## St. Lucia: Staff Concluding Statement of the 2017 Article IV Mission

_IMF News, February 6, 2017_

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## Bibliographic details
- Published: February 6, 2017

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### 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).*

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## References

- [St. Lucia and the IMF](http://www.imf.org/external/country/LCA/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2017/02/06/mcs02062017-st-lucia-staff-concluding-statement-of-the-2017-article-iv-mission_