ST. Lucia: 2019 Article IV Consultation—Press Release; and Staff Report
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International Monetary Fund. Western Hemisphere Dept.
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Publication Date:
24 Feb 2020
eISBN:
9781513530963
ISBN:
9781513530963
Language:
English
Keywords:
ISCR; CR; investment; infrastructure investment; cost; CARTAC TA; energy price shock; CARTAC Customs; CARTAC Mac programme; fuel price pressure; Natural disasters; Tax administration core functions; Tourism; Caribbean; Global; public finance; debt target; management framework; rising allocation; time deposit
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2019 Article IV Consultation-Press Release; and Staff Report

Abstract

2019 Article IV Consultation-Press Release; and Staff Report

Recent Developments and Outlook

A. Context

1. The St. Lucia economy is heavily dependent on tourism. A late 2000s investment boom in the tourism sector ended abruptly with the global financial crisis, leading to sizeable banking sector non-performing loans (NPLs) and a heavy public debt burden from the use of fiscal stimulus to cushion the impact of the shock. Despite more favorable external conditions in recent years, including robust growth in the United States which accounts for nearly one half of stayover tourists, St. Lucia’s growth has remained subdued, averaging 0.9 percent in 2008–18 compared to 2.4 percent in the previous decade. Tourism has contributed only one-third of that growth, reflecting strong regional competition and domestic capacity constraints arising from a weak appetite for new private investment in additional hotel capacity.

uA01fig01

Real GDP Growth

(Ten-year average, percent)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Sources: ECCB and national authorities.
uA01fig02

Hotel Sector Development

(2004–2018, in percent)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Sources: Caribbean Tourism Organization (CTO)

2. Domestic vulnerabilities are heightening St. Lucia’s susceptibility to external shocks. Public debt, already high at 64 percent of GDP as of 2018, is expected to rise to 74 percent over the near term as a result of external debt-financed public infrastructure investment.1 As such, this limits the policy space to react to an economic downturn. In addition, weak asset quality weighs on bank balance sheets and there are long-standing structural impediments to efficient financial intermediation which constrains the funding for private sector projects. Finally, St. Lucia is susceptible to disruptions in tourism demand and to large shifts in its terms of trade as the country’s energy needs are almost entirely met through imported fossil fuels.

3. St. Lucia is also among the countries most exposed to climate and natural disaster shocks. As underscored in the 2018 Climate Change Policy Assessment (CCPA), the average annual damage of natural disasters exceeds 1 percent of GDP. More frequent and severe natural disasters due to global warming would substantially harm long-term growth and undermine fiscal sustainability (staff calculations suggest that the average economic impact of natural disasters could increase by 40 percent in a high CO2 emission scenario). Despite being a regional leader in climate change preparedness, St. Lucia has large institutional, financing and capacity gaps in its disaster and climate response strategy.

B. Current Trends

4. Growth slowed in 2018 due to a sharp fall in construction but has picked up in the first three quarters of 2019 based on preliminary quarterly data. Following relatively strong growth in 2016–17, real GDP growth declined to 0.9 percent in 2018 as the completion of the Port Castries expansion project led to a 20 percent contraction in construction (Figure 1). The tourism sector expanded modestly in 2018, with stayover arrivals growing by 2.2 percent (although this is below the average growth of 3 percent for the Caribbean as a whole). While the slump in construction activity continued in early 2019, strong growth in stayover arrivals (7.9 percent y-o-y in the first three quarters of the year) contributed to stronger GDP growth. Unemployment has declined somewhat but remains high at 18 percent as of Q2 of 2019. Inflation picked up to 2.2 percent in 2018, driven by higher food and fuel prices, but has subsequently moderated to 1.6 percent in the first half of 2019.

Figure 1.
Figure 1.

St. Lucia: Recent Developments

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

5. Prolonged bank de-leveraging remains a significant headwind to private sector activity amidst an increasing fragmentation of the domestic credit market. Total bank credit to the private sector shrank for the sixth consecutive year. The contraction is driven by banks’ more conservative lending practices and their efforts to resolve legacy NPLs (which have more than halved from the 2013-peak to about 9 percent). This has led to greater competition for the higher quality projects, compressing lending margins and increasing banks’ reliance on non-interest income from fees, charges and overseas security investments. Increasingly, borrowers that are unable to access bank credit are turning to non-bank financing, most notably credit unions (where the annual growth of lending is around 10 percent) and the fast-expanding micro-lenders.2

uA01fig03

St. Lucia: Private Sector Credit Growth

(Resident credit, percent)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

6. The fiscal position has improved in recent years, reflecting prudent fiscal policies and revenues from the citizenship-by-investment program (CIP). The primary fiscal surplus rose to 2.1 percent of GDP in 2018 and is projected to be broadly balanced in 2019. However, the overall deficit remains large due to interest payments. CIP applications grew strongly in 2018, generating 1.3 percent of GDP in budget revenues, but have declined sharply in 2019. The recently concluded tri-annual wage negotiations between the government and public sector unions have resulted in additional salary expenditures of 0.5 percent of GDP in 2019 due to retroactive wages increases. Under the terms of the agreement, wages for 2020–21 are set to rise only modestly and the public sector wage bill is expected to stabilize around 7¼ percent of GDP, below the average of 9 percent of GDP in 2010–15.

7. Construction of large infrastructure projects is about to commence. At a cost of US$175 million (9 percent of GDP), a new airport terminal will replace the existing outdated facility. The project is funded through government-guaranteed loans from Taiwan Province of China and from local and regional banks. Since January 2018 the government has been collecting a US$35 airport development tax per airport arrival (estimated to yield revenue of 0.7 percent of GDP annually) to repay these loans. Other planned public investment projects include a US$42 million (2.2 percent of GDP) road improvement program and hospital rehabilitations (1.6 percent of GDP), mostly financed by semi-concessional loans.

8. Preliminary data suggest an increase in the current account surplus to 2.3 percent of GDP in 2018 with an increase in tourism receipts more than offsetting higher imports.3 In part, the strength in tourism revenues has reflected St. Lucia’s increased share in the ECCU tourism market as several countries in the currency union were recovering from the 2017 hurricanes. The overall external position in 2018 is assessed to be broadly consistent with the level implied by fundamentals and desirable policies (Annex II). Nonetheless, St. Lucia still has considerable competitiveness challenges, particularly in its non-tourism sector, where the main impediments stem from a poor business environment, skills mismatches in the labor market, and misalignments between wages and labor productivity. Imputed reserves at the Eastern Caribbean Central Bank (ECCB) correspond to 3.4 months of imports in 2018 and is projected to remain above 3 months of imports in 2019.

C. Outlook and Risks

9. The short-term outlook is favorable, but long-run growth continues to be impeded by important structural weaknesses. Growth in 2019 is projected to pick up to 1.5 percent, thanks to strong growth in tourist arrivals. The current account surplus is projected to rise to around 3 percent of GDP. Import-intensive infrastructure projects will provide a substantial boost to growth in 2020–22 but will push public debt to 74 percent of GDP by 2023 and weaken the external position. However, without greater private sector investment into hotel expansions, the additional capacity from the new airport may remain underutilized, diluting the impact of this investment on long-run potential growth.

10. Risks are to the downside (Annex III). External downside risks include sharp rises in global risk premia, higher energy prices and a deeper-than-expected slowdown in major source markets for tourism (the U.S., Canada and the U.K., see Figure 2). A drying up of CIP revenues would pose additional challenges to public finances. There are also macro-financial risks related to weaknesses in the AML/CFT frameworks, compliance with international tax rules, slow progress in addressing financial sector weaknesses, and a further loss of Correspondent Banking Relationships (CBRs). Natural disasters constitute an ever-present risk to both growth and the fiscal outlook. On the other hand, there is an upside that infrastructure investment could catalyze a greater-than-expected expansion of the tourism sector and related activities.

Figure 2.
Figure 2.

St. Lucia: External Sector Developments

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Authorities’ Views

11. The authorities broadly agreed with staff’s growth outlook and risk assessment. They anticipate growth to average around 3 percent over 2020–22, driven by major public investment projects, and inflation to rise modestly. Whereas activity in the construction sector is to pick up sharply, growth in the hospitality sector is expected to moderate due to capacity constraints. They believed that the airport and road renovation projects, once completed, would lead to further expansion of the hospitality sector and catalyze other domestic private investment. While the current account surplus is expected to remain strong in 2019, the authorities acknowledged that the current account balance will decline over the medium term as construction-related imports pick up. While agreeing with the thrust of staff’s risk assessment, the authorities stressed that a further slowdown in advanced economies would have limited impact on St. Lucia’s tourism industry as it serves a very resilient segment of the market, namely upscale and romance tourism.

Policy Discussions

A. Rebuilding Policy Space

12. A coherent and credible medium-term adjustment strategy is needed to rebuild policy space and ensure that debt declines smoothly to the regional target of 60 percent of GDP by 2030. Notwithstanding the projected growth benefits from infrastructure investment, debt vulnerabilities are elevated and under current policies public debt does not stabilize in the near term (Annex IV). Moreover, the elevated level of public debt limits the policy space to react to adverse shocks. Finally, the need to build ex-ante resilience to natural disasters further exacerbates public finance pressures.

13. A medium-term adjustment strategy should be built around three main pillars. First, the government should maximize the revenue potential of planned reforms and develop new revenue sources. Second, public spending on resilience should be increased, financed by additional revenue sources and/or grant financing. Third, a clear institutional fiscal responsibility framework, including a fiscal rule, should be adopted to guide the pace and composition of the needed medium-term fiscal adjustment.

14. Revenue-enhancing measures should be a key focus in the near term. The government’s planned reforms to the personal income tax (PIT) and the residential property tax are expected to be largely revenue neutral in the near term (Box 1). The government also plans to introduce a hotel accommodation fee (estimated to generate annual income of 0.7 percent of GDP) to fund tourism marketing and promotion. However, this fee would be matched by a lower VAT on the hospitality sector to limit the impact on tourist expenses. Staff analysis suggests that even if the fee is fully passed on to tourists, it is unlikely to change St. Lucia’s regional ranking on tourist expenses or have a material impact on the number of arrivals given the estimated low-price elasticity of tourists to the region (see Annex V). As such, revenue gains from the hotel accommodation fee should be preserved and not offset with an expansion of VAT preferences. Additional revenue could also be mobilized by eliminating other VAT exemptions (while minimizing the impact on poor and vulnerable households) and by harmonizing tax incentives through regional coordination (see 2019 ECCU Discussion of Common Policies). Restraining current spending, especially on the public sector wage bill, remains a key priority. The plan to introduce the National Health Insurance (NHI) system to provide coverage of basic medical services is in the early stage and needs to be implemented in a fiscally responsible manner.

uA01fig04

Week at the Beach plus Airfare (in US$)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Source:IMF-W@tB Index (WP/14/229), IMF staff calculations.

