## 1knaea2022001

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### Rise and Fall of the SIDF
- Background and mandate:
  - SIDF (Sugar Industry Diversification Foundation) established in 2006 after closure of the sugar industry.
  - Original mandate: support development and diversification of the economy by providing training and conducting research.
  - Mandate expanded in 2011 to include support to the government’s efforts to diversify the economy and maintain stability, and to finance or undertake developments of new and existing industries, projects or enterprises.
- Boom period and quasi-fiscal expansion:
  - Early 2010s CBI inflows led to expansion of quasi-fiscal activities and cash accumulation at the SIDF.
  - CBI-supported activities included grants to capital investment projects; social and economic spending including STEP; subsidies to SKELEC; subsidized housing and SME lending programs.
- Revenue decline and balance deterioration:
  - Plummeting CBI revenue and a shift away from the SIDF option within the CBI program caused rapid deterioration in SIDF finances.
  - SIDF overall balance turned negative in 2016 and worsened in 2017; SIDF cash holdings started to shrink.
- Transparency and governance issues:
  - SIDF established as a private foundation with no formal requirement to publish audited financial statements; audited accounts available only up to 2011.
  - Authorities agreed to: determine expenditures and revenues to transfer to the Federal Government budget; audit recent financial statements; prepare a report on SIDF’s audit results and activities once audit is complete.
- Fiscal integration and macro implications:
  - Staff recommendation: integrate SIDF’s assets, income, and expenditure responsibilities into the general government and include SIDF income and expenditures in the budget.
  - If SIDF income and expenditure are integrated into the budget starting 2019, staff estimate the underlying overall fiscal deficit would average about 5.8 percent of GDP over the medium-term (2019-2023), reflecting transfers to fund SIDF’s spending commitments, most notably STEP which amounts to 1.6 percent of GDP.
  - If additional SIDF expenditures are financed by domestic borrowing, staff project the debt-to-GDP ratio will rise to almost 70 percent of GDP by 2023.
- Policy recommendations:
  - Integrate SIDF activities and finances into the general government budget.
  - Recast STEP from an open-ended employment program paying minimum wage without time limits into a one-year time-bound internship program and integrate into the national training system.
  - Complete auditing of SIDF recent financial statements and prepare a report on audit results and activities.
  - If SIDF expenditures remain financed via domestic borrowing, implement additional fiscal adjustment (see staff recommendation of a 4 percent of GDP adjustment in the primary balance for 2019-23).

### Box: The Debt-Land Swap Arrangement
- Design and immediate impact:
  - Debt-land swap implemented in 2013 and 2014 as part of debt restructuring.
  - Banking system held about 31 percent of total government debt (around 50 percent of GDP) and received land in exchange for debt relief.
  - Operation resulted in an over 30 percent of GDP reduction in the debt stock.
  - Special purpose vehicle: Special Land Sales Company (SLSC) set up to sell land and remit proceeds.
  - Four sales completed totaling less than 10 percent of total lands.
  - Total value of land equals about 23 percent of total assets of banks involved.
  - Under the agreement, if lands sold for less than initial valuation the government must transfer additional lands; banks do not benefit if sales exceed initial valuation.
- Operational constraints and recommended actions:
  - Slow sales due to SLSC capacity constraints and pricing difficulties; sales below threshold require government approval and may require additional land transfers.
  - Actions to accelerate sales: prepare time-bound (up to five years) strategic plan; adopt aggressive marketing; sign agreements with real-estate agents; enhance website; establish partnerships with CIU and SKIPA.
  - Strengthen and resource SLSC; short-term expectation to fill CEO position and hire staff.
  - ECCB reclassified the claim from financial to fixed assets; lands must be sold within 5 years or be fully provisioned per ECCB regulation.
  - A dividend payment equivalent to 2.75 percent on the value of the unsold lands has been guaranteed up to 2019.
- Banking implications and stress impacts:
  - With a 100 percent risk-weight on unsold lands and assuming provisioning to NPLs ratio of at least 60 percent, CAR would decrease from 28 percent to 15 percent, still above the 8 percent regulatory minimum.
  - Banking sector soundness worsened in 2017Q4 from low to medium risks; asset quality deteriorated sharply due to a small number of relatively large CBI real estate project defaults.
  - ECCB actions include loan restructuring, asset sales, and adequate provisioning; planned measures (prudential regulation on valuation implemented in July; provisioning scheduled for October 2018; IFRS9 introduction) expected to reduce reported capitalization but keep it above 8 percent regulatory minimum.
  - Foreclosure processes hampered by administrative and legislative rigidities (e.g., at least one year to take foreclosure to court; requirement of at least 3 bids in auctions).
  - Non-bank financial system: credit unions NPLs = 4 percent and ROA = 2 percent; rapid expansion suggests regulatory arbitrage; FSRC applying risk-based supervision.

### Fiscal framework, GRF, and fiscal risks
- Fiscal responsibility framework recommendations:
  - Establish long-term fiscal anchor at 60 percent of GDP and use general government overall balance (excl. CBI-related receipts) as operational target with narrowly defined escape clauses.
  - Given current debt-to-GDP ratio above 60 percent, operational target path up to 2023 should follow proposed adjustment scenario.
  - Support rules with enhanced institutional frameworks, fiscal strategy statements, and clarification of revenue-sharing and transfer mechanisms with local government.
- Proposed fiscal adjustments over 5 years (2019-23) (In percent of GDP):
  - Proposed Adjustments over 5 years (2019-23) 4.0
  - Streamline tax incentives 2.3
  - Replacement of Tax Holidays by Investment Allowance 0.4
  - Ceiling on the value of imports with preferential tax treatment 1.3
  - Elimination of border exemptions for taxis and restaurants 0.05
  - Reduction of Duty free shops exemptions 0.5
  - Restructuring of STEP program 1.2
  - Contain wage bill: predictable wage determination and civil service reform 0.5
- Growth and Resilience Fund (GRF) proposal:
  - Initial capital could be around 20 percent of GDP funded by transferring part of government’s deposits.
  - Annual costs of natural disasters to public sector averaged 1.9 percent of GDP for 1980-2017.
  - Annual contribution to GRF should be at least 1 percent of GDP to avoid depletion.
  - GRF should allow access to (i) respond to adverse shocks without debt accumulation; and (ii) support resilience-enhancing investment projects subject to defined criteria and risk controls.
  - GRF structure: simple sovereign-wealth-fund operating as a financing fund; invest abroad in principle for risk diversification while considering short-term financial stability; report semi-annually to the National Assembly.
- Authorities’ commitments:
  - Authorities broadly concurred with staff recommendations and agreed to consider bringing SIDF expenditures on budget with revenues as part of a comprehensive strategy.
  - Authorities prefer targeting the general government balance that includes a proportion of CBI receipts, rejecting staff’s proposal to exclude CBI receipts from the operational target.
  - Authorities committed to reduce concessions, streamline STEP, establish predictable public sector pay packages (requested Fund TA), and establish the GRF to manage revenue from the Sustainable Growth Fund.

