## 1knaea2023002 ## Source details **Canonical URL:** [1knaea2023002](https://www.imf.org/-/media/files/publications/cr/2023/english/1knaea2023002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1knaea2023002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1knaea2023002.pdf.json) --- ### Macroeconomic performance and recent developments - St. Kitts and Nevis is a high income two-island economy: GDP per capita, about 18,000 USD in 2021. - Economic structure: - Tourism: about one-third of GDP in recent years. - Construction and light manufacturing have emerged as the economy transitioned away from traditional agricultural activities. - Exposure to natural disasters: - From 1970 to 2021, the country had an annual average negative impact from NDs of 4.2 percent of GDP. - CBI and fiscal history: - Recurrent CBI revenue amounted to a cumulative 65 percent of GDP between 2017 and 2021. - Public debt peaked at 135 percent of GDP in 2010, fell to less than 70 percent in 2015, and remained below the ECCU target of 60 percent for most of the last 5 years. - Pandemic and near-term developments: - GDP contracted 14.5 percent in 2020 and 0.9 percent in 2021. - Staff projects growth of 9 percent in 2022 and 4.5 percent in 2023. - Real GDP expected to return to pre-pandemic levels by end-2024. - By 2026, growth is expected to be in line with potential, estimated at 2.7 percent. - Inflation reached 3.8 percent y/y in December (the highest since 2011); core inflation remained relatively low. - Fiscal response and outcomes: - Policy response during the pandemic was 5 percent of GDP. - H1 2022 measures (10 percent public wage/pension increase, income support, excise reductions) totaled 4 percent of GDP. - Government recorded a deficit of 3 percent of GDP in 2022. - Public wages are now 3 percentage points of GDP above pre-pandemic levels; capital spending edged lower in 2022. - The previous government repurchased land amounting to 8 percent of GDP in 2022; contingent liability remains at 12 percent of GDP. - Financial sector: - Financial sector buffers remain adequate; NPLs are high and capital ratios edged lower though remain well above the 8 percent minimum. - Provisions relative to NPLs rose substantially and were near target of 60 percent end-2022. - Profitability dropped sharply in 2022 driven by losses on the overseas investment portfolio. - Credit growth was stronger than in other ECCU countries. ### Outlook and risks - Baseline projections: - Growth: 4.5 percent of GDP in 2023 and 3.8 percent in 2024. - Inflation: projected average 2.3 percent in 2023 and 2 percent in 2024. - Current account deficit: projected to be 3.6 percent of GDP in 2023 and 2.8 percent of GDP in 2024. - Fiscal outlook: broadly balanced budgets projected in 2023–25 turning into growing deficits of up to 3 percent of GDP in outer years as CBI revenue declines from 25 percent of GDP in 2022 to 10 percent towards the end of the forecast horizon. - Gross public debt will remain below 60 percent of GDP, though on an upward trajectory in 2025–28. - Key risks: - Short-term downside: global slowdown (particularly in the United States), de-anchoring of inflation expectations and stagflation, commodity price shocks. - Fiscal risk: growing dependence on CBI revenue. - Financial risk: fuller NPL recognition could dampen credit growth; tightening global financial conditions could hit bank capital via exposure to the U.S. stock market. - Climate risk: high exposure to frequency and intensity of NDs; likely to intensify with climate change. - Upside potential: faster-than-expected rebound in tourism, strong CBI revenue, development of renewable energy lowering energy costs and boosting potential growth. ### Fiscal policy, debt sustainability, and financing policy - Overarching policy message: - Large fiscal buffers and low debt helped cushion shocks, but increasing dependency on CBI revenue conceals erosion of tax revenue and undermines the fiscal framework. - Fiscal prudence requires well-sequenced policies to tighten the fiscal stance in the short run, rationalize current spending in the medium term, improve social targeting, and streamline tax policy to reduce dependence on CBI. - Short-term priorities: - Tighten the fiscal stance by phasing out pandemic-era measures and withdraw crisis-related support as recovery continues. - Medium-term priorities: - Rationalize and strictly control current spending, including the wage bill. - Make social transfers better targeted (reform the Poverty Alleviation Program). - Streamline tax policy to reduce dependence on CBI. - Use additional fiscal space to support investment in climate change resilience and accelerate economic diversification. - Financing policy recommendations: - Consider access to the regional government securities market (RGSM). - Strive to lengthen debt maturities. - Use state-contingent debt instruments when possible. - DSA findings: - Net debt breaches the regional ceiling only in the 95th percentile scenarios with joint GDP, primary deficit, and interest rate shocks. - Overall assessment: risk of sovereign stress is moderate; ample deposits provide a buffer but operational use requires active financing policy. ### Natural disaster resilience, SWF proposal, and alternative scenario - ND vulnerability and rationale for action: - ND risks are high: annual average impact 4.2 percent of GDP (1970–2021) versus 2.0 percent for small developing states; about three times more NDs than other developing states. - Investment in resilient infrastructure and additional insurance coverage yield economic and fiscal savings after each ND. - Policy elements for ND preparedness: - Multi-layered insurance framework: earmark deposits for ND insurance, boost CCRIF coverage, consider state-contingent instruments such as catastrophe bonds. - Substantial long-term investment in resilience (20 years or longer), with upfront fiscal costs budgeted and gains over time. - Alternative (front-loaded) scenario: - Shift investment towards resilience up to 5.8 percent of GDP (aligns with long-term average). - Fiscal costs increase initially due to larger CCRIF coverage; as investment accumulates, insurance needs fall and insurance costs decline. - Deposits allowed to decline gradually towards about 12 percent of GDP by 2040; gross debt rises through 2040. - Quantified gains: a 4 percent increase in the level of GDP relative to baseline by 2028 and a 14 percent increase by 2040. - Policy implications: maintain fiscal restraint while optimizing tax revenues and expenditures to create space for ND preparedness; earmark CBI revenue for ND preparedness and capital expenditure. - Footnote assumption: 90 percent of capital expenditures in nominal terms from 2024 onward is assumed to go into resilience. - Sovereign wealth fund (SWF) proposal: - Objectives: standard wealth accumulation and smoothing, ND preparedness, investment in resilience. - Benefits: formalize ND preparedness funding, earmark a portion of CBI revenue, transfer public deposits from the systemic bank to an arm’s-length SWF to improve governance and reduce sovereign-bank nexus risk. - Authorities requested TA for optimal CCRIF coverage and SWF design. ### Renewable energy, competitiveness, and structural reforms - Renewable energy potential and goals: - Government goal: 100 percent renewable generation by 2030 and energy security. - Geothermal project in testing phase; wind and solar require substantial financing. - Success could enable clean energy exports, reduce energy imports and electricity costs, and boost medium-term growth. - Competitiveness challenges: - High GDP per capita and human development but stagnant labor productivity, high energy and labor costs, and a large and growing public sector. - Structural policy recommendations: - Strengthen labor market, improve education and TVET, implement Active Labor Market Policies (ALMPs). - Rechannel CBI flows towards growth-friendly sectors (agriculture, fishery, manufacturing). - Labor market reforms (labor protection, unemployment benefits, minimum wage) should proceed via social dialogue. - Explore multiple financing sources for the renewable agenda and encourage private investment; consider channeling CBI revenue to renewable projects. ### Financial sector vulnerabilities and reform priorities - Systemic bank and banking sector profile: - Systemic bank accounts for over a half of the country’s banking assets and is 51 percent government-owned. - Large exposure to government due to debt-for-land swaps (2013–15); bank holds government/SSB deposits and substantial U.S. equities positions. - It recorded the largest losses in the ECCU in 2022, appears vulnerable to global financial tightening, and has some of the highest NPL ratios in the ECCU. - Recommendations for the systemic bank: - Revisit business model emphasizing risk reduction. - Review overseas investments; shift towards safer instruments like bonds. - Increase loan loss provisions and consider limits on exposures to government and volatile instruments. - Establish contingency plans should risks materialize. - Broader financial sector reforms: - Closer supervisory monitoring of restructured loans and additional data collection. - Strengthen FSRC oversight of credit unions; pass legislation to designate ECCB as AML/CFT supervisor. - Regional initiatives: regional credit bureau/registry, regional partial credit guarantee scheme, revisit minimum household savings deposit rate, pass securities legislation to deepen markets. - Financial soundness indicators (selected): - Private sector credit growth (y/y): 1.4 (2018), 1.5 (2019), -4.0 (2020), 7.7 (2021), 6.5 (2022). - CAR: 17.4 (2018), 17.8 (2019), 24.5 (2020), 22.1 (2021), 18.7 (2022). - Regulatory Tier 1: 18.2 (2018), 17.1 (2019), 17.2 (2020), 16.5 (2021), 11.8 (2022). - ROA: 1.3 (2018), 0.8 (2019), 2.6 (2020), 1.9 (2021), -4.2 (2022). - NPLs to gross loans: 24.7 (2018), 24.0 (2019), 23.5 (2020), 20.9 (2021), 22.0 (2022). - Total provisions to NPLs: 21.5 (2018), 24.7 (2019), 30.8 (2020), 58.9 (2021), 54.7 (2022). ### Fiscal, external, and social statistics (selected exact figures) - Total revenue and grants (percent of GDP): 37.4 (2019), 35.0 (2020), 50.4 (2021), 51.5 (2022), 43.6 (2023), 41.5 (2024), 39.1 (2025), 37.0 (2026), 35.4 (2027), 33.8 (2028). - Tax revenue (percent of GDP): 18.5 (2019) → 17.9 (2028). - CBI revenue (percent of GDP): 14.8 (2019), 11.3 (2020), 23.3 (2021), 25.8 (2022), 19.0 (2023), 17.0 (2024), 15.0 (2025), 13.0 (2026), 11.5 (2027), 10.0 (2028). - Total expenditure and net lending (percent of GDP): 38.1 (2019), 38.1 (2020), 44.8 (2021), 54.8 (2022), 43.0 (2023), 40.9 (2024), 38.8 (2025), 37.6 (2026), 37.1 (2027), 37.0 (2028). - Capital expenditure (percent of GDP): 12.0 (2019), 7.5 (2020), 8.3 (2021), 14.9 (2022), 5.4 (2023), 5.2 (2024), 5.0 (2025), 4.8 (2026), 4.6 (2027), 4.6 (2028). - Land buyback: 3.3 (2019) and 7.8 (2022) as percent of GDP within capital expenditure series. - Overall balance (after grants, percent of GDP): -0.7 (2019), -3.1 (2020), 5.6 (2021), -3.3 (2022), 0.6 (2023), 0.5 (2024), 0.3 (2025), -0.5 (2026), -1.7 (2027), -3.2 (2028). - Overall balance (less CBI revenue, percent of GDP): -11.3 (2019), -13.3 (2020), -16.4 (2021), -18.6 (2022), -16.4 (2023), -14.7 (2024), -13.1 (2025), -12.2 (2026), -12.0 (2027), -12.1 (2028). - Public sector debt (end-of-period, percent of GDP): 54.3 (2019), 68.0 (2020), 68.9 (2021), 58.4 (2022), 55.3 (2023), 53.3 (2024), 51.7 (2025), 50.9 (2026), 51.4 (2027), 53.4 (2028). - Government deposits (percent of GDP): 24.8 (2019), 21.6 (2020), 30.3 (2021), 24.0 (2022–2028 assumed constant at 24.0). - Current account (percent of GDP): -5.8 (2019), -10.9 (2020), -5.8 (2021), -5.0 (2022), -3.6 (2023), -2.8 (2024), -1.9 (2025), -1.3 (2026), -1.3 (2027), -1.3 (2028). - Current account, excluding CBI receipts (percent of GDP): -20.6 (2019), -22.2 (2020), -29.2 (2021), -30.8 (2022), -22.6 (2023), -19.8 (2024), -16.9 (2025), -14.3 (2026), -12.8 (2027), -11.3 (2028). - Tourism receipts (millions of EC$): 976.5 (2019), 289.3 (2020), 413.9 (2021), 488.3 (2022), 610.3 (2023), 732.4 (2024), 826.6 (2025), 893.8 (2026), 917.9 (2027), 942.7 (2028). - Citizenship-by-investment budgetary fees (millions of EC$): 442.6 (2019), 270.8 (2020), 542.6 (2021), 678.2 (2022), 539.1 (2023), 505.5 (2024), 467.3 (2025), 424.4 (2026), 393.5 (2027), 358.6 (2028). ### Social protection and implementation priorities - Social safety net and PAP: - PAP accounted for 94 percent of total social program spending in 2022. - PAP provides a monthly stipend of EC$500 to households with gross monthly income less than EC$3,000; estimated coverage 40–50 percent of households with 6,763 beneficiaries in September 2022. - Recommendations to improve social assistance: - Redesign PAP eligibility to account for household special needs and consider a multivariate framework. - Develop a single beneficiary data system using national registries to reduce exclusion errors. - Improve inter-agency cooperation among Ministry of Social Development and Gender Affairs, Ministry of Sustainable Development, and the SSB. ### Structural reforms, AML/CFT, and asset recovery - Asset recovery and foreclosure: - Streamline protracted foreclosure processes and facilitate non-citizen ownership of property to support post-pandemic asset recovery. - Revisit funding of regional NPL divestment strategies; ECAMC has limited resources. - AML/CFT: - Country has not designated the ECCB as AML/CFT supervisor for banks; MER (December 2021) found low or moderate effectiveness across immediate outcomes. - Primary ML/TF risks: domestic financial sector, international business center/company formation, CBI program. - FSRC gaps: inadequate resourcing, inconsistent supervisory approaches, weaknesses in supervision of TCSPs and real estate agents. - Authorities are conducting a new NRA, developing a supervisory manual, increased FSRC staffing, and requested TA to strengthen AML/CFT supervision. *Source: IMF staff report excerpt — "1. Macroeconomic Performance vs. Regional Peers" (content unit: 1knaea2023002).* ### 1. Macroeconomic Performance vs. Regional Peers _______________________________________________ 8 ### 1. Macroeconomic Performance vs. Regional Peers ### Context - St. Kitts and Nevis is a high income two-island economy: GDP per capita, about 18,000 USD in 2021. - Economic structure: - Tourism: about one-third of GDP in recent years. - Construction and light manufacturing have emerged as the economy transitioned away from traditional agricultural activities. - Exposure to natural disasters (NDs): from 1970 to 2021, the country had an annual average negative impact from NDs of 4.2 percent of GDP. - CBI and fiscal history: - Recurrent CBI revenue amounted to a cumulative 65 percent of GDP between 2017 and 2021. - Public debt peaked at 135 percent of GDP in 2010, fell to less than 70 percent in 2015, and remained below the ECCU target of 60 percent for most of the last 5 years. - Fiscal stance: fiscal prudence has been a cornerstone of public policies; the 2023 budget envisages a small surplus, conservative CBI projections, well-contained current spending, and an increase in capital expenditure. ### Recent developments: From pandemic to cost-of-living crisis - Pandemic impact: - GDP contracted 14.5 percent in 2020 and 0.9 percent in 2021. - Tourism recovery lagged ECCU and Caribbean peers due to stricter and longer-lasting COVID restrictions (only fully vaccinated tourists allowed, extensive testing, contact-tracing). - Recovery and growth projections: - Staff projects growth to be 9 percent in 2022 and 4.5 percent in 2023. - Real GDP expected to return to pre-pandemic levels by end-2024. - By 2026, growth is expected to be in line with potential, estimated at 2.7 percent. - Inflation and policy measures: - Inflation reached 3.8 percent y/y in December (the highest since 2011). - Core inflation remained relatively low; multiple government measures contributed to softening price impact on food and energy. - Fiscal measures and outcomes: - Policy response during the pandemic was 5 percent of GDP (one of the strongest in the ECCU). - H1 2022 measures included a 10 percent increase in public wages and pensions, income support to the vulnerable, and a reduction of excise taxes—totaling 4 percent of GDP. - The government recorded a deficit of 3 percent of GDP in 2022. - Reliance on CBI revenue has increased; tax revenue continued to fall with a long-term decline in income taxes. - The previous government repurchased land amounting to 8 percent of GDP in 2022 from a debt-for-land swap arrangement; contingent liability remains at 12 percent of GDP. - Public wages rose rapidly and are now 3 percentage points of GDP above pre-pandemic levels; capital spending edged lower in 2022. - External and financial sector: - In 2022, the external position was moderately weaker than the level consistent with fundamentals and desirable policies. - Financial sector buffers remain adequate, but profits are volatile, NPLs are high (some of the highest in the region due to legacy loans), and capital ratios edged lower though remain well above the 8 percent minimum. - Provisions relative to NPLs rose substantially and were near target of 60 percent end-2022. - Profitability dropped sharply in 2022 driven by losses on the overseas investment portfolio amid tightened global financial conditions. - Credit growth was stronger than in other ECCU countries amid heightened competition and some relaxation of lending standards. ### Outlook and risks - Staff projections: - Growth: 4.5 percent of GDP in 2023 and 3.8 percent in 2024. - GDP returning to pre-pandemic level by end-2024. - By 2026, growth expected to be in line with potential at 2.7 percent of GDP. - Inflation: projected average 2.3 percent in 2023 and 2 percent in 2024. - Current account deficit: projected to be 3.6 percent of GDP in 2023 and 2.8 percent of GDP in 2024. - Fiscal outlook: broadly balanced budgets projected in 2023–25 are expected to turn into growing deficits of up to 3 percent of GDP in the outer years as CBI revenue declines from 25 percent of GDP in 2022 to 10 percent towards the end of the forecast horizon. - Gross public debt will remain below 60 percent of GDP, though on an upward trajectory in 2025–28. - Credit growth is projected to follow nominal GDP. - Risks: - Downside risks in the short term: global slowdown (particularly in the United States), de-anchoring of inflation expectations and stagflation, commodity price shocks. - Fiscal risk: growing dependence on CBI revenue. - Financial risk: fuller NPL recognition could dampen credit growth; further tightening in global financial conditions could hit bank capital via exposure to the U.S. stock market. - Climate risks: high exposure to frequency and intensity of NDs, likely to intensify with climate change. - Upside potentials: faster-than-expected rebound in tourism, strong CBI revenue, development of renewable energy resources lowering energy costs and boosting potential growth. ### Policy discussions - Overarching message: large fiscal buffers and low debt helped cushion shocks, but increasing dependency on CBI revenue conceals erosion of tax revenue and undermines the fiscal framework. Fiscal prudence requires well-sequenced policies to tighten the fiscal stance in the short run, rationalize current spending in the medium term, improve social targeting, and streamline tax policy to reduce dependence on CBI. - Short- and medium-term priorities: - Short term: tighten the fiscal stance by phasing out pandemic-era measures; opportunity presented by continuing recovery to withdraw crisis-related support. - Medium term: - Rationalize and strictly control current spending, including the wage bill. - Make social transfers better targeted. - Streamline tax policy to reduce dependence on CBI. - Use additional fiscal space to support investment in climate change resilience, accelerate economic diversification, and help restore competitiveness. - Fiscal and debt sustainability (A. Entrenching Fiscal and Debt Sustainability): - Revenue-side: taxes on income and international trade have remained below pre-pandemic averages, creating room to raise the effective tax rate. - Expenditure-side: current expenditure in 2022 was 16 percentage points of GDP above the average pre-pandemic level, driven by wages, goods and services, and transfers. - Social transfers: shift emphasis to targeted transfers rather than price controls or blanket energy subsidies. Options to phase out energy subsidies include: - electricity block pricing; - lump sum bonus; - budgeted transfers to low-income households (Annex VI). - Reform the Poverty Alleviation Program (PAP) to better target the most vulnerable. - Tax policy reforms (Annex VII guidance and country-specific recommendations): - Reduce zero- or low-rated VAT items (e.g., sugar and hydrocarbon fuels) and avoid temporary exemptions; VAT should be as broad as possible and applied at all stages of production. - Keep import taxes low and flat on all imports; avoid exemptions (zero duty on food, duty-free items available to residents). - Raise excise taxes on alcohol and tobacco, with no exemptions. - Increase property tax rates based on actual residential property and commercial land values; current property tax rates in KNA are extremely low. - Reduce property transaction taxes that inhibit the housing market and home ownership. - Avoid CIT holidays and exemptions; replace with expenses for capital expenditures or forward loss carryovers. - Introduce a non-zero PIT to broaden the tax base; design PIT to be progressive to improve redistribution. _Italic: Source: IMF staff report excerpt — "1. Macroeconomic Performance vs. Regional Peers" (content unit: 1knaea2023002)._ ### 17. The risk of sovereign stress is assessed as moderate, but financing policy should be ### 17. The risk of sovereign stress is assessed as moderate, but financing policy should be strengthened, and long-term risks tackled. ### Sovereign risk, debt outlook, and financing policy - Overall assessment: risk of sovereign stress is moderate. - Fiscal stance: If fiscal restraint is exercised as in the past, gross public debt is projected to remain below the regional target of 60 percent of GDP with stable deposits. - Buffer: The wedge between the regional target and current debt level could be viewed as a buffer, but operational