Address by the Honourable Prime Minister to St. Lucia Chamber of Commerce August 6, 2002
PROSPECTS FOR THE ECONOMY
I would imagine that your primary concerns as a business community today relate to the immediate prospects for the economy and the implications for your own strategic corporate planning. Clearly, having a picture of public sector performance and expectations will help to inform some of the business decisions you need to make in the immediate and medium term.
I am always pleased to be able to share public sector perspectives with you and to cultivate areas of common interest where our collective ambitions for economic progress and development can find fertile ground. While I do not wish to belabour this point, I do wish to commence by reminding you that last year was the worst economic year the Caribbean has seen in nearly two decades. Even the most resilient of the region’s economies – Barbados and Trinidad included - showed signs of stress. Governments, without exception had to refashion their economic expectations.
As you will no doubt appreciate, our economy, like that of the rest of the world, is greatly affected by developments in the U.S. economy. I would imagine that those of you with stock portfolios have felt much the same kind of trepidation as many American shareholders who have watched their wealth being eroded by contractions in the US stock market in the wake of this latest series of corporate scandals.
This decline accelerated the trend which commenced quite ironically, with the Bush Presidency. Despite the President’s affirmations that the U.S. economic fundamentals remain strong, the S&P 500 index is down 40% compared to when he took office in January 2001. The Economist magazine asserts in its July 27th issue, that this broad stock index is now 45% below its peak of early 2000, making this, in some measures, a deeper ”bear” market than the 1973-74 crash, and the worst since the 1930s. There has been a commensurate dent in investor confidence, globally. Indeed, the decline in equity values is not restricted to the US economy. Since their peaks in 1999-2000 stock market indices have almost halved in Britain and continental Europe.
Fortunately, The Economist also asserts in the same issue, that the health of the US economy is more robust than might have been expected last autumn. The Federal Reserve has just raised its forecast of likely GDP growth and corporate profits are in fact recovering quite strongly from last year’s trough.
The August 5th issue of US News paints a similar picture of cautious optimism. That periodical notes that while the S&P index is severely down, trading volumes are higher than ever, even if price earnings ratios have declined to more realistic levels. While stocks of wealth may have been affected, personal income in the U.S. is still rising, and the economy promises a 2.4% improvement in GDP. Meanwhile inflation, the scourge of real growth, has declined from 3% a year ago to 1.1% as of June 2002. Unemployment is relatively steady, and job growth is positive if modest. Instructively, 70% of senior corporate executives surveyed expect to be hiring again in the next financial year.
You may well ask yourself whether all this will translate into gains for us. Well, if the U.S. economic trend has bottomed out, the prospects for direct foreign investment in St. Lucia are likely to improve. Foreign direct investment constitutes a major component of the balance of payments, promoting growth in GDP and employment. If the U.S. economy rebounds, remittances from St. Lucians abroad may also improve as working relatives in metropolitan areas, continue to support their families at home.
Similarly, our tourism arrivals are likely to improve if the average American feels optimistic enough about his earnings, savings and retirement prospects. On this score, we note that while Cruise arrivals are still down 18.8% over last year, the more significant category, that of stay-over arrivals are marginally better this April, May and June, than for the same period in 2001. Excursion Arrivals are also up 31.4%. Overall, arrivals are still off by 8% for the first half of this year compared to the same period last year. However, with the winter season still ahead of us and a comprehensive advertising and promotion strategy still playing out, the sector may well recover substantially by year-end. Thus there is reason to be optimistic about next season. As noted, prospects for tourism will depend mainly on the success of increased marketing and promotional efforts but the refurbishment and opening of the Sandals St. Lucia Grande Hotel in November this year will certainly help recovery in that sector. Prospects will be further enhanced by the construction of the Beaches property in Vieux Fort. Incidentally, we also expect that the future of the Club Med Hotel will be resolved very shortly.
