Mission Concluding Statement 

St. Kitts and Nevis: Staff Concluding Statement of the 2023 Article IV Mission

January 31, 2023

Washington, DC: An IMF mission, led by Mr. Alexandre Chailloux, visited St. Kitts and Nevis during January 16-27, 2023, for the 2023 Article IV consultation discussions on economic developments and macroeconomic policies. The mission team benefited from candid and constructive discussions with public and private sector counterparts and other stakeholders. At the conclusion of the meetings Mr. Chailloux issued the following statement:

St. Kitts and Nevis is recovering from the COVID-19 pandemic and cost of living crisis. The large fiscal buffers accumulated over a decade of prudent fiscal policy have supported the authorities’ forceful policy response to protect the livelihood of the population. The outlook is positive but subject to downside risks in the short term, primarily stemming from global headwinds impacting key tourism source markets and commodity price volatility. Preserving the country’s legacy of fiscal prudence, in a context of concerns over the sustainability of Citizenship-by-investment program (CBI) resources, and of a pressing need for investment in climate change adaptation, will require prioritizing policies. This includes tightening the fiscal stance through phasing out crisis-related measures, rationalizing and controlling current spending, streamlining social transfers, and a holistic overhaul of the taxation framework. Fiscal space could support investment in climate change adaptation, accelerate economic diversification, and restore waning competitiveness. Concentration of risks in the banking sector calls for a business model change, including de-risking of the investment portfolio, addressing legacy asset quality issues, and safeguarding government deposits, while supporting credit growth and financial stability.

Recent developments, outlook, and risks

The economy was severely hit by the COVID-19 pandemic with GDP contracting 14.5 percent in 2020 and 4.3 percent in 2021. Tourism recovery has been lagging ECCU and other Caribbean peers because of stricter and longer lasting COVID restrictions. The growth catch-up in 2022 was moderated by global headwinds. GDP is estimated to have grown by 9 percent in 2022. The authorities’ proactive policy response helped dampen inflation pressure with average inflation rising to only 2.7 percent. The previous administration made a substantial repurchase of land (7.6 percent of GDP) from the land-to-debt swap arrangement, hereby reducing its deposits and contingent liability (which now remains at 12 percent of GDP). These measures came at a cost to public finances: despite receiving record high CBI revenues, the government incurred the largest primary deficit in two decades.

The outlook is positive, but risks are somewhat tilted to the downside. Growth is projected at 4.5 percent in 2023, supported by a strong recovery in tourism and other service sectors. In the short term, downside risks dominate, primarily stemming from global headwinds impacting key tourism source markets and commodity price volatility . The growing dependance on volatile and uncertain CBI revenue is a major source of vulnerability. Further worsening of global financial conditions could affect bank capital. Natural disasters pose an ever-present downside risk. On the other hand, medium-term prospects for an acceleration of the transition to renewable energy and increased investment in resilience by the public sector could represent material upside risks.

Entrenching Debt Sustainability

In the near term, phasing out crisis-related measures will be essential to safeguard fiscal prudence and entrench debt sustainability. The tightening of the fiscal stance is required to achieve fiscal prudence. This could be achieved through phasing out of electricity price subsidies, the streamlining of income support measures, and the restoration of the Corporate Income Tax rate.

In the medium term, a holistic overhaul of the taxation framework will be of the essence to reduce dependency on CBI and to maintain fiscal space. A reform of the property tax to support the housing market and home ownership while increasing progressivity and a reintroduction of progressive personal income tax could help strengthen fiscal sustainability, improve fairness and equity, and achieve inclusive growth. Evaluating thoroughly current tax expenditures, with a view to eliminating those coming at a cost to public finance with little proven social and economic benefit, would be an important part of an effective tax reform.

The use of budget resources should be geared towards increasing sustainability. Better targeted social transfers can help address more efficiently the protection of the most vulnerable. The ongoing reform of the Poverty Alleviation Programme is a commendable step in that direction. Going forward, a rebalancing between current expenditures, notably through a better control of the public sector wage bill, and public sector capital expenditure will help catalyze investment in natural disaster resilience, climate change adaptation and innovation to support the long-term growth potential of the Federation.

Achieving Natural Disaster Resilience and Climate Change Adaptation

Enhancing natural disaster preparedness will require resolute policy implementation over the coming decades. Climate change adaptation policies, which will require substantial fiscal outlays, can improve welfare and achieve economic and fiscal sustainability. A long-term policy package should include higher resilient infrastructure spending, an optimal insurance framework against natural disasters, and renewable energy transition investment. In this regard, the mission welcomes the authorities’ plan to create a Sovereign Wealth Fund. This Fund should be set up based on international best practices and aim to accumulate national wealth, finance resilient investment, and ensure adequate buffers.

Enhancing Competitiveness to Achieve Sustainable Growth

Continued structural policy efforts are needed to strengthen competitiveness through enhancing the labor market and encouraging economic diversification. Ongoing efforts to improve the access and delivery of education and TVET should be complemented by Active Labor Market Policies with an emphasis on better integrating vocational training with the labor market to reduce skill mismatches and promote job opportunities. Linkages between the hospitality sector and the rest of the economy can be leveraged to provide more diversified and higher-quality job opportunities. The transition to renewable energy could help reduce energy costs and improve resilience.

Strengthening the Financial System

The business model of the systematically important bank should be strengthened with emphasis on de-risking, while public sector deposits should be better safeguarded. The systemic bank holds a substantial overseas investment portfolio and carries high NPLs, and at the same time is responsible for keeping public sector deposits. The bank’s management has taken important steps to de-risk its investment portfolio and write off some legacy NPLs, but further progress is needed. Public sector deposits should be ring-fenced from the risks inherent in any single bank, ideally through a separate arm-length structure, such as a Sovereign Wealth Fund. In the non-bank segment, credit unions require close monitoring, including their restructured loans. The authorities should continue advancing the AML/CFT agenda.

The IMF mission would like to thank the authorities, private sector counterparts and other stakeholders for their warm hospitality and the candid and constructive discussions.