An IMF mission, led by Ms Nan Geng, visited St. Vincent and the Grenadines during August 18-31, 2022, for the 2022 Article IV consultation discussions on economic developments and macroeconomic policies.
The mission team benefited from candid and constructive discussions with public and private sector counterparts and other stakeholders and issued the following statement:
The IMF team said the pandemic and 2021 volcanic eruptions, compounded by the impact of the war in Ukraine, highlighted St. Vincent’s vulnerability to external shocks and natural disasters.
The shocks wielded a major blow to agriculture and tourism, two main sectors. The proactive policy responses mitigated the socio-economic impact of the shocks and helped contain economic scars. GDP is estimated to have increased by 0.5 percent in 2021, after shrinking by 5.3 percent in 2020. Despite authorities’ strong efforts to mobilize revenue and contain non-priority spending, critical fiscal responses to address the humanitarian and healthcare crises— coupled with weaker economic activity—raised public debt to about 88 percent of GDP in 2021. Tourism recovery has been slow, with Q1 stayover arrivals reaching 45 percent of the pre-pandemic levels. The war in Ukraine have compounded the 2020-21 shocks through a spike in import prices.
The team said the outlook is favourable, although subject to large downside risks.
“The post-eruption rebuilding activity, continued recovery in tourism and agriculture, and the start of several large-scale investment projects would support real GDP growth of 5 percent this year. Growth is projected to strengthen to 6 percent in 2023 as major projects get into full swing. Higher import prices, in particular those for fuel and food, are projected to push inflation to 5.7 percent in 2022. Nevertheless, core inflation is estimated to have remained below 2 percent, reflecting the still negative output gap. Risks to the outlook are tilted to the downside, including from commodity price volatility as a result of a further escalation of the war in Ukraine or supply chain disruptions, sharper-than-expected slowdown in trading partners’ growth, Covid-19 outbreaks, potential delays in investment projects including due to supply chain disruptions, and ever-present threat of natural disasters. On the upside, a faster-than-projected recovery in tourism could improve growth.”
Safeguarding debt sustainability while supporting a resilient and inclusive recovery
The fiscal stance embedded in the 2022 budget strikes a balance between the need to support the vulnerable, building resilience, and maintaining fiscal prudence.
Rising living costs in the environment of limited fiscal space pose difficult trade-offs. The authorities have rightly prioritized spending to provide essential support to reconstruction and economic activity and plan to keep the fiscal relief to cushion the impact of rising living costs temporary. Additionally, the government rolled out temporary income support and other targeted programs to support households heavily affected by the volcanic eruptions. This should be accompanied by further efforts to enhance coverage and targeting of social safety nets, including through ongoing efforts to digitize beneficiary information and payment system.
The mission welcomes the authorities’ continued commitment to reaching the regional debt ceiling and the medium-term fiscal strategy set out in the 2021 RCF.
This includes further strengthening of tax administration, continued containment of wage and other current spending growth while safeguarding critical service delivery, and focusing public investment on reconstruction, resilience building, and essential infrastructure. Supported by the strategy, the primary balance would improve to a surplus of about 3 percent of GDP once the large-scale projects are completed in 2026. The public debt is projected to peak in 2024 and steadily decline thereafter to fall below 60 percent of GDP before the regional target date of 2035. Given the elevated macroeconomic uncertainty and high vulnerability to external shocks and natural disasters, the debt trajectory is, however, subject to significant risks.
Once the recovery takes hold, it will be important to recalibrate and fully operationalize the FRF to underpin the commitments and reinforce fiscal sustainability.
The potential increase in external borrowing costs due to tighter global financial conditions and elevated debt stock underscores the need to operationalize a well-designed FRF to signal credible medium-term fiscal plans. The recent surge in debt resulted from multiple shocks and higher cost of key infrastructure projects have made the current debt and operational targets inconsistent with the new reality. Aligning the timing of the debt target with the revised regional one (from 2030 to 2035) would strike an appropriate balance between supporting the recovery and ensuring debt sustainability. Given the announced policies, the primary balance would reach about 3¼ percent of GDP over 2027–35 (compared to the current FRF target of 2.7 percent)—consistent with achieving the regional debt target and debt sustainability.
