St. Kitts and Nevis: Staff Concluding Statement of the 2017 Article IV Mission

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MIL OSI Global Economy

Source: International Monetary Fund

Headline: St. Kitts and Nevis: Staff Concluding Statement of the 2017 Article IV Mission

St. Kitts and Nevis: Staff Concluding Statement of the 2017 Article IV Mission May 12, 2017

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

An IMF mission visited St. Kitts and Nevis during April 18-May 4 to conduct
the 2017 Article IV consultation.

Notwithstanding a difficult international environment, St. Kitts and
Nevis’ economy is expected to grow again in 2017 for the 5th
consecutive year. St. Kitts and Nevis’ strong macroeconomic performance
owes much to the robust Citizenship-by-Investment (CBI) inflows and
their spillovers to the economy, as well as overall prudent
macroeconomic policies. Against the background of elevated risks to CBI
inflows and risks associated with completion of the debt-land swap, the
mission focused on measures to safeguard macroeconomic and financial
stability, including by strengthening the fiscal policy framework and
reducing reliance on CBI inflows, and necessary reforms to attain
sustainable, inclusive growth.


Economic performance moderated somewhat in 2016 compared to the recent

. The economy grew at a modest 3.2 percent in 2016, compared to 4.9 percent
in 2015, while still exceeding the average growth rate in the ECCU region.
The overall fiscal surplus, at 4.2 percent of GDP, deteriorated compared to
2015, owing mainly to lower CBI receipts. The underlying overall balance
(that is, the overall balance excluding SIDF grants, CBI-related receipts
and due diligence expenditure) remains in deficit, around 3.3 percent of
GDP. A combination of lower CBI-budgetary receipts and a larger trade
deficit resulted in a significant widening of the current account deficit.
At the same time, public debt fell further, projected to reach the 60
percent ECCU debt-to-GDP target by 2018, ahead of ECCU peers.


The authorities made significant efforts to strengthen the CBI program,
given risks to

CBI revenues in a challenging regional and global environment

. They have strengthened the due-diligence process with dedicated resources
and global collaboration, as this is essential to reduce integrity and
security risks, preserve the program’s credibility, and avoid a


The medium-term outlook incorporates conservative assumptions on future
CBI flows.

Growth is projected to be 2.7 percent for 2017 and is expected to average
around 3 percent in the medium term. The projected slowdown in construction
would be offset by public investment on infrastructure and higher tourism
growth (as source market growth accelerates and new tourism facilities come
on stream in 2017-19). The external current account deficit should remain
large with CBI inflows tapering off.

4. Risks to the medium-term outlook are broadly balanced. Key risks
include further delays in completing the debt-land swap and a sharp drop in
CBI inflows due to more acute competition and global security concerns.
Other negative risks include a stronger U.S. dollar, a tighter financial
environment, a more severe Zika epidemic, and a major natural disaster.
Loss of correspondent banking relationships (CBRs) could add to challenges.
Softer global climate change policy may exacerbate natural-disaster risks.
On the upside, stronger CBI inflows (from ongoing program reforms and
tougher immigration policies in the United States on other countries) and
weaker oil-prices could support faster growth.

5. The

authorities’ 2017 policy priorities focus on preserving the gains in
fiscal sustainability while supporting growth and strengthening

. The strategy aims at controlling government recurrent spending while
scaling up public investment to build resilience, and to support stronger
sustainable and inclusive growth. The budget does not propose new taxes,
but envisages streamlining concessions over the next 2-3 years and
implementing public financial management reform.

6. The medium-term fiscal framework should continue to

focus on reducing reliance on CBI inflows in a world of heightened

The VAT and import-duty exemptions since 2014 have weakened the fiscal
framework. Notwithstanding the large fiscal buffers accumulated, an extreme
scenario of a sharp drop in CBI inflows could result in fiscal deficits
that erode the buffers as early as 2020 and risk reversing the downward
debt trajectory, absent fiscal adjustment. An economic slowdown could
further weaken tax performance.


