IMF concludes mission to St Vincent and the Grenadines
An International Monetary Fund (IMF) staff mission, led by Elie Canetti, visited St Vincent and the Grenadines during November 5 to 19, 2014, to conduct discussions for the 2014 Article IV Consultation. The team exchanged views with Prime Minister Ralph Gonsalves, the director general of the ministry of finance, other senior government officials, public sector labour unions, and a broad range of private sector representatives.
1. Growth is projected at 1.1 percent in 2014, concentrated in the construction, manufacturing, health, education and public administration sectors. The projection is based in part on the plans for a significant acceleration in airport construction in the final months of 2014, including finishing the taxiways, the construction of aprons and runway paving. Should these plans prove to have been unable to have been fully implemented, the final growth number would be lower. On the other hand, there is some potential for growth to be revised higher should agriculture turn out to have performed better than currently expected. Based on incomplete data, the mission estimates that agricultural production fell by about 3 percent due to the impact of the floods of December 2013 and subsequently, by a drought in the second and third quarters. Growth is projected at 1.8 percent in 2015 as the primary and utilities sectors rebound. Although there are no recent data, unemployment is still reportedly high.
2. Over the medium term, potential growth is expected to be enhanced by the completion of the international airport, currently projected for late 2015. Staff estimates that GDP growth could rise to 3 percent starting from 2016. Investment related to tourism and ancillary activities is expected to start to pick up once there is a greater degree of confidence on the timing of the airport coming into operation, while the tourism authority’s program to upgrade existing facilities could further increase value added per tourist arrival. There is further upside potential to the outlook to the extent that more direct flights can be scheduled than the mission’s relatively conservative assumption. In addition, lower energy prices, if sustained, would also help boost tourism. On the other hand, delays in the airport’s completion and the possibility of a serious global economic downturn are downside risks to the outlook.
3. The fiscal balance for 2014 is likely to come in better than expected, largely reflecting an under spending of the capital budget. From around 6¼ percent of GDP in 2013, the overall fiscal deficit is projected to come in at about 4¾ percent of GDP in 2014, while the primary deficit (i.e. excluding interest payments) is anticipated to be around 2¼ percent of GDP. The improvement is due in part to higher-than-anticipated revenues, given an improvement in tax collection (including due to increased withholding and the advent of e-filing) and significant one-off revenues, and despite losses from the floods and the granting of increased concessions due to flood damage. However, most of the improvement is due to under-execution of projects in the capital budget. This includes projects for recovery and reconstruction following the December 2013 floods, notwithstanding substantial progress on restoring housing for those most impacted by the floods. Thus, capital spending in 2014 is now projected to reach around EC$147 million compared to a budgeted EC$330 million (including the EC$ 73 million in the supplementary budget following the floods) and EC$151 million executed in 2013.
4. Progress continues in implementing the government’s policies, which were outlined in a letter submitted in support of the Fund’s RCF/RFI disbursed in August. Progress has been significant in improving tax compliance and in implementing e-filing of income taxes and an arrears monitoring and management system. The wage bill as a percent of GDP should begin to decline next year. Progress to date has been limited on rationalizing tax exemptions and limiting transfers to state-owned enterprises. If fully implemented, the mission estimates that these sets of measures would yield a primary surplus of 2 percent of GDP by 2019.
5. However, rising domestic arrears and increasing challenges from a tightening of domestic financing conditions are increasing the difficulties of managing cash flows. The government’s accounts payable, including on VAT refunds, have continued to mount. Some of these are payables, such as subventions to statutory bodies, that are expected eventually to be written off, while others are arrears to international bodies. Nonetheless, by constraining cash flows for public and private enterprises, this may now be serving as a serious headwind to economic activity. In turn, the government’s finances are constrained by tax arrears, suggesting the scope for a more systematic netting of pending obligations. In fact, the tax arrears exceed the government’s arrears to suppliers, highlighting the importance of more vigorous tax collection efforts.
6. A stronger medium-term fiscal consolidation effort would be critical to build much needed fiscal space. The ratio of gross public debt as a percent of GDP has risen nearly 10 percentage points since 2010, and it will be critical to arrest and reverse that increase once the period of high capital expenditures associated with the airport and flood rebuilding ends. The criticality of the task is underscored by the presence of risks to growth and the fiscal position, including slower global growth, the potential loss of the preferential arrangement on energy financing via PetroCaribe, and future natural disasters. The mission estimates that even a single hurricane of a size broadly similar to that experienced in 2010 could push the debt/GDP ratio well above 80 percent, and even with substantial additional fiscal measures, push the date back by which the ECCB debt target of 60 percent of GDP is achieved by another two years. Importantly, fiscal consolidation that would allow an expeditious clearing of government arrears would remove an important headwind to business activity.
