## _cr05290 — Executive Summary

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### Key findings and near-term outlook
- Growth declined by 3 percent in 2004 and growth of only 1 percent is projected in 2005.
- Tourism and agricultural activity remain weak and nearly offset the stimulus from the reconstruction boom.
- Poverty rates reportedly rose sharply, particularly in the rural sector; the majority of homes are still in need of repair.
- Damage from Hurricane Ivan exceeded 200 percent of GDP (EC$ 2.4 billion).
- Nearly 8 percent of the labor force was displaced immediately after Ivan, raising unemployment to over 20 percent.
- Public debt at end-2004 rose to almost 130 percent of GDP and is projected to increase to 133.1 percent of GDP in 2005 (staff baseline).
- The government faces financing gaps: gap of about 4½ percent of GDP in 2005 and gaps of 12–14 percent of GDP per year between 2006 and 2010 under the baseline.
- The authorities announced in October 2004 intent to seek a cooperative solution with creditors and hired legal and financial advisors in January 2005.

### Fiscal position, 2001–05 selected indicators (exact reported series)
- Real GDP (annual percent change): 2001: -4.4; 2002: 0.8; 2003: 5.8; 2004: -3.0; 2005 (Proj.): 0.9.
- CPI, average (annual percent change): 2001: 1.7; 2002: 1.1; 2003: 2.2; 2004: 2.3; 2005 (Proj.): 3.0.
- External current account balance (percent of GDP): 2001: -26.6; 2002: -32.0; 2003: -32.7; 2004: -17.4; 2005 (Proj.): -33.9.
- Capital grants (public sector, percent of GDP): 2001: 4.4; 2002: 2.7; 2003: 4.5; 2004: 2.5; 2005 (Proj.): 6.6.
- Direct investment (net, percent of GDP): 2001: 14.9; 2002: 14.1; 2003: 18.5; 2004: 9.1; 2005 (Proj.): 12.5.
- Overall central government balance (percent of GDP): 2001: -8.5; 2002: -19.2; 2003: -4.8; 2004: -2.8; 2005 (Proj.): -8.5.
- Revenues and grants (percent of GDP): 2001: 31.0; 2002: 29.0; 2003: 34.5; 2004: 33.1; 2005 (Proj.): 41.7.
- Grants (percent of GDP): 2001: 4.2; 2002: 2.1; 2003: 6.9; 2004: 7.5; 2005 (Proj.): 13.9.
- Expenditures (percent of GDP): 2001: 39.5; 2002: 48.2; 2003: 39.3; 2004: 35.9; 2005 (Proj.): 50.2.
- Capital expenditures (percent of GDP): 2001: 15.3; 2002: 22.2; 2003: 15.0; 2004: 7.9; 2005 (Proj.): 19.2.
- Primary balance (after grants, percent of GDP): 2001: -5.8; 2002: -14.5; 2003: 0.4; 2004: 3.7; 2005 (Proj.): -2.5.
- Financing gap (percent of GDP): 2001–2004: 0.0; 2005 (Proj.): 4.6.
- Public sector debt (percent of GDP): 2001: 63.7; 2002: 109.6; 2003: 110.0; 2004: 129.4; 2005 (Proj.): 133.1.

### The 2005 budget and reconstruction program — revenue and expenditure measures
- Revenue measures proposed to yield over 2 percent of GDP, including:
  - A special levy on incomes instituted for a five-year period, proceeds to be deposited in the Grenada Reconstruction and Development Fund (RDF).
  - An increase by about 13 percent in the retail price of fuel and adoption of a flexible fuel price mechanism.
  - An increase in excise taxes on alcohol and tobacco.
  - Strengthened tax administration.
- Offsetting reductions and exemptions for 2005:
  - Taxes payable on residential properties reduced by 50 percent for 2005 only.
  - Taxes on certain vehicle tires and brakes and on alternative (renewable) energy products were lowered.
- Capital and current expenditures for reconstruction:
  - Capital expenditures planned at 19.2 percent of GDP in 2005, priority areas include housing and shelter; rehabilitation of schools; revitalization of agriculture; reactivation of business sector; social recovery; skills training; reconstruction of sporting facilities including the National Stadium.
  - Wage bill expected to increase by over 8 percent in 2005 (an additional 1 percent of GDP), comprising a 4½ percent contracted wage increase and salary increments.

### Debt strategy, financing gaps, and projections (staff baseline and illustrative burden-sharing)
- Staff baseline fiscal projections (selected, percent of GDP unless denoted otherwise):
  - 2005: Total revenues 27.8; Grants 13.9; Noninterest current expenditures 24.9; Interest expenditures 6.1; Capital expenditures 19.2; Overall balance (after grants) -8.5; Financing gap 4.6; Financing gap (in US$ millions) 21.1; Debt service (in percent of revenue) 31.8; Public sector debt 133.1.
  - 2006: Total revenues 26.1; Grants 6.1; Noninterest current expenditures 23.8; Interest expenditures 6.2; Capital expenditures 16.5; Overall balance (after grants) -14.3; Financing gap 13.4; Financing gap (in US$ millions) 66.9; Debt service 35.9; Public sector debt 135.7.
  - 2007: Total revenues 27.6; Grants 2.7; Noninterest current expenditures 23.8; Interest expenditures 6.8; Capital expenditures 12.0; Overall balance (after grants) -12.3; Financing gap 12.8; Financing gap (in US$ millions) 69.0; Debt service 42.1; Public sector debt 138.0.
  - 2008: Total revenues 28.6; Grants 0.6; Noninterest current expenditures 23.6; Interest expenditures 7.4; Capital expenditures 10.0; Overall balance (after grants) -11.7; Financing gap 12.6; Financing gap (in US$ millions) 71.9; Debt service 40.0; Public sector debt 141.2.
  - 2009: Total revenues 29.3; Grants 0.6; Noninterest current expenditures 23.6; Interest expenditures 8.0; Capital expenditures 10.0; Overall balance (after grants) -11.6; Financing gap 12.9; Financing gap (in US$ millions) 78.9; Debt service 37.0; Public sector debt 144.1.
  - 2010: Total revenues 29.0; Grants 0.5; Noninterest current expenditures 23.3; Interest expenditures 8.5; Capital expenditures 10.0; Overall balance (after grants) -12.3; Financing gap 13.3; Financing gap (in US$ millions) 86.2; Debt service 37.9; Public sector debt 147.5.
- Staff illustrative burden-sharing projections (selected, percent of GDP unless denoted otherwise):
  - 2005: Financing gap 0.0; Illustrative debt relief 7.7; Debt service (in percent of revenue) 15.1; Public sector debt 129.2.
  - 2006: Financing gap 0.0; Illustrative debt relief 5.6; Debt service 12.0; Public sector debt 121.1.
  - 2007: Financing gap 0.0; Illustrative debt relief 6.9; Debt service 10.9; Public sector debt 115.6.
  - 2008: Financing gap 0.0; Illustrative debt relief 4.3; Debt service 15.5; Public sector debt 109.7.
  - 2009: Financing gap 0.0; Illustrative debt relief 3.4; Debt service 13.2; Public sector debt 103.3.
  - 2010: Financing gap 0.0; Illustrative debt relief 3.2; Debt service 11.4; Public sector debt 97.6.
- Financing gaps under baseline scenario (percent of GDP): 2005 4.6; 2006 13.4; 2007 12.8; 2008 12.6; 2009 12.9; 2010 13.3.
- In staff's burden-sharing scenario, gaps are filled through fiscal effort, creditor support, and additional grants so gaps are 0.0 in all years.

### Potential fiscal measures (aggregate and examples, 2006–2010)
- Aggregate potential impact: EC$68–89 million; 5.5–7.3 percent (table shows EC$ and percent of GDP).
- Revenue measures (examples and ranges):
  - Implement new pricing for petroleum products: EC$12–15 million; 1.0–1.2 percent of GDP.
  - Reduce concessions for taxes on imports: EC$8–11 million; 0.7–0.9 percent of GDP.
  - Implement the special levy on incomes: EC$10–12 million; 0.8–1.0 percent of GDP.
  - Strengthen tax audits and collections: EC$4–6 million; 0.3–0.5 percent of GDP.
  - Strengthen Lands and Surveys Dept: EC$2–4 million; 0.2–0.3 percent of GDP.
- Expenditure measures (examples and ranges):
  - Contain the wage bill: EC$3–4 million; 0.2–0.3 percent of GDP.
  - Control expenditures on goods and services: EC$3–4 million; 0.2–0.3 percent of GDP.
  - Restrict capital expenditure to well-targeted projects (limit locally financed component): EC$24–30 million; 2.0–2.4 percent of GDP.
- Staff note: The proposed fuel price increase should yield over ½ percent of GDP in additional revenues; full pass through of world price increases since end-2000 would have brought in about 2 percent of GDP; inflation would increase temporarily by about 1½ percentage points.

