## _cr09180 - EXECUTIVE SUMMARY

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### Background and key macroeconomic outlook
- Context: global financial crisis, collapse of CL Financial Group, and Hurricane Omar constitute a "perfect economic storm."
- Real GDP growth:
  - 2008: grew by 3.2 percent.
  - 2009 projection: contract by 1.2 percent ("with risks clearly on the downside").
- Inflation:
  - End-2007: 2.1 percent.
  - Peak October 2008: 8.3 percent.
  - End-2008: 7.6 percent.
  - 2009 projection: 3.5 percent (projected to ease on lower oil prices).
- Monetary and credit:
  - Broad money growth: 2.2 percent in 2008 (from 11.2 percent in 2007).
  - Private sector credit growth: 7.5 percent by end-2008 (from 9.2 percent a year earlier).
- External sector:
  - Current account deficit: 24 percent of GDP in 2007; expected to widen to about 29 percent in 2008.
  - 2009 projection: deficit projected to narrow by about 7 percentage points as FDI-related imports fall sharply.
  - External current account long-run equilibrium cited: 30 percent of GDP.

### Impact of Hurricane Omar (October 16–17, 2008)
- Physical and labor impact:
  - Severe storm surge flooded the major tourism resort on Nevis; hotel closure initially estimated six months but now expected much longer due to substantial redesign.
  - Over 600 employees laid off.
- Economic and balance-of-payments impact:
  - Hurricane contributed to 2008 slowdown and could depress growth by about 1 percentage point in 2009.
  - Balance of payments impact estimated at EC$50 million (3½ percent of GDP), mostly felt in 2009.
  - Resort's closure estimated declines in tourism receipts: EC$11 million in 2008 and EC$50 million in 2009.
  - Net impact on imports: reduction of about EC$10 million, partially offset by higher rehabilitation imports.
  - No offsetting insurance inflows as payments were impounded by the bank holding the mortgage.
  - Balance-of-payments impact equivalent to about one month of 2008 imports.
- Fiscal/fiscal-unit impact:
  - Nevis Island Authority (NIA) revenue decline estimate: about 1.5 percent of GDP in 2009.
  - Hotel room and restaurant tax accounted for about 13 percent of NIA’s budget revenue.
  - Direct tax revenue impact from resort closure: about EC$8 million (0.5 percent of GDP) over 12 months.
- Authorities’ immediate response: relief and infrastructure repair largely completed; measures to ensure severance benefits and facilitate alternative employment; developing a comprehensive economic program.

### Fiscal performance, scenarios, and key targets
- Recent fiscal performance:
  - 2008 primary surplus: estimated at 5.3 percent of GDP (fourth consecutive year).
  - Improvement driven by capital expenditure cutback (by about 60 percent relative to approved budgets); current expenditure rose reflecting higher interest payments and an additional 7.5 percent civil service salary increase retroactive to January 2008 (estimated cost 0.9 percent of GDP).
  - Government measures to compensate for high food and fuel prices estimated to cost about 0.3 percent of GDP.
- Public debt and debt service:
  - Public debt ratio: 178 percent of GDP at end-2008 (fell by about 20 percentage points since 2005).
  - Debt service: interest payments represented 24 percent of total government revenue in 2008.
  - Interest payments expected to swell from about 8 percent of GDP in 2007 to 15 percent in 2014.
- Government medium-term target:
  - Aim to raise central government primary surplus to 8 percent of GDP by 2010.
- ENDA request:
  - Authorities requested a purchase equivalent to SDR 2.225 million (25 percent of quota) under ENDA.
  - Purchase equals approximately ½ percent of 2009 GDP.
  - Fund financing expected to partly offset Hurricane Omar balance-of-payments impact estimated at almost US$19 million.

### Baseline versus active fiscal scenarios (selected exact projections)
- Staff baseline (2009 budget parameters):
  - Primary surplus projected to decline to about 2.4 percent of GDP in 2009.
  - Public debt: rising from 178 percent of GDP at end-2008 to close to about 186 percent by end-2009.
  - Debt projection series (Baseline, percent of GDP): 178, 186, 192, 196, 200, 206, 213.
  - Primary balance (Baseline, percent of GDP): 5.3 / 2.4 / 0.9 / 1.3 / 1.7 / 1.6 / 1.5.
  - Real GDP growth (Baseline, percent): 3.2 / -1.2 / 0.0 / 1.0 / 2.0 / 2.0 / 2.0.
- Staff active scenario:
  - Additional adjustment to achieve primary surpluses of about 6–8½ percent of GDP during 2009–14.
  - Public debt projected to decline to under 140 percent of GDP by 2014.
  - Debt projection series (Active, percent of GDP): 178, 179, 174, 164, 155, 146, 135.
  - Primary balance (Active, percent of GDP): 5.3 / 6.0 / 6.3 / 6.8 / 7.4 / 8.0 / 8.5.
  - Real GDP growth (Active, percent): 3.2 / -1.2 / 1.0 / 3.0 / 4.0 / 4.0 / 4.0.
  - Active scenario assumes land sales equivalent to 2 percent of GDP in 2009 and 3 percent of GDP per year thereafter (with caveat on feasibility).

### Recommended fiscal adjustment measures (near-term focus on expenditure containment)
- Active-scenario 2009 aim: primary surplus of 6.0 percent of GDP.
- Fiscal adjustment composition (2009, active scenario relative to 2008):
  - St. Kitts Government adjustment: 0.9 percent of GDP.
  - NIA adjustment: 0.5 percent of GDP.
  - Unlocking additional grants: about 2.6 percent of GDP.
- Key expenditure and revenue measures (verbatim program elements and impacts where provided):
  - Civil service reform: moderate wage increases (e.g., keeping them in line with inflation).
  - Tight control over goods and services spending (growth kept in line with inflation).
  - Corporatize the Electricity Department to remove a substantial drain:
    - Shortfall estimated at almost 2 percent of GDP in 2007.
    - Revenue loss from 50-percent cap on electricity fuel surcharge since January 2008 estimated at 0.6 percent of GDP.
    - Under active scenario, corporatization assumed early 2010; baseline assumed early 2011.
  - Targeted social transfers and phased-back consumption taxes by end-year; if politically difficult, raise excise taxes and expedite VAT implementation.
  - Contain and prioritize capital expenditure; strengthen PSIP process and seek concessional financing.
- Options table (total impact of fiscal measures under active scenario, In percent of GDP):
  - Total impact of fiscal measures: 1.4 (Total), 0.9 (St. Kitts), 0.5 (Nevis).
  - Components: Reduce transfers/net lendings to public enterprises 0.7 (Total), 0.7 (St. Kitts), 0.1 (Nevis); Contain capital expenditure 0.3 (Total), 0.0 (St. Kitts), 0.3 (Nevis); Revenue measures 0.4 (Total), 0.2 (St. Kitts), 0.2 (Nevis).

### Revenue and tax reforms
- VAT:
  - VAT would broaden coverage and consolidate taxes, including fully replacing current consumption tax.
  - Preparatory work began in December 2008 with a VAT team comprising staff from both islands.
  - Critical requirement: unified regime administered at the federal level with effective revenue-sharing between St. Kitts and Nevis.
  - VAT implementation timing: active scenario assumes late 2010; baseline delays to mid-2011 or October 2010 in other references.
- Tax concessions and corporate tax:
  - Authorities preparing a new Investment Code to specify a transparent, nondiscretionary regime for investment incentives.
  - Plan to introduce a new Corporate Tax Act to modernize the existing Income Tax Act.

### Debt management, asset sales, and financing
- Staff advice and Box 2 recommendations:
  - A substantial increase in the primary surplus to around 8 percent of GDP would be needed to place debt firmly on a downward path.
  - Land/asset sales target: aim for land sales to the private sector at about 3 percent of GDP per year (global downturn may hinder meeting target).
  - Use sales proceeds to pay down most expensive public debt first; establish a land sales agency with transparent, market-based procedures.
  - Concessional resources: CDB policy-based loan first tranche and EU sugar grants of 2–3 percent of GDP per year through 2014 contingent on meeting conditions.
  - Rationalize public liabilities: simplify structure, reduce cross-liabilities and guarantees; avoid using land as collateral for public enterprise borrowing; reduce SSB exposure to quasi-fiscal public corporations.
  - Strengthen debt management capacity: compile comprehensive government debt database; establish a Public Debt Committee chaired by the Minister of Finance.

### Financial sector vulnerabilities and recommended regulatory actions
- Banking sector vulnerabilities (selected indicators):
  - NPLs ratio: rose to 5.2 percent in 2008 (1 percentage point increase) — slightly above ECCB prudential target of 5 percent.
  - Gross government exposure to total capital of banking system: 207 percent at end-2008.
  - Banking system public sector exposure: 51 percent of total loans; locally incorporated banks: 79 percent of total loans.
  - Provisioning in foreign banks has declined; officially reported capital adequacy ratios are well above prudential norms.
  - Local banks more profitable than foreign banks but generally less liquid.
- Nonbank and systemic risks:
  - Failure/intervention of CL Financial Group exposed weaknesses in nonbank regulation. CL subsidiaries hold about 17 percent of GDP in deposits and investments and about 3 percent of GDP of public debt.
  - SSB role: major financier of government via loans, treasury bills, and indirectly via banks and land sales; SSB shifted investments toward real estate and quasi-fiscal activities, reducing financing available to government.
  - Deposits held on behalf of individuals in St. Kitts and Nevis amount to EC$120 million; mid-March withdrawals requests of EC$40 million from one insurance company largely not accommodated.
  - Offshore sector: provides about 10 percent of tax revenues; inclusion on OECD list of tax havens noted.
- Staff recommendations:
  - Intensify monitoring and frequent on-site inspections, stress testing, enforcement of banking regulations, and develop a full-fledged contingency plan.
  - Eliminate intermediary role of the indigenous bank between social security and central government; consider temporary direct government borrowing from social security (transitory).
  - Establish a Single Regulatory Unit (SRU) as soon as feasible; expand Financial Services Commission into a fully operational SRU; pass supporting legislation (Insurance Act, Cooperatives Act).
  - Enhance oversight of insurance companies; ensure adequate reinsurance contracts.
  - Monitor developments at foreign bank headquarters more closely.
  - Prepare emergency fiscal measures as part of contingency planning (e.g., special levy on incomes, temporary import surcharge, nominal public sector wage cut).

### Debt sustainability analysis, gross financing needs, and stress scenarios
- Major vulnerabilities:
  - Very high public debt and large gross financing needs: almost 30 percent of GDP during 2009–13.
  - ENDA repurchases scheduled: fall due in 2012 and 2013.
- DSA projections and stress tests (selected exact metrics):
  - Public enterprise indebtedness: 40 percent of GDP in 2008 (starting point); projected around 32 percent by 2014 under active scenario.
  - Public debt projections:
    - Baseline: above 200 percent of GDP by 2014.
    - Active: under 140 percent of GDP by 2014.
  - Gross external financing need (in percent of GDP): selected entries show 35.6, 32.3, 30.5, 37.0, 39.5 in DSA tables.
- Downside/modified active scenario stress cases:
  - Disaster in 2009 and 2013: assume real growth reduced by 5 percent in 2009 and 2013, expenditure increased by 2–3 percent of GDP, revenue declines by about 2 percent of GDP during 2009–13.
  - Lower growth with land sales of 1 percent of GDP: same fiscal path as active but lower GDP growth and land sales.
  - Lower growth with land sales of 3 percent of GDP: same fiscal path/land sales but GDP growth declines as in baseline.
  - Under pessimistic shocks, decline in debt ratio much slower and could be reversed in some years.

