## 1. Fiscal: Major Tax Measures

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### Context and key vulnerabilities
- Economy heavily dependent on tourism; growth averaged 0.9 percent in 2008–18 compared to 2.4 percent in 1999–2008.
- Public debt: 64 percent of GDP as of 2018; expected to rise to 74 percent over the near term due to external debt-financed public infrastructure investment.
- Average annual damage of natural disasters exceeds 1 percent of GDP; staff calculations suggest the average economic impact of natural disasters could increase by 40 percent in a high CO2 emission scenario.
- External energy dependence: energy needs are almost entirely met through imported fossil fuels.
- Bank asset quality: NPLs have more than halved from the 2013 peak to about 9 percent.
- Unemployment: 18 percent as of Q2 of 2019.
- Inflation: 2.2 percent in 2018; 1.6 percent in the first half of 2019.
- Imputed ECCB reserves correspond to 3.4 months of imports in 2018 and projected to remain above 3 months in 2019.

### Recent fiscal and macro developments
- Primary fiscal surplus rose to 2.1 percent of GDP in 2018 and is projected to be broadly balanced in 2019.
- Citizenship-by-investment program (CIP) generated 1.3 percent of GDP in budget revenues in 2018; CIP revenues declined sharply in 2019.
- Tri-annual public sector wage negotiations added salary expenditures of 0.5 percent of GDP in 2019; public sector wage bill expected to stabilize around 7¼ percent of GDP.
- Major planned public investments:
  - New airport terminal: US$175 million (9 percent of GDP), funded through government-guaranteed loans and other sources.
  - Road improvement program: US$42 million (2.2 percent of GDP).
  - Hospital rehabilitations: 1.6 percent of GDP.
- Airport development tax: US$35 per airport arrival, estimated to yield revenue of 0.7 percent of GDP annually, earmarked for repayment of the airport loans.

### Outlook, risks, and financing needs
- Growth: projected to pick up to 1.5 percent in 2019; construction-related projects expected to boost growth in 2020–22.
- Current account: projected current account surplus rose to 2.3 percent of GDP in 2018; projected to be around 3 percent of GDP in 2019.
- Public debt trajectory: import-intensive infrastructure projects will push public debt to 74 percent of GDP by 2023; under baseline public sector debt does not stabilize in the near term.
- Near-term gross financing needs: 18.8 percent of GDP in FY2018; annual financing needs will remain high at around 18 percent of GDP over the medium term.
- Downside risks include:
  - Sharp rises in global risk premia, higher energy prices.
  - Deeper-than-expected slowdowns in major source markets for tourism (the U.S., Canada and the U.K.).
  - Drying up of CIP revenues.
  - Macro-financial risks: weaknesses in AML/CFT frameworks, compliance with international tax rules, slow progress on financial sector weaknesses, further loss of Correspondent Banking Relationships (CBRs).
  - Natural disasters.
- Upside risk: infrastructure investment could catalyze greater-than-expected expansion of tourism and related activities.

### Policy guidance: Rebuilding policy space and fiscal rule
- Objective: rebuild policy space and ensure debt declines smoothly to the regional target of 60 percent of GDP by 2030.
- Three pillars for a medium-term adjustment strategy:
  - Maximize revenue potential of planned reforms and develop new revenue sources.
  - Increase public spending on resilience, financed by additional revenue sources and/or grant financing.
  - Adopt a clear institutional fiscal responsibility framework, including a fiscal rule, to guide pace and composition of adjustment.
- Fiscal rule design and institutions:
  - Link growth of primary current spending to debt-to-GDP ratio, anchored by the 60 percent of GDP debt target.
  - Rule should encompass the annual fiscal cost of natural disasters and lumpy infrastructure expenditure.
  - Key enforceability elements: credible escape clauses; corrective mechanisms in legislation; clear transition provisions; robust accounting (debt, deficits, CIP inflows); improved fiscal projections; effective independent fiscal oversight (example model: Grenada’s fiscal responsibility oversight committee).
- Near-term priorities: focus on revenue-enhancing measures; restrain current spending, especially the public sector wage bill.
- National Health Insurance (NHI) implementation should be fiscally responsible and possibly phased.

### Box 1 — Major Tax Measures (status, revenue impact, staff assessment)
- Airport Development Tax
  - Status: Implemented
  - Revenue impact: 0.7 percent of GDP
  - Staff assessment: Revenue is earmarked for repayment of the airport loans. During the grace period of airport loans staff recommends that funds be invested prudently.
- Personal Income Tax Reform
  - Status: Proposed
  - Revenue impact: Neutral
  - Staff assessment: Reform aims to enhance progressivity through higher personal allowances and fewer PIT deductions. To further simplify the system and to allow automatic filing staff recommends to remove deductions as much as possible.
- Residential Property Tax
  - Status: Proposed
  - Revenue impact: Marginal
  - Staff assessment: The tax is currently being redesigned to improve efficiency and lower administrative requirements. In the long term the tax could yield 0.3 percent of GDP.
- Hotel Accommodation Fee
  - Status: Proposed
  - Revenue impact: Neutral (projected to raise additional revenue of 0.7 percent of GDP if implemented)
  - Staff assessment: Government envisages compensating hotels via a lower VAT rate. Staff recommends to minimize any offsetting measures. Staff analysis suggests that even if the fee is fully passed on to tourists, it is unlikely to change St. Lucia’s regional ranking on tourist expenses or have a material impact on the number of arrivals given the estimated low-price elasticity of tourists to the region. Revenue gains from the hotel accommodation fee should be preserved and not offset with an expansion of VAT preferences.
- Carbon tax
  - Status: Recommended by staff
  - Revenue impact: Around 1 percent of GDP
  - Staff assessment: Introducing a carbon tax can help attain the emission targets and finance much-needed resilience investment. The carbon tax would be moderately regressive and should be introduced in parallel with targeted assistance to offset impact on poorer households.

### Box 2 — Baseline and Adjustment Scenarios (selected figures)
- Baseline scenario (selected years shown, in percent of GDP unless otherwise noted)
  - Real GDP growth: 2019: 1.5; 2020: 3.2; 2021: 3.0; 2022: 2.4; 2023: 1.5; 2024: 1.5; ... 2030: 1.5
  - Primary balance (incl. natural disasters) 1/: 2019: 0.1; 2020: -0.3; 2021: -0.2; 2022: 0.3; 2023: 0.3; 2024: 0.3; ... 2030: 0.1
  - Public sector debt: 2019: 65.5; 2020: 69.1; 2021: 72.6; 2022: 73.7; 2023: 74.1; 2024: 74.1; ... 2030: 75.4
- Adjustment scenario (selected years shown)
  - Real GDP growth: 2019: 1.5; 2020: 3.2; 2021: 3.0; 2022: 2.7; 2023: 1.8; 2024: 1.7; ... 2030: 1.7
  - Primary balance (incl. natural disasters) 1/: 2019: 0.1; 2020: 1.3; 2021: 1.3; 2022: 1.7; 2023: 1.6; 2024: 1.6; ... 2030: 1.4
  - Public sector debt: 2019: 65.5; 2020: 67.6; 2021: 69.4; 2022: 69.0; 2023: 67.9; 2024: 66.3; ... 2030: 58.0
- Adjustment measures (in percent of GDP; annual flows where applicable)
  - Revenue items:
    - Accommodation tax: 0.0 (2019), 0.7 (2020 onward)
    - Carbon tax: 0.0 (2019), 1.0 (2020 onward)
    - Grants 3/: 0.0 (2019), 1.0 (2020), 1.0 (2021), 1.3 (2022), 1.3 (2023), 1.3 (2024), ... 0.3 (2030)
  - Expenditure items and allocations:
    - Social benefits offset 2/: 0.0 (2019), 0.1 (2020 onward)
    - Capital expenditure: 0.0 (2019), 0.0 (2020-2021), 0.5 (2022 onward)
    - Self-insurance saving fund: 0.0 (2019), 1.0 (2020-2024), ... 0.0 (2030)
- Notes and assumptions:
  - 1/ Annualized cost of natural disasters of 0.66 percent of GDP.
  - 2/ Assumes that 10 percent of carbon tax revenues are used to offset negative impact on bottom quintile of households.
  - 3/ It is assumed that grants of 1 percent of GDP received FY2020-FY2024 is used to capitalize self-insurance saving fund.
  - Staff estimate that a 5 percent of GDP self-insurance fund, together with other existing insurance coverages of 3 percent of GDP, would be sufficient to cover fiscal costs of natural disasters without incurring additional debt with 95-percent probability.

### Staff recommendations (summarized)
- Preserve revenue gains from the hotel accommodation fee and avoid offsetting VAT preference expansions.
- Eliminate other VAT exemptions where possible while minimizing impact on poor and vulnerable households.
- Harmonize tax incentives through regional coordination.
- Introduce a carbon tax of US$50 per ton of CO2 (EC$135) to raise around 1 percent of GDP and support mitigation and resilience investments; accompany with targeted transfers (estimated targeted transfers of around 0.1 percent of GDP can fully mitigate impact on the poorest 20 percent of households).
- Phase in resilience-building investments and capitalize a self-insurance saving fund (e.g., target a 5 percent of GDP fund) financed by grants and/or CIP over-performance to manage disaster risk ex-ante.
- Adopt a fiscal responsibility framework, including a fiscal rule, to guide adjustment and pace of debt reduction to 60 percent of GDP by 2030.

### Fiscal responsibility framework, PFM and public investment management
- Draft PFM Bill measures include:
  - Strengthening public asset management.
  - Setting annual ceilings for public guarantees and government borrowing (including by parastatals).
  - Consolidating legislation on public debt.
  - Improving financial statements of public institutions.
  - Introducing enforcement mechanisms.
- Public investment management improvements recommended:
  - Better align public investment to the budget cycle.
  - Enhance project appraisal.
  - Strengthen procurement planning, operations and transparency.
- Authorities’ views:
  - Supportive of tax reforms (reformed PIT, property tax) as longer-term revenue-enhancing and easier to administer.
  - View that a VAT reduction for the hotel industry would be needed to offset the hotel accommodation fee’s competitiveness impact.
  - Caution on carbon tax given already-high energy costs; NHI to be phased contingent on financing.
  - Actively considering fiscal rule to guide spending and meet 60 percent debt-to-GDP target; rule should allow smooth expenditure path and include escape clauses.

### Financial sector implications linked to fiscal and PFM reforms
- Legacy asset quality weaknesses persist: NPLs remain well above the ECCB’s 5 percent benchmark; stock of impaired loans nearly twice reported NPLs in audited statements.
- Indigenous banks: about one quarter of total assets invested in corporate debt overseas, more than twice total regulatory capital—exposure to mark-to-market losses.
- Structural impediments to private credit growth: outdated foreclosure/insolvency laws, absence of a credit bureau/registry, shortage of acceptable collateral, regional MSR distortions.
- Progress and recommendations:
  - Harmonized legislation for regional credit bureau at advanced stage.
  - Modernizing insolvency legislation in progress; online registry for movable property proposed.
  - Phase out MSR per 2019 ECCU Discussion of Common Policies.
- Credit union sector: rapid growth warrants stronger regulation, adoption of Harmonized Co-Operative Societies Bill, strengthened supervision, stress-testing and crisis frameworks.

