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IMF Country Report No. 21/157

ST. VINCENT AND THE GRENADINES

July 2021

REQUEST FOR DISBURSEMENT UNDER THE RAPID CREDIT FACILITY—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR ST. VINCENT AND THE GRENADINES

In the context of the REQUEST FOR DISBURSEMENT UNDER THE RAPID CREDIT FACILITY, the following documents have been released and are included in this package:

• A Press Release including a statement by the Chair of the Executive Board.

• The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on July 1, 2021, following discussions that ended on May 27, 2021, with the officials of St. Vincent and the Grenadines on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on June 22, 2021.

• A Statement by the Executive Director for St. Vincent and the Grenadines. The documents listed below have been or will be separately released:

  Letter of Intent sent to the IMF by the authorities of St. Vincent and the Grenadines*

  *Also included in Staff report

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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Press Release

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PR 21/205

IMF Executive Board Approves a Disbursement of US$11.6 Million for St. Vincent and the Grenadines to Address the Fallout from the Volcanic Eruption

FOR IMMEDIATE RELEASE

• The IMF Executive Board approved the request by St. Vincent and the Grenadines for emergency financing assistance of about US$11.6 million under the Large Natural Disaster Window (LNDW) of the Rapid Credit Facility (RCF). The RCF will help address the urgent balance of payment needs associated with the explosive eruption of the La Soufrière volcano.

• The ongoing eruption is hitting St. Vincent and the Grenadines hard, compounding the economic and social/humanitarian impact of the pandemic and by IMF staff’s estimates, may result in economic losses amounting to around 30 percent of GDP as infrastructure, housing and crops are damaged.

• This will be the first request under the LNDW of the RCF. A member may qualify for the LNDW when urgent balance of payments needs stem from a natural disaster that results in damages of at least 20 percent of the member’s GDP.

Washington, DC – July 1, 2021: The Executive Board of the International Monetary Fund (IMF) approved today a disbursement to St. Vincent and the Grenadines following its request under the Large Natural Disaster Window (LNDW) of the Rapid Credit Facility (RCF) for SDR 8,172,450 (US$11.6 million). The RCF will help cover its balance of payment and fiscal needs stemming from the explosive eruption of the La Soufrière volcano that began on April 9, 2021. This request is the first of its kind under the LNDW.

St. Vincent and the Grenadines is a small state, vulnerable to external shocks, including large natural disasters. The explosive volcanic eruption is hitting St. Vincent and the Grenadines hard, creating an urgent balance of payments need and a humanitarian crisis while the country continues to deal with the fallout from the global pandemic. The economy is estimated to have contracted in 2020 by 3.8 percent as tourism activity fell 70 percent. While considerable uncertainty about the evolution of the eruption remains, IMF staff estimate the infrastructure damage to exceed 20 percent of GDP and for the economy to contract by 6.1 percent in 2021, with agriculture and related sectors severely affected. A drop in fiscal revenues, combined with additional social, cleanup and reconstruction expenditures, will increase the fiscal deficit and financing needs. IMF support will help cover some of these needs and allow the government to ease the impact on the population.

Following the Executive Board discussion of the requests, Mr. Tao Zhang, Deputy Managing Director and acting Chair, made the following statement:

“The ongoing eruption of the La Soufriere volcano has compounded the economic and social impact from the COVID-19 pandemic, creating humanitarian challenges and immediate fiscal and balance of payments needs. The eruption has destroyed livelihoods and a significant part of agricultural crops, and has caused structural damage to public infrastructure.

“The authorities responded to the emergency swiftly. A fiscal package includes humanitarian support, income support for affected sectors and displaced workers, and cleanup and reconstruction spending. Large rebuilding expenses will be required given the magnitude of the damages.

“The authorities remain committed to meeting the debt target set by the Eastern Caribbean Central Bank (ECCB). Once the eruption subsides, the authorities intend to undertake measures to ensure debt sustainability and rebuild fiscal buffers, including replenishing the Contingencies Fund and adhering to the Fiscal Sustainability Framework.

“The ECCB and the Financial Services Authority (FSA) are collaborating to safeguard financial stability. Efforts to strengthen crisis management plans and enhance the AML/CFT framework will help contain financial risks.

