## _cr04397

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### Background: Medium-Term Perspective
- Growth decline and structural factors
  - Average real GDP growth declined from 6½ percent per year in the 1980s to 2½ percent in the 1990s and -½ percent during 2000-03.
  - The sharp contraction in 2001 was -4.3 percent.
  - Decline in the banana sector accounted for less than ½ of a percentage point of the reduction in average annual GDP growth in the 1990s.
  - Contributing structural factors: increased competition from lower-priced tourist destinations, a maturing high-end tourism product, high utility costs, real wage increases despite flat productivity.
- Sectoral and demand shifts
  - Agriculture share of GDP fell below 7 percent in the early 2000s from an average of 14 percent during the 1980s; banana production fell from about 10 percent of GDP to about 3½ percent during the 1990s.
  - Exports of tourism services rose from 24 percent of GDP in the 1980s to about 40 percent in recent years.
  - Private consumption and investment fell relative to GDP from the 1980s to the 1990s; public investment rose sharply.
  - External current account deficit remained high at over 10 percent of GDP in the 1990s.
  - Foreign direct investment (FDI) fell to an average of 5½ percent of GDP during 2000–02, from about 9 percent during the 1990s.
- Labor market rigidities and wages
  - Only 16 percent of the labor force is unionized, but unions influence wider wage-setting practices.
  - Average real wage per worker in the private sector rose by about 25 percent between 1992 and 2002 despite essentially flat productivity.
  - Unemployment averaged 18 percent of the labor force; youth unemployment is reported at twice the average rate.
- Fiscal deterioration and debt accumulation
  - Consolidated public sector deficit widened from 0.7 percent of GDP on average during 1990–99 to 4.6 percent during 2000–03.
  - Public debt rose from 39 percent of GDP in 1999 to an estimated 65 percent in 2003.
  - Public external debt rose from 25 percent of GDP in 1999 to 48 percent of GDP in 2003.
  - Most of the increase in debt was to foreign commercial banks as the government undertook long-term borrowing.
- Banking sector vulnerabilities
  - Nonperforming loans to total loans: 15 percent as of September 2003 (ECCU average about 12 percent).
  - Liquid asset ratio: 22 percent (St. Lucia); ECCU average was 29 percent.

### Recent Developments — Economic Situation
- Growth and tourism recovery
  - Real GDP estimated growth: 2.3 percent in 2003 following -4.3 percent in 2001.
  - Growth in 2003 driven by expansion in tourism, wholesale and retail trade.
  - Stay-over arrivals up close to 10 percent during January–September 2003.
  - Indicator of real exchange rate versus main tourism competitors showed marked appreciation in 2003 due mostly to depreciation of the Dominican Republic peso (potential negative effect on market share).
- External balances and one-off investment
  - Current account deficit widened by 6 percent of GDP in 2003 to about 19 percent, mainly due to substantial one-off private investments in telecommunications.
  - Imports surged by 20 percent in 2003 driven by telecommunications equipment, food and fuel.
  - Overall exports increased about 12 percent in 2003.
  - Nearly 80 percent of the external current account deficit in 2003 financed by FDI (telecoms and hotels); remainder mainly by public sector borrowing.
- Inflation and wages
  - Average inflation: -0.2 percent in 2002; estimated around 1 percent in 2003.
  - Civil service wages almost flat since 2001; private sector wages leveled off in 2002 after a 10 percent real increase in 2000–01.
  - Employers and unions increasingly able to reach wage settlements without Labor Department mediation.

### Banking, Credit, and Monetary Developments
- Credit and liquidity
  - Bank credit to the private sector declined by 3½ percent in 2003 (mainly to distributive trades and households).
  - M2 increased by 3.2 percent in 2002 and is estimated to grow by 4.8 percent in 2003.
  - Ratio of loans to deposits reached a historically low level in September 2003.
- Bank behavior and profitability
  - Faced with excess liquidity, banks reduced mortgage lending rates and increased foreign asset purchases (foreign assets rose by 24 percent in the year ending September 30, 2003).
  - Interest rates on time deposits fell below the legally mandated minimum savings deposit rate of 3 percent.
  - Shift from time deposits to more liquid forms of deposit.
  - Commercial banks’ profitability declined due to higher provisioning for nonperforming loans and reduced interest income.
  - Banks’ exposure to the public sector remained limited at around 9.4 percent of assets; higher provisioning aligned with ECCB prudential regulations.

### Fiscal Outcomes, Stance, and Public Debt
- Central government fiscal indicators (percent of GDP, selected)
  - Current revenue: 26.4 (FY00/01), 24.1 (FY01/02), 24.0 (FY02/03).
  - Current expenditure: 21.0 (FY00/01), 22.5 (FY01/02), 22.9 (FY02/03).
  - Capital expenditure: 7.3 (FY00/01), 7.6 (FY01/02), 8.0 (FY02/03).
  - Primary balance: 0.3 (FY00/01), -2.0 (FY01/02), -2.4 (FY02/03).
  - Overall balance (after grants): -1.3 (FY00/01), -4.4 (FY01/02), -4.9 (FY02/03).
  - FY02/03 included a one-off outlay equal to 2.6 percent of GDP from liquidation of a guarantee for a large hotel construction (0.8 percent current transfer; 1.8 percent capital transfer).
- Fiscal stance and recent moves
  - Central government overall deficit estimated to reach 5.8 percent of GDP in FY 2003/04 from 4.9 percent in FY 2002/03.
  - Current revenues increased due to net effect of tax measures and cyclical recovery; rising primary expenditures largely offset revenue gains.
  - Measures in FY 2002/03: raise retirement age by one year and minimum years of contribution by two years; new civil servants contribute to NIC beginning March 2003; steering committee selected in September 2003 to examine a unified Revenue Authority.
  - Delays: private sector involvement in WASCO delayed; no decision on VAT introduction.

- Public debt dynamics and vulnerabilities
  - Public debt rose sharply in 2003 after EC$232 million borrowing arrangements with Trinidad and Tobago banks in late 2002/early 2003 (about half used to refinance short- and medium-term debt).
  - Average interest rate on public debt around 6½ percent.
  - Government built up deposits at foreign commercial banks (close to 3 percent of GDP at end-2003).
  - Public debt at end-2003 exceeded ECCB Monetary Council benchmark of 60 percent for central government debt.
  - Convergence Criteria / Status 2003/04:
    - Current balance (guideline: 4-6 percent of GDP): 0.0
    - Overall balance (guideline: at least -3 percent of GDP): -5.8
    - Government and government guaranteed debt outstanding: 64.7 (guideline: no more than 60 percent of GDP)
    - Debt service payments 1/: 17.1 (guideline: no more than 15 percent of current revenue)
      - 1/ Excludes domestic debt amortization.

### Medium-Term Fiscal Outlook and Scenarios
- Staff projection under current trends
  - Public debt would reach close to 90 percent of GDP by FY 2008/09 (assuming no rise in interest rates).
  - Interest costs would reach nearly 5 percent of GDP.
  - Projected growth under baseline: 1 percent a year.
  - Gross financing needs could reach 20 percent of GDP in 2008 under current policies.
- Strong upfront adjustment scenario (staff preferred)
  - Bring debt below 60 percent by FY 2008/09 requires a swing of 7 percentage points of GDP in the primary balance over five years.
  - Primary balance needs to improve by about 5 percent of GDP in the next two years and by an additional 2 percent over the subsequent three years.
  - With accelerated structural reforms, annual GDP growth could rise above 3 percent over the medium term (projections include 3.5 percent by 2008/09).
  - Targets: public debt from 66 percent of GDP in FY 2003/04 to about 55 percent by FY 2008/09.
- More gradual/baseline scenario (authorities’ preference)
  - Stabilizing debt around 70 percent of GDP would still require a substantial swing in the primary balance of about 5 percent of GDP in the next 5 years.
  - Baseline (no policy change): primary deficits remain at 2½ percent of GDP, raising public debt to about 90 percent of GDP by FY 2008/09.
  - Stress tests show exogenous shocks could push debt above 100 percent under current policies.

### Proposed Upfront Fiscal Adjustment — Quantitative Paths (select figures, percent of GDP)
- Total revenue and grants: Est. 2003/04 = 26.6; 2004/05 = 26.7; 2005/06 = 27.6; 2008/09 = 28.4.
- Current non-interest expenditure: Est. 2003/04 = 21.1; 2004/05 = 20.2; 2005/06 = 19.2; 2008/09 = 17.7.
- Capital expenditure: Est. 2003/04 = 8.0; 2004/05 = 6.0; 2005/06 = 6.0; 2008/09 = 6.0.
- Total non-interest expenditure: Est. 2003/04 = 29.1; 2004/05 = 26.2; 2005/06 = 25.2; 2008/09 = 23.7.
- Primary balance: Est. 2003/04 = -2.5; 2004/05 = 0.4; 2005/06 = 2.4; 2008/09 = 4.6.
- Total balance: Est. 2003/04 = -5.8; 2004/05 = -3.1; 2005/06 = -1.1; 2008/09 = 1.7.
- Memorandum (public debt percent of GDP): Est. 2003/04 = 65.7; 2004/05 = 67.3; 2005/06 = 66.3; 2008/09 = 55.5.
- Real GDP growth rate (percent change): Est. 2003/04 = 2.3; 2004/05 = 1.0; 2005/06 = 2.0; 2008/09 = 3.5.

### Revenue and Tax Reform Recommendations
- Key proposals
  - Replace existing domestic consumption taxes with a value-added tax (VAT), supplemented by a modern system of excises (regional-level reform).
  - Reduce import duties; facilitate reduction of tax incentives and indirect tax concessions via VAT.
  - Award tax concessions only under strict interpretation; seek repeal of acts authorizing tax incentives; do not renew income tax holidays and cease granting new ones.
  - Reform petroleum taxation and price adjustment mechanism: remove price controls on petroleum products; convert current consumption tax on petroleum to an excise at a specific rate.
  - Strengthen property taxation by basing valuations on market value and updating regularly.
  - Create a unified Revenue Authority to coordinate tax and customs administrations.
  - Widen the tax base and increase progressivity of the personal income tax.
- Authorities’ stance: endorsed OECS Tax Reform report conclusions and intend public circulation; noted introducing VAT not a national priority given existing comprehensive tax system.

### Expenditure Measures and Public Investment Priorities
- Staff recommendations
  - Scale back actual capital outlays upfront by 2 percent of GDP.
  - Cut current goods, services, and transfers gradually by 2 percent of GDP.
  - Reduce the wage bill by about 1 percent of GDP through civil service reform; public sector wage increases linked to performance.
  - Prioritize public investment to support private sector-led growth.
- Authorities: concurred on rationalizing expenditures and slowing capital projects but noncommittal on detailed measures/timetable.

### Financial Sector Vulnerabilities and Supervisory Recommendations
- Main vulnerabilities
  - High level of nonperforming loans in the domestic banking sector (highest in the ECCU).
  - Need to reduce nonperforming loan portfolios; banks increasing provisioning and exercising caution in new lending.
- Staff recommendations
  - Continue close cooperation with ECCB; implement more frequent on-site inspections; ensure compliance with the Basle Core Principles.
  - Proceed with divestiture of government shares in the Bank of St. Lucia.
  - Strengthen supervision of the offshore sector and tighten enforcement of AML/CFT regulations.

