Press Information Notice: IMF Concludes Article IV Consultation with St. Vincent and the Grenadines
IMF News, December 17, 1997
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- Published: December 17, 1997
Background and recent policy actions
- Economy historically heavily dependent on bananas exported under preferential arrangements to the European Union (EU).
- Around 1993 the government accelerated a strategy to:
- create a more efficient banana industry;
- promote diversification through upmarket tourism development, domestic agriculture, and enclave manufacturing.
- Implemented measures and outcomes:
- reduction in shipping and marketing costs for banana exports to the EU;
- initiation of a replanting and rehabilitation program on better banana lands;
- improvement in banana quality;
- strong growth in yacht tourism and major investments in luxury accommodations on Canouan island;
- steps taken to improve the macroeconomic environment and strengthen the incentive framework.
- Statistical capacity: St. Vincent’s statistical base has been deficient; government taking steps to improve scope and quality; IMF Statistical Department technical assistance under discussion.
1997 economic performance and near-term projections
- Real GDP growth in 1997: about 1.5 percent (sluggish, reflecting decline in banana exports).
- Factors contributing to weak growth:
- uncertainties from pressures for dismantling of the EU banana regime;
- pest infestation affecting exports of domestic agriculture to regional markets;
- slower growth in manufacturing value added after closure of a large enclave industry in 1996.
- Inflation: has remained under control due to regional currency arrangement discipline and private sector wage restraint.
- External current account deficit:
- projected to decline to 7.5 percent of GDP in 1997 (from 8.6 percent in 1996) as expected rise in tourism receipts offsets lower banana export earnings.
- Public sector savings:
- projected to remain around 7 percent of GDP in 1997 (roughly the level of the last few years).
- overall fiscal position expected to shift from a surplus of around 1.7 percent of GDP to near balance in 1997 due to expected pickup in investment spending.
- recommendation that an increase in public savings will be needed over the next few years to provide counterpart funds for infrastructural projects.
- Banking and credit:
- bank liabilities to the private sector projected to increase by around 9 percent during 1997, partly based on strong growth in emigrants’ remittances;
- bank credit growth projected to be about 12 percent, mainly due to increase in construction loans.
- External debt and guarantees:
- direct debt and debt-service indicators of the public sector are relatively low;
- authorities negotiating rescheduling of a sizable external loan to the private sector which carries a government guarantee; scheduled debt-service payments on this loan would put serious pressures on the budget over the medium term.
Risks and policy responses
- WTO ruling risk:
- A recent ruling by the World Trade Organization (WTO) could result in an early reduction in EU banana preferences, with adverse implications for the industry and the economy as a whole.
- Authorities’ planned responses include implementation of an extensive irrigation program to raise banana yields and consideration of steps to improve efficiency of the traditional manufacturing sector to cope with likely phaseout of protection in subregional markets.
- Structural and competitiveness recommendations (Executive Board):
- maintain external competitiveness through appropriate financial policies and wage restraint;
- improve the incentive framework by eliminating price controls and import licensing requirements, and reducing bureaucratic and other impediments to foreign investment;
- fiscal adjustment focus on a restrained public sector wage strategy—including elimination of the system of automatic wage increments—and streamlining public sector employment over time;
- improve management and operations of the National Commercial Bank and consider eventual privatization;
- some Directors advised against proceeding with establishment of the National Development Bank and advised avoiding increased government involvement in commercial activities;
- urgent improvement in coverage and quality of statistical base recommended.
Executive Board assessment — key points
- Welcomed steps to improve banana industry efficiency and reduce costs but noted potential severe effects from WTO ruling reducing EU banana preferences; urged rapid completion of irrigation program.
- Welcomed encouraging developments in tourism; expressed concern about prospects for manufacturing sector.
- Emphasized need for further improvements in the incentive framework and maintenance of external competitiveness.
- Urged fiscal restraint focused on wages and public employment streamlining.
- Supported improvements in National Commercial Bank management and consideration of privatization; cautioned against greater government commercial involvement.
- Recommended urgent statistical improvements to support policy formation and IMF surveillance.
Selected economic indicators (as presented)
- Annual percentage changes — Domestic Economy:
- Real GDP: 1993: 0.2; 1994: -2.4; 1995: 7.6; 1996: 1.2; Prel. 1997: 1.5
- GDP deflator: 1993: 3.5; 1994: 4.7; 1995: 0.5; 1996: 3.7; Prel. 1997: 2.6
- Consumer prices (end of period): 1993: 4.5; 1994: 0.4; 1995: 3.1; 1996: 3.6; Prel. 1997: 0.0
- In millions of U.S. dollars — External economy:
- Exports, f.o.b.: 1993: 55.6; 1994: 48.9; 1995: 61.9; 1996: 52.3; Prel. 1997: 44.1
- Imports, f.o.b.: 1993: 118.2; 1994: 115.4; 1995: 119.3; 1996: 126.3; Prel. 1997: 131.1
- Tourism receipts: 1993: 39.4; 1994: 39.0; 1995: 56.2; 1996: 64.0; Prel. 1997: 78.5
- Current account balance: 1993: -41.6; 1994: -30.6; 1995: -16.4; 1996: -23.5; Prel. 1997: -21.1
- Capital account balance: 1993: 39.8; 1994: 31.0; 1995: 16.1; 1996: 23.9; Prel. 1997: 21.3
- Of which Direct investment: 1993: 31.4; 1994: 46.9; 1995: 18.6; 1996: 29.9
- Gross official reserves (imputed): 1993: 84.6; 1994: 82.3; 1995: 78.2; 1996: 79.3; Prel. 1997: 79.8
- Current account balance (in percent of GDP): 1993: -17.5; 1994: -12.6; 1995: -6.2; 1996: -8.6; Prel. 1997: -7.5
- Percentage change in real effective exchange rate (- depreciation): 1993: 6.9; 1994: -3.0; 1995: -4.9; 1996: 4.3; 1997: ...
- In percent of GDP — Financial variables:
- Consolidated public sector balance: 1993: -1.0; 1994: -2.7; 1995: 1.9; 1996: 1.7; Prel. 1997: -0.1
- Change in broad money (in percent): 1993: 5.9; 1994: 5.5; 1995: 8.0; 1996: 4.4; Prel. 1997: 9.0
- Interest rate (in percent) 2: 1993: 4.2
Press Information Notice: IMF Concludes Article IV Consultation with St. Vincent and the Grenadines — December 17, 1997