## 1lcaea2024001

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---

### Recent developments and macroeconomic context
- Economy rebounded strongly in 2022 after two external shocks; output is currently near the pre-pandemic level.
- Real GDP (annual change):
  - 2022: 15.7 percent
  - 2023: 3.2 percent
  - 2024 (projection): 2.3 percent
- Consumer prices, period average:
  - 2022: 6.5 percent; 2023: 4.3 percent; 2024: 2.1 percent
- Unemployment rate (annual average): 2019: 16.8; 2020: 21.7; 2021: 21.9
- Tourism recovery:
  - Stay-over tourist arrivals in 2022 reached 84 percent of the level in 2019.
- Public finances in FY2022:
  - Fiscal balance improved by 4.1 percentage points to a deficit of 1.4 percent of GDP due to strong tax revenue collection and growth of Citizenship by Investment Program (CIP) revenue, and delays in public investment execution.
  - Gross financing needs remained elevated at 15.4 percent of GDP in FY 2022 due to increased short-term amortization payments.

### Fiscal position and public debt
- Public debt dynamics and stock:
  - Public debt rose sharply during the pandemic to near 95 percent of GDP and, with recovery, now stands near 75 percent of GDP—about 12 percent above the 2019 level.
  - Overdrafts and payables remain high at 3.7 percent of GDP.
- Central government (percent of GDP):
  - Revenue: 2019: 21.5; 2020: 21.6; 2021: 21.2; 2022: 21.8; 2023: 21.3; 2024: 21.0
  - Expenditure: 2019: 25.0; 2020: 33.0; 2021: 26.7; 2022: 23.2; 2023: 23.5; 2024: 23.4
  - Primary balance, incl. ND cost: 2019: -0.5; 2020: -7.7; 2021: -2.3; 2022: 1.5; 2023: 0.4; 2024: 0.2
  - Overall balance, incl. ND cost: 2019: -3.5; 2020: -11.5; 2021: -5.5; 2022: -1.4; 2023: -2.8; 2024: -3.0
  - Central government debt: 2019: 58.5; 2020: 89.1; 2021: 77.8; 2022: 69.5; 2023: 67.6; 2024: 67.4
  - Total public sector debt: 2019: 61.9; 2020: 94.2; 2021: 82.9; 2022: 74.1; 2023: 73.7; 2024: 75.0
  - Domestic debt: 2019: 32.2; 2020: 49.0; 2021: 39.8; 2022: 36.0; 2023: 34.2; 2024: 33.7
  - External debt: 2019: 29.7; 2020: 45.2; 2021: 43.1; 2022: 38.1; 2023: 39.5; 2024: 41.3
- Projections and risks:
  - On current policies, public debt is projected to stabilize around 75 percent of GDP in the medium term, above the regional ceiling of 60 percent of GDP by 2035.
  - Short maturity profile of domestic (regional) debt implies elevated refinancing risk.
  - Government revenue plans are insufficient to reach the regional debt ceiling.

### External sector and reserves
- Current account balance (percent of GDP):
  - 2019: 5.5; 2020: -15.2; 2021: -7.0; 2022: -2.3; 2023: -0.8; 2024: -0.4
- Exports of goods and services: 2019: 57.5; 2020: 29.7; 2021: 38.4; 2022: 52.6; 2023: 54.4; 2024: 54.8
- Imports of goods and services: 2019: -46.2; 2020: -43.8; 2021: -44.1; 2022: -51.3; 2023: -51.4; 2024: -51.4
- Imputed international reserves, months of imports of goods and services: 2019: 4.5; 2020: 3.3; 2021: 3.6; 2022: 2.9; 2023: 3.9; 2024: 5.0

### Financial sector performance and risks
- Banking sector:
  - NPL ratios: banks’ NPL ratios have edged higher to 14 percent of loans.
  - Provisioning: Provisioning coverage ratios at some banks are still below the ECCB’s requirement of 15 percent.
  - Gross bank exposure to the government is 6 percent of total assets.
  - Deposits continued to grow, strengthening liquidity buffers; banks remain profitable supported by steady net interest income.
  - Credit growth: Credit growth picked up in 2023 but remains below nominal GDP growth; credit to private sector (nominal) 2023: 4.0 percent; 2024 projection: 3.0 percent.
- Credit unions:
  - Loans grew 14 percent in 2023Q1.
  - Delinquency ratios fell to 8 percent in 2023Q1 from a pandemic high of 13 percent.
  - Rapid credit growth raises credit risk concerns given relatively weaker credit standards, generally high NPLs, and low capital buffers in some institutions.
- Systemic risk:
  - Overall level of systemic risk remains moderate, but high public debt is a source of systemic risk through sovereign-bank links.

### Outlook and key projections
- Growth and inflation:
  - Growth is projected to slow in the medium term as the economy completes recovery; inflation projected around 4 percent in 2023 and moderating to 2 percent in 2024.
  - Output gap (percent of potential GDP): 2019: 6.5; 2020: -19.3; 2021: -11.3; 2022: 1.0; 2023: 2.2; 2024: 2.5
- Credit and investment:
  - Bank credit to the private sector is projected to remain anemic without improved loan loss provisioning, fiscal adjustment, and legislative reform.
  - Limited access to credit is a key obstacle to domestic investment, employment, and growth.

### Risks to the outlook
- Downside risks are tilted to the downside, including:
  - global economic slowdown;
  - commodity price volatility;
  - additional global financial tightening;
  - extreme climate events (recurrent risk; see RAM in Appendix).
- Financial sector risks:
  - Fuller NPLs recognition from the restructured loans portfolio could further depress credit growth and harm the recovery.
  - An increase in banks’ foreign investments to take advantage of higher (or more persistently high) international interest rates could further depress credit growth and harm the recovery.
- Tightening in global financial conditions above expectations could:
  - reduce FDI, tourism demand, and appetite for risky public debt (projected to remain high in the baseline).
- CIP revenue implications:
  - CIP revenue implies significant downside and upside uncertainty on the fiscal and external balances, with potentially large implications for public and private investment execution and growth.
- Upside risk:
  - Better-than-expected tourism recovery.

### Authorities’ views on outlook and risks
- Authorities broadly concurred with staff’s baseline projections but have more upbeat medium-term growth forecasts based on:
  - the hotel construction pipeline over the medium term;
  - plans to upgrade key public infrastructure.
- Authorities generally agreed with the staff risk assessment and expressed concern about the lingering and/or renewed threat of Covid.

### Policy priorities (overview)
- Near-term focus:
  - restore fiscal and financial buffers to withstand shocks;
  - improve conditions for investment and growth;
  - complement with institutional and legal reforms to protect space for public investment while ensuring access to government financing at favorable terms.
- Financial sector actions:
  - improve classification of NPLs in the post-moratorium and restructured portfolios;
  - raise provisions to the regulatory minimum;
  - strengthen interest rate risk management.
- Credit union sector: strengthen regulation and enforcement to address risks and support financial stability and inclusion.
- Social policies: address deep-rooted social problems to reduce youth unemployment and support female labor market participation.

### Rebuilding fiscal buffers — detailed priorities and targets
- Fiscal priority: start fiscal consolidation in FY 2023/24 to:
  - (i) put public debt firmly on a downward path;
  - (ii) create fiscal space to support infrastructure and social investment;
  - (iii) build buffers against natural disasters.
- Authorities contemplating measures including a new 2.5 percent Health and Citizen Security Levy, increases in excises on tobacco products, and a tax amnesty.
  - Staff view: projected yields from these measures are insufficient to put debt on a downward trajectory to reach the regional debt ceiling and are relatively less efficient than alternative options proposed by staff.
  - Concern: tax amnesty may incentivize future non-compliance; tax administration needs an operational plan for arrears collection.
  - Authorities’ proposals also include measures that would decrease revenue or increase expenditures (temporary removal of 12.5 percent VAT on building materials, a one-off payment to pensioners and teachers).
- Staff recommendation for stronger consolidation:
  - savings measures of 2½ percent of GDP to strengthen debt sustainability (this consolidation need includes a natural disaster cost of two-thirds of a percent of GDP annually);
  - an additional 1 percent of GDP consolidation could be targeted to boost public investment, including resilience to natural disasters.

### Options for fiscal consolidation (estimates preserved exactly)
- Estimated Medium-Term Adjustment Need:
  - 3.5 (To set debt on a downward path toward the regional 2035 debt targett of 60 percent of GDP)
  - 2.5 (To increase public investment to at least the pre-pandemic average level relative to GDP)
  - 1.0
- Menu of Potential Measures (Est. yield (% of GDP)):
  - Containing growth of the public sector wage bill ...: 3.9
  - Containing wage bill (reduces to precrisis levels): 0.7
  - VAT measures, of which: 2.3
    - Rate increase from 12.5 to 15 percent: 1.1
    - Reversal of reduced rate for hospitality sector: 0.7
    - Increasing the VAT rate on fuel from 0 to 15 percent: 0.5
  - Removal of some tax exemptions: 0.8
  - Increasing the excise rate on fuel from 3.5 to 4 ECD: 0.1
  - Review tourism sector tax incentives, including in the context of the global minimum corporate income tax: tbd
  - Reinstating a value-based residential property tax: tbd

### Fuel tax reform and pricing mechanisms
- Current regime:
  - fuel is taxed at a zero VAT rate and an excise tax around a target of EC$3.5 per imperial gallon which is adjusted discretionally every three weeks.
- Reform options and estimated yields:
  - increasing the VAT rate on fuel to the statutory rate would yield additional revenue of 0.5 percent of GDP;
  - restoring the excise tax rate to the pre-pandemic level could yield an additional 0.1 percent of GDP.
- Pricing mechanism:
  - replace discretionary pass-through with a rule smoothing the passthrough from international oil to domestic fuel prices to cushion social/economic impacts of sharp international oil price increases.
  - Staff simulations: an appropriately calibrated smoothing passthrough rule can better protect expected revenue in the long term while easing short-term social burden and acting as an automatic stabilizer of output and inflation.
- Further increases in fuel taxes could support carbon emission mitigation commitments; revenue could finance well-designed social transfers to protect the poor.
- Implementation note: sustainability of revenue in the long term requires containment of fuel tax reductions when international oil prices are low; implementation may require a fuel price stabilization fund.

