Public and private investments are constrained by weak balance sheets

Durrant Pate/Contributor

Despite projecting economic growth of 9.1 per cent in 2022 for St Lucia, the International Monetary Fund (IMF) has assessed that the recovery process is incomplete with an output gap minus 4.3 per cent of gross domestic product (GDP).

St Lucia has been severely affected by the COVID-19 pandemic and the increase in import prices due to the war in Ukraine. After a collapse in 2020, tourist arrivals have rebounded significantly in 2021–22 but the recovery remains incomplete.

The IMF, in its latest Article IV consultation of St Lucia, reports that, “the public balance sheet remains under considerable strain with a sizeable fiscal deficit and a significant increase in public debt since 2019. Inflation has picked up with the surge in commodity prices—somewhat mitigated by price controls and energy subsidies”.

On the positive side, the IMF said St Lucia’s financial sector has remained stable cautioning that non-performing loans have risen during the pandemic. Output is projected to gradually recover to the pre-pandemic level by 2024, slowed by the impacts of the war in Ukraine and the tightening of global financial conditions.

In addition to the weak balance sheets, the Caribbean territory is struggling with higher input costs and supply constraints. Inflation is projected to rise to 6.4 per cent in 2022. The fiscal outlook, according to the IMF is challenging due to high public debt and large refinancing needs which lead to financing constraints.

 “Without additional policy measures, public debt is projected to stabilise around 90 per cent of GDP in the medium term, limiting the space for public infrastructure and social investments,“ the IMF said.

The current account deficit is projected to gradually narrow with the recovery of tourism.

Bank credit to the private sector is expected to remain anemic due to concerns about weak corporate balance sheets and structural impediments, such as the lack of a credit registry and a weak insolvency framework.

The IMF has identified that “downside risks dominate, mainly from higher global food and energy prices, global inflation and tightening of financial conditions, supply bottlenecks, and the ongoing pandemic. The natural disaster risk remains a near-term challenge and is expected to intensify with climate change”.

IMF executive directors’ assessments

IMF executive directors in their Article IV consultation report emphasises the need to address the fiscal and financial constraints to public and private investment to foster a sustainable and inclusive recovery. Directors concurred that, in the near-term, fiscal policy should focus on protecting the most vulnerable from food and fuel price increases.

Given financing constraints, they encouraged the St Lucian authorities to prioritise spending and to increase the pass-through of global energy prices while supporting vulnerable households with targeted transfers.

As the recovery takes hold, the IMF directors called for pursuing a credible and growth-friendly fiscal consolidation to strengthen fiscal sustainability, create space for social and infrastructure investment, build buffers against natural disasters, and put debt on a downward path. They recommended the adoption of a medium-term fiscal responsibility framework, a debt management strategy, and a fiscal rule to support debt sustainability.

The directors highlighted the role of the financial sector to unlock private sector growth and encouraged the government to facilitating access to credit and boosting financial intermediation while modernising the insolvency and foreclosure legislation and establishing the credit bureau and a movable collateral framework, as well as strengthening the non-bank financial sector.