WASHINGTON, USA – An International Monetary Fund (IMF) team, led by Varapat Chensavasdijai, visited St. John’s during September 20-October 3, 2022, to hold the 2022 Article IV consultation. At the conclusion of the mission, Chensavasdijai issued the following statement.
Recent developments, outlook, and risks
Antigua and Barbuda’s economy is recovering, but output remains well below pre-pandemic levels. Labor market disruptions, loss of tourism capital stock, and school closures during the pandemic may contribute to long-term scarring effects. Following a decline of 20 percent in 2020, real GDP is estimated to have expanded by 5.3 percent in 2021 buoyed by tourism and construction activity. The external position in 2021 is assessed to be weaker than the level implied by fundamentals and desirable policies, with the current account deficit estimated at 15 percent of GDP and financed by foreign direct investment. Tourism has been robust despite some real exchange rate appreciation. The financial sector remains stable so far even as regulatory forbearance has expired, but credit growth is weak.
Higher commodity prices and tighter global financing conditions are weighing on economic activity. The country’s first international bond issuance was delayed in the context of elevated gross financing needs (19 percent of GDP at end-2021). Inflation accelerated to 8½ percent in July following the surge in global food and energy prices. The government responded by allowing fuel price pass-through but introducing targeted subsidies to the transport and fishing sectors to keep public transportation fares and seafood prices stable.
Implementation of the Medium-Term Fiscal Strategy (MTFS) and growth recovery have helped improve the fiscal position, but outturns underperformed the original targets. The primary deficit narrowed by 2 percent of GDP in 2021 as pandemic-related spending was wound down and better tax administration and higher external capital grants bolstered revenues. The outturn, however, fell short of the MTFS target by 1 percent of GDP. Despite arrears resolution during 2021, arrears to domestic and external creditors stood at 19 percent of GDP. Public debt peaked at 102 percent of GDP and is projected to decline to 91 percent of GDP in 2022. Revenue shortfalls in 2022 are likely to imply a primary deficit of about ½ percent of GDP, or 1 percent of GDP below target. Tax exemptions have increased significantly from late 2021. Fuel consumption taxes have fallen by about 1½ percent of GDP since 2021 to absorb the impact of rising global energy prices.
Risks to the outlook are largely on the downside. Output is expected to return gradually to its pre-pandemic level by 2025 supported by strong tourism recovery and foreign direct investment in the hospitality sector, and public sector projects. Real GDP is projected to grow at 6 and 5½ percent in 2022 and 2023, respectively. However, commodity price shocks can dampen domestic demand and entrench inflation. A growth slowdown in main tourism source markets and/or renewed COVID-19 outbreaks and travel restrictions could stall the tourism recovery and deepen scarring effects. A further appreciation of the US dollar would weaken competitiveness through the currency peg.
Tighter financial conditions may put additional strain on public finances and lead to further domestic arrears accumulation. On the domestic front, a decline in citizenship-by-investment program (CIP) revenues due to increased scrutiny of such programs by the EU and US would hamper fiscal consolidation efforts. More frequent and intensive natural disasters due to climate change pose an ever-present risk. On the upside, a faster-than-expected recovery in tourism activity could boost growth.
The government should continue to prioritize spending on social safety nets to protect the vulnerable against rising living costs. The authorities should expedite efforts to centralize and digitize information and payment systems for social transfer programs, to improve their coverage and targeting. Coordination amongst government agencies implementing social transfer programs should be enhanced, in line with the objectives of the Social Protection Act. A comprehensive social safety net program, including cash transfers to lower-income households, could then be used to replace the temporary gas voucher program, which needs to be monitored to avoid abuses.
To return to the fiscal path envisaged in the MTFS will require steadfast implementation of the strategy and additional measures of at least 1¼ percent of GDP over the next three years. Tax exemptions should be limited to those specified in the legislation with clear eligibility criteria and sunset clauses, and effective monitoring and evaluation. To improve accountability and transparency, tax expenditures should be published with the budget. The ABST rate for tourism activities could be harmonized to the standard 15 percent and the ABST extended to online purchases. Excise duties could be introduced on alcohol and tobacco products. Stricter controls on the property tax are required to ensure timely payment of obligations, while property valuations for tax purposes should be updated effective 2023.
The authorities will also need to contain increases in public sector real wages and rely on worker attrition and redeployment to ensure the wage bill is brought below 9 percent of GDP by 2025. A public sector employment census and skills database will help inform a longer-term strategy to tackle the wage bill. The government’s decision to allow pass-through of international fuel prices to domestic consumers is welcome and should be continued to ensure demand responds to the global shift in relative prices. Going forward, the authorities should consider adopting an automatic fuel pricing mechanism with full pass-through in conjunction with social protection for vulnerable households.
Securing long-term financing and avoiding accumulation of new arrears are critical in an environment of tight financial conditions. Continued fiscal consolidation and growth recovery are expected to bring debt to under 70 percent of GDP by 2030 as set out in the MTFS. However, gross financing needs will remain above 10 percent of GDP until 2025 even as the deficit falls, if high reliance on short-term borrowing continues. Public debt remains unsustainable due to the large outstanding stock of arrears and high gross financing needs, which if not covered, will likely lead to the accumulation of new arrears. To address these vulnerabilities will require progress in reducing the underlying fiscal imbalance and securing financing with long maturities.
