WASHINGTON, USA – An International Monetary Fund (IMF) staff mission, led by Swarnali Ahmed Hannan, concluded discussions as part of the 2025 Article IV consultation with the authorities of St. Lucia in Castries on November 3-14, 2025. At the end of the visit, the mission issued the following statement, summarising its key findings and recommendations.
- Lucia staged a robust recovery following the Covid-19 pandemic. The economy is projected to grow by 1.7 percent in 2025, following a strong expansion of 4.7 percent in 2024. While tourism is expected to moderate in 2025 due to temporary hotel closures and reduced airlift, this will be largely offset by strong construction activities, domestic demand, and credit expansion. The economy is then expected to rebound in 2026 from tourism pickup and, over the medium term, gradually decline to its potential rate of 1.5 percent as tourism stabilizes and planned infrastructure and tourism-related projects complete.
- Inflation was negative in 2024 from lower international food and energy prices, and it is projected to increase to 0.8 percent in 2025. Despite improved net exports, the current account deficit increased in 2024 from widening net income balances but is expected to decline over the medium term. Staff assesses the external position in 2024 as broadly in line with the level implied by fundamentals and desirable policies. Public finances are improving with primary balance surpluses recorded for three consecutive years.
- Long-standing challenges remain, nevertheless. Income per capita has diverged from that of the U.S. in the past decades and potential growth remains very weak, constrained by limited productivity, labor market distortions and high informality, and past weak credit growth. High public debt stock and large rollover needs represent important vulnerabilities. Located in the hurricane belt, St. Lucia is highly susceptible to natural disasters, underscoring the need for increased investments in resilience.
- The government has taken important actions to address some of these shortcomings. To support the poor, vulnerable, differently abled, and elderly population, the government increased pensions and minimum pensions, implemented a minimum wage, expanded the Universal Health Care program, established a Ministry for Persons with Disabilities, and announced a plan to establish an unemployment insurance program. Policies were aimed at strengthening the regulatory framework and financial preparedness for natural disasters and at advancing renewable energy prospects.
- Risks to the outlook remain tilted to the downside. Geopolitical tensions, escalating trade measures and prolonged policy uncertainty could dampen global economic activity, potentially weakening tourism and FDI flows to St. Lucia while increasing its import costs. On the domestic front, weaker-than-expected performance in the tourism and construction sectors may further constrain growth, and an increase in recognized non-performing loans (NPLs) could depress credit growth. A global slowdown triggered by escalating trade measures and prolonged uncertainty would weigh heavily on St. Lucia’s economy, given its dependence on tourism flows and reliance on imports. Weaker demand from key tourism markets would dampen growth directly and create negative spillovers across other sectors, further reducing fiscal revenues. Upside risks to growth include stronger-than-expected growth in tourism, construction, and public investment.
Rebuilding fiscal buffers and creating space for spending priorities
The medium-term fiscal outlook remains challenging amid high public debt stock and large rollover needs. The fiscal balance improved in FY2024/25 mainly from lower capital expenditure. The overall fiscal deficit excluding natural disaster costs is expected to narrow to 2.3 percent of GDP by FY2030/31, with rising interest and wage bills partly offset by a decline in capital expenditure due to limited access to financing. Public debt, which also pencils in natural disaster costs, is projected to stabilise at around 77 percent of GDP in the medium term. The gross financing needs will remain elevated implying continued high rollover risks.
The overarching fiscal policy priority is to reduce public debt and create room for capital spending through revenue-based measures. Under current policies, public debt remains stable but falls short of the regional debt target of 60 percent by 2035. Without further actions, development resources may shrink, and debt and borrowing costs could increase further during shocks. A growth-friendly and feasible fiscal adjustment would help to decisively reduce public debt to the regional target, lower borrowing costs, and enable resources for higher capital expenditure to address growth bottlenecks. It could include three pillars: (i) a comprehensive tax reform and enhanced tax administration—starting now and implemented gradually over the medium term; (ii) improved control and targeting of current expenditures; and (iii) adoption of a sound fiscal rule within a fiscal responsibility framework.
Reforming the tax system will boost revenue, improve equity, and reduce distortions. St. Lucia’s tax system has high tax expenditures (e.g., exemptions and deductions) which weaken collection. Staff’s recommended reforms offer gains exceeding the adjustment needed to meet the regional debt target, allowing flexibility based on feasibility and political economy considerations. The reform options include:
- Tax measures: (i) rationalizing corporate income tax incentives, particularly in the hospitality sector; (ii) broadening the VAT base, lowering thresholds, limiting zero-rated items, and introduction of VAT on digital services—accompanied with targeted support to vulnerable households; (iii) improving personal income tax progressivity; (iv) shortening property exemptions; and (v) reforming fuel taxes and increasing excises on alcohol and tobacco.
