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.