### External competitiveness, growth, and structural reforms
- Real effective exchange rate (REER): staff analysis suggests REER is "broadly in line with macroeconomic fundamentals."
- Competitiveness challenges:
  - Recent minimum and government wage increases have kept private and government wage levels among the highest in the region.
  - Loss of some Caribbean tourist market share since 2006.
- Key reform areas:
  - Business climate: St. Kitts and Nevis ranks 67th out of 181 on the World Bank’s 2009 Doing Business Indicators; simplify starting/closing businesses, strengthen contract enforcement, improve credit information.
  - Role of government: remove infrastructure bottlenecks, corporatize electricity and water services, comprehensive civil service reform.
  - Labor market: strengthen vocational/technical education, increase labor market flexibility (firing costs noted as highest in the region), support labor mobility within CSME.
  - Regional integration: deepen cooperation to exploit trade agreements and lower costs.

### Data, donor support, and institutional/implementation considerations
- Data and statistical weaknesses (selected):
  - GDP by expenditure not available at constant prices; current price estimates unreliable.
  - Tourism statistics not compiled in detail since end-2001.
  - No comprehensive labor market data.
  - Fiscal data for public enterprises and nonfinancial public sector incomplete.
  - Monetary/statistical coverage improvements noted; broad money (M2) definition revised from January 1, 2009 to include deposits of non-bank financial institutions.
- Donor and multilateral relations:
  - CDB: approved loans total US$169.6 million, US$135.1 million disbursed as of end-2008.
  - World Bank: three active projects with total commitment US$9.6 million, US$6.6 million disbursed.
  - Authorities urged to work closely with donors/creditors to secure grants or highly concessional loans and to expedite conditional concessional flows (CDB policy-based loan tranche; EU sugar grants of 2–3 percent of GDP per year contingent on conditions).
- Implementation risks and political economy:
  - Active scenario is ambitious and subject to strong public resistance, especially ahead of parliamentary elections due by October 2009.
  - Limited administrative capacity could delay reforms (staff encouraged aligning targets with development partners).
  - Land sales politically and technically complex; global downturn may impede meeting 3 percent of GDP target.

### Staff appraisal and priorities
- Staff supports ENDA purchase request given severe economic effects and large balance-of-payments needs.
- Recommended policy priorities:
  - Sustain larger primary surpluses over the medium term via expenditure control and structural fiscal reforms (most critically the VAT).
  - Tighten oversight of the broader public sector and financial sector (including SRU).
  - Strengthen debt management capacity and accelerate land/asset sales to lower debt rapidly.
  - Develop a full-fledged contingency/crisis preparedness plan including emergency fiscal measures.
- Growth outlook conditional on reforms and project completion:
  - With appropriate policies and completion of planned high-end tourism projects and geothermal energy development in Nevis, real growth could potentially rise to 4 percent per year or higher over the medium and longer terms.

*Source: IMF staff report content provided in the supplied document.*

### EXECUTIVE SUMMARY

### _cr09180 - EXECUTIVE SUMMARY

### Background and Challenges
- The global financial crisis, the collapse of CL Financial Group, and Hurricane Omar are creating the "perfect economic storm."
- After growing by 3.2 percent in 2008, St. Kitts and Nevis’ real output is projected to contract by 1.2 percent in 2009, "with risks clearly on the downside."
- The government achieved a large primary surplus in 2008 for the fourth consecutive year; the public debt ratio is down by 20 percentage points over the past three years.
- The country’s still heavy debt burden has left no space for fiscal policy to respond to the downturn.
- Liquidity risks have risen due to large rollover needs of short-term debt.
- Financial sector vulnerability stems from banks’ continued high government exposure and inadequate supervision of the nonbank sector.

### Key Policy Recommendations
- Sustain large primary surpluses over the medium term by:
  - Continued and strengthened expenditure control.
  - Further structural fiscal reforms, "including, most critically, the VAT."
- Tighten oversight of the broader public sector.
- Work closely with donors/creditors to tap grants or highly concessional loans.
- Strengthen debt management capacity.
- Strengthen financial sector regulations.
- Accelerate land/asset sales to lower debt more rapidly.
- Develop a full-fledged contingency plan (urgently needed in the current environment).

### External Competitiveness
- The real effective exchange rate and medium-term current account deficits are "broadly in line with fundamentals."
- Maintaining competitiveness remains a challenge.
- Fiscal consolidation is important for:
  - Supporting competitiveness.
  - Maintaining stability.
  - Underpinning the quasi-currency board arrangement.

### Request for Fund Financing
- Authorities requested a purchase under the Fund’s Emergency Assistance for Natural Disasters (ENDA) equivalent to 25 percent of quota (SDR 2.225 million).
- Fund financing is expected to partly offset the balance of payments impact of Hurricane Omar, estimated at almost US$19 million.

### Context (longer-term background)
- Over the past decade the economy faced successive shocks: hurricanes in the late 1990s; the sharp drop in tourism after September 11; closure of the sugar industry.
- Fiscal responses to shocks led to accumulation of public debt, with the debt ratio peaking in 2005 at 197 percent of GDP.
- The global recession is weakening tourism and FDI-related construction, risking a worsening balance-of-payments position.
- Strains from the global crisis are evident through insurance, investment, and banking linkages with CL Financial Group; a deeper slowdown could raise NPLs and erode confidence.
- Major macro risk: very high level of debt and large financing requirements. Debt service takes up nearly a quarter of government revenues.
- Access to external financing is extremely limited; government increasingly relies on a heavily exposed banking system.
- Preliminary Country Poverty Assessment: government made "remarkable strides" in reducing poverty and strengthening social indicators, but the global crisis threatens these gains.
- St. Kitts and Nevis form a twin-island federation; parliamentary elections due by October 2009. Political cycle complicates fiscal consolidation and structural reforms.

### Recent Economic Developments and Near-Term Outlook
- Real GDP growth for 2008 is estimated at about 3.2 percent, despite slower growth in H2 2008 as tourism declined.
- Hurricane Omar (October 2008) severely damaged Nevis’ largest tourism resort; the resort is likely to remain closed during 2009.
- Real GDP is projected to contract by 1.2 percent in 2009; decline tempered by continued construction of some high-end resorts in St. Kitts, expansion of medical and nursing schools, opening of a new horse racing complex, and start of the geothermal project on Nevis.
- Inflation: picked up from 2.1 percent at end-2007 to a peak of 8.3 percent in October 2008, moderating to 7.6 percent by end-2008. Inflation is projected to ease further in 2009 on the back of lower oil prices.
- Monetary developments:
  - Broad money growth fell to 2.2 percent in 2008 from 11.2 percent in 2007.
  - Growth of private sector credit slowed to 7.5 percent by end-2008 from 9.2 percent a year earlier.
- Balance of payments:
  - Current account deficit widened to 24 percent of GDP in 2007; financed more than fully by tourism-related FDI (30 percent of GDP).
  - Current account deficit in 2008 expected to widen to about 29 percent due to lower tourism receipts.
  - Deficit projected to narrow substantially (about 7 percentage points) in 2009 as decline in tourism receipts is more than offset by a sharp drop in FDI-related imports.
- Banking sector prudential indicators:
  - NPLs ratio rose by 1 percentage point in 2008 to 5.2 percent, slightly above the ECCB prudential target of 5 percent.
  - Gross government exposure to total capital of the banking system stood at 207 percent at end-2008.
  - Banking system’s public sector exposure was 51 percent of total loans; for locally incorporated banks public sector exposure was 79 percent of total loans.

### Fiscal Performance and Debt Dynamics
- 2008 primary surplus estimated at 5.3 percent of GDP (fourth consecutive year).
  - Improvement reflected a large cutback in capital expenditure (by about 60 percent relative to the approved budgets), which more than offset a decline in revenues and an increase in current expenditure.
  - Current expenditure rise reflected higher interest payments and an additional 7.5 percent increase (approved in September) in civil service salaries retroactive to January 2008 (estimated to cost 0.9 percent of GDP).
  - Government measures to compensate for high food and fuel prices (including removing consumption tax on critical food items) estimated to cost about 0.3 percent of GDP.
- Little current information on broader public sector financial accounts despite passage of the Financial Administration Act in 2008.
- Share of public enterprises’ debt in total public sector debt was 22 percent as of end-2008.
- Public debt ratio has fallen by about 20 percentage points since 2005 but remains 178 percent of GDP.
- Debt service costs have increased about threefold over the past decade; interest payments represented 24 percent of total government revenue in 2008.
- Borrowing from commercial banks increasingly via expensive overdraft facility (interest rates and penalties as high as 11.5 percent).
- Interest payments expected to swell from about 8 percent of GDP in 2007 to 15 percent in 2014.
- 2008 improvements in debt profile:
  - EC$150 million bond issued in March 2008 under CDB policy-based guarantee and the first tranche of CDB’s policy-based loan (US$10 million disbursed in July 2008) used to reduce the overdraft facility.
  - Overdraft in domestic banking system by mid-2008 was more than halved from 23 percent of GDP at end-2007.
  - However, about half of the bond was purchased by a local indigenous bank and a large portion by the Social Security Board, both heavily exposed to the government; banking exposure increased again since July 2008.
  - Government returned to tapping the overdraft; January 2009 €5.4 million sugar grant from the EU was used to pay down the overdraft briefly before it resumed rising.

### Banking System Vulnerabilities (selected indicators)
- Unsatisfactory asset ratios began edging up in 2008 after falling through 2007.
- Provisioning in foreign banks has declined.
- Officially reported capital adequacy ratios are well above prudential norms.
- Local banks more profitable than foreign banks but generally less liquid.

*Source: IMF staff compilation from _cr09180 - EXECUTIVE SUMMARY.*

### 15.      St. Kitts and Nevis, particularly the island of Nevis, has been badly affected by

### _cr09180 - 15.      St. Kitts and Nevis, particularly the island of Nevis, has been badly affected by

### Impact of Hurricane Omar (October 16–17, 2008)
- Hurricane Omar passed the region over the period of October 16–17, 2008.
- Severe damage from an extremely high storm surge:
  - Flooded the major tourism resort on Nevis and caused destruction to roads and coastal infrastructure.
  - Hotel initially estimated to be closed for about six months; substantial redesign now expected to keep it closed much longer.
- Over 600 employees have already been laid off.

### Economic and labor-market effects
- The hurricane contributed to the economic slowdown in 2008 and could depress growth by about 1 percentage point in 2009.
- Impact concentrated in Nevis; decline in activity spills over to agriculture and light manufacturing that supply tourism.
- Closure could affect airlift; the damaged hotel is the largest employer in Nevis, implying significant unemployment effects.

### Fiscal impact on Nevis and central government
- Staff’s preliminary estimates: total revenue of the Nevis Island Authority (NIA) would decline by about 1.5 percent of GDP in 2009 from the previous year due to the combined impact of the global downturn and Hurricane Omar.
- Hotel room and restaurant tax accounted for about 13 percent of NIA’s budget revenue.
- The resort’s closure expected direct impact of about EC$8 million on tax revenue (0.5 percent of GDP) over a 12-month period.
- The slow unfolding of effects stretched NIA finances, which bore most of the cost; assistance from development partners has not been forthcoming.
- Although the country participates in the CCRIF, wind speed (not flooding) is the trigger for payout, so St. Kitts and Nevis could not benefit from CCRIF for this event.

### Balance of payments impact
- Balance of payments impact of the hurricane estimated at EC$50 million (3½ percent of GDP), mostly felt in 2009.
- Resort’s closure estimated to cause a decline in tourism receipts of:
  - EC$11 million in 2008
  - EC$50 million in 2009
- Net impact on imports: reduction of about EC$10 million (fewer visitors accommodated and lower spending by displaced workers), partially offset by higher imports for rehabilitation, road repairs, and sea defense strengthening.
- No offsetting inflows of insurance payments as these were impounded by the bank holding the resort’s mortgage.
- The balance of payments impact is equivalent to about one month of 2008 imports.

