## _cr14196 — IMF staff report (Grenada, 2014)

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---

### Background, shocks, and economic context
- A decade of natural disasters and economic shocks culminated in a deep economic crisis by 2011-12.
- Hurricane Ivan (September 2004) caused catastrophic damage in Grenada (at about 150 percent of GDP); Hurricane Emily struck the island in 2005.
- Economic activity declined by over 8 percent of GDP from peak to trough (2008-12), compared to "1⅓ percent" decline in emerging markets and "5⅓ percent" decline in the tourism-based Caribbean over the same period.
- ECCU peg: EC$2.7 to US$1 since 1976; Grenada lacks independent monetary policy and relied on fiscal policy to respond to shocks.
- ECCU regulations maintain a floor on saving deposit interest rates of "3 percent"; nonresident deposits reached "20 percent of GDP by March 2014", up about "2 percentage points of GDP" since the onset of the global crisis.

### Fiscal deterioration, financing strains, and arrears (2011–13)
- Fiscal and debt developments:
  - Overall central government deficit widened to "5½ percent of GDP by 2012".
  - Public debt increased to "103 percent by end-2012".
  - Overall 2013 deficit widened to "7 percent of GDP (on an accrual basis)" from "5½ percent in 2012".
  - Overall public debt increased to about "110 percent of GDP by end-2013".
- Financing and arrears:
  - Financing needs in 2011–12 met through nonmarket placement with the national insurance scheme and PetroCaribe, borrowing from the ECCB, asset sales, and accumulation of arrears.
  - Gross financing needs totaled "33.8 percent of GDP in 2013".
  - About US$638.5 million ("78.5 percent of GDP") in debt outstanding at end-2013 would be eligible for restructuring.
  - Arrears as of end-2013:
    - Total arrears: "15.3 percent of GDP"
    - External arrears: "10.7 percentage points of GDP"
    - Domestic arrears: about "4.6 percentage points of GDP"
  - Outstanding arrears (US$ m, % of GDP) as of end-December 2013:
    - Total Arrears: "124.3 / 15.3"
    - External Arrears: "86.8 / 10.7"
    - Multilateral: "1.3 / 0.2"
    - Official bilateral: "49.3 / 6.1"
    - Paris Club: "2.9 / 0.4"
    - Non-Paris Club: "46.3 / 5.7"
    - Commercial creditors: "15.0 / 1.8"
    - Unpaid contributions: "21.3 / 2.6"
    - Domestic Arrears: "37.5 / 4.6"
    - Domestic Debt: "5.4 / 0.7"
    - ECCB: "1.5 / 0.2"
    - Domestic suppliers: "30.6 / 3.8"

### Recent developments (2013–early 2014)
- Growth and labor market:
  - Real GDP grew by "1.5 percent in 2013" after almost four years of decline.
  - Output estimated at about "3 percent below potential in 2013".
  - Unemployment: "33.5 percent" in 2013; youth unemployment "55.6 percent".
- Recovery drivers:
  - Sandals Resort International project works estimated at "US$80 million (10 percent of GDP) during 2013".
  - Increased enrollment at the off-shore medical school (second largest employer).
- External position and reserves:
  - Current account deficit: "19.2 percent of GDP in 2012" widened to "27.1 percent of GDP in 2013".
  - Imports related to resort construction estimated at about "6½ percent of GDP".
  - Overall balance of payments surplus of "2 percent of GDP in 2013"; reserves rose to "3½ months of imports" from about "2½ months of imports in 2012".
- Prices and credit:
  - Consumer prices declined marginally on average in 2013; CPI declined by "1.2 percent in 2013".
  - Private credit declined by "5 percent in 2013".
  - Central bank discount rate unchanged over the past "nine years".

### Financial sector strains and balance-sheet weaknesses
- Impaired assets and capital:
  - Impaired assets estimated at "13.8 percent of total bank loans in December 2013" under existing loan classifications; impairments may be significantly higher under stricter norms.
  - Provisioning and declining profitability reduced reported regulatory capital to "13.6 percent of risk-weighted assets in December 2013"; Tier 1 capital "12.2" (Dec-13).
- Exposures to failed regional insurer:
  - CL Financial Group exposure estimated at "3.9 percent of GDP" distributed as:
    - banks: "0.7 percent of GDP"
    - credit unions: "1.3 percent of GDP"
    - insurance companies: "0.05 percent of GDP"
    - individuals: "1.2 percent of GDP"
- Financial sector structure (Box 5):
  - Financial sector assets amount to "159 percent of GDP (about 193 percent of GDP including the national pension fund)".
  - Banking sector: five banks; banking sector assets "66.4%" of financial sector assets.
  - National Insurance Scheme (NIS) assets around "35 percent of GDP".
  - Credit unions: 11, assets about "18 percent of GDP", penetration "62 percent of the population".
- Key financial indicators (Dec-13):
  - Nonperforming loans to total gross loans: "13.8 (Dec-13)".
  - Return on assets: "-0.3 (Dec-13)".
  - Return on equity: "0.8 (Dec-13)".
  - Liquid assets to total assets: "27.7 (Dec-13)".
  - Net foreign currency exposure to total capital: "65.2 (Dec-13)".

### Macroeconomic outlook and risks
- Growth and inflation projections:
  - Staff projects growth to average "1½ percent during 2014-17".
  - Over the longer-term, growth projected to recover to about "2½ percent".
  - Inflation projected to average "1½ to 2 percent a year over the program period" and remain around "2 percent" medium-term.
- External balances and financing gap:
  - Current account deficit projected to narrow from "27.1 percent of GDP in 2013" to about "18.9 percent of GDP by 2017".
  - External financing gap estimated to average "US$58.3 million (6¾ percent of GDP) per year during 2014–17" absent a pickup in private inflows and without debt restructuring.
- Downside risks (selected):
  - Probability of negative growth during the next three years estimated at about "40 percent" (based on historical variance).
  - Risks include fiscal consolidation dampening growth, faltering confidence if fiscal crisis is not promptly addressed, weak global recovery affecting tourism, natural disasters, and potential nonresident deposit outflows.

### Program objectives and strategy
- Overarching program objectives:
  - (i) enhance competitiveness for private-sector growth and employment through structural reform;
  - (ii) resolve the fiscal crisis through fiscal adjustment and debt restructuring while protecting social safety nets;
  - (iii) strengthen financial sector stability by enhancing regulation and supervision.
- Lessons applied to program design:
  - Focus on clear ownership and prior actions; few macro-critical reforms; significant fiscal adjustment including wage bill reductions and scaling back tax incentives; policy buffers and realism in growth projections.

### Fiscal consolidation strategy and targets
- Overall adjustment:
  - Program envisages a primary fiscal consolidation of "7¾ percent of GDP over three years", front-loaded.
  - Aim to reach a primary surplus of "3½ percent of GDP by 2016".
  - Total fiscal adjustment effort: "7.8" percent of GDP (program tables).
- Without restructuring and consolidation:
  - Overall deficit would remain in the range of "8–9 percent of GDP".
  - Public debt trajectory without policy change: "about 110 percent of GDP at end-2013" to "over 134 percent of GDP by 2020".
  - Under program consolidation but no restructuring, debt would be around "89 percent of GDP by 2020".

### Revenue measures (full impact by end of program; percent of GDP and start year)
- Total revenue measures: "3.7"
- Personal income tax: "0.5"
  - Reduce threshold to EC$36,000, marginal rate 15% on income up to EC$60,000 — Start 2014 — Full yield "0.5"
  - Widen income and withholding tax base to lottery winnings — Start 2015 — Full yield "0.0"
  - Note: threshold lowered from EC$60,000 to EC$36,000 as of January 2014; marginal tax schedule preserved in source.
- Property tax: "1.0"
  - Increase rate on buildings and land to 0.25% in 2014 and to 0.5% in 2016 — Start 2014 — Full yield "0.8"
  - Revise valuations to market value — Start 2015 — Full yield "0.3"
- Value-added tax: "0.5"
  - Reduce list of exempt items — Start 2015 — Full yield "0.4"
  - Restore 15% rate on construction materials — Start 2014 — Full yield "0.1"
  - Increase VAT for St. George's University from 5 to 15% — Start 2016 — Full yield "0.1"
- Excises: "0.1"
  - 5% excise on vehicle parts, tires, batteries, motor oil, luxury goods — Start 2015 — Full yield "0.1"
  - Increase excises on tobacco and alcohol (at least 10%) — Start 2015 — Full yield "0.1"
- Customs exemptions: "0.7"
  - Halve customs exemptions to GRENLEC, statutory bodies, St. George's University and returning nationals — Start 2014 — Full yield "0.7"
- Other: "0.7"
  - Increase customs service charge from 5% to 6% — Start 2014 — Full yield "0.3"
  - Introduce a 10% tax on financial activities — Start 2015 — Full yield "0.3"
  - Introduce a small business taxation regime — Start 2016 — Full yield "0.1"
  - Increase fees for motor vehicle license, professional licenses, and gun license — Start 2014 — Full yield "0.1"

### Current expenditure measures (full impact by end of program; percent of GDP and start year)
- Total current expenditure measures: "2.1"
- Wage and pension bill: "1.5"
  - Freeze wage bill (including allowances) for 2014-2016 at May-December 2013 levels — Start 2014 — Full yield "0.9"
  - Reduce wage bill by another 0.4 pp of GDP after freeze (attrition, reform) — Start 2015 — Full yield "0.4"
  - Freeze personal allowances for 2014-16 at 2013 levels — Start 2014 — Full yield "0.1"
- Goods and services: "0.5"
  - Spending fixed in nominal terms at 2013 levels for 2014-2016 — Start 2014 — Full yield "0.4"
  - Additional efficiency savings measures — Start 2015 — Full yield "0.2"
- Transfers and subsidies: "0.1"
  - Freeze in nominal terms at 2013 levels for 2014-2016 — Start 2014 — Full yield "0.1"
- Streamline non-grant-financed capital spending — Start 2014 — Full yield "2.0"

### Social protection and targeted spending
- SEED (Support for Education, Employment, Empowerment and Development):
  - SEED consolidated program accounts for "18 percent of total social spending".
  - With World Bank assistance, establish beneficiary registry and introduce proxy means testing for SEED.
  - Cash transfers under SEED will be increased by an estimated "0.3 percent of GDP" during the program; a floor on SEED spending to protect targeted transfers (MEFP ¶15).
  - SEED pilot: database of about "3,500 beneficiary households"; proxy means test likely tested before end-2014.
- Social spending trends:
  - Increased from "1⅓ percent of GDP in 2009" to "2½ percent of GDP in 2013".
  - About 25 social protection programs; SEED, IMANI, De-Bushing account for over two thirds of social spending.

### Debt restructuring: scenarios, coverage, and implications (Box 3)
- Indicative restructuring options offered to creditors for EC$ 2025 bond:
  - Option 1:
    - "60 percent principal nominal haircut"
    - Extends maturity to "15 years"
    - Interest rate: "6.5 percent throughout"
    - Interest arrears: "60% reduction, 40% capitalized"
  - Option 2:
    - "50 percent principal nominal haircut"
    - Extends maturity to "20 years"
    - Grace period: "2 years"
    - Interest rate: "5 percent throughout"
    - Interest arrears: "50% reduction, 50% capitalized"
  - Expected creditor recovery under both options: creditors would receive "around 33-43 cents on the dollar" (calculated for discount rates between "8 and 12 percent").
- Coverage and exclusions:
  - Debts explicitly excluded from restructuring: (i) multilateral debt; (ii) treasury bills issued in the RGSM; (iii) loan facilities extended by the ECCB.
  - If all other debts receive a nominal haircut of "50-60 percent", debt would be put on a firm downward path towards the regional target of "60 percent of GDP by 2020".
- Negotiation progress and creditor engagement:
  - Formal discussions with holders of the US$ 2025 bond (30 percent of eligible debt) started in March 2014.
  - On April 9, 2014, government published restructuring scenarios for holders of the EC$ 2025 bond (11 percent of eligible debt), including 60% and 50% haircut options; some creditors indicated willingness to accept the 60% option.
  - Engagement extended to domestic financial institutions, including the National Insurance Scheme (NIS).
  - Export-Import Bank of the Republic of China (5.4 percent of eligible debt): litigation ongoing in U.S. courts; Bank indicated willingness in principle to participate.

### Impact on National Insurance Scheme (Annex IV)
- NIS exposures and position:
  - NIS exposure to central government papers: "EC$186.8 million (8.5 percent of GDP or 25 percent of assets) at end-2012"; EC$92 million holdings of EC$2025 bond.
  - Excluding RGSM T-bills, total exposure to central government: "EC$175 million (8 percent of GDP or 23 percent of assets)".
- Illustrative impacts of a 50/60 percent haircut:
  - Onset of operational deficits and reserve depletion would be accelerated by five/six years, to "2022/23" (onset) and "2036/37" (reserve depletion), respectively.
  - Over medium term, NIS will continue to run operational surpluses and can address longer-term challenges via parametric reforms.
  - Fiscal offset: negative impact on NIS finances would be fully offset for the public sector as a whole by the gain in central government’s position.

### Financial-sector strategy, supervision, and contingency measures
- Regional engagement and assessments:
  - Authorities support participating in the regional strategy to strengthen banking system regulation and supervision.
  - If regional reforms stall, Grenada will move ahead with an independent assessment of asset quality with ECCB assistance; results to inform recapitalization/resolution plans.
- Non-bank sector reforms:
  - Consolidation of credit unions; increase capital and adopt full risk-based supervision by end-2014.
  - GARFIN supervision for credit unions, insurance companies, and NIS; ECB supervises banks.
- Banking sector-specific measures (programme commitments):
  - Requirements for retaining profits until capital and liquidity meet prudential requirements.
  - Comprehensive and independent valuation of assets of weak banks before end-December 2014 (subject to agreed loan classification/provisioning).
  - Based on valuation, discuss recapitalization or resolution plans with ECCB.

### Program modalities, financing, and safeguards
- IMF support:
  - Three-year Extended Credit Facility arrangement amounting to "SDR 14.04 million (120 percent of quota)" recommended by staff; proposed disbursement schedule totals "14.041 (120 percent of quota)".
  - Proposed schedule highlights: initial disbursement "June 26, 2014: 2.040 (17.436 percent of quota)" and subsequent semiannual disbursements of "2.000 (17.094)" through March 31, 2017.
- Financing assumptions in DSA:
  - DSA baseline assumes fiscal adjustment but does not include debt restructuring; financing gaps filled by exceptional IFI financing during 2014-17 (expected "US$81.9 million, or about 9.4 percent of GDP") and by borrowing on terms similar to official bilateral debt (2 percent interest, 7 years grace and 20 years maturity).
- Contingency and risk mitigation:
  - Contingency measures: gradual release of spending appropriations; expansion of income tax base.
  - Contingency financing: save budgetary receipts from the citizenship-by-investment program (CBI) for contingency financing; seek donor assistance to purchase additional natural disaster insurance (estimated cost "US$3-5 million per year (0.4-0.6 percent of GDP)").
  - Quantitative performance criteria and reporting requirements established; cabinet conclusions and quarterly-authorized spending to safeguard execution.
- Safeguards and monitoring:
  - Program subject to semiannual reviews with continuous performance criteria, indicative targets and structural benchmarks.
  - Safeguards policy to be adhered to in case of Fund budget financing; maintain foreign exchange balances only with ECCB per the 2012 safeguards assessment.

