St. Vincent and the Grenadines
2002 Article IV Consultation —Staff Report; and Public Information Notice on the Executive Board Discussion

This 2002 Article IV Consultation highlights that real GDP for St. Vincent and the Grenadines grew by a modest ¼ percent in 2001, well below the 4 percent average for the previous three years. Preliminary estimates for 2002 indicate about a pickup in real GDP growth to about 1 percent owing to a strong rebound in agriculture prior to tropical storm Lili in late September, and construction activity as public sector projects were implemented. Inflation was about 1 percent in 2001 and 2002, and unemployment is reported to remain high.

Abstract

This 2002 Article IV Consultation highlights that real GDP for St. Vincent and the Grenadines grew by a modest ¼ percent in 2001, well below the 4 percent average for the previous three years. Preliminary estimates for 2002 indicate about a pickup in real GDP growth to about 1 percent owing to a strong rebound in agriculture prior to tropical storm Lili in late September, and construction activity as public sector projects were implemented. Inflation was about 1 percent in 2001 and 2002, and unemployment is reported to remain high.

I. Economic Background

1. Economic activity weakened considerably in 2001 from the preceding year (Figure 1 and Table 1). The slowdown of GDP growth to ¼ percent can be attributed largely to the harsh effects of a drought on agriculture, the fall-off in stopover tourism associated mostly with the September 11 events, and the sluggish global economy. Against this background, unemployment seems to have increased while the 12-month inflation rate fell by ½ percent.

Figure 1.
Figure 1.

VCT: Output and Inflation

(Annual percentage change)

Citation: IMF Staff Country Reports 2003, 028; 10.5089/9781451839937.002.A001

Table 1.

St. Vincent and the Grenadines: Selected Economic Indicators

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Sources: Eastern Caribbean Central Bank; Ministry of Finance and Planning; Department of Tourism; Banana Growers Association; and Fund staff estimates and projections.

Excludes small amounts of banana exports to regional markets.

The 2002 figures for effective exchange rate are end-October and the others are end-June.

In relation to banking system liabilities to the private sector at the beginning of the period.

Interest payments are based on accrual accounting. The government has sought a moratorium on Ottley hall shipyard debt pending an amicable settlement on issues under dispute with the creditors.

The figures quoted here were accepted by the authorities. Budget estimates presented to Parliament following normal practice, has higher totals.

Public sector includes central government, National Insurance Scheme and nonfinancial public enterprises.

Indicate coverage of gross public sector net of NIS borrowings, e.g., general government and nonfinancial public sector.

The government tookover a private debt for the Ottley Hall shipyard in 1999 and provided a loan guarantee to LIAT in 2002.

2. Preliminary data point to only slightly higher growth in 2002. Real GDP growth is estimated to have reached ¾ percent in 2002. The recovery in agriculture took hold, buoyed by a rebound in bananas; construction, mostly related to public sector projects, also contributed to the recovery. Tropical storm Lili, which damaged portions of the banana crop in late September 2002, is expected to have reduced banana output in the final quarter of 2002, but should have a positive impact in 2003 as farmers replant and rehabilitate damaged crops. The 12-month inflation rate at end-October 2002 was around 1 percent.

3. The government’s pursuit of countercyclical fiscal policy to stem the economic slowdown resulted in a substantial deterioration in the government’s financial position. The central government’s overall deficit widened from ¼ percent of GDP in 2000, to 2½ percent of GDP in 2001 and an estimated 3½ percent of GDP for 2002 (Figure 2 and Table 3). Higher spending reflected a larger capital program to finance new roads, schools, and health centers, but also a rising wage bill (Box 1). Central government investment grew by 1 percent of GDP to 5 percent of GDP in 2001, and rose to an estimated 6¾ percent of GDP in 2002. The capital program was largely financed by grants and commercial borrowings. Revenues rose to over 30 percent of GDP in 2002 boosted by improvements in tax compliance (following an amnesty on interest and penalties on tax arrears), a broadening of the tax base to include other financial institutions and professional services, the removal of tax exemptions, and steps to strengthen tax administration.

Figure 2.
Figure 2.

VCT: Central Government Operations

(In percent of GDP)

Citation: IMF Staff Country Reports 2003, 028; 10.5089/9781451839937.002.A001

Table 2.

St. Vincent and the Grenadines: Summary of Consolidated Public Sector Operations 1/

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Sources: Ministry of Finance and Planning; and Fund staff estimates and projections.

The figures quoted here were accepted by the authorities. Budget estimates presented to Parliament following normal practice, has higher totals.

In 2001, a major capital inflow was from the Kingstown Property EC$11.5 million sold by the Arrowroot Industry.

Interest payments are based on accrual accounting. The government has sought a moratorium on Ottley hall shipyard debt pending an amicable settlement on issues under dispute with the creditors.

Major capital projects included Port Authority navigation equipment in 1999, and VINLEC power expansion in 2002 and 2003.

The 2003 figures include post-Lili rehabilitation program.

Other net domestic financing figures are a residual, because domestic debt amortization figures are not accurate.

Table 3.

St. Vincent and the Grenadines: Summary of Central Government Operations 1/

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Sources: Ministry of Finance and Planning; and Fund staff estimates and projections.

The figures quoted here were accepted by the authorities. Budget estimates presented to Parliament following normal practice, has higher totals.

Including contribution to the National Insurance Scheme.

