## _cr09257

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### Executive Summary
- Request and staff support:
  - Authorities requested a disbursement under the Fund’s Rapid-Access Component of the Exogenous Shocks Facility (RAC-ESF).
  - Staff supports the request for access of SDR 6.89 million, equivalent to 45 percent of quota.
- Economic context:
  - Tourism accounts for over three-quarters of exports.
  - Import content of consumption and FDI is very high.
  - St. Lucia has not had a financial arrangement with the Fund for decades; access would signal endorsement of the authorities’ policy agenda, catalyze financing from other international partners, and mitigate the loss of reserves.
- Key recent indicators:
  - Real GDP growth: about 5 percent in 2006; 1.7 percent in 2007; 0.7 percent in 2008.
  - Unemployment: increased by three percentage points to 16.8 percent during 2007–08.
  - Inflation: annual inflation reached 7.2 percent in 2008 and fell to 3.2 percent by end-March 2009.
  - Fiscal outcomes: primary fiscal surplus of 0.2 percent of GDP in 2008.
  - Public debt: about 67⅓ percent of GDP in 2008.
  - Financial sector: credit to the private sector slowed considerably in 2008; prudential indicators weakened; nonperforming loans higher than the ECCB’s prudential target of 5 percent.
  - CL Financial Group collapse: net liabilities in St. Lucia estimated at US$68 million (about 6.8 percent of GDP).

### Economic impact and outlook
- Projections:
  - Real GDP projected to contract by 2½ percent in 2009.
  - Further but milder contraction projected for 2010.
  - Recovery expected to begin in 2011 (global recovery expected to begin in 2010).
- Budget and financing pressures (FY 2009–10 budget approved April 2009):
  - Budget envisaged deterioration in the primary fiscal balance of about 3 percentage points of GDP.
  - Total revenue and grants projected to increase by 2 percentage points of GDP, reflecting an increase in grants of about 2½ percentage points of GDP from the European Union and Taiwan Province of China.
  - Current expenditures expected to increase largely due to a rise in social spending.
  - Capital expenditures budgeted to increase by about 4 percentage points of GDP to reach 15 percent.
  - Overall deficit about 6½ percent of GDP.
  - Identified financing totaled 4½ percent of GDP: Caribbean Development Bank (2.1 percent of GDP), Kuwaiti Fund (0.6 percent of GDP), World Bank (1.7 percent of GDP).
  - Government financing needs could be difficult to accommodate in the current financial environment.
- Balance of payments gap:
  - Projected external financing gap on the order of EC$59 million (about US$22 million or 2.2 percent of GDP), driven by deterioration in the financial account (drop in FDI and reversal of drawdown of commercial bank net foreign assets) more than offsetting a projected narrowing of the current account deficit.
  - Net foreign exchange receipts from tourism projected to fall by 21 percent in 2009.
  - FDI inflows projected to decrease by 28 percent in 2009.
  - Overall impact on the balance of payments estimated at US$37 million (about 4 percent of GDP) in 2009.

### Risks to the outlook
- Downside risks:
  - Deterioration in the fiscal position.
  - Credit constraints and spillovers from the CL Financial Group collapse.
  - Slower recovery in major tourism-source countries (U.K. and U.S.), damping tourism demand and FDI.
  - Vulnerability to natural disasters (hurricane, earthquake).
- Mitigating factors:
  - Regional initiatives to defuse further rounds of the financial crisis may mitigate the downturn.
  - St. Lucia’s exemplary debt servicing record and absence of past fiscal crises; average debt-to-GDP ratio in the ECCU is 100 percent.

### Policy discussions and recommendations
- Overarching constraints on policy responses:
  - As an ECCU member, monetary policy must preserve the quasi-currency board arrangement.
  - Public debt increased from 65 percent of GDP in 2006 to 67⅓ percent of GDP in 2008, limiting room for fiscal stimulus.
  - Very high import content of consumption and investment reduces effectiveness of fiscal stimulus for domestic output.
  - About 75 percent of current revenue is generated by indirect taxes.
  - Transfer programs are not well developed and often poorly countercyclical.
  - Civil service capacity constraints limit rapid, efficient scaling up of public expenditure.
- Fiscal policy focus and measures:
  - Preserve recent gains in fiscal consolidation while addressing the impact of the shock.
  - Allow automatic fiscal stabilizers to work during the downturn.
  - Streamline blanket subsidies (including on energy prices) to create fiscal space for social safety nets and infrastructure.
  - Refocus expenditure toward social protection; spend an additional 1 percent of GDP on social safety nets (increase in pension allowances, funding for social protection projects, better targeting of the conditional cash transfer program, and streamlining cost-ineffective programs).
  - Seek a credible medium-term strategy to maintain government finances on a sustainable footing while preserving and possibly expanding pro-poor spending.
- Revenue measures and timing:
  - Introduce a flexible oil pricing mechanism intended by August 2009 to ensure collection of the legislated consumption tax; consumption tax set at a level to yield about 1 percent of GDP.
  - Increase taxes on alcoholic beverages, cigarettes, and vehicle licensing.
  - Implement a market valuation-based property tax.
  - Authorities restated commitment to introduce a VAT in April 2010: uniform rate 15 percent with very limited zero-rated and exempt products; expected revenue yield of an additional 2½ percentage points of GDP.
- Expenditure rationalization:
  - Contain increases in public sector wages and headcount within broader civil service reforms.
  - Voluntary 10 percent pay-cut for all members of Cabinet.
  - Cut back on unproductive spending, including operations of loss-making public enterprises.
  - Implement a formal public sector investment program.
  - Capital expenditure curtailed to about 10 percent of GDP in the adjustment scenario, in line with available concessional funding.
- Near-term fiscal strategy:
  - Two-fold strategy: (i) target annual primary surpluses to reduce public debt-to-GDP ratio to below 60 percent by 2020 (ECCB benchmark); (ii) improve competitiveness, attract FDI, and diversify the economy.
  - Authorities requested Fund financing equivalent to SDR 6.89 million (about US$10.65 million or 45 percent of quota) under RAC-ESF (about 1.1 percent of GDP and covers about 29 percent of the net impact of the exogenous shock).

