## _cr15297

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### Program request, context, and design
- St. Kitts and Nevis requested a three-year Stand-by Arrangement for SDR 52.51 million (590 percent of quota) amid a debt crisis.
- Debt peaked at around 160 percent of GDP in 2010 and had been considered unsustainable since 2006.
- Program focus:
  - (i) an ambitious medium-term fiscal consolidation;
  - (ii) a comprehensive debt restructuring to address the debt overhang; and
  - (iii) further strengthening of the financial sector.
- Program features:
  - Large, frontloaded fiscal adjustment and frontloaded financing (Fund and restructuring).
  - Quarterly reviews to allow close monitoring given implementation capacity concerns.
  - Conditionality centered on central government fiscal balance, external short-term debt, and domestic and external arrears.

### Key successes and macroeconomic outcomes
- Major achievements:
  - “One of the largest debt reductions in recent times” through the debt restructuring.
  - Headline fiscal and current account balances improved substantially; program fiscal targets were met.
  - Important tax and public financial management reforms enacted (including VAT implementation in Nov. 2010).
  - Sovereign risk materially removed from banks’ balance sheets; banking sector remained resilient.
  - Robust growth resumed, with growth exceeding 6 percent in 2013 and 2014.
- Program precautionary status:
  - Improvement allowed authorities to treat the program as precautionary (non-drawing) from the combined seventh and eighth review.

### Vulnerabilities, limits of adjustment, and risks
- Remaining fiscal and financing risks:
  - Debt is on a declining path but gross financing needs are above the safe level of 15 percent of GDP.
  - The assessment of exceptional access should have provided greater assurance on prospects of debt sustainability at high probability.
- CBI inflows and underlying adjustment:
  - CBI-related inflows materially affected outcomes; headline adjustments were substantially greater than underlying ones.
  - Expected decline in CBI inflows implies the large fiscal surpluses seen will diminish and could create fiscal vulnerabilities without additional reforms.
- Program execution constraints:
  - Capacity constraints limited completion of some structural benchmarks and delayed implementation in year 2.

### Fiscal outcomes, quasi-fiscal activity, and public financial management
- Headline vs underlying fiscal positions:
  - Headline fiscal position improved dramatically; many fiscal targets met.
  - Underlying primary position (excluding grants and CBI) changed little over the program.
- Key numeric fiscal and quasi-fiscal items:
  - VAT raised revenue from domestic goods and consumption by more than 6 ppts on average during 2011–14.
  - Cumulatively saved share of unexpected CBI inflows: around 40 percent of GDP.
  - Extraordinary financing from CBI receipts to the SIDF: grants of 2 percent of GDP in 2013.
  - SIDF quasi-fiscal spending (public employment programs, electricity subsidies, loan subsidies): totaling around 2½ percent of GDP in 2013.
- Public financial management issues:
  - SIDF engaged in quasi-fiscal activity recorded off-budget; unification of fiscal accounts recommended.
  - NIA had repeated financing problems affecting capital spending implementation and arrears to foreign creditors at multiple reviews.

### Debt restructuring — outcomes, timing, and implications
- Outcomes by end-2014:
  - Total public sector debt: 79 percent of GDP (reduced by 56 percentage points on account of restructuring).
  - Domestic debt fell 49 percentage points (debt-land swap accounted for 41 percentage points).
  - External debt dropped 7 percentage points; external amortization decreases by 7.5 percent of GDP over 2012–20.
  - Short-term debt reduced from around 40 percent of GDP to close to 15 percent at end-2014.
- Timing:
  - Commercial debt exchange took 10 months from announcement.
  - Land-debt swap took almost 16 months before first tranche transfer; entire exchange incomplete at program end.
- Remaining flow risks:
  - Gross financing needs anticipated to remain above the 15 percent of GDP risk threshold in the Fund’s DSA for market access countries.
- Design considerations and bank impacts:
  - Land-debt swap reduced government debt and banks’ sovereign exposure but left banks holding illiquid land assets.
  - Proposal to make SPV shares tradable and give shareholders voice in SPV management to limit bank balance sheet impact.

### Financial sector outcomes and challenges
- Financial sector effects:
  - Sovereign risk largely removed from banks; stability preserved through restructuring and recession.
  - No use of the BSRF; liquidity was not a final issue due to surge in CBI inflows.
  - Banks remain among the strongest in the region with key indicators above regulatory thresholds.
- Persistent challenges:
  - High liquidity and low lending persisted; credit to the private sector did not restart despite additional balance sheet space.
  - Capitalization and asset quality weakened as expected; zero risk weight on government debt had previously overstated capital adequacy.
  - Need for stronger demand for credit from viable projects and reforms to facilitate NPL resolution.

### Medium-term growth, competitiveness, and structural reform agenda
- Growth and potential:
  - Medium-term growth range during the program: 3½–4¼ percent.
  - Potential growth downgrade in Fifth review: ¾ percentage point.
  - Revised medium-term growth expectation since program end: 2.5 percent (2015 Article IV).
- Competitiveness and structural constraints:
  - REER remains high relative to peers; competitiveness eroded since 2005.
  - Critical structural priorities: improve business environment, boost private investment, complete civil service reform, and constrain wage bill.
- Public capital and multipliers:
  - Estimated capital spending multiplier: approximately 0.6.
  - Real per capita public capital stock (2005 PPP terms) in 2013: $6,400 in St. Kitts; $8,300 in emerging markets; $4,880 in Caribbean small island states.
  - Failure to spend capital budget in 2011–12 likely reduced near-term growth.

### Program design lessons, adjustors, and policy recommendations
- Saving windfalls and sovereign wealth management:
  - Staff recommended saving the bulk of CBI receipts, establishing an asset-liability framework for a sovereign wealth fund, and prioritizing use to pay down debt rather than increasing current spending.
  - Positive CBI shocks treated like non-renewable resource revenues; opportunity to build buffers and invest in quality capital spending.
- Conditionality and review frequency:
  - Quarterly reviews strained capacity; semi-annual reviews with interim staff visits recommended for small states.
  - Consider expenditure ceilings or adjustors to automatically save upsides while protecting social and capital spending.
- Debt and liquidity management:
  - Reduce gross financing needs via debt management strategy, consider inclusion of domestic Treasury bills in restructuring, and lengthen maturities.
  - Accelerate debt repayments and invest sovereign wealth overseas to normalize banking system liquidity.
- Structural reform priorities:
  - Master fiscal discipline: maintain a suitable structural non-CBI primary balance and prudently manage windfalls.
  - Pursue structural reforms to improve the investment climate, generate bankable projects, and diversify the economy.