Fiscal: Major Tax Measures

article image

15. Introducing a carbon tax would help achieve debt sustainability and provide critical support for St. Lucia’s mitigation efforts. Staff analysis suggests that a carbon tax of US$50 per ton of CO2 (EC$135) would raise revenues of around 1 percent of GDP and, together with other adjustment measures, help bring debt to 60 percent of GDP by 2030 (Box 2). By strengthening incentives to shift to renewables, reducing energy consumption, and improving energy efficiency, the tax would also help St. Lucia attain its emission reduction targets under the Paris Agreement (provided that the carbon tax is complemented with renewed efforts to expand renewables which could also help reduce energy costs, see Annex VI). The carbon tax would be moderately regressive and should be introduced in parallel with targeted assistance to offset the impact on poorer households.4

Fiscal: Baseline and Adjustment Scenarios

article image
Source: IMF staff calculations.

Annualized cost of natural disasters of 0.66 percent of GDP.

Assumes that 10 percent of carbon tax revenues are used to offset negative impact on bottom quintile of households.

It is assumed that grants of 1 percent of GDP received FY2020-FY2024 is used to capitalize self-insurance saving fund.

16. Building ex-ante resilience to natural disasters would enhance St. Lucia’s long-term macroeconomic performance. Phasing in resilience building investments could raise near-term growth by 0.2–0.3 percent (for details see 2018 St. Lucia Article IV report). Garnering donor grants, including climate funds, for such investments will be crucial to preserve a downward path for public debt. In addition, building sufficiently large ex-ante financing instruments, including a dedicated self-insurance saving fund (that would be invested in liquid, highly rated, international assets)5, risk-sharing mechanisms such as insurance products, and pre-arranged credit lines with international financial institutions (IFIs), can help St. Lucia cover the ex-post fiscal costs of natural disasters. Given the large infrastructure spending pressure in the next three years, the self-insurance fund can be built over the medium term and possibly financed by greater access to donor grants and/or over-performance of CIP revenues.

17. Adopting a fiscal responsibility framework (FRF) including a fiscal rule would couch the needed consolidation in a clear, medium-term institutional framework. The government plans to link the growth of primary current spending to the debt-to-GDP ratio, anchored by the 60 percent of GDP debt target.6 A credible and enforceable fiscal rule would help strengthen budget discipline and signal the government’s commitment to sound public finances. To be effective, the rule should encompass a comprehensive definition of fiscal activities, including the annual fiscal cost of natural disasters and the lumpy expenditure associated with infrastructure investment. The fiscal framework should also create incentives both to credibly meet the 2030 debt target and to undertake much-needed investments to build resilience.

18. Appropriate institutional and governance arrangements are needed to ensure the flexibility and enforceability of the FRF. Key elements should include:

  • Credible escape clauses (in the event of extremely large shocks) and corrective mechanisms defined in the relevant legislation.

  • Clear transition provisions that would anchor expenditures even after the debt target has been reached (to avoid a sudden relaxation of the budget constraint once debt is below 60 percent of GDP).

  • Supporting institution and governance arrangements that include: (i) robust accounting procedures (for debt, deficits, CIP inflows) and a full recording of public debt and contingent liabilities; (ii) improved fiscal projections; and (iii) effective independent fiscal oversight and accountability (one model could be Grenada’s fiscal responsibility oversight committee).

19. Efforts are needed to further strengthen public financial management (PFM). The draft PFM Bill includes comprehensive measures aimed to enhance PFM transparency and accountability, such as strengthening public asset management, setting annual ceilings for public guarantees and government borrowing (including by parastatals), consolidating legislation on public debt, improving financial statements of public institutions, and introducing enforcement mechanisms. There is also a scope to improve the public investment management framework by better aligning public investment to the budget cycle, enhancing project appraisal, and strengthening procurement planning, operations and transparency.

Authorities’ Views

20. The authorities noted that the ongoing tax reforms could be revenue enhancing in the long run. The reformed PIT and the new property tax would be easier to administer and could yield efficiency gains over time, while the hotel accommodation fee has the potential to mobilize revenue from the alternative accommodation sector such as Airbnb, which has grown substantially in St. Lucia in recent years without contributing directly to government revenues. The authorities were of the view that a VAT reduction for the hotel industry would be needed to offset the adverse impact on competitiveness. The authorities reaffirmed their commitment to eliminate VAT exemptions and zero-ratings once the social safety system has been reformed. While recently concluded negotiations on retroactive pay will increase the public sector wage bill for the current fiscal year, the authorities emphasized their commitment to restraint on current spending. On carbon taxation, while the authorities recognized its potential benefits for containing carbon emission and raising revenue and they welcomed staff’s analysis on the distributional impact, they cautioned that the tax could lead to further increases in the already-high energy costs in St. Lucia. The authorities recognized that the planned NHI system needs to be implemented in a fiscally responsible manner. As such, the authorities are considering a phased approach under which the services included in the NHI package will be contingent on the financing that can be made available.

21. The authorities are actively considering the introduction of a fiscal rule to guide public expenditure in pursuance of the 60 percent debt-to-GDP target. They emphasized that the fiscal rule should allow for a smooth expenditure path and avoid sharp adjustments to spending. They acknowledged the need to embed the fiscal rule into a broader fiscal responsibility framework, including escape clauses and a strong PFM framework. They also expressed hope that the fiscal rule will signal the government’s commitment to fiscal responsibility and therefore could reduce government borrowing costs. On climate financing, the authorities reported continuing challenges in accessing climate funds, and indicated that they would like to explore alternative financing mechanisms such as a dedicated infrastructure investment foundation with contributions from donors and the private sector. The authorities noted that that the primary purpose of the planned National Economic Fund, which is to be funded from CIP revenues, would be investment into development projects, with a small share potentially serving as a self-insurance fund against natural disasters. The authorities remained committed to fiscal structural reforms including further improving public investment management framework and introducing a new PFM Bill aimed to enhance transparency, accountability and efficiency of public financial management.

B. Strengthening Financial Sector Balance Sheets and Financial Intermediation

22. Legacy asset quality weaknesses continue to weigh on bank balance sheets. NPLs remain well above the ECCB’s 5 percent benchmark and comprise largely of long overdue exposures that are likely to be challenging to recover. Loan portfolios remain sensitive to renewed stress (the stock of impaired loans in indigenous banks’ audited financial statements are nearly twice their NPLs). Banks’ efforts to strengthen their balance sheets should therefore continue, including resolving NPLs through sales of troubled assets to the Eastern Caribbean Asset Management Company (ECAMC) or fully provisioning as required by regulation. The pending introduction of the new ECCB prudential standard on provisioning should give further impetus to loss recognition, although would likely reverse the recent improvement in indigenous banks’ capital adequacy ratios (Figure 4).7

Figure 3.
Figure 3.

St. Lucia: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Figure 4.
Figure 4.

St. Lucia: Banking System Developments

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Sources: Financial Stability Indicators, ECCB Monetary Surveys, IMF staff calculations.

23. Indigenous banks’ risk profiles are changing as they increase their exposure to foreign investments. The banking system benefits from an abundant but relatively costly local deposit base (about 43 percent of the value of deposits is subject to the minimum saving deposit rate, or MSR). Faced with limited local investment opportunities, indigenous banks have increased their overseas security exposures, particularly through investments in corporate debt. Such investments now account for about one quarter of total assets and more than twice total regulatory capital. This leaves the local banks exposed to mark-to-market losses (e.g. if global market conditions deteriorate and risk premia rise). The 2019 ECCU Discussion of Common Policies discusses the need to strengthen supervision of market risk, including attuning bank stress testing exercises to mark-to-market losses on overseas investments.

uA01fig05

Bank Credit, Investment and Liquid Claims

(Indigenous banks, in EC$ millions)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

24. Long-standing structural impediments contribute to a sustained weakness in private business credit growth. St. Lucia’s private sector comprises mostly small businesses with limited access to bank loans or lines of credit. Anecdotal information suggests that many have turned to alternative, often less affordable, non-bank financing sources. The inability of these smaller borrowers to access traditional bank financing has been exacerbated by structural credit market rigidities that include:

  • Outdated foreclosure and insolvency legislation that increase banks’ risk aversion and lead to strict loan approval requirements.8

  • Banks’ ongoing efforts to mitigate and resolve NPLs;

  • The absence of a credit bureau and registry, which creates information asymmetries about borrower risk that are exacerbated by lack of information sharing across lending institutions;

  • A shortage of acceptable collateral that is largely limited to fixed assets (real estate or land);

  • The regional MSR (currently set at 2 percent) that distorts the cost of local funding and contributes to an uneven competitive playing field between indigenous and foreign banks.

uA01fig06

Caribbean: Access to Credit as Major Constraint

(Percent of firms, 2010)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Source: 2017 World Bank Entreprise Survey and staff calculations.

25. Improving the efficiency of financial intermediation would have an important positive effect on private investment and growth. The authorities are at an advanced stage toward adopting the harmonized legislation to support establishment of the regional credit bureau and registry. Supported by technical assistance from development partners, they are also making progress on modernizing the insolvency legislation and introducing a new legal framework and online registry to facilitate the use of movable property as loan collateral. Renewed focus is needed to move forward with legislative changes to address weaknesses in the current court-driven and costly foreclosure process. The 2019 ECCU Discussion of Common Policies called for phasing out the MSR and address its social function through fiscal policies.

26. The rapidly increasing size of the credit union sector warrants a more assertive approach to regulation and supervision. The locally supervised sector has, on aggregate, sizeable capital and liquidity buffers. However, the prolonged rapid credit growth, looser lending standards and persistently high loan delinquencies increase its vulnerability to shocks, while intensifying competition is beginning to weigh on profitability (see Annex VII). The operating environment is becoming increasingly challenging for smaller credit unions with existing prudential weaknesses and capacity limitations in meeting evolving compliance and accounting requirements. Direct cross-exposures between credit unions and the rest of the financial sector appear limited, but the sector’s macro-financial significance is increasing, and disruptive shocks could have confidence effects. Modernizing the national regulatory framework through adoption of the regionally harmonized CoOperative Societies Bill remains a legislative priority. There is also a need to strengthen the sector’s prudential oversight including through regular stress-testing, timely enforcement of prudential standards, resolution frameworks and crisis management processes. It is important that the capacity of the national supervisor (Financial Services Regulatory Authority, or FSRA) keeps apace with the sector’s rising importance, as well as developments of other nonbank financial institutions including micro-lenders and broker dealers.

27. Indigenous banks have avoided major CBR disruptions, but the risks remain significant. The associated cost pressures from international banks exiting the correspondent banking business in the region have stabilized following a sizeable increase in fees in prior years. However, some banks remain hindered in offering certain client services and the active correspondents remain relatively thin and concentrated in a few institutions, underscoring the banking system’s reliance on few foreign institutions’ willingness to maintain their exposure to the region.9 Even as AML/CFT supervision of commercial banks is transferred to the ECCB, it will be key for St. Lucia to remain compliant with international standards, including by strengthening the overall AML/CFT supervisory framework and enhancing the respondent institutions’ capacity to effectively manage risks. The authorities are in the midst of the Caribbean Financial Action Task Force mutual evaluation, with a final report expected in May 2020.