### Competitiveness, growth, and structural reforms
- Improving the business environment:
  - Finalize expedited business registration, uniform commercial code, credit bureau, SME partial-credit-guarantee scheme, and foreclosure legislation reforms.
- Labor productivity and wage-setting:
  - Upgrade skills, better align STEP and education with labor market needs (tourism and hospitality focus), and ensure new labor code avoids wage-setting rigidities.
  - Triparty mechanism exists; proposals for hospitality training institute advanced.
- Tourism and diversification:
  - Measures: attract investment via CBI; develop second cruise pier and rehabilitate airport.
  - Diversification: foster tourism-agriculture linkages; channel CBI inflows to renewable energy, health, education; increase regional connectivity via lower import duties, more competitive intra-regional air travel, and maritime transport development.
- Inclusiveness and social policy:
  - Improve targeting of social programs including conditional cash transfer expansion; continue crime reduction efforts, expand CCTV, and strengthen protection and legal systems.
- Data and governance:
  - Strengthen balance of payments, national accounts, labor market, and tourism statistics.
  - Operationalize Integrity Commission; finalize appointments; consider Anti-Corruption Bill; align declaration of interest regime with best practices; consider becoming party to the United Nations Convention against Corruption.
- Staff appraisal and outlook:
  - Growth moderated in 2017; growth expected to average around 3 percent in the medium term.
  - Key risks: sharper drop in CBI inflows, delays in land sales, loss of CBRs, stronger U.S. dollar.

### Banking sector, NPLs, and macro-financial risks
- Banking indicators and vulnerabilities:
  - NPLs rose to 20.5 percent in 2017 from 6.7 percent in 2011.
  - Liquid assets/total assets: 47.9 percent in 2017 (44.2 in 2011).
  - Return on assets: 0.8 percent in 2017 (1.5 in 2011).
  - Total capital to risk weighted assets remained well above regulatory benchmark; reported capitalization was 27.4 percent (staff note on expected reductions with IFRS9 and provisioning).
- Recommended measures:
  - Support remedial measures to resolve high NPLs; ECCB monitoring of capitalization; operationalize ECAMC; establish credit bureau; modernize foreclosure and insolvency legislation.
  - Continue vigilance on CBRs and enhance AML/CFT regime and CBI transparency; consider transferring AML/CFT supervisory powers to ECCB.

### Debt sustainability, shock scenarios, and vulnerabilities
- Baseline assumptions:
  - CBI budgetary revenues decline from 5.7 percent of GDP in 2017 to 1.4 percent of GDP by 2023.
  - Public sector primary surplus declines from 3 percent in 2017 to – 1.8 percent by 2023.
  - Real economic activity accelerates to about 3 ¼ percent over 2018-2020, then stabilizes at about 2.7 percent.
  - Inflation (GDP deflator) averages 2 percent over 2018-23.
- Key shock scenario outcomes:
  - Adverse growth shock: lowers growth by 3.9 percentage points over 2019-20; public debt rises to 90.4 percent of GDP in 2023 (about 21 percentage points above baseline).
  - Sustained interest rate shock (368 bps): marginal effects, about 3 percentage point increase vs. baseline.
  - Primary balance shock (sudden stop in CBI in 2019): primary deficit worsens by about 3¾ percentage points in 2019 and 1 ¾ percentage points in 2020; debt-to-GDP increases by about 9½ percentage points by 2023.
  - Combined macro-fiscal shock (all above): debt rises to 106 percent of GDP in 2023 (about 37 percentage points above baseline).
  - Natural disaster shock: lowers growth by 6 percentage points in 2019; fiscal balance deteriorates by about 5 percentage points in both 2019 and 2020; fiscal buffers drawn down by 7 percent of GDP in year of hurricane; debt-to-GDP reaches 79.2 percent in 2023 (10 percentage points above baseline).
  - Debt-land swap shock (70 percent of land swapped not divested): assuming long-term loan at 4.5 percent, results in a 17 percentage point upward shift in debt ratio in 2022; debt-to-GDP 85.8 percent in 2023.
- Vulnerability drivers and policy implications:
  - Large annual gross financing needs due to large stock of short-term debt (mainly T-bills).
  - Significant domestic banking liquidity eases near-term rollover but medium-term vulnerability persists.
  - Fan charts show some probability that debt-to-GDP will approach 100 percent under asymmetric negative shocks.
  - Policy recommendations: mobilize land use/sales credibly; implement medium-term fiscal framework to prudently manage accumulated CBI savings by central government and SIDF; preserve buffers to increase resilience without renewed build-up of public debt.

### External public debt outlook and balance of payments
- External public debt projection:
  - External public debt projected to decline from 16.5 percent in 2017 to 9 percent in 2023.
  - Drivers: amortization of restructured bonds with external commercial debt and projected repayment of multilateral debt largely from the CDB.
- Current account and financing:
  - Current account deficit projected to widen as CBI inflows decay.
  - Imports remain elevated due to construction materials, capital goods, and some pick up in fuel prices.
  - Financing of deficits: drawdowns on accumulated investment commitments (reflected in banks’ net foreign asset position and ECCB imputed reserves).
- Stress-test findings:
  - External debt continues to decline under interest rate, growth, real depreciation, and combined shocks.
  - Under current account shock scenario, external debt stays relatively higher, suggesting need for external adjustment to return debt to downward trend.

