St. Kitts and Nevis: Staff Concluding Statement of the 2017 Article IV Mission
IMF News, May 12, 2017
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- Published: May 12, 2017
Economic performance and recent macro outcomes
- Economy grew 3.2 percent in 2016, compared to 4.9 percent in 2015.
- 2017 marked expected growth for the 5th consecutive year.
- Overall fiscal surplus in 2016: 4.2 percent of GDP (deteriorated versus 2015, mainly due to lower CBI receipts).
- Underlying overall balance (excluding SIDF grants, CBI-related receipts and due diligence expenditure) remains in deficit, around 3.3 percent of GDP.
- Public debt projected to reach the 60 percent ECCU debt-to-GDP target by 2018.
- Significant widening of the current account deficit driven by lower CBI-budgetary receipts and a larger trade deficit.
Citizenship-by-Investment (CBI) program and integrity measures
- Strong macro performance owes much to robust CBI inflows and their spillovers.
- Authorities have strengthened the due-diligence process with dedicated resources and global collaboration to reduce integrity and security risks and preserve program credibility.
- Elevated risks to CBI inflows and risks associated with completion of the debt-land swap motivated the mission’s emphasis on safeguarding macro and financial stability.
Outlook and risks
- Medium-term growth projection: 2.7 percent for 2017; expected to average around 3 percent in the medium term.
- Growth drivers/offsets: projected slowdown in construction offset by public infrastructure investment and higher tourism growth (new tourism facilities coming on stream in 2017-19).
- External current account deficit expected to remain large as CBI inflows taper off.
- Downside risks include:
- Further delays in completing the debt-land swap.
- Sharp drop in CBI inflows due to more acute competition and global security concerns.
- Stronger U.S. dollar, tighter financial environment, more severe Zika epidemic, major natural disaster.
- Loss of correspondent banking relationships (CBRs).
- Softer global climate change policy exacerbating natural-disaster risks.
- Upside factors include stronger CBI inflows (from program reforms and tougher U.S. immigration policies elsewhere) and weaker oil prices.
Fiscal framework and policy priorities
- 2017 policy priorities: preserve gains in fiscal sustainability, support growth, strengthen resilience.
- Strategy: control government recurrent spending while scaling up public investment.
- 2017 budget: no new taxes proposed; streamlining concessions over the next 2-3 years and implementing public financial management reform.
- Medium-term fiscal framework should focus on reducing reliance on CBI inflows in a world of heightened uncertainty.
- VAT and import-duty exemptions since 2014 have weakened the fiscal framework.
- An extreme scenario of a sharp drop in CBI inflows could erode fiscal buffers as early as 2020 and risk reversing the downward debt trajectory absent fiscal adjustment.
Recommended fiscal anchor and adjustment path
- A medium-term fiscal framework anchored to a balanced underlying primary-balance target would increase resilience to sharp drops in CBI inflows.
- Needed adjustment: about 2.1 percent of GDP paced over 3-5 years.
- Recommendation to enshrine the target and the ECCB-debt target in fiscal responsibility legislation, with windfall CBI inflows excluded from the rule and saved in a contingency fund.
- Approval of an action plan by both Cabinets to meet the primary balance target at the country level is key.
Revenue measures
- Broaden the tax base, including by streamlining tax incentives and improving tax administration.
- Revenue loss from tax incentives remains high: 6.4 percent of GDP (both discretionary and granted by legislation).
- Suggestions: transparent, rule-based, well-targeted tax incentives; update property valuations; enhance compliance.
- Consider taxes on cigarette, alcohol, and sugary products consistent with CARICOM initiatives.
Expenditure and public wage policy
- Contain spending on goods and services and the public wage bill.
- Establish a more predictable system for public pay-packages; ensure pay increases consistent with budgetary constraints, macro developments, and benchmarking with private sector wages.
- Consider setting a ceiling on the public-wage bill guided by the medium-term fiscal framework anchored to debt and primary-balance targets.
- Cabinet allocations to line ministries should reflect the envisioned qualification- and performance-based incentive system.
Health coverage and social spending
- Plans to introduce universal health-coverage (UHC) are commendable but fiscal implications must be carefully managed.
