## 1lcaea2025001-print-pdf ## Source details **Canonical URL:** [1lcaea2025001-print-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1lcaea2025001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1lcaea2025001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1lcaea2025001-print-pdf.pdf.json) --- ### Context and recent developments - Economy normalized after the pandemic with strong tourist arrivals and a supportive fiscal stance. - Real GDP growth: - 2023: 2.2 percent; 2024: "is expected to have pushed GDP growth to 3.7 percent in 2024." - Unemployment and labor: - Unemployment: 14.0 percent in 2023; youth unemployment: 25 percent in 2023. - Inflation: - Peaked at 6.4 percent y/y in 2022; fell to 0.8 percent in June (year in excerpt). - External and fiscal balances: - Current account deficit: narrowed to 1.9 percent of GDP in 2023. - Fiscal deficit widened in FY2023 to 2.6 percent of GDP. - Public debt: rose to 74.5 percent of GDP in 2023. - Financial sector snapshots: - Bank NPLs: 11.6 percent in 2024Q2. - Bank lending: declined by 2 percent y/y as of August. - Credit unions (CUs): assets equivalent to 24 percent of GDP; 12 percent y/y credit growth as of June. - Thirteen out of sixteen CUs have capital ratios below the new regulatory minimum; three CUs with negative capital. ### Outlook and baseline projections - Medium-term potential growth: 1.5 percent. - Real GDP growth (annual percent change): 2023: 2.2; 2024: 3.7; 2025: 2.8; 2026: 2.4; 2027: 1.9; 2028: 1.5; 2029: 1.5. - Consumer prices, period average: 2023: 4.5; 2024: 1.3; 2025: 1.3; 2026: 1.8; 2027: 2.0; 2028: 2.0; 2029: 2.0. - Fiscal balances (percent of GDP): - Overall balance excl. ND cost: 2023: -2.6; 2024: -1.3; 2025: -2.2; 2026: -2.9; 2027: -2.9; 2028: -2.6; 2029: -2.2. - Overall balance, incl. ND cost: 2023: -2.6; 2024: -1.9; 2025: -2.8; 2026: -3.6; 2027: -3.5; 2028: -3.3; 2029: -2.9. - Debt dynamics (percent of GDP): - Total public sector debt: 2023: 74.5; 2024: 72.7; 2025: 72.3; 2026: 72.7; 2027: 73.2; 2028: 73.6; 2029: 73.6. - Central government debt: 2023: 69.6; 2024: 68.1; 2025: 67.9; 2026: 68.4; 2027: 69.1; 2028: 69.7; 2029: 69.9. - Interest payments: 2023: 3.4; 2024: 3.3; 2025: 3.5; 2026: 3.5; 2027: 3.6; 2028: 3.6; 2029: 3.7. - Capital expenditure: 2023: 3.7; 2024: 2.8; 2025: 3.3; 2026: 3.7; 2027: 3.3; 2028: 2.9; 2029: 2.5. - External sector (percent of GDP): - Current account balance: 2023: -1.9; 2024: -1.6; 2025: -1.3; 2026: -1.2; 2027: -1.0; 2028: -0.6; 2029: -0.5. - Exports of goods and services: 2023: 58.2; 2024: 57.6; 2025: 56.9; 2026: 56.9; 2027: 57.0; 2028: 57.3; 2029: 57.4. - Imports of goods and services: 2023: -52.4; 2024: -52.5; 2025: -52.4; 2026: -52.2; 2027: -52.2; 2028: -52.2; 2029: -52.1. - Reserve coverage: projected to remain stable, ranging from 3.2 to 3.4 months of prospective imports, surpassing the 3-month benchmark. ### Financial sector outlook, constraints, and indicators - Bank credit to the private sector: projected to remain anemic. - Supply-side credit constraints: - High NPLs: 11.6 percent in 2024Q2. - Lack of foreclosure legislation (effectively making lending uncollateralized). - Competition from less-regulated credit unions. - Concerns about the fiscal outlook. - Demand-side constraints: - Stringent loan-qualification requirements and burdensome application processing. - Monetary/credit indicators (end of period, annual percent change): - Broad money (M2): 2023: 11.3; 2024: 2.7; 2025: 4.6; 2026: 4.8; 2027: 4.4; 2028: 4.0; 2029: 4.0. - Credit to private sector (nominal): 2023: 2.7; 2024: 1.6; 2025: 0.6; 2026: 0.8; 2027: 0.4; 2028: 0.0; 2029: 0.0. - Credit to private sector (real): 2023: -1.3; 2024: 0.3; 2025: -0.7; 2026: -1.0; 2027: -1.5; 2028: -1.9; 2029: -1.9. ### Risks to the outlook and scenarios - Downside risks (Annex II): - Investment delays and large debt rollover needs. - Challenges in raising public debt, risking abrupt fiscal adjustment. - High dependence on imports and tourism—vulnerable to global slowdown and supply disruptions. - Larger recognition of NPLs could depress credit growth and impede growth. - Heavy exposure to natural disasters (NDs) and climate change. - Upside scenario: - Stronger-than-expected growth in tourism and construction could boost the economy. - Risk Assessment Matrix highlights (selected entries with staff likelihood/impact): - Intensification of regional conflicts: Likelihood: High; Impact: Medium. - Commodity price volatility: Likelihood: High; Impact: Medium. - Social discontent: Likelihood: High; Impact: Medium. - Sovereign debt distress: Likelihood: Medium; Impact: Medium. - Climate change (structural risk): Likelihood: Medium; Impact: High. ### Debt sustainability and long-term risks (Annex III highlights) - Overall risk of sovereign stress: assessed as high. - Historical debt decline: from 95.0 percent in FY2020 to 74.5 percent in FY2023. - Baseline projection: public debt expected to stabilize around 74 percent of GDP over the medium term. - Key baseline fiscal and debt projection series (selected textual extractions preserved): - Public debt series: "Public debt74.572.772.372.773.273.673.673.773.973.973.9" (table extract preserved as provided). - Gross financing needs: "12.611.113.914.413.412.811.010.612.415.115.3" (table extract preserved). - Effective interest rate (percent) memo: "0.00.05.75.45.65.75.85.85.85.75.7" (table extract preserved). - Demographics and pensions: - Without reforms, the pension fund’s reserves depletion around 2051; NIC proposals could delay depletion from 2051 to 2080. - Pension underfunding could require fiscal outlays of about 3 percent of GDP over the next 60 years (staff projection). - Climate adaptation fiscal impact: - Customized scenario assuming adaptation cost of 1.3 percent of GDP (0.7 p.p. already in baseline) suggests debt-to-GDP could increase by 79 p.p. by 2053. ### Policy recommendations and priorities (summarized) - Fiscal policy and debt: - Sustain fiscal consolidation while safeguarding space for capital projects and ND resilience. - Lower debt to the regional target of 60 percent of GDP by 2035 will require fiscal consolidation and above-potential growth. - Raise domestic revenue via comprehensive, equitable, growth-friendly tax reform. - Improve control and targeting of current expenditures, including the wage bill. - Adopt a sound fiscal rule (recommended: legal primary balance floor and current expenditure ceiling with narrow escape clauses). - Improve transparency of the Citizenship-by-Investment Program (CIP). - Financial sector reforms: - Strengthen bank balance sheets and further reduce NPLs. - Enact foreclosure legislation to support mortgage lending and credit growth. - Improve compliance with ECCB provisioning requirements; meet ECCB’s 60 percent loan loss buffer and 100 percent provisioning for legacy NPLs. - Strengthen CU regulation and supervision; expand pilot asset quality reviews to other large CUs. - Enhance risk monitoring of the insurance sector; integrate climate risks into ORSA guidelines. - Continue progress to address AML/CFT regulatory gaps and preserve correspondent banking relationships. - Structural and resilience measures: - Prioritize investment in infrastructure, education, and disaster resilience (staff analysis: investment in resilience of at least 0.6 percent of GDP has long-term benefits). - Improve credit access and reduce operating and tax compliance costs. - Address labor force skill mismatches and carefully calibrate the minimum wage in consultation with stakeholders. - Enhance the natural-disaster insurance framework (three-layered insurance) and develop geothermal energy (exploratory drilling expected to commence in 2025). - Social protection and pensions: - Support NIC reforms (raise contributions and early retirement age), but complement with comprehensive measures including pension caps and voluntary investment options for high earners. - Governance and administration: - Strengthen debt management practices (Debt Management Act enacted April 2024) and procurement. - Simplify mechanisms for transferring CIP funds to the Treasury through the National Economic Fund. ### Tax reform: priorities, measures, and sequencing - Overall ambition: raise tax revenue by some 2.5 percent of GDP over the medium term; address excessive tax expenditures and regressivity. - Key reform areas and estimated yields: - Corporate Income Tax (CIT): - Eliminate large and widespread incentives; abolishing incentives could yield 2–4 percent of GDP. - Support in light of OECD Pillar II implementation; adopt rules-based framework and monitoring unit. - Consider lowering statutory CIT rate while allowing full expensing and loss carryforwards; introduce simplified regime for SMEs. - Value-Added Tax (VAT): - Raise main and tourism rates (statutory rate from 12.5 percent to 15 percent), lower high VAT threshold, limit zero-rated items. - Potential yield: at least 2 percent of GDP; VAT measures in selected summary: 1.8 percent of GDP. - Bring hotel accommodation rates (7 percent) and other tourism rates (10 percent) to statutory. - Personal Income Tax (PIT): - Replace allowances/deductions with tax credits for low-income earners; eliminate regressive deductions. - Tax dividends, rental income, capital gains, and interest income (currently exempt); consider introducing a fourth bracket. - Property taxes: - Recurrent property taxes to play a larger role; do not renew the 2017 residential property exemption for larger, high-value properties; shorten 3-year exemption for new commercial properties. - Reduce high transfer taxes to stimulate secondary real estate market. - Fuel and excises: - Raise fuel VAT from 0 percent to statutory rate and restore fuel excise to pre-pandemic level; expected yield: at least 0.6 percent of GDP. - Raise excises on alcohol and tobacco; consider sweetened beverage excise. - Tax administration improvements: - Address staffing shortages, manual processes, and inadequate data quality (especially customs). - Leverage Tax Administration Modernization Project and analytics-driven compliance risk management. - Digitalize taxpayer services and improve audit and inspection capacity. - Avoid renewing tax amnesty: ongoing amnesty extended until May 2025 estimated to result in forgone tax revenue of 4.6 percent of GDP and should not be renewed. ### Financial sector reforms: NPLs, CUs, and insurance - Banking sector guidance: - Banks should meet ECCB provisioning and loan-loss buffer requirements; avoid heavy use of prudential reserves instead of provisions. - For banks with insufficient capital: reduce operating costs, sell assets, suspend dividends. - Asset allocation guidance: prefer international government bonds and high-grade corporate bonds; avoid risky instruments such as international equities. - Measures to reduce NPLs and unlock credit: - Strengthen prudential oversight and supervisory enforcement; meet ECCB’s 100 percent provisioning requirement for legacy NPLs. - Enhance debt enforcement regimes; pass foreclosure legislation to facilitate mortgage lending. - Use Insolvency Act to facilitate out-of-court workouts. - Fully operationalize and ensure full participation in the regional credit reporting bureau (including major CUs). - Strengthen ECAMC capitalization and regional cooperation to dispose of NPLs. - Create comprehensive property cadaster to support valuations and the secondary real estate market. - Co-operative sector reforms: - Co-operative Societies Act increases CU capital requirements and empowers FSRA. - FSRA to streamline/tighten provisioning and phase out collateral in provisioning calculations where appropriate. - Wait for ECCU-level deposit insurance before extending to CUs. - Expand pilot asset quality review to other large CUs. - Insurance sector: - Strengthen monitoring; address rising global reinsurance rates and integrate climate risks into ORSA guidelines. - Shrinkage of insurance coverage of real estate would increase household and public reconstruction costs after an ND. ### Labor market, minimum wage, and structural reforms - Minimum wage: - Introduction estimated to affect 13 percent of employed