A. Introduction

1. St. Kitts and Nevis has the highest public debt-to-GDP ratio among the ECCU member states.¹ As of end-2010, the stock of public and publically guaranteed (PPG) debt² is estimated to be around 199 percent of GDP. About 69 percent of St. Kitts and Nevis’ PPG debt is held domestically (139 percent of GDP), mostly by commercial banks (about 90 percent of GDP) and statutory bodies (20 percent of GDP). The remaining 31 percent of PPG debt is external debt (60 percent of GDP) and mainly comprised of obligations to commercial creditors including bond holders (31 percent of GDP). External debt is owed to multilateral creditors (24 percent of GDP), in particular to the Caribbean Development Bank (20 percent of GDP); non-Paris Club bilateral creditors (6 percent of GDP); and Paris Club members (1 percent of GDP). In 2010, the total outstanding borrowing from the Eastern Caribbean Central Bank was about 1.7 percent of GDP.

St. Kitts and Nevis: Public Sector Debt, Dec 2010

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 270; 10.5089/9781463902346.002.A002

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

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St. Kitts and Nevis: Public Sector Debt, Dec 2010

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 270; 10.5089/9781463902346.002.A002

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

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St. Kitts and Nevis: Public Sector Debt, Dec 2010

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 270; 10.5089/9781463902346.002.A002

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

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2. The government has relied heavily on short-term financing from the captive domestic market. As of December 2010, T-bills (mainly 91-day, with the next roll-over scheduled in mid-August 2011) and overdrafts constituted about 30 percent of total government domestic debt. This high share of short-term debt has, in turn, exposed the government to significant rollover risks. Approval of the SBA prior to the rollover, however, would instill confidence and significantly reduce the rollover risks. In addition, there is a concentration of principal repayment scheduled in 2011-13.

3. Despite a tradition of timely servicing its debt, St. Kitts and Nevis is beginning to accumulate arrears. St. Kitts has built up external arrears of about 5.2 percent of GDP (EC$ 74.3 million) during 2008-10, for which the authorities have engaged in discussions with a view to reaching a resolution. Nevis has accumulated external arrears of about 0.1 percent of GDP in 2010 (EC$ 2 million), which will be cleared in the process of the debt restructuring. Beginning June 2011, St. Kitts and Nevis has also started to miss payments to external private creditors but it does not have arrears to multilaterals or the Paris Club.

4. The exchange rate risk stemming from the foreign-denominated debt in St. Kitts and Nevis is relatively low. Reflecting the structure of its treasury operations, all domestic debt is denominated in local currency (Eastern Caribbean dollars). Moreover, about 71.7 percent of its external debt is denominated in U.S. dollars, to which the local currency has been pegged since 1976, and another 11.5 percent in EC dollars. The remaining portion of external debt is denominated mostly in SDRs (2.8 percent), Euros (2.2 percent), and Kuwaiti dinars (1.6 percent).

B. Macroeconomic Assumptions

5. In line with the macroeconomic framework presented in the staff report, the debt sustainability analysis is based on the following assumptions:

• Real GDP Growth: Real GDP growth is projected to reach 1½ percent and 1.8 percent, in 2011 and 2012 respectively, somewhat subdued due to continued high unemployment rates in advanced economies, particularly the U.S. (the main source market for St. Kitts and Nevis’ tourism). Growth is expected to reach 3.5 percent in the medium term, mirroring improvements in both domestic and external economies.

• Inflation: Inflation is projected to peak at about 3.9 percent in 2011, reflecting the pass-through of higher international prices of oil and food, gradually reverting to its historical average of 2½ percent in the medium term, anchored by the currency board arrangement.

• External Sector: The external sector is expected to mark in 2011 the inception of a gradual recovery, albeit below the pre-crisis levels. In the medium term, exports of goods as a percentage of GDP are expected to reach about 11.9 percent. Tourist receipts are expected to gradually recover, reaching 19.5 percent of GDP in the medium term, in line with economic developments in the main source markets for tourism (the USA and the UK), but still below the pre-crisis levels. FDI inflows are also assumed to partially recover to the pre-crisis levels, averaging about 22 percent of GDP during 2011-16. The external current account deficit is expected to widen in 2011 due to the impact of higher energy and food prices. It will converge to about 21.4 percent of GDP in the medium term.

