## cr17186

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**Canonical URL:** [cr17186](https://www.imf.org/-/media/files/publications/cr/2017/cr17186.pdf)

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---

### Recent economic developments
- Real GDP growth:
  - 2016: 3.2 percent (down from 4.9 percent in 2015).
  - Sectoral: Construction grew 7.6 percent in 2016; manufacturing, financial, and tourism-linked sectors decelerated.
- Tourism: Slowdown in cruise arrivals (limited port capacity) and lower stay-over arrivals from the United States and the United Kingdom.
- Inflation:
  - Consumer inflation negative in 2015; end-year inflation in 2016: 0.9 (percent).
- Fiscal performance:
  - Overall fiscal balance in 2016: surplus of 4.2 percent of GDP (deteriorated compared to 2015).
  - Underlying fiscal balance (overall balance excluding SIDF grants and CBI-related receipts and due-diligence spending): deficit narrowed to 3.3 percent of GDP.
  - Reduced surplus driven largely by lower CBI receipts and reduced tax revenues (full-year impact of VAT exemptions granted in April 2015).
  - Total expenditure declined substantially; wage bill increased reflecting the 13th-month bonus to public employees.
- Public debt and buffers:
  - Public debt (end-2016): 65.6 (percent of GDP).
  - Central government and SIDF deposit buffers rose to 42 percent of GDP.
- External sector and reserves:
  - Current account deficit widened to 17.3 percent of GDP in 2016 (from 9.2 percent).
  - Foreign reserves at the ECCB: 7.4 months of imports (2016).
- Banking sector:
  - Banks’ reported capital adequacy ratio: 22 percent as of end-December 2016.
  - Indigenous banks NPLs/Total Loans: 20.8 percent (Dec-16); provisioning/NPLs for indigenous banks: 32.1 percent (Dec-16).
  - Liquid assets/Total Assets for indigenous banks: 50.9 percent (Dec-16).
  - Real credit growth moved to negative territory by end-2016.
  - Correspondent-banking costs rose (average fee increases about 25 percent); one indigenous bank replaced lost CBRs at higher cost (30-50 percent) and longer transaction times (3-4 days).

### Outlook and risks
- Growth projections (baseline):
  - 2017 growth projected at 2.7 percent.
  - Medium-term average around 3 percent.
- Inflation projections:
  - Inflation to rise in 2017 with fuel-price increases; expected to remain around 2 percent in the medium term.
- External and fiscal projections:
  - Current account deficit to remain large as CBI inflows taper off; reserves remain comfortable.
  - Public debt projected to reach the 60-percent ECCU debt-to-GDP target by 2018.
- Key risks (broadly balanced):
  - Downside: delays in land sales under the debt-land swap; sharper drop or sudden stop in CBI inflows; stronger U.S. dollar and tighter financial conditions; more severe Zika epidemic; major natural disaster; loss of CBRs.
  - Upside: stronger CBI inflows from reforms; continued oil-price weakness supporting growth.
- Scenario findings:
  - Extreme stop in CBI inflows could erode buffers as early as 2020 and leave public debt 8 percentage points above the 2022 baseline absent fiscal adjustment.
  - Combined shock (CBI stop + natural disaster assumed to lower growth by 6 percentage points in 2018 and deteriorate fiscal balance by about 5 percent of GDP in 2018-19) would add another 3.5 percent of GDP to the baseline in 2022, taking the debt-to-GDP ratio slightly above the 60 percent target.

### Fiscal policy framework and anchor
- Staff fiscal anchor recommendation:
  - Zero-underlying primary balance target of the general government, net of CBI-related receipts, to guide medium-term fiscal management.
  - Rationale: reduce vulnerability to declining CBI inflows; accumulate fiscal buffers; absorb unforeseen financing needs.
  - Implementation: enshrine target in fiscal responsibility legislation; exclude windfall CBI inflows and save them in a contingency fund; require approval by both St. Kitts and Nevis cabinets for a country-level action plan.
- Required fiscal effort:
  - Additional fiscal effort of about 2.1 percent of GDP over the medium term to achieve the zero-primary-balance target.
- Proposed adjustments (percent of GDP, over 3–5 years):
  - Total deviation from target primary balance (less CBI & SIDF Grants): 2.1
  - Proposed adjustments: 2.1, composed of:
    - Streamline tax incentives: 1.3
    - Increase property tax intake, including on new developments: 0.2
    - Improve tax administration and compliance: 0.2
    - Implement civil service reform and contain wage-bill growth: 0.2
    - Contain spending on goods and services: 0.2
  - Note: Adjusted for dividends on unsold land.

### Revenue mobilization and tax incentives
- Tax-to-GDP ratio: around 20-21 percent since 2011.
- Revenue loss from tax incentives estimated at 6.4 percent of GDP in 2016 (note: estimate likely understated as it excludes corporate income tax and April 2015 VAT exemptions in some tables).
- Tax incentives estimated in 2012: 6 percent of GDP and 30 percent of tax revenue.
- Recommendations:
  - Broaden the tax base by streamlining tax incentives, codifying rules, and improving transparency.
  - Update property valuations to raise property tax revenue.
  - Consider taxes on cigarettes, alcohol, and sugary products.

### Growth and Resilience Fund (GRF) and debt management
- Authorities committed to establish a Growth and Resilience Fund (GRF) later this year to manage savings from fiscal surpluses, respond to adverse shocks, and create fiscal space for public investment while limiting debt accumulation.
- GRF design recommendations:
  - Simple sovereign-wealth-fund structure operating as a financing fund with a prudent investment strategy.
  - Fully integrate GRF with the medium-term fiscal framework, linking flows directly to the primary-balance target.
- Liability-management recommendations:
  - Reduce outstanding T-bills, accelerate payment of expensive debt, improve debt terms.
  - Clear arrears owed by the Federal Government to PDVSA (to be paid over 5 years) and progress on restructuring NIA’s overdraft debt accounts.

### Debt-land swap, sovereign-bank linkages, and NPL resolution
- Debt-land swap issues:
  - Second leg (divest land owned by banks) delayed due to SLSC operationalization and slow sales (two purchase offers amounting to 3 percent of the swapped land).
  - A 3-year dividend guarantee agreement cost to government: 3 percent of GDP; it ended in mid-2016; renewal discussions ongoing.
  - ECCB prudential guideline requires divestment within five years; delays would force provisioning with macro, financial, and fiscal implications.
- Recommendations:
  - Urgently complete land sales; implement clear action plan and timetable with visible milestones; step-up SLSC marketing.
  - Agree on reporting treatment of swapped land to remove uncertainty.
- NPL resolution:
  - Operationalize Eastern Caribbean Asset Management Corporation (ECAMC); six of eight jurisdictions (including St. Kitts and Nevis) have paid capital contributions.
  - Modernize foreclosure/insolvency frameworks; enable non-citizen ownership of property to support cross-border sale of collateral.
  - Implement new collateral appraisal guidelines, credit bureau, and land registry to improve recovery and credit decisions.

### Correspondent banking relationships (CBRs) and AML/CFT
- Authorities amended AML/CFT laws and strengthened tax information exchange legislation.
- Committed to implementing the international standard for automatic exchange of financial account information by September 2018; legal framework in place since end-2016.
- CFATF mutual evaluation scheduled for 2019.
- ECCB and FSRC centralizing AML/CFT supervision of institutions licensed under the Banking Act; FSRC to use a Risk Based Supervisory Framework (RBS) including AML/CFT as an “Inherent Risk Category.”
- Recommendations:
  - Maintain tight AML/CFT regime and improved due diligence; encourage open communication with correspondent banks; consider amalgamation opportunities to address volume-of-business concerns.

### Social, labor-market, and inclusiveness priorities
- Poverty and unemployment:
  - 2008 Poverty Assessment: headcount poverty St. Kitts 23.7 percent; Nevis 15.9 percent.
  - 2016 household registry (different methodology): “Poor” 17 percent in St. Kitts and 14 percent in Nevis.
  - Unemployment low officially (around 4 percent in 2013); apprenticeship schemes likely mask true unemployment (could be around 12 percent without the 3,374 apprenticeship jobs in 2013).
- Labor-market and competitiveness recommendations:
  - Preserve labor-market flexibility; link minimum-wage increases to productivity; enforce time-bound participation with stipends below minimum wage in STEP.
  - Improve business environment: expedite business registration, establish credit bureau and land registry, launch SME partial-credit-guarantee scheme, upgrade foreclosure legislation.
  - Diversify tourism product and source markets; channel CBI inflows cautiously to renewable energy, health, education, and other target areas.
- Social protection and UHC:
  - Authorities intend to introduce Universal Health Coverage (UHC) in the next few years; planning early stage.
  - UHC recommendations:
    - Ensure fiscal sustainability; fund UHC from permanent revenue sources (e.g., VAT, tax on cigarettes or sugary products, or a health levy).
    - Design a reasonably small benefit package for the total population while targeting the poor.
    - Match commitments with delivery capacity and use incentives and regulatory tools to contain costs.

### Data, statistics, and technical assistance
- Data gaps and quality concerns:
  - Urgent attention needed to improve balance of payments, national accounts, labor-market and social statistics.
  - CARTAC assistance: rebasing national accounts, CPI improvements, quarterly GDP methodology (experimental quarterly GDP estimates expected by June 2017).
  - ECCB released preliminary BPM6-based 2014 BOP and IIP estimates in January 2016; comprehensive tables for 2014 and 2015 planned for first semester of 2017.
- Statistical shortcomings:
  - CPI covers St. Kitts but not Nevis; monthly CPI data have long lags.
  - Quarterly GDP estimates not published; tourism monthly data disseminated with lag.
  - Monetary statistics: implementation of new reporting system for commercial banks expected in 2016-17.

### Key fiscal and external statistics (selected exact figures as presented)
- Real GDP (factor cost) growth:
  - 2013: 6.6
  - 2014: 5.1
  - 2015: 4.9
  - 2016: 3.1
  - 2017 (proj): 2.7
- Consumer prices, end-of-period:
  - 2013: 0.6
  - 2014: -0.5
  - 2015: -2.4
  - 2016: 0.9
  - 2017 (proj): 1.5
- General Government overall balance:
  - 2016: 4.2 (percent of GDP) (surplus)
  - General Government overall balance (less CBI budgetary receipts): 2016: -3.0 (percent of GDP)
- Citizenship by investment fees to the budget:
  - 2016: 3.9 (percent of GDP)
  - Projections: 2018: 1.8; 2019: 1.7; 2020: 1.6; 2021: 1.5 (percent of GDP)
- SIDF contributions to the budget:
  - 2016: 1.0 (percent of GDP)
- Total public debt (end-of-period) (includes debt-land swaps):
  - 2016: 65.6 (percent of GDP)
  - Projections: 2017: 61.7; 2018: 59.0; 2019: 56.1; 2020: 53.9; 2021: 50.9; 2022: 48.1 (percent of GDP)
- Current account balance (percent of GDP):
  - 2016: -17.3
  - Projections: 2017: -18.5; 2018: -17.9; 2019: -18.1; 2020: -18.1; 2021: -17.9; 2022: -17.6
- Current account balance (less CBI) (2016): -24.5 (percent of GDP)
- Imputed reserves (months of imports):
  - 2016: 7.4
  - Projections: 2017: 7.8; 2018: 7.8; 2019: 7.3; 2020: 6.8; 2021: 6.1

### Risk Assessment Matrix — highest likelihood / impact items (selected)
- Sharp drop in CBI inflows:
  - Likelihood: High; Impact: High.
  - Policy response: Reduce reliance on CBI for recurrent expenditure; strengthen due diligence; save bulk of inflows and repay debt where warranted.
- Slow pace of land sales from debt-land swap:
  - Likelihood: High; Impact: High.
  - Policy response: Accelerate land sales with concrete action plan; consider extending dividend agreement to safeguard banks while executing milestones.
- Natural disasters:
  - Likelihood: High; Impact: High.
  - Policy response: Invest in weather-resilient infrastructure; accumulate buffers; purchase disaster insurance; develop contingency planning.
- Reduced correspondent banking relationships:
  - Likelihood: Medium; Impact: Medium to High.
  - Policy response: Strengthen AML/CFT, enhance transparency, periodic risk assessments.

