## 1knaea2021001

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### Context and economic background
- GDP per capita of US$19,000.
- Main economic activities: tourism, light manufacturing, and considerable CBI revenues.
- Rapid convergence of income levels with the US stopped in the late 1990s; per capita GDP declined by 10 percent during the 2008–2012 crisis.
- In the decade preceding the pandemic:
  - CBI revenues averaged 10 percent of GDP during 2012–19.
  - Public debt fell from a 2010 peak of 145 percent of GDP to 52 percent in 2019.
  - Government deposits in the local banking sector reached 24 percent of GDP at end-2019.

### Recent developments and policy response to the pandemic
- Borders closed March 2020; GDP declined by 14 percent in 2020.
- Government fiscal package totaled 3½ percent of GDP.
  - St. Kitts and Nevis Stimulus Package in 2020: Total Central Government Relief Package EC$m 91.3 (3.4 percent of GDP).
  - Social Security Board cost: 22.6 (0.9 percent of GDP).
- Specific measures:
  - Deferred property tax from June to September 2020.
  - Reduced unincorporated business tax rate from 4 to 2 percent for the remainder of 2020.
  - Temporarily cut corporate income tax from 33 to 25 percent for companies retaining at least 75 percent of personnel.
  - Additional resources for agriculture; waivers of utilities fees.
- Fiscal outcomes for 2020 (Budget (A) vs Actual (B)):
  - Percent of 2020 Revenue: Budget 996 vs Actual 829, Difference -167 (-6.3).
  - Tax revenue: 571 vs 461, Difference -110 (-4.1).
  - Non tax revenue: 389 vs 355, Difference -34 (-1.3).
    - CBI: 298 vs 259, Difference -39 (-1.5).
  - Grants: 35 vs 13, Difference -22 (-0.8).
  - Expenditure: 946 vs 954, Difference 8 (0.3).
    - Current: 684 vs 779, Difference 95 (3.6).
    - Capital: 261 vs 175, Difference -86 (-3.3).
  - Overall Balance: 50 vs -125, Difference -175 (-6.6).
  - Memo: Cyclical effect on revenue -113 (-4.3); Covid relief package 91 (3.4).
  - GDP at market prices: 2648.
- Bank loan moratoria extended through end-September 2021; temporary freeze on prudential classification of overdue and moratoria loans.
  - At end-March 2021, share of bank performing loans under moratoria ~20 percent; credit unions ~12 percent.
- Consumer prices declined in 2020; GDP deflator has been increasing steadily over the past decade.

### External sector and balance of payments
- ECCB preliminary estimate: current account deficit increased from 4.8 percent of GDP in 2019 to 14.5 percent of GDP in 2020.
- Staff estimate of underlying current account: -5.4 percent of GDP.
- Level consistent with medium-term fundamentals and desirable policies: 4.3 percent of GDP.
- Corresponding REER gap: 2.6 percent.
- Foreign assets and liabilities (2020, percent of GDP and NIIP figures preserved):
  - NIIP: -92.1 (percent of GDP)
  - Gross Assets: 177.6
  - Debt Assets: 136.1
  - Gross Liab.: -269.7
  - Debt Liab.: -- 106.3
- Current account drivers in 2020:
  - Sharp drop in tourism receipts (20 percentage points of GDP).
  - Modest decline in CBI receipts (4 ½ percentage points).
  - Partly offset by lower imports (8.3 percentage points) and profit payments (3 percentage points).
- Real exchange rate:
  - REER depreciated by 6.9 percent in 2020.
  - NEER depreciated by 0.9 percent.
- Capital and financial accounts:
  - CBI inflows averaged 9.5 percent of GDP during the last 5 years, including 9.8 percent during 2020.
- Reserves (imputed ECCB proxy):
  - End-2019 estimated imputed reserves: US$346.3 million.
  - End-2020 estimated imputed reserves: US$383.4 million (increase of 10.7 percent).
  - In 2020, imputed reserves covered 11.2 months of imports and 37.3 percent of broad money.

### Outlook and scenarios
- Staff projection:
  - GDP declines by 1 percent in 2021.
  - GDP growth of 10 percent in 2022.
  - GDP levels return to 2019 levels in 2023 (staff projection in one section) and in another section pre-pandemic level expected to be reached in 2024 (textual variation preserved).
  - By 2025, GDP growth in line with potential estimated at 2.7 percent (1.9 percent in per capita terms).
- Key risks to the outlook:
  - Further sustained disruptions to tourism recovery and domestic activity due to the pandemic.
  - Financial sector uncertainties.
  - Natural disasters.
  - Lower-than-expected CBI receipts.

### Risk Assessment Matrix — selected points
- Conjunctural/global risks:
  - Unexpected shifts in the Covid-19 pandemic (Relative Likelihood: Medium; Impact/Time Horizon: Medium / ST / MT).
    - Policy Response: Extend current pandemic relief measures while designing/communicating a medium-term plan to preserve fiscal sustainability; or end relief and rebuild fiscal buffers under faster containment.
  - Sharp rise in global risk premia exposes financial and fiscal vulnerabilities (Relative Likelihood: Medium).
  - Widespread social discontent and political instability (Relative Likelihood: High; Impact/Time Horizon: Low / ST / MT).
  - Oversupply and volatility in the oil market (Relative Likelihood: Medium).
  - Intensified geopolitical tensions and security risks (Relative Likelihood: High; Impact/Time Horizon: Low / ST / MT).
- Structural risks:
  - Accelerating de-globalization (Relative Likelihood: Medium).
  - Cyber-attacks (Relative Likelihood: Medium).
  - Higher frequency and severity of natural disasters related to climate change (Relative Likelihood: Medium/Low; Impact/Time Horizon: High — Larger and more frequent events than the historical average / ST / MT).
- Domestic risks:
  - Lower than expected CBI revenues (Relative Likelihood: Medium; Impact/Time Horizon: Medium / ST / MT).
    - Policy Response: Rationalize spending and mobilize revenue from other sources.
  - Financial sector weakness (Relative Likelihood: Medium; Impact/Time Horizon: Medium / ST / MT).
    - Identified vulnerabilities include elevated NPLs, a large illiquid legacy asset from the 2012-14 debt-for-land swap (nearly a fifth of the systemically significant bank’s total assets), sizable overseas investments of excess liquidity, and financial integrity/CBR challenges from the CBI program.
    - Policy Response: Formalize crisis management plans; undertake reforms to support asset recovery; reinvigorate divestment of swap lands; complete AML/CFT reforms; enhance transparency of the CBI program; increase loan loss provisions for impaired loans (about half of total loans at mid-2020); implement supervisory guidance for the non-bank sector.

### Debt-for-Land Swap and contingent exposures
- Structure and scale:
  - Debt-for-land swap comprised about EC$800 million, roughly 60 percent of the total value of debt exchanged with external and domestic creditors over 2012–14.
  - It contributed nearly ¾ to the total 56 percent of GDP face value reduction in public debt by end-2014.
- Mechanism: domestic banks’ public sector claims were replaced by claims on proceeds from future sales of sovereign lands by a Special Land Sales Company (SLSC); government guarantees face-value and retains windfalls over face value, pays annual dividend under separate agreements.
- Remaining exposure:
  - About 20 percent of GDP worth of lands remain to be divested, creating potentially sizeable contingent liability.
  - Issues: slow divestment, valuation rigidities, sluggish SLSC operationalization, limited domestic real estate capacity, property acquisition costs to non-CBI foreign investors, limited existing development, and Covid-19 conjunctural factors.

### Pensions, health care, and contingent fiscal pressures
- Pensions:
  - PAYG pension system (SSB) had reserves of about 55 percent of GDP in 2019, but benefits now exceed contributions.
  - Actuarial projection as of 2017: reserves will be exhausted by the mid-2030s.
- Health care:
  - Cabinet established an implementation committee in January 2021 to advise on UHIS, expected annual cost EC$143–181 million (5–7 percent of GDP).
  - Salary deductions are being considered as one funding option; full financing not yet defined.

