## 1knaea2025001-print-pdf ## Source details **Canonical URL:** [1knaea2025001-print-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1knaea2025001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1knaea2025001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1knaea2025001-print-pdf.pdf.json) --- ### Recent developments — growth, inflation, and tourism - Real GDP growth: 1.5 percent (y/y) in 2024, down from 4.3 percent in 2023. - Headline inflation: 1 percent (y/y) by end-2024, down from 1.6 percent in 2023. - Core inflation: 0.7 percent (end-2024). - Tourism: Stayover tourism almost returned to pre-pandemic levels; cruise arrivals remain below pre-pandemic levels. ### Recent developments — fiscal outcomes and CBI - Fiscal deficit widened to 11 percent of GDP in 2024 amid a sharp decline in CBI revenue. - CBI revenue: 8 percent of GDP in 2024 (down from 22 percent of GDP in 2023). - Tax revenue underperformance primarily due to lower Corporate Income Tax (CIT). - Public wages and transfers contained relative to 2023; CBI dividend discontinued. - Current expenditure remained elevated; capital expenditure increased. - Government deposits: 10 percent of GDP (end-2024). - Gross public debt: 52 percent of GDP (2024). - Primary deficit widened to 9 percent of GDP. - Adjusted primary deficit (net of CBI and transfers to public banks): 17 percent of GDP. ### Recent developments — financial sector - Bank credit growth: 10 percent (y/y) in 2024. - Credit unions lending growth: 12 percent (y/y) in 2024. - Mortgage lending: especially strong. - Credit gap: highest in the ECCU region. - Financial soundness: NPL ratios declined (driven by loan growth); capital adequacy ratios strengthened. - Systemic risk: NPLs still high and buffers low. - Development Bank: government-owned Development Bank in difficult financial condition, requiring government action. ### Recent developments — external sector and energy - Current account deficit (CAD): -15.1 percent of GDP in 2024 (from -11.6 percent in 2023). - EBA-Lite model: current account gap -3.9 percent of GDP in 2024. - International reserves: remained stable (net international reserves, end-2024 = 270.7 US$ million). - Energy projects: - Geothermal: procurement advanced and funding secured for drilling stage; drilling-phase investment projected at 2.4 percent of GDP (incorporated into baseline). - Original solar project cancelled; new procurement planned. ### Recent-developments: selected fiscal figures (percent of GDP, 2024) - Tax revenue: 18.7 - Taxes on income: 4.7 - CBI revenue: 8.1 - Current expenditure: 34.3 - Wages and salaries: 13.7 - Goods and services (ex. CBI fees): 8.8 - Transfers: 10.6 - Capex ex. transfers to banks: 7.1 - Overall balance (after grants): -10.6 - Primary balance (ex. CBI and transfers to banks): -17.1 - Public sector debt: 52.2 - Government deposits: 10.4 ### EBA‑Lite model results, 2024 (percent of GDP unless noted) - CA-Actual: -15.1 - Adjusted CA: -15.0 - CA Norm: -11.0 - CA Gap: -3.9 - REER Gap (in percent): 10.7 - Elasticity: -0.4 ### Outlook and risks — growth, inflation, external, fiscal, debt - Growth: - Real GDP growth projected: 2 percent in 2025. - Medium-term growth: around 2½ percent (y/y), benefitting from large energy projects. - Inflation: - Expected around 2 percent in 2025 and 2.0 percent through 2026–2030 (projections table). - External: - CAD projected to narrow to around 12 percent of GDP over the medium term. - Fiscal: - Authorities’ 2025 budget target: deficit of 4 percent of GDP assuming CBI rebound to 16 percent of GDP. - Staff baseline 2025 projection: fiscal deficit of 10 percent of GDP. - Staff projects structurally lower CBI revenue at 9 percent of GDP over the medium term. - Debt: - Public debt projected to rise to 72 percent of GDP by 2030 under staff baseline and does not stabilize. - Overall risk of sovereign debt stress: moderate. - Contingent liabilities from public banks and the Social Security Fund (SSF) are significant risks. - Risks: - Near-term risks tilted to the downside. - Key downside risks: further declines in CBI revenue; slowdown in key tourism markets; global financial instability impacting domestic banks; commodity price volatility; natural disasters. - Upside: renewable energy projects could boost growth and fiscal revenue in the medium term. - Authorities’ view: more optimistic on growth and a small fiscal deficit in 2025 based on tourism, construction projects, green energy transition, and rebound in CBI applications. ### Outlook: selected macro projections (exact series from tables) - Real GDP (market prices): 2024 = 1.5; 2025 = 2.0; 2026 = 2.2; 2027 = 2.6; 2028 = 2.6; 2029 = 2.7; 2030 = 2.6. - Consumer prices, end-of-period: 2024 = 1.0; 2025 = 1.8; 2026 = 2.0; 2027 = 2.0; 2028 = 2.0; 2029 = 2.0; 2030 = 2.0. - Total revenue and grants: 2024 = 31.1; 2025 = 32.5; 2026–2030 = 33.2 each year. - o/w CBI revenue: 2024 = 8.1; 2025 = 9.0; 2026–2030 = 9.0 each year. - Total expenditure and net lending: 2024 = 41.7; 2025 = 42.2; 2026 = 39.8; 2027 = 37.8; 2028 = 37.9; 2029 = 38.1; 2030 = 38.2. - Overall balance (after grants): 2024 = -10.6; 2025 = -9.8; 2026 = -6.6; 2027 = -4.6; 2028 = -4.7; 2029 = -4.8; 2030 = -4.9. - Total public debt: 2024 = 52.2; 2025 = 61.4; 2026 = 65.6; 2027 = 67.3; 2028 = 69.0; 2029 = 70.6; 2030 = 72.4. - Government deposits: 2024 = 10.4; 2025 = 10.3; 2026 = 9.9; 2027 = 9.4; 2028 = 9.0; 2029 = 8.6; 2030 = 8.2. - Current account (percent of GDP): 2024 = -15.1; 2025 = -13.1; 2026 = -12.8; 2027 = -12.3; 2028 = -12.2; 2029 = -11.9; 2030 = -11.3. - Net international reserves, end-of-period (US$ million): 2024 = 270.7; 2025 = 269.0; 2026 = 267.3; 2027 = 265.5; 2028 = 261.4; 2029 = 260.2; 2030 = 259.3. ### Policy discussions — A. Stabilizing public finances (objectives and active scenario) - Objectives: prompt fiscal consolidation; strengthen fiscal and financial sector frameworks; foster potential growth; secure external position. - Active policy scenario targets: - Tighten adjusted primary balance by 3 p.p. of GDP relative to baseline by 2029. - Increase revenue by 2½ p.p. of GDP by 2029 and reduce current expenditures by 2½ p.p. of GDP by 2029, while protecting capital expenditure. - Active scenario: selected paths (percent of GDP) - Tax revenue: 18.7 (2024), 19.1 (2025), 20.6 (2026), 21.1 (2027), 21.4 (2028), 21.5 (2029), 21.5 (2030). - Primary current expenditure: 33.1 (2024), 33.5 (2025), 30.2 (2026), 28.2 (2027), 27.9 (2028), 27.8 (2029), 21.5 (2030). - Capex ex. transfers to banks: 7.1 (2024) maintained through 2029; 5.9 (2030). - Overall balance (after grants): -10.6 (2024), -8.7 (2025), -4.8 (2026), -2.5 (2027), -2.1 (2028), -2.0 (2029), -2.0 (2030). - Primary balance (ex. CBI and transfers to banks): -17.1 (2024), -16.2 (2025), -11.4 (2026), -8.9 (2027), -8.4 (2028), -8.2 (2029), -8.2 (2030). - Public sector debt: 52 (2024), 60 (2025), 62 (2026), 62 (2027), 61 (2028), 60 (2029), 59 (2030). - Macroeconomic impacts (difference vs. baseline for 2029): - Real GDP growth impact: 0.3 - Inflation impact: 0.0 - Current account balance impact: 0.3 - Staff assessment: combined net impact of fiscal consolidation and structural reforms on growth will be positive in the medium term; modest short-term drag expected to be slightly outweighed by higher capital investment and reforms. ### Tax revenue mobilization — assessment and recommendations - Tax-to-GDP ratio: 18 percent (country) vs. 21 percent (ECCU average). - Staff recommends increasing tax revenue by 2½ p.p. of GDP by 2029. - Potential revenue yields could exceed 6 percent of GDP (text table and Annex VIII). - Initial measures and sequencing (selected): - Increase excise rates on alcoholic beverages, tobacco, sugar-sweetened beverages, and petroleum products; minimize remissions and eliminate duty-free shops. - Harmonize VAT, eliminate exemptions and zero-ratings; supplement with improved targeted social support. - For PIT: broaden Housing and Social Development Levy to include a higher tax rate for high-income earners. - Tax non-labor income (investment and rental income). - Medium-term: lapse negotiated CIT concessions for large hospitality companies. - Estimated revenue-enhancing yields (percent of GDP): - Recurrent property tax: 0.6 - VAT: 1.5 - Excise taxes: 0.8 - PIT: >1 - CIT: 2-4 - Total: >5.9 ### Current expenditure rationalization while protecting capital spending (policy priorities) - Current expenditure: 34 percent of GDP in 2024 (pre-pandemic average = 22 percent of GDP). - Public sector employment: 38 percent of total employment in St. Kitts and Nevis in 2018 (ECCU average = 24 percent). - Transfers: 11 percent of GDP (2024) — almost double pre-pandemic level. - Recommendations: - Bring current expenditure closer to pre-pandemic levels under authorities’ 2025-27 plan. - Under reform scenario, public wage bill, goods and services, and transfers would reverse about half of their increase from pre-pandemic levels. - Limit increases in public wage bill and employment to foster private-sector job creation. - Improve targeting and effectiveness of transfers. - Phase out electricity subsidy as soon as possible. - Maintain capital expenditure at 7 percent of GDP over the medium term. - All expenditure items should be planned and budgeted; avoid unbudgeted/unplanned expenditures (examples and amounts listed in source). ### Fiscal rules, SWF, CBI transparency, and debt management - Proposed statutory fiscal rules: - Adjusted PB floor (net of CBI and support to public banks). - Ceiling on primary current expenditure. - Debt target guided by regional debt ceiling with escape clauses for NDs. - Specific targets proposed: - Adjusted PB reduced to -8 percent of GDP by 2029. - Primary current expenditure capped at 28 percent of GDP by 2029. - Sovereign Wealth Fund (SWF): - Authorities plan to establish an SWF soon to absorb upside in CBI revenue and preserve buffers against NDs. - CBI transparency: - Further recommendation to publish comprehensive annual reports following external audits, including application statistics and financial accounts. - Medium-term debt management strategy (MTDMS): - Updated MTDMS under government review and should be published. - Aim to lengthen debt maturity, reduce costs, diversify funding. - Reduce reliance on short-term borrowing (gross financing needs = 25 percent of GDP in 2025 noted in source). - Recent external loan agreements amounting to 7 percent of GDP will finance power plant expansion, geothermal drilling, and a hospital. - Consider increased engagement with multilateral development partners and the Regional