St. Lucia: Staff Concluding Statement of the 2017 Article IV Mission
IMF News, February 6, 2017
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- Published: February 6, 2017
Mission summary
- An IMF mission visited St. Lucia during January 16-27, 2017, for the annual Article IV consultation discussions on economic developments and macroeconomic policies.
- Publication date: February 6, 2017.
- Mission team: Mr. Leo Bonato (head), Mr. Gregorio Impavido, Ms. Veronika Sola, and Mr. Gonzalo Salinas.
- Authorities are designing a bold program of economic reforms to be outlined in the forthcoming budget; a credible medium-term fiscal consolidation plan and rapid implementation of the reform agenda are needed to reduce policy uncertainty.
Recent macroeconomic developments and short-term outlook
- 2016 economy:
- Weak tourism activity dampened growth.
- Employment growth in agriculture and construction led to a significant reduction in unemployment in the first three quarters of 2016.
- GDP growth is estimated to have reached 0.8 percent in 2016.
- Declining exports are widening the current account deficit after recent improvements mainly owing to lower oil prices.
- 2017 outlook:
- Moderate growth is expected in 2017, primarily due to continued strong performance in construction and agriculture.
- Positive developments in tourism (increase in hotel rooms and new direct flights from the U.S.) may be stifled by the impact of the new airport tax.
- Medium-term outlook:
- Remains subdued because structural weaknesses impinge on competitiveness and potential growth.
- Downside risks: low global growth affecting tourism, U.S. dollar appreciation reducing competitiveness, tighter global financial conditions increasing interest costs on high public debt.
- Upside risks: stronger-than-projected foreign direct investment inflows if reforms addressing structural vulnerabilities are implemented.
Fiscal position, debt dynamics, and consolidation needs
- Public debt:
- The high public debt currently exceeding 82 percent of GDP requires prompt attention.
- The mission emphasizes the need for a multi-year fiscal consolidation plan to stabilize projected debt dynamics and attain the 2030 debt target of 60 percent of GDP.
- Fiscal consolidation plan:
- Should be adopted as soon as possible and measures should be included in the FY2017/18 budget currently being prepared.
- Benefits cited: clarifying intentions, confirming commitment to fiscal responsibility, reducing risks, minimizing the risk of sudden corrections (which typically involve cuts to capital projects), gaining control over expenditure composition while improving quality.
Recommended fiscal adjustment focus and measures
- Adjustment should concentrate on:
- Broadening the tax base.
- Controlling expenditure.
- Improving financing terms.
- Specific recommendations:
- Further cuts in tax rates should be preceded by a reduction of extensive exemptions that undermine tax system efficiency.
- Consider reducing very high taxes and charges on imports, which are harmful to external competitiveness.
- Control wage dynamics and intensify attrition in the context of a functional assessment of employment needs, given the importance of the public sector wage bill.
- Preserve social spending; gradually refocus from temporary work programs and non-targeted subsidies to targeted social assistance.
- Finance investment in infrastructure, renewable energy, and natural disaster resilience with concessional lending rather than costly bond issuance; use private sector partnerships when feasible.
Natural disaster preparedness and fiscal resilience
- St. Lucia is extremely vulnerable to natural disasters, which entail significant costs: lower investment, lower GDP, higher poverty, and a more volatile revenue base.
- Policies to increase resilience and reduce risks should be integrated into investment, debt, and public financial management frameworks.
- Financing arrangements should be prepared ahead of time through:
- Fiscal buffers.
- Contingent financing plans.
- Risk transfer arrangements.
Fiscal institutions and monitoring
- The medium-term fiscal framework could be supported by an appropriate fiscal rule, enshrined in fiscal responsibility legislation, covering:
- Institutional arrangements.
- Coverage of government and fiscal aggregates with due consideration for capital spending.
- Implementation procedures (including links with the budget process and escape clauses).