### Public investment, social programs, and institutions
- Government’s public investment plan projects include:
  - a new airport;
  - improvements in the cruise ship port and surrounding infrastructure for commercial expansion;
  - a new cargo seaport;
  - construction of a new hospital and improvements in existing health infrastructure.
- Baseline capital spending is limited to around 2½ percent of GDP due to low revenue, high current spending, and financing constraints.
- Recommendations:
  - protect fiscal space for public infrastructure and social investments to better support private investment, increase labor demand and productivity, and aid debt sustainability;
  - build capacity for well-designed targeted or proxy-targeted social transfers;
  - carefully design universal health care and unemployment insurance framework with commensurate contributions to ensure financial sustainability.
- Pension fund reforms recommended:
  - increase contributions;
  - modify formula to favor longer careers;
  - reform pension parameters including automatic indexation;
  - discourage early retirement;
  - diversify investment portfolio internationally to boost resilience.
  - Note: in the absence of reforms the fund’s reserves would be depleted by around [figure redacted in source text], resulting in a significant underfunding gap of around 165 percent of GDP in 60 years, requiring annual fiscal outlays of about 3 percent of GDP over the next 60 years.
  - Current share of foreign investments outside the ECCU is around 15 percent of the total.

### Fiscal rules, debt management, and bond market development
- Legislative progress:
  - Public Financial Management Act passed in 2020, upgraded with amendments in 2022 and operational guidelines; became effective in May 2023.
  - Public Asset Management Policy endorsed by Cabinet and came in effect in 2023.
  - Government reviewing the Public Finance Act and preparing regulations for the 2021 Public Procurement and Asset Disposal Act.
- Staff recommendation: adopt a fiscal rule combining a primary balance floor and a recurrent spending ceiling to:
  - contain recurrent spending procyclicality;
  - provide additional fiscal space for public investment while supporting debt reduction without increasing taxes;
  - strengthen credibility and reduce implied size of recurrent spending consolidations.
- Debt management and market development:
  - gross financing needs around 15–20 percent of GDP over the medium term, including short-term amortization of domestic, regional treasury bills and bonds;
  - government debt management strategy seeks to lengthen debt maturity but execution delayed due to recent increase in long-term interest rates.
  - Steps to improve primary and secondary bond markets:
    - provide greater transparency and predictability to investors;
    - rely more on primary auctions in the regional government securities market (RGSM) to reduce reliance on private placements and increase liquidity;
  - Access to climate finance:
    - government plans to issue a blue bond at concessional terms combined with a debt swap to lower interest costs and lengthen maturity if well executed;
    - recommendations include developing a database of projects with climate adaptation/mitigation objectives, adopt green tagging of expenditures, consider organizational reforms for coordination, roll out annual borrowing plans, and publish a medium-term fiscal framework and debt management strategy.
  - Contingency planning recommendation: increase coverage from the Caribbean Catastrophe Risk Insurance Facility for large scale low probability events.

### Citizenship by Investment Program (CIP) revenue guidance
- CIP revenue: presents an opportunity to strengthen resilience but is volatile and difficult to predict; risk of sudden stop.
- Recommendation: do not rely on CIP for recurrent spending.
- Current practice: government established a sinking fund to use revenue collected with a new CIP option (citizenship with purchase of government bonds) for debt service exclusively.
- Recommendation: save other CIP proceeds in a separate fund for:
  - self-insurance against natural disasters (immediate availability at low cost);
  - debt service (debt reduction and reduce refinancing risk);
  - public investment, including resilience to natural disasters.

### Pension fund reforms and investment strategy
- Draft reforms put forward by the pension fund are being finalized for submission to Parliament in the coming months; authorities judge there is a good chance the draft reforms will be passed in Parliament based on past experience.
- Authorities receptive to increasing international diversification of the pension fund’s investment portfolio.
- Recommendation reiterated: implement the draft reforms to increase the pension fund’s longevity, and diversify its investment portfolio internationally to boost resilience.

### Strengthening financial sector resilience
- Banks:
  - High bank NPLs and provisions below the ECCB’s requirement, but banks show positive profitability and capital above the regulatory minimum.
  - Most large banks have not reached the minimum requirement for provisions of 60 percent of NPLs, which had to be met by end-2022; reaching the 60 percent requirement by end-2024 may prove challenging to some banks (revised down from the 100 percent by the ECCB recently).
  - Risks from overseas securities holdings include a large amount of corporate bonds relative to Treasuries, sizeable exposure within corporate bond portfolios to the financial sector, and a large portion of bonds rated below A-.
- Government role:
  - Use representation at the ECCB to strengthen enforcement of provisioning requirements and speed up disposal of long-standing NPLs.
- Legal and supervisory reforms:
  - Movable collateral framework passed; a credit bureau received license in December and expected to become fully functional in the coming months; insolvency bill advanced (prepared in 2020 and under review).
  - Recommendation: modernize foreclosure legislation for commercial loans and residential property and pass bankruptcy and insolvency law to expand credit access and lower loan interest rates.
- AML/CFT:
  - Continue reforms to laws and practices to mitigate cross-border financial flow risks and protect correspondent banking relationships.
  - Emphasize implementation of a risk-based approach to supervision of AML/CFT and ensuring adequate, accurate, and up-to-date beneficial ownership information.
- Credit unions:
  - Sector systemic with total assets of 25 percent of GDP.
  - Credit unions extended lending by 16 percent in 2022 on average.
  - Wide variation in NPL ratios, provisioning coverage, and capital ratios; two institutions with very low or negative capital may merge with larger credit unions.
  - FSRA actions:
    - Asset quality review (selecting an international audit firm as of June 2023; review will take three years and cover the largest credit unions).
    - Legislation expected to be passed by end-2023 to strengthen regulatory standards, including raising the capital requirement by 2 pp to 12 percent of assets and limiting the use of collateral as an offset for calculation of provisions.
    - In new legislation, collateral generally will not be used for 365+ days NPLs but will still be used for 90+ days to 365 days NPLs.
  - Note: FSRA provisioning practice differs from ECCB’s—provisioning coverage ratio generally lower (45 percent in aggregate as of March 2023 for credit unions vs the 60 percent required by the ECCB) and assessed against loan amount reduced by value of collateral.

### Increasing employment with labor market reforms
- Labor market challenges and gender/youth gaps:
  - Participation rate for female prime age workers (aged 25–64) is about 10 percentage points lower than male counterparts.
  - Staff estimates: female workers have a 10 percent lower participation rate than males.
  - A median female worker receives 20 percent less in monthly gross income than a male with the same observable characteristics.
  - Since the pandemic, jump in both male and female youth who are not in employment, education, or training (NEET); youth from households with young children and the elderly are more likely to be NEET.
- Policy recommendations:
  - Seek technical assistance to improve education attainment and increase enrollment in technical and vocational education and training.
  - Expand capacity of child and elderly care to raise labor participation of females and youth.
  - Review education programs and align government scholarships with skills in high demand in consultation with employers.
  - Youth Economy Agency to support youth employment with business incubation, entrepreneurship training and guidance; complement with social programs tackling non-economic barriers to employment.
  - Programs should fit within fiscal consolidation plan and could include tuition or cost recovery fees to ensure neutral budget impact.
  - Increase transparency of pay and provide more parental leave to increase labor participation and narrow gender salary gaps.

### Macroeconomic outlook and projections (selected series)
- Real GDP (at market prices) series: -0.2 (2019), -23.6 (2020), 11.3 (2021), 15.7 (2022), 3.2 (2023), 2.3 (2024), 2.3 (2025), 1.8 (2026), 1.5 (2027), 1.5 (2028).
- Consumer prices, period average: 0.5 (2019), -1.8 (2020), 2.4 (2021), 6.5 (2022), 4.3 (2023), 2.1 (2024), 2.0 (2025), 2.0 (2026), 2.0 (2027), 2.0 (2028).
- Fiscal balance, overall balance incl. ND cost: -3.5 (2019), -11.5 (2020), -5.5 (2021), -1.4 (2022), -2.8 (2023), -3.0 (2024), -2.9 (2025), -2.8 (2026), -2.9 (2027), -3.1 (2028).
- Revenue (percent of GDP): 21.5 (2019), 21.6 (2020), 21.2 (2021), 21.8 (2022), 21.3 (2023), 21.0 (2024), 21.0 (2025), 21.1 (2026), 21.0 (2027), 21.0 (2028).
- Expenditure (percent of GDP): 25.0 (2019), 33.0 (2020), 26.7 (2021), 23.2 (2022), 23.5 (2023), 23.4 (2024), 23.2 (2025), 23.2 (2026), 23.3 (2027), 23.4 (2028).
- Central government debt: 58.5 (2019), 89.1 (2020), 77.8 (2021), 69.5 (2022), 67.6 (2023), 67.4 (2024), 67.3 (2025), 67.4 (2026), 67.7 (2027), 68.1 (2028).
- Public sector debt (total): 61.9 (2019), 94.2 (2020), 82.9 (2021), 74.1 (2022), 73.7 (2023), 75.0 (2024), 76.3 (2025), 75.7 (2026), 75.4 (2027), 75.2 (2028).
- Current account balance (percent of GDP): 5.5 (2019), -15.2 (2020), -7.0 (2021), -2.3 (2022), -0.8 (2023), -0.4 (2024), -0.3 (2025), -0.1 (2026), -0.1 (2027), -0.1 (2028).
- Net imputed international reserves: Months of imports of goods and services: 4.5 (2019), 3.3 (2020), 3.6 (2021), 2.9 (2022), 3.9 (2023), 5.0 (2024), 5.9 (2025), 6.7 (2026), 7.5 (2027), 8.0 (2028).

