St. Lucia: External and Public Debt Sustainability Analysis
Author: International Monetary Fund
Publication Date:
15 Feb 2008
eISBN:
9781451823257
Language:
English
Keywords:
ISCR; CR; deficit; NPV; ratio; government; staff; debt service-to-revenue; debt sustainability analysis; debt stock; PPG debt; debt-creating flow; Debt sustainability analysis; Public sector; Caribbean; baseline scenario St. Lucia; debt service-to-revenue ratio
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St. Lucia faces structural challenges that need to be addressed to raise growth durably and reduce poverty. Implementation of planned tax reforms is important to achieve fiscal sustainability. The government’s plans to accelerate tourism-related public investment carry significant risks. Competitiveness is a challenge, and structural reforms need to be accelerated to raise the economy’s growth potential. Strengthening the supervision of the financial sector is another priority. St. Lucia is one of the most disaster-prone countries in the world. Economic and social statistics need to be improved.

Abstract

St. Lucia faces structural challenges that need to be addressed to raise growth durably and reduce poverty. Implementation of planned tax reforms is important to achieve fiscal sustainability. The government’s plans to accelerate tourism-related public investment carry significant risks. Competitiveness is a challenge, and structural reforms need to be accelerated to raise the economy’s growth potential. Strengthening the supervision of the financial sector is another priority. St. Lucia is one of the most disaster-prone countries in the world. Economic and social statistics need to be improved.

I. Introduction

1. Macroeconomic outcomes have strengthened significantly in recent years, while fiscal imbalances have remained sizeable. Real GDP growth averaged 3¾ percent during 2003–05, and reached about 5 percent in 2006. Activity was sustained by construction and government services, both related to tourism and preparations for the Cricket World Cup (CWC). Fiscal imbalances remained high in 2006. Total tax revenues were strong, buoyed by reforms at customs. However, petroleum tax collection was poor (given the limited pass-through of world oil prices). Significant increases occurred in capital expenditures and wages and salaries. As a result, the overall deficit fell only slightly to 6½ percent of GDP in 2006, and gross public debt increased to 67 percent of GDP.

II. Underlying DSA Assumptions

2. The baseline scenario assumes authorities continue current policies with large overall imbalances that are financed commercially. In the medium term, growth is projected around 4¼ percent, driven mostly by public sector capital expenditure and some expansion of the tourism capacity. Under this scenario, the central government primary deficit (excluding grants) deteriorates rapidly peaking at around 6½ percent of GDP by 2012. While these main parameters imply a rate of growth higher than the staff projections and assumptions in the 2005 Article IV consultation DSA, they are consistent with the stronger growth observed in the period 2003–06, and with the projected expansion of tourism capacity.

Baseline Macroeconomic Assumptions (2007–27)

  • Real GDP growth is projected to average about 4¼ percent. While this assumption implies a rate of growth higher than the average observed in the 1990s (3 percent), it is consistent with the stronger growth observed in the period 2003–06, and with the projected expansion of public sector construction and tourism accommodation capacity. Inflation is projected to remain low, consistent with historical averages and the currency board arrangement.

  • The primary balance of the central government (including grants) is projected to deteriorate rapidly peaking around 6½ percent of GDP by 2012. On the revenue side, new measures would be limited to the introduction of a revenue-neutral VAT, and some reform of property taxes. On the expenditure side, the wage bill would remain constant (as a share of GDP), and capital expenditure increases to 12 percent of GDP by 2012.

  • Annual disbursements of external capital grants reach 4 percent of GDP in 2007 as grants from the European Union are expected to increase. In the medium term, grants are expected to be around 1½ percent of GDP, consistent with historical averages.

  • The current account deficit is assumed to return gradually to a more sustainable level following its sharp increase in 2006, due to a slowdown in tourism-related imports and a pickup in tourist receipts. The expansion of tourist arrivals is underpinned by an expansion of the hotel capacity of 40 percent over the medium-term.

  • FDI is assumed to remain around its historical average of 11 percent of GDP.

III. Evaluation of Public Sector Debt Sustainability

3. At end-2006 public debt stood at about 67 percent of GDP—nearly twice the level of a decade ago—albeit still the lowest in the ECCU. Expansionary budgets in 2000–02 sharply raised the fiscal deficit and debt-to-GDP ratio. In subsequent years the authorities strengthened fiscal management by tightening revenue administration and containing capital expenditure. Fiscal imbalances remained high in FY 2006/07, owing to increased CWC-related capital expenditures.