- Automatic correction mechanisms; sanctions and supporting mechanisms for enhanced fiscal transparency and accountability.
- Monitoring recommendations:
- Review the definition of central government debt to comply with GFS guidelines.
- Consider expanding the definition of debt to the consolidated non-financial public sector to ensure all public debt is monitored.
- Rapid approval of new public financial management legislation and a new chart of accounts to improve fiscal statistics quality.
Citizenship by Investment Program (CIP) guidance
- CIP revenues should be used primarily to reduce debt, with limits on amounts used to finance high-priority expenditure.
- After relatively few applications in 2016, recent easing of requirements and lowering of costs is expected to increase revenues.
- To minimize fiscal dependence and volatility risks:
- Priority should be given to amortizing existing debt.
- A capped amount could be used for investment projects of primary importance if public investment management is strengthened to ensure high quality.
- Transparency, appropriate governance, and careful due diligence are paramount to reduce sudden-stop risks.
Financial sector: NPLs, correspondent banking relationships, and reforms
- Banks are still burdened by nonperforming loans (NPLs) and the cost of corresponding bank relationships (CBRs) has increased.
- Swift resolution of NPLs is critical to revive credit and economic growth.
- Priority actions:
- Renewed priority to establishing the regional asset management company (ECAMC).
- Urgent adoption of the Insolvency Act and initiation of legislative work to reform the resolution framework to facilitate foreclosures and debt restructuring.
- Progress and remaining issues:
- Authorities made significant progress in increasing compliance with international standards to mitigate reduced CBRs.
- Banks continue to face increasing costs with correspondent banks, also due to low transaction volumes.
Structural reforms and human capital
- Authorities have made significant progress designing a reform strategy under the Caribbean Growth Forum with immediate priorities:
- (i) skills and productivity;
- (ii) logistics and connectivity;
- (iii) investment climate.
- A six-pillar Long-Term National Development Plan focuses on building human and physical capital, strengthening institutions, improving social resilience, and mitigating and adapting to climate change.
- Implementation needs:
- Elaborate specific policies and timelines for implementation in the forthcoming budget presentation.
- A review of the public education sector is overdue given the persistent skills mismatch and large public education system costs.
Statistics and data needs
- Statistics are among the most comprehensive in the region and adequate for surveillance, but lack of resources hampers quality in several areas.
- Data are subject to large revisions, reflecting pre-existing weaknesses as methodological improvements are introduced.
- As St. Lucia intends to subscribe to the Special Data Dissemination Standard, the Central Statistics Office needs adequate resources for data collection and compilation.
- Timeliness of data provision by government agencies needs enhancement.
Key social and economic indicators (2014–17)
- Real GDP growth (at market prices, percent):
- 2014: 0.4
- 2015: 1.8
- 2016 Est.: 0.8
- 2017 Proj.: 0.5
- Real GDP growth (at factor cost, percent):
- 2014: -0.7
- 2015: 1.2
- 2016 Est.: -0.6
- Consumer price index (annual average change, percent):
- 2014: 3.5
- 2015: -1.0
- 2016 Est.: -1.7
- 2017 Proj.: 1.9
- Overall fiscal balance (percent of GDP) 1/:
- 2014: -3.7
- 2015: -2.6
- 2016 Est.: -4.4
- 2017 Proj.: -5.3
- Central government debt (percent of GDP) 1/ 2/:
- 2014: 78.1
- 2015: 77.8
- 2016 Est.: 82.9
- 2017 Proj.: 85.4
- External current account balance (percent of GDP):
- 2014: -8.9
- 2015: -9.4
- 2016 Est.: -8.2
Notes:
- 1/ Fiscal year (April–March) basis.
- 2/ Including guaranteed debt, overdrafts, ECCB advances, and other outstanding payables.
IMF Staff Concluding Statement: St. Lucia: Staff Concluding Statement of the 2017 Article IV Mission (February 6, 2017).