Mission Concluding Statement 

Antigua and Barbuda Staff Concluding Statement of the 2023 Article IV Mission

September 29, 2023

Washington, DC: An International Monetary Fund (IMF) staff team, led by Ms. Emine Boz, visited Saint John’s during September 18-29 to hold discussions for the 2023 Article IV consultation with Antigua and Barbuda authorities. At the end of the visit, Ms. Emine Boz issued the following statement.

Recent Developments, Outlook, and Risks

Economic activity continues to bounce back from the sharp decline seen during the pandemic. Growth is projected at 8.5 percent and 5.7 percent for 2022 and 2023, respectively, with tourism and construction activity proving to be particularly strong. After reaching 9.2 percent at end-2022, inflation fell to 5 percent by July of this year, with core inflation also steadily declining. The current account deficit widened to an estimated 16.2 percent of GDP in 2022 with higher tourism receipts more-than-offset by an increase in goods imports and a worsening in the terms of trade. As a result, the external position in 2022 is assessed to be weaker than the level implied by medium-term fundamentals and desirable policies.

The deficit and debt have been declining but gross fiscal financing needs remain high and the cashflow position of the government has been under strain. Fiscal measures put in place to limit the pass through of higher global food and fuel prices have been offset by improved revenue performance and wage restraint. As a result, the primary deficit fell to 1.7 percent of GDP in 2022 (from 2.3 percent of GDP in 2021). The rapid rise in nominal GDP is estimated to have brought public debt to 87 percent of GDP by end-2022 (from 95 percent at end-2021). The inability to access international capital markets has resulted in financing needs being met by issuing securities, mainly in the Regional Government Securities Market (RGSM), borrowing from domestic banks and regional institutions, and accumulating arrears. While RGSM yields have remained low, the shortening of maturities has resulted in significant gross financing needs of around 13 percent of GDP in 2022. Despite some progress in resolving arrears to certain external creditors and domestic suppliers, the stock of outstanding arrears remains large.

The financial sector is well capitalized and liquid, but credit growth remains weak. As of 2023Q2, 6.9 percent of bank loans were non-performing loans (NPLs) with 78 percent of NPLs being provisioned for. Bank lending to the private sector has been falling as a share of GDP with weak credit growth for households and for small and medium-sized enterprises (SMEs) due to difficulty meeting documentation and collateral requirements for new loans. On the other hand, credit union lending has continued to grow rapidly (7.6 percent year-on-year), although it still makes up a relatively small share of overall lending (13 percent at 2023Q2).

Antigua and Barbuda faces important risks ahead. Growth is expected to moderate and gradually converge to its long-term trend of about 3 percent and price pressures are expected to dissipate in 2024. However, higher global commodity prices would bring renewed price pressures and slower-than-expected growth in trading partners could hinder the strength of tourism demand. Global financial conditions could tighten further and make the government's efforts to access to international capital markets even more difficult, and a strengthening of the U.S. dollar could weaken competitiveness. The cost and availability of fiscal financing through the regional or domestic debt markets could become more restrictive, potentially worsening debt dynamics and increasing the recourse to arrears, particularly if the planned deficit reduction is not realized. Climate change could lead to more frequent and extensive droughts and/or more severe hurricanes. An upside risk is stronger-than-expected FDI inflows that could further boost construction activity.

Fiscal Policy

The mission welcomes the authorities’ plan to reduce the primary deficit through a combination of revenue measures and expenditure restraint. Tax exemptions constituted 47 percent of potential revenues in 2023 (through August). To mitigate the loss of revenues, the authorities have decided to cap discretionary exemptions on import duties and suspend exemptions on other taxes and charges. An update of valuations for property taxes is scheduled to be completed in Fall 2023 and a higher tax rate is planned to be applied to high-end properties (from 0.3 percent to 0.5 percent). The authorities are transitioning to Harmonized System 2022 classifications at customs, which is expected to result in higher revenues from import duties. There is continued effort in containing public sector wages and employment. These combined policy initiatives envisaged by the authorities are likely to generate a small primary surplus and bring debt down to 69 percent by 2028 and to 61 percent by 2035 (marginally above the ECCB Monetary Council's target of 60 percent by 2035). Public debt is assessed to be unsustainable due to the large outstanding stock of arrears and the fact that paying down these arrears appears unfeasible over the medium term without a broader debt restructuring. Limited access to financing is likely to lead to financing gaps even without considering the need to clear the existing arears.

