## 1knaea2023003

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### A. Introduction and Overview
- St. Kitts and Nevis has faced recent headwinds with labor market challenges characterized by:
  - stagnant labor productivity;
  - a disconnection between wage and labor productivity growth across sectors;
  - a large public sector—with the highest share of public sector employment in the ECCU.
- Strengthening the labor market is key to strengthening job opportunities, restoring competitiveness, and supporting sustainable growth.
- Chapter purpose: review anecdotal evidence on labor market conditions and discuss policy options to strengthen the labor market and support growth.

### B. Labor Market Diagnosis — Employment, Wages, Productivity, and Public Sector
Findings on employment and sectoral composition
- Formal employment composition in 2019:
  - public administration: 38 percent;
  - hospitality: 12 percent;
  - trade: 11 percent.
- COVID-19 effects:
  - public sector employment increased to 43 percent in 2021 due to large private-sector job losses;
  - employment in hospitality and trade in 2021 was at 69 percent of their 2019 level.
- High-productivity sectors (fishing, mining, education, health, financial intermediation, real estate) account for 14 percent of total employment.

Findings on labor costs, wages, and productivity
- Sectoral average wage is the highest in the ECCU for all sectors except manufacturing, utilities, and transportation.
- Labor productivity is close to the ECCU average in many sectors, implying higher unit labor costs in sectors including:
  - hospitality;
  - finance intermediation;
  - real estate;
  - public administration.

Wage-productivity dynamics
- Pre-COVID: wage growth generally outpaced labor productivity in most sectors.
- Post-COVID:
  - real wages in 2021 were below the 2019 level in most of the private sector;
  - real wages in 2021 were slightly above the 2019 level in the public sector.
- Over 2012–2021:
  - real wage growth lagged labor productivity growth in the private sector;
  - real wage growth outpaced labor productivity growth in the public sector.

Public sector size and fiscal weight
- Public sector employment: 38 percent of total employment in 2018 (ECCU average 24 percent).
- Public sector wage bill:
  - average 10.3 percent of GDP during 2013–19 (ECCU average 9.7 percent);
  - increased to 12.1 during 2020–21 (ECCU average 11.2 percent).
- Noted public sector wage increases:
  - 2014–16: total 10 percent increase implemented as 4 percent, 3 percent, and 3 percent over three years;
  - 2022 H1: public sector wages increased by 10 percent, retroactive to January 2022.

Wage co-movement between public and private sectors
- 2003–19: monthly real wage growth in trade, transportation, finance, real estate, education, health, and other services highly correlated with the public sector (correlation above 0.8).
- Hospitality pre-COVID correlation with public sector: 0.2.
- 2020–2022: hospitality–public sector real wage growth correlation increased to above 0.7.

Summary diagnosis points
- Key challenges and opportunities:
  - strengthen jobs and growth opportunities across sectors;
  - enhance the wage-setting system to support competitiveness;
  - increase the efficiency of the public sector.

### C. Leveraging Sectoral Linkages for Jobs and Growth
Empirical findings on linkages
- Hospitality identified as having strong linkages to the rest of the economy and potential to be a stronger lever for jobs and growth.
- COVID-19 tourism collapse:
  - In March 2020, stayover tourists and cruise passengers both fell more than 60 percent compared to March 2019;
  - April–December 2020: stayover arrivals fell by more than 90 percent and cruise passengers fell by 100 percent;
  - Total tourists (stayover and cruise) recorded a 75 percent loss in 2020 compared to 2019.
- Employment losses in 2020 by sector:
  - hospitality: 36 percent loss in number of jobs;
  - construction: 28 percent loss;
  - transportation: 24 percent loss;
  - real estate: 16 percent loss;
  - manufacturing: 16 percent loss;
  - trade: 15 percent loss;
  - education and health services: 10 percent loss.

Regression analysis on hospitality linkages (18 years of data)
- A 1 percent growth in hospitality jobs is associated with:
  - more than 0.4 percent growth in jobs in trade, transportation, and other services within a month (pass-through ~0.4);
  - pass-through to real estate estimated at 1.
- Persistence:
  - Effects last up to 3 months in real estate, transportation, and other services;
  - 3-month cumulative pass-through: 0.6 (real estate), 1.8 (transportation), 0.9 (other services).
- Work hours linkages:
  - Work hours in connected sectors are linked to hospitality work hours, indicating effects on both the extensive margin (jobs) and intensive margin (hours per job).

Wage pass-through
- Linkages in real wages are weaker:
  - real wage growth in hospitality has a significantly positive effect on real wage growth in trade within a month with a pass-through of 0.2.
- Implication: wage gains in hospitality have not broadly translated into wage gains in the rest of the economy despite strong employment linkages.

Policy implications drawn
- Leveraging sectoral linkages can expand diversified and higher-quality job opportunities.
- Developing niche tourism (agricultural tourism, cultural tourism, entertainment-related tourism) can:
  - support employment and growth in hospitality;
  - diversify tourism revenue sources;
  - increase indirect contribution of tourism to the broader economy by generating demand for local agriculture and services.
- Required actions include:
  - coordination of local farmers and communities with hotels, restaurants, and tourism agencies;
  - inter-agency collaboration between tourism, agricultural, cultural, and entertainment authorities;
  - support for local small and medium enterprises to integrate into tourism value chains.

### D. Wage Policies — Unemployment Insurance, Employment Protection, and Minimum Wages
Unemployment insurance (UI)
- Potential benefits:
  - smooth consumption for unemployed workers;
  - enable better job matches and risk-taking for higher-paying jobs, potentially improving productivity and aggregate output.
- Design considerations:
  - balance benefit levels and duration against job search incentives;
  - where monitoring is weaker or informality higher, low benefit generosity and short duration may enhance job search efforts (Bardey et al. 2015).
  - benefits and duration can be increased gradually as administrative capacity improves and informality declines.
- Efficiency depends on complementary policies:
  - structural policies to reduce informality;
  - redistributive policies to protect unemployed without discouraging formal employment;
  - active labor market policies to support job search and skill match.

