Public Information Notice No. 03/10

Public Information Notice: IMF Concludes 2002 Article IV Consultation with Grenada

February 4, 2003

On January 27, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Grenada.¹

Background

After GDP growth averaging 7 percent a year from 1998-2000, real GDP declined by 3 percent in 2001, reflecting the global slowdown, completion of most of the large infrastructure and tourism projects, and the effects on tourism of the September 11 attacks in the United States. For 2002, despite damage to crops and infrastructure caused by a tropical storm in September, economic growth is expected to be slightly positive owing to a higher tourism activity in the fourth quarter.

The fiscal situation deteriorated markedly in 2001 with the central government deficit rising to 8½ percent of GDP, reflecting a sharp increase in spending (about 6 percent of GDP) on social sectors, the wage bill, and goods and services. The authorities aimed to reduce the deficit to 8 percent of GDP in 2002 by: (i) reducing capital spending by 2 percentage points of GDP, while ensuring that key social programs remain unaffected; (ii) limiting spending on goods and services to the 2001 level through tighter control over the procurement of supplies and services; (iii) limiting the growth in the wage bill; and (iv) curtailing some tax exemptions and strengthening revenue administration, including limiting the automatic rollover of tax breaks after the expiration of tax holidays.

A US$100 million (nearly 25 percent of GDP) 10-year international bond was issued in June 2002 yielding 9.5 percent, 475 basis points above U.S. Treasuries. The success of this issue reflects investor confidence in Grenada. The receipts of the bond issue have been used to retire more expensive debt, including lease-purchase arrangements, to clear arrears, and to finance high priority investment projects. This debt consolidation is to be supported by a debt management strategy that gives priority to concessional borrowing from multilateral and official bilateral sources, strictly controlling the granting of debt guarantees to public enterprises and the private sector, and entails continued adherence to the policy of prior approval by the Ministry of Finance for any borrowing by public enterprises.

In late September the country was hit by tropical storm Lili, causing extensive damage to infrastructure and export crops. The authorities have estimated the damage to be about EC$21 million equivalent to nearly 2 percent of GDP, in addition to a potential loss of EC$15 million of export earnings. To cope with the effects of the storm, the authorities have requested assistance from the Fund under its policy for emergency assistance in the case of natural disasters.

Grenada completed the initial self-assessment (Module 1) of its offshore financial sector, conducted with the assistance of the Fund and the Eastern Caribbean Central Bank (ECCB) in September 2001, and was removed by the Organization for Economic Cooperation and Development (OECD) from the list of noncooperative tax havens in February 2002. In June 2002, the Financial Action Task Force (FATF) noted that Grenada had enacted most of the legislation needed to remedy the deficiencies in its anti-money laundering laws, and asked it to submit plans to implement the new legislation.

Structural reform efforts focused on enhancing the efficiency of the public sector through: (i) further increasing the commercialization of public services; (ii) outsourcing work of the public agencies; and (iii) reducing the number of non-established workers. Work is also underway to amend the Public Service Act, which governs the functioning of the public service and public service unions. The unemployment rate remains high at around 12 percent, reflecting structural rigidities in the labor market. To enhance labor market flexibility, the authorities are participating in a regional web-based employment exchange project supported by the U.S. Department of Labor and the International Labor Organization (ILO). The government also plans to amend the dispute resolution law to prevent solidarity strikes by workers in essential services.

Executive Board Assessment

Directors agreed with the thrust of the staff appraisal. Grenada, like other countries in the Caribbean region, faces a difficult economic and financial situation, with a decline in growth, an increasing fiscal deficit, and a high level of public debt. The tropical storm that hit the island in September 2002, destroying important agricultural production assets and infrastructure, has retarded the economic recovery. The main challenge now is to reduce the fiscal deficit while protecting social expenditures, bring down the level of public debt, and reinvigorate growth on a sustainable basis.

Directors emphasized the need for strong fiscal adjustment in 2003 and over the medium term. A pervasive system of tax and duty concessions for certain industries is partly responsible for the fiscal deterioration. Recent actions to reduce some of these exemptions and subject the rest to a review as they come up for renewal were welcomed. At the same time, the granting of discretionary exemptions should be eliminated. These steps would reduce distortions in the economy, enhance transparency, and simplify tax collection. Directors stressed the need for a comprehensive reform of tax policy and tax administration—preferably on a regional basis—based on the outcome of the work underway by the Fiscal Affairs Department and the Caribbean Regional Technical Assistance Center (CARTAC). There is also a need to improve expenditure management, especially capital outlays and project selection, including by undertaking only economically justified projects with priority for those that can be financed from external concessional sources.

Directors urged the authorities to reverse over the medium term the recent sharp and unsustainable increase in the public debt. Debt management should be strengthened, and caution exercised in granting debt guarantees to public enterprises and the private sector. Directors welcomed the authorities' recent action to retire some of the more expensive debt, including for commercially-financed lease-purchase infrastructure projects, and their commitment not to resort to such financing in the future. They commended the authorities for the successful placement of an international bond that had provided funds to retire higher-priced loans, which they considered reflected the confidence of international investors in Grenada.

Directors noted the considerable efforts made to strengthen supervision of the offshore financial sector. They recommended that the proposals in the financial sector self-assessment report to set up a more rigorous supervisory framework, with the Eastern Caribbean Central Bank (ECCB) playing a greater role, be implemented quickly. At the same time, it would be important that the costs of effective supervision of the offshore sector did not overburden administrative capacity or the public finances.

Directors considered that Grenada's domestic banking system is fundamentally sound. To maintain its good financial health the authorities should ensure, in collaboration with the ECCB, that all banks meet all legal and prudential requirements. Directors commended the authorities for taking most of the legislative and administrative measures needed in the campaign to combat money laundering and the financing of terrorism; they urged them to move forward on the few remaining issues to meet the international standard on money laundering and countering of terrorism.

Directors welcomed Grenada's participation in the General Data Dissemination System (GDDS), and the improvement in debt statistics. They stressed the need for improvement in other areas, including national accounts and labor statistics.