Monday, October 14, 2024
spot_img
spot_img
HomeNewsCaribbean NewsIMF executive board concludes 2023 Article IV consultation with St Lucia

IMF executive board concludes 2023 Article IV consultation with St Lucia

WASHINGTON / ST LUCIA – On August 25, 2023, the executive board of the International Monetary Fund (IMF) concluded the 2023 Article IV consultation with Saint Lucia and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.

Saint Lucia’s tourist-dependent economy has rebounded strongly after the COVID-19 pandemic and the commodity import price shock due to Russia’s war in Ukraine. Output is currently near the pre-pandemic level, while higher government revenue has narrowed the fiscal deficit. Similarly, with the recovery of tourism, the current account deficit declined from the pandemic peak of 16 percent of GDP in 2020 to an estimated 2 percent of GDP in 2022.

Though declining, public debt remains much higher than before the pandemic. The banking sector has adequate liquidity and is profitable, but NPLs are elevated.

The GDP growth projection in 2023, at 3.2 percent, is lower than 2022 as tourism demand continues the recovery and the economy approaches the existing production capacity. Afterwards, it is projected to gradually decline towards a potential rate of 1.5 percent in the medium term. Annual inflation is projected to remain high in 2023 at 4.3 percent and then to decline to around 2 percent in the medium term. The current account deficit is expected at 0.8 percent of GDP in 2023 and is projected to close over the medium term driven by the continued recovery in tourism.

On current policies, public debt is projected to stabilize around 75 percent of GDP in the medium term, significantly above the regional ceiling of 60 percent of GDP by 2035. Bank credit to the private sector is projected to remain anemic in the absence of improved loan loss provisioning, fiscal adjustment, and additional legislative reform. Natural disasters are a recurrent threat. Risks to the outlook are tilted to the downside and includes global economic slowdown, commodity price volatility, and additional global financial tightening.

Executive board assessment

The Saint Lucia economy rebounded strongly in 2022 after the collapse in tourism during the pandemic and the war in Ukraine, leading to large improvements in the fiscal and external deficits. GDP grew by an estimated 15.7 percent in 2022. Inflation was high at 6.5 percent with strong impulse from international prices. With the recovery of tourism, the current account deficit narrowed from a peak of 15.2 percent of GDP in 2020 to 2.3 percent of GDP in 2022, while the estimated fiscal balance improved in FY2022 by 4.1 percentage point to a deficit of 1.4 percent of GDP due to strong tax revenue collection and CIP revenue.

However, the large fiscal deficits during the pandemic and the growth collapse in 2020 led to a significant increase in public debt which now stands at near 75 percent of GDP. The financial system has remained stable and liquid with a sustained increase in deposits, but the loan portfolio performance has worsened. The rapid credit growth in the credit unions raises credit risk concern, especially given relatively weaker credit standards in the sector, generally high NPLs, and low capital buffers in some institutions.

Growth is projected to slow in the medium term as the economy completes the recovery, but the fiscal outlook poses challenges. The government’s plan, encompassing investments in the transport, health, and social areas, is ambitious and consistent with the needs to address bottlenecks to growth. However, on current policies, public debt is projected to stabilize around 75 percent of GDP in the medium term, above the regional ceiling of 60 percent of GDP by 2035.

The short maturity profile of domestic (regional) debt keeps financing needs elevated, implying refinancing risk. The government plans to increase revenue are insufficient to reach the regional debt ceiling. Constraints to bank credit, including the need to increase provisioning and legal disincentives affecting the ability to seize collateral remain obstacles to domestic investment, employment, and growth.

The government’s plan could be strengthened with policies that focus on fiscal sustainability and resource allocation efficiency. With output approaching its pre-pandemic level, the government should target a fiscal consolidation of at least 2½ percent of GDP to reach the regional debt ceiling and rely on strengthening of tax compliance, streamlining of tax exemptions, adopting a fuel price pass-through framework, and the more efficient value-added tax. A further 1 percent of GDP of fiscal consolidation could be used to increase public investment resilient to natural disasters.

Public debt sustainability could be supported by a well-designed fiscal rule, self-financing of the initiatives to strengthen the social safety net, and more capacity to access climate finance. To address fiscal risks, CIP revenue could be saved in a fund for self-insurance against natural disasters, debt service, and public investment. The draft reforms put forward by the pension fund should be implemented to increase its longevity, and its investment portfolio should be more internationally diversified to boost its resilience to shocks.

The priority in the financial sector is to strengthen buffers to increase resilience to shocks while enhancing incentives for private lending. Banks should improve the classification of NPLs in the post-moratorium and restructured portfolios, raise provisions to the regulatory minimum, and strengthen risk management of foreign investments. The government should use its representation power at the ECCB to strengthen the enforcement of provisioning requirements and speed up the disposals of NPLs. The modernization of foreclosure legislation for commercial loans and residential property, and passing of the bankruptcy and insolvency law, would expand credit access and lower loan interest rates.

Ensuring effective implementation of the international AML/CFT standards would help protect correspondent banking relationships and mitigate risks related to cross-border financial flows. In the credit unions sector, the passing of the draft bill with stronger regulatory standards will improve compliance with provisioning and capital requirements.

High unemployment, particularly among the youth, requires targeted policies to address deep-rooted social problems and a review of the education programs. While improving conditions for private investment will increase labor demand, it may prove insufficient to achieve full employment. High unemployment affects different segments of the population facing distinct challenges to employment, especially female workers and youth. This suggests the need to review education programs to strengthen employability; increase enrollment in technical and vocational education and training to address skill mismatches; reduce of transport cost; and review the allocation of government scholarships to skills in high demand, in consultation with employers.

Labor participation of females and youth could be addressed by expanding the capacity of child and elderly care. The recently created Youth Economy Agency to support youth employment and business development and entrepreneurship with training and guidance could be complemented with social programs that tackle non-economic barriers to employment.

IMF Communications Department

spot_img
RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

spot_img
spot_img
spot_img

Caribbean News

2024 APEC SMEs to foster quality growth, embrace digitalization and foster innovation

PUCALLPA, Peru - Ministers responsible for small and medium enterprises from the 21 APEC member economies issued a joint statement reiterating their commitment to...

Global News

The Chief Economists of Government (CEoG) Network supporting the role of Africa’s chief economic advisors

By Trudi Makhaya Today’s political chief executive is expected to play a significant role in driving economic policy. Heads of state have always been expected...