St. Lucia: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for St. Lucia
Author:
International Monetary Fund. Western Hemisphere Dept.
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Publication Date:
18 Nov 2022
eISBN:
9798400225772
ISBN:
9798400225772
Language:
English
Keywords:
retail price; St. Lucia economy; flow saving; financing cost; fuel price pressure; Credit bureaus
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1. As a tourism dependent economy, St. Lucia was heavily hit by the Covid-19 pandemic, now compounded by the increase in import prices triggered by the war in Ukraine. St. Lucia has shown low and volatile growth since the beginning of the twenty-first century. The Global Financial Crisis (GFC) marked the end of a credit-fueled investment boom, which led to significant deterioration of private and public balance sheets with significant buildup of banking sector non-performing loans (NPLs) and a high public debt burden that has proven difficult to reduce.1 In 2020, travel restrictions during the Covid-19 pandemic led to the sharpest output decline on record due to the large tourism sector. High dependence on imported fuel and food items implies strong vulnerability to the economic repercussions of the war in Ukraine, adding a negative impulse to a weakened economy. While the tightening of global financial conditions is unlikely to affect financial conditions in St. Lucia significantly (because of limited financial integration), it is expected to dampen growth through real channels.

Abstract

1. As a tourism dependent economy, St. Lucia was heavily hit by the Covid-19 pandemic, now compounded by the increase in import prices triggered by the war in Ukraine. St. Lucia has shown low and volatile growth since the beginning of the twenty-first century. The Global Financial Crisis (GFC) marked the end of a credit-fueled investment boom, which led to significant deterioration of private and public balance sheets with significant buildup of banking sector non-performing loans (NPLs) and a high public debt burden that has proven difficult to reduce.1 In 2020, travel restrictions during the Covid-19 pandemic led to the sharpest output decline on record due to the large tourism sector. High dependence on imported fuel and food items implies strong vulnerability to the economic repercussions of the war in Ukraine, adding a negative impulse to a weakened economy. While the tightening of global financial conditions is unlikely to affect financial conditions in St. Lucia significantly (because of limited financial integration), it is expected to dampen growth through real channels.

Context

1. As a tourism dependent economy, St. Lucia was heavily hit by the Covid-19 pandemic, now compounded by the increase in import prices triggered by the war in Ukraine. St. Lucia has shown low and volatile growth since the beginning of the twenty-first century. The Global Financial Crisis (GFC) marked the end of a credit-fueled investment boom, which led to significant deterioration of private and public balance sheets with significant buildup of banking sector non-performing loans (NPLs) and a high public debt burden that has proven difficult to reduce.1 In 2020, travel restrictions during the Covid-19 pandemic led to the sharpest output decline on record due to the large tourism sector. High dependence on imported fuel and food items implies strong vulnerability to the economic repercussions of the war in Ukraine, adding a negative impulse to a weakened economy. While the tightening of global financial conditions is unlikely to affect financial conditions in St. Lucia significantly (because of limited financial integration), it is expected to dampen growth through real channels.

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Long-Term Growth and Convergence

(In percent unless otherwise stated)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Sources: ECCB and IMF staff calcualtions.

2. Located in the hurricane belt, St. Lucia is highly vulnerable to natural disasters. Though among the regional leaders in climate change preparedness, the country has large institutional, financing, and capacity gaps in its climate response strategy2

3. A new administration that took office in July 2021 is seeking to balance fiscal constraints with its spending priorities. St. Lucia’s Labour Party led by Prime Minister Phillip J. Pierre gained a large parliamentary majority in the 2021 general election.3 The new administration has a strong social agenda, including on health, social protection, food security, climate resilience, and employment.

Covid-19 Pandemic Impact and Policy Response

4. The pandemic initially brought the St. Lucian economy to a halt. Resolute containment measures in 2020 (border closure, country-wide lockdown) successfully prevented community spread, but the collapse of international travel took a severe toll on economic activity. GDP declined by 24 percent and the unemployment rate increased from 16.8 percent to 21.7 percent. The FY2020 budget deficit increased to 11.9 percent of GDP, financed largely by multilateral and bilateral assistance, including a Rapid Credit Facility (RCF) of about US$29 million in April 2020.4

External Loan Financing

(Percent of GDP) 1/

article image

St. Lucia benefited from about EC$2 million and EC$2.5 million of suspended debt service under the Debt Service Suspension Initiative in FY20 and FY21 respectively.

Source: Country authorities.

5. The recovery remains incomplete mainly due to the only partial return of tourism in 2021. Safety protocols and travel restrictions continued to weigh on tourism. Arrivals from main markets (US and UK) picked up significantly following the vaccine rollouts in the first half of 2021, buoyed in part by significant pent-up demand and diversion of tourists from other destinations with more restrictive entry requirements. The revival coincided with several waves of community spread amidst significant vaccine hesitancy, which led to tightening of local restrictions, yet it proved little deterrent to tourism demand.5 By late 2021 arrivals from the US and UK reached pre-pandemic levels,6 although overall arrivals for the year were 53 percent below 2019. Activity was boosted by large public investment projects, including commencement of the Hewanorra International Airport redevelopment (USD$175 million, 10 percent GDP) following pandemic related delays. Preliminary national accounts data shows that GDP rebounded by 12.2 percent in 2021.

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Stay-Over Tourist Arrivals

(Growth rate, in percent, y-o-y )

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Note: 2019 growth rates relative to 201S. 2020 – 2022 y-o-ygrowth rates relative to 2019.The share of tourist arrivals in 2019 for US, UK, Canada, Caribbean and Others are 45, 19, 10, 20 and 7 percent respectively,Sources: Country authorities and IMF staff calculations.
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New COVID-19 Cases

(Per million; 7-day moving average)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Sources: Johns Hopkins database and IMF staff calculations.
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Vaccine Hesitancy

(Delivered and administered vaccines, percent of pop.)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Sources: University of Oxford’s Our World in Date project, PAHO, country

6. The public balance sheet remains under significant strain. Slow revenue recovery and pandemic-related spending, including frontloading capital projects to support the economy, led to a budget deficit of 6.5 percent of GDP in FY2021. Despite strong external support from international development partners and limited redemptions from regional security-based financing, the government’s high financing needs over FY2020–21 resulted in significant cash-constraints and build-up of overdrafts and (domestic supplier) arrears of about 4.3 percent ofGDP in FY2021. Public debt rose significantly from just above 60 in FY2019 to 96.9 percent of GDP in FY2020, and then remained elevated at 92.2 percent of GDP in FY2021.

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Pandemic Response Costs

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

7. Inflation picked up in 2021 with the surge in commodity prices. Following deflation in 2020 amid the pandemic, higher imported food and energy costs and supply bottlenecks have driven up annual inflation to 2.4 percent in 2021. Pass-through of higher oil prices has been mitigated by price controls on retail prices of road fuel (gas and diesel) and energy subsidies for lower weight LPG (used for household cooking).7 The cost of construction materials also rose significantly, impacting ongoing investment projects.

8. The large current account deficit is narrowing slowly with the recovery of tourism, but with further headwinds from commodity prices. After a surplus of 5.7 percent of GDP in 2019, the current account deteriorated to a deficit of 14.7 percent of GDP in 2020. With the recovery of tourism, the deficit is estimated to have narrowed in 2021 to 11 percent of GDP. Imputed reserves are 3 and 3.6 months of imports in 2020 and 2021, respectively.

