St Lucia now largest economy in eastern Caribbean states IMF
CASTRIES, St Lucia, Thursday December 13, 2012 – The St Lucia government has received a stamp of approval from the International Monetary Fund (IMF) for its implementation of the controversial new Value Added Tax (VAT) but this will not be enough to sustain the economic growth of the eastern Caribbean nation cautioned the Washington-based institute.
Following a visit by an IMF staff team to St Lucia during November 27 to December 7 for its annual Article IV consultation with St Lucia public, private sector and trade union officials, a statement issued by the IMF yesterday (December 12) said that it welcomed the introduction of the VAT as this would modernize St Lucia’s tax system, broaden the tax base, and enhance revenue collection.
However, the IMF cautioned that the expected gain from the VAT could only be realized if all sectors contributed, and the base is shielded from the exemptions that have eroded the yield of other taxes. Even then, it said, a considerable further effort would be needed to strengthen the fiscal position and bring it on track to reach the Eastern Caribbean Currency Union-wide debt target of 60 percent of gross domestic product (GDP) by 2020.
To be successful, stated the IMF, this adjustment effort will need to fall predominantly on current spending?especially containing the already large public wage bill and better targeting transfers and subsidies to the most vulnerable?as well as build on the introduction of the VAT to further widen the tax base. It said these efforts were also necessary to safeguard needed productive investments and enhance the country’s competitiveness through restrained growth in wage costs.
“St. Lucia has weathered the difficult post-crisis environment well, becoming the largest economy in the Eastern Caribbean Currency Union (ECCU). Rising external headwinds, however, have dampened economic activity, with growth estimated to slow to 0.2-0.4 percent in 2012, despite government efforts to revive the economy. Low growth and high unemployment are weighing on financial institutions’ credit quality and their balance sheets. Fiscal imbalances have also widened, reflecting past expansionary policies and the recent stimulus efforts to boost growth, and are expected to contribute to continued sizeable external current account deficits. Inflation is projected to edge up in the wake of the introduction of the value added tax (VAT) on October 1, 2012, but the effect will be temporary,” stated the IMF’s St Lucia mission chief Aliona Cebotari in the release.
“Against this backdrop, the discussions with the authorities focused on achieving the appropriate balance between fostering growth and employment, while strengthening economic fundamentals through fiscal adjustment and addressing financial sector vulnerabilities,” she went on to add.
“With unemployment remaining very high, especially among the youth, growth and job creation are appropriately key priorities for the government. Addressing these challenges through fiscal policies is no longer an option because of lack of fiscal space. The mission welcomed efforts under way to improve the efficiency of the public service, streamline the regulatory environment for investments, and establish the institutional underpinnings of competitiveness reforms, in order to boost St. Lucia’s growth potential. Additional structural reforms will be needed to improve the business climate, adapt the education system to the needs of the economy, reduce trading and electricity costs, and eliminate price and non-price impediments to credit availability. Most importantly, restraining growth in public wages will be key to safeguarding the economy’s competitiveness and growth potential going forward,” cautioned Cebotari.
“Restoring the health of the financial system is necessary to support the growth and stability objectives of the government. The mission discussed with the authorities measures to decisively address identified weaknesses in the financial system and its regulatory and supervisory environment, including by working closely with the regional bank supervisor and making the nonbank supervisory body (Financial Sector Regulatory Authority) fully operational. Passing the revamped legislation regulating credit unions and insurance companies will also be important in this respect,” she advised. Click here to receive free news bulletins via email from Caribbean360. (View sample)