IMF Executive Board Concludes 2017 Article IV Consultation with St. Vincent and the Grenadines

December 18, 2017

On December 15, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with St. Vincent and the Grenadines, and considered and endorsed the staff appraisal without a meeting. [2]

Growth in 2017 is expected to remain relatively flat, with a projected boost in tourism arrivals in the second half of the year from new air connections offsetting a decline in the first half of the year. Consumer inflation rose from 1 percent in 2016 to 1.9 percent y-o-y in September 2017, reflecting increases in the VAT and minimum wages. The current account deficit is expected to narrow reflecting additional profit repatriation by telecommunication companies. The domestic banking system remains stable, but credit to the private sector has been flat. The fiscal situation is projected to worsen substantially in 2017 due to a projected decline in tax revenue after exceptional receipts in 2016 and higher outlays for transfers, subsidies and public investment. Reflecting debt relief obtained from a bilateral creditor, public sector debt is expected to decline but remain elevated at 77.5 percent of GDP in 2017.

Growth is expected to pick up to 2.1 percent in 2018 and reach its potential over the medium-term, reflecting improved connectivity and supported by the expected reopening of the large hotel. Over the medium term, inflation is projected to converge to 1.5 percent and the current account deficit to decline as food imports diminish and tourism takes off; reserves should remain at comfortable levels.

Executive Board Assessment [3]

In concluding the 2017 Article IV Consultation with St. Vincent and the Grenadines, Executive Directors endorsed staff’s appraisal as follows:

Economic activity is expected to remain relatively flat in 2017 but recover in 2018 owing to enhanced connectivity with key tourism source countries. The fiscal position is expected to deteriorate in 2017-18, as new revenue measures only partially cover higher outlays. Public debt will resume rising despite some debt relief. Moreover, risks to this projection are tilted to the downside given the inadequate policy stance, the uncertain global environment, and vulnerability to natural disasters. However, strong spillovers from the new airport, the construction of a modern port, and launching the geothermal project could support growth in the medium term.

Additional fiscal measures are needed in 2018 and over the medium-term to pay arrears and put public debt on a clear downward path, mitigate debt distress, and achieve the regional debt target. Under current policies, public debt is projected to continue to rise from its already high level. In this context, the authorities should implement measures yielding 1.8 percent of GDP over the next two years, which would provide the needed savings to a contingency fund to address natural disasters.

Containing the wage bill and curbing the growth of public pensions should be key pillars of the fiscal consolidation strategy. On the revenue side, there is ample scope for broadening the tax base by streamlining tax concessions and exemptions, and for collecting tax arrears, where practical. This would limit the need for further increasing tax rates.

Structural fiscal reforms need to accelerate to mobilize additional revenue and strengthen overall public financial management. Preparing and implementing legislation on tax administration procedures, with a provision for assigning a Tax Identification Number (TIN) to each taxpayer, is critical. Improving the efficiency of public expenditure and cash management practices is critical to stop the accumulation of budgetary arrears. Fiscal reporting should be expanded to capture the widest possible fiscal perimeter beyond the focus on the central government budget, and present fiscal risks explicitly, particularly given PPPs in the pipeline or already in operation and the substantial role of SOEs. The operating losses at the state owned-and-run airport need to be addressed, while the purchase by the state of a bank should be a short transitory step to facilitate moving ahead with the ECCU’s bank consolidation strategy.

The government should increase resources for the contingencies fund and implement initiatives to build resilience against natural disasters. The authorities have earmarked revenue for the contingencies fund, but the resources are insufficient. Moreover, the authorities need to promote more resilient infrastructure. It would also be important to move forward with their plans to strengthen and further enforce the Building Code and Physical Planning Law, enhance the powers of the NEMO through legislation, and articulate and implement a strategy to rezone areas and relocate populations deemed at risk.

The external position appears stable but the real effective exchange rate is overvalued relative to fundamentals and desirable policies. The private sector would benefit more from enhanced connectivity if competitiveness and the business climate were improved. To that end, it would be critical to moderate wage growth and accelerate implementation of risk management practices at Customs and significantly reduce container inspections. It would also be beneficial to move ahead with the preparation of the Investment Act to streamline regulations, development of the vocational training program, and improvement of land title registration. Moreover, enhanced labor market flexibility and improved access to credit is essential. Enforcement of the government’s new tourism standards is needed. In agriculture, swift execution of the World Bank project to reorient the sector from subsistence to agribusiness and strengthen its links to tourism will be important. Furthermore, intensified actions are needed to bridge infrastructure gaps, facilitate access to property by the younger generation, and improve risk-sharing mechanisms.

