OREANDA-NEWS. June 01, 2015. The Executive Board of the International Monetary Fund (IMF) concluded the Third Post-Program Monitoring discussion for Antigua and Barbuda.

Antigua and Barbuda is experiencing a moderate economic recovery, but fiscal performance has been weaker than expected. The economic recovery continues to be tepid, with real GDP growth estimated at 2.4 percent in 2014. A weakening of tourist arrivals in the fourth quarter continued in the first few months of 2015 and is expected to reduce growth to 2.1 percent in 2015, under current policies. Low fuel prices are projected to assist growth (by about 0.2 percentage points), keep inflation low, and narrow the current account deficit. At the same time, pressures persist in the financial system as ABI Bank remains unresolved. This, combined with high NPL ratios in the rest of the banking sector has resulted in a fourth consecutive year of negative credit growth (-5.2 percent in December 2014) and a drag on economic activity. Fiscal performance in 2014 was weaker than projected and financing pressures were substantial. Partly reflecting fiscal loosening in the run-up to the elections, the overall fiscal deficit reached 2.9 percent of GDP compared with year-ago staff projections of 0.7–1.3 percent of GDP. With elevated scheduled amortization, gross financing needs increased to 10.7 percent of GDP (7.5 percent of GDP in 2013). Also with limited financing options, the authorities relied on higher domestic financing (mostly government securities), and arrears. At end-2014, public sector debt-to-GDP increased to 98.7 percent of GDP (94.3 percent of GDP in 2013).

On current policies, economic growth would remain moderate. The fiscal situation would improve but cash flow problems would persist. The growth outlook reflects, on the upside, the lower oil prices, the recovery in the US, and the opening of the new airport terminal. And, on the down side, the decline in tourist arrivals in the first quarter of 2015 (6.4 percent) has reduced the prospects for the sector. Underlying fiscal balances are expected to improve in 2015. The improvement in the primary balance is accounted for by elimination of election-related expenditures and other ad-hoc spending cuts as outlined in the 2015 budget (e.g., reduction in Work Experience Program spending, public work, and national solid waste). Financing pressures will remain. Deficit financing is likely to continue to come mainly from domestic loans, but these will not suffice to cover gross financing needs and arrears will persist.

Executive Board Assessment1

Directors expressed concern about the macroeconomic and financial challenges in Antigua and Barbuda. Amidst moderate economic activity, the country faces long-standing fiscal and banking sector problems, which include unsustainable public debt, accumulation of arrears, high non-performing loans, and an unresolved bank. Directors reiterated the need for early and substantial fiscal adjustment to restore fiscal and debt sustainability and to support the bank resolution strategy.

Directors considered that current policies do not appear to be sustainable, and that urgent actions are needed. They encouraged the authorities to adopt a comprehensive medium-term fiscal consolidation program starting in June 2015. While welcoming the authorities’ intentions to develop an adjustment package, they urged them to move expeditiously in announcing the new measures and to accompany them with structural fiscal reforms. Directors recommended enhancing the tax effort by strengthening tax administration, lowering the wage bill, reducing transfers to SOEs, and cutting expenditures in goods and services. They also suggested improving expenditure and payment control, reducing public sector cross debts, and strengthening oversight of state-owned enterprises.

Directors recognized the positive fiscal effect of the Citizenship by Investment Program (CIP), while cautioning that these windfall revenues should not weaken the commitment to undertake strong fiscal adjustment measures. Directors recommended using CIP revenues to support the bank resolution strategy, clear arrears, pay down debt, build buffers, and invest in strategic infrastructure projects.

Directors welcomed the authorities’ intention to resolve the Antigua and Barbuda Investment Bank by June 2015, and the progress made on the ECCU regional bank resolution strategy. They urged the authorities to expedite the negotiations and complete the critical steps needed for a successful bank resolution. Directors underlined the importance of ensuring that the outcome is least-cost and creates a viable successor bank. It will also be key that resources are available to fund the resolution while safeguarding fiscal sustainability.

Directors concurred with the emphasis on improving growth and employment through the promotion of foreign direct investment. They welcomed the new renewable energy legislation, and recommended expediting the reform of the state-owned utility company, with the goal of reducing energy costs and improving efficiency. They also stressed the need for wage restraint to improve competitiveness.

While welcoming the authorities’ commitment to remain current with the country’s obligations to the Fund, Directors expressed concern that under current policies, the country’s capacity to repay the Fund may be at risk. Noting the high risk of debt distress, they encouraged the authorities to urgently explore available financing and debt management options.