### Fiscal-adjustment scenario and macro outcomes
- Authorities’ adjustment scenario (allowing automatic stabilizers to work and with measures):
  - Primary fiscal surplus of 0.8 percent of GDP in FY 2009–10.
  - Overall fiscal deficit of 2.9 percent of GDP (3.6 percentage points lower than envisaged in the budget).
  - Public debt-to-GDP ratio rising by about 2½ percentage points of GDP to about 70 percent in the short term, largely owing to the contraction in economic activity.
- Identified financing and budget adjustment outcomes:
  - Capital expenditure curtailed to about 10 percent of GDP.
  - Expected net outcome: broadly stable current revenues despite the projected economic downturn.

### Debt management and medium-term sustainability
- Stock and composition (end-2008):
  - Public debt: 67⅓ percent of GDP.
  - External debt: 38 percent of GDP.
  - Domestic debt: 29 percent of GDP.
  - Largest external creditors: multilaterals (about 21 percent of GDP); Caribbean Development Bank 14 percent of GDP; World Bank Group 7 percent of GDP.
- Baseline debt dynamics and targets:
  - With strengthened revenue administration and tightened expenditure controls, public debt-to-GDP ratio projected to fall below 60 percent by 2017 and to 43 percent of GDP by 2029.
  - Debt service as a share of current revenue falls from 30 percent in 2009 to about 17 percent in 2029.
  - Under the baseline, PV of external debt declines to about 29 percent of GDP by 2029, below the prudential threshold of 50 percent.
- Sensitivity analyses and shock scenarios (selected outcomes):
  - Growth shock (one standard deviation below baseline): PV of debt-to-GDP ratio reaches 85 percent by 2029 (Table A2, Scenario A3).
  - Historical growth and primary deficit levels: PV of debt-to-GDP ratio reaches 108 percent by 2029 (Table A2, Scenario A1).
  - Natural disaster (hurricane in 2010 increasing primary deficit by 3 percent of GDP for three years and reducing growth to zero): PV of debt-to-GDP ratio reaches 82 percent by 2012, declining to 51 percent by 2029 (Table A2, Scenario A4).
  - One-time 30 percent nominal depreciation in 2010 would breach the PV external debt-to-GDP threshold of 50 percent (Table A4, Scenario B6).
  - Extreme export shock: export growth at one standard deviation below historical average in 2010–11 would push debt service-to-exports ratio slightly above the 25 percent threshold in one year (Table A4, Scenario B2).
- Debt-management strategy priorities:
  - Establish a high-level Debt Management Advisory Committee chaired by the Permanent Secretary of the Ministry of Finance.
  - Improve capacity for conducting debt sustainability analysis with appropriate staffing at the Ministry of Finance.
  - Assign the Debt and Investment Unit responsibility for formulating a coherent debt management strategy and conducting regular cost-risk analyses.
  - Mitigate rollover risks: establish a general sinking fund; implement bond swaps from short remaining maturity to longer-term bonds; consider inclusion of off-balance sheet projects in strategy and analysis.
  - Improve functioning of the Regional Government Securities Market (RGSM): switch from fixed price auctions to a competitive auction format and develop a medium-term market development reform program.
- Follow-up actions by authorities:
  - Identified members of the Debt Management Advisory Committee.
  - Working with ECCU members on a harmonized public debt strategy under the Eastern Caribbean Central Bank.
  - Transferred macroeconomic and fiscal policy unit of the Ministry of Economic Affairs back to the Ministry of Finance.
  - Securing formal Cabinet approval to establish a new operational structure for debt management.

### Financial sector supervision and structural policy actions
- Financial sector measures and timing:
  - Pass supportive legislation (including Insurance, Cooperatives, and Money Services Acts, among others) in August 2009.
  - Establish a Financial Regulatory Supervisory Authority (responsible for nonbanks) by October 2009.
  - Engage in regional efforts to reach a prompt and sustainable solution to the cross-border CL Financial issue (e.g., appointment of a judicial manager for the British American Insurance Company branch in St. Lucia).
  - ECCB undertaking stress testing of commercial banks.
- Structural reform recommendations:
  - Lower costs of starting a business and simplify property registration.
  - Encourage matching incomes policy to productivity gains to limit wage-driven inflation pressures.
  - Pursue reforms to boost productivity growth, enhance competitiveness, liberalize trade, and increase labor market flexibility.
  - Authorities developing a program with assistance from USAID to address constraints identified in the World Bank Doing Business Report.

### Staff recommendation, access, and program appraisal
- Staff supports the authorities’ request for a disbursement under the Fund’s RAC-ESF based on:
  - the severe effects of the sudden shock on the economy,
  - the associated large balance of payments needs, and
  - the authorities’ commitment to maintain a sound fiscal policy stance to place debt on a downward path over the medium term.
- IMF Executive Board approved a disbursement of SDR 6.89 million (about US$10.7 million) under the rapid-access component of the Exogenous Shocks Facility (Press Release No. 09/270, July 27, 2009).
- Staff appraisal key points:
  - Fiscal tightening and contraction of domestic borrowing should strengthen fiscal position and balance of payments.
  - Access under RAC-ESF and financial support from other institutions will be key to maintaining financial stability.
  - VAT introduction in 2010 is welcome and could substantially broaden the tax base; uniform rate with limited exemptions is commendable.
  - Urgent actions to address nonbank financial sector vulnerabilities and the collapse of CL Financial Group are necessary to prevent spillovers.
  - Structural reforms—labor market flexibility, productivity-matching incomes policy, and strengthening the business environment—are essential to position St. Lucia for recovery.