The authorities should work toward building stronger fiscal buffers. Bringing debt safely below medium-term targets, reducing gross financing needs and clearing arrears will require additional policy measures equivalent to 0.5-1 percent of GDP. The authorities should broaden the Antigua and Barbuda Sales Tax (ABST) base by reducing items subject to exemptions or zero-rating (those that do not serve social and economic objectives or were introduced in response to the COVID-19 pandemic), applying the standard rate of 15 percent to short-term accommodation (currently at 14 percent), and extending the ABST to online purchases. Excise taxes on tobacco, alcohol, and sugar should be introduced. There is scope to improve collection of property taxes. The authorities should expedite the introduction of a single window system at customs and operationalize systems to allow e-filing, e-payment and e-registration of taxes. Furthermore, the authorities should improve tax compliance through administrative measures to close loopholes and further strengthen auditing capacity.

Better cash and debt management would lessen cashflow pressures and reduce the risks to fiscal financing. A sound cash and debt management strategy should focus on lengthening the maturity of debt to lower rollover risk, clearing outstanding debt arrears to external creditors and domestic suppliers, and defining the potential modalities for increasing access to climate financing and insurance against natural disasters. The authorities should also undertake contingency planning for adverse scenarios where the availability of financing falls short of budgetary needs.

Improvements are needed so that the social safety net can better support the vulnerable. There are many social assistance programs administered in an uncoordinated way by various public entities. Consolidating these programs would be helpful but, at a minimum, there is a need for a centralized information system to provide an accurate record of all beneficiaries to keep track of the support they receive and identify gaps in coverage and duplication. There is a need to move from generalized subsidies and support (e.g., through broad-based price subsidies for fuel) toward targeted programs whose benefits are periodically recalibrated to reflect cost of living changes.

Stronger fiscal institutions would improve the credibility of the fiscal framework. The Medium-Term Fiscal Strategy and Fiscal Resilience Guidelines should be enshrined in legislation. The establishment of the Fiscal Responsibility Oversight Commission should be accelerated and the Commission should be tasked with evaluating the government’s fiscal strategy. The Finance Administration Act and the Customs Act should be amended to codify the planned restraint on discretionary tax exemptions and statutory exemptions should be consistent with the Antigua and Barbuda Investment Authority Act with Antigua and Barbuda Investment Authority monitoring the approved projects.

Financial Sector Policies

Modernizing supervisory and regulatory frameworks is crucial to preserve financial stability. The Financial Services Regulatory Commission (FSRC) should strengthen the oversight and regulation of credit unions. On-site examinations should be targeted at the risks presented by the rapid loan expansion of credit unions. Supervisors should strengthen the standards for recognizing, provisioning for, and resolving NPLs. The FSRC should continue to require credit unions to strengthen governance and risk controls, building on recent efforts to require all institutions to have internal auditing capacity, qualified board members, and (for the larger credit unions) to have dedicated risk managers. The stress testing framework should be further improved, and risk-based capital requirements should be established for credit unions, on a level playing field with banks. Furthermore, the planned incorporation of climate risks into the supervisory and regulatory frameworks should be accelerated.