### Banking sector and financial indicators (through March 2005)
- Banking sector actions post-Ivan: banks granted blanket moratoria on loans, sharply increased loan loss provisions, and assessed loan-by-loan credit quality.
- Share of nonperforming loans (NPLs) in total rose to 5.8 percent at end-March 2005.
- Banking sector indicators (selected exact values and series):
  - Broad money (annual percent change): 2001 10.6; 2002 7.1; 2003 8.0; 2004 17.7; 2005 Proj. 2.3.
  - Net foreign assets 1/: 2001 7.4; 2002 10.8; 2003 5.8; 2004 17.9; 2005 Proj. 2.1.
  - Capital adequacy ratio (for locally incorporated banks): 2001 14.1; 2002 15.6; 2003 17.7; 2004 14.9; 2005 Proj. 17.7.
  - Nonperforming loans/total loans: 2001 5.9; 2002 5.8; 2003 4.5; 2004 6.0; 2005 (actual at end-March) 5.8.
  - Loan loss provisions/NPLs: 2001 43.6; 2002 45.6; 2003 61.7; 2004 81.9; 2005 (end-March) 77.2.
- Mission recommendation: ensure, with the ECCB, effective banking supervision including onsite inspections; resolve the issue of the unregulated bank; pass the new Uniform Banking Act; strengthen supervision of the nonbank financial sector and insurance.

### Debt restructuring, burden sharing, and creditor engagement
- Government launched creditor engagement: a creditor committee representing a majority of commercial debt formed in April 2005; authorities preparing an exchange offer for commercial debt to be launched "this summer."
- Mission emphasized that any restructuring should:
  - be transparent;
  - be nested in a comprehensive medium-term macroeconomic framework;
  - involve close and constructive dialogue with all creditors, private and official;
  - ascertain creditor preferences for new debt instruments;
  - treat comparably the different creditor groups.
- Complicating factors: diplomatic estrangement with Taiwan Province of China (largest bilateral creditor) and preference of some Paris Club creditors for a Fund program.
- Under the illustrative burden-sharing scenario, public sector debt declines to below 100 percent of GDP by 2010 (97.6 percent in staff illustrative projections) and debt service falls to between 10 and 18 percent of GDP, but staff stress remaining exposures to shocks.

### Stress tests, alternative scenarios, and risks
- Natural disaster scenario (assumed in 2006) impacts:
  - GDP growth declines relative to burden-sharing by 3½ percent of GDP in 2006 and 1½ percent of GDP in 2007.
  - Foreign grants: annual increase by 1 percent of GDP in 2006 and 2007.
  - Primary fiscal balance: expansion of primary fiscal deficit relative to burden-sharing by 4 percent of GDP in 2006, 3 percent of GDP in 2007, and 1 percent of GDP in 2008.
  - Consequence: debt-service burden rises, "reaching almost 28 percent of revenue over the medium term"; debt-to-GDP ratio stays close to 130 percent until 2007.
- Bound tests and downside scenarios show non-negligible risk that debt-to-GDP could rise above 170 percent under a combination shock (real GDP growth, real interest rate, primary balance adverse shocks in 2006–07).
- Staff conclusion: financing gaps are "too large to be filled through contributions from one source alone."

### Recovery, growth potential, and structural priorities
- Near-term reconstruction needs: improve performance and transparency of the Agency for Reconstruction and Development (ARD); make RDF operational; set measurable targets and regularly disseminate reconstruction status.
- Medium-term growth priorities to achieve staff-authorities consensus of 4−4½ percent annual growth:
  - Improving the investment climate (investment code changes, customs clearance, one-stop shop capacity).
  - Increasing the contribution of services (tourism, linkages with agriculture, sports and entertainment industries).
  - Enhancing skills by training and tapping the diaspora.
- Need for continued inflows of foreign direct investment, remittances and private capital transfers given the fixed exchange rate and temporary export setback.

### Reducing vulnerabilities and statistical capacity
- Disaster preparedness priorities: strengthen enforcement of building codes; National Disaster Management Agency (NaDMA) actions; investigate regional catastrophe insurance pools.
- Statistical weaknesses: major improvements needed in national accounts, tourism, labor markets, public enterprises, balance of payments, and debt; UNDP-supported Core Welfare Indicators Questionnaire survey underway to improve poverty monitoring.

### Mission recommendations and staff appraisal (priorities)
- Adopt a comprehensive medium-term macroeconomic framework with ambitious fiscal targets for next 3–5 years, approved by Parliament, centered on:
  - (i) closing financing gaps and restoring debt sustainability through burden-sharing (fiscal adjustment, donor support, cooperative creditor agreement);
  - (ii) successful reconstruction and enhanced growth potential;
  - (iii) reducing vulnerabilities to adverse shocks (disaster preparedness, stronger financial supervision).
- Recommended additional fiscal consolidation of about 5 percent of GDP per year for 2006–10 (relative to baseline), including increasing retail fuel prices and reducing tax concessions; build public consensus through consultations and transparency.
- Urged completion of commercial debt exchange offer and continued engagement with official creditors consistent with inter-creditor equity.
- Emphasized transparency and accountability in use of donor funds and ARD/RDF operations; recommended technical assistance for revenue administration, public sector reform, and statistical capacity building.

*Source: IMF staff summary (Executive Summary, _cr05290).*

### Executive Summary ......................................................................................................

### _cr05290 - Executive Summary

### Executive summary: key findings and policy priorities
- Eight months after Hurricane Ivan, economic conditions remain difficult: growth declined by 3 percent in 2004 and growth of only 1 percent is projected in 2005.
- Tourism and agricultural activity remain weak and nearly offset the stimulus from the reconstruction boom.
- Poverty rates have reportedly risen sharply, particularly in the rural sector; the majority of homes are still in need of repair.
- Debt is unsustainable and the government faces large financing gaps: gaps of about 4½ percent of GDP in 2005 and 12–14 percent of GDP per year between 2006 and 2010 are projected.
- Public debt is projected to increase from 130 percent of GDP to nearly 150 percent by 2010 on present policies.
- The authorities announced in October 2004 that they intend to seek a cooperative solution with their creditors.
- A comprehensive medium-term plan is needed that: (i) includes measures to close financing gaps and ensure debt sustainability; (ii) facilitates economic recovery and raises medium-term growth; and (iii) reduces vulnerabilities to adverse shocks.
- Burden sharing—through fiscal effort, cooperative debt restructuring agreements, and donor support—will be required to fill financing gaps and reduce debt.
- The 2005 budget demonstrates commitment to fiscal effort, but implementation will require building social and political consensus; staff recommended additional fiscal consolidation of 5 percent of GDP per year for 2006–10, including an increase in retail fuel prices.
- A special levy on incomes proposed by the authorities has been rejected by the opposition party and labor unions; the ruling party holds a slim one-seat majority in Parliament.
- A debt exchange offer to commercial creditors is expected to be launched this summer; diplomatic estrangement with Taiwan Province of China complicates engagement with the largest bilateral creditor.
- Reinvigorating growth is a high priority: near-term needs include improving the performance and transparency of the reconstruction agency; medium-term priorities include skill development, improving the investment climate, diversifying into new services, and more effective engagement with the diaspora.
- Continued efforts are needed to address vulnerabilities: improving natural disaster mitigation and management is a top priority; close attention to financial sector health, including enhanced supervision, is advised.

### I. Background: structural context and recent history
- Economy structure and vulnerabilities:
  - The economy is largely tourism-based, small, open, and vulnerable to external shocks; services now account for over three-quarters of total value added.
  - Most domestically consumed or invested goods are imported.
- Growth and fiscal trajectory over the past two decades:
  - Growth accelerated in the late 1990s driven by telecommunications, construction, and manufacturing.
  - Despite expansionary fiscal policy in the late 1990s, public debt remained around 50 percent of GDP due in part to privatization receipts.
  - Adverse external shocks in 2001–02 (September 2001 terrorist attacks, global slowdown, Tropical Storm Lili) caused contraction; fiscal policy became more expansionary and public debt rose to 110 percent of GDP by end-2003.
  - Recovery in 2003 prompted fiscal consolidation efforts, but debt remained high and interest burden rose.
- Hurricane Ivan (September 2004) and its impact:
  - Damage exceeded 200 percent of GDP (EC$ 2.4 billion).
  - Virtually every house was affected; 30 percent completely destroyed; extensive damage to schools, universities, hospitals, and shelters.
  - Nutmeg sector, employing an estimated 30 percent of the population directly or indirectly, was decimated; nutmeg trees take 7–10 years to grow.
  - The entire population lacked water and electricity immediately after the hurricane.
  - Measured relative to the economy, Ivan was among the most severe recent natural disasters; average damage worldwide over the past 30 years is 0.6 percent of GDP; ECCU average is 2 percent of GDP with a maximum of 101 percent of GDP cited for Dominica in 1979.
- Social and political consequences:
  - Nearly 8 percent of the labor force was displaced immediately after Ivan, raising unemployment to over 20 percent.
  - Starting from an already high poverty incidence of over 30 percent, poverty reportedly rose sharply among farmers and women.
  - Political tensions are high: the government won less than a majority of the popular vote in 2003 and holds only a one-seat majority in Parliament, complicating fiscal measures which face resistance from labor unions and the opposition.

