Allen Chastanet delivers 2019-2020 Budget Address

Executive Overview

Executive Overview‘Growth by Empowerment for a Better Future’ was the headline for the third budget presentation of The Honourable Prime Minister, Allen Chastanet which focused on the need to improve the quality of life indices for Saint Lucia’s citizens, an area in which the country has been lagging behind its Eastern Caribbean Currency Union (ECCU) neighbours. The prime minister spoke about the need to unlock opportunities that will create a better standard of living for every Saint Lucian through economic participation and wealth creation.

In 2018 the economy experienced modest economic growth of just over 3% along with a falling debt to GDP ratio. Additionally, the critical tourism sector saw increases in various key metrics including increases in stayover visitors, increased cruise ship arrivals and a robust investment pipeline for new projects which is expected to add a further 2,000 rooms to the island’s stock.

The government highlighted the urgent need to modernize the island’s infrastructure and public administration in order to provide opportunities for citizens. The government expects to deliver on this agenda through the adoption of a Medium-Term Development Plan which identified six key areas — Healthcare, Education, Citizens’ Safety, Tourism, Agriculture and Infrastructure — to achieve sustainable and inclusive growth by 2022.

The implementation of the Medium-Term Development Plan is to be managed by the formation of a Performance Management and Delivery Unit (PDMU) which will comprise leaders from both the private and public sectors with diverse experience and backgrounds. Once the PDMU is fully functional, Cabinet Ministers will be responsible for the delivery of the goals under the development plan.

Medium-Term Development Plan 

Under the Medium-Term Development Plan the government will invest $162 million in the health sector, with various initiatives including the design and implementation of National Health Insurance to be funded by the establishment of a National Health Fund. The National Health Insurance, together with the final commissioning of Owen King-EU Hospital to be completed with the assistance of a third party in an advisory role, the completion of St. Jude’s Hospital at Augier and the opening and upgrading of a number of health centres and clinics across the island, is expected to positively impact healthcare.

Education is another critical element of the government’s development plan with the prime minister citing an education system that was “unresponsive” to the island’s development goals. In 2018, while overall unemployment stood at 20.2%, youth unemployment was 36.3% and continues to be a concern. To that end, the prime minister’s announcement of plans to improve the quality of technical education and the quality of school education is timely. This is expected to be achieved by having better trained teachers through partnerships with industry, and rationalization of course offerings among the strategies announced.

The prime minister also identified security as key to the improvement in the lives of people on the island, further underlining the role that safety and security plays in achieving development goals in the tourism sector. With further investment in citizens’ safety, the government identified a number of new initiatives to curb rising crime including the Safe City CCTV Project in Castries, community policing and the introduction of a parole system.

Through additional investment in citizens’ safety, the government has targeted a 45% reduction in serious crime and a 30% reduction in repeat offenders by 2020.

The Medium-Term Development Plan also identifies three economic sectors where government will be most focused: tourism, agriculture and infrastructure.

The Tourism Pipeline 

Tourism continues to be the foundation of Saint Lucia’s economy, attracting significant foreign direct investment in new projects. A number of new projects are expected including a Mariott Courtyard at Point Seraphine, a fourth Sandals Resort, the Choiseul Hotel Development, the Anse Sables Development and a four hundred room hotel at Choc.

The government has also identified the need to create a unique Saint Lucia experience that will appeal to a diverse and changing market. To that end, the government will seek to enter into formal agreements with sharing economy providers such as Airbnb which is expected to translate into a tourism sector that will trickle down to a wider supply base for goods and services.

The government will redevelop the Castries market at a cost of $32 million over two years as well as embark on the wider beautification of Castries. These investments within Castries are expected to improve the experience for tourists and citizens which comes at a critical time as cruise ship arrivals continue to increase.

The preparatory legislative and regulatory framework for Village Tourism is another key element of the tourism strategy, with each village having its own unique signature offerings, reflective of the natural and cultural assets of the area.

The tourism market is competitive and so is open to external shocks. The initiative by the government to create a unique Saint Lucia experience is timely and will ensure the sustainability of this important sector.

Development of the Agricultural Sector 

The prime minister highlighted growth in the agricultural sector as part of his Medium-Term Development Plan, with increases in the number of banana farmers and acreage under production as a result of the government’s Banana Productivity Improvement Project. This continued support will be critical if this momentum is to be maintained.

The prime minister also highlighted other initiatives in terms of food production including aquaponics, hydroponics and agro-processing. With the current pipeline of tourism projects and the ongoing commitment of the government to the tourism sector, there is a ready and available market for agricultural produce.

Further investment in the agricultural sector also presents an opportunity for the diversification of the Saint Lucian economy and will serve as an economic buffer in the event of global economic shocks that typically impact negatively on tourist travel. It is imperative that the government explore additional financial and market incentives to inject further growth in this very important sector.

Investment in Infrastructure 

The need for investment in infrastructure continues to be on the priority list of the government. The poor condition of the physical plant, lack of capacity and limited connectivity were identified as the island’s major infrastructural challenges. Infrastructural development is therefore critical to the government’s Medium-Term Development Plan.

