## 1knaea2024001

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---

### Macroeconomic performance and recent developments
- Real GDP increased by 8.8 percent in 2022; tourism contributed to more than half of the total expansion.
- Growth fell to 3.4 percent in 2023 due to delays in public and private sector investment projects.
- Inflation:
  - Average inflation rose to 3.6   percent in 2023, driven by higher food and oil prices and shipping costs, but subsided at end-2023.
  - Fiscal measures reduced the pass-through of world food and energy prices and more recent data showed a moderation of inflation.
- Fiscal position and public debt:
  - Pandemic support phased out from 3.5 percent of GDP in 2022 to 1.1 percent of GDP in 2023.
  - CBI revenues remained solid at 22 percent of GDP in 2023.
  - Fiscal position moved to a surplus of 1.0 percent of GDP in 2023, allowing gross debt to fall to 54 percent of GDP.
  - Government maintains sizable deposits in the systemic bank (of 22 percent of GDP).
  - Net of CBI revenue and land buybacks, the primary fiscal deficit remained high at 18 percent of GDP.
- Key fiscal items (In percent of GDP):
  - Tax revenue: 18.5 2019; 18.8 2020; 19.0 2021; 18.6 2022; 19.1 2023
  - Nontax net revenue: 17.3 2019; 13.5 2020; 26.8 2021; 26.4 2022; 22.5 2023
  - Citizenship by investment (CBI) budgetary receipts: 14.8 2019; 11.3 2020; 23.4 2021; 25.5 2022; 21.5 2023
  - Current expenditure: 25.3 2019; 29.0 2020; 32.9 2021; 35.6 2022; 34.8 2023
  - Capital expenditure: 12.0 2019; 7.5 2020; 8.3 2021; 14.0 2022; 6.7 2023
  - Overall balance (after grants): -0.7 2019; -3.1 2020; 5.4 2021; -4.0 2022; 1.0 2023
  - Overall balance (ex. land buyback, CBI net receipts): -11.3 2019; -13.3 2020; -16.6 2021; -19.3 2022; -18.1 2023
  - Primary balance: 0.5 2019; -1.7 2020; 6.6 2021; -2.7 2022; 2.1 2023
  - Primary balance (ex. land buyback, CBI net receipts): -10.1 2019; -11.9 2020; -15.4 2021; -18.1 2022; -17.0 2023
- CBI revenues:
  - Budget remains highly reliant on CBI revenues.
  - CBI revenues fell sharply in 2023H2, underscoring volatility.
  - In 2023, 14 percent of CBI revenue was paid directly to residents (through a “CBI dividend”).
- 2024 budget highlights:
  - Central government expects a surplus of 0.8 percent of GDP; local government expects a deficit of 1.4 percent of GDP; general government deficit of 0.6 percent of GDP.
  - Featured an 8 percent increase in public salaries and public pensions.
  - Reduction in remaining pandemic-era support and establishment of a contributory public pension fund.
  - Minimum age pension increases: minimum age pension will increase by 16 percent and the assistance pension by 37 percent.

### External position and financial sector
- External sector:
  - Current account deficit narrowed to 5.4 percent of GDP in 2023 (from 10.9 percent in 2022), supported by the tourism recovery.
  - EBA-Lite model estimates the current account gap at -4.8 percent of GDP in 2023.
  - International reserves are adequate (Annex III).
- Financial sector:
  - The systemic bank has assets around 120 percent of GDP and government owns 51 percent of its equity.
  - Systemic bank’s NPL ratio was 39 percent in 2023Q2.
  - Systemic bank has reached the 60 percent coverage ratio required by the ECCB, mostly through the use of regulatory reserves.
  - Excluding the systemic bank, on average NPLs are 9 percent of assets although provisioning and loan-loss reserves are well below the ECCB’s 60 percent minimum.
  - Systemic bank’s profits turned positive in 2023Q2 due to a rebound in US equity prices.
  - Lending by credit unions has been expanding briskly; their NPL ratios rose to 6.8 percent.

### Outlook, projections, and risks
- Growth and inflation projections:
  - Growth expected to increase to 4.7 percent in 2024 following implementation of delayed investments and the solar energy project.
  - Inflation expected to fall to 2.5 percent in 2024, with convergence to 2 percent expected by 2026.
- CBI and fiscal projections:
  - CBI revenue is expected to face a gradual decline to 10 percent of GDP in 2028, which will raise the fiscal deficit over time to 3.9 percent of GDP.
  - Public debt projected to remain below 60 percent of GDP.
- External sector projection:
  - Current account deficit projected to fall to around 2 percent of GDP over the medium term supported by lower fossil fuel imports.
- Risks:
  - Near-term downside risks: geopolitical risks, commodity price volatility, abrupt slowdown in key tourism source markets, worsening NPLs, tighter credit conditions, natural disasters, and uncertainty over CBI inflows.
  - Medium-term upside: renewable energy transition could generate productivity gains and possibly turn St. Kitts and Nevis into a net energy exporter if solar and/or geothermal production exceeds expectations.
- Authorities’ views:
  - Authorities broadly agreed with staff’s projections and risk assessment; expect growth pick up in 2024 and GDP to return to pre-pandemic level by end-2024.

### Fiscal and financial policy priorities (recommendations and scenarios)
- Fiscal strategy overview and key recommendations:
  - Use CBI revenues to increase effectiveness of current spending, improve the tax system, better manage CBI proceeds (including through setting-up a sovereign wealth fund), tackle pension imbalances, and invest in renewable energy and climate adaptation.
  - Reform the systemic bank to improve financial stability, accountability, and transparency in management of public sector resources.
- Baseline fiscal path (selected figures preserved exactly):
  - Baseline: Overall balance (after grants) -0.7 2019; 1.0 2023; -3.9 2029
  - Baseline: Gross debt 54.3 2019; 54.4 2023; 54.4 2029
- Preferred scenario (additional consolidation):
  - Additional fiscal adjustment of 3.9 percent of GDP over the medium term through reductions in current expenditures would improve the primary deficit (excluding land buybacks and CBI net receipts) from 17 percent of GDP in 2023 to 8 percent of GDP in 2029 and lower gross debt to under 40 percent.
  - Under preferred scenario key changes (In percent of GDP):
    - Wages and salaries: 10.7 2019; 13.6 2023; 11.1 2029; deltadiff. vs. baseline -2.4
    - Goods and services (ex. CBI fees): 6.5 2019; 8.4 2023; 6.5 2029; deltadiff. vs. baseline -1.9
    - CBI dividend: 0.0 2019; 3.1 2023; 0.0 2029; deltadiff. vs. baseline -0.9
    - Capex ex. land buyback: 8.7 2019; 6.7 2023; 6.7 2029; deltadiff. vs. baseline 1.4
    - Overall balance (after grants): -0.7 2019; 1.0 2023; 0.2 2029; deltadiff. vs. baseline -0.9
    - Primary balance (ex. land buyback, CBI net receipts): -10.1 2019; -17.0 2023; -7.7 2029; deltadiff. vs. baseline 9.3
    - Gross debt: 54.3 2019; 54.4 2023; 35.7 2029; deltadiff. vs. baseline -18.6
- Recommendations on CBI framework and governance:
  - Further strengthen CBI framework to improve transparency and financial integrity.
  - Commend recent steps: improve governance, advance CBI legislation, create CBI Board of Governors.
  - Additional recommendation: publish an annual financial report on the CBI unit’s operations and key data on applications to enhance transparency and accountability.
- Fiscal institutions and rule-based framework:
  - Introduce a Sustainability and Resilience Fund (SRF) and an explicit fiscal rule, consistent with recent IMF technical assistance.
    - SRF objectives: smooth flows to budget from CBI revenues; manage public assets transparently and prudently; provide self-insurance for natural disasters.
    - Recommendation to transfer bulk of general government deposits from systemic bank to SRF and invest abroad under clear institutional guidelines and transparent reporting.
    - Fiscal rule recommendation: enshrine balanced-budget and regional debt-ceiling adherence into law with narrowly defined escape clauses; consider an expenditure rule to bring current expenditures back to pre-pandemic levels as percent of GDP and limit future current spending increases to nominal growth in potential output.
- Social assistance and targeting:
  - Recommend a digital national household registry based on administrative data and periodic household surveys to improve targeting and identify gaps/overlaps.
  - Recommend training and entrepreneurial support to facilitate transition to employment.
- Tax policy reform priorities:
  - Implement comprehensive tax policy reform as recommended in the 2023 IMF technical assistance report.
  - Priorities: increase progressivity, reduce distortions, property tax reform to reflect current market value, review stamp duty, improve arrears collection.
  - Review CIT concessions quickly in light of OECD pillar II; consider abolishing negotiated tax concessions and income tax holidays.
  - Consider bringing large unincorporated businesses under CIT, allow full expensing of capital spending and loss carryforwards.
  - Scope to scale back VAT exemptions and expand VAT coverage to professional and financial services.
  - Excise on gasoline should return to pre-pandemic level.
  - Tax reform can be initially revenue neutral with structural improvements; be ready to raise tax rates if CBI revenues diminish beyond baseline.
- Debt and cash management recommendations:
  - Use large government deposits to pay down expensive short-term debt to reduce interest costs and Gross Financing Needs (GFN).
  - Establish SRF and fiscal rule requiring greater collaboration between central and local government; more fiscal discipline needed from local government, preferably enshrined in law.
  - Re-establish presence on regional bond market to diversify financing sources.

