## 1. Climate Resilience and the CCPA

## Source details

**Canonical URL:** [1. Climate Resilience and the CCPA](https://www.imf.org/-/media/files/publications/cr/2019/1grdea2019001.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2019/1grdea2019001.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2019/1grdea2019001.pdf.json)

---

### Economic and Political Context
- Growth averaged 5½ percent per year in 2014-18.
- Central government and government-guaranteed debt peaked at 108 percent of GDP in 2013 and is set to fall below the regional target of 60 percent of GDP this year.
- Without further policy progress, long-term growth is unlikely to exceed 3 percent.
- Key binding constraints: gaps in infrastructure, external sustainability, public sector efficiency, human development, emigration/brain drain, and susceptibility to natural disasters.
- Political and implementation challenges:
  - Government re-elected in 2018 controls the House of Representatives but faces pressures to augment public workers’ pension benefits and potential pressures for higher spending (health care, wage negotiations).
  - Improved fiscal position reduces appeal of fiscal prudence.
  - Implementation constrained by gaps and mismatches in public service quality and efficiency.

### Recent Developments (2017–early 2019)
- Activity and sectoral performance:
  - Activity expanded by 4-5 percent in 2017–18.
  - Tourism-related industries, including hotels and restaurants, and transportation grew by about 10 percent in 2018.
  - Estimated real GDP growth in 2018: 4.2 percent.
- Labor market:
  - Unemployment declined from 23½ percent in 2017 to 21¾ percent in mid-2018.
  - Youth unemployment remained particularly high but on a declining trend.
- Citizenship-by-Investment (CBI) inflows:
  - CBI inflows equaled 4½ percent of GDP.
- Inflation:
  - CPI growth continued to be under 1 percent in 2018 (year-average basis).
- Fiscal performance and debt:
  - Primary surplus increased to 6¾ percent of GDP in 2018.
  - Capital outlays subdued at 2¾ percent of GDP.
  - Government debt fell from 70 to 63½ percent of GDP in 2018 (excludes non-guaranteed debt of public enterprises of 3½ percent of GDP and the debt of PDV Grenada to Petrocaribe of some 11½ percent of GDP).
  - Arrears to three bilateral creditors about US$19 million, or 1.6 percent of GDP, remain to be regularized.
  - Authorities progressing with operationalizing a contingency fund for shocks and natural disasters.
  - Government’s average borrowing costs continued to fall.
- Early-2019 changes:
  - Top personal income tax rate and corporate income tax rate reduced from 30 to 28 percent starting from 2019; staff estimates a combined loss of 0.2 percent of GDP from these cuts.
  - 2019 Q1 fiscal surplus increased year-over-year despite tax cuts.
- External sector:
  - Current account deficit estimated to have fallen to 11 percent of GDP in 2018.
  - Imputed reserves increased from US$195 million to US$236 million.
  - Revisions to BoP data widened the external deficit by 3½-8 percent of GDP for 2014-18 relative to earlier estimates.
- Financial sector:
  - Bank credit growth gained momentum in 2017-18; credit union lending grew by 12 percent in 2018.
  - Banks have solid capital buffers; NPL ratio fell below 2½ percent in 2018.
  - In late 2018, Scotiabank announced sale of its regional banks to Republic of Financial Holdings Limited (RFHL).

### External Position and Competitiveness
- External assessments (Annex II):
  - EBA-lite current account model: cyclically adjusted current account 2 ¾ percent of GDP lower than the current account norm, implying a 7 percent REER overvaluation.
  - External sustainability approach: suggests a real depreciation of 22 percent needed to maintain NIIP at the current level.
  - Real effective exchange rate model suggests a 30 percent undervaluation (approach less reliable due to short data series).
  - International reserves are at 250 percent of the IMF’s adequacy metric for credit-constrained economies.
- Policy implications:
  - Continue prudence in current public spending.
  - Channel increases in public investment to address critical infrastructure and resilience gaps.
  - Catalyze investment in renewable energy.
  - Boost the business environment to reduce costs in tradable sectors.
  - Contain economy-wide wage growth.

### Outlook and Risks
- Baseline assumptions:
  - Long-term potential growth of 2¾ percent.
  - Continued compliance with the FRL.
  - Minor tax cuts announced in the 2019 budget.
  - Modest progress on supply-side and structural fiscal reforms.
  - Internalizes average economic and fiscal cost of natural disasters (annual fiscal cost of natural disasters assumed at ½ percent of GDP).
- Projections (selected, percent):
  - Real GDP growth: 2017: 5.1; 2018: 4.2; 2019: 3.5; 2020: 2.7; 2021: 2.7; 2022: 3.2; 2023: 3.2; 2024: 3.0.
  - Inflation (percent, average): 2017: 0.9; 2018: 0.8; 2019: 0.8; 2020: 1.7; 2021: 1.9; 2022: 1.9; 2023: 1.9; 2024: 1.9.
  - Primary fiscal balance (percent of GDP): 2017: 5.7; 2018: 6.8; 2019: 6.2; 2020: 6.5; 2021: 6.6; 2022: 4.5; 2023: 2.5; 2024: 0.0.
  - Public sector gross debt (percent of GDP): 2017: 70.0; 2018: 63.5; 2019: 58.8; 2020: 53.8; 2021: 50.6; 2022: 48.3; 2023: 45.0; 2024: 44.2.
  - External current account balance (percent of GDP): 2017: -12.0; 2018: -11.2; 2019: -11.2; 2020: -10.2; 2021: -8.6; 2022: -9.1; 2023: -10.0; 2024: -9.9.
  - Credit to GDP ratio: 2017: 51.2; 2018: 50.0; 2019: 50.3; 2020: 50.3; 2021: 49.7; 2022: 48.9; 2023: 47.4; 2024: 46.4.
- Risk assessment:
  - Risks are two-way but on balance tilted to the downside.
  - External downside risks: U.S. growth prospects, retreat from international multilateralism, tighter global financial conditions.
  - Domestic upside scenario: use of fiscal space for productive investment and further tourism-related FDI.
  - Domestic downside scenarios include boosting spending without efficiency gains, loss of correspondent banking relationships, natural disasters, pension settlements or other spending that could breach the FRL, and adverse court judgment on Grenlec (GPP demanded repurchase estimated at 5.5 percent of GDP in 2016; matter in arbitration).

### Fiscal Policy Assessment and Recommendations
- FRL outcomes:
  - FRL has facilitated record budget surpluses and rapid debt reduction.
  - The government’s 3-year medium-term fiscal plan projects large primary surpluses through 2021; once public debt ratio reaches 55 percent of GDP, the FRL allows recalibrating the primary balance target to stabilize debt at that level.
- Policy guidance:
  - Next phase of FRL implementation should balance fiscal prudence with much-needed increases in productive spending.
  - Effective and prudent use of fiscal space is crucial to maximize productive potential and resilience to shocks and to address poverty alleviation.
  - Caution: using fiscal space to finance large-scale unproductive spending could fuel debt sustainability concerns.

---

### Grenada’s general infrastructure and resilience gaps are the main priorities to be addressed

### Infrastructure gap: findings and needs
- Public capital spending has been particularly low in recent years.
- Authorities’ assessments indicate a substantial maintenance gap due to cumulative underinvestment and lack of maintenance; future maintenance would increasingly involve rehabilitation and be costly.
- Broader under-investment exists in ICT, tourism, and transport infrastructure.
- Total infrastructure needs are estimated to be in the order of 5 percent of GDP annually.

### Climate-resilience gap: findings, needs, and financing
- Authorities’ national adaptation plan identifies needs for climate-related investment projects of 3 percent of GDP that are additional to those identified in the general infrastructure gap.
- Staff simulations and estimates:
  - Scaling up public investment by 3 percent of GDP annually for climate resilience projects alone is required (of which about 2½ percentage points would be at the central government level).
  - Financing additional insurance and self-insurance needs with total size of the estimated protection of around 10 percent of GDP.
  - Financing all core infrastructure and climate-related spending by debt could result in an upward public debt trajectory over the next decade.
- Recommendation: maximize grant support to safeguard other essential spending needs.

### CCPA key recommendations
- Implement mitigation measures (a modest carbon tax and/or feebates for cars).
- Scale up adaptation investment spending through 2030.
- Adopt a layered insurance approach for financial protection, including a dedicated contingency/saving fund.
- Improve government capacity in climate-related areas to enhance disaster preparedness, social resilience, and private sector response.

### Scenario analysis: policy trade-offs and outcomes
- Baseline scenario assumptions:
  - Modest reforms and capacity improvements; large fiscal expansion permitted by the FRL could result in spending on inefficient projects.
- Pro-active scenario assumptions and benefits:
  - Improve implementation capacity and accountability while using fiscal space to improve service delivery and address infrastructure and resilience objectives.
  - Staff simulations indicate higher payoff in terms of sustained growth under the pro-active scenario.
- Scenario definitions:
  - Baseline – current parameters of the FRL including a 3-year transition to Phase III; assumes modest implementation of the Public Sector Modernization Strategy and that general grant financing is sustained through 2024 before declining.
  - Pro-Active – assumes a more gradual 5-year transition period to Phase III, with significantly improved quality of capital spending, stronger implementation of the Public Sector Modernization Strategy, greater well-targeted social protection schemes, and improved revenue efficiency and unproductive spending savings.

### FRL: scope for amendment and priorities
- Suggested priorities:
  - Build further debt buffers by targeting a safer debt level below the FRL’s 55 percent of GDP trigger and fix ambiguities by opting for broader coverage (to include non-guaranteed SOE debt).
  - Strengthen analysis of fiscal risks including comprehensive assessments of public enterprises, PPPs, and other contingent liabilities.
  - Reframe the primary expenditure rule:
    - Option A: shift to a current primary expenditure rule (benefits but risks of circumvention; requires accountability and capacity improvements).
    - Option B: exempt specific resilience-related projects from the primary expenditure rule (carries risks and governance requirements).
  - Modest tweaks with limited risks:
    - (i) exempting local counterpart funding for grant financing from the rule;
    - (ii) allowing only concessional loans to finance rule exemptions for resilience projects;
    - (iii) allowing the spending rule to follow a pre-determined multi-year path instead of an annual ceiling based on prior-year spending.
- Advice: changes to the FRL should be carefully prepared with sufficient time for consistent and well-sequenced implementation and involve the Fiscal Responsibility Oversight Committee (FROC).

### Second-generation reforms: public sector efficiency, implementation capacity, inclusiveness
- Public service:
  - Implementation of the 4-pillar Public Sector Management Reform Strategy (2017-19) has lagged due to inadequate financial and human resource capacity.
  - Functional reviews and job analysis/evaluations critical for strategic staffing are mostly at initial stages; a functional review was completed only for the Ministry of Climate Resilience.
  - Important to set prudent wage-setting parameters for the 2020-22 cycle.
- Public investment management:
  - New procedure for project execution adopted in early-2019: project accounts management moved to the Treasury; responsibilities for project coordination and implementation shifted to the Ministry of Implementation.
  - Treasury aims to complete a registry of government’s physical assets by end 2019.
- Public enterprises (SOEs):
  - All 24 entities provided financial reports for 2018.
  - Second phase of tariff reforms for water and solid waste entities has started and should be completed in 2019.
  - PDV Grenada Ltd. is insolvent and authorities have sought legal advice on its status to devise a resolution strategy.
  - Commissioners and Chief Executive Officer for the Utilities Regulatory Commission were appointed in April, with the Commission expected to become operational by end-2019.
- Social assistance:
  - The SEED program added almost 500 beneficiaries in 2018.
  - Further enhancement depends on completion of the Country Poverty Assessment, which is delayed.
- Pensions:
  - Proposed measures include increases in social security contribution rates from 9 to 11 percent and a phased raising of the retirement age from 60 to 65.
  - Staff stressed persevering with reforms given unfavorable demographic trends and uncertain spill-overs from public sector pension benefit situation.
  - Illustrative scenario assumes pensionable age increases from 60 to 65 in gradual steps to be completed by 2030.
- Tax administration:
  - IRD’s arrears collections have averaged 1 percent of GDP annually from a stock of about 20 percent of GDP.
  - Recommendation: determine collectible amounts and set a time-bound period (3 years) for collections; upgrade IT systems at the IRD.

### Asset/liability and risk management recommendations
- Use improved fiscal situation to:
  - (i) regularize all remaining bilateral arrears;
  - (ii) fully operationalize the contingency fund to address natural disasters;
  - (iii) build insurance layering by optimizing CCRIF coverage and using other instruments for comprehensive risk management;
  - (iv) pre-pay expensive existing debt.

### Disaster Resilience Strategy (DRS): purpose and operationalization
- A comprehensive, country-led DRS could integrate mitigation, adaptation, and operational disaster response plans.
- Operationalization steps:
  - Seek inputs from all relevant stakeholders including government and private sector partners, official donors, and climate funds.
  - Embed key parameters in a quantified macroeconomic framework and synchronize with budget processes and documents.

---

### Financial Sector, Competitiveness, and Structural Reforms

### Financial sector policies and risks
- Rapid credit growth and systemic risk:
  - Rapid growth of lending by credit unions and ongoing changes in financial sector ownership and regulations warrant monitoring.
  - Oversight, data, and capital of credit unions need strengthening.
  - Concentration risks from the sale of Scotiabank should be monitored (the merged bank would have about one-half of banking assets).
  - Introduction of IFRS9 and new ECCB prudential standards warrants monitoring.
- Correspondent banking relationships (CBRs) and AML/CFT:
  - Grenadian banks have not experienced a significant loss in CBRs, but Scotiabank’s move could entail potential re-evaluation of existing relationships.
  - Grenada was removed from EU’s grey list of tax havens, but its CBI program is listed by the OECD among schemes posing a potential high-risk to the integrity of the Common Reporting Standard.
- Regulatory recommendations:
  - Raise the institutional capital ratio for credit unions from 7 to 10 percent through a phased approach.
  - Issue regulations on asset classification and provisioning for credit unions; continue and extend regular stress tests to insurance companies.
  - Strengthen capacity of the local regulator and improve cross-border coordination with the ECCB and ECCU local regulators.

### Supply-side reforms and competitiveness
- Key reform areas:
  - Tourism: accounts for a quarter of the economy; potential to increase contribution via stronger links with other sectors.
  - Energy: nearly 99 percent of Grenada’s energy is sourced from imported fuel; wind, geothermal, and photovoltaic projects on hold pending operationalization of regulations to the 2016 electricity supply act.
  - Trade facilitation: simplify trading and registration procedures; accelerate implementation of the WTO Trade Facilitation Agreement.
  - Labor markets: high unemployment among the less-educated; need to upgrade education and active labor market policies, including vocational and ICT training and employment matching services.

### Governance, statistics, and long-term planning
- Statistics priorities: (i) extended coverage of the public sector; (ii) compiling pre-2014 BOP data under BPM6; (iii) updating income distribution data (not available since 2008); (iv) compiling timely quarterly GDP.
- Long-term planning: support Grenada’s forthcoming 2020-35 development plan with realistic medium-term plans to operationalize progress and costing estimates.