### II. Recent developments and near-term prospects
- 2005 outlook and sectoral developments:
  - Staff projects growth of about 1 percent in 2005 as weak tourism and agriculture nearly offset reconstruction-related stimulus.
  - About 50 percent of hotel rooms have resumed service; more than 80 percent are expected to be in operation for the tourist season starting later in 2005.
  - Farmers have shifted to short-cycle crops; near-term prospects for nutmeg and cocoa remain bleak.
  - Strong demand for construction workers has reportedly lowered the unemployment rate below the pre-Ivan rate of 13 percent.
  - Year-over-year inflation in April 2005 was 1.8 percent; inflation has remained subdued despite large increases in input prices such as construction materials.
- Competitiveness and external sector:
  - CPI-based real effective exchange rate (REER) has depreciated by more than 15 percent since end-2001, largely owing to depreciation of the U.S. dollar.
  - Tourism-based REER measures have also depreciated; Grenada’s market share of Caribbean tourist arrivals increased sharply in 2002 and 2003.
  - While real wages grew rapidly between 1995 and 2003, they were in line with real GDP growth.
- External current account and capital flows:
  - In 2004, foreign grant inflows and insurance payments improved the external current account deficit to about 17 percent of GDP despite a marked deterioration in the balance of trade after Ivan.
  - For 2005, a sharp deterioration in the external current account deficit is expected due to surging reconstruction-related imports while exports and tourism receipts recover more slowly.
  - Sizable capital grant inflows and direct investment are expected in 2005.
- Fiscal position and financing gap:
  - The government faces a financing gap of 4½ percent of GDP in 2005.
  - In 2004, despite international assistance and spending cuts, the government could not fully service debt obligations.
  - In 2005-to-date, revenue collections have exceeded expectations due to booming tax collections on imports (temporary tax relief measures phased out in February) and a large one-time back payment of taxes; the 2005 budget (approved in April) proposes revenue-enhancing measures.
  - Nevertheless, the financing gap remains large because of high reconstruction expenditures.
- Selected fiscal and external indicators (as presented):
  - Real GDP (annual percent change): 2001: -4.4; 2002: 0.8; 2003: 5.8; 2004: -3.0; 2005 (Proj.): 0.9.
  - CPI, average (annual percent change): 2001: 1.7; 2002: 1.1; 2003: 2.2; 2004: 2.3; 2005 (Proj.): 3.0.
  - External current account balance (percent of GDP): 2001: -26.6; 2002: -32.0; 2003: -32.7; 2004: -17.4; 2005 (Proj.): -33.9.
  - Capital grants (public sector, percent of GDP): 2001: 4.4; 2002: 2.7; 2003: 4.5; 2004: 2.5; 2005 (Proj.): 6.6.
  - Direct investment (net, percent of GDP): 2001: 14.9; 2002: 14.1; 2003: 18.5; 2004: 9.1; 2005 (Proj.): 12.5.
  - Overall central government balance (percent of GDP): 2001: -8.5; 2002: -19.2; 2003: -4.8; 2004: -2.8; 2005 (Proj.): -8.5.
  - Revenues and grants (percent of GDP): 2001: 31.0; 2002: 29.0; 2003: 34.5; 2004: 33.1; 2005 (Proj.): 41.7.
  - Grants (percent of GDP): 2001: 4.2; 2002: 2.1; 2003: 6.9; 2004: 7.5; 2005 (Proj.): 13.9.
  - Expenditures (percent of GDP): 2001: 39.5; 2002: 48.2; 2003: 39.3; 2004: 35.9; 2005 (Proj.): 50.2.
  - Capital expenditures (percent of GDP): 2001: 15.3; 2002: 22.2; 2003: 15.0; 2004: 7.9; 2005 (Proj.): 19.2.
  - Primary balance (after grants, percent of GDP): 2001: -5.8; 2002: -14.5; 2003: 0.4; 2004: 3.7; 2005 (Proj.): -2.5.
  - Financing gap (percent of GDP): 2001–2004: 0.0; 2005 (Proj.): 4.6.
  - Public sector debt (percent of GDP): 2001: 63.7; 2002: 109.6; 2003: 110.0; 2004: 129.4; 2005 (Proj.): 133.1.

*Source: IMF staff summary (Executive Summary, _cr05290).*

### Box 2. The 2005 Budget and the Reconstruction Program

### Box 2. The 2005 Budget and the Reconstruction Program

### Revenue measures and fiscal adjustment
- New revenue measures proposed to yield over 2 percent of GDP, including:
  - A special levy on incomes instituted for a five-year period, proceeds to be deposited in the Grenada Reconstruction and Development Fund (RDF).
  - An increase by about 13 percent in the retail price of fuel (fixed since December 2000) and adoption of a flexible fuel price mechanism.
  - An increase in excise taxes on alcohol and tobacco.
  - Strengthened tax administration.
- Offsetting reductions and exemptions for 2005:
  - Taxes payable on residential properties reduced by 50 percent for 2005 only.
  - Taxes on certain vehicle tires and brakes and on alternative (renewable) energy products were lowered.
- Personal income tax system note:
  - Under the present income tax system, personal income above EC$60,000 per year is taxed at a rate of 30 percent.

### Capital and current expenditures for reconstruction
- Capital expenditures:
  - Government plans capital expenditures of 19.2 percent of GDP in 2005 to promote reconstruction.
  - Priority areas: (i) housing and shelter; (ii) rehabilitation of schools; (iii) revitalization of agriculture (product diversification and replanting of tree crops); (iv) reactivation of the business sector; (v) social recovery for the most vulnerable; (vi) skills training; (vii) reconstruction of sporting facilities, including the National Stadium for co-hosting the 2007 Cricket World Cup.
- Current expenditures:
  - Wage bill expected to increase by over 8 percent in 2005 (an additional 1 percent of GDP), comprising a 4½ percent contracted wage increase and salary increments.
  - Transfers and spending on goods and services have been increased.

### Debt strategy, financing gaps, and projections
- Public debt and strategy:
  - Public debt at end-2004 rose to almost 130 percent of GDP.
  - In January 2005, government hired legal and financial advisors for a comprehensive debt-reduction strategy.
  - Pending the strategy, Grenada discontinued servicing most commercial and official bilateral debt obligations.
  - In April 2005, a creditor committee representing a majority of Grenada’s commercial debt obligations was formed.
  - Authorities published their debt sustainability analysis (DSA) in May 2005 and are preparing an exchange offer for commercial debt; they have approached official creditors for comparable debt and debt-service relief.
- Staff baseline projections (Grenada: Baseline Fiscal Projections, 2005–2010; in percent of GDP unless denoted otherwise):
  - 2005: Total revenues 27.8; Grants 13.9; Noninterest current expenditures 24.9; Interest expenditures 6.1; Capital expenditures 19.2; Overall balance (after grants) -8.5; Financing gap 4.6; Financing gap (in US$ millions) 21.1; Debt service (in percent of revenue) 31.8; Public sector debt 133.1.
  - 2006: Total revenues 26.1; Grants 6.1; Noninterest current expenditures 23.8; Interest expenditures 6.2; Capital expenditures 16.5; Overall balance (after grants) -14.3; Financing gap 13.4; Financing gap (in US$ millions) 66.9; Debt service 35.9; Public sector debt 135.7.
  - 2007: Total revenues 27.6; Grants 2.7; Noninterest current expenditures 23.8; Interest expenditures 6.8; Capital expenditures 12.0; Overall balance (after grants) -12.3; Financing gap 12.8; Financing gap (in US$ millions) 69.0; Debt service 42.1; Public sector debt 138.0.
  - 2008: Total revenues 28.6; Grants 0.6; Noninterest current expenditures 23.6; Interest expenditures 7.4; Capital expenditures 10.0; Overall balance (after grants) -11.7; Financing gap 12.6; Financing gap (in US$ millions) 71.9; Debt service 40.0; Public sector debt 141.2.
  - 2009: Total revenues 29.3; Grants 0.6; Noninterest current expenditures 23.6; Interest expenditures 8.0; Capital expenditures 10.0; Overall balance (after grants) -11.6; Financing gap 12.9; Financing gap (in US$ millions) 78.9; Debt service 37.0; Public sector debt 144.1.
  - 2010: Total revenues 29.0; Grants 0.5; Noninterest current expenditures 23.3; Interest expenditures 8.5; Capital expenditures 10.0; Overall balance (after grants) -12.3; Financing gap 13.3; Financing gap (in US$ millions) 86.2; Debt service 37.9; Public sector debt 147.5.
- Staff burden-sharing illustrative projections (Grenada: Illustrative Burden-Sharing Fiscal Projections, 2005–2010; in percent of GDP unless denoted otherwise):
  - 2005: Total revenues 27.8; Grants 13.9; Noninterest current expenditures 24.9; Interest expenditures 6.1; Capital expenditures 19.2; Overall balance (after grants) -8.5; Financing gap 0.0; Illustrative debt relief 7.7; Debt service (in percent of revenue) 15.1; Public sector debt 129.2.
  - 2006: Total revenues 27.3; Grants 7.8; Noninterest current expenditures 21.9; Interest expenditures 5.7; Capital expenditures 14.0; Overall balance (after grants) -6.5; Financing gap 0.0; Illustrative debt relief 5.6; Debt service 12.0; Public sector debt 121.1.
  - 2007: Total revenues 29.0; Grants 2.8; Noninterest current expenditures 21.0; Interest expenditures 5.2; Capital expenditures 12.0; Overall balance (after grants) -6.3; Financing gap 0.0; Illustrative debt relief 6.9; Debt service 10.9; Public sector debt 115.6.
  - 2008: Total revenues 29.9; Grants 2.4; Noninterest current expenditures 20.4; Interest expenditures 4.9; Capital expenditures 10.5; Overall balance (after grants) -3.5; Financing gap 0.0; Illustrative debt relief 4.3; Debt service 15.5; Public sector debt 109.7.
  - 2009: Total revenues 30.6; Grants 1.8; Noninterest current expenditures 19.9; Interest expenditures 4.5; Capital expenditures 10.0; Overall balance (after grants) -2.1; Financing gap 0.0; Illustrative debt relief 3.4; Debt service 13.2; Public sector debt 103.3.
  - 2010: Total revenues 30.2; Grants 0.5; Noninterest current expenditures 19.3; Interest expenditures 4.2; Capital expenditures 9.5; Overall balance (after grants) -2.2; Financing gap 0.0; Illustrative debt relief 3.2; Debt service 11.4; Public sector debt 97.6.
- Financing gaps and burden-sharing (Grenada: Financing Gaps, 2005−2010; in percent of GDP):
  - Gaps under baseline scenario: 2005 4.6; 2006 13.4; 2007 12.8; 2008 12.6; 2009 12.9; 2010 13.3.
  - In staff's burden-sharing scenario, gaps are filled through:
    - Fiscal effort (relative to baseline): 2005 0.0; 2006 5.6; 2007 4.3; 2008 4.0; 2009 4.9; 2010 5.7.
    - Illustrative official and commercial creditor support: 2005 7.7; 2006 5.6; 2007 6.9; 2008 4.3; 2009 3.4; 2010 3.2.
    - Additional grants from donors (relative to baseline): 2005 0.0; 2006 1.7; 2007 0.1; 2008 1.8; 2009 1.2; 2010 0.0.
    - Reduced debt service from filling gaps: 2005 0.0; 2006 0.5; 2007 1.5; 2008 2.5; 2009 3.4; 2010 4.3.
    - Gaps under burden sharing: all years 0.0.
  - Note: The mission recommended that any excess financing be used to reduce debt.