### Debt Sustainability Analysis and Stress Tests — Key Outcomes
- Public sector debt (percent of GDP): 1998: 42.0; 1999: 38.7; 2000: 43.9; 2001: 49.4; 2002: 61.6; 2003: 65.7; projections to 2008: 55.5 (strong adjustment) vs 89.4 (current policies).
- Under strong adjustment, total debt falls to 55.5 percent of GDP by 2008/09.
- Under current policies, total public sector debt could reach about 89.4 percent of GDP by 2008.
- Scenario and sensitivity outcomes (selected lines for debt-to-GDP, percent)
  - Baseline historical-average path: 49.4, 61.6, 65.7, 69.9, 74.3, 78.8, 83.5, 88.2.
  - One-time 30 percent real (or nominal) depreciation in 2004: 49.4, 61.6, 65.7, 90.6, 96.0, 101.9, 107.9, 114.0 (real depreciation path) and similar large jumps in external debt ratios under alternative tables.
  - Revenue shock (revenue-to-GDP at historical average minus two standard deviations in 2003-04) impact on debt-to-GDP: 49.4, 61.6, 65.7, 75.0, 84.8, 90.2, 95.7, 101.2.
- Stress tests highlight vulnerability: strong adverse shocks to growth or combined shocks raise external and public debt ratios substantially; exogenous shocks could push debt above 100 percent under current policies.

### Structural Reform Priorities to Promote Private Sector-Led Growth
- Key structural priorities
  - Labor market flexibility and input cost reductions given the currency board arrangement.
  - Wage restraint in public and private sectors and productivity increases.
- Specific recommendations
  - Phase out and limit tax exemptions; set expiration dates and require cost-benefit analyses.
  - Streamline administrative obstacles for new investors (e.g., a “one-stop-shop”).
  - Increase regulatory transparency; reduce stamp duties.
  - Privatize the Marketing Board.
  - Assist private businesses in training employees.
- Sectoral recommendations
  - Tourism: review electricity regulation, restructure WASCO, maintain hotel quality, improve air access, conduct cost-benefit analysis of tourism tax incentives, increase local value added from cruise tourism.
  - Agriculture: encourage diversification away from bananas; promote nonbanana agriculture for hotels/restaurants; improve marketing and farmers’ cooperatives.
  - Regional integration: step up efforts toward common targets in trade, financial and fiscal policies and free movement of goods, services, and labor while preparing carefully to preserve autonomy.

### Statistical Issues, Technical Assistance, and Data Gaps
- Statistical assessment
  - Database inadequate: weaknesses in coverage, frequency, quality, and timeliness; weakest areas are national accounts, fiscal accounts, and balance of payments.
  - Comprehensive and regular labor statistics are not available.
- Initiatives and reporting
  - Authorities developing new GDP methodology; attempts to compile quarterly GDP with OAS funding.
  - Need for a comprehensive tourism survey and cross-checking of tourism-related data.
  - Central government reporting improved (monthly current revenue and expenditure) but frequent large revisions signal quality issues.
  - Data on domestic public sector debt not regularly available; no fiscal data reported to STA for GFS Yearbook or IFS.
  - GDDS participation ongoing; metadata posted since September 21, 2000.
- Technical assistance and external support
  - CARTAC missions on financial programming, CPI compilation, import-export price indices, tax administration, financial sector supervision.
  - World Bank active projects with net commitment approximately US$31.1 million across disaster management, recovery, water sector reform, poverty reduction, education, and telecom reform.

### Executive Board Assessment, Authorities’ Views, and Next Steps
- Board messages and recommendations
  - Welcome tourism-led recovery but note it is narrowly based; sustained recovery uncertain.
  - Emphasize sustained recovery depends on fiscal discipline and structural reforms to foster private sector-led growth, diversification, and competitiveness.
  - Urged strong upfront fiscal adjustment and continued moderation in expenditures; concrete timetable toward gradual fiscal consolidation and identification of specific measures.
  - Recommended accelerated tax reform per OECS Tax Reform Commission and prompt establishment of a Revenue Authority.
  - Encouraged restructuring of water company, increased electricity efficiency, and agricultural diversification.
  - Stressed labor market flexibility, continued wage moderation, and improved statistical reporting; urged continued cooperation with ECCB on banking supervision and AML/CFT.
- Authorities’ perspective and actions
  - Reported growth acceleration to 3.7 percent in 2003 (authorities’ preliminary data).
  - Recognized need to control the deficit; actions include revenue measures (departure tax increase, marriage fee increase, higher bank license fees), cuts in capital expenditures, an end-year bonus of EC$850 per person, retroactive 3 percent wage increase, new debt management unit, and issuance of EC$27 million one-year treasury bills at 5.5 percent.
  - Structural initiatives: youth apprenticeship program, agricultural diversification agency, health care reforms, security investments, incentive package for hotel capacity contingent on hosting ICC Cricket World Cup selection, and preparations for CSME participation.
- Timing of next consultation
  - Proposed that the next Article IV consultation be conducted within the next 12 months.

*Source: IMF staff report excerpt from _cr04397 (PDF chapter/section).*

### Executive Summary ......................................................................................................

### Executive Summary

### Background: Medium-Term Perspective
- Growth decline and structural factors
  - Average real GDP growth declined from 6½ percent per year in the 1980s to 2½ percent in the 1990s and -½ percent during 2000-03.
  - The sharp contraction in 2001 was -4.3 percent (drought and decline in tourism after September 11, 2001).
  - The decline in the banana sector accounted for less than ½ of a percentage point of the reduction in average annual GDP growth in the 1990s.
  - Contributing structural factors: increased competition from lower-priced tourist destinations, a maturing high-end tourism product, high utility costs, real wage increases despite flat productivity.
- Sectoral and demand shifts
  - The share of agriculture in GDP declined to below 7 percent in the early 2000s from an average of 14 percent during the 1980s; banana production fell from about 10 percent of GDP to about 3½ percent during the 1990s.
  - Exports of tourism services increased from 24 percent of GDP in the 1980s to about 40 percent in recent years.
  - Private consumption and investment fell relative to GDP from the 1980s to the 1990s, while public investment rose sharply.
  - External current account deficit remained high at over 10 percent of GDP in the 1990s.
  - Foreign direct investment (FDI) fell to an average of 5½ percent of GDP during 2000–02, from about 9 percent during the 1990s.
- Labor market rigidities and wages
  - Only 16 percent of the labor force is unionized, but unions influence wider wage-setting practices.
  - The average real wage per worker in the private sector rose by about 25 percent between 1992 and 2002 despite essentially flat productivity.
  - Unemployment averaged 18 percent of the labor force; youth unemployment is reported at twice the average rate.
- Fiscal deterioration and debt accumulation
  - Consolidated public sector deficit widened from 0.7 percent of GDP on average during 1990–99 to 4.6 percent during 2000–03.
  - Public debt rose from 39 percent of GDP in 1999 to an estimated 65 percent in 2003.
  - Public external debt rose from 25 percent of GDP in 1999 to 48 percent of GDP in 2003 (nearly doubled).
  - Most of the increase in debt was to foreign commercial banks as the government undertook long-term borrowing.
- Banking sector vulnerabilities
  - Ratio of nonperforming loans to total loans in commercial banks was 15 percent as of September 2003 (ECCU average about 12 percent).
  - Liquid asset ratio was 22 percent (the lowest in the region; ECCU average was 29 percent).

### Recent Developments — Economic Situation
- Growth and tourism recovery
  - Following the large contraction in 2001 (-4.3 percent), real GDP is estimated to have grown by 2.3 percent in 2003.
  - Growth in 2003 driven primarily by expansion in tourism, wholesale and retail trade.
  - Total stay-over arrivals were up by close to 10 percent during January-September 2003, led by strong growth from Europe and some increase from the U.S.A.
  - Hotels have reportedly started reversing some discounts offered since late 2001.
  - An indicator of the real exchange rate vis-à-vis main tourism competitors showed a marked appreciation in 2003, mostly due to the sharp depreciation of the Dominican Republic peso; this might negatively affect St. Lucia’s market share in the Caribbean (data not yet available to ascertain this).
- External balances and one-off investment
  - The current account deficit widened by 6 percent of GDP in 2003, to about 19 percent, owing mainly to substantial one-off private investments in telecommunications.
  - Imports surged by 20 percent in 2003 driven by higher expenditure on telecommunications equipment, food and fuel.
  - Overall exports increased by about 12 percent in 2003, mostly due to a rise in other merchandise exports and tourism receipts.
  - Nearly 80 percent of the external current account deficit was financed by foreign direct investment (telecoms and hotels); the remainder mainly by public sector borrowing.
- Inflation and wages
  - Average inflation rate was -0.2 percent in 2002 and is estimated at around 1 percent in 2003.
  - Civil service wages have been almost flat since 2001; private sector wages appear to have leveled off in 2002 after a 10 percent real increase in 2000–01.
  - Reported increased ability of employers and unions to reach wage settlements without Labor Department mediation.

### Policy Priorities and Staff Recommendations
- Fiscal adjustment and sustainability
  - Priority: carry out a strong upfront fiscal adjustment to reduce public debt and vulnerabilities.
  - Reduction in public debt requires a large swing in the primary balance over the next few years.
  - Staff recommended a comprehensive tax reform, including revenue measures following FAD recommendations, and expenditure cuts.
  - Authorities indicated room for cutting capital expenditure and resisting labor unions’ demands for wage increases, but were noncommittal on other measures.
  - Authorities should plan fiscal contingency measures to reduce unanticipated financing needs.
  - Given St. Lucia’s importance in the region, it should lead by demonstrating fiscal restraint and supporting macroeconomic stability under the currency board arrangement; collective prudence is required as adverse developments in another ECCU country could spill over to the region.
- Financial sector stability
  - Reduce the high level of nonperforming loans in the domestic banking sector as recommended by the recent regional FSAP mission.
  - Continue close cooperation with the ECCB and put in place necessary supervisory mechanisms, including more frequent on-site inspections, to ensure compliance with the Basle Core Principles and adequate supervision of the off-shore sector.
- Structural reforms to promote private sector-led growth
  - Reduce costly tax incentives to attract investment, preferably in a regional context.
  - Lower input costs and raise labor productivity, with particular focus on the tourism industry.
  - Given the currency board arrangement, continued wage restraint and a flexible labor market are key to enhancing competitiveness.

### Key Statistics and Indicators (as reported)
- Growth and labor
  - Average real GDP growth: 6½ percent (1980s), 2½ percent (1990s), -½ percent (2000-03).
  - 2001 GDP contraction: -4.3 percent.
  - 2003 estimated GDP growth: 2.3 percent.
  - Private sector real wage increase 1992–2002: about 25 percent.
  - Unemployment: 18 percent average; youth unemployment twice the average.
  - Labor force unionization: 16 percent.
- Fiscal and debt
  - Consolidated public sector deficit: 0.7 percent of GDP (1990–99 average) → 4.6 percent of GDP (2000–03).
  - Public debt: 39 percent of GDP in 1999 → estimated 65 percent of GDP in 2003.
  - Public external debt: 25 percent of GDP in 1999 → 48 percent of GDP in 2003.
  - FDI: about 9 percent of GDP in the 1990s → 5½ percent of GDP during 2000–02.
- External sector and prices
  - Current account deficit widened by 6 percent of GDP in 2003 to about 19 percent.
  - Imports surged by 20 percent in 2003.
  - Exports increased by about 12 percent in 2003.
  - Stay-over arrivals: up close to 10 percent Jan–Sep 2003.
  - Inflation: -0.2 percent in 2002; around 1 percent in 2003.
- Banking sector indicators (September 2003)
  - Nonperforming loans ratio: 15 percent (St. Lucia); ECCU average about 12 percent.
  - Liquid asset ratio: 22 percent (St. Lucia); ECCU average 29 percent.

