St. Lucia: Staff Concluding Statement of the 2022 Article IV Mission
May 31, 2022
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Washington, DC: An IMF mission visited St. Lucia during May 9 – May 23, 2022, for the annual Article IV consultation discussions on economic developments and macroeconomic policies. At the end of the mission, Mr. Guerson, mission chief for St. Lucia, issued the following statement.
While still recovering from the Covid-19 pandemic that severely affected its highly tourism-dependent economy, St. Lucia now confronts a challenge from the war in Ukraine due to its dependence on food and energy imports. These setbacks compound the longstanding problems related to low growth and vulnerability to natural disasters and climate change. In addition, high public debt and large financing needs, which grew significantly during the pandemic, pose significant near-term risks. Fostering a sustainable and inclusive recovery requires to simultaneously address fiscal and financial sector constraints to public and private investment. In the near-term, fiscal support should be provided through spending reprioritization to mitigate the social impact of price pressures. When the recovery is entrenched, the focus should shift to strengthening debt sustainability by adopting a fiscal consolidation plan supported by structural fiscal reforms to facilitate access to financing at better terms and create fiscal space for infrastructure and social investment. Strengthening financial intermediation would improve private sector access to bank credit. Growth and competitiveness could be supported by increasing investment in resilience and insurance coverage of natural disasters, addressing labor market mismatches through training programs, strengthening energy security while lowering energy cost with renewable sources, and supporting economic diversification.
Recent Developments, Outlook and Risks
The rise in commodity prices due to the war in Ukraine has compounded the severe impact of the Covid-19 pandemic. Given its high tourism dependence, St. Lucia was severely hit by the Covid-19 pandemic. Containment measures (border closure, country-wide lockdown) mitigated community spread but the collapse of international arrivals led to an unprecedented 24.4 percent output decline in 2020 and 8 percentage points increase in unemployment from 2019Q4 to 2020Q4. The FY2020 budget deficit, financed largely by multilateral and bilateral assistance, widened to 11.9 percent of GDP due to a collapse in tax revenue and COVID-19-related spending. Gross public debt shot up to 96.9 percent of GDP in FY2020 from 62.1 percent in FY2019. The financial sector remained stable and liquid, but nonperforming loans inched up, though contained by a loan service moratorium granted by the banks and credit unions. Buoyed by pent-up tourism demand in source countries and diversion from competing destinations with more restrictive entry requirements, tourist arrivals picked up in 2021, which paved the way for a rebound of economic activity with estimated output growth of 12.2 percent, while the surge in commodity prices and supply-side bottlenecks increased inflation to 2.4 percent. In 2022, the war in Ukraine is adding balance of payments and inflationary pressures due to the dependence on oil and food imports. Inflation this year is expected to reach 6.4 percent, eroding income and domestic demand, and increasing social hardship.
Output is projected to recover to the pre-pandemic level by 2024 as tourism returns to pre-pandemic levels, but thereafter growth is expected to decline gradually to 1.5 percent per year. High public debt and large refinancing needs, reflecting large issuance of short-term instruments in recent years, pose significant challenges. On current policies, public debt is projected to remain close to 90 percent of GDP in the medium term, which would not provide sufficient fiscal space for social spending and infrastructure investment. The difficult fiscal outlook, together with tighter global financial conditions and a highly uncertain external environment, could lead to persistently high interest rates on government debt. In turn, interest rates on bank credit would remain high and private investment would slow. Medium term potential growth would remain low, estimated at 1-2 percent per year.
Risks to the outlook are skewed to the downside due to the external and domestic challenges. Given St. Lucia’s import dependency and tourist exposure, the main risks include persistently high global food and energy prices and a resurgence of the pandemic in the main tourist source countries or locally—in part due to vaccine hesitancy by St. Lucians. Large rollover needs on government treasury bills and bonds in the near term imply vulnerability to liquidity pressures. In addition, the ever-present natural disaster risk could intensify with climate change, adding to fiscal pressures. A tightening of global financial conditions above current expectations would increase interest rates and government borrowing costs, as well as erode external competitiveness due to the regional currency union’s exchange rate peg to a stronger US dollar. Government revenues from the Citizenship by Investment Program (CIP) could be hampered due to the recent increased scrutiny by the European Union. The large and growing credit union sector includes institutions with thin capital buffers and high non-performing loans (NPLs) and could therefore amplify the impact of shocks. Failure to advance AML/CFT regulation enhancements in line with the January 2021 mutual evaluation could compromise corresponding banking relations and disrupt international trade.
