## _cr06277

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---

### Executive Summary — Background and Context for Reform
- Recent exogenous shocks:
  - Hurricane Ivan (September 2004) caused damage of 200 percent of GDP and killed 39 people.
  - Hurricane Emily (July 2005) caused additional damage estimated at 12 percent of GDP.
  - Earlier shocks: September 11 attacks (sharp drop in tourism) and tropical storm Lili in 2002 (depressed agricultural exports).
- Economic consequences:
  - Output volatility and hampered policy implementation.
  - Reconstruction needs combined with a precarious fiscal position.
- Fiscal and policy context:
  - Public debt was "inordinately high" at 128 percent of GDP at end-2005.
  - Need for fiscal consolidation alongside reconstruction spending, social safety nets, and strengthened fiscal institutions.
  - Tax concessions have eroded the tax base.
- Political context:
  - Government holds a one-vote majority in a 15-member Parliament.
  - Trade unions oppose the National Reconstruction Levy (NRL) introduced in the 2006 budget.
  - General elections must be held before March 2009.

### Recent Developments and Near-Term Outlook (2005–08)
- Growth and sectoral activity:
  - Real GDP rebounded to an estimated 1½ percent in 2005 after a drop of 3 percent in 2004.
  - Recovery driven by brisk construction activity; agriculture and tourism remained weak.
  - By late December 2005, 70–80 percent of pre-Ivan hotel room capacity was restored (alternative source notes 85 percent restored by end-2005).
- Prices and inflation:
  - Domestic petroleum prices increased by 45 percent (October 2005), contributing to inflation of 6 percent at end-2005.
  - Inflation was 4.2 percent year-on-year in September 2005 prior to the fuel adjustment.
  - Inflation expected to decline in the coming months; average inflation for 2005 estimated at 3½ percent in parts of the text.
- Financial sector:
  - Banks implemented a three-month blanket moratorium on loan servicing and raised loan-loss provisioning.
  - Selected indicators:
    - Capital adequacy ratio for locally incorporated banks: 15.0 percent in December 2005.
    - NPLs/total loans: 5.5 percent by Dec-05 (from 5.9 percent Jun-04).
    - Loan loss provision/NPLs (Jun-04 to Dec-05) ranged from 42.9 to 78.9 (tables provide detailed series).
  - Insurance sector stresses:
    - Estimated EC$416 million paid to about 5,000 claimants as at end-June 2005 for Hurricane Ivan claims.
    - A few small insurance companies had payment difficulties; one insurance company was closed by the government in December 2005.
- Fiscal developments and financing:
  - 2005 fiscal accounts were broadly in balance.
  - Grants disbursed in 2005 amounted to 11 percentage points of GDP.
  - Petroleum price adjustment eliminated an implicit subsidy; delayed adjustment had led to liabilities on the order of 2 percent of GDP to oil importing companies.
  - Primary expenditures kept 4½ percentage points of GDP below budget allocation in 2005.
- External current account:
  - Current account deficit widened from 13½ percent of GDP to 37 percent in 2005.
  - Drivers: high reconstruction material imports, low tourism receipts, and low agriculture export receipts.
- Near-term growth projections:
  - Real GDP growth projected to rise to above 5 percent in 2006 and 2007 (reflecting reconstruction, 2007 Cricket World Cup, and anticipated tourism recovery).
  - Planned reforms expected to raise sustainable long-run real GDP growth to 4 percent.

### Authorities’ 2006–08 Program: Objectives and Strategy
- Four strategic objectives:
  1. Promote sustained high economic growth.
  2. Restore fiscal and debt sustainability.
  3. Reduce vulnerabilities (extreme weather and financial regulatory weaknesses).
  4. Alleviate poverty; social development agenda emphasized with a Poverty Eradication Strategy submitted as an Interim-PRSP.
- Fiscal consolidation target:
  - Aim to sharply reduce public debt from 128 percent of GDP at end-2005.
  - Target a primary surplus of 2½ percent of GDP by 2008.
  - Requires an underlying primary adjustment of some 4½ percentage points of GDP.
  - Adjustment phased in over three years to accommodate reconstruction-related spending in 2006 and 2007.
- Structural priorities:
  - Year 1: measures to improve the investment climate.
  - Years 2–3: remove policy-induced distortions in the labor and financial markets.
- Vulnerabilities and social agenda:
  - Commitments to strengthen building code enforcement, insurance regulation, and financial supervision.
  - Fiscal measures create room for increased social spending; interim PRSP to be submitted to Boards.

### Fiscal Consolidation Specifics and Projections (2005–08)
- Key budget measures in 2006:
  - National Reconstruction Levy (NRL) on personal incomes.
  - Automatic fuel pricing mechanism implemented.
  - VAT committed to be introduced by January 1, 2008 to replace the current general consumption tax.
- NRL design and revenue:
  - Effective January 1, 2006.
  - Rates and amounts:
    - 5 percent (3 percent during January 1 to June 30, 2006) for salaries of EC$1,001–5,000 per month.
    - EC$225 per month for EC$5,001–9,000 monthly earners.
    - EC$350 per month for monthly incomes above EC$9,000.
  - Revenue target: EC$10½ million per year (about ¾ percent of GDP).
  - Deductions introduced for mortgage interest and certain education outlays when levy increases from 3 to 5 percent (effective July 1).
- Fuel pricing:
  - Domestic fuel prices raised by over 45 percent on October 1, 2005.
  - Automatic fuel pricing mechanism to include a total tax element of at least EC$2 per gallon.
  - Potential revenue from fuel tax: EC$16–20 million per year.
- Expenditure measures:
  - Public sector wages to be kept constant in real terms through 2008, reducing the wage bill by about 1¼ percentage points of GDP.
  - PSIP reforms: limit PSIP envelope to around 8 percent of GDP once reconstruction is completed; screen projects with CDB/World Bank assistance.
  - Increased monthly transfers to needy elderly persons from EC$100 to EC$135 at an estimated annual cost of about 0.3 percentage points of GDP (EC$4 million noted elsewhere).
- Fiscal projections (In percent of GDP — Est./Proj.):
  - Total revenues and grants: 2005 39.1; 2006 36.1; 2007 31.5; 2008 31.9
  - Grants: 2005 11.0; 2006 8.0; 2007 2.7; 2008 2.5
  - Total expenditures: 2005 38.9; 2006 38.1; 2007 31.6; 2008 28.8
  - Primary expenditures: 2005 36.7; 2006 35.7; 2007 29.4; 2008 26.8
  - Capital expenditures: 2005 15.4; 2006 15.4; 2007 10.0; 2008 8.2
  - Primary balance (excluding grants): 2005 -8.6; 2006 -7.7; 2007 -0.6; 2008 2.5
  - Overall balance (excluding grants): 2005 -10.8; 2006 -10.1; 2007 -2.8; 2008 0.5

### Debt Restructuring — Commercial Debt Exchange (completed November 15, 2005)
- Coverage and participation:
  - Exchange sought to restructure approximately US$190 million of external debt and US$86 million of domestic debt; eligible domestic claims included about US$17 million by domestic banks.
  - Overall participation: 91 percent of eligible claims (about US$237 million).
  - External participation: 93 percent. Domestic participation: exceeded 86 percent.
- Terms and cash-flow relief:
  - No principal reduction; past-due interest fully capitalized.
  - New bonds: 20-year maturity; interest rates of 1 percent for the first three years, gradually increasing thereafter.
  - Exchange provides an 83 percent reduction in Grenada’s commercial debt service costs between 2005 and 2008; 73 percent reduction between 2009 and 2012.
  - Implicit creditor haircut: NPV haircut of 40–45 percent for exit yields in the 9–10 percent range.
  - Credit rating: New bonds received a B- minus rating from Standard and Poors; Grenada lifted from Sovereign Default status held since end-2004.
- Continued creditor engagement:
  - Authorities to continue good-faith efforts to settle remaining nonparticipating creditors on comparable terms.
  - Paris Club engagement expected to follow approval of the program.

### Medium-Term Debt Dynamics and Scenarios (ANNEX I excerpts)
- Program scenario outcomes:
  - Public debt reduced from 120 percent of GDP in 2005 to close to 60 percent of GDP in 2015.
  - By end-2008 public debt will amount to less than 95 percent of GDP.
  - NPV public debt falls from above 85 percent of GDP in 2005 to about 70 percent by end-2008 and to just above 50 percent by 2015 (NPV calculations reflect commercial debt restructuring haircut of 40–45 percent).
- Assumptions on creditor treatment:
  - Program assumes eligible commercial nonparticipants settle on same terms as exchange; Paris Club rescheduled on Houston terms; Taiwan Province of China bilateral debt restructured on comparable terms.
- Alternative scenarios and risks:
  - Alternative Scenario A1: primary deficit at historical average of 2 percent of GDP and GDP growth at historical average would cause NPV of government debt to rise to over 100 percent of GDP by 2015.
  - Alternative Scenario A2: if fiscal adjustment achieved but GDP growth permanently lower than program assumptions, NPV of debt would initially fall but rise rapidly after 2010.
  - Bound tests: sensitivity to short-term shocks (lower GDP growth in 2006/2007, one-time 30 percent real depreciation, 10 percent of GDP increase in other debt-creating flows) could bring debt onto an unsustainable trajectory.

### Program Modalities, Monitoring, and Conditionality
- Fund support:
  - Authorities requested PRGF support; access proposed at 90 percent of quota (SDR 10.53 million).
  - Initial disbursement: SDR 1.56 million becomes available on approval.
  - Two prior emergency purchases: each SDR 2.9 million (25 percent of quota), approved in January 2003 and November 2004.
- PRGF disbursement schedule (2006–09 — Table 8):
  - March 2006: SDR 1.56 million (13.33 percent of Quota) — Board approval condition.
  - September 2006: SDR 1.56 million (13.33 percent) — end-June 2006 performance criteria.
  - March 2007: SDR 1.56 million (13.33 percent) — end-Dec 2006 criteria and adopt second-year conditions.
  - September 2007: SDR 1.46 million (12.50 percent) — end-June 2007 criteria.
  - March 2008: SDR 1.46 million (12.50 percent) — end-Dec 2007 criteria and adopt third-year conditions.
  - September 2008: SDR 1.46 million (12.50 percent) — end-June 2008 criteria.
  - March 2009: SDR 1.46 million (12.50 percent) — end-Dec 2008 criteria.
  - Total: SDR 10.53 million — 90.00 percent of Quota.
- Performance criteria and indicative targets (2006 — Table 2):
  - Central government primary balance excluding grants (floor, EC$ millions, cumulative): 31-Mar (IT) -40; 30-Jun (PC) -60; 30-Sep (IT) -90; 31-Dec (PC) -110
  - Stock of central government domestic arrears (ceiling, EC$ millions): 22 at each test date.
  - Ceiling on contracting/guaranteeing nonconcessional external debt (US$ millions): US$16 at each test date.
  - Zero stock of external short-term debt (continuous).
  - Indicative target: change in net credit of the banking system to the public sector (ceiling) 31-Dec: -33.5 EC$ millions (with interim zeros earlier).
- Structural benchmarks (deadlines preserved):
  - Reach agreement on public sector wage path for 2006–08 — End-April 2006.
  - Initiate implementation of reforms at Customs Authority — End-August 2006.
  - Initiate work to strengthen PSIP planning and implementation — End-June 2006.
  - Amend Income Tax Act for accelerated depreciation and time-bound loss carry-forward — End-June 2006.
  - Repeal Investment Code Incentives Act, Qualified Enterprises Act, and tax-related elements in other legislation — End-June 2006.
- Technical Memorandum of Understanding (TMU) monitoring and reporting:
  - Monthly reporting: central government budgetary accounts, domestic debt data, grant inflows, stock of domestic arrears, capital expenditure details, monetary survey, creditor-by-creditor external debt report, monthly disbursements/grant receipts, CPI, and loan agreements for new/renegotiated loans.
  - Annual reporting: public enterprise financial statements, GDP and components, balance of payments accounts, reports of legislative changes, notification of new public enterprises.
  - Timeliness: monthly data to be provided within three weeks of the end of each month where possible.

### Social Development and Safety Nets
- Social safety net measures in 2006 budget:
  - Increase monthly transfer to needy elderly persons from EC$100 to EC$135 at a budgeted annual cost of about EC$4 million.
  - Temporary subsidy considered to offset bus fare increases for about 2,000 tertiary students at annual cost of EC$1–1.5 million (to be phased out over time).
- PRSP and social strategy:
  - Use updated 2004 Poverty Eradication Strategy as Interim PRSP; elaborate full PRSP in 2006.
  - PRSP to prioritize poverty reduction programmes, cost them, and link to fiscal objectives and PSIP.

### Key Macroeconomic and Fiscal Projections and Selected Indicators (as reported)
- Selected macroeconomic projections (annual percentage change unless otherwise specified):
  - Real GDP: 2003 5.8; 2004 -3.0; 2005 1.5; 2006 6.5; 2007 5.0; 2008 4.0
  - GDP deflator: 2003 1.3; 2004 2.7; 2005 3.5; 2006 4.6; 2007 2.0; 2008 2.0
  - Consumer prices (end-of-year): 2003 1.6; 2004 2.5; 2005 6.0; 2006 2.0; 2007 2.0; 2008 2.0
  - Current account balance (including grants; in percent of GDP): 2003 -33.2; 2004 -13.5; 2005 -37.1; 2006 -32.8; 2007 -28.0; 2008 -26.7
  - Public sector total debt (end-period): 2003 110.0; 2004 129.5; 2005 128.0; 2006 126.7; 2007 117.8; 2008 107.3
- Central government finances (selected levels, in millions of EC dollars; projections):
  - Total revenue and grants: 2003 413.2; 2004 390.7; 2005 500.7; 2006 505.6; 2007 475.7; 2008 513.0
  - Total expenditure: 2003 470.8; 2004 423.4; 2005 497.7; 2006 534.2; 2007 476.6; 2008 464.4
  - Capital expenditure: 2003 179.1; 2004 93.8; 2005 196.6; 2006 216.1; 2007 150.9; 2008 132.1
  - Primary balance (including grants): 2003 4.9; 2004 43.1; 2005 30.8; 2006 4.4; 2007 31.6; 2008 80.6
  - Overall balance (including grants): 2003 -57.6; 2004 -32.7; 2005 3.0; 2006 -28.7; 2007 -0.9; 2008 48.6
- Public sector debt structure (2005, selected):
  - Public sector debt (total, US$ millions and percent of GDP): 606.6; Percent of stock: 100.0; Percent of GDP: 128.0
  - Commercial, total: 199.4 (columns indicate 32.9 and 42.1 in table format)
  - Domestic debt: 170.0 (28.0 35.9 in table format)
  - Nominal GDP (memorandum): 474.0 (US$ millions)
- Balance of payments highlights (US$ millions):
  - Current account balance: 2003 -147.4; 2004 -59.0; 2005 -175.7; 2006 -170.5; 2007 -156.4; 2008 -159.1
  - Exports (f.o.b.): 2003 45.5; 2004 36.9; 2005 31.5; 2006 31.7; 2007 29.1; 2008 33.9
  - Imports (f.o.b.): 2003 226.4; 2004 235.4; 2005 288.6; 2006 278.6; 2007 290.4; 2008 307.1
  - Travel (net, US$ millions): 2003 95.3; 2004 73.9; 2005 71.8; 2006 98.1; 2007 131.7; 2008 137.8

### Indicators of Financial and External Vulnerability; Statistical and Institutional Gaps
- Selected vulnerability indicators (2001–06 series in table form):
  - Real GDP growth (percent): -4.4 0.8 5.8 -3.0 1.5 6.5 (series across years)
  - CPI inflation (period average, percent): 1.7 1.1 2.2 2.3 3.5 4.6
  - Capital adequacy ratio (locally incorporated banks): 14.1 15.6 17.7 14.9 15.0 ...
  - Nonperforming loans/total loans: 5.9 5.8 4.5 6.0 5.5 ...
  - Public gross external debt (US$ millions): 179.7 340.5 355.8 415.6 436.6 459.2
  - Public gross external debt to exports of goods and services (percent): 91.2 197.9 196.9 215.5 261.1 261.6
  - Gross external financing requirement (percent of GDP): 28.8 35.0 36.4 20.1 46.0 36.8
- Statistical and institutional gaps (Appendix IV):
  - National accounts: GDP by expenditure available with long lags; real GDP by sector not available.
  - CPI basket last updated in 2000; no producer price index.
  - Labor statistics outdated (most recent 1998); census data processing ongoing.
  - Public finances: limited coverage of rest of public sector; no consolidated public sector accounts; fiscal data not reported in IFS or GFS Yearbook.
  - Monetary accounts: ECCB compiles monthly commercial bank data with two-month lag; limited coverage of nonbank financial institutions and offshore sector.
  - Balance of payments: latest published data in IFS and BOP Yearbook are for 2002; need for quarterly BOP and IIP.
  - Debt databases: comprehensive external debt records; limited data on domestic debt, government-guaranteed debt, and public enterprise debt.

