St. Vincent and the Grenadines: External and Public Debt Sustainability Analysis
Author: International Monetary Fund
Publication Date:
12 Dec 2011
eISBN:
9781463929190
Language:
English
Keywords:
ISCR; CR; credit facility informational annex; facility; debt; balance of payments difficulty; GDP; GDP series; creating flow; distress indicator; sustainability framework; debt service-to-revenue; Fiscal stance; Debt sustainability analysis; Caribbean
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The Executive Board of the IMF has approved a disbursement of an amount equivalent to SDR 2.075 million under the Rapid Credit Facility for St. Vincent and the Grenadines to help the country manage the economic impact of Hurricane Tomas. The Board’s approval enables the immediate disbursement of the full amount. The late-October 2010 hurricane inflicted significant damage to agriculture, housing, and infrastructure. The initial assessment conducted by the government estimated the cost of damage at 5 percent of gross domestic product.

Abstract

The Executive Board of the IMF has approved a disbursement of an amount equivalent to SDR 2.075 million under the Rapid Credit Facility for St. Vincent and the Grenadines to help the country manage the economic impact of Hurricane Tomas. The Board’s approval enables the immediate disbursement of the full amount. The late-October 2010 hurricane inflicted significant damage to agriculture, housing, and infrastructure. The initial assessment conducted by the government estimated the cost of damage at 5 percent of gross domestic product.

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 is moderate, compared to a high risk in the previous DSA. The public debt is also projected to resume to a sustainable trajectory over the medium term. The lower than projected fiscal deficit last year, commitment for fiscal consolidation in line with the active scenario of the previous DSA, and an upward revision in the GDP series have contributed to the improved external debt dynamics.1

I. Introduction

1. The 2008–09 global economic crisis has significantly affected St. Vincent and the Grenadines’ economy through lowering tourism and FDI flows. Economic activity contracted by about 0.5 percent per annum, on average, during 2008–09. The impact of the external economic factors was exacerbated by Hurricane Tomas in 2010, shrinking real GDP further by 2.3 percent. Government efforts to counter these impacts have turned the primary balance from a surplus of 1.1 percent of GDP 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 11.3 percentage points over the two year period to 68 percent in 2010. That said, the fiscal stance in 2010 was much tighter than projected at the time of the last Article IV, reflecting external financing constraints and significant cuts in expenditure. External debt constitutes about 60 percent of the public sector debt at end-2010, of which about 60 percent represents claims by multilateral creditors. The central government owed about 90 percent of the total public sector debt at end-2010.

2. Hurricane-related reconstruction efforts will further increase the public sector debt in 2011; however, the authorities’ commitment to undertake fiscal consolidation measures will 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 establishing a Large Taxpayer Unit. They will continue to improve public finance management with CARTAC assistance. A task force has also been set up to study the scope for pension reforms in line with CARTAC recommendations.

II. Underlying DSA Assumptions

3.The DSA analysis is based on the following macroeconomic framework, assuming that the authorities will implement the near-term policies agreed with staff.

  • Growth and Inflation: After three consecutive years of decline, the economy is projected to rebound to 2½ percent in 2011. Over the medium term, growth is projected to reach its potential level of 4 percent, equivalent to the active scenario assumption in the previous DSA. On the other hand, end-period inflation is projected to hover around 3 percent in 2010, reflecting the uptick in international food and fuel prices. Over the medium term inflation is projected to revert to its long-term path of 2–2½ percent.

Macroeconomic assumptions under the Baseline Scenario (2011–2030)

  • Growth is projected to rebound to around 2½ percent in 2011, supported by hurricane related reconstruction activities and modest recovery in tourism and FDI flows. Over the medium term, growth is assumed to return to its potential rate of 4 percent, reflecting improved employment and consumption conditions in tourism and FDI source countries. On the other hand, medium term inflation is assumed to remain low in the range of 2–2½ percent, anchored by the currency board arrangement.