### Authorities’ response and financing constraints
- Immediate relief provided; repair to damaged infrastructure largely completed.
- Government steps to cushion displaced workers: ensure severance benefits and facilitate alternative employment.
- Authorities developing a comprehensive economic program aimed at:
  - Strengthening public finances to reduce public debt ratios.
  - Undertaking structural reforms to help reactivate the economy.
- Severe financing constraints at central government level limit response options.

### Fiscal strategy, scenarios, and key targets
- Government reiterated commitment to an ambitious medium-term strategy aiming to raise the central government primary surplus to 8 percent of GDP by 2010 and place debt on a sustainable path.
- Recent measures already taken: close state sugar company, strengthen tax administration, implement automatic fuel pricing mechanism, adopt market-valuation-based property tax (assessments nearly completed).
- Staff baseline (2009 budget parameters) projects primary surplus to decline to about 2.4 percent of GDP in 2009.
- Staff “active” scenario recommends additional adjustment measures aimed at achieving primary surpluses of about 6–8½ percent of GDP during 2009–14.
- Under the active scenario, public debt projected to decline to under 140 percent of GDP by 2014; under the baseline public debt projected to rise above 200 percent of GDP by 2014.

### Specific fiscal projections and comparisons (selected figures preserved exactly)
- Government’s consolidated 2009 budget projects an overall primary surplus of 5.3 percent of GDP, larger than staff’s baseline projection of about 2.4 percent.
- Staff foresees public debt:
  - Rising from 178 percent of GDP at end-2008 to close to about 186 percent by end-2009 under the baseline scenario.
- Note in Box 1 (authorities’ projection): public debt projected to fall from 169 percent of GDP at end-2008 to 165 percent of GDP at end-2009.
- Projections table (Public debt, selected years, In percent of GDP):
  - Active: 178, 179, 174, 164, 155, 146, 135
  - Baseline: 178, 186, 192, 196, 200, 206, 213
- Projections table (Primary balance, In percent of GDP):
  - Active 2008 Prel./2009/2010...: 5.3 / 6.0 / 6.3 / 6.8 / 7.4 / 8.0 / 8.5
  - Baseline 2008 Prel./2009/2010...: 5.3 / 2.4 / 0.9 / 1.3 / 1.7 / 1.6 / 1.5
- Real GDP growth (in percent) from projections:
  - Active: 3.2 / -1.2 / 1.0 / 3.0 / 4.0 / 4.0 / 4.0
  - Baseline: 3.2 / -1.2 / 0.0 / 1.0 / 2.0 / 2.0 / 2.0

### Recommended fiscal adjustment measures (near-term focus on expenditure containment)
- Overall active-scenario aim: primary surplus of 6.0 percent of GDP in 2009.
- Fiscal adjustment in 2009 under active scenario:
  - Relative to 2008: St. Kitts Government adjustment of 0.9 percent of GDP; NIA adjustment of 0.5 percent of GDP; unlocking additional grants of about 2.6 percent of GDP.
- Key expenditure measures include (verbatim program elements and estimated impacts where provided):
  - Civil service reform: moderate wage increases (e.g., keeping them in line with inflation) to reverse fiscal slippages and protect competitiveness.
  - Tight control over goods and services spending (growth in expenditure kept in line with inflation).
  - Corporatize the Electricity Department to remove a substantial drain on the budget:
    - Shortfall estimated to amount to almost 2 percent of GDP in 2007.
    - Revenue loss from 50-percent cap on electricity fuel surcharge since January 2008 estimated to amount to 0.6 percent of GDP.
    - Under active scenario, corporatization assumed early 2010; baseline assumes delay to early 2011.
  - Targeted support: move quickly to put in place well-targeted social transfers and phase back consumption taxes by end-year; if politically difficult, raise excise taxes and expedite VAT implementation.
  - Capital expenditure: contain and prioritize; strengthen PSIP process and seek concessional financing where possible.
- Options table (total impact of fiscal measures under active scenario, In percent of GDP):
  - Total impact of fiscal measures: 1.4 (Total), 0.9 (St. Kitts), 0.5 (Nevis)
  - Components include: Reduce transfers/net lendings to public enterprises 0.7 (Total), 0.7 (St. Kitts), 0.1 (Nevis); Contain capital expenditure 0.3 (Total), 0.0 (St. Kitts), 0.3 (Nevis); Revenue measures 0.4 (Total), 0.2 (St. Kitts), 0.2 (Nevis); other line items as presented in the source.

### Revenue and tax reforms emphasized
- Value-added tax (VAT):
  - VAT would broaden coverage and consolidate taxes, including fully replacing current consumption tax.
  - Preparatory work began in December 2008 with a VAT team comprising staff from both islands.
  - Critical requirement: unified regime administered at the federal level with effective revenue-sharing between St. Kitts and Nevis.
- Tax concessions:
  - Authorities preparing a new Investment Code to specify a transparent, nondiscretionary regime for investment incentives.
- Corporate income tax:
  - Plan to introduce a new Corporate Tax Act to modernize the existing Income Tax Act.

### Debt management and additional measures to reduce public debt
- Staff advice and Box 2 recommendations:
  - Restore debt sustainability: a substantial increase in the primary surplus to around 8 percent of GDP would be needed to place debt firmly on a downward path.
  - Land/asset sales target: aim for land sales to the private sector at about 3 percent of GDP per year (global downturn may hinder meeting target).
  - Use sales proceeds to pay down most expensive public debt first; establish a land sales agency with transparent, market-based procedures.
  - Concessional resources: first tranche of the CDB’s policy-based loan and first disbursement of EU’s pledged sugar grants of 2–3 percent of GDP per year through 2014 contingent on meeting conditions.
  - Rationalize public liabilities: simplify structure, reduce cross-liabilities and guarantees; avoid using land as collateral for public enterprise borrowing; reduce SSB exposure to quasi-fiscal public corporations.
  - Strengthen debt management capacity and institutional arrangements:
    - Compile a comprehensive government debt database including timely inclusion of public enterprise and NIA debt.
    - Establish a Public Debt Committee chaired by the Minister of Finance to approve debt strategy and annual financing plan.
    - Develop a medium-term debt management strategy and capacity for debt sustainability and debt strategy analyses.

*Sources: ECCB; and Fund staff estimates and projections.*

### 27.      The active scenario is, nevertheless, subject to substantial downside risks. Due

### _cr09180 - 27.      The active scenario is, nevertheless, subject to substantial downside risks. Due

### Downside risks to the active scenario
- Any exogenous shock could raise debt to much higher levels given very limited fiscal room for maneuver (Annex I and Figures 6 and 7).
- Growth may remain stagnant under a more severe or prolonged global downturn than currently projected.
- Land sales of 3 percent of GDP per year, as assumed under the active scenario, may prove too optimistic given the difficult global environment and popular resistance.
- Under more pessimistic scenarios:
  - The decline in the debt ratio is much slower and could even be reversed in some years.
  - Debt remains significantly lower than under the baseline scenario, but progress is materially weakened.

### Enhancing competitiveness and fostering growth
- Restoring growth to medium-term potential will help accelerate the reduction in the public debt-to-GDP ratio and improve living standards.
- External competitiveness remains a challenge despite the REER being broadly in line with fundamentals (see Box 3).
- Recent minimum and government wage increases have mitigated commodity price shocks but have kept private sector and government wage levels among the highest in the region.
- St. Kitts and Nevis has given up some recent gains in the share of the Caribbean tourist market since 2006.

Key reform areas and specific measures the authorities reaffirmed commitment to:
- Business climate
  - St. Kitts and Nevis ranks 67th out of 181 countries on the World Bank’s 2009 Doing Business Indicators survey.
  - Simplify procedures for starting and closing businesses, strengthen contract enforcement, and improve availability of credit information.
  - The St. Kitts Investment Promotion Agency (SKIPA) as a one-stop shop is commendable; adopting an Investment Code should be expedited.
- The role of government
  - Public sector should remove infrastructure bottlenecks and create a supportive environment for private-sector-led growth.
  - Corporatization of the electricity department and water services, and comprehensive civil service reform, are critical.
- Labor market
  - Use the slowdown in large-scale investment projects to implement measures to avoid future labor shortages.
  - Strengthen vocational and technical education, make the labor market more flexible (firing costs in St. Kitts and Nevis are the highest in the region), and support labor mobility within the Caribbean Single Market and Economy (CSME).
- Regional integration
  - Deepen regional cooperation to take advantage of trade agreements, facilitate movement of goods, services and labor, and lower costs of providing government services.

### Box 3 — Assessment of External Stability (summary)
- Real effective exchange rate (REER)
  - Staff analysis suggests the REER is broadly in line with macroeconomic fundamentals.
  - Through mid-2008, the CPI-based REER depreciated in line with the weakening of the U.S. dollar; recent strengthening of the U.S. dollar has reversed some competitiveness gains but not enough to suggest misalignment.
  - Competitor- and customer-based REERs have remained roughly stable since 2005.
- External current account
  - The external current account deficit remains elevated but is close to the estimated norm.
  - The recent surge in the current account deficit reflects mainly strong FDI growth and commodity price shocks.
  - The current account deficit is projected to decline over the medium term supported by fiscal consolidation in the authorities’ program, but will remain high as a result of FDI-financed imports.
  - This level appears to be consistent with the long-run equilibrium external current account deficit of 30 percent of GDP.

### Mitigating vulnerability — financial sector and nonbanks
Findings on financial sector risks:
- Failure and intervention of CL Financial Group exposed weaknesses in regulatory framework for nonbanks.
  - CL Financial subsidiaries are holding about 17 percent of GDP in deposits and investments and about 3 percent of GDP of the public debt.
- Nonperforming loans have begun to increase after a period of rapid credit growth as slowing economy and employment losses constrain repayment capacity.

Key risks identified:
- Government exposure of the banking system
  - The largest indigenous bank holds more than 50 percent of the domestic deposit base and holds over 60 percent of the domestic public sector debt.
  - The bank’s gross government exposure-to-capital ratio has come down recently with the lowering of the overdraft and an increase in its capital but remains above 200 percent.
  - Any disruption of government payment capacity could create severe problems in the banking system.
- Liquidity squeeze
  - The Social Security Board (SSB) has been a major financier of the government through loans, treasury bills, and indirectly via the banking system and land sales.
  - The SSB has changed its investment strategy away from fixed deposits toward real estate development and quasi-fiscal activities, markedly reducing financing available to government from banking or social security systems.
- Nonbank financial sector vulnerabilities
  - Intervention of CL Financial and fraud accusations against Stanford International Bank highlight risks from lax regulation of nonbanks.
  - High-interest-rate deposit-taking by associated insurance companies was a red flag.
  - Deposits held on behalf of individuals in St. Kitts and Nevis now amount to EC$120 million and, should there be a “run” on these deposits, the government could not give a credible guarantee.
  - By mid-March, depositors and policyholders had requested EC$40 million in withdrawals from one of the insurance companies, most of which was not accommodated.
- Offshore sector risk
  - St. Kitts and Nevis has been included on the OECD’s list of tax havens.
  - The offshore sector provides about 10 percent of tax revenues; shutting it down would be particularly harmful to the NIA’s fiscal situation.
  - Preliminary CFATF report indicates a better evaluation than the previous one; government is working urgently to address remaining issues, including the Tax Cooperation Act to exchange information.

