The IMF in its 2024 Article IV concluding statement said St. Vincent and the Grenadines has achieved a robust recovery from recent compounded shocks, supported by the authorities’ decisive policy responses, large-scale investment projects, and robust growth in tourism.
The outlook is favorable but subject to downside risks mainly stemming from the uncertain external environment. In addition, the economy is facing challenges from a rapidly ageing population and the ever-present threat of natural disasters and climate change, amid the still high public debt.
Policies need to be calibrated to continue to build buffers and resilience and support sustainable and inclusive growth while safeguarding debt sustainability and financial sector stability.
Current Progress, Prospects, and Vulnerabilities
In 2022-23, the economy saw a robust recovery, reaching the same output levels as before the pandemic.The growth rate for 2022 was 3.1 percent and is projected to increase to 5.8 percent in 2023. This was facilitated by substantial public and private funding and a strong resurgence in tourism, although somewhat counterbalanced by a decline in agriculture resulting from the consequences of volcanic eruptions and the record-breaking high temperature seen in 2023. The number of overnight visitors reached levels similar to those before the epidemic in 2023, thanks to a substantial increase in available flights. Formal employment exceeded pre-pandemic levels in 2022 and is projected to have further increased in 2023, driven by the revival of tourism and increased demand in other service sectors. However, a series of recent combined shocks have had a long-lasting detrimental effect on the employment of young males. Regarding governmental finances, despite a major reduction in non-interest current spending, the budget deficit is projected to have increased in 2022-23 mostly due to the timing of port-related spending and temporary variables. The public debt has decreased from its highest point in 2021 and now stands at approximately 87 percent of the GDP in 2023. However, it still remains significantly higher than the levels observed before the epidemic. In 2022-23, the external position experienced improvement due to the recovery in commodities exports and tourism receipts.
The forecast is positive, yet there are potential dangers that could lead to negative outcomes.The estimated growth rate for 2024 is 4.9 percent, indicating that economic activity is expected to exceed the level projected for the medium term prior to the pandemic. The near-term expansion will be bolstered by the ongoing recuperation in tourism and robust investment in infrastructure, with a special emphasis on the port project. It is expected that inflation will decrease to approximately 2 percent by the end of 2024, due to a reduction in imported inflation. The main risks to the prognosis arise from a sudden worldwide economic slowdown, unpredictable fluctuations in commodity prices, possible delays in investment projects, and the constant danger posed by natural disasters and climate change. Positive factors such as better-than-anticipated progress in tourism development and the recovery of the agriculture sector could contribute to economic growth and strengthen the country’s external position.
Enhance the sustainability of debt and promote inclusive economic growth by implementing a more effective framework for taxation and government spending.
The budgetary position reflected in the 2024 budget achieves a suitable equilibrium between upholding fiscal responsibility and promoting inclusive and resilient economic expansion.The government is actively justifying its current spending and establishing the Contingencies Fund. It is also giving priority to capital spending on the reconstruction, necessary improvement, and strengthening of economic infrastructure, as well as investments in health and education. These measures aim to drive growth that is centred around people and sustainable.
The team appreciates the ongoing dedication of the authorities to achieve the regional debt objective and adhere to the medium-term fiscal policy outlined in the 2021 Rapid Credit Facility.This entails enhancing tax administration, maintaining control over wage growth (as demonstrated by the cautious increase in public sector wages during the 2023-2025 negotiation), reducing non-essential current expenditures, and prioritising capital projects to achieve a balanced approach that promotes both a robust recovery and ensures debt sustainability. Therefore, it is anticipated that the primary balance will increase to a surplus of around 3¼ percent of GDP starting in 2026, when the extensive projects are close to being finished. By 2025, the debt-to-GDP ratio would start to decrease and, if this trend continues, it would reach 60 percent by the regional target date of 2035.
Given the heightened global uncertainty and the country’s susceptibility to shocks, it is imperative to engage in contingency planning and bolster budgetary buffers.The team appreciates the authorities’ decision to implement a Disaster Risk Financing Strategy and their current work to create a new Catastrophe Deferred Drawdown Option worth US$20 million with the World Bank. Additionally, they commend the authorities for their contingency budget planning for disaster responses and resilience activities. Furthermore, achieving a primary surplus of approximately 3¾ percent of GDP in the medium term (which is about ½ percentage point higher than the current medium-term target) would provide a buffer for public debt, mitigating risks and increasing the likelihood of meeting the regional debt target and ensuring debt sustainability.
Continued endeavours to establish a more effective and fair system for taxation and spending will enable the allocation of resources to resist unexpected events and promote sustainable and all-encompassing economic growth.Ongoing efforts are being made to enhance the effectiveness and fairness of public expenditure and services, and these efforts should continue. This includes updating the social assistance system, digitising government infrastructure, platforms, and services, implementing gender-responsive budgeting, and following the recommendations of the IMF’s Public Investment Management Assessment with a Climate Module (C-PIMA). To increase revenue, we can improve the efficiency and progressivity of the tax system by using the detailed plan for tax reforms provided by recent IMF technical assistance. The suggested reform roadmap aims to increase the progressivity and fairness of personal income tax, enhance the design of tax incentives and corporate income tax, simplify value-added tax (VAT), and update recurrent property tax.
Efficiency, sustainability, and justice of the National Insurance Services and Public Sector Pension System (PSPS) can be enhanced by coordinated reforms.The team appreciates the newly implemented pension reform package, which aims to strengthen the financial stability of the National Insurance Services (NIS) in response to the increasing elderly population and the relatively modest payments in comparison to the substantial benefits. Possible steps to ensure the long-term viability and improve the effectiveness and equity of NIS could be explored. These strategies may include tying the retirement age to life expectancy and implementing a consistent accrual rate throughout time to encourage individuals to have longer careers. An urgent need exists to reform the non-contributory PSPS in order to link it more effectively with the NIS, thereby enhancing justice and reducing fiscal expenses.