9. The financial sector remained stable and liquid, but nonperforming loans have increased over the past two years. Bank credit remained flat while deposits maintained robust growth. In contrast, lending to households by credit unions has expanded briskly during the pandemic. Despite a high uptake of the loan moratoria program introduced by the Eastern Caribbean Central Bank (ECCB) and the Financial Services Regulatory Authority (FSRA) for banks and credit unions, respectively, the stock of moratoria loans was largely extinguished before the programs’expiry,8 including through proactive restructurings. Bank NPLs have increased over the past two years from the already elevated 8 percent of loans to 14 percent (2021Q4). This has further increased provisioning needs to match new guidance from the ECCB.9 Bank capital ratios have risen somewhat, and liquidity buffers have remained sizable, even as one local bank significantly increased its assets through the acquisition of the Royal Bank of Canada’s domestic operations. Capital ratios at credit unions have edged lower.10

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Bank Loans under Moratoria

(In percent of total loans)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Sources: ECCB and IMF staff calculations.

Outlook: Headwinds from the War in Ukraine and a Slowing Global Economy

10. Output is projected to gradually recover to the pre-pandemic level by 2024, slowed by the impacts of the war in Ukraine and the tightening of global financial conditions. The pace of recovery is projected to slow amid the reopening of competing tourist destinations, high oil prices, which erode traveler incomes and raise airfares, and the tightening of global financial conditions, which affects both external and domestic demand (Box 1). Staffs baseline projects that the tourism arrivals recovery observed in the latter part of 2021 from the main source countries (US and UK) will continue in 2022, with a slower recovery from other regions (mainly EU and Canada). Together, stay-over arrivals are expected to remain about 20 percent below 2019 levels in 2022 and to fully recover by 2024. Public and private investment are constrained by weak balance sheets, rising global financing costs, and higher prices of imported inputs. With the war in Ukraine, inflation is projected to increase to 6.4 percent in 2022, driven by food, energy and imported goods prices, before moderating towards 2.0 percent in the medium term, adding social hardship by eroding real incomes and slowing the recovery by reducing domestic demand.

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Real GDP Projections

(Index: 2019= 100)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Sources: Country authorities and IMF staff calculations.

11. The fiscal outlook presents significant challenges due to high public debt and large refinancing needs. Assuming no policy changes, public debt is projected to stabilize at a high level, near 90 percent of GDP, in the medium term. The recovery and reduction in pandemic spending improves budget balances, but a short debt maturity profile keeps financing needs elevated over the medium-term. The projection assumes the government remains financially constrained, with limited ability to access sustained net additional funding based on available official envelopes and limited appetite to increase exposure to the government in the regional bond market.11 These constraints limit the fiscal space for public investment in the projection. The government’s first FY2022 budget foresees significant capital spending increase supported by external loan and grant financing which, however, remains uncertain and has therefore not been fully included in staffs projections which reflect factors such as historical underperformance in actual outcome compared to budget estimates.

12. The current account is projected to recover to a modest surplus over the medium-term. The overall external position in 2021 is assessed to be broadly in line with the level implied by the fundamentals and desirable policies (Annex III). However, the assessment is subject to significant risk given the potential impact of the war in Ukraine on the tourism recovery and import prices. The appreciation of the US dollar will lead to real exchange rate appreciation in St. Lucia, dampening tourism export competitiveness.

13. Bank credit to the private sector is projected to remain anemic. Limited access to credit by small firms and households is a key obstacle to private investment, employment, and growth. This is explained by banks’ concerns about high public debt, and the uncertain external environment, increased provisioning requirements in the near-term, as well as by more structural constraints affecting banks’ willingness to lend including legislative gaps (regarding the ability to seize collateral and to access information about debtors’ creditworthiness).

14. Downside risks continue to dominate (Annex II). High import dependency makes St. Lucia vulnerable to further global food and energy price pressures from the ongoing war in Ukraine, which could erode domestic real income, weighing on domestic demand. Extended high global inflation and supply bottle necks could disrupt the execution of ongoing capital projects. A resurgence of the pandemic in St. Lucia’s main source markets for tourism and foreign investment would also worsen the outlook. Given the exchange rate peg, stronger US dollar appreciation with US monetary tightening would weaken competitiveness in the tourism sector. Given the global uncertainties, bursts of financial markets’ instability could reduce tourism demand, affecting domestic demand in St. Lucia and weakening economic activity further (Box 1). The ever-present natural disaster risk remains a near-term challenge and is expected to intensify with climate change, potentially adding fiscal pressure. Recent increased scrutiny by the EU may erode demand for the Citizenship-by-Investment Progarm (CIP), affecting fiscal revenue and financing. The main upside risk is a faster-than-anticipated tourism recovery.

Vulnerability to Tightening Global Financial Conditions

Despite low financial integration, St. Lucia remains vulnerable to tightening of global financial conditions. Even if the capita I flow channel is not prominent, St. Lucia remains exposed through current account transmission given its high openness and import dependence. The empirical evidence shows that a vector of indicators capturing the stateofglobalfinancialconditionscan have a negative impact on tourism, domestic demand, and reduce inflation.

The results show that a severe tightening of global financial conditions (as captured by a vector of financial indicators) has a statistically significant and quantitatively important negative impact on St. Lucia’s macroeconomic conditions. In the two years following a large VIX shock capturing an increase in risk aversion (double the historical median), tourist arrivals decline by about 3 percent, imports (domestic demand proxy) decline, and inflation is lower by about 1 percentage point. The decline in tourist arrivals is explained by the loss of value of financial assets of consumers with investments in global financial centers, which become more cautious with the increased uncertainty about the value of assets (in part also directly affected by more binding borrowing constraints for tourism expenditure and other allocations). In addition, the tightening of global financial conditions leads to loss of external competitiveness in St. Lucia with further negative impact on tourism due to the appreciation of the US dollar (to which the EC dollar is pegged) and currency depreciation in some tourism competitors. The decline in tourism exports in turn leads to lower value of imports in St. Lucia due to the decline in domestic demand with the loss of tourism revenue. Deceleration of global growth under the tightening of global financial conditions leads to easing of global inflation pressures, including lower commodity prices. This reduces inflation pressures in St. Lucia given its high import dependence. The decline of domestic demand with the lower tourism revenue also contributes to ease pressure on consumer prices.

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Source: Fund staff estimats based on data from Bloomberg, Haver Analytics, and St. Lucia authorities.

Policy Priorities

Fiscal consolidation that combines efficiency and equity considerations is needed to address high government debt and refinancing needs, budget pressures to cushion the impact of higher food and fuel prices, and low public investment. Early preparation and execution of the plan is critical to support economic stability and growth. Anchoring the plan in a rules-based fiscal responsibility framework, alongside other parallel institutional reforms, would support its credibility and access to financing. Financial sector and structural reforms can help promote the private sector’s ability to support the recovery and long-term growth, including through building resilience to natural disasters.

A. Fiscal Policy: Preparing an Equitable and Credible Consolidation Plan While Mitigating the Impact on Vulnerable Households

15. Given incomplete economic recovery, fiscal policy should remain supportive in the near-term to cushion the social impact of the inflation surge, mindful of financing constraints. Limited fiscal space will require some spending reprioritization. A budget reserve for targeted social and health spending, including to address persistent vaccine hesitancy, remains a priority until the food and fuel price pressures subside and pandemic no longer poses a public health threat. This may require postponement of non-critical outlays and avoiding additional permanent spending commitments.

16. The road fuel pricing reviews should allow for further pass-through of global energy prices, accompanied by more targeted measures to protect vulnerable households. Despite the recent increase,the current retail price may largely wipe out the government’s petroleum excise revenue (about 1.2 percent of GDP in FY2019) undercurrent international oil price projections. Further pass-through with a rules-based smoothing mechanism would ease the social impact while allowing consumption to adjust. The adverse impact of higher retail prices on poor households can be mitigated by targeted or proxy-targeted transfers and subsidies.12

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Gasoline Price and Excise Tax Rate

(EC$ per imperial gallon, estimated from end-FY20)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

1/ Retail price is subject to a cap.Sources: Country authorities, World Economic Outlook, IMF staff calculations.
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Projected Primary Balance and Public Debt

(Baseline and active scenario, in percent of GDP) 1/

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

1/ For illustrative purposes the active scenario assumes an evenly phased adjustment of 1/2 percent of GDP per year between FY2023–27.Sources: Country authorities and IMF staff calculations.