### Risks, Staff Assessment, and Recommendations
- Main risks to program success:
  - Financing of the large external current account deficit is uncertain.
  - Policy slippages and weak implementation capacity.
  - Higher output growth failing to materialize.
  - Another major hurricane (Ivan-strength) could significantly delay objectives and create sizable financing gaps.
- Staff mitigation and recommendations:
  - Program focus on reducing vulnerabilities and fiscal consolidation to improve resilience.
  - Move from wholesale tax exemptions and tax holidays toward accelerated depreciation linked to investment and time-bound measures.
  - Replace general consumption tax with a broad-based VAT (staff commends decision) — VAT introduction committed for January 1, 2008.
  - Support for automatic fuel pricing mechanism; price formula should include a specific tax element and frequent adjustments.
  - Emphasize spending restraint, improved PSIP screening, and keeping public sector wages unchanged in real terms.
  - Encourage continued engagement with nonparticipating creditors and official creditors for comparable restructuring terms.

*Source: Excerpts from IMF staff report and supporting tables in _cr06277 (Executive Summary, Annexes, Appendix IV, and selected tables).*

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

### Executive Summary

### Background / Context for Reform
- Recent exogenous shocks:
  - Hurricane Ivan (September 2004) caused damage of 200 percent of GDP and killed 39 people.
  - Hurricane Emily (July 2005) caused additional damage estimated at 12 percent of GDP.
  - Earlier shocks included the September 11 attacks (sharp drop in tourism) and tropical storm Lili in 2002 (depressed agricultural exports).
- Economic consequences:
  - Output volatility and hampered policy implementation.
  - Reconstruction needs combined with a precarious fiscal position.
- Fiscal and policy context:
  - Public debt was "inordinately high" at 128 percent of GDP at end-2005.
  - Need for fiscal consolidation alongside reconstruction spending, social safety nets, and strengthened fiscal institutions (noting tax concessions have eroded the tax base).
- Political context:
  - Government holds a one-vote majority in a 15-member Parliament.
  - Trade unions have voiced strong opposition to the National Reconstruction Levy (NRL) introduced in the 2006 budget.
  - General elections must be held before March 2009.

### Recent Developments and Outlook
- Growth and sectoral activity:
  - Real GDP rebounded to an estimated 1½ percent in 2005 after a drop of 3 percent in 2004.
  - Recovery driven by brisk construction activity; agriculture and tourism remained weak.
  - By late December 2005, 70–80 percent of pre-Ivan hotel room capacity was restored.
- Prices and inflation:
  - Domestic petroleum prices increased by 45 percent (October 2005), contributing to inflation of 6 percent at end-2005.
  - Inflation had been 4.2 percent year-on-year in September 2005 prior to the fuel adjustment.
  - Second-round price effects have been limited; inflation is expected to decline in the coming months.
- Financial sector:
  - Domestic commercial banks were relatively strong before Ivan; liquidity increased from insurance proceeds and remittances.
  - Banks implemented a three-month blanket moratorium on loan servicing and raised loan-loss provisioning.
  - Indicators (selected):
    - Capital adequacy ratio for locally incorporated banks declined to 15.0 percent in December 2005.
    - NPLs/total loans moved to 5.5 percent by Dec-05 (from 5.9 percent Jun-04).
    - Loan loss provision/NPLs for Jun-04 to Dec-05 ranged from 42.9 to 78.9 (see table in source).
  - Insurance sector stresses:
    - Estimated EC$416 million paid to about 5,000 claimants as at end-June 2005 for Hurricane Ivan claims.
    - A few small insurance companies had payment difficulties; one insurance company was closed by the government in December 2005.
- Fiscal developments and financing:
  - 2005 fiscal accounts were broadly in balance.
  - Revenues were buoyant, partly reflecting one-off arrears collection and higher trade taxes from construction-related imports.
  - Petroleum price adjustment helped eliminate an implicit subsidy from rising world oil prices (previous delay led to accumulation of liabilities on the order of 2 percent of GDP to oil importing companies).
  - Spending restraint: primary expenditures kept 4½ percentage points of GDP below the budget allocation.
  - Grants disbursed in 2005 amounted to 11 percentage points of GDP.
- Debt restructuring:
  - Commercial debt restructuring (debt exchange launched September 2005) restructured more than 90 percent of eligible commercial debt (accounting for about 45 percent of total public sector debt).
  - The exchange involved no principal reduction, but new bonds carry lower near- to medium-term interest rates implying creditors accepted a haircut in NPV terms of some 40–45 percent.

### The Authorities’ Program for 2006–08 (Objectives and Strategy)
- Strategic objectives of the program:
  - Promote sustained high economic growth.
  - Restore fiscal and debt sustainability.
  - Reduce vulnerabilities (extreme weather and financial regulatory weaknesses).
  - Alleviate poverty; social development agenda emphasized with a Poverty Eradication Strategy submitted as an Interim-PRSP.
- Fiscal adjustment target:
  - Aim to sharply reduce public debt from 128 percent of GDP at end-2005.
  - Target a primary surplus of 2½ percent of GDP by 2008.
  - This requires an underlying primary adjustment of some 4½ percentage points of GDP.
  - The fiscal shift will be phased in over the next three years to accommodate reconstruction-related spending in 2006 and 2007, and will be underpinned by structural fiscal measures already identified in the program.
- Structural policy priorities:
  - Year 1: measures to improve the investment climate.
  - Years 2–3: focus on removing policy-induced distortions in the labor and financial markets.
- Vulnerabilities and social agenda:
  - Commitments to reduce vulnerabilities from extreme weather events and to strengthen the regulatory framework of the financial sector.
  - Fiscal measures create room for increased social spending.
  - A Poverty Eradication Strategy is being submitted to the Boards of the Fund and Bank as the country’s Interim-PRSP.

### Risks
- Main risks to program success:
  - Outlook for the external accounts.
  - Policy slippages.
  - Higher output growth failing to materialize.
  - Weak implementation capacity.
- Mitigation approach:
  - Program focus on reducing vulnerabilities is intended to address these risks.

### Assessment and Arrangement
- Assessment:
  - Much depends on implementation; provided reforms are advanced, the program should improve resilience to shocks and restore debt and fiscal sustainability.
- Fund support and access:
  - Authorities request Fund support under the Poverty Reduction and Growth Facility (PRGF).
  - Access under the arrangement is proposed at 90 percent of quota (SDR 10.53 million).
  - An initial disbursement of SDR 1.56 million becomes available on approval of this request.
- Prior Fund engagement:
  - The Fund provided two emergency purchases following natural disasters: each purchase was SDR 2.9 million (25 percent of quota), approved in January 2003 and November 2004.

*Source: _cr06277 - Executive Summary*

### 10.      The external current account deficit widened sharply in 2005 (Table 4).

### 10.      The external current account deficit widened sharply in 2005 (Table 4).

### External position in 2005
- The current account deficit widened from 13½ percent of GDP to 37 percent in 2005.
- Drivers:
  - High reconstruction material imports.
  - Low tourism receipts.
  - Low agriculture export receipts after much of Grenada’s nutmeg and cocoa trees were destroyed.
- Merchandise exports remain depressed and are likely to remain so until newly planted trees start to bear fruit in about five years’ time.

### Outlook for 2006 and beyond
- Near-term output growth prospects:
  - Real GDP growth should rise to above 5 percent in 2006 and 2007 (reflecting reconstruction activity, preparations for and hosting of the 2007 Cricket World Cup, and an anticipated recovery in tourism).
  - Beyond 2007, growth is likely to slip back as agriculture activity and exports remain depressed and tourism expansion is unlikely without new investment.
  - The planned reforms are expected to raise the real GDP growth rate to a sustainable 4 percent—the long-run average.
- External account projections and uncertainty:
  - Current account deficit projected to decline from the current level of 37 percent of GDP to about 27 percent by 2008 as more hotel rooms come back on stream.
  - Trade balance expected to remain at recent levels through the program period because merchandise exports recover only in the medium term while imports remain high with continued reconstruction activity.
  - Competitiveness assessment:
    - Eastern Caribbean dollar has depreciated markedly in real effective terms since the beginning of 2002 mirroring the depreciation of the U.S. dollar to which it is pegged.
    - Tourism-based indicators suggest competitiveness is adequate; Grenada’s market share of Caribbean stay-over tourist arrivals improved somewhat during 1999–2003, but visitor numbers have been substantially lower after Ivan due to temporary reduction in hotel room capacity.

### Grenada’s commercial debt restructuring (Box 2)
- Arrears and exchange offer:
  - Grenada started incurring arrears on most of its commercial debt after Hurricane Ivan (September 2004).
  - The exchange offer (launched almost a year after Ivan) covered about half of the country’s total public sector debt and sought to restructure approximately US$190 million of external debt (including one global bond of US$100 million) as well as US$86 million of domestic debt.
  - Eligible domestic claims included about US$17 million by domestic banks (separately settled in October ahead of the general offer closing).
- Completion and key features (exchange completed November 15, 2005):
  - Authorities sought a co-operative solution and adjusted the structure of the offer in response to creditors’ suggestions (coupon structure was raised slightly, lowering the NPV haircut by about 5 percentage points).
  - Close consultations (but not formal negotiations) with a creditor committee representing about 70 percent of eligible external debt.
  - Participation:
    - Overall participation reached 91 percent of eligible claims, or about US$237 million.
    - External participation reached 93 percent.
    - Domestic participation exceeded 86 percent.
  - Cash-flow relief:
    - The exchange provides an 83 percent reduction in Grenada’s commercial debt service costs between 2005 and 2008.
    - A reduction of 73 percent between 2009 and 2012.
  - NPV reduction and bond terms:
    - No write down of principal; past-due interest fully capitalized.
    - New bonds: 20-year maturity and interest rates of 1 percent for the first three years, gradually increasing thereafter.
    - For creditors, on average, this implies an NPV haircut of 40–45 percent for exit yields in the 9–10 percent range.
  - Credit rating:
    - New bonds received a B- minus rating from Standard and Poors, lifting Grenada from Sovereign Default status held since end-2004; still below the BB- rating prior to Ivan.

### Authorities’ program for 2006–08 — overall strategy
- Four pillars of the program:
  1. Reducing fiscal imbalances.
  2. Wide-ranging reforms to reinvigorate economic growth.
  3. Steps to reduce vulnerabilities.
  4. Advancing social development.
- Fiscal consolidation is central:
  - Reduce debt stock from 130 percent of GDP at end-2004 to a more prudent level.
  - Main fiscal objective: central government primary surplus (excluding grants) of 2½ percent of GDP to enable the debt-to-GDP ratio to decline to 60 percent by 2015 (ECCB benchmark).
  - Required improvement: 4½ percentage points of GDP in the primary balance (excluding grants), phased in through 2008 to avoid hindering the recovery and to accommodate large capital spending needs in 2006 and 2007.
  - Measures to be initiated early in the program period so adjustment can be completed by 2008.
  - Structural fiscal policies to improve tax efficiency and public spending effectiveness.

### Fiscal consolidation specifics and fiscal projections (2005–08)
- Program emphasis in 2006 budget:
  - Introduced the National Reconstruction Levy (NRL) on personal incomes and an automatic fuel pricing mechanism.
  - Current spending set to decline by about 1 percentage point of GDP relative to last year.
  - Budget measures expected to limit the primary deficit (excluding grants) to 7¾ percent of GDP in 2006, down from 8½ percent of GDP in 2005.
  - With one-off capital expenditures completed and fiscal reforms implemented, primary balance (excluding grants) should swing to a surplus of 2½ percent of GDP by 2008.
- Fiscal developments table (In percent of GDP) — Est./Proj.:
  - Total revenues and grants: 2005 39.1; 2006 36.1; 2007 31.5; 2008 31.9
  - Grants: 2005 11.0; 2006 8.0; 2007 2.7; 2008 2.5
  - Total expenditures: 2005 38.9; 2006 38.1; 2007 31.6; 2008 28.8
  - Primary expenditures: 2005 36.7; 2006 35.7; 2007 29.4; 2008 26.8
  - Capital expenditures: 2005 15.4; 2006 15.4; 2007 10.0; 2008 8.2
  - Primary balance (excluding grants): 2005 -8.6; 2006 -7.7; 2007 -0.6; 2008 2.5
  - Overall balance (excluding grants): 2005 -10.8; 2006 -10.1; 2007 -2.8; 2008 0.5

### Medium-term fiscal consolidation (Box 3)
- Debt and target assumptions:
  - Total public sector debt at end-2005 about 128 percent of GDP; about 17 percent of GDP is guaranteed debt.
  - Program assumes half of contingent liabilities could be called upon, so starting debt-to-GDP ratio for estimating the primary surplus is assumed to be 120 percent of GDP.
  - Restructured claim interest rates step up from 1 percent over the next three years to over 8 percent after ten years.
  - Real GDP assumed to expand by 4 percent a year over the medium term.
- Structural primary deficit and required adjustment:
  - Underlying or structural primary deficit estimated at 2 percent of GDP (after purging one-off factors).
  - Revenue effort on current policies estimated at about 27 percent of GDP.
  - Current primary expenditures about 21 percent of GDP (1990–2002 average).
  - Capital expenditures assumed at 8 percent of GDP.
  - Medium-term primary surplus target requires a fiscal adjustment of around 4½ percentage points of GDP.
- Expected composition of adjustment by 2008:
  - Revenue-to-GDP ratio expected to increase to 29¼ percent by 2008 (from underlying level of 27 percent) via revenue measures and administrative reforms.
  - Current primary spending expected to decline to below 19 percent of GDP (from 21 percent).
- Debt dynamics:
  - Low interest rates in initial years should allow rapid decline in debt-to-GDP ratio; when interest rates step up the rate of decline slows unless primary surpluses rise above 2½ percent of GDP.
  - Discount rate used for external debt in NPV calculations is 9 percent; domestic debt is not discounted.

