Public Information Notice No. 03/14

Public Information Notice: IMF Concludes 2002 Article IV Consultation with St. Vincent and the Grenadines

February 14, 2003

On January, 27, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with St. Vincent and the Grenadines.¹

Background

St. Vincent and the Grenadines, one of the Windward Islands of the Caribbean, is a small open economy largely agriculture-based (bananas and other crops) with a growing services sector including tourism, telemarketing, and a small offshore financial center. Real GDP grew by a modest ¼ percent in 2001 well below the 4 percent average for the previous three years largely due to the harsh effects of a drought on agriculture and the fall-off in stopover tourists associated with the September 11 attacks and the sluggish global economy. Preliminary estimates for 2002 indicate about a pick up in real GDP growth to around 1 percent due to a strong rebound in agriculture prior to tropical storm Lili in late September, and construction activity as public sector projects were implemented. Inflation was around 1 percent in 2001 and 2002, and unemployment is reported to remain high.

The government of the St. Vincent and the Grenadines is to be commended for achievements in its first eighteen months in a difficult regional and global environment. These include consecutive growth in 2001 and 2002; improvement in overall public sector savings through better enterprise performance, reduced tax exemptions, and improved tax collections. These achievements were underpinned by monitoring of public sector enterprise performance on a quarterly basis; regular consultation with civil society on economic matters; and progress in restructuring the banana industry.

The government's counter cyclical policy helped to avoid a recession and mitigate further loss of employment. The result while positive on the side of economic growth led to degeneration in the overall fiscal position. The public sector overall balance reversed from a ¼ percent of GDP surplus in 2000 to a deficit of 1½ percent of GDP in 2001, and 6 percent of GDP in 2002. This reflected a drop in public sector savings to around 4 percent in 2001 and 2002 from an average of above 8 percent of GDP in previous years. Public investment expanded from 7 percent in 2000 to 9 percent in 2001 and around 12 percent of GDP in 2002, largely financed by grants and commercial borrowings. The central government's overall balance recorded a deficit of 3½ percent in 2002, as the wage bill and capital program increased significantly. Preliminary estimates indicate that public sector debt rose to 72 percent of GDP in 2002 from 67 percent in 2001, of which about three quarters is external on concessional terms and of long-term maturity.

St Vincent and the Grenadines was removed from the Organization for Economic Cooperation and Development's (OECD) list of tax havens in 2002, but remains on the Financial Action Task Force's (FATF) list of non-cooperative countries and territories in the fight against money laundering. The authorities are strengthening the regulatory and supervisory framework in line with international best practices. The number of offshore banks fell from 38 in 2001 to around 20 at end-2002.

The external current account deficit remains broadly unchanged at 11¾ percent of GDP in 2002 largely financed by official capital inflows and foreign direct investment. Export receipts from bananas, despite an increase in volume, will remain flat because of lower international prices. Tourist receipts are expected to be somewhat lower than 2001 reflecting significant declines in excursionists, yacht, and cruise passenger arrivals.

The government has made significant progress in improving public sector governance, restructuring the banana sector, strengthening the financial sector, and building consensus for difficult policy issues, including a wage freeze in the public sector. Public enterprises have come under increased financial scrutiny in an effort to improve their financial performance. Poverty reduction remains at the center of the government's economic strategy.

Executive Board Assessment

Directors agreed with the thrust of the staff appraisal. They commended the authorities for their success in maintaining macroeconomic stability in a very difficult regional and global environment. They noted that, despite recent external setbacks—including the recent tropical storm, the events of September 11, and the global economic slowdown—St. Vincent and the Grenadines had achieved modest real growth in 2002, above the average for the Eastern Caribbean Currency Union (ECCU) as a whole, and that inflation was subdued. However, unemployment remained high.

Directors expressed concern about the overall fiscal deterioration and the rise in public sector debt, and urged early fiscal consolidation. Strong actions, including additional measures to rein in recurrent expenditures, will be required to meet the government's target for the central government deficit. Over the medium term, continued efforts will also be necessary to improve the operations of public enterprises. Directors cautioned against expensive overseas borrowing, welcomed the progress on the resolution of the Ottley Hall debt, and urged the government to limit additional borrowing.

Directors expressed concern about the recent growth in the public sector wage bill. Tighter control, including a cap on civil service employment, would be important, and the government should consider the bonus paid in December 2002 as part of any negotiated wage increases for 2004. Any further increases in public sector wages would undermine the economy-wide need for wage restraint in order to enhance competitiveness. On capital spending, Directors underlined the need to prioritize and focus on projects that will promote growth and poverty reduction, while taking advantage of available concessional funding.

Turning to revenues, Directors emphasized that efforts should focus on reform of the tax system over the medium term. A reduction in discretionary exemptions could permit a further lowering in tax rates. With the deadlines imposed by the Caribbean Community (CARICOM) and the Free Trade Area of the Americas (FTAA), the authorities were encouraged to broaden the tax base, and to reduce reliance on trade tariffs. In this connection, a VAT-type tax should be introduced—preferably on a regional basis—in advance of the trade liberalization.

Directors noted that the health of the financial system needed to be bolstered by improvements in the prudential framework of the non-bank sector. The planned unified supervisory agency should be introduced as soon as possible. Directors welcomed plans to restructure the National Commercial Bank, which should provide a basis for the early divestment of the bank. The prospects for the offshore sector were seen to be weak, and the authorities were urged to take steps to intensify supervision and close banks if necessary, to avoid a drain on the budget.

Directors welcomed the recent efforts to strengthen the mechanisms to combat money laundering and the financing of terrorism. Such efforts should be continued.

The medium-term strategy should focus on consolidating the fiscal position and accelerating structural reforms to promote private sector-led growth. Given the fixed exchange rate, they emphasized improving competitiveness as a crucial objective, achievable through public sector wage restraint, productivity enhancing reforms, and an enabling business environment. The government should seek opportunities to enhance public sector efficiency through privatization.

Directors noted that economic data need improvement in key areas, including public sector debt, the capital account of the balance of payments, the finances of public enterprises, and labor statistics.