### Key statistics preserved from the source
- Fund financing request: SDR 52.51 million ($84 million or 590 percent of quota).
- Frontloading produced access of around 450 percent of quota in the first year.
- CBI inflows (counted as service exports): almost 11 percent of GDP.
- Medium-term growth range during the program: 3½–4¼ percent.
- Potential growth downgrade in Fifth review: ¾ percentage point.
- Revised medium-term growth expectation since program end: 2.5 percent (2015 Article IV).
- VAT revenue increase contribution: more than 6 ppts on average during 2011–14.
- Cumulatively saved unexpected CBI inflows: around 40 percent of GDP.
- Extraordinary CBI financing to SIDF: grants of 2 percent of GDP in 2013.
- SIDF quasi-fiscal spending in 2013: around 2½ percent of GDP.
- Estimated capital spending multiplier: approximately 0.6.
- Real per capita public capital stock in 2013: $6,400 (St. Kitts); $8,300 (emerging markets); $4,880 (Caribbean small island states).
- Total public sector debt at end-2014: 79 percent of GDP (reduced 56 percentage points on account of restructuring).
- Domestic debt fall: 49 percentage points (debt-land swap 41 percentage points).
- External amortization decrease: 7.5 percent of GDP over 2012–20.
- Short-term debt reduction: from around 40 percent of GDP to close to 15 percent at end-2014.
- Time to complete commercial debt exchange: 10 months from announcement.
- Time until first tranche transfer for land-debt swap: almost 16 months.
- Gross financing needs anticipated to remain above the 15 percent of GDP risk threshold.

### Authorities’ views and implementation perspectives
- Authorities broadly agreed with the Ex Post Evaluation findings and considered the SBA design broadly appropriate.
- Authority-reported outcomes and priorities:
  - Debt to GDP fell to 79 per cent of GDP from a high of 160 per cent.
  - A primary fiscal surplus of 13 per cent was recorded compared to a small deficit of 0.5 per cent in 2010.
  - Emphasis on careful management of sovereign wealth from CBI inflows, including early debt repayment and considering a dedicated fund.
  - Support for semi-annual reviews due to capacity constraints and interest in targeted technical assistance (notably for the NIA).
- Nevis Island Administration (NIA) concerns:
  - NIA financing and cash management problems highlighted; call for greater NIA-specific conditionality and stronger coordination between federation partners.

*Source: EXECUTIVE SUMMARY and selected chapters and appendices from _cr15297 (IMF staff report excerpts, October 6, 2015).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Program request, context, and design
- St. Kitts and Nevis requested a three-year Stand-by Arrangement for SDR 52.51 million (590 percent of quota) in the midst of a debt crisis.
- Debt peaked at around 160 percent of GDP in 2010 and had been considered unsustainable since 2006.
- The sharp downturn coinciding with the global financial crisis created a large financing gap forcing a debt restructuring and exceptional access to Fund resources.
- The programmed mix of financing and adjustment was reasonable—the fiscal adjustment was large and frontloaded, as was the financing from the Fund and through the restructuring.
- The program focused on: (i) an ambitious fiscal consolidation; (ii) a comprehensive debt restructuring; and (iii) a further strengthening of the financial sector.

### Key successes and macroeconomic outcomes
- The program achieved many successes:
  - One of the largest debt reductions in recent times through the debt restructuring.
  - Headline fiscal and current account balances improved substantially.
  - Important tax and public financial management reforms were enacted.
  - Sovereign risk was removed from the banks.
  - Robust growth resumed, with growth exceeding 6 percent in 2013 and 2014.
- The improvement in headline fiscal and external positions allowed the authorities to treat the program as precautionary (and hence non-drawing) from the combined seventh and eighth review.
- The programmed mix of financing and adjustment was reasonable given the size of the estimated financing gap; the fiscal adjustment and financing from the Fund and restructuring were frontloaded.

### Vulnerabilities, limits of adjustment, and risks
- Despite the dramatic reduction in the level of debt, vulnerabilities remain:
  - Debt is on a declining path but gross financing needs are above the safe level of 15 percent of GDP.
  - The assessment of the exceptional access criteria should have provided greater assurance on the prospects of debt sustainability at high probability.
- The unexpected surge in receipts from the government’s Citizenship by Investment (CBI) scheme materially affected outcomes:
  - The resulting adjustment in both headline fiscal and current account balances were substantially greater than that in underlying terms.
  - This smaller underlying adjustment presents a risk to long-term sustainability if CBI inflows decline.
- With CBI-related inflows expected to decline, the large fiscal surpluses seen recently will diminish, and this would lead to new fiscal vulnerabilities if the authorities do not undertake additional reforms.

### Structural and financial sector issues
- Before the crisis, banks were relatively sound but had growing NPLs relative to loans and stagnant profitability; bank capitalization had been inflated by large sovereign exposure attracting a zero risk weight under regulatory rules.
- Competitiveness was eroded from 2005, and St. Kitts and Nevis’ REER is high relative to peers.
- The program helped preserve financial stability and largely removed sovereign risk from the banks.

### Post-program agenda and policy priorities
- A significant post-program agenda remains to ensure ongoing resilience and competitiveness. The ongoing agenda includes:
  - Fiscal policy aimed at a sound underlying primary fiscal position, and the prudent management of CBI-related windfalls.
  - Structural reforms aimed at strengthening competitiveness and making the private sector the engine of the economy.
- Completing this agenda would strengthen St. Kitts and Nevis’ potential growth and make the country more resilient.
- While more could likely have been done to save and manage windfalls during the program, the structural agenda was appropriately focused on fiscal and public sector reforms important to achieve program objectives.
- Going forward, it will be important to make progress on the real sector reform agenda since the payoffs, which will be broad-based, will take time to materialize.

### Country-specific context and shocks
- St. Kitts and Nevis is a microstate with a population of around 55,000 and is one of the most hurricane affected areas in the world, having suffered 5 major hurricanes since 1990 (one every 3–5 years).
- Losses estimated from the most damaging of these were 110 percent of GDP (Hurricane Georges, 1998).
- The concentrated economic structure, susceptibility to natural disasters, and large fiscal deficits contributed to the accumulation of unsustainable debt exceeding 150 percent of GDP for a period.
- In 2008, Tropical Storm Omar combined with the global financial crisis and triggered a deep recession that brought the unsustainable situation to a head.