7. Additional fiscal measures relative to the baseline could yield a primary surplus of 3 percent of GDP by 2018. These include further bringing down the wage bill by an additional one percent of GDP beyond the baseline over the next four years. This could be accomplished through some blend of wage and hiring restraint. In addition, the mission suggested pursuing rationalization of transfers and subventions to public corporations that could yield an additional ½ percent of GDP in savings over the same period. At the same time, efforts need to be made to improve the rate of implementation of the capital budget. On revenues, there needs to be greater enforcement of existing tax laws, including ensuring that institutions that benefit from tax exempt status receive those exemptions only on those activities that the law specifically exempts. Under this “active” scenario, the ECCB debt target would be met by 2024, instead of 2030 in the authorities’ baseline scenario. More importantly, there is a need for a more credible and well specified medium-term fiscal framework that would, inter alia, incorporate the risk of future natural disasters in order to serve as an anchor for fiscal adjustment efforts.
8. Recent changes to the National Insurance System (NIS) are welcome, but further reforms are necessary to ensure the liquidity of the fund and the pension system more broadly. Risks to long-term sustainability include declining contributions, a falling number of contributors and limited investment opportunities. One desirable reform, which is in process, would be to make contributions from the self-employed compulsory. In addition, government employees currently receive both the pension benefits in the NIS as well as a pension plan specifically for government employees. In the long run this is unsustainable and reforms will be needed, although participants already in the schemes should be grandfathered.
9. Ongoing efforts to improve the business and investment climate are welcome, but should be complemented with reforms aimed at promoting economic diversification. The competitiveness of the tourism sector should be much improved with the construction of the new airport and measures to upgrade tourism facilities and training. In addition, efforts have been made to foster entrepreneurship through training and facilitating the availability of finance. With regard to the latter, the formation of a credit bureau could facilitate lending institutions’ credit decisions by reducing the costs of their due diligence. Additional structural reforms could help diversify the economy by strengthening the links between tourism and other economic sectors, for instance through efforts to improve the marketing of agricultural produce. In addition, procurement legislation to codify and unify procurement procedures would give businesses more certainty and a more level playing field.
10. A key challenge is to alleviate the high cost of energy in St Vincent and Grenadines. This is related primarily to the difficulties of achieving economies of scale in power generation, particularly in a multi-island context. For the most part, the full costs of imported energy are passed on to consumers so that price signals are effectively transmitted to end users, and the plant and equipment used to generate electricity is reportedly fairly modern and efficient. Thus, the main prospect for reducing the cost of energy appears to be the development of alternative energy sources, most notably geothermal, which is currently under active study (hydroelectricity is expected to remain an important part of the energy generation mix). At the moment, the scope for solar power and natural gas appears to be limited until more cost effective methods of production are developed.
11. Building resilience against natural disasters is an imperative given that their intensity is likely to increase due to climate change. The authorities are developing, and starting to implement, programs funded by the World Bank and the Caribbean Development Bank to improve capabilities for emergency response, and to enhance the robustness of physical infrastructure (e.g. coastal and river defenses, slope stabilization, strengthening bridges). In this light, additional insurance recently purchased from the Caribbean Catastrophe Risk Insurance Facility (CCRIF) for excessive rainfall events has a role to play. However, the amounts recovered would have fallen far short of that required to cover the damages experienced in December 2013. At the same time, the authorities noted that some potentially devastating events (e.g. slow-moving tropical storms) might not be covered due to the parametric nature of CCRIF benefits. Accordingly, while further insurance coverage could be considered, it should not be undertaken without a careful cost-benefit analysis.
12. Efforts are being made to improve financial sector soundness, but high NPLs remain a concern. The Financial Service Authority (FSA) has played a crucial role in monitoring and stabilizing the non-bank financial sector, notably the Building and Loan Association. In addition, the FSA has worked with credit unions on a program of amalgamation and recapitalization that should make the sector more robust. The mission encourages the authorities to support the regional efforts to effect a resolution of banking problems within the ECCU.
13. The mission urges the authorities to improve data quality. Progress could be achieved in this area through a greater focus on institutional strengthening of the central statistical office, as well as greater enforcement of its legal authority to collect data and greater accountability of reporting agencies. The IMF stands ready to continue to provide technical assistance to help improve data quality and timeliness.