St. Kitts and Nevis - Economy

St. Kitts and Nevis - Economy

St. Kitts was early regarded as a logical choice for agricultural colonialism and became the launching point for seventeenth-century British expansion into the Caribbean. In many ways, St. Kitts was an ideal island for development of the colonial sugar estate; it had relatively large, fertile tracts of land, an amenable climate, and a steady pattern of rainfall. More than 300 years later, the Kittitian economy was still very dependent on sugar; but by the 1970s, government and business leaders realized that a move away from sugar was vital for continued economic growth.

Tourism and manufacturing developed slowly as economic alternatives in the 1980s, but eventually they began to challenge sugar as the primary foreign exchange earner. Because significant capital investment was a prerequisite, the transition was at first both unpredictable and uneven. Diversification within the agricultural sector, particularly toward fresh vegetables, was also a government priority. Nonsugar agriculture also experienced a similar pattern of steady but slow growth because of land restrictions and reluctance on the part of farmers to attempt smallholder farming.

Nevis, in its bid to achieve economic viability, has had less success. Historically, it lacked the richer soils and larger tracts of land available on its sister island and was consequently less suitable for cultivation of sugar. It was valued, even in colonial times, for its seclusion and beaches rather than for agriculture, a fact that may allow it to accommodate the growing international tourist market of the late twentieth century. Agriculturally, Nevis has relied heavily on the cultivation of sea island cotton as its primary export commodity. This crop, usually planted without rotation, caused a serious soil erosion problem, however, which will likely diminish the island's potential for further agricultural production for many years to come.

In the mid-1980s, the government envisioned the economic future of St. Kitts and Nevis as dependent on tourism, light manufacturing, and a scaled-down sugar industry. Although the potential seemed great, both islands were still struggling to make the necessary adjustments. The development of infrastructure and effective marketing techniques, however, may allow these three economic sectors to mature by the 1980s.

Macroeconomic Overview

Growth of the national economy in the 1980s was generally uneven because of the continued reliance on the sugar industry. Both the agriculture and the manufacturing sectors depended on sugar for large portions of their earnings, and aggregate economic performance mirrored the vagaries of the international sugar market.

Gross domestic product (GDP--see Glossary) grew, on the average, by a respectable 2.8 percent annually from 1977 to 1983. Despite significant expansion of tourism-related services, this figure would have been higher were it not for an actual decline in GDP of 2.4 percent in 1983 because of poor performance by the sugar sector. Sugar rebounded in 1984 so that aggregate economic performance rose by 3.3 percent, but GDP growth was reduced to only 1 percent in 1985, again the result of the weak performance of sugar. GDP grew in 1985 solely because of the strong performance of tourism and related construction projects.

The shift toward the service sector was evidenced by the economic figures for 1985. About 67 percent of GDP was accounted for by wholesale and retail trade, communications, and financial and government services. Agriculture and manufacturing each accounted for about 13 percent of GDP; the other economic sectors accounted for the remaining 7 percent. This trend was expected to continue into the 1990s, particularly if more tourist accommodations could be added to those already existing on the two islands.

Employment statistics in the mid-1980s, although widely regarded as unreliable, also reflected the growing importance of the tourist and manufacturing sectors. By 1982 a reported 26 percent of the work force was associated with trade, hotels, and other services, whereas 22 percent was employed by the manufacturing sector. The agricultural sector (primarily sugar) still employed one-third of the total work force, and sugar processing was still an important part of the manufacturing sector. Most of the remaining 19 percent of the labor force worked for the government, and about 5 percent were employed in the construction industry.

Despite the existence of government-run employment agencies on both islands, unemployment statistics were unavailable in the mid1980s . Best estimates, however, placed the unemployment rate between 20 and 25 percent. This high level of unemployment has been variously attributed to the unwillingness of the labor force to attempt nonsugar agriculture and the lack of training necessary to make the transition to tourism-related services. Unemployment was not expected to decrease in the immediate future, unless the government became more successful at coordinating education and technical training with the demands of the labor market.

