St. Kitts and Nevis: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for St. Kitts and Nevis
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International Monetary Fund. Western Hemisphere Dept.
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Publication Date:
28 Oct 2021
eISBN:
9781513599151
ISBN:
9781513599151
Language:
English
Keywords:
CBI revenue; due diligence; GDP deflator; downside CBI risk; CBI program; COVID-19; Caribbean; lower-than-expected CBI receipts; construction boom
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1. St. Kitts and Nevis is a small and relatively rich two-island economy. Its GDP per capita of US$19,000 is among the highest in Latin America and the Caribbean and it scores relatively well in governance indicators. Tourism is the main source of revenue, but it also has light manufacturing and receives considerable CBI revenues.1 Like other small islands and Caribbean countries, St. Kitts and Nevis is highly exposed to external shocks, global economic cycles, and natural disasters.

Abstract

1. St. Kitts and Nevis is a small and relatively rich two-island economy. Its GDP per capita of US$19,000 is among the highest in Latin America and the Caribbean and it scores relatively well in governance indicators. Tourism is the main source of revenue, but it also has light manufacturing and receives considerable CBI revenues.1 Like other small islands and Caribbean countries, St. Kitts and Nevis is highly exposed to external shocks, global economic cycles, and natural disasters.

Context: Before Covid-19

1. St. Kitts and Nevis is a small and relatively rich two-island economy. Its GDP per capita of US$19,000 is among the highest in Latin America and the Caribbean and it scores relatively well in governance indicators. Tourism is the main source of revenue, but it also has light manufacturing and receives considerable CBI revenues.1 Like other small islands and Caribbean countries, St. Kitts and Nevis is highly exposed to external shocks, global economic cycles, and natural disasters.

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Americas and Europe: Governance and GDP Per Capita, 2019

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Note: Excludes Norway, Ireland and Luxembourg.Source: World Bank database

2. Rapid convergence of income levels with the US stopped in the late 1990s. This was partly the result of a deep crisis between 2008 and 2012, when per capita GDP declined by 10 percent.

3. In the decade preceding the pandemic, the country successfully built up large fiscal buffers. A significant part of large CBI revenues averaging 10 percent of GDP during 2012–19 was prudently saved, resulting in a decade of fiscal surpluses. Combined with the 2012–14 sovereign debt restructuring, public debtfell from a 2010 peak of 145 percent of GDP to 52 percent in 2019, making St. Kitts and Nevis the first country in the ECCU that met the regional debt target of 60 percent by 2030.2 Moreover, significant government deposits were built up in the local banking sector (24 percent of GDP at end-2019).

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St. Kitts and Nevis: Real GDP Per Capita

(Ratio to US Real GDP per Capita)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Source Penn World Tables 10.0
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Citizenship by Investment Revenue in the ECCU

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: Country authorities and MF staff estimates.
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Change in Public Debt to GDP Ratio: 2010–2019

(Percentage points of GDP)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: IMF World Economic Outlook database.
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Average Fiscal Balance: 2011–2019

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: IMF World Economic database.

Recent Developments: The Impact and Policy Response to the Pandemic

4. A prompt closure of the borders in March 2020 helped contain the spread of the disease, but the impact on the economy was severe. St. Kitts and Nevis had no deaths and the lowest number of cases in per capita terms in the western hemisphere in 2020. A complete halt in cruise ship arrivals and very few stayover tourists since the first quarter of 2020 compounded on the pandemic’s disruptions on domestic activity, and GDP declined by 14 percent in 2020.

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Real GDP Contributions to Percent Change in 2020

(Estimates of main selected sectors; in percentage points)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Source: Staff projections
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Stayover Arrivals

(Visitor expenditure in millions of EC dollars)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: ECCB and staff estimates.

5. To mitigate the impact of the pandemic, the government appropriately launched a significant fiscal package of 3½ percent of GDP. The government bought medical equipment and supplies and i) deferred the property tax from June to September 2020; ii) reduced the unincorporated business tax rate from 4 to 2 percent for the remainder of 2020; iii) temporarily cut the income tax from 33 to 25 percent for companies that retained at least 75 percent of their personnel; and, iv) committed additional resources to boost the agriculture sector; and v) waived utilities fees.3 In addition, the Social Security Board (SSB) provided payments to workers who lost their jobs or saw their hours reduced (about a quarter of the working age population), with a total cost of about 0.9 percent of GDP. Loan moratoria further cushioned the impact on the private sector.

St. Kitts and Nevis Stimulus Package in 2020

article image
Source: MoF staff, 2021 Budget Address, IMF Staff Estimates

This item also includes waivers to farmers.

6. A reduction of capital spending limited the deterioration of the fiscal balance. The fiscal balance declined from +0.3 percent of GDP 2019 to -4.7 percent in 2020. The impact of the government’s fiscal package was exacerbated by the large cyclical impact on tax revenues (-4.3 percent of GDP) and a decline in CBI revenues (-1.5 percent of GDP) after an unusually strong 2019. A base effect from a one-off land buy-back in 20194 and a reduction in other capital expenditures helped contain the increase of the deficit, which was financed through a drawdown of deposits.

St. Kitts and Nevis: 2020 Budget and Actual

(In millions of Eastern Caribbean dollars)

article image
Sources: St Kitts and Nevis authorities; and Fund staff estimates.

7. A swift policy response cushioned the pandemic’s impact on financial stability. This included bank loan moratoria extended through end-September 2021 and a temporary freeze on overdue and moratoria loans’ prudential classification.5The Financial Services Regulatory Commission (FSRC) and the National Co-operative League implemented similar forbearance measures for credit unions up to six months, with further moratoria extensions determined at the entity level. At end-March 2021, the share of bank and credit union performing loans under moratoria continued to stand at around 20 and 12 percent respectively. Financial conditions have so far remained stable, with ample liquidity from large public and remarkably resilient private sector deposits, only modest uptick in NPLs and bank profitability buoyed by returns from sizeable overseas investments.

8. Consumer prices declined again in 2020. Consumer prices have been declining since 2014. However, this reflects lower import prices rather than the absence of domestic inflationary pressures. The GDP deflator has been increasing steadily in the past decade, reflecting higher prices mostly in construction, taxes, public administration, financial intermediation, supporting transport activities, business services and hotels.

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CPI and GDP Deflator

(1980=100)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: ECCB and IMF staff calculations.

Contributions to Total Percent Change in GDP Deflator: Main Components

article image
Sources: ECCB, IMF CART AC and staff calculations.

9. According to preliminary ECCB estimates based on partial information, the current account deficit increased from 4.8 percent of GDP in 2019 to 14.5 percent of GDP in 2020. A sharp drop in tourism receipts and lower CBI receipts were the main factors behind the deterioration, which was partly offset by lower imports and profit payments. However, the current account deficit may have been overestimated. About two thirds of the corresponding capital inflows consisted of a reduction in commercial banks’ net foreign assets (NFA), but according to the monetary survey, there was no NFA drawdown of corresponding scale (intuitively corresponding to banks’ limited liquidity needs).

10. In 2020, the external position was broadly in line with the level consistent with medium-term fundamentals and desirable policy settings. Starting from the ECCB’s current account estimate of -14.5 percent of GDP, the underlying current account (-5.4 percent of GDP) was broadly in line with the level consistent with medium-term fundamentals and desirable policies (4.3 percent of GDP), corresponding with a REERgap of 2.6 percent.

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Monthly Stayover Tourist Arrivals

(Number of persons)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Source: Caribbean Tourism Organization, as of July2021.