Employment protection legislation (EPL)
- Role: provides insurance against dismissal and addresses noneconomic motives for dismissal.
- Evidence:
  - EPL reduces productivity, though effects are generally small;
  - EPL may slightly raise unemployment duration by lowering job turnover;
  - overly stringent EPL can foster labor market dualism with adverse implications for efficiency and income inequality.
- Design interaction with UI:
  - expand UI gradually as administrative capacity develops;
  - make EPL less stringent, simpler, and more homogeneous to reduce economic costs and administrative burden and protect different workforce segments evenly.

Minimum wages
- Roles:
  - promote economic efficiency by alleviating excessively low wages and addressing firm market power (Shapiro and Stiglitz 1984);
  - reduce poverty via guaranteed worker compensation.
- Limitations and targeting issues:
  - less effective for poverty reduction when poorly targeted;
  - effectiveness declines when the informal sector share is large or when starting level of minimum wage is high;
  - high minimum wages can adversely affect employment opportunities for less productive workers and hamper competitiveness of small/low-productivity firms.
- Yardsticks:
  - minimum wage to median (or average) wage ratio: advanced economies typically 40 to 60 percent; emerging and developing countries from 40 percent to above 100 percent.
- Current situation in St. Kitts and Nevis:
  - current minimum wage: 360 EC dollars a week;
  - about half of the median wage (as in January to May 2022).

Risks and design of statutory minimum wages
- Statutory minimum wages can generate adverse employment effects; differentiation is a mitigation option:
  - across population groups, regions, industries.
- Minimum wages need to be flexible to ensure resilience of employment to changes in economic conditions.

Role of collective bargaining and wage-setting institutions
- Formal wage bargaining can enhance wage system flexibility.
- Decentralized collective bargaining (e.g., firm level) can be useful for setting wages and working conditions.
- Higher-level bargaining (industry or regional) can enhance equity but may undermine efficiency by reducing flexibility.
- Collective bargaining set minimum wages could facilitate differentiation and flexibility if supported by:
  - effective social dialogue;
  - high degree of representativeness, coordination, and trust between bargaining parties.

Public sector wages: channels and constraints
- Public sector wages influence private sector wages and employment via reference effects, reservation wages, and fiscal expenditure.
- Large public-private wage premium can adversely impact public service delivery, fiscal sustainability, and private sector competitiveness.
- Public sector compensation needs to be competitive but not overly generous.
- Institutional arrangements recommended:
  - regular comparison between public and private sector wages;
  - regular wage negotiations rather than ad hoc adjustments;
  - medium-term wage bill forecasting.
- Short-term tools to contain public sector wage bill increases:
  - worker attrition and redeployment;
  - restraint on wage increases.

Methodology note
- Spillovers from hospitality to other sectors analyzed using a local projection framework (Jordà 2005) at monthly frequency with instrumental variables for hospitality growth based on lagged tourist arrivals and expenditure; monthly data from January 2003 to September 2022.

Conclusion — labor market policy priorities (excerpt)
- Labor market and growth policies could strengthen jobs and growth post-COVID by:
  - leveraging sectoral linkages for diversified and higher-quality job opportunities;
  - enhancing labor market policies (including flexible, differentiated minimum wages and strengthened collective bargaining institutions);
  - increasing public sector efficiency.

### E. Fossil Fuel Dependency, Renewable Energy Potential, and Projects
Fossil fuel dependence and current supply arrangements
- St. Kitts and Nevis buys oil and derivatives from different international suppliers; private distributors serve private sector and consumers.
- St. Kitts obtains oil and petroleum derivatives through Petro-Caribe with a credit up to 60 percent of the value per barrel, interest rate of 1 percent over a period of 25 years.
- Nevis does not participate in Petro-Caribe due to insufficient storage capacity; NEVLEC buys fuel oil at international market prices from a private entity with storage in Nevis.

Renewable energy potential and projects
- Natural resource metrics:
  - Nevis has an active and exceptionally large reservoir of geothermal heat (CARICOM, 2017).
  - Average wind speeds: 6.6 meters per second.
  - Solar resource average: 5kWh per square meter (Energy Transition Initiative, 2018).
  - A 2017 feasibility study indicated potential geothermal plant of about 36MW, which is 55 percent of current installed capacity (Teranov, 2017).
- Government plan and timeline:
  - plan to build a 30MW geothermal plant composed of 3 wells of 10MW each, and an accompanying hydrogen production plant.
  - current needs: 28MW, implying potential to export energy.
  - project estimated total cost: USD 150 million, including wells and transmission lines.
  - goal to start test drilling in June 2023, with estimated completion date in 2025.
- Financing and de-risking:
  - Caribbean Development Bank (CDB) approved USD 17 million in December 2022 under a contingency recoverable grant modality (grant converts to a loan only if drilling is successful).
  - Environmental and social assessment completed; frequent discussions with CDB ongoing.
- Other renewable deployments:
  - 0.75 MW solar plant by St. Christopher Air and Sea Ports Authority.
  - Solar panels at government headquarters producing around 30 percent of its electricity needs (100 KW).
  - Solar-powered streetlights on a portion of the main rural road.
  - Wind farm: in Nevis a 2.2 MW wind power plant (around 20 percent of the island’s installed capacity) operated by a private power producer.
  - Government reviewed “Waste-to-Energy” project proposals.

Emissions and energy cost context
- CO2:
  - 2016 emissions: 203,036 tons of CO2, 1.5 percent higher than in 2015.
  - CO2 emissions per capita: 3.93 tons per person (Worldometer, 2022).
  - Sectoral shares: transportation 48 percent; power industry 44.4 percent.
- Current cost of electricity in St. Kitts: 28 cents per kWh.
- Authorities aim for 100 percent renewable energy generation by 2030.

