IMF Executive Board Concludes 2017 Article IV Consultation with St. Kitts and Nevis
IMF News, July 5, 2017
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- Published: July 5, 2017
Economic performance in 2016 and key developments
- Economic performance moderated in 2016: growth moderated reflecting the deceleration in tourism-linked sectors and contraction in manufacturing output, while still exceeding the average growth in the Eastern Caribbean Currency Union (ECCU) region.
- Lower Citizenship-By-Investment (CBI) receipts were a key factor contributing to:
- a narrowing of the overall fiscal surplus, and
- a significant widening of the current account deficit.
- Consumer inflation was negative in early 2016 due to a favorable tax environment and low international fuel prices; end-year inflation turned positive as these effects subsided.
- Public debt fell further and was projected to reach the ECCU debt-to-GDP target in 2018, well ahead of ECCU peers.
- The banking sector remained stable but faced risks, including:
- slow progress with the sale of land swapped for public debt,
- weak asset quality, and
- loss of Correspondent Banking Relationships (CBRs).
Outlook, projections, and assumptions
- Growth:
- Growth is expected to average around 3 percent in the medium term under current policies and conservative assumptions about future CBI flows.
- Projected drivers: offsetting slowdown in construction linked to lower CBI inflows by public infrastructure investment and higher tourism growth as source market growth accelerates and new tourism facilities come on stream through 2019.
- Inflation:
- Inflation is projected to rise with the expected rise in fuel prices, remaining around 2 percent in the medium term.
- Current account:
- The current account deficit should remain large with CBI inflows tapering off.
- Key risks to the outlook:
- a sharper drop in CBI inflows,
- further delays in completing the sale of lands under the debt-land swap arrangement,
- loss of CBRs, and
- a stronger U.S. dollar.
- Upside potential:
- Stronger-than-expected CBI inflows from ongoing reforms and continued oil-price weakness could lead to upside surprises.
Executive Board Assessment — findings and policy recommendations
- Directors’ overall assessment:
- Welcomed the authorities’ commitment to sound economic management and continued efforts to strengthen their policy framework which produced favorable outcomes.
- Noted the medium-term outlook is favorable with public debt expected to fall below the ECCU target in 2018, but growth has moderated and lower CBI inflows have weakened fiscal and external accounts.
- Emphasized vulnerability to risks outlined above and called for policies to limit fiscal and financial sector risks and support strong, inclusive growth.
- Fiscal policy recommendations:
- Adopt a medium term fiscal framework with a zero underlying primary balance target, which excludes CBI inflows.
- Enshrine the framework in fiscal responsibility legislation while preserving priority spending that contributes to long-term inclusive growth, including infrastructure investment, social sector spending, and poverty alleviation.
- Implement measures to broaden the tax base, streamline tax incentives, and improve tax administration.
- Contain the public wage bill, spending on goods and services, and quasi‑fiscal spending of the Sugar Industry Diversification Foundation.
- Improve oversight of public corporations and fiscal management of the Nevis Island Administration.
- Encourage further prepayment of expensive debt and carefully manage fiscal implications of the planned universal health coverage.
- Growth and Resilience Fund:
- Welcomed commitment to establish a Growth and Resilience Fund to preserve and manage fiscal savings from CBI inflows.
- With a prudent investment strategy and flows integrated with the fiscal framework, the fund should be prioritized for debt reduction and building resilience against natural disasters.
- Encouraged preparation for natural disasters through a comprehensive framework involving risk reduction via public infrastructure investment and risk mitigation through fiscal buffers, risk‑transfer arrangements, and contingent financing plans.
- Financial sector recommendations:
- Urged completion of the land sales to limit fiscal and financial risks.
- Supported continued efforts to improve compliance with international AML/CFT standards, implement risk‑based supervision, and maintain open communications to reduce correspondent banking risks.
- Noted that ongoing regional and national efforts to resolve problem loans, including operationalization of the Eastern Caribbean Asset Management Corporation and modernizing foreclosure legislation, can help revive private sector credit growth.