*IMF staff executive summary (from the source document).*

### 11.      The slowdown in economic activity was also reflected in lower credit flows. Bank

### The slowdown in economic activity was also reflected in lower credit flows. Bank

### Banking, credit, and monetary developments
- Bank credit to the private sector, mainly to distributive trades and households, declined by 3½ percent in 2003.
- M2 increased by 3.2 percent in 2002 and is estimated to grow by 4.8 percent in 2003.
- The ratio of loans to deposits reached a historically low level in September 2003.
- Faced with excess liquidity, banks:
  - reduced lending rates on mortgages;
  - bought assets abroad: foreign assets rose by 24 percent in the year ending September 30, 2003.
- On the liabilities side:
  - interest rates on time deposits fell below the legally mandated minimum savings deposit rate of 3 percent;
  - there was a shift from time deposits to more liquid forms of deposit.
- Commercial banks’ profitability declined owing to higher provisioning of non-performing loans and reduced interest income.
- Banks’ exposure to the public sector remained limited (around 9.4 percent of assets), but high nonperforming loans prompted increased provisioning in line with ECCB prudential regulations.

### Investment and sectoral developments
- Following the liberalization of telecommunications in 2002, two new entrants in mobile telephony invested aggressively in St. Lucia.
  - Total investment in this area was about 6½ percent of GDP in 2003, up from less than 2 percent in 2002.

### Central government fiscal outcomes (selected indicators)
- Central Government Operations (In percent of GDP) — FY00/01 Actual, FY01/02 Actual, FY02/03 Actual, FY02/03 Budget, FY02/03 Est., FY03/04
  - Current revenue: 26.4, 24.1, 24.0, 24.6, 24.4
  - Grants and capital revenue: 0.6, 1.6, 2.0, 3.6, 2.2
  - Current expenditure: 21.0, 22.5, 22.9, 25.0, 24.4
  - Current balance: 5.5, 1.6, 1.1, -0.4, 0.0
  - Capital expenditure: 7.3, 7.6, 8.0, 18.6, 8.0
  - Noninterest total expenditure: 26.7, 27.7, 28.4, 41.2, 29.1
  - Primary balance: 0.3, -2.0, -2.4, -12.2, -2.5
  - Overall balance (after grants): -1.3, -4.4, -4.9, -15.4, -5.8
- Note: FY02/03 included a one off outlay in FY2002/03 (2.6 percent of GDP), broken down as 0.8 percent of GDP (current transfer) and 1.8 percent of GDP (capital transfer) resulting from the liquidation in 2002 of a guarantee for a large hotel construction.

### Fiscal stance and public sector policy
- The central government overall deficit is estimated to reach 5.8 percent of GDP in FY 2003/04 from 4.9 percent in FY 2002/3.
- Current revenues are estimated to have increased owing to the net effect of tax measures and the positive cyclical impact of the ongoing economic recovery.
- Rising primary expenditures largely offset revenue gains, reflecting higher spending on goods and services associated with past capital expenditure. The wage bill and capital expenditure remained broadly unchanged.
- Measures in FY 2002/03 included:
  - Initial steps to enhance pension system long-term viability: raising by one year the retirement age and by two years the minimum years of contribution.
  - Gradual reform of financing of civil service pensions: beginning March 2003 newly hired civil servants contribute to the National Insurance Corporation (NIC); the unfunded civil service pension scheme remains under a grandfathering clause.
  - Selection in September 2003 of a steering committee to examine arrangements for establishing a unified Revenue Authority.
- Delays and outstanding issues:
  - Private sector involvement in the Water and Sewerage Company (WASCO) was delayed, threatening a nascent water supply constraint.
  - No decision taken to introduce a VAT as recommended by the OECS Tax Reform and Administration Commission.

### Public debt and financial vulnerabilities
- Public debt rose sharply in 2003, with a large increase in external borrowing from commercial banks: in late 2002 and early 2003 two borrowing arrangements with banks in Trinidad and Tobago totaled EC$232 million.
  - About half of EC$232 million was used to refinance short- and medium-term debt.
- The average interest rate on public debt remained relatively low (about 6½ percent) despite declining reliance on official creditors.
- With borrowing in excess of the deficit, the government built up deposits at foreign commercial banks (close to 3 percent of GDP at end-2003).
- Public debt relative to GDP at end-2003 exceeded the ECCB Monetary Council benchmark of 60 percent for central government debt.
- Convergence Criteria / Status 2003/04:
  - Current balance (guideline: 4-6 percent of GDP): 0.0
  - Overall balance (guideline: at least -3 percent of GDP): -5.8
  - Government and government guaranteed debt outstanding: 64.7 (guideline: no more than 60 percent of GDP)
  - Debt service payments 1/: 17.1 (guideline: no more than 15 percent of current revenue)
    - 1/ Excludes domestic debt amortization
- Risks highlighted:
  - High vulnerability to exogenous shocks (global economic and security conditions; weather events such as drought in 2001 and tropical storm in 2002) increases volatility of output.
  - Rising public debt and associated debt service increase the risk of financing difficulties and potential spillovers from adverse developments in other ECCU countries.

### Policy discussions and IMF advice
- Fund advice over recent years emphasized:
  - Strengthening public finances by curtailing budgetary expenditures and raising revenue.
  - Expenditure restraint, especially on wages, and broadening the tax base (e.g., reducing tax concessions).
- Authorities’ stance:
  - Agreed on the need for fiscal consolidation but stressed risks that significant retrenchment could undermine the recovery and social objectives (upgrading social infrastructure and services).
  - Justified some expansionary fiscal policies given external shocks (e.g., erosion of preferential market access to the EU for agricultural products).
  - Recognized need to contain accumulation of debt; saw room to cut capital expenditure and resist wage demands but were noncommittal on other measures.
- Staff view:
  - Principal challenges: invigorate private sector growth, reduce public debt, and preserve macroeconomic stability.
  - Recommended strong upfront fiscal adjustment to reduce debt to below 60 percent of GDP by FY 2008/09; staff estimated this would require a swing of 7 percentage points of GDP in the primary balance in the next five years.
  - Emphasized fiscal prudence to preserve the currency board arrangement and warned of regional spillovers.

### Growth, competitiveness, and structural reform recommendations
- Key structural priorities:
  - Labor market flexibility and input cost reductions as central to competitiveness given the currency board arrangement.
  - Wage restraint in public and private sectors, structural reforms, and productivity increases.
- Specific recommendations to foster private sector-led growth:
  - (a) Limit tax exemptions: phase out, set expiration dates, and require cost-benefit analysis of employment, growth, and fiscal impacts.
  - (b) Streamline administrative obstacles for new investors (e.g., a “one-stop-shop”).
  - (c) Increase regulatory transparency.
  - (d) Reduce stamp duties.
  - (e) Privatize the Marketing Board.
  - (f) Assist private businesses in training employees.
- Authorities’ complementary actions:
  - Office of Private Sector Relations (OPSR) supporting businesses via the Business Upgrading Program (technical assistance in marketing and human resources development).
  - Intention to carry out a statistical breakdown of tax incentives to better streamline and phase them out.
- Box 1: Growth constraints identified:
  - Labor market: low productivity; private sector wages reportedly increased despite stagnation and high unemployment.
  - Agriculture: banana sector < 3 percent of GDP but about 10 percent of employment; banana output projected by staff to grow by 15 percent in 2004 from the exceptional low level in 2003 and remain flat after 2004, leaving output at about half the level of the late 1990s.
  - Tourism: operating costs high, productivity of local workers low; electricity expensive; water and sewerage infrastructure often inadequate.
  - Business environment: cumbersome administrative procedures and high stamp duties; discretionary tax concessions and large incentives create inefficiencies.
  - Regional integration: limited trade with neighbors; high transport costs; cumbersome customs procedures; differing tax systems.

### Sectoral policy recommendations: tourism, agriculture, and regional integration
- Tourism sector recommendations:
  - Review regulatory framework governing the electricity sector to reduce costs.
  - Restructure WASCO to allow needed investments in water and sewerage infrastructure (possibly with World Bank technical assistance).
  - Maintain quality of hotels and tourism facilities and improve air travel access.
  - Conduct cost-benefit analysis of tax incentives in the tourism industry.
  - Increase local value added from cruise ship tourism.
- Agriculture and linkages to tourism:
  - Encourage diversification away from bananas; promote nonbanana agriculture for hotels and restaurants.
  - Improve marketing arrangements and support formation of farmers’ cooperatives to secure reliable supply to hotels.
- Regional integration:
  - Staff recommended stepping up efforts toward common targets in trade, financial and fiscal policies and free movement of goods, services, and labor.
  - Benefits include lower transport costs, joint education centers, and coordinated tax and customs procedures.
  - Authorities favored gradual integration preserving autonomy and cautioned that integration requires careful preparation.

### Ensuring fiscal sustainability (policy implications)
- To meet ECCB Monetary Council benchmarks and reduce public debt, a strong fiscal consolidation is required, entailing a 7 percentage point of GDP swing in the primary balance over five years to reach debt below 60 percent of GDP by FY 2008/09.
- Fiscal prudence is critical to preserve macroeconomic stability and the currency board arrangement amid external vulnerability and regional interconnectedness.

*Source: IMF staff report excerpt from _cr04397 - 11. The slowdown in economic activity was also reflected in lower credit flows. Bank (PDF chapter/section).*

### 25.      To address the high and rising debt levels, the mission recommended a strong

### To address the high and rising debt levels, the mission recommended a strong

### Medium-term fiscal outlook and scenarios
- Staff projection under current trends:
  - Public debt would reach close to 90 percent of GDP by FY 2008/09 (assuming no rise in interest rates).
  - Interest costs would reach nearly 5 percent of GDP.
  - Projected growth under baseline: 1 percent a year.
  - Under current policies, gross financing needs could reach 20 percent of GDP in 2008.
- Strong upfront adjustment scenario (staff preferred):
  - Bring debt back to less than 60 percent by FY 2008/09 requires a strong upfront fiscal adjustment.
  - Primary balance needs to improve by about 5 percent of GDP in the next two years, and by an additional 2 percent over the subsequent three years.
  - With accelerated structural reforms, scenario projects annual GDP growth rising above 3 percent over the medium term (top figure references: around 3½ percent a year in Box 2).
  - Targets public debt reduction from 66 percent of GDP in FY 2003/04 to about 55 percent by FY 2008/09.
  - Under strong adjustment, gross financing needs appear manageable.
- More gradual/baseline scenario (authorities’ preference):
  - Medium-term scenario stabilizing debt at around 70 percent of GDP would still require a substantial swing in the primary balance of about 5 percent of GDP in the next 5 years.
  - Baseline (no policy change): primary deficits remain at 2½ percent of GDP, raising public debt to about 90 percent of GDP by FY 2008/09.
  - This poses risks if unanticipated new shocks occur; stress tests show exogenous shocks could push debt above 100 percent under current policies.