Defining the right renewable energy mix (trade-offs)
- Technology trade-offs:
  - Geothermal: low generation costs but high project cost and execution risk; reliable baseload without storage.
  - Solar: falling costs into low single digits; weather dependent; low execution risk.
  - Wind: low cost if onshore; weather dependent; low execution risk.
  - Solar/wind plus storage (BESS): higher electricity costs but high reliability; low execution risk.
- Cost examples and PPA trade-offs:
  - Solar-only generation cost example: on average 6 to 8 cents per KW/h.
  - Solar plus storage via PPA: cost between 20 and 30 cents per KW/h.
  - Geothermal via PPA: can result in single digits electricity costs but faces longer execution and higher upfront risks.
- Policy implications and grid needs:
  - Cheaper electricity will encourage structural changes and broader electrification, raising future electricity consumption faster than GDP.
  - Investment in grid upgrades and burying power lines underground increases initial costs but improves resilience to natural disasters and saves costs long-term.
  - Recommendation: develop all potential RE sources simultaneously to enhance diversification and resilience; potential to export clean energy and develop “green” hydrogen and chemicals.

### F. Modeling Costs and Benefits of Resilient Investment (FGG model summary and results)
Model features
- Markov-switching dynamic stochastic general equilibrium framework calibrated to country-specific parameters.
- Natural disasters (NDs) destroy shares of public and private capital stocks and temporarily reduce total factor productivity.
- Government can invest in resilient structures at a premium (assumed premium of 25 percent over non-resilient investment).
- Model includes labor migration, remittances, incomplete markets, financial frictions with collateral constraints, and a full set of fiscal instruments.
- Public investment shares are constant shares of nominal GDP; fiscal policy anchored by a debt rule; lump-sum taxes used to match public debt target over medium term.

Near-term returns
- Resilient investment reduces output decline (flow return) and reconstruction cost (stock return).
- Assuming 80 percent resiliency of public capital (damage with resiliency reduced to 20 percent of damage without resiliency), gains equivalent to 0.7-2.7 percent of GDP on average per year in the ECCU.
- In St. Kitts and Nevis, output decline after NDs is reduced by about 2 percentage points of GDP, with long-lasting effects.

Long-term returns
- Increasing resilience reduces expected losses from NDs, raising private investment, capital stock, employment, and output.
- An increase in resilience from 0 to 80 percent increases output in ECCU countries in the range of 3–11 percent.
- In St. Kitts and Nevis, the long-term output level increases by about 9 percent.
- Climate change increases the long-term return of resilient investment: GDP increases by an additional 4 percent relative to no climate change.

Fiscal implications
- Near term: resilient investment reduces the increase in public debt after a ND; reduction in debt gap remains protracted (e.g., 20 years after a ND).
- Transitional fiscal cost: costlier resilient investment worsens fiscal balance initially; additional cost of resilience would increase public debt by 4–20 percentage points of GDP in the ECCU by 2030 above the regional target.
- Financing gap: about 0.4–1.5 percent of GDP per year above historical levels would be needed to reach the regional debt target while increasing resilience.
- Time horizon: benefits from resilient public capital may take a long time (possibly over 40 years) before resilient capital share becomes dominant; growth benefit about a 0.4 percent average annual gain accrues slowly.
- Long run: tax revenues increase in the range of 2–6 percent depending on tax type; overall fiscal balances improve in the range of 0–3 percentage points of GDP with resilient investment rising to 80 percent.

### G. Multi-layered Insurance Framework for Disaster Financing and Model Simulations
Overall finding
- A layered insurance of 27 percent of GDP would cover the fiscal costs in 99 percent of ND events (estimation based on a low level of resilient investment).

Layered insurance framework — components and calibrated parameters
- Layer 1 — Saving Funds (SFs):
  - Optimal SF stock suggested: 10 percent of GDP.
  - Annual fiscal cost: 0.3 percent of GDP.
  - Calibrated contribution in a year without NDs: 1.9 percent of GDP to SFs.
  - Use in case of NDs: 4.8 percent of GDP to cover an estimated average fiscal cost of 19.3 percent of GDP.
  - Target probability of SFs depletion: 7 percent.
  - Actual government deposits in 2022: 22 percent of GDP (reflecting CBI windfall); deposits have been used for pandemic emergency spending and a substantial land buyback in 2022.
- Layer 2 — CCRIF:
  - Current maximum coverage: close to 2 percent of GDP (earthquakes, tropical cyclones, rainfalls).
  - Annual fiscal cost (current policy): 0.05 percent of GDP.
  - Historical payout from ND per ND event: 0.1 percent of GDP.
  - CCRIF payout mechanics: parametric triggers often resulted in insufficient payouts; payouts discounted by factor 0.5 for 1/20-year losses and 1 for 1/100-year loss.
  - Insurance multiplier: CCRIF multipliers are around 2, and higher for extreme events.
  - Model suggestion for higher coverage: close to 15 percent of GDP at an annual fiscal cost estimated at 1.1 percent of GDP — may require recalibrating CCRIF triggers.
- Layer 3 — CAT bond issuance:
  - Simulation assumes issuance between US$10 and 100 million as needed to reach 99 percent coverage.
  - For St. Kitts, CAT bond issuance illustrated: 2–5 percent of GDP to reach 99 percent coverage of ND costs.
  - Annual fiscal cost for this CAT bond issuance: 0.3 percent of GDP.
  - No current CAT bond issuance in St. Kitts and Nevis; regional work ongoing.

Policy implications — assessment, adaptation, mitigation, funding
- Suggested actions:
  - design a multi-layered national strategy integrating growth and climate resilient strategies;
  - enhance institutional capacity and build a coherent legal framework for climate mitigation, adaptation, and resilience;
  - develop and maintain early warning systems and risk maps, including hydrometeorological information;
  - adopt zoning and coding regulations for safe and efficient land use, involving private sector through building codes reform;
  - advance sustainable agriculture practices and nationwide vegetation management planning.

