Address by Prime Minister Stephenson King - Update on current economic threats and challenges facing Saint Lucia November 25, 2008

Address

by the

Honourable Stephenson King

Prime Minster and Minister for Finance;

Minister for Economic Affairs, Economic Planning, National Development;

and Minister for External Affairs of Saint Lucia

November 25, 2008

“Update on Current Economic Threats and Challenges facing Saint Lucia”

Introduction

My fellow Saint Lucians, on October 13th of this year, I addressed you on the subject of the current economic threats and challenges facing our Country.  At that time, I also explained to you the likely impact on Saint Lucia and how Government has been responding to the situation.

What started out as a financial crisis, mainly in the United States of America, has precipitated into a full-blown global economic crisis.  The situation is very dynamic, requiring constant monitoring and responses, based on sound judgment.  It is my duty as Prime Minister and Minister responsible for Finance to keep you informed of developments as they unfold, and apprise you of Government’s policy responses. 

The purpose of tonight’s address therefore, is to present an update on developments relating to this international economic catastrophe.   In the circumstances, I will also use this opportunity to make an announcement regarding adjustments to the prices of bread and petroleum products.

Ladies and Gentlemen, since my last address to the Nation, the global economy has experienced further downturn, as the international financial crisis has resulted in contraction in economic activity worldwide.  The latest IMF forecast of global output of 3.75 per cent growth in 2008 represents a deceleration from the 5 per cent economic growth recorded in 2007. The global economy is projected to slow even further in 2009 with growth estimated at 2.2 per cent down by ¾ percentage point of GDP relative to estimates made one month ago.   Output in the advanced economies is projected to fall by 0.3 per cent in 2009, the first such contraction since World War II.

Over the last two weeks the economies of Japan and the countries of the European Union (EU) have slipped into recession as their economies recorded negative growth for the second consecutive quarter.  This development is directly linked to the global financial crisis and shrinking demand.  The economy of the United States is widely believed to be in recession, with unemployment recording its highest level in 14 years.  Analysts predict a 2.6 per cent decline in economic activity in the US in the fourth quarter of 2008.

It was against this backdrop that the leaders of the G-20 (i.e. the 20 largest industrialized and emerging economies of the world) held a summit in Washington D.C. on 15 November 2008 and expressed their commitment to restore global growth and reform the global financial system.  To date some of the G-20 countries and others have taken strong measures to stimulate their economies, provide liquidity, strengthen the capital of financial institutions, unfreeze credit markets, and are working to ensure that international financial institutions can provide critical support for the global economy.

While we should be encouraged by the efforts of the G-20 Countries to tackle this global problem, the reality is that we are in the midst of the “worst financial crisis since the Great Depression”, as was noted by the IMF Managing Director at the last Board of Governors Meeting. 

The current global economic slowdown would no doubt have negative consequences for the economy of Saint Lucia, through its impact on slowing visitor arrivals and declines in inflows of foreign direct investment and remittances.

A comparative analysis of visitor arrivals into Saint Lucia during the last three years reveals that in 2006 stay-over arrivals dropped by -6.2% while cruise arrivals declined by -8.3%.  In 2007 stay-over arrivals increased by 27.5%, and cruise arrivals also increased by 62.5% over 2006.  This year stay-over arrivals; up to October, increased by 5.4% over and above 2007, while cruise arrivals also increased by 5.1% over and above 2007.   Realistically speaking stay-over arrivals increased by 27.2% over the base year 2006 and cruise arrivals also increased by 59.3% over the 2006 performance.

Notwithstanding such performances, it is strongly anticipated that there will be a slowdown in arrivals at the end of this year, reflecting a softening in the number of visitors from the major markets, particularly the US, UK and the Caribbean.  As the recession in the major tourist markets deepens and consumer confidence wanes, the number of long haul travellers is expected to decline during this coming winter season.  Already, several hotels have reported declines in forward bookings and some had to reduce their rates in an endeavour to attract guests.  Indications are that the level of competition in the travel market will intensify and Saint Lucia; like most Caribbean countries, will be challenged in recording growth in stay-over visitors in 2009.  Some Caribbean countries have also witnessed reductions in the number of stay-over visitors in the first six months of 2008.  These include Barbados, by 1.8 per cent, the Bahamas by 0.2 per cent and St. Vincent and the Grenadines by 10.8 per cent.

