May 10, 2024
An IMF staff team, led by Ms. Nan Geng, visited Kingstown during April 23 – May 7, 2024, for the 2024 Article IV consultation discussions on economic developments and macroeconomic policies. The team issued the following statement:
St. Vincent and the Grenadines has achieved a robust recovery from recent compounded shocks, supported by the authorities’ decisive policy responses, large-scale investment projects, and robust growth in tourism. The outlook is favorable but subject to downside risks mainly stemming from the uncertain external environment. In addition, the economy is facing challenges from a rapidly ageing population and the ever-present threat of natural disasters and climate change, amid the still high public debt. Policies need to be calibrated to continue to build buffers and resilience and support sustainable and inclusive growth while safeguarding debt sustainability and financial sector stability.
Recent Developments, Outlook, and Risks
The economy rebounded strongly in 2022-23, returning to pre-pandemic output levels. Growth reached 3.1 percent in 2022 and is estimated to have accelerated to 5.8 percent in 2023. This was supported by large public and private investment and a robust recovery of tourism, which were partly offset by a drop in agriculture due to lingering effects from volcanic eruptions and the historic high temperature in 2023. Stayover arrivals approached pre-pandemic levels in 2023 supported by significant improvement in airlift. Formal employment surpassed pre-pandemic levels in 2022 and is estimated to have continued to grow in 2023, fueled by the recovery in tourism and higher demand in other services. Nevertheless, recent compounded shocks have left a lasting negative impact on employment of young men. As regards public finances, even though non-interest current spending was significantly reduced, the fiscal deficit is estimated to have widened in 2022-23 largely due to the phasing of port-related spending and temporary factors. Public debt declined from its peak in 2021 to about 87 percent of GDP in 2023 but remains well above pre-pandemic levels. The external position improved in 2022-23 supported by recovery in goods exports and tourism receipts.
The outlook is favorable though subject to downside risks. Growth is projected at 4.9 percent in 2024, which implies that economic activity would surpass the level projected for the medium term before the pandemic. Near-term growth will be supported by continued recovery in tourism and strong investment on infrastructure, particularly the port project. Inflation is projected to ease to around 2 percent by end-2024, on account of lower imported inflation. Risks to the outlook stem primarily from an abrupt global slowdown, commodity price volatility, potential delays in investment projects, and the ever-present threat of natural disasters and climate change. On the upside, stronger-than-expected tourism development and agriculture sector recovery could enhance growth and improve the external position.
Support Resilient and Inclusive Growth and Safeguard Debt Sustainability Through a More Efficient Tax and Expenditure Framework
The fiscal stance embedded in the 2024 budget strikes an appropriate balance between maintaining fiscal prudence and supporting inclusive and resilient growth. The government continues to rationalize current spending and build the Contingencies Fund while prioritizing capital spending on reconstruction, essential upgrade and resilience building of economic infrastructure, and health and education investments to propel people-centered and sustainable growth.
The team welcomes the authorities’ continued commitment to reaching the regional debt target and the medium-term fiscal strategy set out in the 2021 Rapid Credit Facility. This includes further strengthening tax administration, continued containment of the growth of wages (as manifested in the prudent public sector wage growth over 2023-25 agreed in the recent round of negotiation) and non-priority current spending, and prioritizing capital programs to balance the needs for a resilient recovery with safeguarding debt sustainability. As such, the primary balance is expected to improve to a surplus of about 3¼ percent of GDP from 2026 once the large-scale projects are near completion. This would put the debt-to-GDP ratio on a downward path from 2025 and, if sustained, reach 60 percent before the regional target date of 2035.
The elevated global uncertainty and the country’s high vulnerability to shocks call for contingency planning and stronger fiscal buffers. The team welcomes the authorities’ adoption of a Disaster Risk Financing Strategy and the ongoing efforts to establish a new Catastrophe Deferred Drawdown Option of US$20 million with the World Bank and contingency budgetary planning for disaster responses and resilience activities. In addition to these efforts, bringing the primary surplus to around 3¾ percent of GDP in the medium term (about ½ percentage above the current medium-term target) would build a safety margin for public debt to guard against risks and meet the regional debt target and debt sustainability with a higher probability.
Continued efforts to build a more efficient and equitable tax and expenditure framework will help create space to withstand shocks and support resilient and inclusive growth. Significant work is underway to improve the efficiency and inclusiveness of public spending and services and should be sustained, including modernizing the social assistance system, digitalizing government infrastructure, platforms, and services, adopting gender-responsive budgeting, and implementing the recommendations from IMF’s Public Investment Management Assessment with a Climate Module (C-PIMA). On the revenue side, the efficiency and progressivity of the tax system can be improved while enhancing revenue by drawing on the comprehensive roadmap for tax reforms from recent IMF technical assistance. The proposed reform roadmap includes enhancing the progressivity and fairness of personal income tax, improving the design of tax incentives and corporate income tax, streamlining value-added tax (VAT), and modernizing recurrent property tax.