### Fiscal measures, expenditure reform, and social spending
- Revenue-side measures:
  - National Reconstruction Levy (NRL) on personal incomes introduced to collect EC$10½ million (¾ percent of GDP); introduced despite opposition from trade unions.
  - Automatic fuel pricing mechanism implemented.
  - VAT committed to be introduced by January 1, 2008 to replace the current general consumption tax.
  - Corporate income tax reductions will be considered as revenue situation permits.
- NRL specifics and social concessions:
  - Following consultations, deductions from the tax base were introduced to ameliorate impact on homeowners; mortgage interest payments and certain outlays on education are allowed to be deducted starting July 1 when the levy increases from 3 to 5 percent on monthly incomes of EC$1,001 to EC$5,000.
- Expenditure-side measures:
  - Public Sector Investment Program (PSIP) reforms:
    - Improve project screening with assistance from CDB and the World Bank.
    - Limit PSIP envelope to around 8 percent of GDP once reconstruction is completed; higher PSIP envelope possible if higher grants become available.
    - Seek to keep nonconcessional financing to a minimum.
  - Wage restraint:
    - Public sector wages rose from 10½ percent of GDP in 2000 to 11¾ percent of GDP in 2005.
    - Authorities intend to keep wages constant in real terms through 2008, reducing the wage bill by about 1¼ percentage points of GDP.
    - These reforms to be underpinned by broader public sector reforms.
- Social spending:
  - 2006 budget increases monthly transfers to needy elderly persons from EC$100 to EC$135 at an estimated annual cost of about 0.3 percentage points of GDP.
  - Budget includes significant allocation for low-income housing projects and support for farmers affected by the hurricanes.

### Tax policy and administration reforms
- VAT introduction committed for January 1, 2008; proceed cautiously due to limited implementation capacity and past administrative problems.
- Tax administration improvements to include enhancements at Customs and auditing capacity of Inland Revenue Department.
- Tax incentives to be reformed to improve predictability and transparency, including repeal of legislations granting wide discretionary powers to grant tax concessions.

*Source: Excerpts from the IMF staff report chapter on Grenada’s 2006 program and fiscal outlook.*

### 21.      Staff supported the ambitious fiscal objectives at the central government level,

### _cr06277 - 21.      Staff supported the ambitious fiscal objectives at the central government level,

### Public finances and public enterprises
- Staff supported ambitious central government fiscal objectives but highlighted need to closely monitor developments in the rest of the public sector.
- Preliminary work suggests the rest of the public sector is in broad balance.
- Hurricanes strained balance sheets of some public enterprises; other enterprises have ambitious investment plans requiring close screening for financial viability.
- Authorities’ measures:
  - Require public enterprises to submit quarterly accounts to the Ministry of Finance.
  - Intend to avoid providing guarantees to public enterprises.
- Revenues foregone on account of tax concessions are estimated to be over 10 percentage points of GDP per year.
- National account data on private investment are derived as a residual and are subject to significant measurement errors; absence of new investment confirmed by survey data.

### Debt restructuring and creditor engagement
- Authorities working to finalize debt restructuring.
- Efforts toward collaborative settlement with remaining nonparticipating commercial creditors:
  - About half of the nonparticipating eligible external claims pertain to a single creditor in contact with authorities and offered the same settlement terms as participants.
  - The other half pertains to about 5 percent of holders of a US$100 million international bond issued in 2002; identity of these nonparticipating creditors unknown and authorities are seeking to find and engage them.
- Authorities have approached official creditors for rescheduling of outstanding obligations.

### Improving the investment climate
- Major relative price distortions and institutional weaknesses not evident; focus on policies to support higher private investment.
- Paucity of new private investment—particularly in tourism—is a major concern.
  - Recent tourism projects have entailed considerable government financial involvement; several projects stalled.
  - Generous income tax holidays have not elicited much new investment and have created repeated extensions and dependency.
- Structural policy initiatives (timing noted in parentheses where provided):
  - Land:
    - Merge three public entities involved in land use and management by end-2006 to facilitate investor access to land (¶14).
    - All major divestment of public properties to occur through well-advertised public auctions.
  - Investment promotion:
    - Strengthen Grenada Industrial Development Corporation (GIDC) and refocus it on investment promotion rather than screening requests for tax incentives (¶14).
  - Investment code:
    - New investment code to be legislated by September 2006, clearly laying out investor rights and obligations (¶14).
  - Tax incentives:
    - Replace current system of tax holidays by end-June 2006 with a system of accelerated depreciation and time-limited loss carry forward provisions (¶26).
- Staff and authorities agreed future program reviews will address other hindrances to higher growth; plans to enhance flexibility of labor and product markets in second and third years of the program, respectively.

### Reducing vulnerabilities (hurricanes and financial sector)
- Program seeks to reduce vulnerabilities from extreme weather events and regulatory weaknesses in financial sector.
- Hurricane-related measures:
  - Building code: current requirement that newly built structures withstand hurricanes up to Category 3 considered adequate; enforcement uneven and authorities will address this weakness in coming months.
  - Insurance: enact a new Insurance Act to improve confidence, contract certainty, and policy holder protection; Act expected to strengthen insurance supervision (currently no on-site inspections). Authorities will explore ways to encourage greater insurance coverage; destruction from Ivan increased demand for housing insurance.
  - Regional initiatives: government exploring participation in regional risk-pooling initiatives, including the World Bank’s Catastrophic Insurance Project.
- Banking sector:
  - Authorities noted banking system coped with recent hurricanes, but increase in share of nonperforming loans is a concern.
  - High share of mortgages in total lending (close to 40 percent) and widespread capital stock damage motivate on-site inspection of the banking system; ECCB to conduct inspection expected to be initiated by mid-2006.
  - Weaknesses in regulatory framework allowed a small domestic bank to operate without supervision; that bank accounts for less than 2 percent of the banking system’s total assets and has been kept outside the formal clearing system.
  - Authorities committed to strengthening relationship with ECCB on licensing practices and to pass the Grenada Authority for the Regulation of Financial Institutions (GARFIN) Act to establish a single supervisory agency.

### Social development
- Grenada considered broadly on track to meet the MDGs; near-term challenges relate to hurricane dislocation; long-term poverty reduction contingent on reducing unemployment.
- Near-term programs:
  - Rural programs: soft loans to rehabilitate farms; rehabilitation of rural roads.
  - Housing: program to contribute building materials to needy households; government preparing program to build several hundred low-income housing units financed by external grants.
- Social strategy:
  - Several documents prepared (Poverty Eradication Strategy 2004 updated late 2005; Core Welfare Indicator Questionnaire Survey 2005; assessment of MDG progress; Macro-Socio-Economic Assessment of Damage by Hurricanes Ivan and Emily) but recommendations not fully costed.
  - Forthcoming PRSP seen as occasion to integrate and prioritize the social development agenda; government considering modalities to outline agenda in a comprehensive poverty reduction strategy paper.

### Program modalities (access, phasing, monitoring, conditionality)
- Access and phasing:
  - Staff supports authorities’ request for full access to come from PRGF resources at the norm for first-time uses of 90 percent of quota.
  - Phasing front loaded (Table 8): 40 percent in the first year, and 25 percent each in the second and third years.
- Capacity to repay the Fund:
  - Debt service to the Fund projected to peak at a modest 1.3 percent of exports of goods and services during 2006–09 when the ENDA purchases are to be repaid (Table 9).
  - During 2011–18, when PRGF disbursements would be repaid, debt service is not expected to exceed 1 percent of exports of goods and services.
- Program monitoring:
  - Program reviews on a semiannual basis, linked to end-June and end-December test dates.
  - Indicative targets for end-March and end-September to allow quarterly assessment.
- Quantitative performance criteria will apply to:
  - the primary balance of the central government excluding grants;
  - nonaccumulation of domestic arrears (continuous basis);
  - nonconcessional public external borrowing up to a certain limit;
  - zero short-term external debt ceiling (continuous);
  - nonaccumulation of external arrears (continuous).
  - An adjuster allows government to spend additional grant proceeds; shortfalls in external financing accommodated up to a limit of EC$25 million.
  - Nonconcessional borrowing of up to US$16 million is allowed for certain official bilateral loans slightly short of the 35 percent grant element threshold.
- Structural benchmarks (deadlines preserved):
  - Reach agreement on public sector wage path for 2006–08 (end-April 2006).
  - Initiate implementation of reforms at Customs Authority (end-August 2006).
  - Initiate work to strengthen PSIP planning and implementation (end-June 2006).
  - Amend Income Tax Act to adopt a system of accelerated depreciation and time-bound loss carry-forward provisions (end-June 2006).
  - Repeal the Investment Code Incentives Act, Qualified Enterprises Act, and elements affecting tax policy in other legislation including the Hotels Act and Fiscal Incentives Act (end-June 2006).
- Debt restructuring and financing assurances:
  - Authorities to continue good-faith efforts toward collaborative settlement with nonparticipating creditors from November 2005 commercial debt exchange; consistent with Fund lending into arrears policy.
  - Approval of program should pave way for restructuring debts owed to Paris Club creditors.
  - Paris Club provided financing assurances for Grenada during its March 7 meeting despite arrears to bilateral creditors (including Belgium and Taiwan Province of China).

### Risks
- Key program risks identified by staff:
  - Financing of external current account deficit uncertain; reliance on projected Fund financing, donor support, commercial and prospective official debt restructurings, and higher private inflows. Failure of higher private inflows could lead to lower imports and constrained output growth.
  - Implementation risks from demanding fiscal reforms; reforms may face stiff resistance.
  - Expected pick-up in real GDP growth could fail to materialize, undermining fiscal effort.
  - Limited implementation capacity could delay reforms or cause data reporting slippages.
  - Ever-present risk of another Ivan-strength hurricane, which would significantly delay fiscal and debt sustainability objectives and likely cause large financing gaps difficult to bridge.

### Staff appraisal and recommendations
- Commendation of Grenadians’ recovery efforts after Hurricane Ivan and resilience despite set back by Hurricane Emily.
- Program assessment:
  - Program should help address public finances on an unsustainable trajectory, weak growth prospects, and heightened vulnerability to shocks.
  - Fiscal consolidation is the centerpiece: program based on gradual improvement in the primary balance (excluding grants) to 2½ percent of GDP by 2008.
  - With debt restructuring, public debt should decline to some 60 percent of GDP by 2015, contingent on strict adherence to fiscal program and corrective actions for deviations.
- Tax reform recommendations:
  - Move from wholesale tax exemptions and tax holidays toward accelerated depreciation linked to investment and time-bound measures to reduce distortions.
  - Replace present general consumption tax with a broad-based value-added tax—staff commends this decision.
  - Staff urges consideration of phased reductions to the corporate income tax rate if fiscal situation permits.
- Energy pricing:
  - Support for authorities’ plans to introduce an automatic fuel pricing mechanism; price build-up formula should include a specific tax element and frequent adjustments to reflect world market prices.
- Expenditure and investment project screening:
  - Success of fiscal reforms depends on spending restraint and improved screening of public investment projects.
  - Staff supports maintaining public sector wages unchanged in real terms and limiting PSIP envelope to around 8 percent of GDP once reconstruction is completed.
  - Staff encourages prompt initiation of reforms to prioritize high-return public investment projects.

*Source: IMF staff report excerpts in provided content.*

### 40.      Improvements to the investment climate will be important to raise growth and

### 40.      Improvements to the investment climate will be important to raise growth and reduce the unemployment which underlies poverty in Grenada.

### Investment climate and near-term priorities
- Authorities focus on increasing the level of private investment by:
  - putting in place a transparent and investor-friendly framework in which investors can operate;
  - simplifying the process through which land is made available to investors;
  - removing other regulatory hurdles.
- Staff commends these initiatives.

### Program risks, shock preparedness, and financing
- Principal risk:
  - A hurricane of the same (or greater) strength than Ivan.
- Program features that reduce vulnerability:
  - Fiscal room created by reducing public debt to provide flexibility in the event of further shocks.
  - Elements of the program directly focused on reducing vulnerability.
- Risks related to program financing:
  - External payments arrears to external creditors create financing risks.
  - These will be addressed through financing assurances reviews for each disbursement under the arrangement until outstanding arrears are eliminated.
- Debt restructuring and creditor engagement:
  - Staff commends authorities’ efforts to reach a collaborative agreement with creditors in the recently completed commercial debt restructuring process (consistent with the Fund’s lending into arrears policy).
  - Strong encouragement to continue working with nonparticipants with a view to reaching agreement.

### Staff recommendation
- Staff believes the proposed program will help address the many economic and social challenges that Grenada faces and recommends approval of the authorities’ request for an arrangement under the PRGF.