### Social Security Fund: findings and recommended parametric reforms
- Key findings:
  - The actuarial imbalance in the system over the next 60 years is around 300 percent of GDP.
  - The SSF is expected to begin running deficits this year and will deplete its reserves by 2040.
- Recommended parametric reforms (some combination of):
  - increasing contributions;
  - lowering the replacement rate;
  - increasing retirement age and linking it to life expectancy;
  - requiring mandatory participation for self-employed persons.
- Additional recommendation:
  - Over time, the pension system for public sector workers could be unified with the SSF while respecting the acquired rights of current participants.
- Staff appraisal emphasis:
  - Urgent and decisive action is needed to preserve the financial balance of the Social Security Fund and protect intergenerational equity.
  - A parametric reform should increase the contribution rate, raise the retirement age, and expand pension coverage.
  - Ensure public sector employees’ pensions are aligned with those of the broader social security system to ensure replacement rates no greater than 100 percent.

### Supply-side priorities: renewable energy, water, and connectivity
- Renewable energy transition:
  - Planned investments in solar and geothermal are expected to reduce energy imports and lower the cost of energy.
  - Transition expected to bring the country to energy self-sufficiency by 2030 and achieve 100 percent of renewable energy production.
  - Full benefits require a comprehensive strategy: determine optimal energy mix, develop investment plans, upgrade and connect the two-island power grids, and enhance resilience to natural disasters.
  - Taxation framework: establish incentives for renewable investments while allowing the public sector to receive a share of future rents; avoid broad-based VAT and corporate income tax exemptions and prefer targeted and economically efficient subsidies or tax incentives.
- Water infrastructure and utility pricing:
  - Annual rainfalls in recent years have been 20 percent below long-term averages, leading aquifers to critical levels and water outages in some areas.
  - Key measures: drilling of wells, investing in water storage, creating desalination capacity.
  - Implement more progressive utility rate structures to raise tariffs for high-use customers, incentivize conservation, and generate resources for investments.
  - The utility commission should provide guidance on appropriate cost-recovery pricing of electricity and water.
- Flight connectivity and tourism:
  - Increasing flight connectivity would bolster growth over the medium-term; high airfare makes the country an expensive destination despite relatively low local costs.
  - Efforts to diversify tourism revenues and boost tourism during low season would make the country a more attractive destination.

### Strengthening the financial system and credit sector
- Systemic bank restructuring:
  - Government should restructure the systemic bank.
  - Institutional framework for managing a large foreign investment portfolio funded by public sector deposits is insufficient.
  - Establishment of the SRF, accompanied by reallocation of some foreign investments and government deposits from the systemic bank into the SRF, will provide a better institutional framework and allow the bank to focus on intermediation of household and corporate deposits to private sector lending.
  - Remaining loan book should be carefully evaluated—potentially through a diagnostic assessment—to determine appropriate adjustments to NPL and loan loss provisioning on long-dated NPLs.
  - Government, as majority shareholder, should mandate the bank to meet all ECCB regulatory requirements, address legacy NPLs, and further increase provisioning.
  - Bank should cut operating costs (e.g., investment in IT infrastructure) to make lending profitable; consider curbs on dividends, sale of non-core assets, or issuance of new equity to strengthen capital.
- Legislative and regulatory priorities to mobilize credit:
  - Accelerate initiatives to reduce disincentives to bank lending.
  - Bring the credit reporting bureau to full operational capacity (including expanded coverage to credit unions).
  - Develop a collateral resolution framework and strengthen insolvency and foreclosure regimes.
- Credit unions:
  - Regulation and oversight need strengthening; lending has expanded rapidly.
  - FSRC oversight should be improved by strengthening lending standards, increasing provisioning requirements, and taking action against institutions unable to meet regulatory requirements.
- AML/CFT improvements:
  - CFATF’s December 2023 plenary approved upgrades resulting in the country now rated as compliant or largely compliant with 31 of the 40 FATF Recommendations.
  - FRSC has strengthened staff capacity and developed new AML/CFT supervisory tools with World Bank support.
  - Authorities encouraged to continue improving effectiveness and to designate the ECCB as the AML/CFT supervisor of banks.

### Data framework improvements
- Data provision is broadly adequate for surveillance but has shortcomings.
- Areas for improvement:
  - reviewing National Accounts methodology to improve data accuracy;
  - reducing publication lags of central government accounts and reviewing classification of capital expenditure items;
  - reviewing data provision of CBI in external sector and fiscal sector statistics;
  - filling gaps in labor market statistics (e.g., unemployment rate and the size of the informal labor market) and surveys (e.g., labor market survey).
- These improvements require strengthening resources of the statistical office.

### Debt consolidation across sectors — baseline and stress diagnostics (selected figures)
- Baseline public debt (Percent of GDP): 60.65 (2022); 54.45 (2023); 51.74 (2024); 49.94 (2025); 49.55 (2026); 50.45 (2027); 52.54 (2028); 54.45 (2029); 56.45 (2030); 58.46 (2031); 60.3 (2032)
- Change in public debt (Percent of GDP): -8. 5 (2023); -6. 3 (2024); -2. 6 (2025); -1. 8 (2026); -0. 4 (2027); 0.9 (2028); 2.0 (2029); 2.0 (2030); 1.9 (2031); 2.0 (2032); 1.9 (final column)
- Gross financing needs (Percent of GDP): 20.9 (2022); 14.3 (2023); 15.5 (2024); 16.8 (2025); 18.5 (2026); 20.5 (2027); 22.4 (2028); 23.7 (2029); 25.0 (2030); 26.5 (2031); 28.1 (2032)
- Memo—Real GDP growth (percent): 8.8 (2022); 3.4 (2023); 4.7 (2024); 4.3 (2025); 3.8 (2026); 3.0 (2027); 2.8 (2028); 2.9 (2029); 2.9 (2030); 2.8 (2031); 2.7 (2032)
- Memo—Inflation (GDP deflator; percent): 2.7 (2022); 4.7 (2023); 2.6 (2024); 2.3 (2025); 2.0 (2026 onward through 2032)

### Renewable energy projects (Annex VI assumptions and staff assessment)
- Solar project:
  - Total investment: 80 million USD
  - Fully operational in 2026.
  - Peak capacity: 35MW; average contribution: about 9 MW (one third of St-Kitts’ grid needs).
  - BESS: 43 MW to maintain baseload capacity and shift energy to night consumption.
  - Facility designed to be resilient to a class-4 Hurricane.
  - Power sold under a 25 years duration Purchase Power Agreement (PPA).
  - Construction start: 2024Q2; construction duration: 18 months.
  - Domestic component at construction stage: 12.5 percent of the total envelope.
  - Job creation: 50 new jobs in 2024 and 100 new jobs in 2025.
  - Operational cost: solar electricity purchased by SKELEC should be 40 percent lower than from diesel-powered generator.
  - Staff assumed operational launch will reduce the Island utility company's fuel import by about 40 percent (4 mil gallons of diesel for total annual imports of 10 million) resulting in annual savings of about 100 mil EC (37 mil USD).
  - Financing mix: foreign equity (about 25 percent of the total investment) and domestic loans.
- Geothermal project:
  - Initial investment: 17 million USD for drilling and exploration provided through a contingent loan of the Caribbean Development Bank.
  - Construction stage expected to take three years (2025-27).
  - Planned capacity: 30 to 45MW (three production wells of 10 to 15MW).
  - Staff assessment: execution risk medium; 50 percent of planned power generation capacity incorporated in the baseline.
  - Domestic component of investment: 25 percent.
  - Unit price of electricity once operational expected to decline by around 63 percent for NEVLEC; electricity cost anticipated to decrease by around 45 percent for the Federation.
- Macro effects:
  - Staff estimate productivity gains to be 1.4 percent of GDP over 6 years given baseline assumptions on project capacities.
  - Solar project operational launch assumed to generate annual fuel import savings of about 100 mil EC (37 mil USD).

### Prospective additional infrastructure (excluded from baseline)
- Grid upgrade technical scope:
  - Replace 11Kv power lines with 66Kv power lines; further grid extension for redundancy; burying of high voltage power lines to strengthen resilience.
- Investment scale and timeline:
  - Authorities estimate investments between 200 and 500 USD million spanning over a decade, depending on scale.
- Implication:
  - Upgrade may be necessary to fully reap energy export potential from Nevis and to align electricity production with net-zero trajectory commitments.

