WASHINGTON, USA – An IMF mission, led by Nan Geng, visited St Vincent and the Grenadines during August 18-31, 2022, for the 2022 Article IV consultation discussions on economic developments and macroeconomic policies. The mission team benefited from candid and constructive discussions with public and private sector counterparts and other stakeholders and issued the following statement:
St Vincent and the Grenadines is recovering from multiple shocks. The authorities’ decisive policy responses supported by two IMF Rapid Credit Facility (RCF) disbursements and financing from other International Financial Institutions have helped protect lives and livelihood and contain economic scars. The outlook is positive but subject to significant downside risks, primarily from the ever-present threat of natural disasters and intensified spillovers from Russia’s war in Ukraine resulting in higher commodity prices.
Policies need to be calibrated to support a resilient and inclusive recovery, while safeguarding debt sustainability and financial sector stability. Near-term priorities are health and reconstruction spending and time-bound targeted fiscal support while maintaining fiscal prudence. Once the recovery takes hold, fiscal buffers should be rebuilt, including by fully operationalizing the fiscal responsibility framework (FRF), to withstand shocks and reinforce fiscal sustainability. Continued supply-side reforms to improve productivity and competitiveness and building resilience to natural disasters and climate change remain key for sustainable growth, which is critical to public debt sustainability.
Recent developments, outlook, and risks
The pandemic and 2021 volcanic eruptions, compounded by the impact of the war in Ukraine, highlighted St Vincent’s vulnerability to external shocks and natural disasters. The shocks wielded a major blow to agriculture and tourism, two main sectors. The proactive policy responses mitigated the socio-economic impact of the shocks and helped contain economic scars. GDP is estimated to have increased by 0.5 percent in 2021, after shrinking by 5.3 percent in 2020. Despite authorities’ strong efforts to mobilize revenue and contain non-priority spending, critical fiscal responses to address the humanitarian and healthcare crises – coupled with weaker economic activity -raised public debt to about 88 percent of GDP in 2021. Tourism recovery has been slow, with Q1 stayover arrivals reaching 45 percent of the pre-pandemic levels. The war in Ukraine have compounded the 2020-21 shocks through a spike in import prices.
The outlook is favorable, although subject to large downside risks. The post-eruption rebuilding activity, continued recovery in tourism and agriculture, and the start of several large-scale investment projects would support real GDP growth of 5 percent this year. Growth is projected to strengthen to 6 percent in 2023 as major projects get into full swing. Higher import prices, in particular those for fuel and food, are projected to push inflation to 5.7 percent in 2022. Nevertheless, core inflation is estimated to have remained below 2 percent, reflecting the still negative output gap. Risks to the outlook are tilted to the downside, including from commodity price volatility as a result of a further escalation of the war in Ukraine or supply chain disruptions, sharper-than-expected slowdown in trading partners’ growth, Covid-19 outbreaks, potential delays in investment projects including due to supply chain disruptions , and ever-present threat of natural disasters. On the upside, a faster-than-projected recovery in tourism could improve growth.
Safeguarding debt sustainability while supporting a resilient and inclusive recovery
The fiscal stance embedded in the 2022 budget strikes a balance between the need to support the vulnerable, building resilience, and maintaining fiscal prudence. Rising living costs in the environment of limited fiscal space pose difficult trade-offs. The authorities have rightly prioritized spending to provide essential support to reconstruction and economic activity and plan to keep the fiscal relief to cushion the impact of rising living costs temporary. Additionally, the government rolled out temporary income support and other targeted programs to support households heavily affected by the volcanic eruptions. This should be accompanied by further efforts to enhance coverage and targeting of social safety nets, including through ongoing efforts to digitize beneficiary information and payment system.
The mission welcomes the authorities’ continued commitment to reaching the regional debt ceiling and the medium-term fiscal strategy set out in the 2021 RCF. This includes further strengthening of tax administration, continued containment of wage and other current spending growth while safeguarding critical service delivery, and focusing public investment on reconstruction, resilience building, and essential infrastructure. Supported by the strategy, the primary balance would improve to a surplus of about 3 percent of GDP once the large-scale projects are completed in 2026. The public debt is projected to peak in 2024 and steadily decline thereafter to fall below 60 percent of GDP before the regional target date of 2035. Given the elevated macroeconomic uncertainty and high vulnerability to external shocks and natural disasters, the debt trajectory is, however, subject to significant risks.
Once the recovery takes hold, it will be important to recalibrate and fully operationalize the FRF to underpin the commitments and reinforce fiscal sustainability. The potential increase in external borrowing costs due to tighter global financial conditions and elevated debt stock underscores the need to operationalize a well-designed FRF to signal credible medium-term fiscal plans. The recent surge in debt resulted from multiple shocks and higher cost of key infrastructure projects have made the current debt and operational targets inconsistent with the new reality.
