The response to the COVID-19 pandemic

With significant fiscal buffers and large savings accumulated because of windfall receipts from the Citizenship by Investment (CBI) Program, the authorities of St. Kitts and Nevis were able to respond swiftly to the COVID-19 pandemic. Containing the pandemic remains a key policy priority. St. Kitts and Nevis has experienced two major waves of the pandemic. In the first wave in March 2020, the closure of the country’s border was instrumental in the Government’s efforts to contain the disease. As a result, St. Kitts and Nevis had no deaths and the lowest number of cases in per capita terms in the western hemisphere in 2020. Unfortunately, a second wave in May 2021 included community spread and resulted in a substantial increase in infections and the first covid-related death.

In the first wave, the authorities’ response included the closure of borders, restricting arrivals by air or sea, introduction of a national lockdown for one month, and procurement of protective and other medical equipment to help fight the disease. In the second wave, a two-week partial lockdown, where hotels remained open, was instituted, but only fully vaccinated tourists were allowed. In addition, extensive testing and contact-tracing were deployed, and free quarantine facilities for local patients living in vulnerable and high-density conditions were provided.

To address the economic fallout, the government introduced tax waivers, deferrals, incentives, and through the Social Security Board, provided unemployment benefits to affected insured workers. In addition, temporary measures, including loan moratoria, were implemented to provide relief in the financial sector. The size of Government’s fiscal support for 2020 is estimated at three and a half percent of GDP with some of the measures extended for 2021.

Recent Economic Developments

The economic impact of the pandemic has been grave. GDP is estimated to have declined 14 percent in 2020. This was largely because of the decline in tourism and a fall in domestic activity because of the pandemic.

Consumer prices continued to decline reflecting lower import prices. There have nevertheless been domestic inflationary pressures with higher prices being recorded for construction, public administration, financial intermediation, supporting transport activities, business services, and hotels.

A fiscal deficit of 4.7 percent of GDP was recorded in 2020. This reflected the impact of the various revenue measures and increased expenditures in response to the crisis. The revenue measures implemented include the temporary reductions of the Corporate Income Tax and Unincorporated Business Tax, VAT and import duty removals on a specified list of goods, and waivers to water payments. Expenditure increases reflect the increased transfers made to the agriculture sector, the Poverty Alleviation Program, and the Severance Payment Fund.

Measures implemented by the Financial Services Regulatory Commission (FSRC) and the credit unions have shored up the financial sector and conditions have so far remained stable. The financial sector measures implemented had the endorsement of the Eastern Caribbean Central Bank (ECCB). The increase in non-performing loans recorded to date has been modest and there are no liquidity concerns.

A sharp drop in tourism receipts and lower CBI receipts were the main factors behind the deterioration of the current account of the balance of payments, with the deficit estimated at 14.5 percent of GDP in 2020 compared to 0.8 percent of GDP in 2019. This was partly offset by lower imports and profit outflows.

Economic Outlook

The risks to the economic outlook are tilted to the downside with the trajectory of recovery subject to the path of the pandemic. A protracted pandemic could delay recovery in the tourism sector and in domestic activity. Staff projects a decline in GDP of one percent in 2021 as the tourism sector has not recovered. Growth of ten percent is projected in 2022 on the assumption that the health situation will improve, and the tourism sector will re-emerge. Inflation is projected at two percent in the medium term.

Managing the risks associated with the pandemic are of utmost priority but the authorities will continue to act to minimize the social and economic costs. As the recovery begins, the authorities will focus more on preserving fiscal and macroeconomic stability.

Fiscal policy

Supporting the economy is an immediate priority for the authorities. Therefore, it is proposed that the fiscal relief measures remain in place until the recovery firmly takes root. Going forward, however, the focus will shift to rebuilding fiscal buffers. Large buffers will provide more fiscal space to mitigate contingent and long-term fiscal pressures, including financing development, responding to crises, and lessening the impacts of climate change. The fiscal and debt performance has been influenced by its CBI Program. The authorities were able to build substantial savings, contain the fiscal deficit and reduce debt because of the positive performance of its CBI Program.