### Program evaluation and authorities’ views
- This paper presents an Ex Post Evaluation of the 2011–14 Stand-by Arrangement.
- The authorities broadly agreed with the main findings of the Ex Post Evaluation. In their view:
  - The program’s design was broadly appropriate, correctly identifying and focusing on the critical macroeconomic priorities.
  - The return to stability and the debt restructuring, including the land-debt swap, were major achievements.
  - The Banking Sector Reserve Fund had served as a valuable safety net.
  - The Fund’s engagement positively influenced the successful implementation of their home-grown program, though additional capacity building at all levels would have been beneficial.
  - They felt the prospects for success under the SBA were good even without the unanticipated rise in Citizenship-by-Investment revenues.
  - Careful management of the country’s sovereign wealth from CBI inflows was a priority.
- Administrative details: authorized for distribution by Adrienne Cheasty and Bob Traa; prepared by an interdepartmental team with Nathan Porter (head), Diana Ayala, Erica Tsounta (all SPR), Kevin Greenidge (WHD), and Mario Mansilla (MCM). A mission visited Basseterre and Charlestown during September 10 and 11, 2015. Document date: October 6, 2015.

*Source: EXECUTIVE SUMMARY, _cr15297 - EXECUTIVE SUMMARY*

### 9.      Given the origin of the crisis, the program appropriately focused on restoring

### 9.      Given the origin of the crisis, the program appropriately focused on restoring

### Program objectives and design
- Three explicit objectives:
  - (i) an ambitious medium-term fiscal consolidation;
  - (ii) a comprehensive debt restructuring to address the debt overhang; and
  - (iii) further strengthening the financial sector.
- Program intended to implement structural measures to underpin the fiscal effort and boost confidence in private sector investment.
- Limited focus on improving the investment climate given near-term crisis resolution priority and expectation that debt restructuring and financial system strengthening would indirectly help growth and competitiveness.
- Program structured around quarterly reviews to allow close monitoring given implementation capacity concerns.

### Conditionality and performance criteria
- Conditionality centered on the three objectives; prior actions focused on strengthening the fiscal position, preconditions for debt restructuring and arrears monitoring, and agreeing with the ECCB arrangements to manage the Banking Sector Reserve Fund (BSRF).
- Quantitative Performance Criteria (PCs) focused on:
  - central government fiscal balance,
  - external short-term debt, and
  - domestic and external arrears.
- Most PCs were met (Table 2 notation: √ means PC was met; X means PC was not met).
- Fiscal balance targets included asymmetric adjustors:
  - grants above or arrears clearance below expectation,
  - lower than expected grants or financial sector recapitalization needs (the latter two adjustors capped).
- Fiscal program front-loaded with specific primary balance targets:
  - primary surplus of 5 percent in 2011 (following a ½ percent of GDP primary deficit in 2010),
  - targets of 5.4 percent in 2012 and 6.4 percent in 2013,
  - primary surpluses assumed to decline slightly from 2014 onwards.
- Financial sector conditionality limited to a benchmark requiring quarterly stress testing of the banks by the ECCB.

### Structural agenda (selected measures)
- Fiscal and Public Sector Reforms (ambitious agenda supported by technical assistance):
  - Facilitation of the debt restructuring: registration and valuation of land intended for the debt restructuring, establishment of an asset management company for this land, and early creditor consultation.
  - Public financial management: corporatization of the electricity department; rationalization of the LPG subsidies; reform of the procurement act.
  - Social Safety net: actuarial review of the Social Security Scheme, proposal for comprehensive pension reform, and reform proposal for the social safety net.
  - Public enterprise reform: review of the borrowing capacity of public enterprises, and rationalization of public land sales and development agencies.
  - Civil service reforms: reform plan covering human resources, and a review of the organization and structure of the civil service and wage and payroll management.
- Medium-term fiscal reforms: establishment of a medium-term expenditure framework, development of a medium term Debt Management Strategy.
- Financial sector reforms: update stress tests of the banks (to be monitored on a quarterly basis).

### Prior actions and early measures (selected)
- Implemented a freeze on public sector hiring and salary increments (July 2010).
- Strengthened auditing and monitoring of duty free shops (mid-2010).
- Implemented a VAT (Nov. 2010).
- Announced and implemented an 80 percent increase in electricity tariffs (announced early-2011; implemented in early-2011).
- Program prior actions included:
  - Authorities commit publicly to undertake a debt restructuring;
  - Appointment of legal advisors for due diligence on existing debt contracts;
  - Put in place a framework to monitor expenditure payment arrears (with assistance from CARTAC);
  - Agreement with the ECCB on modalities of the Banking Sector Reserve Fund.

### Structural benchmarks status (selected entries from Table 3)
- Establish and operationalize a unit dedicated to program design, planning and monitoring in the Inland Revenue — End-September 2013 — completed.
- Submit the bill for the corporatization of the Electricity Department to Parliament — End-September 2011 — completed.
- Update the registry of at least 600 acres of land — End-September 2011 — completed.
- Undertake valuation of at least 600 acres of land — End-September 2011 — completed.
- Submit draft of new Procurement Act to Parliament — End-June 2012 — completed.
- Finalize the implementing regulations to the Procurement and Contract (Administration) Act — End-December 2013 — delayed.
- Actuarial review of the Social Security Scheme — End-December 2012 — met with delay in May 2013.
- Draft proposal for a comprehensive pension reform — End-June 2013 — delayed.
- Update the existing stress tests of banks — To be monitored on a quarterly basis — completed.

### Size, access, and financing rationale
- Fund financing: SDR 52.51 million ($84 million or 590 percent of quota).
- Overall access was lower than the cumulative exceptional access threshold of 600 percent of quota, but:
  - Frontloading produced access of around 450 percent of quota in the first year (relative to a threshold of 200 percent), representing over 75 percent of the total access—making the access request exceptional.
  - Access was around the median share of quota for post-2008 programs, but relative to GDP access was among the largest 5 programs.
  - First disbursement represented over 40 percent and was the second largest share of overall access among post-2008 programs.
- Overall access reflected an expected financing gap of $84 million (after restructuring) resulting from the fall in domestic demand and external financing, including $17.1 million to create the BSRF.
- The programmed size of the BSRF was explained by an assumed loss of 15 percent of deposits less the net liquid assets of the indigenous banking system.

### Treatment of debt restructuring in program documents
- The treatment of debt restructuring differed across IMF program documents; for St. Kitts and Nevis the fiscal table reported the financing gap not covered by IMF lending but did not indicate how much should be financed by debt restructuring.

### Program outcomes — Macroeconomic
- The economic downturn lasted four years instead of the two years the program initially assumed.
- Growth revisions and outcomes:
  - Program predicated on a V-shaped recovery from the start, which was optimistic given recent restructuring experience.
  - For 2011, 2012 and 2013, growth was revised down across reviews; initial estimates for 2011 and 2012 were worse than expected.
  - 2013 outcome was better than expected reflecting combined impact of trading partner recovery, CBI-related inflows, and stronger public capital spending.
- Drivers of revisions:
  - External demand: protracted slowdown in Europe and US led to downward revisions; some review-level forecasts showed inconsistent revisions relative to trading partner outlooks.
  - Domestic demand: slower recovery than anticipated, largely due to significant underperformance in public investment spending. Private consumption recovered quickly towards the end of the program, possibly reflecting influx of CBI flows.