### Risk Assessment Matrix — key risks and policy responses
- Conjunctural risks with relative likelihood and policy responses include:
  - Intensification of regional conflict(s): Relative Likelihood: High; Impact: Medium; Timeframe: ST/MT. Policy Response: strengthen social safety net; diversify tourism revenues; monitor financial sector with ECCB.
  - Commodity price volatility: Relative Likelihood: High; Impact: Medium; Timeframe: ST/MT. Policy Response: strengthen social safety net; allow gradual pass-through and phase out generalized subsidies; accelerate renewable transition.
  - Abrupt global slowdown or recession: Relative Likelihood: Medium; Impact: High; Timeframe: ST/MT. Policy Response: strengthen social safety net; enhance competitiveness; diversify tourism revenues.
  - Systemic financial instability: Relative Likelihood: Medium; Impact: Medium; Timeframe: ST/MT. Policy Response: monitor asset quality and ensure adequate loan loss provisioning.
- Structural and domestic risks include deepening geo-economic fragmentation (High likelihood), extreme climate events (Medium likelihood), disorderly energy transition (Medium likelihood), cyberthreats (Medium likelihood), lower than expected CBI revenues (Medium likelihood), and financial sector weakness (Medium likelihood). Policy responses are specified for each risk in the RAM.
- Note on likelihood definitions: “low” <10 percent; “medium” 10–30 percent; “high” 30–50 percent.

*Source: 1knaea2024001 - ST. KITTS AND NEVIS — STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION — INFORMATIONAL ANNEX (selected sections).*

### 1. Macroeconomic Performance vs. Regional Peers _______________________________________________ 7

### 1. Macroeconomic Performance vs. Regional Peers

### Recent developments
- Real GDP increased by 8.8 percent in 2022; tourism contributed to more than half of the total expansion.
- Growth fell to 3.4 percent in 2023 due to delays in public and private sector investment projects.
- Inflation:
  - Average inflation rose to 3.6   percent in 2023, driven by higher food and oil prices and shipping costs, but subsided at end-2023.
  - Fiscal measures reduced the pass-through of world food and energy prices and more recent data showed a moderation of inflation.
- Fiscal position and public debt:
  - Pandemic support phased out from 3.5 percent of GDP in 2022 to 1.1 percent of GDP in 2023.
  - CBI revenues remained solid at 22 percent of GDP in 2023.
  - Fiscal position moved to a surplus of 1.0 percent of GDP in 2023, allowing gross debt to fall to 54 percent of GDP.
  - Government maintains sizable deposits in the systemic bank (of 22 percent of GDP).
  - Net of CBI revenue and land buybacks, the primary fiscal deficit remained high at 18 percent of GDP.
- Key fiscal items (In percent of GDP, selected rows preserved exactly from source table):
  - Tax revenue: 18.5 2019; 18.8 2020; 19.0 2021; 18.6 2022; 19.1 2023
  - Nontax net revenue: 17.3 2019; 13.5 2020; 26.8 2021; 26.4 2022; 22.5 2023
  - Citizenship by investment (CBI) budgetary receipts: 14.8 2019; 11.3 2020; 23.4 2021; 25.5 2022; 21.5 2023
  - Current expenditure: 25.3 2019; 29.0 2020; 32.9 2021; 35.6 2022; 34.8 2023
  - Capital expenditure: 12.0 2019; 7.5 2020; 8.3 2021; 14.0 2022; 6.7 2023
  - Overall balance (after grants): -0.7 2019; -3.1 2020; 5.4 2021; -4.0 2022; 1.0 2023
  - Overall balance (ex. land buyback, CBI net receipts): -11.3 2019; -13.3 2020; -16.6 2021; -19.3 2022; -18.1 2023
  - Primary balance: 0.5 2019; -1.7 2020; 6.6 2021; -2.7 2022; 2.1 2023
  - Primary balance (ex. land buyback, CBI net receipts): -10.1 2019; -11.9 2020; -15.4 2021; -18.1 2022; -17.0 2023
- CBI revenues:
  - Budget remains highly reliant on CBI revenues.
  - CBI revenues fell sharply in 2023H2, underscoring volatility.
  - In 2023, 14 percent of CBI revenue was paid directly to residents (through a “CBI dividend”).
- 2024 budget highlights:
  - Targets a small overall deficit (central government expects a surplus of 0.8 percent of GDP; local government expects a deficit of 1.4 percent of GDP; general government deficit of 0.6 percent of GDP).
  - Featured an 8 percent increase in public salaries and public pensions.
  - Reduction in remaining pandemic-era support and establishment of a contributory public pension fund.
  - Minimum age pension increases: minimum age pension will increase by 16 percent and the assistance pension by 37 percent.
- External position:
  - Current account deficit narrowed to 5.4 percent of GDP in 2023 (from 10.9 percent in 2022), supported by the tourism recovery.
  - EBA-Lite model estimates the current account gap at -4.8 percent of GDP in 2023.
  - International reserves are adequate (Annex III).
- Financial sector:
  - The systemic bank has assets around 120 percent of GDP and government owns 51 percent of its equity.
  - Systemic bank’s NPL ratio was 39 percent in 2023Q2.
  - Systemic bank has reached the 60 percent coverage ratio required by the ECCB, mostly through the use of regulatory reserves.
  - Excluding the systemic bank, on average NPLs are 9 percent of assets (close to the 2020-23 average) although provisioning and loan-loss reserves are well below the ECCB’s 60 percent minimum.
  - Systemic bank’s profits turned positive in 2023Q2 due to a rebound in US equity prices.
  - Lending by credit unions has been expanding briskly; their NPL ratios rose to 6.8 percent.
- Renewable energy projects:
  - A privately funded utility-scale solar and battery storage project expected to be completed in 2025.
  - A geothermal project in Nevis is at the planning stage and will take at least two years to complete.
  - Together these projects would be able to provide 100 percent of the country’s electricity needs upon completion.

### Outlook and risks
- Growth and inflation projections:
  - Growth expected to increase to 4.7 percent in 2024 following implementation of delayed investments and the solar energy project.
  - Inflation expected to fall to 2.5 percent in 2024, with convergence to 2 percent expected by 2026.
- CBI and fiscal projections:
  - CBI revenue is expected to face a gradual decline to 10 percent of GDP in 2028, which will raise the fiscal deficit over time to 3.9 percent of GDP.
  - Public debt projected to remain below 60 percent of GDP (Annex V).
- External sector projection:
  - Current account deficit projected to fall to around 2 percent of GDP over the medium term supported by lower fossil fuel imports.
- Risks:
  - Near-term downside risks: geopolitical risks, commodity price volatility, abrupt slowdown in key tourism source markets, worsening NPLs, tighter credit conditions, natural disasters, and uncertainty over CBI inflows.
  - Medium-term upside: renewable energy transition could generate productivity gains and possibly turn St. Kitts and Nevis into a net energy exporter if solar and/or geothermal production exceeds expectations.
- Authorities’ views:
  - Authorities broadly agreed with staff’s projections and risk assessment; expect growth pick up in 2024 and GDP to return to pre-pandemic level by end-2024.