use requires active financing policy. - Financing policy recommendations: - Consider using access to the regional government securities market (RGSM). - Strive to lengthen debt maturities. - Use state contingent debt instruments when possible. - Debt sustainability: - The debt sustainability analysis (DSA, Annex VIII) shows net debt breaches the regional ceiling over the medium term only in the 95th percentile scenarios with joint GDP, primary deficit, and interest rate shocks. - Long-term risk: High due to a very large funding gap of the SSB. ### Authorities’ views on fiscal and financing strategy - Authorities concurred on the need to maintain a prudent fiscal stance. - Risks to current expenditure projections include the wage bill, streamlining of social support, and planned phasing out of energy subsidy. - Authorities agree in principle with rebalancing current and capital expenditures; lower capital expenditure forecasts (after 2024) are based on actual projects in the pipeline and the need to maintain balanced budgets. - Some investment in housing and infrastructure would come from statutory bodies; statutory bodies’ fiscal operations and capital expenditures are not fully accounted for in general government reporting (their debt is included in public debt). - Authorities requested technical assistance (TA) on reporting and execution of budgeted projects. - Tax policy reform: - Authorities agreed on the need to overhaul the tax policy framework, potentially supported by IMF TA, to ramp up tax revenue mobilization and reduce dependence on CBI revenue. - They emphasized a holistic approach to improve equity, efficiency, effectiveness, and maintain competitiveness. - Authorities will examine abolishing various tax exemptions, broadening the tax base, and lowering harmful tariffs while remaining in compliance with CARICOM tariffs agreement. - On RGSM: Authorities consider it viable for raising government financing but have no immediate plans to tap it; they do not anticipate difficulties accessing the RGSM if needed. - Authorities highlighted a robust debt management strategy guiding funding options. ### Natural disaster (ND) resilience and climate change adaptation - Risk profile: - ND risks are high for St. Kitts and Nevis. - From 1970 to 2021, the country had an annual average impact from ND of 4.2 percent of GDP compared to the average of 2.0 percent for small developing states. - The country had about three times more NDs than other developing states. - Rationale for preparedness: - Decisive action on ND and climate change preparedness can raise growth and save fiscal costs. - Investment in resilient infrastructure and additional insurance coverage result in economic and fiscal savings after each ND. - Key policy elements: - Required investment in resilience would need to be substantial and span over the long term (20 years or longer); upfront fiscal costs must be budgeted, with significant resulting gains for growth and fiscal savings. - Establish a multi-layered insurance framework: - Government has sufficient deposits for the first, self-insurance layer, but a legal framework should be established to earmark deposits for NDs insurance. - Boost CCRIF coverage for immediate financing. - Consider state-contingent debt instruments such as a catastrophe bond for extreme events. - Develop a comprehensive fiscal policy framework for climate mitigation and adaptation that includes (1) an enhanced multi-layered insurance framework and (2) substantial investment in resilience, supplemented by a strategy to increase public investment, enhance growth, build up buffers and maintain debt below the regional ceiling. ### Alternative scenario: front-loaded resilience investment and insurance - Scenario assumptions and mechanics: - The scenario assumes a shift of investment towards resilience up to 5.8 percent of GDP—which brings it in line with the long-term average—to remain below the regional debt ceiling over the medium term. - Fiscal costs increase due to larger CCRIF insurance coverage. - As resilient investment accumulates, need for insurance via deposits and CCRIF falls, reducing insurance costs. - Deposits are allowed to decline gradually towards about 12 percent of GDP by 2040. - Reduction in deposits alone is not sufficient to absorb upfront fiscal costs; hence gross debt rises through 2040. - Quantified gains: - A 4 percent increase in the level of GDP relative to baseline by 2028. - A 14 percent increase in the level of GDP relative to baseline by 2040. - Scenario highlights and policy implications: - Fiscal restraint should be exercised as debt would be on an upward trajectory; tax revenues and expenditures should be optimized to create fiscal space for ND preparedness and make debt sustainable. Additional fiscal relaxation would lead to breaching the regional ceiling by 2028. - Reliance on CBI—even if following the conservative baseline path—remains significant and a source of concern; earmarking CBI revenue for ND preparedness is recommended. If CBI upside materializes, extra revenues should be used exclusively for ND preparedness and other capital expenditure, or saved. - Timing: Ensure adequate insurance coverage—through CCRIF—in the early years; front-load investment in resilience as much as feasible to boost growth and reduce insurance costs. - Footnote: 90 percent of capital expenditures in nominal terms from 2024 onward is assumed to go into resilience. ### Sovereign wealth fund (SWF) proposal and authorities’ views on ND strategy - SWF objectives recommended: - Standard wealth accumulation and expenditure smoothing. - ND preparedness. - Investment in resilience. - Benefits of a SWF: - Formalize and financially secure ND preparedness by allocating public savings specifically for this purpose and smooth government expenditures across the business cycle. - Earmark a portion of CBI revenue to improve transparency and intergenerational redistribution. - Transfer public sector deposits from the systemic bank to an arm’s-length SWF with proper risk management to improve governance and diminish the sovereign-bank risk nexus. - Authorities’ views: - Concurred that ND preparedness should be reinforced and at the core of long-term fiscal planning. - Acknowledged past resilience investments paid off (smaller adverse effects from flooding). - Emphasized the role of public-private partnerships, state-owned entities, and the private sector in catalyzing investments in resilience and renewable energy. - Requested TA to establish optimal CCRIF insurance coverage and for SWF design, given evolving fiscal parameters and goals. ### Renewable energy transition and competitiveness - Medium-term potential: - Transition to renewable energy could be a game changer over the medium term. - Government goal: 100 percent renewable generation by 2030 and energy security. - Potential: geothermal project still in testing phase with early results expected next year; wind and solar investments will require substantial financing yet to be secured. - Success could turn the country into a clean energy exporter and boost medium-term growth; reduce energy imports and lower electricity costs for commercial and residential consumers; reduce vulnerability to NDs and global fuel shocks. - Competitiveness challenges: - The country has one of the highest GDP per capita and human development in the Caribbean but faces stagnant labor productivity, high energy and labor costs, and a large and growing public sector. - Structural policy recommendations: - Strengthen labor market, encourage economic diversification, and promote sustainable growth. - Improve access and delivery of education and TVET; complement with Active Labor Market Policies (ALMPs) to better integrate training with labor market needs. - Leverage hospitality sector linkages to diversify and improve job quality. - Rechannel CBI flows towards growth-friendly sectors (agriculture, fishery, manufacturing) to support competitiveness. - Labor market reforms (labor protection legislation, unemployment benefits, statutory minimum wage) should be based on social dialogue, including regular tripartite meetings. - Explore multiple financing sources for renewable agenda, encourage private investment, and consider channeling CBI revenue to renewable energy projects. ### Financial system vulnerabilities and reform priorities - Systemic bank profile and risks: - The systemically important bank is the largest financial institution in the ECCU, accounting for over a half of the country’s banking assets. - Government ownership: 51 percent of the bank. - Large exposure to the government because of debt-for-land swaps in 2013–15. - The government and the SSB keep deposits at the bank; the bank fulfills the function of a SWF with a substantial share of assets invested in U.S. equities. - It recorded the largest losses in the ECCU in 2022 and appears vulnerable to further tightening in global financial conditions. - The systemic bank has some of the highest NPL ratios in the ECCU. - Recommendations for the systemic bank: - Revisit the business model with emphasis on risk reduction. - Review overseas investments to mitigate losses, shifting towards safer, less volatile instruments like bonds. - Increase loan loss provisions to cover impaired loans. - National authorities could consider reducing the bank’s exposure to government and imposing limits on investments in volatile instruments such as equities. - Establish a contingency plan should risks materialize. - Broader financial sector issues and reforms: - Bank credit growth has been relatively upbeat recently amid high competition, prompting closer supervisory monitoring of restructured loans and additional data collection for proper classification. - Constraints to credit growth include structural (legislative gaps), legacy (high NPLs), regulatory (stricter provision requirements), and cyclical (tighter global financial conditions) factors. - Credit unions are expanding quickly, but regulation and oversight by the national regulator (FSRC) is weaker than ECCB oversight for banks; FSRC’s regulation and oversight need strengthening. - Annex X outlines measures to strengthen credit and advance the AML/CFT agenda. - Since the 2021 mutual evaluation, authorities have started another national risk assessment (NRA) to present risk analysis in greater detail. - FSRC increased staff substantially between 2020 and 2022 and is developing a supervisory manual to be used by both branches; it should ensure supervisory activities sufficiently focus on AML/CFT supervision. - Authorities should pass legislation to designate the ECCB as the supervisor in the AML/CFT area. - Authorities’ views on financial system reforms: - Agreed the business model of the systemic bank should be strengthened with emphasis on de-risking and ring-fencing public sector deposits. - Management of the systemic bank has taken steps to de-risk overseas investment portfolio and write off some legacy loans, but further progress is needed. - Public sector deposits should be ring-fenced from risks inherent in any single bank, ideally via a separate arm’s-length structure (a SWF being a possible modality). - Supervision of the credit union segment should be strengthened, including close monitoring of restructured loans that exited moratoria. - The ongoing NRA would demonstrate a sound and detailed understanding of ML/TF risks. ### Data and statistical framework - Data framework: broadly adequate for surveillance but requires improvements to support evidence-based policymaking. - Key areas for improvement: - Review National Accounts methodology to improve data accuracy. - Fill gaps in labor market statistics (e.g., unemployment rate and the size of the informal labor market). - Conduct labor market surveys. - Strengthen resources and training for the statistical office. *Source: IMF staff report excerpt provided in the content unit.