### Memorandum and selected fiscal/external figures (exact entries preserved)
- Nominal GDP (in billions of US dollars): 2006: 0.9; 2007: 1.0; 2008: 1.0; 2009–14 Average: 1.1; 2019: 1.7; 2029: 3.2.
- Public sector debt (selected): 2006: 65.0 percent of GDP; 2007: 70.3 percent of GDP; 2008: 67.3 percent of GDP; 2009–14 Average: 68.3 percent of GDP; 2019: 54.6 percent of GDP; 2029: 43.2 percent of GDP.
- Gross financing need (selected): 2006: 10.3 percent of GDP; 2007: 12.2 percent of GDP; 2008: 11.3 percent of GDP; 2009–14 Average: 6.2 percent of GDP; 2019: 4.2 percent of GDP; 2029: 5.5 percent of GDP.
- Net FDI (negative = inflow): 2006: -25.1 percent of GDP; 2007: -26.4 percent of GDP; 2008: -10.6 percent of GDP; 2009–14 Average: -19.0 percent of GDP.

### Conclusion
- Authorities reiterate appreciation for Fund support and emphasize the need to cushion reserves and be positioned to take advantage of eventual external recovery.
- Authorities look forward to a positive assessment from the Executive Board of their request for a purchase under the Rapid Access Component of the Exogenous Shocks Facility in the amount of 45 per cent of quota.

*Source: IMF staff report chapter on St. Lucia fiscal, debt, and structural policy responses (excerpt) contained in content unit _cr09257.*

### Executive Summary

### _cr09257 - Executive Summary

### Context and request for Fund support
- St. Lucia has been negatively affected by the global downturn; tourism accounts for over three-quarters of exports and the import content of consumption and FDI is very high.
- Authorities requested a disbursement under the Fund’s Rapid-Access Component of the Exogenous Shocks Facility (RAC-ESF) to mitigate the crisis.
- Staff supports the request for access of SDR 6.89 million, equivalent to 45 percent of quota.
- St. Lucia has not had a financial arrangement with the Fund for decades; access would signal endorsement of the authorities’ policy agenda, catalyze financing from other international partners, and mitigate the loss of reserves.

### Recent macroeconomic developments
- Real GDP growth:
  - About 5 percent in 2006 (spurred by Cricket World Cup preparations).
  - 1.7 percent in 2007.
  - 0.7 percent in 2008.
- Unemployment:
  - Increased by three percentage points to 16.8 percent during 2007–08.
- Inflation:
  - Annual inflation reached 7.2 percent in 2008.
  - Inflation fell to 3.2 percent by end-March 2009.
- Fiscal outcomes and public debt:
  - Primary fiscal surplus of 0.2 percent of GDP in 2008.
  - Public debt edged down marginally to about 67⅓ percent of GDP.
- External sector and reserves:
  - Preliminary 2008 data suggest a narrowing in the external current account deficit.
  - Deficit largely financed by FDI and a drawdown of commercial banks’ foreign assets.
- Financial sector:
  - Credit to the private sector slowed considerably in 2008.
  - Prudential indicators weakened in 2008: provisioning, asset quality, and capital adequacy ratios for local banks declined.
  - Nonperforming loans increased and are higher than the ECCB’s prudential target of 5 percent.
  - CL Financial Group collapse: net liabilities in St. Lucia estimated at US$68 million (about 6.8 percent of GDP); fiscal implications likely lower given small share of ECCU insurance company deposits and a surplus statutory fund for a local subsidiary.

### Economic impact and outlook
- Projection and timing:
  - Real GDP is projected to contract by 2½ percent in 2009, slightly larger than that for the ECCU as a whole.
  - A further but milder contraction is projected for 2010.
  - Economic activity expected to begin to recover in 2011 (with global recovery expected to begin in 2010).
- Budget and financing pressures (FY 2009–10 budget approved April 2009):
  - Budget envisaged deterioration in the primary fiscal balance of about 3 percentage points of GDP.
  - Total revenue and grants projected to increase by 2 percentage points of GDP, reflecting an increase in grants of about 2½ percentage points of GDP from the European Union and Taiwan Province of China.
  - Current expenditures expected to increase, largely owing to a rise in social spending.
  - Capital expenditures budgeted to increase by about 4 percentage points of GDP to reach 15 percent.
  - Overall deficit about 6½ percent of GDP.
  - Identified financing totaled 4½ percent of GDP: concessional loans from the Caribbean Development Bank (2.1 percent of GDP), loans from the Kuwaiti Fund (0.6 percent of GDP), and the World Bank (1.7 percent of GDP).
  - Government financing needs could be difficult to accommodate in the current financial environment.
- Balance of payments gap:
  - Projected external financing gap on the order of EC$59 million (about US$22 million or 2.2 percent of GDP), driven by a deterioration in the financial account (drop in FDI and reversal of drawdown of commercial bank net foreign assets) more than offsetting a projected narrowing of the current account deficit.

### Risks to the outlook
- Large downside risks given uncertainty over the duration and severity of the global downturn.
- Negative risks include:
  - Deterioration in the fiscal position.
  - Credit constraints and spillovers from the CL Financial Group collapse.
  - Slower recovery in major tourism-source countries (U.K. and U.S.), damping tourism demand and FDI.
- Positive mitigating factor:
  - Regional initiatives to defuse further rounds of the financial crisis may mitigate the downturn.

### Policy discussions and recommendations
- Overarching constraints on policy responses:
  - As an ECCU member, monetary policy must preserve the quasi-currency board arrangement.
  - Public debt increased from 65 percent of GDP in 2006 to 67⅓ percent of GDP in 2008, limiting room for fiscal stimulus.
  - Very high import content of consumption and investment reduces effectiveness of fiscal stimulus for domestic output.
  - About 75 percent of current revenue is generated by indirect taxes, which tend to comove with the output gap.
  - Transfer programs (unemployment, welfare, social protection) are not well developed and often poorly countercyclical.
  - Civil service capacity constraints limit rapid, efficient scaling up of public expenditure.
  - Labor market inflexibility; structural reforms would take time to implement.
- Fiscal policy focus:
  - Preserve recent gains in fiscal consolidation while addressing the impact of the shock.
  - Allow automatic fiscal stabilizers to work during the downturn.
  - Streamline existing blanket subsidies (including on energy prices) to create fiscal space for additional spending on social safety nets and infrastructure.
  - Refocus expenditure toward social protection given limited scope for increased discretionary spending.
  - Seek a credible medium-term strategy to maintain government finances on a sustainable footing while preserving and possibly expanding pro-poor spending.
- Medium-term debt sustainability:
  - Continue implementing sound macroeconomic policies, including revenue and expenditure measures, to entrench fiscal consolidation and secure the debt-to-GDP ratio on a solid downward trajectory.
- Financial-sector reforms:
  - Strengthen regulatory oversight of the financial sector.
  - Overhaul regulation and supervision of nonbank financial institutions in collaboration with regional counterparts to help prevent future problems like those associated with the collapse of the CL Financial Group.