### Fiscal scenarios (CBI-dependent) — baseline, optimistic, pessimistic (selected preserved figures)
- CBI scenarios:
  - Baseline: CBI revenues at 9 percent of GDP.
  - Optimistic: CBI revenues at 14 percent of GDP.
  - Pessimistic: CBI revenues at 4 percent of GDP.
- Baseline (selected years and items, in percent of GDP):
  - Revenue: 35.7 (2020), 33.2 (2021), 30.6 (2022) ... 30.6 (2030).
  - of which: CBI: 9.8 (2020), 13.3 (2021), 9.0 (2022) ... 9.0 (2030).
  - Expenditure: 36.0 (2020), 35.0 (2021), 30.1 (2022) ... 28.4 (2030).
  - Investment: 6.6 (2020), 6.8 (2021), 4.0 (2022) ... 3.0 (2030).
  - Government deposits: 19.5 (2020), 16.4 (2021), 14.6 (2022) ... 21.9 (2030).
  - Public sector debt: 61.1 (2020), 60.8 (2021), 54.4 (2022) ... 39.2 (2030).
- Optimistic (selected):
  - of which: CBI: 9.8 (2020), 13.3 (2021), 14.0 (2022) ... 14.0 (2030).
  - Deposits: 19.5 (2020), 16.4 (2021), 18.5 (2022) ... 43.7 (2030).
  - Public sector debt: 61.1 (2020), 60.8 (2021), 54.4 (2022) ... 39.2 (2030).
- Pessimistic (selected):
  - of which: CBI: 9.8 (2020), 13.3 (2021), 4.0 (2022) ... 4.0 (2030).
  - Deposits: 19.5 (2020), 16.4 (2021), 12.3 (2022) ... 12.1 (2030).
  - Public sector debt: 61.1 (2020), 60.8 (2021), 56.7 (2022) ... 55.8 (2030).
- Staff advocacy under baseline: overall surplus of at least 2 percent of GDP to rebuild deposit buffers by the end of the decade and reduce public debt to about 40 percent of GDP; leave modest room for capital expenditure of about 3 percent of GDP.

### Debt dynamics, stress tests, and DSA findings
- Public debt trajectory:
  - Public debt declined from 145 percent of GDP at end-2010 to 52 percent at end-2019.
  - Public debt-to-GDP ratio increased to 61 percent in 2020 due to GDP decline.
  - Government ran first deficit since 2010 of 4.7 percent of GDP in 2020, financed through drawdown of deposits and not increasing debt.
- Baseline assumptions:
  - CBI revenues: projected constant at 9 percent of GDP (compares to average 10 percent of GDP in 2011–2020 and 13 percent in 2018–20).
  - Fiscal Balance: overall fiscal surplus of 2 percent of GDP assumed; capital expenditure projected at 3 percent of GDP.
  - Growth and Inflation: Real GDP contracts by 1 percent in 2021; tourism recovery from late 2021; inflation (GDP deflator) projected at 2 percent in medium term.
- GFN and vulnerabilities:
  - High GFN largely due to high domestically held short-term debt (11 percent of GDP).
  - GFN increase in 2020 reflects switch to fiscal deficit.
  - Mitigants: significant domestic liquidity, sizeable government deposit buffers, long maturities and low interest on restructured external obligations.
- Stress-test headline finding:
  - External debt would continue to decline under interest rate, growth, real depreciation, and combined shocks.
  - Debt stays relatively higher under the current account shock scenario, suggesting some external adjustment necessary.
- Example simulated shocks and impacts:
  - Adverse growth shock: -5 percentage points over 2022–23 delays downward debt trajectory until 2024.
  - Sustained interest rate shock: 300 bps has only marginal effects on debt trajectory.
  - Primary balance shock of about 5 percent of GDP in 2022 delays downward trajectory until 2024.
  - Combined macro-fiscal shock raises public debt to about 68 percent of GDP by 2023.
  - Natural disaster shock (based on historical hurricanes): lowers growth by 6 percentage points in 2022, fiscal balance deteriorates by about 5 percentage points in 2022 and 2023; debt-to-GDP increases in 2022 and resumes decline from 2023.
  - Full reacquisition of remaining debt-swap lands (22 percent of GDP) at 4.5 percent interest raises debt up to almost 80 percent of GDP, then declines toward regional target.

### AML/CFT, tax cooperation, and CBI safeguards
- Authorities passed a suite of legislations in late 2020 and are undertaking follow-up measures to address NRA-identified risks.
- Authorities see good prospects for compliant assessment under the CFATF mutual evaluation upon its completion in late 2021.
- St. Kitts and Nevis was removed from the EU’s list of non-cooperative tax jurisdictions in February 2020 and is working to ensure continued compliance with OECD tax transparency and information exchange standards.
- Authorities acknowledge financial integrity risks from the CBI program but emphasize a robust multi-layered due diligence framework including comprehensive background checks with reputable due diligence firms and international law enforcement partners.
- Note in source: This could include publishing a list of CBI recipients, as is done in some other countries with similar programs.

### Financial sector readiness and recommendations
- Bank moratoria and prudential forbearance extended; moratoria expiry may reveal full asset-quality impact.
- Recommended measures:
  - Build readiness for exit from temporary support measures.
  - Review and formalize crisis management plans.
  - Contain risks in the systemically important bank that houses bulk of public sector reserves.
  - Strengthen supervisory guidance to the non-bank sector (including FSRC guidance on moratoria expiry, encourage loan restructurings, updated provisioning guidance similar to ECCB standard).
  - Undertake reforms to facilitate asset recovery (streamline foreclosure processes, facilitate non-citizen property ownership).
  - Develop a robust divestment plan for swapped lands and update valuations and cost-sharing for unsold debt-swap lands.

### Public financial management, debt management, and reserve policy
- PFM recommendations:
  - Publish the government’s Medium-Term Framework with a Fiscal Strategy Statement embodying formal fiscal objectives and targets.
  - Strengthen macro-fiscal projections, credibility of revenue forecasts, and top-down budget preparation.
  - Finalize regulations under the FAA; improve PSIP project preparation and selection; make progress under the PFM Reform Action Plan; publish timely SOE financial statements.
- Debt management recommendations:
  - Proactively review borrowing options and re-establish market presence externally and in longer maturities.
  - Alleviate investor uncertainty from unresolved debt-swap lands, pension system risks, and health insurance reform.
  - Enhance transparency of SOE accounts and central government assets/liabilities.
- Reserve management:
  - Consider greater geographical and asset class diversification for reserves.
  - For SSB, consider longer maturities to better match liabilities.
- Buffer targets and insurance:
  - Recommended deposit target: 25 percent of GDP (about half for economic shocks and half for self-insurance of natural disasters).
  - DSGE simulations (IMF Country Report No. 19/63) suggest a savings fund of 12 percent of GDP plus maximum access to CCRIF would provide sufficient buffer for natural disasters; remaining 13 percentage points would buffer economic volatility.

### Structural reforms to boost productivity and diversify economy
- Constraints highlighted:
  - Weak productivity growth despite high investment; limits of small-island economy; human capital output issues; high public and private sector wages in ECCU context; energy reliance on imported diesel (95 percent of generation).
- Recommendations:
  - Use CBI program to attract investment beyond tourism.
  - Upgrade skills through focused training programs and better align the education system with labor market needs; proposed hospitality training institute.
  - Promote wage growth in line with productivity; ensure new labor code avoids rigidities.
  - Improve business climate and access to credit for small firms; introduce a uniform commercial code to allow broader assets as collateral; reduce impediments to asset recovery.
  - Accelerate transition to local renewable energy sources and develop resilient infrastructure.

