ST. JOHN’S, Antigua, CMC – The International Monetary Fund (IMF) Friday said that economic activity continues to bounce back from the sharp declines registered during the coronavirus (COVID-19) pandemic and that economic growth for Antigua and Barbuda this year is projected at 5.7 percent.
An IMF delegation, headed by Emine Boz, an Assistant to the Director at the Research Department of the IMF, has ended a two-week visit here, holding discussions with various stakeholders for the 2023 Article IV consultation.
In a statement, Boz said that economic growth for 2022 is projected at 8.5 percent and that tourism and construction activity proving to be particularly strong as the island is expected to register an increase of 5.7 percent in 2023
“After reaching 9.2 percent at end-2022, inflation fell to five percent by July of this year, with core inflation also steadily declining. The current account deficit widened to an estimated 16.2 percent of GDP (gross domestic product) in 2022 with higher tourism receipts more-than-offset by an increase in goods imports and a worsening in the terms of trade.”
As a result, the external position in 2022 is weaker than the level implied by medium-term fundamentals and desirable policies.
The IMF delegation leader said that while the deficit and debt have been declining, gross fiscal financing needs remain high, and the cash flow position of the government has been under strain.
Boz said fiscal measures to limit the pass-through of higher global food and fuel prices have been offset by improved revenue performance and wage restraint. As a result, the primary deficit fell to 1.7 percent of GDP in 2022 (from 2.3 percent of GDP in 2021).
“The rapid rise in nominal GDP is estimated to have brought public debt to 87 percent of GDP by end-2022 (from 95 percent at end-2021). The inability to access international capital markets has resulted in financing needs being met by issuing securities, mainly in the Regional Government Securities Market (RGSM), borrowing from domestic banks and regional institutions, and accumulating arrears.
“While RGSM yields have remained low, the shortening of maturities has resulted in significant gross financing needs of around 13 percent of GDP in 2022. Despite some progress in resolving arrears to certain external creditors and domestic suppliers, the stock of outstanding arrears remains large,” Boz said.
She said the financial sector is well-capitalized and liquid, but credit growth remains weak. As of the second quarter of this year, 6.9 percent of bank loans were non-performing loans (NPLs), with 78 percent of NPLs being provisioned for.
“Bank lending to the private sector has been falling as a share of GDP with weak credit growth for households and small and medium-sized enterprises (SMEs) due to difficulty meeting documentation and collateral requirements for new loans.
“On the other hand, credit union lending has continued to proliferate (7.6 percent year-on-year), although it still makes up a relatively small share of overall lending, 13 percent in the second quarter this year.”
Boz said Antigua and Barbuda faces significant risks ahead.
She said growth is expected to moderate and gradually converge to its long-term trend of about three percent, and price pressures are expected to dissipate in 2024.
However, higher global commodity prices would bring renewed price pressures, and slower-than-expected growth in trading partners could hinder the strength of tourism demand.
The IMF official said that global financial conditions could tighten further and make the government’s efforts to access international capital markets even more complex, and a strengthening of the US dollar could weaken competitiveness.
“The cost and availability of fiscal financing through the regional or domestic debt markets could become more restrictive, potentially worsening debt dynamics and increasing the recourse to arrears, mainly if the planned deficit reduction is not realized.
“Climate change could lead to more frequent and extensive droughts and severe hurricanes. An upside risk is stronger-than-expected FDI inflows that could further boost construction activity,” Boz said.
The delegation said it welcomes the authorities’ plan to reduce the primary deficit through revenue measures and expenditure restraint.
Tax exemptions constituted 47 percent of potential revenues in 2023 through August. Boz said to mitigate the loss of revenues; the authorities have decided to cap discretionary exemptions on import duties and suspend exemptions on other taxes and charges.
“ An update of valuations for property taxes is scheduled to be completed in Fall 2023, and a higher tax rate is planned to be applied to high-end properties from 0.3 percent to 0.5 percent <’ she said, noting that the authorities are transitioning to Harmonized System 2022 classifications at customs, which is expected to result in higher revenues from import duties.
She said there is a continued effort to contain public sector wages and employment. These combined policy initiatives envisaged by the authorities are likely to generate a small primary surplus and bring debt down to 69 percent by 2028 and to 61 percent by 2035, marginally above the Eastern caribbean Central Bank (ECCB) Monetary Council’s target of 60 percent by 2035.
“Public debt is assessed to be unsustainable due to the large outstanding stock of arrears and the fact that paying down these arrears appears unfeasible over the medium term without a broader debt restructuring. Limited access to financing is likely to lead to financing gaps even without considering the need to clear the existing areas.”
Boz said that Antigua and Barbuda should work toward building more substantial fiscal buffers.
“Bringing debt safely below medium-term targets, reducing gross financing needs, and clearing arrears will require additional policy measures equivalent to 0.5-1 percent of GDP,” she said, adding that the authorities should broaden the Antigua and Barbuda Sales Tax (ABST) base by reducing items subject to exemptions or zero-rating, applying the standard rate of 15 percent to short-term accommodation, currently at 14 percent, and extending the ABST to online purchases.
She said excise taxes on tobacco, alcohol, and sugar should be introduced.
“There is scope to improve the collection of property taxes. The authorities should expedite the introduction of a single window system at customs and operationalize strategies to allow e-filing, e-payment, and registration of taxes.
“Furthermore, the authorities should improve tax compliance through administrative measures to close loopholes and strengthen auditing capacity.”
Boz said that better cash and debt management would lessen cash flow pressures and reduce the risks to fiscal financing.
She said a sound cash and debt management strategy should focus on lengthening debt maturity to lower rollover risk, clearing outstanding debt arrears to external creditors and domestic suppliers, and defining the potential modalities for increasing access to climate financing and insurance against natural disasters.
“ The authorities should also undertake contingency planning for adverse scenarios where the availability of financing falls short of budgetary needs,” Boz said, adding that improvements are needed so that the social safety net can better support the vulnerable.
“There are many social assistance programs administered uncoordinatedly by various public entities. Consolidating these programs would be helpful, but, at a minimum, there is a need for a centralized information system to provide an accurate record of all beneficiaries to keep track of the support they receive and identify gaps in coverage and duplication.”
Boz said there is a need to move from generalized subsidies and support through broad-based price subsidies for fuel toward targeted programs whose benefits are periodically recalibrated to reflect the cost of
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