Statement of the IMF Staff at the Conclusion of the 2010 Article IV Discussions with St. Lucia

Press Release No. 10/49
February 19, 2010

Mr. Alfred Schipke, Division Chief in the Western Hemisphere Department of the International Monetary Fund, issued the following statement today in Castries:

"An IMF staff mission visited St. Lucia February 8–18 to conduct the 2010 Article IV Consultation discussions. The discussions focused on the adoption of a fiscal framework that will support fiscal and debt sustainability, a reduction in vulnerabilities, and St. Lucia’s growth prospects following the global downturn. 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, and other senior government officials, as well as representatives from the tourism sector, financial sector, and labor unions.

"Following a period of modest economic growth, St. Lucia was severely impacted by the global downturn. Real GDP contracted sharply in 2009 after expanding on average by about 3 percent during the previous 5 years, when tourism became a more prominent sector and resulted in Foreign Direct Investment-related (FDI) construction. Inflation is estimated at one percent in December 2009 (from 7 percent in 2008), reflecting a decline in international food and fuel prices, as well as weaker domestic demand. Against the backdrop of a recovery of the global economy, growth is projected at about one percent in 2010 supported by resurgence in tourism and a recovery in the construction sector. There are significant risks to the outlook, however, including a weaker than anticipated recovery in St. Lucia’s main trading partners, permanently lower-than-envisaged FDI flows, and the ever-present threat of natural disasters.

"The mission and the authorities agreed on the importance of adopting a strong fiscal framework on which to anchor fiscal and debt sustainability. The key challenge facing the authorities is the timing of the withdrawal of the fiscal stimulus to ensure fiscal and debt sustainability, while minimizing the impact on unemployment. The mission recommended adjustment measures which would reverse part of the Fiscal Year (FY) 2009/10 fiscal stimulus in the FY2010/11 budget aimed at restoring a primary balance and reaching a surplus of about 1.5 percent of GDP over the medium term. The implementation of these measures would place the public debt on a firmly declining trajectory following a small increase in FY2010, and send a strong signal to market participants about the government’s commitment to an exit strategy and fiscal consolidation. Successful adoption of the framework would also create space to better absorb future shocks and increase targeted social spending. In this regard, the mission welcomed the progress made in implementing tax measures, including the flexible fuel pricing regime; and noted the authorities’ plans to prioritize capital expenditure, request technical assistance on public expenditure reform, and aggressively seek grant financing to help reduce the impact of higher capital outlays on the budget. At the same time, the mission reiterated the need to move forward with the implementation of a broad based Value Added Tax (VAT).

"Macro-financial risks have increased in both St. Lucia and the currency union following the economic downturn. Banking soundness indicators have deteriorated and risks of contagion from other Caribbean countries have increased. The mission and the authorities agreed on the urgency of completing the remaining steps to put in place a fully operational single regulatory unit to provide a unified regulatory framework for nonbanks, including credit unions and the insurance industry. In this context, the IMF mission welcomed the progress made on adopting financial sector legislation and encouraged the authorities to press ahead with the adoption of the Financial Services Regulatory Authority Act and other enabling legislation including the 2009 Insurance Act. The mission also supports the Eastern Caribbean Currency Union (ECCU) authorities’ announced strategy of a regional resolution of BAICO and welcomes the initial steps toward its resolution, including the establishment of a new company. In this context the mission urged that the resolution of BAICO should continue to adhere to three principles: (i) avoid systemic contamination, (ii) minimize the fiscal costs to the extent possible, given the region’s high debt levels and related vulnerabilities, (iii) and ensure equitable treatment of all stakeholders.

“The mission and the authorities concurred on the need to reduce the reliance on tourism as the main engine of economic growth and discussed possible ways of creating appropriate incentives to boost private sector led growth, including improving the investment climate; establishing a one-stop-shop for investors; deepening regional integration; and raising labor productivity.

"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 resuscitate economic growth, reduce unemployment, and eradicate poverty."



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