### Key quantitative indicators (selected figures reported)
- CBI Budgetary Receipts (EC$ millions): 325.4 (2014); 293.4 (2015); 175.3 (2016); 149.4 (2017); 200.0 (2018 est.); 75.0 (2019 proj.); 60.0 (2020 proj.); 50.0 (2021 proj.); 50.0 (2022 proj.); 50.0 (2023 proj.).
- Select fiscal aggregates (EC$ millions):
  - Total revenue: 896.4 (2014); 887.3 (2015); 766.3 (2016); 750.8 (2017); 832.0 (2018 est.).
  - Total expenditure and net lending: 747.5 (2014); 784.1 (2015); 729.9 (2016); 771.4 (2017); 792.4 (2018 est.).
  - Overall balance (after grants): 218.5 (2014); 133.8 (2015); 103.0 (2016); 14.3 (2017); 95.8 (2018 est.).
  - Overall balance (ex. CBI receipts and SIDF Grants & Inv. Proceeds, CBI due diligence costs): -117.6 (2014); -138.6 (2015); -77.8 (2016); -140.5 (2017); -108.0 (2018 est.).
  - Primary balance (ex. CBI receipts and SIDF Grants & Inv. Proceeds, CBI due diligence costs): -54.3 (2014); -87.5 (2015); -35.9 (2016); -100.6 (2017); -65.8 (2018 est.).
- Public sector debt (end of period, EC$ millions): 1,862.3 (2014); 1,670.2 (2015); 1,593.4 (2016); 1,636.6 (2017); 1,725.9 (2018 proj.); projections to 2,417.1 (2023 proj.).
- NPLs to total loans (percent): 6.7 (2011); 10.4 (2012); 10.7 (2013); 12.7 (2014); 15.5 (2015); 14.7 (2016); 20.5 (2017).
- Liquid assets/total assets (percent): 44.2 (2011); 47.7 (2012); 52.0 (2013); 53.8 (2014); 50.7 (2015); 48.4 (2016); 47.9 (2017).
- Broad money (M2, EC$ millions): 2,955.1 (2014); 3,028.0 (2015); 2,907.7 (2016); 2,808.0 (2017); 2,833.8 (2018 est.); projections to 3,653.2 (2023 proj.).
- Net foreign assets (EC$ millions): 2,374.5 (2014); 2,216.7 (2015); 2,177.7 (2016); 1,950.6 (2017); 2,050.6 (2018 est.).
- ECCB imputed reserves (millions of U.S. dollars): 318.4 (2014); 280.4 (2015); 312.9 (2016); 357.0 (2017); 357.0 (2018 est.).
- External public debt (percent of GDP): 33.7 (2011); 25.2 (2012); 20.2 (2013); 16.1 (2014); 14.2 (2015); 12.2 (2016); 10.4 (2017).
- Projection: external public debt 16.5 percent in 2017 → 9 percent in 2023.

### Risk Assessment Matrix — main risks and policy responses (selected)
- Country-specific risks:
  - Sharp drop in CBI inflows: Likelihood: High; Impact: High.
    - Responses: reduce funding of recurrent expenditure through CBI revenues; strengthen due diligence; build precautionary balances; strengthen governance of accumulated CBI resources.
  - Slow pace of land sales from debt-land swap: Likelihood: High; Impact: High.
    - Responses: accelerate land sales with concrete action plan and timetable; mobilize politically palatable options.
  - High banking system liquidity and limited credit opportunities: Likelihood: High; Impact: Medium to High.
    - Responses: strengthen supervisory framework; enhance credit risk management.
- Regional risks:
  - Persistent ECCU banking weaknesses and reduced CBRs: Likelihood: High/Medium; Impact: High/Medium to High.
    - Responses: enforce new banking law; strengthen contingency planning; transfer AML/CFT supervisory powers to ECCB; implement BASEL II.
- Global risks:
  - Sharp tightening of global financial conditions, weaker U.S. growth, rising protectionism: Likelihood: High/Medium; Impact: Medium to High.
    - Responses: build precautionary balances by saving CBI receipts; diversify economy; implement structural reforms.

*Source: IMF staff report excerpts compiled in the St. Kitts and Nevis country chapter.*

### 1. Rise and Fall of the SIDF _______________________________________________________________________ 8

### 1. Rise and Fall of the SIDF

### Background and mandate
- The SIDF (Sugar Industry Diversification Foundation) was established in 2006 following the closure of the sugar industry.
- Original mandate: support development and diversification of the economy by providing training and conducting research.
- Mandate expanded in 2011 to include: support to the government’s efforts to diversify the economy and maintain stability, and to finance or undertake developments of new and existing industries, projects or enterprises.

### Boom period and quasi-fiscal expansion
- Booms in CBI inflows in the early 2010s led to expansion of quasi-fiscal activities and cash accumulation at the SIDF.
- CBI-supported activities included:
  - Grants to capital investment projects.
  - Support for social and economic spending, including a vocational training program (STEP).
  - Subsidies to the St. Kitts Electricity Company (SKELEC).
  - Subsidized housing and SME lending programs (part of deposited funds were tied to these initiatives).
- Significant cash and deposits were accumulated during this period.

### Revenue decline and balance deterioration
- Plummeting CBI revenue and a shift away from the SIDF option within the CBI program caused a rapid deterioration in SIDF’s finances.
- Expenditure adjustments were moderate (including some restructuring of the vocational training program) and insufficient to offset income declines.
- Outcome:
  - SIDF overall balance turned negative in 2016 and worsened in 2017.
  - SIDF cash holdings started to shrink.

### Transparency and governance issues
- SIDF was established as a private foundation with no formal requirement to publish audited financial statements.
- Audited accounts are available only up to 2011.
- Authorities agreed that a comprehensive strategy is required, including:
  - Determination of expenditures and revenues to be transferred to the Federal Government’s budget.
  - Auditing financial statements for more recent years; once audit is complete, a report on SIDF’s audit results and activities should be prepared.

### Fiscal integration and macroeconomic implications
- Staff recommendation: integrate SIDF’s assets, income, and expenditure responsibilities into the general government and include SIDF income and expenditures in the budget to enhance transparency.
- If SIDF income and expenditure are integrated to the budget starting 2019, staff estimate:
  - The underlying overall fiscal deficit would average about 5.8 percent of GDP over the medium-term (2019-2023), reflecting transfers to fund SIDF’s spending commitments, most notably STEP which amounts to 1.6 percent of GDP.
- If the additional SIDF expenditures are financed by domestic borrowing, staff project:
  - The debt-to-GDP ratio will rise to almost 70 percent of GDP by 2023.

### Risks related to SIDF and broader vulnerabilities
- Continued demand for private placements and ample liquidity at the Regional Government Securities Market (RGSM) could provide sufficient domestic financing in the short term, but medium-term risks remain.
- Possibility of a partial reversal of the debt-land swap (see main text references) could increase public debt.
- Natural disaster risk is also highlighted as a concern.
- Staff recommends fiscal buffers aimed at covering costs of natural disasters and possibly tackling vulnerabilities at the state-owned bank.

### Policy recommendations related to SIDF and fiscal sustainability
- Integrate SIDF activities and finances into general government budget to improve transparency and fiscal accounting.
- Recast STEP (the Skills Training Empowerment Program) from an open-ended employment program paying minimum wage without time limits into a one-year time-bound internship program and integrate into the national training system.
- If SIDF expenditures remain financed via domestic borrowing, additional fiscal adjustment will be required to stabilize debt dynamics (see broader staff recommendation of a 4 percent of GDP adjustment in the primary balance for 2019-23).
- Complete auditing of SIDF recent financial statements and prepare a report on audit results and activities.

