On February 6, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with St. Vincent and the Grenadines.
The economy of St. Vincent and the Grenadines shows signs of recovery, but at a slower pace than expected in 2011. After three consecutive years of negative growth, reflecting the impact of the global financial crisis, higher commodity prices and natural disasters, real GDP grew by about ½ percent in 2011. Economic activity indicators for the first six months of 2012 suggest a modest pick-up in tourism arrivals, manufacturing, and agricultural activity. Real GDP growth is expected to be around ½ percent this year, as weak construction activity partly offsets the modest upticks in manufacturing and tourism. Pressures on prices have eased, consistent with declining commodity prices, with year-on-year inflation reaching a low of 0.9 percent in September 2012, after peaking at 4.7 percent at the end of 2011. The external current account deficit remains high at around 30 percent of GDP, largely reflecting higher than expected imports relating to foreign direct investments (FDI), fuel, and international airport construction. Private sector credit growth remains sluggish and continues to drag on growth. While this reflects a tightening of lending standards by banks in the wake of the financial crisis and high non-performing loans (NPLs), it also shows banks’ hesitation to lend to private businesses despite excess liquidity.
The fiscal deficit is expected to narrow by about one percentage point compared to last year to about 2¾ percent of GDP, as lower-than-projected revenues were offset by cuts in capital expenditure due to financing constraints. That said, spending on wages and salaries is expected to be somewhat higher given the recent announcement of a retroactive wage increase of 1½ percent for civil service workers for 2011 and 2012. Earlier in the year, the government issued a EC$40 million 10-year bond on the Regional Government Securities Market (RGSM) to help finance the deficit.
Weak growth performance has taken a toll on the financial sector. NPLs at banks remain in the 7–7½ percent range, almost twice their pre-crisis level, with considerable variation across banks. Similarly, bank profitability has declined significantly since 2009. While capital adequacy ratios at around 20 percent are relatively high, inadequate provisioning against NPLs (less than 30 percent) calls for caution in interpreting these ratios.
Non-bank financial institutions endure low profitability and their balance sheets continue to come under stress with average NPLs at credit unions broadly similar to those at banks. Available data on NPLs at the Building and Loan (B&L) Association indicate that half of its loan portfolio was overdue in 2011. Although exposures to BAICO and CLICO were partly written off in 2011 by two credit unions and the B&L association, a considerable amount remains on their books and a further write-off could worsen their balance sheets.
Regional efforts to resolve the fallout from the BAICO/CLICO failure are underway. In addition to the establishment of the Medical Support Fund last year to address the needs of medical policyholders, negotiations for selling BAICO’s life insurance portfolio to a regional insurance company are well advanced. It is also expected that with the help of the money committed by Trinidad and Tobago, annuity holders may start receiving partial payments by the end of 2012.
Growth is expected to improve over the medium term, albeit gradually, on the back of projected improvements in economic activity in advanced economies and the expected completion of the international airport, which is expected to boost tourism.
Executive Directors noted that the St. Vincent and the Grenadines’ economy is showing signs of recovery following a series of negative shocks. Nevertheless, the near-term outlook for growth is challenging due to the high level of public debt and weaknesses in the financial sector. Directors considered that continued commitment to prudent macroeconomic and financial policies as well as structural reforms to improve competitiveness are key to sustaining growth and enhancing the economy’s resilience to shocks.
Directors welcomed the authorities’ commitment to fiscal consolidation and to the realization of primary surpluses in the medium term. They emphasized that ensuring fiscal and debt sustainability, making room for growth-enhancing capital expenditures, and building buffers against potential future shocks will require further efforts to increase revenues and reduce current expenditure. To this end, Directors encouraged steps to contain the wage bill, limit transfers to state-owned enterprises, and reform of public pensions system. They also called for elimination of discretionary exemptions, strengthening administrative capacity, and improving tax compliance. While recognizing the need for commercial borrowing for the international airport project, Directors urged the authorities to continue to pursue a prudent debt policy to safeguard fiscal and debt sustainability.
Directors underscored the need to monitor the bank and the non-bank financial sectors and to address the vulnerabilities by strengthening supervisory and regulatory standards. In this context, they welcomed the recently established Financial Services Authority and encouraged expeditious resolution of issues at any domestic financial institutions, drawing on technical assistance from international financial institutions.