Abstract
The staff report for the 2006 Article IV Consultation on St. Vincent and the Grenadines highlights economic prospects and the fiscal situation. St. Vincent and the Grenadines is a small, open economy that has increasingly relied on its tourism sector. The export-oriented services sector accounts for about three-fourth of total value added, and the import content of both domestic consumption and investment is high. Despite ongoing efforts to enhance statistical databases in St. Vincent and the Grenadines, weaknesses remain in terms of coverage, timeliness, and dissemination of statistical data.
January 17, 2007
1. The following information has become available since the staff report was issued to Executive Directors. The thrust of the staff appraisal remains unchanged.
2. Recent data confirm that macroeconomic developments have been favorable. The authorities’ preliminary estimates indicate that GDP growth in 2006 reached about 6½ percent, driven by a more rapid than expected pick up in construction activity. Following recent increases in domestic petroleum prices, consumer prices increased by 4.3 percent in the 12 months ending November 2006, in line with staff estimates.
3. Fiscal performance appears to have been weaker than earlier estimated. Data for the second half of 2006 show strong revenue performance, driven by the increase in fuel prices and rising stamp duty revenues, but also a faltering of spending discipline due to both rising capital expenditure and (particularly in the fourth quarter) higher current expenditure on wages, transfers and subsidies. As a result, staff now estimates that the central government overall deficit for 2006 is likely to be close to 5 percent of GDP, with the primary deficit of 1 percent of GDP exceeding the staffs recommendation by about one half of one percent of GDP (see attached table).
4. Assuming capital spending implementation and grant receipts are at historical rates, the 2007 Budget, which was tabled in Parliament on December 11, would yield some fiscal consolidation, albeit less than recommended by the staff. Overall revenue (including grants) is dipping slightly as a share of GDP, as a sharp rise in external grants largely offsets the effects of a cut in petroleum prices from EC$11.50 to EC$9.75 per gallon, a halving of stamp duty, and a reduction in the rate of corporate income tax from 40 percent to 37½ percent. By lowering expenditures by about 1 percent of GDP, staff estimates that the central government overall deficit for 2007 would likely narrow to around 4¼ percent of GDP, with the primary deficit reaching 0.7 percent of GDP in comparison to the staffs recommendation of a primary surplus of 0.8 percent of GDP (see attached table).
5. Broader policy commitments in the 2007 Budget include:
Tax reform. The government affirmed its commitment to implementing the value-added tax by May 2007.
Expenditure reforms. Key priorities for 2007 include: completion of the reclassification exercise for central government employees; implementation of financial management reforms in the civil service, including bringing into operation the new Finance Administration and Audit Acts and passage of a new Procurement Bill, which will enhance budgetary control.
Public debt. The authorities noted their commitment to achieving the fiscal benchmarks recommended by the Monetary Council of the Eastern Caribbean Central Bank—a public sector debt-to-GDP ratio of 60 percent; and a public sector primary balance consistent with achieving and maintaining this ratio over the medium term (that is, by 2020).
6. The staff has learned that the uniform Banking Act was approved on November 20, in line with the 2004 ECCU regional FSAP report. As noted in paragraph 31 of the staff report, this step should help foster a strong and sound domestic banking system.
Summary of Central Government Operations, 2005-07
(In percent of GDP, unless otherwise stated)
Under the active scenario current spending is curtailed by holding constant the wage bill and transfers in real terms, while capital expenditure is reduced through the elimination of low-priority capital projects. Current revenues increase by the introduction of the VAT and other revenues are held constant as a share of GDP.
As in the approved budget, except for capital expenditures and grants, for which an execution rate of 60 percent and 55 percent, respectively, is assumed in line with the expected outturn for 2005-06.