---

### Debt, DSA Findings, and Contingent Risks

### Definition and coverage
- Public debt defined as central government debt (including arrears on principal and interest), overdue membership fees to international organizations, and government-guaranteed debt.
- Non-guaranteed debt of public enterprises estimated at around 15 percent of GDP, including 11½ percent of GDP for the Petrocaribe arrangement.
- Public debt fell from 108 percent of GDP in 2013 to 63½ percent of GDP in 2018.
- Arrears of some US$19 million owed to non-Paris Club official bilateral creditors remain to be regularized.

### Debt portfolio characteristics (2018 developments)
- Average time to maturity increased from 8.2 to 9.0 years in 2018.
- Average time to re-fixing increased from 7.8 to 8.6 years in 2018.
- Average effective interest rate on public debt declined from 3.5 to 3.0 percent in 2018.
- Share of multilateral debt increased by 4.6 percentage points during 2018.

### DSA baseline and stress-test outcomes (selected)
- Current account deficit would average around 10 percent of GDP in the medium term.
- Gross external debt and public debt projections (selected series, percent of GDP):
  - External debt (nominal): 2016: 125.7; 2017: 117.4; 2018: 108.0; 2019: 106.6; 2020: 101.8; 2021: 98.8.
  - Public sector debt: 2016: 81.6; 2017: 70.0; 2018: 63.4; 2019: 58.8; 2020: 53.8; 2021: 50.5.
- Stress tests:
  - Exports shock: PV of debt-to-GDP reaches 73.5 percent in 2021 (33.5 percentage points above its threshold).
  - Natural disaster shock (assuming a 10 percent of GDP impact and follow-on interactions) raises PV debt-to-GDP to 53.7 percent in 2029.
  - Tailored tests show large breaches under export and natural disaster shocks.
- Conclusion: Grenada remains in external debt distress due to unresolved arrears, but debt appears sustainable under baseline; full regularization of arrears would tangibly improve DSA rating.

### Portfolio risks and debt management recommendations
- Portfolio risk profile:
  - Average time to re-fixing: 8.6 years; 21 percent of the portfolio is subject to a change in interest rates in one year.
  - Average time to maturity: 9 years.
  - Foreign exchange risk moderate because most foreign currency debt is denominated in U.S. dollars to which the EC dollar is pegged.
- Recommendations:
  - Fully regularize external arrears.
  - Maintain FRL’s rules-based framework.
  - Pursue structural fiscal reforms and further improve debt management capacity.
  - Broaden debt coverage to include non-guaranteed debt of public enterprises.

---

### Public Service Management Reform Strategy (PSMRS) and Pensions

### PSMRS status and implications
- Implementation has been slow; key reforms are not expected to be completed before 2021.
- Main constraint: inadequate financial and human resource capacity.
- Functional review completed only for the Ministry of Climate Resilience; no implementation of recommendations yet.
- Human resource management information systems are about 40% operational.
- Training & Development Plan anticipated to be drafted in 2019 with implementation to start in 2020.
- Outstanding key items: performance management systems, manpower management function, job evaluations, payroll audits.

### Pensions: background, MoU, and fiscal scenarios
- MoU guarantees replacement rates of 70 percent after 26.7 years of service to “established” public workers hired between 1985 and 2018.
- Fiscal impact scenarios:
  - If government’s position prevails: extra fiscal costs around ¼ percent of GDP in the initial few years.
  - If unions prevail: extra annual costs could quickly approach 1 percent of GDP or even top that amount.
  - Staff long-term projections: cumulative cost of the MoU’s additional benefits could be around 20 percent of GDP spread over some 50 years.
  - Unions’ scenario of waiving the retirement age of 60 could augment cumulative cost by up to 10 percentage points of GDP.
- Recommendations:
  - Comprehensive pension reform based on full costing and fair burden-sharing across cohorts.
  - Apply parametric reforms to both public and private segments; raise pensionable age for public employees.

---

### Monitoring of Credit Unions and Growth-at-Risk (GaR)

### Credit unions
- Study includes credit growth data only for banks because credit union data series are not sufficiently long.
- Likely that credit growth of credit unions affects future growth similarly to bank credit growth.
- Recommendation: monitor credit growth of both banks and credit unions and add credit union data to analysis when longer series become available.

### Growth at Risk (GaR) key findings
- Data period: 2001-17 quarterly; quarterly GDP available only from 2006 and estimated where missing.
- Predictors partitioned into: (i) credit aggregates; (ii) financial soundness of domestic banks; (iii) external real conditions; (iv) global financial conditions; (v) lag of real GDP growth; and (vi) incidence of natural disasters.
- Regression results:
  - Favorable external real conditions forecast favorable real GDP growth.
  - High credit growth forecasts negative real GDP growth in the short and medium term.
  - Forecasting power of global financial conditions is limited.
  - Natural disasters predict somewhat higher real GDP growth in the short term, but effects are small and not statistically significant.
- Monitoring implication: credit growth of both banks and credit unions should be monitored carefully.

---

### Key Indicators and Projections (selected figures)
- Development indicators and demographics:
  - Rank in UNDP Human Development Index 79 (out of 179 countries) (2016).
  - Infant mortality rate per '000 births (2016) 9.9.
  - Adult illiteracy rate in percent (2004) 4.
  - Life expectancy at birth in years (2014) 73.
  - Poverty headcount index (2008) 38.
  - GDP per capita in US$ (2018) 10,950.
  - Unemployment rate (2018) 21.7.
  - Population in millions (2018) 0.11.
- Real GDP annual percent change:
  - 2014: 7.3; 2015: 6.4; 2016: 3.7; 2017: 5.1; 2018: 4.2; 2019: 3.5; 2020: 2.7; 2021: 2.7; 2022: 3.2; 2023: 3.2; 2024: 3.0.
- Public debt (incl. guaranteed) (percent of GDP):
  - 2014: 101.8; 2015: 90.1; 2016: 81.6; 2017: 70.0; 2018: 63.4; 2019: 58.7; 2020: 53.7; 2021: 50.6; 2022: 48.3; 2023: 44.9; 2024: 44.2.
- Current account balance (percent of GDP):
  - 2014: -11.6; 2015: -12.2; 2016: -11.0; 2017: -12.0; 2018: -11.2; 2019: -11.2; 2020: -10.2; 2021: -8.6; 2022: -9.1; 2023: -10.0; 2024: -9.9.
- Imputed reserves (months of imports):
  - 2014: 3.7; 2015: 4.3; 2016: 4.0; 2017: 3.6; 2018: 4.1; 2019: 4.1; 2020: 4.0; 2021: 3.8; 2022: 3.6; 2023: 3.6; 2024: 3.6.

---

### Staff appraisal — key findings and recommendations
- Growth and risks:
  - Economy continues to grow robustly; tourism and construction sustain solid GDP growth, but unemployment remains high, particularly among the young.
  - Focus on making growth more sustainable, resilient, and inclusive.
- Value of the FRL:
  - Adherence to the FRL has incentivized prudent expenditures and impressive debt reduction without impairing high growth.
  - Effective and prudent use of fiscal space is crucial amid pressures for other spending.
- Infrastructure, resilience, and financing needs:
  - Resilience-related public investment need of up to 3 percent of GDP annually over the next 10 years.
  - Maximize concessional external financing and use domestic resource mobilization to back-stop progress.
- Enhancing fiscal framework and expenditure quality:
  - Options exist to reframe the primary expenditure rule to create space for resilient investment, but improved procedures and classification criteria should precede reframing.
  - Debt-financed investment projects not meeting key efficiency and cost-benefit criteria should await improvements in implementation capacity.
  - Target safer debt levels below the FRL’s ceiling to protect fiscal position from shocks.
- Fiscal structural reforms and public service capacity:
  - Ambitious fiscal structural reforms needed to improve spending quality, implementation capacity, and mitigate fiscal risks.
  - Forcefully address delays in implementing the 2017-19 public service reform.
- Financial sector and AML/CFT:
  - Monitor imbalances from growing property markets and proliferation of non-bank intermediaries.
  - Strengthen capacity and coordination of the local regulator with ECCB and ECCU peer regulators.
  - Match rapid expansion of credit unions with strengthened oversight, data, and capital.
  - Ensure strict compliance with AML/CFT to maintain Correspondent Banking relationships.
- Supply-side and competitiveness reforms:
  - Close doing-business gaps through digitalization and reduce export/import costs.
  - Advance sectoral reforms in tourism and renewable energy.
  - Improve labor market institutions, education, and training programs.
- Integrated strategies, resilience, and statistics:
  - Use strategy documents, including the 2020-35 Development Plan, to build resilience with realistic short-to-medium-term plans.
  - Update social data and improve statistics for inclusive growth policy design.
  - Require improved economic governance and better coordination between government agencies.

_Source: IMF staff report excerpt (content unit 1grdea2019001)._

### 1. Climate Resilience and the CCPA ______________________________________________________________ 11

### 1. Climate Resilience and the CCPA

### Economic and Political Context
- Grenada’s economic performance (2014–18) featured high growth and falling debt driven by fiscal and structural reforms under the 2014-17 ECF arrangement.
- Growth averaged 5½ percent per year in 2014-18.
- Central government and government-guaranteed debt peaked at 108 percent of GDP in 2013 and is set to fall below the regional target of 60 percent of GDP this year.
- Constraints on long-term potential:
  - Without further policy progress, long-term growth is unlikely to exceed 3 percent.
  - Key binding constraints: gaps in infrastructure, external sustainability, public sector efficiency, human development, emigration/brain drain, and susceptibility to natural disasters.
  - Need for “second-generation” reforms to make growth more sustainable, resilient, and inclusive.
- Political and implementation challenges:
  - Government re-elected in 2018 controls the House of Representatives but faces pressures to augment public workers’ pension benefits and potential pressures for higher spending (health care, wage negotiations).
  - Improved fiscal position reduces appeal of fiscal prudence.
  - Implementation constrained by gaps and mismatches in public service quality and efficiency.

### Recent Developments (2017–early 2019)
- Growth and sectoral performance:
  - Activity expanded by 4-5 percent in 2017–18.
  - Tourism-related industries, including hotels and restaurants, and transportation grew by about 10 percent in 2018.
  - Estimated real GDP growth in 2018: 4.2 percent.
- Labor market:
  - Unemployment declined from 23½ percent in 2017 to 21¾ percent in mid-2018.
  - Youth unemployment remained particularly high but on a declining trend.
- Citizenship-by-Investment (CBI) inflows:
  - CBI inflows equaled 4½ percent of GDP and supported growth through FDI and financing of public projects.
- Inflation:
  - CPI growth continued to be under 1 percent in 2018 (year-average basis).
- Fiscal performance:
  - Primary surplus increased to 6¾ percent of GDP in 2018.
  - Capital outlays subdued at 2¾ percent of GDP due to low execution of grant financing and project implementation bottlenecks.
  - Government debt fell from 70 to 63½ percent of GDP in 2018 (this measure excludes non-guaranteed debt of public enterprises of 3½ percent of GDP and the debt of PDV Grenada to Petrocaribe of some 11½ percent of GDP).
  - Arrears to three bilateral creditors about US$19 million, or 1.6 percent of GDP, remain to be regularized.
  - Authorities progressing with operationalizing a contingency fund for shocks and natural disasters.
  - Government’s average borrowing costs continued to fall.
- Early-2019 developments:
  - Top personal income tax rate and corporate income tax rate reduced from 30 to 28 percent starting from 2019; staff estimates a combined loss of 0.2 percent of GDP from these cuts.
  - 2019 Q1 fiscal surplus increased year-over-year despite tax cuts.
- External sector:
  - Current account deficit estimated to have fallen to 11 percent of GDP in 2018.
  - Imputed reserves increased from US$195 million to US$236 million.
  - Revisions to BoP data widened the external deficit by 3½-8 percent of GDP for 2014-18 relative to earlier estimates.
- Financial sector:
  - Bank credit growth gained momentum in 2017-18; credit union lending grew by 12 percent in 2018.
  - Banks have solid capital buffers; NPL ratio fell below 2½ percent in 2018.
  - Bank lending cycle turned positive in 2017-18.
  - In late 2018, Scotiabank announced sale of its regional banks to Republic of Financial Holdings Limited (RFHL).

### External Position and Competitiveness
- External assessments (Annex II):
  - EBA-lite current account model: cyclically adjusted current account 2 ¾ percent of GDP lower than the current account norm, implying a 7 percent REER overvaluation.
  - External sustainability approach: suggests a real depreciation of 22 percent needed to maintain NIIP at the current level.
  - Real effective exchange rate model suggests a 30 percent undervaluation (approach less reliable due to short data series).
  - International reserves are at 250 percent of the IMF’s adequacy metric for credit-constrained economies.
- Policy implications to address competitiveness gap:
  - Continue prudence in current public spending.
  - Channel increases in public investment to address critical infrastructure and resilience gaps.
  - Catalyze investment in renewable energy.
  - Boost the business environment to reduce costs in tradable sectors.
  - Contain economy-wide wage growth.

### Outlook and Risks
- Baseline outlook assumptions:
  - Long-term potential growth of 2¾ percent.
  - Continued compliance with the FRL.
  - Minor tax cuts announced in the 2019 budget.
  - Modest progress on supply-side and structural fiscal reforms.
  - Internalizes average economic and fiscal cost of natural disasters (annual fiscal cost of natural disasters assumed at ½ percent of GDP).
- Projections (selected):
  - Real GDP growth: 2017: 5.1; 2018: 4.2; 2019: 3.5; 2020: 2.7; 2021: 2.7; 2022: 3.2; 2023: 3.2; 2024: 3.0 (percent).
  - Inflation (percent, average): 2017: 0.9; 2018: 0.8; 2019: 0.8; 2020: 1.7; 2021: 1.9; 2022: 1.9; 2023: 1.9; 2024: 1.9.
  - Primary fiscal balance (percent of GDP): 2017: 5.7; 2018: 6.8; 2019: 6.2; 2020: 6.5; 2021: 6.6; 2022: 4.5; 2023: 2.5; 2024: 0.0.
  - Public sector gross debt (percent of GDP): 2017: 70.0; 2018: 63.5; 2019: 58.8; 2020: 53.8; 2021: 50.6; 2022: 48.3; 2023: 45.0; 2024: 44.2.
  - External current account balance (percent of GDP): 2017: -12.0; 2018: -11.2; 2019: -11.2; 2020: -10.2; 2021: -8.6; 2022: -9.1; 2023: -10.0; 2024: -9.9.
  - Credit to GDP ratio: 2017: 51.2; 2018: 50.0; 2019: 50.3; 2020: 50.3; 2021: 49.7; 2022: 48.9; 2023: 47.4; 2024: 46.4.
- Risk assessment:
  - Risks are two-way but on balance tilted to the downside (Annex III).
  - External downside risks: U.S. growth prospects, retreat from international multilateralism, tighter global financial conditions.
  - Domestic upside scenario: use of fiscal space for productive investment and further tourism-related FDI.
  - Domestic downside scenarios:
    - Boosting spending without efficiency gains could undermine long-term growth.
    - Difficulties maintaining correspondent banking relationships could affect financial intermediation.
    - Natural disasters.
    - Pension settlements or other spending that could breach the FRL.
    - Adverse court judgment on Grenlec could cause a one-off increase in public debt (GPP demanded repurchase estimated at 5.5 percent of GDP in 2016; matter in arbitration).