The AML/CFT and Citizenship-by-Investment Program (CIP) frameworks should continue to be strengthened. This should include further improving risk-based AML/CFT supervision of financial institutions and designated nonfinancial businesses and professions, ensuring licensing requirements extend to the beneficial owners of applicants for business and exercising the recently expanded sanctioning powers. The Office of National Drug Control Policy should increase its capacity to supervise these licensees for AML/CFT purposes. The databases of the Financial Intelligence Unit should be leveraged in assessing applicants for CIP agents and consideration should be given to additional mechanisms to mitigate financial integrity risks to maintain the integrity and long-term sustainability of the program.

Addressing longstanding constraints to financial intermediation would help bolster credit to the private sector. The upcoming ECCU regional credit bureau should help streamline lending processes and improve credit quality. The Eastern Caribbean Partial Credit Guarantee Corporation has been supporting access to credit by helping SMEs meet documentation requirements (information recording and financial planning) and addressing collateral constraints. Additional efforts to incentivize SMEs to register their businesses would boost their ability to utilize this guarantee scheme. The regional efforts to modernize the national insolvency law will help facilitate the resolution of NPLs and provide greater clarity to lenders.

Structural Policies

Continued efforts are needed to strengthen the main engines of growth. Efforts should continue to increase flight connectivity and cruise ship homeporting. Operationalizing LIAT would help to further improve intra-regional flight connectivity and complement the recent expansion of other airline companies’ presence in Antigua and Barbuda. Efforts should continue to boost tourism during the low season, which would not only smooth hotel occupancy rates throughout the year but also make the country a more attractive destination for airlines. Several cruise lines plan to use Antigua and Barbuda as a homeport starting from 2023, and a further expanded capacity of the Antigua Cruise Port is expected to facilitate the arrival of larger cruise ships.

Measures should be taken to accelerate a reduction in unemployment and underemployment. Active labor market policies should be strengthened to help address the slow recovery in formal employment, which has remained almost 12 percent below its 2019 level in 2022. The existing one-stop employment center should enhance its capabilities to match employers with employees. The New Work Experience Programme should be made more effective by evaluating participants and by ensuring their successful exit from the program. The mission welcomes investments in vocational training and local universities, while training opportunities could be further enhanced in vocational education.

It will be critical to further mobilize donor support for investments in climate resilience. The authorities are utilizing funding from the Green Climate Fund, Adaptation Fund and Global Environment Facility to support 19 active projects of various sizes. Given fixed costs of developing and reporting, they are shifting their focus towards larger projects, facilitated by upgrading accreditation levels with these funds. The authorities have operationalized the Climate Resilience and Development Fund, which could also help to co-finance climate-related projects.

The transition to renewable energy will be challenging. According to the International Renewable Energy Agency, a successful energy transition, which could reduce the country's energy costs by up to 40 percent (and reduce the impact of swings in global energy prices), would require up-front capital costs of up to around 25 percent of GDP (to upgrade the electricity grid, expand the use of electric vehicles, and invest in new wind and solar generation). The limited availability of domestic financing sources makes it important to mobilize donor resources to support these initiatives. The transition has been gradual as regulatory barriers have been slowing the utilization of solar power by households and businesses. However, efforts are being made to explore new solar and wind projects. Upgrading the curriculum at the Antigua and Barbuda Institute of Continuing Education would help train new workers for this transition.

Data Issues

Progress is being made to improve data quality, but further efforts are needed. Data provision is broadly adequate for surveillance, but with important shortcomings. Work is ongoing to construct a Producer Price Index for services, update the Labor Force Survey, rebase the national accounts data along with methodological improvements, and improve external sector statistics. Rental costs have been reintroduced in the Consumer Price Index using interpolation and surveys will resume once the census is completed next year. Efforts are underway to produce poverty indices based on the results of the Labor Force Survey. Timely reporting on central government and state-owned enterprise operations would help inform policy decisions.

The mission team thanks the authorities and other counterparts for their excellent collaboration and the candid and constructive discussions.

Table 1. Antigua and Barbuda: Selected Economic and Financial Indicators