Press Release No. 16/220

Press Release: IMF Staff Completes 2016 Article IV Mission to St. Kitts and Nevis

May 13, 2016

A team from the International Monetary Fund (IMF), led by Ms. Inci Otker, visited St. Kitts and Nevis during April 20–May 3 to conduct the 2016 Article IV Consultation. At the conclusion of the discussions, Ms. Otker issued the following statement:

“St. Kitts and Nevis successfully exited the Post-Program Monitoring Framework at end-October 2015, 7 months ahead of schedule, following the completion of its IMF-supported program in July 2014. The discussions focused on the elements of a comprehensive strategy to lock in the gains achieved in fiscal and debt sustainability in recent years, while enhancing resilience of the macroeconomic performance to adverse shocks and safeguarding macro-financial stability.

“Macroeconomic performance remained strong in 2015. The economy grew at an estimated 5 percent, in line with 2015 Article IV projections, following two consecutive years of strong growth at around 6 percent. Strong construction activity through end-2015 underpinned growth, supported by large real estate projects funded through the Citizenship-by-Investment (CBI) program, as well as large public sector investment projects. The ongoing recovery in tourism and strong wholesale and retail activity also supported growth. Inflation turned negative, owing to the impact of VAT and import duty exemptions and lower commodity prices. The fiscal position remained in surplus, at an estimated 5 percent of GDP. The debt-to-GDP ratio continued its impressive downward trajectory, and is projected to reach the ECCU’s 2030 target of 60 percent in 2017.

“The banking system remained stable with comfortable capital buffers and high levels of liquidity. Private sector credit witnessed a moderate recovery of 3.2 percent year-on-year in 2015. The high level of nonperforming loans continued to dampen banks’ appetite for lending, which, together with a growing deposit base, continued to weigh on profitability.

“The outlook for 2016 is positive, but remains dominated by developments in CBI inflows. Growth is expected to moderate to 3.5 percent in 2016 and 3 percent, on average, over the medium term, reflecting a tapering of construction activity associated with a potential slowdown in the pace of new CBI applications, given the increased competition from new CBI programs. The ongoing recovery in tourism activity is expected to support growth, as new CBI-funded tourist facilities come on stream in 2017-19. Potential spillovers from weak growth prospects in key tourism source markets, de-risking trends, delays in regional financial sector resolution, and exposure to natural disasters pose additional downside risks to the outlook. Higher than expected CBI inflows or favorable oil price developments, however, could surprise on the upside.

“Safeguarding fiscal sustainability requires a prudent medium-term fiscal framework that reduces reliance on CBI inflows and the Sugar Industry Diversification Foundation (SIDF) grants. Although the impact of the VAT and import duty exemptions were largely offset by stronger income tax collection and higher-than-expected outturn of other taxes on international trade, lower CBI budgetary receipts, delays in external grants, and temporary financing of SIDF spending weakened the fiscal position, compared to previous years. A prudent framework would help build resilience to a sudden stop in CBI inflows, and facilitate the accumulation of fiscal buffers necessary to address natural disaster shocks and absorb unforeseen financing needs if tax performance disappoints after a slowdown in CBI inflows.

“Implementing such a framework will require additional fiscal effort to attain a balanced budget target net of CBI receipts and SIDF grants, with the adjustment paced over the medium-term. To this end, it would be important to broaden the tax base, including by streamlining tax incentives and further improving tax administration and compliance, especially at the local government level (NIA). The authorities’ commitment to a comprehensive review of the concessions regime is welcome in this regard. Achieving the target also requires containing recurrent spending, in particular on goods and services and the wage bill.

“Establishing a ‘Growth and Resilience Fund’ can help preserve the accumulated savings from the CBI program, while providing a contingency buffer for future shocks, such as costly natural disasters. The fund should have a prudent investment strategy, with appropriate governance and accountability and its flows fully integrated with the fiscal framework. Investing the funds in safe instruments abroad should help reduce risks to financial stability by easing banks’ excess liquidity pressures.

“Establishing a clear framework for resolving the debt-land swap is crucial, to preserve the credibility of debt restructuring, the hard-earned gains in debt sustainability, and financial sector stability. In this context, the appointment of the Special Land Sales Company (SLSC) board of directors is welcome. The SLSC should be operationalized as a marketing agent for the remaining plots of land and develop a plan to sell locally and abroad, including to the large Kittitian and Nevisian Diaspora. Meanwhile, it is important that a clear strategy is developed to enable reasonable progress with land sales.

“The authorities are to be commended for the comprehensive reform of the CBI program. Cooperation with neighboring islands would be helpful to ensure the sustainability of the CBI schemes in the region. Improvements in the transparency of SIDF financial reporting are welcome, as are the plans for its potential integration with the consolidated fund to provide a comprehensive fiscal perimeter and the efforts to streamline and reorient the People’s Employment Program to its original purpose of training the labor force to close the skills gap.

“The authorities are advised to press ahead with structural reforms that strengthen public financial management and boost the economy’s long-run growth potential. In this context, strengthening the NIA’s budget framework, tax policy, and revenue administration, as well as the oversight of public corporations is critical for the Federation’s fiscal sustainability. Investing in targeted transformative projects will help improve competitiveness, diversification, and resilience of the economy, including by broadening options under the CBI program to include business investment in renewable energy, education and health. Pressing ahead with the regional efforts to revise foreclosure legislation, establishing a credit bureau, and reforming land registry will improve the business environment and support private sector development.

“More systematic and closer coordination between the ECCB and the Financial Services Regulatory Commission will be important to limit potential risks from linkages between banks and nonbanks and between onshore financial institutions and those operating internationally. Implementing the new Banking Law, ratified by the Parliament in 2015, will raise capital cushions and enable the ECCB to conduct consolidated and risk-based supervision. Further strengthening of the supervisory frameworks would help capture weaknesses in growing market segments. Trends in Correspondent Banking Relationships (CBRs) will need to be systematically monitored going forward, and—to limit the risk of losing CBRs—it will be important to maintain a watertight Anti Money Laundering/Combatting the Financing of Terrorism (AML/CFT) regime with adequate financial disclosure, and full compliance with international standards on transparency and exchange of tax information.

“The IMF will continue to engage in policy dialogue with the Government of St. Kitts and Nevis in the context of the Fund’s surveillance framework. The mission would like to thank the authorities and technical staff for their open discussions and excellent cooperation.”

The mission met with the Premier of Nevis, the Governor of the Eastern Caribbean Central Bank (ECCB), the Financial Secretary of St. Kitts and Nevis, the Permanent Secretary of Finance of the Nevis Island Administration (NIA), other senior government and ECCB officials, the Financial Services Regulatory Commission, and representatives of the financial and business community, and concluded with the Honorable Prime Minister Harris on May 5^th in Washington DC.