### Staff recommendations and regulatory actions
- Monitoring and supervision
  - Close monitoring of domestic banking system and international markets, frequent on-site inspections, stress testing, enforcement of banking regulations, and development of a full-fledged contingency plan.
  - Monitor developments at headquarters of foreign banks more closely.
- Public finance and social security
  - Eliminate the intermediary role of the indigenous bank between social security and the central government.
  - Consider government borrowing directly from the social security system as a temporary measure and cease the SSB’s quasi-fiscal and real estate development activities.
  - Ensure any direct borrowing is transitory to preserve long-term viability of social security.
- Strengthening nonbank regulation
  - Establish a Single Regulatory Unit (SRU) as soon as feasible to strengthen regulatory framework for nonbanks and close legal loopholes permitting regulatory arbitrage.
  - Expand the role of the Financial Services Commission into a fully operational SRU; early passage of supporting legislation such as the Insurance Act and Cooperatives Act was commended.
- Contingency planning
  - Develop a contingency/crisis preparedness plan that accounts for various growth and asset sales scenarios and a range of exogenous shocks (e.g., natural disasters, terms-of-trade shocks, elimination of offshore banking sector).
  - As a first step, prepare a set of emergency fiscal measures (e.g., special levy on incomes, temporary import surcharge, nominal public sector wage cut).
  - Continue consultations with legal and financial advisors on debt strategy design and include various scenarios in the contingency plan.

### Risks to the adjustment strategy (detailed)
- Financing of the external current account deficit
  - FDI, external grants (mainly from the EU), and other private flows are a large portion of current account financing.
  - If these flows do not materialize, commercial banks could reduce holdings of net foreign assets, increasing vulnerability, imports would fall, output growth would be constrained, and debt dynamics could become explosive.
  - A liquidity squeeze could complicate rolling over public sector external debt—about EC$53 million (3½ percent of GDP) falling due in 2009.
- Implementation risks
  - The active adjustment scenario is very ambitious and may face strong public resistance, especially ahead of general elections due by October 2009.
  - Limited implementation capacity could delay achievement of goals; staff encouraged aligning targets with those established with development partners like the CDB and the EU.
- Natural disasters
  - A direct hit by a hurricane could severely derail the economic strategy; Hurricane Omar already strained the Nevis economy and its financial autonomy.
  - Staff welcomed emphasis on preparedness and wider use of insurance (including CCRIF participation) for mitigating and managing natural disasters.
  - More effective oversight of insurance companies by the SRU would ensure adequate reinsurance contracts are in place.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 37.      The authorities have requested a purchase for an amount equivalent to

### _cr09180 - 37.      The authorities have requested a purchase for an amount equivalent to 

### Emergency purchase request and immediate impact
- The authorities have requested a purchase for an amount equivalent to SDR 2.23 million (25 percent of quota) under the Fund’s policy of ENDA.
- The purchase represents approximately ½ percent of St. Kitts and Nevis’ 2009 GDP.
- Purpose: to help meet the immediate foreign exchange needs stemming from the disaster, thereby mitigating a decline in external reserves.

### Debt sustainability, vulnerabilities, and repayment capacity
- It is expected that St. Kitts and Nevis will be able to discharge its obligations with the Fund in a timely manner.
- Prior to Hurricane Omar, public sector and external debt ratios had been declining due to authorities’ fiscal efforts to maintain a primary surplus of more than 4 percent of GDP over the last four years.
- The effects of the hurricane will likely contribute to the projected rise in debt.
- A major vulnerability: large gross financing needs of almost 30 percent of GDP during 2009–13, which could become more burdensome when the repurchases for ENDA fall due in 2012 and 2013.
- Staff view: risks are mitigated by the government’s strong debt servicing record, recent fiscal efforts to reduce the public debt ratio, commitment to generate even larger surpluses over the medium term, and land sales to help reduce public debt levels.
- Note from analysis: insurance coverage under the CCRIF is much below the optimal level (as suggested in referenced analysis by Y. Wong, A. Lemus, and N. Wagner).

### Staff appraisal: macroeconomic outlook and policy priorities
- Context: global recession, financial meltdown of CL Financial Group, and Hurricane Omar have created severe economic challenges; the economy is set to contract with downside risks.
- Authorities’ priority: restoring debt sustainability with fiscal adjustment as the central strategy.
- Achievements: four consecutive years of large primary surpluses and substantive lowering of the public debt ratio.
- Near-term expectation: debt ratio expected to rise in the current year.
- Recommended policy actions:
  - Sustain even larger primary surpluses over the medium term through continued and strengthened expenditure control.
  - Implement further structural fiscal reforms, most critically the VAT.
  - Tighten oversight of the broader public sector.
  - Work closely with donors/creditors to tap additional grants or highly concessional loans.
  - Strengthen debt management capacity.
  - Put in place an effective single regulatory unit for the nonbank financial sector.
  - Enhance regulation of the banking system.
  - Accelerate land/asset sales to lower debt more rapidly.
- Financial-sector recommendations: intensify monitoring and enhanced supervision of banking and nonbank sectors; address serious weaknesses in the nonbank financial regulatory framework, particularly in insurance.
- Contingency planning: develop a full-fledged contingency/crisis preparedness plan including emergency fiscal measures to respond quickly to adverse scenarios.
- Growth prospect (conditional): with appropriate policies and completion of planned high-end tourism projects and geothermal energy development in Nevis, real growth could potentially rise to 4 percent per year or higher over the medium and longer terms.

### Staff support for ENDA purchase and risk assessment
- Staff supports the authorities’ request for a purchase under the Fund’s policy on emergency assistance for natural disasters.
- Rationale: severe effect on the economy, large balance of payment needs, and authorities’ commitment to an ambitious reform strategy focused on debt reduction.
- Risks to Fund resources: large public debt and small-island economy vulnerability pose some risks.
- Risk mitigation: authorities’ exemplary record of debt service on external obligations and resolve to sustain fiscal consolidation, foster private sector-led growth, and work closely with the Fund.

### Data and surveillance
- Data are broadly adequate for surveillance, but improvements in coverage and timeliness in some areas would strengthen economic management.
- Progress noted in fiscal and debt data quality and coverage.
- Further improvements needed in national accounts (particularly tourism data), fiscal data for public enterprises, fiscal financing, and labor statistics.
- Recommendation: next Article IV consultation on the standard 12-month cycle.

### Medium-term fiscal scenarios and debt sustainability analysis (summary)
- General assessment: high risk that current fiscal policies will contribute to an explosive public debt path; strong fiscal and structural adjustments could place debt on a downward trajectory but debt would remain at uncomfortably high levels over the medium term.
- Two scenarios considered: baseline and active.

- Baseline scenario:
  - Real growth projected to contract by about 1.2 percent in 2009 before recovering to 2 percent in the medium term.
  - VAT introduced in mid-2011 due to slower-than-expected implementation; tax concessions continue.
  - Electricity department corporatized in early 2011.
  - Wage bill as a share of GDP remains constant; net lending continues; capital expenditure as a share of GDP trends up again in 2010.
  - Central government primary surplus will hover around 1½ percent of GDP, resulting in large financing gaps.
  - Public enterprises borrow mainly from domestic sources; their debt ratio projected only marginally lower than at end-2007.
  - Total public debt projected to increase to above 200 percent of GDP by 2014.

- Active scenario:
  - Accelerated structural reforms, including land/asset sales of 3 percent of GDP per year from 2010.
  - Real growth projected to increase to 4 percent over the medium term.
  - VAT introduced as envisaged in late 2010.
  - Tax concessions contained; efforts to collect tax arrears strengthened.
  - Electricity department corporatized in early 2010.
  - Growth in the wage bill capped in line with inflation; no net lending.
  - Capital expenditures financed by resources freed up by EU sugar grants (with disbursements of 2–3 percent of annual GDP during 2009–13).
  - Central government primary balance will rise, reaching close to 8 percent of GDP by 2013.
  - Public enterprise indebtedness projected to decline from 40 percent of GDP in 2008 to around 32 percent by 2014.
  - Overall public debt projected to decline steadily to under 140 percent of GDP by 2014.
  - Active scenario assumes a land sales equivalent to 2 percent of GDP in 2009.

### Active scenario downside modifications and stress events
- The active scenario is subject to substantial downside risks. Modified cases include:
  - Disaster in 2009 and 2013:
    - Assumes real growth is reduced by 5 percent in 2009 and 2013, respectively.
    - Expenditure is increased by 2–3 percent of GDP.
    - Revenue declines by about 2 percent of annual GDP during 2009–13.
  - Lower growth with land sales of 1 percent of GDP:
    - Same fiscal path as the active scenario but GDP growth and land sales remain at low levels as in the baseline scenario.
  - Lower growth with land sales of 3 percent of GDP:
    - Same fiscal path and land sales as the active scenario but GDP growth declines as in the baseline scenario.
- Under pessimistic/exogenous shock scenarios, the decline in the debt ratio is much slower and could even be reversed in some years, though still significantly lower than under the baseline scenario.

### DSA stress-test highlights (selected metrics preserved)
- Large gross financing needs of almost 30 percent of GDP during 2009–13.
- Central government primary balance targets and projected levels:
  - Historical primary surplus: more than 4 percent of GDP over the last four years (prior to hurricane).
  - Baseline central government primary surplus: around 1½ percent of GDP.
  - Active scenario central government primary balance: reaching close to 8 percent of GDP by 2013.
- Public enterprise indebtedness:
  - 40 percent of GDP in 2008 (starting point).
  - Projected around 32 percent by 2014 under the active scenario.
- Public debt projections:
  - Above 200 percent of GDP by 2014 in the baseline scenario.
  - Under 140 percent of GDP by 2014 in the active scenario.
- ENDA purchase repurchases are scheduled to fall due in 2012 and 2013.

_Italic: Source: IMF staff report content provided in the supplied document._

### Annex II. Summary of Appendices

### Annex II. Summary of Appendices

### Fund relations
- St. Kitts and Nevis has no outstanding Fund resources.
- Member of the Eastern Caribbean Currency Union (ECCU) with a common central bank, the Eastern Caribbean Central Bank (ECCB).
- Common currency: EC dollar, pegged to the U.S. dollar at the rate of EC$2.70 since July 1976.
- St. Kitts and Nevis has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement.
- Exchange system: free of restrictions on the making of payments and transfers for current international transactions.

### Relations with the World Bank Group
- Country assistance strategy (CAS) for FY 2006−09 supports: (1) stimulating growth and improving competitiveness; and (2) reducing vulnerability.
- Three active projects with total commitment of US$9.6 million, with US$6.6 million disbursed:
  - Telecommunications and ICT Development Project (US$0.54 million), approved May 12, 2005 — to improve access, quality, and use of telecommunications and ICT services.
  - Education Development Project (US$5 million), approved June 2003 — to increase equitable access to secondary education and improve quality of teaching and learning.
  - HIV/AIDS Prevention and Control Program (US$4 million), approved January 2003.

### Relations with the Caribbean Development Bank (CDB)
- CDB-approved loans total US$169.6 million, of which US$135.1 million disbursed as of end-2008.
- Major projects under implementation include: a basic education project; a natural disaster management project; loans to Nevis Electricity Company (NEVLEC); the West Basseterre bypass road project; a child development project; a policy-based guarantee; and a policy based loan in support of policy and institutional reforms.

### Statistical issues and data weaknesses
- Participation in the General Data Dissemination System since October 2000; metadata posted on the Fund’s Dissemination Standards Bulletin Board.
- Significant weaknesses in real, fiscal, and balance of payments data:
  - GDP by type of expenditure: not available at constant prices; current price data unreliable due to weaknesses in estimating gross capital formation.
  - New CPI with weights from the 2000 household survey has been introduced.
  - No data on labor market developments.
  - Fiscal data not reported for publication in IFS; latest GFS Yearbook data after 1994 are for 2003 and 2006 only.
  - No data on the nonfinancial public sector.
  - External trade data (especially exports) are not comprehensive and omit important categories of goods.
  - Most components of the financial account need improvement; no data on private external debt.

