Some Thoughts on St. Vincent and The Grenadines’ 2024 Budget

by Prof. C. Justin Robinson
Professor of Corporate Finance and
Principal UWI Five Islands

In assessing national budgets my academic training in Finance and my 16 years as a Director of the Central Bank of Barbados lead me to focus on the current economic context of the country, historical tendencies in terms of the performance of the economy, long term policy targets and the primary balance.

The current economic context in SVG is one of an economy that recovered rapidly from the relatively mild recession related to the Covid-19 pandemic and is pushing ahead with an ambitious capital expenditure program as it seeks to move to a higher economic growth path through the build-out of a modern Tourism & Hospitality sector on mainland St. Vincent to supplement the niche product in the Grenadines. In 2020 Real Gross Domestic Product (Real Gross Domestic Product is the total value of all the goods and services a country produces adjusted to remove the effects of inflation), fell by 3.5% (one of the smallest drops in the region), rebounding by 0.75%, 4.95% and 6.0% in 2021, 2022 and 2023 respectively. The economic losses from Covid-19 also had a devastating impact on the public finances since the economic decline reduced government revenues, while the nature of the pandemic required increased government expenditures. The budgetary proposals can be assessed on whether they are consistent with the administration’s economic strategy, bolster the current economic recovery while taking steps to fix the hole Covid-19 blew in the public finances.

The proposed capital expenditure of $571 million in the budget is indeed consistent with the government’s economic strategy outlined above and is likely to drive a rapid pace of economic growth in SVG. The ambitious capital expenditure program is the major reason ECLAC projects a 5.5% growth rate for SVG in 2024, the third fastest rate in Caricom behind Guyana and Antigua & Barbuda. Over the 1978 to 2023 period the average annual growth rate in Real GDP in SVG was 3.19%. The ambitious capital expenditure program led to above average growth in 2022 and 2023, and the trend is expected to continue in 2024. I view the fiscal measures in the budget as a responsible effort to raise revenues to address the damage to the public finances from the Covid-19 pandemic and to manage the size of the overall budget deficit given the large capital expenditures being undertaken. The issue of whether this effort is adequate will be discussed when we look at the Debt to GDP ratio and the Primary Balance.
The risks to this ambitious program lie in the capacity of the government to effectively and efficiently execute the program, whether the investments do succeed in moving the economy to a higher growth path and the financing of the program.
Growth led by capital expenditures funded by government borrowing runs the risk of fuelling a debt problem in the future, especially if the expenditures don’t succeed in moving the economy to a higher growth path that generate enhanced government revenues and the government fails to control recurrent expenditure. It is critical that the administration pay attention to debt levels and expanded government revenues as expenditure reductions may be damaging to the most vulnerable at this SVG’s stage of economic development.

The historical tendencies in terms of the performance of the economy provide hope in this challenging context. As shown in table 1 SVG has an impressive record of economic growth over the last forty-six years achieving positive growth for 41 of the forty-five years being reviewed here (5 years of negative growth). In terms of comparisons over the same time period, Barbados, Jamaica and Trinidad & Tobago recorded 16, 13 and 16 years of negative growth (of course we are growing from a lower base), while OCES neighbors, St. Kitts & Nevis and St. Lucia recorded 7 and 9 years of negative growth respectively. The budgetary measures can be assessed in terms of whether they bolster or impact negatively on the long-term growth path of the economy and as previously mentioned I am of the view that they do and have a realistic chance of moving SVG to a higher economic growth path as we build out a modern Tourism & Hospitality Industry on mainland St. Vincent alongside the substantial gains in enhancing human capital over the years.

In terms of long-term policy targets, as a member of the Eastern Caribbean Currency Union, a major long-term policy target for SVG is achieving a Debt to GDP ratio of 60% by 2035 (see table 2 for Debt to GDP figures) and the budgetary measures can be assessed on whether they keep the Debt to GDP ratio remains on a path to 60% by 2035. It is noteworthy that the ratio fell in the three years prior to the impact of the Covid-19 pandemic and a combination of the pandemic and the massive capital projects, which are part of the administration’s long-term economic strategy, led to a surge in the Debt to GDP ratio since 2020.

There is inevitably a lag between the financing of the capital expenditure and the economy moving to a higher growth path and as such the surge in the Debt to GDP ratio is not unexpected. The challenge for the Finance Minister is to ensure that the public finances stay on a path to a Debt to GDP ratio of 60% by 2035. The International Monetary Fund has the most sophisticated debt sustainability models and according to my best estimates the economy is still on the path to a Debt to GDP ratio of 60% by 2035 and as such our debt levels can be seen as sustainable.

Alongside the tendency for the economy to grow there is a historical tendency for SVG’s public finances to show primary deficits as seen in table 3. The Primary Balance is the difference between Government’s revenue (what it is earning) and its non-interest expenditure (what it is spending, not including debt payments). To put that in a household context, your “primary balance” would be the difference between your monthly salary and your monthly expenses, not including the money you spend repaying your
debts, e.g. your mortgage or car loan. When the primary balance is positive (negative), that is, when revenue is more (less) than non-interest expenditure, that can also be referred to as a primary surplus (deficit).

(See Table 3 below).

A primary deficit implies that the government has to raise additional financing to cover debt service costs which almost inevitably means a further build-up of debt and/or arrears. A primary surplus on the other hand means that after other expenditures there is extra money available to go towards debt service, which includes interest on debt and the repayment of the principal on debt (amortization).

Primary surpluses are seen as being extremely important if a country is to be able to reduce its debt burden and avoid getting into a situation where debt service takes up a large and growing share of government revenues which can then knock the economy off the growth path it has enjoyed for much of its modern history and divert expenditure from much needed social spending (see table 3 for some data on the debt burden).

The presence of chronic primary deficits in an economy with consistent growth suggests either large and growing government expenditures relative to the tax base and structure, challenges with revenue collection and/or possibly large tax expenditures (tax waivers). Again, the budget can be assessed on the extent to which the measures address these issues in the structure of the public finances and move the public finances towards a primary surplus and an indication of what levels of surpluses are required to achieve a Debt to GDP of 60% by 2035 given date given growth expectations, and a path to achieving such primary surpluses. Again, I view the fiscal measures as a responsible attempt to change the structure of the public finances by making the fees for government services more in line with the cost of these services. However, at a glance the budget appears to generate a Primary Deficit of approximately $211 million which is a relatively large deficit and clearly not sustainable. The surge is consistent with the Port investment. However, with such large Primary Deficits policymakers should consider reducing capital expenditure after 2025.

Conclusion

The Finance Minister faced a delicate and difficult balancing act to repair the public finances from the damage done by the Covid-19 pandemic and the history of primary deficits while not damaging the post Covid-19 recovery and continuing the economic transformation through capital projects largely related to the Tourism & Hospitality sector. I am of the view that he skilfully navigated these challenges and SVG is on solid path to higher economic growth. The large Primary Deficits present a concern for me and policy makers may need to focus on the sequencing of capital expenditures, ways to increase recurrent revenues and reduce recurrent expenditures.