St. Vincent and the Grenadines: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for St. Vincent and the Grenadines

International Monetary Fund. Western Hemisphere Dept.

doi:10.5089/9798400225505.002.A001

Author:

International Monetary Fund. Western Hemisphere Dept.

International Monetary Fund. Western Hemisphere Dept.
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Publication Date:: 17 Nov 2022

eISBN:: 9798400225505

ISBN:: 9798400225505

Language:: English

Keywords:: headline inflation; income support; business practice; debt ratio; core inflation; Tourism; Natural disasters; Fiscal stance; Caribbean; Global

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1. Prior to the pandemic, the authorities had made great strides with strengthening fundamentals. The authorities had implemented policies in line with past Fund advice (Annex I). Significant efforts were made to diversify the export base, strengthen human capital, improve the investment climate, and build climate resilience, benefiting from the relatively sound governance compared with peer averages. A new airport opened in 2017 improved tourism prospects and further plans for upgrading essential economic infrastructure were instituted, including the port modernization project and the new hospital, both with climate resilient features and financed by concessional loans (Annex II).

Abstract

Context

1. Prior to the pandemic, the authorities had made great strides with strengthening fundamentals. The authorities had implemented policies in line with past Fund advice (Annex I). Significant efforts were made to diversify the export base, strengthen human capital, improve the investment climate, and build climate resilience, benefiting from the relatively sound governance compared with peer averages. A new airport opened in 2017 improved tourism prospects and further plans for upgrading essential economic infrastructure were instituted, including the port modernization project and the new hospital, both with climate resilient features and financed by concessional loans (Annex II).

2. The pandemic and 2021 volcanic eruptions, compounded by the impact of the war in Ukraine, highlighted St. Vincent’s significant vulnerability to external shocks and natural disasters. The shocks wielded a major blow to agriculture and tourism, two main sectors of the economy, although the impact from the eruptions was smaller than projected in the 2021 RCF.¹ The negative effects from the war in Ukraine have compounded the 2020–21 shocks through worsening terms of trade.²

3. The proactive policy responses, supported by two RCFs and financing from other IFIs, mitigated the socio-economic impact of the shocks and helped contain economic scars.³ The authorities swiftly introduced containment measures without resorting to full lockdowns,⁴ and timely evacuated over 20,000 people before the volcanic eruptions, thus avoiding fatalities. They also implemented two fiscal packages to provide critical support to households and firms affected by the shocks and the vulnerable. These efforts helped contain cumulative real GDP losses in 2020–21 relative to pre-pandemic projections to 7.4 percent, smaller than the ECCU average of 17.3 percent.

The Compound Shocks and Policy Response

4. Reported Covid-19 infections and fatalities have been relatively moderate. There have been several waves, although they were moderate relatively to the Caribbean average. The vaccination rate remains one of the lowest in the Caribbean due to strong hesitancy.

5. Following a decline of 3.7 percent in 2020, real GDP is estimated to have grown by 0.8 percent in 2021, a better outcome than previously expected. Strong post-eruptions activity in construction and related sectors and smaller-than-expected decline in agriculture dampened the shocks. Tourism recovery has been relatively slow compared to regional averages as stayover arrivals in 2021 declined further to 28 percent of their 2019 levels, amidst the eruptions, lingering impact of the pandemic, and significant transportation bottlenecks, particularly at the intra-regional level (Annex III).⁵

6. Surging commodity prices led to significant inflation pressures (Annex IV). Headline inflation accelerated to 6.6 percent y/y in August 2022, reflecting higher imported food and energy prices and shipping costs associated with supply chain disruptions. The costs of construction materials also rose significantly, impacting ongoing investment projects. Core inflation is also rising but remained low (2.7 percent in August) reflecting the output gap.

7. These shocks widened the CAD. The CAD increased from 3.1 percent of GDP in 2019 to an estimated 22.8 percent of GDP in 2021 on account of weak tourism, higher imports, and lower exports due to the volcanic eruptions (Figure 3). Nevertheless, GIR held up well owing to strong external financing. The external position in 2021 is assessed to be moderately weaker than the level implied by the fundamentals and desirable policies (Annex V).

Outlook and Risks

8. Real GDP is projected to reach its pre-pandemic level in 2022 and the medium-term economic prospects are favorable. The rebuilding activity, continued recovery in tourism and agriculture, and the start of the construction of several investment projects would support growth of 5 percent in 2022 (Annex II).⁶ Growth is projected to strengthen to 6 percent in 2023 as large-scale construction projects get into full swing. Inflation is projected to accelerate to 5.8 percent in 2022 on account of positive contributions from the U.S. inflation and global oil and food prices, which is partly offset by negative contribution from the output gap (Annex IV). It is projected to ease in 2023–24 in line with the projected decline in U.S. inflation and in fuel and food prices as well as the prudent public sector wage growth (Section A). The terms of trade shock and rising volume of imports for construction projects will widen the CAD to 26½ percent of GDP in 2022, but it is projected to subside over the medium term as exports recover and investment projects are completed.

Key Investment Projects, 2022-25

Sources: National authorities and IMF staff estimates.

^{^1/}Relative to the 2021 RCF, the cost has risen by about 6 percent of GDP. A small retention cost falls under 2026.

Key Investment Projects, 2022-25

Project	Implementation period	Size, percent of 2022 GDP
Public
Sea port ^1/	2022-25	25.1
New hospital	2023-25	10.6
Private
Sandals Resort	2022-23	21.1
Total	2022-25	56.8

Sources: National authorities and IMF staff estimates.

^{^1/}Relative to the 2021 RCF, the cost has risen by about 6 percent of GDP. A small retention cost falls under 2026.

Key Investment Projects, 2022-25

Project	Implementation period	Size, percent of 2022 GDP
Public
Sea port ^1/	2022-25	25.1
New hospital	2023-25	10.6
Private
Sandals Resort	2022-23	21.1
Total	2022-25	56.8

Sources: National authorities and IMF staff estimates.

^{^1/}Relative to the 2021 RCF, the cost has risen by about 6 percent of GDP. A small retention cost falls under 2026.

9. Risks to the outlook are tilted to the downside (Annex VI). Intensifying spillovers from the war in Ukraine and commodity price shocks would result in higher food and fuel prices, which would add to inflationary pressures, further eroding incomes and weighing on economic activity. An abrupt global slowdown or recession triggered by global and idiosyncratic risk factors, including de-anchoring of inflation expectations and faster-than-anticipated tightening of global financial conditions, would dampen the recovery. Lingering supply chain disruptions, in conjunction with potential local capacity constraints, would delay planned investment projects, a key contributor to growth. Outbreaks of new Covid-19 variants, amidst low vaccination rates, could affect tourism recovery and construction activity. St. Vincent remains highly vulnerable to natural disasters and climate change. An adverse scenario where a combination of these risks is realized could entail sharply lower growth rates and higher public debt (Annex VII). On the upside, a faster-than-projected recovery in tourism could improve growth.

Policy Discussions

Policies need to be calibrated to support a resilient and inclusive recovery, while safeguarding debt sustainability and financial sector stability. As a member of the ECCU with limited fiscal space, the burden of adjustment falls on fiscal and structural policies. Near-term policy priorities are health and reconstruction spending and time-bound and targeted fiscal support while maintaining fiscal prudence. Once the recovery takes hold, fiscal buffers should be rebuilt, including by fully operationalizing the FRF, to withstand shocks and reinforce fiscal sustainability. Continued supply-side reforms to improve productivity and competitiveness and building resilience to natural disasters and climate change remain key for sustainable growth, which is critical to public debt sustainability.

A. Fiscal Policy: Safeguarding Debt Sustainability While Supporting a Resilient and Inclusive Recovery

10. The critical fiscal responses coupled with a contraction of economic activity led to a reversal of the declining trend of public debt-to-GDP ratio prior to 2020. To mitigate the socio-economic impact of the shocks, the government responded in a timely manner with measures amounting to about 7 percent of GDP in 2020–21.⁷ Despite the shocks, tax revenue remained resilient in 2021 reflecting ongoing revenue mobilization efforts through both tax policy and administration measures as well as tax revenues related to a one-off land sale.⁸ The government also continued to contain the deficit by cutting non-priority current spending, leading to an improvement in the underlying primary balance (PB) compared to 2020. Nevertheless, the much-needed response to address the humanitarian and healthcare crises pushed up public debt sharply to about 891/4 percent of GDP in 2021, from about 68 percent in 2019.

11. The fiscal stance embedded in the 2022 budget strikes a balance between maintaining fiscal prudence and the need to support the vulnerable and recovery and build resilience. 2022 budget restrains current spending at levels broadly in line with policy commitments under the 2021 RCF—while prioritizing spending to provide essential support to reconstruction and economic activity and sustaining higher level of social and health spending—and continues to build the Contingencies Fund. To cushion the impact of rising living costs, the authorities introduced temporary price-mitigating measures (0.5 percent of GDP).⁹ The government also rolled out additional temporary income support and other targeted programs to support households heavily affected by the volcanic eruptions.¹⁰ Preliminary data through September suggest continued improvement in revenue collections, reflecting full-year impact of the CSC rate increase and ongoing efforts with strengthening tax administration (see ¶17), well-contained current spending, and lower-than-budgeted capital spending. While the primary deficit is estimated to widen to 5.7 percent of GDP as the port construction starts, the underlying PB is expected to improve from -0.4 percent of GDP in 2021 to 1.6 percent in 2022.

12. Near-term policies should continue to give priority to health and reconstruction spending and supporting the vulnerable while maintaining fiscal prudence. Rising living costs in the environment of limited fiscal space pose difficult trade-offs. To help minimize fiscal and adverse distributional impact and promote green transformation, the authorities should keep announced generalized relief measures temporary as planned and continue to enhance the coverage and targeting of social safety nets (SSN), including by digitizing beneficiary information and payment system. As the economy recovers, fiscal policy should move from income support and job retention measures to ALMPs to facilitate labor reallocation and training.

13. The Debt Sustainability Analysis (DSA) suggests that public debt is sustainable but remains at high risk of distress for both external and overall public debt. The authorities are committed to reaching the 2035 regional debt target of 60 percent of GDP and the medium-term fiscal strategy set out in the 2021 RCF. This includes further strengthening of revenue administration, continued containment of wage and other current spending growth while safeguarding critical service delivery, and reprioritizing capital spending to balance the needs for a resilient recovery and preserving debt sustainability.¹¹ Supported by these adjustment efforts, the primary balance would improve to a surplus of about 3 percent of GDP in 2026, once the large-scale projects are completed.¹² The debt ratio is projected to peak at 89.2 percent of GDP in 2024 and steadily decline thereafter to fall below 60 percent of GDP before the regional target date of 2035.¹³ Gross financing needs will remain elevated in the near term—largely reflecting concessional financing for large investment projects—before declining sharply from 2025.¹⁴ The undrawn SDR holdings (at about US$14 million or 1.5 percent of GDP as of September 30, 2022) remain a key contingency reserve. Given the elevated macroeconomic uncertainty and the economy’s high vulnerability to external shocks and natural disasters, the baseline projections are subject to large downside risks (DSA, Figure 2, Table 4). An adverse scenario with sharply lower growth (Annex VII) could give rise to significant financing gap and put debt on an unsustainable path.

14. Once the recovery takes hold, it will be important to recalibrate and fully operationalize the FRF to underpin the commitments and reinforce fiscal credibility (Annex VIII). Shortly after its adoption in January 2020, the FRF was suspended due to multiple shocks. The resulted recent surge in debt and higher cost of key infrastructure projects have made the current debt and operational targets inconsistent with the new reality. The potential increase in external borrowing costs due to tighter global financial conditions and elevated debt underscores the need to fully operationalize a well-designed FRF to signal credible medium-term fiscal plans. Aligning the timing of the debt target date with the revised regional one (from 2030 to 2035) would create the needed fiscal space for resilience building and development needs to strike an appropriate balance between supporting the recovery and ensuring debt sustainability. An average primary balance of about 31/4 percent of GDP over 2026–35 (consistent with staff’s baseline projections and compared to the current FRF target of 2.7 percent) would be needed to achieve the debt anchor of 60 percent of GDP before 2035 and public debt sustainability. Aligning the current FRF wage ceiling target of 12.5 percent of GDP with the current baseline could also be considered.¹⁵ An automatic adjustment mechanism, e.g., linking primary balance targets to debt-to-GDP ratio, could also strengthen the credibility and adaptability of the framework.

15. Given the high vulnerability to external shocks, including from frequent natural disasters, it would be prudent to build additional buffers and prepare contingency plans. The economy faces frequent natural disasters, leading to large, unexpected increase in debt in the past (Annex VIII & DSA). Continued build-up of the Contingencies Fund is a move in the right direction. An illustrative scenario suggests that stronger adjustment would ensure the regional debt target and public debt sustainability are met with a high probability (Annex VIII).¹⁶ In this scenario, a primary surplus of around 3¾ percent of GDP in the medium term would provide a stronger reduction of public debt to build a safety margin that could be used in the presence of shocks. It will be useful to develop a detailed contingency plan, drawing on existing buffers (i.e., the Contingencies Fund and special SDR allocation) and a list of contingent measure options (see ¶16), to return debt to the baseline should adverse shocks materialize (Annex VII).

16. To build additional fiscal space to guard against risks and support resilient and inclusive growth, growth-friendly and equity-enhancing measures on both revenue and expenditure sides should be considered.

Revenue. Tax revenues fare well compared to peers, but there is scope to make the tax system more equitable and efficient, including by: (i) streamlining VAT exemptions and import concessions, (ii) raising the recurrent property tax, and (iii) improving the design of PIT and CIT to broaden the base and increase the progressivity of PIT.
Expenditure. Undertaking the long-standing parametric pension reform (Annex IX) will help build fiscal space, including for productive and resilience investment (Section B) and strengthening the SSN. Whereas the ongoing targeted food support program helps support the vulnerable, administratively simpler and less costly programs, such as targeted cash transfers and vouchers, could be further explored. The authorities are also considering establishing a permanent unemployment insurance program, which would help strengthening the SSN provided that the scheme is carefully designed to encourage labor force participation and formality in the labor market and ensure its sustainability.¹⁷ Expanding existing public works schemes (e.g., cash-for-work) could also be considered as a highly effective way in providing employment guarantee in times of need and productively engaging beneficiaries to develop community infrastructure/assets.¹⁸

Measures Options for Further Fiscal Adjustment

Sources: IMF Country Report No.19/66, IMF FAD TA report on VCT Tax Policy Review (2017), IMF FAD TA report “Tax Incentives and Property Taxation in the ECCU” (2015), National authorities, and IMF staff estimates.

Measures Options for Further Fiscal Adjustment

Measure options for additional adjustment	Estimated yield (Percent of GDP)	Notes
Tax Measures
Reduce exemptions on import duties and VAT on imports	>1.3	According to authorities’ latest estimates, total relief on imports is estimated at around 4 percent of GDP annually.
Streamline zero-rated and exempted goods and services from domestic VAT	<2.0	The domestic VAT base could be broadened through reducing the list of exempted supplies and zero-rated domestic supplies.
Strengthen compliance and increase recurrent property tax rate	tbd	Raise tax rates from the currently low level (ranging between 0.04 to 0.08 percent) as part of a reform package aiming to make the system fairer and more effective in raising revenues. Measures should be accompanied by a basic hardship relief regime.
Reform the structure of personal income tax (PIT)	> 0.3	While the recent reduction of top rate from 30 to 28 percent helps reduce the relatively high labor tax wedge towards the regional averages and support the economic recovery from multiple shocks, the tax rate cut should be complemented by a comprehensive tax reform to improve the progressivity and enhance revenues, including (i) broadening the base to include other types of income, especially capital income, (ii) improving the design of the tax brackets given that currently over 90 percent of those who file tax returns are paying at the top rate; and (iii) replacing the standard deduction with a tax credit having an approximately equivalent impact on taxpayers in the lower tax bracket{s).
Reform the structure of corporate income tax (CIT)	>0.6	Unify tax rates at the standard rate, reduce exemptions, update the depreciation schedules, and introduce thin-capitalization rules.
Collect outstanding tax arrears	tbd	The outstanding arrears of PIT, CIT, and VAT stood at 11 percent of GDP as of August 2022.
Expenditure Measures
Reform Public Service Pension System (PSPS) and National Insurance Service (NIS)	tbd	Implement parametric reforms, including (i) increasing contribution rate and introducing mandatory employee contributions for the PSPS, (ii) applying a uniform accrual rate to all years of service while closing the PSPS to new entrants and reducing benefit accrual rate for the PSPS, and (iii) eliminating early pension and linking retirement age to life expectancy while increasing retirement age for civil servant under PSPS in line with the increase for NIS.

Measures Options for Further Fiscal Adjustment

Measure options for additional adjustment	Estimated yield (Percent of GDP)	Notes
Tax Measures
Reduce exemptions on import duties and VAT on imports	>1.3	According to authorities’ latest estimates, total relief on imports is estimated at around 4 percent of GDP annually.
Streamline zero-rated and exempted goods and services from domestic VAT	<2.0	The domestic VAT base could be broadened through reducing the list of exempted supplies and zero-rated domestic supplies.
Strengthen compliance and increase recurrent property tax rate	tbd	Raise tax rates from the currently low level (ranging between 0.04 to 0.08 percent) as part of a reform package aiming to make the system fairer and more effective in raising revenues. Measures should be accompanied by a basic hardship relief regime.
Reform the structure of personal income tax (PIT)	> 0.3	While the recent reduction of top rate from 30 to 28 percent helps reduce the relatively high labor tax wedge towards the regional averages and support the economic recovery from multiple shocks, the tax rate cut should be complemented by a comprehensive tax reform to improve the progressivity and enhance revenues, including (i) broadening the base to include other types of income, especially capital income, (ii) improving the design of the tax brackets given that currently over 90 percent of those who file tax returns are paying at the top rate; and (iii) replacing the standard deduction with a tax credit having an approximately equivalent impact on taxpayers in the lower tax bracket{s).
Reform the structure of corporate income tax (CIT)	>0.6	Unify tax rates at the standard rate, reduce exemptions, update the depreciation schedules, and introduce thin-capitalization rules.
Collect outstanding tax arrears	tbd	The outstanding arrears of PIT, CIT, and VAT stood at 11 percent of GDP as of August 2022.
Expenditure Measures
Reform Public Service Pension System (PSPS) and National Insurance Service (NIS)	tbd	Implement parametric reforms, including (i) increasing contribution rate and introducing mandatory employee contributions for the PSPS, (ii) applying a uniform accrual rate to all years of service while closing the PSPS to new entrants and reducing benefit accrual rate for the PSPS, and (iii) eliminating early pension and linking retirement age to life expectancy while increasing retirement age for civil servant under PSPS in line with the increase for NIS.

17. Continued efforts with fiscal institutional reforms, with the support from CARTAC, are key to underpin the effective implementation of the FRF.¹⁹ Priority areas include:

Strengthening tax administration. The authorities should sustain the ongoing intensified efforts to enhance taxpayer’s compliance through fully implementing the single Tax Identification Number (TIN) and the enacted TAPA, digitalizing the tax system, strengthening fuel imports control, as well as modernizing customs legislation.²⁰
Enhancing the PFM. The authorities should expedite their efforts to improve the budget process and medium-term fiscal planning. It is critical to improve the credibility of annual budget and leveraging the MTEFO to guide medium-term budget preparation in accordance with fiscal targets. Publishing FRM’s reports regularly and ensuring legal and financial independence of the FRM will further enhance the transparency and accountability of the FRF.
Improving public investment management. Despite some progress made in recent years, there remains significant under-execution of the capital budget, stemming from underlying issues with project implementation and planning. The PIMA with a climate module that the authorities plan to undertake with IMF support will help improve the planning, allocation, and implementation of investment projects and strengthen climate resilience. Given the large infrastructure needs, the planning should be consistent with the government’s strategic long-term development goals and prioritized based on resilient growth implication, the certainty of project funding, and the likelihood of successful implementation.
Strengthening SOE oversight and the cash management system. The adoption of the regulations and creation of a monitoring unit for SOE oversight are steps in the right direction, but further enhancement of the oversight function is needed to ensure timely submission of all SOEs’ financial performance to the MOF.²¹ The authorities should also continue efforts to strengthen cash management, including preparing cash flow forecasts periodically and separating arrears from accounts payable.

