Mission Concluding Statement 

St. Lucia: Staff Concluding Statement of the 2015 Article IV Mission

November 24, 2015

A mission led by Mr. Leo Bonato visited St. Lucia during November 10-20, 2015, for the annual Article IV consultation discussions on economic developments and macroeconomic policies. The mission met with the Honorable Prime Minister and Minister of Finance Kenny D. Anthony, Permanent Secretary Reginald Darius, other senior government officials, and representatives of the private sector, labor unions, and the Leader of the Opposition, the Honorable Gale Rigobert. Mr. Bonato was grateful to the authorities for their generous hospitality and excellent collaboration and issued the following statement:

“The nascent recovery provides an opportunity to address long-standing issues that affect the performance of the St. Lucian economy. Reducing public debt and improving competitiveness are key to improve medium-term growth prospects and reduce high unemployment. The authorities have made important strides, but more efforts are needed. In particular, a credible medium-term fiscal consolidation plan and a rapid implementation of the reform agenda are necessary to achieve the authorities’ objectives.”

1. Economic activity is recovering and the short-term growth outlook is positive. On the back of strong tourism inflows and lower oil prices, the St. Lucian economy has returned to growth after experiencing a recession in 2012 and close-to-zero growth in 2013. GDP growth reached 0.5 percent in 2014 and is expected to accelerate to 1.6 percent in 2015, driven by tourism and transportation services.¹ The favorable external environment has contributed to a narrower current account deficit and policy actions by the authorities have strengthened the fiscal position. Inflation remains low.

2. Long-standing structural impediments, however, weigh on economic prospects. The economic recovery has not yet spread to the entire economy and, according to the latest available data, the unemployment rate remains high at 25 percent, with youth unemployment above 40 percent. Although unemployment has increased following the global financial crisis, most of it is structural in nature and cannot be solely reduced by demand-supporting policies. Supply bottlenecks, low productivity, labor skill mismatches, and high costs limit medium-term growth prospects well below what is necessary to reduce unemployment on a durable basis.

3. Notwithstanding the improvement in the fiscal position, high public debt remains a significant vulnerability. At about 80 percent of GDP, public debt is high by international standards, and ever-increasing interest payments limit the budget resources available for other uses, including high-impact social and infrastructure spending. Revenue-enhancing fiscal measures and under-execution of the capital budget have helped the authorities attain a small primary fiscal surplus in fiscal year 2014/15. A slightly better result is expected in the current fiscal year, reflecting revenue-enhancing measures, inflows from the new Citizenship by Investment Program, and further under-execution of capital spending. A surplus of this size, however, is not sufficient to prevent the debt ratio from continuing to rise.

4. A sound plan to put public debt on a sustainable path should be a key priority. The authorities are committed to the ECCU-wide debt target of 60 percent of GDP by 2030. Achieving this target requires a medium-term plan designed to strengthen confidence and to provide buffers for risks, including from natural disasters. In staff’s view, an adjustment of 4 percent of GDP over the next four years could accomplish these objectives. With additional revenue measures already implemented over the past few years, there is greater scope for expenditure reductions. To contain the adverse growth impact of the adjustment, savings should be found in areas other than hard infrastructure and skills attainment. In particular, the wage freeze agreement negotiated with public sector unions through FY2016/17 is useful, but continued efforts to contain wages, salaries, and benefits will be needed until the sustainability of debt is assured. Elsewhere, there is scope to achieve savings on non-targeted subsidies, social expenditures in the capital budget, transfers to statutory enterprises, utilities expenses, and by streamlining tax expenditures.

5. The frequent occurrence of natural disasters highlights the need for measures that enhance resilience by building buffers and planning appropriately. Fiscal adjustment plans should incorporate buffers to absorb potential recovery and reconstruction costs. These buffers would reinforce the credibility of the fiscal adjustment effort and help prevent tight market conditions from magnifying the economic disruption posed by these events. Moreover, accounting for natural disasters in forward planning entails continuing to build and maintain high-quality infrastructure able to withstand natural events and appropriately insuring physical assets.

6. Making the most of the new opportunity provided by the Citizenship by Investment Program requires a prudent approach. Appropriate governance provisions are essential and the Citizenship by Investment Act and its associated regulations contain a number of welcome aspects in this regard. Going forward, the authorities should consider ways to minimize the risks of fiscal dependence on citizenship revenues, which can be volatile and subject to sudden stops. The annual cap on approved citizenship applications could be a strong device for containing these risks. Additionally, these revenues should be directed to lower public debt or to improve growth-enhancing infrastructure.

7. Difficulties in resolving nonperforming assets constrain the ability of banks to support the recovery. Banks continue to maintain tight underwriting standards in response to a challenging operational environment of low profitability, high non-performing loans, and insufficient provisioning for non-performing assets. While progress has been made to resolve non-performing loans, further reduction will be difficult due to the lengthy foreclosure process. Despite some pick-up in lending activity among credit unions and micro-finance institutions, limited financing opportunities from banks are likely to continue to be a drag on the economy in the foreseeable future. Completing the healing process of the banking sector requires a swift reform of the foreclosure and insolvency regulation, and a prompt implementation of the remaining elements of the regional strategy for bank resolution, including the legislation on the Eastern Caribbean Asset Management Corporation. Adopting the regionally harmonized credit union legislation is necessary to strengthen the regulatory framework in the non-bank financial sector.

8. The authorities have embarked on an ambitious program of structural reforms, but important areas remain to be addressed and rapid implementation is key. Steps have been taken to address St. Lucia’s dependence on imported fossil fuels and the high cost of port operations. A new commercial court is about to commence full operations. Modernization of port operations and customs and tax administration has continued and efficiency-enhancing changes to the income tax will be introduced in 2016. The authorities have also pressed forward on public financial management reforms through reformed procurement legislation and improved cash management procedures. More efforts, however, are urgently needed to rationalize and refocus the education system and address labor skill mismatches.