population. - Statutory rate set at 62 percent of mean wages. - IMF guidance: minimum-to-average wage ratio considered “non-distortionary” between 25 and 50 percent of the average wage (IMF 2016). - Recommended mitigating measures: cyclical multiparty reviews, sector differentiation, active labor market policies, targeted investments in skills, national skill registry, strengthen TVET, budget support for the Youth Economy Agency. - Structural reform priorities: - Address high finance costs and credit access, inadequate workforce education, tax and customs compliance challenges. - Diversify tourism offerings; expand business process outsourcing and high human-capital services. - Slow growth of public sector employment where appropriate. - Prioritize public investment: upgrade airport, main hospital, cruise ports, road network, public housing, digitalization and security. ### Climate adaptation, energy transition, and disaster resilience - Vulnerability and institutional actions: - St. Lucia implementing a National Adaptation Plan with projected completion by 2028. - Staff analysis: invest at least 0.6 percent of GDP in resilience annually for long-term growth and fiscal benefits. - Three-layered disaster insurance framework recommended; St. Lucia in discussions with World Bank on Catastrophe Deferred Drawdown Option (third layer). - Geothermal development: exploratory drilling expected to commence in 2025 with World Bank technical expertise and financing. - Financing implications: - Additional fiscal resources recommended each year for insurance layers and adaptation; customization scenarios show large increases in long-term debt-to-GDP under costly adaptation needs. ### Implementation of past Fund advice (Annex IV summary) - Fiscal policy recommendations: mixed implementation; FY2023 fiscal deficit widened despite some measures (Health and Security Levy, excise increases on tobacco); VAT measures pending. - Public financial management and digitalization: progress (Questica, CLOUDSUITE, DigiGov). - Debt management: Debt Management Act enacted April 2024; efforts to lengthen average maturities; overdrafts nearly eliminated. - Financial sector advice: mixed progress—NPLs declined but legacy stock remains; Insolvency Act passed September 2024; foreclosure legislation still lacking. - Structural policies: ongoing public investment and digital initiatives; youth and skills programs in progress; World Bank $40m project approved January 2024 supporting fiscal and green reforms. ### Key statistics and selected exact figures (selected highlights preserved) - Area (sq. km): 616. - Population Total (thousands, 2023, UN): 179.3. - GDP (2023): (millions of US dollars) 2,430; (millions of EC dollars) 6,561; (US$ per capita) 13,555. - Life expectancy at birth (years, 2023): 72.7. - Net imputed international reserves (Millions of US dollars, end of period) 2023: 371.5. - Months of imports of goods and services (net imputed reserves) 2023: 3.3. - Broad money (M2) end-of-period (annual percent change) 2023: 11.3. - Banking NPL ratios: 2022: 13.8; 2023: 14.2 (banking system indicator set). - ECCB policy rate (percent, OEP): 2.00 (listed across periods). - Tourism (percent of GDP) 2023: 49.4. ### Summary of priority policy actions (concise) - Adopt decisive fiscal consolidation combined with comprehensive tax reform and a well-designed fiscal rule (primary balance floor and current expenditure ceiling). - Strengthen provisioning and foreclosure frameworks to reduce NPLs and unlock private credit. - Reinforce CU supervision and expand asset quality reviews; ensure full participation in regional credit bureau. - Integrate climate risks into financial supervision (ORSA) and fund three-layered disaster insurance; proceed with geothermal exploration (exploratory drilling expected to commence in 2025). - Prioritize reforms to broaden the tax base (CIT, VAT, PIT, property taxes, fuel/excises) and strengthen tax administration; avoid further tax amnesties. - Invest in human capital, digitalization, and infrastructure to raise potential growth and support inclusive employment. *Source: IMF staff report for St. Lucia, Staff Report for the 2024 Article IV Consultation (January 8, 2025) — 1lcaea2025001-print-pdf.* ### 2.9 percent of GDP on the back of higher capital expenditures. Debt is projected to stabilize around ### ST. LUCIA STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION ### Context and Recent Developments - St. Lucia’s economy has normalized following the pandemic, with strong tourist arrivals and a supportive fiscal stance boosting growth and reducing unemployment. - Growth slowed to 2.2 percent in 2023 on account of a decline in U.S. visitors, but tourism accelerated in 2024 and "is expected to have pushed GDP growth to 3.7 percent in 2024." - Unemployment was 14.0 percent in 2023 (and 25 percent for youth in 2023). - Inflation: peaked at 6.4 percent y/y in 2022; fell to 0.8 percent in June (year not specified in excerpt). - The current account deficit narrowed to 1.9 percent of GDP in 2023. - The fiscal deficit widened in FY2023 to 2.6 percent of GDP; public debt rose to 74.5 percent of GDP. - Banking sector: NPLs remained elevated at 11.6 percent in 2024Q2. Bank lending declined by 2 percent y/y as of August. Credit unions (CUs) with assets equivalent to 24 percent of GDP saw 12 percent y/y credit growth as of June. Thirteen out of sixteen CUs have capital ratios below the new regulatory minimum, including three with negative capital. ### Outlook and Projections - Medium-term potential growth is estimated at 1.5 percent. - Growth and inflation path: - Real GDP growth: 2023: 2.2; 2024: 3.7; 2025: 2.8; 2026: 2.4; 2027: 1.9; 2028: 1.5; 2029: 1.5 (table values preserved). - Consumer prices, period average: 2023: 4.5; 2024: 1.3; 2025: 1.3; 2026: 1.8; 2027: 2.0; 2028: 2.0; 2029: 2.0. - Fiscal and debt: - Overall balance excl. ND cost: 2023: -2.6; 2024: -1.3; 2025: -2.2; 2026: -2.9; 2027: -2.9; 2028: -2.6; 2029: -2.2 (percent of GDP). - Overall balance, incl. ND cost: 2023: -2.6; 2024: -1.9; 2025: -2.8; 2026: -3.6; 2027: -3.5; 2028: -3.3; 2029: -2.9 (percent of GDP). - Total public sector debt: 2023: 74.5 percent of GDP; projected to stabilize around 74 percent of GDP over the medium term. Table values: 2024: 72.7; 2025: 72.3; 2026: 72.7; 2027: 73.2; 2028: 73.6; 2029: 73.6 (percent of GDP). - Central government debt: 2023: 69.6; 2024: 68.1; 2025: 67.9; 2026: 68.4; 2027: 69.1; 2028: 69.7; 2029: 69.9 (percent of GDP). - Interest payments: 2023: 3.4; 2024: 3.3; 2025: 3.5; 2026: 3.5; 2027: 3.6; 2028: 3.6; 2029: 3.7 (percent of GDP). - Capital expenditure: 2023: 3.7; 2024: 2.8; 2025: 3.3; 2026: 3.7; 2027: 3.3; 2028: 2.9; 2029: 2.5 (percent of GDP). - External sector: - Current account balance: 2023: -1.9; 2024: -1.6; 2025: -1.3; 2026: -1.2; 2027: -1.0; 2028: -0.6; 2029: -0.5 (percent of GDP). - Exports of goods and services: 2023: 58.2; 2024: 57.6; 2025: 56.9; 2026: 56.9; 2027: 57.0; 2028: 57.3; 2029: 57.4 (percent of GDP). - Imports of goods and services: 2023: -52.4; 2024: -52.5; 2025: -52.4; 2026: -52.2; 2027: -52.2; 2028: -52.2; 2029: -52.1 (percent of GDP). - Reserve coverage: projected to remain stable, ranging from 3.2 to 3.4 months of prospective imports, surpassing the 3-month benchmark. ### Financial Sector Outlook and Constraints - Bank credit to the private sector is projected to remain anemic. - Supply constraints on credit: - High NPLs (11.6 percent in 2024Q2). - Lack of legislation permitting foreclosures (effectively making all lending uncollateralized). - Competition from less-regulated credit unions. - Concerns about the fiscal outlook. - Demand-side constraints: - Stringent loan-qualification requirements and burdensome application processing deter borrowers. - Monetary/credit indicators (end of period, annual percent change): - Broad money (M2): 2023: 11.3; 2024: 2.7; 2025: 4.6; 2026: 4.8; 2027: 4.4; 2028: 4.0; 2029: 4.0. - Credit to private sector (nominal): 2023: 2.7; 2024: 1.6; 2025: 0.6; 2026: 0.8; 2027: 0.4; 2028: 0.0; 2029: 0.0. - Credit to private sector (real): 2023: -1.3; 2024: 0.3; 2025: -0.7; 2026: -1.0; 2027: -1.5; 2028: -1.9; 2029: -1.9. ### Risks to the Outlook - Downside risks noted (Annex II): - Investment delays and large debt rollover needs could worsen the outlook. - Challenges in raising public debt could result in an abrupt fiscal adjustment. - High dependence on imports and tourism makes St. Lucia vulnerable to a global slowdown and supply disruptions, potentially weakening tourism, FDI, and domestic incomes. - A larger recognition of NPLs could further depress credit growth and impede economic growth. - Heavy exposure to natural disasters (NDs) and climate change risks. - Upside scenario: - Stronger-than-expected growth in tourism and construction could provide a positive boost to the economy. ### Policy Recommendations and Priorities - Fiscal policy: - Sustain fiscal consolidation while safeguarding space to support capital projects and resilience against natural disasters. - Lower debt to the regional target of 60 percent of GDP by 2035 (authorities’ commitment) will require fiscal consolidation and above-potential growth in the near term to begin the effort. - Raise domestic revenue via a comprehensive, equitable, and growth-friendly tax reform. - Improve control and targeting of current expenditures, including the wage bill. - Adopt a sound fiscal rule. - Improve transparency of the Citizenship-by-Investment Program. - Financial sector reforms: - Strengthen bank balance sheets and further reduce NPLs. - Enact foreclosure legislation to support credit growth. - Improve compliance with ECCB provisioning requirements for banks. - Continue efforts to strengthen credit union regulation (noting many CUs below regulatory capital minimums). - Enhance risk monitoring of the insurance sector. - Continue progress to address AML/CFT regulatory gaps. - Structural and resilience measures: - Prioritize investment in infrastructure, education, and disaster resilience. - Improve credit access and reduce operating and tax compliance costs. - Address labor force skill mismatches and consider careful calibration of the minimum wage in close consultation with stakeholders. - Enhance the natural-disaster insurance framework and develop geothermal energy. *Source: IMF staff report for St. Lucia, Staff Report for the 2024 Article IV Consultation (January 8, 2025).