A medium-term fiscal framework anchored to a balanced underlying
primary-balance target would help increase resilience to sharp drops in
CBI inflows, with needed adjustment at about 2.1 percent of GDP paced
over 3-5 years

. Such a target, along with the ECCB-debt target, could be enshrined in
fiscal responsibility legislation that would provide the government with a
commitment device to anchor its adjustments. It would safeguard against
pressure to deviate from the adjustment path, and save windfall CBI
inflows, excluded from the rule, in a contingency fund. Approval of both
Cabinets of an action plan to meet the primary balance target at the
country level is key.


On the revenue side, the tax base should be broadened, including by
streamlining tax incentives and continuing to improve tax

The revenue loss from tax incentives remains high (at 6.4
percent of GDP—both discretionary and granted by legislation).
Tax incentives should be transparent, rule-based, and well-targeted. The
Fund supports the authorities’ intention to refine the system and stands
ready to assist. Consideration should also be given to updating property
valuations and enhancing compliance. Other taxes, including on cigarette,
alcohol, and sugary products (consistent with initiatives that CARICOM is
exploring) can raise revenue, while contributing to government efforts to
reduce noncommunicable diseases.


On the expenditure side, containing spending on goods and services and
the public wage bill should remain a priority.

We welcome the intention to establish a more predictable system for public
pay-packages and recommend that pay increases be consistent with budgetary
constraints, macroeconomic developments, and regular benchmarking with
private sector wages. A ceiling on the public-wage bill could be set,
guided by the medium-term fiscal framework anchored to the debt and
primary-balance targets. Allocations could be communicated by Cabinet to
line ministries within the budget process, taking into account the
envisaged qualification- and performance-based incentive system.


Plans to introduce universal health-coverage (UHC) are commendable, but
its fiscal implications should be carefully managed

. The design, coverage, and financing of UHC should limit risk to fiscal
sustainability. The scheme should be funded from permanent revenue sources
to avoid recurrent drains on the budget. The benefit
package for the population should ensure the system’s financial viability,
and use specific measures to target the poor. Appropriate incentives and
regulatory tools should contain costs. Drawing on expertise from PAHO and
the World Bank should help tailor the scheme appropriate to the country


We welcome the commitment to establish a Growth and Resilience Fund
(GRF) and stand ready to assist with the modalities.

The GRF should have a simple sovereign-wealth-fund structure, with a
prudent investment strategy and flows fully integrated with the fiscal
framework. We welcome the agreement on the budgetary arrears with PDVSA and
near-agreement on NIA debt-restructuring, and support any further
liability-management efforts, including reducing outstanding T-bills,
accelerating payment of expensive debt, and improving debt terms.


Structural reforms to strengthen public financial management need
urgent attention.

The SIDF’s quasi-fiscal spending should be contained, including by
streamlining its activities and integrating with the general government’s
consolidated account to facilitate more comprehensive fiscal planning and
cash management. Once the GRF is established, the authorities should
consider transferring revenue from CBI flows and resulting SIDF deposits to
the GRF. The authorities have accepted the need to enhance the oversight of
public corporations by enforcing timely reporting of financial statements.
The overall public financial management would also benefit from the
strengthening of the NIA’s debt and cash management frameworks.


Fiscal efforts should address the need to prepare for the inevitable
recurrence of natural disasters.

A comprehensive risk-management framework focusing on risk reduction and
mitigation is critical to building resilience and reducing the fiscal
burden of disasters. Natural disaster risk could be assessed and
incorporated into budget and debt management frameworks, with investments
in risk reduction (e.g., targeted infrastructure projects, early warning
systems, and risk maps), and self-insurance (financed through fiscal
buffers). Contingent financing plans, risk-transfer arrangements, and
encouraging private sector investment in risk mitigation are also


The sale of lands under the debt-land swap arrangement must be
completed urgently to limit fiscal and financial risks

A clear action plan and timetable with concrete milestones are needed.
Completing existing purchase proposals and stepped up marketing to generate
sales, including through real-estate agents and the SLSC website, will help
establish momentum and remove the policy uncertainty. Cooperation with CIU
and SKIPA is welcome and should support these efforts. We welcome the
ongoing discussions on the renewal of the dividend-guarantee agreement with
banks at renegotiated terms.