Authorities’ Views

28. The authorities broadly shared staff’s assessment of the legacy and the emerging financial sector risks. They noted the tightening competitive environment in the domestic banking sector, and the need to monitor risks associated with banks’ rising overseas exposures as well as rapid non-bank domestic credit growth. They remained committed to completing the legislative initiatives to address credit market rigidities, where delays largely reflected thorough stakeholder consultations and capacity constraints. They were also mindful of rising risks in the non-bank financial sector, including pressures on smaller credit unions’ capacity to keep up with the evolving competitive landscape and regulatory requirements. The expected adoption of the harmonized Cooperative Societies Bill should help ensure adequacy of prudential buffers, but the authorities acknowledged this should be accompanied by further strengthening of FSRA’s supervisory capacity. While the imminent threat to indigenous banks’ CBRs has eased, the authorities saw a need for a more sustainable longer-term solution to mitigate the associated risks, which could involve a regional function to strengthen AML/CFT compliance and reduce compliance costs. They also noted their continued commitment to meet the relevant international standards, including on taxation rules and practices.

C. Supporting Resilient, Sustainable Growth

29. St. Lucia is committed to further enhancing resilience to climate change and natural disasters. Commendable progress has been made in implementing the recommendations of the 2018 CCPA, particularly in the areas of updating the national and sectoral adaptation plans, formulating a climate financing strategy and mobilizing resources from the global climate funds (Annex VIII). To address the remaining gaps in the climate adaptation and mitigation strategy, further efforts are needed in the active costing of climate projects, improving public financial management of climate financing and outlays, and mobilizing private investment for mitigation and adaptation. The ongoing PFM reforms should be accompanied by capacity development to ensure that climate-related investments can be systematically identified, costed, procured and evaluated.

30. Targeted reforms are needed to address supply-side impediments to private investment. According to the 2020 Doing Business indicators, St. Lucia ranks relatively low on the availability of credit, the ability to resolve insolvency, and on registering property. The country’s overall ranking has deteriorated since 2016. Implementation of new technologies can help address these challenges by modernizing land registry operations and facilitating greater online delivery of government services. An accelerated transition to renewable energy will help reduce the high electricity costs and the country’s vulnerability to oil price shocks. Achieving greater investment in renewables would require putting in place a more favorable regulatory framework (including by relaxing the existing cap on solar energy production).

31. A persistent skills gap argues for reforms to the education system. Skill mismatches in the labor market, especially in the tourism sector which accounts for nearly one half of employment, have been a long-standing impediment to labor productivity growth. Increasing enrollment in technical and vocational education and training (TVET) could help address this challenge. A more timely assessment of labor market needs would help guide TVET offerings. In addition, containing public sector wage growth will be key to narrowing the misalignment between wages and labor productivity since the public sector wage-setting process has an important effect on private sector wages.

32. Greater diversification can play an important role in providing buffers against external shocks and the seasonal nature of tourism. St. Lucia’s exports as a share of GDP have been declining steadily since 2010, and the country ranks among the least diversified in the region. Further diversifying the economy toward higher-value exports such as business ICT, agro-processing and creative industries would require better education and improved transportation infrastructure. Greater diversification within the tourism sector (including by increasing local content in the tourism supply chain and re-pivoting the country’s package-based tourism market to more diversified products such as wellness tourism, ecotourism and city tours for cruise passengers) could also help boost growth.

33. Continued efforts are needed to improve data quality. While data provision is broadly adequate for surveillance, the lack of historical data on the external sector based on BPM6 and frequent revisions to the historical data pose challenges to macroeconomic analysis and need to be addressed with continued technical assistance from development partners and more resources for capacity development.

Authorities’ Views

34. The authorities remained committed to implementing the national Climate Change Adaption Policy. Resilience to natural disasters is an important aspect of public investment and is embedded in the planned infrastructure projects. Progress has been made to update the national and sectoral adaptation plans, prepare a climate finance strategy to match investment priorities to potential funding sources, and formulate a country program with the Green Climate Fund to unlock financing. They also underscored the importance of continued donor support including technical assistance on capacity development and access to concessional financing.

35. The authorities agreed that structural reforms are needed to boost St. Lucia’s productivity and competitiveness. Efforts to improve the business environment for private initiatives are under way, including through greater use of online delivery of government services and implementation of new technologies. The ongoing labor market assessment will help the formulation of a strategy to address skill mismatches and youth unemployment. In this regard, greater intra-regional labor mobility can also help reduce labor market rigidities. The authorities recognized that energy costs are high in St. Lucia but removing the cap on solar electricity production would require legislative changes.

36. The authorities acknowledged the benefits from greater economic diversification including in the tourism sector. Implementation of the Village Tourism program would spur the local economy while preserving St. Lucia’s high-end destination quality, and re-development of the Castries downtown area can help transform the area into a tourist attraction. Further development of wellness tourism and ecotourism also has the potential to increase local content in the tourism supply chain. In addition, the authorities saw potential to expand the ICT and agro-processing sectors to meet the demand of a growing tourism sector. On the other hand, some fiscal subsidies are needed to support the development of the manufacturing sector and SMEs given their competitiveness challenges.

Staff Appraisal

37. St. Lucia’s near-term growth prospects are favorable, but policy adjustments will be needed to strengthen longer-term growth. The commencement of large public infrastructure projects is expected to substantially boost growth in 2020–22 but will raise public debt and weaken the external position. However, a deeper-than-expected slowdown in major source markets for tourism, energy price shocks, disruptions to global financial markets, and loss of CBR all represent downside risks. St. Lucia’s high vulnerability to natural disasters constitutes an ever-present risk to both growth and the fiscal outlook. Longer-term growth continues to be impeded by the high public debt, lingering vulnerabilities in the financial system, and structural impediments to private investment. On the other hand, there is an upside that infrastructure investment could catalyze a greater-than-expected expansion of the tourism sector and related activities. While the overall external position is assessed to be broadly consistent with the level implied by fundamentals and desirable policies, St. Lucia still has considerable competitiveness challenges, particularly in its non-tourism sector, that need to be addressed.

38. Fiscal policies should be geared toward rebuilding policy space and ensuring public debt converges to the regional target of 60 percent of GDP by 2030. The debt-financed infrastructure investments, despite being on semi-concessional terms with long-run repayment largely covered by dedicated revenue streams, will move public debt further away from the regional target. The need to invest in climate resilience and the uncertainty over future CIP revenues pose additional challenges to public finances. Without policy adjustments, debt vulnerabilities are elevated, and public debt does not stabilize over the near term.

39. The government’s near-term focus should be on revenue-enhancing measures and investments that build resilience to climate related shocks. In addition to limiting current spending growth (particularly the public wage bill), additional revenues should be mobilized from the proposed hotel accommodation fee, the introduction of a carbon tax, and reducing the scope of VAT exemptions. Since some of these measures will likely be regressive, they should be introduced in parallel with targeted transfers that offset the impact on poor and vulnerable households. The National Health Insurance system should also be introduced in a fiscally responsible manner. Concerted efforts are also needed to mobilize donor grants to fund investments in climate resilience. If there is over-performance of the CIP, or of other revenue sources, it should be directed toward financing a self-insurance fund to bolster the economy’s resilience against natural disasters.

40. A fiscal rule would help anchor fiscal policy over the medium term and support consolidation efforts. To be effective, the fiscal rule should encompass a comprehensive definition of fiscal activities, including the fiscal costs of natural disasters and the lumpy expenditure associated with infrastructure investment, and should be part of a broader fiscal responsibility framework that embeds appropriate institutional and governance arrangements to ensure both the appropriate degree of flexibility as well as enforceability of the fiscal rule. The fiscal rule will also need to be carefully calibrated to strike the balance between credibly meeting the debt target over the medium-term and providing space for much-needed spending to build resilience.

41. To support private sector investment, measures are needed to address constraints on financial intermediation. There is scope to improve credit market efficiency by modernizing foreclosure and insolvency legislation, establishing a regional credit bureau and registry, and taking steps to allow for the greater use of movable property as loan collateral.

42. Emerging financial sector risks warrant a more assertive approach to regulation and supervision. The banks’ rising allocation of their assets to overseas debt securities has supported bank profitability but may also expose the sector to losses if global financial market conditions deteriorate or risk premia rise. The rapid expansion of credit unions has increased the sector’s macro-financial significance that warrants stronger oversight. The swift adoption of the Harmonized Co-operative Societies Act, combined with a strengthening of supervisory oversight of the non-bank financial sector, remain key policy priorities. In addition, continued efforts are needed to satisfy international taxation and AML/CFT standards.

43. Efforts are needed to further enhance resilience to climate change and natural disasters. Progress has been made in implementing recommendations of the CCPA. Key measures to address the remaining institutional, financing and capacity gaps include the active costing of climate projects, improving public financial management of climate financing and outlays, mobilizing private investment in mitigation and adaptation and strengthening capacity in managing climate-related investments.

44. Decisive and targeted reforms are needed to address supply-side impediments to long-term growth. Enhancing productivity will require a better alignment of the education system with labor market needs. There is scope to improve the business environment by enhancing access to credit and reducing electricity costs, further diversifying the economy toward higher-value exports, and increasing local content in the tourism supply chain.

45. Staff recommends that the next Article IV Consultation for St. Lucia take place on the standard 12-month cycle.

Figure 5.
Figure 5.

St. Lucia: Credit Union Sector Developments

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Sources: St. Lucia FSRA, ECCB Monetary Surveys, IMF staff calculations.
Figure 6.
Figure 6.

St. Lucia: External Competitiveness and Structural Weaknesses

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Table 1.

St. Lucia: Selected Social and Economic Indicators, 2015–24

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Sources: St. Lucia authorities; ECCB; UNDP HDI; and Fund staff estimates and projections.

Fiscal year (April–March) basis. Fiscal balances do not include the airport project, which is implemented by a public corporation.

Comprises public sector external debt, foreign liabilities of commercial banks and other private debt.

Comprises investment by the central government and construction expenditures of public corporations, incl. the US$175 million airport project.

Table 2a.

St. Lucia: Central Government Operations, 2015–24 1/(In millions of EC dollars)

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Sources: Ministry of Finance; and Fund staff estimates and projections.

Fiscal year (April–March) basis.

Includes revenue from the Airport Development Tax, which is fully transferred to St. Lucia Air and Sea Ports Authority (SLASPA).

Includes transfer to SLASPA corresponding to the Airport Development Tax.

Includes roads rehabilitation in 2019–21 financed through a US$50 million from the government of the Taiwan, Province of China.

Natural disaster costs are annualized estimated costs of 0.7 percent of GDP (for details see 2018 Article IV report).

Includes a government guarantee for a US$75 million syndicated loan from private banks to SLASPA for the redevelopment of Hewanorra airport.