* ### 36. Economic growth rebounded strongly in 2022 despite global headwinds. The lifting of ### 36. Economic growth rebounded strongly in 2022 despite global headwinds. The lifting of ### Near-term performance (2022–2023) - Economic growth rebounded strongly in 2022 despite global headwinds. - The lifting of all COVID-related travel restrictions in August sparked a strong rebound in the tourism sector and across the economy. - Economic activity is not back to pre-pandemic levels. - Inflation picked up, but the authorities’ policy response helped dampen inflation pressures. - The policy response came at a heavy cost to public finances, with a large primary deficit after years of surpluses and increased reliance on CBI revenue. - The current account (excluding CBI) worsened modestly but was offset by large CBI flows. - The financial sector remained stable, but adverse price movements of overseas asset prices and an increase in provisioning severely undermined profitability and weakened capital. ### Outlook (medium term) - Beyond 2022, growth should converge towards its medium-term path. - Return to the pre-pandemic activity level is expected by end-2024. - Inflation is likely to moderate gradually in 2023 and 2024. - The budget is expected to be balanced through 2025 and then turn into growing deficits—predicated on current policies. - Public debt is expected to remain below the regional 60 percent of GDP target over the medium term. ### Risks to the outlook - Short-term risks are tilted to the downside, but there is considerable upside potential in the medium term. - Downside risk factors: - Global headwinds could adversely impact key tourism source markets. - Lingering geopolitical uncertainty could sustain commodity price volatility. - Growing dependence on volatile and uncertain CBI revenue is a major source of vulnerability. - Further tightening of global financial conditions could affect bank capital. - In the medium term, more frequent and intense natural disasters represent a major source of downside risk. - Upside potential: - Acceleration of the transition to renewable energy. - Increased investment in resilience by the public sector. ### Fiscal policy — near term priorities - In the near term, phasing out crisis-related measures will be essential to safeguard fiscal prudence and entrench debt sustainability. - Ongoing tightening of the fiscal stance is required to achieve the fiscal path outlined by the authorities’ medium-term fiscal plan, including: - Planned phasing-out of electricity price subsidies. - Gradual streamlining of income support measures. - Restoration of the corporate income tax rate. ### Fiscal policy — medium term reform agenda - A holistic overhaul of the taxation framework will be essential to reduce dependency on CBI and to maintain fiscal space. - Preconditions and reform elements: - Thorough evaluation of the current tax expenditure framework, with a view to eliminating those coming at a cost to public finance with little proven social and economic benefit. - Streamlining of the VAT. - Reform to the property tax to support the housing market and house ownership while increasing progressivity. - Introduction of progressive personal income tax. - Expected outcomes: - Strengthened fiscal sustainability. - Improved fairness and progressivity. - More inclusive growth. ### Public spending priorities and sustainability - Budget resources should be geared in priority towards increasing sustainability. - Better targeted social transfers can more efficiently protect the most vulnerable segment of the population. - The ongoing reform of PAP is a commendable step in that direction. - Going forward, a rebalancing between current expenditures, notably through a better control of the public sector wage bill, and higher capital expenditure will help catalyze private sector investment in: - Natural disaster resilience. - Climate change adaptation. - Innovation to support long-term growth potential of the federation. ### Natural disaster and climate policy - Enhancing ND preparedness will require resolute policy implementation. - Climate change mitigation policies, which will require fiscal outlays, can improve welfare and achieve economic sustainability. - A long-term policy package should include: - Higher resilient infrastructure spending. - An optimal insurance framework against natural disasters. - Renewable energy transition investment. - Priority: setting up a SWF based on international best practices with an aim to accumulate national wealth, finance resilient investment, and ensure adequate buffers. ### Structural policies for competitiveness and labor markets - Continued structural policy efforts are needed to strengthen competitiveness, labor market development and economic diversification. - Actions to pursue: - Improve access and delivery of education and TVET. - Complement with ALMPs emphasizing better integration of training with the labor market to reduce skill mismatches and promote job opportunities. - Leverage linkages between the hospitality sector and the rest of the economy to provide more diversified and higher-quality job opportunities. - Promote the transition to renewable energy to help lower energy costs and boost potential growth. ### Financial sector and systemic bank recommendations - The business model of the systemically important bank should be revisited with emphasis on de-risking. - Key issues: - The systemic bank is responsible for keeping government and SSB deposits but faces high risks from a large and risky investment portfolio and high NPLs. - Management has taken important steps to de-risk its investment portfolio and to write off some legacy NPLs, but further progress is needed. - Policy recommendations: - Public sector deposits should be ring-fenced from the risks inherent in any single bank, ideally through a separate arm-length structure, such as a SWF. - In the non-bank segment, credit unions require close monitoring, including their restructured loans. - The authorities should continue their work on advancing the AML/CFT agenda. *IMF staff report (excerpt).* ### 45. It is recommended that the next Article IV consultation takes place on the standard ### 1knaea2023002 - 45. It is recommended that the next Article IV consultation takes place on the standard ### Recommendation on Article IV consultation timing - It is recommended that the next Article IV consultation takes place on the standard 12-months cycle. ### Fiscal sector developments - Government response to the pandemic described as "one of the strongest in the region." - Gross debt increased only modestly and remained the lowest in the ECCU. - 2022 developments: - Total revenue was slightly higher than the prior year, boosted by CBI. - Tax revenue edged lower, weighted down by a decline in income taxes. - Total expenditures rose rapidly because of a substantial land buyback at 6.9 percent of GDP. - Capital spending fell in 2022 and remains well below the historical average of about 5 percent of GDP. - Wages accelerated swiftly in nominal terms in the second half of 2022, posing short-term inflation and competitiveness challenges. - Increases in CBI due diligence fees in goods and services and in social support via transfers. - The overall balance is expected to show a deficit in 2022 unless there is additional spending in the last quarter as in the prior year. - Fiscal policy notes: - Reliance on CBI remains high calling for more optimal fiscal policy. - If CBI revenue remains high, it should be earmarked for ND preparedness. ### Alternative fiscal scenario (projections and constraints) - Capital expenditures assumed to be allocated mostly to resilience and to increase modestly in levels to keep gross debt below the regional ceiling of 60 percent of GDP. - As the share of resilient investment grows, need to maintain expensive CCRIF coverage and high deposits diminishes. - Charts (described): - Alternative Scenario: Gross and Net Debt (In percent of GDP) with Regional debt ceiling at 60 percent. - Government Deposits and Insurance Coverage with Investment in Resilience (In percent of GDP): shows alternative scenario deposits, optimal deposits for ND, optimal CCRIF coverage for ND, and share of resilient investment. - Alternative Scenario: CBI Revenue, Interest Expense, and Fiscal Balance (In percent of GDP): plots CBI revenue, interest expense, fiscal balance across years. ### Key fiscal and debt statistics (selected) - Total revenue and grants (percent of GDP): 37.4 (2019), 35.0 (2020), 50.4 (2021), 51.5 (2022), 43.6 (2023), 41.5 (2024), 39.1 (2025), 37.0 (2026), 35.4 (2027), 33.8 (2028). - Tax revenue (percent of GDP): 18.5 (2019) → 17.9 (2028). - CBI revenue (percent of GDP): 14.8 (2019), 11.3 (2020), 23.3 (2021), 25.8 (2022), 19.0 (2023), 17.0 (2024), 15.0 (2025), 13.0 (2026), 11.5 (2027), 10.0 (2028). - Total expenditure and net lending (percent of GDP): 38.1 (2019), 38.1 (2020), 44.8 (2021), 54.8 (2022), 43.0 (2023), 40.9 (2024), 38.8 (2025), 37.6 (2026), 37.1 (2027), 37.0 (2028). - Capital expenditure (percent of GDP): 12.0 (2019), 7.5 (2020), 8.3 (2021), 14.9 (2022), 5.4 (2023), 5.2 (2024), 5.0 (2025), 4.8 (2026), 4.6 (2027), 4.6 (2028). - Land buyback recorded at 3.3 (2019) and 7.8 (2022) as percent of GDP within capital expenditure series. - Overall balance (after grants, percent of GDP): -0.7 (2019), -3.1 (2020), 5.6 (2021), -3.3 (2022), 0.6 (2023), 0.5 (2024), 0.3 (2025), -0.5 (2026), -1.7 (2027), -3.2 (2028). - Overall balance (excl. land buyback, percent of GDP): 2.6 (2019), -3.1 (2020), 5.6 (2021), 4.5 (2022), 0.6 (2023), 0.5 (2024), 0.3 (2025), -0.5 (2026), -1.7 (2027), -3.2 (2028). - Overall balance (less CBI revenue, percent of GDP): -11.3 (2019), -13.3 (2020), -16.4 (2021), -18.6 (2022), -16.4 (2023), -14.7 (2024), -13.1 (2025), -12.2 (2026), -12.0 (2027), -12.1 (2028). - Public sector debt (end-of-period, percent of GDP): 54.3 (2019), 68.0 (2020), 68.9 (2021), 58.4 (2022), 55.3 (2023), 53.3 (2024), 51.7 (2025), 50.9 (2026), 51.4 (2027), 53.4 (2028). - Government deposits (percent of GDP): 24.8 (2019), 21.6 (2020), 30.3 (2021), 24.0 (2022–2028 assumed constant at 24.0). ### Financial sector developments - ECCU loans under moratoria declined steadily from high levels in 2020; moratoria measures expired in March 2022. - Expected post-moratoria increase in NPLs not yet evidenced in St. Kitts and Nevis NPL ratios. - Bank profitability dropped sharply in 2022, driven largely by losses on the overseas investment portfolio