On October 21, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Ex Post Evaluation¹ of the 2011–14 Stand-by Arrangement with St. Kitts and Nevis.

St Kitts and Nevis, a member of the Eastern Caribbean Currency Union, requested a three-year Stand-by Arrangement with IMF in the midst of debt crisis following the Global Financial Crisis (GFC). With the exception of a brief period ahead of the GFC, debt had grown steadily over much of the preceding decade, and had been deemed unsustainable since 2006. Public debt peaked at around 160 percent of GDP in 2010, with significant bank-sovereign links resulting from the debt held by domestic banks. The program had three objectives: (i) a comprehensive debt restructuring to address the debt overhang; (ii) ambitious medium-term fiscal consolidation; and (iii) further strengthening the financial sector, and as such sought to address the factors behind the debt crisis and its implications for the financial sector.

Programmed access and phasing reflected the large financing gap created by the sharp downturn following the GFC, and the lack of access to funding from alternative sources. The arrangement was approved on July 27, 2011, and had access of SDR 52.51 million (590 percent of quota). Access was exceptional because of the need for heavily frontloaded disbursements, with 450 percent of quota available in the first year.

Executive Board Assessment²

Executive Directors agreed that St. Kitts and Nevis’ SBA-supported program had been appropriately designed with conditionality focused on addressing the immediate consequences of the debt crisis and its potential implications for the financial sector. Directors noted the extremely difficult conditions facing St. Kitts and Nevis at program inception, and the limits on implementation capacity in small states. They commended the authorities for their home-grown program, which had allowed for a substantial improvement in macroeconomic conditions, a return to robust growth, and an overall successful program performance. Nevertheless, overly optimistic growth projections early in the program had clouded the assessment of both debt dynamics and the appropriate macroeconomic stance at times.

Directors noted that the debt restructuring, with a steep reduction in overall public debt, had placed debt ratios on a downward path. Nonetheless, the agenda remains incomplete, and the timely sale of land associated with the land-debt swap, as well as efforts to reduce the high level of short-term public debt, remain important going forward. Directors also noted that additional rigorous analysis justifying the prospects for debt sustainability at program inception would have been desirable to clarify program risks. Where a debt restructuring is anticipated, there would be merit in outlining at the outset key debt outcomes that the restructuring should aim to achieve.

Directors welcomed the significant improvement in the headline fiscal and external accounts. In this regard, they noted the important fiscal reforms undertaken by the authorities and the savings accumulated from receipts under the government’s Citizenship by Investment Program (CBI), which were much larger than anticipated. Given the potential risks in the event of declining CBI inflows, Directors considered that designing programs to capture unexpected windfalls can help strengthen fiscal buffers.

Directors considered that, going forward, key issues for St. Kitts and Nevis are to make fiscal discipline permanent, including through further efforts to contain the wage bill, and to prudently manage the windfalls from the CBI program, while protecting high quality infrastructure spending. Other priorities include creating a business environment more conducive to private sector activity, permitting a stronger and more active indigenous financial system, and strengthening competitiveness. Directors also encouraged closer coordination between the federal government and the Nevis Island Administration on financial management, capacity building, and policy implementation.

Regarding the lessons learned, Directors highlighted the importance of structuring programs to save upside windfalls which may prove temporary, and to protect capital and social spending. They also broadly agreed that, in the context of capacity constraints faced by many small states, a semi-annual frequency of program reviews could be more appropriate than a quarterly one, with the case depending on country circumstances.

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: http://www.imf.org/external/np/sec/misc/qualifiers.htm.