Press Release No. 05/109

Press Release: Statement by IMF Staff at the Conclusion of the 2005 Article IV Consultation Discussions with Grenada

May 13, 2005

The following statement was issued by an IMF staff mission on May 12, 2005 in St. George's:

"An IMF mission visited Grenada from April 28 - May 12, 2005 to conduct the 2005 Article IV Consultation discussions. The mission held a constructive dialogue with the Prime Minister, members of cabinet, other senior government officials, the opposition, and representatives from business, trade unions, donor agencies, and civil society. The mission is thankful to them for productive discussions that deepened its understanding of the economic challenges facing Grenada on the road to recovery and higher growth.

"Hurricane Ivan was among the most severe natural disasters in recent decades in terms of its economic damage of over 200 percent of GDP. At least 8 percent of the labor force was displaced, raising the unemployment rate last year to over 20 percent. While some workers have since been reabsorbed in sectors such as reconstruction and repair work, unemployment remains high.

"The fiscal situation is difficult. Fiscal deficits are large and exceed the identified sources of financing by substantial amounts in 2005 and beyond. On present policies, the 2005 financing gap is EC$57 million (4.6 percent of GDP) and is expected to widen to between EC$180-230 million (12-14 percent of GDP) each year between 2006 and 2010. Filling these large gaps requires continued fiscal effort by the authorities, creditor support in the form of a cooperative debt restructuring agreement, and further donor support.

"With the 2005 budget, the government has shown its determination to begin closing the financing gaps. The budget contains measures yielding about EC$25 million (over 2 percent of GDP), including the special levy on incomes and the increase in retail fuel prices, which are difficult but necessary steps in the right direction.

"Further fiscal measures will be needed to fill financing gaps between 2006 and 2010. The mission recommends that the authorities devise a medium-term macroeconomic framework, with fiscal targets for the next 3-5 years, that would be based on a broad consensus and approved by parliament. Such a plan could be built around a menu of growth and fiscal measures, many of which are already on the authorities' agenda.

"The IMF mission suggests limiting tax concessions, which have been very generous. The costs in terms of revenue forgone (over EC$175 million per year) have been among the highest in the Organization of Eastern Caribbean States. The government's decision to move retail fuel prices toward world levels will yield additional revenues; vulnerable groups should be protected through well-targeted subsidies.

"Capital expenditures should be carefully prioritized, keeping in mind the implementation capacity of line ministries and available financing. With the increase in this year's wage bill by 8 percent, the cumulative increase over the last 5 years has exceeded 40 percent, outstripping by far the rate of inflation and productivity growth. An agreement among labor, business and the government to limit wage growth would be a welcome step in this regard.

"The total stock of outstanding public and publicly-guaranteed debt at end-2004 amounted to EC$1.5 billion, or about EC$15,000 per person. The mission welcomes the government's progress with its strategy to reduce public debt to a sustainable level.

"Looking ahead, the external environment is challenging: world interest rates continue to rise, oil prices are projected to remain high, and the Caribbean region faces competition from low-cost developing countries. Moreover, the upcoming hurricane season could pose severe challenges given that many houses, schools, and shelters are still under reconstruction. The mission recommends that vulnerabilities be reduced through enhancing disaster mitigation and management practices, successfully completing the reconstruction program, and strengthening the financial sector.

"The growth potential in Grenada is high, and the global growth outlook in the next few years is positive. This provides an opportune moment to undertake the needed comprehensive reforms to rebuild their economy, ensure fiscal and debt sustainability, and realize their growth potential. The IMF mission wishes the people of Grenada every success in their efforts."