July 23, 2024
On July 22, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with St. Vincent and the Grenadines and endorsed the staff appraisal without a meeting on a lapse-of-time basis (see important note below on the timing of the report, which predates Hurricane Beryl).[2]
The economy rebounded strongly in 2022–23 from the pandemic and 2021 volcanic eruptions, 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. Inflation has subsided from its peak. Formal employment surpassed pre-pandemic levels in 2022 and is estimated to have continued to grow in 2023. Nevertheless, recent compounded shocks have left a lasting negative impact on employment of young men, and female labor force participation remains relatively low. As regards public finances, while non-interest current spending was significantly reduced, the fiscal deficit 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 financial system remains sound.
Growth is projected at 4.9 percent in 2024, supported by continued growth in tourism and strong investment on infrastructure, particularly the port project. Inflation is projected to ease to 2.5 percent by end-2024, on account of lower imported inflation. The authorities are balancing the need to support inclusive and resilient growth and maintain fiscal prudence, with both overall and underlying (excluding pandemic-, volcano-, and port-related spending) primary balances projected to improve significantly in 2024, to -4.6 and 2.1 percent of GDP, respectively. They also remain committed to reaching the regional debt ceiling and the medium-term fiscal strategy set out in the 2021 Rapid Credit Facility. The outlook is subject to downside risks stemming primarily from an abrupt global slowdown, commodity price volatility, and potential delays in investment projects. In addition, the economy is facing significant challenges from a rapidly ageing population and the threat of natural disasters and climate change, amid the still high public debt. On the upside, stronger-than-expected tourism development and agriculture sector recovery could enhance growth and improve the external position.
Executive Board Assessment[3]
St. Vincent and the Grenadines has achieved a robust recovery from recent compounded shocks. The authorities’ decisive policy responses, large-scale investment projects, and robust growth in tourism have contributed to the recovery. Agriculture performance, however, disappointed, due to the lingering impact of volcanic eruptions and historic-high temperatures in 2023. Employment has returned to the pre-pandemic level except for young men, and female labor force participation remains relatively low. Inflation has subsided from its peak. The external position in 2023 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. The outlook is favorable, supported by continued recovery in tourism and strong investment in infrastructure, but is subject to downside risks mainly stemming from an abrupt global slowdown, commodity price volatility, and potential delays in investment projects. Furthermore, the economy is facing significant challenges from a rapidly ageing population and the intensifying threat of natural disasters and climate change, amid the still high public debt.
Fiscal policy should focus on building buffers and supporting resilience and inclusive growth while safeguarding public debt sustainability. The authorities’ continued commitment to reaching the regional debt target and the medium-term fiscal strategy set out in the 2021 RCF is welcome and critical to public debt sustainability. The elevated global uncertainty and the country’s high vulnerability to shocks call for contingency planning and stronger fiscal buffers. In this regard, the adoption of the Disaster Risk Financing Strategy (DRFS) and ongoing efforts to implement it, including continued building of the Contingencies Fund and the establishment of the Catastrophe Deferred Drawdown Option with the World Bank, are important steps. In addition, pursuing a lower debt target and stronger adjustment would provide a safety margin that could be used when shocks materialize and ensure that the regional debt target and public debt sustainability are met with a higher probability. This could be achieved through further efforts to build a more efficient and equitable tax and expenditure framework, which will also help support resilient and inclusive growth. To these ends, significant work underway to improve the efficiency and inclusiveness of public spending and services should continue. The efficiency and progressivity of the tax system can be improved while enhancing revenue. Building on recently launched reforms to the National Insurance Service (NIS), better alignment of the non-contributory Public Sector Pension System 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. Efforts to enhance revenue administration should be sustained, including through the recent initiative to enforce VAT for private home vacation rentals, modernizing the Customs Act, and digitalizing the tax information management system. In view of the tight global financial conditions and still elevated debt level, it will be important to further strengthen the Fiscal Responsibility Framework (FRF) to 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 Fiscal Responsibility Mechanism report, improving the budget process and medium-term fiscal planning, and strengthening SOE oversight and the cash management system.
Sustained efforts with structural reforms are imperative to build climate resilience and address structural bottlenecks to investment, employment, and productivity. The ongoing investments in key infrastructure such as ports, roads, airports, and water supply, along with efforts with digitalization and improving investment climate, are crucial for alleviating supply-side bottlenecks and enhancing competitiveness. The comprehensive education reform underway that focuses on curriculum reforms and expansion of post-secondary and technical and vocational education and training will help reduce skill mismatches and facilitate youth employment. A careful design of the unemployment insurance scheme, complemented by active labor market policies, is needed to encourage labor market participation and formality and ensure the scheme’s sustainability. In addition to the recent strengthening of parental leaves, targeted social investments could further 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. In response to rising risks of climate change and natural disasters, the authorities should continue building structural and financial resilience and transitioning to renewable energy, including by incorporating resilience feature into new infrastructure, implementing the recently adopted DRFS, enhancing the disaster management plan and legislation, and modernizing the Electricity Act.
The financial system remains sound, but efforts should continue to reduce balance sheet vulnerabilities and strengthen regulatory and supervisory frameworks. Capital and liquidity buffers are ample, with no apparent impacts of the compounded shocks on asset quality. Provisioning levels for the banking system, however, should be bolstered and disposal of long-dated nonperforming loans accelerated. The financial authority should continue to strengthen the supervisory and regulatory frameworks and improve crisis preparedness. Building on past achievements, efforts should continue to strengthen the AML/CFT framework to minimize the risk of losing Correspondent Banking Relationships.