### Banking sector and prudential indicators (through March 2005)
- Banking sector response to Hurricane Ivan:
  - Banks granted blanket moratoria on loans, sharply increased loan loss provisions, and assessed loan-by-loan credit quality.
  - Share of nonperforming loans (NPLs) in total rose to 5.8 percent at end-March, rising in foreign banks but declining in locally-incorporated banks.
  - ECCB conducted offsite surveillance but had not undertaken onsite inspections.
  - In 2004, banking sector deposits grew rapidly owing to insurance flows and remittances; commercial bank net foreign assets also grew rapidly.
- Selected monetary and financial indicators (annual percentage change / in percent; Grenada: Selected Monetary and Financial Indicators, 2001–2005):
  - Broad money: 2001 10.6; 2002 7.1; 2003 8.0; 2004 17.7; 2005 Proj. 2.3.
  - Net foreign assets 1/: 2001 7.4; 2002 10.8; 2003 5.8; 2004 17.9; 2005 Proj. 2.1.
  - Net domestic assets 1/: 2001 3.2; 2002 -3.7; 2003 2.2; 2004 -0.2; 2005 Proj. 0.2.
  - Of which: private sector credit 1/: 2001 0.8; 2002 0.9; 2003 3.1; 2004 5.0; 2005 Proj. 1.9.
  - Capital adequacy ratio 2/3/ (for locally incorporated banks): 2001 14.1; 2002 15.6; 2003 17.7; 2004 14.9; 2005 Proj. 17.7.
  - Nonperforming loans/total loans 3/: 2001 5.9; 2002 5.8; 2003 4.5; 2004 6.0; 2005 (actual at end-March) 5.8.
  - Loan loss provisions/NPLs 3/: 2001 43.6; 2002 45.6; 2003 61.7; 2004 81.9; 2005 (end-March) 77.2.
  - 1/ 12-month change in percent of broad money at the beginning of the period.
  - 2/ For locally incorporated banks.
  - 3/ For 2005, actual data at end-March are reported.

### Policy discussions, mission recommendations, and fiscal measures
- Mission’s recommended medium-term plan components:
  - Restoring debt sustainability and closing financing gaps.
  - Facilitating reconstruction and enhancing growth.
  - Reducing vulnerabilities to adverse shocks through natural disaster preparedness and strengthening financial sector supervision and regulation.
- Authorities’ stance:
  - Welcomed Fund dialogue and disbursement; intend to develop a home-grown adjustment program with Fund consultation.
  - Committed to implementing revenue measures while consulting publicly on the special levy design and to show proceeds of the levy transparently on the budget.
  - Considered, but did not implement, a wage freeze for 2005 and 2006; acceded to union demands for the contracted 4½ percent wage increase for 2005.
  - Established the Agency for Reconstruction and Development (ARD) to coordinate reconstruction (ARD established November 2004; officially launched on March 15, 2005).
- Mission recommendation on fiscal effort:
  - Recommended further fiscal effort of about 5 percent of GDP per year (relative to the baseline) during 2006–10 and urged identification of contingent fiscal measures.

### Potential fiscal measures discussed (2006–2010)
- Aggregate potential impact:
  - Total impact of fiscal measures: Range EC$68–89 million; 5.5–7.3 percent (interpretation: table shows EC$ and percent of GDP or revenue where applicable).
- Revenue measures (ranges and examples):
  - Implement new pricing for petroleum products: EC$12–15 million; 1.0–1.2 percent of GDP; applicable items: Petrol levy; GCT; CSC.
  - Reduce concessions for taxes on imports: EC$8–11 million; 0.7–0.9 percent of GDP; applicable items: Import duty; GCT; CSC (estimated EC$167.1–192.9 million revenue base shown).
  - Implement the special levy on incomes: EC$10–12 million; 0.8–1.0 percent of GDP; applicable item: Special levy (note: authorities designing levy to avoid regressivity).
  - Strengthen tax audits and collections, including of arrears: EC$4–6 million; 0.3–0.5 percent of GDP; applicable: Inland Revenue; Customs and Excise (estimated EC$278.8–313.2 million revenue base shown).
  - Strengthen administration of Lands and Surveys Dept: EC$2–4 million; 0.2–0.3 percent of GDP; applicable: Lands and Survey Dept (estimated EC$1.4–3.2 million).
  - Improve company registration and collection of fees: EC$2–3 million; 0.2–0.2 percent of GDP; applicable: Lands and Deeds (estimated EC$13.0–16.0 million).
- Expenditure measures (ranges and examples):
  - Contain the wage bill: EC$3–4 million; 0.2–0.3 percent of GDP; applicable: Wage bill (estimated EC$150.3–162.6 million).
  - Control expenditures on goods and services: EC$3–4 million; 0.2–0.3 percent of GDP; applicable: Goods and services (estimated EC$48.0–56.0 million).
  - Restrict capital expenditure to well-targeted projects (limit locally financed component): EC$24–30 million; 2.0–2.4 percent of GDP; applicable: Capital expenditures (estimated EC$93.8–236.0 million).
- Total impact shown in table: EC$68–89 million; 5.5–7.3 percent.
- Staff estimates and context:
  - Revenue projections include potential gains from the measures described.
  - The proposed fuel price increase should yield over ½ percent of GDP in additional revenues; full pass through of world price increases since end-2000 would have brought in about 2 percent of GDP in additional revenues; inflation would increase temporarily by about 1½ percentage points; impact on growth expected to be modest.
- Additional revenue-enhancing and administrative measures discussed:
  - Restore retail fuel tax collections and introduce more frequent (possibly monthly), transparent, rules-based retail fuel price adjustments.
  - Phase out and reform tax concessions—make concessions nondiscretionary, transparent, subject to fixed upper limits and expiration dates; move toward tax credits rather than tax holidays.
  - Lower the threshold for personal income tax exemption and introduce a lower-rate schedule as an alternative to the special levy (authorities had an election promise not to impose new personal income taxes).
  - Improve collection of taxes and fees via administrative reforms: strengthen Lands and Surveys Department, enhance audit capacity of Inland Revenue and Customs and Excise, tighten enforcement at Customs; implemented measures include requiring tax identification numbers for those getting concessions or licenses and a CDB-financed project to improve internal auditing and anti-smuggling efforts.

*Source: Box 2. The 2005 Budget and the Reconstruction Program (text and tables as provided).*

### 22.      Expenditure efforts could include containing the growth of noninterest current

### 22.      Expenditure efforts could include containing the growth of noninterest current 

### Expenditure containment and efficiency
- Measures amounting to 2−3 percent of GDP per year were discussed.
- Keeping the wage bill aligned to inflation and productivity growth:
  - This year’s wage bill increased by 8 percent.
  - The cumulative increase over the last five years has exceeded 40 percent, far outstripping inflation and real per capita GDP.
  - A freeze on new employment had been noted; mission emphasized civil service reform that would entail some transfer of authority from the Public Service Commission to managers to lay off workers.
  - Authorities considered tripartite discussions among labor, business, and the government as a way to obtain agreement on wages during 2006–09.
  - Authorities expect to table a public sector reform bill before Parliament in the coming months to enhance public sector efficiency and productivity.
  - A critical need is donor financing for potential severance payments.
- Controlling expenditures on goods and services:
  - Potential savings from commercialization of services, improving the procurement system, and reducing spending on professional and other services.
- Realizing greater efficiency in capital expenditures:
  - Capital expenditures should be carefully prioritized and planned, considering implementation capacity of line ministries.
  - Reconstruction activity should be carried out at a measured pace in step with financing developments.
  - Authorities noted concessional finance and grants had been sought for projects.