### Fiscal Policy Assessment and Recommendations
- Fiscal Rule Law (FRL) outcomes:
  - FRL has facilitated record budget surpluses and rapid debt reduction.
  - Fiscal rule targets and 2018 outcomes:
    - Primary Balance Rule: 3.5% of GDP surplus (2018 Article IV rule) vs. 5.6 and 6.8 (2018 outcome figures shown in table formatting).
    - Primary Expenditure Rule: 1/2% real growth cap (2018 Article IV) vs. 2.0 (2018 outcome).
    - Wage Bill/GDP: 9% of GDP ceiling vs. 8.4 and 7.9 (2018 outcome).
    - Public Debt/GDP: 65.0 vs. 63.4 (2018 outcome).
  - The government’s 3-year medium-term fiscal plan projects large primary surpluses through 2021; once public debt ratio reaches 55 percent of GDP, the FRL allows recalibrating the primary balance target to stabilize debt at that level.
- Policy guidance:
  - Next phase of FRL implementation should balance fiscal prudence with much-needed increases in productive spending.
  - Effective and prudent use of fiscal space is crucial to maximize productive potential and resilience to shocks and to address poverty alleviation.
  - Caution: using fiscal space to finance large-scale unproductive spending could fuel debt sustainability concerns.

*Source: IMF staff report "1. Climate Resilience and the CCPA."*

### 15.      Grenada’s general infrastructure and resilience gaps are the main priorities to be addressed

### 15.      Grenada’s general infrastructure and resilience gaps are the main priorities to be addressed

### Infrastructure gap: findings and needs
- Public capital spending has been particularly low in recent years.5
- Authorities’ assessments indicate a substantial maintenance gap due to cumulative underinvestment and lack of maintenance; future maintenance would increasingly involve rehabilitation and be costly.
- Broader under-investment exists in areas that could catalyze new sources of growth, such as ICT, tourism, and transport infrastructure.
- Total infrastructure needs are estimated to be in the order of 5 percent of GDP annually.

### Climate-resilience gap: findings, needs, and financing
- Recent climate change policy assessment (CCPA) documented progress and proposed a comprehensive approach to address climate risks.
- The authorities’ national adaptation plan identifies needs for climate-related investment projects of 3 percent of GDP that are additional to those identified in the general infrastructure gap (Box 1).
- It is desirable that a significant part of these projects be financed with grants or concessional loans, although own resources are needed to back-stop and leverage process.
- Staff simulations and estimates:
  - Scaling up public investment by 3 percent of GDP annually for climate resilience projects alone is required (of which about 2½ percentage points would be at the central government level).
  - Financing additional insurance and self-insurance needs with total size of the estimated protection of around 10 percent of GDP.
  - Financing all core infrastructure and climate-related spending by debt could result in an upward public debt trajectory over the next decade.
- Recommendation: maximize grant support to safeguard other essential spending needs.

### CCPA key recommendations (Box 1)
- Implement mitigation measures (a modest carbon tax and/or feebates for cars).
- Scale up adaptation investment spending through 2030 (a key element of “structural” resilience).
- Adopt a layered insurance approach for financial protection, including a dedicated contingency/saving fund (“financial resilience”).
- Improve government capacity in climate-related areas to enhance disaster preparedness, social resilience, and private sector response (“post-disaster” resilience).

### Scenario analysis: policy trade-offs and outcomes
- Baseline scenario assumptions:
  - Modest reforms and capacity improvements.
  - Large fiscal expansion permitted by the FRL could result in spending on inefficient projects with limited economic benefits.
- Pro-active scenario assumptions and benefits:
  - Pro-actively improve capacities for implementation and strengthen accountability while using fiscal space to improve service delivery and address infrastructure and resilience-building objectives.
  - Staff simulations indicate higher payoff in terms of sustained growth under the pro-active scenario.
- Risks and contingent advice:
  - Given substantial capacity bottlenecks, pace of improvements will likely be gradual and could surprise on the downside.
  - If downside risks materialize, staff recommended saving financial resources until capacity can be fully upgraded.
- Scenario definitions and parameters:
  - Baseline – uses current parameters of the FRL including a 3-year transition to Phase III with full upward adjustment in spending levels to achieve a debt-stabilizing balance. Assumes modest implementation of the Public Sector Modernization Strategy and that general grant financing is sustained through 2024 before declining.
  - Pro-Active – assumes a more gradual 5-year transition period to Phase III, allowing for fiscal reforms including (i) significantly improved quality of capital spending, (ii) stronger implementation of the Public Sector Modernization Strategy, (iii) greater well-targeted social protection schemes, and (iv) improved revenue efficiency and unproductive spending savings.
  - Multipliers – draws on WP/19/72 using the upper range and longer-horizons for the pro-active scenario due to improved efficiency of spending.
  - Note: None of the scenarios assume additional impact of CCPA-related spending that could be financed by grants. All scenarios include public pension payments as per the MoU in Annex V, excluding the cost of lump-sum benefits withdrawal.

### Fiscal Responsibility Law (FRL): scope for amendment and priorities
- Suggested priorities for amending the FRL to support resilience while reinforcing fiscal sustainability:
  - Build further debt buffers by targeting a safer debt level below the FRL’s 55 percent of GDP trigger and fix ambiguities in the FRL’s definition of the public debt threshold by opting for broader coverage (to include non-guaranteed SOE debt).
  - Strengthen analysis of fiscal risks through comprehensive assessments of public enterprises, public private partnerships, and other contingent liabilities; build capacity for evaluating risks from natural disasters, climate change, and long-term aging.
  - Reframe the primary expenditure rule:
    - Option A: shift to a current primary expenditure rule (benefits for upscaling resilient investment but risks of circumvention; requires significant improvements in accountability and capacity).
    - Option B: exempt specific resilience-related projects from the primary expenditure rule (carries risks and entails substantial capacity and governance requirements).
  - Reap low-lying fruit with modest tweaks to the expenditure rule with more limited risks, including:
    - (i) exempting local counterpart funding for grant financing from the rule (grants themselves already exempt);
    - (ii) allowing only concessional loans to finance rule exemptions for resilience projects;
    - (iii) allowing the spending rule to follow a pre-determined multi-year path instead of an annual ceiling based on prior-year spending.
- Advice: changes to the FRL should be carefully prepared with sufficient time for consistent and well-sequenced implementation; involve the fiscal responsibility oversight committee (FROC) to support public confidence and transparency.

### Second-generation reforms: public sector efficiency, implementation capacity, inclusiveness
- Public service:
  - Implementation of the 4-pillar Public Sector Management Reform Strategy (2017-19) has lagged due to inadequate financial and human resource capacity (Annex IV).
  - Functional reviews and job analysis/evaluations critical for strategic staffing are mostly at initial stages; a functional review was completed only for the Ministry of Climate Resilience.6
  - Important to set prudent wage-setting parameters for the 2020-22 cycle.
- Public investment management:
  - New procedure for project execution adopted in early-2019: project accounts management moved to the Treasury; responsibilities for project coordination and implementation shifted to the Ministry of Implementation.
  - Critical skills (e.g., engineers) remain needed.
  - Priority and Planning Consultative Committee tasked to select prioritized projects, monitor implementation, and report quarterly to Cabinet.
  - Treasury aims to complete a registry of government’s physical assets by end 2019.
- Public enterprises (SOEs):
  - All 24 entities provided financial reports for 2018.
  - With CARTAC and World Bank technical assistance, monitoring was strengthened and key performance indicators established; quantified risk assessments expected in 2019.
  - Second phase of tariff reforms for water and solid waste entities has started and should be completed in 2019.
  - Reviews of other entities need to proceed expeditiously and oversight committee on SOE operations and investment should be re-activated.
  - No progress on restructuring the Concrete and Postal enterprises.
  - PDV Grenada Ltd. is insolvent and authorities have sought legal advice on its status to devise a resolution strategy.7
  - Commissioners and Chief Executive Officer for the Utilities Regulatory Commission were appointed in April, with the Commission expected to become operational by end-2019.
- Social assistance:
  - The Support for Education, Employment and Development (SEED) program added almost 500 beneficiaries in 2018.
  - Further enhancement of social assistance depends on completion of the Country Poverty Assessment, which is delayed.
- Pensions:
  - National insurance scheme engaged public on containing and financing future pension liabilities based on government-commissioned actuarial report.
  - Proposed measures include increases in social security contribution rates from 9 to 11 percent and a phased raising of the retirement age from 60 to 65.
  - Staff underscored importance of persevering with reforms given unfavorable demographic trends and uncertain spill-overs from public sector pension benefit situation (dependent on arbitration outcome, Annex V).
  - Advice: continue efforts to contain fiscal costs and identify offsetting measures should the court rule unfavorably; apply parametric reforms to both public and private segments of the system; raise pensionable age for public employees to address adverse incentives of duality in the pension system.
  - Illustrative scenario notes:
    - Assumes pensionable age increases from 60 to 65 in gradual steps to be completed by 2030.
- Tax administration:
  - IRD and CED expected to benefit from initiatives to enhance compliance using third party information, tax compliance certificates, and public outreach.
  - Staffing needs and shortcomings in HR and risk management capacities must be addressed.
  - IRD’s arrears collections have averaged 1 percent of GDP annually from a stock of about 20 percent of GDP.
  - Recommendation: determine collectible amounts and set a time-bound period (3 years) for collections, consistent with the 2016 Tax Administration and Procedures Act; upgrade IT systems at the IRD.

### Asset/liability and risk management recommendations
- Use improved fiscal situation to upgrade asset/liability management:
  - (i) regularize all remaining bilateral arrears;
  - (ii) fully operationalize the contingency fund to address natural disasters;
  - (iii) build insurance layering by optimizing CCRIF coverage and using other instruments for comprehensive risk management as recommended in the CCPA;
  - (iv) pre-pay expensive existing debt.

### Disaster Resilience Strategy (DRS): purpose and operationalization
- A comprehensive, country-led and country-owned DRS could integrate mitigation, adaptation, and operational disaster response plans into a fully-fledged disaster risk management framework.
- The DRS could build on successes in attracting climate fund financing and ongoing work on infrastructure and climate resilience gaps.
- Operationalization steps:
  - Seek inputs from all relevant stakeholders including government and private sector partners, official donors, and climate funds.
  - Embed key parameters in a quantified macroeconomic framework and synchronize with budget processes and documents.

*Source: 1grdea2019001 - 15.      Grenada’s general infrastructure and resilience gaps are the main priorities to be addressed*

### 21.      The authorities emphasized the importance of the FRL in providing discipline and

### 21.      The authorities emphasized the importance of the FRL in providing discipline and

### Fiscal framework, FRL, and public finances
- Authorities reaffirmed commitment to the Fiscal Responsibility Law (FRL) and to its rules.
- Efforts underway to strengthen the FRL to monitor debt in the broadest sense.
- Reframing the primary expenditure rule:
  - Authorities indicated a prudent approach, leaning toward considering limited exemptions for specific resilience-building projects.
  - Recognized the need for improving capacity before making substantial changes.
  - Noted that the Fiscal Responsibility Oversight Committee (FROC) would have a role in assessing these changes.
- Arrears regularization:
  - Authorities are actively working to regularize arrears with remaining bilateral creditors and expected an agreement with Algeria in mid-2019.
- Social spending and liabilities:
  - Committed to reforming pensions and expanding health care coverage and benefits consistent with stakeholder dialogue, while noting that costs would fit within the framework of the FRL and fiscal sustainability more generally.
  - Reaffirmed readiness to take offsetting measures to mitigate risks arising from pension liabilities.
- Implementation timelines and diagnostics:
  - Country Poverty Assessment is underway and would be completed in 2020.
  - Interest expressed in pursuing an integrated Debt Recording and Management System (DRS) and progression to next steps.

### Financial sector policies and risks
- Rapid credit growth and systemic risk:
  - Rapid growth of lending by credit unions and ongoing changes in financial sector ownership and regulations warrant monitoring.
  - Staff estimation using historical bank data and growth-at-risk methodology suggests rapid credit growth is associated with lower subsequent GDP growth (see Annex VI).
  - Oversight, data, and capital of credit unions need further strengthening.
  - Buoyant property markets and proliferation of nonbank financial intermediaries raise the need for a comprehensive assessment of systemic risks.
  - Concentration risks from the sale of Scotiabank should be monitored (the merged bank would have about one-half of banking assets).
  - Introduction of IFRS9 and new ECCB prudential standards warrants monitoring.
- Correspondent banking relationships (CBRs) and AML/CFT:
  - Grenadian banks have not experienced a significant loss in CBRs, but Scotiabank’s move could entail potential re-evaluation of existing relationships.
  - Non-bank financial institutions may have trouble maintaining access to banks based on AML/CFT concerns.
  - Grenada was removed from EU’s grey list of tax havens, but its CBI program is listed by the OECD among schemes posing a potential high-risk to the integrity of the Common Reporting Standard.
- Regulation, supervision, and recommended actions:
  - Raise the institutional capital ratio for credit unions from 7 to 10 percent and tighten its definition in line with World Council of Credit Unions standards through a phased approach.
  - Issue regulations on asset classification and provisioning for credit unions; continue and extend regular stress tests to insurance companies.
  - Strengthen capacity of the local regulator and improve cross-border coordination with the ECCB and ECCU local regulators as part of regional harmonization of non-bank oversight, particularly for the foreign-dominated insurance sector.
  - Enhance regional coordination for contingency planning, identification and monitoring of systemically important financial institutions, analyzing interconnectedness, and assessing risks of overheating in property markets.
  - Ensure forceful compliance with AML/CFT standards and strict enforcement of due diligence requirements; intensify cooperation between GARFIN, Grenada’s Financial Intelligence Unit, and the ECCB on AML/CFT aspects of financial sector supervision (cooperation started in 2018).
- Authorities’ views on financial sector measures:
  - Agreed with staff on policy direction; will increase institutional capital ratio to 10 percent as agreed regionally, with coordination on the definition of institutional capital and a transition period of 3 years.
  - Noted regional integration of insurance supervision is more advanced than that for credit unions; supervision of credit unions will, for now, stay at the national level and requires adequate resources.
  - Emphasized forceful compliance with financial integrity requirements but expressed concerns about recurrence and incremental nature of such requirements increasing transaction costs and diverting limited human resources from other priorities.

### Supply-side reforms and competitiveness
- Key reform areas to complement infrastructure and resilience investments:
  - Tourism:
    - Accounts for a quarter of the economy.
    - Potential to increase contribution via stronger links with other sectors (agri-tourism, medical tourism, integrating hotel services).
  - Energy:
    - Nearly 99 percent of Grenada’s energy is sourced from imported fuel.
    - Significant wind, geothermal, and photovoltaic projects on hold pending operationalization of regulations to the 2016 electricity supply act.
  - Trade facilitation:
    - Simplify trading and registration procedures; accelerate implementation of the WTO Trade Facilitation Agreement.
    - Customs administration to increase communication with importers and fully deploy automated system for customs data.
  - Labor markets:
    - Unemployment concentrated among the unskilled and the young.
    - Need to upgrade education opportunities and active labor market policies, including better vocational and ICT training, review of educational curriculum and effectiveness of existing government programs, and employment matching services via a central depository of labor market data.
- Authorities’ views on supply-side measures:
  - Confirmed plans to intensify efforts to address doing-business gaps.
  - A Digital for Resilience Governance Project is being appraised by the World Bank.
  - Plans to expand CBI tourism-related projects to the North of the island to reduce rural unemployment.
  - Plans to boost training opportunities, upscale employment programs for the young, and create a usable employment-matching database.

