St. Vincent and the Grenadines: Request for Disbursement Under The Rapid Credit—Press Release; Staff Report; and Statement By the Executive Director for St. Vincent and the Grenadines
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International Monetary Fund. Western Hemisphere Dept.
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Publication Date:
29 May 2020
eISBN:
9781513545745
ISBN:
9781513545745
Language:
English
Keywords:
ISCR; CR; IMF support; financing; GDP; emergency financing assistance; financing needs; percent of GDP; sustainability framework; pandemic crisis; Fiscal stance; Natural disasters; Global; Caribbean; GDP ratio; financing option; response measure; $ million; funding gap; COVID-19; Imports
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Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for St. Vincent and the Grenadines

Abstract

Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for St. Vincent and the Grenadines

Context

1. During the past years, the authorities have strived to advance structural reforms and put public finances in order. The opening of the modern Argyle International Airport in February 2017 reinvigorated tourist and investor interest in St. Vincent and the Grenadines. The government also intensified its efforts to diversify the export base, strengthen human capital, improve the investment climate, and build infrastructure resilient to natural disasters. Furthermore, it maintained a relatively prudent fiscal policy stance (including VAT rate hikes and the introduction of a new hotel levy), instituted a contingency fund for natural disasters, and strengthened the oversight of state-owned enterprises. In January 2020, the government enacted the Fiscal Responsibility Resolution, which includes fiscal rules.1 Although progress in implementing reforms has been slow, the government’s policy direction has been broadly in line with past staff recommendations.

General Government Overall Balance and Public Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2020, 179; 10.5089/9781513545745.002.A001

Sources: St. Vincent and the Grenadines authorities; and IMF staff calculations.

Public Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 179; 10.5089/9781513545745.002.A001

2. Prior to the global COVID 19 outbreak, output growth had slowed in 2019 but was expected to rebound in 2020. Real GDP growth slowed from 2.2 percent in 2018 to 0.4 percent in 2019 (Table 1 and Figure 1).2 Stayover tourist arrivals continued to grow (6.3 percent year on year for the first nine months of 2019), supporting tourism-related activities, but the manufacturing and construction sectors contracted, primarily due to reduced demand for reconstruction materials from Dominica, which was hit hard by Hurricane Maria in September 2017. Before the pandemic crisis, output growth was expected to rebound to 2.3 percent in 2020, on the back of a steady increase in tourist arrivals, a recovery of the construction sector (several hotel and resort projects were expected to begin), and a pick-up in exports of non-traditional crops (e.g., cocoa and dasheen) and fisheries (e.g., lobster and tuna).

Table 1.

St. Vincent and the Grenadines: Selected Social and Economic Indicators, 2017–2025

article image
Sources: Eastern Caribbean Central Bank; Ministry of Finance and Planning; and Fund staff estimates and projections.

Annual changes relative to the stock of broad money at the beginning of the period.

Percent of GDP.

In percent of exports of goods and services.

Figure 1.
Figure 1.

St. Vincent and the Grenadines: Real Sector Developments

Citation: IMF Staff Country Reports 2020, 179; 10.5089/9781513545745.002.A001

Source: Government Statistical Office; ECCB; Flight Radar 24; and IMF staff calculations.

3. In December 2019, the Caribbean Development Bank (CDB) approved funding for a large-scale port modernization project (Annex I). The existing port was built more than 50 years ago, giving rise to safety concerns and with limited capacity to accommodate increased traffic. The cost of building a new port, however, is quite large for a small economy like St. Vincent and the Grenadines, amounting to nearly 21 percent of GDP.3 The new port will boost construction demand but also put heavy pressure on public finances. The construction is expected to start in 2021 (originally scheduled for 2020) and end in 2024.

COVID-19 Shock and Macroeconomic Impact

4. The number of local COVID-19 outbreaks remained limited to 17 as of May 13. The authorities’ response was relatively quick: well before the first case, the authorities had introduced preventive measures, including 14-day quarantines for persons arriving from China and other Asian economies with COVID-19 outbreaks. Following the first case (March 11), the authorities introduced social distancing and health measures to contain the spread of the virus, including (i) closing schools; (ii) cancelling the Vincy Mas carnival (the biggest annual carnival in St. Vincent and the Grenadines) scheduled for June 26-July 7; (iii) distributing protective equipment to health care workers; and (iv) increasing the number of intensive care unit beds and respirators and building an isolation and testing center. The government has not declared a state of emergency, and all businesses, excluding entertainment establishments, have continued activities.4

Impact of COVID-19

(Percent of GDP; unless otherwise indicated)

article image
Source: Fund staff calculations.