### Key macroeconomic and fiscal statistics (selected exact figures from source)
- Real GDP growth (annual): 2008 "0.9"; 2009 "-6.6"; 2010 "-0.5"; 2011 "0.8"; 2012 "-1.8"; 2013 "1.5"; 2014 "1.1"; 2015 "1.2"; 2016 "1.7"; 2017 "2.0".
- Nominal GDP (EC$ million): 2013 "2,197"; 2014 "2,265"; 2015 "2,338"; 2016 "2,437"; 2017 "2,550".
- Public debt (incl. guaranteed, percent of GDP): 2008 "84.4"; 2009 "91.7"; 2010 "97.6"; 2011 "100.9"; 2012 "103.1"; 2013 "109.8"; 2014 "111.3"; 2015 "110.2"; 2016 "106.4"; 2017 "102.1".
- Central government revenue (percent of GDP): 2013 "24.8"; projected 2014 "24.9".
- Interest payments (percent of GDP): 2013 "2.7"; projected 2014 "3.4"; 2015 "4.1".
- Current account (percent of GDP): 2013 "-27.1"; 2012 "-19.2"; projected 2017 "-18.9".
- Gross external debt (percent of GDP): 2013 "155.5"; 2014 "160.0"; 2015 "163.2".
- Nonresident deposits: "20 percent of GDP at end-2013".
- 2025 bond trading level after restructuring announcement: "below 35% of face value".
- Gross international reserves of the ECCB: "1,188.8 (Nov-13, US$ million)".
- Banking system summary (selected levels):
  - Net foreign assets (EC$ millions): 2013 "347.8"; 2014 "359.0".
  - Credit to private sector (EC$ millions): 2013 "1,700.4"; 2014 "1,719.5".
- Financing requirement (US$ million): 2013 "274.7"; 2014 "330.6"; 2015 "108.4"; 2016 "124.2"; 2017 "119.8".

### Risk Assessment (selected entries)
- Major risks and recommended responses:
  - Protracted slower growth in advanced and emerging economies — Relative likelihood: "High"; Expected impact: "High". Recommended: carry through programmed fiscal adjustment and structural reforms.
  - Escalation of financial sector stress in the ECCU — Relative likelihood: "Medium"; Expected impact: "High". Recommended: accelerate regional banking reforms and agree on backstopping before bank resolution.
  - Natural disasters (hurricanes) — Relative likelihood: "Medium"; Expected impact: "High". Recommended: build financing buffers and obtain disaster insurance; work with World Bank on resilience.
  - Disruption in the PetroCaribe arrangement with Venezuela — Risk level: "High (likelihood), Medium (overall concern)". Recommended: same mitigations as above.
  - Side-effects from global financial volatility — Risk level: "High (likelihood), Low (overall concern)". Recommended: same mitigations as above.

*Italic: IMF staff report — Article IV discussions and ECF programme documentation for Grenada (sections and tables extracted from source _cr14196).*

### 1. Fiscal Adjustment Effort and the Fiscal Impulse _______________________________________________  21

### 1. Fiscal Adjustment Effort and the Fiscal Impulse

### Background: shocks and policy context
- A decade of natural disasters and economic shocks culminated in a deep economic crisis by 2011-12.
- Hurricane Ivan (September 2004) caused catastrophic damage in Grenada (at about 150 percent of GDP); Hurricane Emily struck the island in 2005.
- Economic activity declined by over 8 percent of GDP from peak to trough (2008-12).
- This decline compared to "1⅓ percent" decline in emerging markets and "5⅓ percent" decline in the tourism-based Caribbean over the same period.
- As a member of the Eastern Caribbean Currency Union (ECCU), the EC dollar has been pegged at EC$2.7 to US$1 since 1976; Grenada lacks an independent monetary policy and resorted to fiscal policy to counteract the global financial crisis.
- ECCU regulations maintain a floor on saving deposit interest rates of "3 percent", contributing to inflows of nonresident deposits that reached "20 percent of GDP by March 2014", up about "2 percentage points of GDP" since the onset of the global crisis.

### Past Fund arrangements and program performance
- Two consecutive Fund arrangements during 2006–13 supported the authorities’ efforts to maintain macroeconomic stability.
  - The first arrangement during 2006–10 under the Poverty Reduction and Growth Facility (now Extended Credit Facility (ECF)) was originally approved for "US$15.2 million (SDR 10.53 million)" and later augmented to "US$24.9 million (SDR 16.4 million or 140 percent of quota)".
  - The second arrangement was under the ECF, approved in 2010 for "US$13.3 million (SDR 8.8 million, or 75 percent of quota)". The second arrangement went off-track soon after its first review in November 2010 and expired in April 2013.

### Fiscal deterioration and financing strains (2011–12)
- By 2011–12 Grenada faced low growth, large fiscal and current account deficits, high debt, and increasing financing pressures.
- Widening fiscal imbalances:
  - Overall central government deficit widened to "5½ percent of GDP by 2012".
  - Public debt increased to "103 percent by end-2012".
- Growing financing constraints:
  - Financing needs in 2011–12 were met through nonmarket placement of government paper with the national insurance scheme and PetroCaribe, borrowing from the Eastern Caribbean Central Bank (ECCB), sale of assets, and accumulation of arrears.
- External imbalances:
  - Current account deficit narrowed to "19.2 percent of GDP in 2012", from an average of about "25 percent of GDP" over the previous five years.
  - External debt increased to "144½ percent of GDP in 2012", up by about "40 percent of GDP since 2007".
  - Reserves were broadly stable at about "3 months of imports".

### Recent developments (2013–early 2014)
- Growth and output:
  - After almost four years of decline, real GDP is estimated to have grown by "1.5 percent in 2013".
  - Staff estimates that output was at about "3 percent below potential in 2013".
  - Unemployment was recorded at "33.5 percent" in 2013, with youth unemployment at "55.6 percent".
- Drivers of recovery:
  - Recovery in 2013 largely driven by a large resort construction project and increased enrollment at Grenada’s off-shore medical school (the second largest employer on the island).
  - The Sandals Resort International project undertook works estimated at "US$80 million (10 percent of GDP) during 2013".
- External position:
  - Current account deficit widened to "27.1 percent of GDP in 2013" from "19.2 percent in 2012", driven by a sharp increase in imports related to the resort construction project, estimated at about "6½ percent of GDP".
  - Overall balance of payments was in a surplus of "2 percent of GDP in 2013", pushing up reserves to "3½ months of imports" from about "2½ months of imports in 2012".
  - FDI-related imports and weak tourism receipts contributed to the deterioration; exports of goods improved slightly due to recovery in nutmeg production and the fishing industry.
  - Nutmeg production remains at about "15 percent of pre-hurricane levels" because nutmeg trees take "7-10 years" to reach harvest level and "13 years" to reach peak production following the 2004 hurricane.
- Inflation and credit:
  - Consumer prices declined marginally on average in 2013; deflationary pressure reflected weak demand and tight credit conditions.
  - Central bank’s discount rate has not changed over the past "nine years"; lending rates declined only marginally despite ample liquidity.
  - Private credit declined by "5 percent in 2013", which continued into early 2014.
  - Real effective exchange rate depreciated slightly since mid-2013.

### Main recommendations from the 2012 Article IV Consultation (implementation status noted)
- Enhance growth and competitiveness:
  - Improve tourism competitiveness through strict wage discipline, infrastructure enhancements, and linkages between agricultural and tourism sectors. (Implementation: tourism strategy started; wage discipline to be addressed during the program.)
  - Raise productivity by improving labor skills and increased labor market flexibility. (Implementation: vocational training introduced; labor market flexibility to be addressed during the program.)
  - Focus on pro-growth spending. (Addressed in the program.)
  - Improve the investment climate via customs modernization, company registration harmonization, contract enforcement, and streamlining business start/close procedures. (To be addressed during the program.)
  - Promote SME development by strengthening support services, increasing labor market flexibility, and clearing public sector arrears to SMEs. (Grenada Development Bank tasked to provide project finance to small industries.)
  - Expedite exploration of alternative energy with World Bank assistance. (World Bank assisting; further assistance expected during the program.)
  - Systematize monitoring and financial reporting of SOEs. (Work underway; reforms to be undertaken during the program.)
- Pursue fiscal consolidation and reduce debt:
  - Allow the manufacturer’s rebate to expire by September this year. (Prior action: rebate significantly limited in scope and set to expire at end-2016.)
  - Limit ad hoc tax exemptions. (Prior action: legislation passed to halve tax exemptions to GRENLEC, statutory bodies and returning nationals; and to eliminate some VAT-exempt goods.)
  - Contain the wage bill. (Agreement reached with trade unions to cap the nominal wage bill during "2014-16".)
  - Enhance efforts to streamline spending on goods and services. (Savings realized on utilities bill and communication costs.)
  - Protect priority capital expenditures, including co-financing for donor financed projects. (Addressed in the program.)
  - Remain current on both domestic and external obligations. (Addressed in the program.)
  - Put in place a strong credible fiscal framework for the medium-term through revenue and expenditure measures. (To be done during the program.)
- Reduce financial sector vulnerabilities:
  - Seek and implement recommendations of the Financial Sector Task Force at the regional level for the banking sector. (Grenada participating in a regional strategy including banking sector diagnostics, legal and institutional reforms, and bank restructuring and recapitalization.)
  - Ensure non-bank institutions meet prudential requirements and follow developments at weak institutions. (Authorities have supervised non-banks closely and taken measures to strengthen weak institutions.)

*Source: IMF staff report — Article IV discussions held over May 12-16, 2014 (Grenada).*

### 8.      Financial sector balance sheets have been increasingly strained. Impaired assets

### _cr14196 - 8.      Financial sector balance sheets have been increasingly strained. Impaired assets

### Financial sector strains and balance-sheet weaknesses
- Impaired assets continued to increase with weak economic activity and are estimated at 13.8 percent of total bank loans in December 2013 under existing loan classifications; however, the level of impairments may be significantly higher under stricter international norms.
- Provisioning and declining profitability weakened reported capital adequacy to 13.6 percent of risk-weighted assets in December 2013; capital adequacy would be lower under stricter loan classification and provisioning rules.
- Erosion of capital over the past few years also reflects provisioning against financial institutions’ exposures to the failed regional insurance company, the CL Financial Group, which was fully written off by end-2012 by banks, credit unions, and insurance companies.
- Grenada’s exposure to the CL Group was estimated at 3.9 percent of GDP, with the following breakdown:
  - banks: 0.7 percent of GDP
  - credit unions: 1.3 percent of GDP
  - insurance companies: 0.05 percent of GDP
  - individuals: 1.2 percent of GDP
- Non-bank financial sector: consolidation continued; credit unions’ financial position improved marginally from 2012 in terms of capital position, liquidity and non-performing assets.

### Fiscal position, arrears, and public debt pressures
- Subdued activity weakened the 2013 fiscal position despite efforts to rein in current spending; tax revenues weakened across the board.
- Primary deficit containment: the government contained the primary deficit to 3⅔ percent of GDP (within budgeted targets), though still significantly wider than the previous year.
- Interest bill pressures: a step up in the coupon on the 2025 bond and the high cost of the bank overdraft pushed the interest bill to 3½ percent of GDP.
- Overall 2013 deficit widened to 7 percent of GDP (on an accrual basis) from 5½ percent in 2012.
- Overall public debt increased to about 110 percent of GDP by end-2013.
- Gross financing needs totaled 33.8 percent of GDP in 2013.
- Debt restructuring and eligibility:
  - Treasury bills issued in the RGSM and multilateral debt were to be excluded from restructuring; these account for 31.3 percent of GDP (29 percent of public debt).
  - About US$638.5 million (78.5 percent of GDP) in debt outstanding at end-2013 would be eligible for restructuring.
- Arrears as of end-2013:
  - Total arrears: 15.3 percent of GDP
  - External arrears: 10.7 percentage points of GDP
  - Domestic arrears: about 4.6 percentage points of GDP
- Outstanding arrears (US$ m, % of GDP) as of end-December 2013 (as presented):
  - Total Arrears: 124.3 / 15.3
  - External Arrears: 86.8 / 10.7
  - Multilateral: 1.3 / 0.2
  - Official bilateral: 49.3 / 6.1
  - Paris Club: 2.9 / 0.4
  - Non-Paris Club: 46.3 / 5.7
  - Commercial creditors: 15.0 / 1.8
  - Unpaid contributions: 21.3 / 2.6
  - Domestic Arrears: 37.5 / 4.6
  - Domestic Debt: 5.4 / 0.7
  - ECCB: 1.5 / 0.2
  - Domestic suppliers: 30.6 / 3.8

### Macroeconomic outlook, risks, and financing gaps
- Growth outlook:
  - Staff projects growth to average 1½ percent during 2014-17, supported by broadening recovery as a new resort boosts tourist arrivals and easing of government financing constraints as fiscal crisis is gradually resolved.
  - Over the longer-term, growth is projected to recover steadily to about 2½ percent as domestic and external conditions normalize.
- Inflation projections:
  - Staff projects inflation would average 1½ to 2 percent a year over the program period.
  - Over the medium-term, inflation is projected to remain around 2 percent.
- External sector:
  - Current account deficit projected to narrow from 27.1 percent of GDP in 2013 to about 18.9 percent of GDP by 2017.
  - External financing gap estimated to average US$58.3 million (6¾ percent of GDP) per year during 2014–17 in the absence of a significant pickup in private capital inflows and without debt restructuring.
- Downside risks:
  - Risks dominated by uncertain impact of fiscal consolidation on growth, faltering confidence if fiscal crisis is not promptly addressed, continued weak global recovery affecting tourism, and potential natural disasters.
  - Probability of negative growth during the next three years estimated at about 40 percent (based on historical variance of growth outcomes).
  - Some risk of nonresident deposit outflows if interest differentials narrow; potential spillovers from regional market developments could have disruptive effects.
- Authorities’ view:
  - Authorities agree on the need to restore fiscal sustainability but are concerned that sizeable fiscal consolidation may thwart the fragile recovery; they stress importance of unlocking competitiveness and growth through structural reform.

### Policy discussions, program objectives, and recommended reforms
- Overarching program objectives:
  - (i) enhance competitiveness to promote private sector growth and employment through structural reform;
  - (ii) resolve the fiscal crisis through fiscal adjustment and debt restructuring while protecting social safety nets;
  - (iii) strengthen financial sector stability by enhancing regulation and supervision.
- Lessons from the EPA and implications for program design:
  - EPA identified overoptimistic growth projections, excessive number of structural measures beyond capacity, and weak program ownership as contributors to past program underperformance.
  - Program design priorities include: clear ownership and prior actions; focus on few macro-critical reforms with external assistance (World Bank, CDB); significant fiscal adjustment including wage bill reductions and scaling back tax incentives; policy buffers and built-in flexibility; and realistic growth projections.
- Competitiveness and growth-enhancing reforms:
  - Key objectives: tighten income policies; remove constraints through reforms in energy and other sectors; improve investment environment; establish legal infrastructure for PPPs.
  - Specific measures and reforms outlined:
    - Reduce energy costs; operationalize an independent regulatory authority for more efficient electricity pricing (with World Bank assistance).
    - Liberalize key sectors: renewable energy, nutmeg and cocoa trade.
    - Improve the business environment: address investment process bottlenecks; transform the Industrial Development Corporation into a functioning one-stop shop for investors.
    - Codify all tax incentives that could benefit investments.
    - Explore PPPs and put in place a comprehensive framework to safeguard against associated risks.
    - Review labor agreements with the port authority and revise the Labor Code to introduce a shift system to reduce costs and increase efficiency.
    - Undertake national consultations with trade unions, private businesses and social partners; finalize and implement a Social Compact to foster sustainable development with improved competitiveness and wage moderation.
  - Rationale: wage moderation in the public sector should transmit to private wages and contribute to lowering unit labor costs; reduction in markups through liberalization and better investment climate to attract private investment.

