ST. KITTS-ECONOMY-IMF says economic growth is projected at 4.5 percent this year

BASSETERRE, St. Kitts, CMC – The International Monetary Fund (IMF) says the economic outlook for St. Kitts-Nevis is “positive” but warns the twin-island Federation that it is subject to downside risks in the short term, primarily stemming from global headwinds impacting key tourism source markets and commodity price volatility.

The IMF said economic growth is projected at 4.5 percent in 2023, supported by a strong recovery in tourism and other service sectors. It said the economy was severely hit by the coronavirus (COVID-19) pandemic, with the gross domestic product (GDP) contracting 14.5 percent in 2020 and 4.3 percent in 2021.

An IMF mission led by Alexandre Chailloux has ended a two-week visit to Basseterre for the 2023 Article IV consultation discussions on economic developments and macroeconomic policies.

He said St. Kitts-Nevis is recovering from the COVID-19 pandemic and the cost of living crisis. The large fiscal buffers accumulated over a decade of prudent fiscal policy have supported the authorities’ forceful policy response to protect the population’s livelihood.

He said preserving the country’s legacy of fiscal prudence in a context of concerns over the sustainability of Citizenship-by-investment Programme (CBI) resources and a pressing need for investment in climate change adaptation will require prioritizing policies.

“This includes tightening the fiscal stance through phasing out crisis-related measures, rationalizing and controlling current spending, streamlining social transfers, and a holistic overhaul of the taxation framework.

“Fiscal space could support investment in climate change adaptation, accelerate economic diversification, and restore waning competitiveness. The concentration of risks in the banking sector calls for a business model change, including de-risking the investment portfolio, addressing legacy asset quality issues, and safeguarding government deposits while supporting credit growth and financial stability,” Chailloux said.

He said the tourism recovery here has lagged behind the Eastern Caribbean Currency Union (ECCU) and other Caribbean countries because of stricter and longer-lasting COVID restrictions. The IMF official said global headwinds moderated the growth catch-up in 2022.

“GDP is estimated to have grown by nine percent in 2022. The authorities’ proactive policy response helped dampen inflation pressure, with average inflation rising to only 2.7 percent. The previous administration made a substantial repurchase of land – 7.6 percent of GDP – from the land-to-debt swap arrangement, reducing its deposits and contingent liability, which now remains at 12 percent of GDP”.

Chailloux said these measures came at a cost to public finances: despite receiving record-high CBI revenues, the government incurred the most significant primary deficit in two decades.

He acknowledged that the outlook is positive, but risks are somewhat tilted to the downside.

“Growth is projected at 4.5 percent in 2023, supported by a strong recovery in tourism and other service sectors. In the short term, downside risks dominate primarily from global headwinds impacting key tourism source markets and commodity price volatility. The growing dependence on volatile and uncertain CBI revenue is a significant source of vulnerability.

“Further worsening of global financial conditions could affect bank capital. Natural disasters pose an ever-present downside risk. On the other hand, medium-term prospects for accelerating the transition to renewable energy and increased investment in resilience by the public sector could represent material upside risks,” Chailloux added.

The IMF official said that phasing out crisis-related measures will be essential to safeguard fiscal prudence and entrench debt sustainability. He said tightening the fiscal stance is required to achieve budgetary sense. This could be achieved by phasing out electricity price subsidies, streamlining income support measures, and restoring the Corporate Income Tax rate.

“In the medium term, a holistic overhaul of the taxation framework will be of the essence to reduce dependency on CBI and to maintain fiscal space.”

Chailloux said a property tax reform to support the housing market and home ownership while increasing progressivity and reintroducing progressive personal income tax could help strengthen fiscal sustainability, improve fairness and equity, and achieve inclusive growth.

“Evaluating thoroughly current tax expenditures, to eliminate those coming at a cost to public finance with little proven social and economic benefit would be an important part of an effective tax reform.”

Chailloux said using budget resources should be geared towards increasing sustainability, and that better-targeted social transfers can help address the protection of the most vulnerable more efficiently.

“The ongoing reform of the Poverty Alleviation Programme is a commendable step in that direction. In the future, a rebalancing between current expenditures, notably through better control of the public sector wage bill, and public sector capital expenditure will help catalyze investment in natural disaster resilience, climate change adaptation, and innovation to support the long-term growth potential of the Federation,” Chailloux said.