### Technical assistance and administrative capacity
- Authorities requested donor-supported technical assistance to carry out the needed fiscal effort.
- Administrative capacity needs:
  - Ministry of Finance: additional staff needed for economic management and revenue administration.
  - Customs and Excise Department: capacity needs boosting.
  - Technical assistance needed to bring the Inland Revenue and the Customs and Excise Departments on a common data platform to contribute to the revenue effort.
  - Assistance needed to evaluate feasibility and cost effectiveness of public transportation and commercialization of services.

*Italic line: Debt restructuring, burden sharing, and creditor engagement*

### Debt restructuring
- Government hopes to strike a cooperative agreement with creditors to restructure debt and help close financing gaps.
- The mission emphasized any restructuring agreement should:
  - (a) be transparent;
  - (b) be nested in a comprehensive medium-term macroeconomic framework;
  - (c) involve a close and constructive dialogue with all creditors, private and official;
  - (d) ascertain and incorporate to the extent possible the preferences of creditors with respect to new debt instruments;
  - (e) treat comparably the different creditor groups.
- Mission encouraged authorities to launch the exchange offer in a timely fashion.
- Progress and hurdles:
  - Authorities intend to launch their commercial debt exchange offer this summer.
  - They have approached bilateral creditors asking for full debt forgiveness or—at a minimum—for relief on comparable terms with commercial creditors.
  - Diplomatic relations with Taiwan Province of China, the largest bilateral creditor, were ruptured in December 2004 when Grenada established diplomatic relations with the People’s Republic of China.
  - Preference of some Paris Club creditors for a Fund program has complicated matters.
- Risks and stress tests:
  - Under staff’s illustrative burden-sharing scenario, debt levels and debt servicing would decline, but Grenada would remain exposed to risks.
  - Mission presented several stress tests with reference to different risk factors, including natural disasters (Tables 11 and 12). In some scenarios, debt increases substantially (Annex I).
  - Authorities agreed burden sharing would pave the way for Grenada to emerge from difficulties but would not resolve all vulnerabilities.
- Additional donor support:
  - Even with strong fiscal adjustment and creditor support, additional donor support would be required to fill remaining financing gaps.
  - Authorities urged the international community, including the IMF, to play its part in triggering and providing grants and technical assistance.

### Reviving growth and enhancing growth potential
- Reconstruction progress and constraints:
  - Reconstruction has been proceeding slower than desired; a number of houses re-roofed or reconstructed, but the vast majority still in need of repair.
  - Emergency resuscitation program for short-cycle crops had to be halted temporarily owing to administrative difficulties.
  - National replanting program for nutmeg and cocoa is expected to commence soon.
  - Authorities pointed to limitations of institutional capacity and to slow disbursement of grants for reconstruction projects.
- Steps to speed reconstruction and improve transparency:
  - Set measurable targets and collect and regularly disseminate information on reconstruction status to improve accountability.
  - Stepped-up performance by ARD; ARD attained a critical mass of staff and moved into permanent offices only in March. RDF is not yet operational.
  - Ensure ARD operations are consistent with overall prioritization of capital expenditures and decision-making of Parliament through budget discussions.
  - RDF and ARD operating expenditures should be reported transparently as items in the regular budget; ARD’s activities monitored by its Executive Board and subject to regular independent audit.
- Medium-term growth potential:
  - Staff and authorities agreed medium-term growth of 4−4½ percent a year could be achieved through appropriate policies on several fronts:
    - Improving the investment climate: changes in investment code, customs’ regulations to speed up clearance, strengthening the Grenada Industrial Development Corporation’s capacity as a ‘one-stop shop’.
    - Increasing the contribution of the service sector: develop tourism, improve linkages between agriculture and tourism, and develop sports and entertainment industries.
    - Enhancing skills by training and tapping the diaspora: shortage of local specialized skills identified as the main hindrance to raising private investment and growth; training and education quality need enhancement; consider tapping the diaspora’s skills and funds for reconstruction and investment.
- Structural measures and external inflows:
  - Authorities recognized the need for continued inflows of foreign direct investment, remittances and private capital transfers given the fixed exchange rate regime and temporary export setback.
  - Improving the investment climate and enhancing productivity are critical.
- Trade promotion:
  - Authorities formulating a national export strategy with support from the Commonwealth Secretariat and consultation with the private sector.
  - Benefits from the Generalized System of Preferences (GSP) with the European Union and other industrialized countries remain limited for Grenada—key export products, including nutmeg, cocoa, and spices, are not covered by GSP.
  - Market access to industrialized countries complicated by heightened administrative requirements (e.g., U.S. Bioterrorism Act).

### Regional integration
- Authorities committed to deepening regional integration, particularly through progress towards the Caribbean Community Single Market and Economy (CSME).
- Potential benefits: collective provision of government services and harmonization of tax concessions.
- CSME slated to become fully effective in January 2006; many elements, including partial liberalization of labor movement, already in place.
- Authorities intend to seek an extension of their right to impose certain quantitative restrictions after 2005.
- Commitment to other regional initiatives: Organization of Eastern Caribbean States Economic Union and the Free Trade Area of the Americas.

### Reducing vulnerabilities to adverse shocks
- Disaster preparedness:
  - Grenada’s high vulnerability to natural disasters highlights need for disaster-preparedness initiatives.
  - National Disaster Management Agency (NaDMA) procuring better communications equipment, working with communities to identify resilient structures, and raising awareness and strengthening enforcement of building codes.
  - New construction by aid agencies and national Housing Authority reportedly resistant to category 3 hurricanes.
  - Authorities exploring interest in regional risk-pooling and working with the World Bank to investigate regional catastrophe insurance pools as a risk transfer mechanism.
- Financial system stability:
  - Mission urged close attention to financial sector health to detect stress post Ivan.
  - Staff’s calculations suggest banking system could withstand further deterioration in nonperforming loans, although some banks are more vulnerable.
  - Authorities noted banking sector had been in a strong position before Ivan, allowing increased provisions.
  - Mission recommendations:
    - Ensure, with the ECCB, effective banking supervision including onsite inspections.
    - Resolve without delay the issue of the unregulated bank referred to the courts.
  - Authorities expect to bring shortly before Parliament the new Uniform Banking Act to enhance banking supervision effectiveness.
  - Recommendation of regional FSAP to give licensing authority to the ECCB is not likely to be accepted.
  - Supervision of the insurance sector acknowledged as weak; with assistance of CARTAC, draft insurance legislation expected to be finalized by end year.
  - Supervision of the nonbank financial sector (credit unions, money transfer agencies, offshore financial sector, insurance companies) expected to be strengthened by passage of the Grenada Authority for the Regulation of Financial Institutions (GARFIN) Act, which would establish a single supervisory agency; additional staff expected to be recruited.

### Statistical issues
- Grenada’s statistical data remain weak in coverage and timeliness despite ongoing efforts.
- Major improvements needed in national accounts, tourism, labor markets, public enterprises, balance of payments, and debt (Appendix IV).
- Shortcomings have affected accuracy of staff’s assessments of fiscal, labor market, and external sector developments.
- Authorities seeking financial and technical assistance from donors to enhance statistical databases.
- With assistance from the UNDP, a Core Welfare Indicators Questionnaire survey is being conducted to improve timeliness and reliability of poverty monitoring data; the data would help in designing better-targeted social safety nets.

### Staff appraisal — program objectives and outlook
- Recognition of Grenadians’ resilience and government’s fiscal stance in 2004:
  - Government maintained fiscal stability in 2004 under challenging circumstances—nonessential expenditures were curtailed—and international support was marshaled quickly to help fill financing gaps.
- Economic outlook and challenges:
  - Economy expected to recover slowly this year while the external current account deficit is expected to deteriorate sharply.
  - Fiscal situation is challenging with large financing gaps in 2005 and beyond.
  - Public debt, already at unsustainable levels, is projected to rise further.
- Comprehensive economic program needed:
  - Program should be centered on a medium-term macroeconomic framework, with appropriately ambitious fiscal targets for the next 3–5 years based on a broad consensus and approved by Parliament.
  - Program aims:
    - (i) close financing gaps and move Grenada toward a sustainable debt level through a burden-sharing strategy—a combination of fiscal adjustment, additional donor support, and a cooperative agreement with creditors;
    - (ii) bring about successful reconstruction and economic recovery and take steps to enhance the growth potential;
    - (iii) reduce vulnerabilities to adverse shocks.

*Italic line: IMF Staff Country Report content unit.*

### 40.      There has been progress with the burden sharing strategy, but its eventual

### _cr05290 - 40.      There has been progress with the burden sharing strategy, but its eventual

### Burden sharing and financing gaps
- Financing gaps are "too large to be filled through contributions from one source alone."
- Adequate support from "creditors, donors, and the Grenadians is needed urgently."
- Even if the burden-sharing scenario unfolds as envisaged, Grenada would remain exposed to risks: "Financing gaps could re-emerge and debt and debt service could rise substantially" in the event of adverse shocks such as:
  - "shortfalls in donor financing and tax revenues,"
  - "increases in real interest rates,"
  - "natural disasters, and other exogenous economic and financial events."

### Fiscal effort, public consensus, and revenue measures
- The government "has shown a commitment to fiscal effort," and "additional fiscal effort in 2006 and beyond is needed to contribute to filling financing gaps."
- The 2005 budget announced specific measures to contribute to financing needs.
- Public acceptance and resistance:
  - "The impending increase in retail fuel prices has been widely accepted by the public."
  - "The special levy on incomes has met with stiff resistance from the opposition party and labor unions," forcing reconsideration of its design.
- Other revenue-enhancing measures required include:
  - "continued increases in fuel prices toward world levels" and
  - "reductions in tax concessions."

