## 1lcaea2020002

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### Context and request for Fund support
- St. Lucia is a tourism-dependent economy; tourism exports in a typical year would account for nearly 90 percent of the country’s foreign exchange earnings.
- The economy is projected to contract by 8.5 percent in 2020.
- Authorities requested financial assistance under the Rapid Credit Facility (RCF) exogenous shock window of SDR 21.4 million, equivalent to 100 percent of quota, to be used for budget support.
- Staff supports this RCF request.

### Recent developments (pre-COVID and immediate impact)
- Growth averaged 2.6 percent in 2017-19 versus a historical average of 1.5 percent.
- Increased activity in hotel and food services accounted for half of recent growth.
- A new airport terminal will cost 9 percent of GDP funded through government-guaranteed loans and other financing; public debt was projected to rise to nearly 70 percent of GDP owing to these project loans.
- 2019 current account recorded a 2 percent of GDP surplus.
- Imputed reserves at the Eastern Caribbean Central Bank (ECCB) were around 3.2 months of imports at end-2019.
- Financial system: generally adequately capitalized and liquid entering the pandemic, but legacy asset quality weaknesses and structural impediments persist; emerging risks from rising overseas bank investments and rapid expansion of the credit union sector.
- Confirmed infections in country: fifteen.
- Government containment: border closures and a 24-hour shutdown during April 1-7.

### Impact of COVID-19: findings and key statistics
- Tourism significance: tourism accounts for nearly one half of the domestic economy (direct and indirect effects).
- Preliminary tourism export shock: could decline by at least 50 percent year-on-year in 2020, with a near cessation of arrivals in Q2 and Q3.
- Growth projections:
  - 2020: -8.5 percent (from 3.2 percent in the pre-virus baseline).
  - 2021: around 6.9 percent rebound.
  - Nominal GDP not expected to recover to the 2019 level until 2022.
- External (BOP) impacts:
  - Expected sharp decline in tourism exports of about US$460 million.
  - Expected decline in remittances of US$10 million.
  - Estimated balance of payments financing need for 2020: US$154 million, or 8 percent of GDP.
  - Financing assumed to be largely met by multilateral and bilateral support, disbursements under the RCF, and liquidity support from the ECCB.
- Balance of Payments summary (selected lines, in millions of USD):
  - 2019 Current account balance: 98
  - 2020 Current account balance: -202
  - Of which tourism exports: 2019 = 988; 2020 = 526
  - Of which oil imports: 2019 = -103; 2020 = -59
  - Of which remittances: 2019 = 26; 2020 = 16
  - Capital and financial accounts: 2019 = -98; 2020 = 48
  - Of which FDI: 2019 = 78; 2020 = 89
  - Of which changes of reserves: 2019 = 18; 2020 = 37
  - Remaining BOP gap: 154
    - IMF (RCF): 29
    - Other multilaterals and bilateral disbursements: 88
    - ECCB: 37

### Fiscal impact and financing needs (central government)
- FY2020/21 overall fiscal deficit expected to widen to 7 percent of GDP (from 2 percent in FY2019/20).
- Total revenue projected to decline by 2 percent of GDP.
- Potential offsets and one-offs:
  - Potential increase in fuel surcharges of up to 1.3 percent of GDP.
  - One-off stamp duty from sale of a bank to foreign investors: 0.4 percent of GDP.
- Spending increases by 2 percent of GDP, mainly from:
  - Additional public health expenditure estimated in excess of EC$30 million, or 0.6 percent of GDP.
  - Temporary income support to vulnerable households.
- Central Government Gross Financing Needs (in millions of EC dollars, FY2020/21):
  - Total Revenue (A): 1,097
  - Total Expenditure (B): 1,466
  - Overall Balance (C=A-B): -369
  - Debt Amortization (D): 914
  - Gross Financing Needs (GFN) (E=D-C): 1,284
  - GFN as % of GDP: 23.9
  - Projected Financing Sources: 1,154
    - Debt Issuances: 679
    - Government Deposits: 60
    - External Financing: 415
      - IMF: 78
      - Other multilaterals and bilateral: 237
      - ECCB: 100
  - Remaining financing from other sources: 130
- Public debt amortization in 2020: around USD185 million (8.5 percent of GDP), half held by external creditors.
- Large stock of privately held government securities: 40 percent of GDP with average maturity around 36 months.