5. The global COVID-19 pandemic crisis is taking a heavy toll on the Vincentian economy, leading to a deterioration in the outlook. Tourism is a key driver of economic growth in St. Vincent and the Grenadines, with tourist arrivals from the United States, Canada, and the United Kingdom accounting for nearly two thirds of total arrivals5. Tighter border controls, travel restrictions, and possibly a fear of travelling, have led to a sharp decline in tourist arrivals and widespread hotel booking cancellations. All major cruise companies have also suspended operations. Staff expects a nearly 50 percent decline in overall tourist arrivals in 2020. The economy is expected to enter a recession, with output growth contracting by 5.5 percent—7.8 percentage points below pre COVID-19 projections. Inflation would fall below 1 percent in 2020 (compared to 1.5 percent in pre-COVID-19 projections). Lower tourism receipts and remittance inflows would lead to a widening of the current account deficit to 17½ percent of GDP in 2020 (compared to 10 percent of GDP in pre-COVID-19 projections). Pressures on fiscal revenue and the cost of crisis response measures could increase the fiscal deficit to 6¼ percent of GDP in 2020 (compared to 3½ percent of GDP in pre COVID-19 projections).

6. The pandemic crisis is giving rise to an urgent balance of payments need: if not addressed, this need would result in immediate and severe economic disruption, with a large loss in international reserves (Table 2 and Figure 2). Coupled with the widening current account deficit, an expected deterioration in the financial account (excluding reserves assets) —due to a significant decline in FDI inflows—would put pressure on international reserves. Without additional official financing, the stock of imputed reserves could fall by more than 50 percent to EC$242 million (2½ months of projected imports of goods and services in 2021). With support of official financing from multilateral sources (EC$169 million, equivalent to 8 percent of GDP), reserves could be maintained at about EC$410 million (4½ months of projected imports).

Table 2.

St. Vincent and the Grenadines: Balance of Payments Summary, 2017–2025

article image
Sources: Ministry of Finance and Planning; Eastern Caribbean Central Bank; and Fund staff estimates and projections.
Figure 2.
Figure 2.

St. Vincent and the Grenadines: External Sector Developments

Citation: IMF Staff Country Reports 2020, 179; 10.5089/9781513545745.002.A001

Source: Government Statistical Office; ECCB; Caribbean Tourism Organization; and IMF staff calculations.

External Accounts, 2019–2020

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

Excludes reserves and propsective official financing.

Activated on April 17, 2020.

7. Once the pandemic crisis recedes, economic prospects would be more favorable. Staff’s baseline scenario assumes that the global pandemic crisis would subside by the fourth quarter of 2020. Real GDP is projected to rebound to about 4 percent in 2021, and relatively high levels of growth could be sustained over the medium term. Inflation is projected to stay at around 2 percent (broadly in line with inflation in the United States). Key assumptions underlying staff’s growth projections are: (i) reflecting a recovery of the global economy, stayover tourism arrivals gradually bounce back; (ii) construction of the new port project gets into full swing in 2021, boosting demand for construction; (iii) hotel and resort projects recover over time, accompanied by higher FDI inflows; (iv) exports of non-traditional crops and fisheries gradually strengthen; and (v) geothermal electricity production commences in 2022.

8. The main risks to the outlook arise from a possible greater impact of Covid-19 both in terms of a slower recovery of the global economy and of local outbreaks. The economic outlook is subject to an unusual degree of uncertainty related to the impact of COVID-19 on the global economy. The coronavirus pandemic crisis could be prolonged, with more severe disruptions to global economic activity than assumed, resulting in a deeper and more protracted damage to the tourism sector and a wider current account deficit. In addition, were wider local outbreaks to erupt, the economic recession would be more severe and protracted. Should this occur, additional measures to support health services and vulnerable populations would be needed. These would be partially covered by further reallocation of the budget toward health and social needs (see paragraph 14), but the fiscal deficit would further widen. Furthermore, once the hurricane season starts (early Summer), St. Vincent and the Grenadines would be threatened by natural disaster risks.

