Appendix I. The Views of the Authorities
Views of the St. Kitts and Nevis authorities were sought during a visit to Basseterre (St Kitts) and Charlestown (Nevis) during September 10–11, 2015. Meetings were held with the Prime Minister and Minister of Finance T. Harris, the Premier of Nevis V. Amory, senior officials from the Ministry of Finance, and the Governor of the Eastern Caribbean Central Bank. The mission also met with members of the former government under which the SBA was negotiated in 2011 and subsequently implemented. Views heard at these meetings are summarized below.
The authorities broadly agreed with the main findings of the Ex Post Evaluation. They agreed the program’s design was broadly appropriate, correctly identifying and focusing on the critical macroeconomic priorities. They recognized the positive impact of the Fund’s engagement on the successful implementation of their home-grown program and felt the prospects for success under the SBA were good even without the unanticipated rise in Citizenship-by-Investment revenues.
The authorities noted that capacity constraints and insufficient clarity on one structural benchmark contributed to the three missed benchmarks. They also pointed to actions they had taken to advance these goals. The authorities agreed with the evaluation’s finding that a quarterly review frequency strained their limited resources, which sometimes resulted in delays in completing program reviews. They suggested that semi-annual reviews were generally more appropriate for countries like St Kitts and Nevis, but thought that interim staff visits could help maintain progress where there are capacity constraints.
The authorities felt that the program, and the related constructive engagement with Fund staff, had led to a strengthening of capacity in the central government. The authorities welcomed further ongoing engagement in terms of targeted assistance to strengthen some aspects of domestic capacity. In particular, progress with the structural reform agenda would benefit from identifying reforms to raise potential GDP and strengthen the business environment. They also requested broader technical assistance from the IMF, especially in the area of public financial management, to raise the capacity of the Nevis Island Administration. They expressed disappointment that plans to utilize an EU grant to establish a TA fund under the IMF’s supervision were not realized.
The central government thought that the program could have usefully introduced specific conditionality on the Nevis Island Administration (NIA), with the aim of strengthening public financial and cash management. They argued that the Fund’s monitoring of fiscal performance focused primarily on the general government fiscal position, leaving the central government to bear the brunt of adjustment. They also felt that the pace of reform had been weaker in the NIA as the structural reform agenda had focused on actions by the central government. The Nevis Island authorities agreed that their fiscal discipline was only entrenched late in the program; however, they noted that the former Nevis Island government could have been more involved in program negotiations, resulting in stronger ownership of the program.
The authorities saw the debt restructuring as a significant success, although the Nevis Island authorities and the Governor of the ECCB were critical of the haircuts imposed on external creditors as they felt this would hinder the restoration of the federation’s market access for some time. The central government and ECCB agreed that gross financing needs remained too high, although they argued that it would have been difficult to reduce them, particularly through a restructuring of Treasury bills, during the program as this may have damaged the credibility of the instrument and created significant social and financial challenges given the diverse base of Treasury bill holders. However, the authorities agree that lengthening the maturity structure to ease short-term gross financing needs remains important and they are working to do this through regular debt operations in the near-term. Members of the previous government stressed that the program should have been designed to protect the progress made during it, in the face of a subsequent change in government.
Although it was never used, the authorities reiterated that the Banking Sector Reserve Fund (BSRF) served as a valuable safety net, strengthening the government’s capacity to make decisions which could have affected the financial system. They also recognized that the domestic financial system remained resilient despite the debt-land swap but noted ongoing challenges in managing excess liquidity at banks emerging from banks’ high risk aversion and the lack of bankable private sector projects. The ECCB, by contrast, did not see the BSRF as critical to the maintenance of financial stability during the program.
The authorities expressed interest to continue working closely with the Fund on devising plans to enhance private sector development, including through reorienting existing initiatives like the People Employment Program (PEP), to support entrepreneurship and long-term sustainable growth. While they felt that exchange rate overvaluation was not a given, they reiterated the need for a strategy and targeted policies to boost competitiveness of the external sector and enhance the business environment, which would also strengthen the financial system by creating bankable projects. Careful management of the country’s sovereign wealth from CBI inflows, including by the early repayment of debt, was also a priority.
