Statement by IMF Staff at the Conclusion of the 2008 Article IV Consultation Discussions with St. Lucia

Press Release No. 08/170
July 8, 2008

An International Monetary Fund Mission to St. Lucia issued the following statement today in Castries:

"An IMF staff mission led by Mr. Paul Cashin, Division Chief in the Western Hemisphere Department, visited St. Lucia June 5-18 to conduct the 2008 Article IV Consultation discussions. The discussions covered recent developments and current economic policies, as well as the medium-term outlook for the St. Lucian economy. The mission received excellent cooperation and benefited from a constructive exchange of views with Prime Minister the Honorable Stephenson King, Leader of the Opposition Dr. Kenny Anthony, Permanent Secretary of the Ministry of Finance Isaac Anthony, Permanent Secretary of the Ministry of Economic Affairs Donovan Williams and otherigor senior government officials, as well as representatives from the tourism sector, financial sector, farmers, and trade unions.

"Macroeconomic performance has been mixed in recent years. While real GDP growth averaged 4 percent during 2003-06, growth slowed to about 1¾ percent in 2007, reflecting contraction in hurricane-affected agriculture (mainly banana exports), and slowdowns in construction activity and stayover tourist arrivals. Inflation increased sharply to almost 7 percent at end-December 2007, due to higher imported fuel and food prices and the ongoing depreciation of the U.S. dollar. With deteriorating global prospects and only modest recovery in agriculture, growth is expected to increase only slightly in 2008 (reaching 2⅓ percent) and to rise further in 2009. Additional hotel capacity, combined with vigorous marketing and more frequent airlift, is expected to boost growth. Despite this broadly positive outlook, vulnerabilities remain, including the country's dependence on imported oil, high food prices, declining European Union (EU) banana preferences, volatile tourism receipts, and exposure to natural disasters.

"Discussions focused on the challenges involved in enhancing St. Lucia's growth potential; maintaining external stability; strengthening its fiscal position and debt sustainability; and reducing economic and financial vulnerabilities. The mission and the authorities discussed possible ways of creating appropriate incentives for the private sector to flourish, including: reducing the cost of capital by improving the investment climate; boosting regional and global integration; raising labor productivity; and strengthening social safety nets. St. Lucia's external competitiveness continues to be bolstered by the ongoing depreciation of the U.S. dollar against major currencies. Nevertheless, the current account deficit remained elevated at about 30 percent of GDP in 2007, due in part to an adverse movement in the terms of trade, accompanied by a surge in foreign direct investment (FDI) for tourism-related construction. Current account imbalances are expected to decline over the medium term, and remain financed largely by nondebt-creating FDI.

"A key challenge will be achieving sound public finances and ensuring debt sustainability. Public debt and debt servicing remain high, and the mission supports the authorities' intention to deepen fiscal consolidation and reduce public debt through greater spending discipline and reforms to broaden the tax system. In particular, while supporting increased capital spending to enhance tourism infrastructure and attract foreign and domestic investment, the mission noted that greater prioritization and evaluation of the capital budget would also help to reduce fiscal imbalances, while facilitating increased social spending. The mission and the authorities agreed that there is a need to rely on grant and concessional financing and introduce a formal Public Sector Investment Program mechanism to ensure the effectiveness of capital expenditures. The IMF mission urged stepped-up efforts to introduce a value-added tax and allow for greater flexibility in retail petroleum pricing, which will improve the efficiency and stability of revenue raising. While unemployment has fallen in recent years it remains high, and when combined with recent spikes in the price of imported food and fuel, it is vital that the coherence of poverty reduction initiatives be sharpened to ensure that scarce resources are targeted at the neediest members of society.

"Prudential indicators point to a continued strengthening of the country's banking sector. While positive steps have been taken to enhance the regulation and supervision of banks and international financial service providers, greater efforts need to be made to implement a single regulatory authority to supervise nonbank financial intermediaries. Ongoing competitive pressures and the erosion of EU trade preferences have affected the country's banana sector, and the mission supports the authorities' efforts (with donor support) to ease the social impact of this structural transformation. Given St. Lucia's recent experience with hurricanes and earthquakes, it remains critical to continue to bolster risk mitigation and disaster management. The IMF mission welcomed the progress made in enhancing the National Emergency Management Organization, improving the national disaster response plan, and St. Lucia's continued participation in the Caribbean Catastrophic Risk Insurance Facility, while urging that greater efforts be made to strengthen building codes and insurance of public infrastructure.

"The IMF mission thanks the government and the people of St. Lucia for their warm hospitality, and wishes them every success in their ongoing efforts to raise economic growth, and reduce poverty and unemployment."



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