### Risk assessment — key risks and policy responses (selected)
- Conjunctural risks (shorter horizon) examples:
  - Intensification of regional conflict(s): Likelihood High; Impact Medium; Policy: Diversify tourism revenues; Increase linkage between tourism and other sectors; Vigilantly monitor the financial sector development in coordination with ECCB.
  - Social discontent from supply shocks/high inflation: Likelihood High; Impact Medium; Policy: Provide temporary and targeted support to the vulnerable; Strengthen the labor market and provide diversified higher-quality job opportunities.
  - Abrupt global slowdown or recession: Likelihood Medium; Impact High; Policy: Enhance competitiveness; Diversify tourism revenues.
  - Commodity price volatility: Likelihood Medium; Impact Medium; Policy: Provide temporary targeted transfers; Allow gradual pass-through and phase out generalized subsidies; Accelerate transition to renewables.
  - Systemic financial instability: Likelihood Medium; Impact Medium; Policy: Monitor asset quality and ensure adequate loan loss provisioning.
- Structural risks (longer horizon):
  - Deepening geo-economic fragmentation: Likelihood High; Impact Medium; Policy: Enhance international cooperation and competitiveness.
  - Cyberthreats: Likelihood Medium; Impact Medium; Policy: Enhance digital security in public and private platforms.
  - Extreme climate events: Likelihood Medium; Impact Medium; Policy: Implement national adaptation plans with investment in structural and financial resilience, and appropriate ex ante financing.
- Domestic risks:
  - Lower than expected CIP revenues (pressure from EU to end Citizenship by Investment Program): Likelihood Medium; Impact Medium; Policy: Mobilize revenue from alternative sources.
  - Disorderly fiscal adjustment: Likelihood Low; Impact High; Policy: Adopt a fiscal rule and implement tax reforms.
  - Financial sector weakness (high NPLs): Likelihood Medium; Impact High; Policy: Monitor asset quality and ensure adequate loan loss provisioning.
  - Delays in infrastructure investment: Likelihood Medium; Impact High; Policy: Contain growth of current expenditures.

### External sector assessment — competitiveness and policy implications
- EBA-lite model results (2022):
  - EBA-lite CA model suggests a positive current account gap of 2.5 percent of GDP.
  - EBA-lite REER model implies a positive current account gap of 5.3 percent of GDP.
  - REER depreciated by 4.7 percent in 2022; NEER depreciated by 1.1 percent.
  - REER gap in 2022: -6.9 percent (EBA-lite CA model, elasticity -0.4); EBA-lite REER model shows REER gap of -12.2 percent.
- Policy implications:
  - Address supply-side bottlenecks and structural reforms to diversify and strengthen productivity outside tourism.

### Annex III — Debt Sustainability Analysis (selected baseline indicators)
- Summary assessment:
  - St. Lucia’s debt remains at high risk of sovereign stress.
  - Public debt declined from 94.2 percent in FY2020 to 82.9 in FY2021 and then to 74.1 in FY2022.
  - In the baseline scenario, debt will stabilize around 75 percent of GDP in the medium term.
  - Implementation of the fiscal consolidation plan envisaged in the main text would put public debt on a path that stabilizes below the regional debt target of 60 percent in the long term.
- Baseline public debt (percent of GDP):
  - 2022: 74.1; 2023: 73.7; 2024: 75.0; 2025: 76.3; 2026: 75.7; 2027: 75.4; 2028: 75.2; 2029: 75.2; 2030: 75.4; 2031: 75.5; 2032: 75.8
- Gross financing needs (GFN):
  - 2022: 14.4; 2023: 15.1; 2024: 18.2; 2025: 15.6; 2026: 18.0; 2027: 16.9; 2028: 15.6; 2029: 15.6; 2030: 15.3; 2031: 15.7; 2032: 18.7
- Debt service component of GFN:
  - 2022: 16.0; 2023: 15.5; 2024: 18.4; 2025: 15.9; 2026: 18.5; 2027: 17.4; 2028: 16.1; 2029: 15.5; 2030: 15.7; 2031: 16.2; 2032: 19.2
- Memo items:
  - Real GDP growth (percent): 2022: 12.2; 2023: 3.0; 2024: 2.3; 2025: 2.2; 2026: 1.7; 2027: 1.5; 2028: 1.5; 2029: 1.5; 2030: 1.5; 2031: 1.5; 2032: 1.5
  - Inflation (GDP deflator; percent): 2022: 6.5; 2023: 4.2; 2024: 2.6; 2025: 2.5; 2026–2032: 2.5 each year
  - Effective interest rate (percent): 2022: 3.7; 2023: 4.5; 2024: 4.5; 2025: 4.6; 2026: 4.7; 2027: 4.9; 2028: 5.1; 2029: 5.3; 2030: 5.4; 2031: 5.5; 2032: 5.4
- Staff commentary: The public debt-to-GDP ratio is projected to remain elevated around 75 percent, well above the regional debt target commitment of 60 percent.

### Medium- and long-term risk analysis and stress tests (selected)
- Medium-Term Risk signals:
  - Fanchart width: 63.5
  - Probability of debt not stabilizing (pct): 68.3
  - Average GFN in baseline: 16.5
  - Bank claims on government (pct bank assets): 5.8
  - Change in claims on government in stress (pct bank assets): 9.6
  - GFN financeability index: 10.7
- Long-term risks and modules:
  - Large amortization trigger suggests liquidity risk beyond the medium-term horizon.
  - Pension system adjustments (Permanent Adjustment Needed in the Pension System (Percent of GDP per year)):
    - 0.06%: 50 years
    - 1.32%: Until 2100
    - 2.13%: 30 years
  - Health/demographics: health cost increases could raise debt-to-GDP by 13 pp by 2052; with additional 0.6 pp growth in healthcare costs, debt-to-GDP could increase by 17 pp more.
  - Climate adaptation: customized scenario with adaptation cost of 1.3 percent of GDP (0.7 pp already included in baseline) suggests debt-to-GDP could increase by 28 pp by 2052.
- Stress tests:
  - Natural disaster stress test indicates higher GFN and debt.
  - Contingent liability stress test triggered mechanically but not conducted because scope already includes public nonfinancial corporations.

### Policy implications from DSA and staff recommendations
- Implement the fiscal consolidation plan envisaged in the main text to put public debt on a path that stabilizes below the regional target of 60 percent in the long term.
- Address financial sector vulnerability (high NPLs and low provisions) to reduce medium-term stress risk.
- Build resilience to natural disasters and plan for climate adaptation costs to contain long-term fiscal impact.
- Consider reforms to pension and healthcare financing to mitigate long-term demographic and health-related debt pressures.

### Annex IV — Youth and Gender in the Labor Market (selected findings)
- Occupational distribution:
  - Youth more likely employed in service and sales, elementary occupations, and clerical support than older workers with the same observable characteristics.
  - Female workers more likely employed in service and sales, clerical support, professionals, and management than male workers with the same observable characteristics.
- Sectoral employment and self-employment:
  - Youth more likely employed in the private sector and less likely to be self-employed than older workers.
  - Female workers more likely employed in the central government and less likely to be self-employed.
- Wage gaps and outcomes:
  - A median female worker earns 20 percent less in monthly gross income than male workers with the same observable characteristics.
- Correlation with illicit activity:
  - Youth unemployment correlated with reports of illegal drugs sold at the district level, suggesting some unemployed youth may be participating in illicit informal economy.
- Interpretation:
  - Youth and female workers disproportionately represented in lower-paying occupations and arrangements; borrowing constraints may limit youth self-employment; policy responses should address skills, care services, and targeted programs within fiscal constraints.

*Source: IMF staff report content for St. Lucia (content unit: 1lcaea2024001).*

### 1.4 percent of GDP due to strong tax revenue collection and CIP revenue. However, the large

### 1lcaea2024001 - 1.4 percent of GDP due to strong tax revenue collection and CIP revenue. However, the large

### Recent developments and macroeconomic context
- Economy rebounded strongly in 2022 after two external shocks; output is currently near the pre-pandemic level.
- Real GDP (annual change):
  - 2022: 15.7 percent
  - 2023: 3.2 percent
  - 2024 (projection): 2.3 percent
- Inflation and labor:
  - Consumer prices, period average: 2022: 6.5 percent; 2023: 4.3 percent; 2024: 2.1 percent
  - Unemployment rate (annual average): 2019: 16.8; 2020: 21.7; 2021: 21.9
- Tourism recovery:
  - Stay-over tourist arrivals in 2022 reached 84 percent of the level in 2019.
- Public finances in FY2022:
  - Fiscal balance improved by 4.1 percentage points to a deficit of 1.4 percent of GDP due to strong tax revenue collection and growth of Citizenship by Investment Program (CIP) revenue, and delays in public investment execution.
  - Gross financing needs remained elevated at 15.4 percent of GDP in FY 2022 due to increased short-term amortization payments.

