IMF Concludes 2009 Article IV Consultation With St. Kitts And Nevis

by Mike Godfrey, Tax-News.com, Washington

10 June 2009

The IMF has concluded an Article IV consultation with St. Kitts and Nevis. After several years of robust growth, the economy of St. Kitts and Nevis has weakened markedly. The IMF believes that, while the global downturn and heavy debt burden are likely to weigh heavily on near-term growth, the economy is well placed to achieve strong growth over the medium term provided that appropriate policies and reforms are implemented.

The island of Nevis, in particular, has been badly affected by Hurricane Omar which passed the region in October 2008, with the island’s largest hotel likely to remain closed during 2009 due to damage from the hurricane’s storm surge. After growing by 3.2% in 2008, St. Kitts and Nevis’s real output is projected to contract by 1.2% in 2009. Higher food and fuel prices led to a pick-up in inflation in the first ten months of 2008, peaking in October 2008 at 8.3% before moderating to 7.6% at the end of 2008. Inflation is projected to ease further in 2009 on the back of lower oil prices.

The government’s commitment to debt reduction resulted in a fiscal primary surplus in 2008, more than 5% of GDP, for the fourth consecutive year, helping to lower the public debt ratio by 20 percentage points over the past four years. However, the primary surplus is projected to decline to 2.5% of GDP in 2009, largely due to an expected drop in revenues without concomitant cuts in expenditures, and the debt ratio is expected to trend up again. With a debt ratio at more than 175% of GDP by end-2008, debt service comprises nearly a quarter of government revenues, leaving no space for fiscal policy to respond to the adverse shocks. According to the IMF, fiscal consolidation will be important not only for restoring debt sustainability, but also for supporting competitiveness, maintaining stability, and underpinning the Eastern Caribbean Currency Union (ECCU) quasi-currency board arrangement.

Financial sector vulnerability stems from banks’ continued high government exposure and a needed further strengthening of supervision of the non-bank sector, says the IMF. Moreover the IMF warns that should the global slowdown be prolonged, the adverse impact could spread to the banking sector through a rise in nonperforming loans. The insurance sector, meanwhile, is grappling with the fallout of CL Financial Group’s problems. The IMF endorsed plans to put in place an effective single regulatory unit to include the non-bank financial sector and efforts to coordinate with other regional governments to address the regional financial turmoil in the wake of the CL Financial Group collapse.

The authorities have made a request for an Emergency Natural Disaster Assistance (ENDA) purchase equivalent to 25% of quota (SDR 2.225 million). Although Hurricane Omar struck in October 2008, the full impact due to the indefinite closure of a major tourism resort on Nevis, has been slow to evolve. The authorities are attempting to address the effects of the hurricane, but face severe financing constraints. Fund financing is expected to partly offset the balance of payments impact, estimated at 3.5% of GDP due largely to a decline in tourism receipts.

The IMF had the following comments:

Given the continued large financing needs, the IMF want the authorities to push ahead with their goal of achieving even larger primary surpluses over the medium term. They should strengthen expenditure control and introduce further structural fiscal reforms including, most critically, the implementation of the VAT, the IMF believes. The IMF also encouraged the authorities to tighten oversight of the broader public sector; work closely with donors to tap additional grants or highly concessional loans; accelerate land and/or other asset sales to lower debt more rapidly; and strengthen debt management capacity. Fiscal consolidation is important in order to support competitiveness and underpin the ECCU’s quasi-currency board arrangement, in the view of the IMF. Maintaining competitiveness in the context of relatively high wage levels and a highly competitive tourism market will require sustained efforts to improve the business climate and labour market, noted the IMF.

While noting the country’s large public debt and inherent vulnerability, the IMF acknowledged the authorities’ exemplary record of debt service on external obligations and their resolve to sustain fiscal consolidation, foster private sector-led growth, and work closely with the Fund in pursuing their reform strategy. A full-fledged contingency and crisis preparedness plan, including the identification of emergency fiscal measures was recommended.

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