11. The authorities reopened the country to tourism on October 31, 2020, while keeping restrictions in place to avoid a spike in COVID-19 cases. Tourists needed to present a negative PCR test before arrival, and for the first 14 days could only stay at pre-approved hotels and not travel around the island.6 Stay over arrivals started picking up in November although levels remained far below pre-Covid and cruise arrivals are yet to resume.

12. In June 2021, a flare-up in Covid-19 cases led to new restrictions and another, partial, lockdown. St. Kitts and Nevis successfully avoided community spread from isolated cases until late May 2021, when it suddenly faced a significant spike in infections and 3 deaths. In response, on June 12, the government decreed a two-week partial lockdown.7 Hotels remained open, but only fully vaccinated tourists were now allowed. In addition, extensive testing and contact-tracing has been deployed, with all Covid-19 cases successfully traced. Free quarantine facilities for local patients living in vulnerable and high-density conditions have been established.

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Total COVID-19 Cases

(Per million)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: Johns Hopkins database and IMF staff calculations.
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New COVID-19 Cases

(Per million; 7-day moving average)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: Johns Hopkins database and IMF staff calculations.
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ECCU: Total COVID-19 Infections

(Per million population)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Source: Johns Hopkins University Haver and IMF staff calculations

COVID-19 Cases in the ECCU 1/

(Per million population)

article image

Data as of July 27,2021.

Sources: Worldometers.irfo/coronavirus and IMF staff estimates.

Outlook and Risks

13. Rapid progress in vaccination in both St. Kitts and its major tourist markets should set the stage for a strong recovery from 2022 onward. Staff projects a small further decline in GDP of 1 percent in 2021, followed by 10 percent growth in 2022.8 After 2022, growth would gradually slow as output gaps close. GDP levels would return to 2019 levels in 2023. By 2025, GDP growth would be in line with potential, which staff estimates at 2.7 percent— 1.9 percent in per capita terms.

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Flight Arrivals in the Caribbean

(Percentage change between Jan-May 2019 and Jan-May 2021)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: Flightradar.com and IMF staff calculations.

14. Risks to the outlook remain significant. 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.

Authorities’ Views

15. The authorities had similar views on the risks to the outlook. They sawCovid-19, CBI revenue volatility and natural disasters as the main risks, but they were hopeful that strong CBI revenues would continue based on the level of interest through the pandemic. They considered the risk from natural disasters as high and did not foresee any material risk of widespread social unrest in St. Kitts and Nevis.

16. At the time of the mission, the authorities had not yet decided whether they are going to draw on the SDR allocation. The new allocation would increase St. Kitts and Nevis’ SDR allocation bySDR 11.8 million to SDR 20.3 million, of which SDR 16.5 million (2.6 percent of GDP) remains undrawn.

Risk Assessment Matrix1

article image
1 The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood is the staffs subjective assessment of the risks surrounding the baseline (“low”is meant to indicate a probability below 10 percent, “medium”a probability between 10and 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. The conjunctural shocks and scenario highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given the current baseline. Structural risks a re those that a re likely to remain salient overa longer horizon.

Policy Priorities: Ensuring a Well-grounded Recovery

Policy makers face several challenges. In the near term, these include bringing and then keeping the recent Covid-19 flare-up under control. Reaching herd immunity through vaccination is needed to safely allow full reopening of the country for tourism. In the meantime, boosting investment and keeping fiscal relief measures in place will help support the economy. To further support the recovery, risks from legacy weaknesses in the financial sector need to be mitigated while taking steps to promote post-pandemic balance sheet repair. Once the recovery is firmly established, fiscal buffers should be rebuilt given high susceptibility to external shocks and CBI revenue volatility.

A. Reopening the Economy for Tourism and Supporting the Recovery

17. At the time of the mission, the government’s immediate concern was getting the Covid-19 outbreak under control. In late June, after the mission, the initially two-week partial lockdown was extended and intensified, as community spread continued, albeit at a lower level.9

18. The authorities reopened to cruise arrivals in late July. To avoid community transmission, only fully vaccinated cruise passengers are allowed into the country, and must participate in “bubble tours”, interacting only with fully vaccinated tourist workers.

19. To protect lives and livelihoods, the government aims to vaccinate 70 percent of the population aged 18 and older.10 As of June 21, 35 percent of the target population had been fully vaccinated, while 67 percent of the government target population had received the first dose.11

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COVID-19 Vaccinations in the Caribbean

(Number of people who have received at least one dose per 100 population)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

1/ BHS data as of July 17, JAM data as of July 23, BRB data as of July 24, TTO and ECCU country data as of July 25, 2021.Sources: ECCB, University of Oxford’s Our World in Data project and IMF staff calculations.

20. The government aims to support the economy through fiscal relief measures and public investment. Covid-19 relief measures for the private sector have been appropriately extended in 2021. They include the temporary reductions of the Corporate Income Tax and Unincorporated Business Tax, VAT and import duty removals from certain goods, and waivers to water payments. Additional transfers are being made this year to the agriculture sector (EC$5 million), the Poverty Alleviation Program (EC$3 million), and the Severance Payment Fund (EC$7 million). A planned increase in public investment from the low levels in 2020 would further support the economy although the authorities expressed concern regarding a possible slowdown in implementation as a result of difficulties in importing cement and other construction inputs.12

21. In early July, the government announced further measures to support the longer-term unemployed and SMEs. The government will pay EC$1000 a month for three months to those who have been out of job since March 2020.13 Support to SMEs mainly consists of temporary tax reductions and waivers.14

22. The government has boosted CBI revenues through a modification of the CBI program. A temporary reduction of the needed donation under the CBI Sustainable Growth Fund program and the introduction of new CBI options15 have fueled applications and revenues. CBI revenues are now projected at 13 percent of GDP, up from 10 percent in 2020.

23. The increase in CBI revenues has helped contain the fiscal deficit. Staff projects a deficit of around 2 percent of GDP in 2021, down from 4.7 percent in 2020.16

St. Kitts and Nevis: General Government Fiscal Operations, 2019–21

(In millions of Eastern Caribbean dollars)

article image
Sources: St. Kitts and Nevis authorities; and Fund staff estimates.

The higher actual Z0Z0 GDP relative to the Z0Z0 Budget projection (despite the Covid shock) results from a recent upward revision of the historical GDP series.

Authorities’ Views

24. The government’s main focus was to protect lives. At the time of the mission, the authorities were hopeful that the duration of the partial lockdown would be limited due to steady progress in vaccination. They noted that the number of new cases had started to fall and that all new infections had been successfully traced to existing cases. However, no measure was off the table if the pandemic continued to spread.

25. The government recognized that vaccinating the full target population in the near term would be challenging. At the time of the mission it needed about 24 thousand additional vaccine doses to meet its target,17 but hoped to receive a share of the vaccines pledged by the US to CARICOM through COVAX.

26. The government concurred with the merits of supporting the economy through higher investment but noted implementation constraints. Capital projects had experienced pandemic related delays, including difficulties in importing cement and other construction inputs as a result of supply chain disruptions and constraints due to Covid-19 spikes and restrictions in source markets.

B. Dealing with Crisis Legacies in the Financial Sector

27. Financial system vulnerabilities precede the current crisis. Going into the crisis, the local banks held large capital buffers, but also (i) high NPLs ( averaging about a quarter of total loans) and low provisioning, (ii) a sizeable and illiquid legacyfixed assetfromthe 2012–14 debt-for-land swap and (iii) large overseas investments of excess liquidity subject to heightened revaluation risks. Credit unions’ pre- pandemic NPLs were more limited (6 percent), but they also held thinner prudential buffers following preceding years’ rapid credit expansion (Table 6).

Table 1.

Fiscal Scenarios by CBI Path Assumption, 2020–30

(In percent of GDP)

article image
Source: Authorities data and IMF staff calculations.