### Fiscal position and public debt
- Public debt dynamics:
  - Public debt rose sharply during the pandemic to near 95 percent of GDP and, with recovery, now stands near 75 percent of GDP—about 12 percent above the 2019 level.
  - Overdrafts and payables remain high at 3.7 percent of GDP.
- Central government (percent of GDP):
  - Revenue: 2019: 21.5; 2020: 21.6; 2021: 21.2; 2022: 21.8; 2023: 21.3; 2024: 21.0
  - Expenditure: 2019: 25.0; 2020: 33.0; 2021: 26.7; 2022: 23.2; 2023: 23.5; 2024: 23.4
  - Primary balance, incl. ND cost: 2019: -0.5; 2020: -7.7; 2021: -2.3; 2022: 1.5; 2023: 0.4; 2024: 0.2
  - Overall balance, incl. ND cost: 2019: -3.5; 2020: -11.5; 2021: -5.5; 2022: -1.4; 2023: -2.8; 2024: -3.0
  - Central government debt: 2019: 58.5; 2020: 89.1; 2021: 77.8; 2022: 69.5; 2023: 67.6; 2024: 67.4
  - Total public sector debt: 2019: 61.9; 2020: 94.2; 2021: 82.9; 2022: 74.1; 2023: 73.7; 2024: 75.0
  - Domestic debt: 2019: 32.2; 2020: 49.0; 2021: 39.8; 2022: 36.0; 2023: 34.2; 2024: 33.7
  - External debt: 2019: 29.7; 2020: 45.2; 2021: 43.1; 2022: 38.1; 2023: 39.5; 2024: 41.3
- Projections and risks:
  - On current policies, public debt is projected to stabilize around 75 percent of GDP in the medium term, above the regional ceiling of 60 percent of GDP by 2035.
  - Short maturity profile of domestic (regional) debt implies elevated refinancing risk.
  - Government revenue plans are insufficient to reach the regional debt ceiling.

### External sector and reserves
- Current account balance (percent of GDP):
  - 2019: 5.5; 2020: -15.2; 2021: -7.0; 2022: -2.3; 2023: -0.8; 2024: -0.4
- Exports of goods and services: 2019: 57.5; 2020: 29.7; 2021: 38.4; 2022: 52.6; 2023: 54.4; 2024: 54.8
- Imports of goods and services: 2019: -46.2; 2020: -43.8; 2021: -44.1; 2022: -51.3; 2023: -51.4; 2024: -51.4
- Imputed international reserves, months of imports of goods and services: 2019: 4.5; 2020: 3.3; 2021: 3.6; 2022: 2.9; 2023: 3.9; 2024: 5.0

### Financial sector performance and risks
- Banking sector:
  - NPL ratios: banks’ NPL ratios have edged higher to 14 percent of loans.
  - Provisioning: Provisioning coverage ratios at some banks are still below the ECCB’s requirement of 15 percent.
  - Bank exposure to government: Gross bank exposure to the government is 6 percent of total assets.
  - Liquidity and deposits: Deposits continued to grow, strengthening liquidity buffers; banks remain profitable supported by steady net interest income.
  - Credit growth: Credit growth picked up in 2023 but remains below nominal GDP growth; credit to private sector (nominal) 2023: 4.0 percent; 2024 projection: 3.0 percent.
- Credit unions:
  - Loans grew 14 percent in 2023Q1.
  - Delinquency ratios fell to 8 percent in 2023Q1 from a pandemic high of 13 percent.
  - Rapid credit growth raises credit risk concerns given relatively weaker credit standards, generally high NPLs, and low capital buffers in some institutions.
- Systemic risk:
  - Overall level of systemic risk remains moderate, but high public debt is a source of systemic risk through sovereign-bank links.

### Outlook and key projections
- Growth and inflation:
  - Growth is projected to slow in the medium term as the economy completes recovery; inflation projected around 4 percent in 2023 and moderating to 2 percent in 2024.
  - Output gap (percent of potential GDP): 2019: 6.5; 2020: -19.3; 2021: -11.3; 2022: 1.0; 2023: 2.2; 2024: 2.5
- Credit and investment:
  - Bank credit to the private sector is projected to remain anemic without improved loan loss provisioning, fiscal adjustment, and legislative reform.
  - Limited access to credit is a key obstacle to domestic investment, employment, and growth.

### Policy recommendations and priorities
- Fiscal sustainability and resource allocation:
  - Target a fiscal consolidation of at least 2½ percent of GDP to reach the regional debt ceiling, relying on:
    - Strengthening tax compliance.
    - Streamlining tax exemptions.
    - Adopting a fuel price pass-through framework.
    - Implementing a more efficient value added tax.
  - A further 1 percent of GDP of fiscal consolidation could be used to increase public investment resilient to natural disasters.
  - Support public debt sustainability with:
    - A well-designed fiscal rule.
    - Self-financing of initiatives to strengthen the social safety net.
    - Increased capacity to access climate finance.
  - Save CIP revenue in a fund for self-insurance against natural disasters, debt service, and public investment.
  - Implement draft pension fund reforms to increase longevity and diversify its investment portfolio internationally.
- Financial sector reforms to strengthen resilience and lending:
  - Banks should:
    - Improve classification of NPLs in post-moratorium and restructured portfolios.
    - Raise provisions to the regulatory minimum.
    - Strengthen risk management of foreign investments.
  - Government actions:
    - Use representation at the ECCB to strengthen enforcement of provisioning requirements and speed up disposals of NPLs.
    - Modernize foreclosure legislation for commercial loans and residential property.
    - Pass bankruptcy and insolvency law to expand credit access and lower loan interest rates.
    - Ensure effective implementation of international AML/CFT standards to protect correspondent banking relationships.
  - Credit union sector:
    - Pass the draft bill with stronger regulatory standards to improve compliance with provisioning and capital requirements.
    - Carry forward planned asset quality review.
- Labor market and social policies:
  - Address high unemployment, particularly among youth and female workers, through:
    - Review of education programs to strengthen employability.
    - Increase enrollment in technical and vocational education and training to address skill mismatches.
    - Reduce transport cost.
    - Review allocation of government scholarships to skills in high demand, in consultation with employers.
    - Expand capacity of child and elderly care to improve labor participation of females and youth.
    - Complement the Youth Economy Agency with social programs that tackle non-economic barriers to employment.

*ST. LUCIA: STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION*

### 12.      Risks to the outlook are tilted to the downside. Downside risks include global economic

### 1lcaea2024001 - 12.      Risks to the outlook are tilted to the downside. Downside risks include global economic

### Risks to the outlook
- Downside risks are tilted to the downside, including:
  - global economic slowdown;
  - commodity price volatility;
  - additional global financial tightening;
  - extreme climate events (recurrent risk; see RAM in Appendix).
- Financial sector risks:
  - fuller NPLs recognition from the restructured loans portfolio could further depress credit growth and harm the recovery;
  - an increase in banks’ foreign investments to take advantage of higher (or more persistently high) international interest rates could further depress credit growth and harm the recovery.
- Tightening in global financial conditions above expectations could:
  - reduce FDI, tourism demand, and appetite for risky public debt (projected to remain high in the baseline).
- CIP revenue implies significant downside and upside uncertainty on the fiscal and external balances, with potentially large implications for public and private investment execution and growth.
- Upside risk: better-than-expected tourism recovery.

### Authorities’ views on outlook and risks
- Authorities broadly concurred with staff’s baseline projections but have more upbeat medium-term growth forecasts based on:
  - the hotel construction pipeline over the medium term;
  - plans to upgrade key public infrastructure.
- Authorities generally agreed with the staff risk assessment and expressed concern about the lingering and/or renewed threat of Covid.

### Policy priorities (overview)
- Near-term focus:
  - restore fiscal and financial buffers to withstand shocks;
  - improve conditions for investment and growth;
  - complement with institutional and legal reforms to protect space for public investment while ensuring access to government financing at favorable terms.
- Financial sector actions:
  - improve classification of NPLs in the post-moratorium and restructured portfolios;
  - raise provisions to the regulatory minimum;
  - strengthen interest rate risk management.
- Credit union sector: strengthen regulation and enforcement to address risks and support financial stability and inclusion.
- Social policies: address deep-rooted social problems to reduce youth unemployment and support female labor market participation.

### Rebuilding fiscal buffers (detailed priorities and targets)
- Fiscal priority: start fiscal consolidation in FY 2023/24 to:
  - (i) put public debt firmly on a downward path;
  - (ii) create fiscal space to support infrastructure and social investment;
  - (iii) build buffers against natural disasters.
- Authorities contemplating measures including a new 2.5 percent Health and Citizen Security Levy, increases in excises on tobacco products, and a tax amnesty.
  - Staff view: projected yields from these measures are insufficient to put debt on a downward trajectory to reach the regional debt ceiling and are relatively less efficient than alternative options proposed by staff.
  - Concern: tax amnesty may incentivize future non-compliance; tax administration needs an operational plan for arrears collection.
  - Authorities’ proposals also include measures that would decrease revenue or increase expenditures (temporary removal of 12.5 percent VAT on building materials, a one-off payment to pensioners and teachers).
- Staff recommendation for stronger consolidation:
  - savings measures of 2½ percent of GDP to strengthen debt sustainability (this consolidation need includes a natural disaster cost of two-thirds of a percent of GDP annually);
  - an additional 1 percent of GDP consolidation could be targeted to boost public investment, including resilience to natural disasters.
- Potential measures to achieve consolidation (examples from text):
  - increase the VAT rate back to 15 percent from 12.5 percent currently;
  - contain public sector wage growth below nominal output growth during the triennial wage negotiations with labor unions;
  - reverse the reduced VAT rate for the hospitality sector and reinstate value-based property taxation;
  - streamline tax incentives and exemptions which amount to at least 3.7 percent of GDP;
  - review tourism sector tax incentives and adopt a rules-based framework including an annual cap on revenue foregone and transparent publication.