### Authorities’ measures (announced and planned)
- Social stabilization plan estimated around 2 percent of GDP, including:
  - Temporary income support to vulnerable households (including non-contributors to national insurance).
  - Extension of tax payment deadlines.
  - Tax credits to companies that retain employees.
  - Temporary suspension of rental payments for small enterprises in government properties.
  - Targeted assistance to local entrepreneurs producing crisis-response essentials.
- Actively seeking concessional funding and debt relief from bilateral and multilateral sources including the Caribbean Development Bank and the World Bank.
- ECCU coordination commitments: consult on national policy decisions with regional implications, proactively engage with creditors to minimize rollover risks, encourage statutory bodies to maintain or increase exposure to region’s sovereign bonds.
- Medium-term policy intentions:
  - Widen the tax base (including targeting the informal sector) once economy recovers.
  - Adopt a fiscal rule to guide medium-term consolidation.
  - Increase public investment on health, education and resilience; seek concessional financing including global climate funds.
  - Introduce a new Public Financial Management (PFM) Bill to enhance transparency, accountability and efficiency of PFM.
- ECCB measures:
  - Announced loan moratorium and waiver of late fees and charges for six months and targeted supervisory flexibility.
  - Measures to increase members’ access to ECCB lending: temporary advances to governments and purchasing of discount and rediscount treasury bills and long-term bonds and other government guaranteed bonds.
- Non-bank sector measures:
  - FSRA committed to work closely with ECCB and government to maintain stability in the non-bank sector and obtain access to emergency liquidity assistance from the public sector if needed.

### Risks, scenarios and contingency actions
- Main risks:
  - Prolonged COVID-19 outbreak and a more prolonged halt to tourism than currently anticipated.
  - Increased domestic infection rates leading to widespread domestic disruptions.
  - Uncertainty about local and regional financial institutions’ willingness to refinance corporates, households and the public sector.
  - Vulnerability to natural disasters.
- Staff baseline assumptions:
  - Spread of the disease contained at moderate levels.
  - Activity resumes relatively rapidly once the immediate health crisis wanes.
- Contingency actions if conditions deteriorate:
  - Authorities will consider a follow up longer-term upper credit tranche (UCT) arrangement with the IMF.
  - Reprioritizing expenditures to contain the fiscal deficit.
  - Exploring other financing sources: overdraft facilities with commercial banks, increasing national insurance fund exposure to the public sector, expanding the citizenship-by-investment program.
  - Eligibility for IDA resources under the IDA19 replenishment (July 2020 to June 2023).

### RCF access, safeguards, and modalities of support
- Staff proposes to provide support of 100 percent of quota (SDR 21.4 million) under the RCF.
- Staff estimate that the RCF will cover 19 percent of the projected financing gap.
- The RCF disbursement will be disbursed to the ECCB and be on-lent to the St. Lucian government to provide for fiscal financing and support virus-related spending.
- Authorities are committed to collaborating with IMF staff in undergoing a safeguards assessment.
- The ECCB will provide Fund staff with the necessary central bank audit reports and has authorized the external auditors to hold discussions with staff.
- The next safeguards assessment of the ECCB is expected to take place during 2020, in accordance with the four-year cycle for regional central banks.

### Debt sustainability: baseline, risks, and stress tests
- Under staff’s baseline:
  - Public debt will increase by nearly 12 percentage of GDP in FY2020 and peak at 78 percent in FY2022 before declining gradually toward the authorities’ 2030 debt target of 60 percent of GDP.
- Assumptions underlying the baseline:
  - Authorities implement medium-term consolidation measures to meet 2030 debt target.
  - Pandemic impact on tourism is largely temporary, with GDP returning to 2019 levels after two years.
- Gross financing needs:
  - Will spike above 26 percent of GDP in the current year and revert back to pre-crisis levels only in FY2022.
  - Central government gross financing needs expected to remain high at above 20 percent over the next two years.
- Debt composition and vulnerabilities:
  - About half of total central government debt is domestic.
  - Domestic debt is composed predominantly of medium- and long-term debt securities and commercial loans (92 percent).
  - About 9 percent of GDP public debt is associated with semi-concessional loans for a new airport that are paid from a dedicated revenue source accumulated in an extrabudgetary fund.
  - Debt in foreign currencies is overwhelmingly denominated in U.S. dollars; Eastern Caribbean dollar peg to U.S. dollar since 1976.
- Stress test outcomes (selected):
  - Real GDP growth shock (reduction in growth by one standard deviation (2 percent) over 2021 and 2022) steers public debt to a peak of about 84 percent of GDP.
  - Combined macro-fiscal shock or natural disaster scenario (modeled to mimic damages sustained by Hurricane Tomas in 2010) — deterioration of real GDP growth of 5, 3, and 2 percent relative to baseline for 2021, 2022, and 2023 and deterioration of the primary balance of the same amount — would imply prolonged high gross financing needs and a higher debt path stabilizing around 90 percent of GDP.
  - Primary balance shock of one standard deviation to the primary balance spread over 2021 and 2022 induces an adverse debt trajectory.
- Policy implications and recommendations:
  - Anchor fiscal adjustment efforts in a clear, institutional medium-term framework.
  - Implement ambitious medium-term consolidation measures to meet the 2030 debt target of 60 percent of GDP.
  - Manage near-term financing pressures given gross financing needs spiking above 26 percent of GDP and central government rollover assumptions (renew short-term in full; rollover about 80 percent domestic and 40 percent external medium- and long-term debt maturing in FY2020).
  - Continue using extrabudgetary mechanisms (e.g., airport redevelopment tax revenue in an extrabudgetary fund) to mitigate longer-term debt service vulnerabilities for project-specific semi-concessional loans.

