## 1atgea2023001 - 2022. The mission team comprised Varapat Chensavasdijai (head) ## Source details **Canonical URL:** [1atgea2023001 - 2022. The mission team comprised Varapat Chensavasdijai (head)](https://www.imf.org/-/media/files/publications/cr/2023/english/1atgea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1atgea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1atgea2023001.pdf.json) --- ### CONTEXT - External shocks and recovery: - Hurricane Irma in 2017 and the COVID-19 pandemic reduced per capita GDP in 2020 back to its 1985 level. - Real per capita income is expected to recover only gradually and will not reach pre-pandemic levels within the next five years. - Disaster and climate exposure: - Ten major disasters during 1983-2017 affected around one-quarter of the population and, on average, caused damage of 22 percent of GDP. - Sea-level rise under IPCC RCP 4.5 scenario will affect at least 20 square kilometers of Antigua’s land mass and approximately 15 square kilometers for Barbuda by 2060 (around 8 percent of total land area). - Political context: - General elections due in March 2023; administration in power since 2014 controls 15 of 17 seats. Early elections could be called before March. ### SCARRING EFFECTS FROM THE PANDEMIC — key findings - Channels of scarring: - Labor market disruptions, loss of tourism capital stock, and school closures may contribute to long-term scarring. - Selected indicators and impacts: - More than 20,000 room nights per month lost due to permanent closure of hotels. - Learning gaps in primary and secondary schools owing to protracted school closures. - Persistent labor market weakness in 2021 with continued year-on-year decline in total number of registered workers (2 percent) and number of employers (9 percent). - Employment in hospitality and wholesale and retail sectors at 80 and 85 percent of 2019 levels, respectively. - Lower average earnings across many sectors in 2021, including hospitality and self-employment. - Self-employed and younger workers hardest hit as shown by the number of social security contributors lost. ### HEADWINDS TO THE RECOVERY - Recovery dynamics and tourism: - After a 20 percent decline in 2020, real GDP is estimated to have expanded by 5.3 percent in 2021. - Stayover arrivals for 2021 reached 56 percent of 2019 level; for January-September 2022 stayovers were 88 percent of pre-COVID levels; hotel occupancy rates returned to 2019 levels in mid-2022. - Stayover arrivals by source for Jan-Sep 2022: US 49.7 percent, Canada 5.1 percent, UK 30.9 percent, Caribbean 8.7 percent, Other 5.5 percent. - Inflation and policy response: - CPI inflation was 1.2 percent at end-2021 (y-o-y). - Inflation accelerated to 8½ percent in 2022Q3 (core inflation at 7 percent). - Gas voucher program provided a 30 percent discount at the pump to transport and fishing sectors (discount was 25 percent when introduced in March and increased to 30 percent in June); estimated cost 0.1 percent of GDP for 2022. - Taxes on flour were removed in September 2022. - Fiscal position and arrears: - Primary deficit narrowed by 2 percent of GDP in 2021 but missed MTFS target by about 1 percent of GDP. - Public debt peaked at 102 percent of GDP at end-2021. - Total arrears to domestic and external creditors estimated at 19 percent of GDP as of end-2021, with about one-third subject to reconciliation. - External sector: - Current account deficit narrowed to an estimated 15 percent of GDP in 2021 (from 18½ percent in 2020). - Current account gap was -2.6 percent of GDP in 2021 and REER was overvalued by around 5.9 percent (EBA-Lite model). - Reserve cover stood at 3.1 months of prospective imports. - REER appreciated by 4 percent through September 2022. - Financial sector: - Provisioning at banks reached 97.2 percent of NPLs at end-June 2022 (ECCB minimum is 60 percent; minimum provisioning ratio introduced in January 2022 will increase in steps to 100 percent by 2024). - Locally-owned banks’ sovereign exposure was 103 percent of Tier-1 capital in June 2022 compared with 132 percent in December 2020. - Usage of ECCB’s digital currency (DCash) minimal since pilot launch in March 2021. - Energy pricing: - Retail gasoline prices were increased by 24 percent and now broadly reflect international market prices after many energy prices remained fixed since February 2016. ### OUTLOOK AND RISKS - Baseline projections: - Real GDP projected to grow at 6 percent in 2022 and 5½ percent in 2023, returning gradually to pre-pandemic levels by 2025. - CPI inflation forecast to accelerate to 8½ percent in 2022 before moderating to 4½ percent in 2023. - Fiscal position expected to improve in 2022 but gross financing needs and public debt-to-GDP ratio remain elevated. - Key downside risks (tilted to the downside): - Continued commodity price shocks, growth slowdown in trading partners, renewed COVID outbreaks, delays in fiscal adjustment, tighter global financial conditions, further U.S. dollar appreciation, decline in CIP revenues, more frequent/intensive natural disasters. - Upside risk: - Faster-than-expected tourism recovery. ### AUTHORITIES’ AGREEMENT, NEAR-TERM POLICY PRIORITIES - Authorities agreed with staff’s macroeconomic projections and risk assessment. - Near-term priorities: - Improve social safety nets. - Fully implement the MTFS to build fiscal buffers and bring down public debt. - Address long-standing arrears to suppliers and bilateral creditors. - Ensure sustainability of the pension system. - Strengthen financial system oversight, improve competitiveness, and invest in climate resilience. ### RETURNING TO A SUSTAINABLE FISCAL POSITION — key findings and measures - Near-term fiscal approach: - Prioritize spending on social safety nets; expedite centralization and digitization of beneficiary information and payment systems. - Replace temporary gas voucher program with a comprehensive, targeted social assistance system including cash transfers. - Maintain decision to allow pass-through of international fuel prices; consider automatic fuel pricing mechanism with full pass-through combined with targeted social protection. - Fiscal outcomes and gaps: - MTFS envisaged a primary surplus of ½ percent of GDP for 2022; revenue shortfalls likely imply a primary deficit of about ½ percent of GDP for 2022. - Additional measures of around 1¼ percent of GDP over the next three years required to return to the MTFS path. - Corporate income tax amended to make permanent the windfall tax introduced in 2019. ### REVENUE, EXPENDITURE, AND REFORM OPTIONS (exact figures preserved) - Tax exemptions: - Increased from 41 percent of potential revenue in 2021 to 46 percent through August 2022 (equivalent to 4½ percent of GDP, of which discretionary exemptions accounted for 1½ percent of GDP). - Policy recommendations: - Limit tax exemptions to those specified in legislation; use sunset clauses and publish annual cost of each tax expenditure with the budget. - Harmonize ABST rate for tourism activities to the standard 15 percent and extend ABST to online purchases. - Introduce excise duties on alcohol and tobacco. - Stricter controls on property tax and update property valuations. - Contain public sector real wage increases and rely on attrition to bring wage bill below 9 percent of GDP by 2025. - Conduct public sector employment census and skills database. - Tabled reform options and estimated fiscal yield (staff estimates): - Harmonizing ABST rate for tourism activities (currently at 14 percent) to 15 percent: 0.1 (Percent of GDP) - Reassessing property values for tax purposes: 0.1-0.3 (Percent of GDP) - Strengthening tax compliance including auditing: 0.5-0.9 (Percent of GDP) - Rationalizing transfers to SOEs and strengthening oversight of SOEs: 0.1-0.2 (Percent of GDP) - Total (cumulative over 2023-25): 0.8-1.5 (Percent of GDP) - Authorities considering waiver of unpaid property taxes for January 1, 2016 to December 31, 2021 conditional on paying 2022 obligations during January 1 and March 31, 2023. - Government plans to raise public wages to compensate for past inflation imply a 5-10 percent nominal increase over 2022-23. ### DEBT, FINANCING NEEDS, ARREARS, AND CONTINGENCY PLANNING - Debt and financing: - Continued fiscal consolidation expected to bring debt to under 70 percent of GDP by 2030. - Gross financing needs would remain above 10 percent of GDP until 2025. - Staff assesses public debt to be unsustainable due to large outstanding arrears and high gross financing needs. - Financing strategy: - Need for lower fiscal deficit and new, preferably concessional, financing with long maturities. - Authorities working to issue long-term securities and a green bond in 2023. - Clearing arrears (reconciliation, prioritization, engagement with creditors) is critical to credibility. - Contingency plan for adverse scenario: - Implement recommended fiscal measures more expeditiously (limit exemptions, introduce new taxes). - Contain recurrent spending (freeze public sector wages, rationalize transfers to SOEs). - Tap more expensive external commercial financing if necessary. ### STRENGTHENING FISCAL FRAMEWORK AND PUBLIC FINANCIAL MANAGEMENT - Recommended actions: - Parliamentary endorsement of MTFS and Fiscal Resilience Guidelines. - Increase Macro-Fiscal Unit capacity and operationalize FROC before year-end. - Approve regulations to operationalize the CRDF and enact amended Finance Administration Act. - Develop PFM action plan based on PEFA self-assessment; introduce SOE financial performance measurement and amend Procurement Administration Act. - Implement single window system at customs; extend forensic audits to low compliance sectors. - Implement e-filing and e-payment of taxes within the coming year. ### PENSION SYSTEM SUSTAINABILITY — parametric reform (exact proposals) - Challenges: - Contributions fell below 2017 actuarial forecasts and financial position weakened. - Additional central government transfers covered cash flows; payments of old age pensions and assistance were delayed. - Recommended parametric reforms: - Increase retirement age to 64.5 years in 2024 (it will already rise to 65 years in 2025). - Gradually raise contribution rates (e.g., by 0.5 percent per year up to 17 and 18 percent for public and private sector employees, respectively). - Automatically adjust retirement age in line with increase in life expectancy at retirement. - Revise pension investment framework to diversify away from long-term domestic government bonds and real estate. ### REINFORCING THE FINANCIAL SYSTEM - Supervisory and resilience recommendations: - FSRC to remain vigilant; intensify monitoring of credit unions given rapid mortgage lending expansion. - Encourage better governance (internal audits) and consider risk-weighting assets for credit unions. - Strengthen crisis preparedness and coordinate with ECCB to develop national crisis management plan for banks and nonbanks. - Incorporate climate risks into supervision, reporting, and stress tests for nonbanks. ### ACCESS TO CREDIT — findings and policy recommendations - Findings: - Regional credit bureau and regional partial credit guarantee scheme expected to facilitate greater lending. - Informal sector entrepreneurs not fully covered; business registration/documentation constrain access. - Insolvency law limitations and unclear creditor rights deter lending. - Recommendations: - Expand partial credit guarantee coverage by bringing informal entrepreneurs into the business registry and simplifying documentation. - Modernize insolvency law to facilitate out-of-court settlement and clarify creditor rights. - Consider additional loan guarantee programs for small businesses. ### AML/CFT AND CIP RISKS - Findings: - Significant progress toward risk-based AML/CFT supervisory framework applicable to all financial institutions and DNFBPs (including CIP agents). - Beneficial ownership information and multiple due diligence layers for CIP applicants exist. - Recommendations: - Strengthen CIP legislative framework and codify CIP agent guidelines. - Maintain active communication with EU, U.S., and