Fiscal Impact of Independence on Nevis.
Prepared by the Caribbean Development Bank and the Nevis Island Administration – October 1996.
(This paper was prepared in readiness for the secession vote in 1998)
In June 1996, the Nevis
Island Administration invoked Section 113 of the Constitution of the
Federation of St. Christopher and Nevis for the political and economic
separation of Nevis from St. Kitts. The decision to seek independence
for Nevis was formalised on July 18th 1996, by the introduction into
the Nevis Island Assembly of the Nevis Secession Ordinance.
The Nevis Island Administration
has subsequently conducted meetings with the general public and various
social partners throughout the island. Meetings have also been held
with the Nevis Reformation Party and with nationals overseas. In
addition, the Administration has published and circulated its proposals
for an independent Nevis. These proposals highlight the
Administration’s vision of the future relationship between Nevis and
St. Kitts given the proximity of the islands and the long historical
The economic viability of Nevis
was a critical element in the decision to seek independence. The
Administration is aware that additional revenue will be required to
attend to all the demands of an independent Nevis. It has always been
this Administration’s conviction, however, that approximately ten to
twelve million dollars is being lost by the Nevis economy.
Although this paper could have
been based solely on the Administration’s convictions, the
Administration believed it was in the best interest of the island to
obtain the assistance of an internationally recognised financial
institution to present an independent analysis of the Nevis economy. In
this regard, the Administration sought the assistance of the Caribbean
Development Bank to undertake a study of the financial implications of
secession. The results of the study, from the Administration’s
perspective, confirm that the island generates enough revenue to move
forward into independence and with fiscal prudence will continue to
maintain a surplus on its recurrent budget.
The object of this paper is to
present the economic and financial implications of secession. The paper
addresses the amounts that will be required to maintain certain
essential services and foreign affairs as well as the amounts necessary
to augment and improve certain Government Departments after
A mission from the Caribbean
Development Bank (CDB) visited the Federation from August 19-23.
The purpose of the visit was to
objectively assess the economic impact of secession for Nevis. The
mission analysed both the economy in St. Kitts and the economy in Nevis
in order to make an assessment of how much Nevis contributes to the
overall economy of St. Kitts and Nevis. The analysis by the mission is
what is normally referred to in economic terms as "the annual,
net-incremental impact" (that is, the difference between the additional
revenue that will be collected after independence and the additional
expenditure that an independent Nevis will have to assume). This
analysis gives an indication of what adjustments will have to be made
to the economy of Nevis either in the form of improved revenue
performance or reduction in expenditure.
Collection of tax revenue.
It is a well known fact that a
significant amount of tax revenues generated from activities in Nevis
are collected in St. Kitts and that St. Kitts has been better able to
develop its physical and institutional infrastructure. Having regard to
this, the Nevis Island Administration has already begun to upgrade the
physical and institutional infrastructure of the island. In the event
of secession therefore, taxes which are paid in St. Kitts for goods
consumed or activities generated in Nevis, will be paid directly to
The projected additional revenue
to be collected by an independent Nevis is based in large part on the
current level of economic activity in the Federation. In other words,
if Nevis contributes 25% or 30% to the total economic activity of both
islands, then the taxes to be collected will be based on the requisite
percentage contributed by Nevis Official estimates of the contributions
of Nevis to the economy of St. Kitts and Nevis are unavailable
Since there are no official
estimates of Nevis’ contribution to the economy of St. Kitts and Nevis
the CDB mission had meetings with business persons in St. Kitts and
business persons in Nevis in order to formulate an estimate of Nevis’
contribution to the overall economy. The mission also held meetings
with various Government Departments in St. Kitts and in Nevis.
The mission presented three
scenarios in relation to Nevis’ contribution to the overall economy of
both islands. The three scenarios are that Nevis contributes 20% or 25%
or 30% to the economy of St. Kitts and Nevis. Although the report
includes a 20% and 25% scenario, the Administration is of the view that
these scenarios cannot be an accurate reflection of Nevis’ contribution
because of the growth of the Nevis economy. Information on the growth
of the Nevis economy is outlined later in this paper.
The records reflect that the
levels of economic activities in Nevis have grown substantially since
1983. It is the Administration’s firm view that Nevis contributes more
than the 30% that the CDB mission identified. The 30% scenario will be
used for the purposes of this paper, but reference is also made to the
In assessing the Nevis
contribution to overall revenues generated from IDD overseas calls and
Departure taxes in St. Kitts and Nevis the CDB mission assumed a Nevis
proportion of 40%. The mission also assumed that Nevis will no longer
collect revenue from ticket sales for the government ferry. The
Administration is in agreement with the projections for the 3000
scenario made by the CDB mission in Table 1.
