IMF Executive Board Concludes 2007 Article IV Consultation with GrenadaPublic Information Notice (PIN) No. 07/132
October 25, 2007
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On September 26, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Grenada.1
Grenada's economy has rebounded after the devastating impact of Hurricanes Ivan and Emily, with the recovery centered on reconstruction and 2007 Cricket World Cup (CWC) preparations. Real GDP growth averaged 7 percent a year during 2005-06 and is projected at about 3 percent in 2007 and 4 percent beyond, reflecting a further strengthening of tourism, the recent initiation of several major tourism projects, and a gradual recovery of agriculture. Inflation has remained low, buttressed by the regional currency board arrangement.
The external current account deficit improved slightly in 2006, with rising tourism receipts nearly offsetting the tapering off of large insurance payouts in 2005. The deficit is expected to remain large, at over 20 percent of GDP over the near term, mainly financed by foreign direct investment and capital grants. In particular, there has been a substantial increase in foreign direct investment in the tourism sector. External competitiveness appears to have improved recently, but fiscal adjustment and enhancing the investment climate will be important to sustaining competitiveness over the longer term.
Monetary and financial developments have been favorable. Growth in credit to the private sector, which had declined sharply after Hurricane Ivan, picked up pace in 2006. Grenada's banking system is resilient, having weathered the hurricanes well. While there was a temporary increase in the share of nonperforming loans following Hurricane Ivan, unsatisfactory assets have since been steadily declining, with the share falling below pre-hurricane levels. Grenada also established a single regulatory agency to strengthen supervision of nonbank financial institutions.
Large fiscal slippages in 2006-07 have slowed the pace of restoring fiscal and debt sustainability. Despite revenue-enhancing measures, capital expenditure overruns (owing to higher-than-anticipated costs for reconstruction and CWC preparations) led to much higher fiscal deficits than targeted. As a result, public debt rose, reaching 125 percent of GDP at end-2006, leaving little room for maneuver in the event of future shocks. On current policies, the overall deficit (including grants) this year would be about 3¼ percent of GDP, compared with almost 7 percent in 2006. Absent more active and front-loaded fiscal adjustment, the authorities' debt-to-GDP target of 60 percent might not be achieved until well after 2020, the Eastern Caribbean Central Bank's regional target date.
Implementation of the structural reform agenda has been uneven. Solid progress has been made with fiscal measures, including the introduction of the National Reconstruction Levy, the adoption of an automatic fuel pricing mechanism, strengthened collection of tax arrears, and work toward implementing a VAT. Important steps have also been taken to reduce vulnerabilities, such as participating in the Caribbean Catastrophe Risk Insurance Facility and taking steps toward giving the Building Code force of law. Other structural reforms have suffered delays, including legislative action to reform the tax concessions regime, creating a one-stop shop for investors, strengthening the capacity to evaluate and prioritize capital projects, and modernizing the public sector.
The government's highly successful debt restructuring is now largely complete and has resulted in substantial debt service savings. The authorities have continued good-faith efforts to pursue debt restructuring agreements with the few remaining nonparticipating creditors.
Executive Board Assessment
Directors welcomed Grenada's strong economic rebound in the aftermath of hurricane devastation and the broadly favorable economic prospects, with major tourism investments under way and the gradual recovery of the agricultural sector. At the same time, substantial challenges remain, in particular the weak fiscal position and high debt levels, which erode the room for maneuver in the event of further external shocks. The debt situation would remain unsustainable if current fiscal policies were continued. Against that background, Directors agreed that the authorities' home-grown reform program focuses appropriately on achieving fiscal and debt sustainability, durable high growth, poverty alleviation, and the mitigation of vulnerabilities.
Directors welcomed the steps that have been taken by the authorities to place Grenada's fiscal position on a more solid footing, including the implementation of an automatic mechanism for setting fuel prices and a broadly-based National Reconstruction Levy. They noted, however, that further fiscal consolidation will be key to placing debt on a sustainable trajectory. Spending restraint will be needed, including on capital expenditure and the public sector wage bill. The expected divestment proceeds should be used to pay down expensive debt, rather than to finance additional budgetary expenditures. Directors called on the authorities to explore a regional solution to the current counter-productive tax abatement competition among Caribbean countries.
Directors encouraged the authorities to strengthen public financial management and adopt multi-year budgeting. They recommended clearing arrears as soon as possible, avoiding reliance on unsustainable financing, and enhancing capital project evaluation capacity. They welcomed the authorities' intention to introduce a VAT, and encouraged them to move forward expeditiously in line with their implementation schedule. A track record of budgetary discipline would help boost investor confidence, which will be critical to maintain credit market access and foreign direct investment flows. Directors noted that technical assistance from the Fund in the areas of debt management and the budget could be useful.
Directors considered that external competitiveness appears adequate, with Grenada's share of the regional tourism market increasing. Fiscal consolidation will help sustain competitiveness and support the regional currency board arrangement.
Directors commended the authorities for strengthening the financial system's supervisory framework, as evidenced by the establishment of a single regulatory agency for nonbank institutions. They supported plans to address regulatory gaps in the insurance sector and bring all nonbank financial entities under the regulatory agency's oversight. Directors called on the authorities to bring the unregulated commercial bank under proper supervision without delay.
Directors welcomed the efforts being made by the authorities to enhance the business climate and improve competitiveness, including through the recently developed national export strategy, the one-stop shop being established for investors, and other measures to reduce business costs. They encouraged the authorities to accelerate the implementation of these and other aspects of their structural reform agenda, including moving ahead with reforms to arrangements governing tax concession.
Directors welcomed the steps taken to strengthen enforcement of the building code and enact a new Insurance Act, which will help mitigate vulnerabilities.
Directors encouraged the authorities to further strengthen the coverage, quality, and timeliness of the statistical database to support policy analysis, surveillance, and public debate.
Directors encouraged the authorities to work toward completion of the pending first review under the Poverty Reduction and Growth Facility (PRGF) arrangement-by taking corrective action on the fiscal front, addressing the issue of the unregulated bank, and accelerating the pace of structural reform. These steps would unlock additional financial resources and help lay the foundation for strong, sustainable growth in the years ahead.