Without sight of the Economic and Social Review 2020 and the Budget Address to be presented on April 14th, it is difficult to prepare a comprehensive analysis of the Estimates. In the absence of the government’s policy statement and rationale for the plan of expenditure contained in the Estimates this commentary is merely a high-level analysis of Central Government’s performance in 2020/21 and the approved Estimates for 2021/22. A more detailed analysis will follow the Budget Address in April.
We all got the memo. One year ago, because of the threat of the global pandemic, Saint Lucia closed its borders to international markets and did not begin re-opening its borders for the tourism industry, on a phased basis, until on June 4, 2020. The impact on tourism was immediate and dramatic, and combined with stringent domestic COVID-19 protocols, these events sent the economy into a tailspin from which we are still struggling to recover.
The 2020/21 Estimates were prepared in the height of the pandemic and the Budget Address was not delivered until June 23, 2020. As it was almost impossible for the Government to forecast how the pandemic would affect Central Government operations the estimates were prepared on the assumption that Saint Lucia’s GDP would shrink by 10%, and the decline in tourism, our lead sector would have a drastic impact on Government Revenues.
The Estimates demonstrate how severe the impact actually was. The projected outturn for 2020/21 paints a grim picture. GDP at market prices declined by 18%, and while the decline in GDP at constant prices is not available, the ECCB estimated that the decline may have been as deep as 26%. The true figure is probably somewhere between 18% and 26%, but either way it was the biggest decline in GDP since independence in 1979, and far exceeded the 10% decline on which the 2020/21 Estimates were based.
The impact is evidenced by the following:
-Total revenue and grants contracted by 24% compared with actual revenues and grants in 2019/20 and were 19% lower than the 2020/21 Estimates. The biggest decreases were in VAT (30%), Airport Taxes (65%) and taxes on income and profits (16%). Revenue was $280 million lower than Revenue in 2019/20 and $219 million lower than had been estimated in 2020/21.
-Expenditure was held in check, with an actual decline (1.5%) in current expenditure but as a result of increases in Capital expenditure, total expenditure increased by 0.5%. Total expenditure was 10% lower than the estimates for 2020/21 due mainly to a reduction of 28% in planned capital expenditure in the 2020/21 Estimates.
-As a result of the contraction in revenue without a corresponding drop in expenditure. Central Government incurred a current deficit or $289 million and an overall deficit of $499 million. To finance the deficit, Government had to borrow $618 million, an increase of $289 million from total borrowings in 2019/20
-$180 million of the increased debt came from external borrowings (CDB, IMF and the Republic of China on Taiwan were the main lenders) and $109 million was raised from Bonds and Treasury Bills. This surge in borrowings increased total public debt to approximately $3.9 billion or 89% of GDP. This figure is subject to change after receipt of more accurate information from the Review.
-According to the Prime Minister, in his contribution during the debate on the Estimates, while the total debt increased, the Debt Management Unit in the Ministry of Finance was able to roll-over 75% of debt that matured during the year, and most of the new external borrowings were at concessional rates. Government was also able to lengthen the maturity profile towards more medium to long-term instruments.
-We were told that the weighted average cost of debt was reduced to 4.9% compared with 5.32% in 2018, but because of the increase in total debt, and decrease in recurrent revenue, interest charges as a percentage of recurrent revenue increased from 14.8% in 2019/20 to 19.1% in 2020/21.
Overall, it was an annus horribilis for the economy, for Central Government operations, and for the people of Saint Lucia. There were a few bright spots or encouraging trends, such as the $2.7 million increase in contributions from the National Economic Development Fund and CIP Unit, but these were exceptions rather than the rule.
Total stay-over visitor arrivals of 130,699 for 2020 were 31% of stayover arrivals in 2019 and Cruise passenger arrivals of 297,885 for 2020 were 38% of arrivals in 2019. In both cases, most of the arrivals were for the first three months of 2020. There were no cruise arrivals after March 2020, and only 39,300 stayover arrivals after the borders were re-opened. Hotels were forced to shut down for long periods, and thousands of hotel workers were laid off or retrenched.
While there was little fiscal space for Central Government to maneuver during the pandemic, and few options for us to increase revenue or finance deficits without additional borrowings, we are still haunted by the same old systemic issues that have been with us for decades:
-An overdependence on one industry, tourism, that is extremely vulnerable to exogenous shocks.
