Public Disclosure Authorized Economic Memorandum on ......% of population - urban 82.9 7 of population - uraan - rural 73.1 -rural NUTRITION EDCATION 1980 Calorie intake as % of requirements

Report No. 3826-MO FILE C PYEconomic MemorandumonMontserratApril 19, 1982

Latin America and the Caribbean Regional Office

FOR OFFICIAL USE ONLY

Document of the Ubrld Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit East Caribbean Dollar

Since its creation in 1965, the East Caribbean dollar was tied to sterlinga the rate of L 1.00 = EC$4.8. In July 1976 the link with sterling wasbroken and the East Caribbean dollar was aligned with the US dollar at therate US$1.00 = EC$2.70.-

Since July 1976:

EC$1.00 = US$0.370 orUS$1.00 = EC$2.700

FOR OFFICIAL USE ONLY

This report is based on the work of an economic mission toMontserrat during October 1981. The mission consisted of:Mr. Carlos Elbirt (IBRD); Mr. Peter Harrold (IBRD); and Mr.

Paijit Habanananda (IMF). The assistance and cooperation of the

Statistics Office of the Government of Montserrat in upgradingbasic statistics and revising national accounts is duly

acknowledged.

This document has a-restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

MONTSERRAT

Table of Contents

Page No.

COUNTRY DATA

SUMMARY AND CONCLUSIONS .............................. i-iii

I. ECONOMIC BACKGROUND .................................. 1

A. Recent Growth Performance . . .1....... B. Public Sector Finances . . .1........ C. Investment and Savings . . . 2D. Money and Credit ... 2E. Prices and Wages ... 3F. Balance of Payments . . . 3

II. DEVELOPMENT POLICY ISSUES ............................ 4

A. Introduction ... 4B. Agriculture ... 4C. Industry ... 6D. Tourism ... 7E. The Development Finance and Marketing Corp ....... 9F. Other Sectors ... 10

III. PRIVATE INVESTMENT AND EXPORT DEVELOPMENT ............ 12

A. Policy ........................................... 12B. Constraints ...................................... 12C. Necessary Measures and Essential Works ........... 13

IV. PUBLIC SECTOR INVESTMENT PROGRAM . . 14

A. Introduction ..................................... 14B. Progress of the Program .......................... 14C. The Public Sector Investment Program,1982-85 ..... 15D. Financing the Program ............................ 16

V. PROSPECTS ............................................ 18

GOVERNMENT'S PROJECT LIST

STATISTICAL APPENDIX

MAP

PREFACE AND ABSTRACT

The economy of Montserrat continues to perform satisfactorily withan estimated rate of growth of 4.6% in 1981. Inflation fell rapidly to 7%in 1981 and public finances continue to improve. The Government is tryingto revive agriculture, although marketing and extension need moreattention. New industries had been attracted. It is advisable that theconstruction of new factory shells by the Government proceeds in line withdemand. Additional efforts to promote tourism during the slack season arerequired. The credit operations of the Development Financial and MarketCorporation remain non-viable. There are good prospects for continuedgrowth of the economy. Debt servicing remains very low but it cannot beforeseen at present that Montserrat will be able to borrow externally onconventional terms. Therefore, in order to implement its investmentprogram, Montserrat will continue to require the external assistance onconcessionary terms.

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COtNTRY DATA - MONTSERRAT

AREA 2 P5PVtATI3N DENSITY100 km 11,606 (aid-198 0 116 per k=2

Rate of Growth: 0% (from 1970tO 1980) 580 per ki of arable land

POPULATION CHARACTERISTICS 1980 HEM.TH 1980Crude Birth Rate (per 1,000) 19.3 Population per physician 1536Crude Death Rate (per 1,000) 8.9 Population per hospital bed 225Infant Mortality (per 1,000 live births) 40-2

INCOME DISTRIBUTION 1975 DISTRIBUTION OF LAND OWNERSHIP (year)7, of national income, higlest quintile 39.2 7 owvned by top 107 of owners -

lowest quintile 3.5 % owned by smallest lOio of owners -

ACCESS TO PIPED WATEA 1980 ACCESS TO ELECTRICITY (year)% of population - urban 82.9 7 of population - uraan

- rural 73.1 - rural

NUTRITION EDCATION 1980Calorie intake as % of requirements - Adult literacy rate 7' 76.3Per capita protein intake Primary school enrollment 7. 99.0

GNP PER CPITAin 198C : US $ 1400

GROSS NATIONAL PRODUC IN 1980 ANNUAL RATE OF GROWTH (7.. constant prices)

US $ Mln. 7 1975/80 1981

GNP at Market Prices 16.5 100.0 4 3Gross Domestic Investment 8.1 49.1 7 -5Gross National Saving 2.2 13.3 1Current Account Balance -5.9 35.8Exports of Goods, NFS 5.5 33.3 18 30Imports of Goods, NFS 16.9 102.6 12 5

OUPITT 19R0

Value AddedUS $Mln. 7.

Agriculture 1.0 6.9Industry 3.1 21.2Other 10.5 71.9

Total 14.6 l00.0

GOVERNMENT FINANCE Central Government

( EC$ HMln.) % of GDP1979 1980 1979 1980

14.4 15.5 32.4 34.8Current Receipts121 5- L 39Current Expenditure 12.1 15.1 3. 33.9Current Surplus 40.7 0.4 -2.0 0.9Capital Expenditures 4.0 6.8 11.4 15.2External Assistance (net) 5.6 6.3 15.9 14.1

.not availablenot *pplicable

?age 2 of 2 pages

COUNTRY DATA - MONTSERRAT

MONEY, CREDIT and PRICES 1976 1977 1978 1979 1980(Million outstandir.g end period)

.Money and Quasi Money 14.9 15.6 17.2 19.0 20.2Bank Credit to Public Sector -0.5 -1.5 -1.1 -2.3 -2.3bank Credit to Private Sector 11.3 11.3 11.9 9.0 12.4

(Percentages or Index Numbers)

mcney and Quasi Money as % of CDP 63.4 61.2 61.4 54.0 45.3General Price Index (1963 = 100) 146.1 165.1 180.6 210.0 272.2AOnual percentage changes in:

General Priee Index - 13.0 10.9 16.3 29.8Bank credit to Public Sector - -200.0 27.0 -109.0 0Bank credit to Private Sector - 0 5.3 -24.4 37.8

B.ZAN_E OF PAYVENTS MERCHANDISE EXPORTS (AVERAGE1978-80

1978 1979 1980 us $'000 o %(Miullions US $) Cattle 19.5 1.8

Electronic Components 162.6 14.6Exports of Goods, NFS 4.4 4.5 5.5 Tomatoes 16.7 1.5Imports of Goods, NFS 10.0 12.0 16.9 Hot Peppers 48.0 4.3

4.6 - Live Plants 52.1 4.7Resource Gap (deficit -) -5.6 -7.5 -11.4

All other commodities 813.1 73.1Total 1112.0 100.0

Factor Payments (net) -0.03 -0.03 -0.01Net Transfers 4.7 4.9 5.6 EXTERNAL DEBT, DECEMBER 31,1980Balance on Current Account -0.9 -

US $ Mm

Net MLT Borrowing 0.1 0.1 0.2 Public Debt, incl. guaranteed 2.0Disbursement 0.2 0.2 0.3 Non-Guaranteed Private Debt -Amortization 0.1 0.1 0.1 Total outstanding & Disbursed

Capital Grants 1.3 1.7 2.0 DEBT SERVICE RATIO for 1980i1/Other Capital (net) -0.2 0.7 3.8 %

Increase in Reserves (-) -0.3 0.2 -0.1 Public Debt, inel. guaranteed 0.9Non-Guaranteed Private Debt -Total outstanding & Disbursed

RATE OF EXCHANSE IBRO/IDA TENDING. (latest month) (Million US $)

IBRD IDA

Outstanding & Disbursed -Undisbursed -

- May 1976 Outstanding incl. Undisbureed -US $ 1.00 = EC$2.70

1.00 = US $ 0.37

1/ Ratio of Debt Service to Exports of Goods and Non-Factor Services.

not available

not applicable

MONTSERRAT

SUMMARY AND CONCLUSIONS

i. The economy of Montserrat continues to perform satisfactorilywith an estimated rate of growth of 4.6% in 1981, due to industrialexpansion, a high level of public investment, the tourism-cum-constructionactivity and banking operations. According to the 1980 census, thepopulation has now stabilized at 11,600. Inflation fell rapidly in 1981 toa level of about 7%, and Government wage rises were a moderate 5%.

ii. Public finances continue to improve, with a current surplus ofEC$1.3 million in 1981. This was furthermore the first year that UKbudgetary support was not received, achieving this target two years earlierthan previously expected. Public investment rose to EC$11.7 million in1981, of which over 20% was financed by domestic borrowing.

iii. In the banking sector, domestic loans continue to grow fasterthan deposits, partly because domestic interest rates remain well belowworld and ECCA rates. Nevertheless the financial sector has experiencedrapid growth in the last three years, because of the opening of the MedicalSchool, and the increase in tourism. The current account balance ofpayments deficit remains large at about US$6 million because of rapidlyrising investment-associated imports.