### Policy discussions — fiscal and financial policy priorities
- Fiscal strategy overview:
  - Ongoing large CBI revenues have provided room to increase the effectiveness of current spending, improve the tax system, better manage CBI proceeds (including through setting-up a sovereign wealth fund), tackle pension imbalances, and invest in renewable energy and climate adaptation.
  - Reform of the systemic bank recommended to improve financial stability, accountability, and transparency in management of public sector resources.
- Baseline fiscal path (selected figures preserved exactly):
  - Baseline: Overall balance (after grants) -0.7 2019; 1.0 2023; -3.9 2029
  - Baseline: Gross debt 54.3 2019; 54.4 2023; 54.4 2029
- Preferred scenario (more ambitious fiscal consolidation):
  - Additional fiscal adjustment of 3.9 percent of GDP over the medium term through reductions in current expenditures would improve the primary deficit (excluding land buybacks and CBI net receipts) from 17 percent of GDP in 2023 to 8 percent of GDP in 2029 and lower gross debt to under 40 percent.
  - Under preferred scenario key changes (In percent of GDP, preserved exactly where presented):
    - Wages and salaries: 10.7 2019; 13.6 2023; 11.1 2029; deltadiff. vs. baseline -2.4
    - Goods and services (ex. CBI fees): 6.5 2019; 8.4 2023; 6.5 2029; deltadiff. vs. baseline -1.9
    - CBI dividend: 0.0 2019; 3.1 2023; 0.0 2029; deltadiff. vs. baseline -0.9
    - Capex ex. land buyback: 8.7 2019; 6.7 2023; 6.7 2029; deltadiff. vs. baseline 1.4
    - Overall balance (after grants): -0.7 2019; 1.0 2023; 0.2 2029; deltadiff. vs. baseline -0.9
    - Primary balance (ex. land buyback, CBI net receipts): -10.1 2019; -17.0 2023; -7.7 2029; deltadiff. vs. baseline 9.3
    - Gross debt: 54.3 2019; 54.4 2023; 35.7 2029; deltadiff. vs. baseline -18.6
- Recommendations on CBI framework and governance:
  - Further strengthen CBI framework to improve transparency and financial integrity.
  - Commend recent steps: improve governance, advance CBI legislation, create CBI Board of Governors.
  - Additional recommendation: publish an annual financial report on the CBI unit’s operations and key data on applications to enhance transparency and accountability.
- Fiscal institutions and rule-based framework:
  - Introduce a Sustainability and Resilience Fund (SRF) and an explicit fiscal rule, consistent with recent IMF technical assistance.
    - SRF objectives: smooth flows to budget from CBI revenues; manage public assets transparently and prudently; provide self-insurance for natural disasters.
    - Recommendation to transfer bulk of general government deposits from systemic bank to SRF and invest abroad under clear institutional guidelines and transparent reporting.
    - Fiscal rule recommendation: enshrine balanced-budget and regional debt-ceiling adherence into law with narrowly defined escape clauses; consider an expenditure rule to bring current expenditures back to pre-pandemic levels as percent of GDP and limit future current spending increases to nominal growth in potential output.
- Social assistance and targeting:
  - Progress noted on recertifying beneficiaries of the Poverty Alleviation Program.
  - Recommend a digital national household registry based on administrative data and periodic household surveys to improve targeting and identify gaps/overlaps.
  - Recommend training and entrepreneurial support to facilitate transition to employment.
- Tax policy reform:
  - Implement comprehensive tax policy reform as recommended in the 2023 IMF technical assistance report.
  - Priorities: increase progressivity, reduce distortions, property tax reform to reflect current market value, review stamp duty, improve arrears collection.
  - Review CIT concessions quickly in light of OECD pillar II; consider abolishing negotiated tax concessions and income tax holidays.
  - Consider bringing large unincorporated businesses under CIT, allow full expensing of capital spending and loss carryforwards.
  - Scope to scale back VAT exemptions and expand VAT coverage to professional and financial services.
  - Excise on gasoline should return to pre-pandemic level.
  - Tax reform can be initially revenue neutral with structural improvements; be ready to raise tax rates if CBI revenues diminish beyond baseline.
- Debt and cash management:
  - Debt is sustainable but improvements needed in debt and cash management.
  - Main fiscal risks: heavy dependence on CBI revenues, high Gross Financing Needs (GFN), large long-term contingent liability from the Social Security Fund.
  - Recommendations:
    - Use large government deposits to pay down expensive short-term debt to reduce interest costs and GFNs.
    - Establish SRF and fiscal rule requiring greater collaboration between central and local government; more fiscal discipline needed from local government, preferably enshrined in law.
    - Re-establish presence on regional bond market to diversify financing sources.

*Source: 1knaea2024001 - 1. Macroeconomic Performance vs. Regional Peers*

### 19. There is an urgent need for parametric reform of the Social Security Fund.

### 19. There is an urgent need for parametric reform of the Social Security Fund.

### Social Security Fund: key findings and recommended parametric reforms
- The actuarial imbalance in the system over the next 60 years is around 300 percent of GDP.
- The SSF is expected to begin running deficits this year and will deplete its reserves by 2040.
- Recommended parametric reforms (some combination of):
  - increasing contributions;
  - lowering the replacement rate;
  - increasing retirement age and linking it to life expectancy;
  - requiring mandatory participation for self-employed persons.
- Additional recommendation:
  - Over time, the pension system for public sector workers could be unified with the SSF while respecting the acquired rights of current participants.
- Staff appraisal emphasis:
  - Urgent and decisive action is needed to preserve the financial balance of the Social Security Fund and protect intergenerational equity.
  - A parametric reform should increase the contribution rate, raise the retirement age, and expand pension coverage.
  - Ensure public sector employees’ pensions are aligned with those of the broader social security system to ensure replacement rates no greater than 100 percent.

### Authorities’ views on fiscal and pension policies
- Authorities broadly agreed with staff advice on fiscal policy.
- They noted that elevated current spending will likely lead to deficits over time and concurred with the need to steer current expenditures back to pre-pandemic levels as a share of GDP, including the wage bill.
- They welcomed recent IMF technical assistance and intend to establish the SRF this or next fiscal year.
- Authorities re-iterated commitment to implicit fiscal rules of balanced budgets (at the central government level) and debt below the regional ceiling and expressed interest in enshrining them into law.
- On tax reform they:
  - Agreed broadly with IMF technical assistance options but favored a stepwise approach and first estimating the tax take impact to ascertain short-run revenue neutrality.
  - Highlighted capacity constraints in assessing the impact of the OECD Pillar II that could require further technical assistance.
- On pension fund reform the authorities stressed reform options were being analyzed for potential future implementation.
- On debt and cash management they:
  - Are exploring reducing short-term debt issuance.
  - Requested staff advice on the minimum cash buffers required for fiscal operations, with a view to assess the share of public sector deposits that could be potentially shifted to the SRF.

### Supply-side priorities: renewable energy, water, and connectivity
- Renewable energy transition:
  - Planned investments in solar and geothermal are expected to reduce energy imports and lower the cost of energy.
  - The transition is expected to bring the country to energy self-sufficiency by 2030 and achieve 100 percent of renewable energy production.
  - Full benefits require a comprehensive strategy: determine optimal energy mix, develop investment plans, upgrade and connect the two-island power grids, and enhance resilience to natural disasters.
  - Taxation framework: establish incentives for renewable investments while allowing the public sector to receive a share of future rents; avoid broad-based VAT and corporate income tax exemptions and prefer targeted and economically efficient subsidies or tax incentives.
- Water infrastructure and utility pricing:
  - Annual rainfalls in recent years have been 20 percent below long-term averages, leading aquifers to critical levels and water outages in some areas.
  - Key measures: drilling of wells, investing in water storage, creating desalination capacity.
  - Implement more progressive utility rate structures to raise tariffs for high-use customers, incentivize conservation, and generate resources for investments.
  - The utility commission should provide guidance on appropriate cost-recovery pricing of electricity and water.
- Flight connectivity and tourism:
  - Increasing flight connectivity would bolster growth over the medium-term; high airfare makes the country an expensive destination despite relatively low local costs.
  - Efforts to diversify tourism revenues and boost tourism during low season would make the country a more attractive destination.

### Strengthening the financial system: systemic bank, SRF, and credit sector
- Systemic bank restructuring:
  - Government should restructure the systemic bank.
  - The bank has met ECCB requirement for loan loss provisions and regulatory reserves and de-risked its foreign investment portfolio by shifting from US equities to US Treasuries and corporate bonds.
  - Institutional framework for managing a large foreign investment portfolio funded by public sector deposits is insufficient.
  - Establishment of the SRF, accompanied by reallocation of some foreign investments and government deposits from the systemic bank into the SRF, will provide a better institutional framework and allow the bank to focus on intermediation of household and corporate deposits to private sector lending.
  - Remaining loan book should be carefully evaluated—potentially through a diagnostic assessment—to determine appropriate adjustments to NPL and loan loss provisioning on long-dated NPLs.
  - Government, as majority shareholder, should mandate the bank to meet all ECCB regulatory requirements, address legacy NPLs, and further increase provisioning.
  - Bank should cut operating costs (e.g., investment in IT infrastructure) to make lending profitable; consider curbs on dividends, sale of non-core assets, or issuance of new equity to strengthen capital.
- Legislative and regulatory priorities to mobilize credit:
  - Accelerate initiatives to reduce disincentives to bank lending.
  - Bring the credit reporting bureau to full operational capacity (including expanded coverage to credit unions).
  - Develop a collateral resolution framework and strengthen insolvency and foreclosure regimes.
- Credit unions:
  - Regulation and oversight need strengthening; lending has expanded rapidly.
  - FSRC oversight should be improved by strengthening lending standards, increasing provisioning requirements, and taking action against institutions unable to meet regulatory requirements.
- AML/CFT improvements:
  - CFATF’s December 2023 plenary approved upgrades resulting in the country now rated as compliant or largely compliant with 31 of the 40 FATF Recommendations.
  - FRSC has strengthened staff capacity and developed new AML/CFT supervisory tools with World Bank support.
  - Authorities encouraged to continue improving effectiveness and to designate the ECCB as the AML/CFT supervisor of banks.

### Data framework improvements
- Data provision is broadly adequate for surveillance but has shortcomings.
- Areas for improvement:
  - reviewing National Accounts methodology to improve data accuracy;
  - reducing publication lags of central government accounts and reviewing classification of capital expenditure items;
  - reviewing data provision of CBI in external sector and fiscal sector statistics;
  - filling gaps in labor market statistics (e.g., unemployment rate and the size of the informal labor market) and surveys (e.g., labor market survey).
- These improvements require strengthening resources of the statistical office.