Inflation in the Kittitian economy was typical for a Caribbean island in the mid-1980s; it was fueled by both internal and external sources but tended to parallel world inflation because of the open nature of the domestic economy. Because St. Kitts and Nevis was so dependent on imports, the price changes of these goods often had a strong effect on the domestic inflation rate. Local inflationary pressures, such as wage increases, were also occasionally evident but generally had a minimal effect on prices in the mid-1980s.

After rising at double-digit rates in the early 1980s, inflation as measured by the consumer price index fell to 3.6 percent in 1983, 2.7 percent in 1984, and 1.8 percent in 1985. This decline reflected global trends, as well as stable prices for essential imports and minimal increases in domestic wages. Stable prices and wages were expected for the rest of the decade.

Finance and Banking

St. Kitts and Nevis had a relatively simple system of public and private financial institutions in the 1980s. As a member of the Organisation of Eastern Caribbean States (OECS--see Glossary), it had as its central monetary authority the Eastern Caribbean Central Bank (ECCB), headquartered in Basseterre. St. Kitts and Nevis also used the Eastern Caribbean dollar as its medium of economic exchange; it was pegged to the United States dollar at a rate of EC$2.70 to US$1.00 in 1987.

The two islands had six financial institutions in 1986, including both foreign and domestic concerns. Barclays Bank, the Royal Bank of Canada, and the Bank of Nova Scotia represented foreign interests, whereas domestic institutions included the St. Kitts and Nevis National Bank, the Development Bank of St. Kitts and Nevis, and the Nevis Co-operative Bank. Financial assistance was also provided by multilateral institutions, such as the CDB and the World Bank (see Glossary).

By the mid-1980s, savings levels had been deteriorating steadily since 1978. By 1981 they had become negative, forcing foreign savings to become the base for lending to both the public and the private sectors. Public sector borrowing increased in the 1980s because of the deteriorating fiscal situation caused in part by the fall in sugar tax revenues. Additionally, the private sector was saving less and purchasing more, particularly consumer durables.

Role of Government

The government played both direct and indirect roles in the national economy. Although it allowed the private sector to control most of the country's economic assets, it found itself having to assume management of the sugar industry in the 1970s, a situation that remained unchanged as of 1987. The government, however, considered its primary role as one of facilitating economic development by exercising fiscal and monetary options, managing public sector investment, and creating an attractive environment for both public and private foreign capital.

Following independence in 1983, St. Kitts and Nevis attempted to maintain a balance of revenues and expenses. By the mid-1980s, however, current expenditures and capital investment exceeded revenues. Large increases in public salaries, 45 percent in 1981 and 25 percent in 1986, were partially responsible for the growing deficit; tax receipts, however, did not realistically reflect fiscal requirements. To offset the resulting budget deficit, which reached 5 percent of GDP in 1984, the government cut capital expenditures, borrowed from domestic and foreign banks, and developed new revenue sources. Although the personal income tax was abolished in 1980, increased revenue was realized from two new taxes created in 1986, the Social Services Levy and the Employment Protection Levy. These new financial measures, in addition to import duties and utilities fees that had previously formed the basis of government revenue, allowed St. Kitts and Nevis to reverse its operational deficit and actually realize a small surplus by 1987. This was a critical development for maintaining the country's international credit rating and access to foreign loans.

Because it was a member of a regional monetary authority, St. Kitts and Nevis had a limited ability to exercise control over the economy by manipulating money supply and interest rates. The nation's primary goals of growth and stability, however, were in accordance with those of other regional economies, and balanced growth of the money supply, which was managed by the ECCB, assisted the government in financing deficits and providing funds for public sector investment. The Social Security Scheme provided local public funds for budget and public investment loans.

The government coordinated growth through a program of public sector investment, which managed foreign and domestic capital expenditures used for national development. The primary goal was to expand the country's economic base by moving away from sugar and toward tourism, manufacturing, and nonsugar agriculture. Public investment managers allocated funds to three major areas: directly productive sectors such as agriculture, industry, and tourism; economic infrastructure projects, including transportation, communications, and utilities; and social infrastructure, such as health, education, and housing. In the early 1980s, construction of economic infrastructure was emphasized to accommodate future growth in both manufacturing and tourism. Thirty percent of total expenditures were allocated to transportation. This resulted in the completion of a 250-kilometer road system, the Golden Rock International Airport, and a deep-water port in Basseterre.