### Building consensus and accountability
- To build consensus the authorities need to:
  - "strengthen public consultations and regularly disseminate information on both the fiscal situation and their reconstruction efforts."
  - Use "town hall meetings, debates, and press conferences" for frequent consultations.
  - "Set measurable targets and to collect and regularly disseminate information on the status of the reconstruction effort" to improve accountability.
- Tripartite negotiations among government, labor unions, and the private sector must result in "an agreement that limits wage growth over 2006–09 to productivity increases."

### Debt negotiations with creditors
- Progress has been made toward a cooperative agreement with creditors, but "hurdles remain."
- With help from debt advisors the authorities have advanced discussions with commercial creditors; "a debt exchange offer is expected to be launched this summer."
- Discussions with official creditors: authorities "have approached all their bilateral creditors for relief."
- Complicating factors:
  - "the diplomatic estrangement with Taiwan Province of China, the largest bilateral creditor,"
  - "the preference of some Paris Club creditors for a Fund program."

### Reconstruction, ARD performance, and transparency
- A successful reconstruction effort requires "a stepped-up performance—and increased transparency—from the Agency for Reconstruction and Development (ARD)."
- Eight months after Hurricane Ivan, "the vast majority of the homes are still in need of some repair."
- ARD and government should "focus on priority areas such as housing."
- Transparency and accountability shortfalls:
  - Mechanisms promised at the donors' conference last November "are still not fully in place."
  - "The Grenada Reconstruction and Development Fund" should be "made operational."
  - "ARD’s operations should be recorded transparently in the budget."

### Disaster mitigation and regional insurance
- Deficiencies in Grenada’s disaster mitigation and management capacity "need to be addressed immediately."
- Steps initiated by Grenada’s National Disaster Management Agency—such as "raising awareness of building codes and carrying out inspections"—are supported and staff "urges their continued and forceful implementation."
- Staff "welcomes the authorities’ intention to investigate the cost-efficacy of regional catastrophe insurance pools."

### Financial sector supervision
- It will be critical to "monitor the health of the financial sector closely."
- The ECCB should ensure effective banking supervision, including "onsite inspections."
- Specific actions recommended:
  - Resolve "the issue of the unregulated bank" without delay.
  - Pass and implement "the new Uniform Banking Act" as soon as feasible to enhance supervisory authority.
  - Transfer licensing authority to the ECCB.
  - Strengthen supervision of the nonbank financial sector, "including the insurance industry," as planned.

### Statistical capacity and data shortcomings
- Despite efforts, "Grenada’s statistical data remain weak in terms of coverage and timeliness."
- Major improvements needed in: "national accounts, tourism, labor markets, public enterprises, balance of payments, and debt."
- Shortcomings affected "the accuracy of staff’s assessments of fiscal, labor market, and external sector developments."
- Staff "welcomes efforts to improve poverty assessment data, which would help in designing targeted social safety nets."

### Article IV consultation and transparency of mission outputs
- It is proposed that "the next Article IV consultation take place on the standard 12-month cycle."
- Staff "welcomes the authorities’ decision to publish the mission’s concluding statement and the transcript of the press conference held at the conclusion of the mission."

### Key fiscal and external figures (selected exact values from text)
- Current account balance (including grants; in percent of GDP): -21.5, -26.6, -32.0, -32.7, -17.4, -33.9 (2000–2005)
- Total revenue and grants (In percent of GDP): 29.8, 31.0, 29.0, 34.5, 33.1, 41.7 (2000–2005)
- Total expenditure (In percent of GDP): 33.0, 39.5, 48.2, 39.3, 35.9, 50.2 (2000–2005)
- Overall balance (after grants) (In percent of GDP): -3.2, -8.5, -19.2, -4.8, -2.8, -8.5 (2000–2005)
- Public sector total debt (end-period) (In percent of GDP): 56.2, 63.7, 109.6, 110.0, 129.4, 133.1 (2000–2005)
- Financing gap (In percent of GDP): 0.0, 0.0, 0.0, 0.0, 0.0, 4.6 (2000–2005)
- Gross international reserves of the ECCB, end-of-period: 383.7, 446.0, 504.8, 539.9, 632.4, 678.7 (2000–2005)
- Nominal GDP (In millions of U.S. dollars): 410.4, 394.6, 407.5, 443.7, 437.3, 454.3 (2000–2005)
- Current account balance (In millions of U.S. dollars): -88.1, -105.0, -130.3, -144.9, -76.0, -154.0 (2000–2005)
- Exports (f.o.b., In millions of U.S. dollars): 83.0, 63.6, 41.4, 45.5, 35.0, 30.4 (2000–2005)
- Imports (f.o.b., In millions of U.S. dollars): 220.4, 196.4, 181.0, 226.4, 235.7, 276.8 (2000–2005)
- External public sector debt (In millions of U.S. dollars): 144.0, 179.7, 340.5, 355.8, 415.6, 455.9 (2000–2005)
- Central government total revenue and grants (In millions of Eastern Caribbean dollars): 330.5, 330.5, 318.8, 413.2, 390.7, 511.2 (2000–2005)
- Central government total expenditure (In millions of Eastern Caribbean dollars): 365.7, 420.6, 529.8, 470.8, 423.4, 615.9 (2000–2005)
- Central government overall balance (after grants) (In millions of Eastern Caribbean dollars): -35.2, -90.0, -211.1, -57.6, -32.7, -104.7 (2000–2005)
- Public and publicly guaranteed debt (In percent of GDP): 48.8, 100.0, 110.0, 56.5, 100.0, 129.4 (selected stock shares)
- External debt shares (selected): External debt 355.8 (72.9 percent of total), multilateral for central government 86.6 (17.7 percent of total), Taiwan Province of China bilateral 20.6 (4.2 percent of total)

*IMF staff report text (pages excerpted).*

### 3.  Commercial, total132.127.129.8177.731.440.6

### _cr05290 - 3.  Commercial, total132.127.129.8177.731.440.6

### Commercial debt breakdown (explicit holdings and instruments)
- Commercial, total: 132.127.129.8177.731.440.6
- Bonds: 129.526.529.2175.731.140.2
  - International Bonds: 100.020.522.5104.718.523.9
  - RBTT Merchant Bank Ltd. bonds: 0.00.0.00.042.27.59.7
  - Unit Trust Corporation (T&T) bonds: 10.62.22.410.61.92.4
  - Citibank (T&T) bonds: 9.92.02.29.91.72.3
  - Royal Merchant Bank (T&T) bonds: 9.11.92.08.41.51.9
  - Other commercial: 2.60.50.61.90.30.4
    - South Trust Bank (U.S.): 2.30.50.51.70.30.4
    - Other: 0.30.10.10.20.00.0
- B. Central-government guaranteed: 72.614.916.473.513.016.8
- C. Other public sector: 11.72.42.611.72.12.7

### Domestic debt composition (central government and public sector)
- Domestic debt: 132.527.129.8150.226.534.3
  - A. Central government: 107.822.124.3121.721.527.8
    - National Insurance Scheme: 28.45.86.428.45.06.5
    - Bonds: 17.63.64.027.74.96.3
    - Treasury bills: 32.46.67.326.94.76.1
    - Compensation claims: 14.83.03.314.82.63.4
    - Commercial bank loans: 8.81.82.022.94.15.2
    - Other: 5.81.21.31.00.20.2
  - B. Central-government guaranteed: 24.75.15.628.55.06.5
  - C. Other public sector: 0.00.00.00.00.00.0

### Memorandum items (nominal aggregates)
- Nominal GDP: 443.7437.3
- Sources noted: Ministry of Finance; and Fund staff estimates.
- Footnotes included in source: 1/ Preliminary. 2/ Includes central government liabilities to the National Insurance Scheme. 3/ In addition, Russia put forward a claim of US$260,000, which the authorities intend to reconcile.

