## _cr09181 ## Source details **Canonical URL:** [_cr09181](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09181.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09181.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09181.pdf.json) --- ### Executive summary — background and request - Global downturn caused a sharp output slowdown in 2008; growth expected to decline further in 2009. - Liquidity tight; banking system remains sound, but insurance and investment linkages with CL Financial Group create uncertainties. - Fiscal position strengthened in 2008; progress on social and poverty reduction. - Authorities requested the rapid-access component of the Exogenous Shocks Facility (ESF): SDR 3.735 million, 45 percent of quota. The full amount would become available upon approval. ### Key policy discussions and recommendations - Restore growth through competitiveness gains: - Improve competitiveness, enhance financial sector resilience, and develop contingency financing plans. - Address limited air transportation links via construction of a new international airport without jeopardizing debt sustainability. - Consider a more flexible construction timetable to alleviate bridge-financing bottlenecks in 2009–10. - Ensure fiscal and debt sustainability: - Recent income tax reform to support growth; need to reform tax incentive system. - Establishment of a Tax Reform Commission welcomed. - Sustained fiscal consolidation recommended to provide space for social spending and airport construction. - Key measures: further civil service reforms, improved prioritization of capital spending, additional pension reforms. - Reduce vulnerabilities: - Improve regulatory and supervisory framework for nonbank institutions. - Renew participation in the Caribbean Catastrophic Risk Insurance Facility and enhance disaster preparedness and response plans. ### Recent developments and selected projections (2008–09) - Output and sectors: - Real output growth estimated to have fallen from 7 percent in 2007 to around 1 percent in 2008 (potential estimated at around 4¼ percent). - Stay-over arrivals declined by an estimated 6 percent in 2008; stayover visitors declined in H2 2008 by 6.5 percent vs H2 2007. - Construction lost dynamism; agriculture declined due to banana disease. - Consumption expenditure fell with real disposable incomes. - Financial sector and liquidity: - Financial system largely unaffected by global crisis despite tight liquidity. - Ratio of nonperforming to total loans remained at 3.9 percent in December 2008. - Interbank markets tightened; maturity of interbank transactions shortened. - Inflation and external accounts: - Inflation peaked at 11.6 percent in September 2008 and declined to 8.7 percent by end-2008 (long-term average about 3 percent). - External current account deficit: 33⅔ percent of GDP in 2008; projected decline to about 29 percent of GDP in 2009 and below 21 percent of GDP by 2014. - Currency appreciated by around 3 percent in real effective terms. - Monetary and credit: - Private sector credit growth slowed to 3 percent through end-2008, compared to 15 percent in 2007. - Public finances (2008 outcomes and 2009 impact): - Central government overall deficit reduced to 1.7 percent of GDP in 2008. - Primary surplus of 1.2 percent of GDP achieved in 2008, the first since 2002. - VAT introduced in May 2007 exceeded expectations, surpassing replaced taxes by about 0.6 percent of GDP. - US$16 million bond placement (10 year maturity) helped finance the deficit. - 2009: total revenue and grants expected to decline by 2.6 percent of GDP; total expenditure projected to decline slightly; overall balance projected at -3.8 percent of GDP in 2009 (from -1.7 percent in 2008). - Social measures: - Expanded social safety nets: reduced import tariffs on basic food items; larger cost of living support payments; subsidy on electricity surcharge; increased minimum pension payments. - External shocks and vulnerabilities: - Total exposure to CL Financial Group estimated at around EC$350 million, or 22 percent of GDP. - IFSA appointed a receiver for Millennium Bank in March 2009; SEC complaint alleges misappropriation of around $US68 million from investors. ### Box 1 — Economic impact of tourism and FDI shock (selected quantitative impacts) - Contribution of tourism to real GDP growth turned negative in 2008 and projected to reduce GDP growth by about 1.6 percent in 2009. - Projected 2009 declines: - Net tourism receipts: EC$41 million (2.9 percentage points of GDP) - FDI: EC$99 million (6.5 percentage points of GDP) - Balance of payments impacts (In millions of EC dollars): - Current Account: 2008 = -547.3 ; 2009 = -485.2 ; Difference = 62.1 - Exports (A): 2008 = 148.9 ; 2009 = 142.1 ; Difference = -6.7 - Imports (B): 2008 = -806.4 ; 2009 = -677.2 ; Difference = 129.2 - FDI-related (C) contribution to imports: 68.9 - Fuel and Food (D) price effect: 36.9 - Endogenous adjustment (E): 23.3 - Travel (net) (F): 2008 = 201.0 ; 2009 = 159.8 ; Difference = -41.2 - Private transfers (G): 2008 = 32.6 ; 2009 = 25.7 ; Difference = -7.0 - Capital and Financial Account 1/: 2008 = 537.9 ; 2009 = 456.1 ; Difference = -81.8 - Direct investment (H): 326.6 → 228.2 ; Difference = -98.5 - Overall balance: 2008 = -9.4 ; 2009 = -29.1 - Financing gap and reserves: - Decline in net international reserves: EC$14.2 million - Financing gap: EC$14.9 million - Gross impact (I = A+F+G+H): -153.3 - Net impact (J = I+C+D): -47.5 - Memorandum — Central government operations (percent of GDP): - Total Revenue and grants: 2008 = 32.4 ; 2009 = 29.8 ; Difference = -2.6 - Current revenue: 29.8 → 27.9 ; Difference = -1.9 - Total expenditure: 2008 = 34.1 ; 2009 = 33.7 ; Difference = -0.4 - Overall balance: 2008 = -1.7 ; 2009 = -3.8 ; Difference = -2.1 - Financing: Net external financing: 1.0 → 2.0 ; Net domestic financing: 1.0 → 0.9 ; Requested ESF: ... → 0.9 ### Financial-sector resilience and contingency planning — recommendations - Strengthen prudential supervision of asset quality, including assets held abroad by banks operating in St. Vincent and the Grenadines. - Heightened vigilance on provisioning, particularly in foreign banks; continue liaison with the ECCB for on-site inspection and higher frequency monitoring of banks’ liquidity. - Improve regulatory and supervisory framework for nonbank institutions; consider establishing a single regulatory unit (SRU) for all nonbank financial institutions. - Strengthen AML/CFT supervision, including offshore and nonbanking sectors, following the Fund AML/CFT assessment in February–March 2009. - Develop contingency plans for access to buffer financing from international financial institutions for a deeper, prolonged global downturn. ### Competitiveness, tax measures, and infrastructure (airport) - Income tax reforms: - Personal and corporate tax rates lowered from 37.5 percent to 35 percent; 2009 Budget announced further reduction to 32.5 percent. (Box notes further reduction to 32.5 percent.) - Tax Reform Commission to make recommendations by end-2009 on comprehensive income tax legislation and revamping tax incentive system. - Public sector wage policy: - Increasing compensation by 12 percent over three years (2009–11) to avoid entrenching high inflation and support external competitiveness. - New international airport (Argyle International Airport): - Goal to complete by 2011. - Total cost estimated at about EC$608 million (37½ percent of GDP). - Identified grant and concessional financing shortfall: approximately EC$185 million (11½ percent GDP). - Planned government land sales progressing slowly; global slowdown may impede realization. - Mission recommendations to mitigate financing risks: - (i) Adopt comprehensive fiscal reform package. - (ii) Implement a more flexible construction timetable, to the extent technically feasible. - (iii) Continue seeking additional grant and concessional financing. - Reduce costs of doing business: modernize customs and port procedures, one-stop business registration, develop a land registry, introduce a new bankruptcy law. ### Fiscal policy, debt dynamics, and reform package - 2009 Budget and fiscal outlook: - 2009 Budget envisages an increase in the fiscal deficit. - Reduction in personal and corporate tax rates expected to reduce revenues by around 0.4 percent of GDP; current expenditure (excluding utilities) expected to decline by around 0.2 percent of GDP from 2008. - After adjustments, primary deficit and overall fiscal deficit projected to be 0.9 percent and 3.8 percent of GDP, respectively, raising central government debt to about 56½ percent of GDP in 2009. - Attaining fiscal target requires keeping current expenditure some 2 percentage points of GDP below budgeted levels. - Debt dynamics: - Under current policies, debt-to-GDP projected to rise to nearly 87 percent by 2014 and unlikely to reach 60 percent by 2020 (ECCB target). - Airport borrowing is the main driver of this profile. - Worst-case (expected grants/concessional financing do not materialize): debt-to-GDP would reach 101 percent by 2014. - Even if concessional financing materializes, significant domestic bridge financing needed, increasing banks' exposure and possibly prompting reduction in banks' net foreign assets. - Recommended fiscal reforms: - Increase primary surplus to about 2.6 percent of GDP over the medium term (from projected -0.9 percent in 2009). - Revenue-side: broaden tax base, continue VAT, introduce market-based property tax in mid-2011, revamp tax incentive system. - Expenditure-side: deepen civil service reform, improve capital spending prioritization. - Support well-targeted transfers during downturn; avoid making public sector the employer of last resort. - Other measures: customs reform, MTEF development, maintain automatic fuel pricing mechanism (three-month rolling average pricing rule adopted August 2008). - Fiscal consolidation scenarios: - Active scenario with intensified reforms: public debt rises temporarily then declines to around 69½ percent of GDP by 2014; 60 percent target reached in 2017 under active scenario. ### VAT performance and tax administration - VAT introduced May 2007 (15 percent for goods and services; 10 percent for tourist accommodation). - VAT exceeded expectations in yield and compliance; accounts for one third of tax revenues. - Staff recommends strengthening audit, collections enforcement, and IT capabilities; absorb VAT unit into mainstream tax operations. - Authorities welcomed continued CARTAC and Fund technical assistance. ### Social protection, pensions, and vulnerable groups - Poverty assessment due first half 