-A stubborn public sector salaries and wages bill that accounts for over 50% of current expenditure (it was 54% in 2020/21) and more than 10% of GDP.
-A dependance on borrowings to finance Capital expenditure and overall deficits, and in some cases even current account deficits.
-Overall deficits that are higher than the prudential limit of 3% of GDP. The actual overall deficit in 2020/21 increased to 11.3%, partly due to the increase in capital expenditure and the contraction in GDP.
The Estimates were prepared at a time of considerable uncertainty as a result of a global pandemic that is affecting our main tourism source markets as much as, or even more, than it is affecting us. Second and third waves of the virus have restricted travel from the UK and CARICOM countries, and forced us to continue lockdowns and other protective protocols that have impaired domestic economic growth in all sectors.
There are positive signs that the virus is receding, and the IMF global outlook projected 2021 global growth at 5.5%, but prospects of a stronger recovery are emerging – because of additional fiscal stimulus, especially in the U.S., and prospects of broader vaccination. Growth for the US is projected at 6.2% in 2021 and the UK is projected to grow by 4.5%. However, according to the IMF the global recovery has been incomplete and unequal. “It is incomplete because despite a stronger than expected recovery in the second half of 2020, GDP remains well below pre-pandemic trends in most countries.” Uncertainty about the recovery remains exceptionally high because of the lingering health crisis, uneven access to vaccines, the spread of resistant mutations and concerns as to the efficacy of the current vaccines.
These are the tinted lenses through which I will view and comment on the Estimates, in determining whether they are realistic or feasible. In the absence of information as to the priorities, policies, plans and vision of the Government, it is more difficult to determine whether these Estimates will address the systemic issues with Central Government Operations or the inequality and unemployment in Saint Lucia both of which have deteriorated over the last year.
The Estimates assume that GDP at Market Prices will grow by 9.7% in 2021/22 and that Total Revenue and Grants will increase by 23.3% compared with the projected outturn for 2020/21. This appears overly ambitious, but is influenced by a $90 million increase in Grants, without which the increase would only be 13%.
The major increases projected in revenue are from VAT (20%), Excise taxes (57%), Airport tax (68%), Import Duties (15%) and Service Charges on imports (11.4%). The basis for these projections appears to be a rebound in tourism and an increase in construction activity from increased Capital expenditure on shovel-ready projects.
Current expenditure is only expected to increase by 5%, with no significant growth anticipated in debt servicing or Wages and Salaries but with reductions in transfers and increases in Goods and Services.
Marginal increases are projected in the principal repayment of debt, but there are planned increases of $37 million (15%) in Capital Expenditure. This is in keeping with Government’s policy of spending on capital projects to increase employment and economic growth.
Total expenditure of $1,638,600,900 is 6.8% higher that the outturn for 2020/21 and 7.4% or $113 million higher than actual expenditure in 2019/20. The Estimates forecast that there will be a Current Account deficit of $232 million and an overall deficit of $384 million, and the overall deficit will be 8% of GDP.
The deficits will be financed by new borrowings of $510 million which will increase Public Debt to $4.3 billion or 88% of GDP. 53% of the new debt will come from External borrowing, supposedly at concessional rates, and 47% from Treasury Bills and Bonds. The weighted average cost of capital and interest charges as a percentage of total recurrent revenue are both expected to decrease.
These Estimates do not have the hallmarks of a typical election budget. There is no clear evidence of tax giveaways, or expenditure increases, and the 18% decline in Corporate tax revenues may have more to do with the application of the COVID tax credit incentive than a rate reduction. Individual income tax reform promised in the 2020/21 Budget may also be implemented in 2021/22.
There is skepticism regarding the projected $121 million in Grants, given the lower Grant revenues in prior years, and the achievement of a higher implementation rate of Capital Expenditure than in 2020/21. There will be concern about the lack of fiscal space, or reserves, to carry us through natural disasters, a third wave of the virus, delays in the receipt of vaccinations, travel restrictions from our main tourism markets, and exogenous financial shocks that delay the expected rebound in tourism.
The inevitability of national elections during the year may also result in an inconvenient distraction from the tough task ahead of us, a wastage of resources on campaigning, and an increase in social and political polarization in a year when bipartisanship is so desperately needed. In the words of Abraham Lincoln: “We must not be enemies. Though passion may have strained, it must not break our bonds of affection. The mystic chords of memory will swell when again touched, as surely they will be, by the better angels of our nature.”
