Grenada and the IMF
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Transcript of a Presentation and Press Conference |
on Grenada's 2005 Article IV Consultation
St. George's, Grenada
May 12, 2005
View a PDF of the presentation (378kb PDF file).
Mr. Antoine, Permanent Secretary, Ministry of Finance: Welcome to this press conference organized by the IMF. Before I hand it over, I'm pleased to take this opportunity to record the Government of Grenada's deep appreciation to the staff of the IMF for their yeoman service, quite frankly, in the last several months. They've worked with us through some very difficult issues facing us at this time.
Prior to Hurricane Ivan, Grenada enjoyed a very good working relationship with the IMF. But, frankly speaking, we have seen a very strong development in that relationship over the past eight months. In fact, we were noting only yesterday that we've had eight visits in eight months—five visits from the IMF to Grenada and three trips by the government to Washington D.C. This average of a trip a month is a clear indication of the kind of cooperation and collaboration and very close working relationship we have developed.
We are really and truly encouraged that we have friends overseas, and that at the IMF we have people who are working to help Grenada. Most of them you know because you will have seen them at the donors' conference last November. They were involved there, they have been working with us since, and they will continue to be involved with Grenada on a variety of issues. In addition to this technical assistance the IMF has actually provided financial assistance. Last November they gave us a soft loan of US$ 4.4 million; the interest rate is 0.5 percent. So the IMF has played its part.
Let me recognize Mr. Paul Jenkins, Senior Advisor in the Office of the Executive Director for Canada and the Caribbean countries at the IMF. His office, in other words, represents Grenada at the IMF. He came in for the final stages of these consultations and we're very happy to have him. The office has been very helpful in a number of areas, and particularly with the debt restructuring initiative. I'm also aware that we have two representatives from USAID here—very happy to see you; thank you for coming.
I also note we have the representative from ECCB, Mr. Morvin Williams, economist at the central bank; he has been involved as well with the IMF mission. I'd like to recognize the staff of the Ministry of Finance, who have worked very hard with the IMF for the last few days, and really and truly for months, on our fiscal effort. Finally, representative from the Government Information Service and ladies and gentlemen of the media, welcome.
As you will have seen from the press release, the IMF today concluded its Article IV consultation with Grenada. And, as they have done on past occasions, IMF staff would like to inform the media and others of their findings. So with these few words of thanks and welcome, let me turn it over the head of the mission, Ms. Ratna Sahay.
Ms. Sahay, Assistant Director, Western Hemisphere Department, IMF: Thank you, Mr. Antoine, for those very kind words. Our staff has indeed worked very hard, motivated by a desire to help you overcome the deep problems you face and, equally, by the close relationship we have developed with you and your team. We stand ready and available to help you in any way we can. Let me acknowledge the members of the team who have worked so hard: Rishi Goyal, the desk economist for Grenada; Harald Finger, who has been helping particularly with assessments of the debt strategy; Werner Keller, who has been giving additional help on Grenada. With that let me hand it over to Prakash Loungani, the mission chief, for the presentation of our preliminary findings.
Mr. Loungani, Mission Chief, Grenada: Thank you. The Article IV mission is like an annual health check up. It's a discussion with a country, roughly once a year, of its economic situation and an assessment of the polices it has in place.
On the economic situation, let's begin with the impact of Ivan. We should not lose sight of the scale of the disaster. The damage was 200 percent of annual income. IMF research has found that if you look at all the natural disasters over the last thirty years before Ivan, the damage on average was about 2 percent of GDP. So Ivan was 100 times your average disaster. As we assess the extent of the recovery of Grenada and the challenges that lie ahead, we should not lose sight of what a tremendous blow the country suffered last September.
It's no surprise that the unemployment situation worsened. The NIS has estimated that about 8 percent of the labor force was displaced from their jobs in the immediate aftermath of Ivan. We think the unemployment rate probably increased to over 20 percent since it was starting already from a pretty high level of 12-13 percent. But of course since then some people will have gotten re-employed in the reconstruction sector and in other sectors such as fishing.
I think you will be aware that women are finding it more difficult to get reabsorbed into the labor force than men, because of the nature of the demand that is coming from the various sectors. USAID and other donor agencies, and the government, are aware of this problem. They are providing training to everybody, but particularly also to women, so they can get reabsorbed in the labor force.