B. Supporting Resilient and Inclusive Growth and Promoting Job Opportunities

18. Continued structural reforms are needed to improve productivity and competitiveness, minimize scarring from past shocks, and support sustainable growth. The recent and ongoing key infrastructure investments are instrumental for addressing supply-side constraints to growth. To unlock their full potential, continued improvement in business and investment environment is needed to foster private sector activity and create jobs, including through the planned Investment Act and single windows for land registration and trade. Participation in the regional initiatives to integrate and ensure food security, including by removing intra-regional trade barriers, and to undertake digital transformation, would boost productivity, which has been constrained by the small size of local markets and high costs.²² Ongoing efforts to improve the scope, coverage, and effectiveness of TVET programs across the country should be complemented by ALMPs, e.g., creating employment service centers, to provide less formal but structured services to facilitate training and employment. This would help reduce the long-standing skill mismatches and reduce the persistent youth unemployment, especially in view of the ample job opportunities upcoming from the large investment projects.

19. The tourism sector is well-positioned to contribute more to growth. The authorities are preparing a 10-year masterplan that will guide the development for the sector. The combination of attractive nature, the modern airport opened in 2017, and the rich agricultural base creates conditions for increasing the value added of the sector and job opportunities. The ongoing expansion of the room capacity (e.g., the Sandals Resort) is a move in the right direction and needs to be accompanied by strengthened air connectivity, including at the intra-regional level, and further enhancement of road infrastructure. There is potential for strengthening the linkages between tourism and agriculture/fisheries sectors through building supply platforms to promote greater use of local produce by resorts and for developing ecotourism. Planned increase in capacity of the health sector could promote St. Vincent’s attractiveness as a safe destination that can cater to tourists with medical needs.

20. Building resilience to natural disasters and climate change remains a priority. The authorities are implementing a comprehensive National Adaptation Plan (2018–30) and have already made significant efforts to enhance the country’s structural and financial resilience, including legislating the CF’s governance and operational framework and strengthen the capacity of the NEMO. Under the WB’s VEEP, the authorities are also preparing for a major review of the National Disaster Plan in 2022, including clarifying the terms of reference for various agencies during a disaster, reviewing the hazard management plan, and updating procedures, and a comprehensive review of the National Emergency and Disaster Act is envisaged for 2023. To improve long-term outlook and fiscal sustainability, they should continue to strengthen structural resilience, complemented by financial resilience, especially during the transition period:

Structural resilience. Resilient public capital lowers expected losses from natural disasters and hence needed reconstruction spending and increase expected returns to private investment and increases employment and wages. Staff analysis calibrated to St. Vincent illustrates that public investment in resilience of about 0.9 percent of GDP per year would yield long-run benefits of about 1.2 percent of GDP per year.²³ To support cost-effective resilience-building, the authorities should continue to seek concessional financing from the international community, including climate funds, as well as to mobilize private sector investment.

Financial resilience. The authorities introduced three layers of instruments to improve financial resilience and alleviate fiscal pressure. They (i) created a CF in 2017 as a self-insurance Fund to cover post-disaster emergency measures, (ii) enrolled in the regional risk-sharing facility CCRIF and under the WB’s Blue Economy project, enabled access to the regional climate risk insurance for fisheries,²⁴ and (iii) arranged contingent credit lines, the WB’s CAT DDO in 2020, from which St. Vincent received a disbursement in 2021. With the WB’s support, the authorities are exploring the possibility of a Caribbean Regional Catastrophe Bond and also developing a Disaster Risk Financing Strategy (DRFS) that is expected to strengthen their ability to assess, reduce, and manage disaster-related fiscal risk.²⁵ Promoting a deeper use of insurance by the private sectors, especially agriculture and fishery, would enhance their resilience.
Moving to renewable energy. The authorities are moving towards renewable energy sources to improve resilience, competitiveness, and energy security. There are various tax incentives in place (e.g., for purchasing solar equipment),²⁶ but the Electricity Act remains to be revised to provide an enabling environment to further support the shift. The transition will be important for de-carbonizing the energy production and moving closer to their NDC targets.²⁷

C. Maintaining Financial Sector Stability While Supporting the Recovery

21. The financial sector has weathered the shocks relatively well so far. Capital buffers remain well above regulatory requirements and the regional average. NPLs have increased compared to pre-pandemic levels to 9.9 percent for banks and 7.8 percent for CUs as of June 2022 but remained below the regional average. The provisioning levels for the banking system have recently declined to below the ECCB’s recently introduced more stringent guidance and should be bolstered.²⁸ Loans under moratorium for both banks and CUs have declined significantly as shares of total loans as of end-2021 and financial institutions are taking measures to prudently manage and mitigate the potential impact of the expiration of the moratoria on asset quality, including case-by-case loan restructuring, sales of NPLs, and planned increase in loan loss provisioning.²⁹ Credit growth rebounded in late 2021 and early 2022 driven by CUs while bank credit declined marginally despite ample liquidity. Profitability indicators for banks have remained positive. While St. Vincent has become the front-runner in the ECCU in the uptake of DCash (the digital EC dollar) since the launch of the pilot in August 2021, the momentum waned following the early 2022 outage.

Financial Soundness Indicators

(Percent)

Sources: ECCB, FSA, and IMF staff calculations.

^{^1/}2022Q1 data if 2022Q2 is not availble.

Financial Soundness Indicators

(Percent)

	2018	2019	2020	2021	2022Q2 ^1/
Banks
Deposit-to-loan Ratio	144.6	160.2	168.0	185.7	181.8
Non-performing Loan Ratio	6.5	6.4	7.4	7.8	9.9
Capital Adequacy Ratio (CAR)	23.1	22.2	22.5	22.4	21.9
Provisions for Loan Losses to NPLs	69.5	58.8	64.0	59.2	47.7
Liquid Assets/ Total Assets	37.7	41.4	44.0	47.2	47.6
Return on Average Assets (ROA)	0.5	1.1	0.1	0.4	0.4
Credit Unions
Deposit-to-loan Ratio	126.2	130.4	138.6	149.2	152.2
Non-performing Loan Ratio	5.2	5.0	7.1	8.0	7.8
Capita l Adequacy Ratio (CAR)	13.9	13.0	15.3	13.3	13.1
Provisions for Loan Losses to NPLs	43.9	66.4	53.3	54.3	58.0
Liquid Assets/ Total Assets	20.8	27.7	31.4	30.0	31.8
Return on Average Assets (ROA)	1.3	1.3	0.7	0.9	0.3
ECCU Average {Banks)
Deposit-to-loan Ratio	170.0	169.8	165.2	174.4	180.8
Non-performing Loan Ratio	11.4	10.1	11.4	11.7	11.8
Capita l Adequacy Ratio (CAR)	19.1	21.2	20.9	20.0	15.8
Provisions for Loan Losses to NPLs	44.0	43.0	50.9	48.4	47.7
Liquid Assets/ Total Assets	36.4	40.2	41.6	41.2	42.9
Return on Average Assets (ROA)	1.1	1.4	1.0	0.9	0.3

Sources: ECCB, FSA, and IMF staff calculations.

^{^1/}2022Q1 data if 2022Q2 is not availble.

Financial Soundness Indicators

(Percent)

	2018	2019	2020	2021	2022Q2 ^1/
Banks
Deposit-to-loan Ratio	144.6	160.2	168.0	185.7	181.8
Non-performing Loan Ratio	6.5	6.4	7.4	7.8	9.9
Capital Adequacy Ratio (CAR)	23.1	22.2	22.5	22.4	21.9
Provisions for Loan Losses to NPLs	69.5	58.8	64.0	59.2	47.7
Liquid Assets/ Total Assets	37.7	41.4	44.0	47.2	47.6
Return on Average Assets (ROA)	0.5	1.1	0.1	0.4	0.4
Credit Unions
Deposit-to-loan Ratio	126.2	130.4	138.6	149.2	152.2
Non-performing Loan Ratio	5.2	5.0	7.1	8.0	7.8
Capita l Adequacy Ratio (CAR)	13.9	13.0	15.3	13.3	13.1
Provisions for Loan Losses to NPLs	43.9	66.4	53.3	54.3	58.0
Liquid Assets/ Total Assets	20.8	27.7	31.4	30.0	31.8
Return on Average Assets (ROA)	1.3	1.3	0.7	0.9	0.3
ECCU Average {Banks)
Deposit-to-loan Ratio	170.0	169.8	165.2	174.4	180.8
Non-performing Loan Ratio	11.4	10.1	11.4	11.7	11.8
Capita l Adequacy Ratio (CAR)	19.1	21.2	20.9	20.0	15.8
Provisions for Loan Losses to NPLs	44.0	43.0	50.9	48.4	47.7
Liquid Assets/ Total Assets	36.4	40.2	41.6	41.2	42.9
Return on Average Assets (ROA)	1.1	1.4	1.0	0.9	0.3

Sources: ECCB, FSA, and IMF staff calculations.

^{^1/}2022Q1 data if 2022Q2 is not availble.

22. The FSA should continue to closely monitor asset quality in the non-bank financial sector following the end of the loan moratoria. After the onset of the pandemic, the FSA appropriately enhanced reporting requirements for deposit-taking institutions and the frequency and intensity of oversight, including by requesting institutions to incorporate pandemic and volcanic eruption-related risks into stress testing exercises. The authorities should maintain a vigilant approach, as the impact of the moratoria on asset quality is still unfolding with potential further increase in NPLs considering fragile borrower balance sheets, slow recovery of the tourism industry, and inflation headwinds.³⁰ CUs have increased their share in total credit in recent years, mostly through the expansion in mortgages and consumer loans, and the FSA should maintain close monitoring of lending standards.³¹ Further progress is needed in rolling out stress testing to insurance companies and in tackling the challenges related to the insurance sector’s transition to IFRS 17.

23. The authorities should continue strengthening the regulatory and supervisory frameworks and improve crisis preparedness and management. CUs have successfully implemented IFRS 9 with no significant impact on provisioning levels. Regulatory provisions for friendly societies and cooperative societies were strengthened under the new Friendly Societies Act and the recently approved amendments to the Cooperative Societies Act, and risk management and internal control guidelines for insurance companies published. The harmonized Virtual Asset Business Act was approved by Parliament and an action plan for its implementation has been prepared.³² The pending priorities are:

Transition to risk-based supervision, including incorporating risks related to climate change and cyber threats. With CARTAC’s support, significant progress has been made with transitioning to risk-based supervision, including pilot application of the framework and the publication of a guideline detailing the methodology. Incorporating climate risks in the supervisory and risk assessment frameworks and developing regulatory measures that support climate risk-aware business practices would help enhance climate resilience.
Regulatory reforms to strengthen the framework and FSA’s enforcement and resolution powers, including amendments to the FSA Act and the Building Societies Act and the implementation of the regional Harmonized Credit Union Regulation.
Strengthening crisis preparedness, including by developing a crisis management framework for the non-bank financial sector, in consultation with the MOF and the ECCB.
Improving analysis and transparency, including preparing and publishing periodical financial stability assessments.

24. Leveraging regional and national initiatives to promote private sector credit growth and digitalization would help bolster the recovery and financial inclusion. Structural reforms (Section B) can help increase the number of bankable projects. As mentioned in the 2022 ECCU staff report, to remove bottlenecks that hinder financial inclusion and foster inclusive recovery, continued efforts are needed to move ahead with several regional and national initiatives, including (i) establishing the regional credit bureau which will help encourage prudent risk-taking in lending;³³ (ii) leveraging the recently launched regional credit guarantee scheme, that is expected to help relax collateral constraints to access to credit by micro-, small- and medium-sized enterprises; and (iii) digitalizing financial services in the context of the ongoing Caribbean Digital Transformation Program supported by the WB. The authorities have recently partnered with a local financial institution to promote the use of digital payment by recipients of VEEP and other cash transfer programs, an initiative that is expected to improve social assistance spending efficiency and boost financial inclusion.

25. The authorities are prioritizing efforts to strengthen the AML/CFT framework ahead of the March 2023 assessment by CFATF to minimize the risks of losing CBRs. They assessed the country’s ML/TF risks in 2018-2020 and, on the basis of their findings, developed an Action Plan. Significant progress has been made with the implementation of the Action Plan, including the development of an AML/CFT Risk-Based Supervisory Framework and the recent approval of Non-Regulated Service Provider Guidance. Legislative amendments required to enable authorities to establish an effective administrative sanctions regime for non-compliant reporting entities are expected to be discussed in Parliament soon. The authorities should continue the ongoing strong efforts to further strengthen the framework and its effectiveness, including by fully implementing the recently revised FATF Recommendation 24.

D. Data Issues

26. The data framework should be improved to enhance data-driven policymaking. Data provision is broadly adequate for surveillance, but there is scope to improve its timeliness, availability, and granularity, including for high-frequency indicators (e.g., tourism), the national accounts data, and key surveys (e.g., labor market and household budget surveys), which would require adequate resources and training for the statistics agency. The regional Data for Decision Making Project (2022-27) supported by the WB is expected to improve the infrastructure, processes and capacity of the National Statistical System and support compilation and dissemination of quality statistical data for country- and regional-level analytics.

Authorities’ Views

27. The authorities broadly agreed with the staff’s macroeconomic outlook. They noted that their strong efforts to address the shocks led to a much better 2021 outcome than expected at the time of the volcanic eruptions. They expected a slightly stronger GDP growth in 2022 compared to staff’s projections, supported by a robust recovery in tourism, agriculture, continued growth in construction and related sectors. They noted that current investments can offer upside potential in the medium term. The authorities broadly shared staff’s assessment of risks, noting that their efforts to develop tourism, agriculture and fisheries could result in faster-than-projected growth.

28. The authorities broadly shared staff’s views on the near-term priorities. They will continue their efforts to support post-volcanic eruption rebuilding and the affected households. The authorities emphasized their plan to keep generalized price-mitigating measures time-bound to ensure fiscal sustainability and agreed with the need for further efforts to improve the coverage and targeting of the social safety net. On the revenue side, they plan to continue their strong efforts to fully implement the TAPA and single TIN, and digitalize the system, modernize customs legislation, strengthen fuel import control, and intensify collection of the sizable tax arrears.

29. The authorities remain committed to the regional debt target and the medium-term fiscal strategy set out in the 2021 RCF. They will continue pursuing prudent wage policy, as manifested in the recently concluded public sector wage negotiation for 2023–25. They agreed with the need to recalibrate the FRF before the next stipulated amendment date of 2025 to reflect developments since the framework’s introduction in early 2020 and facilitate its full operationalization once the recovery takes hold. They also stressed the need for investment to support growth and resilience building, which are key for reducing the debt burden, and plan to carry out the C-PIMA in early 2023, which will strengthen the effectiveness of capital investment as well as climate resilience. The authorities agreed with the need for pension reforms and plan to begin the tripartite dialogue soon. They consider the establishment of the FRM an important step of fully operationalizing the FRF and expect the FRM to provide independent and important feedback and inputs into the budget process.

30. The authorities concurred with the need for additional buffers and contingency planning in view of the elevated uncertainty and vulnerability to external shocks and natural disasters. They broadly agreed with staff’s proposed contingent measure options and are considering including a contingency plan in the 2023 Budget. They are building the CF, preparing a DRFS with assistance from the WB, and exploring financing options like state-contingent bonds and a regional CAT bond. The authorities plan to continue their debt management strategy to lower borrowing costs including by utilizing more concessional financing and lengthening maturities, and to monitor interest and exchange rate risks. They concurred that the risks warrant pursuing a somewhat lower debt anchor to ensure that the regional debt target is met.

31. The authorities shared staff’s view that structural reforms are vital for supporting medium-term growth and public debt sustainability. They are making efforts to further improve the business climate, including through single windows for land registration and trade, and the preparation of a new Investment Act that would streamline investment procedures. They recognized the need for further developing skills in the local labor market and agreed with staff on the merits of expanding ALMPs to seize the upcoming ample job opportunities from large-scale investment and facilitate employment. The authorities acknowledged the headwinds to the tourism sector, but agreed with staff on the positive outlook, noting that expected increase in hotel room capacity is attracting additional flights. They stressed the importance of promoting economic diversification by developing the agriculture sector, including by exploring synergies with the tourism sector, and of improving energy security by shifting to renewable energy sources.

32. The authorities broadly agreed with staff’s assessment of the financial sector. They are closely monitoring asset quality following the end of the moratoria and noted that, despite the expected further increase in NPLs, the current trajectory is not envisaged to pose significant risks to the system. They are prioritizing the implementation of their NRA recommendations in view of the upcoming 2023 CFATF evaluation. Nevertheless, the FSA is committed to other reform agenda and expects to approve key legislations, including amendments to the FSA Act, in coming months. They agreed on the importance of developing a crisis management framework, which is part of their strategic plan for 2022-24. While recognizing the need for supporting credit growth, they believe it is important to continue monitoring risks as CUs increase their share in total outstanding credit.

Staff Appraisal

33. St. Vincent and the Grenadines is recovering from multiple shocks under a challenging external environment. The authorities’ commendable response to the pandemic and volcanic eruptions reduced economic scarring and contributed to a small positive growth in 2021. At the same time, the inflationary pressure stemming from rising import prices poses a challenge. The external position in 2021 was moderately weaker than the level implied by the fundamentals and desirable policies. The outlook is favorable, supported by large-scale investment projects and continued recovery of agriculture and tourism, but is subject to large downside risks, stemming primarily from intensifying spillovers from the war in Ukraine, an abrupt global slowdown or recession, and delays in investment projects including due to supply chain disruptions, and the ever-present threat of frequent natural disasters.

34. Near-term policy priorities continue to be health and reconstruction spending and time-bound targeted fiscal support while maintaining fiscal prudence. The reconstruction efforts and temporary support for households heavily affected by the eruptions have been instrumental for the post-volcanic eruption recovery, and price-mitigating measures helped cushion the impact of surging inflation. To help minimize fiscal and adverse distributional impact, the authorities should keep the generalized fiscal relief temporary as announced and continue to enhance the coverage and targeting of the SSN. Fiscal policy should move from income support to ALMPs to facilitate training and employment.

35. Once the recovery takes hold, fiscal buffers should be rebuilt, including by fully operationalizing the FRF, to withstand shocks and reinforce fiscal sustainability. The authorities’ continued commitment to reaching the regional debt target and the medium-term fiscal strategy set out in the 2021 RCF is welcome and critical to public debt sustainability. Given the potential increase in public sector borrowing costs, it is important to recalibrate and fully operationalize the FRF to underpin the commitment and signal a credible medium-term fiscal plan. An automatic adjustment mechanism could strengthen the credibility and adaptability of the framework. Complementary fiscal institutional reforms will be key to the effective implementation of the FRF, including continued strengthening of tax administration, enhancing public financial management, improving public investment management, and strengthening SOE oversight and cash management.

36. Building additional buffers and preparing contingency plans will be key to increasing resilience to external shocks, including from frequent natural disasters. The continuous building of the Contingencies Fund is an important step. Given the high vulnerability to frequent shocks that result in higher debt, building buffers and pursuing a stronger adjustment would provide a safety margin that could be used when shocks materialize and ensure that the regional debt target and public debt sustainability are met with a higher probability. It will be also useful to develop a contingency plan to return debt to the baseline should adverse shocks materialize. To these ends, growth-friendly and equity-enhancing measures on both revenue and expenditure sides should be considered, including streamlining VAT exemptions and import concessions, raising the recurrent property tax, improving design of PIT/CIT, and undertaking the long-standing parametric pension reform.