Economic Policies
In the near-term, the government should pursue fiscal policies to relieve the social hardship from the rise in inflation. Given the incomplete economic recovery and limited fiscal space, government spending should prioritize targeted social support and health spending until the food and energy price pressures subside, and the pandemic no longer poses a major public health threat. This may require postponing lower priority outlays. In addition, lifting of the road fuel price cap should be maintained to preserve revenue from excise taxes on fuel. The revenue could be used for targeted or proxy-targeted transfers and subsidies to protect vulnerable households.
In the medium term, a comprehensive package of fiscal and financial sector reforms is needed to contain risk and unlock St. Lucia’s growth potential. Without decisive policy action, the increased vulnerabilities after successive external shocks since 2020 are a burden on growth prospects. In the absence of a credible fiscal consolidation plan, domestic and regional financing constraints are unlikely to ease. This could lead to persistently high interest rates and reluctance to increase exposure to the government, thereby limiting the margin to respond to shocks. These conditions would keep domestic lending interest rates high and restrict private credit extension by banks despite ample liquidity, slowing private investment and growth.
It is critical to prepare a fiscal consolidation strategy that credibly sets public debt on a downward trajectory that is resilient to shocks. Specific measures and composition could be designed to be growth-friendly and include fiscal space to support the most vulnerable segments of the population. Implementation should start once the recovery is well entrenched and phased over the medium term to ease its impact on domestic demand. The size of consolidation should be anchored on the regional debt target of 60 percent of GDP by 2035, which would require fiscal saving measures of about 2 ½ percent of GDP. Options to increase fiscal saving include expansion of the indirect tax base by streamlining concessions and exemptions that benefit high-income households, increase of the VAT rates, and maintaining restraint in public sector compensation to reduce the wage bill relative to GDP to pre-pandemic levels. Over the medium term, value-based property taxation could be reinstated, and the tax incentives to the tourism sector could be reviewed. Introduction of a well-designed carbon taxation regime, potentially to replace the existing fuel taxation framework, could ease the pass through of oil prices to consumers while also aligning incentives to meet St. Lucia’s carbon emission targets’ commitments.
The growth impact of the consolidation could be further contained by shifting the composition of government spending towards infrastructure and social investment. Without fiscal consolidation, financing constraints would limit the fiscal space for government capital expenditure to 2.3 percent of GDP, which falls short of St. Lucia’s investment needs. A greater allocation towards capital investment, which has higher fiscal multipliers, would reduce the need for fiscal consolidation over the medium term by improving growth prospects. Any fiscal consolidation in excess of 2 ½ percent of GDP could be used to increase social and infrastructure investments, supporting growth and employment and ameliorating the impact of the consolidation. Government plans to strengthen the social safety net, including universal health care and unemployment insurance, are important initiatives and could be designed to be self-financing with actuarially sustainable contributions and charges.
To maximize the favorable impact of the consolidation, complementary institutional fiscal reforms are critically important:
· The debt management bill under preparation would be a positive step and the publication of a debt management strategy would add fiscal transparency. The government’s intention to ease funding risks by increasing average bond maturity and reduce interest cost by relying more on concessional official and bilateral financing would yield fiscal savings. To this end, a strong debt management strategy could improve credibility, increase investor confidence, and lower the effective cost of debt. Such strategy should (i) embed the assessment of the feasibility of debt issuance; (ii) include a medium-term financing plan by debt category and instrument; (iii) be formally approved, publicly disclosed, and reported on periodically; and (iv) complemented by a forward-looking cash management strategy covering several quarters to avoid liquidity strains and excessive reliance on costly bank overdrafts.
· Fiscal consolidation should be supported by the adoption of a medium-term fiscal responsibility framework with a credible debt reduction path that is resilient to shocks and is clearly communicated. Adoption of a fiscal rule would support the credibility of the fiscal consolidation plan and ease access to financing at better terms, thereby supporting the debt management strategy objectives. The fiscal rule could be anchored on debt targets linked to operational fiscal balance targets that can be easily monitored. To strengthen its credibility, the fiscal rule would require a comprehensive definition of fiscal activities, internalization of natural disaster costs and escape clauses for such events with clear and verifiable triggers, and enforceability through robust accounting procedures and independent oversight.