Interest payments are based on accrual accounting. The government has sought a moratorium on Ottley hall shipyard debt pending an amicable settlement on issues under dispute with the creditors.

Mainly contributions to households and international organizations.

The 2003 figures include post-Lili rehabilitation program.

Other net domestic financing figures are a residual, because domestic debt amortization figures are not accurate.

St. Vincent and the Grenadines: Salary and Wage Bill Pressures

The central government’s current expenditure-to-GDP ratio rose by 5 percentage points between 1998 and 2002 largely due to a higher wage bill. Despite the freeze on salaries of civil servants in 2002, the wage bill rose to an estimated 15 percent of GDP from 14 percent of GDP in 2001. The increase can be explained as follows:

  • about ¼ percent of GDP due to an increase in number of civil servants employed; new hires were mainly health workers, as well as security officers at airports and tourist resort areas;

  • ½ percent of GDP in 2002 related to the granting of a half-month salary bonus in lieu of a salary increase. The freeze on increases was extended into 2003, and wage negotiations were deferred until 2004;

  • about ¼ percent of GDP due to the statutory salary increase for movement within grades,

Central Government Salary and Wage Bill

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Sources; Ministry of Finance and Planning.

A half-month salary bonus is included in 2002.

Statutory increase for movement in grade is included.

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St. Vincent and the Grenadines - Civil Servants

Citation: IMF Staff Country Reports 2003, 028; 10.5089/9781451839937.002.A001

4. The overall balance of the nonfinancial public enterprises (including the National Insurance Scheme (NIS)) deteriorated from a surplus of about 1 percent of GDP in 2001 to a deficit of about 2½ percent in 2002.1 This swing largely reflected higher capital spending on power expansion and the Dalaway water supply project, as well as the impact of lower savings by other public enterprises. These include the Water Authority, the electricity company (due to higher administrative and debt-service expenses) and the NTS (due to an increase in benefits and the number of beneficiaries). In addition, capital revenues fell by 1 percent of GDP, reflecting the one-off benefit of a property sale in 2001. Total public sector debt, meanwhile, rose from 67 percent to 72 percent of GDP in 2002 in line with the higher deficit. Most of the additional debt was contracted in domestic currency (loans from the banking system) and foreign currency debt fell slightly to 49 percent of GDP.2

5. Sluggish economic activity in 2002 was accompanied by a sharp deceleration in deposit and credit growth in the banking system (Table 5). The banks’ average prime rate fell marginally to 10 percent in 2001, following a reduction of 1 percentage point in the ECCB’s discount rate to 7 percent in October 2001. Increased competition was spurred by the ECCB’s lowering of the floor interest rate on savings deposits by 1 percentage point to 3 percent in July 2002, which led to a similar decline in bank lending and deposit rates in 2002.

Table 4.

St. Vincent and the Grenadines: Public Sector Debt

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Sources: Data provided by the St. Vincent and the Grenadines authorities; and Fund staff estimates and projections.

The 2001 Actuarial Valuation reports that the NIS is solvent until 2016 at the current 6 percent contribution rate.

The government lookover a private debt for the Ottley Hall shipyard (EC$156 million) in 1999 and provided a loan guarantee to LIAT (EC$ 1.1 million) in 2002.

There is no accurate information of domestic debt amortization.

Interest payments are based on accrual accounting. The government has sought a moratorium on Ottley hall shipyard debt pending an amicable settlement on issues under dispute with the creditors.

Including foreign currency deposits.

Interest payment as percent of the previous period debt stock.

Table 5.

St. Vincent and the Grenadines: Monetary Survey

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Sources: ECCB; Ministry of Finance and Planning; and Fund staff estimates.

Including resident foreign currency deposits.

Change in relation to the stock of broad money at the beginning of the period.

Nominal GDP at market prices divided by liabilities to the private sector.

6. The offshore sector contracted sharply in 2002, as the authorities strengthened the regulatory and supervisory framework in line with international best practices. The number of offshore banks is expected to have declined to 20 by end-2002 from 38 at end 2001. St. Vincent and the Grenadines was removed from the OECD’s list of tax havens earlier in 2002, but remains on the Financial Action Task Force’s (FATF) list of noncooperative countries and territories in the fight against money laundering. The government expects the country to be removed from the FATF list soon as it has fulfilled all of the FATF requirements and awaits an onsite inspection by FATF officials.

7. The external current account deficit in 2002 is estimated to have been broadly unchanged at 11¾ percent of GDP (Table 6). Despite an increase in volume, export receipts from bananas remained flat because of lower international prices. Tourist receipts are expected to be somewhat lower than in 2001 reflecting a significant drop in arrivals, especially in yachting business. The financial and capital accounts are expected to be broadly the same as last year. The real effective exchange rate, which was roughly unchanged in 2001, depreciated by close to 3 percent through end-October 2002,3 largely reflecting the weakening of the U.S. dollar.

Table 6.

St. Vincent and the Grenadines: Balance of Payments Summary

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Sources: Ministry of Finance and Planning; Eastern Caribbean Central Bank; and Fund staff estimates and projections.

Interest payments are based on accrual accounting. The government has sought a moratorium on Ottley hall shipyard debt pending an amicable settlement on issues under dispute with the creditors.

Debt forgiveness on UK loan totalling EC$1.06 million in 2000, EC$0.51 million in 2001, and EC$9.5 million in 2002.