9. In the area of financial sector policies, both the Eastern Caribbean Central Bank (ECCB) and the Financial Services Authority have announced measures to mitigate the crisis. The ECCB agreed with the ECCU Bankers Association on a relief program available for commercial bank customers through: (i) loan moratoria for 6 months, extendable upon review; and (ii) a waiver of late fees and charges to eligible customers during this period. Several other measures are being considered by the ECCB. Credit unions and other financial institutions (under the supervision of the Financial Services Authority) have also agreed to participate in the moratorium. The announced measures are largely consistent with the IMF guidance that such measures should be transparent, temporary, and combined with intensified supervision.

Policy Discussions: Ensuring Debt and Financial Sustainability

10. In response to the pandemic crisis, on March 25, the authorities announced a fiscal package of about 3½ percent of GDP. The measures are targeted to address urgent needs in the health sector, to support the agriculture and tourism sectors, and to help displaced workers. Most of these measures are temporary and set to expire in 3 months with possible extensions.

  • Expenditure measures (amounting to 3 percent of GDP) include: (i) an increase in funding for the health sector (to construct an isolation unit, purchase drugs and equipment, and hire extra medical staff); (ii) various construction projects of public infrastructure to generate jobs, (iii) financial support to the agriculture and fishery sector, (iv) a temporary widening of the social safety net to cover vulnerable households, (v) an income support program for displaced workers in the tourism and transport sectors, (vi) financial support to the Tourism Authority and Argyle International Airport, and (vii) other initiatives targeting the youths and small businesses.

  • Tax measures (amounting to ½ percent of GDP) include: (i) VAT and import duties exemptions on a range of health and hygiene products; (ii) a tax relief for local airlines; and (iii) a reduction of airport departure fees (from EC$40 to EC$20) for CARICOM citizens. The deadlines for payment of personal income taxes and other fees have also been deferred to end-April.

Announced Supplementary Fiscal Measures

article image
Sources: Ministry of Finance and Planning and IMF staff calculations.

Central Government Operations, 2019–2020 (Above-the-line)

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

No construction in 2020. EC$ 12 million has been allocated for the expense to reallocate businesses which need to move from the port construction site.

11. The pandemic crisis and the economic contraction will thus lead to a deterioration in the fiscal position (Tables 3 and 4).

  • Revenue is projected to decline, but a collapse of the revenue base is unlikely. During the first three months of this year, total revenue and grants increased by 8¼ percent year on year, with strong domestic indirect tax revenues (27 percent year on year). The main sources of revenue include the financial, manufacturing, construction, retail, and utility sectors —which are still operating, since a state of emergency has not been declared. The collapse of tourism has limited direct impact on fiscal revenue because the tourism sector is largely tax exempt. Under the baseline scenario, staff expect total revenue and grants to fall from 30 percent of GDP in 2019 to 28¾ percent of GDP.

  • On the expenditure side, pressure would rise due to the fiscal package in response to the pandemic crisis (3½ percent of GDP). To make room for these additional spending needs, the authorities have reprioritized current and capital spending programs— including postponing the start of the port project— , so that the increase in total expenditure would be limited to less than 3 percentage points of GDP (from 32¼ percent of GDP in 2019 to 35 percent of GDP in 2020).

  • Nonetheless, the overall deficit is expected to rise to EC$133 million (6¼ percent of GDP). Given the existing (pledged prior to the crisis) external disbursements, amortization, and net domestic financing, (prospective) official financing needs are estimated at EC$169 million (8 percent of GDP). The timely disbursement of the R CF would pave the way for external financing from other multilaterals. In particular, the CDB has approved a repayment assistance loan (EC$ 30.5 million, equivalent to 1½ percent of GDP),6 and the World Bank is committed to approve a Development Policy Loan (EC$ 54 million, 2½ percent of GDP), pending the approval of the RCF. Without these RCF and Development Policy Loan disbursements (in total, 4½ percent of GDP), the authorities would face difficulties in implementing the pandemic crisis measures without drastically cutting other expenditure programs.

Table 3.

St. Vincent and the Grenadines: Summary of Central Government Operations, 2017–2025

(In millions of Eastern Caribbean dollars; unless otherwise stated)

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

Wages and salaries including social security contributions, commissions, rewards, allowances, and incentives.

Includes other non-banking sector domestic financing.

Table 4.

