A team from the International Monetary Fund (IMF) led by Ms. Emine Boz visited Antigua and Barbuda from September 18-29 to discuss the 2023 Article IV consultation with Antigua and Barbuda authorities.
At the end of their visit, Ms. Emine Boz observed that the economy is recovering well from the pandemic’s sharp decline.
The projected growth rates for 2022 and 2023 are 8.5 percent and 5.7 percent, respectively, according to her report
She said the tourism and construction sectors are particularly strong. As of July 2022, inflation has dropped to 5 percent from 9.2 percent at the end of 2021. Core inflation has also been steadily declining.
In addition, the current account deficit is estimated to have increased to 16.2 percent of GDP in 2022 due to a rise in goods imports and a worsening in the terms of trade, which offset higher tourism receipts.
Consequently, according to Boz, the external position in 2022 is weaker than the level implied by medium-term fundamentals and desirable policies.
Although the deficit and debt have been decreasing, the government’s gross fiscal financing needs remain high she said, and its cash flow position is under strain.
Fiscal measures according to the report have been implemented to limit the pass-through of higher global food and fuel prices, but they were outweighed by improved revenue performance and wage restraint.
As a result, the primary deficit decreased from 2.3 percent of GDP in 2021 to 1.7 percent of GDP in 2022. Public debt was brought down to 87 percent of GDP by the end of 2022, from 95 percent at the end of 2021 due to the rapid increase in nominal GDP.
The government has not been able to access international capital markets. As a result, it has issued securities mainly in the Regional Government Securities Market (RGSM), borrowed from domestic banks and regional institutions and accumulated arrears to meet its financing needs.
Although RGSM yields have remained low, the shortening of maturities has led to significant gross financing requirements of around 13 percent of GDP in 2022. Despite making some progress in resolving arrears to certain external creditors and domestic suppliers, the stock of outstanding arrears remains significant.
The financial sector is well-capitalized and liquid, but credit growth remains weak. As of Q2 2023, 6.9 percent of bank loans were non-performing loans (NPLs), with 78 percent of NPLs being provisioned for.
Bank lending to the private sector has been falling as a share of GDP due to weak credit growth for households and small and medium-sized enterprises (SMEs), which face difficulties in meeting documentation and collateral requirements for new loans.
On the other hand, credit union lending has continued to grow rapidly (7.6 percent year-on-year), although it still makes up a relatively small share of overall lending (13 percent at Q2 2023).
Meanwhile the report states that Antigua and Barbuda is facing significant risks in the future.
It is expected that the growth will slow down and gradually reach its long-term trend of approximately 3 percent. As a result, price pressures are also expected to dissipate in 2024.
However, if global commodity prices rise, this may bring renewed price pressures. Moreover, if trading partners experience slower-than-expected growth, then it could hinder the strength of tourism demand.
There is also a possibility that global financial conditions could tighten further. This could make it more difficult for the government to access international capital markets. Furthermore, if the U.S. dollar strengthens, it could weaken competitiveness.
The cost and availability of fiscal financing through the regional or domestic debt markets could become more restrictive. This could potentially worsen debt dynamics and increase the recourse to arrears, particularly if the planned deficit reduction is not realized.
Climate change is another risk that could lead to more frequent and extensive droughts and/or more severe hurricanes.
However, there is an upside risk as well. If there are stronger-than-expected FDI inflows, this could further boost construction activity.
The authorities have put forward a plan to reduce the primary deficit. They aim to achieve this through a combination of revenue measures and expenditure restraint. Tax exemptions are a significant part of potential revenues in 2023, making up 47 percent of them until August.
The authorities plan to mitigate the loss of revenues by capping discretionary exemptions on import duties and suspending exemptions on other taxes and charges. Additionally, they plan to update valuations for property taxes in the Fall of 2023 and apply a higher tax rate to high-end properties (from 0.3 percent to 0.5 percent).
To increase revenues from import duties, the authorities are transitioning to Harmonized System 2022 classifications at customs. There is also a continuous effort to contain public sector wages and employment.
All of these policy initiatives combined are likely to generate a small primary surplus, bringing debt down to 69 percent by 2028 and 61 percent by 2035. Although this is marginally above the ECCB Monetary Council’s target of 60 percent by 2035, public debt is still considered unsustainable due to the large outstanding stock of arrears. Paying down these arrears appears unfeasible over the medium term without a broader debt restructuring.
Limited access to financing is likely to lead to financing gaps even without considering the need to clear the existing arrears.