Coordinated reforms to the National Insurance Services and Public Sector Pension System (PSPS) are needed to improve their efficiency, sustainability, and fairness. The team welcomes the recently launched pension reform package to bolster the National Insurance Services’ (NIS) financial sustainability in view of the rapid population ageing and the still low contributions compared to generous payouts. Additional measures to ensure NIS’s long-term sustainability and further enhance its efficiency and fairness could be considered, including linking retirement age to life expectancy and applying a uniform accrual rate across years to promote long careers. Reforming the non-contributory PSPS to better align it with the NIS is urgently needed to improve fairness and reduce fiscal costs.
Continued strengthening of fiscal institutions is key to underpin fiscal efforts and reinforce fiscal credibility. The government is stepping up efforts to enhance revenue administration, including through the recent initiative to enforce VAT for private home vacation rentals, modernizing the Customs Act, and digitalizing the tax information management system. The team welcomes the publication of the Fiscal Responsibility Mechanism’s (FRM) first report, pursuant to the Fiscal Responsibility Framework (FRF) adopted in 2020. In view of the tight global financial conditions and still elevated debt level, it will be important to further strengthen the FRF and signal a credible medium-term fiscal plan, including by recalibrating and fully operationalizing the FRF, timely publishing and incorporating forward-looking budgetary advice into the FRM report, improving the budget process and medium-term fiscal planning, and strengthening SOE oversight and the cash management system.
Build Climate Resilience and Advance Structural Reforms to Promote Investment, Employment, and Productivity
Sustained efforts to address supply-side bottlenecks would help unleash a higher growth potential. Ongoing investment on critical public infrastructure, including the port, roads, airports, water supply, and agriculture production, along with the development of sectoral strategies guided by the National Development Plan, is instrumental in alleviating structural bottlenecks, improving competitiveness, and releasing the country’s full potential of comparative advantage on tourism and agriculture. Strengthening linkages with agriculture and fisheries will help increase the domestic value-added of tourism. In addition, with relatively high internet access and low cost, the country is well-positioned to benefit from the ongoing digital transformation of government, business, and financial infrastructure and services. This transformation is expected to enhance productivity and the business environment. Ongoing efforts to streamline the Investment Act and establish single windows for land registration and trade are critical to improve the investment climate.
A well-functioning labor market, with skills attuned to market needs and higher participation, is critical for boosting productivity and employment, especially in view of the rapid population ageing. The team welcomes the establishment of the Prime Ministerial Advisory Council on Youth and the recently launched comprehensive education reform with focuses on curriculum reforms and expansion of post-secondary and technical and vocational education and training, which will help reduce skill mismatches and integrate the youth into the labor market. Recent strengthening of parental leaves would encourage participation and formality and reduce gender gaps. Targeted social investments could further help unleash the full potential of the female labor force, including by enhancing access to affordable and quality child and elderly care and reducing adolescent pregnancy. The team welcomes the planned introduction of a permanent unemployment insurance, but it needs to be carefully designed and complemented by continued strong efforts in active labor market policies to ensure the scheme’s sustainability and achieve the desired labor market outcomes.
Building resilience to natural disasters and climate change remains a priority. The authorities have stepped up efforts to strengthen structural and financial resilience, including by incorporating resilience feature into new infrastructure, adopting a Disaster Risk Financing Strategy, tapping Green Climate Fund, and enhancing the disaster management plan and legislation. Efforts to transition to renewable energy are ongoing, including the introduction of new solar projects and a new revenue-neutral import tax regime to promote cleaner motor vehicles. Ongoing work to modernize the Electricity Act and update the National Energy Policy would help provide an enabling environment to support the transition.
Maintain Financial Sector Stability
The financial system remains sound, but efforts should continue to reduce balance sheet vulnerabilities. Capital and liquidity buffers are ample. Non-performing loans (NPLs) have declined from the 2022 peak and remain below regional averages, with no significant impact from the expiration of the pandemic moratorium. Banks’ profitability has fully recovered to pre-pandemic levels, but provisioning levels—while above the regional average—fall below the new regional requirement and should be bolstered and disposal of long-dated NPLs accelerated. Despite the still relatively small size of credit union loans compared to those of banks, the increasing role of the less stringently regulated credit union sector in credit provision warrants continued vigilance in oversight of asset quality and underwriting standards, especially in the absence of resolution frameworks and financial safety nets.
Building on past achievements, the authorities should sustain the efforts to strengthen regulatory and supervisory frameworks and improve crisis preparedness. Priorities include (i) completing the transition to risk-based supervision, including incorporating climate risks, (ii) adopting amendments to the FSA Act, (iii) establishing a National Crisis Committee to develop a crisis management framework for the non-bank financial sector and deposit insurance schemes in consultation with the Ministry of Finance and the Eastern Caribbean Central Bank (ECCB), and (iv) supporting the establishment of an ECCU regional standards setting body for non-bank financial institutions.
Continued strengthening of the effectiveness of the AML/CFT framework remains important to minimize the risks of losing correspondent banking relationships. The authorities have updated the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) legal framework and started implementing risk-based supervision for some of the higher-risk sectors. Efforts should continue to implement other recommendations of the 2024 Caribbean Financial Action Task Force (CFATF) Mutual Evaluation.
The IMF mission would like to thank the authorities, private sector counterparts and other stakeholders for their warm hospitality and the candid and constructive discussions.