### External debt profile and drivers (selected figures)
- The bulk of the projected FY2020 increase in debt financing is external (10½ percent of GDP).
- Baseline external debt (percent of GDP): 2015 = 29.0; 2016 = 29.3; 2017 = 30.9; 2018 = 29.6; 2019 = 29.3; 2020 = 39.9; 2021 = 40.1; 2022 = 41.1; 2023 = 41.1; 2024 = 40.6; 2025 = 39.5.
- External debt-to-exports ratio (percent): 53.4; 59.5; 59.4; 53.7; 54.1; 120.1; 84.4; 79.3; 78.0; 76.0; 73.6 (2015–2025).
- Gross external financing need (percent of GDP): 9.2; 12.5; 9.6; 6.6; 2.7; 20.4; 9.0; 5.7; 6.0; 7.9; 6.9 (2015–2025).
- Sensitivity: a permanent one-half standard deviation deterioration in the non-interest current account would raise external debt to 49 percent of GDP by 2024.
- Scenario outcomes (figure summaries):
  - CA shock: external debt reaches 49 (percent of GDP).
  - Combined shock: external debt reaches 45 (percent of GDP).
  - Real depreciation shock (30% one-time depreciation): external debt reaches 58 (percent of GDP).
  - Growth shock: external debt reaches 40 (percent of GDP).

### Key statistics and projections (selected)
- RCF disbursement: SDR21.4 million (100 percent of quota).
- Staff estimate: RCF will cover 19 percent of the projected financing gap.
- Target public debt: lower debt to 60 percent of GDP by 2030.
- Real GDP (at market prices, percent change, Table 1 projections): 2019 = 1.7; 2020 = -8.5; 2021 = 6.9; 2022 = 2.2; 2023 = 1.5; 2024 = 1.5; 2025 = 1.5.
- Net imputed international reserves (US$ millions, Table 3 memorandum): 220.2 in 2020; projected 250.4 in 2021; 290.2 in 2022; 325.9 in 2023; 367.6 in 2024; 411.9 in 2025.
- Outstanding Fund credit (in US$ millions): 29.2 in 2021–2024; 26.2 in 2025; 20.4 in 2026; 14.6 in 2027; 8.7 in 2028; 2.9 in 2029; 0.0 in 2030.

*Source: 1lcaea2020002 - EXECUTIVE SUMMARY; Annex I. Debt Sustainability Analysis; IMF staff and St. Lucia authorities.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- St. Lucia is a tourism-dependent economy; tourism exports in a typical year would account for nearly 90 percent of the country’s foreign exchange earnings.
- The economy is projected to contract by 8.5 percent in 2020.
- More severe local outbreaks of COVID-19 could cause additional widespread and prolonged disruptions to economic activity.

### Request for Fund support
- Authorities requested financial assistance under the Rapid Credit Facility (RCF) exogenous shock window of SDR 21.4 million, equivalent to 100 percent of quota, to be used for budget support.
- Staff supports this RCF request.

### Macroeconomic policies (near-term and medium-term)
- Near-term focus: mobilizing external financing and maintaining macroeconomic stability.
- Regional coordination across the ECCU is emphasized to ensure resources are available for member states.
- Authorities will monitor economic, fiscal and financing conditions and may request a follow up longer-term upper credit tranche arrangement if conditions deteriorate.
- Commitments by the authorities:
  - Meet their 2030 public debt target.
  - Introduce revenue-enhancing measures once the immediate crisis moderates.
  - Adopt a fiscal rule to guide the pace and composition of medium-term fiscal consolidation.
  - Increase public investments over the medium-term on health, education and resilience against natural disasters and climate change.
  - Strengthen financial supervision and regulation to safeguard macro-financial stability.

### Recent developments (pre-COVID and near-term)
- Growth averaged 2.6 percent in 2017-19 versus a historical average of 1.5 percent.
- Increased activity in hotel and food services accounted for half of recent growth.
- A new airport terminal will cost 9 percent of GDP funded through government-guaranteed loans and other financing; public debt was projected to rise to nearly 70 percent of GDP owing to these project loans.
- 2019 current account recorded a 2 percent of GDP surplus.
- Imputed reserves at the Eastern Caribbean Central Bank (ECCB) were around 3.2 months of imports at end-2019.
- Financial system: generally adequately capitalized and liquid entering the pandemic, but legacy asset quality weaknesses and structural impediments persist; emerging risks from rising overseas bank investments and rapid expansion of the credit union sector.

