Washington -- Oct. 7, 2008 -- Following an acceleration in real GDP growth between 2001–06, activity was flat in 2007, reflecting a hurricane-induced contraction in banana exports, and a downturn in construction activity and tourist arrivals. Despite being underpinned by the regional currency board arrangement, annual inflation reached close to 7 percent in 2007, due largely to food and fuel price shocks and the ongoing depreciation of the U.S. dollar. The fiscal policy stance tightened markedly in 2007/08, while public debt remained stable at about 70 percent of GDP.

Outlook and risks.

Although near-term growth prospects are favorable, risks are tilted to the downside. Given continuing pressure for higher social and capital spending, there is a risk that current policies may adversely affect the sustainability of public debt. While St. Lucia’s domestic credit markets remain largely unaffected by international financial turbulence, slower growth and consumption in the U.S. and world economy, accompanied by high energy prices, may dampen
tourism and private capital inflows.

External competitiveness.

The real effective exchange rate is in line with macroeconomic
fundamentals, yet maintaining competitiveness remains a challenge. The recent rise in the external current account deficit reflects an adverse terms of trade shock and a downturn in tourist arrivals, and is almost fully financed by nondebt-creating private capital inflows.

Main
issues.

Policy discussions focused on the key challenges facing St. Lucia:
● Broadening the bases of growth. The authorities and staff agreed on the required steps, including efforts to revitalize tourism, improve the investment climate, and diversify exports.

● Debt sustainability and fiscal consolidation. To ensure fiscal and debt sustainability, staff advocated fiscal adjustment to be achieved largely by greater prioritization of capital spending, enhanced debt management, and a broadening of the tax base, including through enhanced pass through
of world energy prices. The authorities agreed with the need for fiscal consolidation and better evaluation of public sector investment, but emphasized that their plan to boost tourism sector public infrastructure was the lynch pin of a strategy to attract large private capital flows into tourism.

● Financial and external stability. Current account imbalances are projected to decline over the medium term, and be smaller than the estimated equilibrium level. The authorities have strengthened banking sector supervision, but need to bolster efforts to introduce a single regulatory agency for non-bank financial institutions and close unregulated investment schemes.

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Source" imf.org