IMF Survey: Caribbean’s St. Kitts Gets Opportunity for Transformation

IMF News, September 2, 2011

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The IMF’s Executive Board approved a three-year Stand-By Arrangement with St. Kitts and Nevis amounting to about $84 million (EC $228 million).
Program objectives: boost growth, reduce high public debt levels, and indirectly strengthen the regional currency union.

Impact of shocks and decline in activity:
- Hit hard by the 2008–09 global financial crisis.
- Further affected by recent international food and fuel price increases.
- Significant drop in tourism, slowdown in tourism-related construction and foreign direct investment.
- Closure of the largest tourism resort in Nevis following Hurricane Omar.
Fiscal outcomes and vulnerabilities:
- Tax revenue declined 13.5 percent in 2010.
- The deficit widened to 9.4 percent of GDP in 2010.
- At end 2010, St. Kitts and Nevis had a debt of almost 200 percent of GDP—the highest public debt level among all emerging markets and developing countries.
- Population: about 50,000 people.
- Member of the Eastern Caribbean Currency Union (ECCU); solvency issues in one country can spill over to other members.

Fiscal consolidation
- Allow revenue to rise up front and contain spending increases while protecting the most vulnerable groups.
- Implemented measures already yielding results: introduced a value-added tax and increasing electricity tariffs.
- Public sector wage bill frozen until 2013—implying a notable reduction in real wages over the period.
- Capital spending has been prioritized.
Comprehensive debt restructuring
- Process launched to negotiate a comprehensive and substantive public debt restructuring to ensure the burden of adjustment is shared by all.
- Authorities expect that debt restructuring will put public debt on a sustainable trajectory over the medium term.
Strengthening the financial sector
- The banking sector is described as very well capitalized.
- Government established a Banking Sector Reserve Fund—managed by the Eastern Caribbean Central Bank—as a backstopping mechanism for temporary liquidity support for solvent banks, if needed.
IMF financial support
- The IMF loan also provides financial support in the form of an “insurance policy” via the banking sector support fund.
- Quote: “The economic program is a real paradigm change for St. Kitts and Nevis, laying the foundations for strong economic growth and reduced vulnerabilities,” — Alfred Schipke, mission chief for St. Kitts and Nevis, after the IMF Board’s July 27 approval of the loan.

Structural reforms to strengthen public spending efficiency and effectiveness include:
- Improving public financial management.
- Pension reform.
- Civil service reform.
- Social safety net reforms.
Protection of vulnerable groups:
- An essential priority throughout the program period and beyond.
- Ultimate medium-term goal: a coherent social protection strategy that will rationalize programs and better link social assistance to actions aimed at building human capital.

Because St. Kitts and Nevis is an important member of the ECCU, the reform measures are expected to benefit the ECCU as a whole.
Elements of the program could serve as a model for other countries in the region—for example, the Banking Sector Reserve Fund.
The IMF has engaged with various stakeholders in the country to explain the program and its implications.

IMF Survey: Caribbean’s St. Kitts Gets Opportunity for Transformation.