Losses estimated from the most damaging of these were 110 percent of GDP (Hurricane Georges, 1998).
In general, by several different measures, the six ECCU countries rank among the 10 most disaster prone in the world. See Rasmussen, Tobias, “Natural Disasters and Their Macroeconomic Implications” in The Caribbean, from Vulnerability to Sustained Growth, edited by R. Sahay, D. Robinson, and P. Cashin, IMF, 2006.
See International Monetary Fund, 2014,
The report for the 2011 Article IV consultation (and program request) placed the extent of overvaluation of the real effective exchange rate, which mainly reflected wage pressures, between 13 and 17 percent.
Bova, Elva, Nathalie Carcenac, and Martine Guerguil, 2014,
CARTAC TA was provided to the NIA during the program.
Estimates of the recurrent expenditure multiplier is statistically not different from zero, while that for capital expenditure is approximately 0.6. See Chapter 8, in IMF, 2013, “The Eastern Caribbean Economic and Currency Union: Macroeconomic and Financial Systems” (International Monetary Fund: Washington, DC.) The projection line in Figure 19 is constructed by assuming capital and current spending were as initially expected and growth adjusted by the relevant multiplier.
The real per capita public capita stock (2005 PPP terms) in 2013 was $6,400 in St. Kitts compared with $8,300 in emerging markets and $4,880 in Caribbean small island states (IMF, 2015,
See the June 2015 IMF policy paper
The importance of gross financing needs was emphasized in IMF, 2011,
As mentioned above, the land was held in a special purpose vehicle (SPV), which was responsible for its timely disposal.
This concern was addressed by a fixed 3.5 percent dividend based on the value of unsold land in the SPV.
Notwithstanding the usual caveats in measuring competitiveness in small economies like St. Kitts and Nevis, including the poor quality BOP data and methodological weakness in accessing current account norms, all available indicators suggest that competitiveness remains a concern for St. Kitts and Nevis, reflecting mainly high labor and other costs. The authorities recognize this and are making efforts to improve competitiveness including investing in alternative energy sources, targeting high-end tourism and manufacturing, and strengthening the tourism sector.
The small states strategy (2013–14), created after the program started, highlights many of the issues which have been long recognized as relevant for economies like St. Kitts and Nevis. Two of the five thematic areas identified in the strategy critical to the Fund’s engagement with small states are creating resilience to shocks, and workable fiscal and debt sustainability options. Both are directly related to saving windfalls. The strategy is outlined in IMF, 2014,
The Fund’s small states strategy described above suggest overall competitiveness, and workable fiscal and debt sustainability options as key areas for Fund engagement with small states.
Given the negative elasticity between the current account and the underlying current balance, a real depreciation would improve the external position.
This reflects the fact that staff does not project changes in the of Treasury bills. Under the 2015 Article IV macro framework, gross financing needs decline to 16 percent of GDP in 2020, and they remain vulnerable to adverse growth, hurricane, and fiscal policy surprises. The debt burden threshold in the debt sustainability framework are estimated on an EM sample of debt distress (restructurings and rescheduling, defaults, and IMF financing) events using a signal extraction approach. This analysis identifies government debt of 60 precedent of GDP and gross public financing needs of 15 percent of GDP, respectively, as levels associated with debt distress. See Annex II of IMF, 2013,
There are cases where the maturity of Treasury bills were extended as part of debt restructuring. Two relevant examples are provided by Ukraine and Cote d’Ivoire. In Ukraine during 1998–99, a conversion scheme for Treasury bills owned by domestic banks was implemented through an exchange of Treasury bills into longer term bonds of 3 to 6 years maturity. (See F. Sturzenegger, and J. Zettelmeyer (2005), “Haircuts: Estimating Investor Losses in Sovereign Debt Restructurings, 1998–2005,” IMF Working Paper 05/137, Washington). In January 2011, Cote d’Ivoire Treasury bills were also restructured (IMF, 2015, The Fund’s Lending Framework and Sovereign Debt—Further Considerations—Annexes).
The Fund’s small states strategy identifies growth and job creation, and strengthening thin financial sectors as central to engagement with these economies.
Although the CDB did provide a guarantee to facility the debt restructuring with external commercial creditors.