Press Release No. 08/226

Press Release: Statement by an IMF Staff Mission to Grenada

September 26, 2008

Ms. Catherine Pattillo, head of an International Monetary Fund (IMF) staff mission to Grenada, issued the following statement in St. George’s on September 23, 2008:

"An IMF mission visited Grenada during September 15-23 to conduct discussions for the second review of the government’s home-grown economic program that is supported by the IMF’s Poverty Reduction and Growth Facility (PRGF). The mission had a constructive dialogue with Finance Minister Nazim Burke, Permanent Secretary Timothy Antoine and other senior government officials, and representatives of public enterprises and the private sector. Staff from the Caribbean Development Bank and the Eastern Caribbean Central Bank participated. Discussions focused on recent economic developments, fiscal performance, progress with the government’s economic and structural reform agenda, and a policy framework for the remainder of 2008 and 2009.

"Economic growth in 2008 has slowed, and the outlook for the year has deteriorated, reflecting the global slowdown. Real GDP is projected to grow by around 1.6 percent in 2008 as weakened global demand and temporary disruptions in airlift capacity to Grenada are expected to dampen tourism receipts. Work has slowed on several tourism investment projects, resulting in a marked slowing of construction activity. The outlook for 2009 growth has also been revised downward but is expected to improve somewhat relative to 2008 as construction activity picks up. At the same time, rising world food and fuel prices have pushed up domestic inflation, which is expected to remain elevated through year-end and begin to ease in 2009, given projections of declining world fuel and food prices.

"Spending pressures in the run up to the July elections resulted in serious fiscal slippages and accumulation of unpaid claims (domestic arrears) in the first half of 2008. Capital expenditure was significantly higher than programmed, and there were some overruns on current expenditure driven by higher spending on social programs. Thus, fiscal performance fell short of program targets. In this context, the new authorities quickly developed a set of corrective measures, which the mission supports. These include issuing a finance circular to significantly reduce capital expenditures below budgeted levels, and bringing forward the cutoff date for new expenditure commitments. Some social spending programs are also being rationalized to ensure that the benefits are targeted to the most vulnerable groups. To ensure full cost-recovery pricing, the mission encouraged the authorities to reinstate soon the automatic fuel price mechanism, following missed adjustments since May 2008, and to restore the EC$3 per gallon specific tax.

"The mission agreed with the government on the importance of fiscal consolidation in 2009 and beyond to achieve the overarching objectives of fiscal and debt sustainability. The mission welcomed the planned introduction of the VAT; this is a major reform that will help widen the tax base and enhance revenues, as has been the case in neighboring countries. The authorities also plan to strengthen tax administration and efforts to collect tax arrears. On the expenditure side, the main challenges are to slow the pace of capital expenditure, rationalize social programs while protecting transfers to vulnerable groups, and moderate growth in the public sector wage bill. The reorganization in the Ministry of Finance, aimed at supporting strengthened economic and fiscal management, should enhance the quality of the 2009 budget preparation. Furthermore, the establishment of a Waste Reduction Unit and a Debt Management Unit will facilitate making savings on government spending, and developing a strategy to manage and reduce the high public debt.

"Progress on structural reforms has been slower than anticipated and meeting most of the structural benchmarks for the second review will be delayed. The authorities plan to move forward with an action plan to improve Grenada’s Doing Business Indicators, a Fraud Control Plan for customs, and new investment incentives legislation. On the latter, the new Investment Code under preparation will provide a clear and transparent framework for resident and non-resident investors. The government intends to use the findings of the Country Poverty Assessment (CPA), currently underway, to strengthen its strategy to reduce poverty.

"On the issue of Capital Bank International Ltd, the recent actions taken by the authorities should move the resolution process forward. They have revoked the bank’s license and, acting on the recommendation of the ECCB, reappointed a receiver. The receiver will make a recommendation to the Minister of Finance to either liquidate or reorganize the bank. By law, the Minister is required to petition the Court within 60 days to either liquidate or reorganize the bank.

"Overall, the new government has made a good start on credible efforts to strengthen implementation of the economic and structural reform program supported by the PRGF arrangement. IMF staff will continue to work closely with the authorities to assist them in such efforts. Discussions will continue in the next two months on a framework for the 2009 budget.

"The mission thanks the Grenadian government officials for their close cooperation and looks forward to a continued constructive dialogue on the economic challenges facing Grenada."