iv. Economic development is being promoted on three parallel fronts:agriculture, industry and tourism. Government is trying to reviveagriculture, which has been in decline, through its Agriculture Sector Plan1979-82. Support services - particularly marketing and extension - needmore attention and Government should consider transferring responsibilityfor marketing from Development Finance and Marketing Corporation (DFMC) tothe Ministry of Agriculture in order to improve coordination betweenmarketing and extention services. The Integrated Sea-Island CottonProject, which aims to expand the area under cotton to 160 acres andproduce high quality products locally for the Caribbean tourist market, isa crucial project which should be carefully monitored. Some technicalassistance in marketing, both of cotton and other products, may benecessary.

v. There has been a major success in attracting industry, with 170new jobs created since mid-1980, and Government has played an importantrole in this development through the construction of factory shells, anddirect promotion of cottage-style industries. Manufacturing now accountsfor 14% of employment. Construction of future factory shells shouldproceed only in line with the overall limitation on available labor, toavoid overheating the economy. Montserrat Industrial Enterprises Ltd.(MIEL), a Government company which aims to spread managerial and accountingskills over a range of different enterprises, is a good concept, but someof its projects are not viable, and should be closed down.

vi. The tourism sector remains dominant in the economy. The recentWorld Tourism Organization (WTO) report on required tourism infrastructureimprovements must be implemented as a prerequisite to further expansion.There remains potential for increasing the numbers of European visitorsduring the April-December period, and a promotion effort is required for

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this. The new Twin-Otter aircraft which has been acquired by Governmentgives the opportunity to improve greatly air services to the island if asatisfactory arrangement for its operation and maintenance can be workedout with LIAT. The proposal for a major hotel development at Little Bayshould be studied very carefully before implementation.

vii. The advisability of continuing operations of DFMC isquestionable. The credit operations of DFMC remain non-viable. If themarketing responsibilities of DFMC are transferred then DFMC could be woundup, with credit operations being transferred either to a National Bank (ifit should be created), a 'Montserrat window' at CDB, or even to localcommercial banks. Supervision of the factory shells program could then betransferred to the Development Unit of the Ministry of Finance.

viii. The maintenance of a realistic exchange rate should be consideredan essential element of any effective program directed towards stimulatingexports of goods and services. The need to monitor closely thecompetitiveness of the country's exports has become increasingly importantrecently owing to the appreciation of the US$. Since the EC$ is pegged tothe US$, it has appreciated considerably against pound sterling during thepast year. This development has rendered tourist services more expensivefor visitors from Europe and Canada.

ix. The proposed implementation of Social Security Scheme, which wouldprovide income-related pensions and short-term benefits for sickness andmaternity, is sensible and should be established to replace the presentNational Provident Fund. It would generate surpluses of about EC$1.5million a year, which could be available as a source of domestic financingfor the Public Sector Investment Program.

x. Despite a high level of education, a recent UNESCO report pointsout the need for certain qualitative changes in curricula and time-tablingin order to better prepare school graduates for their likely employement.

xi. The utilities are in a generally satisfactory position, andshould not pose a financial burden on Government. Electricity capacityshould be adequate until 1987, but improvements in water storage and in thecapacity of the Water Authority to carry out projects are warranted.

xii. External transport remains a significant constraint to thefurther development of the economy. However, a solution to the problem ofshipping services should be sought in a regional context.

xiii. The Government of Montserrat is committed to developing a strongprivate sector, and believes that export-oriented private investment, bothdomestic and foreign, is essential to the future of the economy. Theprimary constraints relate to the small size of the economy, although thisalso means that any individual project can have a significant impact.Apart from complementary actions in other sectors, the major requirement isforaction on promotion and project preparation. Government should sponsorpre-investment studies, utilizing the resources available under theUSAID-PIDAP project, and the IFC facility. Having identified feasible

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industries, the Government should then actively promote them, and seekpotential investors or partners in investment.

xiv. The Public Investment Program made good progress in 1981, with netdisbursements at a level of EC$11.4 million. This included the start-up ofthe Integrated Sea Island Cotton Project, progress on the land settlementprogram, the purchase of a new aircraft, and road construction.

xv. The program for 1982-85 calls for total public investment of EC$46million. However, nearly 40% of this program is for unidentified projects,which suggests a lack of forward planning, and makes it difficult either tojudge the overall balance of the program, or to mobilize the level ofcommitments, that would be necessary to generate this level ofdisbursement. A fully projectized development plan is needed to define theoverall direction of the economy and the role of public investment, and thepreparation of such a plan is within the Government's competence.

xvi. Should such a plan be prepared at an early date, there are goodprospects for mobilizing the finance that would be required. Public sectorsavings are projected at EC$7.6 million (US$2.8 million) over the period,and domestic borrowing, primarily from surpluses of the social securityscheme, could provide a further EC$5.0 million (US$1.9 million). Existingcommitments, or approvals in principle are projected to generatedisbursements of EC$25.2 million (US$9.3 million) leaving only EC$8.2million (US$3 million) in new external financing, which would probablyrequire new commitments of about EC$20 million (US$7.4 million) during theperiod. The projected proportion of domestic financing (27%) would be amajor achievement when it is considered that budgetary assistance was stillbeing received in 1980.

xvii. There are good prospects for continued growth of the economy, anda growth rate of 3-4% a year has been projected. Debt servicing remainsvery low at less than 1% of exports, but it cannot be foreseen at presentthat Montserrat will be able to borrow on more conventional terms, so thecontinued assistance of external donors will be required.

MONTSERRAT

I. ECONOMIC BACKGROUND

A. Recent Growth Performance

1. Montserrat is a dependent territory of the United Kingdom in theLeeward chain of the Caribbean Islands. With only 100 km andsomewhatunder 12,000 inhabitants, this mountainous island is characterizedby a narrow resource base. Tourism-cum-construction, and, to a lesserextent, agriculture and industry are the principal determinants of thecountry's economy.

2. Because of its small size, the economy of Montserrat tends to beextremely sensitive to major investment projects. Thus, the strongeconomic growth in GDP during 1979 (14.6%) and the first half of 1980 werelargely attributable to the construction of the medical college which wascompleted in mid-1980, the arrival of 450 students to this college, and the19.7% increase in stayover visitors in 1979. In 1980, real GDP isestimated to have increased by 7.9% even with the slowdown in constructionactivities after the completion of the medical school. It is now estimatedthat the real GDP growth rate in 1981 would be 4.6% due to the substantialincrease in public sector investment. (EC$11.7 million compared to EC$6.9million in 1980), the starting up of new factories for cotton spinningandweaving, garments and knitwear, and relatively active constructionactivities in the tourist sector. The storm that hit Montserrat onSeptember 3, 1981 causing damage mainly to roads and sewerageinfrastructure (estimated tentatively at EC$2.5 million), is expected tohave some negative impact on the growth of the economy in 1981. Also,after two years of rapid growth, tourist arrivals levelled off in 1981.

3. The population of Montserrat seems to have leveled off at around11,600 residents (mid-1980) after many years of steady decline. Sinceemigration continues, the age composition of the population has becomehighly skewed; therefore, with a relatively small working population, butlow levels of unemployment, some shortages of labor may occur, and caremust be taken not to overheat the economy.

B. Public Sector Finances

4. Public sector finances have been improving since 1979. Publicsector current operations, which had been in deficit until 1979, registereda surplus of EC$1 million for the first time in 1980. In 1981, the surplusis estimated to reach EC$2 million. This improvement is associated withthe Central Government whose financial performance is a large determinantof the performance of the public sector as a whole. In 1980, currentrevenue of the Central Government increased by 36% in nominal terms,reflecting the growth in the economy and the changes in indirect taxesadopted in 1979. In 1981, current revenues are estimated to increase by25%. Thanks to prudent fiscal management, current expenditures increasedless rapidly than revenues, i.e., by 25% in 1980 (including a 5% increasein salaries to civil servants) and 19 percent in 1981. As a result, thecurrent account balance switched from a deficit of about EC$1 million in

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1979 to a small surplus of EC$0.4 million in 1980 and EC$1.3 million in1981. Thanks to these surpluses no budgetary assistance from the UK willbe needed for the first time in 1981. Regarding the rest of the publicsector, the major parastatal agencies continue to register small surpluses,although the Central Water Authority ran a small deficit in 1981 because ofthe flood damage on September 3. The Authority is applying for a tariffincrease ranging from 29% (domestic use), 33% (non-domestic use) to over60% (construction), which should ensure future coverage of all operatingand maintenance costs.

C. Investment and Savings

5. Public sector investment increased from EC$6.9 million in 1980 toEC$11.7 million in 1981, reflecting the execution of several sizableprojects. Contrary to the situation in 1980 when over 70% of total publicinvestment was financed by external grants, in 1981 external grants coveredonly about half of the total financing needs. Net domestic borrowingaccounted for more than 20% as a result of the loan granted by a commercialbank to the Government for the purchase of the new airplane. Public sectorsavings financed 18% of total public investment while net foreign borrowingfinanced 11%.

