Start of several large-scale investment projects to under pin growth forecast

Durrant Pate/Contributor

Having been rocked by two external shocks over the past three years, St Vincent of the Grenadines (SVG) is set to record economic growth of five per cent, based on the latest assessment of the International Monetary Fund (IMF).

In its latest Article IV consultation with SVG during the period August 18-31, 2022, the IMF Mission Team led by Nan Gen projects a further economic growth of six per cent in 2023. This is based on the post-eruption rebuilding activity, continued recovery in tourism and agriculture, and the start of several large-scale investment projects.

The IMF reports that these new large scale investment projects will support real Gross Domestic Product (GDP) growth of five per cent this year, growing to six per cent next year, as these major projects get into full swing. GDP is estimated to have increased by 0.5 per cent in 2021 after shrinking by 5.3 per cent in 2020.

Higher import prices, in particular those for fuel and food, are projected to push inflation to 5.7 per cent in 2022. Nevertheless, core inflation is estimated to have remained below two per cent.

Given the elevated macroeconomic uncertainty and high vulnerability to external shocks and natural disasters, the debt trajectory is subject to significant risk.

Risk to positive outlook

The outlook for SVG is favourable, although subject to large 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. Also supply chain disruptions and natural disasters.

According to the IMF, “the 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”.

The IMF complimented the government on safeguarding debt sustainability while supporting a resilient and inclusive recovery stating, “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 IMF commended the authorities for rightly prioritised 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.

The mission team argued that this should be accompanied by further efforts to enhance coverage and targeting of social safety nets, including through ongoing efforts to digitise beneficiary information and payment system.

Commitment to reaching debt ceiling

The IMF mission team welcomed the government’s continued commitment to reaching the regional debt ceiling and the medium-term fiscal strategy set out in its debt recovery programme. 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 is improving the country’s primary balance to a surplus of about three per cent 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 per cent 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.

SVG FINANCIAL SECTOR WEATHERED SHOCKS RELATIVELY WELL

The IMF reports that SVG financial sector has weathered the shocks relatively well so far noting that 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.

However, the IMF reports that the provisioning levels for the banking system have declined recently to below the Eastern Caribbean Central Bank’s (ECCB’s) recently introduced more stringent guidance and should be bolstered.