Aligning the timing of the debt target with the revised regional one (from 2030 to 2035) would strike an appropriate balance between supporting the recovery and ensuring debt sustainability. Given the announced policies, the primary balance would reach about 3¼ percent of GDP over 2027–35 (compared to the current FRF target of 2.7 percent)—consistent with achieving the regional debt target and debt sustainability.
Continued efforts with fiscal institutional reforms are key to supporting the effective implementation of the FRF. The authorities’ strong efforts to strengthen tax administration have been instrumental in sustaining revenue collections and should continue, including by implementing e-Tax and unique ID, strengthening fuel import control, fully implementing the enacted Tax Administration and Procedure Act, and modernizing customs legislation.
The recent establishment of the Fiscal Responsibility Mechanism (FRM) is a step in the right direction. It will be important to ensure the transparency and accountability of the FRF, including by publishing FRM’s reports regularly as planned, improving the budget process and medium-term fiscal planning, and strengthening SOE oversight and the cash management system. The public investment management assessment with a climate module that the authorities plan to undertake with IMF support will help improve the planning, allocation, and implementation of investment projects and strengthen climate resilience.
It would be prudent to build additional buffers and prepare contingency plans to guard against external shocks and natural disasters. The mission welcomes continued building-up of the Contingencies Fund. A higher primary surplus target and a lower debt anchor would provide a safety margin that could be used in the presence of shocks. It will be also useful to develop a contingency plan to return debt to the baseline should adverse shocks materialize. The authorities could consider growth-friendly and equity-enhancing measures, including further streamlining tax concessions, improving the design of income taxes, and intensifying the collection of tax arrears. In view of the rapid population ageing, it will be important to design and implement a comprehensive pension reform to support fiscal sustainability.
Supporting resilient and inclusive growth and promoting employment
Continued structural reforms are needed to improve productivity, minimize scarring from past shocks, and support sustainable growth that is critical to debt sustainability. The recent and ongoing key infrastructure investments are instrumental for alleviating supply-side constraints to growth. To unlock their full potential, continued improvement in business and investment environment is needed to foster private sector activity and create jobs, including through the planned Investment Act and single windows for land registration and trade. Participation in the regional initiatives to integrate and ensure food security and to undertake digital transformation, would boost productivity, which has been constrained by a small internal markets and high costs. Ongoing efforts to improve the scope, coverage, and effectiveness of the technical and vocational education and training, complemented by active labor market policies, would alleviate skill mismatches.
The tourism sector is well positioned to support long-term growth. The combination of attractive nature, the new airport, and the rich agricultural base, creates conditions for more value added and job opportunities. The ongoing expansion of room capacity is a move in the right direction and needs to be accompanied by strengthened air connectivity, including at the intra-regional level, and further enhancement of road infrastructure. Developing the linkages between tourism and agriculture/fisheries would create synergies for economic development.
Building resilience to natural disasters and climate change remains a priority. Important progress has been made, including legislating the Contingencies Fund’s governance and operational framework and expanding the capacity of the National Emergency Management Organization. Further strengthening of structural resilience, including through ongoing efforts to implement the National Adaptation Plan and to diversify energy sources, would bolster resilience to natural disasters and improve energy security. The mission welcomes the planned National Disaster Financing Strategy in an effort to build financial resilience.
Maintaining financial sector stability while supporting the recovery
The financial sector has weathered the shocks relatively well so far. Capital buffers remain well above regulatory requirements and the regional average, although non-performing loans (NPLs) have increased compared to pre-pandemic levels. Continued close monitoring of the local financial sector is needed as some of the moratoria loans are still expected to transition to NPLs. The provisioning levels for the banking system have declined recently to below the ECCB’s recently introduced more stringent guidance and should be bolstered.
Building on past achievements, the financial authorities should continue to strengthen the supervisory and regulatory frameworks and improve crisis preparedness. Priorities are to transition to risk-based supervision, complete regulatory reforms, amend the Financial Services Authority (FSA) Act to strengthen the FSA’s enforcement powers, and develop a crisis management plan.
Leveraging regional and national initiatives to promote private sector credit growth would help bolster the recovery and financial inclusion. These include establishing the regional credit bureau to encourage prudent risk-taking, utilizing the recently launched regional partial credit guarantee scheme to relax collateral constraints for SMEs, and continuing to digitalize financial services.
Ongoing efforts to strengthen AML/CFT framework should continue to minimize the risks of losing CBRs. Completing the National Risk Assessment was a significant step forward. The authorities should address the risks identified in the assessment before the upcoming 2023 Caribbean Financial Action Task Force’s assessment.