CASTRIES, St Lucia -- A staff team from the International Monetary Fund (IMF) visited Castries during November 27 -- December 7 to hold discussions on the 2012 Article IV consultation1 with St Lucia. The mission met with Prime Minister and Minister of Finance Kenny Anthony, senior government officials, opposition leaders, and representatives of the private sector and trade unions.
At the end of the mission, Aliona Cebotari, IMF mission chief for St Lucia, issued the following statement:
“St Lucia has weathered the difficult post-crisis environment, becoming the largest economy in the Eastern Caribbean Currency Union (ECCU). Rising external headwinds, however, have dampened economic activity, with growth estimated to slow to 0.2-0.4 percent in 2012, despite government efforts to revive the economy. Low growth and high unemployment are weighing on financial institutions’ credit quality and their balance sheets. Fiscal imbalances have also widened, reflecting past expansionary policies and the recent stimulus efforts to boost growth, and are expected to contribute to continued sizeable external current account deficits. Inflation is projected to edge up in the wake of the introduction of the value added tax (VAT) on October 1, 2012, but the effect will be temporary.
“Against this backdrop, the discussions with the authorities focused on achieving the appropriate balance between fostering growth and employment, while strengthening economic fundamentals through fiscal adjustment and addressing financial sector vulnerabilities.
“The mission discussed with the authorities options for putting the fiscal position on a sustainable path. In this context, the mission welcomed the introduction of the VAT as this will modernize the tax system, broaden the tax base, and enhance revenue collection. It cautioned, however, that the expected gain from the VAT will be realized only if all sectors contribute, and the base is shielded from the exemptions that have eroded the yield of other taxes. Even then, a considerable further effort will be needed to strengthen the fiscal position and bring it on track to reach the ECCU-wide debt target of 60 percent of GDP by 2020. To be successful, this adjustment effort will need to fall predominantly on current spending -- especially containing the already large public wage bill and better targeting transfers and subsidies to the most vulnerable -- as well as build on the introduction of the VAT to further widen the tax base. These efforts are also necessary to safeguard needed productive investments and enhance the country’s competitiveness through restrained growth in wage costs.
“With unemployment remaining very high, especially among the youth, growth and job creation are appropriately key priorities for the government. Addressing these challenges through fiscal policies is no longer an option because of lack of fiscal space. The mission welcomed efforts under way to improve the efficiency of the public service, streamline the regulatory environment for investments, and establish the institutional underpinnings of competitiveness reforms, in order to boost St Lucia’s growth potential. Additional structural reforms will be needed to improve the business climate, adapt the education system to the needs of the economy, reduce trading and electricity costs, and eliminate price and non-price impediments to credit availability. Most importantly, restraining growth in public wages will be key to safeguarding the economy’s competitiveness and growth potential going forward.
“Restoring the health of the financial system is necessary to support the growth and stability objectives of the government. The mission discussed with the authorities measures to decisively address identified weaknesses in the financial system and its regulatory and supervisory environment, including by working closely with the regional bank supervisor and making the nonbank supervisory body (Financial Sector Regulatory Authority) fully operational. Passing the revamped legislation regulating credit unions and insurance companies will also be important in this respect.
“The mission wishes to express its gratitude to the authorities for their warm reception, open exchange of views, and kind assistance. Additionally, the mission would like to thank other interlocutors for sharing their insights and perspectives. Upon its return to Washington, the mission will prepare a report, tentatively scheduled to be discussed by the IMF’s Executive Board in mid-February 2013.”