Activity in the construction sector has declined, as is evident by a fall in both public and private sector construction.   Foreign direct investment, the main source of financing private sector construction projects, has shown signs of slowing down.  As a result, some major tourism related projects in Saint Lucia has either slowed or have not commenced.  The implications for the domestic economy are profound, as construction has been the main driver of economic activity over the last 3 years or so. 

The softening in the domestic economic activity is also reflected in a deceleration in domestic credit expansion.  Growth in commercial bank credit to the private sector expanded to 8.7 per cent during the January to September 2008 period, compared with growth of 17.8 per cent over the same period in 2007.  This development reflects significant slowdown in credit extended to businesses as the rate of increase in domestic investment wanes.

As I earlier noted, the slowdown in domestic economic activity is already taking its toll on government’s fiscal position, mainly through slower growth in revenue receipts.  As the economy slows, the level of imports also slows resulting in lower government revenue receipts from imports.  Current expenditure is projected to increase, reflecting salary and wage increases to public servants.  Therefore, the current fiscal position of government is expected to deteriorate in the short term. 

Although government has a responsibility to respond to the economic challenges by implementing appropriate policies to stimulate economic activity, the policy space available is very limited.  This constraint is reflected in the relatively high debt to GDP ratio inherited and the difficulties posed in managing such a debt burden.  Further, Customs revenues have not performed as expected, due mainly to the subsidization of fuel prices and slowdown in economic activity.  Government net subsidies on fuel amounted to approximately $8.4 million in the April to September 2008 period.

However, notwithstanding these constraints, my Government has implemented a number of measures designed to help cushion the impact of the global economic crisis.  These measures were outlined in my last address to you.  My Government will continue to use, where possible, the fiscal policy instruments at its disposal, to stimulate economic activity while managing the country’s debt in a responsible manner.  As was also stated in my last address, government will be embarking on a number of road development projects which will commence early in 2009.  We will also immediately embark on a number of short-term measures to provide some economic stimulus over the upcoming Christmas season.  This will entail re-prioritization of the government’s budget.  These short-term measures will begin to manifest themselves in the coming weeks. 

Ladies and Gentlemen, one of the major issues that I wish to address tonight is the situation of fuel prices.  For much of this year, the international price of crude oil has been persistently and unbearably high.  However, in recent months, oil prices have been plummeting, falling below US$50 a barrel last week - the lowest price in three years.  My Government last increased the domestic retail prices of petroleum products on January 14th, 2008, when international oil prices were approaching US$100 per barrel. However, as we are all aware, oil prices continued to escalate, rising to as high as US$147 a barrel in July.

This Government, concerned about the unbearable impact of the rising cost of living on the people of Saint Lucia, maintained the policy of keeping retail prices of fuel unchanged, despite mounting fiscal pressures. This decision; not to increase prices at the pump in the face of rising oil prices, came at a significant cost to Government in terms of foregone revenue.  This resulted in significant revenue losses due to the continued subsidization of petroleum products, particularly cooking gas.  Even at a recent price of oil of US$55 per barrel, the 20 pound cylinder of cooking gas was costing the Government $6.50 per cylinder in subsidies. 

I wish to highlight that while the prices of unleaded gas and diesel in Saint Lucia remained fixed at $12.75 a gallon, prices in other countries in the region increased on a number of occasions between January and August 2008, to as high as $18.40 per gallon for diesel and just under $17.00 per gallon for gasoline. 

I wish to assure you that the Government of Saint Lucia has been monitoring oil price movements very closely and will continue to do so, as the volatile nature of oil prices poses a challenge to Government, with respect to its policy responses. To date, the Government has resisted what may have been an immediate and premature response to the drop in global oil prices. We sought instead to monitor the situation, whilst exercising prudent management of the Government’s finances.  Government’s ability to implement this year’s budget has been adversely affected by its decision to continue to subsidize fuel, when oil prices were increasing. Government’s revenue has also been eroded by slower than expected economic growth, further exacerbated by the global financial crisis, to which I alluded to earlier.  Therefore, the Government has realized revenue shortfalls in relation to its 2008/09 budget targets. However, the fall in oil prices over the past few months has allowed the Government to partly offset the losses incurred in the first half of this budget year.

