St. Vincent and the Grenadines: External and Public Debt Sustainability Analysis
Author: International Monetary Fund
Publication Date:
05 Dec 2011
eISBN:
9781463929183
Language:
English
Keywords:
ISCR; CR; debt; balance of payments difficulty; The RCF; present value; grant element; distress indicator; grant-equivalent financing; a number of revenue; creating flow; Debt sustainability; debt ratio
Download PDF (617.4 KB)

The current Debt Sustainability Analysis (DSA) indicates that, under the baseline scenario discussed in the staff report, St. Vincent and the Grenadines’ risk of external debt distress remains moderate. Despite rising in recent years, the public debt to GDP ratio is projected to resume to a sustainable trajectory over the medium term in light of the authorities’ commitment to undertake fiscal consolidation measures and the projected rebound in economic growth.

Abstract

The current Debt Sustainability Analysis (DSA) indicates that, under the baseline scenario discussed in the staff report, St. Vincent and the Grenadines’ risk of external debt distress remains moderate. Despite rising in recent years, the public debt to GDP ratio is projected to resume to a sustainable trajectory over the medium term in light of the authorities’ commitment to undertake fiscal consolidation measures and the projected rebound in economic growth.

I. Introduction

1. St. Vincent and the Grenadines’ economy has been buffeted by a string of adverse shocks in the last 3 years. Economic activity contracted by about 1 percent per annum, on average, during 2008-10, reflecting the impacts of the global slowdown that began in 2007, the international commodity price increases in 2008-09 and more recently since mid-2010, the draught in the first half of 2010, and Hurricane Tomas at end-2010. Government efforts to counter these impacts resulted in a reversal of the 1.1 percent of GDP primary surplus in 2008 to a deficit of 2½ percent of GDP in 2010. At the same time, the public sector debt-to-GDP ratio increased by 9.3 percentage points over the two year period to 66 percent in 2010. External debt constitutes around 62 percent of the public sector debt at end-2010, of which about 67 percent represents claims by multilateral creditors. The central government owed about 83 percent of the total public sector debt at end-2010, with the rest owed by state-owned enterprises.

2. The torrential rains, flooding and landslides that hit St. Vincent and the Grenadines around mid-April 2011 have further added to the strains in the economy. As a result, economic growth is expected to remain in the negative territory for the fourth year in a row and additional government spending on rehabilitation and reconstruction activities is expected to further increase the public sector debt in 2011. However, the authorities’ commitment to undertake fiscal consolidation measures would ensure debt sustainability over the medium term. The authorities plan to make further improvements in tax administration, including by improving compliance and enhancing audits, and fully operationalizing the Large Taxpayer Unit. They will continue to improve public finance management with CARTAC assistance and a task force has also been set up to study the scope for pension reforms with the help of the International Labor Organization.

II. Underlying DSA Assumptions

3. The DSA analysis is based on the following macroeconomic framework, assuming that the authorities will implement the policies discussed in the staff report.

  • Growth and Inflation: While expected to decline by 0.4 percent this year, the economy is projected to rebound to around 2½ percent in 2012, supported by hurricane and floods related reconstruction activities and modest recovery in tourism and FDI flows. Over the medium term, growth is projected to reach its potential level of 3½-4 percent, reflecting improved employment and consumption conditions in tourism and FDI source countries. End-period inflation is projected to reach around 6 percent in 2011, reflecting the uptick in international food and fuel prices. Over the medium term, inflation is projected to revert to its long-term path of around 2½ percent, anchored by the currency board arrangement.

  • Fiscal Balance: While the central government’s primary balance is projected to register a deficit of 1.7 percent of GDP in 2011, reflecting hurricane and flood related spending, over the medium-term it is assumed that the primary surplus will be in the range of 1½-2 percent of GDP, in line with the authorities’ commitment in the context of the RCF discussions.1 Revenue is projected to increase over the medium term, reflecting the authorities’ plan to implement a number of revenue enhancing measures such as revaluation of property and broadening the coverage of the property tax, improving compliance and enhancing tax audits, and streamlining exemptions and transfers to state-owned enterprises. Central government external grants, which peaked in 2009, are projected to return to the pre-crisis level of around 2½ percent of GDP over the medium term and further fall to 1½ percent of GDP in the long term. On the other hand, expenditures in percent of GDP are assumed to gradually fall to the pre-crisis level, reflecting the phasing out of one-off spending items.1/