### Staff recommendations (summary)
- Adopt a zero-underlying primary balance target net of CBI receipts and enshrine it in fiscal responsibility legislation.
- Implement revenue measures: streamline tax incentives, update property valuations, strengthen tax administration.
- Achieve expenditure restraint: contain spending on goods and services, implement civil-service reforms to manage the wage bill.
- Establish and operationalize the GRF with prudent investment strategy and integration with fiscal framework; prioritize debt reduction and buffering for shocks.
- Urgently complete debt-land swap land sales and operationalize SLSC; agree reporting treatment of swapped land.
- Operationalize ECAMC; modernize foreclosure/insolvency frameworks; establish credit bureau and land registry.
- Maintain tight AML/CFT regime and implement automatic exchange of financial account information by September 2018.
- Improve data quality and statistics with CARTAC and ECCB support; publish experimental quarterly GDP estimates and comprehensive BOP/IIP tables.

*Italic: International Monetary Fund staff summary from cr17186 (PDF chapter/section).*

### 1. Regional Context ______________________________________________________________________________  20

### 1. Regional Context

### Recent Economic Developments
- Real GDP growth:
  - 2016: 3.2 percent (down from 4.9 percent in 2015).
  - Sectoral: Construction grew 7.6 percent in 2016; manufacturing, financial, and tourism-linked sectors decelerated.
- Tourism: Slowdown in cruise arrivals (limited port capacity) and lower stay-over arrivals from the United States and the United Kingdom.
- Inflation:
  - Consumer inflation was negative during 2015 due to tax exemptions and low international fuel prices; end-year inflation in 2016 turned positive as those effects subsided.
- Fiscal performance:
  - Overall fiscal balance in 2016: surplus of 4.2 percent of GDP (deteriorated compared to 2015).
  - Underlying fiscal balance (overall balance excluding SIDF grants and CBI-related receipts and due-diligence spending): deficit narrowed to 3.3 percent of GDP.
  - Reduced surplus driven largely by lower CBI receipts and reduced tax revenues (full-year impact of VAT exemptions granted in April 2015).
  - Total expenditure declined substantially due to a significant fall in goods and services spending and capital expenditure; wage bill increased reflecting the 13th-month bonus to public employees.
- Public debt and buffers:
  - Public debt fell to 66 percent (end-2016).
  - Central government and SIDF deposit buffers rose to 42 percent of GDP.
- External sector and reserves:
  - Current account deficit widened to 17.3 percent of GDP in 2016 (from 9.2 percent).
  - Capital inflows were strong, in part due to CBI-linked FDI, helping to finance the trade deficit.
  - Foreign reserves at the ECCB: 7.4 months of imports (comfortable; above reserve-adequacy metrics).
- Banking sector:
  - Banks’ reported capital adequacy ratio: 22 percent as of end-December 2016 (note ECCB treatment of land-assets swapped for government debt and zero risk-weight treatment).
  - High NPLs: Indigenous banks NPLs/Total Loans rose to 20.8 percent (Dec-16); provisioning/NPLs for indigenous banks 32.1 percent (Dec-16).
  - Liquid assets/Total Assets for indigenous banks: 50.9 percent (Dec-16).
  - Real credit growth moved to negative territory by end-2016.
  - Correspondent banking relationships preserved through increased due diligence, but at higher costs: average fee increases about 25 percent; one indigenous bank replaced lost CBRs at higher cost (30-50 percent) and longer transaction times (3-4 days).
  - Some business lines were discontinued in some banks (e.g., clearing US$-checks, money services).

### Outlook and Risks
- Growth projections (baseline with current policies and cautious assumptions on future CBI flows):
  - 2017 growth projected at 2.7 percent.
  - Medium-term average around 3 percent.
  - Construction slowdown linked to lower CBI inflows expected to be offset by public investment and higher tourism growth (2017-19).
- Inflation projections:
  - Expected rise in 2017 with fuel-price increases; inflation to remain around 2 percent in the medium term.
- External and fiscal projections:
  - External current account deficit should remain large as CBI inflows taper off; reserves remain comfortable.
  - Public debt projected to reach the 60-percent ECCU debt-to-GDP target by 2018.
- Key risks (broadly balanced):
  - Downside risks: further delays in completing sale of lands under the debt-land swap arrangement; sharper drop or sudden stop in CBI inflows; stronger U.S. dollar and tighter financial conditions raising borrowing costs; a more severe Zika epidemic; major natural disaster; loss of CBRs adding to financial sector challenges.
  - Upside risks: stronger CBI inflows from ongoing reforms; continued oil-price weakness supporting growth.
- Scenario findings:
  - An extreme scenario of a stop in CBI inflows could result in budget deficits that erode buffers as early as 2020 and leave public debt 8 percentage points above the 2022 baseline absent fiscal adjustment.
  - Combined shock (CBI stop + natural disaster assumed to lower growth by 6 percentage points in 2018 and deteriorate fiscal balance by about 5 percent of GDP in 2018-19) would add another 3.5 percent of GDP to the baseline in 2022, taking the debt-to-GDP ratio slightly above the 60 percent target.

### Policy Discussions and Recommendations
- Policy focus: safeguard macroeconomic and financial stability by strengthening fiscal policy framework, reducing reliance on CBI inflows, mitigating financial stability risks, and implementing reforms for sustainable, inclusive growth.
- Authorities’ stance: broadly concurred with staff’s assessment and policy recommendations; implementation of most prior Article IV recommendations ongoing.
- Fiscal strategy (authorities’ 2017 priorities):
  - Preserve gains in fiscal sustainability while supporting growth and resilience.
  - Control government recurrent spending and scale up public investment for sustainable inclusive growth and disaster resilience.
  - Budget: no new taxes proposed; streamlining tax concessions envisaged over the next 2-3 years; implement PFM reforms.
- Medium-term fiscal framework recommendations:
  - Continue to reduce reliance on CBI inflows given risks to fiscal sustainability from underlying deficits.
  - Address VAT and import-duty exemptions: revenue loss from tax incentives estimated at 6.4 percent of GDP in 2016 (estimate likely understated as it excludes corporate income tax and April 2015 VAT exemptions).
  - Strengthen measures to preserve fiscal buffers against sudden CBI shocks and natural disasters.

### Fiscal and External Key Statistics (selected, as presented)
- Real GDP (factor cost) growth series (selected):
  - 2013: 6.6
  - 2014: 5.1
  - 2015: 4.9
  - 2016: 3.1
  - 2017 (proj): 2.7
- Consumer prices, end-of-period (selected):
  - 2013: 0.6
  - 2014: -0.5
  - 2015: -2.4
  - 2016: 0.9
  - 2017 (proj): 1.5
- General Government overall balance:
  - 2016: 4.2 (percent of GDP) (surplus)
  - General Government overall balance (less CBI budgetary receipts):
    - 2016: -3.0 (percent of GDP)
- Citizenship by investment fees to the budget:
  - 2016: 3.9 (percent of GDP)
  - Projections: declining to 1.8 (2018), 1.7 (2019), 1.6 (2020), 1.5 (2021)
- SIDF contributions to the budget:
  - 2016: 1.0 (percent of GDP)
- Total public debt (end-of-period) (includes debt-land swaps):
  - 2016: 65.6 (percent of GDP)
  - Projections: 61.7 (2017), 59.0 (2018), 56.1 (2019), 53.9 (2020), 50.9 (2021), 48.1 (2022)
- Current account balance (in percent of GDP):
  - 2016: -17.3
  - Projections: -18.5 (2017), -17.9 (2018), -18.1 (2019), -18.1 (2020), -17.9 (2021), -17.6 (2022)
- Current account balance (less CBI) (in percent of GDP):
  - 2016: -24.5
- Imputed reserves (in months of imports):
  - 2016: 7.4
  - Projections: 7.8 (2017), 7.8 (2018), 7.3 (2019), 6.8 (2020), 6.1 (2021)

*Source: IMF staff summary of "1. Regional Context" (St. Kitts and Nevis) as provided in the supplied content.*

### 10. Staff maintains that a zero-underlying primary balance target of the general

### 10. Staff maintains that a zero-underlying primary balance target of the general

### Fiscal anchor recommendation
- Staff recommends a zero-underlying primary balance target of the general government, net of CBI-related receipts, as the fiscal anchor guiding medium-term fiscal management.
- Rationale:
  - Declining CBI inflows and projections of further falls increase vulnerability to negative surprises.
  - The target would help increase resilience to negative shocks in CBI inflows, facilitate accumulation of fiscal buffers to address external shocks, and absorb unforeseen financing needs if tax performance is insufficient after CBI inflows decline.
- Implementation:
  - The target could be enshrined in fiscal responsibility legislation to commit the government to anchor adjustments to meet the target.
  - Windfall CBI inflows, excluded from the target, should be saved in a contingency fund.
  - Approval by both the St. Kitts and the Nevis cabinets of an action plan to meet the primary balance target at the country level will be key.

### Required fiscal effort and revenue measures
- Achieving the zero-primary-balance target will require additional fiscal effort of about 2.1 percent of GDP over the medium term.
- Revenue-side measures and scope:
  - Broaden the tax base by streamlining tax incentives and continuing to improve tax administration and compliance, especially at the Nevis Island Administration (NIA) level (Annex V).
  - Tax incentives should be well-targeted, rules-based, transparent, and codified in appropriate laws.
  - Scope for higher property tax revenue, which remained flat in GDP in 2016, by updating property valuations and enhancing compliance.
  - Other taxes (cigarette, alcohol, and sugary products) can raise revenue and contribute to reducing noncommunicable diseases.

- Proposed Adjustments to Achieve a Zero Primary Balance Target, Net of CBI and SIDF Grants (In percent of GDP)
  - Deviation from Target Primary Balance (less CBI & SIDF Grants): 2.1
  - Proposed Adjustments over 3-5 years: 2.1
    - Streamline tax incentives: 1.3
    - Increase property tax intake, including on new developments: 0.2
    - Continue to improve tax administration and compliance: 0.2
    - Implement civil service reform: payroll audit and public sector modernization and contain growth in the wage bill: 0.2
    - Contain spending on goods and services: 0.2
  - 1/ Adjusted for dividends on unsold land.

### Expenditure-side measures and wage bill management
- Priorities:
  - Contain spending on goods and services.
  - Implement remaining civil service reforms.
- Public-sector wage bill:
  - Absorbs a large share of budgetary resources, even though wages are not defined by collective bargaining with trade unions unlike in other ECCU countries (Annex VI).
  - Authorities intend to better manage the wage bill by establishing more predictable public-pay packages.
  - Pay increases should be consistent with budgetary constraints and macroeconomic developments.
  - Regular benchmarking of public and private sector wages should be incorporated in wage determination to avoid misalignment over time.
  - The 13th-month bonus pay can be made conditional on macroeconomic variables (e.g., GDP or revenue exceeding thresholds, or fiscal performance exceeding the primary balance target), but should be the exception rather than the rule.

### Universal Health Coverage (UHC) fiscal implications
- Authorities signaled intention to introduce UHC within the next few years; planning is still in early stages (Annex VII).
- Design recommendations:
  - UHC design, coverage, and financing should be calibrated to achieve goals while limiting fiscal sustainability risks.
  - The scheme should be funded from permanent revenue sources (e.g., VAT, tax on cigarettes or sugary products, or a health levy) to avoid recurrent drains on the budget.
  - Coverage should reflect national priorities; the benefit package for the total population should ensure financial viability while using specific measures to target the poor and match commitments with delivery capacity.
  - Appropriate incentives and regulatory tools should help contain costs.

### Building fiscal buffers and debt management (Growth and Resilience Fund - GRF)
- Authorities committed to establish a Growth and Resilience Fund (GRF) later this year to manage savings from fiscal surpluses (currently held in the banking system), respond to adverse shocks, and create fiscal space to support public sector investment projects while limiting debt accumulation.
- GRF design and integration:
  - Should have a simple sovereign-wealth-fund structure operating as a financing fund with a prudent investment strategy.
  - Fully integrate the GRF with the medium-term fiscal framework, linking flows directly to the primary-balance target.
- Liability-management recommendations:
  - Reduce outstanding T-bills, accelerate payment of expensive debt, and improve debt terms to further reduce public debt and its service.
  - Authorities agreed to clear arrears owed by the Federal Government to PDVSA (to be paid over 5 years) and progress on restructuring of NIA’s overdraft debt accounts.
- Strengthening public financial management at the NIA (debt and cash management) and at public corporations remains critical.