• Fiscal Balance: The primary surplus of the central government is expected to reach 5 percent of GDP in 2011, reflecting three key projections: (i) revenue from the implementation of a VAT and the increase in the electricity tariff; (ii) constraining of capital expenditure; and (iii) two tranches of EU sugar grant will be disbursed in the second-half of the year. Furthermore, the primary surplus is expected to increase to 5.4 percent of GDP in 2012 through freezing the public wage bill and containing expenditure on goods and services. Financing gaps will be filled almost exclusively by recourse to the domestic banking system (we assume 90 percent domestic financing by commercial banks at a market interest rate with the remaining 10 percent externally financed).

• Fund program: We consider public debt developments in the context of a three-year SBA with access of SDR 52.5 million (590 percent of quota). The disbursements are programmed to become available on a quarterly basis following the Board’s approval after each review. Exceptional access will be required as disbursements in 2011 will be about 378 percent of quota, exceeding the normal access limit of 200 percent of quota on an annual basis.

C. Evaluation of External and Public Debt Sustainability under the Non-Restructuring Scenario

6. Although external public debt is projected to decline over the medium term and can sustain most shocks, the adoption of strong fiscal adjustment measures will not be enough to place St. Kitts and Nevis’s total PPG on a sustainable path. External debt is projected to fall from the current level of about 60 percent of GDP to about 23 percent of GDP in the medium term (Figure 1 and Table 1). Shocks to the economy will not deter its downward trajectory although it will converge to a higher debt level in the medium term. Total public debt is set to decrease from 199 percent of GDP in 2010 to 162 percent of GDP by 2016 (Figure 2 and Tables 2). The bound tests show that a growth shock will reverse the downward trajectory of public debt causing it to be on an explosive path despite adoption of strong reforms. The range of shocks would cause the PPG debt-to-GDP ratio to range between 160 to 201 percent of GDP in the medium term.

St. Kitts and Nevis: External Debt Sustainability: Bound Tests ^1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2011, 270; 10.5089/9781463902346.002.A002

Sources: International Monetary Fund, Country desk data, and staff estimates.^1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.3/ One-time real depreciation of 30 percent occurs in 2010.

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St. Kitts and Nevis: External Debt Sustainability: Bound Tests ^1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2011, 270; 10.5089/9781463902346.002.A002

Sources: International Monetary Fund, Country desk data, and staff estimates.^1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.3/ One-time real depreciation of 30 percent occurs in 2010.

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St. Kitts and Nevis: External Debt Sustainability: Bound Tests ^1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2011, 270; 10.5089/9781463902346.002.A002

Sources: International Monetary Fund, Country desk data, and staff estimates.^1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.3/ One-time real depreciation of 30 percent occurs in 2010.

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St. Kitts and Nevis: Public Debt Sustainability: Bound Tests ^1/2/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2011, 270; 10.5089/9781463902346.002.A002

Sources: International Monetary Fund, country desk data, and staff estimates.^1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.^2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.4/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

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St. Kitts and Nevis: Public Debt Sustainability: Bound Tests ^1/2/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2011, 270; 10.5089/9781463902346.002.A002

Sources: International Monetary Fund, country desk data, and staff estimates.^1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.^2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.4/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

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St. Kitts and Nevis: Public Debt Sustainability: Bound Tests ^1/2/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2011, 270; 10.5089/9781463902346.002.A002

Sources: International Monetary Fund, country desk data, and staff estimates.^1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.^2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.4/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

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Table 1.

St. Kitts and Nevis: External Debt Sustainability Framework, 2006-2016

(In percent of GDP, unless otherwise indicated)

^1/Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

^2/The contribution from price and exchange rate changes is defined as [-ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ρ > 0) and rising inflation (based on GDP deflator).

^3/For projection, line includes the impact of price and exchange rate changes.