### Impact of COVID-19 (findings and key statistics)
- Confirmed infections in country: fifteen.
- Government containment: border closures and a 24-hour shutdown during April 1-7.
- Tourism significance: tourism accounts for nearly one half of the domestic economy (direct and indirect effects).
- Preliminary tourism export shock: could decline by at least 50 percent year-on-year in 2020, with a near cessation of arrivals in Q2 and Q3.
- Growth projections:
  - 2020: -8.5 percent (from 3.2 percent in the pre-virus baseline).
  - 2021: around 6.9 percent rebound.
  - Nominal GDP not expected to recover to the 2019 level until 2022.
- External (BOP) impacts:
  - Expected sharp decline in tourism exports of about US$460 million.
  - Expected decline in remittances of US$10 million.
  - Estimated balance of payments financing need for 2020: US$154 million, or 8 percent of GDP.
  - Financing assumed to be largely met by multilateral and bilateral support, disbursements under the RCF, and liquidity support from the ECCB.
- Balance of Payments summary (selected lines, in millions of USD):
  - 2019 Current account balance: 98
  - 2020 Current account balance: -202
  - Of which tourism exports: 2019 = 988; 2020 = 526
  - Of which oil imports: 2019 = -103; 2020 = -59
  - Of which remittances: 2019 = 26; 2020 = 16
  - Capital and financial accounts: 2019 = -98; 2020 = 48
  - Of which FDI: 2019 = 78; 2020 = 89
  - Of which changes of reserves: 2019 = 18; 2020 = 37
  - Remaining BOP gap: 154
    - IMF (RCF): 29
    - Other multilaterals and bilateral disbursements: 88
    - ECCB: 37

### Fiscal impact and financing needs (central government)
- FY2020/21 overall fiscal deficit expected to widen to 7 percent of GDP (from 2 percent in FY2019/20).
- Total revenue projected to decline by 2 percent of GDP.
- Potential offsets and one-offs:
  - Potential increase in fuel surcharges of up to 1.3 percent of GDP.
  - One-off stamp duty from sale of a bank to foreign investors: 0.4 percent of GDP.
- Spending increases by 2 percent of GDP, mainly from:
  - Additional public health expenditure estimated in excess of EC$30 million, or 0.6 percent of GDP.
  - Temporary income support to vulnerable households.
- Central Government Gross Financing Needs (in millions of EC dollars, FY2020/21):
  - Total Revenue (A): 1,097
  - Total Expenditure (B): 1,466
  - Overall Balance (C=A-B): -369
  - Debt Amortization (D): 914
  - Gross Financing Needs (GFN) (E=D-C): 1,284
  - GFN as % of GDP: 23.9
  - Projected Financing Sources: 1,154
    - Debt Issuances: 679
    - Government Deposits: 60
    - External Financing: 415
      - IMF: 78
      - Other multilaterals and bilateral: 237
      - ECCB: 100
  - Remaining financing from other sources: 130
- Public debt amortization in 2020: around USD185 million (8.5 percent of GDP), half held by external creditors.
- Large stock of privately held government securities: 40 percent of GDP with average maturity around 36 months.

### Authorities’ policies to address the crisis (measures announced and planned)
- Social stabilization plan estimated around 2 percent of GDP, including:
  - Temporary income support to vulnerable households (including non-contributors to national insurance).
  - Extension of tax payment deadlines.
  - Tax credits to companies that retain employees.
  - Temporary suspension of rental payments for small enterprises in government properties.
  - Targeted assistance to local entrepreneurs producing crisis-response essentials.
- Actively seeking concessional funding and debt relief from bilateral and multilateral sources including the Caribbean Development Bank and the World Bank.
- ECCU coordination commitments: consult on national policy decisions with regional implications, proactively engage with creditors to minimize rollover risks, encourage statutory bodies to maintain or increase exposure to region’s sovereign bonds.
- Medium-term policy intentions:
  - Widen the tax base (including targeting the informal sector) once economy recovers.
  - Adopt a fiscal rule to guide medium-term consolidation.
  - Increase public investment on health, education and resilience; seek concessional financing including global climate funds.
  - Introduce a new Public Financial Management (PFM) Bill to enhance transparency, accountability and efficiency of PFM.
- ECCB measures:
  - Announced loan moratorium and waiver of late fees and charges for six months and targeted supervisory flexibility.
  - Measures to increase members’ access to ECCB lending: temporary advances to governments and purchasing of discount and rediscount treasury bills and long-term bonds and other government guaranteed bonds.
- Non-bank sector measures:
  - FSRA committed to work closely with ECCB and government to maintain stability in the non-bank sector and obtain access to emergency liquidity assistance from the public sector if needed.

### Risks and scenarios
- Main risks:
  - Prolonged COVID-19 outbreak and a more prolonged halt to tourism than currently anticipated.
  - Increased domestic infection rates leading to widespread domestic disruptions.
  - Uncertainty about local and regional financial institutions’ willingness to refinance corporates, households and the public sector.
  - Vulnerability to natural disasters.
- Staff baseline assumptions:
  - Spread of the disease contained at moderate levels.
  - Activity resumes relatively rapidly once the immediate health crisis wanes.
- Contingency actions if conditions deteriorate:
  - Authorities will consider a follow up longer-term upper credit tranche (UCT) arrangement with the IMF.
  - Reprioritizing expenditures to contain the fiscal deficit.
  - Exploring other financing sources: overdraft facilities with commercial banks, increasing national insurance fund exposure to the public sector, expanding the citizenship-by-investment program.
  - Eligibility for IDA resources under the IDA19 replenishment (July 2020 to June 2023).

