St. Lucia Economic Report for 2006

ST. LUCIA 1. RECENT ECONOMIC PERFORMANCE A. Overview Spurred on by a strong performance in construction and to a lesser extent agriculture, real economic activity in St. Lucia expanded in 2006. Activity in the construction sector was boosted by preparations for CWC 2007, as work proceeded on infrastructural upgrades and hotel-related renovation and expansion; while tourism activity, the main-stay of the economy, contracted during the year due to heightened regional and international competition. The rise in real GDP led to an increase in fiscal savings, as improved government revenue collections were able to offset higher recurrent expenditures due mainly to the retroactive payment of salaries. On the external account, while strong import growth coupled with a decline in tourism receipts led to a widening in the current account deficit, substantial capital inflows resulted in a net accumulation of foreign reserves. B. Sectoral Performance Tourism Real tourism activity probably contracted in 2006 as available data to October showed declines in both long-stay and cruise arrivals, although estimated tourism receipts remained at about the same level ($270.6 mn as against $270.7 mn in the previous year). Much of the decline in long-stay arrivals occurred in the European market where the loss of a charter service out of the UK coupled with World Cup Football in June 2006 led to some diversion of arrivals. Consequently, long-stay arrivals for the first 10 months of the year declined by 4.6% as the 5.2% increase in arrivals out of North America could not compensate for the 16.1% fall in European visitors. Cruise arrivals were also down, decreasing by 7.8% over the 10-month period. This was due mainly to the use of smaller vessels, notwithstanding the increase in the number of ship calls, as larger ships were diverted to other Caribbean destinations and US ports. St. Lucia Construction Activity in the construction sector accelerated in 2006 with work in both the public and private sectors proceeding apace. In the private sector, work on new hotels, condominiums, and residential and commercial structures dominated output, while in the public sector work focussed on the psychiatric hospital, the renovation of two highways, construction of an access road for the new hospital, and flood mitigation activities. Agriculture Output in the agricultural sector expanded during the year, mainly reflecting higher banana production. Supported by favourable weather conditions, improved crop husbandry practices, and containment of leaf spot disease, banana output rose by 11.6% to 23,524 tonnes in the first 9 months of year, which translated to $12.1 mn in earnings. C. Prices Wages and Employment The general price level is estimated to have declined by 1.7% over January to September after rising at a similar rate during the corresponding period a year earlier. While the relatively high price of oil exerted some upward pressure on prices as evidenced by a 6.4% rise in the fuel and light category of the consumer prices index, this was more than offset by a 4.7% decline in the food sub-index on account of lower prices of fish and vegetables. D. Fiscal Policy and Debt Operations There was some improvement in public finances in 2006, as fiscal savings increased for the third consecutive year. This was due in large measure to robust revenue collections, and occurred despite a substantial rise in recurrent spending,mainly as the result of a higher wages bill. While Government’s overall position in absolute terms showed a slight deterioration in the overall fiscal deficit from $55.9mn to $56.9mn indications are that as a ratio to GDP, the deficit narrowed owing to the rise in overall output. CDB Annual Economic Review 2006 79 Total revenue rose by approximately 12% in 2006, up from 7.1% a year earlier, as all major categories registered growth. Taxes on international trade and transactions showed significant improvement (up 12.2%) mainly due to a 13% rise in import duty collections as real sector activity expanded. Similarly, taxes on domestic goods and services also rose, growing by 18% due to higher inflows from consumption taxes, stamp duties and licences. A 6.3% increase from taxes on income and profits also contributed to the overall revenue outturn, with personal income tax collections rising by 23%, due in part to taxes being levied on a larger incomes base from the wages settlement awarded to civil servants. On the expenditure side, recurrent spending rose by 11% due mainly to a 14% increase in personal emoluments and a 13.8% rise in outlays on goods and services. Capital expenditure rose by 7.3% to $93.1 mn to cover the cost of ongoing building and infrastructure works. Public spending on CWC 2007 preparations in St Lucia was lower than in other match venues as most of the facilities were already in place. E. Financial Sector Liquidity levels tightened somewhat in 2006 as evidenced by a 6.4 percentage point increase in the loan to deposit ratio of commercial banks over the first nine months of the year. For the full year 2006, however, growth in credit to the private sector is estimated to have risen to 24.5%, from 16.2% a year earlier as relatively high investor confidence coupled with the increase in salaries and stable interest rates created a favourable lending environment. Loans to businesses rose by 36.8%, nearly double the growth rate recorded a year earlier, to end the period at $482.1 mn, while household credit rose by a further 12.4%. Credit to central government was also on the rise, growing 20.1% up from 13.4% a year earlier. F. External Sector St. Lucia’s imputed share of the reserves of the Central Bank rose by $24.3mn to reverse the $21.6mn decline in 2005. Capital inflows were again the principal source of the accumulation as the trade deficit, estimated at $298.3 mn over the January to September period of 2005, rose to $317.7 mn for the corresponding period of 2006. This outturn, coupled with the projected decline in travel credits owing to the fall in visitor arrivals, is likely to have resulted in further deterioration in the current account balance during the first nine months of 2006. 