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.
[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]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:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.
St. Kitts and Nevis: Selected Economic and Financial Indicators 2015 –20
Est. | Proj. | |||||
2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |
(Annual percentage change; unless otherwise specified) | ||||||
National income and prices | ||||||
Real GDP (factor cost) 1/ | 2.7 | 2.9 | 2.1 | 2.7 | 3.5 | 3.5 |
Consumer prices, end-of-period 2/ | -2.4 | 0.0 | 0.8 | 2.0 | 2.0 | 2.0 |
Consumer prices, period average 2/ | -2.3 | -1.2 | 0.4 | 1.4 | 2.0 | 2.0 |
Real effective exchange rate appreciation (+) (end-of-period) | -2.8 | -0.4 | -2.5 | … | … | … |
Banking system | ||||||
Change in net foreign assets 3/ | -5.3 | -1.3 | -7.8 | 3.6 | 1.4 | 0.0 |
Credit to public sector 3/ | -0.8 | -5.1 | 0.7 | -3.7 | 2.5 | 3.2 |
Credit to private sector 3/ | 1.5 | 0.4 | 0.8 | 1.1 | 1.2 | 1.3 |
Broad money | 2.5 | -4.0 | -3.4 | 0.9 | 5.2 | 4.5 |
(In percent of GDP) | ||||||
Public sector 4/ | ||||||
Total revenue and grants | 36.3 | 32.2 | 30.2 | 32.7 | 27.6 | 26.8 |
o/w Tax revenue | 20.1 | 19.3 | 19.1 | 19.4 | 19.3 | 19.3 |
o/w CBI fees | 11.6 | 6.8 | 5.7 | 7.4 | 2.6 | 2.0 |
Total expenditure and net lending | 31.0 | 28.2 | 29.6 | 29.2 | 30.4 | 30.3 |
Current expenditure | 24.4 | 24.0 | 24.8 | 24.6 | 26.1 | 26.2 |
Capital expenditure and net lending | 6.6 | 4.2 | 4.8 | 4.6 | 4.3 | 4.2 |
Primary balance | 7.3 | 5.6 | 2.1 | 5.1 | -1.3 | -1.8 |
Overall balance | 5.3 | 4.0 | 0.5 | 3.5 | -2.8 | -3.5 |
Overall balance (less CBI inflows) 5/ | -5.5 | -3.0 | -5.4 | -4.0 | -5.3 | -5.4 |
Foreign financing | -6.8 | -1.9 | -0.9 | -0.9 | -0.9 | -0.8 |
Domestic financing | 1.2 | -0.9 | -0.1 | -3.0 | 3.3 | 3.9 |
Change in arrears | -0.1 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
Sale of assets | 0.5 | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 |
Extraordinary financing 6/ | 0.3 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
Total public debt (end-of-period) 7/ | 66.1 | 61.5 | 62.9 | 63.6 | 63.4 | 63.3 |
Public debt service (percent of total revenue and grants) | 24.5 | 11.2 | 8.5 | 7.6 | 8.6 | 9.6 |
External sector | ||||||
External current account balance | -9.2 | -12.0 | -11.2 | -10.9 | -17.3 | -17.8 |
Trade balance | -26.5 | -30.7 | -27.9 | -30.4 | -32.4 | -32.4 |
Services, net | 27.8 | 26.9 | 25.1 | 27.4 | 23.0 | 22.6 |
o/w Tourism receipts | 32.6 | 33.4 | 37.6 | 38.0 | 38.3 | 38.6 |
FDI (net) | 13.6 | 13.3 | 8.9 | 10.2 | 12.8 | 12.7 |
External public debt (end-of-period) | 25.2 | 20.2 | 16.1 | 14.2 | 12.2 | 10.4 |
(In percent of exports of goods and nonfactor services) | ||||||
External public debt service | 6.8 | 3.8 | 3.5 | 2.9 | 3.0 | 2.7 |
External public debt (end-of-period) | 44.9 | 38.7 | 31.5 | 26.6 | 24.9 | 21.5 |
Memorandum items | ||||||
Net international reserves, end-of-period | ||||||
(in millions of U.S. dollars) | 280.4 | 312.8 | 358.2 | 358.2 | 354.5 | 350.7 |
(in percent of broad money) | 25.0 | 29.0 | 34.4 | 34.1 | 32.1 | 30.4 |
Holdings of SDRs, in millions of U.S. dollars | 13.8 | 13.8 | 14.8 | 15.8 | 16.8 | 17.8 |
Nominal GDP at market prices (in millions of EC$) | 2,528 | 2,591 | 2,602 | 2,714 | 2,868 | 3,031 |
Sources: St. Kitts and Nevis authorities; ECCB; UNDP; World Bank; and Fund staff estimates and projections. | ||||||
1/ Authorities revised historical GDP growth backwards from 2015. | ||||||
2/ Includes St. Kitts and Nevis (in the past, only St. Kitts data was reflected). | ||||||
3/ In relation to broad money at the beginning of the period. | ||||||
4/ Consolidated general government balances unless otherwise noted. Primary and overall balances are based on above-the-line data. | ||||||
5/ Excludes CBI budgetary fees, SIDF grants and Investment proceeds, and CBI due diligence costs. | ||||||
6/ Reflects operations linked to the restructuring of public debt. | ||||||
7/ Reflects the debt-land swap equivalent to EC$565 million in 2013 and EC$231 million in 2014. | ||||||