### Options for fiscal consolidation (estimates preserved exactly)
- Estimated Medium-Term Adjustment Need:
  - 3.5 (To set debt on a downward path toward the regional 2035 debt targett of 60 percent of GDP)
  - 2.5 (To increase public investment to at least the pre-pandemic average level relative to GDP)
  - 1.0
- Menu of Potential Measures (Est. yield (% of GDP)):
  - Containing growth of the public sector wage bill ...: 3.9
  - (Specific items and yields)
    - Containing wage bill (reduces to precrisis levels): 0.7
    - VAT measures, of which: 2.3
      - Rate increase from 12.5 to 15 percent: 1.1
      - Reversal of reduced rate for hospitality sector: 0.7
      - Increasing the VAT rate on fuel from 0 to 15 percent: 0.5
    - Removal of some tax exemptions: 0.8
    - Increasing the excise rate on fuel from 3.5 to 4 ECD: 0.1
    - Review tourism sector tax incentives, including in the context of the global minimum corporate income tax: tbd
    - Reinstating a value-based residential property tax: tbd

### Fuel tax reform and pricing mechanisms
- Current regime:
  - fuel is taxed at a zero VAT rate and an excise tax around a target of EC$3.5 per imperial gallon which is adjusted discretionally every three weeks.
- Reform options and estimated yields:
  - increasing the VAT rate on fuel to the statutory rate would yield additional revenue of 0.5 percent of GDP;
  - restoring the excise tax rate to the pre-pandemic level could yield an additional 0.1 percent of GDP.
- Pricing mechanism:
  - replace discretionary pass-through with a rule smoothing the passthrough from international oil to domestic fuel prices to cushion social/economic impacts of sharp international oil price increases.
  - Staff simulations: an appropriately calibrated smoothing passthrough rule can better protect expected revenue in the long term while easing short-term social burden and acting as an automatic stabilizer of output and inflation.
- Further increases in fuel taxes could support carbon emission mitigation commitments; revenue could finance well-designed social transfers to protect the poor.
- Implementation note: sustainability of revenue in the long term requires containment of fuel tax reductions when international oil prices are low; implementation may require a fuel price stabilization fund.

### Public investment, social programs, and institutions
- Government’s public investment plan is ambitious and aims to address bottlenecks to growth with projects including:
  - a new airport;
  - improvements in the cruise ship port and surrounding infrastructure for commercial expansion;
  - a new cargo seaport;
  - construction of a new hospital and improvements in existing health infrastructure.
- Baseline capital spending is limited to around 2½ percent of GDP due to low revenue, high current spending, and financing constraints.
- Recommendations:
  - protect fiscal space for public infrastructure and social investments to better support private investment, increase labor demand and productivity, and aid debt sustainability;
  - build capacity for well-designed targeted or proxy-targeted social transfers;
  - carefully design universal health care and unemployment insurance framework with commensurate contributions to ensure financial sustainability.
- Pension fund reforms recommended:
  - increase contributions;
  - modify formula to favor longer careers;
  - reform pension parameters including automatic indexation;
  - discourage early retirement;
  - diversify investment portfolio internationally to boost resilience.
  - Note: in the absence of reforms the fund’s reserves would be depleted by around [figure redacted in source text], resulting in a significant underfunding gap of around 165 percent of GDP in 60 years, requiring annual fiscal outlays of about 3 percent of GDP over the next 60 years.
  - Current share of foreign investments outside the ECCU is around 15 percent of the total.

### Fiscal rules, debt management, and bond market development
- Legislative progress:
  - Public Financial Management Act passed in 2020, upgraded with amendments in 2022 and operational guidelines; became effective in May 2023.
  - Public Asset Management Policy endorsed by Cabinet and came in effect in 2023.
  - Government reviewing the Public Finance Act and preparing regulations for the 2021 Public Procurement and Asset Disposal Act.
- Staff recommendation: adopt a fiscal rule combining a primary balance floor and a recurrent spending ceiling to:
  - contain recurrent spending procyclicality;
  - provide additional fiscal space for public investment while supporting debt reduction without increasing taxes;
  - strengthen credibility and reduce implied size of recurrent spending consolidations.
- Design and communication:
  - keep the rule relatively simple with two operational targets anchored on a debt ceiling;
  - include escape clauses for natural disasters and pandemics;
  - calibrate rules to target a level lower than the regional debt ceiling.
- Debt management and market development:
  - gross financing needs around 15–20 percent of GDP over the medium term, including short-term amortization of domestic, regional treasury bills and bonds;
  - government debt management strategy seeks to lengthen debt maturity but execution delayed due to recent increase in long-term interest rates.
  - Steps to improve primary and secondary bond markets:
    - provide greater transparency and predictability to investors;
    - rely more on primary auctions in the regional government securities market (RGSM) to reduce reliance on private placements and increase liquidity;
  - Access to climate finance:
    - government plans to issue a blue bond at concessional terms combined with a debt swap to lower interest costs and lengthen maturity if well executed;
    - recommendations include developing a database of projects with climate adaptation/mitigation objectives, adopt green tagging of expenditures, consider organizational reforms for coordination, roll out annual borrowing plans, and publish a medium-term fiscal framework and debt management strategy.
  - Contingency planning recommendation: increase coverage from the Caribbean Catastrophe Risk Insurance Facility for large scale low probability events.

### Citizenship by Investment Program (CIP) revenue guidance
- CIP revenue: presents an opportunity to strengthen resilience but is volatile and difficult to predict; risk of sudden stop.
- Recommendation: do not rely on CIP for recurrent spending.
- Current practice: government established a sinking fund to use revenue collected with a new CIP option (citizenship with purchase of government bonds) for debt service exclusively.
- Recommendation: save other CIP proceeds in a separate fund for:
  - self-insurance against natural disasters (immediate availability at low cost);
  - debt service (debt reduction and reduce refinancing risk);
  - public investment, including resilience to natural disasters.

### Authorities’ reactions to staff recommendations
- Authorities confident planned revenue measures could generate substantial revenue, potentially larger than staff estimates.
  - See willingness to consider some fiscal consolidation measures: review of tax exemptions, fuel taxes, and tax incentives to the tourism sector.
  - Authorities view the Health and Citizen Security Levy as a viable alternative with specific revenue allocation and regard staff’s yield estimate as conservative.
  - Authorities see VAT exemptions on building materials as helpful to boost construction and housing affordability.
- Authorities reacted positively to staff recommendations on:
  - fiscal rules (open to consider options);
  - fuel price pass-through smoothing (noted de-facto discretionary practice and will consider smoothing options);
  - CIP framework recommendations (positive to saving other CIP proceeds in a separate fund for disaster, debt service, and public investment).

*Source: 1lcaea2024001*

### 26.      The draft reforms put forward by the pension fund are being finalized in preparation

### 26.      The draft reforms put forward by the pension fund are being finalized in preparation for submission to the Parliament in the coming months.

### Pension fund reforms and investment strategy
- The draft reforms put forward by the pension fund are being finalized for submission to Parliament in the coming months; authorities judge there is a good chance the draft reforms will be passed in Parliament based on past experience.
- Authorities were receptive to staff recommendation to increase the international diversification of the pension fund’s investment portfolio.
- Recommendation reiterated later: the draft reforms should be implemented to increase the pension fund’s longevity, and its investment portfolio should be more internationally diversified to boost its resilience to shocks.

### Strengthening financial sector resilience
- Priority: strengthen buffers to increase resilience to shocks while enhancing conditions for private lending and growth.
- Banks:
  - High bank NPLs and provisions below the ECCB’s requirement, but banks show positive profitability and capital above the regulatory minimum—presenting an opportunity to improve NPL classification and raise provisions to required levels.
  - Most large banks have not reached the minimum requirement for provisions of 60 percent of NPLs, which had to be met by end-2022; reaching the 60 percent requirement by end-2024 may prove challenging to some banks (revised down from the 100 percent by the ECCB recently).
  - Banks should improve investment portfolio risk management, including interest rate risk management, de-risk and better diversify portfolios.
  - Some banks have substantial investments in overseas securities, including US government bonds; risks include a large amount of corporate bonds relative to Treasuries, sizeable exposure within corporate bond portfolios to the financial sector, and a large portion of bonds rated below A-. Higher global interest rates could translate into investment losses on foreign securities and a possible widening in credit spreads on corporate bonds, hitting bank capital and affecting credit growth.
- Government role:
  - Government should use its representation power at the ECCB to strengthen enforcement of provisioning requirements and speed up disposal of long-standing NPLs.
- Legal and supervisory reforms:
  - Progress achieved: movable collateral framework passed, a credit bureau approved (received license in December and expected to become fully functional in the coming months), and insolvency bill advanced (prepared in 2020 and under review; no specific timeline for submission to Parliament).
  - Remaining recommendation: modernize foreclosure legislation—government prepared to consider inclusion of commercial and investment residential properties in the legislation (excluding primary residences) and planning to request TA on this topic.
  - Modernization of foreclosure legislation for commercial loans and residential property, and passing of the bankruptcy and insolvency law, would expand credit access and lower loan interest rates.
- AML/CFT:
  - Continuation of reforms to laws and practices will mitigate risks related to cross-border financial flows and help protect correspondent banking relationships.
  - Several legal and institutional reforms were passed between 2021 and 2023 to address technical deficiencies identified in the Caribbean Financial Action Task Force’s mutual evaluation report (January 2021).
  - Emphasis needed on implementation of the risk-based approach to supervision of AML/CFT and ensuring adequate, accurate, and up-to-date beneficial ownership information; prioritize mutual legal assistance and cross-border sharing of information.
- ECCB safeguards:
  - Authorities continued to work on legal reforms recommended in the 2021 ECCB Safeguards Assessment to strengthen operational autonomy of the ECCB and align its Agreement Act with leading practices.
  - Work continuing at the ECCB to address new risks with issuance of DCash requiring additional controls and oversight.
- Credit unions:
  - The credit union segment is systemic, with total assets of 25 percent of GDP.
  - Credit unions extended lending by 16 percent in 2022 on average, with some large institutions expanding even faster.
  - Wide variation exists in NPL ratios, provisioning coverage, and capital ratios across credit unions; two institutions have very low or negative capital and are envisioned to eventually merge with larger credit unions.
  - FSRA actions:
    - Proceeding with plan to conduct an asset quality review (selecting an international audit firm as of June 2023; review will take three years and cover the largest credit unions).
    - Put forward legislation expected to be passed by end-2023 to strengthen regulatory standards, including raising the capital requirement by 2 pp to 12 percent of assets and limiting the use of collateral as an offset for calculation of provisions.
    - In the new legislation, generally, collateral will not be used for 365+ days NPLs but will still be used for 90+ days to 365 days NPLs.
  - Note: FSRA provisioning practice differs from ECCB’s—provisioning coverage ratio generally lower (45 percent in aggregate as of March 2023 for credit unions vs the 60 percent required by the ECCB) and assessed against loan amount reduced by value of collateral; use of collateral as an offset is unusual by international standards given uncertainties in real estate markets and lack of modernized foreclosure legislation.