St. Vincent and the Grenadines: Summary of Central Government Operations, 2017–2025

(In percent of GDP; unless otherwise stated)

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

Wages and salaries including social security contributions, commissions, rewards, allowances, and incentives.

Includes other non-banking sector domestic financing.

Central Government Operations, 2019–2020 (Below-the-line)

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

Subject to IMF/WB Board approval.

Available financing options include: ECCB credit lines (EC$56 million) and WB Catastrophe Deferred Drawdown Option (EC$ 54 million).

12. Total public sector gross financing needs are estimated at EC$332 million (15½ percent of GDP) in 2020. A total of EC$163 million (7¾ percent of GDP) would be financed through: (i) rolling over TBs; (ii) drawing from existing official financing; (iii) drawing down government deposits; and (iv) issuing bonds and borrowing from banks. The remaining EC$169 million (8 percent of GDP) would be financed by prospective official financing, including: (i) Fund disbursements under the RCF; (ii) WB disbursements under the first track COVID19 facility and Development Policy Loan; and (iii) CDB disbursements under the Repayment Assistance Loan.

Public Sector Gross Financing Needs

article image
Source: St. Vincent Ministry of Finance and IMF staff estimates.

Available financing options include: ECCB credit lines (EC$56 million) and WB Catastrophe Deferred Drawdown Option (EC$54 million).

13. Public debt will rise temporarily but would remain sustainable if the authorities implement fiscal consolidation measures, once the pandemic crisis ends and the economy recovers (see Debt Sustainability Analysis report). Combined with the effects of the pandemic crisis and the economic recession, the port project would put additional pressures on public finances, given its size and relatively expensive financing terms. 7 Without additional efforts (passive scenario), staff expect the public debt to GDP ratio to peak at around 98 percent of GDP in 2022 and to fall to 77 percent of GDP by 2030. A moderate fiscal adjustment of 3 percent of GDP over 2021–23 would ensure that the public debt to GDP ratio would peak at 85 percent in 2020 and thereafter fall to 60 percent of GDP in 2030 (the ECCU’s regional goal).

Fiscal Assumptions

(Percent of GDP; unless otherwise indicated)

article image
Source: IMF staff estimates and projections.

Public Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 179; 10.5089/9781513545745.002.A001

14. The authorities are committed to taking both revenue and expenditure measures, with greater emphasis on expenditure measures.

  • On the expenditure side, the authorities have agreed with labor unions to refrain from wage increases for central government employees in 2021. They are also committed to; (i) limiting the growth of the wage bill to 2.0 percent a year (around the inflation rate) through 2024 (compared to 4½ percent assumed in the passive scenario); and (ii) capping the total amount of capital spending at EC$ 1 billion during 2020–2025 (compared to EC$1.2 billion in the passive scenario), focusing on the port project and cutting back on non-port projects.

  • On the revenue side, the authorities are committed to: (i) enhance taxpayer compliance, especially by focusing on large taxpayers and by adhering to the recently enacted Tax Administration and Procedures Act; and (ii) rationalizing exemptions from import duties and VAT on imports. With these measures, under staff’s baseline scenario, the primary balance is expected to improve from -3¾ percent of GDP in 2020 to 2 percent of GDP in 2025 (a year after the completion of the port project).

  • Given the large size of the port investment, the authorities are committed to ensure that the overall fiscal plan keeps debt on a sustainable path based on the DSA, which they will update at the time of the 2021 budget preparation. In addition, to reduce the debt service burden, the authorities are seeking better financing terms on the port project, taking advantage of sharply reduced global interest rates since the global pandemic outbreak.

  • If downside risks materialize, with weaker revenue and greater health expenditure needs, to protect crisis related spending on health and social protection for the vulnerable, the authorities will need to (i) reduce discretionary exemptions from import duties and VAT imports and (ii) further reprioritize non-priority spending

15. Going forward, the authorities need to make further efforts to strengthen public infrastructure management. To improve infrastructure planning process and project selection, there are merits in developing a long-term national infrastructure plan, which should be linked closely to the Medium-term Fiscal Framework. Projects should be prioritized based on the government’s strategic development goals, the likelihood of successful implementation, and the certainty of project funding. The plan should also embed resilient infrastructure projects. Moreover, efforts should continue to strengthen capital projects implementation and quality.

