IMF Executive Board Concludes 2009 Article IV Consultation with Grenada

Public Information Notice (PIN) No. 10/05
January 8, 2010

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 November 25, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the 2009 Article IV consultation with Grenada.1


Grenada’s economy has been hit hard by the global crisis and the downturn has been deeper than expected, reflecting the strong drag of the global crisis on tourism receipts, Foreign Direct Investment (FDI), and remittances. Tourism, a key growth driver, is expected to experience a 20 percent decline in stayover arrivals; FDI is almost at a standstill; construction, an important source of employment, is projected to fall by 35 percent, the fourth consecutive year of double-digit declines. As a result, real GDP is expected to contract by more than 6 percent in 2009, with a further 2 percent decline in 2010, before seeing positive growth. Falling prices of international commodities in the first half and weak domestic demand have pushed consumer prices down, with inflation projected to be negative 0.4 percent during 2009 (compared to 5.2 percent during 2008).

The weak economy has led to rising unemployment, while poverty remains widespread. According to a preliminary draft of the Country Poverty Assessment, the unemployment rate stood at 25 percent in June 2008. Compounding matters, the authorities believe that labor market conditions have softened further in 2009 leading to unemployment rates closer to 30 percent. Some 38 percent of the population lives below the poverty line.

Reflecting the anemic economic activity, the growth of monetary aggregates is slowing: year-on-year growth of credit to the private sector and broad money continued to decelerate (8.2 percent and -1.0 percent, respectively, as of August 2009). The current account deficit is expected to narrow sharply in 2009 (to 22 percent of GDP), as falling FDI and other external financing force a sharp import reduction, more than offsetting lower tourism receipts.

Commercial banks, many of which are subsidiaries of international banks, have generally remained resilient. However, the quality of commercial bank loan portfolios is deteriorating: the ratio of nonperforming loans (NPLs) to total loans, while low, has been worsening (4.1 percent at end-June 2009) and the ratio of provisions to NPLs declined to 37.8 percent at end-June 2009, the lowest level in recent years. The financial system remains vulnerable to contagion from regional financial sector entities. ECCU governments are working together closely on a regional solution to the difficulties of the Trinidad and Tobago-based CL Financial Group.

The authorities have made significant progress with structural reforms. Preparations to introduce a VAT by February 2010, which is expected to improve the efficiency of the tax system, are solidly on track. Reforms to lay the basis for broad-based economic growth by improving the investment and business environment are underway. An institutional reform of the ministry of finance aims at improving the capacity for economic management.

Executive Board Assessment

Executive Directors noted that Grenada’s real GDP has contracted markedly in 2009, due primarily to sharp falls in tourism receipts, foreign direct investment, and remittances, while unemployment has risen further. Fiscal policy has been constrained by revenue shortfalls and the rising public debt ratio. Directors commended the Grenadian authorities for the satisfactory performance of their economic program under these highly challenging circumstances. They supported focusing macroeconomic policies on mitigating the short-term impact of the external shocks, while laying the foundation for sustainable, broad-based economic growth.

Directors considered medium-term fiscal consolidation to be a high priority. They welcomed the planned fiscal measures, including the prioritization of capital spending, wage restraint, and increased efficiency of spending on goods and services, while protecting social expenditures. Directors stressed the importance of accelerating tax and customs reforms and strengthening institutional capacity for public financial management. They endorsed the planned introduction of a value-added tax in early 2010, a key measure to boost revenue and reduce reliance on trade taxes. Directors looked forward to the early completion of the Poverty Reduction and Strategy Paper.

Directors expressed concern over Grenada’s high risk of debt distress. They urged vigilance in contracting an external loan for the joint venture under consideration, stressing the need for an objective assessment of the project’s financial viability as well as substantial equity participation from private investors. Directors encouraged sustained efforts to put public debt on a sustainable trajectory, and to regularize financial relations with external creditors. They called on the authorities to adhere to their plan to reduce the stock of domestic arrears.

Directors noted the staff’s assessment that the real effective exchange rate appears broadly in line with macroeconomic fundamentals. Looking forward, they encouraged the authorities to take steps to preserve external competitiveness, including by completing action plans to improve the business climate and implementing structural reforms to expand and diversify external receipts.

Directors noted that, although the banking sector has remained resilient, financial stresses in the region could pose a risk. This highlights the need for careful monitoring of financial sector vulnerabilities and close cooperation among regional governments, particularly in dealing with the financial difficulties associated with the Trinidad and Tobago-based CL Financial Group. Directors encouraged the authorities to control the fiscal costs of intervention strictly. They commended the authorities for the progress in improving the capacity for nonbank financial supervision and regulation, and looked forward to the passage of a new Insurance Act by the end of this year. Directors noted the authorities’ intention to keep their Special Drawing Rights allocation as a shared reserved cushion at the Eastern Caribbean Central Bank, as a buffer against risks stemming from financial stresses in the region.

Grenada: Selected Economic Indicators

          Prog.1/ Prel. Proj.
  2006 2007 2008  

2009 2010
(Annual percentage change, unless otherwise specified)
Output and prices              
Real GDP -2.3 4.9 2.2   -0.7 -6.2 -2.0
GDP deflator 3.9 3.4 10.2   5.5 0.7 5.5
Consumer prices (end of period) 1.7 7.4 5.2   2.1 -0.4 4.4
Money and credit 2/              
Net foreign assets of the banking system -7.3 -1.0 -9.3   -3.6 -5.1 -4.7
Net domestic assets of the banking system 7.4 12.1 13.4   4.6 3.2 6.4
Of which              
Net credit to the nonfinancial public sector -0.3 1.5 1.0   1.9 -0.8 1.2
Credit to the private sector 8.5 12.0 10.2   2.7 4.1 5.2
Liabilities to the private sector (M2) 0.1 11.0 4.1   1.0 -1.9 1.6
Balance of payments              
Merchandise exports, f.o.b. -1.7 26.1 -7.4   -0.8 -5.7 10.1
Merchandise imports, c.i.f. -0.8 10.6 4.8   -22.2 -40.1 2.8
Real effective exchange rate (end of period, depreciation -) -4.6 0.2 6.6  
Current account balance (in percent of GDP) -33.2 -43.2 -40.4   -33.4 -22.1 -21.6
(In percent of GDP, unless otherwise specified)
Central government finances 3/              
Total revenue and grants 33.6 27.1 29.4   27.9 27.1 27.0
Of which              
Grants 8.7 1.0 4.1   2.6 3.5 3.1
Current expenditure 20.9 21.4 22.8   23.7 23.3 23.3
Capital expenditure 18.8 13.5 11.7   9.3 8.3 7.0
Primary balance (excluding grants) -13.0 -6.9 -7.0   -4.6 -5.0 -3.3
Overall balance (including grants) -6.1 -7.9 -5.1   -5.1 -4.5 -3.3
Public and publicly guaranteed debt (end-period) 116.5 111.0 102.2   114.2 113.9 114.9
(In millions of U.S. dollars)
Memorandum items:              
Nominal GDP 564.4 610.3 678.5   640.9 640.9 662.9

Sources: Grenada authorities; ECCB; and IMF staff estimates and projections.
1/ Corresponds to projections in IMF Country Report No. 09/200.
2/ As a percent of broad money at the beginning of the year.
3/ Measured using above-the-line information.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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