The St Lucia government has received a stamp of approval from the International Monetary Fund (IMF) for its implementation of the controversial new Value Added Tax (VAT) but this will not be enough to sustain the economic growth of the eastern Caribbean nation cautioned the Washington-based institute.
Following a visit by an IMF staff team to St Lucia during November 27 to December 7 for its annual Article IV consultation with St Lucia public, private sector and trade union officials, a statement issued by the IMF yesterday (December 12) said that it welcomed the introduction of the VAT as this would modernize St Lucia’s tax system, broaden the tax base, and enhance revenue collection.
However, the IMF cautioned that the expected gain from the VAT could only be realized if all sectors contributed, and the base is shielded from the exemptions that have eroded the yield of other taxes. Even then, it said, a considerable further effort would be needed to strengthen the fiscal position and bring it on track to reach the Eastern Caribbean Currency Union-wide debt target of 60 percent of gross domestic product (GDP) by 2020.
To be successful, stated the IMF, this adjustment effort will need to fall predominantly on current spending?especially containing the already large public wage bill and better targeting transfers and subsidies to the most vulnerable?as well as build on the introduction of the VAT to further widen the tax base. It said these efforts were also necessary to safeguard needed productive investments and enhance the country’s competitiveness through restrained growth in wage costs.
“St. Lucia has weathered the difficult post-crisis environment well, becoming the largest economy in the Eastern Caribbean Currency Union (ECCU). Rising external headwinds, however, have dampened economic activity, with growth estimated to slow to 0.2-0.4 percent in 2012, despite government efforts to revive the economy. Low growth and high unemployment are weighing on financial institutions’ credit quality and their balance sheets. Fiscal imbalances have also widened, reflecting past expansionary policies and the recent stimulus efforts to boost growth, and are expected to contribute to continued sizeable external current account deficits. Inflation is projected to edge up in the wake of the introduction of the value added tax (VAT) on October 1, 2012, but the effect will be temporary,” stated the IMF’s St Lucia mission chief Aliona Cebotari in the release.