### Disaster risk management
- Establish a comprehensive risk management framework focusing on risk reduction and mitigation to prepare for natural disasters.
- Recommendations:
  - Incorporate disaster risk assessments into budget and debt management frameworks.
  - Invest in risk reduction (risk maps, early-warning systems, targeted infrastructure).
  - Maintain self-insurance through fiscal buffers given insufficient catastrophe-risk insurance payouts in the Caribbean.
  - Use contingent financing plans, risk-transfer arrangements, and encourage private sector investment in risk mitigation.

### SIDF reform and integration
- Problems identified:
  - Delays in audited financial statements and expansion into quasi-fiscal activities have reduced fiscal transparency and fragmented fiscal management.
  - SIDF finances under pressure as CBI contributions declined and quasi-fiscal social spending continued.
- Recommendations:
  - Contain SIDF’s quasi-fiscal spending by streamlining activities.
  - Establish steps for SIDF integration with the Treasury Single Account (TSA).
  - Once the GRF is established, transfer CBI revenue flows and resulting SIDF deposits to the GRF and integrate SIDF’s quasi-fiscal spending with the general government fiscal account to facilitate comprehensive fiscal reporting, planning, cash-management, and control.
- Authorities’ actions:
  - Agreement on clearing federal government budgetary arrears with PDVSA (to be paid over 5 years).
  - Close to agreement with creditors on NIA debt restructuring; repaid outstanding NIA arrears to bilateral creditors; stopped rollover of interest on federal government T-bills.
  - Aim to operationalize the GRF later this year and expressed interest in TA.
  - Legislative work ongoing to ensure SIDF transparency; decision on integration with the TSA pending.
  - Commitment to enhance oversight of public corporations and enforce timely reporting of financial statements.

### Financial system stability: sovereign-bank linkages and debt-land swap
- Risk:
  - Sovereign-bank linkages through the debt-land swap present a risk to domestic financial system stability.
  - Second leg of the swap—to divest the land now owned by banks—has not been fully carried out due to delays in operationalizing the Special Land Sales Company (SLSC) and finalizing sales transactions (two purchase offers amounting to 3 percent of the swapped land).
  - A 3-year dividend guarantee agreement with the banks, at a total cost to the government of 3 percent of GDP, ended in mid-2016; discussions for renewal are ongoing.
- Recommendation:
  - Complete land sales urgently to preserve credibility of debt restructuring and limit fiscal and financial risks.
  - Delays will require banks to provision for unsold land under an ECCB prudential guideline requiring divestment within five years, with significant macro, financial, and fiscal implications.
  - Need for a clear action plan and timetable with concrete, visible milestones.
  - Complete sales of existing purchase proposals and step-up marketing by the SLSC (real-estate agents, SLSC website).
  - Staff welcomed ongoing discussions to renew the dividend guarantee agreement at renegotiated terms and cooperation among SLSC, Citizenship by Investment Unit (CIU), and St. Kitts Investment Promotion Agency (SKIPA).

- Authorities’ views:
  - Agreed on urgency to complete land sales under the debt-land swap.
  - Made progress on existing purchase proposals and committed to push forward with sales and support financial stability and growth.
  - Open to promoting land for projects to support resilience, diversification and economic development.
  - Signaled commitment to conclude discussions on renewal of the dividend guarantee agreement by June, when the rate would be applied retroactively, under a mutually beneficial arrangement.

### Nonperforming loans (NPLs) resolution and asset quality
- Challenges impeding NPL resolution:
  - Lengthy foreclosure processes with outdated legislation, difficulty in seizing/divesting collateral, a weak resale market, and information obstacles.
- Progress and recommendations:
  - Some progress in lowering NPLs in 2016 through banks’ increased resolution efforts.
  - Complete final steps to operationalize the Eastern Caribbean Asset Management Corporation (ECAMC) by the ECCB; expected shortly (six of the eight jurisdictions, including St. Kitts and Nevis, have paid capital contributions and its Board of Directors confirmed).
  - Enable non-citizen ownership of property to support cross-border sale of collateral.
  - Modernize foreclosure/insolvency frameworks to help recovery and reduce fiscal costs.
  - New collateral appraisal guidelines and upcoming credit bureau and land registry should improve credit decisions and reduce future NPLs.
  - Increase coordination between bank and nonbank regulators to limit risks from bank-nonbank linkages, considering high delinquency rates in the credit union sector.

### Monitoring CBI slowdown impacts on the banking system
- Risks and channels:
  - Direct impact may be limited if CBI-related and local real-estate markets are segmented and most CBI properties are self-financed.
  - Slower CBI inflows affect banks through construction activity and repayment capacity of some property-developer borrowers (Annex VIII).
  - Ending of the 5-year holding-period in 2018 could increase properties for sale, reduce property values, and hence impair bank asset quality (real-estate-related activity makes up an important share of bank loans and NPLs).
- Recommendation:
  - Authorities should monitor market developments and banks’ asset portfolios and ensure adequate prudential oversight to reduce macro-financial risks.
- Authorities’ view:
  - Participation in regional efforts to expedite resolution of distressed assets (ECAMC, foreclosure legislation, collateral valuation, credit bureau, land registry).
  - Alien-land-holding legislation not seen as an impediment to resolution; cabinet approvals for licenses occur routinely.
  - Local and CBI-related real-estate markets largely segmented, but monitoring and adequate prudential oversight acknowledged as necessary.

### Reducing CBR risks and safeguarding CBI program integrity; AML/CFT and information exchange
- Legislative and supervisory actions:
  - Amended AML/CFT laws and strengthened legislation for tax information exchange.
  - Committed to implementing the international standard for automatic exchange of financial account information by September 2018; legal framework in place since end-2016.
  - Compliance with AML/CFT FATF standards will be assessed in a CFATF mutual evaluation in 2019.
  - ECCB and FSRC, through the Regulatory Oversight Committee, focusing on AML/CFT issues after Monetary Council approval of centralizing AML/CFT supervision of financial institutions licensed under the Banking Act under the ECCB.
  - FSRC to supervise and monitor regulated entities using a Risk Based Supervisory Framework (RBS) in accordance with FATF Recommendation 26; RBS includes AML/CFT as one of the “Inherent Risk Categories.”
  - Ongoing open communication and information sharing between respondent and correspondent banks, implementation of Basel II and risk-based supervision, and avoiding destructive competition with other CBI programs to limit loss of correspondent banking relationships (CBRs) and preserve CBI program integrity.
  - Consideration of amalgamation opportunities to address volume-of-business concerns and improve risk management capability.

- Authorities’ views:
  - Emphasized strong efforts and commitment at significant costs to improve compliance with global AML/CFT standards and tax information exchange protocols.
  - Expressed concern about recent reports regarding AML/CFT standards containing inaccurate statements, and noted tightening due-diligence processes and improved compliance.
  - Acknowledged importance of Basel II implementation at the regional level.
  - Open to amalgamation opportunities but emphasized need for a comprehensive ECCB framework to achieve consensus.

### Competitiveness, external position, and social considerations
- External sector analysis:
  - External position weaker than implied by fundamentals and desirable policies based on a broad set of competitiveness indicators (Annex II).
  - Adjusted EBA-lite model suggests no significant overvaluation as of 2016, but non-price indicators show competitiveness challenges.
- Competitiveness weaknesses:
  - Ease-of-Doing-Business ranking has worsened, with weaknesses in registering property, accessing credit, and resolving insolvency.
  - Decline in the 2017 ranking mainly reflects increased number of days needed to register property, underscoring need for a dedicated land registry.
  - GDP-per-capita-adjusted minimum wage slightly higher than average among ECCU countries and substantially higher than non-Caribbean tourist islands.
  - Skills mismatches, low labor productivity, high energy costs, significant infrastructure gaps, high import duties (average tariff at about 12 percent—one of the highest in the world), and limited and expensive intraregional travel hinder competitiveness.

- Social and inclusion objectives:
  - 2017 policy objectives include attaining inclusive growth, social cohesion, and human development.
  - A 2008 Poverty Assessment indicates relatively high poverty levels despite high income status (23.7 percent in St. Kitts and 15.9 percent in Nevis).
  - World Bank Social Safety Net Assessment identifies need to better target and streamline social programs.
  - Unemployment reported as low (around 4 percent in 2013), but large government apprenticeship schemes (e.g., PEP and STEP) likely conceal true unemployment (unemployment could be around 12 percent without the 3,374 jobs provided under the apprenticeship scheme in 2013).
  - Gender issues (domestic violence and equal opportunity) and very high homicide rates related to gang activity are significant social concerns that could adversely affect perceptions and tourism.

*INTERNATIONAL MONETARY FUND*

### 24. The authorities should adopt a comprehensive strategy to overcome persistent

### 24. The authorities should adopt a comprehensive strategy to overcome persistent

### Priorities to achieve sustainable, inclusive growth
- Improve business environment
  - Ongoing efforts: expedite business registration, establish a credit bureau and a dedicated land registry later this year, launch an SME partial-credit-guarantee scheme, and upgrade foreclosure legislation.
  - Banks should increase efforts to educate small businesses to improve credit culture through proper business planning and management.
  - Improving collateral availability should increase the bankability of projects.

- Enhance diversification and continue to address skill gaps
  - Cabinet decision to channel CBI inflows to additional target areas (e.g., renewable energy, health, and education) intended to support skills development and economic diversification, and reduce risk of asset bubbles in the real estate market (with most CBI inflows coming through the real-estate option).
  - Constraints to developing backward linkages from tourism to agriculture: insufficient technology, small plot sizes, insufficient infrastructure for droughts, and invasion from a large monkey population.
  - Support measures: technical assistance, investment in drought-resilient crops, and promotion of commercial investments in agriculture.
  - Diversify the tourism product (e.g., expanding to medical tourism) and source markets to reduce tourism volatility.
  - Reorientation this year of the PEP to STEP for vocational training and certification to help meet high-end needs of the economy.
  - Policy design: enforce time-bound participation and set stipends below the minimum wage to encourage employment outside the STEP program.

- Enhance productivity and connectivity
  - Any future increase in the relatively high minimum wage should be linked to productivity; maintain labor-market flexibility (as envisaged in the upcoming labor code).
  - Improve regional and global connectivity through lower regional import duties, more competitive intra-regional air travel, and development of intra-regional maritime-transportation jointly with the World Bank.

- Pursue inclusiveness
  - Improve targeting of government social programs (as indicated in the National Social Protection Policy strategy), including by expanding the conditional-cash transfer program, addressing gender issues, and focusing housing programs on the poorest (Annex IX).
  - Ongoing actions to reduce crime through increased use of CCTV systems and community-related programs are welcome.

- Address data gaps and improve data quality
  - Urgent attention needed to improve the availability and quality of data on balance of payments, national accounts, and labor-market and social statistics.
  - Further dedicated TA recommended to support these improvements, given their importance for assessing vulnerabilities and effective policymaking.

- Household-poverty reference (from footnote)
  - A more recent 2016 household registry, whose methodology/coverage differs from the 2008 Poverty Assessment, classified as “Poor” 17 percent of households in St. Kitts and 14 percent in Nevis.

### Authorities’ views
- Continue strengthening the business environment.
- Will move cautiously in channeling CBI inflows to alternative investments to avoid reputational risks.
- Welcome focus on labor market and social issues; expect the upcoming labor code to bring the country in line with international labor-market standards.
- Note existence of a tripartite mechanism (government, unions, private sector/employers) to build a common understanding on productivity and competitiveness.
- Report substantial progress in reforming social safety nets, including the recent centralized conditional cash transfer program and provision of childcare facilities at a subsidized cost to facilitate women's labor-force participation.
- Observe that crime has not affected tourism but acknowledge the need to address it and note efforts in this direction.
- Acknowledge need to improve availability and quality of data and welcome dedicated TA on balance-of-payments, national accounts, labor market, and social statistics.

### Staff appraisal — recent performance and outlook (paragraphs 25–33)
- 25. Economic performance moderated in 2016
  - Growth moderated (though still exceeding the ECCU average), reflecting a slowdown in tourism and manufacturing activity.
  - Lower CBI receipts contributed to narrowing of the overall fiscal surplus and a significant widening of the current account deficit.
  - Public debt fell further and is projected to reach the ECCU debt-to-GDP target in 2018, well ahead of ECCU peers.
  - Banks continue to hold adequate capital and liquidity, but face risks from slow progress with land sales, high NPLs, and loss of CBRs.
  - Growth is expected to average around its current level in the medium term.
  - Key risks: a sharper drop in CBI inflows, further delays in completing the sale of lands under the debt-land swap arrangement, loss of CBRs, and a stronger U.S. dollar.

