Public Information Notice (PIN) No. 08/42
April 1, 2008
| Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. |
On February 4, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with St. Kitts and Nevis.1
Background
The closure in 2005 of the sugar industry””the historical mainstay of the economy””set the stage for a new economic course. Indeed, despite the closure, growth remained strong in 2006, with output increasing by 4 percent, driven by tourism, construction, and communications. Some slowdown is expected for 2007, with growth projected at 3.3 percent. Medium-term prospects look promising, with a number of high-end foreign investment tourism projects in the pipeline.
Large adjustments in retail fuel prices and a new fuel surcharge for electricity created a temporary inflation spike in 2006, but inflation has since decelerated as these one-off effects dissipated. Reflecting strong construction-related imports, the current account deficit increased to around 30 percent of GDP in 2006/07, but has been largely financed by tourism-related foreign direct investment (FDI).
Considerable progress has been made in strengthening the fiscal accounts. The government achieved a sizable primary surplus in 2006 for the second year in a row. A buoyant economy, the electricity surcharge, strengthened tax administration, and wage restraint have contributed to this improvement. However, expenditure management remains a challenge. The primary surplus is projected to decline to 2 percent of GDP in 2007 (from around 4½ percent in 2006), largely because of a sharp increase in net lending in St. Kitts and a near-tripling of capital expenditure in Nevis, with major road projects underway.
Despite the fiscal improvement, public debt remains high””at about 185 percent of GDP at end-2006″”leaving little room for maneuver in the event of an adverse shock. Facing tightened external borrowing conditions, the government has relied mainly on domestic sources to meet its financing needs. There also continues to be insufficient financial information on public enterprises, whose share in public debt reached 38 percent by end-June 2007.
Monetary and financial developments have been largely favorable, although the high and rising public sector exposure of the banking system is a concern. Credit to the private sector rebounded on the back of buoyant economic activity and, partly reflecting this, the nonperforming loans ratio declined. However, the banking system’s holdings of public debt had risen to 44 percent as of end-June 2007. The nonbank sector has been growing rapidly, while progress in establishing an appropriate supervisory and regulatory framework for this sector has been limited so far.