The International Monetary Fund (IMF) says it welcomes the strong economic performance of St. Kitts and Nevis since the twin island Federation completion a three-year Stand-By Arrangement in 2014.
“Although the outlook remains favourable, it is vulnerable to a possible reduction of the large inflows of recent years under the Citizenship-By-Investment (CBI) Programme,” the IMf said, noting that is it urging the authorities to continue their “prudent policies and structural reforms to safeguard fiscal and debt sustainability and deliver broad-based growth”.
The Washington-based financial institution said that continued rapid inflows under the CBI have led to a surge in construction activity, and supported a large increase in government and Sugar Industry Diversification Fund (SIDF) investments and spending, including on the People Employment Programme (PEP).
It said that these factors, together with the ongoing recovery in tourist arrivals fueled rapid gross domestic product (GDP) growth of about six per cent in 2013 and 2014.
“The banking system has remained stable, notwithstanding the restructuring of government debt held by the banks. However, the growth of private sector credit, while turning positive, has remained very weak, despite the high bank liquidity.”
The IMF said inflation has remained very low, at 0.6 per cent at end-2014, reflecting weak international commodity prices.
“The current account deficit remained at about 7.5 per cent of GDP, below historical levels, on the back of high CBI budgetary inflows, while external reserves remain high at about nine months of imports.”
The Washington-based institution said that the fiscal balance has remained high and that tax revenues grew more rapidly than GDP, offsetting higher expenditures, including the 13 month wage bonus and reforms to the CBI programme.
“CBI budgetary revenues surpassed their 2013 performance, reaching 14 per cent of GDP. The overall fiscal surplus in 2014 was 9.5 per cent, compared to 12 per cent in 2013, primarily on account of substantial decline in SIDF support to the budget.
“Debt has declined faster than planned, reflecting higher GDP growth and advance debt repayments, to reach 79 per cent of GDP at end-2014 compared to 100.8 per cent at end-2013.”
The IMF said that the near-term outlook remains strong, but there are risks on the horizon.
It said that the imposition of visa requirements by Canada, combined with new competition on the CBI front, from neighbouring countries and globally, raising uncertainty regarding future CBI inflows.
“Further, while the high fiscal surplus allows the government to accommodate the expected decline in tax revenues from the substantial widening in VAT and custom exemptions granted in December 2014 and April 2015, these measures may undermine fiscal and debt sustainability over the medium term.
“Without corrective measures, the new exemptions could lead to a reversal of the downward trajectory of the debt-to-GDP ratio, particularly in case of a natural disaster or an exogenous shock. Finally, a substantial part of the rapid reduction in the debt-to-GDP ratio is the result of the debt-land swap. A reversal of this operation would erode much of the gains in debt sustainability and increase fiscal spending on debt service,” the IMF said.
It noted that over the medium term, growth is expected to converge to the regional average of about 2.5 per cent, consistent with the staff’s cautious assumptions regarding CBI inflows, as large CBI construction projects reach completion, and tourism resumes as the main driver of growth.