Ladies and Gentlemen, after careful consideration, I am pleased to announce that Government is now in a position to adjust the retail prices of fuel and provide you with some relief. Effective midnight on Monday December 1st, 2008, the prices at the pump and of cooking gas will be adjusted as follows:

* Unleaded gas will be reduced from $12.75 to $11.50 per gallon, representing a reduction of $1.25 per gallon;

* Diesel will be reduced from $12.75 to $12.00 per gallon, a savings of 75cents per gallon;

* Kerosene will be move from $11.10 to $6.00 per gallon, a reduction of $5.10;

* Households will realize savings in cooking gas as the price of the 20 pound cylinder, will be reduced by $5 from $33 to $28 and the 100 pound cylinder will fall by $11 to $199 from $210;

* Bulk LPG will be reduced from $2.45 to $2.40 per pound, representing a savings of five cents per pound.

These price reductions currently place Saint Lucia below the ECCU average which as at November 21, 2008 was $12.29 a gallon for gasoline and $13.32 for diesel. With this change, the price of diesel in Saint Lucia will also be the second lowest in the region.

It is anticipated that with these fuel price reductions, consumers will benefit further from cheaper costs for other goods and services, where possible.

I must emphasize however, that depending on future market developments, further price adjustments may follow. I would like to encourage you, once again, to continue to be moderate in your consumption of fuel, despite these reductions in the retail prices of petroleum products.

Ladies and Gentlemen, the other issue that I wish to speak about this evening is the price of bread.   In September 2008 officials of the Ministry of Trade, Industry, Commerce, Consumer Affairs and Investment met with the Bakers’ Association to discuss a range of issues including the Bakers’ request for a price increase on controlled bread.  I refer here to the 3 ounce creole loaf and the large 2 pound 2 ounce sandwich.  The Bakers’ Association argued that the cost of inputs had increased significantly and in some cases, at or about thirty (30) per cent.  Consequently the bakers made a request to Government to review and approve a price increase that will be satisfactory to its membership.  It is also important to note that the last increase granted on these price controlled bread products was as far back as 1984 (i.e. 24 years ago).

Consequently, the Ministry of Commerce conducted an analysis on the cost of production of bread, by taking account of recent fluctuations in the price of certain inputs that are associated with the production of bread.  key among them are increases in the price of shortening and the cost of electricity, fuel and labour.

The price of wheat flour which is another significant input in the production of bread has increased substantially over the last year resulting in government having to absorb the price increase as a subsidy.  It is important to note that at the current price of wheat flour to bakers, government's subsidy per 100 pound bag is $43.42.

Having taken into account the recent increases in inputs for the production of bread, at the current controlled price of creole bread which is fixed at 25 cents for the 3 ounce loaf, the bakers net margin is approximately negative one cent (-1c).  For the large 2 pound 2 ounce sandwich loaf the net margin works out to be approximately negative seventy nine cents (79c).

Recent indications are that whist there maybe some downward movement in the price of wheat flour in response to falling world commodity prices, the price of flour could still remain relatively high. Therefore, Government will either have to continue subsidizing the price of flour to the bakers, albeit at a price where the subsidy per bag will be reduced, or adopt a policy option of selling at a price slightly higher than the landed cost and give the bakers a reasonable margin on cost of production.

Government has therefore agreed to the following to take effect December 1:

1. an increase in the price per ounce of the creole loaf from 8 cents to 12 cents, or an increase from 25 cents to 35 cents for a 3 ounce creole loaf

2. an increase in the price per ounce of a sandwich loaf from 8 cents to 15 cents, plus 60 cents per loaf for packaging and slicing, and

3. That the prices controlled bread products will be reviewed at least every two years.

Ladies and Gentlemen, we are in a time of extraordinary global economic challenges and uncertainty.  It therefore cannot be business as usual.  We must prepare for tough decisions.  Our ability to survive those challenges would depend on how well we effect the required adjustments. 

At the governmental level, we must be even more judicious in how we manage the public finances.  At the individual level, we must also contain our spending habits.

We do not know for certain where this crisis will head, but experts predict that the impact will be greater next year.  We must therefore prepare for the worst while, we hope for the best.

As your Prime Minister, I promise all of you that I will do my best to steer the Ship of State through those difficult conditions.  I have every confidence in the ability of my Cabinet to put their shoulders to the wheel.  I am also confident about the ability of our people to understand the gravity of the situation and to respond in a responsible manner.

As we prepare to observe Saint Lucia’s National Day, and the festive season, let our preparations be modest and our spending prudential.  Let the fortunate reach out to the unfortunate, and let us all come together with our individual and collective ambitions to weather the storm ahead of us.

Let me extend my very best wishes to all of you, and may God richly bless you.

I thank you.

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