Government Securities Market. ### Social Security Fund (SSF) sustainability - SSF has started to incur a deficit; reserves projected to be depleted by 2040 if no reforms. - Reform options: raise contribution rate, increase retirement age, increase minimum contribution period. - Recommend diversification of SSF investment portfolio by increasing share of liquid foreign instruments. - Authorities agree with parametric reforms and diversification. ### Authorities’ stance and initiatives - Authorities concurred with the need for fiscal consolidation while protecting capital expenditure and reducing reliance on CBI. - Immediate revenue focus: strengthen tax collection and update property tax assessments. - Interest in raising excise rates on alcoholic beverages, tobacco, and petroleum products and making the tax system more equitable. - Pledged to phase out temporary relief measures introduced in 2025 and reduce current expenditure. - Plan to formalize fiscal rules, establish SWF, improve CBI Unit transparency, proceed with SSF parametric reforms, and publish updated MTDMS soon. - Productivity and human capital: - Authorities plan a Productivity Council and reviewed training programs (ELEVATE, STEP). - Minimum wage increases: 19.4 percent in January 2024 and 16.3 percent in July 2025 (around 39 percent increase versus 2014 level). - Energy and infrastructure: - Geothermal project: authorities indicate it "could become operational in two years, with financing secured to commence drilling." - Plan for a resilient single power grid connecting two islands; desalination plant construction expected to be finished in the coming months. ### Financial sector priorities and state-owned banks - Financial system: some strengthening but further progress needed. - Systemic bank: progress reducing legacy NPLs and de-risking portfolio; external advisors encouraged to revitalize lending focus. - Private banks: continue to reduce NPLs and meet ECCB prudential requirements. - Regional credit bureau: participation by all banks and credit unions essential. - Development Bank: needs reform due to high NPLs and weak capital; priority actions include analyzing financial situation, reassessing functions, and revising legal framework to strengthen regulation and supervision. ### Potential growth, productivity, and structural reforms (Annex VII highlights) - Potential growth declined from 5.6 percent in the 1980s to 1.9 percent in the decade prior to COVID-19. - Decline drivers: lower TFP and lower human capital contributions (each nearly two-fifths of decline); population contribution not main driver. - Firm-level evidence (IFPG survey, sample = 119 firms): - Potential TFP gain from eliminating misallocation: 55 percent. - Back-of-the-envelope: addressing misallocation could narrow GDP per capita gap with the U.S. by 27 percentage points (assumes labor participation unchanged). - Major firm-level obstacles: access to finance; inadequately educated workforce; customs and trade regulations; tax rates; cost of finance. - Estimated firm-level productivity gains from addressing top obstacles (percent changes in firm-level productivity): - Inadequately educated workforce: 3.5 percentage points - Cost of finance: 2.6 percentage points - Tax administration: 2.6 percentage points - Business license and permits: 1.7 percentage points - Aggregate implication: addressing these four obstacles could raise aggregate TFP by 10 percent. - Policy priorities: strengthen education and vocational training; improve access to finance and financial infrastructure; modernize tax and customs administration; accelerate energy transition. ### CBI revenue dynamics and implications - CBI revenue collapse: 8 percent of GDP in 2024 (from 22 percent in 2023). - Weakness persistent across months in 2024; processing lags imply weakness likely to continue into 2025. - Structural change drivers: tighter due diligence, regional price minimums, and international scrutiny. - Medium-term projection: CBI revenue at 9 percent of GDP for St. Kitts and Nevis (staff). - Regional ECCU projection: CBI revenue declines from 7 percent of ECCU GDP in 2024 to 4 percent in 2029. - Policy implications: - Reduce reliance on CBI and mobilize tax revenue. - Introduce fiscal rules linked to conservative CBI assumptions. - Establish a SWF to absorb upside and manage volatility. - Timeline of key CBI program changes (selected events preserved as supplied in source). ### Risk Assessment Matrix — salient risks and policy responses - Conjunctural risks (selected): - Trade policy and investment shocks: Likelihood = High; Impact = Medium; Timing = ST, MT. Response: strengthen social safety net; monitor fiscal/financial risks; accelerate structural reforms. - Tighter financial conditions and systemic instability: Likelihood = Medium; Impact = Medium; Timing = ST. Response: monitor asset quality; ensure adequate provisioning; coordinate with ECCB. - Commodity price volatility: Likelihood = Medium; Impact = Medium; Timing = ST, MT. Response: strengthen social safety net; allow gradual pass-through; phase out generalized subsidies; accelerate RE transition. - Structural risks (selected): - Deepening geoeconomic fragmentation: Likelihood = High; Impact = Medium; Timing = MT. Response: reduce reliance on CBI; diversify economy. - Cyberthreats: Likelihood = High; Impact = Low; Timing = MT. Response: enhance digital security; improve AML/CFT. - Climate change: Likelihood = Medium; Impact = High; Timing = ST, MT. Response: adopt ex-ante resilience strategy; improve MTFF and PSIP. - Domestic risks (selected): - Sovereign debt distress: Likelihood = Medium; Impact = Medium; Timing = MT. Response: monitor financial risks; tighten supervision; implement fiscal consolidation. - Lower than expected CBI revenues: Likelihood = Medium; Impact = Medium; Timing = MT. Response: mobilize alternative revenue; strengthen governance of CBI. - Financial sector weakness: Likelihood = Medium; Impact = Medium; Timing = ST. Response: meet ECCB provisions and capital requirements; prepare fiscal contingency plans. - Disorderly energy transition: Likelihood = Medium; Impact = Medium; Timing = MT. Response: accelerate RE transition with transparent strategy; improve procurement and project execution; invest in resilient infrastructure. ### Debt consolidation across sectors — baseline debt dynamics and financeability (selected figures) - Public debt path (percent of GDP): 2024 = 52.26; 2025 = 61.46; 2026 = 65.66; 2027 = 67.36; 2028 = 69.07; 2029 = 70.67; 2030 = 72.47; 2034 = 80.2. - Change in public debt (percent of GDP): 2024 = -3.7; 2025 = 9.3; 2026 = 4.2; 2027 = 1.7; 2028 = 1.7; 2029 = 1.6; 2030 = 1.8. - Primary deficit (percent of GDP): 2024 = 9.4; 2025 = 8.6; 2026 = 4.5; 2027–2034 = 2.3 (constant). - Gross financing needs (percent of GDP): 2024 = 27.2; 2025 = 25.4; 2026 = 21.5; 2027 = 19.8; 2028 = 19.6; 2029 = 19.4; 2030 = 19.2. - Debt service (percent of GDP): 2024 = 17.7; 2025 = 16.8; 2026 = 17.1; 2027 = 17.5; 2028 = 17.3; 2029 = 17.1; 2030 = 17.0. - Local currency component of debt service (percent of GDP): 2024 = 16.2; 2025 = 15.2; 2026 = 15.2; 2027 = 14.8; 2028 = 14.2; 2029 = 13.7; 2030 = 13.2. - Foreign currency component of debt service (percent of GDP): 2024 = 1.5; 2025 = 1.5; 2026 = 1.8; 2027 = 2.8; 2028 = 3.1; 2029 = 3.4; 2030 = 3.8. - Medium-term indices: - Debt fanchart width: 71.0 (percent of GDP). - Probability of debt non-stabilization: 90.4 (percent). - GFN financeability index (GFI): 12.2; risk signal: Moderate. - Medium-term index: overall risk signal: High. - Final assessment: Prob. of missed crisis, 2025-2030 = 54.5 percent; Prob. of false alarms = 9.1 percent. ### Data adequacy and priorities - Overall data adequacy assessment: C (some shortcomings but broadly adequate for surveillance). - Priority data improvements: national accounts, external sector statistics, reduced publication lags for central government accounts, better classification of capital expenditure, improved labor market statistics, and addressing large unexplained errors and omissions in external statistics. - Participation: St. Kitts and Nevis participates in the e-GDDS (first posted metadata October 2000) but has not yet disseminated all recommended e-GDDS data. *Source: 1knaea2025001-print-pdf - IMF staff report excerpts and tables.* ### 1. Macroeconomic Performance vs. Regional Peers ______________________________________________ 21 ### 1. Macroeconomic Performance vs. Regional Peers ### Recent Developments - Growth and inflation - Real GDP is projected to have grown by 1.5 percent (y/y) in 2024, slowing from 4.3 percent in 2023. - Headline inflation is estimated at 1 percent (y/y) by end-2024, down from 1.6 percent in 2023. - Core inflation remains low at 0.7 percent. - Stayover tourism has almost returned to pre-pandemic levels; cruise arrivals remain below pre-pandemic levels. - Fiscal developments and CBI - Fiscal deficit widened to 11 percent of GDP in 2024 amid a sharp decline in CBI revenue. - CBI revenue fell to 8 percent of GDP in 2024—from 22 percent of GDP in 2023—due to reforms entailing stronger due diligence and higher prices. - Tax revenue underperformed, mainly owing to lower Corporate Income Tax (CIT). - Public wages and transfers were contained relative to 2023; CBI dividend was discontinued. - Current expenditure remained elevated; capital expenditure increased. - Government deposits declined to 10 percent of GDP at end-2024. - Gross public debt contained at 52 percent of GDP. - Primary deficit widened to 9 percent of GDP. - Adjusted primary deficit (net of CBI and transfers to public banks) was 17 percent of GDP. - Financial sector - Bank credit grew 10 percent (y/y) in 2024. - Lending by credit unions expanded by 12 percent (y/y). - Credit growth was especially strong in mortgage loans. - The credit gap is the highest in the ECCU region. - Financial soundness improved: NPL ratios declined (primarily driven by loan growth); capital adequacy ratios strengthened. - Systemic risk remains heightened: NPLs still high and buffers low. - The government-owned Development Bank is in a difficult financial condition, necessitating government action. - External sector - Current account deficit (CAD) widened to 15.1 percent of GDP in 2024 from 11.6 percent in 2023. - The EBA-Lite model estimates the current account gap at -3.9 percent of GDP in 2024. - International reserves remained stable. - Energy projects - Groundwork ongoing on an important geothermal project; procurement advanced and funding secured for the drilling stage. - The plan for the original solar