Press Release: IMF Executive Board Concludes 2014 Article IV Consultation with St. Kitts and Nevis
IMF News, March 27, 2014
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- Published: March 27, 2014
Recent economic performance and context
- On March 19, the Executive Board of the International Monetary Fund (IMF) concluded the 2014 Article IV consultation with St. Kitts and Nevis. The Board also completed the seventh and eighth review under a program supported by a 36-month Stand-by Arrangement (SBA).
- St. Kitts and Nevis is recovering from a four-year economic recession, occasioned by the international financial crisis, the need to restore fiscal sustainability and restructure public debt.
- For 2013, real GDP is estimated to have grown by 1.7 percent, based on a modest recovery in tourism, and a strong pickup in construction related to the Citizenship by Investment (CBI) program and other tourism-related projects.
- Inflation has declined following the introduction of the VAT at end-2010 and the hike in electricity tariffs in early 2011 and remains low and stable.
- The current account deficit is projected to have narrowed from 21.4 percent of GDP in 2010 to 8.5 percent of GDP in 2013, supported by robust CBI and rising tourism receipts and increased capital inflows, which increased international reserves.
- The commercial banks remain resilient despite the recession and the impact of the debt restructuring.
Near-term outlook and growth projections
- The economy is expected to grow by 2.7 percent in 2014 and continue to strengthen over the medium-term towards its potential growth rate of 3–3.5 percent.
- Drivers of the recovery include continued tourism recovery supported by increased airlift capacity and new room capacity, and continued CBI inflows and other projects fueling construction.
Fiscal developments and public debt
- The fiscal consolidation has progressed considerably, reflecting both concerted policy efforts and continued strong CBI revenues which have mostly been saved.
- The overall balance improved from a deficit of 7.8 percent of GDP in 2010 to an estimated surplus of 10.6 percent of GDP in 2013.
- Tax revenues stagnated in percent of GDP after an initial boost from introducing the VAT.
- CBI revenues grew from 2.3 percent of GDP in 2010 to a projected 13 percent of GDP in 2013.
- Current expenditures were compressed through a hiring and wage freeze since 2010.
- The corporatization of the Electricity Company, and interest reductions following the debt restructuring provided for further budgetary savings.
- The stronger fiscal positions enabled the authorities to grant the thirteenth month wage payment in 2013 and increase capital spending.
- Fiscal consolidation and debt restructuring reduced the debt-to-GDP ratio from 164 percent in 2010 to around 105 percent in 2013, but the debt remains high and vulnerable to exogenous shocks.
Executive Board assessment and priorities
- Executive Directors agreed with the thrust of the staff appraisal and commended the authorities’ successful implementation of their home-grown Fund-supported program.
- Directors noted that growth has resumed after four years of contraction; a significant fiscal adjustment has been achieved; and progress has been made in debt restructuring.
- Directors underscored the importance of continued efforts to strengthen the fiscal framework, reduce debt further, and implement growth-enhancing reforms.
- Directors welcomed the authorities’ intention to treat the arrangement as precautionary for the remainder of the program in view of the improved external position.
Policy recommendations and structural reforms
- Fiscal policy and public finances:
- Continue fiscal consolidation to secure medium-term fiscal sustainability.
- Broaden the tax base and strengthen tax administration.
- Contain current outlays and enhance public financial management.
- Exercise greater restraint in future wage increases and public sector hiring, and proceed with civil service reform.
- Save the bulk of Citizenship by Investment receipts to build buffers and consider setting up a stabilization fund to support public debt reduction and productive infrastructure projects.
- Maintain vigilance to prevent a recurrence of external arrears.
- Structural and governance reforms:
- Move swiftly to implement regulations for the Civil Service Act and the Procurement and Contract Act.
- Develop proxy means testing for social safety net programs.
- Submit the Customs Law to parliament.
- These measures aim to create a more efficient and productive public sector that can support a dynamic private sector.
- Debt restructuring:
- Finalize debt restructuring negotiations with remaining bilateral creditors.
- Financial sector:
- Continue strong oversight of the financial sector in close collaboration with the Eastern Caribbean Central Bank.
- Consolidate credit unions’ balance sheets despite progress in strengthening their supervisory framework and increases in their capitalization.
- Facilitate banks’ plans to reduce nonperforming loans and launch land sales to buttress banks’ liquidity.
- Growth-enhancing measures:
- Enhance growth by boosting tourism and its contribution to GDP.
- Support investment in alternative energy to reduce energy costs.
- Strengthen the business and investment climate and ensure investments are yielding expected results, with readiness to review strategy as needed.
International Monetary Fund