17. As the recovery takes hold, fiscal policy should focus on strengthening fiscal sustainability with efficient measures to protect vulnerable households. This requires a credible, growth-friendly consolidation strategy to (i) bring public debt firmly to a downward path toward the 2035 regional debt target; (ii) create fiscal space to support infrastructure and social investment; and (iii) build buffers against natural disasters. Building capacity for targeted social transfers or proxy-targeted measures with effective reach would mitigate the impact on the poor and help sustain public support over the adjustment period.13 Clear communication of the government commitment to specific measures and a fiscal responsibility framework (see below), would support market confidence and ease access to regional and official financing.

Text Table: St. Lucia: Estimated Medium-Term Adjustment Needs and Potential Measures

article image

18. Reaching the 2035 debt target requires consolidation measures of around 2½ percent of GDP. The measures could be phased in over the medium term to smooth the burden on domestic demand.14 The adjustment could be underpinned by continued restraint in public sector compensation to reduce the current wage bill to pre-pandemic levels relative to GDP. Measures to expand St. Lucia’s indirect tax revenue base could address equity concerns by streamlining specific concessions and exemptions that benefit relatively high-income households (see text table). To support longer-term adjustment needs, the government could reinstate value-based recurrent property taxation and review tax incentives to align it with development objectives, with an annual cap on revenue loss, rules-based (non-discretional) allocation, and transparently communicated and published.15

19. Shifting government spending composition towards infrastructure investment can support the recovery and ease the fiscal consolidation burden. Under staffs baseline projections, fiscal constraints are assumed to limit the government’s capital expenditure envelope to around 2½ percent of GDP. This falls short of St. Lucia’s sizeable resilience investment needs (section C) and would slow growth. A more efficient allocation of government resources towards capital investment with higher fiscal multipliers would ease the medium-term adjustment need by boosting growth.16

20. Elevated financing needs underscore the importance of strengthening debt management and developing contingency plans. Despite the absence of acute rollover pressures in recent months, St. Lucia’s refinancing vulnerabilities are projected to remain high over the medium-term due to high reliance on short-maturity bullet-payment debt. Debt management should also internalize the inherent uncertainty over future CIP bond financing that was a successful funding source over the pandemic.17 Moreover, in recent times, the regional market has been reluctant to significantly increase its already large exposure to St. Lucia, raising challenges to clearing the high domestic arrears and expensive overdrafts. To ameliorate refinancing risk, the government should continue pushing for longer maturity issuances, roll out annual borrowing plans and publish a comprehensive medium-term fiscal framework including a debt management strategy. Major capital projects should rely as much as possible on longer-term concessional financing. The undrawn SDR holdings (1¾ percent of GDP) remain a key contingency reserve.

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Projected Medium-Term Gross Financing Needs 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

1/ Projection assumes gradual reduction of outstanding payables and overdrafts over the medium-term.Sources: Country authorities and IMF staff calculations.

21. Commitment to a rules-based fiscal responsibility framework (FRF) would support the credibility of the consolidation path and ease access to financing. An FRF can help instill confidence in the government’s ability to sustain sizeable primary surpluses while protecting space for investment, including on climate adaptation and mitigation. An effective framework would include a comprehensive definition of fiscal activities, including State-Owned Enterprises and contingent liabilities, and internalize the cost of natural disasters. Institutional arrangements to support the framework’s transparency, flexibility, and enforceability include a medium-term fiscal framework, robust accounting procedures and independent oversight. The FRF’s credibility and sustainability, would benefit from clearly defined operational targets anchored on a debt target, escape clauses for large shocks, a correction mechanism of deviations, and legal or reputational penalties in case of no compliance.

22. Fiscal risks can also be mitigated by accelerating progress to strengthen public financial management, debt management, pension system sustainability, and CIP processes. The parliament passed a Public Finance Management Act in late-2020, but the associated regulations remain pending.18 Supporting regulations also need to be approved to implement the modernized Public Procurement and Asset Disposal Act enacted in mid-2021. Improving SOE financial reporting will help manage contingent liability risks. A strong debt management strategy could improve credibility, increase investor confidence, and lower the effective cost of debt by including (i) an assessment of the feasibility of debt issuance; (ii) a medium-term financing plan by debt category and instrument; and (iii) formal approval and periodic reporting; (iv) complemented by a forward-looking cash management strategy to minimize reliance on costly bank overdrafts. The debt management bill under preparation would be a positive step and the publication of a debt management strategy would enhance fiscal transparency. Early implementation of parametric pension reform can mitigate long-term fiscal contingencies by alleviating demographic pressures on the system’s finances. Further strengthening the CIP program’s investor due diligence and transparency processes can help protect its sustainabilty as a source of future revenue.

Authorities’ Views

23. The authorities are committed to fiscal discipline and debt reduction, but the consecutive global shocks required addressing immediate priorities. The authorities agreed with the need for fiscal consolidation and are interested in fiscal rules. However, the pandemic challenges and global inflation have put pressure on the budget with the need to cushion the impact on the population. They intend to increase concessional financing to lengthen maturities and lower the cost of debt. They expect that the debt management bill should be a positive development towards increasing transparency and providing a positive signal to the market.

24. The new government has a strong social protection agenda with spending implications. This includes the development of a social safety net, universal healthcare, and programs to tackle high unemployment, especially among the youth. While cognizant of the fiscal constraints, the authorities emphasized that consolidation would not come at the cost of their social policy priorities. They shared the concern about natural disasters and emphasized that resiliency also includes protection against recurrent small-scale shocks with significant fiscal cost. They welcomed the quantification of disaster insurance needs and noted the high opportunity cost.

B. Financial Sector: Supporting Growth and Financial Inclusion

25. Unlocking the growth potential of the private sector also requires strengthening financial intermediation. Fiscal consolidation would set a strong base to ease credit conditions to the private sector, but in itself would likely remain insufficient to fully unlock St. Lucia’s growth potential.

26. Reforms are needed to facilitate access to credit and support financial inclusion. Faced with long-standing structural impediments to domestic credit, banks continued to increase overseas security exposures. A potential further increase in NPLs from fragile borrower balance sheets and commodity cost headwinds, combined with the tighter provision requirements, may reinforce the banks’ tendency to increase investments abroad and curtail domestic credit expansion. Modernizing the insolvency legislation, establishing the credit bureau, and introducing a movable collateral framework would help boost domestic credit intermediation. The authorities should also proceed with legislative reforms to modernize prolonged foreclosure processes to facilitate asset recovery.

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Shift in Bank Asset Composition

(In EC$ millions)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Sources: ECCB and IMF staff calculations.

27. Continued strengthtening of the non-bank financial sector remains important. While the insurance sector has seen limited impact from the pandemic, it is exposed to regional sovereigns with stretched balance sheets. In particular, life insurers’ assets have grown rapidly during the pandemic, propelled by government securities. Improving consolidated oversight and reporting of cross-border conglomerates remains critical to minimize possible blindspots. Resuming the rollout of risk-based supervision frameworks, delayed during the pandemic, can improve targeting of non-bank oversight. The oversight priorities should increasingly include risks from climate change.19 The credit union segment has grown notably during the pandemic to 29 percent of GDP. Credit unions have experienced some asset quality deterioration from the pandemic, but a proper assessment is complicated by the classification of loans exiting the moratoria.20 In this regard, the FSRA’s plan to carry out an asset quality review within a year is timely. The FSRA’s recent initiative to strengthen provisioning would help address legacy shortcomings.21 Loan quality warrants continued close monitoring, including because of rapid credit growth in recent years and the sector’s significance to financial inclusion. Continued efforts to strengthen regulations toward industry best practices would help prepare the non-bank sectors for the announced regional standards setting body22

28. Ensuring effective implementation of the international AML/CFT standards will help protect corresponding banking relationships. The Caribbean Financial Action Task Force’s (CFATF) mutual evaluation in January 2021 revealed legal and effectiveness issues. Legal, institutional, and operational changes are needed to ensure effective application of the AML/CFT framework in the identified areas of supervisors’ responsibilities regarding compliance of financial and non-financial institution with the AML/CFT requirements, beneficial owners, and integrity of the CIP.

