Source: Loop Caribbean
The International Monetary Fund (IMF) Friday said economic growth rebounded “strongly” last year in St. Kitts-Nevis despite global headwinds and that gross domestic product (GDP) is estimated to have grown by nine per cent in 2022 after contracting 14.5 per cent in 2020 and 0.9 per cent in 2021.
In a statement, the Washington-based financial institution said the lifting of all COVID-related travel restrictions in August last year sparked a strong rebound in the tourism sector and across the economy.
“The authorities’ proactive policy response, facilitated by the fiscal buffers accumulated from a decade of prudent fiscal policy, helped shelter domestic prices from high global energy and food prices,” it said, noting that these measures nonetheless took a heavy toll on fiscal accounts in 2022.
According to the IMF, the primary balance ex-Citizenship by Investment Programme (CBI) revenue and land buybacks, deteriorated to a deficit of 17 per cent of GDP as against 15 per cent in 2021.
The IMF said large CBI inflows in 2022 helped finance this expansion, keeping public debt below the Eastern Caribbean Currency Union (ECCU) regional target of 60 per cent of GDP.
Under the CBI programme, foreign investors are granted citizenship of the twin island Federation in return for making a substantial investment in the socio-economic development of the island.
The IMF said that return to the pre-pandemic activity level is expected by the end of next year and beyond that, growth should converge towards its medium-term path.
“The budget is expected to be broadly balanced through 2025 and then go into deficits—predicated on current policies. Risks to the outlook are tilted to the downside in the short term, but with some upside potential in the medium term.
“Downside risks primarily stem from a global slowdown, particularly in the United States, global inflation, and sustained commodity price volatility from lingering geopolitical uncertainty,” the IMF said, adding that the growing dependence on volatile and uncertain CBI revenue is a major source of vulnerability.
“But prospects for an acceleration of the transition to renewable energy and increased investment in resilience by the broader public sector could represent a material upside risk.
“The authorities are committed to maintaining a prudent fiscal stance going forward. Small budget surpluses are planned for the next three years, supported by the phasing-out of electricity price subsidies and streamlining of income support measures.”
The IMF said that the authorities have reiterated their intention to undertake structural fiscal policy changes to reduce dependency on CBI revenues over the medium term. They have also remained committed to investing in natural disaster resilience and climate change adaptation.
In its assessment of the situation in the twin island Federation, the IMF executive board noted that the strong economic rebound last year was moderated by tighter global financing conditions and high fuel and food prices.
The board said that while proactive policies facilitated by accumulated buffers helped keep inflation under control, the fiscal measures have weighed on public finances.
“Strong Citizenship-by-Investment flows cushioned the impact of higher expenditures on public debt but also increased reliance on these revenues. Looking ahead, as risks are tilted to the downside in the short run, Directors encouraged the authorities to pursue prudent fiscal policies, ensure financial stability, and implement ambitious structural reforms to boost sustainable and inclusive growth.”
The IMF executive board agreed that the fiscal stance should be tightened to entrench debt sustainability, and noted the importance of the planned phasing-out of electricity price subsidies and other crisis-era support measures.
“Containing current expenditures, notably the wage bill, will help create space for sustainable investment. Directors called for reducing dependence on CBI revenue, which would require an overhaul of the taxation framework, including reducing tax expenditures, streamlining VAT, reforming property taxes, and introducing a progressive personal income tax.”
The IMF executive board also emphasized the need for structural policies to strengthen competitiveness, labour market development, and diversification.
The directors have recommended higher resilient infrastructure spending and an optimal insurance framework against natural disaster risks and endorsed the authorities’ strategy to transition toward renewable energy.
They supported the plan for a sovereign wealth fund to finance resilient investment and ensure adequate fiscal buffers and welcomed efforts to improve the delivery and access to education and vocational training, which should be complemented by active labour market policies, to reduce skills mismatches and promote job opportunities.
The IMF is also calling for a re-assessment of the business model of the systemically important bank, noting that further progress is needed to de-risk its investment portfolio and reduce non-performing loans (NPLs).