*Source: IMF staff calculations.*

### 19.      Medium-term growth was also revised considerably, ranging from 3½–4¼ percent

### _cr15297 - 19.      Medium-term growth was also revised considerably, ranging from 3½–4¼ percent

### Medium-term growth and potential growth revisions
- Medium-term growth was revised to range from 3½–4¼ percent during the program, producing fluctuations in debt dynamics.
- Upward revisions in potential growth occurred while actual growth disappointed; together with changing interest rates, this improved the projected debt sustainability picture during the program.
- Through the Fourth review, the estimated debt stabilizing primary balance declined continuously.
- In the Fifth review, potential growth had been downgraded by ¾ percentage point and growth issues received more attention.
- Since the program ended, medium-term growth expectations were further revised to 2.5 percent (2015 Article IV), described as a large revision compared with revisions elsewhere—reflecting a better understanding of potential growth given the risks from lower CBI inflows and natural disasters.

### Fiscal outcomes — headline and underlying fiscal positions
- The headline fiscal position improved dramatically under the program, and program fiscal targets were met.
- Overall program strategy: raise core tax revenue and accommodate a modest increase in capital spending through current expenditure restraint.
- Many critical fiscal revenue reforms were introduced ahead of program commencement; these contributed significantly to revenue:
  - The VAT raised revenue from domestic goods and consumption by more than 6 ppts on average during 2011–14.
- Taxes on income and international trade fell slightly, in part reflecting ongoing importance of exemptions.
- Non-tax revenue, especially from the government’s CBI program, contributed significantly more revenue than anticipated.
- Expenditure measures included a freeze of the nominal wage bill and containment of goods and service spending, with a broad-based reform to rationalize the public-sector wage structure and employment.
- The underlying fiscal position improved by less than the headline and softened again at the end of the program:
  - The important contribution of CBI-related revenue (on top of revenue reforms) meant fiscal targets could be met despite little change in the underlying primary position (excluding grants and CBI) over the program.
  - Much of the unexpected rise in CBI inflows was saved (cumulatively around 40 percent of GDP), but the additional space allowed less underlying adjustment than anticipated and seen in other recent programs.
  - Core tax revenue under-performed reflecting shortfalls in GDP relative to program projections, particularly in 2011 and 2012, and exemptions (extended for cyclical reasons in 2012).
  - Under-execution of capital spending early in the program also helped ensure program targets were met.
  - Goods and services spending tended to come in above expectations, although the wage freeze in 2010–12 contributed importantly to progress achieved.
  - Spending (both capital and current) was loosened in 2013 to lift growth after the long recession, given the anticipated output gap.
  - Extraordinary financing for capital spending from CBI receipts to the SIDF (through grants of 2 percent of GDP) assisted in reversing under-execution of capital spending in 2013.
- Risk: This lower level of underlying adjustment poses a longer-run risk if CBI-related revenues decline in future; additional underlying fiscal adjustment would then be necessary.

### Quasi-fiscal activity and public financial management
- The SIDF, legally a non-government entity, engaged in quasi-fiscal activity particularly in 2013–14:
  - In addition to the public investment grant provided to the budget in 2013, the SIDF undertook quasi-fiscal spending in 2013 and 2014 including public employment programs, electricity subsidies, and loan subsidies (totaling around 2½ percent of GDP in 2013).
  - The quasi-fiscal spending by the SIDF and the loosening of wage spending (including payment of the 13th month of salary) undermined overall adjustment.
  - Unification of the fiscal accounts (incorporation of off-budget activity with the budget) could help ensure the end of the procyclical bias and that priority items are financed.
- The NIA had repeated financing problems affecting capital spending implementation:
  - Arrears to foreign creditors were incurred at multiple reviews; each occurrence was small and temporary but suggest broader cash management issues.
  - Problems affected implementation of NIA capital spending in 2012, indicating need to strengthen cash management and broader public financial management capacity in the NIA and greater cooperation between federation partners.
- Inability to spend the capital budget likely harmed near-term and longer-term growth:
  - Low fiscal multipliers in small open economies suggest fiscal adjustment had little impact on overall growth over the program period.
  - Estimated multiplier from capital spending is approximately 0.6; ensuring the capital budget in 2011 and 2012 was spent on high priority projects should have raised near-term growth substantially.
  - St. Kitts and Nevis’ real per capita public capital stock (2005 PPP terms) in 2013 was $6,400 compared with $8,300 in emerging markets and $4,880 in Caribbean small island states.

### Fiscal-structural agenda and capacity constraints
- Important parts of the fiscal-structural agenda remain incomplete partly because of capacity constraints:
  - Incomplete items included: completion of civil service reforms; development of a method for proxy means testing for a cash transfer program; implementation of regulations for the new Procurement and Contract (Administration) Act; and a proposal for a comprehensive pension reform.
  - Initial steps on civil service reform were put in place under the program, but the agenda was not complete.
  - Delays were linked to exogenous events (delayed donor-provided assistance or region-wide initiatives).

### Debt restructuring — outcomes and timing
- St. Kitts and Nevis was known to have unsustainable debt long before the program; the Fund recognized the Federation’s public debt as unsustainable in 2006, and restructuring was a precondition of the program.
- By end-2014, total public sector debt stood at 79 percent of GDP, reduced by 56 percentage points on account of the restructuring.
  - Domestic debt fell 49 percentage points, reflecting mainly the debt-land swap (41 percentage points).
  - External debt dropped 7 percentage points primarily because of the debt exchange (and external amortization decreases by 7.5 percent of GDP over 2012–20).
  - Short-term debt was reduced from around 40 percent of GDP ahead of the restructuring to close to 15 percent at end-2014.
- Despite reduced debt service, gross financing needs are anticipated to remain above the 15 percent of GDP percent risk threshold incorporated in the Fund’s DSA for market access countries.
- Timing and implementation:
  - The debt exchange for commercial creditors took 10 months to complete from the announcement of intent in June 2011—roughly the average time for debt exchanges.
  - The land-debt swap took almost 16 months before the first tranche of land was transferred to an SPV; the entire exchange remained incomplete at the end of the program, reflecting limited domestic capacity to set up the SPV and political opposition actions.
- Second-stage land-debt swap implications:
  - The land-debt swap reduced government debt and the financial system’s exposure to the government but left banks holding a relatively illiquid asset (land).
  - An earlier proposal had been for the government to sell the land, allowing the government to provide a liquid asset to the banks.
  - Concern existed about the impact of the land-debt swap on banks’ income; illiquidity implications for bank operations received less attention.
  - Banks have no direct ability to divest the land; completion of land sales is important to ensure benefits of debt reduction are preserved and fully felt by banks despite a new government.