### Fiscal consolidation strategy
- The program envisages a primary fiscal consolidation of 7¾ percent of GDP over three years, with upfront legislated measures.
- Goal: together with debt restructuring and fiscal structural reforms, set public debt on a firm downward path to the regional target of 60 percent of GDP.

*Source: IMF staff report content provided in the supplied PDF extract.*

### 20.      The authorities and staff agreed that significant fiscal consolidation is needed to

### _cr14196 - 20.      The authorities and staff agreed that significant fiscal consolidation is needed to

### Fiscal consolidation, debt outlook, and program targets
- Without debt restructuring and consolidation measures, the overall deficit would remain in the range of 8–9 percent of GDP as debt servicing costs would continue to rise.
- Public debt trajectory without policy change:
  - About 110 percent of GDP at end-2013.
  - Over 134 percent of GDP by 2020.
- Authorities’ program targets:
  - Sizeable fiscal consolidation of 7¾ percentage points of GDP.
  - Aim to reach a primary surplus of 3½ percent of GDP by 2016 (Box 1; MEFP ¶17).
- Staff assessment:
  - The consolidation would put debt on a firmly downward path and strike the right balance between short-term growth and long-term fiscal sustainability.
  - In the absence of complementary debt restructuring, debt would remain high at around 89 percent of GDP by 2020 and fiscal financing gaps would not be covered by marketable instruments.

### Front‑loaded adjustment and expected growth impact
- Design and timing:
  - Three quarters of the fiscal consolidation effort will be undertaken in the first two years of the proposed program (most revenue measures already approved).
  - Adjustment focuses on curtailing current spending and widening the tax base.
- Protection of priorities:
  - Fiscal consolidation should protect social spending and growth-enhancing capital investments; this is reflected in the program design.
- Fiscal impulse and mitigation:
  - The fiscal impulse is expansionary in the first year of the program due to 1.2 percent of GDP in retroactive wage payments and about 4½ percent of GDP in expected investment spending financed by external grant inflows from China and PetroCaribe, among other sources (Box 1).

### Revenue measures (full impact by end of program; percent of GDP and start year)
- Total revenue measures: 3.7
- Personal income tax: 0.5
  - Reduce threshold to EC$36,000, with a marginal rate of 15 percent on income up to EC$60,000 — Start 2014 — Full yield 0.5
  - Widen the income and withholding tax base to winnings from lotteries and games of chance — Start 2015 — Full yield 0.0
  - Note: The personal income tax threshold was lowered from EC$60,000 to EC$36,000 as of January 2014. The marginal tax rate will be 0 percent up to EC$36,000, 15 percent between EC$36,000 and EC$60,000, and 30 percent above this threshold.
- Property tax: 1.0
  - Increase rate on both buildings and land to 0.25 percent in 2014 and to 0.5 percent in 2016 — Start 2014 — Full yield 0.8
  - Revise valuations to market value — Start 2015 — Full yield 0.3
- Value-added tax: 0.5
  - Reduce the list of exempt items (nonbasic foods, private accommodations) — Start 2015 — Full yield 0.4
  - Restore 15 percent rate on construction materials — Start 2014 — Full yield 0.1
  - Increase VAT paid by St. George's University from 5 to 15 percent — Start 2016 — Full yield 0.1
- Excises: 0.1
  - Excise tax of 5 percent on motor vehicle parts, tires, batteries, motor oil, and luxury goods — Start 2015 — Full yield 0.1
  - Increase excises on tobacco and alcohol (at least 10 percent) — Start 2015 — Full yield 0.1
- Customs exemptions: 0.7
  - Halve customs exemptions to GRENLEC, statutory bodies, St. George's University and returning nationals — Start 2014 — Full yield 0.7
- Other: 0.7
  - Increase in customs service charge from 5% to 6% — Start 2014 — Full yield 0.3
  - Introduce a 10% tax on financial activities — Start 2015 — Full yield 0.3
  - Introduce a small business taxation regime — Start 2016 — Full yield 0.1
  - Increase fees for motor vehicle license, professional licenses, and gun license — Start 2014 — Full yield 0.1

### Current expenditure measures (full impact by end of program; percent of GDP and start year)
- Total current expenditure measures: 2.1
- Wage and pension bill: 1.5
  - Freeze wage bill (including allowances) for 2014-2016 at May-December 2013 levels — Start 2014 — Full yield 0.9
  - Reduce wage bill by another 0.4 pp of GDP after freeze (attrition, reform) — Start 2015 — Full yield 0.4
  - Freeze personal allowances for 2014-16 at 2013 levels — Start 2014 — Full yield 0.1
- Goods and services: 0.5
  - Goods and services spending fixed in nominal terms at 2013 levels for 2014-2016 — Start 2014 — Full yield 0.4
  - Additional measures from efficiency savings (LED lights, air conditioners, rental bill agreements, reduced mobile and land telephone bills) — Start 2015 — Full yield 0.2
- Transfers and subsidies: 0.1
  - Freeze in nominal terms at 2013 levels for 2014-2016 — Start 2014 — Full yield 0.1
- Total revenue and current expenditure measures: 5.8
- Streamline non-grant-financed capital spending — Start 2014 — Full yield 2.0
- Total fiscal adjustment effort: 7.8

### Tax administration and structural reforms
- Key tax administration reforms with CARTAC support:
  - Increased focus on risk management and large taxpayers.
  - Improve incentives for tax collections by designing compensation structure for tax collectors.
  - Connect customs and inland revenue information systems; ensure exchange of information between departments.
  - Enactment of newly drafted Customs Bill to modernize legislation and introduce penalties for noncompliance.
  - Creation of an internal audit unit at customs (MEFP ¶18 & ¶25).
- Tax incentive regime will be reformed to ensure the integrity of the tax base.

### Social protection and targeted spending
- Social spending and program redesign:
  - SEED (Support for Education, Employment, Empowerment and Development) consolidated program now accounts for 18 percent of total social spending.
  - With World Bank assistance, establish a beneficiary registry and introduce proxy means testing for SEED.
  - During the program period, cash transfers under SEED will be increased by an estimated 0.3 percent of GDP; a floor on SEED spending will ensure adjustment is not achieved by retrenchment in targeted transfers (MEFP ¶15).
  - Government approved a Social Protection Strategy at end-March 2014 to: strengthen household poverty data, increase poverty reduction focus through consolidation, undertake social and legal reforms to improve access, help families transition to economic self-sufficiency, and ensure efficient and transparent service delivery using proxy means tests and harmonized eligibility criteria.
- Social protection spending trends:
  - Increased from 1⅓ percent of GDP in 2009 to 2½ percent of GDP in 2013.
  - About 25 social protection programs exist; top three programs (SEED, IMANI, De-Bushing) account for over two thirds of social spending.
  - SEED pilot includes developing a database of about 3,500 beneficiary households and testing proxy means test criteria likely before end-2014.

### Risks, contingency measures, and contingency financing
- Main fiscal risks:
  - Underperformance in revenues due to weaker-than-expected growth or lower than expected yield of new revenue measures.
  - Expenditure risks from difficulties in controlling line ministries’ commitments before structural reforms take effect and potential disaster-related spending hikes.
- Program responses:
  - Contingency measures on revenues and expenditures (gradual release of spending appropriations; expansion of income tax base).
  - Contingency financing: save budgetary receipts from the recently established citizenship-by-investment program (CBI) for contingency financing during the program period (TMU ¶5).
  - Government seeking donor assistance to purchase additional natural disaster insurance for program duration (MEFP ¶20).

### Debt restructuring: scope, progress, and creditor engagement
- Need for restructuring:
  - Comprehensive debt restructuring is essential to bring public debt to sustainable levels; without it, debt distress risk remains high and all debt and debt service thresholds would be breached (Annex II).
  - Restructuring is critical to lower the risk of debt distress and to put the ECCU debt target of 60 percent of GDP by 2020 within reach (Annex II, MEFP ¶22).
- Negotiation progress and creditor groups:
  - Formal discussions with holders of the US$ 2025 bond (30 percent of eligible debt) started in March 2014 with consultations and weekly conference calls.
  - On April 9, 2014, government published restructuring scenarios for holders of the EC$ 2025 bond (11 percent of eligible debt) indicating initial offers including a 60 percent and a 50 percent principal haircut, maturity extensions, and coupon reductions; some creditors indicated willingness to accept the 60 percent haircut option.
  - Negotiations expanded to domestic financial institutions, including the National Insurance Scheme (NIS).
  - The Export-Import Bank of the Republic of China (5.4 percent of eligible debt): litigation in U.S. courts is ongoing; the Bank indicated a willingness in principle to participate in the restructuring. Indicative scenarios for the EC$ 2025 bond were also presented to this creditor, along with a proposal on treatment of outstanding arrears.
  - For other bilateral creditors, the government will request financing assurances from Paris Club creditors (1.7 percent of eligible debt) prior to the IMF Executive Board meeting and will seek agreement on a date to discuss treatment of its debt (including arrears) following approval of the proposed ECF arrangement.

*Italic: IMF staff report excerpt from _cr14196 (section 20 and related boxes).*

### Box 3. The Published Debt Restructuring Scenarios

### Box 3. The Published Debt Restructuring Scenarios

### Indicative restructuring options offered to creditors
- Option 1:
  - 60 percent principal nominal haircut
  - Extends maturity to 15 years
  - Principal payments: equal installments
  - Interest rate: 6.5 percent throughout
  - Interest arrears: 60% reduction, 40% capitalized
- Option 2:
  - 50 percent principal nominal haircut
  - Extends maturity to 20 years
  - Principal payments: increasing installments
  - Grace period: 2 years
  - Interest rate: 5 percent throughout
  - Interest arrears: 50% reduction, 50% capitalized
- Expected creditor recovery under both options:
  - Creditors would receive around 33-43 cents on the dollar
  - Calculated for discount rates ranging between 8 and 12 percent
  - Discount rates cited are "levels at or above which the bond is currently trading in the secondary market"

### Coverage, NPV equivalence, and debt sustainability implications
- Debts excluded from restructuring (explicitly): 
  - (i) multilateral debt
  - (ii) treasury bills issued in the RGSM
  - (iii) loan facilities extended by the ECCB
- If all other debts receive a nominal haircut of 50-60 percent (as pursued by the authorities):
  - This would put debt on a firm downward path towards the regional target of 60 percent of GDP by 2020.
- Given the scope and diversity of creditors:
  - The instruments offered will likely comprise combinations of principal haircuts and maturity extensions, all aimed at yielding equivalent NPV terms.
  - The likely outcome will be a combination of scenarios on equivalent NPV terms, resulting in a range of possible outcomes for reductions in nominal debt.
- Under scenarios within the 50-60 percent nominal haircut range and their NPV-equivalent terms:
  - The fiscal financing gaps for the near and medium term would be covered (see section “Program Modalities”).

### Near-term objective and operational notes
- The published scenarios are presented in the context of ongoing consultations with affected creditors (holders of the EC$ 2025 bond and the Taiwanese Export-Import Bank of the Republic of China).
- The two indicative options differ in haircut magnitude, maturity extension, payment profile, grace period, and interest rate, but are designed to be NPV-equivalent outcomes that materially reduce near-term debt servicing obligations.

*Source: Government of Grenada (Box 3. The Published Debt Restructuring Scenarios).*

### Box 5. Structure of the Financial Sector

### Box 5. Structure of the Financial Sector

### Overview
- Financial sector assets amount to 159 percent of GDP (about 193 percent of GDP including the national pension fund).
- The financial sector is mid-sized relative to regional peers and is dominated by banks.

### Banks
- Number of banks: five.
- Composition and share of banking system assets:
  - Grenada Cooperative Bank (the only indigenous bank): about a quarter of total bank assets; second largest bank.
  - RBTT Grenada (foreign-owned, locally incorporated): together with Republic Bank Grenada account for another 42 percent of banking system assets.
  - Republic Bank Grenada (foreign-owned, locally incorporated).
  - Two foreign bank branches with headquarters in Canada and Barbados:
    - Scotiabank (Canada, branch).
    - FirstCaribbean International Bank (branch of a Barbados subsidiary of the Canadian bank CIBC).
- Offshore banks are not permitted in Grenada.
- Supervision: banks are supervised by the Eastern Caribbean Central Bank (ECCB).

### Credit unions
- Number of credit unions: 11.
- Assets: about 18 percent of GDP.
- Penetration: 62 percent of the population.
- Main activities: provide mostly mortgage and consumption loans by mobilizing member deposits and shares.
- Supervision: credit unions have been supervised by Grenada Authority for the Regulation of Financial Institutions (GARFIN) since March 2007.

### Insurance companies and National Insurance Scheme (NIS)
- Insurance companies:
  - Number: 23 insurance companies.
  - Total assets: about 12 percent of GDP.
  - Supervision: GARFIN.
- National Insurance Scheme (NIS):
  - Provides a defined benefit plan to the entire population.
  - Total assets: around 35 percent of GDP.
  - Investment portfolio: relatively large share allocated to Grenadian government securities.
  - Regulation: NIS is regulated by GARFIN.

### Asset distribution (percent of total financial sector assets)
- Banking Sector (5): 66.4%
  - Republic Bank (T&T, subsidiary): 26.8%
  - GCB (indigenous): 22.7%
  - RBTT (T&T, subsidiary): 15.2%
  - BNS (Canada, branch): 20.5%
  - FCIB (Barbados, branch): 14.8%
- NIS (1): 18.3%
- Credit Unions (11): 9.3%
- Savings and Loan Associations (1): 1%
- Insurance Companies (23): 6%

(Note: number of institutions is given in parentheses. The source also notes there are 40 Pension Plans and 2 Money Service Providers.)

### Supervision and regulation
- Banks: supervised by the Eastern Caribbean Central Bank (ECCB).
- Credit unions, insurance companies, and NIS: supervised/regulated by GARFIN.

### Key observations and implications from the Box
- The banking sector dominates financial intermediation, representing two-thirds of total financial sector assets.
- The national insurance scheme (NIS) is a major institutional investor with holdings around 35 percent of GDP and a large exposure to domestic government securities.
- Credit unions have significant outreach (62 percent penetration) and assets equivalent to about 18 percent of GDP, mobilizing member deposits and shares to finance mortgages and consumption.
- Supervisory responsibilities are split: ECCB for banks; GARFIN for credit unions, insurance companies, and NIS.
- Offshore banking activity is explicitly prohibited in Grenada.

*Sources: ECCB, country authorities, and World Council of Credit Unions.*

### 50.      Proactive engagement with the ECCB is needed to secure the stability and health of

### Proactive engagement with the ECCB is needed to secure the stability and health of

### Financial sector strategy and actions
- Authorities support and are participating in the regional strategy to strengthen the regional banking system and improve its regulation and supervision.
- If consensus on the pace of regional reforms stalls, the program envisages that— with help from the ECCB— Grenada will move ahead with an independent assessment of the asset quality of its banking system.
- The results of the assessment will be used to design a comprehensive strategy to strengthen the financial position of banks in Grenada.
- In the non-banking sector, the authorities have made significant progress in overhauling the regulation and supervision of credit unions and insurance companies, and will continue with reforms during the program period.

### Authorities’ ownership of reforms
- The authorities have shown strong ownership of the reform effort, demonstrated by the important policy measures they have already undertaken since late 2013.
- Their readiness to address the difficult challenges facing the country, the ambitious reforms they intend to undertake and the substantial assistance from Grenada’s international partners, bode well for the chances of addressing the country’s debt overhang.

