Press Release: IMF Executive Board Approves Three-Year US$84.5 Million Stand-By Arrangement with St. Kitts and Nevis
July 28, 2011Press Release No.11/295
July 28, 2011
The Executive Board of the International Monetary Fund (IMF) has approved a three-year Stand-By Arrangement (SBA) for an amount equivalent to SDR 52.51 million (about US$84.5 million) with St. Kitts and Nevis. The arrangement will support the authorities’ economic program, coupled with a comprehensive debt restructuring, to restore debt and external sustainability and set the stage for sustained growth.
As a result of the Board’s decision, an amount equivalent to SDR 22.15 million (about US$35.6 million) is available for immediate disbursement. The three-year SBA arrangement represents 590 percent of St. Kitts and Nevis’ (SDR 8.9 million) IMF quota. St. Kitts and Nevis joined the Fund in August 1984.
Following the Executive Board’s discussion of St. Kitts and Nevis on July 27, 2011,
Ms. Nemat Shafik, Deputy Managing Director and Acting Chair, made the following statement:
“The St. Kitts and Nevis economy is gradually recovering from a prolonged recession. However, fiscal imbalances and structural fragilities pose significant risks to the economic outlook.
“The authorities have started to implement an economic program to address these challenges over the medium term. The main objectives of this program are achieving higher growth and a sustainable fiscal position. The authorities’ plans include front-loaded fiscal consolidation, a comprehensive debt restructuring, and further steps to strengthen the financial sector.
“The authorities have already taken important revenue and expenditure measures. These include an introduction of a value added tax, implementation of an excise tax and electricity tariff reform, and a freeze of the public wage bill. Given the magnitude of the targeted adjustment, sustained consolidation is critical.
“In addition to fiscal adjustment, a comprehensive and timely debt restructuring is needed to achieve a sustainable fiscal position. The authorities have publicly announced their intention to restructure the public debt and have initiated discussions with creditors to this end.
“Further strengthening of the financial system is also a critical element of the authorities’ economic program. In this respect, the forthcoming Banking Sector Reserve Fund would be able to provide temporary liquidity support to solvent financial institutions, if needed.
“Over the medium term, the structural reforms envisaged by the authorities will complement fiscal adjustment. These reforms aim at strengthening public financial management, improving the business climate, enhancing the social safety nets, removing obstacles to growth, and restoring competitiveness.”
Recent Economic Development
St. Kitts and Nevis’ economy was severely impacted by the global financial and economic crisis causing the economy to contract both in 2009 and 2010. This reflected a sharp decline in stay-over tourist arrivals and FDI inflows. The fiscal position deteriorated in 2010 as tax revenue declined by 13½ percent. The global downturn also coincided with the collapse of two large regional insurance companies.
Faced with increasing fiscal imbalances in 2010, the authorities started implementing a strong fiscal adjustment program towards the end of last year and the beginning of 2011, including the introduction of a VAT and the increase in electricity tariffs by about 80 percent. Despite those efforts, the public debt increased further to about 200 percent of GDP in 2010.
The authorities have requested Fund assistance to support their economic program. The main objectives of the program are to substantially strengthen public finances, significantly reduce public debt levels and set the stage for sustained economic growth.
Key reform objectives include:
• Continued implementation of fiscal adjustment measures.
• Strengthening fiscal management and improving the effectiveness and efficiency of the public sector.
• Continued support to the most vulnerable social groups.
• Removing obstacles to growth.
These reform efforts, however, will need to be complemented by a comprehensive debt restructuring. The authorities have announced their intention to seek a comprehensive and substantive restructuring of the public debt in June 2011. To address the financing difficulties and help set the public debt firmly on a downward path toward the ECCU debt target of 60 percent of GDP by 2020, a substantial reduction in the debt service burden consistent with the country’s payment capacity will be needed.