- 26. Medium-term fiscal framework and CBI risks
  - Given risks to CBI revenues, framework should continue to focus on reducing reliance on CBI inflows while preserving a strong program.
  - Authorities have strengthened the CBI program since 2015 by dedicating resources and increasing global collaboration to tighten due-diligence.
  - Continued efforts recommended to reduce integrity and security risks, avoid destructive competition with other regional programs, and preserve program credibility and sustainability.
  - A fiscal framework not reliant on CBI inflows would build resilience and facilitate accumulation of fiscal buffers, which could be eroded quickly under an extreme scenario of a sharp drop in CBI inflows and reverse the downward debt trajectory.
  - Authorities should target a zero-primary balance, net of CBI-related receipts, over the medium term.
  - Recommendation: enshrine such a target in fiscal responsibility legislation to anchor adjustments and save windfall CBI inflows in a contingency fund.

- 27. Fiscal adjustment needs
  - Achieving the target requires additional fiscal effort.
  - Revenue-side: broaden the tax base, streamline tax incentives to be more targeted and rule-based, and continue efforts to improve tax administration.
  - Expenditure-side: contain spending on goods and services and the public wage-bill; adopt a more predictable system for pay packages consistent with budgetary constraints, macroeconomic developments, and regular benchmarking with private sector wages.
  - Fiscal implications of introducing universal health-coverage should be carefully managed; scheme should be funded from permanent revenue sources to avoid recurrent drains on the budget and ensure financial viability.

- 28. GRF (Sovereign wealth fund) commitment
  - Staff welcomes commitment to establish the GRF to preserve and manage savings from the CBI program.
  - GRF should have a simple sovereign-wealth-fund structure, a prudent investment strategy, and flows fully integrated with the fiscal framework.
  - GRF resources would be prioritized for debt reduction and building buffers for future shocks, including natural disasters.

- 29. Disaster risk management and fiscal resilience
  - GRF should be paired with a comprehensive risk management framework.
  - Assess natural-disaster risks and incorporate them into budget and debt management frameworks to build resilience and reduce fiscal burden of disasters through investments in risk reduction and self-insurance financed through fiscal buffers.
  - Contingent financing plans, risk-transfer arrangements, and encouraging private sector investment in risk mitigation are essential.

- 30. Public financial management (PFM) reforms needed urgently
  - Contain SIDF’s quasi-fiscal spending by streamlining activities and integrating with the general government’s TSA for comprehensive fiscal planning and cash management.
  - Once the GRF is established, consider transferring revenue from CBI flows and resulting SIDF deposits to the GRF.
  - Enhance oversight of public corporations through timely reporting of financial statements.
  - Strengthen the NIA’s debt and cash management frameworks.
  - Staff welcomes progress in clearing remaining arrears and encourages improved liability management, including reducing outstanding T-bills, accelerating payment of expensive debt, and improving debt terms.

- 31. Urgent completion of land sales under the debt-land swap arrangement
  - The sale of lands should be completed urgently to limit fiscal and financial risks.
  - Establish a clear action plan and timetable with concrete, visible milestones.
  - Complete existing purchase proposals and step-up marketing to generate sales (including support from the CIU and the Investment Promotion Agency).
  - Ongoing discussions on renewal of the dividend-guarantee agreement with banks at renegotiated terms are welcome.
  - Staff urges authorities and banks to agree on the reporting treatment of the swapped land to remove remaining uncertainty about the debt-land swap.

- 32. Financial-stability measures: CBRs and NPLs
  - Continue efforts to reduce CBR risks and make rapid progress with NPL resolution.
  - Actions to improve compliance with international standards, implement risk-based supervision, and encourage respondent banks’ open communication and information sharing with correspondent banks should help limit CBR risks.
  - Carefully considered amalgamation opportunities can address volume-of-business concerns and improve risk management.
  - Swift NPL resolution is critical to supporting bank credit and economic growth.
  - Ongoing efforts: operationalize the ECAMC; modernize foreclosure/insolvency frameworks; establish collateral-appraisal guidelines, credit bureaus, and a land registry to facilitate resolution and contain future NPLs.
  - Ensure adequate prudential oversight to minimize potential effects on banks from further slowdowns in CBI inflows and the ending of the 5-year holding-period for existing CBI properties.

- 33. Comprehensive reform strategy endorsed
  - A strategy focusing on improved business environment, diversification, human resources, competitiveness, and social safety would help overcome persistent structural challenges limiting inclusive growth.
  - Staff’s external assessment based on a broad set of competitiveness indicators points out competitiveness challenges.
  - Ongoing efforts to improve ease-of-doing-business and investments in strategic transformative projects, including alternative investment options under the CBI program, should support skills development, economic diversification, and competitiveness.
  - Support for inclusive growth through streamlining and better targeting social programs, tackling gender gaps, and reducing crime (including increased use of CCTV systems and community-related programs) is welcome.
  - Urgent attention needed to improve availability and quality of data, which is key to assessing macroeconomic, financial, and social vulnerabilities and facilitating effective policymaking.

*IMF staff appraisal and authorities’ views as presented in the source document.*

### 34. Staff recommends the next Article IV consultation with St. Kitts and Nevis to take

### 34. Staff recommends the next Article IV consultation with St. Kitts and Nevis to take place on a 12-month cycle.

### Regional context and overview
- St. Kitts and Nevis experienced the strongest economic recovery in the region (relative comparison shown versus ECCU, Emerging market and developing economies, Latin America and the Caribbean).
- The country recorded the strongest fiscal balance in the region, driven by large CBI receipts to the budget.
- Public debt is on a firm downward trajectory, helped by the successful debt restructuring (including the debt-land swap) and early debt repayments.
- The banking system is the third most liquid in the region (Liquid assets in percent of total assets as of December 2016).
- Estimated current account deficit is sizable, notwithstanding large CBI service fees to government.
- The business climate ranks among the weakest and has been worsening (Doing Business ranking: 2010 ranking out of 183 countries; 2015 ranking out of 189 countries; 2017 ranking out of 189 countries—relative positions shown graphically in source).

### Real sector developments
- Growth slowed in 2016 but remained higher than peers and key trade partners.
- Unemployment remains the lowest in the region.
- The slowdown in 2016 mainly reflects lower growth in tourism-related sectors and manufacturing.
- After buoyant tourist activity in 2015 there was a marked slowdown in Jan-Sep 2016 year-on-year.
- Output was above its potential level in the period referenced.
- With moderate rebound in fuel prices, consumer price inflation turned back positive in 2016.
- CPI and component dynamics are reported (Food, Transportation, Electricity, Gas & Water, Others; overall CPI inflation shown monthly through Dec-2016).

### Fiscal sector developments
- Headline fiscal performance in 2016 continued its deterioration since 2013.
- Deterioration mainly due to a slowdown in CBI receipts to the budget and weaker tax performance.
- Growth in expenditures has been contained, limiting further deterioration in the underlying fiscal position.
- Underlying fiscal position has been large and negative since 2013 (Underlying Fiscal Position excludes all SIDF grants and Investment Proceeds).
- Debt-to-GDP ratio is rapidly approaching the ECCU 60 percent debt limit, supported by strong growth and early debt repayments.
- Fiscal and debt positions remain vulnerable to CBI sudden stops and natural disaster shocks.
- Key fiscal figures (consolidated general government unless noted) — select values preserved exactly:
  - Total revenue (2016): 718.3 (In millions of Eastern Caribbean dollars; Table 2a)
  - CBI Budgetary Receipts (2016): 175.3 (In millions of Eastern Caribbean dollars; Table 2a)
  - Total expenditure and net lending (2016): 804.9 (In millions of Eastern Caribbean dollars; Table 2a)
  - Overall balance (2016): -0.7 (In percent of GDP; Table 2b)
  - Overall balance (less CBI inflows) (2016): -6.6 (In percent of GDP; Table 2b)
  - Primary balance (2016): 6.0 (In percent of GDP; Table 2b)
  - Public sector debt (end-of-period, 2016): 65.6 (In percent of GDP; Table 2b)
  - Total public debt (end-of-period, 2016): 65.6 (In percent of GDP; Table 1)

### External sector developments
- Estimates indicate a weakened current account position in 2016 due to lower CBI receipts; number of applicants to the CBI program fell in 2016.
- Despite reduced new CBI inflows, FDI continued financing the current account deficit.
- International investment position stayed flat, with increasing Central Bank Reserves offsetting a decline in commercial banks’ foreign assets.
- Selected external figures preserved exactly:
  - Current account balance (2016): -420.1 (Millions of U.S. dollars; Table 4)
  - Current account (percent of GDP, 2016): -17.3 (Table 4)
  - Current account excluding CBI receipts (percent of GDP, 2016): -24.5 (Table 4)
  - Tourism receipts (2016): 375.0 (In millions of U.S. dollars; Table 4 services receipts breakdown)
  - Citizenship-by-investment budgetary fees (2016): 293.4 (In millions of U.S. dollars; Table 4 services receipts breakdown)
  - FDI (net, 2016): 20.6 (In percent of GDP; Table 4 and Table 7 summary)
  - Net international reserves, end-of-period (memorandum, 2016): 312.9 (in millions of U.S. dollars; Table 1 / Table 4)

### Monetary and financial sector developments
- Banking system deposits slowed after rapid growth from 2010, with an inflection in early 2014.
- Banks’ loan portfolio has been recovering after a large drop due to the public debt restructuring (debt-land swap).
- Banking system liquidity fell from its 2014 peak to levels similar to ECCU peers, yet remains high enough to pressure profitability in the absence of lending.
- Nonperforming loan (NPL) ratio is persistent and far above the regulatory benchmark.
- Commercial banks remain well capitalized.
- Key monetary/financial figures preserved exactly:
  - Net foreign assets change (2016): -5.3 (percent relative to broad money at the beginning of the period; Table 5)
  - Credit to private sector (annual percent change, 2016): -0.2 (Table 5 nominal changes and Table 6)
  - Net liquid assets to total deposits (2016, percent): 41.0 (Table 6)
  - NPLs to Total Loans (2016, percent): 15.9 (Table 6)
  - Total Capital/Risk Weighted Assets (2016, percent): 21.3 (Table 6, locally incorporated banks)
  - Return on Assets (series shown quarterly through 2016Q3; graphical data preserved in source)

### Key data, projections, and vulnerabilities
- Real GDP (factor cost) growth series and projections (selected exact values from Table 1):
  - 2014: 5.1
  - 2015: 4.9
  - 2016: 3.1
  - 2017: 2.7
  - 2018: 3.5
  - 2019: 3.2
  - 2020: 3.0
  - 2021: 2.7
  - 2022: 2.7
- Consumer prices, end-of-period (selected exact values from Table 1):
  - 2015: -2.4
  - 2016: 0.9
  - 2017: 1.5
  - 2018: 2.0
- External current account balance (percent of GDP) historical and projected (Table 4 / Table 1):
  - 2015: -17.3
  - 2016: -18.5 (Table 1 shows -18.5 for 2016 in one series; Table 4 shows -420.1 Millions US$ and percent -17.3—source presents both metrics)
- Public debt dynamics and restructuring:
  - Debt-land swap equivalents reflected: EC$565 million in 2013 and EC$231 million in 2014 (Table notes).
  - Total public debt (end-of-period, percent of GDP): 146.6 (2011), 137.9 (2012), 101.0 (2013), 81.4 (2014), 70.6 (2015), 65.6 (2016) (Table 1 / Table 2b)

### Policy implications and staff recommendation
- Staff recommends the next Article IV consultation with St. Kitts and Nevis to take place on a 12-month cycle (title recommendation).
- Underlying fiscal vulnerabilities—heavy reliance on CBI receipts and exposure to sudden stops—imply a need for:
  - Strengthening fiscal buffers beyond CBI-dependent receipts.
  - Containing current expenditure while protecting priority capital spending.
  - Monitoring and managing public debt closely given proximity to the ECCU 60 percent debt limit.
- External and financial sector resilience priorities include:
  - Diversifying external financing sources to reduce reliance on CBI and to sustain FDI inflows.
  - Addressing high NPL ratios to restore bank profitability and support credit growth.
  - Maintaining adequate international reserves and monitoring commercial banks’ foreign asset positions.