project was cancelled; authorities intend to initiate a new procurement process. - Investment in the drilling phase is projected to amount to 2.4 percent of GDP and has been incorporated into the baseline over the medium term. ### Recent-Developments: Key Fiscal Items (selected figures) - Tax revenue: 18.7 (2024, percent of GDP) - Taxes on income: 4.7 (2024) - Citizenship by investment (CBI) revenue: 8.1 (2024) - Current expenditure: 34.3 (2024) - Wages and salaries: 13.7 (2024) - Goods and services (ex. CBI fees): 8.8 (2024) - Transfers: 10.6 (2024) - Capex ex. transfers to banks: 7.1 (2024) - Overall balance (after grants): -10.6 (2024) - Primary balance (ex. CBI and transfers to banks): -17.1 (2024) - Public sector debt: 52.2 (2024) - Government deposits: 10.4 (2024) ### EBA-lite Model Results, 2024 (selected figures) - CA-Actual: -15.1 (percent of GDP) - Adjusted CA: -15.0 - CA Norm (from model): -11.0 - CA Gap: -3.9 - REER Gap (in percent): 10.7 - Elasticity: -0.4 --- ### Outlook and Risks - Growth and inflation projections - Real GDP growth projected to pick up to 2 percent in 2025. - Inflation expected to remain around 2 percent in 2025. - Medium-term growth projected to rise to around 2½ percent (y/y), benefitting from large energy projects. - External outlook - CAD projected to narrow to around 12 percent of GDP over the medium term, supported by import savings from the renewable energy transition and moderate expansion in tourism. - Fiscal outlook and debt - Authorities’ 2025 budget targets a deficit of 4 percent of GDP based on a rebound in CBI revenue; authorities assume CBI revenue will bounce back to 16 percent of GDP. - Staff baseline projects a fiscal deficit of 10 percent of GDP in 2025. - Staff projects structurally lower CBI revenue at 9 percent of GDP over the medium term. - Public debt projected to rise to 72 percent of GDP by 2030 under staff baseline and does not stabilize. - Overall risk of sovereign debt stress assessed as moderate. - Contingent liabilities from public banks and the Social Security Fund (SSF) are significant risks to debt sustainability. - Risks - Near-term risks tilted to the downside. - Key downside risks: further declines in CBI revenue; slowdown in key tourism source markets; global financial instability impacting domestic banks; commodity price volatility; natural disasters. - Upside: renewable energy projects could create additional growth and fiscal revenue in the medium term. - Authorities’ views - Authorities more optimistic about growth in 2025 and over the medium term, citing tourism and large construction projects and the green energy transition. - Authorities project only a small fiscal deficit in 2025, citing reductions in current expenditure and a recent rebound in CBI applications. --- ### Policy Discussions — A. Stabilizing Public Finances - Policy priorities - Implement a prompt fiscal consolidation. - Enhance fiscal and financial sector policy frameworks. - Foster potential growth. - Objectives: address fiscal sustainability issues, strengthen financial stability, secure a sound external position. - Fiscal consolidation: active policy scenario - Adjusted primary balance (PB) needs to be tightened by 3 p.p. of GDP relative to the baseline by 2029. - Fiscal consolidation anchored by fiscal rules and driven by tax reforms (increase revenue by 2½ p.p. of GDP by 2029) and reductions in current expenditures (by 2½ p.p. of GDP by 2029), while creating room for additional capital expenditure. - Under the active scenario (selected figures): - Tax revenue path (percent of GDP): 18.7 (2024), 19.1 (2025), 20.6 (2026), 21.1 (2027), 21.4 (2028), 21.5 (2029), 21.5 (2030). - Primary current expenditure (percent of GDP): 33.1 (2024), 33.5 (2025), 30.2 (2026), 28.2 (2027), 27.9 (2028), 27.8 (2029), 21.5 (2030). - Capex ex. transfers to banks: 7.1 (2024) and maintained at 7.1 through 2029, 5.9 (2030). - Overall balance (after grants): -10.6 (2024), -8.7 (2025), -4.8 (2026), -2.5 (2027), -2.1 (2028), -2.0 (2029), -2.0 (2030). - Primary balance (ex. CBI and transfers to banks): -17.1 (2024), -16.2 (2025), -11.4 (2026), -8.9 (2027), -8.4 (2028), -8.2 (2029), -8.2 (2030). - Public sector debt (percent of GDP): 52 (2024), 60 (2025), 62 (2026), 62 (2027), 61 (2028), 60 (2029), 59 (2030). - Macroeconomic impacts (difference vs. baseline for 2029) - Impact on real GDP growth (Difference vs. Baseline): 0.3 (for 2029 cumulative effect shown across years; see table for year-by-year impacts). - Impact on inflation: 0.0 (long-run effect shown in table; marginal impacts over years). - Impact on current account balance: 0.3 (by medium term). - Staff assessment: combined net impact of fiscal consolidation and structural reforms on growth will be positive in the medium term. A modest drag on growth expected to be slightly outweighed by higher capital investment and structural reforms. - Tax revenue mobilization - Assessment - Tax-to-GDP ratio is at 18 percent, lower than the average of 21 percent in other ECCU countries. - Tax system contains several regressive features and lacks equity. - Large, ad hoc tax expenditures have often been granted, resulting in low tax revenue. - Example: since the pandemic, business tax rates were reduced and VAT exemptions expanded—most are still in place. - Recommendation - Staff recommends increasing tax revenue by 2½ p.p. of GDP by 2029. - Potential revenue yields could exceed 6 percent of GDP (text table and Annex VIII). - Steps taken or proposed: improve tax collection (including property taxes and CIT); update property tax assessments (unchanged since 2007); plan not to renew the temporary reduction in VAT for the first half of 2025. - Priority: phase out other pandemic-era tax breaks. - Suggested sequencing (initial measures): - Increase excise rates on alcoholic beverages, tobacco, sugar-sweetened beverages, and petroleum products, and minimize remissions, including via eliminating duty-free shops. - Harmonize the VAT, eliminate exemptions and zero-ratings, supplemented by improved targeted social support. - For PIT: broaden Housing and Social Development Levy to include a higher tax rate for high-income earners. - Tax non-labor income (investment and rental income) to improve equity. - Medium-term: lapse negotiated tax concessions for CIT benefitting large hospitality companies. *Source: 1knaea2025001-print-pdf - 1. Macroeconomic Performance vs. Regional Peers* ### 12. Current expenditure should be rationalized while protecting capital expenditure. ### 12. Current expenditure should be rationalized while protecting capital expenditure. ### Assessment of current expenditure - Current expenditure increased to 34 percent of GDP in 2024, up from a pre-pandemic average of 22 percent of GDP. - The country has a high share of public sector employment and a high wage bill relative to other ECCU countries. Public sector employment constituted 38 percent of total employment in St. Kitts and Nevis in 2018, compared to the ECCU average of 24 percent. - Transfers (including social and training programs) account for 11 percent of GDP—almost double the pre-pandemic level. - Authorities’ recent measures (controlling the wage bill and suspending the CBI dividend in 2024) helped contain a larger fiscal deficit. - Capital expenditure is currently at 7 percent of GDP over the medium term target level to be maintained. ### Recommendations to rationalize current expenditure and protect capital spending - Aim to bring current expenditure closer to pre-pandemic levels under the authorities’ 2025-27 plan. - Under the reform scenario, public wage bill, goods and services, and transfers would reverse their increase from pre-pandemic levels by about half. - Limit increases in public wage bill and employment to foster private sector job creation and improve productivity. - Improve targeting and effectiveness of transfers. - Phase out the electricity subsidy as soon as possible. - Maintain capital expenditure at the current level of 7 percent of GDP over the medium term. - Revenue-enhancing measures mentioned (with estimated yields in percent of GDP): - Recurrent property tax: 0.6 - VAT: 1.5 - Excise taxes: 0.8 - PIT: >1 - CIT: 2-4 - Total: >5.9 - Policy notes on revenue measures: - The country collects in labor income tax (Housing and Social Development Levy) 1 p.p. of GDP less than the regional average for PIT. - Recommend higher tax rates on labor income for high-income earners and introduce taxation of non-labor (e.g., investment and rental) income. - Eliminating large CIT incentives, especially in the profitable hospitality sector, could yield 2-4 percent of GDP. - Collecting assessed taxes from delinquent commercial and residential high-value properties more forcefully would double current property tax revenues. - VAT reforms assume harmonizing the VAT rate at 15 percent from 17 percent, coupled with eliminating exemptions and zero-ratings. - Increasing excise for alcohol, tobacco, sweetened beverages, and petroleum products could increase revenue from 1.1 percent of GDP to the regional average of 1.9 percent. ### Fiscal rules and budgeting discipline - Statutory fiscal rules should include: - An adjusted PB floor (net of CBI and support to public banks). - A ceiling on primary current expenditure. - A debt target guided by the regional debt ceiling—with escape clauses related to NDs. - Specific targets proposed: - The adjusted PB should be reduced to -8 percent of GDP by 2029. - Primary current expenditure capped at 28 percent of GDP by 2029. - Concern: several unbudgeted and unplanned expenditures have been introduced outside the budget process, including: - Temporary VAT reduction: 0.8 percent of GDP in 2025. - Budget Boost Wallet social transfer: 1.1 percent of GDP in 2025. - SKELEC transfers: 0.9 percent of GDP in 2024 and 0.6 percent of GDP in 2025. - Lending to the Development Bank: 0.2-0.4 percent of GDP in 2022-24. - Lending to a private hotel: 0.6 percent of GDP in 2023 and 0.3 percent of GDP in 2024. - Recommendation: All expenditure items should be planned and budgeted to enhance confidence in the fiscal consolidation path. ### Structural fiscal reforms: SWF, CBI transparency, and debt management - Sovereign Wealth Fund (SWF): - Authorities plan to establish an SWF soon. - Coupled with statutory fiscal rules, the SWF should absorb upside in projected CBI revenue, reduce CBI volatility impact on the budget, and help preserve fiscal buffers against NDs. - CBI framework transparency: - Government has taken steps to improve governance, due diligence and application processes. - Further