Fiscal policy for resilience building and climate adaptation
- Priority: build adequate fiscal buffers and optimize their allocation.
- Recommended comprehensive fiscal policy framework to include:
  1. An enhanced multi-layered insurance framework.
  2. Substantial investment in resilience.
- Supplementary strategy: increase public investment to enhance growth, build buffers, and lower gross debt.
- Insurance model results:
  - required insurance coverage (around 20.5 percent of GDP in total) is smaller than current “self-insurance” coverage (up to 27 percent of GDP in total).
  - recalibrate CCRIF attachment point and coverage limit to ensure payouts for severe and less frequent ND events.
  - CAT bond issuance beneficial only if issuance costs are significantly smaller than observed.

Fiscal prudence, debt, and savings
- Fiscal restraint is needed over the medium- and long-term.
- CBI proceeds: could be partially earmarked for climate strategies.
- Debt projections:
  - If fiscal restraint is exercised, gross debt ratio projected to fall below the regional target of 60 percent of GDP.
  - Projected debt ratio in 2028: 51 percent of GDP.
  - The wedge between 60 percent and projected 51 percent of GDP in 2028 could be part of buffers for climate strategies.
- IMF TA suggestion: 40 percent of GDP as an appropriate safe debt anchor for St. Kitts and Nevis.

### H. Sovereign Wealth Fund (SWF), Market Access, and Regional Government Securities Market (RGSM)
Sovereign wealth fund (SWF) proposal and objectives
- SWF objectives: standard wealth accumulation, ND preparedness, and investment in resilience.
- Expected benefits:
  - formalize and financially secure ND and climate adaptation strategy by allocating government savings specifically;
  - earmarking portion of CBI revenue to the SWF would improve transparency and redistribute CBI revenue across generations;
  - transferring government deposits from the National Bank to a SWF with proper risk management and external advisors would improve governance, reduce investment risk, potentially raise sustainable income, and diminish the bank-sovereign nexus.
- Strategy:
  - allocate a large portion of CBI—especially in early years;
  - increase CCRIF coverage early on to protect the economy and preserve fiscal resources;
  - front-loaded investment in resilience would gradually reduce need for expanded insurance coverage, yielding savings from reduced insurance premiums.

Market access and RGSM
- Benefits of a well-functioning LCBM/RGSM: reliable medium- to long-term financing with attractive cost and risk characteristics.
- Importance for ND preparedness:
  - severe ND could deplete buffers, requiring rapid debt issuance;
  - absence of market access during “good times” makes post-ND market access nearly impossible.
- St. Kitts and Nevis history:
  - has not tapped RGSM for T-bills for about 10 years and T-bonds for about 20 years; mainly relied on domestic loans.
- Alternative financing: tapping international concessional lending with long-term maturities (e.g., blue bonds) to finance resilience investment at lower costs.

*Source: 1knaea2023003 — ST. KITTS AND NEVIS, INTERNATIONAL MONETARY FUND (excerpt).*

### References _______________________________________________________________________________ 12

### 1knaea2023003 - References _______________________________________________________________________________ 12

### A. Introduction and Overview
- The economy of St. Kitts and Nevis has been on the regional frontier but faced headwinds in recent years, with labor market challenges characterized by:
  - stagnant labor productivity;
  - a disconnection between wage and labor productivity growth across sectors;
  - a large public sector—with the highest share of public sector employment in the ECCU.
- Strengthening the labor market is presented as key to strengthening job opportunities, restoring competitiveness, and supporting sustainable growth.
- This chapter reviews anecdotal evidence on labor market conditions and discusses policy options to strengthen the labor market and support growth.

### B. Labor Market Diagnosis — Employment, Wages, Productivity, and Public Sector
Findings on employment and sectoral composition
- Most formal employment in 2019 came from three sectors:
  - public administration: 38 percent;
  - hospitality: 12 percent;
  - trade: 11 percent.
- COVID-19 effects:
  - public sector employment increased to 43 percent in 2021 due to large private-sector job losses;
  - employment in hospitality and trade in 2021 was at 69 percent of their 2019 level.
- High-productivity sectors (fishing, mining, education, health, financial intermediation, real estate) account for only 14 percent of total employment.

Findings on labor costs, wages, and productivity
- Sectoral average wage is the highest in the ECCU for all sectors except manufacturing, utilities, and transportation.
- Labor productivity is close to the ECCU average in many sectors, implying higher unit labor costs in sectors including:
  - hospitality;
  - finance intermediation;
  - real estate;
  - public administration.

Wage-productivity dynamics
- Before COVID-19, wage growth generally outpaced labor productivity in most sectors.
- After the pandemic, the trend reversed:
  - real wages in 2021 were below the 2019 level in most of the private sector;
  - real wages in 2021 were slightly above the 2019 level in the public sector.
- Over 2012–2021:
  - real wage growth lagged labor productivity growth in the private sector;
  - real wage growth outpaced labor productivity growth in the public sector.

Public sector size and fiscal weight
- Public sector employment constituted 38 percent of total employment in 2018, compared to the ECCU average of 24 percent.
- Public sector wage bill:
  - average 10.3 percent of GDP during 2013–19 (ECCU average 9.7 percent);
  - increased to 12.1 during 2020–21 (ECCU average 11.2 percent).
- Noted public sector wage increases:
  - 2014–16: total 10 percent increase implemented as 4 percent, 3 percent, and 3 percent over three years;
  - 2022 H1: public sector wages increased by 10 percent, retroactive to January 2022.

Wage co-movement between public and private sectors
- During 2003–19, monthly real wage growth in trade, transportation, finance, real estate, education, health, and other services was highly correlated with the public sector (correlation above 0.8).
- Hospitality sector had low co-movement with the public sector pre-COVID (correlation of 0.2).
- After COVID-19 (2020–2022), co-movement between hospitality and public sector real wage growth increased to above 0.7.

Summary diagnosis points
- Key challenges and opportunities include:
  - strengthening jobs and growth opportunities across sectors;
  - enhancing the wage-setting system to support competitiveness;
  - increasing the efficiency of the public sector.