### Carbon tax (Annex VI) — emissions, revenues, and distributional impacts
- Emissions shares (2018): Power generation 47%; Transport 41%; LPG 8%; Other commercial 4%.
- Current excise landscape (2018): total fuel excise/levy EC$/gallon 2.4; total revenue 1.8 percent of GDP (road fuels EC$4 per gallon revenues 1.5 percent of GDP; diesel for power EC$1 per gallon revenues 0.4 percent of GDP); LPG untaxed and subsidized at annual cost of 0.1 percent of GDP.
- Modelled scenarios (2030 outcomes relative to BAU):
  - US$50 carbon tax (EC$135): emissions reduced by 7.5 percent; revenue raises 1.1 percent of GDP; road fuel prices rise by 12.5 percent (EC$1.6); electricity prices rise by 10.2 percent; other fuels including LPG rise by 14 percent.
  - US$100 carbon tax: emissions reduced by 14 percent; revenue raises 2.1 percent of GDP; price impacts roughly twice US$50 case.
  - Renewables to 50 percent by 2030: emissions reduced by 25 percent.
  - Renewables + US$50 tax: emissions reduced by 30 percent; revenue raises 0.7 percent of GDP.
  - Renewables + US$100 tax: emissions reduced by 34 percent; revenue raises 1.4 percent of GDP.
- Distributional assessment:
  - Carbon tax is mildly regressive: poorest 20 percent bear 1.4 percent of consumption; wealthiest 20 percent bear 1.2 percent.
  - Poorest 20 percent pay only 9.4 percent of carbon tax revenue; using that share for targeted assistance would fully offset poorest quintile’s burden.
  - Recommendation: accompany carbon tax with means-tested transfers or targeted assistance; reform LPG subsidy (poorly targeted: poorest 20 percent account for 14.3 percent of LPG spending).

### Debt sustainability and stress tests (selected DSA figures and scenarios)
- Public debt: 64 percent of GDP at end-FY2018; projected to rise to 74 percent of GDP by FY2024 under baseline.
- DSA baseline nominal gross public debt (percent of GDP): 2017: 62.1; 2018: 65.5; 2019: 64.3; 2020: 65.5; 2021: 69.1; 2022: 72.6; 2023: 73.7; 2024: 74.1.
- Public gross financing needs (percent of GDP): 2017: 14.4; 2018: 19.1; 2019: 18.8; 2020: 18.2; 2021: 23.4; 2022: 22.6; 2023: 17.4; 2024: 16.1.
- DSA stress scenarios:
  - Real GDP growth shock (one standard deviation = 2 percent over 2020–2021) pushes public debt towards 80 percent of GDP over the medium term.
  - Primary balance shock (one standard deviation deterioration = 2.3 percent of GDP over 2020–2021) induces a sharp rise in public debt.
  - Natural disaster scenario (modeled on Hurricane Tomas, 2010): real GDP falls by 5, 3, and 2 percent in 2020–2022; primary balance deteriorates similarly; financing needs climb to almost 30 percent of GDP; debt exceeds 80 percent of GDP by 2021.
- External debt trends:
  - Public sector external debt declined from 34 percent of GDP at end-FY2017 to 31.4 percent at end-FY2018; projected to rise to 38 percent of GDP by FY2024 due to airport loan.
  - Bound-test: a permanent one-half standard deviation deterioration in the non-interest current account would bring external debt to 47 percent of GDP by 2024.

### Annex findings: Hotel Accommodation Fee (HAF) impact
- Tourism scale (2018): almost 400,000 stayover tourists; about 760,000 cruiseship visitors.
- Econometric estimates: overall price elasticity (W@tB index) implies a 1.0 percent increase in index reduces arrivals by 0.25–0.34 percent.
- HAF impact: HAF would add around 1.4 percent (or $33) to the average per capita cost of a one-week stay; estimated reduction in arrivals of 0.3–0.4 percent, equivalent to about 1,300–1,700 tourists annually.

### Implementation progress and technical assistance
- Implementation status highlights:
  - Credit bureau: expected to start operations by end of year; delays anticipated.
  - Insolvency legislation: draft bill being finalized after Cabinet approval (October 2019); foreclosure legislation consultations ongoing.
  - ECAMC: operating since July 2017; funding and NPL acquisition modalities outstanding; extended deadline to October 2020 for NPL acquisition.
  - Harmonized Co-Operative Societies Bill and Harmonized Credit Reporting Bill: at stages of review/preparation.
  - PFM reform: draft PFM Bill and public investment management improvements underway; World Bank TA to resume PSIP and strengthen appraisal and monitoring.
- Technical assistance: CARTAC and IMF TA across macro programming, revenue administration, PFM, statistics, and financial sector (missions and workshops cited through 2019).

*IMF staff summary of "1. Fiscal: Major Tax Measures" content unit (1lcaea2020001).*

### 1. Fiscal: Major Tax Measures _____________________________________________________________________ 8

### 1. Fiscal: Major Tax Measures

### Context and key vulnerabilities
- Economy heavily dependent on tourism; growth averaged 0.9 percent in 2008–18 compared to 2.4 percent in 1999–2008.
- Public debt was 64 percent of GDP as of 2018 and is expected to rise to 74 percent over the near term due to external debt-financed public infrastructure investment.
- Average annual damage of natural disasters exceeds 1 percent of GDP; staff calculations suggest the average economic impact of natural disasters could increase by 40 percent in a high CO2 emission scenario.
- External energy dependence: energy needs are almost entirely met through imported fossil fuels.
- Bank asset quality: NPLs have more than halved from the 2013 peak to about 9 percent.
- Unemployment was 18 percent as of Q2 of 2019.
- Inflation: 2.2 percent in 2018; 1.6 percent in the first half of 2019.
- Imputed ECCB reserves correspond to 3.4 months of imports in 2018 and projected to remain above 3 months in 2019.

### Recent fiscal and macro developments
- Primary fiscal surplus rose to 2.1 percent of GDP in 2018 and is projected to be broadly balanced in 2019.
- Citizenship-by-investment program (CIP) generated 1.3 percent of GDP in budget revenues in 2018; CIP revenues declined sharply in 2019.
- Tri-annual public sector wage negotiations added salary expenditures of 0.5 percent of GDP in 2019; public sector wage bill expected to stabilize around 7¼ percent of GDP.
- Major planned public investments:
  - New airport terminal: US$175 million (9 percent of GDP), funded through government-guaranteed loans and other sources.
  - Road improvement program: US$42 million (2.2 percent of GDP).
  - Hospital rehabilitations: 1.6 percent of GDP.
- Airport development tax: US$35 per airport arrival, estimated to yield revenue of 0.7 percent of GDP annually, earmarked for repayment of the airport loans.

### Outlook and risks
- Growth: projected to pick up to 1.5 percent in 2019; construction-related projects expected to boost growth in 2020–22.
- Current account: projected current account surplus rose to 2.3 percent of GDP in 2018; projected to be around 3 percent of GDP in 2019.
- Public debt trajectory: import-intensive infrastructure projects will push public debt to 74 percent of GDP by 2023; under baseline public sector debt does not stabilize in the near term.
- Downside risks include:
  - Sharp rises in global risk premia, higher energy prices.
  - Deeper-than-expected slowdowns in major source markets for tourism (the U.S., Canada and the U.K.).
  - Drying up of CIP revenues.
  - Macro-financial risks: weaknesses in AML/CFT frameworks, compliance with international tax rules, slow progress on financial sector weaknesses, further loss of Correspondent Banking Relationships (CBRs).
  - Natural disasters.
- Upside risk: infrastructure investment could catalyze greater-than-expected expansion of tourism and related activities.

### Authorities’ views
- Authorities expect growth to average around 3 percent over 2020-22, driven by major public investment projects.
- Expect inflation to rise modestly; construction to pick up sharply; hospitality growth to moderate due to capacity constraints.
- Authorities foresee current account surplus remaining strong in 2019 but acknowledge a decline over the medium term as construction imports pick up.

### Policy guidance: Rebuilding policy space
- Objective: rebuild policy space and ensure debt declines smoothly to the regional target of 60 percent of GDP by 2030.
- Three pillars for a medium-term adjustment strategy:
  - Maximize revenue potential of planned reforms and develop new revenue sources.
  - Increase public spending on resilience, financed by additional revenue sources and/or grant financing.
  - Adopt a clear institutional fiscal responsibility framework, including a fiscal rule, to guide pace and composition of adjustment.
- Near-term focus on revenue-enhancing measures; restrain current spending, especially the public sector wage bill.
- National Health Insurance (NHI) implementation should be fiscally responsible.

### Box 1 — Major Tax Measures (measures, status, revenue impact, staff assessment)
- Airport Development Tax
  - Status: Implemented
  - Revenue impact: 0.7 percent of GDP
  - Staff assessment: Revenue is earmarked for repayment of the airport loans. During the grace period of airport loans staff recommends that funds be invested prudently.
- Personal Income Tax Reform
  - Status: Proposed
  - Revenue impact: Neutral
  - Staff assessment: Reform aims to enhance progressivity through higher personal allowances and fewer PIT deductions. To further simplify the system and to allow automatic filing staff recommends to remove deductions as much as possible.
- Residential Property Tax
  - Status: Proposed
  - Revenue impact: Marginal
  - Staff assessment: The tax is currently being redesigned to improve efficiency and lower administrative requirements. In the long term the tax could yield 0.3 percent of GDP.
- Hotel Accommodation Fee
  - Status: Proposed
  - Revenue impact: Neutral (projected to raise additional revenue of 0.7 percent of GDP if implemented)
  - Staff assessment: The government envisages compensating hotels via a lower VAT rate. Staff recommends to minimize any offsetting measures. Staff analysis suggests that even if the fee is fully passed on to tourists, it is unlikely to change St. Lucia’s regional ranking on tourist expenses or have a material impact on the number of arrivals given the estimated low-price elasticity of tourists to the region (see Annex V). Revenue gains from the hotel accommodation fee should be preserved and not offset with an expansion of VAT preferences.
- Carbon tax
  - Status: Recommended by staff
  - Revenue impact: Around 1 percent of GDP
  - Staff assessment: Introducing a carbon tax can help attain the emission targets and finance much-needed resilience investment. The carbon tax would be moderately regressive and should be introduced in parallel with targeted assistance to offset impact on poorer households.