*Source: IMF staff Report for St. Kitts and Nevis (figures, tables, and text as provided).*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Country-Specific Risks
- Sharp drop in CBI inflows. Increased competition from regional programs, integrity concerns, high global security risks, and rising political pressure against international migration increase downside risks to CBI inflows, with implications for fiscal, growth and external performance.
  - Likelihood: High
  - Impact: High
  - Policy Response: Reduce reliance on CBI revenues for funding of recurrent expenditure; ensure strong due diligence to reduce risks to financial integrity and security and to the sustainability and integrity of the program; continue to build precautionary balances by saving the bulk of inflows, and repay debt, where warranted; and strengthen the management/governance of accumulated CBI resources.
- Slow pace of land sales from the debt-land swap. A large stock of unsold land at the end of the 3-year dividend arrangement with the government and approaching deadline for the ECCB provisioning requirement pose risks to banking sector stability.
  - Likelihood: High
  - Impact: High
  - Policy Response: Accelerate efforts to sell the land, with a concrete action plan and timetable. Pursue politically palatable options to mobilize land sales and consider extending the 3-year dividend agreement to safeguard banks' soundness as concrete milestones are executed to resolve land assets.
- High banking system liquidity and limited credit opportunities, putting pressure on profitability. This may push banks to engage in high-risk investments and/or raise concentration risks to specific sectors.
  - Likelihood: High
  - Impact: Medium to High
  - Policy Response: Strengthen supervisory framework, and establish the Growth Resilience Fund along the lines of a Sovereign Wealth Fund to alleviate excess liquidity pressure on bank balance sheets.

### Regional Risks
- Persistent banking sector weaknesses in the ECCU. Regional financial distress could spill over to domestic financial institutions. Vulnerability heightened by lack of deposit insurance, low capitalization of regional banks and limited fiscal space in the region to support weak institutions.
  - Likelihood: High
  - Impact: High
  - Policy Response: Support the regional resolution strategy by continuing to enforce the new banking law enacted in July 2015. Strengthen contingency planning. Upgrade foreclosure legislation to accelerate NPL resolution. Implement Basel II and ensure increased capital to absorb the impact of the shift to Basel II and IFRS.
- Reduced financial services by global/regional banks ("withdrawal of CBRs"). This could curtail cross-border payments, trade finance, and remittances in St. Kitts and Nevis.
  - Likelihood: Medium
  - Impact: Medium to High
  - Policy Response: Further strengthen risk-based supervision and maintain tight AML/CFT regime to ease AML/CFT concerns; enhance transparency of the CBI program. Conduct periodic risk assessments. Ensure full compliance with international standards.

### Global Risks
- Natural disasters. High vulnerability to more frequent natural disasters increases risks of substantial damage to infrastructure, entailing large reconstruction costs, and risk to growth and fiscal outlook.
  - Likelihood: High
  - Impact: High
  - Policy Response: Invest in weather-resilient infrastructure and other tools to reduce and mitigate risk of natural disasters. Accumulate buffers as self-insurance, saving CBI inflows. Purchase additional disaster insurance to reduce public exposure to disaster risks. Increase private sector awareness of the need to hedge against disaster risks, including through weather-linked insurance products. Ensure contingency planning.
- Spread of the Zika virus. Associated health concerns may lower tourist arrivals and reduce Caribbean tourism market share.
  - Likelihood: Medium
  - Impact: High
  - Policy Response: Continue eradication and protection actions; put in place case-management framework; and continue to lead public education/awareness campaigns.
- Significant strengthening of US dollar/higher interest rates would hinder competitiveness and increase global and regional interest rates. Given high-end tourism focus and US as main source market, competitiveness impact may be less.
  - Likelihood: High
  - Impact: Medium to High
  - Policy Response: Address cost competitiveness by containing public sector wages, which may affect private sector wages; lower energy prices; address skill gaps; and mitigate other obstacles to ease of doing business. Repay expensive debt, where warranted to reduce vulnerability to rising borrowing costs.
- Structurally weak growth in key advanced and emerging economies. Persistently weak demand and lower medium-term growth could lower tourist arrivals, trade, FDI, grants, and investor confidence.
  - Likelihood: Medium to High
  - Impact: Medium
  - Policy Response: Continue to build precautionary balances by saving the bulk of CBI receipts, and create fiscal space by repaying debt, where warranted. Increase economic diversification as well as diversification of tourism source markets and products, and step up structural reforms to boost potential growth.
- Policy uncertainty in the U.S. and Europe. Could fuel global imbalances and exchange rate and capital flow volatility that could lower tourist arrivals, trade, FDI, grants, and investor confidence. Could reduce cooperation on climate change.
  - Likelihood: High
  - Impact: Medium to High
  - Policy Response: Continue to build precautionary balances, saving the bulk of CBI receipts, and create fiscal space by repaying debt, where warranted. Increase diversification and step up structural reforms to boost potential growth. Reduce integrity risks to the CBI program and implement disaster-resilient infrastructure projects and other mitigation measures.

### RAM methodology note
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

*Annex I. Risk Assessment Matrix — IMF staff charting of risks and recommended responses.*

### Annex III. Progress on 2016 Article IV Policy Recommendations

### Annex III. Progress on 2016 Article IV Policy Recommendations

### Growth Agenda
- Improve business environment
  - Status: Ongoing.
  - Policy actions: Implementing reforms on business registration and foreclosure legislation, and establishing land-registry, SME partial-credit-guarantee, and credit bureau.
- Address the skills gap (including through reorientation and streamlining PEP)
  - Status: Ongoing.
  - Policy actions: The upgraded apprenticeship scheme (STEP) includes a training component. Recommendation to reduce stipends below the minimum wage not implemented.
- Enhance economic diversification (backward linkages from tourism, targeted transformative projects, including by broadening options under the CBI program)
  - Status: Ongoing.
  - Policy actions: Cabinet decision to channel CBI inflows to additional target areas (e.g., renewable energy, education and health) but proceeding cautiously. Project design for the construction of a second pier at the main port being finalized.

### Fiscal Sector
- Establish clear framework to complete debt-land swap. The SLSC should develop a clear strategy to enable progress with land sales.
  - Status: Ongoing.
  - Policy actions: Steps taken toward completing the sale for two outstanding purchase proposals and new purchase offers being sought actively.
- Adopt a medium-term fiscal framework with a zero-primary balance target, net of CBI receipts and SIDF grants.
  - Status: Not yet implemented.
  - Policy actions: Authorities committed to give due consideration to implementing the staff’s recommendation and enshrining it in fiscal-responsibility law after full assessment and consultations.
- Broadening the tax base (including through streamlining tax incentives) and containing spending to achieve the recommended medium-term fiscal target.
  - Status: Ongoing.
  - Policy actions: Monitoring discretionary tax incentives, but legislative changes have not taken place. Made progress in civil service reform and seeking technical assistance to make the wage bill predictable.
- Establish Growth and Resilience Fund to accumulate savings from CBI and provide a contingency buffer for future shocks.
  - Status: Ongoing.
  - Policy actions: Announced commitment to establish GRF to deal with shocks and manage CBI revenues. Exploring TA on modalities and design.
- Strengthen PFM, debt management, NIA debt/cash management. Increase transparency of SIDF and integrate with government’s Consolidated Fund.
  - Status: Ongoing.
  - Policy actions: Legislative work ongoing on reforming the SIDF targeted at increased transparency. Restructured PDVSA debt, near-agreement on NIA debt restructuring. No progress on integrating SIDF with government Consolidated Fund.

### Financial Sector
- Rapid progress needed in NPL resolution. Implement legislation on ECAMC. Revise foreclosure legislation.
  - Status: Ongoing.
  - Policy actions: Opening of ECAMC expected in short order. Six of the eight jurisdictions, including St. Kitts and Nevis, paid capital contributions. Some senior staff have been recruited. Foreclosure legislation in progress.
- Consider temporary extension of debt-land swap dividend guarantee with banks.
  - Status: Ongoing.
  - Policy actions: Authorities expect to conclude discussions on the renewal of the dividend agreement by June.
- Systematic coordination between ECCB and FSRC to limit risks from bank-nonbank linkages.
  - Status: Ongoing.
  - Policy actions: Quarterly meetings resumed, with focus so far on AML/CFT.
- Monitor systematically CBRs trends to limit risk of losing CBRs.
  - Status: Ongoing.
  - Policy actions: ECCB is monitoring the developments closely, in St. Kitts and Nevis as well as the whole ECCU region.
- Maintain a watertight AML/CFT regime with adequate financial disclosure.
  - Status: Ongoing.
  - Policy actions: Ongoing efforts to improve compliance with international AML/CFT standards and information exchange (with ECCB). Onsite risk-related examinations. Legislation put in place to implement the international standard for automatic exchange of financial account information.

### Data Gaps
- Enhance the quality of statistical data in Balance of Payments, National Accounts.
  - Status: Ongoing.
  - Policy actions: CARTAC assisted with compilation of National Account Statistics, Price Statistics, and BOP BPM6 and IIP data. BOP-BPM6 data and 2015/16 labor force survey to be released soon.

*Annex III. Progress on 2016 Article IV Policy Recommendations*

### 9.       High uncertainty related to CBI inflows explains large forecast errors in recent

### 9.       High uncertainty related to CBI inflows explains large forecast errors in recent

### Forecast track record and CBI inflows
- Staff has underestimated growth and fiscal outturns in recent projections owing to an unanticipated surge in CBI inflows, resulting in:
  - a delayed but much stronger-than-anticipated recovery; and
  - record primary surpluses, far above peers and historical averages.
- Given high uncertainty about sustainability of future CBI flows, staff remains cautious on future growth and fiscal projections, which may continue to lead to higher forecast errors.
- Inflation projections have shown fewer forecast errors in recent years.
- Baseline scenario assumption: the 3-year dividend guarantee is assumed to be extended for three additional years, expiring by 2018 for the first tranche of swapped land and 2019 for the second tranche, consistent with the ECCB’s guidelines on resolving collateral assets within a 5-year window.

### Fiscal assumptions and cyclically adjusted primary balance
- The cyclically adjusted primary balance in the forecast period reflects the assumption that CBI inflows are not expected to continue at their current pace.
- The estimated change in the cyclically adjusted primary surplus over the forecast period is at the lower end of the distribution of adjustments historically achieved by advanced and emerging economies with debt greater than 60 percent of GDP.
- This reflects baseline assumptions of significantly lower CBI inflows, and hence the projected decline in non-tax revenues and primary surplus over a 3-year forecast horizon.

### Authorities' conclusions and policy implications
- The authorities agree that ensuring St. Kitts and Nevis’ medium-term debt sustainability requires resolving the debt-land swap and prudent management of the accumulated government savings.
- Policy priorities to cement debt sustainability and preserve gains:
  - Resolve the debt-land swap and effectively mobilize land use/sales in a manner that ensures the credibility of the debt restructuring while preserving national interests and the stability of domestic banks.
  - Implement an effective medium-term fiscal framework to preserve and prudently manage the large accumulated savings from CBI inflows by both central government and the SIDF.
  - Stabilize the debt path and increase resilience to exogenous shocks, including costly natural disasters, without renewed build-up of public debt.

### External Debt Sustainability Analysis — baseline projections and drivers
- External public debt is projected to decline rapidly over the medium term to 9 percent in 2022, down from 24 percent in 2016.
- Key drivers of the decline:
  - Amortization of restructured bonds with external commercial debt.
  - Projected repayment of multilateral debt, largely from the CDB.
- Current account deficit is projected to widen as a result of the modeled decay in CBI inflows in the baseline scenario, while imports remain elevated partly because of continued imports of construction materials and capital goods and some pick up in fuel prices.
- Drawdowns on accumulated investment commitments from prior years, reflected in commercial banks’ net foreign asset position (and the growth in the imputed reserves at the ECCB), will finance the bulk of current account deficits as CBI-projects reach completion, resulting in no significant accumulation of new foreign debt.