### Staff appraisal and policy priorities (selected)
- Near-term priorities:
  - Reaching herd immunity through vaccination as the number one priority.
  - Keep fiscal relief measures in place until recovery firmly takes root.
  - Maintain robust public investment to support activity.
- Fiscal medium-term strategy:
  - Save part of CBI revenues once recovery is established to rebuild buffers; an overall fiscal surplus of 2 percent of GDP would support a downward public net debt trajectory.
- Data and technical assistance:
  - Data gaps in BOP and National Accounts; work in progress with CARTAC on National Account Statistics, Price Statistics, and BOP BPM6 and IIP data.
  - Authorities requested IMF technical assistance on rationalizing tax incentives and wage determination.
  - Recommendation: next Article IV consultation on standard 12-months cycle.

*International Monetary Fund — Staff report excerpt for St. Kitts and Nevis*

### 2022. However, the  recovery path could be derailed should the pandemic lead to further

### 1knaea2021001 - 2022. However, the  recovery path could be derailed should the pandemic lead to further

### Context and economic background
- GDP per capita of US$19,000.
- Tourism is the main source of revenue; additional activity includes light manufacturing and considerable CBI revenues.
- Rapid convergence of income levels with the US stopped in the late 1990s; per capita GDP declined by 10 percent during the 2008–2012 crisis.
- In the decade preceding the pandemic:
  - CBI revenues averaged 10 percent of GDP during 2012–19.
  - Public debt fell from a 2010 peak of 145 percent of GDP to 52 percent in 2019.
  - Government deposits in the local banking sector reached 24 percent of GDP at end-2019.

### Recent developments and policy response to the pandemic
- Borders closed March 2020; GDP declined by 14 percent in 2020.
- Government fiscal package totaled 3½ percent of GDP.
  - St. Kitts and Nevis Stimulus Package in 2020: Total Central Government Relief Package EC$m 91.3 (3.4 percent of GDP).
  - Social Security Board cost: 22.6 (0.9 percent of GDP).
- Specific measures included:
  - Deferred property tax from June to September 2020.
  - Reduced unincorporated business tax rate from 4 to 2 percent for the remainder of 2020.
  - Temporarily cut corporate income tax from 33 to 25 percent for companies retaining at least 75 percent of personnel.
  - Additional resources for agriculture; waivers of utilities fees.
- Fiscal outcomes for 2020 (Budget (A) vs Actual (B)):
  - Percent of 2020 Revenue: Budget 996 vs Actual 829, Difference -167 (-6.3).
  - Tax revenue: 571 vs 461, Difference -110 (-4.1).
  - Non tax revenue: 389 vs 355, Difference -34 (-1.3).
    - CBI: 298 vs 259, Difference -39 (-1.5).
  - Grants: 35 vs 13, Difference -22 (-0.8).
  - Expenditure: 946 vs 954, Difference 8 (0.3).
    - Current: 684 vs 779, Difference 95 (3.6).
    - Capital: 261 vs 175, Difference -86 (-3.3).
  - Overall Balance: 50 vs -125, Difference -175 (-6.6).
  - Memo: Cyclical effect on revenue -113 (-4.3); Covid relief package 91 (3.4).
  - GDP at market prices: 2648.
- Bank loan moratoria extended through end-September 2021; temporary freeze on prudential classification of overdue and moratoria loans.
  - At end-March 2021, share of bank performing loans under moratoria ~20 percent; credit unions ~12 percent.
- Consumer prices declined in 2020; GDP deflator has been increasing steadily over the past decade.

### External sector and balance of payments
- ECCB preliminary estimate: current account deficit increased from 4.8 percent of GDP in 2019 to 14.5 percent of GDP in 2020.
- Staff estimate of underlying current account: -5.4 percent of GDP.
- Level consistent with medium-term fundamentals and desirable policies: 4.3 percent of GDP.
- Corresponding REER gap: 2.6 percent.

### Outlook and scenarios
- Staff projection:
  - GDP declines by 1 percent in 2021.
  - GDP growth of 10 percent in 2022.
  - GDP levels return to 2019 levels in 2023.
  - By 2025, GDP growth in line with potential estimated at 2.7 percent (1.9 percent in per capita terms).
- Key risks to the outlook:
  - Further sustained disruptions to tourism recovery and domestic activity due to the pandemic.
  - Financial sector uncertainties.
  - Natural disasters.
  - Lower-than-expected CBI receipts.

### Authorities’ stance and reserves
- Authorities view Covid-19, CBI revenue volatility, and natural disasters as main risks; they expressed optimism that strong CBI revenues would continue given interest during the pandemic.
- New SDR allocation would increase St. Kitts and Nevis’ SDR allocation by SDR 11.8 million to SDR 20.3 million, of which SDR 16.5 million (2.6 percent of GDP) remains undrawn.

### Policy recommendations and priorities
- Fiscal buffers and CBI revenues:
  - Once the recovery is firmly established, resume saving part of the CBI revenues to rebuild fiscal buffers.
  - Rationale: as a small, natural disaster-susceptible country dependent on tourism and historically volatile CBI revenues, St. Kitts and Nevis needs significant buffers to provide fiscal space for contingent and long-term fiscal pressures, including possible reacquisitions of lands swapped during 2012–14 and potential future needs to buttress the national pension system (projected soon to start running deficits and depleting reserves).
- Financial sector readiness:
  - Build readiness for exit from temporary support measures.
  - Review and formalize operationalizable crisis management plans.
  - Contain elevated risks in the systemically important bank.
  - Strengthen supervisory guidance to the non-bank sector.
  - Undertake reforms to facilitate asset recovery.
  - Develop a more robust divestment plan for swapped lands to reinvigorate private sales.
- Structural and productivity reforms:
  - Use the CBI program to attract investment beyond the tourism sector.
  - Upgrade skills through focused training programs and better align the education system with labor market needs.
  - Facilitate access to credit for small firms, including reforms that enable use of non-fixed assets as loan collateral.

*International Monetary Fund — Staff report excerpt for St. Kitts and Nevis*

### Box 1. Risk Assessment Matrix

### Box 1. Risk Assessment Matrix

### Conjunctural Shocks and Scenarios — Global/External Risks
- Unexpected shifts in the Covid-19 pandemic
  - Asynchronous progress (↓). Limited deployment of vaccines prompts a reassessment of their growth prospects.
    - Relative Likelihood: Medium
    - Impact/Time Horizon: Medium / ST / MT
    - Policy Response: Extend current pandemic relief measures while designing/communicating a medium-term plan to preserve fiscal sustainability.
  - Prolonged pandemic (↓). The disease proves harder to eradicate, requiring costly containment efforts and prompting persistent behavioral changes rendering many activities unviable.
    - Relative Likelihood: Medium
    - Impact/Time Horizon: Medium / ST / MT
    - Policy Response: Extend current pandemic relief measures while designing and communicating a medium-term plan to preserve fiscal sustainability.
  - Faster containment (↑). Pandemic is contained faster than expected due to the rapid production and distribution of vaccines, boosting confidence and economic activity.
    - Relative Likelihood: Medium
    - Impact/Time Horizon: Medium / ST / MT
    - Policy Response: End pandemic relief measures while maintaining focus on promoting a sustainable economic recovery; and eventually rebuild fiscal buffers by resuming saving of part of the CBI revenue.
  - Vaccine supply bottlenecks in producing countries and COVAX quantity limitations
    - Relative Likelihood: Medium
    - Impact/Time Horizon: Medium / ST / MT

- Sharp rise in global risk premia exposes financial and fiscal vulnerabilities (↓)
  - A reassessment of market fundamentals triggers widespread risk-off event; risk asset prices fall sharply, losses in financial institutions, higher borrowing costs, financing difficulties for firms/households and sovereigns.
    - Relative Likelihood: Medium
    - Impact/Time Horizon: Medium / ST / MT
    - Policy Response: Provide fiscal support to affected sectors within a sustainable medium-term fiscal plan; intensify surveillance of financial institutions.
  - Higher risk perception could lead to loss/higher costs of CBRs
    - Relative Likelihood: Medium
    - Impact/Time Horizon: Medium / ST / MT

- Widespread social discontent and political instability (↓)
  - Social tensions erupt as the pandemic and inadequate policy response cause socio-economic hardship; political polarization weakens policymaking and confidence.
    - Relative Likelihood: High
    - Impact/Time Horizon: Low / ST / MT
    - Policy Response: Provide fiscal support to affected sectors within a sustainable medium-term fiscal plan.