### Governance, statistics, and long-term planning
- Governance:
  - Continue improving fiscal governance (revenue institutions, spending outcomes, PFM controls), the regulatory framework (ease of doing business, state import/export monopoly for certain products), and the rule of law.
- Statistics:
  - Need more reliable and timely statistics to inform inclusive growth policies.
  - Priorities: (i) extended coverage of the public sector; (ii) compiling pre-2014 BOP data under BPM6; (iii) updating income distribution data (not available since 2008); and (iv) compiling timely quarterly GDP.
  - Promote better coordination and data sharing among the statistics office, survey respondents, and the ECCB.
- Long-term planning:
  - Support Grenada’s forthcoming 2020-35 development plan with realistic medium-term plans to operationalize progress and costing estimates.
- Authorities’ views on governance and statistics:
  - Agreed on the need to bolster statistics and monitoring and evaluation systems to support evidence-based decision making.
  - Pointed to recent initiatives to improve governance, including project implementation procedures.

### Staff appraisal — key findings and recommendations
- Growth and risks:
  - Grenadian economy continues to grow robustly, helped by external tailwinds and reforms; tourism and construction sustain solid GDP growth, but unemployment remains high, particularly among the young.
  - Efforts should focus on making growth more sustainable, resilient, and inclusive; various risks could weigh on growth and stability.
- Value of the FRL:
  - Adherence to the FRL has incentivized prudent expenditures and impressive debt reduction.
  - Fiscal prudence has not impaired high growth; improved debt situation facilitated access to concessional financing and helped lower borrowing costs.
  - Existing FRL provisions allow for reducing the fiscal balance substantially upon attaining the 55 percent of GDP debt trigger.
  - Effective and prudent use of fiscal space is crucial amid pressures for other spending.
- Infrastructure, resilience, and financing needs:
  - Based on the authorities’ national adaptation plan and recent climate change policy assessment, resilience-related public investment need of up to 3 percent of GDP annually over the next 10 years.
  - Grenada also faces sizable general infrastructure and maintenance gaps.
  - Maximize concessional external financing and use domestic resource mobilization to back-stop progress.
- Enhancing fiscal framework and expenditure quality:
  - Options exist to reframe the primary expenditure rule to create space for resilient investment, but improved procedures and classification criteria prioritizing efficient spending and distinguishing current from capital spending should precede reframing.
  - Debt-financed investment projects not meeting key efficiency and cost-benefit criteria should await improvements in implementation capacity.
  - Targeting safer debt levels below the FRL’s ceiling would protect fiscal position from shocks.
  - Any changes to the FRL should be carefully prepared with enough time for consistent and well-sequenced implementation.
- Fiscal structural reforms and public service capacity:
  - Ambitious fiscal structural reforms needed to improve spending quality, implementation capacity, and mitigate fiscal risks.
  - Substantially strengthen implementation capacities and accountability systems in the public service.
  - Ongoing delays in implementing the 2017-19 public service reform need to be forcefully addressed.
  - Sectoral structural reforms needed in aging-related spending, tax administration, public enterprise efficiency, and asset/liability operations.
  - Continued improvements in public financial management to maximize gains.
- Financial sector and AML/CFT:
  - Monitor imbalances from growing property markets and proliferation of non-bank intermediaries; strengthen contingency planning and systemic risk monitoring.
  - Strengthen capacity and coordination of the local regulator with ECCB and ECCU peer regulators to harmonize non-bank oversight.
  - Match rapid expansion of credit unions with strengthened oversight, data, and capital.
  - Strict compliance with AML/CFT to maintain Correspondent Banking relationships and pre-empt financial integrity concerns.
- Supply-side and competitiveness reforms:
  - Close gaps in business environment through digitalization of procedures and reduce export/import costs.
  - Advance sectoral reforms to increase tourism penetration and unlock investment in renewable energy.
  - Improve labor market institutions, education, and training programs to match job opportunities with Grenada’s still-young labor force.
- Integrated strategies, resilience, and statistics:
  - Use strategy documents, including the 2020-35 Development Plan, to build resilience supported by realistic short-to-medium-term plans.
  - A national Disaster Resilience Strategy could target resilient infrastructure, financial protection, and post-disaster response, serving as a platform for coordinated action and support from development partners.
  - Strategies should rely on improved statistics; overdue update of social data is essential for inclusive growth policy design.
  - Require improved economic governance and better coordination between government agencies.

*Source: IMF staff report excerpt (content unit 1grdea2019001).*

### 40.      Staff recommends that the next Article IV consultation take place on the standard

### 1grdea2019001 - 40. Staff recommends that the next Article IV consultation take place on the standard 12-month cycle.

### Recommendation
- Staff recommends that the next Article IV consultation take place on the standard 12-month cycle.

### Recent economic developments and growth
- The growth momentum is still above its estimated potential.
- External tailwinds have helped growth, with strength in tourism demand and related activity in construction.
- Agriculture resumed moderate growth.
- After a pick-up from a jump in telecom prices in 2016, inflation moderated in 2017-18.
- Fuel price adjustments continue to reflect world oil price trends.
- Figures and charts show:
  - Actual and Potential Real GDP (levels in millions of 2006 EC$; growth in percent).
  - Real GDP Growth and Output Gap.
  - Contributions to Real GDP growth from Advanced Economies vs. Grenada-specific factors.
  - Tourist Arrival Growth by Country (contribution to growth, in percent yoy).
  - Headline and Core CPI with Food and Fuel contributions (year-over-year).
  - Retail Petroleum Product Prices (Monthly, US$ per gallon, assumes 100% passthrough). 1/ From WEO, simple average of Brent, WTI and Dubai Fateh spot prices.
  - Economic growth decomposition showing contributions of Real GDP, Agriculture (RHS), and Tourism (RHS).

### Labor market and unemployment
- Unemployment has been declining but remains high.
- Youth unemployment has been well above average but fell substantially in 2017-18.
- Labor force participation has been increasing slightly.
- Employment rate depends on the level of education; high unemployment among the less-educated suggests a need of skill upgrading.
- Duration of unemployment data reflects weaknesses in survey data.
- Chart highlights:
  - Unemployment Rate and Economic Growth (percent).
  - Unemployment Rate and Youth Unemployment Rate (in percent).
  - Labor Force (number of persons) and Labor force participation (%, rhs).
  - Job Supply vs Demand by Education (2018, number of persons/jobs) — Jobs available vs Unemployed for Primary, Secondary, Tertiary.
  - Unemployment Rate By Duration (percent) — Not stated, Long term (>6ms), Short term.
  - Unemployed By Education Level (2018, percent of total) with values: None or Primary 42.74, Secondary 43.34, Post Secondary 5.75, Tertiary 8.17, Other 0.00.

### External sector and reserves
- The real effective exchange rate appreciated in 2018.
- The current account deficit is projected to remain close to comparator average.
- The current account deficit in 2018-19 is expected to be lower than in 2017.
- The current account deficit is more than fully financed by FDI and capital transfers.
- The net foreign asset position is improving; imputed reserves are now above 4 months of imports.
- Charts and data:
  - Imputed Reserves, US$m and Import Coverage (months), Jan-14 to Jan-18.
  - Real Effective Exchange Rate (Based on CPI, index, 2010=100) with 20-yr moving avg and Tourism-customer REER (tourism market destinations include US, UK, Canada and Trinidad and Tobago, weighted by share of total tourism arrival).
  - Current Account Balances of Small Tourism-Dependent Countries (in percent of GDP) showing Grenada vs comparator minimum/maximum/average.
  - Trade and Current Account Deficit (in percent of GDP) and projections.
  - Current Account Financing (in percent of GDP) decomposition: Other investment, FDI, Portfolio investment, Capital Transfer, CA deficit.
  - Grenada: Net Foreign Assets (in percent of GDP) and External debt, Stock of FDI.

### Monetary and banking sector developments
- Banks’ domestic deleveraging is petering out while liquidity remains ample.
- Bank credit to the private sector has turned positive.
- Loan and deposit rates have been steadily declining.
- Excess liquidity continues to be placed abroad and in unremunerated excess reserves at the central bank.
- Charts and indicators:
  - Commercial Banks' Net Domestic Assets (contribution to growth, y-o-y) components: Credit to Central & Local Government, Net Credit to NIS 1/, Credit to Non Fin. Public Enterp., Credit to Private Sector, Other.
  - Components of Broad Money Growth (M2) (contribution to growth, y-o-y): Currency in Circulation, Demand Deposits, Savings Deposits, Time Deposits, Foreign Currency Deposits.
  - Private Sector Credit Growth (year-over-year) and contributions by Household Credit, Business Credit, Non-Bank Financial Institutions Credit, Subsidiaries & Affiliates Credit.
  - Interest Rates (in percent) with specific series: Policy Rate (ECCB), Lending Rate (Grenada), U.S. Bank Prime Rate, Deposit Rate (Grenada), Interbank Rate (ECCB). Example values shown in chart: 8.4, 1.5, 6.5, 6.5, 3.5 (years listed).
  - Commercial Banks Net Foreign Assets (in millions of EC$).
  - Deposits and Bank Excess Reserves (indices, 100=sample average for each deposit type; Excess Reserves: percent of total deposits).

  Note: 1/ Net credit to NIS is negative in levels meaning that the NIS is holding deposits, so if this item is growing it means that the NIS is depleting its deposits.

### Fiscal developments and public finances
- Fiscal deficit reduction in 2018 was larger than envisaged.
- Tax revenue overperformed partially because of robust economic growth.
- Spending was kept under control, aided in part by the government’s attrition policy that helped lower wage spending. 1/
- Capital expenditure was stable in 2018 but underperformed largely because of implementation capacity.
- The stronger fiscal position together with high GDP growth and debt restructuring further reduced public debt.
- Charts and data highlights:
  - Budget Execution and Outcomes (EC$m) with Revenues, Current primary spending, Non-grant financed capital spending 1/, Primary balance for 2016–2018 Budget/Estimates.
  - Total Tax Revenue (in percent of GDP) and components: Income taxes, Taxes on domestic goods & services, Taxes on international trade, Property taxes.
  - Current Primary Expenditure (in percent of GDP) with components: Personnel expenditure, Goods and services, Transfers, Pension & NIS Contributions.
  - Public Employment and Wage Bill: Established workers (number), Un-established workers (number), Wage bill (EC$m, rhs). 2016 and 2017 include retroactive payment of wage increments.
  - Capital Expenditure (in percent of GDP) with Grants, Non-Grants, Total.
  - Public Sector Debt and Fiscal Balance (in percent of GDP) with Debt to GDP and Primary Surplus projections.

  Notes:
  - 1/ Higher than budget non-grant financed capital spending is allowed by the program in the case of revenue overperformance.
  - 1/ In 2016 spending estimated at 3.5 percent of GDP was reclassified from capital expenditure to current expenditure in the new chart of accounts (GFSM 2014). Dotted line shows old chart of accounts classification.

### Financial sector condition and performance
- Banks continue to strengthen balance sheets and build up provisioning levels.
- High liquidity continues to be maintained but is increasingly placed in low-yielding assets.
- Profitability declined moderately in 2017-18.
- Capital remains well above the regulatory minimum.
- Chart indicators:
  - Nonperforming Loans (in percent of total loans) for Commercial Banks, Foreign Banks, Indigenous Banks (2010Q1–2018Q1).
  - Provisions to Nonperforming Loans (percent) for the same bank groups.
  - Commercial Banks' Liquidity metrics: Liquid Assets/Total Assets; Total Liquid Assets/Total Deposits; Net Liquid Assets/Total Deposits; Liquid Assets/Total Deposits plus Liquid Liabilities.
  - Interest Margin/Gross Income (in percent) by bank type.
  - Return on Average Assets (Net Profit before Taxes/Average Assets, in percent) by bank type.
  - Commercial Banks' Capital Adequacy (Regulatory capital/Risk-weighted assets, in percent) with Regulatory Minimum; sample values show regulatory capital series from -3 to 22 across quarters.

### Key indicators and projections (selected figures from Table 1 and Tables 2a/2b)
- Development indicators and demographics:
  - Rank in UNDP Human Development Index 79 (out of 179 countries) (2016).
  - Infant mortality rate per '000 births (2016) 9.9.
  - Adult illiteracy rate in percent (2004) 4.
  - Life expectancy at birth in years (2014) 73.
  - Poverty headcount index (2008) 38.
  - GDP per capita in US$ (2018) 10,950.
  - Unemployment rate (2018) 21.7.
  - Population in millions (2018) 0.11.
- Output and prices (Real GDP annual percent change):
  - 2014: 7.3
  - 2015: 6.4
  - 2016: 3.7
  - 2017: 5.1
  - 2018: 4.2
  - 2019: 3.5
  - 2020: 2.7
  - 2021: 2.7
  - 2022: 3.2
  - 2023: 3.2
  - 2024: 3.0
- Consumer prices, end of period (annual percent):
  - 2014: -0.6
  - 2015: 1.1
  - 2016: 0.9
  - 2017: 0.5
  - 2018: 1.4
  - 2019: 0.9
  - 2020: 1.9
  - 2021: 1.9
  - 2022: 1.9
  - 2023: 1.9
  - 2024: 1.9
- Central government balances (percent of GDP) selected series:
  - Revenue (2018): 25.6
  - Total expenditure and net lending (2018): 21.7 (Table 2b shows Total expenditure and net lending 1/ as 24.9 in 2018; see tabulated values).
  - Primary balance (2018): 6.8 (Table 1 primary balance series includes multiple formats; Table 2a shows Primary balance 2/ as -27.6 for 2018 Est. — users should refer to the tables for the exact series and context).
- Public debt (incl. guaranteed) (percent of GDP) series from Table 1:
  - 2014: 101.8
  - 2015: 90.1
  - 2016: 81.6
  - 2017: 70.0
  - 2018: 63.4
  - 2019: 58.7
  - 2020: 53.7
  - 2021: 50.6
  - 2022: 48.3
  - 2023: 44.9
  - 2024: 44.2
- Money and credit, end of period (annual percent change):
  - Broad money (M2): (sample shows 4.1, 5.2, 1.3, 4.0, 5.9, 4.7, 4.6, 4.8, 5.3, 5.3, 4.8 across periods in Table 1).
  - Credit to private sector: -5.1, -3.8, -0.2, 0.6, 2.8, 5.2, 4.7, 3.6, 3.7, 2.2, 2.7 (2014–2024 series in Table 1).
- Balance of payments:
  - Current account balance (percent of GDP), o/w: -11.6 (2014), -12.2 (2015), -11.0 (2016), -12.0 (2017), -11.2 (2018), -11.2 (2019), -10.2 (2020), -8.6 (2021), -9.1 (2022), -10.0 (2023), -9.9 (2024).
  - Exports of goods and services (percent of GDP): 52.5 (2014), 51.2 (2015), 49.3 (2016), 51.3 (2017), 54.2 (2018), 54.0 (2019), 54.0 (2020), 54.1 (2021), 53.9 (2022), 53.6 (2023), 53.4 (2024).
  - Imports of goods and services (percent of GDP): 54.1 (2014), 50.9 (2015), 49.8 (2016), 53.1 (2017), 55.2 (2018), 54.9 (2019), 54.1 (2020), 52.5 (2021), 52.8 (2022), 53.3 (2023), 52.9 (2024).
  - Capital account balance (percent of GDP): 7.1 (2014), 3.3 (2015), 4.7 (2016), 5.9 (2017), 5.2 (2018), 5.2 (2019), 5.1 (2020), 5.0 (2021), 4.9 (2022), 4.8 (2023), 4.5 (2024).
  - Financial account balance (percent of GDP): -6.2 (2014), -5.8 (2015), -2.2 (2016), -5.8 (2017), -5.8 (2018), -6.0 (2019), -5.1 (2020), -3.6 (2021), -4.2 (2022), -5.2 (2023), -5.4 (2024).
- External debt (gross) (percent of GDP): 143.0 (2014), 133.2 (2015), 125.7 (2016), 117.4 (2017), 108.0 (2018), 106.6 (2019), 101.7 (2020), 98.9 (2021), 96.0 (2022), 91.3 (2023), 88.2 (2024).
- Memorandum items:
  - Nominal GDP (EC$ million): 2014 2,461; 2015 2,692; 2016 2,866; 2017 3,043; 2018 3,202; 2019 3,352; 2020 3,352; 2021 3,508; 2022 3,677; 2023 3,873; 2024 4,080; (Table 2a projects up to 4,289).
  - Net imputed international reserves: Months of imports of goods and services: 3.7 (2014), 4.3 (2015), 4.0 (2016), 3.6 (2017), 4.1 (2018), 4.1 (2019), 4.0 (2020), 3.8 (2021), 3.6 (2022), 3.6 (2023), 3.6 (2024).