16. The authorities need to remain vigilant to ensure financial stability and continue to enhance capacity for prompt mitigating actions against the effects of the pandemic crisis. In parallel with the ECCB’s measures to safeguard stability of the banking system, the Financial Services Authority (FSA) has strengthened monitoring, identified risks, and developed contingency plans. The FSA has instituted requirements for daily reporting on liquidity positions and lending activities, reviewed the non-bank financial institutions’ plans for business continuity, and provided guidance on supervisory expectations. Moreover, the FSA has required non-bank financial institutions to assess the likely impact of the crisis on their liquidity and encouraged them to identify likely distressed borrowers and consider offering temporary relief. If the shock persists or risks materialize, while refraining from generalized forbearance measures, the FSA could consider allowing financial institutions to use their buffers on capital and liquidity requirements. Collaboration with the ECCB and the FSA should be deepened to inform the monitoring and coordinated response. Risk-based AML/CFT supervision should be enhanced to reduce pressure on correspondent banking relations and remittances.

Modalities of Support

17. The RCF is the most appropriate instrument at this juncture. Given the rapid development of the shock, uncertainty over its depth and duration, and the current practical difficulties, it is not feasible to put in place a UCT Fund-supported program. The authorities have been continuously engaging with the World Bank and the Caribbean Development Bank (CDB), and timely IMF involvement will play a catalytic role in securing external financing from these multilateral institutions. Subject to adhering to the authorities’ plan to implement measures to put debt on a solid downward trajectory in the medium term, St Vincent and the Grenadines possesses the capacity to repay the Fund (Table 5).

Table 5.

St. Vincent and the Grenadines: Indicators of Capacity to Repay the Fund

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Sources: St. Vincent and the Grenadines authorities; Eastern Caribbean Central Bank; and Fund staff estimates and projections.

Includes the RCF approved in 2014.

WEO Global Assumptions (GAS), dated March 24, 2020 up to 2025, after which the exchange rate is fixed at the 2019 level.

18. Staff considers an immediate access of 100 percent of quota (SDR 11.7 million, equivalent to about US$ 16 million) to be appropriate. Staff estimates that the RCF will cover about a quarter of the projected external financing gap (US$62 million). The authorities are actively engaging with the World Bank and the CDB on other budget support options. Staff expects that, with the participation of these institutions, the external financing gap will be fully filled. St Vincent and the Grenadines had an RCF arrangement with the Fund in 2014, which currently has an outstanding principal of SDR 2.66 million (22.7 percent of quota). Access of 100 percent of the quota for a new RCF is within the normal access limit under the PRGT.

19. The RCF funds will be disbursed to the East Caribbean Central Bank (ECCB) and be on-lent to the government of St. Vincent and the Grenadines to provide immediate fiscal support. The authorities are committed to hold all foreign exchange from the IMF disbursement at the ECCB, pending use. The ECCB will provide Fund staff with the necessary central bank audit reports and has authorized the external auditors to hold discussions with staff. The authorities are also committed to continuing the publication of procurement documentation and adding information on the beneficial owners of the companies that receive crisis-related procurement contracts.8 Moreover, they are committed to reporting monthly on COVID-19 related expenditures and undertaking a full ex-post financial and operational audit of COVID-19 spending at the time of the annual audit9.

20. The authorities are also committed to collaborating with staff in undertaking a safeguards assessment. The ECCB undertakes a safeguards assessment every four years with the most recent one completed in 2016.

21. Risks to St. Vincent and the Grenadines’ capacity to repay are mitigated by several positive factors. These include: (i) the authorities’ positive track record from previous financing programs with the Fund, (ii) their ability in recent years to enact fiscal consolidation measures to reduce debt, and (iii) their continued close dialogue with the Fund.

Authorities’ Views

22. The authorities expect a significant weakening in economic activity in 2020. However, given that the tourism sector is smaller relative to other ECCU member states, and the economy is not fully “locked down,” the authorities’ view of the economic impact of the pandemic is milder than in other neighboring economies. Nonetheless, they agree that the economy has entered a deep recession. The authorities are particularly concerned with the sharp decline in tourist arrivals and its impact on employment and fiscal revenue. They agree that there is significant downside risk to the outlook: if the crisis persists until 2021, the impact on growth performance would be much more severe.