The table below shows the
additional revenue likely to be collected by an independent Nevis. The
table was prepared by the CDB mission based upon the assumptions
outlined earlier in this paper.
1: Projected Impact of Secession on Recurrent Revenue Collections by NIA.
Scenario 1* (EC$)
Scenario 2* (EC$)
|Trade Marks and Patents
|Registration of Companies
Consumption Tax (inland Revenue)
|IDD Overseas Calls Tax
|Consumption Tax (Customs and
|Import Duties – Articles other
than Alcoholic Liquors
|Import Duties on Alcoholic Liquors
|Export Duties - Unclassified
|Customs Service Charge
|Communication – Post Office
|Operating of Passenger Vessel
Source: CDB Economics and Programming Department,
- Nevis assumed to account for 25%
of Federation’s GDP
- Nevis assumed to account for 30%
of Federation’s GDP
Most notable amongst the revenue
increases accruing to the NIA are corporation tax, consumption tax,
import duties and customs service charge. Together these represent 80%
of the increased revenue.
The increased revenue shown in
Table 1 is based on Nevis’ economic contribution to the overall economy
of St. Kits and Nevis. If Nevis contributes 25% to the combined economy
of both islands then the amounts outlined in scenario 1 would apply
resulting in increased revenue of $13.2 million. On the other hand, if
Nevis contributes 30% then the amounts in scenario 2 would apply,
resulting in increased revenue of $17.4 million [N.B. The increases
shown are in addition to the revenue currently collected by the Nevis
The information contained in
Table 2 represents the additional amounts that the CDB mission assumes
Nevis will have to spend once it is independent. These figures show the
projected impact of secession on recurrent expenditures. Recurrent
expenditures are those amounts which must be met annually by an
independent Nevis. These expenditures include, among others, payment of
civil servants, payment for external services, payment for the police
and fire services and payment for education and health. [N.B. With the
exception of foreign affairs and defence the Administration meets all
of the recurrent expenditures for the island of Nevis from its own
Estimated Impact of Secession on Recurrent Expenditure of the NIA.
|Area of Expenditure
|Provision of Specific Domestic
|Adequacy of Public Service
Communications, Works, Public Utilities & Posts
|Provision of External Services
|Foreign and Joint
Regional and International Organisations
Economics and Programming Department, September 1996.
a) Provision of Domestic Services.
An independent Nevis will have to
assume responsibility for the following domestic services: Prisons,
Police and Fire Brigade. The CDB mission assumed that provision of
these services involves certain fixed costs that are present regardless
of the extent of the service. Expenditures for these services are
assumed by the mission to be 50% of the cost incurred by the Federal
b) Adequacy of Public Service
As the government of an
independent country, a number of Ministries and Departments will have
to be upgraded, these include: Deputy Governor-General, Audit, Legal,
and the Ministry of Finance (including Planning and Statistics). There
is also provision made for a Ministry of Home Affairs. The CDB mission
assumes that the costs for upgrading these Ministries and Departments
are approximately 60% of the expenditure currently incurred by the
c) Provision of External Services.
As an independent country Nevis
will be responsible for its own foreign affairs and representation in
regional and international organisations. The costs for foreign affairs
and joint missions will have to be paid by Nevis. The CDB mission has
projected the cost for membership of regional and international
organisations as well as for foreign affairs and joint missions. The
Administration is in agreement with the costs projected for external
affairs by the CDB mission. As a start, the Administration believes
that Nevis should become a member of the International Monetary Fund
(IMF), Caribbean Development Bank (CDB), Organisation of Eastern
Caribbean States (OUTS), CARICOM and the United Nations.
Additional Expenditure Projections for an Independent
Alter analysing the cost
estimates submitted by the CDB mission, shown in Table 2, the Nevis
Island Administration has determined that these estimates can be
revised downward for the following reasons:
- The expansion in the Public
Service will be phased over a period of at least five years.
- The allocation to the Ministry of
Finance can be reduced significantly as a result of the lower level of
domestic and external debt obligations of the Nevis Island
- The cost for the Police can be
reduced significantly based on projections for a police force with 100
The Administration projections
for the initial increase in recurrent expenditure are set out in Table
3 below. It should be noted that the amount for external services has
been increased by almost $100,000.00 over what is proposed by the CDB
mission. At the same time an amount of $500,000.00 has been included
for training, as well as an amount of $300,000 for a Ministry of Home
Affairs. These expenses were not represented in the CDB mission’s report
Additional Expenditure Projections for Nevis.
|Area of Expenditure
|Provision of Specific Domestic
|Adequacy of Public Service
|Ministry of Finance
|Ministry of Home Affairs
|Provision of External Services
Island Administration, September 1996.
of Table 3.
