Abstract
IMF Country Report No. 21/236
Copyright Page
IMF Country Report No. 21/236
ST. KITTS AND NEVIS
2021 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR ST. KITTS AND NEVIS
October 2021
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2021 Article IV consultation with St. Kitts and Nevis, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its September 13, 2021 consideration of the staff report that concluded the Article IV consultation with St. Kitts and Nevis.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on September 13, 2021, following discussions that ended on June 22, 2021, with the officials of St. Kitts and Nevis on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 29, 2021.
An Informational Annex prepared by the IMF staff.
A Staff Statement updating information on recent developments.
A Statement by the Executive Director for St. Kitts and Nevis.
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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© 2021 International Monetary Fund
Press Release
PR21/317
IMF Executive Board Concludes 2021 Article IV Consultation
with St. Kitts and Nevis
FOR IMMEDIATE RELEASE
Washington, DC – October 29, 2021: On September 13, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with St. Kitts and Nevis.
St. Kitts and Nevis entered the Covid-19 pandemic from a position of fiscal strength following nearly a decade of budget surpluses. A significant part of the large CBI revenues was prudently saved, reducing public debt below the regional debt target of 60 percent of GDP and supporting accumulation of large government deposits.
Prompt government action helped contain the pandemic’s public health impact. At the onset of the pandemic the government swiftly restricted inbound travel, introduced a month-long national lockdown, and procured protective and medical equipment. The reopening of borders at end-October 2020 has been accompanied by strict safety protocols. The response measures effectively mitigated the pandemic’s human cost, with St. Kitts and Nevis having had the lowest per capita case count in the Western Hemisphere and no mortalities in 2020.
But the impact on the economy has been severe. The complete halt in cruise ship arrivals and very few stay over tourists since the first quarter of 2020 compounded on the pandemic’s impact on domestic activity. The pandemic resulted in an estimated annual decline in GDP of 14 percent, and the general government’s first fiscal deficit (4.7 percent of GDP) since 2010, financed by drawing down sizeable deposit buffers.
An expected rebound in tourism sets the stage for a strong recovery from 2022 onward, but risks to the outlook remain significant. Following a loss of the 2020–21 winter tourism season and slow resumption of tourism inflows to date, staff projects a small further decline in GDP of 1 percent in 2021, followed by 10 percent growth in 2022. However, the recovery path could be derailed should the pandemic lead to further sustained disruptions on the anticipated pace of tourism recovery and domestic activity. Other risks include financial sector uncertainties, natural disasters, and lower-than-expected CBI receipts.
Executive Board Assessment2
Executive Directors agreed with the thrust of the staff appraisal. They noted that St. Kitts and Nevis entered theCOVID-19 pandemic from a position of fiscal strength and commended the authorities’ prompt and effective policy response, which has helped contain the pandemic’s economic and health impact. Directors agreed that, in the near term, the key policy priorities are containing the pandemic and supporting the economic recovery. In particular, they emphasized that reaching herd immunity through vaccination is the chief priority to save lives and livelihoods.
Directors agreed that fiscal relief measures should be kept in place until the recovery firmly takes root. They noted that robust levels of public investment would further support economic activity. Given the small economy’s susceptibility to natural disasters and dependance on tourism and volatile revenues from the Citizenship by Investment (CBI) Program, Directors concurred that once the recovery is firmly established, the government should resume saving part of the CBI revenues to rebuild fiscal buffers, which will also provide additional fiscal space to mitigate contingent and long-term fiscal pressures.
Directors agreed on the need to preserve the stability of the financial system by increasingly focusing on building readiness to exit the temporary support measures. They recommended reviewing and formalizing crisis management plans, containing risks in the systemic bank, strengthening supervision of non-banks, developing a more robust plan to divest unsold lands, and pursuing reforms to facilitate asset recovery. While commending the authorities for promoting financial integrity, securing correspondent banking relationships, establishing CBI program safeguards and bolstering the AML/CFT and tax cooperation frameworks, Directors called for further efforts in these areas.
Directors encouraged structural reforms that raise productivity growth, economic competitiveness, and human capital. In this regard, they particularly welcomed the authorities’ agenda to diversify energy sources and channel CBI revenues into other sectors besides tourism and for infrastructure that protects against natural disasters.
St. Kitts and Nevis: Selected Economic Indicators: 2016–26
St. Kitts and Nevis: Selected Economic Indicators: 2016–26
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St. Kitts and Nevis: Selected Economic Indicators: 2016–26
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Title page
ST. KITTS AND NEVIS
STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION
July 29, 2021
KEY ISSUES
St. Kitts and Nevis entered the Covid-19 pandemic from a position of fiscal strength following nearly a decade of budget surpluses. A significant part of the large CBI revenues was prudently saved, reducing public debt belowthe regional debt target of 60 percent of GDP and supporting accumulation of large government deposits.
Prompt government action helped contain the pandemic’s public health impact. At the onset of the pandemic the government swiftly restricted inbound travel, introduced a month-long national lockdown, and procured protective and medical equipment. The reopening of borders at end-October 2020 has been accompanied by strict safety protocols. The response measures effectively mitigated the pandemic’s human cost, with St. Kitts and Nevis having had the lowest per capita case count in the Western Hemisphere and no mortalities in 2020.