6. Gross domestic investment fell from 86% of GDP in 1979 to about40% in 1980 following the completion of the medical college. It isestimated that gross domestic investment in 1981 reached 45% of GDP becauseofa substantial increase in public sector capital outlays (i.e., 70%).

7. Consumption expenditure continues to exceed total production.The rapid increase in private consumption in recent years, which isbalanced by declining public consumption in relation to GDP, is largelyexplained by the opening of the medical college.

D. Money and Credit

8. The operations of the commercial banks in Montserrat seem to beundergoing an important structural change. The net foreign assets of thecommercial banks, excluding the net position with the East CaribbeanCurrency Authority (ECCA), have increased from an average of EC$0.5 millionin 1977-78 to an average of EC$5 million in 1979-80. This primarilyreflects the increased operations with banks abroad associated with thefinancing of major projects and the presence of 450 foreign students sincethe opening of the medical school. Domestic assets grew substantiallyduring 1980 but this was not accompanied by a corresponding growth indeposits. As a result, the domestic banks had to draw down their depositswith ECCA in order to finance the increased domestic demand for credit.Available information up to September 1981 indicates that net domesticassets continue to increase strongly, boosted by credit to the Government(for the purchase of the airplane) and by the demand for credit from theprivate sector. Because deposits with the commercial banks did notincrease as rapidly, the banks again had to resort to drawing down not onlytheir deposits with ECCA but also their foreign assets. Most of the creditto the private sector was directed to personal loans, commerce, tourism,and transportation. Domestic interest rates remain very low and totallyunrelated to either world market rates or ECCA interest rates.

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E. Prices and Wages

9. A burst of inflation in 1979 and early 1980 originated chiefly inconstruction-related demand, the increase in oil prices, and the impact ofthe new indirect taxes introduced in late 1979. The annual increase inconsumer prices peaked in April 1980 with increases in fuel, food, andhousing leading the way. Inflation slowed down during the rest of 1980;the inflation rate averaged 29.5% in 1980 on an annual basis but it wasonly 17.7% on a year-end-to-year-end basis. The trend which started inmid-1980 continued into 1981 and inflation averaged about 7% on a 12-monthbasis for September 1981.

10. There are no summary wage data for Montserrat. Informationconcerning the public sector, an important employer, may be indicative ofthe economy as a whole. In March 1979 the Government instituted salaryincreases for civil servants and non-established workers ranging from 60%at the bottom of the pay-scale to 35% at the top. Furthermore, theGovernment granted an increase to both civil servants and non-establishedworkers of 5% in 1980 and another 5% in 1981.

F. Balance of Payments

11. The current account balance of payments of Montserrat hasdeveloped large trade deficits in 1979 and 1980 because ofconstruction-related imports and the rise in fuel costs. The resourcebalance deficit increased from 58% of GDP in 1979 to 65% in 1980. This wasfinanced by private transfers from nationals living abroad, capital inflowsto the private sector, and grants and loans to the public sector.Available information for 1981 indicates that the current account deficitwould be of about the same magnitude as in 1980, i.e., US$6 millionalthough the resource balance would improve somewhat (55% of GDP) due tobetter performance in exports (especially manufacturing goods such aspolythene bags). The nonimprovement of the current account is dueprimarily to the absence of budgetary grants. The financing sources ofthis deficit remain the same as in 1980, i.e., private transfers fromnationals living abroad, transfers for foreign students and private andpublic capital inflows.

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II. DEVELOPMENT POLICY ISSUES

A. Introduction

12. The strategy of the Government of Montserrat is to promoteeconomic development on three parallel fronts - agriculture, tourism andindustry - and consequently these three sectors account for a large part ofthe Public Investment Program. Given the small size of each of thesesectors, individual projects can have a significant impact on the overallsituation in those sectors. Consequently, development issues and projectsbecome inextricably linked and are therefore discussed together in thischapter.

B. Agriculture

13. The agricultural sector in Montserrat has been in decline formany years since the collapse of the plantations in the 1950s, andGovernment is attempting to revive this sector through its AgriculturalSector Plan 1979-83. The six key elements of this program are: (a)settlement of good farmers on economic farm units on estates; (b) provisionof good support services - marketing, storage, extension and credit; (c)irrigation; (d) soil conservation; (e) development of the integrated cottonproject, and (f) at a later date, development of food processingindustries. The different parts of this program are gradually beingimplemented.

14. The settlement program is continuing at a fairly good pacethrough the Land Development Authority, with the virtual completion ofLees, Otway, and Hermitage estates. The development of Riley's andRichmond estates are under way, the latter including the establishment oftree crops under initial Government control. It is too early to judge thesuccess of the estates, but the demand for land appears to be good. Theprogram involves some 2,000 acres in total.

15. It is in the area of support services that the greatest problemslie. The Development Finance and Marketing Corporation (DFMC) is the mainmarketing outlet (although private traders exist for certain crops, notablytomatoes and peanuts), and its services are inadequate. It suffers from alack of storage facilities and of overseas outlets. Linked with this isthe inadequate level of the extension service, which still has unfilledposts. Coordination between the two services is poor, and consequently,market information is not reaching farmers with regard to which crops toplant at what time, and this results in difficulties to farmers in sellingproduce, and difficulties to DFMC in marketing the produce it buys. DFMCsustains a heavy loss in its marketing functions, a loss which is, however,reduced slightly by its retailing functions, which appear to consume adisproportionate amount of its efforts. The Caribbean Agricultural andRural Development Advisory and Training Service (CARDATS) program hasdemonstrated the potential benefits of a good extension service, and thedemand for agricultural credit, and this should be acted upon. Governmenthas been examining the role of DFMC for some time, but no decisions haveyet been reached.

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16. There is a high level of demand for the provision of tractorservices, but with only 4 out of 8 tractors actually in operation, theMinistry is unable to satisfy demand at present. Efforts should be made toimprove the maintenance of these tractors.

17. The reafforestation project funded by USAID replanted 50 acres offorest, and, to promote soil conservation, a program that would plant 100acres a year over a 10 year period is now required. Given the pastdestruction of forests for firewood and by livestock, such a program seemsdesirable and Government has demonstrated its ability to carry out projectsin this sector. Charcoal supplies nearly half of household energyrequirements.

18. A major constraint that has been identified to the development ofagricultural export markets has been the irregularity of supply.Government proposes to deal with this through irrigation. Although thepotential area concerned is very small (an initial 30 acres) this couldmake a significant difference to total supplies. Government is seekingtechnical assistance with the implementation of irrigation schemes.

19. Livestock is being encouraged on some of the new estates.Government runs a breeding station for cattle, sheep, pigs, goats andrabbits and the soon to be completed abbatoir should improve the processingof meat. There seems to be major potential in this sector, andencouragement and assistance should be given to the development of improvedpastures.

20. The integrated cotton project was implemented in 1981, with CDBand CIDA assistance, through the newly established Montserrat Sea IslandCotton Company. The cost of this project was some EC$2.3 million intotal. Cotton had been steadily declining as a crop and acreage had fallento only 35 acres in 1979-80. The project aimed to expand area to 160acres, provide ginning and spinning capacity, and weaving equipment for themanufacture of high quality products aimed at the Caribbean tourist market,including Antigua, St. Lucia and Barbados. The agricultural side of theproject has gone well with 130 acres planted in 1980/81. This is beingreduced to 100 acres in 1981/82, because of some problems in the ginningand spinning plant. The aim is now to have 300 acres in 1983, althoughthis appears ambitious. There are 84 hand-operated looms in place in theweaving factory, and with Canadian technical assistance, very good productsare being manufactured.

21. The spinning capacity is at present 40,000 lbs. of lint per year,and this would be supplied by 150 acres at a yield of 800 lbs.cotton/acre. If the acreage expands above this, then surplus cotton wouldhave to be exported in lint form. When fully operational, the project isexpected to generate exports worth over EC$2 million a year.

Issues and Recommendations

(i) The land settlement program is to be supported, but care willneed to be taken to ensure that farmers properly utilize theland. There appear to be increasing numbers of 'part-time'farmers;

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(ii) Government should seriously consider the transfer of marketingresponsibilities from the DFMC to the Ministry of Agriculture toachieve closer coordination with the extension services;

(iii) The CARDATS program has demonstrated the potential impact of goodextension services, and every effort should be made to fillexisting extension service posts and to expand the service asoutlined in the Sector Plan;

(iv) Greater attention should be paid in marketing to the selling ofMontserratian produce and less to the importation and retailaspects;

(v) A planned maintenance program for tractors should be established;

(vi) An irrigation engineer should be sought under technicalassistance;

(vii) Government should continue to support livestock services and tooperate its breeding station;

(viii) The Cotton Project is a well-designed and managed project. It isof major potential importance to the future of the agriculturalsector. However, careful monitoring of the project is requiredat all stages and in time, a major marketing effort may have tobe conducted (c.f. para 27 on M.I.E.L. below).

