KINGSTOWN, St Vincent -- An International Monetary Fund (IMF) staff mission, led by Dominique Simard, visited St Vincent and the Grenadines from February 22 to March 3, 2016, to conduct discussions for the 2016 Article IV Consultation.
Discussions were held with the Prime Minister Dr Ralph Gonsalves; the leader of the opposition, Arnhim Eustace; the director general of the ministry of finance; other senior government officials, public and private sector labour unions, and a broad range of private sector representatives.
The mission team issued the following statement:
The government of St Vincent and the Grenadines has contributed to improving poverty indicators since 2000 and is pursuing game-changing projects, such as the completion of the new airport, expected in 2016, and the development of geothermal energy over the medium-term. A strong macroeconomic framework is essential to optimize the impact of these large infrastructure projects, improve competitiveness and boost sustainable growth. Key elements of this strategy should include: (i) credible and sustainable medium-term fiscal consolidation; (ii) reforms to buttress the financial sector; and (iii) policies to improve the business environment and build climate resilience.
1. Economic activity is picking up and is expected to be further sustained by the airport’s entry in operations. Real GDP growth is estimated at 1.6 percent in 2015 -- led by recovering tourism inflows, construction and agriculture -- and projected to reach 2.2 percent in 2016, spurred by investment in anticipation of the new airport, which is expected to boost tourist arrivals and agriculture exports through expanded airlift capacity and direct routes to main source markets. The recovery of tourism and lower oil prices—which also contributed to maintaining low inflation -- have narrowed the current account deficit in 2015. The fiscal position improved due to expenditure restraint while tax collections were generally good, particularly for customs duties with the increase in the customs service charge.
2. Public debt has increased steadily since 2008, but St. Vincent and the Grenadines has committed to reduce it through fiscal consolidation. Public debt rose from 57 percent of GDP at end-2008, since launching the airport project, to 74 percent of GDP at end-2015 -- up to the median for ECCU countries -- during a challenging period of global economic financial crisis and damages caused by three natural disasters in 2010, 2011 and 2013. The PetroCaribe agreement has represented an important financing source for the government. At end-January 2016, the debt of PetroCaribe St Vincent to Venezuela stood at EC$183 million (8.7 percent of GDP), of which only EC$71 million is recorded as government debt. The other EC$112 million (5.3 percent of GDP) has not been entered in the government’s public debt statistics, but is included in IMF projections. Due to lower oil prices, PetroCaribe financing flows have declined considerably more recently, and are expected to be reduced further in 2016. St Vincent and the Grenadines has committed to reducing its public debt to 60 percent of GDP by 2030, in line with the agreement among Eastern Caribbean Currency Union (ECCU) countries.
3. The measures announced in the 2016 budget are expected to improve the primary balance relative to 2015 but leave the overall fiscal position unchanged. The budget provides for tax policy measures expected to yield 0.7 percent of GDP, including broadening the VAT base, raising excises on alcoholic and sweet beverages, and raising the automobile surcharge and drivers’ license fees. Concerning expenditure, among other things, the budget provides for a general salary increase of 1½ percent for civil servants, additional funds for health services, operating the new airport, and the government’s equity investment in the geothermal project. While the primary balance projected for 2016 is 0.4 percent of GDP, higher than the 0.1 percent of GDP outturn in 2015, the projected overall deficit remains unchanged at 2.1 percent of GDP due to higher expected interest payments. Assuming no additional measures, and increasing the tax to GDP ratio beyond its 2016 level to reflect the whole year impact of the 2016 revenue measures, the central government’s primary balance would reach a surplus of 1.6 percent of GDP in 2019.
4. Fiscal policy should include a strategy to build financial defenses against natural disasters. Preparedness for hurricanes has improved, as have building codes and housing stocks. The authorities’ comprehensive disaster management approach, developed with multilateral partners, is being reviewed by Cabinet. Given the challenge to finance the reconstruction when a natural disaster materializes, it is advisable for the government to self-insure against this occurrence. Based on historical data, the average annual damages from natural disasters in St Vincent and the Grenadines is 1.2 percent of GDP, of which about three-quarters are the responsibility of the government. This indicates that an annual amount of 0.9 percent of GDP would constitute an adequate buffer against natural disasters.
5. More ambitious fiscal consolidation is needed to meet the public debt target, and build adequate buffers against natural disasters. In particular, the government needs to target a primary surplus of 3.3 percent of GDP over the medium-term, including additional measures of about 0.8 percent of GDP (beyond current plans) to meet the ECCU public debt target and another 0.9 percent of GDP to address natural disasters. Under this scenario, St Vincent and the Grenadines would reach its 2030 debt target even if it is subject to natural disasters. In terms of measures, there is significant scope to mobilize additional revenue by further broadening the tax base, including by streamlining ad-hoc tax concessions and other tax incentives, and intensifying collection of tax arrears. Concerning expenditures, continued restraint of the wage bill will be key, particularly since real wages of public sector employees have increased by 45 percent between 2000 and 2014 resulting in the second highest public sector wages (relative to productivity) in the ECCU. Furthermore, intensified control over public entities will be needed. Sustainability of the public pension scheme and the National Insurance Service (NIS) also need improvement. Budgetary arrears should continue to be cleared and targeted for their full elimination by 2017, which would help boost private sector activity. Upcoming technical assistance from CARTAC should be helpful in that regard.
