Washington, DC: On September 13, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with St. Kitts and Nevis.
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 was prudently saved, reducing public debt below the regional debt target of 60 percent of GDP and supporting accumulation of large government deposits.
Prompt government action helped contain the pandemic's public health impact. At the onset of the pandemic the government swiftly restricted inbound travel, introduced a month-long national lockdown, and procured protective and medical equipment. The reopening of borders at 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 impact on domestic activity. The pandemic resulted in an estimated annual decline in GDP of 14 percent, and the general government's first fiscal deficit (4.7 percent of GDP) since 2010, financed by drawing down sizeable deposit buffers.
An expected rebound in tourism sets the stage for a strong recovery from 2022 onward, but risks to the outlook remain significant. Following a loss of the 2020–21 winter tourism season and slow resumption of tourism inflows to date, staff projects a small further decline in GDP of 1 percent in 2021, followed by 10 percent growth in 2022. However, the recovery path could be derailed should the pandemic lead to further sustained disruptions on the anticipated pace of tourism recovery and domestic activity. Other risks include financial sector uncertainties, natural disasters, and lower-than-expected CBI receipts.
Executive Board Assessment[2]
Executive Directors agreed with the thrust of the staff appraisal. They noted that St. Kitts and Nevis entered the COVID-19 pandemic from a position of fiscal strength and commended the authorities' prompt and effective policy response, which has helped contain the pandemic's economic and health impact. Directors agreed that, in the near term, the key policy priorities are containing the pandemic and supporting the economic recovery. In particular, they emphasized that reaching herd immunity through vaccination is the chief priority to save lives and livelihoods.
Directors agreed that fiscal relief measures should be kept in place until the recovery firmly takes root. They noted that robust levels of public investment would further support economic activity. Given the small economy's susceptibility to natural disasters and dependance on tourism and volatile revenues from the Citizenship by Investment (CBI) Program, Directors concurred that once the recovery is firmly established, the government should resume saving part of the CBI revenues to rebuild fiscal buffers, which will also provide additional fiscal space to mitigate contingent and long-term fiscal pressures.
Directors agreed on the need to preserve the stability of the financial system by increasingly focusing on building readiness to exit the temporary support measures. They recommended reviewing and formalizing crisis management plans, containing risks in the systemic bank, strengthening supervision of non-banks, developing a more robust plan to divest unsold lands, and pursuing reforms to facilitate asset recovery. While commending the authorities for promoting financial integrity, securing correspondent banking relationships, establishing CBI program safeguards and bolstering the AML/CFT and tax cooperation frameworks, Directors called for further efforts in these areas.
Directors encouraged structural reforms that raise productivity growth, economic competitiveness, and human capital. In this regard, they particularly welcomed the authorities' agenda to diversify energy sources and channel CBI revenues into other sectors besides tourism and for infrastructure that protects against natural disasters.
[1]Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2]At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