### Staff appraisal: growth, fiscal stance, tax reform, and other priorities
- Growth prospects:
  - Economic growth is poised to accelerate in the near term due to public and private investments, including renewable energy, which will add productive capacity and lower energy imports.
- Fiscal stance:
  - Fiscal stance should be tightened to maintain a balanced budget over the medium term.
  - A small deficit is expected in 2024; balancing the budget will require tightening in response to an expected decline in CBI revenue.
  - Essential steps: forego further unbudgeted and untargeted payments (such as CBI dividends), return current expenditures to pre-pandemic levels as a share of GDP, improve control over the wage bill and goods and services expenditures, and fully phase out electricity subsidies.
  - Progress would support expansion of targeted social assistance and capital expenditures for natural disasters’ resilience.
- Tax reform roadmap:
  - A comprehensive roadmap would prepare for a future decline in CBI revenues.
  - Recommend a more progressive tax system, reform property tax to reflect current market value and abolish stamp duty, focus on tax arrears collection.
  - Review CIT concessions to abolish negotiated tax concessions and income tax holidays; bring unincorporated businesses under the CIT to allow full expensing of capital spending and carryforward of losses.
  - Scale back VAT exemptions and expand VAT coverage to professional and financial services.
- CBI framework:
  - Continue efforts to enhance CBI framework integrity: improve governance, advance CBI legislation, and create the CBI Board of Governors to improve oversight.
  - Further enhance transparency and accountability by publishing an annual financial report on the CBI unit’s operations and key data on applications.
- Public finance and fiscal rules:
  - Enshrine the implicit fiscal practice of balancing the budget and remaining below the regional debt ceiling into law to provide a clear fiscal anchor and support SRF establishment.
  - An expenditure rule would help bring current expenditures back to pre-pandemic levels and cap future current spending increases from volatile CBI inflows.
  - Consolidate public sector investment policy through a consolidated investment budget prioritizing projects.
- Debt and cash management:
  - Consider using the Regional Bond Market to diversify funding sources.
  - More collaboration at the federal level could optimize public finance management.
- Labor market and wages:
  - Assess the impact of wage increases on employment, informality, and external competitiveness.
  - A two-tier increase of minimum wage in January 2024 and July 2025 will increase the minimum wage by nearly 40 percent compared to the previous level set in 2014, placing it higher than ECCU peers and likely subjecting one-sixth of the workforce to the minimum wage.
  - Public sector wage setting should consider cascading effects in the private sector.
- Financial system recap:
  - Provisions and capital for all banks should meet ECCB regulatory minimums and long-standing non-performing loans be addressed.
  - Banks unable to meet regulatory minimums should work with the ECCB through clear and monitorable capital restoration plans.
  - Establishment of the SRF and reallocation of some foreign investments and government deposits from the systemic bank into the SRF will allow the bank to focus on channeling household and corporate deposits towards private sector lending.
  - Credit union sector expansion should be monitored to ensure proper recordation of non-performing loans and adequate provisioning and capital.
- External position:
  - The 2023 external position is assessed to be weaker than the level implied by medium-term fundamentals and desirable policies.
  - The current account deficit is projected to fall over the medium term supported by lower fossil fuel imports.
  - International reserves are adequate.

*Source: 1knaea2024001 - 19. There is an urgent need for parametric reform of the Social Security Fund.*

### 42. It is expected that the next Article IV Consultation with St. Kitts and Nevis will take

### 1knaea2024001 - 42. It is expected that the next Article IV Consultation with St. Kitts and Nevis will take

### Fiscal sector developments
- Government response to the twin crises described as "one of the strongest in the region."
- Gross debt remained the lowest in the ECCU and below regional ceiling of 60 percent of GDP.
- Total revenue in 2023:
  - Total revenue: 42.5 percent of GDP (2022), projected 39.5 percent (2023 est.), with projections showing 37.7 (2024), 35.9 (2025), 34.2 (2026), 32.4 (2027), and 32.4 (2029).
  - Tax revenue: 19.1 percent of GDP (2023 est.) and a repeated series of 19.1 for projections through 2029.
  - CBI revenue: 21.5 percent of GDP (2022), 18.0 percent (2023 est.), 16.0 (2024 proj.), 14.0 (2025 proj.), 12.0 (2026 proj.), 10.0 (2027–2029 proj.).
- CBI revenue slowed rapidly in 2023H2.
- Tax revenues have edged slightly higher, helped by income taxes, but remain below ECCU peers in the absence of reforms.
- Total expenditure and net lending:
  - Total expenditure and net lending: 41.6 percent of GDP (2022), 39.7 percent (2023 est.), projections 38.6 (2024), 37.8 (2025), 37.0 (2026), 36.3 (2027), 36.3 (2029).
  - Current expenditure: 35.6 percent of GDP (2022), 34.8 percent (2023 est.), projections trending down to 30.9 percent (2029).
  - Capital expenditure and net lending: 6.7 percent of GDP (2023 est.), declined to long-term average thereafter, projections 6.5 (2024), 6.2 (2025), 5.9 (2026), 5.7 (2027), 5.4 (2029).
- Overall balance:
  - Overall balance (after grants): 1.0 percent of GDP (2022), -0.2 percent (2023 est.), projected -0.9 (2024), -1.9 (2025), -2.9 (2026), -3.9 (2027–2029).
  - Overall balance is expected to show a small surplus in 2023, unless there is additional spending in Q4.
- Alternative balances:
  - Overall balance (ex. land buyback): 3.8 percent of GDP (2022), 1.0 percent (2023 est.), projected -0.2 (2024).
  - Overall balance (ex. land buyback, CBI net receipts): -18.1 percent of GDP (2022), -16.2 (2023 est.), projected -15.1 (2024), -14.3 (2025), -13.5 (2026), -12.7 (2027), -12.8 (2029).
- Total public debt:
  - Total public debt: 54.4 percent of GDP (2019), 68.0 (2020), 69.1 (2021), 60.6 (2022), 54.4 (2023 est.), projections 51.7 (2024), 49.9 (2025), 49.5 (2026), 50.4 (2027), 52.5 (2028), 54.4 (2029).
- Government deposits: 24.8 percent of GDP (2019), 21.6 (2020), 30.4 (2021), 21.8 (2022), 19.9 (2023 est.), projected decline to 14.3 (2029).

### Financial sector developments
- Nonperforming loans (NPLs):
  - KNA NPL ratio highest in the ECCU; NPLs to total gross loans: 24.0 (2019), 23.5 (2020), 20.9 (2021), 21.8 (2022), 19.4 (2023).
  - Total provisions to nonperforming loans: 24.7 (2019), 30.8 (2020), 58.9 (2021), 55.9 (2022), 55.9 (2023).
- Profitability and capital:
  - KNA bank profits turned positive after heavy losses in 2022.
  - Regulatory capital to risk-weighted assets (CAR): 20.2 (2019), 24.5 (2020), 21.8 (2021), 11.1 (2022), 10.3 (2023).
  - Regulatory Tier 1 capital to risk-weighted assets: 19.4 (2019), 17.2 (2020), 16.8 (2021), 7.8 (2022), 6.8 (2023).
  - Return on average assets (ROA): 0.9 (2019), 2.6 (2020), 1.9 (2021), -3.5 (2022), 1.0 (2023).
- Deposits, liquidity, and credit:
  - Private and public deposits declined slightly in 2023 but remained substantial.
  - Banks have ample liquidity buffers, supported by large deposits.
  - Liquid assets to total assets: 55.9 (2019), 58.4 (2020), 51.6 (2021), 51.8 (2022), 47.8 (2023).
  - Net liquid assets to deposits: 62.2 (2019), 76.6 (2020), 60.4 (2021), 57.5 (2022), 53.7 (2023).
  - Credit to government remained stable and below ECCU average.
  - Credit to households slowed but maintained positive growth in 2023; credit growth to firms dropped sharply, turning negative.
  - Credit to private sector (annual percent change): 1.5 (2019), -4.0 (2020), 7.7 (2021), 5.8 (2022), 4.0 (2023).
  - Credit-to-private-sector (percent of GDP): 51.1 (2019), 61.5 (2020), 68.2 (2021), 63.6 (2022), 60.3 (2023), projected 59.3 (2024), 58.3 (2025), 57.8 (2026), 57.4 (2027), 56.9 (2028), 56.4 (2029).
- Investment abroad:
  - KNA investment in overseas assets among the highest in the ECCU and continued to climb.

### Structural and social indicators
- High levels relative to peers:
  - St. Kitts and Nevis has one of the highest GDP per capita and human development, and lowest inequality in the Caribbean.
- Economic structure:
  - Economy mainly supported by tourism, trade, finance, and real estate services.
- Public sector and informal economy:
  - Public sector employment share is the largest in ECCU peers.
  - Estimated size of informal economy is the lowest in the ECCU (MIMIC model estimates referenced).

