Abstract
The staff report for the 2006 Article IV Consultation on Antigua and Barbuda highlights the economic backdrop and outlook for restoring sound public finances. The government of Antigua and Barbuda has adopted an ambitious reform program in its endeavor to pull the economy from decades of fiscal weakness and declining growth rates. The tax reform, including the imminent implementation of the value-added tax, is a major achievement. At the same time, it will be important to strengthen tax administration and tax compliance.
1. The information below, largely based on the 2007 Budget Speech, has become available after the issuance of the staff report. These developments do not alter the thrust of the staff appraisal. Rather they reinforce the message of the need for stronger expenditure discipline and management.
2. The 2007 Budget. While the budget reiterated the authorities’ commitment to achieving sound public finances and debt sustainability, it also announced a very substantial increase in spending on investment and wages; which, if implemented, would seriously undermine the prospects of achieving viable public finances.
Wage bill. The 2007 budget shows a nominal wage bill (unadjusted for the savings that would accrue from the separation program) that is over 3 percent of GDP higher than staff’s projections. However, even after adjusting for the savings from the separation program, the wage bill would still be over 2 percent of GDP higher.
Capital spending. Also budgeted is a very large increase in capital spending (to 8 percent of GDP, compared with about 4½ percent projected in the staff report), mainly for infrastructure.
Fiscal balance. Even if capital spending were contained at the still high 2006 level, and after taking into account wage savings from the voluntary separation program, the budget would imply a primary deficit of more than 4 percent of GDP, compared with a surplus of about 1 percent of GDP recommended in paragraph 10 of the staff report. If implemented, the budget would represent a serious blow to the planned turnaround in Antigua and Barbuda’s public finances over the coming years.
3. Authorities’ views. In discussion with staff, the authorities acknowledged that the spending ceilings announced in the budget speech were high, but reaffirmed their intention to work toward achieving the fiscal adjustment described in the staff report consistent with achieving debt sustainability.
4. Tax reforms. On a positive note, tax reforms are on track. The modernized property tax has come into effect, and the value-added tax is to be implemented on January 29, 2007, as expected. Preparations are well underway and there has been a sharp increase in registration in recent weeks. The government is receiving technical assistance from CARTAC in the form of four experts (for a 2–3 week period), and has also hired outside experts, to ensure a successful introduction of the VAT.
5. Gasoline pricing mechanism. The government announced an imminent move to a flexible oil pricing mechanism in 2007 that allows full pass-through of world oil price changes to domestic prices, as done recently by other countries in the region (Grenada since October 2006, and St. Kitts and Nevis since December 2006).
6. Revised banking data. Revised official data on financial soundness for 2001–05, indicate slightly lower capital adequacy and non-performing loan levels than previously reported and slightly higher provisioning (see revised Table 10).
7. Implications. The very large increases in capital spending and the wage bill included in the 2007 budget send a worrying signal about the direction of policies, and, if implemented, would cause a serious setback to restoring sound public finances. Staff has urged the government to prioritize and consolidate expenditures to achieve the fiscal adjustment recommended in the staff report consistent with achieving debt sustainability, and would encourage the authorities to quickly develop a mechanism to restrain expenditure correspondingly.
Antigua and Barbuda: Summary of Central Government Operations, 2006-07
(In millions of Eastern Caribbean dollars)
Figures as quoted in the Budget speech. Wages are adjusted for arrears and the savings from the separation program, and capital spending is based on the 2005 implementation rate.
Antigua and Barbuda: Summary of Central Government Operations, 2006-07
(In millions of Eastern Caribbean dollars)
| Prel. | Proj. | Proj. | ||||
|---|---|---|---|---|---|---|
| Jan.-Sep. | SM/06/390 | Budget 1/ | ||||
| 2006 | 2006 | 2007 | 2007 | |||
| Revenue | 510 | 678 | 649 | 662 | ||
| Current revenue | 460 | 603 | 637 | 649 | ||
| Expenditure | 603 | 833 | 757 | 851 | ||
| Current expenditure | 443 | 665 | 635 | 670 | ||
| Wages and salaries | 191 | 258 | 242 | 303 | ||
| Capital expenditure and net lending | 160 | 168 | 123 | 180 | ||
| Overall balance | -93 | -155 | -108 | -189 | ||
| Primary balance | -22 | -45 | 24 | -117 | ||
| (in percent of GDP based on IMF projection) | -0.9 | -1.7 | 0.8 | -4.2 | ||
Figures as quoted in the Budget speech. Wages are adjusted for arrears and the savings from the separation program, and capital spending is based on the 2005 implementation rate.