### Key socioeconomic and macroeconomic indicators (selected, as reported)
- Rank in UNDP Human Development Index66 out of 177 countries (2004)
- Infant mortality rate per '000 births (2003)18
- Adult illiteracy rate in percent (2001)4
- Life expectancy at birth in years (2003)65
- Poverty headcount index (2000)32
- GDP per capita in US$ (2004)4,620

### Selected macroeconomic projections (annual percentage change; unless otherwise specified)
- Real GDP: 2003 5.8; 2004 -3.0; 2005 1.5; 2006 6.5; 2007 5.0; 2008 4.0
- GDP deflator: 2003 1.3; 2004 2.7; 2005 3.5; 2006 4.6; 2007 2.0; 2008 2.0
- Consumer prices (end-of-year): 2003 1.6; 2004 2.5; 2005 6.0; 2006 2.0; 2007 2.0; 2008 2.0
- Current account balance (including grants; in percent of GDP): 2003 -33.2; 2004 -13.5; 2005 -37.1; 2006 -32.8; 2007 -28.0; 2008 -26.7
- Public sector total debt (end-period): 2003 110.0; 2004 129.5; 2005 128.0; 2006 126.7; 2007 117.8; 2008 107.3

### Central government finances (selected levels, in millions of EC dollars; projections)
- Total revenue and grants: 2003 413.2; 2004 390.7; 2005 500.7; 2006 505.6; 2007 475.7; 2008 513.0
- Total expenditure: 2003 470.8; 2004 423.4; 2005 497.7; 2006 534.2; 2007 476.6; 2008 464.4
- Current revenue: 2003 330.0; 2004 301.2; 2005 359.7; 2006 392.3; 2007 434.2; 2008 471.4
- Tax revenue: 2003 298.3; 2004 278.8; 2005 343.8; 2006 362.1; 2007 400.0; 2008 434.8
- Grants: 2003 82.9; 2004 88.2; 2005 140.6; 2006 112.8; 2007 41.0; 2008 41.0
- Capital expenditure: 2003 179.1; 2004 93.8; 2005 196.6; 2006 216.1; 2007 150.9; 2008 132.1
- Primary balance (including grants): 2003 4.9; 2004 43.1; 2005 30.8; 2006 4.4; 2007 31.6; 2008 80.6
- Overall balance (including grants): 2003 -57.6; 2004 -32.7; 2005 3.0; 2006 -28.7; 2007 -0.9; 2008 48.6

### Central government finances (selected ratios, percent of GDP; projections)
- Total revenue and grants: 2003 34.5; 2004 33.1; 2005 39.1; 2006 36.1; 2007 31.5; 2008 31.9
- Total expenditure: 2003 39.3; 2004 35.9; 2005 38.9; 2006 38.1; 2007 31.6; 2008 28.8
- Current expenditure: 2003 24.3; 2004 27.9; 2005 23.5; 2006 22.7; 2007 21.6; 2008 20.6
- Capital expenditure: 2003 15.0; 2004 8.0; 2005 15.4; 2006 15.4; 2007 10.0; 2008 8.2
- Primary balance (including grants): 2003 0.4; 2004 3.7; 2005 2.4; 2006 0.3; 2007 2.1; 2008 5.0
- Overall balance (including grants): 2003 -4.8; 2004 -2.8; 2005 0.2; 2006 -2.0; 2007 -0.1; 2008 3.0
- Total public sector debt (percent of GDP): 2003 110.0; 2004 129.5; 2005 128.0; 2006 126.7; 2007 117.8; 2008 107.3

### Balance of payments highlights (selected, in millions of U.S. dollars and percent of GDP)
- Current account balance (US$ millions): 2003 -147.4; 2004 -59.0; 2005 -175.7; 2006 -170.5; 2007 -156.4; 2008 -159.1
- Exports (f.o.b., US$ millions): 2003 45.5; 2004 36.9; 2005 31.5; 2006 31.7; 2007 29.1; 2008 33.9
- Imports (f.o.b., US$ millions): 2003 226.4; 2004 235.4; 2005 288.6; 2006 278.6; 2007 290.4; 2008 307.1
- Services (net, US$ millions): 2003 47.1; 2004 61.1; 2005 29.8; 2006 40.3; 2007 70.3; 2008 73.0
  - Travel (net, US$ millions): 2003 95.3; 2004 73.9; 2005 71.8; 2006 98.1; 2007 131.7; 2008 137.8
- Capital and financial account (US$ millions): 2003 127.1; 2004 94.0; 2005 79.5; 2006 148.4; 2007 142.1; 2008 143.9
- External public sector debt (US$ millions, memorandum): 2003 355.8; 2004 415.6; 2005 436.6; 2006 459.2; 2007 469.5; 2008 473.9
- Current account balance (percent of GDP): 2003 -33.2; 2004 -13.5; 2005 -37.1; 2006 -32.8; 2007 -28.0; 2008 -26.7
- External public sector debt (percent of GDP): 2003 80.2; 2004 95.1; 2005 92.1; 2006 88.4; 2007 84.0; 2008 79.5

### Public sector debt structure (year end, in millions of U.S. dollars; percent of total debt and percent of GDP)
- Public sector debt (total): 606.6; Percent of stock: 100.0; Percent of GDP: 128.0
- Central government debt: 524.1; Percent of stock: 86.4; Percent of GDP: 110.6
- External debt (total): 436.6; Percent of stock: 72.0; Percent of GDP: 92.1
  - Multilateral (A. Central government): 116.9; Percent of GDP: 24.7
    - CDB 71.2; IDA 22.9; IBRD 10.1; IMF 8.4; Other multilateral 4.4
  - Official bilateral: 66.2; Percent of GDP: 14.0
    - Taiwan Province of China 20.3; Kuwait 18.7; Trinidad and Tobago 13.1; Other 5.8

*Source: Ministry of Finance; Eastern Caribbean Central Bank; United Nations, Human Development Report 2004; World Bank, WDI 2005; and Fund staff estimates and projections.*

### 3.  Commercial, total199.432.942.1

### 3.  Commercial, total199.432.942.1

### Public Sector Debt Composition (selected items)
- Commercial, total: 199.4 32.9 42.1
  - Restructured bonds: 193.5 31.9 40.8
  - Unrestructured bonds: 5.8 1.0 1.2
- B. Central government guaranteed: 33.6 5.5 7.1
  - Of which Paris Club: 15.2 2.5 3.2
- C. Other public sector: 20.5 3.4 4.3
- Domestic debt: 170.0 28.0 35.9
  - A. Central government: 141.7 23.4 29.9
    - Restructured bonds: 68.1 11.2 14.4
    - Restructured commercial bank loans: 14.9 2.5 3.1
    - Unrestructured bonds: 11.0 1.8 2.3
    - Treasury bills: 25.5 4.2 5.4
    - Compensation claims: 14.8 2.4 3.1
    - Liability to oil companies: 6.7 1.1 1.4
    - Other: 0.6 0.1 0.1
  - B. Central government guaranteed: 28.4 4.7 6.0
  - C. Other public sector: 0.0 0.0 0.0
- Memorandum items:
  - Nominal GDP: 474.0

- Notes:
  - Sources: Grenadian authorities; and Fund staff estimates.
  - 1/ Includes central government liabilities to the National Insurance Scheme.
  - 2/ In addition, Russia put forward a claim of US$260,000, which the authorities intend to reconcile.

*Table 5. Grenada: Public Sector Debt, 2005*

### Indicators of Financial and External Vulnerability, 2001–06 (selected series)
- Real sector indicators
  - Real GDP growth (percent): -4.4 0.8 5.8 -3.0 1.5 6.5
  - CPI inflation (period average, in percent): 1.7 1.1 2.2 2.3 3.5 4.6
- Financial sector indicators
  - Capital adequacy ratio (locally incorporated banks): 14.1 15.6 17.7 14.9 15.0 ...
  - Nonperforming loans/total loans: 5.9 5.8 4.5 6.0 5.5 ...
  - Locally incorporated banks (NPLs? series): 9.3 9.0 7.2 7.1 6.8 ...
  - Foreign banks: 1.4 1.3 0.6 4.4 3.5 ...
  - Loan loss provision/NPLs: 43.6 45.6 61.7 81.9 78.9 ...
    - Locally incorporated banks: 40.6 39.3 49.5 63.0 60.0 ...
    - Foreign banks 1/: 71.1 106.9 301.3 127.8 134.6 ...
  - Gross government claims/total assets: 14.3 15.6 13.9 11.3 11.2 ...
  - FX deposits/total deposits: 7.3 6.9 7.3 5.6 7.8 ...
  - Net foreign currency exposure/capital (locally incorporated banks): 49.8 78.7 116.4 221.4 142.4 ...
  - Contingent liabilities/capital (locally incorporated banks): 74.0 73.2 55.5 67.7 81.0 ...
  - (Pre-tax) return on average assets: 2.4 2.3 2.8 0.5 0.7 ...
  - Broad money (percent change, 12-month basis): 10.6 7.1 8.0 17.7 -0.4 7.8
  - Private sector credit (percent change, 12-month basis): 0.9 1.1 4.1 6.8 9.2 11.6
  - US treasury bill rate (percent per annum): 3.5 1.6 1.0 1.4 3.2 ...
  - Treasury bill rate (percent per annum) 1/: 7.0 7.0 6.0 6.0 6.0 ...
- External sector indicators
  - Exchange rate (per US$, end of period): 2.7 2.7 2.7 2.7 2.7 2.7
  - REER appreciation (percent change on 12-month basis, end of period): -0.1 -3.4 -8.5 -4.6 5.2 ...
  - Exports of goods (percent change, 12-month basis): -23.3 -34.9 10.0 -18.9 -14.7 0.6
  - Imports of goods (percent change, 12-month basis): -10.9 -7.8 25.1 3.9 22.6 -3.4
  - Travel receipts (gross, percent change, 12-month basis): -9.9 6.7 16.5 -19.6 -1.8 33.1
  - Current account balance (percent of GDP): -26.6 -32.0 -33.2 -13.5 -37.1 -32.8
  - Capital and financial account balance (percent of GDP): 22.7 33.2 28.6 21.5 16.8 28.6
  - FDI inflows (percent of GDP): 15.4 14.9 20.4 12.7 10.8 16.3
  - Gross international reserves of the ECCB (in US$ millions): 446.0 504.8 539.9 632.4 600.7 ...
  - Gross international reserves in months of current year imports in ECCU countries: 4.1 4.6 4.6 4.5 4.5 ...
  - Gross international reserves to broad money in ECCU countries (percent): 19.1 20.2 19.7 19.2 19.2 ...
  - Public gross external debt (in US$ million): 179.7 340.5 355.8 415.6 436.6 459.2
  - Public gross external debt to exports of goods and services (percent): 91.2 197.9 196.9 215.5 261.1 261.6
  - Public gross external interest payments to exports of goods and services (percent): 4.1 11.3 12.6 14.0 15.4 16.0
  - Public gross external amortization payments to exports of goods and services (percent): 4.1 6.1 6.3 10.8 25.5 11.8
  - Public gross external interest payments to fiscal revenue (percent): 7.6 17.8 18.7 26.7 21.4 21.2
  - Public gross external amortization payments to fiscal revenue (percent): 7.6 9.7 9.3 18.7 31.9 14.2
  - Gross external financing requirement (in percent of GDP) 2/: 28.8 35.0 36.4 20.1 46.0 36.8
- Public sector indicators
  - Central government overall balance (after grants) 3/: -8.5 -19.2 -4.8 -2.8 0.2 -2.0
  - Central government current account balance: 2.5 0.6 3.2 -2.4 4.6 5.3
  - Public sector gross external debt: 44.0 83.6 80.2 95.1 92.1 88.4

- Sources: Ministry of Finance; Eastern Caribbean Central Bank; and Fund staff estimates and projections.
- Notes:
  - 1/ Rate on three-month treasury bills for 2000, on one-year treasury bills for 200–05.
  - 2/ Defined as external current account deficit plus external amortization.
  - 3/ Includes 11.4 percent of GDP paid in 2002 to extinguish lease arrangements, and reflected in capital expenditures.

*Table 6. Grenada: Indicators of Financial and External Vulnerability, 2001–06*

### Millennium Development Goals, 1990–2003 (selected indicators)
- Goal 1 — Eradicate extreme poverty and hunger
  - Population below $1 a day (percent): (data not shown)
  - Poverty gap at $1 a day (percent): (data not shown)
  - Percentage share of income or consumption held by poorest 20 percent: (data not shown)
  - Population below minimum level of dietary energy consumption (percent): (data not shown)
- Goal 2 — Achieve universal primary education
  - Net primary enrollment ratio (percent of relevant age group): 84.2 ...
  - Primary completion rate, total (percent of relevant age group): 80.0 ...
  - Percentage of cohort reaching grade 5 (percent): 79.0 ...
- Goal 3 — Promote gender equality
  - Share of women employed in the nonagricultural sector (percent): 38.4
  - Proportion of seats held by women in national parliament (percent): 20.0 27.0 27.0
- Goal 4 — Reduce child mortality
  - Immunization, measles (percent of children under 12 months): 85.0 87.0 92.0 92.0 99.0
  - Infant mortality rate (per 1,000 live births): 30.0 26.0 ... 21.0 18.0
  - Under 5 mortality rate (per 1,000): 37.0 33.0 ... 26.0 23.0
- Goal 5 — Improve maternal health
  - Births attended by skilled health staff (percent of total): 99.0 99.0 ...
- Goal 6 — Combat HIV/AIDS, malaria and other diseases
  - Incidence of tuberculosis (per 100,000 people): 6.1 5.7 5.4 5.2 4.9
  - Contraceptive prevalence rate (percent of women ages 15–49): 54.0 ...
- Goal 7 — Ensure environmental sustainability
  - Forest area (percent of total land area): 14.7 ... 14.7 ...
  - Access to an improved water source (percent of population): 95.0
  - Access to improved sanitation (percent of population): 97.0 ... 97.0
- Goal 8 — Develop a global partnership for development
  - Youth unemployment rate (percent of total labor force ages 15–24): 27.0 ...
  - Fixed line and mobile telephones (per 1,000 people): 178.3 242.3 301.1 377.6 666.7
  - Internet users (per 1,000 people): 0.0 0.0 11.0 43.6 169.0
  - Personal computers (per 1,000 people): 108.3 127.1 132.1

- Source: World Development Indicators database, April 2005.
- Note:
  - 1/ DOTS detection rate is the percentage of estimated new infectious tuberculosis cases detected under the directly observed treatment, short course case detection, and treatment strategy.