### Debt sustainability (findings and stress)
- Under staff’s baseline:
  - Public debt will increase by nearly 12 percentage of GDP in FY2020 and peak at 78 percent in FY2022 before declining gradually toward the authorities’ 2030 debt target of 60 percent of GDP.
- Assumptions underlying the baseline:
  - Authorities implement medium-term consolidation measures to meet 2030 debt target.
  - Pandemic impact on tourism is largely temporary, with GDP returning to 2019 levels after two years.
- Risks highlighted:
  - Heat map points to substantial risks to debt sustainability from weaker than projected growth and fiscal deficit paths.
  - Stress tests indicate continued vulnerability of debt dynamics to natural disasters.
- Note: About 9 percent of GDP public debt is associated with semi-concessional loans for a new airport that are paid from a dedicated revenue source accumulated in an extrabudgetary fund.

### Modalities of support (staff proposal)
- Staff proposes to provide support of 100 percent of quota (SDR 21.4 million) under the RCF.
- Rationale:
  - St. Lucia meets RCF eligibility requirements and has an urgent balance of payments need that, if not addressed, will result in immediate and severe economic disruption.
  - It is not feasible at this stage to put in place a UCT Fund-supported program due to urgent BOP and fiscal financing needs and high uncertainty over COVID-19 duration and scale.
  - St. Lucia is assessed as having capacity to repay the Fund and sustainable debt if consolidation measures are implemented once the economy fully recovers.
- Authorities have indicated intention to cooperate with the Fund and pursue appropriate policies; they may consider a UCT arrangement if conditions worsen.

*Source: 1lcaea2020002 - EXECUTIVE SUMMARY*

### 16.      The proposed access of 100 percent quota will partially meet St. Lucia’s external

### 1lcaea2020002 - 16. The proposed access of 100 percent quota will partially meet St. Lucia’s external

### External financing and RCF access
- The proposed access of 100 percent quota will partially meet St. Lucia’s external financing needs for the coming 12 months.
- Staff estimate that the RCF will cover 19 percent of the projected financing gap.
- Access of 100 percent of quota is within the access limits under the PRGT.
- Staff supports the authorities’ request for a disbursement under the Rapid Credit Facility in the amount of SDR21.4 million (100 percent of quota).
- The RCF disbursement will be disbursed to the ECCB and be on-lent to the St. Lucian government to provide for fiscal financing and support virus-related spending.
- The authorities are actively seeking further budget support from bilateral and multilateral sources including the World Bank and the Caribbean Development Bank.
- Remaining financing needs are expected to be largely filled by other official sector financing and liquidity support from the ECCB.

### Safeguards and central bank documentation
- The authorities are committed to collaborating with IMF staff in undergoing a safeguards assessment.
- The ECCB will provide Fund staff with the necessary central bank audit reports and has authorized the external auditors to hold discussions with staff.
- The next safeguards assessment of the ECCB is expected to take place during 2020, in accordance with the four-year cycle for regional central banks.

### Authorities’ views and policy intentions
- The authorities emphasize the urgency of external financing to respond to the crisis and sustain macroeconomic stability.
- They welcome rapid Fund assistance to address balance of payments gaps arising from health care upgrades and protection of the most vulnerable and people who have lost income due to the collapse of tourism exports.
- The authorities will consider a follow up longer-term upper credit tranche arrangement with the Fund, should economic, fiscal and financing conditions deteriorate beyond expectations in coming months.
- They are developing a strategy to reopen the tourism sector to international travelers in the near term while ensuring health and safety through rigorous containment and mitigation measures.
- The authorities stress commitment to policies consistent with medium-term stability and meeting the 2030 debt target.
- They are considering revenue-enhancing measures and a medium-term fiscal rule to be introduced when the economy recovers from the crisis.
- Planned infrastructure projects are expected to enhance St. Lucia’s connectivity as a tourism destination and its long-run growth.

### Staff appraisal: risks and medium-term fiscal stance
- St. Lucia faces significant policy challenges due to the COVID-19 outbreak; tourism may take a long time to recover to pre-pandemic levels.
- Diminished availability of external financing sources and high vulnerability to natural disasters add risks to growth and the fiscal outlook.
- The authorities are committed to maintaining macroeconomic stability and achieving their 2030 debt target, and stand ready to act once the immediate health crisis moderates to return the deficit to a path that lowers debt to 60 percent of GDP by 2030.
- The government is working to mobilize donor grants to fund investments in health, education and climate resilience.
- Additional public investment should be implemented in a fiscally responsible manner to safeguard debt sustainability.

