Abstract
Our St. Kitts and Nevis (SKN) authorities thank staff and management for the constructive engagement during the Article IV consultations. Our authorities value the cordial relationship with the Fund, welcome the staff report, and broadly agree with the policy recommendations. The SKN economy continues to register solid growth, however maintaining this momentum will require continued strong resolve to tackle existing and emerging vulnerabilities. To this end, our authorities will remain focused on pursuing sound policies geared toward solidifying the macroeconomic framework, safeguarding financial sector stability, enhancing the business environment, and strengthening resilience to natural disasters and climate change.
Our St. Kitts and Nevis (SKN) authorities thank staff and management for the constructive engagement during the Article IV consultations. Our authorities value the cordial relationship with the Fund, welcome the staff report, and broadly agree with the policy recommendations. The SKN economy continues to register solid growth, however maintaining this momentum will require continued strong resolve to tackle existing and emerging vulnerabilities. To this end, our authorities will remain focused on pursuing sound policies geared toward solidifying the macroeconomic framework, safeguarding financial sector stability, enhancing the business environment, and strengthening resilience to natural disasters and climate change.
Recent Economic Developments and Outlook
Stimulating Growth
The SKN economy is rebounding following the recent slowdown. Growth slowed to 2.1 percent in 2017 from 2.9 percent the previous year. Contributing to the deceleration were Hurricanes Irma and Maria, which adversely affected several sectors, including construction, tourism, and international trade. Aided by disbursement from the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and the use of fiscal buffers built up largely from the Citizenship By Investment (CBI) program, our authorities responded quickly and decisively to address the damage caused by the hurricanes. As a result, economic expansion is expected to strengthen to 2.7 percent in 2018 and to average 3 percent over the medium term.
While the outlook for growth is positive, our authorities are mindful of downside risks. SKN, like the rest of the Caribbean, remains susceptible to shocks from natural disasters and climate change, inflows from CBI are expected to moderate, and public safety remains a concern for the authorities.
Our authorities will continue to undertake measures on several fronts to mitigate these risks. They increased coverage under the CCRIF this year and will continue to work toward strengthening the resilience of the country’s infrastructure. Maintaining the integrity of the CBI program and accelerating land sales also remain priorities for our authorities. To complement these undertakings, they are advancing structural reforms to improve the business environment, promote economic diversification and boost potential growth. These reforms include stepping up plans to improve access to credit and business registration, and forging closer linkages between tourism and agriculture. To ensure that the education system is in sync with emerging labor market demands, our authorities will examine human capital deficiencies and undertake the requisite enhancements. They will also sustain ongoing efforts to improve the security and justice apparatus through increased provision of financial and technical resources.
Sustaining Fiscal Prudence
Fiscal policy continues to support debt containment and macroeconomic stability. The overall balance remained in surplus. The CBI program continues to be an important element of the fiscal landscape, and in this vein, our authorities have rebranded it and strengthened the due diligence process. These enhancements to the program offerings and operations have led to a considerable turnaround in business activity. CBI inflows for the first half of this year have already surpassed 2017 levels and are also ahead of staff’s estimate for 2018. Based on current trends, and even with an expected moderation in inflows going forward, our authorities consider staff’s medium-term fiscal forecasts to be overly pessimistic.
Durable measures will be adopted to reinforce fiscal discipline. While our authorities remain confident in the integrity of the CBI program, they will continue to use these inflows to build fiscal buffers, reduce reliance on them, and work toward strengthening the medium-term fiscal framework. In this regard, they will expedite efforts to streamline tax incentives, informed by recent Fund TA. Containment of the wage bill is also a top priority for SKN and our authorities look forward to Fund TA in this area. They acknowledge that a comprehensive strategy is required in respect of the Sugar Industry Diversification Foundation (SIDF) to minimize the associated fiscal risks. To this end, they consider it prudent to undertake a proper analysis to explore and weigh the options for the future treatment of the SIDF. Our authorities have initiated the legal process regarding the future of the SIDF, however incorporating its activities into the 2019 budget as recommended by staff is not practical. They are nevertheless willing to discuss possible options going forward and welcome technical advice from the Fund to inform their decisions.
Looking ahead, our authorities intend to establish a Growth and Resilience Fund (GRF), informed by Fund TA launched earlier this year. They will undertake a thorough analysis to determine what portion of government’s deposits could be transferred to the GRF, taking into account the desire to pay down debt and upscale public investments. Our authorities are also giving consideration to the Fund’s TA report received in July to guide their decision on an appropriate fiscal responsibility framework.
Preserving Financial Sector Soundness
A stable financial sector is integral to sustaining the economy’s growth momentum and deepen inclusion. Key macroprudential ratios such as capital and liquidity requirements remain above regulatory minimum, and indigenous banks have preserved CBRs, albeit at increased costs. Our authorities however are concerned about the higher levels of NPLs and related impacts on profitability within the banking system. To ameliorate these unfavorable trends, they developed an NPL resolution strategy, which is being implemented with ongoing monitoring by the ECCB.
Our authorities will move steadfastly to develop a sound action plan to expedite the sale of lands and thereby attenuate financial sector risks. While progress with land sales has been slower than anticipated, implementation of the action plan is expected to stimulate a pick-up in transactions. To demonstrate their commitment in this regard, our authorities will engage a credible realtor to aggressively market plots of land for sale.
Other efforts to bolster financial sector stability will continue. Following the implementation of strengthened regulations on valuation in July, work is far advanced toward adoption of more stringent provisioning requirements by October. SKN maintains a robust AML/CFT regime, nevertheless they will continue to work determinedly to ensure that the framework remains compliant with international standards. Furthermore, the SKN government is collaborating with the ECCB as part of an ongoing regional initiative to establish a modern credit reporting system and develop modern foreclosure legislation.