Assumes that half of maturing debt is refinanced.

Assumes that half of additional revenue is spent on investment and other half is saved.

Assumes 2.5 percent of GDP reduction in capital expenditure in response to lower CBI revenues.

Assumes borrowing that would bring public sector debt below the regional target 60 percent of GDP.

Table 2.

St. Kitts and Nevis: Basic Data, 2016–26

article image
Sources: St. Kitts and Nevis authorities; ECCB; UN DP; World Bank; and Fund staff estimates and projections.

In June 2021, the National Statistics Office revised historical GDP series.

The series for monetary aggregates have been revised consistent with the 2016 Monetary and Financial Statistics Manual and Compilation Guide.

Consolidated general government balances. Primary and overall balances are based on above-the-line data.

Excludes CBI budgetary fees, and Investment proceeds and CBI due diligence costs.

Includes only central government deposits at the commercial banks.

Table 3a

St. Kitts and Nevis: General Government Fiscal Operations, 2016–26 1/

(In millions of Eastern Caribbean dollars)

article image
Sources: St. Kitts and Nevis authorities; and Fund staff estimates.

Combined accounts of the Federal Government of St. Kitts and Nevis and the Nevis Island Administration.

In 2018 and 2019, includes ECS 100 million buy-backs of land related to the debt-land swap.

Based on actual data of 10 public sector corporations and estimates for 4 others. No audited financial statements have yet been published for St. Kitts Electricity Company {SKELEC).

Table 3b.

St. Kitts and Nevis: General Government Fiscal Operations, 2016–26 1/

(In percent of GDP)

article image
Sources: St. Kitts and Nevis authorities; and Fund staff estimates.

Combined accounts of the Federal Government of St. Kitts and Nevis and the Nevis Island Administration.

In 2018 and 2019, includes ECS 100 million buy-backs of land related to the debt-land swap.

Based on actual data of 10 public sector corporations and estimates for 4 others. No audited financial statements have yet been published for St. Kitts Electricity Company (SKELEC).

Table 4.

St. Kitts and Nevis: Balance of Payments, 2016–26 1/

article image
Sources: ECCB; and Fund staff estimates and projections.

Reflect the outcome of the debt exchange offer to bondholders and external commercial creditors.

Table 5.

St. Kitts and Nevis: Monetary Survey, 2016–20 1/

article image
Sources: ECCB; and Fund staff estimates and projections.

The series for monetary aggregates have been revised in 2020 consistent with the 2016 Monetary and Financial Statistics Manual and Compilation Guide. Historical mapping may involve inconsistencies due to data limitations.

Includes net credit to the national insurance scheme and statutory bodies providing goods and services without charging fees.

Statutory bodies charging prices for their goods and services that cover fully or mostly their operational costs.

Includes only central government deposits at the commercial banks.

Table 6.

Selected Financial Soundness Indicators: 2016–20

(In percent)

article image
Sources: FSRC, ECCB and Fund staff calculations.

Data available only for locally incorporated banks

Not included in standard FSIs.

Institutional capital and non-withdrawable member shares.

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Nonperforming Loans

(In percent of total gross loans)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Source: ECCB

28. The pandemic adds to the vulnerabilities, but its full asset quality impact will become apparent only upon expiry of the loan moratoria. 18 At the same time, the phased introduction of stricter ECCB provisioning standard from 2021 is likely to impel more timely loss recognition, including by curtailing use of loan collateral to limit provisioning needs for long-overdue loans.

29. Building readiness for the exit from the temporary support measures can help mitigate risks and support post-pandemic balance sheet repair. Key measures include:

  • Review and formalize crisis management plans in coordination with the ECCB: These should cover both banks and non-banks, set out readily operationalizable policy responses to downside risk scenarios, and ensure the adequacy of requisite legal powers and coordination arrangements (see the 2021 Discussion on Common Policies).

  • Contain risks in the systemically significant bank that also houses the bulk of public sector reserves. Loan loss provisions should be increased to provide adequate cover for the sizeable and long-standing portfolio of impaired loans (about half of total loans at mid-2020), and the allocation of the bank’s large overseas investments that drive its financial performance should mitigate the risk of abrupt fair-value losses.

  • Implement further supervisory guidance for the non-bank sector: This should include more formal FSRC guidance on the application and expiry of loan moratoria, encouraging loan restructurings over further moratoria extensions. Updated provisioning guidance similar to the new ECCB standard can help timely loss recognition. While the pandemic impact on the insurance sector has so far been limited, companies should be encouraged to assess the potential impact from the loan moratoria’s expiry.

  • Completion of long-standing reforms would support post-pandemic asset recovery. These include streamlining protracted foreclosure processes,facilitating non-citizen ownership of property and revisiting funding of regional NPL divestment strategies.19

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Credit Unions: Credit Quality Indicators

(End of period, in percent of total loans)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

1/ The share of loans under moratoria does not reflect the expected scale of future delinquencies as some of the loans would return to normal payment before or upon the support measures’expiry. Sources: FSRC; and IMF staff calculations.

30. A more robust plan is needed to divest the unsold lands from the 2012–14 sovereign debt restructuring (Box 1). Private sales of the lands have not materialized as intended under the terms of the debt-for-land swap. Notwithstanding the recent partial buy-backs by the government, the systemic bank has therefore been left with a large illiquid asset (nearly a fifth of its total assets) earning a modest annual dividend from the government.20 Updating the near-decade old valuations of the unsold lands that may have also been affected by the pandemic, and revisiting the cost-sharing agreement between the bank and the government on any shortfalls from original valuations, can help reinvigorate the divestment process. This should be combined with a more active marketing strategy to attract potential investors, including through closer coordination with the CBI program. The authorities should also review the costly alien land holding license requirement that may limit overseas interest among non-CBI investors.

31. Careful management of financial integrity risks remains important, including to support correspondent banking relationships (CBRs) and sustaining CBI revenues. The pandemic has so far not materially affected available CBR services or costs, but foreign banking groups’ recently reduced market presence increases the financial system’s reliance on local banks’ relationships.21 This further emphasizes the need to limit operational and reputational risks, including by completing pending AML/CFT legislative amendments (foremost designation of ECCB as the competent AM L/CFT authority over institutions licensed under the Banking Act), addressing the risks identified in the recently updated AM L/CFT National Risk Assessment (NRA) and the ongoing CFTAF (Caribbean Financial Action Task Force) mutual evaluation, and diligently containing integrity risks from the CBI program including by strengthening its transparency22

Authorities’ Views

32. The authorities broadly agreed with staff’s assessment and remain mindful of the pandemic’s potential impact on financial sector asset quality. They took note of the need to review national crisis management plans and to contain risks around the systemically important bank. The FSRC is considering undertaking a more formal approach to its moratoria guidance to credit unions, noting however that provisioning requirements are stipulated by law.23 The authorities acknowledged the need to reform the lengthy foreclosure processes and are reviewing processes for non-resident real estate investment. They also remain open to consider resolution options for the remaining debt-swap lands but noted that the pandemic environment is not an opportune time for real estate sales.

33. The authorities highlighted recent progress in bolstering the national AML/CFT and tax cooperation frameworks, as well as extensive CBI program safeguards. The authorities passed a suite of legislations in late 2020 and are undertaking other follow-up measures to address risks identified in the NRA report and see good prospects for compliant assessment under the CFATF mutual evaluation upon its completion in late 2021. St. Kitts and Nevis was removed from the EU’s list of non-cooperative tax jurisdictions in February 2020 having implemented the necessary reforms and is working to ensure continued compliance with these and the OECD tax transparency and information exchange standards. The authorities are conscious of financial integrity risks emanating from the CBI program, but also stressed the program’s robust multi-layered due diligence framework that includes comprehensive and systematic background checks with reputable due diligence firms and international law enforcement partners.