regional CIPs; strengthen coordination with ECCB in AML/CFT supervision. ### ENHANCING COMPETITIVENESS AND GREEN RECOVERY — key points - LIAT restructuring: - LIAT under administration; new company expected to be managed by a private investor in 2023. - Labor market policies: - Prioritize training, vocational education, skills certification, job search assistance, and support to small businesses. - Climate resilience: - Annual loss caused by natural disasters around 4.2 percent of GDP. - Investment in resilient infrastructure of 3 percent of GDP per annum would create a long-run output gain of up to 13 percent of GDP (staff analysis). - National Adaptation Plan expected by June 2023; CCRIF enrollment and CRDF capitalization underway. - Renewable energy: - Solar generation capacity around 15 percent of total electricity generation; target of 86 percent renewables by 2030. - Green and blue finance: - Planned issuance of a green bond; potential benefit from World Bank’s CAT DDO; scope to raise blue financing aligned with the Maritime Economy Plan. ### DATA ISSUES - Progress and shortcomings: - New Producer Price Index, rental component for CPI, and improvements in national accounts and external sector statistics underway. - Key shortcoming: need to publish timely reports on central government and SOEs’ operations. ### STAFF APPRAISAL — macro-fiscal and financial stability priorities (summary) - Recovery supported by tourism and construction; output expected to return to pre-pandemic levels by 2025. - Higher food and fuel prices are raising inflation and eroding real incomes. - Near-term fiscal focus: protect vulnerable, improve targeting of social safety nets, introduce automatic fuel pricing with targeted social protection, mobilize additional revenue, contain wage bill. - Debt and arrears: secure long-term financing, extend maturities, engage with creditors to clear arrears. - Institutional reforms: legislate MTFS and Fiscal Resilience Guidelines; operationalize CRDF, FROC, and customs single window; implement e-filing/e-payment; introduce SOE performance report cards. - Pensions: gradual contribution increases, automatic retirement age adjustments, revamped investment strategy. - Financial stability: closely monitor asset quality and provisioning; formulate national crisis management plan with ECCB; strengthen AML/CFT and CIP frameworks. ### OUTLOOK — tabulated gross financing needs and selected balance of payments (selected figures preserved) - Table 2: Gross Financing Needs (Millions of Eastern Caribbean dollars) — Total Gross Financing Needs: 724 751 680 807 592 572 566 580 (series across years). - Selected Balance of Payments (US$ million; projections): Current Account: -118.0 -233.7 -126.9 -251.6 -220.9 -343.6 -263.3 -269.0 -267.4 -263.4 -266.4 (series); Gross tourist receipts: 736.7 776.0 903.6 411.8 546.1 768.0 858.4 903.6 966.8 1,034.5 1,106.9 (series). - Net imputed international reserves (US$ million): 313.5 328.5 278.9 221.7 323.8 353.8 418.9 486.3 528.4 547.8 553.4. - Net imputed international reserves (in months of prospective imports): 3.3 3.3 4.5 3.1 3.1 3.3 4.0 4.4 4.6 4.5 4.2. - GDP at market prices (US$ million): 1,468 1,606 1,688 1,370 1,471 1,692 1,867 2,014 2,137 2,239 2,345. ### RISK ASSESSMENT MATRIX — selected entries (likelihood, impact, policy responses) - Intensifying spillovers from Russia’s war on Ukraine: - Relative Likelihood: High; Expected Impact: High. - Policy Response: Targeted transfers; improve social safety nets; accelerate shift to renewables. - Commodity price shocks: - Relative Likelihood: High; Expected Impact: High. - Policy Response: Targeted transfers; continue pass-through and phase out generalized subsidies; improve social safety nets; accelerate renewables. - More frequent natural disasters: - Relative Likelihood: Medium; Expected Impact: High. - Policy Response: Rule-based fiscal framework internalizing disaster exposure; implement national adaptation plan; arrange ex ante financing. ### ANNEX III — EXTERNAL SECTOR ASSESSMENT (key findings and EBA-lite results) - Overall assessment: - External position in 2021 weaker than level implied by fundamentals and desirable policies (EBA-lite results). - External sustainability not a major concern as external liabilities are mostly FDI. - Foreign assets and liabilities (2021, % GDP): - NIIP: -103.7; Gross Assets: 89.9; Debt Assets: 50.9; Gross Liab.: -193.7; Debt Liab.: -87.1. - Current account and CA gap: - Current account deficit shrank to 15 percent of GDP in 2021 from 18.4 percent in 2020. - EBA-lite results (2021): CA-Actual-15.0; Adjusted CA -8.4; CA Norm -5.8; CA Gap -2.6. - REER Gap (in percent) 5.9 12.3; staff-estimated REER overvaluation by 5.9 percent (elasticity -0.44). - Reserves: - Net imputed international reserves in 2021 corresponded to 3.1 months of prospective imports and 21.8 percent of broad money (ECCB benchmarks: 3 months of imports and 20 percent of broad money). - Data gaps preclude reserve adequacy assessment by IMF ARA EM metric. ### DEBT SUSTAINABILITY ASSESSMENT — core finding and baseline figures - Core finding: - Public debt is unsustainable given large outstanding stock of arrears (not expected to be cleared within projection horizon) and high gross financing needs. - Restoring sustainability requires resolving arrears and securing long-term financing. - Baseline DSA selected series (Nominal gross public debt, Percent of GDP across projection years 2020–2027): 91.4, 101.5, 102.4, 91.3, 85.7, 80.2, 75.8, 71.8, 68.6. - Public gross financing needs (Percent of GDP): 10.2, 20.3, 19.4, 14.9, 16.0, 10.9, 9.9, 9.3, 9.0. - Real GDP growth (percent): 3.2, -20.2, 5.3, 6.0, 5.6, 5.4, 4.0, 2.7, 2.7. - Inflation (GDP deflator, percent): 1.2, 1.7, 2.0, 8.5, 4.5, 2.4, 2.0, 2.0, 2.0. - Effective interest rate (percent): 2.9, 1.9, 2.9, 3.0, 3.4, 3.8, 3.9, 4.0, 4.2. - Debt-stabilizing primary balance: -0.4. ### DSA STRESS TESTS — themes and implications - Stress scenarios include bond spread shocks (200 and 600 basis points), external financing requirement shocks (5 and 15 percent of GDP), increases in short-term debt share, higher public debt held by non-residents, and higher share of foreign-currency denominated debt. - Under several stress scenarios, gross nominal public debt and gross financing needs increase materially relative to baseline, including under combined macro-fiscal and contingent liability shocks. ### LABOR MARKET — persistent decline and policy responses - Trends: - Public sector workers declined nearly 5 percent y-o-y in 2020 and a further 14 percent in 2021. - Registered employment fell to 90 percent of 2019 peak in 2021. - Hospitality employment fell 9 percent y-o-y in 2021; self-employment contracted by 14 percent in the second year of the pandemic. - Distributional impacts: - Employment decline larger among men; youngest labor market participants hardest hit. - Loss of young contributors to social security raises concerns for system sustainability. - Policy recommendations: - Skills enhancement, job search assistance targeting youth, support for small businesses and sole proprietorships. - Expand vocational training, skills certification, and improve access to credit and digital capacity for self-employed workers. - Improve labor market data collection and social security coverage information. ### CLIMATE RISK, RESILIENCE, AND BLUE FINANCE - Increasing frequency/intensity of extreme events: - Antigua and Barbuda Adaptation Communication projects frequency of Category 4 and 5 hurricanes will increase by 80 percent over the next 80 years. - RCP 4.5 scenario predicts nine drought years during 2040–69, representing an 8 percent increase in drought severity to 23 percent. - Vulnerabilities and financial exposure: - Severe hurricane can disrupt power/water for 3–24 months and transport/communication for up to 6 months. - CCRIF payment after Hurricane Irma was only 2.7 percent of total damage. - Non-life insurance penetration measured against average annual disaster cost is 1.8 percent. - IMF study estimates gross benefit of resilience building could be as large as 13 percent of GDP if 80 percent of infrastructure becomes resilient. - Institutional and financing actions: - DOE accreditation and project financing: AF access US$10 million; GCF access US$21.4 million; two approved GCF-funded projects valued at US$64.8 million. - SIRF Fund established; CRDF being established, financed by Tourism Accommodation Levy. - Recommendations: combine ex ante donor support with liquidity buffers and parametric insurance/catastrophe bonds; strengthen governance of funds; prioritize resilience projects with co-benefits. - Blue bonds and sovereign experience: - Blue bond market thin; first blue bond issued by Seychelles in 2018 (US$15 million); Belize issued a large blue bond transaction (US$364 million) in 2021. - Seychelles case: Amount US$15 million; coupon 6.5 percent subsidized to 2.8 percent with donor support; redeemed 2026–2028. - Belize case: Amount US$364 million; step-up coupon schedule 3 percent in 2022, 3.55 percent in 2023, 5.15 percent in 2024, and 6.04 percent thereafter; maturity 19 years; grace 10 years. - Lessons: credit support, debt conversion role, long timelines, intermediary and technical assistance critical. - Constraints for Antigua and Barbuda: US$150 million owed to Paris Club creditors exceeds past swap scales; tighter global financing conditions and need for grant financing to make blue bond favorable. - Preparatory steps: concrete KPIs, monitoring/reporting system, operationalize MEP, integrate climate objectives into macro and budget frameworks. *Source: IMF staff report content provided in the PDF chapter "1atgea2023001 - 2022. The mission team comprised Varapat Chensavasdijai (head)".* ### 2022. The mission team comprised Varapat Chensavasdijai (head), ### 1atgea2023001 - 2022. The mission team comprised Varapat Chensavasdijai (head), ### CONTEXT - Over the past five years, Antigua and Barbuda was hit by a series of external shocks: Hurricane Irma in 2017 and the COVID-19 pandemic, which reduced per capita GDP in 2020 back to its 1985 level. - Even as the economy recovered in 2021, real per capita income as a share of U.S. per capita income continued declining; per capita income is expected to recover only gradually and will not reach pre-pandemic levels within the next five years, reflecting long-term scarring effects (see Box 1). - Antigua and Barbuda is highly exposed to natural disasters and climate change: - The ten major disasters during 1983-2017 affected around one-quarter of the population and, on average, caused damage of 22 percent of GDP. - Sea-level rise under IPCC RCP 4.5 scenario will affect at least 20 square kilometers of Antigua’s land mass and approximately 15 square kilometers for Barbuda by 2060 (around 8 percent of total land area), implying severe damage to critical infrastructure and coastal economic activities. - Political context: General elections are due in March 2023; the administration in power since 2014 controls 15 of 17 seats. Early elections could be called before March. ### SCARRING EFFECTS FROM THE PANDEMIC (Box 1) — key findings - Labor market disruptions, loss of tourism capital stock, and school closures may contribute to long-term scarring. - Selected indicators and impacts: - More than 20,000 room nights per month lost due to permanent closure of hotels. - Learning gaps in primary and secondary schools owing to protracted school closures. - Persistent labor market weakness in 2021 with continued year-on-year decline in total number of registered workers (2 percent) and number of employers (9 percent). - Employment in hospitality and wholesale and retail sectors at 80 and 85 percent of 2019 levels, respectively. - Lower average earnings across many sectors in 2021, including hospitality and self-employment. - Self-employed and younger workers hardest hit as shown by the number of social security contributors lost. ### HEADWINDS TO THE RECOVERY - Recovery dynamics: - A recovery began mid-2021 as COVID waned in key source countries and vaccination rates allowed relaxation