Public Information Notice No. 02/11

IMF Concludes 2001 Article IV Consultation with St. Vincent and the Grenadines

February 19, 2002

On January 28, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with St. Vincent and the Grenadines.¹

Background

In recent years, the economy of St. Vincent and the Grenadines has diversified from bananas into services, mainly tourism, telephone and internet based marketing, and offshore financial services. However, the rate of economic growth, which had averaged 4 percent a year during 1997-99, declined sharply to 2 percent in 2000, reflecting mainly contraction in the construction sector as major public sector projects were completed. Growth is expected to have declined further in 2001 due to the impact of a severe drought on agriculture and a slowdown in tourism resulting partly from the September 11 terrorist attacks. Annual inflation remained below 2 percent in both 2000 and 2001. While recent labor data—including the results of the 2001 census—are not available, unemployment is thought to be around one fifth or higher.

Public sector savings gradually declined from above 8 percent of GDP a year in 1997-1998 to 5 percent in 2000. Central government current expenditures increased by 2½ percentage points of GDP from 1999 to 2001 partly due to an increased wage bill; revenues rose by 1½ percentage points of GDP over the same period. Public investment roughly halved to 7 percent of GDP in 2000 due to capacity constraints and the slow disbursements of external funds.

The growth of the offshore sector has slowed in recent months, and more licenses have been revoked in response to the further measures, including legislation, taken by the government to improve the regulatory and supervisory framework. As of end-2001, the offshore financial center comprised 10,075 international business corporations, 896 trusts, 38 banks, 35 registered agents, 5 mutual funds, and 1 insurance company.

The external current account deficit is estimated to have doubled to around 16½ percent of GDP in 2001 due largely to a decline in banana export volumes, higher imports and a slowdown in tourism receipts and remittances. The deficit was financed mainly by private capital flows. Public sector debt has increased from 49 percent of GDP in 1998 to 73 percent of GDP in 2001 following the takeover of private and other nongovernment guaranteed debt.

The new government which took office in April 2001 has begun implementing an ambitious framework of policy reforms designed to strengthen the public finances, achieve higher growth, lower unemployment and reduction in poverty. Adjustment measures were announced in October 2001—after civil society consultation—in response to the deteriorating economic situation, partly resulting from the September 11 attacks.

Executive Board Assessment

Directors noted that the new administration is facing a difficult economic challenge made worse by the impact on tourism of the September 11th terrorist attacks. They commended the ambitious framework of policy reforms undertaken by the government, and the additional measures announced in October 2001. The degree of civil society consultation prior to the adoption of these measures is particularly noteworthy.

Directors agreed that the medium-term challenge facing the authorities is to generate faster economic growth to reduce poverty and unemployment. They stressed that this will require continued diversification from bananas—which still rely on a protected market—into other marketable crops, and into services and small industries, particularly crafts and agro-processing. In this context, they welcomed recent steps to restructure the banana industry to promote agricultural diversification and small businesses, but noted that these should be reinforced by the abolition of remaining price controls and discretionary government decisions.

Directors agreed that an expanded public sector investment program, particularly on projects that target the productive sectors, should help promote private sector-led growth. However, they observed that funding the investment program without worsening the debt position will require a rebuilding of public sector savings over the medium term. In this context, they expressed concern about the recent signs of revenue weakness and urged the authorities to redouble their efforts to restrain current spending—particularly on wages, given recent increases in the wage bill—and to implement revenue enhancement measures. Given the relatively high tax burden, the medium-term focus should be on expenditure reduction through greater efficiency and higher labor productivity. On the revenue side, there is a need to broaden the tax base and remove exemptions, preferably within the harmonized OECS context, to help bring the informal sector into the tax net. The authorities' interest in introducing a VAT-type tax was welcomed.

Directors encouraged the authorities to include in the budget only expenditure that can be realistically implemented over the coming year, to enhance transparency and accountability. Directors commended the government's efforts to monitor and improve the efficiency of public enterprises. They suggested that the government establish clear financial goals for all enterprises, with full management accountability, and a schedule for possible privatization of selected enterprises.

Directors welcomed indications that the domestic banking system remains sound. They shared the view that the monetary easing this year would be appropriate in light of the economic slowdown. However, they cautioned that a lowering of interest rates should result from continued prudent use of the central bank's discount rate rather than a forced reduction in spreads, as the latter could adversely affect the banking system given the recent increase in nonperforming loans. Directors also welcomed the authorities' intention to strengthen the supervision of nonbanks.

Directors commended the steps taken by the authorities to strengthen the supervision of the offshore financial sector, including the enhancement of the role of the ECCB and the passage of legislation dealing with financial intelligence and money laundering. They urged the authorities to redouble their efforts to ensure that they comply fully with international standards. This will require firm implementation of the recent legislation on financial intelligence and money laundering, strengthening of legislation governing trusts and international business companies, providing additional resources and staff to the offshore financial authority, and improving effective coordination with the ECCB.

Directors welcomed St. Vincent and the Grenadines' adoption of the General Data Dissemination Standard, and their commitment to improve the quality of economic data. Noting that timely statistics and transparent budgets are essential to guide the authorities in the implementation of economic policy and for effective Fund surveillance, they recommended the authorities to draw on technical assistance from CARTAC to upgrade their statistics.

Directors welcomed the authorities' decision to publish the staff report for the 2001 Article IV consultation.