You will also be aware that Ivan placed the government in a difficult fiscal situation. But Grenada has received strong support from the international community, through the donors' conference that the Permanent Secretary mentioned for instance. It was through the efforts of your own government, and the support of the international community, that the financing gaps—a concept that I will explain more fully in a minute—that we saw in 2004 were filled. In November we told you, and the government told you, that it faced huge financing gaps. But those were filled in 2004 through a combination of self-help from the government and people of Grenada and help from the international community. In addition to the fiscal effort and the support from the donor community, a third channel was the forbearance shown by your creditors.
Let's move on to the situation for 2005 the way it looks to us. You will have seen that the government introduced in the 2005 budget some very difficult measures to yield revenues to the tune of EC$25 million. The reason is that the revenue base remains quite weak and the government has to undertake huge reconstruction expenditures. It is also a fact that there were contractual obligations that could not be worked around, so that the wage bill is projected to increase by about EC$12 ½ million this year. So between the capital expenditures, the wage bill, and the still-recovering sources of revenue, the government faces a fiscal deficit of EC$72 million, which is about 6 percent of the country's annual income.
Now let me explain the difference between the fiscal deficit and the financing gaps. We compute the financing gaps in this way: We look at the sources of revenue that the government has, the grants that it has attracted. We look at its expenditure needs. And when we subtract expenditures from revenues and grants that gives us the fiscal deficit. Then we look at the sources of financing to see if the government has ways of financing this deficit. We subtract those off. The financing gap is what's left over above and beyond those financing sources.
So these financing gaps are like the unmet needs of the government that it has to find some way of financing over the course of the year. The situation remains quite difficult. This year we project that the government will have needs of EC$50 million that it will have to somehow finance from various sources. Next year there are unmet demands on the government of EC$150 million. And we see that the situation keeps getting progressively difficult in the coming years.
Now, what has led to this situation [of huge financing gaps]? Of course, Hurricane Ivan is one big factor. But there are others as well. So let's take stock to see what has been happening in the last few years. That is part of what we do in an Article IV consultation. We're doing a health check-up so we look at the behaviors and past events that can account for the present health of the country.
One factor that has placed the economy in a very difficult position is that average growth has been low in the last few years—in fact, on average, growth has been zero over the last few years. That's because the economy has been on a roller coaster as a result of many adverse shocks—9/11, Tropical Storm Lili, and then Hurricane Ivan. This is a far cry from the high growth that Grenada enjoyed in the mid-1990s of 6 percent.
In addition, some decisions have been made on the revenue side that have made the situation difficult. One is that the government has foregone huge amounts of revenue from tax concessions. We think that about EC$175 million a year have been given up in recent years in revenue as a result of all the tax concessions.
The other thing that has also put the government in a tough spot is that retail fuel prices have remained fixed in Grenada, as indeed elsewhere in the region, at levels that are quite low. In Grenada, until the recent proposal to increase by a dollar, retail prices had remained fixed for four years at EC$7.50 an imperial gallon. And this is a period over which world oil prices went up by 50 percent. What that meant is that the government was giving up a lot of revenue. The tax rate on fuel imports was on the order of 30 percent prior to 2000, but now it has dwindled to zero. So the government has to try to recoup some of the lost revenue from fuel imports.
On the expenditure side, the wage bill has grown quite dramatically. The wage bill has grown faster than inflation. And it has grown faster than in the average growth of incomes in the economy, that is to say, it has grown faster than GDP.
So between the foregone revenues from various sources and the increased expenditures, what has happened is a situation where the stock of public debt has grown quite markedly. At the end of 2004, the stock of debt was 130 percent of the country's annual income. This debt represents about EC$15,000 per Grenadian. So that's quite a lot of a lot of debt for people to bear. And, as you know, it's not just in Grenada but elsewhere in the ECCU region that rising debt levels are a problem.
How will all these problems be fixed? We'll get to that in a few minutes but first let's assess if the global environment will be helpful or a hindrance to Grenada's recovery. There are some factors that are going to make things difficult. One is that world oil prices are projected to remain high. Another factor, as you will be aware, is that countries in the Caribbean region are facing increasing competition from low-cost producers—China, India and many other developing countries. So this restricts can the kinds of sectors Grenada can enter in its attempt to generate growth.