* ### 11. The authorities expected higher growth in the near term and were more optimistic ### 11. The authorities expected higher growth in the near term and were more optimistic about medium-term prospects ### Authorities’ outlook and staff concurrence - Authorities expected enhanced investment in physical, social, and digital infrastructure to drive growth over the next two years and to create favorable conditions for higher medium-term growth than staff assessed. - The authorities generally concurred with staff’s risk assessment. ### Policy priorities — A. Creating Fiscal Space - Main policy priority: decisive fiscal consolidation while creating space for priority spending on capital projects and climate resilience. - Public debt: - Already high, exceeding the regional ceiling of 60 percent of GDP. - Expected to remain stable but subject to important risks including high rollover needs and a constrained domestic investor base. - Rationale: - Banks have identified high sovereign risk as a key obstacle to credit growth; high public debt rollovers crowd out private lending. - Fiscal consolidation is essential to mitigate vulnerabilities and to fulfill the commitment to achieving the regional debt target by 2035. - A potential shock, such as an ND, could put debt on a higher trajectory and increase borrowing costs. - Objectives and instruments: - Create fiscal space to expand capital expenditure and address growth bottlenecks and climate challenges. - Achieve objectives through comprehensive tax policy reform, improved control and targeting of current expenditures, and adoption of a sound fiscal rule within a fiscal responsibility framework. ### Active scenario to achieve regional debt target by 2035 - Fiscal stance tightening: 1.3 percent of GDP over five years relative to the baseline. - Primary surplus: maintain a primary surplus of 2.1 percent of GDP over the subsequent five years. - Revenue and expenditure composition: - Gradual increase in tax revenue by 2.5 percent of GDP over five years through comprehensive tax reform and enhanced tax administration. - Stabilize the wage-to-GDP ratio (a clawback of 0.6 percent of GDP relative to the baseline). - Capital expenditure to reach the pre-pandemic average of 3.7 percent of GDP while investing an additional 0.6 percent of GDP annually to prepare for NDs. - Complementary reforms: labor, social, and financial reforms to improve potential growth and equity. - Staff assessment: net impact on growth of recommended tax reform and fiscal consolidation, including higher capital expenditure, is expected to be positive over the longer term. ### Tax reform recommendations (preserving source terminology and figures) - Overall ambition: raise tax revenue by some 2.5 percent of GDP over the medium term; address excessive tax expenditures and regressivity (some 12 percent of GDP shy of tax-generating potential). - Key focus areas: - Rationalizing Corporate Income Tax (CIT) incentives: - Large and widespread incentives keep CIT revenue especially low, including in the exceptionally profitable hospitality sector. - Eliminating these incentives could yield 2–4 percent of GDP. - Opportunity: upcoming implementation of the OECD Pillar II to tax international hotels domestically. - Support design with a rules-based framework, reduce discretionary concessions, and establish a monitoring unit. - Reforming the VAT: - Raise the main and tourism rates, lower the high VAT threshold, and limit the number of zero-rated items. - Potentially generate at least 2 percent of GDP and make the VAT the main and most efficient revenue source. - Improving the Personal Income Tax (PIT): - Replace extensive allowances, deductions, and exemptions with tax credits mostly for low-income earners. - Eliminate regressive deductions such as insurance benefits and purchase of shares. - Tax dividends, rental income, capital gains, and interest income (all currently exempt). - Developing property taxes: - Recurrent property taxes to become an important, growth-friendly revenue source. - The 2017 residential property exemption should not be renewed, at least for larger, high-value properties; extend the property cadaster. - Shorten the 3-year exemption for new commercial properties. - Reduce high transfer taxes to stimulate the secondary real estate market. - Reforming fuel taxes: - Raise the fuel VAT rate from zero to the statutory rate and restore the fuel excise to the pre-pandemic level. - Expected yield: at least 0.6 percent of GDP. - Use ensuing revenues to finance climate adaptation and reach carbon emission targets. - Raise excises on alcohol and tobacco and possibly introduce a sweetened beverage excise to address health externalities and finance health-related expenditures. ### Improving tax administration - Key weaknesses: insufficient staffing, manual processes, inadequate data quality and transparency (especially with customs). - Priorities: - Improve auditing and inspection capabilities to match regional standards. - Leverage the Tax Administration Modernization Project and analytics-driven compliance risk management. - Improve taxpayer access and service digitalization; reduce perception of impunity for tax avoidance and evasion; foster a strong culture of compliance. - Tax amnesty: - Ongoing tax amnesty extended until May 2025 is estimated to result in forgone tax revenue of 4.6 percent of GDP—up to 6 times the taxes collected through the amnesty—and should not be renewed further. ### Better current spending control and targeting - Some current expenditure categories—goods and services, transfers, pensions, and interest—were together nearly 2 percent of GDP above the pre-pandemic average in FY2023. - Wages contained so far but expected to rise in the medium term. - Recommendations: - Better control and curtail expenditures where possible, including reduced headcount. - Target transfers to vulnerable households using proxy-targeted measures in the near term and build capacity for more effective targeting mechanisms over the longer term. ### Stronger fiscal framework and fiscal rules - Staff analysis shows that a legal primary balance floor and current expenditure ceiling—in conjunction with the regional debt target—would work well for St. Lucia. - Benefits: - Primary balance floor ensures debt sustainability. - Current spending rule constrains unplanned current spending and secures space for public investments. - Narrowly defined escape clauses for NDs and other large exogenous shocks recommended. - Fiscal rule should be a key component of a broader fiscal responsibility framework and ideally calibrated to target both increased capital expenditures and debt below the regional ceiling. ### National pension fund (NIC) sustainability - NIC proposals: gradually raise contribution rates and the early retirement age, which would delay projected depletion from 2051 to 2080. - Staff view: proposals deserve support but a more comprehensive approach is required, including pension caps and voluntary investment options for high earners. - Note: this year’s increase in the minimum pension will likely worsen the funding gap, increasing urgency for reforms. ### Other fiscal priorities: debt management and CIP - Recent legislation has strengthened procurement and debt management practices, including implementation of a medium-term debt strategy. - Authorities strengthened due diligence processes for the currently small CIP program, but further improvements in governance and transparency are needed—especially for the real estate or enterprise investment option. - Recommendation: simplify the mechanism for transferring funds from the CIP Unit to the Treasury through the National Economic Fund. ### Authorities’ views on fiscal policy and reforms - Acknowledged necessity for fiscal consolidation but expressed a lower sense of urgency and a preference for more flexibility. - Emphasized successful debt issuance and do not perceive elevated debt levels and rollover needs as particularly vulnerable. - Plan to gradually increase the primary surplus to achieve the debt target of 60 percent of GDP by 2035. - Expressed interest in staff recommendations on a fiscal rule but currently favor a flexible approach. - Emphasized importance of policies to boost growth and a rebasing of GDP to improve the debt-to-GDP ratio. - On debt management: highlighted progress in extending average debt maturity and reducing average cost through increased concessional financing from multilateral and bilateral partners. - Supported proposed tax reform while stressing protection for vulnerable populations and the social/business costs of raising tax rates; timing is crucial given the political cycle. - Concurred with PIT proposals to increase progressivity and with need to improve tax administration; hoped more taxpayers could benefit from the ongoing tax amnesty to assist firms in unlocking credit access upon clearing outstanding tax arrears. - Agreed on the need to reform the NIC, willing to consider options but concerned about political risks of parametric reforms such as raising the statutory retirement age. ### Policy priorities — B. Strengthening the Financial System - Overall assessment: systemic risks from banking and other sectors are contained but further reforms are necessary to enhance resilience. - Banking sector: - Banks are adequately capitalized and have ample liquidity. - Credit unions are growing but individually small with limited links to the banking sector. - Downside risks to the economic outlook and sluggish credit growth warrant additional measures. ### Banking sector measures and NPLs - NPLs have declined but remain elevated with uneven progress across banks. - All banks should meet the ECCB’s 60 percent requirement on loan loss buffers. - Concerns: - Some banks make heavy use of prudential reserves rather than provisions—a practice not recommended by the Fund. - Proper NPL recognition and provisioning could result in a decline in bank capital ratios. - Recommended actions for banks with insufficient capital: reduce operating costs, sell assets, suspend dividends. - Asset allocation guidance: maintain prudence by investing in international government bonds and high-grade corporate bonds; avoid risky instruments such as international equities. ### Reducing NPLs and improving credit growth (multi-pronged approach) - Strengthen prudential oversight to incentivize write-off or restructuring of impaired loans: - Banks should promptly meet the ECCB’s 100 percent provisioning requirement for legacy NPLs; strengthen supervisory enforcement. - Supervisor could offer incentives such as increased capital charges or time limits for carrying legacy NPLs. - Enhance debt enforcement regimes and address information gaps: - Recent Insolvency Act expected to facilitate out-of-court debt workouts. - Remaining legislative gap: lack of foreclosure legislation—imperative to facilitate mortgage lending and inclusive home ownership. - Proposed unemployment insurance framework could reduce adverse effects of foreclosures but should be carried out within fiscal consolidation parameters. - The credit reporting bureau is expected to improve credit conditions but requires full participation of all banks and at least the large credit unions. - Improve market infrastructure for distressed debt and repossessed properties: - Strengthen regional cooperation to improve capitalization and capacity of the Eastern Caribbean Asset Management Company (ECAMC). - Government, banks, and realtors should develop a comprehensive cadaster of real properties to help valuations, revive the secondary real estate market, and develop a market for repossessed properties. - Reducing transfer taxes can support the market. ### Co-operative (CU) sector reforms - Passage of the Co-operative Societies Act introduces higher capital requirements for CUs and empowers the Financial Services Regulatory Authority (FSRA). - FSRA recommendations: - Streamline and tighten provisioning requirements—including phasing out use of collateral in calculation of provisions due to high uncertainty over effective collateral values—to align more with the ECCB. - Deposit insurance: - Recommended approach: wait for implementation of an ECCU-level deposit insurance system for banks, which can then be extended to CUs. - Pilot asset quality review has been successfully concluded and should be expanded to other large CUs. *Source: 1lcaea2025001-print-pdf - 11. The authorities expected higher growth in the near term and were more optimistic* ### 27. Strengthened monitoring of the insurance sector remains important amid rising ### 27. Strengthened monitoring of the insurance sector remains important amid rising climate risks ### Insurance sector risks and implications - Asset quality of the general insurance sector has improved. - Ongoing rise in global reinsurance rates for the property market may: - Constrain insurers' profitability. - Limit insurers' capacity to maintain underwriting practices. - Addressing climate risks in the ongoing discussion on ORSA guidelines would help ensure insurers' risk exposures remain within prudential limits. - Shrinkage of insurance coverage of real estate (in number of insured households and insurance coverage relative to home value) would: - Reduce insurers’ demand for long-term public debt. - Increase household and public reconstruction and recovery costs after a ND. ### AML/CFT, correspondent banking, and regulatory gaps - Continued progress is needed to address AML/CFT regulatory gaps to mitigate cross-border flow risks and help maintain correspondent banking relationships. - Reforms passed in response to the Caribbean Financial Action Task Force’s 2021 mutual evaluation include: - Enhanced customer due diligence measures for private sector entities subject to AML/CFT regulation. - Bringing virtual asset service providers