recommendation: publish comprehensive annual reports following external audits, including statistics on applications and financial accounts. - Medium-term debt management strategy (MTDMS): - Updated MTDMS is under government review and should be published. - MTDMS should aim to lengthen debt maturity, reduce costs, and diversify funding sources. - Government reliance on short-term borrowing led to large gross financing needs (25 percent of GDP in 2025) and high costs; reliance should continue to be reduced. - Recent external loan agreements amounting to 7 percent of GDP will finance a power plant expansion, the drilling phase of the geothermal project, and a hospital. - Government should consider increased engagement with multilateral development partners for concessional borrowing and tapping into the Regional Government Securities Market. ### Social Security Fund (SSF) and other fiscal institutions - SSF sustainability: - SSF has started to incur a deficit and reserves are projected to be depleted by 2040 if no reforms are implemented. - Reform options under consideration include raising the contribution rate, the retirement age, and the minimum period of contributions. - A comprehensive approach is needed for SSF sustainability given the aging population. - SSF investment portfolio should be more diversified by increasing the share of liquid foreign instruments. - Authorities agree with the need for SSF parametric reforms and investment portfolio diversification. ### Authorities’ stance on fiscal consolidation and reforms - Authorities concurred with the need for fiscal consolidation while protecting capital expenditure. - They aim to reduce reliance on CBI revenue and seek economic diversification under the Sustainable Island State agenda. - Immediate revenue focus: strengthening tax collection and updating property tax assessments. - Authorities showed interest in raising excise rates on alcoholic beverages, tobacco, and petroleum products and intend to make the tax system more equitable. - They pledged to phase out the temporary relief measures introduced in 2025 and to reduce current expenditure, including controlling the wage bill and improving targeting of transfers. - Authorities acknowledged the need to adjust water and electricity tariffs to better reflect costs and reduce the fiscal burden. - They intend to protect capital expenditure, especially investments in infrastructure and ND preparedness. - Authorities plan to formalize fiscal rules, establish the SWF to absorb CBI upside, improve CBI Unit transparency with publication of annual reports, proceed with SSF parametric reforms, and publish the updated MTDMS soon. *Source: IMF staff report content unit "12. Current expenditure should be rationalized while protecting capital expenditure."* ### 33. The authorities agreed with the staff's analysis of potential growth and challenges. ### 33. The authorities agreed with the staff's analysis of potential growth and challenges. ### Authorities' agreements, plans, and ongoing initiatives - Authorities plan to form a Productivity Council aimed at enhancing productivity and have begun reviewing training programs to tackle skill mismatches. - Authorities concurred that the renewable energy transition would enhance productivity and energy security. - Authorities highlighted ongoing efforts to invest in renewable energy by tapping into external financing and advance the geothermal project, which "could become operational in two years, with financing secured to commence drilling." - The original solar project was suspended in November; authorities underscored their intention to proceed with a new procurement process in due course. - Minimum wage adjustments: - The minimum wage was increased by 19.4 percent in January 2024 and set to be increased by 16.3 percent in July 2025. - This represents around 39 percent increase compared to the previous minimum wage established in 2014. - Authorities’ training programs include ELEVATE and Skills Training Empowerment Programs (STEP). - Authorities plan to develop a resilient single power grid connecting the two islands as part of the geothermal project. - Authorities plan to increase investments in water infrastructure, including the construction of a desalination plant—expected to be finished in the coming months—and the development of water wells. - Authorities noted that establishing a strategy for the public sector investment program will strengthen overall oversight of public investment. - Authorities agreed on the need to expand the multi-layered insurance framework against natural disasters (NDs). ### Improving preparedness to natural disasters (ND) - Rationale: - The country is highly vulnerable to NDs, and building resilience is critical for macroeconomic and financial stability. - Strengthening ND-resilience will help mitigate key macro and financial risks, including fiscal deficits and debt (primarily arising from disaster relief and recovery), challenges in the financial sector (e.g., higher NPLs due to physical damage and stranded assets), and impacts on the real economy (such as adverse effects on tourism and infrastructure losses). - Public investment framework (recommendations): - Integrate a pipeline of projects funded by the public sector—including statutory bodies—into the Public Sector Investment Program (PSIP) to improve medium-term fiscal planning, anchor ND-resilient investment plans, and help unlock concessional financing. - Strengthen capital expenditure forecasts for the medium-term fiscal framework. - Improve project execution and use a medium-term PSIP strategy for comprehensive oversight and project progress tracking. - ND-resilient infrastructure (priorities): - Upgrade the power grid—as part of the geothermal project—to enhance resilience to NDs, support energy sustainability by introducing a one-grid that connects the two islands and facilitate the energy transition. - Construct two desalination plants—one for each island—given challenges with water supply. - Multi-layered insurance framework (recommendations): - Preserve government deposits at their current level as the first self-insurance layer. - Supplement self-insurance by (i) expanding coverage through the Caribbean Catastrophe Risk Insurance Facility; and (ii) issuing a state-contingent instrument, such as catastrophe bonds or lines of credit. - Staff analysis indicates additional fiscal buffers are essential to enhance an insurance framework against NDs. - The level of layered choice could be calibrated for an efficient cost-minimizing framework. ### Staff appraisal — growth, external position, and near-term outlook - Growth and inflation: - Growth has moderated and inflation remains stable. - Lower contributions from tourism and government services reduced growth in 2024. - Growth is expected to pick up this year, supported by expanding tourism, and to be moderate in the medium term. - Credit growth rose rapidly amid strong demand and lenders’ competition. - Near-term risks are tilted to the downside, but the potential for renewable energy provides upsides over the medium term. - External position: - The external position in 2024 is assessed as weaker than implied by medium-term fundamentals and desirable policies. - The CAD further widened, reflecting a decline in CBI inflows and larger fiscal deficits. - The CAD is expected to moderately narrow in the medium term, supported by import savings from the energy transition. - International reserves remain stable. ### Fiscal outlook and policy priorities - Fiscal deficit and public debt: - The fiscal deficit is projected to remain large, with public debt rising in the baseline—without additional adjustment. - Recent reforms to strengthen the CBI program, reinforced by international agreements, have likely reduced CBI revenue to more sustainable levels. - Public debt is projected to exceed 70 percent of GDP by 2030. - The overall risk of sovereign debt stress continues to be assessed as moderate. - Contingent liabilities from public banks and the SSF pose considerable risks to debt sustainability. - Policy priority and recommended measures: - The policy priority is to implement a prompt and decisive fiscal consolidation to keep public debt below the regional ceiling. - Fiscal consolidation should be driven by tax revenue mobilization and reductions in current expenditures and anchored by fiscal rules. - Tax revenue mobilization will also help reduce reliance on the CBI program. - The combined net effects of fiscal consolidation and structural reforms on growth and the external position are assessed as positive in the medium term. - Fiscal institutions and funds: - The authorities’ plan to establish a SWF—which should absorb any upside in the CBI revenue—is commendable and should be implemented. - Important progress has been made in strengthening the CBI framework; however, its transparency needs to be further improved. - Regarding the SSF, the authorities’ intention to improve its sustainability is welcome, and the reform proposals under consideration deserve support. - The medium-term debt management strategy should prioritize diversification of funding sources. ### Financial sector and state-owned banks - Financial system: - The financial system has somewhat strengthened, but further progress is needed. - The systemic bank has made progress in strengthening its balance sheet, including reducing legacy NPLs and de-risking its investment portfolio. - Efforts should continue to further strengthen the systemic bank’s balance sheet and to revitalize its business model, with government engagement with external advisors encouraged to make it more focused on lending. - Private banks should continue efforts to reduce NPLs and meet the ECCB’s prudential requirements. - The participation of all banks and credit unions in the regional credit bureau is essential for its effectiveness and for mitigating risks associated with the rapid credit growth. - Development Bank: - The Development Bank needs to be reformed; it is facing significant challenges due to high NPLs and a weak capital position. - Priority actions: analyze the bank’s financial situation, reassess its functions, and chart the optimal path forward based on the bank’s viability and fiscal prudence. - The legal framework around the bank should be revised to significantly strengthen its regulation and supervision. ### Structural reforms and medium-term growth prospects - Outlook and drivers: - Potential growth has declined, mainly driven by slow productivity growth and a lower contribution from human capital. - Recommended structural reforms: - Enhance the efficiency of government services. - Improve credit access. - Better align labor skills with market demands. - Accelerate the energy transition to help increase competitiveness. - Improve investment framework and enhance the multi-layered insurance framework to strengthen ND preparedness. *Source: 1knaea2025001-print-pdf - 33. The authorities agreed with the staff's analysis of potential growth and challenges.