^4/Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

^5/The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

^6/Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Table 1.

St. Kitts and Nevis: External Debt Sustainability Framework, 2006-2016

(In percent of GDP, unless otherwise indicated)

						Actual					Projections
				2006	2007	2008	2009	2010			2011	2012	2013	2014	2015	2016	Debt-stabilizing
																	non-interest
																	current account 6/
Baseline: External debt				67.6	58.7	56.6	60.2	60.4			52.4	38.9	31.2	28.0	25.2	23.1	−21.2
Change in external debt				−8.8	−8.9	−2.1	3.6	0.2			−8.0	−13.4	−7.7	−3.2	−2.7	−2.2
Identified external debt-creating flows (4+8+9)				−3.4	−4.2	−5.7	14.7	7.6			8.9	6.4	4.2	2.3	0.8	−0.2
	Current account deficit, excluding interest payments			15.9	20.5	29.6	30.2	23.9			26.8	25.3	23.7	22.3	21.1	20.4
		Deficit in balance of goods and services		17.4	21.5	30.8	31.4	25.3			28.5	26.9	25.3	23.8	22.4	21.7
			Exports	48.4	44.9	40.4	35.3	35.7			36.7	37.6	38.4	39.1	39.8	40.6
			Imports	65.8	66.5	71.2	66.6	60.9			65.2	64.5	63.6	63.0	62.3	62.3
	Net non-debt creating capital inflows (negative)			−18.4	−23.7	−33.0	−22.8	−19.6			−19.8	−20.0	−20.1	−20.3	−20.5	−20.8
	Automatic debt dynamics 1/			−1.0	−1.1	−2.2	7.4	3.3			1.9	1.2	0.6	0.3	0.1	0.2
		Contribution from nominal interest rate		4.6	3.7	3.6	3.7	3.6			2.7	2.1	1.5	1.1	1.1	1.0
		Contribution from real GDP growth		−1.8	−2.6	−2.4	5.8	0.9			−0.9	−0.9	−0.9	−0.9	−0.9	−0.8
		Contribution from price and exchange rate changes 2/		−3.8	−2.1	−3.4	−2.1	−1.2
Residual, incl. change in gross foreign assets (2-3) 3/				−5.3	−4.7	3.6	−11.1	−7.5			−17.0	−19.9	−12.0	−5.5	−3.5	−2.0
External debt-to-exports ratio (in percent)				139.7	130.6	140.3	170.7	169.3			142.6	103.4	81.3	71.5	63.4	56.8
Gross external financing need (in billions of US dollars) 4/				0.2	0.2	0.2	0.2	0.2			0.2	0.3	0.2	0.2	0.2	0.2
	in percent of GDP			33.8	36.4	42.4	44.1	37.5	10-Year	10-Year	43.0	46.0	36.4	29.3	27.1	26.3
Scenario with key variables at their historical averages 5/											52.4	34.3	23.1	17.9	14.6	12.7	−24.6
									Historical	Standard
Key Macroeconomic Assumptions Underlying Baseline									Average	Deviation
Real GDP growth (in percent)				2.6	4.2	4.6	−9.6	−1.5	1.3	4.8	1.5	1.8	2.5	3.0	3.5	3.5
GDP deflator in US dollars (change in percent)				5.2	3.3	6.2	3.9	1.9	3.3	1.5	4.0	3.5	2.5	2.6	2.6	2.6
Nominal external interest rate (in percent)				6.5	5.9	6.8	6.1	5.9	6.7	0.6	4.8	4.2	4.0	3.9	4.0	4.3
Growth of exports (US dollar terms, in percent)				4.0	−2.1	−0.3	−19.3	1.5	2.8	10.6	8.7	7.9	7.1	7.7	8.1	8.2
Growth of imports (US dollar terms, in percent)				14.5	6.4	19.0	−13.6	−8.2	3.1	11.0	12.9	4.2	3.6	4.5	5.0	6.2
Current account balance, excluding interest payments				−15.9	−20.5	−29.6	−30.2	−23.9	−24.0	7.5	−26.8	−25.3	−23.7	−22.3	−21.1	−20.4
Net non-debt creating capital inflows				18.4	23.7	33.0	22.8	19.6	24.8	9.1	19.8	20.0	20.1	20.3	20.5	20.8

^1/Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

^2/The contribution from price and exchange rate changes is defined as [-ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ρ > 0) and rising inflation (based on GDP deflator).