### Risks, contingency measures, and support
- Program implementation will be challenging due to:
  - The potential for a slower-than-expected economic recovery.
  - Severe capacity constraints.
- To mitigate these risks, the program envisages:
  - Contingency adjustment and financing measures to ensure that unanticipated developments do not derail the program.
  - Identification of technical assistance and donor support for all major reforms in the program.
- In light of Grenada’s balance of payment financing needs and the strength of the proposed reforms to restore macroeconomic imbalances, staff supports the authorities’ request for a three-year Extended Credit Facility arrangement amounting to SDR 14.04 million.

*Source: IMF country report text (excerpts provided).*

### 53.      The staff recommends that the next Article IV consultation be held on the 24-

### _cr14196 - 53.      The staff recommends that the next Article IV consultation be held on the 24-

### Recommendation on Consultation Cycle
- The staff recommends that the next Article IV consultation be held on the 24-month consultation cycle in accordance with the provisions of Decision No. 14747, as amended, on consultation cycles.

### Grenada: In Context
- Grenada is middle sized compared to its peers in the ECCU in both population and size of economy.
- Following the collapse of the banana trade, the education system expanded significantly with the success of its offshore medical school.
- Tourism is somewhat less developed than in other ECCU countries.
- Grenada is less reliant on tourism from North America than its ECCU peers, which in part explains a slower recovery during the latest crisis.
- Grenada was the second largest exporter of nutmeg in the world until 2004, when Hurricane Ivan destroyed the crops (which need 7-10 years to recover).
- The damages caused by Hurricane Ivan in 2004 were the highest in the history of Caribbean storms, and are still being felt today.

### Recent Economic Developments (Highlights)
- Economic activity fell sharply in 2009 and has remained depressed since; after an initial rebound in 2013, the economy is expected to recover slowly with global growth.
- Tourism and construction sectors were particularly affected by the global recession.
- The number of stay-over visitors failed to pick up despite a global recovery, dragged down by lower arrivals particularly from the UK and other Caribbean countries.
- Private credit has been declining throughout 2013 despite a recent recovery in demand deposits.
- Investment (along with savings) is estimated to have fallen to its lowest levels in recent history, and was only temporarily boosted by the construction of the Sandals resort in 2013.
- Following the March 2013 debt restructuring announcement, the price of the 2025 bond collapsed and the bond was trading at below 35% of its face value.

### External Developments (Highlights)
- The current account deficit narrowed significantly since 2006, although remained above 20 percent of GDP over the past few years and widened in 2013 due to a large-scale resort construction.
- Both imports and exports were subdued at relatively low levels over the past few years.
- FDI declined in recent years, except in 2013 when they surged with the construction of the Sandals resort.
- Until 2013, external deficits were increasingly financed through debt flows (banks accumulated foreign liabilities via nonresident deposits and borrowing from headquarters by foreign banks); these latter flows reversed in 2013.
- Grenada’s indebtedness to the rest of the world increased to about 150 percent of GDP by 2013 (or over 300 percent including potential FDI liabilities).
- Reserves remained stable despite large current account deficits due to ample liquidity in regional markets.

### Monetary Developments (Highlights)
- Banks’ net foreign assets position improved in 2013, reversing a deteriorating trend of the previous ten years.
- Improvement mainly due to a decline in bank foreign liabilities reflecting repayments of obligations to foreign banks.
- Non-resident deposits continued to grow, especially savings deposits subject to the 3 percent interest floor, accounting for 20 percent of GDP at end-2013.
- Sovereign default and limited profitable lending opportunities led to a precipitous slowdown in credit growth; private sector credit was negative throughout 2013.
- Overall deposit stability and negative credit growth kept bank excess reserves at historical highs.

### Fiscal Developments (Highlights)
- Grenada is among the most indebted countries in the world, with widening deficits and low growth among the main factors behind the recent rise in the debt ratio.
- Debt servicing burden is relatively large compared to Grenada’s revenue collections.
- The stepped-up coupon on the 2025 bond has been putting pressures on the central government‘s fiscal accounts.
- Gross fiscal financing needs are very large and triggered the recent debt restructuring announcement.

### Key Statistics and Indicators (selected exact figures from source)
- GDP per capita (2013, USD): Grenada, $6,522; Antigua, $9,835; Dominica, $6,036; St. Kitts, $9,868; St. Lucia, $6,143; St. Vincent, $4,782.
- Geographic origin of stay-over visitors (Grenada 2013): Canada 8%; UK 18%; USA 31%; Caribbean 22%; Other Countries 21%.
- Current account deficits (percent of GDP): remained above 20 percent of GDP in recent years; current account balance series in Table 1: -28.0 (2008), -22.2 (2009), -22.1 (2010), -21.8 (2011), -19.2 (2012), -27.1 (2013).
- Net foreign assets / External debt: external debt about 150 percent of GDP by 2013 (or over 300 percent including potential FDI liabilities).
- Non-resident deposits: accounted for 20 percent of GDP at end-2013.
- 2025 bond trading level after restructuring announcement: below 35% of face value.
- Table 1 selected macro aggregates (exact values):
  - Real GDP growth (annual): 2008 0.9; 2009 -6.6; 2010 -0.5; 2011 0.8; 2012 -1.8; 2013 1.5; 2014 1.1; 2015 1.2; 2016 1.7; 2017 2.0; 2018 2.4; 2019 2.5.
  - Nominal GDP (EC$ million): 2008 2,230; 2009 2,082; 2010 2,082; 2011 2,102; 2012 2,164; 2013 2,197; 2014 2,265; 2015 2,338; 2016 2,437; 2017 2,550; 2018 2,682; 2019 2,824.
  - Public debt (incl. guaranteed, percent of GDP): 2008 84.4; 2009 91.7; 2010 97.6; 2011 100.9; 2012 103.1; 2013 109.8; 2014 111.3; 2015 110.2; 2016 106.4; 2017 102.1; 2018 97.5; 2019 93.0.
  - Central government balances (percent of GDP): Revenue 24.2 (2008); 22.8 (2009); 24.6 (2010); 23.6 (2011); 20.8 (2012); 24.8 (2013); projected revenues 24.9 (2014) through 24.8 (2019).
  - Interest payments (percent of GDP): 1.7 (2008); 2.2 (2009); 2.2 (2010); 2.5 (2011); 3.4 (2012); 2.7 (2013); projected 3.4 (2014); 4.1 (2015); 3.6 (2016); 4.3 (2017); 4.8 (2018); 4.5 (2019).
  - Overall balance (percent of GDP): -4.1 (2008); -5.2 (2009); -3.1 (2010); -4.7 (2011); -5.4 (2012); -7.1 (2013); projected -6.0 (2014); -3.0 (2017); -1.2 (2018); -1.0 (2019).
- Table 2a selected central government figures (EC$ million, exact values):
  - Total revenue and grants: 2008 539.3; 2009 473.9; 2010 512.8; 2011 496.4; 2012 449.3; 2013 552.0; 2014 Budget 471.6; 2015 Est. 609.6; 2016 Budget 564.9; 2017 Proj. 581.5; 2018 Proj. 603.3; 2019 Proj. 631.3; 2020 Proj. 664.0; 2021 Proj. 699.0.
  - Tax revenue: 2008 418.1; 2009 363.6; 2010 388.3; 2011 387.4; 2012 387.9; 2013 403.2; 2014 Budget 376.8; 2015 Est. 430.5; 2016 Budget 423.1; 2017 Proj. 466.4; 2018 Proj. 507.9; 2019 Proj. 531.5; 2020 Proj. 559.0; 2021 Proj. 588.5.
  - Grants: 2008 74.3; 2009 68.3; 2010 83.9; 2011 70.5; 2012 23.7; 2013 75.0; 2014 Budget 31.3; 2015 Est. 138.5; 2016 Budget 105.0; 2017 Proj. 77.1; 2018 Proj. 55.9; 2019 Proj. 58.5; 2020 Proj. 61.5; 2021 Proj. 64.7.
  - Total expenditure and net lending: 2008 631.7; 2009 582.7; 2010 578.1; 2011 594.3; 2012 565.6; 2013 706.5; 2014 Budget 626.6; 2015 Est. 749.0; 2016 Budget 701.2; 2017 Proj. 652.1; 2018 Proj. 633.6; 2019 Proj. 657.6; 2020 Proj. 689.4; 2021 Proj. 723.6.
  - Interest payments (EC$ million): 2008 38.2; 2009 46.3; 2010 45.0; 2011 51.6; 2012 73.6; 2013 60.2; 2014 Budget 74.5; 2015 Est. 95.4; 2016 Budget 81.0; 2017 Proj. 101.6; 2018 Proj. 115.9; 2019 Proj. 115.9; 2020 Proj. 119.8; 2021 Proj. 124.0.
  - Public Debt (EC$ millions, selected): 2008 1,882.1; 2009 1,908.8; 2010 2,031.0; 2011 2,120.3; 2012 2,230.6; 2013 2,385.1; 2014 Budget 2,412.1; 2015 Est. (dash) ; 2016 Proj. 2,521.2; 2017 Proj. 2,577.1; 2018 Proj. 2,592.7; 2019 Proj. 2,604.3; 2020 Proj. 2,615.0; 2021 Proj. 2,627.2.
- Table 3a medium-term financing projections (U.S. Dollars, exact values):
  - Financing requirement (US$ million): 2013 274.7; 2014 330.6; 2015 108.4; 2016 124.2; 2017 119.8; 2018 132.1; 2019 141.5; 2020 146.7.
  - Primary balance (US$ million): 2013 -29.8; 2014 -20.5; 2015 11.5; 2016 31.7; 2017 33.2; 2018 35.0; 2019 36.8; 2020 38.8.
  - Total interest (US$ million): 2013 27.9; 2014 30.0; 2015 37.6; 2016 42.9; 2017 44.9; 2018 44.4; 2019 45.9; 2020 45.9.
  - Accumulation of arrears: 124.3 (figure shown in financing table).
  - Debt restructuring (illustrative regularization): 26.4; 19.9; 33.3; 40.1; 43.7; 41.4; 35.9 (series shown under “Debt restructuring”).
- Table 4: Public Sector debt (year end, US$ million, selected exact values)
  - Public Sector debt: 2011 785.3 (100.0 percent of GDP); 2012 826.1 (100.0); 2013 893.4 (100.0).
  - Central government debt: 2011 733.4 (93.4); 2012 772.1 (93.4); 2013 846.3 (94.8).
  - External debt: 2011 538.6 (68.6); 2012 547.1 (66.2); 2013 590.9 (66.1).
  - Central Government (component A) stock: 507.0 (64.6) in 2011; 515.1 (62.6) in 2012; 564.5 (63.2) in 2013.

### Projections and Medium-Term Considerations
- Fiscal projections incorporate assumptions including:
  - The primary surpluses for 2017-20 would include revenue from the future Citizenship by Investment programme.
  - Table 1 notes: 1/ Assumes an adjustment of 7.5 percent of GDP during 2014-16 but no debt restructuring.
  - Table 1 notes: 2/ To be closed through IMF and other IFIs financing and debt restructuring.
  - Table 2 and Table 3 notes: 3/ Excluding one-off items (license fees in 2013 and retroactive wage and pension payments in 2013 and 2014).
  - Table 3: For illustrative purposes, imputes a repayment of arrears accumulated through Q4 2014. The arrears include debt service owed to external and domestic creditors and arrears to domestic suppliers and statutory bodies.

*Source: IMF staff report (extract provided).*

### 1.  Multilateral211.126.927.1214.726.026.8220.824.727.1

### 1. Multilateral211.126.927.1214.726.026.8220.824.727.1

### External and Domestic Arrears (selected figures, year-end, US$ millions and percent of GDP)
- Total arrears: 79.0 (2.8 percent of GDP) in 2012; 124.3 (15.3 percent of GDP) in 2013.
- External arrears: 48.0 (2.8 percent of GDP) in 2012; 86.8 (10.7 percent of GDP) in 2013.
  - Multilateral arrears: 1.6 (1.2 percent of GDP) in 2012; 2.7 (0.3 percent of GDP) in 2013.
    - CDB: 1.1 (0.9 percent of GDP) in 2012; 2.0 (0.2 percent of GDP) in 2013.
    - OPEC 1/: 0.4 (0.3 percent of GDP) in 2012; 0.7 (0.1 percent of GDP) in 2013.
    - EIB 2/: 0.1 (0.0 percent of GDP) in 2012; 0.1 (0.0 percent of GDP) in 2013.
  - Bilateral arrears: 40.8 (1.6 percent of GDP) in 2012; 49.3 (6.1 percent of GDP) in 2013.
    - Paris Club: 1.1 (0.3 percent of GDP) in 2012; 1.5 (0.2 percent of GDP) in 2013.
    - Non-Paris Club: 39.7 (1.3 percent of GDP) in 2012; 46.3 (5.7 percent of GDP) in 2013.
      - Kuwait: 2.7 (0.9 percent of GDP) in 2012; 3.6 (0.5 percent of GDP) in 2013.
      - Libya: 5.0 (0.0 percent of GDP) in 2012; 5.0 (0.6 percent of GDP) in 2013.
      - Taiwan Province of China: 30.5 (0.0 percent of GDP) in 2012; 30.5 (3.8 percent of GDP) in 2013.
  - Commercial arrears: 5.6 (0.0 percent of GDP) in 2012; 15.0 (1.8 percent of GDP) in 2013.
  - Unpaid contributions to organizations: 16.8 (0.0 percent of GDP) in 2012; 21.3 (2.6 percent of GDP) in 2013.
- Domestic arrears: 31.0 (0.0 percent of GDP) in 2012; 37.5 (4.6 percent of GDP) in 2013.
  - Domestic suppliers & statutory bodies: 28.7 (0.0 percent of GDP) in 2012; 30.6 (0.0 percent of GDP) in 2013.
  - Domestic debt: 2.3 (0.0 percent of GDP) in 2012; 5.3 (0.7 percent of GDP) in 2013.
  - ECCB arrears: 0.0 in 2012; 1.5 (0.0 percent of GDP) in 2013.

### Detailed arrears components (selected rows from original table)
- Multilateral aggregate line: CDB115.0 14.6 14.8 116.7 14.1 14.6 118.1 13.2 14.5
- IDA45.2 5.8 5.8 48.6 5.9 6.1 54.2 6.1 6.7
- IBRD12.5 1.6 1.6 11.6 1.4 1.4 11.3 1.3 1.4
- IMF28.8 3.7 3.7 28.3 3.4 3.5 27.9 3.1 3.4
- Other Multilateral9.6 1.2 1.2 9.5 1.1 1.2 9.3 1.0 1.1

---

### Notes on arrears (textual annotations from source)
- EIB and IFAD arrears have been cleared in March, 2014.
- Payment plan to OPEC has been agreed and the arrears will be clared by Q3 2014.
- Debt service obligations to the Paris Club were rescheduled in May 2006.
- Resulting from commercial debt restructuring in 2005.