  Notes on tables:
  - Table 2a: Operations of the Central Government, selected EC$ million series for 2018 Est., 2019 Budget, projections 2019–2024 (Total revenue and grants, Revenue, Tax revenue and components, Nontax revenue, Citizenship by Investment Program receipts, Grants, Total expenditure and net lending, Current expenditure components, Interest payments, Capital expenditure and net lending, Grant-financed vs Non-grant financed capital spending, Primary balance 2/, Overall balance, Public Debt in EC$).
  - Table 2b: Same fiscal aggregates expressed in percent of GDP for 2014–2024.
  - Table 3: Public Sector Debt, 2015–2018 (Year end, in millions of U.S. dollars) showing Public Sector debt and Central government debt stocks and percent of GDP; external debt and central government components.

*International Monetary Fund staff compilation from the Grenada country chapter.*

### 1.  Multilateral280.031.228.1288.233.327.1293.937.226.1314.441.826.5

### 1grdea2019001 - 1.  Multilateral280.031.228.1288.233.327.1293.937.226.1314.441.826.5

### Debt composition and external liabilities
- Multilateral creditors (stocks by creditor, in unspecified units):  
  - CDB: 134.7 15.0 13.5 141.3 16.3 13.3 13.3 136.3 17.3 12.1 13.2 5.1 7.6 11.2  
  - IDA: 77.7 8.6 7.8 78.5 9.1 7.4 92.1 11.7 8.2 12.2 2.0 16.2 10.3  
  - IBRD: 14.9 1.7 1.5 13.8 1.6 1.3 12.7 1.6 1.1 14.8 2.0 1.3  
  - IMF: 29.3 3.3 2.9 28.9 3.3 2.7 28.6 3.6 2.5 23.1 3.1 3.1 1.9  
  - Other Multilateral: 23.4 2.6 2.3 25.6 3.0 2.4 24.2 3.1 2.1 22.0 2.9 1.9
- Official bilateral and Paris Club exposures (selected entries):  
  - Official bilateral total: 97.0 10.8 9.7 94.3 10.9 8.9 88.7 11.2 7.9 84.8 11.3 7.2  
  - Paris Club (aggregate): 10.8 1.2 1.1 8.9 1.0 0.8 8.2 1.0 0.7 7.2 1.0 0.6  
  - Kuwait: 17.0 1.9 1.7 16.2 1.9 1.5 15.6 2.0 1.4 14.0 1.9 1.2  
  - Taiwan Province of China (new debt issued after restructuring 2/): 19.4 2.2 1.9 19.4 2.2 1.8 18.3 2.3 1.6 16.8 2.2 1.4  
  - Trinidad and Tobago: 32.9 3.7 3.3 32.9 3.8 3.1 32.9 4.2 2.9 32.9 4.4 2.8
- Commercial debt and bonds (selected):  
  - Commercial debt total: 188.1 20.9 18.9 178.5 20.6 16.8 117.3 14.9 10.4 108.3 14.4 9.1  
  - US$ 2040 Bonds (prior to restructuring was the US$ 2025 bonds): 179.2 19.9 18.0 170.2 19.6 16.0 112.3 14.2 10.0 103.3 13.7 8.7  
  - Other Bonds: 8.9 1.0 0.9 8.3 1.0 0.8 5.0 0.6 0.4 5.0 0.7 0.4
- External arrears on interests: 3.4 0.4 0.3 3.9 0.4 0.4 4.8 0.6 0.4 5.4 0.7 0.5
- Overdue membership fees: 22.8 2.5 2.3 21.8 2.5 2.1 16.7 2.1 1.5 14.2 1.9 1.2

### Domestic debt, instruments, and guarantees
- Domestic debt total (end-period stocks, unspecified currency): 286.4 31.9 28.7 265.5 30.6 25.0 254.5 32.3 22.6 225.0 29.9 19.0  
  - A. Central Government: 266.6 29.7 26.7 250.4 28.9 23.6 241.1 30.6 21.4 225.0 29.9 19.0
- Treasury bills (components and placements): 117.9 13.1 11.8 113.3 13.1 10.7 76.6 9.7 6.8 59.7 7.9 5.0  
  - Private placements: 82.0 9.1 8.2 78.7 9.1 7.4 43.3 5.1 5.5 38.8 3.6 4.8  
  - National Insurance Scheme: 14.8 1.6 1.5 14.8 1.7 1.4 14.8 1.9 1.3 14.8 2.0 1.2  
  - Petrocaribe Grenada: 34.8 3.9 3.5 34.8 4.0 3.3 15.8 2.0 1.4 0.0 0.0 0.0
- Bonds (domestic): 111.4 12.4 11.2 115.7 13.4 10.9 138.8 17.6 12.3 132.2 17.6 11.2  
  - EC$ 2040 Bonds: 68.9 7.7 6.9 67.3 7.8 6.3 57.1 7.2 5.1 55.5 7.4 4.7
- Domestic arrears on interests: 4.4 0.5 0.4 1.6 0.2 0.1 1.3 0.2 0.1 0.0 0.0 0.0
- Central-government guaranteed (non-sovereign) 20.6 2.3 2.1 14.1 1.6 1.3 13.3 1.7 1.2 0.1 0.0 0.0

### Medium-term central government financing (Table 4, selected flows and stocks; in EC$ million)
- Stock of deposits at beginning of the period: 82.7 134.7 131.5 184.1
- Inflows total: 392.7 496.2 577.2 463.2  
  - Primary surplus: 57.8 148.3 172.6 217.0  
  - Debt placement: 336.9 280.1 246.3 231.1  
    - External: 134.9 76.2 45.5 112.3 (of which Exceptional financing: 82.6 42.1 12.4)  
    - Domestic: 202.0 203.9 200.8 118.8  
  - Arrears accumulation: 55.9 38.1
  - Debt stock reduction from restructuring 1/: 153.6 14.6 158.3 15.1  
  - New debt issued under restructuring 2/: 78.8 15.1
- Outflows total: 1,340.7 499.4 524.6 401.7  
  - Interest bill: 89.9 82.3 81.0 63.2  
  - Scheduled Amortization: 264.7 332.1 300.7 244.3  
    - External: 50.7 87.7 90.3 91.4  
    - Domestic: 214.0 245.0 210.4 152.9  
  - Arrears clearance 3/: 169.6  
  - Debt restructuring: 775.3 29.7 158.3 15.1
- Net cash flow (+surplus/-deficit): 52.1 -3.3 52.6 61.5
- Stock of deposits at the end of the period: 134.7 131.5 184.1 245.6
- Memorandum (selected):  
  - Overall fiscal balance: -32.2 66.0 91.6 153.8  
  - Public Debt: 2,425.4 2,338.1 2,130.9 2,030.8 (in percent of GDP) 90.1 81.6 70.0 63.4  
  - Domestic: 773.4 716.1 687.2 607.5  
  - External: 1,652.1 1,622.0 1,443.6 1,423.4

### Balance of payments summary and external sector projections (Table 5, US$ millions and percent of GDP)
- Current account (US$ mn): -105.3 -122.0 -116.5 -134.8 -132.8 -138.8 -132.6 -117.5 -129.9 -151.3 -157.0  
- Trade balance for goods and services (US$ mn): -14.4 3.7 -5.1 -20.5 -11.4 -10.7 0.7 21.6 16.5 3.9 7.0  
- Exports of goods and services (US$ mn): 478.6 510.8 523.5 578.2 642.9 670.4 702.9 736.9 773.3 809.8 847.6  
  - Tourism (US$ mn): 388.1 421.6 437.4 482.0 541.0 566.5 592.8 620.5 649.6 680.2 707.4  
  - Nutmeg (US$ mn): 6.1 4.9 4.6 3.8 4.1 4.2 4.3 4.4 4.6 4.7 4.8  
- Imports of goods and services (US$ mn): 492.9 507.1 528.7 598.7 654.3 681.1 702.2 715.2 756.8 805.9 840.5  
- Net income (US$ mn): -82.8 -114.2 -97.1 -104.5 -111.2 -116.4 -121.8 -127.7 -134.5 -141.7 -149.0  
- Capital account (US$ mn): 65.1 32.4 49.7 66.9 61.7 64.7 66.5 68.3 70.3 72.5 71.6 (capital transfers = same)  
  - o.w. debt forgiveness 1/: 17.2 48.4 4.5 49.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0  
- Financial account (US$ mn): -56.6 -57.6 -23.7 -65.7 -68.8 -74.0 -66.1 -49.2 -59.6 -78.8 -85.4  
  - Foreign direct investment (US$ mn): -97.2 -134.3 -96.9 -139.3 -151.6 -131.5 -131.1 -130.6 -130.4 -137.4 -144.5  
  - Portfolio investment (net, US$ mn): -2.9 66.0 70.2 61.7 86.1 89.7 93.5 97.6 102.1 106.8 111.7
- Current account (percent of GDP): -11.6 -12.2 -11.0 -12.0 -11.2 -11.2 -10.2 -8.6 -9.1 -10.0 -9.9  
- Exports of goods and services (percent of GDP): 52.5 51.2 49.3 51.3 54.2 54.0 54.1 54.1 53.9 53.6 53.4  
- Imports of goods and services (percent of GDP): 54.1 50.9 49.8 53.1 55.2 54.9 54.1 52.5 52.8 53.3 52.9
- Memoranda: Gross external debt (percent of GDP): 143.0 133.2 125.7 117.4 108.0 106.6 101.7 98.9 98.2 95.7 94.7  
  - External public and publicly guaranteed debt (percent of GDP): 67.7 61.4 56.6 47.4 44.5 42.0 39.4 38.6 37.9 35.4 34.4  
  - Nominal GDP (US$ mn): 911.5 997.0 1,061.6 1,126.9 1,185.9 1,241.4 1,299.1 1,361.7 1,434.4 1,511.0 1,588.5

### Monetary sector and money aggregates (Table 6; EC$ millions, selected)
- Net foreign assets (end-period): 582.2 852.5 1,003.2 1,053.5 1,315.0 1,378.5 1,455.5 1,516.0 1,564.5 1,623.2 1,675.8  
  - ECCB net foreign assets / Net imputed reserves: 427.3 509.0 543.7 526.1 623.2 640.5 651.1 655.4 660.8 685.4 711.1  
  - Commercial banks (net): 154.8 343.5 459.5 527.4 691.8 738.0 804.4 860.6 903.7 937.8 964.8
- Net domestic assets: 1,435.8 1,269.9 1,147.8 1,182.7 1,053.9 1,101.3 1,139.5 1,204.0 1,300.7 1,395.1 1,497.2  
  - Public sector credit (net): -86.9 -232.3 -307.7 -351.8 -500.2 -534.1 -572.6 -568.3 -535.8 -479.4 -426.6  
    - Central government: 17.6 -65.6 -58.8 -120.6 -201.3 -239.5 -248.2 -219.9 -171.2 -101.2 -31.6  
    - ECCB claims: -9.8 -55.8 -56.5 -42.0 -109.7 -167.7 -213.8 -287.9 -352.7 -363.4 -374.5  
    - Commercial banks claims: 27.4 -9.8 -2.3 -78.6 -91.6 -171.8 -234.5 -332.0 -418.5 -437.9 -457.1  
  - Credit to private sector: 1,613.9 1,552.4 1,548.6 1,558.5 1,602.0 1,685.5 1,764.6 1,827.4 1,894.4 1,935.6 1,988.0
- Broad money (M2) (end-period): 2,018.0 2,122.4 2,151.0 2,236.2 2,368.9 2,479.8 2,595.0 2,720.0 2,865.2 3,018.3 3,173.1  
  - Money: 466.5 543.0 577.9 625.1 702.3 766.1 834.5 897.2 966.0 1,043.0 1,122.9  
    - Currency in circulation: 124.1 131.5 135.7 151.4 143.9 156.9 170.9 183.8 197.9 213.6 230.0  
    - Cash in commercial banks: 342.4 411.4 442.2 473.7 558.4 609.2 663.6 713.4 768.2 829.3 892.9  
  - Quasi-money: 1,551.5 1,579.4 1,573.1 1,611.2 1,666.6 1,713.7 1,760.5 1,822.8 1,899.2 1,975.4 2,050.1
- Interest rates (percent per year):  
  - ECCB policy rate: 6.5 6.5 6.5 6.5 6.5 …  
  - US policy rate: 0.1 0.1 0.4 1.0 1.8 …  
  - Time deposit rate: 2.0 1.6 1.3 0.9 1.2 …  
  - Demand deposit rate: 0.3 0.3 0.1 0.1 0.1 …  
  - Weighted average lending rate: 9.0 8.7 8.4 8.0 7.6 …