Update on the Debt-for-Land Swap

The debt-for-land swap was a cornerstone component of the sovereign debt restructuring announced in 2011 and implemented under auspices of an IMF stand-by program. At about EC$800 million, the swap comprised roughly 60 percent of the total value of debt exchanged with external and domestic creditors over 2012–14 and contributed nearly ¾ to the total 56 percent of GDP face value reduction in public debt by end-2014.

The swap was based on an innovative mechanism that may however have led to sale price rigidities. Domestic banks’ public sector claims were replaced in three tranches by a claim on proceeds from the future sales of sovereign lands by a Special Land Sales Company (SLSC).1 Under the terms of the swap, the government guarantees the face-value of the asset (by transfer of additional lands for sale), and the price range for the lands is subject to a minimum relative to their original valuation. Conversely, the government would retain any windfall over the face value of the original debt. It also pays an annual dividend on the value of the asset under separately negotiated agreements.

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Debt-for-Land Swap: Value of the Undivested Land Stock

(In millions of EC dollars)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: Bank financial statements and IMF staff calculations.

Divestment of the lands has been slow besides the two-government land repurchases in 2018 and 2019. This may reflect valuation rigidities, but also other factors including sluggish operationalization of the SLSC and its marketing strategy, the domestic real estate market’s limited capacity to absorb lands of this scale, property acquisition costs to non-CBI foreign investors, limited existing development in some of the lands, as well as conjunctural factors such as the Covid-19 pandemic.

1 The sovereign debt included in the debt swap was collateralized by lands that originated from the national sugar industry after it was shut down in 2005.

C. Rebuilding Buffers and Creating Sufficient Resilience to Shocks

34. As a small, natural disaster-prone country dependent on tourism and CBI revenues, St. Kitts and Nevis needs significant buffers. Historical volatility of GDP growth is high; and volatility of consumption is even higher.24 Annual CBI revenues have averaged 11 percent of GDP (30 percent of total revenues) since 2012, but they have also been very volatile, dropping by about a half between 2014 and 2016, and tripling from 2017 to 2018.

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Real Consumption and Real GDP Per Capita: 1990–2019

(Standard deviation of annual growth)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Source: Penn Wand Tables

35. Large buffers would also provide more fiscal space to mitigate contingent government liability risks and looming long-term fiscal pressures.

  • Resolution of the remaining swap-lands: About 20 percent of GDP worth of lands remain to be divested, giving rise to potentially sizeable contingent liability should other resolution options not prove feasible.25

  • Pensions. The partially funded PAYG pension system managed by the SSB has built up large reserves (about 55 percent of GDP in 2019) but benefits now exceed contributions. Under the most recent actuarial projection as of 2017, the reserves will be exhausted by the mid-2030s.

  • Health care. In January 2021, the cabinet established an implementation committee for advice on setting up Universal Health Insurance Scheme (UHIS), which is expected to have an annual cost of EC$143—181 million (5–7 percent of GDP). Although salary deductions are being considered as one of the options to partly fund this initiative, its full financing is yet to be defined.

36. A deposit target of 25 percent of GDP would provide significant buffers against both macro-economic shocks and natural disasters. About half of this would be for economic shocks and half for self-insurance of natural disasters.26 The deposits should be supplemented by obtaining sufficient coverage under the Caribbean Catastrophe Risk Insurance Facility (CCRIF) against very large tropical storms, and further investment in disaster resilient infrastructure.

37. Given the large size of CBI revenues, St. Kitts and Nevis’ fiscal outlook depends on what happens to these volatile and hard-to-predict inflows. Table 1 presents projections of headline fiscal items under three different CBI scenarios: a Baseline scenario in which CBI revenues at 9 percent of GDP (broadly their average level in the last ten years); an Optimistic scenario with CBI revenues remaining at 14 percent of GDP (approximately their 2018–19 level); and a Pessimistic scenario in which CBI revenues remain at 4 percent of GDP (slightly below their 2016–17 level).

38. For the baseline scenario, staff advocates an overall surplus of at least 2 percent of GDP. This would allow rebuilding deposit buffers by the end of the decade to near pre-crisis levels and reducing public debt to about 40 percent of GDP.27 The targetted surplus though would leave only modest room for capital expenditure of about 3 percent of GDP. To create more space for investment, measures to reduce current expenditure or increase other revenue could be considered.

39. For the optimistic scenario, staff recommends saving half of the additional CBI revenues and using the other half to fund higher investment. The higher savings would lead to a faster build-up of deposit buffers relative to the baseline (up to 44 percent of GDP by the end of the decade).28 The higher deposits would create more room to address contingent fiscal pressures or establish a savings fund with a longer-term mandate, such as inter-generational income sharing.

40. The pessimistic scenario would necessitate fiscal adjustment to avoid running down the government’s buffers. To prevent further erosion of the deposit-to-GDP ratio below its projected level in 2022 (the first full year of recovery), part of the revenue shortfall could be compensated by lower investment, and part by a lower fiscal balance. In this scenario the additional borrowing to finance the resulting deficit of 1.2 percent of GDP and the build-up of deposits needed to keep the deposit-to-GDP ratio constant would keep public debt near the regional 60 percent of GDP debt target. The government would thus be left with much more limited space to respond to shocks or contingent fiscal pressures, while investment would be at very low levels. To create room for more investment and to allow for higher buffers, measures to reduce current expenditure or increase other revenue would be needed.

41. Proactively reviewing borrowing options and re-establishing market presence can help mitigate the downside CBI risks. The pessimistic scenario is likely to require ramping up government borrowing, including on commercial terms. However, any meaningful market access remains to be tested since the sovereign debt restructuring, and the post-pandemic regional sovereign debt market is getting saturated with increased financing needs of other sovereigns and the more cautious stance taken by some investors. Even though the still-sizeable deposits may provide potential investors a significant safeguard, the government should consider (i) starting to gradually re-establish a market presence both externally as well as in longer maturities; (ii) alleviating the potential areas of investor uncertainty from the unresolved debt-swap lands, the pension system and the health insurance reform, as well as enhancing transparency of SOEs accounts and Central Government assets and debt liabilities.

42. It will also be important to review management options for the government’s buffers and the national insurance reserves. The bulk of the SSB’s national insurance funds and the central government’s savings are . deposited in the indigenous banking system, which in turn seeks returns in overseas markets given excess liquidity and limited opportunities domestically. The authorities should consider greater geographical and asset class diversification, while for the SSB longer maturities would better match its liability structure and institutional role.

43. Several other areas of Public Financial Management could be strengthened. The government’s Medium-Term Framework should be published and eventually supplemented with a Fiscal Strategy Statement that embodies formal fiscal objectives and targets. In addition the authorities should continue (i) strengthening macro-fiscal projections and the identification of fiscal risks; (ii) the credibility of revenue forecasts and the investment budget; (iii) strengthening the top-down aspects of budget preparation;29 (iv) finalizing regulations under the FAA; (v) improving PSIP project preparation and selection; and (vi) making progress under the PFM Reform Action Plan. The recent rise in State-Owned Enterprises (SOEs) debt highlights the need for timely publication of financial statements.

Debt sustainability analysis

44. The debt outlook would be relatively robust under the baseline scenario. Standard primary balance and growth shocks or a natural disaster would imply modestly higher yet still downward trending debt trajectories. A combination of these macro-fiscal shocks or a full reacquisition of land related to the debt-land swap would more significantly increase the debt-to-GDP ratio, but the impact would be reversed over the medium-term.

