The government in St Kitts and Nevis is being cautioned to learn from the 1970s oil boom lessons of T&T and resist the temptation to increase expenditure from the inflows generated by the St Kitts Citizenship-by-Invitation (CBI) initiative in a way that leaves the Eastern Caribbean twin-island nation vulnerable to a sudden reversal of fortune.
The caution comes from Judith Gold, who headed the last International Monetary Fund (IMF) mission to St Kitts, speaking on the sideline of an IMF forum on Unlocking Economic Growth, which was held in Montego Bay, Jamaica on Thursday and Friday.
The first inkling that St Kitts and Nevis has been performing very well economically came in the presentation by Alejandro Werner, the director of the Western Hemisphere Department of the IMF during his luncheon address on Thursday.
After describing how growth in many of the Eastern Caribbean countries has been constrained by their high debt burdens, soft tourism arrivals and the high cost of energy, Werner said the Citizenship-by-Invitation inflows “have already led to a robust recovery in St Kitts and Nevis and could help support an economic recovery and improve macro-balances in a few other economies.”
But, he warned, “prudent management is key to containing the risks associated with these programmes as large and volatile CBI inflows may increase macro vulnerability” leading to:
Economic overheating that creates risks of Dutch Disease;
Reduced fiscal discipline leading to increased dependence on the inflows; and
Higher external vulnerability with risks of sudden stops.
The fact that a senior official of the IMF could use the words St Kitts and Dutch Disease—which conveys the negative consequences of a large increase in a country’s income generally from natural resources—in the same sentence came as a surprise because in the last 40 years in the Caribbean, Dutch Disease has been used exclusively with regard to the T&T economy. Some background might be useful.
Coming out of the end of the sugar preference regime and global financial crisis, St Kitts/Nevis had a debt to GDP ratio of 159.3 per cent and a fiscal deficit of 7.6 per cent, according to the 9th and final review of the island’s three-year, stand-by arrangement with the IMF.
That document states: “The programme began in July 2011 amid an exceptionally deep crisis with large fiscal and current account deficits, very high debt and concerns about financial stability.
In the three years between July 2011 and July 2014, St Kitts/Nevis was able to turn a fiscal deficit of 7.6 per cent of GDP at the 2010 into a fiscal surplus of 12.3 per cent in I2013 and lowered its debt-to-GDP ratio from 159.3 per cent to 103 per cent, according to the IMF document.
The island nation achieved this feat by embarking on a three-year hiring and wage bill freeze (which would have led to a reduction in expenditure over the period), by ramping up its Citizenship-by-Investment receipts and engaging in an innovative, but highly controversial, debt-for-land swap.
The debt-for-land swap came about because the State in St Kitts acquired a great deal of what used to be sugar lands after the end of that era in the island’s history.
Realising that the land, which was mostly unproductive, was an asset that could be used to reduce its debt, the Kittitian government decided to swap the land for debt. In other words, it owed a significant percentage of the debt to a St Kitts financial institution and transferred the land to the institution in satisfaction of the debt.
According to the IMF July 2014 Review of the stand-by arrangement: “St. Kitts transferred 27 percent of GDP in lands to a domestic creditor, extinguishing a corresponding amount of debt, contributing to a reduction in the debt-to-GDP ratio from 137.3 per cent at end-2012 to 103.1 percent at end-2013. Additional land transfers in 2014, by both the Nevis Island Administration and the Federal Government, up to the equivalent of 11 per cent of GDP, is expected to lower the debt ratio to 86.2 percent by year-end.
Apparently the Citizenship-by-Investment inflows have been very large. According to a slide in Werner’s presentation, the inflows to the St Kitts/Nevis government and Sugar Industry Diversification Foundation from the Citizenship-by-Investment initiative jumped from about 7 per cent of GDP in 2010 to about 25 per cent in 2013. Twenty-five per cent of GDP in a T&T context would be about $45 billion.
Making the link between Dr Werner’s comment about Dutch Disease and the St Kitts economy Ms Gold, who was previously assigned to T&T as the mission head, said: “The Citizenship-by-Investment inflows are very similar to natural resource inflows and yes they represent a very positive windfall into the economy.
“In the same way that T&T had very large oil earnings, spending those earnings too rapidly can lead to a decline in competitiveness in the rest of the economy.
“The rest of the economy needs to compete on labour cost and price, in a way that oil does not and if you spend the money very quickly, you can increase aggregate demand and wages and reduce competitiveness.”
She said spending the inflows from the Citizenship-by-Investment initiative too quickly is a concern that St Kitts has to take into account and watch out for because they do have these large windfall earnings.
“Like T&T, they provide more fiscal space and comfort, but they also represent the risk that some industries could become uncompetitive, which was the case with Trinidad’s agriculture sector, for example,” Gold said.
“There is also a question of sustainability, because right now these programmes are very popular and the advanced economies are happy to tolerate them, but we don’t know what the future holds and the advanced countries may clamp down on these programmes.”
She cautioned St Kitts against allowing its wage bill to increase too rapidly. If not, the nation may be stuck with unsustainable public sector wages at a time of declining revenues.
She advised that the issue of public sector wages be handled “very carefully and judiciously to ensure that you remain on a sustainable path.”
She agreed that St Kitts/Nevis was a success story in terms of the Caribbean, attributing the turnaround to “strong policy implementation” of structural reforms such as the introduction of a Value-Added Tax (VAT) and the improvement of tax administration.
“They did many good things and that coupled with having the good fortune of the CBI programme becoming very popular allowed them the benefit of a strong fiscal framework and strong inflows.”