Antigua and Barbuda: Summary of Central Government Operations, 2006-07
(In millions of Eastern Caribbean dollars)
| Prel. | Proj. | Proj. | ||||
|---|---|---|---|---|---|---|
| Jan.-Sep. | SM/06/390 | Budget 1/ | ||||
| 2006 | 2006 | 2007 | 2007 | |||
| Revenue | 510 | 678 | 649 | 662 | ||
| Current revenue | 460 | 603 | 637 | 649 | ||
| Expenditure | 603 | 833 | 757 | 851 | ||
| Current expenditure | 443 | 665 | 635 | 670 | ||
| Wages and salaries | 191 | 258 | 242 | 303 | ||
| Capital expenditure and net lending | 160 | 168 | 123 | 180 | ||
| Overall balance | -93 | -155 | -108 | -189 | ||
| Primary balance | -22 | -45 | 24 | -117 | ||
| (in percent of GDP based on IMF projection) | -0.9 | -1.7 | 0.8 | -4.2 | ||
Figures as quoted in the Budget speech. Wages are adjusted for arrears and the savings from the separation program, and capital spending is based on the 2005 implementation rate.
Antigua and Barbuda: Selected Indicators of Vulnerability
Prudential indicators reported by commercial banks, with infrequent onsite verification by the ECCB.
Domestically licensed banks only.
Based on average daily expenditures by visitors arriving by air and import-weighted export unit values from partner.
ECCU aggregates.
Scheduled.
Antigua and Barbuda: Selected Indicators of Vulnerability
| Prel. | |||||||
|---|---|---|---|---|---|---|---|
| 2001 | 2002 | 2003 | 2004 | 2005 | |||
| Financial indicators | |||||||
| Broad money (12-month percent change) | 4.8 | 6.3 | 21.1 | 9.2 | 6.9 | ||
| Private sector credit (12-month percent change) | 3.1 | 8.0 | 2.4 | 1.1 | 10.4 | ||
| Commercial bank soundness indicators (in percent)1/ | |||||||
| Capital adequacy ratio2/ | 15.3 | 14.7 | 13.0 | 11.6 | 11.6 | ||
| Unsatisfactory assets/total loans | 12.4 | 11.3 | 10.5 | 12.5 | 10.4 | ||
| Provision for loan losses/unsatisfactory assets | 22.3 | 23.8 | 26.8 | 27.8 | 26.2 | ||
| Net profit before taxes/average assets | 1.6 | 1.7 | 1.4 | 1.6 | 2.1 | ||
| Liquid assets/total assets | 26.7 | 28.7 | 32.3 | 32.4 | 40.6 | ||
| Gross government exposure/total capital 2/ | 207.4 | 202.2 | 186.6 | 231.1 | 210.2 | ||
| External indicators | |||||||
| Foreign exchange earnings from tourism 3/ | |||||||
| (12-month percent change) | -6.4 | 0.6 | 9.5 | 12.6 | -0.3 | ||
| Merchandise imports | |||||||
| (12-month percent change in U.S. dollars) | 5.2 | -4.6 | 16.3 | 6.3 | 10.9 | ||
| Current account balance (percent of GDP) | -8.0 | -10.9 | -13.4 | -9.5 | -14.5 | ||
| Capital and financial account balance (percent of GDP) | 8.0 | 12.8 | 13.5 | 7.8 | -5.1 | ||
| Of which: | |||||||
| Inward foreign direct investment | 13.9 | 9.2 | 22.1 | 9.0 | 14.1 | ||
| Imputed net international reserves 4/ | |||||||
| In millions of U.S. dollars | 442 | 502 | 537 | 631 | 597 | ||
| In percent of broad money | 18.9 | 20.1 | 19.6 | 20.4 | 17.8 | ||
| Commercial banks’net foreign assets (millions of US$, end of period) | 38.8 | 34.2 | 133.6 | 150.2 | 370.2 | ||
| External government debt (millions of US$, end-period) | 473.0 | 525.8 | 588.2 | 579.1 | 351.0 | ||
| External government debt service (in percent of exports of goods and services) 5/ | 8.4 | 8.5 | 8.9 | 9.7 | 30.8 | ||
| External interest payments (in percent of exports of goods and services) 5/ | 3.1 | 3.3 | 3.3 | 2.8 | 2.7 | ||
| External amortization (in percent of exports of goods and services) 5/ | 5.3 | 5.2 | 5.6 | 7.0 | 28.1 | ||
| Exchange rate (E.C. dollars per U.S. dollar), end-period | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | ||
| Real effective exchange rate appreciation (+) (end-period, percentage change) | 3.3 | 1.3 | -2.2 | -2.2 | -0.3 | ||
Prudential indicators reported by commercial banks, with infrequent onsite verification by the ECCB.