And, third, even though in the post-Ivan period Grenada attracted tremendous amounts of aid, the fact of the matter is that foreign aid to this region has been declining. It has actually halved over the more recent period compared to the twenty years before that. And that's because aid is being redirected, to say countries in Africa, where donors feel there is a very serious poverty problem that needs urgent attention.
So all these are things that are going to make Grenada's recovery very difficult. So how can we move forward? That is what we have been discussing with people here—with the Ministry of Finance in particular, but also with the Prime Minister and members of Cabinet. We also met the members of the Opposition yesterday and we met the labor unions today. So we're really trying to get a well-rounded picture of what Grenadians think the solutions should be.
In the next couple of years, growth will depend on how well the reconstruction goes. This year is going to be pretty soft because while you have a booming construction sector, agriculture is quite depressed and tourism is just starting to get back on its feet. You have the different sectors pulling in different directions, so on average we expect that growth will only be about 1 percent a year. Next year is when we hope that all sectors will be pulling in the same direction. The private sector will have recovered and there will still be a boost from reconstruction. So we're projecting very strong growth of 7 percent next year.
Beyond that, we're projecting that, with growth-enhancing measures, Grenada can enjoy growth of 4 to 4 ½ percent a year, which is a reasonable medium-term trajectory we think.
Now how can it realize this growth potential? In the near-term, as I said, reconstruction has to be carried out in an efficient manner. But looking beyond that, where will the medium-term growth come from? The World Bank, as you may know, has done a very comprehensive study of the growth prospects for the OECS region. Some of the factors that they have mentioned are among those we've been talking about with the government.
• First, how can the investment climate in Grenada be improved?
• Second, what kinds of service sectors can Grenada go into which would enhance their contribution to growth?
• Third, can you strengthen linkages between agriculture and tourism? One example would be that farmers grow crops that are needed by the tourist industry.
• And fourth: migration rates from Grenada are extremely high. Over the last thirty years, seventy percent of skilled people have left the island. Of course, they do contribute through remittances but migration on this magnitude depletes the skill base to an extent that it makes it difficult to have sustained growth. So that's how we see the growth picture evolving and the challenges.
On the fiscal side: there are the financing gaps I mentioned before. The government needs to find ways of raising EC$70-90 million per year from 2006 onwards. To address this, we have discussed with the government their intention to put together an economic plan that will cover this five-year period. It will be a comprehensive plan that will gather together in one place all the reforms that are already going on in different areas. It'll put them in a very systematic framework and lay out explicit targets of what can be achieved on the fiscal side, on the growth side.
This is something that the government already had in mind and was trying to put together pre-Ivan. The attempt should be revived in this post-Ivan situation and we would be very happy to work with them to develop this plan.
The situation is so difficult that it will require all the elements of Grenadian society to come together and come to a consensus on how they can provide to their government the help that it needs. That's why we've been meeting the Opposition and the labor unions, in addition to meeting the government, to see what is a common core of reforms that people agree on.
Now there are specific fiscal measures that we have discussed with the government—these are either items that are already on the government's agenda or items that, drawn on the basis of my presentation thus far, the IMF would like to recommend.
• First, given the huge revenue losses from tax concessions, we think that consideration should be given to having an open investment regime, which would over time phase out these tax concessions. A more transparent regime in which there isn't so much discretion in who gets what and where concessions are quite limited in duration and amount.
• Second, the government has already indicated that it will begin a process through which it will restore the tax collections it used to get from fuel imports. Pump prices are going up a dollar and the government has already announced that it will put in place a mechanism whereby prices will be flexible and adjust toward world oil prices.
• Third, there is lot of room for improvements in collections of taxes and fees, which we have discussed with the government.
• And, finally, one medium-term step, which was pushed back because of Hurricane Ivan, is to introduce the value-added tax.
Now on the expenditure side:
• First, we recognize that the country has suffered a tremendous blow from Ivan and it has to go through a period of enormous reconstruction. It has to incur extraordinary levels of capital expenditures. But nevertheless we feel that the absorptive capacity, the implementation capacity, of line ministries may be limited. Of course, the Agency for Reconstruction and Development (ARD) is trying to raise the implementation capacity of the ministries but that is not going to happen right away. It may also be that you have to keep track of how much financing is coming in. So there is scope we think of carrying out capital expenditures at a measured pace.