of restrictions. - After a 20 percent decline in 2020, real GDP is estimated to have expanded by 5.3 percent in 2021, buoyed by partial recovery in tourism and construction. - Stayover arrivals for 2021 reached 56 percent of 2019 level; for January-September 2022 stayovers were 88 percent of pre-COVID levels; hotel occupancy rates returned to 2019 levels in mid-2022. - Stayover arrivals by source for Jan-Sep 2022: US 49.7 percent, Canada 5.1 percent, UK 30.9 percent, Caribbean 8.7 percent, Other 5.5 percent (shares of total arrivals). - Inflation and policy response: - CPI inflation was 1.2 percent at end-2021 (y-o-y) due to price controls on utilities, fuels, and public transportation. - Inflation accelerated to 8½ percent in 2022Q3 (core inflation at 7 percent) reflecting pass-through from higher global food and fuel prices. - Government introduced targeted fuel subsidies via a gas voucher program providing a 30 percent discount at the pump to the transport and fishing sectors (discount was 25 percent when introduced in March and increased to 30 percent in June); estimated cost of the program is 0.1 percent of GDP for 2022. - Taxes on flour were removed in September 2022 to contain bread price increases. - Fiscal developments and arrears: - The primary deficit narrowed by 2 percent of GDP in 2021 as pandemic-related spending wound down and revenues improved, but the outturn fell short of MTFS target by about 1 percent of GDP. - Deficit mainly financed by external sources, including Caribbean Development Bank and SDR drawdown; government sold 10 percent of its stake in a regional oil company (shareholding fell from 51 percent to 46 percent). - Excluding Paris Club, arrears to creditors declined by about 1¼ percent of GDP in 2021. - Public debt peaked at 102 percent of GDP at end-2021. - Total arrears to domestic and external creditors are estimated at 19 percent of GDP as of end-2021, with about one-third subject to reconciliation. - External sector: - Current account deficit narrowed to an estimated 15 percent of GDP in 2021 (from 18½ percent in 2020); deficit mainly financed by FDI. - Based on preliminary data and the EBA-Lite model, the current account gap was -2.6 percent of GDP in 2021 and the real effective exchange rate (REER) was overvalued by around 5.9 percent. - Reserve cover stood at 3.1 months of prospective imports, driven by a strong rebound in FDI inflows. - In 2022, the REER appreciated by 4 percent through September. - Financial sector: - Banks maintained capital and liquidity ratios well above regulatory minima and remained profitable; credit growth is weak. - Provisioning at banks reached 97.2 percent of NPLs at end-June 2022 (ECCB minimum is 60 percent; minimum provisioning ratio introduced in January 2022 will increase in steps to 100 percent by 2024). - Bank credit to private sector contracted due to project delays, supply disruptions, skilled labor shortages, competition from credit unions, and election-related uncertainty. - Credit unions are liquid and well-capitalized with adequate provisioning though NPLs have risen more recently. - Locally-owned banks’ sovereign exposure (loans and securities) was 103 percent of Tier-1 capital in June 2022 compared with 132 percent in December 2020. - Usage of ECCB’s digital currency (DCash) has been minimal since pilot launch in March 2021; system outage in early 2022 had limited impact but merchant adoption remains a challenge. - Energy pricing: - Retail gasoline prices were increased (by 24 percent) and now broadly reflect international market prices after many energy prices remained fixed since February 2016. ### OUTLOOK AND RISKS - Baseline projections: - Real GDP is projected to grow at 6 percent in 2022 and 5½ percent in 2023, returning gradually to pre-pandemic levels by 2025, supported by continued tourism recovery, FDI-financed hospitality investments, and public sector projects (including a port upgrade). - CPI inflation is forecasted to accelerate to 8½ percent in 2022 before moderating to 4½ percent in 2023. - The fiscal position is expected to improve in 2022 but gross financing needs and the public debt-to-GDP ratio remain elevated. - Key downside risks (tilted to the downside; see Annex II): - Continued commodity price shocks that entrench high inflation and dampen demand. - Growth slowdown in trading partners and/or renewed COVID-19 outbreaks and travel restrictions that could stall tourism recovery and deepen scarring. - Delays in implementing the government’s fiscal adjustment program leading to higher deficits, debt, and gross financing needs. - Tighter global financial conditions that strain public finances and lead to new arrears accumulation, especially given lack of access to concessional financing. - Further appreciation of the U.S. dollar that would weaken competitiveness through the currency peg, notably for tourism from non-U.S. markets. - A decline in citizenship-by-investment program (CIP) revenues due to increased scrutiny by the EU and U.S., hampering fiscal consolidation. - More frequent or intensive natural disasters due to climate change. - Upside risk: - A faster-than-expected recovery in tourism activity could boost growth. *Source: IMF staff report content provided in the PDF chapter "1atgea2023001 - 2022. The mission team comprised Varapat Chensavasdijai (head)," as supplied.* ### 12. The authorities agreed with staff’s macroeconomic projections and assessment of ### 12. The authorities agreed with staff’s macroeconomic projections and assessment of ### Macroeconomic assessment and risks - Authorities agreed with staff’s macroeconomic projections and assessment of risks. - Observed scarring effects of the pandemic on the labor market and hotel sector and long-term human capital implications due to school closures. - Strong recovery in tourism activity (including stayover arrivals and cruise visitors) and ongoing tourism projects expected to enable the sector to return to pre-pandemic levels by 2023. - Risks to the outlook are largely on the downside, including challenges in attracting foreign direct investment without tax concessions amid growing risks to investors from the pandemic, tighter global financial conditions, and frequent natural disasters. ### Near-term policy priorities - Improve social safety nets to protect the vulnerable. - Fully implement the MTFS to build fiscal buffers and bring down public debt. - Address long-standing arrears to suppliers and bilateral creditors. - Ensure sustainability of the pension system. - Strengthen financial system oversight, improve competitiveness, and invest in climate resilience. ### Returning to a sustainable fiscal position — key findings - Near-term fiscal policy should prioritize spending on social safety nets; expedite centralization and digitization of information and payment systems for social transfer programs. - Replace the temporary gas voucher program with a comprehensive, targeted system of social assistance—including cash transfers to lower-income households. - Government decision to allow pass-through of international fuel prices to domestic consumers is welcomed and should be maintained; consider adopting an automatic fuel pricing mechanism with full pass-through combined with targeted social protection. - Fiscal consolidation is proceeding but at a slower pace than envisaged in the original fiscal strategy (December 2020). - MTFS envisaged a primary surplus of ½ percent of GDP for 2022; revenue shortfalls are likely to imply a primary deficit of about ½ percent of GDP for 2022. - To return to the fiscal path envisaged in the MTFS will require additional measures of around 1¼ percent of GDP over the next three years. - More recently, the corporate income tax was amended to make permanent the windfall tax introduced in 2019. ### Revenue, expenditure, and reform options (exact figures preserved) - Tax exemptions increased from 41 percent of potential revenue in 2021 to 46 percent through August 2022 (equivalent to 4½ percent of GDP, of which discretionary exemptions accounted for 1½ percent of GDP). - Policy recommendations: - Limit tax exemptions to those specified in legislation with clear eligibility criteria, sunset clauses, and effective monitoring and evaluation; publish annual cost of each tax expenditure with the budget. - Harmonize ABST rate for tourism activities to the standard 15 percent and extend the ABST to online purchases of goods and services. - Introduce excise duties on alcohol and tobacco products. - Stricter controls on property tax and update property valuations for tax purposes. - Contain increases in public sector real wages and rely on worker attrition and redeployment to bring the wage bill below 9 percent of GDP by 2025. - Conduct a public sector employment census and skills database to inform a longer-term wage-bill strategy. - Tabled reform options and estimated fiscal yield (staff estimates): - Harmonizing the ABST rate for tourism activities (currently at 14 percent) to the standard 15 percent rate: 0.1 (Percent of GDP) - Regularly reassessing property values based on their market value for tax purposes: 0.1-0.3 (Percent of GDP) - Strengthening tax compliance including tax auditing and risk assessment functions: 0.5-0.9 (Percent of GDP) - Rationalizing transfers to SOEs and strengthening oversight of SOEs: 0.1-0.2 (Percent of GDP) - Total (cumulative over 2023-25): 0.8-1.5 (Percent of GDP) - Authorities are considering a waiver of unpaid property taxes for January 1, 2016 to December 31, 2021, conditional on paying 2022 obligations during January 1 and March 31, 2023. - Government’s plans to raise public wages to compensate for past increases in inflation would imply a 5-10 percent nominal increase over 2022-23. ### Debt, financing needs, arrears, and contingency planning - Continued fiscal consolidation is expected to bring debt to under 70 percent of GDP by 2030. - Gross financing needs would remain above 10 percent of GDP until 2025. - Staff assesses public debt to be unsustainable due to the large outstanding stock of arrears (not expected to be cleared within the current projection horizon) and high gross financing needs; risk of accumulation of new arrears if financing needs are not fully covered. - Need for lower fiscal deficit and new, preferably concessional, financing with long maturities. - Authorities are making efforts to issue long-term securities on domestic and external markets, including a recently placed bond in the European market, and are working with partners to issue a green bond in 2023. - Further progress in clearing arrears—including reconciliation, prioritization of arrears for clearance, and close engagement with creditors—will help credibility of fiscal discipline. - Arrears with statutory bodies (Social Security Board and Medical Benefits Scheme) should be resolved to alleviate cash flow constraints. - Contingency plan recommended for an adverse scenario (weaker growth, inability to meet fiscal targets, lack of investor appetite): - Implement all recommended fiscal measures more expeditiously, including further limiting tax exemptions and introducing new taxes. - Contain recurrent spending such as freezing public sector wages and rationalizing transfers to SOEs. - Tap more expensive external commercial financing sources to bridge financing shortfalls if necessary. ### Strengthening fiscal framework and public financial management - Recommend parliamentary endorsement of MTFS and Fiscal Resilience Guidelines to build political consensus. - Increase operational capacity of the Macro-Fiscal Unit and operationalize the Fiscal Resilience Oversight Committee (FROC) before year-end. - Approve regulations to operationalize the Climate Resilience and Development Fund (CRDF) (funded by the TAL) and enact amended Finance Administration Act. - Develop a public financial management action plan based on PEFA self-assessment; introduce system to measure financial performance of SOEs; finalize amendments to the Procurement Administration Act and accompanying regulations. - Operationalization of post-clearance audit and risk management