*Executive Summary, _cr09257 - Executive Summary.*

### 16.      The authorities recognized the risks of increasing the primary fiscal deficit in

### _cr09257 - 16.      The authorities recognized the risks of increasing the primary fiscal deficit in

### Fiscal adjustment scenario and macro outcomes
- Authorities agreed to an adjustment scenario allowing automatic stabilizers to work, with revenue and current expenditure items adjusting automatically to the weak economic environment.
- Measures included less optimistic revenue projections, scaling back on capital spending, limiting public sector wage increases, and raising fuel prices.
- With total capital expenditure curtailed to about 10 percent of GDP, in line with available concessional funding, and additional revenue measures, the scenario yields:
  - Primary fiscal surplus of 0.8 percent of GDP in FY 2009–10.
  - Overall fiscal deficit of 2.9 percent of GDP (3.6 percentage points lower than envisaged in the budget).
  - Public debt-to-GDP ratio rising by about 2½ percentage points of GDP to about 70 percent this year, largely owing to the contraction in economic activity.

### Revenue measures and timing
- Introduction of a flexible oil pricing mechanism intended to be implemented by August 2009; expected effect:
  - Ensure revenue authorities garner the full amount of the legislated consumption tax as world petroleum prices change.
  - Consumption tax set at a level to yield about 1 percent of GDP.
- Other revenue measures already implemented or planned:
  - Increased taxes on alcoholic beverages, cigarettes, and vehicle licensing.
  - Implementation of a market valuation-based property tax.
- Expected net outcome: broadly stable current revenues despite the projected economic downturn.

### Expenditure rationalization and efficiency
- Staff urged expenditure rationalization and increased spending efficiency to create fiscal space for social spending.
- Authorities’ measures and commitments:
  - Contain increases in public sector wages and headcount within broader civil service reforms to raise productivity and efficiency.
  - Voluntary 10 percent pay-cut for all members of Cabinet.
  - Cut back on unproductive spending, including operations of loss-making public enterprises.
  - Implement a formal public sector investment program.
  - Roll back increases in broad-based consumption subsidies introduced in response to the surge in international fuel and food prices.
- Fiscal space objective:
  - Spend an additional 1 percent of GDP on social safety nets to protect the most vulnerable, including increases in pension allowances, funding for social protection projects, better targeting of the conditional cash transfer program, and streamlining of programs that are not cost-effective.

### VAT introduction and revenue potential
- Authorities restated commitment to introduce a VAT in April 2010.
- Design intent:
  - Establish a uniform rate (15 percent) VAT with a very limited number of zero-rated and exempt products and services.
  - Expected revenue yield of an additional 2½ percentage points of GDP.
- Staff view: such a VAT regime would be among the best-designed in the region and simple to administer, strengthening incentives to comply.

### Debt management and medium-term sustainability
- Recognition that GDP contraction and infrastructure investment plans may raise the public debt-to-GDP ratio in the short term; mission urged strengthening debt management capacity.
- Debt sustainability outlook:
  - Authorities’ adjustment scenario should allow public debt-to-GDP ratio to decline to about 52 percent by 2020, below the ECCB benchmark target of 60 percent for 2020.
  - St. Lucia is expected to remain at moderate risk of debt distress despite external shocks and additional borrowing.
- Borrowing request and context:
  - Authorities requested Fund financing under the RAC-ESF in an amount equivalent to SDR 6.89 million (about US$10.65 million or 45 percent of quota).
  - This borrowing represents about 1.1 percent of GDP and covers about 29 percent of the net impact of the exogenous shock.
  - Rationale: meet immediate foreign exchange needs, reduce decline in external reserves, and catalyze financing from the Caribbean Development Bank, the World Bank, and other donors.

### Debt management strategy key priorities (Box summary)
- Staff identified five policy priorities for improving public debt management:
  - Establish a high-level Debt Management Advisory Committee chaired by the Permanent Secretary of the Ministry of Finance.
  - Improve capacity for conducting debt sustainability analysis, requiring appropriate staffing at the Ministry of Finance.
  - Assign the Debt and Investment Unit responsibility for formulating a coherent debt management strategy and conducting regular cost-risk analyses of the debt portfolio.
  - Mitigate rollover risks, including establishing a general sinking fund and implementing bond swaps from short remaining maturity to longer-term bonds; consider inclusion of off-balance sheet projects in strategy and analysis.
  - Improve functioning of the Regional Government Securities Market (RGSM), switching from fixed price auctions to a competitive auction format and developing a medium-term market development reform program.
- Contextual debt statistics preserved in staff analysis:
  - St. Lucia had the lowest debt-to-GDP ratio among ECCU members (around 67 percent in FY2008–09).
  - Public debt is mostly owned by central government; exchange and interest rate risks are relatively small; maturity profile influenced by bonds with short remaining maturity.
- Authorities’ follow-up actions:
  - Identified members of the Debt Management Advisory Committee.
  - Working with ECCU members on a harmonized public debt strategy under the Eastern Caribbean Central Bank.
  - Transferred macroeconomic and fiscal policy unit of the Ministry of Economic Affairs back to the Ministry of Finance to assist with debt sustainability analysis.
  - Securing formal Cabinet approval to establish a new operational structure for debt management.