* ### 45. It is expected that the next Article IV Consultation with St. Kitts and Nevis will take ### 1knaea2025001-print-pdf - 45. It is expected that the next Article IV Consultation with St. Kitts and Nevis will take ### Macroeconomic performance vs. regional peers - Growth in 2024: "growth is in line with the ECCU average in 2024." - Tourist arrivals in 2024: "close to their pre-pandemic levels in 2024, still lagging the ECCU average." - Current account in 2024: "The current account deficit widened in 2024, edging closer to that of ECCU peers." - Fiscal balance in 2024: "The overall fiscal balance deteriorated, falling below the ECCU average." - Public debt: "gross public debt was the lowest in the region, remaining below the regional ceiling of 60 percent of GDP." - External debt: "External debt also remains lowest among ECCU member countries." ### Real sector developments - Output gap and growth: - "The output gap has edged closer to zero ..." - "despite the recent deceleration in real growth." - Tourism: - "Stay-over arrivals have almost recovered to pre-COVID levels" - "tourism via cruise arrivals has remained below pre-COVID levels although it performed slightly better than the ECCU average." - Inflation: - "Inflation has continued to recede amid lower food and energy prices ..." - "... remaining below ECCU peers also in part due to subdued economic activity." ### Fiscal sector developments - 2024 fiscal stance: - "The overall balance turned sharply negative in 2024, while the fiscal stance remains loose..." - "on a significant decline in CBI revenue and still large expenditures." - Revenue composition and trends: - "Total revenue also weakened, largely reflecting lower CBI revenue." - "The decline in CBI revenue contrasts with other regional programs." - Tax revenue: "While tax revenue declined marginally because of lower CIT... it remains is lower than in the ECCU, and more recently, other peer groups." - Expenditure and debt dynamics: - "Total expenditure declined in 2024 but remained about 10 percent of GDP higher than before the pandemic." - "Active wage bill control helped stabilize current expenditures, , albeit at elevated levels relative to ECCU and other comparators." - "Debt declined in 2024, as the deficit was financed by deposits." - "The debt of St. Kitts and Nevis is currently the lowest in the ECCU." - From Table 1 / Table 2 (selected exact figures, percent of GDP unless otherwise specified): - Real GDP (market prices): 2024 = 1.5; 2025 = 2.0; 2026 = 2.2; 2027 = 2.6; 2028 = 2.6; 2029 = 2.7; 2030 = 2.6. - Consumer prices, end-of-period: 2024 = 1.0; 2025 = 1.8; 2026 = 2.0; 2027 = 2.0; 2028 = 2.0; 2029 = 2.0; 2030 = 2.0. - Total revenue and grants: 2024 = 31.1; 2025 = 32.5; 2026 = 33.2; 2027 = 33.2; 2028 = 33.2; 2029 = 33.2; 2030 = 33.2. - o/w CBI revenue: 2024 = 8.1; 2025 = 9.0; 2026–2030 = 9.0 each year. - Total expenditure and net lending: 2024 = 41.7; 2025 = 42.2; 2026 = 39.8; 2027 = 37.8; 2028 = 37.9; 2029 = 38.1; 2030 = 38.2. - Overall balance (after grants): 2024 = -10.6; 2025 = -9.8; 2026 = -6.6; 2027 = -4.6; 2028 = -4.7; 2029 = -4.8; 2030 = -4.9. - Primary balance (ex. CBI and transfers to banks): 2024 = -17.1; 2025 = -17.3; 2026 = -13.1; 2027 = -11.0; 2028 = -11.3; 2029 = -11.3; 2030 = -11.3. - Total public debt: 2024 = 52.2; 2025 = 61.4; 2026 = 65.6; 2027 = 67.3; 2028 = 69.0; 2029 = 70.6; 2030 = 72.4. - Government deposits: 2024 = 10.4; 2025 = 10.3; 2026 = 9.9; 2027 = 9.4; 2028 = 9.0; 2029 = 8.6; 2030 = 8.2. ### External sector developments - Current account and financing: - "The current account deficit widened, primarily due to a significant decline in services exports driven by lower CBI." - "The current account deficit was mainly financed by other investment, FDI, and capital transfers." - Reserves and REER: - "International reserves remained adequate." - "The REER depreciated slightly over the last 12 months." - Tourism market share and source markets: - "The country’s market share in the overall tourism of ECCU is small." - "The U.S. and the Caribbean are the biggest source markets for St. Kitts and Nevis." - From Table 3 (selected exact figures, in percent of GDP or millions as indicated): - Current account (percent of GDP): 2024 = -15.1; 2025 = -13.1; 2026 = -12.8; 2027 = -12.3; 2028 = -12.2; 2029 = -11.9; 2030 = -11.3. - Services, net (percent of GDP): 2024 = 21.2; 2025 = 22.9; 2026 = 24.1; 2027 = 24.6; 2028 = 24.7; 2029 = 23.7; 2030 = 24.4. - Tourism receipts (percent of GDP): 2024 = 35.8; 2025 = 37.5; 2026 = 38.7; 2027 = 38.8; 2028 = 38.9; 2029 = 38.9; 2030 = 38.9. - FDI (net, percent of GDP): 2024 = 4.5; 2025–2030 = 4.5 each year (projected). - Net international reserves, end-of-period (in millions of U.S. dollars): 2024 = 270.7; 2025 = 269.0; 2026 = 267.3; 2027 = 265.5; 2028 = 261.4; 2029 = 260.2; 2030 = 259.3. - Net international reserves (in months of imports of goods and services): 2024 = 4.8; 2025 = 4.5; 2026 = 4.3; 2027 = 4.1; 2028 = 3.9; 2029 = 3.7; 2030 = 3.5. ### Financial sector developments - Asset quality and profitability: - "The NPL ratio is the highest in the ECCU despite the recent improvement." - "Bank profits have finally turned positive after heavy losses in 2022." - "As a result of the losses, St Kitts and Nevis has the lowest capital ratio in the ECCU." - Deposits and liquidity: - "Private and public deposits declined in 2024 but remained substantial." - "Banks continue to have ample liquidity buffers, supported by large deposits." - "Credit to the government has remained stable and at moderate levels." - Credit and investment: - "Credit to households accelerated in 2024... as well as credit to firms." - "Credit growth is projected to converge to nominal GDP growth." - "Investment in overseas assets has been among the highest in the ECCU but has plateaued since 2023." - From financial tables (selected exact figures): - Nonperforming loans to total gross loans (end-of-period): 2024 = 18.1. - Credit to private sector (annual percentage change): 2024 = 9.8; projections: 2025 = 8.1; 2026 = 6.4; 2027 = 4.7; 2028 = 4.7; 2029 = 4.8; 2030 = 4.7. - Broad money (annual percentage change): 2024 = 2.5; 2025 = 13.5; 2026 = 8.9; 2027 = 6.0; 2028 = 6.0; 2029 = 6.4; 2030 = 6.5. - Regulatory capital to risk-weighted assets (CAR), banking sector: 2020 = 24.5; 2021 = 21.8; 2022 = 11.1; 2023 = 10.3; 2024 = 12.9. - Return on average assets (ROA), banking sector: 2020 = 2.6; 2021 = 1.9; 2022 = -3.5; 2023 = 1.0; 2024 = 0.3. - Liquid assets to total assets (percent), banking sector: 2024 = 46.4. ### Structural indicators and social metrics - GDP per capita and human development: - "St. Kitts and Nevis has one of the highest GDP per capita in the Caribbean region... and human development in the Caribbean." - Economic structure: - "The economy is mainly supported by tourism, finance, and real estate services." - Vulnerability: - "The region is highly vulnerable to natural disasters with large economic and humanitarian impacts." - Labor policy: - "The minimum wage was increased in January 2024... and is set to be raised again in July 2025." - Selected basic data (from Table 1): - Area (sq. km): 269.4. - Headcount Poverty (percent, 2008): 23.7. - Income inequality (Gini coefficient, 2008): 0.38. - Population total (thousands, 2023 est.): 51.3. - Gross domestic product (millions of U.S. dollars, 2023): 1,055.7. - Gross domestic product (US$ per capita, 2023): 20,568.4. - Net migration rate (per thousand, 2014 est.): 1.2. - Access to safe water (percent, 2011): 98.9. - Life expectancy at birth (years, 2021): 71.7. - Infant mortality (per thousand live births, 2020): 12.6. - Under 5 mortality rate (per thousand, 2020): 15.0. - Adult literacy rate (percent, 2009): 97.8. ### Key projections and vulnerabilities (selected) - Economic growth projections (Real GDP, market prices): 2025 = 2.0; 2026 = 2.2; 2027 = 2.6; 2028 = 2.6; 2029 = 2.7; 2030 = 2.6. - Fiscal trajectory: - Overall balance (after grants) widens then improves: 2024 = -10.6; 2025 = -9.8; 2026 = -6.6; 2027 = -4.6; 2028 = -4.7; 2029 = -4.8; 2030 = -4.9. - Public debt rises in projections: 2025 = 61.4; 2030 = 72.4 (percent of GDP). - External position: - Current account deficits persist: 2024 = -15.1 percent of GDP; 2030 = -11.3 percent of GDP. - Net international reserves remain in the range: 2024 = 270.7 (US$ million); 2030 = 259.3 (US$ million). - Financial sector risks: - Nonperforming loans remain elevated though improving: 2024 = 18.1 (percent of gross loans). - Capital adequacy recovered somewhat in 2024: CAR = 12.9. *Sources: ECCB authorities; CTO; national authorities; National authorities; ECCB; UNDP; World Bank; IMF staff calculations, estimates, and projections.