  • External Sector: The current account deficit is projected to widen in 2011 primarily due to the increase in imports for reconstruction, before converging to around 22 percent of GDP over the medium term. Tourism and FDI are assumed to rebound as economic recovery strengthens in source countries (mainly North America and Europe), over the medium term. The grant element of new external borrowing is projected to fall over the medium to long term, reflecting difficulty of accessing concessional resources as per capita income increases, however, the grant element will continue to remain high in the near to medium term in line with the central government’s commitment not to borrow on non-concessional terms.

III. Evaluation of Public Sector Debt Sustainability

4. Although public sector debt has risen in recent years, the public sector debt dynamics are expected to improve over the medium-term. The public sector debt-to-GDP ratio is projected to increase further by another 4 percentage points to 70 percent in 2011, reflecting the additional spending for hurricane and floods related reconstruction activity and borrowings by the International Airport Development Corporation (IADC) and the Electricity Company (VINLEC).2 However, the debt trajectory is expected to start a downward trend starting in 2012 reflecting fiscal consolidation measures that the authorities plan to take combined with the projected rebound in economic growth, as discussed in the staff report. The public debt-to-GDP ratio is projected to fall to 46 percent of GDP by 2021 (Table 1a).

Table 1a.

St. Vincent & the Grenadines: Public Sector Debt Sustainability Framework, Baseline Scenario, 2008-2031

(In percent of GDP, unless otherwise indicated)

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

Gross debt of central government and nonfinancial state-owned enterprises.

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.

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

5. Sensitivity analysis shows that higher primary deficits are key vulnerabilities for St. Vincent and the Grenadine’s debt dynamics. Under a scenario where the primary balance is unchanged at the 2011 level, the present value of debt-to-GDP ratio would reach 91 percent in 2020 and 81 percent in 2031, compared to the base line levels of 44 percent and 30 percent in 2021 and 2031, respectively (Table 1b, Scenario A2). A scenario with permanently lower GDP growth also poses a significant risk, increasing the present value of debt-to-GDP ratio to 62 percent in 2021 and 58 percent in 2031.3

Table 1b.

St. Vincent & the Grenadines: Sensitivity Analysis for Key Indicators of Public Debt 2011-2031

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

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

IV. Evaluation of External Debt Sustainability

6. St. Vincent and the Grenadines’ risk of external debt distress remains moderate. Under the baseline scenario, the present value (PV) of public sector external debt is estimated at 43 percent of GDP in 2011 and is projected to decline to 27 percent of GDP by 2021, well below the threshold value of 50 percent4 (Table 3a). The present values of debt and debt service to- export and revenue ratios also remain below the respective thresholds under the baseline scenario. Nevertheless, some of these ratios including the PV of debt-to-GDP ratio and the PV of debt-to-export ratio exceed the respective prudential thresholds under the alternative scenarios of ‘historical average’ and ‘most extreme shocks’ (Figure 1 and Table 2b).5

Figure 1.

St. Vincent & the Grenadines: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2011-2031 1/

Citation: IMF Staff Country Reports 2011, 344; 10.5089/9781463929183.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress shock in Figures b-f refers to a combination of shocks to key macroeconomic variables such as real GDP, primary balance, and the exchange rate.
Table 2a.

External Debt Sustainability Framework, Baseline Scenario, 2008-2031 1/

(In percent of GDP, unless otherwise indicated)

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

Includes both public and publicly guaranteed external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = 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. The relatively large residual reflects the significant role of capital grants in financing the current account.

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

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

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

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 PV of new debt).

Table 2b.

St. Vincent & the Grenadines: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2011-2031

(In percent)

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

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.

7. Sensitivity analysis shows that St. Vincent and the Grenadines’ external debt dynamics is vulnerable to changes in the nominal exchange rate and non-debt creating flows. The stress test assuming a one-time 30 percent nominal depreciation relative to the baseline in 2012 indicates that the PV of external debt-to-GDP ratio would jump to 58 percent, breaching the country-specific threshold of 50 percent (Table 2b, Scenario B6). Similarly, the PV of external debt-to-GDP ratio would jump to 54 percent in 2012 and further to 65 percent in 2013, if the net non-debt creating flows (mainly FDI) were at the historical average minus one standard deviation in 2012-20136 (Table 2b, Scenario B4).