*Source: IMF staff report excerpt — "Rise and Fall of the SIDF" (St. Kitts and Nevis).*

### Box 2. The Debt-Land Swap Arrangement

### Box 2. The Debt-Land Swap Arrangement

### Debt-land swap design and immediate impact
- In 2013 and 2014, the government of St. Kitts implemented a debt-land swap agreement as a key component of a debt restructuring program supported by an IMF program.
- The banking system, which held about 31 percent of total government debt (around 50 percent of GDP), received land from the government in exchange for debt relief.
- The operation resulted in an over 30 percent of GDP reduction in the debt stock.
- A special purpose vehicle (Special Land Sales Company, or SLSC) was set up to sell the land and remit funds received from the sales.
- Progress in land sales has been slow; the SLSC reported that four sales totaling less than 10 percent of the total lands have been completed.
- The total value of the land amounts to about 23 percent of total assets of the banks involved in the debt-land swap arrangement.
- Under the terms of the debt/land swap agreement, the banking system would not be exposed to any valuation losses/gains: if lands are sold for less than initial valuation, the government is obligated to transfer additional lands to make up the shortfall; banks do not stand to benefit if lands are sold for more than initial value.

### Operational constraints on land sales and bank balance sheets
- SLSC capacity constraints and difficulties in pricing have been cited as reasons for slow sales; any sale below a certain threshold price needs government approval, which could require transferring additional land to the bank to compensate for lower sales revenue.
- Suggested actions to accelerate sales: prepare a time-bound (up to five years) strategic plan; adopt an aggressive marketing strategy; sign agreements with real-estate agents; enhance a website; establish strategic partnerships with the Citizenship-by-Investment Unit (CIU) and St. Kitts Investment Promotion Agency (SKIPA).
- The SLSC should be strengthened and receive additional resources; in the short term, the SLSC expects to fill the CEO position and hire additional staff to support promotion efforts.
- The ECCB has required reclassification of the claim related to the debt-land swap from financial to fixed assets.
  - This reclassification will require that the lands be sold within a timeframe of 5 years or be fully provisioned, consistent with ECCB regulation.
  - A dividend payment equivalent to 2.75 percent on the value of the unsold lands has been guaranteed up to 2019.
- Staff estimates indicate that with a 100 percent risk-weight parameter applied to the unsold lands of the debt-land swap arrangement, and assuming the banking system should reach a provisioning to NPLs ratio of at least 60 percent, CAR would decrease from 28 percent to 15 percent, still above the 8 percent regulatory minimum.

### Banking system soundness and vulnerabilities
- Banking sector soundness indicators worsened in 2017Q4 from low to medium risks; asset quality deteriorated sharply due to a small number of relatively large CBI real estate projects that went into default.
- ECCB actions to resolve large loans accounting for bulk of NPLs by end of the year include loan restructuring, asset sales, and adequate provisioning.
- Foreclosure processes face administrative rigidities (e.g., at least one year to take foreclosure cases to court) and legislative rigidities (e.g., requirement of at least 3 bids in auctions).
- Planned preventive and remedial measures include training staff on credit risk management, establishment of recoveries units within some banks, implementation of new prudential regulations on valuation (implemented in July) and provisioning (scheduled for October 2018), and introduction of IFRS9 reporting standards.
  - These measures are expected to reduce reported capitalization levels (reported capitalization level at 27.4 percent) but leave them above the 8 percent regulatory minimum.
- Additional measures pending: operationalization of the ECAMC, establishment of a credit bureau, and modernization of foreclosure and insolvency legislation.
- Correspondent Banking Relationships (CBRs) have been preserved, although at increasing costs; difficulties in increasing CBRs are more related to low transaction volumes than AML/CFT concerns.
- Non-bank financial system:
  - Credit unions have NPLs equal to 4 percent and ROA equal to 2 percent.
  - Rapid expansion of credit unions suggests regulatory arbitrage and warrants a strengthened regulatory framework.
  - FSRC is applying risk-based supervision to credit unions and insurance companies; limited interlinkages between banks and non-banks, except for a limited amount of deposits that credit unions hold at commercial banks.

### Fiscal framework, Growth and Resilience Fund (GRF), and fiscal risks
- Staff recommends a formal fiscal responsibility framework to support proposed fiscal adjustment and ensure long-term debt sustainability.
  - The framework would establish a long-term fiscal anchor at 60 percent of GDP and general government overall balance (excl. CBI-related receipts) as an operational target, complemented by clearly and narrowly defined escape clauses.
  - Given current debt-to-GDP ratio is above 60 percent, the operational target path up to 2023 should follow the proposed adjustment scenario described in the source.
  - Rules should be supported by enhanced institutional frameworks, including fiscal strategy statements and clarification of revenue-sharing and transfer mechanism with the local government.
- Proposed Fiscal Adjustments over 5 years (2019-23) (In percent of GDP) — as presented in the source:
  - Proposed Adjustments over 5 years (2019-23)4.0
  - Streamline tax incentives2.3
  - Replacement of Tax Holidays by Investment Allowance 0.4
  - Ceiling on the value of imports with preferential tax treatment1.3
  - Elimination of border exemptions for taxis and restaurants0.05
  - Reduction of Duty free shops exemptions0.5
  - Restructuring of STEP program1.2
  - Contain wage bill: predictable wage determination and civil service reform0.5
- Growth and Resilience Fund (GRF) proposal:
  - Initial capital of the GRF could be around 20 percent of GDP and funded by transferring part of the government’s deposits.
  - The fiscal responsibility framework would dictate inflows to and access from the GRF.
  - Annual costs of natural disasters that accrue to the public sector have been 1.9 percent of GDP on average for 1980-2017.
  - Annual contribution to the GRF should be at least 1 percent of GDP to avoid its depletion.
  - At a minimum, an annual contribution in line with the average fiscal cost of natural disasters should be made irrespective of the level of CBI revenues.
  - Access to the GRF should be allowed to (i) respond to adverse shocks without debt accumulation; and (ii) support resilience-enhancing investment projects subject to clearly-defined criteria and risk controls.
  - The GRF should have a simple sovereign-wealth-fund structure operating as a financing fund in line with international best practices and should not directly engage in fiscal activities.
  - Investment strategy should favor placing funds abroad in principle for risk diversification, but consideration for financial stability is paramount in the short term.
  - GRF activities should be reported semi-annually to the National Assembly.

### Authorities’ views and commitments
- Authorities broadly concurred with staff recommendations and agreed to consider bringing the SIDF expenditures on budget together with the revenues in the context of a comprehensive strategy.
- Authorities agreed on the need to strengthen the medium-term fiscal framework through the development and implementation of a fiscal adjustment strategy over the medium term but disagreed with staff on the operational target:
  - Authorities prefer to target the general government balance that includes a proportion of the CBI receipts and did not accept staff’s proposal to target the general government balance excluding CBI receipts.
- On specific fiscal measures, authorities confirmed commitment to continue to reduce concessions and to explore an incentive strategy based on recent Fiscal Affairs Department TA.
- Authorities committed to continue efforts to streamline the STEP initiative to address unsustainable quasi-fiscal activities of the SIDF, establish a more predictable system for public sector pay-packages (and requested Fund TA), and establish the GRF to manage revenue from the Sustainable Growth Fund (a new option of the CBI program launched in April).
- Authorities target completing land sales in a five-year timeframe and agreed stepped-up land sales are needed to protect financial and fiscal sectors from contingent liabilities.