under a suitable supervisory framework. - Remaining gaps to close include: - Entity transparency. - AML/CFT risk-based supervision of financial institutions, lawyers, and company service providers. - Priority actions: - Strengthen mutual legal assistance and cross-border sharing of information between competent AML/CFT authorities. - Address risks linked to regulatory incentives geared toward non-residents, including through the CIP, which continues to present money laundering and terrorist financing risks. ### ECCB safeguards and foreign exchange system - The ECCB has addressed most of the 2021 safeguards recommendations; the pending recommendation concerns legal reforms to strengthen the ECCB’s operational autonomy and align its Agreement Act with leading practices. - St. Lucia has not introduced changes in the foreign exchange system that: - (i) may give rise to exchange restrictions or MCPs pertaining to obligations under Article VIII; or - (ii) could be designed to limit capital flows and may need assessment under the revised Institutional View. - St. Lucia accepted the obligations of Article VIII, Sections 2(a), 3 and 4, in 1980, and maintains an exchange system free of restrictions on payments and transfers for current international transactions. ### Credit, NPLs, and supervisory actions - Authorities view weak bank credit growth and high NPLs as constraints on economic expansion; recent legislative actions include the Insolvency Act and pending foreclosure legislation to reduce mortgage-lending risks. - Authorities and supervisors emphasized: - Importance of enforcing provisioning rules at the ECCU level, the ECAMC, and the regional credit bureau. - The FSRA’s view that the new Co-operative Societies Act will enhance powers to address undercapitalized institutions. - FSRA support for strengthening provisioning rules for CUs, noting that phasing out collateral in provisioning calculations would currently be possible only for long-dated NPLs. - Staff recommendations and priorities: - Improve compliance with the ECCB’s provisioning requirements. - Address legislative gaps on foreclosures to improve access to credit. - Create a comprehensive property cadaster in collaboration with government, banks, and realtors. - Strengthen regional cooperation with the ECAMC to dispose of NPLs. - Ensure full participation from all banks and major CUs in the regional credit reporting bureau. - Extend the pilot asset quality review to other large CUs. - Continue financial literacy initiatives for households and micro firms. ### Labor market and minimum wage considerations - The introduction of the minimum wage is estimated to affect 13 percent of the employed population. - The statutory rate is set at 62 percent of mean wages. - Guidance and risks: - A high minimum-to-average wage ratio can be distortionary; minimum wages are assessed to be “non-distortionary” at between 25 and 50 percent of the average wage (IMF 2016). - Miscalibration risks include reduced competitiveness for smaller firms, fewer job opportunities for less-skilled workers, and greater informality. - Recommended mitigating measures: - Implement cyclical multiparty reviews and sector-specific differentiation. - Adopt active labor market policies. - Pursue targeted investments to address skill mismatches and youth- and gender gaps in salaries and labor force participation. - Develop a national skill registry, strengthen TVET institutions, and secure budget support for the Youth Economy Agency. ### Structural reforms, growth constraints, and public investment - Potential growth has been slowing since before the pandemic; addressing firm-cited obstacles—high finance costs and credit access, inadequate workforce education, and tax and customs compliance challenges—could boost productivity. - Government investment priorities include upgrading the airport, main hospital, cruise ports, road network, and public housing, and promoting digitalization and security. - Recommendations to support private-sector diversification and higher long-term growth: - Diversify tourism offerings and encourage tourist flows to inland communities, leveraging shared accommodation opportunities with improved government monitoring. - Expand business process outsourcing and higher human capital-content services given St. Lucia’s English-speaking workforce, political stability, and IT investments. - Slow the growth of public sector employment where appropriate. ### Climate adaptation, energy transition, and disaster resilience - St. Lucia is highly vulnerable to NDs and climate change, with significant fiscal and financial implications. - Key facts and actions: - St. Lucia is implementing a National Adaptation Plan with projected completion by 2028. - Staff analysis shows investment in resilience of at least 0.6 percent of GDP has long-term growth and fiscal benefits. - Additional fiscal resources should be allocated each year for a three-layered insurance framework. - St. Lucia is in discussions with the World Bank on obtaining a Catastrophe Deferred Drawdown Option—the third layer of the recommended insurance framework. - Development of geothermal energy could reduce electricity costs and oil price vulnerabilities and lift long-run growth. - St. Lucia is cooperating with the OECS Commission on geothermal development; exploratory drilling—with the World Bank providing technical expertise and financing—is expected to commence in 2025. - Institutional and financing gaps remain large despite regional leadership in climate response. ### Fiscal consolidation, tax reform, and fiscal rules - Staff appraisal: despite favorable near-term prospects, St. Lucia faces low structural growth and a challenging fiscal outlook; the fiscal deficit is relatively contained due to capital under-execution but is projected to widen over the medium term, with debt stabilizing well above the regional debt target. - Fiscal strategy recommendations: - Pursue decisive fiscal consolidation while safeguarding space for capital projects and climate resilience. - Tighten the fiscal stance over five years, then maintain a moderate primary surplus over the subsequent five years. - Increase tax revenue through comprehensive tax policy reform and enhanced tax administration, and control the wage bill. - Tax reform priorities: - Eliminate corporate tax exemptions, especially for the profitable tourism sector. - Broaden and equalize the VAT. - Make the PIT more progressive. - Resume and improve property taxation. - Modernize fuel taxation. - Enhance tax administration capabilities and cease tax amnesties. - Fiscal rules and framework: - Adopt well-designed fiscal rules (a primary balance floor, a ceiling on current expenditures, and alignment with the regional debt target), with narrowly defined escape clauses for NDs. - Integrate NIC reforms into a comprehensive fiscal strategy and improve transparency of the CIP. ### Summary of priority policy actions - Strengthen monitoring and prudential guidance in the insurance sector, including integrating climate risks into ORSA guidelines. - Close remaining AML/CFT regulatory gaps and enhance cross-border cooperation and information sharing. - Implement and enforce ECCB provisioning and foreclosure-related legislation to reduce NPLs and unlock credit growth. - Calibrate the minimum wage with stakeholders, and implement active labor market policies and targeted skill investments. - Accelerate structural reforms to reduce supply-side bottlenecks, diversify the economy, and improve the business environment for FDIs. - Allocate fiscal resources for climate adaptation and a three-layered disaster insurance framework; progress geothermal development (exploratory drilling expected to commence in 2025). - Initiate comprehensive tax reform and adopt fiscal rules to stabilize debt and strengthen fiscal resilience. *Source: 1lcaea2025001-print-pdf - 27. Strengthened monitoring of the insurance sector remains important amid rising* ### 43. Staff recommend that the next Article IV consultation be held on the standard 12- ### 43. Staff recommend that the next Article IV consultation be held on the standard 12-month cycle. ### Recent economic developments - Stay-over arrivals now expected above 2019 levels (figure note). - Public investment supporting growth (figure note). - Real GDP growth continued to recover, reducing the unemployment rate to a decade low (figure note). - Inflation, past its 2022 peak, is correcting swiftly (figure note). - Current account deficit narrowed, supported by the recovery in tourism (figure note). ### Fiscal sector developments - Despite the recovery, the fiscal deficit in 2023 worsened (figure note). - Revenues increased slowly and were outpaced by expenditures (figure note). - Public debt edged higher in 2023 (figure note). - Short-term debt is being reduced, with progress on overdrafts and outstanding payables (figure note). - Stock of Overdrafts and Outstanding Payables charted in EC$ Millions (time series Mar-16 to Sep-24) (figure note). ### External sector developments - Tourism continued to recover in 2023 (figure note). - Exports of goods almost reached 2019 levels (figure note). - Current account deficit continued to shrink in 2023, while net FDI increased (figure note). - Negative NIIP continued to improve (figure note). - REER has slightly appreciated over the last 12 months due to NEER appreciation (figure note). - St. Lucia remains a moderately competitive tourist destination, though it has become more expensive relative to its peers since 2020 (figure note). ### Financial sector developments - Banks remained profitable, supported by steady net interest income (figure note). - Deposit growth slowed but remained positive, underpinning ample liquidity at banks (figure note). - Banks have capital above the regulatory minimum, but bank NPL ratios—while improved—remained high (figure note). - Credit growth remained anemic despite the economic recovery (figure note). - Credit unions’ NPLs have declined but loan growth is still strong (figure note). ### Key statistics and projections (selected exact figures from Tables) - Area (sq. km): 616 - Infant mortality (per thous. live births, 2023): 14.4 - Human Development Index ranking (of 189 countries, 2022): 108 - Population Total (thousands, 2023, UN): 179.3 - Gross Domestic Product (2023): (millions of US dollars) 2,430; (millions of EC dollars) 6,561; (US$ per capita) 13,555 - Life expectancy at birth (years, 2023): 72.7 - Real GDP (annual percent change) 2020–23: -24.4; 11.6; 20.4; 2.2 - Consumer prices, period average 2020–23: -1.8; 2.4; 6.4; 4.5 - Unemployment rate (% annual average) 2020–23: 21.7; 21.9; 16.5; 14.0 - Central government revenue (percent of GDP) 2020–23: 21.7; 21.0; 21.0; 21.4 - Central government expenditure (percent of GDP) 2020–23: 33.2; 25.8; 22.7; 24.0 - Overall balance, incl. ND cost (percent of GDP) 2020–23: -11.4; -4.8; -1.6; -2.6 - Total public sector debt (percent of GDP) 2020–23: 95.0; 81.9; 73.4; 74.5 - Central government debt (percent of GDP) 2020–23: 89.8; 76.8; 68.9; 69.6 - Broad money (M2) end-of-period (annual percent change) 2020–23: -6.6; 14.9; 3.8; 11.3 - Current account balance (percent of GDP) 2020–23: -18.9; -11.9; -2.9; -1.9 - Exports of goods and services (percent of GDP) 2020–23: 30.1; 38.1; 55.3; 58.2 - Imports of goods and services (percent of GDP) 2020–23: -47.7; -47.8; -51.0; -52.4 - Net reserves assets (annual flow percent of GDP) 2020–23: -2.0; 8.3; -1.7; 2.5 - Gross external debt (percent of GDP) 2020–23: 79.0; 70.0; 63.0; 68.0 - Net imputed international reserves (Millions of US dollars, end of period) 2023: 371.5 - Months of imports of goods and services (net imputed reserves) 2023: 3.3 ### Central government operations (selected percent of GDP, fiscal year Apr–Mar) - Revenue 2020–23: 21.7; 21.0; 21.0; 21.4 - Tax revenue 2020–23: 19.0; 18.0; 18.0; 19.0 - Capital expenditure 2020–23: 5.6; 4.5; 2.8; 3.7 - Net Lending/Borrowing (Overall Balance, excl. ND Cost) 2020–23: -11.4; -4.8; -1.6; -2.6 - Net Lending/Borrowing (Overall Balance, incl. ND Cost) 2020–23: -11.4; -4.8; -1.6; -2.6 - Primary balance (excl. ND) 2020–23: -7.6; -1.7; 1.2; 0.7 - Central government debt (percent of GDP) 2020–23: 89.8; 76.8; 68.9; 69.6 - Public sector debt (percent of GDP) 2020–23: 95.0; 81.9; 73.4; 74.5 - Nominal GDP fiscal year (EC$ millions) 2023: 6,653 ### Balance of payments (selected exact figures, percent of GDP) - Current Account Balance 2020–23: -18.9; -11.9; -2.9; -1.9 - Tourism (percent of GDP) 2020–23: 22.7; 30.5; 46.5; 49.4 - Net Income, o.w. 2020–23: -2.4; -4.0; -8.4; -8.9 - Capital Account 2020–23: 1.6; 1.6; 1.9; 1.7 - Financial Account 2020–23: -14.3; -8.3; -1.1; -0.2 - Direct Investment 2020–23: -8.2; -6.8; -2.2; -5.8 - Net Reserve Assets 2020–23 (Millions of US dollars, end of period): 224.3; 350.7; 309.9; 371.5 - GDP (in US$ millions) 2023: 2,430 ### Monetary and banking system (selected exact figures) - Net Domestic Assets (percent of GDP) 2020–23: -14.2; 2.9; 1.1; -19.3 - Broad Money (M2) 2020–23 (12-month percent change): -6.6; 14.9; 3.8; 11.3 - Net Foreign Assets (12-month percent change) 2020–23: 26.4; 29.2; 25.1; 36.9 - ECCB policy rate (percent, OEP): 2.00 (listed across periods) - Banking system: Nonperforming loans to total gross loans (percent) 2022: 13.8; 2023: 14.2 - Return on Avg Assets 2018–2023: 1.9; 1.5; 0.8; 0.8; 1.2; 1.4; 1.3 ### Labor market (selected exact figures, 2017–23) - Unemployment rate (percent) 2017–2023: 20.2; 20.2; 16.8; 21.7; 21.9; 16.5; 14.0 - Youth unemployment rate (percent) 2017–2023: 38.5; 36.3; 31.6; 38.2; 37.0; 26.8; 25.0 - Labor force participation rate (percent) 2017–2023: 71.4; 71.4; 71.0; 68.8; 70.5; 71.3; 71.6 ### External sector assessment (Annex I) - Overall assessment: External position of St. Lucia in 2023 is assessed as broadly in line with the level implied by fundamentals and desirable policies. - Current account (2023): -1.9 percent of GDP; cyclically adjusted CA: -1.4 percent of GDP (after adjusting for natural disaster factor). - Net IIP: deficit declined from 72 percent of GDP in 2020 to 54 percent of GDP in 2023; projected at 36 percent of GDP in 2029 versus 41 in 2019. - Foreign assets composition (2023): Gross Assets: 102 (percent of GDP); Debt Assets: 35; Gross Liabilities: 156; Debt Liabilities: 26; NIIP: -54 (percent of GDP). - Current account background: CA deteriorated to -18.9 percent of GDP in 2020 and narrowed to -1.9 percent of GDP in 2023. - Model assessments: EBA-lite REER model indicates REER undervalued by 5.5 percent in 2023; EBA-lite CA model shows REER gap -8.3 percent and CA gap 2.9/1.9 (table: CA-Actual -1.9; Cyclical contributions (-) -0.4; Natural disasters and conflicts (-) -0.1; Adjusted CA -1.4; CA Norm (from model) 2/-4.2; Adjusted CA Norm -4.2; CA Gap 2.9/1.9; o/w Relative policy gap 1.2; Elasticity -0.3; REER Gap (in percent) -8.3 / -5.5). - Capital and financial accounts: Net FDI inflows and net other investment inflows increased to 5.8 percent of GDP and -3.8 percent of GDP in 2023, respectively; net FDI projected to decline gradually to 5.3 percent of GDP. - Reserves: Net imputed reserves improved to 15.3 percent of GDP in 2023; imputed reserves exceeded typical benchmarks of 20 percent of broad money and three months of prospective imports (assessment note). ### Policy implications and recommended priorities (from Annex I and body text) - Address competitiveness challenges: inadequate workforce education and high unit labor costs, particularly in non-tourism sectors. - Implement supply-side reforms to boost competitiveness amid low structural growth. - Continue efforts to reduce NPLs and close legislative gaps to revive private credit growth. - Monitor climate change and natural disaster exposure as downside risks to FDI projections. - Maintain prudent reserve/FX policies under the currency board arrangement and monitor imputed reserves against benchmarks. *Source: St. Lucia country report materials and annexes as provided in the supplied content.* ### Annex II. Risk Assessment Matrix ### Annex II. Risk Assessment Matrix ### Conjunctural Risks - Intensification of regional conflicts - Likelihood: High - Impact: Medium - Policy Response (ST): Diversify tourism revenues. Monitor financial risks to FDI. Monitor the banking sector development in coordination with ECCB and strengthen national supervision of CUs. - Commodity price volatility - Likelihood: High - Impact: Medium - Policy Response (MT): Provide temporary and targeted transfers to the vulnerable. Allow a gradual pass-through of international prices and phase out generalized subsidies. Accelerate transition to renewable energy sources. - Social discontent - Likelihood: High - Impact: Medium - Policy Response (ST): Provide temporary and targeted support to the vulnerable. Strengthen the labor market and provide more diversified and higher-quality job opportunities. - Global growth surprises - Scenarios: - Slowdown: Medium likelihood, High impact (ST, MT policy orientation suggested) — risks include supply disruptions, tight monetary policy, rising corporate bankruptcies, deeper real estate contraction, adverse spillovers through trade and financial channels. - Acceleration: Medium likelihood, Low impact — positive supply-side surprises, monetary easing, productivity gains from AI, or stronger EMDE performance could ease global financing conditions. - Policy Responses: Enhance competitiveness to support economic recovery. Diversify tourism revenues. Monitor the financial sector development, including risks to FDI, in coordination with ECCB. - Systemic financial instability - Likelihood: Medium - Impact: Medium - Policy Response (ST): Monitor asset quality and ensure adequate loan loss provisioning. Vigilantly monitor the financial sector development in coordination with ECCB. - Sovereign debt distress - Likelihood: Medium - Impact: Medium - Policy Response (ST): Strengthen the fiscal position, including through comprehensive tax reform, and communicate credible medium-term fiscal plan, anchored in sound fiscal rules. Monitor the banking sector development in coordination with ECCB and strengthen national supervision of CUs. Note: The RAM defines relative likelihood as staff’s subjective assessment (“low” = probability below 10 percent, “medium” = probability between 10 and 30 percent, and “high” = probability between 30 and 50 percent). Conjunctural shocks and scenarios are those likely over a shorter horizon (between 12 to 18 months). ### Structural Risks - Deepening geoeconomic fragmentation - Likelihood: High - Impact: Medium - Policy Response (MT): Enhance international cooperation and competitiveness to support economic recovery and cross border collaboration. - Cyberthreats - Likelihood: High - Impact: Medium - Policy Response (MT): Enhance digital security in public and private platforms. - Climate change - Likelihood: Medium - Impact: High - Policy Response (ST): Invest in resilient infrastructure and implement a multi-layered insurance framework against NDs. Proceed with energy transition initiatives, including geothermal. ### Domestic Risks - Delays in infrastructure investment - Likelihood: Medium - Impact: High - Policy Response (ST, MT): Contain growth of current expenditures, including through the implementation of fiscal rules and structural reforms. - Disorderly fiscal adjustment - Likelihood: Medium - Impact: High - Policy Response (MT): Adopt a fiscal rule and implement tax reforms to ensure adequate fiscal adjustment and debt sustainability. - Financial sector weakness - Likelihood: Medium - Impact: Medium - Policy Response (MT): Monitor asset quality and ensure adequate loan loss provisioning. --- ### Debt Sustainability and Long-Term Risks (Annex III highlights) ### Overall assessment - Final assessment: The overall risk of sovereign stress is high. - Commentary: "St. Lucia is assessed to be at a high overall risk of sovereign stress. The debt-to-GDP ratio has decreased rapidly from 95 percent in FY2020 to 74.5 percent in FY2023 thanks to a swift tourism-led recovery and inflation surprises. However, given that growth is projected to moderate to potential, unless the government implements a substantial fiscal consolidation, debt is expected to stabilize at 74 percent of GDP in the medium term, much higher than the 60 percent of GDP ECCU-wide debt target. 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), while high long-term risks stem from large amortization risks, climate adaptation risks, and demographic risks. Natural disasters present a recurrent threat to fiscal stability." ### Key baseline fiscal and debt projections (percent of fiscal year GDP unless indicated otherwise) - Public debt series (Actual and projections): - "Public debt74.572.772.372.773.273.673.673.773.973.973.9" - Change in public debt: - "Change in public debt1.1-1. 8-0. 40.30.50.4-0. 10.20.10.00.0" - Contribution of identified flows: - "Contribution of identified flows-3. 3-2. 0-0. 50.40.80.70.20.40.40.30.2" - Primary deficit: - "Primary deficit-0. 7-1. 3-0. 60.10.0-0. 3-0. 8-0. 8-0. 8-0. 8-0. 8" - Noninterest revenues: - "Noninterest revenues21.322.222.122.021.921.821.821.821.821.821.8" - Noninterest expenditures: - "Noninterest expenditures20.720.921.522.222.021.521.021.021.021.021.0" - Automatic debt dynamics: - "Automatic debt dynamics-2. 6-3. 90.70.61.11.41.51.51.51.41.4" - Real growth and inflation (memos): - "Real GDP growth (percent)2.63.52.72.31.81.51.51.51.51.51.5" - "Inflation (GDP deflator; percent)1.61.81.92.32.52.52.52.52.52.52.5" - Gross financing needs: - "Gross financing needs12.611.113.914.413.412.811.010.612.415.115.3" - Of which: debt service: - "of w hich: debt service13.412.514.614.313.413.211.811.513.216.016.2" - Memo effective interest rate: - "Effective interest rate (percent)0.00.05.75.45.65.75.85.85.85.75.7" - Commentary on baseline: "The public debt-to-GDP ratio is to projected to remain elevated at around 74 percent, well above the 2035 regional debt target commitment of 60 percent. Slowing real GDP growth, and an unfavorable interest rate to inflation differential, will make a reduction in public debt less likely unless decided fiscal consolidation measures are implemented. Alternative simulations where interest rates on medium-to-long term external debt issuances are higher by 1-1.5 percentage points yield similar assessments to our baseline scenario, albeit with marginally higher terminal debt-to-GDP ratios (about 1-2 p.p. respectively)." ### Medium-term and long-term risk modules: selected findings - Medium-term risk analysis: "The overall risk of sovereign stress is high, reflecting a high underlying level of debt and vulnerabilities in the medium and the long term. Medium-term risks are assessed as high against a moderate overall mechanical signal, due to high debt fanchart signal and the vulnerability in the financial sector (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." - Large amortization / liquidity risk: "The large amortization submodule is suggesting a liquidity risk beyond the medium-term horizon." ### Demographics, pensions, and health fiscal impacts - Pensions: "In the absence of reforms, the pension fund’s reserves would be depleted around 2051, resulting in an underfunding gap of around 165 percent of GDP in 60 years, which would require fiscal outlays of about 3 percent of GDP over the next 60 years." - Health/demographics: "The health module suggests that with increase in healthcare costs related to demographic change, debt-to-GDP ratio could increase by 35 p.p. by 2053. With additional 0.6 pp of growth in healthcare costs, debt-to-GDP ratio could increase by 45 p.p. more, further increasing long term sustainability risks." ### Climate adaptation fiscal impact - Standard/customized findings: "The customized scenario, assuming an adaptation cost of 1.3 percent of GDP, 0.7 p.p. of which is already included in the baseline scenario, suggests that debt-to-GDP could increase by 79 p.p. by 2053, further increasing long term sustainability risks." --- *Annex II. Risk Assessment Matrix; Annex III. Debt Sustainability Analysis (selected tables and commentary) from the provided IMF content unit.