### Indicators of capacity to repay the Fund (Table 7; in SDRs, US$, and percent)
- Existing Fund credit (stock): in percent of quota 174.3 180.8 131.3 122.3 101.2 89.0 80.7 69.6 53.8 36.6 19.5  
  - In millions of SDRs: 20.4 21.2 21.5 20.1 16.6 14.6 13.2 11.4 8.8 6.0 3.2  
  - In millions of US$: 29.7 29.3 29.0 27.0 22.3 19.7 17.8 15.4 11.9 8.1 4.3  
  - In percent of GDP: 3.3 2.9 2.7 2.4 1.9 1.6 1.4 1.1 0.8 0.5 0.3
- Outstanding Fund credit (end of period): same levels repeated (see above).  
- Fund obligations based on existing and prospective (in millions of US$): 2.7 4.5 5.0 4.8 4.9 2.5 2.1 2.7 3.9 4.1 4.1  
- Repurchases and repayments (in millions of US$): 1.8 3.2 3.6 3.5 3.5 1.7 1.4 1.8 2.6 2.8 2.8
- Memorandum:  
  - Exports of goods and services (US$ mn): 478.6 510.8 523.5 578.2 642.9 670.4 702.9 736.9 773.3 809.8 847.6  
  - Debt service (US$ mn): 121.3 107.7 54.6 56.1 52.9 45.5 49.2 48.2 48.0 46.5 44.0  
  - Imputed Net International Reserves (US$ mn): 158.3 188.5 201.4 194.9 230.8 237.2 241.2 242.7 244.7 253.8 263.4

### Financial sector indicators (Table 8; percent and levels, 2010–2018)
- Balance sheet (percent of GDP or index numbers as reported):  
  - Total Assets: 136.0 137.2 128.8 122.4 114.8 111.7 109.7 110.5 110.4  
  - Gross Loans: 96.2 95.8 91.6 82.0 71.4 61.8 57.0 53.7 52.8  
  - NPLs (o/w): 7.3 9.0 10.8 11.3 10.4 6.2 3.8 2.1 ...  
  - Provisions for NPLs: 2.1 2.5 3.6 4.0 4.1 2.6 1.9 1.3 1.0
- Profitability and returns (selected):  
  - ROAE: 6/16.5 3.2 6.9 -28.7 -1.0 31.3 28.4 17.2 15.8  
  - ROAA: 1.2 0.2 0.5 -1.9 -0.1 1.5 1.5 1.1 1.0
- Capital adequacy: CAR 6/16.9 15.4 14.5 14.1 13.6 12.6 14.2 13.8 13.2; T1R 15.0 13.6 13.2 12.2 11.7 10.2 11.4 ...
- Asset quality and liquidity:  
  - NPL Ratio: 7.5 9.4 11.8 13.8 14.6 10.0 6.7 3.9 2.4  
  - Liquid Assets/Total Assets: 20.7 22.9 22.9 27.7 32.8 37.5 40.8 42.3 45.0  
  - Liquidity Coverage Ratio: 23.0 25.2 25.2 30.4 35.5 40.8 44.9 46.4 49.1
- Concentration and leverage: Loan-to-Deposit (LD) Ratio: 83.6 83.4 83.4 76.6 68.6 61.2 58.8 56.2 55.0

### Annex I — Implementation of IMF policy recommendations (2018 Article IV Consultation)
- Fiscal policy recommendations (status highlights):  
  - Amendments to the FRL: Partial implementation. Amendments are pending a review of IMF technical assistance recommendations and Cabinet approval.  
  - Broaden tax base (investment income, PIT threshold): Partial implementation. Income tax rates on the top tax category reduced from 30 to 28 percent in January 2019; elements to broaden base not implemented.  
  - Corporate income tax base and rate reduction to 25%: Partial implementation. Corporate income tax rates reduced from 30 to 28 percent in January 2019.  
  - Strengthen management of public wage bill: Ongoing. Attrition rule from 2014 ongoing; functional reviews for one ministry conducted but implementation delayed.  
  - Asset registry: Ongoing. Treasury solicited bids for asset registry software.  
  - Strengthen social assistance via SEED: Pending.  
  - Parametric reforms of National Insurance Scheme: Ongoing.  
  - SOE risk assessments and second-phase SOE reforms: Partial implementation. Annual risk assessments for 2019 budget exercise conducted; tariff adjustment reforms commencing in water sector.  
  - Transparency of CBI inflows and natural disaster fund: Ongoing. Not all CBI receipts recorded in budget; allocations to savings fund made in August 2018; regulations under review.
- Financial sector recommendations (status highlights):  
  - Ensure AML/CFT compliance and enforcement of CBI risk-mitigating measures: Ongoing. Joint audits of banks commenced; FIU received additional staff for CBI due diligence; Grenada removed from EU grey list of tax havens in March 2019.  
  - Strengthen regulation and oversight of non-bank financial sector and move toward single regional non-bank supervisor: Ongoing. GARFIN improved credit quality review and stress-testing capacity for credit unions; work on national crisis management plan, ECCU uniform insurance bill, and envisaged ECFSC continuing.
- Growth policy recommendations (status highlights):  
  - Accelerate structural reforms (corporate governance, customs, port charges, building control, regional credit registry): Ongoing. Judicial system delays being addressed (case management system, more hiring, commercial division); regional credit registry approved by ECCB monetary council but not yet established.  
  - Revise education curriculum and expand technical/vocational training with private sector: Ongoing. Youth skills training and apprenticeship program revamped; digitalization of business procedures ongoing; labor market information system progress slow.

*Sources: Grenadian authorities and Fund staff estimates.*

### Annex II. External Sector and Competitiveness Assessment

### Annex II. External Sector and Competitiveness Assessment

### A. Current Account Position
- Grenada’s current account deficit remained high in 2018 and is projected to stay at a relatively high level over the medium term.
- Estimated current account deficit is around 11 percent of GDP in 2018.
- Recent dynamics:
  - Private sector-led import increase was more than offset by services export growth, producing a deficit slightly lower than in 2014-17.
  - The tapering construction boom is expected to put downward pressure on the current account deficit.
  - This will be offset by the effects of the rise in public sector spending on the current account deficit.
- EBA-lite and external sustainability findings:
  - The EBA-lite current account model finds Grenada’s cyclically adjusted current account to be substantially weaker than the estimated “norm” of -7.3 percent of GDP by 2¾ percentage points.
  - External sustainability approach assumptions and result:
    - NIIP of -115 percent of GDP.
    - Trade deficit projections (inclusive of secondary transfers) projected in the medium-term.
    - Foreign currency share of foreign assets (foreign liabilities) of about 99 percent (46 percent).
    - Trade elasticity of -0.40.
    - A real effective exchange rate depreciation of 22 percent is required to stabilize the NIIP at -115 percent of GDP.
  - The real effective exchange rate model shows Grenada to be around 30 percent undervalued, but results are less reliable due to short data series for certain variables.
- Financing:
  - The current account deficit is more than fully financed by FDI and capital transfers, despite sizable portfolio outflows.
  - FDI to GDP ratio averaged 11.7 percent in 2014-18.

### B. Nominal and Real Effective Exchange Rates
- Real and nominal movements in 2018:
  - Grenada experienced a real appreciation in 2018 in line with strengthening of the U.S. dollar.
  - Grenada’s nominal effective exchange rate (NEER) appreciated in the second half of 2018, reversing the trend since early 2017, and was approaching the end-2016 peak by end-2018.
- Driving factors:
  - The underlying driving force for the 2018 real and nominal appreciation is the appreciation of the U.S. dollar, to which the regional currency is pegged.
  - The divergence of NEER and REER since 2014 largely reflects inflation undershooting that of trading partners.

### C. Reserve Adequacy
- Imputed reserves and coverage (end-2018):
  - Imputed reserves stood at US$236 million at end-2018.
  - Coverage: 4.5 months of imports.
  - Coverage: 27 percent of broad money.
- Adequacy assessment:
  - Imputed reserve position is 250 percent of ARA metric for credit-constrained economies.
  - This ARA-based comparison suggests 1.8 month of imports as optimal level using a risk-based model tailored to low-income economies.
- Conclusion: Reserves appeared to be adequate for cushioning external shocks and preventing disorderly market conditions.

### D. Labor Costs and Productivity
- Recent trends:
  - Labor productivity fell sharply during the global financial crisis, resulting in an increase in unit labor costs.
  - As the economy exited a four-year long recession, labor productivity started to recover, reducing unit labor costs.
  - Since 2015 labor costs have leveled out at levels above those prior to the global financial crisis.
- Structural issues and implications:
  - Labor market reforms and modernization of the public sector are essential to improve flexibility, allocate labor to its best use, and reward strong performance.
  - Additional reforms are needed to match human capital to the needs of the economy.
- Policy recommendations and supply-side reforms:
  - Contain growth in nominal wages.
  - Continue fiscal restraint.
  - Raise productivity.
  - Upgrade active labor market policies, including better vocational training, to support long run productivity growth and reduce relative labor costs.
  - Make the public service more flexible so staff can be allocated to their best uses and so that strong performance is rewarded.
  - Prioritize rural infrastructure investments and reduce export and import costs to enhance agricultural production and export capacity.
  - Improve air cargo logistics and storage, technology and research, clarify land ownership rights, and promote crop insurance.
  - Re-examine energy markets to facilitate competition, particularly the entry of renewable energy, and ensure pricing practices are not generating unwarranted monopoly rents.
  - Continue efforts on climate change mitigation, adaptation, resilience planning, and disaster preparedness by upgrading legal and institutional frameworks and targeted public infrastructure investments.

### E. Tourism: Arrivals, Market Share, and Price
- Market share developments:
  - Grenada’s tourism market share is gradually growing.
  - After the devastating hurricanes in 2004 and 2005, Grenada suffered a 30 percent drop in its share of total stay-over visitors in the ECCU.
  - The tourism industry was hit again during the global financial crisis in 2008-09.
  - Grenada started to regain its market share in 2014, helped by intensified marketing, establishment of a new Grenada Tourism Authority, and the opening of a large brand-name luxury resort.
- Price competitiveness:
  - While tourism costs in the Caribbean are high relative to other global beach destinations, comparisons against other Caribbean destinations suggest prices in Grenada are competitive.

_Annex II. External Sector and Competitiveness Assessment — Grenada (from the source content provided)_

### 5. PSMRS’ implementation has been slow, and while the reform agenda for 2019 is

### 1grdea2019001 - 5. PSMRS’ implementation has been slow, and while the reform agenda for 2019 is ambitious, key reforms are not expected to be completed before 2021

### Status of Public Service Management Reform Strategy (PSMRS) implementation
- Overall assessment
  - Implementation has been slow; the reform agenda for 2019 is ambitious, and key reforms are not expected to be completed before 2021.
  - Main constraint: inadequate financial and human resource capacity.
- Re-Engineering the Public Service
  - A white paper on the new vision for the public service was launched.
  - A functional review for the Ministry of Climate Resilience (full title: the Ministry of Climate Resilience, the Environment, Forestry, Fisheries, Disaster Management & Information) was completed.
  - No implementation of recommendations from that functional review has occurred.
  - Government plans to start the second phase of functional reviews for the remaining 13 ministries in 2019.
  - Work has not commenced on: (i) delineation of roles and responsibilities of centers of government; (ii) strengthening the legislation, regulations and policy instruments for governance and accountability arrangements.
- Strategic Human Resource Management
  - Data collection for the human resource management information systems is completed and it is about 40% operational.
  - A needs assessment for the public service was completed.
  - Four learning development programs have been established for training and capacity development.
  - Government anticipates drafting the Training & Development Plan in 2019 with implementation to start in 2020.
  - Outstanding critical work not commenced: (i) performance management systems; (ii) manpower management function for the medium to long-term to facilitate central personnel management.
- Strategic Compensation Management
  - A compensation management policy framework for public pensions was developed.
  - Outstanding items: (i) revision of the architecture for compensation across employment categories to develop competitive and performance-based remuneration; (ii) completion of job evaluations and analysis; (iii) systems for regular payroll audits.
  - These outstanding inputs are critical to the wage negotiation framework and will not be incorporated in time for the 2020/22 agreement with public unions which should be completed by November.
- Integrated Information & Communication Technology (ICT)
  - Use of ICT to improve ease and cost of doing business and enhance service delivery is under consideration under a 3-year financing arrangement with the World Bank.

### Policy implications and resource needs
- A well-functioning public service is critical to Grenada’s sustainable development and improved living standards.
- Requirements for success
  - Deeper commitment of financial and human resources to accelerate reform implementation.
  - Active participation of senior members of government and the legislature.
  - Establishment of a highly consultative process to encourage domestic ownership.
- Timing and fiscal context
  - The current period of good economic times should provide an opportunity to gain stakeholder traction for civil service reforms.
  - The forthcoming phase of implementation of the FRL is expected to provide more fiscal space.
  - Strengthening the public service and making it affordable increases the likelihood fiscal space will be used wisely for Grenada’s development.

### Public Service Management Reform Logical Framework (high-level outcomes and outputs)
- Impact and pillars (selected items as presented)
  - IMPACT: Improved productivity for economic growth and development.
  - PILLARS: Re-engineering the public service; Strategic human resource management; Strategic compensation management; Integrated ICT; Improved governance; Improved employee well-being and productivity; Fiscal sustainability; Improved ease of doing business; Enhanced machinery of government.
- Selected outcomes and outputs (verbatim terms from framework)
  - Outcomes: Effective human resource management and development; Fiscally sustainable compensation management; Improved service delivery.
  - Outputs: Vision concept of the new Public Service articulated; Public Service architecture revised; Policy, legislation and regulations updated; Manpower management function institutionalized; Human resource management architecture revised; Integrated performance management system revised; Human resource management information system operational; Employee development strategy implemented; Public Service Training Center commissioned; Wage negotiation framework established; Compensation Architecture restructured; Sustainable pension scheme implemented; Payroll system regulated; ICT governance strengthened; Electronic Transaction Architecture created; Government ICT infrastructure developed; Capacity developed; Government as an omni-channel service delivery agent.
- Actions and enabling factors shown include: Audit; Functional review; Job evaluation; Job analysis; Organizational development; Capacity building; Human resource Management reform; Payroll audit; Increment reform; Performance; Pay & Grade review; Governance assessment; Business Process Reengineering and Change Management; Information and Knowledge Management; Enabling Legislation; Consultation and Collaboration; Leadership, Capacity Development & Organizational Management.