• Second, I mentioned is that the wage bill has gone up faster than inflation and faster than the average growth of the economy. So keeping the wage bill aligned to inflation and productivity growth—limiting the wage bill—would really make a very welcome contribution to the nation's fiscal effort and also to growth.
• Third, controlling expenditures on goods and services. This is a matter of detail, of going line by line through the budget and seeing where there is wasteful spending that could be controlled. And the Ministry of Finance indeed has the intention of doing that.
The medium-term plan should also outline steps to reduce the vulnerability to adverse shocks:
• The financial sector seems to be holding its own so far. Banking sector indicators were quite strong relative to the region pre-Ivan, and that has given the sector some room to manage without any stresses emerging. The insurance monies that people provided a cushion. But we think that a very close eye should be kept on the health of the banking sector because those stresses could emerge. If people don't get reabsorbed into the labor force quickly, they will have pressures on them. So the health of the banking sector could be monitored very closely, as indeed should the health of the non-bank financial sector—insurance companies, credit unions and so on.
• There has to be improved disaster-preparedness and mitigation. I don't need to stress this. With the coming of the rains over the past few weeks, and with the approach of the hurricane season, we sense that there is anxiety among the people on what has been done to improve disaster preparedness.
• Third, reducing debt. The government does have a debt strategy, it has appointed professional advisors with the intent of working out a cooperative agreement with its private creditors, and with other creditors, that would allow it to reduce the debt to what would be much more safer levels.
I mentioned earlier that the external environment is not generally favorable. But there is one factor that is favorable. The global growth outlook, rising oil prices and interest rates notwithstanding, is favorable over the next few years. Grenada's growth, particularly of its tourist sector, is very closely tied to how the world economy is doing. So this gives Grenada hope, and makes it an opportune to put in place its medium-term plan that the government is contemplating and which we would be very happy to help them with.
With that, we would be happy to take your questions.
Question & Answer Session
Questioner: On the extent of migration, is Grenada in the middle of the pack?
Ms. Sahay: Guyana is closer to ninety percent. St. Lucia is lower, forty to fifty. So countries like Jamaica and Grenada are in the middle. But the Caribbean region as a whole has the highest migration rate in the world.
Questioner: When you say you met the opposition, you mean members of the NDC?
Mr. Antoine: Yes, [they met the] Parliamentary Opposition.
Questioner: Isn't it the NDC that went in for an IMF structural adjustment program in the early 1990's?
Ms. Sahay: Really? I wasn't aware...
Questioner: You see you're all so young compared to me ...
Mr. Antoine: Wait, let me clarify. There was an adjustment program prepared by the Government of Grenada in 1992-94 in close collaboration with the CDB, the ECCB and the IMF. They were all aware of it, they were all involved, they all supported it. But what is your question?
Questioner: I don't think a wage freeze was part of that adjustment program ...
Mr. Antoine: I think there was a wage freeze ...
Questioner: On that let's agree to disagree. My point, Timothy, uh Mr. Antoine, is that we have been asked to give up 5 percent of our incomes. With me, I'm a freelancer, I don't know how you're going to calculate 5 percent of my income, which is up and down from month to month. And the same with all the lawyers and the doctors and all those who don't keep receipts and so on. Plus I would like to suggest to you that a lot of us are already making a lot of sacrifices. We're rebuilding our homes and our homes are part of the country. When I rebuild my house, I'm rebuilding my country. And I feel hurt that we are not regarded as making a contribution.
Questioner: Can you explain what you mentioned about the change in the growth rates? The government says there was growth in the years before Ivan.
Mr. Loungani: You did have growth in some years over this period. But it has been uneven. Because of the declines in growth following the shocks—9/11, Tropical Storm and Hurricane Ivan—the average turns out to be zero. Just prior to Hurricane Ivan we had been projecting growth of positive 4 percent. We ended up with negative 3 percent. So it was a big swing.
Ms. Sahay: In many of the other OECS countries growth had already slowed down in the second half of the 1990s. What is unusual about Grenada is that it enjoyed high growth—nearly six percent compared with about three percent for the OECS as a whole.
Questioner: So the growth in the mid-1990s was cosmetic?