C. Industry

22. Discussion of the industrial sector in Montserrat has to be madeagainst the background of the very small size of the country and the laborforce, and the limited domestic resource base, which set limits on thescale and type of industry that can be established. Given this background,the success achieved to date in this sector has been considerable and canbe attributed to three major factors: (i) the active and positive role ofGovernment; (ii) the supply of relatively cheap, but well-educated andadaptable labor; and (iii) the stable political climate coupled with anappropriate investment incentives package.

23. The role of Government has primarily been twofold: by theconstruction of factory shells and their subsequent lease to the privatesector, and secondly by direct involvement in individual enterprises. Todate, Government, through its intermediary DFMC, has constructed 64,000sq.ft. of factory space in seven units, all of which have been leased, tofirms involved in electronics, flour bag manufacturing, garment making,knitwear, and the sea island cotton project. Of these, four have beenestablished since the 1980 census, and have created an additional 168 jobs,increasing employment in manufacturing from 464 to 632 or 14% of totalemployment. If the garment and cotton industries expand as expected, thisfigure will increase by a further 100 jobs by early 1982. Most of thoseemployed recently are females in the 16-20 age group, which was the groupwith the highest unemployment rate previously.

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24. The second role of Government has been by direct involvement inindividual enterprises, primarily of a cottage industry type. Most ofthese small industries are controlled by Montserrat Industrial EnterprisesLimited (M.I.E.L.), and consist of a leatherworks, a tannery, a pottery, ahot pepper project, and a knitwear factory. A total of only about 35 jobsare involved, but MIEL lost about EC$50,000 in 1980, which is a relativelyhigh cost per job. The MIEL concept is good, in that it aims to spreadscarce managerial and accounting skills over a range of differententerprises, none of which could support these servics individually. Theproblem is the individual projects. The pottery, for example, is so smallthat it could probably never be viable. In 1980, its sales covered lessthan 50% of its costs. The hot pepper project was breaking even untilearly 1981, when its major marketing outlet was lost, and since then it hasmade virtually no sales. The tannery and leatherworks, and the knitwearproject seem to be doing satisfactorily, although the former are dependenton external technical assistance. At the present time, MIEL has nomanager, and the manager of DFMC is temporarily fulfilling this function.

25. Very few industrial credits have been granted recently, and thosethat have are in general delinquent in repayments. This issue is discussedin section (e) below.


26. It is recommended that Government should now proceed with itsplans for the construction of an additional factory shell of 8,040 sq.ft.on the present site. This will complete this site, and further sitesshould be identified, allocated and planned. However, given the very lowunemployment rate at present, Government should move slowly in constructingadditional shells to avoid severe labor shortages in industry. Furtherfactories should thus be timed to coincide with the entry of additionalpersons into the labor force. Secondly, rent levels and collections shouldbe improved, for otherwise the repayment of the CDB loans for factory shellconstruction will prove a burden on Government. Rent levels willneed to rise when repayment of principal on these loans commences in aboutthree years' time.

27. The MIEL concept is sound, but some of its projects are not, andGovernment is advised to look hard at these and close down non-viableunits. Technical assistance continues to be needed, particularly in thearea of marketing, which is at present threatening the pepper project, andcould cause problems to the tannery and leatherworks in the near future.

28. While the industrial program can overall be judged a success,particularly in terms of employment creation, only the cotton projects andone of the electronics firms have made any real investment in Montserrat,the remainder being primarily "screwdriver" industries. Given the relativescarcity of labor at present, Government is advised to be more selective infuture about the type of firm it accepts, and to encourage those firms withhigher investment, and thus greater permanence.

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D. Tourism

29. The tourism industry, broadly defined, remains the dominantsector of the economy. After a lull in the early 1970s, thetourism-cum-construction industry is now very active again. This industryis involved in the construction of villas for investment or retirement forCanadians, Americans, and British. To date, about 400 such villas havebeen built, and there are about 40 starts each year, which employ many ofthe 560 construction workers in Montserrat. When the industry started inthe early 1960s, some 3500 plots, owned by expatriate companies, weresurveyed and block planning permission was granted, subject only tobuilding regulations. However, it is anticipated that the maximum numberof villas that could be accommodated on these plots could never exceed1600. With the attraction of a pleasant climate, good health conditions,relatively cheap but high standard construction, and a stable politicalclimate, there are excellent prospects for this industry to continue itsimportant role in the economy at least for the next ten years.

30. Associated with this industry, is a growing villa rentalindustry, with perhaps 90 villas available for rental in theDecember-April period. These holidays are marketed in New York, Floridaand London, and are increasing each year. This is an encouragingdevelopment in the tourism industry, as it probably generates higher localexpenditures than conventional tourism, and provides considerableemployment in the service sector.

31. The conventional tourism sector remains very limited, with onlyabout 350 beds in the hotel and guest house sector, of which some 150 canbe judged of international standard. It caters for only about 4000visitors a year, and even the best hotels only have 40% year-roundoccupancy. The remaining visitors stay in private houses, rented villas oron cruise ships and yachts. Total visitor arrivals in 1980 topped 20,000for the first time, but it is estimated that this figure fell back to18,500 in 1981, but with expenditure rising to EC$13 million from EC$11.6million in 1980. Although Montserrat has both scenic beauty andattractions of its own, the development of the sector is hampered both bynatural limitations, such as the lack of good beaches, and by veryinadequate facilities. These have been catalogued by the 1980 WorldTourism Organization (WTO) report, which made recommendations for specificshort-term improvements. These include such things as a tourist map, avisitors guide, clearing of nature trails, signposting, better internaltransport, improved entertainment and restaurants, boating facilities,passing bays and parking areas, general 'cleaning up', and a centralizedbooking system. Little progress has so far been made on these, and untilaction is taken, it is unlikely that increased visitor arrivals can beexpected.

32. With very low occupancy rates in April-December, there is majorscope for increasing visitor arrivals (subject to improvements in thetourism 'package' mentioned above) without increasing bed capacity.However, Government has just commissioned, with UK assistance, afeasibility study of a proposal for a hotel/marina/condominium developmentat Little Bay on the North-West coast. The proposal calls for 100-120

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hotel beds, 15 condominiums and a marina, and will also examine thepossibilities of a golf course, and any necessary improvements toinfrastructure i.e. roads, services and air transport. There has also beensome discussion of a casino. The final decision on this proposal willclearly have a major impact on economic development in Montserrat in thecoming years, not the least being during the construction period.

33. A crucial factor will be air services. Government has recentlypurchased a new Twin Otter aircraft to replace the Trislander it previouslyowned. This latter aircraft did not work satisfactorily, primarily becauseof its lack of luggage capacity. The present aircraft is a majorimprovement, but it is losing money, and a satisfactory arrangement withLIAT has yet to be worked out. It is very hard to get a confirmed bookingto Montserrat from Antigua, and this almost certainly deters a number ofvisitors each year. A suggestion has been made to make all flight requestsconfirmed bookings, and to operate the aircraft on a 'shuttle' basis fromAntigua, a 30 minute round-trip. This suggestion merits furtherexamination.


34. The recommendations of the WTO report should be implemented assoon as possible. This is a 'sine qua non' for further tourism developmentof the island. Similarly air transport remains a major constraint,but itis recommended that Government seriously examine the 'shuttle' servicesuggestion prior to contemplating any more costly solutions, such as runwayextensions. Considerable increases in occupancy rates could be achievedthrough European visitors (who have direct flights to Antigua) and thisshould be explored further also prior to any expansion of bed capacity.

35. As to the Little Bay proposal, it is advised that this beapproached cautiously and only after careful study. There are legitimatefears in the existing tourism industry that such a development coulddetract from the existing market. Certainly, it would seem unlikely that acasino should be included, for this would clearly clash with the existingtourism style. However, if the overall tourist package is improved, ifefforts are made to increase July-September visitors, if air servicesbecome more reliable, and if the proposal is designed in such a way as tobe compatible with the present industry, then such a development, basedaround a marina which has natural advantages, could be viable and a majorboost to the economy. However, Government should continually bear in mindthe importance of the existing industry, especially the retiree industry,and its overall contribution to the economy should not be underestimated.

E. The Development Finance and Marketing Corporation

36. The Development Finance and Marketing Corporation (DFMC) hasthree roles at present:

(a) industrial and farm credits;

(b) managing the industrial estates program; and

(c) marketing of agricultural produce, and importing of food andagricultural inputs.

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The DFMC made an overall loss of EC$120,000 in 1980, mostly accounted forby its marketing operations. Unless improvements are made in thecollection and level of rents, and in repayments of credits, it is likelythat this figure will rise considerably in the coming years. Thepossibility of transfering marketing operations to the Ministry ofAgriculture, Trade and Housing has already been discussed in section (b)above.

37. Previous reports have noted that the credit operations of DFMCare non-viable, and likely to remain so, given the scale of operations.Moreover, until the repayment situation improves, DFMC would not beeligible to receive further credits from CDB. Government is studying theCDB task force report on credit and must decide;

a) is credit required in Montserrat?

b) if so, how can it best be controlled and administered?

