By Kenton X. Chance
Washington, DC: The outlook for St. Vincent and the Grenadines is “favourable” but the economy is facing challenges from an ageing population and climate change, the International Monetary Fund (IMF) said on Wednesday.
In a statement following its usual — “Article IV” — consultations, the Washington-based global financial institution said that the favourable outlook is subject to downside risks mainly stemming from the uncertain external environment.
It said the country had achieved a robust recovery from recent compounded shocks, supported by the government’s “decisive policy responses, large-scale investment projects, and robust growth in tourism”.
However, the economy is facing “challenges from a rapidly ageing population and the ever-present threat of natural disasters and climate change, amid the still high public debt”.
The IMF said that government policies need to be calibrated to continue to build buffers and resilience and support sustainable and inclusive growth while safeguarding debt sustainability and financial sector stability.
The Vincentian economy rebounded strongly in 2022-23, returning to pre-pandemic output levels, the IFM said, adding that growth reached 3.1% in 2022 and is estimated to have accelerated to 5.8% in 2023.
“This was supported by large public and private investment and a robust recovery of tourism, which were partly offset by a drop in agriculture due to lingering effects from volcanic eruptions [of April 2021) and the historic high temperature in 2023”
Meanwhile, stayover arrivals approached pre-pandemic levels in 2023 supported by significant improvement in airlift.
“Formal employment surpassed pre-pandemic levels in 2022 and is estimated to have continued to grow in 2023, fuelled by the recovery in tourism and higher demand in other services.”
The IMF, however, said recent compounded shocks have left a lasting negative impact on the employment of young men.
“As regards public finances, even though non-interest current spending was significantly reduced, the fiscal deficit is estimated to have widened in 2022-23 largely due to the phasing of port-related spending and temporary factors.
“Public debt declined from its peak in 2021 to about 87 percent of GDP in 2023 but remains well above pre-pandemic levels. The external position improved in 2022-23 supported by recovery in goods exports and tourism receipts,” the IMF said.
SVG’s public debt, as at Sept. 30, 2023, stood at EC$2,444,470,403, a 12.8% increase year-on-year, Minister of Finance Camillo Gonsalves told Parliament in January as he presented the EC$1.6 billion EC$1.6 billion Budget for 2024.
Domestic debt was EC$638.5 million or 26% of the total while external debt was EC$1.8 billion or 73.9%.
Total debt service for 2024 was estimated at EC$282.9 million or 37% of current revenue.
The IMF said it welcomes the government’s continued commitment to reaching the regional debt target and the medium-term fiscal strategy set out in the 2021 Rapid Credit Facility.
“This includes further strengthening tax administration, continued containment of the growth of wages (as manifested in the prudent public sector wage growth over 2023-25 agreed in the recent round of negotiation) and non-priority current spending, and prioritising capital programmes to balance the needs for a resilient recovery with safeguarding debt sustainability.”
It said that as such, the primary balance is expected to improve to a surplus of about 3¼% of GDP from 2026 once the large-scale projects are near completion.
“This would put the debt-to-GDP ratio on a downward path from 2025 and, if sustained, reach 60% before the regional target date of 2035.”
The IMF said growth is projected at 4.9% in 2024, which implies that economic activity would surpass the level projected for the medium term before the pandemic.
“Near-term growth will be supported by continued recovery in tourism and strong investment on infrastructure, particularly the port project.”
Inflation is projected to ease to around 2% by yearend on account of lower imported inflation.
“Risks to the outlook stem primarily from an abrupt global slowdown, commodity price volatility, potential delays in investment projects, and the ever-present threat of natural disasters and climate change.
“On the upside, stronger-than-expected tourism development and agriculture sector recovery could enhance growth and improve the external position.”
The IMF said that coordinated reforms to the National Insurance Services (NIS) and Public Sector Pension System (PSPS) are needed to improve their efficiency, sustainability, and fairness.
In the 2024 Budget approved in January, Minister of Finance Camillo Gonsalves announced reforms of the NIS, the nation’s social security agency, which would see contribution rate rising from 10-15% over the next two years, beginning in June.
The finance minister told lawmakers that the adjustment in the contribution rate is among eight recommendations that Cabinet had approved “to improve financial sustainability, benefit, adequacy, and coverage.
“These approved reforms, when fully implemented, will secure the financial future of the fund and ensure that the NIS remains the best investment for Vincentian workers to secure their financial future,” he said.
Gonsalves, however, said work on the necessary parallel reforms, namely to the necessary improvements to the public pension system is also well advanced.
The IMF said it welcomes the recently launched pension reform package to bolster the NIS’ financial sustainability “in view of the rapid population ageing and the still low contributions compared to generous pay-outs.
“Additional measures to ensure NIS’s long-term sustainability and further enhance its efficiency and fairness could be considered, including linking retirement age to life expectancy and applying a uniform accrual rate across years to promote long careers,” the IMF said.
“Reforming the non-contributory PSPS to better align it with the NIS is urgently needed to improve fairness and reduce fiscal costs.”
The IMF further said that building resilience to natural disasters and climate change remains “a priority”.
It said that the government has stepped up efforts to strengthen structural and financial resilience, including by incorporating resilience features into new infrastructure, adopting a Disaster Risk Financing Strategy, tapping Green Climate Fund, and enhancing the disaster management plan and legislation.
“Efforts to transition to renewable energy are ongoing, including the introduction of new solar projects and a new revenue-neutral import tax regime to promote cleaner motor vehicles,” the IMF said.
It said that ongoing work to modernise the Electricity Act and update the National Energy Policy would help provide an enabling environment to support the transition.
The IMF staff team, led by Nan Geng, visited Kingstown from April 23 to May 7, for the 2024 Article IV consultation discussions on economic developments and macroeconomic policies