High public debt impeding growth in St Lucia — IMF

While highlighting “robust tourism inflows” in the island of St Lucia, the International Monetary Fund (IMF) that the country’s growth is being held by back by high public debt.

In a statement outlining its findings during a mission to the island from October 29 to November 8, the IMF noted, “St Lucia’s near-term growth prospects are favourable, supported by large infrastructure investments and robust tourism inflows. However, longer-term growth continues to be impeded by high public debt, lingering vulnerabilities in the financial system, and structural impediments to private investment.”

An aerial view of Bay Gardens Resorts in Rodney Bay, St Lucia (Photo: Bay Garden Resorts)

According to the statement, record-level growth in St Lucia’s tourism industry was more than enough to offset a falloff in construction activities. Moreover, based on preliminary information, the IMF reported that there are signs of improvement in the country’s current account.

Notwithstanding, the fund said that unemployment, which has declined and now stands at 18 per cent, is still too high.

Looking ahead, the IMF forecasts that large public infrastructure projects, which will begin by the year-end, can significantly boost growth from 2020 in 2022.

“The major upgrade of the international airport and the road network will help address capacity constraints and has the potential to catalyse a more durable expansion of the tourism sector and related activities,” the IMF statemtent pointed out.

However, it also warned that there are “downside risks” for which the Government of St Lucia must prepare to mitigate.

“Downside risks to the outlook include a deeper-than-expected slowdown in major source markets for tourism, energy price shocks, disruptions to global financial markets, and loss of correspondent bank relationships. St Lucia’s high vulnerability to natural disasters constitutes an ever-present risk to both growth and the fiscal outlook,” the IMF revealed.

To this end, the fund recommends that the Eastern Caribbean island implements policies that focus on rebuilding the fiscal space and addressing risks to financial stability in order to improve its economic resilience. Furthermore, it pointed out that “prudent fiscal policies” such as St Lucia’s citizenship-by-investment programme (CIP) have contributed to stabilising the country’s public debt as a share of gross domestic product (GDP).

The IMF review indicated, though, that uncertainties about revenues to be generated from the CIP could pose a risk to growth.

In addition, the country’s debt obligations could threaten its growth prospects, in particular, the public wage bill, citing that the country recently concluded wage negotiations in which retroactive increases were agreed upon.

“… the still elevated level of public debt, currently at 65 per cent of GDP, leaves the government with little fiscal space to react to shocks. The debt-financed infrastructure investments, despite being on concessional terms with long-run repayment largely covered by new revenue measures, will move public debt further away from the regional target in the absence of fiscal consolidation efforts,” the statement read.

In the meantime, the IMF encouraged the Government of St Lucia to implement measures that support private sector investment. Of note, it said that the private sector’s ability to access

“The prolonged contraction of bank credit to the private sector remains a significant headwind to the domestic economy. This in part reflects banks’ steady efforts to repair their balance sheets, which should continue,” the IMF stated.

Added to that, the fund recommends that, in order to improve credit market efficiency, the Government should amend legislation that will modernise foreclosure and insolvency challenges.

The IMF also raised concern over banks in St Lucia investing in “overseas debt securities”, which, it said, was due to the contraction in credit.

“This has supported bank profitability but may also expose the sector to losses if global financial market conditions deteriorate and risk premia rise,” the statement warned.

Still, the IMF commends St Lucia’s efforts to enhancing resilience to climate change and natural disasters, including preparing a climate financing strategy and mobilising resources from the global climate funds.