The counterpart to the BOP financing is partly an adjustment in imputed reserves held at the ECCB.

Exports (f.o.b.) and imports (f.o.b.) relative to nominal GDP at current market prices.

8. Total external debt is expected to have fallen slightly to 49 percent of GDP by end 2002 (Figure 3 and Table 4). Debt service as a share of exports of goods and service is around 6½ percent. Most of the external debt is contracted on concessional terms and of a long maturity.

Figure 3.
Figure 3.

Public Sector External Debt in 2002

(US$ million)

Citation: IMF Staff Country Reports 2003, 028; 10.5089/9781451839937.002.A001

Figure 4.
Figure 4.

St. Vincent and the Grenadines: Selected Economic Indicators, 1998-2002

Citation: IMF Staff Country Reports 2003, 028; 10.5089/9781451839937.002.A001

Sources: Data provided by the St. Vincent and Grenadine authorities; and Fund staff estimates and projections.1/ National savings figures were revised following the revision of BOP figures by the ECCB.2/ Including foreign currency deposits.3/ Including net credit to nonbank financial institutions.4/ Left scale in percent of GDP, right scale in index 1990 = 100, increase is an appreciation.5/ In percent of exports of goods and services.

II. Medium-Term Outlook

9. The outlook in 2003 is for modest growth, but there are a number of downside, mostly external, risks. Real GDP is projected to increase by just over 2 percent, reflecting a projected strong recovery in the banana sector following the rehabilitation of crops following tropical storm Lili and the somewhat improved outlook for the global economy. Risks include a prolonged sluggishness in the global economy and the adverse impact on tourism from a possible conflict in the Middle East or further terrorist attack. There is also the risk of domestic policy slippage particularly in the fiscal area.

10. The authorities expressed a sanguine view of the medium-term growth prospects, and projected and that real GDP will grow by an annual average rate of 3 percent. They predicated their assessment on the strength of: (i) several ongoing and planned residential and tourist-related construction projects; and (ii) growth in tourism related to the expected “demonstration effect” from the return of a major cruise line in the latter part of 2003, and the new operations of the Moorings Yacht Charter Company in late 2002. Growth in agriculture is expected to be moderate, however, as banana preferences for the EU markets expire in 2005, and diversification into other crops is still in progress.

11. Staff emphasized that achieving this positive outcome would require continuing fiscal adjustment. In the staff’s active scenario (Table 9), fiscal adjustment and average growth of around 3 percent are assumed. The central government balance shifts from a deficit of about 3½ percent of GDP in 2002 to ½ percent in 2007. This reflects initiatives to improve the tax system and streamline expenditures (after the World Bank’s public expenditure review). Beginning in 2004, public sector savings are expected to improve from 4¼ percent of GDP to around 10½ percent of GDP by 2007, which will help finance a public sector investment program of about 10 percent of GDP.4 Under this scenario, the public sector debt is reduced from around 72 percent of GDP in 2002 to about 60 percent of GDP by 2007.5

Table 7.

St. Vincent and the Grenadines: Comparative Economic Performance

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Sources: CIA World Factbook, Eastern Caribbean Central Bank; and Fund staff estimates.

Comprises the ECCB member countries, which are Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.

Data unavailable for Antigua and Barbuda.

Data unavailable for St. Kitts and Nevis.

Including migrants’ remittances.

Government and government-guaranteed debt, end of period.

This includes borrowing from the NIS.

Table 8.

ECCU: Compliance with Proposed Central Government Fiscal Guidelines 1/

(in percent of GDP, unless otherwise indicated)

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Sources: ECCU member country authorities, and Fund staff estimates.

Excludes the territories of Anguilla and Montserrat.

Includes external arrears.

Excludes domestic debt amortization.

Table 9.

St. Vincent and the Grenadines: Medium-Term Projections

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Sources: Eastern Caribbean Central Bank; Ministry of Finance and Planning; Department of Tourism; and Fund staff estimates and projections.

The figures quoted here were accepted by the authorities. Budget estimates presented to Parliament following normal practice, has higher totals.

The 2001 Actuarial Valuation reported that the NIS is solvent until 2016 at the current 6 percent contribution rate.

The government provided a loan guarantee of EC$1,1 million to LIAT in 2002.

Interest payments are based on accrual accounting. The government has sought a moratorium on Ottley hall shipyard debt pending an amicable settlement on issues under dispute with the creditors.

12. The active scenario is predicated on implementation of key structural reforms. Improvements in the banking system, steps to strengthen development capacity for farmers and small enterprises, and actions to reduce energy costs through higher efficiency are important to help create a more enabling environment for private sector growth.

13. An alternative scenario shows the impact of a lack of fiscal adjustment and slower reforms (Table 9). The assumption is that the government fails to deliver on expenditure management and public enterprise reforms, leaving the public sector deficit at around 4 percent of GDP, while GDP growth averages only 1 percent. This underscores the importance of persistent fiscal consolidation and measures to promote private sector-led growth.

14. The medium-term outlook is subject to an uncertain external environment as well as domestic policy slippage and to challenges posed by further regional and global integration. Downside risks are significant. If the global economy continues to be sluggish (because of conflict in the Middle East, terrorism or other factors), tourism growth will remain weak. Agricultural exports and growth are vulnerable to the failure of the banana sector to become more competitive or to diversify. Sensitivity analysis performed on the medium-term active scenario shows that the public sector debt, as well as the external debt, would either remain largely unchanged or decline very slowly if growth is lower or if interest rates or external current account deficits are higher.