Communications were also upgraded in the 1980s and were considered good on both islands. A modern telephone system consisting of more than 2,400 telephones provided excellent international service by means of radio-relay links to both Antigua and St. Martin. St. Kitts had two AM stations: the government-owned Radio ZIZ on 555 kilohertz and the religious Radio Paradise with a powerful transmitter on 825 kilohertz. Channel 5, near Basseterre, was the principal television transmitter, and programs were rebroadcast through repeaters from the northern tip of St. Kitts on Channel 9 and Nevis on Channel 13.

Other major projects in the early 1980s included construction of new schools, diversification of agriculture, and development of a manufacturing industry. Total allocation for these areas was about 39 percent of the budget; the remaining 61 percent was split among small projects in all three major areas.

After 1984, with the completion of large portions of the supporting infrastructure, public sector investment was focused more intently on the productive sectors of the economy. Tourism received approximately 32 percent of total funds allocated through 1987; agriculture and industry followed with 12 percent and 14 percent, respectively. Economic and social infrastructure each received about 21 percent of total funding, with emphasis placed on developing new energy sources and upgrading educational facilities.

Foreign Trade and Balance of Payments

St. Kitts and Nevis' trading patterns were well established by the 1980s, but this did not guarantee the stability of trade or the balance of payments. Although relationships with major trading partners such as the United States, Britain, and Caricom had existed for a long time, St. Kitts and Nevis' export earnings were hard to predict because of the volatility of demand for its tourist services, agricultural (sugar) products, and manufactured goods.

Raw and processed sugar products continued to lead export earnings in the 1980s, but to a lesser degree than before because of steady growth in the manufacturing and tourist sectors. Export earnings from sugar had accounted for 77 percent of the total in 1978, but they fell to 60 percent in the mid-1980s as clothing, shoes, and electronic components sold abroad in greater quantities. In spite of improved earnings from nonagricultural trade, the trade deficit continued into the 1980s. Only the growing tourist sector kept the current account deficit from being even worse.

St. Kitts and Nevis imported goods at a constant rate through the 1980s, the most significant of which were manufactured products, food, and machinery. They accounted for about 21 percent, 20 percent, and 19 percent, respectively, of total imported goods in the mid-1980s. Fuel and chemicals combined for a total of 20 percent of imports; the remaining 20 percent comprising numerous miscellaneous items. Over 55 percent of imports originated in Britain, the United States, and Puerto Rico. Trinidad and Tobago, Canada, and other countries accounted for approximately 12 percent, 6 percent, and 27 percent of imports, respectively.

Because St. Kitts and Nevis was forced to import basic necessities such as food and many manufactured products, the danger of a large current account deficit was ever present. Should sugar, light manufacturing, and tourism all perform poorly at the same time, a large deficit in the current account would be unavoidable. As of 1987, this situation had not occurred only because the tourist market had been very buoyant. Sugar output fell in the mid1980s , while production of manufactured goods, such as garments and footwear, fluctuated with the trade restrictions characteristic of the Caricom market. This fluctuation often compounded the trade deficit.

Despite these uncertainties and the large deficit in the trade balance, St. Kitts and Nevis ran a relatively small current account deficit for 1985 of US$6.8 million. Three items helped minimize the negative trade balance: a strong positive services account composed almost entirely of tourist revenues, unrequited private remittances, and official government transfers.

The overall balance of payments for 1985 was a surplus US$1.7 million. A capital account surplus of US$8.5 million, composed predominantly of private sector investment in tourism and communications but also bolstered by public sector loans, more than offset the current account deficit. Growing public sector loan commitments caused the World Bank to express concern over the potential for a long-term external debt obligation. But the World Bank suggested that continued growth of the tourism sector would do much to minimize St. Kitts and Nevis' debt service burden; there would be even less probability of a serious problem should sugar and manufacturing markets stabilize in the future.

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