Includes a government guarantee for a US$100 million loan from the government of the Taiwan, Province of China, to SLASPA for the redevelopment of Hewanorra airport.

Table 2b.

St. Lucia: Central Government Operations, 2015–24 1/

(In percent of GDP)

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Sources: Ministry of Finance; and Fund staff estimates and projections.

Fiscal year (April–March) basis. Figures shown for a given calendar year relate to the fiscal year beginning on April 1 of that year.

Includes revenue from the Airport Development Tax, which is fully transferred to St. Lucia Air and Sea Ports Authority (SLASPA).

Includes transfer to SLASPA corresponding to the Airport Development Tax.

Includes roads rehabilitation in 2019–21 financed through a US$50 million from the government of the Taiwan, Province of China.

Natural disaster costs are annualized estimated costs of 0.7 percent of GDP (for details see 2018 Article IV report).

Includes a government guarantee for a US$75 million syndicated loan from private banks to SLASPA for the redevelopment of Hewanorra airport.

Includes a government guarantee for a US$100 million loan from the government of the Taiwan, Province of China, to SLASPA for the redevelopment of Hewanorra airport.

Table 3.

St. Lucia: Balance of Payments Summary, 2015–24

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Sources: Ministry of Finance and Planning; ECCB; World Bank, and Fund staff estimates and projections.

Includes collections from the Airport Development tax.

Includes largely gross foreign liabilities of commercial banks and other private debt.

Table 4.

St. Lucia: Monetary Survey, 2015–19

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Sources: St. Lucia authorities; ECCB; and Fund staff estimates and projections.

End-of-period rates.

Table 5.

St. Lucia: Banking System Summary Data, 2013–18

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Correspond to indigenous banks only.

Sources: ECCB; and IMF staff estimates.

Annex I. Implementation of Previous Staff Advice

Progress on 2018 Article IV Policy Recommendations

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Annex II. External Sector Assessment

St. Lucia’s external position in 2018 is assessed to be broadly consistent with the level implied by medium term fundamentals and desirable policies. Despite an improvement in the current account balance, other indicators including the Doing Business Ranking, labor productivity growth and unit labor costs highlight St. Lucia’s competitiveness challenges and the need for supply-side reforms.

1. The current account balance turned positive in 2018. The most recent ECCB revisions to BoP-BPM6 data resulted in lower current account estimates for 2014–18 (the downward revisions for the current account balance of 2017 and 2018 were more than 2 percent of GDP).1 Nevertheless, the estimations are subject to further changes due to revisions to the tourist expenditure surveys, and consequently, service receipts estimates. 2 Preliminary estimates based on the latest trade and tourism data from the authorities indicate that the current account surplus could increase further in 2019 owing to robust tourism receipts (including the US$35 airport development tax that the government started to collect in January 2018), but the current account balance is expected to turn negative starting in 2020 due to the construction of the large infrastructure projects. Historically St. Lucia’s current account deficits have been mostly financed by FDI, while disbursement of the project loans will contribute to finance the current account deficit in the medium term.

uA01fig07

Current Account Balance (BPM6)

(In percent of GDP)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

2. The real effective exchange rate (REER) appreciated since the second half of 2018. This trend was driven by a nominal appreciation of the exchange rate in 2018 reflecting a stronger U.S. dollar (to which the E.C. dollar is pegged). The imputed net international reserves held at the ECCB remained above the reserve adequacy thresholds in 2018. As a member of the ECCU, reserve adequacy is assessed based on the net imputed reserves held at the ECCB. The reserve coverage—of about 14 percent of GDP in 2018 corresponding to 3.4 months of imports and 23 percent of broad money—exceeds the ECCB benchmarks of 3 months and 20 percent, respectively.

uA01fig08

REER Appreciation

(In percent, year-on-year contribution to growth)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Sources: INS Database; and IMF Staff Estimates.
uA01fig09

Foreign Currency Reserves and Adequacy Thresholds

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Sources: Country Authorities; and IMF Staff Estimates.

St. Lucia: External Sector Assessment

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Percent of GDP.

Multilaterally consistent. Includes adjustment due to the Airport Development Tax.

Positive number indicates overvaluation.

The REER gap is negative when the REER must appreciate to stabilize the NFA at its 2018 level. NIIP represented -55 percent of GDP in 2018.

3. Staff assess the 2018 external position to be broadly consistent with the level implied by fundamentals and desirable policies. The EBA-lite CA model yields a CA norm of -2 percent of GDP in 2018, implying a CA gap of about 4.2 percent of GDP and an undervaluation of the effective exchange rate of 20 percent. However, the EBA-lite REER model points to a REER undervaluation of only 3.9 percent. The improvement in the current account in 2018 (and 2019) reflected in part a temporary increase in national savings due to the collection of the airport development tax (0.7 percent of GDP in 2018) which is not accounted for in the CA model and will be offset by higher imports once construction of the airport project starts.3 Adjusting for the airport development tax, the EBA-lite CA model yields a CA gap of about 3.8 percent of GDP and an undervaluation of the effective exchange rate of 18 percent (see table). However, these results should be interpreted with caution given the large uncertainties in the current account data, partly due to the expected revisions to the tourism exports data.4 At the same time, the EBA-lite REER model has tracked the actual data reasonably well (see figure) and does not suffer from the risk of large revisions (St. Lucia’s REER series has also been less volatile than those of some other ECCU countries). Thus, staff base the assessment on the REER model, which implies that the external position is broadly consistent with the level implied by fundamentals and desirable policies.5 The NIIP, estimated at -55 percent of GDP as of 2018, is assessed to be sustainable under the EBA-lite external sustainability (ES) approach.

uA01fig10

IREER (index of REER): Actual, Fitted, and Norm

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Source: EBA-lite model, IMF staff calculations.

4. St. Lucia’s external position is stronger compared to the other members of the ECCU. The 2019 ECCU Discussion of Common Policies indicates that the external position of the currency union was weaker than that consistent with fundamentals and desirable policies by 3½ percent of GDP (and the REER was overvalued by 9 percent in 2018), in part due to rising imports for post-disaster reconstruction in Dominica. As several countries in the currency union are still recovering from the 2017 hurricanes, St. Lucia’s share in the region’s exports market has been rising, contributing to its strong external position relative to others in the currency union.

uA01fig11

Exports of Goods and Services

(in percent)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Source: St. lucia authoirities and IMF staff calculations.

5. A range of non-price indicators point to St. Lucia’s long-standing competitiveness challenges particularly in the non-tourism sector. The World Bank Doing Business ranking indicates St. Lucia’ overall ranking has continued to fall from 86 in 2017 to 93 in the 2020 vintage. Major weakness exists in the areas of getting credit (mainly linked to the lack of credit information/absence of a credit bureau), resolving insolvency (due to a weak legal framework), and registering property (driven by high costs respect to the value of properties and a large number of procedures needed.). In addition, productivity per worker has been flat during the last decade, while labor costs have increased by around 10 percent, indicating a disconnect between wages and productivity. The country’s narrow production and export base also means that competitiveness of the non-tourism sector is even weaker.

6. In the medium-term, St. Lucia’s current account balance is projected to decline considerably due to the rising public investment. The large infrastructure projects will increase imports, only partly offset by the projected steady growth in tourist arrivals. This outlook is subject to potentially large downside risks, including lower than expected growth in major tourist source countries, natural disasters, and increases in oil prices. The projected increase in St. Lucia’s imports (and the corresponding decline in its current account balance) should also unwind the discrepancy between the external positions of St. Lucia and the ECCU. This outlook, together with St. Lucia’s high public debt, highlight the needs to rebuild policy space through fiscal consolidation and address structural impediments to competitiveness and long-run growth.

Annex III. Risk Assessment Matrix1

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Annex IV. Debt Sustainability Analysis1

Public debt as a percentage of GDP declined slightly to reach 64 percent at the end of FY2018, in part owing to benign external economic conditions. However, being projected to rise to 74 percent of GDP by FY2024 debt vulnerabilities are elevated and under current policies public debt does not stabilize over the near term. Financing needs were 18.8 percent of GDP and will remain elevated over the medium term. The heat map points to substantial risks to debt sustainability from lower growth and growing fiscal deficits. Debt dynamics are also vulnerable to natural disasters, as illustrated in a stress test scenario. Reducing public debt to sustainable levels will require fiscal consolidation, in particular by developing new revenue sources, and continued progress with lowering borrowing cost.

1. Debt dynamics and gross financing requirements. Gross public debt as a percentage of GDP declined to 64.3 percent at the of FY2018, compared to 65.5 percent a year earlier.2 As in the year before the decline in the debt ratio was driven by the primary surplus of the central government, but unlike in FY2017 real GDP growth contributed only little. Guaranteed and non-guaranteed debt of public corporations expressed as a percentage of GDP remained constant at 3.8 percent, or 5.8 percent of gross public debt. In FY2018 gross financing needs amounted to 18.8 percent of GDP as Treasury bills and bonds on the regional government securities market (RGSM) came due. In the near-term debt will rise due to the US$175 million (9.1 percent of GDP) airport redevelopment project and other major capital projects (see main text). The associated financing needs are covered by semi-concessional loans from Taiwan, Province of China, with the grant element estimated at 10 percent, and a US$75 million syndicated loan from local and regional banks. Over the medium-term public debt will continue to rise towards 74 percent of GDP. Annual financing needs will remain high at around 18 percent of GDP.

2. Debt composition and vulnerabilities. Domestic debt is 49.7 percent of total central government debt, composed of medium- and long-term debt (93.4 percent), with Treasury bills (4.5 percent) and overdrafts (2.1 percent). External debt of the central government debt is 50.3 percent of the total and is composed of bilateral or multilateral loans (42.7 percent), medium-and long-term commercial borrowings (43.1 percent), and Treasury bills (14.2 percent). Commercial banks in the ECCU are the largest holder of Treasury bills, reflecting excess liquidity in the regional banking system and thus providing support to the government’s financing needs. Having peaked at 21.5 percent in 2016, the share of short-term debt in total central government debt has declined to 10.4 percent, and the government is pursuing further efforts to lengthen maturities and reduce issuance of Treasury bills. Similar to other countries in the region, a sinking fund has been set up to manage redemptions of maturing bonds. Most borrowings of public corporations are domestic (81.6 percent out of total debt of public corporations), but with the implementation of the airport redevelopment project the external share will rise. Debt in foreign currencies is overwhelmingly denominated in U.S. dollars, which the Eastern Caribbean dollar remains pegged to since 1976.

3. Realism of baseline assumptions. After a robust but short expansion over the near-term staff forecasts growth to return to its potential of 1.5 percent, with inflation remaining near 2 percent throughout the projection period. While the fiscal stance of the central government accounts remains broadly neutral this debt sustainability analysis includes in the fiscal balance the airport redevelopment project that is being executed by a public corporation (see information in main text). The adjusted primary balance is therefore sharply negative in FY2020 and FY2021 and is the primary driver of the rise in debt. Forecasts errors for growth, inflation, and the primary balance have been large but declined markedly in 2018. Forecast errors for the primary balance are partially explained by the upward revision of nominal GDP by the Statistics Office as the revised actuals for the primary deficits are now smaller and make past forecasts appear overly pessimistic.