2009 expected to show substantial progress in poverty reduction. - Use poverty assessment and poverty reduction action plan to develop well-targeted social protection. - Targeted programs to strengthen: public assistance; children against poverty; rural development facility; home-help-for the elderly; school feeding programs. - National Insurance Scheme (NIS): - Contribution rate increased from 6 to 8 percent in January 2008. - Staff recommends further increases to contribution rate, increases to retirement age, and reductions to average replacement rate (per Seventh Actuarial Review). - Encourage rationalization of public pension system by integrating with NIS or transforming public pensions into a complement to NIS. ### Debt sustainability analysis (DSA) — baseline and alternatives (key numeric outcomes) - Baseline assumptions: - Real GDP growth projected to average about 1.7 percent during 2009–11; medium-term return to potential. - Primary balance projected to deteriorate sizably in 2009 then remain broadly stable; primary deficit may peak at about 4.8 percent of GDP by 2010 under baseline assumptions in a section. - Annual external capital grants assumed around 1½ percent of GDP. - Average nominal interest rates on foreign debt assumed to increase to around 6 percent medium term. - FDI assumed to return to historical average of around 15¾ percent of GDP over medium term. - Airport cost: EC$608 million; expected completion by 2011. - Baseline public sector debt projections: - NPV of public debt at end-2008: 66.8 percent of GDP (67½ percent nominal). - Baseline NPV of public debt-to-GDP rises to about 83 percent by 2014 (86¾ percent nominal). - Long-term NPV of public debt-to-GDP around 102 percent by 2029 (106½ percent nominal). - NPV debt-to-revenue ratio increases from 183½ percent in 2009 to around 255 percent by 2014. - Active scenario (fiscal adjustment): - Central government primary surplus raised to 2⅔ percent of GDP over medium term. - Revenue measures yield 1.9 percent of GDP; customs efficiency 0.5 percent of GDP; civil service reform savings 0.4 percent of GDP; capital expenditure reduction ⅓ percent of GDP. - Growth accelerates to about 4⅔ percent over medium term. - NPV of public debt-to-GDP declines to about 65 percent by 2014 and to 17 percent by 2029. - Vulnerabilities and stress tests: - If growth remains one standard deviation below baseline, NPV debt-to-GDP reaches 154 percent by 2029. - If primary deficit remains at high 2009 level, NPV debt-to-GDP reaches 157 percent by 2029. - Natural disaster shock (9 percent of GDP fiscal cost; zero growth 2010–12) raises NPV debt-to-GDP to 99 percent by 2014. - Worst-case airport borrowing (government borrows 50 percent of airport cost) raises NPV debt-to-GDP to 95 percent by 2014. - External debt projections and sensitivities: - Baseline NPV of external debt rises to nearly 42½ percent of GDP by 2017 (47 percent nominal) then declines to 38½ percent by 2029 (43 percent nominal) — within 50 percent prudential threshold. - Combined negative shocks can raise NPV external debt-to-GDP to 59 percent by 2011, breaching the 50 percent threshold. - One-time 30 percent nominal depreciation in 2010 raises NPV external debt-to-GDP to 55 percent in 2010. ### Box 4 — The 2009 Budget (highlights) - Central themes: macroeconomic stability, sharpened business competitiveness, socio-economic progress. - Capital program partly financed by expected grants; if fully implemented, would worsen fiscal deficit and increase public debt to nearly 60 percent of GDP. - Staff baseline (accounting for historical capital spending rates and grants) projects: - Primary deficit: 0.9 percent of GDP. - Overall fiscal deficit: 3.8 percent of GDP. - Government debt: about 56½ percent of GDP. - Tax policy changes: - Company tax and top marginal personal income tax projected to decline from 35 percent to 32.5 percent. - Estimated annual tax forgone about ½ percent of GDP. - Current spending: wage bill increases by 0.9 percent of GDP relative to 2008; transfers and goods and services rise by about 1.3 percent of GDP. ### ESF request, IMF response, and capacity to repay - Authorities requested rapid-access ESF disbursement of SDR 3.735 million (45 percent of quota). - Purpose: close the external financing gap in 2009, assist adjustment to tourism and FDI shock, and catalyze donor budget support. - Executive Board approved an SDR 3.735 million disbursement (about US$5.7 million) under the ESF rapid-access component. - St. Vincent and the Grenadines had no outstanding credit from the Fund at time of report. - Future repayments to the Fund projected negligible relative to exports of goods and services (on average 0.2 percent of exports of goods and services over the 2014-19 period). - ESF disbursement would contribute about 0.9 percent of GDP toward financing the projected 2009 fiscal deficit of 3.8 percent of GDP and would not materially worsen the debt profile. ### Social and external support, disaster risk management, and donor relations - Renewed participation in the Caribbean Catastrophic Risk Insurance Facility (June 2008); IDA credits supported insurance premia. - EU funds committed to ameliorate banana sector transition; disbursements slow — authorities request transformation of commitments into budgetary support; staff supported this. - World Bank engagement: four active projects with net commitment ~US$14.44 million (US$5.92 million disbursed) as of March 6, 2009; regional IDA allocations noted. ### Data, technical assistance, and institutional relations - Data shortcomings: coverage and timeliness issues in national accounts (tourism and agriculture), fiscal data for public enterprises, fiscal financing, and labor statistics. - Fund technical assistance provided via CARTAC, FAD, LEG since 2006 (VAT/excise implementation, tax administration modernization, statistical capacity building). - Recommended next Article IV consultation on the standard 12-month cycle. _Italic: Source — IMF staff report (content unit _cr09181) as presented in the provided document._ ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Background - The global economic downturn led to a significant decline in tourism, worsening the balance of payments position and, together with lower foreign direct investment (FDI) and construction activity, produced a sharp output slowdown in 2008. Growth is expected to decline further in 2009. - Liquidity is tight, but the banking system remains sound. Insurance and investment linkages with the Trinidad and Tobago–based CL Financial Group are creating uncertainties and could pose risks for the financial system. - The fiscal position strengthened in 2008, and solid progress has been made toward social and poverty reduction goals. ### Request for support under the Exogenous Shocks Facility (ESF) - The authorities requested the rapid-access component of the ESF: SDR 3.735 million, 45 percent of quota. The full amount would become available upon approval. ### Key policy discussions and recommendations - Restore growth through competitiveness gains: - Address (i) the effects of the adverse global environment by improving competitiveness, enhancing financial sector resilience, and developing contingency financing plans; and (ii) limited air transportation links through construction of a new international airport without jeopardizing debt sustainability. - Managing bridge financing needs for the airport in 2009–10 is likely to be a challenge in an environment of tight liquidity; a more flexible construction timetable, to the extent technically feasible, could help alleviate a potential financing bottleneck. - Ensure fiscal and debt sustainability: - Recent income tax reform should provide timely support to growth, but there is a need to reform the tax incentive system. - Staff welcomed the establishment of a Tax Reform Commission to make recommendations on comprehensive income tax legislation to broaden the tax base. - Sustained fiscal consolidation would help provide space for raising social spending and accommodate airport construction without compromising debt sustainability. - Key measures include further civil service reforms, continued improvement in the prioritization of capital spending, and additional pension reforms. - Reduce vulnerabilities: - Improving the regulatory and supervisory framework for nonbank institutions is a high priority. - Staff welcomed renewed participation in the Caribbean Catastrophic Risk Insurance Facility and other enhancements to disaster preparedness and response plans. ### Recent developments and outlook (selected findings and projections) - Output and sectoral developments: - Real output growth is estimated to have fallen from 7 percent in 2007 to around 1 percent in 2008, far below potential (estimated at around 4¼ percent). - Stay-over arrivals declined by an estimated 6 percent in 2008. - Construction lost dynamism owing to completion of major phases in some public sector projects; the agricultural sector declined because of a disease in the banana sector. - Consumption expenditure fell in line with a drop in real disposable incomes. - Financial sector and liquidity: - Despite tight liquidity, the financial system has been largely unaffected by the global financial crisis. - The ratio of nonperforming to total loans remained at 3.9 percent in December 2008. - Interbank markets tightened as liquidity dried up, shortening the maturity of interbank transactions. - Authorities raised funds from the regional government securities market without significantly increased risk premia, though oversubscription declined markedly. - Inflation and external accounts: - Inflation declined to 8.7 percent by end-2008 after peaking at 11.6 percent in September 2008; inflation remains far higher than its long-term average of about 3 percent. - The external current account deficit remained high at 33⅔ percent of GDP in 2008. - The currency appreciated by around 3 percent in real effective terms. - Monetary and credit developments: - Private sector credit growth slowed to 3 percent through end-2008, compared to 15 percent in 2007. - Growth of monetary aggregates decelerated sharply. - Public finances and revenue measures: - The central government overall deficit was reduced to 1.7 percent of GDP in 2008. - A primary surplus of 1.2 percent of GDP was achieved in 2008, the first since 2002. - The VAT, introduced in May 2007, exceeded expectations from revenue and compliance perspectives, surpassing replaced taxes by about 0.6 percent of GDP. - Total government spending declined marginally as lower capital expenditure made room