### Basic data and macroeconomic indicators (selected)
- Geography and population:
  - Area (sq. km): 269.4
  - Population total (thousands, 2021 est.): 53.5
  - Population growth rate (percent per year, 2021): 0.66
  - Density (per sq. km., 2021): 198.8
  - Net migration rate (per thousand, 2014 est.): 1.2
- Health and education:
  - Life expectancy at birth (years, 2021): 71.7
  - Adult literacy rate (percent, 2009): 97.8
  - Calorie intake (per capita a day, 2011): 2,452
  - Physicians (per 1,000 people, 2018): 2.8
- GDP and prices:
  - Gross domestic product (millions of U.S. dollars, 2022): 973.3
  - Nominal GDP at market prices (in millions of EC$): 2,628 (2022), projected 3,062 (2024), 3,260 (2025), 3,453 (2026), 3,631 (2027), 3,811 (2028), 4,000 (2029).
  - Real GDP growth (market prices, annual percent): 4.1 (2019), -14.6 (2020), -0.9 (2021), 8.8 (2022), 3.4 (2023 est.), projections 4.7 (2024), 4.3 (2025), 3.8 (2026), 3.1 (2027), 2.9 (2028), 2.9 (2029).
  - Consumer prices, end-of-period: -0.8 (2019), -1.2 (2020), 1.9 (2021), 3.9 (2022), 2.1 (2023 est.), projections 2.3 (2024), 2.0 (2025–2029).
- External sector:
  - Current account (percent of GDP): -4.8 (2019), -10.8 (2020), -5.1 (2021), -10.9 (2022), -5.4 (2023 est.), projections -6.5 (2024), -8.6 (2025), -4.3 (2026), -3.4 (2027), -1.8 (2028–2029).
  - Tourism receipts (percent of exports): 32.7 (2019), 12.1 (2020), 17.7 (2021), 30.7 (2022), 33.0 (2023 est.), projections 33.8 (2024), 33.1 (2025), 32.8 (2026), 32.2 (2027), 31.6 (2028), 31.0 (2029).
  - Net international reserves, end-of-period (millions of U.S. dollars): 346.3 (2019), 365.4 (2020), 312.8 (2021), 270.3 (2022), 267.0 (2023 est.), projections 264.7 (2024), 263.0 (2025), 261.2 (2026), 259.4 (2027), 266.0 (2028), 264.8 (2029).

### Federal government fiscal operations (highlights)
- Total revenue (percent of GDP): 35.8 (2019), 32.3 (2020), 45.8 (2021), 45.0 (2022), 41.6 (2023 est.), projections 38.5 (2024), 36.7 (2025), 34.9 (2026), 33.2 (2027), 31.4 (2028), 31.4 (2029).
- Nontax revenue and CBI:
  - Nontax revenue: 17.3 (2019), 13.5 (2020), 26.8 (2021), 26.4 (2022), 22.5 (2023 est.), projections 19.4 (2024), 17.6 (2025), 15.9 (2026), 14.1 (2027), 12.3 (2028), 12.3 (2029).
  - Citizenship by investment (CBI) revenue: 14.8 (2019), 11.3 (2020), 23.4 (2021), 25.5 (2022), 21.5 (2023 est.), projections 18.0 (2024), 16.0 (2025), 14.0 (2026), 12.0 (2027), 10.0 (2028–2029).
  - CBI due diligence fees: 0.9 (2019), 1.1 (2020), 1.4 (2021), 2.3 (2022), 2.4 (2023 est.), projections 2.0 (2024), 1.8 (2025), 1.6 (2026), 1.4 (2027), 1.1 (2028–2029).
- Wages and salaries: 10.7 percent of GDP (2019), 12.8 (2020), 14.2 (2021), 14.4 (2022), 13.6 (2023 est.), projected steady at 13.6 (2024–2029).
- Interest (percent of GDP): 1.2 (2019), 1.4 (2020), 1.2 (2021), 1.3 (2022), 1.1 (2023 est.), projections 1.0 (2024–2029).
- Capital expenditure and net lending: see fiscal sector developments above.
- Gross financing need (percent of GDP): 15.2 (2019), 22.6 (2020), 13.5 (2021), 20.9 (2022), 14.3 (2023 est.), projections 15.5 (2024), 16.8 (2025), 18.5 (2026), 20.5 (2027), 22.4 (2028), 3.9 (2029) [series includes amortization notes].

### Balance of payments (selected)
- Current account (in millions of U.S. dollars): -143.1 (2019), -258.7 (2020), -118.1 (2021), -285.5 (2022), -154.5 (2023 est.), projections -200.0 (2024), -278.8 (2025), -149.5 (2026), -123.2 (2027), -68.8 (2028), -70.4 (2029).
- Trade balance (in millions of U.S. dollars): -821.2 (2019), -668.5 (2020), -610.2 (2021), -918.3 (2022), -902.6 (2023 est.), projections -998.0 (2024), -1,094.5 (2025), -992.3 (2026), -987.9 (2027), -951.1 (2028), -975.6 (2029).
- Services receipts and tourism:
  - Services receipts (millions of U.S. dollars): 1,401.0 (2019), 881.7 (2020), 971.8 (2021), 1,380.9 (2022), 1,551.6 (2023 est.), projections 1,591.8 (2024), 1,643.4 (2025), 1,705.9 (2026), 1,757.9 (2027), 1,808.0 (2028), 1,859.5 (2029).
  - Tourism receipts (millions of U.S. dollars): 976.5 (2019), 289.3 (2020), 410.0 (2021), 807.2 (2022), 961.9 (2023 est.), projections 1,035.0 (2024), 1,062.9 (2025), 1,103.3 (2026), 1,137.0 (2027), 1,169.4 (2028), 1,202.7 (2029).
- Capital and financial account:
  - Capital account (millions of U.S. dollars): 189.0 (2019), 124.1 (2020), 212.5 (2021), 252.6 (2022), 260.5 (2023 est.), projections 270.6 (2024), 282.8 (2025), 294.7 (2026), 305.0 (2027), 315.0 (2028), 324.7 (2029).
  - Financial account (millions of U.S. dollars): 38.6 (2019), -129.9 (2020), 158.0 (2021), -37.8 (2022), 106.0 (2023 est.), projections 70.7 (2024), 4.0 (2025), 145.2 (2026), 181.7 (2027), 246.1 (2028), 254.3 (2029).
  - Foreign direct investment (net): 135.5 (2019), -3.0 (2020), 68.2 (2021), 120.6 (2022), 115.8 (2023 est.), projections 108.5 (2024), 107.3 (2025), 103.5 (2026), 96.4 (2027), 87.1 (2028), 93.9 (2029).
- Reserve assets (ECCB imputed reserves, millions of U.S. dollars): 346.3 (2019), 365.4 (2020), 312.8 (2021), 270.3 (2022), 267.0 (2023 est.), projections 264.7 (2024), 263.0 (2025), 261.2 (2026), 259.4 (2027), 266.0 (2028), 264.8 (2029).
- Current account ratios:
  - Current account (percent of GDP): -4.8 (2019), -10.8 (2020), -5.1 (2021), -10.9 (2022), -5.4 (2023 est.), projections -6.5 (2024), -8.6 (2025), -4.3 (2026), -3.4 (2027), -1.8 (2028–2029).
  - Current account, excluding CBI receipts (percent of GDP): -19.6 (2019), -22.2 (2020), -28.5 (2021), -36.3 (2022), -26.8 (2023 est.), projections -24.5 (2024), -24.6 (2025), -18.3 (2026), -15.4 (2027), -11.8 (2028–2029).

### Monetary survey (selected)
- Broad money (M2, percent change): 5.1 (2019), -4.5 (2020), 8.9 (2021), 3.7 (2022), 4.3 (2023 est.), projections 6.3 (2024), 7.1 (2025), 7.9 (2026), 8.2 (2027), 9.1 (2028), 8.2 (2029).
- Net foreign assets (percent change): 5.7 (2019), 0.4 (2020), 9.1 (2021), -7.0 (2022), 2.6 (2023 est.), projections 2.6 (2024), 2.5 (2025), 2.3 (2026), 2.1 (2027), 2.5 (2028), 1.8 (2029).
- Net credit to central government (percent change): 2.9 (2019), 6.8 (2020), -4.8 (2021), 4.9 (2022), -0.6 (2023 est.), projections 1.0 (2024), 1.6 (2025), 2.5 (2026), 3.2 (2027), 3.9 (2028), 3.7 (2029).
- Private sector credit (in nominal terms): 1.5 (2019), -4.0 (2020), 7.7 (2021), 5.8 (2022), 4.0 (2023 est.), projections 4.4 (2024), 4.7 (2025), 5.1 (2026), 4.3 (2027), 4.1 (2028), 4.1 (2029).
- Income velocity of money: 4.7 (2019), 4.0 (2020), 3.4 (2021), 3.0 (2022), 3.2 (2023 est.), projected steady near 3.2–2.8.