### Box 2 — Baseline and Adjustment Scenarios (selected figures)
- Baseline scenario (selected years shown, in percent of GDP unless otherwise noted)
  - Real GDP growth: 2019: 1.5; 2020: 3.2; 2021: 3.0; 2022: 2.4; 2023: 1.5; 2024: 1.5; ... 2030: 1.5
  - Primary balance (incl. natural disasters) 1/: 2019: 0.1; 2020: -0.3; 2021: -0.2; 2022: 0.3; 2023: 0.3; 2024: 0.3; ... 2030: 0.1
  - Public sector debt: 2019: 65.5; 2020: 69.1; 2021: 72.6; 2022: 73.7; 2023: 74.1; 2024: 74.1; ... 2030: 75.4
- Adjustment scenario (selected years shown)
  - Real GDP growth: 2019: 1.5; 2020: 3.2; 2021: 3.0; 2022: 2.7; 2023: 1.8; 2024: 1.7; ... 2030: 1.7
  - Primary balance (incl. natural disasters) 1/: 2019: 0.1; 2020: 1.3; 2021: 1.3; 2022: 1.7; 2023: 1.6; 2024: 1.6; ... 2030: 1.4
  - Public sector debt: 2019: 65.5; 2020: 67.6; 2021: 69.4; 2022: 69.0; 2023: 67.9; 2024: 66.3; ... 2030: 58.0
- Adjustment measures (in percent of GDP; noted as annual flows where applicable)
  - Revenue items:
    - Accommodation tax: 0.0 (2019), 0.7 (2020 onward)
    - Carbon tax: 0.0 (2019), 1.0 (2020 onward)
    - Grants 3/: 0.0 (2019), 1.0 (2020), 1.0 (2021), 1.3 (2022), 1.3 (2023), 1.3 (2024), ... 0.3 (2030)
  - Expenditure items and allocations:
    - Social benefits offset 2/: 0.0 (2019), 0.1 (2020 onward)
    - Capital expenditure: 0.0 (2019), 0.0 (2020-2021), 0.5 (2022 onward)
    - Self-insurance saving fund: 0.0 (2019), 1.0 (2020-2024), ... 0.0 (2030)
- Notes and assumptions:
  - 1/ Annualized cost of natural disasters of 0.66 percent of GDP.
  - 2/ Assumes that 10 percent of carbon tax revenues are used to offset negative impact on bottom quintile of households.
  - 3/ It is assumed that grants of 1 percent of GDP received FY2020-FY2024 is used to capitalize self-insurance saving fund.
  - Staff estimate that a 5 percent of GDP self-insurance fund, together with other existing insurance coverages of 3 percent of GDP, would be sufficient to cover fiscal costs of natural disasters without incurring additional debt with 95-percent probability.

### Staff recommendations (summarized)
- Preserve revenue gains from the hotel accommodation fee and avoid offsetting VAT preference expansions.
- Eliminate other VAT exemptions where possible while minimizing impact on poor and vulnerable households.
- Harmonize tax incentives through regional coordination.
- Introduce a carbon tax of US$50 per ton of CO2 (EC$135) to raise around 1 percent of GDP and support mitigation and resilience investments; accompany with targeted transfers (estimated targeted transfers of around 0.1 percent of GDP can fully mitigate impact on the poorest 20 percent of households).
- Phase in resilience-building investments and capitalize a self-insurance saving fund (e.g., target a 5 percent of GDP fund) financed by grants and/or CIP over-performance to manage disaster risk ex-ante.
- Adopt a fiscal responsibility framework, including a fiscal rule, to guide adjustment and pace of debt reduction to 60 percent of GDP by 2030.

*IMF staff summary of "1. Fiscal: Major Tax Measures" content unit.*

### 17.      Adopting a fiscal responsibility framework (FRF) including a fiscal rule would couch

### 17.      Adopting a fiscal responsibility framework (FRF) including a fiscal rule would couch

### Fiscal responsibility framework (FRF) and fiscal rule — purpose and design
- The government plans to link the growth of primary current spending to the debt-to-GDP ratio, anchored by the 60 percent of GDP debt target.
- A credible and enforceable fiscal rule would help strengthen budget discipline and signal the government’s commitment to sound public finances.
- To be effective, the rule should encompass a comprehensive definition of fiscal activities, including:
  - the annual fiscal cost of natural disasters; and
  - the lumpy expenditure associated with infrastructure investment.
- The fiscal framework should create incentives both to credibly meet the 2030 debt target and to undertake much-needed investments to build resilience.
- Footnote: The government is currently discussing with development partners on the modality of the fiscal rule. The rule can be implemented as early as in the 2020 Budget and will set limits on government annual primary current spending depending on the public debt to GDP ratio.

### Institutional and governance arrangements for FRF enforceability
- Key elements needed:
  - Credible escape clauses (in the event of extremely large shocks) and corrective mechanisms defined in the relevant legislation.
  - Clear transition provisions that would anchor expenditures even after the debt target has been reached (to avoid a sudden relaxation of the budget constraint once debt is below 60 percent of GDP).
  - Supporting institution and governance arrangements including:
    - robust accounting procedures (for debt, deficits, CIP inflows) and a full recording of public debt and contingent liabilities;
    - improved fiscal projections; and
    - effective independent fiscal oversight and accountability (one model could be Grenada’s fiscal responsibility oversight committee).

### Public financial management (PFM) reforms and public investment management
- The draft PFM Bill includes comprehensive measures aimed to enhance PFM transparency and accountability, such as:
  - strengthening public asset management;
  - setting annual ceilings for public guarantees and government borrowing (including by parastatals);
  - consolidating legislation on public debt;
  - improving financial statements of public institutions; and
  - introducing enforcement mechanisms.
- Scope to improve the public investment management framework by:
  - better aligning public investment to the budget cycle;
  - enhancing project appraisal; and
  - strengthening procurement planning, operations and transparency.

### Authorities’ views on fiscal reforms and related policies
- The authorities noted ongoing tax reforms could be revenue enhancing in the long run:
  - The reformed PIT and the new property tax would be easier to administer and could yield efficiency gains over time.
  - The hotel accommodation fee has the potential to mobilize revenue from the alternative accommodation sector such as Airbnb.
  - The authorities were of the view that a VAT reduction for the hotel industry would be needed to offset the adverse impact on competitiveness.
  - The authorities reaffirmed their commitment to eliminate VAT exemptions and zero-ratings once the social safety system has been reformed.
- On wages and spending:
  - Recently concluded negotiations on retroactive pay will increase the public sector wage bill for the current fiscal year, but authorities emphasized commitment to restraint on current spending.
- On carbon taxation and NHI:
  - Authorities recognized potential benefits of carbon taxation but cautioned it could lead to further increases in the already-high energy costs in St. Lucia.
  - The planned NHI system needs to be implemented in a fiscally responsible manner; authorities are considering a phased approach with services contingent on available financing.
- On the fiscal rule:
  - Authorities are actively considering the introduction of a fiscal rule to guide public expenditure in pursuance of the 60 percent debt-to-GDP target.
  - They emphasized the fiscal rule should allow for a smooth expenditure path and avoid sharp adjustments to spending, and should be embedded in a broader FRF including escape clauses and a strong PFM framework.
  - They expressed hope that the fiscal rule will signal commitment to fiscal responsibility and therefore could reduce government borrowing costs.
- On climate financing and the National Economic Fund:
  - Authorities report continuing challenges in accessing climate funds and would like to explore alternative financing mechanisms such as a dedicated infrastructure investment foundation with contributions from donors and the private sector.
  - The primary purpose of the planned National Economic Fund (to be funded from CIP revenues) would be investment into development projects, with a small share potentially serving as a self-insurance fund against natural disasters.
- Continued commitment to fiscal structural reforms:
  - Further improving public investment management framework and introducing a new PFM Bill aimed to enhance transparency, accountability and efficiency of public financial management.

### Financial sector implications linked to fiscal and PFM reforms (selected findings)
- Legacy asset quality weaknesses continue to weigh on bank balance sheets.
  - NPLs remain well above the ECCB’s 5 percent benchmark and comprise largely of long overdue exposures that are likely to be challenging to recover.
  - The stock of impaired loans in indigenous banks’ audited financial statements are nearly twice their NPLs.
  - Banks should continue resolving NPLs through sales of troubled assets to the Eastern Caribbean Asset Management Company (ECAMC) or fully provisioning as required by regulation.
  - The pending introduction of the new ECCB prudential standard on provisioning should give further impetus to loss recognition, although would likely reverse the recent improvement in indigenous banks’ capital adequacy ratios.
- Indigenous banks’ exposures and risks:
  - The banking system benefits from an abundant but relatively costly local deposit base (about 43 percent of the value of deposits is subject to the minimum saving deposit rate, or MSR).
  - Indigenous banks have increased their overseas security exposures, particularly through investments in corporate debt; such investments now account for about one quarter of total assets and more than twice total regulatory capital.
  - This leaves local banks exposed to mark-to-market losses.
- Structural impediments weighing on private business credit growth:
  - Outdated foreclosure and insolvency legislation that increase banks’ risk aversion and lead to strict loan approval requirements.
  - Banks’ ongoing efforts to mitigate and resolve NPLs.
  - The absence of a credit bureau and registry, creating information asymmetries about borrower risk.
  - A shortage of acceptable collateral largely limited to fixed assets (real estate or land).
  - The regional MSR (currently set at 2 percent) that distorts the cost of local funding and contributes to an uneven competitive playing field between indigenous and foreign banks.
- Policy progress and recommendations:
  - Authorities are at an advanced stage toward adopting harmonized legislation to support establishment of the regional credit bureau and registry.
  - Progress on modernizing insolvency legislation and introducing a new legal framework and on-line registry to facilitate the use of movable property as loan collateral.
  - Renewed focus is needed to move forward with legislative changes to address weaknesses in the current court-driven and costly foreclosure process.
  - The 2019 ECCU Discussion of Common Policies called for phasing out the MSR and address its social function through fiscal policies.
- Credit union sector:
  - Rapidly increasing size warrants a more assertive approach to regulation and supervision.
  - Need to modernize the national regulatory framework through adoption of the regionally harmonized Co-Operative Societies Bill and to strengthen prudential oversight, stress-testing, enforcement, resolution frameworks and crisis management processes.
  - Important that the capacity of the national supervisor (Financial Services Regulatory Authority, or FSRA) keeps apace with the sector’s rising importance.

### Broader structural and resilience recommendations linked to fiscal posture
- Climate resilience and public investment:
  - St. Lucia committed to enhancing resilience to climate change and natural disasters; progress made on national and sectoral adaptation plans, a climate financing strategy and mobilizing resources from global climate funds.
  - Remaining gaps require active costing of climate projects, improved public financial management of climate financing and outlays, and mobilizing private investment for mitigation and adaptation.
  - Ongoing PFM reforms should be accompanied by capacity development to ensure climate-related investments are systematically identified, costed, procured and evaluated.
- Supply-side and competitiveness reforms:
  - Targeted reforms needed to address supply-side impediments to private investment; 2020 Doing Business indicators show weaknesses in availability of credit, ability to resolve insolvency, and registering property.
  - Implementation of new technologies can modernize land registry operations and facilitate greater online delivery of government services.
  - Accelerated transition to renewable energy would help reduce high electricity costs and vulnerability to oil price shocks; achieving greater investment in renewables requires a more favorable regulatory framework (including by relaxing the existing cap on solar energy production).
- Labor market and education:
  - Persistent skills gap argues for reforms to the education system; skill mismatches, especially in tourism which accounts for nearly one half of employment, impede labor productivity growth.
  - Increasing enrollment in technical and vocational education and training (TVET) and timely assessment of labor market needs recommended.
  - Containing public sector wage growth is key to narrowing the misalignment between wages and labor productivity.
- Economic diversification:
  - St. Lucia’s exports as a share of GDP have been declining steadily since 2010 and the country ranks among the least diversified in the region.
  - Diversification toward higher-value exports such as business ICT, agro-processing and creative industries would require better education and improved transportation infrastructure.
  - Diversifying the tourism sector (including increasing local content and shifting to wellness tourism, ecotourism and city tours for cruise passengers) could help boost growth.
- Data and capacity:
  - Continued efforts needed to improve data quality; lack of historical data on the external sector based on BPM6 and frequent revisions to historical data pose challenges to macroeconomic analysis and need continued technical assistance and resources for capacity development.

