-of-period) 2/

-3.9 -4.0 5.4 0.5 ... ...

Banking system


Net foreign assets 3/

13.6 -5.7 8.4 7.1 9.8 1.4

Net domestic assets 3/

-6.7 27.8 -4.1 5.7 4.3 4.7

Of which


Credit to public sector 3/

-10.8 18.3 9.2 6.4 4.2 0.6

Credit to private sector 3/

3.4 6.8 5.1 8.2 6.6 4.0

Broad money

6.9 22.1 4.3 12.8 14.1 6.1

Of which



11.0 25.4 -1.9 12.7 14.1 6.1


6.2 21.6 5.5 12.8 14.1 6.1

Weighted average deposit rate (in percent per year) 4/

4.1 3.6 4.1 3.7 ... ...

Weighted average lending rate (in percent per year) 4/

12.0 9.9 9.7 9.4 ... ...
(In percent of GDP)

Public sector 5/


Primary balance

-1.4 -0.8 4.0 4.7 1.9 -0.3

Overall balance

-9.0 -7.9 -4.1 -5.0 -7.7 -9.8

Total revenue and grants

33.5 34.3 39.5 38.9 37.4 36.3

Total expenditure and net lending

42.5 42.1 43.5 43.9 45.1 46.2

Foreign financing

14.5 1.5 -1.1 0.2 -0.9 -0.9

Domestic financing

-3.1 8.7 11.9 9.6 5.6 6.1

Sale/purchase of assets

0.2 0.4 0.3 0.5 3.0 1.0

Statistical discrepancy

-2.6 -2.8 -7.1 -5.4 0.0 0.0

Financing gap

0.0 0.0 0.0 0.0 0.0 3.6

Total public sector debt (end-of-period)

181.5 195.0 194.8 184.6 181.0 182.5

Of which


Central government

119.4 121.2 117.2 112.6 110.3 112.8

Public enterprises 6/

62.1 73.8 77.6 72.0 70.8 69.7

External sector


External current account balance

-34.9 -20.2 -22.6 -29.0 -31.0 -30.2

Trade balance

-32.8 -25.6 -29.9 -32.2 -32.9 -32.7

Services, net

7.7 13.6 13.7 9.1 7.2 7.5

Of which


Tourism receipts

20.8 25.7 26.1 23.5 21.6 22.0

Transfers, net

5.1 4.6 4.7 4.1 4.0 4.0

Net capital inflow 7/

34.7 23.7 21.1 32.5 31.0 30.2

FDI (net)

20.9 11.6 19.5 40.3 29.4 29.4

External public debt (end-of-period)

88.5 85.5 77.0 66.9 60.1 55.4
(In percent of exports of goods and nonfactor services)

External public debt service

25.5 26.2 24.1 25.1 25.3 25.7

External public debt (end-of-period)

194.4 176.3 163.3 153.2 144.5 132.8

Sources: St. Kitts and Nevis authorities; and IMF staff estimates and projections.
1/ Based on the baseline (current policy) scenario.
2/ Weights given by the average trade share during 1999-2003. Depreciation (-).
3/ In relation to broad money at the beginning of the period.
4/ End of period. Weighted by the size of loans or deposits. There was a break in the series in June 2003.
5/ Central government unless otherwise noted.
6/ Including St. Kitts Sugar Manufacturing Corporation (SSMC).
7/ 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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