at customs is welcome; further actions include implementing a single window system and extending forensic audits to other low compliance sectors. - Implement e-filing and e-payment of taxes in the coming year to enhance revenue mobilization and reduce compliance costs. ### Pension system sustainability — parametric reform (exact proposals) - Ongoing increases in legal retirement age, number of required work weeks, and contribution rates have helped, but contributions have fallen below the 2017 actuarial forecasts and the overall financial position of the pension system has weakened. - Additional transfers from central government helped cover cash flows but payments of old age pensions and other assistance were delayed. - Recommended parametric reforms: - Increase the retirement age to 64.5 years in 2024 (it will already rise to 65 years in 2025). - Gradually raise contribution rates (e.g., by 0.5 percent per year up to 17 and 18 percent for public and private sector employees, respectively). - Automatically adjust the retirement age in line with the increase in life expectancy at retirement. - Revise the pension system’s investment framework to address liquidity constraints and increase longer-term returns, including diversifying asset holdings away from long-term domestic government bonds and real estate. ### Authorities’ views (summary of positions) - Emphasized contributions of comprehensive social safety nets to protecting living standards. - Limited perceived risks to food security but concern about impact of global food and energy prices on domestic inflation. - Plan to continue adjusting fuel prices in line with international trends, set to meet monthly targets for consumption taxes and cover cost of temporary gas voucher program. - Progress on centralizing beneficiary registry; more capacity will be needed to manage the new system. - Agree additional measures are required to return to MTFS path; intend to streamline tax exemptions and consider new revenue measures such as excise taxes on alcohol and tobacco products. - Committed to containing public sector wage bill despite planned salary increases to offset rising living costs. - Progress in securing long-term financing and addressing arrears; intend to allocate portion of proceeds from forthcoming long-term bond issuances to settle arrears and plan to issue the first green bond in the ECCU. - Support advancing structural fiscal reforms: Macro-Fiscal Unit to monitor SOEs; CRDF regulations expected to be finalized by year-end; PEFA self-assessment completed; amendments to Finance Administration Act to be submitted for Cabinet approval by year-end with regulations effective by 2023; Procurement Administration Act amendments under review and expected by year-end; single window system at customs to be implemented with funding being sought; FROC to be operationalized in early 2023. - Agree further parametric pension reforms are necessary; once current reforms are completed in 2025, further reforms should be gradual and more automatic; plan to review investment strategy due to liquidity constraints and low returns. ### Reinforcing the financial system - Financial Services Regulatory Commission (FSRC) should remain vigilant to safeguard financial stability. - Credit unions’ loan loss provisioning is currently above prudential levels; given rapid mortgage lending expansion, intensify monitoring of asset quality and ensure loan loss provisioning is consistent with borrower fragilities. - FSRC should encourage better governance (including internal auditing) and risk management of credit unions and consider a shift to risk-weighting assets. - Strengthen crisis preparedness and incentivize resilience to climate-related shocks; enhance collaboration with the ECCB to accelerate a national crisis management plan covering banks and nonbanks in contingency scenarios. - FSRC has started collecting climate risk information from nonbanks and should leverage regional ECCB-led initiatives to incorporate climate risks into supervision, reporting, and regulatory frameworks, including stress tests for nonbanks. *Source: 1atgea2023001 - 12. The authorities agreed with staff’s macroeconomic projections and assessment of (PDF chapter).* ### 28. Reforms are needed to improve the access to credit. The regional credit bureau is ### 1atgea2023001 - 28. Reforms are needed to improve the access to credit. The regional credit bureau is ### Access to credit: findings and recommendations - Findings: - The regional credit bureau is expected to facilitate greater lending and enhance credit quality. - A recently launched regional partial credit guarantee scheme for micro-, small- and medium-sized enterprises has the potential to alleviate collateral constraints of borrowers. - Informal sector entrepreneurs are not fully covered; business registration and documentation requirements constrain access. - Insolvency law limitations and unclear creditor rights deter lending. - Policy recommendations: - Expand coverage of the regional partial credit guarantee scheme by bringing informal sector entrepreneurs into the business registry and simplifying documentation requirements for new startups. - Modernize the insolvency law to facilitate out-of-court settlement and clarify creditor rights to incentivize lending. - Consider additional loan guarantee programs to mitigate perceived risk of lending to small businesses. ### AML/CFT and Citizenship-by-Investment Program (CIP) risks - Findings: - Significant progress toward a risk-based AML/CFT supervisory framework applicable to all financial institutions and designated non-financial businesses and professions (including CIP agents). - Provision of beneficial ownership information and multiple layers in the due diligence process for screening CIP applicants exist. - Uptick in NPLs of credit unions following the expiration of loan moratoria; viewed by authorities as presenting limited risks but under close monitoring. - Policy recommendations: - Continue strengthening the CIP legislative framework and codify comprehensive guidelines for CIP agents into legislation. - Maintain active communication with counterparts in the EU, U.S., and other regional CIPs to keep partners informed and share best practices. - Strengthen coordination with the ECCB in AML/CFT supervision and address Caribbean Financial Action Task Force recommendations. - Formulate a national crisis management plan in collaboration with the ECCB. ### Authorities’ views (relevant excerpts) - Authorities remain committed to safeguarding financial stability and strengthening AML/CFT and CIP frameworks. - Authorities highlighted structural challenges facing credit unions: lack of internal audit function and exclusion from the payment system. - Authorities are maintaining constant contact with U.S. and EU regulators to alleviate security concerns about the CIP. - Authorities agree that the regional credit bureau and regional partial credit guarantee scheme are expected to improve firms’ access to finance by enhancing credit quality, accelerating lending processes, and alleviating collateral constraints. ### Enhancing competitiveness and green recovery: key points - LIAT restructuring: - LIAT is under administration, operating limited services, creating intra-regional transportation bottlenecks. - New company expected to be managed by a private investor in 2023 with additional investment to expand operations; government support has been limited to paying severance. - Recommendation: Conclude LIAT’s reorganization and focus on improving overall profitability. - Labor market: - Pandemic caused sizable employment decline for the self-employed and younger workers; formal work arrangements declined and education outcomes worsened. - Policy recommendations: prioritize increased training, vocational education, skills certification, job search assistance, and support to small businesses. - Climate resilience: - The annual loss caused by natural disasters for Antigua and Barbuda is around 4.2 percent of GDP. - Much current infrastructure is not resilient; natural disasters expected to become more intense and frequent due to climate change. - Staff analysis: an investment in resilient infrastructure of 3 percent of GDP per annum would create a long-run output gain of up to 13 percent of GDP. - Authorities actions: partnerships with private climate funds and organizations for grant financing; National Adaptation Plan expected to be completed by June 2023; Sustainable Island Resource Framework Fund established; development of a risk map and an early warning system; enrollment in the Caribbean Catastrophe Risk Insurance Facility (CCRIF); capitalizing the CRDF in a timely manner. - Recommendation: increase financial resilience by shielding public finances against large contingent needs from severe natural disasters; ensure transparency, oversight, and accountability in climate financing. - Renewable energy transition: - Electricity tariffs are among the highest in the Caribbean. - Solar generation capacity is around 15 percent of total electricity generation, below the goal of having 86 percent of electricity generated from renewables by 2030. - Authorities promoting renewables in schools and public buildings and encouraging distributed renewable energy (e.g., rooftop solar). - Recommendation: adopt a phased approach with careful consideration of financing instruments and implications for stranded assets in carbon-intensive generation. - Green and blue finance: - Planned issuance of a green bond to ease financing constraints. - Potential benefit from World Bank’s Catastrophe Deferred Drawdown Option (CAT DDO). - Scope to raise blue financing from multilaterals and NGOs aligned with the Maritime Economy Plan. ### Data issues - Findings: - Progress in data quality, aided by IMF and donor capacity development. - Work underway: new Producer Price Index, rental component for Consumer Price Index, improvements in national accounts and external sector statistics. - Key shortcoming: need to publish timely reports on central government and SOEs’ operations. ### Staff appraisal: macro-fiscal and financial stability priorities - Economic outlook and risks: - Economy recovering, supported by tourism and construction; output expected to return gradually to pre-pandemic levels by 2025 reflecting scarring effects from the pandemic. - Higher food and fuel prices driving up inflation, eroding real incomes, and exacerbating fiscal and external imbalances. - External position in 2021 weaker than implied by medium-term fundamentals and desirable policies. - Large downside risks include further commodity price shocks, global growth slowdown, tighter global financial conditions, lower CIP revenues, and natural disasters. - Fiscal policy recommendations: - Near-term focus on protecting the vulnerable against rising living costs. - Implement a clear coordination framework among entities responsible for social safety net programs; allocate sufficient resources for centralized beneficiary registry completion and maintenance. - Introduce an automatic fuel pricing mechanism with full pass-through of international prices, paired with targeted social protection programs to move away from generalized subsidies. - Additional revenue mobilization needed to achieve Medium-Term Fiscal Strategy targets: limit tax exemptions, introduce new tax measures, contain the wage bill. - Undertake a public sector employment census and skills database to address the wage bill. - Debt and arrears: - Secure long-term financing, extend debt maturity profile domestically and externally to reduce rollover risks. - Engage with creditors to clear remaining arrears and avoid new arrears. - Institutional and structural reforms: - Consider legislating the MTFS and Fiscal Resilience Guidelines to build political consensus. - Operationalize the Climate Resilience and Development Fund, Fiscal Resilience Oversight Committee, and single window system at customs. - Implement e-filing and e-payment of taxes; implement amended Finance Administration Act and Procurement Administration Act. - Introduce performance report card system for SOEs and develop a public financial management action plan based on the recent PEFA self-assessment. - Pensions: - Reforms needed for long-term sustainability: gradual increases in contribution rate, automatic adjustments to retirement age in line with increases in life expectancy at retirement, and a revamped investment strategy to address liquidity constraints and increase longer-term returns. - Financial stability: - Monitor asset quality and provisioning buffers of financial institutions closely. - Formulate a national crisis management plan with the ECCB. - Continue initiatives to strengthen AML/CFT and CIP frameworks to protect correspondent banking relationships and CIP integrity. - Complementary measures to support recovery: - Increase role of regional credit bureau and partial credit guarantee scheme in improving credit quality, accelerating lending, and alleviating collateral constraints. - Modernize insolvency law to incentivize lending. - Labor market policies should emphasize training, vocational education, skills certification, and job search assistance to reintegrate workers into the labor force. - Leverage donor and international financing for climate resilience; shift to renewables with private sector financing to reduce energy costs and improve competitiveness. *International Monetary Fund, Antigua and Barbuda staff report (excerpts).