Authorities’ Views

45. The authorities’ agreed on the need to maintain sizeable buffers and concurred with staff approach to assess the fiscal outlook based on different CBI revenue scenarios. They expressed their preference to preserve liquid assets that could allow them to swiftly react to natural disasters and other sudden shocks. They aim to maintain strong public investment, including for natural disaster resilience. The authorities were not concerned about market access if they needed to borrow. They noted that there had been interest in the market in St. Kitts and Nevis sovereign debt, which had been boosted by its strong fiscal performance and debt management. They further reiterated their commitment to implement pending PFM reforms in their action plan, and emphasized the need for SOEs to improve compliance.

46. The government is considering options to address its contingent liability risks. Aware of the need to reform the partly funded pension system, the Cabinet has recently appointed a reform committee that will be informed by forthcoming actuarial recommendations. The authorities have also established a committee to consider options for introducing a universal health insurance scheme (UHIS) given current low coverage and high costs of insurance which results in delayed care for the uninsured. Funding for the UHIS is under consideration by the authorities, which have expressed the intent to implement it in a fiscally sustainable manner.

uA001fig19

Share in GDP of Gross Capital Formation at Current Purchasing Power Parities

(In percent)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Source: Perm World Tables 10.0

D. Boosting Productivity and Reducing Volatility through Diversification

47. GDP per capita growth in the last two decades has been relatively weak. As a result, there has been no further convergence of GDP per capita levels with those in the United States. Growth has been held back by weak productivity growth—investment has been high.

uA001fig20

St. Kitts and Nevis: Growth Decomposition, 1971–2019

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: IMF staff calculations, Guerson et al. 2017,
uA001fig21

Americas: Population and Capital Output Ratio, 2019

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Source: Penn World Tables 10,0

48. Weak productivity growth may partly reflect the limits of a small-island economy. Like most small islands in the Western Hemisphere, St. Kitts and Nevis has a high capital-output ratio. The decline in TFP growth may also be the result of the finished transition of an agricultural to a tourism-based economy.

49. Human capital likely plays a role as well. Compared with Europe, and the US, human capital levels in St. Kitts and Nevis are relatively low.30This does not reflect so much input (years of schooling) but output (relatively low scores on harmonized test scores). Large scale emigration has further exacerbated the problem—a large part of well-schooled Kittitians and Nevisians live abroad.

uA001fig22

Americas and Europe: Human Capital and GDP Per Capita, 2019

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Note: Excludes Norway, Ireland and Luxembourg.Source: World Bank database.
uA001fig23

Americas and Europe: Expected Years of School and Harmonized Test Scores, 2019

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Source: World Bank database.

50. High public sector wages and a CBI-induced construction boom may have reduced competitiveness by driving up wages in the tradable sector. In the ECCU, St. Kitts and Nevis is the country with the highest public sector wages, and the second highest private sector wages.

51. High electricity costs further hamper competitiveness. Although average electricity rates in St. Kitts and Nevis are lower than in other ECCU countries, they are higher than in Latin America and developing countries. 95 percent of electricity generation uses imported diesel.

52. Several reforms might help boost productivity growth and promote diversification (which would reduce economic volatility)

  • Promote other sources of growth by fostering vertical and horizontal linkages between agriculture and tourism.

  • Upgrade skills through targeted training programs, and better align the STEP program and the education system with the needs of the labor market. Current proposals for a hospitality training institute would help enhance human capital in the tourism sector.

  • Promote an environment in which wages grow in line with productivity. Ensure that the new labor code currently being drafted and soon to be submitted to cabinet for consideration avoids imposing rigidities in the wage setting process.

  • Improve the business climate and make it easier to for small firms to get credit, including by introducing a uniform commercial code to allow for broader assets to be used as collateral, and reducing legal and administrative impediments to asset recovery.

uA001fig24

Public and private wages in the ECCU (2017)

(Wages in thousands of EC dollars; public/private comparison in percent)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: Staff calculations, Guerson et al. 2017.
uA001fig25

Electricity Prices in 2020

(US cents per kWh)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Source: World Bank Wortd Development Inductors database

Authorities’ Views

53. To boost growth, the authorities are channeling CBI flows to other sectors. In addition to the traditional use of the CBI flows for hotel real estate development, the CBI program now offers two new investment options (the alternative investment option and the private homes sales option31), which target other sectors. According to the CBI unit, residences and infrastructure have been funded with these resources, and plans to fund investments in agriculture and other areas are envisioned.

54. The authorities intend to reduce dependency on imported fuel by diversifying into solar energy. They have signed a contract for a new solar plant that will replace 60–75 percent of diesel generated power. The contract should be completed in the next 18 months. The government also continues to explore geothermal energy options.

55. The government is in the process of transitioning the STEP program by absorbing current participants into the government work force. In light of the current economic situation, in consultation with the National Tripartite Committee on International Labour Standards, the government has no plans for increases of the minimum wage.

Staff Appraisal

56. St. Kitts and Nevis entered the Covid-19 pandemic from a position of fiscal strength. A significant part of the large CBI revenues was prudently saved, leading to a decade of fiscal surpluses, a reduction of public debtto belowthe regional debttargetof 60 percent of GDP, and accumulation of large government deposits.

57. Prompt government action helped to contain the pandemic’s public health impact, but the impact on the economy has been severe. A complete halt in cruise ship arrivals and very few stayover tourists since the first quarter of 2020 had a severe impact on the economy. A fiscal package, unemployment payments and loan moratoria, helped mitigate the impact of the pandemic on the private sector.

58. In the near term, containing the pandemic and supporting the economy remain the key policy priorities. Reaching herd immunity through vaccination 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.

59. Once the recovery is firmly established, the government should resume its policy of saving part of the CBI revenues to build 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 would also provide more fiscal space to mitigate contingent and long-term fiscal pressures..

60. Financial sector policies should increasingly focus on building readiness for the exit from temporary support measures. The pandemic’s full asset quality impact will become apparent only upon the expiry of the loan moratoria and may over time test the financial system’s sizeable buffers. Risks maybe contained by reviewing and formalizing crisis management plans, containing risks in the systemic bank, guiding non-banks’ preparedness, and pursuing reforms to facilitate asset recovery. A more robust divestment plan for the swapped lands can help reinvigorate private sales.

61. Reforms to strengthen productivity growth, economic competitiveness, and human capital would help restart income convergence with the US. These include attracting investment beyond the tourism sector, upgrading skills through focused training programs, better aligning the education system with the needs of the labor market, and making it easier for small firms to access credit, including through reforms that facilitate use of non-fixed asset as loan collateral.

62. The external position is broadly in line with the level consistent with medium-term fundamentals and desirable policy settings.

63. It is recommended that the next Article IV consultation takes place on the standard 12-months cycle.

Figure 1.
Figure 1.

St. Kitts and Nevis: Regional Context

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: Country authorities and IMF staff calculations.
Figure 2.
Figure 2.

St. Kitts and Nevis: Real Sector Developments

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: Country authorities and IMF staff calculations.
Figure 3.
Figure 3.

St. Kitts and Nevis: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: Country authorities and IMF staff calculations.
Figure 4.
Figure 4.

St. Kitts and Nevis: External Sector Developments

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: Country authorities and IMF staff calculations.
Figure 5.
Figure 5.

St. Kitts and Nevis: Banking System Developments

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Sources: Country authorities and IMF staff calculations.
Table 7.

St. Kitts and Nevis: Indicators of External and Financial Vulnerability, 2016–20

(12-month percentage change, unless otherwise specified)

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

The series for monetary aggregates have been revised consistent with the 2016 Monetary and Financial Statistics Manual and Compilation Guide.