· Other fiscal reforms to strengthen the fiscal sustainability outlook include ensuring pension sustainability by adopting parametric reforms in line with the upcoming actuarial review, adopting public financial management enhancements, and further strengthening the CIP due diligence and transparency processes to maintain visa-free access to key regions.
Unlocking the growth potential of the private sector also requires strengthening financial intermediation. The fiscal consolidation would set a strong base to ease credit conditions to the private sector, but in itself would likely remain insufficient to fully unlock St. Lucia’s growth potential. At present, domestic banks continue to increase their exposures to overseas securities due to long-standing structural impediments to domestic credit. Domestic credit intermediation at lower interest rates could be facilitated by modernizing the insolvency and foreclosure legislation, passing of the legislation to establish the regional credit bureau, and introducing a movable collateral framework. The credit union segment is large and has expanded briskly during the pandemic despite the economic slowdown, and the evolution of NPLs, restructured loans, and moratorium loans warrant close monitoring. The Financial Services Regulatory Authority’s plan to carry out an asset quality review of credit unions within a year is timely. Continued strengthening of the credit unions also remains essential, guided by the adoption of stronger prudential regulations in line with international standards and consistent with the regional harmonization effort. Maintaining progress on AML/CFT recommendations will help protect correspondent banking relationships.
Specific structural investments are critical to increase growth potential and to reduce output volatility. Key priorities include:
- Investment in physical and financial resilience to natural disasters and climate change through a fully integrated strategy. Investment in resilient infrastructure is costly, but the return outweighs the cost, supports growth, and improves the fiscal sustainability outlook. Staff analysis indicates that investment that is resilient to natural disasters lowers reconstruction spending after each event, limits the output decline, and accelerates the recovery. In addition, it can increase the level of output by over 5 percent and tax revenue by about 1 percent of GDP in the long term. The government’s National Adaptation Plan (NAP), which defines a 10-year process with projected full implementation by 2028 is an important step. However, its implementation is costly. In light of the government fiscal constraints, the implementation would benefit from an integrated strategy that considers all the costs and benefits of resilient investments in a comprehensive macroeconomic framework. In addition, the plan would benefit from fiscal reforms that integrate climate adaptation objectives in government budget practices, public financial management and public procurement. Given the long time needed to build structural resilience, a strong disaster insurance strategy is necessary during the transition phase while resiliency is built.
- Tackling labor market skill mismatches. Expanding technical and vocational education and training (TVET) programs could help in reducing skill mismatches, enhance opportunities for self-employment, and improve labor productivity, thereby helping reduce unemployment.
- Investment in renewable energy to enhance energy security and reduce energy cost. The transition to renewable energy, including the expansion of solar and exploration of geothermal generation, should be expedited to decrease electricity cost and the vulnerability to oil price shocks.
- Increase economic diversification to boost lagging productivity growth. Sectors with potential for export diversification includes business process outsourcing (BPO), agro-processing, and health and wellness industries.
The IMF staff team is grateful to the St. Lucian authorities and other counterparts for their time and constructive discussions.