### Proposed upfront fiscal adjustment — key measures and quantitative impacts (Box 2 and table)
- Timing: adopt upfront fiscal measures and structural reforms starting in FY 2004/05.
- Fiscal arithmetic and composition (as percent of GDP at market prices):
  - Total revenue and grants: Est. 2003/04 = 26.6; 2004/05 = 26.7; 2005/06 = 27.6; 2008/09 = 28.4; Changes from 2003/04: 2005/06 = 1.0; 2008/09 = 1.8.
  - Current non-interest expenditure: Est. 2003/04 = 21.1; 2004/05 = 20.2; 2005/06 = 19.2; 2008/09 = 17.7; Changes: 2005/06 = -2.0; 2008/09 = -3.4.
  - Capital expenditure: Est. 2003/04 = 8.0; 2004/05 = 6.0; 2005/06 = 6.0; 2008/09 = 6.0; Changes: 2005/06 = -2.0; 2008/09 = -2.0.
  - Total non-interest expenditure: Est. 2003/04 = 29.1; 2004/05 = 26.2; 2005/06 = 25.2; 2008/09 = 23.7; Changes: 2005/06 = -4.0; 2008/09 = -5.4.
  - Primary balance: Est. 2003/04 = -2.5; 2004/05 = 0.4; 2005/06 = 2.4; 2008/09 = 4.6; Changes: 2005/06 = 4.9; 2008/09 = 7.2.
  - Total balance: Est. 2003/04 = -5.8; 2004/05 = -3.1; 2005/06 = -1.1; 2008/09 = 1.7; Changes: 2005/06 = 4.7; 2008/09 = 7.5.
  - Memorandum items:
    - Central government debt, percent of GDP: Est. 2003/04 = 52.7; 2004/05 = 54.7; 2005/06 = 54.0; 2008/09 = 44.8; Changes from 2003/04: 2005/06 = 1.3; 2008/09 = -8.0.
    - Public debt, percent of GDP: Est. 2003/04 = 65.7; 2004/05 = 67.3; 2005/06 = 66.3; 2008/09 = 55.5; Changes from 2003/04: 2005/06 = 0.6; 2008/09 = -10.2.
    - Real GDP growth rate, percent change: Est. 2003/04 = 2.3; 2004/05 = 1.0; 2005/06 = 2.0; 2008/09 = 3.5.

### Revenue measures and tax reform (Box 3 and staff recommendations)
- Key revenue policy recommendations:
  - Replace existing domestic consumption taxes with a value-added tax (VAT), supplemented by a modern system of excises (regional-level reform).
  - Reduce import duties, facilitate reduction of tax incentives and indirect tax concessions via VAT.
  - Award tax concessions only under strict interpretation of existing legislation; seek to repeal acts authorizing tax incentives; do not renew income tax holidays and cease granting new ones.
  - Reform petroleum taxation and price adjustment mechanism: remove price controls on petroleum products; convert current consumption tax on petroleum to an excise at a specific rate.
  - Strengthen property taxation by basing valuations on market value and updating regularly.
  - Create a unified Revenue Authority to coordinate tax and customs administrations.
  - Widen the tax base and increase progressivity of the personal income tax.
- Staff urged implementation of comprehensive medium-term tax reform as soon as possible and welcomed authorities’ plans for public discussions.
- Authorities’ stance:
  - Endorsed conclusions of the OECS Tax Reform and Administration Commission report and intend to circulate it for public consensus on VAT introduction.
  - Argued that introducing VAT was not a national priority given St. Lucia’s comprehensive tax system including a personal income tax.

### Expenditure measures and public investment priorities
- Staff recommended expenditure cuts in combination with revenue measures:
  - Scale back actual capital outlays upfront by 2 percent of GDP to contain growth of associated recurrent expenditure and borrowing.
  - Cut spending on current goods, services, and transfers gradually by 2 percent of GDP.
  - Reduce the wage bill by about 1 percent of GDP through civil service reform; public sector wage increases should be based on performance.
  - Prioritize public investment and direct it to support private sector-led growth.
- Authorities concurred on need to rationalize expenditures, slow capital projects, and strengthen revenue collection, but remained noncommittal on specific measures and timetable.

### Financing, contingency planning, and debt management
- Projected financing needs through end-2004:
  - Projected financing needs around US$62 million are largely secured (including from official creditors).
  - Staff stressed the need for a contingency plan if access to financing diminishes or a natural disaster creates additional financing needs.
  - Recommended identifying public expenditures that could be postponed or cut and other potential financing sources.
- Debt management:
  - Mission welcomed creation of a newly-created debt and investment unit to enhance debt management.
  - Debt sustainability analysis and stress tests indicate vulnerability: exogenous shocks could push debt above 100 percent under current policies.
  - Under continuation of current policies, financing the deficit could become difficult; gross financing needs could reach 20 percent of GDP in 2008.

### Financial sector vulnerabilities and supervisory recommendations
- Main vulnerabilities:
  - High level of nonperforming loans in the domestic banking sector (highest in the ECCU).
  - Need to reduce nonperforming loan portfolios; banks increasing provisioning and exercising caution in new lending.
- Staff recommendations:
  - Continue close work with ECCB to put in place necessary supervisory mechanisms, including more frequent on-site inspections and ensuring compliance with the Basle Core Principles.
  - Proceed with divestiture of government shares in the Bank of St. Lucia.
  - Strengthen supervision of the offshore sector and tighten and step up enforcement of AML/CFT regulations.

### Staff appraisal — overall findings and priorities
- Economic outlook and challenges:
  - Economy has started to recover; prospects for sustained growth and unemployment reduction remain uncertain.
  - High and persistent unemployment is a major social and political challenge.
  - Expansionary fiscal policy during low growth sharply raised public debt to over 65 percent of GDP at end-2003.
- Policy priorities (staff urges):
  - Carry out a strong upfront fiscal adjustment and continued moderation in expenditures in the medium term to meet ECCB benchmark and set debt on a declining path.
  - Accelerate tax reform and step up establishment of the Revenue Authority.
  - Develop contingency measures to reduce unanticipated financing needs.
  - Continue measures to reduce nonperforming loans and improve banking supervision; complete divestiture from the Bank of St. Lucia.
  - Strengthen statistical collection, analysis, and reporting; enhance GDDS reporting and seek technical assistance through CARTAC and other donors.
  - Lead by example regionally in demonstrating fiscal restraint under the currency board arrangement.

*Source: IMF staff report excerpt (paragraphs 25–38, Box 2 and Box 3, and associated tables and projections).*

### 39.      It is proposed that the next Article IV consultation be conducted within the next

### _cr04397 - 39.      It is proposed that the next Article IV consultation be conducted within the next

### Timing of Next Article IV Consultation
- It is proposed that the next Article IV consultation be conducted within the next 12 months.

### Real Effective Exchange Rate (Figure 1)
- The real effective exchange rate (REER) is estimated as a trade-weighted index of nominal exchange rates deflated by seasonally adjusted relative consumer prices. An increase means an appreciation.
- Series and indices shown (1990–2003): Real effective exchange rate 1/; Nominal effective exchange rate; Relative price index.
- Tourism-based REER indices (1990–2003):
  - Real Effective Exchange Rate (Tourism Competitors - CPI) 3/
  - Real Effective Exchange Rate (Tourism Customers - CPI) 2/
- Tourism customers (weighted CPI): Canada, UK, USA; weights based on proportion of tourists arriving from each country in 2001.
- Tourism competitors (weighted CPI) and weights: Bahamas (23.4%), Barbados (8.0%), Dominican Republic (43.5%), Jamaica (19.4%), Trinidad and Tobago (5.7%); weights based on share of tourism arrivals to the Caribbean in 2000.
- Sources: IMF Information Notice System; and staff estimates.

### Trade Unions and Collective Bargaining (Annex I)
- Labor legislation:
  - Presently found in separate acts; Government decided to consolidate, update and amend all labor legislation with participation of all social partners.
- Minimum wage:
  - No national legal minimum wage. Wages Regulations Order of 1985 stipulates minimum wages for certain categories.
  - Labor Department statistics: workers in several categories receive wages double that of the legal minimum; rural area wages tend to be much closer to the legal minimum.
- Role of trade unions:
  - Authorities: trade unions have a significant part in determination of wages and a much lesser role in determining level of employment.
  - Wages and other conditions in the public sector carried out through collective bargaining.
  - Registration Status and Recognition of Employees and Employer Organizations Act No. 42 of 1999 guarantees compulsory union recognition; tendency for increase in union representation.
- Union membership (accounts for about 16 percent of total employment; list may not be fully exhaustive; percentage of total employment in parenthesis):
  - National Workers Union 3,575 (5.7)
  - Civil Service Association 2,450 (3.9)
  - Teachers’ Union 1,724 (2.7)
  - Seamen Union 1,220 (1.9)
  - Vieux Fort Dock Workers Union 740 (1.2)
  - St. Lucia Worker’s Union 250 (0.4)
- Negotiation and dispute resolution:
  - Recognized trade unions in public and private sector negotiate with employers; Labor Department assists; unresolved cases referred to the Minister of Labor.
  - Recent economic downturn has led to more realistic wage demands and easier internal wage settlements, typically for 2–3 years.
  - Majority of wage negotiations decentralized at firm level; public sector negotiations conducted by an ad hoc “umbrella” group (National Workers Union, St. Lucia Teachers Union, Civil Service Association, Vieux Fort Dock Workers Union).
- Employment adjustment practices:
  - Employers can lay off an employee for up to twelve consecutive weeks during downturns or reorganization; lay-off does not interrupt continuity of employment; if not re-instated after twelve weeks the employee is considered dismissed and may claim redundancy pay.