III. Policy Discussions

15. While the 18-month old administration of Prime Minister Gonsalves has made significant strides on the reform front, the public sector’s financial position has deteriorated in the face of a sluggish economy. Against this background, the government’s record of policy implementation since the last Article IV discussion has been mixed (Box 2). Major advances have been made in improving public sector governance, restructuring the banana sector, and building consensus for difficult policy issues, including a wage freeze in the public sector. Public enterprises have come under increased financial scrutiny aimed at improved performance. The recent counter-cyclical fiscal stance—while temporarily stemming economic weakness—has led to a deterioration in the overall public financial position and to rising debt. The mission’s discussions focused on policies to consolidate the fiscal position in the near and medium term, and on structural reforms needed to promote private sector led growth.

St. Vincent and the Grenadines: Policy Recommendations and Implementation

At the conclusion of the 2001 Article IV consultation on January 28, 2002 (SM/02/17), Directors expressed concern about the decline in economic growth and weakening public finances. They emphasized that, while public sector investment could play an important role in supporting growth, government savings should be increased to avoid an unsustainable debt build up. They also saw the need for urgent fiscal measures: wage restraint, a curb in other recurrent expenditures, broadening of the tax base, and removing tax exemptions. Directors urged the authorities to streamline public spending to core areas, improve budget transparency, and implement capacity building. They stressed the need to improve the management of public enterprises. Directors commended the government for consulting civil society in undertaking ambitious policy reforms.

Implementation of Fund advice over the years has been mixed. Since the 2001 consultation, progress has to be viewed against the very difficult macroeconomic environment. The new government has succeeded in improving transparency, engaging in open dialogue with all stakeholders and establishing a framework for regular financial oversight of public enterprises. However, while the public sector investment program has been expanded, the increase was not financed by higher public sector savings. More needs to be done to control the central government’s wage bill as a share of GDP, which reached its highest level in recent years, despite a wage freeze in 2002.

A. Fiscal Policy

16. The authorities viewed an expansionary fiscal stance as key to avoiding the recession experienced by some of St. Vincent and the Grenadines’ neighbors in the ECCU (Table 7). They defended the higher wage bill in 2002 on the grounds of additional essential hires (health and security), as well as the need to absorb some temporary workers given the weak economy.6 In lieu of a wage increase in 2003, government employees received a half-month salary bonus for December 2002 (EC$4.8 million for an effective increase of around 4 percent). The authorities considered the payment of the bonus as crucial to maintaining goodwill with the public service and as partial recompense for the delayed wage increase.7

17. In light of the deterioration in the central government’s position since 2001, the authorities agreed that a 1-percentage point of GDP reduction in the deficit to around 2½ percent of GDP was appropriate for 2003. They also reiterated their commitment to maintaining a prudent fiscal stance over the medium term. The 2003 budget presented to Parliament is consistent with a 2½ percent of GDP deficit—after an adjustment to reduce capital spending to more realistic levels reflecting the country’s limited implementation capacity.8 The budget also proposes a tightening in non-wage spending, such as in travel and overseas representation (Table 3).

18. The mission stressed the importance of controlling wage as well as non-wage spending. In light of high expenditure levels, the mission expressed disappointment with the growth in the wage bill since 2001, and suggested that an effective freeze on employment was warranted.9 Accordingly, only posts created through attrition should be filled, while rationalization of employment could form the basis of a wider civil service reform.10 The Public Expenditure Review with the World Bank could help to improve the efficiency of spending, while contributing to faster adjustment.

19. The authorities have embarked on tax reform with a view to simplifying the tax system. Major steps include the introduction of a value-added tax, a review of property tax, and the elimination of ad hoc tax exemptions—consistent with the OECS mandate.11 The mission considered this approach consistent with the need to improve efficiency of the tax system by broadening the tax base and reducing tax concessions. Over the medium term, it will be crucial for VCT to reduce its dependence on tariff revenues to facilitate a smooth transition to integration into the C ARICOM single market and the Free Trade Area of the Americas (FTAA).12 The authorities shared this assessment and looked forward to the upcoming technical assistance from the Fiscal Affairs Department on tax reform, in conjunction with the work of the regional Tax Commission.

20. The authorities expressed broad commitment to the ECCB’s fiscal guidelines (see Table 8).13 The authorities regarded the targets as achievable medium-term goals especially in the context of the OECS four-year stabilization and transformation program (SATAP), which is being facilitated with CARTAC assistance. The mission expressed concern that, in the absence of binding targets or agreed penalties for non-observance, it remained questionable how quickly ECCU members—including St. Vincent and the Grenadines—could meet these guidelines. In 2001, St. Vincent and the Grenadines observed only two of the four guidelines.

21. The authorities view the public sector investment program (PSIP) as key to stimulating economic activity and providing the basis for private sector-led growth. The PSIP is projected to increase to 13½ percent of GDP in 2003 from 12 percent in 2002 (Table 2).14 The monthly monitoring by a cabinet committee of key projects should help to keep the PSIP on track. A number of major projects—including electricity expansion, the Windward water and road system, and emergency recovery disaster management (including post-Lili rehabilitation)—build up into 2003. Most of these projects are expected to be completed by 2004, after which the PSIP drops sharply. The authorities agreed that the PSIP should reflect realistic projects that are ready to be implemented with financing identified—particularly from external concessional sources. They assured the mission that they have identified financing for the 2003 capital budget and are determined to complete the projects as scheduled. Staff encouraged the government to work with donors, especially the European Union (EU),15 to ensure timely disbursements of project support.