### Key socioeconomic and macroeconomic indicators (selected)
- Area (sq. km): 269.4
- Adult literacy rate (percent, 2004): 97.8
- Population total (thousands, 2001): 46.1
- Population growth rate (percent per year, 2001): 0.02
- Population density (per sq. km., 2001): 171.2
- Net migration rate (per thousand, 2002): -9.8
- Life expectancy at birth (years, 2006): 71.2
- Infant mortality (per thousand live births, 2006): 16.8
- Under 5 mortality rate (per thousand, 2006): 19.0
- Gross domestic product (2008) (millions of U.S. dollars): 546
- Gross domestic product (2008) (millions of E.C. dollars): 1,474
- GDP per capita (US$ per capita): 10,310

### Recent macro developments and projections (selected series)
- Real GDP (factor cost), annual percent change:
  - 2003: -1.2
  - 2004: 7.3
  - 2005: 5.2
  - 2006: 2.5
  - 2007: 2.9
  - 2008: 3.2
  - 2009 (prel./proj.): -1.2
- Consumer prices, end-of-period (percent change):
  - 2003: 2.9
  - 2004: 1.7
  - 2005: 6.0
  - 2006: 7.9
  - 2007: 2.1
  - 2008: 7.6
  - 2009 (prel./proj.): 3.5
- Total public debt (end-of-period), percent of GDP:
  - 2003: 182.4
  - 2004: 194.4
  - 2005: 196.8
  - 2006: 188.7
  - 2007: 181.7
  - 2008: 177.6
  - 2009 (prel./proj.): 186.1
- External current account balance (percent of GDP):
  - 2003: -34.8
  - 2004: -20.1
  - 2005: -18.2
  - 2006: -20.4
  - 2007: -24.2
  - 2008: -28.5
  - 2009 (prel./proj.): -22.1
- Tourism receipts (selected years, percent of exports of goods and nonfactor services):
  - 2004: 25.7
  - 2005: 27.6
  - 2006: 26.9
  - 2007: 24.6
  - 2008: 19.4
  - 2009 (prel./proj.): 12.1

### Central government fiscal operations (2003–09, selected)
- Total revenue and grants (millions of EC$):
  - 2003: 321.4
  - 2004: 365.3
  - 2005: 434.4
  - 2006: 484.2
  - 2007: 517.3
  - 2008: 543.7
  - 2009 (prel.): 520.4
- Total expenditure and net lending (millions of EC$):
  - 2003: 415.6
  - 2004: 454.1
  - 2005: 514.6
  - 2006: 586.6
  - 2007: 611.6
  - 2008: 626.0
  - 2009 (prel.): 667.7
- Overall balance (after grants), millions of EC$:
  - 2003: -88.2
  - 2004: -84.7
  - 2005: -48.0
  - 2006: -66.3
  - 2007: -65.9
  - 2008: -52.1
  - 2009 (prel.): -122.3
- Primary balance (millions of EC$):
  - 2003: -13.7
  - 2004: -8.6
  - 2005: 47.8
  - 2006: 62.4
  - 2007: 50.5
  - 2008: 77.5 (preliminary for St. Kitts government; about 5.2 percent of GDP)
  - 2009 (prel.): 36.3

### Monetary and financial sector highlights
- Broad money (M2), end-period (millions of EC$):
  - 2003: 903.0
  - 2004: 1,102.9
  - 2005: 1,150.8
  - 2006: 1,298.3
  - 2007: 1,443.6
  - 2008: 1,476.0
  - 2009 (prel./proj.): 1,491.2
- Credit to the private sector (annual percent change):
  - 2003: 4.3
  - 2004: 8.9
  - 2005: 7.5
  - 2006: 11.8
  - 2007: 13.3
  - 2008: 13.5
  - 2009 (prel./proj.): 4.8
- Banking system indicators (Table 8, selected):
  - Share of nonperforming assets to total assets of banks (percent): 2003: 8.6; 2004: 7.8; 2005: 6.1; 2006: 4.8; 2007: 4.1; 2008: 5.2.
  - Provisions for loan losses/nonperforming assets (percent): 23.2, 17.0, 19.3, 24.3, 23.9, 17.3 (2003–08).
  - Total Capital/Risk Weighted Assets (percent) (for locally incorporated banks only): 2003: 33.7; 2004: 33.8; 2005: 45.1; 2006: 38.9; 2007: 41.8; 2008: 47.3.

### Balance of payments and external sector (selected, 2005–14 baseline projections)
- Trade balance (millions of EC$, 2005–14 projections sample):
  - 2005: -504.1
  - 2008: -333.9
  - 2014 projection (table shows multi-year series)
- Services receipts (millions of EC$), tourism receipts (selected):
  - Services receipts 2005: 471.0; 2008: 401.0; 2014 projection: 581.9
  - Tourism receipts 2005: 340.5; 2008: 272.4; 2014 projection: 440.3
- Current account (percent of GDP) projections:
  - 2009–14: values shown, e.g., 2014 projection: -20.1 (Table 5 shows series to 2014).
- Gross international reserves of the ECCB, end-of-period (millions of U.S. dollars):
  - 2003: 539.9
  - 2004: 632.4
  - 2005: 600.8
  - 2006: 696.0
  - 2007: 764.5
  - 2008: 759.0
  - 2009 (proj.): 692.2
- External public debt (percent of GDP):
  - 2003: 89.5
  - 2004: 85.0
  - 2005: 76.4
  - 2006: 67.4
  - 2007: 59.3
  - 2008: 63.3
  - 2009 (proj.): 63.1

### Structure of public debt (2003–08, selected)
- Total stock of debt (millions of U.S. dollars):
  - 2003: 660.4
  - 2004: 776.2
  - 2005: 863.4
  - 2006: 929.6
  - 2007: 969.6
  - 2008: 9xx.x (table continues)
- Total stock of debt (percent of GDP):
  - 2003: 182.4
  - 2004: 194.4
  - 2005: 196.8
  - 2006: 188.7
  - 2007: 181.7
  - 2008: 177.6
- Composition highlights (2008):
  - Total external debt (by creditor) (percent of GDP) components include Bilateral, Multilateral, Commercial and other; CDB and World Bank shares reported in table.
  - Total domestic debt instruments include loans and advances, treasury bills, debentures, regional government securities market.

### Status of policy conditions for the Second Disbursement of PBL (as of March 31, 2009)
- General Fiscal Policy
  - Condition: Maintenance or strengthening of existing fiscal policy arrangements; central government primary balance not to fall below 3.5 percent of GDP; IMF to have no objections; arrangements acceptable to CDB for PSIP management.
  - Status: Pending. Preliminary fiscal data for 2008 indicated a primary balance of EC$77.5 million (about 5.2 percent of GDP) for the St. Kitts government.
- Revenue Measures
  - Completion of valuation of at least 50 percent of total registered properties for property tax assessment: Done. As of end-February 2009, 60.4 percent completed.
  - Enactment and bringing into force of new Income Tax Act: Pending. Revised draft completed with CARTAC assistance; enactment expected by second quarter of 2009.
  - Arrangements for collection of corporate income tax under the new Income Tax Act, and evidence of collections: Pending.
  - Submission to CDB of schedule for implementation of a transaction-based tax: Partially done. VAT Implementation Plan submitted; major policy decisions pending; VAT implementation expected by October 2010.
- Expenditure Management
  - Multiyear budgeting introduction and consultant engagement: Done.
  - Unit in MOF to monitor public enterprises: Partially Done. Government Entities Monitoring Unit and Oversight Board established; many public entity financial reports remain outstanding.
- Debt Management
  - Substantial implementation of arrangements acceptable to CDB for public debt management: Pending. Debt management strategy approved by cabinet; details being finalized.
- Land Sales
  - Establishment of single public sector entity for land sales: Pending. Government requested CDB technical assistance; consultant financing approval pending.
  - Identify land in excess of 1,000 acres in addition to 1,200 acres already earmarked: Pending.
  - Develop program for land development and sale covering at least to December 2013: Pending.
  - Commence sales from the 1,200 acres with proceeds to reduce public debt until public/GDP ratio falls below 60 percent: Pending. Sale of land ongoing; Land Sales Agency to be established.
- Privatization
  - Corporatization of electricity utility completed: Pending. Technical consultant's report being revised; corporatization likely by mid-2010.

### Capacity to repay the Fund (selected projections, 2008–14)
- Fund obligations based on existing and prospective credit (in millions of SDRs): shows small prospective obligations, e.g., 2010: 0.6; 2011: 1.1; 2012: 0.6.
- Outstanding Fund credit (in millions of SDRs): 2009: 2.2; 2010: 2.2; 2011: 2.2; 2012: 1.7; 2013: 0.6; 2014: -
- Memorandum items:
  - Nominal GDP (in millions of U.S. dollars) (selected): 2008: 546.1; 2009 proj.: 551.7; 2010 proj.: 563.6; 2014 proj.: 656.0
  - Government revenue (in millions of U.S. dollars) (selected): 2008: 201.4; 2009 proj.: 192.7; 2014 proj.: 217.1
  - Exports of goods and services (in millions of U.S. dollars) (selected): 2008: 211.5; 2009 proj.: 164.8; 2014 proj.: 279.7
  - Net international reserves (in millions of U.S. dollars) (selected): 2008: 102.8; 2009 proj.: 84.2; 2014 proj.: 0.6

### Debt dynamics and debt sustainability (selected)
- Public sector debt (percent of GDP), 2004–14 projections:
  - 2004: 194.4
  - 2005: 196.8
  - 2006: 188.7
  - 2007: 181.7
  - 2008: 177.6
  - 2009: 186.1
  - 2010: 192.1
  - 2014: 213.2
- Identified debt-creating flows and drivers (2004–14, selected):
  - Primary deficit (percent of GDP): 2003: 5.0; 2004: 0.2; 2005: -2.9; 2006: -4.3; 2007: -5.9; 2008: -3.5; 2009: -1.9; 2014: -2.5
  - Automatic debt dynamics contribution (percent of GDP): 2003: -6.0; 2004: -5.6; 2005: -8.9; 2006: 1.2; 2007: -1.3; 2008: 10.2; 2009: 7.6; 2014: 8.3
  - Contribution from real interest rate (percent): 2003: 6.7; 2004: 4.3; 2005: 0.5; 2006: 2.8; 2007: 2.7; 2008: 8.1; 2009: 7.5; 2014: 12.3
  - Contribution from real GDP growth (percent): 2003: -12.6; 2004: -9.9; 2005: -9.4; 2006: -1.5; 2007: -4.0; 2008: 2.1; 2009: 0.0; 2014: -4.0
- Gross financing need (percent of GDP) (selected):
  - 2004: 75.7
  - 2005: 93.4
  - 2006: 66.2
  - 2008: 67.2
  - 2014 projection: 102.4

*Source: Annex II. Summary of Appendices (IMF staff; tables and text as provided in the source content).*

### 1. Key variables are at their historical averages in 2009

### _cr09180 - 1. Key variables are at their historical averages in 2009

### Debt-stress scenarios (public sector)
- Scenario A. "Key variables are at their historical averages in 2009–14"
  - Series: 186.1, 187.7, 188.6, 190.1, 192.4, 194.5
  - Value shown: -0.6
- Scenario 2. "No policy change (constant primary balance) in 2009"
  - Series: 186.1, 190.6, 193.4, 196.8, 202.0, 207.6
  - Value shown: 7.3
- Bound Tests (B)
  - B1. "Real interest rate is at baseline plus one standard deviations"
    - Series: 186.1, 193.8, 199.6, 205.7, 214.0, 223.0
    - Value shown: 10.0
  - B2. "Real GDP growth is at baseline minus one-half standard deviation"
    - Series: 186.1, 195.0, 202.4, 210.7, 221.9, 234.4
    - Value shown: 11.2
  - B3. "Primary balance is at baseline minus one-half standard deviation"
    - Series: 186.1, 199.9, 212.0, 224.5, 239.5, 255.4
    - Value shown: 9.3
  - B4. "Combination of B1-B3 using one-quarter standard deviation shocks"
    - Series: 186.1, 198.0, 208.2, 219.0, 232.2, 246.4
    - Value shown: 11.5
  - B5. "One time 30 percent real depreciation in 2010"
    - Series: 186.1, 223.1, 228.1, 233.4, 240.9, 249.0
    - Value shown: 9.0
  - B6. "10 percent of GDP increase in other debt-creating flows in 2010"
    - Series: 186.1, 202.1, 206.4, 210.9, 217.6, 224.8
    - Value shown: 8.0