  • The primary balance of the central government is projected to improve to about 1½–2 percent of GDP, reflecting the authorities’ commitment to fiscal consolidation. 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 audits, and establishing a Large Taxpayer Unit. On the other hand, expenditure in percent of GDP is assumed to gradually fall to the pre-crisis level, reflecting the phasing out of one-off spending items.1/

  • The overall deficit is assumed to be financed increasingly from external sources, reflecting the authorities’ strategy of avoiding domestic borrowing to the extent possible. However, the grant element of new external borrowing is projected to fall over the medium to long term, reflecting difficulty of accessing concessional resources as the country’s income increases.

  • External grants, which peaked in 2009, is 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.

  • The current account deficit is projected to widen in 2011, primarily due to the increase in imports for the reconstruction, before converging to around 20 percent of GDP over the medium term. As economic conditions in source countries continue to improve, tourism and FDI inflows are assumed to rebound.

1/ These include, (i) hurricane related spending (1 percent of GDP), (ii) transfers to the airport authority (1.1 percent of GDP), (iii) provision for addressing the cost of resolving BAICO (½ percent of GDP), and (iv) purchase of coastguard vessels (0.3 percent of GDP). The last two items are carry overs from the previous year, although the magnitudes are smaller.

  • Fiscal Balance: The current baseline scenario reflects the fiscal structural measures proposed under the active scenario of the previous DSA as the authorities have committed to undertake them. The 2011 budget, approved in January, already incorporates most of the proposed measures, such as broadening the property tax base, streamlining exemptions, and modernizing customs. The authorities are continuing to implement measures to improve public finance management. While the central government’s primary balance is projected to register a further deficit of 1.3 percent of GDP in 2011, reflecting hurricane related and other one-off spending items, over the medium-term it is assumed that the primary surplus will be in the range of 1½-2percent of GDP, in line with the authorities are commitment in the context of the program discussions.2

  • External Sector: The current account deficit is projected to widen in 2011 primarily due to the increase in imports for the reconstruction, before converging to around 20 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.

III. Evaluation of Public Sector Debt Sustainability

4. Though lower than projected in the last DSA, the debt-to-GDP ratio rose by 6 percentage points to 68 percent in 2010. The ratio is projected to increase further by another 4 percentage points to 72 percent in 2011, due to additional borrowing (concessional) for hurricane related and other one-off spending items. Fiscal consolidation measures being undertaken by the authorities are, however, expected to return the public debt to a declining path over the medium term. The public debt-to-GDP ratio is projected to fall to 46 percent of GDP by 2020 (about the same as the Eastern Caribbean Central Bank (ECCB) recommended benchmark of 60 percent with the old GDP series).3 This is comparable to the level projected under the active scenario of the previous DSA.

5. Sensitivity analysis shows that higher primary deficit is a key vulnerability for St. Vincent and the Grenadine’s debt dynamics. Under the scenario that primary balance is unchanged at the 2010 level, which is a historically high deficit, the present value of debt-to-GDP ratio will reach 87 percent in 2020 and 118 percent in 2030, compared to the base line levels of 37 percent and 20 percent in 2020 and 2030, respectively (Table 2a, Scenario A2). The scenario of permanently lower GDP growth also poses a significant risk, increasing the present value of debt-to-GDP ratio to 50 percent in 2020 and 56 percent in 2030.

Table 1a.

St. Vincent and the Grenadines: Public Sector Debt Sustainability Framework, Baseline Scenario, 2007-2030

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

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.

Table 2a.

St. Vincent and the Grenadines: Sensitivity Analysis for Key Indicators of Public Debt 2010-2030

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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 is moderate, compared to high in the previous DSA. The authorities’ commitment to undertake fiscal measures proposed under the active scenario of the previous DSA, lower than projected external disbursements4 and significant expenditure cuts in 2010, and an upward revision in the GDP series have contributed to the improved external debt dynamics. That said, the PV of external debt-to-GDP ratio is projected to increase by 2 percentage points to 44 percent of GDP in 2011, reflecting the widening fiscal deficit due to hurricane related and other one-off spending items. Nevertheless, projected fiscal tightening over the medium term will reduce the ratio to 26 percent of GDP by 2020, well below the prudential threshold of 50 percent 5 (Table 3a).