22. The mission emphasized the need to improve fiscal transparency, particularly in the budget. In line with the OECS fiscal guidelines, the CARTAC-assisted effort to establish a system to guide and monitor fiscal management reforms should be pursued vigorously.16 In this connection, the Auditor General should publish annual reports in a timely manner. The authorities agreed with fiscal transparency, indicating that they already regularly publish and discuss fiscal performance and actively engage civil society on economic issues.

23. The authorities emphasized that most of their debt is concessional and contracted with long-term maturities. They remain conscious of a potential debt build up, but see current debt levels as manageable.17 Total public sector debt is projected to increase from 72 percent of GDP in 2002 to 76 percent of GDP in 2003, in line with a public sector borrowing requirement of 6¼ percent of GDP. The mission cautioned against the continuing rapid increase in public sector debt in recent years, particularly as domestic debt has been contracted at higher commercial interest rates and with shorter maturities.18

24. The United Kingdom wrote-off external loans of EC$9.5 million and the Ottley Hall debt of EC$105 million is on track for a favorable resolution.19 However, in the past year, the central government has assumed debt totaling EC$23 million from public enterprises, including the Banana Growers Association (BGA), Campden Park Container port, and the Development Bank. The mission emphasized the need to monitor public enterprise borrowings and to limit government guarantees including financial exposure to LIAT, the regional airline. The mission encouraged the government to make use of the Regional Government Securities Market (RGSM) for new debt issues, in order to access a wider range of investors and at more competitive (lower) rates. Given the captive market for government securities from local banks, the authorities face little or no funding risk for the rollover of securities.

B. Monetary and Financial Issues

25. The banking system has a strong foreign-owned sector (dominated by a few large banks), but the ratio of nonperforming loans to total loans for the banking sector as a whole rose from 13 to 14½ percent in 2002. On a broader level, commercial banks continue to face competition from an essentially unsupervised nonbank sector. The plans for setting up an umbrella agency to supervise and regulate all nonbank institutions, drawing on CARTAC’s assistance, should be completed as soon as possible. Contrary to the advice of CARTAC, the authorities do not intend for the planned umbrella agency to cover the supervision of registered agents and trust companies, which is expected to remain under the Offshore Financial Authority (OFA).

26. Additional steps are underway to strengthen the regulation of the offshore financial sector. However, the sector appears to be in decline. On the regulatory environment, the banking legislation has been upgraded and is under review.20 Upgrades include the International Banking Act designed to address the issue of bearer shares, one of the main concerns of the FATF; the Trust Act; and the Proceeds of Crime and Money Laundering (Prevention) Act to strengthen anti-money laundering (AML) and efforts to combat the financing of terrorism (CFT).21 The Financial Intelligence Unit (FIU) Act created a FIU. A review of the AML/CFT is planned in conjunction with the scheduled FSAP for the ECCB in the third quarter of 2003. The tightening of regulation has led to closure of a number of banks, and the total fell to 22 in 2002 compared with 38 at end 2001.

27. The authorities saw the potential for a recovery by the offshore sector from current difficulties. They expect that, with the sector’s reputation restored in a strengthened supervisory environment, new business would emerge since St. Vincent and the Grenadines should be an attractive offshore center to yachting clients in the Grenadines. However, staff viewed the sector as being in a more precarious position and questioned the comparative advantage of the country in this area given the strong competition from already well-established offshore sectors. The mission stressed that the cost of supervision of the offshore sector should not outweigh the overall economic benefits of the sector. Some reduction of costs might be obtained by combining supervision of the offshore sector with that of domestic nonbanks (as recommended by CARTAC).

C. External Sector Prospects and Policies

28. While the government has made progress in restructuring the banana sector, the medium-term prospects for the sector remain poor given the imminent loss of trade preferences. Initiatives to diversify into other crops (dasheen, sweet potatoes, and yams) and agro-processing (banana and plantain chips) are encouraging and the government should seek the full support of the EU Diversification Fund in these efforts.22 Moving to large-scale organic banana production, while a possible option, would take considerable time and would be a challenge given the vulnerability of bananas to disease.23 The restructured BGA has been effective in encouraging qualified farmers to deal directly with marketing agencies and in fostering a greater response to market conditions.

29. Steps have been taken to revitalize the tourist industry in the aftermath of September 11, 2001. The new operations of a major yachting company (Moorings) in the Grenadines, the expected return of Princess Cruise Lines in late 2003, and the hub arrangement with St. Lucia and, possibly, Barbados, should boost arrivals. Recognizing that there may have been some erosion in the competitiveness of the hotel industry, the government, is working closely with private sector partners and Canadian assistance to develop ways to help hotel operators (especially small property owners) to improve quality and service, including by establishing good practice codes and standards and by strengthening linkages with the agricultural sector to increase value added.

30. Staff noted that the fixed exchange rate under a currency board arrangement has served St. Vincent and the Grenadines well. Among the key benefits is low inflation and exchange rate stability. However, these arrangements need to be supported by fiscal consolidation and steps to enhance competitiveness, including wage restraint throughout the economy and flexible labor and product markets.24 The depreciation of the real effective exchange rate by close to 3 percent through October 2002 has only partly offset the earlier sustained real appreciation when the U.S. dollar was much stronger (Figure 5).