Table 8.

St. Kitts and Nevis: External Financing Requirement and Sources, 2016–26

(In millions of US dollars)

article image
Sources: St. Kitts and Nevis authorities; Eastern Caribbean Central Bank; and Fund staff estimates and projections.

Based on the Program exchange rate (US£1 = 0.625 SDR).

Includes clearance of NIA’s debt service arrears through restructuring in 2015.

Annex I. Progress on 2018 Article IV Policy Recommendations

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Annex II. External Sector Assessment

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The Eastern Caribbean dollar, the currency of St. Kitts and Nevis, is pegged to the U.S. dollar.

According to the ECCB by-laws, the imputed reserves of each ECCB member are calculated as the difference between the member’s reserve money and net domestic assets. The ECCB has the mandate to maintain a foreign exchange cover of 60 percent of total demand liabilities.

IMF 2015, Assessing Reserve Adequacy-Specific Proposals. Reserve adequacy assessments for currency unions should consider the reserve needs of the consolidated union level. This should be supplemented by a discussion of factors that have a bearing on the size of reserves, such as the union’s financial architecture and supportive institutions, and the correlation of shocks faced by union members.

Information on short term debt and other liabilities is unavailable and consequently assessments against other reserve adequacy metrics such as the IMF’s composite Assessment Reserve Adequacy (ARA) metric cannot be computed.

Annex III. Debt Sustainability Analysis

Debt remains sustainable, albeit subject to increased risks. The fiscal impact from the pandemic added to pre-existing vuinerabiiities ofCBI revenue voiatiiity, natural disaster susceptibility, uncertain long-term pension system sustainability and contingent liability risks from the debt-land swap and other banking sector vulnerabilities. Risks could considerably be mitigated by rebuilding fiscal buffers by saving a portion of future CBI revenues. An overall fiscal surplus of 2 percent of GDP would result in a significant downward trajectory in public net debt. Standard DSA adverse shocks, a natural disaster or a full reacquisition of lands related to the debt-swap would temporarily delay this downward trend.

A. Public Debt Sustainability Analysis

1. Public debt declined sharply in the past decade from a peak of 145 percent of GDP at end-2010 to 52 percent of GDP at end-2019. This was driven by a decade of fiscal surpluses (supported by high CBI revenues) and a sovereign debt restructuring that involved a debt-land swap with domestic banks in 2013–14 (equivalent to about 41 percent of 2010 GDP) and debt exchanges with external commercial creditors and reduced interest rates on debt with one Club creditor in 2012. Fiscal surpluses in following years allowed the general government to repay many of its remaining obligations.1

2. The public debt-to-GDP ratio increased in 2020 to 61 percent as a result of the decline in GDP. The government ran its first deficit since 2010 of 4.7 percent of GDP, but this was financed through a drawdown of deposits and did not increase debt.2 High Gross Financing Needs (GFN) are in large part the result of high (domestically held) short-term debt (11 percent of GDP), which mainly consists of T-bills. The increase in GFN in 2020 reflects the switch from a fiscal surplus to a deficit,

3. The baseline scenario incorporates the following assumptions on growth and the outlook for CBI inflows:

  • CBI revenues: Projected constant at 9 percent of GDP. This compares to their average 10 percent of GDP in 2011–2020 and 13 percent of GDP in 2018–20.

  • Fiscal Balance: An overall fiscal surplus of 2 percent of GDP is assumed, with capital expenditure projected at 3 percent of GDP.

  • Growth and Inflation: Real GDP slightly further contracts by 1 percent in 2021 given the already lost winter tourism season in the first quarter. Tourism and related sectors are expected to recover from late 2021. Inflation, measured by the GDP deflator in the DSA, is projected at 2 percent in the medium term.

  • Debt: Only half of other maturing long-term debt is assumed to be renewed, which should result in a gradual reduction of GFN.3The DSA assumes that government increases borrowing when facing negative shocks, while maintaining the same projection of government deposits as in the baseline scenario.4

4. Staff used standard and customized MAC DSA shocks to simulate the impact of downside risks, highlighted in the Risk Assessment Matrix, on the public debt trajectory. These shocks will raise debt only temporarily and delay the projected downward debt trajectory under the baseline.

  • An adverse shock to growth of 5 percentage points relative to the baseline over 2022–23 (calibrated as 1 standard deviation of growth volatility over the past 10 years) lowers inflation by 1 percentage point in each year and delay the downward trajectory of public debt until 2024.

  • A sustained interest rate shock of 300 bps (difference between the average real interest rate level over the projection period and the maximum 10-year historical level— consistent with a projected 350 bps increase in US interest rates over the medium-term) has only marginal effects on the debt trajectory.

  • A primary balance shock of about 5 percent of GDP in 2022 , to simulate the impact of a temporary decline in CBI inflows similar to 2016, would delaythe downward trajectory of public debt until 2024.

  • A combined macro-fiscal shock of all the above would raise public debt to about 68 percent of GDP by 2023 and result in a more sustained level shift in the downward debt trajectory, without reaching the regional debt target of 60 percent of GDP at the end of the projection period.

  • A customized natural disaster shock, based on historical hurricane episodes in St. Kitts and Nevis, lowers growth by 6 percentage points compared to baseline in 2022, followed by swift recovery to 5 percent in 2023, including through reconstruction efforts. The fiscal balance would deteriorate by about 5 percentage points in both 2022 and 2023. The debt-to-GDP ratio increases in 2022 and resumes its downward trajectory from 2023.

  • A customized shock of full reacquisition of remaining debt-swap lands (22 percent of GDP) through an exchange to a long-term loan at an interest rate of 4.5 percent (about 3 percentage points higher than the current interest rate on one-year T-bills) would significantly raise debt up to almost 80 percent of GDP, but the debt-GDP ratio would decline towards the regional debt target of 60 percent of GDP afterwards.

5. GFN vulnerabilities reflected in the heat map are mitigated by large buffers. The projected debt level does not trigger the heat map threshold under standard adverse scenarios, but annual gross financing needs are elevated because of a large stock of domestically held short-term debt (mainly T-bills). Rollover risks are nonetheless mitigated by the significant liquidity in the domestic financial system as well as the government’s sizeable and liquid deposit buffers. The medium level vulnerability with respect to external debt and foreign currency denominated debt is mitigated by long repayment profile and low interest rate, as these largely reflect restructured obligations. The fan charts show only modest probability that the debt-to-GDP ratio would not continue on its downward trajectory.

6. High uncertainty related to CBI inflows explains large forecast errors in recent years. Staff underestimated growth and fiscal outturns in projections during the peak years of CBI inflows (2012–14). The surge in CBI inflows in 2018–20 was similarly unanticipated.

7. The anticipated recovery in tourism arrivals should result in an unusually large reversal in the fiscal balance. Figure 5 indicates that the baseline projected changed in the fiscal balance is large by historical, cross country standards. The authorities’ positive track record in preserving fiscal surpluses, as highlighted in Figure 5, also backs up the projected return to surpluses.

Conclusion

8. A fiscal stance that ensures saving a portion of CBI revenues results in a relatively strong medium-term debt sustainability. Key risks comprise of any contingencies from the remaining debt-swap lands, (extraordinary) combined macro-fiscal shocks and natural disasters of more significant impact than simulated in this DSA, such as the Category 5 hurricane that affected Dominica in 2017. Major and permanent changes to CBI revenues, such as those simulated in this staff report, could also considerably erode this outlook. A significant delay in reforming the pension fund would constitute a significant long-term risk.

