Statement by IMF Staff at the Conclusion of the 2007 Article IV Consultation Discussions with GrenadaPress Release No. 07/162
July 16, 2007
Ms. Nancy Wagner, head of an International Monetary Fund (IMF) staff mission to Grenada, issued the following statement today in St. George's:
"An IMF mission visited Grenada from July 9-16, 2007 to conduct the 2007 Article IV Consultation discussions. The mission held productive discussions with the Prime Minister, the Deputy Prime Minister, other senior government officials, the opposition, and representatives of the business community, trade unions, and civil society.
"Grenada's economy has made a remarkable recovery after the unprecedented devastation caused by Hurricanes Ivan and Emily. Led by reconstruction activity, Cricket World Cup (CWC) preparations, and the recovery of the tourism sector, real GDP growth averaged 7 percent per year during 2005-06. Moreover, inflation has fallen markedly, from a high of 5.8 percent (on a year-on-year basis) in late 2005 to only 2.2 percent by April 2007. This impressive rebound is a testament to the combined efforts of the Grenadian people, the government, and the creditor and donor communities.
"In the aftermath of the hurricanes' destruction, the government recognized that public debt was unsustainable and initiated a collaborative debt restructuring process (now largely completed). They also launched a home-grown comprehensive medium-term reform program, with the key objectives of sustaining high economic growth, restoring fiscal and debt sustainability, reducing vulnerabilities, and alleviating poverty.
"Progress has been made on each of these objectives of the reform program:
• On sustaining high economic growth, the country's main road infrastructure has been rebuilt, the agricultural sector is gradually recovering, and several major tourism projects are now coming on stream, which should raise Grenada's profile as an upmarket tourist destination. A National Export Strategy has begun to be implemented, with the aim of diversifying the economic base. Thus, the economic outlook appears highly favorable.
• On restoring fiscal and debt sustainability, a number of measures have been implemented to address the difficult fiscal situation, including introducing the National Reconstruction Levy, adopting a flexible fuel pricing mechanism to isolate revenues from oil price fluctuations, and strengthening the collection of tax arrears. The government's highly successful debt restructuring has resulted in substantial debt service savings, and the government has maintained its strategy of not contracting any further commercial external debt.
• On reducing vulnerabilities, Grenada was the first ECCU member to establish a single supervisory agency—the Grenada Authority for the Regulation of Financial Institutions (GARFIN)—to strengthen supervision over the nonbank financial sector. To mitigate the impact of natural disasters, Grenada is working to strengthen the enforcement of the Building Code and is participating in the World Bank's Caribbean Catastrophe Risk Insurance Facility. The government also plans to enact a new Insurance Act by end-year.
• On alleviating poverty, work is underway on a Country Poverty Assessment to underpin a full-fledged Poverty Reduction Strategy (PRS), and targeted assistance is being provided to the most vulnerable groups (including transport assistance to tertiary-level students and monthly transfers for the needy elderly) to mitigate the impact of high fuel prices. The government has also been working closely with importers of basic food items to bring down prices.
"The IMF mission commends the government for its progress with these important elements of its reform program.
"But substantial challenges remain, particularly on the fiscal and debt fronts. The 2006 fiscal outturn was worse than expected. Spending on goods and services was greater than projected, reflecting higher utility costs and transfers to households. Government investment reached 20 percent of GDP, about 5 percentage points higher than envisaged, on the back of higher-than-expected costs for reconstruction and preparations for the CWC. These expenditure overruns led to a primary deficit almost 7 percentage points of GDP higher than targeted. As a result, the debt-to-GDP ratio increased from 121 percent at end-2005 to 126 percent by end-2006.
"Data through the first half of 2007 indicate that fiscal slippages have continued this year, with capital expenditure outpacing grant financing owing to substantial shortfalls in grants relative to pledges. On present policies, the overall fiscal deficit could reach 3½ percent of GDP this year.
"Grenada's current public debt level remains high, reducing the country's flexibility to respond to future shocks, such as natural disasters. Placing debt firmly on a sustainable trajectory will require a determined effort, all the more so in light of the fiscal slippages. With reconstruction almost completed, capital spending in 2007 and beyond should be brought in line with identified financing. In this regard, the IMF mission encourages the government to enhance their capacity with intensive training in prioritization and implementation of the public sector investment program, to strengthen their procedures for cash management and expenditure control, and to avoid unsustainable financing sources such as the overdraft facility, the drawdown of bank deposits, or the accumulation of domestic arrears. The mission urges the trade unions and government to contain wage growth in line with consumer price inflation as an important step in addressing the difficult fiscal situation. The possibility of substantial divestment or privatization proceeds would allow the government to begin decisively tackling the rising debt ratio by paying down the most expensive debt.
"The pace of structural reforms also needs to be accelerated to consolidate the growth momentum and to allow Grenada to compete effectively in the challenging external environment. The current strong investor interest in Grenada provides an opportune time to undertake improvements in the business environment. The IMF mission encourages the government to push ahead with creating a one-stop shop for investors, facilitating land transactions, adopting the new Investment Act (including reforming the regime for tax concessions), and implementing the action plan to address the deficiencies identified in the World Bank's "Doing Business Indicators" report. Other critical reforms—introducing the VAT, strengthening tax administration, modernizing the public sector, enhancing the financial sector's regulatory framework, and using the forthcoming PRS to integrate and prioritize the social development agenda within the budget framework—will ultimately ensure Grenada's future economic success.
"The IMF mission is grateful to the Grenadian government officials and the other stakeholders in the economy for the constructive dialogue that enhanced its understanding of the economic challenges facing Grenada. The mission wishes the people of Grenada great success in their efforts. Grenada's future looks promising, indeed."