### Key statistics and projections (selected)
- RCF disbursement: SDR21.4 million (100 percent of quota).
- Staff estimate: RCF will cover 19 percent of the projected financing gap.
- Target public debt: lower debt to 60 percent of GDP by 2030.
- Outstanding Fund credit (Table 4, projections): SDR21.4 million for 2020–2024 (100.0 percent of quota each year), declining in later years per projected schedule.
- Obligations from prospective drawings (Table 4): Principal (in SDR millions) shows 2.1 in 2025, 4.3 in 2026–2029, and 2.1 in 2030.
- Total obligations based on existing and prospective credit (in SDR millions): 0.4 in 2020 and 2021; 2.2 in 2025; 4.3 in 2026–2029; 2.2 in 2030.
- Outstanding Fund Credit (in US$ millions): 29.2 in 2021–2024; 26.2 in 2025; 20.4 in 2026; 14.6 in 2027; 8.7 in 2028; 2.9 in 2029; 0.0 in 2030.
- Net imputed international reserves (US$ millions, Table 3 memorandum): 220.2 in 2020; projected 250.4 in 2021; 290.2 in 2022; 325.9 in 2023; 367.6 in 2024; 411.9 in 2025.
- Current account balance (percent of GDP, Table 1): projected -0.6 in 2020 (pre-virus -10.4 in Table 3 translation), -10.4 in 2020 (post-virus scenario in Table 1), -0.5 in 2021, 0.8 in 2022, 0.5 in 2023, 0.2 in 2024, 0.3 in 2025.
- Real GDP (at market prices, percent change, Table 1 projections): 2019 = 1.7; 2020 = -8.5; 2021 = 6.9; 2022 = 2.2; 2023 = 1.5; 2024 = 1.5; 2025 = 1.5.

*Source: IMF staff and St. Lucia authorities (excerpts from 1lcaea2020002).*

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### Overview
- Public debt is projected to remain sustainable, but risks are elevated.
- Staff’s baseline assumes:
  - the region’s financial markets continue to contribute significantly to meeting the government’s financing needs in FY2020 and over the medium-term, and
  - the authorities implement ambitious medium-term consolidation measures to meet their 2030 debt target of 60 percent of GDP.
- Under the baseline, overall public sector debt will increase by 12 percent of GDP in FY2020 and peak at 78 percent in FY2022 before declining gradually as the authorities undertake substantial medium-term adjustment measures.
- Key risks: high near-term financing pressures amid weaker external market conditions and region-wide breadth of the COVID-19 crisis.
- Gross financing needs will spike above 26 percent of GDP in the current year and revert back to pre-crisis levels only in FY2022.
- The heat map indicates substantial risks from weaker than projected growth and fiscal deficit paths, high vulnerability to natural disasters, and significant implementation risks associated with the substantial adjustment measures assumed under staff’s baseline.
- Importance of anchoring fiscal adjustment efforts in a clear, institutional medium-term framework is underscored.

### 1. Debt dynamics and gross financing requirements
- St. Lucia’s near-term financing pressures are significant.
- The widening of the FY2020/21 overall fiscal deficit to 6.9 percent of GDP coincides with high amortizations of pre-existing debt and new debt financing for major capital projects.
- Gross public debt projections:
  - rise sharply by 12 percent of GDP in FY2020,
  - peak above 78 percent in FY2022.
- The peak debt includes about 9 percent of GDP (US$ 175 million) of semi-concessional loans for a new airport to be paid off from dedicated airport redevelopment tax revenue accumulated in an extrabudgetary fund, mitigating longer-term debt service vulnerabilities.
- Central government’s gross financing needs expected to remain high at above 20 percent over the next two years.
- Under staff’s baseline assumptions for FY2020 maturing debt:
  - renew maturing short-term debt in full,
  - rollover about 80 percent of domestic medium- and long-term debt maturing in FY2020,
  - rollover about 40 percent of external medium- and long-term debt maturing in FY2020.
- As the economy rebounds and authorities undertake fiscal consolidation measures in line with their commitment to a 60 percent of GDP debt target by 2030, gross financing needs are projected to decline to around 15 percent by FY2022.
- Note on rebasing: an early-2020 rebasing led to a 9.3 percent upward revision in nominal 2016 GDP; relative to the 2019 Article IV report, the revision implied a reduction of 4 percentage points in the estimated end-2019 public-debt-to-GDP ratio.

