## Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with St. Vincent and the Grenadines

_IMF News, May 20, 2009_

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## Bibliographic details
- Published: May 20, 2009

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### Background
- Economic growth and shocks
  - Real output growth estimated to have fallen from 7 percent in 2007 to around 1 percent in 2008, far below potential (estimated at 4½ percent).
  - Tourism sector weakened owing to the U.S. and global growth downturn; construction lost dynamism with completion of major phases in some public sector projects.
- Inflation and prices
  - Inflation peaked at 11.6 percent in September and declined to 8.7 percent by end-2008, reflecting declines in world food and fuel prices.
- External sector
  - External current account deficit improved modestly in 2008 as lower imports offset lower foreign exchange revenues from tourism and a larger food and fuel import bill.
- Credit and banking
  - Private sector credit growth slowed to 3 percent in 2008, compared to 15 percent in 2007.
  - Banking sector largely unaffected by the global financial crisis and remains well capitalized; ratio of nonperforming to total loans remained low.
  - Strains from the fallout of the Trinidad and Tobago-based CL Financial Group created uncertainty in the local financial system; international financial services sector also suffered shocks.
  - An update of a 2004 AML/CFT assessment took place in February–March 2009.
- Fiscal position and public debt
  - Overall deficit reduced to 1.7 percent of GDP in 2008.
  - Factors: larger grants, efforts at tax arrears collection, one-off non-tax revenue, and solid VAT performance leading to a primary surplus (first since 2002).
  - VAT exceeded expectations both in revenue and compliance, surpassing replaced taxes despite growth slowdown.
  - Lower capital expenditure helped contain total government spending.
  - Public sector debt-to-GDP ratio declined to 67½ percent of GDP at end-2008.
- Fund support request
  - Authorities requested support under the Fund’s Exogenous Shocks Facility (ESF): rapid-access component of the ESF (SDR 3.735 million, 45 percent of quota).
  - Fund financing expected to partly offset balance of payments impact and contribute to financing of the fiscal deficit.

### Executive Board Assessment
- Overarching assessment
  - Executive Directors noted a marked decline in real GDP growth due to sharply weaker activity in the tourism and construction sectors following the global slowdown.
  - Balance of payments adversely affected by declines in tourism receipts, foreign direct investment and remittances.
  - Directors welcomed authorities’ commitment to mitigate the external shock with ESF support and to enhance growth potential while ensuring fiscal and debt sustainability.
- Fiscal policy and reforms
  - Directors commended recent steps toward fiscal consolidation and solid progress on social and poverty reduction goals.
  - Welcomed ongoing tax reform, including establishment of a Tax Reform Commission, and commitment to maintain VAT integrity and stability.
  - Recommended continued spending restraint through a prudent public sector wage policy and prioritization of capital expenditure.
  - Encouraged reforms to support medium-term fiscal consolidation: tax and customs reform, civil service reform, and adoption of a medium-term expenditure framework.
- Competitiveness and investment
  - Staff assessed the real exchange rate as broadly in line with macroeconomic fundamentals.
  - Directors encouraged steps to improve external competitiveness by easing infrastructure bottlenecks, reducing institutional rigidities, and lowering the cost of doing business.
  - Noted construction of a new international airport as necessary to develop tourism and improve medium-term growth potential.
  - Stressed importance of sustained fiscal consolidation and timely availability of concessional financing to accommodate the airport project without compromising debt sustainability.
  - Suggested a more flexible timetable for implementation of the airport project, to the extent technically feasible, to help alleviate a possible 2009 financing bottleneck given tight liquidity.
- Financial sector governance
  - Emphasized improving regulatory and supervisory framework for nonbanks as a high priority in light of shocks to offshore and insurance sectors.
  - Encouraged establishment of a single regulatory unit for domestic nonbanks and the international financial service sector.
  - Welcomed authorities’ coordination with other regional governments to address regional financial turmoil from the CL Financial Group fallout.

### Selected Economic Indicators, 2004–09 (est./proj.)
- Output and prices (Annual percentage change, unless otherwise specified)
  - Real GDP (factor cost): 2004: 6.8; 2005: 2.6; 2006: 7.6; 2007: 7.0; 2008: 0.9; 2009: 0.1
  - Nominal GDP (market price): 2004: 8.3; 2005: 7.5; 2006: 11.9; 2007: 9.7; 2008: 10.0; 2009: 3.5
  - Consumer prices, end of period: 2004: 1.7; 2005: 3.9; 2006: 4.8; 2007: 8.7; 2008: 2.9
  - Consumer prices, period average: 2004: 3.0; 2005: 3.7; 2006: 6.9; 2007: 10.1; 2008: 4.2
- Banking system
  - Net foreign assets 1/: 2004: 15.7; 2005: -4.6; 2006: 4.5; 2007: -8.1; 2008: 3.2; 2009: -3.4
  - Net domestic assets 1/: 2004: -2.0; 2005: 11.0; 2006: 15.2; 2007: -0.7; 2008: 5.6
  - Of which: Credit to private sector 1/: 2004: 0.8; 2005: 4.3; 2006: 11.1; 2007: 12.4; 2008: 1.2
  - Broad money: 2004: 13.7; 2005: 6.4; 2006: 7.1; 2007: 2.5; 2008: 1.3
- Public sector (In percent of GDP, unless otherwise specified)
  - Total revenues and grants: 2004: 29.5; 2005: 30.1; 2006: 30.9; 2007: 32.4; 2008: 29.8
  - Total expenditure and net lending: 2004: 33.1; 2005: 35.1; 2006: 34.0; 2007: 34.6; 2008: 34.1; 2009: 33.7
  - Current expenditure: 2004: 25.9; 2005: 27.1; 2006: 26.4; 2007: 25.6; 2008: 26.6; 2009: 26.2
  - Capital expenditure: 2004: 8.0; 2005: 8.9
  - Overall balance: 2004: -3.6; 2005: -5.6; 2006: -3.9; 2007: -1.7; 2008: -3.8
  - Of which: Primary balance: 2004: -1.1; 2005: -2.6; 2006: -0.6; 2007: -0.9
  - Gross public sector debt 2/: 2004: 78.6; 2005: 80.2; 2006: 77.5; 2007: 69.5; 2008: 67.5; 2009: 73.2
- External sector
  - External current account: 2004: -24.8; 2005: -22.3; 2006: -24.1; 2007: -35.1; 2008: -33.7; 2009: -28.9
  - Stayover arrivals (percentage change): 2004: 10.4; 2005: 9.5; 2006: -6.1; 2007: -14.0
  - Public sector external debt (end of period): 2004: 52.9; 2005: 52.0; 2006: 46.4; 2007: 37.0; 2008: 35.0; 2009: 37.2
  - External public sector debt service (In percent of exports of goods and services): 2004: 11.6; 2005: 13.4; 2006: 12.8; 2007: 13.6; 2008: 18.5
  - Real effective exchange rate (- = depreciation) (Annual percentage change): 2004: -3.5; 2005: 0.0; 2006: 0.3; 2007: ...
  - External terms of trade (- = depreciation): 2004: 4.4; 2005: -13.8; 2006: -7.3; 2007: 2.0
- Sources: ECCB; Ministry of Finance and Planning; and Fund staff estimates and projections.
- Notes:
  - 1/ Annual changes relative to the stock of broad money at the beginning of the period.
  - 2/ Net of intra-public sector debt (mainly central government debt to the National Insurance Scheme (NIS)).

*Public Information Notice (PIN) No. 09/63 — May 20, 2009.*

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