- Oversupply and volatility in the oil market (↑)
  - Higher supply and lower demand lead to renewed weakness in energy prices.
    - Relative Likelihood: Medium
    - Impact/Time Horizon: Medium / ST / MT
    - Policy Response: Accelerate transition to local renewable energy sources.

- Intensified geopolitical tensions and security risks (↓)
  - (Geo)political tensions in selected countries/regions cause economic/political disruption, higher commodity price volatility.
    - Relative Likelihood: High
    - Impact/Time Horizon: Low / ST / MT
    - Policy Response: Accelerate transition to local, renewable energy sources.

### Structural Risks
- Accelerating de-globalization (↓)
  - Geopolitical competition leads to further fragmentation; reshoring and less trade reduce potential growth.
    - Relative Likelihood: Medium
    - Impact/Time Horizon: Medium / ST / MT
    - Policy Response: Redouble efforts to strengthen export competitiveness.

- Cyber-attacks (↓)
  - Attacks on critical infrastructure, institutions, and financial systems trigger systemic financial instability or widespread disruptions in socio-economic activities and remote work arrangements.
    - Relative Likelihood: Medium
    - Impact/Time Horizon: Low / ST / MT
    - Policy Response: Strengthen Cybersecurity measures and contingency plans, especially for key infrastructure and institutions.

- Higher frequency and severity of natural disasters related to climate change (↓)
  - Severe damage to smaller economies susceptible to disruptions; sequence of severe events in large economies reduces global GDP and raises commodity price levels and volatility (low probability).
    - Relative Likelihood: Medium/Low
    - Impact/Time Horizon: High — Larger and more frequent events than the historical average / ST / MT
    - Policy Response: Accelerate development of natural disaster resilient infrastructure and transition to local, renewable energy sources.

### Domestic Risks
- Lower than expected CBI revenues (↓)
  - Relative Likelihood: Medium
  - Impact/Time Horizon: Medium / ST / MT
  - Policy Response: Rationalize spending and mobilize revenue from other sources.

- Financial sector weakness (↓)
  - The pandemic triggers large losses by adding to pre-existing vulnerabilities:
    - 1) Elevated NPLs
    - 2) A large illiquid legacy asset from the 2012-14 debt-for-land swap
    - 3) Sizable overseas investments of excess liquidity
    - 4) Financial integrity and CBR challenges stemming from the CBI program and remaining weaknesses in the AML/CFT frameworks
  - Relative Likelihood: Medium
  - Impact/Time Horizon: Medium / ST / MT
  - Policy Response: 
    - Formalize crisis management plans, undertake reforms to support asset recovery, commit to a robust divestment plan for unsold swap lands, complete pending AML/CFT reforms and NRA follow-up measures, and enhance transparency of the CBI program.
    - Contain risks in the systemically significant bank that also houses the bulk of public sector reserves: increase loan loss provisions for impaired loans (about half of total loans at mid-2020) and manage large overseas investments to mitigate abrupt fair-value losses.
    - Implement further supervisory guidance for the non-bank sector (including FSRC guidance on moratoria expiry, encourage loan restructurings, updated provisioning guidance similar to the new ECCB standard).
    - Complete long-standing reforms to support post-pandemic asset recovery (streamline foreclosure processes, facilitate non-citizen property ownership, revisit funding of regional NPL divestment strategies).
    - Update valuations and revisit cost-sharing on unsold debt-swap lands (nearly a fifth of the systemically significant bank’s total assets), reinvigorate divestment process, coordinate with the CBI program, and review the alien land holding license requirement.

- Financial integrity and correspondent banking relationships
  - Continued importance of completing pending AML/CFT legislative amendments (foremost designation of ECCB as the competent AML/CFT authority over institutions licensed under the Banking Act), addressing risks identified in the updated AML/CFT National Risk Assessment (NRA) and ongoing CFTAF mutual evaluation, and diligently containing integrity risks from the CBI program by strengthening its transparency.
  - Policy Response: Limit operational and reputational risks to sustain CBRs and CBI revenues.

### Notes on the RAM and Probability Definitions
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path.
- The relative likelihood is staff’s subjective assessment of the risks surrounding the baseline:
  - “low” indicates a probability below 10 percent
  - “medium” indicates a probability between 10 and 30 percent
  - “high” indicates a probability between 30 and 50 percent
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.
- Conjunctural shocks and scenarios highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given the current baseline. Structural risks are those likely to remain salient over a longer horizon.

*IMF staff assessments as presented in Box 1. Risk Assessment Matrix*

### 33.      The authorities highlighted recent progress in bolstering the national AML/CFT and

### 33.      The authorities highlighted recent progress in bolstering the national AML/CFT and tax cooperation frameworks, as well as extensive CBI program safeguards

### AML/CFT, tax cooperation, and CBI safeguards
- Authorities passed a suite of legislations in late 2020 and are undertaking follow-up measures to address risks identified in the NRA report.
- Authorities see good prospects for compliant assessment under the CFATF mutual evaluation upon its completion in late 2021.
- St. Kitts and Nevis was removed from the EU’s list of non-cooperative tax jurisdictions in February 2020 after implementing the necessary reforms and is working to ensure continued compliance with OECD tax transparency and information exchange standards.
- Authorities acknowledge financial integrity risks from the CBI program but emphasize a robust multi-layered due diligence framework that includes comprehensive and systematic background checks with reputable due diligence firms and international law enforcement partners.
- Note in source: This could include publishing a list of CBI recipients, as is done in some other countries with similar programs.

### Rebuilding buffers and creating sufficient resilience to shocks
- Context and vulnerability:
  - St. Kitts and Nevis is a small, natural disaster-prone country dependent on tourism and CBI revenues.
  - Historical volatility: GDP growth volatility is high; consumption volatility is even higher. (Footnote: "The higher volatility of consumption may reflect the very pro-cyclical behavior of imported durables.")
  - Annual CBI revenues have averaged 11 percent of GDP (30 percent of total revenues) since 2012, but have been very volatile—dropping by about a half between 2014 and 2016, and tripling from 2017 to 2018.
- Buffer targets and insurance:
  - A deposit target of 25 percent of GDP is recommended to provide significant buffers against macro-economic shocks and natural disasters; about half for economic shocks and half for self-insurance of natural disasters.
  - Deposits should be supplemented by sufficient coverage under the Caribbean Catastrophe Risk Insurance Facility (CCRIF) against very large tropical storms, and further investment in disaster resilient infrastructure.
  - DSGE simulations in IMF Country Report No. 19/63 suggest a savings fund of 12 percent of GDP would provide sufficient buffer to deal with natural disasters, provided it is supplemented with maximum access to CCRIF; the other 13 percentage points would provide a buffer for economic volatility.