Mr. Loungani: I would not say cosmetic, because the decline may have been a matter of the sequence of the three shocks Grenada suffered since 2000. Or it's possible that growth would have slowed anyway but perhaps not to zero on average.
Questioner: Will your call for reducing tax concessions come in the way of the preparations for the World Cup in 2007? Most of the governments in the region are giving concessions as part of the strategy for getting the games.
Mr. Loungani: That's better directed to the government.
Mr. Antoine: Yes, the IMF cannot answer that question. The government has said very clearly that it is committed to hosting World Cup 2007 and it will do what it takes, starting with the rebuilding of the National Stadium. This requires putting in the requisite infrastructure in place, whether it is hospitals, transportation, security, all the other things that have to be done. The main area of concessions would really be the hotels, which enjoy concessions anyway and have been granted concessions to rebuild in the wake of Hurricane Ivan. So that will not be affected.
But there are other areas of the economy where the government has been granting concessions where we'll have to take a very careful review and, frankly, scale down. The truth is that this is really a call to intensify what the government has already started. For instance, you might be aware that several years ago St. George's University enjoyed 100 percent concessions on nearly everything. Today that has been reduced. They pay taxes, 50 percent on some things, and what they get wide relief on is a very narrow range of goods. Similarly, Cable & Wireless—they now pay for their imports and so on, whereas before they were getting 100 percent relief. So it is proper, it is fitting, it is right that as a firm develops, as an industry develops, that it should pay its fair share. When you graduate from an infant to an adult, you are expected to take on your contribution to the taxes of the country. So the call is for us to reduce these holidays [from taxes], to be more selective with how we give these concessions. And grant them to sectors and activities that we particularly want to grow rather than give them out to everybody. So perhaps you give concessions to agriculture but you don't give the same amount to the entertainment industry because it doesn't have the same relative importance in the growth of the economy. So it is a call and a very important one that the government has to heed.
Questioner: Do the statistics on wage increases include the wages of consultants?
Mr. Loungani: I take it you are referring to people hired under the so-called `line 340'? No, those people are not included in here—this is the wage bill outside of that. But it does have both the contractual wage increase for each year that was agreed with the unions and also the growth in the wage bill that comes from increments—when people get promoted or go up the job scale they get higher wages.
Questioner: Do your projections for 2007 growth include the impact of the World Cup?
Mr. Loungani: That's a good question. Our forecasts for this year and next year are based on the scenarios for the various sectors that I described. Beyond that, we are going with what we regard as a reasonable medium-term trajectory. We have not done the kind of analysis that would be required to analyze the boost that might be imparted from the World Cup.
Questioner: So it's a worst case scenario?
Mr. Loungani: I wouldn't call it a worst case scenario. I would just say we have not taken a strong view at the moment on the growth impact of the World Cup.
Questioner: You mentioned the 20 percent unemployment. With tightening immigration laws, will it not become worse?
Ms. Sahay: Yes, the tightening of laws could make it more difficult. But our suggestion to governments throughout the region is to do more to realize the domestic growth potential of the countries. We see that tourism in these countries is not fully developed, we see that there are many sectors within services that can be developed, we see the potential for increased linkages between the agriculture and the tourism sectors. So we see so many areas where growth can take place and at the same time we hear of skill shortages and youth unemployment. So why is there a mismatch? Part of the answer, and this is what we're recommending to governments, is a reorientation of education so that after high school there is more vocational education that can suit the needs of the region. And this can be done at the regional level—the OECS or the Caribbean level. And the other thing we are recommending is that the governments should attract not just remittances but investments by their own people. This happens in many other parts of the world. It's just that the investment regime has got be more transparent, more conducive to making that happen.
Question: You mentioned the high level of the debt. What is being done about that?
Mr. Loungani: As I mentioned, the government is embarked on a fairly well-defined process. After Hurricane Ivan, the government immediately realized that the debt was unsustainable under the circumstances of the severe damage the country had suffered, and issued a press statement to that effect. In January this year the government appointed professional financial and legal advisors and it has over the last few months been working closely with those advisors to work out a strategy such that it can reach a very cooperative deal with its creditors, both commercial and official. We fully support what the government has been doing on this front. What I understand from the Finance Minister and the Permanent Secretary is that the timetable is to reach an agreement in the next few months. We don't know how the deal will work out, what the precise details will be, but there is hope at this point that if a cooperative deal is struck that it move Grenada's debt not quite out of the woods but to a much safer place than where you are at present.