Continued enhancement of fiscal institutions is crucial to support fiscal endeavours and bolster fiscal trustworthiness. The government is intensifying its efforts to improve revenue administration, which includes implementing VAT for private home holiday rentals, updating the Customs Act, and digitising the tax information management system. The team appreciates the release of the initial report of the Fiscal Responsibility Mechanism (FRM), in accordance with the Fiscal Responsibility Framework (FRF) that was implemented in 2020. Given the current challenging global financial conditions and high levels of debt, it is crucial to enhance the FRF (Fiscal Risk Framework) and demonstrate a credible fiscal plan for the medium term. This can be achieved by adjusting and fully implementing the FRF, promptly publishing and integrating forward-looking budgetary advice into the FRM (Fiscal Risk Monitor) report, enhancing the budget process and medium-term fiscal planning, and improving oversight of state-owned enterprises (SOEs) and the cash management system.
Develop strategies to enhance the ability to withstand and adapt to climate change impacts, while also implementing changes to the fundamental systems and processes in order to stimulate investment, create jobs, and improve productivity.
Consistent endeavours to resolve obstacles in the production and distribution processes would facilitate the realisation of a greater capacity for economic expansion.Continued investment in essential public infrastructure, such as the port, roads, airports, water supply, and agriculture production, combined with the implementation of sector-specific strategies outlined in the National Development Plan, is crucial for addressing existing limitations, enhancing competitiveness, and fully capitalising on the country’s comparative advantages in tourism and agriculture. Enhancing connections with agriculture and fisheries will contribute to the growth of the domestic value-added of tourism. Furthermore, due to its relatively abundant internet accessibility and affordable rates, the nation is strategically positioned to capitalise on the ongoing digital revolution in governance, commerce, and financial infrastructure and services. This transition is anticipated to improve productivity and the overall corporate atmosphere. Continuing endeavours to simplify the Investment Act and create centralised systems for land registration and trading are crucial for enhancing the investment environment.
An efficient labour market, characterised by skills aligned with market demands and increased participation, is crucial for enhancing productivity and employment, particularly considering the rising ageing of the population.The team appreciates the creation of the Prime Ministerial Advisory Council on Youth and the recent introduction of a comprehensive education reform. This reform specifically targets curriculum changes and the expansion of post-secondary, technical, and vocational education and training. These efforts will contribute to reducing skill mismatches and facilitating the integration of young people into the labour market. The recent enhancement of parental leave policies would promote greater involvement and adherence to established norms, while also diminishing disparities based on gender. Strategic investments in social programmes could effectively unlock the complete capabilities of the female workforce. This could be achieved by improving the availability and quality of inexpensive child and senior care services, as well as by lowering instances of teenage pregnancy. The team appreciates the proposed implementation of a permanent unemployment insurance, but it must be meticulously crafted and supported by ongoing robust initiatives in active labour market policies to guarantee the program’s long-term viability and attain the intended labour market results.
Ensuring the ability to withstand and recover from natural disasters and climate change continues to be of utmost importance. The authorities have intensified their efforts to enhance the structural and financial ability to withstand and recover from adverse events. This includes integrating resilience features into new infrastructure, implementing a strategy for financing catastrophe risks, accessing funds from the Green Climate Fund, and improving the disaster management plan and legislation. Continued endeavours are being made to shift towards renewable energy, which involve the implementation of fresh solar initiatives and the establishment of a revenue-neutral import tax system aimed at encouraging the use of cleaner motor vehicles. Continuing efforts to modernise the Electricity Act and revise the National Energy Policy would provide a favourable climate to facilitate the transition.
Ensure the stability of the financial sector.
The financial system is stable, nevertheless, it is important to persist in reducing any weaknesses in the balance sheet.There is a sufficient amount of capital and liquidity buffers. The level of non-performing loans (NPLs) has decreased since reaching its highest point in 2022 and is currently lower than the average in the region. The expiration of the pandemic moratorium has not had a substantial impact on NPLs. The profitability of banks has completely returned to the levels seen before the pandemic. However, the amount set aside for potential losses, known as provisioning levels, although higher than the average in the region, are still below the new regional standard. It is necessary to strengthen these levels and speed up the process of getting rid of non-performing loans that have been held for a long time. Although credit union loans are still relatively small compared to those of banks, it is important to remain vigilant in overseeing the quality of assets and underwriting standards in the credit union sector. This is particularly necessary due to the sector’s less strict regulations and the absence of resolution frameworks and financial safety nets.
In order to continue making progress, it is important for the authorities to maintain their efforts in enhancing regulatory and supervisory frameworks and enhancing their ability to respond to crises.The priorities are as follows: (i) finalising the transition to risk-based supervision, which includes integrating climate risks, (ii) implementing changes to the FSA Act, (iii) creating a National Crisis Committee to develop a crisis management framework for the non-bank financial sector and deposit insurance schemes in collaboration with the Ministry of Finance and the Eastern Caribbean Central Bank (ECCB), and (iv) assisting in the establishment of a regional standards setting body for non-bank financial institutions in the Eastern Caribbean Currency Union (ECCU).
It is crucial to continuously enhance the efficiency of the AML/CFT system to reduce the likelihood of losing correspondent banking relationships.The authorities have revised and enhanced the legal framework for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT). They have also begun adopting risk-based monitoring for sectors that pose higher risks. Continued efforts should be made to execute other recommendations from the 2024 Caribbean Financial Action Task Force (CFATF) Mutual Evaluation.
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