Figure 5.
Figure 5.

St. Vincent and the Grenadines: Exchange Rate Developments in Selected Caribbean Countries

(Index 1990=100)

Citation: IMF Staff Country Reports 2003, 028; 10.5089/9781451839937.002.A001

Sources: IMF Information Notice System; and staff estimates.1/ Trade-weighted index of nominal exchange rates deflated by seasonally adjusted relative consumer prices. An increase (decrease) indicates an appreciation (depreciation).

D. Structural and Regional Issues

31. The authorities reiterated that while their strategy is to promote private sector initiative, the public sector is still expected to continue to play an important and catalytic role. Staff stressed that medium-term goals should focus on accelerating structural reforms for sustained long-term growth. The mission commended the authorities’ success in involving all stakeholders in policy discussions, including engagement through the National Economic and Social Development Council (NESD) and the Tripartite Council. The NESD’s has played a valuable role in strengthening links between productivity and wages to enhance competitiveness given the fixed exchange rate; in improving infrastructure and human capital; and in encouraging agricultural diversification and in combating crime. The authorities expect that these activities will encourage an emphasis on productivity based wage increases, and in this regard, the shift to performance-based merit pay in the labor market is a step in the right direction.

32. The authorities emphasized that plans are underway to promote and foster a friendly and efficient investment climate. Efforts include lowering energy costs (by increasing efficiency in VTNLEC) and improving the supply of skilled labor through vocational training. Impediments to regional labor mobility will be addressed, including legislation for the provision of work permits to meet OECS requirements. The mission saw room for investment opportunities to be expanded through privatization of some public enterprises (VINLEC, NCB, and Marketing Corporation) and listing the commercial public enterprises on the Eastern Caribbean Stock Exchange. The authorities do not have a policy on privatization nor plans to divest, but they are open to strategic partnerships for the NCB and the Marketing Corporation.

33. The government initiated a number of institutional changes in 2002 including a three-year rolling budget, aimed at strengthening public sector management, and improving fiscal transparency and governance. To enhance the capital project management process, all planning functions of line ministries have been centralized within the Ministry of Planning, which regularly monitors the status of the PSIP. For public expenditure management, the mission stressed the need for implementing the advice from the Bank’s Public Expenditure Review and from CARTAC’s technical assistance.

34. Notwithstanding some progress towards restructuring public enterprises in the last 12 months, further efforts are required to address rising losses (lower profitability) in 2001. The authorities imposed limits on the amount of NIS exposure to other public institutions and have begun to restructure the portfolios of National Commercial Bank and National Development Bank to improve their efficiency. Quarterly financial performance reviews and implementing strategic corporate plans for all public enterprises should help to improve their financial performance. While some progress was evident in 2002, there is room for more accountability with an explicit set of financial targets.

35. The fifth actuarial valuation assessment of the NIS completed in 2001 recommended that the contribution rate of 6 percent must be reviewed soon, as the scheme is projected to become insolvent in 2016 (if current demographic trends and investment returns persist). Further, it recommended that some short-term investments (76 percent of reserves) should be converted to long-term investments. In view of this assessment, the mission expressed concern about the medium-term prospects of the NIS and urged the authorities to consider an early review. The authorities agreed to a review of the pension system in a regional context and saw a need to harmonize pension schemes within the ECCU to facilitate the free movement of labor within the region.

36. On regional developments, the authorities were aware of the problems faced by the ECCU, particularly the weakness in economic activity, high public sector deficits leading to rising debt levels and the associated risks to the stability of the currency board. They agreed that the sustainability of the currency board and its benefits to the region, would require greater fiscal discipline, and adhering to fiscal targets as proposed by the ECCB, including cooperative enforcement mechanisms. They support the OECS/CARICOM Regional Stabilization and Transformation program to assist countries restructure their economies for integration into CARICOM and FTAA.25 The authorities agreed to harmonize macroeconomic policy and structural reforms with other ECCU members, including adhering to the ECCB’s fiscal guidelines, adopting a VAT-type tax and a common investment promotion strategy. The FTAA, with appropriate domestic adjustment, should provide employment and economic opportunities.

E. Social and Other Issues

37. The authorities reiterated that lowering unemployment and poverty alleviation remain at the forefront of their economic program.26 The government has instituted a Youth Empowerment Service as a temporary measure to address youth unemployment.27 On HIV/AIDS, the government began to address the issue with the launching of a Strategic Plan in December 2001. A special unit of the Ministry of Health is responsible for prevention and education programs.

38. While the statistical base has improved in recent years, weaknesses remain that adversely affect the quality of economic analysis. Areas for improvement include public sector debt (especially domestic debt amortization), the capital account of the balance of payments, the finances of public enterprises, and labor statistics. The staff urged the authorities to seek external technical assistance including from CART AC to improve the reliability and timeliness of these data and to ensure that the statistics office is adequately staffed. The mission welcomed the government’s commitment to the GDDS.

IV. Staff Appraisal

39. The authorities have been successful in maintaining macro economic stability in a very difficult regional and global environment. Economic activity weakened considerably in the last two years from the more rapid growth of preceding years, but is expected to pick up in 2003 as domestic demand (mostly led by the public sector) strengthens, banana output recovers (despite tropical storm Lili) and the more positive global economy improves tourism prospects. Higher capital spending played an important role in this positive outcome. However, the corollary was deterioration in the overall fiscal position, which threatens fiscal sustainability, with a rise in public sector debt. Inflation remains subdued and unemployment remains high. Nevertheless, St. Vincent and the Grenadines achieved modest real growth in 2002, above the average for the ECCU as a whole.