Table 3a.:

External Debt Sustainability Framework, Baseline Scenario, 2007-2030 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]1(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = 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 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).

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 2011 indicates that the PV of external debt-to-GDP ratio would jump to 62 percent, breaching the country-specific threshold of 50 percent (Table 3b, Scenario B6). Similarly, the PV of external debt-to-GDP ratio would jump to 57 percent in 2011 and further to 74 percent in 2012, if the net non-debt creating flows (mainly FDI) were at the historical average minus one standard deviation in 2011–20126 (Table 3b, Scenario B4).

Table 3b.

St. Vincent and the Grenadines: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2010-2030

(In percent)

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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.

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. Under this scenario, the public sector debt-to-GDP ratio would jump to 88 percent in 2012, compared to 71 percent in the baseline scenario, and would reach 52 percent by 2020 (above the ECCB’s target of 60 percent using the old GDP series). Furthermore, all of the external debt distress indicators; the PV of external debt-to-GDP ratio, the PV of external debt to export ratio, and the PV of external debt to revenue ratio, lie above the corresponding country-specific thresholds indicating the risk of external debt distress is high.

VI. Conclusion

9. St Vincent and the Grenadines’ public debt is projected to revert to a sustainable trajectory over the medium term, achieving the ECCB’s debt-to-GDP ratio target of 60 percent by 2020. 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 percent by 2020.

10. St Vincent and the Grenadines’ external debt risk is upgraded to moderate. Lower than projected external disbursements in 2010 the authorities’ commitment to generate primary surpluses in the range of 1½–2 percent of GDP over the medium term, and the upward revision in GDP have contributed to the improved external debt profile.

Figure 1.
Figure 1.

St. Vincent and the Grenadines: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2010-2030 1/

Citation: IMF Staff Country Reports 2011, 349; 10.5089/9781463929190.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2020. In figure b. it corresponds to a One-time depreciation shock; in c. to a Combination shock; in d. to a One-time depreciation shock; in e. to a Combination shock and in figure f. to a Combination shock
Figure 2.

St. Vincent and the Grenadines: Indicators of Public Debt Under Alternative Scenarios, 2010-2030 1/

Citation: IMF Staff Country Reports 2011, 349; 10.5089/9781463929190.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2020.2/Revenues are defined inclusive of grants.
Figure 3.
Figure 3.

St. Vincent and the Grenadines: Indicators of Public and Publicly Guaranteed External Debt under Borrowing for the Airport Scenario, 2010-2030

Citation: IMF Staff Country Reports 2011, 349; 10.5089/9781463929190.002.A002

Sources: Country authorities; and staff estimates and projections.1/The most extreme stress test is the test that yields the highest ratio in 2020. In figure b. it corresponds to a One-time depreciation shock; in c. to a Combination shock; in d. to a One-time depreciation shock; in e. to a Combination shock and in figure f. to a Combination shock
1

The baseline scenario in this DSA corresponds to the “active” scenario in the previous DSA.

2

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.

3

The authorities have officially launched the much anticipated new GDP series, which shows an upward revision in nominal GDP by about 23 percent, on average, during 2000–09.

4

For instance, the authorities only received US$20 million of the total US$50 million expected from ALBA, and the planned supplier credit for the purchase of coastguard vessels did not materialize due to financial problems with the supplier.

5

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.

6

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

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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 349
Publisher:
International Monetary Fund
ISBN:
9781463929190
ISSN:
1934-7685
Pages:
55
DOI:
https://doi.org/10.5089/9781463929190.002