It had at one time been contemplated that a National Bank would beestablished and that it would take over the credit function. No progresshas been made on this proposal, although if it were to materialize, itwould be a sensible solution. The suggestion made in previous reports thatGovernment consider establishing a 'Montserrat window' at CDB also remainsvalid. Finally, given the already fairly active role of commercial banksin Montserrat in providing credit, it may be possible to reach somearrangement between the banks, CDB and Government. In any event, whicheverof these options is finally taken up, it is still recommended that DFMC'scredit operations be wound up.

38. The role of DFMC with regard to industrial estates is a role thathas been attached to DFMC primarily for convenience. If decisions aretaken to remove the marketing and credit functions from DFMC, it wouldhardly make sense for DFMC to continue to run the industrial estatesprogram as its sole activity. If, therefore, the first two functions areto be transferred, then the estates function should also, and theappropriate location would seem to be the Development Unit in the Ministryof Finance, which is already responsible for negotiations with potentialinvestors. Alternatively, this function could be vested in MIEL, given itsgeneral role in stimulating industrial development. The crucial decisionis that related to marketing, which is the largest activity of DFMC atpresent. Should this disappear from DFMC's portfolio, the other twodecisions should follow. If the transfers are made, with the consequentdissolution of DFMC, then whoever becomes responsible for the differentprograms will still have to ensure that the basic problems are corrected,notably with regard to collection of rents and credit repayments. Theapparent prevalent attitude that credits are government subsidies, and thatrents will not be enforced will have to be overcome. A change ofcontrolling organization would be an appropriate point at which toestablish a new approach to these issues.

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F. Other Sectors

39. The basic situation in most other sectors has been described inprevious reports and is not restated here. Therefore only certain changesare noted together with outstanding issues.

40. Electricity supply is greatly improved since the commissioning ofthe new generating set financed by CDB, and with the recent revision intariffs, the financial performance of Montserrat Electricity Services Ltd.(MONLEC) should be very satisfactory. With installed capacity of 5MWcompared to peak demand of 2.1 MW, capacity should be sufficient until1987. The financial target is a 12% return on net capital, and although80% of households are now connected, 20% of electricity sales are to RadioAntilles(a West German Government venture), and thus the attainment of thetarget is heavily dependent on whether the present trend of reduction inelectricity demand by Radio Antilles continues.

41. In water, the major issue is water storage, which is veryinadequate.' Projects exist to improve this situation, as well as to extendsupplies and to improve the Water Authority's implementation capacity.These projects deserve support.42. In education, despite ten years' universal education, andgenerally good facilities, there persists a shortage of trained manpower.A recent draft UNESCO report of the education sector points out the needfor major qualitative changes, in the way of curricula and time-tabling,and quantitative changes, primarily increased availability of teachingmaterials and equipment, and better maintenance of existing equipment. Theaim of the suggested improvements would be to lower present failure ratesat secondary and post-secondary levels, and to better equip schoolgraduates for their likely employment.

43. Montserrat has benefitted from the ILO/UNDP Eastern CaribbeanMulti-Island Social Security Project. Like most other ECCM states,Montserrat has been operating a National Provident Fund, at a contributionrate of 10% of earnings (5% employer, 5% employee) up to a maximumcontribution of EC$30/month, covering about 1,980 members. The new system,if adopted, would provide sickness and maternity benefits (short-termbranch) and pensions (long term branch) and would cover 4,500 persons at acontribution rate of 6% (3% employer, 3% employee) up to an earningsceiling of EC$1,300/month. The scheme would not provide workmen'scompensation in its initial phase, given the existing legislation coveringthis aspect. The starting date for the scheme has not yet been determined,but will be soon. A surplus of about EC$1.5 million a year would begenerated in the early years. The present investment policy for NPF fundshas generally been to place funds outside Montserrat to achieve higherinterest rates, but it will be important for the proposed investmentcommittee of the Social Security Scheme to find ways of safely investingsurplus funds in Montserrat. Previously, no loans were made toGovernment, and this policymay have to change, with Government, perhaps,issuing ten-year development bonds at a suitable rate of interest forinvestment by the scheme. The funds could then be used for developmentprojects, of which housing wouldbe a good possibility. The existingmanagement of the NPF is competent and efficient, and should have noproblems in establishing the scheme, which is well-planned, but continuingILO actuarial support will be required once every few years.

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44. External transport continues to be a major constraint todevelopment, not only to Montserrat, but throughout the Eastern Caribbean.Some improvements have taken place recently, with the start of a weeklyservice to Puerto Rico, which has, for example, greatly improved the supplysituation with regard to agricultural inputs. The airport has already beendiscussed in the context of tourism. Shipping services must be improved,but the solution must be found in the regional context, as it is certainlybeyond the capacity of the smaller States to solve the problem on theirown. This should be a priority task for the newly-formed OECS economicsecretariat in collaboration with the CARICOM secretariat and the WestIndies Shipping Company. The present services constrain agricultural andindustrial development, and cause problems to existing industry.

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III. PRIVATE INVESTMENT AND EXPORT DEVELOPMENT

A. Policy

45. The analysis of the previous chapter points out the necessarymeasures and policy changes needed to stimulate development in the threemain sectors of agriculture, tourism and industry. Because of the verysmall size of the economy, all three sectors must be geared towards exportmarkets, and must rely on the private sector to generate additionalproduction and capacity. In this chapter, we analyse specific issues inrelation to the stimulation export-oriented private investment. Thenecessary measures recommended are to be seen as complementary to, notsubstitutes for measures recommended in the previous chapter.

46. The Government of Montserrat is committed to developing a strongprivate sector, and believes that export-oriented private investment, bothdomestic and foreign, is essential to the future of the economy. Theofficial decision making process in this area is expeditious and reasonablyefficient, as evidenced by the speed with which the Government processedthe application from the American University of the Caribbean for theconstruction of a medical college in 1979. With a view to encouragingprivate investments, the Government has established a set of investmentincentives, including tax holidays, duty-free imports etc. Both theoverall favorable investment climate, and specific inducements havegenerated positive responses. However, Montserrat is somewhat exceptionalamongst the Eastern Caribbean states, in that much of the private sectorinvolvement in the country is by nationals. The hotel industry, which islargely owned and operated by Montserratians, is a typical example and isattributable to the existence of dynamic private entrepreneurship.

47. However, the Government of Montserrat does not consider that itshould leave all productive investment to the private sector. Indeed, asnoted in section II.c. above, the Government has played an essential rolein the stimulation and direct development of industry. When it has seen aviable investment, with no apparent private sector interest, it has beenprepared to become directly involved in such investments. Recent examplesof this are the Sea Island Cotton Company, and the Tannery andLeatherworks. To date, however, every effort has been made to run suchenterprises along commercial lines. The Government is not entering suchprojects solely for employment generation or other public interest reasons,but because it considers that the ventures can be financially andeconomically sound. This is a positive approach, which has already made asignificant contribution to the industrial development of the country.It is to be hoped that the Government will take an equally business-likeapproach to any such ventures which turn out to be unsound.

B. Constraints

48. The primary constraint to further private investment is and willremain the small size of the country coupled with its lack of naturalresources. The small size mitigates against the possibility ofestablishing processing plants for agricultural products and importsubstituting industries. Compounding this problem is the lack of adequate

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external transportation facilities, which is a further reflection of thesmall size of the economy. Finally, the country remains relatively unknownas a possible location for external private investment.

49. Notwithstanding these constraints, the progress that has beenmade in stimulating export-oriented private investment and industrialdevelopment has been impressive, as noted in para. 22 above. Just as smallsize is a serious constraint, it is also a blessing, in that any individualenterprise or project can make a significant impact on employment creationand export earnings. Thus, the establishment of just four new factories in1980/81 increased industrial employment by 35%. In this sense, theconstraints are not severely binding, and it will not require theestablishment of many industries to solve any future employment problems.

50. It should also be noted that in addition to a generallyappropriate investment incentives package, Montserrat also has a goodinvestment climate. There is political stability, a good supply of cheapbut relatively well-educated labor, and an excellent record on industrialrelations.

51. The maintenance of a realistic exchange rate should be consideredan essential element of any effective program directed towards stimulatingexports of goods and services. The need to monitor closely the competi-tiveness of the country's exports has become increasingly importantrecently owing to the appreciation of the US$. Since the EC$ is pegged tothe US$, it has appreciated considerably against pound sterling during thepast year. This development has rendered tourist services more expensivefor visitors from Europe and Canada.

C. Necessary Measures and Essential Works

52. The essential investment incentive legislation is in place inMontserrat. The only modification that may be necessary to this is toextend the same tax holiday priviledges to the tourism sector as alreadyapplied to industry. Certain actions which have been noted earlier in thischapter (such as improvements to marketing of both agricultural andindustrial products, improvements to tourism infrastructure, andconstruction of factory shells) are also prerequisites to stimulation offurther private investment.

53. Aside from these measures, the two areas requiring most attentionare promotion and project preparation. As noted earlier, Montserrat canafford to be relatively selective about those industries which are to beestablished in future. It would therefore make sense for Government toidentify desired industries, and sponsor the preparation of pre-investmentstudies. Two recent developments are relevant in this context. Firstly,Government should make full use of the USAID-PIDAP project, which providespersonnel and funds for this very purpose for the islands of the EasternCaribbean, using the consultantcy services of Coopers and Lybrand and LouisBerger. Secondly, the International Finance Corporation has established afund for financing preinvestment studies in the Caribbean. A recentexample of this type of approach, which is to be encouraged, is the LittleBay Tourist Development study, currently being carried out with UKassistance.