### Consolidated banking system — summary accounts (ECC$ millions, end period)
- Net foreign assets: 136.7209.9327.7395.1620.8652.5
- Net domestic assets: 849.2880.5839.6865.3862.6865.1
- Net credit to the public sector: 39.987.738.865.1-16.3-15.2
  - Central government: 59.893.371.1126.675.075.8
  - Nonfinancial public enterprises 1/: -19.9-5.6-32.3-61.4-91.3-91.0
- Credit to private sector: 878.4886.4896.2933.0996.41025.1
- Liabilities to private sector (M2): 985.81090.41167.41260.41483.41517.6
  - Money: 182.4192.3212.0241.1340.2355.2
  - Quasi-money: 803.5898.0955.41019.31143.11162.4
- Imputed net international reserves: 155.7174.0237.2224.7328.6313.6
- Base money: 163.3181.3214.7234.1327.6313.6
  - Currency held by the public: 71.170.275.284.7102.1112.8
  - Commercial bank reserves: 92.2111.1139.6149.4225.5200.8

### Consolidated banking system — 12-month percent changes (percent of M2 at beginning)
- Liabilities to private sector: 15.410.67.18.017.72.3
- Net foreign assets: 0.37.410.85.817.92.1
- Net domestic assets: 15.03.2-3.72.2-0.20.2
- Credit to private sector: 12.90.80.93.15.01.9

### Financial and external vulnerability indicators (2000–05)
- Real GDP growth (percent): 7.0-4.40.85.8-3.00.9
- CPI inflation (period average): 2.11.71.12.22.33.0
- Capital adequacy ratio (locally incorporated banks) 1/: 13.514.115.617.714.917.7
- Nonperforming loans/total loans 1/: 8.55.95.84.56.05.8
  - Locally incorporated banks 1/: 13.49.39.07.27.15.9
  - Foreign banks 1/: 2.01.41.30.64.45.8
- Loan loss provision/NPLs 1/: 31.243.645.661.781.977.2
- (Pre-tax) return on average assets 1/: 2.52.42.32.90.50.5
- Broad money (12-month percent change): 15.410.67.18.017.72.3
- Private sector credit (12-month percent change): 14.40.91.14.16.82.9
- Gross international reserves of the ECCB (US$ millions): 383.7446.0504.8539.9632.4678.7
- Public gross external debt (US$ million): 144.0179.7340.5355.8415.6455.9
- Public gross external debt to exports of goods and services (percent): 61.191.2197.9197.0235.8270.4
- Gross external financing requirement (percent of GDP) 3/: 23.628.835.035.825.136.9
- Central government overall balance (after grants) 4/: -3.2-8.5-19.2-4.8-2.8-8.5
- Public sector gross external debt (percent of GDP): 35.145.583.680.295.0100.4

### Medium-term central government finances — Baseline scenario (Table 7, 2004–10 projections)
- Total revenue and grants (ECC$ millions): 390.7511.2432.8439.5451.8493.1518.8
- Total revenue: 302.5341.0351.3400.1442.4483.6509.3
  - Tax revenue: 278.8313.2320.7361.8400.5437.7459.8
  - Nontax revenue: 22.327.930.237.941.545.549.1
- Grants: 88.2170.281.539.49.59.59.5
- Total expenditure: 423.4615.9624.6617.6633.3684.6734.1
  - Current expenditure: 329.6380.0402.9443.5478.6519.8558.5
    - Wages and allowances: 150.3162.6178.1192.3205.0218.4232.7
    - Interest: 75.874.683.098.2114.3131.6149.8
      - Domestic interest: 21.120.420.319.219.520.120.0
      - Foreign interest: 54.754.362.779.094.9111.5129.9
  - Capital expenditure: 93.8236.0221.8174.1154.6164.8175.6
- Current balance: -28.4-38.9-51.9-43.7-36.6-36.6-49.6
- Primary balance (after grants): 43.1-30.1-108.8-79.9-67.1-59.9-65.6
- Overall balance (after grants): -32.7-104.7-191.8-178.1-181.5-191.5-215.4
- Financing gap (in percent of GDP): 0.056.9180.6186.4194.1213.1232.9
- Memo: Total public sector debt 3/ 4/: 129.4133.1135.7138.0141.2144.1147.5

### Balance of payments — Baseline scenario (Table 8, US$ millions and percent of GDP)
- Current account balance (US$ millions): -76.0-154.0-204.3-203.3-209.4-208.5-210.2
  - Exports (f.o.b.): 35.030.430.628.431.133.837.1
  - Imports (f.o.b.): 235.7276.8254.6265.5276.9289.0305.1
  - Services (net): 53.737.751.671.679.495.1112.1
    - Travel (net): 83.476.4104.8126.6136.9155.2176.0
  - Income (net): -53.3-53.4-58.3-66.0-73.2-80.8-89.1
  - Transfers (net): 124.2108.226.328.230.232.434.7
- Capital and financial account (US$ millions): 84.0135.5141.2137.9139.4131.4125.8
  - Public sector net borrowing 1/: 51.427.86.910.3-1.1-5.5-3.3
  - Direct investment (net): 39.656.771.275.779.583.387.4
- Overall balance (US$ millions): 46.5-18.5-63.2-65.3-70.1-77.1-84.4
- Financing gap (percent of GDP): 0.04.613.412.812.612.913.3
- Memo: External public sector debt 1/: 415.6455.9529.7609.0679.8753.2836.2

### Burden-sharing scenario — Medium-term central government finances (Table 9, ECC$ millions, 2004–10)
- Total revenue and grants: 390.7511.2472.3462.4499.4533.6540.3
- Total revenue: 302.5341.0367.5421.3462.7504.0530.8
  - Tax revenue: 278.8313.2337.0383.0420.8458.1481.3
  - Grants: 88.2170.2104.741.136.729.69.5
- Total expenditure: 423.4615.9559.1554.0552.8568.1579.4
  - Interest: 75.874.676.875.775.174.973.9
    - Domestic: 21.120.419.218.018.319.018.9
    - Foreign: 54.754.357.657.756.755.955.1
- Current balance: -28.4-38.9-3.741.171.9100.3117.9
- Primary balance (after grants): 43.1-30.1-10.1-15.921.740.434.8
- Overall balance (after grants): -32.7-104.7-86.8-91.6-53.4-34.5-39.1
- Illustrative debt relief (ECC$ millions): ...94.075.599.966.056.156.6
- Financing gap: 0.00.00.00.00.00.00.0
- Memo: Total public sector debt 4/: 129.4129.2121.1115.6109.7103.397.6

### Burden-sharing scenario — Balance of payments (Table 10, US$ millions, 2004–10)
- Current account balance (US$ millions): -76.0-154.0-179.3-170.0-167.7-157.8-147.2
  - Exports (f.o.b.): 35.030.430.628.431.133.837.1
  - Imports (f.o.b.): 235.7276.8237.7247.0256.7267.0278.7
  - Services (net): 53.737.757.978.486.8103.2121.2
    - Travel (net): 83.476.4104.8126.6136.9155.2176.0
  - Income (net): -53.3-53.4-56.4-58.1-59.1-60.2-61.4
- Capital and financial account (US$ millions): 84.0126.9160.0151.6149.2141.5131.1
  - Public sector net borrowing 2/: 51.427.86.910.3-1.1-5.5-3.3
- Overall balance 3/ (US$ millions): 46.5-27.1-19.4-18.4-18.4-16.3-16.0
- Financing gap: 0.00.00.00.00.00.00.0
- Memo: External public sector debt 2/: 415.6449.6465.2483.5490.6492.9497.5

### Public sector debt sustainability — Burden-sharing scenario (Table 11, 2000–10, selected items)
- Public sector debt (percent of GDP): 56.263.7109.6110.0129.4129.2121.1115.6109.7103.397.6
  - Foreign-currency denominated share (percent of GDP): 35.145.583.680.295.099.093.489.390.085.780.876.5 (as presented in tables for external debt)
- Change in public sector debt (percent of GDP): 4.47.545.90.419.3-0.1-8.2-5.5-5.9-6.4-5.6
- Identified debt-creating flows (percent of GDP): 1.710.735.3-5.65.5-3.9-10.5-9.5-8.0-8.1-7.4
  - Primary deficit (percent of GDP): 2.54.931.0-3.7-4.70.1-1.4-0.9-3.3-4.2-3.6
- Automatic debt dynamics (percent of GDP): -0.85.74.5-1.810.23.6-3.4-1.7-0.4-0.4-0.5
  - Contribution from real interest rate: 2.53.25.14.06.84.74.84.44.54.23.8
  - Contribution from real GDP growth: -3.42.5-0.5-5.83.4-1.1-8.3-6.1-4.9-4.6-4.3
- Other identified debt-creating flows (percent of GDP): 0.00.0-0.20.00.0-7.7-5.6-6.9-4.3-3.4-3.2
  - Other (e.g., bank recapitalization): 0.00.0-0.00.00.0-7.7-5.6-6.9-4.3-3.4-3.2
- Residual, including asset changes (percent of GDP): 2.7-3.2 10.66.013.83.82.34.02.11.71.7
- Public sector debt-to-revenue ratio (percent): 157.0172.2322.7278.6358.5282.9301.6313.4294.0276.3273.0
- Gross financing need (percent of GDP): 10.614.644.612.717.723.1...
  - In millions of US dollars: 43.657.5181.956.177.4...

### Stress tests and alternative scenarios (Table 11 & 12 summaries)
- Alternative scenarios (public sector debt ratio outcomes, selected):
  - A1 (key variables at historical averages, 2006–10): 129.2130.8132.8135.5138.8142.3
  - A2 Baseline scenario: 133.1135.7138.0141.2144.1147.5
  - A3 Downside (natural disaster in 2006): 129.2128.4127.5122.2116.2111.0
- Bound tests (selected):
  - B1 Real interest rate = historical average + 2 sd (2006–07): 129.2127.1127.7121.8115.4109.7
  - B2 Real GDP growth = historical avg - 2 sd (2006–07): 129.2142.1160.7162.9164.4166.4
  - B3 Primary balance = historical avg - 2 sd (2006–07): 129.2146.6165.7159.6153.1147.2
  - B5 One-time 30 percent real depreciation in 2006: 129.2167.2161.1155.0148.5142.6
  - B6 10 percent of GDP increase in other debt-creating flows in 2006: 129.2131.1125.4119.5113.1107.4

### External debt sustainability — Burden-sharing scenario (Table 12 highlights)
- External debt (percent of GDP): 35.145.583.680.295.099.093.489.390.085.780.876.5
- Change in external debt (percent of GDP): 4.110.438.0-3.414.93.9-5.5-3.5-4.3-4.9-4.3
- Identified external debt-creating flows (percent of GDP): 2.5-3.42.5-0.5-9.7-3.1-3.4-0.6-0.5-2.2-3.4
  - Current account deficit excluding interest payments (percent of GDP): 18.523.525.526.49.626.128.825.023.120.117.2
  - Net non-debt creating capital inflows (negative): -16.7-31.0-28.4-27.6-27.4-36.2-33.2-27.8-26.2-24.6-22.7
- Automatic debt dynamics (percent of GDP): 0.74.25.50.88.17.01.02.22.62.32.1
  - Contribution from nominal interest rate: 3.03.16.56.47.77.47.46.86.45.95.5
  - Contribution from real GDP growth: -2.01.6-0.4-4.52.4-0.8-6.3-4.7-3.8-3.6-3.4
- Residual, incl. change in gross foreign assets: 1.613.835.5-2.924.67.0-2.1-2.8-3.8-2.7-0.9
- External debt-to-exports (percent): 61.191.2197.9197.0235.8266.6259.2239.1225.3204.3186.0
- Gross external financing need (US$ millions): 108.0144.8218.4196.2138.5211.3190.5185.0185.9176.9171.6
  - In percent of GDP: 26.336.753.644.231.