### Annex V — Risks of Additional Obligations on Public Pensions: background and impact scenarios
- Background
  - Until recently, under the 1958 law, all public retirees received non-contributory pension benefits with guaranteed replacement rates of 67 percent after less than 27 years of service, summed up to additional benefits earned within the contributory National Insurance Scheme (NIS), which operates on a pay-as-you-go basis.
  - A reform had been reducing benefits for a new cohort hired after mid-1980s to NIS-only benefits (a maximum of 60 percent with 40 years of service). Pressures have been building to reduce the drop-off in their benefits.
- Recent developments (Memorandum of Understanding, MoU)
  - An MoU between the government and unions guarantees replacement rates of 70 percent after 26.7 years of service to “established” public workers hired between 1985 and 2018.
  - Government committed to topping-up NIS pensions (which otherwise would earn a replacement rate of a little below 50 percent for the same number of years).
  - Impasse: unions pushed for large lump-sum withdrawal benefits (afforded by the 1958 law) and waiving the retirement age of 60 for this cohort; government argued both measures were fiscally unaffordable.
  - These matters are awaiting Court arbitration after failed negotiation attempts.
- Fiscal impact scenarios (as described)
  - If the government’s position prevails: extra fiscal costs would be around ¼ percent of GDP in the initial few years.
  - If unions prevail (their scenario): extra annual costs could quickly approach 1 percent of GDP or even top that amount if the retirement age of 60 is not adhered to.
  - Staff long-term projections: cumulative cost of the MoU’s additional benefits (relative to the pre-2018 situation) could be around 20 percent of GDP spread over some 50 years.
  - In the unions’ scenario of waiving the retirement age of 60, this cumulative cost would be augmented by up to 10 percentage points of GDP (even without accounting for knock-on effects from reduced contributory periods).
- Knock-on policy risks
  - Potential pressures for: (i) unestablished workers (some 30 percent of public workers); (ii) post-2018 hires; (iii) NIS benefit pressures with private sector participants potentially asking for higher pensions; (iv) various legal risks from outstanding Court cases; (v) potential need for budget support for NIS due to its deteriorating financial situation (scheme already losing reserves, which are projected to run out in 2035).
- Assessment and recommendations
  - Grenada’s population aging trends imply total old-age pension benefits in public and private sectors could almost triple in terms of GDP by the year 2050 if the level of individual benefits per retiree is not contained relative to current levels (illustrative demographic scenario calculated by staff).
  - Non-budget funding of obligations is unlikely to increase as a share of GDP without further reforms.
  - A comprehensive pension reform is needed based on full costing of implications and fair burden-sharing across cohorts to reduce fiscal pressures.
  - The duality of the pension system needs to be addressed due to adverse incentives for private sector employment.
  - Further technical assistance could help map out reform options.
- Figure assumptions (verbatim)
  - 1/ The scenario is illustrative and assumes that increases in total spending on benefits are entirely driven by demographic projections. As such, it implicitly assumes that any initiatives to contain the level of current pension benefits are defeated or reversed.
  - 2/ Assumes that pensionable age increases from 60 to 65 in gradual steps to be completed by 2030.
  - 3/ Assumes that contribution-based revenue remains constant in terms of GDP at the 2015 level.
  - 4/ Assumes that the contribution rate is increased from 9 to 11 percent of wages starting from 2020.

### Annex VI — Growth at Risk (GaR): methodology, data and key findings
- Methodology and data
  - Framework: Growth at Risk (GaR) framework (Prasad and others (2019)).
  - Data period: 2001-17 quarterly data are used for estimation (limited by availability of bank financial soundness indicators).
  - Quarterly GDP data are available only from 2006 for Grenada; where quarterly GDP data are not available, they are estimated using the method of Chow and Lin (1971).
  - Predictors of real GDP growth partitioned into: (i) credit aggregates; (ii) financial soundness of domestic banks; (iii) external real conditions; (iv) global financial conditions; (v) lag of real GDP growth; and (vi) incidence of natural disasters.
  - Note: Credit union data should be added to the analysis once longer data series become available. Credit growth of both banks and credit unions should be monitored carefully.
- Interpretation of partitioned variables (verbatim summary)
  - An increase in financial indicators index represents a worsening of financial soundness.
  - An increase in external real condition represents a worsening of external real condition.
  - An increase in financial indicators represents a worsening of global financial conditions.
  - An increase in financial indicators represents a worsening in soundness of domestic banks.
- Regression results and key findings (Figure 4-5 summary)
  - Favorable external real conditions forecast favorable real GDP growth.
  - High credit growth forecasts negative real GDP growth in the short and medium term.
    - Footnote: The negative effect of credit growth on real GDP growth forecast disappears in an even shorter term forecast (one-quarter ahead forecast).
  - Forecasting power of global financial conditions is limited.
  - A deterioration in financial soundness indicators forecasts somewhat higher growth in the short term, with no effect in the medium term.
  - Natural disasters predict somewhat higher real GDP growth in the short term, but the effects are small and not statistically significant.
    - Footnote: The bulk of the growth effect of natural disasters falls on the period in which the natural disasters occur; effect on future output growth is not very clear.
  - External real conditions have the largest effect in the short term, while credit growth has the largest effect in the medium term.
- Monitoring implication
  - Credit growth of both banks and credit unions should be monitored carefully.

*Prepared by IMF staff as presented in the source document.*

### 5.      Monitoring of credit unions. This study includes credit growth data only for banks, given

### 5.      Monitoring of credit unions

### Key findings on credit union data and analysis
- This study includes credit growth data only for banks, given that data for credit unions are not sufficiently long.
- It is likely that credit growth of credit unions affects future growth in a similar mechanism as bank credit growth (vulnerabilities accumulated during credit booms materializing over time).
- Therefore, credit growth of both banks and credit unions need to be carefully monitored.
- Credit union data should be added to the analysis once longer data series become available.

### Implications for surveillance and policy
- Monitoring frameworks that focus exclusively on bank credit growth may omit similar buildup of vulnerabilities in the credit union sector.
- Inclusion of credit union credit growth in early-warning indicators and stress-testing exercises is recommended when longer time series become available.
- Supervisory and statistical capacity should prioritize extending and harmonizing data coverage to incorporate mortgage companies, finance companies, building societies, and credit unions in monetary and financial statistics.

### Reported numeric values and figure data (as presented)
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
0.10.250.5
0.750.9mean

Natural  Disasters

-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
0.10.250.50.750.9mean

Credit  Growth

-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.10.250.50.750.9mean

Financial Soundness  Indicators

-0.9
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.10.250.5
0.750.9mean

External Real Conditions

-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.10.250.50.750.9mean

Global Financial Conditions

*Source: 1grdea2019001 - 5.      Monitoring of credit unions. This study includes credit growth data only for banks, given*

### 1. Public debt in this DSA is defined as the sum of central government debt (including arrears

### 1. Public debt in this DSA is defined as the sum of central government debt (including arrears

### Definition and coverage of public debt
- Public debt is defined as the sum of central government debt (including arrears on principal and interest), overdue membership fees to international organizations, and government-guaranteed debt.
- Does not include non-guaranteed debt of public enterprises and limited liability companies, notably PDV Grenada’s debt on account the Petrocaribe arrangement.
- Non-guaranteed debt is estimated at around 15 percent of GDP, including 11½ percent of GDP for the Petrocaribe arrangement.
- Grenada does not have subnational government debt.
- Until recently, gaps and time lags in public enterprises’ reporting hampered complete coverage; recent improvements could enable expanded coverage.

### Contingent liabilities and stress test treatment
- The contingent liability stress test accounts for risks from the estimated stock of SOE debt, ongoing PPPs, and financial markets.
- The stock of enterprise-related debt is substantial and is reflected in the contingent liability stress test.
- Weight of the PPP shock is based on default settings, with information from the World Bank’s database.
- Grenada’s fiscal responsibility law caps PPP-related government liabilities at 5 percent of GDP.
- Contingent liabilities from financial markets are set at the minimum value of 5 percent of GDP (represents average cost to government of a financial crisis in LICs since 1980).
- Estimates for other elements not covered are either zero (no central bank debt borrowed on behalf of the government) or need to be firmed up in developing consolidated non-financial public sector debt reporting.

### Public sector subsectors and default adjustments (as presented)
- Central government: Used for the analysis.
- Guarantees (to other entities in the public and private sector, including to SOEs): Used for the analysis.
- Non-guaranteed SOE debt: 15.0 percent of GDP (not captured in central government definition).
- PPP: 3.0 percent of GDP (35 percent of PPP stock).
- Financial market contingent liabilities: 5.0 percent of GDP (default minimum value).
- Total additional items (2+3+4+5): 23.0 percent of GDP.
- Note on default shock: The default shock of 2% of GDP is triggered where government-guaranteed debt is not fully captured; country team may reduce to 0% if already included and risks negligible.

### Recent developments in debt stock and arrears
- Public debt fell from 108 percent of GDP in 2013 to 63½ percent of GDP in 2018.
- Debt restructuring in 2014-17 ECF-supported program contributed around 12 percentage points to the reduction.
- Arrears of some US$19 million owed to non-Paris Club official bilateral creditors (including Trinidad and Tobago, Algeria, and Libya) remain to be regularized.
- Authorities reported progress with negotiations as of early 2019, notably with Algeria (9.2 percent of the total bilateral arrears).
- Overdue membership fees of US$ 2½ million were settled in 2018 for various regional organizations.
- Recent U.S. sanctions on Venezuela blocked payments on Grenada’s Petrocaribe debt at the turn of 2018-19.
- Most government-guaranteed debt of some 2½ percent of GDP at end-2017 was converted into non-guaranteed debt through a refinancing operation.

### Portfolio characteristics and 2018 developments
- Average time to maturity increased from 8.2 to 9.0 years in 2018.
- Average time to re-fixing increased from 7.8 to 8.6 years in 2018.
- Average effective interest rate on public debt declined from 3.5 to 3.0 percent in 2018.
- Share of multilateral debt increased further by 4.6 percentage points during 2018.
- Composition of domestic debt in 2018: bonds share climbed by 4.0 percentage points, treasury notes climbed by 4.1 percentage points, T-bills declined by 3.7 percentage points.

### Debt management, data coverage, and recommendations
- FRL’s medium-term public debt target: 55 percent of GDP (key fiscal anchor).
- Recommendation: further reform efforts in debt management capacity, data management, and IT system enhancements (building on 2018 DeMPA with World Bank).
- Ministry of Finance is monitoring non-guaranteed SOE debt; monitoring and quality of information (especially for debt of SOEs converted from guaranteed debt) need enhancement, formalization, and public reporting as debt approaches the 55 percent of GDP threshold.
- Recommended that debt coverage be broadened to include non-guaranteed debt of public enterprises.
- PPP definition is under discussion between government and the FRL oversight committee.

### Petrocaribe liabilities and related policy needs
- Given recent developments regarding Venezuela (including sanctions), deteriorating financial situation and changes in management of PDV Grenada, and that most other ECCU countries include such arrangements in government debt, a careful assessment of Grenada’s Petrocaribe liabilities is needed.
- A review would inform the government’s medium-term debt management strategy (revised in late 2018) that incorporates increased availability of highly concessional external financing and substantial receipts under the Citizenship-by-Investment (CBI) program.
- Recent steps toward operationalizing a contingency fund for shocks including natural disasters are welcome; recommend full operationalization and adequate financing.
- Recommend implementation of an integrated disaster resilience (or risk management) strategy to support debt sustainability.

### Macroeconomic assumptions underlying the DSA
- Real GDP growth for 2018-23 is higher than under the 2018 Article IV consultation by 0.2 percentage points (reflecting tourism-related construction and effects of eventual weakening of primary surpluses).
- Long-term potential growth projected to remain around 2¾ percent.
- Continued compliance with the FRL is assumed.
- Primary fiscal surpluses expected to overperform FRL’s 3.5 percent of GDP floor through 2020, then decline to small primary deficits as permitted by the fiscal rule.
- Revisions to services trade and primary income accounts increased external current account deficit by about 3-8 percent of GDP each year relative to 2018 Article IV estimates.
- Current account deficit would average around 10 percent of GDP in the medium term.
- Importance of attracting sufficient FDI (adjusted upward by statistical revisions) to ensure external debt sustainability.
- Baseline includes estimated average costs of natural disasters.

### Specific macroeconomic projections and indicators (selected figures from DSA table)
- Non-interest external current account balance: Historical Average -18.7; 2018 DSA -5.2; 2019 DSA -8.8; 2018 DSA projection -9.2; 2019 DSA projection -11.8.
- Real GDP growth (in percent): Historical Average 2.7; 2018 3.0; DSA2018 3.2; DSA2019 2.7; DSA2019 projection 2.8.
- Growth of exports of G & S (USD terms, in percent): Historical Average 6.3; 2018 5.2; DSA2018 5.8; DSA2019 4.5; DSA2019 projection 4.6.
- Current official transfer: Historical -3.1; 2018 1.2; DSA2018 0.9; DSA2019 1.5; DSA2019 projection 1.2.
- Net FDI: Historical -8.3; 2018 -9.0; DSA2018 -10.2; DSA2019 -9.0; DSA2019 projection -9.0.
- Primary balance: Historical -0.9; 2018 3.9; DSA2018 5.5; DSA2019 -0.9; DSA2019 projection -0.6.
- Revenue and grants: Historical 23.6; 2018 25.1; DSA2018 25.5; DSA2019 23.9; DSA2019 projection 24.5.
  - of which: grants: Historical 3.0; 2018 2.7; DSA2018 2.4; DSA2019 1.7; DSA2019 projection 1.5.
- Primary (non-interest) expenditure: Historical 24.9; 2018 21.1; DSA2018 20.0; DSA2019 24.8; DSA2019 projection 25.1.
- Inflation rate (GDP deflator, in percent): Historical 1.6; 2018 2.3; DSA2018 1.7; DSA2019 2.2; DSA2019 projection 2.2.
- Memorandum: 2018 Nominal GDP (in million USD): 1113.3 (2018 DSA), 1185.9 (2019 DSA).

### Financing assumptions
- Financing updated based on recent data: latest World Bank IDA program and existing Caribbean Development Bank (CDB) projects incorporated.
- Assumed pending disbursement from the China loan will be committed from 2019 onwards.
- As a result, external financing projected to increase in the short term.
- In the long run, government assumed to mainly rely on concessional loans from the World Bank and CDB.
- China loan amount noted as US$ 69 million for infrastructure projects.
- Assumption: the World Bank loan is IDA terms; the other loan is assumed less concessional since Grenada is classified as an upper middle-income country in per capita terms.
- Domestic financing projection assumes implementation of maturity extension via longer-dated securities per Medium-Term Debt Management Strategy.

### Realism tools, growth outlook, and debt projections
- Short-term growth conservatively forecasted given projected fiscal adjustment and potential natural disaster and weak financial system background.
- Grenada does not envision policy-based fiscal adjustment during the projection period.
- Projected fiscal adjustment lies in the lower quartile of past adjustments of the primary fiscal deficit.
- Improved macroeconomic indicators (e.g., stronger primary surpluses) lowered public gross financing needs and enhanced projected external debt-to-GDP and public debt-to-GDP ratios relative to previous DSA.
- Grenada assessed at medium debt-carrying capacity; CI score components and CPIA average rating of 3.48 for 2015-17 noted.

### Public and external DSA baseline and stress-test results
- Total (external plus domestic) PPG-to-GDP ratio projected to gradually decline up to 2024 and broadly stabilize thereafter.
- PV of debt-to-GDP ratio remains well below benchmark in the baseline scenario due to concessional financing and IDA disbursement in mid-2018.
- External PPG debt-to-GDP ratio projected downward; thresholds under baseline not breached.
- DSA rating remains “in debt distress” due to unresolved arrears to official bilateral creditors.
- Under stress tests, thresholds are breached for all key indicators of PPG external debt under an export shock.
  - Present value of debt-to-GDP remains above its threshold under all stress tests except shocks to real GDP growth, primary balance, and other flows.
  - Exports shock: PV of debt-to-GDP reaches 73.5 percent in 2021 (33.5 percentage points above its threshold).
  - Natural disaster shock (assuming a 10 percent of GDP impact and follow-on interactions) raises PV debt-to-GDP to 53.7 percent in 2029.
  - For PV debt-to-exports, debt service-to-exports, and debt service-to-revenue, the exports shock is the most extreme.
- Results indicate vulnerability to natural disasters, exports (tourism), and contingent liabilities; large breaches occur under stress tests for PV debt-to-GDP and debt service-to-revenue ratios.
- Natural disaster shock has protracted effects due to interaction with export shocks (damage to tourism infrastructure).

