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   st. kitts economic environment   

     

     
     
     

     

    Introduction

     

     

    The country outline for St Kitts and Nevis (SKN) aims to offer a general overview of the SKN social and economic situation. It was prepared using inputs from the Caribbean Development Bank Annual Economic Report for the year 2003-2004, the CIA fact-book and World Bank Discussion Papers available online. The complete list of references is available in the sections named Bibliography and Sources on-line.

     

     

     

    Section I. presents social indicators; section II analyzes the economic situation. Finally section III presents major policy issues prioritized by the government and the budget communication.

     

     

     

    I. Social Indicators

     

     

    The Country Poverty Assessment conducted in 2000 revealed that 30.5% of individuals in St Kitts and 32% in Nevis were poor. The characteristics of the poor were quite similar for each island with: (i) poverty being highest among individuals under the age of 25 years; (ii) there was a higher proportion of the female population than the male population living in poverty; and (iii) participation rates of the poor in the labour force were high. The 'working poor' tended to engage in elementary low-level occupations that attracted low wages and require low levels of skills and educational achievement. The CPA identified a lack of education and functional illiteracy as among the major causes of poverty.

     

     

     

    II. Economic Situation analysis

     

     

    a. Overview of the recent economic performance

     

     

     

    Economic performance in St Kitts and Nevis (SKN) improved moderately in 2003, with real economic growth estimated at 2% compared with 0.8% and 2.3% in 2002 and 2001, respectively. Improvement in the economic performance of the international economy in 2003 contributed in part to the economic growth performance in the domestic economy despite the lingering effects of 9/11.

     

     

     

    The performance continues to reflect the inherent vulnerability of the economy to developments in the global economy and natural hazards. Positive growth was recorded in tourism, construction, manufacturing, wholesale and retail trade and transport and communications, while negative growth was recorded in agriculture.

     

     

     

    • The tourism industry rebounded with total visitor arrivals estimated to increase over the previous year despite severe challenges, including the outbreak of SARS, the war in Iraq and the increasing security concerns of terrorists' activities worldwide[1].
    • The construction sector, likewise, recorded positive growth following a decline in 2002. The sector continued to be the largest contributor to GDP in 2003 accounting for 15%, the same level (15.1%) as in the previous year [2].
    • The manufacturing sector also registered positive growth despite a significant decline in sugar production during the year. Firms involved in the manufacture of electrical and electronic components, as well as firms producing for the local market, had a higher level of output on account of the improved economic performance in the US and improved domestic economic activities.
    • The agriculture sector was affected by adverse weather conditions (prolonged dry spell) during 2003. Agricultural output was mixed, with a significant decline in sugarcane production on account of the adverse weather conditions, late application of fertilizers and a reduced area planted[3], while non-sugar agriculture production increased due to improved pest control and extension support. The launching of the first agriculture irrigation project and the establishment of the project steering committee for agricultural diversification were major developments in the sector during the year[4].

     

     

    b. Prices, wages and employment

     

     

     

    The relative strengthening of economic activity in 2003 occurred within the context of price stability, notwithstanding fluctuating oil prices in the international market. The rate of inflation, as measured by the change in the CPI, rose on average by 2.2% in 2003, compared with 2.1% and 2.4% in 2002 and 2001, respectively[5].

     

    In the labour market, wages and salaries in both the private and public sectors remained generally stable during 2003.

     

     

     

     

     

    c. Fiscal Policy and Public Debt

     

     

     

    The consolidated overall fiscal performance of SKN improved moderately during 2003 on account of a moderate increase in revenue collections although the fiscal situation still remains challenging[6]. The rise in total current expenditure reflected mainly the growth in interest payments which are in turn reflective of public indebtedness. The current account deficit is estimated at $16.3 mn (1.6% of GDP), compared with $29.4 mn (3.1% of GDP) in 2002.

     

     

     

    The fiscal improvement arose principally from the determined efforts by the authorities to correct the unsustainable fiscal position by the implementation of the Structural Adjustment Technical Assistance Programme.

     

    In addition to revenue and expenditure measures in the adjustment programme, there were several structural reform measures to be implemented at specific time periods. The Government has also implemented measures to strengthen the institutional arrangements for monitoring, reviewing and addressing follow-up action in the programme, which impacted positively on the fiscal performance[7].