*Source: IMF staff summary from the provided content.*

### 22. A comprehensive strategy is needed to strengthen competitiveness and boost

### 22. A comprehensive strategy is needed to strengthen competitiveness and boost

### Improving the business environment
- Ongoing efforts to expedite business registration, introduce a uniform commercial code to allow for broader assets to be used as collateral, establish a credit bureau, an SME partial-credit-guarantee scheme, and revise the foreclosure legislation should be promptly finalized to strengthen the weak business environment.
- Authorities’ view: Agreed that strengthening the business environment is critical and have focused on accessing credit, registering property, and resolving insolvency.

### Strengthening labor productivity and avoiding wage-setting rigidities
- Amidst rising unit labor costs, the government should:
  - Upgrade skills through targeted training programs.
  - Better align the STEP program and the education system with labor market needs, including developing skills in the tourism and hospitality sector.
  - Ensure the new labor code being drafted and soon to be submitted to cabinet avoids imposing rigidities in the wage setting process so that wages grow in line with productivity.
- Authorities’ view: A triparty mechanism (government, unions, private sector) exists to develop a common understanding on productivity and competitiveness; proposals for a hospitality training institute have been put forward.

### Fostering growth in tourism and economic diversification
- Key measures to facilitate tourism expansion:
  - Attract investment through the CBI program.
  - Ongoing development of the second cruise pier and airport rehabilitation.
- Further diversification recommendations:
  - Foster backward linkages from tourism to agriculture.
  - Channel CBI inflows to additional target areas (for example, renewable energy, health, and education).
  - Increase connectivity to regional and international markets via lower regional import duties, more competitive intra-regional air travel, and development of intra-regional maritime transportation.
- Authorities’ view: Emphasized need to improve quality, timeliness and reliability of tourism statistics to better inform policy.

### Pursue inclusiveness
- Continue to improve targeting of social programs, including expanding the conditional cash transfer program.
- Preserve ongoing efforts to reduce crime through enhanced security and community-related programs; support security services, expand the CCTV program, and allocate more technical resources to protection and the legal system.

### Improving availability and quality of data
- Priority to strengthen balance of payments, national accounts, labor market and social statistics (ongoing with technical assistance).
- Tourism sector data needs enhancement for effective marketing and sector development.

### Strengthening anti-corruption framework and AML/CFT
- Operationalization of the Integrity Commission is a positive step; staff urges finalization of appointment of the 3-person Commission on schedule.
- The Anti-Corruption Bill could complement the Integrity in Public Life Act.
- Consider bringing the declaration of interest regime in line with best practices to facilitate detection of illicit enrichment and increase effectiveness of the AML/CFT framework.
- Consider becoming a party to the United Nations Convention against Corruption and ensuring its implementation, including criminalization of all acts of corruption.
- Authorities’ view: Implemented the Integrity in Public Life Act; members for an Integrity Commission have been selected; recently passed Freedom of Information Legislation and the Data Protection Bill would improve governance.

### Staff appraisal: recent performance and medium-term growth
- Economic performance continued to moderate in 2017: growth moderated reflecting slowdown in CBI receipts and related construction activity.
- Growth is expected to average around 3 percent in the medium term.
- Key risks to the outlook: a sharper drop in CBI inflows, further delays in completing the sale of lands under the debt-land swap arrangement, loss of CBRs, and a stronger U.S. dollar.

### Fiscal adjustment and public debt path
- A 4 percent of GDP adjustment in the primary balance (excluding CBI-related receipts) in 2019-23 is necessary to reverse debt dynamics.
- On current policies, public debt is expected to increase over the medium term as CBI revenues decline sharply and previously off-budget SIDF expenditure will be integrated into the budget.
- Adjustment should encompass both revenue and expenditure measures; main measures include streamlining tax incentives and restructuring activities funded by the SIDF.
- Transparency measure: require tax concessions or tax expenditures to be part of annual fiscal reporting.
- Contain the wage bill by establishing a predictable multi-year wage determination framework that precludes ad-hoc 13th month bonuses, supported by implementation of remaining civil-service reform priorities.

### Growth and Resilience Fund (GRF)
- A GRF should be established as soon as possible, tightly linked to the fiscal responsibility framework to ensure savings from past CBI revenues are used to maintain fiscal buffers to cover the cost of natural disasters.
- The fiscal responsibility framework would dictate inflows to and access from the GRF:
  - Access allowed to (i) respond to adverse shocks without debt accumulation; and (ii) support resilience-enhancing investment projects subject to clearly-defined criteria and risk controls.
- GRF design recommendations:
  - Simple sovereign-wealth-fund structure operating as a financing fund in line with international best practices and not directly engaging in fiscal activities.
  - Investment strategy should favor placing funds abroad in principle for risk diversification, with consideration for financial stability in the short term.
  - GRF activities should be reported semi-annually to the Parliament.

### Banking sector, NPLs, and macro-financial risks
- Banks’ reported capital and liquidity remain above regulatory requirements but face risks from slow land sales and worsening financial sector vulnerabilities, including high NPLs.
- Authorities should support remedial measures to resolve high NPLs and ECCB monitoring of bank capitalization, especially given implementation of IFRS9 and new prudential regulations on provisioning and valuation.
- Medium-term priorities at ECCU level: operationalize the Eastern Caribbean Asset Management Corporation (ECAMC), establish a credit bureau, and strengthen foreclosure and insolvency legal frameworks to improve asset quality and boost credit to the private sector.
- Macro-financial linkages:
  - Moderate banking risks from low profitability and high NPLs.
  - Increase in NPLs by end-2017 related to a small number of relatively large defaulted loans.
  - Significant risk that land under the debt-land swap will not be sold as envisaged or that prices may be lower than anticipated, possibly leaving a significant share unsold.
  - Partial reversal of the swap would significantly raise public debt and require an additional fiscal adjustment to ensure the debt-to-GDP ratio will reach 60 percent in the medium term.

### Sale of lands under the debt-land swap
- Continue sale of lands while protecting financial and fiscal sectors from contingent liabilities.
- Develop and aggressively implement a time-bound plan supported by strong marketing efforts, including signing agreements with real-estate agents, enhancing a website, and establishing strategic partnerships with the Citizenship-by-Investment Unit (CIU) and St. Kitts Investment Promotion Agency (SKIPA).
- Strengthen and resource the SLSC.
- Renewal of the dividend-guarantee agreement with banks is welcome to limit negative impacts to the financial sector.

