St. Kitts and Nevis
Recent Economic Developments

This paper reviews economic developments in St. Kitts and Nevis during 1995–96. Output performance was robust in 1996, showing a strong recovery from hurricanes Luis and Marilyn, which damaged the country in September 1995. Real GDP growth was 5.8 percent in 1996, compared with 3.7 percent in 1995, largely because of a strong rebound in agriculture and tourism and related sectors. Domestic expenditures increased an average of 10 percent a year over 1995–96. The increase in 1995 reflects a surge in both public and private capital expenditures following the hurricanes.

Abstract

This paper reviews economic developments in St. Kitts and Nevis during 1995–96. Output performance was robust in 1996, showing a strong recovery from hurricanes Luis and Marilyn, which damaged the country in September 1995. Real GDP growth was 5.8 percent in 1996, compared with 3.7 percent in 1995, largely because of a strong rebound in agriculture and tourism and related sectors. Domestic expenditures increased an average of 10 percent a year over 1995–96. The increase in 1995 reflects a surge in both public and private capital expenditures following the hurricanes.

Introduction

1. St. Kitts and Nevis has a small, highly open economy, with exports (including tourism) equal to 40 percent, and imports equal to 50 percent of GDP. Historically, sugar has been an important export but in recent years there has been considerable diversification into tourism and light manufacturing. The country shares a common currency (the Eastern Caribbean dollar) with the other seven members of the Eastern Caribbean Central Bank. The central bank is operated effectively as a currency board and the currency has been pegged to the U. S. dollar at a rate of 2.70 since 1976.

2. Elections in mid–1995 brought the Labor Party to power with a sizeable majority, following a brief period of coalition government by the other parties in the federation. Recently, there has been discussion of withdrawal from the federation on the part of Nevis. This movement is fueled by Nevis’ desire to retain autonomy in the conduct of a rapidly growing business of off-shore registration of corporations, trusts, and limited liability companies.

3. Although the two islands have been subjected to external shocks, including a number of destructive hurricanes, economic performance has been marked by sustained and almost uninterrupted growth. Inflation has been at the level of trading partners and unemployment is low. Thanks to high levels of private capital inflows, the external account balances have been generally positive. The sustained growth of per capita income has led to a graduation from concessional borrower status.

4. The consolidated nonfinancial public sector generally has recorded a positive overall fiscal balance; however, the central government typically has recorded deficits averaging about 1 percent of GDP. This picture has changed recently because of sharply higher levels of public sector investment. Until 1996 surpluses of the social security system have been large enough to balance out the deficits of the central government as well as the chronic losses of the state-owned sugar company. The government has been pursuing a strategy of economic diversification which has been supported by sizeable investments in economic infrastructure that would enhance the prospects for tourism development and expansion of light manufacturing.

I. Review of Major Economic Developments in 1995—96

A. The Domestic Economy

Output, expenditure, and savings

5. Output performance was robust in 1996, showing a strong recovery from hurricanes Luis and Marilyn which damaged the country in September 1995. Real GDP growth was 5.8 percent in 1996, compared to 3.7 percent in 1995, largely because of a strong rebound in agriculture and tourism and related sectors (Table 1). Domestic expenditures increased an average of 10 percent a year over the 1995–96 period (Table 2). The increase in 1995 reflects a surge in both public and private capital expenditures following the hurricanes. In 1996, the increase can be traced to an expansion in government current expenditures, in particular on wages and salaries and goods and services. After a sharp decline in 1994, national savings recovered to 26½ percent of GDP in 1995, but declined to 20⅓ percent of GDP in 1996. During the same period the ratio of investment to GDP was unchanged at 46 percent of GDP.

Table 1.

St. Kitts and Nevis: GDP by Sector at Constant Prices

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Sources: Ministry of finance; and Fund staff estimates.
Table 2.

St. Kitts and Nevis: GDP by Expenditure at Current Prices

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Sources: Ministry of finance; and Fund staff estimates.