### Millennium Development Goals — selected indicators (1990–2003)
- Net primary enrollment ratio (percent of relevant age group): 84.2 (year listed)
- Primary completion rate, total (percent): 80.0
- Percentage of cohort reaching grade 5 (percent): 79.0
- Share of women employed in the nonagricultural sector (percent): 38.4
- Seats held by women in national parliament (percent): 20.027.027.0
- Immunization, measles (percent of children under 12 months): 85.087.092.092.099.0
- Infant mortality rate (per 1,000 live births): 30.026.0...21.018.0
- Under-5 mortality rate (per 1,000): 37.033.0...26.023.0
- Contraceptive prevalence rate (percent of women ages 15–49): 54.0
- Incidence of tuberculosis (per 100,000 people): 6.15.75.45.24.9
- Access to an improved water source (percent of population): 95.0
- Access to improved sanitation (percent of population): 97.0
- Fixed line and mobile telephones (per 1,000 people): 178.3242.3301.1377.6666.7
- Internet users (per 1,000 people): 0.00.011.043.6169.0
- Personal computers (per 1,000 people): 108.3127.1132.1

*Sources: Ministry of Finance; Eastern Caribbean Central Bank; World Development Indicators database; and Fund staff estimates and projections.*

### 1.      Under the current circumstances, Grenada’s large stock of public and publicly

### _cr05290 - 1.      Under the current circumstances, Grenada’s large stock of public and publicly

### Baseline scenario: unsustainability
- Public debt service is projected to range between 32 and 42 percent of revenue in 2005-10.
- Financing gaps are already large at 5 percent of GDP this year, and are expected to increase to 13 percent of GDP in 2006-10.
- Both debt service ratios and financing gaps would increase further over the longer term.
- The ratio of public and publicly guaranteed debt to GDP was 130 percent of GDP at end-2004 and would continue its upward dynamics, reaching nearly 150 percent by 2010 (Table AI.1).

### Burden-sharing scenario: gradual return to sustainability
- Assumptions:
  - Substantial additional fiscal consolidation over the medium term.
  - Additional foreign grants.
  - Implementation of a comprehensive debt restructuring in 2005.
- Outcomes of burden-sharing among Grenadians, their donors, and their creditors:
  - A primary fiscal surplus by 2008, which reaches 3.8 percent of GDP over the longer term.
  - A reduction in debt service obligations to between 10 and 18 percent of GDP, and financing gaps that are fully covered.
  - A decline in the ratio of debt to GDP to below 100 percent of GDP by 2010 and below 50 percent by 2020.

*Source: _cr05290 - 1. Under the current circumstances, Grenada’s large stock of public and publicly guaranteed debt is unsustainable.*

### 3.      Notwithstanding the considerable improvements in debt and debt service

### _cr05290 - 3.      Notwithstanding the considerable improvements in debt and debt service

### Risks to the burden-sharing scenario
- Staff stress that "depending on the macroeconomic conditions—debt-service ratios and debt dynamics could turn out considerably worse than under the burden-sharing scenario."
- Scenarios and bound tests presented to the authorities show "non-negligible risk" that debt and debt-service outcomes deteriorate relative to the burden-sharing scenario (Figures AI.1 and AI.2).

### Natural disaster scenario (staff presentation)
- Assumptions and impacts:
  - Assumes a natural disaster in 2006 (Table AI.1).
  - GDP growth declines relative to the burden-sharing scenario by "3½ percent of GDP in 2006" and "1½ percent of GDP in 2007."
  - Foreign grants: "annual increase in foreign grants by 1 percent of GDP in 2006 and 2007."
  - Primary fiscal balance: temporary deterioration with an "expansion of the primary fiscal deficit relative to the burden-sharing scenario by 4 percent of GDP in 2006, 3 percent of GDP in 2007, and 1 percent of GDP in 2008."
- Consequences:
  - Debt-service burden rises markedly, "reaching almost 28 percent of revenue over the medium term."
  - Debt-to-GDP dynamics weaken: "the ratio staying close to 130 percent until 2007."

### Historical averages scenario and bound tests
- Historical averages scenario:
  - Uses 10-year historical averages for key variables during 2006–10 (real GDP growth, the real interest rate and the primary balance).
  - Under this scenario "the debt-to-GDP ratio would continue its upward trend."
- Combination bound test:
  - Under a bound test that shocks "real GDP growth, the real interest rate and the primary balance by one standard deviation in 2006 and 2007," the "debt-to-GDP ratio would quickly rise to above 170 percent in 2007 before stabilizing."

### Select fiscal and macro facts and risks highlighted in the Report and PIN
- Damage and macro impact:
  - Hurricane Ivan damage "exceeded 200 percent of GDP."
  - The economy "contracted by 3 percent in 2004."
- Public debt and debt-service context:
  - Public debt "spiraled to 110 percent of GDP by end-2003."
  - Donor and Fund support in aftermath of Ivan:
    - Donor pledges of "US$150 million (34 percent of 2004 GDP)."
    - Fund emergency assistance "US$4.4 million (25 percent of quota)" in November 2004.
- Fiscal and policy vulnerabilities:
  - Authorities missed interest payments in December 2004 on two large international bonds; Grenada was downgraded to "‘selective default’ by Standard & Poor’s."
  - The public sector wage bill had experienced a "cumulative increase of 40 percent in the public sector wage bill over the last five years."
- External sector and financing:
  - External current account deficits averaged around "20 percent of GDP in 1997–2000" and increased to "32.7 percent by 2003."
  - In 2001–03, financing of current account deficits: "more than half ... by foreign direct investment, and nearly one third by capital transfers, including migrant capital transfers."
- Financial sector indicators:
  - Ratio of nonperforming loans to total loans was "4½ percent at end-2003" and rose to "5.8 percent at end-March 2005."
- Inflation:
  - Inflation averaged "2 percent over the past 15 years"; "the annual inflation rate in April 2005 was 1.8 percent."

### Policy recommendations, priorities, and conditional actions emphasized by Directors
- Restore debt sustainability and fill financing gaps with a collective effort of "creditors, donors, and the Grenadian people":
  - Directors support the authorities' intent to adopt "a comprehensive medium-term plan to fill financing gaps and reduce and restructure public debt, with a view to restoring debt sustainability and boosting growth."
  - Directors urged early implementation of "measures proposed in the 2005 budget."
- Fiscal measures and revenue actions:
  - Further fiscal effort required beyond the 2005 budget measures.
  - Recommended revenue-side actions: "reduce tax concessions and strengthen tax audits and collection."
  - Recommended expenditure-side actions: "wage moderation" and aligning "public sector wage increases ... with productivity growth."
  - Careful prioritization of capital expenditures was urged.
  - Support for "technical assistance to catalyze their efforts."
- Debt-restructuring process and creditor engagement:
  - Commended progress in discussions with commercial creditors and urged completion of a debt exchange offer.
  - Urged dialogue with official creditors and respect for "the principle of inter-creditor equity."
  - Several Directors saw "an important role for the Fund in assisting Grenada to move to a position of debt sustainability, including by facilitating the process of restructuring the country’s Paris Club debt."
  - Need to engage non-Paris Club creditors was underscored.
- Reconstruction governance and transparency:
  - Strong urging that "mechanisms to ensure transparency and accountability in the use of donor funds be made fully operational."
  - Recommend that operations of the Reconstruction and Development Fund and the Agency’s operational expenses "should be recorded transparently as an item in the budget."
- Disaster preparedness and risk management:
  - Urged strengthening disaster mitigation and preparedness, including "better enforcement of building codes" and exploring "ways to transfer disaster risk, including through regional insurance pools."
- Financial sector supervision and statistics:
  - Emphasized "close monitoring of the health of the financial sector" and urged effective supervision in conjunction with the ECCB, including "onsite inspections."
  - Encouraged strengthening "the quality, coverage, timeliness, and frequency of the statistical database" and welcomed efforts to improve poverty data to design social safety nets.

*Source: IMF staff report and Public Information Notice (PIN) summarizing the 2005 Article IV consultation with Grenada, including Annex I scenario analysis and Table AI.1 projections as presented in the source content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05290.pdf_