*Table 7. Grenada: Millennium Development Goals, 1990–2003*

### PRGF Reviews and Disbursements Under the Three-Year PRGF Arrangement, 2006–09
- March 2006
  - Conditions: Board approval of PRGF arrangement
  - Disbursement: SDR 1.56 million
  - Percent of Quota: 13.33
- September 2006
  - Conditions: Observance of end-June 2006 performance criteria and completion of first review
  - Disbursement: SDR 1.56 million
  - Percent of Quota: 13.33
- March 2007
  - Conditions: Observance of end-December 2006 performance criteria, completion of second review and adopt conditions for second year of the arrangement
  - Disbursement: SDR 1.56 million
  - Percent of Quota: 13.33
- September 2007
  - Conditions: Observance of end-June 2007 performance criteria and completion of third review
  - Disbursement: SDR 1.46 million
  - Percent of Quota: 12.50
- March 2008
  - Conditions: Observance of end-December 2007 performance criteria, completion of fourth review and adopt conditions for third year of the arrangement
  - Disbursement: SDR 1.46 million
  - Percent of Quota: 12.50
- September 2008
  - Conditions: Observance of end-June 2008 performance criteria and completion of fifth review
  - Disbursement: SDR 1.46 million
  - Percent of Quota: 12.50
- March 2009
  - Conditions: Observance of end-December 2008 performance criteria, completion of sixth review
  - Disbursement: SDR 1.46 million
  - Percent of Quota: 12.50
- Total: SDR 10.53 million — 90.00 percent of Quota

*Table 8. Grenada: Reviews and Disbursements Under the Three-Year PRGF Arrangement, 2006–09*

### Indicators of Capacity to Repay the Fund, 2004–10 (projections)
- Outstanding Fund credit
  - In millions of SDRs: 5.9 5.9 7.9 9.4 10.5 10.5 10.5
  - In millions of U.S. dollars: 9.0 8.5 11.5 13.7 15.3 15.4 15.3
- In percent of:
  - Quota: 50.0 50.0 67.5 80.3 89.7 90.0 90.0
  - GDP: 2.1 1.8 2.2 2.4 2.5 2.4 2.2
  - Government revenues 2/: 6.2 4.6 6.1 7.8 8.1 8.0 7.5
  - Exports of goods and nonfactor services: 4.7 5.1 6.5 6.6 6.9 6.1 5.4
  - Net imputed international reserves: 7.4 8.3 10.8 12.4 13.6 13.4 13.2
  - Public and publicly guaranteed debt: 1.6 1.4 1.9 2.3 2.6 2.7 2.7
- Debt service to the Fund
  - In millions of SDRs: 0.1 0.1 1.1 1.5 1.8 1.5 0.1
  - In millions of U.S. dollars: 0.1 0.1 1.6 2.2 2.6 2.2 0.1
- In percent of:
  - Quota: 0.8 0.5 9.4 12.8 15.4 12.8 0.7
  - GDP: 0.0 0.0 0.3 0.4 0.4 0.3 0.0
  - Government revenues 2/: 0.1 0.0 0.9 1.2 1.4 1.1 0.1
  - Exports of goods and nonfactor services: 0.1 0.1 0.9 1.0 1.2 0.9 0.0
  - Net imputed international reserves: 0.1 0.1 1.5 2.0 2.3 1.9 0.1
  - Public and publicly guaranteed debt: 0.0 0.0 0.3 0.4 0.5 0.4 0.0

- Source: Fund staff estimates and projections.
- Notes:
  - 1/ Assuming access of 90 percent of quota under the PRGF, with the first disbursement in 2006, and debt service according to the obligations schedule. Further assuming disbursements under the Fund's emergency assistance policy for natural disasters as scheduled and debt service according to the obligations schedule.
  - 2/ Including grants.

*Table 9. Grenada: Indicators of Capacity to Repay the Fund, 2004–10*

### Medium-Term Outlook and Debt Sustainability (summary of Annex I)
- Purpose:
  - Assess sustainability of Grenada’s domestic and external public debt under the program and alternative scenarios.
- Program scenario (paragraphs 44–45)
  - Public debt reduced from 120 percent of GDP in 2005 to close to 60 percent of GDP in 2015 (Table A1a).
  - By end-2008 public debt will amount to less than 95 percent of GDP.
  - Large part of adjustment achieved during program period, driven by sharp improvement in the primary balance during 2006–08 and a pick-up in GDP growth.
  - In NPV terms, total public debt falls from above 85 percent of GDP in 2005 to about 70 percent by end-2008 and to just above 50 percent by 2015.
  - NPV calculation accounts for restructuring of Grenada’s commercial debt, which implied a haircut of 40–45 percent on the NPV of future debt servicing flows (for exit yields in the 9–10 percent range), while leaving the face value of debt unchanged.
- Assumptions on creditor treatment (paragraph 46)
  - Program scenario assumes eligible commercial creditors that did not participate in the recent debt restructuring will settle their claims in 2006 on the same terms as the recent debt exchange.
  - Assumes Paris Club debt rescheduled on Houston terms and bilateral debt to Taiwan Province of China restructured on terms comparable to the commercial debt exchange.
- Alternative scenarios (paragraph 47)
  - Alternative Scenario A1: Keeping the primary deficit at its ten-year historical average of 2 percent of GDP and assuming GDP growth in line with the historical average would cause the NPV of government debt to rise to over 100 percent of GDP by 2015.
  - Alternative Scenario A2: With the program’s fiscal adjustment achieved, but GDP growth rates permanently lower than assumed under the program scenario, the NPV of debt would initially fall only to rise rapidly after 2010.
  - Bound tests indicate considerable sensitivity to external shocks, particularly lower GDP growth in 2006/2007, which could bring the NPV of debt-to-GDP ratio onto an unsustainable trajectory.
- External vulnerability (paragraph 48)
  - Under the program, external public debt would fall from almost 85 percent of GDP at end-2005 to below 50 percent of GDP by 2015.
  - In NPV terms, external public debt would fall from almost 50 percent of GDP to below 40 percent by 2015.
  - Bound tests suggest significant sensitivity to short-term shocks, but these effects peter out with time.

*ANNEX I: Medium-Term Outlook and Debt Sustainability (excerpts)*

### 49.      All told, the adjustment envisaged under the program would bring public debt

### All told, the adjustment envisaged under the program would bring public debt on a sustainable path.

### Program conclusion and risks
- The program envisages an adjustment that "would bring public debt on a sustainable path."
- Two conditions are highlighted as crucial:
  - "Accomplishment of both fiscal and growth objectives are crucial to obtain this result."
  - "Failure to adhere to program targets would rapidly result in an unsustainable debt trajectory."
- A major external shock (example given: "another major hurricane") "could have a similar adverse effect."

### Public sector debt levels and projections (selected indicators, in percent of GDP unless stated)
- Public sector debt:
  - 2003: 110.0
  - 2004: 129.5
  - 2005 (actual/projection table): 120.1
  - 2006: 111.7
  - 2007: 103.8
  - 2008: 94.3
  - 2009: 87.8
  - 2010: 81.5
  - 2015: 60.8
  - 2025: 33.3
- Of which, foreign-currency denominated public sector debt:
  - 2003: 80.2
  - 2004: 95.1
  - 2005: 84.3
  - 2006: 81.3
  - 2007: 77.4
  - 2008: 73.2
  - 2009: 69.1
  - 2010: 65.2
  - 2015: 48.7
  - 2025: 26.5
- Change in public sector debt (yearly entries shown in table):
  - 2003: 0.4
  - 2004: 19.5
  - 2005: -9.4
  - 2006: -8.4
  - 2007: -7.8
  - 2008: -9.6
  - 2009: -6.5
  - 2010: -6.3
  - 2015: -3.5
  - 2025: -3.0
- Identified debt-creating flows (table, selected):
  - 2003: -5.3
  - 2004: 3.5
  - 2005: -6.4
  - 2006: -10.3
  - 2007: -7.3
  - 2008: -8.9
  - 2009: -6.5
  - 2010: -6.3
  - 2015: -3.5
  - 2025: -3.0

### Fiscal composition and dynamics (selected entries from the Public Sector DSA)
- Primary deficit (series from table):
  - 2003: -3.5
  - 2004: -5.5
  - 2005: 2.0
  - 2006: 4.7
  - 2007: -3.3
  - 2008: -1.1
  - 2009: -2.8
  - 2010: -5.5
  - 2015: -4.0
  - 2025: -3.8
- Revenue and grants (percent of GDP):
  - 2003: 39.5
  - 2004: 42.9
  - 2005: 49.1
  - 2006: 47.1
  - 2007: 43.5
  - 2008: 44.9
  - 2009: 43.5
  - 2010: 43.4
  - 2015: 42.3
  - 2025: 42.3
- Grants (component of revenue):
  - 2003: 6.9
  - 2004: 7.5
  - 2005: 11.0
  - 2006: 8.0
  - 2007: 2.7
  - 2008: 2.5
  - 2009: 1.2
  - 2010: 1.1
  - 2015: 0.0
  - 2025: 0.0
- Primary (noninterest) expenditure:
  - 2003: 36.0
  - 2004: 37.4
  - 2005: 45.8
  - 2006: 46.0
  - 2007: 40.8
  - 2008: 39.3
  - 2009: 39.5
  - 2010: 39.6
  - 2015: 39.6
  - 2025: 39.7
- Automatic debt dynamics (contribution):
  - 2003: -1.8
  - 2004: 9.0
  - 2005: -3.1
  - 2006: -9.3
  - 2007: -4.6
  - 2008: -3.4
  - 2009: -2.5
  - 2010: -2.5
  - 2015: -0.8
  - 2025: -0.3
- Contribution from average real interest rate (component):
  - 2003: 4.9
  - 2004: 5.6
  - 2005: -0.3
  - 2006: 0.0
  - 2007: 0.8
  - 2008: 0.6
  - 2009: 1.1
  - 2010: 0.9
  - 2015: 1.6
  - 2025: 1.1
- Contribution from real GDP growth (component):
  - 2003: -6.0
  - 2004: 3.4
  - 2005: -1.9
  - 2006: -7.3
  - 2007: -5.3
  - 2008: -4.0
  - 2009: -3.6
  - 2010: -3.4
  - 2015: -2.5
  - 2025: -1.4
- Residual, including asset changes:
  - 2003: 5.7
  - 2004: 16.0
  - 2005: -3.0
  - 2006: 1.9
  - 2007: -0.5
  - 2008: -0.6
  - 2009: 0.0
  - 2010: 0.0
  - 2015: 0.0
  - 2025: 0.0
- NPV of public sector debt (selected):
  - 2005: 84.6
  - 2006: 85.9
  - 2007: 80.9
  - 2008: 76.6
  - 2009: 70.3
  - 2010: 67.5
  - 2015: 64.2
  - 2025: 51.5
  - 2015 (alternate table): 28.9 (note: table shows multiple NPV series; use context-specific series as presented)
- Gross financing need (percent of GDP):
  - 2003: 8.2
  - 2004: 16.9
  - 2005: 7.1
  - 2006: 8.7
  - 2007: 6.0
  - 2008: 3.0
  - 2009: 4.9
  - 2010: 4.2
  - 2015: 4.9
  - 2025: 5.7

### Key macroeconomic and fiscal assumptions (selected)
- Real GDP growth (in percent), series in table:
  - 2003: 5.8
  - 2004: -3.0
  - 2005: 3.2
  - 2006: 4.3
  - 2007: 1.5
  - 2008: 6.5
  - 2009: 5.0
  - 2010: 4.0
  - 2011–25 average shown as: 4.0 (table entries include 4.2, 4.0, 4.0, 4.0 in different rows)
- Average nominal interest rate on forex debt (in percent):
  - 2003: 6.7
  - 2004: 5.7
  - 2005: 6.4
  - 2006: 2.5
  - 2007: 1.6
  - 2008: 2.6
  - 2009: 2.4
  - 2010: 2.3
  - 2015: 2.9
  - 2025: 2.9
  - Longer-run averages also shown: 4.5, 5.0, 5.0
- Average real interest rate on domestic currency debt (in percent):
  - 2003: 5.1
  - 2004: 10.2
  - 2005: 5.9
  - 2006: 3.4
  - 2007: 1.6
  - 2008: -1.1
  - 2009: 1.5
  - 2010: 1.3
  - 2015: 2.2
  - 2025: 2.0
  - Longer-run averages: 1.2, 3.4, 3.6, 3.7
- Inflation rate (GDP deflator, in percent):
  - 2003: 2.9
  - 2004: 2.7
  - 2005: 2.2
  - 2006: 1.3
  - 2007: 3.5
  - 2008: 4.6
  - 2009: 2.0
  - 2010: 2.0
  - 2015: 2.0
  - 2025: 2.0
  - Average series entries: 2.7, 2.0, 2.0, 2.0

### Sensitivity analysis and stress tests (selected outcomes)
- Table A1b and A2b report alternative scenarios and bound tests for public debt indicators (2005–2025). Examples of scenario outcomes (selected entries):
  - Program Scenario (NPV of Debt-to-GDP Ratio, selected years): 2005: 86, 2015: 77, 2025: 68 (table formatting shows series across columns)
  - Alternative scenario A1 (real GDP growth and primary balance at historical averages) and A2 (permanently lower GDP growth) produce higher NPV outcomes than the program scenario in many years.
  - Bound tests include shocks such as:
    - B1. "Real GDP growth is at historical average minus one standard deviations in 2006-2007"
    - B2. "Primary balance is at historical average minus one standard deviations in 2006-2007"
    - B4. "One-time 30 percent real depreciation in 2006"
    - B5. "10 percent of GDP increase in other debt-creating flows in 2006"
  - Figures 1 and 2 show that the "Most extreme stress test" yields the highest ratios in 2015 for NPV of debt-to-GDP, NPV of debt-to-revenue, and debt service-to-revenue ratios.

### External debt, balance of payments, and external vulnerabilities (selected)
- External government debt (nominal, percent of GDP):
  - 2003: 80.2
  - 2004: 95.1
  - 2005: 84.3
  - 2006: 81.3
  - 2007: 77.4
  - 2008: 73.2
  - 2009: 69.1
  - 2010: 65.2
  - 2015: 48.6
  - 2025: 26.4
- Change in external debt:
  - 2003: -3.4
  - 2004: 15.0
  - 2005: -10.8
  - 2006: -3.0
  - 2007: -3.9
  - 2008: -4.1
  - 2009: -4.1
  - 2010: -3.9
  - 2015: -2.8
  - 2025: -2.6
- Identified net debt-creating flows (external):
  - 2003: 6.3
  - 2004: 2.4
  - 2005: 22.0
  - 2006: 9.1
  - 2007: 4.9
  - 2008: 3.8
  - 2009: 2.0
  - 2010: 0.8
  - 2015: -4.5
  - 2025: -3.9
- Key external sector ratios and indicators:
  - NPV of external debt (selected):
    - 2005: 48.4
    - 2006: 48.3
    - 2007: 48.8
    - 2008: 48.4
    - 2009: 47.9
    - 2010: 47.5
    - 2015: 46.5
    - 2025: 39.1
    - (alternate series shows 22.1 for one column)
  - NPV of external debt in percent of exports (selected):
    - 2005: 109.7
    - 2006: 136.8
    - 2007: 144.3
    - 2008: 129.5
    - 2009: 128.6
    - 2010: 119.6
    - 2015: 110.0
    - 2025: 85.9
    - (alternate series shows 48.2 for one column)
  - Debt service-to-exports ratio (in percent):
    - 2003: 49.8
    - 2004: 64.3
    - 2005: 7.5
    - 2006: 9.0
    - 2007: 8.8
    - 2008: 10.0
    - 2009: 8.1
    - 2010: 8.4
    - 2015: 10.8
    - 2025: 17.0
  - Total gross financing need (billions of U.S. dollars) entries in table (selected):
    - 2003: 120.0
    - 2004: 93.2
    - 2005: 118.2
    - 2006: 81.6
    - 2007: 56.6
    - 2008: 49.9
    - 2009: 40.8
    - 2010: 32.2
    - 2015: -2.6
    - 2025: 44.3
- Key external sector assumptions:
  - GDP deflator in US dollar terms (change, percent) include entries such as 2.9, 1.5, 1.5, 1.0, 6.9, 2.9, 2.5, 2.6, 2.0, 2.0, 3.2, 2.0, 2.0, 2.0.
  - Effective interest rate (percent) entries include 8.3, 10.1, 10.2, 2.1, 1.2, 1.8, 2.4, 2.8, 2.2, 3.3, 2.3, 5.5, 8.2, 5.8.