for higher non-wage, non-interest current expenditure; the wage bill remained constant as a percent of GDP despite back pay and a modest wage increase. - A US$16 million bond placement with a 10 year maturity helped finance the deficit, lowering domestic borrowing requirements. - Social measures: - Social safety nets were expanded: reduced import tariffs on a number of basic food items; larger cost of living support payments to persons enrolled in the public assistance program; a subsidy on the electricity surcharge; and increased minimum pension payments. - External shocks and vulnerabilities: - Strains from the fallout of the CL Financial Group have created uncertainty; total exposure to the CL Financial Group is estimated at around EC$350 million, or 22 percent of GDP. - IFSA appointed a receiver for Millennium Bank in March 2009 following an emergency court action by the U.S. SEC; the SEC complaint alleges the bank and its parent were part of a scheme that raised and misappropriated around $US68 million from investors. - 2009 outlook and medium-term projections: - Real GDP growth is projected to be close to zero in 2009, with significant downside risks from a sharper downturn in U.S. and global growth. - The external current account deficit is expected to decline to about 29 percent of GDP in 2009 as imports are projected to fall by more than the decline in tourism receipts. - The fiscal balance for 2009 will be affected by the adverse economic environment: total revenue and grants are expected to decline by 2.6 percent of GDP owing to the ongoing income tax reform and lower collection of VAT and import duties as well as lower grants. - Total expenditure is projected to decline slightly owing to lower expenditure on goods and services, while the wage bill is projected to remain broadly unchanged in percent of GDP. - The external current account deficit is projected to fall below 21 percent of GDP by 2014 as the global economy gradually recovers and construction of new tourism infrastructure tapers off. - Competitiveness and exchange rate assessment: - Staff analysis suggests the real effective exchange rate is close to its medium-term equilibrium value. - External competitiveness remains a challenge: regional tourism market shares have deteriorated and the REER measured relative to tourism competitor- or customer-based markets has appreciated. - If tourism stagnates, further real depreciation (partly expected as inflation returns to historical levels) and other nonprice measures would be necessary to maintain competitiveness. *IMF staff report: Executive Summary* ### Box 1. The Economic Impact of the Tourism and FDI Shock ### Box 1. The Economic Impact of the Tourism and FDI Shock ### Economic impact and key statistics - The adverse shock to tourism and FDI in 2008–09 has weakened economic activity and heightened balance of payments vulnerabilities. - The contribution of tourism to real GDP growth turned negative in 2008 and is projected to reduce GDP growth by about 1.6 percent in 2009. - Stayover visitors declined in the second half of 2008 by 6.5 percent, compared to the same period in 2007. - Net tourism receipts and FDI are projected to fall in 2009 by: - Net tourism receipts: EC$41 million (2.9 percentage points of GDP) - FDI: EC$99 million (6.5 percentage points of GDP) - The global slowdown is expected to lower remittances and reduce demand for exports; imports are lower due to both exogenous factors (lower food and fuel prices and lower FDI-related imports) and endogenous compression associated with weak activity. - Exogenous import reduction will not fully offset declines in tourism receipts and FDI (together with lower exports and private transfers), contributing to: - Decline in net international reserves: EC$14.2 million - Financing gap: EC$14.9 million ### Estimated net impact (selected table entries; In millions of EC dollars) - Current Account: 2008 = -547.3 ; 2009 = -485.2 ; Difference = 62.1 - (A) Exports: 2008 = 148.9 ; 2009 = 142.1 ; Difference = -6.7 - (B) Imports: 2008 = -806.4 ; 2009 = -677.2 ; Difference = 129.2 - (C) FDI-related (both fuel and nonfuel) ...... 68.9 - (D) Fuel and Food (price effect) ...... 36.9 - (E) Endogenous adjustment ...... 23.3 - (F) Travel (net): 2008 = 201.0 ; 2009 = 159.8 ; Difference = -41.2 - (G) Private transfers: 2008 = 32.6 ; 2009 = 25.7 ; Difference = -7.0 - Capital and Financial Account 1/: 2008 = 537.9 ; 2009 = 456.1 ; Difference = -81.8 - Of which: 326.6 → 228.2 ; Difference = -98.5 - (H) Direct investment - Overall balance: 2008 = -9.4 ; 2009 = -29.1 - Financing: 2008 = 9.4 ; 2009 = 29.1 - Change in imputed reserves: 8.8 → 14.2 - Requested ESF: 0.0 → 14.9 - (I) Gross impact (A+F+G+H) ...... -153.3 - (J) Net impact (I+C+D) ...... -47.5 Memorandum items: Central government operations (In percent of GDP) - Total Revenue and grants: 2008 = 32.4 ; 2009 = 29.8 ; Difference = -2.6 - Of which Current revenue: 29.8 → 27.9 ; Difference = -1.9 - Total expenditure: 2008 = 34.1 ; 2009 = 33.7 ; Difference = -0.4 - Overall balance: 2008 = -1.7 ; 2009 = -3.8 ; Difference = -2.1 - Financing - Net external financing: 1.0 → 2.0 - Net domestic financing: 1.0 → 0.9 - Requested ESF: ... → 0.9 Sources noted in the table: Ministry of Finance and Planning; ECCB; and Fund staff projections. 1/ Includes net errors and omissions ### Balance of payments, ESF financing, and fiscal impact - The authorities sought concessional budget support from the Caribbean Development Bank. - The proposed ESF purchase (45 percent of quota, or around EC$14.9 million) would: - Close the external financing gap - Contribute about 0.9 percent of GDP toward financing the fiscal deficit of 3.8 percent of GDP projected for 2009 - Imply less projected net domestic financing, appropriate given past trends and the tight liquidity environment in 2009 ### Financial-sector resilience and contingency planning - Need to enhance resilience of the financial system and develop contingency financing plans. - Key concerns and recommendations: - Strengthen prudential supervision of asset quality, including assets held abroad by banks operating in St. Vincent and the Grenadines. - Heightened vigilance on provisioning, particularly in foreign banks; continue liaison with the ECCB for on-site inspection, cross-border transaction examination, and higher frequency monitoring of banks’ liquidity. - Improve regulatory and supervisory framework for nonbank institutions; consider establishing a single regulatory unit (SRU) for all nonbank financial institutions. - Strengthen AML/CFT supervision, including of the offshore and nonbanking sectors, following the Fund AML/CFT assessment carried out in February–March 2009. - Develop contingency plans for access to buffer financing from international financial institutions in case of a deeper and more prolonged global downturn. ### Competitiveness and growth-enhancing measures - Income tax reforms and tax administration: - Personal and corporate tax rates were lowered from 37.5 percent to 35 percent, and the 2009 Budget speech announced a further reduction to 32.5 percent. - Establishment of a Tax Reform Commission to make recommendations by end-2009 on comprehensive income tax legislation and revamping the tax incentive system. - Public sector wage policy: - Increasing compensation by 12 percent over three years (2009–11) to avoid entrenching high inflation and support external competitiveness. - Infrastructure and business environment priorities: - Construction of a new international airport: goal to complete by 2011. - Total cost now estimated at about EC$608 million (37½ percent of GDP). - Identified grant and concessional financing falls short by approximately EC$185 million (11½ percent GDP). - Planned contribution from government land sales is progressing slowly and may be more difficult in the global slowdown. - Mission recommendations to mitigate airport-financing risks: - (i) Adopt comprehensive fiscal reform package to help cover the airport financing gap without compromising debt sustainability. - (ii) Implement, to the extent technically feasible, a more flexible construction timetable to minimize domestic bridge financing needs. - (iii) Continue seeking additional grant and concessional financing. - Reduce costs of doing business: modernize customs procedures, modernize port operations, develop a one-stop business registration process, develop a land registry, and introduce a new bankruptcy law. ### Fiscal policy, debt sustainability, and reform package - Recent fiscal position and 2009 budget: - The 2009 Budget envisages an increase in the fiscal deficit. - The reduction in personal and corporate tax rates is expected to reduce revenues by around 0.4 percent of GDP; current expenditure (excluding utilities) is expected to decline by around 0.2 percent of GDP from 2008. - After adjustments with historical capital spending rates and materialization of budgeted grants, the primary deficit and the overall fiscal deficit would increase to 0.9 percent and 3.8 percent of GDP, respectively, raising central government debt to about 56½ percent of GDP in 2009. - Attaining this fiscal target would require keeping current expenditure some 2 percentage points of GDP below budgeted levels. - Debt dynamics: - Under current policies (small primary deficit in the medium term), the debt-to-GDP ratio is projected to rise to nearly 87 percent by 2014 and unlikely to reach the 60 percent mark by 2020 (the ECCB’s target for the region). - Expected borrowing for the new international airport is the main reason for this debt profile. - Worst-case scenario (expected grants and concessional financing do not materialize): debt-to-GDP ratio would reach 101 percent by 2014. - Even if all concessional financing materializes, significant bridge financing from domestic sources would be needed, increasing banks' exposure to the public sector and potentially prompting banks to reduce net foreign assets to generate bridge financing. - Recommended fiscal reforms and outcomes: - Mission recommended fiscal measures to increase the primary surplus to about 2.6 percent of GDP over the medium term, from a projected deficit of 0.9 percent in 2009. - Revenue-side measures: further tax policy and administrative reforms to broaden the tax base, continue VAT, planned introduction of a market-based property tax in mid-2011, and revamp tax incentive system. - Expenditure-side measures: deepen civil service reform and improve prioritization of capital spending. - During the downturn, support well-targeted transfers to vulnerable groups but avoid making the public sector “the employer of last resort.” - Other supporting measures: customs reform (risk management, post-clearance audit, IT upgrades), civil service reform (pay and career structures, performance incentives), development of a medium-term expenditure framework (MTEF), and maintain the automatic fuel pricing mechanism (three-month rolling average pricing rule adopted August 2008). - Fiscal consolidation scenarios: - Under an active scenario of intensified fiscal reforms, public debt would rise temporarily and then decline to around 69½ percent of GDP by 2014. - The 60 percent debt-to-GDP target would be reached in 2017 under the active reform scenario. ### VAT integrity and tax administration - The VAT has performed well in yield and compliance and now accounts for one third of tax revenues. - Authorities committed to maintaining VAT integrity and resisted pressures for further exemptions and concessions. - Staff recommended strengthening audit, collections enforcement, and information technology capabilities and absorbing the VAT unit into mainstream tax operations. - Authorities welcomed continued CARTAC and Fund technical assistance in these areas. *Source: IMF Fund staff projections and discussion as presented in the Box titled "The Economic Impact of the Tourism and FDI Shock" in the provided document.