2. MAJOR POLICY ISSUES A. Environmental Protection The process of sustainable development requires the effective management of a country’s natural resources as well as of its solid and liquid wastes. The need for adequate environmental management takes on greater significance in St. Lucia given its small size, fragile ecosystem, and dependence on tourism. The main environmental challenge in St. Lucia is the need to improve coastal zone management. Specifically, the development which has occurred over the past 30 years, particularly in the northern part of the island, but now extending to other areas as well, has resulted in poor coastal water quality and substantial damage to the marine habitat. This has been largely the result of: • poor management practices pertaining to inappropriate land-use, watershed management and agriculture. These practices have contributed to top soil erosion and sediment loading, deterioration of the coral reefs and other damage to marine habitats; continuation of the tradition of the placement of tourism and recreational facilities along the narrow coastal belt, which leading to acceleration of coastal erosion, water pollution and nutrient loading; inadequate sewage management systems, resulting in the flow of inadequately treated effluent into coastal waters; and limited controls on resource extraction. • • • The issue of coastal zone management, however, is particularly important given the need to safeguard the health of the population as well as that visitors in light of the importance of the tourism industry. The challenge of coastal zone management will require the construction of improved sewage treatment and management systems, and the implementation of the necessary institutional, legal and economic instruments to encourage good practices and to eliminate, reduce or mitigate negative externalities. The water sector in St. Lucia is also facing challenges, as depletion of some water sources has resulted in the need to identify new sources and to build appropriate infrastructure. Poor land use practices, such as the planting of crops too close to delineated water catchments as well as the growing water consumption St. Lucia 80 CDB Annual Economic Review 2006 needs of the domestic population and visitors alike, based on technologies developed in a context of water abundance,, have placed additional stress on fresh water resources. The St. Lucian authorities have, however, recognised the importance of securing fresh water supplies and systems, and have stated their intention to foster the adoption of an integrated approach to the management of water resources, and to ensure efficient and equitable allocation of water among competing uses. Solid waste management is also a critical component in ensuring sustainable environmental practices. While solid waste management has improved significantly since the formation of the Solid Waste Management Company, and initiatives are ongoing to integrate their collection system with that of town and village authorities, an ongoing challenge remains in the need to change the waste disposal habits of the population. Public education at all levels, and an appropriate structure of incentives, will be critical to the success of the process; this will need to follow the establishment of policies to encourage proper disposal of recyclable waste, hazardous material, and derelict vehicles, and to promote reduction in the generation of waste. B. Crime and Security The level and composition of crime has changed substantially over time. While violent crime, especially homicides, appear to be fuelled by the trade in illegal drugs, other economic and social factors have also contributed to the worsening crime situation. The decline in the banana industry, as a result of changes to EU’s preferential regime, has resulted in higher levels of unemployment and poverty. The effects of this decline were most acute in rural villages where income from the industry maintained the integrity of the social fabric of these communities, and its sharp decline may have led some persons to turn to illegal means of coping. Moreover, shifting cultural values,including the demonstration effect of different cultural practices via the media, and insufficient guidance for children and adolescents are also likely to have contributed to the increasing tendency towards criminal activities. Several initiatives have been undertaken to combat the crime situation in St. Lucia, including the establishment of new police stations and the refurbishment of existing ones, and the construction of new correctional facility to replace one destroyed by inmates.. Enhanced training, and recruitment of additional police officers, have also been used in the fight against crime. There will be a need, however, for continuous upgrading St. Lucia and modernisation of the police service to improve its technical competence to address issues of forgery, electronic and other white collar crime; for refocusing the prison system on rehabilitation instead of punishment, to address prison overcrowding, and to reduce the high percentage of repeat offenders; for teaching coping skills to children and adolescents; and for reducing the high turn-over of police staff. There is also need for a comprehensive national strategy on crime and security identifying the nature and causes of crime as well as long and short-term measures needed to improve the crime and security situation in St. Lucia. In addition, there is need for at least an equally comprehensive approach for identifying and addressing the causes of crime, particularly where those causes might include perceptions of exclusion from the mainstream of economic, social and political life, and where the number of persons with those perceptions may be approaching some critical number. C. Human Resource Development HRD is another critical component in ensuring longterm competitiveness and sustaining economic growth and development. An Education Sector Development Plan 2000-05 and beyond was developed to guide the development of the sector. However, there are certain resource-related constraints that can impact the effectiveness of the HRD Strategy. These include a shortage of equipment, instructional material, and furniture at the primary and secondary levels; inadequacy of facilities for the range of approaches to teaching and learning; inappropriate classroom layout and partitioning; inadequate fencing; and inadequately maintained school buildings. Resource constraints have