The amount of $537,000 tinder
prisons will be used to pay salaries for a total of 12 prison officers
and for upkeep and maintenance of the prison.
The projected amount under Police
will cover salaries for an increased number of police officers A phased
increase of police officers would be made over time to bring the force
up to a total of 100 officers.
The amount projected for Fire
Brigade will be used to upgrade the Fire Service.
The Administration currently
meets all expenses for Health Services in Nevis; the additional
expenditure of $1,000,000 will be used for the purchase of laboratory
equipment and the employment of specialist staff. Although there is no
provision made for training by the CDB mission an amount of $500,000 is
included to augment the amount currently provided by the Administration.
The Administration presently
meets most of its printing costs. The amount of $500,000 will be used
to establish a proper printing facility to meet increased Government
demand The amount for the Deputy Governor-General has been increased to
provide for additional staff and upkeep at Government House in order
that the office be upgraded to that of Governor General.
The amount for Audit is increased
to $100,000 to allow for additional staff and equipment for the Audit
The establishment of the office
of Director of Public Prosecutions, Registrar of Companies and the
revision of laws to meet the needs of an independent Nevis, will be met
by the projected increase under Legal.
The amounts for the Ministry of
Finance involves upgrading the Customs and Inland Revenue Departments
and the Treasury This sum also includes an amount for Tourism promotion.
An independent Nevis would
require the establishment of a Ministry of Home Affairs.
Growth of the Nevis Economy.
Earlier in this paper, the
additional costs that an independent Nevis will have to assume were
An integral part of the economic
picture is the performance of the Nevis economy. The success of an
independent Nevis will rest on the sustained growth of the economy.
Since 1983 the economic
development of Nevis has been entrusted by the Constitution to the
Nevis Island Administration. It is important to point out that the
Administration currently pays the salaries of all public servants
including teachers, nurses and all staff at the Alexandra Hospital. The
Administration also pays for the infrastructural development of the
island including road repair, electricity services, and water services,
among others. The Administration pays all pensioners in Nevis [All of
the above payments are made from the resources of the Nevis Island
For the 1984 fiscal year the
Administration had a total budget of $38,546,000. By 1991 the budget
had increased to $66,151,000. Between 1991 and 1995 the actual
recurrent revenue in Nevis grew at an average rate of more than 10% per
year. This growth was achieved without the introduction of any new
taxes by the Nevis Island Administration. This growth was due largely
to the expansion in the tourism and financial service sectors.
Since 1992, through the efforts
of this Administration, Nevis’ economic performance has increased
considerably to the extent that the island has consistently maintained
a small current surplus. The graphs shown in the annex to this paper
display the growth of the Nevis economy in several key areas
[Please Note – The Annex is not
included within this document as it was not available].
The Administration firmly
believes that with continued prudent management of the economy, Nevis
can become independent and continue its current positive growth. In
1991 the revenue collected in Nevis was $25,204,989.00. By 1995 this
had increased to $38,661,308.00. This represents an increase of 50% in
four years. The main contributors to the growth in revenue are the
tourism and offshore financial services sectors. An independent Nevis
will ensure a continued stable economic and investment climate The
Administration is also convinced that with prudent financial management
the Nevis economy can perform even better.
Further, the following measures
will be implemented:
- Improvement in the
Administration’s tax collection capability.
- Control of expenditure through a
program of budget reform.
- Administrative reforms of public
- Administrative reforms in the
With these administrative reforms
the Administration is of the view that there would be no need to impose
new taxes in order to meet the financial commitments of an independent
Nevis. The Administration is committed to continuing with the prudent
fiscal management of the economy so as to advance the best interest of
the island without placing any additional burden on the shoulders of
The projections of the
Administration, contained in this paper, demonstrate that Nevis can
meet the additional cost of secession. Since the inception of the Nevis
Island Administration and especially within the last four years Nevis
has experienced phenomenal growth. There has been an 80% increase in
revenue, a 30% growth in employment and 300 new businesses have come on
stream. Through hard work and determination the people of Nevis, in
partnership with government, have transformed the economy without the
necessity of any new taxes Working hand in hand with the people of
Nevis, the Administration is confident that an independent Nevis can
move forward into the future with confidence.