* ### 20. Meeting the needs of vulnerable groups more efficiently will help the ### Meeting the needs of vulnerable groups more efficiently will help the government continue its solid efforts at pursuing social and poverty reduction goals. ### Social protection and poverty reduction - Forthcoming poverty assessment report due in the first half of 2009 is expected to demonstrate substantial progress in poverty reduction, particularly in tackling extreme poverty. - The poverty assessment and the planned poverty reduction action plan could be used to develop a well-targeted social protection scheme. - Targeted social programs that could be strengthened include: - the public assistance program, - the children against poverty program, - the rural development facility, - home-help-for the elderly, - the school feeding programs. ### Public debt dynamics and airport financing risk - Uncertainties associated with the financing strategy for the new airport pose risks to the sustainability of public debt. - If there were significant delays in expected grants and concessional financing or in land sales, it would be prudent to extend the construction timetable for the airport to the extent technically feasible to avoid a major increase in public debt. - The construction of the new international airport is projected to cost around 37½ percent of 2008 GDP and will involve a significant increase in construction-related imports during 2009–2011. - Recommendation: Minimize the need to undertake bridge domestic financing on commercial terms in 2009 by continuing efforts to mobilize grant and concessional resources and by being flexible with the construction timetable, to the extent technically feasible. ### National Insurance Scheme (NIS) and pension reform - NIS contribution rate increased from 6 to 8 percent in January 2008. - Staff view the increase as a positive initial step but note contribution rates remain low relative to international standards and to the large and growing financing requirements of the pay-as-you-go pension system. - Recommended reform measures (based on the Seventh Actuarial Review and Fund technical assistance report): - further increases to the contribution rate, - increases to the retirement age, - reductions to the average replacement rate. - Staff encouraged rationalization of the public pension system by integrating it with the NIS or transforming public pensions into a complement to the NIS. ### Insurance sector resolution (CL Financial Group) - Difficulties in the insurance sector caused by the CL Financial Group failure and subsequent intervention remain a challenge. - Authorities have determined exposure to subsidiaries CLICO Life Insurance and British American Insurance. - National and regional authorities are taking a regional approach to assessing liquidity and solvency positions and to developing a resolution plan to maintain confidence in the financial system. - The region’s limited fiscal space and high debt burdens will most likely influence the choice of resolution option. - Note: In April 2009 Ministers announced a US$80 million Liquidity Support Fund to support the liquidity position of British American Insurance operations in the ECCU. ### Natural disasters and disaster risk management - Natural disasters are a perennial threat to sustained growth. - St. Vincent and the Grenadines renewed participation in the Caribbean Catastrophic Risk Insurance Facility in June 2008, supported by IDA credits to pay insurance premia. - Mission welcomed the prudent development of further disaster contingency response plans, including through public safety programs. ### EU funds for banana sector transition - The European Union has committed funds to ameliorate the social impact of the secular decline of the banana sector, but disbursements have been slow. - Authorities’ efforts to speed disbursements have not been successful; they are requesting the EU to transform all commitments into budgetary support, which staff supported. ### Measures to ameliorate the shock to tourism - Broad policy framework (fiscal and structural) aimed at maintaining competitiveness and supporting restoration of growth. - Implemented/ongoing measures with negligible expected fiscal impact: - Special incentives for the tourism sector, including a reduction in corporate income tax rates from 30 percent to 20 percent, and lower electricity charges by the state electricity company. Staff emphasized incentives should be time-bound and linked to progress on enhancing efficiency in the tourism sector. - LIAT airline’s flight schedule was restructured to ease air travel. - Establishment of a Tourism Authority to provide greater focus to marketing efforts. - Government coordinated with hoteliers to develop special packages for visitors. ### Request for ESF support and capacity to repay - Fund support under the rapid-access component of the ESF: a disbursement of SDR 3.735 million (45 percent of quota) would close the external financing gap in 2009, assist authorities to adjust to the tourism and FDI shock, and could help catalyze donor budget support. - St. Vincent and the Grenadines has no outstanding credit from the Fund. - Future repayments to the Fund would be negligible in relation to exports of goods and services (on average 0.2 percent of exports of goods and services over the 2014-19 period). - The ESF disbursement would not materially worsen the debt profile. - A safeguards assessment of the ECCB was conducted in 2007 and most recommendations have been implemented. ### Staff appraisal: growth, fiscal policy, and structural priorities - Growth and external shock: - After two years of record-high growth, estimated growth fell to around 1 percent in 2008 due to sharply weakened tourism and agriculture sectors, and is projected to decline further in 2009. - Global crisis affected the balance of payments through declines in tourism receipts and FDI. - New airport should raise medium-term growth potential if managed prudently. - Fiscal policy and competitiveness: - Fiscal measures should be supportive of external competitiveness. - Staff welcomed reforms aimed at further reducing corporate tax rates and plans for broadening the tax base, and the prudent public sector wage policy. - Sustained fiscal consolidation will increase fiscal room to address poverty alleviation and social needs. - Tax reform and administration: - Authorities committed to maintaining the integrity and stability of the VAT. - Staff recommends strengthening of audit and collections to improve VAT administration and minimize risk of deterioration in compliance. - Revamping the tax incentive system would allow for further reductions in the corporate income tax. - Introduction of a market-based property tax would provide another revenue source. - Social security reform: - Further parametric reforms to social security are necessary beyond the recent contribution rate increase. - Rationalize public pensions to complement NIS. - Financial sector oversight: - Improving regulatory and supervisory framework for nonbanks is a high priority. - Steps underway to improve framework for building and loan societies and credit unions are welcomed. - Establishment of a single regulatory unit for domestic nonbanks and the international financial services sector would create efficiencies and allow a system-wide perspective. - Improving regulatory and supervisory framework for the insurance sector has gained added urgency after the CL Financial Group meltdown. - Data shortcomings: - Coverage and timeliness issues in national accounts (tourism and agriculture), fiscal data for public enterprises, fiscal financing, and labor statistics. - Consultation cycle recommendation: - Next Article IV consultation recommended on the standard 12-month cycle. ### Box 2 — The impact of VAT and global commodity prices on CPI inflation (key findings) - Inflation history and spikes: - During 2001–06 the CPI rose at an annual (geometric) average rate of about 2.4 percent. - 12-month inflation exceeded 8 percent in December 2007 and reached a peak of 12 percent in September 2008, before falling to 8.7 percent by December 2008. - VAT introduction effects: - VAT introduced in May 2007 with a rate of 15 percent for goods and services and 10 percent for tourist accommodation. - Statistical decomposition identifies a spike in monthly inflation for April 2007 of approximately 3.7 percent (or 4½ times the standard deviation of inflation relative to its long-run average), suggesting VAT was anticipated and caused a one-off increase about a month before commencement. - Spikes account for nearly 95 percent of the total CPI basket; no evidence of multiple spikes in any CPI category during 2007. - Weighted effect: inflation was 8 percent relative to its annual average of 3 percent, reflecting the large weight on the partially exempt food component (53 percent). - 2008 global commodity price effects: - Increase in global fuel and food prices during 2008 was the main factor behind the spike in inflation in 2008. - Decomposition shows food, fuel and light, and transportation categories together accounted for approximately 97 percent of the 2008 inflation. - Result implies inflation likely to decline fairly rapidly starting in 2009 in line with unwinding of global fuel and food prices. ### Box 