### 2. Debt composition and vulnerabilities
- About half of total central government debt is domestic.
- Domestic debt is composed predominantly of medium- and long-term debt securities and commercial loans (92 percent).
- The National Insurance Corporation, the local social security fund, is a major investor.
- External debt composition:
  - about 12 percent of external debt is short-term Treasury bills,
  - remainder broadly evenly split between multilateral loans and medium- and long-term commercial borrowing.
- Weighted average maturity of overall medium- and long-term debt exceeds 10 years, but about a third of such debt securities are treasury notes with relatively shorter maturities, raising periodic rollover risks.
- Nearly all external debt securities are held by institutions within the ECCU.
- Commercial banks are the largest holder of Treasury bills, reflecting prior excess liquidity in the regional banking system.
- Prominent external bond and treasury note holders include regional insurance companies and other non-bank financial institutions.
- A sinking fund has been set up to manage redemptions of maturing bonds.
- Public corporations’ borrowings are comparatively small and domestic, but their external share will rise over the projection period with the airport redevelopment project.
- Debt in foreign currencies is overwhelmingly denominated in U.S. dollars; the Eastern Caribbean dollar remains pegged to the U.S. dollar since 1976.

### 3. Realism of baseline assumptions
- Staff projects:
  - a sharp contraction of 8.5 percent in 2020 (4.9 percent in the fiscal year 2020 from April 2020 to end-March 2021),
  - a strong GDP rebound as crisis measures ease.
- Inflation is expected to decelerate but remain positive in 2020 and revert to around 2 percent thereafter over the medium-term.
- Central government fiscal deficit widens temporarily to 6.9 percent of GDP in FY2020 (the debt sustainability analysis’ public sector primary balance reflects extra-budgetary costs of the airport redevelopment project executed by a public corporation).
- Under staff’s baseline, authorities are assumed to undertake sizeable fiscal consolidation measures to steer central government debt toward the 2030 debt target; these measures are subject to significant implementation risks.
- Historical forecast errors for growth, inflation, and the primary balance have been large, partly explained by the upward revision of nominal GDP by the Statistics Office.
- As the COVID-19 pandemic situation continues to evolve, risks around the staff’s baseline scenario remain substantial.

### 4. Stress tests and scenario outcomes
- Real GDP growth shock:
  - a reduction in growth by one standard deviation (2 percent) over 2021 and 2022
  - steers public debt to a peak of about 84 percent of GDP over the medium-term.
- Primary balance shock:
  - a negative shock of one standard deviation to the primary balance spread over 2021 and 2022 induces an adverse debt trajectory, highlighting implementation risks.
- Combined macro-fiscal shock or natural disaster scenario (modeled to mimic damages sustained by Hurricane Tomas in 2010):
  - simulates a deterioration of real GDP growth of 5, 3, and 2 percent relative to baseline for 2021, 2022, and 2023,
  - simulates a deterioration of the primary balance of the same amount,
  - would imply prolonged high gross financing needs and a higher debt path stabilizing around 90 percent of GDP.

### Policy implications and recommendations
- Anchor fiscal adjustment efforts in a clear, institutional medium-term framework to mitigate elevated risks and significant implementation challenges.
- Implement ambitious medium-term consolidation measures to meet the 2030 debt target of 60 percent of GDP.
- Manage near-term financing pressures given gross financing needs spiking above 26 percent of GDP and central government rollover assumptions (renew short-term in full; rollover about 80 percent domestic and 40 percent external medium- and long-term debt maturing in FY2020).
- Continue using extrabudgetary mechanisms (e.g., airport redevelopment tax revenue in an extrabudgetary fund) to mitigate longer-term debt service vulnerabilities for project-specific semi-concessional loans.

*Source: Annex I. Debt Sustainability Analysis*

### 5. External debt. The bulk of the projected FY2020 increase in debt financing is external (10½

### 5. External debt. The bulk of the projected FY2020 increase in debt financing is external (10½

### Overview
- The bulk of the projected FY2020 increase in debt financing is external (10½ percent of GDP).
- The external debt stock peaks at about 41 percent of GDP before gradually declining over the projection period.
- Beyond crisis financing needs, the increase partly reflects the external semi-concessional loan for the airport redevelopment.
- Reflecting the importance of tourism revenues, bound tests indicate vulnerability: a permanent one-half standard deviation deterioration in the non-interest current account would bring external debt to 49 percent of GDP by 2024.