37. Continued broad-based structural policies are needed to support inclusive growth, promote employment, and bolster resilience to natural disasters. The recent and ongoing key infrastructure investments are instrumental for addressing supply-side constraints to growth. To unlock their full potential, continued improvement in business environment is needed to foster economic activity and create jobs. The authorities should continue building structural resilience, including via resilient and cost-effective public investments that are financed on concessional terms and would reduce expected losses from natural disasters, and enhancing financial resilience. Ongoing efforts to improve the scope, coverage, and effectiveness of TVET programs should be complemented by ALMPs to reduce skill mismatches and facilitate employment. The tourism sector is well-positioned to contribute more to growth, including by strengthening air connectivity and fostering its synergies with agriculture and fisheries.

38. The financial sector has weathered the crisis relatively well so far. With the impact of the moratoria on asset quality is still unfolding, financial regulators should, however, continue the close monitoring. Provisioning levels for the banking system should be bolstered. The financial authorities should continue to strengthen the supervisory and regulatory frameworks and improve crisis preparedness. Ongoing efforts to strengthen the AML/CFT framework should continue to minimize the risk of losing CBRs.

39. It is proposed that the next Article IV consultation with St. Vincent and the Grenadines takes place on the standard 12-month cycle.

^{Table 1.}

St. Vincent and the Grenadines: Selected Social and Economic Indicators, 2018–27

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

^{^1/}In percent of exports of goods and services.

^{^2/}The authorities rebased GDP to 2018 and improved methodology with support from CARTAC (2021). As a result, nominal GDP in 2018 increased by 9 percent.

^{Table 2.}

St. Vincent and the Grenadines: Balance of Payments, 2018–27

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

^{^1/}The 2021 value is explained mostly by loans from the World Bank.

^{^2/}Includes SDR holdings.

^{Table 2.}

St. Vincent and the Grenadines: Balance of Payments, 2018–27

	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
				Prel.	Projections
	(EC$ million; unless otherwise stated)
Current Account	-243	-75	-355	-537	-679	-781	-599	-440	-341	-314
Trade balance	-717	-677	-607	-782	-931	-1185	-1170	-1169	-1171	-1197
Exports f.o.b.	125	120	157	103	125	146	172	195	216	241
Imports f.o.b.	842	798	764	885	1056	1331	1342	1365	1387	1439
Of which: Mineral fuels	120	93	84	110	202	169	167	164	162	162
Services (net)	364	413	108	34	116	297	488	624	709	755
Travel (net)	579	591	212	142	311	536	775	869	915	963
Other nonfactor services (net)	-215	-177	-104	-108	-195	-240	-288	-245	-206	-209
Primary income (net)	-1	-20	-13	-13	-52	-77	-92	-67	-53	-48
Secondary income (net)	111	209	157	224	189	183	174	173	173	177
Private transfers	74	150	113	180	141	144	143	146	149	152
Official transfers	37	59	43	44	48	40	32	27	25	25
Capital Account	15	12	13	47	70	104	65	75	72	79
Financial Account	-83	-8	-116	-70	-609	-677	-534	-365	-269	-235
Direct investment	-92	-187	-77	-167	-329	-457	-279	-306	-319	-350
Portfolio investment	-14	50	38	14	12	19	11	5	11	11
Other investment	57	64	-109	-144	-275	-212	-257	-58	14	68
Assets	32	60	55	84	22	29	-9	46	77	86
Liabilities	25	4	-165	-228	-296	-241	-249	-103	-63	-18
General Government loans ^1/	23	-75	-143	-251	-251	-246	-167	-105	-1	12
of which RCF disbursement	0	0	-43	-31	0	0	0	0	0	0
Other liabilities	2	79	-21	23	-46	5	-82	1	-62	-30
Reserve assets	-34	64	32	226	-17	-27	-10	-6	24	36
Net Errors and Omissions	144	55	226	420	0	0	0	0	0	0
Imputed International Reserves ^2/	458	522	554	779	762	735	725	720	744	779
In months of imports of good and services	4.8	6.2	5.9	6.7	5.3	4.9	4.9	4.9	4.9	4.9
	(Percent of GDP, unless otherwise stated)
Current account	-10.2	-3.1	-15.1	-22.8	-26.5	-27.6	-19.8	-13.8	-10.2	-9.0
Exports f.o.b.	5.2	4.9	6.7	4.4	4.9	5.2	5.7	6.1	6.5	6.9
Imports f.o.b.	35.3	32.4	32.6	37.6	41.3	47.1	44.4	42.8	41.5	41.1
Net private transfers	3.1	6.1	4.8	7.6	5.5	5.1	4.7	4.6	4.4	4.4
Tourism exports	27.0	26.5	10.2	6.8	12.9	19.7	26.4	28.0	28.1	28.3
Direct investment	3.9	7.6	3.3	7.1	12.9	16.2	9.2	9.6	9.6	10.0
Memorandum Items
Terms of trade of goods (Index 2002=100)	110.8	115.4	129.1	132.1	115.7	120.6	120.5	118.8	119.1	118.8
Total trade of goods and nonfactor services	87.6	82.7	64.7	63.6	77.0	90.5	95.9	94.4	92.1	92.1
Exports of goods and nonfactor services	36.4	36.0	21.7	15.9	22.5	29.5	36.7	38.7	39.2	39.7
Imports of goods and nonfactor services	51.2	46.7	43.0	47.7	54.4	60.9	59.2	55.8	53.0	52.4

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

^{^1/}The 2021 value is explained mostly by loans from the World Bank.

^{^2/}Includes SDR holdings.

^{Table 2.}

St. Vincent and the Grenadines: Balance of Payments, 2018–27

	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
				Prel.	Projections
	(EC$ million; unless otherwise stated)
Current Account	-243	-75	-355	-537	-679	-781	-599	-440	-341	-314
Trade balance	-717	-677	-607	-782	-931	-1185	-1170	-1169	-1171	-1197
Exports f.o.b.	125	120	157	103	125	146	172	195	216	241
Imports f.o.b.	842	798	764	885	1056	1331	1342	1365	1387	1439
Of which: Mineral fuels	120	93	84	110	202	169	167	164	162	162
Services (net)	364	413	108	34	116	297	488	624	709	755
Travel (net)	579	591	212	142	311	536	775	869	915	963
Other nonfactor services (net)	-215	-177	-104	-108	-195	-240	-288	-245	-206	-209
Primary income (net)	-1	-20	-13	-13	-52	-77	-92	-67	-53	-48
Secondary income (net)	111	209	157	224	189	183	174	173	173	177
Private transfers	74	150	113	180	141	144	143	146	149	152
Official transfers	37	59	43	44	48	40	32	27	25	25
Capital Account	15	12	13	47	70	104	65	75	72	79
Financial Account	-83	-8	-116	-70	-609	-677	-534	-365	-269	-235
Direct investment	-92	-187	-77	-167	-329	-457	-279	-306	-319	-350
Portfolio investment	-14	50	38	14	12	19	11	5	11	11
Other investment	57	64	-109	-144	-275	-212	-257	-58	14	68
Assets	32	60	55	84	22	29	-9	46	77	86
Liabilities	25	4	-165	-228	-296	-241	-249	-103	-63	-18
General Government loans ^1/	23	-75	-143	-251	-251	-246	-167	-105	-1	12
of which RCF disbursement	0	0	-43	-31	0	0	0	0	0	0
Other liabilities	2	79	-21	23	-46	5	-82	1	-62	-30
Reserve assets	-34	64	32	226	-17	-27	-10	-6	24	36
Net Errors and Omissions	144	55	226	420	0	0	0	0	0	0
Imputed International Reserves ^2/	458	522	554	779	762	735	725	720	744	779
In months of imports of good and services	4.8	6.2	5.9	6.7	5.3	4.9	4.9	4.9	4.9	4.9
	(Percent of GDP, unless otherwise stated)
Current account	-10.2	-3.1	-15.1	-22.8	-26.5	-27.6	-19.8	-13.8	-10.2	-9.0
Exports f.o.b.	5.2	4.9	6.7	4.4	4.9	5.2	5.7	6.1	6.5	6.9
Imports f.o.b.	35.3	32.4	32.6	37.6	41.3	47.1	44.4	42.8	41.5	41.1
Net private transfers	3.1	6.1	4.8	7.6	5.5	5.1	4.7	4.6	4.4	4.4
Tourism exports	27.0	26.5	10.2	6.8	12.9	19.7	26.4	28.0	28.1	28.3
Direct investment	3.9	7.6	3.3	7.1	12.9	16.2	9.2	9.6	9.6	10.0
Memorandum Items
Terms of trade of goods (Index 2002=100)	110.8	115.4	129.1	132.1	115.7	120.6	120.5	118.8	119.1	118.8
Total trade of goods and nonfactor services	87.6	82.7	64.7	63.6	77.0	90.5	95.9	94.4	92.1	92.1
Exports of goods and nonfactor services	36.4	36.0	21.7	15.9	22.5	29.5	36.7	38.7	39.2	39.7
Imports of goods and nonfactor services	51.2	46.7	43.0	47.7	54.4	60.9	59.2	55.8	53.0	52.4

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

^{^1/}The 2021 value is explained mostly by loans from the World Bank.

^{^2/}Includes SDR holdings.

^{Table 3.}

St. Vincent and the Grenadines: Central Government Operations, 2018–27

(Millions of Eastern Caribbean dollars, unless indicated otherwise)

Sources: Ministry of Finance and Planning; and IMF staff estimates and projections.

^{^1/}Wages and salaries including social security contributions, commissions, rewards, allowances, and incentives.

^{^2/}(-) implies accumulation of government assets, including deposits, sinking fund, and contingency fund.

^{^3/}Includes other non-banking sector domestic financing.

^{^4/}Includes central government debt relief of 4.2 percent of GDP from Venezuela (2022).

^{Table 3.}

St. Vincent and the Grenadines: Central Government Operations, 2018–27

(Millions of Eastern Caribbean dollars, unless indicated otherwise)

	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
				Prel.	Projections
Total Revenue and Grants	637	680	716	740	766	868	887	943	983	1,030
Current revenue	596	602	606	681	695	758	815	860	904	947
Tax revenue	551	555	555	628	638	695	748	790	829	869
Of which
Taxes on income and profits	148	140	143	144	157	165	178	189	202	211
Taxes on property	5	4	4	4	4	5	5	6	5	6
Taxes on international trade	236	233	235	247	282	310	330	348	364	381
Of which: VAT	92	94	91	96	110	117	125	132	139	145
Taxes on domestic transactions	162	178	174	233	195	215	234	247	259	271
Of which: VAT	78	96	88	87	94	104	115	122	128	134
Non-tax	46	47	51	54	57	63	67	71	74	78
Capital Revenue	1	4	46	21	1	6	6	6	6	6
Grants	40	74	63	38	70	104	65	77	73	77
Total Expenditure and Net Lending	657	746	840	913	975	1,040	1,149	1,019	964	996
Current	573	600	642	694	697	739	769	792	816	848
Of which
Wages and salaries ^1/	288	304	324	338	348	362	373	384	395	414
Interest	52	56	52	60	64	75	83	85	82	78
Domestic	32	35	32	37	31	33	33	30	31	30
Foreign	20	21	19	23	33	42	50	54	51	49
Transfers and subsidies	156	161	177	196	178	190	199	205	215	225
Goods and services	77	80	90	100	107	113	115	118	124	130
Capital Expenditure	84	146	198	219	278	301	380	227	148	148
Port	…	2	2	6	113	195	222	91	12	0
Hospital	…	…	…	…	0	54	108	108	0	0
Reconstruction (La Soufriere): capital spending	…	…	…	64	58	32	26	0	0	0
Others	84	144	196	213	107	20	24	28	136	148
Current balance (before grants)	23	1	-36	-13	-2	19	46	69	88	99
Overall Balance	-20	-66	-124	-172	-210	-172	-263	-75	20	34
Overall balance (excl. port project)	-20	-64	-122	-167	-96	23	-41	16	32	34
Overall Bal. (exc. Covid-19, volcano one-offs, and port)	-20	-64	-80	-69	-24	55	-15	16	32	34
Primary Balance	32	-10	-73	-112	-145	-97	-180	9	102	112
Primary balance (excl. port project)	32	-8	-71	-106	-32	98	42	100	113	112
Prim. Bal. (exc. Covid-19, volcano one-offs, and port)	32	-8	-29	-8	40	131	68	100	113	112
Identified Financing	20	66	124	172	210	172	263	75	-20	-34
Net external financing	15	40	74	260	237	247	167	105	3	-10
Disbursements	89	113	126	313	340	358	271	233	144	105
Amortization	74	73	52	53	102	111	104	128	142	115
Change in government assets ^2/	56	27	23	-89	-43	-73	60	-38	-3	-27
Net domestic financing ^3/	-77	6	27	1	15	-2	36	8	-20	2
Change in account payable and arrears	26	-7	0	0	0	0	0	0	0	0
Memorandum Items ^4/
Public debt	1,657	1,674	1,866	2,102	2,244	2,486	2,695	2,800	2,781	2,771
Covid-19 and volcano-related expenditure	…	…	42	98	72	32	26	0	0	0

Sources: Ministry of Finance and Planning; and IMF staff estimates and projections.

^{^1/}Wages and salaries including social security contributions, commissions, rewards, allowances, and incentives.

^{^2/}(-) implies accumulation of government assets, including deposits, sinking fund, and contingency fund.

^{^3/}Includes other non-banking sector domestic financing.

^{^4/}Includes central government debt relief of 4.2 percent of GDP from Venezuela (2022).

^{Table 3.}

St. Vincent and the Grenadines: Central Government Operations, 2018–27

(Millions of Eastern Caribbean dollars, unless indicated otherwise)

	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
				Prel.	Projections
Total Revenue and Grants	637	680	716	740	766	868	887	943	983	1,030
Current revenue	596	602	606	681	695	758	815	860	904	947
Tax revenue	551	555	555	628	638	695	748	790	829	869
Of which
Taxes on income and profits	148	140	143	144	157	165	178	189	202	211
Taxes on property	5	4	4	4	4	5	5	6	5	6
Taxes on international trade	236	233	235	247	282	310	330	348	364	381
Of which: VAT	92	94	91	96	110	117	125	132	139	145
Taxes on domestic transactions	162	178	174	233	195	215	234	247	259	271
Of which: VAT	78	96	88	87	94	104	115	122	128	134
Non-tax	46	47	51	54	57	63	67	71	74	78
Capital Revenue	1	4	46	21	1	6	6	6	6	6
Grants	40	74	63	38	70	104	65	77	73	77
Total Expenditure and Net Lending	657	746	840	913	975	1,040	1,149	1,019	964	996
Current	573	600	642	694	697	739	769	792	816	848
Of which
Wages and salaries ^1/	288	304	324	338	348	362	373	384	395	414
Interest	52	56	52	60	64	75	83	85	82	78
Domestic	32	35	32	37	31	33	33	30	31	30
Foreign	20	21	19	23	33	42	50	54	51	49
Transfers and subsidies	156	161	177	196	178	190	199	205	215	225
Goods and services	77	80	90	100	107	113	115	118	124	130
Capital Expenditure	84	146	198	219	278	301	380	227	148	148
Port	…	2	2	6	113	195	222	91	12	0
Hospital	…	…	…	…	0	54	108	108	0	0
Reconstruction (La Soufriere): capital spending	…	…	…	64	58	32	26	0	0	0
Others	84	144	196	213	107	20	24	28	136	148
Current balance (before grants)	23	1	-36	-13	-2	19	46	69	88	99
Overall Balance	-20	-66	-124	-172	-210	-172	-263	-75	20	34
Overall balance (excl. port project)	-20	-64	-122	-167	-96	23	-41	16	32	34
Overall Bal. (exc. Covid-19, volcano one-offs, and port)	-20	-64	-80	-69	-24	55	-15	16	32	34
Primary Balance	32	-10	-73	-112	-145	-97	-180	9	102	112
Primary balance (excl. port project)	32	-8	-71	-106	-32	98	42	100	113	112
Prim. Bal. (exc. Covid-19, volcano one-offs, and port)	32	-8	-29	-8	40	131	68	100	113	112
Identified Financing	20	66	124	172	210	172	263	75	-20	-34
Net external financing	15	40	74	260	237	247	167	105	3	-10
Disbursements	89	113	126	313	340	358	271	233	144	105
Amortization	74	73	52	53	102	111	104	128	142	115
Change in government assets ^2/	56	27	23	-89	-43	-73	60	-38	-3	-27
Net domestic financing ^3/	-77	6	27	1	15	-2	36	8	-20	2
Change in account payable and arrears	26	-7	0	0	0	0	0	0	0	0
Memorandum Items ^4/
Public debt	1,657	1,674	1,866	2,102	2,244	2,486	2,695	2,800	2,781	2,771
Covid-19 and volcano-related expenditure	…	…	42	98	72	32	26	0	0	0

Sources: Ministry of Finance and Planning; and IMF staff estimates and projections.

^{^1/}Wages and salaries including social security contributions, commissions, rewards, allowances, and incentives.

^{^2/}(-) implies accumulation of government assets, including deposits, sinking fund, and contingency fund.

^{^3/}Includes other non-banking sector domestic financing.

^{^4/}Includes central government debt relief of 4.2 percent of GDP from Venezuela (2022).

^{Table 4.}

St. Vincent and the Grenadines: Central Government Operations, 2018–27

(Percent of GDP, unless indicated otherwise)

Sources: Ministry of Finance and Planning; and IMF staff estimates and projections.

^{^1/}Wages and salaries including social security contributions, commissions, rewards, allowances, and incentives.

^{^2/}(-) implies accumulation of government assets, including deposits, sinking fund, and contingency fund.

^{^3/}Includes other non-banking sector domestic financing.