3 — Assessment of external stability (key findings and projections) - 2007 current account and drivers: - In 2007 the external current account deficit deteriorated by more than 10 percentage points of GDP, owing to lower receipts from tourism-related services and higher imports. - Total imports represent over 50 percent of GDP; food and fuel items account for 40 percent of the total, while FDI and tourism-related imports account for 50 percent. - Adjusted current account: - Adjusting for FDI, grants and temporary factors, the current account deficit for 2007 is estimated at around 10 percent of GDP. - This adjusted deficit is projected to fall to around 3.9 percent by 2014, in line with an expected decline in commodity prices, FDI and grants. - Equilibrium/current-account norm: - Using CARICOM-only or an extended sample of tourism-dependent countries, the equilibrium current account deficit (or current account ‘norm’) for St. Vincent and the Grenadines is estimated at around 20 percent of GDP, suggesting the equilibrium exchange rate is statistically aligned with medium-term fundamentals. - Key numeric entries from underlying current account table: - Observed Current Account (a): 2007 = -35.1, 2014 = -20.8 - Temporary Effects (b): -2.5 - Underlying Current Account (a-b): 2007 = -32.6, 2014 = -20.8 - FDI: 2007 = 21.5, 2014 = 15.9 - Grants 1/: 3.7 (2007), 2.0 (2014) - Import content of FDI and Grants 2/: 2007 = 22.6, 2014 = 16.9 - Current Account Excluding Import content of FDI and Grants: 2007 = -10.0, 2014 = -3.9 - Memorandum item — Fuel imports: 2007 = 7.9, 2014 = 5.4 - 1/ Grants actually used during the year. - 2/ Assumes that 90 percent of FDI and used grants are spent on imports. - Risk highlighted: - A further widening of the current account deficit remains a key risk; financing of the airport project must avoid turning a transitory departure from the current account equilibrium into a disorderly external adjustment. *Source: IMF staff report (content unit _cr09181).* ### Box 4. The 2009 Budget ### Box 4. The 2009 Budget ### Budget priorities and objectives - Central themes: macro-economic stability, sharpened business competitiveness, and socio-economic progress. - Stated priorities: - Investment in education. - Targeted social programs. - Further reductions in corporate and personal taxes. - Prioritization of public sector investment in infrastructure. - Mobilization of private investment including through regulatory reform. ### Capital expenditure program and grants - The 2009 Budget communication includes an ambitious capital expenditure program partly financed by expected grants. - If fully implemented (i.e., assuming full capital spending and full realization of grants), the budget would: - Worsen the fiscal deficit. - Increase public debt to nearly 60 percent of GDP. - Staff baseline scenario (accounting for historical rates of capital spending implementation, materialization of grants, and financing constraints) projects: - Primary deficit will widen to 0.9 percent of GDP. - Overall fiscal deficit will widen to 3.8 percent of GDP. - Government debt will increase to about 56½ percent of GDP. ### Current spending developments and staff view - Budgeted current spending would increase the overall fiscal balance. - Compared with the 2008 outturn: - The wage bill increases by 0.9 percent of GDP. - Spending on transfers and goods and services rise by about 1.3 percent of GDP. - Staff assessment: - There is room to reduce current spending in line with the Budget emphasis on public service reform and a more focused public assistance guided by the Country Poverty Assessment underway. - This view is consistent with strong efforts in recent years to keep spending under control. ### Tax policy changes and fiscal impact - To bolster business competitiveness and reward effort, the budget announces further reductions in income tax rates. - Continuing the 2008 income tax reform: - Both the standard rate of company tax and the top marginal rate of the personal income tax are projected to decline from 35 percent to 32.5 percent. - The threshold for the personal income tax will be raised. - Fiscal cost: - The estimated annual tax forgone amounts to about ½ percent of GDP. ### Key short-run fiscal statistics (as highlighted) - Staff baseline projections (summary figures emphasized in the Box): - Primary deficit: 0.9 percent of GDP (widening). - Overall fiscal deficit: 3.8 percent of GDP (widening). - Government debt: about 56½ percent of GDP (rising under the baseline). - Comparative statement if fully implemented: - Public debt would rise to nearly 60 percent of GDP. *Source: Box 4. The 2009 Budget (from the provided IMF document).* ### 1. Eradicate extreme poverty and hunger ### 1. Eradicate extreme poverty and hunger ### Millennium Development Goals indicators — selected outcomes and service indicators - Prevalence of undernourishment (% of population): 12.00 10.00 - School enrollment, primary (% net): 90.51 92.70 93.59 91.71 91.75 90.44 - Primary completion rate, total (% of relevant age group): 73.54 76.95 79.02 89.33 92.04 - Persistence to grade 5, total (% of cohort): 81.84 - Ratio of girls to boys in primary and secondary education (%): 105.47 101.39 100.07 100.04 99.10 100.61 - Proportion of seats held by women in national parliament (%): 5.00 5.00 23.00 23.00 23.00 22.70 18.20 - Mortality rate, under-5 (per 1,000): 21.91 23.11 … 20.41 20.03 - Mortality rate, infant (per 1,000 live births): 17.96 19.46 … 17.42 17.09 - Immunization, measles (% of children ages 12-23 months): 99.00 96.00 98.00 99.00 94.00 99.00 97.00 99.00 - Maternal indicators: Births attended by skilled health staff (% of total): 100.00 100.00 100.00 100.00 - Contraceptive prevalence (% of women ages 15-49): 48.00 - Incidence of tuberculosis (per 100,000 people): 32.70 31.22 30.94 30.66 30.37 30.10 29.82 29.55 - Tuberculosis cases detected under DOTS (%): 55.24 18.49 … 37.25 31.16 37.53 50.23 - Forest area (% of land area): 25.64 28.21 - Nationally protected areas (% of total land area): 11.28 - CO2 emissions (metric tons per capita): 1.13 1.33 1.51 1.56 1.65 1.67 - Fixed line and mobile phone subscribers (per 100 people): 16.33 23.52 28.80 31.83 71.36 76.82 78.17 92.07 - Personal computers (per 100 people): 10.35 11.15 11.95 12.73 13.50 13.85 - Internet users (per 100 people): 0.12 3.02 4.72 5.12 5.94 6.75 8.39 29.22 ### General socio-economic indicators (selected) - Population (thousands): 112.98 115.95 116.57 117.20 117.85 118.49 119.14 119.77 - Gross national income (Millions US$ constant LCU): 200.85 259.78 260.72 278.78 280.35 - GNI per capita (in U.S. dollars): 1777.74 2240.48 2236.68 2378.68 2378.92 - Fertility rate, total (births per woman): 2.57 2.34 2.30 2.24 2.22 - Life expectancy at birth, total (years): 70.01 70.42 70.58 71.18 71.38 - Aid (% of GNI): 18.70 1.95 2.63 1.38 1.59 2.71 1.08 1.03 ### Key development finance and external indicators (selected memoranda) - Exports of goods and services (in millions of US$): 212.7 199.8 182.1 205.4 240.3 276.9 310.2 350.3 390.3 435.1 485.6 542.3 606.0 - Debt service (in millions of US$): 16.5 17.3 19.2 27.3 32.3 35.6 37.7 39.4 47.1 53.0 57.5 61.2 63.5 - GDP (in millions of US$): 546.4 600.8 621.6 642.5 686.8 733.2 777.9 827.1 883.3 943.4 1007.5 1076.0 1149.2 - Imputed Net International Reserves (in millions of US$): 86.2 82.9 77.7 78.9 81.0 84.2 87.8 91.7 95.3 99.2 103.1 107.2 111.5 - Quota (in millions of SDR): 8.3 (constant across years) --- ### Policy actions and recent government request to the Fund - Economic shock from global downturn: tourism receipts and foreign direct investment declined sharply. - Net foreign exchange receipts from tourism: decline of around US$16.6 million in 2008 (4.3 percentage points of GDP). - Projected cumulative decline in tourism receipts in 2008–09: US$31.8 million (7.2 percentage points of GDP). - FDI projected decline in 2008-09: close to 7.9 percentage points of GDP. - Government mitigation measures include: - Enhancing efficiency and technological capacity of customs and port operations. - Maintaining a prudent public sector wage policy. - Reducing corporate tax rates. - Construction of a new international airport (airport completion expected by 2011). - Time-bound incentives for the tourism sector, namely a reduction in corporate income tax rates from 30 percent from 20 percent, and lower electricity charges by the state electricity company. - Working with the regional airline on improved flight schedules, establishing a Tourism Authority to strengthen marketing, and coordinating with hoteliers to develop special packages for visitors. - Government request: stand-alone disbursement equivalent to SDR 3.74 million (45 percent of quota) under the Rapid-Access Component of the Fund’s Exogenous Shocks Facility. --- ### Fiscal sustainability — medium-term outlook under alternative scenarios - Common assumptions: - Airport expected to be completed by 2011. - Current fiscal pressure from higher capital and social spending; without prioritization and revenue increases, debt dynamics unfavorable. - Current financing gap for the international airport estimated at around EC$185 million net of expected land sales and is assumed to be borrowed by the public sector. - Baseline Scenario: - Authorities continue expansionary policies; deficits financed with commercial borrowing and some grants. - Growth remains lower (by about ½ percent) than under the active scenario. - Maximum corporate income tax rate is reduced to 30 percent by 2010, reducing corporate tax revenues as a share of GDP by 0.5 percentage points. - Wage bill as a share of GDP remains constant after 2008; capital expenditures remain at around 7½ percent of GDP. - Primary balance remains in deficit throughout the forecast horizon. - Public debt reaches about 86¾ percent of GDP by 2014. - Active Scenario: - Revenue measures targeted to yield: - Substituting tax holidays and exemptions with investment credits, accelerated depreciation, and improving loss carry-forward provisions — conservatively expected to yield, as a group, 1.9 percent of GDP. - Efficiency gains in customs collections — estimated to yield ½ percent of GDP. - Expenditure-side reforms: - Civil service reform yielding cost savings of 0.4 percent of GDP. - Gradual reforms to the public service pension system. - Capital expenditure reduced by elimination or postponement of low-priority projects, though remaining above long-run average of 6.6 percent of GDP. - Growth outcomes: - Under active scenario, underlying growth expected to accelerate to about 4⅔ percent over the medium term. - Fiscal outcome: - Public debt would decline to about 69½ percent of GDP by 2014. --- ### Institutions, Fund relations, and exchange arrangement (selected) - St. Vincent and the Grenadines is a member of the Eastern Caribbean Central Bank (ECCB) and the Eastern Caribbean Currency Union. - The Eastern Caribbean dollar has been pegged to the U.S. dollar at the rate of EC$2.70 per U.S. dollar since July 1976. - St. Vincent and the Grenadines has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions. - Fund involvement: - No outstanding obligations to the Fund as of the document. - Several missions from CARTAC, FAD, and LEG have provided technical assistance since the beginning of 2006, including VAT and excise implementation, tax administration modernization, and statistical capacity building. *Source: Staff Report for the 2009 Article IV Consultation and Request for Disbursement Under the Rapid-Access Component of the Exogenous Shocks Facility—Informational Annex (St. Vincent and the Grenadines).