### C. Leveraging Sectoral Linkages for Jobs and Growth
Empirical findings on linkages
- The hospitality sector is identified as having strong linkages to the rest of the economy and potential to be a stronger lever for jobs and growth.
- COVID-19 tourism collapse:
  - In March 2020, stayover tourists and cruise passengers both fell more than 60 percent compared to March 2019;
  - Between April and December 2020, stayover arrivals fell by more than 90 percent and cruise passengers fell by 100 percent;
  - Total tourists (stayover and cruise) recorded a 75 percent loss in 2020 compared to 2019.
- Employment losses in 2020 by sector:
  - hospitality: 36 percent loss in number of jobs;
  - construction: 28 percent loss;
  - transportation: 24 percent loss;
  - real estate: 16 percent loss;
  - manufacturing: 16 percent loss;
  - trade: 15 percent loss;
  - education and health services: 10 percent loss.

Regression analysis on hospitality linkages (18 years of data)
- A 1 percent growth in the number of jobs in the hospitality sector is associated with:
  - more than 0.4 percent growth in the number of jobs in trade, transportation, and other services within a month (pass-through ~0.4);
  - pass-through to the real estate sector is estimated at 1.
- Persistence:
  - Effects last up to 3 months in real estate, transportation, and other services;
  - 3-month cumulative pass-through estimated at 0.6 (real estate), 1.8 (transportation), and 0.9 (other services).
- Work hours linkages:
  - Work hours in connected sectors are also linked to hospitality work hours, indicating effects on both the extensive margin (jobs) and intensive margin (hours per job).

Wage pass-through
- Linkages in real wages are weaker:
  - real wage growth in hospitality has a significantly positive effect on real wage growth in trade within a month with a pass-through of 0.2.
- Implication: wage gains in hospitality have not broadly translated into wage gains in the rest of the economy despite strong employment linkages.

Policy implications drawn
- Leveraging sectoral linkages can expand diversified and higher-quality job opportunities.
- Developing niche tourism (agricultural tourism, cultural tourism, entertainment-related tourism) can:
  - support employment and growth in hospitality;
  - diversify tourism revenue sources;
  - increase indirect contribution of tourism to the broader economy by generating demand for local agriculture and services.
- Required actions include:
  - coordination of local farmers and communities with hotels, restaurants, and tourism agencies;
  - inter-agency collaboration between tourism, agricultural, cultural, and entertainment authorities;
  - support for local small and medium enterprises to integrate into tourism value chains.

### D. Wage Policies — Unemployment Insurance, Employment Protection, and Minimum Wages
Unemployment insurance (UI)
- Potential benefits:
  - smooth consumption for unemployed workers;
  - enable better job matches and risk-taking for higher-paying jobs, potentially improving productivity and aggregate output.
- Design considerations:
  - balance benefit levels and duration against job search incentives;
  - in contexts with weaker monitoring or higher informality, low benefit generosity and short duration may enhance job search efforts (Bardey et al. 2015).
  - Benefit and duration can be increased gradually as administrative capacity improves and informality declines.
- Efficiency depends on complementary policies:
  - structural policies to reduce informality;
  - redistributive policies to protect unemployed without discouraging formal employment;
  - active labor market policies to support job search and skill match.

Employment protection legislation (EPL)
- Role:
  - provides insurance against dismissal and addresses noneconomic motives for dismissal (abuse, discrimination).
- Evidence:
  - EPL is found to reduce productivity, though effects are generally small;
  - EPL may slightly raise unemployment duration by lowering job turnover;
  - overly stringent EPL can foster labor market dualism (formal vs. informal), with potential adverse implications for efficiency and income inequality.

Design interactions between UI and EPL
- Policy suggestion:
  - expand unemployment insurance gradually as the economy and administrative capacity develop;
  - make employment protection legislation less stringent, simpler, and more homogeneous to reduce economic costs and administrative burden and to protect different workforce segments evenly (regular and temporary workers).

Minimum wages
- Roles of minimum wage:
  - promote economic efficiency by alleviating excessively low wages and addressing firm market power (Shapiro and Stiglitz 1984);
  - reduce poverty via guaranteed worker compensation.
- Limitations and targeting issues:
  - Less effective for poverty reduction when poorly targeted (e.g., targets individuals instead of households, only formal workers, focuses on income rather than expenses).
  - Effectiveness declines when the informal sector share is large or when the starting level of minimum wage is high.
  - High minimum wages can adversely affect employment opportunities for less productive workers (e.g., less educated youth) and hamper competitiveness of small/low-productivity firms.
- Yardsticks:
  - minimum wage to median (or average) wage ratio is a useful gauge;
  - advanced economies: ratio typically 40 to 60 percent;
  - emerging and developing countries: ratio from 40 percent to above 100 percent.
- Current situation in St. Kitts and Nevis:
  - current minimum wage: 360 EC dollars a week;
  - about half of the median wage (as in January to May 2022).

*International Monetary Fund — ST. KITTS AND NEVIS: Labor Market Diagnosis and Policies (February 28, 2023)*

### 27. The risks of adverse employment effect should be considered when setting statuary

### 27. The risks of adverse employment effect should be considered when setting statuary minimum wages

### Risks and design of statutory minimum wages
- Statutory minimum wages can generate adverse employment effects that should be considered when setting levels.
- Differentiation is a mitigation option:
  - Across population groups, regions, industries—dimensions along which productivity vary.
- Minimum wages need to be flexible to ensure the resilience of employment to changes in economic conditions.

### Role of collective bargaining and wage-setting institutions
- A formal wage bargaining process can enhance the flexibility of the wage system.
- Decentralized collective bargaining (e.g., at the firm level) can be a useful tool for setting wages and working conditions.
- Bargaining at a higher level (e.g., industry or regional) can enhance equity but may undermine efficiency by making wage and labor allocation decisions inflexible.
- Minimum wages set through collective bargaining rather than statutory decisions could facilitate differentiation and flexibility.
- For collective bargaining to achieve differentiation without undermining equity, it needs:
  - An effective social dialogue.
  - High degree of representativeness, coordination, and trust between bargaining parties.

