BASSETERRE, St Kitts – Growth is expected to pick up to 2 percent in 2025—from 1.5 percent in 2024—supported by tourism, with inflation remaining around 2 percent. In the medium term, growth is projected at 2.5 percent, and inflation is expected to remain stable. Progress has been made in the transition to renewable energy, as the geothermal project is nearing the drilling phase with funding secured.
The current account deficit (CAD) further widened to 15 percent of GDP in 2024, from 12 percent in 2023. The CAD remains significantly larger than pre-pandemic levels, reflecting a decline in CBI inflows and widening fiscal deficits. It is expected to remain around 12 percent of GDP in the medium term. The external position in 2024 is assessed as weaker than implied by medium-term fundamentals and desirable policies.
Staff projects fiscal deficits to remain large with public debt rising. The fiscal deficit in 2024 is estimated at 11 percent of GDP, driven by a sharp reduction in CBI revenue. Recent reforms to the program, reinforced by international agreements, suggest that CBI revenue will likely be structurally lower but more sustainable going forward. Hence, the fiscal deficit is projected to be 9 percent of GDP this year, also impacted by the increase in the wage bill and the temporary VAT reduction. Public debt is expected to rise to 61 percent of GDP in 2025. The overall risk of sovereign debt stress continues to be assessed as moderate. In the medium term, fiscal deficits are expected to decrease modestly due to the authorities’ efforts to control expenditures, while debt is projected to reach 68 percent of GDP in 2030.
Bank credit growth accelerated while vulnerabilities remain. Bank credit grew rapidly at 11 percent (y/y) (particularly in mortgages and consumer loans) amid high non-performing loans (NPLs) and low buffers, while competition among banks increased. Overall, bank NPLs declined, profits rose, and capital somewhat improved. Meanwhile, lending by credit unions expanded swiftly by 12 percent (y/y), while their delinquency ratio increased to 10 percent.
Near-term risks are tilted to the downside, but the potential for renewable energy provides upsides over the medium term. Substantial changes in CBI revenue constitute an important two-sided risk but a further decline in CBI revenue would pressure fiscal accounts. Downside risks include a slowdown in key source markets for tourism, commodity price volatility, as well as global financial instability impacting domestic banks. The country is also highly exposed to natural disasters (ND). On the other hand, the renewable energy projects could create an additional source of growth and fiscal revenue.
Economic policies
Fiscal Policy
The staff believes that the main priority is to implement a prompt and steady fiscal consolidation to keep public debt below the regional ceiling of 60 percent of GDP. While the authorities made efforts to contain the fiscal deficit in 2024, more active policies are necessary going forward. Fiscal consolidation will help create space to protect capital expenditure, strengthen resilience against NDs, and hedge against contingent liabilities.
Under staff’s active policies scenario, the adjusted primary balance (excluding CBI and transfers to public banks) should be tightened by 2 percentage points of GDP by 2029 relative to the baseline. To this end, fiscal consolidation should be anchored by a set of fiscal rules and driven by tax reforms and reductions in current expenditures while protecting capital expenditure. The combined net impact of fiscal consolidation and structural reforms on growth and the external position is assessed to be positive in the medium term. In particular:
- Statutory fiscal rules should include an adjusted primary balance floor and a primary current expenditure ceiling, as well as the regional debt ceiling—with escape clauses related to NDs. This would enhance the credibility of the fiscal path and help contain borrowing costs.
- Tax reforms would boost tax revenue by 2.5 percentage points of GDP and are well within reach. The reforms would also help reduce reliance on the CBI and improve equity and growth. Recommended measures include harmonizing the VAT, supplemented by improved targeted social support; increasing excise rates on alcoholic beverages, tobacco, and fossil fuels; and updating property tax assessments. The Housing and Social Development Levy could become more progressive, and non-labor income, such as investment and rental income, could be taxed to improve equity.
- The temporary reduction in VAT for the first half of 2025, as well as other pandemic-era tax breaks, should be phased out. Negotiated tax concession packages for corporate income tax—which unfairly benefit profitable large international hospitality companies—should be lapsed, especially in light of the upcoming OECD Pillar II. The authorities’ efforts to improve tax collections, including property taxes and CIT, and to enhance tax administration are welcome, and should be further strengthened.
- Current expenditure. The authorities’ efforts to streamline current expenditure are welcome and should go further to bring them closer to pre-pandemic levels. Limiting public wage increases and employment—the largest in the ECCU—would help foster private sector job creation. Transfers, including social spending, should be better targeted and more effective.
- Accompanying structural reforms aimed at enhancing productivity, labor quality, and access to finance could generate significant growth gains.
The planned establishment of a Sovereign Wealth Fund (SWF) is welcome. The SWF should absorb any upside in the projected CBI revenue, reduce the impact of volatile and uncertain CBI revenue on the budget, and help create fiscal buffers against NDs.
Progress has been made in improving the CBI framework, but its transparency needs to be enhanced. The government has taken important steps to improve the governance of the program and strengthen the due diligence and application processes. To further improve transparency and accountability, comprehensive annual reports following external audits should be published regularly, including statistics on applications and financial accounts.