amid heightened global market volatility. - Regulatory capital ratios declined in 2021–22 but remain well above the 8 percent regulatory minimum. - Banks continue to have ample liquidity buffers, supported by strong deposit growth. - Banks slightly increased exposure to the government in 2022 (to 6 percent of assets or over 100 percent of Tier 1 capital). ### Selected financial soundness indicators (highlights) - Private sector credit growth (y/y): 1.4 (2018), 1.5 (2019), -4.0 (2020), 7.7 (2021), 6.5 (2022). - Regulatory capital to risk-weighted assets (CAR): 17.4 (2018), 17.8 (2019), 24.5 (2020), 22.1 (2021), 18.7 (2022). - Regulatory Tier 1 capital to risk-weighted assets: 18.2 (2018), 17.1 (2019), 17.2 (2020), 16.5 (2021), 11.8 (2022). - Return on average assets (ROA): 1.3 (2018), 0.8 (2019), 2.6 (2020), 1.9 (2021), -4.2 (2022). - Nonperforming loans to total gross loans (banking sector): 24.7 (2018), 24.0 (2019), 23.5 (2020), 20.9 (2021), 22.0 (2022). - Total provisions to nonperforming loans: 21.5 (2018), 24.7 (2019), 30.8 (2020), 58.9 (2021), 54.7 (2022). ### Structural and labor market indicators - Structural indicators: - St. Kitts and Nevis has one of the highest GDP per capita, high human development, and lowest inequality in the Caribbean. - Economy mainly supported by tourism, construction, and manufacturing sectors. - Exports of goods concentrated in a few categories and have transitioned from low-quality agricultural products to high-quality manufactured product. - Labor market developments: - Employment relatively high in certain sectors with relatively low labor productivity. - Wage growth outpaced labor productivity in most sectors before COVID-19; trend partially reversed after the pandemic. - Real wage growth outpaced labor productivity growth in the public sector but lagged in the private sector over 2012–2021. ### External sector and balance of payments (selected) - Current account (millions of Eastern Caribbean dollars): -173.3 (2019), -259.9 (2020), -135.8 (2021), -132.4 (2022), -102.6 (2023), -82.0 (2024), -58.8 (2025), -41.2 (2026), -43.0 (2027), -45.1 (2028). - Trade balance (millions of EC$): -850.9 (2019), -668.5 (2020), -610.0 (2021), -828.2 (2022), -854.0 (2023), -881.0 (2024), -902.6 (2025), -925.0 (2026), -932.0 (2027), -939.2 (2028). - Services receipts (millions of EC$): 1,401.2 (2019), 881.7 (2020), 980.7 (2021), 1,322.0 (2022), 1,419.3 (2023), 1,495.6 (2024), 1,562.3 (2025), 1,622.0 (2026), 1,647.0 (2027), 1,672.6 (2028). - Tourism receipts (millions of EC$): 976.5 (2019), 289.3 (2020), 413.9 (2021), 488.3 (2022), 610.3 (2023), 732.4 (2024), 826.6 (2025), 893.8 (2026), 917.9 (2027), 942.7 (2028). - Citizenship-by-investment budgetary fees (millions of EC$): 442.6 (2019), 270.8 (2020), 542.6 (2021), 678.2 (2022), 539.1 (2023), 505.5 (2024), 467.3 (2025), 424.4 (2026), 393.5 (2027), 358.6 (2028). - Current account (percent of GDP): -5.8 (2019), -10.9 (2020), -5.8 (2021), -5.0 (2022), -3.6 (2023), -2.8 (2024), -1.9 (2025), -1.3 (2026), -1.3 (2027), -1.3 (2028). - Current account, excluding CBI receipts (percent of GDP): -20.6 (2019), -22.2 (2020), -29.2 (2021), -30.8 (2022), -22.6 (2023), -19.8 (2024), -16.9 (2025), -14.3 (2026), -12.8 (2027), -11.3 (2028). ### External financing requirement and sources (selected) - Gross financing requirement (millions of US$): 98.0 (2018), -29.4 (2019), 119.2 (2020), 37.0 (2021), 51.7 (2022), 44.4 (2023), 37.8 (2024), 30.2 (2025), -4.7 (2026), 13.7 (2027), 27.0 (2028). - Sources of financing (millions of US$): 55.5 (2018), 15.1 (2019), 18.6 (2020), 65.5 (2021), 66.3 (2022), 89.6 (2023), 95.7 (2024), 102.7 (2025), 78.1 (2026), 92.2 (2027), 101.0 (2028). - Capital grants and transfers (millions of US$): 52.8 (2018), 70.0 (2019), 46.0 (2020), 64.0 (2021), 64.6 (2022), 56.3 (2023), 60.6 (2024), 59.3 (2025), 58.0 (2026), 56.6 (2027), 55.2 (2028). - Foreign Direct Investment (net, millions of US$): 11.5 (2018), 0.2 (2019), 2.7 (2020), 55.6 (2021), 63.8 (2022), 59.0 (2023), 59.0 (2024), 58.0 (2025), 56.1 (2026), 55.0 (2027), 53.1 (2028). - New borrowing (millions of US$): 0.0 (2018–2019), 0.0 (2020), 12.6 (2021), 0.0 (2022), 14.9 (2023), 15.1 (2024), 18.8 (2025), 20.6 (2026), 26.3 (2027), 29.6 (2028). ### Basic data and socio-demographics (selected) - Area (sq. km): 269.4 - Population total (thousands, 2021 est.): 53.5 - Rate of growth (percent per year, 2021): 0.66 - Density (per sq. km., 2021): 198.8 - Life expectancy at birth (years, 2021): 71.7 - Infant mortality (per thousand live births, 2020): 12.6 - Gross domestic product (2021, millions of U.S. dollars): 860.8 - (US$ per capita) 16,076.7 *Source: IMF staff estimates and projections as presented in the content unit.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Conjunctural Risks - Intensification of regional conflict(s). Escalation of Russia’s war in Ukraine or other regional conflicts and resulting economic sanctions disrupt trade (e.g., energy, food, tourism, and/or critical supply chain components), remittances, refugee flows, FDI and financial flows, and payment systems. - Likelihood: High - Impact: Medium - Policy Response (ST): - Diversify tourism revenues. - Increase the linkage between tourism and other sectors. - Vigilantly monitor the financial sector development in coordination with ECCB. - Social discontent. Supply shocks, high inflation, real wage drops, and spillovers from crises in other countries worsen inequality, trigger social unrest, and give rise to financing pressures and damaging populist policies with possible spillovers to other EMDEs. This exacerbates imbalances, slows growth, and triggers market repricing. - Likelihood: High - Impact: Medium - Policy Response (ST): - Provide temporary and targeted support to the vulnerable. - Strengthen the labor market and provide more diversified and higher-quality job opportunities. - Abrupt global slowdown or recession. Global and idiosyncratic risk factors combine to cause a synchronized sharp growth downturn, with recessions in some countries, adverse spillovers through trade and financial channels, and markets fragmentation. EMDEs: A new bout of global financial tightening, possibly combined with volatile commodity prices, leads to spiking risk premia, debt distress, widening of external imbalances, fiscal pressures, and sudden stops. - Likelihood: Medium - Impact: High - Policy Response (ST, MT): - Enhance competitiveness to support economic recovery. - Diversify tourism revenues. - Increase the linkage between tourism and other sectors. - Vigilantly monitor the financial sector development in coordination with ECCB. - Commodity price volatility. A succession of supply disruptions (e.g., due to conflicts and export restrictions) and demand fluctuations (e.g., reflecting China reopening) causes recurrent commodity price volatility, external and fiscal pressures, and social and economic instability. - Likelihood: Medium - Impact: Medium - Policy Response (MT): - Provide temporary and targeted transfers to the vulnerable. - Allow a gradual pass-through of international prices and phase out generalized subsidies. - Accelerate transition to renewable energy sources. - Monetary policy miscalibration. Amid high economic uncertainty and volatility, major central banks slow monetary policy tightening or pivot to loosen monetary policy stance prematurely, de-anchoring inflation expectations and triggering a wage-price spiral in tight labor markets. - Likelihood: Medium - Impact: Medium - Policy Response (ST): - Provide temporary and targeted support to the vulnerable. - Strengthen the fiscal and communicate credible medium-term fiscal plan. - Systemic financial instability. Sharp swings in real interest rates, risk premia, and assets repricing amid economic slowdowns and policy shifts trigger insolvencies in countries with weak banks or non-bank financial institutions, causing markets dislocations and adverse cross-border spillovers. - Likelihood: Medium - Impact: Medium - Policy Response (ST): - Monitor asset quality and ensure adequate loan loss provisioning. - Vigilantly monitor the financial sector development in coordination with ECCB. Note on likelihood terminology: “low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent. The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. The conjunctural shocks and scenarios highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given the current baseline. Structural risks are those that are likely to remain salient over a longer horizon. ### Structural Risks - Deepening geo-economic fragmentation. Broader and deeper conflict(s) and weakened international cooperation lead to a more rapid reconfiguration of trade and FDI, supply disruptions, technological and payments systems fragmentation, rising input costs, financial instability, a fracturing of international monetary and financial systems, and lower potential growth. - Likelihood: High - Impact: Medium - Policy Response (MT): - Enhance international cooperation and competitiveness to support economic recovery and cross border collaboration. - Cyberthreats. Cyberattacks on critical domestic and/or international physical or digital infrastructure (including digital currency and crypto ecosystems) trigger financial and economic instability. - Likelihood: Medium - Impact: Medium - Policy Response (MT): - Enhance digital security in public and private platforms. - Extreme climate events. Extreme climate events cause more severe than expected damage to infrastructure (especially in smaller vulnerable economies) and loss of human lives and livelihoods, amplifying supply chain disruptions and inflationary pressures, causing water and food shortages, and reducing growth. - Likelihood: Medium - Impact: Medium - Policy Response (ST): - Implement national adaptation plans with investment in structural and financial resilience, and appropriate ex ante financing. ### Domestic Risks - Lower than expected CBI revenue. Pressure from EU to end Citizenship by Investment Program or face visa restrictions, leaving the program unattractive. - Likelihood: Medium - Impact: Medium - Policy Response (MT): - Mobilize revenue from alternative sources. - Financial sector weakness. Higher NPLs and low capital buffer impairs credit intermediation and dampens growth. - Likelihood: Medium - Impact: Medium - Policy Response (ST): - Monitor asset quality and ensure adequate loan loss provisioning. *IMF staff.