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

by Ulrika Lomas, Tax-News.com, Brussels

24 February 2009

The Executive Board of the International Monetary Fund (IMF) has concluded its Article IV consultation with St. Vincent and the Grenadines, and reported its findings, noting that following 2 years of strong growth the economic climate has drastically deteriorated since the onset of the global financial crisis.

The IMF noted that economic growth is estimated to have fallen from 7% in 2007 to around 1%, due to sharply weakened activities in the tourism and agriculture sectors. Inflation rose sharply in the first three quarters of 2008, reflecting higher world fuel and food prices, but declined to 8.7% at the end of the year as these prices eased. Consistent with a slowing economy, private sector credit growth declined to about 3% in 2008.

The central government’s fiscal position has been strengthening since 2005. In 2008 the fiscal deficit was lowered to 1.7% of GDP and a primary surplus achieved. Larger grants and continued improvements in tax administration complemented the solid VAT performance. The VAT, which was introduced in May 2007, has exceeded expectations from both a revenue and compliance perspective. Total expenditure declined as a percentage of GDP as lower capital expenditure also made room to reinforce the social safety net to protect vulnerable groups.

The income and corporate tax reforms implemented in 2008 and continued in 2009 aim to reward efforts and enhance the competitiveness of the economy, providing timely support to economic activity. The mission commends the government on the establishment of a Tax Reform Commission, which aims to make a set of comprehensive recommendations by end-2009, including enhancing legislation and revamping the tax incentive system to broaden the tax base. Ongoing improvements to customs administration are also expected to strengthen revenue potential and efficiency.

The government has made progress in fiscal consolidation in recent years but faces a challenging environment. The global economic downturn and financial crisis have weakened growth prospects for 2009. Most of St. Vincent and the Grenadines’ tourism-source countries are projected to suffer recessions in 2009, significantly dimming the prospects for the tourism sector. Declining tourism-related receipts, remittances and lower foreign direct investment will adversely affect output growth and constrain banking sector liquidity. In this context, the IMF mission discussed the importance of steps to improve competitiveness, enhance the business climate by reducing the cost of doing business, and address tourism-related infrastructure constraints. The IMF shared the authorities’ view that construction of a new international airport is necessary to develop the tourism industry further. To avoid compromising the efforts to put debt on a downward path, there is a need for sustained fiscal consolidation, in conjunction with continued availability of concessional financing (including in-kind grants) for the airport project. The IMF encouraged the authorities to continue efforts to minimize the need for bridge commercial financing in the face of tightened global and domestic credit availability in 2009, including through mobilizing more grant and concessional resources and being flexible with the construction timetable, to the extent technically feasible.

The IMF welcomed recent steps toward consolidating the regulation and supervision of domestic non-bank financial intermediaries in the Ministry of Finance. In view of developments in the global financial system, further strengthening regulation and supervision of the domestic financial system, including both domestic banks and non-banks and the offshore financial sector, is a top priority.

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