### Financial sector supervision and structural policy actions
- Recent financial sector difficulties increase need for stronger supervision and regulation, especially for nonbanks.
- Planned steps and timing:
  - Pass supportive legislation (including Insurance, Cooperatives, and Money Services Acts, among others) in August 2009.
  - Establish a Financial Regulatory Supervisory Authority (responsible for nonbanks) by October 2009.
  - Engage in regional efforts to reach a prompt and sustainable solution to the cross-border CL Financial issue; e.g., appointment of a judicial manager for the British American Insurance Company branch in St. Lucia to protect policyholders.
- Structural reform recommendations:
  - Boost growth and competitiveness by lowering costs of starting a business and simplifying property registration.
  - Encourage matching incomes policy to productivity gains to limit wage-driven inflation pressures.
  - Pursue reforms to boost productivity growth, enhance competitiveness, liberalize trade, and increase labor market flexibility.
  - Authorities developing a program, with assistance from USAID, to improve competitiveness by addressing constraints identified in the World Bank Doing Business Report.

### Access, risks, and staff appraisal
- Risks and resilience:
  - Downside risks to the macroeconomic outlook are significant given vulnerability to shocks (including natural disasters) and still-high debt level.
  - St. Lucia has an exemplary debt servicing record, has never had a fiscal crisis, and has a track record of prudent policies; average debt-to-GDP ratio in the ECCU is 100 percent.
- Staff appraisal key points:
  - Fiscal policies aim to maintain macroeconomic stability and minimize reserve losses; proposed tightening and contraction of domestic borrowing should strengthen fiscal position and balance of payments.
  - Access under RAC-ESF and financial support from other institutions will be key to maintaining financial stability.
  - VAT introduction in 2010 is welcome and could substantially broaden the tax base; uniform rate with limited exemptions is commendable.
  - Improving efficiency of social spending and prioritizing capital expenditure via a formal public sector investment program are important to place fiscal accounts on a firm footing.
  - Urgent actions to address nonbank financial sector vulnerabilities and the collapse of CL Financial Group are necessary to prevent spillovers.
  - Structural reforms—labor market flexibility, productivity-matching incomes policy, and strengthening the business environment—are essential to position St. Lucia for recovery.

*Source: IMF staff report chapter on St. Lucia fiscal, debt, and structural policy responses (excerpt).*

### 32.      Staff supports the authorities’ request for a disbursement under the Fund’s

### _cr09257 - 32.      Staff supports the authorities’ request for a disbursement under the Fund’s

### Staff recommendation and rationale
- Staff supports the authorities’ request for a disbursement under the Fund’s RAC-ESF.
- Support is based on:
  - the severe effects of the sudden shock on the economy,
  - the associated large balance of payments needs, and
  - the authorities’ commitment to push ahead with a sound fiscal policy stance aimed at placing debt on a firm downward path over the medium term, as outlined in the authorities’ letter of intent.
- While downside risks remain, these risks are mitigated considerably by the authorities’ resolve to maintain prudent fiscal policies, bolster private sector-led growth, and their commitment to continued close cooperation with the Fund.

### Macroeconomic impact of the external shock
- Economic activity:
  - Economic activity is expected to contract by as much as 2½ percent in 2009.
  - Unemployment is expected to increase substantially in 2009 (no precise number provided in the text).
- External sector vulnerabilities:
  - Tourism accounts for over three-quarters of exports.
  - Net foreign exchange receipts from tourism are projected to fall by 21 percent in 2009.
  - FDI inflows are projected to decrease by 28 percent in 2009.
  - The overall impact on the balance of payments is estimated at US$37 million (about 4 percent of GDP) in 2009.

### Fiscal program and policy measures (FY 2009–10)
- Revenue-side measures:
  - Introduce a flexible petroleum pricing mechanism in August 2009.
  - Implement a market valuation-based property tax.
  - Increase taxes on alcoholic beverages, cigarettes, and vehicle licensing.
  - These revenue measures are expected to achieve broadly stable current revenue receipts despite the downturn.
- Expenditure-side measures:
  - Delay the third tranche of the triennial salary increase for all civil servants.
  - Cap the size of the public sector at its current levels within broader civil service reform.
  - Introduce a voluntary 10 percent pay-cut for all members of Cabinet.
  - For capital expenditure: implement only projects for which funding is available (including borrowing from Caribbean Development Bank, the Kuwaiti Fund, and the World Bank), implying lowering capital expenditure relative to the FY 2009–10 budget to approximately ten percent of GDP.
- Social protection:
  - Intend to spend an additional 1 percent of GDP to keep the most vulnerable covered under social safety nets (including an increase in pension allowances, funding for social protection projects, and better targeting of the conditional cash transfer program).
  - Plan to streamline programs that are not cost effective.
- Fiscal outcome stated in the letter:
  - “Taken together, our fiscal measures would allow us to achieve a primary surplus of about” (text cuts off at this point in the source).

### Balance of payments and financing implications
- The authorities request RAC-ESF financing to address large balance of payments needs driven by declines in tourism, FDI, and remittances.
- The staff note that the combined external shocks and weaker revenue will depress net international reserves and widen external financing needs in 2009.

### Governance and cooperation
- Authorities committed to:
  - maintaining prudent fiscal policies,
  - bolstering private sector-led growth, and
  - continued close cooperation with the Fund.
- Staff confidence in program prospects reflects these commitments and the authorities’ proposed policy measures.