^{Table 4.}

St. Vincent and the Grenadines: Central Government Operations, 2018–27

(Percent of GDP, unless indicated otherwise)

	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
				Prel.	Projections
Total Revenue and Grants	26.7	27.7	30.5	31.4	30.0	30.7	29.3	29.6	29.4	29.4
Current revenue	25.0	24.5	25.8	28.9	27.2	26.8	27.0	27.0	27.0	27.0
Tax revenue	23.1	22.6	23.7	26.7	25.0	24.6	24.8	24.8	24.8	24.8
Of which
Taxes on income and profits	6.2	5.7	6.1	6.1	6.1	5.8	5.9	5.9	6.0	6.0
Taxes on property	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2
Taxes on international trade	9.9	9.5	10.0	10.5	11.0	11.0	10.9	10.9	10.9	10.9
Of Which: VAT	3.9	3.8	3.9	4.1	4.3	4.2	4.2	4.2	4.2	4.2
Taxes on domestic transactions	6.8	7.2	7.4	9.9	7.6	7.6	7.7	7.7	7.7	7.7
Of Which: VAT	3.3	3.9	3.7	3.7	3.7	3.7	3.8	3.8	3.8	3.8
Non-tax	1.9	1.9	2.2	2.3	2.2	2.2	2.2	2.2	2.2	2.2
Capital Revenue	0.0	0.2	2.0	0.9	0.0	0.2	0.2	0.2	0.2	0.2
Grants	1.7	3.0	2.7	1.6	2.7	3.7	2.2	2.4	2.2	2.2
Total Expenditure and Net Lending	27.5	30.3	35.8	38.8	38.2	36.8	38.0	31.9	28.8	28.5
Current	24.0	24.4	27.4	29.5	27.3	26.2	25.5	24.8	24.4	24.2
Of which
Wages and salaries ^1/	12.1	12.4	13.8	14.3	13.6	12.8	12.3	12.0	11.8	11.8
Interest	2.2	2.3	2.2	2.6	2.5	2.7	2.7	2.7	2.4	2.2
Domestic	1.3	1.4	1.4	1.6	1.2	1.2	1.1	1.0	0.9	0.8
Foreign	0.8	0.8	0.8	1.0	1.3	1.5	1.7	1.7	1.5	1.4
Transfers and subsidies	6.5	6.5	7.5	8.3	7.0	6.7	6.6	6.4	6.4	6.4
Goods and services	3.2	3.2	3.8	4.2	4.2	4.0	3.8	3.7	3.7	3.7
Capital Expenditure	3.5	5.9	8.5	9.3	10.9	10.6	12.6	7.1	4.4	4.2
Port	…	0.1	0.1	0.2	4.4	6.9	7.3	2.9	0.3	0.0
Hospital	…	…	…	…	0.0	1.9	3.6	3.4	0.0	0.0
Reconstruction (La Soufriere): capital spending	…	…	…	2.7	2.3	1.1	0.9	0.0	0.0	0.0
Others	3.5	5.8	8.4	9.1	4.2	0.7	0.8	0.9	4.1	4.2
Current balance (before grants)	1.0	0.1	-1.5	-0.5	-0.1	0.7	1.5	2.2	2.6	2.8
Overall Balance	-0.8	-2.7	-5.3	-7.3	-8.2	-6.1	-8.7	-2.4	0.6	1.0
Overall balance (excl. grants)	-2.5	-5.7	-8.0	-8.9	-10.9	-9.8	-10.9	-4.8	-1.6	-1.2
Overall balance (excl. port project)	-0.8	-2.6	-5.2	-7.1	-3.8	0.8	-1.4	0.5	0.9	1.0
Overall Bal. (exc. Covid-19, volcano one-offs, and port)	-0.8	-2.6	-3.4	-2.9	-1.0	2.0	-0.5	0.5	0.9	1.0
Primary Balance	1.4	-0.4	-3.1	-4.8	-5.7	-3.4	-6.0	0.3	3.0	3.2
Primary balance (excl. port project)	1.4	-0.3	-3.0	-4.5	-1.3	3.5	1.4	3.1	3.4	3.2
Prim. Bal. (exc. Covid-19, volcano one-offs, and port)	1.4	-0.3	-1.2	-0.4	1.6	4.6	2.2	3.1	3.4	3.2
Identified Financing	0.8	2.7	5.3	7.3	8.2	6.1	8.7	2.4	-0.6	-1.0
Net external financing	0.6	1.6	3.2	11.0	9.3	8.7	5.5	3.3	0.1	-0.3
Disbursements	3.7	4.6	5.4	13.3	13.3	12.7	9.0	7.3	4.3	3.0
Amortization	3.1	3.0	2.2	2.2	4.0	3.9	3.4	4.0	4.2	3.3
Change in government assets ^2/	2.3	1.1	1.0	-3.8	-1.7	-2.6	2.0	-1.2	-0.1	-0.8
Net domestic financing ^3/	-3.2	0.2	1.2	0.1	0.6	-0.1	1.2	0.3	-0.6	0.1
Change in account payable and arrears	1.1	-0.3	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Memorandum Items
Gross public sector debt	69.4	68.1	79.5	89.3	87.8	88.0	89.2	87.8	83.2	79.2
GDP at market prices (EC$ millions)	2,388	2,459	2,347	2,355	2,556	2,826	3,022	3,189	3,341	3,500
Real GDP growth (percent)	3.2	0.7	-3.7	0.8	5.0	6.0	4.8	3.5	2.7	2.7
Covid-19 and volcano-related expenditure	…	…	1.8	4.2	2.8	1.1	0.9	0.0	0.0	0.0

Sources: Ministry of Finance and Planning; and IMF staff estimates and projections.

^{^1/}Wages and salaries including social security contributions, commissions, rewards, allowances, and incentives.

^{^2/}(-) implies accumulation of government assets, including deposits, sinking fund, and contingency fund.

^{^3/}Includes other non-banking sector domestic financing.

^{Table 4.}

St. Vincent and the Grenadines: Central Government Operations, 2018–27

(Percent of GDP, unless indicated otherwise)

	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
				Prel.	Projections
Total Revenue and Grants	26.7	27.7	30.5	31.4	30.0	30.7	29.3	29.6	29.4	29.4
Current revenue	25.0	24.5	25.8	28.9	27.2	26.8	27.0	27.0	27.0	27.0
Tax revenue	23.1	22.6	23.7	26.7	25.0	24.6	24.8	24.8	24.8	24.8
Of which
Taxes on income and profits	6.2	5.7	6.1	6.1	6.1	5.8	5.9	5.9	6.0	6.0
Taxes on property	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2
Taxes on international trade	9.9	9.5	10.0	10.5	11.0	11.0	10.9	10.9	10.9	10.9
Of Which: VAT	3.9	3.8	3.9	4.1	4.3	4.2	4.2	4.2	4.2	4.2
Taxes on domestic transactions	6.8	7.2	7.4	9.9	7.6	7.6	7.7	7.7	7.7	7.7
Of Which: VAT	3.3	3.9	3.7	3.7	3.7	3.7	3.8	3.8	3.8	3.8
Non-tax	1.9	1.9	2.2	2.3	2.2	2.2	2.2	2.2	2.2	2.2
Capital Revenue	0.0	0.2	2.0	0.9	0.0	0.2	0.2	0.2	0.2	0.2
Grants	1.7	3.0	2.7	1.6	2.7	3.7	2.2	2.4	2.2	2.2
Total Expenditure and Net Lending	27.5	30.3	35.8	38.8	38.2	36.8	38.0	31.9	28.8	28.5
Current	24.0	24.4	27.4	29.5	27.3	26.2	25.5	24.8	24.4	24.2
Of which
Wages and salaries ^1/	12.1	12.4	13.8	14.3	13.6	12.8	12.3	12.0	11.8	11.8
Interest	2.2	2.3	2.2	2.6	2.5	2.7	2.7	2.7	2.4	2.2
Domestic	1.3	1.4	1.4	1.6	1.2	1.2	1.1	1.0	0.9	0.8
Foreign	0.8	0.8	0.8	1.0	1.3	1.5	1.7	1.7	1.5	1.4
Transfers and subsidies	6.5	6.5	7.5	8.3	7.0	6.7	6.6	6.4	6.4	6.4
Goods and services	3.2	3.2	3.8	4.2	4.2	4.0	3.8	3.7	3.7	3.7
Capital Expenditure	3.5	5.9	8.5	9.3	10.9	10.6	12.6	7.1	4.4	4.2
Port	…	0.1	0.1	0.2	4.4	6.9	7.3	2.9	0.3	0.0
Hospital	…	…	…	…	0.0	1.9	3.6	3.4	0.0	0.0
Reconstruction (La Soufriere): capital spending	…	…	…	2.7	2.3	1.1	0.9	0.0	0.0	0.0
Others	3.5	5.8	8.4	9.1	4.2	0.7	0.8	0.9	4.1	4.2
Current balance (before grants)	1.0	0.1	-1.5	-0.5	-0.1	0.7	1.5	2.2	2.6	2.8
Overall Balance	-0.8	-2.7	-5.3	-7.3	-8.2	-6.1	-8.7	-2.4	0.6	1.0
Overall balance (excl. grants)	-2.5	-5.7	-8.0	-8.9	-10.9	-9.8	-10.9	-4.8	-1.6	-1.2
Overall balance (excl. port project)	-0.8	-2.6	-5.2	-7.1	-3.8	0.8	-1.4	0.5	0.9	1.0
Overall Bal. (exc. Covid-19, volcano one-offs, and port)	-0.8	-2.6	-3.4	-2.9	-1.0	2.0	-0.5	0.5	0.9	1.0
Primary Balance	1.4	-0.4	-3.1	-4.8	-5.7	-3.4	-6.0	0.3	3.0	3.2
Primary balance (excl. port project)	1.4	-0.3	-3.0	-4.5	-1.3	3.5	1.4	3.1	3.4	3.2
Prim. Bal. (exc. Covid-19, volcano one-offs, and port)	1.4	-0.3	-1.2	-0.4	1.6	4.6	2.2	3.1	3.4	3.2
Identified Financing	0.8	2.7	5.3	7.3	8.2	6.1	8.7	2.4	-0.6	-1.0
Net external financing	0.6	1.6	3.2	11.0	9.3	8.7	5.5	3.3	0.1	-0.3
Disbursements	3.7	4.6	5.4	13.3	13.3	12.7	9.0	7.3	4.3	3.0
Amortization	3.1	3.0	2.2	2.2	4.0	3.9	3.4	4.0	4.2	3.3
Change in government assets ^2/	2.3	1.1	1.0	-3.8	-1.7	-2.6	2.0	-1.2	-0.1	-0.8
Net domestic financing ^3/	-3.2	0.2	1.2	0.1	0.6	-0.1	1.2	0.3	-0.6	0.1
Change in account payable and arrears	1.1	-0.3	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Memorandum Items
Gross public sector debt	69.4	68.1	79.5	89.3	87.8	88.0	89.2	87.8	83.2	79.2
GDP at market prices (EC$ millions)	2,388	2,459	2,347	2,355	2,556	2,826	3,022	3,189	3,341	3,500
Real GDP growth (percent)	3.2	0.7	-3.7	0.8	5.0	6.0	4.8	3.5	2.7	2.7
Covid-19 and volcano-related expenditure	…	…	1.8	4.2	2.8	1.1	0.9	0.0	0.0	0.0

Sources: Ministry of Finance and Planning; and IMF staff estimates and projections.

^{^1/}Wages and salaries including social security contributions, commissions, rewards, allowances, and incentives.

^{^2/}(-) implies accumulation of government assets, including deposits, sinking fund, and contingency fund.

^{^3/}Includes other non-banking sector domestic financing.

^{Table 5.}

St. Vincent and the Grenadines: Monetary Survey, 2018–27

(Millions of Eastern Caribbean dollars)

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

^{^1/}Including resident foreign currency deposits.

^{^2/}Nominal GDP at market prices divided by liabilities to the private sector.

^{Table 5.}

St. Vincent and the Grenadines: Monetary Survey, 2018–27

(Millions of Eastern Caribbean dollars)

	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
						Projections
Net Foreign Assets	599	826	905	1,238	1,159	1,102	1,071	1,046	1,054	1,072
ECCB	455	518	551	735	717	691	681	675	699	735
Of which: Imputed reserves	455	518	551	735	717	691	681	675	699	735
Commercial banks	144	309	353	503	441	412	390	371	355	337
Net Domestic Assets	966	894	739	616	717	881	1,050	1,192	1,291	1,384
Public sector credit (net)	4	-67	3	-49	-76	-151	-55	-85	-107	-132
Central government	106	40	128	48	20	-55	41	12	-11	-35
ECCB	1	-16	26	2	-20	-57	-27	-45	-47	-60
Commercial banks	105	56	102	47	40	2	68	57	36	25
Net credit to other public sector institutions	-102	-107	-125	-97	-97	-97	-97	-97	-97	-96
National Insurance Scheme	-74	-70	-79	-79	-79	-79	-79	-79	-79	-79
Other	-28	-37	-47	-19	-19	-19	-19	-19	-19	-19
Net credit to nonbank financial institutions	40	26	16	16	16	16	17	18	18	19
Credit to private sector	1,063	1,074	1,109	1,109	1,109	1,131	1,165	1,214	1,272	1,332
Other items (net)	-141	-139	-389	-461	-332	-115	-77	45	108	165
Broad Money (M2)	1,565	1,720	1,643	1,854	1,876	1,983	2,120	2,238	2,345	2,456
Money	516	580	586	694	807	853	912	963	1,008	1,056
Currency in circulation	107	131	157	194	197	168	179	189	200	209
Demand deposits	409	449	429	500	610	685	733	773	809	847
Quasi-money	1,049	1,140	1,057	1,159	1,069	1,130	1,208	1,275	1,336	1,400
Local currency deposits	981	1,023	941	980	904	956	1,022	1,078	1,130	1,183
Foreign currency deposits	68	116	116	179	165	175	187	197	206	216
	(Percent change)
Net foreign assets	-1.4	37.9	9.5	36.8	-6.4	-4.9	-2.8	-2.3	0.7	1.7
Net domestic assets	3.7	-7.5	-17.4	-16.7	16.5	22.9	19.1	13.5	8.3	7.2
Credit to private sector	-0.5	1.1	3.3	0.0	0.0	2.0	3.0	4.2	4.8	4.8
Broad money (M2)	1.7	9.9	-4.5	12.8	1.2	5.7	6.9	5.6	4.8	4.8
Money	8.4	12.5	1.0	18.4	16.2	5.7	6.9	5.6	4.8	4.8
Quasi-money ^1/	-1.3	8.6	-7.3	9.7	-7.8	5.7	6.9	5.6	4.8	4.8
	(Contributions to M2 growth)
Net foreign assets	-0.6	14.5	4.6	20.3	-4.3	-3.0	-1.6	-1.1	0.3	0.8
Net domestic assets	2.3	-4.6	-9.0	-7.5	5.5	8.8	8.5	6.7	4.4	4.0
Public sector credit (net)	0.9	-4.5	4.0	-3.1	-1.5	-4.0	4.8	-1.4	-1.0	-1.0
Of which: Central government	0.7	-4.2	5.1	-4.9	-1.5	-4.0	4.8	-1.4	-1.0	-1.0
Credit to private sector	-0.4	0.7	2.0	0.0	0.0	1.2	1.7	2.3	2.6	2.6
Other items (net)	1.2	0.1	-14.5	-4.4	7.0	11.6	1.9	5.8	2.8	2.4
Memorandum Item
Income velocity ^2/	1.53	1.43	1.43	1.27	1.36	1.43	1.43	1.43	1.43	1.43

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

^{^1/}Including resident foreign currency deposits.

^{^2/}Nominal GDP at market prices divided by liabilities to the private sector.

^{Table 5.}

St. Vincent and the Grenadines: Monetary Survey, 2018–27

(Millions of Eastern Caribbean dollars)

	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
						Projections
Net Foreign Assets	599	826	905	1,238	1,159	1,102	1,071	1,046	1,054	1,072
ECCB	455	518	551	735	717	691	681	675	699	735
Of which: Imputed reserves	455	518	551	735	717	691	681	675	699	735
Commercial banks	144	309	353	503	441	412	390	371	355	337
Net Domestic Assets	966	894	739	616	717	881	1,050	1,192	1,291	1,384
Public sector credit (net)	4	-67	3	-49	-76	-151	-55	-85	-107	-132
Central government	106	40	128	48	20	-55	41	12	-11	-35
ECCB	1	-16	26	2	-20	-57	-27	-45	-47	-60
Commercial banks	105	56	102	47	40	2	68	57	36	25
Net credit to other public sector institutions	-102	-107	-125	-97	-97	-97	-97	-97	-97	-96
National Insurance Scheme	-74	-70	-79	-79	-79	-79	-79	-79	-79	-79
Other	-28	-37	-47	-19	-19	-19	-19	-19	-19	-19
Net credit to nonbank financial institutions	40	26	16	16	16	16	17	18	18	19
Credit to private sector	1,063	1,074	1,109	1,109	1,109	1,131	1,165	1,214	1,272	1,332
Other items (net)	-141	-139	-389	-461	-332	-115	-77	45	108	165
Broad Money (M2)	1,565	1,720	1,643	1,854	1,876	1,983	2,120	2,238	2,345	2,456
Money	516	580	586	694	807	853	912	963	1,008	1,056
Currency in circulation	107	131	157	194	197	168	179	189	200	209
Demand deposits	409	449	429	500	610	685	733	773	809	847
Quasi-money	1,049	1,140	1,057	1,159	1,069	1,130	1,208	1,275	1,336	1,400
Local currency deposits	981	1,023	941	980	904	956	1,022	1,078	1,130	1,183
Foreign currency deposits	68	116	116	179	165	175	187	197	206	216
	(Percent change)
Net foreign assets	-1.4	37.9	9.5	36.8	-6.4	-4.9	-2.8	-2.3	0.7	1.7
Net domestic assets	3.7	-7.5	-17.4	-16.7	16.5	22.9	19.1	13.5	8.3	7.2
Credit to private sector	-0.5	1.1	3.3	0.0	0.0	2.0	3.0	4.2	4.8	4.8
Broad money (M2)	1.7	9.9	-4.5	12.8	1.2	5.7	6.9	5.6	4.8	4.8
Money	8.4	12.5	1.0	18.4	16.2	5.7	6.9	5.6	4.8	4.8
Quasi-money ^1/	-1.3	8.6	-7.3	9.7	-7.8	5.7	6.9	5.6	4.8	4.8
	(Contributions to M2 growth)
Net foreign assets	-0.6	14.5	4.6	20.3	-4.3	-3.0	-1.6	-1.1	0.3	0.8
Net domestic assets	2.3	-4.6	-9.0	-7.5	5.5	8.8	8.5	6.7	4.4	4.0
Public sector credit (net)	0.9	-4.5	4.0	-3.1	-1.5	-4.0	4.8	-1.4	-1.0	-1.0
Of which: Central government	0.7	-4.2	5.1	-4.9	-1.5	-4.0	4.8	-1.4	-1.0	-1.0
Credit to private sector	-0.4	0.7	2.0	0.0	0.0	1.2	1.7	2.3	2.6	2.6
Other items (net)	1.2	0.1	-14.5	-4.4	7.0	11.6	1.9	5.8	2.8	2.4
Memorandum Item
Income velocity ^2/	1.53	1.43	1.43	1.27	1.36	1.43	1.43	1.43	1.43	1.43

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

^{^1/}Including resident foreign currency deposits.

^{^2/}Nominal GDP at market prices divided by liabilities to the private sector.

Annex I. Implementation of Past Fund Policy Advice

Recommendations from the 2018 Article IV Consultation	Authorities’ Actions
Fiscal Policy
Develop a long-term infrastructure plan closely linked to the MTFF. Prioritize developmental project plans, considering capacity and budget constraints, while seeking concessional financing and containing procurement costs.	Ongoing. The government continued efforts to prioritize capital spending on reconstruction, resilience building, and essential infrastructure and expects to receive a C-PIMA to strengthen capital investment planning, allocation, and implementation as well as climate resilience. Investment projects are largely financed by concessional financing.
Introduce additional fiscal measures, for example by broadening the tax base, limiting the growth of the wage bill, and moving resolutely with the plan to reform the pension system.	Ongoing. The authorities introduced revenue-enhancing measures, including raising excise taxes on selected items (2019), increasing the customs service charge (2021), and continuously improving tax administration. On the expenditure side, they have been implementing prudent wage and non-priority current spending policies. Pension reforms are under consideration.
Strengthen the fiscal institutional framework, including improving revenue administration by adopting risk-based framework and completing the various reform initiatives, publishing a MTFF together with the budget, introducing fiscal rules, and improving cash management and SOE oversight.	Ongoing. The authorities undertook significant efforts to improve tax administration, including enacting TAPA and establishing a compliance management unit for large taxpayers in 2019. The FRF was approved in January 2020. Enhancement of cash management is pending. In 2019, the government adopted the Finance Administration Monitoring and Oversight of Statutory Bodies regulations and established a high-level Monitoring and Oversight Committee and an oversight unit, but the regulations and oversight function remain to be implemented.
Legislate the CF’s governance and operational framework to ensure its effectiveness and transparency and seek additional fiscal buffers in anticipation of natural disasters (e.g., expanding the coverage of disaster insurance; setting aside expenditure reserves for emergency operations).	Ongoing. The CF’s framework was legislated in 2019 and the authorities have been making transfers to the fund. The authorities are considering including a contingency plan in the 2023 budget and are preparing a Disaster Risk Financing Strategy with support from the WB.
Structural Reforms
Strengthen the investment and business environment, including by streamlining the procedural and legislative requirements for investment in a standalone investment law, transforming Invest SVG (the government’s investment promotion agency) into a one-stop shop, and improving land title registration, to reduce the administrative burden for investors.	Ongoing. The authorities are working on a comprehensive Investment Act and single windows for land registration and trade, which will facilitate investment and trade.
Continue efforts to improve productivity in the agriculture and fishery sector.	Ongoing. The authorities recently attracted private investment for a new seafood processing plant and are providing affordable fleet expansion loans to fishers. They are building supply platforms to promote greater use of local agricultural produce by the tourism sector.
Continue efforts to develop human capital and address the labor skill mismatch problem.	Ongoing. The authorities are making efforts to improve the scope, coverage, and effectiveness of the TVET programs.
Continue efforts to make economic infrastructure more resilient to natural disasters, particularly irrigation, water supply, roads, and ports.	Ongoing. The authorities launched a climate-resilient port modernization project and are undertaking significant efforts to repair and rebuild infrastructure with strengthened climate-resilience features after the volcanic eruptions.
Continue working on disaster preparedness, including updating the National Emergency and Disaster Act and river basin risk maps, enhancing public education and awareness, and increasing resources for the NEMO to ensure its effective post-disaster emergency operations.	Ongoing. The resources for NEMO have been increased and the river basin risk maps have been updated. The update of the National Emergency and Disaster Act is pending.
Financial Sector Policy
Strengthen financial sector oversight, and regulatory and supervisory framework. FSA should extend stress testing and communicate its financial stability assessment to the public more periodically.	Ongoing. Financial soundness indicators for banks and credit unions are published on a quarterly basis and credit unions have implemented IFRS 9. The FSA has enhanced the frequency and intensity of oversight and included publishing the financial sector stability report under its strategic plan for 2022-24. The implementation of stress testing by insurance companies is deferred due to other priorities, including transition to IFRS 17.
Advance the ongoing reform initiatives. Enact pending legislation, including amendments to the FSA Act, the Building Societies Act and the Friendly Societies Act. Formulate a crisis management plan for the non-bank financial sector and establish a Financial Crisis Management Committee.	Ongoing. A new Friendly Societies Act and the Cooperative Societies (Amendment) Act as well as a Virtual Asset Business Act have recently been approved. Authorities are working on finalizing proposed amendments to the FSA Act and the Building Societies Act. Formulation of a crisis management framework is still pending, but it is part of FSA’s strategic plan for 2022-2024.
Address remaining legal deficiencies in the AML/CFT framework, including by completing the National Risk Assessment.	Largely completed. The National Risk Assessment was published in 2020 and an Action Plan was prepared with strategies to address the deficiencies. The authorities are focused on implementing the Action Plan in time for their CFATF evaluation scheduled for March 2023.