Six infrastructural development projects were identified which are expected to support economic activity in tourism, agriculture, retail and trade, including:

• Rehabilitation of Millennium Highway and West Coast Road;

• Reconstruction or rehabilitation of secondary roads and connector roads;

• Development of a cargo and container facility at 

Cul-de-Sac;

• Upgrade of the amenities and facilities for cruise ships at Port Castries;

• Development of a Vieux Fort Cruise Port;

• Re-development and expansion of Hewanorra International Airport to handle one million passengers by 2022.

The government proposes to commit $246.7 million or 15.5% of its budgetary expenditure to capital projects which will be further augmented through funding from grants, external loans and other debt instruments.

However, while investment in infrastructure is critical to Saint Lucia’s growth and tourism thrust, it must be planned and executed in a sustainable manner as there is the risk of cost overruns which will add to the island’s growing debt stock. Further, there must be focus and attention on good governance and controls within the procurement process to ensure value for money.

Debt Management 

With the increased investments in infrastructure and various tourism-focused projects across the island primarily funded by debt, Saint Lucia will be challenged to meet the ECCU public debt target of 60% of GDP. However, with the increased investment, the expectation is that there will be creation of economic capacity and further growth which should offset the increased debt levels.

The government must manage this carefully and, while it is commendable that the debt to GDP ratio marginally improved in 2018 to 64.9% (2017: 65.2%), there are lessons to be learned from neighbours across the Caribbean where an unmanageable debt burden has resulted in significant structural adjustments, which has been a bitter pill to swallow. 

European Union Blacklisting 

Saint Lucia has been removed from the European Union (EU) Blacklist and placed on the Greylist pending changes to the tax regime. In 2018 several legislative amendments were made, including changes to pieces of legislation governing tax regimes as well as changes to the Income Tax Act, the Companies Act and the International Partnership Act.

Based on a letter received in February 2019 from the EU, there continue to be areas of concern and Saint Lucia has committed to revisiting the tax measures highlighted and to making the required changes by the end of 2019.

Additionally, the prime minister indicated that in January 2019 Saint Lucia’s tax regimes were assessed by the Organization for Economic Cooperation and Development’s (OECD) Forum on Harmful Tax Practices and were found to be in compliance with their criteria. 

Fiscal Measures 

The prime minister announced several changes to the personal income tax system which is expected to benefit low income earners. These changes included a reduction in the tax bands and changes to the personal allowance.

Summary 

The IMF has projected Saint Lucia to grow by 3.3% in 2019. It must be noted that Saint Lucia’s growth is driven by various tourism projects and the short- to medium-term outlook is favourable. However, there remains a prevalence of downside risks with the current strategy and the government must be cautious while continuing the initiatives that it has embarked upon. Diversification of the economy is the key to managing these downside risks and the government is encouraged to explore opportunities beyond agriculture and tourism. In a global economy that is data- and knowledge-driven, there is a diversification opportunity for Saint Lucia through continued investment in Information Communications Technology and the training and development of a skilled workforce. The implementation of these measures will equip Saint Lucia for its continued journey to economic development and growth.

Macro-economic Review 

Real GDP Growth Rate 

The Eastern Caribbean Central Bank’s (ECCB) most recent estimates indicate that real GDP likely grew by less than 1% during 2018. Projections suggest an acceleration of economic activity in the region of 2% during 2019, led by sustained growth in the tourism sector of 3.4% as well as a rebound in construction of 9.5% as planned public sector projects get off the ground. However, the associated increased capital expenditure could potentially derail the fiscal position, underscoring the need to contain current expenditure. The ECCB suggests that on its current path, baseline projections will surpass the 60% debt-to-GDP target by 2030.

Unemployment Rate 

The unemployment rate remained constant at 20.2% at the end of 2018 and 2017. Youth unemployment persisted notably above overall unemployment at 38.5% in 2017 and females remained more likely to be unemployed than males, albeit with a marginally narrower gender gap. The working age population and the labour force both decreased by 0.4% to an estimated 142,800 and 102,005 persons respectively in 2018. As a result, the labour force participation rate remained unchanged at 71.4% in 2018. Females were estimated to account for 47,076 of the labour force while males made up the estimated balance of 54,929.

Total Public Sector 

Debt to GDP 

Positive estimated economic growth for 2018 resulted in the public debt to GDP ratio falling to 64.9% from 65.2% in 2017. Central government debt accounted for 94% of the official public debt while the share of government guaranteed debt and non-guaranteed debt stood at 5.6% and 0.4% respectively at the end of 2018. Led by movements in central government debt, domestic public debt accounted for 51.1% of the total public debt and the remaining 48.9 % was categorized as external debt.

Inflation Rate 

The inflation rate stood at 0.1% for the end of 2017, while inflation grew to 2.6% at the end of 2018, despite declines in the price of clothing and transport of 9.4% and 1.3% respectively. Consumer prices increased as high prices were recorded for food and non-alcoholic beverages up 3.0%, housing gas and utilities up 17.3%, and communication up 0.5%. These price increases were transmitted through imported inflation.