- Structural reforms to boost inclusive growth:
- Priorities include improving the business environment, supporting skills‑development and economic diversification, strengthening wage‑productivity links, improving global and regional connectivity, better targeting social programs, and reducing gender gaps and crime.
- Urged progress in improving availability of reliable data to enhance the quality of surveillance and policymaking.
Selected economic and financial indicators (Estimates and projections)
- National income and prices (Percentage change)
- Real GDP (factor cost) 1/: 2015 = 4.9, 2016 = 3.1, 2017 = 2.7, 2018 = 3.5, 2019 = 3.2
- Consumer prices, end-of-period 2/: 2015 = -2.4, 2016 = 0.9, 2017 = 1.5, 2018 = 2.0
- Consumer prices, period average 2/: 2015 = -2.3, 2016 = -0.7, 2017 = 1.2, 2018 = 1.8
- Banking system (Annual percentage change)
- Change in net foreign assets 3/: 2015 = -5.3, 2016 = -1.3, 2017 = 0.7, 2018 = -0.6
- Credit to public sector 3/: 2015 = -0.8, 2016 = -5.1, 2017 = 0.4, 2018 = 1.0
- Credit to private sector 3/: 2015 = -0.2, 2016 = 1.7, 2017 = 1.9
- Broad money: 2015 = 2.5, 2016 = -4.0, 2017 = 3.3
- Public sector (In percent of GDP)
- Total revenue and grants: 2015 = 38.8, 2016 = 34.3, 2017 = 31.0, 2018 = 29.9, 2019 = 28.1
- o/w Tax revenue: 2015 = 21.4, 2016 = 20.6, 2017 = 20.7, 2018 = 20.8
- o/w CBI fees: 2015 = 12.4, 2016 = 7.2, 2017 = 3.9, 2018 = 3.7
- Grants: 2015 = 1.3
- Total expenditure and net lending 5/: 2015 = 33.1, 2016 = 30.1, 2017 = 31.8, 2018 = 31.3, 2019 = 30.0
- Primary balance: 2015 = 7.8, 2016 = 6.0, 2017 = 0.3, 2018 = -0.4
- Overall balance: 2015 = 5.7, 2016 = 4.2, 2017 = -1.4, 2018 = -1.9
- Overall balance (less CBI inflows) 6/: 2015 = -6.7, 2016 = -3.7, 2017 = -6.6, 2018 = -6.1, 2019 = -4.6
- Total public debt (end-of-period)7/: 2015 = 70.6, 2016 = 65.6, 2017 = 61.7, 2018 = 59.0, 2019 = 56.1
- External sector (In percent of GDP)
- External current account balance 8/: 2015 = -9.2, 2016 = -17.3, 2017 = -18.5, 2018 = -17.9, 2019 = -18.1
- Trade balance 8/: 2015 = -27.4, 2016 = -30.2, 2017 = -28.2, 2018 = -27.5, 2019 = -27.0
- Services, net: 2015 = 16.6, 2016 = 11.6, 2017 = 8.6, 2018 = 8.9, 2019 = 8.2
- o/w Tourism receipts: 2015 = 14.7, 2016 = 14.8, 2017 = 15.2, 2018 = 15.7
- External public debt (end-of-period): 2015 = 26.9, 2016 = 21.6, 2017 = 18.5, 2018 = 16.2, 2019 = 14.1
- Memorandum items
- Net international reserves (in millions of U.S. dollars): 2015 = 280.4, 2016 = 312.9, 2017 = 336.9, 2018 = 351.7, 2019 = 348.0
- Nominal GDP at market prices (in millions of EC$): 2015 = 2,366, 2016 = 2,429, 2017 = 2,534, 2018 = 2,676, 2019 = 2,820
IMF Communications Department — Press Release No. 17/261; July 5, 2017. Executive Board concluded Article IV consultation with St. Kitts and Nevis on June 16, 2017.