### Update on the Debt-for-Land Swap (Box 2)
- Structure and scale:
  - The debt-for-land swap was implemented under an IMF stand-by program and comprised about EC$800 million, roughly 60 percent of the total value of debt exchanged with external and domestic creditors over 2012–14.
  - It contributed nearly ¾ to the total 56 percent of GDP face value reduction in public debt by end-2014.
- Mechanism and issues:
  - Domestic banks’ public sector claims were replaced in three tranches by a claim on proceeds from future sales of sovereign lands by a Special Land Sales Company (SLSC).
  - Under the swap, the government guarantees the face-value of the asset (by transfer of additional lands for sale); price range for the lands is subject to a minimum relative to original valuation; government retains any windfall over face value and pays an annual dividend on the asset value under separately negotiated agreements.
  - Divestment of lands has been slow (despite two government land repurchases in 2018 and 2019), potentially reflecting valuation rigidities, sluggish operationalization of the SLSC and marketing strategy, limited domestic real estate capacity, property acquisition costs to non-CBI foreign investors, limited existing development on some lands, and conjunctural factors such as the Covid-19 pandemic.
- Remaining exposure:
  - About 20 percent of GDP worth of lands remain to be divested, giving rise to potentially sizeable contingent liability should other resolution options not prove feasible.
  - Sovereign debt included in the swap was collateralized by lands originating from the national sugar industry after it was shut down in 2005.

### Contingent fiscal pressures: pensions and health care
- Pensions:
  - The partially funded PAYG pension system managed by the SSB had reserves of about 55 percent of GDP in 2019, but benefits now exceed contributions.
  - Under the most recent actuarial projection as of 2017, the reserves will be exhausted by the mid-2030s.
- Health care:
  - In January 2021, the cabinet established an implementation committee to advise on setting up a Universal Health Insurance Scheme (UHIS), expected to have an annual cost of EC$143–181 million (5–7 percent of GDP).
  - Salary deductions are being considered as one option to partly fund the UHIS; full financing is yet to be defined.

### Fiscal outlook and CBI-dependent scenarios
- CBI scenarios described (CBI share of GDP assumptions preserved as in source):
  - Baseline scenario: CBI revenues at 9 percent of GDP (broadly their average level in the last ten years).
  - Optimistic scenario: CBI revenues at 14 percent of GDP (approximately their 2018-19 level).
  - Pessimistic scenario: CBI revenues at 4 percent of GDP (slightly below their 2016–17 level).
- Baseline scenario recommendations and projections:
  - Staff advocates an overall surplus of at least 2 percent of GDP to rebuild deposit buffers by the end of the decade to near pre-crisis levels and reduce public debt to about 40 percent of GDP.
  - The targeted surplus would leave modest room for capital expenditure of about 3 percent of GDP; measures to reduce current expenditure or increase other revenue could create more space for investment.
- Optimistic scenario recommendation:
  - Save half of the additional CBI revenues and use the other half to fund higher investment.
  - Higher savings would lead to faster build-up of deposit buffers relative to the baseline (up to 44 percent of GDP by the end of the decade), creating more room to address contingent fiscal pressures or establish a longer-term savings fund.
- Pessimistic scenario implications:
  - Fiscal adjustment will be needed to avoid running down government buffers.
  - To prevent erosion of the deposit-to-GDP ratio below its projected level in 2022, part of the revenue shortfall could be compensated by lower investment and part by a lower fiscal balance.
  - In this scenario additional borrowing to finance a resulting deficit of 1.2 percent of GDP and the build-up of deposits needed to keep the deposit-to-GDP ratio constant would keep public debt near the regional 60 percent of GDP debt target, leaving limited space to respond to shocks and very low investment levels.
  - Measures to reduce current expenditure or increase other revenue would be needed to create room for investment and higher buffers.

### Fiscal scenarios: key numeric projections (selected preserved figures from Table 1)
- Baseline (selected years and items, in percent of GDP):
  - Revenue: 35.7 (2020), 33.2 (2021), 30.6 (2022) ... 30.6 (2030)
  - of which: CBI: 9.8 (2020), 13.3 (2021), 9.0 (2022) ... 9.0 (2030)
  - Expenditure: 36.0 (2020), 35.0 (2021), 30.1 (2022) ... 28.4 (2030)
  - Investment: 6.6 (2020), 6.8 (2021), 4.0 (2022) ... 3.0 (2030)
  - Government deposits: 19.5 (2020), 16.4 (2021), 14.6 (2022) ... 21.9 (2030)
  - Public sector debt: 61.1 (2020), 60.8 (2021), 54.4 (2022) ... 39.2 (2030)
- Optimistic (selected):
  - Revenue: 35.7 (2020), 33.2 (2021), 35.6 (2022) ... 35.6 (2030)
  - of which: CBI: 9.8 (2020), 13.3 (2021), 14.0 (2022) ... 14.0 (2030)
  - Investment: 6.6 (2020), 6.8 (2021), 5.5 (2022) ... 5.5 (2030)
  - Deposits: 19.5 (2020), 16.4 (2021), 18.5 (2022) ... 43.7 (2030)
  - Public sector debt: 61.1 (2020), 60.8 (2021), 54.4 (2022) ... 39.2 (2030)
- Pessimistic (selected):
  - Revenue: 35.7 (2020), 33.2 (2021), 25.6 (2022) ... 25.6 (2030)
  - of which: CBI: 9.8 (2020), 13.3 (2021), 4.0 (2022) ... 4.0 (2030)
  - Investment: 6.6 (2020), 6.8 (2021), 3.3 (2022) ... 1.0 (2030)
  - Deposits: 19.5 (2020), 16.4 (2021), 12.3 (2022) ... 12.1 (2030)
  - Public sector debt: 61.1 (2020), 60.8 (2021), 56.7 (2022) ... 55.8 (2030)
- Table source: Authorities data and IMF staff calculations.
- Assumptions noted in the table:
  - 1/ Assumes that half of maturing debt is refinanced.
  - 2/ Assumes that half of additional revenue is spent on investment and other half is saved.
  - 3/ Assumes 2.5 percent of GDP reduction in capital expenditure in response to lower CBI revenues.
  - 4/ Assumes borrowing that would bring public sector debt below the regional target 60 percent of GDP.

### Debt management, market access, and buffer management
- Recommendations to mitigate downside CBI risks and improve financing options:
  - Proactively review borrowing options and re-establish market presence both externally and in longer maturities.
  - Alleviate potential investor uncertainty from unresolved debt-swap lands, the pension system, and the health insurance reform.
  - Enhance transparency of SOE accounts and Central Government assets and debt liabilities.
- Management of government buffers and national insurance reserves:
  - Bulk of SSB’s national insurance funds and central government savings are deposited in the indigenous banking system; that system seeks returns in overseas markets.
  - Authorities should consider greater geographical and asset class diversification for reserves; for the SSB, longer maturities would better match liability structure and institutional role.

### Public Financial Management (PFM) reforms and recommendations
- Suggested PFM improvements:
  - Publish the government’s Medium-Term Framework and supplement it with a Fiscal Strategy Statement embodying formal fiscal objectives and targets.
  - Continue strengthening:
    - Macro-fiscal projections and identification of fiscal risks.
    - Credibility of revenue forecasts and the investment budget.
    - Top-down aspects of budget preparation (setting expenditure limits consistent with fiscal objectives rather than agency bids).
  - Finalize regulations under the FAA.
  - Improve PSIP project preparation and selection.
  - Make progress under the PFM Reform Action Plan.
  - Timely publication of SOE financial statements in view of rising SOE debt.

### Debt sustainability analysis and authorities’ views
- Debt outlook:
  - Under the baseline, the debt outlook is relatively robust: standard primary balance and growth shocks or a natural disaster imply modestly higher yet still downward-trending debt trajectories.
  - A combination of macro-fiscal shocks or a full reacquisition of land related to the debt-land swap would more significantly increase the debt-to-GDP ratio, but the impact would be reversed over the medium-term.
- Authorities’ views and actions:
  - Authorities agree on the need to maintain sizeable buffers and concur with staff’s approach to assess the fiscal outlook based on different CBI revenue scenarios.
  - Preference to preserve liquid assets to swiftly react to natural disasters and other sudden shocks; aim to maintain strong public investment, including for natural disaster resilience.
  - Authorities were not concerned about market access if borrowing were needed and noted market interest in St. Kitts and Nevis sovereign debt due to strong fiscal performance and debt management.
  - Reiterated commitment to implement pending PFM reforms and emphasized need for SOEs to improve compliance.
  - Government is considering options to address contingent liability risks:
    - Cabinet appointed a pension reform committee to be informed by forthcoming actuarial recommendations.
    - Established a committee to consider options for introducing a Universal Health Insurance Scheme (UHIS) aimed to be implemented in a fiscally sustainable manner.