* ### Annex IV. Implementation of Past Fund Advice ### Annex IV. Implementation of Past Fund Advice ### Fiscal Policies — Findings on Authorities' Actions - Recommendation: Implement medium-term adjustment of 2.5-3.5 percent of GDP to reach the regional debt target and increase public investment. - Status: Pending/Mixed. - Observations: - The fiscal deficit has widened in FY2023 and in the FY2024 budget, despite several measures implemented. - Debt is projected to remain high, at 74 percent of GDP over the MT in the baseline. - Authorities imposed a 2.5 percent health and security levy from August 2023 and increased excises on tobacco products amid the lack of progress on the VAT. - A tax amnesty, which helped the collection of arrears, was extended for another year, but it can disincentivize compliance amid feeble enforcement. - Authorities are evaluating taxation of shared accommodations to even the competitive field. - Recommendation: Increase the VAT and excise on fuel. - Status: Pending. - Observations: - No measures have been undertaken. - Contrary to Fund advice, temporary VAT exemptions on medical equipment and construction materials were introduced. - Recommendation: Contain growth in the wage bill. - Status: Work in progress. - Observations: - In FY2023, the wage bill in percent of GDP was smaller than the prior year. - It is expected to decompress in the baseline. - Recommendation: Modernize public financial management, digitalize public services, and strengthen tax compliance. - Status: Work in progress. - Actions: - Adoption of new IT systems (Questica, CLOUDSUITE); transition away from checks as means of payment. - Creation of an online platform (DigiGov) as one-stop digital access to over 150 services across 8 ministries. - Modernizing the Inland Revenue Department through innovative use of new ICT and plans to encourage digitalization of tax filing and payment. - Recommendation: Implement parametric reforms of the pension fund to reduce long-term fiscal risks. - Status: Pending. - Authorities’ proposal: - National pension fund proposed gradual increases in contribution rates and the early retirement age, which would postpone the fund’s depletion date from 2051 to 2080. - Recommendation: Adopt a fiscal rule combining a primary balance floor and a recurrent spending ceiling. - Status: Pending. - Observation: Authorities are analyzing fiscal rules’ options but currently prefer flexibility. - Recommendation: Reduce high debt rollover needs and refinancing risks. - Status: Work in progress. - Actions and observations: - Efforts to lengthen average maturities and reduce cost of debt, primarily through a larger share of concessional financing. - Nearly eliminated expensive overdrafts. - Debt Management Act enacted in April 2024 to consolidate and modernize laws and strengthen public debt management. - Blue bond initiative put on hold because of high global long-term interest rates and technical complexity. - Recommendation: Spend revenue from Citizenship by Investment Program (CIP) cautiously and avoid relying recurrent spending on CIP financing. - Status: Mixed. - Observations: - Progress to bolster the CIP, but improvement in governance and transparency remains necessary. - Regional memorandum of agreement on pricing, due-diligence, and information sharing approved in June 2024. ### Financial Sector Policies — Findings on Authorities' Actions - Recommendation: Strengthen enforcement of provisioning requirements and speed up disposal of long-standing NPLs. - Status: Mixed. - Observations: - Banks have reduced NPLs in aggregate, increased provisions, and made progress with NPL disposals, but the stock of legacy NPLs remains high. - Recommendation: Close legislative gaps, including modernization of foreclosure legislation. - Status: Mixed. - Observations: - Regional credit bureau is operational, but time is needed to collect and collate credit score data. - Bankruptcy and Insolvency Bill (under review since 2020) was passed in September 2024. - Foreclosure legislation is still lacking. - Recommendation: Continue reforms of AML/CFT laws and practices. - Status: Work in progress. - Action: Regional memorandum of agreement on pricing, due-diligence, and information sharing approved in June 2024. - Recommendation: Strengthen regulation and supervision of Credit Unions (CUs) and enforcement by the regulator. - Status: Work in progress. - Actions: - Asset quality review for the largest CU completed in 2024, with plans to expand to others. - Co-operative Societies Act passed in October 2024 to strengthen requirements and empower the national supervisor (in line with harmonized regional regulations). ### Structural Policies — Findings on Authorities' Actions - Recommendation: Continue implementation of government physical, digital, and social investment plan to address bottlenecks to growth. - Status: Work in progress. - Investment focus: Health, education, digital infrastructure, and physical infrastructure. - Physical infrastructure projects: - Upgrading road networks, upgrading the airport, building a new cargo seaport, improving the cruise ship port, and upgrading justice and policing facilities. - Renovating the main hospital and several school facilities; transforming four secondary schools into TVET-dedicated schools. - Digital initiatives: - Modernization and provision of broadband internet access free of charge through the GiNet project; provision of laptops to secondary school students. - Energy initiatives: - Updating the island’s energy production mix with incentives for solar energy and EV acquisition. - Exploratory drilling for a World Bank-supported geothermal energy project to start in 2025. - Recommendation: Improve labor force participation and productivity. - Status: Work in progress. - Actions: - Initiatives to develop TVET skills, including with aid of the OECS, and planning for a national skill registry in collaboration with employers. - Youth Economy Agency (YEA) facilitating small-scale credit for young entrepreneurs and signed a Technical Agreement with Taiwan Province of China for a grant of $1.2 million to support youth training. - Collaboration between Ministry of Agriculture and YEA to encourage youth participation in agriculture using modern production techniques. ### Annex V — Tax Reform Key Aspects and Sequence (Part I: General Principles) - Tourism taxation principles: - Substantial economic rents associated with tourism; charging high fees for access to scarce, location-specific features is efficient. - Taxation focus: tourist accommodation and charges for publicly provided activities or access to unique cultural/natural features. - Administrative challenges: accommodation taxation complicated by transactions processed outside the destination and profit shifting by international hotel chains; scattered vacation rentals are harder to monitor. - Preferred tax bases for tourism-dependent Caribbean economies: - VAT: - Well-designed VAT is preferred for raising substantial revenues with the smallest negative effect on growth. - Best practice: collect VAT on broadest possible range and provide input credits to registered taxpayers. - Recurrent property taxes: - Efficient and progressive; taxing land is growth friendly; taxing improved residential property is desirable. - Personal income tax: - A potent revenue source and mechanism for improving income distribution; fairness concepts: horizontal and vertical equity. - Damaging taxes to avoid or reform: - Production/transaction-based taxes insensitive to profits (e.g., Stamp Duty) and unrelieved taxes on business inputs (e.g., customs duties) are especially harmful for growth. - Tax incentives: minimizing economic and fiscal damage - Preferably avoid incentives; if used, relate them to bases that are less robust or more economically damaging. - Recommended approaches: - Transaction Taxes: consider exemptions or repeal of stamp duties and property transfer taxes. - Corporate Income Tax (CIT): prefer incentives tied to costs (e.g., expensing capital investments; extended loss carry-forward) rather than profit-based holidays; consider limits on interest deductibility. - Non-Resident Withholding Taxes: full exemption on dividends could be considered; exemptions for interest, royalties, management services should be time-limited and capped. - Customs Tariff: full exemption on business inputs advisable; eliminate relief for imports consumed by project employees. - Avoid incentives for efficient, resilient tax instruments: - No exemptions for alcohol, tobacco, or fossil fuels (excises). - VAT and recurrent property tax: ideally no exemptions; narrow exceptions only for targeted poor support. - Personal income tax: avoid exemptions for employees of favored projects. - Annex V. Table 1 (summary of tax-base impacts) — selected textual conclusions preserved: - Recurrent Property Tax: growth friendly for land; recurrent taxation of improved value of residential property helps achieve progressivity; recommended. - VAT: Growth friendly; helps achieve progressivity; minimal leakage; essential for small Caribbean countries. - Customs Tariffs: Damaging for growth; minimal leakage; maybe recommended. - Stamp Duties: Damaging; high leakage; not recommended. - Excise Taxes: Depends on good design; manageable leakage; recommended for fossil fuels, tobacco, alcohol. - Personal Income Tax: Somewhat negative for growth; best mechanism for progressivity; recommended. - Corporate Income Tax: Negative for growth; supports progressive PIT; substantial tax planning opportunities; recommended unless top marginal PIT rate is low. ### Annex V — Part II: Key Recommendations for Tax Policy Reform in St. Lucia - Overall recommendation: - Implement a comprehensive tax policy reform (based on technical assistance reports) to boost tax revenue, improve equality, and reduce distortions. - Rationale: St. Lucia has a significant number of tax expenditures, low tax revenue, and widespread regressivity; exemptions have been growing and eroding the tax base; with growth above potential in the near-term, it is opportune to redesign the tax system. - Corporate Income Tax (CIT): - Problem: CIT revenue especially low due to wide-ranging tax incentives; hospitality sector highly profitable while benefiting from generous incentives. - Recommendation: - Quickly conclude review of tax concessions given implementation of OECD pillar II with a view to abolish tax concessions. - Abolishment of CIT concessions could yield 2-4 percent of GDP. - Consider lowering the CIT rate while allowing full expensing of capital expenditures and loss carryforwards. - Introduce a simplified corporate income tax regime for SMEs and micro firms. - Adopt a rules-based framework for incentives and establish a monitoring unit. - Value-Added Tax (VAT): - Recommendation: - Reverse main VAT rate from current 12.5 percent to the pre-pandemic 15 percent. - Reduce the high VAT threshold. - Minimize zero-VAT items. - Increase tourism VATs from current rates of 7 and 10 percent. - These measures together could generate at least 2 percent of GDP. - A uniform, broad VAT would serve as main, cost-effective revenue source for shocks. - Personal Income Tax (PIT): - Problem: Excessive allowances, deductions, and exemptions reduce revenue and are often regressive. - Recommendation: - Replace allowances and deductions that reduce taxable income with tax credits. - Eliminate regressive deductions. - Tax dividends, rental income, capital gains, and interest income (currently exempt). - Introduce a fourth income tax bracket to increase progressivity. - Recurrent Property Taxes: - Problem and facts: - Recurrent property taxes currently low. - Exemption on Land and House Tax (initially for residential properties in 2017) has been extended until now. - Only about 50 percent of residential properties are registered. - Newly built commercial properties are exempt for three years. - Recommendation: - Eliminate these exemptions. - Update and expand the cadaster of real properties. - Consider introducing inheritance, gift, and net wealth taxes to increase progressivity and revenue. - Reduce transfer taxes, which are currently too high and harm the secondary real estate market. - Fuel and Excises: - Fuel tax reform recommendation: - Raise fuel VAT from current 0 percent to the statutory rate and restore the fuel excise to the pre-pandemic level; this would generate at least 0.6 percent of GDP. - Implement a smoothing pass-through mechanism from international oil to domestic fuel prices to protect revenue long-term. - Use higher fuel VAT and excise to help finance climate adaptation and reach carbon emission targets. - Other excises: - Increase excises on alcohol and tobacco. - Introduce an excise on sweetened beverages to address health externalities and generate revenue for health spending. - Additional notes: - The IMF and World Bank technical assistance reports underpin the sequencing and content of these recommendations. *Source: Annex IV and Annex V (Part I and Part II) — "Implementation of Past Fund Advice" and "Tax Reform Key Aspects and Sequence" as presented in the provided content.