^3/For projection, line includes the impact of price and exchange rate changes.

^4/Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

^5/The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

^6/Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

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Table 1.

St. Kitts and Nevis: External Debt Sustainability Framework, 2006-2016

(In percent of GDP, unless otherwise indicated)

						Actual					Projections
				2006	2007	2008	2009	2010			2011	2012	2013	2014	2015	2016	Debt-stabilizing
																	non-interest
																	current account 6/
Baseline: External debt				67.6	58.7	56.6	60.2	60.4			52.4	38.9	31.2	28.0	25.2	23.1	−21.2
Change in external debt				−8.8	−8.9	−2.1	3.6	0.2			−8.0	−13.4	−7.7	−3.2	−2.7	−2.2
Identified external debt-creating flows (4+8+9)				−3.4	−4.2	−5.7	14.7	7.6			8.9	6.4	4.2	2.3	0.8	−0.2
	Current account deficit, excluding interest payments			15.9	20.5	29.6	30.2	23.9			26.8	25.3	23.7	22.3	21.1	20.4
		Deficit in balance of goods and services		17.4	21.5	30.8	31.4	25.3			28.5	26.9	25.3	23.8	22.4	21.7
			Exports	48.4	44.9	40.4	35.3	35.7			36.7	37.6	38.4	39.1	39.8	40.6
			Imports	65.8	66.5	71.2	66.6	60.9			65.2	64.5	63.6	63.0	62.3	62.3
	Net non-debt creating capital inflows (negative)			−18.4	−23.7	−33.0	−22.8	−19.6			−19.8	−20.0	−20.1	−20.3	−20.5	−20.8
	Automatic debt dynamics 1/			−1.0	−1.1	−2.2	7.4	3.3			1.9	1.2	0.6	0.3	0.1	0.2
		Contribution from nominal interest rate		4.6	3.7	3.6	3.7	3.6			2.7	2.1	1.5	1.1	1.1	1.0
		Contribution from real GDP growth		−1.8	−2.6	−2.4	5.8	0.9			−0.9	−0.9	−0.9	−0.9	−0.9	−0.8
		Contribution from price and exchange rate changes 2/		−3.8	−2.1	−3.4	−2.1	−1.2
Residual, incl. change in gross foreign assets (2-3) 3/				−5.3	−4.7	3.6	−11.1	−7.5			−17.0	−19.9	−12.0	−5.5	−3.5	−2.0
External debt-to-exports ratio (in percent)				139.7	130.6	140.3	170.7	169.3			142.6	103.4	81.3	71.5	63.4	56.8
Gross external financing need (in billions of US dollars) 4/				0.2	0.2	0.2	0.2	0.2			0.2	0.3	0.2	0.2	0.2	0.2
	in percent of GDP			33.8	36.4	42.4	44.1	37.5	10-Year	10-Year	43.0	46.0	36.4	29.3	27.1	26.3
Scenario with key variables at their historical averages 5/											52.4	34.3	23.1	17.9	14.6	12.7	−24.6
									Historical	Standard
Key Macroeconomic Assumptions Underlying Baseline									Average	Deviation
Real GDP growth (in percent)				2.6	4.2	4.6	−9.6	−1.5	1.3	4.8	1.5	1.8	2.5	3.0	3.5	3.5
GDP deflator in US dollars (change in percent)				5.2	3.3	6.2	3.9	1.9	3.3	1.5	4.0	3.5	2.5	2.6	2.6	2.6
Nominal external interest rate (in percent)				6.5	5.9	6.8	6.1	5.9	6.7	0.6	4.8	4.2	4.0	3.9	4.0	4.3
Growth of exports (US dollar terms, in percent)				4.0	−2.1	−0.3	−19.3	1.5	2.8	10.6	8.7	7.9	7.1	7.7	8.1	8.2
Growth of imports (US dollar terms, in percent)				14.5	6.4	19.0	−13.6	−8.2	3.1	11.0	12.9	4.2	3.6	4.5	5.0	6.2
Current account balance, excluding interest payments				−15.9	−20.5	−29.6	−30.2	−23.9	−24.0	7.5	−26.8	−25.3	−23.7	−22.3	−21.1	−20.4
Net non-debt creating capital inflows				18.4	23.7	33.0	22.8	19.6	24.8	9.1	19.8	20.0	20.1	20.3	20.5	20.8