### CBRs, AML/CFT supervisory framework, and CBI transparency
- Authorities should be vigilant to CBR risks and continue to enhance the AML/CFT regime and transparency of the CBI program.
- Support legislation to transfer AML/CFT supervisory powers to the ECCB and continue efforts to bring the AML/CFT regime in line with the 2012 FATF standard and ensure risk-based supervision.
- Additional measures: strengthen governance and transparency of the CBI program, increase information-sharing between indigenous and correspondent banks, and maintain risk-based supervision in the non-bank financial sector.

*Source: IMF staff report excerpt.*

### 32. Staff recommends the next Article IV consultation with St. Kitts and Nevis take place

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

### Regional context and overview
- St. Kitts and Nevis "enjoyed one of the strongest economic recovery in the region" and recorded "the strongest fiscal balance, on the back of large CBI receipts to the budget."
- Successful debt restructuring (including the debt-land swap) and early debt repayments decreased public debt.
- The banking system "remains the third most liquid in the region."
- Estimated current account deficit is sizable, "notwithstanding the large CBI service fees to government."
- The business climate "is one of the weakest and has been worsening."

### Real sector developments
- Growth slowed in 2016 but "remains higher than peers and key trade partners."
- The slowdown mainly reflects lower growth in the tourism related sectors and manufacturing.
- After buoyant tourist activity in 2015 there was "a marked slowdown in Jan-Sep 2016 year-on-year."
- Unemployment "remains the lowest in the region."
- With output above its potential level and a moderate rebound in fuel prices, consumer price inflation "turned back positive in 2016."

### Fiscal sector developments and vulnerabilities
- Headline fiscal performance in 2017 "has continued its deterioration since 2013."
- Both tax and non-tax revenue weakened.
- Growth in expenditures has been contained but "was not sufficient to prevent further deterioration in the underlying fiscal position."
- The debt-to-GDP ratio is approaching the ECCU 60 percent debt limit, although "the trend is reversing."
- Fiscal and debt position remains vulnerable to CBI sudden stops and natural disaster shocks.
- Citizenship by investment (CBI) Budgetary Receipts (o/w CBI) by year (EC$ millions): 325.4 (2014); 293.4 (2015); 175.3 (2016); 149.4 (2017); 200.0 (2018 est.); 75.0 (2019 proj.); 60.0 (2020 proj.); 50.0 (2021 proj.); 50.0 (2022 proj.); 50.0 (2023 proj.).
- Select fiscal aggregates (EC$ millions):
  - Total revenue: 896.4 (2014); 887.3 (2015); 766.3 (2016); 750.8 (2017); 832.0 (2018 est.).
  - Total expenditure and net lending: 747.5 (2014); 784.1 (2015); 729.9 (2016); 771.4 (2017); 792.4 (2018 est.).
  - Overall balance (after grants): 218.5 (2014); 133.8 (2015); 103.0 (2016); 14.3 (2017); 95.8 (2018 est.).
  - Overall balance (ex. CBI receipts and SIDF Grants & Inv. Proceeds, CBI due diligence costs): -117.6 (2014); -138.6 (2015); -77.8 (2016); -140.5 (2017); -108.0 (2018 est.).
  - Primary balance (ex. CBI receipts and SIDF Grants & Inv. Proceeds, CBI due diligence costs): -54.3 (2014); -87.5 (2015); -35.9 (2016); -100.6 (2017); -65.8 (2018 est.).
- Public sector debt (end of period, EC$ millions): 1,862.3 (2014); 1,670.2 (2015); 1,593.4 (2016); 1,636.6 (2017); 1,725.9 (2018 proj.); projections up to 2,417.1 (2023 proj.).
- Central government debt (EC$ millions) and share in public debt: 636 (2014); 803 (2015); 794 (2016); 936 (2017); 869 (2018 proj.); rising to 2,022 (2023 proj.).

### External sector developments
- Current account (EC$ millions): -112.6 (2014); -230.5 (2015); -276.4 (2016); -262.8 (2017); -267.6 (2018 est.).
- Projected current account (EC$ millions) further deteriorates to -452.7 (2019 proj.), -491.6 (2020 proj.), -505.7 (2021 proj.), -530.5 (2022 proj.), -558.9 (2023 proj.).
- Current account (percent of GDP): -4.5 (2014); -9.1 (2015); -10.7 (2016); -10.1 (2017); projections to -16.0 (2023).
- Current account excluding CBI receipts (percent of GDP): -17.7 (2014); -20.7 (2015); -17.4 (2016); -15.8 (2017); -17.4 (2023 proj.).
- Trade balance (EC$ millions): -637.6 (2014); -683.8 (2015); -692.4 (2016); -708.4 (2017); -808.6 (2018 est.).
- Tourism receipts (EC$ millions): 837.1 (2014); 832.4 (2015); 894.0 (2016); 979.0 (2017); 1,030.9 (2018 est.); projections to 1,366.0 (2023 proj.).
- Services receipts (EC$ millions): 1,331.5 (2014); 1,302.4 (2015); 1,261.0 (2016); 1,224.7 (2017); 1,331.9 (2018 est.).
- Net foreign assets composition: commercial banks’ foreign assets declined while Central Bank reserves increased, keeping the international investment position roughly flat.

### Banking system developments and financial indicators
- Banking system deposits growth slowed after rapid expansion from 2010, with an inflection in early 2014.
- Banks’ loan portfolio "has been recovering after a large drop due to the public debt restructuring (debt-land swap)."
- Banking system liquidity fell from its 2014 peak and reached levels similar to ECCU peers, but remains high enough to pressure profitability absent lending.
- Nonperforming loans (NPLs) remain persistent and far above the regulatory benchmark.
  - NPLs to total loans (percent): 6.7 (2011); 10.4 (2012); 10.7 (2013); 12.7 (2014); 15.5 (2015); 14.7 (2016); 20.5 (2017).
- Liquid assets/total assets (percent): 44.2 (2011); 47.7 (2012); 52.0 (2013); 53.8 (2014); 50.7 (2015); 48.4 (2016); 47.9 (2017).
- Return on assets (sum of quarterly returns for the four quarters up to the period, in percent): 1.5 (2011); 0.6 (2012); 0.7 (2013); 0.6 (2014); 0.8 (2015); 0.9 (2016); 0.8 (2017).
- Total capital to risk weighted assets (percent) remained well above regulatory benchmark; note change in risk weighting from 2014Q3 reflecting land assets treatment in the debt-land swap.

