IMF Executive Board Concludes 2015 Article IV Consultation with St. Lucia
On the back of strong tourism inflows and lower oil prices, the St. Lucian economy has returned to growth after experiencing a recession in 2012 and close-to-zero growth in 2013. GDP growth reached 0.5 percent in 2014, with transportation and hotels mostly contributing to the economic recovery. The current account deficit is estimated to have narrowed from 11.2 to 6.7 percent of GDP in 2014. Inflation increased to 3.5 percent, mainly owing to higher food prices. For the first time since FY2008/092, the primary balance switched to a small surplus of 0.1 percent of GDP in FY2014/15, reflecting somewhat higher revenues, including from policy measures, restraint on current spending, and cuts to capital expenditures. Nevertheless, debt continued to rise to almost 80 percent of GDP reflecting non-concessional interest rates and low growth.
Despite moderate economic recovery, unemployment rose to 24.4 percent in 2014. Youth unemployment, in particular, reached 41.8 percent. Despite some reduction in nonperforming loans, credit to private sector continued to decline. Compounded by robust deposit growth, the fall in credit continued to add onto liquidity accumulation in the banking system, raising excess reserves to an all-time high. The February 2015 decision by the Eastern Caribbean Currency Union Monetary Council to lower the minimum saving deposit interest rate from 3 to 2 percent (effective May 2015) alleviated pressures on bank profitability and allowed some easing of monetary conditions while the exchange rate, which is pegged to the U.S. dollar, appreciated by 3 percent as of September 2015 in real effective terms from a year ago.
Executive Board Assessment3
Executive Directors welcomed the recent uptick in economic activity and the positive short-term outlook on the back of stronger tourist arrivals and lower oil prices, but noted that unaddressed vulnerabilities are holding back the pace of the recovery. Accordingly, Directors encouraged the authorities to persevere with their efforts to improve the fiscal position, revive bank intermediation, and push ahead with the reform agenda. Actions on all these fronts hold the key to reducing unemployment, boosting competitiveness, and strengthening St. Lucia’s growth prospects over the medium term.
Directors welcomed progress in tackling financial sector weaknesses, but observed that non-performing loans remain high and bank credit to the private sector continues to decline. They agreed that cleaning up banks’ balance sheets and facilitating a resumption of lending should be top policy priorities. While some efforts require regional coordination, key steps for the St. Lucian authorities to consider include a reform of the foreclosure and insolvency legislation and the ratification of all the elements of the regional strategy for bank resolution, particularly the law on the Eastern Caribbean Asset Management Corporation. Directors welcomed the progress so far on complying with the international standards against money laundering and the financing of terrorism.
Directors noted recent improvements in the fiscal balance, but concurred that St. Lucia’s high public indebtedness limits the room for policy maneuver and poses risks. They encouraged the authorities to formulate without delay a strong medium-term plan to achieve the regional debt target and secure the sustainability of public finances. Directors generally agreed that the fiscal adjustment should be based for the most part on current expenditure reductions and aim at preserving priority capital spending and creating buffers against natural disasters.
Directors took note of the newly launched Citizenship by Investment Program. They welcomed the emphasis on transparency in the governing legislation, noting that the highest integrity standards could help prevent abuses of the program. Directors underscored the importance of a prudent deployment of the associated revenues which may be volatile, for example to finance key infrastructure projects or retire public debt.
Directors underscored the importance of ambitious structural reforms to reduce unemployment, improve the business environment, and foster higher and more inclusive growth. They shared the view that continued efforts are needed to diversify energy sources, reduce the costs of doing business, and improve efficiency, including in port operations and customs. Furthermore, education reform would help address skills mismatches in the labor market