*Source: 1lcaea2020001 - 17.      Adopting a fiscal responsibility framework (FRF) including a fiscal rule would couch*

### 36.      The authorities acknowledged the benefits from greater economic diversification

### 36.      The authorities acknowledged the benefits from greater economic diversification 

### Tourism and economic diversification
- Authorities recognize benefits from greater economic diversification including in the tourism sector.
- Implementation of the Village Tourism program would spur the local economy while preserving St. Lucia’s high-end destination quality.
- Re-development of the Castries downtown area can help transform the area into a tourist attraction.
- Further development of wellness tourism and ecotourism has the potential to increase local content in the tourism supply chain.
- Authorities see potential to expand the ICT and agro-processing sectors to meet the demand of a growing tourism sector.
- Some fiscal subsidies are needed to support the development of the manufacturing sector and SMEs given their competitiveness challenges.

### Staff appraisal: growth outlook and risks
- Near-term growth prospects are favorable; commencement of large public infrastructure projects is expected to substantially boost growth in 2020-22.
- Infrastructure projects will raise public debt and weaken the external position.
- Downside risks: a deeper-than-expected slowdown in major source markets for tourism, energy price shocks, disruptions to global financial markets, and loss of CBR.
- High vulnerability to natural disasters is an ever-present risk to growth and the fiscal outlook.
- Longer-term growth impediments: high public debt, lingering vulnerabilities in the financial system, and structural impediments to private investment.
- Upside possibility: infrastructure investment could catalyze a greater-than-expected expansion of the tourism sector and related activities.
- External position is assessed to be broadly consistent with fundamentals and desirable policies, but competitiveness challenges remain, particularly in the non-tourism sector.

### Fiscal policy and public debt
- Fiscal policies should be geared toward rebuilding policy space and ensuring public debt converges to the regional target of 60 percent of GDP by 2030.
- Debt-financed infrastructure investments, despite being on semi-concessional terms with long-run repayment largely covered by dedicated revenue streams, will move public debt further away from the regional target.
- Need to invest in climate resilience and uncertainty over future CIP revenues pose additional challenges to public finances.
- Without policy adjustments, debt vulnerabilities are elevated, and public debt does not stabilize over the near term.

### Near-term fiscal priorities and revenue measures
- Government’s near-term focus should be on revenue-enhancing measures and investments that build resilience to climate related shocks.
- Limit current spending growth, particularly the public wage bill.
- Mobilize additional revenues from:
  - the proposed hotel accommodation fee,
  - the introduction of a carbon tax,
  - reducing the scope of VAT exemptions.
- Since some measures will likely be regressive, introduce targeted transfers that offset the impact on poor and vulnerable households.
- Introduce the National Health Insurance system in a fiscally responsible manner.
- Mobilize donor grants to fund investments in climate resilience.
- If there is over-performance of the CIP, or of other revenue sources, direct proceeds toward financing a self-insurance fund to bolster resilience against natural disasters.

### Fiscal rules and institutions
- A fiscal rule would help anchor fiscal policy over the medium term and support consolidation efforts.
- For effectiveness, the fiscal rule should:
  - encompass a comprehensive definition of fiscal activities, including the fiscal costs of natural disasters and lumpy expenditure associated with infrastructure investment,
  - be part of a broader fiscal responsibility framework that embeds appropriate institutional and governance arrangements to ensure flexibility and enforceability.
- Fiscal rule calibration must balance credibly meeting the debt target over the medium term and providing space for spending to build resilience.

### Financial intermediation and sectoral supervision
- To support private sector investment, address constraints on financial intermediation by:
  - modernizing foreclosure and insolvency legislation,
  - establishing a regional credit bureau and registry,
  - allowing greater use of movable property as loan collateral.
- Emerging financial sector risks warrant a more assertive approach to regulation and supervision:
  - Banks’ rising allocation of assets to overseas debt securities supports profitability but may expose the sector to losses if global financial conditions deteriorate or risk premia rise.
  - Rapid expansion of credit unions increases macro-financial significance and warrants stronger oversight.
  - Swift adoption of the Harmonized Co-operative Societies Act and strengthened supervisory oversight of the non-bank financial sector are key priorities.
  - Continued efforts needed to satisfy international taxation and AML/CFT standards.

### Climate resilience and disaster preparedness
- Progress has been made in implementing recommendations of the CCPA.
- Key measures to address remaining institutional, financing, and capacity gaps include:
  - active costing of climate projects,
  - improving public financial management of climate financing and outlays,
  - mobilizing private investment in mitigation and adaptation,
  - strengthening capacity in managing climate-related investments.

### Supply-side reforms for long-term growth
- Decisive and targeted reforms are needed to address supply-side impediments to long-term growth.
- Enhancing productivity requires better alignment of the education system with labor market needs.
- Scope to improve the business environment by:
  - enhancing access to credit,
  - reducing electricity costs,
  - further diversifying the economy toward higher-value exports,
  - increasing local content in the tourism supply chain.

*Source: 1lcaea2020001 - 36.      The authorities acknowledged the benefits from greater economic diversification*

### 45.      Staff recommends that the next Article IV Consultation for St. Lucia take place on the

### 1lcaea2020001 - 45. Staff recommends that the next Article IV Consultation for St. Lucia take place on the standard 12-month cycle.

### Article IV scheduling
- Staff recommends that the next Article IV Consultation for St. Lucia take place on the standard 12-month cycle.

### Recent developments (growth, labor, prices, construction, tourism)
- Robust growth and buoyant labor markets in advanced economies have boosted tourism demand for St. Lucia.
- However real GDP growth remained subdued amid a decline in construction activity.
- Meanwhile, unemployment remains high.
- Inflation has picked up on the back of higher fuel and food prices.

### External sector developments
- St. Lucia is the main tourist destination across ECCU countries, and the U.S. is its principal source market.
- Since mid-2018, the REER appreciated by 5 percent, owing to an appreciation of the U.S. dollar.
- The current account balance turned positive in 2018, with robust tourism and CIP inflows offsetting the effect of higher oil prices and weaker goods exports.
- The NFA position improved since 2013, driven by shrinking Other Investment liabilities.
- Goods export decomposition shows weak diversification of the St. Lucian economy compared to other countries in the region.

### Fiscal sector developments and public debt
- Primary surpluses over the last five years contributed to the slight decline in the debt-to-GDP ratio.
- The share of short-term debt has been reduced.
- High CIP revenue was a positive development on the revenue side.
- While wage bill growth has been contained, interest costs continue to weigh on the budget.
- Over the last decade fiscal deficits in St. Lucia were larger than in other ECCU countries, and the country no longer boasts the lowest debt ratio in the region.

### Banking system developments
- Despite gradual progress in their resolution, NPLs in commercial banks remain elevated.
- Indigenous banks’ capital buffers have converged toward the ECCU average.
- Banks continue to deleverage their exposure in the local economy, particularly in business credit, while deposit-based funding continues to grow even as average deposit rates decline.
- Banks have accumulated sizeable liquidity buffers that are increasingly held in assets abroad, leading to a shift in the sector’s net foreign asset position.

### Credit union sector developments
- St. Lucia’s credit union sector is the largest in the ECCU and its significance in the domestic financial system continues to increase rapidly.
- Credit union private deposit growth continues to outpace commercial banks; membership-based lending activities have softened the impact of commercial bank deleveraging.
- Persistently elevated loan delinquencies amidst rapid loan growth warrant strengthened credit risk monitoring.
- While on aggregate well capitalized, some smaller unions display prudential weaknesses.

### External competitiveness and structural weaknesses
- St. Lucia is a competitive tourist destination in the region, but structural constraints are more tangible in other sectors, such as goods exports.
- Doing Business indicators suggest weaknesses on getting credit, resolving insolvency and registering property sub-components, which are common challenges for the ECCU region.
- Skills mismatches contribute to persistent high unemployment.
- Salaries have been growing faster than labor productivity, further eroding competitiveness.

### Key social and economic indicators (selected numbers from Table 1)
- Area (sq. km): 616
- Total population (2018): 178,696
- GDP (2018): (millions of US dollars) 1,922; (millions of EC dollars) 5,189
- Real GDP (at market prices), annual series 2015–24: 0.2, 3.2, 2.6, 0.9, 1.5, 3.2, 3.0, 2.4, 1.5, 1.5
- Unemployment rate (% annual average, 2018): 20.2 (table shows unemployment series ending 2018 as 20.2 and earlier years 24.1, 21.3, 20.2)
- Consumer prices, end of period series 2015–24: -2.6, -2.8, 2.0, 2.2, 2.1, 2.2, 2.0, 2.0, 2.0, 2.0
- Public sector debt (percent of GDP) series 2015–24: 66.1, 66.2, 65.5, 64.3, 65.5, 69.1, 72.6, 73.7, 74.1, 74.1
- Net imputed international reserves (months of imports of goods and services) 2015–24: 4.3, 3.7, 3.9, 3.4, 3.6, 4.0, 3.8, 3.6, 3.5, 3.2
- Nominal GDP (EC$ millions), memorandum: 4,480 (2015) rising to 6,676 (2024 projection)

### Central government operations (high-level fiscal figures, Tables 2a/2b)
- Revenue (EC$ millions) 2015–24: 1,041.9; 1,091.8; 1,142.3; 1,232.2; 1,256.7; 1,296.5; 1,357.4; 1,411.8; 1,459.4; 1,508.3
- Taxes (EC$ millions) 2015–24: 934.4; 978.2; 1,002.3; 1,074.3; 1,127.2; 1,165.1; 1,221.1; 1,271.1; 1,315.1; 1,360.0
- Citizen by Investment Program (CIP) receipts (Sales, fees and fines, EC$ millions): 0.0; 5.9; 27.8; 67.0; 33.5; 33.5; 33.5; 33.5; 33.5; 33.5
- Expenditure (EC$ millions) 2015–24: 1,156.8; 1,161.1; 1,262.5; 1,287.8; 1,392.5; 1,460.4; 1,523.6; 1,544.3; 1,598.1; 1,654.5
- Interest payments (EC$ millions) 2015–24: 156.0; 158.7; 162.4; 165.8; 174.7; 184.0; 191.9; 194.8; 201.9; 209.9
- Net lending/borrowing (overall balance, excl. ND cost) (EC$ millions) 2015–24: -114.8; -69.4; -120.2; -55.5; -135.8; -163.9; -166.1; -132.5; -138.6; -146.2
- Public sector debt (EC$ millions) 2015–24: 2,980; 3,091; 3,258; 3,368; 3,573; 3,972; 4,375; 4,634; 4,824; 4,991
- Primary balance (excl. ND, percent of GDP) 2015–24: 0.9; 1.9; 0.8; 2.1; 0.7; 0.3; 0.4; 1.0; 1.0; 0.9