*Source: Excerpts from the St. Lucia staff report and Letter of Intent (July 7, 2009) as contained in the provided content unit.*

### 0.8 percent of GDP in FY 2009–10.

### 0.8 percent of GDP in FY 2009–10.

### Near-term fiscal strategy and policy measures
- Two-fold strategy:
  - (i) target annual primary surpluses with a view to reducing the public debt-to-GDP ratio to below 60 percent by 2020, in line with the fiscal benchmarks established by the Monetary Council of the Eastern Caribbean Central Bank; and
  - (ii) improve the competitiveness of St. Lucia as a premier tourist destination, attract FDI, and continue the diversification of the economy.
- Key measures to be taken:
  - (i) introduce a value added tax (VAT) in 2010, with a uniform rate and very limited number of exempted goods and services, aimed at broadening the tax base;
  - (ii) rationalize expenditures, with a focus on strengthening our public sector investment program;
  - (iii) strengthen the regulation and supervision of the nonbank financial sector through passage of a package of supportive legislation in August 2009 and putting in place a Financial Regulatory Supervisory Authority by October 2009;
  - (iv) develop a program, with assistance from USAID, to improve the competitiveness of the economy by addressing constraints identified in the World Bank Doing Business Report; and
  - (v) implement our National Export Strategy.
- Request for external support:
  - The Government of St. Lucia requests a purchase equivalent to SDR 6.89 million (about US$10.65 million or 45 percent of quota) under the Rapid-Access Component of the Fund’s Exogenous Shocks Facility (ESF).

### Macroeconomic context and assumptions (2009–29)
- Recent performance:
  - Real GDP growth declined from an average of 3.7 percent during 2004–07 to 0.7 percent in 2008.
  - Primary surpluses of 0.7 and 0.2 percent of GDP were achieved in 2007 and 2008, respectively.
  - Gross public sector debt declined from 70⅓ percent of GDP in 2007 to 67⅓ percent in 2008.
- Baseline projections and assumptions:
  - Real GDP growth is projected to average about 4 percent over the longer term.
  - Inflation is expected to remain in the low single digits.
  - Interest rates are assumed to be around 5 percent a year.
  - The primary balance of the central government (including grants) is projected to average about 1.1 percent of GDP.
  - After 2009 the nominal wage bill remains constant, while capital spending rises slowly to about 10½ percent of GDP.
  - Annual grants are conservatively projected at 0.8 percent of GDP.
  - The current account deficit is expected to stabilize at about 22 percent of GDP, largely financed by FDI.
  - Following a sharp decline in 2008–09, FDI is assumed to rise to around 19 percent of GDP by 2014.

### Public sector debt assessment and dynamics
- Stock and composition (end-2008):
  - Public debt: 67⅓ percent of GDP.
  - External debt: 38 percent of GDP.
  - Domestic debt: 29 percent of GDP.
  - Largest external creditors: multilaterals (about 21 percent of GDP); Caribbean Development Bank 14 percent of GDP; World Bank Group 7 percent of GDP.
- Baseline debt path and fiscal impact:
  - Economic downturn would raise the fiscal deficit and the debt-to-GDP ratio in 2009–11.
  - With strengthened revenue administration and tightened expenditure controls, the public debt-to-GDP ratio would fall below 60 percent—the ECCB’s benchmark—by 2017.
  - Debt service as a share of current revenue falls from 30 percent in 2009 to about 17 percent in 2029.
  - Under the baseline, St. Lucia would reduce its stock of public debt steadily, reaching 43 percent of GDP by 2029.

### External debt sustainability
- Baseline:
  - The PV of external debt declines to about 29 percent of GDP by 2029, well below the prudential threshold of 50 percent.
  - All other debt and debt service ratios remain relatively stable and below relevant indicative thresholds.
- Policy classification and thresholds:
  - St. Lucia is classified by the CPIA as a strong performer, implying prudential thresholds on PV of debt-to-GDP, debt-to-exports and debt-to-revenue of 50, 200 and 300 percent, respectively.

### Sensitivity analyses and shock scenarios
- Growth and fiscal shocks:
  - If growth remains at one standard deviation below the baseline, the PV of debt-to-GDP ratio will reach 85 percent by 2029 (Table A2, Scenario A3).
  - If both annual growth and the primary deficit were kept at historical levels, the PV of debt-to-GDP ratio would reach 108 percent by 2029 (Table A2, Scenario A1).
  - Natural disaster shock: if a hurricane hits in 2010, increasing the primary deficit by 3 percent of GDP for three years and reducing growth to zero, the PV of debt-to-GDP ratio would reach 82 percent by 2012, declining to 51 percent by 2029 (Table A2, Scenario A4). Note: the actual impact could be lower given participation in the Caribbean Catastrophe Risk Insurance Facility.
- External vulnerability shocks:
  - A one-time 30 percent nominal depreciation relative to the baseline in 2010 would breach the PV external debt-to-GDP threshold of 50 percent (Table A4, Scenario B6).
  - An extreme export shock—export growth at one standard deviation below the historical average in 2010–11—would push the debt service-to-exports ratio to slightly above the 25 percent threshold in one year (Table A4, Scenario B2).

### Conclusions and policy recommendations
- Under the baseline scenario (with an average primary surplus of around 1 percent of GDP over the medium term), overall public sector imbalances are projected to be on a decreasing and sustainable path.
- Public debt-to-GDP ratio target and trajectory:
  - Achieve a public debt-to-GDP ratio of 60 percent by 2017.
  - Continue reducing public debt to 43 percent of GDP by 2029.
- Emphasis on policy implementation:
  - Implement VAT in 2010 and other revenue measures (flexible petroleum pricing mechanism, market valuation-based property tax).
  - Rationalize and contain current expenditure; prioritize capital expenditure.
  - Strengthen financial sector regulation and supervision as scheduled (supportive legislation in August 2009; Financial Regulatory Supervisory Authority by October 2009).
  - Seek accelerated and increased financial and technical assistance from donors (European Union, Caribbean Development Bank, World Bank, and governments).

*Source: _cr09257 - 0.8 percent of GDP in FY 2009–10.*

### 11.      St. Lucia faces a moderate risk of external debt distress. While the baseline scenario

### _cr09257 - 11.      St. Lucia faces a moderate risk of external debt distress. While the baseline scenario

### Risk assessment
- St. Lucia faces a moderate risk of external debt distress.
- The baseline scenario indicates no breach of any threshold over the projection period (2009–29).
- The most extreme shock scenario suggests breaches of the PV of debt-to-GDP and debt service-to-exports thresholds.
- Private external debt data are not available; results cover public external debt only.