### Monetary and balance of payments summary (selected figures)
- Broad money (M2, EC$ millions): 2,955.1 (2014); 3,028.0 (2015); 2,907.7 (2016); 2,808.0 (2017); 2,833.8 (2018 est.); projections to 3,653.2 (2023 proj.).
- Net foreign assets (EC$ millions): 2,374.5 (2014); 2,216.7 (2015); 2,177.7 (2016); 1,950.6 (2017); 2,050.6 (2018 est.).
- ECCB imputed reserves (millions of U.S. dollars): 318.4 (2014); 280.4 (2015); 312.9 (2016); 357.0 (2017); 357.0 (2018 est.).
- Net international reserves in millions of U.S. dollars (imputed): 231.5 (2011); 251.6 (2012); 291.3 (2013); 318.4 (2014); 280.4 (2015); 312.9 (2016); 357.0 (2017).
- External public debt (percent of GDP): 33.7 (2011); 25.2 (2012); 20.2 (2013); 16.1 (2014); 14.2 (2015); 12.2 (2016); 10.4 (2017).

### Key risks and policy implications (as presented)
- Heavy fiscal reliance on CBI receipts makes the fiscal position vulnerable to "CBI sudden stops."
- Vulnerability to natural disasters amplifies fiscal and debt risks.
- Underlying fiscal position is weaker once CBI receipts and SIDF grants and investment proceeds are excluded, highlighting the need for measures to strengthen tax and non-tax revenue and contain expenditures.
- Banking sector is liquid and well capitalized but profitability pressures and high NPLs warrant monitoring and policy attention.

*Source: INTERNATIONAL MONETARY FUND.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Main Risks to Baseline Scenario — Country-Specific Risks
- Sharp drop in CBI inflows.
  - Likelihood: High
  - Impact: High
  - Policy response:
    - Reduce funding of recurrent expenditure through CBI revenues.
    - Further strengthen due diligence of applicants to reduce risks to financial integrity and international security, and limit risks to the integrity of the program and its sustainability.
    - Build precautionary balances by saving the bulk of inflows and repaying debt.
    - Strengthen the management/governance of accumulated CBI resources.
- Slow pace of land sales from the debt-land swap.
  - Likelihood: High
  - Impact: High
  - Policy response:
    - Accelerate efforts to sell the land, with a concrete action plan and timetable.
    - Pursue politically palatable options to mobilize land sales.
- High banking system liquidity and limited credit opportunities.
  - Likelihood: High
  - Impact: Medium to High
  - Policy response:
    - Strengthen banks' supervisory framework, and enhance credit risk management.

### Main Risks to Baseline Scenario — Regional Risks
- Persistent banking sector weaknesses in the ECCU; regional financial distress spillovers.
  - Likelihood: High
  - Impact: High
  - Policy response:
    - Support the regional resolution strategy by continuing to enforce the new banking law enacted in July 2015.
    - Strengthen contingency planning.
    - Upgrade foreclosure legislation to accelerate NPL resolution.
    - Implement BASEL II Framework.
- Reduced financial services by global/regional banks ("withdrawal of CBRs").
  - Likelihood: Medium
  - Impact: Medium to High
  - Policy response:
    - Further strengthen AML/CFT supervisory framework, including by transferring AML/CFT supervisory powers to the ECCB.
    - Conduct periodic risk assessments.
    - Ensure full compliance with international standards on tax information transparency.
- Natural disasters.
  - Likelihood: High
  - Impact: High
  - Policy response:
    - Invest in weather-resilient infrastructure.
    - Accumulate buffers, including by reorienting CBI inflows.
    - Ensure sufficient coverage of disaster insurance.
    - Increase private sector access to weather-linked insurance products.

### Main Risks to Baseline Scenario — Global Risks
- Sharp tightening of global financial conditions (e.g., sharper-than-expected increase in U.S. interest rates).
  - Likelihood: High
  - Impact: Medium to High
  - Policy response:
    - Address cost competitiveness by containing public sector wages, which may affect private sector wages.
    - Lower energy prices.
    - Mitigate other bottlenecks that weigh on businesses (including ease of doing business).
- Weaker-than-expected U.S. growth.
  - Likelihood: Medium
  - Impact: Medium
  - Policy response:
    - Continue to build precautionary balances by saving the bulk of CBI receipts.
    - Increase economic diversification and step up structural reforms to boost potential growth.
- Rising protectionism and retreat from multilateralism.
  - Likelihood: High
  - Impact: Medium to High
  - Policy response:
    - Continue to build precautionary balances by saving the bulk of CBI receipts.
    - Increase economic diversification and step up structural reforms to boost potential growth.

### Risk Assessment Matrix (RAM) methodology note
- The RAM shows events that could materially alter the baseline path.
- The relative likelihood classifications are staff’s subjective assessment:
  - "low" indicates a probability below 10 percent,
  - "medium" indicates a probability between 10 and 30 percent,
  - "high" indicates a probability of 30 percent or more.
- The RAM reflects staff views as of the time of discussions with the authorities.
- Non-mutually exclusive risks may interact and materialize jointly.

*Source: Annex I. Risk Assessment Matrix.*

### 3.      Despite large accumulated public sector savings, the scope for more rapid debt

### 3.      Despite large accumulated public sector savings, the scope for more rapid debt repayment remains limited.

### Current debt position and recent actions
- Central government has paid down all outstanding domestic loans to commercial banks and social security and settled debt with major external bilateral creditors including debt owed to PDVSA; the PDVSA negotiation concluded in 2017 and the old loan was converted to a new loan with a lower interest rate.  
- Purchases under the SBA were fully repaid in April 2016.  
- Bonds from the debt restructuring or external multilateral debt carry a low interest rate with long maturities, beneficial for long-run debt sustainability.  
- Expensive overdraft debt accounts held by the Nevis Island Administration (NIA) were consolidated with existing loans and converted into a new long-term loan in 2018 at a lower interest rate.  
- Remaining debt owed by the NIA and public corporations is equivalent to 16 percent of GDP; aggressive repayment of this could deplete central government savings and weaken fiscal sustainability absent significant strengthening of fiscal discipline at NIA and sufficient central government oversight on public corporations.  
- T-bills held by private investors and arrears to PDVSA seem to be the most likely candidate for immediate repayment.

### Baseline scenario assumptions (growth and CBI inflows)
- Fiscal Balance:
  - CBI budgetary revenues are assumed to decline from 5.7 percent of GDP in 2017 to 1.4 percent of GDP by 2023.
  - Public sector primary surplus declines from 3 percent in 2017 to – 1.8 percent by 2023.
- Growth and Inflation:
  - Real economic activity accelerates to about 3 ¼ percent over 2018-2020, before stabilizing at about 2.7 percent for the rest of the projection horizon.
  - This growth path is about 1 percentage point below the 10-year pre-crisis historical growth average.
  - Inflation, measured by the GDP deflator, averages 2 percent over 2018-23.
- Debt and financing:
  - No assumptions on further early retirement of debt, despite authorities’ plans to consider repaying historical budgetary arrears to PDVSA.
  - It is assumed that the government will resume domestic borrowing in the baseline as its fiscal balance worsens.
  - Negative shocks that worsen the primary balance will be financed by new borrowing except for the natural disaster shock, for which the worsened primary balance for the year of the disaster is financed by drawing down central government deposits.