4. Stress tests. Debt dynamics are inherently vulnerable to adverse macro-fiscal shocks. As discussed in Annex III as a tourism-dependent economy St. Lucia is very exposed to external economic conditions, and a slowdown in advanced economies could bring about a decline in tourist arrivals, as experienced in the Global Financial Crisis. Illustrating this risk, the real GDP growth shock scenario, which reduces growth by one standard deviation (2 percent) over 2020 and 2021, steers public debt towards 80 percent of GDP over the medium-term. The primary balance shock, a one standard deviation (2.3 percent of GDP) deterioration in the primary balance spread over 2020 and 2021, induces a succinct rise in public debt but thanks to sustained growth the medium-term debt dynamics are more favorable than under the real GDP growth shock. The deterioration of the primary balance is equally distributed over the revenue and expenditure side to allow an interpretation of either a lapse of fiscal restraint or a sudden fall in revenues, e.g. a drop in CIP revenues. The natural disaster scenario, modeled to mimic damages sustained by Hurricane Tomas in 2010, simulates a fall of real GDP growth of 5, 3, and 2 percent relative to baseline for 2020, 2021, and 2022, and a deterioration of the primary balance of the same amount. Under the shock scenario financing needs climb to almost 30 percent of GDP and debt rises even more rapidly than under the combined macro-fiscal shock, reaching more than 80 percent of GDP by 2021.

5. External debt. External debt of the public sector declined from 34 percent of GDP at end-FY2017 to 31.4 percent of GDP at end-FY2018, with the decline primarily reflecting an improvement in the current account.3 Driven by the external semi-concessional loan for the airport redevelopment external debt in the baseline is to rise markedly and to reach 38 percent of GDP by FY2024. Reflecting the importance of tourism revenues for the economy, bound tests suggest that the external debt profile is vulnerable to shocks in the non-interest current account, i.e., a permanent one-half standard deviation deterioration in the non-interest current account would bring external debt to 47 percent of GDP by 2024.

Annex IV Figure 1.
Annex IV Figure 1.

St. Lucia: Public DSA Risk Assessment

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Source: IMF staff.1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.4/ EMBIG, an average over the last 3 months, 09-Oct-19 through 07-Jan-20.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.
Annex IV Figure 2.
Annex IV Figure 2.

St. Lucia: Public DSA – Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Source : IMF Staff.1/ Plotted distribution includes all countries, percentile rank refers to all countries.2/ Projections made in the spring WEO vintage of the preceding year.3/ Not applicable for St. Lucia, as it meets neither the positive output gap criterion nor the private credit growth criterion.4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.
Annex IV Figure 3.
Annex IV Figure 3.

St. Lucia: Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

(In percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Source: IMF staff.1/ Public sector is defined the central government and includes public corporations.2/ Based on available data.3/ EMBIG.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r – π(1+g) – g + ae(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; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r – π (1+g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).8/ Includes changes in the stock of guarantees, asset changes, and interest revenues (if any). For projections, includes exchange rate changes during the projection period.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.
Annex IV Figure 4.
Annex IV Figure 4.

St. Lucia: Public DSA – Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Source: IMF staff.
Annex IV Table 1.

St. Lucia: External Debt Sustainability Framework, 2014–24

(In percent of GDP, unless otherwise indicated)

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

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

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

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

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.

Average and standard deviation computed with available BPM6 data since 2014.

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.

Annex IV Figure 6.
Annex IV Figure 6.

St. Lucia: External Debt Sustainability: Bound Tests 1/ 2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

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 current account balance.4/ One-time real depreciation of 30 percent occurs in 2019.

Annex V. The Potential Impact of the Hotel Accommodation Fee1

Tourism is the most important sector for the St. Lucian economy and an important revenue source. Using a novel dataset, we measure the elasticity of tourist arrivals to variations in prices, while considering other elements that might affect tourism market demand and supply. The estimated low elasticity suggests limited impact of the proposed hotel accommodation fee on competitiveness.

1. St. Lucia’s tourism sector has been growing steadily in recent years, outpacing other ECCU countries. In 2018, St. Lucia hosted almost 400,000 stayover tourists, more than twice of its total population.2 Despite the increase of the airport tax and the introduction of the airport development tax in 2017–18,3 the number of stayover arrivals grew by 11 and 2.2 percent in 2017 and 2018, respectively, in part due to the diversion of tourists from the neighboring countries that were affected by Hurricane Irma in 2017.

uA01fig12

ECCU: Index of Stay-Over arrivals

(2007=100)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Source: IMF staff calculations; CTO.

2. The impact of the proposed Hotel Accommodation Fee (HAF) on tourist arrivals depends on supply and demand elasticities. Tourism supply and demand respond to a complicated interaction between final consumers (i.e. tourists) and providers of products (such as lodging and transportation companies, marketing, and travel agencies.) One simplification in the analysis is to consider the fee as a price component of tourist expenditure. The overall impact of prices on tourist demand in the Caribbean has been analyzed in Laframboise et al. (2014), Ghazanchyan et al. (2019) and Bolaky (2011). They found that the number of tourist arrivals in the region is not overly sensitive to changes in prices; indeed, it responds more to external factors such as income in tourist source countries. This finding might be a characteristic of high-end destinations (Tran, 2011). On the other hand, while the supply of tourism products, at least in the short-term, is considered inelastic to prices, the hotel industry has benefitted during the past couple of decades from technological advances including price discrimination techniques (Ghose et al., 2012.) These elements might contribute to scenarios where a combination of new taxes and price discrimination do not necessarily affect the efficiency of the tourism sector (Gu and Tam, 2014.)

3. The IMF-Week at the Beach index (W@tB), a novel database for tourist expenditure, suggests that the Caribbean is the most expensive beach destination.4 Most Caribbean countries report an average cost in the range of $1,300–2,300 excluding airfares ($1,900–3,000 including airfares from/to Miami). A week at the beach in St. Lucia at a 3–4 bubble rating hotel (according to the TripAdvisor scale) might cost around $1,600 excluding airfares, or $2,500 including a roundtrip airfare.

uA01fig13

Week at the Beach Index – Heat Map of Hotel Rates

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

4. Compared to the overall cost, the introduction of the HAF would add around 1.4 percent (or $33) to the average per capita cost of spending one week in St. Lucia. The fee does not affect the relative position of St. Lucia in the ranking among the Caribbean tourist destinations (including W@tB costs plus a roundtrip airfare from/to Miami).

5. To quantify the impact of price changes, we estimate the demand of tourist services proxied by the number of stayover arrivals. The econometric specification follows Laframboise et al. (2014) and Ghazanchyan et al. (2019) with a country specific model for St. Lucia and the monthly W@tB index. The general specification is:

ln ⁡ ( # a r r i v ) = α + β 1 ln ⁡ ( Pr ⁡ i c e ) + β 2 ln ⁡ ( I n c − U S ) + β 3 ln ⁡ ( A i r − c a p ) + β [ c o n t r o l s ] + ϵ

Since the main variables are expressed in natural logarithms, the interpretation of the β coefficients can be done in terms of elasticities. We gathered monthly data reflecting quantities, prices, and other control variables affecting the tourism market in St. Lucia.

6. Our results suggest the following determinants for tourism demand (Table 1).

  • Prices. The W@tB index represents an innovation in the specification and it is our preferred proxy for prices in the tourism industry. A 1.0 percent increase in the index is associated with 0.25–0.34 percent decrease in arrivals (Table 1). Alternative specifications, including measures of the REER weighted by trading-partners or tourism-source-countries (as in Laframboise et al. 2014 and Ghazanchyan et al. 2019) are not statistically significant.

  • Income in tourist source countries. A 1.0 percent increase in the index of U.S. retail sales would represent a 0.5–0.62 percent increase in arrivals.

  • Supply/connectivity factors. The monthly airlift capacity (measured by the number of seats available) has a positive and statistically significant impact on arrivals. A 1.0 percent increase in the number of available seats is associated with a 1.5–1.6 percent increase in the number of total arrivals.

  • Other factors. Drawing on the annual Emergency Events Database (EM-DAT), we built a monthly series of natural disasters. While the number of observations is limited within the sample period, our results suggest that a natural disaster that causes damage of 1 percent of GDP would reduce stayover arrivals by 1.6 percent.

Annex V. Table 1.

Determinants of Stay-over Arrivals

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Robust pval in parentheses *** p<0.01, ** p<0.05, * p<0.1

Logarithm of the index (2015M1=100)

Include seasonal dummies (not reported).

7. For robustness checks, we also analyze whether tourists from distinct parts of the world might respond with varying intensity to changes in prices. We run the previously described specification replacing the dependent variable “total stayover arrivals” by total arrivals from each of the main tourism source regions. Our results, reported in Table 2, suggest that only the specification for tourists from the Caribbean shows a statistically significant price elasticity, which is approximately 3 times higher than the one reported for the whole sample in Table 1. This result indicates that a 1 percent increase in prices might lead to a 1.07 percent reduction of tourist arrivals from the Caribbean region. The specifications corresponding to visitors from the U.S., the U.K. and Canada show price elasticities that are not statistically different from zero.

Annex V. Table 2.

Sensitivity of Price Elasticity by Tourist Country Source

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Robust pval reported below the coefficient

a/ Logarithm of the index (2015M1=100)

All specifications Include seasonal dummi es and other controls (not reported).

8. Given the above price elasticity estimates and the magnitude of the proposed HAF, the implementation of the measure would have little effect on the number of tourist arrivals. Our findings suggest that the number of visitors might fall by 0.3–0.4 percent, or 1300–1700 tourists annually.

References

  • Bolaky, Bineswaree, 2011. “Tourism competitiveness in the Caribbean,” Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.

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  • Ghose, Anindya and Ipeirotis, Panagiotis G. and Li, Beibei, “Designing Ranking Systems for Hotels on Travel Search Engines by Mining User-Generated and Crowd-Sourced Content”, Marketing Science, Vol. 31, No. 3, May–June 2012, pp. 493–520.

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  • Gu, Xinhua and Tam, Pui Sun, (2014), “Tax incidence and price discrimination: An application of theories to gambling markets”, China Economic Review, 28, issue C, p. 135–151

    • Search Google Scholar
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  • Manuk Ghazanchyan & Li Zhao & Steve Brito & Vivian Parlak, 2019. “New Insights into ECCU’s Tourism Sector Competitiveness,” IMF Working Papers 19/154, International Monetary Fund.

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    • Export Citation

  • Nicole Laframboise & Nkunde Mwase & Joonkyu Park & Yingke Zhou, 2014. “Revisiting Tourism Flows to the Caribbean; What is Driving Arrivals?” IMF Working Papers 14/229, International Monetary Fund.

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    • Export Citation

  • Tran, X. (2011). “Price sensitivity of customers in luxurious hotels in U.S.”, e-Review of Tourism Research. 9. 122–133.