4. External debt represents 44 percent of GDP, while domestic debt represents 23 percent of GDP. Regarding the stock of external debt, the largest share is owed to multilateral and bilateral creditors (around 27 percent of GDP, with the Caribbean Development Bank holding around three fifths of that share), followed by commercial creditors (around 12 percent of GDP). In the future, most of new external requirements are expected to be financed through the ECCU Regional Securities Markets (RGSM). On the domestic front, commercial banks are the most important lenders to the government.

Baseline scenario

5. Under the baseline scenario St. Lucia would reach a public debt to GDP ratio of about 91 percent by 2012. The debt-to-GDP ratio would increase further to around 116 percent of GDP by 2017. All other indicators of debt sustainability show a sharp deterioration, particularly with the NPV of debt-to revenue ratio increasing from 235 percent in 2007 to around 331 percent by 2012.

Alternative scenarios

Adjustment scenario

6. Under this scenario a fiscal adjustment would reduce the primary deficit of the central government to ½ of 1 percent over the medium term. This adjustment would restore the primary deficit to its average level over the last decade, and would require the introduction of a revenue-positive VAT, introduction of a market valuation-based property tax and prioritization of capital expenditure.

7. Under this adjustment scenario St. Lucia would reach a public debt to GDP ratio of about 60 percent—the benchmark of the ECCB—by 2012. The debt to GDP ratio would decline further to around 53 percent of GDP by 2027. All other indicators of debt sustainability would show a constant improvement, particularly with debt service as a share of current revenue falling from around 40 percent in 2006 to around 25 percent by 2012.

Changes in growth and primary balance

8. The sensitivity analysis shows that economic growth and the primary balance are the two key drivers of St. Lucia’s debt dynamics. If no fiscal adjustment is implemented and the primary deficit were to be kept at its 2006 level (3 percent of GDP), the NPV of debt-to-GDP ratio would reach 128 percent of GDP by 2027 (Table 2, Scenario A2). Similarly if growth is assumed to remain at one standard deviation below the baseline, the NPV of debt-to-GDP ratio reaches 198 percent of GDP by 2027 (Table 2, Scenario A3).

9. The sensitivity analysis also shows the importance of containing expenditure if economic growth were to decline. In Alternative Scenario B1, in which growth declines to –0.6 percent for 2008 and 2009, the NPV of debt-to-GDP ratio increases rapidly reaching 199 percent of GDP by 2027. This is because as output slows, fiscal revenues are assumed to remain constant as a share of GDP while expenditures are assumed to remain constant in nominal terms relative to the baseline scenario, producing a substantial and permanent deterioration of the primary balance. This, in turn increases debt ratios markedly.

Natural disaster

10. The impact of a natural disaster on St. Lucia’s debt dynamics was also analyzed (Table 2, Alternative Scenario A4). Under this scenario it is assumed that a hurricane increases the primary deficit of the government by 3 percent of GDP in 2008, 2009 and 2010, reverting to its baseline levels thereafter.1 This shock accelerates the deterioration of the NPV of debt-to-GDP ratio reaching 108 percent of GDP by 2012.

IV. Evaluation of External Debt Sustainability

11. St. Lucia’s external debt sustainability analysis includes only public sector debt, since data on private sector external borrowing is not available. As a result, the external DSA follows a similar pattern to that of the public sector DSA.

12. Under the baseline scenario the NPV of external debt shows a clear increasing path reaching 84 percent of GDP by 2017, and exceeding the prudential threshold of 50 percent by 2008.2 The NPV of debt to exports ratio increases rapidly exceeding the indicative threshold of 200 percent by 2020.

13. Sensitivity analysis shows that the level of external debt is most responsive to a negative shock on output growth and costlier terms of financing. If the current account deficit, FDI and GDP growth are assumed at their historical averages, the external debt-to-GDP ratio increases to 100 percent by 2017 (Table 4, Scenario A1). This is driven by the lower output growth, since the current account deficit and FDI evolve in a manner similar to that in the baseline scenario. Similarly, if GDP growth were to fall permanently to one standard deviation below the historical average, the external debt-to-GDP ratio would increase to 98 percent by 2017 (Table 4, Scenario B1). If the interest rate on new borrowing was 2 percentage points higher than in the baseline, the external debt-to-GDP ratio would increase to 99 percent by 2017 (Table 4, Scenario A2).