Questioner: So it would bring debt down to EC$10,000 instead of EC$15,000 a person?
Mr. Loungani: That's a very good question. I honestly can't give you a numerical answer to that. But the process is moving along.
Ms. Sahay: Let me add to the response. What Prakash mentioned is one aspect of the debt strategy, that is, directly appealing to the creditors, both commercial and official, for debt relief. This is a very complicated negotiation, you need highly skilled people to carry it out. The government has hired the top people in the profession. And they appealed to the donors to pay for the fees for these advisors, and USAID and the UK are doing that.
But the main point I wanted to make is that there are also other ways in which the government can reduce debt. The first is fiscal measures: reducing government borrowing so you reduce the debt. You can have fiscal surpluses, for instance. A second way is privatization. Many developing countries own enterprises that are better off belonging in the private sector. Grenada has done better than many other countries in this regard. When you privatize, you can use the proceeds to retire the debt. The third way is to implement measures to improve growth in the economy. The fourth is getting new money from donors rather than borrowing.
Questioner: What is the opposition's view of the situation?
Mr. Loungani: We've been talking to the Opposition, to the trade unions, to civil society—I see we have one of our friends here from the Grenada National Organization of Women who we spoke to—and to people we run into in the street. What has impressed us the most is that there is a realization that the government is in a difficult situation, that it is your government, and that sacrifice is needed. So there is a consensus on the need to do something, for people to contribute to the recovery and reconstruction of their own country. With the Opposition, I would not want to put words in their mouth, but I think they do agree with the need for a medium-term framework. A lot of people say: We realize the government is doing a lot but we don't get the big picture. How is it all going to fit together? What will the steps look like?' People would like to see what the targets are so that you can hold the government somewhat accountable. I think that kind of realization is there and that kind of support for these difficult steps is there. And I think that is there among the unions as well.
Ms. Sahay: I want to add that this is a time when a lot of support is still needed from outside the country. One of the things the external donors are saying is they will provide some financing but there has to be some adjustment by Grenada also. And it's not just the government, it's also the people. This was something we felt was quite well understood by the people of Grenada. We had very productive discussions with the Opposition and the unions. Many of the issues we're talking about here today is what we discussed with them as well. But what we think would be very helpful is for the various stakeholders to actually work together and for there to be better communication among them.
Questioner: What is your assessment of the Agency for Reconstruction and Development (ARD)?
Mr. Loungani: As the Permanent Secretary said, we've been here many times and we've had discussions with ARD on each of our visits. My own view is that it's very difficult to come to any judgment yet on the effectiveness of the agency. It was only launched formally on March 15 and it only coming up to a critical level of staffing. I know that the task it has been assigned of coordinating the recovery is an important one and the people are relying on it a lot. We have had very productive discussions with the staff there and they're working very hard. I know they are putting together a document of what they have done over the past few months and what their plans are over the period ahead.
Questioner: Well, in the concluding statement that you distributed you call for transparency and accountability of ARD. Why don't you say honestly state here what your position is?
Mr. Loungani: We have said that clearly in all our documents. At the time of the donors' conference, the government did say the ARD would be fully transparent and accountable. And in our concluding statement we do call for that. We're obviously not backing away from that—that's a given.
Ms. Sahay: In fact, we want to reinforce that point each time we come.
Questioner: Should the government place any emphasis on agriculture when it's a dying sector?
Mr. Loungani: There is room we think for strengthening the linkages between agriculture and tourism, which will remain the mainstay of the economy. Your hotel industry brings in tourists who have quite high expectations of the quality of food they will be served and it's possible that your local agriculture can meet that need.
Questioner: Are you trying to change the negative perception of the IMF in the region?
Mr. Loungani Well, I certainly hope so. This [press conference] is part of changing the perception. We hope we've succeeded.
Ms. Sahay: The IMF has changed over the years. There was a period of time, in the 1970s and 1980s, when the IMF was willing to take the heat on behalf of governments that wanted to take difficult measures but say that it was the IMF that made them do it. Over time, we have realized that is creating a problem for us. So today we are more likely to want to work with governments who are more openly committed to reform.
IMF EXTERNAL RELATIONS DEPARTMENT