### Authorities’ views on financial resilience and reforms
- Authorities agreed NPLs are high at both banks and credit unions and acknowledged upside and downside risks:
  - Risk NPLs could increase further due to lenient treatment of restructured loans after the Covid-19 pandemic (restructured loans are immediately classified as performing).
  - NPLs could also decline organically due to economic rebound.
- Authorities concurred provisions need improvement at some banks and in most credit unions and acknowledged importance of strengthening financial resilience to protect deposits and financial inclusion.
- Commitments:
  - On AML/CFT: committed to carrying out pending legislative reforms and improving implementation.
  - Committed to passing legal reforms recommended in the 2021 ECCB Safeguards Assessment.
  - FSRA agreed with assessment of credit unions and acknowledged need to strengthen regulation, supervision, and enforcement with passage of new legislation.

### Increasing employment with labor market reforms
- Labor market challenges and gender/youth gaps:
  - Participation rate for female prime age workers (aged 25–64) is about 10 percentage points lower than male counterparts.
  - Staff estimates suggest female workers have a 10 percent lower participation rate than males.
  - A median female worker receives 20 percent less in monthly gross income than a male with the same observable characteristics.
  - Since the pandemic, there has been a jump in both male and female youth who are not in employment, education, or training (NEET).
  - Likelihood of participation is lower for youth, lower-secondary educated, and caretakers of elders; youth from households with young children and the elderly are more likely to be NEET.
- Policy recommendations to increase participation, productivity, and external competitiveness:
  - Seek technical assistance to improve education attainment and increase enrollment in technical and vocational education and training to address skill mismatches.
  - Expand capacity of child and elderly care to raise labor participation of females and youth.
  - Review education programs to strengthen employability; align government scholarships with skills in high demand in consultation with employers.
  - Youth Economy Agency (recently created) to support youth employment with business incubation, entrepreneurship training and guidance; complement with social programs tackling non-economic barriers to employment.
  - Programs should fit within fiscal consolidation plan and could include tuition or cost recovery fees to ensure neutral budget impact.
  - Increase transparency of pay and provide more parental leave to increase labor participation and narrow gender salary gaps.

### Macroeconomic developments, outlook, and fiscal recommendations (staff assessment)
- Recent performance and risks:
  - GDP grew by an estimated 15.7 percent in 2022.
  - Inflation was 6.4 percent in 2022.
  - Current account deficit narrowed from a peak of 15.2 percent of GDP in 2020 to 2.3 percent of GDP in 2022.
  - Estimated fiscal balance improved in FY2022 by 4.1 percentage point to a deficit of 1.4 percent of GDP due to strong tax revenue collection and CIP revenue.
  - Public debt now stands near 75 percent of GDP.
  - Financial system remained stable and liquid with sustained increase in deposits, but loan portfolio performance worsened; rapid credit growth in credit unions raises credit risk concern.
- Medium-term outlook and fiscal strategy:
  - Growth projected to slow in the medium term as the economy completes recovery.
  - On current policies, public debt is projected to stabilize around 75 percent of GDP in the medium term, above the regional ceiling of 60 percent of GDP by 2035.
  - Short maturity profile of domestic (regional) debt keeps financing needs elevated, implying refinancing risk.
  - Government’s planned revenue increases are insufficient to reach regional debt ceiling.
  - Recommended fiscal consolidation: at least 2½ percent of GDP to reach regional debt ceiling, relying on:
    - Strengthening tax compliance.
    - Streamlining tax exemptions.
    - Adopting a fuel price pass-through framework.
    - More efficient value added tax.
  - Additional 1 percent of GDP of fiscal consolidation could be used to increase public investment resilient to natural disasters.
  - Public debt sustainability could be supported by a well-designed fiscal rule, self-financing of initiatives to strengthen social safety net, and greater capacity to access climate finance.
  - To address fiscal risks, CIP revenue could be saved in a fund for self-insurance against natural disasters, debt service, and public investment.

*ST. LUCIA — INTERNATIONAL MONETARY FUND*

### 42.      It is recommended that the next Article IV consultation takes place on the standard

### It is recommended that the next Article IV consultation takes place on the standard 12-months cycle.

### Recent economic developments
- Tourism recovered strongly in 2022, supporting output and employment.
- Real GDP continued to recover: headline Real GDP (at market prices) series: -0.2 (2019), -23.6 (2020), 11.3 (2021), 15.7 (2022), 3.2 (2023), 2.3 (2024), 2.3 (2025), 1.8 (2026), 1.5 (2027), 1.5 (2028).
- Unemployment rate fell from 21.7 (2020 annual average) and 21.9 (2021 annual average) toward lower levels as tourism recovered; youth from households with young children and the elderly are more likely to be NEET.
- Inflation, though past its peak, remains elevated: Consumer prices, period average: 0.5 (2019), -1.8 (2020), 2.4 (2021), 6.5 (2022), 4.3 (2023), 2.1 (2024), 2.0 (2025), 2.0 (2026), 2.0 (2027), 2.0 (2028).
- The REER has slightly appreciated over the last 12 months due to NEER appreciation; St. Lucia became more expensive relative to peers between 2021 and 2022.

### Fiscal sector developments and outlook
- Fiscal balance improved following the pandemic-driven deterioration: Overall balance, incl. ND cost: -3.5 (2019), -11.5 (2020), -5.5 (2021), -1.4 (2022), -2.8 (2023), -3.0 (2024), -2.9 (2025), -2.8 (2026), -2.9 (2027), -3.1 (2028).
- Revenues (percent of GDP) showed recovery: Revenue: 21.5 (2019), 21.6 (2020), 21.2 (2021), 21.8 (2022), 21.3 (2023), 21.0 (2024), 21.0 (2025), 21.1 (2026), 21.0 (2027), 21.0 (2028).
- Expenditure (percent of GDP) declined since the pandemic but remains elevated: Expenditure: 25.0 (2019), 33.0 (2020), 26.7 (2021), 23.2 (2022), 23.5 (2023), 23.4 (2024), 23.2 (2025), 23.2 (2026), 23.3 (2027), 23.4 (2028).
- Public debt remains high though declining from pandemic peak: Central government debt: 58.5 (2019), 89.1 (2020), 77.8 (2021), 69.5 (2022), 67.6 (2023), 67.4 (2024), 67.3 (2025), 67.4 (2026), 67.7 (2027), 68.1 (2028).
- Public sector debt (total) trajectory: 61.9 (2019), 94.2 (2020), 82.9 (2021), 74.1 (2022), 73.7 (2023), 75.0 (2024), 76.3 (2025), 75.7 (2026), 75.4 (2027), 75.2 (2028).
- Debt composition: Domestic debt and external debt series presented; short-term liabilities remain large with significant overdrafts and outstanding payables.

### External sector developments and outlook
- Current account: Current account balance (percent of GDP): 5.5 (2019), -15.2 (2020), -7.0 (2021), -2.3 (2022), -0.8 (2023), -0.4 (2024), -0.3 (2025), -0.1 (2026), -0.1 (2027), -0.1 (2028). Projection: current account expected to improve gradually and close in 2024–28 as tourism recovery offsets trade deficit from oil and food imports.
- Travel receipts: fell from 50.6 percent of GDP in 2019 to 22.4 percent of GDP in 2020, rebounded to 47.0 percent of GDP in 2022.
- Net International Investment Position (NIIP): Background: deficit averaged about 51 percent of GDP during 2015–19, peaked at 70 percent of GDP in 2020 and declined to 54 percent of GDP in 2022. 2022 snapshot (% GDP): NIIP: -54; Gross Assets: 93; Debt Assets: 39; Gross Liabilities: 147; Debt Liabilities: 23.
- Assessment/projection: net IIP deficit expected to steadily decline close to pre-pandemic levels (projected at 38 percent of GDP in 2028 versus 43 in 2019).
- Capital and financial accounts: Capital transfers averaged 0.9 percent of GDP in 2015–19, rose to 1.3 percent of GDP in 2022; net FDI inflows: -1.5 (2019), -3.5 (2020), -6.1 (2021), -1.1 (2022) in the financial account series; medium-term projection: capital transfers stable at 1.2 percent of GDP and net FDI inflows expected to decline to 1.0 percent of GDP.
- FX intervention and reserves: Net imputed reserves averaged 14.5 percent of GDP during 2015–19, declined to 13.5 percent of GDP in 2022; in 2022 imputed reserves were close to typical benchmarks of 20 percent of broad money and three months of prospective imports.