Recommendations from the 2018 Article IV Consultation	Authorities’ Actions
Fiscal Policy
Develop a long-term infrastructure plan closely linked to the MTFF. Prioritize developmental project plans, considering capacity and budget constraints, while seeking concessional financing and containing procurement costs.	Ongoing. The government continued efforts to prioritize capital spending on reconstruction, resilience building, and essential infrastructure and expects to receive a C-PIMA to strengthen capital investment planning, allocation, and implementation as well as climate resilience. Investment projects are largely financed by concessional financing.
Introduce additional fiscal measures, for example by broadening the tax base, limiting the growth of the wage bill, and moving resolutely with the plan to reform the pension system.	Ongoing. The authorities introduced revenue-enhancing measures, including raising excise taxes on selected items (2019), increasing the customs service charge (2021), and continuously improving tax administration. On the expenditure side, they have been implementing prudent wage and non-priority current spending policies. Pension reforms are under consideration.
Strengthen the fiscal institutional framework, including improving revenue administration by adopting risk-based framework and completing the various reform initiatives, publishing a MTFF together with the budget, introducing fiscal rules, and improving cash management and SOE oversight.	Ongoing. The authorities undertook significant efforts to improve tax administration, including enacting TAPA and establishing a compliance management unit for large taxpayers in 2019. The FRF was approved in January 2020. Enhancement of cash management is pending. In 2019, the government adopted the Finance Administration Monitoring and Oversight of Statutory Bodies regulations and established a high-level Monitoring and Oversight Committee and an oversight unit, but the regulations and oversight function remain to be implemented.
Legislate the CF’s governance and operational framework to ensure its effectiveness and transparency and seek additional fiscal buffers in anticipation of natural disasters (e.g., expanding the coverage of disaster insurance; setting aside expenditure reserves for emergency operations).	Ongoing. The CF’s framework was legislated in 2019 and the authorities have been making transfers to the fund. The authorities are considering including a contingency plan in the 2023 budget and are preparing a Disaster Risk Financing Strategy with support from the WB.
Structural Reforms
Strengthen the investment and business environment, including by streamlining the procedural and legislative requirements for investment in a standalone investment law, transforming Invest SVG (the government’s investment promotion agency) into a one-stop shop, and improving land title registration, to reduce the administrative burden for investors.	Ongoing. The authorities are working on a comprehensive Investment Act and single windows for land registration and trade, which will facilitate investment and trade.
Continue efforts to improve productivity in the agriculture and fishery sector.	Ongoing. The authorities recently attracted private investment for a new seafood processing plant and are providing affordable fleet expansion loans to fishers. They are building supply platforms to promote greater use of local agricultural produce by the tourism sector.
Continue efforts to develop human capital and address the labor skill mismatch problem.	Ongoing. The authorities are making efforts to improve the scope, coverage, and effectiveness of the TVET programs.
Continue efforts to make economic infrastructure more resilient to natural disasters, particularly irrigation, water supply, roads, and ports.	Ongoing. The authorities launched a climate-resilient port modernization project and are undertaking significant efforts to repair and rebuild infrastructure with strengthened climate-resilience features after the volcanic eruptions.
Continue working on disaster preparedness, including updating the National Emergency and Disaster Act and river basin risk maps, enhancing public education and awareness, and increasing resources for the NEMO to ensure its effective post-disaster emergency operations.	Ongoing. The resources for NEMO have been increased and the river basin risk maps have been updated. The update of the National Emergency and Disaster Act is pending.
Financial Sector Policy
Strengthen financial sector oversight, and regulatory and supervisory framework. FSA should extend stress testing and communicate its financial stability assessment to the public more periodically.	Ongoing. Financial soundness indicators for banks and credit unions are published on a quarterly basis and credit unions have implemented IFRS 9. The FSA has enhanced the frequency and intensity of oversight and included publishing the financial sector stability report under its strategic plan for 2022-24. The implementation of stress testing by insurance companies is deferred due to other priorities, including transition to IFRS 17.
Advance the ongoing reform initiatives. Enact pending legislation, including amendments to the FSA Act, the Building Societies Act and the Friendly Societies Act. Formulate a crisis management plan for the non-bank financial sector and establish a Financial Crisis Management Committee.	Ongoing. A new Friendly Societies Act and the Cooperative Societies (Amendment) Act as well as a Virtual Asset Business Act have recently been approved. Authorities are working on finalizing proposed amendments to the FSA Act and the Building Societies Act. Formulation of a crisis management framework is still pending, but it is part of FSA’s strategic plan for 2022-2024.
Address remaining legal deficiencies in the AML/CFT framework, including by completing the National Risk Assessment.	Largely completed. The National Risk Assessment was published in 2020 and an Action Plan was prepared with strategies to address the deficiencies. The authorities are focused on implementing the Action Plan in time for their CFATF evaluation scheduled for March 2023.

Annex II. Macroeconomic Impact of the Large-Scale Investment Projects¹

Three large-scale investment projects—including public sector projects on port modernization and the construction of a new hospital and a private sector project on the construction of the Beaches Resort— will shape the macroeconomic outlook in St. Vincent and the Grenadines in the coming years. These projects collectively amount to about 57 percent of 2022 GDP and will have significant macroeconomic impact on growth, employment, current account deficit, and fiscal outcomes in both short and long term. Public sector projects, financed by grants and loans on concessional terms, will add to gross financing needs and public debt in the coming years. Nevertheless, they will strengthen resilience to climate change and natural disasters, improve living conditions and equity, and bolster St. Vincent’s economic potential.

A. Project Background

1. Port Modernization. In December 2019, the authorities reached an agreement with the CDB on a large-scale port modernization project with the objective to replace the existing port in Kingstown built more than 50 years ago as its physical assets passed the end of their design life.² The relocation of residents on the new site—mostly low-income families—started in 2019, but the construction was delayed due to the pandemic and 2021 volcanic eruptions, and only launched recently in mid-2022 and is expected to be completed by 2025. Key benefits include strengthening resilience to natural disasters, improving shipping and operational efficiency, reducing transportation costs (as the location of the new port is closer to the importers) and increasing capacity. Due to the delay, the cost of the project rose to 25 percent of 2022 GDP (US$238 million), about 6 percent of GDP more than expected at the time of the 2021 RCF. It is financed by a combination of grants from the United Kingdom and loans from the CDB (about US$110 million) and from bilateral creditors at similar terms.

2. Arnos Vale Acute Referral Hospital. The authorities are planning to construct a state-of-the-art hospital as part of a broader reform of the health sector with an objective to broaden access to health services and improve their quality and move hospital beds closer to the ECCU averages.³ The new hospital has an estimated total cost of about 10½ percent of 2022 GDP, of which the World Bank (WB) is expected to finance around two-thirds of the total at concessional terms, with the remaining financing expected from multilateral and bilateral creditors at similar terms. The construction is expected to begin in 2023 and finish by 2025. The new hospital will increase the capacity of the health sector, improve profile and quality of health services, and strengthen overall resilience of the sector, as the old hospital was prone to floods.

3. New Beaches Resort. Sandals Resorts International is constructing a 350-room Beaches Resort at Buccament Bay, replacing the previous Buccament Bay Resort and Spa, which was closed in 2016. Baseline projections assume that the total project amounts to US$200 million (about 21 percent of 2022 GDP), financed by Sandals’ own resources that would be recorded as FDI. The new resort is expected to open by early 2024. The new resort will significantly expand the capacity the tourism sector, particularly its high-end segment. It is also expected to bring more direct flights to St. Vincent and thus utilize the potential of the new airport.⁴ It will also have a significant effect on employment, as Sandals already hired and sent for training over 400 hospitality workers.

B. Macroeconomic Impact

4. Growth impact. Given the small size of the economy, the local content of these projects is likely to be modest. All projects are likely to employ low-skilled labor from the local labor market and high-skilled labor from abroad. Baseline projections assume a conservative long-term output multiplier of 0.2, with the main growth channel being through the employment of low-skilled labor. On the basis of these assumptions, the three projects are likely to add about 10 percentage points to growth during 2022–26. To the extent that the current output gap and likely sizeable unemployment rate put a lid on local wage growth, the impact of these projects on local inflation should be limited.

5. Fiscal impact. The port modernization and hospital projects imply significant increase in capital spending and the overall balance. Public debt is projected to remain around the current high level in the near term and peak at about 89 percent of GDP in 2024. Once the projects are completed, the debt-to-GDP ratio is projected to return to a declining path.

6. Balance of payments impact. High import intensity of the projects implies a significant increase in imports, widening the current account deficit. The projects are expected to widen the CAD to 27½ percent of GDP in 2023. Given that the bulk of financing is external, the imports should not create pressure on gross international reserves. In the medium term, the port and the Sandals Resort would improve St. Vincent’s potential to export agriculture goods, strengthen the tourism sector as a leading engine of economic growth and therefore contribute to reducing the CAD closer to the norm.

Annex III. Tourism in St. Vincent and the Grenadines: The Impact of Recent Shocks and Opportunities for the Future¹

Tourism is a significant contributor to output and employment in St. Vincent and the Grenadines and is well-positioned to become a stronger engine of growth given the country’s unique comparative advantages and the sector’s relatively small size compared with regional peers. The tourism sector was growing steadily following the opening of the new airport in 2017 but was hard hit by the pandemic and volcanic eruptions and its recovery pace has fallen behind regional peers again since last April as airlines prioritize long-established destinations amidst capacity constraints. Nevertheless, the outlook is positive as recent and ongoing investment projects will increase room capacity and attract more direct flights and renewed interest. To fully unlock the potential, continued efforts are needed to invest in human capital, move up the value-chains, strengthen air connectivity, foster innovation and digitalization, and develop greater linkages between tourism and other sectors, especially agriculture.

The Tourism Sector Before the Pandemic and 2021 Volcanic Eruptions

1. Tourism contributes significantly to employment and economic activity. The tourism sector is a major contributor to GDP in St. Vincent and the Grenadines (VCT), with direct contribution of 6 percent of GDP and total contribution, if considering linkages with other sectors, of a quarter of GDP in 2019. These are slightly up from about 6 and 24 percent of GDP in 2016. The industry—accounting for on average about 83 percent of the country’s exports over 2016–19—is also key for the sustainability of the country’s external position. In addition, it is an important source of jobs with the accommodation and food service industry directly employing 8 percent of employees and 19 percent of self-employed workers who contributed to the National Insurance Service (NIS) in 2019. According to the NIS, more than half of the sector’s formal employees are women (at about 57 percent in 2019). If considering the high informal employment in the tourism sector and the sector’s indirect contribution to connected sectors, the World Travel & Tourism Council (WTTC) estimates that employment in tourism contributed to about 23 percent of total employment in 2019.

2. Before the 2020–21 shocks, tourist arrivals were steadily rising on the back of a strong performance of the cruise sector, with the impact of the new airport on stay-over arrivals remained to fully materialize. Between 2017 and 2019, number of cruise ship passengers grew rapidly with an average yoy growth of about 42 percent. With the new Argyle International Airport opened in 2017, connectivity has improved, with international carriers establishing direct flights to the country.² Overall price competitiveness is strong. According to the Week at the Beach index, the cost of vacation in St. Vincent, as of September 2022, was below the averages for the ECCU, Caribbean, and North and Central America. These have helped reinvigorate tourists’ interest in the country, as the number of stay-over visitors gradually increased during 2017-19, at an average annual rate of 2.6 percent. The number of yacht passengers, another important market segment, increased by 8.7 percent between 2017 and 2019. Hotel room capacity in VCT is below the Caribbean average and has increased only slightly from 2011 to 2020, which has been a major bottleneck for attracting more international flights and for stayover tourism growth.³

3. Stayover arrivals in St. Vincent and the Grenadines rely heavily on the intra-regional visitors. In 2019, 28 percent of total stayover arrivals in St. Vincent and the Grenadines were from other Caribbean countries, compared to a 21 percent average for the ECCU. Other important source countries of stay-over visitors are the USA (35 percent), the UK (15 percent), and Canada (12 percent). Before the pandemic, stayover visitors stayed in the country for 11.2 days, spent EC$114 daily on average, and stayed mostly in private homes.

4. Despite its importance, the tourism sector in VCT is significantly smaller than that in most other ECCU economies, implying ample room to reach its full potential. Partly reflecting the limited hotel capacity, the trade and tourism direct contribution to gross value added in VCT was 5.1 percent in 2019, well below the ECCU average of 11.9 percent and 25.1 percent for neighboring St. Lucia. Tourist arrivals per resident were only 43.4 percent of the ECCU average. As such, total contributions of tourism to GDP and employment were 24 and 23 percent, respectively, between 2016 and 2019, well below the ECCU average contribution (excluding VCT) of 36 percent for both.

The Impact of the 2020–21 Shocks and Tourism Recovery

5. 2021 volcanic eruptions have compounded the blow to the tourism sector wielded by the pandemic. The pandemic and necessary containment measures have had a disproportionate impact on contact intensive industries. The export of services in the ECCU on average shrunk by half in 2020 and remained at about 57 percent of the 2019 level in 2021. On top of the pandemic, VCT’s tourism sector was also hit by the La Soufrière eruptions in 2021. VCT’s tourism recovery trajectory after the Covid-19 shock was initially broadly in line with the average performance of the ECCU. Nonetheless, the volcanic eruptions led to a reversal in the recovery trend and underperformance compared to the ECCU average during January to November 2021. The number of stayover arrivals in VCT would have been approximately 57 percent higher during this period, had VCT followed the average tourism recovery path of other ECCU countries.

6. The pace of tourism recovery in VCT fell below the regional peers again in the second quarter of 2022. By 2021: Q4, the tourism recovery had caught up pace with the ECCU average and the number of stayover arrivals increased further in Q1, reaching 65 percent of the pre-pandemic level in March. The recovery pace, however, started to lose momentum at the end of 2021/22 peak season, falling below regional peers, including compared with St. Lucia which has a similar vaccination rate. In June 2022, stayover arrivals as a share of the 2019 level were at 61 percent against the ECCU average of 87 percent.

7. The main bottleneck constraining the recovery of tourism in VCT is airline capacity and connectivity. The availability of frequent and direct flights at competitive prices plays an important role in promoting tourism.⁴ The connectivity of VCT to international destinations outside of the Caribbean was improving slowly following the opening of the Argyle International Airport, but the trend was interrupted by the pandemic. The number of flights by traditional carriers decreased sharply at the onset of the pandemic. The recovery has been slow since, affecting tourist arrivals from multiple countries. Air Canada, which resumed flights to VCT in December 2021, suspended flights again in end-January 2022 and is expected to resume weekly flights in November 2022. International flights recovered in the peak season of 2021–22 but are dominated by charter flights and the recovery slowed in 2022: Q2 as airlines prioritize long-established destinations with higher hotel capacity when allocating limited pilots and large aircrafts amidst capacity constraints. The number of international flights arrivals in VCT significantly lagged the regional average and neighboring St. Lucia. Data for August 2022 show that only a very small share of flights arriving in St. Vincent come from outside the Caribbean, very different from St. Lucia. In addition, intra-regional air transportation has become a big challenge since 2020 with the regional airline LIAT operating with reduced capacity. With only a few airlines offering connections to the region on small aircrafts, demand outweighs supply, putting upward pressure on air ticket prices especially in the context of increasing and volatile costs.⁵

Opportunities for the Future and Policy Implications

8. The stunning natural endowments render the tourism sector in VCT high potential to be a stronger engine of growth. The unique comparative advantage that combines numerous islands of top-notch fine sand beaches, beautiful rain forests, pristine ocean, rich cultural heritage, and a solid base of agriculture and fisheries put the country in a privileged position to accommodate new travel habits and protocols in the post-Covid world and develop tourism beyond traditional beach-focused travel and into nature-, agri-, and culture-based tourism.

9. The recent and ongoing key investment projects help address bottlenecks and offer opportunities for tourism growth. The conclusion of the Argyle airport in 2017 created the infrastructure needed to accommodate larger planes, which was an important supply constraint for attracting international direct flights and has revigorated tourists’ and investors’ interest in the country. The ongoing and planned construction of new hotels, including the Holiday Inn by the new airport, will help address the existing challenge of small stock of hotel rooms. In particular, a family-oriented resort with an estimated investment of US$200 million by the Sandals group, which is currently under construction and expected to open by end-2023, will add 350 rooms and at least 400 jobs. As hotel capacity expands and interest in VCT as an emerging tourism destination consolidate, airlines are expected to respond by increasing airlift frequency and connectivity. Recently, American Airlines announced that it will increase the frequency of non-stop flights to the country from twice a week to daily in March 2023. In addition, the ongoing climate-resilient port modernization project, once completed in 2025, is expected to remove shipping bottlenecks that could affect the supply chains of the hospitality industry. The planned new modern hospital would help strengthen the quality of healthcare, which could cater visitors in need of medical assistance, including attracting retirees, by mitigating health concerns.

10. Further growth potential could come from greater innovation and investment in niche markets to increase domestic value added of the sector and move up the value-chains. The recent and ongoing key infrastructure investments are instrumental for alleviating supply-side constraints. Continued efforts to increase vaccination rates are important to build resilience to new Covid-19 outbreaks. To unlock their full potential, continued improvement in business environment and efforts to attract investment in niche markets are needed. This should be accompanied by strengthened connectivity, including exploring alternative intra-regional transportation at lower costs which will support tourism during low seasons. Continued efforts to increase vaccination rates are important to build resilience to new Covid-19 outbreaks. Digital transformation, better access to financing opportunities, and greater marketing and standardization efforts could boost productivity and create the conditions for higher participation of local and small providers in the industry. Developing linkages between tourism and other sectors, especially agriculture which accounts for a significant share of total output, would create synergies for economic development, including through the ongoing efforts to establish a local agriculture and fishery produce supply platform for the hospitality industry. To fully support and reap the benefits of a growing tourism industry, the country should continue to invest in training and reskilling programs to reduce labor market frictions and skill mismatches.

References

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Annex IV. Inflation Outlook¹

1. As a small open economy heavily relying on imports, St. Vincent and the Grenadines is highly vulnerable to external price shocks. About two-fifths of imports come from the U.S., making the U.S. prices an important driver of VCT’s inflation. Three categories, namely (i) food and non-alcoholic beverages, (ii) housing and utilities, and (iii) transportation, make up the bulk of contributions to headline inflation. These are largely driven by import food and fuel prices as housing and utilities include electricity prices which, in turn, depend on the cost of imported fuel, a key input to the energy sector.