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Overview - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. - The relative likelihood is the staff’s subjective assessment: “low” indicates a probability below 10 percent, “medium” between 10 and 30 percent, and “high” between 30 and 50 percent. - Non-mutually exclusive risks may interact and materialize jointly. - “Short term” (ST) and “medium term” (MT) indicate risks that could materialize within 1 year and 3 years, respectively. ### Conjunctural Risks - Trade policy and investment shocks - Likelihood: High - Impact: Medium - Timing: ST, MT - Description: Higher trade barriers or sanctions reduce external trade, disrupt FDI and supply chains, and trigger further U.S. dollar appreciation, tighter financial conditions, and higher inflation. - Policy Response: - Strengthen the social safety net. - Monitor fiscal developments and financial risks closely, in coordination with the ECCB. - Accelerate structural reforms and diversify economic links. - Tighter financial conditions and systemic instability - Likelihood: Medium - Impact: Medium - Timing: ST - Description: Higher-for-longer interest rates and term premia amid looser financial regulation, rising investments in cryptocurrencies, and higher trade barriers trigger asset repricing, market dislocations, weak bank and NBFI distress, and further U.S. dollar appreciation, which widens global imbalances, worsens debt affordability, and increases capital outflow from EMDEs. - Policy Response: - Monitor asset quality and ensure adequate loan loss provisioning. - Vigilantly monitor financial sector developments in coordination with ECCB. - Regional conflicts - Likelihood: Medium - Impact: Medium - Timing: MT - Description: Intensification of conflicts (e.g., in the Middle East, Ukraine, Sahel, and East Africa) or terrorism disrupt trade in energy and food, tourism, supply chains, remittances, FDI and financial flows, payment systems, and increase refugee flows. - Policy Response: - Strengthen the social safety net. - Monitor financial risks closely, in coordination with the ECCB. - Commodity price volatility - Likelihood: Medium - Impact: Medium - Timing: ST, MT - Description: Supply and demand volatility (due to conflicts, trade restrictions, OPEC+ decisions, AE energy policies, or green transition) increases commodity price volatility, external and fiscal pressures, social discontent, and economic instability. - Policy Response: - Strengthen the social safety net to better support the vulnerable. - Allow a gradual pass-through of international prices and phase out generalized subsidies. - Accelerate transition to RE sources. - Global growth acceleration - Likelihood: Low - Impact: High - Timing: MT - Description: Easing of conflicts, positive supply-side surprises (e.g., oil production shocks), productivity gains from AI, or structural reforms raise global demand and trade. - Policy Response: - Enhance competitiveness by implementing structural reforms to foster economic growth. - Accelerate fiscal adjustment. ### Structural Risks - Deepening geoeconomic fragmentation - Likelihood: High - Impact: Medium - Timing: MT - Description: Persistent conflicts, inward-oriented policies, protectionism, weaker international cooperation, labor mobility curbs, and fracturing technological and payments systems lead to higher input costs, hinder green transition, and lower trade and potential growth. - Policy Response: - Reduce reliance on CBI to finance FDI and improve its governance and transparency. - Diversify the economy and improve competitiveness through structural reforms. - Cyberthreats - Likelihood: High - Impact: Low - Timing: MT - Description: Cyberattacks on physical or digital infrastructure (including digital currency and crypto assets), technical failures, or misuse of AI technologies trigger financial and economic instability. - Policy Response: - Enhance digital security in public and private platforms. - Improve financial stability. - Continue to make progress in the area of AML/CFT. - Climate change - Likelihood: Medium - Impact: High - Timing: ST, MT - Description: Extreme climate events driven by rising temperatures cause loss of life, damage to infrastructure, food insecurity, supply disruptions, lower growth, and financial instability. - Policy Response: - Adopt comprehensive ex-ante resilience strategy to enable resilient investment and adequate insurance against NDs. - Improve the MTFF and PSIP. ### Domestic Risks - Sovereign debt distress - Likelihood: Medium - Impact: Medium - Timing: MT - Description: Higher interest rates, stronger U.S. dollar, and shrinking development aid amplified by sovereign-bank feedback result in capital outflows, rising risk premia, loss of market access, abrupt expenditure cuts, and lower growth in highly indebted countries. - Policy Response: - Monitor financial risks closely, in coordination with the ECCB. - Intensify domestic supervision of financial institutions and tighten regulations. - Strengthen fiscal buffers by implementing fiscal consolidation and reduce debt rollover risk by decreasing reliance on short-term financing. - Lower than expected CBI revenues - Likelihood: Medium - Impact: Medium - Timing: MT - Description: Pressures to either end the CBI program or face visa restrictions, which could jeopardize correspondent banking relationships. - Policy Response: - Mobilize revenue from alternative sources. - Strengthen governance frameworks to protect the integrity of the CBI program. - Financial sector weakness - Likelihood: Medium - Impact: Medium - Timing: ST - Description: An unexpected increase in losses or NPLs at public and private banks and CUs would further impair credit intermediation and entail fiscal costs. - Policy Response: - Meet the ECCB requirements on provisions and capital; create and implement a capital restoration plan where needed; and have a fiscal contingency plan in place. - Disorderly energy transition - Likelihood: Medium - Impact: Medium - Timing: MT - Description: 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. - Policy Response: - Accelerate the transition to RE through a transparent strategy. - Improve project execution, including procurement processes. - Supplement the RE transition with investments in climate-resilient infrastructure, including an upgraded electricity grid. *Source: Annex I. Risk Assessment Matrix (from provided IMF PDF).* ### 5. Debt consolidation across sectors: ### 5. Debt consolidation across sectors ### Public debt structure and issuance strategy - Public debt coverage includes the central government (St. Kitts), the local government (Nevis), and the public enterprises. - Commentary: The increase in public debt is projected to be implemented through the issuance of external debt. This is based on staff's assessment of the external and domestic investor absorption capacity of new public debt. - Noted classification/measurement items (as provided): - CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector. - Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable. - IPSGSs: Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities. - Basis of recording includes accrual recording, commitment basis, due for payment, etc. - Definitions preserved: Nominal value, Face value, Market value (only traded debt securities have observed market values). ### Baseline scenario: public debt projections and drivers (Percent of GDP unless indicated) - Public debt path (Actual / Projections): - 2024: 52.26 - 2025: 61.46 - 2026: 65.66 - 2027: 67.36 - 2028: 69.07 - 2029: 70.67 - 2030: 72.47 - 2031: 74.37 - 2032: 76.27 - 2033: 78.28 - 2034: 80.2 - Change in public debt: - 2024: -3.7 - 2025: 9.3 - 2026: 4.2 - 2027: 1.7 - 2028: 1.7 - 2029: 1.6 - 2030: 1.8 - 2031: 1.9 - 2032: 1.9 - 2033: 2.0 - 2034: 2.0 - Contribution of identified flows: - 2024: 9.3 - 2025: 7.8 - 2026: 4.1 - 2027–2034: 1.7 to 2.1 (detailed: 2027: 1.7; 2028: 1.7; 2029: 1.7; 2030: 1.8; 2031: 2.0; 2032: 2.0; 2033: 2.1; 2034: 2.1) - Primary deficit (percent of GDP): - 2024: 9.4 - 2025: 8.6 - 2026: 4.5 - 2027–2034: 2.3 (constant) - Noninterest revenues (percent of GDP): - 31.1 in 2024; then 32.5 in 2025; 33.2 from 2026 onward (33.2 repeated) - Noninterest expenditures (percent of GDP): - 40.5 in 2024; 41.0 in 2025; 37.7 in 2026; 35.5 from 2027 onward (35.5 repeated) - Automatic debt dynamics: - 2024: -0.2; 2025: -0.8; 2026: -0.4; 2027–2034: between -0.6 and -0.2 (listed) - Real interest rate and relative inflation (percent): - 2024: 0.5 - 2025: 0.2 - 2026: 0.9 - 2027: 1.1 - 2028: 1.2 - 2029: 1.2 - 2030: 1.3 - 2031: 1.4 - 2032: 1.4 - 2033: 1.5 - 2034: 1.5 - Real interest rate (percent) (separately reported): - 2024: 0.7 - 2025: 0.2 - 2026: 0.9 - 2027: 1.0 - 2028: 1.1 - 2029: 1.2 - 2030: 1.2 - 2031: 1.3 - 2032: 1.4 - 2033: 1.4 - 2034: 1.5 - Relative inflation (percent): - 2024: -0.1 - 2025–2034: values of 0.0 to 0.1 (preserved as presented) - Real growth rate (percent): - 2024: -0.8 - 2025: -1.0 - 2026: -1.3 - 2027: -1.6 - 2028: -1.7 - 2029: -1.8 - 2030: -1.8 - 2031: n.a. - 2032: -1.6 - 2033: -1.7 - 2034: -1.7 - Contribution of residual: - 2024: -13.0 - 2025: 1.4 - 2026: 0.1 - 2027–2034: -0.1 (repeated) - Gross financing needs (percent of GDP): - 2024: 27.2 - 2025: 25.4 - 2026: 21.5 - 2027: 19.8 - 2028: 19.6 - 2029: 19.4 - 2030: 19.2 - 2031: 19.2 - 2032: 19.3 - 2033: 19.3 - 2034: 19.4 - Of which: debt service (percent of GDP): - 2024: 17.7 - 2025: 16.8 - 2026: 17.1 - 2027: 17.5 - 2028: 17.3 - 2029: 17.1 - 2030: 17.0 - 2031: 17.0 - 2032: 17.0 - 2033: 17.0 - 2034: 17.1 - Local currency component of debt service (percent of GDP): - 2024: 16.2 - 2025: 15.2 - 2026: 15.2 - 2027: 14.8 - 2028: 14.2 - 2029: 13.7 - 2030: 13.2 - 2031: 12.7 - 2032: 12.3 - 2033: 11.8 - 2034: 11.4 - Foreign currency component of debt service (percent of GDP): - 2024: 1.5 - 2025: 1.5 - 2026: 1.8 - 2027: 2.8 - 2028: 3.1 - 2029: 3.4 - 2030: 3.8 - 2031: 4.2 - 2032: 4.7 - 2033: 5.2 - 2034: 5.7 - Memo: - Real GDP growth (percent): 1.5 in 2024; 2.0 in 2025; 2.2 in 2026; 2.6 in 2027; 2.6 in 2028; 2.7 in 2029; 2.6 in 2030; 2.3 in 2031; 2.3 in 2032; 2.2 in 2033; 2.2 in 2034. - Inflation (GDP deflator; percent): 1.0 in 2024; 1.8 in 2025; 2.0 in 2026–2034 (2.0 repeated; 2034 shows 2.0). - Nominal GDP growth (percent): 5.8 in 2024; 1.0 in 2025; 4.1 in 2026; 4.7 in 2027; 4.7 in 2028; 4.8 in 2029; 4.7 in 2030; 4.4 in 2031; 4.4 in 2032; 4.4 in 2033; 4.3 in 2034. - Effective interest rate (percent): 2.2 in 2024; 2.3 in 2025; 3.6 in 2026; 3.7 in 2027; 3.8 in 2028; 3.8 in 2029; 3.9 in 2030; 3.9 in 2031; 3.9 in 2032; 4.0 in 2033; 3.9 in 2034. - Commentary: - The main driver of the increasing debt path is large primary deficits, while the low medium-term real growth rates are not sufficient to stabilize the debt-to-GDP ratio. - The large residual in 2024 is due to the use of deposits to finance the deficit that year. ### Realism of baseline assumptions and fiscal adjustment scenarios - Forecast track record indicators and percentile-based realism diagnostics are reported (chart-based). - Commentary: The high percentile rank is based on the historical sample which includes very high debt numbers before 2012. The large residual in 2024 is due to the use of deposits to finance the deficit that year. - Fiscal adjustment and possible growth paths charting: - Scenarios shown: Baseline; Optimistic; Pessimistic. - Fiscal multipliers shown: Multiplier=0.5; Multiplier=1; Multiplier=1.5. - Historical benchmarking: - 3-year debt reduction above 75th percentile: 5.9 ppts of GDP (max. 3-year reduction stated as percentile rank 9.9 in distribution panel). - 3-year adjustment above 75th percentile (primary balance): 2 ppts of GDP (percentile rank 15). - Laubach rule: The note states a linear rule assuming bond spreads increase by about 4 bps in response to a 1 ppt increase in the projected debt-to-GDP ratio. ### Medium-term risk assessment and financeability (key indices and probabilities) - Debt fanchart module: - Debt fanchart width: 71.0 (percent of