Sectoral developments

Agriculture, livestock, and fishing

6. Agricultural activity is dominated by large-scale cultivation of sugarcane by the state-owned St. Kitts and Nevis Sugar Manufacturing Company (SSMC). Continuing a trend begun in the early 1980s, the contribution of sugarcane to GDP declined steadily from 3.2 percent of GDP in 1992 to 2.4 percent in 1996 (Table 3). The export of sugar currently relies on preferential trade agreements with the European Union and the United States and the future of the sugar industry depends upon further improvements in efficiency and capacity utilization. The government is currently undertaking a World Bank-financed study to examine the costs and benefits of maintaining the sugar industry, versus closing it down.

Table 3.

St. Kitts and Nevis: GDP by Sector at Current Prices

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Sources: Ministry of finance; and Fund staff estimates.

7. Sugarcane production remained flat in 1995 (in part due to dry weather conditions in the first half of the year), and increased by 13 percent in 1996. This improvement was due to more favorable weather conditions, increased acreage under cultivation, and improvements in cultivation and harvesting methods.

8. Fruit and vegetable production has shown growth, especially in the production of limes, mangos, onions, pineapples, pumpkins and yams. While this small-scale farming has strong growth potential, given the needs of the hotel and restaurant sector, it is still focused mainly on domestic consumption and remains a very small percentage of GDP. Crop production is done under rain-fed conditions which create a surplus production of vegetables for the first four months of the year and shortages for the remaining months. The lack of supplemental irrigation is a key constraint to expanding the crop season. Other major constraints include limited access to productive lands, insecure land tenure, and undeveloped production and marketing systems.

9. These same constraints also limit the production of livestock—beef, pork, mutton—and poultry. Following the 1995 hurricanes, meat production dropped by 33½ percent, and partially rebounded by I6½ percent in 1996. Similarly, as traps had not yet been fully replaced, fisheries continued to feel the impact of the 1995 hurricane, with a further marginal decline in 1996.

10. The government recently developed a strategic nonsugar agricultural plan for the 1995–2000 period which seeks to increase output and significantly reduce the food import bill by 2000. After an initial focus on meeting domestic demand, the strategy will then center on developing external market niches.

Tourism

11. Following the damage from the hurricanes, value added in the hotel and restaurant sector (representing the bulk of the tourism sector) declined by nearly 22 percent in 1995, and recovered by only 9 percent in 1996. As a share of GDP, tourism accounted for about 9 percent in 1996, compared to a peak of 11¾ percent in 1994. In 1996, the number of total visitors to St. Kitts and Nevis declined by 19 percent to about 165,000 (Table 4).

Table 4.

St. Kitts and Nevis: Selected Data on Tourism

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Source: Statistical office; and Fund staff estimates.

12. While the number of stopover visitors in 1996 partially recovered from effects of the 1995 hurricanes, cruise-ship passenger arrivals declined by another 35 percent in 1996. This was due to the decision of three cruise-ship lines to reposition their fleets to other destinations and discontinue stops in the Eastern Caribbean. Despite this decline, the future outlook for cruise-ship business in St. Kitts and Nevis appears bright and will be supported by the completion in 1997 of a new berthing facility at Port Zante, which can simultaneously receive two of the new large-scale cruise ships.

13. In 1996, stopover passengers staying at hotels or guest houses accounted for 51 percent of all arrivals; cruise-ship passengers represented 48 percent. In terms of expenditures, stopover visitors spend a daily average of US$227, compared to only US$79 spent by cruise-ship passengers. And, because the average stopover visitor stays for about nine days, compared to just one day for cruise-ship passengers, total expenditures by stopovers account for 96 percent of total tourism expenditures.

14. The capacity of the tourism sector has steadily increased over the past decade.1 In 1996, St. Kitts and Nevis had 1,510 rooms in 32 hotels and an additional 219 rooms in guest houses. Expansion of existing facilities and the expected construction of two new hotels in St. Kitts and two new properties in Nevis will increase the number of rooms by over 600 in the next three years. In addition, the airport facilities in St. Kitts are currently being refurbished and upgraded to accommodate increased arrivals, and the airport runway in Nevis is being lengthened in order to receive international passenger aircraft.

