PRELIMINARY findings of the International Monetary Fund (IMF) at the end of an official visit to Saint Lucia in November of last year presented a mixed bag of fortunes for the country. This visit, or mission, as is called in IMF circles, was undertaken as part of regular (usually annual) consultations under Article 1V of the IMF’s Articles of Agreement.
The IMF team visited Saint Lucia between October 29 – November 8 for discussions on economic developments and macro-economic policies and concluded that the country’s near-term growth prospects are favourable, supported by large infrastructure investments and robust tourist inflows.
The IMF however warned that longer-term growth continues to be impeded by high public debt, lingering vulnerabilities in the financial system, and structural impediments to private investment, noting that to enhance economic resilience in an increasingly precarious external environment, near-term policies should focus on rebuilding fiscal space and addressing risks to financial stability. Further, concerted efforts are also needed to mobilize climate financing and unlock potential growth through supply-side reforms.
Noting that robust tourism inflows had sustained economic activity despite delays in public infrastructure investment, the IMF is of the view that the commencement of large public infrastructure projects by year-end (2019) is expected to substantially boost growth in 2020-22.
The Fund observed that the upgrade to the Hewanorra International Airport and the road network will help address capacity constraints and has the potential to catalyze a more durable expansion of the tourism sector and related activities. The downside risks to the outlook include a deeper-than-expected slowdown in major source markets for tourism, energy price shocks, disruptions to global financial markets, and loss of correspondent bank relationships. Saint Lucia’s high vulnerability to natural disasters constitutes an ever-present risk to both growth and the fiscal outlook.
The IMF preliminary report urges fiscal policies to be geared toward rebuilding policy space and ensuring public debt converges to the ECCU target of 60 percent of GDP by 2030. It noted that prudent fiscal policies in recent years, supported by revenues from the Citizenship by Investment Program (CIP), have helped to stabilize public debt as a share of GDP. However, the still elevated level of public debt, currently at 65 percent of GDP, leaves the government with little fiscal space to react to shocks. The debt-financed infrastructure investments, despite being on concessional terms with long-run repayment largely covered by new revenue measures, will move public debt further away from the regional target in the absence of fiscal consolidation efforts.
“The need to invest in climate resilience and the uncertainty over future CIP revenues pose additional challenges to public finances,” the IMF report noted.
The report stated that government’s near-term focus should be on revenue-enhancing measures and investing to build resilience against climate related shocks.
“The fiscal measures that have been announced—including reforms to the personal income tax and the residential property tax—are expected to be budget neutral in the near term. This underscores the need to restrain current spending (particularly the public wage bill) and to mobilize additional revenues from the hotel accommodation fee, introducing a carbon tax, and reducing the scope of VAT exemptions. Since some of these measures will likely be regressive, they should be introduced in parallel with targeted transfers that offset the impact of these measures on poor households,” stated the report.
The report made mention of concerted efforts needed to mobilize donor grants to fund investments in climate resilience, noting that any over-performance of the CIP, or of other revenue sources, should be directed toward financing a self-insurance fund that should be invested in liquid, highly rated, international assets to bolster the economy’s resilience against natural disasters.
“The government’s commitment to adopting a fiscal rule to guide fiscal policy over the medium-term is welcome,” the IMF preliminary report noted, warning that to be effective, the fiscal rule should encompass a comprehensive definition of fiscal activities, including the fiscal costs of natural disasters and the lumpy expenditure associated with infrastructure investment.
According to the report, to support private sector investment measures would be needed to address inefficiencies in financial intermediation and emerging financial sector risks warrant a more assertive approach to regulation and supervision.
Noting that Saint Lucia is committed to further enhancing resilience to climate change and natural disasters and that the government’s infrastructure programmes include a commendable focus on building resilience to natural disasters, the IMF report notes that progress has also been made in implementing recommendations of the 2018 Climate Change Policy Assessment including updating the national and sectoral adaptation plans, preparing a climate financing strategy, and mobilizing resources from the global climate funds.
“To address the remaining institutional and financing gaps in the climate adaptation and mitigation strategy, efforts are needed in the active costing of climate projects, improving public financial management of climate financing and outlays, and mobilizing private investment in mitigation and adaptation,” stated the report.
The report concluded that decisive and targeted reforms are needed to address supply-side impediments to long-term growth and that enhancing labour market performance and productivity will require a better alignment of the education system with labour market needs.
“There is also scope to improve the business environment especially by enhancing delivery of online government services and access to credit, reducing electricity costs by making greater use of renewable energy, further diversifying the economy toward higher-value exports, and increasing local content in the tourism supply chain,” noted the IMF report, which also claimed that unemployment had declined somewhat but remains high at 18 percent with inflation subdued.