* ### 49. It is recommended that the next Article IV consultation with Antigua and Barbuda take ### It is recommended that the next Article IV consultation with Antigua and Barbuda take place on the standard 12-month cycle. ### Economic developments - The economy is steadily recovering from the pandemic shock, supported by the return in tourist arrivals. - The nascent recovery is broad-based despite credit to the private sector remaining weak. - FDI inflows, mainly to the hospitality sector, have picked up strongly. - The pass-through from rising international commodity prices is raising inflation. - Sources for charts and staff calculations: Country authorities, ECCB, and IMF staff calculations. ### Fiscal sector developments and financing needs - The fiscal balance improved due to both revenue and expenditure measures. - Revenues were supported by domestic taxes (VAT and stamp duties), while trade taxes and CIP inflows fell. - Scaling down of pandemic-related spending contributed to lower recurrent primary spending. - The wage bill remained stable in nominal terms owing to the real wage freeze. - The fiscal deficit in 2021 was financed mainly by external sources, including from the SDR allocation. - Public debt has stabilized on account of rising nominal GDP despite the fiscal balance remaining in deficit. - Table 2: Gross financing needs (Millions of Eastern Caribbean dollars) - Total Gross Financing Needs: 724 751 680 807 592 572 566 580 - Deficit Financing: 235 189 124 169 63 31 26 28 - Central Government External Amortization: 264 273 282 410 296 319 359 391 - Central Government Domestic Amortization: 224 289 275 228 233 221 181 161 - Financing Sources total: 682 751 460 376 302 280 281 282 - External financing (row entry): 279 412 277 190 162 154 153 153 - Domestic financing (row entry): 271 299 212 212 128 128 128 128 - Change in Arrears (row entry): 15 12 1 -30 -26 12 -20 0 - Financing Gap (note): "......220431290292284298" (as presented) - Note: In 2021, the government sale of 10 percent of its equity stake in the state oil company (WIOC) is reflected in the Central Government Sale/Purchase of Domestic Assets. Financing gaps are assumed to be filled by unidentified long-term financing sources. ### External sector developments and balance of payments highlights - Current account deficit stabilized in 2021, with an improvement in the services balance reflecting a rebound of tourist arrivals. - The pick-up in import growth was broad-based. The current account deficit continued to be financed mostly by FDI. - Reserve coverage remained broadly stable. The real effective exchange rate appreciated in 2022 reflecting the stronger U.S. dollar. - Selected Balance of Payments figures (Million of US Dollars; projections) - Current Account: -118.0 -233.7 -126.9 -251.6 -220.9 -343.6 -263.3 -269.0 -267.4 -263.4 -266.4 - Trade balance: -456.7 -579.8 -576.7 -402.1 -495.3 -673.6 -699.4 -753.8 -791.3 -824.3 -861.7 - Exports (f.o.b.): 37.2 43.0 50.1 34.4 36.6 39.1 42.2 46.8 50.2 53.5 56.6 - Imports (f.o.b.): 493.9 622.7 626.8 436.6 531.8 712.7 741.6 800.6 841.5 877.9 918.3 - Non-factor services balance: 474.6 484.8 592.6 255.3 376.0 439.2 544.1 677.0 730.0 778.8 823.9 - Gross tourist receipts (row entry): 736.7 776.0 903.6 411.8 546.1 768.0 858.4 903.6 966.8 1,034.5 1,106.9 - Current transfers (net): -59.9 -58.5 -53.9 -61.4 -53.4 -45.8 -42.6 -57.9 -61.4 -64.3 -67.4 - Capital and Financial Account: 101.2 187.4 162.0 223.4 220.9 343.6 263.3 269.0 267.4 263.4 266.4 - Financial Account (net): -67.6 -164.1 -131.6 -194.9 -183.3 -288.8 -213.3 -220.1 -227.8 -224.3 -226.3 - Foreign direct investment (net): -139.6 -205.9 -128.3 -81.7 -178.8 -219.0 -188.6 -217.7 -216.9 -216.3 -215.7 - Overall Balance: -35.4 -7.9 -70.7 -96.9 63.6 15.8 64.8 69.3 50.7 29.4 20.0 - Net imputed international reserves (US$ million): 313.5 328.5 278.9 221.7 323.8 353.8 418.9 486.3 528.4 547.8 553.4 - Net imputed international reserves (in months of prospective imports): 3.3 3.3 4.5 3.1 3.1 3.3 4.0 4.4 4.6 4.5 4.2 - GDP at market prices (US$ million): 1,468 1,606 1,688 1,370 1,471 1,692 1,867 2,014 2,137 2,239 2,345 - Memorandum items: - Current account (percent of GDP): -8.0 -14.5 -7.5 -18.4 -15.0 -20.3 -14.1 -13.4 -12.5 -11.8 -11.4 - Gross tourist receipts (percent of GDP): 50.2 48.3 53.5 30.1 37.1 45.4 46.0 44.9 45.2 46.2 47.2 - External public sector debt service (in percent of exports of goods and services): 5.2 5.1 4.6 17.3 13.9 10.9 14.3 10.7 11.0 11.7 12.0 - Foreign direct investment (net, percent of GDP): 9.5 12.8 7.6 6.0 12.2 12.9 10.1 10.8 10.2 9.7 9.2 ### Banking system and financial sector - NPLs have been stable but remain higher than the regulatory target. - Commercial banks remain well-capitalized. - Credit to the private sector contracted recently even as deposits continued to grow. - Liquidity improved but remained below pre-pandemic levels. - Net foreign assets showed an upward trend reflecting investment in overseas assets. - Financial sector policy implementation status (Annex I): - Monitor asset quality, facilitate resolution of NPLs, and formalize national crisis management plan: Limited progress. NPLs reduced through loan restructuring and provisioning; no progress in modernizing insolvency law or developing national crisis management plan. - Enhance effectiveness of AML/CFT framework: Ongoing. A risk-based approach to AML/CFT supervision is under development; legislative amendments require beneficial ownership information to be submitted to the company registry. ### Implementation of past Fund policy advice (Annex I) - Fiscal policy recommendations (implementation status): - Fully implement Medium-Term Fiscal Strategy by broadening tax base and containing spending; introduce additional revenue measures; secure long-term financing: Ongoing. Tourism Accommodation Levy introduced; property tax net expanded; primary spending contained via cuts in public investment; tax exemptions have increased; fiscal targets missed; efforts to issue long-term securities ongoing. - Develop longer-term comprehensive public sector wage strategy: Partial. Wage bill expected to be contained despite planned wage increases; public sector employment census and skills database delayed. - Put in place concrete plan to clear arrears and avoid new arrears: Ongoing. Progress on arrears to commercial banks and large domestic creditors; authorities committed to reducing 15 percent of stock of arrears to domestic suppliers annually. - Improve governance and efficiency of SOEs via financial report card system and enforce reporting: Limited progress. Report card system not developed; Macro-Fiscal Unit will assume monitoring; sanctions for non-compliant SOEs to be embedded in amended Finance Administration Act. - Strengthen public financial management (PFM) framework, including PEFA self-assessment: Ongoing. PEFA self-assessment completed; results to inform action plan and Finance Administration Act amendments. - Strengthen revenue administration (tax compliance and collecting arrears): Ongoing. Post-clearance audit and risk management at customs operational; Inland Revenue conducting forensic audits in low compliance sectors and collecting tax arrears. - Structural reform recommendations (implementation status): - Implement single window system at customs and electronic filing/payment of taxes: Ongoing. Progress towards operationalizing single window and e-filing/e-payment; non-intrusive detection systems installed; customs procedures and tariffs available online. - Develop comprehensive climate resilience strategy and invest in renewable energy: Ongoing. National Adaptation Plan expected by mid-2023; new National Energy Policy being finalized; donor partnerships support grant-financed climate adaptation projects; risk map and early warning system under development; transition to renewables needs acceleration. - Data issues: - Improve quality and timeliness of data: Ongoing. Progress on new Producer Price Index, rental component for CPI, and national accounts and external sector statistics; limited progress on reporting of SOE operations. ### Risk Assessment Matrix — key risks, likelihood, expected impact, and policy responses (Annex II) - Conjunctural risks - Intensifying spillovers from Russia’s war on Ukraine - Relative Likelihood: High - Expected Impact: High. Inflation rises, eroding income, and dampening demand. - Policy Response: Provide targeted transfers to the vulnerable. Expeditiously improve coverage and targeting of social safety nets. Accelerate shift to renewables. - Commodity price shocks - Relative Likelihood: High - Expected Impact: High. Inflation rises, eroding income, dampening demand, and widening fiscal and trade deficits. - Policy Response: Provide targeted transfers to the vulnerable. Continue to pass through global prices and phase out generalized subsidies. Expeditiously improve coverage and targeting of social safety nets. Accelerate shift to renewables. - De-anchoring of inflation expectations and stagflation - Relative Likelihood: Medium - Expected Impact: High. Wage pressures intensify; tourism recovery stalled; fiscal and external positions worsen. - Policy Response: Contain increases in public real wages and rely on attrition policy. Implement structural reforms to improve competitiveness. - Abrupt global slowdown or recession - Relative Likelihood: Medium - Expected Impact: High. Economic recovery stalled; fiscal and external positions worsen; real exchange rate appreciation given U.S. dollar peg; higher borrowing costs add fiscal strains. - Policy Response: Strengthen fiscal framework to rebuild buffers and communicate credible medium-term fiscal plan. Implement structural reforms to improve competitiveness. Intensify monitoring of financial institutions. - Local COVID-19 outbreaks from vaccine-resistant variants - Relative Likelihood: Medium - Expected Impact: High. Tourism recovery stalled; domestic activity disrupted; deeper scarring; fiscal and external positions worsen. - Policy Response: Ensure adequate access to essential items. Extend targeted pandemic relief to support the vulnerable and prioritize health spending. Adopt credible medium-term plan to preserve fiscal sustainability. - Structural risks - More frequent natural disasters related to climate change - Relative Likelihood: Medium - Expected Impact: High. Reduce growth and worsen fiscal and external positions. - Policy Response: Design rule-based fiscal framework that internalizes exposure to natural disasters. Implement national adaptation plan, invest in structural and financial resilience, and arrange appropriate ex ante financing. - Cyberattacks on critical physical or digital infrastructure (including digital currency platforms) - Relative Likelihood: Medium - Expected Impact: Low. Payment and financial systems disrupted, hurting confidence. - Policy Response: Prepare crisis management plan. Strengthen financial regulation and supervision. Pursue a prudent approach to financial innovation. - CIP program scrutiny and phase-out - Relative Likelihood: Medium - Expected Impact: Medium. Worsen fiscal and external positions. - Policy Response: Enhance oversight and transparency of CIP program. Collaborate with EU and U.S. counterparts to address concerns. - High NPLs and market risk in indigenous banks and non-banks - Relative Likelihood: Medium - Expected Impact: Medium. Financial sector instability disrupts economic activity. - Policy Response: Monitor asset quality and ensure adequate loan loss provisioning. Enhance regulatory and supervisory frameworks for non-banks. - Loss of correspondent banking relationships - Relative Likelihood: Medium - Expected Impact: Low. Cross-border payment fees rise, increasing business costs. - Policy Response: Strengthen compliance with AML/CFT and tax transparency standards. *Source: IMF staff report content as provided in the supplied document.