Manufacturing

15. The manufacturing sector accounts for about 11 percent of GDP, about 2 percentage points of which is comprised of the sugar refinery and related products. Sugar production was little changed at 20,249 mt in 1996 and has shown virtually no gain since 1991 (Table 5). In 1996, the SSMC embarked on a three-year EC$15 million capital improvement program to increase productivity.

Table 5.

St. Kitts and Nevis: Cane and Sugar Production, 1992-96

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Source: St. Kitts and Nevis Sugar Manufacturing Company.

16. In contrast, the performance of nonsugar manufacturing has been stronger, with output increasing by about 6½ percent in 1995 and 4 percent in 1996. In particular, enclave firms assembling electronic equipment for exports and performing information processing operations, are expanding and require additional factory space. According to the ministry of trade, there is currently an excess demand of about 20,000 sq ft for factory space and requests for lease of government-owned factory shells have had to be turned down. Foreign-owned enclave firms are entitled to duty exemptions on inputs, raw materials, and equipment, as well as to tax holidays. These foreign investment incentives are currently being reviewed by CARICOM to ensure harmonization among CARICOM member countries. The Alien Land-Holding Act, which restricts foreign ownership of land and of local company stock, is also under review within the OECS.

Construction

17. Post-hurricane reconstruction activities led to 14¾ percent growth in the construction sector in 1995. As repair activities slowed, new construction projects supported continued growth of 5 percent in 1996. Public sector construction projects included the land reclamation and waterfront Port Zante project, the national insurance building, and the refurbishing of the airport. Some of the private sector construction is being financed by expatriates returning home. A national housing corporation was recently created to carry out the construction of over 300 low-cost housing units annually, to be financed by the social security system.

Labor market and wages

18. St. Kitts and Nevis is close to reaching full employment and labor shortages could pose a constraint to future growth. The estimated unemployment rate of 4½ percent is very low in comparison to other countries in the region.2 Although jobs are available as cane cutters in the sugar sector, negative social perceptions impede larger employment of nationals. The resulting shortage of workers during the harvesting season is satisfied by migrant workers from Guyana. Similar negative perceptions about employment conditions and wage rates in the electronic assembly operations are creating labor shortages, but thus far employment of immigrant labor in this sector has been limited. For specialized jobs, especially in the construction sector, skilled workers are often brought in. While St. Kitts and Nevis has experienced a decline in population over the past several years, returning expatriates are becoming an increasingly important source for needed skills and investment.

19. The largest employer is business and general services (22 percent), followed by government and statutory bodies (excluding SSMC) (18 percent), and tourism (13 percent) (Table 6). Employment in the informal sector is estimated to account for about 20 percent of total jobs. Professional and technical jobs account for about 14 percent of all formal employment, and service-related work constitutes about 37 percent.3 While there is a shortage of skilled workers, the quality of the existing labor pool is considered to be high—a major attraction for foreign investment in St. Kitts and Nevis.

Table 6.

St. Kitts and Nevis: Employment by Sector, 1994

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Source: OAS, Report on Labor Force Survey, St. Kitts and Nevis, 1995.

20. Earnings of workers in St. Kitts and Nevis are relatively higher than in many other Caribbean countries. 4 The weekly minimum wage, which has been in effect since 1994, covers shop employees (EC$120-EC$200), domestic servants (EC$150), manufacturing (EC$120), hotel and restaurant employees (EC$150 for entry level and EC$200 for semiskilled), casino workers (EC$150), and private security (EC$240). Except for entry-level employees, most workers are paid above the minimum wage. The average weekly wage for sugarcane cutters is EC$200 for those working year-round, and EC$300 for those employed just during the harvest.