Annex VI. Carbon Taxation in St. Lucia: An Update1

St. Lucia’s mitigation plan relies on greater energy efficiency and a shift to renewable energies. But overall emissions continue to rise as the renewable share is growing only slowly and the country is at risk of missing its emission reduction targets from the 2015 Paris Agreement. A carbon tax – a charge on the carbon content of fossil fuels – can complement mitigation efforts by strengthening incentives for shifting to renewables, reducing energy consumption, and improving energy efficiency. At the same time the tax can also mobilize urgently needed revenue to support debt sustainability. Building on the work for the 2018 Climate Change Policy Assessment, this annex provides updated projections for emissions and fiscal revenues under various carbon tax scenarios. It also discusses concerns about the distributional impact of a carbon tax and its impact on competitiveness for energy-intensive industries.

A. Supporting Mitigation through Carbon Taxes

1. St. Lucia’s mitigation strategy focuses on renewable energies and energy efficiency. For the 2015 Paris Agreement, St. Lucia pledged to limit greenhouse gases (GHGs) to 634 and 628 kilo-tons (or Gg) of CO2 equivalent in 2025 and 2030 respectively, reductions of 16 and 23 percent below projected ‘business as usual’ (BAU) levels in those years. The commitment is underpinned by a plan to expand the share of renewable power generation, currently around 2 percent, to 35 percent by 2025 and 50 percent by 2030. However, achieving this target appears challenging given limited progress with increasing solar capacity and setbacks with wind and geothermal projects.

2. A carbon tax would leverage St. Lucia’s mitigation strategy by strengthening incentives for shifting to renewables and improving energy efficiency. The tax would raise the gap in generation costs between conventional and renewable energies and thus stimulate investment into renewables, provided that structural bottlenecks impeding the expansion of renewables are resolved (see main text). Also, carbon taxes are far more effective at exploiting emissions mitigation opportunities than other policies since they encourage the full range of behavioral responses of households and firms for reducing energy use at the lowest cost (e.g. conserving energy better, purchasing more efficient appliances, etc.).2 Administratively, a carbon tax is straightforward to implement as a modification of existing fuel taxes and is virtually impossible to avoid. Furthermore, a carbon tax can also improve energy security by reducing dependence on oil imports from geopolitical volatile regions.

B. Projections for Emissions and Fiscal Revenues

3. In St. Lucia power generation and transportation each account for more than

40 percent of total emissions, yet the current excise tax system treats the two sectors unevenly. In 2018, power generation accounted for 47 percent of fossil fuel CO2 emissions, transportation 41 percent, LPG 8 percent and other commercial use 4 percent (see Figure 1).3 However, three quarters of excise tax revenues were generated by the transportation sector (see Table 1). Road fuels are subject to an EC$4 per gallon excise tax (annual revenues of 1.5 percent of GDP)4 while the levy on diesel for power generation is only EC$1 per gallon (annual revenues of 0.4 percent of GDP)5. LPG is not subject to an excise tax but rather it is subsidized at an annual cost of 0.1 percent of GDP.6

Annex VI. Figure 1.
Annex VI. Figure 1.

CO2 Emission Shares

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Source: MoF, LUCELEC, and IMF staff calculations.
Annex VI. Table 1.

Excises and Levies On Fossil Fuels (2018)

article image
Source: MoF, LUCELEC, and IMF staff calculations.

4. There is scope for a modest increase in energy prices from a regional perspective. Road fuel prices are already higher in St. Lucia than in most regional comparators while electricity prices are lower than in some comparator markets (see Figure 2). Both electricity and road fuels are zero-rated items under St. Lucia’s VAT Act while in some other countries electricity is not (or only partially) exempt from VAT. The increase of energy prices resulting from a US$50 carbon tax—as illustrated by the red boxes in Figure 2—does not appear to materially affect the ranking of electricity and fuel prices relative to comparator countries.

Annex VI. Figure 2:
Annex VI. Figure 2:

Regional Energy Prices (2017)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Source: IMF staff calculations.

5. A spreadsheet model is used to assess the impact of a carbon tax on emissions and fiscal revenues. The model projects fuel use and electricity demand through 2030 using calibrated income and price elasticities combined with assumptions about improvements in energy efficiency and the transition to renewables.7 The BAU scenario (with no further changes to the fuel tax system) is compared to various scenarios with a carbon tax and accelerated transition to renewables. In all carbon tax scenarios, the tax is phased in gradually on top of current excise taxes on diesel for power generation, road fuels, fuels for other commercial use, and subsidies for LPG.8 Scenarios with a faster transition to renewables simulate an increase in the renewable share in electricity generation to 50 percent by 2030, consistent with St. Lucia’s pledge under the Paris Agreement.

6. The model projections show that while the carbon tax can raise sizable revenues, a more forceful expansion of renewables is needed to attain the emission reduction targets by 2030. By itself, a carbon tax rising to US$50 per ton (EC$135) in 2030 reduces emissions by an estimated 7.5 percent below BAU levels in 2030 (see Figure 3).9 Doubling the carbon tax to US$100 reduces emissions 14 percent. If renewables could be expanded in line with the NDC pledge, economy-wide emissions would be reduced 25 percent. Combining this renewables scenario with the US$50 and US$100 carbon taxes cuts 2030 emissions by 30 and 34 percent respectively. In terms of revenues10, the US$50 and US$100 carbon taxes by themselves would be raising 1.1 and 2.1 percent of GDP in extra revenue in 2030, compared with the BAU and accounting for the erosion in the base of pre-existing fuel taxes. When combined with the renewables policy (which further erodes the tax base from diesel used in power generation) extra revenues from the carbon taxes are 0.7 and 1.4 percent of GDP respectively.

Annex VI. Figure 3.
Annex VI. Figure 3.

Model Projections For Carbon Tax Scenarios

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Source: IMF staff calculations.

C. Distributional Impact and Competitiveness

7. While carbon taxes are effective for mitigation and fiscal purposes, they can be regressive if spending on energy or energy-intensive products by the most vulnerable is disproportionately high. The distributional and social impact of the tax depends on the spending patterns of different segments of the population and the assessment must incorporate the effect from both direct price changes of energy products and indirect price changes of non-energy products. Indirect effects emerge as the carbon tax is passed on along the supply chain into the prices of intermediate and ultimately final goods and in practice such effects, while not as visible as direct increases in fuel and electricity prices, are often sizable. If the tax is found to be regressive poorer households could be compensated through means-tested cash or in-kind transfers (provided the social safety net and administrative capacity are sufficiently effective) or assistance for household energy bills (though this reduces environmental effectiveness of the tax and there are limitations to compensate for indirect effects).

8. In St. Lucia a carbon tax would be mildly regressive because of relatively high spending shares for electricity and cooking gas among poorer households. Based on analysis of the 2016 Household Survey of Living Conditions and Household Budgets (SLC/HBS) poorer households spend a larger proportion of their total expenditures on electricity and cooking gas than more affluent households, while the reverse holds for purchases of gasoline and diesel (due to lower car ownership among lower poorer households). As shown in Figure 4 these spending patterns result in the carbon tax being mildly regressive, with the tax burden of the poorest 20 percent amounting to 1.4 percent of their total consumption compared to only 1.2 percent of the wealthiest 20 percent.11 Indirect effects are significant (about 0.6 percent of total household consumption), yet they affect all segments similarly.

Annex VI. Figure 4.
Annex VI. Figure 4.

Burden of a US$50 Carbon Tax on Households

(In percent of total household consumption)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Source: IMF staff calculations.

9. Nonetheless, compensating poorer households for the loss of purchasing power would require only relatively modest resources. Despite being regressive in relative terms the absolute burden of the carbon tax falls mostly on affluent households that have higher total spending. The poorest 20 percent of households pay (directly or indirectly) only 9.4 percent of the carbon tax revenue. If a corresponding share of total proceeds was used for targeted assistance these households as a group would be as well as off as before the tax. The analysis also demonstrates that the current subsidization of LPG, which in part is motivated by the high spending by the most vulnerable households, is not an effective social policy. Only 14.3 percent of economy-wide spending on LPG can be attributed to the poorest 20 percent of households and thus most of the subsidy ends up benefitting wealthier households. In sum, these results should encourage accelerated work to improve the social safety net and administrative capacities, such as implementing a central beneficiary registry.12

10. The carbon tax increases production costs for energy-intensive sectors (e.g. transportation, hotels, fisheries) to a limited extent. From the producers’ perspective a carbon tax increases production costs, resulting in depressed profits margins if the rise in costs cannot be passed on to consumers. For sectors that compete in international markets, such as tourism, a carbon tax that is introduced unilaterally would adversely affect competitiveness. Figure 5 shows that with a US$50 carbon tax production costs rise by 0.6 percent on average and by 1.3 percent for the most energy-intensive industries.13 Importantly, these numbers represent an upper bound to the cost increase since in practice firms will substitute towards less energy-intensive intermediate inputs and may reduce energy use through investment into new and more energy-efficient equipment.

Figure 5.
Figure 5.

Burden of a US$50 Carbon Tax on Industries

(Output-weighted average cost increase by cumulative industry share, in percent)

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

Source: IMF staff calculations.

References

  • Coady, David and Moataz El-Said, Robert Gillingham, Kangni Kpodar, Paulo Medas, David Newhouse, 2006. “The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka”, IMF Working Paper 06/247.

    • Search Google Scholar
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  • International Monetary Fund (IMF), 2018, “St. Lucia: Climate Change Policy Assessment”, Country Report No. 18/181

  • International Monetary Fund (IMF), 2019a, “Fiscal Monitor: How to Mitigate Climate Change”, Washington, DC, October.

  • International Monetary Fund (IMF), 2019b, “Fiscal Policies for Implementing Paris Climate Strategies”, Washington, DC.

  • Parry, Ian and Dirk Heine, Eliza Lis, Shanjun Li, 2014, “Getting Energy Prices Right: From Principle to Practice”, IMF, Washington, DC.

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Annex VII. Emerging Risks from Credit Unions1

1. St Lucia has 16 non-profit credit unions with membership covering about 60 percent of the population. The unions provide basic financial services to their membership, typically based on a common community or professional bond, under a member-friendly business model. Funding consists primarily of withdrawable member shares and deposits that earn attractive interest and profit dividends, and benefit from income tax deductibility. Lending comprises of household property and consumption loans (although the latter may also include financing used by borrowers for small business purposes). Credit unions are nationally regulated under the Co-operative Societies Act (COSA) and supervised by the local Financial Service Regulatory Authority (FSRA), with effective operations from January 2014.2

2. The credit unions play an increasingly important role in local financial intermediation. At end-2018, the sector’s total assets amounted to about 20 percent of GDP and it accounted for about a quarter of total resident household deposits and loans. Credit unions’ rapid expansion in part reflects their niche market, underpinned by their ability to serve underbanked population segments with the benefit of close community ties, but also lower fees, higher returns on savings and less stringent lending regulations relative to commercial banks. Their growth has helped to cushion the prolonged decline in bank private sector credit, although their business lending activity remains limited.