* ### Appendix II. St. Vincent and the Grenadines: Relations with the World Bank Group ### Appendix II. St. Vincent and the Grenadines: Relations with the World Bank Group (as at March 6, 2009) ### World Bank Eastern Caribbean Sub-Region Country Assistance Strategy (FY06–09) - Strategy presented to the World Bank’s Board on September 13, 2005. - Two main pillars: - (1) stimulating growth and improving competitiveness; - (2) reducing vulnerability, by promoting greater social inclusion and strengthening disaster risk management. - Given OECS countries’ weakened creditworthiness due to high debt ratios, Bank activities will focus on leveraging available donor grant financing. - IBRD and IDA support to focus on technical and financial assistance aligned with the two pillars, following the OECS growth and competitiveness study. - Indicative Base Case lending scenario: about US$51.3 million in IDA resources for the four OECS blend countries (Dominica, Grenada, St. Lucia and St. Vincent and the Grenadines) for FY06–09. - This amount includes an IDA Regional allocation of US$15.2 million for two regional projects: - US$12 million for Catastrophe Risk Insurance; - US$3.2 million for Infrastructure and Utilities Reform. ### I. Projects — active World Bank projects in St. Vincent and the Grenadines - Aggregate figures: - Four active World Bank projects for a net commitment of approximately US$14.44 million. - Of this net commitment, US$5.92 million has been disbursed. - OECS Catastrophe Insurance Project - Approved: March 2007. - Amount: US$0.7 million. - Objective: reduce participating OECS governments' financial vulnerability to natural disasters through insurance coverage against earthquakes and hurricanes. - Mechanism: establishment of the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and financing of catastrophe insurance coverage from the Facility. - Components: - (a) payment of entrance fee (equal to the first year’s insurance premium) to assist countries to join CCRIF; - (b) payment of annual insurance premium for the first three years to purchase coverage offered by CCRIF. - Telecommunications & ICT Development Project - Approved: September 2005. - 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 and promote competition; capacity building for ECTEL and NTRCs; revise 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): finance management and administration of the overall project; finance related technical assistance by providing complementary resources. - St. Vincent and the Grenadines Education Reform Project - Approved: June 2004. - Amount: US$6.2 million. - Objective: build human capital to contribute to diversification of the economy and more sustainable growth. - Intended achievements: - (i) increasing equitable access to secondary education; - (ii) improving quality of teaching and learning with focus on student-centered learning and direct school-level interventions; - (iii) strengthening management of the education sector and governance of schools. - HIV/AIDS Prevention and Control Program - Approved: July 2002. - Funded under the Multi-Country Adaptable Program Loan for the Caribbean Region. - Objectives: - (i) curbing the spread of HIV/AIDS epidemic; - (ii) reducing morbidity and mortality attributed to HIV/AIDS; - (iii) improving 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. ### II. Economic and Sector Work (analytical and advisory activities supporting Bank program) - Completed, ongoing and planned studies include: - “Towards a New Agenda for Growth”—OECS growth and competitiveness study (2005); - An OECS Skills Enhancement Policy Note (2006); - Caribbean Air Transport Report (2006); - Regional study on Crime, Violence, and Development: Trends, Costs, and Policy Options in the Caribbean (2007); - OECS Private Sector Financing Study (2008); - OECS Tourism Backward Linkages Study (2008); - Report “Caribbean—Accelerating Trade Integration: Policy Options for Sustained Growth, Job Creation and Poverty Reduction” (2008); - CARICOM study on Managing Nurse Migration (ongoing); - Preparatory study aimed at developing a Caribbean-wide Regional Energy Strategy (ongoing). ### III. Financial Relations (In millions of U.S. dollars) - Project-level financial snapshot: - OECS Catastrophe Insurance — Original Principal: 0.70; Disbursed*: 0.57; Undisbursed*: 0.12 - OECS Telecom and ICT Development — Original Principal: 0.54; Disbursed*: 0.25; Undisbursed*: 0.30 - OECS Education Development Project — Original Principal: 6.20; Disbursed*: 1.92; Undisbursed*: 4.53 - HIV/AIDS Prevention and Control — Original Principal: 7.00; Disbursed*: 3.18; Undisbursed*: 4.12 - Total — Original Principal: 14.44; Disbursed*: 5.92; Undisbursed*: 9.07 - Note: * 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) — annual series (values as presented) - Total disbursements by year (selected): 2000: 0.02; 2001: 0.36; 2002: 1.46; 2003: 1.73; 2004: 1.20; 2005: 2.48; 2006: 4.55; 2007: 3.06; 2008: 1.48; 2009**: 1.22 - Repayments by year (selected): 2000: 0.13; 2001: 0.12; 2002: 0.12; 2003: 0.29; 2004: 0.14; 2005: 0.27; 2006: 0.30; 2007: 0.31; 2008: 0.63; 2009**: 0.62 - Net Disbursements by year (selected): 2000: 0.10; 2001: 0.24; 2002: 1.34; 2003: 1.44; 2004: 1.06; 2005: 2.21; 2006: 4.25; 2007: 2.75; 2008: 0.85; 2009**: 0.6 - Interest and fees by year (selected): 2000: 0.00; 2001: 0.03; 2002: 0.07; 2003: 0.12; 2004: 0.13; 2005: 0.19; 2006: 0.21; 2007: 0.30; 2008: 0.34; 2009**: 0.30 - **Data as of March 6, 2009. *Italic: Source — Appendix II. St. Vincent and the Grenadines: Relations with the World Bank Group (as at March 6, 2009).* ### 1. Following a period of robust growth, macroeconomic outcomes were mixed in 2008. ### _cr09181 - 1. Following a period of robust growth, macroeconomic outcomes were mixed in 2008. ### Macroeconomic outcomes in 2008 - Real GDP growth decelerated from an annual average of almost 6 percent during 2004–07 to 0.9 percent in 2008, owing to sharply weakened activities in the tourism, construction and agriculture sectors. - Central government fiscal balance strengthened by about 2 percent of GDP, achieving a primary surplus of 1.2 percent of GDP, the first since 2002. - Public sector debt in nominal terms declined to about 67½ percent of GDP at end-2008 from 77½ percent in 2006, reflecting strong growth and an agreement with Italy to write-off the Ottley Hall debt obligation. ### II. UNDERLYING DSA ASSUMPTIONS — baseline summary - Near term: continued declines in real growth for 2009–10 reflecting the global economic slowdown and financial crisis. - Medium term: growth expected to return to potential of around 4 percent, driven mostly by large-scale public sector construction and a recovery in tourism. - Financing: sizeable overall fiscal deficits expected to continue, financed commercially and with some grants from the European Union and nontraditional donors, such as Venezuela, Cuba, and Taiwan Province of China. - Central government primary deficit projected to stay close to around 0.9 percent of GDP during 2009–14. - Compared to the DSA accompanying the 2007 Article IV consultation, current growth projections for 2009–10 have been marked down; medium- to long-term projections are similar. - Public sector fiscal projections for 2009–14 are more conservative due to uncertainties around financing of the international airport and the economic downturn. ### Box 1. Baseline Macroeconomic Assumptions (2009–29) - a. Real GDP growth is projected to average about 1.7 percent during 2009–11, well below the historical average (around 4.2 percent during 1999–2008), and to return to its potential over the medium term. Inflation is projected to return to low levels consistent with historical averages and the currency board arrangement. - b. Primary balance: projected to deteriorate sizably in 2009 and then remain broadly stable. - Revenue side: maximum corporate income tax rate reduced to 30 percent by 2010, reducing corporate tax revenues as a share of GDP by ½ percentage points. - Property tax reform expected to bring a revenue gain of about ⅓ percent of GDP. - Expenditure side: after 2008 the wage bill as a share of GDP remains constant; capital expenditure remains at around 7½ percent of GDP. - Under this scenario, the public sector primary deficit would remain sizable (peaking at about 4.8 percent of GDP by 2010). - c. Annual disbursements of external capital grants expected to be around 1½ percent of GDP, consistent with the historical average. - d. Average nominal interest rates on foreign debt assumed to increase to around 6 percent in the medium term. - e. Current account deficit projected to decline moderately from elevated 2007–08 levels but remain high during airport construction; expected to return to a more sustainable level with a pickup in tourism receipts supported by hotel capacity expansion and construction of the new international airport. - f. FDI, following a sharp decline in 2008–09, assumed to return to its historical average of around 15¾ percent of GDP over the medium term. - Note: The authorities plan to complete the construction of a new international airport by 2011 with an estimated cost of EC$608 million. ### III. EVALUATION OF PUBLIC SECTOR DEBT SUSTAINABILITY — key facts - At end-2008 the NPV of public debt was 66.8 percent of GDP (67½ percent in nominal terms). - External debt at end-2008: 35 percent of GDP. - Domestic debt at end-2008: 32½ percent of GDP. - Composition of external debt stock: multilateral creditors around 55½ percent; commercial creditors around 25½ percent. - Future external financing expected primarily through the ECCU Regional Government