B. External Debt Sustainability Analysis5

9. The GDP impact of the pandemic increases the external public debt-to-GDP ratio before declining over the medium term to 8 percent in 2026, slightly below its 2019 level. After following a declining path in recent years as a result of public debt restructuring, external GFN substantially increased in 2020 as the current account deficit considerably widened in 2020 because of the pandemic shock to tourism. The deficit and external GFN should decline in line with the normalization of international travel. Amortization of restructured bonds with external debtors and repayment of multilateral debt, largely from the CDB, will further contribute to the decline.

10. Stress tests indicate that external debt would continue to decline under interest rate, growth, real depreciation, and combined shocks. However, debt stays relatively higher under the current account shock scenario, suggesting that some external adjustment would be necessary to bring the debt path back to a downward trend under that shock.

Figure 1.
Figure 1.

Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Source: IMF staff.1/ Public sector is defined as consolidated public sector.2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r- n(1 + g) – g + ae(1+r)]/(1+g+n+gn)) times previous period debt ratio, with r – interest rate; n – 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- n (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 asset changes (including debt restructuring) 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.
Figure 2.
Figure 2.

St. Kitts and Nevis: Public DSA -Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Source: IMF staff.
Figure 3.
Figure 3.

St. Kitts and Nevis: Public DSA – Stress Tools

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.A001

Source: IMF staff.
Figure 4.
Figure 4.

St. Kitts and Nevis: Public Debt Risk Assessment

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.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 1 5% 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/ Long-term bond spread over German bonds, an average over the last 3 months, 12-Jan-21 through 12-Apr-21.5/ 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.
Figure 5.
Figure 5.

St. Kitts and Nevis: Public DSA—Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.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/ St. Kitts and Nevis has had a positive output gap for 3 consecutive years, 2018–2020. For St. Kitts and Nevis, t corresponds to 2021; for the distribution, t corresponds to the first year of the crisis.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.
Figure 6.
Figure 6.

St. Kitts and Nevis: External Debt Sustainability: Bound Tests1/2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2021, 236; 10.5089/9781513599151.002.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 2010.
Table 1.

St. Kitts and Nevis: External Debt Sustainability Framework, 2016–26

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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.

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.
1

The CBI program was established in 1984, making it the oldest of its kind in the world. Qualified foreign applicants may obtain citizenship through 2 traditional options: (i) a contribution to the Sustainable Growth Fund (SGF) of US$150,000 for individuals, or US$195,000 for a family of up to 4); or(ii) an investment in the Real Estate Fund of US$200,000 (share only) held for 7 years before resale;or US$400,000 (full title) held for 5 years before resale, plus fees. In 2021, the government introduced two additional options (see further below).

2

In February 2021, the ECCB Monetary Council extended the regional debt target of 60 percent to 2035.

3

The authorities have not implemented specific measures to promote transparency and accountability of COVID-19 related spending as they considered existing safeguard sufficient. The audit of all expenditures, including those related to the Covid-19 response, will be published in the National Audit Office’s 2020 Annual Report, which will be submitted to parliament in December.

4

This pertains to unsold lands from the debt-land swap arrangement that was part of the 2012–14 debt restructuring. The government made another land buy-back of similar magnitude in 2018.

5

For fuller discussion on the banking system response measures, see the 2021 Discussion on Common Policies.

6

There are currently 8 approved hotels. After day 7, they can go on approved excursions.

7

Companies were required to allow workers to work from home; there was a night curfew; and restaurants could only operate on carry-out basis.

8

This partly reflects base effects. Tourism in the first quarter of 2020 was still very strong.

9

New restrictions included a full 24-hour shelterin place on four days (July 1, 2, 8 and 9, with all businesses closed except for essential businesses.

10

This corresponds to about 70 percent of the total population.

11

As a percent of the total population,47 percent has received a first dose and 25 percent has been fully vaccinated.

12

Historically, public investment has on average been 30 percent below budgeted levels, reflecting both policy adjustments (the authorities have tended to reduce capital expenditure when revenues disappointed so to avoid running fiscal deficits) and capacity constraints, and Previous IMF TAon budget preparation identified systemic issues with under-execution of the capital budget. The capital spending pipeline contains many delayed projects, and new projects are included that have not satisfied readiness criteria

13

Unemployed who had received EC$15,000 or more in severance payment were excluded.

14

These include rent waivers to leasers of government real estate, reduced VAT on commercial rent, and import duty and fuel subsidy for bus operators.

15

The Alternative Investment Option allows applicants to fund government initiatives in social areas such as education, digital economy, and technological training. The Private Homes Sales Option allows foreign investors to purchase private homes.

16

Staff projections assume that investment will be 70 percent of the budgeted amount—in line with the historical average.

17

At the time of the mission, St. Kitts had received 42 thousand Astra Zeneca doses—of which 22 thousand were channeled through the COVAX facility and 20 thousand were provided by India—enough to vaccinate 21 thousand out of the target population of 33 thousand people. To vaccinate the remaining 12 thousand, a minimum of 24 thousand additional doses are needed—and more if not all doses are used before their end-June expiration date.

18

Staff simulations in the 2021 Discussion on Common Policies suggest that, for the ECCU region on average, the tourism shock could result in near tripling of the banking sector NPLs in post-pandemic years, exceeding the NPL increase after the global financial crisis.

19

Prior regional efforts to reduce NPLs through purchases by the Eastern Caribbean Asset Management Corporation (ECAMC) have been hampered by funding constraints.

20

The ECCB’s current view is that the protracted holding of the land-swap asset since 2013 does not give rise to any regulatory repercussions beyond being attributed a capital adequacy risk-weight of 100 percent.

21

The Trinidad-based Republic Bank completed the acquisition of most of Bank of Nova Scotia’s ECCU operations in November 2019, and the sale of RBC/RBTT’s regional operations to a consortium of indigenous banks was completed in April 2021, whereby the Bank of Nevis acquired the group’s St. Kitts and Nevis operations.

22

This could include publishing a list of CBI recipients, as is done in some other countries with similar programs.

23

FSRC 2019 guidelines on periodic revaluation of real estate loan collateral can also mitigate potential loan losses.

24

The higher volatility of consumption may reflect the very pro-cyclical behavior of imported durables.

25

There are also risks from SOEs. Compliance by SOEs remains weak despite the ongoing PFM reforms and weaknesses in PFM capacity continue at the Nevis Island Authority.

26

DSGE simulations in IMF County Report No. 19/63 suggest that a savings fund of 12 percent of GDP would provide sufficient buffer to deal with natural disasters, provided it is, supplemented with maximum access to CRIFF. The other 13 percentage point would provide a buffer for economic volatility, based on the projected use of government deposits in response to the ongoing Covid-19 crisis.

27

This scenario assumes that half of all maturing debt is refinanced. If a lower share of maturing debt is refinanced, debt would fall more rapidly, but fewer deposit buffers would be built up.

28

For simplicity the refinancing assumption on maturing debt is kept the same as under the baseline.

29

Under atop-down approach the government would set expenditure limits consistent with fiscal objectives, rather than on the basis of agency bids.

30

Bakkeret al. (2020) showed there is a strong conditional convergence: poorer countries with high levels of human capital (and strong governance) convergence with richer countries, while poorer countries lower levels of human capital do not.

31

CBI flows have been traditionally used for tourism real estate development thro ugh the Real Estate Option. Since last year, 2 more investment options were created to channel CBI resources to other sectors as well asto provide investor flexibility.These options are: “Alternative Investment Option” and “Private Home Sales”.