Domestically licensed banks only.
Based on average daily expenditures by visitors arriving by air and import-weighted export unit values from partner.
ECCU aggregates.
Scheduled.
Antigua and Barbuda: Selected Indicators of Vulnerability
| Prel. | |||||||
|---|---|---|---|---|---|---|---|
| 2001 | 2002 | 2003 | 2004 | 2005 | |||
| Financial indicators | |||||||
| Broad money (12-month percent change) | 4.8 | 6.3 | 21.1 | 9.2 | 6.9 | ||
| Private sector credit (12-month percent change) | 3.1 | 8.0 | 2.4 | 1.1 | 10.4 | ||
| Commercial bank soundness indicators (in percent)1/ | |||||||
| Capital adequacy ratio2/ | 15.3 | 14.7 | 13.0 | 11.6 | 11.6 | ||
| Unsatisfactory assets/total loans | 12.4 | 11.3 | 10.5 | 12.5 | 10.4 | ||
| Provision for loan losses/unsatisfactory assets | 22.3 | 23.8 | 26.8 | 27.8 | 26.2 | ||
| Net profit before taxes/average assets | 1.6 | 1.7 | 1.4 | 1.6 | 2.1 | ||
| Liquid assets/total assets | 26.7 | 28.7 | 32.3 | 32.4 | 40.6 | ||
| Gross government exposure/total capital 2/ | 207.4 | 202.2 | 186.6 | 231.1 | 210.2 | ||
| External indicators | |||||||
| Foreign exchange earnings from tourism 3/ | |||||||
| (12-month percent change) | -6.4 | 0.6 | 9.5 | 12.6 | -0.3 | ||
| Merchandise imports | |||||||
| (12-month percent change in U.S. dollars) | 5.2 | -4.6 | 16.3 | 6.3 | 10.9 | ||
| Current account balance (percent of GDP) | -8.0 | -10.9 | -13.4 | -9.5 | -14.5 | ||
| Capital and financial account balance (percent of GDP) | 8.0 | 12.8 | 13.5 | 7.8 | -5.1 | ||
| Of which: | |||||||
| Inward foreign direct investment | 13.9 | 9.2 | 22.1 | 9.0 | 14.1 | ||
| Imputed net international reserves 4/ | |||||||
| In millions of U.S. dollars | 442 | 502 | 537 | 631 | 597 | ||
| In percent of broad money | 18.9 | 20.1 | 19.6 | 20.4 | 17.8 | ||
| Commercial banks’net foreign assets (millions of US$, end of period) | 38.8 | 34.2 | 133.6 | 150.2 | 370.2 | ||
| External government debt (millions of US$, end-period) | 473.0 | 525.8 | 588.2 | 579.1 | 351.0 | ||
| External government debt service (in percent of exports of goods and services) 5/ | 8.4 | 8.5 | 8.9 | 9.7 | 30.8 | ||
| External interest payments (in percent of exports of goods and services) 5/ | 3.1 | 3.3 | 3.3 | 2.8 | 2.7 | ||
| External amortization (in percent of exports of goods and services) 5/ | 5.3 | 5.2 | 5.6 | 7.0 | 28.1 | ||
| Exchange rate (E.C. dollars per U.S. dollar), end-period | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | ||
| Real effective exchange rate appreciation (+) (end-period, percentage change) | 3.3 | 1.3 | -2.2 | -2.2 | -0.3 | ||
Prudential indicators reported by commercial banks, with infrequent onsite verification by the ECCB.
Domestically licensed banks only.
Based on average daily expenditures by visitors arriving by air and import-weighted export unit values from partner.
ECCU aggregates.
Scheduled.