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1. RECENT ECONOMIC PERFORMANCE A. Overview In 2006, heightened volcanic activity, which resulted in dome collapse and heavy ash-fall at the end of May, together with a downturns in construction and tourism, caused the value of real output in the Montserrat economy to decline by 3.1%, compared with growth of 1.6% in 2005. Construction sector output contracted by 34%, reflecting delays in the implementation of several major projects. Activity in tourism was severely affected by a fall in excursionist arrivals. The rate of increase in prices slowed, with the consumer price index increasing by 1%, compared with 2.9% in 2005. Central Government’s recurrent account deficit widened as revenue receipts stagnated while expenditure increased. High liquidity in the financial system did not prevent some increases in interest rates. On the external account, the merchandise trade deficit widened as exports declined and imports increased. B. Sectoral Performance Tourism During 2006, activity in the tourism industry declined.Total visitor arrivals to the end of October 2006, declined by 32% to 6,948 from 10,205 for the same period in 2005, with the number of stay-over and excursionist visitors declining by 18% and 62%, respectively, to 5,772 and 226. Total sea arrivals to the end of October 2006 fell by 97% to 201 because of the closure of the ferry service between Montserrat and Antigua in 2005. The number of air arrivals, however, increased by 86% over the same period to 6,747 from 3,637 a year earlier. As a result of this fall in tourist arrivals, estimated tourist receipts, to the end of September 2006, declined by 12.3% to $5.3 mn from $6 mn for the same period in 2005. The Government of Montserrat expected the number of excursionists to fall after the ferry service ended, but had 70
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not expected it to adversely impact stay-over arrivals from the UK and the countries of the OECS. Over the first ten months of the year, arrivals from these sources fell by 21% and 39%, respectively, to 1,497 and 1,129.. At the same time, stay-over visitor arrivals from the USA and Canada increased by 12.8% and 8%, respectively, to 1,626 and 286. In 2003, the authorities had adopted a national tourism strategy and plan, the main aim of which was to reposition Montserrat by implementing several programmes to strengthen institutional capacity, improve visitor facilitation and infrastructure, help in product development, and enhance destination marketing, among other things. One of these programmes aimed at raising Montserrat’s profile in the yachting industry. The number of yacht calls during January to October 2006, rose by 52% to 267 from 176 for the same period in 2005, indicating some positive results. Agriculture The agricultural sector is small, accounting for a little more than 1% of GDP, much smaller than it was before the start of volcanic eruptions in 1995. Since then, most farmers and fishermen had to resettle in the North of the island where the plots of land for crop production are smaller and less fertile, and the fishing grounds not as productive. In 2006, output from the agricultural sector rose by 60% despite the adverse effects of the May ash-fall on crops, livestock and fishing. Output from the crops and fishing sub-sectors increased by 226.1% and 8%, respectively; while output in the livestock sub-sector, which bore the brunt of the adverse ash-fall effects, declined by 27.8%. Manufacturing The manufacturing sector is small, accounting for about 1% of GDP, and mainly involves baking, furniture manufacturing, concrete-block making, and craft productions. Output from the sector
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rose by 4% in 2006, because of an increase in production of bakery products. Discussions were underway during the year to establish a facility to manufacture roof-tiles from volcanic ash, and to set-up a a water- bottling plant. Construction In 2006, the rate of decline in construction activity accelerated to 34% from 10.3% in 2005. A fall off in public sector construction expenditure following the completion of the new airport in 2005 and delays in the implementation of several new projects because of lengthy administrative lead times were responsible for the decline. Public sector projects dominate the construction sector, but recently there have some increase in private sector construction. The number of planning applications filed during the 11 months to the end of November 2006 numbered 138,with an aggregate value of $11.1 mn, compared with 48 applications valued at $4.9 mn during the corresponding 2005 period. Prices, Wages and Employment The rate of inflation declined to 1% in 2006 from 2.9% in 2005. Except for the household goods and the other services subindices, all sub-indices reported modest price increases. The largest increase was reported by the food and nonalcoholic beverages sub-index, which rose by 2.5%. While employment data were not available, evidence suggesed little change in labour market conditions from the previous year, despite the slowdown in construction. C. Fiscal Policy and Debt Obligations Preliminary revenue and expenditure data to the end of November 2006 indicated that the recurrent account deficit, before budgetary grants, widened to $17.6 mn from $15 mn for the same period in 2005. Recurrent revenue declined slightly to $11.7 mn during the first 11 months of 2006 from $11.8 mn for the same period in 2005. This was mainly attributable to a fall in direct tax receipts. Over the same period, recurrent expenditure rose by 4.1% to $27.9 mn from $26.8 mn in 2005, mainly because of the impact of wages and pensions increases agreed in 2005. Expenditure on the purchase of goods and services increased by 1.4% to $5.3 mn, while transfers and subsidies fell by 30.3% to $3.7 mn, reflecting the cessation of the helicopter and ferry services to Antigua during in the second half of 2005. Budgeted capital expenditure totalled $12.1 mn in 2006, down from $17.7 mn in 2005, although actual expenditure during the first 11 months of 2006 only amounted to $5.7 mn, with a full-year estimated total of $7.3 mn, below actual spending of $9.1 mn in 2005. In
