Public Information Notice No. 10/110

Public Information Notice: IMF Executive Board Concludes 2010 Article IV Consultation with St. Vincent and the Grenadines

August 5, 2010

On July 26, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with St. Vincent and the Grenadines.¹

Background

The global economic slowdown has continued to have its toll on St. Vincent and the Grenadines’ economy. Following an average growth of about 8 percent in 2006–07, economic activity contracted by 0.6 percent in 2008 and 1.0 percent in 2009, reflecting slowdowns in tourism and Foreign Direct Investment (FDI). Stay-over arrivals fell by 10 percent and FDI declined by 11 percent, (year over year) in 2009. End-period inflation stood at minus 1.6 percent in 2009 and average inflation was close to zero after a spike to about 10 percent in 2008, reflecting in large part the decline in international food and fuel prices and a weak domestic demand.

The central government’s overall fiscal deficit more than doubled to 3.5 percent of GDP in 2009, largely due to spending increases to help mitigate the impact of the global crisis on the poor and one-off costs of constitutional and public sector reforms. The deficit was financed largely by issuing government paper in the regional securities market, leading to an increase in the public debt-to-GDP ratio by 5.5 percentage points of GDP to 75 percent of GDP at end 2009.

Developments in the monetary aggregates also reflected the weak economic activity. The growth of credit to the private sector and broad money remained sluggish, growing only by about 2 and 3 percent, respectively, in the 12 months ending March-2010. Banking sector soundness indicators point to deterioration in bank balance sheets, especially at the indigenous bank. The ratio of non-performing loans (NPLs) to total loans of the banking sector increased from 4 percent at end 2008 to 9.3 percent at end-March 2010. While foreign banks remain well-capitalized and profitable, the indigenous bank is facing liquidity problems. The authorities have decided to sell the bank to a strategic investor.

The fallout from the collapse of the Trinidad and Tobago-based CL Financial group poses risks to financial sector stability and to the fiscal stance. Judicial managers for one of the subsidiaries—British American Insurance Company (BAICO)—declared the company insolvent last year and recommended establishing a new company to take over its Eastern Caribbean Currency Union (ECCU) operations. The other subsidiary—Colonial Life Insurance Company (CLICO)—has been barred from writing life insurance policies, following similar actions by Barbados and other ECCU countries.

Executive Board Assessment

The Executive Directors noted that the global downturn has adversely affected St. Vincent and the Grenadines’ economy, resulting in a further real GDP decline in 2009. The fiscal position worsened, reflecting in part increased spending needed to help mitigate the impact of the crisis on the poor and vulnerable groups.

Directors cautioned that continuation of the expansionary fiscal stance this year, combined with the fiscal costs of addressing the problems in the financial sector, would lead to a further significant increase in the public debt burden. They encouraged the authorities to contain the deficit this year as planned, mainly through limiting the sharp rise in capital spending, while protecting spending on the poor.

Directors underscored the need for strong fiscal consolidation to restore fiscal and debt sustainability over the medium term. In particular, they advised the authorities to improve the efficiency of tax collections, including streamlining exemptions, limit the increase in the wage bill, and contain spending on transfers and subsidies. Directors emphasized the need to establish, with the Caribbean Regional Technical Assistance Center assistance, systematic reporting by state-owned enterprises and impose hard budget constraints on them to minimize the fiscal burden. They also stressed the importance of introducing a multi-year budget framework and further reforms to the pension system.

Directors welcomed the authorities’ decision to sell the troubled state-owned National Commercial Bank to a private strategic investor, which will help strengthen the banking sector and impose discipline on public sector borrowing. While the rest of the banking sector remains well-capitalized, Directors encouraged the authorities to monitor the recent increase in nonperforming loans.

Directors supported the authorities’ regional approach to the resolution of the CL-financial Group. They emphasized the importance of avoiding the likelihood of a systemic contagion while minimizing the fiscal costs to the extent possible. Directors underscored the need to improve the regulatory and supervisory framework for the nonbank financial sector. They noted that the Insurance Act will be amended to strengthen supervisory powers and ensure its harmonization with regional partners’ practices. Directors stressed the importance of establishing a Single Regulatory Unit and bringing all nonbank financial institutions under its umbrella.

Directors noted the staff’s assessment that the exchange rate does not show clear evidence of misalignment. They encouraged the authorities to undertake structural reforms to enhance competitiveness and boost growth, in particular, by improving the business climate.