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IMF Executive Board Concludes 2018 Article IV Consultation with St. Lucia

On June 13, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with St. Lucia.

GDP growth reached 3 percent in 2017, sustained by robust activity in several sectors. Favorable external conditions, coupled with hotel expansions and the addition of new flights, generated a strong recovery in tourism, with stay-over arrivals rising by 11 percent, the fastest growth in the Caribbean. Continued strong FDI and public investment supported activity in construction and other sectors, including wholesale and retail trade, but agriculture suffered the lingering effects of Hurricane Matthew. Backed by strong tourism inflows, the current account balance strengthened. Unemployment declined from 21.3 percent in 2016 to 20.2 percent in 2017, but youth unemployment remains high at 38.5 percent and labor force participation has fallen. Inflation turned positive again after two years of oil-price related deflation.

Based on preliminary data, the fiscal stance deteriorated slightly in FY2017/18, reflecting additional spending. As a result, the overall fiscal deficit and public debt continued to rise. To upgrade ailing infrastructure and reduce the high cost of servicing public debt, the authorities have secured concessional financing from a bilateral creditor, the terms of which are yet to be finalized. Banks continued to underperform while the non-bank sector expanded further. Nonperforming loans are still hovering at 12.5 percent of total loans, contributing to low profitability and contracting credit to the private sector since 2013. Credit unions continued their expansion, with assets growing respectively by 42 percent since 2014. Indigenous banks managed to maintain their corresponding bank relationships, although at higher costs.

The short-term outlook is favorable, but prospects beyond that are sobering. GDP growth is expected to remain buoyant in the near term, supported by large infrastructure investment, tourism-related FDI, and continued tourist inflows driven by the global recovery and increased capacity. Downside risks are prevalent. Over the medium term, growth will decline gradually as pipeline projects are completed. In the absence of corrective fiscal measures, public sector wage negotiations and rising interest rates will add to expenditure pressures and government debt. Structural bottlenecks will continue to limit growth.

Executive Board Assessment [2]

Executive Directors welcomed St. Lucia’s continued sustained growth and improved short‑term outlook, supported by strong inflows of tourism and foreign direct investment. Directors noted, however, that there are significant risks, including those associated with rising public debt and recurrent natural disasters. They underlined the importance of fiscal consolidation and structural reforms to remove impediments to longer‑term growth, enhance productivity, and reduce high production costs.

Directors noted that, while the rapid increase in infrastructure investment is necessary to address constraints to growth, the ensuing increase in public debt and the risks associated with its repayment heighten fiscal vulnerabilities. In this regard, they stressed the need for an adjustment aimed at attaining the ECCU debt target of 60 percent of GDP by 2030. The adjustment could focus on streamlining tax exemptions, controlling the government wage bill, and improving financing terms. Consideration of a fiscal rule, together with targeted social assistance, could support the fiscal effort while protecting the most vulnerable. Directors supported the authorities’ plans to strengthen public financial management based on the Public Expenditure and Financial Accountability assessment, including revising the PFM Act and reviving the Public‑Sector Investment Plan.

Noting the high exposure of St. Lucia’s economy to climate change and natural disasters, Directors welcomed the Climate Change Policy Assessment pilot. They agreed that building resilience through appropriate mitigation and adaptation policies, which should be fully integrated in the macroeconomic framework, would enhance growth prospects and strengthen the fiscal position. They noted that donor support, primarily through grants, as well as private investment, would be important to assist these efforts.

Directors noted that, despite some progress, indigenous banks remain weighed down by non‑performing loans, low profitability, and low capitalization relative to regional peers. They recommended a swift completion of new legislation on foreclosure and insolvency, as well as the operationalization of the Eastern Caribbean Asset Management Company. They concurred that the rapid growth of credit unions and microfinance companies calls for stronger supervision and regulation of these entities. Directors also underscored the importance of strengthening the AML/CFT regime, reinforcing due diligence procedures under the Citizenship‑by‑Investment program, and addressing gaps in compliance with international tax rules.

Directors agreed that comprehensive structural reforms would improve growth prospects and reduce external vulnerability. Addressing high structural unemployment requires enhancing education and professional training while attenuating labor market rigidities. Reducing other costs of doing business, including of energy and international trade, is necessary to improve competitiveness. Strengthening tourism’s backward linkages and developing sectors where scale economies are less important would help diversify the economy.

It is expected that the next Article IV consultation with St. Lucia will be held on the standard 12‑month cycle.


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