^1/Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

^2/The contribution from price and exchange rate changes is defined as [-ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ρ > 0) and rising inflation (based on GDP deflator).

^3/For projection, line includes the impact of price and exchange rate changes.

^4/Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

^5/The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

^6/Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Table 2.

St. Kitts and Nevis: Public Sector Debt Sustainability Framework, 2006-2016

(In percent of GDP, unless otherwise indicated)

^1/Public sector covers general government and gross debt is used.

^2/Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

^3/The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

^4/The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

^5/For projections, this line includes exchange rate changes.

^6/Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

^7/The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

^8/Derived as nominal interest expenditure divided by previous period debt stock.

^9/Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Table 2.

St. Kitts and Nevis: Public Sector Debt Sustainability Framework, 2006-2016

(In percent of GDP, unless otherwise indicated)

						Actual			Projections
				2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	Debt-stabilizing
															primary
															balance 9/
Baseline: Public sector debt 1/				187.7	178.2	165.0	189.3	199.2	190.4	183.7	177.1	171.6	166.1	161.5	2.1
	o/w foreign-currency denominated			67.6	58.7	56.6	60.2	60.4	52.4	38.9	31.2	28.0	25.2	23.1
Change in public sector debt				−7.8	−9.6	−13.1	24.3	10.0	−8.8	−6.7	−6.6	−5.5	−5.5	−4.6
Identified debt-creating flows (4+7+12)				−6.4	−10.6	−16.1	12.5	8.0	−6.4	−6.4	−6.3	−5.1	−5.1	−4.2
	Primary deficit			−2.9	−4.3	−4.0	−5.9	−2.7	−7.6	−7.9	−8.8	−6.7	−6.5	−6.4
		Revenue and grants		48.0	47.8	45.6	51.5	48.3	52.9	51.3	51.7	49.1	48.9	48.8
		Primary (noninterest) expenditure		45.1	43.5	41.6	45.6	45.6	45.2	43.4	42.9	42.3	42.4	42.5
	Automatic debt dynamics 2/			−3.0	−3.7	−8.0	20.6	11.6	1.4	1.7	2.7	2.1	2.0	2.7
		Contribution from interest rate/growth differential 3/		−3.0	−3.7	−8.0	20.6	11.6	1.4	1.7	2.7	2.1	2.0	2.7
			Of which contribution from real interest rate	1.7	3.6	−0.6	3.7	8.8	4.3	5.0	7.1	7.2	7.6	8.2
			Of which contribution from real GDP growth	−4.7	−7.3	−7.4	16.8	2.8	−2.8	−3.3	−4.4	−5.0	−5.7	−5.5
		Contribution from exchange rate depreciation 4/		0.0	0.0	0.0	0.0	0.0	…	…	…	…	…	…
	Other identified debt-creating flows			−0.5	−2.6	−4.0	−2.2	−0.9	−0.3	−0.3	−0.3	−0.5	−0.5	−0.5
			Privatization receipts (negative)	−0.5	−2.6	−4.0	−2.2	−0.9	−0.3	−0.3	−0.3	−0.5	−0.5	−0.5
			Recognition of implicit or contingent liabilities	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
			Other (specify, e.g. bank recapitalization)	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Residual, including asset changes (2-3) 5/				−1.4	1.0	3.0	11.8	1.9	−2.4	−0.3	−0.3	−0.4	−0.4	−0.4
Public sector debt-to-revenue ratio 1/				391.4	372.8	361.8	367.4	412.2	360.3	358.2	342.6	349.8	339.4	330.7
Gross financing need 6/				87.6	74.8	68.9	65.1	65.4	63.4	75.4	70.6	68.2	67.7	67.0
	in billions of U.S. dollars			0.4	0.4	0.4	0.3	0.3	0.4	0.4	0.4	0.4	0.5	0.5
Scenario with key variables at their historical averages 7/									190.4	195.1	199.9	204.5	209.1	213.7	3.2
Scenario with no policy change (constant primary balance) in 2011-2016									190.4	184.0	178.5	172.2	165.7	159.8	2.1
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (in percent)				2.6	4.2	4.6	−9.6	−1.5	1.5	1.8	2.5	3.0	3.5	3.5
Average nominal interest rate on public debt (in percent) 8/				6.3	5.5	6.1	5.6	6.6	6.3	6.3	6.6	6.9	7.4	7.9
Average real interest rate (nominal rate minus change in GDP deflator, in percent)				1.1	2.2	−0.1	1.7	4.6	2.3	2.8	4.1	4.3	4.8	5.3
Nominal appreciation (increase in US dollar value of local currency, in percent)				0.0	0.0	0.0	0.0	0.0	…	…	…	…	…	…
Inflation rate (GDP deflator, in percent)				5.2	3.3	6.2	3.9	1.9	4.0	3.5	2.5	2.6	2.6	2.6
Growth of real primary spending (deflated by GDP deflator, in percent)				−5.9	−1.5	0.0	−2.5	−1.5	0.6	−2.3	1.3	1.6	3.7	3.6
Primary deficit				−2.9	−4.3	−4.0	−5.9	−2.7	−7.6	−7.9	−8.8	−6.7	−6.5	−6.4