V. Alternative scenario: additional borrowing for the airport project

8. Additional borrowing in commercial terms to finance the airport project, in the rare event that all expected grants, concessional borrowing, and revenues from land sales are not available in 2011 and 2012, would put St. Vincent and the Grenadines in high risk of debt distress.7 Under this scenario, the public sector debt-to-GDP ratio would jump to 83 percent in 2012 and still be above the threshold at 55 percent in 2021. Furthermore, most external debt distress indicators, such as the PV of external debt-to-GDP ratio, the PV of external debt to export ratio, and the PV of debt service to export ratio, lie above the corresponding country-specific thresholds indicating that the risk of external debt distress is high (Figure 3).

Figure 2.
Figure 2.

St. Vincent & the Grenadines: Indicators of Public Debt Under Alternative Scenarios, 2011-2031 1/

Citation: IMF Staff Country Reports 2011, 344; 10.5089/9781463929183.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress shock in Figures b-f refers to a combination of shocks to key macroeconomic variables such as real GDP, primary balance, and the exchange rate.2/ Revenues are defined inclusive of grants.
Figure 3.
Figure 3.

St. Vincent & the Grenadines: Indicators of Public and Publicly Guaranteed External Debt under ‘Commercial Borrowing for the Airport’ Scenarios, 2011-2031 1/

Citation: IMF Staff Country Reports 2011, 344; 10.5089/9781463929183.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress shock in Figures b-f refers to a combination of shocks to key macroeconomic variables such as real GDP, primary balance, and the exchange rate.

VI. Conclusion

9. St. Vincent and the Grenadines’ public debt is projected to revert to a sustainable trajectory over the medium term and the external debt distress remains moderate. While the fiscal situation has been deteriorating in recent years, the authorities have stepped up fiscal consolidation measures, both on the revenue and expenditure fronts. These, along with projected improvements in economic prospects are expected to improve the fiscal situation and reduce the public debt-to-GDP ratio to 46.2 percent by 2021.

1

The fiscal balance numbers discussed in the assumption reflect only central government, whereas the DSA includes both the central government and state-owned enterprises. The primary balance for the consolidated public sector, that is, including both the central government and the state owned enterprises, is somewhat higher in the short-term reflecting disbursements to the electricity company and the airport authority. However, the difference becomes very small after 2012.

2

The IADC expects disbursements of EC$27.3 million from Taiwan and EC$ 6.9 million from the Caribbean Development Fund (both loans are concessional) and VINLEC expects a disbursement of EC$ 14.9 million from ALBA, the last tranche of the electricity expansion project loan.

3

The permanently lower GDP growth is calculated as the baseline level minus one standard deviation divided by the square root of the projection period.

4

The DSA uses policy-dependent external debt burden indicators. Policy performance is measured by the Country Policy and Institutional Assessment Index (CPIA), compiled annually by the World Bank, categorizing countries into three groups based on the quality of their macroeconomic policies (strong, medium, and poor). St. Vincent and the Grenadines is classified as a strong performer, with the thresholds on PV of debt-to-GDP, debt-to-exports, and debt-to-revenue of 50, 200 and 300 percent, respectively.

5

The historical average scenario assumes key macroeconomic variables to remain at historical averages of the last 10 years, whereas the most extreme shock scenario assumes all key macroeconomic indicators will be at their historical average minus one standard deviation.

6

FDI flows have been at historically low levels in the last few years due to the global economic recession.

7

Under the baseline scenario, the airport project is financed by a combination of grants, concessional borrowing, land sales, and privatization proceeds.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
St. Vincent and the Grenadines: Request for Disbursement under the Rapid Credit Facility
Author: International Monetary Fund
Volume/Issue:
Volume 2011: Issue 344
Publisher:
International Monetary Fund
ISBN:
9781463929183
ISSN:
1934-7685
Pages:
54
DOI:
https://doi.org/10.5089/9781463929183.002