also affected plans for curriculum development and the speed of introduction of new programmes. Additionally, there is a tendency for youth unemployment to be quite high. For instance, in 2000, while the average unemployment rate was 16.5%%, the unemployment rate among the 15-19 and 20-24 age groups were 50.7% and 20.8%, respectively. While there is a tendency for the unemployment rate to decrease with age and the accumulation of skills and experience, there is a need for programmes to shorten the length of time it takes for young persons to find jobs, specifically programmes aimed at equipping young persons with appropriate skills given the changing structure of production and the new areas of activity that are likely to develop. The authorities have adopted a number of initiatives to enhance youth development, including targetting children at risk within the school system, and CDB Annual Economic Review 2006 81 sports programmes. Initiatives such as the National Skills Development Centre provide career counselling, apprenticeships, labour market information, job matching services, vocational skills training and computer resources. However, gaps remain in the process of HRD, particularly for young persons. Youth development is important not only as a means of raising income but as an important strategy in addressing negative social behaviour. 3. PUBLIC SECTOR INVESTMENT PROGRAMME A. Development Objectives The primary development objective of the Government of St. Lucia has been to raise the quality of life of its citizenry. To this end, the sub-objectives of achieving sustained economic growth while protecting past social gains and creating an enabling environment to attract investment have been accorded high priority. In particular stimulating growth and improving the competitiveness of the tourism industry has been a critical component of the long-term development plan, given the importance of the industry to the economy. Agriculture is also expected to play an important role in the strategic development of the country, given its importance to employment and incomes. Support for these sectors and industries, and for other areas of potential growth such as international business services, will continue to be critical given the need to diversify the economic base. Reducing vulnerability to natural hazards has also been particularly important to the authorities given the social and economic losses that can arise as a result of disasters from these sources. Poverty reduction has also been a major objective. The Government has sought to reduce poverty directly by targeting groups at risk, and indirectly through its social and economic sector policies. Securing the progress made in education and health while creating a safe environment for the population have also been important objectives. B. Composition of the PSIP Capital expenditure for FY 2006/07 is estimated at $421.4 mn. The single largest component of the budget, accounting for 10% of spending, was for road and infrastructure projects related to CWC 2007, although the facilities are part of the infrastructure in general use. The upgrading of economic infrastructure, will continue to dominate public capital spending, with an estimated 22.6% earmarked for road rehabilitation and reconstruction, drainage, and the desilting of rivers and drains. Substantial social sector investments are also planned, with 10% of capital budget going to education, HRD, youth and sports. The majority of these funds will be directed towards education enhancement by programmes aimed at increasing access to secondary education, improving governance and management in the education system, and rehabilitation of the school plant. In the health sector, refurbishment of clinics, the building of a new hospital, and HIV/AIDS prevention and control will account for most of the expenditure. In the directly productive sectors, the allocation to agriculture and fisheries was 4.3%, with the majority of funds being used in support of diversification and banana commercialization; while tourism policy development as well destination marketing and promotion will account for 6.4% of the budget. C. Financing of the PSIP The PSIP is expected to be financed primarily from bond proceeds, most of which will be placed on the regional government securities market, followed by loans from multilateral development agencies and commercial banks, and by grants coming predominantly from the EU. D. Implementation Issues The implementation framework for the PSIP is in the process of being upgraded with the preparation of the Medium-Term Development Strategy Paper (MTDSP). This MTDSP is expected to be used as the basis for the preparation of a medium-term PSIP and the annual capital expenditure budgets. 4. MEDIUM-TERM ECONOMIC PROSPECTS The medium-term prospects for St. Lucia are very favourable based on the positive outlook for the tourism industry and the construction sector. The hosting of CWC 2007 is expected to provide a boost to the economy, particularly through legacy effects; and while some of the construction activity involving hotels and villas will continue beyond 2007. The outlook for agriculture, however, remains uncertain given the likelihood of reduced protection given the liberalising global trading environment. Further improvement in the public finances is expected to accompany the projected rise in economic activity; and this, coupled with some slowing in capital spending, should result in increased savings and a more favourable overall outturn. The external account should also benefit from St. Lucia 82 CDB Annual Economic Review 2006 heightened export activity. However, this outcome may be tempered by strong import demand as construction activity continues above historic trend. St. Lucia’s ability to generate overall net funds will therefore depend on its ability to attract foreign investment. Commercial bank credit is anticipated to remain robust over the near to medium-term, with the potential to outpace deposit growth and lead to further tightening in liquidity. With respect to social sector development, ongoing investment in education and health, particularly in light of the construction of the new hospital, will be required if the main issues that have so far been identified are to be addressed effectively. St. Lucia CDB Annual Economic Review 2006 83