### Balance of payments summary (Table 3, selected figures)
- Current account balance (US$ millions) 2015–24: 0.2; -121.6; -19.3; 44.8; 60.6; -27.0; -57.0; -17.2; -6.4; -0.1
- Exports of goods and services (US$ millions) 2015–24: 980.9; 919.4; 1,038.6; 1,125.7; 1,149.2; 1,189.2; 1,234.1; 1,270.1; 1,317.3; 1,384.1
  - Tourism receipts (US$ millions) 2015–24: 810.2; 776.0; 874.8; 963.1; 988.3; 1,028.3; 1,069.7; 1,102.2; 1,145.5; 1,207.7
- Imports of goods and services (US$ millions) 2015–24: -836.8; -925.3; -957.6; -975.5; -983.8; -1,105.3; -1,175.3; -1,167.9; -1,200.0; -1,255.6
- Capital account (percent of GDP) 2015–24: 0.8; 0.8; 0.7; 0.7; 0.8; 0.8; 0.8; 0.8; 0.8; 0.8
- Financial account (percent of GDP) 2015–24: 3.9; -4.7; -0.1; 2.5; 3.8; -0.5; -1.8; 0.0; 0.5; 0.8
- Net imputed international reserves (US$ millions, end of period) 2015–24: 298.1; 289.0; 307.4; 274.8; 292.3; 365.2; 370.1; 347.7; 348.8; 337.2
- Months of imports of goods and services (2015–24): 4.3; 3.7; 3.9; 3.4; 3.6; 4.0; 3.8; 3.6; 3.5; 3.2
- Gross external debt (percent of GDP) 2015–24: 70.7; 67.4; 68.8; 65.9; 66.7; 67.9; 66.4; 65.2; 65.5; 64.0

### Monetary and financial aggregates (Table 4)
- Net foreign assets (EC$ millions) 2015–19: 268.4; 486.3; 820.0; 833.3; 1,113.1
  - Central bank NFA (EC$ millions) 2015–19: 804.9; 780.4; 829.9; 742.0; 850.3
  - Commercial banks (net) NFA (EC$ millions) 2015–19: -536.5; -294.1; -9.9; 91.3; 262.8
- Broad money (M2) (EC$ millions) 2015–19: 3,054.7; 3,125.0; 3,132.4; 3,238.9; 3,358.6
- Broad money (M2) growth (12-month percent change) 2015–19: 5.8; 2.3; 0.2; 3.4; 3.7
- Private sector credit, net (real) series: 3,026.3; 2,872.5; 2,764.4; 2,678.5; 2,640.9 (EC$ millions)
- ECCB policy rate (end-of-period): 6.50 (2015–2019 listed as 6.50)
- US policy rate (end-of-period) series 2015–2019: 0.13; 0.39; 0.97; 1.78; 2.15

### Banking system summary (Table 5, selected indicators)
- Total assets (index) 2013–2018: 141.1; 134.0; 128.0; 125.7; 121.2; 120.9
- Gross loans 2013–2018: 110.1; 97.5; 85.4; 76.4; 70.7; 66.5
- NPLs (o/w) 2013–2018: 22.7; 17.1; 15.5; 10.0; 8.8; 6.7
- Provisions for NPLs 2013–2018: 9.7; 7.7; 7.5; 5.4; 5.0; 3.6
- Capital Adequacy (CAR, indigenous banks) 2013–2018: 14.3; 13.3; 12.9; 11.8; 18.2; 19.1
- NPL ratio (percent) 2013–2018: 20.6; 17.6; 18.2; 13.1; 12.5; 10.0
- Liquidity and funding indicators show increasing liquid assets and declining loan-deposit ratios over 2013–2018.

*International Monetary Fund staff compilation and estimates drawn from the St. Lucia Article IV consultation materials.*

### Annex I. Implementation of Previous Staff Advice

### Annex I. Implementation of Previous Staff Advice

### Implementation of previous staff recommendations (summary)
- Staff recommended reforms to address structural impediments and increase economic diversification, with specific recommendations and policy actions:
  - Improve access to credit, including by completing the introduction of a credit bureau.
    - Credit bureau was expected to start operations by end of this year. Delays are expected.
  - Reduce comparatively high costs of trading and energy. Implement renewable energy initiatives.
    - Geothermal project is being funded by the WB which will cover cost of the exploratory drilling program and completing of the technical and implementation preparation activities necessary. A final decision on further geothermal development activities is pending.
  - Reduce labor market rigidities that delink productivity and wages.
    - Training apprenticeship programs and better aligning the education system with labor market needs would help reduce structural unemployment.
    - The authorities have indicated their intention to modernize school curriculum and teaching methods, and continue to provide professional development training for teachers.
  - Improve effectiveness of social assistance through better targeting of transfers, and by reducing temporary work programs and non-targeted subsidies.
    - The government is developing a central beneficiary registry to monitor social spending, and is receiving technical assistance from the WB Human Resilience project to reform the safety net.
  - Strengthen tourism backward linkages with agriculture, and develop sectors where economies of scale are less important to increase diversification.
    - The government supports further development of spa & wellness tourism and ecotourism. Preparatory legislative and regulatory framework for Village tourism is advanced and will allow persons to become participants in the value chain of tourism.

### Fiscal policy advice and implementation
- Staff advised fiscal adjustment, anchored by the ECCU debt target of 60 percent of GDP by 2030.
  - Streamline tax exemptions, which undermine the revenue base and the efficiency of the tax system.
    - No measures were undertaken.
  - Control the wage bill through continued wage moderation and public sector reform.
    - The government concluded the tri-annual wage negotiations with public sector unions resulting in additional salary expenditures in FY2019. Wages for FY2020 and FY2021 are set to rise only modestly and the public sector wage bill is expected to stabilize around 71/4 percent of GDP.
  - Increase reliance on concessional financing and a shift to longer-term instruments to reduce servicing costs and mitigate rollover risks.
    - New concessional loans were acquired (airport expansion and roads improvement) funded by Taiwan, Province of China, representing more than 10 percent of additional stock of debt.
  - Introduce a fiscal responsibility framework, defining institutional arrangements, and mechanisms for transparency and accountability.
    - The government is considering the implementation of a fiscal responsibility law. Discussions are still at an early stage.

### Financial sector reforms and related actions
- Staff recommended both local and regional reforms to bolster the financial system:
  - Adopt modernized foreclosure and insolvency legislations.
    - In progress. Draft legislative bill on insolvency is in the process of being finalized following a Cabinet of Ministers approval of underpinning policies in October 2019. Foreclosure legislation has undergone successive consultation rounds, but policy direction remains to be determined.
  - Commit to full operationalization of the Eastern Caribbean Asset Management Company's (ECAMC) mandate, including collection and disposal of distressed assets.
    - The ECAMC started operating in July 2017, but outstanding issues regarding its funding modalities and acquiring a critical mass of NPLs to support its asset management mandate remain to be resolved. The ECAMC has been granted an extended deadline of October 2020 for the acquisition of the NPLs.
  - Strengthen monitoring and supervision of credit unions and microfinance companies and rapid approval of the regionally harmonized regulation.
    - In progress. Following stakeholder consultations, a revised draft harmonized Co-Operative Societies Bill is under review.
  - Adopt the Harmonized Credit Reporting Bill to support operationalization of the regional Credit Bureau.
    - At advanced stage of preparation. A draft legislation has been prepared and is pending submission to Parliament.
  - Strengthen due diligence procedures under the Citizenship-by-Investment program.
    - Applicants are vetted through independent third parties, local law enforcement, and the Joint Regional Communications Centre (JRCC). The government seeks to harmonize due diligence procedures in the region and enhance information sharing, including with the JRCC.
  - Continue efforts on strengthening the AML/CFT regime, address gaps in compliance with international tax rules, and deepen collaboration and information sharing between respondent and correspondent banks.
    - In progress. The authorities are in the process of preparing for the 2019 CFTAF mutal evaluation. The government committed to improve compliance on international tax matters by the end of the year.

### Progress on 2018 Article IV Policy Recommendations
- Growth Agenda: See structural and sectoral reforms above (credit access, energy, labor market, tourism linkages).
- Fiscal Policy: See fiscal measures and pending fiscal responsibility law.
- Financial Sector: See legislative and supervisory progress, ECAMC operational issues, and credit reporting developments.

### External Sector Assessment (highlights)
- 1. The current account balance turned positive in 2018.
  - ECCB revisions to BoP-BPM6 data resulted in lower current account estimates for 2014-18 (the downward revisions for the current account balance of 2017 and 2018 were more than 2 percent of GDP).
  - Revisions to tourist expenditure surveys may lead to further changes in current account estimates.
  - Preliminary estimates indicate the current account surplus could increase further in 2019 owing to robust tourism receipts (including the US$35 airport development tax that the government started to collect in January 2018), but the current account balance is expected to turn negative starting in 2020 due to the construction of the large infrastructure projects.
  - Historically St. Lucia’s current account deficits have been mostly financed by FDI, while disbursement of the project loans will contribute to finance the current account deficit in the medium term.
- 2. The real effective exchange rate (REER) appreciated since the second half of 2018.
  - Trend driven by a nominal appreciation of the exchange rate in 2018 reflecting a stronger U.S. dollar (to which the E.C. dollar is pegged).
  - Imputed net international reserves held at the ECCB remained above the reserve adequacy thresholds in 2018.
  - Reserve coverage—of about 14 percent of GDP in 2018 corresponding to 3.4 months of imports and 23 percent of broad money—exceeds the ECCB benchmarks of 3 months and 20 percent, respectively.
- 3. Staff assess the 2018 external position to be broadly consistent with the level implied by fundamentals and desirable policies.
  - The EBA-lite CA model yields a CA norm of -2 percent of GDP in 2018, implying a CA gap of about 4.2 percent of GDP and an undervaluation of the effective exchange rate of 20 percent. However, the EBA-lite REER model points to a REER undervaluation of only 3.9 percent.
  - The airport development tax (0.7 percent of GDP in 2018) temporarily increased national savings and is not accounted for in the CA model; adjusting for this tax yields a CA gap of about 3.8 percent of GDP and an undervaluation of the effective exchange rate of 18 percent.
  - NIIP represented -55 percent of GDP in 2018 and is assessed to be sustainable under the EBA-lite external sustainability approach.
- 4. St. Lucia’s external position is stronger compared to other members of the ECCU.
  - The 2019 ECCU Discussion of Common Policies indicates the currency union external position was weaker than consistent with fundamentals and desirable policies by 3½ percent of GDP (and the REER was overvalued by 9 percent in 2018).
  - St. Lucia’s share in the region’s exports market has been rising as several ECCU countries recover from the 2017 hurricanes.
- 5. Non-price indicators point to long-standing competitiveness challenges, particularly in the non-tourism sector.
  - World Bank Doing Business ranking fell from 86 in 2017 to 93 in the 2020 vintage.
  - Major weaknesses: getting credit (linked to lack of credit information/absence of a credit bureau), resolving insolvency (weak legal framework), and registering property (high costs relative to property values and many procedures).
  - Productivity per worker has been flat during the last decade, while labor costs have increased by around 10 percent.
- Medium-term outlook:
  - Current account balance projected to decline considerably due to rising public investment and large infrastructure projects increasing imports, only partly offset by projected steady growth in tourist arrivals.
  - Projection subject to downside risks: lower growth in major tourist source countries, natural disasters, increases in oil prices.
  - Projected import increase should also unwind discrepancy between St. Lucia and ECCU external positions.
  - Outlook and high public debt highlight need to rebuild policy space through fiscal consolidation and address structural impediments to competitiveness and long-run growth.

