IMF Executive Board Concludes 2024 Article IV Consultation with St. Kitts and Nevis
IMF News, May 15, 2024
Source details
- Canonical URL
- IMF Executive Board Concludes 2024 Article IV Consultation with St. Kitts and Nevis
Other formats
Bibliographic details
- Published: May 15, 2024
Recent economic performance
- Real GDP growth fell to 3.4 percent in 2023 (from 8.8 percent in 2022) due to delays in public and private sector investment projects.
- Average inflation was 3.6 percent in 2023, pushed up by higher food and oil prices and shipping costs, and subsided at end-2023.
- The current account deficit narrowed to 5.4 percent of GDP in 2023 (from 10.9 percent in 2022) supported by the robust tourism recovery.
- Pandemic support declined from 3.5 percent of GDP in 2022 to 1.1 percent of GDP in 2023.
- Citizenship-by-Investment (CBI) revenues remained solid at 22 percent of GDP in 2023.
Fiscal position and public debt
- Fiscal position moved to a surplus of 1.0 percent of GDP in 2023.
- Gross public debt fell to 54 percent of GDP in 2023.
- CBI revenue is expected to face a gradual decline to 10 percent of GDP in 2028, which will raise the fiscal deficit over time to 3.9 percent of GDP.
- Public debt is projected to remain below 60 percent of GDP.
- The systemic bank has high non-performing loans (NPLs), low capital and a large foreign investment portfolio funded by public sector deposits.
Outlook and risks
- Near-term economic outlook is positive owing to renewable energy projects:
- A privately funded utility-scale solar and battery storage project is expected to be completed in 2025.
- A geothermal project in Nevis is at the planning stage.
- Key near-term downside risks: geopolitical risks, commodity price volatility, an abrupt slowdown in key source markets for tourism, and natural disasters.
- Longer-term upside: greater-than-expected production of solar and/or geothermal energy could turn St. Kitts and Nevis into a net energy exporter, creating an additional source of growth.
Executive Board assessment — key messages
- Economic growth is poised to accelerate in the near term as public and private investments, including renewable energy, add productive capacity and lower energy imports.
- Cheaper energy prices are expected to support competitiveness, foster economic diversification and raise potential growth.
- Carefully crafted policies on natural resource taxation, utility prices, and investment tax incentives will be required to seize the potential of the energy transition and harness renewable resources.
Policy recommendations — fiscal and public finance
- Tighten the fiscal stance to maintain a balanced budget over the medium term; a small deficit is expected in 2024.
- Forego further unbudgeted and untargeted payments, such as the CBI dividends.
- Return current expenditures to their pre-pandemic level as a share of GDP.
- Improve control over the wage bill and goods and services expenditures.
- Fully phase out electricity subsidies.
- Support expansion of targeted social assistance and capital expenditures for natural disasters’ resilience through savings from fiscal consolidation.
- Enshrine the implicit fiscal rule of balancing the budget and remaining below the regional debt ceiling into law to provide a clear fiscal anchor and foundations for the SRF.
- Consider an expenditure rule to cap future current spending increases from volatile CBI inflows and rebalance towards capital expenditures.
- Consolidate public sector investment policy and planning through a consolidated investment budget prioritizing across projects.
- Use the Regional Bond Market to diversify funding sources and improve collaboration at the federal level to optimize public finance management.
Policy recommendations — tax reform and CBI framework
- Develop a comprehensive roadmap for tax reform to prepare for a future decline in CBI revenues and create a more progressive tax system.
- Reform the property tax to reflect current market value and abolish stamp duty.
- Focus on tax arrears collection.
- Review CIT concessions with a view to abolishing negotiated tax concessions and income tax holidays, time-critical given the window opened by implementation of the OECD pillar II.
- Bring unincorporated businesses under the CIT to allow full expensing of capital spending and carryforward of losses.
- Scale back VAT exemptions and expand VAT coverage to professional and financial services.
- Continue efforts to enhance the CBI framework: improve governance, advance CBI legislation, create the CBI Board of Governors, and increase transparency and accountability by publishing an annual financial report on the CBI unit’s operations and key data on applications.
Policy recommendations — social security and debt management
- Urgent and decisive reform of the Social Security Fund is required to preserve financial balance and protect intergenerational equity.
- Parametric reform should increase the contribution rate, raise the retirement age, and expand pension coverage.
- Align public sector employees’ pensions with the broader social security system to ensure replacement rates no greater than 100 percent.
- Improve debt and cash management to avoid costly short-term debt buildups when fiscal buffers are available.
Policy recommendations — energy, utilities, and climate adaptation
- Fully harness renewable energy potential through a comprehensive strategy: decide on the optimal energy mix, investment plans, financing options, and multi-year infrastructure planning to connect the two islands’ power grids and increase resilience.
- Reform utility prices so water and electricity reflect production costs and promote conservation.
- Invest in drilling of wells, water storage, and desalination capacity to secure fresh water supply.
- Adopt more progressive utility rate structures to encourage conservation and generate resources for investments.
- Utility commission should provide guidance on cost-recovery pricing of electricity and water.