### Boosting productivity and reducing volatility through diversification
- Historical performance:
  - GDP per capita growth over the last two decades has been relatively weak; no further convergence with United States levels.
  - Growth held back by weak productivity growth despite high investment.
- Structural constraints:
  - Limits of small-island economy: high capital-output ratio; decline in TFP growth may reflect transition from agriculture to tourism.
  - Human capital: levels are relatively low compared with Europe and the US—more an output issue (low scores on harmonized test scores) than an input issue (years of schooling). Large-scale emigration reduces domestic human capital stock.
  - Labor costs: High public sector wages and a CBI-induced construction boom may have reduced competitiveness by driving up wages in the tradable sector; St. Kitts and Nevis has the highest public sector wages and the second highest private sector wages in the ECCU.
  - Energy costs: Average electricity rates are lower than other ECCU countries but higher than in Latin America and developing countries; 95 percent of electricity generation uses imported diesel.
- Policy recommendations to boost productivity and diversify:
  - Promote other sources of growth by fostering vertical and horizontal linkages between agriculture and tourism.
  - Upgrade skills through targeted training programs and better align the STEP program and the education system with labor market needs; proposed hospitality training institute would enhance human capital in tourism.
  - Promote an environment where wages grow in line with productivity; ensure the new labor code avoids imposing rigidities in the wage-setting process.
  - Improve the business climate and make it easier for small firms to get credit, including by introducing a uniform commercial code to allow for broader assets as collateral, and reducing legal and administrative impediments to asset recovery.

*Source: Excerpt from IMF country material (St. Kitts and Nevis) provided in the input content unit.*

### 53.      To boost growth, the authorities are channeling CBI flows to other sectors. In addition

### St. Kitts and Nevis: Staff Appraisal (Selected Extract, paras. 53–63; Annexes I–III)

### CBI program and allocation of flows
- CBI flows historically used for hotel real estate development through the Real Estate Option.
- Two new investment options created to channel CBI resources to other sectors and provide investor flexibility: “Alternative Investment Option” and “Private Home Sales”.
- According to the CBI unit, residences and infrastructure have been funded with these resources.
- Plans to fund investments in agriculture and other areas are envisioned.
- Recommendation: Once recovery is firmly established, the government should resume saving part of CBI revenues to build fiscal buffers, given reliance on historically volatile CBI revenues.

### Energy diversification and infrastructure
- Authorities signed a contract for a new solar plant that will replace 60–75 percent of diesel generated power.
- The solar plant contract should be completed in the next 18 months.
- The government continues to explore geothermal energy options.

### Labor programs and minimum wage policy
- The government is transitioning the STEP program by absorbing current participants into the government work force.
- In consultation with the National Tripartite Committee on International Labour Standards, the government has no plans for increases of the minimum wage in light of the current economic situation.

### Fiscal position, pandemic response, and short-term priorities
- St. Kitts and Nevis entered the Covid-19 pandemic from a position of fiscal strength: a significant part of large CBI revenues was prudently saved, producing a decade of fiscal surpluses, reduction of public debt to below the regional debt target of 60 percent of GDP, and accumulation of large government deposits.
- The pandemic’s economic impact was severe: a complete halt in cruise ship arrivals and very few stayover tourists since the first quarter of 2020.
- Policy actions taken: fiscal package, unemployment payments, and loan moratoria to mitigate private sector impact.
- Near-term priorities:
  - Reaching herd immunity through vaccination as the number one priority.
  - Keep fiscal relief measures in place until recovery firmly takes root.
  - Maintain robust levels of public investment to support activity.

### Fiscal medium-term strategy and buffers
- Recommendation: Save part of CBI revenues once recovery is established to rebuild buffers; higher buffers provide fiscal space to mitigate contingent and long-term fiscal pressures.
- Annex III summary: An overall fiscal surplus of 2 percent of GDP would result in a significant downward trajectory in public net debt. Standard DSA adverse shocks, a natural disaster, or a full reacquisition of lands related to the debt-swap would temporarily delay this downward trend.

### Financial sector readiness and vulnerabilities
- Financial policies should increasingly focus on building readiness for exit from temporary support measures.
- The pandemic’s full asset quality impact will become apparent upon expiry of loan moratoria and may test the financial system’s sizeable buffers.
- Suggested risk-containment measures:
  - Review and formalize crisis management plans.
  - Contain risks in the systemic bank.
  - Guide non-banks’ preparedness.
  - Pursue reforms to facilitate asset recovery.
  - Develop a more robust divestment plan for the swapped lands to reinvigorate private sales.

### Structural reforms to boost growth and competitiveness
- Reforms recommended to strengthen productivity growth, economic competitiveness, and human capital:
  - Attract investment beyond the tourism sector.
  - Upgrade skills through focused training programs and better align the education system with labor market needs.
  - Make it easier for small firms to access credit, including reforms to facilitate use of non-fixed assets as loan collateral.

### External position: assessment and indicators
- Overall assessment: In 2020, the external position was broadly in line with the level consistent with medium-term fundamentals and desirable policy settings.
- The downturn in tourism and lower CBI receipts led to a sizable current account deterioration partly offset by lower imports and profit payments.
- Foreign assets and liabilities (2020, percent of GDP and NIIP figures preserved):
  - NIIP: -92.1 (percent of GDP)
  - Gross Assets: 177.6
  - Debt Assets: 136.1
  - Gross Liab.: -269.7
  - Debt Liab.: -- 106.3
- Current account:
  - Deterioration from 4.8 percent of GDP in 2019 to an estimated 14.5 percent of GDP in 2020.
  - Drivers: sharp drop in tourism receipts (20 percentage points of GDP) and a modest decline in CBI receipts (4 ½ percentage points), partly offset by lower imports (8.3 percentage points) and profit payments (3 percentage points).
- Real exchange rate:
  - REER depreciated by 6.9 percent in 2020.
  - NEER depreciated by only 0.9 percent.
  - Comparison with other Caribbean tourism-based countries suggests an improvement of about 2 percent in competitiveness for St. Kitts and Nevis.
- Capital and financial accounts:
  - CBI inflows averaged 9.5 percent of GDP during the last 5 years, including 9.8 percent during 2020.
  - The Covid-19 shock led to a large current account deficit financed mostly by FDI, portfolio investment flows, and short-term deposits.

### Reserves and reserve adequacy metrics
- Imputed reserves (ECCB proxy allocation):
  - End-2019 estimated imputed reserves: US$346.3 million.
  - End-2020 estimated imputed reserves: US$383.4 million (increase of 10.7 percent).
  - In 2020, imputed reserves covered 11.2 months of imports and 37.3 percent of broad money (benchmarks noted: typical benchmark 3 months of imports and 20 percent of broad money).
- Note: As a member of the Eastern Caribbean Currency Union, St. Kitts and Nevis is under a quasi-currency board arrangement; imputed reserves are used as a proxy because ECCB foreign assets and liabilities cannot be directly assigned to individual countries.

### Debt sustainability and risks
- Debt remains sustainable but subject to increased risks from:
  - Pandemic fiscal impact.
  - CBI revenue volatility.
  - Natural disaster susceptibility.
  - Uncertain long-term pension system sustainability.
  - Contingent liability risks from the debt-land swap and banking sector vulnerabilities.
- Mitigant: Rebuilding fiscal buffers by saving a portion of future CBI revenues can considerably reduce risks.
- Specific items:
  - The government purchased back lands worth about EC$200 million, but the majority of the lands remain to be divested; a sales and marketing plan remains to be devised.
  - Recommendation from Annex I: Establishment of a Growth and Resilience Fund (GRF) was mixed; a GRF has not been established though savings from CBI revenues surpassed staff recommended savings ceiling.