15. The authorities

should continue strong efforts to reduce CBR risks and maintain the
integrity of the CBI-program

. The authorities have further improved compliance with international
AML/CFT standards and exchange of information, and are jointly working with
the ECCB to implement AML/CFT standards. Banks continue to suffer from
increasing costs through higher fees, lengthier transactions, and increased
due diligence, but open communication and information-sharing between
respondent and correspondent banks have helped limit loss of CBRs.
Introducing Basel II and the continued implementation of risk-based
supervision should also improve perceptions. Careful consideration of
amalgamation opportunities can help address volume-of-business concerns and
improve risk-management capability.


Banks are still burdened by high levels of nonperforming loans (NPLs).

Their swift resolution is critical to limit further deterioration, revive
credit expansion, and support economic growth. The establishment of the
ECAMC will allow for a more efficient collection and disposal of distressed
assets. Ongoing efforts to modernize the foreclosure and insolvency
frameworks would help maximize recovery. The new collateral appraisal
guidelines, credit bureau, and land registry should help contain future
losses from NPLs.


The authorities should monitor other potential risks, including the
implications of a slowdown in CBI inflows for the banking system.

While the direct impact may be limited, and even though the local and
CBI-related real-estate markets are segmented, and most CBI-properties are
self-financed, slower inflows may affect banks through reduced construction
activity and its spillover effects on borrowers’ repayment capacity.
Authorities should monitor market developments closely and ensure adequate
prudential oversight to minimize any potential effects on banks of further
slowdown in CBI inflows and the ending of the 5-year holding-period for
existing CBI properties.


The authorities should adopt a comprehensive strategy to overcome

structural challenges that continue to limit the potential for
inclusive growth.

Ongoing efforts to expedite business registration, establish a dedicated
land-registry, credit bureau, and SME partial-credit-guarantee scheme, and
revise the foreclosure legislation should improve the weak business
environment that lags peers. Alternative investment options under the CBI
program could channel funds to renewable energy, health, education,
supporting skill development and economic diversification, while also
reducing the risk of asset bubbles. Soft-skills training program is
welcome; however, time-bound participation should be enforced upon
certification, and stipends set below the minimum wage. A substantial rise
in the minimum wage (already high compared to non-Caribbean tourist-islands
and competitive middle-income countries) should be avoided without
increased productivity. Focusing on housing programs for the poorest and
emphasis on gender gaps in the National Social Protection Policy should
support inclusiveness. Ongoing actions to reduce crime through increased
use of CCTV systems and community-related programs are welcome.


The authorities welcome Technical Assistance to improve the
availability and quality of data

with respect to balance of payments, national accounts, and labor market
and social statistics. These are key to assessing vulnerabilities and for
effective policymaking.

The mission thanks the authorities and technical staff for the warm
welcome, constructive discussions, and positive spirit of cooperation.


The IMF mission led by Ms. Inci Otker and consisting of T.
Komatsuzaki, G. Salinas, and M. Vargas visited St. Kitts and Nevis
during April 18-May 4 to conduct the 2017 Article IV consultation.
The mission met with Prime Minister the Honorable Timothy Harris,
Premier of Nevis Honorable Vance Amory, Deputy Governor of the
ECCB, the Financial Secretary of St. Kitts and Nevis, the Permanent
Secretary of Finance of the Nevis Island Administration, the
Citizenship by Investment Unit, Ministries of Agriculture, Health,
Labor, Social Development, and Sustainable Development, and other
senior public officials, and representatives of the Financial
Services Regulatory Commission, Leader of the Opposition, St. Kitts
and Nevis Trades and Labor Union, and financial and business
community. Courtney Williams from the Office of the Executive
Director and A.M. Wickham, IMF local economist, participated in the


Excluding exemptions related to Government, the corporate income
tax, and the April 2015 VAT exemptions.

IMF Communications Department
PRESS OFFICER: Raphael Anspach
Phone: +1 202 623-7100Email:

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