Statement by the IMF Staff Representative February 4, 2008

The authorities announced a strategy to restore fiscal and debt sustainability, in conjunction with a transition out of sugar production. Discussions centered on restoring fiscal and debt sustainability, enhancing competitiveness and growth, and containing risks. However, policies need to be strengthened to achieve these targets. Discussions centered on structural reforms to enhance the business climate and improve labor market flexibility, and on releasing government land/assets for more productive uses. Although prudential indicators point to some strengthening of the banking system, its high public sector exposure has increased further.

Abstract

The authorities announced a strategy to restore fiscal and debt sustainability, in conjunction with a transition out of sugar production. Discussions centered on restoring fiscal and debt sustainability, enhancing competitiveness and growth, and containing risks. However, policies need to be strengthened to achieve these targets. Discussions centered on structural reforms to enhance the business climate and improve labor market flexibility, and on releasing government land/assets for more productive uses. Although prudential indicators point to some strengthening of the banking system, its high public sector exposure has increased further.

Since the issuance of the staff report, the authorities revised slightly the 2006 fiscal data, granted a salary increase for government employees, and presented the 2008 budgets for St. Kitts and Nevis. The new information does not alter the thrust of the staff appraisal.

1. The revised 2006 fiscal estimates indicate a primary surplus of 4.7 percent of GDP, compared to 4.3 percent in the staff report. The adjustment reflects the removal of some double-counting of capital expenditures.

2. A 5 percent interim salary increase for government employees, retroactive from January 2007, was paid in December 2007.1 The cost is estimated at about EC$8 million (0.6 percent of GDP). Accordingly, staff has revised the 2007 primary surplus projection to 1.9 percent of GDP, down from 2.4 percent in the staff report.

3. The 2008 budgets imply an overall primary surplus of about 1 percent of GDP, compared with a small deficit in the staff’s baseline scenario. As before, the revised staff estimate is based on historical rates for capital expenditure implementation and grants. Key components of the budgets include:

  • No new taxes in 2008, while efforts to strengthen tax collection will continue. A decision on the introduction of a VAT will be made in 2008.

  • Savings arising from the PetroCaribe agreement2 are broadly offset by higher wages and capital expenditures.

  • As part of comprehensive civil service reform, a salary review is to be completed in 2008, with a further retroactive payment if the final increase is higher than the interim.

  • Capital expenditures reflect ongoing and new road projects, Nevis airport expansion, projects to improve public utilities, and investments in health and education.

  • To mitigate the impact of rising prices, the government plans to limit retail margins on a basket of basic consumption items, reduce duties and taxes on some imported foods (already incorporated in the original baseline scenario), and cap the electricity fuel surcharge. However, the electricity department is envisaged to be corporatized by late 2008.

St. Kitts and Nevis: Central Government Fiscal Operations, 2006–08

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Sources: St. Kitts and Nevis authorities; and Fund staff estimates.

As in the approved budgets, except for capital revenue, which has been reclassified as “below-the-line” financing, and grants and capital expenditure and net lending, which are assumed to be in line with Fund staff baseline projections and historical implementation rates.

1

A general salary increase had been built into the original baseline scenario for 2008, but not for 2007.

2

The first shipment of about 7,000 barrels of diesel fuel was received in December 2007.

St. Kitts and Nevis: 2007 Article IV Consultation: Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion
Author: International Monetary Fund