### Public sector debt profile (selected exact figures)
- Public sector debt:
  - 2006: 65.0 percent of GDP
  - 2007: 70.3 percent of GDP
  - 2008: 67.3 percent of GDP
  - 2009–14 Average: 68.3 percent of GDP
  - 2019: 54.6 percent of GDP
  - 2029: 43.2 percent of GDP
- Foreign-currency denominated public sector debt:
  - 2006: 43.2 percent of GDP
  - 2007: 43.9 percent of GDP
  - 2008: 37.9 percent of GDP
  - 2009–14 Average: 39.5 percent of GDP
  - 2019: 33.9 percent of GDP
  - 2029: 28.6 percent of GDP
- Change in public sector debt:
  - 2006: -2.0 percent of GDP
  - 2007: 5.3 percent of GDP
  - 2008: -2.9 percent of GDP
  - 2009–14 Average: -1.8 percent of GDP
  - 2019: -2.2 percent of GDP
  - 2029: -0.7 percent of GDP
- Identified debt-creating flows (selected):
  - Primary deficit (in percent of GDP): 2006: 2.6; 2007: -0.7; 2008: -0.2; 2009–14 Average: -0.4; 2019: -1.8; 2029: -0.4
  - Revenue and grants (in percent of GDP): 2006: 27.1; 2007: 28.4; 2008: 32.7; 2009–14 Average: 33.8; 2019: 33.9; 2029: 33.8
  - Primary (noninterest) expenditure (in percent of GDP): 2006: 29.7; 2007: 27.7; 2008: 32.5; 2009–14 Average: 32.1; 2019: 32.1; 2029: 33.4
- Automatic debt dynamics:
  - Contribution from interest rate/growth differential (selected): 2006: -1.5; 2007: 0.7; 2008: 1.5; 2009–14 Average: -0.4; 2019: 0.1; 2029: 0.1
  - Contribution from average real interest rate (selected): 2006: 1.7; 2007: 1.8; 2008: 2.0; 2009–14 Average: 2.4; 2019: 2.3; 2029: 1.8
  - Contribution from real GDP growth (selected): 2006: -3.2; 2007: -1.1; 2008: -0.5; 2009–14 Average: -2.6; 2019: -2.2; 2029: -1.7
  - Contribution from real exchange rate depreciation (selected): 2006: 0.9; 2007: 0.7; 2008: 0.0; 2009–14 Average: -0.1

### Other sustainability indicators (selected exact figures)
- PV of public sector debt:
  - 2006: 65.0 percent of GDP
  - 2007: 70.3 percent of GDP
  - 2008: 67.3 percent of GDP
  - 2009–14 Average: 67.5 percent of GDP
  - 2019: 54.6 percent of GDP
  - 2029: 43.2 percent of GDP
- Gross financing need:
  - 2006: 10.3 percent of GDP
  - 2007: 12.2 percent of GDP
  - 2008: 11.3 percent of GDP
  - 2009–14 Average: 6.2 percent of GDP
  - 2019: 4.2 percent of GDP
  - 2029: 5.5 percent of GDP
- PV of public sector debt-to-revenue and grants ratio (in percent):
  - 2006: 239.9
  - 2007: 247.5
  - 2008: 205.9
  - 2009–14 Average: 199.5
  - 2019: 161.1
  - 2029: 127.8
- Debt service-to-revenue and grants ratio (in percent):
  - 2006: 28.6
  - 2007: 45.3
  - 2008: 34.9
  - 2009–14 Average: 18.0
  - 2019: 17.6
  - 2029: 17.2
- Primary deficit that stabilizes the debt-to-GDP ratio (in percent of GDP):
  - 2006: 4.6
  - 2007: -5.9
  - 2008: 2.8
  - 2009–14 Average: 0.5
  - 2019: 0.4
  - 2029: 0.3

### Key macroeconomic and fiscal assumptions (selected exact figures)
- Real GDP growth (in percent):
  - 2006: 4.9
  - 2007: 1.7
  - 2008: 0.7
  - 2009–14 Average: 1.8
  - 2015–29 Average: 3.9
  - Profile used in projections: 1.7; 4.0; 4.0; 4.0 (various entries)
- Average nominal interest rate on forex debt (in percent):
  - 2006: 5.0
  - 2007: 4.4
  - 2008: 4.3
  - 2009–14 Average: 5.3
  - 2019: 5.4
  - 2029: 5.4
- Average real interest rate on domestic debt (in percent):
  - 2006: 4.8
  - 2007: 5.0
  - 2008: 4.2
  - 2009–14 Average: 3.6
  - 2019: 3.6
  - 2029: 3.7
- Inflation rate (GDP deflator, in percent):
  - 2006: 1.1
  - 2007: 1.1
  - 2008: 2.1
  - 2009–14 Average: 2.2
  - 2019: 2.2
  - 2029: 2.2
- Growth of real primary spending (deflated by GDP deflator, in percent):
  - 2006: 7.3
  - 2007: -5.0
  - 2008: 18.2
  - 2009–14 Average: 3.2
  - 2019: 3.6
  - 2029: 3.2

### External debt and balance dynamics (selected exact figures)
- External debt (nominal):
  - 2006: 43.2 percent of GDP
  - 2007: 43.9 percent of GDP
  - 2008: 37.9 percent of GDP
  - 2009–14 Average: 39.5 percent of GDP
  - 2019: 33.9 percent of GDP
  - 2029: 28.6 percent of GDP
- Net current transfers (negative = inflow):
  - 2006: -1.3 percent of GDP
  - 2007: -1.4 percent of GDP
  - 2008: -1.4 percent of GDP
  - 2009–14 Average: -1.3 percent of GDP
  - 2019: -1.3 percent of GDP
  - 2029: -0.9 percent of GDP
- Net FDI (negative = inflow):
  - 2006: -25.1 percent of GDP
  - 2007: -26.4 percent of GDP
  - 2008: -10.6 percent of GDP
  - 2009–14 Average: -19.0 percent of GDP
  - 2019–2029 projection entries: -22.0; -22.0; -22.0 (selected)
- PV of external debt (selected):
  - 2011: 36.4 percent of GDP
  - 2012: 39.2 percent of GDP
  - 2013: 40.1 percent of GDP
  - 2019: 33.9 percent of GDP
  - 2029: 28.6 percent of GDP
- PV of PPG external debt in percent of exports (selected):
  - 2011: 62.9
  - 2012: 77.9
  - 2013: 78.0
  - 2019: 60.2
  - 2029: 49.4
- Debt service-to-exports ratio (in percent):
  - 2006: 7.6
  - 2007: 12.2
  - 2008: 11.7
  - 2009–14 Average: 8.6
  - 2019: 7.5
  - 2029: 8.4

