Press Release: IMF Statement at the Conclusion of the 2007 Article IV Consultation Discussions with St. Lucia
July 23, 2007Press Release No. 07/167
An IMF staff mission issued the following statement today in Castries: "An IMF staff mission led by Mr. Paul Cashin, Division Chief in the Western Hemisphere Department, visited St. Lucia June 28-July 11 to conduct the 2007 Article IV Consultation discussions. The discussions covered recent developments and current economic policies, as well as the medium-term economic outlook. The mission received excellent cooperation and benefited from a constructive exchange of views with Acting Prime Minister the Honorable Stephenson King, Minister for Economic Affairs Senator the Honorable Ausbert d'Auvergne, Leader of the Opposition Dr. Kenny Anthony, Permanent Secretary of the Ministry of Economic Affairs Donovan Williams, Director of Finance in the Ministry of Finance Isaac Anthony, and other senior government officials, as well as representatives from the private sector, financial sector, farmers, and trade unions.
"Macroeconomic outcomes have strengthened significantly in recent years. Real GDP growth averaged about 4 percent during 2003-05, and is estimated to have reached close to 5 percent in 2006. Economic activity was sustained by construction and government services, both related to tourism and preparations for the Cricket World Cup (CWC). Inflation has remained low, anchored by St. Lucia's membership of the Eastern Caribbean Currency Union (ECCU). In 2007 growth is expected to decelerate to about 3½ percent, as activity in the tourism sector slows.
"The external current account deficit grew to over 30 percent of GDP in 2006, accompanied by strong capital inflows. The deficit was driven by an expansion in imports related to hotel construction and public capital expenditure in preparation for the CWC, as well as a large deterioration in the terms of trade. Foreign direct investment surged in 2006, reflecting the construction of several large tourism projects. The current account deficit is expected to narrow in 2007, due to a slowing of CWC-related import spending and a modest rebound in exports of goods and services. The current account is expected to continue to be financed largely by foreign direct investment flows. Looking forward, St. Lucia remains vulnerable to exogenous shocks, given its dependence on imported oil, declining European Union (EU) banana preferences, volatile tourism receipts, and high exposure to natural disasters.
"Discussions centered on the importance of enhancing St. Lucia's growth potential, strengthening its fiscal position and reducing debt and debt servicing costs, and bolstering the economy's resilience to potential shocks. The mission encouraged the authorities to adopt measures to enhance productivity and efficiency by improving the investment climate, reviewing the investment incentives regime, boosting regional and global integration, and strengthening social safety nets.
"A key challenge will be achieving sound public finances and ensuring debt sustainability. Although public debt in St. Lucia is the lowest in the ECCU, it is high by international standards, and rising debt servicing costs constrain the fiscal room for maneuver in the event of adverse shocks. The mission supports the authorities' medium-term intention to deepen fiscal consolidation and reduce public debt through spending discipline and reforms aimed at increasing the efficiency of the tax system. The mission noted that greater prioritization and evaluation of the capital budget would also help to reduce fiscal imbalances, while facilitating increased social spending. The IMF mission supports the government's plans to introduce a value-added tax, which will improve the efficiency and stability of revenue raising over the medium term. The mission noted that, while unemployment has fallen in recent years, it remains high, and recommended that the focus and coherence of poverty reduction initiatives be sharpened to ensure that scarce resources are directed to the neediest members of society. Other fiscal matters discussed included property taxation, domestic pricing of petroleum products, current expenditures, and prospects for external grants and concessional financing.
"The IMF mission observed that prudential indicators point to a strengthening of the country's banking sector. In addition, positive steps have been taken to enhance the regulation and supervision of banks, nonbank financial intermediaries and international financial service providers. While ongoing competitive pressures and the erosion of EU trade preferences have affected the country's banana sector, the mission supports the authorities' efforts to ameliorate the social impact of this structural transformation. The importance of enhancing risk mitigation and disaster management cannot be overemphasized. The mission welcomed the progress made by St. Lucia in enhancing the National Emergency Management Organization, improving the national disaster response plan, and its participation in the World Bank's Catastrophic Risk Insurance Facility.
"The IMF mission is grateful to the government and the people of St. Lucia for their warm hospitality, and wishes them every success in their ongoing efforts to build a strong, prosperous, and diversified economy."