Prices

21. The 1995–96 price increases exceeded somewhat the average of the preceding two-year period (1.6 percent). The retail price index increased by 3 percent in 1995, with the largest increase (16 percent) for “other goods and services” which has a 9 percent weight in the overall index (Table 7). In 1996, overall retail prices increased by 2 percent; food items, which represent 50 percent of the index, increased by 3.8 percent.

Table 7.

St. Kitts and Nevis: Retail Price Index

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Source: Ministy of finance; and Fund staff estimates.

22. The government has in place price controls in the form of maximum markups on import prices on a variety of items, including basic foods, household goods, fuel, building materials, and furnishings. In practice, however, mark-up controls have only been applied to goods imported by the government (flour, milk, rice) and gasoline, kerosene and cooking oil imported by private companies.

The environment

23. St. Kitts and Nevis’ small size, fragile ecosystem, and vulnerability to natural hazards create a special need for protection of natural resources. The economic importance of tourism also underscores the need for sound environmental planning and management. To this end, the government prepared in 1994 a National Environmental Action Plan (NEAP) which outlines appropriate policy legislation, and regulatory and institutional measures needed to address key priorities: solid waste management; coastal and marine pollution; beach erosion; biodiversity and wildlife habitat; forestry; land use planning; national parks and cultural heritage; natural and environmental hazards; and public awareness. Sustainable development will also require an increased public awareness of environmental issues.

24. To support St. Kitts and Nevis’ environmental program as part of a regional effort, the World Bank is funding the OECS Regional Solid Waste Management Project which deals with ship-generated waste facilities at the port, construction of landfills, garbage collection and institutional strengthening of environmental management. As a follow-on, an OECS regional liquid sewage waste management project is under preparation which will address key deficiencies in the management of waste water, including the establishment of an institutional framework for the system and the identification of cost recovery mechanisms.

B. Public Finances

25. During 1990–95, the nonfinancial public sector registered surpluses in four of the years, and small deficits in two (0.5 percent of GDP in 1991 and 0.2 percent in 1993). However, in 1996 the overall balance moved to a deficit of 3½ percent of GDP, mainly because the current surplus decreased to only 3½ percent of GDP from an average of 6½ percent of GDP during the first half of the 1990s (Table 8). The decline in the current surplus was due to strong increases in central government wage expenditure and in spending on goods and services. The increase in wage payments was caused by a temporary employment experience program which was introduced by the new Labour government, which came to office in mid–1995. Contributing to the deterioration of the consolidated public sector current balance was a worsening current account deficit of the public enterprises, from an average of ¼ percent of GDP in 1990–95 to 2½ percent of GDP in 1996. The surplus in the social security system has been roughly constant at 4½ percent of GDP.

Table 8.

St. Kitts and Nevis: Consolidated Public Sector Operations

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Sources: Ministry of finance; and Fund staff estimates

Adjusted for internal public sector transfers.

Operating surplus.

Operating deficit.

Central government

26. The overall deficit of the central government moved from an average of 1 ½ percent of GDP in 1993–94 to 2½ percent in 1995 and 3½ percent in 1996 (Table 9). The current surplus, which had averaged 2½ percent of GDP in 1993–94, rose to over 4 percent in 1995 and then declined sharply to only 1½ percent in 1996. As noted above, the reduction in savings was attributable to strong increases in wage payments and expenditures on other goods and services. Revenues increased in line with nominal GDP in 1996, after a surge in 1995 that reflected the introduction of a “citizenship by investment” program. Following the country’s graduation from concessional borrower’s status, the government increasingly resorted to domestic sources to finance its deficit. Whereas around 90 percent of the overall balance was financed externally during 1990–94, this share dropped to only 20 percent in 1995–96.

Table 9.

St. Kitts arid Nevis: Central Government Operations

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Sources: Ministry of finance; and Fund staff estimates
Revenue

27. Central government revenue increased from an average of 27 percent of GDP in 1993–94 to 31 percent in both 1995 and 1996, in large part because of increases in nontax revenue from a “citizenship-investment program” (Table 10).5 Indirect taxes still account for the largest part of government revenue, although their share declined from an average of 65 percent in the early 1990s to 54 percent in 1995 and 1996. Among these, taxes on trade are the most prominent and contributed around 40 percent of revenues in 1995–96.