### Financial sector outcomes
- Strengthening the financial system was a key objective of the program, reflecting concerns over the impact of the debt restructuring on banks’ liquidity, profitability and capitalization.
- Two major events shaped financial system developments: (i) the debt restructuring; and (ii) the influx of liquidity due to the rise in CBI program participation.
  - These factors left local banks weaker in capitalization, asset quality, and profitability, although the debt restructuring was always expected to have an adverse impact on key financial soundness indicators.
  - Despite the land-debt swap, liquidity improved due to the surge in CBI inflows, resulting in a dramatic rise in mostly government deposits.
  - There was no use of the BSRF and liquidity was not an issue in the end.
  - St. Kitts and Nevis’ banks remain among the strongest in the region with key indicators above regulatory thresholds.
- Despite restructuring and CBI-related rise in liquidity, credit to the private sector did not restart:
  - Restructuring led to a large reduction in credit to the government, but additional space in banks’ balance sheets did not lead to increased lending to other sectors even as they recovered in 2013–14.
- Program commitments and stress tests:
  - The program included benchmarks on quarterly stress tests to provide assurance the financial sector was not in jeopardy as a result of the restructuring.
  - The authorities committed to these tests but implementation was by the ECCB.
  - Initial stress tests were important to reassure that the restructuring had not adversely affected the financial system more than expected.
  - It is noted that less frequent stress tests would likely have been sufficient given limited intra-quarter change.

### Key statistics and specific figures preserved from the source
- Medium-term growth range during the program: 3½–4¼ percent.
- Potential growth downgrade in Fifth review: ¾ percentage point.
- Revised medium-term growth expectation since program end: 2.5 percent (2015 Article IV).
- VAT revenue increase contribution: more than 6 ppts on average during 2011–14.
- Cumulatively saved share of unexpected CBI inflows: around 40 percent of GDP.
- Extraordinary financing from CBI receipts to the SIDF: grants of 2 percent of GDP in 2013.
- SIDF quasi-fiscal spending in 2013 (public employment programs, electricity subsidies, loan subsidies): totaling around 2½ percent of GDP in 2013.
- Estimated capital spending multiplier: approximately 0.6.
- Real per capita public capital stock (2005 PPP terms) in 2013: $6,400 in St. Kitts; $8,300 in emerging markets; $4,880 in Caribbean small island states.
- Total public sector debt at end-2014: 79 percent of GDP.
- Debt reduction on account of restructuring: 56 percentage points of GDP.
  - Domestic debt fall: 49 percentage points (debt-land swap 41 percentage points).
  - External debt drop: 7 percentage points; external amortization decreases by 7.5 percent of GDP over 2012–20.
- Short-term debt reduction: from around 40 percent of GDP to close to 15 percent at end-2014.
- Time to complete commercial debt exchange: 10 months from announcement.
- Time until first tranche transfer for land-debt swap: almost 16 months.
- Gross financing needs anticipated to remain above the 15 percent of GDP percent risk threshold in the Fund’s DSA for market access countries.

*Source: IMF staff estimates and text from the provided _cr15297 PDF chapter excerpt.*

### 34.      The program strategy targeted the macro critical issues of sustainability and financial

### 34.      The program strategy targeted the macro critical issues of sustainability and financial

### Program strategy and structural reform implementation
- The program targeted macro critical issues of sustainability and financial stability, aiming to reduce the drag from the fiscal and encumbered financial system on the private sector and the national risk premium, and to improve the efficiency of revenue collection and reduce the distortionary impact of tax exemptions.
- Additional program actions (not explicit program focus):
  - (i) deregulation of “retail” sector on St. Kitts through the closing of the government supply store;
  - (ii) corporatization of the electricity company (although its viability was not sealed);
  - (iii) development of a proposal to rationalize the LPG subsidy; and
  - (iv) increased oversight of public enterprises.
- Implementation performance:
  - The vast majority of structural benchmarks were met.
  - Implementation performance was in line with many other recent programs.
  - Early implementation was relatively good, despite a higher share of partially met benchmarks.
  - Implementation suffered most in year 2 when benchmarks related to implementing regulations for the procurement law, means-tested social assistance, and pension reform were not completed (ultimately delayed beyond the program).
  - Delays mainly reflected capacity constraints and delays in necessary TA provision; the pension benchmark shortfall also reflected alignment with a region-wide initiative and “insufficient clarity in the specification of the original benchmark.”
  - Other delayed reforms (new Customs law, actuarial review of social security, rationalization of public land sale agencies, improved SOE oversight) largely reflected capacity constraints but were ultimately completed.

### External position, CBI inflows, and competitiveness
- Headline current account:
  - The headline current account improved significantly during the program.
  - Overall the current account declined around 10 percent of GDP over the course of the program, compared with a programmed adjustment of around 4 percent.
  - CBI inflows (counted as service exports) were almost 11 percent of GDP.
  - The improvement allowed the authorities to make the program precautionary at the combined seventh and eighth review and not draw the related funds.
- Underlying adjustment and cycle:
  - Changes in underlying terms were smaller and competitiveness changed little.
  - The cycle played a surprisingly modest role, with the actual and cyclically adjusted current accounts (ex-CBI inflows) moving little.
  - The exchange rate remained overvalued, with the current account gap larger than at the request.
- Competitiveness and policy implications:
  - More underlying adjustment was seen in other recent programs.
  - The need for structural reforms and additional infrastructure to improve competitiveness and longer-term growth remained at the end of the program.
  - World Bank’s Doing Business Survey suggests weaknesses in paying taxes, registering property, getting credit, and resolving insolvency.
  - Decline in credit after the restructuring during a period of recovery suggests the need for effort to improve the investment climate.

### Timing, delayed reviews, and implementation delays
- Review timing:
  - On average, delays in the completion of reviews were a little under 4 months per review, which is close to the upper end of recent programs.
  - Delays resulted in combined reviews and were concentrated in the fifth and sixth review and the seventh and eighth.
  - Causes of delays included administrative and capacity constraints; the authorities also noted that the two changes in mission chief added to delays.

