Concludes 2023 Article IV consultation with the government

The International Monetary Fund (IMF) is pushing to have the government St. Kitts and Nevis to tighten its fiscal stance to entrench debt sustainability.

In its latest Article IV consultation with the government, the IMF emphasized the importance of the planned phasing-out of electricity price subsidies and other crisis-era support measures. According to the IMF “containing current expenditures, notably the wage bill, will help create space for sustainable investment.”

The IMF Directors called for reducing dependence on CBI revenue, which would require an overhaul of the taxation framework, including reducing tax expenditures, streamlining value added tax (VAT), reforming property taxes, and introducing a progressive personal income tax.

The Article IV Consultation highlights that, “the authorities are committed to maintaining a prudent fiscal stance going forward. Small budget surpluses are planned for the next three years, supported by the phasing-out of electricity price subsidies and streamlining of income support measures.”

The government during the consultation reiterated its intention to undertake structural fiscal policy changes to reduce dependency on CBI revenues over the medium term as well as restate its commitment to investing in natural disaster resilience and climate change adaptation.

Need for structural policies

According to the Article IV report, “Directors emphasized the need for structural policies to strengthen competitiveness, labor market development, and diversification. They recommended higher resilient infrastructure spending and an optimal insurance framework against natural disaster risks, and endorsed the authorities’ strategy to transition toward renewable energy.”

The IMF Directors supported the plan for a sovereign wealth fund to finance resilient investment and ensure adequate fiscal buffers. They welcomed efforts to improve the delivery and access to education and vocational training, complemented by active labor market policies, to reduce skills mismatches and promote job opportunities.

The Directors called for a re-assessment of the business model of the systemically important bank, noting that further progress is needed to de-risk its investment portfolio and reduce NPLs. They stressed the importance of ring-fencing public sector deposits from risks in any single bank adding that close monitoring of credit unions and continuing to advance the AML/CFT agenda would be important.

IMF growth observation

The IMF observed that St. Kitts and Nevis’ economic growth rebounded strongly in 2022 despite global headwinds. Gross Domestic Product (GDP) is estimated to have grown by 9% in 2022 after contracting 14.5% in 2020 and 0.9 in 2021. The lifting of all COVID-related travel restrictions in August 2022 sparked a strong rebound in the tourism sector and across the economy.

In addition, the IMF conceded that “the authorities’ proactive policy response, facilitated by the fiscal buffers accumulated from a decade of prudent fiscal policy, helped shelter domestic prices from high global energy and food prices. These measures nonetheless took a heavy toll on fiscal accounts in 2022.”

The primary balance ex-CBI revenue and land buybacks, an indicator of the underlying fiscal stance, deteriorated to a deficit of 17% of GDP (vs. 15% in 2021). Large CBI inflows in 2022 helped finance this expansion, keeping public debt below the ECCU regional target of 60 percent of GDP.

Balanced budget

Return to the pre-pandemic activity level is expected by end-2024, and beyond that, growth should converge towards its medium-term path. The Article IV Consultation assessed that “the budget is expected to be broadly balanced through 2025 and then go into deficits predicated on current policies. Risks to the outlook are tilted to the downside in the short term, but with some upside potential in the medium term.”

Downside risks primarily stem from a global slowdown, particularly in the United States, global inflation, and sustained commodity price volatility from lingering geopolitical uncertainty. However, prospects for an acceleration of the transition to renewable energy and increased investment in resilience by the broader public sector could represent a material upside risk.