Anguilla Faces Economic Challenges

by Amanda Banks, Tax-News.com, London

19 December 2011

The International Monetary Fund (IMF) has warned authorities in Anguilla 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.

The economic downturn in Anguilla was pronounced, exacerbated by the stalling of large resort projects, which led to a contraction in Anguilla's gross domestic product (GDP of 16.5% in 2009 and 5.9% in 2010. A slow recovery is only expected to begin in 2012. The IMF has reported that balancing the budget by the start of 2013 will be challenging.

The IMF Executive Board, in presenting recommendations, said that a new fiscal framework should be designed to meet the combined objectives of debt sustainability, deficit reduction and long-term economic growth.

The Board 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, and underscored that a general consumption-based tax such as a value-added tax or a goods and services tax, 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, the Board further advocated.

The IMF agreed that a fundamental course change is needed to increase the potential for long-term GDP growth and reduce volatility. It was recommended that the short-run policy priorities be to increase capital spending, improve the business environment including through the formation of a 'one-stop shop' to reduce bureaucracy, and address skills shortages through improved training and greater labour mobility. In the longer run, the IMF said the authorities should focus on improving access to the island and seek to diversify the island's economy, which would reduce the volatility of real GDP growth rates.

On the country's finance sector, the IMF said the downturn had accentuated strains on the financial system. In particular the asset portfolio of the banking system, which is concentrated in construction, tourism and personal loans, was said to have been adversely affected, with the non-performing loans to total loans ratio increasing 36% by the end of June 2011.

Concluding its recommendations, the Board advised that close public-private sector cooperation would be critical to addressing financial sector vulnerabilities, particularly those related to indigenous banks. The IMF board called on the government to engage with banks towards cleaning up their balance sheets.

Recommended