### Program design and saving windfalls
- Positive shocks and CBI receipts:
  - St. Kitts and Nevis benefited from significant positive shocks during the program period, most notably the unexpected explosion of CBI inflows.
  - Savings from CBI-related inflows were around 40 percent of GDP.
- Policy recommendations and rationale:
  - Staff recommend saving the bulk of these receipts, establishing an asset-liability framework to manage the savings in a sovereign wealth fund, and prioritizing their use to pay down debt rather than using them to increase current spending.
  - Additional revenues are likened to non-renewable resource revenues given likely temporariness; they provide an opportunity to build buffers and resilience, including debt reduction, saving to smooth public consumption, and, if possible, increasing quality capital spending.
- Permanence concerns:
  - It is unlikely the current rise in CBI inflows can be relied on to permanently contribute to the extent seen since 2011, given the growth of competitors and Canada’s 2014 decision to end visa free entry for the citizens of St. Kitts and Nevis.
- Initial program design shortcomings:
  - The initial design was not focused on ensuring positive surprises were saved or protecting capital spending.
  - Commitment to wage restraint was important early in the program (through 2011–12); under-spending on capital (not financed by grants or loans) helped meet overall program targets in 2011–12.
  - By 2013 the government increased both current (including wages) and capital spending; there was no automatic mechanism in the initial design to limit crowding out of capital spending or the spending of windfalls.
- Program adjustments:
  - Adjustors to protect capital spending and to ensure saving of stronger-than-anticipated CBI receipts were added only in the Fifth and Sixth and Seventh and Eighth Reviews.
  - An earlier introduction of these adjustors would have strengthened incentives to complete the capital spending plan and increased fiscal countercyclicality.

### Expenditure adjustors, conditionality, and post-program engagement
- Comparative practice:
  - Many programs include expenditure ceilings in addition to quantitative conditionality on fiscal balances to save unexpected revenues; such conditions can be designed to protect social and capital spending.
  - Examples of expenditure adjustors and ceilings in other programs were reviewed (see table references in source).
- Post-program recommendations:
  - Fund engagement should continue seeking greater resilience through fiscal discipline and savings, and strengthening capacity for quality infrastructure spending.
  - Pursuing a sovereign wealth fund linked to a fiscal rule based on a non-CBI primary balance and unification of fiscal activity were advocated by the team.
  - Improving net debt position through early repayments was recommended to build resilience.
  - Authorities expressed interest in building buffers and strengthening domestic infrastructure.

### Fiscal and external adjustment pacing and domestic cost pressures
- Fiscal phasing:
  - The fiscal adjustment was unusually front-loaded: the primary surplus was envisioned to rise more than 5 percentage points of GDP in the first year of the program, and around a further 1½ points in the following two, with the primary surplus falling subsequently.
  - Rationale for front-loading included (i) the program began as an unfinanced home-grown effort with the Fund as the only available multilateral financing source, and (ii) a large upfront effort signaled creditors in the debt exchange operation.
- Constraints to external adjustment:
  - Membership of a currency union made external adjustment difficult; REER overvaluation continued to hamper the economy.
  - Underlying current account adjustment (net of CBI) was minimal despite a large headline change.
  - Internal devaluation (relative price decline) is costly and slow; structural reforms, wages/incomes policy, and productivity improvements remain necessary.
- Domestic cost pressures and wage bill:
  - Electricity costs are around thrice and twice the averages in the US and Latin America, respectively, and no better than the average in the Caribbean.
  - The government wage bill was 11½ percent of GDP and was the second highest in the Caribbean in 2014.
  - The wage bill was around 2 percentage points of GDP higher than the average for a large sample of small states.
  - The minimum wage was the third highest in the region during the program period.
  - The Federation maintained a much leaner public sector following fiscal consolidation in 2006, but there was a considerable expansion in the lead-up to the debt crisis.
  - The authorities’ nominal wage restraint ended after the three year ceiling, in 2013 and 2014; the public sector remains much larger than its average 2006–08 size (of 10 percent of GDP).
  - Maintaining nominal restraint (and a broader income policy), and completing public sector reform could have assisted greater external adjustment.

*Source: IMF staff estimates and program documentation as provided in the content unit.*

### 48.      The strategy surrounding the debt restructuring was innovative, transparent, and

### The strategy surrounding the debt restructuring was innovative, transparent, and

### Debt restructuring: design, outcomes, and innovations
- The strategy sought to make good use of the sovereign balance sheet and brought about a large reduction in the debt of St. Kitts and Nevis.
- Debt is likely to meet the authorities’ medium-term objective (of 60 percent of GDP) ahead of the date expected under the program.
- The early achievement of this target partly reflects early repayments by the authorities using CBI-related revenues.
- Innovative elements:
  - The use of the land-debt swap.
  - The use of the CDB guarantee.
- Limitations in scope and pace:
  - The restructuring brought debt down slowly in some respects: the restructuring of the debt held by banks was not completed during the program.
  - Domestic Treasury Bills were excluded from the restructuring.
  - Gross financing needs remain high despite the restructuring.

### Debt sustainability and financing flow risks
- Key risk metrics and thresholds:
  - Public gross financing requirements remain above the high risk debt burden threshold of 15 percent of GDP throughout the medium term.
  - Under the 2015 Article IV macro framework, gross financing needs decline to 16 percent of GDP in 2020, and they remain vulnerable to adverse growth, hurricane, and fiscal policy surprises.
  - The debt sustainability framework identifies government debt of 60 percent of GDP and gross public financing needs of 15 percent of GDP as levels associated with debt distress.
- Options that could have addressed flow concerns (identified in the report):
  - Greater fiscal adjustment: theoretically feasible but “greater ex ante adjustment was unlikely feasible.”
  - Scope of restructuring: domestic bonds and Treasury bills could have been included, with maturity extensions to reduce ongoing gross financing needs; absence of a haircut on bank claims meant the land-debt swap involved an indirect subsidy to private shareholders of affected banks.
  - Debt management strategy: shift the balance between domestic Treasury bills and bonds per the authorities’ 2013 Debt Management Strategy to address short-term funding pressures and make longer-term instruments more attractive.

### Financial sector: stability, liquidity, and reform needs
- Program successes:
  - Removed sovereign risk from banks’ balance sheets.
  - Preserved financial stability through the debt restructuring and the long recession.
  - No use of the BSRF (Banking Sector Restructuring Facility) and no regional spillovers; many key FSIs remain above regional peers and regulatory requirements.
- Liquidity and structural challenges:
  - The financial sector remains subject to significant challenges of high liquidity and low lending.
  - The BSRF was not used and therefore untested; its existence likely helped allay fears.
  - The later surge in CBI-related liquidity flooded the financial sector beyond effective domestic absorption without stronger domestic investment demand.
- Capitalization and asset quality:
  - The restructuring was expected to reduce reported capital adequacy, bank income, share of earning assets, and asset quality (NPL ratio).
  - Capitalization was in line with expectations; the underlying change in capital adequacy was overstated by the zero weight applied to government debt.
  - Returning banks to healthy profits and asset quality requires stronger demand for credit from viable projects—hence the need for reforms to improve the business environment.
  - Further reforms to facilitate non-performing loan resolution are important.
- Possible design improvements for similar transactions:
  - Make shares in the land holding company tradable so banks could liquidate them if needed.
  - Ensure sufficient voice in SPV management for shareholders of such shares to limit bank balance sheet impact.