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54. Having identified and prepared feasible projects, the Governmentshould then promote them, and actively seek potential investors or partnersin investment. Again, the USAID-PIDAP project should be of assistance inthis area, in the same way that Coopers and Lybrand were able to assist theGovernment of St. Vincent and the Grenadines under a similar project. Inthis way, the Government will be able to generate those industries whichwill be of greatest benefit to the economy, and which it knows to have agreater chance of success.

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IV. PUBLIC SECTOR INVESTMENT PROGRAM

A. Introduction

55. The purpose of this chapter is to review progress during 1981 inimplementing the Public Sector Investment Program, and to review theprogram for the period 1982-85. The program has been prepared by theGovernment of Montserrat with assistance from the World Bank/IMF mission ofOctober 1981. With regard to this program, two fundamental issues arise.Firstly, it is imperative that new projects should be identified andprepared at an early date. Nearly 40% of the 1982-85 investment program isat present unidentified, and for 1984-85, this proportion rises to 56%. Itmust be acknowledged that this is partly due to the fact that the major aiddonor, the UK, does not program its assistance to Montserrat further thantwo years ahead. Nevertheless, the failure to plan makes reachingjudgements on the program very difficult, and suggests that projects arebeing implemented and financed on an 'ad hoc' basis, rather than in thecontext of an overall framework for the economic development of thecountry.

56. Further to this, the second issue is that it would be appropriateat this point in time for the Government of Montserrat to prepare aDevelopment Plan. With the recent moves towards industrialization, butwith large ongoing projects in agriculture, and with proposals for majorexpansion of tourism, there is a serious need for an assessment of thedirection that the economy should take in the coming years, and how suchgoals are to be achieved through public investment projects. It seems tous that the Government is quite capable of preparing such a plan with itsown resources, but it must decide that this is a priority and give theDevelopment Unit the time to undertake the task. Further comments on thissubject are to be found in Chapter V below.

B. Progress of the Program

57. Implementation of the public sector investment program in 1981proceeded very satisfactorily, with capital expenditure of EC$11.4 million,compared to EC$6.8 million in 1980, reflecting the implementation ofseveral major projects. This excludes rehabilitation expenditure of almostEC$1.75 million to repair damage to roads and water supply following thesevere rainstorms of September 3rd. Moreover, 64% of this expenditure wason directly productive projects, an impressive performance.

58. An estimated EC$3.3 million was invested in agriculture. TheIntegrated Cotton Project was virtually completed, with the commissioningof the spinning equipment, planting of 130 acres of cotton, andestablishment of the weaving factory with 84 looms. The estates programmoved relatively rapidly, with virtual completion of Lees, Hermitage andOtway estates, and a start on Richmond and Riley's. The abbatoir wasstarted and should be completed in 1982. The reafforestation projectproceeded satisfactorily and should be finished early in 1982. Inindustry, the factory shell program was completed and all units are let.This includes one unit for the stitching industry, which started operationsin January 1981. The other major project in the productive sector was thepurchase of a Twin Otter aircraft to replace the Trislander. This beganoperations in 1981,and immediately improved the service from Antigua.

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59. In economic infrastructure, slow progress was made with the majorroad project, the St. John's/Trants Road, and this is now not due forcompletion until 1983. Progress should now improve, however, because ofthe EC$600,000 spent on refurbishing plant and equipment and providing aworkshop. A total of EC$2 million is estimated to have been invested ininfrastructural projects.

60. Other projects that have made some progress included the OldPeople's Home, an EC$750,000 project. Rehabilitation of schools tookplace, and some improvement to water supplies. New broadcasting equipmentalso arrived.

61. Ongoing projects account for only about EC$5.2 million out of thetotal 1982-85 public investment program. The only projects with majorexpenditures in this period are the estates program, the Little Bay TourismDevelopment Feasibility Study (due to start early 1982), the St.John's/Trants Road, and the completion of the storm damage repair. Thusthe bulk of investment in the 1982-85 period will come from new projects,discussed below.

C. The Public Sector Investment Program 1982-85

62. The table below gives a sectoral breakdown of the 1982-85 PublicInvestment Program. As was noted above, EC$18 million (39%) is allocatedto unspecified projects. This is on the basis of a total program of EC$46million estimated to be necessary (and achievable) over the period tocontribute to economic growth of 3-4% per annum. Of the remaining EC$28million, EC$5 million is for ongoing projects, and EC$23 million is for newprojects. This is spread almost equally between productive projects,economic infrastructure and other projects. It is conceivable that aconsiderable proportion of the presently unidentified investment will beallocated to the tourism sector, should the Little Bay study identify afeasible project.

63. As noted earlier, the large element of unidentified projectsmakes it difficult to judge the overall balance of the program. However,it may be noted that most of the projects included in the program aspresently formulated are worthy of support. Given the relative importancein the program of the agricultural estates, and industrial estatesprojects, and, related to these, the programs for agricultural and smallindustry credits, the success of the program will depend heavily ondecisions to be taken with regard to credit services, and the DFMC. In thepresent situation, it is unlikely that the credit programs will besuccessfully mobilized, and without these the estates program is unlikelyto succeed. Similarly, marketing problems must be solved if the estatesand credit programs are to achieve increased agricultural production. Thisemphasizes the need for action on DFMC as discussed in section II(e) above.

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Sectoral Breakdown of the Public Sector Investment Program 1982-85(EC$'000)

Ongoing Projects New Projects Total %

Agriculture 1405 2629 4034 (9)Industry 255 3319 3574 (8)Tourism 540 406 946 (2)Total-Productive 2200 6354 8554 19

Transport 1031 6561 7592 (16)Civil Aviation 200 540 740 (2)Infrastructure 1224 - 1224 (3)Total-Infrastructure 2455 7101 9556 21

Water - 3240 3240 (7)Broadcasting 50 - 50 (-)Housing 2500 2500 (5)Education - 1870 1870 (4)Other 500 1620 2120 (5)

Total-Other 550 9230 9780 21MAF 920 - 920 (2)SDA 1080 - 1080 (2)Unidentified - 16110 16110 (35)Total-Unspecified 2000 16110 18110 39

TOTAL 7205 38795 46000 100

64. It is not considered that there are major constraints toimplementing such a program. The capacity of the construction industry andof PWD should be quite adequate, and the Development Unit and the Ministryof Finance are capable of carrying out the necessary relatedadministration. The major constraint, as in the past, is likely to befinancial.

D. Financing the Program

65. Of the EC$46 million public investment program, only EC$28million is for identified projects. Of these, it is estimated that as muchas EC$25 million is already committed or approved in principle. Of theremaining EC$21 million, some EC$7.6 million is estimated as coming from

public sector savings. Perhaps another EC$5 million will come fromdomestic borowing, primarily from the Social Security Scheme. Thereremains therefore, only some EC$8 million in unidentified externalfinancing, which would probably require new commitments of about EC$20million during the period. It is therefore anticipated that the financingof the program could be as follows:

EC$mCommitted New Total %

(or approvedin principle)

Bilateral Grants(UK,USAID,CIDA) 17.0 8.2 25.2 55Multilateral Grants(EDF) 2.8 2.8 6Loans(net) 5.4 5.4 12Public Sector Savings - 7.6 7.6 16Domestic Borrowing 5.0 5.0 11Total 25.2 20.8 46.0 100

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66. Domestic financing is therefore estimated at 27% of the total,which seems realistic given recent public sector savings and the new SocialSecurity Scheme. If achieved, this will be a remarkable performance, giventhat only two years ago, the investment program was almost entirelyexternally financed, and UK budgetary assistance was still required tosupplement recurrent revenues.

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V. PROSPECTS

67. With the existing potential in the industrial and tourism(including tourism-cum-construction) industries, it should not provedifficult to maintain current employment levels over the coming few years.However, it is important to look a little further ahead. The agriculturalsector is suffering from an aging labor force, and as yet there are fewyoung people attracted to this sector, except in a part-time capacity.Although the present settlement campaign will probably raise theproductivity of existing workers, the prospects for maintaining the sectorin the medium term are not good at present.

68. With political stability, a good investment climate, andrelatively skilled labor, the industrial sector offers more promise. Thepresent enclave style of development has some advantages, but itsvalue-added to the economy is relatively limited. The cotton project, and,to a lesser extent, the electronics industry are good examples of the typeof industry that offer more scope and a higher contribution to GDP. Giventhe relatively small size of the labor force, it will not require many suchindustries to solve any future employment problem in Montserrat, and thisis clearly an area where major attention should be paid. As noted earlier,the tourism-cum-construction industry has good prospects for a further tenyears, but after that it will probably only be important in terms of theservice employment it generates.

69. The scope for more conventional tourism remains to bedetermined. It is however, difficult to believe that it could ever becomethe major industry in the economy, given the limited natural conditions ofthe country. A maximum of about 500-750 beds could be envisaged,generating a similar number of jobs. It is unlikely therefore, that thissector could provide employment for more than 10% of the future laborforce.

