Press Release No. 14/579

Press Release: IMF Executive Board Concludes 2014 Article IV Consultation with Antigua and Barbuda

December 15, 2014

On November 24, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Antigua and Barbuda.

A modest recovery is underway but macroeconomic indicators are still weak and important vulnerabilities remain. Economic activity in the first half of 2014 showed continuing signs of recovery following real GDP growth of 1.8 percent in 2013. Tourism has performed strongly, with stay-over arrivals up 7.7 percent during the first half of the year. The winter tourist season was the most successful since 2009. Nevertheless, tourist arrivals are still over 5 percent below pre-global crisis (2008) levels while real GDP is 14 percent lower. Commercial bank credit to the private sector was down by 4.4 percent in June 2014 compared with a year ago, as banks continue to deal with high levels of non-performing loans. Inflation remains subdued, reflecting sluggish aggregate demand and the absence of international commodity price pressures. The fiscal stance was eased after the Stand-by Arrangement ended in June 2013 and in the run up to the June 2014 elections. At the same time, scheduled external amortization has more than doubled this year to nearly 3 percent of GDP. With limited financing options, there was a re-emergence of arrears on external debt.

On current trends, growth would remain modest, with risks tilted slightly to the downside. Real GDP would grow by 1.9 percent in 2014 and 1.7 percent in 2015, underpinned by the ongoing recovery in North America and the United Kingdom. Although the government has begun to address its fiscal imbalances, arrears would be projected to grow. Increased cash flow problems for the government and unattended banking system problems represent serious downside risks. On the other hand, the possibility of large inflows from the Citizenship by Investment Program (CIP) and foreign direct investments could significantly improve the outlook. However, these would not obviate the need for important policy adjustments.

Executive Board Assessment¹

Executive Directors noted that macroeconomic and financial conditions in Antigua and Barbuda remain challenging. While a modest recovery continues, long standing problems in the fiscal and banking sectors remain unresolved, including unsustainable public debt, persistent large financing gaps, and high non performing loans and the delay in bank resolution. Directors underscored the need for decisive action to restore fiscal and debt sustainability as a matter of priority. They also emphasized the importance of achieving macroeconomic and financial stability to underpin stronger growth.

Directors noted the urgency of addressing the cash flow problem. They encouraged the authorities to adopt a comprehensive medium term fiscal consolidation program beginning with the upcoming 2015 budget. While welcoming the measures recently taken, they considered that, given limited financing options, additional measures would be required on the revenue side to improve tax collection and administration, and reduce tax incentives while enhancing regional collaboration to avoid tax competition. They also recommended measures to reduce the wage bill, and cut transfers to state owned enterprises and improve their financial performance and oversight more broadly.

Directors stressed that fiscal efforts should continue over the medium term to reform public financial management and strengthen the cash management system. They saw the benefits of a strong fiscal framework, including a fiscal rule prioritizing the reduction of debt to sustainable levels. In this context, Directors recommended using revenues from the CIP to first pay off arrears and reduce debt, while adhering to the highest level of transparency and governance in the administration of the CIP.

Directors welcomed the authorities’ intention to expedite the resolution of Antigua and Barbuda Investment Bank. It would be important to ensure that resources are available to fund the resolution while safeguarding fiscal sustainability. Directors looked forward to progress on the asset quality review and legislative reforms in support of the ECCU regional bank resolution strategy.

Directors agreed that boosting growth and employment continues to be a high priority. They advised that the focus be placed on improving cost competitiveness and the investment climate. In this regard, they saw a need for reforms of the energy sector, including the state owned utility company, aimed at reducing energy costs and improving efficiency. Lower labor costs and deeper regional collaboration, particularly on labor market issues, would also help enhance productivity.

Directors welcomed the new government’s swift action to settle arrears and commitment to remain current with its obligations to the Fund. Noting the high risk of debt distress, they encouraged the authorities to explore available financing and debt management options.