### Key Macroeconomic Indicators and Projections (Selected figures from Tables)
- Real sector and prices (Est./Proj. series)
  - Real GDP at factor cost (index 1998=100): 1999: 102.8; 2000: 102.9; 2001: 98.5; 2002: 98.5; 2003: 100.8; 2004: 101.8
  - Real GDP growth (percent): 1999: 2.8; 2000: 0.1; 2001: -4.3; 2002: 0.0; 2003: 2.3; 2004 (Proj.): 1.0
  - GDP deflator at factor cost: 1999: 4.7; 2000: 2.2; 2001: 1.3; 2002: 1.2; 2003: 0.7; 2004 (Proj.): 1.0
  - Consumer prices (end of period): 1999: 6.1; 2000: 0.4; 2001: 2.1; 2002: -0.6; 2003: 0.5; 2004 (Proj.): 1.0
- Labor and production
  - Unemployment rate: 1999: 18.1; 2000: 16.4; 2001: 18.1; 2002: 16.2
  - Banana production (annual percent changes): 1999: -10.7; 2000: 7.7; 2001: -51.6; 2002: 41.5; 2003: -34.8; 2004 (Proj.): 15.0
  - Tourist stayovers (percent change): 1999: 3.3; 2000: 3.6; 2001: -7.3; 2002: 1.3; 2003: 11.0; 2004 (Proj.): 3.5
- External sector (selected)
  - Exports, f.o.b. (index 1998=100): 1999: 86.5; 2000: 75.1; 2001: 76.9; 2002: 99.2; 2003: 94.0; 2004 (Proj.): 101.9
  - Imports, f.o.b. (index 1998=100): 1999: 105.8; 2000: 105.9; 2001: 92.2; 2002: 93.4; 2003: 119.5; 2004 (Proj.): 106.5
  - Travel receipts (percent change): 1999: 1.9; 2000: 3.3; 2001: -12.2; 2002: -8.1; 2003: 15.6; 2004 (Proj.): 8.5
  - Current account balance (percent of GDP): 1999: -12.5; 2000: -12.4; 2001: -9.0; 2002: -12.5; 2003: -18.6; 2004 (Proj.): -10.3
  - External debt (end of period, percent of GDP): 1999: 25.4; 2000: 28.8; 2001: 32.8; 2002: 38.4; 2003: 47.6; 2004 (Proj.): 48.0
  - Debt-service ratio (percent of exports of goods and services): 1999: 4.4; 2000: 5.3; 2001: 10.4; 2002: 10.0; 2003: 8.5; 2004 (Proj.): 10.2
- Public finances (percent of GDP, selected)
  - Nonfinancial public sector current balance: 1999: 7.7; 2000: 7.0; 2001: 2.8; 2002: 1.1; 2003: 1.1; 2004 (Proj.): 2.4
  - Capital outlays: 1999: 11.4; 2000: 9.0; 2001: 8.4; 2002: 10.4; 2003: 8.9; 2004 (Proj.): 7.2
  - Overall balance (before grants): 1999: -3.5; 2000: -1.9; 2001: -5.4; 2002: -9.4; 2003: -7.9; 2004 (Proj.): -4.7
  - Overall balance (after grants): 1999: -0.1; 2000: -1.3; 2001: -4.0; 2002: -7.4; 2003: -5.7; 2004 (Proj.): -3.2
  - Total public sector debt (percent of GDP): 1999: 38.7; 2000: 43.9; 2001: 49.4; 2002: 61.6; 2003: 65.7; 2004 (Proj.): 67.3
  - Of which central government debt (percent of GDP): 1999: 26.4; 2000: 31.0; 2001: 36.0; 2002: 48.4; 2003: 52.7; 2004 (Proj.): 54.7
- Monetary and banking (selected)
  - Money and quasi-money (M2, 12-month change): 1999: 9.7; 2000: 7.9; 2001: 4.7; 2002: 3.2; 2003: 4.8
  - Credit to private sector (12-month change): 1999: 13.6; 2000: 8.0; 2001: 5.1; 2002: 0.9; 2003: -4.1
  - Gross international reserves of the ECCB (US$ millions, end-of-period): 1999: 361.4; 2000: 377.3; 2001: 441.5; 2002: 501.9; 2003: 521.9

### Balance of Payments (Table 3, Strong Adjustment projections)
- Current account (US$ millions): 1999: -83.6; 2000: -84.8; 2001: -59.0; 2002: -84.9; 2003: -129.1; 2004 (Proj.): -72.5; 2005 (Proj.): -74.0; 2006 (Proj.): -74.6; 2007 (Proj.): -75.4; 2008 (Proj.): -76.8
- Trade balance (US$ millions): 1999: -251.1; 2000: -259.6; 2001: -218.0; 2002: -205.7; 2003: -286.4; 2004 (Proj.): -242.6
  - Exports, f.o.b. (US$ millions): 1999: 60.9; 2000: 52.9; 2001: 54.1; 2002: 69.8; 2003: 66.1; 2004 (Proj.): 71.7
  - Imports, f.o.b. (US$ millions): 1999: -312.0; 2000: -312.5; 2001: -272.1; 2002: -275.6; 2003: -352.6; 2004 (Proj.): -314.3
- Services (net, US$ millions): 1999: 145.5; 2000: 157.7; 2001: 145.4; 2002: 107.9; 2003: 143.3; 2004 (Proj.): 159.3
  - Travel receipts (US$ millions): 1999: 277.1; 2000: 286.1; 2001: 251.2; 2002: 230.7; 2003: 266.7; 2004 (Proj.): 289.3
- Capital and financial account (US$ millions): 1999: 91.3; 2000: 93.0; 2001: 69.2; 2002: 90.0; 2003: 146.3; 2004 (Proj.): 75.5
- Memorandum items:
  - Current account balance (percent of GDP): 1999: -12.5; 2000: -12.4; 2001: -9.0; 2002: -12.5; 2003: -18.6; 2004 (Proj.): -10.3
  - Foreign direct investment (net, percent of GDP): 1999: 12.4; 2000: 8.0; 2001: 3.4; 2002: 4.6; 2003: 14.7; 2004 (Proj.): 8.9
  - External debt (percent of GDP): 1999: 25.4; 2000: 28.8; 2001: 32.8; 2002: 38.4; 2003: 47.6; 2004 (Proj.): 48.0

### Fiscal Operations of the Central Government (Table 4, Strong Adjustment; selected levels and percent of GDP)
- Central government operations (EC$ millions, FY series)
  - Total revenue and grants (EC$ millions): 1999/00: 529.9; 2000/01: 493.6; 2001/02: 457.9; 2002/03: 478.1; 2003/04: 500.0; 2004/05 (Proj.): 512.5; 2005/06 (Proj.): 547.6; 2006/07 (Proj.): 585.7; 2007/08 (Proj.): 612.6; 2008/09 (Proj.): 640.9
  - Total expenditure and net lending (EC$ millions): 1999/00: 521.0; 2000/01: 517.3; 2001/02: 535.8; 2002/03: 615.6; 2003/04: 609.5; 2004/05 (Proj.): 571.7; 2005/06 (Proj.): 569.8; 2006/07 (Proj.): 581.4; 2007/08 (Proj.): 592.8; 2008/09 (Proj.): 603.6
  - Current balance (EC$ millions): 1999/00: 110.9; 2000/01: 99.5; 2001/02: 27.7; 2002/03: 5.8; 2003/04: 0.4; 2004/05 (Proj.): 27.3; 2005/06 (Proj.): 67.1; 2006/07 (Proj.): 97.4; 2007/08 (Proj.): 117.1; 2008/09 (Proj.): 139.0
- Central government operations (percent of GDP, FY series)
  - Total revenue and grants (percent of GDP): 1999/00: 29.2; 2000/01: 27.0; 2001/02: 25.7; 2002/03: 26.0; 2003/04: 26.6; 2004/05 (Proj.): 26.7; 2005/06 (Proj.): 27.6; 2006/07 (Proj.): 28.3; 2007/08 (Proj.): 28.3; 2008/09 (Proj.): 28.4
  - Total expenditure and net lending (percent of GDP): 1999/00: 28.7; 2000/01: 28.3; 2001/02: 30.1; 2002/03: 33.5; 2003/04: 32.4; 2004/05 (Proj.): 29.7; 2005/06 (Proj.): 28.7; 2006/07 (Proj.): 28.1; 2007/08 (Proj.): 26.7; 2008/09 (Proj.): 26.7
  - Current balance (percent of GDP): 1999/00: 6.1; 2000/01: 5.5; 2001/02: 1.6; 2002/03: 0.3; 2003/04: 0.0; 2004/05 (Proj.): 1.4; 2005/06 (Proj.): 3.4; 2006/07 (Proj.): 4.7; 2007/08 (Proj.): 5.4; 2008/09 (Proj.): 6.2
- Note: FY2002/03 includes a transfer of EC$47.5mn to the private sector (EC$15.1mn current transfer; EC$32.4mn capital transfer).

### Medium-Term Outlook (Tables 7 & 8; Current Policies vs Strong Adjustment)
- Medium-term (Current Policies) projections (selected):
  - Real GDP growth (annual): Average 2000-01: -2.1; 2002: 0.0; 2003: 2.3; 2004 (Proj.): 2.0; 2005 (Proj.): 1.5; 2006 (Proj.): 1.0; 2007 (Proj.): 1.0; 2008 (Proj.): 1.0
  - Current account (percent of GDP): Average 2000-01: -10.7; 2002: -12.5; 2003: -18.6; 2004 (Proj.): -10.0; 2005 (Proj.): -10.4; 2006 (Proj.): -10.5; 2007 (Proj.): -10.6; 2008 (Proj.): -10.8
  - Total public sector debt (percent of GDP): Average 2000-01: 46.7; 2002: 61.6; 2003: 65.7; 2004 (Proj.): 69.9; 2005 (Proj.): 74.4; 2006 (Proj.): 79.3; 2007 (Proj.): 84.3; 2008 (Proj.): 89.4
- Medium-term (Strong Adjustment) projections (selected):
  - Real GDP growth (annual): 2003: 1.0; 2004 (Proj.): 2.0; 2005 (Proj.): 3.0; 2006 (Proj.): 3.5; 2007 (Proj.): 3.5
  - Public sector overall balance (percent of GDP): 2003: -3.2; 2004 (Proj.): -1.1; 2005 (Proj.): 0.2; 2006 (Proj.): 0.9; 2007 (Proj.): 1.7
  - Total Debt (percent of GDP): 2003: 65.7; 2004 (Proj.): 67.3; 2005 (Proj.): 66.3; 2006 (Proj.): 63.4; 2007 (Proj.): 59.7; 2008 (Proj.): 55.5

### Public Debt and Debt Dynamics (Selected from Debt Sustainability Analysis)
- Public sector debt (percent of GDP): 1998: 42.0; 1999: 38.7; 2000: 43.9; 2001: 49.4; 2002: 61.6; 2003: 65.7; projections to 2008 reach 89.4 (2008).
- Change in public sector debt (percent of GDP): 1999: -3.4; 2000: 5.2; 2001: 5.5; 2002: 12.2; 2003: 4.1; subsequent annual projected changes around 4.2–5.0 (2004–2008).
- Identified debt-creating flows (percent of GDP): 1999: 1.2; 2000: 4.7; 2001: 8.6; 2002: 6.0; 2003: 4.4; 2004–2008 projections: 4.2–5.0
- Primary deficit (percent of GDP): 1999: 1.3; 2000: 2.6; 2001: 4.5; 2002: 4.4; 2003: 2.0; 2004–2008 projections trend downward from 2.1 to 1.3.
- Key macro-fiscal assumptions cited:
  - Real GDP growth (percent): Actuals and projections provided (e.g., 2003: 2.3 actual; 2004: 2.0 projection).
  - Average nominal interest rate on public debt (percent): 1999: 5.1; 2000: 4.8; 2001: 5.9; 2002: 6.7; 2003: 6.4; projections at 6.4–6.5.
  - Inflation rate (GDP deflator, percent): 1999: 6.0; 2000: 1.9; 2001: 0.3; 2002: 2.0; 2003: 3.2; 2004 onward: 0.0–1.1 projections.