* ### Annex III. External Sector Assessment ### Annex III. External Sector Assessment ### Overall assessment and policy implications - Overall Assessment: Based on preliminary data and EBA-lite model results, the external position of Antigua and Barbuda in 2021 was weaker than the level implied by fundamentals and desirable policies. - Potential Policy Responses: - Near-term policies should continue to support the recovery and limit the impact of rising living costs on the vulnerable. - As the recovery takes hold, steadfast commitment to sustain fiscal consolidation efforts would be essential to ensure debt sustainability. - External sustainability is not a major concern, as external liabilities are mostly attributed to FDI inflows. - Structural reforms aimed at addressing intra-regional transportation bottlenecks, enhancing the labor market, and building climate resilience can help improve competitiveness and strengthen the external position. ### Foreign assets and liabilities: position and trajectory - Background: - The net IIP declined relative to GDP between 2015 and 2020, a trend that was reversed in 2021, with the net IIP rising to -104 percent of GDP in 2021 from -110 percent in 2020, mainly driven by reserve assets. - On the asset side, other investment, portfolio, and FDI assets were 42, 1 4, and 12 percent of GDP respectively in 2021. - On the liability side, FDI was the largest component (103 percent of GDP), followed by other investment (87 percent of GDP). - The negative IIP continued to reflect mainly large FDI liabilities. - Assessment: - The large and growing FDI stock being the main driver of the net IIP substantially mitigates potential risks. - The impact of Russia’s invasion of Ukraine is expected to adversely affect the net IIP through temporarily larger current account deficits, but without causing a concern for external debt sustainability. - 2021 (% GDP) key figures: - NIIP: -103.7 - Gross Assets: 89.9 - Debt Assets: 50.9 - Gross Liab.: -193.7 - Debt Liab.: -87.1 ### Current account: developments and outlook - Background: - The current account deficit shrank from 18.4 percent of GDP in 2020 to 15 percent in 2021, reflecting the tourism recovery. - Travel receipts had a strong rebound (from 49 percent of the 2019 level in 2020 to 62 percent in 2021). - On the back of tourism rebound and robust FDI, imports as a share of GDP are close to the pre-pandemic level. - Other current account components were broadly stable, with one exception being investment income payment, which has not recovered from its sharp contraction in 2020. - The current account deficit is expected to widen again in 2022, due to Russia’s invasion of Ukraine and high import costs, before declining steadily over time. - Tourism receipts will return to the 2019 level only in 2024, and imports will remain buoyant due to robust FDI inflows. - The trajectory of current account deficit will be sensitive to the speed of tourism recovery and progress of ongoing mega hotel projects. - Assessment: - The EBA-lite CA model suggests a current account gap of -2.6 percent of GDP in 2021, implying that the current account deficit is higher than the desirable medium-term level. - The model estimates a multilaterally-consistent cyclically adjusted CA norm at -5.8 percent of GDP. - The CA model is preferred over the REER model and the ES model in assessing the CA gap for Antigua and Barbuda, given the better historical performance. ### EBA-lite results, 2021 (as presented in source) - CA-Actual-15.0 - Cyclical contributions (from model) (-) 0.9 - COVID-19 adjustor (-) 2/-5.4 - Additional temporary/statistical factors (-) 3/-1.9 - Natural disasters and conflicts (-) -0.2 - Adjusted CA -8.4 - CA Norm (from model) 4/ -5.8 - Adjustments to the norm (-) 0.0 - Adjusted CA Norm -5.8 - CA Gap -2.6 - -5.4 o/w Relative policy gap 1.2 - Elasticity -0.44 - REER Gap (in percent) 5.9 12.3 - 1/ Based on the EBA-lite 3.0 methodology. - 4/ Cyclically adjusted, including multilateral consistency adjustments. - 3/ FDI in 2021 exceeded the pre-pandemic projection by 4.5 percent of GDP, which is estimated to increase the CA deficit by 1.9 percent of GDP. - 2/ Additional cyclical adjustment to account for the temporary impact of the pandemic on tourism. ### Real effective exchange rate (REER) - Background: - The REER depreciated by 3.5 percent in December 2021 relative to December 2020, driven mainly by inflation differential relative to major trading partners. - The REER appreciated significantly in late 2014, comoving with the U.S. dollar, but has depreciated by 7.7 percent between 2016 and 2021. - Assessment: - The EBA-Lite Index-REER model suggests an overvaluation of 12.3 percent. - However, it does not have sufficient granularity to capture the determinants of Antigua and Barbuda’s currency fluctuations. - The exchange rate gap is better evaluated based on the gap from the CA model. - Based on the staff-estimated elasticity of CA to REER of -0.44, the REER is overvalued by 5.9 percent. ### Capital and financial accounts - Background: - As a small country with limited domestic resources, Antigua and Barbuda has heavily relied on FDI to develop the tourism sector. - Assessment: - Financial account inflows mainly consist of equity financing, especially FDI, which limits the risk of capital flow reversal in the face of tightening global financial conditions. - Capital account inflows primarily derive from the Citizenship-by-Investment Program, which remains relatively small. ### Reserves level and adequacy - Background: - Net imputed international reserves rebounded significantly in 2021, on the back of tourism recovery and robust FDI inflows. - It was in line with the increase in imports of goods and services that are projected for the following year (i.e., the prospective imports of goods and services), resulting in a stable ratio between the two. - Assessment: - Net imputed international reserves in 2021 corresponded to 3.1 months of prospective imports and 21.8 percent of broad money, compared with ECCB benchmarks of 3 months of imports and 20 percent of broad money. - Notes: - Imputed reserves are calculated for each member country of the ECCU as the difference between the country’s reserve money (currency issued in the country) and net domestic assets (net claims of the ECCB on the government and the country’s commercial banks). - Data gaps for short-term debt and other liabilities preclude reserve adequacy assessments based on the IMF’s ARA EM metric. *Source: Annex III. External Sector Assessment (from the supplied IMF content).* ### 22. Public debt is unsustainable given the large outstanding stock of arrears (which are ### 1atgea2023001 - 22. Public debt is unsustainable given the large outstanding stock of arrears (which are ### Debt sustainability assessment — core finding - Public debt is unsustainable given the large outstanding stock of arrears (which are not expected to be cleared within the current projection horizon). - High gross financing needs, which if not fully covered will likely lead to the accumulation of new arrears over the medium term. - The debt-to-GDP ratio and gross financing needs decline markedly over the projection horizon, conditional on steady implementation of the fiscal adjustment plan and robust growth. - Restoring debt sustainability is predicated on definitively resolving the large arrears with domestic and external creditors. - Debt service obligations and arrears clearance with Paris Club creditors will further raise financing needs, which are not reflected in the DSA baseline. - Securing long-term financing currently under negotiations, including the authorities’ first internationally tradable bond and a green bond, will: - effectively extend the maturity profile of their commercial debt, - greatly reduce rollover risk and medium-term gross financing needs, - create fiscal room for green capital investments. - The debt trajectory remains vulnerable to shocks, including: - lower growth, - reduction in CIP revenues, - natural disasters, - contingent liabilities. - This highlights the need for strong commitment to the fiscal consolidation plan. ### Baseline scenario and key DSA figures (as reported) - Projection horizon years explicitly shown: 2020, 2021, 2022, 2023, 2024, 2025, 2026, 2027. - Nominal gross public debt (Percent of GDP): 91.4, 101.5, 102.4, 91.3, 85.7, 80.2, 75.8, 71.8, 68.6 (table shows a multi-year sequence starting 2020 through 2027). - Public gross financing needs (Percent of GDP): 10.2, 20.3, 19.4, 14.9, 16.0, 10.9, 9.9, 9.3, 9.0 (sequence across projection years). - Real GDP growth (in percent): 3.2, -20.2, 5.3, 6.0, 5.6, 5.4, 4.0, 2.7, 2.7 (annual series). - Inflation (GDP deflator, in percent): 1.2, 1.7, 2.0, 8.5, 4.5, 2.4, 2.0, 2.0, 2.0 (annual series). - Nominal GDP growth (in percent): 4.4, -18.8, 7.4, 15.0, 10.3, 7.9, 6.1, 4.8, 4.8 (annual series). - Effective interest rate (in percent): 2.9, 1.9, 2.9, 3.0, 3.4, 3.8, 3.9, 4.0, 4.2 (annual series). - Change in gross public sector debt (cumulative, percent of GDP): -0.9, 20.2, 0.9, -11.0, -5.6, -5.5, -4.4, -3.9, -3.2, -33.7 (table shows cumulative through projection horizon). - Identified debt-creating flows (cumulative): -0.9, 25.4, -1.8, -10.3, -4.8, -4.7, -3.7, -2.6, -2.4, -28.6. - Primary deficit (Percent of GDP, annual line items): 0.5, 4.7, 2.4, 0.4, 0.9, -1.5, -2.0, -2.1, -2.1, -6.4 (series across years, cumulative column present). - Primary (noninterest) revenue and grants (Percent of GDP): 20.8, 20.4, 20.6, 20.9, 20.2, 21.2, 20.9, 20.8, 20.8, 124.9 (annual series and cumulative). - Primary (noninterest) expenditure (Percent of GDP): 21.3, 25.1, 22.9, 21.3, 21.0, 19.8, 18.9, 18.7, 18.7, 118.5 (annual series and cumulative). - Automatic debt dynamics contribution (cumulative): -1.4, 20.7, -4.2, -10.6, -5.7, -3.3, -1.7, -0.6, -0.4, -22.2. - Real interest rate contribution (selected values shown): 1.4, 0.5, 0.7, -5.3, -1.0, 1.0, 1.4, 1.4, 1.5, -1.1. - Real GDP growth contribution (selected values shown): -2.8, 20.2, -5.0, -5.4, -4.7, -4.3, -3.0, -2.0, -1.8, -21.2. - Residual, including asset changes (cumulative): 0.0, -5.2, 2.7, -0.8, -0.8, -0.8, -0.7, -1.3, -0.8, -5.1. - Debt-stabilizing primary balance: -0.4 (balance primary indicated as -0.4). ### DSA risk assessment and stress-test highlights - Heat map and risk-assessment benchmarks referenced (benchmarks include 70% debt burden, 15% gross financing needs benchmark, and various numeric thresholds used for stress tests). - Specified stress-test parameters and benchmarks include: - Bond spread shocks of 200 and 600 basis points. - External financing requirement shocks of 5 and 15 percent of GDP. - Change in the share of short-term debt shocks of 0.5 and 1 percent. - Public debt held by non-residents shocks of 15 and 45 percent. - Share of foreign-currency denominated debt shocks of 20 and 60 percent. - Figures present alternative scenarios: - Baseline underlying