V. Conclusion

14. Absent a fiscal adjustment that would return the primary balance to its historical average, imbalances for the overall public sector would be on an increasing and unsustainable path exceeding a NPV of debt-to-GDP ratio of 100 percent by 2014. Staff analysis show that with a fiscal adjustment that would bring the primary deficit (including grants) to around ½ of 1 percent of GDP over the medium term (close to the long-term average), St. Lucia would reach a sustainable public debt-to-GDP ratio of about 60 percent—the benchmark of the ECCB—by 2012.

15. On the external front St. Lucia faces a high risk of debt distress. The baseline scenario indicates a breach of the NPV of debt-to-GDP threshold by 2008, while different stress tests underlined St. Lucia’s vulnerabilities to natural disasters, costlier terms of financing, and lower output growth.

Table 1.

St. Lucia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2004–27

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and Fund staff estimates and projections.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Nonfinancial public sector gross debt, government guaranteed debt, and government nonguaranteed debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium-and long-term debt.

Table 2.

St. Lucia: Sensitivity Analysis for Key Indicators of Public Debt 2007–27

article image
Sources: Country authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Assumes that a hurricane hits St. Lucia increasing its primary deficit by three percent of GDP for 2008, 2009 and 2010, and reducing growth to zero.

Revenues are defined inclusive of grants.

Table 3.

St. Lucia: External Debt Sustainability Framework, Baseline Scenario, 2004–27

(In percent of GDP, unless otherwise indicated)

article image
Source: Staff simulations.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Nonfinancial public sector gross debt.

Derived as [r - g - r(1+g)]/(1+g+r+gr) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and r = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the NPV of new debt).

Table 4.

St. Lucia: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2007–27

(In percent)

article image
Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Figure 1.
Figure 1.

St. Lucia: Indicators of Public Debt Under Alternative Scenarios, 2007–27 1/

Citation: IMF Staff Country Reports 2008, 067; 10.5089/9781451823257.002.A002

Source: Staff projections and simulations.1/ Most extreme stress test is test that yields highest ratio in 2017.2/ Revenue including grants.
Figure 2.
Figure 2.

St. Lucia: Indicators of Public and Publicly Guaranteed External Debt

Under Alternative Scenarios, 2007–2027

Citation: IMF Staff Country Reports 2008, 067; 10.5089/9781451823257.002.A002

Source: Staff projections and simulations.
1

The actual impact of this shock could be lower given the recent participation of St. Lucia in the Caribbean Catastrophe Insurance Facility—a regional insurance pool organized by the World Bank.

2

The DSA uses policy-dependent external debt-burden indicators. Policy performance is measured by the Country Policy and Institutional Assessment (CPIA) index, compiled annually by the World Bank. The CPIA divides countries into three performance categories (strong, medium, and poor) based on the overall quality of its macroeconomic policies, with strong performers having higher prudential thresholds than poor performers. St. Lucia is classified by the CPIA as a strong performer, with prudential thresholds on NPV of debt-to-GDP and debt-to-exports ratios of 50 and 200 percent, respectively.

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Cover IMF Staff Country Reports
St. Lucia: 2007 Article IV Consultation: Staff Report; Staff Supplement; and Public Information Notice on the Executive Board Discussion
Author: International Monetary Fund
Volume/Issue:
Volume 2008: Issue 067
Publisher:
International Monetary Fund
ISBN:
9781451823257
ISSN:
1934-7685
Pages:
66
DOI:
https://doi.org/10.5089/9781451823257.002
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    St. Lucia: Indicators of Public Debt Under Alternative Scenarios, 2007–27 1/

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    St. Lucia: Indicators of Public and Publicly Guaranteed External Debt

    Under Alternative Scenarios, 2007–2027

St. Lucia: Indicators of Public Debt Under Alternative Scenarios, 2007–27 1/

St. Lucia: Indicators of Public and Publicly Guaranteed External Debt

Under Alternative Scenarios, 2007–2027