Washington---13 Sept. 2006:

St. Lucia’s GDP growth has slowed since the 1980s and public debt has risen rapidly in recent years. The development of tourism did not fully compensate for the declining production of bananas and other export products since 1990. A restrictive trade regime, high cost of capital, and labor market rigidities appear to have hampered structural change. Public debt built up as the authorities attempted to stimulate growth, contributing to making the economy more vulnerable to shocks.

• The recent pick-up in economic activity provides an opportunity to address these challenges. GDP growth is accelerating, based on tourism and related investments, and is expected to exceed 5 percent in 2005 and 2006. The positive growth outlook provides a window to reduce the fiscal imbalances and adopt measures to strengthen competition and flexibility in labor and goods markets.

• Fiscal policy should aim to set public debt on a rapidly declining path. While fiscal deficits have narrowed since 2003, the budget for the current fiscal year would sharply set back fiscal consolidation. However, in light of capacity constraints, the full implementation of budgeted capital expenditure is unlikely. Regarding the medium term, there was agreement on targeting a primary surplus of 3−4 percent of GDP by FY 2008/09 which would reduce debt to below 60 percent of GDP by the end of the
decade.

• Fiscal consolidation should be based on a combination of revenue and expenditure measures. Staff and the authorities broadly agreed on most key elements of such a program, including lowering capital spending to historical levels, sustained moderation in civil service wage growth and employment, the implementation of a VAT, and the need to protect the yield of the petroleum tax through fuel price adjustments. The authorities were concerned that a large reduction of tax concessions would render the
economy uncompetitive vis-à-vis other islands that also offer such concessions.

• Long-term growth would benefit from a stronger outward orientation, and measures to promote domestic investment and labor market flexibility. Staff recommended cutting peak import tariffs and licenses to promote export diversification, lowering the cost of capital by easing foreclosure laws, better targeting investment incentives, raising labor mobility under the CSME to broaden the available skills mix, and strengthening assistance programs to help ease the movement of banana workers into other sectors while cushioning the social impact. The authorities were committed to
trade integration and greater competition, but argued that reforms required time.

• There has been some progress in addressing financial and natural vulnerabilities. Still, the stock of nonperforming loans remains high and should be closely monitored. St. Lucia has a well-designed disaster prevention and mitigation framework, but enforcement will be key. Public assets should be insured against natural disasters to a greater degree.