2. A simple regression model summarizes inflation drivers. Taking the annual period average inflation rate as the dependent variable, the model includes core inflation in the U.S., changes in the global food price index, changes in a global oil price index lagged by a quarter to reflect delays in its pass-through onto domestic fuel prices, the estimated GDP gap, and also the inflation lagged by one period. All coefficients have expected signs and reasonable values, although not all of them are statistically significant, most likely due to the small sample size. Based on the model and the global assumptions in October 2022 WEO, the point estimates of period average inflation rates in 2022 and 2023 are 5.9 and 3.1 percent, respectively, although they should be viewed as indicative as the model is subject to considerable standard errors. As expected, the U.S. core inflation, food prices, and oil prices would exert significant pressures in 2022, only partially offset by the effect of the negative output gap. In 2023, the model suggests that the projected decline in oil and food prices and the lingering output gap would result in disinflation.

Annex V. External Sector Assessment

^¹2020 BOP data is preliminary and based on the April 2022 ECCB release. 2021 data is a combination of the ECCB and IMF staff estimates.

^²For the CA model we include two adjustors, a Covid-19 adjustor that incorporates information on the observed and expected losses in export of travel services and an additional temporary adjustor, that incorporates the impact of the volcanic eruption on trade balance. To calculate the additional adjustor, we estimate a model that compares the monthly trade balance of St. Vincent and Grenadines against other ECCU country before and after the eruption, controlling for country, year, and month fixed effects. We use information on monthly trade balance as a percentage of GDP, provided by the ECCB, for the period between Jan-2015 and Dec-2021 to estimate the model. Estimates, which are significant at the 5 percent level, suggest that the volcanic eruption has deteriorated St. Vincent and the Grenadines trade balance by an average of 0.6 percent of GDP per month after the eruption.

^³St. Vincent and the Grenadines contained public sector wage growth in recent years and has one of the lowest energy prices among countries in the region.

^⁴As an ECCU member, St. Vincent and the Grenadines is subject to a quasi-currency board arrangement. Foreign assets and liabilities at the ECCB cannot be assigned to individual countries, but reserves are imputed to individual member countries based on their balance of net domestic assets and reserve money. The Easter Caribbean dollar, the currency of St. Vincent and the Grenadines, is pegged to the U.S. dollar.

Overall Assessment: The external position of St. Vincent and the Grenadines in 2021 was moderately weaker than the level implied by fundamentals and desirable policies. Nevertheless, this assessment is subject to large uncertainty considering the use of preliminary data for the current account and the challenges of assessing the impact of the pandemic and the volcanic eruption.

Potential Policy Responses: Given the unprecedented socio-economic fallout from multiple shocks, near-term policies should continue to support a resilient and inclusive recovery while maintaining fiscal prudence. Once the recovery takes hold, efforts to strengthen the fiscal framework should continue to safeguard fiscal sustainability. Structural reforms to unleash growth potential and build resilience to national disasters and climate changes can help boost competitiveness and strengthenthe external position.

Foreign Assets and Liabilities: Position and Trajectory

Background. The net international investment position (NIIP) deficit, which averaged about 128 percent of GDP between 2015–19, slightly increased from 137 percent of GDP in 2020 to 140 in 2021. In 2021, other investment (mostly currency and deposits) and reserve assets comprised the largest components on the asset side (37 and 36 percent of gross assets). On the liability side, two largest components were direct investment (69 percent of gross liabilities) and other investment, particularly long-term general government loans.¹

Assessment. The NIIP is expected to deteriorate in the near term on account of the implementation of large capital investment projects on hotels and resilient infrastructure, financed through both private direct investment and general government loans on concessional terms. Nevertheless, the IIP position is expected to stabilize and improve over the medium term as tourism and agricultural exports recover from the shocks in 2020–21 and exports grow faster with improved connectivity and cargo capacity.

2021 (% GDP)

NIIP: -140

Gross Assets: 92

Debt Assets: 19

Gross Liab.: 232

Debt Liab.: 13

Current Account

Background. The current account deficit, which averaged about 10.5 percent of GDP over 2015–19, increased to 15 percent of GDP in 2020 and to 22.8 percent of GDP in 2021. The widening deficit largely reflects the sharp decline in tourism receipts in the aftermath of the pandemic and the volcanic eruptions. Exports of travel services declined to 10 percent of GDP in 2020 and to 7 percent of GDP in 2021 against an average of 26 percent between 2015–19. The impact of the volcanic eruption on the exports of goods and higher imports of relief supplies and reconstruction materials also contributed to the larger deficit. In the near term, the deficit is expected to widen further reflecting high import content of large investment projects and surging costs of imports of fuels and other goods. Going forward, the CA is expected to reach the level implied by fundamentals and desirable policies in the medium term as these construction projects are completed and tourism fully recovers.

Assessment. The CA model suggests that the external position was moderately weaker than the level implied by fundamentals and desired policies.² The smaller gap compared to that assessed by the 2018 Article IV Consultation likely reflects recent improvements in competitiveness, as the government intensified efforts to diversify the export base, strengthen human capital, upgrade the transportation and climate resilient infrastructure, and contain production costs.³ However, the uncertainty around the assessment remains high considering the challenge of estimating the impact of the shocks.

	CA model ^1/	REER model ^1/
	(in percent of GDP)
CA-Actual	-22.8
Cyclical contributions (from model) (+)	0.7
COVID-19 adjustor (-) ^2/	-8.7
Additional temporary/statistical factors (-)	-5.4
Natural disasters and conflicts (+)	1.0
Adjusted CA	-10.4
CA Norm (from model) ^3/	-9.0
Adjustments to the norm (-)	0.0
Adjusted CA Norm	-9.0
CA Gap	-1.4	-0.3
o/w Relative policy gap	5.1
Elasticity	-0.27
REER Gap (in percent)	5.2	1.2
^1/ Based on the EBA-lite 3.0 methodology.
^2/ Additional cyclical adjustment to account for the temporary impact of the pandemic on tourism (8.7 percent of GDP) and of the volcanic eruption on trade (5.4 percent of GDP).
^3/ Cyclically adjusted, including multilateral co nsistency adjustments.

Real Exchange Rate

Background. In 2021, the real effective exchange rate (REER) depreciated by 3.7 percent, largely driven by differences in inflation. After appreciating 1.6 percent on average between 2015–19, the REER depreciated by 2.2 percent in 2020. Despite the recent trend, the cumulative appreciation of REER (relative to 2012 levels) remains slightly above the average for tourism dependent economies.

Assessment. The REER gap, derived from the EBA-Lite CA model and an estimated elasticity of -0.27, was 5.2 percent. Meanwhile, the EBA-Lite REER model suggests a REER gap of 1.2 percent.

Capital and Financial Accounts: Flows and Policy Measures

Background. Foreign direct investment (FDI), which averaged 10.8 percent of GDP during 2015–19, declined substantially to 3.3 percent of GDP in 2020 but rebounded slightly in 2021 to about 7 percent of GDP.

Assessment. Net FDI inflows are expected to increase substantially in the near term reaching around 16 percent of GDP in 2023, as large investment projects in the tourism sector come into fruition, and to return to pre-pandemic levels in the medium term (around 10 percent of GDP). Downside risks to the projections are related to the impact of natural disasters and the tightening of global financial conditions.

FX Intervention and Reserves Level

Background. The reserve position improved substantially in 2021, on account of the external support received in the aftermath of the volcanic eruption. In 2021, imputed reserves, a proxy for net foreign assets held at the Eastern Caribbean Central Bank (ECCB),⁴ increased by 9.5 percent of GDP from US$205 million to US$288 million, equivalent to about 7 months of imports and 42 percent of broad money.

Assessment. Imputed reserves in 2021 were above typical benchmarks for reserve adequacy in terms of months of imports and percent of broad money. In 2021, St. Vincent and the Grenadines received a special SDR allocation of 11.2 million SDRs (approximately US$15.7 million at the time of the allocation) which have been kept mostly as reserves.

^¹2020 BOP data is preliminary and based on the April 2022 ECCB release. 2021 data is a combination of the ECCB and IMF staff estimates.

^³St. Vincent and the Grenadines contained public sector wage growth in recent years and has one of the lowest energy prices among countries in the region.

Foreign Assets and Liabilities: Position and Trajectory

2021 (% GDP)

NIIP: -140

Gross Assets: 92

Debt Assets: 19

Gross Liab.: 232

Debt Liab.: 13

Current Account

	CA model ^1/	REER model ^1/
	(in percent of GDP)
CA-Actual	-22.8
Cyclical contributions (from model) (+)	0.7
COVID-19 adjustor (-) ^2/	-8.7
Additional temporary/statistical factors (-)	-5.4
Natural disasters and conflicts (+)	1.0
Adjusted CA	-10.4
CA Norm (from model) ^3/	-9.0
Adjustments to the norm (-)	0.0
Adjusted CA Norm	-9.0
CA Gap	-1.4	-0.3
o/w Relative policy gap	5.1
Elasticity	-0.27
REER Gap (in percent)	5.2	1.2
^1/ Based on the EBA-lite 3.0 methodology.
^2/ Additional cyclical adjustment to account for the temporary impact of the pandemic on tourism (8.7 percent of GDP) and of the volcanic eruption on trade (5.4 percent of GDP).
^3/ Cyclically adjusted, including multilateral co nsistency adjustments.

Real Exchange Rate

Capital and Financial Accounts: Flows and Policy Measures

FX Intervention and Reserves Level

^¹2020 BOP data is preliminary and based on the April 2022 ECCB release. 2021 data is a combination of the ECCB and IMF staff estimates.

^³St. Vincent and the Grenadines contained public sector wage growth in recent years and has one of the lowest energy prices among countries in the region.

^{Table 1.}

Classification of the Overall Assessments¹

^¹The qualitative assessment of the external position is primarily based on the CA gap. Due to different elasticities, the same CA gap could be associated with different REER gaps for different economies.

^{Table 1.}

Classification of the Overall Assessments¹

CA gap	Description in overall assessment
> 4%	… substantially stronger…
[2%, 4%]	… stronger…
[1%, 2%]	… moderately stronger…
[-1%, 1%]	The external position is broadly in line with the level implied by fundamentals and desirable policies
[-2%, -1%]	… moderately weaker…
[-4%, -2%]	… weaker…
< -4%	… substantially weaker…

^{Table 1.}

Classification of the Overall Assessments¹

CA gap	Description in overall assessment
> 4%	… substantially stronger…
[2%, 4%]	… stronger…
[1%, 2%]	… moderately stronger…
[-1%, 1%]	The external position is broadly in line with the level implied by fundamentals and desirable policies
[-2%, -1%]	… moderately weaker…
[-4%, -2%]	… weaker…
< -4%	… substantially weaker…

Annex VI. Risk Assessment Matrix¹

Risks	Relative Likelihood	Impact	Policy Response
Intensifying spillovers from Russia’s war in Ukraine and/or commodity price shocks. Further sanctions resulting from the war and related uncertainties exacerbate trade and financial disruptions and commodity price volatility, with Europe, LICs and commodity-importing EMs among the worst hit. A combination of continuing supply disruptions (e.g., due to conflicts and export restrictions) and negative demand shocks causes recurrent commodity price volatility and social and economic instability.	High	High. Inflation pressures intensify, eroding incomes, dampening demand, widening fiscal and trade deficits, and threatening food and energy security.	Provide temporary and targeted transfers to the vulnerable. Allow a gradual pass-through of international prices and phase out generalized subsidies. Continue to improve coverage and targeting of social safety nets. Accelerate transition to renewable energy sources.
De-anchoring of inflation expectations and stagflation. Supply shocks to food and energy prices sharply increase headline inflation and pass through to core inflation, de-anchoring inflation expectations and triggering a wage-price spiral in tight labor markets. Central banks tighten monetary policy more than envisaged leading to weaker global demand, currency depreciations in EMDEs, and sovereign defaults. Together, this could lead to the onset of stagflation.	Medium	Medium. Higher imported inflation triggers demand for higher wages, intensifying inflation pressures. Domestic currency appreciates given U.S. dollar peg, weakening competitiveness. Higher borrowing costs add fiscal strains.	Continue restraints in wage growth while providing temporary and targeted support to the vulnerable. Strengthen the fiscal framework to rebuild buffers and communicate credible medium-term fiscal plan. Implement structural reforms to improve competitiveness. Intensify monitoring of financial institutions.
Abrupt global slowdown or recession. Global and idiosyncratic risk factors combine to cause a synchronized sharp growth slowdown, with outright recessions in some countries, spillovers through trade and financial channels, and downward pressures on some commodity prices.	Medium	Medium. A global slowdown hinders tourism recovery, weakens remittances and FDI, and reduces growth.	Accelerate structural reforms to support economic recovery. Adopt credible medium-term plan to preserve fiscal sustainability. Provide targeted support to the vulnerable.
Local Covid-19 outbreaks. Outbreaks in slow-to-vaccinate countries or emergence of more contagious vaccine-resistant variants force new lockdowns or inhibit commerce. This results in extended supply chain disruptions, slower growth, capital outflows, and debt distress in some EMDEs.	Medium	Medium. Tourism recovery is stalled or reversed, and domestic activity disrupted, deepening scarring effects and worsening fiscal and external positions.	Ensure adequate access to essential items, such as food and medicine. Extend targeted pandemic relief measures to support the vulnerable and prioritize health spending. Adopt credible medium-term plan to preserve fiscal sustainability. Continue public education campaign to address vaccine hesitancy.
Natural disasters related to climate change. More frequent natural disasters deal severe damage to infrastructure (especially in smaller vulnerable economies) and amplify supply chain disruptions and inflationary pressures, causing water and food shortages and reducing medium-term growth.	Medium	High. Lower growth and worsen fiscal and external positions.	Recalibrate the fiscal responsibility framework (FRF) to internalize exposure to natural disasters. Implement national adaptation plans with investment in structural and financial resilience, and appropriate ex ante financing.
Delays in investment project implementation. Implementing several large-scale projects at the same time could stretch available capacity. In conjunction with supply chain disruptions and rising project costs, this could delay the schedule.	High	High. Lower growth. Slower-than-expected investment would slow down the recovery and resilience building.	Strengthen public financial management and project implementation capacity, including through undertaking PIMA, C-PIMA and CARTAC TAs.
Unexpected rise in spending needs that are inconsistent with the FRF, including higher than expected public sector wage increase and pension benefits.	Medium	High. It would slow down fiscal consolidation and endanger fiscal sustainability.	Recalibrate and operationalize the FRF once the recovery takes hold. Adopt parametric reforms of the pension system. Identify and implement revenue and expenditure measures to mitigate the impact.
Higher NPLs and market risk in indigenous banks and non-banks trigger a confidence shock.	Medium	Medium. Financial sector instability disrupts economic activity.	Monitor asset quality and ensure adequate loan loss provisioning. Enhance regulatory and supervisory frameworks for non-banks.
Loss of correspondent banking relationships. Curtailment of cross-border financial services may intensify amid the exit of global banks.	Medium	Low. Fees of cross-border payments rise, raising business costs and reducing remittance inflows.	Strengthen compliance with AML/CFT and tax transparency standards.

Risks	Relative Likelihood	Impact	Policy Response
Intensifying spillovers from Russia’s war in Ukraine and/or commodity price shocks. Further sanctions resulting from the war and related uncertainties exacerbate trade and financial disruptions and commodity price volatility, with Europe, LICs and commodity-importing EMs among the worst hit. A combination of continuing supply disruptions (e.g., due to conflicts and export restrictions) and negative demand shocks causes recurrent commodity price volatility and social and economic instability.	High	High. Inflation pressures intensify, eroding incomes, dampening demand, widening fiscal and trade deficits, and threatening food and energy security.	Provide temporary and targeted transfers to the vulnerable. Allow a gradual pass-through of international prices and phase out generalized subsidies. Continue to improve coverage and targeting of social safety nets. Accelerate transition to renewable energy sources.
De-anchoring of inflation expectations and stagflation. Supply shocks to food and energy prices sharply increase headline inflation and pass through to core inflation, de-anchoring inflation expectations and triggering a wage-price spiral in tight labor markets. Central banks tighten monetary policy more than envisaged leading to weaker global demand, currency depreciations in EMDEs, and sovereign defaults. Together, this could lead to the onset of stagflation.	Medium	Medium. Higher imported inflation triggers demand for higher wages, intensifying inflation pressures. Domestic currency appreciates given U.S. dollar peg, weakening competitiveness. Higher borrowing costs add fiscal strains.	Continue restraints in wage growth while providing temporary and targeted support to the vulnerable. Strengthen the fiscal framework to rebuild buffers and communicate credible medium-term fiscal plan. Implement structural reforms to improve competitiveness. Intensify monitoring of financial institutions.
Abrupt global slowdown or recession. Global and idiosyncratic risk factors combine to cause a synchronized sharp growth slowdown, with outright recessions in some countries, spillovers through trade and financial channels, and downward pressures on some commodity prices.	Medium	Medium. A global slowdown hinders tourism recovery, weakens remittances and FDI, and reduces growth.	Accelerate structural reforms to support economic recovery. Adopt credible medium-term plan to preserve fiscal sustainability. Provide targeted support to the vulnerable.
Local Covid-19 outbreaks. Outbreaks in slow-to-vaccinate countries or emergence of more contagious vaccine-resistant variants force new lockdowns or inhibit commerce. This results in extended supply chain disruptions, slower growth, capital outflows, and debt distress in some EMDEs.	Medium	Medium. Tourism recovery is stalled or reversed, and domestic activity disrupted, deepening scarring effects and worsening fiscal and external positions.	Ensure adequate access to essential items, such as food and medicine. Extend targeted pandemic relief measures to support the vulnerable and prioritize health spending. Adopt credible medium-term plan to preserve fiscal sustainability. Continue public education campaign to address vaccine hesitancy.
Natural disasters related to climate change. More frequent natural disasters deal severe damage to infrastructure (especially in smaller vulnerable economies) and amplify supply chain disruptions and inflationary pressures, causing water and food shortages and reducing medium-term growth.	Medium	High. Lower growth and worsen fiscal and external positions.	Recalibrate the fiscal responsibility framework (FRF) to internalize exposure to natural disasters. Implement national adaptation plans with investment in structural and financial resilience, and appropriate ex ante financing.
Delays in investment project implementation. Implementing several large-scale projects at the same time could stretch available capacity. In conjunction with supply chain disruptions and rising project costs, this could delay the schedule.	High	High. Lower growth. Slower-than-expected investment would slow down the recovery and resilience building.	Strengthen public financial management and project implementation capacity, including through undertaking PIMA, C-PIMA and CARTAC TAs.
Unexpected rise in spending needs that are inconsistent with the FRF, including higher than expected public sector wage increase and pension benefits.	Medium	High. It would slow down fiscal consolidation and endanger fiscal sustainability.	Recalibrate and operationalize the FRF once the recovery takes hold. Adopt parametric reforms of the pension system. Identify and implement revenue and expenditure measures to mitigate the impact.
Higher NPLs and market risk in indigenous banks and non-banks trigger a confidence shock.	Medium	Medium. Financial sector instability disrupts economic activity.	Monitor asset quality and ensure adequate loan loss provisioning. Enhance regulatory and supervisory frameworks for non-banks.
Loss of correspondent banking relationships. Curtailment of cross-border financial services may intensify amid the exit of global banks.	Medium	Low. Fees of cross-border payments rise, raising business costs and reducing remittance inflows.	Strengthen compliance with AML/CFT and tax transparency standards.

Annex VII. An Adverse Scenario and Contingency Planning

Given highly uncertain global environment and elevated risks, staff have developed an illustrative adverse scenario where several risks materialize simultaneously in 2023–24. A complicating factor is that the risks are not orthogonal to one another and may interact to magnify some of the adverse effects.¹ Unsurprisingly, the adverse scenario shows lower growth, worsened external and fiscal positions, sizeable fiscal financing gap, and higher public debt (Figure AVII.1). Preparing a contingency plan would be critical to guard against the risks and mitigate the impact of the shocks.

