‘Economic activity’ picking up in SVG – IMF report

The International Monetary Fund (IMF) says the Government of St Vincent and the Grenadines (SVG) has contributed to improving poverty indicators since 2000 and is pursuing game-changing projects for which a strong macroeconomic framework is essential, if we are to optimize the impact of the completion of the Argyle International Airport and the development of geothermal energy.{{more}}

In their Staff Concluding Statement, following the 2016 Article IV Mission to SVG, the IMF said key elements of this strategy, which will also improve competitiveness and boost sustainable growth, should include: (i) credible and sustainable medium-term fiscal consolidation; (ii) reforms to buttress the financial sector; and (iii) policies to improve the business environment and build climate resilience.

The IMF staff mission, led by Dominique Simard, visited St Vincent and the Grenadines from February 22 to March 3, 2016.

Their report said economic activity is picking up and is expected to be further sustained by the airport’s entry into operation. Real GDP growth is estimated at 1.6 per cent in 2015, led by recovering tourism inflows, construction and agriculture, and projected to reach 2.2 per cent in 2016, spurred by investment in anticipation of the new airport, which is expected to boost tourist arrivals and agriculture exports through expanded airlift capacity and direct routes to main source markets.

“Public debt has increased steadily since 2008, but St Vincent and the Grenadines has committed to reduce it through fiscal consolidation. Public debt rose from 57 per cent of GDP at end-2008, since launching the airport project, to 74 per cent of GDP at end-2015 – up to the median for ECCU countries – during a challenging period of global economic financial crisis and damages caused by three natural disasters in 2010, 2011 and 2013.”

The IMF said the measures announced in the 2016 Budget are expected to improve the primary balance relative to 2015 but leave the overall fiscal position unchanged.

“While the primary balance projected for 2016 is 0.4 per cent of GDP, higher than the 0.1 per cent of GDP outturn in 2015, the projected overall deficit remains unchanged at 2.1 per cent of GDP due to higher expected interest payments. Assuming no additional measures, and increasing the tax to GDP ratio beyond its 2016 level to reflect the whole year impact of the 2016 revenue measures, the central government’s primary balance would reach a surplus of 1.6 per cent of GDP in 2019.”

The IMF has recommended that fiscal policy should include a strategy to build financial defenses against natural disasters.

“Preparedness for hurricanes has improved, as have building codes and housing stocks. The authorities’ comprehensive disaster management approach, developed with multilateral partners, is being reviewed by Cabinet. Given the challenge to finance the reconstruction when a natural disaster materializes, it is advisable for the government to self-insure against this occurrence.”

They have recommended an annual amount of 0.9 per cent of GDP would constitute an adequate buffer against natural disasters.

“More ambitious fiscal consolidation is needed to meet the public debt target, and build adequate buffers against natural disasters. In particular, the government needs to target a primary surplus of 3.3 per cent of GDP over the medium-term, including additional measures of about 0.8 per cent of GDP (beyond current plans) to meet the ECCU public debt target and another 0.9 per cent of GDP to address natural disasters. Under this scenario, St Vincent and the Grenadines would reach its 2030 debt target even if it is subject to natural disasters.”

According to the IMF, there is significant scope to mobilize additional revenue by further broadening the tax base, including by streamlining ad-hoc tax concessions and other tax incentives, and intensifying collection of tax arrears.

“Concerning expenditures, continued restraint of the wage bill will be key, particularly since real wages of public sector employees have increased by 45 percent between 2000 and 2014 resulting in the second highest public sector wages (relative to productivity) in the ECCU. Furthermore, intensified control over public entities will be needed. Sustainability of the public pension scheme and the National Insurance Service (NIS) also need improvement. Budgetary arrears should continue to be cleared and targeted for their full elimination by 2017, which would help boost private sector activity. Upcoming technical assistance from CARTAC should be helpful in that regard.”

The report also recommended proactive implementation of structural reforms to support the fiscal consolidation agenda.

“In particular, reforms in revenue administration and public financial management need to be accelerated and sustained, with a public commitment to a timetable and key milestones.”

They have recommended the filling of vacancies in leadership positions required to spearhead these reforms, including the internal auditor in the Ministry of Finance.

During the IMF’s visit, discussions were held with the Prime Minister Dr Ralph Gonsalves, the Leader of the Opposition, Arnhim Eustace, the Director General of the Ministry of Finance, other senior government officials, public and private sector labour unions, and a broad range of private sector representatives.