*Sources: Grenadian authorities and Fund staff estimates.*

---

### Balance of Payments Summary, 2008–19 (selected lines, US$ millions and percent of GDP)

### Current account and trade
- Current account (US$): 2008 -231.3; 2009 -171.6; 2010 -170.4; 2011 -169.6; 2012 -153.9; 2013 -220.5; 2014 (Est.) -200.1; 2015 -178.6; 2016 -173.1; 2017 -178.1; 2018 -179.0; 2019 -180.0.
- Trade balance for goods and services (US$): 2008 -223.3; 2009 -148.1; 2010 -162.3; 2011 -161.9; 2012 -149.9; 2013 -210.1; 2014 -182.8; 2015 -153.8; 2016 -141.6; 2017 -143.6; 2018 -139.7; 2019 -138.7.
- Exports of goods and services (US$): 2008 228.4; 2009 212.8; 2010 217.3; 2011 233.6; 2012 245.7; 2013 255.9; 2014 275.9; 2015 286.5; 2016 301.8; 2017 318.6; 2018 338.0; 2019 358.7.
- Imports of goods and services (US$): 2008 451.7; 2009 361.0; 2010 379.6; 2011 395.5; 2012 395.7; 2013 466.0; 2014 458.6; 2015 440.4; 2016 443.4; 2017 462.1; 2018 477.8; 2019 497.4.

### Other current account components
- Net income (US$): 2008 -42.7; 2009 -63.0; 2010 -39.9; 2011 -31.8; 2012 -34.3; 2013 -38.3; 2014 -46.1; 2015 -54.8; 2016 -62.6; 2017 -66.8; 2018 -72.7; 2019 -75.8.
- Current transfers (US$): 2008 34.7; 2009 39.6; 2010 31.8; 2011 24.1; 2012 30.3; 2013 27.9; 2014 28.9; 2015 30.0; 2016 31.1; 2017 32.3; 2018 33.4; 2019 34.6.

### Capital and financial account (US$)
- Capital and financial account: 2008 252.9; 2009 229.2; 2010 185.8; 2011 194.5; 2012 158.7; 2013 237.2; 2014 75.3; 2015 147.0; 2016 138.0; 2017 160.7; 2018 160.1; 2019 160.4.
  - Capital transfers: 2008 40.0; 2009 32.3; 2010 40.2; 2011 47.8; 2012 31.5; 2013 35.2; 2014 63.4; 2015 54.1; 2016 47.3; 2017 49.4; 2018 51.7; 2019 54.2.
  - Foreign direct investment: 2008 134.8; 2009 102.6; 2010 60.4; 2011 42.6; 2012 31.5; 2013 112.8; 2014 66.4; 2015 60.4; 2016 67.9; 2017 80.5; 2018 89.7; 2019 99.6.
  - Public sector borrowing (net): 2008 14.9; 2009 26.6; 2010 32.5; 2011 2.7; 2012 8.9; 2013 44.3; 2014 -137.1; 2015 -0.2; 2016 -18.9; 2017 -2.9; 2018 -4.7; 2019 -4.5.
  - Other private flows (o/w Petrocaribe): o/w Petrocaribe values 17.2 (2008), 8.3 (2009), 13.2 (2010), 21.8 (2011), 22.1 (2012), 16.4 (2013), 13.0 (2014), 11.6 (2015), 10.7 (2016), 9.9 (2017), 9.7 (2018), 10.0 (2019).

### Overall balance and financing
- Overall balance (US$): 2008 -13.5; 2009 16.1; 2010 -16.0; 2011 -11.7; 2012 -13.3; 2013 16.7; 2014 -124.8; 2015 -31.6; 2016 -35.0; 2017 -17.3; 2018 -18.9; 2019 -19.6.
- Overall financing (US$): 2008 13.5; 2009 -16.1; 2010 16.0; 2011 11.7; 2012 13.3; 2013 -16.7; 2014 -4.9; 2015 -5.9; 2016 -6.9; 2017 -6.9; 2018 -6.8; 2019 -3.9.
- Change in ECCB NFA (US$): 2008 7.9; 2009 -25.8; 2010 9.6; 2011 -2.0; 2012 2.0; 2013 -30.9; 2014 -2.2; 2015 -0.9; 2016 -1.2; 2017 -1.4; 2018 -1.4; 2019 -1.1.
- Change in Reserve Position with the IMF (US$): 2008 5.7; 2009 9.7; 2010 6.4; 2011 -0.3; 2012 -0.5; 2013 -0.5; 2014 -2.7; 2015 -5.0; 2016 -5.7; 2017 -5.4; 2018 -5.4; 2019 -3.2.

### Ratios and memorandum items
- Current account (percent of GDP): 2008 -28.0; 2009 -22.2; 2010 -22.1; 2011 -21.8; 2012 -19.2; 2013 -27.1; 2014 -23.8; 2015 -20.6; 2016 -19.2; 2017 -18.9; 2018 -18.0; 2019 -17.2.
- Gross external debt (percent of GDP): 2008 104.2; 2009 114.8; 2010 124.7; 2011 137.4; 2012 144.6; 2013 155.5; 2014 160.0; 2015 163.2; 2016 163.7; 2017 162.3; 2018 158.9; 2019 154.1.
- Nominal GDP in US$: 2008 826; 2009 771; 2010 771; 2011 779; 2012 802; 2013 814; 2014 839; 2015 866; 2016 903; 2017 944; 2018 993; 2019 1,046.

*Sources: Ministry of Finance and Planning; ECCB; and Fund staff estimates and projections.*

---

### Summary Accounts of the Banking System, 2008–15 (EC$ millions, selected lines)

### Levels (end of period)
- Net foreign assets: 2008 248.8; 2009 283.7; 2010 242.3; 2011 165.8; 2012 110.4; 2013 347.8; 2014 359.0; 2015 366.8.
  - ECCB component: 281.0 303.4 277.5 282.9 277.5 361.0 366.9 369.2 (listed under ECCB row).
  - Commercial banks: -32.2 -19.8 -35.2 -117.0 -167.0 -13.2 -7.9 -2.4.
- Net domestic assets: 1,504.9 1,528.4 1,577.3 1,671.4 1,742.5 1,579.2 1,594.7 1,649.8.
- Credit to private sector: 1,596.7 1,668.8 1,762.2 1,800.3 1,803.2 1,700.4 1,719.5 1,757.6.
- Broad money: 1,753.7 1,812.1 1,819.6 1,837.2 1,852.9 1,927.0 1,953.6 2,016.6.

### Annual percentage change (selected)
- Net foreign assets (annual % change): -38.7 14.0 -14.6 -31.6 -33.4 214.9 3.2 2.2.
- Net domestic assets (annual % change): 17.6 1.6 3.2 6.0 4.3 -9.4 1.0 3.5.
- Credit to private sector (annual % change): 12.0 4.5 5.6 2.2 0.2 -5.7 1.1 2.2.
- Broad money (annual % change): 4.1 3.3 0.4 1.0 0.9 4.0 1.4 3.2.

*Sources: Eastern Caribbean Central Bank; Ministry of Finance; and Fund staff estimates.*

---

### Financial Sector Indicators, 2008–13 (latest available = Dec-13 for many series)

### Capital, asset quality, profitability, liquidity (Dec-13 values where specified)
- Regulatory capital to risk-weighted assets: 13.6 (Dec-13).
- Regulatory Tier 1 capital to risk-weighted assets: 12.2 (Dec-13).
- Nonperforming loans net of provisions to capital: 61.6 (Dec-13).
- Nonperforming loans to total gross loans: 13.8 (Dec-13).
- Return on assets: -0.3 (Dec-13).
- Return on equity: 0.8 (Dec-13).
- Net interest income to total income: 54.5 (Dec-13).
- Noninterest expenses to gross income: 80.8 (Dec-13).
- Liquid assets to total assets: 27.7 (Dec-13).
- Liquid assets to short-term liabilities: 29.8 (Dec-13).
- Net foreign currency exposure to total capital: 65.2 (Dec-13).

### External sector and public sector indicators (latest)
- Exchange rate (per US$, end of period): 2.7 (Dec-13).
- REER appreciation (percent change, end-period): -2.3 (Dec-13).
- Gross international reserves of the ECCB (in US$ millions): 1,188.8 (Nov-13).
- Gross international reserves to broad money in ECCU countries (percent): 20.0 (Nov-13).
- Public gross external debt (in US$ million): 590.9 (Dec-13).
- Public gross external interest payments to fiscal revenue (percent): 8.8 (Dec-13).
- Central government overall balance (after grants): -7.1 (Dec-13).
- Public and publicly-guaranteed gross external debt: 109.8 (Dec-13).

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

---

### Indicators of Capacity to Repay the Fund, 2012–20 (selected values)

### Existing Fund credit (stock)
- In percent of quota: 2012 157.6; 2013 155.0; 2014 139.7; 2015 112.1; 2016 81.1; 2017 51.5; 2018 21.8; 2019 4.7; 2020 0.0.
- In millions of SDRs: 2012 18.4; 2013 18.1; 2014 16.4; 2015 13.1; 2016 9.5; 2017 6.0; 2018 2.6; 2019 0.6; 2020 0.0.
- In millions of US$: 2012 28.4; 2013 27.9; 2014 25.3; 2015 20.5; 2016 14.9; 2017 9.5; 2018 4.0; 2019 0.9; 2020 0.0.
- In percent of GDP: 2012 3.5; 2013 3.4; 2014 3.0; 2015 2.4; 2016 1.7; 2017 1.0; 2018 0.4; 2019 0.1; 2020 0.0.

### Proposed Extended Credit Facility (stock) (selected)
- In percent of quota: peaks at 119.9 in 2016 and 2017; 109.6 in 2020.
- In millions of SDRs: 12.0 (2015), 14.0 (2016), 14.0 (2017), 13.8 (2018), 12.8 (2019).
- In millions of US$: 12.6 (2014), 18.9 (2015), 22.1 (2016), 22.1 (2017), 21.8 (2018), 20.2 (2019).

### Outstanding Fund credit (end of period) (selected)
- In percent of quota: 2012 157.6; 2013 154.9; 2014 174.3; 2015 180.7; 2016 183.9; 2017 171.3; 2018 141.7; 2019 122.8; 2020 109.6.
- In millions of SDRs: 2012 18.4; 2013 18.1; 2014 20.4; 2015 21.1; 2016 21.5; 2017 20.0; 2018 16.6; 2019 14.4; 2020 12.8.
- In percent of exports of goods and services: 2012 11.5; 2013 10.9; 2014 11.4; 2015 11.5; 2016 11.2; 2017 9.9; 2018 7.7; 2019 6.3; 2020 5.3.
- In percent of debt service: 2012 77.6; 2013 60.3; 2014 88.5; 2015 69.6; 2016 65.9; 2017 62.1; 2018 51.0; 2019 44.5; 2020 44.6.

### Memorandum items
- Exports of goods and services (US$ millions): 2012 245.7; 2013 255.9; 2014 275.9; 2015 286.6; 2016 302.1; 2017 319.0; 2018 338.7; 2019 359.7; 2020 378.3.
- Debt service (US$ millions): 2012 36.5; 2013 46.3; 2014 35.7; 2015 47.5; 2016 51.4; 2017 50.8; 2018 51.1; 2019 50.9; 2020 45.2.
- GDP (US$ millions): 2012 801.5; 2013 813.7; 2014 839.1; 2015 866.1; 2016 902.6; 2017 944.5; 2018 993.4; 2019 1,045.8; 2020 1,100.9.
- Quota (in millions of SDR): 11.7 (constant).

*Source: Staff estimates and projections.*

---

### Proposed Schedule of Disbursement under the Extended Credit Facility (SDR million; percent of quota)
- June 26, 2014: 2.040 (17.436 percent of quota) — Executive Board approval of the arrangement (tentative).
- September 30, 2014: 2.000 (17.094) — Observance of continuous and end-June 2014 performance criteria and completion of the first review.
- March 31, 2015: 2.000 (17.094) — Observance of continuous and end-December 2014 performance criteria and completion of the second review.
- September 30, 2015: 2.000 (17.094) — Observance of continuous and end-June 2015 performance criteria and completion of the third review.
- March 31, 2016: 2.000 (17.094) — Observance of continuous and end-December 2015 performance criteria and completion of the fourth review.
- September 30, 2016: 2.000 (17.094) — Observance of continuous and end-June 2016 performance criteria and completion of the fifth review.
- March 31, 2017: 2.000 (17.094) — Observance of continuous and end-December 2016 performance criteria and completion of the sixth review.
- Total: 14.041 (120 percent of quota).

*Source: Fund staff estimates. Quota is SDR 11.7 million.*

---

### Risk Assessment Matrix (selected risks, relative likelihood, expected impact, and recommended policy response)
- Risk 1: Protracted period of slower growth in advanced and emerging economies.
  - Relative likelihood: High
  - Expected impact: High
  - Summary impact: Could dampen Grenada’s growth via lower tourism arrivals, remittances, and FDI; fiscal position could worsen with weaker revenues.
  - Recommended policy response: Carry through with the programmed fiscal adjustment and structural reforms, which would increase the probability of continued FDI and donor flows.

- Risk 2: Escalation of financial sector stress in the ECCU.
  - Relative likelihood: Medium
  - Expected impact: High
  - Summary impact: Lack of a lender of last resort, deposit insurance, and fiscal space could lead to liquidity stress, deposit withdrawals, credit retrenchment, lower growth, and higher debt if eventual bailouts are needed.
  - Recommended policy response: Accelerate banking sector reforms at the regional level, and agree on a backstopping mechanism in the context of the regional reforms before banks are resolved.

- Risk 3: Natural disasters, mainly hurricanes.
  - Relative likelihood: Medium
  - Expected impact: High
  - Summary impact: Severe damage to infrastructure, disruption of tourism flows, increased cost of infrastructure rehabilitation, slower tourism inflows, reduced growth, wider current account deficit.
  - Recommended policy response: Build financing buffers by saving receipts from the recently introduced citizenship-by-investment program and obtaining supplementary natural disaster insurance with donor assistance. In the long-term, work with the World Bank to build resilience to climate change.

*Annex I: Grenada: Risk Assessment Matrix entries reproduced from source.*

_Italic source: Grenada—IMF staff report tables and annexes as provided in the source content._

### 4. Sustained decline in

### 4. Sustained decline in commodity prices triggered by deceleration of global demand and coming-on-stream of excess capacity (medium-term)

### Risk description and channels
- Risk level: Medium
- A decline in oil prices could tighten liquidity in the regional financial markets that largely stems from the oil-producing Trinidad and Tobago.
- Possible consequences:
  - Increased rollover risks for the sovereign T-bills.
  - Some withdrawal of nonresident deposits in banks.
  - External current account would benefit from a reduced fuel import bill.

### Policy recommendations / mitigation
- Build fiscal and financing buffers by carrying through the fiscal adjustment and saving receipts from the recently introduced citizenship-by-investment program.
- Support regional reforms to build capital cushions in banks.

---

### 5. Disruption in the PetroCaribe Arrangement with Venezuela (Annex VII)

### Risk description and channels
- Risk level: High (likelihood), Medium (overall concern)
- Pressures on the balance of payment and fiscal financing available through the arrangement could result in some decline in reserves and a tighter financing envelope for the government.

### Policy recommendations / mitigation
- Same as in risks 1-4.

---

### 6. Side-effects from global financial conditions: surges in global financial market volatility (related to UMP exit), leading to economic and fiscal stress, and constraints on country policy settings

### Risk description and channels
- Risk level: High (likelihood), Low (overall concern)
- Spillovers from the international (as opposed to regional) financial markets are low, given the relative insulation from traditional capital flows.
- At the same time, some outflow of nonresident deposits when interest differentials narrow could put pressures on the balance of payments.