Authorities’ Views

29. The authorities agreed that the weak bank credit growth and limited access to credit are some of the key obstacles to growth. Relatedly, the authorities acknowledged that the momentum on the national financial legislative reforms needs to be maintained. They, however, noted long-standing obstacles affecting progress on the credit bureau and foreclosure legislation being affected by social concerns and implications. Regarding foreclosure legislation, they noted it is important to protect residential single-home ownership.

30. The authorities are closely monitoring developments in the growing credit union segment. The FSRA supported credit unions’ efforts to provide financial relief to its members via moratoria but noted that some of the loans exiting the moratoria have been restructured and classified as newly issued performing loans. Given the significant expansion of credit unions’ assets and loans, the FSRA plans to carry out an asset quality review of the three largest institutions in the coming months, with the help of an independent auditor.23 The FSRA has proposed enhancements to regulations concerning provisioning and NPL to clarify the definitions of loan loss exposure and collateral. The authorities noted that the insurance industry has remained stable during the pandemic in terms of profitability, liquidity, asset quality, and solvency. Main financial stability risks from insurers stem from their sovereign debt exposure and increased receivables.

31. St. Lucia is making progress in addressing the deficiencies identified in the CFATF report. Several legal amendments have been made by the 2021 Money Laundering (Prevention) (Amendment) Act, including in relation to preventive measures. The authorities recognize the importance of the specified AML/CFT areas and have been taking specific actions, including on the clarification of AML/CFT supervisory roles, dedicated on-site reviews, and the definition of beneficial ownership.24 A National AML/CFT Policy was adopted at the end of 2021 to streamline the necessary reforms. Regarding the CIP, the authorities assured that the applicable AML/CFT safeguards are effectively applied but agreed that checks for tax evasion are currently not carried out.

Addresing Long-Term Structural Challenges

Key policy areas to support growth and reduce output volatility include (i) investment in physical and financial resilience to natural disasters; (ii) address labor market skill mismatches; (Hi) invest in renewable energy to reduce energy cost; and (iv) increase economic diversification and backward linkages to tourism.

A. Climate Change: Investing in Resilience to Natural Disasters

32. The government’s plans to build resilience to natural disasters are promising but require long-term financing planning and supporting institutions. St. Lucia is implementing a comprehensive 10-year National Adaptation Plan (NAP) with projected completion by 2028. It is accompanied by Sectoral Adaptation Strategy and Action Plans. The implementation would benefit from an integrated strategy that includes all costs and returns of resilient investments in a comprehensive macroeconomic framework. Effective execution of the plan would benefit from supporting institutional fiscal reforms, including the integration of climate adaptation objectives and impact in the government budget practices, public financial management, and public procurement.

33. Investment in resilient infrastructure is costly, but the return outweighs the cost, supports growth, and strengthens the fiscal sustainability outlook. Staff analysis25 calibrated to the St. Lucia economy indicates that public investment in resilience of about 0.6 percent of GDP per year would yield benefits of about 1.5 percent of GDP per year (text table). First, investment in resilience lowers reconstruction spending after each event (stock loss), thereby limiting the decline in output (flow loss) and accelerating the recovery. The simulations indicate average annual GDP flow saving of about 0.3 percent of GDP, and a recovery to the pre-disaster output level twice as fast, in five years. Second, resilient investment increases the long-term level of output because lower expected losses stimulate additional private investment, increasing employment, wages. The simulations yield a long-term increase in the GDP level of 5.5 percent.

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Response to a Natural Disaster with Resilience

(Output levels in real terms, saving in percent of baseline)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

1/ Flow saving in the calculated as the difference between the output response to a natural disaster under Resilient investment and the Basline, as a percent of the Baseline. The Resilient response has been normalize for account for different steady state levels.Source: Staff calculations based on data from authorities, CCRIFand EM-DAT
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Long -Term Return of Public Investment in Resilience to Natural Disasters

(Percent increase relative to no resilience)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Sources: Fund draff calculations based on data from authrities, CCRIF and EM-DAT.

Text Table: St. Lucia: Average Annual Fiscal Return of Investment in Resilience

(In percent of steady state GDP)

article image
Sources: Model-based estimates by staff, based on authorities’ data. It assumes the government increases investment in resilient infrastructure sufficient to reduce damages by climate-related natural disasters to 20 percent compared with no resilience investment, while maintaining historical investment rates.

34. Given the long time needed to build structural resilience, a strong insurance strategy is necessary during a transition, while resiliency is built. At current public investment rates, it would take more than a decade to achieve a substantial level of physical resilience. This leaves the economy vulnerable to natural disasters during a transition. To address this, the government should increase insurance coverage with a layered framework to secure immediate financing after natural disasters. A suitable framework could include three insurance layers for different levels of disaster intensity and associated loss. Staff simulations indicate that a framework with potential funding of near 13 percent of GDP would cover disaster costs in 99 percent of the events.26 A first layer, of about 8 percent of GDP, would cover recurrent but less damaging disasters and could take the form of a saving fund for self-insurance, at a relatively low cost. A second layer could include the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which the government is already accessing but with a re-calibration of the triggers to more severe disasters with higher disbursement per event. The government could also consider a third layer using state-contingent debt instruments for extreme events.27 Such insurance framework would strengthen debt sustainability by ensuring the internalization of natural disaster cost in the budget, accelerating economic recovery after each event, and reducing the dispersion of public debt outcomes—there is less need for debt issuance after a natural disaster.

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Natural Disaster Layered Insurance Framework

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Source: Staff calculations based on authorities and CCRIF data.

B. Addressing Structural Growth Constraints

35. Structural reforms to increase productivity and competitiveness would help unlock St. Lucia’s growth potential.

  • Labor market skill mismatches. Increasing enrollment in technical and vocational education and training (TVET) could help in addressing skill mismatches, particularly in the tourism sector, and improve labor productivity.

  • Renewable energy. Expediting the transition to renewable energy, including with expansion of geothermal generation, should help reduce the high electricity cost and the vulnerability to oil price shocks.

  • Economic diversification. St. Lucia ranks among the least diversified countries in the region. Sectors with potential for export diversification includes business ICT, agro-processing, and creative industries.

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Domestic Electricity Tariffs: 2021

(In US¢/kWh)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Source Cable Co UK.

Authorities’ Views

36. The authorities welcomed the analysis on resilience and confirmed their determination to maintain climate resiliency and environmental considerations in their public investments. In terms of clean energy generation and cost reduction, they noted that the Government is making progress on a geothermal project with World Bank support—the feasibility study has been completed and several sites are being explored. The broad objectives have been set in the 2017 National Energy Transition Strategy, including to achieve energy independence, environmental integrity in line with the Paris Agreement commitments, and cost containment and reliability critical for competitiveness. They also noted that an update of the legislation under preparation will allow independent power producers. The government has also provided a guarantee for a large solar farm including battery storage capacity. Once these projects to replace diesel generation are completed, St. Lucia’s electricity will become mostly renewable and energy-independent.