- UHC design, coverage, and financing should limit fiscal sustainability risk; scheme should be funded from permanent revenue sources.
- Benefit package should ensure financial viability and target the poor; use incentives and regulatory tools to contain costs.
- Draw on expertise from PAHO and the World Bank to tailor the scheme.
Growth and Resilience Fund (GRF) and liability management
- Support for establishment of a Growth and Resilience Fund with a simple sovereign-wealth-fund structure, prudent investment strategy, and flows integrated with the fiscal framework.
- Welcome agreement on the budgetary arrears with PDVSA and near-agreement on NIA debt-restructuring.
- Support further liability-management efforts: reduce outstanding T-bills, accelerate payment of expensive debt, and improve debt terms.
- Consider transferring revenue from CBI flows and resulting SIDF deposits to the GRF once established.
Public financial management and structural reforms
- Urgent attention needed to strengthen public financial management.
- Contain SIDF’s quasi-fiscal spending by streamlining activities and integrating with the general government’s consolidated account.
- Enhance oversight of public corporations with timely reporting of financial statements.
- Strengthen the NIA’s debt and cash management frameworks.
- Encourage approval of measures to finalize the debt-land swap and accelerate land sales.
Debt-land swap and land sales
- Sale of lands under the debt-land swap must be completed urgently to limit fiscal and financial risks.
- Need a clear action plan and timetable with concrete milestones.
- Complete existing purchase proposals and step up marketing (real-estate agents and SLSC website) to generate sales and remove policy uncertainty.
- Cooperation with CIU and SKIPA is welcome; ongoing discussions on renewal of the dividend-guarantee agreement with banks at renegotiated terms are noted.
Financial sector risks and banking system
- Continue strong efforts to reduce CBR risks and maintain CBI-program integrity.
- Authorities improved compliance with international AML/CFT standards and exchange of information; jointly working with the ECCB to implement AML/CFT standards.
- Banks face higher costs (higher fees, lengthier transactions, increased due diligence); open communication between respondent and correspondent banks has helped limit loss of CBRs.
- Introducing Basel II and continued implementation of risk-based supervision should improve perceptions.
- Consider amalgamation opportunities to address volume-of-business concerns and improve risk-management capability.
- High levels of nonperforming loans (NPLs) persist; swift resolution is critical to limit further deterioration, revive credit expansion, and support growth.
- Establishment of the ECAMC expected to improve collection and disposal of distressed assets.
- Modernizing foreclosure and insolvency frameworks, new collateral appraisal guidelines, credit bureau, and land registry should help contain future NPL losses.
Monitoring and contingency for CBI slowdown impacts
- Monitor implications of a slowdown in CBI inflows for the banking system; direct impact may be limited but indirect effects via reduced construction activity and borrower repayment capacity are possible.
- Ensure adequate prudential oversight to minimize potential effects from further slowdown in CBI inflows and the ending of the 5-year holding-period for existing CBI properties.
Structural constraints to inclusive growth and recommended reforms
- Adopt a comprehensive strategy to overcome persistent structural challenges that limit inclusive growth.
- Ongoing reforms: expedite business registration, establish dedicated land-registry, credit bureau, SME partial-credit-guarantee scheme, and revise foreclosure legislation.
- Consider channeling alternative investment options under the CBI program to renewable energy, health, education, skills development, and economic diversification to reduce asset-bubble risk.
- Soft-skills training: enforce time-bound participation upon certification and set stipends below the minimum wage.
- Avoid substantial rise in the minimum wage without increased productivity.
- Focus on housing programs for the poorest and emphasize gender gaps in the National Social Protection Policy.
- Continue actions to reduce crime via increased CCTV and community-related programs.
Data, technical assistance, and mission engagement
- Authorities welcome Technical Assistance to improve availability and quality of data for balance of payments, national accounts, and labor market and social statistics.
- Mission dates: visited St. Kitts and Nevis during April 18-May 4 to conduct the 2017 Article IV consultation.
- Mission expresses thanks to authorities and technical staff for constructive discussions and cooperation.
IMF Staff Concluding Statement, May 12, 2017