### Public sector wages: channels and constraints
- Public sector wages influence private sector wages and employment through various channels:
  - Private sector wages may use public sector wages as a reference.
  - Public sector wages set too high can increase reservation wages and crowd out private sector employment.
  - Through taxation and government expenditure, public sector wages have direct and indirect effects on growth.
- Public sector wages and employment need to be set consistent with the effective delivery of public services.
  - A large public-private wage premium is found to adversely impact public service delivery, fiscal sustainability, and private sector competitiveness (IMF 2016).
  - Public sector compensation needs to be competitive and not overly generous relative to the private sector.
  - The public sector needs flexibility to adjust compensation levels and the size and skill composition of employment to be in line with growth and fiscal objectives.
- Strong institutions are required to manage public sector wages over the medium term. Institutional arrangements include:
  - Regular comparison between public and private sector wages.
  - Regular wage negotiations as opposed to ad hoc adjustments.
  - Using medium-term wage bill forecasting to support better fiscal outcomes.
- Short-term tools to contain increases in the public sector wage bill could include:
  - Worker attrition and redeployment.
  - Restraint on wage increases.

### Empirical approach (methodology summary)
- To analyze spillovers from the hospitality sector to other sectors, a local projection framework (Jordà 2005) is estimated at the monthly level.
- Dependent variable y is the number of jobs; growth is measured as the first difference of logs relative to t, multiplied by 100.
- Hospitality sector growth Ht is instrumented with lagged 1- and 2-month growth in:
  - Total tourist arrivals.
  - Stay-over tourist arrivals.
  - Total tourist expenditure.
- Identification assumption: tourist arrivals and expenditure are driven by external tourism demand shocks unrelated to domestic conditions, affecting other sectors only through the tourism sector.
- Regression estimated using monthly data from January 2003 to September 2022.
- The same regression specification is used for other dependent variables including the number of work weeks and real average wage.

### Conclusion: policy priorities for St. Kitts and Nevis (excerpt)
- Labor market and growth policies could play a key role in strengthening jobs and growth in the post-COVID era by:
  - Leveraging sectoral linkages to provide more diversified and higher-quality job opportunities.
  - Enhancing labor market policies (including flexible, differentiated minimum wages and strengthened collective bargaining institutions).
  - Increasing the efficiency of the public sector.

*Source: 1knaea2023003 — ST. KITTS AND NEVIS, INTERNATIONAL MONETARY FUND (excerpt).*

### 16.      Significant vulnerabilities stem from fossil fuel dependency. St. Kitts and Nevis buys

### 16. Significant vulnerabilities stem from fossil fuel dependency

### Fossil fuel dependence and current supply arrangements
- St. Kitts and Nevis buys oil and derivatives from different international suppliers. The private sector and general consumers are served by private distributors.  
- St. Kitts obtains oil and petroleum derivatives for energy generation and transportation through the Petro-Caribe deal with Venezuela. The government benefits from a credit from Petro-Caribe of up to 60 percent of the value per barrel, with an interest rate of 1 percent over a period of 25 years.  
- Nevis does not participate in the Petro-Caribe deal because it does not have sufficient storage capacity. NEVLEC buys fuel oil at international market prices from a private entity with its own storage capacity located in Nevis.

### Renewable energy potential and projects
- Natural resource and resource metrics:
  - Nevis has an active and exceptionally large reservoir of geothermal heat (CARICOM, 2017).  
  - Average wind speeds: 6.6 meters per second.  
  - Solar resource average: 5kWh per square meter (Energy Transition Initiative, 2018).  
  - A 2017 feasibility study indicated a potential geothermal plant of about 36MW, which is 55 percent of the current installed capacity (Teranov, 2017).
- Government plan and timeline:
  - Government plans to build a 30MW geothermal plant composed of 3 wells of 10MW each, and an accompanying hydrogen production plant.  
  - Current needs of the country are 28MW, implying potential to export energy.  
  - Project estimated total cost: USD 150 million, including wells and transmission lines (some underground for resiliency).  
  - Goal to start test drilling in June 2023, with an estimated completion date in 2025.
- Financing and de-risking:
  - Caribbean Development Bank (CDB) approved USD 17 million in December 2022 under a contingency recoverable grant modality (grant converts to a loan only if drilling is successful) to de-risk later phases and facilitate private participation.  
  - Environmental and social assessment completed; frequent discussions with CDB ongoing.
- Other renewable deployments:
  - A 0.75 MW solar plant constructed and operated by the St. Christopher Air and Sea Ports Authority.  
  - Solar panels at government headquarters producing around 30 percent of its electricity needs (100 KW).  
  - Solar-powered streetlights installed on a portion of the main rural road.  
  - A wind farm established; in Nevis a 2.2 MW wind power plant (around 20 percent of the island’s installed capacity) is operated by a private power producer.  
  - Government has reviewed proposals related to “Waste-to-Energy” projects.

### Emissions and energy cost context
- Carbon emissions:
  - In 2016 St. Kitts and Nevis emitted 203,036 tons of CO2, 1.5 percent higher than in 2015.  
  - CO2 emissions per capita: 3.93 tons per person (Worldometer, 2022).  
  - Sectoral shares: transportation 48 percent; power industry 44.4 percent.
- Energy cost and national RE target:
  - Current cost of electricity in St. Kitts: 28 cents per kWh.  
  - Authorities aim for 100 percent renewable energy (RE) generation by 2030.