Securities Market (RGSM) with some financing from IFIs such as the Caribbean Development Bank (CDB). - On the domestic front, commercial banks are the most important lenders to the public sector. ### Baseline public sector debt projections - NPV of public debt-to-GDP ratio rises to about 83 percent by 2014 (86¾ percent in nominal terms) under the baseline. - Long term: NPV of public debt-to-GDP around 102 percent of GDP by 2029 (106½ percent in nominal terms). - NPV of debt-to-revenue ratio increases from 183½ percent in 2009 to around 255 percent by 2014. ### Alternative scenarios — Active scenario (fiscal adjustment) - Fiscal adjustment raises central government primary surplus to 2⅔ percent of GDP over the medium term. - Revenue measures envisioned: - Substitute tax holidays and exemptions with investment credits, accelerated depreciation, and improved loss carry-forward provisions (conservatively expected to yield 1.9 percent of GDP). - Efficiency gains in customs collections estimated to yield 0.5 percent of GDP. - Gradual reduction by 2012 of the corporate income tax from 37.5 to 30 percent along with gradual reduction of tax concessions (revenue neutral). - Donor support assumed, with additional grants from the European Union and Taiwan Province of China. - Expenditure measures: - Civil service reform yields cost savings of 0.4 percent of GDP. - Gradual reforms to public service pension system. - Capital expenditure reduced by elimination or postponement of low-priority projects (yielding ⅓ percent of GDP), although remaining above long-run average of 6.6 percent of GDP. - Growth effect: underlying growth rate expected to accelerate to about 4⅔ percent over the medium term due to public sector capital projects and greater private sector activity. - Debt outcomes under Active scenario: - NPV of public debt-to-GDP declines to about 65 percent by 2014 and to 17 percent by 2029. - Debt service as a share of current revenue falls to around 11 percent by 2029. ### Alternative scenarios — vulnerabilities and shocks - Lower growth and lower primary balance are key vulnerabilities: - If growth remains at one standard deviation below baseline, NPV of debt-to-GDP reaches 154 percent by 2029. - If the primary deficit remains unchanged from the high level projected in 2009, NPV of debt-to-GDP reaches 157 percent by 2029. - Natural disaster shock: - Government incurs fiscal cost of 9 percent of GDP and real GDP growth is zero during 2010–12, reverting to baseline thereafter. - This shock raises NPV of debt-to-GDP to 99 percent by 2014. - Note: actual impact could be lower given participation in the Caribbean Catastrophe Risk Insurance Facility. - Borrowing for the new international airport: - Worst-case: if in-kind grants do not materialize, land sales are lower than expected, and government borrows around 50 percent of airport cost, then by 2014 NPV of debt-to-GDP rises to 95 percent. ### IV. EVALUATION OF EXTERNAL DEBT SUSTAINABILITY — key projections and sensitivities - Analysis covers only public sector external debt; private sector external borrowing data unavailable. - Baseline external debt projections: - NPV of external debt rises to nearly 42½ percent of GDP by 2017 (47 percent in nominal terms), then declines to 38½ percent by 2029 (43 percent in nominal terms) — remains within prudential threshold of 50 percent. - NPV of debt-to-exports ratio remains below 125 percent throughout, comfortably below the indicative threshold of 200 percent. - Sensitivity to combined negative shocks (output growth, export growth, and FDI flows): - NPV of external debt-to-GDP increases to 59 percent by 2011, breaching the 50 percent threshold. - If FDI falls to one standard deviation below historical average, NPV of external debt-to-GDP increases to 51 percent by 2011. - If export value growth is one standard deviation below historical average, NPV of external debt-to-GDP increases to 54 percent by 2011. - A one-time 30 percent nominal depreciation in 2010 raises the NPV of external debt-to-GDP to 55 percent in 2010, breaching the debt-to-GDP threshold. - Majority of external debt is denominated in U.S. dollars, increasing vulnerability to nominal depreciation. ### V. CONCLUSION — policy implications - Sound public finances are key to achieving debt sustainability given uncertainties from the economic slowdown and airport financing. - Without continued fiscal adjustment, public sector imbalances would remain relatively high and the ECCB’s public debt benchmark of 60 percent of GDP by 2020 would be out of reach. - Staff analysis indicates that a fiscal adjustment achieving a central government primary surplus (including grants) of around 2⅔ percent of GDP by 2014 would enable St. Vincent and the Grenadines to reach a nominal public debt-to-GDP ratio below 60 percent by 2017. *Source: _cr09181 - 1. Following a period of robust growth, macroeconomic outcomes were mixed in 2008.* ### 14. St. Vincent and the Grenadines faces a moderate risk of external debt distress. The ### _cr09181 - 14. St. Vincent and the Grenadines faces a moderate risk of external debt distress. ### Debt-distress classification and prudential thresholds - The country "faces a moderate risk of external debt distress." - The DSA uses policy-dependent external debt-burden thresholds tied to the Country Policy and Institutional Assessment (CPIA). - St. Vincent and the Grenadines is classified by the CPIA as a "strong performer," implying prudential thresholds of: - NPV of debt-to-GDP: 50 (percent) - NPV of debt-to-exports: 200 (percent) - Caution: private external debt data are unavailable; results cover public external debt only. ### Main findings from the baseline scenario and stress tests - Baseline scenario outcome: - "The debt trajectory under the baseline scenario does not breach the NPV of debt-to-GDP indicative threshold." - Stress-test outcomes and vulnerabilities: - "Various stress tests underline the country’s vulnerabilities to natural disasters, lower FDI, and lower output growth and suggest several breaches of the NPV of debt-to-GDP threshold." - Specific stress scenarios flagged in the sensitivity analysis include: - Permanently lower GDP growth. - Natural Disaster (assumes zero growth and a fiscal cost for the government of 9 percent of GDP between 2010 and 2012). - Airport Financing (assumes in-kind grants do not materialize and the government needs to borrow 50 percent of the airport cost). - Terms shock: "New public sector loans on less favorable terms" (assumes interest rate on new borrowing is 2 percentage points higher than in the baseline). - Bound tests: one-time 30 percent real depreciation in 2010; shocks to real GDP growth, primary balance, export growth, and net non-debt creating flows. ### Selected historical and projected public debt and fiscal indicators (tables and projections) - Public sector gross debt (percent of GDP, selected years): - 2006: 77.5 - 2007: 69.5 - 2008: 67.5 - 2009: 73.2 - 2010: 80.0 - 2011: 83.6 - 2012: 84.3 - 2013: 85.6 - 2014: 86.8 - 2019: 92.8 - 2029: 106.4 - Of public sector debt: foreign-currency denominated (percent of GDP, selected years): - 2006: 46.4 - 2007: 37.0 - 2008: 35.0 - 2009: 37.2 - 2014: 44.5 - 2019: 46.9 - 2029: 43.0 - PV of public sector debt (percent of GDP, selected projections): - 2009–14 Average: 66.8 (table shows ellipses before; later projections) - 2019: 82.9 - 2029: 102.0 - PV of public sector debt-to-revenue and grants ratio (percent, selected projections): - 2009–14 Average: 166.7 - 2019: 269.5 - 2029: 312.6 - Debt service indicators (percent): - Debt service-to-revenue and grants ratio (2009–14 average): 19.4 (historical average shown as 19.4 in one cell) - Projected debt service-to-revenue and grants ratio for 2029: 29.4 - Debt service-to-revenue ratio (historical and projections): 21.4 (2006), 30.8 (2029) - Primary balance that stabilizes debt-to-GDP ratio (percent): various values shown; sample entries: - 2006: 3.1 - 2007: 11.7 - 2008: -1.1 - Key fiscal aggregates (percent of GDP): - Revenue and grants (2009–14 historical average shown): 39.1 (2008) with later projections around 32.5–32.6 - Primary (noninterest) expenditure (2009–14 averages and projections): around 33.5–43.4 in historical years; projected around 33.5–33.8 in various years. ### External debt and external sector (selected figures) - External debt (nominal, percent of GDP; includes only public sector external debt): - 2006: 46.4 - 2007: 37.0 - 2008: 35.0 - 2009: 37.2 - 2014: 44.5 - 2019: 46.9 - 2029: 43.0 - PV of external debt (percent of GDP, selected projections): - 2019: 42.0 - 2029: 38.5 - PV of external debt (percent of exports, selected projections): - 2009: 103.0 - 2010: 122.2 - 2011: 122.3 - 2019: 95.8 - 2029: 91.0 - PV of public and publicly guaranteed (PPG) external debt (percent of government revenues, selected projections): - 2009: 97.2 - 2010: 115.2 - 2011: 125.4 - 2019: 130.8 - 2029: 123.8 - Debt service-to-exports ratio (percent, historical/projections): - 2006: 13.4 - 2009–14 and projections: ranges shown with 2019: 13.6 and 2029: 13.1 - Total gross financing need (Millions of U.S. dollars, selected years): - 2006: 44.2 - 2007: 92.0 - 2008: 99.6 - 2009: 118.9 - 2010: 118.0 - 2011: 107.4 - 2019: 89.0 - 2029: 169.2 ### Macroeconomic and debt dynamics assumptions (selected) - Real GDP growth (percent, selected series and projections): - 2006: 7.6 - 2007: 7.0 - 2008: 0.9 - 2009: 3.6 - 2010: 2.6 - 2011: 0.1 - 2012: 1.2 - 2013: 3.8 - 2014: 4.3 - 2015–29 Average: 4.1 - Average nominal interest rate on forex debt (percent, selected): - 2006: 4.4 - 2007: 4.3 - 2008: 4.6 - 2009: 3.8 - 2010: 0.9 - 2011: 4.8 - 2019: 7.1 - 2029: 6.9 - Inflation rate (GDP deflator, percent; sample values): - 2006: 4.0 - 2007: 2.6 - 2008: 9.0 - 2009: 2.9 - 2010: 2.6 - 2011: 3.3 - 2015–29 Average: 2.6 - Grant element of new external borrowing (percent) for projection years shown: - 2010 onward: sample entries 15.6, 12.4, 12.6, 12.5, 12.8, 12.8, 13.1, 12.0, 12.4 ### Sensitivity analysis highlights (selected outcomes from Tables/Figures) - PV of debt-to-GDP ratio (percent) — baseline and scenarios (selected entries): - Baseline projections show increases over time with 2019: 42 and 2029: 39 (external DSA table shows baseline series). - Alternative and bound scenarios produce higher ratios; several stress tests produce substantially higher PV ratios in 2019 and 2029. - PV of debt-to-exports and PV of debt-to-revenue ratios: - Baseline and stress scenarios indicate large sensitivity to export shocks, revenue shocks, and depreciation shocks; several stress scenarios push ratios well above prudential