Public Information Notice No. 11/157

Public Information Notice: IMF Executive Board Concludes 2011 Article IV Consultation Discussions with United Kingdom–Anguilla–British Overseas Territory

December 13, 2011

On November 28, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the first ever Article IV consultation discussions with United Kingdom–Anguilla–British Overseas Territory.¹

Background

Anguilla has experienced a boom-bust cycle related to the global crisis and faces a persisting hangover. Several large resort projects fueled a FDI boom during 2003–08, which doubled nominal GDP. The stalling of one of these projects and the global crisis led to declines in real GDP of 16.5 percent in 2009 and 5.9 percent in 2010 respectively. The fiscal situation deteriorated sharply as revenue collapsed while expenditure remained elevated after the increases during the boom years, notwithstanding a series of fiscal measures.

The downturn has accentuated strains on the financial system. The asset portfolio of the banking system, which is concentrated in construction, tourism, and personal loans, was

adversely affected, and the ratio of nonperforming loans to total loans in the indigenous banks increased to 36 percent by end-June 2011.

The growth outlook is improving with the major tourism projects getting back on course, though a slow recovery is only expected to begin in 2012. Risks are tilted to the downside given the global outlook. Nevertheless, balancing the overall budget by the start of 2013 will be challenging.

Executive Board Assessment

The Executive Directors noted that the severe boom-bust cycle related to the global crisis has accentuated weaknesses in the financial sector, undermined the fiscal position, and pushed the island into recession. They concurred that urgent action is needed to improve the health of the financial sector, to stabilize public finances, and to increase the potential for long-run economic growth.

Directors agreed that close cooperation will be needed to address financial sector vulnerabilities, particularly those related to the indigenous banks. They recommended developing a strategy to strengthen the banks’ capital and clean up their balance sheets and underscored the need for an action plan which could usefully spell out the respective roles of the key players.

Directors emphasized that a new fiscal framework is needed with an appropriate balance between current and capital expenditure and in line with the resources available. Fiscal policy should be designed to meet the combined objectives of debt sustainability, deficit reduction, and long-term economic growth. Given financing constraints and economic vulnerabilities, they urged the government to accumulate buffers during good times to allow for countercyclical spending during slowdowns. As part of the new framework, they suggested that the 2012 budget restore capital spending to historical levels, cut current spending, while ensuring adequate revenue given financing constraints.

Directors welcomed efforts toward reforming the inefficient and inequitable tax system. They supported a comprehensive tax reform that would simplify the tax structure and broaden the tax base. They noted that a general consumption-based tax such as a VAT/GST and a permanent income tax would attain both objectives. The complex system of customs duties and exemptions should be replaced with a tariff with few rates and limited exemptions.

Directors noted that the tourism sector, the driver of the economy, has begun to recover, benefiting from its high-end focus. They were encouraged that prospects have brightened now that the two major tourism projects are getting back on track. However, they recognized that air and sea access to the island needs to be improved.

Directors agreed that a fundamental course change is needed to increase the potential for long-term GDP growth and reduce its volatility. They recommended that the short-run policy priorities be to increase capital spending, improve the business environment including through a one-stop shop, and address skills shortages through improved training and greater labor mobility. In the longer run, the focus should be on improving access to the island and enhancing diversification, which would reduce the volatility of real GDP growth rates.

Directors welcomed the Anguillan authorities’ initiative in proposing the first ever Article IV Consultation Discussions, which had usefully informed the 2011 Eastern Caribbean Currency Union Common Policies Discussions and hoped that the close dialog developed would continue.