### Policy implications and measures highlighted in the annex
- The debt sustainability outcome under the program depends on fiscal consolidation and growth performance; adherence to program targets is emphasized.
- Sensitivity analyses indicate vulnerability to:
  - Lower-than-expected real GDP growth.
  - Deterioration in the primary balance.
  - One-time large real depreciation (example: 30 percent).
  - Large increases in other debt-creating flows (example: 10 percent of GDP in a given year).
- Program and policy design incorporates scenarios and bound tests to assess resilience and financing needs under shocks.

### Data, technical assistance, and institutional matters (selected)
- Sources noted: "Country authorities; and Fund staff estimates and projections."
- Annexes and appendices detail external partners, financing, and technical assistance (CARTAC, World Bank, CDB) and their projects.
- Statistical gaps and needs highlighted (Appendix IV):
  - National accounts: GDP by expenditure available with long lags; real GDP by sector not available; need to improve gross capital formation estimates and sectoral price deflators.
  - Consumer price index basket last updated in 2000; producer price index not available.
  - Labor statistics outdated (most recent 1998); census data processing still ongoing.
  - Public finances: improved reporting but limited coverage of rest of public sector; no consolidated public sector accounts; no systematic reporting to Ministry of Finance for some entities; fiscal data not reported for publication in IFS or GFS Yearbook.
  - Monetary accounts: ECCB compiles monthly commercial bank data with two-month lag; coverage of nonbank financial institutions and offshore sector limited.
  - Balance of payments: latest data published in IFS and BOP Yearbook are for 2002; need more timely statistics, quarterly BOP and international investment position not compiled.
  - External and domestic debt databases: government external debt database comprehensive; limited data on domestic debt, government-guaranteed debt, debt of public enterprises, and private external debt.

*Sources: Country authorities; and Fund staff estimates and projections.*

### APPENDIX                                                                                                IV              

### _cr06277 - APPENDIX IV

### Table of Common Indicators Required for Surveillance (as of February 28, 2006)
- Exchange Rates: NA
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities:
  - Date of latest observation: Mar 2005
  - Date received: 5/3/05
  - Frequency of Data: M
  - Frequency of Reporting: M, with 2- to 3-month lag
  - Frequency of publication: A/Q
- Reserve/Base Money:
  - Date of latest observation: Dec 2005
  - Date received: 2/15/06
  - Frequency of Data: M
  - Frequency of Reporting: M, with 2- to 3-month lag
  - Frequency of publication: A/Q
- Broad Money:
  - Date of latest observation: Dec 2005
  - Date received: 2/15/06
  - Frequency of Data: M
  - Frequency of Reporting: M, with 1- to 2-month lag
  - Frequency of publication: A/Q
- Central Bank Balance Sheet:
  - Date of latest observation: Dec 2005
  - Date received: 2/15/06
  - Frequency of Data: M
  - Frequency of Reporting: M, with 1- to 2-month lag
  - Frequency of publication: A/Q
- Consolidated Balance Sheet of the Banking System:
  - Date of latest observation: Dec 2005
  - Date received: 2/15/06
  - Frequency of Data: M
  - Frequency of Reporting: M, with 2- to 3-month lag
  - Frequency of publication: A/Q
- Interest Rates:
  - Date of latest observation: Dec 2005
  - Date received: 2/15/06
  - Frequency of Data: M
  - Frequency of Reporting: M, with 1- to 2-month lag
  - Frequency of publication: A/Q
- Consumer Price Index:
  - Date of latest observation: Apr 2005
  - Date received: May 2005
  - Frequency of Data: M
  - Frequency of Reporting: M, with 1- to 2-month lag
  - Frequency of publication: A/M
- Revenue, Expenditure, Balance and Composition of Financing – Central Government:
  - Date of latest observation: Mar 2005
  - Date received: May 2005
  - Frequency of Data: M
  - Frequency of Reporting: Q, with 1- to 2-month lag
  - Frequency of publication: A
- Stocks of Central Government and Central Government‑Guaranteed Debt:
  - Date of latest observation: Dec 2004
  - Date received: Feb 2005
  - Frequency of Data: M/A
  - Frequency of Reporting: Q, with 1- to 2-month lag
  - Frequency of publication: A
- External Current Account Balance:
  - Date of latest observation: Dec 2004
  - Date received: May 2005
  - Frequency of Data: A
  - Frequency of Reporting: Article IV Mission
  - Frequency of publication: A
- Exports and Imports of Goods and Services:
  - Date of latest observation: Dec 2004
  - Date received: May 2005
  - Frequency of Data: A
  - Frequency of Reporting: Article IV Mission
  - Frequency of publication: A
- GDP/GNP:
  - Date of latest observation: Dec 2004
  - Date received: May 2005
  - Frequency of Data: A
  - Frequency of Reporting: Article IV Mission
  - Frequency of publication: A
- Gross External Debt:
  - Date of latest observation: Dec 2004
  - Date received: May 2005
  - Frequency of Data: Q
  - Frequency of Reporting: Q, with 1- to 2-month lag
  - Frequency of publication: A/Semi-annual

Notes included in table:
- 1: D, W, M, Q, A, I, NA definitions.
- 2: Grenada is a member of the Eastern Caribbean Currency Union; US$1=EC$2.70 since July 1976.
- 3: Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
- 4: Both market-based and officially-determined rates included.
- 5: Foreign, domestic bank, and domestic nonbank financing.
- 6: Including currency and maturity composition.
- 7: Public external debt only.

### Letter from the Government (St. George’s, Grenada — March 21, 2006)
- Reconstruction progress cited after Hurricane Ivan (September 2004) and Hurricane Emily (July 2005).
- Government requests a three-year arrangement under the Poverty Reduction and Growth Facility in an amount equivalent to SDR 10.53 million (90 percent of quota).
- Government expects:
  - First review under the arrangement to be completed by September 15, 2006.
  - Second review by March 15, 2007.
- Government authorizes publication of the letter, Memorandum of Economic Policies (MEP), and accompanying staff report.

### Memorandum of Economic Policies — Key Findings and Recent Developments
- External shocks affecting Grenada:
  - September 11, 2001 attacks (recession in 2001–02).
  - Tropical Storm Lili in 2002.
  - Hurricane Ivan in September 2004: unprecedented 200 percent of GDP damage.
  - Hurricane Emily in July 2005: additional 12 percent of GDP damage.
  - High world oil prices.
- Reconstruction and recovery indicators:
  - More than 60 percent of the 28,000 housing units damaged by Ivan have had some repairs; an additional 9,000 dwellings remain to be brought on stream.
  - In tourism, some 85 percent of the pre-Ivan capacity had been restored by end-2005.
- Fiscal and financing developments:
  - US$110 million of the US$290 million pledged following Hurricane Ivan has been disbursed to date.
  - A debt exchange concluded on November 15, 2005, with substantial lowering of debt service payments for the next few years.
  - Fiscal measures taken include a levy on incomes to fund reconstruction and a 45 percent increase in retail fuel prices.
- Economic performance 2005:
  - Real output: estimated recovery around 1½ percent in 2005 after contracting 3 percent in the previous year.
  - Average inflation: estimated 3½ percent for 2005; higher at end-2005 due to fuel price increase.
  - External current account deficit: estimated to have widened sharply to about 37 percent of GDP due to reconstruction material imports and low tourism receipts.
  - Banking system: prudential indicators relatively stable through first half of the year; marginal deterioration in third quarter. Credit growth to private sector recovered modestly in 2005.
- 2006 outlook and projections:
  - Real GDP growth projected: 6–6½ percent in 2006.
  - Growth beyond 2006–07: 4 percent would need to be sustained through growth-enhancing reforms.
  - Average inflation projected for 2006: 4½ percent; expected to decline to 2 percent by year-end 2006. Beyond 2006, inflation projected at 2 percent.
  - Fiscal financing gap for 2006: over 5 percent of GDP (EC$70 million).
  - External current account deficit expected to narrow in 2006 to some 33 percent of GDP; financed partly by foreign direct investment and capital grants.

### Strategic Objectives of the 2006–08 Reform Programme
- Fourfold objectives:
  - Promote sustained high economic growth.
  - Restore fiscal and debt sustainability.
  - Reduce vulnerabilities by safeguarding the soundness of the financial system.
  - Reduce poverty through more effective social development programmes and safety nets.
- Fiscal sustainability targets and projections:
  - Public debt stock stated at 130 percent of GDP (equivalent to some EC$15,000 per Grenadian).
  - Fiscal program aims to move from an underlying primary deficit of 2 percent in 2005 to a primary surplus of 2.5 percent of GDP in 2008.
  - If surplus maintained, public debt projected to decline to 60 percent of GDP by around 2015.
- Social and vulnerability considerations:
  - Unemployment rate: stood at 19 percent in July; more than 25 percent for women; more than 30 percent for youth.
  - Preparation of a comprehensive poverty reduction strategy paper (PRSP) to update the 2004 Poverty Eradication Strategy.
  - 2006 budget focus: introducing social safety nets, particularly for those worst hit by the increase in domestic fuel prices to world market levels in October.

### Fostering Economic Growth — Planned Measures (2006)
- Overall aim: raise private sector investment and sustain growth beyond reconstruction-related stimulus.
- Near-term structural reform focus: improve investment climate and private investment participation; target at least 4 percent sustained growth.
- Specific measures for 2006:
  - Strengthening investment promotion:
    - Review role of Grenada Industrial Development Corporation (GIDC) to improve effectiveness in promoting new investment.
    - Reorient GIDC to be a one-stop shop for investors as tax incentive regime is simplified and rationalized.
    - Strengthen due diligence process for new investments.
  - Investment code:
    - New investment code to be legislated by September 2006.
    - Code will improve and clarify legal system for investment, outline investor rights and obligations, detail investment procedures, and means to access fiscal incentives.
  - Facilitating land transactions (initiatives planned for completion by end-2006):
    - Upgrade the land registry to enhance public accessibility to records, including leasehold information.
    - Establish a new executive agency to manage land use by end-2006, consolidating valuation section (Ministry of Finance), land and surveys division (Ministry of Agriculture), and Registry at the Supreme Court.
    - Conduct significant future divestments of public properties through well advertised international auctions to enhance transparency.
  - Simplifying customs clearance:
    - Reforms at the Customs Authority aim to reduce paperwork and time (currently as much as four days) needed to clear imports through the ports.
  - Implementing export strategy:
    - Prepare a National Export Strategy (NES) in partnership with private sector stakeholders and NGOs.
    - NES objectives: support existing and potential export sectors via policies on business environment, training, trade liberalization, trade promotion, reduction of transaction costs (including customs reform), and institutional strengthening of the trade support network.
    - NES to seek support industry creation around specific clusters, particularly tourism.
    - NES expected to be completed by mid-2006.

*Source: APPENDIX IV, _cr06277 (Memorandum of Economic Policies and supporting tables), as of February 28, 2006.*

### 15.      Beyond the measures slated for 2006, our reform program envisages action in

### 15.      Beyond the measures slated for 2006, our reform program envisages action in

### Reform program overview
- Over the next three years the program envisages actions to:
  - Enhance labor market efficiency and flexibility through a review to assess the effectiveness of the market.
  - Tap the large expatriate community in areas of skills development and training, investments (especially in entrepreneurship and small businesses), and finance.
  - Abolish most existing price controls except on a few essential items to foster market functioning and efficient allocation of productive resources.
  - Explore the role of the financial sector in enhancing small business development.

### V. RESTORING DEBT AND FISCAL SUSTAINABILITY — Overview
- Fiscal measures undertaken in the past year, coupled with reforms below, are intended to restore debt and fiscal sustainability.
- Measures form a critical mass undertaken in the context of the 2006 budget and early in the programme period.
- Fiscal programme goals include:
  - Improving the structure and efficiency of public finances.
  - Reducing poverty and achieving the Millennium Development Goals.
  - Enhancing the investment climate.
- The fiscal programme comprises revenue and expenditure measures, structural reforms, and a debt strategy.

### A. Fiscal Measures — Revenues
- National reconstruction levy introduced to finance reconstruction:
  - Levy effective on income earned starting on January 1, 2006.
  - Rates and amounts:
    - 5 percent (3 percent during January 1 to June 30, 2006) for those earning salaries of EC$1,001–5,000 per month.
    - EC$225 per month for those earning between EC$5,001 and EC$9,000 per month.
    - EC$350 per month for those earning above EC$9,000 per month.
  - Design considerations: personal incomes below EC$5,000 per month are exempt from income taxes.
  - Administration: additional resources to the Inland Revenue Department (IRD) and a software module to manage the levy.
  - Revenue target: EC$10.5 million per year, about ¾ percent of GDP.
- Domestic petroleum pricing and automatic fuel price mechanism:
  - Domestic fuel prices raised by over 45 percent on October 1, 2005.
  - Aim: eliminate subsidy that built up about 2 percent of GDP in liabilities to oil importing companies.
  - Introduce transparent automatic fuel pricing mechanism including a total tax element of at least EC$2 per gallon.
  - Potential revenue: EC$16–20 million per year.
  - Mitigation: social safety nets to protect vulnerable groups.
  - Outstanding liabilities: cleared to one oil company; repayment schedule agreed with the other; liabilities added to debt stock.
- Administrative and revenue-strengthening measures:
  - Improving tax administration:
    - Seek technical and financial assistance to strengthen Customs and Excise Department.
    - Possibly hire specialized private firms to improve customs revenue collection procedures.
    - Strengthen audit capacity at Customs and Inland Revenue Department; tighten enforcement and information exchange between departments.
    - Commence reforms in these areas in the second half of 2006.
  - Nontax revenues:
    - Upgrade the land registry to boost fees and arrears collection related to leaseholds.
    - Improve collection of company registration fees by end-2006.
    - Examine adjustment of other long-unchanged fees and charges.
  - Property taxes:
    - Property taxes on buildings are paid on values as at 1994.
    - Commence work on a comprehensive cadastre to revalue land and property to current market values.
    - Examine legislative changes to allow Inland Revenue Department alternatives to property-by-property inspections.