*Source: St. Lucian authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections as presented in the provided IMF staff report content.*

### 1. Real GDP

### _cr04397 - 1. Real GDP

### Scenario results: impact on debt-to-GDP (selected scenario lines)
- Baseline phrasing: "Real GDP growth, real interest rate, and primary balance are at historical averages in 2003-2007"
  - 49.4
  - 61.6
  - 65.7
  - 69.9
  - 74.3
  - 78.8
  - 83.5
  - 88.2

- "Real interest rate is at historical average plus two standard deviations in 2003 and 2004"
  - 49.4
  - 61.6
  - 65.7
  - 71.6
  - 78.0
  - 83.1
  - 88.2
  - 93.4

- "Real GDP growth is at historical average minus two standard deviations in 2003 and 2004"
  - 49.4
  - 61.6
  - 65.7
  - 75.5
  - 86.6
  - 92.3
  - 98.1
  - 104.0

- "Primary balance is at historical average minus two standard deviations in 2003 and 2004"
  - 49.4
  - 61.6
  - 65.7
  - 74.3
  - 83.7
  - 89.1
  - 94.5
  - 100.0

- "Combination of 2-4 using one standard deviation shocks"
  - 49.4
  - 61.6
  - 65.7
  - 75.7
  - 86.6
  - 89.1
  - 91.6
  - 93.9

- "One time 30 percent real depreciation in 2004 7/"
  - 49.4
  - 61.6
  - 65.7
  - 90.6
  - 96.0
  - 101.9
  - 107.9
  - 114.0

- "10 percent of GDP increase in other debt-creating flows in 2003"
  - 49.4
  - 61.6
  - 65.7
  - 79.9
  - 84.8
  - 90.2
  - 95.7
  - 101.2

### Sensitivity: revenue shock impacts
- "Impact on debt-to-GDP ratio if revenue-to-GDP ratio is at historical average minus two standard deviations in 2003-04"
  - 49.4
  - 61.6
  - 65.7
  - 75.0
  - 84.8
  - 90.2
  - 95.7
  - 101.2

- "Impact on debt-to-revenue ratio if revenue-to-GDP ratio is at historical average minus two standard deviations in 2003-04"
  - 175.9
  - 190.9
  - 199.9
  - 276.1
  - 312.4
  - 280.5
  - 297.7
  - 314.8

### Historical statistics for key variables (past 5 years)
- Historical / Standard deviation / Average (as presented)
  - Primary deficit
    - 2.6
    - 2.0
  - Real GDP growth (in percent)
    - 0.4
    - 3.0
  - Nominal interest rate (in percent) 6/
    - 5.8
    - 0.8
  - Real interest rate (in percent)
    - 3.1
    - 2.5
  - Inflation rate (GDP deflator, in percent)
    - 2.7
    - 2.1
  - Revenue to GDP ratio
    - 30.4
    - 1.6

- Notes embedded in the source:
  - Definitions and derivations for debt dynamics and contributions (footnotes 2/–7/) are provided verbatim in the source text.

### Public sector debt sustainability table (selected series, 1998–2008)
- Public sector debt 1/ (percent of GDP), 1998–2008 (estimates and projections):
  - 1998: 42.0
  - 1999: 38.7
  - 2000: 43.9
  - 2001: 49.4
  - 2002: 61.6
  - 2003: 65.7
  - 2004: 67.3
  - 2005: 66.3
  - 2006: 63.4
  - 2007: 59.7
  - 2008: 55.5

- Of which: foreign-currency denominated (percent of GDP), 1998–2008:
  - 24.2
  - 25.3
  - 29.2
  - 32.5
  - 44.2
  - 47.1
  - 48.2
  - 47.5
  - 45.5
  - 42.8
  - 39.8

- Change in public sector debt (percent of GDP), 1998–2008:
  - 4.3
  - -3.4
  - 5.2
  - 5.5
  - 12.2
  - 4.1
  - 1.6
  - -1.0
  - -2.9
  - -3.7
  - -4.2

- Identified debt-creating flows (4+7+12), 1998–2008:
  - -1.5
  - 1.2
  - 4.7
  - 8.6
  - 6.0
  - 4.4
  - 1.6
  - -1.0
  - -2.9
  - -3.7
  - -4.2

- Primary deficit (percent of GDP), 1998–2008:
  - -0.1
  - 1.3
  - 2.6
  - 4.5
  - 4.4
  - 2.0
  - -1.0
  - -2.9
  - -4.1
  - -4.6
  - -5.1

- Revenue and grants (percent of GDP), 1998–2008:
  - 30.5
  - 31.4
  - 29.6
  - 28.1
  - 32.3
  - 32.8
  - 32.9
  - 33.8
  - 34.6
  - 34.6
  - 34.6

- Primary (noninterest) expenditure (percent of GDP), 1998–2008:
  - 30.4
  - 32.8
  - 32.3
  - 32.5
  - 36.7
  - 34.8
  - 31.9
  - 30.9
  - 30.4
  - 30.0
  - 29.5

- Automatic debt dynamics 2/ (percent of GDP), 1998–2008:
  - -1.5
  - -0.1
  - 2.1
  - 4.1
  - 1.5
  - 2.5
  - 2.6
  - 1.9
  - 1.3
  - 1.0
  - 0.9

- Contribution from real interest rate (percent of GDP), 1998–2008:
  - -0.4
  - 1.1
  - 2.1
  - 2.1
  - 1.5
  - 3.9
  - 3.2
  - 3.2
  - 3.2
  - 3.1
  - 2.9

- Contribution from real GDP growth (percent of GDP), 1998–2008:
  - -1.1
  - -1.2
  - -0.1
  - 1.9
  - 0.0
  - -1.4
  - -0.6
  - -1.3
  - -1.9
  - -2.1
  - -2.0

- Residual, including asset changes (2-3), 1998–2008:
  - 5.8
  - -4.6
  - 0.5
  - -3.0
  - 6.2
  - -0.3
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0

- Public sector debt in percent of revenues 1/, 1998–2008:
  - 137.8
  - 123.0
  - 148.2
  - 175.9
  - 190.9
  - 199.9
  - 204.5
  - 195.9
  - 183.5
  - 172.8
  - 160.4

- Gross financing 5/ (percent of GDP), 1998–2008:
  - -0.9
  - 1.4
  - 4.1
  - 7.6
  - 16.0
  - 7.4
  - 5.2
  - 3.9
  - 4.3
  - 3.6
  - 2.6

- Gross financing in millions of U.S. dollars, 1998–2008:
  - -6.1
  - 9.5
  - 27.9
  - 50.1
  - 108.8
  - 51.8
  - 37.1
  - 28.8
  - 33.0
  - 28.5
  - 22.0

### Key macroeconomic and fiscal assumptions (selected)
- Real GDP growth (in percent), 1998–2008:
  - 3.1
  - 3.1
  - 0.2
  - -4.3
  - 0.0
  - 2.3
  - 1.0
  - 2.0
  - 3.0
  - 3.5
  - 3.5

- Average nominal interest rate on public debt (in percent) 6/:
  - 5.1
  - 4.8
  - 5.9
  - 6.7
  - 6.4
  - 6.4
  - 6.3
  - 6.2
  - 6.2
  - 6.1
  - 6.1

- Average real interest rate (nominal rate minus change in GDP deflator, in percent):
  - -1.0
  - 2.9
  - 5.6
  - 4.7
  - 3.2
  - 6.4
  - 5.0
  - 5.0
  - 5.0
  - 5.1
  - 5.1

- Nominal appreciation (increase in US dollar value of local currency, in percent):
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0

- Inflation rate (GDP deflator, in percent):
  - 6.0
  - 1.9
  - 0.3
  - 2.0
  - 3.2
  - 0.0
  - 1.3
  - 1.3
  - 1.1
  - 1.0
  - 1.0

- Growth of real primary spending (deflated by GDP deflator, in percent):
  - 5.4
  - 11.0
  - -1.4
  - -3.5
  - 12.7
  - -2.9
  - -7.3
  - -1.3
  - 1.5
  - 1.9
  - 1.9

*Sources: St. Lucian authorities; ECCB; and Fund staff estimates and projections.*

### 8. Im

### _cr04397 - 8. Im

### Impact scenarios: revenue shock (revenue-to-GDP at historical average minus two standard deviations in 2003-04)
- Impact on debt-to-GDP ratio (series): 49.4, 61.6, 65.7, 73.0, 78.9, 76.2, 72.8, 68.7
- Impact on debt-to-revenue ratio (series): 175.9, 190.9, 199.9, 269.1, 290.5, 220.6, 210.5, 198.6

### Table 10 — Public Sector Debt Sustainability Framework, 1998–2008 (Strong Adjustment) — selected items (in percent of GDP unless otherwise indicated)
- External debt (1998–2008): 24.6, 25.4, 28.8, 32.8, 38.4, 47.6, 49.3, 52.2, 55.7, 59.2, 62.8
- Change in external debt (1998–2008): 1.1, 0.9, 3.4, 3.9, 5.6, 9.2, 1.7, 2.9, 3.5, 3.5, 3.6
- Identified external debt-creating flows (4+8+9) (1998–2008): -3.7, -1.3, 3.9, 6.9, 6.8, 3.0, 1.0, 1.8, 2.8, 2.9, 3.0
- Current account deficit, excluding interest payments (1998–2008): 10.5, 11.5, 11.2, 7.3, 11.0, 16.4, 7.3, 7.7, 7.7, 7.6, 7.5
- Net non-debt creating capital inflows (negative) (1998–2008): -13.2, -12.4, -8.0, -3.4, -4.6, -14.7, -7.6, -7.1, -6.6, -6.6, -6.6
- Automatic debt dynamics (1998–2008): -0.9, -0.4, 0.7, 3.0, 0.5, 1.3, 1.3, 1.3, 1.8, 1.9, 2.2
  - Contribution from nominal interest rate (1998–2008): 1.0, 1.0, 1.2, 1.8, 1.6, 2.2, 2.7, 2.7, 2.8, 3.0, 3.3
  - Contribution from real GDP growth (1998–2008): -0.8, -0.6, 0.0, 1.3, 0.0, -0.9, -0.9, -1.0, -0.5, -0.5, -0.6
  - Contribution from price and exchange rate changes (1998–2008): -1.1, -0.8, -0.5, 0.0, -1.1, 0.0, -0.5, -0.5, -0.5, -0.6, -0.6
- Residual, incl. change in gross foreign assets (2-3) (1998–2008): 4.8, 2.2, -0.4, -3.0, -1.2, 6.2, 0.7, 1.1, 0.6, 0.6, 0.5
- External debt-to-exports ratio (in percent) (1998–2008): 40.5, 44.3, 51.1, 60.3, 74.6, 84.8, 84.4, 89.0, 94.5, 100.0, 105.4
- Gross external financing need (in billions of US dollars) (1998–2008): 0.1, 0.1, 0.1, 0.1, 0.2, 0.2, 0.1, 0.1, 0.2, 0.2, 0.2

### Key macroeconomic assumptions (historical average and projections where shown)
- Real GDP growth (in percent) — historical series and projections: 3.8, 2.8, 0.1, -4.3, 0.0, 0.5, 3.1, 2.3, 2.0, 2.0, 1.0, 1.0, 1.0
- GDP deflator in US dollars (change in percent): 5.1, 3.2, 2.0, 0.1, 3.5, 2.8, 1.9, 0.1, 1.0, 1.0, 1.0, 1.0, 1.0
- Nominal external interest rate (in percent): 4.8, 4.5, 4.7, 5.8, 5.0, 5.0, 0.5, 6.0, 5.8, 5.7, 5.5, 5.6, 5.7
- Growth of exports (US dollar terms, in percent): 2.2, 0.4, 0.5, -7.7, -2.1, -1.3, 3.9, 11.6, 7.2, 3.5, 2.4, 2.6, 2.6
- Growth of imports (US dollar terms, in percent): 4.3, 3.2, -0.4, -12.1, 4.1, -0.2, 6.9, 19.2, -6.1, 3.7, 2.5, 2.7, 2.8
- Current account balance, excluding interest payments (in percent of GDP): -10.5, -11.5, -11.2, -7.3, -11.0, -10.3, 1.7, -16.4, -7.3, -7.7, -7.7, -7.6, -7.5
- Net non-debt creating capital inflows (in percent of GDP): 13.2, 12.4, 8.0, 3.4, 4.6, 8.3, 4.4, 14.7, 7.6, 7.1, 6.6, 6.6, 6.6