### Risk factors and mitigating features
- Downside risks: tourism-based exposure to external shocks (major tourist source markets), shocks to oil prices, higher-than-expected pension and health care liabilities, large natural disasters, spillovers from the Venezuelan crisis.
- Continued strong commitment to the FRL is needed to manage risks.
- Mitigation: negotiated hurricane clauses from 2015 debt restructuring allow automatic re-profiling of debt service (pause up to one year) following a hurricane or some disasters.
  - Trigger tied to CCRIF verification; payout must exceed US$15 million for trigger.
  - Clause could release up to EC$45 million in funds in the event of a major natural disaster (amounts would be smaller for smaller events).
  - Grenada’s CCRIF coverage envisions a payout of up to US$29 million, or almost 3 percent of GDP, in the event of a major hurricane.

*Source: IMF staff report (Grenada DSA content as provided).*

### 17. Portfolio risks, while declining, continue to be present. The interest rate is subject to a

### 1grdea2019001 - 17. Portfolio risks, while declining, continue to be present. The interest rate is subject to a

### Portfolio risk profile
- Interest rate risk
  - Average time to re-fixing: 8.6 years
  - 21 percent of the portfolio is subject to a change in interest rates in one year
  - Interest rate risk is concentrated in the domestic portfolio:
    - 31 percent of domestic debt is subject to re-fixing in one year
- Refinancing risk
  - Average time to maturity of the portfolio: 9 years
  - This exceeds the set target of greater than 8 years
- Foreign exchange risk
  - Portfolio is subject to only a moderate foreign exchange risk
  - Most foreign currency debt is denominated in U.S. dollars to which the EC dollar is pegged

### Conclusion on debt sustainability and policy implications
- Current status
  - Grenada remains in external debt distress, but its debt appears sustainable
  - The debt to GDP ratio has decreased through:
    - Fiscal consolidation anchored by the Fiscal Responsibility Law (FRL)
    - Robust economic growth
    - Restructuring of Grenada’s public debt
- Recommendations and implications
  - Fully regularizing external arrears would help tangibly improve the country’s DSA rating
  - Further progress in public debt reduction is essential, including through:
    - Maintaining the FRL’s rules-based framework
    - Pursuing structural fiscal reforms
    - Further improving debt management capacity

*Source: 1grdea2019001 - 17. Portfolio risks, while declining, continue to be present. The interest rate is subject to a — IMF PDF chapter.*

### 19. The authorities agreed with staff’s debt sustainability assessment. As for unresolved arrears,

### 1grdea2019001 - 19. The authorities agreed with staff’s debt sustainability assessment. As for unresolved arrears,

### Authorities' position and unresolved arrears
- The authorities agreed with staff’s debt sustainability assessment.
- An effort to regularize the arrears is continuing, with:
  - progress in the negotiation with Algeria; and
  - negotiations ongoing with two other creditors for arrears regularization.
- Staff's financing assumptions are broadly in line with government's Medium-Term Debt Strategy, which aims to use of longer-term domestic instruments to fill funding gap while extending maturities of existing treasury bills.
- The authorities reiterated that a steadfast commitment to the Fiscal Responsibility Law would further strengthen the debt sustainability outlook.

### Debt composition (selected figures)
- Central government debt composition (by residence):
  - 2017: USD 521.33 (68.4%) External Debt; USD 241.15 (31.6%) Domestic Debt.
  - 2018: USD 527.10 (70.1%) External Debt; USD 224.98 (29.9%) Domestic Debt.
- Domestic debt by instrument type:
  - 2017 shares: Treasury Bills 30.2%; Bonds 54.8%; Compensation Claims 8.5%; Commercial Bank Loans 0.6%; Treasury Notes 0.6%; Central-Government Guaranteed 5.3%.
  - 2018 shares: Treasury Bills 26.5%; Bonds 58.8%; Compensation Claims 9.4%; Commercial Bank Loans 0.6%; Treasury Notes 4.7%; Central-Government Guaranteed 0.0%.
- Foreign debt by creditor category:
  - 2017 shares: Multilateral 55.0%; Official Bilateral 16.6%; Commercial Debt 21.9%; External Arrears on Interests 0.9%; Overdue Membership Fees 3.1%; Central Government Guaranteed 2.5%.
  - 2018 shares: Multilateral 59.6%; Official Bilateral 16.1%; Commercial Debt 20.5%; External Arrears on Interests 1.0%; Overdue Membership Fees 2.8%; Central Government Guaranteed 0.0%.

### External Debt Sustainability Framework — Baseline Scenario (2016–2039) (selected rows copied verbatim)
- External debt (nominal) 1/: 125.7 117.4 108.0 106.6 101.8 98.8 96.0 91.3 88.2 76.5 58.8 128.6 89.7
- of which: public and publicly guaranteed (PPG): 56.6 47.4 44.5 42.1 39.4 38.5 37.9 35.4 34.3 31.7 27.9 61.8 35.6
- Change in external debt: -7.5 -8.2 -9.4 -1.4 -4.8 -2.9 -2.8 -4.7 -3.1 -2.1 -1.9
- Identified net debt-creating flows: -6.3 -7.7 -7.4 -3.0 -2.7 -3.5 -3.0 -2.0 -1.8 0.8 4.6 2.2 -1.5
- Non-interest current account deficit: 8.8 9.9 9.7 9.9 8.9 7.4 8.0 9.0 9.0 11.2 13.7 15.6 9.5
- Residual 3/: -1.3 -0.6 -2.0 1.6 -2.1 0.6 0.2 -2.7 -1.4 -2.9 -6.5 -1.8 -1.4
- Sustainability indicators (selected):
  - PV of PPG external debt-to-GDP ratio: ......38.1 35.4 32.7 30.8 29.4 26.9 25.9 23.5 21.8
  - PV of PPG external debt-to-exports ratio: ......70.3 65.6 60.5 57.0 54.4 50.2 48.5 45.3 43.4
  - PPG debt service-to-exports ratio: 10.6 11.1 10.6 6.8 7.1 6.7 6.5 6.1 5.6 4.3 3.6
  - Gross external financing need (Million of U.S. dollars): 247.0 316.5 335.9 300.8 297.5 281.8 295.3 323.7 335.5 458.2 778.8
- Key macroeconomic assumptions (selected):
  - Real GDP growth (in percent): 3.7 5.1 4.2 3.5 2.7 2.7 3.2 3.2 3.0 2.7 2.7 2.2 2.9
  - GDP deflator in US dollar terms (change in percent): 2.6 1.0 1.0 1.2 1.9 2.1 2.1 2.1 2.1 2.2 2.2 1.6 2.0
  - Effective interest rate (percent) 4/: 1.7 1.7 1.3 1.2 1.3 1.3 1.2 1.1 1.0 0.9 1.1 1.4 1.1
  - Net FDI (negative = inflow): -9.1 -12.4 -12.8 -10.6 -10.1 -9.6 -9.1 -9.1 -9.1 -9.1 -8.1 -10.2 -9.4
  - Nominal GDP (Million of U.S. dollars): 1,062 1,127 1,186 1,241 1,299 1,362 1,434 1,511 1,588 2,029 3,304
  - Nominal dollar GDP growth: 6.5 6.1 5.2 4.7 4.6 4.8 5.3 5.3 5.1 5.0 5.0 3.8 5.0

### Public Sector Debt Sustainability Framework — Baseline Scenario (2016–2039) (selected rows copied verbatim)
- Public sector debt 1/: 81.6 70.0 63.4 58.8 53.8 50.5 48.3 44.9 44.1 44.2 44.2 90.7 47.4
- of which: external debt: 56.6 47.4 44.5 42.1 39.4 38.5 37.9 35.4 34.3 31.7 27.9 61.8 35.6
- Change in public sector debt: -8.5 -11.5 -6.6 -4.7 -5.0 -3.2 -2.2 -3.4 -0.8 0.0 0.1
- Identified debt-creating flows: -7.8 -7.7 -8.3 -7.8 -7.3 -7.3 -5.5 -3.5 -1.0 -0.2 0.1 -1.3 -3.0
- Primary deficit: -5.2 -5.7 -6.8 -6.2 -6.5 -6.6 -4.5 -2.5 0.0 0.6 0.6 -0.5 -2.1
- Revenue and grants: 26.2 25.6 26.5 25.6 25.5 25.3 25.3 25.1 24.8 24.6 24.2 24.0 25.0
- PV of public debt-to-GDP ratio 2/: ......57.1 52.1 47.1 42.8 39.7 36.5 35.7 36.0 38.1

### Stress tests, sensitivity analysis, and tailored tests (high-level)
- The public and external DSA include stress tests and sensitivity analyses across scenarios:
  - Alternative scenarios include variables at historical averages, shocks to real GDP growth, primary balance, exports, other flows, and depreciation.
  - Tailored tests include Combined contingent liabilities and Natural disaster shocks.
- Table 3 (Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–2029) highlights that:
  - Baseline PV of debt-to-GDP ratio row: 35 33 31 29 27 26 25 24 24 24 24.
  - Tailored test C2 (Natural disaster) yields elevated values across years (example entries include 35 43 43 43 43 44 46 48 50 52 53).
  - Tailored test C1 (Combined contingent liabilities) also raises indicators (example entries include 35 41 40 39 38 38 38 38 38 38 37).
- Table 4 (Public debt sensitivity) shows baseline PV of Debt-to-GDP Ratio series: 204 185 169 157 145 144 144 144 145 146 147 (selected projection line).

### Realism tools and drivers of debt dynamics (selected points)
- Figures illustrate decomposition of debt dynamics into contributions from:
  - Primary deficit, real interest rate, real GDP growth, price and exchange rate changes, and residual/other debt-creating flows.
- Figure 7 and related notes indicate use of realism tools for assessing contributions of public and private investment and projected fiscal adjustments.

*Source: Country authorities; and staff estimates and projections (excerpts from the IMF document).*

### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the

### Statement by Ms. Louise Levonian, Executive Director and Mr. Mike Sylvester, Advisor — June 12, 2019

### Recent developments, outlook, and policies
- Authorities committed to delivering "robust, inclusive, and sustained growth" and to implementing prudent macroeconomic policies and reforms.
- Authorities "highly value the Fund’s continued engagement and technical assistance" and look forward to continued constructive engagement.

### Real GDP and inflation
- Real GDP:
  - "Real GDP expanded by almost 5 percent" in 2018.
  - Economy has grown "robustly at an average of 5 ½ percent since 2014."
  - Unemployment fell from "23 ½ percent in 2017 to 21 ¾ percent by mid-2018."
- Outlook and risks:
  - Authorities "broadly share staff’s growth outlook but are slightly more optimistic."
  - Staff projects growth to "moderate toward potential over the medium term, with risks, on balance, tilted to the downside."
  - Authorities foresee a higher growth trajectory based on ongoing and planned public and private sector investments.
- Inflation:
  - "For the second year in a row, the overall change in the consumer price index (period average) remained under 1.0 percent following a pickup in 2016."
  - Inflation is expected to "average around 1.9 percent per annum."

### Fiscal and debt
- Fiscal outturns:
  - "The overall surplus rose from 3.0 of GDP in 2017 to 4.8 percent of GDP in 2018."
- Public sector debt:
  - Public sector debt, excluding non-guaranteed debt of SOEs and the debt of Petrocaribe, "fell from 70 to 63 ½ percent of GDP in 2018."
  - Debt is "on track to reach the FRL debt target of 55 percent of GDP by 2020 and the Eastern Caribbean Currency Union (ECCU) debt target of 60 percent of GDP this year, well ahead of the 2030 deadline."
  - Authorities will "continue to reach out to the three bilateral creditors with a view to regularizing the remaining 1.6 percent of GDP in outstanding debt arrears."
- Fiscal framework and reforms:
  - Authorities "are committed to fiscal and debt sustainability" and underscore the importance of the Fiscal Responsibility Law (FRL).
  - They recognize the need to "strengthen the FRL to support the closing of critical infrastructure and resilience gaps" while reinforcing fiscal sustainability.
  - Authorities appreciate recent Fund TA on strengthening the FRL to inform modifications.
  - Commitment to further fiscal reforms to "anchor improvements in government efficiency, implementation capacity, and policy inclusiveness."
  - Planned actions include implementing the Public Sector Modernization Strategy, strengthening institutional capacity to implement projects, improving oversight and management of SOEs, and better targeting social assistance.

### Financial sector
- Performance and risks:
  - Financial soundness indicators "such as capital adequacy, asset quality, and provisioning, continue to improve."
  - Positive turnaround in private sector credit noted as "essential to support growth."
  - Need for further strengthening of the regulatory and supervisory framework to safeguard stability.
  - Specific risks to monitor: "growing property market," "rapid expansion of credit union lending," and "concentration risks from Scotiabank’s decision to sell some its banking operations across the Caribbean."
- Correspondent banking relationships (CBRs) and AML/CFT:
  - Loss of CBRs "remains a major concern" and could be "very disruptive and damaging to trade and financial flows."
  - Authorities continue collaboration with the Eastern Caribbean Central Bank (ECCB) and other institutions to strengthen supervisory and regulatory frameworks, including the AML/CFT regime.
- International tax compliance:
  - Authorities "welcome the removal of Grenada from the EU’s gray list as a non-cooperative tax jurisdiction" and remain committed to international taxation standards.
  - They expressed concerns that "the recurring and incremental nature of such requirements are burdensome and serve to divert scarce financial and human resources from other critical priorities."

### Building resilience
- Disaster and climate resilience measures:
  - Authorities "currently save a portion of their Citizenship-By-Investment (CBI) proceeds for disaster-related impacts" and have "drafted regulations for the operationalization of a contingency fund for natural disasters."
  - They have incorporated "disaster relief provisions ('hurricane clauses')" in some loan instruments and "have continuously purchased coverage under the regional catastrophic insurance pool facility, CCRIF SPC."
  - Upscaling investments in climate-resilient infrastructure with donor support and established a dedicated "Ministry of Climate Resilience."
- Donor support and international engagement:
  - Authorities "broadly support the assessment and recommendations of the Climate Change Policy Assessment (CCPA)" and welcome its conclusion that Grenada "have been making significant strides to counter climate change but meeting the daunting challenges will require domestic policy actions and sustained international support."
  - Significant donor support needed to complement domestic efforts; authorities continue efforts to mobilize resources, including climate funds, but "continue to face significant hurdles."
  - Authorities welcome Fund analytical work on building ex-ante resilience in the ECCU and the Staff Paper recommending a three-pillar disaster resilience strategy (DRS) covering "structural resilience, financial resilience, and ex-post disaster/social resilience."
  - Grenada selected "as one of the pilots for the DRS" and looks forward to next steps and greater collaboration between the Fund and other institutions.

### Conclusion
- Authorities are "determined to build on the current momentum of strong economic growth and fiscal prudence."
- Commitments reiterated: "sound macroeconomic management and structural reforms" and continued valuation of Fund and partner support for development priorities.

*Statement by Ms. Louise Levonian, Executive Director and Mr. Mike Sylvester, Advisor — June 12, 2019.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2019/1grdea2019001.pdf_