### Policy recommendations / mitigation
- Same as in risks 1-4.

---

### Risk Assessment Matrix note
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).
- The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more).
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

---

### Annex II — Grenada: Debt Sustainability key findings and statistics

### Main findings
- Grenada’s public debt is in distress. The country defaulted on debt payments in March 2013 and a debt service moratorium is in effect while debt restructuring negotiations are underway.
- Public debt is estimated at around 110 percent of GDP at end-2013.
- In the absence of consolidation and debt restructuring, public debt would increase to over 134 percent of GDP by 2020, more than twice the regional target (60 percent of GDP by 2020).
- The authorities’ planned fiscal adjustment, if maintained over the medium-term, will reverse the debt dynamics and put debt on a firmly downward path.
- However, in the absence of a debt restructuring and only with non-market financing, debt would fall to only 89 percent of GDP by 2020.
- The risk of debt distress will continue to remain high as all debt and debt service thresholds would be breached even in the absence of shocks.
- The comprehensive debt restructuring currently being pursued by the authorities will be critical to reducing debt to sustainable levels, lowering the risk of debt distress, and putting the ECCU target within reach.

### Public debt composition and levels (end-2013)
- Public debt (central government direct and guaranteed): around 110 percent of GDP.
- Over a third of the debt is held domestically: 37 percent of GDP.
- External debt composition (percent of GDP, as reported in text):
  - Multilateral: 27 percent of GDP (especially the Caribbean Development Bank at 15 percent of GDP).
  - Commercial creditors: 24½ percent of GDP.
  - Paris Club members: 1.3 percent of GDP.
  - Other bilateral creditors beside Paris Club: 12.3 percent of GDP.

### Detailed debt stock fragments (as presented)
- External debt, 72.6
- Domestic debt, 37.2
- Restructured bonds, 8.8
- Treasury bills, 14.8
- Compensation claims, 1.8
- Commercial bank loans, 1.3
- Overdraft, 0.7
- Domestic arrears, 3.8
- Central government guaranteed, 3.0
- Other, 3.0
- Commercial, 24.6
- Multilateral, 27.1
- Central government guaranteed, 3.2
- Paris Club, 1.3
- Non-Paris Club, 12.3
- External interest arrears, 1.4
- Unpaid contributions, 2.6
- CDB, 14.5
- IDA, 6.7
- IBRD, 1.4
- IMF, 3.4
- Other, 1.1

*GRENADA — INTERNATIONAL MONETARY FUND*

### 1.4 percent of GDP.

### _cr14196 - 1.4 percent of GDP.

### Debt outlook and baseline projections
- Without debt restructuring and fiscal adjustment, public debt would increase to over 134 percent of GDP by 2020, more than twice the regional target for that year.
- Under the program’s targeted fiscal adjustment but without debt restructuring, public debt would be around 89 percent of GDP by 2020 and potentially higher if exogenous shocks occur during this period.
- External public debt would decline to about 62.7 percent of GDP by 2020 as authorities rely increasingly on external concessional sources while paying down domestic non-concessional debt.
- For public external debt vulnerability assessment, Grenada is rated as a medium performer according to the World Bank’s CPIA (Grenada scored 3.72 during 2010-12; it was 3.78 in 2010 and has since declined and remained below the threshold for strong performers of 3.75).

### Key assumptions underlying the outlook
- Real GDP Growth: Growth is projected to recover from 1½ percent estimated for 2013 to about 2½ percent, supported by recovery in tourism and FDI source markets.
- Inflation: Inflation is projected to pick up gradually to about 2 percent over the medium-term in line with higher imported U.S. inflation.
- Fiscal Balance: The central government primary balance is programmed to turn from a deficit of 3⅔ percent of GDP in 2013 to a surplus of 3½ percent by 2016, reflecting significant and front-loaded fiscal adjustment over three years. Measures include increasing personal income tax thresholds, freezing the public wage bill, and other revenue and expenditure measures.
- Proposed ECF arrangement: A three-year ECF arrangement with access of SDR14.04 million (120 percent of quota). Disbursements are programmed semiannually following Board approval of reviews. Grenada’s proposed access is above the 75 percent of quota norm for a country with outstanding concessional credit of 100-200 percent of quota.
- Debt Restructuring in baseline: The DSA’s baseline assumes fiscal adjustment but does not include debt restructuring.
- Financing assumptions: DSA financing gaps are assumed filled by exceptional IFI financing during 2014-17 (expected at US$81.9 million, or about 9.4 percent of GDP, from IMF, World Bank and CDB) and by borrowing on terms similar to official bilateral debt (2 percent interest, 7 years grace and 20 years maturity).

### Debt restructuring and implementation
- Authorities have embarked on a comprehensive debt restructuring to help address fiscal imbalances.
- The restructuring will exclude treasury bills issued in regional securities markets and loans from multilateral institutions (together accounting for 29 percent of public debt) to avoid contagion and preserve multilateral creditor claims.
- With assistance from financial and legal advisors, debt restructuring negotiations have been initiated and extended to all creditor groups; discussions with external private creditors continue through scheduled weekly calls.
- Authorities will approach Paris Club creditors before Board approval of the arrangement to request financing assurances and seek agreement on a date to discuss treatment of debt, including outstanding arrears.
- Staff will provide updates in future reviews and assess outcomes at their conclusion.

### Debt sustainability indicators and stress-test results (selected)
- Public sector debt (central government and central government guaranteed debt only) path highlights (in percent of GDP, before restructuring):
  - 2013: 109.8
  - 2014-20 average: 102.1
  - 2019: 93.0
  - 2020: 88.5
  - 2024: 78.0
  - 2034: 70.2
- Of public sector debt, foreign-currency denominated share:
  - 2013: 72.6
  - 2020: 62.7
  - 2034: 57.8
- Identified debt-creating flows, contribution to change in debt (selected):
  - Primary deficit (percent of GDP): 2013: 3.7; baseline programmed path reaches -3.5 (primary surplus) in projection years.
  - Automatic debt dynamics (percent of GDP): 2013: 2.1; 2014-20 average: 0.3; 2020-34 average: -0.5.
- Other sustainability indicators (selected):
  - PV of public sector debt (percent of GDP): 2014: 103.8 (table excerpt); projection declines over time (for example, 2020: 89.3; 2034: 57.5 in table excerpts).
  - Gross financing need (percent of GDP): 2013: 22.5; 2014-20 average: 13.8; 2020-34 average: 5.8.
  - Debt service-to-revenue and grants ratio (percent): 2013: 87.6; 2014-20 average: 69.8; 2020-34 average: 24.8.
- External debt (nominal) and public and publicly guaranteed (PPG) external debt (percent of GDP, before restructuring):
  - External debt nominal: 2013: 155.5; 2020: 148.7; 2024: 136.1; 2034: 98.1 (selected years).
  - PPG external debt: 2013: 72.6; 2020: 62.7; 2024: 57.3; 2034: 57.8.
- PV of PPG external debt (in percent of exports and of government revenues) (selected):
  - PV of PPG external debt in percent of exports: 2014: 475.4 (table excerpt); declines over projection horizon (e.g., 2024 and 2034 shown as lower values).
  - PV of PPG external debt in percent of government revenues: 2014: 332.7; downward over time but remains elevated in baseline.
- Stress tests and sensitivity analysis:
  - All debt and debt service thresholds are breached in the baseline scenario and under stress-test scenarios, leaving Grenada’s risk of public external debt distress high and unchanged from previous DSAs.
  - Some debt service ratio thresholds would breach only in the medium-term; upcoming debt restructuring is likely to stave off those medium-term vulnerabilities.
  - Private external debt is projected on an upward path in the medium-term as it finances large current account deficits and therefore continues to present an important risk.

### Policy implications and priorities (as presented in the source)
- Implement significant and front-loaded fiscal adjustment to reach a primary surplus consistent with the program (turn primary balance from a deficit of 3⅔ percent of GDP in 2013 to a surplus of 3½ percent by 2016).
- Proceed with comprehensive debt restructuring across creditor groups while excluding specific instruments to avoid regional contagion and preserve multilateral claims.
- Rely increasingly on external concessional financing to meet financing needs and reduce reliance on domestic non-concessional debt.
- Secure exceptional IFI financing and official borrowing on concessional terms as assumed in the DSA to fill financing gaps during 2014-17.

*Italic: Source — IMF staff report content from _cr14196 - 1.4 percent of GDP.*

### Annex III. Grenada: Competitiveness Issues and Exchange

### Annex III. Grenada: Competitiveness Issues and Exchange Rate Assessment

### Competitiveness trends and tourism/goods market shares
- Tourism:
  - Grenada’s share in the Caribbean tourism market has declined notably since 2007.
  - Recovery after the 2004-05 hurricanes was thwarted by the global financial crisis and is now 66 percent of its pre-hurricane shares.
  - U.K. was Grenada’s largest stay-over market until 2010.
  - Grenada’s real exchange rate, measured against its tourist origin markets, appreciated significantly following the global financial crisis and has since remained 13 percent more appreciated relative to the pre-crisis period.
  - Measured against tourism competitor markets, the exchange rate has also appreciated during 2013, as inflation in Grenada is much lower than most of its competitors.
- Goods:
  - Grenada’s market share of nutmeg plunged from about a fifth of world nutmeg trade in early 2000’s to about 3 percent after the hurricanes destroyed almost all of the crops in 2004-05.

### External position and external liabilities
- Current account and financing:
  - Current account deficits have settled around 20 percent of GDP in the post-hurricane period, compared to 8½ percent of GDP during the 1990s.
  - With receding foreign direct investment, the deficits have been increasingly financed by debt.
- Net foreign liabilities:
  - Grenada’s net foreign liability position deteriorated to more than 270 percent of GDP in 2012, among the highest in the world.
- Historical/current account and FDI dynamics (figures reproduced from source):
  - Charts show current account balance and FDI in percent of GDP and net foreign assets in percent of GDP.

### Formal exchange rate assessments (CGER-type results)
- Summary of CGER-type assessment outcomes:
  - Macro balance approach: potential real exchange rate overvaluation of 34¼ percent.
    - Rationale: projected gap between underlying current account balance and fundamentals-driven savings-investment norm remains at about 7 percent of GDP over the medium-term despite the large fiscal consolidation.
    - Calculation basis: REER adjustment required to close the current account balance gap in the medium term, based on elasticity of the current account balance to real exchange rate (-0.21 in the case of Grenada).
  - External sustainability approach: potential exchange rate overvaluation of about 12½ percent.
    - Suggests a current account balance adjustment of 2½ percent of GDP is required to stabilize Grenada’ net foreign liability position.
    - Unlike the CGER methodology, staff does not assume the capital account grants to be zero, since these are an important financing source for Grenada’s public sector.
  - Equilibrium real exchange rate approach: suggests the exchange rate is broadly in line with its equilibrium levels (misalignment 0.9 percent per table).
    - Note: the real effective exchange rate may not be the most relevant measure of the country’s competitiveness given the nominal peg to the U.S. dollar and the largely imported inflation.
- Numerical results excerpt (from CGER-type table):
  - Macro Balance: Misalignment (%) 34.2; CA norm 1 -10.1-14.6...; Underlying CA 1 -17.2-17.2...; CA gap 7.1 2.6...
  - External Sustainability: Misalignment (%) 12.5
  - Equilibrium Real Exchange Rate: Misalignment (%) 0.9
  - CAB/RER elasticity -0.21 (used in calculations)
- Additional note on ERER dynamics:
  - The appreciation of the equilibrium real exchange rate during the 2009–12 period, opposing the depreciation trend of the actual REER that generally tracked the U.S. Dollar, is due to the relative (to trading partners, most of whom have undergone strong fiscal consolidation) higher government consumptions in Grenada. The model interprets that such higher government consumption may lead to higher non-tradable prices and subsequently REER appreciation in Grenada.

### Demographics (relevant for long-run competitiveness)
- Population profile projection (figures shown in source):
  - Dependency ratios: current dependency ratios (number of persons in the working age divided by the number of retired persons) expected to fall from 4.5 in 2009 to 1.8 in 2069 if current trends continue.
  - Demographic drivers: declining fertility rates, increasing life expectancy, migration of working age population to other ECCU countries, US and Canada.

---

### Annex IV. Grenada: Impact of the Debt Restructuring on the National Insurance Scheme (NIS)

### NIS background and design
- Structure and coverage:
  - Defined benefit plan created in 1983.
  - Employee contribution 4 percent and employer 5 percent. Self-employed pay the employer contribution as well.
  - Mandatory retirement age 60 years.
  - Maximum replacement value under NIS is 60 percent of the five highest years of earnings.
  - The NIS covered about 43,096 workers in 2012 or about 85 percent of the employed population.
  - Benefits: old-age, disability, death, employment injury, maternity and sickness.
- Governance and actuarial review:
  - Operations overseen by the National Insurance Board (NIB).
  - Actuarial reviews every three years. Last review was done in 2009 and next review expected to be completed by June 2014.

### NIS financial position: income, assets, and exposures
- Income composition (2013 and recent years):
  - Almost two-thirds of the NIS annual income comes from contributions, while the remaining third derives from NIS investments, largely in non-financial assets such as real estate.
  - Income derived from government paper increased from less than EC$2 million in 2008 to almost EC$5 million in 2013 (18 percent of total income).
- Asset exposure to central government and statutory bodies:
  - NIS exposure to central government papers stood at EC$186.8 million (8.5 percent of GDP or 25 percent of assets) at end-2012, of which EC$92 million were holdings of the EC$2025 bond issued in the 2005 restructuring.
  - Excluding RGSM T-bills that will not be restructured, the total exposure to the central government is EC$175 million (8 percent of GDP or 23 percent of assets).
  - NIS exposure to various statutory bodies totals EC$58.5 million (2.7% of GDP).

### Cash position and trends
- Operational dynamics:
  - NIS has been running an operational surplus, which narrowed during the downturn of 2009-11 as unemployment increased and contribution base shrunk.
  - Revenue growth slowed from an average of 10 percent per year during 2000-08 to about zero thereafter.
  - Higher levels of expenditure due to provisioning for losses from investment stakes in BAICO and CLICO.

### Results of the 2009 actuarial review and recommended reforms
- Key actuarial findings and timeline:
  - The 2009 review estimated expenditures will exceed contributions by 2017 and total income by 2029.
  - After 2029, the operational deficit will continue to grow and the reserve is expected to begin to decrease in the next decade, to be completely depleted by 2042.
- Main recommendations:
  - Increase the retirement age from 60 to 65.
  - Increase the contribution rates to 11 percent (5 percent employee + 6 percent employer) from the current rate of 9 percent (4 percent employee + 5 percent employer).
  - Increase the insurable limit gradually, since current limits were very small for high income brackets.
    - Note: Insurable limit increases already enacted: increased from EC$3000 per month in 2012 to EC$4250 per month in 2013 and will be increased further to EC$5000 per month in 2014.
- Government action:
  - The government is evaluating reform options and waiting for the outcome of the 2013 actuarial review (expected in June) before making the final decision.

### Impact of debt restructuring on NIS finances
- Baseline (no debt restructuring) projection:
  - Under program macro-framework and assuming no debt restructuring, projected cash flow for 2014-2042 remains broadly similar to the 2009 actuarial review: NIS begins running deficits in 2028 and reserves get depleted by 2042.
  - Demographic assumptions unchanged from the 2009 actuarial review.
- Debt restructuring illustrative impacts:
  - If NIS takes a 50/60 percent haircut on restructurable government papers:
    - The onset of operational deficits and reserve depletion would be accelerated by five/six years, to 2022/23 and 2036/37, respectively.
  - Over the medium term, NIS will continue to run operational surpluses and can address longer-term challenges through parametric reforms.
- Fiscal offset:
  - The negative impact on NIS financial position from restructuring would be fully offset for the public sector as a whole by the gain in the central government’s position.

