IMF, August 24, 2006.. "An IMF staff mission led by Mr. Paul Cashin, Deputy Division Chief in the Western Hemisphere Department, visited St. Vincent and the Grenadines during July 25-August 2 to conduct the 2006 Article IV Consultation discussions.

The discussions covered recent developments and current economic policies, as well as the medium-term economic outlook. The mission received excellent cooperation and benefited from a constructive exchange of views with Prime Minister the Honorable Dr. Ralph Gonsalves, the Leader of the Opposition Arnhim Eustace, Green Party leader Ivan O'Neal, Director General of the Ministry of Finance and Planning Maurice Edwards and other senior government officials, as well as representatives from the private sector, financial sector, farmers, and trade unions.

"The near-term outlook appears broadly favorable. After having slowed in 2005, economic activity in St. Vincent and the Grenadines is expected to accelerate in 2006 to just over 4 percent, driven by a pick up in construction and tourism-related services, as well as a rebound in agricultural production. While inflationary pressures have emerged due partly to higher world energy prices, inflation has remained low, anchored by St. Vincent and the Grenadines' membership of the regional currency union administered by the Eastern Caribbean Central Bank.

"Looking further ahead, however, vulnerabilities remain given the country's dependence on imported oil, the erosion of trade preferences in bananas, and frequent natural disasters. Moreover, St. Vincent and the Grenadines faces the challenges of enhancing its growth potential, reducing poverty, and bringing incomes closer to that of its Eastern Caribbean Currency Union counterparts. Against this background, the IMF mission discussed the importance of strengthening the fiscal position, creating a conducive investment climate for the private sector, expanding remittance and investment flows from St. Vincent and the Grenadines' large overseas population, and addressing air transportation links and ongoing structural change in the economy.

"More specifically on the fiscal front, the IMF mission encouraged the authorities to adopt a prudent fiscal stance over the medium term, that balances pressures to provide fiscal stimulus during periods of below-average economic growth and ensuring debt sustainability. In the past, such stimulus has fueled an increase in public indebtedness and debt servicing, which restricts the fiscal space available to pursue social and poverty agendas. The IMF mission noted the government's plans to replace several indirect taxes by a value-added tax in 2007. This is an important reform, which will place fiscal balances on a firmer footing over the medium term, and significant preparatory work has already been completed. The mission had productive discussions on a range of other fiscal-related matters, including prioritizing the capital budget, the challenges facing National Insurance Services, education and investment in human capital, disaster preparedness, and domestic pricing of petroleum products.

"The IMF mission observed that prudential indicators point to a strengthening of the country's banking sector, while welcome steps have been taken to enhance the regulation and supervision of both bank and nonbank financial intermediaries, as well as of the offshore financial sector. The robust growth of the offshore financial sector illustrates the benefits of greater supervision of providers of financial services.

"The economy's rebound since 2001 is likely to have reduced unemployment, but poverty and labor market imbalances remain areas of concern, especially given the erosion of preferential access for exports of bananas to the European Union. The mission supports the government's plans to conduct a study of household expenditure and poverty assessment, which should be used to guide public policy in this area. The mission recommends that the coverage of poverty-alleviating social programs be limited to the most needy and vulnerable groups, ultimately through the creation of a formal social safety net."