### Consistency with Fund policies — exceptional access, arrears, and waivers
- Exceptional access:
  - The conditions for granting exceptional access were met.
  - Access and disbursement details:
    - The overall access request was 590 percent of quota.
    - Almost 450 percent of quota was to be disbursed in the first year.
    - These conditions require additional assurance where lending would involve more than 200 percent of quota be disbursed in a 12-month period or result in cumulative outstanding credit of over 600 percent of quota.
  - Front-loading was described as inevitable; the BSRF did not, by itself, create the exceptional access need.
  - Constraints on other financing partners limited alternatives: St. Kitts and Nevis was not eligible for IDB support, the World Bank was constrained, and the CDB had already provided a guarantee to facilitate the debt exchange.
  - The case for exceptional access was not formally reconsidered at subsequent reviews despite medium-term debt and financing needs becoming clearer.
- Lending into arrears policy:
  - The program was consistent with the Fund’s Lending into Arrears policy: (i) prompt Fund support was essential for program success; and (ii) the member was pursuing appropriate policies and making good faith efforts with creditors.
  - External arrears (relating to the NIA) that arose during the program were resolved quickly after identification.
- Waivers of applicability of performance criteria:
  - Waivers were frequently required in this program due to review timing and data availability.
  - St. Kitts and Nevis requested six waivers of applicability for quantitative performance criteria at seven program (including combined) reviews.
  - Among exceptional access programs since 2008, only Portugal requested waivers at more reviews; relative to the number of reviews St. Kitts and Nevis used more waivers.
  - Staff supported each waiver request on the basis that observance of the PCs was achievable and there was no clear evidence the performance criterion would not be met.
  - Possible design response: consider semi-annual reviews (rather than quarterly) to reduce the need for waivers while retaining options for quarterly staff visits and/or quarterly indicative targets to support capacity development.

### Conclusions, outlook, and policy recommendations
- Context and program rationale:
  - St. Kitts and Nevis approached the Fund during a deep recession, with unsustainably high debt and heavy reliance on domestic banks for financing; the currency was overvalued and the current account deficit exceeded 20 percent of GDP.
  - The authorities commenced a home-grown program in 2010 and approached the Fund in 2011 ahead of the debt restructuring.
- Program achievements:
  - The Fund program provided exceptionally large and front-loaded support, allowing return to stability and robust growth.
  - The unsustainable public debt was restructured and reduced substantially and is credibly on the path to reach the authorities’ medium-term target of 60 percent of GDP assuming fiscal policy discipline holds.
  - Headline fiscal and external accounts improved substantially ahead of program expectations.
  - Critical fiscal reforms were introduced, including introduction of a VAT, tax administration reform, and improved oversight of public enterprises.
  - Savings from CBI inflows were substantial: around 40 percent of GDP by end-2014.
- Remaining vulnerabilities and policy priorities:
  - Gross financing needs remain higher than desirable and should have been addressed more fully.
  - Cash management issues in the Nevis Island Administration were not fully addressed; greater coordination between the two governments on financial management and policy implementation is desirable.
  - Managing excess CBI-related liquidity requires accelerated debt repayments and the creation of a sovereign wealth fund invested overseas to help normalize banking system liquidity.
  - Key forward-looking agenda items:
    - Master fiscal discipline (maintain a suitable structural non-CBI primary balance) and prudently manage windfalls from CBI while allowing higher quality infrastructure spending.
    - Pursue structural reforms to create a business environment conducive to greater private sector investment and activity, which will support stronger lending demand and a more diversified resilient economy.
- Other lessons for Fund engagement with small states:
  - Program robustness to upside surprises and protecting capital spending: design programs to automatically save upsides (while protecting infrastructure and social spending) via adjustors or expenditure ceilings; if upside becomes permanent, adjust program objectives.
  - Program review frequency: quarterly reviews may be too heavy for small states with capacity constraints; semi-annual reviews are likely more appropriate, with options for quarterly staff visits and indicative targets.
  - Adjustment in currency unions: lasting external adjustment is difficult in currency unions where nominal depreciation is impossible; emphasizes importance of structural reforms and limits on cost structure, and the potential role of incomes policy.
  - Debt restructuring parameters: staff should outline at the time of request key parameters (post-restructuring level and financing needs) the restructuring should achieve to provide assurance of sustainability with high probability.
  - Land-debt swaps: innovative given strong bank-sovereign link, but consider limiting bank impact by making SPV shares tradable and granting sufficient shareholder voice in management.
  - Conditionality in currency unions: conditionality carried out by the union’s central bank (quarterly bank stress tests agreed by the authorities and carried out by the central bank for the union) can be a useful modality; facilitated here by agreement between the government and the ECCB.

*Italic: Source — IMF staff report excerpts on St. Kitts and Nevis (2015 Article IV and program assessment).*

### Box 1. The Citizenship-by-Investment and Sugar Industry Diversification Foundation Nexus

### Box 1. The Citizenship-by-Investment and Sugar Industry Diversification Foundation Nexus

### Citizenship-by-Investment (CBI) program: design and fees
- Established in 1984 to allow foreign nationals to make an economic contribution to the country in exchange for full citizenship.
- Investment options:
  - Invest at least US$400,000 in designated real estate.
  - Make a contribution to the Sugar Industry Diversification Foundation (SIDF) of at least US$250,000.
- Application fee:
  - US$50,000 application fee with either option (included in the SIDF contribution) per applicant.
  - Additional lower fees apply for family members.
- Treatment in public accounts:
  - These fees are recorded as non-tax revenue in the Central Government budget.

### SIDF: origin, functions, and fiscal role
- The SIDF was established in 2006 following the closure of St. Kitts and Nevis’ 300-plus year sugar industry.
- Functions:
  - Provides direct support to the budget through investment proceeds and capital grants.
  - Directly funds a variety of quasi-fiscal social and economic programs.
  - Supports subsidized credit activities through the banking system by providing zero interest deposits, which are leveraged by banks to provide targeted credit facilities at lower-than-market rates (including housing and student-targeted facilities).
  - Quasi-fiscal activities include the People Employment Program (PEP) and electricity subsidies.
- Budgetary impact:
  - Investment proceeds and capital grants collectively peaked at 4.7 percent of GDP in 2013 as the government accelerated its capital program following the 4-year recession.

### Trends, net receipts, and fiscal significance
- In recent years both direct government revenue and contributions to the SIDF, net of processing and due diligence costs, have become sizable.
- Net contributions to the SIDF are reported net of processing and due diligence fees.
- The SIDF’s spending and quasi-fiscal activities have grown in recent years, providing both budget support and direct financing of social and economic programs.