* ### 2. Other indirect channels of transmission are likely to have an impact later, like lower ### 2. Other indirect channels of transmission are likely to have an impact later, like lower ### Indirect external transmission and financial conditions - Other indirect channels, such as lower tourism from the US, are expected to play out fully only in 2023. - Tightening of global financial conditions: immediate impact deemed limited due to: - quasi-financial autarky of the country, - low reliance on global and regional funding market, and - ample liquidity buffers. - Potential vulnerability: a strong shock to USD-denominated assets could affect the profitability and capital adequacy of the systemic bank (discussed in Section D). *ST. KITTS AND NEVIS — INTERNATIONAL MONETARY FUND* ### Annex VI — Options for the phasing-out of the electricity subsidies - Context: - Electricity subsidies are currently implemented by SKELEC and financed through direct transfers from the budget. - Subsidies are regressive, increasingly expensive, and unsustainable. - If the electricity subsidy were to continue for 12 months, its annual cost would amount to about 4 percent of GDP. - Early step (targeted subsidy by consumption proxy): - Provide subsidies only to households with low income — proxied by low electricity and fuel consumption. - Block pricing is viable to preserve some price signal but less preferred to options below. - Design: energy consumption below a minimum level subsidized at a guaranteed price; consumption above that level priced at market rates. - Trade-off: more generous policy → higher fiscal cost and lower incentive to compress energy consumption. - More optimal option (lump-sum bonus): - Provide a lump-sum bonus for households linked to past electricity consumption and the price wedge between current and a reference price. - SKELEC would distribute the lump sum as a one-off rebate—separate from the regular utility bill—to facilitate adjustment to the price shock. - Ultimate approach (phase-out plus targeted transfers): - Phase out subsidies completely and replace with targeted transfers to low-income households (with the bulk of transfers being transitory). - Implementation may be costly but can be complemented with enhanced digitalization. - Positive experience cited: Chile and Colombia showed progress with digitalization could result in a substantial reduction in tax administration costs. - Delivery mechanisms and safety nets: - Ideally, targeted transfers should be facilitated via social safety nets, for example, using the framework of the already operational PAP (see Annex IX). - Government should provide support to vulnerable households not covered by safety nets; need to expand safety nets as soon as feasible. - Expansion could be achieved by increasing digitalization, e.g., inviting people to apply through a dedicated online platform. - Note on fuel subsidy to bus drivers: - The fuel subsidy program to bus drivers was relatively well-targeted because: - (i) it supported an energy-intensive business segment, and - (ii) it provided support to households with low income (bus riders indirectly). *ST. KITTS AND NEVIS — INTERNATIONAL MONETARY FUND* ### Annex VII — Improving tax policy in the Caribbean (summary of findings and recommendations) - Overarching points: - There are substantial economic rents associated with tourism; charging high fees for access to scarce, location-specific features is an efficient revenue source and a mechanism to manage overcrowding. - Largest components of tourist expenditures: international transportation and accommodation; smaller expenditures include taxis, tour guides, souvenirs, activities, and meals. - Effective revenue generation from tourism should focus on taxation of tourist accommodation and charging appropriate fees for publicly provided activities and access to unique cultural or natural features. - Taxation of stays at international hotel chains and vacation rentals faces administrative challenges (transactions processed outside country, profit shifting within chains, scattered vacation rentals hard to monitor). - Preferred tax bases and rationales: - VAT: - Well-designed VAT preferred for raising substantial revenues with smallest negative effect on growth. - Best practice: collect VAT on broadest possible range and at each stage, providing input tax credits to registered taxpayers. - VAT exemptions for business inputs should be considered tax relief for the informal economy; administration of input tax credits remains a work in progress. - Recurrent taxes on land and residential property: - Efficient and progressive; tax on improved residential property value is relatively progressive. - Taxing improved value of commercial property is less efficient as it discourages income-earning capital investment. - Personal income tax: - Potent revenue source and effective for improving income distribution. - Concepts of fairness: horizontal equity and vertical equity. - Harmful taxes for growth: - Production or transaction-based taxes insensitive to profits (e.g., Stamp Duty on property transactions) and unrelieved taxes on business inputs (e.g., customs duties) are damaging. - Transactions taxes reduce market liquidity, distort asset allocation, and impede mobility. - Recurrent property tax does not impact mobility or allocation. - Tax incentives: minimizing economic and fiscal damage - Preferable to avoid tax incentives if core tax system and other policies are competitive. - If used, incentives should target tax bases that are less robust or more economically damaging. - Recommended approaches for incentives (in lieu of tax holidays): - Expensing for capital investments. - Extended loss carry-forward period plus no limit on ability to use losses to reduce current-year taxable income to zero, combined with limits on interest deductibility. - These measures delay corporate income tax until initial capital investment recovered through operating profits. - Treatment of withholding taxes: - Full exemption from withholding tax on dividends could be considered where a corporate income tax exists. - Exemptions for withholding taxes on interest, royalties, management services should be time-limited and capped (or avoided), since withholding tax often ensures source country taxation. - Customs tariff: - Full exemption from Customs Tariffs on business inputs (e.g., construction materials) is advisable; general elimination could be considered. - No tax relief for imports destined for employee consumption (e.g., personal automobiles). - Avoid incentives for efficient/admin-resilient tax instruments: - No exemptions for excise taxes on alcohol, tobacco or fossil fuels. - No exemptions for VAT and recurrent property tax. - No exemptions in personal income tax for employees of favored projects. - Specific recommendation on transaction taxes: - Stamp duties and property transfer taxes impose significant efficiency costs and are suitable targets for exemptions or repeal. - Table 1 (qualitative summary of tax bases for small Caribbean countries): - Recurrent Property Tax: Relative Growth Friendliness — "Land taxation is growth friendly, taxing commercial buildings discourages investment"; Helps Achieve Progressivity — "Recurrent taxation of the improved value of residential property"; Leakage — "None"; Recommended — "Essential". - VAT: Relative Growth Friendliness — "Growth friendly"; Helps Achieve Progressivity — "No"; Leakage — "Minimal"; Recommended — "Essential". - Customs Tariffs: Relative Growth Friendliness — "Damaging"; Helps Achieve Progressivity — "No"; Leakage — "Minimal"; Recommended — "Maybe". - Stamp Duties: Relative Growth Friendliness — "Damaging"; Helps Achieve Progressivity — "No"; Leakage — "High"; Recommended — "No". - Excise Taxes: Relative Growth Friendliness — "Depends on good"; Helps Achieve Progressivity — "No"; Leakage — "Manageable"; Recommended — "Yes (fossil fuels, tobacco, alcohol)". - Personal Income Tax: Relative Growth Friendliness — "Somewhat negative"; Helps Achieve Progressivity — "Best mechanism"; Leakage — "Potential for informal employment and some tax planning by wealthy"; Recommended — "Yes". - Corporate Income Tax: Relative Growth Friendliness — "Negative"; Helps Achieve Progressivity — "Supports a progressive personal income tax"; Leakage — "Substantial tax planning opportunities"; Recommended — "Yes, unless the top marginal personal income tax rate is low". - Note: Table summarizes impacts and may simplify details without affecting overall impacts highlighted. *ST. KITTS AND NEVIS — INTERNATIONAL MONETARY FUND* ### Annex VIII — Debt Sustainability Analysis (DSA): key findings and baseline assumptions - Current position and risks: - Public debt remains well below the regional ceiling of 60 percent of GDP, and is further buttressed by deposits of around 24 percent of GDP, but risks have increased. - Fiscal support extended during pandemic and cost-of-living crisis (early 2022 with war in Ukraine, high global inflation, high commodity prices). - Added vulnerabilities: CBI revenue volatility, natural disasters, deeply underfunded long-term pension system, contingent liabilities from debt-land swap and banking sector vulnerabilities. - New government (since August 2022) announced measures under discussion that could lead to further fiscal expansion. - Recommendation: mitigate risks by exercising fiscal prudence and optimizing tax and expenditure policies. - Suggested use of CBI revenue and about half of deposits: earmark for investment in resilience and boosting insurance against natural disasters. - If CBI revenue stronger than baseline: bulk should still be used for ND preparedness; remainder to debt reduction or a sovereign wealth fund. - Standard DSA adverse shocks would worsen debt trajectory with debt breaching regional ceiling—deposits’ cushion would remain. - Public debt history: - Public debt declined from a peak of 135 percent of GDP at end-2010 to 52 percent of GDP at end-2019. - Drivers: decade of fiscal surpluses supported by high CBI revenue and a sovereign debt restructuring involving a debt-land swap with domestic banks in 2013–14 (equivalent to about 41 percent of 2010 GDP) and debt exchanges with external commercial creditors plus reduced interest rates with one Club creditor in 2012. - Fiscal surpluses allowed repayment of many remaining obligations. - Pandemic period and recent numbers: - Public debt-to-GDP ratio increased to 69 percent during the pandemic. - Government ran a deficit of 3.1 percent of GDP in 2020 and a surplus of 5.6 percent of GDP in 2021 driven by strong CBI revenue (23 percent of GDP) in 2021. - Nominal GDP declined in 2020–21 by a cumulative 22 percent. - Deposits rose to 30 percent of GDP in 2021 from 25 in 2019. - 2022 developments: - In 2022, both debt and deposits expected to fall sharply. - Fiscal support extended and increased; CBI revenue continued to outperform at 26 percent of GDP. - Government repurchased land in the amount of 8 percent of GDP from the financial sector, reducing contingent liability. - Resulted in a deficit of 3 percent of GDP and reduced government deposits to 24 percent of GDP. - Government did not borrow; gross debt estimated to drop to 58 percent of GDP in 2022—despite a deficit—mainly because of a 13 percent nominal GDP rebound. - Fiscal space—based on full use of deposits and regional gross debt ceiling—is about 26 percent of GDP. - Baseline scenario assumptions: - New government’s policy: 2023 central government budget envisages a small surplus; policy of fiscal prudence continues. Ex-CBI revenue expected to increase; expenditures to decline as some pandemic-era support measures are phased off short-term. However, ex-CBI revenue and current expenditure projected to stabilize at lower and higher levels, respectively, compared to pre-pandemic decade because new government advocates more social support via more tax expenditures and larger social programs. - CBI revenue projected to decline gradually to 10 