37. The authorities noted that economic diversification in a small island state is challenging, but it could increase employment and value added if appropriately targeted. Their development agenda with a strong emphasis on human development includes programs to stimulate entrepreneurship and private employment with training for business development, including in vocational activities. They also highlighted their intention to increase diversification into sectors with potential for export and linked to tourism, agro-processing, and health and wellness industries. Expansion of business process outsourcing (including call centers) will remain a growing sector and will provide additional employment opportunities. The authorities also indicated their intention to increase the focus on the financial services sector to explore its potential for expansion.

Staff Appraisal

38. The rise in commodity prices due to the war in Ukraine has compounded the severe impact of the Covid-19 pandemic. The collapse of international tourist arrivals led to an unprecedented output decline in 2020. The budget deficit widened sharply due to a collapse in tax revenue and COVID-19-related spending, and public debt shot up. The financial sector remained stable and liquid, but nonperforming loans inched up, though contained by a loan service moratorium granted by the banks and credit unions. Buoyed by pent-up tourism demand in source countries, tourist arrivals picked up in 2021, which led to a rebound of economic activity, while the surge in commodity prices and supply-side bottlenecks increased inflation. In 2022, the war in Ukraine is adding balance of payments and inflationary pressures due to the dependence on oil and food imports.

39. Output is projected to recover to the pre-pandemic level by 2024 backed by the recovery of tourism, but thereafter growth is expected to be modest. High public debt and large refinancing needs, reflecting large issuance of short-term instruments in recent years, pose significant challenges. On current policies, public debt is projected to remain high, resulting in insufficient fiscal space for social development and infrastructure investment. The difficult fiscal outlook, together with tighter global financial conditions, would lead to higher interest rates on government debt, slowing bank credit to the productive sectors and modest medium-term potential growth.

40. Risks to the outlook are skewed to the downside. The main risks include persistently high global food and energy prices and a resurgence of the pandemic. Large rollover needs on government treasury bills and bonds imply vulnerability to liquidity pressures. Natural disaster risk could intensify with climate change, adding fiscal pressure. Further tightening of global financial conditions could increase interest rates and government borrowing costs further and erode external competitiveness due to the regional currency union’s exchange rate peg to a stronger US dollar. Government revenues from the Citizenship by Investment Program (CIP) could be hampered due to the recent increased scrutiny by the European Union. The large and growing credit union sector includes institutions with thin capital buffers and high non-performing loans (NPLs) which could amplify the impact of shocks. Failure to advance AML/CFT regulation enhancements in line with the January 2021 mutual evaluation could compromise corresponding banking relations and disrupt international trade.

41. In the near-term, the government should pursue fiscal policies to protect vulnerable households from the rise in inflation. Given the incomplete economic recovery and limited fiscal space, government spending should prioritize targeted social support and health spending while the pandemic remains a threat to public health threat. Lifting of the road fuel price cap should be maintained to preserve revenue from excise taxes on fuel, complemented by targeted or proxy-targeted transfers and subsidies to protect vulnerable households.

42. In the medium term, a comprehensive package of fiscal reforms is needed to contain risk and unlock St. Lucia’s growth potential. It is critical to prepare a fiscal consolidation strategy that credibly sets public debt on a downward trajectory, supports growth, and protects the poor. Implementation should start once the recovery is entrenched and be phased overtime to ease its impact on domestic demand. The consolidation should amount to at least 2½ percent of GDP, so as to reach the regional debt target of 60 percent of GDP by 2035. The government plans to strengthen the social safety net, including universal health care and unemployment insurance, are important initiatives and should be designed to be self-financing with actuarially sustainable contributions and charges.

43. To maximize the favorable impact of the consolidation, complementary institutional fiscal reforms are critically important. More concessional financing and approval of the new debt management bill would help ease funding risks, increase average bond maturity, and reduce interest cost. Achievement of these objectives would also be facilitated by the adoption of a medium-term fiscal responsibility framework including a fiscal rule to strengthen the credibility of the fiscal consolidation plan. Other fiscal reforms to strengthen the fiscal sustainability outlook include ensuring pension sustainability by adopting parametric reforms in line with the upcoming actuarial review and further strengthening the CIP due diligence and transparency processes.

44. Measures to increase bank credit at lower interest rates would support private investment and growth. This would be facilitated by modernizing the insolvency and foreclosure legislation, passing the legislation to establish the regional credit bureau, and introducing a movable collateral framework. The credit union segment is large and has expanded briskly during the pandemic, so NPLs, restructured loans, and moratorium loans warrant close monitoring. The Financial Services Regulatory Authority’s plan to carry out an asset quality review of credit unions within a year is timely. Continued strengthening of the credit unions also remains essential, guided by the adoption of stronger prudential regulations in line with international standards and consistent with the regional harmonization effort. Maintaining progress on AML/CFT recommendations will help protect correspondent banking relationships.

45. Structural policies could increase growth potential and reduce output volatility. Ensuring public investment is resilient to natural disasters lowers reconstruction spending after each event, limits the output decline, accelerates the recovery, and increases the level of output and tax revenue in the long term. An integrated plan that includes all the costs and benefits of resilient investments in a comprehensive macroeconomic framework would support a sustainable implementation. Given the long time needed to build structural resilience, a strong disaster insurance strategy is necessary while resiliency is built. Lowering of unemployment could be achieved with the expansion of technical and vocational education and training (TVET) programs to reduce labor skill mismatches, enhance opportunities for self-employment, and improve labor productivity. Investment in renewable energy with expansion of solar and exploration of geothermal generation will increase energy security and reduce cost, while supporting the transition to renewables. Increasing diversification into sectors with potential for export and link to tourism, including business process outsourcing (BPO), agro-processing, and health and wellness industries, would add value added and boost productivity growth.

46. It is proposed that the next Article IV Consultation with St. Lucia take place on the standard 12-month cycle.

Figure 1.
Figure 1.

St. Lucia: Recent Economic Developments

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Figure 2.
Figure 2.

St. Lucia: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Figure 3.
Figure 3.

St. Lucia: External Sector Developments

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Figure 4.
Figure 4.

St. Lucia: Banking System Developments

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Table 1.

St. Lucia: Selected Social and Economic Indicators, 2018–27

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Sources: St. Lucia authorities; ECCB; UNDP HDI; and Fund staff estimates and projections.

Fiscal year (April-March) basis. Fiscal balances do not include the airport project, which is implemented by a public corporation.

Public sector debt includes payables and overdrafts/ECCB advances.

Comprises public sector external debt, foreign liabilities of commercial banks and other private debt.

GDP historical series was rebased to 2018 base year in 2020. This increased nominal GDP figures by about 9 percentage points.

Table 2a.

St. Lucia: Central Government Operations, 2018–27 1/

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

Fiscal year (April-March) basis.

Includes revenue from the Airport Development Tax, which is fully transferred to St. Lucia Air and Sea Ports Authority (SLASPA).

There are classification changes in other revenue from FY2019. 2018 data show sales, fees, and fines in the category fines, penalties & forfeits, voluntary transfers in the table. From FY2Q19 onwards: sales and other nontax revenue include sale of goods & services, social security contributions, and miscellaneous revenue. CIP income in the table shows voluntary transfers, which include CIP-related receipts (transfers of CIP revenue to the central government from the Saint Lucia National Economic Fund and from the operating surplus of the CIP Unit.

Includes transfer to SLASPA corresponding to the Airport Development Tax.

Natural disaster costs are annualized estimated costs of 0.7 percent of GDP (for details see 201S Article IV report).

The improvement in the primary balance is predominantly driven by the reduction in capital spending as a result of financing constraints.

Includes payables and overdrafts/ECCE advances.

Government guaranteed.

Table 2b.

St. Lucia: Central Government Operations, 2018–27 1/

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

Fiscal year (April-March) basis. Figures shown for a given calendar year relate to the fiscal year beginning on April 1 of that year.