While the financial sector remains stable, decisive measures are needed to buttress it and foster credit growth Implementing the OECS Harmonised Credit Reporting Act will improve information about borrowers. Moreover, the full operationalization of the Eastern Caribbean Asset Management Corporation, combined with the country’s new insolvency law, will help banks unwind their NPLs. To strengthen the supervision of non-banks swift approval of implementing regulations to the Financial Supervisory Authority Act is needed. The authorities should continue addressing AML/CFT shortcomings by swiftly issuing a regulation on non-profit organizations and moving towards compliance with the 2012 FATF recommendations, including to reduce correspondent banking relationships risks. Following the recent buyback of the Bank of St Vincent and the Grenadines, which effectively ends an envisaged merger, the authorities are encouraged to redouble their efforts to explore alternative amalgamation options.

Table 1. St. Vincent and the Grenadines: Selected Social and Economic Indicators, 2013–18
Social and Demographic Indicators
Area (sq. km)	389.3	Adult literacy rate (percent, 2001)				89.0
Population (2016)		Health and nutrition
Total (thousands)	110.1	Calorie intake (per capita a day, 2007)				2,810
Rate of growth (percent per year)	0.09	Population per physician (thousand, 2004)				1.2
Density (per sq. km.)	282.8	Health expenditure per capita, PPP-2011 (2014)				917
Population characteristics		Gross domestic product (2016)
Life expectancy at birth (years, 2015)	73.1	(millions of US dollars)				770
Infant mortality (per thousand live births, 2016)	15.2	(millions of EC dollars)				2,079
Under 5 mortality rate (per thousand, 2016)	16.6	(US$ per capita)				6,992
	2013	2014	2015	2016 Est.	2017 Est.	2018 Proj.
Output and prices	(Annual percentage change, unless otherwise specified)
Real GDP (factor cost)	2.5	0.3	0.9	0.8	1.0	2.1
Nominal GDP (market prices)	4.1	0.8	3.8	1.9	4.1	4.2
Consumer prices, end of period	0.0	0.1	-2.1	1.0	2.2	1.5
Consumer prices, period average	0.8	0.2	-1.7	-0.2	2.0	1.5
Banking system 1/
Net foreign assets	7.2	1.1	1.7	8.8	-0.7	-1.7
Net domestic assets	1.4	8.4	3.1	-5.8	5.7	6.7
Credit to private sector	1.1	-0.2	1.7	1.0	0.7	0.7
Central government finances (in percent of GDP)
Total revenue	26.9	29.3	27.9	29.8	28.4	29.0
Tax revenue	21.6	24.0	23.7	25.5	24.7	25.2
Grants	1.3	2.0	1.2	1.2	1.0	1.4
Total expenditure and net lending	33.0	32.3	30.0	28.7	30.8	31.1
Current expenditure	25.2	25.9	25.1	24.9	26.7	27.3
Wages and salaries	12.9	12.6	12.6	13.2	13.1	13.2
Interest	2.5	2.3	2.2	2.1	2.6	2.5
Capital expenditure	7.8	6.4	4.9	3.8	4.0	3.8
Overall balance	-6.2	-3.0	-2.1	1.1	-2.4	-2.0
Overall balance (excl. grants)	-7.5	-5.0	-3.3	-0.1	-3.4	-3.4
Primary balance	-3.7	-0.7	0.1	3.2	0.2	0.5
Primary balance (excl. grants)	-5.0	-2.7	-1.1	1.9	-0.8	-0.9
External sector (in percent of GDP)
External current account	-30.9	-25.7	-14.9	-15.8	-14.3	-13.6
Exports of goods and services	25.2	34.4	37.0	37.1	37.1	37.7
Imports of goods and services	58.0	60.6	54.5	53.7	52.9	52.2
Stayover arrivals (percentage change)	-3.5	-1.4	6.6	7.4	0.0	3.0
Public sector external debt (end of period)	43.2	45.5	46.4	56.7	50.1	47.7
External public debt service
(In percent of exports of goods and services)	16.8	12.9	10.4	28.5	9.6	13.2
Memorandum items (in percent of GDP)
Gross public sector debt 2/	75.9	79.5	79.4	82.9	77.5	78.5
Nominal GDP (market prices; in millions of EC$)	1,947	1,963	2,039	2,079	2,164	2,255
Sources: ECCB; Ministry of Finance and Planning; and Fund staff estimates and projections. 1/ Annual changes relative to the stock of broad money at the beginning of the period. 2/ From 2016, reflects additional debt contracted with PetroCaribe but not previously recorded (EC$ 112 million or 5.3 percent of GDP in 2016). It includes debt of central government and state-owned enterprises.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] The Executive Board takes decision under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

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