Abstract
2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for St. Lucia
Our St. Lucian authorities thank staff and management for the constructive exchanges during the Article IV Mission. They welcome the staff report and value the policy advice and recommendations. In this regard, they will remain focused on implementing policies to stimulate job-rich growth through strengthening the macroeconomic and fiscal frameworks, safeguarding financial sector stability, and enhancing resilience to natural disasters and climate change. Given the criticality of building resilience to weather-related shocks, our authorities especially welcome the Climate Change Policy Assessment (CCPA), which they intend to utilize to catalyze much-needed donor support.
Recent Economic Developments
Growth momentum continued on the back of favorable external conditions and supportive fiscal policy. Economic activity expanded by 3 percent in 2017 and was broad-based, with tourism, construction, and wholesale and retail being the main contributors. The tourism sector benefited from a strong recovery in cruise arrivals, as well as the opening of new hotel rooms and additional airlift, which led to stopover arrivals surging by 11 percent, the fastest growth in the Caribbean. The solid tourism performance contributed to the current account returning to a surplus. In addition to the renovation and expansion of the hotel room stock, public investment also buoyed construction activities. Relatedly, unemployment fell for the third successive year to 20.2 percent. Following consecutive years of deflation, inflation turned slightly positive in 2017 fueled by rising oil prices.
Public debt rose marginally, following a slight slippage in fiscal performance. With revenue remaining flat at just over 24 percent of GDP, increased expenditure led to a deterioration in the overall fiscal stance and, consequently, a slight uptick in the public debt to around 70 percent of GDP. The higher expenditure outlay arose largely from the scaling up of public investment, which contributed to the robust growth outturn and prospects.
There are emerging signs of an improvement in the banking sector though vulnerabilities persist. Key macroprudential ratios improved as profitability and return on equity (ROE) in the banking sector turned positive on the back of a notable turnaround by indigenous banks. Additionally, capital adequacy remained above the regulatory minimum, and NPLs, though still high, are on a declining path. Meanwhile, the loss of CBR has been limited although costlier requirements continue to burden the banking system.
Outlook and Policies
Maintaining Fiscal Prudence
Debt sustainability remains a top priority for our authorities. They take careful note of the unsustainable baseline debt path presented by staff and acknowledge that further fiscal adjustments are necessary to redirect public debt toward the ECCU target of 60 percent of GDP by 2030. To this end, our authorities are considering a suite of revenue enhancing measures, including streamlining the VAT and diversifying the CIP through a new residency program. These will be complemented by prudent actions to restrain recurrent spending with added focus on measures to limit wage increases, rationalize some government services, and contain interest costs. Regarding the latter, our authorities are considering options for enhancing debt management, including plans to commence work on a new debt law. As part of the process to sustain these and other critical fiscal efforts, our authorities are in discussions with the World Bank toward an agreement on a Development Policy Loan (DPL) before the end of this year. Further, the draft Public Financial Management (PFM) Act entails wide-ranging provisions aimed at improving the budget process, reinforcing fiscal discipline, and promoting fiscal transparency and accountability. The legislation, which will be a useful instrument for anchoring debt on a steady downward path, is slated to be enacted by the end of this fiscal year.
Safeguarding Financial Sector Soundness
Our authorities will continue to advance efforts to reduce financial sector vulnerabilities. They are concerned about the still high NPLs and associated stunted private sector credit growth. To address these risks, our authorities are working determinedly to enact new legislation on, inter alia, foreclosure, insolvency, and credit reporting, and they remain committed to the ongoing regional initiative to establish a credit bureau. In addition, our authorities are cognizant of the risks surrounding the CIP and will ensure that the sound due-diligence process remains intact to protect the integrity of the program. Concerning the EU Blacklisting related to international tax rules, our authorities will work toward ensuring compliance by the end of 2018. They will also sustain efforts to strengthen the AML/CFT framework.
Invigorating Growth
The outlook for growth is positive but our authorities are mindful of notable risks. The tourism and construction sectors are expected to remain robust, as new hotel developments should add 1,200–1,500 rooms in the next 2–3 years. Our authorities are close to finalizing concessional funding from Taiwan, Province of China, to upgrade the international airport and the road network. These projects are part of a package to boost the overall tourism product and sustain inclusive growth. Further, plans are underway to uplift the cruise ship facilities to position St. Lucia to keep pace with the expanding world cruise market, and to take advantage of opportunities for home porting. High production costs, particularly for electricity and shipping, could limit growth prospects. While diversifying the energy mix is unlikely to reduce the cost of electricity meaningfully in the short to medium term, our authorities will continue to pursue greener energy as a dedicated strategy to promote resilience and mitigate against volatile fuel prices.
To promote economic diversification, our authorities intend to step up plans to establish closer linkages between tourism and agriculture, and will intensify efforts to develop other sectors, such as business process outsourcing. Within this context, they will undertake further work to examine human capital deficiencies and seek to enhance the education system to ensure it is in sync with new labor market demands.
Building Resilience – CCPA
Going forward, our authorities will accelerate initiatives to bolster resilience to natural disasters and climate change. As outlined by staff, important growth and fiscal dividends will accrue from strengthening resilience. In this regard, our authorities appreciate the tremendous effort of Fund and Bank staffs in preparing the CCPA, and broadly concur with the recommendations. The CCPA has provided useful guidance for our authorities to press ahead with initiatives aimed at enhancing financial and structural protection. They welcomed the three-pronged approach to resilience building proposed by staff covering: initiatives aimed at lowering risk insurance premium, including for CCRIF through higher donor contributions; access to climate funds, for which the Fund is planning an interactive seminar involving various stakeholders later this year; and capacity development.
Greater donor support is critical to backstop efforts for bolstering resilience. While our authorities are committed to building fiscal buffers, they consider the Savings Fund of 5 percent of GDP as proposed by staff to be quite challenging. They posit that vulnerable small island developing states (SIDs) like St. Lucia do not have the fiscal space to undertake the requisite investment to alleviate the risks posed by natural disasters and climate change, and hence donor funding is urgently needed. Nevertheless, our authorities remain proactive and, within this context, they have advanced discussions with the World Bank toward finalizing a Catastrophe Deferred Drawdown (Cat DDO) facility later this year. Furthermore, they have engaged a team of engineers from the UK to visit St. Lucia by this summer to compute and compile the costs associated with the six pillars of the CCPA – preparedness, mitigation, adaptation, financing, risk management, and national processes. The objective is to have the engineers undertake the assessments, rank the priorities, and develop a roadmap with the associated costings for presentation to the donor community to unlock ex-ante financing. Our authorities look forward to the seminar being organized by the Fund and will endeavor to have the engineers complete the work in time to inform deliberations at that event.