1

The central government paid down or restructured all outstanding domestic loans to commercial banks and the SSB and settled debt with major external bilateral creditors. The latter included debt owed to PDVSA, which in 2017 was converted to a new loan with a lower interest rate. Purchases under the SBA were fully repaid in April 2016. The restructured debt from the 2012 agreements carry a low interest rate with long maturities. Meanwhile, expensive overdraft debt accounts held by the Nevis Island Administration (NIA) were consolidated with existing loans and converted into a new long-term loan in 2018 at a lower interest rate.

2

This resulted in a substantial but temporary increase in Gross Financing Needs above the MAC DSA threshold of 15 percent of GDP (Figure 1).

3

It is assumed that short-term debt will be fully rolled over.

4

Note that this assumption ingrained in the DSA tern plate differs from the assumed projections of government deposits in the CBI scenarios in Section C of the staff report.

5

Only covers public external debt.

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Cover IMF Staff Country Reports
St. Kitts and Nevis: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for St. Kitts and Nevis
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2021: Issue 236
Publisher:
International Monetary Fund
ISBN:
9781513599151
ISSN:
1934-7685
Pages:
72
DOI:
https://doi.org/10.5089/9781513599151.002
  • View in gallery

    Americas and Europe: Governance and GDP Per Capita, 2019

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    St. Kitts and Nevis: Real GDP Per Capita

    (Ratio to US Real GDP per Capita)

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    Citizenship by Investment Revenue in the ECCU

    (In percent of GDP)

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    Change in Public Debt to GDP Ratio: 2010–2019

    (Percentage points of GDP)

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    Average Fiscal Balance: 2011–2019

    (In percent of GDP)

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    Real GDP Contributions to Percent Change in 2020

    (Estimates of main selected sectors; in percentage points)

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    Stayover Arrivals

    (Visitor expenditure in millions of EC dollars)

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    CPI and GDP Deflator

    (1980=100)

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    Monthly Stayover Tourist Arrivals

    (Number of persons)

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    Total COVID-19 Cases

    (Per million)

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    New COVID-19 Cases

    (Per million; 7-day moving average)

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    ECCU: Total COVID-19 Infections

    (Per million population)

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    Flight Arrivals in the Caribbean

    (Percentage change between Jan-May 2019 and Jan-May 2021)

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    COVID-19 Vaccinations in the Caribbean

    (Number of people who have received at least one dose per 100 population)

  • View in gallery

    Nonperforming Loans

    (In percent of total gross loans)

  • View in gallery

    Credit Unions: Credit Quality Indicators

    (End of period, in percent of total loans)

  • View in gallery

    Debt-for-Land Swap: Value of the Undivested Land Stock

    (In millions of EC dollars)

  • View in gallery

    Real Consumption and Real GDP Per Capita: 1990–2019

    (Standard deviation of annual growth)

  • View in gallery

    Share in GDP of Gross Capital Formation at Current Purchasing Power Parities

    (In percent)

  • View in gallery

    St. Kitts and Nevis: Growth Decomposition, 1971–2019

  • View in gallery

    Americas: Population and Capital Output Ratio, 2019

  • View in gallery

    Americas and Europe: Human Capital and GDP Per Capita, 2019

  • View in gallery

    Americas and Europe: Expected Years of School and Harmonized Test Scores, 2019

  • View in gallery

    Public and private wages in the ECCU (2017)

    (Wages in thousands of EC dollars; public/private comparison in percent)

  • View in gallery

    Electricity Prices in 2020

    (US cents per kWh)

  • <sup>Figure 1.</sup>
    View in gallery
    Figure 1.

    St. Kitts and Nevis: Regional Context

  • <sup>Figure 2.</sup>
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    Figure 2.

    St. Kitts and Nevis: Real Sector Developments

  • <sup>Figure 3.</sup>
    View in gallery
    Figure 3.

    St. Kitts and Nevis: Fiscal Sector Developments

  • <sup>Figure 4.</sup>
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    Figure 4.

    St. Kitts and Nevis: External Sector Developments

  • <sup><xref rid="RA001fig05" ref-type="fig">Figure 5.</xref></sup>
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    Figure 5.

    St. Kitts and Nevis: Banking System Developments

  • <sup>Figure 1.</sup>
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    Figure 1.

    Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

    (In percent of GDP, unless otherwise indicated)

  • <sup>Figure 2.</sup>
    View in gallery
    Figure 2.

    St. Kitts and Nevis: Public DSA -Composition of Public Debt and Alternative Scenarios

  • <sup>Figure 3.</sup>
    View in gallery
    Figure 3.

    St. Kitts and Nevis: Public DSA – Stress Tools

  • <sup>Figure 4.</sup>
    View in gallery
    Figure 4.

    St. Kitts and Nevis: Public Debt Risk Assessment

  • <sup>Figure 5.</sup>
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    Figure 5.

    St. Kitts and Nevis: Public DSA—Realism of Baseline Assumptions

  • <sup>Figure 6.</sup>
    View in gallery
    Figure 6.

    St. Kitts and Nevis: External Debt Sustainability: Bound Tests1/2/

    (External debt in percent of GDP)

Americas and Europe: Governance and GDP Per Capita, 2019

St. Kitts and Nevis: Real GDP Per Capita

(Ratio to US Real GDP per Capita)

Citizenship by Investment Revenue in the ECCU

(In percent of GDP)

Change in Public Debt to GDP Ratio: 2010–2019

(Percentage points of GDP)

Average Fiscal Balance: 2011–2019

(In percent of GDP)

Real GDP Contributions to Percent Change in 2020

(Estimates of main selected sectors; in percentage points)

Stayover Arrivals

(Visitor expenditure in millions of EC dollars)

CPI and GDP Deflator

(1980=100)

Monthly Stayover Tourist Arrivals

(Number of persons)

Total COVID-19 Cases

(Per million)

New COVID-19 Cases

(Per million; 7-day moving average)

ECCU: Total COVID-19 Infections

(Per million population)

Flight Arrivals in the Caribbean

(Percentage change between Jan-May 2019 and Jan-May 2021)

COVID-19 Vaccinations in the Caribbean

(Number of people who have received at least one dose per 100 population)

Nonperforming Loans

(In percent of total gross loans)

Credit Unions: Credit Quality Indicators

(End of period, in percent of total loans)

Debt-for-Land Swap: Value of the Undivested Land Stock

(In millions of EC dollars)

Real Consumption and Real GDP Per Capita: 1990–2019

(Standard deviation of annual growth)

Share in GDP of Gross Capital Formation at Current Purchasing Power Parities

(In percent)

St. Kitts and Nevis: Growth Decomposition, 1971–2019

Americas: Population and Capital Output Ratio, 2019

Americas and Europe: Human Capital and GDP Per Capita, 2019

Americas and Europe: Expected Years of School and Harmonized Test Scores, 2019

Public and private wages in the ECCU (2017)

(Wages in thousands of EC dollars; public/private comparison in percent)

Electricity Prices in 2020

(US cents per kWh)
Figure 1.

St. Kitts and Nevis: Regional Context
Figure 2.

St. Kitts and Nevis: Real Sector Developments
Figure 3.

St. Kitts and Nevis: Fiscal Sector Developments
Figure 4.

St. Kitts and Nevis: External Sector Developments
Figure 5.

St. Kitts and Nevis: Banking System Developments
Figure 1.

Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

(In percent of GDP, unless otherwise indicated)
Figure 2.

St. Kitts and Nevis: Public DSA -Composition of Public Debt and Alternative Scenarios
Figure 3.

St. Kitts and Nevis: Public DSA – Stress Tools
Figure 4.

St. Kitts and Nevis: Public Debt Risk Assessment
Figure 5.

St. Kitts and Nevis: Public DSA—Realism of Baseline Assumptions
Figure 6.

St. Kitts and Nevis: External Debt Sustainability: Bound Tests1/2/

(External debt in percent of GDP)