### Data, technical assistance, and governance recommendations
- Data gaps remain in Balance of Payments and National Accounts; work in progress with CARTAC assistance on National Account Statistics, Price Statistics, and BOP BPM6 and IIP data.
- Authorities have requested IMF technical assistance on rationalizing tax incentives and wage determination.
- Recommendation: The next Article IV consultation should take place on the standard 12-months cycle.

*Source: Excerpts from IMF staff appraisal and annexes for St. Kitts and Nevis (paragraphs 53–63, Figures, Annexes I–III).*

### 1.      Public debt declined sharply in the past decade from a peak of 145 percent of GDP at

### 1knaea2021001 - 1.      Public debt declined sharply in the past decade from a peak of 145 percent of GDP at

### Public debt trajectory
- Public debt declined from a peak of 145 percent of GDP at end-2010 to 52 percent of GDP at end-2019.
- Public debt-to-GDP ratio increased in 2020 to 61 percent as a result of the decline in GDP.
- The government ran its first deficit since 2010 of 4.7 percent of GDP in 2020, but this was financed through a drawdown of deposits and did not increase debt.
- The projected external public debt-to-GDP ratio declines over the medium term to 8 percent in 2026, slightly below its 2019 level.

### Drivers of past debt dynamics
- A decade of fiscal surpluses (supported by high CBI revenues) contributed to the decline.
- Sovereign debt restructuring included:
  - a debt-land swap with domestic banks in 2013–14 (equivalent to about 41 percent of 2010 GDP),
  - debt exchanges with external commercial creditors and reduced interest rates on debt with one Club creditor in 2012.
- Fiscal surpluses in following years allowed the general government to repay many of its remaining obligations.
- Restructured debt from the 2012 agreements carries a low interest rate with long maturities.
- Expensive overdraft debt accounts held by the Nevis Island Administration (NIA) were consolidated and converted into a new long-term loan in 2018 at a lower interest rate.
- Purchases under the SBA were fully repaid in April 2016.

### Baseline assumptions and projections
- CBI revenues: Projected constant at 9 percent of GDP. This compares to their average 10 percent of GDP in 2011–2020 and 13 percent of GDP in 2018–20.
- Fiscal Balance: An overall fiscal surplus of 2 percent of GDP is assumed, with capital expenditure projected at 3 percent of GDP.
- Growth and Inflation:
  - Real GDP slightly further contracts by 1 percent in 2021 given the already lost winter tourism season in the first quarter.
  - Tourism and related sectors are expected to recover from late 2021.
  - Inflation, measured by the GDP deflator in the DSA, is projected at 2 percent in the medium term.
- Debt: Only half of other maturing long-term debt is assumed to be renewed, which should result in a gradual reduction of GFN.
- The DSA assumes that government increases borrowing when facing negative shocks, while maintaining the same projection of government deposits as in the baseline scenario.
- It is assumed that short-term debt will be fully rolled over.

### Gross Financing Needs (GFN) and vulnerabilities
- High Gross Financing Needs are in large part the result of high (domestically held) short-term debt (11 percent of GDP), which mainly consists of T-bills.
- The increase in GFN in 2020 reflects the switch from a fiscal surplus to a deficit.
- GFN vulnerabilities are mitigated by:
  - significant liquidity in the domestic financial system,
  - the government’s sizeable and liquid deposit buffers,
  - long repayment profiles and low interest rates on restructured external obligations.
- The projected debt level does not trigger the heat map threshold under standard adverse scenarios, but annual gross financing needs are elevated because of the large stock of domestically held short-term debt.
- The fan charts show only modest probability that the debt-to-GDP ratio would not continue on its downward trajectory.

### Downside scenarios and simulated shocks
- Staff used standard and customized MAC DSA shocks to simulate downside risks; these shocks raise debt only temporarily and delay the projected downward debt trajectory under the baseline.
- An adverse shock to growth of 5 percentage points relative to the baseline over 2022–23 (calibrated as 1 standard deviation of growth volatility over the past 10 years) lowers inflation by 1 percentage point in each year and delays the downward trajectory of public debt until 2024.
- A sustained interest rate shock of 300 bps (difference between the average real interest rate level over the projection period and the maximum 10-year historical level—consistent with a projected 350 bps increase in US interest rates over the medium-term) has only marginal effects on the debt trajectory.
- A primary balance shock of about 5 percent of GDP in 2022, to simulate the impact of a temporary decline in CBI inflows similar to 2016, would delay the downward trajectory of public debt until 2024.
- A combined macro-fiscal shock of all the above would raise public debt to about 68 percent of GDP by 2023 and result in a more sustained level shift in the downward debt trajectory, without reaching the regional debt target of 60 percent of GDP at the end of the projection period.
- A customized natural disaster shock, based on historical hurricane episodes in St. Kitts and Nevis:
  - lowers growth by 6 percentage points compared to baseline in 2022, followed by swift recovery to 5 percent in 2023, including through reconstruction efforts;
  - the fiscal balance would deteriorate by about 5 percentage points in both 2022 and 2023;
  - the debt-to-GDP ratio increases in 2022 and resumes its downward trajectory from 2023.
- A customized shock of full reacquisition of remaining debt-swap lands (22 percent of GDP) through an exchange to a long-term loan at an interest rate of 4.5 percent (about 3 percentage points higher than the current interest rate on one-year T-bills) would significantly raise debt up to almost 80 percent of GDP, but the debt-GDP ratio would decline towards the regional debt target of 60 percent of GDP afterwards.

### Forecast uncertainty and recent forecast errors
- High uncertainty related to CBI inflows explains large forecast errors in recent years.
- Staff underestimated growth and fiscal outturns in projections during the peak years of CBI inflows (2012–14).
- The surge in CBI inflows in 2018–20 was similarly unanticipated.
- The anticipated recovery in tourism arrivals should result in an unusually large reversal in the fiscal balance; the baseline projected change in the fiscal balance is large by historical, cross country standards.
- The authorities’ positive track record in preserving fiscal surpluses backs up the projected return to surpluses.

### Conclusion and policy-relevant implications
- A fiscal stance that ensures saving a portion of CBI revenues results in a relatively strong medium-term debt sustainability.
- Key risks comprise:
  - any contingencies from the remaining debt-swap lands,
  - (extraordinary) combined macro-fiscal shocks and natural disasters of more significant impact than simulated in this DSA, such as the Category 5 hurricane that affected Dominica in 2017,
  - major and permanent changes to CBI revenues,
  - a significant delay in reforming the pension fund, which would constitute a significant long-term risk.

### External Debt Sustainability Analysis (public external debt)
- The GDP impact of the pandemic increases the external public debt-to-GDP ratio before declining over the medium term to 8 percent in 2026, slightly below its 2019 level.
- After following a declining path in recent years as a result of public debt restructuring, external GFN substantially increased in 2020 as the current account deficit considerably widened in 2020 because of the pandemic shock to tourism.
- The deficit and external GFN should decline in line with the normalization of international travel.
- Amortization of restructured bonds with external debtors and repayment of multilateral debt, largely from the CDB, will further contribute to the decline.

*International Monetary Fund — ST. KITTS AND NEVIS DSA excerpt (chapter content provided)*

### 10.      Stress tests indicate that external debt would continue to decline under interest rate,

### 1knaea2021001 - 10.      Stress tests indicate that external debt would continue to decline under interest rate,

### Stress-test headline finding
- Stress tests indicate that external debt would continue to decline under interest rate, growth, real depreciation, and combined shocks.
- Debt stays relatively higher under the current account shock scenario, suggesting that some external adjustment would be necessary to bring the debt path back to a downward trend under that shock.