### Financial soundness and vulnerability indicators
- Banking sector indicators (2023):
  - Private sector credit growth (y/y): 4.0
  - CAR: 10.3
  - Regulatory Tier 1: 6.8
  - ROA: 1.0
  - Net-interest income to gross income: 30.7
  - Non-interest expenses to gross income: 78.0
  - Liquid assets to total assets: 47.8
  - Loan-to-deposit ratio: 55.0
- Credit unions (2023 highlights):
  - Credit growth (y/y): 11.0
  - Return on assets (ROA): 0.9
  - Total provisions to nonperforming loans: 56.0
- Indicators of external and financial vulnerability (2023):
  - Merchandise exports (12-month change): -0.4 percent
  - Merchandise imports (12-month change): -1.6 percent
  - Tourism earnings (12-month change): 19.2 percent
  - Current account balance (percent of GDP): -5.4
  - Capital and financial account balance (percent of GDP): 2.3
  - Foreign direct investment: 4.0 (percent of GDP)
  - Imputed net international reserves (millions of U.S. dollars): 267.0; in percent of broad money: 22.1
  - Commercial banks’ net foreign assets (millions of U.S. dollars): 619.6
  - External public debt (percent of GDP): 10.5
  - Nominal exchange rate (E.C. dollars per U.S. dollar, end period): 5.7
  - Real effective exchange rate appreciation (end period): 0.6

_Source: National authorities; ECCB; UNDP; World Bank; and IMF staff calculations and projections._

### 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, FDI and financial flows, and payment systems, and lead to refugee flows.  
  - Relative Likelihood: High  
  - Impact: Medium  
  - Timeframe: ST/MT  
  - Policy Response:  
    - Strengthen the social safety net.  
    - 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, uncertainty, and export restrictions) and demand fluctuations causes recurrent commodity price volatility, external and fiscal pressures in EMDEs, contagion effects, and social and economic instability.  
  - Relative Likelihood: High  
  - Impact: Medium  
  - Timeframe: ST/MT  
  - Policy Response:  
    - Strengthen the social safety net to 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.

- 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 market fragmentation causing sudden stops in EMDEs.  
  - Specific example: U.S.: Amid tight labor markets and/or commodity price shocks, inflation remains elevated, prompting the Fed to keep rates higher for longer and resulting in more abrupt financial, housing and commercial real estate market correction, and “hard landing”.  
  - Relative Likelihood: Medium  
  - Impact: High  
  - Timeframe: ST/MT  
  - Policy Response:  
    - Strengthen the social safety net to provide temporary and targeted support to the vulnerable.  
    - Enhance competitiveness to support economic recovery.  
    - Diversify tourism revenues.  
    - Increase the linkage between tourism and other sectors.

- Systemic financial instability. Sharp swings in real interest rates and risk premia, and asset repricing amid economic slowdowns and policy shifts trigger insolvencies in countries with weak banks or non-bank financial institutions, causing market dislocations and adverse cross-border spillovers.  
  - Relative Likelihood: Medium  
  - Impact: Medium  
  - Timeframe: ST/MT  
  - Policy Response:  
    - Monitor asset quality and ensure adequate loan loss provisioning.  
    - Vigilantly monitor the financial sector development in coordination with ECCB.

### Structural Risks
- Deepening geo-economic fragmentation. Broader and deeper conflict(s) and weakened international cooperation result in a more rapid reconfiguration of trade and FDI, supply disruptions, protectionism, technological and payments systems fragmentation, rising input costs, financial instability, a fracturing of international monetary and financial systems, and lower potential growth.  
  - Relative Likelihood: High  
  - Impact: Medium  
  - Timeframe: ST/MT  
  - Policy Response:  
    - Enhance international cooperation and competitiveness to support economic recovery and cross border collaboration.

- Extreme climate events. Extreme climate events driven by rising temperatures cause loss of human lives, severe damage to infrastructure, supply disruptions, lower growth, and financial instability.  
  - Relative Likelihood: Medium  
  - Impact: Medium  
  - Timeframe: ST/MT  
  - Policy Response:  
    - Design rule-based fiscal frameworks that internalize exposure to natural disasters.  
    - Adopt national adaptation plans with investment in structural and financial resilience, and appropriate ex ante financing.

- Disorderly energy transition. Disorderly shift to net-zero emissions (e.g., owing to shortages in critical metals) and climate policy uncertainty cause supply disruptions, stranded assets, market volatility, and subdued investment and growth.  
  - Relative Likelihood: Medium  
  - Impact: Medium  
  - Timeframe: MT  
  - Policy Response:  
    - Accelerate transition to renewable energy to improve resilience and reduce vulnerability to imported energy prices.

- Cyberthreats. Cyberattacks on physical or digital infrastructure (including digital currency and crypto assets ecosystems) or misuse of AI technologies trigger financial and economic instability.  
  - Relative Likelihood: Medium  
  - Impact: Low  
  - Timeframe: MT  
  - Policy Response:  
    - Enhance digital security in public and private platforms.

### Domestic Risks
- Lower than expected CBI revenues. Pressure from EU to end Citizenship by Investment Program or face visa restrictions, leaving the program unattractive.  
  - Relative Likelihood: Medium  
  - Impact: Medium  
  - Timeframe: MT  
  - Policy Response:  
    - Mobilize revenue from alternative sources.  
    - Strengthen governance frameworks to protect the integrity of the CBI program.

- Financial sector weakness. Higher NPLs and low capital buffer impairs credit intermediation and dampens growth.  
  - Relative Likelihood: Medium  
  - Impact: Medium  
  - Timeframe: ST  
  - Policy Response:  
    - Monitor asset quality and ensure adequate loan loss provisioning.

### Risk Assessment Notes
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“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. “Short term” (ST) and “medium term” (MT) are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

*Source: Annex I. Risk Assessment Matrix.*

### 5. Debt consolidation across sectors:

### 5. Debt consolidation across sectors

### Public debt coverage and structure
- Public debt coverage includes the central government (St. Kitts), the local government (Nevis), and the public enterprises.
- Commentary: External debt is expected to dinimish, while domestic debt is projected to remain stable.
- Consolidation scope shown: consolidated public sector (per notes in figures).
- Commentary: The fan chart has a very large width because of the high historical debt numbers before 2012.

### Public debt composition indicators (as presented)
- Debt by Currency (Percent of GDP): Foreign currency / Local currency / Local-linked (projection series 2013–2029 shown in figure).
- Public Debt by Holder (Percent of GDP): External private creditors / External official creditors / Domestic other creditors / Domestic commercial banks (series shown 2013–2021 with projection).
- Public Debt by Governing Law, 2022 (percent): Domestic law / Foreign law ex. multilateral / Multilateral (perimeter shown is general government).
- Debt by Instruments (Percent of GDP): Marketable debt / Nonmarketable debt (perimeter shown is general government).
- Public Debt by Maturity (Percent of GDP): ≤ 1 year / 1-5 years / > 5 years; residual maturity: 6. years (projection 2018–2028 shown).

### Baseline scenario (Figure 4) — key values (Percent of GDP unless indicated otherwise)
- Public debt: 60.65 (2022); 54.45 (2023); 51.74 (2024); 49.94 (2025); 49.55 (2026); 50.45 (2027); 52.54 (2028); 54.45 (2029); 56.45 (2030); 58.46 (2031); 60.3 (2032)
- Change in public debt: -8. 5 (2023); -6. 3 (2024); -2. 6 (2025); -1. 8 (2026); -0. 4 (2027); 0.9 (2028); 2.0 (2029); 2.0 (2030); 1.9 (2031); 2.0 (2032); 1.9 (final column)
- Contribution of identified flows: -3. 2 (2023); -5. 4 (2024); -3. 2 (2025); -1. 9 (2026); -0. 4 (2027); 1.0 (2028); 2.0 (2029); 2.0 (2030); 2.0 (2031); 2.0 (2032)
- Primary deficit: 2.7 (2022); -2. 1 (2023); -0. 8 (2024); -0. 1 (2025); 0.9 (2026); 1.9 (2027); 2.9 (2028); 2.9 (2029); 2.9 (2030); 2.9 (2031); 2.9 (2032)
- Noninterest revenues: 45.64 (2022); 42.53 (2023); 39.5 (2024); 37.7 (2025); 35.9 (2026); 34.2 (2027); 32.4 (2028); 32.4 (2029); 32.4 (2030); 32.4 (2031); 32.4 (2032)
- Noninterest expenditures: 48.44 (2022); 40.43 (2023); 38.6 (2024); 37.6 (2025); 36.9 (2026); 36.1 (2027); 35.3 (2028); 35.3 (2029); 35.3 (2030); 35.3 (2031); 35.3 (2032)
- Automatic debt dynamics: -6. 0 (2023); -3. 3 (2024); -2. 4 (2025); -1. 8 (2026); -1. 4 (2027); -0. 9 (2028); -0. 9 (2029); -0. 9 (2030); -0. 9 (2031); -0. 9 (2032)
- Real interest rate and relative inflation: -0. 9 (2023); -1. 3 (2024); 0.1 (2025); 0.3 (2026); 0.5 (2027); 0.5 (2028); 0.5 (2029); 0.6 (2030); 0.6 (2031); 0.6 (2032)
- Real interest rate: -0. 4 (2023); -1. 4 (2024); 0.0 (2025); 0.3 (2026); 0.5 (2027); 0.5 (2028); 0.5 (2029); 0.6 (2030); 0.6 (2031); 0.6 (2032)
- Relative inflation: -0. 5 (2023); 0.1 (2024); 0.0 (2025 onward through 2032)
- Real growth rate: -5. 6 (2023); -2. 0 (2024); -2. 5 (2025); -2. 1 (2026); -1. 8 (2027); -1. 5 (2028); -1. 4 (2029); -1.5 (2030); -1.5 (2031); -1.5 (2032)  [note: formatting in source shows truncated series]
- Real exchange rate: 0.5 (single entry)
- Contribution of residual: -5. 2 (2023); -0. 9 (2024); 0.6 (2025); 0.1 (2026); 0.0 (2027 onward)
- Gross financing needs: 20.9 (2022); 14.3 (2023); 15.5 (2024); 16.8 (2025); 18.5 (2026); 20.5 (2027); 22.4 (2028); 23.7 (2029); 25.0 (2030); 26.5 (2031); 28.1 (2032)
- of which: debt service: 18.1 (2022); 16.4 (2023); 16.4 (2024); 16.9 (2025); 17.6 (2026); 18.6 (2027); 19.6 (2028); 20.8 (2029); 22.2 (2030); 23.6 (2031); 25.2 (2032)
- Local currency debt service: 16.5 (2022); 15.2 (2023); 15.0 (2024); 15.7 (2025); 16.5 (2026); 17.6 (2027); 18.7 (2028); 20.1 (2029); 21.5 (2030); 23.1 (2031); 24.7 (2032)
- Foreign currency debt service: 1.6 (2022); 1.1 (2023); 1.3 (2024); 1.2 (2025); 1.1 (2026); 1.0 (2027); 0.8 (2028); 0.7 (2029); 0.6 (2030); 0.6 (2031); 0.5 (2032)