### Stress tests and scenario results
- Stress tests indicate:
  - External debt would continue to decline under interest rate, growth, real depreciation, and combined shocks.
  - Debt stays relatively higher under the current account shock scenario, suggesting some external adjustment would be necessary to bring the debt path back to a downward trend under that shock.
- Macro-fiscal stress-test assumptions and highlights (as presented):
  - Liquid Buffers (baseline): 30.4, 26.9, 24.6, 21.2, 18.1, 15.4 (for 2017–2022 respectively in one table), and similar series appear in alternative shock tables.
  - Primary Balance (baseline): 1.9, 1.3, 0.5, 1.2, 1.2, 0.5 (for 2017–2022 in the Baseline column of Figure 2).
  - Real GDP growth (baseline): 2.7, 3.5, 3.2, 3.0, 2.7, 2.7 (for 2017–2022 in the Baseline column of Figure 2).
- Additional scenario notes:
  - Reversed Debt-Land Swap Shock and Natural Disaster Shock are modeled as additional stress tests with their own projected paths for real GDP growth, inflation, primary balance, effective interest rate, and liquid buffers.

### Key statistics and projections (selected from tables and figures)
- External public debt: 24 percent in 2016; projected 9 percent in 2022.
- Public sector (consolidated) metrics shown in the Public Sector DSA figure include series for:
  - Nominal gross public debt: 130.7, 70.6, 65.6, 61.7, 59.1, 56.2, 54.0, 50.9, 48.2 (as presented across years in the figure).
  - Public gross financing needs: 28.2, 20.3, 2.7, 17.6, 16.3, 16.2, 15.0, 14.8, 15.1 (as presented across years in the figure).
  - Net public debt: 120.4, 42.6, 36.5, 31.4, 31.8, 31.5, 33.0, 33.1, 33.1 (as presented across years in the figure).
  - Real GDP growth (in percent): 1.6, 4.9, 3.1, 2.7, 3.5, 3.2, 3.0, 2.7, 2.7 (as presented across years in the figure).
  - Inflation (GDP deflator, in percent): 3.6, -1.4, -0.5, 1.6, 2.1, 2.1, 2.1, 2.1, 2.1 (as presented across years in the figure).
  - Nominal GDP growth (in percent): 5.3, 3.4, 2.6, 4.3, 5.6, 5.4, 5.2, 4.9, 4.9 (as presented across years in the figure).
  - Change in gross public sector debt (cumulative): -8.5, -10.8, -5.0, -3.8, -2.7, -2.9, -2.2, -3.0, -2.8, -17.4 (series shown in figure).
  - Identified debt-creating flows (cumulative): -6.3, -4.6, -5.3, -4.1, -4.5, -3.2, -4.7, -4.0, -2.9, -23.4 (series shown in figure).
- External DSA Table 1 selected rows:
  - Baseline: External debt (percent of GDP): 47.3, 48.2, 43.2, 40.7, 36.4, 26.9, 21.6, 18.5, 16.2, 14.1, 12.3, 10.7, 9.2 (2010–2022).
  - Change in external debt (annual): 1.6, 0.9, -5.0, -2.5, -4.3, -9.5, -5.3, -3.1, -2.3, -2.1, -1.8, -1.6, -1.5 (2010–2022).
  - Current account deficit, excluding interest payments (percent of GDP): 17.7, 11.0, 6.7, 10.9, 7.2, 8.5, 16.9, 17.9, 17.3, 17.6, 17.6, 17.4, 17.2 (2010–2022).
  - Net non-debt creating capital inflows (negative, percent of GDP): -14.0, -11.9, -8.4, -23.6, -22.0, -13.7, -18.6, -18.2, -17.5, -16.6, -15.9, -15.3, -15.4 (2010–2022).
  - Gross external financing need (in millions of US dollars): 200.4, 160.6, 214.3, 140.3, 137.6, 179.1, 202.8, 209.2, 210.2, 220.7, 228.4, 234.4, 239.3 (2010–2022).
  - External debt-to-exports ratio (in percent): 157.1, 138.8, 113.8, 98.8, 82.7, 63.0, 57.7, 54.3, 47.7, 42.7, 37.0, 32.0, 27.5 (2010–2022).

*Source: IMF staff.*

### Annex V. Challenges in Domestic Revenue Mobilization in

### Annex V. Challenges in Domestic Revenue Mobilization in St. Kitts and Nevis

### Overview and policy context
- Domestic revenue mobilization continues to be a key policy challenge for St. Kitts and Nevis.
- The tax-to-GDP ratio remains around 20-21 percent since 2011.
- Staff recommends that St. Kitts and Nevis maintain fiscal discipline and reduce reliance on CBI inflows through targeting a non-CBI primary balance and improving it; increases in tax revenue are expected to play a large part in this policy effort.
- Extensive technical assistance (TA) on both tax policy and tax administration supports staff’s policy recommendations.

### Tax policy technical assistance and tax incentives
- Tax incentives remain significant in the country, along with other countries in ECCU.
- The size of tax incentives was estimated to be 6 percent of GDP and 30 percent of tax revenue in 2012.
- New VAT and customs exemptions, including on food and medicine, were introduced in December 2014.
- In April 2015, funeral expenses were also exempted from VAT and the VAT exemption on food was broadened.
- An ECCU-wide TA took place in 2013-14 and made broad recommendations such as:
  - (i) introduction of comprehensive tax expenditure budgeting for all main taxes with regular publication;
  - (ii) consideration of a cap on annual costs for duty and other concessions; and
  - (iii) introduction of rules-based approach to minimize discretion and improve transparency.
- A St. Kitts and Nevis-specific TA on tax incentives started 2016. A scoping mission in March 2016 made suggestions on the initial steps in reviewing the existing system.
- The Fund TA is available to support the authorities’ intention to review the tax concessions regime, expressed in the 2016 and 2017 budget speeches.
- Apart from tax incentives, the 2013-14 ECCU-wide TA also made some diagnosis on property taxation.

### Tax administration technical assistance and reform progress
- Tax administration TA has supported the implementation of the authorities’ home-grown revenue administration reform programs.
- A December 2012 mission reviewed VAT administration and made a broad assessment of the operations of the Inland Revenue Department (IRD) and Customs and Excise Department (CED).
  - The mission made a number of recommendations on improving taxpayer compliance of VAT, including on taxpayer registration and filing, collection enforcement, audits and investigation, appeals process, and IT system.
  - Broad recommendations on IRD focused on organizational changes and formulation of a reform strategy.
  - Recommendations on CED included implementation emphasis, including a risk management strategy.
- A January 2016 mission revisited the progress with reforms in IRD and CED and acknowledged solid progress, including:
  - establishment of a strategic, risk, data analysis and program monitoring division and adoption of a five-year corporate strategic plan in IRD;
  - significant progress with risk management practices in CED by the introduction of ASYCUDA World and post clearance audits.
- The January 2016 mission also made suggestions on next steps, including:
  - strengthening cooperation between St. Kitts and Nevis for IRD;
  - finalization of Corporate and Strategic Plan for CED;
  - other technical recommendations to continue implementation.

### Implications for revenue strategy
- Increasing tax revenue is expected to play a large part in reducing reliance on CBI inflows and achieving the targeted non-CBI primary balance.
- Reviewing and reforming tax incentives and exemptions (including VAT and customs exemptions) is a priority given their estimated scale (6 percent of GDP; 30 percent of tax revenue in 2012).
- Continued implementation of tax administration reforms (organizational changes, risk management, IT systems such as ASYCUDA World, and data analysis capacity) is critical to improving taxpayer compliance and revenue collection.

*Annex V. Challenges in Domestic Revenue Mobilization in St. Kitts and Nevis.*

### 3. While the health care system has performed well in delivering low-cost access to

### 3. While the health care system has performed well in delivering low-cost access to

### Health system structure and access
- Primary health care is delivered through 17 primary health care centers (11 on St. Kitts and six on Nevis).
- Facilities are strategically located so that each household is within three miles of a clinic.
- Secondary health care: public sector health services are provided at four hospitals, with Joseph N. France Hospital in St. Kitts and Alexandra Hospital in Nevis being main referral hospitals.
- There are no private hospitals; there are private clinics and specialist practitioners.
- Out-of-pocket payment for secondary health care can be costly if not covered by insurance (Nakhimovsky et al. (2013)).
- Accessing advanced care requires travel to off-island facilities and is prohibitively costly for much of the population.
- Authorities have previously experimented with limited user fees and outsourcing through public-private partnerships.
- Major challenges: ensuring universal access while sustaining health-care financing; adequate supply and distribution of human resources; reorienting service delivery to emphasize health promotion and prevention of diseases (PAHO (2008)).

### Public health expenditure and comparative metrics (Health Expenditure in 2014, Percent of GDP / Per Capita Current US$)
- St. Kitts and Nevis: 5.1 2.1 2.9 770.5
- Antigua and Barbuda: 5.5 3.8 1.8 773.7
- St. Vincent and the Grenadines: 8.6 4.4 4.2 575.1
- Dominica: 5.5 3.8 1.7 407.8
- Grenada: 6.1 2.8 3.3 505.8
- St. Lucia: 6.7 3.6 3.1 499.6
- Caribbean small states 1/: 6.1 3.3 2.9 596.3
- Small states: 4.5 3.1 1.4 625.6
- Notes:
  - Health spending at 5.1 percent of GDP is 1 percentage point lower than the Caribbean small-states average.
  - More than half of total health expenditure in St. Kitts and Nevis is covered by the private sector, in contrast with Caribbean small-states, for which more than half of total expenditure on average is covered by the public sector.
  - 1/ Caribbean small states include Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago.
- Source: World Development Indicators

### Selected country experiences with moving toward Universal Health Coverage (UHC)
- General: Introduction of UHC is typically gradual; financing sources include taxation, social contribution, and recurrent budget allocation; many programs include special programs focused on the poor; some mechanisms used to contain cost.

- Barbados
  - Health care system is free to all locals and funded through taxation on income earned by companies and employees as well as private contributions (private health insurance, fee-for-services and out-of-pocket payments).
  - Government sets an annual budget for the healthcare sector to provide universal accessibility.
  - Primary health care is offered through a network of polyclinics scattered throughout the island.
  - Secondary and tertiary care provided mainly through the island’s main hospital, a 600-bed institution offering a wide range of ambulatory services and acute care, including intensive care services.
  - 1969 Health Services Act (Cap. 44) ensures public universal health coverage for Barbadians.
  - A National Insurance Scheme covers employed and self–employed persons from ages 16 to 65, with benefits including sickness, maternity, unemployment, and work–related injury.

- Jamaica
  - Established the Jamaica National Health Fund (NHF) in 2003 and abolished user fees at public facilities in 2008 (Chao (2013)).
  - NHF benefits package is a drug subsidy program with relatively high copayments.
  - NHF was initially funded by a consumption tax on tobacco, alcohol, petroleum, and motor vehicles, and a payroll tax.
  - When user fees were abolished, the government increased its budget allocation to compensate for the loss of income.
  - Utilization of health care substantially increased following abolition of user fees.
  - NHF covers only 19 percent of the population; insufficient supply of public medical services induced more people, including the poor, to increasingly use private health services.
  - NHF’s drug subsidy and abolition of user fees did not reduce overall out-of-pocket health expenditures and resulted in the poor paying a higher proportion of their income for health care.

- Kyrgyz Republic
  - State Guaranteed Benefits Package (SGBP) introduced during 1996-2006 as part of comprehensive national health-reform program.
  - SGBP ensures free provision of primary and emergency care to all citizens; referral care provided for a flat copayment with generous exemptions.
  - Mandatory health insurance (MHI) contribution introduced through earmarked payroll contributions; Mandatory Health Insurance Fund (MHIF) created to pool all public funds.
  - Introduction of official copayments, output-based payment mechanisms, and organizational reforms improved efficiency.

- Thailand
  - Universal Coverage Scheme (UCS) introduced in 2002 for those not covered by social security and civil servants’ insurance (Hanvoravongchai (2013)).
  - Scheme relies on central government funding and employs mechanisms to contain costs.
  - Overall expenses of the UCS continued to increase despite cost-containment efforts.
  - Experience suggests challenges in designing comprehensive UHC for entire population at once; trade-off between comprehensive benefits for specific populations vs limited benefits for entire population.

- Turkey
  - Launched “Health Transformation Program” (HTP) in 2003 to increase access and eliminate fragmentation by merging five health insurance schemes into Universal Health Insurance (UHI) managed by Social Security Institution (Menon and others (2013)).
  - Scheme financed by budget allocation; formal insurance coverage expanded to over 95 percent of the population.
  - Total health spending to GDP ratio increased but remained comparable to countries with similar income levels; share of public health spending in total health spending increased.
  - Expansion and improved targeting of the Green Card program for the Poor increased financial protection for the poor.

