Introduction. The Background. Assumptions. Fiscal Impact. Expenditure Projections. Growth of Nevis Economy. Fiscal Management. Conclusion.

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 relationship.

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 independence.

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 Nevis.

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 25% scenario.

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.

Source: CDB Economics and Programming Department, September 1996.

* Scenario

1. Nevis assumed to account for 25% of Federation’s GDP
2. 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 Island Administration].

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 resources].

Source: CDB 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 Government.

b) Adequacy of Public Service Provision.

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 Federal Government.

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.

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:

1. The expansion in the Public Service will be phased over a period of at least five years.
2. 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 Administration.
3. The cost for the Police can be reduced significantly based on projections for a police force with 100 officers.

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

Source: Nevis Island Administration, September 1996.

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 Department.

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.

Earlier in this paper, the additional costs that an independent Nevis will have to assume were outlined.

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 Administration].

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:

1. Improvement in the Administration’s tax collection capability.
2. Control of expenditure through a program of budget reform.
3. Administrative reforms of public utilities.
4. Administrative reforms in the public service.

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 Nevisians.

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.