Includes revenue from the Airport Development Tax, which is fully transferred to St. Lucia Air and Sea Ports Authority (SLASPA).

There are classification changes in other revenue from FY2019. 2018 data show sales, feesr and fines in the category fines, penalties a forfeits, voluntary transfers in the table. From FY2019 onwards: sales and other nontax revenue include sale of goods & services, social security contributions, and miscellaneous revenue. CIP income in the table shows voluntary transfers, which include CIP-related receipts (transfers of CIP revenue to the central government from the Saint Lucia National Economic Fund and from the operating surplus of the CIP Unit).

Includes transfer to SLASPA corresponding to the Airport Development Tax.

Natural disaster costs are annualized estimated costs of 0.7 percent of GDP (for details see 201S Article IV report).

The improvement in the primary balance is predominantly driven by the reduction in capital spending as a result of financing constraints.

Includes payables and overdrafts/ECCB advances.

Government guaranteed.

Table 3.

St. Lucia: Balance of Payments Summary, 2018–27

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Sources: Ministry of Finance and Planning; ECCB; World Bank, and Fund staff estimates and projections.

Includes largely gross foreign liabilities of commercial banks and other private debt.

Table 4.

St. Lucia: Monetary Survey, 2018–22

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Sources: St. Lucia authorities; ECCB; and Fund staff estimates and projections.

End-of-period rates.

Table 5.

St. Lucia: Banking System Summary Data, 2017–21

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Sources: ECCB and IMF staff calculations.

Interest Spread = Weighted average lending rates – weighted average deposit rates

Table 6.

St. Lucia: Selected Labor Market Indicators, 2014–20

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Sources-: St, Lucia Population and Housing Census and National Insurance Corporation,

Annex I. Risk Assessment Matrix

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Annex II. External Sector Assessment

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Based on the preliminary estimates by the ECCBfor 2020 and IMF staff projections thereafter.

The ESA model includes a Covid-19 cyclical adjuster to account for the temporary impact of the pandemic on a country’s external position. Two adjusters are available: one for tourism, another one for oil trade balance. In the case of St. Lucia, only the Covid-19 adjuster for tourism was used, yielding an adjustment of 6.0 percent of GDP.

The CA/REER elasticity of -0.20 incorporates an elasticity of tourist expenditure with respect to REER of -0.1 for the Caribbean countries (see IMF Working Papers WP/14/229) and an elasticity of -0.4 for non-travel exports.

The EBA-lite model does not provide a country-fixed effect for St. Lucia. Compared to last assessment, a smaller country-fixed effect is used (based on minimizing the model residuals for St. Lucia in 2018–2021) to reflect the fact that Covid-19 related adjustments and scarring effects are likely to pose downward pressure on the equilibrium REER, which is not captured by the model.

Annex III. Debt Sustainability Analysis1

Public debt is projected to be on a siightiy declining trajectory while maintaining high rollover rates on maturing domestic (regional) government debt. This outlook is based on a sustained tourism recovery, which has been very strong and above expectations in recent months so that activity reaches pre-pandemic levels, and adjustment of public investment in the face of financing constraints. The successful debt rollover in FY2021 and FY2022 is also expected to continue. On this basis, the overall public sector debt is projected to remain on a slightly declining trajectory, from 92.2 percent in FY2021 to 86.5 percent of GDP in FY2027. Gross financing needs will remain elevated at 24.0 percent of GDP in FY2022. These elevated debt indicators are important sources of vulnerability and the stress tests point to substantial risks to debt sustainability from higher than projected interest rates, weaker than projected growth and fiscal deficit paths, and high vulnerability to natural disasters. This underscores the importance of ambitious medium-term consolidation measures to enhance debt sustainability. Reaching the regional debt target commitment of 60 percent of GDP by 2035 requires consolidation measures of at least 2V2 percent of GDP.

1. Debt dynamics and gross financing requirements. St. Lucia’s near-term financing pressures are significant. Gross public debt rose sharply to 96.9 percent of GDP in FY2020 from 60.2 percent in FY2019.2 The 36.7 percent surge in the debt ratio was driven by big increase of primary deficit and real interest rate, as well as sharp downturn of growth. The debt to GDP ratio declined slightly to 92.2 percent in FY2021, despite 12.9 percent rebound in nominal output after the 25.5 percent collapse a year earlier. Underpinned by primary fiscal balances stabilizing at 1.1 percent of GDP, and after incorporating 0.5 percent of GDP of annualized expected costs of natural disasters, the public debt ratio is projected to decline slowly from FY2022. This is driven by the disbursement of about 9.7 percent of GDP of semi-concessional/concessional loans for a new airport that are to be paid off from dedicated airport redevelopment tax revenue accumulated in an extrabudgetaryfund, mitigating longer-term debt service vulnerabilities (seethe 2019 Article IV report for details). The central government’s gross financing needs are expected to remain high at 24.0 and 18.5 percent of GDP over the next two years. The associated risks are accentuated by the monetary policy tightening of major central banks amid high inflation and threats of the de-anchoring of inflation expectations. Under staff’s baseline projections, the government is assumed to renew its maturing debt in full. The gross financing needs are projected to maintain well above pre-crisis level of around 15 percent and the debt to GDP ratio stabilize at around 85 percent in the medium to long run, well above the authorities’ commitment to a debt target of 60 percent by 2035.

2. Debt composition and vulnerabilities. About half of total central government debt in FY2021 is domestic, composed predominantly of medium- and long-term debt (80.2 percent) and significant overdrafts and payables (10.5 precent, about 6 percentage points higher than FY2019). The National Insurance Corporation, the local social security fund, is a major investor. Its government exposure is around 26 percent with a target range of 20 to 30percent. External debt of the central government in FY2021 is composed of bilateral or multilateral loans (58.0 percent, about 15 percentage points higher than FY2019), medium- and long-term commercial borrowings (30.4 percent), and Treasury bills (11.6 percent). While the weighted average maturity of overall medium-and long-term debt slightly exceeds 10 years, about 19 percent of such debt securities are treasury notes with relatively short maturities. Nearly all external debt securities are held by institutions within the ECCU. Commercial banks are the largest holder of Treasury bills, reflecting a prolonged period of excess liquidity in the regional banking system. The most prominent external bond and treasury note holders include the regional insurance companies and other non-bank financial institutions. The comparatively small borrowings of public corporations are largely domestic, but their external share will rise to dominance over the projection period with the implementation of the airport redevelopment project. Debt in foreign currencies is overwhelmingly denominated in U.S. dollars, which the Eastern Caribbean dollar remains pegged to since 1976.

Figure AIII. 1.
Figure AIII. 1.

St. Lucia: Central Government Debt Composition (FY2021)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Source: St. Lucia authorities.

3. Realism of baseline assumptions. After a sharp contraction of 24.4 percent in 2020 (22.1 percent in FY2020 covering April 2020 to end-March 2021), staff projects a gradual recovery to 2019 GDP level by 2024. GDP deflator decelerated to -4.3 percent in FY2020 but is projected to peak in FY2022 and stabilize at 2.5 percent in the medium term. Historical forecasts errors for growth, inflation, and the primary balance have been large, particularly when pandemic devastated the tourism-dependent economy unprecedentedly in 2020.

4. Stress tests. If international interest rates increase significantly, domestic interest rates could follow suit. In a scenario where interest rate increases permanently by the difference between average real interest rate level over projection and maximum historical level (860 bpts), the debt to GDP path takes an increasing trajectory. This risk, however, is mitigated by the ample liquidity buffers in the financial sector and strong competition in credit markets under limited lending opportunities and insufficient bankable projects, all of which contain the increase in interest rates. The same factors helped rollover debt in FY2020 and FY2021.