^1/Public sector covers general government and gross debt is used.

^2/Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

^3/The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

^4/The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

^5/For projections, this line includes exchange rate changes.

^6/Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

^7/The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

^8/Derived as nominal interest expenditure divided by previous period debt stock.

^9/Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

View Table

Table 2.

St. Kitts and Nevis: Public Sector Debt Sustainability Framework, 2006-2016

(In percent of GDP, unless otherwise indicated)

						Actual			Projections
				2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	Debt-stabilizing
															primary
															balance 9/
Baseline: Public sector debt 1/				187.7	178.2	165.0	189.3	199.2	190.4	183.7	177.1	171.6	166.1	161.5	2.1
	o/w foreign-currency denominated			67.6	58.7	56.6	60.2	60.4	52.4	38.9	31.2	28.0	25.2	23.1
Change in public sector debt				−7.8	−9.6	−13.1	24.3	10.0	−8.8	−6.7	−6.6	−5.5	−5.5	−4.6
Identified debt-creating flows (4+7+12)				−6.4	−10.6	−16.1	12.5	8.0	−6.4	−6.4	−6.3	−5.1	−5.1	−4.2
	Primary deficit			−2.9	−4.3	−4.0	−5.9	−2.7	−7.6	−7.9	−8.8	−6.7	−6.5	−6.4
		Revenue and grants		48.0	47.8	45.6	51.5	48.3	52.9	51.3	51.7	49.1	48.9	48.8
		Primary (noninterest) expenditure		45.1	43.5	41.6	45.6	45.6	45.2	43.4	42.9	42.3	42.4	42.5
	Automatic debt dynamics 2/			−3.0	−3.7	−8.0	20.6	11.6	1.4	1.7	2.7	2.1	2.0	2.7
		Contribution from interest rate/growth differential 3/		−3.0	−3.7	−8.0	20.6	11.6	1.4	1.7	2.7	2.1	2.0	2.7
			Of which contribution from real interest rate	1.7	3.6	−0.6	3.7	8.8	4.3	5.0	7.1	7.2	7.6	8.2
			Of which contribution from real GDP growth	−4.7	−7.3	−7.4	16.8	2.8	−2.8	−3.3	−4.4	−5.0	−5.7	−5.5
		Contribution from exchange rate depreciation 4/		0.0	0.0	0.0	0.0	0.0	…	…	…	…	…	…
	Other identified debt-creating flows			−0.5	−2.6	−4.0	−2.2	−0.9	−0.3	−0.3	−0.3	−0.5	−0.5	−0.5
			Privatization receipts (negative)	−0.5	−2.6	−4.0	−2.2	−0.9	−0.3	−0.3	−0.3	−0.5	−0.5	−0.5
			Recognition of implicit or contingent liabilities	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
			Other (specify, e.g. bank recapitalization)	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Residual, including asset changes (2-3) 5/				−1.4	1.0	3.0	11.8	1.9	−2.4	−0.3	−0.3	−0.4	−0.4	−0.4
Public sector debt-to-revenue ratio 1/				391.4	372.8	361.8	367.4	412.2	360.3	358.2	342.6	349.8	339.4	330.7
Gross financing need 6/				87.6	74.8	68.9	65.1	65.4	63.4	75.4	70.6	68.2	67.7	67.0
	in billions of U.S. dollars			0.4	0.4	0.4	0.3	0.3	0.4	0.4	0.4	0.4	0.5	0.5
Scenario with key variables at their historical averages 7/									190.4	195.1	199.9	204.5	209.1	213.7	3.2
