IMF: St Kitts and Nevis continues to recover from pandemic and cost of living crisis

The International Monetary Fund (IMF) sent a mission to St Kitts and Nevis for the 2024 Article IV consultation, under the leadership of Alexandre Chailloux, who’s team was in the Caribbean nation from the 15^th of February, 2024 till the 26^th of February, 2024.

The overarching aim of the IMF mission was to converse with relevant authorities in St Kitts and Nevis regarding macroeconomic policies and other economic developments. In order to facilitate the same, they spoke candidly with their private and public sector counterparts, as well as other important stakeholders.

After going through the process, the IMF staff responsible for the mission issued the following statement:

St. Kitts and Nevis continues to recover from the pandemic and cost of living crisis. The general government has ended 2023 with a surplus, thanks to fiscal prudence and the outperformance of the citizenship-by-investment program (CBI). The outlook is positive, particularly as large-scale renewable energy projects begin to be implemented. Nonetheless, there are still important downside risks ahead potentially from a less hospitable external environment, natural disasters, or CBI underperformance. Increasing the effectiveness of government spending, improving the tax system, setting up a Sustainability and Resilience Fund, and putting in place an explicit fiscal rule would help strengthen the fiscal framework and insulate the country from possible shocks. There is also a need to reform the pension system and increase investments in both renewable energy and climate adaptation. Addressing vulnerabilities in the banking sector would improve financial stability, and greater accountability and transparency in the management of CBI resources would strengthen the integrity of the program.

Tourism Sector recovery pushes growth

According to the assessment made by Mr. Alexandre Chailloux’s team, the economy of St Kitts and Nevis displayed growth by a measure of 3.4% in 2023, which was preceded by 8.8% in 2022.

The general consensus is that the GDP of St Kitts and Nevis will rebound to pre-pandemic levels this year, which is a significantly positive development.

High shipping costs and commodity prices influenced average inflation, which stood at an estimated figure of 3.6% in 2023, having stood at 2.7% in 2022, even though fiscal measures were taken to counter the shift.

St Kitts and Nevis can accredit a surplus figure of 1% of its GDP to the exceptional performance of the CBI Programme and prudent fiscal measures.

Thus, it is safe to say that the economic outlook for St Kitts and Nevis is quite positive, specifically due to the medium-term benefits of renewable energy projects which will add momentum to the growth factor.

The tourism sector, along with investments in renewable energy and housing/public infrastructure projects, are expected to influence growth and bring it to a healthy 4.7 percent in 2024. Having said that, St Kitts and Nevis must remain aware of the effects of a global slowdown which could affect tourism, commodity price volatility and geopolitical risks in general, as they have the ability to influence the economy of the nation.

Focusing on solar and geothermal energy projects and their implementation would be a prudent decision on the part of St Kitts and Nevis as it will allow the nation to push near-term activity, making it a net energy exporter, while spurring economic diversification and capital investments.

The benefits of a healthy CBI Programme

The improvements made to the CBI Programme in terms of legislations, governance and oversight have been much appreciated, both with in St Kitts and Nevis and by parties outside the nation. This has allowed the programme to improve in a holistic manner, while also serving the role of being a significant contributor to the economy of St Kitts and Nevis.

Having said that, it has been suggested that the already impressive transparency and accountability of the CBI Programme can be improved upon if an annual financial report on the CBI unit’s operations and key data is published.

Tightening of Fiscal stance

St Kitts and Nevis’s budget for 2024 is expected to be reasonably balanced but to maintain that criteria over the medium term, it has been suggested that the nation must pursue a gradual tightening of its fiscal stance, keeping in mind that the IMF staff sees the possibility of a potential teetering of CBI revenue.

To do so, St Kitts and Nevis has been asked to look into its wage bills, goods and services expenditures and the full phasing-out of electricity subsidies.

Tax Policy Reforms

The IMF staff have suggested that a considerate and, in some senses, comprehensive approach to tax reforms, would allow St Kitts and Nevis to safeguard its economic interests in the future.

To do so, a review of CIT concessions, in conjunction with the time frame of the OECD pillar II implementation, while focusing specifically on abolishing income tax holidays and negotiated tax concessions would be the appropriate approach.

It has also been suggested that the remit of VAT could be extended to encompass professional and financial services, as efforts are made to reduce VAT exemptions.

Infrastructure and Disaster Resilience

The efforts made by St Kitts and Nevis to promote natural disaster resilience in terms of the investments made in infrastructure projects has been appreciated. To supplement these efforts, it has been suggested that investment policies in the public sector should focus on consolidating the budget and prioritize projects that align with this vision.

To do so, procurement methods can be improved upon and climate resilient projects can be given a higher level of preference in terms of project selection.

Introduction of a Sustainability and Resilience Fund (SRF)

The IMF staff applauded the government for remaining cognizant of the regional debt ceiling and ensuring that that St Kitts and Nevis remains below it by pursuing fiscal rules that allow for a balanced budget.

To continue along the path of stability, one viable option would be the establishment of a Sustainability and Resilience Fund (SRF). To facilitate this, improvements must be made to the levels of transparency when it comes to fiscal policy making, so as to provide the SRF with the appropriate base to move ahead from.

Surpluses can then be transferred to the SRF, which can then be used to make investments abroad, in accordance with preset institutional guidelines. All of this should also be supplemented with the transparent reporting of any relevant financial results.

Debt and Cash Management

It has been suggested that St Kitts and Nevis could make use of government deposits to pay off short term debt, which is an expensive proposition as it is. This would in turn help bring down the costs incurred by St Kitts and Nevis with regards to interest on the debt and gross financial needs.

The government of St Kitts and Nevis could also approach its finances with more fiscal discipline and pursue the reduction of short-term debt.

Transition to Renewable Energy

The transition to renewable energy by St Kitts and Nevis has been recognized to be of the utmost importance and could transform the economy of the nation in a positive manner. By focusing specifically on solar and geothermal energy, St Kitts and Nevis will be able to cut down on the costs incurred by importing energy, while also dropping the cost of energy with in the nation in general.

By pursuing this transition, St Kitts and Nevis could potentially become self-sufficient with regards to its energy requirements by 2030, which would mark an achievement of great significance to the nation and its future.

A small hurdle in the nation’s path is its need to upgrade and build climate resilient power grids, which would help cancel out the threat posed by natural disasters.

Minimum Wage Increases to be assessed

St Kitts and Nevis has made the decision to increase the minimum wage in the nation in two tiers, the first in January 2024 and the second in July 2025. This would see the minimum wage in the nation rise by 40%, compared to the level which was set previously in 2014.

It has been suggested that St Kitts and Nevis must consider the impact of this decision on employment, informality and external competitiveness, not to mention the knock-on effects of setting public sector wages on the private sector.

Overall strengthening of the Financial System

St Kitts and Nevis has been asked to look into long-standing non-performing loans, so as to finds ways in which the issue can be addressed. It has also been suggested by the IMF staff that the regulatory minimum established by the ECCB for all banks in terms of provisions and capital must be adhered to.

Any banks that fail to fit the bill must then be monitored by the ECCB and function in accordance with a stringent capital restoration plan.

In accordance with the suggestion made by the last IMF report, banks managed to de-risk their large foreign investment portfolio, which has been very important.

The establishment of the SRF is said to be essential for St Kitts and Nevis as it will allow for the reallocation of funds that are currently in the form of foreign investments and government deposits, held by the domestic banking system to the SRF.

The expansion of the credit union sector has been quite sharp and it must be monitored to keep track of non-performing loans.