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Table 1. St. Lucia: Selected Social and Economic Indicators, 2018–27 |
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I. Social and Demographic Indicators |
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Area (sq. km) |
616 |
Infant mortality (per thous. live births, 2020) |
22 |
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Human Development Index ranking (of 189 countries, 2020) |
85 |
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Population Characteristics |
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|
Total (thousands, 2021) |
184.4 |
Gross Domestic Product (2021) |
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|
Rate of growth (average 2010-2021) |
0.53 |
(millions of US dollars) |
1,691 |
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|
Population density (per sq. km., 2021) |
299.4 |
(millions of EC dollars) |
4,566 |
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|
Secondary education enrollment (percent, 2019) |
90 |
(US$ per capita) |
9,172 |
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|
Life expectancy at birth (years, 2019) |
76 |
Gross National Income per Capita (US$, 2020) |
8,790 |
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II. Economic and Financial Indicators |
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|
Est. |
Projections |
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|
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
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|
(Annual percentage change, unless otherwise specified) |
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|
Output and prices |
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|
Real GDP (at market prices) |
2.9 |
-0.7 |
-24.4 |
12.2 |
9.1 |
5.8 |
3.8 |
2.0 |
1.7 |
1.5 |
|
|
Real GDP (at factor cost) |
3.1 |
0.2 |
-24.6 |
11.5 |
9.1 |
5.8 |
3.8 |
2.0 |
1.7 |
1.5 |
|
|
Consumer prices, period average |
2.6 |
0.5 |
-1.8 |
2.4 |
6.4 |
2.7 |
2.2 |
2.0 |
2.0 |
2.0 |
|
|
Output gap (percent of potential GDP) |
1.2 |
-1.4 |
-19.1 |
-10.0 |
-4.3 |
-2.5 |
-1.3 |
-0.8 |
-0.2 |
0.0 |
|
|
Unemployment rate (% annual average) |
20.2 |
16.8 |
21.7 |
21.9 |
… |
… |
… |
… |
… |
… |
|
|
Real effective exchange rate |
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|
(annual average, depreciation -) |
102.6 |
103.3 |
99.7 |
… |
… |
… |
… |
… |
… |
… |
|
|
(In percent of GDP, unless otherwise specified) |
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Central government balance 1/ |
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|
Revenue |
22.1 |
21.6 |
22.1 |
23.7 |
23.1 |
22.5 |
22.3 |
22.3 |
22.3 |
22.2 |
|
|
Taxes |
19.2 |
19.4 |
19.4 |
20.3 |
19.7 |
19.6 |
19.4 |
19.4 |
19.3 |
19.3 |
|
|
Non-tax revenue |
2.1 |
1.5 |
1.6 |
2.1 |
1.9 |
1.9 |
1.9 |
1.9 |
1.9 |
1.9 |
|
|
Grants |
0.8 |
0.7 |
1.1 |
1.3 |
1.4 |
1.0 |
1.0 |
1.0 |
1.0 |
1.0 |
|
|
Expenditure |
23.2 |
25.1 |
34.0 |
30.1 |
29.0 |
24.8 |
24.7 |
24.5 |
24.5 |
24.6 |
|
|
Current primary expenditure |
17.2 |
18.6 |
23.8 |
21.5 |
20.4 |
18.8 |
18.7 |
18.7 |
18.6 |
18.6 |
|
|
Interest payments |
3.0 |
3.0 |
3.9 |
3.6 |
3.5 |
3.6 |
3.6 |
3.6 |
3.6 |
3.7 |
|
|
Capital expenditure |
3.0 |
3.5 |
6.3 |
5.0 |
5.1 |
2.4 |
2.4 |
2.3 |
2.3 |
2.3 |
|
|
Natural disaster (ND) annualised cost |
… |
0.0 |
0.0 |
0.0 |
0.7 |
0.7 |
0.7 |
0.7 |
0.7 |
0.7 |
|
|
Primary balance, excl. ND cost |
1.9 |
-0.5 |
-8.0 |
-2.9 |
-2.4 |
1.3 |
1.2 |
1.4 |
1.4 |
1.3 |
|
|
Primary balance, incl. ND cost |
… |
-0.5 |
-8.0 |