### Recommendations for introducing UHC in St. Kitts and Nevis
- Fiscal sustainability must be ensured.
  - Expansion of public coverage would create a new recurrent expenditure that should be matched by permanent revenue.
  - Financing by higher deficits is not desirable due to the still high level of public debt.

- Taxation should be the primary financing source.
  - Potential options: general taxation (e.g., VAT), special taxation (e.g., on alcohol, tobacco, soda, motor vehicles), and social contribution.
  - Choice is country-specific considering growth prospects, size of the informal sector, tax administration capacity, and room to introduce reasonable contribution rates.
  - Examples: Jamaica used consumption taxes and a payroll tax; Kyrgyz Republic introduced mandatory health insurance contribution; Thailand and Turkey relied primarily on budget allocation for their schemes.
  - In St. Kitts and Nevis, budget allocation is not desirable given limited fiscal space; limited room to mobilize revenue from social security contributions given already high social security contribution and potential need to raise the contribution rate for pension sustainability (Nassar et al. (2016)).

- Design a reasonably small benefit package for the total population to ensure financial viability, with specific measures to improve targeting of spending to the poor.
  - Diseases included should be guided by the country’s health objectives.
  - Example: Jamaica’s drug subsidy program targeted 15 most common NCDs and the elderly over 65.

- Implement correct incentives and appropriate regulatory tools to contain costs.
  - Country examples involve attempts to improve efficiency of supply and control costs; modalities depend on country circumstances.

- Match commitments to UHC with the capacity to deliver health services.
  - Capacity depends critically on availability of qualified and motivated health workers.
  - Fiscal costs of capacity building need to be accounted for in UHC design.
  - Capacity constraints became an issue in Jamaica after removal of user fees, which significantly increased demand beyond system capacity.

_Italic: International Monetary Fund staff summary from cr17186 (PDF chapter/section)._

### 6.      The potentially adverse effects of CBI slowdown on the banking system and the real-

### 6.      The potentially adverse effects of CBI slowdown on the banking system and the real-estate market could be magnified by the ending of the 5-year holding period restriction

### Impact of ending the 5-year holding period and a CBI slowdown
- Since 2012, CBI-real-estate applicants are required to hold their CBI properties for at least 5 years; with the ending of the 5-year holding restriction in 2017, CBI investors are permitted to resell their properties to another CBI applicant or to a local buyer.
- An offloading of a significant number of CBI properties in the local market could:
  - dampen real-estate prices, and
  - affect the banking system through banks’ exposure to real estate loans and reduced value of collateral.
- If existing CBI properties are resold to new CBI investors, the banking system could be affected indirectly through a slowdown of construction activity, with the only benefit to the economy coming from application fees to the government.

### Structural factors limiting transmission to the broader market
- The small size of the market, the relatively high transaction costs, and legal constraints may have reduced the market’s dynamism, potentially limiting the impact of a CBI-slowdown on the overall real-estate market.
- Average prices of CBI properties are well above those of the local housing market, with the former internalizing the benefits of the St. Kitts and Nevis citizenship.
- Real-estate transactions face obstacles to entry, including:
  - high stamp duty,
  - difficulty in getting mortgage loans, and
  - high commission rates.
- These structural factors may limit the incentives of citizens-by-birth to acquire a CBI-eligible property, keeping the two markets somewhat fragmented.
- CBI properties were also subject to a 5-year holding period restriction that prevented their immediate resale and dampened impact on the market (prior to ending in 2017).

### Data gaps and prudential oversight recommendations
- Proper assessment of the channels of transmission from CBI slowdown to the banking system is significantly undermined by the absence of data on real estate market prices and transactions.
- Efforts to develop a real estate database are essential.
- Close monitoring is required of:
  - developments in the real-estate market,
  - bank balance sheet exposures to real estate,
  - banking system deposits, and
  - currency/maturity mismatches in bank balance sheets.
- Adequate prudential oversight of the banking system will be key to preserving financial soundness.

### Labor market and social context (Annex IX) — key findings
- Unemployment:
  - Unemployment in St. Kitts and Nevis remains at single digits; rate at 3.9 percent by 2013, down from 5.1 percent before the global crisis.
  - Employment is highly dependent on the public-funded apprenticeship scheme that accounts for a large share of formal employment.
  - In 2013, apprenticeship schemes accounted for 14 percent of total formal employment; without these programs, unemployment in 2013 would have been around 13 percent (assuming 30 percent of all jobs are informal).
- Drivers of low unemployment relative to other ECCU countries:
  - St. Kitts and Nevis spared from large recent natural disasters; government absorbed many unemployed after sugar industry decline.
  - Coverage of collective-bargaining agreements is lower than in other ECCU countries, implying more flexible wage-setting.
  - Real GDP bounced back relatively rapidly; by 2014 it was already above its 2008 level.
  - CBI revenues fueled overall activity, particularly in construction and government service.
- Labor costs and competitiveness:
  - Minimum wage adjusted by GDP per capita is higher than in most comparator country groups.
  - Female wages across industries are on average 81 percent the level of male wages (Social Security Board labor statistics).
- Poverty and vulnerability:
  - 2009-Country Poverty Assessment (2008/09): headcount poverty in 2008/09 at 23.7 percent in St. Kitts (down from 30.5 percent in 2000/01) and at 15.9 percent in Nevis (down from 32 percent in 2008/09).
  - Gini coefficient standing at 0.38 in both islands.
  - Vulnerable groups: children (one third in St. Kitts and one fourth in Nevis assessed poor in 2008/09), retirees (in 2008 only half of individuals 62 and older were covered by retirement pensions), and youth affected by gang-related violence contributing to a high homicide rate.
  - A 2016-household registry classified as “Poor” 17 percent of households in St. Kitts and 14 percent in Nevis (methodology differs from 2009 Assessment).
- Social assistance and services:
  - Social assistance spending as a share of GDP is about the average for emerging markets, and above the average for the Caribbean countries.
  - Government spending on health and education constitutes a smaller share of total government expenditure relative to the Caribbean and Emerging Market economies.
  - Key indicators such as the number of hospital beds per capita and net enrollment in primary education are below Caribbean and Emerging Markets averages.

### Housing programs and related figures
- National Housing Corporation (NHC) initiatives (by 2016):
  - Grants up to $10,000 for critical repairs and basic improvements to homes (assistance granted to 150 households by 2016).
  - Under the Habitat Independence 30 Programme, the NHC sourced EC$15 million to facilitate the completion of 115 homes by 2016.
  - By 2016, the NHC and the National Bank assisted 43 individuals to construct homes on their lots.
  - The NHC mortgage payment assistance (‘Pay As You Earn’) sets mortgage interest rates according to income:
    - Individuals earning income up to EC$3,500 per month will pay 2 percent for their mortgage;
    - those earning EC$3,501 to $4,500 per month will pay 3 percent;
    - those earning EC$4,501 and over per month will pay 5 percent.
  - The government is introducing “Unity Housing Solutions,” which will provide housing for more than 300 families.
- The ‘Pay As You Earn’ system was created to address the high incidence of NPLs listed with the NHC.

### Recommended policies (summarized)
- Labor market:
  - Preserve labor market flexibility and strengthen training and certification.
  - Ensure:
    - Training and certification under the recently overhauled apprenticeship program (STEP, transformed from PEP) is enforced with time-bound participation upon certification.
    - The revised labor code preserves labor market flexibility.
    - Increases in minimum wage are linked to productivity.
- Social assistance and protection:
  - Implement reforms suggested by international organizations and the National Social Protection Strategy.
  - Expand the MEND conditional cash transfer, incorporating lessons from an upcoming UNICEF evaluation.
  - Improve targeting of social policies; housing schemes should give priority to the poor rather than mainly the middle class.
  - Ensure the announced establishment of universal health care is properly funded and aligned with the National Social Protection Strategy.
  - Safeguard well-targeted social spending from potential reductions in CBI flows.
- Gender and crime:
  - Implement recommendations from CDB’s 2014 Country Gender Assessment, including:
    - address gender-related legislative gaps;
    - reform technical and vocational education and training to challenge traditional gender stereotypes;
    - undertake measures to make police and other stakeholders more responsive to gender-based violence.
  - Continue efforts to address the high homicide rate, ensuring appropriate budget to combat crime and capitalize on international experience in reducing gang-related violence.
  - Recent steps: installation of a Closed-Circuit TV system and community programs.

*Source: ST. KITTS AND NEVIS — STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION — INFORMATIONAL ANNEX (sections on CBI effects, financial stability, and Annex IX: Labor Market and Social Issues).*

### 2010. Quota size before the increase was SDR 8.9 million.

### ST. KITTS AND NEVIS

### Exchange Arrangement
- Member of the Eastern Caribbean Central Bank (ECCB), which manages monetary policy and the exchange system for its eight members.
- Common currency: Eastern Caribbean dollar, pegged to the U.S. dollar at the rate of EC$2.70 per U.S. dollar since July 1976.
- De jure regime: currency board; ECCB operates as a quasi-currency board, maintaining foreign exchange backing of its currency and demand liabilities close to 100 percent.
- Accepted obligations of Article VIII, Sections 2, 3, and 4 in December 1984.
- Exchange system: free of multiple currency practices and restrictions on the making of payments and transfers for current international transactions.

### Safeguards Assessment
- Under Fund policy, the ECCB is subject to a full safeguards assessment on a four year cycle.
- An update assessment completed in April 2016 found:
  - ECCB has maintained generally strong controls over its key operations.
  - External audit and financial reporting practices remain sound.
  - ECCB financial statements are compliant with International Financial Reporting Standards and are published on a timely basis.
  - Internal audit function needs reform to align with leading international practices.
  - Oversight could be further strengthened by enhancing the financial expertise of the audit committee.

### Last Article IV Consultation
- Last Article IV staff report: IMF Country Report No. 16/250, published on July 26, 2016.
- Board discussion took place on July 08, 2016 on an LOT basis.
- Article IV consultations take place on a 12-month cycle.

### FSAP Participation, ROSCs, and OFC Assessment
- Participated in the regional ECCU FSAP conducted in September 2004.
- Financial System Stability Assessment available (reference provided in source).
- AML/CFT Assessment review conducted by CFATF assessors in September 2012.

### Technical Assistance (2010–Present)
- Areas of TA: tax policy, tax administration, economic statistics, financial supervision, macroeconomic management from IMF HQ and CARTAC.
- Statistics and national accounts:
  - CARTAC and STA advised on rebasing national accounts and the CPI.
  - CARTAC assisting development of quarterly GDP estimates, including separate production-based measures for St. Kitts and Nevis.
  - Milestone achieved: developing quarterly GDP methodology.
  - Compilation worksheets around 80 percent completion.
  - Experimental quarterly GDP estimates expected to be available by June 2017.
  - Assistance to improve CPI, and develop producer price index and export-import price indices.
  - Assistance to improve external sector statistics and introduce survey instruments in line with BPM6.
- External sector statistics:
  - ECCB released preliminary summary estimates of 2014 balance of payments and—for the first time—international investment position (IIP) statistics using BPM6 in January 2016.
  - ECCB plans to publish comprehensive tables for 2014 and 2015 in the first semester of 2017.
  - CARTAC TA supported new surveys, training, and efforts to close remaining data gaps (business and visitor expenditure surveys, trade in goods coverage, other data sources).
- Financial sector regulation and supervision:
  - CARTAC, MCM, and LEG advised on strengthening regulation and risk-based supervision.
  - With OSFI, CARTAC provided TA to ECCB on drafting the OECS Insurance Act.
  - CARTAC and LEG assisted in finalizing the OECS Money Services Business Act.
  - Assistance in development of the Single Regulatory Unit and training FSRC on Risk-Based Supervision, including nonbank financial institutions and offshore banking sector in Nevis.
  - Since 2014, assistance on guidelines for supervisory interventions, implementation of Basel II, and risk-based supervisory frameworks.
  - Financial stability TA: stress-testing and dynamic modelling of the banking system; capacity building on financial soundness indicators and risk-weighted capital adequacy.
- Tax administration and customs:
  - CARTAC provided TA to the Inland Revenue Department (IRD) on comprehensive compliance risk management, audit plan for large taxpayer segment, data analytics and cross-matching, training to improve collections enforcement.
  - CARTAC delivered TA to Customs and Excise Department (CED) on reform and modernization: Post-Clearance Audit (PCA), Valuation and Risk Management training, Corporate and Strategic Business Plan (2014-17), drafting new Customs bill and regulations, and training for OECS Harmonized System.
- Public debt and fiscal management:
  - CARTAC and MCM provided TA on public debt management under the Fund-supported program.
  - FAD and the World Bank provided assistance on Public Financial Management under SEMCAR.
  - FAD follow-up mission visited in February 2016 to review progress and advise on modernizing tax and customs administration.
  - FAD scoping mission in March 2016 to review laws granting tax concessions and identify next steps for comprehensive review of tax incentives regime.
  - CARTAC, FAD and LEG provided assistance to improve cash management and tax administration, including collection enforcement.
  - CARTAC assisted in property tax reform to move the property tax base from rental value to market value, and in improving central government fiscal and debt data.
  - Capacity building to train new officers in preparation of fiscal and debt projections.
- Stabilization and Adjustment Technical Assistance Program (SATAP): capacity building in macroeconomic analysis.

