IMF Credits CBI For Softening Blow of Pandemic on Saint Kitts Economy, Encourages Optimization of the Program

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In its concluding statement following the most recent Artice IV Mission to Saint Kitts & Nevis, the IMF indicated accumulated CBI-funds played a central role in staving off economic disaster and encouraged the country to do what it can to boost CBI inflows.

The IMF pointed out that, epidemiologically speaking, Saint Kitts & Nevis has fared better than most countries in the last year and a half: In 2020, the federation experienced the lowest per-capita case count in the Western Hemisphere and did not record a single COVID-related fatality.

The Kittitian economy, however, did not come away unscathed. The complete halt in cruise ship arrivals and the decimation of stay-over tourism levels drove a 12.5% reduction in GDP, which the IMF expects to decline by another percent this year before recovering by 10% in 2022. The IMF projected a return to pre-pandemic GDP levels only in 2024, with the caveat that further COVID-related disruptions could derail the recovery schedule.

But the Fund also pointed out that economic matters would have been considerably worse were it not for the country’s citizenship by investment program:

“St. Kitts and Nevis entered the Covid-19 pandemic from a position of fiscal strength following nearly a decade of budget surpluses,” the IMF wrote. “A significant part of the large CBI revenues were prudently saved, reducing public debt to below the regional debt target of 60 percent of GDP and supporting accumulation of large government deposits.”

The other side of the Keynesian coin

The buffer provided by years of budget surpluses thanks to CBI-receipts allowed Saint Kitts & Nevis to mitigate the negative economic effects through measures like public investments, loan moratoria, tax waivers, and unemployment support. Dipping into the accumulated CBI-savings, however, has reduced the country’s fiscal buffer and brought about the first fiscal deficit in a decade (4.7% of GDP). The IMF, consequently, encouraged the government to return to accumulation once the recovery begins in earnest.

“Once the recovery is firmly established,” wrote the IMF, “the government should resume its policy of saving part of the CBI revenues to build fiscal buffers. As a small, natural disaster-susceptible country dependent on tourism and historically volatile CBI revenues, St. Kitts and Nevis needs significant buffers.”

To that end, the Fund recommended the Federation aim to maintain an annul budget surplus of at least 2% of GDP, which – assuming CBI-receipts could amount to 9% of GDP – would “allow reducing public debt to around 40 percent of GDP and rebuilding deposits to close to a quarter of GDP by the end of the decade, which would provide a significant buffer against both macro-economic and natural disaster shocks.”

The IMF also pointed out that CBI receipts have historically been volatile, and that lower-than-assumed revenues from the program could necessitate additional borrowing and, by extension, slow down the reduction of debt levels.

The Fund advised the country to introduce a “more active strategy to attract potential investors, including closer coordination with the CBI program,” and to further “strengthen compliance with international AML/CFT standards and transparency and oversight of the CBI program,” which would help “mitigate risks to correspondent banking relationships.”

Intimating a causal relationship between the high levels of investment in the country over the last several years and relatively slower growth in productivity, the IMF suggested reforms could bolster productivity and export competitiveness. One such reform, said the Fund, might involve using the CIP to “attract investment beyond the tourism sector.”