3. Continued rapid credit growth, information gaps and pockets of prudential weaknesses give rise to increasing financial stability risks. The credit union sector holds on aggregate sizeable liquidity and capital buffers, but with significant and drawn-out vulnerabilities among the smaller entities (the FSRA designates seven unions under a high-risk watchlist). Delinquent and long-overdue loans remain persistently high across much of the sector, reflecting in part unions’ reluctance to write-off and foreclose on irrecoverable loans, while supervisory information gaps preclude monitoring of forbearance related asset quality weaknesses.3 Loan-loss provisioning falls short of the FSRA regulatory guidance in a significant share of the sector, and its adequacy is in some cases highly sensitive to the recoverable value of the underlying collateral.4 This under-provisioning risk is particularly pertinent given credit unions’ vulnerability to a deterioration in the housing market through sizeable property loan exposures. The unions also face increasing pressures from the pending implementation of IFRS9 (with potential implications to provisions and write-offs), potential downward pressures on lending margins from the more competitive credit environment, as well as costs of rising compliance requirements.

Annex VII. Table 1.

St. Lucia Credit Unions: Selected Prudential Indicators 2014–2018

(Sector aggregate, percent)

article image
Source: St Lucia FSRA, IMF staff calculations

Ratio of share capital, retained earnings and statutory and other non-withdrawable reserves to total assets.

Ratio of liquid assets (cash and deposits) and short-term investments less short-term payables to short-term liabilities.

4. Macro-financial linkages from credit unions are so far moderate but growing. The unions are owned and funded by their members. Direct government exposures are limited to security holdings of about one percent of GDP. Credit unions hold deposits at the indigenous banks, but the amounts are so far not significant relative to these banks’ sizeable deposit base.5 That said, the sector’s macro-significance is growing rapidly with its size and the largest credit union (with assets of about 5 percent of GDP) has been designated as systemically significant under a recent ECCB regional initiative.6 Sector-wide distress could have adverse spillover effects on domestic economic activity and give rise to significant fiscal costs to the extent the government would back the sizeable household savings and equity in the unions (over 16 percent of GDP).

5. The sector’s rising importance underscores timely detection of vulnerabilities. The FSRA implements risk-based supervision with prioritized on-site inspections. The backdrop of rapid expansion calls for supplementary enhancement of off-site monitoring, including closing asset quality information gaps, enhancing consistency of supervisory reporting and clarifying prudential norms. This should be further informed by regular stress testing, under development with CARTAC technical assistance, with scenarios accounting for potential weaknesses arising from prolonged rapid credit growth, identified under-provisioning and uncertainties over collateral valuations.

6. Existing intervention and resolution frameworks need to adapt to rising stability risks. Credit unions’ funding options are inherently tied to their membership, which may prove constrained in periods of distress, and formal financial safety nets are very limited.7 Also, notwithstanding minimal direct cross-union exposures, weak transparency and absence of a formalized crisis communication plan may give rise to indirect spillovers through confidence channels in the event of a prominent failure.8 In absence of a precisely defined ladder of escalation measures, efforts to address current prudential weaknesses have so far largely relied on moral suasion and the full scope of the FSRA’s early intervention powers remain to be tested. Moreover, the existing resolution framework is constrained by absence of standing resolution funding, as well as legislative rigidities and ambiguities.9 The FSRA is reviewing existing procedures as part of its recent initiative to develop a Financial Crisis Management Plan (FCMP) for non-bank financial institutions, a first in the region.

Annex VII. Figure 1.
Annex VII. Figure 1.

Credit Unions: Overview and Prudential Metrics1

Citation: IMF Staff Country Reports 2020, 054; 10.5089/9781513530963.002.A001

1 Prudential indicators based on end-2018 data, subject to availability.Sources: ECCB, FSRA and IMF Staff calculations.

Annex VIII. Implementation of the 2018 CCPA Recommendations

Background

1. The Climate Change Policy Assessment (CCPA) is a joint initiative by the IMF and World Bank to assist small states to understand and manage the expected economic impact of climate change, while safeguarding long-run fiscal and external sustainability. St. Lucia underwent the CCPA in 2018 as one of the pilot countries for the assessment.1

2. The CCPA provided a comprehensive assessment of St. Lucia’s plans to manage climate change from the perspective of the macroeconomic implications. The assessment suggested macro-relevant reforms that could strengthen the likelihood of success of the national strategy in the areas of: general preparedness, mitigation, adaptation, financing, risk management and national processes. Overall, the CCPA recognized that St. Lucia has shown leadership among the Caribbean countries in confronting climate change, despite its difficult fiscal constraints, and highlighted that success of its long-term climate adaptation and mitigation strategy will require full articulation of a costed strategy, the mobilization of private investment for bankable projects and external grants for public goods, and capacity-building to manage the plans effectively.

3. The authorities have made commendable progress on implementing the CCPA recommendations. Their reform agenda is guided by the 2015 Climate Change Adaptation Policy which provided a framework for addressing the impacts of climate change in an integrated manner across all key sectors with interconnected processes on adaptation facilitation, adaptation financing and adaptation implementation. Recent progress in carrying out the reform agenda includes updating the national and sectoral adaptation plans, preparing a climate financing strategy, and mobilizing resources from the global climate funds. The government’s infrastructure programs also include a focus on building resilience to natural disasters. This note summarizes the progresses in each of the six areas presented in the CCPA.

Implementation of the CCPA Recommendations

A. General Preparedness

Recommendations

  • Strengthen the National Determined Contribution (NDC), to provide a comprehensive strategy of St. Lucia’s climate-change related effort—particularly by adding costed adaptation plans.

  • Update the National Vision Plan and Medium-Term Development Plan, and develop supporting operational sectoral plans, with focus on costing and resource mobilization.

  • Ensure that all enabling legislation and standards relevant to climate, environment and energy are in place.

Progress

4. Based on the 2018 National Adaptation Plan (NAP) which outlined immediate, medium and long-term climate change adaptation needs and the process for the development of adaptation strategies and investment plans for priority sectors, the government is now in the process of finalizing Sectoral Adaptation Strategies and Action Plans (SASAPs) in water, agriculture, fisheries, infrastructure, education and health with indicative estimate of financing needs in each sector. The draft climate change legislation is also under review. The government’s Medium-Term Development Plan 2019–22 will also have a focus on building resilience against climate change.

5. On climate financing, the government is in the process of developing a climate financing strategy that will map the indicative financing needs in the identified priority sectors to the possible financing resources including global climate funds, donor support and budget resources. However, the active costing of climate projects has not taken place.

B. Mitigation

Recommendations

  • Introduce a carbon tax by applying the announced road fuel tax increase to other diesel products (including for power generation) and synchronizing future tax increases across all fuels.

Progress

6. The authorities are mindful of the potential benefits of carbon taxation on supporting St. Lucia’s efforts to meet emission reduction efforts and further strengthen public finance and appreciate the IMF staff’s work on the distributional impact of a carbon tax and the policy implications. However, they note that there is limited scope to introduce a carbon tax given the already high cost of the energy in the country.

C. Adaptation

Recommendations

  • Enact the amendments to the OECS Building Code for Saint Lucia.

  • Review and approve the Coastal Zone Management Policy and Strategy.

  • Consider rezoning flood areas.

Progress

7. The SASAPs will include strategies for natural resource management, including coastal, marine and terrestrial biodiversity. Studies on the OECS building code is undergoing with donor’s support. Currently there is no timetable for approving the Coastal Zone Management Policy and Strategy or rezoning flood areas, although the National Integrated Planning Program (NIPP) and the Sustainable Development and Environmental Division (SDED) have both been looking at the vulnerability of government assets and communities along St. Lucia’s coast.

D. Financing

Recommendations

  • Articulate a strategy for raising climate-change financing; use the NDC forum as a catalyst.

  • Rely as much as possible on private sector and grant financing, to ensure continued fiscal and debt sustainability.

  • Fully implement the renewables strategy, not least because it will strengthen St. Lucia’s balance of payments.

Progress

8. The Climate Financing Strategy is being finalized. The government is developing a country program with the Green Climate Fund to unlock financing for the already-identified projects. However, there is little progress with mobilizing private investment. The scope of increasing the use of renewable energy is restricted by the existing cap for solar energy production. Removing the cap will require legislative changes.

E. Risk Management

Recommendations

  • Build a contingency funding buffer through:

  • Immediate capitalization of a fund of USD 5–7 million

  • In the medium term, a savings fund with capitalization of 5 percent of GDP, replenished on a rolling basis, which would give St. Lucia a 95 percent probability of being able to cover the fiscal costs of disasters without incurring additional debt.

  • Use revenues from the Citizenship-by-Investment program (CIP) to capitalize disaster funding.

  • Consider making insurance mandatory for key public buildings.

  • Study the value of making insurance mandatory for buildings in flood-risk areas.

  • Support the strengthening of the domestic insurance market, as well as regional initiatives for insurance, which are likely to be relatively cost-effective.

Progress

9. The government plans to use part of the CIP revenues to build a liquid self-insurance fund to bolster the country’s resilience to disasters. A parametric insurance scheme for the fisheries sector to enhance resilience against the impacts of climate-related disasters has been introduced with donor support. Currently there is no plan to introduce mandatory insurance.

F. National Processes

Recommendations

  • Ensure that responsibilities for climate action are logically assigned to relevant ministries, with clear responsibilities for developing sectoral strategies and costed investments.

  • Revive the public sector investment plan (PSIP), while addressing any problems that made it be considered inadequate.

  • Ensure that climate-related objectives and activities are systematically identified in thebudget, and investment projects explicitly linked to these.

  • Build capacity for effective public investment appraisal and monitoring, in the Ministry of Finance and other relevant ministries.

Progress

10. The NAP and SASAPs have clearly defined the responsibilities for climate change for the relevant ministries and the government has set up a delivery unit to monitor policy implementation, as well as the strategy for capacity development. The government will receive technical assistance from the World Bank to resume the PSIP with an aim to strengthen appraisal and monitoring for all public investment projects. Resilience to natural disasters is an important aspect of the government’s infrastructure programs.
1

A 2018 revision to the nominal GDP data resulted in a lower debt to GDP ratio by about 5 percentage points. With technical assistance from the Caribbean Regional Technical Assistance Centre (CARTAC), the authorities are in the process of rebasing the GDP estimates to better reflect the current structure of the St. Lucian economy. The rebasing may lead to another upward revision to the nominal GDP figures.

2

Micro-lenders provide typically short-term and small-value uncollateralized credit (up to EC$50 thousand). Over a three-year period through end-2017, the total value of disbursed loans grew by nearly 50 percent to EC$78 million.

3

Based on the official ECCB external sector statistics which was released after the 2019 ECCU Discussion of Common Policies, in which staff estimated the 2018 current account balance for St. Lucia to be 3 percent of GDP.