6. Proactive implementation of structural reforms is critical to support the fiscal consolidation agenda. In particular, reforms in revenue administration and public financial management need to be accelerated and sustained, with a public commitment to a timetable and key milestones. The soon to be established National Economic Advisory Council may be helpful in monitoring progress in these reforms. Following today’s appointment of the Comptroller of the Customs and Excises Department (CED), it is very important to fill the remaining leadership positions required to spearhead these reforms, including the Internal Auditor in the Ministry of Finance. In order to improve the cross-checking of tax returns by the CED and the Inland Revenue Department, issuance of a single Tax Identification Number (TIN) per taxpayer must be finalized without delay. Furthermore, tax compliance would be improved if it was required prior to obtaining government contracts, soft loans or exemptions. To improve the efficiency of public expenditure, building on procedures already in place, the draft Procurement Bill needs to be revised to clarify its provisions, adopted and implemented.
7. With a few envisaged Public Private Partnerships (PPPs), adopting a legal framework for PPPs would help limit their contingent fiscal liabilities. As different line ministries negotiate PPPs, including the geothermal and agriculture projects, there is a risk that negotiations with private partners culminate in direct and implicit guarantees leading to eventual budgetary liabilities. A codified enunciation of PPP principles that provides safeguards against possible large contingent liabilities -- including on-lending to PPP partners combined with undue sharing of risk -- would allow the government to set overall limits in the accumulation of PPP liabilities, which may strengthen its negotiation position with private partners.
8. Accelerating structural reforms to bolster competitiveness is essential to leverage the growth-enhancing impact of improved access to tourism and export markets. St. Vincent and the Grenadines’ hiring costs relative to labor productivity are among the highest in the region. To lift labor productivity, the newly established Hospitality Institute -- once it is fully operational -- can help upgrade the work force’s skills to match business requirements. Furthermore, the tourism industry is improving its operations to meet the government’s new minimum standards, and enforcement will be critical. Finally, future extension of training to maritime tourism activities would be beneficial. Concerning small businesses, access to affordable credit remains a significant concern. Soft loans for agriculture offered by the government’s Farmers’ Support Program, implemented in 2014 are contributing to the pickup of the agro-business sector. Finally, to lower the clearance time for importers and facilitate trade, the links between the CED and the Port Authority should continue to be improved.
9. St Vincent and the Grenadines has relatively sound banks and leads the region in the supervision of credit unions, but continued monitoring of the financial system is needed. Commercial banks’ financial soundness indicators remain relatively stable at end-2015Q3 and point to a good performance relative to the region, with rising profitability, decreasing levels of reported non-performing loans (NPLs), better provisioning of these NPLs and a capital adequacy ratio well above regulatory requirements. The new insolvency law introduced in 2014 and its regulations issued in 2015 will be an important step to improve the business environment and facilitate the extension of credit. Introducing credit bureaus and registries to reduce credit risk, in the context of a region-wide initiative, would be another step in that direction. The authorities have led the passage of regional banking legislation to strengthen the regulatory framework, in particular for bank resolution. Through their membership of the Monetary Council of the ECCB, the authorities are encouraged to press for the elimination of the deposit interest floor and the operationalization of the Eastern Caribbean Asset Management Company. Intensified competition for loans between banks and credit unions, especially personal loans, requires monitoring by the regulatory authorities. To this aim, the Financial Service Authority (FSA) has continued to strengthen the supervision of the non-bank financial sector by formalizing a risk based supervisory framework. Moreover the FSA has issued binding prudential guidelines for the insurance sector and has closely monitored the offshore banking sector by frequent onsite inspections and higher minimum capital requirements. It is expected to promote the creation of a common insurance and pension market under the supervision of a single regional regulatory authority.
10. The mission welcomes the data improvements by the authorities on various fronts, but recommends improving state owned enterprises (SOEs) financial reporting. The authorities concluded a labor survey in 2015, and are expecting to publish the results in the second quarter of this year. Additionally, in the transition of balance of payments (BoP) statistics to BPM6 the authorities, with assistance from CARTAC, improved the surveys, which now include international investment position (IIP) statistics. The improved BoP statistics are expected to be released by end-2016. The authorities also enhanced fiscal statistics by implementing a new chart of accounts for the 2016 budget, to be compliant with GFS 2014. However, statistical coverage of the operations of SOEs is weak, due to non-compliance with the required timeliness of financial reporting. The authorities should aim to have more timely and updated information by end-2016.