WASHINGTON, CMC – The International Monetary Fund (IMF) says that economic growth in St. Vincent and the Grenadines continues to be affected by the global slowdown through its impact on tourism and Foreign Direct Investment (FDI).

After concluding its 2011 Article IV Consultation with the authorities in St. Vincent and the Grenadines, the Washington-based financial institution said on Wednesday that  two recent natural disasters – Hurricane Tomas in October 2010 and torrential rains and floods in April 2011 – have also “taken a toll” on the country.

“After a contraction of 1.8 per cent in 2010, growth in 2011 is expected to remain negative, albeit to -0.4 per cent, moderated by reconstruction activity after Hurricane Tomas,” the IMF said.

Along with other donors, the Fund said it has provided “significant emergency assistance” to St. Vincent and the Grenadines to address the immediate balance of payments need arising from the impact of the global financial crisis and the two recent natural disasters.

It said inflation has picked up, reflecting higher international commodity prices.

It said the “pass-through” from higher food and fuel prices, with a combined weight of 34 per cent in the Consumer Price Index (CPI), resulted in “headline inflation,” accelerating to about 2.8 per cent (year-over-year) by June this year, compared to about 0.5 per cent at the end of last year.

Meanwhile, core inflation remained unchanged at 0.6 per cent compared to December last year, the IMF said.

It said the fiscal deficit is expected to be smaller than last year, mainly reflecting cuts in capital spending to offset shortfalls in revenues and delayed disbursement of external loans.

The IMF said current expenditure has been rising, in part, to mitigate the impact of the adverse shocks on the poor and vulnerable.

But, over the medium-term, it said the authorities “remain committed to generating a primary surplus averaging about 2 per cent of Gross Domestic Product (GDP).

“A more ambitious fiscal consolidation path would allow for a faster reduction in debt and room to build a cushion against future exogenous shocks,” it urged.

The IMF said monetary aggregates remain “flat,” with the year-on-year growth in real private sector credit and broad money supply “nearly flat as of June 2011, reflecting banks wariness to make new loans in an uncertain environment.”

With regard to the financial sector, the IMF said non-performing loans (NPLs) at commercial banks in the country decreased somewhat from 8.5 per cent at end-December 2010 to 7.5 per cent at end-June 2011, adding, however, that bank profitability has also been declining.

“NPLs remain elevated in the non-banking financial sector, although efforts are ongoing to improve performance,” it said.

In order to improve supervision in the non-bank sector, the IMF said the Government of Prime Minister Dr. Ralph Gonsalves is planning to establish the Single Regulatory Unit by year-end.

It said efforts continue to help resolve the fallout from the failure of the two insurance companies, British American Life Insurance Company (BAICO) and the Colonial Life Insurance Company (CLICO).

The IMF noted that a Health Insurance Fund was set up to settle medical claims of BAICO’s policyholders, and that an announcement was recently made inviting interested parties to bid for BAICO’s life insurance policy portfolio, adding that discussions are also ongoing to find a solution for BAICO’s annuity holders.

On CLICO, the IMF said the government continues to work with other governments in the region to find a solution.

“Directors welcomed the authorities’ commitment to prudent macro-economic policies and encouraged them to press ahead with efforts to enhance the economy’s resilience to shocks and foster sustainable growth,” the statement said.

The directors commended the authorities’ intention to generate primary fiscal surpluses in the range of 2 percent of GDP by 2016 and to avoid external commercial borrowing “to ensure debt sustainability.”

They welcomed plans to introduce market based property taxes, strengthen revenue administration, contain the public sector wage bill, limit transfers to state owned enterprises, and rationalize spending on goods and services.

“While the difficult trade-offs with current pro-growth and social spending needs were recognized, many directors noted that a more ambitious consolidation, including pension and civil service reforms, would help to build buffers against potential future shocks,” the statement said.

“Directors underscored the need for close monitoring of both the banking and nonbank financial sectors,” it noted, stating that regional financial sector concerns “could affect confidence and ultimately impact economic activity.”

The directors supported enhanced monitoring of cross-institution and cross-border holdings, in coordination with regional authorities, and also encouraged the authorities to expedite the establishment of the Single Regulatory Unit for the nonbank sector.

In addition, the directors underscored the need to increase the growth potential and diversify the economy, including by improving the business climate and enhancing competitiveness.

“This would help to reduce the large and unsustainable current account deficit,” they said.

They also welcomed the authorities’ efforts to ease access to credit, and invest in infrastructure and education.

The directors said that technical assistance and donor support would be “important to underpin the country’s reform agenda.”