---

### Annex V. Grenada: Statutory Bodies

### Overview and fiscal exposure
- Number and types:
  - Grenada has 24 statutory bodies, of which nine operate as commercial entities and one is the National Insurance Board that manages the pension fund.
- Financial performance (2012 summary):
  - Financial performance and service provision of many SBs has been poor; most SBs for which data are available reported a loss in 2012, except for NIS which is running operational profits.
  - None of the SBs made any dividend payments.
  - Recorded debts of SBs amounted to about 6 percent of GDP at end-2012.
  - Total contingent liability of SBs guaranteed by the government stood at EC$62.3 million (2.9% of GDP) and are included in the official debt statistics.
  - Some SBs have debts that are not guaranteed; information on these is not reliable.
- Specific arrears and government transfers:
  - Government arrears to SBs include: National Insurance Board EC$30 million, Solid Waste Management Authority EC$19 million, Water and Sewerage Authority EC$10.5 million.
  - Government transfers to SBs were relatively small in 2012: EC$2 million or 0.1% of GDP.
  - With the exception of the Gravel Concrete and Emulsion Corporation and the Marketing and National Importing Board, all SBs benefit from VAT and customs exemptions (currently being reformed).

### Operational and governance issues
- Causes of weak SB finances:
  - Impacted by government decisions to approve substantial wage increases and unsustainable pension schemes, and by the collapse of regional insurance companies BAICO and CLICO.
  - SB remuneration and employee benefits substantially higher than in the rest of the public service.
  - Many SBs have separate and overly generous pension schemes with significant unfunded pension liabilities.
  - BAICO/CLICO collapse led to asset impairments at Ports Authority, Development Bank, Water and Sewerage Authority and National Insurance Board.
- Monitoring and reporting weaknesses:
  - SBs are required by legislation to submit audited financial statements to Parliament, but most SBs don’t report financial statements on a regular basis.
  - In 2012, more than half of SBs reported their financial statements six months after the end of the calendar year.
  - While Ministry of Finance officials are Board members of SBs, there is no unit at the MoF that monitors SBs on a regular basis and MoF yields little control over SB financials.

### Financial summary table (percent of GDP, 2012 or latest available) — selected items
- Aggregated figures (from source table, excluding Grenlec and SBs without data):
  - Total Profit/Loss: -0.3 percent of GDP
  - Total Debt: 5.9 percent of GDP
  - Government guaranteed debt: 2.9 percent of GDP
- Selected SB entries (percent of GDP):
  - Airports Authority: Profit/Loss -0.1; Total Debt 2.6; Govt. guaranteed debt 2.0
  - Development Bank: Profit/Loss 0.0; Total Debt 0.7; Govt. guaranteed debt 0.6
  - Gravel Concrete and Emulsion: Profit/Loss -0.1; Total Debt 0.2; Govt. guaranteed debt 0.2
  - Industrial Development Corp.: Profit/Loss 0.0; Total Debt 0.1; Govt. guaranteed debt 0.1
  - National Water and Sewerage: Profit/Loss -0.2; Total Debt 0.0; Govt. guaranteed debt 0.0
  - Ports Authority: Profit/Loss 0.0; Total Debt 2.2; Govt. guaranteed debt 0.0
  - Board of Tourism: Profit/Loss 0.1; Total Debt 0.0; Govt. guaranteed debt 0.0

---

### Annex VI. Grenada: Petrocaribe Arrangement

### Operational mechanics
- Operator and imports:
  - Petrocaribe arrangement operated by PDV Grenada Ltd., a joint venture between the governments of Venezuela and Grenada since 2007.
  - PDV Grenada imports diesel fuel from Venezuela at international prices, usually about one shipment per month with an average of 18 thousand barrels per shipment.
  - PDV Grenada sells the fuel in the local market at market prices plus a markup to cover operational costs.
- Payment and loan terms:
  - If the oil price exceeds US$100 per barrel, then 40 percent of the import invoice is repaid to Venezuela; otherwise 50 percent is repaid.
  - The remainder of the invoice is converted into a long-term concessional loan, repayable over 25 years, with 2 years of grace period and an annual interest rate of 1 percent.
- Use of concessional loan proceeds:
  - 35 percent of the loan is allocated to a social fund to be spent on social projects.
  - 65 percent goes to a trust fund that makes financial investments intended to generate returns to offset the cost of social projects and service the long-term loan.
  - The trust fund has mainly invested in securities issued by Grenada and other governments in the region.
  - Money from the social fund is transferred to the central government as “grant” from the rest of the public sector and has averaged 0.8 percent of GDP over the past five years, financing investment and social programs.

### Stock, flows, and reliance
- Stock and flows:
  - The stock of the long-term debt of PDV Grenada to Venezuela reached US$102.4 million or 12.6 percent of GDP at end-2013.
  - The annual financing under the arrangement averaged US$21 million or 2.6 percent of GDP over the past three years.
  - These inflows provided notable relief in financing the large current account deficit.
- Legal and fiscal classification:
  - Because PDV Grenada is incorporated under the Companies Act 1994 as a limited liability company, the government’s liability is limited only to the unpaid amounts (if any) on shares it holds in the company. Therefore this debt is excluded from the stocks of central government contracted or guaranteed debt.

### Risks and potential impacts of disruption
- Social spending:
  - Grants from the social fund financed about 40½ percent of the total social spending in 2013, particularly in education, employment support, and infrastructure and housing.
  - An abrupt withdrawal of this funding could derail these social projects unless the government effectively mobilizes additional resources for the capital budget.
- Balance of payments:
  - For the rest of the economy the impact would be moderate assuming fuel imports could be quickly redirected from other countries.
  - Balance of payment pressures could emerge if the annual financing inflows cannot be easily replaced with other external financing.

*Source: _cr14196 - Annex III. Grenada: Competitiveness Issues and Exchange Rate Assessment (IMF).*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Economic context and recent history
- Grenada faced "unprecedented challenges" over the past decade, including its largest natural disaster and the most prolonged recession since independence.
- Public debt reached about 110 percent of GDP at end 2013.
- Default announced and debt restructuring initiated in early 2013 due to inability to meet financial obligations.
- Key historical and macro indicators:
  - Two hurricanes in 2004–05 caused damage estimated at around 150 percent of GDP (compared to about 20 percent on average for the three most affected countries in the aftermath of the 2004 Asian tsunami).
  - Real activity declined by 8.2 percent from its pre-crisis peak during 2009–12.
  - Unemployment rate: 33½ percent in September 2013.
  - Youth unemployment: 55.6 percent.
- Past IMF support:
  - Two ECF arrangements during 2006-12; first (2006-10) completed, second (2010-12) went off-track after the first review.
  - Reforms continued despite programme hiatus, including modernizing customs and tax administration, reinforcing supervision of nonbank institutions, and strengthening social safety nets.
- External sector: large current account deficit increasingly financed by debt as FDI flows have receded.
- Structural constraints: weak price and structural competitiveness, high debt overhang, vulnerability to external shocks; growth over past two decades too weak to reduce unemployment meaningfully.

### Requested IMF support and programme objectives
- Government requests a 36-month arrangement under the Extended Credit Facility (ECF) for SDR 14.04 million (120 percent of Grenada’s quota, about US$21.9 million at current exchange rates).
- Programme aims:
  - Restore macroeconomic stability in the short term.
  - Promote strong, sustainable, and inclusive growth in the medium term.
  - Main pillars: ambitious fiscal adjustment supported by public financial management reforms and debt restructuring; structural reforms to promote a business-friendly environment, growth and job creation; measures to strengthen financial system safety and stability.
- Programme monitoring: semi-annual reviews, quantitative performance criteria, indicative targets, and agreed structural benchmarks.

### Medium-term macroeconomic framework and projections
- Near-term growth:
  - Growth is estimated to have picked up to at least 1½ percent (market prices) in 2013.
- Medium-term growth projection:
  - Growth expected to pick up steadily to about 2½ percent, in line with historical growth over the past twenty years.
- Fiscal adjustment and growth interaction:
  - Planned fiscal adjustment of 7¾ percent of GDP during three years will have some dampening effect on growth in the short run, but drag expected to be limited and offset by resumption of financing flows and resolution of uncertainty.
- Inflation and external balances:
  - Inflation projected to remain subdued due to negative output gap and moderate commodity price inflation.
  - External imbalances expected to narrow gradually during the programme period reflecting improvement in fiscal balance and recovery in exports.

### Economic and financial programme — reforms to boost growth and social protection
- Overarching goal: create conditions for higher economic growth that is sustainable, job-creating and inclusive through:
  - Deep structural reforms to expand private sector activity and employment.
  - Strengthened social safety nets to protect the most vulnerable.
  - Returning the public sector to solvency and ensuring financial sector stability.

- Investment climate and private sector measures:
  - Strengthen Investment Promotion Act of 2009 and have the Act acceded to law to improve business environment and attract investment by:
    - Streamlining investment procedures and cutting excess “red tape”.
    - Codifying requirements for investment/opening a business in legislation.
    - Codifying all tax incentives and associated qualifying criteria in the law.
    - Transforming the Grenada Industrial Development Corporation into a functioning one-stop shop for investors.
  - Structural benchmark: Parliamentary approval of the revised Investment Act by end-November 2014.

- Public-Private Partnerships (PPPs):
  - Government will adopt a PPP policy and comprehensive PPP legislation to establish principles and institutions for managing contingent liabilities.
  - Parliamentary approval of PPP legislation targeted for end-2014.
  - Technical assistance to be sought from the World Bank and other donors.

- Sector liberalization and energy strategy:
  - Liberalize certain sectors, including nutmeg and cocoa, to boost efficiency and farmers’ incomes.
  - Two-pronged electricity strategy (supported by World Bank technical advice):
    - Transition from fuel-based generation to renewable energy (geothermal, solar and wind) through policy and regulatory changes.
    - Establish an independent regulatory authority for more efficient pricing of electricity.
  - Specific electricity-sector actions by end-December 2014:
    - Amend the Electricity Supply Act and revisit the agreement with GRENLEC to:
      - Enable effective regulation by the Eastern Caribbean Energy Regulatory Authority (ECERA).
      - Address cost inefficiencies in GRENLEC through revised tariff-setting mechanisms.
      - Set out roadmap for transitioning generation to renewable energy.
      - Streamline tax exemptions granted to GRENLEC.
  - Government is supporting exploration of geothermal potential and will seek donor assistance.

- GRENLEC ownership note:
  - Government made a recent bid to acquire majority shares on sale in GRENLEC; bid was deemed too low by the seller. After expiration of Government’s offer, other investors expressed interest. Government will not participate in further bidding but will undertake required sector reforms with private owners.

- Labor market and wage policy:
  - Wage pressures concentrated in public sector and at the main port.
  - Government initiated tripartite Social Partnership Agreements to align collective bargaining with macroeconomic fundamentals.
  - Short-term objective: reach understandings to set wages in line with macroeconomic fundamentals and in advance of negotiated triennium.
  - Government will review existing labor agreements in ports by end-June 2015 to consider streamlining labor charges.
  - Government will seek to revise the Labor Code in consultation with Social Partners to improve labor market competitiveness.

- Social protection measures:
  - Protect the most vulnerable during fiscal adjustment by increasing and better targeting assistance.
  - For fiscal year 2014:
    - Increase allocations to SEED by 40 percent to EC$13⅔ million (0.6 percent of GDP).
    - SEED to reach 5,690 households (about a sixth of all households).
    - Establish a floor on spending for SEED to prevent cuts to targeted safety nets.
  - Improve targeting and coverage by:
    - Compiling an inventory of all social assistance programmes.
    - Establishing a registry of beneficiaries.
    - Introducing proxy means testing as eligibility criterion for SEED before end-2014, to be rolled out to other programmes afterward.
  - Government will seek World Bank technical assistance to develop a coherent social protection strategy and finalize a Poverty Reduction Strategy Paper in 2014.

### Restoring fiscal sustainability and fiscal consolidation
- Debt objective:
  - Reduce debt from about 110 percent of GDP to the ECCU-wide target of 60 percent of GDP by 2020 through fiscal adjustment, debt restructuring, and fiscal structural reforms.

- Past fiscal developments and near-term targets:
  - Fiscal deficits averaged 5 percent of GDP over the past decade.
  - Government measures in 2013 limited the primary deficit to 3⅔ percent of GDP, below the budgeted target of 4.2 percent of GDP (outcomes consistent with the budget was a prior action).

- Fiscal consolidation plan:
  - A fiscal adjustment effort of 7¾ percent of GDP during three years will bring the primary balance into a surplus of 3½ percent of GDP by 2016.
  - Adjustment will be frontloaded with 5.6 percentage points of GDP undertaken during the first two years to meet higher financing requirements early in the programme.
  - Safeguards to mitigate social and growth impacts:
    - Establish a floor on social spending for targeted programmes.
    - Safeguard critical infrastructure programmes by allocating, fiscal space permitting, at least 7 percent of GDP to the public sector investment programme on average during the next three years.

### Implementation commitments and consultation
- Government affirms policies in the MEFP are adequate to meet programme objectives and stands ready to take additional measures if circumstances change.
- Government will consult with the IMF on adoption of additional measures in advance of necessary policy revisions and will provide Fund staff with relevant information required for programme reviews and monitoring.
- Government consents to publication of the letter, the attached MEFP and Technical Memorandum of Understanding, and the related staff report.

*Letter dated June 12, 2014, signed by Hon. Keith Mitchell, Prime Minister, Minister of Finance and Energy, Grenada.*

### 18.      The fiscal consolidation will rely on measures that ensure a broader and a more

### The fiscal consolidation will rely on measures that ensure a broader and a more equitable participation in the tax effort, as well as reductions in less productive spending

### Fiscal measures to broaden revenue and reduce less productive spending
- Personal income tax:
  - Reduction in the personal income tax threshold from EC$60,000 to EC$36,000 in 2014.
  - A lower rate of 15 percent will apply to income below EC$60,000.
  - The rate for income above EC$60,000 will remain unchanged at 30 percent.
- Income and withholding tax:
  - Extend the income tax base to winnings from lotteries and games of chance (to come into effect in 2014).
- Property tax:
  - Increase the property tax rate on buildings and land from 0.1-0.15 percent to double those amounts in 2014, and to an average of 0.5 percent in 2016.
  - Revaluation of assessed property values to reflect market valuations.
  - Once the primary balance targeted under the programme (3½ percent) has been achieved, the Government intends to reduce the currently high property transfer taxes.
- Streamlining tax exemptions:
  - (i) A 50 percent reduction in tax exemptions to GRENLEC, statutory bodies, St. George’s University and the returning nationals (GRENLEC is the largest beneficiary of exemptions).
  - (ii) Reduce the tax rebate to manufacturers by eliminating credits accumulated during 2010-13; allow the use of the rebate against non-VAT liabilities only; cap the annual fiscal loss to EC$2.5 million; and discontinue the program fully after 2016.
  - (iii) Reform the tax incentive regime to ensure the integrity of the tax base going forward.
  - First two measures effective from 2014 (excluding St. George’s University, effective in 2016).
- VAT base expansion:
  - Apply VAT to select exempt items (non-basic food, private accommodations).
  - Apply the full 15 percent rate to construction inputs (from 2014) and utilities provided to St. George’s University (from 2016).
- Excise taxes:
  - Introduce a 5 percent excise on luxury goods and on vehicle parts, tires, batteries, and motor oil.
  - Increase the excise tax on alcohol and tobacco products by at least 10 percent.
- Other revenue-enhancing measures:
  - Introduce a small business tax regime for firms with sales between EC$30,000 and the VAT threshold (EC$120,000), charging a flat rate of 5 percent on gross sales.
  - Introduce a 10 percent tax on financial activities (wages and profits of financial institutions).
  - Increase fees on motor vehicle, professional and gun licenses.
  - Introduce fees for new government guarantees on the debt of statutory bodies.
  - Increase the customs service charge from 5 to 6 percent.
- Revenue-neutral simplification of the tax system to overcome resource constraints and improve compliance; IMF technical assistance requested (including on the small business tax regime).
- Measures to improve tax collection and governance:
  - Passage of a revised Integrity in Public Life law to strengthen governance in revenue collecting agencies.
  - Implement reforms developed with CARTAC, including:
    - Complete institutional reforms to focus on risk management and large taxpayers.
    - Eliminate the bonus for tax collectors on interest from tax arrears (prior action).
    - Introduce a strict sanction regime for late payment of taxes due (tax laws revised before end-November 2014).
    - Connect customs and inland revenue information systems and ensure exchange of information between the two departments.
    - Enact the newly drafted Customs Bill to modernize legislation and introduce penalties for noncompliance (by end-June 2014).
    - Establish an Internal Audit Unit at Customs.
    - Improve controls and monitoring of customs bonding warehouses by increasing audits and closing repeated non-compliant warehouses.
- Nominal wage bill reduction:
  - Reduce central government’s nominal wage bill to 9 percent of GDP by 2016, from a projected 10.3 percent in 2013 (excluding retroactive payments).
  - Cap the nominal wage bill during 2014-16 (including allowances) at May-December 2013 levels (projecting the wage bill to 9½ percent of GDP by 2016).
  - Achieve further reductions through attrition, replacing only 3 out of 10 departing employees.
  - Eliminate at least 100 vacancies a year during 2014-16.
  - Not award performance increments for 2013-16 period while improving the performance appraisal system.
- Spending on goods and services:
  - A 20 percent reduction in spending on goods and services relative to 2012, focused on utilities, rental costs, and communication costs.
  - Freeze other spending on goods and services at 2013 levels.
  - Streamline other spending, including investments of lower social return and reforms of statutory bodies.