### Risk Assessment Matrix (selected risks, likelihoods, impacts, and policy responses)
- Global/External risks:
  - Rising protectionism and retreat from multilateralism. Relative Likelihood: High. Impact/Time Horizon: High/ST, MT.
    - Policy response: Diversify the economy and reduce its dependence on tourism. Pursue fiscal adjustment to attain sustainability and reduce debt rollover risks.
  - Weaker-than-expected global growth. Relative Likelihood: Medium/High. Impact: High/ST, MT.
    - Policy response: Address cost and structural competitiveness disadvantages, including high dependence on hydrocarbon fuels, high energy prices, and other bottlenecks that weigh on businesses.
  - Cyber-attacks on critical global financial systems. Relative Likelihood: Low. Impact: Medium/ST, MT.
    - Policy response: Prepare appropriate crisis management plans. Strengthen financial sector regulation and supervision.
  - Sharp rise in risk premia. Relative Likelihood: High. Impact: High/ST.
    - Policy response: Pursue fiscal adjustment to attain sustainability and reduce debt rollover risks. Continue efforts to strengthen compliance with AML/CFT and tax transparency standards.
  - Higher frequency and severity of natural disasters. Relative Likelihood: Medium/Low. Impact: High/ST, MT.
    - Policy response: Build fiscal buffers, invest in resilience, and ensure financing, including with risk-transfer instruments, with the assistance of the World Bank.
  - Large swings in energy prices. Relative Likelihood: Medium. Impact: Medium/ST, MT.
    - Policy response: Reduce high dependence on hydrocarbon fuels. Support transition to alternative energy sources.
- Domestic risks:
  - Lower than expected CIP revenues. Relative Likelihood: Medium. Impact: Medium/MT.
    - Policy response: Mobilize revenue from other sources.
  - Disorderly fiscal adjustment. Relative Likelihood: Low. Impact: High/MT.
    - Policy response: Adopt a fiscal rule and implement tax reforms to ensure adequate fiscal adjustment and debt sustainability.
  - Financial sector weakness. Relative Likelihood: Medium. Impact: Medium/MT.
    - Policy response: Promptly implement remaining elements of the ECCU strategy to strengthen the banking sector. Enhance regulatory and supervisory frameworks for non-banks. Continue efforts to strengthen compliance with AML/CFT and tax transparency standards.
  - Delayed infrastructure investment. Relative Likelihood: Low. Impact: High/ST, MT.
    - Policy response: Address bottlenecks in project implementation and step up other resilience investment.

### Debt Sustainability Analysis (key figures and implications)
- Public debt dynamics:
  - Public debt as a percentage of GDP declined slightly to reach 64 percent at the end of FY2018.
  - Projected to rise to 74 percent of GDP by FY2024; debt vulnerabilities are elevated and under current policies public debt does not stabilize over the near term.
  - Financing needs were 18.8 percent of GDP and will remain elevated over the medium term.
  - Gross public debt as a percentage of GDP declined to 64.3 percent at the of FY2018, compared to 65.5 percent a year earlier.
  - The decline in the debt ratio was driven by the primary surplus of the central government; real GDP growth contributed only little in FY2018.
  - Guaranteed and non-guaranteed debt of public corporations expressed as a percentage of GDP remained constant at (text cut off in source).
- Risks and policy implications:
  - Heat map points to substantial risks to debt sustainability from lower growth and growing fiscal deficits.
  - Debt dynamics vulnerable to natural disasters (illustrated in a stress test scenario).
  - Reducing public debt to sustainable levels will require fiscal consolidation, in particular by developing new revenue sources, and continued progress with lowering borrowing cost.

*Source: Annex I. Implementation of Previous Staff Advice.*

### 3.8 percent, or 5.8 percent of gross public debt. In FY2018 gross financing needs amounted to

### 1lcaea2020001 - 3.8 percent, or 5.8 percent of gross public debt. In FY2018 gross financing needs amounted to

### Near-term financing and trajectory
- In FY2018 gross financing needs amounted to 18.8 percent of GDP as Treasury bills and bonds on the regional government securities market (RGSM) came due.
- In the near-term debt will rise due to the US$175 million (9.1 percent of GDP) airport redevelopment project and other major capital projects.
- The associated financing needs are covered by semi-concessional loans from Taiwan, Province of China, with the grant element estimated at 10 percent, and a US$75 million syndicated loan from local and regional banks.
- Over the medium-term public debt will continue to rise towards 74 percent of GDP.
- Annual financing needs will remain high at around 18 percent of GDP.

### Debt composition and vulnerabilities
- Domestic debt is 49.7 percent of total central government debt.
  - Domestic debt composition: medium- and long-term debt (93.4 percent), Treasury bills (4.5 percent), overdrafts (2.1 percent).
- External debt of the central government is 50.3 percent of the total.
  - External debt composition: bilateral or multilateral loans (42.7 percent), medium- and long-term commercial borrowings (43.1 percent), Treasury bills (14.2 percent).
- Most borrowings of public corporations are domestic: 81.6 percent out of total debt of public corporations.
- Debt in foreign currencies is overwhelmingly denominated in U.S. dollars; the Eastern Caribbean dollar remains pegged to the U.S. dollar since 1976.
- The share of short-term debt in total central government debt:
  - Peaked at 21.5 percent in 2016.
  - Declined to 10.4 percent (most recent observation).
- The government is pursuing efforts to lengthen maturities and reduce issuance of Treasury bills.
- A sinking fund has been set up to manage redemptions of maturing bonds.
- With the implementation of the airport redevelopment project the external share of public corporations’ borrowing will rise.

### Realism of baseline assumptions and fiscal outlook
- Staff forecasts: growth returns to potential of 1.5 percent; inflation remains near 2 percent throughout the projection period.
- Fiscal stance of the central government accounts is broadly neutral, but the DSA includes the airport redevelopment project executed by a public corporation.
- The adjusted primary balance is sharply negative in FY2020 and FY2021 and is the primary driver of the rise in debt.
- Forecast errors for growth, inflation, and the primary balance have been large historically but declined markedly in 2018.
- Forecast errors for the primary balance are partially explained by an upward revision of nominal GDP by the Statistics Office, which mechanically lowered past primary deficits.

### Stress tests and shock scenarios
- Real GDP growth shock:
  - A one standard deviation shock (2 percent) over 2020 and 2021 steers public debt towards 80 percent of GDP over the medium-term.
- Primary balance shock:
  - A one standard deviation deterioration (2.3 percent of GDP) in the primary balance spread over 2020 and 2021 induces a succinct rise in public debt; medium-term debt dynamics are more favorable than under the real GDP growth shock due to sustained growth.
  - The deterioration is equally distributed over revenue and expenditure to represent either a lapse of fiscal restraint or a sudden fall in revenues (e.g., a drop in CIP revenues).
- Natural disaster scenario (modeled on Hurricane Tomas, 2010):
  - Simulates fall of real GDP growth of 5, 3, and 2 percent relative to baseline for 2020, 2021, and 2022, and a deterioration of the primary balance of the same amounts.
  - Under this scenario financing needs climb to almost 30 percent of GDP.
  - Debt rises more rapidly than under the combined macro-fiscal shock, reaching more than 80 percent of GDP by 2021.

### External debt trends and vulnerabilities
- External debt of the public sector:
  - Declined from 34 percent of GDP at end-FY2017 to 31.4 percent of GDP at end-FY2018, primarily reflecting an improvement in the current account.
  - Driven by the external semi-concessional loan for the airport redevelopment, external debt in the baseline is projected to rise to 38 percent of GDP by FY2024.
- Bound-test vulnerability:
  - A permanent one-half standard deviation deterioration in the non-interest current account would bring external debt to 47 percent of GDP by 2024.
- Gross external financing need (selected figures from Annex IV Table 1):
  - In percent of GDP: 9.3, 10.1, 13.7, 10.6, 7.0, 5.0, 10.1, 10.6, 6.9, 6.2, 7.0 (series as shown in table).

### DSA baseline scenario — key projection figures (as of January 07, 2020)
- Nominal gross public debt (percent of GDP): 2017: 62.1; 2018: 65.5; 2019: 64.3; 2020: 65.5; 2021: 69.1; 2022: 72.6; 2023: 73.7; 2024: 74.1.
- Public gross financing needs (percent of GDP): 2017: 14.4; 2018: 19.1; 2019: 18.8; 2020: 18.2; 2021: 23.4; 2022: 22.6; 2023: 17.4; 2024: 16.1; 2024 (alternate column): 17.6.
- Real GDP growth (percent): 2017: 1.1; 2018: 2.6; 2019: 0.9; 2020: 1.5; 2021: 3.2; 2022: 3.0; 2023: 2.4; 2024: 1.5; 2024 (alternate): 1.5.
- Inflation (GDP deflator, percent): 2017: 2.1; 2018: 4.1; 2019: 4.9; 2020: 2.2; 2021: 2.1; 2022: 2.1; 2023: 2.0; 2024: 2.0; 2024 (alternate): 2.0.
- Nominal GDP growth (percent): 2017: 3.4; 2018: 6.5; 2019: 5.2; 2020: 4.1; 2021: 5.3; 2022: 5.0; 2023: 4.2; 2024: 3.5; 2024 (alternate): 3.5.
- Effective interest rate (percent): 2017: 5.2; 2018: 5.3; 2019: 5.1; 2020: 4.9; 2021: 4.9; 2022: 4.9; 2023: 4.8; 2024: 4.8; 2024 (alternate): 4.8.
- Change in gross public sector debt (cumulative): 2017: 1.7; 2018: -0.7; 2019: -1.2; 2020: 1.2; 2021: 3.6; 2022: 3.4; 2023: 1.2; 2024: 0.4; cumulative to 2024: 0.0; nine-year cumulative shown as 9.8.
- Primary (noninterest) revenue and grants (percent of GDP, cumulative to 2024): 135.4.
- Primary (noninterest) expenditure (percent of GDP, cumulative to 2024): 143.0.
- Automatic debt dynamics contribution (cumulative shown): 2.4.
- Real interest rate contribution (cumulative shown): 11.1.
- Real GDP growth contribution (cumulative shown): -8.7.
- Residual, including asset changes (cumulative to 2024): shows sequence including -0.4, 1.1, 1.3, 0.0, 0.4, 0.2, 0.1, -0.2, -0.7, -0.1.

### Alternative scenarios and assumptions (selected)
- Baseline underlying assumptions (percent unless otherwise noted), selected entries:
  - Real GDP growth (2020–2024): 1.5, 3.2, 3.0, 2.4, 1.5, 1.5 (as in Annex IV Figure 4 table).
  - Inflation (2020–2024): 2.2, 2.1, 2.1, 2.0, 2.0, 2.0.
  - Primary Balance (percent of GDP, 2019–2024 baseline): -0.4, -3.6, -3.3, -0.9, 0.3, 0.3.
- Constant Primary Balance Scenario: Primary Balance held at -0.4 percent of GDP for 2020–2024.
- Historical Scenario: lower growth profile with Real GDP growth at 0.9 percent for 2020–2024 and Primary Balance at -0.6 percent of GDP across 2019–2024.