- Tax administration measures: strengthening audit and inspection; accelerating digitalization of processes; enhancing compliance and improving transparency. The tax amnesty should not be renewed further to avoid undermining compliance.
Higher efficiency and spending rebalancing would create space for growth- and equity-enhancing expenditures. Social protection initiatives should be well-targeted and budgeted. Saint Lucia spends more on public sector wages, goods and services, and debt interest than the Latin America and Caribbean average, but less on capital. Shifting focus to capital and social spending is crucial, including through controlling spending items like compensation of employees and increasing resources through revenue measures. Strengthening the public-private partnerships (PPPs) framework through transparent reviews and sound institutional structures can support infrastructure development without undermining fiscal discipline. The government’s strategic use of digital technologies to modernize public administration, improve service delivery, and enhance citizen engagement can enhance targeting of transfers and promote inclusive growth. Investment in digital infrastructure and public services can enhance data integration, reduce costs, and improve spending effectiveness.
The recent increase in pension benefits, amid a rapidly aging population, creates longer-term fiscal risks and requires forward-looking reforms. The National Insurance Corporation’s (NIC) expenditures are projected to exceed income by 2035, with reserve depletion by 2051. Restoring actuarial balance will require parametric or structural reforms, including higher contribution rates, lower replacement rates, increasing the retirement age, introducing pension caps, and/or voluntary investment options.
Introduction of a medium-term fiscal framework (MTFF) and formal fiscal rules, and continued strengthening of the Citizenship Investment Program (CIP) could further instill fiscal planning, prudence, and discipline. It is worth noting that recent legislation has strengthened procurement and debt management practices, including through implementation of a medium-term debt strategy (MTDS). Further priorities, in some cases building upon past initiatives, include:
- Publication of an MTFF prior to the annual budget, with at least three years’ projections, a fiscal risk statement, a debt sustainability analysis, and policy scenarios.
- Examining the potential establishment of operational fiscal rules, such as a legal floor on the primary balance and a ceiling on current expenditures, with narrowly defined escape clauses for natural disasters and external shocks.
- Improving CIP governance and transparency, including simplification of fund transfers to the Treasury and saving of the proceeds in a separate fund for planned public investment and self-insurance against natural disasters. The government has recently approved the creation of the first sovereign wealth fund, financed by CIP proceeds, to support sustainable economic development and climate resilience. The authorities are taking significant regionally coordinated steps to strengthen investor screening and CIP integrity, including through establishment of a new regulatory body with powers to set common standards and conduct oversight of the relevant stakeholders. This also represents an important opportunity to strengthen data transparency and CIP project monitoring to ensure the investment options deliver the expected economic benefits.
Strengthening financial system resilience
The banking sector is well-capitalized and highly liquid, but NPLs remain elevated despite recent improvements. Real credit to the private sector rebounded strongly by 5.6 percent in 2024, the highest in fifteen years, primarily driven by commercial real estate lending. Credit unions continue to expand their lending, but many have yet to comply with regulatory capital requirements.
The recent surge in commercial real estate (CRE) lending warrants close monitoring. Although CRE loans accounted for just 7.4 percent of total loans as of Q12025, the rapid pace and scale of the increase contrast with sluggish overall credit growth. If sustained, this trend could pose financial stability risks, especially under deteriorating financial conditions. Lending standards should be carefully reviewed, and stress testing could be employed to assess institutional resilience to adverse shocks.
Efforts to strengthen the banking sector should be sustained. Policy priorities include ensuring full compliance with the Eastern Caribbean Central Bank (ECCB) 60 percent provisioning requirement for NPLs and avoiding excessive reliance on general reserves. For persistently high NPLs, oversight should be reinforced to promote timely write-offs or restructuring of impaired assets, supported both by stronger supervisory enforcement and by targeted incentives. Strengthening market infrastructure, such as capitalizing the Eastern Caribbean Asset Management Corporation (ECAMC) and the establishment of a property cadaster, would facilitate asset disposal and revive the secondary real estate market. Banks should also pursue prudent foreign investment strategies focused on high-grade securities.
Complementary foreclosure legislation that balances market efficiency with strong borrower protections would strengthen the country’s financial regulatory framework. The recent enactment of legislation aimed at strengthening debtor rights and streamlining movable asset financing marks a significant milestone. Introducing foreclosure legislation to effectively secure real estate mortgages would be a recommended next step. This would promote bank lending, reduce the cost of credit, and foster market development. Such a foreclosure framework should give predictable collateral recovery while embedding borrower protections, including pre-foreclosure negotiations, fair market value safeguards, and access to judicial review.
