IMF says the economy of St. Kitts and Nevis is slowly recovering

Prime Minister Hon. Dr. Denzil Douglas (l) and Alfred Schipke, Division Chief Caribbean 1 Division, Western Hemisphere Department

BASSETERRE, ST. KITTS, JULY 28TH 2011 – The International Monetary Fund (IMF) said Thursday that the St. Kitts and Nevis economy is gradually recovering from a prolonged recession but fiscal imbalances and structural fragilities pose significant risks to the economic outlook.

“The authorities have started to implement an economic program to address these challenges over the medium term. The main objectives of this program are achieving higher growth and a sustainable fiscal position. The authorities’ plans include front-loaded fiscal consolidation, a comprehensive debt restructuring, and further steps to strengthen the financial sector, said Ms. Nemat Shafik, Deputy Managing Director and Acting Chair in a statement following the Executive Board’s discussion of St. Kitts and Nevis.

Shafik said the authorities have already taken important revenue and expenditure measures.

“These include an introduction of a value added tax, implementation of an excise tax and electricity tariff reform, and a freeze of the public wage bill. Given the magnitude of the targeted adjustment, sustained consolidation is critical,” she said.

She added that in addition to fiscal adjustment, a comprehensive and timely debt restructuring is needed to achieve a sustainable fiscal position and the authorities have publicly announced their intention to restructure the public debt and have initiated discussions with creditors to this end.

“Further strengthening of the financial system is also a critical element of the authorities’ economic program. In this respect, the forthcoming Banking Sector Reserve Fund would be able to provide temporary liquidity support to solvent financial institutions, if needed,” said Shafik in the statement.

She added that over the medium term, the structural reforms envisaged by the authorities will complement fiscal adjustment. These reforms aim at strengthening public financial management, improving the business climate, enhancing the social safety nets, removing obstacles to growth, and restoring competitiveness.

The IMF said that St. Kitts and Nevis’ economy was severely impacted by the global financial and economic crisis causing the economy to contract both in 2009 and 2010. This reflected a sharp decline in stay-over tourist arrivals and Foreign Direct Investment (FDI) inflows. The fiscal position deteriorated in 2010 as tax revenue declined by 13½ percent. The global downturn also coincided with the collapse of two large regional insurance companies.

It noted that faced with increasing fiscal imbalances in 2010, the authorities started implementing a strong fiscal adjustment program towards the end of last year and the beginning of 2011, including the introduction of a VAT and the increase in electricity tariffs by about 80 percent. Despite those efforts, the public debt increased further to about 200 percent of GDP in 2010.

The authorities have requested Fund assistance to support their economic program. The main objectives of the program are to substantially strengthen public finances, significantly reduce public debt levels and set the stage for sustained economic growth.

The IMF said key reform objectives include:
• Continued implementation of fiscal adjustment measures.
• Strengthening fiscal management and improving the effectiveness and efficiency of the public sector.
• Continued support to the most vulnerable social groups.
• Removing obstacles to growth.

It stated that these reform efforts, however, will need to be complemented by a comprehensive debt restructuring. The authorities have announced their intention to seek a comprehensive and substantive restructuring of the public debt in June 2011.

To address the financing difficulties and help set the public debt firmly on a downward path toward the ECCU debt target of 60 percent of GDP by 2020, a substantial reduction in the debt service burden consistent with the country’s payment capacity will be needed.