IMF Gives Positive Report On St. Kitts And Nevis Economy

Basseterre, Saint Kitts – Nevis, MARCH 28TH 2007

The Washington-based International Monetary Fund (IMF) says despite the
closure of the sugar industry in St. Kitts and Nevis, economic growth has
accelerated in 2006,fiscal imbalances have improved significantly and
monetary aggregates have continued to grow in line with economic growth.

That’s according to the international financial institution’s Executive
Board Article IV consultation on St. Kitts and Nevis.

It noted that in July 2005, the sugar industry – the historical mainstay of
the economy – closed after more than 300 years. The industry had incurred
substantial losses –  on the order of 3 to 4 percent of GDP annually in the
last several years – even before the announced further cut in preferential
access to the EU market. The closure has required the government to service
the debt of the sugar company (about 29 percent of GDP). Public debt,
accumulated as a result of exogenous shocks (including three hurricanes in
the second half of the 1990s) and an accommodative policy stance, reached
190 percent of GDP at end-2005.

The IMF said despite the closure of the sugar industry, economic growth has
accelerated.“In 2006, the economy is estimated to have recorded its third consecutive
year of strong growth, projected at 4½ percent in 2006, with good prospects
for 2007 due to the combination of ongoing construction projects and
activity related to the Cricket World Cup,” said the Report.

It added that while the current account deficit remains large (at 25 percent
of GDP in 2005), it has been mainly financed by foreign direct investment,
and competitiveness appears to be improving – partly owing to the
depreciation of the U.S. dollar against major currencies. Large adjustments
in the regulated prices for petroleum and electricity prices in response to
the higher global prices for petroleum, created a temporary spike in
inflation during 2005-06.

The IMF also reported that fiscal imbalances in St. Kitts and Nevis have
improved significantly, reflecting both policy adjustments and continued
growth.

“The central government primary surplus is estimated at 6 percent of GDP in
2006, a significant turnaround from the small primary deficit recorded in
2004. Policy adjustments include increasing revenue effort based on
administrative reforms that enhanced compliance and containing non-interest
expenditures,” said the Report.

It said that despite the fiscal adjustment, public sector debt remains at a
very high level and while the central government accounts have strengthened
significantly, public enterprises are contracting significant debt. “The
large gross financing needs of the government have been met by increased
reliance on domestic financing sources,” said the Report.

The IMF noted that monetary aggregates in St. Kitts and Nevis have continued
to grow in line with economic growth. Private credit has rebounded, rising
by about 8 percent in 2005, and is projected to increase by more than 10
percent in 2006.

“The approval of the revisions to the uniform Banking Act has strengthened
the regulatory basis for the banking system. Further progress has also been
made in improving the supervision and the regulation of the Anti-Money
Laundering/Combating the Financing of Terrorism framework to reflect ongoing
changes in the financial system. Executive Board Assessment,” the IMF said.

IMF Directors also welcomed the improvement in economic outcomes and
prospects achieved over the last few years, with recent growth driven
largely by tourism and construction.

“To develop more sustainable sources of growth, Directors recommended
strengthening the business and investment climate and improving
competitiveness, including by enhancing the efficiency and reliability of
public utilities,” said the Article IV statement.

The IMF said the St. Kitts and Nevis Government’s ambitious fiscal
consolidation programme has already resulted in the central government
achieving a strong primary surplus.

“Nevertheless, greater efforts to prioritize and control government
expenditure are needed to sustain the fiscal adjustment and the
transparency, accountability, monitoring, and oversight of public
enterprises need to be improved, to ensure that the central government’s
fiscal consolidation is not undermined by the poor financial performance of
public entities,” said the IMF Report.

IMF Directors welcomed the authorities’ commitment to reform the tax system
to improve its efficiency, but emphasised that for the reform to be
successful it will need to be supported by improvements in administrative
capacity.

“Even with full implementation of the authorities’ consolidation strategy,
the public debt stock  will remain very high for many years. Directors
emphasised the importance of exploring options for a more rapid reduction of
the debt-to-GDP ratio, including by accelerating the pace of asset sales and
strengthening debt management. They stressed that a social consensus in
favor of fiscal consolidation needs to be nurtured and strengthened, even as
expenditure pressures related to population aging grow,” said the IMF.

It added that reducing financial sector risks, including in non-bank
financial institutions, needs to be given high priority.

IMF Directors called for additional progress in making effective the single
regulatory unit and in approving supporting legislation.

IMF directors observed that St. Kitts and Nevis’s high vulnerability to
natural disasters and shocks to tourism, highlights the importance of
precautionary measures and contingency planning, welcomed the recent
enhancements in the statistical database, but called for further efforts to
improve the reliability and timeliness of key data, including on tourism,
debt, and public enterprises.

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