assumptions (selected values): Real GDP growth 6.0, 5.6, 5.4, 4.0, 2.7, 2.7 across 2022–2027; Inflation 8.5, 4.5, 2.4, 2.0, 2.0, 2.0; Primary Balance -0.4, -0.9, 1.5, 2.0, 2.1, 2.1; Effective interest rate 3.0, 3.5, 3.8, 3.9, 4.0, 4.3 (by year). - Historical scenario (selected values): Real GDP growth 6.0, 1.6, 1.6, 1.6, 1.6, 1.6; Inflation 8.5, 4.5, 2.4, 2.0, 2.0, 2.0; Primary Balance -0.4, -1.0, -1.0, -1.0, -1.0, -1.0; Effective interest rate 3.0, 3.5, 4.1, 4.3, 4.6, 5.0. - Constant Primary Balance scenario: Primary Balance stays at -0.4 across 2022–2027; Real GDP growth and Inflation follow baseline. - Stress tests shown include: - Primary Balance Shock scenario (Primary Balance moves to more negative values in early years). - Real GDP Growth Shock scenario (Real GDP growth falls to -2.3 and -2.5 in early years under shock). - Real Interest Rate Shock scenario (Effective interest rate increases, e.g., to 4.8, 5.1, 5.6, 6.1 in some years). - Real Exchange Rate Shock scenario. - Combined Macro-Fiscal Shock and Contingent Liability Shock (Primary balance falls to -10.9 in one contingent liability shock year). - Natural Disaster Shock and Additional Stress Tests reported in figures. - Under several stress scenarios, gross nominal public debt (in percent of GDP and in percent of revenue) and public gross financing needs increase materially relative to baseline (figures display large upticks under combined and contingent shocks). ### Labor market annex — pandemic impact (selected findings) - The pandemic’s impact persisted into 2021 despite output growth rebound; job loss intensified while average earnings improved year-on-year with significant heterogeneity by industry. - Self-employment and hospitality sectors were particularly hard hit in employment and earnings. - Male employment suffered more than female employment, partly due to over-representation of male workers among the self-employed. - Policy design recommendation: target support to the most affected groups such as the self-employed, young workers, and workers in the hospitality industry. - Pre-pandemic labor market structure (2019): - The public and hospitality sectors each contributed to one-fifth of total registered employment. - Trade activities employed an additional 13 percent of the registered labor force. - Registered jobs grew by 9 percent between 2016 and 2019. - Employment composition and demographics: - Sole proprietorships are prevalent; over 40 percent of employers are self-employed sole proprietors. - Men are a significantly larger proportion of the self-employed while women are more represented in private and public sector employment. - The self-employed are more likely to be older workers, 40–60 years of age. - Earnings (2019 and 2016–19 growth): - Average reported earnings in 2019 were highest in finance, transportation, utility companies, and arts and entertainment. - Average public sector earnings were comparable with average private sector earnings. - Cumulative average earnings growth over 2016-19 was 2 percent; average inflation in the same period was 4.6 percent. - Earnings in hospitality and communication declined over 2016-19; utilities, manufacturing, and transportation earnings did not keep pace with inflation. - COVID labor market effects: - In 2020 the economy contracted by an estimated 20 percent while registered employment fell by 9 percent. - The largest employment contractions occurred in manufacturing, construction, trade, hospitality, communication, and self-employment. - In 2021 registered employment fell further to 90 percent of the pre-pandemic peak in 2019. - Hospitality employment fell 9 percent year-on-year in 2021 and self-employment contracted by 14 percent in the second year of the pandemic. - The number of employers fell between 2019 and 2021 across sectors; notable shifts in employees per employer occurred in utilities and administrative employers. *Source: IMF staff.* ### 6. Persistent labor market decline ### 6. Persistent labor market decline ### Labor market trends and overall findings - Benefits from the nascent economic recovery are not reaching the labor force. - The labor market followed a negative trajectory between 2020 and 2021 that may reflect: - a strong first quarter of 2020, prior to the introduction of COVID restrictions; and - businesses retaining workers in early stages of the pandemic but retrenching as the pandemic persisted. - The number of public sector workers declined by nearly 5 percent y-o-y in 2020 and recorded a further decline of 14 percent in 2021. ### Sectoral sources of job growth and losses - Sources of job growth during the pandemic years were limited: - Professional employment increased by 5 percent y-o-y in 2020 and by 6 percent y-o-y in 2021, but represents a small portion of overall employment. - Finance sector employment rebounded in 2021 relative to pre-pandemic levels due to a smaller pandemic shock in 2021 and the sector’s amenability to teleworking. - Construction showed a strong rebound in jobs in 2021, but overall employment in construction remained well below pre-pandemic levels owing to a more severe contraction in 2020. - Less contact-intensive industries were less impacted and more amenable to teleworking, aligning with observed sectoral employment patterns. ### Earnings and wage dynamics - The pandemic contributed to earnings decline in many sectors with limited reversal in 2021. - Self-employment income recorded further losses in 2021 following substantial losses in 2020. - Wages in the hospitality sector showed some signs of recovery in 2021 but remained 7 percent below their pre-pandemic level. - Some sectors (construction, communication, and professional employment) recorded higher average wages during the first year of the pandemic when employment numbers were declining, indicating labor supply bottlenecks in these markets; wages in these sectors continued to rise in 2021. - Administrative workers and trade workers recorded earnings increases in 2021 relative to pre-pandemic levels. ### Distributional impacts by gender, employment type, and age - Employment decline was larger among men, who are more likely to be self-employed. - Reduction in active contributors to the social security system worsened between 2020 and 2021 across all employee categories with no large asymmetries by gender among public and private sector workers. - In self-employment, men suffered larger employment losses relative to women. - Youngest labor market participants were the hardest hit; older public sector workers were the least likely to stop contributing to social security. - The loss of young contributors to the social security system may have far-reaching impacts on the sustainability of the system if the trend is not reversed. ### Policy recommendations - Adopt a labor-centered approach in economic recovery plans that includes: - Skills enhancement to compensate for lost human capital due to prolonged separation from the labor market. - Comprehensive assistance with job search, particularly targeted at the youth. - Greater support for small businesses and sole proprietorships that have suffered disproportionately from the pandemic. - Expand access to vocational skills training and continuing education to assist labor market entry and transitions for new and separated workers. - Channel more resources towards improving skills certification to allow domestic workers greater access to the regional CARICOM labor market. - Tailor business support to improve productivity and address weak earnings in self-employment through greater credit, training, and improvement of digital capacity. - Support labor market recovery to prevent greater transition into informality, which would compromise labor force productivity, weaken economic growth, reduce the government’s revenue base, and threaten the sustainability of the social security system. ### Data and institutional recommendations - Improve data collection to permit design of more effective labor market and social protection policies: - Social security data pertain only to formal, registered workers who are actively contributing and thus provide a partial account of labor market developments. - Vulnerable populations tend to be unregistered, informal workers; a more comprehensive accounting of labor force data would aid policy design. - Engage with technical assistance partners to improve collection of labor market statistics, including labor force participation and unemployment rates, to shed greater light on the overall health of the labor market and areas for improvement. *Source: 1atgea2023001 - 6. Persistent labor market decline* ### 2. Extreme climate events are expected to occur more frequently due to climate change. ### 1atgea2023001 - 2. Extreme climate events are expected to occur more frequently due to climate change. ### Increasing frequency and intensity of extreme events - Historical and projected changes: - Only nine Category 4 and two Category 5 hurricanes have been recorded since 1850, with eight of them occurring since 1995. - Antigua and Barbuda Adaptation Communication (November 2021) projects the frequency of Category 4 and 5 hurricanes will increase by 80 percent over the next 80 years. - Stronger storms with maximum wind speed increases of 2 to 11 percent can be expected. - The RCP 4.5 scenario predicts nine drought years during 2040–69, which represents an 8 percent increase in drought severity to 23 percent. - Sectoral exposure: - Sea-level rise can significantly erode land mass and presents a grave threat to the tourism sector, whose activities concentrate in coastal areas. - Climate change risks identified include accelerated coastal erosion and inundation, lower average annual rainfall, increased rainfall intensity causing flooding, and a likely increase in tropical storm intensity. ### Recent disaster impacts and risk interaction - Overlap and compounding shocks: - Disruption to tourist flows from global shocks (e.g., the COVID-19 pandemic) can interact with climate-related shocks and amplify economic hardship. - Heavy rainfall in November 2020 eroded most of the road network, causing a damage of around US$62 million and exacerbating pandemic-related hardship. ### Sources of Antigua and Barbuda’s vulnerability to natural disasters - Structural resilience gaps: - A severe hurricane can disrupt power and water supply for 3–24 months and communication and transport infrastructure for up to 6 months. - Weak infrastructure stems from low capital stock per capita, low public investment as percent of GDP (even versus ECCU peers), and insufficient maintenance spending. - Financial vulnerability: - Limited insurance protection: the Caribbean Catastrophe Risk Insurance Facility (CCRIF) payment after Hurricane Irma was only 2.7 percent of total damage. - High indebtedness raises the risk of hitting borrowing constraints when repairing disaster-damaged infrastructure and can amplify scarring effects of severe natural disasters. - Non-life insurance penetration measured against the average annual disaster cost is 1.8 percent for Antigua and Barbuda. - Low private insurance uptake may reflect high premia, insufficient enforcement of insurability-compliant building codes, and cultural factors. - Economic stakes: - A recent IMF study estimates the gross benefit of resilience building in Antigua and Barbuda to be as large as 13 percent of GDP if 80 percent of infrastructure can become resilient. ### Actions to improve resilience (institutions, planning, financing) - Institutional strengthening and coordination: - 2015 Environmental Protection and Management Act (EPMA) transitioned the Division of Environment to the Department of Environment (DOE); 2019 EPMA assigned DOE responsibility to coordinate core climate change issues. - A Technical Advisory Committee (TAC) with representatives from 17 government agencies, three NGOs, and one private sector coalition meets monthly to support DOE work. - Planning and priority-setting: - A National Adaptation Plan (NAP) is scheduled to be completed by June 2023; the NDC Implementation Plan complements the NAP. - The