…commends St. Kitts-Nevis on its legacy of fiscal prudence
WASHINGTON, DC- FIVE questions were recently posed to the International Monetary Fund (IMF) by this publication, and among them was what recommendation could be given to OECS member states that depend on the Citizenship By Investment (CBI) programme to boost their economy but are making large payments to social programmes to cushion economic challenges.
In response, the IMF, in a written document, acknowledged that the OECS’ economies, in general, have accelerated economic recovery but containing inflation remains a policy priority, pointing out that “high inflation disproportionally hurts low-income households and pose a risk to social and political stability”.
The international financial agency however recommended that “temporary and well-targeted transfers are important to mitigate the risk”.
The IMF said, “Another policy priority is to restore fiscal buffers,” noting that the large increases in public debt generated by natural disasters, COVID-19 pandemic and the policy response to high food and fuel prices call for resolute action to restore fiscal space.
The financial institution posited that policymakers in OECS member states would need to find savings without cutting into key social programs or spending on health, education and public infrastructure.
It therefore recommended that “public investment with stronger growth and employment impacts should be prioritized, and lower-priority expenditure should be scaled down. Creating fiscal space will also require further progress on revenue administrative reforms and rationalization of tax expenditures”.
With regards to the IMF Article IV Staff Report on St. Kitts and Nevis, the question asked was - “What is the country’s financial state, especially when considering that the Fund is recommending, among other things, introduction of personal income tax and the Government to find new investment sources?”
The IMF, in response, commended the Federation for its continuing legacy of fiscal prudence, which it claimed has ensured that St. Kitts and Nevis’ “public finances are in good shape”.
“The 2023 Budget adopted a cautious fiscal stance over the medium-term and the Treasury holds a significant cash buffer. Yet important challenges remain,” the IMF said.
Given the uncertain nature of revenue from the CBI programme, IMF advised that it should not be relied upon for regular expenditure and recommended that “a tax reform agenda to achieve more revenue mobilization, as well as a rebalancing between current expenditures and capital expenditures are both overdue”.
The Fund claimed that another challenge is the risk of severe natural disasters, for experience shows that the cost of a major natural disaster could well exceed the cash buffers. “Therefore, St. Kitts and Nevis’ public finances, while in good shape, need to remain prudent to prepare for these challenges.”
The IMF was also asked if it would recommend that the Federation cuts a large swat of its social spending in light of the growing threat of a recession in the United States and economic challenges globally, to which it spoke to the institution’s recent report.
“As stated in the recent Article IV Staff Report, the IMF advice is not to cut social spending but rather ensuring that social transfers are used more efficiently to protect the most vulnerable segment of the population. Some blanket measures adopted during the COVID-19 and cost-of-living crises have undesirable side effects. For instance, one-size-fits-all energy subsidies are not conducive to energy efficiency.
“The ongoing reform of Poverty Alleviation Program, whose objective is to refocus transfers to vulnerable households through means-testing and other social criterion, is a commendable step in the right direction and could increase welfare, while reducing the budget footprint.”
“As for all its member states, we stand ready to support St. Kitts and Nevis government policies, be it through the regular economic surveillance and policy dialogue carried out in the context of Article IV consultations, or through IMF lending if circumstances make it necessary,” was the answer to the question - “Based on the economic review that St. Kitts and Nevis will seek funding due to its current economic state will the IMF provide same?
When asked what advice would be given to CBI dependent territories, taking the global mixed economic outlook into consideration, the IMF said they need to make prudent use of CBI revenues.
“Save them in a rainy-day fund so that future spending to mitigate external shocks is derived from a stream of income, rather than from depleting the fiscal buffer. CBI revenues not saved or used for immediate debt reduction can be channeled towards common good projects - such as disaster resilient infrastructure and energy transition - to support climate change adaptation and promote sustainable economic development.”
The IMF also advised that a high level of transparency and accountability in CBI programs is also essential for their sustainability. “For these reasons the IMF welcomed the announcements made on March 6 by ECCU Finance Ministers together with the ECCB on a set of measures taken to boost the integrity of these programs.”