40. Looking ahead to 2003 and beyond, it is crucial that the authorities focus their efforts on strengthening the fiscal position and reducing public debt. Decisive action will be required to meet the government’s target of a central government deficit close to 2½ percent of GDP in 2003, including additional measures to rein in recurrent expenditures. Continued efforts to improve the operations of public enterprises will be necessary over the medium term. The quarterly monitoring by the Cabinet of financial operations of public enterprises is welcome. The government should avoid expensive overseas borrowing and limit additional assumption of debt. Government guarantees of new debt should be limited and financial exposure to LIAT be kept to a minimum. Progress on the resolution of the Ottley Hall debt is encouraging and options to further reduce the obligations through an early sale of the Ottley Hall facility should be explored.

41. The wage bill has grown by over 1 percent of GDP since 2001, despite a freeze in wage increases, and needs to be brought under tighter control. Civil service employment should be capped, and the bonus paid in December 2002 should be taken into account to minimize any negotiated wage increases in 2004, especially in light of the increase in real wages for civil servants in recent years. Any further increases would undermine the economy-wide need for wage restraint in order to enhance competitiveness. Capital spending should be prioritized focusing on projects that will promote growth and poverty reduction and taking advantage of availability of external funding, especially from concessional sources.

42. On the revenue side, efforts should focus on reform of the tax system in the medium term. A further reduction in discretionary exemptions is needed to allow for a reduction in some tax rates. In order to broaden the tax base, and reduce reliance on trade tariffs, a VAT-type tax should be introduced well in advance of the trade liberalization deadlines imposed by CARICOM and FTAA.

43. The health of the financial system would be bolstered by improvements in the prudential framework of the non-bank sector. The planned uniform supervisory agency needs to be completed as soon as possible. Plans to restructure the NCB are welcome and should provide a basis for the early divestment of the bank. The future prospects for the offshore sector are not encouraging, and steps should be taken to amalgamate supervision and close banks if necessary to avoid a drain on the budget.

44. Over the medium term, the economy continues to be vulnerable to external shocks and to challenges posed by further regional and global integration. Efforts to strengthen the tourism sector and agriculture diversification will be critical. The medium-term strategy should focus on consolidating the fiscal position and accelerating structural reforms to promote private sector-led growth. Given the fixed exchange rate, emphasis on improving competitiveness is crucial. This can be achieved through public sector wage restraint, productivity enhancing reforms, and creating an enabling business environment. Opportunities to enhance public sector efficiency through privatization should be explored.

45. The stability of the ECCB’s currency board arrangement is central to the long-term stability of the region and its members. The government’s commitment to the ECCB’s guidelines on fiscal targets and to a stabilization and transformation program beginning in 2003 is welcome, and will need to be reflected in their future actions.

46. St. Vincent and the Grenadines’ data need improvement as the poor quality, timeliness, and coverage hamper economic analysis. While progress has been made in some areas, through the assistance of CARTAC, several major deficiencies still exist in key areas, including public sector debt, the capital account of the balance of payments, the finances of public enterprises, and labor statistics.

It is proposed that the next Article IV consultation with St. Vincent and the Grenadines take place on the standard 12-month cycle.

Table 10.

St. Vincent and the Grenadines: Public Sector Assets and Liabilities

Public debt: Total public sector debt has increased steadily since 1998 reflecting the deterioration in the fiscal position and weakening economy. At end-December 2002, total public debt is estimated to be EC$ 704 million (72 percent of GDP) External debt (2/3 of the total) is largely concessional at fixed interest rates with long term maturity.

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Sources: Ministry of Finance and Planning; and Fund staff estimates.

Indicate coverage of gross public sector net of NIS borrowings, e.g., general government and nonfinancial public sector.

The government took over a private debt, Ottley Hall Shipyard about 17 percent of GDP in 1999.

The deposits include sinking fund accounts and unused balances of grant and loan disbursements.

Public sector deposits with the banking system at end December is estimated to be EC$243 million (25 percent of GDP). About two thirds of the deposits are NIS funds; central government deposits are unused balances from revenue and other sources, including grants and loans.

ATTACHMENT I St. Vincent and the Grenadines: Fund Relations

(As of November 30, 2002)

I. Membership status: Joined 12/28/79; Article VIII.

II. General resources account:

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III. SDR department:

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IV. Outstanding purchases and loans: None.

V. Financial arrangements: None.

VI Projected obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs): None.

VII. Exchange rate arrangement: Since July 1976, the Eastern Caribbean dollar has been pegged to the U.S. dollar at the rate of EC$2.70 per U.S. dollar. The exchange system is free of restrictions on the making of payment and transfers for current international transactions. However, a few import goods require import license.

VIII. Article IV consultation: The last Article IV consultation was concluded by the Executive Board on January 28, 2002. St. Vincent is on the 12-month consultation cycle. The authorities have not accepted the Fourth Amendment to the Fund’s Articles of Agreement.

IX. Technical assistance: (2001-present)

Caribbean Regional Technical Assistance Centre (CARTAC):

  • ■ In December an FAD/CART AC mission assisted the government in a comprehensive study of the tax systems and administration.