*Source: IMF staff.*

### Annex IV Figure 6. St. Lucia: External Debt Sustainability: Bound Tests

### 1lcaea2020001 - Annex IV Figure 6. St. Lucia: External Debt Sustainability: Bound Tests

### External debt bound tests — key scenario values
- Baseline external debt: 38 (percent of GDP)
- Historical scenario (boxed figure): 42 (percent of GDP)
- Interest rate shock (i-rate shock) scenario (boxed figure): Baseline 38; Scenario 38; (figure timeline shows values across 2014–2024)
- Current account (CA) shock scenario (boxed figure): Baseline 38; CA shock 47
- Combined shock scenario (boxed figure): Baseline 38; Combined shock 44
- Combined shock with 30% depreciation (real depreciation shock 4/): Baseline 38; Combined shock with 30% depreciation 56
- Growth shock scenario (boxed figure): Baseline 38; Growth shock 40
- Gross financing need under baseline (right scale) and non-interest current account shock (in percent of GDP) shown in figure (timeline 2014–2024)

### Figures-in-box — baseline, scenario, and historical averages (as presented)
- First grouping: Baseline: 4.4; Scenario: 4.6; Historical: 4.5
- Second grouping: Baseline: 2.3; Scenario: 1.3; Historical: 0.9
- Third grouping: Baseline: 1.2; Scenario: -0.6; Historical: -0.3

*Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown. For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead. Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. One-time real depreciation of 30 percent occurs in 2019.*

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### Annex V. The Potential Impact of the Hotel Accommodation Fee (HAF)

### Context and approach
- Tourism is the most important sector for St. Lucia; in 2018:
  - Almost 400,000 stayover tourists (more than twice total population)
  - About 760,000 cruiseship visitors (more than 4 times population)
- The analysis treats the proposed HAF as a price component of tourist expenditure and uses the IMF Week at the Beach (W@tB) index as a price proxy.
- Econometric specification (log-log) used to estimate elasticities of stayover arrivals to prices and controls:
  - ln(#arriv) = α + β1 ln(Price) + β2 ln(Inc_US) + β3 ln(Air_cap) + β[controls] + ε

### Estimated determinants of stayover arrivals (summary of results)
- Price elasticity (W@tB index): a 1.0 percent increase in the index is associated with a 0.25–0.34 percent decrease in arrivals.
  - Table 1 reported coefficients: Week at the Beach Index: -0.251 (column 1) and -0.342** (column 2)
- Income in tourist source countries (US Advance Retail Sales): a 1.0 percent increase is associated with a 0.499*** to 0.622*** percent increase in arrivals.
- Airlift (monthly seats available): a 1.0 percent increase in seats associated with a 1.514*** to 1.593*** percent increase in arrivals.
- Natural disasters: a natural disaster causing damage equal to 1 percent of GDP would reduce stayover arrivals by about 1.6 percent (estimate -1.286 in column 1; -1.598** in column 2).

### Heterogeneity by source market (Table 2)
- Price elasticity by region (Week at the Beach Index coefficients, reported):
  - US: -0.86 (not statistically significant)
  - CANADA: -1.49 (not statistically significant)
  - UK: 0.57 (not statistically significant)
  - Caribbean: -1.07 (statistically significant; standard error 0.04)
- Only tourists from the Caribbean show a statistically significant and larger price elasticity (about three times the overall elasticity).

### Impact of the proposed HAF
- The HAF would add around 1.4 percent (or $33) to the average per capita cost of spending one week in St. Lucia.
- Given estimated price elasticities and the magnitude of the HAF, implementation would likely reduce arrivals by 0.3–0.4 percent, equivalent to about 1,300–1,700 tourists annually.

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### Annex VI. Carbon Taxation in St. Lucia: An Update

### Emissions shares and current tax treatment (2018)
- CO2 emission shares (2018):
  - Power generation: 47%
  - Transport: 41%
  - LPG: 8%
  - Other commercial: 4%
- Current excise treatment and 2018 revenues (Annex VI Table 1):
  - Diesel for power generation: Consumption 20.2 million gallons; Excise/levy EC$/gallon 1.0; Revenue 0.4 (% GDP)
  - Diesel/gasoline for transport: Consumption 19.1 million gallons; Excise/levy EC$/gallon 4.0; Revenue 1.5 (% GDP)
  - Fuels for other commercial use: Consumption 1.7 million gallons; Excise/levy EC$/gallon 0.0; Revenue 0.0 (% GDP)
  - Total/average: Consumption 41.0 million gallons; Excise/levy EC$/gallon 2.4; Revenue 1.8 (% GDP)
- Notes:
  - Road fuels subject to EC$4 per gallon excise tax (annual revenues of 1.5 percent of GDP).
  - Diesel for power generation taxed at EC$1 per gallon (annual revenues of 0.4 percent of GDP).
  - LPG is not taxed and is subsidized at an annual cost of 0.1 percent of GDP.
  - If duty-free fuels were taxed similarly to road fuels the annual revenue would amount to EC$7 million (0.1 percent of GDP).

### Model and scenarios
- A spreadsheet model projects fuel use and electricity demand through 2030 using calibrated income and price elasticities, assumptions on energy efficiency, and transition to renewables.
- BAU compared to scenarios with carbon taxes phased in on top of current excise taxes and scenarios with accelerated renewables (renewable share in electricity to 50 percent by 2030, per NDC pledge).

### Emissions and revenue projections (2030)
- Emissions reductions relative to BAU in 2030:
  - Carbon tax US$50 per ton (EC$135) alone: reduces emissions by 7.5 percent below BAU in 2030.
  - Carbon tax US$100 per ton alone: reduces emissions by 14 percent.
  - Renewables expansion to 50 percent by 2030 (NDC pledge): reduces economy-wide emissions by 25 percent.
  - Renewables + US$50 carbon tax: reduces emissions by 30 percent.
  - Renewables + US$100 carbon tax: reduces emissions by 34 percent.
- Fiscal revenue impact in 2030 (extra revenue relative to BAU, accounting for erosion in existing fuel tax bases):
  - US$50 carbon tax alone: raises 1.1 percent of GDP.
  - US$100 carbon tax alone: raises 2.1 percent of GDP.
  - US$50 carbon tax combined with renewables: raises 0.7 percent of GDP.
  - US$100 carbon tax combined with renewables: raises 1.4 percent of GDP.
- Price impacts (relative to BAU by 2030) under US$50 carbon tax:
  - Road fuel prices rise by 12.5 percent (EC$1.6).
  - Electricity prices rise by 10.2 percent.
  - Prices of other fuels, including LPG, rise by 14 percent.
  - Under a US$100 carbon tax price changes are roughly twice as large.

### Policy implications highlighted
- A carbon tax can:
  - Strengthen incentives for shifting to renewables and improving energy efficiency.
  - Raise sizable fiscal revenues that can support debt sustainability.
  - Improve energy security by reducing dependence on oil imports.
- To meet Paris Agreement targets by 2030, a carbon tax alone appears insufficient; a more forceful expansion of renewables is required.
- Administrative feasibility: a carbon tax is straightforward to implement as a modification of existing fuel taxes and is difficult to avoid.

*Sources: International Monetary Fund, Country desk data, and staff estimates.*

### Annex VI. Figure 2: Regional Energy Prices (2017)

### Annex VI. Figure 2: Regional Energy Prices (2017)

### Regional energy price presentation
- Figure displays regional retail prices for (a) Gasoline (US$/liter), (b) Road Diesel (US$/liter), and (c) Electricity (US$/kWh) across Ant. & Barb., Bahamas, Barbados, Dominica, Grenada, Jamaica, St. Kitts & Nevis, St. Lucia, St. Vin. & Gren., and Trinidad for 2017.
- The gasoline panel (a) includes a comparative series "With US$50 carbon tax".
- Source: IMF staff calculations.

### Distributional impact of a carbon tax
- Carbon taxes are effective for mitigation and fiscal purposes but can be regressive if spending on energy or energy-intensive products by the most vulnerable is disproportionately high.
- Direct and indirect effects must be assessed: indirect effects arise as the carbon tax is passed along supply chains into intermediate and final goods, and can be sizable though less visible than direct fuel and electricity price increases.
- In St. Lucia the carbon tax is characterized as "mildly regressive" based on the 2016 Household Survey of Living Conditions and Household Budgets (SLC/HBS):
  - The poorest 20 percent bear a tax burden amounting to 1.4 percent of their total consumption.
  - The wealthiest 20 percent bear a tax burden amounting to 1.2 percent of their total consumption.
- Indirect effects represent about 0.6 percent of total household consumption and affect all segments similarly.

### Revenue distribution and compensatory options
- The poorest 20 percent of households pay (directly or indirectly) only 9.4 percent of the carbon tax revenue.
  - If a corresponding share of total proceeds were used for targeted assistance, these households as a group would be as well off as before the tax.
- Current LPG subsidization is a poor-targeted social policy:
  - Only 14.3 percent of economy-wide spending on LPG can be attributed to the poorest 20 percent of households.
- Policy recommendations for protecting vulnerable households:
  - Compensate poorer households through means-tested cash or in-kind transfers (conditional on social safety net and administrative capacity).
  - Provide assistance for household energy bills (noting this reduces environmental effectiveness and has limitations in compensating indirect effects).
  - Accelerate work to improve the social safety net and administrative capacities, such as implementing a central beneficiary registry.

### Competitiveness and industry cost impacts
- From producers’ perspective, a carbon tax increases production costs and can depress profit margins if costs cannot be passed on to consumers.
- For sectors competing in international markets (e.g., tourism), a unilateral carbon tax could adversely affect competitiveness.
- Quantified impacts for a US$50 carbon tax in St. Lucia:
  - Production costs rise by 0.6 percent on average.
  - Production costs rise by 1.3 percent for the most energy-intensive industries.
- These numbers represent an upper bound because firms may substitute towards less energy-intensive intermediate inputs or reduce energy use via investment in more energy-efficient equipment.

### Modeling scenarios (as presented)
- Model projections for carbon tax scenarios include:
  - US$50 carbon tax
  - US$100 carbon tax
  - Renewables
  - US$50 carbon tax + renewables
  - US$100 carbon tax + renewables
- Figures report (a) CO2 emission reductions (% reduction below BAU) and (b) Revenue gains (% GDP) over 2019–2029 for the scenarios listed above (specific plotted values are in the figures).

### Additional contextual and methodological notes
- Households are sorted into quintiles based on per capita household consumption for the distributional analysis.
- Indirect effects computed using approach by Coady et al. (2006), employing data on intermediate input use from Supply-and-Use tables (SUTs).
- Both household expenditure shares and firms’ input structure are assumed fixed with no substitution effects in the analysis.
- The most recent poverty estimates from 2016 indicate that 20.3 percent of Saint Lucia's population are poor (or live below $5.50 dollars a day).

*Source: IMF staff calculations; extracted from Annex VI and accompanying text.*

### 2.      The CCPA provided a comprehensive assessment of St. Lucia’s plans to manage climate

### 2.      The CCPA provided a comprehensive assessment of St. Lucia’s plans to manage climate

### Overall assessment and progress summary
- The CCPA provided a comprehensive assessment of St. Lucia’s plans to manage climate change from the perspective of the macroeconomic implications.
- The assessment suggested macro-relevant reforms in: general preparedness, mitigation, adaptation, financing, risk management and national processes.
- The CCPA recognized that St. Lucia has shown leadership among the Caribbean countries in confronting climate change, despite difficult fiscal constraints.
- The CCPA highlighted that success of its long-term climate adaptation and mitigation strategy will require:
  - full articulation of a costed strategy,
  - mobilization of private investment for bankable projects and external grants for public goods,
  - capacity-building to manage the plans effectively.
- Authorities have made commendable progress guided by the 2015 Climate Change Adaptation Policy.
- Recent progress includes updating national and sectoral adaptation plans, preparing a climate financing strategy, mobilizing resources from global climate funds, and infrastructure programs with a focus on resilience.