### Defining the right renewable energy mix (Box 1 — findings and trade-offs)
- Technology trade-offs:
  - Geothermal:
    - Generally low generation costs but high project cost (utility construction, drilling) can reduce savings.  
    - Reliability: High, good alternative to fossil fuel baseload; does not require storage solutions.  
    - Execution risk: High (potential difficult to ascertain without costly and lengthy test drilling phases).
  - Solar:
    - Solar panel generated electricity costs have been falling for two decades into the low single digits.  
    - Reliability: Weather dependent; generation stops at night.  
    - Execution risk: Low, fast implementation.
  - Wind:
    - Cost: Limited if installed onshore, also in the low single digits.  
    - Reliability: Weather dependent.  
    - Execution risk: Low, fast implementation.
  - Solar or wind plus storage (BESS):
    - Generates higher electricity costs but makes wind and solar reliable alternatives to fuel-generated baseload.  
    - Reliability: High when combined with storage.  
    - Execution risk: Low, fast implementation.
- Cost examples and PPA trade-offs:
  - Solar-only generation cost example: on average 6 to 8 cents per KW/h.  
  - Solar plus storage via PPA: cost between 20 and 30 cents per KW/h.  
  - Geothermal via PPA: can result in single digits electricity costs but faces longer execution and higher upfront risks.
- Policy implications and grid needs:
  - Cheaper electricity will encourage structural changes and broader electrification (for example, electrical vehicles), raising future electricity consumption faster than GDP.  
  - Investment in grid upgrades and burying power lines underground will increase initial costs but improve resilience to natural disasters (NDs) and save costs long-term.  
  - Recommendation: develop all potential sources of RE simultaneously to enhance diversification and resilience; potential to become exporter of clean energy and develop “green” hydrogen and chemicals as green electricity production exceeds grid needs.

### Modeling costs and benefits of resilient investment (FGG model summary and results)
- Model features:
  - Uses a Markov-switching dynamic stochastic general equilibrium framework calibrated to country-specific parameters.  
  - NDs destroy shares of public and private capital stocks and temporarily reduce total factor productivity.  
  - Government can invest in resilient structures at a premium (assumed premium of 25 percent over non-resilient investment).  
  - Labor migration, remittances, incomplete markets, financial frictions with collateral constraints, and a full set of fiscal instruments are included.  
  - Public investment shares are constant shares of nominal GDP; fiscal policy anchored by a debt rule; lump-sum taxes used to match public debt target over medium term.
- Near-term returns:
  - Resilient investment reduces output decline (flow return) and reconstruction cost (stock return).  
  - Assuming 80 percent resiliency of public capital (damage with resiliency reduced to 20 percent of damage without resiliency), gains equivalent to 0.7-2.7 percent of GDP on average per year in the ECCU.  
  - In St. Kitts and Nevis, output decline after NDs is reduced by about 2 percentage points of GDP, with long-lasting effects.
- Long-term returns:
  - Increasing resilience reduces expected losses from NDs, raising private investment, capital stock, employment, and output.  
  - An increase in resilience from 0 to 80 percent is assessed to increase output in ECCU countries in the range of 3–11 percent.  
  - In St. Kitts and Nevis, the long-term output level increases by about 9 percent.  
  - Climate change increases the long-term return of resilient investment: GDP increases by an additional 4 percent relative to no climate change.
- Fiscal implications:
  - Near term: resilient investment reduces the increase in public debt after a ND; reduction in debt gap remains protracted (e.g., 20 years after a ND).  
  - Transitional fiscal cost: costlier resilient investment worsens the fiscal balance initially; additional cost of resilience would increase public debt by 4–20 percentage points of GDP in the ECCU by 2030 above the regional target.  
  - Financing gap: about 0.4–1.5 percent of GDP per year above historical levels would be needed to reach the regional debt target while increasing resilience.  
  - Time horizon: benefits from resilient public capital may take a long time (possibly over 40 years) before resilient capital share becomes dominant; growth benefit about a 0.4 percent average annual gain accrues slowly.  
  - Long run: tax revenues increase in the range of 2–6 percent depending on tax type; overall fiscal balances improve in the range of 0–3 percentage points of GDP with resilient investment rising to 80 percent.

### Multi-layered insurance framework for disaster financing
- Role of disaster insurance:
  - Disaster insurance provides urgent financing for immediate expenditure needs after NDs; governments often act as insurer of first resort as the private sector tends to be uninsured or underinsured.
- Layered financing approach (Guerson, 2020):
  - Model uses Monte Carlo simulations to project output, fiscal revenue, and spending under ND shocks; ND shocks identified via the tail of the distribution of fiscal deterioration from a country-specific VAR.  
  - Three-layer financing structure proposed:
    - Layer 1: Saving Funds (SF) — first line; SF size and annual contributions calibrated to cover fiscal costs in 95 percent of simulated NDs.  
    - Layer 2: CCRIF — covers more severe events beyond SF capacity.  
    - Layer 3: Contingent bond issuance — covers extreme events to achieve 99 percent coverage of simulated NDs.  
  - Rationale: costlier instruments (CCRIF, contingency bonds) are reserved for severe and extreme events where SFs would be insufficient without unrealistically large SFs.

*Source: Excerpt from IMF country report chapter on St. Kitts and Nevis (text provided).*

### 28.      In the case of St. Kitts and Nevis, model simulations suggest that a layered insurance

### 1knaea2023003 - 28.      In the case of St. Kitts and Nevis, model simulations suggest that a layered insurance

### Model simulations and overall finding
- A layered insurance of 27 percent of GDP would cover the fiscal costs in 99 percent of ND events.  
- The estimation is based on a low level of resilient investment most relevant in the current context.

