St. Kitts and Nevis
December 10, 1998

Dear Mr. Camdessus:

As you are aware, on September 20-21, Hurricane Georges caused extensive damage to St. Kitts and Nevis. There were five fatalities. Over 75 percent of homes on St. Kitts were damaged, of which one-third was destroyed. The airport and seaport were badly damaged, as were businesses, hotels, schools, and the main hospital. The sugarcane crop is estimated to have been 25 percent destroyed. Economic losses are estimated at close to US$400 million on St. Kitts and at about US$15 million on Nevis. To put the scale of this damage in perspective, you should note that our total GDP in 1997 was US$271 million. To help St. Kitts and Nevis meet its immediate financing needs without seriously depleting its external reserves, the government requests a purchase from the Fund for the equivalent of SDR 1.625 million (25 percent of its quota in the Fund) under the emergency assistance procedure.

The destruction of a substantial portion of our sugar crop and the likelihood that much of the country's tourism plant will not be operative for at least part of the winter high season will result in a large loss of foreign exchange earnings in 1998 and 1999. In addition, the country will have to import materials for repairs on an exceptional basis. Without additional financial assistance, the country would not have the resources necessary to render assistance to that part of the population without homes or adequate shelter, nor to restore quickly the infrastructure services on which its ability to earn foreign exchange depends.

We estimate that the loss of export and tourism receipts will reach US$10 million (3 ½ percent of GDP) in 1998 and over US$28 million (9 percent of GDP) in 1999. Furthermore, we estimate exceptional import needs at US$11 million in 1998 and US$4 million in 1999. There will also be strong adverse effects on our public finances from lost tax revenues as well as from the exceptional spending requirements for social needs and economic recovery. We expect that these effects would increase the central government deficit by EC$21 million (2 ½ percent of GDP) in 1998 and by EC$29 million (3 percent of GDP) in 1999.

To date, we have benefited from emergency grants of over US$1 million and expect to receive a disaster related loan from the World Bank of US$8 ½ million, to be disbursed over three years. We are discussing a long-term credit from the ECCB of US$2 ½ million.

Although the amount of assistance that the Fund could make available under its guidelines for emergency assistance is small relative to our total needs, we believe that the speed with which the resources could become available as well as the concrete sign of close cooperation with, and availability of advice from the Fund, will be positive influences as we seek additional financial assistance from other sources.

Even with this external and exceptional assistance, much remains to be done to address the stress being put on our public finances. To this end, we have prepared a package of measures which will considerably strengthen our fiscal position over the medium term and would have been beneficial even in the absence of a hurricane. Some of these measures can be implemented quickly, as we are now preparing our 1999 budget. Others will require further consultation and preparation before they can be implemented.

For 1998, we plan to forego the payment of a 13th month salary in December--a payment that has been traditional in all years in which there has not been a general salary increase--for a saving of EC$9 million, or over 1 percent of GDP. In 1999, we will implement a 50 percent increase in the stamp tax on property transfers which will yield about EC$2 ½ million per year. We also plan to restore the hotel and meal tax during the slow summer months, which had been granted back to hotels for marketing expenses. This measure will yield about EC$200,000.

Our utility tariffs have not been adjusted in many years and are very low in comparison with tariffs in other countries of the region and in respect to the costs of providing these services. We plan a general review of the charges for electricity and water, with the intention of bringing them up to levels in the region. Because the present gap in comparability is large, the correction will be phased in over several years. In addition, because the level of these tariffs is part of ongoing discussions with potential foreign investors, there will have to be some consultation before implementation takes place. In revising utility tariffs, the government will maintain a differentiated structure that will shelter low-income consumers from the full effects of the adjustment. We expect to begin work on a new structure of utility tariffs in the coming year and to commence implementation no later than in the year 2000.

The measures we plan to implement will reduce the 1998 deficit by over 1 percent of GDP. In 1999, the purchase of electrical generation equipment will sharply increase the overall deficit to more than 12 percent of GDP. However, in the following years, the proposed measures will bring about a rapid reduction of the central government deficit. We expect that these measures will be sufficient to bring the central government finances into balance by the year 2003.

The strengthening of our public finances will permit us to create a special contingency fund for use in the event of any future disasters or unexpected need for replacement of public sector capital equipment. This fund would be initiated in 2000 in the amount of EC$2 million, and would be regularly incremented each year by at least EC$3 million.

Please be assured that the Government of St. Kitts and Nevis will continue to collaborate with the Fund in finding solutions to deal with the country's economic challenges. We have recently consulted with the Fund staff to discuss the macroeconomic and structural policies that are needed to ensure recovery of our economy.

The Government of St. Kitts and Nevis does not intend to impose new, nor intensify existing restrictions on payments and transfers for current international transactions, introduce any multiple currency practices, or impose new or intensify existing import restrictions for balance of payments purposes.

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431