St Kitts And Nevis Urged To Tighten Fiscal Policy

by Phillip Morton, Investors Offshore.com

08 November 2010

In its latest Article IV consultation with St. Kitts and Nevis, the International Monetary Fund (IMF) is concerned at the 185% debt ratio to GDP at end-2009, a burden which leaves no room for fiscal policy to respond to adverse shocks.

Although the government recorded a primary surplus for the fifth consecutive year of 5% of Gross Domestic Product (GDP) in 2009, helped by one-off tax revenue increases, non-tax revenues and higher grants, the public debt ratio increased by 15% in 2009, according to the IMF.

Arrears on energy imports continued to accumulate and the IMF said without stepped-up efforts to rein in expenditure, the fiscal situation was projected to deteriorate markedly to a primary deficit of 6.8% of GDP in 2010.

The IMF said fiscal consolidation was critical not only for debt reduction, but also to support competitiveness and underpin the quasi-currency board arrangements. The IMF noted that the weak economic environment was contributing to a widening of existing fiscal imbalances, and recommended that the government work hard towards developing a national consensus on tackling the problems.

While welcoming recent efforts at fiscal consolidation, the IMF emphasized that a combination of both revenue and expenditure measures, including reducing the wage bill, prioritizing capital spending and speeding up land sales was needed to maintain primary fiscal surpluses. The IMF welcomed the government's commitment to introduce a value-added tax, introduced on November 1, and other recently announced fiscal measures.

The IMF stressed the need for structural fiscal reforms over the medium-term to underpin fiscal and debt sustainability, including corporatization of the electricity department, rationalization of the civil service, and strengthening of public financial management. Given that fiscal adjustment alone would not be sufficient to achieve fiscal and debt sustainability, the IMF thought financial support from multilateral institutions would be needed.

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