As a tourism-dependent economy St. Lucia is very exposed to external economic conditions, and a slowdown in advanced economies and further appreciation of the US dollar under tightening global financial conditions, to which the Eastern Caribbean dollar is pegged, could slow the recovery of tourist arrivals. Illustrating this risk, the real GDP growth shock scenario, which reduces growth by one standard deviation (8.5 percent) over FY2023 and 2024, steers public debt towards 116.6 percent of GDP over the medium-term.

A slower improvement of primary balance (2.0 percent of GDP cumulative) spread over FY2023 to 2027 also induces an adverse debt trajectory, underscoring implementation risks around the assumed fiscal adjustment path.

A natural disaster scenario, modeled to mimic damages sustained by Hurricane Tomas in 2010 (simulating a fall of real GDP growth of 5, 3, and 2 percent relative to baseline for FY2023, 2024, and 2025, and a deterioration of the primary balance of the same amount), would imply a higher debt path stabilizing at about 100 percent of GDP. The risk would be mitigated if the authorities invest in resilient infrastructure and boost layered insurance coverage.

5. Adjustment scenario. Ambitious medium-term consolidation measures are needed to set debt on a downward trajectory that is more resilient to shocks. To complement the stress tests, an adjustment scenario is presented with a primary balance improvement of ½, 1, 1½, 2 2½ percent of GDP respectively for FY2023-FY2027. With this consolidation, the debt to GDP ratio reaches 78.9 percent of GDP by 2027, 7.6 percentage points below the baseline. If maintained this 2½ percent of GDP consolidation in outer years, this consolidation is sufficient to reach the regional debt target of 60 percent debt to GDP by 2035.

6. External debt. External debt of the public sector rose from 29.8 percent of GDP in FY2019 to 50.0 percent of GDP in FY2021. The ratio increases further over the projection period and eventually plateaus at about 53 percent in the medium run. Beyond the crisis financing needs, this in part reflects the external semi-concessional/concessional loans for the airport redevelopment. Reflecting the importance of tourism revenues for the economy, bound tests suggest that the external debt profile is vulnerable to shocks (one-half standard deviation) in the growth and non-interest current account. The impact from one-half standard deviation of nominal interest rate shock is small. This is because the nominal effective interest on external debt is fairly stable.

Figure AIII. 2.
Figure AIII. 2.

St. Lucia: Public Debt Sustainability Analysis Risk Assessment

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Source: IMF staff.1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.4/ EMBIG, an average over the last 3 months, 09-Mar-22 through 07-Jun-22.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.
Figure AIII. 3.
Figure AIII. 3.
Figure AIII. 3.

St. Lucia: Public Debt Sustainability Analysis – Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Figure AIII. 4.
Figure AIII. 4.

St. Lucia: Public Sector Debt Sustainability Analysis- Baseline Scenario

(In percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Source: IMF staff.1/ The DSA is based on fiscal year data (April to end-March). Public sector is defined the central government and includes public corporations.2/ Based on available data.3/ EMBIG.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Includes extra-budgetary costs of the airport redevelopment project executed by a public corporation.6/ The improvement in the primary balance is predominantly driven by the reduction in capital spending as a result of financing constraints.7/ Derived as [(r -π(1 +g) – g + ae(1 +r)]/(1 +g+π+g-n)) times previous period debt ratio, with r – interest rate;n – growth rate of GDP deflator; g – real GDP growth rate; a – share of foreign-currency denominated debt; and e – nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).8/ The real interest rate contribution is derived from the numerator in footnote 5 as r -π (1 +g) and the real growth contribution as -g.9/The exchange rate contribution is derived from the numerator in footnote 5 as ae(1 +r).10/ Includes changes in the stock of guarantees, asset changes, and interest revenues (if any). For projections, includes exchange rate changes during the projection period.11/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
Figure AIII. 5.
Figure AIII. 5.

St. Lucia: Public Debt Sustainability Analysis – Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Source: IMF staff.
Figure AIII. 6.
Figure AIII. 6.

St. Lucia: Public Debt Sustainability Analysis- Stress Tests

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Source: IMF staff.
Table AIII. 1.

St. Lucia: External Debt Sustainability Framework

article image

Derived as [r – g – r(1 +g) + ea(1 + r)]/(1+g+r+gr) times previous period debt stock, with r – nominal effective interest rate on external debt; r – change in domestic GDP deflator in US dollar terms, g – real GDP growth rate, e – nominal appreciation (increase in dollar value of domestic currency), and a – share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1 +g) + ea(1 +r)]/(1 +g + r+gr) times previous period debt stock, r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Average and standard deviation computed with available BPM6 data since 2014.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure AIII. 7.
Figure AIII. 7.

St. Lucia: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2022, 348; 10.5089/9798400225772.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to nominal interest rate, growth rate, and current account4/ One-time real depreciation of 30 percent occurs in 2023.
1

Increase in public debt ratio was in part contained by upward GDP revisions in 2017 and 2019 as well as its rebasing conducted in early-2020.

2

St. Lucia undertook a Climate Change Policy Assessment (CCPA) pilot in 2018 (Country Report No. 18/181). The 2019 Article IV staff report took stock on its implementation (IMF Country Report No. 20/54).

3

The new administration holds 13 of the 17 seats in the House of Assembly.

4

The update safeguards assessment finalized in August 2021 found strong external audit and financial reporting practices that continue to be aligned with international standards, and further improvements in the capacity of the internal audit function. Legal reforms were recommended to further strengthen operational autonomy of the ECCB and align its Agreement Act with leading practices. The issuance of DCash introduces new risks that require additional controls and oversight,and the assessment made recommendations to enhance the related project-governance framework.

5

St. Lucia long had the highest cumulative Covid-19 case load amongst the ECCU members and its vaccination rate is among the lowest in the Western Hemisphere.

6

The largest two source countries, US and UK, account for about 45 percent and 19 percent of total stay-over arrivals respectively in 2019.

7

The authorities set retail prices for road fuels, kerosene and LPG every three weeks. The government cushions increases to road fuel retail prices by lowering the excise tax rate from the pre-pandemic standard EC$4 per imperial gallon. Retail prices caps have been adjusted up recently to avoid the excise taxes falling negative. The government also subsidizes LPG. For electricity, which is mainly generated using diesel, additional cost is fully passed to consumers with a fuel surcharge.

8

Bank moratoria program was introduced by the ECCB in March 2020 and extended twice through March 2022. The FSRA introduced a similar program for credit unions.

9

Communicated by ECCB in September 2021 and in effect from January 2022. It requires an initial coverage ratio of 60 percent of all NPLs, increasing further to 100 percent by 2024.

10

The FSRA intervened over the pandemic in two small CUs that were already under enhanced supervision (see 2019 Article IV report), and one was acquired into receivership and required a capital restructuring plan.

11

The projection also assumes the gradual normalization of suppliers’ domestic arrears, constraining medium-term fiscal space further.

12

Temporary direct support could be considered for businesses (like bus companies) directly affected by higher costs.

13

These include subsidies to goods and services that are disproportionally consumed by the poor,transfers to households employed in sectors with majority of poor workers, and in-kind supports and assistance programs to increase productivity in low-income sectors such as agriculture.

14

The consolidation need internalizes a natural disaster cost of % percent of GDP annually.

15

In St. Lucia, a large share of tax exemptions are granted to the tourism sector and to the importation of cars. For the ECCU region in the period 2010–18, staff has estimated the foregone tax revenue from tourism incentives to have averaged 5.8 percent of GDP or 21 percent of total revenue. See IMF Country Report No. 20/70.

16

Existing studies show that small open island economies have very low fiscal multipliers to recurrent government expenditure, of 0–0.2 but larger and persistent multiplier to investment of 0.4–0.6.