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both years delays in project implementation accounted for the difference between budgeted and actual spending. Expenditure on projects financed by funds managed and disbursed by the European Development Fund (EDF) are not included in the Central Government’s capital expenditure data. During the year, EDF resources were used to finance the Montserrat Community College and the Lookout Point Housing Project. In 2007, the EDF is expected to finance infrastructural work for the Little Bay Town Centre Development. Public sector disbursed and outstanding debt at the end of 2006 amounted to $4.6 mn, slightly lower than the $4.8 mn recorded at the end of 2005. The Central Government’s debt fell to $1.6 mn from $1.7 mn at the beginning of the year, while the liabilities of the public corporations fell to $3 mn from $3.1 mn. Central Government’s ratio of debt service payments to recurrent revenue, at 4%, remained low. D. Financial Sector Commercial bank liquidity remained high throughout the first nine months of 2006. During this period, M1 money supply declined by 7.5% to $11 mn, and M2 increased by 5.3% to $48.2 mn, compared with the same period in 2005. Within M1, currency with the public increased by 15.7%, but demand deposits and cash at the commercial banks fell by 22% and 70.4%, respectively. Within M2, the savings and foreign currency deposits components increased by 9.8% and 46.5%, respectively, to $37.3 mn and $2.2 mn. Time deposits, however, fell by 24.2% to $1.5 over the same period. During the first nine months of 2006, the maximum interest rate on saving deposits was reduced by one percentage point to 3.5%. The maximum deposit rate on time deposits of three to six months and between one and two years were increased by 2 percentage points and 2.5 percentage points, respectively, to 4%. The prime lending rate, however, remained unchanged at 9.5%. E. External Sector Preliminary trade data showed a marginal increase in merchandise, imports to $27.3 mn during January to November 2006 from $27.1 mn for the same period in 2005, while merchandise exports fell to $1.2 mn in 2006 from $1.4 mn in 2005. As a result, a merchandise trade deficit of $26.1 mn was recorded to the end of November 2006, compared with $25.8 mn for the same period in 2005. The small rise in the merchandise deficit in 2006 was mainly attributable to higher imports of food and fuel and a decline in re-exports of machinery
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and transport equipment. Growth was recorded in the export of crude materials (except fuel), which increased by 470.5% to $0.7 mn from $0.1 mn in the previous year. The export of aggregates obtained from the volcanic ash to countries within the Region accounted for this increase.
focal point for future commercial development, which would help to re-establish and encourage private sector economic activity. Work is expected to start in 2007 on the infrastructural phase of the Little Bay Town Centre Development Project. The Project is expected to take 10 years to complete. D. Housing Needs and Appropriate Response Mechanisms While there has been substantial progress in housing development since the relocation of the population to the north of the island, there are still many households with inadequate housing, and persons living in rented accommodation who would prefer to have their own homes. Expanding the availability of serviced lots and providing access to financial resources for new l home construction are regarded as important components in addressing the country’s housing needs. Housing has the largest allocation in the PSIP for the period 200608. E. The Size, Composition and Retention of the Population The size of Montserrat’s population is a major constraint to the country’s economic development. The country suffers from severe skill shortages in almost all social and economic sectors. These skill shortages have adversely affected Montserrat’s ability to attract foreign direct investment. In addition, the small size of the population restricts the public sector’s ability to raise revenue and its ability to provide economic and social services at competitive prices because of the inability to benefit from the economies of scale. Since 2003, the population has been growing at a rate of 4.5% per year, and now stand at an estimated 5,000 persons, compared with 4,500 in 2002. G. Poverty, Hardship and Protection of the Vulnerable The volcanic eruption caused significant disruption in economic activity, and hardship and poverty for many Montserratians, who became dependent on the Government for welfare support. The participatory poverty assessment, completed in 2000, highlighted the problems associated with poverty and dependence. . In 2006, the public sector provided assistance to 284 poor and vulnerable households.