### A. Fiscal Measures — Spending reform
- Public wage policy:
  - Due to Hurricane Ivan’s destruction, compressing public wages is not an option; programme will try to protect real wages.
  - Seek early agreement with civil service unions on the wage path for 2006–08 in line with projected evolution of average annual inflation via multipartite committee.
  - Provided growth accelerates, the wage-to-GDP ratio should decline; recent wage bill increase was about 35 percent in the last five years.
- PSIP (Public Sector Investment Programme) planning and implementation:
  - Strengthen PSIP to undertake only projects with high social and economic rates of return.
  - Seek assistance from Caribbean Development Bank and World Bank to screen all projects above EC$5 million.
  - PSIP to be consistent with poverty-reducing objectives in forthcoming poverty reduction strategy paper.
  - Capital budget projection: once reconstruction and World Cup Cricket related projects are completed, capital budget would decline to about EC$130 million, or 8 percent of GDP, by 2008.
  - A higher capital budget dependent on higher grants and concessional financing.
- Additional expenditure control measures:
  - Goods and services spending:
    - Subject government procurement to competitive bidding, including outsourced services.
    - With World Bank assistance, strengthen procedures to monitor and review contracted services.
    - Potential savings: about ½ percent of GDP by 2008.
  - Transfers and subsidies:
    - Provision for well-targeted social safety nets for elderly poor and needy students of about EC$5 million in the 2006 budget.
- Fiscal consolidation targets:
  - Measures in the 2006 budget targeted about one-quarter of the underlying medium-term fiscal consolidation.
  - National reconstruction levy expected to generate around ¾ percentage points of GDP per annum on the revenue side.
  - Expenditure savings from keeping wage increases constant in real terms.
  - Primary deficit (excluding grants) targeted under 2006 programme: EC$110 million (7¾ percent of GDP).
  - Commitment to avoid supplementary budgets (or special warrants) that would increase spending without matching tax revenues and/or higher grants.

### B. Fiscal Reforms — Tax reform
- VAT introduction:
  - Introduce a value-added tax (VAT) by January 1, 2008.
  - VAT will replace existing consumption tax which applies on a relatively narrow base and has multiple and varying rates.
  - VAT design:
    - Incorporate standard exemptions (financial, education, and health services, etc.).
    - Zero rate for exports.
    - Single non-zero rate for all other goods and services.
    - VAT and accompanying excises to be calibrated to be broadly revenue neutral.
- Reform of tax incentives and concessions:
  - Historical context: During 2000–02, revenue forgone from import duty and consumption tax concessions was nearly 11 percent of GDP.
  - Publishing new concessions:
    - Publish all new concessions granted on a quarterly basis starting in June 2006, with information on beneficiaries, intended purpose, and cost in terms of revenue foregone.
  - Specific reforms:
    - Income tax:
      - Effective January 1, 2006, the government will not grant any new tax holidays or renew expiring ones.
      - Incentives thereafter provided as tax write-offs for investment and after June 30, 2006 through accelerated depreciation with loss carry forward provisions.
      - Submit to Parliament amendments to the Income Tax Act by end-April to adopt accelerated depreciation and five-year loss carry forward for investments.
      - Existing holidays currently in effect will be grandfathered.
      - Until legislative amendments, tax incentives where warranted will be granted as tax write-offs.
    - Consumption tax:
      - Reforms to consumption tax concessions to occur in the context of VAT introduction by January 1, 2008.
      - All consumption taxes will be repealed and replaced with a broad-based VAT with a low rate and few exemptions.
      - Until VAT introduction, will not renew expiring consumption tax concessions.
    - Import duties:
      - Initiate a review on options for reform of the import duty regime for completion by end-September 2006.
      - Review will consider need to provide import duty exemptions for exporters, including in tourism sector.
      - Objective: reduce scope of exemptions provided in SRO/37/99.
    - Legislative repeal:
      - Repeal the Investment Code Incentives and Qualified Enterprises Acts by end-June, 2006.
      - These Acts are little used and not necessary once new incentive regime for income taxes is in place.
- Corporate tax rate timetable (conditional):
  - Provided the revenue situation permits, announce a firm timetable to lower corporate income tax gradually to promote higher private investment.
  - One possibility: lower the rate gradually to 25 percent over the 2007–10 period.
  - Estimated cost: reduction from 30 percent to 25 percent would cost about EC$5 million per year.

### B. Fiscal Reforms — Civil service reform
- Public Sector Modernization Programme with World Bank assistance to be implemented during 2006–10.
- Civil service actions planned for 2007:
  - Enhance performance appraisal system and improve efficiency and quality of government services, including commercialization.
  - Examine need for greater flexibility in employment and separation decisions.
  - Decompression of the wage scale to reward and retain high performers.
  - Rebalance civil service mix towards more professional and fewer clerical staff.
- Public sector positions freeze maintained since 2000; reforms aim to address outsourcing and staffing quality.

### B. Fiscal Reforms — Fiscal transparency and institution building
- Measures to improve transparency and fiscal monitoring:
  - Quarterly public dissemination of information on the overall fiscal and economic situation, possibly through press briefings or presentations in Parliament and on the government’s official website.
  - Strengthen budget accountability by making the Audit Department fully operational and enforcing regular auditing procedures.
  - Report all expenditures on the budget, including expenditures of the Grenada Reconstruction and Development Fund and transfers to the Agency for Reconstruction and Development.
  - Budget formulation to include quarterly projections of gross financing needs as well as targets and performance indicators.
  - Improve formulation of PSIP and reporting by line ministries by establishing monthly reporting of capital expenditures.
  - Require public enterprises to submit audited financial statements at the close of the financial year, and establish a mechanism in 2006 for quarterly reporting (with a one-quarter lag) to serve as an early warning system.
  - Review financial conditions of public enterprises and prepare financial management guidelines.

### C. Debt Strategy and Privatization
- Debt exchange offer outcomes:
  - Holders of over 90 percent of eligible claims participated in the exchange.
  - Provide substantial near-term cash flow relief.
  - Government will make good faith efforts to dialogue with creditors that did not participate.
- Official creditor engagement:
  - Intensify dialogue with official creditors and request debt relief on terms comparable to those provided under the debt exchange offer.
  - Commitment to principle of inter-creditor equity.
  - After seeking Fund support, approach Paris Club and non-Paris Club creditors for relief.
- Debt management capacity and transparency:
  - Upgrading debt recording systems with assistance from Commonwealth Secretariat and the ECCB.
  - Develop and implement a debt management strategy to improve the debt profile and lower vulnerabilities, including retiring expensive debt with any financing surpluses and asset sales.
- Asset divestiture:
  - Consider divesting remaining government assets and use proceeds to retire debt and finance approved capital expenditures subject to strict rate of return analysis.
  - Most privatization and divestiture occurred in the 1990s; government retains small share holdings and is acquiring assets related to called government guarantees.
  - Sales to be conducted through a transparent bidding process; proceeds to reduce public debt.
  - Consider careful timing: early sale of some assets desirable to avoid damage to partially completed tourism projects, but selling too many assets simultaneously could depress prices.

### VI. REDUCING VULNERABILITIES
- Financial sector safeguards:
  - Request ECCB to undertake an on-site inspection of the banking system before end-2006.
    - Rationale: aggregate prudential indicators show commercial banks generally in good shape with adequate capitalization and loan-loss provisioning, but Hurricane Ivan’s damage and slowdown may have stressed balance sheets.
  - Enact Grenada Authority for the Regulation of Financial Institutions (GARFIN) legislation:
    - Uniform Banking Act passed in August; banks supervised under this new Act.
    - Introduce GARFIN Act in Parliament in January next year, with a view to enactment by March.
    - GARFIN Act would establish a single supervisory agency for the nonbank financial sector (insurance, cooperatives, offshore sector, money changers).
    - Intend to increase staff resources devoted to supervising the sector.
- Disaster risk reduction and resilience:
  - Enforce the building code and consider giving it the force of law; step up enforcement.
  - Strengthen regulation of the insurance sector; enactment of new Insurance Act to ensure contract certainty, improve confidence, and better protect policyholders.
  - Participate in regional initiatives such as the World Bank’s Catastrophic Risk Insurance Project to pool insurance risk across countries.

### VII. SOCIAL DEVELOPMENT
- Social development agenda and PRSP process:
  - Prioritizing social development agenda building on prior work:
    - Poverty Eradication Strategy prepared in 2004.
    - Core Welfare Indicator Questionnaire undertaken.
    - Macro-Socio-Economic Assessment of Damage by Hurricanes Ivan and Emily completed.
  - Use updated 2004 Poverty Eradication Strategy as Interim Poverty Reduction Strategy Paper (PRSP).
  - Elaborate a full PRSP in 2006 through a broad consultative process.
- PRSP objectives and approach:
  - Sharpen focus and coherence of poverty reduction initiatives; ensure scarce resources directed to the neediest.
  - Link poverty reduction objectives closely to social development programmes in the budget and ensure consistency with macroeconomic and fiscal objectives.
  - Specific PRSP elements:
    - Adopt a forward-looking and strategic approach defining goals for poverty reduction and steps to achieve Millennium Development Goals (MDGs).
    - Evaluate effectiveness of existing poverty alleviation programmes using empirical evidence; define institutional responsibilities, size, financing, duration, modes and timeframe of implementation.
    - Prioritize programmes and policies by desirability and social effectiveness.
    - Include detailed costing separating investment outlays from expected recurrent costs for maintenance and operation as part of cost-benefit analysis to evaluate consistency with fiscal objectives, PSIP, and available resources.

*Source: _cr06277 - 15.      Beyond the measures slated for 2006, our reform program envisages action in*

### 37.      In the 2006 budget, we plan to put in place a social safety net to help the most

### _cr06277 - 37.      In the 2006 budget, we plan to put in place a social safety net to help the most

### Social safety net measures in the 2006 budget
- Objective:
  - Help the most vulnerable segments of society cope with new challenges and ensure that progress in poverty reduction is not rolled back by the effects of the hurricanes and policy side-effects such as retail fuel price increases.
- Measures to be included in the 2006 budget:
  - An increase in the monthly transfer to needy elderly persons, mainly in rural areas, from EC$100 to EC$135 at a budgeted annual cost of about EC$4 million.
  - A scheme to temporarily subsidize the increase in bus fares for about 2,000 tertiary students at a budgeted annual cost of EC$1–1.5 million (being considered).
- Policy note:
  - Given the seemingly permanent nature of the increase in international oil prices, this subsidy will be phased out over time.

### Structural benchmarks for 2006 (as listed)
- Fiscal reforms and targets (category, target, date):
  - Reach agreement on public service wage path for 2006–08 — Benchmark — End-April 2006
  - Initiate comprehensive reforms to Customs administration — Benchmark — End August 2006
  - Initiate work to strengthen PSIP planning and implementation by seeking CDB and/or World Bank assistance in screening projects above a threshold (EC$5 million) — Benchmark — End June 2006
  - Publish information on all new concessions granted from January 1, 2006 — End-June 2006
  - Stop granting new tax holidays or extending holidays — January 1, 2006
  - Amend Income Tax Act to adopt a system of accelerated depreciation and five-year loss carry forward — Benchmark — End June 2006
  - Repeal Investment Code Incentives Act, Qualified Enterprises Act, and tax components in all other incentives legislation including Hotel Aids Act and Fiscal Incentives Act — Benchmark — End June 2006

### Quantitative Performance Criteria (PC) and Indicative Targets (IT) for 2006 (Table 2)
- Schedule (dates shown): 31-Mar (IT), 30-Jun (PC), 30-Sep (IT), 31-Dec (PC).
- Performance Criteria (in millions of EC$):
  - Central government primary balance excluding grants (floor) 1/2/: -40; -60; -90; -110
  - Stock of central government domestic arrears (ceiling) 3/: 22; 22; 22; 22
- Performance Criteria (in millions of US$):
  - Contracting and guaranteeing of nonconcessional external debt by the central government with maturity of at least one year (ceiling) 1/: 16; 16; 16; 16
  - Stock of external short-term debt (ceiling) 3/: 0; 0; 0; 0
  - Central government or guaranteed external arrears accumulation (ceiling) 3/: 0; 0; 0; 0
- Indicative Target (in millions of EC$):
  - Change in net credit of the banking system to the public sector (ceiling) 1/ 4/: 0; 0; 0; -33.5
- Notes:
  - 1/ Cumulative.
  - 2/ Floor will be adjusted downward to the extent grants exceed programmed amounts; and adjusted upward for shortfalls in grants exceeding EC$25 million.
  - 3/ To be monitored on a continuous basis.
  - 4/ Ceiling will be adjusted upward to the extent that grants fall short of programmed amounts up to a limit of EC$25 million.