### Relations with the World Bank Group (As of April 2017)
- OECS Regional Partnership Strategy (RPS) endorsed November 13, 2014 for FY15-FY19 with objectives: “competitiveness,” “public sector modernization,” and “resilience.”
- IFC and MIGA expected to contribute selectively; IBRD lending program for six OECS countries around US$120 million total, up to US$20 million per OECS country for FY15-19, subject to conditions.
- IDA allocations:
  - IDA17 (FY15-17) allocation for the OECS was SDR60.2 million, an increase of around 20 percent over IDA16 (SDR50.3 million).
  - Final IDA17 allocation used by all OECS countries was SDR43.6 million.
  - Dominica did not avail of any IDA17 resources.
  - IDA18 (FY18-FY20) allocation for the OECS countries is expected to be roughly of SDR 200 million.
- For St. Kitts and Nevis:
  - Not eligible to IDA resources; indicative amount of US$ 20 million IBRD resources for FY15-19.
  - So far, St. Kitts and Nevis has not availed of any of these resources.
- Recent WBG project:
  - Grant of US$ 415,000 to enhance Public Sector Governance and Efficiency, closed October 2015.
  - Project objectives: increase quality of expenditures and public sector efficiency; promote fiscally sustainable and equitable system of pay and employment; implement personnel expenditure efficiency measures; align HR needs and staffing via functional reviews; introduce pay classification and evaluations.
- Caribbean Growth Forum (CGF):
  - National chapter launched February 2013; CGF led by World Bank, IDB, and CDB with DFID and Global Affairs Canada participation; aims to identify policies to induce growth and job creation.
  - CGF national chapters launched in 12 Caribbean countries, including all six OECS countries.
- Economic and sector work:
  - Analytical products on public expenditure, fiscal and debt sustainability, growth and competitiveness, financial sector, public sector management and social protection.
  - Knowledge products disseminated include: “Driving tourism in the Eastern Caribbean: The case for a regional Ferry”; “Trade matters: new opportunities for the Caribbean”; “Linking farmers and agro-processors to the tourism industry in the OECS”; and the “OECS Growth report”.

### Relations with the Caribbean Development Bank (As of March 2017)
- CDB support: financing for priority capital and technical assistance projects, policy dialogue, infrastructure, agriculture lending, and emergency rehabilitation.
- 2017: CDB plans to approve a new assistance strategy for St. Kitts and Nevis for 2017-2020.
- Previous strategy resulted in a lending program of USD23.5 million over 2013-16.
- At the end of 2016, CDB had approved loans totaling USD198.1 million to St. Kitts and Nevis, of which USD20.4 million were undisbursed.
- Nevis Water Supply Enhancement project:
  - Objective: improve water supply network capacity on Nevis.
  - Under the project: approximately 20 kilometers of pipelines, 2 pumping stations and storage capacity of 1 million gallons to be constructed.
  - Project includes capacity building and strengthening institutional arrangements for delivery of water services.
  - 2016 reporting period saw the practical completion of the project (originally projected for).

*Source: IMF country material provided in the content unit.*

### 2014. Total disbursements to date total USD7.1 million, approximately 74% of the loan amount of

### cr17186 - 2014. Total disbursements to date total USD7.1 million, approximately 74% of the loan amount of

### Major projects and implementation status
- Nevis Water Supply Enhancement
  - Approved amount: USD8.425 million
  - Disbursements to date: USD7.1 million, approximately 74% of the loan amount of USD8.4 million.
  - Based on amounts outstanding on existing contracts and projected activities, the project will be completed approximately USD1.3 million below budget.
  - The savings will be spent on additional reservoirs and pipe network.
- Technical and Vocational Education and Training (TVET) support project
  - CDB-approved loan amount: USD8.000 million.
  - Objectives: improve the TVET learning environment, enhance institutional capacity, provide support for TVET Secretariat programming, and develop operational guidelines to improve the employability of beneficiaries of the People Employment Programme and overall program effectiveness.
  - Disbursement timing: initially expected to start in late 2016; now expected to start in mid-2017.
- Street and Flood Light Retrofitting Project
  - CDB-approved loan amount: USD5.8 million.
  - Scope: replace all existing high-pressure sodium and mercury vapor street lights and flood lights at public facilities in St. Kitts and Nevis (approximately 10,650) with high-efficiency, light-emitting diode lights.
  - Expected outcomes:
    - Reduced street and flood lighting energy consumption and associated greenhouse gas emissions in St. Kitts and Nevis.
    - Enhanced capacity of St. Kitts Electricity Company Ltd. (SKELEC) and Nevis Electricity Company Ltd. (NEVLEC) in climate change adaptation planning.
  - Project launch: anticipated for the second quarter of 2017, subsequent to the final review and signing of the Loan Agreement.
  - Expected completion: December 2018.

### Major Projects Under Implementation (USD million) — table summary (as presented)
- Project — Approved — Undisbursed
  - Nevis Water Supply Enhancement — 8.425 — 1.783
  - TVET — 8.000 — 8.000

### Loan disbursement, service and resource flow (USD million) — annual figures (2012–2016)
- Net Disbursement
  - 2012: -5.48
  - 2013: 4.34
  - 2014: -5.25
  - 2015: -6.28
  - 2016: -6.97
- Disbursement
  - 2012: 1.28
  - 2013: 18.98
  - 2014: 3.31
  - 2015: 0.75
  - 2016: 0.45
- Amortization
  - 2012: 6.76
  - 2013: 14.64
  - 2014: 8.56
  - 2015: 7.03
  - 2016: 7.42
- Interest and Charges
  - 2012: 3.32
  - 2013: 3.15
  - 2014: 3.23
  - 2015: 2.84
  - 2016: 2.35
- Net resource flow
  - 2012: -8.80
  - 2013: 1.18
  - 2014: -8.48
  - 2015: -9.12
  - 2016: -9.32
- Source: CDB.

### Statistical issues — Assessment of data adequacy for surveillance
- General
  - Data provision has some shortcomings but is broadly adequate for surveillance.
- National Accounts
  - GDP figures rely on the production approach, both in constant and current prices.
  - Limited survey data hinder assessments of value-added for each sector; some sectors suffer significant weaknesses in estimation methodology.
  - On the expenditure side, available only at current prices: aggregate final private consumption expenditure is derived as a residual (includes households and NPISH final consumption expenditures, and changes in inventories).
  - Weaknesses in methods to estimate gross capital formation.
  - Significant delays in completing data collection and processing of the annual NA.
  - Staffing constraints in the compiling agency may compromise development of new statistics, quality improvement, and timeliness.
  - Quarterly GDP estimates are not published.
  - Monthly data on tourism is disseminated by the ECCB with a significant lag.
- Price statistics
  - CPI covers St. Kitts but not Nevis although information is available.
  - Monthly CPI data are posted on the ECCB website with a long lag.
  - A break in the series in November 2010 suggests a methodological problem in the linking process with the previous base.
  - Tourism expenditure estimates are based on an old survey and are only updated by changes in CPI.
- Labor market data
  - Except for data from the social security board, limited data are available on labor market developments.
- Government Finance Statistics
  - STA has derived quarterly and annual government finance statistics (GFS) for St. Kitts and Nevis up to 2016Q2 and annual GFS up to 2014 on main aggregates and components for revenue, expense, and financing of the budgetary central government.
- Monetary and Financial Statistics
  - Monthly monetary statistics compiled and reported to the Fund by the ECCB since July 2006 (SRF 1SR and SRF 2SR).
  - April 2007 data ROSC assessment indicated incomplete institutional coverage (mortgage companies, finance companies, building societies, and credit unions excluded).
  - Accrued interest is not incorporated in the value of interest-bearing assets and liabilities; valuation adjustments included in other liabilities.
  - Source data for commercial banks lack recommended disaggregation.
  - ECCB is working to implement a new reporting system for commercial banks expected to be implemented in 2016-17 to address ROSC recommendations.
- Financial Sector Surveillance
  - ECCB compiles financial soundness indicators (FSIs) for member countries, including St. Kitts and Nevis.
  - Publication of FSIs approved by the ECCB in February 2017 and will follow in the next months.
- External sector statistics
  - Balance of payments data compiled and disseminated by the ECCB on an annual basis.
  - January 2016: ECCB released preliminary summary estimates of 2014 balance of payments and—for the first time—international investment position statistics based on BPM6 for the eight ECCU member economies.
  - ECCB plans to disseminate comprehensive balance of payments data in April 2017.
  - More work underway to review 2014 preliminary balance of payments statistics and identify components needing further improvement.
  - Further work required to improve coverage, particularly recording of trade in goods sourced from customs records and direct investment transactions due to low survey response rates.
  - Travel credit services are now based on the results of the recent visitor expenditure survey.
  - New data have not been submitted to STA.
  - Actions needed in collaboration with the ECCB, which coordinates compilation of external sector statistics for its member economies.

### Data standards and quality
- Participation in data frameworks
  - St. Kitts and Nevis has been participating in the General Data Dissemination System (GDDS) since October 2000 and currently participates in its successor initiative, the e-GDDS.
- Data ROSC and assessments
  - The 2007 regional data ROSC provides an assessment on the ECCB’s monetary statistics.
  - Monetary Statistics Component of the Regional Data Module Report on Observance of Standards and Codes (ROSC) for the ECCB was published in 2007.
  - Data ROSC was published on August 2007.

### Table of Common Indicators Required for Surveillance (As of March 2017) — selected timing and frequency details (as presented)
- Exchange Rates: Fixed Rate — NA — NA — NA — NA.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities
  - Date of latest observation: 2/17
  - Date received: 3/07/2017
  - Frequency of data: M
  - Frequency of reporting: M
  - Frequency of publication: M
- Reserve/Base Money
  - Date of latest observation: 12/16
  - Date received: 2/17/2017
  - Frequency of data: M
  - Frequency of reporting: M
  - Frequency of publication: M
- Broad Money
  - Date of latest observation: 12/16
  - Date received: 2/17/2017
  - Frequency: M/M/M
- Central Bank Balance Sheet
  - Date of latest observation: 12/16
  - Date received: 2/17/2017
  - Frequency: M/M/M
- Consolidated Balance Sheet of the Banking System
  - Date of latest observation: 12/16
  - Date received: 2/17/2017
  - Frequency: M/M/M
- Interest Rates
  - Date of latest observation: 12/16
  - Date received: 2/17/2017
  - Frequency: M/M/M
- Consumer Price Index
  - Date of latest observation: 9/16
  - Date received: 12/30/2016
  - Frequency: M/M/M
- Revenue, Expenditure, Balance and Composition of Financing — General Government (Central government only)
  - Date of latest observation: 3/15
  - Date received: 07/01/15
  - Frequency of data: Q
  - Frequency of reporting: Q
  - Frequency of publication: A
- Stocks of Central Government and Central Government-Guaranteed Debt
  - Date of latest observation: 3/15
  - Date received: 07/01/15
  - Frequency: Q/Q/A
- External Current Account Balance
  - Date of latest observation: 2013
  - Date received: 02/27/15
  - Frequency: A/A/A
- Exports and Imports of Goods and Services
  - Date of latest observation: 2015
  - Date received: 12/30/2016
  - Frequency: A/A/A
- GDP/GNP
  - Date of latest observation: 2014
  - Date received: 07/07/2015
  - Frequency: A/A/A
- Gross External Debt
  - Date of latest observation: 3/15
  - Date received: 07/01/15
  - Frequency: Q/Q/A

*Source: International Monetary Fund staff report (CDB and ECCB data as presented).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17186.pdf_