2. MAJOR POLICY ISSUES The Montserrat sustainable development plan 2003-07 identified several key issues facing the country. These issues included the threat from the volcano and other natural disasters, restricted external transportation linkages, lack of a central commercial district, insufficient housing,small population,poverty,and a need for special support for the vulnerable and for the environment. A. Threat from the Volcano and Other Natural Disasters Since the volcano first erupted in 1995, Montserrat’s economy has been severely disrupted. Apart from the continuing threat of the volcano, Montserrat is also susceptible to other natural disasters, such as earthquakes and hurricanes. The authoritiesrecognises these threats and have introduced measures to reduce the impact of natural disasters on the population at large and on external investor confidence. A new national disaster management plan is under preparation. B. External Transport The redevelopment of Montserrat and re-establishing its economic sustainability require adequate external transportation linkages with the rest of the world. Before the construction of the new airport, Montserrat’s external transportation linkages were restricted and needed large Central Government subsidies. The new airport was the largest single project undertaken by the authorities since the population was moved to the northern part of the island. The completion of the airport has not fully addressed the transportation difficulty, and the discontinuation of the state-subsidised ferry service has had an adverse impact on the tourism industry. It is expected that a private sector-owned and operated ferry service may become operational in the near future. C. Central Focal Point Since Plymouth, the capital city, was destroyed by lava flows in 1997, Montserrat has not had a defined central commercial district. The authorities see the Little Bay area as being the ideal site for developing a central 72
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Montserrat
3. PUBLIC SECTOR INVESTMENT PROGRAMME A. Strategic Objectives The Montserrat Sustainable Development Plan (SDP) for the period 2003-07 is designed to build on the achievements of the previous SDF for the period 19982002. It was developed through a process of broadbased consultations with stakeholders, which resulted in the following six national strategic objectives: (a) promoting the retention of the present population and encouragement of the return of nationals from overseas; (b) promoting prudent economic management, sustained economic growth, economic diversification and employment opportunities; (c) promoting human development and well-being, and enhancing the quality of life for ail people on island;
economy through the development of a vibrant offshore services sector. Planned expenditure on the PSIP for the period FY 2006-08 is projected to total $76.7 mn. The productive sector component of the PSIP is dominated by the Tourism Development Project, and is allocated $3.8 mn. Housing projects account for approximately $40.8 mn or 50% of total projected expenditure. Social sector projects include expansion of secondary education and health services. GOM is expected to contribute $4 mn or 5.2% of financial resources to the financing of the PSIP 2006-08. The remainder $72.7 mn (94.8%) will be provided by grants from the UK DFID ($62.5 mn,) EDF ($7.9 mn) and the CDB through its BNTF ($2.3 mn).
4. MEDIUM-TERM ECONOMIC PROSPECTS Over the medium-term, real GDP is projected to grow by an average rate of 3% a year. The Little Bay Town Centre Development and the Lookout Point Housing projects, which will be financed by the EDF, are expected to provide considerable impetus to the construction sector over the medium-term. In addition, the export of aggregates from Montserrat to the rest of the Caribbean region is expected to expand rapidly. The tourism industry’s contribution to economic activity is projected to increase gradually as the effects of the Tourism Development Project are realised. The commencement of flights by a new airline, which commenced operations in Montserrat during the final quarter of 2006, should provide some impetus to visitor arrivals. With the business climate expected to improve over the medium term, private sector development activity should strengthen. Over the medium term, the rate of inflation is expected to remain modest. Given the openness of the Montserrat economy, inflation has a tendency to reflect conditions in its major trading partners.
(d) ensuring good governance by strengthening public administration and promoting civil society; (e) improving and expanding external relationships to facilitate Montserrat’s integration into the regional and global environment; and (f ) ensuring that Montserrat’s development is environmentally sustainable and includes appropriate strategies for disaster mitigation.
B. Composition of the PSIP The strategic objectives agreed between the UK Government and the Government of Montserrat (GOM) establish the priorities for the PSIP. GOM’s first order of business pertains to the forging of a strategic partnership with the private sector to stimulate economic growth. The tourism and hospitality sector is expected to play a pivotal role in the process. GOM aims to diversify the
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