March 31, 2017

On March 24, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with St. Lucia, and considered and endorsed the staff appraisal without a meeting. [2]

Driven by agriculture and construction, GDP growth is estimated to have reached 0.8 percent in 2016, down from 1.8 percent in 2015. Strong employment growth in agriculture and construction put a dent on unemployment, which declined to 20 percent in the third quarter of 2016. Youth unemployment also fell, but remains very high at 41 percent. However, weakness in tourism, manufacturing, and transportation dampened growth. Exports of goods declined, contributing to widen the current account deficit to an estimated 6.7 percent of GDP in 2016. Inflation was driven down by import prices, and lingered in negative territory over the last 12 months.

GDP is projected to grow at 0.5 percent in 2017, driven mostly by continued strong performance in construction and agriculture. Higher import prices, including oil, will cause inflation to rise temporarily and, together with weak tourist expenditures, will contribute to widen external imbalances. With slow progress in cleaning up their balance sheets, banks are expected to further shrink their loan portfolio. While the forthcoming budget should bring some clarity about fiscal policies, in the absence of corrective measures, rising interest payments will add to expenditure pressures, leading public debt to an unsustainable path. As commodity prices gradually rise from recent lows, the current account deficit will widen, reflecting low competitiveness. Unless structural reforms are implemented, rigidities in the labor market, high costs of doing business, and low external competitiveness will continue to weigh on growth.

Executive Board Assessment

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

Growth remains subdued. In the short term, construction and agriculture should continue to perform strongly while growth in tourism —which should be driven by consistent inflows of U.S. tourist, new flights, and new hotels— could be stifled by the new airport tax. Slow progress in cleaning up bank balance sheets limits the extent to which banks can help sustain growth. In the medium term, rigidities in the labor market, a costly business environment, and low external competitiveness severely limit growth prospects. A comprehensive reform program is needed to appropriately address key weaknesses and improve growth prospects, but downside risks, both external and domestic, dominate the outlook.

The deterioration of the fiscal position, which has been accelerated by the recent fiscal package, should be addressed promptly and decisively in the context of the forthcoming budget. In the absence of corrective measures, financing difficulties will increase and force inefficient fiscal adjustment—typically by reducing already low capital spending—with negative effects on growth. At the same time, public debt will continue to increase with unsustainable dynamics. The FY2017/18 budget therefore presents an opportunity for the authorities to demonstrate their commitment to fiscal responsibility and clarify their intentions on a broad range of policies. A more stable fiscal position and reduced uncertainty about the government’s economic program would pave the way to stronger domestic and foreign investment.

Corrective measures should be supported by a multi-year consolidation plan to attain the 2030 debt target of 60 percent of GDP. The consolidation plan should address the need to prepare for the inevitable recurrence of natural disasters. To be consistent with the authorities’ intention to reform the tax system and reduce tax burdens, the adjustment effort could focus on broadening the tax base, controlling expenditure, and improving financing terms. The planned increase in the airport tax should be reconsidered if its negative growth effects do materialize. A reduction in the wage bill should be targeted through continued wage restraint and attrition. Social spending should be preserved and reoriented from temporary work programs and non-targeted subsidies to targeted social assistance. Concessional lending, rather than costly bond issuance, should be used to finance much needed investment in infrastructure, renewable energy, and natural disaster resilience, and partnerships with the private sector should be used when feasible. If enough fiscal space can be created, considerations should be given to reducing high taxes and duties on imports, which harm external competitiveness.

An appropriate fiscal rule would adequately support the adjustment effort. The PFM bill contains some welcome steps to strengthen the budget process and move toward a medium-term fiscal framework, but is not adequately tied to the debt target of 60 percent of GDP by 2030. A fiscal rule, enshrined in fiscal responsibility legislation, would be necessary to ensure the appropriate institutional arrangements for enhanced fiscal transparency and accountability.

Good governance of the citizenship program and of the sovereign wealth fund are essential to minimize risks and ensure good use of these additional resources. The recent changes to the CIP could provide a welcome boost to fiscal revenues. These revenues, however, are very volatile and the authorities’ decision to collect these funds in a sovereign wealth fund reduces the risk of fiscal dependence. As in other countries, the CIP entails significant reputational and financial integrity risks, which could be minimized by strict adherence to the highest standards for due diligence, governance, and transparency. The same principles should apply to the wealth fund, which should follow transparent criteria in its operations. Addressing remaining weaknesses in public investment management would ensure that only high-yield projects are selected. In view of the high public debt, priority should be given to its reduction.

Resolution of NPLs is critical to revive credit and support economic growth and renewed priority should be given to the establishment of the regional asset management company. New insolvency legislation will be an important step to facilitate foreclosures and debt restructuring. While the final steps to establish the ECAMC should be completed promptly by all jurisdictions, increased provisions for impaired assets by banks’ shareholders would facilitate the sale of NPLs. Continued efforts to implement international standards on AML/CFT and tax cooperation will be required to mitigate the risk of loss of CBRs.

Structural reforms remain critical to remove obstacles to long-term growth. Priorities include: (i) addressing skills mismatches and improving labor productivity by revising the national curriculum to match market demands and providing better training opportunities across sectors; (ii) aligning wages with productivity by gradually introducing performance-based pay in the public sector; (iii) removing obstacles preventing a more widespread adoption of solar energy or the passing of savings to final users; (iv) reducing costs to trade, including costs of port operations and import duties; and (v) addressing bank weaknesses to facilitate access to credit.

Statistics are adequate for surveillance. However, lack of resources is hampering quality in several areas. Data are subject to large revisions, which often reflect pre-existing weaknesses as methodological improvements are introduced. Adequate resources should be provided to the Central Statistics Office for data collection and compilation. The timeliness of data provision by government agencies should also be improved.

The 2016 update safeguards assessment found that the ECCB continues to maintain a governance framework that provides for independent oversight. Transparency in financial reporting has been maintained and the external audit mechanism is sound. The ECCB is taking steps to restructure the internal audit and risk management functions to align them with leading international practices.