23. The authorities stress the urgent need to support the health and social sectors and to secure external official financing. Weaker revenue prospects together with increased spending needs will lead to higher deficits and public debt. They also underscore the urgent need for Fund support ahead of the 2020 hurricane season. The authorities agree that the port project would place pressure on the public finances but are committed to implementing measures to still achieve the regional public debt target of 60 percent of GDP by 2030. To this end, the authorities agree with staff recommendations to facilitate fiscal consolidation by enhancing the effectiveness of tax administration, tightly controlling current expenditure and wage bill growth, and selecting strategically important non-port projects.

24. The authorities agree on the need to continue carefully monitoring the financial system and indicate that the financial system remains stable. The authorities are taking measures, including conducting stress testing to identify funding gaps, requiring non-bank financial institutions to submit daily reporting, reviewing their business continuity plans, discussing with them preparedness, escalation measures, and regulatory forbearance. The authorities note that the ECCB and the FSA will continue close collaboration to exchange information and coordinate responses.

Staff Appraisal

25. Staff supports the request in light of the large size of the shock, giving rise to an urgent balance of payments need. The authorities are committed to policies ensuring macroeconomic stability, including through fiscal measures to safeguard fiscal sustainability. The authorities have indicated their commitment to implementing a fiscal adjustment of 3 percent of GDP over 2021–23, once the pandemic subsides, mainly through expenditure-side measures (e.g., containing the growth of current spending and cutting back on non-port capital programs). This will put the debt-to-GDP ratio on a solid downward path after 2021, deeming debt as sustainable in a forward-looking sense.

26. Staff considers that following disbursement, public debt will remain sustainable, and St. Vincent and the Grenadines will have the capacity to repay the Fund.

Annex I. Macroeconomic and Resilience Impacts of the Port Modernization Project

In December 2019, just before the pandemic outbreak, St. Vincent and the Grenadines reached an agreement with the Caribbean Development Bank (CDB) on a large-scale port modernization project (21 percent of GDP). The project will strain public finances but will boost construction demand, strengthen resilience to natural disasters, and improve the port capacity and efficiency.

Objectives. The existing port in Kingstown was built more than 50 years ago, well above its operational life of 30 years, raising capacity and safety concerns. The CDB’s regional study (2016) suggests that Kingstown’ port fares relatively poor compared to other ports in the region in terms of productivity, infrastructure quality, and IT capabilities.1

Port Efficiency Score

Citation: IMF Staff Country Reports 2020, 179; 10.5089/9781513545745.002.A001

Source: Caribbean Development Bank Note: Productivity is the speed of service; Infrastructure quality has an impact on the type of operations and efficiency of handling; Equipment availability improves efficiency of moving cargo; Information Technology implementation improves efficiency.

Key benefits. The new port will:

  • Strengthen resilience to natural disasters. The port is one of the key strategic projects to boost infrastructure resilience to natural disasters.

  • Improve shipping efficiencies and reduce berthing times. The new port can accommodate larger vessels, double the existing capacity, raise economies of scale (through lower unit charter and fuels costs), and reduce the time required for cargo vessels to berth and discharge cargo (thus increasing operational efficiencies).

  • Improve tracking efficiencies. Currently, container cargo is received at Campden Park Container Port located 3.5 km from Kingstown. The location of the new port (Kingstown) is closer to the main importers, reducing in-land transportation costs.

  • Increase capacity. By the mid-2020s, cargo volumes are projected to hit port capacity. Maintenance costs are expected to rise fast to address the deteriorating condition of the port.

Economic growth impacts. While the port project is sizable (US$185 million, 21 percent of 2020–24 average GDP), its growth impact is relatively modest (0.2–1.2 percentage points of GDP a year).2 The main growth channel is through the employment of unskilled labor, and the impact from capital inputs is limited as these will mostly be imported. The long-term growth impact of the port would hinge on the authorities’ efforts to strengthen over St. Vincent and the Grenadines’ competitiveness and foster private sector activity. In the absence of this investment, however, should there be structural failure of the existing port, significant negative economic impacts would ensue.

Growth Impact of Port Construction

(Percentage points of GDP)

Citation: IMF Staff Country Reports 2020, 179; 10.5089/9781513545745.002.A001

Source: Caribbean Development Bank; and IMF staff estimates.

Fiscal impacts. The port project will contribute to a significant increase in capital spending (about 8 percent of GDP in 2022 at the peak of the construction) and the overall deficit. The project will be financed through a mix of non-concessional and concessional borrowing from the CDB (US$110 million), a grant from the United Kingdom (US$32.5 million), and counterpart borrowing by the authorities (US$42.8 million).