### Table 11: Public Sector Debt Sustainability Framework (2004–14) — selected indicators and dynamics
- External debt (percent of GDP), selected years:
  - 2004: 85.5
  - 2005: 76.9
  - 2006: 64.6
  - 2007: 59.1
  - 2008: 63.3
  - 2009: 63.1
  - 2010: 60.2
  - 2011: 56.2
  - 2012: 52.2
  - 2013: 47.1
  - 2014: 41.4
  - Debt-stabilizing non-interest current account: -17.2
- Change in external debt (selected years):
  - 2004: -3.0
  - 2005: -8.7
  - 2006: -12.3
  - 2007: -5.5
  - 2008: 4.3
  - 2009: -0.2
- Identified external debt-creating flows (4+8+9) (selected years):
  - 2004: 2.8
  - 2008: 3.6
  - 2009: 12.3
  - 2010: 6.2
  - 2014: -0.9
- Current account deficit, excluding interest payments (percent of GDP), selected years:
  - 2004: 14.8
  - 2008: 24.7
  - 2009: 17.8
  - 2014: 16.0
- Exports (percent of GDP), selected years:
  - 2004: 48.6
  - 2008: 38.7
  - 2009: 29.9
  - 2014: 42.6
- Imports (percent of GDP), selected years:
  - 2004: 60.5
  - 2008: 65.1
  - 2009: 49.2
  - 2014: 61.0
- Net nondebt creating capital inflows (negative) (percent of GDP), selected years:
  - 2004: -9.1
  - 2008: -21.2
  - 2009: -9.2
  - 2014: -19.1
- Automatic debt dynamics (percent of GDP), selected years:
  - 2004: -2.9
  - 2009: 3.7
  - 2014: 2.2
- Contributions to automatic dynamics (percent of GDP):
  - From nominal interest rate (selected years): 2004: 5.3; 2009: 4.3; 2014: 4.1
  - From real GDP growth (selected years): 2004: -6.1; 2009: 0.7; 2014: -0.9
  - From price and exchange rate changes (selected years): 2004: -2.1; 2009: -1.4; 2014: -1.0
- Residual, including change in gross foreign assets (2-3) (selected years):
  - 2004: -5.8
  - 2009: -12.5
  - 2014: -4.9
- External debt-to-exports ratio (in percent), selected years:
  - 2004: 176.1
  - 2008: 163.5
  - 2009: 211.4
  - 2014: 97.0
- Gross external financing need (in billions of U.S. dollars): 0.1 (series shown across years)
  - In percent of GDP (selected entries): 35.6, 32.3, 30.5, 37.0, 39.5

### Key macroeconomic assumptions (selected)
- Real GDP growth (in percent), sequence shown including projections:
  - Historical/projection series: 7.6, 5.6, 5.3, 0.9, 2.4, 3.3, 2.4, -1.2, 0.0, 1.0, 2.0, 2.0, 2.0, 2.0, 1.4
- Exchange rate appreciation (U.S. dollar value of local currency, change in percent): 0.0 (series of zeros)
- GDP deflator in U.S. dollars (change in percent), sequence:
  - 2.4, 4.1, 5.7, 3.8, 4.3, 3.2, 1.3, 2.2, 2.2, 2.1, 2.1, 2.1, 2.1, 2.1, 2.1
- Nominal external interest rate (in percent), sequence includes:
  - 6.6, 6.6, 6.5, 6.2, 7.0, 6.7, 0.7, 6.9, 5.5, 6.2, 7.3, 7.9, 9.0, 9.0, 7.2
- Growth of exports (U.S. dollar terms, in percent), sequence includes:
  - 17.4, 16.9, 4.0, -1.5, -8.8, 4.1, 8.3, -22.1, 7.7, 14.9, 15.2, 9.4, 8.8, 11.2
- Growth of imports (U.S. dollar terms, in percent), sequence includes:
  - -5.5, 15.9, 14.5, 8.1, 2.6, 6.6, 8.6, -23.6, 6.6, 8.6, 10.4, 7.5, 7.2, 8.1
- Current account balance, excluding interest payments (percent of GDP), sequence includes:
  - -14.8, -13.1, -15.9, -20.4, -24.7, -21.9, 7.0, -17.8, -18.4, -17.5, -16.6, -16.3, -16.0, -17.0
- Net nondebt creating capital inflows (sequence): 9.1, 17.8, 18.3, 27.6, 21.2, 25.2, 8.8, 9.2, 14.2, 17.1, 17.9, 18.5, 19.1, 17.4

### Table 12: External Debt Sustainability Framework — selected alternative scenarios (debt-stabilizing non-interest current account)
- A1. "Key variables are at their historical averages in 2009–14"
  - Series: 63.1, 51.1, 42.1, 34.9, 27.5, 20.0
  - Value shown: -25.2
- Bound Tests (external debt)
  - B1. "Nominal interest rate is at baseline plus one-half standard deviation"
    - Series: 63.1, 60.4, 56.6, 52.8, 48.0, 42.4
    - Value shown: -17.0
  - B2. "Real GDP growth is at baseline minus one-half standard deviations"
    - Series: 63.1, 60.7, 56.9, 52.8, 47.3, 40.6
    - Value shown: -17.9
  - B3. "Non-interest current account is at baseline minus one-half standard deviations"
    - Series: 63.1, 63.7, 63.3, 63.0, 61.8, 60.2
    - Value shown: -16.3
  - B4. "Combination of B1-B3 using 1/4 standard deviation shocks"
    - Series: 63.1, 62.3, 60.3, 58.3, 55.1, 51.1
    - Value shown: -16.9
  - B5. "One time 30 percent real depreciation in 2010"
    - Series: 63.1, 79.8, 65.3, 51.0, 34.9, 17.1
    - Value shown: -27.4

### Letter of Intent — key facts, impacts, and policy actions (April 24, 2009)
- Hurricane Omar impacted St. Kitts and Nevis (island of Nevis) over October 16–17, 2008.
- Reported impacts and estimates:
  - Tourism arrivals declined by 80 percent in the last quarter of 2008.
  - Initial estimate of overall damage: EC$150 million, nearly 11 percent of GDP.
  - Loss of external earnings through 2009 estimated at EC$50 million, or 3½ percent of GDP.
  - Four Seasons Resort (major hotel and largest private sector employer on Nevis) expected to remain closed until at least the end of 2009; closure now expected at least one year due to insurer-requested redesign.
- Government requests and objectives:
  - Requests a purchase equivalent to SDR 2.225 million (25 percent of quota) under the Fund’s Emergency Natural Disaster Assistance.
  - Purpose: meet immediate foreign exchange needs, ease pressure on external reserves, maintain confidence in external position.
- Short- and medium-term policy measures described:
  - Short-run: reprogramming expenditure to repair and build critical infrastructure; measures to cushion impact on displaced workers by ensuring benefits from the hotel and facilitating alternative employment.
  - Medium-term program focuses on:
    - Sustaining large fiscal primary surpluses to place public debt ratios on a downward trajectory.
    - Undertaking structural reforms to reactivate the economy.
    - Implementation of value added tax (VAT) to boost revenues and strengthen public finances.
    - Staying current on all debt-service payments and accelerating debt reduction through asset/land sales.
    - Establishing an appropriately-staffed agency to expedite market-based sales of land to achieve debt reduction targets.
    - Broader priorities: (i) strengthening fiscal policies to place debt on a firmly declining path; (ii) enhancing the investment climate, including privatization of public assets; (iii) strengthening oversight of the financial sector.
- International assistance:
  - Government seeks accelerated and increased financial and technical assistance from EU, Caribbean Development Bank, World Bank, and other governments.

### IMF relations, exchange arrangement, safeguards, and technical assistance (as of March 31, 2009)
- Membership and status:
  - Joined August 15, 1984; Article VIII.
- General Resources Account (SDR Million):
  - Quota: 8.90 (100.00 percent)
  - Fund holdings of currency: 8.82 (99.09 percent)
  - Reserve position in the Fund: 0.08 (0.92 percent)
- SDR Department:
  - Holdings: 0.00 (N/A)
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements: None
- Projected Payments to Fund: None
- HIPC Initiative: Not Applicable
- MDRI Assistance: Not Applicable
- Exchange arrangement:
  - Member of the Eastern Caribbean Central Bank (ECCB).
  - Common currency (Eastern Caribbean dollar) pegged to the U.S. dollar at EC$2.70 per U.S. dollar since July 1976.
  - ECCB operates like a quasi-currency board, maintaining foreign exchange backing of its currency and demand liabilities of close to 100 percent.
  - St. Kitts and Nevis accepted obligations of Article VIII, Sections 2, 3, and 4 in December 1984.
  - Exchange system is free of restrictions on payments and transfers for current international transactions.
- Safeguards assessment:
  - ECCB subject to full safeguards assessment on a four-year cycle.
  - Most recent assessment completed in July 2007; concluded ECCB has appropriate control mechanisms and strengthened transparency and accountability since 2003.
  - Assessment made recommendations to sustain safeguards framework going forward.
- Last Article IV Consultation:
  - Concluded by the Executive Board on February 4, 2008. Staff report: IMF Country Report No. 08/126; statistical appendix: IMF Country Report No. 08/127.
- FSAP, ROSCs, and OFC Assessment:
  - Participated in regional ECCU FSAP in September–October 2003.
  - AML/CFT assessment by CFATF in September 2003.
- Technical assistance (2005–present) — areas and specific assistance:
  - National accounts, rebasing CPI, export-import price indices; production-based GDP measures (CARTAC and STA).
  - Strengthening financial regulation and supervision, including risk-based supervision (CARTAC, MCM, LEG); assistance on OECS Insurance Act and OECS Money Services Business Act; development of Single Regulatory Unit.
  - Public debt management: capacity building and medium-term debt strategy (CARTAC, MCM).
  - Cash management and tax administration improvements, including collection enforcement; Property Tax reform to move base from rental value to market value; improving central government fiscal and debt data (CARTAC, FAD, LEG).
  - Assistance for implementation of a value-added tax (VAT): sensitivity study, VAT Implementation Project Plan, drafting VAT and excise tax legislation (CARTAC, FAD, LEG).
  - Tax legislation assistance: Social Service Levy and Corporate Income Tax (LEG).
  - Administration and design of a new pension plan for public sector employees (CARTAC).
  - Capacity building in macroeconomic analysis under the Stabilization and Adjustment Technical Assistance Program (SATAP).

*International Monetary Fund — ST. KITTS AND NEVIS: Staff Report for the 2009 Article IV Consultation—Informational Annex (prepared by the Western Hemisphere Department, April 29, 2009).*

### Appendix II. St. Kitts and Nevis: Relations with the World Bank Group

### Appendix II. St. Kitts and Nevis: Relations with the World Bank Group (As of March 6, 2009)

### World Bank Strategy and Lending Framework
- The World Bank’s Management presented the Eastern Caribbean Sub-Region Country Assistance Strategy (CAS) on September 13, 2005.
- CAS coverage: FY 2006–09.
- CAS two main pillars:
  - (1) stimulating growth and improving competitiveness;
  - (2) reducing vulnerability, by promoting greater social inclusion and strengthening disaster risk management.
- Strategy emphasis: leverage available donor grant financing due to weakened creditworthiness from high debt ratios.
- CAS proposed new commitments of US$103.4 million for six borrowing member states of the OECS, including St. Kitts and Nevis.
- Planned IBRD lending to St. Kitts and Nevis under the high-case lending scenario: US$10 million.