Summary of Central Government Operations, 2005-07
(In percent of GDP, unless otherwise stated)
| Est. | Active | Staff Est. | ||||||
|---|---|---|---|---|---|---|---|---|
| Est. | SM/06/393 | Est. | SM/06/393 | Budget | Budget | |||
| 2005 | 2006 | 2006 | 2007 1/ | 2007 | 2007 2/ | |||
| Total revenue and grants | 30.5 | 31.1 | 32.7 | 31.7 | 35.0 | 32.4 | ||
| Current revenue | 29.0 | 29.6 | 31.1 | 30.3 | 29.2 | 29.2 | ||
| Grants | 1.5 | 1.5 | 1.7 | 1.4 | 5.8 | 3.2 | ||
| Total expenditure and net lending | 36.1 | 35.4 | 37.6 | 34.3 | 41.9 | 36.6 | ||
| Current | 27.8 | 27.7 | 28.9 | 26.7 | 28.8 | 28.8 | ||
| Capital expenditure | 8.3 | 7.6 | 8.7 | 7.6 | 13.1 | 7.9 | ||
| Net lending | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Current balance (before grants) | 1.3 | 1.9 | 2.1 | 3.6 | 0.4 | 0.4 | ||
| Overall balance (cash basis) | -5.6 | -4.2 | -4.9 | -2.6 | -6.8 | -4.2 | ||
| Of which | ||||||||
| Primary balance | -2.6 | -0.4 | -1.0 | 0.8 | -3.3 | -0.7 | ||
| Gross central government debt (in percent of GDP) | 72.1 | 70.8 | 71.4 | 67.6 | 72.4 | 69.8 | ||
| Public sector debt (in percent of GDP) | 81.6 | 84.5 | 85.2 | 83.5 | 88.5 | 85.9 | ||
| Debt service as a proportion of current revenues | 21.3 | 24.9 | 24.0 | 23.9 | 25.1 | 25.1 | ||
| GDP at market prices (EC$ millions) | 1,161 | 1,258 | 1,258 | 1,370 | 1,370 | 1,370 | ||
Under the active scenario current spending is curtailed by holding constant the wage bill and transfers in real terms, while capital expenditure is reduced through the elimination of low-priority capital projects. Current revenues increase by the introduction of the VAT and other revenues are held constant as a share of GDP.
As in the approved budget, except for capital expenditures and grants, for which an execution rate of 60 percent and 55 percent, respectively, is assumed in line with the expected outturn for 2005-06.
Summary of Central Government Operations, 2005-07
(In percent of GDP, unless otherwise stated)
| Est. | Active | Staff Est. | ||||||
|---|---|---|---|---|---|---|---|---|
| Est. | SM/06/393 | Est. | SM/06/393 | Budget | Budget | |||
| 2005 | 2006 | 2006 | 2007 1/ | 2007 | 2007 2/ | |||
| Total revenue and grants | 30.5 | 31.1 | 32.7 | 31.7 | 35.0 | 32.4 | ||
| Current revenue | 29.0 | 29.6 | 31.1 | 30.3 | 29.2 | 29.2 | ||
| Grants | 1.5 | 1.5 | 1.7 | 1.4 | 5.8 | 3.2 | ||
| Total expenditure and net lending | 36.1 | 35.4 | 37.6 | 34.3 | 41.9 | 36.6 | ||
| Current | 27.8 | 27.7 | 28.9 | 26.7 | 28.8 | 28.8 | ||
| Capital expenditure | 8.3 | 7.6 | 8.7 | 7.6 | 13.1 | 7.9 | ||
| Net lending | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Current balance (before grants) | 1.3 | 1.9 | 2.1 | 3.6 | 0.4 | 0.4 | ||
| Overall balance (cash basis) | -5.6 | -4.2 | -4.9 | -2.6 | -6.8 | -4.2 | ||
| Of which | ||||||||
| Primary balance | -2.6 | -0.4 | -1.0 | 0.8 | -3.3 | -0.7 | ||
| Gross central government debt (in percent of GDP) | 72.1 | 70.8 | 71.4 | 67.6 | 72.4 | 69.8 | ||
| Public sector debt (in percent of GDP) | 81.6 | 84.5 | 85.2 | 83.5 | 88.5 | 85.9 | ||
| Debt service as a proportion of current revenues | 21.3 | 24.9 | 24.0 | 23.9 | 25.1 | 25.1 | ||
| GDP at market prices (EC$ millions) | 1,161 | 1,258 | 1,258 | 1,370 | 1,370 | 1,370 | ||
Under the active scenario current spending is curtailed by holding constant the wage bill and transfers in real terms, while capital expenditure is reduced through the elimination of low-priority capital projects. Current revenues increase by the introduction of the VAT and other revenues are held constant as a share of GDP.
As in the approved budget, except for capital expenditures and grants, for which an execution rate of 60 percent and 55 percent, respectively, is assumed in line with the expected outturn for 2005-06.