     

     

     

    The total stock of public sector debt of SKN grew by an estimated 18.7% to $1,797.9 mn (177.8% of GDP) at the end of 2003 from $1,514.3 mn (157.4% of GDP) at the end of 2002. The external debt rose by 22.4% to $851 mn and the domestic debt increased by an estimated 15.6% to $946.9 mn at the end of 2003. The rapid growth of the debt over the last five years reflected mainly the weak financial performance of the public sector and the financing of a large capital programme. However, despite larger debt service obligations, the Government has always serviced its debt on a timely basis and has maintained good relations with its creditors. The Government has indicated plans to contain and minimise the accumulation of debt and to rationalise the debt portfolio with a view to reducing debt service obligations

     

     

     

     

     

    III. Major Policy Issues

     

     

    a. Overview

     

     

     

    The major policy issues for the Government at this juncture are[8]:

     

    • Economic diversification
    • Financial Management and Public Indebtedness
    • Poverty reduction
    • Disaster mitigation and environmental protection

     

     

    Economic diversification will be the cornerstone in the pursuit of economic restructuring, with greater focus on tourism, financial services and information technology as key economic sectors in context of the pending closure or restructure of the sugar industry. Discussions are ongoing between the Government and FAO and CDB on agricultural diversification and land use management.

     

     

     

     

     

     

    The tourism industry, the major pillar of the economy, is likely to improve further during the medium term with the addition of significant room capacity.

     

    The financial services sector is identified as the second major pillar of the economy and significant efforts are being made to promote SKN as strong and 'clean' financial jurisdictions.

     

     

     

    Fiscal Management and Public Indebtedness The fiscal performance of SKN deteriorated significantly over the last five years on account of the expansionary fiscal policy as expenditure growth outpaced revenue growth. Public finances witnessed a decline in fiscal savings and deterioration in the overall deficit. Concomitant with the deteriorating fiscal imbalances was the increase in public indebtedness. The enormity of the debt situation in SKN is reflected in the high level of total public sector debt. SKN's debt is the highest in the OECS sub-region. The Government needs to carefully monitor the debt situation and implement workable measures to reduce this high level of indebtedness.

     

     

     

    Poverty Reduction. The reduction of poverty will, for the foreseeable future, present the Government with perhaps its most formidable developmental challenge The Government is currently preparing a poverty-reduction strategy and action plan for SKN, spearheaded by the Ministry of Social Development, Community and Gender Affairs. Given the increasing service orientation of the economy and the growing importance of an adequate skills base, the Government views human resource development as a very important element of its economic restructuring and as an integral part of its poverty-reduction strategy.

     

    Disaster Mitigation and Environmental Protection. Given the frequency of the passage of hurricanes over SKN in recent years, there is the need for effective emergency response planning, consistent coordination and liaison among government agencies, response agencies and organisations and community support groups. SKN's National Disaster Mitigation Council, which is responsible for formalising the institutional arrangements for disaster mitigation and management, needs significant institutional strengthening. Also, a catastrophe insurance programme needs to be in place to cater for emergencies. The land use and management programme is necessary to preserve the quality of the environment.

     

     

     

     

     

    b. Public Sector Investment Programme

     

     

     

    Development objectives. The development objectives and economic strategy of the Government have been articulated in its MTESP: 2003- 2005.  Spending on the PSIP is projected to remain high especially in the period: 2004-2006 as the Government continues to create and maintain conditions conducive for economic growth and development. Total expenditure on the PSIP during 2004-2006 is estimated at $142.8 mn, with an average of over 4% of GDP annually. Economic infrastructure is expected to be the dominant sector, accounting for 45.7% of the entire programme. Other major projects include education, the health sector, other social services  and the Emergency Response Disaster Management project.

     

     

     

    Financing of the PSIP. External loans are expected to account for an average of about 83.1% of the programme's financing requirements with a peak of 49.5% in 2004. EU and CDB are among the major donors. It is projected that grants will account for about 10.6% of the programme's financing requirements, much lower than in previous years. The remaining 6.3% of the financing requirements of the PSIP is expected from domestic revenue.

     

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