### Layered insurance framework — components and calibrated parameters
- Layer 1 — Saving funds (SFs)
  - Optimal SFs stock suggested: 10 percent of GDP.
  - Annual fiscal cost: 0.3 percent of GDP.
  - Calibrated contribution in a year without NDs: 1.9 percent of GDP to SFs.
  - Use in case of NDs: 4.8 percent of GDP to cover an estimated average fiscal cost of 19.3 percent of GDP.
  - Target probability of SFs depletion: 7 percent.
  - Actual government deposits in 2022: 22 percent of GDP (reflecting CBI windfall); deposits have been used for pandemic emergency spending and a substantial land buyback in 2022.
- Layer 2 — Caribbean Catastrophe Risk Insurance Facility (CCRIF)
  - Current maximum coverage: close to 2 percent of GDP (earthquakes, tropical cyclones, rainfalls).
  - Annual fiscal cost (current policy): 0.05 percent of GDP.
  - Historical payout from ND per ND event: 0.1 percent of GDP.
  - CCRIF payout mechanics: parametric triggers (wind and rain intensity) often resulted in insufficient payouts to cover fiscal costs; payouts are discounted for smaller, more frequent events and not discounted for rare, severe events.
  - Discounting detail: CCRIF payouts are discounted by a factor of 0.5 for 1/20-year losses and 1 for 1/100-year loss.
  - Insurance multiplier note: CCRIF insurance multipliers (ratio of cost of premia and expected payouts) are around 2, and higher for extreme events.
  - Model suggestion for higher coverage: close to 15 percent of GDP at an annual fiscal cost estimated at 1.1 percent of GDP — achieving this may require recalibrating CCRIF triggers.
- Layer 3 — CAT bond issuance
  - Simulation assumes issuance between US$10 and 100 million as needed to reach 99 percent coverage target.
  - For St. Kitts, CAT bond issuance illustrated: 2–5 percent of GDP to reach 99 percent coverage of ND costs.
  - Annual fiscal cost for this CAT bond issuance: 0.3 percent of GDP.
  - No current CAT bond issuance in St. Kitts and Nevis; regional work ongoing (St. Vincent and Grenadines enrolled in a contingent credit line with the World Bank in 2020; World Bank working on issuing a regional CAT bond for the 2024 hurricane season).

### Policy implications — assessment, adaptation, mitigation, funding
- Suggested actions to strengthen gaps (benchmarked on peer countries' strategies):
  - Designing a multi-layered national strategy that integrates growth and climate resilient strategies.
  - Enhancing institutional capacity and building a complete and coherent legal framework supporting climate change mitigation, adaptation, and resilience.
  - Developing and maintaining early warning systems and risk maps, including hydrometeorological information.
  - Adopting zoning and coding regulations for safe and efficient land use, particularly in vulnerable coastal and high-density areas, involving private through building codes reform.
  - Advancing sustainable agriculture practices and related land-use change consistent with efficient land and water use and reduced carbon emissions.
  - Adopting nationwide vegetation management planning to support balanced economic development and sectoral plans.

### Fiscal policy for resilience building and climate adaptation
- Priority: build adequate fiscal buffers and optimize their allocation.
- Recommended comprehensive fiscal policy framework to include:
  1. An enhanced multi-layered insurance framework.
  2. Substantial investment in resilience.
- Supplementary strategy: increase public investment to enhance growth, build buffers, and lower gross debt.
- Disaster Layered Insurance Framework benefits:
  - Protects government finances from ND shocks and accelerates economic recovery.
  - Insurance model results: required insurance coverage (around 20.5 percent of GDP in total) is smaller than current “self-insurance” coverage (up to 27 percent of GDP in total).
  - Recalibration advice: coverage size and choice should reflect preferences toward risk aversion, fiscal space, capacity constraints, and idiosyncratic considerations.
  - CCRIF recalibration: review and recalibrate CCRIF’s attachment point (“deductible”) and coverage limit to ensure payouts are triggered for severe and less frequent ND events that SFs cannot cover.
  - CAT bond issuance beneficial only if issuance costs are significantly smaller than observed.

### Fiscal prudence, debt, and savings
- Fiscal restraint (often via fiscal rules) is needed over the medium- and long-term.
- CBI proceeds: one key revenue source that could be partially earmarked for climate strategies.
- Debt projections and buffers:
  - If fiscal restraint is exercised, gross debt ratio projected to fall below the regional target of 60 percent of GDP.
  - Projected debt ratio in 2028: 51 percent of GDP.
  - The wedge between 60 percent of GDP and the projected 51 percent of GDP in 2028 could be considered part of buffers available for climate strategies (SF layer and deposits).
- Optimal combination of gross debt and deposits should consider net costs and economic volatility:
  - Trade-off: deposits provide immediate liquidity after NDs but accumulating deposits rather than paying down debt could be costly because interest on debt is higher than interest on deposits.
  - IMF TA suggestion: 40 percent of GDP as an appropriate safe debt anchor for St. Kitts and Nevis.
  - This anchor would allow the country to remain below the ECCU debt ceiling of 60 percent of GDP with a 95 percent probability.
  - Technical note on net debt sustainability: net r-g simplifies to net nominal interest rate defined in the source (Interest_G * G/(G+D) – Interest_D * D/(G+D)).

### Sovereign wealth fund (SWF) and allocation of CBI revenue
- Proposal: a SWF with three objectives — standard wealth accumulation, ND preparedness, and investment in resilience.
- Expected benefits:
  - Formalize and financially secure ND and climate adaptation strategy by allocating government savings specifically.
  - Earmarking portion of CBI revenue to the SWF would improve transparency and help redistribute CBI revenue across generations.
  - Transferring government deposits from the National Bank to a SWF with proper risk management and external advisors would improve governance, reduce investment risk, potentially raise sustainable income, and diminish the bank-sovereign nexus.
  - Allocating a large portion of CBI—especially in the early years—would be optimal.
  - Increased CCRIF coverage early on would help protect the economy and preserve fiscal resources.
  - Front-loaded investment in resilience would gradually reduce the need for expanded insurance coverage, yielding savings from reduced insurance premiums.
  - Future SWF gains and potential CBI upside would be used for further resilience investment and protection against other shocks.

### Market access and regional government securities market (RGSM)
- More frequent recourse to RGSM may be worthwhile; benefits of a well-functioning LCBM include reliable medium- to long-term financing with attractive cost and risk characteristics.
- Importance for ND preparedness:
  - Severe ND could deplete buffers; government would need to raise debt quickly.
  - Absence of market access during “good times” makes post-ND market access nearly impossible.
- St. Kitts and Nevis history of market use:
  - Has not tapped RGSM for T-bills for about 10 years and T-bonds for about 20 years; mainly relied on domestic loans.
- Alternative financing: tapping international market for concessional lending with long-term maturities (e.g., blue bonds) would open opportunities to finance resilience investment at lower costs.

*Source: ST. KITTS AND NEVIS — INTERNATIONAL MONETARY FUND (content unit 1knaea2023003).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1knaea2023003.pdf_