  • ■ In September a mission assisted the OECS member country governments on developing indicators for the compilation of quarterly BOP for ECCU countries and updating GDDS metadata for the financial and external sectors.

  • ■ In September a mission assisted the OECS member country governments in the first workshop (which is part of a series over 18 month period) on statistics Sweden program for implementing System of National Accounts, 1993.

  • ■ In October 2002 a mission assisted the OECS member country governments in a financial sector supervision seminar.

  • ■ In September 2002 a mission assisted the ECCB and member country governments in a stabilization/financial programming workshop under the Structural Adjustment Technical Assistance project (SATAP).

  • ■ In September 2002, a mission assisted the government in a workshop on Onsite Inspection.

  • ■ In July 2002, a mission assisted the government linking the new CPI basket based on the 1995/96 Household Budget and Expenditure survey (HBES) to the old basket based on 1976 HBES. The base year was changed from 1981 to 2001.

  • ■ In June 2002, a mission assisted the ECCB in a seminar on launching major fiscal reform programs in the ECCB member countries.

  • ■ In April 2002, a mission assisted the ECCB in conducting a regional workshop in strengthening compilation of national accounts and coordinating efforts to link the CPI indices for all the ECCU countries.

  • ■ In September 2001, a workshop jointly sponsored by the ECCB, and the Fund on “Estimating and Forecasting Techniques for Financial Programming” was held at the ECCB for officials of ECCB member countries.

STA: In July 2002, a mission assisted the ECCB and member country governments in a debt management workshop.

MAE: In September 2001, a mission assisted the government to complete the OFC Module 1, and prepare an aide-memoire on the principal issues.

STA: In July 2001, a mission assisted ECCB countries to complete GDDS metadata for socio-demographic topics, and GDDS external metadata.

ATTACHMENT II St. Vincent and the Grenadines: Relations with the World Bank Group

(As of December 17, 2002)

I. Projects / Economic and Sector Work

1. There were three active World Bank projects in St. Vincent and the Grenadines with net commitments of just over US$10 million. All of these projects are part of the OECS sub-regional programs of the World Bank.

2. The OECS Telecommunications Reform Program, approved in FY98, seeks to introduce pro-competition reforms in the telecommunications sectors and increase the supply of informatics-related skills in five OECS borrowing member countries: the Commonwealth of Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. The project has helped the OECS countries negotiate with the sub-regional telecom monopoly and lower the long distance and regional telephone rates. St. Vincent and the Grenadines’ share of the US$6.0 million loan is US$1.2 million in IBRD loan and IDA credit. This project is currently active.

3. The OECS Emergency Recovery Projects were approved on March 8, 2002, for Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines to support efforts in each country to revitalize tourism, which had fallen off as a result of the events of September 11, 2001. St. Vincent and the Grenadines’ share of the US$20.9 million in IBRD loans and IDA credits is for US$3.2 million. This project is currently active.

5. St. Vincent and the Grenadines is also participating in the Disaster Management Project approved in FY99, part of a regional program for the five OECS borrowing countries to fortify, reconstruct, and rehabilitate key economic and social infrastructure and facilities to minimize damage caused by natural and man-made disasters and to speed-up emergency recovery following such disasters. Additionally, the project aims to strengthen countries’ institutional capacities to prepare for and respond to disaster emergencies efficiently and effectively. The total program size is US$46 million, and the St. Vincent and the Grenadines component, which was approved in May 2002 is for US$5.91 million in IBRD loan and IDA credit.

6. The World Bank’s Management presented to its Board an Eastern Caribbean Sub-Region Country Assistance Strategy (CAS), on June 4, 2001. The CAS for World Bank fiscal years 2002–06 covers St. Vincent and the Grenadines and proposes new commitments of US$107 million for the five OECS World Bank borrowers.

7. In FY04, US$4 million of the US$20 million sub-regional OECS Education Reform Project, and US$4 million out of a US$150 million Caribbean-wide HIV/AIDS program, are expected to be allocated to St. Vincent and the Grenadines. The CAS also foresees lending to St. Vincent and the Grenadines as part of an OECS-wide Regulatory Reform Project in the electricity sector (US$5.0 million) and a Public Sector Reform project (US$4.0 million), both in FY05.

8. In addition, the Bank is preparing reports in the area of OECS institutional development and fiduciary issues: the OECS Institutional and Organizational Capacity Review; the Country Procurement Assessment Review; and the County Financial Accountability Assessment all expected to be finalized and disseminated in FY03. Additionally, a Fiscal Issues paper is expected to be finalized in FY04.

9. In June 2002, St. Vincent participated in the biannual meetings of the Caribbean Group for Cooperation in Economic Development (CGCED), in Washington. Four reports were presented by the Bank, with specific emphasis on the OECS: Natural Hazard Risk Management in the Caribbean: Revisiting the Challenge; Youth Development in the Caribbean; Development Assistance and Economic Development in the Caribbean Region: Is there a Correlation?; and Caribbean Economic Overview 2002: Macroeconomic Volatility, Household Vulnerability, and Institutional and Policy Responses. St. Vincent and the Grenadines presented its Medium Term Economic Strategy Paper (for 2002–2004) at the conference.

II. Financial Relations

IBRD and IDA Operations

(In millions of U.S. dollars)

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Source: The World Bank Group.

All years are World Bank fiscal years (ending June 30).