Building on the new Co-operative Societies Act, further steps are needed to strengthen credit union regulation and supervision. Next steps could include developing and enforcing prudential standards to safeguard stability, streamlining provisioning rules, and aligning them more closely with ECCB practices. Building on the successful Asset Quality Review conducted for two credit unions, the review process should be progressively extended to other credit unions, complemented by regular stress testing. On deposit insurance, the priority should be given to establishing a regionally coordinated system for banks within the ECCU, then gradually include credit unions.
Strengthening the insurance sector’s resilience is critical given St. Lucia’s exposure to natural disasters and climate-related risks. In the context of rising reinsurance rates, local insurers exhibit lower property reinsurance retention ratios and premium levels compared to other Eastern Caribbean Currency Union (ECCU) peers, limiting profitability. A more integrated regional supervisory framework would enhance oversight and resilience which would help to narrow the insurance protection gap and support affordability, ultimately safeguarding households and reducing the fiscal burden from disaster recovery.
Efforts to mitigate Money Laundering/Terrorism Financing (ML/FT) risks should continue. The ongoing 2025 National Risk Assessment process is expected to improve understanding of ML/FT risks and help develop targeted measures, including those associated with the CIP scheme. Further progress on implementation is needed to ensure financial institutions apply appropriate AML/CFT measures through effective risk-based supervision to mitigate cross-border illicit financial flow. Efforts should also continue to address other remaining AML/CFT gaps, including measures to increase entity transparency and strengthen oversight of higher-risk designated non-financial businesses and professions, such as real estate agents and lawyers.
Enhancing growth and resilience through structural reforms
Addressing supply-side bottlenecks will increase long-run growth and reduce cost of living. Key constraints—such as high finance costs and limited access to credit, inadequate workforce education, and difficulties to comply with tax and customs regulations—have contributed to the slowdown in potential growth over the past three decades. Tackling these obstacles could improve productivity and growth. Implementation should be sequenced, leveraging regional coordination and aligning with ongoing initiatives in digitalization, climate adaptation, and energy transition to maximize impact. While Saint Lucia’s cost of living is lower than that in peer countries, it remains high by global standards.
Strengthening labor market institutions remains essential for inclusive growth. The government’s proposed unemployment insurance scheme is an important step that would strengthen social protection and make the labor market more resilient, especially given persistently high youth unemployment and skill mismatches despite the overall decline in unemployment. The recent introduction of a minimum wage provides an important safeguard for low-income workers, but careful monitoring is required to make sure that it supports vulnerable groups without hampering their employment opportunities or competitiveness.
Digitalization effort should be sustained to unlock long-term growth and foster new opportunities. Building on recent advancements in digital infrastructure and public services, further efforts could be targeted to expanding internet connectivity, strengthening digital literacy, and encouraging innovation. Advancing education in digital technologies would support job creation, economic diversification, and foreign investment.
Expanding trading relationships, improved connectivity, and regional coordination could increase economic resilience and affordability. Like other ECCU economies, St. Lucia is significantly more open than other country groups, with international trade comprising more than 100 percent of its GDP, mainly from exports of services (tourism), which are subject to high volatility, and imports of goods.
- Import concentration increases living costs and external vulnerability. Policy efforts should streamline customs procedures, help reduce freight costs and shipping fees, and enhance market competition. However, the scope and the size of source-reorientation would hinge on addressing diversification challenges, for example, lack of economies of scale limiting entry for producers of tradeable goods, availability of shipping routes and exchange rate risks.
- Tourism and export broadening over time should continue, including expanding into new source markets, and broadening the economic base beyond tourism.
- Proactively looking for trade opportunities through existing and new trading relationships and in cooperation with the Organization of Eastern Caribbean States (OECS) and CARICOM partners could support a sustainable reorientation of St. Lucia’s trade network.
Continued efforts on climate adaptation, energy transition, and climate insurance are essential. Recent reforms—such as the revision of land-use regulations, the adoption of a Disaster Risk Financing Strategy, and the establishment of a contingent credit line through the World Bank’s Catastrophe Deferred Drawdown Option (CAT DDO)—represent important progress in enhancing institutional capacity and financial resilience. Furthermore, climate insurance protection gaps should be addressed, as low affordability contributes to widespread non- and under-insurance. Insurance schemes must address basis risk, maintain affordability via targeted subsidies, and improve climate data systems to ensure effectiveness.
