SVG: Take-Off?

St Vincent & the Grenadines was hit hard by the financial crisis. But the subsequent recovery has been hindered by a sequence of adverse weather-shocks. The government has pinned its hopes for an economic uplift on the long-awaited opening of the Argyle International Airport. But so far no major international airlines have signed up to use the facilities. This will change. Nonetheless, for now, the costs to the Vincentian tax payer may outweigh the immediate benefits.

SVG neatly summarises the Caribbean and all its economic vulnerabilities. The withdrawal of a preferential banana trade agreement with the EU has decimated its agricultural backbone and led to a shift towards tourism and to a lesser extent offshore banking, both driven by a generous tax regime and funding concessions.

As in the rest of the Caribbean, both sectors contracted during the financial crisis leading to the economy shrinking by around 5% over 2008-10. But just as the recovery seemed to be gathering momentum, the nation was trounced by Hurricane Tomas in October 2010 which is estimated to have caused damage equating to 5% of GDP, and floods in April 2011 and December 2013 (4% and 12% of GDP respectively).

Most of the damage was done to the basic infrastructure including roads, bridges, housing, schools, hospitals and electricity provision. In response, the government has embarked on a 5-year programme of reconstruction which will be largely funded by loans from the World Bank, Caribbean Development Bank and the IMF as well as bilateral grants.

The IMF estimate that after slipping from 2.3% growth in 2013 to 1.7% in 2014, output will expand by 2.6% this year and 3.0% in 2016. This pickup is envisaged to partly reflect the opening of the Argyle International Airport which has been under construction since 2008 and is set to be fully operational by the end of the year. The airport will facilitate intercontinental flights into SVG (at the moment visitors largely rely on light aircraft or ferry connections from other nearby islands such as Barbados and Grenada) and will be able to handle up to 1.4m passengers a year.

In principle, the increased capacity will drive an increase in tourist inflows, which stood at around 60k in 2014. In anticipation, several new resort developments and upgrades been made including the $250m all-inclusive Buccament Bay Resort which opened in 2011 and the $120m Pink Sands Hotel which started operating last year.

However, concerns about the venture are bubbling. Despite many meetings with several North American and European carriers, no international airlines have yet signed up to using the new facilities. The authorities seem pretty relaxed insisting that airlines typically wait until virtual completion before organising flights and schedules.

Perhaps. But an equally likely story is that waiting until the last moment greatly increases the bargaining power of the airlines in negotiations over tax breaks, including multi-year tax holidays, and revenue guarantees with a government that will have spent over $250m on the airport and has a gross debt of nearly 80% of GDP to service and trim. Although the detailed terms and conditions are unlikely to see sunlight, a recent report by the Economic Commission for Latin America and the Caribbean hints at the pliability of local authorities by noting that:

“An unusual aspect of the relationship between the airlines and Caribbean economies is that, although airlines such as Delta Air Lines, United Airlines, American Airlines and British Airways have a great impact on the latter, they do not usually make significant investments there themselves.”

In other words, while the airport is highly likely to deliver a long-run gain to the economy, for now the average Vincentian can look forward to effectively subsidising each and every incoming flight.