1. The scenario assumes a realization of external and domestic risks in 2023–24 that significantly worsen St. Vincent and the Grenadines’ macroeconomic outlook. On the external side, the scenario assumes lingering Covid-19 effects, an increase in oil and food prices stemming from continuing supply disruptions, intensifying spillovers from the war in Ukraine, and de-anchoring of inflation expectations in the global economy, an abrupt global slowdown, and higher-than-anticipated tightening of global financial conditions. These factors, in combination with local capacity constraints, are assumed to delay implementation of major investment projects by 1–2 years relative to the baseline and delay the tourism recovery. As a result, real GDP growth is reduced by 3.5 and 1.8 percentage points, from 6 and 4.8 percent in the baseline, respectively. The scenario also assumes that the combination of the shocks reduces medium-term potential growth to 2.3 percent from 2.7 percent in the baseline. Inflation would accelerate to 6.6 percent in 2023, about 2 percentage points higher than in the baseline, driven by higher import prices.

2. The growth slowdown and delayed recovery would translate into larger current account deficits, exerting pressure on international reserves. In 2023, the current account deficit would widen slightly compared to the baseline projections as the loss of tourism receipts and higher fuel and food imports would be partly offset by lower investment project-related imports. The CAD will remain elevated in 2024 as imports pick up, driven by re-phased investments, before subsiding thereafter as the shocks wane and the project construction are completed by 2027. In the adverse scenario, international reserves would decline to about 2 months of imports by 2027.

3. The fiscal position would worsen, creating fiscal financing gaps in the coming years should additional financing dry up. Despite lower capital spending relative to the baseline due to delays in port and hospital construction, the overall fiscal deficit would worsen to 7.5 and 8.2 percent of GDP in 2023 and 2024, respectively, on account of lower tax revenue and higher current spending needs, including higher cost from extension of price-mitigating measures. Assuming no additional financing from local or regional markets, this would result in fiscal financing gaps of 3.3 and 2.3 percent of GDP in 2023 and 2024, respectively. Higher deficit, coupled with lower GDP growth, would push the public debt to 94 percent of GDP in 2025 and lead to a slower pace of decline afterwards, keeping it above 90 percent of GDP by 2027.

4. Slower economic activity could also weaken financial institutions’ balance sheets. Asset quality has already deteriorated relative to pre-pandemic levels and could weaken further as NPLs usually peak a few years after crises (Ari et al., 2021). Prolonged recessions followed by slow economic recoveries have been associated with increasing NPLs in the ECCU, with a higher impact on institutions with low profitability and more exposed to volatile sectors as construction and tourism (Beaton et al., 2016). A panel regression in Beaton et al. (2017) suggested that asset quality in the Caribbean deteriorates as a function of low real GDP growth, both at local and in advanced economies. Thus, sharply lower growth in St. Vincent, in conjunction with a global slowdown, could raise NPLs and exert pressure on the capital buffers, although the currently strong capital buffers would allow banks to absorb losses without breaching their minimum regulatory requirements.

5. Preparing a contingency plan will be critical to guard against the risks and mitigate the impact of the shocks. The plan could draw on the existing buffers (i.e., the Contingencies Fund and special SDR allocation) to cover the liquidity needs and include growth-friendly and equity-enhancing measures on both revenue and expenditure sides to return debt to the baseline. On the revenue side, the authorities could consider further streamlining VAT exemptions and import concessions (See ¶16). On the expenditure side, they could reprioritize spending, while safeguarding resources for critical areas and the vulnerable. Continued containment of public sector wage growth would help avoid second-round inflationary pressures.

References

Anil Ari, Sophia Chen, and Lev Ratnovski, 2021, “The dynamics of non-performing loans during banking crises: A new database with post-COVID-19 implications.” Journal of Banking & Finance 133.
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Beaton, Kimberly, Alla Myrvoda, and Shernnel Thompson, 2016, “Non-performing loans in the ECCU: Determinants and macroeconomic impact”. IMF Working Paper 16/229.
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Kimberly Beaton, Thomas Dowling, Dmitriy Kovtun, Franz Loyola, Alla Myrvoda, Shelton Nicholls, Joel Okwuokei, Inci Ötker, and Jarkko Turunen, 2017, “Problem Loans in the Caribbean: Determinants, Impact and Strategies for Resolution” IMF Working Paper 17/230.
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Annex VIII. Fully Operationalizing St. Vincent and the Grenadines’ Fiscal Responsibility Framework¹

St. Vincent and the Grenadines introduced a rules-based fiscal responsibility framework (FRF) in January 2020. Shortly thereafter, the country was hit hard by the pandemic, followed by the volcanic eruptions, which delayed the full operationalization of the FRF and have significantly widened the distance between the fiscal position and the envisaged targets. This annex reviews and provides options for updating the existing FRF for an effective full implementation to signal credible medium-term fiscal plans and safeguard debt sustainability. Key recommendations include: (i) lowering debt ceiling to internalize external shocks and natural disaster risks as well as aligning with the revised regional target date; (ii) recalibrating operational targets to ensure sufficient convergence towards the debt target; and (iii) discussing additional considerations to strengthen the resilience of the framework.

Context

1. The authorities adopted a Fiscal Responsibility Framework (FRF) right before the onset of the pandemic. Prior to the pandemic, the authorities had been making critical efforts to put the public finances in order while investing in natural disaster (ND) resilient infrastructure. They maintained a prudent fiscal stance, introduced tax measures,² strengthened tax administration, and set up the Contingencies Fund (CF), including legislating its governance and operational framework. In addition, the FRF was approved by Parliament in January 2020 and updated in May 2020 to reflect the port modernization project.³ The FRF includes operational targets on primary balance and current spending to achieve the public debt-to-GDP ratio of 60 percent by 2030 (Table AVIII.1).

2. The pandemic and the volcanic eruptions in 2021 have delayed the full implementation of the FRF. Shortly after adoption, the escape clause was triggered and the full implementation of the FRF was delayed due to the multiple shocks (Table AVIII.1). The government plans to fully implement the FRF once the recovery takes hold but recognizes the need to first update the framework to reflect the developments since the adoption. The recent surge in debt and delay and higher costs of key infrastructure have made the current debt and operational targets inconsistent with the new reality.

3. The government is making efforts to strengthen the institution to underpin the effective implementation of the FRF. The government appointed five members of the Fiscal Responsibility Mechanism (FRM), i.e., fiscal council, in September 2021, following the amendment to the FRF made in February 2021, with CARTAC support. The FRM is currently preparing its first report to review fiscal performance in 2021–22 and the 2022 Budget. Following the CARTAC TA, the authorities also plan to improve the budget process and leverage the Medium-term Economic and Fiscal Outlook (MTEFO) to guide medium-term budget preparation in accordance with fiscal targets.

^{Table AVIII.1.}

Summary of St. Vincent and the Grenadine’s Fiscal Responsibility Framework

^{^1/}The ECCU regional debt target of 60 percent of GDP was extended to achieve from 2030 to 2035 on February 12th, 2021. Sources: National authorities and IMF staff calculations.

Current Targets in the Post-Pandemic and Volcanic Eruptions World

4. The pandemic and the 2021 volcanic eruptions opened a large gap between the current fiscal landscape and existing fiscal targets, making the latter inconsistent with the current economic outlook and revised regional debt target.

The distance between the current fiscal indicators and envisaged fiscal targets has significantly widened. Pre-pandemic forecast suggests that the debt target of 60 percent of GDP by 2030 and associated operational targets in the FRF were achievable at the time.⁴ However, GDP declined by 3.7 percent in 2020. Despite the authorities’ strong efforts to mobilize revenue and contain non-priority spending, the critical volcanic eruption- and pandemic-related fiscal responses to the humanitarian crises, coupled with lower economic activity, have pushed up the debt level to 89.3 percent of GDP in 2021 from 68.1 percent in 2019. Meanwhile, higher cost of the port project, together with the new hospital project, imply a lower near-term primary balance. As such, the medium-term primary balance targets in the current FRF no longer ensure sufficient convergence of the debt ratio towards the debt target.
The ECCB Monetary Council extended the date for reaching the regional debt target of 60 percent of GDP from 2030 to 2035 in February 2021.⁵ This is to recognize the challenges posted by the socio-economic impact of the pandemic, including the considerable deterioration in growth, fiscal and debt positions in 2020–21, as well as the need to create the fiscal space needed for resilience building and development needs.

Options and Considerations for the Framework Review

5. To strike an appropriate balance between supporting the recovery and ensuring debt sustainability, recalibrating the fiscal rule targets and their timeframe is necessary. Given the potential increase in external borrowing costs due to tighter global financial conditions and elevated debt, the need to fully operationalize a credible and well-designed FRF has become more pressing to signal credible medium-term fiscal plans and increase fiscal discipline and transparency. In addition, given the economy’s high vulnerability to external shocks, the resilience of the FRF could be enhanced to explicitly account for the presence of macroeconomic uncertainty and sizable natural disaster risks. Such considerations call for revisiting the current calibration now rather than at the next scheduled review in 2025.

6. The country’s significant exposure to external shocks, including natural disasters, warrants a lower prudent debt anchor, unless financial buffers and other mitigating mechanisms are in place.

As a small open island economy, St. Vincent and the Grenadines (VCT) is highly vulnerable to external shocks, including from natural disasters. The economy faces more frequent natural disasters compared to the peer countries, incurring a fiscal cost of 1.1 percent of GDP based on the historical data since 1980. Unlike adverse demand and inflation shocks, natural disasters also represent often large and asymmetric supply shocks that lower output and increase inflation, reducing the fiscal and external sector’s ability to respond to the crisis. Moreover, the country’s reliance on tourism and agriculture exacerbates the impact of natural disasters. This requires large financing needs to rebuild the economy rapidly and to minimize scarring effects.
A stochastic simulation featuring external shocks including natural disasters illustrates that incorporating a safety margin into the debt anchor would improve chances of keeping debt below the regional debt ceiling over the long term. The analysis of the optimal debt anchor extends the original IMF’s fiscal rule calibration toolkit (Eyraud and others, 2018) to incorporate large and asymmetric supply shocks from natural disasters, tailored to VCT, in addition to the shocks implied by the historical data.⁶ The model, calibrated based on the historical data (including the frequency and growth impact of natural disasters), suggests that a debt anchor of 47 percent of GDP would provide a safety margin against shocks and keep debt below the regional debt ceiling of 60 percent of GDP with 95 percent probability.

The safety margin should be set depending on the size of financial buffers in place, including the government’s self-insurance, insurance policies, disaster clauses in debt securities, access to grants conditional on disasters, and private self-insurance. The government introduced three layers of instruments, in line with the IMF advice, to improve climate financial resilience and alleviate fiscal pressures, including: (1) establishing the CF in 2017 as a self-insurance fund to cover emergency relief in the event of natural disasters; (2) enrolling in regional risk-sharing facilities, Caribbean Catastrophe Risk Insurance Facility (CCRIF); and (3) arranging contingent credit lines, the World Bank’s Catastrophe Deferred Drawdown Option, from which VCT already received a disbursement in 2021.⁷ Nevertheless, staff simulations indicate that a framework with potential funding of 13 percent of GDP would be needed to cover ND costs in 99 percent of the events,⁸ which is well above the current available disaster mitigating financial layering (DMFL). Such optimal DMFL framework would strengthen debt sustainability by internalizing ND cost in the budget, accelerating economic recovery after each event, and reducing the dispersion of public debt outcomes—hence allowing a higher prudent debt anchor. Considering the high cost and imperfect damage-payout correlation of sovereign insurance, the country could prioritize building the CF and further explore the use of state-contingent debt instruments for extreme events.⁹ Given that the CF is debt financed, building CF rather than paying debt would imply a net negative return for the government due to the relatively lower returns from the liquid CF compared to the higher interest rates on higher debt. Therefore, the government’s policy choice for building buffers should strike an appropriate balance between building CF and paying down debt to ensure adequate coverage of immediate liquidity needs after natural disasters while minimizing cost.

7. Primary balance targets and the time frame of the debt target need to be reviewed to strike a good balance between supporting the recovery and ensuring debt sustainability. Three scenarios are presented below to illustrate the primary balance targets needed under the current and desired debt anchors and target dates that are consistent with the current outlook:

Scenario 1: Keeping the debt target in the current FRF. An average primary balance of 5 percent of GDP is required over 2026–30 to achieve the debt anchor of 60 percent of GDP by 2030, following the target date stipulated in the current FRF.
Scenario 2: Baseline projections. An average primary balance of about 31/4 percent of GDP over 2026-35 would allow the authorities to achieve the debt anchor of 60 percent of GDP before 2035—in line with the revised regional debt target date and meet the public debt sustainability. Nevertheless, the debt paths under both scenarios 1 & 2 are subject significant risks in the presence of external shocks and NDs.
Scenario 3: External shock and ND-resilient scenario. Targeting the illustrative debt anchor of 47 percent of GDP by 2035 will keep 95 percent of debt path realizations below the ceiling of 60 percent of GDP under simulations incorporating shocks, including stemming from natural disasters. Reaching the illustrative debt anchor would require an average primary surplus of about 3¾ percent of GDP over 2026-35, ½ percent of GDP more than in baseline projections.

8. An automatic adjustment mechanism could help strengthen the credibility of the framework. Linking primary balance targets to debt-to-GDP ratio could also be considered so as to avoid unduly tight primary balance targets once the debt target is reached, allow auto-corrections when shocks lead to a deviation from the adjustment path, and improve predictability and adaptability of the FRF (IMF, 2018). A correction mechanism the transitional arrangement can be time-bound (requiring return to compliance with the rule in a fixed number of years, e.g., Georgia) or data-driven (specifying a state-dependent transition period, e.g., Canada’s guardrails to maintain fiscal support measures as long as employment is below a certain level).

9. The wage bill ceiling remains useful, but it should be aligned with the current baseline to reflect higher rebased GDP and stronger wage adjustment committed under the 2021 RCF. International experience suggests that wage rules have played an important role in anchoring wage negotiation in the public sector. Keeping the wage rule as a key feature of the FRF is desirable for maintaining fiscal discipline, especially given the current relatively large public wage bill compared to regional and peer averages. The authorities could consider aligning the current FRF wage ceiling target of 12.5 percent of GDP with the current baseline, which is broadly in line with the small states average, to anchor the committed adjustments.

10. Strong fiscal institutions are key to underpin the effective operationalization of the FRF. Priority areas are:

Strengthening tax administration. Sustained efforts are needed to enhance taxpayer’s compliance through focusing on large taxpayers, digitalizing the tax system, fully incorporating the TAPA, strengthening petroleum imports control, as well as modernizing customs legislation, will help support fiscal adjustment and create the needed space for resilience building.
Enhancing the public financial management (PFM), including improving the credibility of annual budget and leveraging the MTEFO to guide medium-term budget preparation in accordance with fiscal targets, with support from CARTAC. To further enhance transparency and accountability of the FRM, it is important to (i) publish FRM’s reports regularly, (ii) amend the current FRF to ensure independent appointment of FRM members,¹⁰ and (iii) ensure legal and financial independence of the FRM (IMF, 2021). In general, the FRF and FRM could increase its enforceability by legally supporting the framework (IMF, 2022).
Improving public investment management (PIM) to support effective planning, allocation, and implementation and mitigate fiscal costs and risks, supported by an IMF PIMA, incorporating the new climate module (C-PIMA). To reap the benefits of investment projects as well as to better plan the new ones, VCT should identify strengths and weaknesses in PIM procedures and ensure climate change mitigation and adaptation are appropriately addressed in the public investment cycle. In this regard, C-PIMA will also provide a roadmap with priority reform measures for future PIM reforms including for resilient public investment. Given the large infrastructure needs, the planning should be consistent with the government’s strategic long-term development goals and prioritized based on resilient growth implication, the certainty of project funding, and the likelihood of successful implementation.
Strengthening SOE oversight and cash management. SOE oversight needs to be further strengthened by effectively implementing the 2019 regulations to ensure timely submission of all SOEs’ financial reports. The authorities should also continue efforts to strengthen cash management, including preparing cash flow forecasts periodically and separating arrears from accounts payable.

References

Luc Eyraud, Anja Baum, Andrew Hodge, Mariusz Jamuzek, H. Elif Ture, Samba Mbaye, and Young Kim, 2018, “How to Calibrate Fiscal Rules: A Primer”, How-To Notes, Fiscal Affairs Department, International Monetary Fund.
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Eyraud, L., Debrun, X., Hodge, A., Lledó, V. and C. Pattillo, 2018, “Second-Generation Fiscal Rules: Balancing Simplicity, Flexibility, and Enforceability”, IMF Staff Discussion Note SDN 18/04.
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IMF, 2017, “2017 Staff Guidance Note on the Fund’s Engagement with Small Developing States”, International Monetary Fund.
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IMF, 2021, “Operationalizing the Fiscal Responsibility Framework”, Technical Report, International Monetary Fund.
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Gbohoui, William, and Olusegun Akanbi, 2022, “Integrating Natural Disaster Risks in the Calibration of Fiscal Rule Limits”. Technical Note, Fiscal Affairs Department, IMF.
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Guerson, Alejandro, 2020, “Government Insurance Against Natural Disasters: An Application to the ECCU”, International Monetary Fund.
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Annex IX. The Pension System and Reform Options¹

1. The current pension system in St. Vincent and the Grenadines consists of two earnings-related defined benefit pension schemes: (i) the non-contributory Public Sector Pension System (PSPS) for civil servants, funded through budget revenues, and (ii) the contributory National Insurance Service (NIS) for public and private sector employees, self-employed, and voluntary contributors. The PSPS is viewed as too generous and costly, with civil servants entitled to full pension of up to two-thirds of their highest pensionable earnings at the age of 60 without making contributions.² To qualify for old-age pension benefits under the NIS plan, a minimum contribution period of 650 weeks is required to receive the minimum accrual rate of 30 percent,³ followed by one percent increases for every 50 weeks to reach 60 percent replacement rate. While the maximum replacement rate of the NIS plan is broadly in line with Caribbean and Latin American (LAC) averages, for pensionable civil servants who are also covered under the PSPS, the maximum combined replacement rate could reach 127 percent (60 percent under the NIS plan and 67 percent under the PSPS. In addition, the frontloaded accrual rates under the NIS plan create an incentive for workers to shorten their formal work histories so as only to contribute for the period with the higher accrual rate.

2. Reflecting relatively low contributions and generous payouts, the financial sustainability of the NIS pension system was already under strain prior to the pandemic and volcanic eruptions. Recognizing the deteriorating financial situation of the NIS, the government introduced parametric reforms in 2014, including a gradual increase in the statutory retirement age from 60 to 65 over 15 years (currently at 63) and an increase in the contribution rate from 8 percent to 10 percent. However, these reforms improved the NIS’ financial situation only temporarily, with the contribution rate still well below LAC, emerging market, and OECD averages. In addition, benefits paid under the early age pension schemes that was introduced in 2016 have grown fast and reached 16 percent of total benefits paid in 2021.⁴ As a result, total benefits have surpassed total contributions since 2019, and the latest actuarial report completed in 2021 projected the NIS’ reserves to be depleted by 2034.

3. The impact of the shocks, combined with the rapid population ageing, has increased the urgency for further reforms. The severe impact of the pandemic and volcanic eruptions on the labor market has worsened the NIS’ financial situation further as contribution growth plunged and benefit payments surged, including due to the temporary unemployment benefit scheme, sickness benefits related to Covid-19 cases, and the rising number of early retirees. In addition, the old-age dependency ratio—currently already above the LAC average—is expected to rise rapidly from 2025, which calls for immediate pension reforms to allow for gradual implementation and prevent the need for an abrupt adjustment in the future. In this context, timely implementation of pension reforms would help address the key weaknesses in pension system design and improve the fiscal sustainability of the program. A comprehensive parametric reform that combines measures to increase contribution rate and retirement age and reduce replacement rate should be considered to safeguard the long-term sustainability and to incentivize long careers.