IMPROVED ECONOMIC ACTIVITY
Also on the subject of our economic prospects, the Eastern Caribbean Central Bank report for July 2002 states that economic activity in St. Lucia is expected to have improved in this second quarter relative to the corresponding quarter of 2001. The report attributes this improvement to developments in the agricultural sector where we know banana production is showing encouraging recovery. Banana production is estimated to have grown by 33% during the first quarter of 2002 relative to the corresponding period in 2001.
Construction activity is expected to further increase based on the implementation of a number of public sector projects mostly in road maintenance and construction. Activity in construction is influenced largely by a 7.4% increase in public sector capital expenditure. This trend is likely to be sustained with the provisions for road construction, including the Vieux- Fort/Soufriere Highway, the enhancement of the Castries/Gros Islet Highway, the construction of new jetties and schools, and the completion of fisheries complexes in Choiseul and Soufriere.
The current account of Central Government is expected to record a surplus above the level recorded during the corresponding period in 2001. Both current revenue and expenditure are projected to increase. Indeed, the haemorrhaging of revenue has decelerated and there are encouraging signs of a return to previous levels of revenue intake. Actual collections from the Customs and Excise Department show an increase over the corresponding period in 2001, signalling a return toward normal import levels.
The ECCB report also anticipates further expansion in the broad money supply (M2), influenced by developments in the real and external sectors. Already, there is evidence of improved liquidity in the banking system. The Central Bank report concludes that “in the second half of 2002 the economic recovery is likely to be sustained as a result of an anticipated increase in the major sectors”.
This is evidenced by an overall balance of payments surplus of $16.5 million in the first quarter of 2002, compared to the deficit of $8.7 million during the first quarter of 2001. This translated into a 7% improvement in St. Lucia’s share of ECCB reserves. Although this improvement in the overall balance reflects a shrinkage in the merchandise trade deficit consistent with a general contraction in demand, St. Lucia did experience higher inflows on its capital and financial accounts. In the current account, payments for imports fell reflecting lower petroleum and petro-chemical prices. Export revenues on the other hand, improved due to developments in the banana industry. On the capital and financial accounts, gross inflows increased with higher inflows of official grants and loans as well as short-term capital to commercial banks. In contrast to net outflows of $9.4 million in the first quarter of 2001, commercial bank data indicates net capital inflows of $22.1 million for the same period in 2002.
I know that there has been some speculation regarding Government borrowing. Recent information on this account may prove instructive. During the first quarter of 2001, domestic credit increased by just 0.7%. Against this, net deposits of the public sector declined by 7.4% ($20.9 million) as public enterprises and central government were able to draw down on their cash deposits in lieu of borrowing to finance operations. Accordingly, domestic credit to central government declined 0.6% and to the rest of the public sector by 0.9%. The reduction in credit reflected increased inflows of external loans and official capital grants largely from the European Union, to finance the Public sector Investment Programme.
To some extent these inflows will counter the $70 million haemorrhage in tax and non-tax revenue suffered after the general economic shocks of last fiscal year. Interestingly, current expenditure shrank by 5.6% due to decreases in personal emoluments, goods and services procurement, and interest payments.
At the end of March 2002, total disbursed external debt to Central Government stood at $378.6 million. This figure is not to be confused with total debt liability which also includes debt guarantees. You may be encouraged to note that St. Lucia’s total outstanding debt to GDP ratio for 2001 stood at 45.2%. This should be compared with a high of 102.7% in St. Kitts and Nevis; 93.7% for Dominica; 65.2% for St. Vincent; and 97.3% for Antigua/Barbuda. St. Lucia’s outstanding debt per capita is the second lowest in the region. Our external debt ratio at 65.3% is below the ECCU average and the 3rd lowest in the region after St. Kitts and Anguilla. The same can be said of our central government debt to GDP ratio which stands at 36.6%.
Most importantly, at the end of 2001 St. Lucia’s central government debt service as a percentage of current revenue stands at 21.1%. This in fact, is below the ECCU average, and compares very favourably with those of Antigua (28.1%) and St. Kitts/Nevis (27.4%).