Scenario with no policy change (constant primary balance) in 2011-2016									190.4	184.0	178.5	172.2	165.7	159.8	2.1
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (in percent)				2.6	4.2	4.6	−9.6	−1.5	1.5	1.8	2.5	3.0	3.5	3.5
Average nominal interest rate on public debt (in percent) 8/				6.3	5.5	6.1	5.6	6.6	6.3	6.3	6.6	6.9	7.4	7.9
Average real interest rate (nominal rate minus change in GDP deflator, in percent)				1.1	2.2	−0.1	1.7	4.6	2.3	2.8	4.1	4.3	4.8	5.3
Nominal appreciation (increase in US dollar value of local currency, in percent)				0.0	0.0	0.0	0.0	0.0	…	…	…	…	…	…
Inflation rate (GDP deflator, in percent)				5.2	3.3	6.2	3.9	1.9	4.0	3.5	2.5	2.6	2.6	2.6
Growth of real primary spending (deflated by GDP deflator, in percent)				−5.9	−1.5	0.0	−2.5	−1.5	0.6	−2.3	1.3	1.6	3.7	3.6
Primary deficit				−2.9	−4.3	−4.0	−5.9	−2.7	−7.6	−7.9	−8.8	−6.7	−6.5	−6.4

^1/Public sector covers general government and gross debt is used.

^2/Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

^3/The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

^4/The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

^5/For projections, this line includes exchange rate changes.

^6/Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

^7/The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

^8/Derived as nominal interest expenditure divided by previous period debt stock.

^9/Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

7. A comprehensive and substantive debt restructuring is needed to put St. Kitts and Nevis’ total PPG debt on a sustainable path. Even with the substantial fiscal measures contemplated, PPG debt would not decline significantly as a share of GDP in the absence of a comprehensive debt restructuring. In this context, the authorities have retained debt and legal advisors, publicly announced to seek a comprehensive and substantive debt restructuring, initiated discussions with creditors, and obtained financing assurances from the Paris Club. The authorities’ strategy, developed with the assistance of their debt advisors, would bring public debt levels closer to the ECCU target of 60 percent of GDP by 2020.³

D. Conclusion

8. This DSA illustrates that St. Kitts and Nevis’ PPG debt is unsustainable even in the presence of strong fiscal adjustment measures, thus making a comprehensive debt restructuring critical. The adoption of strong fiscal adjustment measures will put debt on a downward trajectory but it will still be at an uncomfortably high level, achieving a public debt-to-GDP ratio of about 162 percent by 2016. Furthermore, growth shocks can cause the PPG debt to switch to an explosive path. A comprehensive and substantive debt restructuring, therefore, is critical to ensure fiscal sustainability. The authorities’ debt restructuring scenario currently under discussion is expected to bring the debt-to-GDP ratio down towards the ECCU’s target level of 60 percent by 2020.