IMF Concludes 2018 Article IV Consultation with St. Kitts and Nevis

Washington, DC: On September 14, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with St. Kitts and Nevis.

Growth decelerated marginally in 2017, as the continued decline in CBI inflows slowed growth in construction. Consumer inflation was low, partly due to a small contraction in food prices. The overall fiscal balance remained in surplus but has deteriorated markedly since its 2013-peak, and the debt-to-GDP ratio increased marginally from the previous year. The current account deficit remains high and only marginally declined in 2017, as the decline in CBI receipts was more than offset by growing tourism receipts and a significant decrease in imports. Foreign reserves at the ECCB remained at comfortable levels, well above the various reserve-adequacy metrics. The banking sector has reported capital and liquidity ratios that are well above the regulatory minimum but has elevated NPLs and risks, including delays in completing the debt-land swap arrangement and loss of Corresponding Banking Relationships (CBRs).

Medium-term growth is projected to fluctuate around 3 percent under the current policies. It is projected to improve in 2018-20 as the implementation of FDI projects in the tourism sector accelerates and decelerate to around 2.7 percent over time as the momentum slows down. The current account deficit is projected to worsen over the medium term, driven by higher FDI-related imports associated with tourism projects and a tapering of CBI inflows, partially offset by growth in tourism receipts. Downside risks include lower than projected CBI inflows; further delays in resolving the debt-land swap; failure to tackle worsening financial sector vulnerabilities; exposure to major natural disasters; a tighter financial environment from higher U.S. interest rates; and spillovers from regional financial challenges, including loss of CBRs. On the upside, stronger CBI inflows and higher growth in advanced economies could support growth compared to the baseline.

Executive Board Assessment[2]

Executive Directors welcomed St. Kitts and Nevis’s good macroeconomic performance in recent years. However, growth has slowed over the past year, and the medium‑term outlook remains moderate. Directors acknowledged significant challenges, including those associated with declining Citizenship By Investment (CBI) inflows, financial sector vulnerabilities, tighter global financial conditions, and weather‑related shocks. Against this background, Directors encouraged policies to safeguard macroeconomic and financial stability, together with reforms to strengthen competitiveness and foster inclusive growth.

Directors noted that, absent any corrective policies, public debt is expected to increase over the medium term, as revenue from CBI receipts further declines. They considered that a significant fiscal adjustment is needed to reverse debt dynamics. The adjustment could focus on both revenue and expenditure measures, including streamlining tax incentives, restructuring activities funded by the Sugar Industry Diversification Foundation, and containing the wage bill through a multi‑year framework.

Recognizing the need to maintain fiscal buffers to assist in covering the cost of natural disasters, Directors recommended the establishment of a Growth and Resilience Fund (GRF), which should be linked to a fiscal responsibility framework. They suggested that access to the GRF could be used to respond to adverse shocks and to support natural disaster resilience investment projects. The GRF should have a sovereign wealth fund structure in line with international best practices.

Directors expressed concern about the high level of NPLs and urged the authorities to prioritize their resolution, which would include the operationalization of the Eastern Caribbean Asset Management Corporation, a credit bureau, and the strengthening of foreclosure and insolvency legislation. They supported the implementation of IFRS9 and new regulations on provisioning and valuation and encouraged the authorities to closely monitor capitalization levels of the banking system.

Directors encouraged the authorities to take decisive steps to accelerate land sales under the debt‑land swap arrangement to mitigate the fiscal and financial sectors from contingent liabilities. They also emphasized the importance of remaining vigilant to CBR risks, enhancing the AML/CFT regime, and strengthening the transparency of the CBI program.

Directors agreed that comprehensive structural reforms would strengthen the potential for diversified and inclusive growth, and address competitiveness challenges. They welcomed ongoing efforts to improve the ease‑of‑doing business, support skills development, promote growth in tourism and other sectors, and strengthen social policies and security. Improving labor productivity and promoting trade integration at the regional and international level are also necessary to support competitiveness.