### A. Projects — Active World Bank Projects in St. Kitts and Nevis
- Total active projects commitment: approximately US$9.6 million; disbursed: approximately US$6.6 million.
- St. Kitts and Nevis Telecommunications and ICT Development Project
  - Approval date: May 12, 2005.
  - Amount: US$0.54 million.
  - Objective: improve access, quality, and use of telecommunications and ICT services to achieve socioeconomic development in the OECS.
  - Components:
    - Component (1): strengthen national and regional regulatory frameworks; capacity building for Eastern Caribbean Telecommunications Authority (ECTEL) and National Telecommunications Regulatory Commissions (NTRCs); assist revision of regional and national sector legislation; develop a modem interconnection regime.
    - Component (2): review universal access policy; create guidelines; provide financial support to establish a Universal Service Fund (USF).
    - Component (3): improve growth and competitiveness in ICT-enabled services through utilization of broadband infrastructure.
    - Component (4): management and administration of the overall project.
- St. Kitts and Nevis Education Development Project
  - Approval date: June 2003.
  - Amount: US$5.0 million.
  - Overall objective: build human capital to contribute to economic diversification and more sustainable growth.
  - Objectives achieved by:
    - (i) increasing equitable access to secondary education;
    - (ii) improving quality of teaching and learning with school-level interventions and student-centered learning;
    - (iii) strengthening management of the sector and governance of schools.
- HIV/AIDS Prevention and Control Program
  - Approval date: January 2003.
  - Amount: US$4.0 million.
  - Funded under the Multi-Country APL for the Caribbean Region.
  - Objectives:
    - (i) curbing the spread of HIV/AIDS epidemic;
    - (ii) reducing the morbidity and mortality attributed to HIV/AIDS;
    - (iii) improving the quality of life for persons living with HIV/AIDS (PLWAs);
    - (iv) developing a sustainable organizational and institutional framework for managing the HIV/AIDS epidemic over the longer term.

### B. Economic and Sector Work
- The Bank completed analytical work relating to:
  - public expenditure, fiscal and debt sustainability, growth and competitiveness, the financial sector, public sector management, and social protection.
- Ongoing dissemination of these reports is a key instrument for policy dialogue with OECS governments, including St. Kitts and Nevis.
- Completed, ongoing and planned analytical and advisory activities include:
  - “Towards a New Agenda for Growth”—OECS growth and competitiveness study (2005);
  - An OECS Skills Enhancement Policy Note (2006);
  - a Caribbean Air Transport Report (2006);
  - a regional study on Crime, Violence, and Development: Trends, Costs, and Policy Options in the Caribbean (2007);
  - an OECS Private Sector Financing Study (2008);
  - the OECS Tourism Backward Linkages Study (2008);
  - the report “Caribbean—Accelerating Trade Integration: Policy Options for Sustained Growth, Job Creation and Poverty Reduction” (2009);
  - a CARICOM study on Managing Nurse Migration (ongoing);
  - a preparatory study aimed at developing a Caribbean-wide Regional Energy Strategy (ongoing).

### C. Financial Relations (In millions of U.S. dollars)
- Operation / Original Principal / Available* / Disbursed*
  - TELECOMMUNICATIONS & ICT DEVELOPMENT PROJECT—ST. KITTS AND NEVIS
    - 0.54 / 0.27 / 0.25
  - OECS EDUCATION DEVELOPMENT PROJECT—ST. KITTS AND NEVIS
    - 5.0 / 0.84 / 3.71
  - HIV/AIDS PREVENTION AND CONTROL PROGRAM—ST. KITTS AND NEVIS
    - 4.05 / 1.20 / 2.62
  - Totals
    - 9.58 / 2.31 / 6.58
- Footnote: * Amounts may not add up to Original Principal due to changes in the SDR/US exchange rate since signing.

- Disbursements and Debt Service (Fiscal Year Ending June 30)
  - Total disbursements2.881.38
  - 1.904.122.381.66
  - 1.351.852.041.77
  - Repayments0.070.05
  - 0.120.330.670.89
  - 1.181.752.561.55
  - Net disbursements2.821.32
  - 1.783.791.710.77
  - 0.170.10-0.520.22
  - Interest and fees0.220.34
  - 0.400.640.600.65
  - 0.670.760.750.28
  - Actual
  - Note: * Data for June 2008 to February 2009.

*Source: Appendix II. St. Kitts and Nevis: Relations with the World Bank Group (As of March 6, 2009).*

### Appendix III: St. Kitts and Nevis—Relations with the Caribbean Development Bank (As of December 31, 2008)

### Overview
- The Caribbean Development Bank (CDB) has approved loans totalling US$169.6 million, of which US$34.5 million are undisbursed.

### A. Major Projects (summaries)
- Basic Education Project: assist GOSKN in provision and maintenance of a more appropriate learning environment for more students (including those with learning disabilities); enhance education system management, planning, data collection and analysis, student assessment, school management, curriculum development and pedagogy.
- West Basseterre By-Pass Road: construct approximately 3.8 kilometres of road to relieve traffic congestion in Basseterre; road runs north of Basseterre along the boundary fence of the Robert L. Bradshaw International Airport.
- Second Power Project: installation of a generator of approximate size 2.5MW and ancillary switchgear; establishment of an operations facility at Nevis Electricity Company Limited (NEVLEC); provide additional generating capacity and replace engines past useful life.
- Student Loan Scheme (Sixth Loan): assist the National Bank of St Kitts-Nevis-Anguilla in financing loans to students attending local, regional and extra-regional institutions for technical, vocational and academic studies.
- Child Development Project: provide a comprehensive framework for care and protection of children and reform of juvenile offenders; improve connectedness with the school system and provide rehabilitative care for those at risk and those who have committed offences.
- Natural Disaster Management Project: contribute to rehabilitation of economic infrastructure caused by Hurricane Lenny; rehabilitate 8.66 metres of sea defence structures with rock armouring and stone on geo-textile sheeting; reconstruct a reinforced concrete ramp; repair other infrastructure and public buildings; support development and adoption of mitigation policies, standards and practices.
- Policy-Based Guarantee: support a bond issue of up to EC$150 million by the Government to refinance high cost debt; support macroeconomic and structural reforms; improve debt dynamics and lower the time path of the debt-to-GDP ratio.
- Policy-Based Loan: support policy and institutional reforms; use loan proceeds to replace some high-cost debt; reforms designed to improve public finance management, budget management and revenue systems, and public enterprise governance systems to achieve fiscal and debt sustainability.

### B. Current Portfolio (In millions of U.S. dollars)
- Approved / Undisbursed
  - Basic Education Project — 14.18 / 1.97
  - Natural Disaster Management Project — 6.7 / 3.47
  - Student Loan Scheme (Sixth Loan) — 6.2 / 6.2
  - Second Power Project — 8.43 / 8.38
  - West Basseterre By-Pass Road — 7.5 / 0.82
  - Child Development Project — 2.64 / 2.64
  - Corporatisation of the Electricity — 0.6 / 0.27
  - Policy-Based Guarantee — 8.3 / 8.3
  - Policy-Based Loan — 20.0 / 10.0

### C. Loan Disbursement (In millions of U.S. dollars)
- Net Disbursement: 4.08 3.13 4.32 6.44 9.26
- Disbursement: 6.48 6.02 7.38 10.41 15.43
- Amortization: 2.4 2.89 3.06 3.97 6.17
- Interest and charges: 2.8 3.07 3.35 3.77 3.93
- Net resource flow: 1.28 0.06 0.97 2.67 5.33

*Source: Appendix III: St. Kitts and Nevis—Relations with the Caribbean Development Bank (As of December 31, 2008).*

### Appendix IV. St. Kitts and Nevis: Statistical Issues

### Appendix IV. St. Kitts and Nevis: Statistical Issues

### Data provision (overview)
- Data provision is broadly adequate for surveillance, although significant shortcomings in data provision and data quality remain.
- St. Kitts and Nevis has been participating in the General Data Dissemination System (GDDS) since October 2000, and its metadata are posted on the Fund’s Dissemination Standards Bulletin Board (DSBB).

### A. Real Sector — deficiencies and recent changes
- GDP by type of expenditure:
  - Not available at constant prices.
  - Current price estimates are unreliable due to weaknesses in estimating gross capital formation.
- Private final consumption expenditure is estimated as a residual.
- CPI:
  - A new CPI with weights from the 2000 household survey has been introduced.
  - Monthly CPI data are reported regularly but with a long lag.
- Tourism statistics:
  - Detailed data on tourism arrivals and expenditure have not been compiled since end-2001.
- Labor market:
  - Limited data are available on labor market developments.

### B. Public Finances — coverage, gaps, and recommendations
- Data availability:
  - Data on revenue, expenditure, and financing of the consolidated central government are made available to Fund staff on request.
  - The most recent data on the central government published in the GFS Yearbook are for 2003 and 2006.
- Improvements noted:
  - Commendable progress in improving the quality and coverage of central government fiscal data, including on government and public enterprise debt.
- Remaining issues:
  - Discrepancies between overall balance and available financing need to be resolved.
  - Lack of a set of fully integrated accounts for the central government on a regular basis.
  - No mechanism for regular reporting of financial data on the rest of the public sector.
- Recommendations (implied):
  - Produce fully integrated central government accounts regularly.
  - Institute regular reporting mechanisms for the rest of the public sector.

### C. Balance of Payments and External Debt — data status and gaps
- Data production:
  - Estimates are currently provided on an annual basis by the Eastern Caribbean Central Bank (ECCB).
  - Latest data published in IFS are for 2007.
  - Incomplete provisional data have been produced for 2008 by the ECCB; these will be completed and finalized in early 2009.
- Data gaps:
  - Data on external trade (especially exports) are not comprehensive, as they omit important categories of goods.
  - Most components of the financial account need improvement.
  - No data on private external debt.
- Recommendation:
  - Reconcile data on the public sector investment plan for external loans with the public external debt database.

### D. Monetary and Financial Statistics — assessment and action
- 2003 mission findings:
  - Recommended enhanced institutional coverage, classification of financial instruments, and sectorization of economic units.
  - Recommended expanding institutional coverage for other depository corporations to include credit unions, finance companies, and building societies (which accept demand and other deposits).
  - Recommended broadening coverage to include insurance companies, pension funds, development banks, and offshore institutions and foundations.
- April 2007 data ROSC mission (GDDS and DQAF, July 2003):
  - Quality of ECCB and ECCU monetary statistics has improved and is broadly adequate for macroeconomic analysis and policy design and monitoring.
  - Shortcomings with potential to detract from accurate and timely analysis:
    - Institutional coverage of other depository corporations remains incomplete; data for mortgage companies, finance companies, building societies, and credit unions are excluded.
    - Accrued interest is not incorporated in the value of interest-bearing assets and liabilities.
    - Valuation adjustments are included in other liabilities.
    - Source data for commercial banks lack the disaggregation recommended in the Monetary and Financial Statistics Manual.
  - Authorities endorsed the mission’s recommendations and an action plan.
  - Policy change with effect from January 1, 2009:
    - Definition of broad money aggregates revised to include the deposits of non-bank financial institutions and subsidiaries and affiliates held at commercial banks.
    - This change is first reflected in the monetary statistics from January 2009.