THE PATH TO CAUTIOUS RECOVERY
My central message to you then is that while we are still not out of the woods, we are on the path to a cautious recovery. Moreover, St. Lucia’s performance is likely to be more robust that many other OECS economies, owing to the diversity of our economy, the sound state of our macroeconomic fundamentals and the management of our general economic environment.
Consequently, both donor and investor interest in St. Lucia remains high. We are for example, in the process of completely renovating our relationship with the European Union, having recently concluded agreements for the inflow of new SFA and NIP funds for capital investment, economic diversification, social sustainability, agricultural diversification, and private sector development. In addition, government is in the final stages of a reallocation process which will deploy some $30 million of unused STABEX resources into the domestic economy. These initiatives will for example more than double the funds available directly to the private sector for market and product diversification and productivity enhancement. These resources should be available to us by the third quarter of this year.
Among the most significant developments in the economic picture will be the new investment in the telecommunications sector. This will be heralded by the formal issuance of licences to three new telecommunications service providers. This is the most recent phase of the liberalisation and modernisation process, taking place across the OECS. Associated investment, which should follow during this third quarter, will expand the economic space into which new and existing businesses can diversify.
In the meantime, Government wishes to encourage and support the private sector through this difficult period with some additional measures besides the ones offered in the 2001/02 Budget and the emergency measures introduced in the last quarter of 2001. Regarding interest rates, you will have already learned of the recent decision to lower the cost of borrowing via a reduction of interest rates. This is but one tentative step to improve the business and investment environment. Government also proposes to encourage the formation of new ventures by lowering the corporate tax rate for publicly traded companies, listed on the Eastern Caribbean Stock Exchange. We are also considering corporate tax exemptions, tax holidays and special depreciation allowances. I would encourage your views on this particular issue.
ESTABLISHMENT OF EQUITY FUND
These initiatives reflect our belief that firstly, we need new corporate vehicles to carry us forward. It is not enough to fix what exists; we must also create a new breed of St. Lucian companies. Secondly, we need to raise domestic capital for private sector development through more equity rather than more debt; and thirdly, we must find new ways to pool our limited resources while broadening the range of investment options available within the economy. This is consistent with the formation of the fifteen million dollar Productive Sector Equity Fund; financed by the European Investment Bank, the Bank Of St. Lucia and the National Insurance Corporation. the establishment of the Eastern Caribbean Securities Exchange.
STRENGTHENING OUR NEGOTIATING MACHINERY
Our future also depends on positions taken in the world trading arena. Consequently it is imperative that we enhance our external negotiating machinery, and I will be looking to the private sector to play a critical role in this process. Government will continue to encourage private sector participation in such negotiations. Indeed, we strongly maintain that if the private sector was involved when St. Lucia commenced its WTO deliberations we might have been in a better position today.
Consistent with this position, the Minister of Foreign Affairs and Foreign Trade is anxious to reactivate the External Trade Council in which the private sector must take a lead role. We must not languish under the impression that we cannot influence the design of emerging trading arrangements. It is hardly coincidental, for example that we were visited by a concerned U.S. trade representative shortly after St. Lucia raised its dissenting voice at the CARICOM level. A similar insistence from St. Lucia has prompted the decision to convene a CARICOM Economic Summit here in St. Lucia on August 16th.
At home, we will also support the work of the soon to be inaugurated National Economic Council. Resources for research, policy work, advocacy and strategic economic interventions has been provided for in the Phase II budget of the Office of Private Sector Relations, which will serve as the secretariat for this important forum.
Finally, I would like to publicly thank the private sector for its support over these very difficult months and encourage you all to keep your noses to the corporate as well as the national grindstone. I know it has been a long, often painful year and many of us have been forced by circumstance into positions we hoped never to encounter. Some have disposed of long held assets. Others have parted with faithful staff. Some may have abandoned loyal suppliers and longstanding clients. Nevertheless, I believe that we are coming through the fire, more burnished and resilient than we went in. We must continue to rationalize and fortify the economy and the businesses within in if we are to make space for the coming generations. In so doing, we are very fortunate in St. Lucia to have a few more economic options than many of our sister economies and we are blessed with that most critical ingredient: a creative and determined people.
I thank you.
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