The explosive eruptions took place during April 9–22, 2021, and volcanic activities ended earlier than anticipated in the 2021 RCF staff report, with the alert level reduced to yellow on September 15, 2021. The eruption-related impact on the agriculture sector is estimated to be smaller than expected in the 2021 RCF, and post-eruption reconstruction activity took place earlier and faster, contributing positively to growth.

Given limited direct exposure to Russia, Belarus, or Ukraine, the impact of the war in Ukraine and sanctions imposed on Russia and Belarus is realized mainly through higher prices of food, fuel, and other imports.

Two RCF disbursements were approved for VCT in recent years, of SDR 11.7 million (100 percent of quota) on May 20, 2020, to address the Covid-19 pandemic and SDR 8.17 million (69.85 percent of quota) on July 1, 2021, to address the fallout from the volcanic eruptions. They also helped catalyze financing from other multinational organizations.

Containment measures include social distancing, mask mandates, distance learning at schools, etc.

The pace of tourism recovery fell below regional peers again in 2022: Q2, largely due to airlift limitations as airlines prioritized other destinations when allocating limited large aircrafts and pilots amidst various capacity constraints. The situation is expected to gradually improve as Air Canada resumes flights in November 2022 and American Airlines increase flight frequency from twice a week to daily in March 2023.

Stayover tourism is projected to recover gradually and reach its pre-pandemic (2019) level in 2024.

The measures included: (i) an increase in health care spending; (ii) cash payments to vulnerable households; (iii) income support during April 2020–mid-2021 for displaced workers and firms in the tourism, agriculture, and other sectors affected; (iv) public infrastructure projects to clean and reconstruct; and (v) temporary VAT and import duty exemptions on health and aid-related products. The authorities have published all awarded procurement contracts for Covid-19 spending though completing and publishing their full ex-post audit are likely to take years given the backlog.

The authorities raised the Customs Service Charge (CSC) rate by 1 percentage point to 6 percent, effective from June 2021, with an estimated full-year yield of one percent of GDP. Staff estimate that one-off land sale related taxes contributed 2.5 percent of GDP to tax revenues in 2021.

These include (i) a temporary reduction in fuel excise taxes by half and removal of custom service charges on fuel imports of St. Vincent Electricity Services Limited (VINLEC) from May through end-2022; (ii) direct fertilizer subsidies to farmers in 2022 and feed subsidies to livestock farmers from July until the fund is exhausted; (iii) re-introduction of the targeted food support program (’love box’) from May; (iv) lower fuel surcharges on electricity bill for June only to smooth the price impact, with the cost largely borne by the VINLEC; (v) an increase in VAT exemption threshold on monthly electricity usage from 150kWh to 250kWh from July through end-2022, and (vi) a waiver of half of the CSC on flour from July. Extensions of the measures are to be reviewed.

These programs are largely supported by the WB’s VEEP (2022–26), including the additional temporary income support during 2022:H2 and other targeted programs, e.g., to facilitate employment and the agriculture recovery.

The authorities could consider functional reviews to ensure that both level and skill composition of government employment is consistent with the effective delivery of public services and a benchmark study of compensation to calibrate it to retain the required talent and incentivize performance. The baseline assumes that the total amount of capital spending during 2021–26 is capped at about EC$1.6 billion compared to EC$1.2 billion in the 2021 RCF, reflecting higher cost of the port modernization project and the new hospital project.

The baseline projections incorporate (i) the recently concluded public sector wage negotiation which implies a cumulative wage growth of about 7 percent over 2023-25; and (ii) the recently announced reduction of the top income tax rate from 30 to 28 percent and increase of the standard personal income tax deductions from EC$20,000 to EC$22,000, taking effect from 2023, with an estimated annual cost of 0.4 percent of GDP. The projections also incorporate contingency planning for an expected annual fiscal cost from natural disasters of 1.1 percent of GDP, estimated based on the magnitude and frequency of those occurred during 1980-2021. This includes an average annual contribution to the contingency fund of about 0.7 percent of GDP and contingent spending of goods and services and transfers of 0.4 percent of GDP. CF has an existing balance of about 1.2 percent of GDP as of end-2021 and CCRIF has an average payout of 0.2 percent of GDP for VCT, based on the historical payout information, in the event of natural disasters.

Staff also incorporated a debt relief from Venezuela of 4.2 percent of GDP in 2022. The amount represents the remaining debt outstanding from the debt forgiveness by PetroCaribe in 2017.

Despite global financial tightening, interest rates in the regional debt market remained at low levels given the ample liquidity in the financial system.

The lower medium-term wage-to-GDP ratio under the current baseline (compared to the current FRF wage bill ceiling)—reflecting higher rebased GDP as well as stronger wage adjustment as committed under the 2021 RCF—is broadly in line with the small states average.

An illustrative calibration exercise suggests a debt anchor of 47 percent of GDP would provide a safety margin against shocks and keep debt below the regional debt ceiling of 60 percent of GDP with 95 percent probability. This draws on the methodology in 2022 ECCU Selected Issues Paper (IMF Country Report No. 22/254).

A temporary unemployment insurance program was introduced during the pandemic.

The authorities introduced a Labor-Intensive Temporary Employment (LITE) program which targets hiring people (especially women) from poor households for short-term critical community work, supported by the WB’s VEEP. It builds on the existing experience of the Roads, Buildings, and General Services Authority (BRAGSA) in implementing the Road Clean-Up Program, which is a cash-for-work seasonal program aimed at basic public infrastructure maintenance and the creation of short-term employment benefiting unemployed working-age people.

CARTAC TAs continue to support fiscal institutional reforms in multiple areas, which has included strengthening tax administration, the operationalization of the FRF, assessing the disaster resilience capacities of the government’s PFM processes, systems and institutions, strengthening the SOE oversight, improving bank reconciliation, and supporting the implementation of cash basis International Public Sector Accounting Standard (IPSAS).

The main objective of the TAPA is to improve compliance, transparency, overall effectiveness of the tax policy. The ongoing digital transformation initiative through e-Payment (e.g., social program), e-Tax system, and securing electronic identification system, will streamline the custom process, lower administrative costs, and enhance the overall efficiency. A petroleum unit was created in the Customs to exercise better control petroleum supply chain and reduce revenue leakage.

In 2019, The government adopted the Finance Administration Monitoring and Oversight of Statutory Bodies regulations and established a high-level Monitoring and Oversight Committee and an oversight unit, but the oversight function remains limited to one officer allocated on a part time basis.

The WB-supported OECS Digital Transformation Project is underway to help create a digital enabling environment, build digital government infrastructure, and enable digital skills and technology adoption.

See 2018 ECCU Regional Consultation Report (IMF Country Report No. 19/62) and Western Hemisphere Regional Economic Outlook (October 2021) for the model. The model is calibrated here to St. Vincent and using the EM-DAT dataset.

The WB’s Blue Economy project will enable VCT’s participation in the COAST facility, a regional insurance scheme for fisheries designed to increase resilience to extreme weather events such as hurricanes and storms. COAST also enhances inclusiveness by covering not only fishers, but also fish vendors and processors, most of whom are women.

The DRFS is setting out four strategic priorities, namely (i) strengthening data collection and management, (ii) strengthening PFM, (iii) improving fiscal protection and timely access to financing, and (iv) increasing collaboration with private sector to improve availability, affordability and use of catastrophe risk insurance and other financial products that encourage risk reduction.

About 150 private owners of solar panels are already supplying electricity back to the grid. Several ongoing and planned projects are expected to nearly double the current share of solar power to about 5 percent within two years.

St. Vincent intends to achieve an unconditional, economy-wide reduction in greenhouse gas emissions of 22 percent by 2025 compared to the business-as-usual scenario.

The ECCB has recently increased provisioning requirements under its Treatment of Impaired Assets Standards and banks are now required to maintain a coverage ratio of minimum 60 percent of all NPLs in effect from 2022. The technical requirements for the planned phased increase of banks’ minimum provisioning ratio to 100 percent for long-standing NPLs by 2024 are currently being reviewed by the ECCB based on industry consultations, and the revised guidance is due to be formally articulated in the ECCB’s 2022 review of the Treatment of Impaired Assets Standard (TIAS).

Loan moratoria, which were initially applied system wide and extended selectively in March 2021 and September 2021 to sectors and households most hit by the shocks, have expired at end-March 2022 for both banks and CUs.

Delinquency rates for credit unions, which includes loans 30 days past due, reached 9.4 percent of total loans in 2022: Q2.

The Building and Loan Association has been under enhanced supervision since 2013.

See 2022 ECCU Regional Consultation Report, IMF Country Report No. 22/253.

St. Vincent has already approved the supporting national legislation for its establishment.

Prepared by Dmitriy Kovtun (WHD).

This project primarily involves designing and building a cargo port, relocating a sewer outfall line, and upgrading and strengthening roads within Kingstown’s port area. Additional scope includes reclaiming 6.5 hectares of seaward reclaimed land for the terminal, a container storage yard, and maintenance areas for break-bulk vehicles. An administration and customs building, workshops, warehouses, and a container freight station will be included in the terminal buildings.

The new hospital will have 134 beds and employ 528 staff members.

Air Canada announced that it will resume weekly flights in November 2022, increasing the frequency to twice a week from December 2022. American Airlines recently also announced to increase the frequency of non-stop flights from Miami from twice a week to daily from March 2023.

Prepared by Isabela Duarte with research assistance from Beatriz Garcia-Nunes (both WHD).

Carriers that established routes to St. Vincent during at least some part of the period between 2017 and 2019 include Caribbean Airlines, SunWing, Air Canada, and American Airlines.

See 2018 VCT Article IV Consultation Report, IMF Country Report No. 19/66.

See Acevedo et al. (2016).

Market participants have highlighted limited airlift capacity and high prices for air travel to VCT as main constraints for tourism recovery.

Prepared by Dmitriy Kovtun (WHD).

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

See October 2022 World Economic Outlook.

Prepared by Marie Kim (WHD).

The authorities introduced revenue-enhancing measures, including raising excise taxes on selected items (2019), and increasing the Customs Service Charge (2021).

It was approved as Resolution by Parliament, as part of World Bank’s First Fiscal Reform and Resilience Development Policy Credit (2019). The updated FRF incorporated the original construction cost of 18 percent of 2022 GDP, which is about 40 percent lower than the current cost. The construction timeline has also been significantly delayed due to the recent shocks.

The January 2020 WEO forecast was close to the target stipulated in the FRF, approved in January 2020.

See 2021 ECCU Regional Consultation Report, IMF Country Report No. 21/86.

Natural disaster shocks are modeled parametrically as a combination of a binomial distribution, to capture the frequency of natural disasters, and a pareto distribution, to capture the growth impact conditional on the materialization of a disaster (Gbohoui and Akanbi, 2022).

The CCRIF has an average payout of 0.2 percent of GDP for St. Vincent and the Grenadines, based on the historical payout information, in the event of natural disasters. Staff’s baseline projections incorporate an expected annual fiscal cost from natural disasters of 1.1 percent of GDP—estimated based on the magnitude and frequency of those occurred during 1980–21—of which the Contingencies Fund is expected to cover 0.7 percent of GDP annually, with the remaining from current allocations in goods and services and transfers.

The simulations are based on a Monte Carlo experiments that simulated the impact of natural disasters on output and government finances. It assumes that a portion of reconstruction spending is covered by the reallocation of resources originally allotted to pre-existing investment projects. See IMF working paper series No. 20/266 for a technical presentation of the methodology.

The WB is currently working towards to issue a regional CAT bond for the 2024 hurricane season.

Currently, the FRM members are appointed by the Cabinet of Ministers, which could put FRM’s independency and transparency at risk.

Prepared by Marie Kim (WHD).

For those who joined before and on August 3rd, 1983, the statutory retirement age is 55.

Reduced pension requires minimum contribution of 500 weeks, and the program is available from 2016 through 2027.

Early age pension allows workers to receive benefits as early as age 60 with a penalty of 6 percent pension reduction for each year of retirement before the worker’s statutory pensionable age.

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St. Vincent and the Grenadines: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for St. Vincent and the Grenadines

Author:

International Monetary Fund. Western Hemisphere Dept.

Volume/Issue:: Volume 2022: Issue 346

Publisher:: International Monetary Fund

ISBN:: 9798400225505

ISSN:: 1934-7685

Pages:: 105

DOI:: https://doi.org/10.5089/9798400225505.002

Keywords
Context
The Compound Shocks and Policy Response
Outlook and Risks
Policy Discussions
Authorities’ Views
Staff Appraisal
Annex I. Implementation of Past Fund Policy Advice
Annex II. Macroeconomic Impact of the Large-Scale Investment Projects1
- A. Project Background
- B. Macroeconomic Impact
Annex III. Tourism in St. Vincent and the Grenadines: The Impact of Recent Shocks and Opportunities for the Future1
References
Annex IV. Inflation Outlook1
Annex V. External Sector Assessment
Annex VI. Risk Assessment Matrix1
Annex VII. An Adverse Scenario and Contingency Planning
References
Annex VIII. Fully Operationalizing St. Vincent and the Grenadines’ Fiscal Responsibility Framework1
References
Annex IX. The Pension System and Reform Options1

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2020 Worldwide Governance Indicators

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Contribution of Tourism and Agriculture to GDP, 2019

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Contributions to Headline Inflation

(Percent, yoy)

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Primary Balance and Debt Path Under Various Scenarios

(Percent of GDP)

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Rooms in Tourism Accommodations

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Electricity Generation Mix in 2020

(Percent)

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Loans and Deposits by Banks and Credit Unions

(2019Q3 = 100)

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^{Figure 1.}

St. Vincent and the Grenadines: Key Macroeconomic Indicators

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St. Vincent and the Grenadines: Real Sector Developments

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St. Vincent and the Grenadines: External Sector Developments

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St. Vincent and the Grenadines: Fiscal Sector Developments

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^{Figure 5.}

St. Vincent and the Grenadines: Financial Sector Developments

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Health Indicators

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Growth Contributions From Large-Scale Projects

(Percentage points)

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Contribution of Travel and Tourism

(Percent)

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Tourism Sector Performance, 2016-21

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Stayover Tourist Arrivals per Origin Country, 2019

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The Trade and Tourism Sector in 2019

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Post-Pandamic Tourism Recovery

(Percentage of stayover arrivals in the same month of 2019)

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Contribution of Tourism and Agriculture to GDP, 2019

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^{Figure AVII.1.}

Baseline and Adverse Scenarios, 2022–27

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Comparison of Fiscal Targets with Fiscal Projections Before and After the Pandemic

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Disaster Resilience Financial Layering

(Percent of GDP)

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Primary Balance and Debt Path Under Various Scenarios

(Percent of GDP)

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Wage Bill

(Percent of GDP; 2019 Pre-pandemic)

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Policy Options for Pension Reforms

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	Numerical Target	Target Date
Primary balance	1.2 percent of GDP 2.7 percent of GDP	2021-2023 2024 onwards
Current spending ceiling	Nominal current growth to be less than nomianl GDP growth in the same year	through 2030
Wage bill ceiling	13.0 percent of GDP 12.5 percent of GDP	through 2021 2022 onwards
Government debt ^1/	60 percent of GDP	2030
Key Design Features
Coverage	Central Government
Compliance margin	0.55 percent of GDP
Summary
Escape Clause and Triggers	Subject to the approval of Cabinet, the Minister may suspend fiscal rule under: (i) natural disaster declared by the National Emergency Management Act, (ii) declared public health epidemic, (iii) real GDP contracts by 2 percent or more in a year or cumulatively by 3 percent or greater over two consecutive years, and (iv) a financial crisis certified by the ECCB and with fiscal costs has occurred or is imminent.
Oversight Committee	Fiscal Responsibility Mechanism (i.e. Fiscal Council), appointed by Cabinet, monitors compliance with the fiscal rule and reports to the Cabinet and the Finance Committee.
Review	The Government shall review the requirements in 2025 and every five years thereafter.

	Numerical Target	Target Date
Primary balance	1.2 percent of GDP 2.7 percent of GDP	2021-2023 2024 onwards
Current spending ceiling	Nominal current growth to be less than nomianl GDP growth in the same year	through 2030
Wage bill ceiling	13.0 percent of GDP 12.5 percent of GDP	through 2021 2022 onwards
Government debt ^1/	60 percent of GDP	2030
Key Design Features
Coverage	Central Government
Compliance margin	0.55 percent of GDP
Summary
Escape Clause and Triggers	Subject to the approval of Cabinet, the Minister may suspend fiscal rule under: (i) natural disaster declared by the National Emergency Management Act, (ii) declared public health epidemic, (iii) real GDP contracts by 2 percent or more in a year or cumulatively by 3 percent or greater over two consecutive years, and (iv) a financial crisis certified by the ECCB and with fiscal costs has occurred or is imminent.
Oversight Committee	Fiscal Responsibility Mechanism (i.e. Fiscal Council), appointed by Cabinet, monitors compliance with the fiscal rule and reports to the Cabinet and the Finance Committee.
Review	The Government shall review the requirements in 2025 and every five years thereafter.

	Numerical Target	Target Date
Primary balance	1.2 percent of GDP 2.7 percent of GDP	2021-2023 2024 onwards
Current spending ceiling	Nominal current growth to be less than nomianl GDP growth in the same year	through 2030
Wage bill ceiling	13.0 percent of GDP 12.5 percent of GDP	through 2021 2022 onwards
Government debt ^1/	60 percent of GDP	2030
Key Design Features
Coverage	Central Government
Compliance margin	0.55 percent of GDP
Summary
Escape Clause and Triggers	Subject to the approval of Cabinet, the Minister may suspend fiscal rule under: (i) natural disaster declared by the National Emergency Management Act, (ii) declared public health epidemic, (iii) real GDP contracts by 2 percent or more in a year or cumulatively by 3 percent or greater over two consecutive years, and (iv) a financial crisis certified by the ECCB and with fiscal costs has occurred or is imminent.
Oversight Committee	Fiscal Responsibility Mechanism (i.e. Fiscal Council), appointed by Cabinet, monitors compliance with the fiscal rule and reports to the Cabinet and the Finance Committee.
Review	The Government shall review the requirements in 2025 and every five years thereafter.

Topics

Countries

Series

About

Resources

Abstract

Context

The Compound Shocks and Policy Response

Outlook and Risks

Policy Discussions

A. Fiscal Policy: Safeguarding Debt Sustainability While Supporting a Resilient and Inclusive Recovery

B. Supporting Resilient and Inclusive Growth and Promoting Job Opportunities

C. Maintaining Financial Sector Stability While Supporting the Recovery

D. Data Issues

Authorities’ Views

Staff Appraisal

Annex I. Implementation of Past Fund Policy Advice

Annex II. Macroeconomic Impact of the Large-Scale Investment Projects1

A. Project Background

B. Macroeconomic Impact

Annex III. Tourism in St. Vincent and the Grenadines: The Impact of Recent Shocks and Opportunities for the Future1

The Tourism Sector Before the Pandemic and 2021 Volcanic Eruptions

The Impact of the 2020–21 Shocks and Tourism Recovery

Opportunities for the Future and Policy Implications

References

Annex IV. Inflation Outlook1

Annex V. External Sector Assessment

Annex VI. Risk Assessment Matrix1

Annex VII. An Adverse Scenario and Contingency Planning

References

Annex VIII. Fully Operationalizing St. Vincent and the Grenadines’ Fiscal Responsibility Framework1

Context

Current Targets in the Post-Pandemic and Volcanic Eruptions World

Options and Considerations for the Framework Review

References

Annex IX. The Pension System and Reform Options1

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Inter-American Development Bank

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Table of Contents

Headings

Figures

Metrics

Foresee

Annex II. Macroeconomic Impact of the Large-Scale Investment Projects¹

Annex III. Tourism in St. Vincent and the Grenadines: The Impact of Recent Shocks and Opportunities for the Future¹

Annex IV. Inflation Outlook¹

Annex VI. Risk Assessment Matrix¹

Annex VIII. Fully Operationalizing St. Vincent and the Grenadines’ Fiscal Responsibility Framework¹

Annex IX. The Pension System and Reform Options¹