On February 4th, 2008, the Executive Board of the International Monetary Fund (IMF) concluded its Article IV consultation with St Kitts and Nevis, the results of which were published on Tuesday.
The Executive Directors began their conclusion by commending the authorities of St Kitts and Nevis for their efforts to strengthen macroeconomic performance, with growth rebounding and fiscal balances improving markedly.
Directors observed, however, that the country's high public debt leaves little room for manoeuvre in the event of adverse shocks. Sustained fiscal consolidation, backed up with the development of a contingency plan to respond to economic shocks, would help mitigate the risks associated with the high debt stock, they argued.
Despite this, Directors welcomed the important steps that have been taken towards strengthening fiscal performance, including the improvement of tax administration, and the adoption of an automatic pass-through of fuel prices.
They encouraged the authorities to continue their efforts to achieve their medium-term fiscal goals and put debt on a solid downward trajectory. Expenditure restraint, including comprehensive civil service reform, will be key, the IMF suggested.
Plans to broaden the tax base, improve the oversight and transparency of public enterprises and strengthen debt management capacity will also support these goals.
Directors noted that public debt would remain elevated throughout the medium term, and encouraged the authorities to explore options for a more rapid debt reduction, including by accelerating the pace of asset sales, which could also promote private sector-led growth.
Directors additionally noted that the real effective exchange rate does appear broadly in line with fundamentals, suggesting that further fiscal consolidation would support external competitiveness and underpin the regional currency arrangement.
Further to this, Directors also encouraged the authorities to accelerate the implementation of planned structural reforms aimed at improving the business climate and strengthening the economy's flexibility and resilience.
Also noted was the fact that the country's large external current account deficit, mainly financed by foreign direct investment, although likely to remain high over the medium term, could be expected to decline as investment in infrastructure and tourism projects taper off.
Additionally, Directors warned that financial sector risks need to be carefully monitored.
They called for further progress in mitigating risks, including through enhancing supervision of vulnerable banks and reducing the large government exposure, and welcomed the authorities' plan to establish a single regulatory unit for the nonbank financial sector.
Lastly, Directors welcomed the progress made in improving the quality and coverage of fiscal data, and looked forward to similar progress in other areas.
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