### A. General Preparedness
Recommendations
- Strengthen the National Determined Contribution (NDC), to provide a comprehensive strategy of St. Lucia’s climate-change related effort—particularly by adding costed adaptation plans.
- Update the National Vision Plan and Medium-Term Development Plan, and develop supporting operational sectoral plans, with focus on costing and resource mobilization.
- Ensure that all enabling legislation and standards relevant to climate, environment and energy are in place.

Progress
- The 2018 National Adaptation Plan (NAP) outlined immediate, medium and long-term climate change adaptation needs and the process for the development of adaptation strategies and investment plans for priority sectors.
- The government is finalizing Sectoral Adaptation Strategies and Action Plans (SASAPs) in water, agriculture, fisheries, infrastructure, education and health with indicative estimate of financing needs in each sector.
- The draft climate change legislation is under review.
- The government’s Medium-Term Development Plan 2019–22 will also have a focus on building resilience against climate change.
- The government is developing a climate financing strategy that will map indicative financing needs in priority sectors to possible financing resources including global climate funds, donor support and budget resources.
- Active costing of climate projects has not taken place.

### B. Mitigation
Recommendations
- Introduce a carbon tax by applying the announced road fuel tax increase to other diesel products (including for power generation) and synchronizing future tax increases across all fuels.

Progress
- Authorities are mindful of the potential benefits of carbon taxation for emission reduction and public finance, and appreciate the IMF staff’s work on the distributional impact of a carbon tax and policy implications.
- Authorities note limited scope to introduce a carbon tax given the already high cost of energy in the country.

### C. Adaptation
Recommendations
- Enact the amendments to the OECS Building Code for Saint Lucia.
- Review and approve the Coastal Zone Management Policy and Strategy.
- Consider rezoning flood areas.

Progress
- SASAPs will include strategies for natural resource management, including coastal, marine and terrestrial biodiversity.
- Studies on the OECS building code are underway with donor support.
- There is currently no timetable for approving the Coastal Zone Management Policy and Strategy or rezoning flood areas.
- The National Integrated Planning Program (NIPP) and the Sustainable Development and Environmental Division (SDED) have been looking at vulnerability of government assets and communities along St. Lucia's coast.

### D. Financing
Recommendations
- Articulate a strategy for raising climate-change financing; use the NDC forum as a catalyst.
- Rely as much as possible on private sector and grant financing, to ensure continued fiscal and debt sustainability.
- Fully implement the renewables strategy, not least because it will strengthen St. Lucia’s balance of payments.

Progress
- The Climate Financing Strategy is being finalized.
- The government is developing a country program with the Green Climate Fund to unlock financing for already-identified projects.
- Little progress has been made in mobilizing private investment.
- The scope of increasing the use of renewable energy is restricted by the existing cap for solar energy production; removing the cap will require legislative changes.

### E. Risk Management
Recommendations
- Build a contingency funding buffer through:
  - Immediate capitalization of a fund of USD 5–7 million
  - In the medium term, a savings fund with capitalization of 5 percent of GDP, replenished on a rolling basis, which would give St. Lucia a 95 percent probability of being able to cover the fiscal costs of disasters without incurring additional debt.
- Use revenues from the Citizenship-by-Investment program (CIP) to capitalize disaster funding.
- Consider making insurance mandatory for key public buildings.
- Study the value of making insurance mandatory for buildings in flood-risk areas.
- Support strengthening of the domestic insurance market, as well as regional initiatives for insurance.

Progress
- The government plans to use part of CIP revenues to build a liquid self-insurance fund to bolster resilience to disasters.
- A parametric insurance scheme for the fisheries sector has been introduced with donor support.
- There is currently no plan to introduce mandatory insurance.

### F. National Processes
Recommendations
- Ensure that responsibilities for climate action are logically assigned to relevant ministries, with clear responsibilities for developing sectoral strategies and costed investments.
- Revive the public sector investment plan (PSIP), while addressing any problems that made it be considered inadequate.
- Ensure that climate-related objectives and activities are systematically identified in the budget, and investment projects explicitly linked to these.
- Build capacity for effective public investment appraisal and monitoring, in the Ministry of Finance and other relevant ministries.

Progress
- (Progress text continued in source beyond excerpt provided.)

*IMF staff assessment and implementation summary from the CCPA report and subsequent government actions as presented in the source document.*

### 10.      The NAP and SASAPs have clearly defined the responsibilities for climate change for

### 10. The NAP and SASAPs have clearly defined the responsibilities for climate change for the relevant ministries and the government has set up a delivery unit to monitor policy implementation, as well as the strategy for capacity development.

### Climate change governance and public investment
- The NAP and SASAPs clearly define responsibilities for climate change for the relevant ministries.
- The government has set up a delivery unit to monitor policy implementation.
- A strategy for capacity development has been established.
- The government will receive technical assistance from the World Bank to resume the PSIP with an aim to strengthen appraisal and monitoring for all public investment projects.
- Resilience to natural disasters is an important aspect of the government’s infrastructure programs.

### Fund relations and financial position (As of November 30, 2019)
- Membership Status: Joined: November 15, 1979; Article VIII.
- General Resources Account:
  - Quota 21.40 SDR Million 100.00 percent of Quota
  - Fund holdings of currency 19.87 SDR Million 92.85 percent of Quota
  - Reserve Tranche Position 1.53 SDR Million 7.16 percent of Quota
- SDR Department:
  - Net cumulative allocation 14.57 SDR Million 100.00 percent of Allocation
  - Holdings 4.14 SDR Million 28.41 percent of Allocation
- Outstanding Purchases and Loans:
  - RCF Loans 1.15 SDR Million 5.37 percent of Quota
- Latest Financial Arrangements: None
- Projected Payments to the Fund (Forthcoming)
  - 2019: Principal 0.77; Charges/Interest 0.02; Total 0.02
  - 2020: Principal 0.38; Charges/Interest 0.85; Total 0.85
  - 2021: Principal (blank); Charges/Interest 0.47; Total 0.47
  - 2022: Charges/Interest 0.08; Total 0.08
  - 2023: Charges/Interest 0.08; Total 0.08

### Exchange rate and safeguards
- Exchange Rate Assessment: The de jure exchange rate arrangement is a currency board.
- St. Lucia participates in a currency union with seven other members of the ECCU and has no separate legal tender.
- The Eastern Caribbean dollar is pegged to the U.S. dollar under a currency board arrangement at EC$2.70 per U.S. dollar.
- St. Lucia has accepted the obligations of Article VIII, Sections 2(a), 3 and 4.
- Safeguards Assessment: An update assessment completed in April 2016 found that the ECCB has maintained generally strong controls over its key operations; external audit and financial reporting practices remain sound; financial statements are compliant with International Financial Reporting Standards.

### Technical assistance overview (selected items and dates)
- CARTAC and IMF have provided substantial technical assistance across areas including macroeconomic programming, revenue administration, PFM, statistics, and financial sector.
- Macroeconomic Programming and Analysis:
  - September 2019 (CARTAC): 2 officers from the MOF attended the ECCU Customized DSA/FP course.
  - July 2019 (CARTAC): 1 official from the MOF participated in the Macroeconomics Diagnostics Course.
  - May/June 2019 (CARTAC): Workshop on the MAC DSA framework; 13 persons from the MOF attended.
  - April 2016 (CARTAC): Updating the Macro Framework and drafting the medium-term fiscal framework.
- National Accounts:
  - October 2019 (CARTAC): National Accounts Mission to assist with redeveloping the national accounts compilation system and compiling rebased GDP estimates.
  - September 2017, September 2018 and February 2019 (CARTAC): Missions to assist with compiling and balancing the supply and use tables (SUT) for 2016.
  - Since 2011, CARTAC TA on quarterly GDP compilation, with St. Lucia serving as a pilot for the ECCU countries.
- Tax Reforms and Revenue Administration: Numerous CARTAC missions from 2013–2019 covering audit capacity, IT support, HQ capacity, VAT, compliance risk management, KPI establishment, and more (examples: November 2019, September 2019, July 2019, June 2019, May & November 2018).
- Expenditure Rationalization and PFM Reforms:
  - April 2018 (CARTAC): PFM Action Plan.
  - September 2017 (CARTAC): Budget Workshop with MoF and all Ministries.
  - July 2017 (CARTAC): PEFA Assessment.
- Financial Sector:
  - FY18–FY20 (CARTAC): FSRA participation in regional workshops on supervision, consolidated supervision, risk-based supervision, cyber risk, FinTech.
  - October 2019 (CARTAC): Bilateral TA to the FSRA on implementation of Risk-based supervision across non-bank financial institutions.
  - October 2019 (CARTAC): Developing the Stress Testing Framework for the Credit Union Sector.
  - April 2016 and February 2016 (CARTAC): Basel II Implementation.
  - December 2015 (MCM): Implementation of Risk Based Supervision.
  - A joint IMF/World Bank FSAP mission in two missions—September 1–19 and October 20–31, 2003; FSSA discussed May 5, 2004.

### Statistical issues and data adequacy (As of May 16, 2018)
- General: Data provision has some shortcomings but is broadly adequate for surveillance; weaknesses in coverage, frequency, quality, and timeliness, particularly national accounts, public sector beyond budgetary central government, and balance of payments.
- National Accounts:
  - Nominal GDP compiled annually using production and expenditure approaches.
  - Real GDP compiled only using the production approach.
  - Since 2011, real GDP estimates are compiled with 2006 as the new base year.
  - Preliminary GDP available about four months after end of year; estimates usually finalized with a two-year lag.
  - Quarterly GDP estimates by the expenditure approaches were developed and released in April 2017 with CARTAC technical assistance.
- Price Statistics:
  - The rebasing exercise of the CPI has been completed—the new CPI basket (base January 2018) is based on the 2016 Household Expenditure Survey.
  - The statistical office has started developing a producer price index covering hotels and restaurants and is considering unit-value based export and import price Indexes.
- Government Finance Statistics:
  - Authorities report monthly data on the budgetary central government’s current revenue and expenditure using a non GFSM 2014 presentation with lags of a couple of months.
  - Need to move to a complete GFSM framework; need improvements to accounting systems for capital expenditures and to compile rest of public sector (financial and nonfinancial public corporations) data regularly.
- Monetary and Financial Statistics:
  - Monetary data compiled by the ECCB monthly and reported regularly to the Fund.
  - Institutional coverage of other depository corporations is incomplete; valuation of interest-bearing assets and liabilities does not incorporate accrued interest.
- External Sector Statistics:
  - Since 2017, ECCB and NSOs jointly disseminating annual balance of payments and IIP statistics following BPM6.
  - Data for 2014 onwards available on the ECCB’s website and re-disseminated by STA.
  - Travel credits estimates based on up-to-date visitor expenditure surveys carried out by the St. Lucia Tourist Board.
  - The Debt Management Office compiles granular public sector external debt reported to the World Bank’s QEDS database; data on external debt of the non-bank private sector are not available.
- Participation in data dissemination:
  - St. Lucia is a participant in the enhanced General Data Dissemination System (e-GDDS) since September 2000 but has not yet launched a National Summary Data Page (NSDP).

*Prepared by Western Hemisphere Department (in consultation with other departments and the Caribbean Regional Technical Assistance Center, CARTAC) — January 21, 2020.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1lcaea2020001.pdf_