### Sensitivity analysis and stress tests (selected outcomes)
- Table A2 and Table A4 present multiple alternative scenarios and bound tests for 2009–29.
- Notable shocks and outcomes (values correspond to scenario indicators, exact tabulated entries preserved in source):
  - A4. Natural disaster: PV of debt-to-GDP entries show values such as 68, 73, 78, 82, 79, 76, 64, 51 (in the table format).
  - B4. One-time 30 percent real depreciation in 2010 produces significant increases in several indicators (e.g., PV of debt-to-GDP, debt service ratios).
- Figure A1 and Figure A2 show that the most extreme stress tests (one-time 30 percent real depreciation in 2010 and permanently lower GDP growth) raise the PV of Debt-to-Revenue Ratio, PV of Debt-to-GDP Ratio, and Debt Service-to-Revenue Ratio well above baseline paths in the projection period.

### IMF program decision and macro-fiscal context
- IMF Executive Board approved a disbursement of SDR 6.89 million (about US$10.7 million) under the rapid-access component of the Exogenous Shocks Facility (Press Release No. 09/270, July 27, 2009).
- The global slowdown led to:
  - Projected contraction of real GDP by as much as 2½ percent in 2009.
  - Sharp declines in tourism, FDI, and remittances.
- Authorities’ fiscal response and measures (selected exact policy parameters and targets):
  - Fiscal program for FY 2009–10 aims to maintain macroeconomic stability while protecting social spending.
  - Measures on revenue side: introduction of a flexible petroleum pricing mechanism; implementation of a market-valuation based property tax; introduction of a value-added tax in 2010.
  - On expenditure side: prioritize spending, control costs, implement only projects for which funding is available.
  - In 2009, timing adjustment of revenue returns from the hotel industry to ease cash flow (timing only; deferred revenues will be recovered).
  - Public sector pay: deferral of some planned pay increases; capping of public sector numbers; voluntary pay reduction of 10 percent for all members of Cabinet.
  - Capital expenditure restricted to 10 percent of GDP in 2009 (well below original intent).
  - These measures aimed to create headroom for additional social safety net spending equivalent to 1 percent of GDP, halve the originally envisaged budget deficit to below 3 percent of GDP, and achieve a primary surplus of 0.8 percent of GDP.
  - Authorities target reducing the debt/GDP ratio to below 60 percent by 2020 (ECCB benchmark).

### Financial sector and institutional reforms
- St. Lucia not unduly affected by CL Financial Group failure, but authorities plan:
  - Strengthen regulation and supervision of nonbank financial institutions.
  - Establish a unified Supervisory Authority backed by enabling legislation.
- ECCB is undertaking stress testing of commercial banks.
- No new or intensified restrictions in making transfers for current international transactions are intended.

### Structural features, vulnerabilities, and strengths
- Structural vulnerabilities:
  - High dependence on tourism: tourism accounts for over three-quarters of export earnings and visitor expenditure accounts for one-third of GDP.
  - Heavy reliance on external finance for tourism sector capital development.
  - Exposure to extreme weather events (e.g., hurricane in August 2007; earthquake in November 2007).
  - Secular decline in some economic sectors (e.g., banana production).
- Strengths:
  - Pre-crisis average output growth around 4 percent between 2003 and 2007.
  - Political stability and capable public administration.
  - Benefits from ECCU membership: low inflation, foreign reserves stability, regulatory framework.
  - Good rankings in World Bank Doing Business Indicators and reasonable standing on debt sustainability metrics.
  - Pipeline projects that could boost construction and recovery when conditions improve.

### Memorandum and financing items (selected exact figures)
- Nominal GDP (in billions of US dollars):
  - 2006: 0.9
  - 2007: 1.0
  - 2008: 1.0
  - 2009–14 Average: 1.1
  - 2019: 1.7
  - 2029: 3.2
- Total gross financing need (in billions of U.S. dollars): selected annual entries include 0.1; 0.2; 0.3; 0.1; 0.1; 0.1; 0.1; 0.1; 0.0; 0.1; 0.2
- Aid flows (in billions of US dollars) and grants (selected):
  - Aid flows (2008): 0.02; (2009): 0.05; (2009–14 entries): 0.01; 0.01; 0.01; 0.01; 0.01; 0.03
  - Of which Grants: same pattern as aid flows in the table
- Grant-equivalent financing (in percent of GDP) entries include 7.4, 2.6, 0.8, 0.8, 0.8, 0.8, 0.8, 0.8 for selected years in projections.

*Source: St. Lucia authorities; and Fund staff estimates, projections, and press release material contained in the provided IMF document.*

### Conclusion

### Conclusion

### Appreciation for Fund support
- "The authorities reiterate their appreciation for the support that has been forthcoming from the Fund to date as they seek to deal with the impact of the global crisis on the economy."

### Economic objectives during the crisis
- "It is vital that St Lucia should be in a position to take full advantage of the eventual recovery in its external markets and that it should be able to cushion the impact on its reserves during this exceptionally difficult period."
- "St Lucia has an excellent debt servicing record and is implementing a revenue reforms agenda that will strengthen further its debt sustainability position."

### Request to the Executive Board
- The authorities "look forward to a positive assessment from the Executive Board of their request for a purchase under the Rapid Access Component of the Exogenous Shocks Facility in the amount of 45 per cent of quota."

* _cr09257 - Conclusion_*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09257.pdf_