percent of GDP towards the end of the medium term (conservative assumption reflecting high volatility and non-zero probability of cancelation). - Fiscal balance: small surpluses expected in 2023–24 projected to turn into deficits up to 3 percent of GDP due to (1) ex-CBI revenue and current expenditures stabilizing at lower and higher levels, respectively, and (2) falling CBI revenue; partly offset by lower capital expenditures compared to historical averages. - Growth and inflation: after a rebound in 2023–24, real GDP is expected to stabilize at 2.7 percent. Inflation (GDP deflator in the DSA) projected at 2 percent in the medium term. - Debt mechanics: maturing long-term debt assumed repaid with no additional borrowing unless the overall balance is negative; short-term debt assumed fully rolled over. In event of shocks, DSA assumes government increases borrowing when facing negative shocks, while maintaining the same projection of government deposits in nominal terms. - Projected debt trajectory: - Projected debt declines on average over the medium term to 44 percent of GDP in 2028 (Table 3 and Figure 1). - Positive debt dynamics driven by real growth rates and low real interest rates. - Debt reduction in projection period is qualitatively different from past reductions, which were mainly generated by primary surpluses. *ST. KITTS AND NEVIS — INTERNATIONAL MONETARY FUND* ### 5. Staff used the 2022 DSA template to simulate the impact of downside risks, ### 5. Staff used the 2022 DSA template to simulate the impact of downside risks, ### DSA simulations and overall risk assessment - Staff used the 2022 DSA template to simulate the impact of downside risks, highlighted in the Risk Assessment Matrix, on the public debt trajectory. - These shocks will raise the debt path, resulting in its breaching the regional ceiling of 60 percent of GDP. However, the government has ample deposits which can be used to reduce debt. - The overall risk of sovereign stress is moderate (Table 1), reflecting: - relatively low debt levels for a high-income economy, and - ample deposits. - Offsetting vulnerabilities: - dependence on CBI is heavy, and - the contingent liability related to social security is very large (see paragraph 7 in the DSA). ### Medium-term risks: fan chart and Gross Financing Need (GFN) - Medium-term risks are assessed as moderate because both components—the fan chart for debt projections and GFN risks—are assigned moderate risks. - Fan chart (Figure 2): - Built on the historical distribution of joint growth, interest rate, and primary balance shocks. - Signals high risk through a wide distribution driven by historical episodes of high debt after the GFC and the subsequent debt restructuring (see paragraph 1 in the DSA). - Even in this analysis, government deposits will be sufficient to bring debt down below the regional ceiling in scenarios corresponding to the 75th percentile (but not under the 95th percentile). - Final assessment of risk from the fan chart: moderate. - GFN chart (Figure 2): - Presents standard natural disaster and stress test shocks which increase GFN only moderately, so that it remains around 2022 levels. - Signals low risk, but: - GFN are large in nominal terms—around 10 percent of GDP—because of substantial amounts of T-bills, - the government currently has access to the regional debt market and thus fully depends on the domestic financial system. - Final assessment of GFN risk: moderate. ### Alternative scenario: ND preparedness and resilient investment - Scenario assumptions (Section B and Figure 6): - a shift of investment towards resilience, and - an increase in investment up to 5.8 percent of GDP. - Outcomes: - Gross debt remains below the regional debt ceiling over the medium term. - Deposits are allowed to decline gradually as the share of resilient investment accumulates and the need for insurance against natural disaster (ND) falls. - Economic gains: a 4 percent increase in the level of GDP relative to baseline by 2028. ### Debt and GFN vulnerabilities and policy recommendations - Large buffers (domestic liquidity and sizeable government deposits) largely mitigate debt and GFN vulnerabilities, but additional steps are needed to reduce risk. - If a large natural disaster shock occurs, high GFNs combined with banking sector vulnerabilities could heighten sovereign-bank nexus risk. - To reduce rollover risk, the authorities should strive to: - (i) lengthen debt maturities to reduce GFN and propose borrowing policy to this end; - (ii) shift some borrowing away from the domestic market to reduce sovereign-bank nexus in light of banking sector vulnerabilities; or - (iii) use state contingent debt instruments when accessing regional or international markets. Such instruments would automatically reduce or suspend debt service in the event of an ND, freeing up resources for emergency response. ### Long-term risk modules and pension (SSB) vulnerabilities - Long-term sovereign stress modules (Figure 4): - High amortization shock module signals low risk. - Climate adaptation module points to high long-term risk as GFN and debt rise considerably under both standardized and customized (calibrated on the SIP results) scenarios beyond the medium term, with debt exceeding the regional ceiling. - Climate mitigation standardized scenario: debt would increase substantially; authorities indicated the transition to geothermal energy would be facilitated by the private sector (without fiscal outlays) and would result in economic and fiscal savings. - SSB (Social Security Board) issues: - SSB is deeply underfunded and may carry substantial fiscal costs over the long term even in the baseline. - SSB coverage and financing: - Covers employed and self-employed persons; offers short-term benefits, long-term benefits or pensions, and employment injury benefits. - Financed by contributions levied on employment earnings and paid by employers, employees, and self-employed persons. - Latest actuarial review as of end-2020 found: - (1) total expenditure will first exceed total income in 2024 if no parametric reform is implemented in the short-run, - (2) reserves will be depleted by 2040, - (3) currently proposed reforms (raising retirement age, increasing contributions) would postpone the exhaustion of the reserves by only 6 years, and - (4) the current actuarial balance (gap) over 2021–2080 is almost 3 times GDP. - Board’s portfolio exposure: local investments account for 95 percent of the total, and 51 percent are in local banks’ CDs. - If the government were to cover the SSB funding gap over 60 years, this would entail additional fiscal costs of about 5 percent of GDP per year. ### Conclusion and external debt findings - Fiscal policy that invests a large portion of CBI revenue in ND preparedness and saves the rest for debt reduction, with no further fiscal relaxation, results in relatively strong medium-term debt sustainability. - Key risks: - contingencies from remaining debt-swap lands, - extraordinary combined macro-fiscal shocks, - natural disasters of more significant impact than simulated in this DSA (e.g., Category 5 hurricane that affected Dominica in 2017), - a more-than-projected decline or cancellation of CBI revenue. - Pension fund (SSB) will require substantial fiscal contributions over the long term unless ambitious parametric reforms are undertaken. - External Debt Sustainability Analysis: - external public debt-to-GDP ratio fell to 8 percent of GDP in 2022 and is projected to remain almost flat over the medium term. - Stress tests indicate external public debt would increase by 4–10 percentage points of GDP under the real depreciation, combined, and current account shocks (Figure 5 and Table 4). - The most pronounced impact on external debt is from the current account shock, suggesting external adjustment would be necessary under that shock. ### Social safety net (Annex IX) — key points and program details - National Social Protection Strategy aims to progressively develop social protection coverage and prevent chronic poverty; mainstreams social assistance, education and training, health care, and labor market issues. - Social safety framework comprises social assistance programs (financed by government revenue) and a social security system (funded by contributions and taxes). - Poverty Alleviation Program (PAP): - Accounts for 94 percent of total social program spending in 2022. - Provides a monthly stipend of EC$500 to households with a gross monthly income of less than EC$3,000. - PAP covers an estimated 40–50 percent of households and had 6,763 beneficiaries in September 2022. - Other programs: - Food voucher: valued as $200 for a family of 1–2 persons; $300 for a family of 3–4 persons; $400 for a family of more than 4 persons. - Medical Assistance: maximum payable benefit to an individual is $5000.00 USD. - COVID Income Support: - Provided up to $1,000 per month for affected workers; had 4,238 beneficiaries over January to June 2022; phased out in Q2 2022. - Recommendations to improve social assistance: - redesign PAP eligibility to account for household special needs (children, elderly) and consider a multivariate framework; - develop a single beneficiary data system built on existing infrastructure (national household registry, census, social security) to reduce exclusion errors and streamline case management; - improve inter-agency cooperation among Ministry of Social Development and Gender Affairs, Ministry of Sustainable Development, and the SSB. ### Banking sector and measures to support credit growth (Annex X) - Banking sector characteristics: - Sector is over 2 times GDP and the second largest in the ECCU for total assets. - Sector has ample capital and liquidity buffers but some of the highest NPLs (around 20 percent) in the ECCU. - Bank provisions are close to the ECCB requirement of 60 percent but need to rise further to meet the 100 percent target for long-standing NPLs by 2024. - Supervisory and policy recommendations: - Close supervisory monitoring to ensure proper loan classification; additional data reporting on restructured loans; consider an audit. - Monitor loans to construction and real estate sectors given concentration and potential CBI-driven risks. - Strengthen FSRC supervision of the credit union segment (which has assets of 20 percent of GDP and NPLs of 5.5 percent). - FSRC should analyze asset quality, conduct stress tests of large credit unions, and adopt updated provisioning guidance similar to the new ECCB standard. - Measures to support credit growth: - regional initiatives such as establishing a regional credit bureau and registry; - address collateral constraints for MSME, including via a regional partial credit guarantee scheme; - revisit the 2 percent minimum household savings deposit rate; and - pass relevant securities legislation to deepen capital markets. *Source: 1knaea2023002 - 5. Staff used the 2022 DSA template to simulate the impact of downside risks,* ### 3. Completion of long-standing reforms would support post-pandemic asset recovery. ### 3. Completion of long-standing reforms would support post-pandemic asset recovery. ### Foreclosure, property ownership, and NPL divestment - Streamlining