GDP) - Probability of debt non-stabilization (percent): 90.4 - Terminal debt-to-GDP x institutions index: 33.8 - Debt fanchart index (DFI): 2.5 - Risk signal for DFI: High - Gross financing needs (GFN) module: - Average baseline GFN (percent of GDP): 20.8 - Initial banks' claims on the general government (pct bank assets): 6.5 - Change in banks' claims in stress (pct banks' assets): 9.0 - GFN financeability index (GFI): 12.2 - Risk signal for GFI: Moderate - Medium-term index and final assessment: - Medium-term index (Index Number) components shown; overall risk signal: High - Final assessment: - Prob. of missed crisis, 2025-2030, if stress not predicted: 54.5 pct. - Prob. of false alarms, 2025-2030, if stress predicted: 9.1 pct. - Commentary: The fan chart has a very large width because of the high historical debt numbers before 2012. ### Triggered modules, long-term risks, and climate change impacts - Triggered modules include: Pensions, Health, and Long-Term Risk Assessment: Large Amortization. - Long-run projections and scenarios: - Medium-term extrapolation with debt stabilizing primary balance vs. large amortizations scenarios are presented. - Commentary: The upward trajectory is driven by the large deficits in the baseline and the historically high debt before the GFC, which was subsequently restructured. - Climate change: Adaptation - Commentary: Climate change adaptation notably worsens the debt dynamic. - Charts show GFN-to-GDP Ratio and Total Public Debt-to-GDP Ratio under: - Baseline: 10-year historical average - With climate adaptation (standardized scenario) - With climate adaptation (customized scenario) - Time horizon shown through 2053 with increases in both GFN-to-GDP and Total Public Debt-to-GDP under adaptation scenarios. ### Policy priorities and engagement strategy (Annex V) - Overall objective: Support St. Kitts and Nevis’ efforts toward implementing fiscal consolidation, enhancing fiscal and financial sector policy frameworks, and fostering potential growth. - Key challenges identified: - Small economic base, high dependence on tourism and CBI revenue, capacity constraints, vulnerability to natural disasters. - Constraining factors: suboptimal resource allocation, low productivity, labor skills mismatches, limited access to finance. - Government agenda highlighted: - Sustainable Island State Agenda aims for economic diversification, renewable energy transition, and food security and agriculture. - Goals include bolstering new growth engines, energy security, and encouraging local food production to reduce import dependence. - Fund engagement focus areas: - Fiscal Consolidation: mobilize tax revenue, rationalize current expenditure, and enhance the CBI framework; support from FAD, CARTAC, and development partners. - Financial Stability: engagement at regional level with the ECCB to strengthen banking supervision and identify regulation gaps; monitor public banks’ financial stability indicators. - Structural Reforms: address obstacles to potential growth, promote higher productivity, and increase human capital. - Natural Disaster Preparedness: strengthen public investment framework and develop ND-resilient infrastructure. - Collaboration: The Fund will collaborate with development partners and regional organizations, notably the World Bank and the Caribbean Development Bank (CDB), and with CARTAC for capacity development. ### Data adequacy and priorities (Annex VI) - Overall data adequacy assessment: C (Data provided to the Fund has some shortcomings but is broadly adequate for surveillance). - Table highlights (summarized): - Sectoral ratings across National Accounts, Prices, Government Finance Statistics, External Sector Statistics, Monetary and Financial Statistics, Inter-sectoral Consistency show mixed grades (letters as presented). - Key data gaps: assessing impact of physical and transitional risks associated with natural disasters. - Changes since last Article IV: main issues remain unaddressed, but progress in external sector statistics and classification of fiscal accounts; CARTAC TA and ECCB collaboration noted. - Corrective actions and CD priorities: - Continue improving data quality and coverage, prioritize national accounts and external sector statistics, strengthen statistical office resources. - Specific improvement areas: (i) producing expenditure-based national accounts data and quarterly GDP; (ii) reducing publication lags of central government accounts and reviewing classification of capital expenditure items; (iii) reviewing external sector data given large unexplained errors and omissions and historical revisions, and CBI data provision; (v) filling gaps in labor market statistics. - Table of Common Indicators: Dates of latest observation and frequency metadata are reported (as of January 2025) for reserve/base money, broad money, central bank balance sheet, consolidated banking system balance sheet, interest rates, CPI, government finance, IIP, gross external debt, external current account, exports and imports, GDP/GNP, exchange rates, international reserve assets and liabilities. St. Kitts and Nevis participates in the Enhanced General Data Dissemination System (e-GDDS) and first posted metadata in October 2000 but has not yet disseminated all recommended e-GDDS data. *Source: IMF staff estimates and projections as presented in the chapter "5. Debt consolidation across sectors."* ### Annex VII. Potential Growth and Productivity ### Annex VII. Potential Growth and Productivity ### Overview and key findings - Slow growth in productivity and human capital is a key driver of declining potential growth in St. Kitts and Nevis. - Potential growth has significantly declined over the last three decades: from 5.6 percent in the 1980s to 1.9 percent in the decade prior to COVID-19. - All components except population contribute to the decline; lower growth in TFP and human capital each contribute nearly two-fifths of the total decline. - IMF (2024) finds weakening growth is a global phenomenon, with low productivity growth as a key driver. ### Aggregate estimates of potential growth (growth accounting) - Potential growth is defined as the economy’s maximum noninflationary growth given resources and technological capacities; contributions disentangled from: total factor productivity (TFP), physical capital, human capital, and labor. - Natural disasters (NDs) are explicitly accounted for by adjusting physical capital stock and measuring production inefficiencies during and immediately after NDs. - Adjusting capital for NDs is particularly relevant for Caribbean countries due to frequent severe NDs. ### Firm-level survey evidence (IFPG dataset) - Dataset: the ‘Innovation, Firm Performance, and Gender (IFPG)’ survey (2020), covering 1,979 firms across 13 Caribbean countries. - St. Kitts and Nevis sample: 119 firms, representing 51 percent of manufacturing firms and 11 percent of service firms. - Survey year: fiscal year 2019 (pre-COVID-19). - TFP estimation: factor share approach (cost share = output elasticity under assumptions of cost minimization, perfect competition, and constant returns to scale). Firms with missing values or in top/bottom 2 percent of productivity excluded to address outliers. ### Misallocation and potential gains - Misallocation measured using Hsieh and Klenow (2009) as dispersion in marginal revenue products of capital and labor across firms. - Potential TFP gain from eliminating misallocation in St. Kitts and Nevis: 55 percent (mid-range among ECCU countries, range cited between 34 percent and 65 percent). - Back-of-the-envelope implication: addressing misallocation could narrow GDP per capita gap with the U.S. by 27 percentage points (assumes gains in labor productivity equal gains in TFP and labor participation does not change). ### Main obstacles to resource allocation and firm-level productivity - Of 18 potential obstacles in the survey, the major obstacles are: - access to finance, - inadequately educated workforce, - customs and trade regulations, - tax rates, - cost of finance. - Identified access-to-finance constraint persists despite recent strong credit growth and the largest positive credit gap in the region, reflecting weaknesses in the banking system and limited financial infrastructure (e.g., credit bureaus, collateral framework). - Workforce skill inadequacy aligns with aggregate evidence of low human capital growth; firms point to weaknesses in local education and training quality, lack of personal and soft skills, and shortages of professionals. Worker emigration and movement to other sectors are relatively less important. ### Estimated impacts of removing top firm-level obstacles (cross-Caribbean regression results) - Firm-level TFP increases associated with eliminating specific obstacles (percent changes in firm-level productivity): - Inadequately educated workforce: 3.5 percentage points - Cost of finance: 2.6 percentage points - Tax administration: 2.6 percentage points - Business license and permits: 1.7 percentage points - Aggregate implication: if these four top obstacles were addressed for firms in St. Kitts and Nevis, the overall increase in aggregate TFP could total 10 percent. ### Policy priorities and recommendations - Prioritize strengthening productivity and human capital development to raise potential growth, focusing on the obstacles identified. - Improve workforce quality by: - enhancing the quality of education and vocational training, - building on recent efforts in the ELEVATE and STEP programs, - modernizing the system to align with evolving economic needs, including leveraging digitalization and artificial intelligence. - Improve access to finance by: - strengthening banking system soundness, - developing financial infrastructure (see Annex VIII for related measures). - Improve customs, tax administration, and trade regulations by: - adopting a single electronic window system, - enhancing tax administration and compliance (see Annex VIII). ### Box 1 — Methodology of potential growth estimation (summary of steps and definitions) - Production function: Y_t = A_t θ_t K_t^α L_t^{1−α}, where θ_t measures inefficiencies in production during and immediately after NDs; capital stock adjusted for NDs. - Steps to adjust for NDs and estimate potential growth: 1. Estimate investment excluding impact of NDs (Ĩ_t) using ARIMA: I_t = φ(L) I_t + A(L) ε_t + γ_1 z_t + γ_2 z_{t+1}, where z_t is dummy for year of ND and the year after. 