NAP includes: (i) data collection and climate risk assessment; (ii) sectoral and local areas planning; and (iii) strengthening policies, legislation, and financial incentives for adaptation. - The NDC Implementation Plan includes a capacity building action plan and identifies priority areas (building, infrastructure, energy off-grid back-up, micro-finance, health). - Monitoring and early action systems: - A Measuring, Reporting, and Verification (MRV) system is being developed to track climate actions, loss and damage, GHG emissions, and climate support (financing, technology transfer, capacity building). - A risk map and an early warning system are under development to improve disaster management. - Mobilizing external finance and national funds: - The DOE has built relationships with the Adaptation Fund (AF), Global Environment Facility (GEF), and Green Climate Fund (GCF). - DOE accreditations and funding/access: - DOE obtained accreditation to the AF in 2015 and was re-accredited in 2020 until 2025; accessed US$10 million from the AF for a project to restore natural drainage canals and climate-proof vulnerable homes and storm shelters. - DOE obtained accreditation to the GCF in 2017 and has accessed US$21.4 million from the GCF for climate change activities. - DOE has two approved GCF-funded projects at various stages of implementation valued at US$64.8 million. - One project’s components include: (i) climate-proofing interventions in critical public service and community buildings; (ii) mainstreaming climate change adaptation into the building sector and relevant financial mechanisms; (iii) strengthening climate information services for early action in the building sector. - National financing mechanisms: - Sustainable Island Resources Framework Fund (SIRF Fund) established and managed by the DOE to channel donor funding into environmental management and climate change action. - Climate Resilience and Development Fund (CRDF) being established, financed by the Tourism Accommodation Levy. ### Further improvements and prioritization - Policy and financial recommendations: - Combine ex ante donor support with accumulation of liquidity buffers and stronger protection from contingent payment instruments (parametric insurance/catastrophe bonds), noting governance risks for self-insurance funds. - Strengthen governance and institutional arrangements to minimize misuse risks for accumulated funds. - Project selection and co-benefits: - Prioritize resilience projects that generate co-benefits for other development goals to alleviate trade-offs between resilience building and development objectives. - Strengthen coordination across agencies to determine and quantify co-benefits and inform project selection. - Public engagement: - Enhance public awareness to secure political support for enforcing building codes, increasing private insurance uptake, and mobilizing resources for post-disaster reconstruction to limit scarring effects. ### Annex: Sovereign blue bonds and the blue economy (summary points) - Blue economy importance and vulnerabilities: - Tourism is estimated to contribute over one-half of total GDP and is highly dependent on a healthy marine and coastal environment; port infrastructure is critical to transportation and tourism. - Coastal ecosystems (mangroves, reefs) provide coastal protection and carbon sequestration. - Maritime Economy Plan (MEP) priorities: - Promote climate resilient coastal infrastructure, resilience of ports and shipping facilities, sustainable tourism infrastructure, and balanced support for the fishing sector. - Operationalizing the MEP requires detailed implementation plans, supporting legislation, technical partnerships, capacity building, stewardship, and financing. - Blue financing opportunities: - Blue bonds are debt securities financing SDGs related to the blue economy (subset of green and sustainable development bonds). - Sovereign blue bonds can connect impact investors with governments and provide incentives to develop comprehensive marine conservation frameworks aligned with SDGs. - Given Antigua and Barbuda’s large stock of debt to official bilateral creditors, a debt-for-nature swap may be less feasible compared with recent successful cases; progress on operationalizing the MEP is important to unlock blue financing. *International Monetary Fund — Antigua and Barbuda country report content unit 1atgea2023001 (chapter section).* ### 7. Unlike the green bond market, the blue bond market is relatively small. Instruments ### 7. Unlike the green bond market, the blue bond market is relatively small. Instruments ### Market overview - Instruments classified under the green bond market were issued as early as 2008, with the market’s debt volume topping US$500 billion in 2021. - The first blue bond was issued in 2018 by Seychelles. - Since 2018, blue bonds have been issued by multilateral banks such as the World Bank, Asian Development Bank and Nordic Investment Bank, commercial banks such as the Bank of China, and other sovereigns such as Belize. - Belize recently issued the world’s largest blue bond at over US$550 million (Box 2). - By debt volume and issuances, the blue bond market remains relatively thin and estimates of its size are currently unavailable. ### Sovereign blue bond case study — Seychelles (Box 1) - Issuance details: - Amount: US$15 million - Year: 2018 - Coupon: 6.5 percent (market rate placement), subsidized to 2.8 percent with donor support - Redemption: Redeemed in 3 equal installments in 2026, 2027 and 2028 - Private placement to three U.S.-based investors - Credit and support: - Government credit rating: BB- - World Bank provided a US$5 million grant to guarantee the bond. - Global Environment Facility (GEF) provided a US$5 million loan to subsidize coupon payments, lowering the coupon from 6.5 percent to 2.8 percent. - Relationship with prior debt-for-nature swap (2015): - TNC raised US$20.2 million in impact funding and grants to allow the government to purchase US$21.6 million of debt to Paris Club creditors and South Africa at a discount of 6.5 percent. - Seychelles issued two promissory notes: US$15.2 million to repay SeyCCAT’s loan financing at 3 percent over 10 years; US$6.4 million to capitalize SeyCCAT and fund conservation activities. - Conservation outcomes and enabling policy: - Blue financing allowed Seychelles to protect 30 percent of its national waters. - Seychelles Marine Spatial Plan (SMSP) initiative (started in 2014) designated 13 marine protection areas covering 30 percent of Seychelles’ Exclusive Economic Zone and guided SeyCCAT’s strategies for sustainable management of marine resources. ### Sovereign blue bond case study — Belize (Box 2) - Issuance and transaction structure: - Amount of blue bond issued: US$364 million (2021) - Background: Following Belize’s default on its commercial external debt (Eurobond of US$553 million) - TNC created the Belize Blue Investment Company (BBIC) which bought back outstanding debt for a discount of 55 cents on the dollar. - Credit Suisse fully financed the transaction by issuing the blue bond through a repackaging vehicle syndicated to institutional investors. - USDFC provided political risk insurance for the blue bond, allowing the bond to receive an Aa2 investment grade rating. - Syndication was oversubscribed multiple times. - First commercial sovereign issuance covered by parametric catastrophe insurance for eligible hurricane events. - Use of proceeds and structure: - US$301 million used to retire the Eurobond at a discount. - US$24 million of the bond principal prefunded the establishment of a Conservation Fund in Belize, in partnership with TNC. - An additional US$39 million used for financing the costs of the transaction and setting up a reserve account for debt service. - Coupon schedule, maturity, and grace: - Step-up coupon: 3 percent in 2022, 3.55 percent in 2023, 5.15 percent in 2024, and 6.04 percent thereafter. - Maturity: 19 years - Grace: 10 years - Fiscal and conservation impacts: - Debt conversion yielded over US$200 million in debt service savings. - Government commitment to channeling approximately US$4 million annually towards ocean conservation efforts, in addition to initial capitalization of the Conservation Fund. - Planned outputs: Marine Spatial Plan to guide protection and conservation of 30 percent of Belize’s ocean area; protection of public lands in the barrier reef system; marine and coastal biodiversity offsets in the Coastal Zone Management Plan; governance frameworks for fisheries, aquaculture and mariculture; creation of a national blue carbon policy framework. ### Lessons for scalability and structuring (from Seychelles and Belize) - Credit support: - If sovereign credit ratings are weak, guarantees and/or insurance may be necessary to ensure favorable financing terms. - Seychelles issuance was backed by guarantees to reduce risk and a grant to subsidize market rates; Belize issuance was given political risk insurance by the U.S. Development Finance Corporation (USDFC). - In the absence of such insurance and guarantees, demand may be lower and financing terms less favorable. - Debt conversion role: - Both sovereign blue bond issuances involved debt conversions (Seychelles: debt conversion prior to the blue bond; Belize: blue bond transaction itself involved a debt conversion). - Debt conversions require extensive consultation and cooperation among multiple stakeholders and creditor willingness to engage. - Timelines are long: successful negotiations in both cases exceeded one year. - Role of intermediaries and technical assistance: - The Nature Conservancy and its Blue Bonds for Ocean Conservation strategy were pivotal to structuring and assistance for marine spatial plans and monitoring frameworks. - Preparation of marine spatial plans requires government leadership, coordination with multiple local stakeholders, political capital, and human resource allocation. ### Antigua and Barbuda — case for blue bonds and constraints - Debt treatment scale: - Outstanding arrears to bilateral creditors necessitate a debt treatment. - The amount of bilateral debt for treatment (US$150 million owed to Paris Club creditors by Antigua and Barbuda) is much larger than past similar transactions (Seychelles swap amount was very small by comparison). - Belize’s larger debt swap involved commercial creditors. - Financing environment and debt sustainability considerations: - Tighter global financing conditions may limit benefits of blue issuance in improving debt sustainability. - To restore debt sustainability, Antigua and Barbuda must clear outstanding arrears with official bilateral creditors and lower rollover risks by securing more financing sources with longer maturities, ideally at favorable rates. - A conservation-based swap improves debt sustainability if it is received at a large discount (lowers stock of debt) or reduces the flow of debt service obligations by extending duration. - The discount received by Seychelles on its debt swap was relatively small, reducing the benefit to the debt stock in bilateral creditor cases. - Given an increase in the cost of market financing, issuing a blue bond at market rates may adversely affect financing needs unless grant financing can be acquired to lower the cost of debt service. - Preparatory steps for Antigua and Barbuda: - Conservation commitments are key to securing blue financing and require concrete and measurable Key Performance Indicators (KPIs) in the blue economy and a monitoring and reporting system. - Work with the Commonwealth Marine Economies Programme is a step toward creating a data-driven baseline for the blue economy, but further development of concrete project proposals and action plans to operationalize the MEP is needed. - Integration of climate objectives into the country’s macroeconomic and budget frameworks would help signal seriousness of intent to the blue financing market. *International Monetary Fund — Antigua and Barbuda: Staff Report informational annex excerpts* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1atgea2023001.pdf_