Table 10.

St. Kitts and Nevis: Central Government Revenue

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Sources: Ministry of finance; and Fund staff estimates.

28. In 1996, the government introduced a series of changes to the revenue system, effective from the beginning of 1997 (Appendix II). First, the tax on domestic services (the domestic part of indirect taxation) was raised from 2½ to 4 percent. The traveler tax on outbound tourism was increased from 7½ to 10 percent, and the trader’s tax on unincorporated businesses was increased from 2 to 3 percent. Also, the social services levy, a tax on labor income, was increased from 4 to 6 percent.

29. St. Kitts and Nevis does not have an individual income tax. However, the taxation of labor is quite significant. In addition to the 6 percent social services levy (which is shared by employer and employee), a 10 percent contribution to the social security scheme (also shared by employer and employee) and a 1 percent injury levy (paid only by the employer) are imposed on wage earnings. This adds up to an effective taxation of 17 percent on the factor labor.

30. The basis for the corporate income tax is narrow. The few large companies which are classified as corporations pay up to 40 percent tax on profits, but a restrictive limit on the size of salaries that are deductible for income tax purposes leads to an effective tax rate in excess of 40 percent. Most businesses, however, are unincorporated and do not pay income tax. As a substitute for income taxation, the government levies a multitude of licence fees (see Appendix I). These fees are easy to administer and not very distortionary, since they consist of a lump-sum payment which is independent of profits. However, they are not particularly effective as a means of raising revenues and are estimated to be equivalent to an income tax rate of only 1 percent. As most license fees had been unchanged in nominal terms since the 1970s, the government raised many of them substantially in the 1997 budget.

Expenditure

31. Total government expenditure increased by 17 percent in 1995 and by 10½ percent in 1996 (Table 11). These increases were more rapid than nominal GDP growth, and brought the share of total government expenditure in GDP to 34½ percent of GDP in 1996 from 29½ percent in 1994. The increase in 1995 was mainly due to higher capital spending in connection with clean-up activities after the passage of two hurricanes. However, the increase in 1996 resulted from accelerated current expenditures. In 1996 wages and salaries increased by 12 percent, mainly because of a temporary work experience program for young people. The program involved about 1,000 participants, or around 5 percent of the labor force, and was extended from the originally planned six to nine months. It also resulted in the creation of 150 new permanent jobs. An increase in spending on goods and services in 1996 was partly due to the hurricane clean-up, which continued from 1995. It also reflected efforts of the new government to gain support and recognition abroad by taking part in regional and international conferences, and the hiring of expert consultants in areas where the administration lacked experience. Interest expenditure increased by more than 20 percent in 1996, following graduation from concessional borrower status and a resort to bank overdraft financing for hurricane repairs. Transfers decreased significantly, as direct payments to public and departmental enterprises and to the tourist board were reduced to almost zero. After reaching a high of 6½ percent of GDP in 1995, capital spending declined to 5 percent of GDP in 1996. A large proportion of the investment hump in 1995 is explained by hurricane clean-up activities.

Table 11.

St. Kitts and Nevis: Central Government Expenditure

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Sources: Ministry of finance; and Fund staff estimates.

Domestic debt

32. Domestic debt of the central government, which had declined relative to GDP during the early 1990s, increased again in the most recent years (Table 12). After falling from 39 percent of GDP in 1990 to 29½ percent in 1994, domestic debt rose to 33½ percent in 1995, and to 34½ percent in 1996. This trend reversal coincides with the graduation of St. Kitts and Nevis from concessional borrowing. No longer able to draw on inexpensive foreign credits, the government has increasingly relied on domestic sources to finance its deficit.

Table 12.

St. Kitts and Nevis: Central Government Domestic Debt

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Sources: Ministry of finance; and Fund staff estimates.