The Executive Board of the International Monetary Fund (IMF) has concluded its 2023 Article IV consultation with Saint Lucia, endorsing the staff appraisal without a meeting on a lapse-of-time basis.
The assessment reveals a resilient bounce-back of the island nation's economy after grappling with the impacts of the COVID-19 pandemic and import price shocks, particularly from the war in Ukraine.
Saint Lucia, heavily reliant on tourism, witnessed a robust recovery post-pandemic, with its output nearing pre-crisis levels.
According to the Board’s report, the surge in government revenue has led to a narrowing fiscal deficit, while the current account deficit has also declined significantly since its peak in 2020.
However, challenges remain, particularly in the realm of public debt, which remains substantially higher than pre-pandemic levels.
Growth projections of 3.2 percent for 2023 indicate a slight slowdown compared to the previous year, with tourism demand continuing its recovery trajectory. However, the medium-term outlook suggests a gradual decline in growth rates down to a potential 1.5 percent.
Inflation is expected to remain elevated in the short term (4.3 percent in 2023) but is projected to taper off to around 2 percent in the medium term. The current account deficit is anticipated to decrease further, driven by sustained recovery in tourism.
The Executive Board's assessment highlights several key areas of concern and recommendations for policy action.
"The government’s plan, encompassing investments in the transport, health, and social areas, is ambitious and consistent with the needs to address bottlenecks to growth. However, on current policies, public debt is projected to stabilize around 75 percent of GDP in the medium term, above the regional ceiling of 60 percent of GDP by 2035. The short maturity profile of domestic (regional) debt keeps financing needs elevated, implying refinancing risk. The government plans to increase revenue are insufficient to reach the regional debt ceiling. Constraints to bank credit, including the need to increase provisioning and legal disincentives affecting the ability to seize collateral remain obstacles to domestic investment, employment, and growth.
The government’s plan could be strengthened with policies that focus on fiscal sustainability and resource allocation efficiency. With output approaching its pre-pandemic level, the government should target a fiscal consolidation of at least 2½ percent of GDP to reach the regional debt ceiling and rely on strengthening of tax compliance, streamlining of tax exemptions, adopting a fuel price pass-through framework, and the more efficient value-added tax. A further 1 percent of GDP of fiscal consolidation could be used to increase public investment resilient to natural disasters.
Public debt sustainability could be supported by a well-designed fiscal rule, self-financing of the initiatives to strengthen the social safety net, and more capacity to access climate finance. To address fiscal risks, CIP revenue could be saved in a fund for self-insurance against natural disasters, debt service, and public investment. The draft reforms put forward by the pension fund should be implemented to increase its longevity, and its investment portfolio should be more internationally diversified to boost its resilience to shocks.
The priority in the financial sector is to strengthen buffers to increase resilience to shocks while enhancing incentives for private lending. Banks should improve the classification of NPLs in the post-moratorium and restructured portfolios, raise provisions to the regulatory minimum, and strengthen risk management of foreign investments. The government should use its representation power at the ECCB to strengthen the enforcement of provisioning requirements and speed up the disposals of NPLs. The modernization of foreclosure legislation for commercial loans and residential property, and passing of the bankruptcy and insolvency law, would expand credit access and lower loan interest rates. Ensuring effective implementation of the international AML/CFT standards would help protect correspondent banking relationships and mitigate risks related to cross-border financial flows. In the credit unions sector, the passing of the draft bill with stronger regulatory standards will improve compliance with provisioning and capital requirements.
High unemployment, particularly among the youth, requires targeted policies to address deep-rooted social problems and a review of the education programs. While improving conditions for private investment will increase labour demand, it may prove insufficient to achieve full employment. High unemployment affects different segments of the population facing distinct challenges to employment, especially female workers and youth. This suggests the need to review education programs to strengthen employability; increase enrollment in technical and vocational education and training to address skill mismatches; reduce of transport cost; and review the allocation of government scholarships to skills in high demand, in consultation with employers.
Labour participation of females and youth could be addressed by expanding the capacity of child and elderly care. The recently created Youth Economy Agency to support youth employment and business development and entrepreneurship with training and guidance could be complemented with social programs that tackle non-economic barriers to employment."