-2.9 |
-3.1 |
0.6 |
0.5 |
0.7 |
0.7 |
0.7 |
|
|
Overall balance excl. ND cost |
-1.0 |
-3.5 |
-11.9 |
-6.5 |
-5.9 |
-2.3 |
-2.4 |
-2.2 |
-2.3 |
-2.4 |
|
|
Overall balance, incl. ND cost |
… |
-3.5 |
-11.9 |
-6.5 |
-6.6 |
-3.0 |
-3.0 |
-2.9 |
-2.9 |
-3.0 |
|
|
Central government debt |
56.9 |
58.7 |
91.6 |
86.5 |
82.1 |
78.6 |
77.2 |
76.8 |
76.6 |
76.7 |
|
|
Total public sector debt 2/ |
60.4 |
62.1 |
96.9 |
92.2 |
91.8 |
90.0 |
89.4 |
89.0 |
88.3 |
87.5 |
|
|
Domestic |
31.1 |
32.3 |
50.4 |
44.2 |
39.2 |
36.7 |
35.1 |
34.4 |
34.0 |
34.0 |
|
|
External |
29.2 |
29.8 |
46.4 |
48.0 |
52.7 |
53.2 |
54.3 |
54.6 |
54.2 |
53.5 |
|
|
Money and credit, end of period (annual percent change) |
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|
Broad money (M2) |
3.4 |
3.2 |
-6.6 |
14.9 |
8.0 |
4.5 |
3.7 |
4.6 |
4.2 |
4.0 |
|
|
Credit to private sector (real) |
-3.5 |
-2.4 |
4.5 |
-2.4 |
-5.4 |
-2.3 |
-2.1 |
-2.9 |
-2.9 |
-2.9 |
|
|
Credit to private sector (nominal) |
-1.0 |
-1.9 |
2.7 |
-0.1 |
0.6 |
0.3 |
0.0 |
-1.0 |
-1.0 |
-1.0 |
|
|
Balance of payments |
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|
Current account balance, o/w: |
1.4 |
5.7 |
-15.7 |
-11.8 |
-6.3 |
-0.8 |
0.8 |
0.8 |
0.6 |
0.4 |
|
|
Exports of goods and services |
54.2 |
57.7 |
29.4 |
42.3 |
55.8 |
58.2 |
59.8 |
59.2 |
58.9 |
58.4 |
|
|
Imports of goods and services |
-47.9 |
-46.2 |
-44.4 |
-53.0 |
-58.4 |
-54.6 |
-54.5 |
-53.8 |
-53.6 |
-53.3 |
|
|
Capital account balance |
0.6 |
1.6 |
1.6 |
1.4 |
1.5 |
1.0 |
1.0 |
1.0 |
1.0 |
1.0 |
|
|
Financial account balance |
3.0 |
0.9 |
-9.1 |
-10.4 |
-4.8 |
0.2 |
1.8 |
1.9 |
1.6 |
1.4 |
|
|
Direct investment |
-2.7 |
-1.5 |
-4.9 |
-4.8 |
-4.6 |
-4.6 |
-4.4 |
-4.3 |
-4.2 |
-4.1 |
|
|
Portfolio investment |
3.6 |
2.5 |
9.1 |
3.3 |
2.8 |
2.8 |
2.8 |
2.8 |
2.8 |
2.8 |
|
|
Other investment |
3.9 |
1.1 |
-11.4 |
-13.3 |
-2.4 |
0.3 |
1.7 |
2.1 |
2.3 |
2.5 |
|
|
Net reserves assets |
-1.7 |
-1.2 |
-2.0 |
4.4 |
-0.7 |
1.6 |
1.7 |
1.2 |
0.6 |
0.2 |
|
|
Errors and omissions |
1.0 |
-6.5 |
4.9 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
|
External debt (gross) 3/ |
61.7 |
61.6 |
79.5 |
78.2 |
78.6 |
77.0 |
76.6 |
75.9 |
74.7 |
73.2 |
|
|
Public |
29.2 |
29.8 |
46.4 |
48.0 |
52.7 |
53.2 |
54.3 |
54.6 |
54.2 |
53.5 |
|
|
Memorandum items: |
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|
Nominal GDP (EC$ millions) 4/ |
5,554 |
5,654 |
4,093 |
4,566 |
5,325 |
5,814 |
6,194 |
6,478 |
6,750 |
7,020 |
|
|
Net imputed international reserves |
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|
Months of imports of goods and services |
3.4 |
4.5 |
3.0 |
3.7 |
3.4 |
3.6 |
3.8 |
3.9 |
3.9 |
3.8 |
|
|
Percentage of demand liabilities |
90.7 |
88.7 |
88.3 |
92.6 |
91.0 |
91.1 |
91.4 |
91.5 |
91.5 |
91.2 |
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Sources: St. Lucia authorities; ECCB; UNDP HDI; and Fund staff estimates and projections. |
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1/ Fiscal year (April–March) basis. Fiscal balances do not include the airport project, which is implemented by a public corporation. 2/ Includes payables and bank overdrafts/ECCB advances. |
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3/ Comprises public sector external debt, foreign liabilities of commercial banks and other private debt. |
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4/ GDP historical series was rebased to 2018 base year in 2020. This increased nominal GDP figures by about 9 percentage points. |
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