4

As the poorest 20 percent of households pay (directly or indirectly) only 9.4 percent of the carbon tax revenue of 1 percent of GDP, well-targeted transfers of around 0.1 percent of GDP should be able to fully mitigate the impact of the carbon tax on their living standards.

5

Staff estimate that a 5 percent of GDP self-insurance fund, together with other existing insurance coverages of 3 percent of GDP, would be sufficient to cover fiscal costs of natural disasters without incurring additional debt with 95-percent probability (2018 Climate Change Policy Assessment).

6

The government is currently discussing with development partners on the modality of the fiscal rule. The rule can be implemented as early as in the 2020 Budget and will set limits on government annual primary current spending depending on the public debt to GDP ratio.

7

The new provisioning regulations, expected to be phased in over 2020–22, would significantly limit banks’ ability to take into account the value of collateral for loans that are overdue by more than a year.

8

The current legislations impede efficient settlement of insolvency, add substantial time and cost to realizing the loan collateral, and limit borrowers’ ability and incentives to seek a restructuring.

9

The continued divestment by global financial groups adds to concerns about CBR losses. The three foreign branches of Canadian banks made up roughly one half of St. Lucia’s total banking sector assets but have all decided to exit the Caribbean markets. The operations of Scotiabank were acquired by the Trinidad-based Republic Financial Holdings Limited in late 2019. First Caribbean International Bank announced the sale of its ECCU operations to a Colombian investor in November 2019, and Royal Bank of Canada announced the sale of its banking operations to a consortium of indigenous banks in December 2019.

1

BoP-BPM6 data before 2014 are not available.

2

The revision is due to the lack of reliable tourist expenditure survey data in 2017. As the authorities are still resolving inconsistencies in the survey data, further revisions to the historical current account data are expected.

3

The airport tax is recorded in the current account under exports of other services. At the same time, it is accounted for in the fiscal accounts as a revenue and as an expenditure under transfers to public institutions.

4

An indication for further downward revisions is the discrepancy in the tourism data. While the official CA data point to an increase of tourism exports by 10 percent from 2017 to 2018, the actual stay-over tourist arrival only increased by 2.2 percent.

5

Using a CA/REER elasticity of -0.21 implies a CA gap of -0.8 percent. The CA/REER elasticity is based on previous staff estimation of the elasticity of tourist expenditure with respect to REER of -0.1 for the Caribbean countries (see IMF Working Papers WP/14/229).

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” (ST) and “medium term” (MT) are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

1

The debt sustainability analysis for St. Lucia is based on the framework for market access countries. Gross public debt is defined as central government debt and guaranteed and non-guaranteed debt of public corporations. External debt is defined as external debt of the public sector. The fiscal year runs from April to March. Fiscal year GDP for 2018 is extrapolated using the calendar year GDP projection for 2019 from the baseline.

2

A revision of the national accounts series raised nominal GDP for 2016 (2017) by 4.6 (8) percent compared to the 2018 Article IV report, resulting in a public debt-to-GDP ratio that is lower by 3.1 (5.2) percentage points.

3

Compared to the 2018 Article IV report the much lower level of external debt is primarily due to the different coverage. In addition, resulting from the revision of the national accounts series the ratio of public external debt to GDP for 2016 (2017) was mechanically lowered by 1.5 (2.7) percentage points.

1

Prepared by Mauricio Vargas.

2

In addition, St. Lucia receives more than 4 times its population in cruiseship tourists, representing about 760,000 visitors in 2018.

3

The government increased the airport tax on non-CARICOM travel from US$25 to US$63 in mid-2017 and introduced an airport development tax of US$35, effective January 2018. The airport tax was then reduced to US$53 in January 2018.

4

Laframboise et al. (2014). The index accounts for the average spending necessary to spend one week on beach destinations all over the world (without airline ticket costs). Currently, the index includes 56 countries and 155 destinations.

1

Prepared by Jan Moeller, Victor Mylonas, and Ian Parry.

2

For a general discussion of carbon taxation see: IMF 2019. How to Mitigate Climate Change. Fiscal Monitor.

3

Due to data constraints it is not possible to cleanly separate fuel consumption for transportation and fuels for commercial use, e.g., by manufacturing firms or hotels. The Other commercial use category represents fuels that are exempt from import duties due to concessions. The Transportation category likely contains non-exempt fuels for commercial use, which are taxed like road fuels.

4

Road fuel retail prices are regulated and adjusted every three weeks based on actual import prices. In theory, this should result in a quick pass-through from oil prices on world markets. In practice, however, there is an overall cap on retail prices and during periods of high oil prices the government lowers the excise tax to honor the cap.

5

If duty-free fuels were taxed similarly to road fuels the annual revenue would amount to EC$7 million (0.1 percent of GDP).

6

LPG is cross-subsidized from the excise tax revenue on road fuels. Excise tax revenue in Table 1 is gross revenue.

7

For details on the model see 2018 Climate Change Policy Assessment, and IMF (2019).

8

This treatment implies that the uneven structure of the current system is preserved, meaning that emissions in the transportation sector continue to be taxed at a higher rate than emissions from power generation. There is some justification for this treatment to the extent that road fuel taxes are addressing other environmental costs like congestion. See Parry et al. (2014).

9

Under the US$50 carbon tax road fuel prices would rise by 12.5 percent (EC$1.6) relative to BAU by 2030. Electricity prices would rise by 10.2 percent and prices of other fuels, including LPG, would rise by 14 percent (all relative to BAU). Under a US$100 carbon tax price changes are roughly twice as large.

10

The revenue scenarios presented here are separate from the revenue projection in the adjustment scenario of the main text. The adjustment scenario assumes a much quicker implementation of a carbon tax, yielding revenue of 1 percent of GDP starting in FY2020/21.

11

For the analysis households are sorted into quintiles based on per capita household consumption. Using data on intermediate input use from the Supply-and-Use tables (SUTs) indirect effects are computed using the approach by Coady et al. (2006). Both household expenditure shares and firms’ input structure are assumed to be fixed with no substitution effects.

12

The most recent poverty estimates from 2016 indicate that 20.3 percent of Saint Lucia’s population are poor (or live below $5.50 dollars a day).

13

Compared to the estimates for various other countries in IMF (2019a) the cost increases for St. Lucia are very modest. Partially, this is accounted for by a more dominant share of emission-intensive sectors, such as manufacturing, in advanced and emerging economies, e.g., US and China.

1

Prepared by Janne Hukka.

2

St. Lucia is yet to adopt the regionally Harmonized Co-Operative Societies Bill due to extensive stakeholder consultations. The revised Act would seek to enhance credit union licensing and reporting requirements, prudential standards, and supervisory enforcement actions.

3

In contrast to commercial banks, credit unions are not bound by the ECCB Banking Act restrictions on repeat restructuring, and the regulations do not include clear loan reclassification rules (nor minimum provisioning requirement) for restructured/forborne loans.

4

Similar to commercial banks, the current regulations allow credit unions to determine their provisioning requirement net of qualifying collateral held against overdue loans (ranging from 25 percent of the loan value from 90 days past due to 100 percent for over 365 days overdue). Recoverable collateral valuations are subject to significant uncertainty due to unspecified treatment of recovery costs, lack of granularity in supervisory reporting and market specific factors (e.g. absence of a real estate index to support and regularly update property appraisals).

5

Aggregate credit union deposits in other financial institutions of about EC$ 180 million are equivalent to about 7½ percent of the indigenous banks’ total deposits, of which more than a third is in fixed deposits or CDs.

6

The current regulatory framework does not impose additional requirements on the systemically important credit union, but ongoing regional reform considerations assess the option of bringing these entities under the ECCB’s regulatory and supervisory purview.

7

Credit unions savings have no formal deposit insurance nor access to emergency liquidity. A local advocate body (St. Lucia Co-Operative Credit Union League) has facilities to lend to credit-worthy member societies, but its capacity is limited to only a few percent of total sector assets and has not been employed in practice.

8

Only six credit unions have their annual reports and audited financial statements readily available online and some are published with a significant lag. The FSRA’s annual reports provide quantitative information only on a sector aggregate level.

9

The range of available resolution strategies, including an outright sale, establishment of a bridge bank or a forced merger, are limited by legal restrictions on the transfer of union assets to non-member parties (subject to special-majority membership approval). The legal framework also lacks clearly defined operational triggers or designated authority charged with directing intervention into a distressed union (placement into receivership and liquidation are subject to ministerial approval and may be directed either by the FSRA or courts).

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Cover IMF Staff Country Reports
St. Lucia: 2019 Article IV Consultation-Press Release; and Staff Report
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2020: Issue 054
Publisher:
International Monetary Fund
ISBN:
9781513530963
ISSN:
1934-7685
Pages:
82
DOI:
https://doi.org/10.5089/9781513530963.002

Real GDP Growth

(Ten-year average, percent)

Hotel Sector Development

(2004–2018, in percent)
Figure 1.

St. Lucia: Recent Developments

St. Lucia: Private Sector Credit Growth

(Resident credit, percent)
Figure 2.

St. Lucia: External Sector Developments

Week at the Beach plus Airfare (in US$)
Figure 3.

St. Lucia: Fiscal Sector Developments
Figure 4.

St. Lucia: Banking System Developments

Bank Credit, Investment and Liquid Claims

(Indigenous banks, in EC$ millions)

Caribbean: Access to Credit as Major Constraint

(Percent of firms, 2010)
Figure 5.

St. Lucia: Credit Union Sector Developments
Figure 6.

St. Lucia: External Competitiveness and Structural Weaknesses

Current Account Balance (BPM6)

(In percent of GDP)

REER Appreciation

(In percent, year-on-year contribution to growth)

Foreign Currency Reserves and Adequacy Thresholds

(Percent of GDP)

IREER (index of REER): Actual, Fitted, and Norm

Exports of Goods and Services

(in percent)
Annex IV Figure 1.

St. Lucia: Public DSA Risk Assessment
Annex IV Figure 2.

St. Lucia: Public DSA – Realism of Baseline Assumptions
Annex IV Figure 3.

St. Lucia: Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

(In percent of GDP unless otherwise indicated)
Annex IV Figure 4.

St. Lucia: Public DSA – Composition of Public Debt and Alternative Scenarios
Annex IV Figure 6.

St. Lucia: External Debt Sustainability: Bound Tests 1/ 2/

(External debt in percent of GDP)

ECCU: Index of Stay-Over arrivals

(2007=100)

Week at the Beach Index – Heat Map of Hotel Rates
Annex VI. Figure 1.

CO2 Emission Shares
Annex VI. Figure 2:

Regional Energy Prices (2017)
Annex VI. Figure 3.

Model Projections For Carbon Tax Scenarios
Annex VI. Figure 4.

Burden of a US$50 Carbon Tax on Households

(In percent of total household consumption)
Figure 5.

Burden of a US$50 Carbon Tax on Industries

(Output-weighted average cost increase by cumulative industry share, in percent)
Annex VII. Figure 1.

Credit Unions: Overview and Prudential Metrics1