“IMF emergency support under the Large Natural Disaster window of the Rapid Credit Facility will help fill St. Vincent and the Grenadines’ balance of payments needs. This represents the first time the window is used. Fund financing is expected to help catalyze additional donor support. The authorities remain committed to ensuring transparency and good governance in the use of humanitarian and crisis-related spending.”

For information on the emergency financing requests approved by the IMF Executive Board, please see a link to the IMF Lending Tracker: https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker

For upcoming discussions on the emergency financing requests, please see a link to the calendar of the IMF Executive Board meetings: https://www.imf.org/external/NP/SEC/bc/eng/index.aspx

Factsheet: “IMF Rapid Credit Facility (RCF)” https://www.imf.org/en/About/Factsheets/Sheets/2016/08/02/21/08/Rapid-Credit-Facility

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ST. VINCENT AND THE GRENADINES

REQUEST FOR DISBURSEMENT UNDER THE RAPID CREDIT FACILITY

June 22, 2021

EXECUTIVE SUMMARY

Context. An explosive volcanic eruption that began on April 9 is hitting St. Vincent and the Grenadines hard creating an urgent balance of payments need and a humanitarian crisis as the country continues to deal with the fallout from the global pandemic. The economy is estimated to have contracted in 2020 by 3.8 percent as tourism activity fell 70 percent. Before the eruption, economic growth was expected to be flat in 2021, as the global pandemic continued, and tourism remained depressed. While there is considerable uncertainty about the evolution of the eruption, staff estimate the infrastructure damage to exceed 20 percent of GDP and for the economy to contract by 6.1 percent in 2021 with agriculture and related sectors severely affected.

Request for Fund support. Reflecting the large external financing gaps arising from the sharp deterioration of the balance of payments position and the large fiscal needs to address the humanitarian crisis and cleanup operation, which come on top of financing needs to support the most vulnerable and maintain public health spending in the context of the pandemic, the authorities are seeking immediate financial assistance under the Large Natural Disaster Window (LNDW) within the Rapid Credit Facility (RCF) of SDR 8.17245 million, equivalent to 69.85 percent of quota, to address the urgent balance of payment need. The resources will be on-lent for urgent immediate budget support and to address expected economic losses, that according to staffs estimates exceed 30 percent of 2021 GDP. This request is the first of its kind under the LNDW. Staff supports this request and will continue close engagement with the authorities in the coming months.

Main Policy Recommendations.

• In the short term, adopt measures to alleviate the humanitarian crisis, address the pandemic and support the economy. The authorities estimate the fiscal support in the order of 7¾ percent of GDP.

• Once the volcanic eruption and pandemic shock subside and the economy recovers, rebuild the Contingencies Fund, and resume fiscal consolidation to put public debt on a firmly downward trajectory. Both revenue and expenditure measures, including the reprioritization of public investment projects are required.

• Continue to enhance monitoring of financial sector vulnerabilities and capacity for prompt action to ameliorate the effects of the twin crises.

Approved By

Patricia Alonso-Gamo (WHD) and Chad Steinberg (SPR)

Contents

• CONTEXT AND THE IMPACT OF THE COVID-19 SHOCK

• ERUPTING LA SOUFRIERE: A HUMANITARIAN AND ECONOMIC CRISIS

• POLICY DISCUSSIONS: NAVIGATING THE CRISIS WHILE ENSURING DEBT AND FINANCIAL SUSTAINABILITY

• MODALITIES OF SUPPORT

• AUTHORITIES’ VIEWS

• STAFF APPRAISAL

• FIGURES

• 1. Real Sector Developments

• 2. External Sector Developments

• TABLES

• 1. Selected Social and Economic Indicators, 2017–26

• 2. Balance of Payments Summary, 2017–26

• 3 Summary of Central Government Operations, 2017–26 (In millions of EC$)

• 4. Summary of Central Government Operations, 2017–26 (In percent of GDP)

• 5. Indicators of Capacity to Repay the Fund

• ANNEXES

• I. The Macroeconomic Impact of the Volcanic Eruption

• II. Debt Sustainability Analysis

• APPENDIX

• I. Letter of Intent