But the impact on the economy has been severe. The complete halt in cruise ship arrivals and very few stayover tourists since the first quarter of 2020 compounded on the pandemic’s impact on domestic activity. In response, the government introduced tax waivers, deferrals, incentives, and the Social Security Board provided unemployment benefits to affected insured workers. In parallel, the regional and national financial supervisors swiftly introduced temporary measures, including loan moratoria, that supported liquidity and effectively mitigated the pandemic’s financial system impact. Nonetheless, the pandemic resulted in an estimated annual decline in GDP of 14 percent, and the general government’s first fiscal deficit (4.7 percent of GDP) since 2010, financed by drawing down sizeable deposit buffers.
Containing the pandemic and supporting the economy remain the key near-term policy priorities. As the flare-up in Covid-19 in June 2021 demonstrated, reaching herd immunity is the number one priority to save lives and livelihoods. Fiscal relief measures should be kept in place until the recovery firmly takes root. Robust levels of public investment would further support activity, while investment in resilient infrastructure would also build resilience to natural disasters.
An expected rebound in tourism sets the stage for a strong recovery from 2022 onward, but risks to the outlook remain significant. Following a loss of the 2020–21 winter tourism season and slow resumption of tourism inflows to date, staff projects a small further decline in GDP of 1 percent in 2021, followed by 10 percent growth in 2022. However, the recovery path could be derailed should the pandemic lead to further sustained disruptions on the anticipated pace of tourism recovery and domestic activity. Other risks include financial sector uncertainties, natural disasters, and lower-than-expected CBI receipts.
Once the recovery is firmly established, the government should resume saving part of the CBI revenues to rebuild fiscal buffers. As a small, natural disaster-susceptible country dependent on tourism and historically volatile CBI revenues, St. Kitts and Nevis needs significant buffers. Higher buffers will also provide more fiscal space to mitigate contingent and long-term fiscal pressures, including possible further reacquisitions of lands swapped as part of the 2012–14 sovereign debt restructuring, and a possible future need to buttress the national pension system that under current projections will soon start to run deficits and depleting reserves.
Financial sector policies should increasingly focus on building readiness for the exit from temporary support measures. The financial system remains stable and benefits from sizeable buffers, but the pandemic’s full asset quality impact will become apparent only upon the expiry of the loan moratoria. The authorities should therefore review and formalize operationalizable crisis management plans, contain elevated risks in the systemically important bank, strengthen supervisory guidance to the non-bank sector, and undertake reforms to facilitate asset recovery. A more robust divestment plan for the swapped lands can help reinvigorate private sales.
There is room to strengthen productivity growth, economic competitiveness, and human capital. GDP per capita growth in the last two decades has been relatively weak and convergence with the US has stopped. Several reforms might boost productivity growth and export competitiveness, including using the CBI program to attract investment beyond the tourism sector, upgrading skills through focused training programs, better aligning the education system with the needs of the labor market, and facilitating access to credit to small firms, including through reforms that facilitate use of non-fixed asset as loan collateral.
Approved By
Patricia Alonso-Gamo (WHD) and Chad Steinberg (SPR)
Team: Bas Bakker (Head), C. Brozdowski, J. Hukka, and G. Salinas (all WHD), assisted by R. Vishvesh. Discussions took place remotely during June 9–22, 2021. The team met Prime Minister, Doctor the Honorable Timothy Harris, Premier of Nevis Honorable Mark Brantley; Minister of Health Honorable Akilah Byron-Nisbett; Minister with responsibilityfor National Health Insurance Honorable Eugene Hamilton; Minister of Tourism Honorable Lindsay Grant; Attorney General Honorable Vincent Byron; and other senior officials, financial sector analysts, think-tanks, academics, and representatives of the private sector. RJ. Edwards (OED), P.Abraham and R. Harris (both ECCB) participated in most meetings.
Contents
CONTEXT: BEFORE COVID-19
RECENT DEVELOPMENTS: THE IMPACT AND POLICY RESPONSE TO THE PANDEMIC
OUTLOOK AND RISKS
POLICY PRIORITIES: ENSURING A WELL-GROUNDED RECOVERY
A Reopening the Economy for Tourism and Supporting the Recovery
B. Dealing with Crisis Legacies in the Financial Sector
C. Rebuilding Buffers and Creating Sufficient Resilience to Shocks
D. Boosting Productivity and Reducing Volatility through Diversification
STAFF APPRAISAL
BOXES
1. Risk Assessment Matrix
2. Update on the Debt-for-Land Swap
FIGURES
1. Regional Context
2. Real Sector Developments
3. Fiscal Sector Developments
4. External Sector Developments
5. Banking System Developments
TABLES
1. Fiscal Scenarios byCBI Path Assumption, 2020–30
2. Basic Data, 2016–26
3a. General Government Fiscal Operations, 2016–26 (In millions of Eastern Caribbean dollars)
3b. General Government Fiscal Operations, 2016–26 (In percent of GDP)4. Balance of Payments, 2016–26
5. Monetary Survey, 2016–20
6. Selected Financial Soundness Indicators: 2016–20
7. Indicators of External and Financial Vulnerability, 2016–20
8. External Financing Requirement and Sources, 2016–26
ANNEXES
I. Progress on 2018 Article IV Policy Recommendations
II. External Sector Assessment
III. Debt Sustainability Analysis
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff pre pa res a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/aualifiers.htm.