70. Of the three major sectors, therefore, it is considered that theindustrial sector offers most scope for the medium term development of theeconomy. Government may wish to consider these thoughts when it draws up aDevelopment Plan for Montserrat.

71. With rising national income, improved public finances, reducedinflation, and low unemployment, the present economic situation ofMontserrat is reasonably satisfactory. However, since domestic consumptioncontinues to exceed GDP, viability remains predicated on emigrantremittances. The Public Sector Investment Program, if implemented in full,should be sufficient together with expected private investment to generatea real growth rate of 3-4% per annum. Nevertheless, it cannot be foreseenat the present time that Montserrat will be able to graduate from grant andconcessional loan financing for its projects, so the continued support ofbilateral and multilateral agencies will be required for some time to come.

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MONTSERRAT - MAJOR NEW PROJECTS AND SOURCE OF FINANCING(US$ 000)

External Counterpart RecurrentTotal Financing Financing CostsCost Required Source Amount % 1982/85

Directly Productive Projects

Development of Estates 250 250 UK - --Soil Conservation 444 444 UNKNOWN - -Dairy Project - Phase I 80 80 UK - - -Farm Improvement Credits II & III 654 654 CDB - -Industrial Estates IV 700 700 CDB - - -Small Industry Credit II & III 646 646 CDB - - -Tourist Facilities 150 150 UNKNOWN - - -Handicraft - Leather 57 57 Poss.CIDA - - -

Economic Infrastructure

Harbor Protection & Groyne 480 480 UK - - -Road Improvement Program &Construction Equipment 1500 1500 UK - - -

Port Crane 250 250 UK - - -PWD - New Equipment 200 200 UK - - -Blackburne Airport - Rapid

Intervention Vehicle 80 80 UK - - -Blackburne Airport - Electricity Supply 100 100 UK - - -Blackburne Airport - Rescue Craft 20 20 UK - - -

Other

Water Development 1000 1000 EDF/CIDA/UK - - -Water Authority Equipment 200 200 UK - - -Low Cost Housing 1111 1111 UNKNOWN - - -Student Loans III 200 200 CDB - - -Junior Secondary School 370 370 UNKNOWN - - -Schools Furniture/Laboratory Equipmentfor Industrial Arts Center 122 122 UNKNOWN - - -

Ministry of Finance Building 600 600 Poss.UK - - -

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MONTSERRAT - MAJOR ONGOING PROJECTS(0S$ '000)

External Arortizatios Grace Counterpart RecurestTotal Finascing Interest Period Period - Pisascing CostaCost Secured Source (Yearo) (Years) A--out 2 1982/85

Directly Productive ProJectsa/ a/

Estegrated Sea Ilood Cottou Project 808 716 EDB/CIDA 4 15 5 142 17 -Abbatoir 397 397 UE Great - - - - -FPeo Impr-ve e-t Credit 129 129 CDB 4 15 5Estates Isirostructere - Lee.,

der=itage., ad Otwoy ERtates 60 60 UK Sot - -Reafforestation 75 75 USAID GrantAgricsltore Inport Subsidy 42 42 Ut Grot - -S-1l1 Industry Credit TI 100 100 CDB 4 15 5 bDeveloptent of Stitching Industry 219 197 UK Grant - - 22_- 10Iadu-trial Estates III 155 155 CDB 4 15 5 -Little Bay Tourisn Developteet -

Feasibility Study 200 200 UK Grant - -Estates Developteet - Riley's end

Richnond Estates 330 330 ER Grat - - - -

Eco=ic 1sf rastrocture

St. John's/Trasts Road(EDF) 756 739 ODF Great - - 17 2 38St. Jobs's/Treats Road(UE) 554 554 UE Grant - - - - 28Airport Resurfacing 289 289 UK Grt - - - - -Yaoht Finger (Old Read Bay) 100 100 UK Grat - - - -Pleat Overhaul and Replac-eent 100 100 UE Grant - - - -PWD Stores and Equipteat 57 57 UE Scot - - - -GStun Dfarge Repair ond Proteotion 925 925 UESEDP Grart - - - -

Gthecs

IGprove=ent to Broeadasting Services 39 39 UE Grant - - - -Neu Broadcasting Equip-ent 71 71 UE Grout - - - - -Old People's Mane 333 333 UE Grant - - - - 70student Loans - Higher Education II 131 131 CDB 4 15 5 -Third Country Training III & IV 644 644 CIDA Grnt - - -

JR/WI Training Schaee 163 163 UE Grat - - -slossI. Adeinistered Food 340 340 CIDA Grat - - -

Special Deveiop=ent Assistance 400 400 USAID Grat - - -

a/ Coonterpart is represented by enisrtig equip-ent.I/ -Couterpart provided by private sector.

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MONTSERRAT

1982/85 Project List - Individual Project Description

Agriculture(US$'000)

I. NAME OF PROJECT: Development of Estates

II. EXECUTING GOVERNMENT AGENCY: Land Development Authority

III. TOTAL ESTIMATED COST: US$ 250

IV. EXTERNAL FINANCING REQUIRED: US$ 250

V. LENDING AGENCY: UK

VI. DESCRIPTION AND JUSTIFICATION: Project involves the acquisition,management, and development of land for settlement and directproduction. The project is a key element in the agriculturaldevelopment plan for 1980/1983 that has been prepared by Montserrat,and continues an ongoing program of estate development.

VII. COST COMPONENTS AND FINANCING:

Financed by TotalLocal ExternalSources Sources Amount %

Local Costs - 175 175 70Foreign Costs _ 75 75 30Total Costs - Amount - 250 250 -

-% - 100 - 100

VIII. DISBURSEMENT PERIOD:Post

1982 1983 1984 1985 Total 1985

Local Sources - - - - - -

External Sources - 125 125 250Total 125 125 250 -

IX. STATUS OF PREPARATION: Further sites to be identified.

X. PROJECT IMPLICATIONS:

Operating and Maintenance Costs: None during 1982/85.Debt Obligations: None.

XI. TECHNICAL ASSISTANCE: The UK is providing the required technicalassistance.

- 24 -

MONTSERRAT


Agriculture(US$'000)

I. NAME OF PROJECT: Farm Improvement Credit II and III

II. EXECUTING GOVERNMENT AGENCY: DFMC

III. TOTAL ESTIMATED COST: US$654

IV. EXTERNAL FINANCING REQUIRED: US$654

V. LENDING AGENCY: CDB

VI. DESCRIPTION AND JUSTIFICATION: The project is a continuation ofthe farm improvement credit scheme.



Local Costs - -Foreign Costs - 654 654 100Total Costs - Amount - 654 654 -

-% - 100 - 100


1982 1983 1984 1985 Total 1985

Local Sources - - - - - -External Sources - 151 151 176 478 176Total - 151 151 176 478 176

IX. STATUS OF PREPARATION: CDB is to be approached.

X. TERMS OF FINANCING:

Interest Rate: Unknown.Amortization Period: Unknown.

XI. PROJECT IMPLICATIONS:

Operating and Maintenance Costs: None.Debt Obligations: Unknown.

XII. TECHNICAL ASSISTANCE: None.

- 25 -

MONTSERRAT


Agriculture(US$ '000)

I. NAME OF PROJECT: Soil Conservation

II. EXECUTING GOVERNMENT AGENCY: Ministry of Agriculture, Trade andHousing



V. LENDING AGENCY: Unknown

VI. DESCRIPTION AND JUSTIFICATION:

A. Description: This project is a positive effort tocheck soil erosion and maintain soilcover and fertility. It will promotethe establishment of soil conservationmeasures on hillside lands.

B. Justification: Most of the useable land is exposed torapid erosion and the cultivation of seaisland cotton on steep slopes some yearsago has accelerated the erosion. Theproject aims at improving and maintainingthe production capability of these lands.


Financed by TotalLocal ExternalSources Sources Amount _

Local Costs - 355 355 80Foreign Costs - 89 89 20Total Costs - Amount - 444 444 -

- % - 100 - 100

- 26 -


1982 1983 1984 1985 Total 1985

Local Sources - - - - - -External Sources - 45 60 60 165 279Total - 45 60 60 165 279

IX. STATUS OF PREPARATION: Concept has been identified. USAID willpossibly finance this project.


Operating and Maintenance Costs: None.Debt Obligations: Not determined.

XI. TECHNICAL ASSISTANCE REQUIRED: Technical assistance is required toprepare the project and to advise the Ministry of Agriculture onimplementation.

- 27 -

MONTSERRAT


Industry(US$'000)

1. NAME OF PROJECT: Dairy Project - Phase One

II. EXECUTING GOVERNMENT AGENCY: DFMC/MIEL





A. Description: The project consists of constructing andequipping a dairy plant to pasturize milkfor the local market.

B. Justification: To substitute for imported milk products andencourage cooperative milk production aswell as develop potential for beef and hidesproduction.