- Establish a taxation framework that incentivizes renewable energy investment while allowing the public sector to receive a share of future rents; avoid broad-based tax exemptions and favor targeted, economically efficient subsidies or tax incentives.
Policy recommendations — labor market and wages
- Carefully assess the impact of wage increases on employment, informality, and external competitiveness.
- A two-tier increase of minimum wage in January 2024 and July 2025 will increase the minimum wage by nearly 40 percent compared to the previous level set in 2014, placing it higher than ECCU peers and likely subjecting one-sixth of the workforce to the minimum wage.
- Public sector wage setting should consider cascading effects in the private sector.
Policy recommendations — financial sector
- Restructure the systemic bank.
- Ensure provisions and capital for all banks meet the ECCB regulatory minimum and address long-standing NPLs.
- Banks unable to meet regulatory minimum should work with the ECCB through a clear and monitorable capital restoration plan.
- Continue de-risking of large foreign investment portfolios in the systemic bank and reallocate some foreign investments and government deposits from the systemic bank into the SRF to allow the bank to focus on channeling household and corporate deposits towards private sector lending.
- Monitor the credit union sector closely to ensure proper recordation of NPLs and adequate provisioning and capital at each institution.
External position and reserves
- The 2023 external position is assessed to be weaker than the level implied by medium-term fundamentals and desirable policies.
- The current account deficit is projected to fall over the medium term supported by lower fossil fuel imports.
- International reserves are adequate.
Key statistics and projections (selected items)
- Real GDP (market prices): 2019: 4.1; 2020: -14.6; 2021: -0.9; 2022: 8.8; 2023: 3.4; 2024: 4.7; 2025: 4.3 (annual percentage change).
- Real GDP (factor cost): 2019: 4.8; 2020: -13.4; 2021: -0.1; 2022: 6.3; 2023: 8.4; 2024: 3.5 (annual percentage change).
- Consumer prices, period average: 2019: -0.3; 2020: -1.2; 2021: 1.2; 2022: 2.7; 2023: 3.6; 2024: 2.5; 2025: 2.2.
- Real effective exchange rate appreciation (+) (end-of-period): 2019: -0.2; 2020: -2.3; 2021: -4.7; 2022: -2.7; 2023: 0.6.
- Broad money (annual percentage change): 2019: 5.6; 2020: -8.1; 2021: 8.9; 2022: 3.7; 2023: 7.1.
- Change in net foreign assets (annual percentage change): 2019: 6.5; 2020: -0.4; 2021: 9.1; 2022: -7.0; 2023: 2.6.
- Net credit to general government (annual percentage change): 2019: -9.5; 2020: -18.4; 2021: -4.8; 2022: 4.9; 2023: -0.6; 2024: 1.0; 2025: 1.7.
- Credit to private sector (annual percentage change): 2019: 1.5; 2020: 1.1; 2021: 3.0; 2022: 2.1; 2023: 2.3.
- Total revenue and grants (percent of GDP): 2019: 36.6; 2020: 33.5; 2021: 46.6; 2022: 45.6; 2023: 42.5; 2024: 39.5; 2025: 37.7.
- o/w Tax revenue (percent of GDP): 2019: 18.5; 2020: 18.8; 2021: 19.0; 2022: 18.6; 2023: 19.1.
- o/w CBI fees (percent of GDP): 2019: 14.8; 2020: 11.3; 2021: 23.4; 2022: 25.5; 2023: 21.5; 2024: 18.0; 2025: 16.0.
- Total expenditure and net lending (percent of GDP): 2019: 37.3; 2020: 36.5; 2021: 41.2; 2022: 49.6; 2023: 41.6; 2024: 39.7; 2025: 38.6.
- Overall balance (percent of GDP): 2019: -0.7; 2020: -3.1; 2021: 5.4; 2022: -4.0.
- Total public debt (end-of-period, percent of GDP): 2019: 54.3; 2020: 68.0; 2021: 69.1; 2022: 60.6; 2023: 54.4; 2024: 51.7; 2025: 49.9.
- General government deposits (percent of GDP): 2019: 24.8; 2020: 21.6; 2021: 30.4; 2022: 21.8; 2023: 19.9; 2024: 18.7; 2025: 17.6.
- External current account balance (percent of GDP): 2019: -10.8; 2020: -5.1; 2021: -10.9; 2022: -5.4; 2023: -6.5; 2024: -8.6.
- Trade balance (percent of GDP): 2019: -27.5; 2020: -28.0; 2021: -26.3; 2022: -34.9; 2023: -31.0; 2024: -32.6; 2025: -34.1.
- Net international reserves, end-of-period (holdings of SDRs, in millions of U.S. dollars): 2019: 346.3; 2020: 365.4; 2021: 312.8; 2022: 270.3; 2023: 267.0; 2024: 264.7; 2025: 263.0.
- Nominal GDP at market prices (in millions of EC$): 2019: 2,989; 2020: 2,387; 2021: 2,318; 2022: 2,628; 2023: 2,884; 2024: 3,062; 2025: 3,260.
Press Release No. 24/164, May 15, 2024.