### Stress tests for external debt ratio — selected scenario outcomes (external debt ratios in percent)
- Baseline / Alternative Scenarios (2004–2008) A1 (key variables at historical averages in 2004-08): 47.6, 51.0, 54.9, 58.3, 61.9, 65.3
- A2 (country-specific shock: reduction in GDP growth of one standard deviation in 2004): 47.6, 50.8, 53.9, 57.5, 61.1, 64.8
- Bound tests:
  - B1 (nominal interest rate = historical average + two standard deviations in 2004 and 2005): 47.6, 49.4, 52.5, 56.0, 59.5, 63.1
  - B2 (real GDP growth = historical average - two standard deviations in 2004 and 2005): 47.6, 52.8, 59.2, 61.9, 64.6, 67.4
  - B3 (US dollar GDP deflator = historical average - two standard deviations in 2004 and 2005): 47.6, 50.1, 53.9, 57.2, 60.5, 63.9
  - B4 (non-interest current account = historical average - two standard deviations in 2004 and 2005): 47.6, 55.7, 64.8, 68.7, 72.7, 76.8
  - B5 (combination of 2–5 using one standard deviation shocks): 47.6, 55.8, 65.4, 69.5, 73.6, 77.9
  - B6 (one-time 30 percent nominal depreciation in 2004): 47.6, 67.2, 68.1, 69.5, 71.0, 72.4

### Table 11 — External Debt Sustainability Framework, 1998–2008 (Current Policies) — selected baseline projections (in percent of GDP unless otherwise indicated)
- External debt (1998–2008): 24.6, 25.4, 28.8, 32.8, 38.4, 47.6, 48.0, 47.8, 46.0, 43.5, 40.5
- Change in external debt (1998–2008): 1.1, 0.9, 3.4, 3.9, 5.6, 9.2, 0.5, -0.3, -1.8, -2.5, -2.9
- Identified external debt-creating flows (4+8+9) (1998–2008): -3.7, -1.3, 3.9, 6.9, 6.8, 3.0, 0.4, -0.8, -2.1, -2.9, -3.2
- External debt-to-exports ratio (in percent) (1998–2008): 40.5, 44.3, 51.1, 60.3, 74.6, 84.8, 81.0, 79.4, 75.7, 70.6, 65.0
- Gross external financing need (in billions of US dollars) (1998–2008): 0.1, 0.1, 0.1, 0.1, 0.2, 0.2, 0.1, 0.2, 0.2, 0.2, 0.2

### Stress tests under current policies — selected scenario outcomes (external debt ratios in percent)
- A1 (key variables at historical averages in 2004–08): 47.6, 50.3, 53.7, 56.8, 60.1, 63.3
- A2 (country-specific shock: reduction in GDP growth of one standard deviation in 2004): 47.6, 49.6, 49.3, 47.5, 44.9, 41.9
- B1 (nominal interest rate = historical average + two standard deviations in 2004 and 2005): 47.6, 48.1, 48.0, 46.2, 43.7, 40.7
- B2 (real GDP growth = historical average - two standard deviations in 2004 and 2005): 47.6, 51.0, 53.7, 50.4, 46.3, 41.7
- B3 (US dollar GDP deflator = historical average - two standard deviations in 2004 and 2005): 47.6, 48.9, 49.3, 47.1, 44.2, 40.8
- B4 (non-interest current account = historical average - two standard deviations in 2004 and 2005): 47.6, 54.2, 60.4, 58.8, 56.4, 53.6
- B5 (combination of 2–5 using one standard deviation shocks): 47.6, 53.9, 60.1, 58.3, 55.6, 52.5
- B6 (one-time 30 percent nominal depreciation in 2004): 47.6, 65.4, 61.7, 56.0, 49.2, 41.9

### Selected policy-relevant observations from the projections and tests
- Under current policies the external debt ratio peaks in projections and then declines: external debt reaches 48.0 (2004) and falls to 40.5 (2008).
- Strong adverse shocks to real GDP growth (B2) or a combined adverse shock (B5) raise external debt ratios substantially under the strong-adjustment baseline (ratios rising into the 60s and 70s in some scenarios).
- A one-time 30 percent nominal depreciation in 2004 produces large increases in external debt ratios under strong-adjustment scenarios (B6: 47.6, 67.2, 68.1, 69.5, 71.0, 72.4).

### IMF relations, technical assistance, and major external financing and projects (selected facts and amounts)
- Membership: Joined 11/15/79; Article VIII.
- Quota: SDR Million 15.30 (100.00 percent of quota). Fund holdings of currency: 15.29 (99.97). Reserve position in Fund: 0.01 (0.04).
- Exchange rate arrangement: Member of Eastern Caribbean Currency Union; EC$ pegged to U.S. dollar at EC$2.70 per U.S. dollar since July 1976.
- Technical assistance (CARTAC) — selected activities 2001–2004: multiple missions on financial programming, CPI compilation, import-export price indices, tax administration training, financial sector supervision, and regulatory support.
- World Bank active projects in St. Lucia (net commitment approximately US$31.1 million):
  - St. Lucia Disaster Management Project: St. Lucia component US$6 million (total program US$46 million).
  - Emergency Recovery Projects (Bank’s support to St. Lucia): US$6.3 million.
  - St. Lucia Water Sector Reform Technical Assistance: $2.6 million.
  - St. Lucia Poverty Reduction Fund: US$3 million.
  - OECS Education Reform Project (St. Lucia component): US$12.0 million.
  - OECS Telecommunications Reform (St. Lucia component): US$1.2 million.
- World Bank financial relations — selected disbursements and availabilities (in millions of U.S. dollars):
  - ST. LUCIA EMERGENCY RECOVERY PROJECT — Original 6.30; Disbursed 3.16; Available/Principal 3.70
  - ST. LUCIA DISASTER MANAGEMENT — Original 3.04; Disbursed 0.25; Available/Principal 2.79
  - OECS TELECOM REFORM - ST. LUCIA — Original 1.20; Disbursed 0.65; Available/Principal 0.57
  - ST. LUCIA WATER SECTOR REFORM TA — Original 2.60; Disbursed 2.33; Available/Principal 0.57
  - ST. LUCIA POVERTY REDUCTION FUND — Original 1.50; Disbursed 0.65; Available/Principal 0.85
  - OECS EDUCATION (APL01) ST. LUCIA — Original 12.00; Disbursed 13.04; Available/Principal 0.09

*Sources: St. Lucian authorities; and Fund staff estimates and projections.*

### 1970. Of this amount, $110.6 million were provided from the Ordinary Capital Resources while

### _cr04397 - 1970. Of this amount, $110.6 million were provided from the Ordinary Capital Resources while

### CDB assistance: approvals and sectoral distribution (1970–2002)
- Total approved financing, 1970–2002: $230.8 million (100.0 percent).
- Sectoral distribution of approved financing (In Millions of U.S. Dollars; In Percent):
  - Transportation: 52.2 — 22.6
  - Education: 41.7 — 18.1
  - Manufacturing: 26.7 — 11.6
  - Agriculture: 26.2 — 11.4
  - Water: 19.1 — 8.3
  - Tourism: 14.1 — 6.1
  - Housing: 19.1 — 8.3
  - Health: 5.6 — 2.4
  - Power and energy: 1.4 — 0.6
  - Multisector: 24.7 — 10.6
  - TOTAL: 230.8 — 100.0

### Recent approvals, outstanding balances, and disbursements
- Total net loans, contingent loans, equity and grants approved:
  - During 2002: $8.8 million
  - During the first half of 2003: $8.7 million
- Outstanding balances:
  - End of December 2002: $85.6 million (compared to $76.4 million at end-2001)
  - End of June 2003: $91.0 million on some 46 loans with 15 projects under implementation
- Disbursements of loans, contingent loans, equity and grants:
  - During 2002: $17.5 million
  - During the first half of 2003: $7.0 million
- Initial financing split referenced for 1970: $110.6 million from Ordinary Capital Resources; remainder from “soft” resources.

### Statistical issues: overarching assessment
- General assessment:
  - St. Lucia’s statistical database is inadequate for meeting authorities’ needs and for Fund surveillance.
  - Weaknesses in coverage, frequency, quality, and timeliness.
  - Weakest areas: national accounts, fiscal accounts, and balance of payments.
  - Comprehensive and regular labor statistics are not available.
- Data publications:
  - Ministry of Finance: annual economic and social review with macroeconomic sector statistics.
  - Eastern Caribbean Central Bank (ECCB): quarterly economic and financial review and an annual balance of payments for each member country.
- GDDS participation:
  - St. Lucia participates in the General Data Dissemination System (GDDS).
  - Metadata, including detailed plans for statistical development, posted on the Fund’s Dissemination Standards Bulletin Board since September 21, 2000.

### Real sector: issues and initiatives
- GDP methodology:
  - Authorities developing a new methodology for GDP to obtain better sectoral estimates; process hindered by data collection problems.
  - Attempts to compile quarterly GDP estimates with funding from the OAS.
- Tourism statistics:
  - Need for a new comprehensive survey to establish key data: average length of stay by accommodation type and average daily expenditure by type of tourist arrivals.
  - Recommendation to cross-check tourism data with related activities (restaurants, transportation) to ensure consistency.
- Price indices and tourism price measurement:
  - Caribbean Regional Technical Assistance Center mission helped develop export and import price indices and undertook initial work on measuring price developments in tourism.
- Labor statistics:
  - Reporting of private and public employment and wages needs improvement.

### Public sector finance: data strengths and gaps
- Central government:
  - Reporting has improved substantially; monthly central government current revenue and expenditure reported using a Fund-compatible economic classification with lags of one to two months.
  - Frequent large revisions to initially reported figures indicate need for further quality improvements.
- Rest of public sector:
  - Periodicity and timeliness of reporting should be improved.
  - Annual statements and projections are obtained directly from each entity during Fund missions; consolidated public sector accounts compiled by Fund staff.
  - Data on domestic debt of the public sector are not available on a regular basis.
  - No fiscal data are reported to STA for publication in the GFS Yearbook or in IFS.

### Money and banking
- ECCB compiles monthly data on commercial banks with a lag of about six weeks; information is reliable and regularly reported.
- Data for a group of nonbank financial intermediaries are compiled by the Ministry of Finance with a lag of about three months and reported on an irregular basis.

### Balance of payments
- ECCB compiles balance of payments data on an annual basis.
- Recent data provide a more detailed goods breakdown than in the past, but other areas lack sufficient detail to enable publication using the full BPM5 classification.
- Data for 2001 and revised earlier years were published in the March 2003 issue of IFS.
- Enhanced data sources and better compilation procedures are needed; efforts should be made to compile quarterly balance of payments statistics.

### External debt
- Ministry of Finance maintains a comprehensive database for public and publicly guaranteed external loans, providing detailed and reasonably up-to-date breakdowns of disbursements and debt service.
- Information on bonds placed abroad is compiled annually; monthly bond data provided only at staff request.
- Recent weakening in bond information quality due to discontinuation of disaggregation between resident and nonresident holders; restoring this detail would be useful.

