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St Lucia’s economy ‘pose significant near-term risks’, says IMF report

By Caribbean News Global fav

CASTRIES, St Lucia – The International Monetary Fund (IMF) staff concluding statement of the 2022 Article IV Mission released Tuesday, following the mission visit to Saint Lucia from May 9 – May 23, 2022, for the annual Article IV consultation discussions on economic developments and macroeconomic policies, reads:

“ Saint Lucia now confronts a challenge from the war in Ukraine due to its dependence on food and energy imports. These setbacks compound the longstanding problems related to low growth and vulnerability to natural disasters and climate change. In addition, high public debt and large financing needs, which grew significantly during the pandemic, pose significant near-term risks.

The IMF report advised: “Fostering a sustainable and inclusive recovery requires to simultaneously address fiscal and financial sector constraints to public and private investment. In the near-term, fiscal support should be provided through spending reprioritization to mitigate the social impact of price pressures.”

According to the IMF mission chief for Saint Lucia statement:

When the recovery is entrenched, the focus should shift to strengthening debt sustainability by adopting a fiscal consolidation plan supported by structural fiscal reforms to facilitate access to financing at better terms and create fiscal space for infrastructure and social investment. Strengthening financial intermediation would improve private sector access to bank credit. Growth and competitiveness could be supported by increasing investment in resilience and insurance coverage of natural disasters, addressing labor market mismatches through training programs, strengthening energy security while lowering energy cost with renewable sources, and supporting economic diversification.” 

The IMF statement outlined – Recent Developments, Outlook and Risks noting:

The rise in commodity prices due to the war in Ukraine has compounded the severe impact of the Covid-19 pandemic. Output is projected to recover to the pre-pandemic level by 2024 as tourism returns to pre-pandemic levels, but thereafter growth is expected to decline gradually to 1.5 percent per year. Risks to the outlook are skewed to the downside due to the external and domestic challenges.”

On economic policies the IMF statement reads:

“In the near-term, the government should pursue fiscal policies to relieve the social hardship from the rise in inflation. In the medium term, a comprehensive package of fiscal and financial sector reforms is needed to contain risk and unlock Saint Lucia’s growth potential. It is critical to prepare a fiscal consolidation strategy that credibly sets public debt on a downward trajectory that is resilient to shocks. The growth impact of the consolidation could be further contained by shifting the composition of government spending towards infrastructure and social investment. To maximize the favorable impact of the consolidation, complementary institutional fiscal reforms are critically important…”

“To this end, a strong debt management strategy could improve credibility, increase investor confidence, and lower the effective cost of debt. Such strategy should (i) embed the assessment of the feasibility of debt issuance; (ii) include a medium-term financing plan by debt category and instrument; (iii) be formally approved, publicly disclosed, and reported on periodically; and (iv) complemented by a forward-looking cash management strategy covering several quarters to avoid liquidity strains and excessive reliance on costly bank overdrafts.

  • Fiscal consolidation should be supported by the adoption of a medium-term fiscal responsibility framework with a credible debt reduction path that is resilient to shocks and is clearly communicated. […]”
  • “Other fiscal reforms to strengthen the fiscal sustainability outlook include ensuring pension sustainability by adopting parametric reforms in line with the upcoming actuarial review, adopting public financial management enhancements, and further strengthening the CIP due diligence and transparency processes to maintain visa-free access to key regions.” 

The IMF statement noted that: “Unlocking the growth potential of the private sector also requires strengthening financial intermediation.”

“At present, domestic banks continue to increase their exposures to overseas securities due to long-standing structural impediments to domestic credit. Domestic credit intermediation at lower interest rates could be facilitated by modernizing the insolvency and foreclosure legislation, passing of the legislation to establish the regional credit bureau, and introducing a movable collateral framework. The credit union segment is large and has expanded briskly during the pandemic despite the economic slowdown, and the evolution of NPLs, restructured loans, and moratorium loans warrant close monitoring.[…] Maintaining progress on AML/CFT recommendations will help protect correspondent banking relationships.” 

Specific structural investments are critical to increase growth potential and to reduce output volatility.

Key priorities include:

Investment in physical and financial resilience to natural disasters and climate change through a fully integrated strategy. Investment in resilient infrastructure is costly, but the return outweighs the cost, supports growth, and improves the fiscal sustainability outlook. Staff analysis indicates that investment that is resilient to natural disasters lowers reconstruction spending after each event, limits the output decline, and accelerates the recovery. In addition, it can increase the level of output by over 5 percent and tax revenue by about 1 percent of GDP in the long term. 

The government’s National Adaptation Plan (NAP), which defines a 10-year process with projected full implementation by 2028 is an important step. However, its implementation is costly. In light of the government fiscal constraints, the implementation would benefit from an integrated strategy that considers all the costs and benefits of resilient investments in a comprehensive macroeconomic framework. In addition, the plan would benefit from fiscal reforms that integrate climate adaptation objectives in government budget practices, public financial management and public procurement. Given the long time needed to build structural resilience, a strong disaster insurance strategy is necessary during the transition phase while resiliency is built.

Tackling labor market skill mismatches. Expanding technical and vocational education and training (TVET) programs could help in reducing skill mismatches, enhance opportunities for self-employment, and improve labor productivity, thereby helping reduce unemployment.

Investment in renewable energy to enhance energy security and reduce energy cost. The transition to renewable energy, including the expansion of solar and exploration of geothermal generation, should be expedited to decrease electricity cost and the vulnerability to oil price shocks.

Increase economic diversification to boost lagging productivity growth. Sectors with potential for export diversification includes business process outsourcing (BPO), agro-processing, and health and wellness industries. 

Read more:  St Lucia: Staff Concluding Statement of the 2022 Article IV Mission



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