The authorities’ efforts to publish the medium-term debt management strategy (MTDMS) are welcome. Heavy reliance on short-term borrowing—entailing large gross financing needs and additional fiscal risks—should continue to be reduced. The MTDMS—now under government review—should aim to lengthen debt maturity, reduce costs, and diversify the sources of funds. The authorities’ plan to resume the publication of the MTDMS—not published since 2018—is welcome. The government has recently reached three loan agreements with favorable terms with international partners. Additionally, the government could consider increasing engagement with multilateral development partners for concessional borrowing and tapping into the Regional Government Securities Market.
The staff supports the authorities’ intention to reform the Social Security Fund (SSF). The authorities announced their intention to reform the SSF and have initiated extensive consultations with stakeholders. The proposed options are welcome and concrete measures should be identified. Furthermore, a more comprehensive approach is needed to ensure the fiscal sustainability of the SSF, including improvements in asset management.
Financial sector policy
Progress to strengthen the systemic bank and safeguard public deposits should continue. The bank has made progress toward reducing NPLs, restoring profitability of its lending business, and further de-risking its foreign investment portfolio. These efforts should continue. The government—as its majority shareholder—and the bank are encouraged to engage with external advisors to revitalize its business model. The planned establishment of the SWF presents an opportunity to transfer public sectors deposits and associated foreign investments from the bank to the SWF, except for the portion necessary for the government’s cash management.
The development bank needs to be reformed. The bank is facing significant challenges due to high NPLs and weak profits. Although the bank does not take deposits, it has borrowed from the public and the banking sector and poses a contingent liability to the government.
The government and the new management are actively working to address the bank’s accountability and financial performance. The external audit—not conducted since 2018—is ongoing to fully assess the bank’s financial condition and is expected to conclude in the coming months. The priority is to thoroughly analyze the bank’s financial situation, including its NPLs and loss-making loan programs, reassess its financial and social functions—potentially achievable through private lending and targeted social support—and chart the optimal path forward, firmly based on the bank’s viability and fiscal prudence. The legal framework around the bank should be revised to significantly strengthen its regulation and supervision.
Financial soundness should be strengthened at private banks and credit unions. Banks should continue their efforts to reduce NPLs and to meet the prudential requirements for provisions and capital, based on their plans submitted to the ECCB. Banks’ efforts to improve financial education of their potential clients are welcome and should be potentially joined with public resources. This is especially important amid the rapid credit growth and the regional credit bureau becoming more operational. In addition, the regulation and oversight of credit unions by the Financial Services Regulatory Commission has room for improvement, particularly in the areas of lending standards, provisioning requirements, and supervisory actions. Efforts to enhance the effectiveness of the AML/CFT framework should continue.
Structural policy
The medium-term growth prospects can be improved. Staff analysis indicates that potential growth has steadily declined from around 6 percent in the 1980s to 2.5 percent, mainly driven by slow productivity growth and a lower contribution from human capital. Staff assess that growth potential can be enhanced through structural reforms aimed at better resource allocation, particularly in the following areas.
- The efficiency of government services can be enhanced. In this regard, recent progress with digitalization, streamlining tax administration, and implementing a single electronic window is welcome.
- Credit access should be improved, especially for firms. All banks and credit unions are encouraged to participate in the recently created regional credit bureau to make it effective. While foreclosure processes appear to work efficiently, bankruptcy and insolvency regimes can be enhanced to incentivize out-of-court debt workouts, given the lengthy in-court processes.
- Labor skills should be better aligned with private and public sector demands. Upskilling is essential for maintaining labor market competitiveness, especially with the recent two-tier increases in minimum wage in 2024 and July 2025, which position the minimum wage well above that of ECCU peers. There are shortages of qualified workers in both the private (tourism) and public (healthcare) sectors. Recent efforts aimed at improving access to education and vocational training can help, especially benefiting the unemployed, and these initiatives should be tailored to meet market demands.
- Accelerating the energy transition is crucial to increasing competitiveness and growth resilience. The energy transition is expected to enhance energy security, reduce energy costs, and support economic diversification. It is essential to build strong expertise in project management. The investment, ownership, and taxation agreements related to large energy projects should be crafted carefully, considering their long-term economic and fiscal implications.
To strengthen ND preparedness, the public investment framework and the multi-layered insurance framework should be further enhanced.
- ND-resilient Infrastructure. Upgrading the power grid—as part of the geothermal project—will enhance resilience to NDs, support energy sustainability by introducing a one-grid that connects the two islands and facilitate the energy transition. Given the country’s challenges with water supply, the authorities’ plan for a renewable energy-powered desalination plant is a significant development.
- Investment framework. Integrating a pipeline of projects funded by the overall public sector, including statutory bodies, into the Public Sector Investment Program (PSIP)) will help improve medium-term fiscal planning, anchor ND-resilient investment plans, and help unlock concessional financing. Strengthening capital expenditure forecasts would be important for the medium-term fiscal framework. Project execution should be improved considerably. In this regard, the authorities’ plan to formulate a medium-term PSIP strategy will provide a useful framework for comprehensive oversight of public investment and enable project progress tracking.
- An enhanced multi-layered insurance framework. Staff analysis indicates additional fiscal buffers are essential to enhance an insurance framework against NDs, and government deposits should be preserved at their current level as the first self-insurance layer. This could be further supplemented by (i) expanding coverage through the Caribbean Catastrophe Risk Insurance Facility and (ii) issuing a state-contingent instrument, such as catastrophe bonds or lines of credit.
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