Public Information Notice No. 11/156

Public Information Notice: IMF Executive Board Concludes 2011 Article IV Consultation Discussions with United Kingdom-Montserrat–British Overseas Territory

December 13, 2011

On November 28, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the first ever Article IV consultation discussions with United Kingdom–Montserrat–British Overseas Territory.¹

Background

Montserrat has made enormous progress in its recovery from the 1995 eruption of a long dormant volcano, which remains intermittently active. The economy is sustained by grants from the UK. Low growth is expected in 2011 after sharp output contractions in 2009–10. Stress in the financial sector and slower than expected development of the major capital investment projects continue to limit prospects for growth.

The island has made enormous progress in its recovery, with generous support from the UK government, the European Union, and other donors. Nevertheless, the eruption has had a large and lasting demographic, economic and social impact.

Grants from the UK finance around half of expenditure. The ability to mobilize revenue domestically is constrained by the dominant role of government and donor activity which is not taxable. UK grants buffered the impact of the global crisis on Montserrat. The economy contracted in 2009–10 due in part to a small volcanic eruption and the passage of Hurricane Earl in 2010. Inflation remained low at around 2.5 percent in 2009–10. Although UK grants sustained expenditure in 2009, the fiscal stance in 2010 was contractionary. The fiscal stance and weak activity reflect in part implementation delays in key capital projects. The economic outlook hinges upon progress with major public capital projects, improving access to the island, and strengthening the private sector.

Executive Board Assessment

The Executive Directors welcomed Montserrat’s significant progress in recovering from the eruption of the volcano, which remains intermittently active. At the same time, they noted that in many respects the island’s economy is still out of equilibrium, as it adapts to living with the volcano while exploiting related opportunities. They supported the authorities in their efforts with support from the United Kingdom to gradually reduce dependence on external grants.

Directors welcomed the development of a strategy for addressing financial vulnerabilities and the initial progress in implementing it. They supported preemptive action to minimize costs and risks and preparation of an action plan spelling out the roles of the key players. They urged the authorities to further improve regulation and supervision of the nonbank financial sector and bringing the building society under the purview of the Financial Services Commission.

Directors agreed that reducing dependence on recurrent and capital grants should be a key objective of fiscal policy. They urged the authorities to reach agreement with the United Kingdom on a revised fiscal framework and timetable for reforms in light of implementation delays in key projects and the current economic environment. Directors commended the authorities’ progress in improving tax administration and urged them to maintain momentum with reforms including by introducing a single Taxpayer Identification Number and integrating IT systems.

Directors encouraged the authorities to take advantage of a range of opportunities to promote long-run growth. They noted that improving access to the island would remove an important bottleneck that impedes economic growth generally and tourism in particular. In addition, construction of a new capital would provide a focal point for private and public activity. They suggested that the short-run priority should be to accelerate the investment program by overcoming implementation constraints and obtaining grant financing. Directors welcomed steps toward putting in place a sound framework for the mining of volcanic sands which would facilitate exports while addressing negative externalities.

Directors underscored that ensuring a reliable energy supply and minimizing its cost would be essential for faster growth. They encouraged the authorities to continue improving energy generating capacity and fully exploring the possibility to develop geothermal energy sources.

Directors welcomed the Montserratian authorities’ decision to propose the first ever Article IV Consultation Discussions, which had helped provide context for the 2011 Eastern Caribbean Currency Union Common Policies Discussions, and hoped that the close dialog developed would continue.