thresholds (e.g., exports-based ratios rising into the 200s under some shocks). - Debt service-to-revenue and debt service-to-exports ratios increase substantially under adverse scenarios (figures and tables indicate peaks under terms shocks, combination shocks, and one-time depreciation). ### Vulnerabilities, caveats, and structural risks highlighted in the material - Key vulnerabilities: - Exposure to natural disasters. - Dependence on FDI (net FDI is a significant negative flow in historical data; "Net FDI (negative = inflow)" entries such as -18.9, -21.5, -20.1 in early years). - Sensitivity to lower output growth and external market shocks (tourism, exports). - Data caveat: - Private external debt data are unavailable — analysis covers public external debt only, which suggests "some caution should be used when interpreting these results." - External sector context (from PIN background): - Real output growth fell from 7 percent in 2007 to around 1 percent in 2008; potential estimated at "4½ percent." - Tourism weakened and construction slowed following completion of major public-sector projects. - Inflation peaked at 11.6 percent in September 2008 and declined to 8.7 percent by end-2008. - Private sector credit growth slowed to 3 percent in 2008 from 15 percent in 2007. - Banking sector remained "largely unaffected" by the global financial crisis and "remains well capitalized," though fallout from CL Financial Group and shocks to international financial services created uncertainty. - AML/CFT assessment update took place in February–March 2009. - Fiscal trend noted in the PIN: "The fiscal position continued to strengthen in 2008 and the overall deficit was reduced to" (table/text truncated at that point). *Sources: St. Vincent and the Grenadines authorities; and Fund staff estimates and projections. IM F staff publications and tables as presented in the source content.* ### 1.7 percent of GDP. Larger grants, efforts at tax arrears collection and one-off non-tax ### _cr09181 - 1.7 percent of GDP. Larger grants, efforts at tax arrears collection and one-off non-tax ### Fiscal outcomes and revenue performance - Achieved a primary surplus, the first since 2002. - Revenue drivers: - Larger grants, efforts at tax arrears collection and one-off non-tax revenue. - Solid VAT performance: “The VAT exceeded expectations from both the revenue and the compliance perspectives, surpassing replaced taxes, notwithstanding the growth slowdown.” - Expenditure: - Lower capital expenditure helped contain total government spending. - Public debt: - Public sector debt-to-GDP ratio declined to 67½ percent of GDP at end-2008. - Central government finances (selected ratios, in percent of GDP): - Total revenues and grants: 29.5 (2004), 29.5 (2005), 30.1 (2006), 30.9 (2007), 32.4 (2008), 29.8 (2009 Est./Proj.) - Total expenditure and net lending: 33.1 (2004), 35.1 (2005), 34.0 (2006), 34.6 (2007), 34.1 (2008), 33.7 (2009 Est./Proj.) - Current expenditure: 25.9 (2004), 27.1 (2005), 26.4 (2006), 25.6 (2007), 26.6 (2008), 26.2 (2009 Est./Proj.) - Capital expenditure: 7.1 (2004), 8.0 (2005), 7.5 (2006), 8.9 (2007), 7.5 (2008), 7.5 (2009 Est./Proj.) - Overall balance: -3.6 (2004), -5.6 (2005), -3.9 (2006), -3.6 (2007), -1.7 (2008), -3.8 (2009 Est./Proj.) - Primary balance: -1.1 (2004), -2.6 (2005), -0.7 (2006), -0.6 (2007), 1.2 (2008), -0.9 (2009 Est./Proj.) - Gross public sector debt 2/: 78.6 (2004), 80.2 (2005), 77.5 (2006), 69.5 (2007), 67.5 (2008), 73.2 (2009 Est./Proj.) ### Exogenous Shocks Facility (ESF) request and IMF response - Authorities requested rapid-access component of the ESF to help adjust to tourism and FDI shock. - Requested amount: SDR 3.735 million (45 percent of quota). - Executive Board approval: - Approved an SDR 3.735 million disbursement (about US$5.7 million) under the ESF rapid-access component. - Purpose: partly offset balance of payments impact and contribute toward financing of the fiscal deficit. - Press Release highlights: - The decision enables immediate draw of SDR 3.735 million (about US$5.7 million). - Statement emphasized need to mitigate decline in tourism receipts, FDI, and remittances. ### Macroeconomic developments and outlook - Growth and output: - Real GDP (factor cost): 6.8 (2004), 2.6 (2005), 7.6 (2006), 7.0 (2007), 0.9 (2008), 0.1 (2009 Est./Proj.) - Nominal GDP (market price): 8.3 (2004), 7.5 (2005), 11.9 (2006), 9.7 (2007), 10.0 (2008), 3.5 (2009 Est./Proj.) - Prices and inflation: - Consumer prices, end of period: 1.7 (2004), 3.9 (2005), 4.8 (2006), 8.3 (2007), 8.7 (2008), 2.9 (2009 Est./Proj.) - Consumer prices, period average: 3.0 (2004), 3.7 (2005), 3.0 (2006), 6.9 (2007), 10.1 (2008), 4.2 (2009 Est./Proj.) - External sector: - External current account (percent of GDP): -24.8 (2004), -22.3 (2005), -24.1 (2006), -35.1 (2007), -33.7 (2008), -28.9 (2009 Est./Proj.) - Stayover arrivals (percentage change): 10.4 (2004), 9.5 (2005), 2.6 (2006), -8.1 (2007), -6.1 (2008), -14.0 (2009 Est./Proj.) - Public sector external debt (end of period): 52.9 (2004), 52.0 (2005), 46.4 (2006), 37.0 (2007), 35.0 (2008), 37.2 (2009 Est./Proj.) - External public sector debt service (In percent of exports of goods and services): 11.6 (2004), 11.6 (2005), 13.4 (2006), 12.8 (2007), 13.6 (2008), 18.5 (2009 Est./Proj.) - Banking and monetary indicators (annual changes relative to stock of broad money at beginning of period): - Net foreign assets 1/: 15.7 (2004), -4.6 (2005), 4.5 (2006), -8.1 (2007), 3.2 (2008), -3.4 (2009 Est./Proj.) - Net domestic assets 1/: -2.0 (2004), 11.0 (2005), 3.0 (2006), 15.2 (2007), -0.7 (2008), 5.6 (2009 Est./Proj.) - Of which: Credit to private sector 1/: 0.8 (2004), 4.3 (2005), 11.1 (2006), 12.4 (2007), 2.6 (2008), 1.2 (2009 Est./Proj.) - Broad money: 13.7 (2004), 6.4 (2005), 7.5 (2006), 7.1 (2007), 2.5 (2008), 1.3 (2009 Est./Proj.) - Terms of trade and real effective exchange rate: - Real effective exchange rate (annual percentage change): -3.5 (2004), 0.0 (2005), -0.6 (2006), 0.3 (2007), 3.7 (2008), ... - External terms of trade (annual percentage change): -8.1 (2004), 4.4 (2005), 1.3 (2006), -13.8 (2007), -7.3 (2008), 2.0 (2009 Est./Proj.) ### Executive Board assessment and recommendations - Directors noted: - Severe impact of global slowdown on tourism and construction, causing marked decline in real GDP growth. - Adverse balance of payments effects from declines in tourism receipts, FDI, and remittances. - Commendation for authorities’ commitment to mitigate external shock with ESF support and to enhance growth potential while ensuring fiscal and debt sustainability. - Fiscal policy recommendations: - Continue spending restraint through prudent public sector wage policy and prioritization of capital expenditure. - Encourage reforms for medium-term fiscal consolidation: tax and customs reform, civil service reform, and adoption of a medium-term expenditure framework. - Maintain integrity and stability of the VAT. - External competitiveness and growth: - Staff assessment: real exchange rate appears broadly in line with macroeconomic fundamentals. - Directors encouraged easing infrastructure bottlenecks and institutional rigidities, and lowering cost of doing business. - Infrastructure and airport project: - Construction of a new international airport deemed necessary to develop tourism and improve medium-term growth potential. - Importance of sustained fiscal consolidation and timely concessional financing to accommodate airport project without compromising debt sustainability. - A more flexible timetable for project implementation could alleviate a possible financing bottleneck in 2009 given tight liquidity. - Financial sector oversight: - Emphasized improving regulatory and supervisory framework for nonbanks. - Encouraged establishment of a single regulatory unit for domestic nonbanks and the international financial service sector. - Welcomed coordination with regional governments to address regional financial turmoil from CL Financial Group fallout. ### Authorities’ perspective and priorities (statement by St. Vincent and the Grenadines) - Economic context and vulnerabilities: - SVG is one of the lower income, less developed economies in the Eastern Caribbean and has a large poor rural population. - Transition from an agricultural-based economy (banana industry decline compounded by disease) toward tourism and services. - Authorities accept Fund’s 2009 forecast of 0.1 percent growth in 2009, with downside risks. - Inflation and monetary stability: - Strong EC dollar peg to US dollar provides monetary stability. - Inflation drivers: pass-through of high oil prices, VAT introduction, rising global food prices, and weak US dollar. - Inflation peaked in 2008 at 10.1 percent and came down only slowly thereafter. - Fiscal policy stance and reforms: - Authorities report steady progress on fiscal consolidation and positive VAT revenue results. - Fiscal measures taken: monthly pass-through of oil price increases (no fully automatic pricing mechanism), maintenance of VAT integrity, and tax adjustments in the 2009 budget: - Top marginal rate of income tax reduced from 35 percent to 32.5 percent. - Threshold for personal income tax raised from EC$17,000 to EC$18,000. - Corporate tax rate reduced from 35 percent to 32.5 percent. - Authorities contemplate further income tax reforms, improved collection and administration, and property tax reform. - New international airport (Argyle International Airport): - Project described as massive relative to GDP but almost fully financed with concessional cash and in-kind resources. - Authorities acknowledge staff concerns about project risk to debt dynamics but affirm financing will be handled “cautiously, skillfully and prudently.” - Authorities expect the project to be growth-enhancing and sustainable; moving ahead now would be countercyclical. - Financial sector actions: - Banking sector remains well capitalized with limited exposure to distressed assets. - Authorities coordinate regional response to CL Financial Group and Bank of Antigua shocks and support ECCB as lender of last resort. - Interventions in two local institutions and agent role of Financial Intelligence Unit in prosecutions, convictions, and asset recoveries. - ESF request rationale: - Authorities view ESF assistance as an important contribution to address transitory but significant shocks to tourism receipts and FDI. - Requested rapid access to the ESF in the amount of 45 percent of their quota. *Source: IMF staff report and Press Release for St. Vincent and the Grenadines, May 15, 2009.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09181.pdf_