### Baseline projections (selected series and assumptions)
- Baseline external debt (in percent of GDP):
  - 2015: 29.0
  - 2016: 29.3
  - 2017: 30.9
  - 2018: 29.6
  - 2019: 29.3
  - 2020: 39.9
  - 2021: 40.1
  - 2022: 41.1
  - 2023: 41.1
  - 2024: 40.6
  - 2025: 39.5
- Change in external debt (in percent of GDP): -1.8; 0.3; 1.6; -1.3; -0.3; 10.5; 0.2; 1.0; -0.5; -1.1; -1.1 (2015–2025)
- Identified external debt-creating flows (4+8+9) (in percent of GDP): -8.0; -2.5; -4.3; -6.5; -9.5; 8.7; -5.8; -5.5; -5.0; -4.6; -4.7 (2015–2025)
- Current account deficit, excluding interest payments (in percent of GDP): -1.1; 5.3; -0.5; -3.7; -6.0; 9.1; -0.8; -2.1; -1.8; -1.5; -1.6 (2015–2025)
- Net non-debt creating capital inflows (negative, in percent of GDP): -7.1; -8.0; -2.9; -3.3; -3.7; -4.7; -3.8; -3.9; -3.9; -3.9; -3.9 (2015–2025)
- Automatic debt dynamics (in percent of GDP): 0.3; 0.2; -0.9; 0.5; 0.2; 4.2; -1.2; 0.4; 0.7; 0.7; 0.7 (2015–2025)
- Contribution from nominal interest rate (in percent of GDP): 1.1; 1.2; 1.4; 1.5; 1.4; 1.5; 1.3; 1.2; 1.3; 1.3; 1.3 (2015–2025)
- Contribution from real GDP growth (in percent of GDP): 0.0; -1.0; -0.9; -0.8; -0.5; 2.8; -2.4; -0.8; -0.6; -0.6; -0.6 (2015–2025)
- Residual, including change in gross foreign assets (in percent of GDP): 6.2; 2.8; 5.8; 5.2; 9.2; 1.9; 6.1; 6.6; 4.4; 3.4; 3.6 (2015–2025)
- External debt-to-exports ratio (in percent): 53.4; 59.5; 59.4; 53.7; 54.1; 120.1; 84.4; 79.3; 78.0; 76.0; 73.6 (2015–2025)
- Gross external financing need (in billions of US dollars): 166.8; 232.7; 192.0; 134.6; 56.7; 390.0; 191.4; 127.5; 137.4; 187.4; 169.0 (2015–2025)
- Gross external financing need (in percent of GDP): 9.2; 12.5; 9.6; 6.6; 2.7; 20.4; 9.0; 5.7; 6.0; 7.9; 6.9 (2015–2025)

### Drivers and key assumptions noted in the DSA
- The increase in external debt in 2020 is driven by crisis financing needs and an external semi-concessional loan associated with the airport redevelopment (extra-budgetary costs included).
- Key macroeconomic assumptions (selected):
  - Real GDP growth (in percent): 0.1; 3.4; 3.5; 2.6; 1.7; 1.5; 2.0; -8.5; 6.9; 2.2; 1.5 (historical and projection series)
  - GDP deflator in US dollars (change in percent): 2.8; 0.1; 4.8; 0.7; 2.4; 3.0; 2.0; -1.7; 4.7; 1.8; 2.0 (historical and projection series)
  - Nominal external interest rate (in percent): 3.7; 4.2; 5.3; 5.0; 4.9; 4.5; 0.5; 4.5; 3.6; 3.2; 3.3 (historical and projection series)
  - Exports growth (US dollar terms, in percent): n.a; -6.3; 13.0; 8.4; 2.3; 4.3; 8.3; -45.0; 60.2; 13.7; 3.7 (historical and projection series)
  - Imports growth (US dollar terms, in percent): n.a; 10.6; 3.5; 1.9; -3.0; 3.2; 5.6; -22.7; 25.7; 12.3; 4.3 (historical and projection series)

### Sensitivity and bound tests
- Bound tests and stress scenarios illustrate vulnerability to shocks:
  - A permanent one-half standard deviation deterioration in the non-interest current account would raise external debt to 49 percent of GDP by 2024.
- Figure descriptions and scenario results:
  - Baseline external debt shown rising from 38–39 (baseline label variation) up to peaks near 40–41 percent of GDP in projection years.
  - Individual shocks presented include: interest rate shock, current account (CA) shock, combined shock, real depreciation shock (one-time real depreciation of 30 percent occurs in 2019), and growth shock.
  - Selected scenario outcomes shown in figure captions:
    - CA shock: external debt reaches 49 (percent of GDP) in the scenario box.
    - Combined shock: external debt reaches 45 (percent of GDP).
    - Real depreciation shock (30% depreciation): external debt reaches 58 (percent of GDP).
    - Growth shock: external debt reaches 40 (percent of GDP).

### Stress tests and alternative scenarios (high-level)
- Stress tests reported in the Public DSA include:
  - Primary Balance Shock scenario, Real GDP Growth Shock scenario, Real Interest Rate Shock scenario, Real Exchange Rate Shock scenario, Combined Shock, and an Additional Natural Disaster shock.
- Example projected outcomes (from stress test figures and tables):
  - Under several stress scenarios, gross nominal public debt and public gross financing needs increase relative to baseline (charts show higher percent-of-GDP and percent-of-revenue series under shocks).
  - The natural disaster shock produces a deterioration in primary balance and real GDP growth in early projection years (specific series for growth and primary balance under this shock are presented in the DSA tables).

### Implications highlighted in the text
- The external debt increase in FY2020 is concentrated on external financing (10½ percent of GDP).
- Airport redevelopment financing (external semi-concessional loan) contributes materially to the external debt profile.
- The external debt profile is vulnerable to shocks in the non-interest current account, reflecting tourism revenue importance; a material permanent deterioration in that account significantly raises external debt ratios.

*Source: IMF staff (as presented in the DSA materials).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1lcaea2020002.pdf_