The In­ter­na­tion­al Mon­e­tary Fund (IMF) on Fri­day said  St. Lu­cia has been “se­vere­ly af­fect­ed” by the COVID-19 pan­dem­ic and the in­crease in im­port prices due to the war in Ukraine.

“Af­ter a col­lapse in 2020, tourist ar­rivals have re­bound­ed sig­nif­i­cant­ly in 2021–22, but the re­cov­ery re­mains in­com­plete,” said the Wash­ing­ton-based fi­nan­cial in­sti­tu­tion af­ter its Ex­ec­u­tive Board con­clud­ed Ar­ti­cle IV con­sul­ta­tion with St. Lu­cia.

“The pub­lic bal­ance sheet re­mains un­der con­sid­er­able strain, with a size­able fis­cal deficit and a sig­nif­i­cant in­crease in pub­lic debt since 2019,” it added. “In­fla­tion has picked up with the surge in com­mod­i­ty prices—some­what mit­i­gat­ed by price con­trols and en­er­gy sub­si­dies. The fi­nan­cial sec­tor has re­mained sta­ble, but non­per­form­ing loans have risen dur­ing the pan­dem­ic.”

The IMF said out­put is pro­ject­ed to grad­u­al­ly re­cov­er to the pre-pan­dem­ic lev­el by 2024, slowed by the im­pacts of the war in Ukraine and the tight­en­ing of glob­al fi­nan­cial con­di­tions.

It said pub­lic and pri­vate in­vest­ments are con­strained by weak bal­ance sheets, as well as high­er in­put costs and sup­ply con­straints.

The IMF said in­fla­tion is pro­ject­ed to rise to 6.4 per­cent in 2022, adding that the fis­cal out­look is chal­leng­ing due to high pub­lic debt and large re­fi­nanc­ing needs which lead to fi­nanc­ing con­straints.

“With­out ad­di­tion­al pol­i­cy mea­sures, pub­lic debt is pro­ject­ed to sta­bi­lize around 90 per­cent of GDP (gross do­mes­tic prod­uct) in the medi­um term, lim­it­ing the space for pub­lic in­fra­struc­ture and so­cial in­vest­ments……the cur­rent ac­count deficit is pro­ject­ed to grad­u­al­ly nar­row with the re­cov­ery of tourism.”

“Bank cred­it to the pri­vate sec­tor is ex­pect­ed to re­main ane­mic due to con­cerns about weak cor­po­rate bal­ance sheets and struc­tur­al im­ped­i­ments, such as the lack of a cred­it reg­istry and a weak in­sol­ven­cy frame­work,” the IMF added. “Down­side risks dom­i­nate, main­ly from high­er glob­al food and en­er­gy prices, glob­al in­fla­tion and tight­en­ing of fi­nan­cial con­di­tions, sup­ply bot­tle­necks, and the on­go­ing pan­dem­ic. The nat­ur­al dis­as­ter risk re­mains a near-term chal­lenge and is ex­pect­ed to in­ten­si­fy with cli­mate change.”

Ex­ec­u­tive di­rec­tors not­ed that St. Lu­cia’s tourism-de­pen­dent econ­o­my was se­vere­ly hit by the pan­dem­ic, and while there was a sig­nif­i­cant re­bound in tourism in 2021, the re­cov­ery re­mains in­com­plete, “as the surge in im­port prices and high in­fla­tion fol­low­ing the war in Ukraine weigh on eco­nom­ic growth.”

The IMF di­rec­tors not­ed sig­nif­i­cant chal­lenges ahead as the pub­lic bal­ance sheet re­mains un­der pres­sure, with a size­able fis­cal deficit, high rollover needs, and a sharp in­crease in pub­lic debt, as well as the loom­ing threat of nat­ur­al dis­as­ters.

Against this back­drop, they em­pha­sized the need to ad­dress fis­cal and fi­nan­cial con­straints to pub­lic and pri­vate in­vest­ment “to fos­ter a sus­tain­able and in­clu­sive re­cov­ery”.

The di­rec­tors con­curred that, in the near-term, fis­cal pol­i­cy should fo­cus on pro­tect­ing the most vul­ner­a­ble from food and fu­el price in­creas­es.

Giv­en fi­nanc­ing con­straints, they en­cour­aged the au­thor­i­ties to pri­or­i­tize spend­ing and to in­crease the pass-through of glob­al en­er­gy prices, while sup­port­ing vul­ner­a­ble house­holds with tar­get­ed trans­fers.

As the re­cov­ery takes hold, the IMF di­rec­tors called for pur­su­ing a “cred­i­ble and growth-friend­ly fis­cal con­sol­i­da­tion to strength­en fis­cal sus­tain­abil­i­ty, cre­ate space for so­cial and in­fra­struc­ture in­vest­ment, build buffers against nat­ur­al dis­as­ters, and put debt on a down­ward path.”

“Adopt­ing a medi­um-term fis­cal re­spon­si­bil­i­ty frame­work, a debt man­age­ment strat­e­gy, and a fis­cal rule to sup­port debt sus­tain­abil­i­ty would be im­por­tant,” the di­rec­tors urged.

They high­light­ed the role of the fi­nan­cial sec­tor to un­lock pri­vate sec­tor growth, and en­cour­aged fa­cil­i­tat­ing ac­cess to cred­it and boost­ing fi­nan­cial in­ter­me­di­a­tion, in­clud­ing by mod­ern­iz­ing the in­sol­ven­cy and fore­clo­sure leg­is­la­tion and es­tab­lish­ing the cred­it bu­reau and a mov­able col­lat­er­al frame­work, as well as strength­en­ing the non-bank fi­nan­cial sec­tor.

The di­rec­tors not­ed the ex­pan­sion of the cred­it union seg­ment and wel­comed the Fi­nan­cial Ser­vices Reg­u­la­to­ry Au­thor­i­ty’s plan to con­duct an as­set qual­i­ty re­view of cred­it unions.

They urged the au­thor­i­ties to ad­dress re­main­ing AML/CFT de­fi­cien­cies to pro­tect cor­re­spon­dent bank­ing re­la­tion­ships.

In ad­di­tion, the IMF di­rec­tors called for tack­ling struc­tur­al chal­lenges to sup­port growth and boost pro­duc­tiv­i­ty, in­clud­ing by ad­dress­ing la­bor mar­ket skill mis­match­es, build­ing en­er­gy in­de­pen­dence and in­creas­ing eco­nom­ic di­ver­si­fi­ca­tion.

They en­cour­aged en­hanc­ing struc­tur­al and fi­nan­cial re­silience to nat­ur­al dis­as­ters through a long-term in­te­grat­ed strat­e­gy 2 in a “com­pre­hen­sive macro­eco­nom­ic frame­work with­in debt-sus­tain­able bounds.”

“In­vest­ment in re­silient in­fra­struc­ture would sup­port growth and en­hance fis­cal sus­tain­abil­i­ty,” the di­rec­tors urged, not­ing the im­por­tance of de­vel­op­ing a strong dis­as­ter in­sur­ance strat­e­gy while struc­tur­al re­silience is built.