### Baseline projections and underlying assumptions
- Public sector defined as consolidated public sector.
- Projections as of April 12, 2021.
- Real GDP growth (baseline by year): 2.5, 4.8, -14.4, -1.0, 10.0, 5.1, 2.8, 2.7, 2.7 (presented across 2019–2026 in figures).
- Inflation (GDP deflator, in percent): 1.3, 3.1, -1.6, 0.5, 1.7, 0.9, 1.7, 1.6, 2.0.
- Nominal GDP growth (in percent): 3.8, 8.0, -15.8, -0.5, 11.8, 6.0, 4.5, 4.3, 4.7.
- Effective interest rate (in percent): 3.3, 2.2, 2.0, 2.1, 2.4, 2.4, 2.3, 2.3, 2.3.
- Primary (noninterest) revenue and grants (in percent of GDP for projection horizon): 30.8, 34.8, 30.8, 32.7, 30.1, 30.2, 30.2, 30.2, 30.2 (cumulative 183.7).
- Primary (noninterest) expenditure (in percent of GDP for projection horizon): 26.7, 34.1, 34.8, 33.9, 29.1, 27.9, 27.9, 27.9, 27.9 (cumulative 174.4).
- Change in gross public sector debt (percent of GDP, projection cumulative through 2026): -8.1, -3.5, 9.4, -0.3, -6.4, -3.0, -1.9, -1.8, -1.8 (cumulative -15.2).
- Net public debt (percent of GDP by year sample): 66.1, 25.7, 39.1, 41.5, 37.2, 33.8, 31.2, 28.7, 26.2.
- Public gross financing needs (in percent of GDP): 23.6, 12.2, 18.3, 14.5, 10.7, 8.6, 8.1, 7.7, 7.3, 5.3 (figure listing across years).

### Stress scenarios and specific shocks
- Macro-fiscal stress tests considered: Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Macro-Fiscal Shock.
- Alternative scenarios presented in Figure 2: Baseline, Historical, Constant Primary Balance Scenario.
- Stress-tool assumptions (examples from figures):
  - Real GDP growth scenarios include values such as -1.0, 10.0, 5.1, 2.8, 2.7, 2.7 (baseline) and alternative paths like -1.0, 3.9, -1.0, 2.8, 2.7, 2.7.
  - Primary balance under shocks moves (examples): baseline -1.2 then improving to 1.1 and 2.4; primary balance shock path shows deeper negatives (e.g., -3.0, -4.0 in combined shock).
  - Real interest rate shock increases effective interest rate values to as high as 2.7 in some years under shock scenarios.
  - Real exchange rate shock example: a one-time real depreciation of 30 percent occurs in 2010 in one historical shock.
- External-debt bound tests (Figure 6) indicate:
  - Baseline average projection values in boxes: e.g., Baseline: 2.2, 2.7, 2.3 for listed variables (growth/interest/other) and Historical: 4.6, 1.6, 1.3 for some comparisons.
  - Current-account (CA) shock produces substantially higher external debt paths (e.g., CA shock shown with value 18 in figure context).
  - Combined shock scenarios raise external debt compared to baseline (combined shock values shown, e.g., 12 and 30 in different panels).

### External debt sustainability framework (Table 1) — key figures
- Baseline external debt (percent of GDP) by year: 19.3, 14.7, 13.7, 12.1, 13.6, 13.1, 11.2, 10.1, 9.2, 8.4, 7.6 (2016–2026).
- Change in external debt (percent of GDP): -3.2, -4.6, -1.0, -1.6, 1.5, -0.5, -1.8, -1.1, -0.9, -0.8, -0.8.
- Identified external debt-creating flows (4+8+9, percent of GDP): 7.5, 6.1, 5.8, 10.3, 12.8, 6.2, 4.1, 4.3, 4.3, 4.1, 3.9.
- Current account deficit, excluding interest payments (percent of GDP): 11.9, 10.2, 5.0, 4.5, 14.2, 10.9, 6.9, 6.1, 5.3, 5.5, 5.5.
- Net non-debt creating capital inflows (negative, percent of GDP): -3.6, -3.5, 0.7, 6.5, -4.0, -5.1, -1.9, -1.5, -0.9, -1.3, -1.6.
- Automatic debt dynamics contribution (percent of GDP): -0.8, -0.7, 0.1, -0.7, 2.6, 0.5, -0.9, -0.3, -0.1, 0.0, 0.0.
- Residual, including change in gross foreign assets (percent of GDP): -10.7, -10.7, -6.8, -12.0, -11.3, -6.7, -6.0, -5.5, -5.3, -5.0, -4.7.
- External debt-to-exports ratio (in percent): 38.8, 30.9, 24.8, 22.0, 39.2, 37.9, 25.6, 20.6, 16.9, 14.3, 12.5.
- Gross external financing need (in billions of US dollars): 0.1 each year in projection horizon; in percent of GDP example figure: 13.7, 11.7, 6.4, 5.7, 15.6, 10-Year10-Year11.9, 7.9, 7.0, 6.2, 6.3, 6.3 (table contains formatting of these percent values).

### Policy recommendations and implications
- Some external adjustment would be necessary if a persistent current account shock occurs to return external debt to a declining path.
- Maintain fiscal relief measures until the recovery is firmly established, while planning to rebuild fiscal buffers once recovery takes hold.
- Staff simulations suggest maintaining an overall budget surplus of at least 2 percent of GDP would support buffer build-up.
  - Assuming annual CBI revenues of 9 percent of GDP, this would allow reducing public debt to around 40 percent of GDP and rebuilding deposits to close to a quarter of GDP by the end of the decade.
  - Room for government investment would be modest at around 3 percent of GDP annually under that scenario, but could be expanded by policy measures.
- Policy actions to improve fiscal outcomes: broaden the tax base, streamline tax incentives, build capacity with Fund technical assistance, and complete the debt-land-swap arrangement with updated valuations and revised cost-sharing.
- Financial sector policy priorities:
  - Build readiness for exit from temporary support measures (loan moratoria), formalize crisis management plans in coordination with the ECCB.
  - Address long-standing high non-performing loans and elevated investment portfolio risks in the systemically significant bank.
  - Pursue divestment plan for remaining lands from sovereign debt swap with updated valuations and revised cost-sharing.
  - Strengthen supervisory guidance on moratoria expiry and loan loss provisioning; streamline foreclosure processes.
  - Continue efforts to strengthen AML/CFT compliance and transparency of the CBI program to mitigate risks to correspondent banking relationships.
- Structural reforms to boost productivity and competitiveness:
  - Use CBI program to attract investment beyond tourism.
  - Upgrade skills via focused training programs and align education with labor market needs.
  - Facilitate access to credit for small firms, including reforms to allow non-fixed assets as loan collateral.
  - Build resilience to natural hazards via resilient infrastructure and broaden solar power generation.

### Key risks and outlook
- Pandemic risks: staff projects GDP decline of 1 percent in 2021 and growth of 10 percent in 2022; pre-pandemic GDP level expected to be reached in 2024.
- Other risks: financial sector uncertainties, natural disasters, and lower-than-expected CBI receipts.
- 2020 impacts: GDP estimated to have declined 14 percent in 2020; general government fiscal deficit of 4.7 percent of GDP in 2020.
- Fiscal support size for 2020 estimated at 3.5 percent of GDP.
- CBI program history and volatility:
  - Annual CBI revenues have averaged 11 percent of GDP or 30 percent of total revenues since 2012.
  - Staff assumption example: annual CBI revenues of 9 percent of GDP used in simulation scenarios.
- Vaccination progress (authority statement): aims to vaccinate 70 percent of population aged 18 and older; as of June 21, 35 percent fully vaccinated and 67 percent received first dose (authority statement included).

*Source: IMF staff.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1knaea2021001.pdf_