Citizenship by investment: a lifeline for many small states

04 July 2018

Recent research by the International Monetary Fund (IMF) has brought to light the significant macroeconomic impact of citizenship by investment programmes on many small states.

A blog by Heather Cover-Kus, Technical Research Officer - Commonwealth Secretariat

Recent research by the International Monetary Fund (IMF) has brought to light the significant macroeconomic impact of citizenship by investment programmes on many small states. In the Caribbean region where five small states offer them, the industry jumped from 0 per cent of regional GDP in 2007 to a substantial 5.1 per cent in 2015. At a country level, the figures, are even more impressive, with the industry contributing 14 per cent of GDP in St Kitts in 2014 and 9.5 per cent in Dominica in 2015-16.

Noting these impressive figures, I think my last blog – which discussed the strengths and weaknesses of citizenship by investment – understated its economic importance to the small states that have these programmes.

The impact and challenges of the citizenship by investment industry deserve an in-depth look.

Simultaneously, the governments tend to use the income of these programmes to address the issues that arise from their vulnerability as a small state.

In Dominica, funds from the programme have been used to aid the recovery from devastating hurricanes and tropical storms. Similarly, in Antigua and Barbuda, the income is being used in the reconstruction of Barbuda, which was badly damaged by hurricane Irma. In Grenada, 40 per cent of the income is put into a contingency fund to clear debts or deal with natural disasters.

However, the income from citizenship by investment programme is volatile. There are upcoming challenges to the industry which need to be handled with care if it is to be sustained. These challenges can be classed into three categories - international, regional and national.

  • International challenges: The Organisation for Economic Co-operation and Development (OECD) is exploring the potential abuse of citizenship programmes to circumvent the common reporting standard and avoid tax payments. If this issue is not tackled effectively, this may signal the beginning of further international regulation of this industry, possibly blacklists.
  • Regional challenges: The last five years have seen an increase in the number citizenship by investment programmes offered in the Caribbean, rising from two between 1993-2012 to five between 2013-2015. Following the growing competition, there have been changes to programme structures and decreases in fees, which many fear signal a “race to the bottom” for those in the industry. While the governments had planned to sign an MoU on the margins of the Caribbean Community Heads of Government Meeting last February, which never transpired. Without an agreed set of parameters of the industry, all countries stand to lose out.
  • National challenges: The citizenship can be a personal and sacred thing, particularly for people without the means to acquire another one or the interest in doing so. For the locals of the countries which offer citizenship programmes, there are fears that programmes are subject to corruption. There have been whispers of diplomatic passports being issued and people making money under the table. If the industry is to succeed, it needs to be properly managed with transparency and integrity. From a social perspective, governments need to consider how to avoid creating enclaves of the super wealthy and causing resentment among the locals.

I recently gave a presentation at the Global Investment Immigration Summit and highlighted these critical challenges. I noted the Commonwealth’s continued support for small states in finding innovative ways to obtain development funds and its assistance to help them keep this revenue source open and sustainable. Given the importance of this economic lifeline for many small states, they were receptive to the offer of support.

Perhaps, there is a role for the Commonwealth in helping the industry to define parameters and standards. But is that enough for small states? Beyond setting the parameters to achieve true sustainable benefits of these programmes, countries should think carefully about how the revenue can create jobs and boost economic growth.

For me, this economic lifeline should not be held forever, but rather, should be used to help countries get back on a sustainable path.

What are your views? Join the conversation. Email me at [email protected]

Gold, J and A Myrvoda (2017), ‘Managing Economic Citizenship Program Inflows: Reducing Risk and Maximising Benefits’, Unleashing Growth and Strengthening Resilience in the Caribbean, International Monetary Fund, Washington DC.