Memo:
- Real GDP growth (percent): 8.8 (2022); 3.4 (2023); 4.7 (2024); 4.3 (2025); 3.8 (2026); 3.0 (2027); 2.8 (2028); 2.9 (2029); 2.9 (2030); 2.8 (2031); 2.7 (2032)
- Inflation (GDP deflator; percent): 2.7 (2022); 4.7 (2023); 2.6 (2024); 2.3 (2025); 2.0 (2026 onward through 2032)
- Nominal GDP growth (percent): 13.4 (2022); 9.7 (2023); 6.2 (2024); 6.4 (2025); 5.9 (2026); 5.2 (2027); 5.0 (2028); 5.0 (2029); 5.0 (2030); 4.8 (2031); 4.8 (2032)
- Effective interest rate (percent): 2.1 (2022); 2.1 (2023); 2.7 (2024); 2.9 (2025); 3.0 (2026); 3.1 (2027); 3.2 (2028); 3.2 (2029); 3.1 (2030); 3.1 (2031); 3.1 (2032)

Commentary: The main driver of debt is moderate deficits, largely ameliorated by real GDP growth.

### Medium-term risk assessment (Figure 5) — key indicators and signals
- Debt fanchart module:
  - Fanchart width: 98.6 1.4 (percent of GDP)
  - Terminal debt-to-GDP x: 24.1
  - Debt fanchart index (DFI): 2.7
  - Risk signal: High (per note 3/)
- Probability of debt non-stabilization (percent): 94.6 0.8
- Gross Financing Needs (Percent of GDP) module:
  - Average baseline GFN: 18.0 6.1 (percent of GDP)
  - Initial Banks' claims on the gen. govt (pct bank assets): 6.0 1.9
  - Change in banks' claims in stress (pct banks' assets): 7.1 2.4
  - GFN financeability index (GFI): 10.5
  - Risk signal: Moderate
- Final assessment:
  - Prob. of missed crisis, 2023-2028, if stress not predicted: 54.5 pct.
  - Prob. of false alarms, 2023-2028, if stress predicted: 9.1 pct.
- Medium-term index: Risk signal: 5/ (final assessment shown as High/Moderate across modules)
- Commentary: The fan chart has a very large width because of the high historical debt numbers before 2012.

### Realism of baseline assumptions (Figure 6) — diagnostics
- Forecast track record and comparator group tests shown for: Public debt to GDP, Primary deficit, r - g.
- Distribution metrics:
  - 3-year debt reduction above 75th percentile (5.9 ppts of GDP); percentile rank: 84.1
  - 3-year adjustment above 75th percentile (2 ppts of GDP); percentile rank: 51
- Laubach (2009) rule referenced: implied spread response rule to projected debt-to-GDP increases.
- Commentary: The high percentile rank is based on the historical sample which includes very high debt numbers before 2012.

### Triggered modules and long-term risks (Figures 7–9, Triggered Modules)
- Triggered modules include Pensions and Health.
- Long-Term Risk Assessment (Large Amortization incl. Custom Scenario):
  - Baseline variable assumptions for 2028 and 2032–2036 average and Custom Scenario:
    - Real GDP growth: 2.8%
    - Primary Balance-to-GDP ratio: -2.9%
    - Real depreciation: -2.0%
    - Inflation (GDP deflator): 2.0%
  - Commentary: The upward trajectory is driven by the historically high debt before the GFC, which was subsequently restructured.
- Climate change: Adaptation module:
  - Commentary: Climate change adaptation does not worsen the debt dynamic significantly.

### Annex VI — Staff baseline assumptions on renewable energy projects
- Solar project:
  - Total investment: 80 million USD
  - Fully operational in 2026.
  - Peak capacity: 35MW; average contribution: about 9 MW (one third of St-Kitts’ grid needs).
  - BESS: 43 MW to maintain baseload capacity and shift energy to night consumption.
  - Facility designed to be resilient to a class-4 Hurricane.
  - Power sold under a 25 years duration Purchase Power Agreement (PPA) between a Dutch-Swiss private sector consortium and St-Kitts Energy Utility Company (SKELEC).
  - Construction start: 2024Q2; construction duration: 18 months.
  - Staff assessment: execution risk small; full power generation capacity incorporated in the baseline.
  - Domestic component of the investment at construction stage: 12.5 percent of the total envelope.
  - Job creation: 50 new jobs in 2024 and 100 new jobs in 2025.
  - Operational cost: solar electricity purchased by SKELEC should be 40 percent lower than from diesel-powered generator (accounting for the fuel surcharge transferred from the budget).
  - Staff assumed operational launch of the solar facility will reduce the Island utility company's fuel import by about 40 percent (4 mil gallons of diesel for total annual imports of 10 million) resulting in annual savings of about 100 mil EC (37 mil USD).
  - Financing mix: foreign equity (about 25 percent of the total investment) and domestic loans; hence a small impact on primary income through profits outflows according to staff calculations.
- Geothermal project:
  - Initial investment: 17 million USD for drilling and exploration provided through a contingent loan of the Caribbean Development Bank (acting as intermediary for the Green Climate Fund).
  - Construction stage expected to take three years (2025-27).
  - Planned capacity: 30 to 45MW (three production wells of 10 to 15MW).
  - Staff assessment: execution risk medium; 50 percent of planned power generation capacity incorporated in the baseline.
  - Note: geothermal energy consultants' forecasts range between 100MW and 1GW.
  - Domestic component of investment: 25 percent.
  - Baseline assumes no impact on the domestic labor market due to lack of information and specific skillsets required.
  - Unit price of electricity once operational expected to decline by around 63 percent for NEVLEC (Nevis utility); electricity cost anticipated to decrease by around 45 percent for the Federation.
- Macroeconomic and external effects:
  - Projects expected to affect long-term growth through productivity gain: staff estimate productivity gains to be 1.4 percent of GDP over 6 years given baseline assumptions on project capacities.
  - External accounts: current account expected to deteriorate during investment phase due to high imports demand for construction; once operational, projects expected to generate savings from lower fuel imports (see solar project savings estimate above).

*Source: 1knaea2024001 - 5. Debt consolidation across sectors (IMF staff estimates and projections).*

### 5. Related additional infrastructure projects could create additional upside risk for

### 1knaea2024001 - 5. Related additional infrastructure projects could create additional upside risk for

### Prospective infrastructure projects excluded from baseline
- Staff did not include in its baseline scenario the impact of prospective projects that the authorities are contemplating to upgrade the power grid.
- The contemplated upgrade is linked to larger electricity generation from geothermal and to realizing energy export potential estimated from Nevis’ potential resources.

### Technical scope of the proposed grid upgrade
- Replace 11Kv power lines with 66Kv power lines.
- Further grid extension to ensure redundancy.
- Burying of high voltage power lines to strengthen resilience to Natural Disasters.

### Investment scale and timeline
- Authorities estimate that this extension of their energy plans, depending on its scale, could involve investments ranging between 200 and 500 USD million spanning over a decade.

### Economic and policy implications
- The upgrade may be necessary if the country decides to fully reap the energy export potential estimated from Nevis’ potential resources.
- The upgrade may be necessary if electricity production is ramped up in line with:
  - the expected growth of the economy, and
  - the estimated increase in electricity production required to reach the net-zero trajectory featured in their National Determined Contribution to COP21.

*Source: ST. KITTS AND NEVIS — STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION — INFORMATIONAL ANNEX (section 5).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1knaea2024001.pdf_