The authorities are making efforts to issue long-term securities on the domestic and external markets and are planning a green bond issuance in collaboration with multilateral and commercial partners. Securing this financing could potentially extend debt maturity and lower rollover risk and debt service burden. Further progress in clearing the stock of domestic and external arrears, including reconciliation and prioritization of arrears for clearance and close engagement with creditors, will help increase credibility of the government’s commitment to fiscal discipline and will boost economic activity.
Further strengthening of the fiscal framework will help institutionalize fiscal discipline and build buffers against natural disasters. To build political consensus, it would be useful to have the MTFS and underlying Fiscal Resilience Guidelines formally endorsed by parliament. There is also a need to increase the operational capacity of the Macro-Fiscal Unit and get the Fiscal Resilience Oversight Committee up and running before end-year.
The government should move ahead to approve regulations to operationalize the Climate Resilience and Development Fund (CRDF), enact the amended Finance Administration Act, develop a public financial management action plan based on the results of the Public Expenditure and Financial Accountability self-assessment, introduce a system to measure the financial performance of SOEs, and finalize amendments to the Procurement Administration Act and ensuing regulations. On revenue administration, operationalization of post-clearance audit and risk management at customs is a welcome step. The authorities should put in place the single window system at customs and extend forensic audits to other low-compliance sectors as planned. Implementation of e-filing and e-payment of taxes in the coming year will enhance revenue mobilization and improve the business environment.
Parametric reforms to the pension system are essential to ensure its long-term sustainability. Despite ongoing reforms that began in 2017, the financial position of the public pension system weakened in large part due to the loss in expected contributions as wage income and employment remain permanently lower than pre-pandemic forecasts. Further parametric reforms and revisions to the investment framework and strategy are thus warranted. As a transitory step, retirement age could be increased by half a year to 64.5 years in 2024 and reach 65 years in 2025 as currently envisaged. After 2025, gradual increases in contribution rates (0.5 percent per year up to 17 and 18 percent for public and private sector employees, respectively) and automatic adjustment in the retirement age in line with the increase in life expectancy at retirement would improve the pension system’s sustainability.
Financial sector policies
The Financial Services Regulatory Commission (FSRC) should continue to exercise vigilance to safeguard financial stability. It will be important to intensify the monitoring of credit unions’ asset quality and ensure loan loss provisioning is consistent with fragilities in borrowers’ financial position and broader economic prospects. The FSRC should also collaborate with the ECCB to formulate a national crisis management plan to contain potential system-wide risk covering both banks and non-banks. In addition, the supervision, reporting, and regulatory frameworks should be adapted to incorporate climate risks, leveraging regional initiatives led by the ECCB and including through stress tests for non-banks.
Reforms are needed to improve access to credit. The regional credit bureau is expected to accelerate the lending process and enhance credit quality. Modernization of the insolvency law to facilitate out-of-court settlement and clarify creditor rights can help incentivize lending. The recently launched regional partial credit guarantee scheme for micro-, small- and medium-sized enterprises can be utilized to alleviate collateral constraints of borrowers.
Effective implementation of the AML/CFT framework would help mitigate risks to the CIP, thereby protecting existing correspondent banking relationships. Significant progress has been made in adopting and strengthening a risk-based supervisory AML/CFT framework applicable to all financial institutions and designated non-financial businesses and professions (including CIP agents). The due diligence process for screening CIP applicants that is currently in place has several layers to minimize the risks and additional measures are being taken to strengthen the CIP legislative framework. Active communication with counterparts in the EU and U.S. and other CIPs in the region should be maintained to keep all partners abreast of the progress of these reforms and to share best practices.
Policies to revive the labor market would support the economic recovery. Formal work arrangements declined and education outcomes worsened due to school closures during the pandemic. To help mitigate these effects, policies should prioritize increased training, vocational education, and skills certification to address human capital deterioration, assisting with job search to facilitate reintegration of workers into the labor force, and reversing the decline in self-employment by providing comprehensive support to small businesses.
Investment in climate resilience continues to be a priority. Resilience building is necessary as part of the current infrastructure is not resilient to natural disasters, which will become more intense and frequent due to climate change. Ongoing efforts to leverage donor resources and other international financing are crucial given the large investment needs and limited fiscal space. The National Adaptation Plan is expected to be completed by June 2023, which will help coordinate and focus donor efforts on key priorities and incorporate climate resilience considerations into the development strategy and budget process. Timely capitalization of the CRDF will be key to building fiscal buffers against natural disasters.
Accelerating the shift to renewables would help insulate the country from swings in global energy prices. Antigua and Barbuda’s electricity tariffs are among the highest in the Caribbean region. Diversifying the energy matrix in line with the National Energy Policy and allowing private sector participation in the renewable energy market can bring significant energy cost reduction. A phased approach to the transition to renewables should be taken, with careful considerations given to the financing instruments and the implications of stranded assets of carbon-intensive sectors.
Progress is being made to improve data quality, but further efforts are needed to update and disseminate critical information for policy and business decision-making. With support from the IMF Statistics Department and CARTAC and other donors, progress is being made on a new Producer Price Index, collection of the rental index for the Consumer Price Index, and improvements to the national accounts and external sector statistics. Key remaining areas that require attention include conducting a poverty assessment, publishing timely reports on central government and SOE operations, and compiling detailed labor market statistics.