Washington -- July 19, 2010 -- On June, 07, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Antigua and Barbuda.¹

Background

Antigua and Barbuda’s economy is experiencing its worst recession in decades. The global slowdown has severely affected the economy through its impact on tourist arrivals, Foreign Direct Investment (FDI) inflows and remittances, and fiscal revenue. Real GDP contracted by 7 percent in 2009 after expanding on average by about 6 percent during the previous 5 years. Following a spike in 2008, inflation has remained in the low single digits despite a 20 percent increase in fuel prices and higher consumption taxes. The recession and associated fiscal crisis coincided with an already unsustainable fiscal situation and mounting problems in the financial sector—the collapse of the Stanford Group (the largest private conglomerate) and of the Trinidad-based CL Financial Group.

Following many years of accumulation of arrears to domestic and external creditors, the fiscal situation turned critical in 2009 as the recession led to a 20 percent decline in tax revenue. Meanwhile, recorded primary expenditure rose by 4.5 percent of GDP due to higher-than-budgeted current outlays. The overall fiscal deficit widened from 6 percent of GDP in 2008 to about 19 percent in 2009. With limited financing options, the government accumulated arrears amounting to about 9 percent of GDP to domestic and external creditors, bringing the total stock of arrears to about 53 percent of GDP, or 45 percent of the outstanding public debt, which totaled 115 percent of GDP. To contain the deterioration in the fiscal position, the authorities implemented revenue measures in mid-2009 amounting to about 1.5 percent of GDP on an annualized basis. These included raising petroleum product prices in August, by an average of 20 percent (about 1.5 percent of GDP), while introducing a flexible and market-based petroleum-product pricing mechanism.

The external current account deficit narrowed to 25 percent of GDP in 2009, reflecting a decline in FDI inflows. Aside from some financing from Venezuela, the deficit was financed mainly by a drawdown in commercial banks foreign asset position, a reduction in Antigua and Barbuda’s share of international reserves at the Eastern Caribbean Central Bank (ECCB), and the further accumulation of arrears on public external debt.

The contraction of economic activity has resulted in a significant slowdown in private sector credit growth, while domestic bank lending rates have remained broadly stable. However, non-performing loans fell sharply in 2009 as percent of total loans, reflecting the restructuring of loans to both government and the private sector. In February 2009, the ECCB assumed control of the Bank of Antigua following a sharp withdrawal of deposits precipitated by the collapse of the Stanford Group. This has resulted in a shift of about 20 percent of indigenous banks’ deposits to foreign owned banks.

The authorities have requested Fund financial assistance and the Executive Board approved a three-year Stand-By Arrangement in June (see Press Release No. 10/232) in support of a comprehensive reform strategy aimed at restoring fiscal and debt sustainability. The reforms include a significant and sustained tightening of fiscal policy supported by a comprehensive debt restructuring and structural reforms to strengthen the customs and inland revenue departments. The approved 2010 budget built on the fiscal measures taken in mid-2009, and features additional measures that are designed to shift the fiscal position to primary surplus of 3 percent of GDP from a primary deficit of 11.5 percent of GDP in 2009. These measures, which include prioritizing capital and goods and services expenditure and a freeze on public sector wages, will be complemented by revenue measures aimed at returning the tax-to-GDP ratio to pre-crisis levels and bring the overall deficit to zero by 2012. The authorities have approached their domestic and external creditors seeking to restructure their public debt and to regularize the extremely high level of arrears. The authorities’ strategy also includes strengthening supervision and regulation of the financial sector to increase its resilience to shocks and reduce macro-financial risks.

Executive Board Assessment

The Executive Directors commended the authorities for their strong and comprehensive response to the exogenous shocks to tourism receipts, FDI inflows and remittances, which led to the most severe recession experienced by Antigua and Barbuda. The already unsustainable fiscal position, with high public debt and a large stock of arrears, turned critical and problems also mounted in the financial sector. Directors endorsed the authorities’ three-pronged strategy comprising front-loaded fiscal adjustment measures, debt restructuring, and structural reforms to further strengthen the fiscal position, address financial sector vulnerabilities and foster growth. They stressed the critical importance of full implementation of this strategy which underpins the Fund-supported program.

Directors welcomed the authorities’ commitment to a strong fiscal adjustment program, which will constitute a decisive step towards restoring debt sustainability. They observed that the combination of both, raising tax revenue and cutting expenditure by prioritizing capital spending and reducing the wage bill, are needed to shift the fiscal position from a significant primary deficit to a surplus. They welcomed the actions already taken and emphasized that maintaining fiscal discipline and following through on additional measures, if needed, would also be important. Directors stressed that sustained commitment to the planned fiscal structural reforms, including strengthening revenue agencies and reforming the civil service, social security and public financial management, will be central to further fortifying the fiscal position.

Directors emphasized that comprehensive domestic and external debt restructuring is paramount for achieving debt sustainability, given that the public debt of Antigua and Barbuda is unsustainable even with the significant fiscal adjustment envisaged. They welcomed the authorities’ first steps to engage in open and transparent negotiations with external creditors as part of a restructuring strategy. In this context, Directors considered it essential to engage also non-Paris Club creditors and to seek treatment comparable to Paris Club creditors. Directors stressed that, since the bulk of the interest relief will come from restructuring domestic debt, the parametric reform envisaged by the authorities for the social security scheme, a key domestic creditor, will be essential to ensure its long-term viability.

Directors agreed that the financial sector reform agenda is well focused on both bank and nonbank segments. Onsite inspection of the banking system by the Eastern Caribbean Central Bank will provide important and timely information and form the basis to deal with fragilities of domestic banks. Strengthening the regulation and supervision of offshore financial services and nonbanks will address major shortcomings in the regulatory framework. Directors welcomed the ongoing efforts to strengthen legislation concerning anti-money laundering and combating the financing of terrorism, and encouraged the authorities to persevere in these efforts.