### Shock scenarios and simulated impacts (MAC DSA and custom shocks)
- Adverse growth shock (calibrated as 1 standard deviation of growth volatility over the past 10 years):
  - Lowers growth by 3.9 percentage points relative to baseline over 2019-20.
  - Lowers inflation by 1 percentage point in each year.
  - Public debt rises to 90.4 percent of GDP in 2023, about 21 percentage points above baseline.
- Sustained interest rate shock:
  - A shock of 368 bps (difference between the average real interest rate level over the projection period and the maximum 10-year historical level) applied—consistent with a projected 350 bps increase in US interest rates over the medium-term.
  - The shock has only marginal effects (by about 3 percentage point compared to baseline).
- Primary balance shock (sudden stop in CBI inflows):
  - A sudden stop in 2019 shocks the primary deficit by about 3¾ percentage points in 2019 and 1 ¾ percentage points in 2020 and about 1½ percentage points over 2021-2023.
  - Under this scenario, the debt-to-GDP ratio increases by about 9½ percentage points by 2023.
- Combined macro-fiscal shock (all above shocks together):
  - Debt rises to 106 percent of GDP in 2023, about 37 percentage points higher than baseline.
- Custom natural disaster shock (based on historical hurricane episodes):
  - Lowers growth by 6 percentage points compared to baseline in 2019, with growth assumed to quickly recover to 1.6 percent in 2020 including through reconstruction efforts.
  - Historical shocks suggest an expected deterioration in the fiscal balance by about 5 percentage points in both 2019 and 2020.
  - Fiscal buffers will be drawn down by 7 percent of GDP in the year of the hurricane.
  - The debt-to-GDP ratio reaches 79.2 percent in 2023, 10 percentage points above baseline.
- Debt-land swap shock (if swapped land not divested as planned):
  - Scenario assumes swapping of 70 percent of the land for a long-term loan with domestic banks at an interest rate of 4.5 percent (about 0.5 percent higher than the current interest rate on one-year T-bills and about 1.75 percentage point higher than the 2.75 percent dividend guarantee on unsold land).
  - This shock results in a 17 percentage points upward shift in the debt ratio compared to baseline in 2022.
  - The debt-to-GDP ratio will be 85.8 percent in 2023.

### Assessment of alternative scenarios and forecast track record
- Historical and constant primary balance scenarios do not provide reliable insight into possible risk because they reflect several years of very high CBI budgetary inflows combined with strong fiscal performance during the Fund-supported program; such large inflows are more likely to be used to bolster fiscal buffers than pay down debt more rapidly.
- Forecast track record:
  - Staff underestimated growth and fiscal outturns during peak years of CBI inflows (2012-14) due to the unanticipated surge in CBI inflows.
  - Forecast errors have shrunk more recently.
  - Inflation projections have shown fewer forecast errors in recent years.

### Vulnerabilities and risk profile
- The heat map reflects a vulnerable debt risk profile:
  - Under baseline, debt level does not trigger the heat map threshold of 70 percent, but it exceeds 70 percent in all shock scenarios.
  - A debt-land swap shock would raise the debt level to over 85 percent by the end of the projection period.
- Key vulnerability drivers:
  - Large annual gross financing needs given the large stock of short-term debt (mainly T-bills).
  - Significant liquidity in the domestic banking system lowers potential near-term rollover challenges for central government, but vulnerability remains.
  - Indicators show a medium level of vulnerability with respect to external debt and foreign currency denominated debt.
  - Fan charts show some probability that the debt-to-GDP ratio will approach 100 percent over the medium term under the asymmetric fan chart (where only negative shocks to growth and the exchange rate are considered).
- The estimated change in the cyclically adjusted primary surplus over the forecast period is at the lower end of the distribution of adjustments historically achieved by advanced and emerging economies with debt greater than 60 percent of GDP, reflecting baseline assumptions of significantly lower CBI inflows.

### Policy implications and recommendations (conclusions)
- Ensuring medium-term debt sustainability requires attention to risks associated with the debt-land swap and prudent management of the accumulated government savings.
- Framework needed to effectively mobilize land use/sales in a manner that ensures the credibility of the debt restructuring, while preserving national interests and the stability of domestic banks.
- Implementing an effective medium-term fiscal framework to preserve and prudently manage the large accumulated savings from CBI inflows by both central government and the SIDF is critical to stabilizing the debt path and increasing resilience to exogenous shocks, including costly natural disasters, without renewed build-up of public debt.

*Source: IMF staff analysis in the St. Kitts and Nevis DSA chapter provided.*

### 11.      The external public debt is projected to decline rapidly over the medium term to

### 11.      The external public debt is projected to decline rapidly over the medium term to

### External public debt outlook
- External public debt is projected to reach 9 percent in 2023, down from 16.5 percent in 2017.
- Drivers of the decline:
  - Amortization of restructured bonds with external commercial debt.
  - Projected repayment of multilateral debt, largely from the CDB.

### Current account and financing dynamics
- The current account deficit is projected to widen because of the modeled decay in CBI inflows in the baseline scenario.
- Imports remain elevated, in part because of:
  - Continued imports of construction materials and capital goods.
  - Some pick up in fuel prices.
- Financing of current account deficits:
  - Drawdowns on the accumulated investment commitments from prior years will finance the bulk of the current account deficits.
  - These drawdowns are reflected in commercial banks’ net foreign asset position and the growth in the imputed reserves at the ECCB.
  - As CBI-projects reach completion, financing through these drawdowns will result in no significant accumulation of new foreign debt.

### Stress tests and scenario outcomes
- Stress tests indicate external debt would continue to decline under the following individual shocks:
  - Interest rate shock
  - Growth shock
  - Real depreciation shock
  - Combined shocks (interest rate + growth + real depreciation)
- Under the current account shock scenario:
  - Debt stays relatively higher, suggesting that some external adjustment would be necessary to return the debt path to a downward trend under that shock.

### Key quantitative points (as reported in the source)
- External public debt: 16.5 percent in 2017 → 9 percent in 2023.
- Current account dynamics tied to CBI inflows and import composition (construction materials, capital goods, fuel prices).
- Financing via:
  - Commercial banks’ net foreign asset position (drawdowns on accumulated investment commitments).
  - Growth in imputed reserves at the ECCB.
- Stress-test coverage: interest rate, growth, real depreciation, combined shocks, and current account shock (current account shock leads to relatively higher debt path).

*Source: IMF staff (excerpt from the St. Kitts and Nevis public debt and external debt sustainability analysis).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1knaea2022001.pdf_