Annual CBI revenues have averaged 11 percent of GDP or 30 percent of total revenues since 2012, but they have also been very volatile. The authorities recognize that CBI revenue volatility is a major risk, but they anticipate that recent changes to the program and the high level of interest maintained through the pandemic will ensure continued strong performance of CBI revenues. In that regard, they are fully committed to using the CBI program earnings to boost savings and to attract investment beyond the tourism sector. The authorities also agree with the approach proposed by staff to assess the fiscal outlook based on different CBI revenue scenarios but expressed their preference to maintain liquid assets that allow for quick response to shocks and emergencies.

To improve fiscal outcomes, the authorities will continue to work towards broadening the tax base including through streamlining tax incentives. They identify the need to build capacity in this area and have requested Fund technical assistance to do so.

The authorities are committed to the establishment of a clear action plan and timetable to complete the debt-land-swap arrangement but have indicated challenges in doing so. They recognize that there are fiscal implications to the lands being re-purchased by the Government. Lands are to be revalued but this process is hindered by the pandemic. The agreement between the Government and the bank will also have to be revisited to minimize any impact on either party of the delays in disposing of the land. The authorities also acknowledge that a suitable strategy could be crafted to market these lands as part of the CBI program.

The authorities aim to maintain strong public investment, including for natural disaster resilience. High levels of public investment would further support activity and create employment opportunities. The authorities acknowledge the capacity constraints that impede efficient implementation of the investment program. However, as a policy, should revenue fall below projections, or to avoid running fiscal deficits and create fiscal challenges, the authorities could reduce capital expenditure.

The fiscal framework will also address the potential risks from SOEs. Increased surveillance, which forms part of a broader program of PFM reforms, will continue. The authorities have also taken action to address the increases in social security expenditures and to define a strategy to ensure that the social security is sustainable and funded.

Financial sector

Maintaining financial sector stability remains crucial to support economic recovery and actions to bolster financial system stability will deepen. The sector has weathered the pandemic well and is broadly sound. Recognizing that it will be necessary to withdraw some of the support measures once the crisis abates, the authorities will work closely with the ECCB to formalize and operationalize crisis management plans. They have also noted the importance of undertaking reforms to facilitate asset recovery. Special emphasis will be placed on the large systemically important bank and on the non-bank sector. In the case of the latter, measures to strengthen supervision are also being advocated.

The pandemic has not affected available Correspondent Baking Relationships (CBR) services and strengthening the AML/CFT framework remains a priority. The authorities are cognizant of the imperative to minimize financial integrity risks as these could impact the CBI program. In February 2020, St. Kitts and Nevis was removed from the EU’ s list of non-cooperative tax jurisdictions having implemented the necessary reforms. The authorities are working to ensure continued compliance with these and the OECD tax transparency and information exchange standards. Further, a suite of legislation targeting AML/CFT improvements was passed by the National Assembly in late 2020. In addition, follow-up measures to address risks identified in the National Risk Assessment (NRA) report are being implemented, with anticipation of a successful assessment under the Caribbean Financial Action Task Force (CFATF) mutual evaluation which is due to be completed in late 2021.

Structural reforms

Reforms to boost productivity growth and anchor sustainable and inclusive growth will be pursued. Improving the business environment is central to boost competitiveness. In that regard, reforms to expedite business registration including the establishment of a dedicated land registry and an SME partial credit guarantee scheme have been implemented.

To better align the education system with the needs of the labor market, the upgraded apprenticeship scheme (STEP) includes a training component focusing on several areas to address skills mismatches to meet the high end of the economy.

Building resilience to natural hazards is indispensable. St. Kitts and Nevis continues to take steps to boost resilience to climate change and natural disasters. Building resilient infrastructure and broadening solar power generation are cornerstones of the public investment program.

Concluding Remarks

The ongoing pandemic poses a monumental challenge for a tourism-dependent economy. St. Kitts and Nevis is no exception. The authorities are aware that the longer the pandemic lasts, the deeper will be the impact and as such they have adopted a strategy that will continue the support of the economy until the situation abates. The near-term priority is to protect lives and livelihoods, but they acknowledge the need to rebuild reserves, consolidate the fiscal position, and generate sustainable and inclusive growth.