protracted foreclosure processes is needed to support post-pandemic asset recovery. - Facilitating non-citizen ownership of property is highlighted as a reform to promote recovery. - Revisit funding of regional NPL divestment strategies to accelerate asset resolution. - ECAMC limited resources and the uncertainty with the valuation of collateral impede these efforts. ### AML/CFT risks and supervisory framework - St. Kitts and Nevis is one of the three countries in the ECCU that have not yet designated the ECCB as the supervisory authority for supervision of AML/CFT for banks. - Further action is needed to pass other financial sector legislation in St. Kitts and Nevis, as advised by the ECCB. - The country’s fourth round mutual evaluation report (MER) was adopted by the Caribbean Financial Action Task Force (CFATF) in December 2021. - The MER assessed the country as having a low level of effectiveness in 8 of the 11 immediate outcomes assessed and a moderate level of effectiveness for the remaining immediate outcomes. - As a result of these ratings St. Kitts and Nevis will be subject to enhanced follow-up by the CFATF. - Primary ML/TF risks arise from: - (i) its domestic financial sector, - (ii) its activity as an international business center, particularly company formation activity, - (iii) its CBI program. - MER identified deficiencies in the country’s understanding of its ML/TF risk, including on the part of the Financial Services Regulatory Commission (FSRC), the supervisor of financial institutions and trust and company service providers (TCSP). - Deficiencies identified in the FSRC’s operations: - Failure to devote sufficient attention to AML/CFT supervision. - FSRC found to be inadequately resourced. - Differences in the supervisory approach adopted by the St. Kitts and Nevis branches. - Deficiencies in FSRC’s supervision of TCSPs, relevant to the CBI program because TCSPs are intermediaries for CBI Unit applications. - Absence of effective AML/CFT supervision of real estate agents noted with concern. - Measures announced by the European Parliament in March 2022 to deny visa-free entry to persons from countries with CBI programs could place further pressures on CBRs as correspondent banks take note of these concerns. ### Authorities’ actions and recommended next steps on AML/CFT - Authorities are conducting another national risk assessment (NRA). - The new NRA is designed to undertake a more robust and detailed assessment and will present its findings in a more granular manner. - To improve supervisory consistency: - A supervisory manual is being developed to guide FSRC’s St. Kitts and Nevis branches and promote greater consistency in practices. - FSRC staffing changes: - Over the period 2020 to 2022 four new staff members joined the Commission, including a manager, two regulators and an additional staff member in the registry. - Gaps and outstanding concerns: - FSRC did not outline measures taken in response to MER findings regarding TCSP supervision and international banks. - No specific measures taken to address absence of effective supervisory arrangements for real estate agents; this remains a concern given services to persons who acquired citizenship through CBI and are in a high ML/TF risk category. - Measures followed by the FSRC during onsite examinations appear largely compliance driven; scope exists to enhance risk-based practices (e.g., place more emphasis on assessing the effectiveness of risk management frameworks and practices rather than identifying compliance exceptions). - Staff encouragement and recommendations: - Continue efforts to strengthen St. Kitts and Nevis’ AML/CFT regime. - Particular attention to enhancing effective supervision of international banks, TCSPs and real estate agents. - Continue strengthening the FSRC’s resources and its risk-based supervisory systems and practices. ### Interaction with correspondent banking and CBI-related pressures - CBI program is a material source of ML/TF risk and linked to supervisory weaknesses in TCSP oversight. - European Parliament measures in March 2022 concerning visa-free entry for persons from countries with CBI programs may exacerbate correspondent banking relationship (CBR) pressures. *Source: ST. KITTS AND NEVIS — INTERNATIONAL MONETARY FUND (excerpt from chapter titled "3. Completion of long-standing reforms would support post-pandemic asset recovery." and related AML/CFT and geothermal annex material).* ### 14.5 percent in 2020 and 0.9 percent in 2021. The rebound in tourism is the ### Macroeconomic Outlook and Policies ### Recent economic performance - "14.5 percent in 2020 and 0.9 percent in 2021. The rebound in tourism is the" (text excerpted as provided). - The rebound in tourism is the main contributing factor to the improved economic performance. - Consumer prices increased from 1.9 percent in 2021 to 3.8 percent in 2022 largely because of higher food prices and shipping costs. - Government mitigation measures included an electricity subsidy, income support and increased wages in the public sector. ### Fiscal position and public finances - The fiscal deficit widened in 2022 with the gap financed with resources from the CBI program. - The primary balance, excluding CBI revenue and expenditure and land buybacks, deteriorated to a deficit of 17 percent of GDP compared to 15 percent in 2021. - Deterioration reflects the impact of various revenue measures and increased expenditures implemented in response to the dual crises. - Tax revenue continued to fall due to a decline in income taxes. - The authorities rely mostly on the good performance of the CBI program to fund pandemic and cost of living mitigation measures. - Authorities commit to using CBI program earnings to boost savings and concur with staff recommendations for the establishment of a Sovereign Wealth Fund (SWF); technical assistance has been requested to update guidance on the Fund. - Authorities accept that over-reliance on CBI resources is not optimal and have requested technical assistance to review the current revenue framework and to consider recommendations to improve administration and efficiency of the tax system. - Authorities are working with other ECCU member states to improve transparency and governance arrangements for CBI programs and have engaged with the United States Government and propose to meet the European Union. ### External sector and tourism - Recovery in the tourism sector is expected to contribute to improvements in the external sector, resulting in a narrowing of the current account deficit. - For 2022, it is estimated that the current account deficit was 14.5 percent of GDP compared to 0.8 percent of GDP in 2021. This was partly offset by lower imports and profit outflows. ### Financial sector developments and stability - Financial sector conditions have so far remained stable, and buffers remain adequate. - Bank profits declined as they recorded losses on the overseas investment portfolio. - Capital ratios declined in 2021–22 but are still well above the 8 percent minimum. - The level of non-performing loans remains high largely because of legacy loans within the system, but post-moratoria NPL increases have not yet materialized. - A focus on the large systemically important bank includes support for a review of the business model to lessen risks and minimize losses from global financial and monetary conditions. - For the non-bank sector, authorities agree that efforts to improve supervision and monitoring are vital and have increased the number of staff of the FSRC. - The authorities have taken several measures to address outstanding AML/CFT matters and are committed to continue these efforts; the ongoing national risk assessment (NRA) will help design a more robust system. - Authorities are considering the outstanding matter to have the Eastern Caribbean Central Bank (ECCB) as the AML/CFT supervisor for financial institutions licensed under the Banking Act. ### Macroeconomic outlook and projections - Staff project growth to be 4.5 percent of GDP in 2023 and 3.8 percent in 2024, with GDP returning to the pre-pandemic level by end-2024. - By 2026, growth is expected to be in line with potential, estimated at 2.7 percent of GDP. - Inflation is projected to be 2.3 percent in 2023 and 2 percent in 2024. - Risks to the economic outlook are tilted to the downside in the short term but are expected to improve over the medium term with the trajectory of recovery, subject to the success of the government’s proposed investments and the path of global conditions. ### Fiscal policy priorities and measures - Fiscal consolidation is a priority for the authorities. - Authorities propose to discontinue the electricity subsidy implemented to address the rise in fuel and energy costs and the income support measures introduced during the COVID-19 pandemic. - Better targeting of social support will be guided by a reform of the Poverty Alleviation Program (PAP). - Complementary measures being considered include streamlining expenditure and public sector wage bill control. - Authorities aim to maintain strong public investment and indicated several large public sector projects are being executed through government statutory agencies; a number of capital projects are at the design stage and will be pursued over the medium term. - These factors account for a relatively small capital expenditure being included in the central government budget; authorities consider this approach a more efficient way of managing public investments. ### Structural reforms and resilience building - Reforms to boost labor productivity are essential to both the private and public sector and will be pursued. - Authorities see value in reorienting skills training towards jobs created through proposed new investments. - Training and job opportunities will be integrated into the review of the STEP program with the goal of transitioning more people into the formal workforce. - Inclusion of arrangements for tripartite engagement is considered useful and should be considered in the review of labor protection legislations and unemployment benefits. - Building resilience to natural hazards is imperative: plans include building resilient infrastructure, development of multiple sources of renewable energy and reduced use of fossil fuels to address climate concerns and enhance competitiveness. - Authorities are fully onboard with staff’s recommendation on possible steps to financial resilience to respond to climate change impacts and natural disasters and are requesting Fund technical assistance to effect these recommendations. ### Concluding remarks - Authorities in St. Kitts and Nevis value engagement with the Fund. - The economy faces disruptions from the lingering effect of the COVID-19 pandemic, high prices and the impacts of global monetary tightening conditions. - Technical assistance and other support from the Fund and other international partners remain key in the authorities’ efforts to address challenges and to stay on track to achieving inclusive and sustainable development. *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1knaea2023002.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1knaea2023002.pdf_