*Source: Box 1 text from the provided IMF content unit.*

### Appendix I. The Views of the Authorities

### Appendix I. The Views of the Authorities

### Meetings and participants
- Authorities were consulted during a visit to Basseterre (St Kitts) and Charlestown (Nevis) during September 10–11, 2015.
- Meetings were held with the Prime Minister and Minister of Finance T. Harris, the Premier of Nevis V. Amory, senior officials from the Ministry of Finance, and the Governor of the Eastern Caribbean Central Bank (ECCB).
- The mission also met members of the former government under which the SBA was negotiated in 2011 and subsequently implemented.

### Agreement with evaluation and program design
- Authorities broadly agreed with the main findings of the Ex Post Evaluation.
- They considered the program’s design to be broadly appropriate and that it correctly identified and focused on critical macroeconomic priorities.
- They recognized the positive impact of the Fund’s engagement on the successful implementation of their home-grown program and felt prospects for success under the SBA were good even without the unanticipated rise in Citizenship-by-Investment (CBI) revenues.

### Implementation challenges and capacity constraints
- Capacity constraints and insufficient clarity on one structural benchmark contributed to three missed benchmarks.
- Authorities agreed that a quarterly review frequency strained limited resources and sometimes resulted in delays in completing program reviews.
- They suggested that semi-annual reviews were generally more appropriate for countries like St Kitts and Nevis, with interim staff visits as a useful supplement where capacity is constrained.
- Authorities welcomed targeted technical assistance to strengthen aspects of domestic capacity, notably public financial management for the Nevis Island Administration (NIA).
- They expressed disappointment that plans to utilize an EU grant to establish a TA fund under the IMF’s supervision were not realized.

### Fiscal performance, CBI proceeds, and debt outcomes
- Authorities viewed the debt restructuring as a significant success.
- Key numeric outcomes highlighted by authorities:
  - Debt to GDP fell to 79 per cent of GDP from a high of 160 per cent.
  - A primary fiscal surplus of 13 per cent had been recorded compared to a small deficit of 0.5 per cent in 2010.
- Authorities noted that significant progress meeting fiscal targets occurred even without the unanticipated rise in CBI proceeds; CBI allowed building sizeable buffers.
- They emphasized the need to manage sovereign wealth from CBI inflows carefully, including by the early repayment of debt, and are considering a dedicated fund with a medium to long-term investment horizon.
- Central government and ECCB agreed that gross financing needs remained too high; authorities argued reducing them (particularly via Treasury bill restructuring) during the program would have been difficult and potentially damaging to the credibility of the instrument and social/financial stability.
- Authorities agree that lengthening the maturity structure to ease short-term gross financing needs remains important and they are working to do this through regular debt operations in the near-term.

### Nevis Island Administration (NIA) — ownership and conditionality
- Central government thought the program could have usefully introduced specific conditionality on the NIA to strengthen public financial and cash management.
- They argued Fund monitoring focused primarily on the general government fiscal position, leaving the central government to bear most adjustment.
- They felt the pace of reform had been weaker in the NIA as structural reforms focused on central government actions.
- Nevis Island authorities agreed fiscal discipline was only entrenched late in the program and noted that greater involvement of the former Nevis Island government in program negotiations could have led to stronger ownership.

### Financial sector resilience, BSRF, and liquidity challenges
- Authorities noted the domestic financial system remained resilient despite the debt-land swap.
- They viewed the Banking Sector Reserve Fund (BSRF) as a valuable safety net that strengthened the government’s capacity to make decisions potentially affecting the financial system; the ECCB did not see the BSRF as critical to financial stability during the program.
- Ongoing challenges included managing excess liquidity at banks, which emerged from banks’ high risk aversion and the lack of bankable private sector projects.

### Private sector development, competitiveness, and structural reforms
- Authorities expressed interest in continuing close work with the Fund to enhance private sector development and reorient initiatives like the People Employment Program (PEP) to support entrepreneurship and long-term sustainable growth.
- They reiterated the need for a strategy and targeted policies to boost competitiveness of the external sector and enhance the business environment, which would also strengthen the financial system by creating bankable projects.
- Priorities include:
  - Identifying reforms to raise potential GDP and strengthen the business environment.
  - Reforming the civil service and constraining wages as a percentage of fiscal revenue.
  - Capitalizing fully on tourism potential and attracting Foreign Direct Investment (FDI), supported by a pipeline of private sector investment in hotel accommodation and amenity projects.
  - Diversifying source markets and product offerings, increasing airlift, and developing specialized services (e.g., a terminal for private jets, proposed yachting facilities at Christophe Harbor).
  - Exploring backward linkages to ensure greater local participation in the tourism value chain.
  - Intensifying efforts to develop alternative energy (solar, geothermal) to reduce dependence on fossil fuel imports and lower energy costs.

### Views from members of the previous government and implementation lessons
- Members of the previous government stressed the program should have been designed to protect progress in the face of a subsequent change in government.
- Delays in sourcing technical assistance from development partners (for example on pension reform) compromised achievement of some program targets.
- Authorities reiterated that semi-annual targets may be considered for small states as a way to accommodate capacity constraints, as in other Caribbean members’ ongoing programs.
- The Program was viewed as an important source of capacity building, particularly assistance in public financial management.

### Statement by Mr. Serge Dupont and Mr. Kelvin Dalrymple (October 21, 2015) — key points
- Authorities thanked staff for including the Government in the Ex Post Evaluation and agreed with the main thrust of staff findings.
- They consider the program a success, having broadly met and, in some cases, exceeded the three broad objectives:
  - Comprehensive debt restructuring.
  - Ambitious fiscal consolidation.
  - Strengthening of the financial sector.
- Observations and commitments:
  - The SBA design was appropriate and effective; the program started with strong ownership as a homegrown program.
  - Stated outcomes: debt to GDP fell to 79 per cent of GDP from 160 per cent; primary fiscal surplus of 13 per cent compared to a deficit of 0.5 per cent in 2010; commercial banks were liquid and well capitalized.
  - The Federation successfully implemented components of the regional legislative program for financial sector reform, with priority treatment by the new government in 2015 and passage of the ECCU-wide Banking Act.
  - Given vulnerability to exogenous shocks (economic and natural hazards), authorities are committed to a medium-term agenda focused on fiscal discipline, debt reduction, and an enabling environment for business.
  - Growth prospects are promising but constrained by small size; authorities aim to capitalize on tourism and FDI and to pursue energy diversification.
  - Capacity constraints argued for semi-annual rather than quarterly reviews; other forms of contact could substitute for formal program reviews to allow small teams to focus on benchmark achievement.
  - The Federal Government and the NIA are drawing lessons and working toward enhanced coordination.

*Appendix I. The Views of the Authorities (meetings Sept 10–11, 2015; Statement dated October 21, 2015).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15297.pdf_