### Financial sector developments and vulnerabilities
- Banks remained profitable supported by steady net interest income; profitability indicators: Return on Avg Assets: 1.9 (2018), 1.5 (2019), 0.8 (2020), 0.8 (2021), 1.0 (2022); Return on Avg Equity: 35.2 (2018), 25.3 (2019), 10.8 (2020), 9.7 (2021), 12.0 (2022).
- Asset quality concerns: Nonperforming loans to total gross loans: 10.0 (2018), 8.2 (2019), 11.3 (2020), 13.8 (2021), 13.1 (2022); provisions are below the ECCB’s requirement; Nonperforming loans net of provisions to capital rose to 64.2 (2022).
- Liquidity and capital metrics: Liquid Assets/Total Assets: 39.4 (2018), 40.4 (2019), 37.8 (2020), 39.3 (2021), 40.5 (2022); Regulatory CAR: 19.1 (2018), 15.9 (2019), 14.9 (2020), 16.8 (2021), 16.6 (2022).
- Credit dynamics: Credit growth has picked up recently but remains anemic; Credit to private sector (real): -2.4 (2019), 4.5 (2020), -2.4 (2021), -4.6 (2022), -0.3 (2023), 0.9 (2024), 0.0 (2025), -1.0 (2026), -2.0 (2027), -2.0 (2028).
- Credit unions: NPLs have declined but remain elevated and could rise due to classification issues.

### Social and macro indicators (selected)
- Population: Total (thousands, 2022Q3) 181.8.
- Area (sq. km) 616.
- Infant mortality (per thous. live births, 2020) 22.
- Human Development Index ranking (of 189 countries, 2020) 85.
- GDP (millions of US dollars) 1,850 (2021).
- Nominal GDP (EC$ millions): 5,677 (2019), 4,112 (2020), 4,994 (2021), 6,201 (2022), 6,709 (2023), 7,044 (2024), 7,385 (2025), 7,707 (2026), 8,018 (2027), 8,341 (2028).
- Life expectancy at birth (years, 2019) 76.
- Gross National Income per Capita (US$, 2020) 8,790.
- Percentage of demand liabilities: 88.7 (2019), 88.3 (2020), 92.3 (2021), 91.4 (2022), 93.6 (2023), 94.9 (2024), 95.6 (2025), 96.1 (2026), 96.5 (2027), 96.7 (2028).
- Net imputed international reserves: Months of imports of goods and services: 4.5 (2019), 3.3 (2020), 3.6 (2021), 2.9 (2022), 3.9 (2023), 5.0 (2024), 5.9 (2025), 6.7 (2026), 7.5 (2027), 8.0 (2028).

### Risk Assessment — key risks, likelihoods, impacts, and policy responses
- Conjunctural risks (shorter horizon):
  - Intensification of regional conflict(s): Likelihood High; Impact Medium; Policy: Diversify tourism revenues; Increase the linkage between tourism and other sectors; Vigilantly monitor the financial sector development in coordination with ECCB.
  - Social discontent from supply shocks/high inflation: Likelihood High; Impact Medium; Policy: Provide temporary and targeted support to the vulnerable; Strengthen the labor market and provide more diversified and higher-quality job opportunities.
  - Abrupt global slowdown or recession: Likelihood Medium; Impact High; Policy (ST, MT): Enhance competitiveness to support economic recovery; Diversify tourism revenues; Increase the linkage between tourism and other sectors; Vigilantly monitor the financial sector development in coordination with ECCB.
  - Commodity price volatility: Likelihood Medium; Impact Medium; Policy (MT): Provide temporary and targeted transfers; Allow gradual pass-through and phase out generalized subsidies; Accelerate transition to renewable energy sources.
  - Monetary policy miscalibration: Likelihood Medium; Impact Medium; Policy (ST): Provide temporary and targeted support to the vulnerable; Strengthen fiscal communication and implement credible medium-term fiscal plan.
  - Systemic financial instability: Likelihood Medium; Impact Medium; Policy (ST): Monitor asset quality and ensure adequate loan loss provisioning; Vigilantly monitor the financial sector development in coordination with ECCB.
- Structural risks (longer horizon):
  - Deepening geo-economic fragmentation: Likelihood High; Impact Medium; Policy (MT): Enhance international cooperation and competitiveness.
  - Cyberthreats: Likelihood Medium; Impact Medium; Policy (MT): Enhance digital security in public and private platforms.
  - Extreme climate events: Likelihood Medium; Impact Medium; Policy (ST): Implement national adaptation plans with investment in structural and financial resilience, and appropriate ex ante financing.
- Domestic risks:
  - Lower than expected CIP revenues (pressure from EU to end Citizenship by Investment Program): Likelihood Medium; Impact Medium; Policy (MT): Mobilize revenue from alternative sources.
  - Disorderly fiscal adjustment: Likelihood Low; Impact High; Policy (MT): Adopt a fiscal rule and implement tax reforms to ensure adequate fiscal adjustment and debt sustainability.
  - Financial sector weakness (high NPLs): Likelihood Medium; Impact High; Policy (ST): Monitor asset quality and ensure adequate loan loss provisioning.
  - Delays in infrastructure investment: Likelihood Medium; Impact High; Policy (ST, MT): Contain growth of current expenditures.

### External sector assessment — competitiveness and policy implications
- Overall assessment: The external position of St. Lucia in 2022 was broadly in line with the level implied by fundamentals and desirable policies, but assessment is subject to unusually high uncertainty due to pandemic impacts, preliminary current account data, and conflicting EBA-lite CA and REER signals.
- EBA-lite model results and gaps:
  - EBA-lite CA model suggests a positive current account gap of 2.5 percent of GDP (2022).
  - EBA-lite REER model implies a positive current account gap of 5.3 percent of GDP (2022).
  - REER depreciation: REER depreciated by 4.7 percent in 2022; NEER depreciated by 1.1 percent. REER gap in 2022: -6.9 percent (EBA-lite CA model, elasticity -0.4); EBA-lite REER model shows REER gap of -12.2 percent.
- Competitiveness challenges and policy responses:
  - Labor productivity growth and unit labor costs highlight competitiveness challenges, particularly in non-tourism sectors.
  - Given stalling growth in the past decade, supply-side reforms are needed to increase competitiveness, realize growth potential, and minimize scarring from the pandemic.
  - Potential policy responses include addressing supply-side bottlenecks and structural reforms to diversify and strengthen productivity outside tourism.

*Source: IMF staff report content for St. Lucia (content unit: 1lcaea2024001 - 42).*

### Annex III. Debt Sustainability Analysis

### Annex III. Debt Sustainability Analysis

### DS A Summary Assessment and Key Findings
- St. Lucia’s debt remains at high risk of sovereign stress.
- Public debt declined from 94.2 percent in FY2020 to 82.9 in FY2021 and then to 74.1 in FY2022.
- In the baseline scenario, debt will stabilize around 75 percent of GDP in the medium term.
- Implementation of the fiscal consolidation plan envisaged in the main text would put public debt on a path that stabilizes below the regional debt target of 60 percent in the long term.
- Downside risks include: weaker tourism-related revenues from global slowdown, vulnerability in the financial sector, contingent liability from the social security fund (NIC), and natural disasters.
- Commentary: St. Lucia is at a high overall risk of sovereign stress. High medium-term risks stem from financial sector vulnerability and high GFN, driven by amortization of medium and long term debt (both domestic and external). High long-term risks stem from large amortization risks, climate adaptation risks, and demographic risks.

### Debt Coverage and Disclosures
- Chosen coverage: central government and public nonfinancial corporations (government guaranteed) (perimeter shown).
- Answer to "If central government, are non-central government entities insignificant?": No.
- Subsectors captured in the baseline:
  - Budgetary central government: Yes
  - Extra budgetary funds (EBFs): Yes
  - Social security funds (SSFs): No
  - State governments: No
  - Local governments: No
  - Public nonfinancial corporations: Yes
  - Central bank: No
  - Other public financial corporations: No
- Airport redevelopment: Non-consolidated
- Separate entity (NIC): Not applicable
- Government-guaranteed: CPS, NFPS, GG: expected (coverage notes as in source)