### Common Indicators Required for Surveillance (selected entries, As of April 15, 2009)
- Exchange Rates: Fixed Rate (n.a. entries for dates and frequencies in table).
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities:
  - Date of latest observation: 02/09; Date received: 04/09/09; Frequency: M.
- Reserve/Base Money:
  - Date of latest observation: 02/09; Date received: 04/09/09; Frequency: M.
- Broad Money:
  - Date of latest observation: 02/09; Date received: 04/09/09; Frequency: M.
- Central Bank Balance Sheet:
  - Date of latest observation: 02/09; Date received: 04/09/09; Frequency: M.
- Consolidated Balance Sheet of the Banking System:
  - Date of latest observation: 02/09; Date received: 04/09/09; Frequency: M.
- Interest Rates:
  - Date of latest observation: 02/09; Date received: 04/09/09; Frequency: M.
- Consumer Price Index:
  - Date of latest observation: 12/08; Date received: 2/23/09; Frequency: M.
- Revenue, Expenditure, Balance and Composition of Financing — General Government:
  - Date of latest observation: 02/09; Date received: 3/20/09; Frequency: M (reporting), A (publication).
- Stocks of Central Government and Central Government-Guaranteed Debt:
  - Date of latest observation: 12/08; Date received: 03/13/09; Frequency: Q (reporting), A (publication).
- External Current Account Balance:
  - Date of latest observation: 2008; Date received: 03/10/09; Frequency: A.
- Exports and Imports of Goods and Services:
  - Date of latest observation: 2008; Date received: 03/10/09; Frequency: A.
- GDP/GNP:
  - Date of latest observation: 2008; Date received: 03/10/09; Frequency: A.
- Gross External Debt:
  - Date of latest observation: 12/08; Date received: 03/13/09; Frequency: Q (reporting), A (publication).

### Executive Board and Press Summary — key findings, outlook, and assistance
- Near-term growth and shocks:
  - Real GDP grew by 3.2 percent in 2008.
  - Real output projected to contract by 1.2 percent in 2009.
  - Deterioration due to global recession, collapse of CL Financial Group, and damage from Hurricane Omar (October 2008), with Nevis especially hard hit.
  - The island’s largest hotel on Nevis likely to remain closed during 2009 due to hurricane storm surge damage.
- Inflation:
  - Picked up in first ten months of 2008, peaking in October 2008 at 8.3 percent; moderated to 7.6 percent at end-2008.
  - Inflation projected to ease in 2009 on the back of lower oil prices.
- Fiscal performance and risks:
  - Government’s commitment to debt reduction resulted in a fiscal primary surplus in 2008—at more than 5 percent of GDP—for the fourth consecutive year.
  - Primary surplus projected to decline to 2½ percent of GDP in 2009, largely due to expected drop in revenues without concomitant cuts in expenditures.
  - Public debt ratio was more than 175 percent of GDP by end-2008; debt service comprises nearly a quarter of government revenues.
  - Directors emphasized fiscal consolidation to restore debt sustainability and support competitiveness and the ECCU quasi-currency board arrangement.
- Financial sector vulnerabilities:
  - High government exposure of banks and need to strengthen supervision of the nonbank sector.
  - Possible spread of adverse impact to banks via a rise in nonperforming loans if the global slowdown is prolonged.
  - Insurance sector affected by fallout of CL Financial Group’s problems.
- Emergency assistance request and approval:
  - Authorities requested an Emergency Natural Disaster Assistance (ENDA) purchase equivalent to 25 percent of quota (SDR 2.225 million).
  - The Executive Board approved SDR 2.225 million (about US$3.4 million) in ENDA for St. Kitts and Nevis.
  - Estimated balance-of-payments impact of the hurricane: US$19 million (about 3½ percent of GDP).
- Directors’ recommendations and views:
  - Continue to implement policies and reforms to achieve medium-term strong growth.
  - Push ahead with larger primary surpluses over the medium term.
  - Strengthen expenditure control and implement structural fiscal reforms, most critically VAT implementation.
  - Tighten oversight of the broader public sector; work with donors to secure grants or highly concessional loans; accelerate land and/or other asset sales; strengthen debt management capacity.
  - Enhance monitoring and supervision of bank and nonbank financial sectors; implement a single regulatory unit for the nonbank financial sector.
  - Develop a full-fledged contingency and crisis preparedness plan, including identification of emergency fiscal measures.
  - Some Directors considered the Stand-By Arrangement might be a more appropriate instrument given large public debt and vulnerability.

### Selected Economic Indicators, 2004–09 (selected series and exact values)
- Output and prices (annual percentage change, unless otherwise specified):
  - Real GDP (factor cost): 2004: 7.3; 2005: 5.2; 2006: 2.5; 2007: 2.9; 2008: 3.2; 2009: -1.2.
  - Consumer prices, end-of-period: 2004: 1.7; 2005: 6.0; 2006: 7.9; 2007: 2.1; 2008: 7.6; 2009: 3.5.
  - Real effective exchange rate (end-of-period) 2/: 2004: -4.0; 2005: 5.4; 2006: 2.6; 2007: -4.5; 2008: 9.7; 2009: ...
- Banking system (in relation to broad money at the beginning of the period, unless otherwise noted):
  - Net foreign assets 3/: 2004: -5.7; 2005: 8.4; 2006: 7.1; 2007: 7.7; 2008: 12.1; 2009: -5.2.
  - Net domestic assets 3/: 2004: 27.8; 2005: -4.1; 2006: 5.7; 2007: 3.5; 2008: -9.8; 2009: 6.3.
  - Of which: Credit to private sector 3/: 2004: 6.8; 2005: 5.1; 2006: 8.2; 2007: 9.2; 2008: 9.5; 2009: 3.7.
  - Broad money: 2004: 22.1; 2005: 4.3; 2006: 12.8; 2007: 11.2; 2008: 2.2; 2009: 1.0.
- Public sector (percent of GDP):
  - Total revenues and grants: 2004: 34.3; 2005: 39.4; 2006: 39.4; 2007: 39.5; 2008: 38.9; 2009: 36.6.
  - Total expenditure and net lending: 2004: 42.1; 2005: 43.3; 2006: 44.5; 2007: 44.3; 2008: 42.5; 2009: 44.8.
  - Overall balance: 2004: -7.9; 2005: -4.0; 2006: -5.0; 2007: -4.8; 2008: -3.5; 2009: -8.2.
  - Primary balance: 2004: -0.8; 2005: 4.0; 2006: 4.7; 2007: 3.7; 2008: 5.3; 2009: 2.4.
  - Total public sector debt (end-of-period): 2004: 194.4; 2005: 196.8; 2006: 188.7; 2007: 181.7; 2008: 177.6; 2009: 186.1.
  - Central government debt 5/: 2004: 122.0; 2005: 124.8; 2006: 141.7; 2007: 137.7; 2008: 137.9; 2009: 143.1.
  - Public enterprises debt 5/: 2004: 72.4; 2005: 72.0; 2006: 47.0; 2007: 44.0; 2008: 39.7; 2009: 43.0.
- External sector:
  - External current account: 2004: -20.1; 2005: -18.2; 2006: -20.4; 2007: -24.2; 2008: -28.5; 2009: -22.1.
  - Trade balance: 2004: -25.6; 2005: -27.7; 2006: -33.0; 2007: -36.5; 2008: -34.8; 2009: -19.9.
  - Services, net: 2004: 13.6; 2005: 15.5; 2006: 15.6; 2007: 14.1; 2008: 8.4; 2009: 0.6.
  - Tourism receipts: 2004: 25.7; 2005: 27.6; 2006: 26.9; 2007: 24.6; 2008: 19.4; 2009: 12.1.
  - FDI (net): 2004: 11.6; 2005: 21.2; 2006: 22.6; 2007: 30.8; 2008: 24.1; 2009: 12.1.
  - External public debt (end-of-period): 2004: 85.0; 2005: 76.4; 2006: 67.4; 2007: 59.3; 2008: 63.3; 2009: 63.1.

*Source: IMF staff report and associated documents (as provided in the content unit).*

### 7.6 percent at the end of 2008, and while this has been a source of concern for authorities in

### _cr09180 - 7.6 percent at the end of 2008, and while this has been a source of concern for authorities in

### External position and current account
- External vulnerability: current account deficit was "roughly 30 percent of GDP in 2008".
- Nature of financing: the sizeable current account deficit is mostly financed by FDI-related investments in the tourism sector and "should not be mistaken for a competitiveness/exchange rate issue".
- Oil prices: lower oil prices "have yet to be factored in" when assessing external concerns.

### Fiscal policy
- Fiscal stance: the sizable public debt in SKN has driven a prudent fiscal policy, including the generation of primary surpluses "since 2005".
- Scenarios presented: staff articulated two distinct paths for authorities — a "baseline scenario" and an "active scenario".
- Authorities’ commitment and recent measures:
  - Closure of the state sugar company.
  - Strengthening tax administration.
  - Introduction of an electricity surcharge.
  - Implementation of an automatic pass-through of fuel prices.
  - Implementation underway of a market-based property tax regime; "over 60 percent of the residential properties have been valued at market" and commercial property valuation is in progress.
  - Comprehensive civil service reform planned to contain the wage bill and pension costs.
  - Planned introduction of a new Investment Code and Corporate Tax Act to limit discretionary concessions.
- VAT reform issues:
  - Complication arises from "the existence of separate tax administrations on the two islands".
  - Authorities aim to design "one VAT system" compatible with constitutional and political constraints.
  - Progress: formation of a VAT team "with representation from both islands" and ongoing discussions on a revenue-sharing agreement.

### Public debt management and reduction
- Policy measures:
  - Adoption of stricter guidelines and policies on borrowing and provision of debt guarantees via a new Financial Administration Act.
  - Efforts to enhance debt management capacity and reduce dependence on "high cost, short-term bank financing".
- External financial support and conditions:
  - Concessional resources have greatly assisted SKN.
  - Authorities "have met the conditions for the first tranche of the Caribbean Development Bank’s (CDB) Policy-Based Loan and the release of the first in a series of EU sugar grants".
  - Continued engagement with the CDB, the EU and other developmental partners is anticipated.
- Debt reduction strategy:
  - Authorities agree on aiming "for land sales to the private sector at about 3 percent of GDP per year", with proceeds used to pay down the highest interest-bearing debt first.
  - Land sales are described as "complex... both politically and technically" and require "careful planning and execution" over a considerable period of time.

### Financial sector matters
- Bank exposure: staff expressed concerns about "the high level of exposure of domestic banks to the government"; authorities aim to reduce this exposure over time.
- Financing options considered: staff suggested borrowing directly, albeit temporarily, from the social security system (eliminating the intermediary role of the indigenous private bank); authorities "will be factoring this into their consideration".
- Regulation: SKN authorities "just passed a new Insurance Law, strengthening their regulation over the insurance sector".
- Non-bank/offshore sector:
  - Authorities continue to work with the Caribbean Financial Action Task Force (CFATF) to resolve issues from its most recent evaluation.
  - Authorities express concern about unintended negative impacts from global measures against non-cooperative jurisdictions on "well-regulated, transparent, financial centers".
  - Principle stated: "countries that comply with international standards should be protected from such measures", and SKN and the ECCU will continue to work constructively to ensure CFATF views are considered internationally.

### Concluding comment and request for ENDA support
- Structural transformation: authorities continue "along their path of transforming the economy away from sugar" and recognize vulnerability to world economic developments and catastrophic risk.
- Active scenario: authorities are "fully committed to policies, such as those articulated in the 'active scenario', to enhance the flexibility and resilience of the economy".
- 2009 Budget proposal: a policy response paper for Cabinet proposes cutting the 2009 Budget by "EC$30 million (roughly 2 percent of SKN’s GDP)".
  - Core principles of the paper: protection of the most vulnerable; prevention of further deterioration of the fiscal situation; continuation of downward trajectory with respect to debt; concentration on growth enhancing capital projects; exploring opportunities for development/improvements in the policy framework.
  - Process: re-examining short-term and long-term revenue and expenditure measures, and contingency sources of financing.
- Hurricane Omar impact: closure of the largest tourism resort in Nevis (largest direct/indirect employer) has transitory but significant balance of payment effects — lower tourism receipts estimated at "3.5 percent of SKN’s GDP".
- ENDA support request: authorities request "25 percent of their quota (SDR 2.225 million)" to help contend with the balance of payment impact.

*Source: IMF staff report excerpt (content unit: _cr09180 - 7.6 percent at the end of 2008, and while this has been a source of concern for authorities in).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09180.pdf_