17

Alongside options of real estate investment, enterprise project and non-refundable contributions to St. Lucia’s National Economic Fund, which maybe used by the government for debt service and qualified investments, CIP investors may purchase anon-interest-bearing five-year bond. For FY2021 the program is projected to add fresh financing of around 1 percent of GDP.

18

These include to support more rapid,appropriately channeled emergency response after natural disasters.

19

The FSRA is in process of finalizing reinsurance guidelines for the local retail insurers and, in recognition of climate change risks, is encouraging additional reinstatement clauses to help restore affordable reinsurance coverage after more than one storm event, as well as reviews of maximum loss exposures.

20

Some non-performing loans as of 2020 were classified as restructured in 2021. Moreover, some loans that ought to be classified as restructured were classified as newly issued performing loans in 2021. As a result, the NPL ratio dropped from 13 percent in 2020 to 10 percent in 2021, and the data on restructured loans since the pandemicis incomplete.

21

See discussion in 2019 Article IV staff report. Under the FSRA’s proposal, the provisioning coverage ratio of NPL net of collateral value would be 35 percent (for NPLs overdue less than a year).

22

See discussion in the ECCU 2022 Regional Consultations.

23

By end of 2021, nine out of sixteen credit unions had implemented IFRS 9.

24

The AML/CFT supervisory roles of the ECCB and Financial Intelligence Authority (FIA) have been clarified. The supervision of the registered agents and trustees remains within the competence of the FSRA, which following the adoption of the 2022 FSRA (Amendment Act) can more closely cooperate with the FIA beyond the interactions already possible within the National AML Oversight Committee (NAMLOC). Dedicated AML/CFT on-site reviews are currently being scheduled. Legal changes have been made to clarify the definition of beneficial ownership and the ML/TF risks posed by legal entities are being analyzed, as facilitated by the World Bank’s risk assessment tool.

25

The results are based on a model specifically designed to address adaptation investment and climate change in Small Developing States. See Fernandez-Corugedo, Gonzalez-Gomes,and Guerson(2022).

26

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.

27

The World Bank CAT-DDO is another option that could be used to complement or strengthen layers 2 and 3. It is a parametric instrument that provides financial relief triggered by natural disasters, including weather-related. Use of SCDIs should consider fiscal constraints given their relatively high cost.

1

The debt sustainability analysis for St. Lucia is based on the framework for market access countries. Gross public debt is defined as central government debt and public corporations. External debt is defined as external debt of the public sector. The fiscal year runs from April to March.

2

An early-2020 rebasing of historical GDP data to better reflect the current structure of the St. Lucian economy, conducted with technical assistance from the Caribbean regional Technical Assistance Centre (CARTAC). Relative to the 2019 Article IV report,the revision implied a reduction of 4 percentage points in the estimated end-2019 public-debt-to-GDP ratio.

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Cover IMF Staff Country Reports
St. Lucia: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for St. Lucia
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2022: Issue 348
Publisher:
International Monetary Fund
ISBN:
9798400225772
ISSN:
1934-7685
Pages:
67
DOI:
https://doi.org/10.5089/9798400225772.002
  • View in gallery

    Long-Term Growth and Convergence

    (In percent unless otherwise stated)

  • View in gallery

    Stay-Over Tourist Arrivals

    (Growth rate, in percent, y-o-y )

  • View in gallery

    New COVID-19 Cases

    (Per million; 7-day moving average)

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    Vaccine Hesitancy

    (Delivered and administered vaccines, percent of pop.)

  • View in gallery

    Pandemic Response Costs

    (In percent of GDP)

  • View in gallery

    Bank Loans under Moratoria

    (In percent of total loans)

  • View in gallery

    Real GDP Projections

    (Index: 2019= 100)

  • View in gallery
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    Gasoline Price and Excise Tax Rate

    (EC$ per imperial gallon, estimated from end-FY20)

  • View in gallery

    Projected Primary Balance and Public Debt

    (Baseline and active scenario, in percent of GDP) 1/

  • View in gallery

    Projected Medium-Term Gross Financing Needs 1/

    (In percent of GDP)

  • View in gallery

    Shift in Bank Asset Composition

    (In EC$ millions)

  • View in gallery

    Response to a Natural Disaster with Resilience

    (Output levels in real terms, saving in percent of baseline)

  • View in gallery

    Long -Term Return of Public Investment in Resilience to Natural Disasters

    (Percent increase relative to no resilience)

  • View in gallery

    Natural Disaster Layered Insurance Framework

    (In percent of GDP)

  • View in gallery

    Domestic Electricity Tariffs: 2021

    (In US¢/kWh)

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

    St. Lucia: Recent Economic Developments

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

    St. Lucia: Fiscal Sector Developments

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

    St. Lucia: External Sector Developments

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

    St. Lucia: Banking System Developments

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

    St. Lucia: Central Government Debt Composition (FY2021)

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

    St. Lucia: Public Debt Sustainability Analysis Risk Assessment

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

    St. Lucia: Public Debt Sustainability Analysis – Realism of Baseline Assumptions

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

    St. Lucia: Public Sector Debt Sustainability Analysis- Baseline Scenario

    (In percent of GDP unless otherwise indicated)

  • <sup>Figure AIII. 5.</sup>
    View in gallery
    Figure AIII. 5.

    St. Lucia: Public Debt Sustainability Analysis – Composition of Public Debt and Alternative Scenarios

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

    St. Lucia: Public Debt Sustainability Analysis- Stress Tests

  • <sup>Figure AIII. 7.</sup>
    View in gallery
    Figure AIII. 7.

    St. Lucia: External Debt Sustainability: Bound Tests 1/2/

    (External debt in percent of GDP)

Long-Term Growth and Convergence

(In percent unless otherwise stated)

Stay-Over Tourist Arrivals

(Growth rate, in percent, y-o-y )

New COVID-19 Cases

(Per million; 7-day moving average)

Vaccine Hesitancy

(Delivered and administered vaccines, percent of pop.)

Pandemic Response Costs

(In percent of GDP)

Bank Loans under Moratoria

(In percent of total loans)

Real GDP Projections

(Index: 2019= 100)

Gasoline Price and Excise Tax Rate

(EC$ per imperial gallon, estimated from end-FY20)

Projected Primary Balance and Public Debt

(Baseline and active scenario, in percent of GDP) 1/

Projected Medium-Term Gross Financing Needs 1/

(In percent of GDP)

Shift in Bank Asset Composition

(In EC$ millions)

Response to a Natural Disaster with Resilience

(Output levels in real terms, saving in percent of baseline)

Long -Term Return of Public Investment in Resilience to Natural Disasters

(Percent increase relative to no resilience)

Natural Disaster Layered Insurance Framework

(In percent of GDP)

Domestic Electricity Tariffs: 2021

(In US¢/kWh)
Figure 1.

St. Lucia: Recent Economic Developments
Figure 2.

St. Lucia: Fiscal Sector Developments
Figure 3.

St. Lucia: External Sector Developments
Figure 4.

St. Lucia: Banking System Developments
Figure AIII. 1.

St. Lucia: Central Government Debt Composition (FY2021)
Figure AIII. 2.

St. Lucia: Public Debt Sustainability Analysis Risk Assessment
Figure AIII. 3.

St. Lucia: Public Debt Sustainability Analysis – Realism of Baseline Assumptions
Figure AIII. 3.

St. Lucia: Public Debt Sustainability Analysis – Realism of Baseline Assumptions
Figure AIII. 4.

St. Lucia: Public Sector Debt Sustainability Analysis- Baseline Scenario

(In percent of GDP unless otherwise indicated)
Figure AIII. 5.

St. Lucia: Public Debt Sustainability Analysis – Composition of Public Debt and Alternative Scenarios
Figure AIII. 6.

St. Lucia: Public Debt Sustainability Analysis- Stress Tests
Figure AIII. 7.

St. Lucia: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)