### Technical Memorandum of Understanding (TMU): monitoring, definitions, and adjustments
- General definitions:
  - Central government covers all items included in the government budget, including transfers to the Agency for Reconstruction and Development.
  - Nonfinancial public sector = central government + nonfinancial public enterprises (listed in source). New nonfinancial public enterprises established during the program period will normally be covered.
  - External debt = all debt owed to creditors residing outside of Grenada. Domestic debt = all debt owed to residents of Grenada. All bonds issued at the Regional Government Securities Market (RGSM) regarded as domestic debt.
- Performance criterion on the primary balance of the central government excluding grants:
  - Treatment and measurement:
    - Revenues will not include proceeds from sale of public assets exceeding EC$1 million (treated as financing below the line).
    - Expenditure includes transfers to public enterprises.
    - Primary balance measured from financing side as sum of net domestic financing + net external financing + domestic and external interest payments on a due basis minus grants.
  - Components of net domestic financing:
    - (i) net domestic bank financing as change in domestic banking system credit to central government net of deposits, as reported by consolidated balance sheet of monetary authorities and commercial banks, including special tranches from the ECCB;
    - (ii) net nonbank financing as net changes in holdings of government securities by nonbanks, and net borrowing from nonbank institutions;
    - (iii) change in the stock of domestic arrears defined as net changes in unpaid checks issued, unprocessed claims, pending invoices, plus accrued interest payments, and other above-the-line expenditures not paid;
    - (iv) gross receipts from divestment;
    - (v) any exceptional financing.
  - Components of net external financing:
    - (i) disbursements of project and nonproject loans, including securitization;
    - (ii) proceeds from bonds issued abroad;
    - (iii) exceptional financing (including rescheduled principal and interest), net changes in cash deposits held outside domestic banking system;
    - (iv) net changes in short-term external debt;
    - (v) any change in arrears on external interest payments and other above-the-line external expenditures not paid;
    - less (vi) payments of principal on current maturities for bonds and loans on a due basis but excluding use of IMF resources, and including any prepayment of external debt.
  - Adjustments to the floor on the primary balance before grants:
    - (i) downward to the extent that grants exceed programmed amounts (Table 2).
    - (ii) upwards to the extent grants fall short of programmed amounts by more than EC$25 million through end-June or after.
    - (iii) downward to the extent that concessional financing from multilateral development banks exceeds programmed amounts (Table 2).
- Programmed disbursements of Grants and Concessional Loans in 2006 (EC$ millions) — as presented:
  - Quarter II III IV
  - Grants202036.436.4
  - Concessional Loans12.612.622.922.9
- Indicative target on net credit of the banking system to the public sector:
  - Net credit measured as change in credit of domestic banking system to public sector net of deposits, as reported by consolidated balance sheet of monetary authorities and commercial banks, including special tranches from the ECCB.
  - Ceiling adjustments:
    - (i) Upward to the extent that grants fall short of programmed amounts up to a limit of EC$25 million through end-June or after.
    - (ii) Upward to the extent that concessional financing falls short of programmed amounts.
- Performance criterion on central government arrears accumulation to domestic private parties and public enterprises:
  - Definition: sum of all pending payments by the government for goods and services purchased from these parties, pending interest and amortization payments on domestic debt outstanding for 60 days or longer; includes changes in arrears to oil companies from gas price subsidization arrangement (not systematically recorded).
  - Exclusions: (i) debt claims irrevocably tendered in the debt exchange closed on November 15, 2005; (ii) debt claims eligible to participate in the debt exchange but not tendered.
  - Ceiling: set equal to the stock of such arrears as per December 31, 2005; to be monitored on a continuous basis.
  - Stock of Domestic Arrears as per December 31, 2005 (in EC$ millions):
    - Unpaid checks issued: 0
    - Unprocessed claims and Pending Invoices: 2.99
    - Interest and amortization arrears on domestic debt: ...
    - Arrears resulting from gas price arrangement 1/: 18.15
    - Total stock of arrears: 21.14
    - 1/ Estimate
- Performance criterion on nonconcessional external debt with original maturity of at least one year contracted or guaranteed by the central government:
  - Ceiling applies to contracting or guaranteeing of debt by the central government and includes commitments contracted or guaranteed for which value has not been received.
  - Definition of debt follows Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) August 24, 2000) and includes loans, suppliers’ credits, leases, and arrears/penalties/judicial damages arising from contractual obligations that constitute debt.
  - Exclusions from the ceiling: credits extended by the IMF and credits on concessional terms provided by multilateral development banks.
  - Concessional terms defined as grant element of more than 35 percent (NPV relative to face value) based on CIRR published monthly by the OECD; discounting procedures and margins specified.
- Performance criterion on net changes in stock of short-term external debt with original maturity of less than one year contracted or guaranteed by the central government:
  - Stock of short-term external debt defined as debt with original maturity less than one year contracted or guaranteed by the central government (debt definition per point No. 9 of the Guidelines), but excludes normal import-related credits.
  - Ceiling applied on a continuous basis to the stock of short-term external debt owed or guaranteed by the central government.
- Performance criterion on nonaccumulation of central government and central government guaranteed external payment arrears:
  - External payment arrears defined as overdue payments (principal or interest) on debt contracted or guaranteed by the central government.
  - Exclusions: (i) debt claims eligible to participate in the debt exchange but not tendered; (ii) debt claims of official bilateral creditors under rescheduling or refinancing negotiation.
  - No external payment arrears of the central government and central government guaranteed debt will be allowed; monitored continuously.
- Periodic reporting requirements:
  - Monthly reporting to include data for monitoring the program’s performance criteria and monthly indicative targets across fiscal, financial, external, and real sectors.
  - Fiscal sector reporting items:
    - (i) Central government budgetary accounts.
    - (ii) Central government domestic debt data.
    - (iii) Current grant inflows.
    - (iv) Stock of domestic arrears, including unpaid checks issued, stock of unprocessed claims due and invoices pending; interest and amortization on domestic debt.
    - (v) Capital expenditure, including revised projections for remainder of fiscal year; plus a detailed quarterly project-by-project expenditure overview and financing composition.
  - Financial sector reporting item:
    - (vi) Monetary survey for Grenada as prepared by the Eastern Caribbean Central Bank.
  - External and real sector reporting items:
    - (vii) Detailed (creditor by creditor) external debt report from the Debt Unit in the Ministry of Finance showing fiscal year-to-date disbursements, amortization, interest payments, and outstanding stocks for the central government and public enterprises.
    - (viii) Total disbursements/grant receipts, monthly, disaggregated into: (a) budgetary support (by type—either loans or external “bonds” and/or other securities); (b) project loans; (c) budgetary grants; and (d) project grants.
    - (ix) Copies of loan agreements for any new loans contracted, including financing involving the issue of government paper, and of any renegotiated agreements on existing loans.
    - (x) Stock of external arrears (creditor-by-creditor).
    - (xi) Consumer price index.
  - Timing: All such information will be provided to Fund staff, to the extent possible, within three weeks of the end of each month.

*Text excerpt from the supplied IMF document content.*

### 25.      Reporting on an annual basis will include the following:

### _cr06277 - 25.      Reporting on an annual basis will include the following:

### Fiscal sector (annual reporting requirements)
- Financial statements of the public enterprises (as listed in paragraph 4).

### External and real sectors (annual reporting requirements)
- (xii) GDP and its components.
- (xiii) Balance of payments accounts.

### Other reporting (annual)
- (xiv) Reports of legislative changes pertaining to economic matters.
- (xv) Notification of any establishment of new public enterprises.

### Press Release summary — IMF Executive Board Approves US$15.2 Million PRGF Arrangement for Grenada (Press Release No. 06/75; April 18, 2006)
- A three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) for Grenada in a total amount equivalent to SDR 10.53 million (about US$15.2 million).
- An initial disbursement of SDR 1.56 million (about US$2.2 million) will become available immediately.
- PRGF terms:
  - Annual interest rate of 0.5 percent.
  - Repayable over 10 years with a 5 ½-year grace period on principal payments.
- Purpose: support the government’s comprehensive medium-term economic reform program based on a Poverty Reduction Strategy Paper (PRSP).
- Key diagnostics noted by Mr. Agustín Carstens:
  - A modest economic recovery underway after Hurricanes Ivan (2004) and Emily (2005).
  - Economic growth rebounded in 2005 with brisk construction activity offsetting slowdowns in agriculture and tourism.
  - A substantial increase in domestic fuel prices led to an increase in inflation in 2005, but second-round price increases were limited and price rises expected to moderate.
- Program objectives highlighted:
  - Alleviate poverty, promote sustained high economic growth, restore fiscal and debt sustainability, reduce vulnerabilities to extreme weather events and financial sector developments.
  - Implementation through a comprehensive medium-term reform program launched with the 2006 budget.
  - Target to sharply reduce public debt to some 60 percent of GDP by 2015, with a primary surplus (excluding grants) target of 2.5 percent of GDP beginning in 2008.
  - Fiscal adjustment phased in over three years to accommodate reconstruction spending in 2006 and 2007; adjustment to be evenly distributed between revenues and expenditure measures.
  - Room for increased social expenditure to address hurricane dislocation and higher energy prices.
  - Structural measures to improve investment climate, simplify land acquisition by investors (making government-controlled land available through open and well-publicized auctions), and strengthen financial sector regulatory framework.

### Annex — Recent economic developments (diagnosis)
- Recent exogenous shocks:
  - Hurricane Ivan (September 2004) caused damage of 200 percent of GDP.
  - Hurricane Emily (July 2005) caused additional damage estimated at 12 percent of GDP.
  - Earlier shocks: September 11 attacks (sharp drop in tourism) and tropical storm Lili in 2002 (depressed agricultural exports).
  - High international oil prices contributed to further hardship.
- Output and inflation:
  - Economic growth: rebound to an estimated 1.5 percent in 2005 after a drop of 3 percent in 2004.
  - Near-term growth prospects: GDP potentially expanding by more than 5 percent in 2006 and 2007 reflecting construction activity and expected recovery in tourism.
  - Following a 45-percent increase in domestic fuel prices, inflation reached 6 percent at the end of 2005; second-round price increases limited and inflation expected to decline in coming months.
- Fiscal situation:
  - Shocks exacerbated fiscal imbalances and growing public debt, amplifying the need for fiscal consolidation alongside reconstruction.

### Program summary (policy framework and priorities)
- Strategic objectives of the government’s comprehensive medium-term reform program:
  - Promote sustained high economic growth.
  - Restore fiscal and debt sustainability.
  - Reduce vulnerabilities.
  - Alleviate poverty.
- Fiscal targets and rationale:
  - Reduce public debt from 128 percent of GDP at end-2005 to a more prudent level.
  - Target central government primary surplus (excluding grants) of 2.5 percent of GDP by 2008 to enable debt-to-GDP ratio to decline gradually to 60 percent.
  - Phased implementation over three years to accommodate reconstruction-related spending in 2006 and 2007.
  - Structural fiscal measures already identified to underpin adjustment.
- Structural policy priorities by year:
  - Year 1: measures to improve the investment climate.
  - Years 2–3: focus on improving flexibility of labor and financial markets.
- Risk-reduction measures:
  - Increase enforcement of building standards and insurance coverage to reduce vulnerability to extreme weather events.
  - Enhance regulatory framework for non-bank financial institutions to reduce financial sector vulnerabilities.
- Social policy implications:
  - Fiscal measures make room for increased social spending to support social development agenda and address hurricane-related dislocation.
  - Government’s interim PRSP emphasizes reducing unemployment as central to long-term poverty reduction.

### Key statistics and projections (Table 1: Selected Economic and Financial Indicators, 2003–08)
- Human and social indicators:
  - Rank in UNDP Human Development Index: 66 out of 177 countries (2004).
  - Infant mortality rate per '000 births (2003): 18.
  - Adult illiteracy rate in percent (2001): 4.
  - Life expectancy at birth in years (2003): 65.
  - Poverty headcount index (2000): 32.
  - GDP per capita in US$ (2004): 4,620.
- National income and prices (Annual percentage change; unless otherwise specified):
  - Real GDP: 2003: 5.8; 2004: -3.0; 2005: 1.5; 2006: 6.5; 2007: 5.0; 2008: 4.0.
  - GDP deflator: 2003: 1.3; 2004: 2.7; 2005: 3.5; 2006: 4.6; 2007: 2.0; 2008: 2.0.
  - Consumer prices, end-of-year: 2003: 1.6; 2004: 2.5; 2005: 6.0; 2006: 2.0; 2007: 2.0; 2008: 2.0.
  - Consumer prices, period average: 2003: 2.2; 2004: 2.3; 2005: 3.5; 2006: 4.6; 2007: 2.0; 2008: 2.0.
- External sector (annual percentage change unless noted):
  - Exports, f.o.b.: 2003: 7.1; 2004: -24.8; 2005: -14.6; 2006: 0.6; 2007: -8.2; 2008: 16.7.
  - Imports, c.i.f.: 2003: 25.9; 2004: 3.3; 2005: 22.6; 2006: -3.4; 2007: 4.2; 2008: 5.7.
  - Export volume 1/: 2003: -2.0; 2004: -25.6; 2005: -23.5; 2006: -0.6; 2007: -10.0; 2008: 17.1.
  - Import volume 1/: 2003: 11.6; 2004: -8.6; 2005: 11.7; 2006: -5.0; 2007: 4.3; 2008: 5.7.
  - Current account balance (including grants; in percent of GDP): 2003: -33.2; 2004: -13.5; 2005: -37.1; 2006: -32.8; 2007: -28.0; 2008: -26.7.
  - Terms of trade (deterioration -): 2003: -3.2; 2004: -10.6; 2005: 1.7; 2006: -0.5; 2007: 2.0; 2008: -0.4.
  - Real effective exchange rate (end of period, depreciation -): 2003: -8.5; 2004: -4.6; 2005: 5.2; 2006: ...; 2007: ...; 2008: ....
- Banking system (as a percent of broad money at the beginning of the year unless otherwise noted):
  - Net foreign assets 2/: 2003: 5.8; 2004: 17.9; 2005: -19.4; 2006: -2.2; 2007: -2.0; 2008: -2.5.
  - Net domestic assets 2/: 2003: 2.2; 2004: -0.2; 2005: 19.0; 2006: 10.1; 2007: 7.7; 2008: 7.3.
    - Credit to public sector (net) 2/: 2003: 2.3; 2004: -6.7; 2005: -0.8; 2006: 0.0; 2007: 0.0; 2008: 0.0.
    - Credit to private sector 2/: 2003: 3.1; 2004: 5.0; 2005: 6.2; 2006: 8.5; 2007: 7.7; 2008: 7.7.
  - Money and quasi-money (M2): 2003: 8.0; 2004: 17.7; 2005: -0.4; 2006: 7.8; 2007: 5.7; 2008: 4.8.
  - Weighted deposit rate (in percent per year) 3/: 2003: 3.4; 2004: 2.8; 2005: 2.8; 2006: ...; 2007: ...; 2008: ....
  - Weighted lending rate (in percent per year) 3/: 2003: 12.4; 2004: 10.0; 2005: 10.2; 2006: ...; 2007: ...; 2008: ....
- Central government finances (In percent of GDP):
  - Total revenue and grants: 2003: 34.5; 2004: 33.1; 2005: 39.1; 2006: 36.1; 2007: 31.5; 2008: 31.9.
    - Grants: 2003: 6.9; 2004: 7.5; 2005: 11.0; 2006: 8.0; 2007: 2.7; 2008: 2.5.
  - Total expenditure: 2003: 39.3; 2004: 35.9; 2005: 38.9; 2006: 38.1; 2007: 31.6; 2008: 28.8.
  - Current expenditure: 2003: 24.3; 2004: 27.9; 2005: 23.5; 2006: 22.7; 2007: 21.6; 2008: 20.6.
    - Salaries and allowances: 2003: 10.9; 2004: 12.7; 2005: 11.8; 2006: 11.7; 2007: 11.1; 2008: 10.6.
  - Capital expenditure: 2003: 15.0; 2004: 8.0; 2005: 15.4; 2006: 15.4; 2007: 10.0; 2008: 8.2.
  - Primary balance (after grants): 2003: 0.4; 2004: 3.7; 2005: 2.4; 2006: 0.3; 2007: 2.1; 2008: 5.0.
  - Current balance: 2003: 3.2; 2004: -2.4; 2005: 4.6; 2006: 5.3; 2007: 7.2; 2008: 8.6.
  - Overall balance (after grants): 2003: -4.8; 2004: -2.8; 2005: 0.2; 2006: -2.0; 2007: -0.1; 2008: 3.0.
- Public sector total debt (end-period) 4/: 2003: 110.0; 2004: 129.5; 2005: 128.0; 2006: 126.7; 2007: 117.8; 2008: 107.3.
- Other levels (In millions of U.S. dollars; unless otherwise specified):
  - Gross international reserves of the ECCB, end-of-period: 2003: 539.9; 2004: 632.4; 2005: 600.7; 2006: ...; 2007: ...; 2008: ....
  - In percent of broad money in all ECCU countries: 2003: 19.8; 2004: 20.4; 2005: 20.1; 2006: ...; 2007: ...; 2008: ....
  - Nominal GDP: 2003: 443.7; 2004: 436.8; 2005: 474.0; 2006: 519.3; 2007: 558.9; 2008: 596.5.

*IMF staff estimates and projections as presented in the source document.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06277.pdf_