### APPENDIX                                                                                                IV

### APPENDIX IV — Statement materials and Public Information Notice (May 5, 2004; PIN November 15, 2004)

### Economic activity and tourism
- Real GDP grew by 3.7 percent in 2003 (preliminary data), driven by 17 percent growth in the hotels and restaurants sector (staff statement).
- Tourism indicators:
  - Gross tourism receipts: $266.7 million (2003).
  - Stay-over arrivals increased by 9.3 percent to an all time high of nearly 277,000 (authorities’ statement).
  - Tourism sector growth cited as 16.6 percent (authorities’ breakdown).
  - Cruise arrivals increased by 1.6 percent (authorities’ statement).
  - European travel to St. Lucia increased by 17.6 percent (authorities’ statement).
- Despite the tourism rebound, growth was described as “narrowly based” and the recovery had not spilled over broadly to the rest of the economy (staff and Board assessment).

### Labor market and output composition
- Unemployment:
  - Reported to have increased from 20.4 percent in 2002 to 22.2 percent in 2003 (staff statement).
  - Executive Board cited unemployment “remained high (16–18 percent)” (PIN).
- Sectoral movements (authorities’ detail):
  - Wholesale and retail trade grew by 7.8 percent.
  - Communications grew by 4.5 percent.
  - Transportation grew by 2.6 percent.
  - Agriculture value added fell by 10.8 percent; banana output declined by 29.5 percent due to adverse weather and leaf spot disease.

### Fiscal developments and public finances
- FY2003/04 preliminary fiscal outturns (staff statement):
  - Central government current revenue increased by almost 10 percent.
  - Excluding payments associated with a government guarantee, current expenditure rose by almost 8 percent.
  - Outlays for wages and salaries increased by about 11 percent, reflecting an end-year bonus of EC$850 per person and a retroactive 3 percent wage increase.
  - Current account (central government) showed a surplus of 0.5 percent of GDP (staff), compared to an earlier estimate of approximate balance.
- Central government balance and public sector (PIN table):
  - Public sector revenue: 37.3 percent of GDP (2003).
  - Public sector expenditure: 39.8 percent of GDP (2003).
  - Central government balance: -5.5 percent of GDP (FY 2003/04 estimate).
  - Public sector balance: -2.6 percent of GDP (2003).
  - Public sector savings: 4.7 percent of GDP (2003).
- Fiscal stance for FY 2004/05 (staff statement):
  - Budget largely neutral on revenue; current expenditure budgeted to increase by over 7 percent.
  - Budget implies worsening of the current balance of almost 1 percent of GDP compared to the previous fiscal year, against staff’s recommendation of an improvement of about the same magnitude.
  - Capital spending allocation sharply cut relative to last year’s budget but higher than realized FY 2003/04 spending.
  - A 50 percent execution rate for capital expenditure (consistent with recent experience) would imply a reduction in capital expenditure of about 2 percent of GDP, as recommended by staff.
- One-off and legal note:
  - On March 29, 2004, the OECS Court of Appeal overturned a High Court ruling that the St. Lucia Government had not followed proper procedure in issuing a government guarantee (staff footnote).

### Debt dynamics and debt management
- External public debt (PIN table): 46.6 percent of GDP (2003).
- Public debt at end-2003: 64 percent of GDP (staff note).
- Staff and authorities:
  - Recent rise in public debt driven by expansionary fiscal policies since 1999 and increased external borrowing from commercial banks in 2003.
  - Authorities reported improvements in debt management: lengthening maturities and reducing interest costs through refinancing operations; issuance of EC$27 million one-year treasury bills in January 2004 at a yield of 5.5 percent (fully subscribed).
  - Interest payments around 3.5 percent of GDP (authorities’ statement).

### External sector and balance of payments
- Current account and external flows (PIN table and staff notes):
  - Current account balance: -$129.1 million (2003).
  - Current account balance: -18.3 percent of GDP (2003).
  - Merchandise exports: $66.1 million (2003).
  - Merchandise imports: $352.6 million (2003).
  - Overall balance: $17.2 million (2003).
  - Gross tourism receipts: $266.7 million (2003).
- Banking sector:
  - Bank credit to the private sector declined by an estimated 3½ percent in 2003 (PIN narrative); PIN table reports credit to the private sector change of -4.1 percent (2003).
  - Directors expressed concern about high levels of nonperforming loans and noted banks are increasing provisioning and exercising caution in new lending.

### Executive Board assessment and policy recommendations
- Main Board messages:
  - Welcome to the ongoing recovery led by tourism but concern that recovery is narrowly based and prospects for sustained growth are uncertain.
  - Emphasis that sustained recovery depends on fiscal discipline and structural reforms to foster private sector-led growth, diversification, and competitiveness.
  - Concern over steep increase in public debt; urged strong upfront fiscal adjustment and continued moderation in expenditures to mitigate vulnerability to exogenous shocks.
  - Welcome to authorities’ intention to reduce capital outlays in FY 2004/05 but stressed need for additional steps to contain current expenditures.
  - Directors urged a concrete timetable toward gradual fiscal consolidation, identifying specific measures to rationalize expenditure and strengthen revenue collection.
  - Some Directors called for fundamental public sector reform to reduce the overall wage bill.
  - Recommended accelerated tax reform along lines proposed by the Tax Reform and Administration Commission of the Organization of Eastern Caribbean Countries and prompt establishment of a Revenue Authority; welcomed circulation of the OECS Tax Reform report for public discussion.
  - Encouraged structural reforms to improve the business environment and reduce costly tax incentives.
  - Stressed need for labor market flexibility within the currency board arrangement, continued wage moderation, and increased labor productivity.
  - Urged restructuring of the water company, increased efficiency in electricity generation, and agricultural diversification to support tourism.
  - Urged continued cooperation with the Eastern Caribbean Central Bank (ECCB) to address banking-sector vulnerabilities; encouraged completion of divestiture from the Bank of St. Lucia and enforcement of AML/CFT regulations for the offshore sector.
  - Noted need to improve the consistency and timeliness of economic statistics and encouraged enhanced reporting under the GDDS and seeking technical assistance from CARTAC and other donors.

### Monetary and financial sector supervision
- Authorities’ stance:
  - Continue to view the common monetary and exchange arrangement with the ECCB as indispensable for low inflation and economic stability.
  - Working with the ECCB to implement supervisory mechanisms for compliance with Basel Core Principles and to develop and enforce AML/CFT regulations.
  - Welcomed the regional FSAP and FSSA recommendations but shared ECCB concerns about tone and interpretation in parts of the Executive Summary (authorities’ statement).

### Selected economic indicators (from table)
- Output and prices:
  - Real GDP: 1999: 2.8; 2000: 0.1; 2001: -4.3; 2002: 0.4; 2003: 3.7.
  - Consumer prices (average): 1999: 3.5; 2000: 3.6; 2001: 2.1; 2002: -0.2; 2003: 1.0.
- Investment and saving (percent of GDP):
  - Gross domestic investment: 1999: 27.7; 2000: 26.6; 2001: 26.0; 2002: 22.8; 2003: 28.4.
  - Gross domestic savings: 1999: 15.2; 2000: 14.2; 2001: 17.0; 2002: 10.2; 2003: 10.1.
- Public sector operations (percent of GDP):
  - Public sector revenue: 1999: 39.3; 2000: 38.0; 2001: 36.3; 2002: 36.7; 2003: 37.3.
  - Public sector expenditure: 1999: 36.7; 2000: 37.4; 2001: 38.0; 2002: 41.2; 2003: 39.8.
  - Public sector savings: 1999: 10.7; 2000: 10.2; 2001: 5.6; 2002: 4.3; 2003: 4.7.
  - Public sector balance: 1999: 2.6; 2000: 0.6; 2001: -1.7; 2002: -4.4; 2003: -2.6.
  - Central government balance: 1999: 0.5; 2000: -1.3; 2001: -4.4; 2002: -7.5; 2003: -5.5.
- External sector (levels, in millions of U.S. dollars):
  - Merchandise exports: 1999: 60.9; 2000: 52.9; 2001: 54.1; 2002: 69.8; 2003: 66.1.
  - Merchandise imports: 1999: 312.0; 2000: 312.5; 2001: 272.1; 2002: 275.6; 2003: 352.6.
  - Gross tourism receipts: 1999: 277.1; 2000: 286.1; 2001: 251.2; 2002: 230.7; 2003: 266.7.
  - Current account balance: 1999: -83.6; 2000: -84.8; 2001: -59.0; 2002: -84.9; 2003: -129.1.
  - Overall balance: 1999: 7.7; 2000: 8.2; 2001: 10.1; 2002: 5.1; 2003: 17.2.
  - Current account balance (in percent of GDP): 1999: -12.5; 2000: -12.4; 2001: -9.0; 2002: -12.5; 2003: -18.3.
  - External public debt (in percent of GDP): 1999: 25.4; 2000: 28.8; 2001: 32.8; 2002: 38.4; 2003: 46.6.
  - Real effective exchange rate (1990=100), year average (2003: January to November): 1999: 115.5; 2000: 122.3; 2001: 122.9; 2002: 120.6; 2003: 108.2.
- Monetary sector (changes in percent of broad money at the beginning of the period):
  - Net domestic assets: 1999: 10.8; 2000: 4.7; 2001: 4.6; 2002: 4.1; 2003: -6.3.
  - Credit to the private sector: 1999: 13.6; 2000: 8.0; 2001: 5.1; 2002: 0.9; 2003: -4.1.
  - Broad money (M2): 1999: 9.7; 2000: 7.9; 2001: 4.7; 2002: 3.2; 2003: 4.8.

### Authorities’ perspectives and structural initiatives (Statement by Ian Bennett, Executive Director for St. Lucia)
- Authorities’ view:
  - Growth acceleration to 3.7 percent in 2003 was “significantly higher than the 2.3 percent projected growth at the time of the Article IV mission.”
  - Government recognizes need to control the size of the deficit; interest payments around 3.5 percent of GDP.
  - Government actions to support the economy include upgrading social infrastructure and services and preparing for the Caribbean Single Market and Economy (CSME) by January 2005.
- Revenue and expenditure measures taken or proposed:
  - Revenue-enhancing measures: increase in departure tax for Caribbean Community nationals by approximately 50 percent; tripling of marriage fees; significant increase in commercial bank license fees; intention to increase fuel prices if oil prices do not recede; support for work on a regional VAT-type tax.
  - Capital expenditures significantly cut; a one-time end-year bonus of EC$850 per person paid; modest structural pay increase from salary negotiations and a retroactive 3 percent wage increase.
  - Debt management improvements: issuance of treasury bills on the regional securities market at 5 ½ percent; establishment of a new debt management unit with expert personnel.
- Structural reforms and programs:
  - Youth apprenticeship program in collaboration with private sector agencies.
  - Creation of an agricultural diversification agency.
  - Health care reforms to support universal health care.
  - Investments to enhance internal security (e.g., forensic unit).
  - Incentive package to increase hotel room capacity contingent on selection to host the ICC Cricket World Cup in 2007.
  - Preparations for CSME participation, including reforms on work permits, recognition of degrees and certificates, social security agreements, taxation non-discrimination on CARICOM goods, and amendment of discriminatory legislation.

*Source: IMF staff statement, Public Information Notice No. 04/128, and statements by authorities (May 5, 2004; PIN November 15, 2004).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04397.pdf_