Table. Project Financing Summary

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BOP impacts. The port project will widen the current account deficit during the construction period (nearly 4 percent of GDP in 2022 at its peak). This reflects an increase in (i) imports of construction materials and equipment and (ii) transfer abroad by foreign engineers, partly offset by a small increase in service exports (as foreign technicians would contribute to local spending). The widening of the current account will be more than offset by an increase in the grant from the United Kingdom and the official loan by the CDB. To the extent that the money spent for local labor and procurement is saved, the project will also contribute to supporting St. Vincent and the Grenadines’ foreign reserves.

References

  • CDB, 2016, “Transforming the Caribbean Port Services Industry: Towards the Efficiency Frontier”

  • CDB, 2013, “Port Rationalization Development Study-CDB”

  • D. Cubas, C. Briceño-Garmendia, and H.C. Bofinger, 2013, “OECD Ports: An Efficiency and Performance Assessment,” World Bank, Policy Research Working Paper 7162

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1

The fiscal rules include: (i) reducing public debt to no more than 60 percent of GDP by 2030; (ii) targeting an improvement in the primary balance to a surplus of one percent of GDP; and (iii) taking appropriate measures to ensure that nominal current expenditure in a fiscal year does not reasonably exceed the growth in nominal GDP in the year. Because macroeconomic assumptions underpinning these rules have significantly changed since the pandemic outbreak, the authorities are currently reviewing these parameters.

2

Ministry of Finance’s estimates, as official data from the National Statistics Office are not yet available.

3

The project will be financed through grants (4 percent of GDP) and financing (17 percent of GDP).

4

All ECCU countries except for St. Vincent and the Grenadines have declared a state of emergency or much tighter restrictions on economic activities.

5

In the National Accounts, tourism-related sectors (hotels, restaurants, transport, and retail trade), as well as the wholesale sector (which cannot be stripped out due to data limitation) account for about 30 percent of GDP.

6

A total of EC$15.9 million will be disbursed in 2020, and the remaining EC$14.6 million will be disbursed in 2021.

7

The total size of the port project is US$ 185 million, of which US$100 million will be financed through the Caribbean Development Bank’s Ordinary Capital Resources (2.75 percent interest rate, 19-year maturity, including a 5-year grace period) and US$10 million from the Special Funds Resources (at 1 percent, 25-year maturity including a 5-year grace period).

8

A beneficial owner is defined as “an individual who is an ultimate beneficial owner of the legal person, partnership or legal arrangement, whether or not the individual is the only beneficial owner; and an individual who exercises ultimate control over the management of the legal person, partnership or legal arrangement, whether alone or jointly with any other person or persons” (St. Vincent and the Grenadines, Anti-money Laundering and Terrorist Financing Regulations, 2014, Article 4).

9

Conducted by St. Vincent and the Grenadines Audit Office.

1

A visual survey that the CDB conducted in 2009 recommended major remedial works, while CDB (2013) suggests that the assets of the port had reached the end of their design life. Cubas et. al (2013) also pointed to cargo capacity and efficiency problems of the Kingstown port.

2

Estimated as follows. First, the project budget was decomposed into capital, skilled labor, and unskilled labor inputs. Second, the amount of domestic procurement for each component was estimated —for capital and skilled labor, the share of the domestic procurement in total budget is assumed to be around 5–10 percent and for unskilled labor, 100 percent. Finally, the fiscal impulse was calculated, assuming a fiscal multiplier of 0.3 for the first year and 0.1 for the second year. The GDP deflator to estimate real impacts was used.

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Cover IMF Staff Country Reports
St. Vincent and the Grenadines: Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for St. Vincent and the Grenadines
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2020: Issue 179
Publisher:
International Monetary Fund
ISBN:
9781513545745
ISSN:
1934-7685
Pages:
46
DOI:
https://doi.org/10.5089/9781513545745.002

General Government Overall Balance and Public Debt

(In percent of GDP)

Public Debt

(Percent of GDP)
Figure 1.

St. Vincent and the Grenadines: Real Sector Developments
Figure 2.

St. Vincent and the Grenadines: External Sector Developments

Public Debt

(Percent of GDP)

Port Efficiency Score

Growth Impact of Port Construction

(Percentage points of GDP)