### Baseline Scenario (Selected indicators; percent of GDP unless indicated)
- Public debt (Actual 2022 and projections):
  - 2022: 74.1
  - 2023: 73.7
  - 2024: 75.0
  - 2025: 76.3
  - 2026: 75.7
  - 2027: 75.4
  - 2028: 75.2
  - 2029: 75.2
  - 2030: 75.4
  - 2031: 75.5
  - 2032: 75.8
- Change in public debt:
  - 2022: -8.8
  - 2023: -0.4
  - 2024: 1.3
  - 2025: 1.3
  - 2026: -0.6
  - 2027: -0.3
  - 2028: -0.2
  - 2029: 0.0
  - 2030: 0.1
  - 2031: 0.2
  - 2032: 0.2
- Contribution of identified flows:
  - 2022: -11.1
  - 2023: 0.2
  - 2024: 1.5
  - 2025: 1.4
  - 2026: -0.4
  - 2027: 0.0
  - 2028: 0.1
  - 2029: 0.5
  - 2030: 0.4
  - 2031: 0.4
  - 2032: 0.4
- Primary deficit:
  - 2022: -1.5
  - 2023: -0.3
  - 2024: -0.2
  - 2025: -0.3
  - 2026: -0.5
  - 2027: -0.4
  - 2028: -0.4
  - 2029: -0.4
  - 2030: -0.4
  - 2031: -0.4
  - 2032: -0.4
- Noninterest revenues:
  - 2022: 21.8
  - 2023: 21.3
  - 2024: 21.0
  - 2025: 20.9
  - 2026: 21.1
  - 2027: 21.0
  - 2028: 21.0
  - 2029: 21.0
  - 2030: 20.9
  - 2031: 20.9
  - 2032: 20.9
- Noninterest expenditures:
  - 2022: 20.4
  - 2023: 21.0
  - 2024: 20.9
  - 2025: 20.6
  - 2026: 20.6
  - 2027: 20.6
  - 2028: 20.6
  - 2029: 20.5
  - 2030: 20.5
  - 2031: 20.5
  - 2032: 20.5
- Automatic debt dynamics:
  - 2022: -9.6
  - 2023: -1.4
  - 2024: -0.2
  - 2025: 0.0
  - 2026: 0.5
  - 2027: 0.9
  - 2028: 1.0
  - 2029: 1.4
  - 2030: 1.2
  - 2031: 1.3
  - 2032: 1.2
- Real interest rate and relative inflation:
  - 2022: -0.7
  - 2023: 0.8
  - 2024: 1.5
  - 2025: 1.6
  - 2026: 1.8
  - 2027: 2.0
  - 2028: 2.1
  - 2029: 2.5
  - 2030: 2.3
  - 2031: 2.4
  - 2032: 2.4
- Real growth rate:
  - 2022: -9.0
  - 2023: -2.2
  - 2024: -1.7
  - 2025: -1.6
  - 2026: -1.3
  - 2027: -1.1
  - 2028: -1.1
  - 2029: n.a.
  - 2030: -1.1
  - 2031: -1.1
  - 2032: -1.1
- Other identified flows:
  - 2022: -0.1
  - 2023: 1.9
  - 2024: 1.8
  - 2025: 1.7
  - 2026: -0.5
  - 2027: -0.5
  - 2028: -0.5
  - 2029: -0.4
  - 2030: -0.4
  - 2031: -0.4
  - 2032: -0.4
- Contingent liabilities: 0.0 for 2022–2032
- Contribution of residual:
  - 2022: 2.3
  - 2023: -0.6
  - 2024: -0.1
  - 2025: -0.1
  - 2026: -0.2
  - 2027: -0.3
  - 2028: -0.3
  - 2029: -0.5
  - 2030: -0.2
  - 2031: -0.2
  - 2032: -0.2
- Gross financing needs (GFN):
  - 2022: 14.4
  - 2023: 15.1
  - 2024: 18.2
  - 2025: 15.6
  - 2026: 18.0
  - 2027: 16.9
  - 2028: 15.6
  - 2029: 15.6
  - 2030: 15.3
  - 2031: 15.7
  - 2032: 18.7
- Of which: debt service:
  - 2022: 16.0
  - 2023: 15.5
  - 2024: 18.4
  - 2025: 15.9
  - 2026: 18.5
  - 2027: 17.4
  - 2028: 16.1
  - 2029: 15.5
  - 2030: 15.7
  - 2031: 16.2
  - 2032: 19.2
- Local currency share of GFN:
  - 2022: 10.9
  - 2023: 10.5
  - 2024: 9.8
  - 2025: 8.8
  - 2026: 7.9
  - 2027: 7.5
  - 2028: 6.9
  - 2029: 6.3
  - 2030: 6.2
  - 2031: 6.3
  - 2032: 8.6
- Foreign currency share of GFN:
  - 2022: 5.0
  - 2023: 5.0
  - 2024: 8.6
  - 2025: 7.2
  - 2026: 8.7
  - 2027: 9.9
  - 2028: 9.1
  - 2029: 9.2
  - 2030: 9.6
  - 2031: 9.9
  - 2032: 10.5
- Memo items:
  - Real GDP growth (percent): 2022: 12.2; 2023: 3.0; 2024: 2.3; 2025: 2.2; 2026: 1.7; 2027: 1.5; 2028: 1.5; 2029: 1.5; 2030: 1.5; 2031: 1.5; 2032: 1.5
  - Inflation (GDP deflator; percent): 2022: 6.5; 2023: 4.2; 2024: 2.6; 2025: 2.5; 2026–2032: 2.5 each year
  - Nominal GDP growth (percent): 2022: 19.5; 2023: 7.3; 2024: 4.9; 2025: 4.7; 2026: 4.3; 2027–2032: 4.0 each year
  - Effective interest rate (percent): 2022: 3.7; 2023: 4.5; 2024: 4.5; 2025: 4.6; 2026: 4.7; 2027: 4.9; 2028: 5.1; 2029: 5.3; 2030: 5.4; 2031: 5.5; 2032: 5.4

- Staff commentary: The public debt-to-GDP ratio is projected to remain elevated around 75 percent, well above the regional debt target commitment of 60 percent.

### Realism of Baseline Assumptions
- Commentary: Realism analysis does not point to major concerns: past forecast errors do not reveal any systematic biases and the projected fiscal adjustment and debt reduction are well within norms.

### Medium-Term Risk Analysis
- Key indicators and signals:
  - Fanchart width: 63.5
  - Probability of debt not stabilizing (pct): 68.3
  - Terminal debt level x institutions index: 41.9
  - Average GFN in baseline: 16.5
  - Bank claims on government (pct bank assets): 5.8
  - Change in claims on government in stress (pct bank assets): 9.6
  - GFN financeability index: 10.7 (normalized level and weights reported in figures)
- Commentary: Medium-term risks are assessed as high against a moderate overall mechanical signal, considering the high debt fanchart signal and vulnerability in the financial sector displayed by high NPLs and low provisions. The debt fanchart signal is high, reflecting a history of high volatility and a high terminal debt level. The GFN financeability signal is moderate, reflecting a high average GFN offset by low bank claims on government. The natural disaster stress test indicates the risk of higher GFN and debt. The contingent liability stress test was triggered mechanically but not conducted because there is no state or local government and guaranteed debt of public non-financial corporations are already included in the coverage.
- Probabilities (2023–2028):
  - Prob. of missed crisis (if stress not predicted): 27.3 pct.
  - Prob. of false alarm (if stress predicted): 15.9 pct.

### Long-Term Risk Analysis: Amortization, Demographics, Health, Climate
- Large amortization trigger: The large amortization submodule suggests a liquidity risk beyond the medium-term horizon.
- Long-term projections (selected):
  - Alternative baseline projections include medium-term extrapolation; medium-term extrapolation with debt stabilizing; and historical average assumptions (figures provided).
- Demographics / Pension:
  - To keep pension assets positive:
    - Permanent Adjustment Needed in the Pension System (Percent of GDP per year):
      - 0.06%: 50 years
      - 1.32%: Until 2100
      - 2.13%: 30 years
  - Commentary: Pension financing needs and total benefits paid are projected across 2023–2099 in figures.
- Health (Demographics):
  - Commentary: The health module suggests that with increase in healthcare costs related to demographic change, debt-to-GDP ratio could increase by 13 pp by 2052. With additional 0.6 pp of growth in healthcare costs, debt-to-GDP ratio could increase by 17 pp more, further increasing long term sustainability risks.
- Climate change (Adaptation):
  - Customized scenario assuming an adaptation cost of 1.3 percent of GDP (0.7 pp of which is already included in the baseline) suggests that debt-to-GDP could increase by 28 pp by 2052, further increasing long term sustainability risks.

### Stress Tests and Vulnerabilities
- Triggered stress tests: natural disaster stress test indicates higher GFN and debt; contingent liability stress test triggered mechanically but not conducted (reasons noted above).
- Liquidity and financeability risks are emphasized by high GFN and large upcoming amortization.

### Policy Implications Highlighted in Source
- Implement the fiscal consolidation plan envisaged in the main text to put public debt on a path that stabilizes below the regional target of 60 percent in the long term.
- Address financial sector vulnerability (high NPLs and low provisions) to reduce medium-term stress risk.
- Build resilience to natural disasters and plan for climate adaptation costs to contain long-term fiscal impact.
- Consider reforms to pension and healthcare financing to mitigate long-term demographic and health-related debt pressures.

*Source: IMF staff (Annex III. Debt Sustainability Analysis).*

### Annex IV. Youth and Gender in the Labor Market

### Annex IV. Youth and Gender in the Labor Market

### Key findings: occupational distribution
- Youth are more likely to be employed in service and sales, elementary occupations, and clerical support occupations than older workers with the same observable characteristics.
- Female workers are more likely to be employed in service and sales, clerical support, professionals, and management than male workers with the same observable characteristics.

### Key findings: sectoral employment and self-employment
- Youth are much more likely to be employed in the private sector and less likely to be self-employed than older workers, possibly due to borrowing constraints.
- Female workers are much more likely to be employed in the central government and less likely to be self-employed.
- Females are more likely to be employed in the central government, private firm, statutory, or as an unpaid family worker, given the same educational attainment.

### Wage gaps and labor market outcomes
- A median female workers earn 20 percent less in monthly gross income than male workers with the same observable characteristics.
- Overall, the available data suggest that youth and female workers face a particularly lower market wage (and workplace amenities) compared to their reservation wage.

### Correlation with illicit activity
- Youth unemployment is correlated with reports of illegal drugs sold at the district level, consistent with the hypothesis that some unemployed youth may be participating in the illicit, informal economy.

### Interpretation and implications (as presented in the source)
- The occupational and sectoral patterns imply that both youth and female workers are disproportionately represented in lower-paying occupations and in employment arrangements that differ from older or male counterparts.
- The higher private-sector employment and lower self-employment among youth may reflect borrowing constraints that limit entry into self-employment.
- The observed correlation between youth unemployment and reports of illegal drugs sold on the streets provides suggestive evidence that some unemployed youth may be drawn into illicit economic activity when market wages and workplace amenities fall below reservation wages.

*Annex IV. Youth and Gender in the Labor Market (1lcaea2024001)*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1lcaea2024001.pdf_