* ### 13. The tax reform should prioritize the policy areas and steps with the largest ### 13. The tax reform should prioritize the policy areas and steps with the largest potential to raise revenue, while considering the impacts on growth and equity, as well as implementation cost ### High-priority reforms (short- to medium-term) — summary of recommendations and rationale - Corporate Income Tax (CIT) - Recommendations: - Eliminate tax exemptions and holidays. - Reform tax incentives. - Allow for full expensing of capex and loss carryforwards and put a cap on interest deductibility. - Rationale/Estimated impact: - Improve fairness and make taxation more investment friendly. - Raise tax revenue by 2-4 percent of GDP. - Implementation notes: - Would likely yield the largest increase in revenue but would require substantial legislative changes which could take time. - Completion of a thorough CIT reform would allow the authorities to consider lowering the statutory CIT rate towards 25 percent (see medium-term sequencing). - Value Added Tax (VAT) - Recommendations: - Bring the rates on hotel accommodation (7 percent) and other tourism services (10 percent) to the statutory rate. - Raise the statutory rate from 12.5 percent to 15 percent. - Reduce the VAT threshold. - Rationale/Estimated impact: - Improve fairness. - 1.8 percent of GDP. - Personal Income Tax (PIT) - Recommendations: - Eliminate regressive tax breaks. - Replace pre-tax breaks with flat tax credits. - Tax dividends, rental income, capital gains, and interest income. - Rationale/Estimated impact: - Raise revenue, reduce regressivity. - Medium-term consideration: - Consider introducing the fourth income bracket to increase progressivity. - Property taxes - Recommendations: - Eliminate the 2017 exemption on residential properties and shorten the exemption on new residential properties from 3 years. - Cut transaction taxes. - Rationale/Estimated impact: - Raise revenue, reduce regressivity. - Revive the secondary real estate market. - Implementation note: - Higher and broader recurrent property taxes would tax the economy in a growth-friendly manner; as an offset, significant cuts in transaction taxes are recommended. - Fuel taxes - Recommendations: - Raise the fuel VAT rate from 0 percent to 15 percent. - Eliminate the subsidy on LPG. - Tax kerosene. - Rationale/Estimated impact: - Promote energy transition. - 0.6 percent of GDP. - Implementation note: - Better fuel taxation would reduce negative externalities and finance both the green transition and social investment. - Health taxes - Recommendations: - Raise excises on alcohol and tobacco (short-term). - Introduce an excise of sweetened beverages (short- to medium-term). - Rationale/Estimated impact: - Address negative health externalities, fund expenditure on health. - 0.1 percent of GDP (from raising excises on alcohol and tobacco). ### Medium-term and sequencing measures (2nd priority / medium-term) - CIT - Introduce simplified regimes for SMEs and micro firms to reduce informality. - After thorough reform of exemptions and incentives, consider lowering the CIT rate from 30 percent toward 25 percent to promote growth and increase compliance. - VAT - Gradually eliminate temporary and permanent zero-rated VAT items, supplemented by targeted social transfers to increase tax revenues and reduce VAT distortions while avoiding negative distributional impact. - Property taxes - Update and expand the cadaster of real properties. - Consider progressive tax rates and the introduction of inheritance and gift taxes to increase progressivity. - Fuel taxes - Create expenditure-based green tax incentives on renewable energy to promote the energy transition. - Health taxes - Introduce an excise of sweetened beverages to address negative health externalities and fund health expenditure. ### Implementation cost, timing, and complementary measures - Timing priorities noted in sequencing: - Multiple measures are classified as 1st/Short- to medium-term or 1st/Short-term for expedient near-term action while broader legislative work continues. - Cost and ease of implementation: - Some elements require substantial legislative change (e.g., full CIT reform) and may take time. - Other elements carry little implementation cost if they avoid extending existing exemptions (e.g., expanding recurrent property taxes). - Complementary policy recommendations: - Cut transaction taxes as an offset to higher recurrent property taxes to revive the secondary property market and support bank lending. - Simplification of the CIT and PIT would help reduce informality. - Better fuel and health taxation to finance green transition and social investment. ### Contextual fiscal objectives and constraints (from country engagement) - Fiscal objective: - St. Lucia is committed to reaching the regional debt target of 60 percent of GDP by 2035. - Domestic constraints to revenue mobilization: - Political and public resistance to higher taxes and lower spending. - Regional tax competition, a low-tax burden culture, tax evasion and avoidance, tax enforcement challenges, and a habit of conceding tax exemptions depress tax revenues. - Staff engagement and capacity building: - Staff recommends decisive fiscal consolidation over the next 10 years, a tax reform, and introduction of fiscal rules. - Staff plans to advise on designing an efficient, fair, and effective tax system, and advocates strengthening tax administration capabilities, including targeted capacity development by FAD, CARTAC, and the World Bank. *Source: Excerpt from “13. The tax reform should prioritize the policy areas and steps with the largest potential to raise revenue...” (Annex V, Table 2 and related text).* ### Annex VII. Table 3. St. Lucia: Table of Common Indicators Required for Surveillance ### Annex VII. Table 3. St. Lucia: Table of Common Indicators Required for Surveillance (As of November 2024) ### Data reporting and timeliness - Table status: "Table of Common Indicators Required for Surveillance" (As of November 2024). - Data Standards Bulletin Board note: Based on the information from the Summary of Observance for SDDS and SDDS Plus participants, and the Summary of Dissemination Practices for e-GDDS participants, available from the IMF Dissemination Standards Bulletin Board (https://dsbb.imf.org/). For those countries that do not participate in the Data Standards Initiatives, as well as those that do have a National Data Summary Page, the entries are shown as "..." - Frequency and timeliness coding used in table: (“D”) daily; (“W”) weekly or with a lag of no more than one week after the reference date; (“M”) monthly or with lag of no more than one month after the reference date; (“Q”) quarterly or with lag of no more than one quarter after the reference date; (“A”) annual.; ("SA") semiannual; ("I") irregular; ("NA") not available or not applicable; and ("NLT") not later than. - Specific indicators listed (table headings retained): Exchange Rates; International Reserve Assets and Reserve Liabilities of the Monetary Authorities; Reserve/Base Money; Broad Money; Central Bank Balance Sheet (Including currency and maturity composition); Consolidated Balance Sheet of the Banking System; Interest Rates (Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds); Consumer Price Index; Revenue, Expenditure, Balance and Composition of Financing — General Government (The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments); Revenue, Expenditure, Balance and Composition of Financing — Central Government; International Investment Position; Stocks of Central Government and Central Government-Guaranteed Debt (Including reserve assets pledged or otherwise encumbered, as well as net derivative positions); External Current Account Balance; Exports and Imports of Goods and Services; GDP/GNP; Gross External Debt; Data Provision to the Fund; Publication under the Data Standards Initiatives through the National Summary Data Page. - Notes: “Both market-based and officially determined” and “Foreign, domestic bank, and domestic nonbank financing” text preserved in indicator definitions. Encouraged/required frequencies: Encouraged frequency of data and timeliness of reporting under the e-GDDS and required frequency of data and timeliness of reporting under the SDDS and SDDS Plus. Any flexibility options or transition plans used under the SDDS or SDDS Plus are not reflected. ### Fund relations and financial position - Membership Status: Joined: November 15, 1979; Article VIII. - Quota (General Resources Account): Quota 21.40 SDR Million — Percent of Quota 100.00. - Fund holdings of currency: 19.87 SDR Million — Percent of Quota 92.85. - Reserve Tranche Position: 1.53 SDR Million — Percent of Quota 7.16. - SDR Department: Net cumulative allocation 35.08 SDR Million — Percent of Allocation 100.00; Holdings 22.53 SDR Million — Percent of Allocation 64.23. - Outstanding Purchases and Loans: RCF Loans 21.40 SDR Million — Percent of Quota 100.00. - Latest financial arrangement (RCF): Date of Commitment April 28, 2020; Date of Drawn/Expired April 30, 2020; Amount Approved (SDR million) 21.40; Amount Approved (SDR million) 21.40. - Overdue Obligations and Projected Payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs) — Forthcoming: - 2024: Principal 2.14 - 2025: Principal 4.28 - 2026: Principal 4.28 - 2027: Principal 4.28 - Charges/Interest (each year listed): 0.42 for 2025, 0.42 for 2026, 0.42 for 2027, 0.42 for 2028 - Total (each year listed): 2.56 for 2024; 4.70 for 2025; 4.70 for 2026; 4.70 for 2027 - Implementation of HIPC, MDRI, CCR: Not Applicable. ### Exchange rate framework and safeguards - De jure exchange rate arrangement: Currency board. - Currency union: St. Lucia participates in a currency union with seven other members of the ECCU and has no separate legal tender. - Peg: The Eastern Caribbean dollar is pegged to the U.S. dollar under a currency board arrangement at EC$2.70 per U.S. dollar. - Article VIII obligations: St. Lucia has accepted the obligations of Article VIII, Sections 2(a), 3 and 4, and maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions. - Safeguards assessment: The Eastern Caribbean Central Bank (ECCB) is subject to a full safeguards assessment on a four-year cycle. An update assessment was completed in August 2021 and found that the ECCB has maintained strong external audit and financial reporting practices aligned with international standards, with further improvements in internal audit capacity. Legal reforms were recommended to further strengthen operational autonomy of the ECCB and align its Agreement Act with leading practices. The issuance of digital currency (DCash) introduces new risks requiring additional controls and oversight; the assessment made recommendations to enhance the related project-governance framework. ### Technical assistance (select entries and areas) - Macroeconomic Programming and Analysis: - July 2024 (CARTAC): Building capacity in medium-term macro-fiscal frameworks. - February 2022 (ICD and CARTAC): Provide ECCU member countries with a customized workshop on public debt dynamics. - October 2021 (ICD and CARTAC): Fiscal Frameworks Course (offered to all CARTAC countries). - April 