IMF Concludes 2009 Article IV Consultation With St. Vincent And The Grenadines

by Mike Godfrey, Tax-News.com, Washington

04 June 2009

The IMF has concluded its 2009 Article IV consultation with St. Vincent and the Grenadines. There has been a marked decline in real GDP growth due to sharply weaker activity in the tourism and construction sectors. IMF assistance is sought in the form of an Exogenous Shocks Facility.

The balance of payments is adversely affected by declines in tourism receipts, foreign direct investment and remittances. Following two years of strong growth, real output growth is estimated to have fallen from 7% in 2007 to around 1% in 2008, far below potential (estimated at 4.5%). Construction lost some dynamism from a sharp reduction in public sector project activity. Inflation, which peaked at 11.6% in September, declined to 8.7% by the end of 2008, reflecting declines in world food and fuel prices.

While still high, the external current account deficit improved modestly in 2008. Private sector credit growth slowed to 3% in 2008, compared to 15% in 2007, reflecting lower demand especially in the household sector.

The banking sector has been largely unaffected by the global financial crisis and remains well capitalized. However, strains from the fallout of the Trinidad and Tobago-based CL Financial Group have created uncertainty in the local financial system, and the international financial services sector has also suffered shocks. An update of a 2004 Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) assessment took place in February-March 2009.

The fiscal position continued to strengthen in 2008 and the overall deficit was reduced to 1.7% of GDP. Larger grants, efforts at tax arrears collection and one-off non-tax revenue were complemented by solid VAT performance to attain a primary surplus, the first since 2002. The introduction of VAT exceeded expectations from both the revenue and the compliance perspectives, surpassing replaced taxes, notwithstanding the growth slowdown. These are the achievements of ongoing tax reform, including the recent establishment of a Tax Reform Commission.

Lower capital expenditure helped contain total government spending. The public sector debt to GDP ratio declined to 67.5% of GDP at the 2008 year-end. Continued spending restraint through a prudent public sector wage policy and prioritization of capital expenditure will be important. The construction of a new international airport is needed for the tourism industry and to improve medium-term growth potential. A possible financing bottleneck was foreseen in 2009 which might require a more flexible timetable for implementation of the project.

The authorities have requested support under the Fund’s Exogenous Shocks Facility (ESF) to help the economy adjust to the tourism and foreign direct investment (FDI) shock. The authorities are requesting the rapid-access component of the ESF (SDR 3.735 million, 45% of quota). Fund financing can improve the balance of payments impact as well as contribute toward the financing of the fiscal deficit.

The IMF Directors had the following comments:

The authorities’ commitment to mitigate the impact of the global economy downturn with IMF support under the Exogenous Shock Facility was welcomed. The IMF were pleased with progress toward fiscal consolidation and on social and poverty reduction goals. The IMF want to see further moves toward sustained medium-term fiscal consolidation, including tax and customs reform, civil service reform, and adoption of systems for planning medium-term expenditure. In this regard the IMF would like to see an easing of infrastructure bottlenecks and institutional rigidities and timely availability of concessional financing to accommodate the airport project.

The improving of the regulatory and supervisory framework for nonbanks ought to take a high priority, particularly in light of the recent shocks to the region’s offshore and insurance sectors, in the view of the IMF. The authorities should establish a single regulatory unit for domestic nonbanks and the international financial service sector, the IMF recommended. The IMF welcomed the authorities’ efforts to coordinate with other regional governments to address the regional financial turmoil resulting from the fallout of the Trinidad and Tobago-based CL Financial Group.

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