WASHINGTON (CMC) – The executive board of the International Monetary Fund (IMF) says economic growth in St Kitts-Nevis is poised to accelerate in the near term.

It said that public and private sector investments, including on renewable energy, will add to the productive capacity of the economy, and lower energy imports will increase national income.

“It is also expected that cheaper energy prices will support competitiveness, foster economic diversification and ultimately raise potential growth. Carefully crafted policies in the areas of natural resource taxation, utility prices, investment tax incentives will be required to fully seize the potential of energy transition and harness renewable energy resources towards sheltering the country from growing climate risks,” said the IMF executive board as it concluded the Article IV consultation and endorsed the staff appraisal.

The IMF had earlier noted that despite a continued strong tourism performance, economic growth fell to 3.4 per cent in 2023 from 8.8 per cent the previous year due to delays in public and private sector investment projects.

It said then that higher food and oil prices and shipping costs pushed average inflation to 3.6 per cent, which subsided at end-2023. The current account deficit narrowed to 5.4 per cent of gross domestic product (GDP) in 2023, from 10.9 per cent in 2022, supported by the robust tourism recovery.

In its assessment , the IMF executive board said that the fiscal stance should be tightened to maintain a balanced budget over the medium term.

It said while a small deficit is expected in 2024, balancing the budget over the medium term will require tightening the fiscal stance in response to an expected decline in the Citizenship by Investment Programme (CBI) CBI revenue.

Under that programme, foreign investors are granted citizenship of the twin island Federation in return for making a significant contribution to the socio-economic development of the country.

“Foregoing further unbudgeted and untargeted payments, such as the CBI dividends, and returning current expenditures to their pre-pandemic level as a share of GDP will be essential. Improving control over the wage bill and goods and services expenditures, along with fully phasing out of electricity subsidies, should form the core of the effort.

‘”Progress in these areas would support an expansion of targeted social assistance and capital expenditures for natural disasters’ resilience,” the IMF executive board said.

It said a comprehensive roadmap for tax reform would help prepare for a future decline in CBI revenues.

“A more progressive tax system would address the distortions created by broad tax concessions and bring greater fairness and economic efficiency. Reforming the property tax to reflect the current market value of properties and abolish stamp duty, as well as focusing on tax arrears collection, are steps in the right direction.”

It said conducting a review of CIT concessions, with a view to abolishing negotiated tax concessions and income tax holidays, is time critical given the window of opportunity opened by the implementation of the Organisation for Economic Co-operation and Development (OECD).

“Bringing unincorporated businesses under the CIT would allow for the full expensing of capital spending and the carryforward of losses. There is also scope to scale back VAT exemptions and expand VAT coverage to professional and financial services.

“Efforts to enhance the CBI framework should be continued. CBI revenue have provided crucial support to the budget in the last few years but there is scope to further improve the integrity of the programme”.

The IMF executive said the steps taken to improve the governance of the programe, advance CBI legislation, and create the CBI Board of Governors to improve oversight are commendable.

“The transparency and accountability of the CBI program could be further enhanced by publishing an annual financial report on the CBI unit’s operations and key data on applications.”

The Washington-based financial institution said the country’s legacy of fiscal prudence can be entrenched by a further strengthening of the fiscal framework.

It said the government’s implicit fiscal rule of balancing the budget and remaining below the regional debt ceiling has served the country well.

“Enshrining this practice into law would provide a clear fiscal anchor, improve fiscal policy making transparency and provide solid foundations to the establishment of the SRF. An expenditure rule would help bring current expenditures back to pre-pandemic levels and cap future current spending increases from volatile CBI inflows, supporting a rebalancing towards capital expenditures.

Public sector investment policy and planning should be consolidated across the public sector through a consolidated investment budget prioritizing across projects, the IMF said, noting that debt and cash management could be improved and the social security fund requires urgent reform.

“Maintaining a large amount of short-term debt can be costly, particularly when fiscal buffers are available. Consideration should be given to using the Regional Bond Market as a means to diversify funding sources, and more collaboration at the federal level could optimize public finance management.

“Urgent and decisive action is needed to preserve the financial balance of the Social Security Fund and protect intergenerational equity. A parametric reform should increase the contribution rate, raise the retirement age, and expand pension coverage. Ensuring that public sector employees’ pensions are aligned with those of the broader social security system to ensure replacement rates no greater than 100 percent is central to the fairness of the reform.”

The IMF said that a successful transition to renewable energy will transform the economy. It notes that the government aims to bring the country to energy self-sufficiency by 2030 with 100 per cent of renewable energy production.

“Investments planned in solar and geothermal energy will reduce energy imports, lower energy costs and could support productivity growth by boosting economic diversification and export opportunities.

“Fully harnessing the country’s renewable energy potential calls for a comprehensive strategy, including deciding on the optimal energy mix, related investment plans and financing options, and multi-year planning for the infrastructure upgrades needed to connect the two islands power grids and increase resilience to natural disasters,” the IMF executive board added.