2016 (CARTAC): Updating the Macro Framework and drafting the medium-term fiscal framework. - National Accounts: - September 2024 (CARTAC): Developing Expenditure-based GDP. - January-February 2020 (CARTAC): Follow up mission of national statistics; Compile rebased GDP estimates and update of the SUT benchmark estimates. - September 2015 (CARTAC): Expand and improve the national accounts, including producing SUT and rebasing the GDP estimates. - Price Statistics: - September 2024 (CARTAC): Producer Price and Trade Price Statistics (PPT). - April 2024 (CARTAC): Real Sector—Prices-PPI. - November 2022 (CARTAC): Updating CPI. - External Sector Statistics: - October 2024 (CARTAC): Balance of payments and IIP—Source Data. - October 2023 (CARTAC): Balance of payments and IIP—Source Data. - March 2021 (CARTAC): Data collection continuity in the context of the COVID-19 pandemic. - January 2020 (CARTAC): Assist on the backcasting for balance of payments data for 2000-13, addressing methodological changes reflected in the 2014-18 following the BPM6. - Tax Reforms and Revenue Administration (select missions): - September 2024 (CARTAC): Digital technologies better aligned with strategic objectives/Data Cleansing (HYBRID). - September 2024 (CARTAC): Taxpayers meet their payment obligations as required by law/Collection and Enforcement. - May 2024 (CARTAC): Public Sector Accounting Standards (IPSAS) Support. - November 2023 (CARTAC): Development of a Request for Proposal (RFP) for system acquisition. - November 2021 (FAD and CARTAC Revenue Administration): Provide a ‘Tax Administration Diagnostic Assessment Tool’ (TADAT) diagnostic. - Expenditure Rationalization and PFM Reforms: - September 2024 (CARTAC): Implementing a revised and modern Chart of Accounts (CoA). - April 2022 (CARTAC): A Roadmap for Treasury Reform. - July-August 2021 (CARTAC): Strengthening Budget Planning and Preparation. - Financial Sector (select missions): - September 2024 (CARTAC): Guidelines on Corporate governance and ERM—Insurance. - May 2024 (CARTAC): RBS Implementation Credit Unions and IFRS 9. - October 2019 (CARTAC): Implementation of Risk-based supervision across non-bank financial institutions. - Debt Management: - February 2024 (CARTAC): Debt Management MTDS and Green Financing. - June 2021 (CARTAC): Debt Management strategy and Annual Borrowing Plan (joint workshop for the ECCB and ECCU countries). ### Recent developments and economic outlook (authorities' statement) - Growth: - Growth for 2024 is projected at 3.7 percent. - Growth in 2025 is estimated at 2.8 percent. - Tourism: 2024 was a record-breaking year for tourism arrivals; authorities project continued strong capital project/FDI pipeline and tourism growth with higher airlift expected for the near-term. - Inflation: - Peak inflation: 6.4 percent. - Inflation fell to 0.8 percent in June 2024. - Inflation is expected to stabilize around 2 percent as global input costs normalize. - Labor market: - Unemployment has dropped to decade lows (no numeric value provided in source). - Youth unemployment: described as "still very high" but reducing. - Authorities intend to implement an unemployment insurance scheme, complementing recent minimum wage and pension reforms. - Downside risks highlighted by authorities: climate change-induced weather events (tropical storms, hurricanes, droughts), regional and global conflicts causing inflation and economic downturns. ### Fiscal responsibility and debt sustainability (authorities' statement) - Debt-to-GDP ratio: - Decreased from 95 percent in FY2020 to 74.5 percent in FY2023. - Fiscal stance and projections: - The authorities plan to increase the primary surplus. - There were surpluses in 2022-23 and 2023-24. - A surplus is projected for 2024-25. - Debt stock composition: Includes central government contracted debt and liabilities, government-guaranteed debt, and public sector debt. - Debt management strategy: In line with the government’s Medium Term Debt Management Strategy (MTDS), the authorities will continue to convert treasury bills into longer-term instruments to lengthen the maturity profile, reduce rollover risk, and pursue long term financing with lower interest rates from multilateral agencies, financial institutions, and donor governments. *Prepared by Western Hemisphere Department (in consultation with other departments and the Caribbean Regional Technical Assistance Center, CARTAC); Staff Report for the 2024 Article IV Consultation — Information Annex (As of Nov 30, 2024).* ### 7. The government of St. Lucia plans to overhaul the tax system to ensure greater efficiency ### 7. The government of St. Lucia plans to overhaul the tax system to ensure greater efficiency ### Tax policy, revenue administration, and public finances - Government plans to overhaul the tax system to: - ensure greater efficiency in the collection of taxes, - secure a higher level of tax compliance, - broaden the tax base. - Recent legislation has strengthened procurement and debt management practices. - Due diligence processes for St. Lucia’s Citizenship by Investment Programme have been further strengthened. - A permanent Health and Security Levy raises additional revenue to finance health and security projects for the benefit of Saint Lucians and visitors. - Authorities agree that better spending control and targeting can help secure fiscal space; public sector wages as a percentage of GDP have fallen. - Authorities agree on the need to ensure sustainability of the national pension fund (National Insurance Corporation, or NIC). - Authorities have expressed interest in Fund technical assistance to estimate tax expenditure. ### Financial sector resilience - The financial sector remains stable, with a liquid and profitable banking system and falling NPL levels. - Weak bank credit growth has been complemented by rapid lending growth within the credit union sector. - Authorities agree financial institutions should leverage the current upswing in the economic cycle to: - strengthen balance sheets, - increase reserves, - enhance business processes to build resilience for future downturns. - Ongoing initiatives and reforms: - Co-operative Societies Act: harmonized approach to strengthen supervision and resilience within credit unions. - Insolvency Act (2024): allows citizens facing financial challenges to renegotiate loan terms with creditors and pause foreclosures while retaining their investments. - Better pricing of risks by banks is recognized as a key reform; authorities have requested technical assistance. - Full participation of all banks and at least the large credit unions is needed to ensure the effectiveness of the ECCU Credit Bureau. - Continued strengthening of the insurance sector remains a priority; authorities acknowledged CARTAC technical assistance in the Financial Services Regulatory Authority (FRSA) draft Own Risk and Solvency Assessment Guidelines. - Anti-money laundering/CTF progress: - Authorities have made progress addressing Caribbean Financial Action Task Force (CFATF) findings. - In October 2024, the CFATF positively re-rated St. Lucia on 7 Recommendations; previous application in May 2023 resulted in the upgrading of 20 Recommendations. - Saint Lucia continues preparations for its Fifth Round Mutual Evaluation by the CFATF. ### Structural reform — Climate policy and resilience - St. Lucia remains extremely vulnerable to climate change risks; resilience-building is mainstreamed across government and non-government actors. - Discussions with the World Bank are underway on obtaining a Catastrophe Deferred Drawdown Option—the third layer of the recommended insurance framework against national disasters. - World Bank support: - In January 2024, the World Bank approved a $40m project to support Saint Lucia’s fiscal and green reforms for sustainable recovery, including assistance to implement the National Energy Policy and Climate Change Act 2024. - Climate Change Act 2024 mandates: - comprehensive approach to mitigation, adaptation, and loss and damage, - development of a Climate Change Adaptation Policy, - implementation of a National Adaptation Plan (including Sectoral Adaptation Strategies and Action Plans), - updated Nationally Determined Contributions. - National Energy Policy (NEP) objectives and measures: - increase renewable energy generation and decarbonize thermal and transport systems, supported by new legislation, - ambitious expansion of renewable energy expected to support an increase of around 10 to 33 percent of electric vehicles in the transport sector, depending on the type of vehicle, - emphasis on energy efficiency: energy audits of government buildings, efficiency labeling of appliances, and public education on energy conservation. - 2025 environmental initiative: - government, community groups, Saint Lucia Social Development Fund, and Solid Waste Management Authority will intensify efforts to create a cleaner environment and ensure a healthier Saint Lucia for all. ### Infrastructure — physical, social, and digital - Fiscal year 2024-2025 was dubbed the “Year of Infrastructure”; infrastructural development will continue beyond March 2025 and be intensified throughout 2025 with significant investments in houses, seaports, airport, and roads. - Castries Cruise Port Development project has commenced. - Redevelopment of Hewanorra International Airport will continue in a prudent and responsible way. - Tourism: - remains the leading generator of revenue, economic activity, and capital investments. - Growth is expected to intensify in the year due to large private investments and government investments reaching rural and coastal communities through the Community Tourism Agency (CTA). - The new Tourism Development Act will ensure enhanced supervision, certification, and incentivization of investment. - Health infrastructure and services: - Government mission to provide accessible, quality, and affordable healthcare remains high priority. - Final stage of completion and commissioning of a new, modern, fully equipped St Jude Hospital at the original site. - Enhancement of free medical services to registered citizens will be expanded in 2025 at Health & Wellness Centres. - Digital transformation and education: - Department of the Public Service undertaking a systematic review of its digital landscape. - Initiatives to enhance regional connectivity include the Digital Government Integrated Services Platform (DigiGov) Project and the World Bank sponsored Caribbean Digital Transformation Project (Digital Caribbean). - Continued investment in digitization and procurement of ICT equipment to aid teaching of science and technology. ### Opportunities for youth, women, and persons with disabilities - Youth Economy: - The Youth Economy Agency (YEA) provides finance, training, marketing, and mentorship to young people seeking self-sustainable employment. - Youth unemployment has dropped from a high of 37% in 2021, to 17% in 2024. - Gender and disability inclusion: - Gender-based institutional training and development as part of the Fire Service project supports enhanced female labor force participation. - In 2024, Saint Lucia appointed its first-ever Minister for Persons with Disabilities. - Authorities will continue targeted investment to address skill mismatches and youth and gender gaps in salaries and labor force participation. ### Conclusion and international engagement - Authorities are committed to sustaining momentum of strong economic growth and fiscal prudence through sound macroeconomic management. - They remain dedicated to maintaining debt sustainability while addressing critical development priorities. - Authorities appreciate technical assistance received over the years that enhanced public financial management, revenue administration, public investment management, financial sector supervision, and data adequacy, and look forward to continued support from the Fund and other partners. *Source: 1lcaea2025001-print-pdf - 7. The government of St. Lucia plans to overhaul the tax system to ensure greater efficiency* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1lcaea2025001-print-pdf.pdf_