July 6, 2021
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 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.
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The impact of the COVID-19 pandemic on St. Kitts and Nevis’ tourism-dependent economy has been severe, despite timely government actions that kept domestic infections in 2020 the lowest in the Western Hemisphere. A rebound in tourism should prompt a strong recovery from 2022 onward, but risks to the outlook are significant. Containing the pandemic and supporting the economy are near-term policy priorities. As the recovery takes hold, policy focus should shift to rebuilding fiscal buffers by resuming to save part of the Citizenship by Investment (CBI) revenues, preparing the financial system for exit from the temporary support measures and pursuing structural reforms to support productivity, economic competitiveness, and human capital.
St. Kitts and Nevis entered the Covid-19 pandemic from a position of fiscal strength following nearly a decade of budget surpluses. A significant part of the large CBI revenues were prudently saved, reducing public debt to below the regional debt target of 60 percent of GDP and supporting accumulation of large government deposits.
Prompt government action helped to contain the pandemic’s public health impact. At the onset of the pandemic in March 2020, the government swiftly restricted inbound travel, introduced safety protocols including a month-long national lockdown, and procured protective and medical equipment. The subsequent reopening of borders from end-October 2020 has been accompanied by strict safety protocols. The response measures effectively mitigated the pandemic’s human cost with St. Kitts and Nevis having had the lowest per capita case count in the Western Hemisphere and no mortalities in 2020.
But the impact on the economy has been severe. The complete halt in cruise ship arrivals and very few stayover tourists since the first quarter of 2020 compounded on the pandemic’s disruptions on domestic activity. In response, the government introduced tax waivers, deferrals and incentives, and the Social Security Board provided unemployment benefits to affected insured workers. In parallel, the regional and national financial supervisors swiftly introduced temporary response measures, including loan moratoria, that supported liquidity and effectively mitigated the pandemic’s financial system impact. Nonetheless, the pandemic resulted in an estimated annual decline in GDP of 12½ percent, and the general government’s  first fiscal deficit (4.7 percent of GDP) since 2010, financed by drawing down on its sizeable deposit buffer
Containing the pandemic and supporting the economy remain the key near-term policy priorities. The government has made rapid progress toward its end-October vaccination target of 70 percent of the population (about a quarter of the target population is fully vaccinated and 65 percent have received the first dose). As the recently instated partial lockdown in response to budding community spread confirms, herd immunity has not yet been reached, and should remain the number one priority to save lives and livelihoods. Fiscal relief measures should be kept in place until the recovery firmly takes root. Maintaining robust levels of public investment would further support activity.
An expected rebound in tourism sets the stage for a strong recovery from 2022 onward, but risks to the outlook remain significant . We project a small further decline in GDP of 1 percent in 2021, followed by 10 percent growth in 2022. The pre-pandemic GDP level is expected to be reached in 2024. However, the recovery path could be derailed should the pandemic impose sustained disruptions on the anticipated pace of tourism inflows and domestic activity. Other risks include financial sector uncertainties, natural disasters, and lower-than-expected CBI receipts.
Once the recovery is firmly established, the government should resume its policy of saving part of the CBI revenues to build fiscal buffers. As a small, natural disaster-susceptible country dependent on tourism and historically volatile CBI revenues, St. Kitts and Nevis needs significant buffers. Higher buffers would also provide more fiscal space to mitigate contingent and long-term fiscal pressures, including possible further reacquisitions of lands swapped as part of the 2012-14 sovereign debt restructuring, and a possible future need to buttress the national pension system that under current projections will start to run deficits and begin depleting its reserves if corrective measures are not taken in due course.
Staff simulations suggest that maintaining an overall budget surplus of at least 2 percent of GDP would support a robust pace of buffer build-up. Assuming annual CBI revenues of 9 percent of GDP, the savings would allow reducing public debt to around 40 percent of GDP and rebuilding deposits to close to a quarter of GDP by the end of the decade, which would provide a significant buffer against both macro-economic and natural disaster shocks. The room for government investment would be modest, at around 3 percent of GDP annually, but could be expanded by policy measures such as reducing the government wage bill, reforming tax incentives and strenghtening public investment efficiency. Higher-than-assumed CBI revenues could also create more room for investment, albeit part of the additional revenues should be saved (including as additonal buffer against contingent fiscal pressures). Lower CBI revenues would increase the necessity of policy adjustment and possibly additional borrowing, which would lead to a slower reduction of government debt.
Financial sector policies should increasingly focus on building readiness for the exit from temporary support measures. The financial system remains stable and benefits from sizeable buffers, but the pandemic’s full asset quality impact will become apparent only upon the expiry of the loan moratoria. National authorities should therefore review and formalize operationalizable crisis management plans in close coordination with the ECCB. Long-standing high non-performing loans and elevated investment portfolio risks in the systemically significant bank should be more decisively addressed. In addition, a more robust divestment plan for the remaining lands from the sovereign debt swap should be pursued, based on updated valuations for the unsold lands, a revised cost-sharing agreement between the bank and the government on any shortfalls from original valuations, and a more active strategy to attract potential investors, including closer coordination with the CBI program. Further supervisory guidance, including on loan moratoria expiry and loan loss provisioning, can support timely balance sheet repair of the non-bank sector. Legislative reforms to streamline foreclosure processes would facilitate asset recovery efforts. Continued efforts to strengthen compliance with international AML/CFT standards and transparency and oversight of the CBI program can help mitigate risks to correspondent banking relationships.
There is room to strengthen productivity growth, economic competitiveness, and human capital.GDP per capita growth in the last two decades has been relatively weak and convergence with the U.S. has stopped. Growth has been held back by weak productivity growth as investment has been high, which may partly reflect the limits of a small-island economy. However, several reforms might help boost productivity growth and export competitiveness, including using the CBI program to attract investment beyond the tourism sector, upgrading skills through focused training programs, better aligning the education system with the needs of the labor market, and making it easier for small firms to access credit, including through reforms that facilitate use of non-fixed asset as loan collateral.