2. Calculate capital stock excluding NDs (K̃_t) via perpetual inventory: K̃_{t+1} = (1−δ) K̃_t + Ĩ_t. 3. Estimate output excluding impact of NDs (Ŷ_t) using ARIMA: Y_t = φ(L) Y_t + A(L) ε_t + γ_1 z_t + γ_2 z_{t+1}, same z_t. 4. Calculate θ_t = Ŷ_t / Y_t for the year of ND and the following year; set θ_t = 1 for other years. 5. Calculate actual TFP: A_t = Y_t / (θ_t K̃_t^α L_t^{1−α}). 6. Estimate trend TFP using Hodrick–Prescott filter to obtain potential TFP A_t^{pot}. 7. Calculate potential output: Y_t = A_t^{Pot} θ_t K̃_t^α L_t^{1−α}. - Labor: measured as human-capital-augmented population L_t = h_t P_t, where h_t = exp(ϑ (1−ω) s_t^{1−ω}), s_t = years of schooling of population aged 24 or older; parameter values: ϑ = 0.32 and ω = 0.58 (following literature). Average schooling years estimated using skill-specific emigration rates from IAB database and secondary enrollment rates from WDI. *Source: Innovation, Firm Performance and Gender (IFPG) survey; IMF staff calculations.* ### 4. The decline in St. Kitts and Nevis CBI fiscal revenue in 2024 is expected to be lasting. ### 4. The decline in St. Kitts and Nevis CBI fiscal revenue in 2024 is expected to be lasting. ### Key findings on CBI revenue decline - CBI revenue declined to 8 percent of GDP in 2024 from 22 percent of GDP in 2023. - CBI revenue underperformed in nearly each month of 2024, including the most recent ones, suggesting the weakness will likely continue into 2025, given the processing time of several months. - Tightening of application requirements and due diligence processes amid international scrutiny, as well as the regional minimum for the price of the program, are expected to be permanent, leading to a structurally lower number of applications. - The government implemented several price reductions in 2024—while still remaining above the price floor—in an attempt to boost demand for the program, which had not materialized as of early 2025. - CBI revenue is inherently volatile and uncertain, posing substantial two-sided risks to the economy and public finances. ### Projections and regional context - For St. Kitts and Nevis, CBI revenue is projected to remain at the current level of 9 percent of GDP in the medium term, slightly below the pre-pandemic average of 11 percent of GDP for 2014-2019. - Regional ECCU projection: regional CBI revenue is expected to gradually decline from 7 percent of ECCU GDP in 2024 to 4 percent of GDP in 2029, although significant uncertainty surrounds the projections. ### Policy implications and recommended measures - The structurally lower CBI revenue in the medium term calls for reducing reliance on CBI and mobilizing tax revenue. - Heavy reliance on CBI inflows has induced macroeconomic vulnerabilities and disincentivized and limited tax revenue growth, contributing to the lowest tax-to-GDP ratio in the region. - Critical actions recommended: - Mobilize tax revenue via a comprehensive tax reform (see Annex VII in source). - Introduce fiscal rules linked to conservative assumptions of CBI revenue. - Establish a SRF to absorb the upside to the CBI and manage volatility. ### Box — Recent timeline of changes to the CBI program (selected events) - December 2022: New CEO of the CIU, Michael Martin, appointed; pledged strengthening measures and announced a “limited time offer” (LTO) 1/1/2023–6/30/2023 with applications processed within 60 days (down from 90 days) and price reductions from $150K (single applicant cash option) to $125K, plus reductions for families and real estate options. - June 2023: LTO extended by seven months until 1/31/24 due to “an overwhelming demand”. - July 2023: CIU announced immediate doubling of prices and changes to application process: cash option for single applicant and family of four doubled from $125K and $170K to $250K and $350K, respectively; real estate share and home investments doubled to $400K and $800K, respectively; alternative cash option (public benefit) rose from $175K to $250K; due diligence fees increased; interviews became mandatory; financial sponsorship no longer possible. - July 2024: CIU reduced the cash option for a family up to 4 people from $350K to $250K (as for a single applicant). - September 2024: CEO Michael Martin resigned; CBI oversight mechanism restructured (technical committee to include the PS for National Security, two civil servants appointed by the Minister, the CIU CEO, and a BoG representative). - October 2024: PM Drew said CBI revenue dropped 60 percent yoy and that the country had been “on the brink of losing that precious visa-free access [to the EU and the UK]” which necessitated rushed reforms in July 2023; real estate share and home investments reduced from $400K and $800K to $325K and $600K, respectively. *Source: IMF staff report excerpt (chapter on CBI revenue and policy implications).* ### 1.0 percent by end-2024, down from 1.6 percent in 2023, driven largely by lower global ### 1.0 percent by end-2024, down from 1.6 percent in 2023, driven largely by lower global ### Inflation outlook - Inflation is 1.0 percent by end-2024, down from 1.6 percent in 2023, driven largely by lower global commodity prices and subdued domestic activity. - Core inflation remained contained at 0.7 percent. - Looking ahead to 2025, inflation is projected to remain stable around 2.0 percent, consistent with global price expectations. ### Fiscal strategy and stabilizing public finances - The 2025 budget aims to reduce the fiscal deficit, anticipating a recovery in CBI revenues as a result of the reforms implemented in 2024, alongside expenditure rationalization. - Fiscal outlook and risks: - Fiscal deficit expected to remain elevated in the near term. - Public debt is projected to reach 73.3 percent of GDP by 2030. - Key risks include global policy uncertainties, increased trade protectionism, global financial instability, fluctuations in CBI revenue, a downturn in key tourism source markets, commodity price volatility, and vulnerability to natural disasters. - Immediate fiscal measures and priorities: - Prioritizing revenue mobilization and prudent expenditure management. - Improving tax administration and updating property tax assessments. - Exploring increases in excise rates on alcoholic beverages, tobacco, and petroleum products to enhance equity and revenue generation. - The Income Tax Appeals Commission and the Property Tax Valuation Review Board will address arrears related to property, corporate income, and value added taxes. - Reinstated the fuel excise tax at the pump, which had been temporarily suspended three years ago. - Plan to phase out other temporary relief measures introduced during the pandemic and in 2025. - Controlling current expenditure while safeguarding capital investments through rationalizing public transfers, managing the public wage bill, and better targeting social programs. - Considering tariff adjustments for water and electricity services to reduce fiscal pressures and improve cost recovery. - Prioritizing spending on resilient infrastructure and natural disaster preparedness. - Structural fiscal reforms: - Establishing a Sovereign Wealth Fund (SWF) to better manage CBI revenue. - Considering adoption of statutory fiscal rules to ensure fiscal discipline. - Ensuring long-term viability of the Social Security Fund (SSF) via parametric reforms: raising the contribution rate, increasing the minimum contribution period, and adjusting the retirement age. - Diversifying the SSF’s investment portfolio. ### Strengthening financial stability - Actions to enhance financial system stability: - Strengthening the systemic bank’s balance sheet and de-risking its investment portfolio. - Plans to engage external advisors to revitalize the bank’s business model with a stronger focus on lending. - Launch of the Achieving Success through Personal Investment, Resources, and Education (ASPIRE) program to build financial awareness among children; plans to expand educational aspects to adults with a focus on sound credit practices. - Continued enhancement of regulatory oversight for non-bank financial institutions (NBFIs), particularly credit unions. - Support for the Eastern Caribbean Central Bank’s efforts to implement a common minimum regulatory framework for bank and non-bank sectors in the region. - Commitment to strengthen the AML/CFT framework and supervisory practices. - Development Bank reforms and contingent fiscal risks: - Reform efforts focused on improving accountability and financial performance. - Revision of the legal framework governing the Bank to strengthen regulation and supervision. - Ongoing external audit findings will guide decisions on the Bank’s long-term viability. - Authorities will assess the Bank’s financial condition and determine an appropriate course of action to balance viability with fiscal responsibility. ### Boosting sustainable, inclusive, and resilient growth - Structural reform agenda: - Improve government service delivery through digitalization, modernization of tax and customs administrations, and simplification of trade regulations. - Target productivity and competitiveness by enhancing resource allocation, labor market skills, access to finance, and energy resilience. - Review technical and vocational training programs to address skill mismatches and reduce dependence on imported labor. - Initiatives include a pre-nursing program and the establishment of the National Institute of Training to equip locals for opportunities in healthcare, construction, and hospitality. - Energy transition: - Significant strides in securing financing for the first phase of the geothermal project. - The geothermal project is expected to become operational within two years and reduce dependence on imported fossil fuels. ### Improving preparedness to natural disasters - Climate and disaster resilience priorities: - Strengthen both infrastructure and financial resilience and the public investment framework. - Integrate public sector-financed projects into the broader Public Sector Investment Program to enhance medium-term fiscal planning and align investment with resilience goals. - Plans to upgrade the power grid to complement the geothermal project. - Construction of two new desalination plants to enhance disaster preparedness, improve energy sustainability, and address water supply challenges. - Ministry of Public Infrastructure has onboarded a new team of professionals to ensure alignment with the fiscal framework and efficient project execution. - These efforts are intended to advance the Sustainable Island State agenda. *Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1knaea2025001-print-pdf.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1knaea2025001-print-pdf.pdf_