- % - 100 - 100


1982 1983 1984 1985 Total 1985

Local Sources - - - - - -External Sources 30 50 - - 80Total 30 -O - - 8

- 28 -

IX. STATUS OF PREPARATION: CFTC produced a feasibility study in 1977.Project is to be implemented at a scale much smaller thananticipated when it was originally identified.


Operating and Maintenance Costs: None.Debt Obligations: None.

XI. TECHNICAL ASSISTANCE REQUIRED: A dairy farming expert is requiredto assist in project implementation.

- 29 -

MONTSERRAT


Industry

(US$'000)

I. NAME OF PROJECT: Industrial Estates IV






A. Description: The project consists of 36,000 square feetof factory shell space to be constructed

when industrial tenants are identified.

B. Justification: To promote the establishment of private sector

industrial enterprises in Montserrat.


Financed by Total

Local External

Sources Sources Amount %


- % - 100 - 100

VIII. DISBURSEMENT PERIOD:

Post1982 1983 1984 1985 Total 1985


External Sources _ 200 230 270 700

Total - 200 230 270 700

- 30 -

IX. STATUS OF PREPARATION: CDB to be approached. Standard design will

be used.X. PROJECT IMPLICATIONS:

Operating and Maintenance Costs: None.Debt Obligations: Not determined.

XI. TECHNICAL ASSISTANCE REQUIRED: None.

- 31 -

MONTSERRAT


Industry(US$'000)

I. NAME OF PROJECT: Small Industry Credit II and III





VI. DESCRIPTION AND JUSTIFICATION: The project is a continuationof the small industry credit scheme.



Local Costs 7 - -

Foreign Costs - 646 646 100Total Costs - Amount - 646 646 -

-% - 100 - 100


1982 1983 1984 1985 Total 1985


External Sources - 155 143 174 472 174

Total - 155 143 174 472 174

- 32 -

MONTSERRAT


Industry(us$o'000)

I. NAME OF PROJECT: Handicraft/Leather

II. EXECUTING GOVERNMENT AGENCY: Montserrat Industrial Enterprises,Ltd. (MIEL)



V. LENDING AGENCY: Possibly CIDA


A. Description: The project proposes to revive the leatherworkshop set up in 1974 which has declineddue to lack of management, design and marketingcapability. The project will include a three-year leather craftsmen training program.

B. Justification: The enterprise, if successfully revived, couldemploy 35 skilled craftsmen and provide aforward linkage for the new tannery with thetourism sector.


Financed by TotalLocal External



-% - 100 - 100


1982 1983 1984 1985 Total 198 5

Local Sources - - - - - -External Sources 19 38 - - 57Total 19 38 - - 57

- 33 -

MONTSERRAT


Tourism(US$'000)

I. NAME OF PROJECT: Tourist Facilities

II. EXECUTING GOVERNMENT AGENCY: Chief Minister's Office



V. LENDING AGENCY: Unknown


A. Description: The project involves the establishment offacilities for hot mineral baths on the siteof hot springs which formed a touristattraction some years ago,plus other tourisminfrastructure such as nature trails,signs and maps.

B. Justification: To attract additional tourists to the island.




-% - 100 - 100


1982 1983 1984 1985 Total 1985

Local Sources - - - - -

External Sources 40 35 35 40 150Total 40 35 35 40 150

- 34 -

IX. STATUS OF PREPARATION: The concept has been identified.Feasibility study will be done by the Government.


Operating and Maintenance Costs: Potentially self-liquidating.Debt Obligations: Unknown.

XI. TECHNICAL ASSISTANCE REQUIRED: Technical assistance is requiredat all stages.

- 35 -

MONTSERRAT


Transport

(us$'OOO)

I. NAME OF PROJECT: Harbor Protection and Groyne

II. EXECUTING GOVERNMENT AGENCY: Ministry of Communications and Works





A. Description: Project includes construction of a 450-foot

clearance yacht arm to 20-foot depth of waterto the left of the Ro-Ro facility at Plymouth

Harbor (similar to yacht arm under construction

at Vue Point).

B. Justification: To meet existing demand for berthing facilitiesand segregate pleasure craft from commercial

craft.


Financed by Total

Local ExternalSources Sources Amount %


-% - 100 - 100


Post

1982 1983 1984 1985 Total 1985


External Sources 90 180 210 _ 480Total 90 180 210 - 480

- 36 -

MONTSERRAT


Transport(US$'000)

I. NAME OF PROJECT: Road Improvement Program and Construction Equipment






A. Description: Project includes upgrading of 15 miles of existingroads(widening and surface-dressing)and provisionof a new stone-crusher to improve PWD'sinplementation capability.

B. Justification: The project will improve access to villagesand agricultural areas.




Local Costs - 450 450 30Foreign Costs - 1050 1050 70Total Costs - Amount - 1500 1500

-% - 100 - 100


1982 1983 1984 1985 Total 1985

Local Sources - - - - - -External Sources 630 430 440 - 1500Total 630 430 440 - 1500

- 37 -

IX. STATUS OF PREPARATION: The project has been identified. BDD hasbeen approached.


Operating and Maintenance Costs: No incremental costs.Debt Obligations: None.

XI. TECHNICAL ASSISTANCE REQUIRED: None.

I

- 38 -

MONTSERRAT


Transport(US$ '000)

I. NAME OF PROJECT: Port Crane

II. EXECUTING GOVERNMENT AGENCY: Ministry of Communications & Works


IV. EXTERNAL FINANCING REQUlR.ED: US$250



1. Description: A new crane is required for the Port, inparticular to speed up loading and unloadingof containers.

2. Justification: To improve the efficiency of the Port.

VII. COST COMIPONENTS AND FINANCING:



Local CostsForeign Costs _ 250 250 100Total Costs - !=ount - 250 250 -

- % - 100 - 100


Post1982 198.3 1984 1985 Total 1985

Local Sources - - -External Sources - 250 - - 250Total - 25n? -

- 39 -

IX. STATUS OF PREPARATION: Project can be inplemented uponapproval by donor.


Operating and maintenance costs: Minor

XI. TECHNICAL ASSISTANCE REQUIRED: None

- 40 -

MONTSERRAT


TransportIUM'UUU)

I. NAME OF PROJECT: PWD - New Equipment


III. TOTAI. ESTIMATED COST: US$200

IV. EXTERNIAL1 FINANCING REQUIRED: US$200

V. LENDING AGENCY: Ul(


1. Description: A variety of equipment is required for PWD toimprove its capability in maintenance and directworks, and to enable a preventative maintenancesystem to be established.

2. Justification: To improve PWD's efficiency.




Local CostsForeign Costs - 200 200 100Total Costs - Amount - 200 200 -

- % - 100 - 100


Post1982 1983 1984 1985 Total 1985

Local Sources - - - - - _External Sources 50 100 50 - 200Total 50 100 50 - 200-

- 41 -

IX. STATUS OF PREPARATTON: Project can be implemented upon approval by donor.




- 42 -

MONTSERRAT


Transport(US$ '00u)

I. NAME OF PROJECT: BlackburieAirport - Rapid Intervention Vehicle

II. EXECUTING GOVERNMFENT AGENCY: Ministry of Communications and Works

III. TOTAL ESTIIM'!ATED COST: US$80

IV. EXTERNAL FINANCING REQTJIRED: US$80



1. Description: A rapid intervention vehicle is required atBlackburne Airport to improve the standardof fire protection services.

2. Justification: To improve safety at the airport.

VII. COST COMPObi'EN,,TtS AND FINANCING:

Financed bv TotalLocal External


Local CostsForeign Costs - 80 80 100Total Costs A; ount - 80 80

-% - 100 - 100

VIII. DISBURSEM7ENT PERIOD:

Post1982 1983 1984 1985 Total 1985

Local Sources - - - -External. Sources 80 - - - 80Total 80 - - - 80

- 43 -

IX. STATlUS OF PRLPARATTON: Project can be implemented upon approval by donor.



XI. TECIHNICAL ASSISTANCE REQUIRED: None

- 44 -

MONTSERRAT


Transport(USs '000)

I. NAME OF PROJECT: Blackburne Airport - Electricity Supply


III. TOTAL ESTIMATED COST: US$1-00




1. Description: A generator is required for Blackburne Airpotyas a stand-by electricity supply.

2. Justification: To-improve electricity supply at the airportand therefore guarantee night flights whichare at present uncertain.

VII. COST CO,PONENTS AND FINANCING:


Local Costs _ -Foreign Costs - 100 100 100

Total Costs - Amount - 100 100 -- X - 100 - 100


Post

1982 1983 1984 1925 Total 1985

Local Sources - - - - -External Sources 100 - - - 100Total 100 - - 100

- 45 -

IX. STATUS OF PREPARATION: Project can be implemented upon approval bydonor.




- 46 -

MONTSERRAT


Transport

(US$ '000)

I. NAME OF PROJECT: Blackburne Airport - Rescue Craft

II. EXECUTING GOVERNMENT AGENCY: Ministry of Communic4ations and Works

Documents

Public Disclosure Authorized Economic Memorandum on ......% of population - urban 82.9 7 of population - uraan - rural 73.1 -rural NUTRITION EDCATION 1980 Calorie intake as % of requirements