### Prior actions, safeguards, and budget execution
- Parliamentary approval:
  - Government will obtain parliamentary approval of all fiscal adjustment measures in paragraph 18 that require legislative amendments as a prior action.
  - Four exceptions to ex-ante legislation:
    - New taxes to be introduced in 2015 (financial activities tax and small business tax) will be legislated during 2014 to allow proper design and technical assistance.
    - Second round of property tax increases for 2016 will be legislated after assessing the first round.
    - Fees for new government guarantees will be enacted after post-restructuring technical assistance on public debt management.
    - Measures associated with St. George’s University will be enacted before mid-2015 after renegotiations.
- 2014 budget:
  - Parliament approved the 2014 budget in line with the programmed primary deficit target of 2½ percent of GDP.
- Safeguards to ensure programmed execution if budgeted revenues do not materialize (items (i) and (ii) are prior action for the program):
  - (i) Issue a cabinet conclusion allowing spending commitments only up to the programmed, rather than budgeted, spending.
  - (ii) Issue spending authorizations in line with the programmed spending targets, and only one quarter ahead.
  - (iii) Revise the Public Finance Management Act to introduce personal financial penalties for responsible officers committing to spending above budgetary ceilings.

### Contingent measures and disaster risk management
- Natural disaster insurance:
  - Seek donor assistance to purchase additional natural disaster insurance for the duration of the programme.
  - Estimated cost of supplementary insurance: US$3-5 million per year (0.4-0.6 percent of GDP).
  - Coverage would represent 20 to 30 percent of the estimated average annualized loss for the covered perils.
- Contingent fiscal measures identified for up to 0.7 percent of GDP in 2014:
  - (i) Reduced expenditure authorizations (only one-quarter-ahead) in the first three quarters, with remaining allocations released once there is evidence the fiscal programme is on track.
  - (ii) Further widening of the income tax base to capital gains, dividends, and interest.

### Arrears clearance
- Plan to clear existing domestic and external arrears during the programme period.
- A clearance framework for existing stock of Government debt arrears will be agreed as part of ongoing debt restructuring.
- Government will not incur additional debt arrears during the programme outside the restructuring process.
- Existing supplier arrears will be repaid through a combination of Government paper and cash during the first two years of the program.
- Government will not incur additional arrears on membership fees to regional and international organizations from the start of the program and will seek to regularize delayed payments in the course of 2015.
- Strengthen monitoring of expenditure commitments as part of public financial management reforms to prevent future accumulation of arrears.

### Debt restructuring and financing assurances
- Comprehensive debt restructuring:
  - Announced March 8, 2013 to undertake a “comprehensive and collaborative” restructuring of public debt.
  - Scope: comprehensive, covering all public and publicly guaranteed debt except loans from multilateral institutions and Treasury bills issued on the regional government securities market (RGSM).
  - Government contracted financial and legal advisors and is working with creditors to advance the process.
- Engagement strategy:
  - With financial advisors, strategy to engage private and bilateral official creditors to achieve cash flow relief and materially reduce the overall stock of debt.
  - Meetings with commercial bondholders began in March 2014.
  - Request financing assurances from the Paris Club before the IMF’s Executive Board meeting on the program request.
  - Continue engagement with bilateral non-Paris Club creditors to regularize existing arrears and restructure debt; agreements to reschedule arrears reached with the OPEC Fund and with Kuwait.
- Multilateral financing:
  - World Bank and Caribbean Development Bank (CDB) preparing new lending programs with expected cumulative disbursements of US$30 million each during the three years of the arrangement.
  - European Union plans to resume grant support once an IMF program is in place.
- Financing gap and closure:
  - Remaining financing gap estimated at about US$350 million in 2014-17 after accounting for expected official creditor support.
  - About two thirds of this residual financing gap will be closed through regularization of existing arrears during debt negotiations; the remaining one third closed through restructuring of future maturities.
- Prior actions related to restructuring progress:
  - (i) Initiate negotiation phase with private and bilateral official creditors.
  - (ii) Seek agreement on a debt restructuring consistent with closing the financing gap and reducing debt to 60 percent of GDP by 2020.
  - (iii) Obtain financing assurances from the Paris Club.
  - (iv) Develop a credible timetable for advancing restructuring discussions with private creditors through mid-2014.
  - Issue a supplementary Letter of Intent before the Board discussion with an update on progress and adequate financing assurances.

### Fiscal structural reforms (pillars and specific measures)
- Objective: impose meaningful constraints on fiscal conduct and provide a fiscal anchor; focus on five areas: (i) fiscal policy framework; (ii) public financial management; (iii) management of parastatal entities; (iv) pension reform; and (v) debt management.
- Fiscal policy framework:
  - Transition to a rule-based fiscal framework.
  - Rules will cap real spending growth at trend GDP growth (2-2½ percent), while allowing revenues to absorb cyclical fluctuations.
  - Rules will set caps on personnel spending as a share of tax revenues; details during the first review following technical assistance.
  - Improve fiscal risk analysis and management by: (i) strengthening control over finances of the rest of the public sector; (ii) widening scope of PFM legislation to the general government and producing consolidated public sector accounts; (iii) create a Public Investment Unit to monitor and manage risks associated with parastatal entities, PPPs, and other risks.
  - Introduction of umbrella legislation for the fiscal framework will be a structural benchmark for end-December 2014; relevant regulations to be approved by end-June 2015.
- Public financial management (PFM) legislation:
  - Revise PFM legislation to: (i) limit use of executive orders to spend above budget; (ii) require appropriation by parliament ex ante for spending in excess of the originally approved fiscal year budget; (iii) introduce meaningful contingency funds and contingency appropriations; (iv) strengthen control over expenditure commitments including strict personal and institutional penalties; (v) prohibit implementation of tax system changes without parliamentary approval.
  - Strengthen capital budgeting, move to multiyear budgeting, and develop a medium-term strategy plan.
  - IMF technical assistance on revision of PFM legislation; parliamentary approval of revised legislation by end-August 2014 (structural benchmark); regulations to be approved by end-March 2015.
  - Request IMF to carry out a Public Expenditure and Financial Accountability (PEFA) assessment during the coming 12 to 18 months.
- Statutory bodies:
  - Strategic review of functions and rationale of existing statutory bodies and new ones (the Printery, the Government Information Service, and Statistics Grenada).
  - Develop a strategic plan to: (i) provide up-to-date financial viability information including pension sustainability; (ii) classify each for liquidation, privatization, or retention with a timetable; (iii) lay out concrete restructuring plans for financially weak retained entities.
  - Technical assistance from CARTAC; Cabinet approval of the strategic plan is a structural benchmark for end-October 2014.
  - Financial control over statutory bodies to be dealt with in revised PFM legislation.
- Public sector modernization:
  - Strategic review to reduce public sector size and increase efficiency, including government functions, public hiring, refocusing the Department of Public Administration, and reforming the Public Service Commission.
  - Develop a strategic action plan by end-March 2015, conditional on availability of technical assistance.
  - Parliamentary approval of revised legislation on government functions, civil service, and public compensation (including the 1969 Public Service Law) expected within six months thereafter.
- Tax incentive regime:
  - Overhaul process for granting tax incentives to prevent erosion of the tax base.
  - Require all new tax exemptions codified in legislation, prohibit discretionary exemptions, and require beneficiaries to be tax compliant (structural benchmark for end-November 2014).
  - IMF technical assistance provided in February 2014 and further assistance scheduled for July 2014.
  - Publish annual information on revenue foregone under all tax exemptions in the budget presentation to parliament; conduct periodic reviews of rationale, cost, and benefits of existing exemptions.
- Pension reform:
  - Reform to consolidate two different schemes, ensure more equitable outcomes, and provide a competitive return to retain quality staff.
  - Working group on pension reform formed; CARTAC technical assistance to assess fiscal implications.
  - Aim to submit reform legislation to parliament by March 2016.
- Treasury Single Account:
  - Transition to an effective treasury single account to manage resources and save interest costs.
  - CARTAC technical assistance to assess banking arrangements, facilitate full audit of bank accounts, and develop a strategy for closing bank accounts and moving to a treasury single account.
  - Seek cabinet approval of the strategy by end-July 2014 and aim to fully implement by end-October 2014.
- Strengthening debt management:
  - Seek technical assistance from the IMF and the World Bank on debt management, including guarantee fees.
- Strengthening public procurement:
  - Seek parliamentary approval by end-June 2014 for revised public procurement legislation to improve efficiency and transparency.
- Governance of the National Transformation Fund (NTF):
  - Ensure strong and transparent governance of the NTF that will manage receipts of the citizenship-by-investment (CBI) programme.
  - From 2014, NTF accounts will be audited annually by the Director of Audit; audit report submitted to parliament and accessible to the public.
  - Steps to avoid abuse: (i) applications subject to adequate criminal background checks; (ii) appropriate AML/CFT measures and oversight targeted to new citizens.

*Source: _cr14196 - 18. The fiscal consolidation will rely on measures that ensure a broader and a more equitable participation in the tax effort, as well as reductions in less productive spending*

### 26.      The Government will take a proactive approach to ensuring the continued stability

### _cr14196 - 26.      The Government will take a proactive approach to ensuring the continued stability

### Financial‑system stability and nonbank sector strengthening
- Objective: assess impact of the debt restructuring on financial sector capitalization needs and strengthen nonbank regulatory frameworks and financial position, in keeping with points 6-8 of the ECCU’s eight-point stabilization and growth program.
- Actions with the ECCB:
  - Conduct stress tests to gauge the potential impact of the debt restructuring on income and capitalization of financial institutions.
  - Assess potential impact of the debt restructuring on the long run solvency of the NIS.
- Credit unions and nonbank sector measures:
  - Promote consolidation of the credit union sector to strengthen the financial safety net.
  - Support establishment of the proposed Eastern Caribbean Financial Services Regulatory Commission.
  - Enact new uniform ECCU Credit Union Regulations currently being finalized.
  - Enhance the supervisor’s toolkit (in consultation with the ECCB) by: developing options for providing liquidity support to solvent institutions; strengthening requirements for retaining profits under the new regional regulations; requiring credit unions to increase capital to assure adequate capitalization over the next three years, based on the stress tests for the debt exchange impact.
  - Complete, by end-2014, the move to a full risk-based supervision model for credit unions started in 2013.

### Banking sector measures and resolution planning
- Support regional efforts to strengthen banking regulation and supervision to:
  - Bolster the ECCB’s resolution powers.
  - Strengthen loan classification and provisioning requirements.
- Legislative and institutional steps:
  - Commit to promptly present to Parliament the revised Banking Act and the ECCB agreement once approved by the Monetary Council.
- Measures to strengthen commercial banks in Grenada (to be discussed with the ECCB):
  - (i) Requirements for retaining profits until capital and liquidity position of banks meets prudential requirements.
  - (ii) Undertake a comprehensive and independent valuation of the assets of weak banks before end-December 2014, subject to loan classification and provisioning requirements to be agreed with IMF staff and the World Bank, unless such a valuation had already been initiated in the context of regional efforts before end-September.
  - (iii) Based on valuation findings, government will discuss with the ECCB how to address results within recapitalization or resolution plans.

### Program monitoring, safeguards, and publication
- Program frequency and monitoring:
  - Programme subject to semiannual reviews and semiannual performance criteria, indicative targets and structural benchmarks as set out in Tables 1-2 and the TMU.
  - Anticipated first two reviews: September 30, 2014 and March 31, 2015; these will require observance of continuous performance criteria and conditionality for end-June 2014 and end-December 2014, respectively.
  - Progress monitored quarterly through staff visits.
- Quantitative enforcement feature:
  - A quantitative performance criterion on the wage bill for 2015-16 will be set if wage objectives are not safeguarded through agreement with trade unions or fiscal responsibility legislation before end-2014.
- Safeguards policy:
  - Adhere to safeguards policy in case of Fund budget financing.
  - In accordance with recommendations of the 2012 safeguards assessment of the ECCB, maintain foreign exchange balances only with the ECCB.
- Publication:
  - Government authorizes the IMF to publish the Letter of Intent, its attachments, and the related staff report.

### Key program adjustment rules, targets, and contingency mechanisms
- Primary balance measurement:
  - Central government primary balance measured from above the line as total revenue and grants less total non-interest expenditure; expenditures recorded on an accrual basis with MOF budget execution data supplemented by data on unprocessed claims.
  - Also monitored from below the line using a set of financing and stock-change items (i–vii) and net of interest payments and unutilized grants.
- Tolerances for reconciliation between measures:
  - If difference between primary balance measured above and below the line exceeds EC$10 million in 2014, EC$6 million in 2015 and EC$3 million in 2016, the MOF will consult with IMF staff.
- Adjustors to the primary balance floor:
  - Downward/upward adjustments for retroactive wage and pension payments for 2009–2012, with cumulative payments during the programme period not exceeding EC$26.5 million.
  - Upward adjustment by the amount of fees received from the recently legislated citizenship-by-investment (CBI) programme (treated as non-tax fees in the budget).
  - Upward adjustment by one half of revenue and budgetary grant outperformance during January–June to allow additional capital spending.
  - Upward adjustment for shortfalls in targeted cash transfers (SEED) from their indicative target.
- Contingency allocation control for 2014:
  - Reduce budget allocations to ministries by EC$9.3 million for the first and second quarter combined.
  - Reduce budget allocations by EC$14 million for the first, second and third quarter combined.
  - Withheld allocations may be released in the fourth quarter if programme targets are on track.

### Fiscal and debt‑related continuous performance criteria and definitions
- Non‑accumulation of external debt arrears (continuous):
  - Central government will not incur new arrears in external obligations at any time during the programme.
  - Arrears defined as delay in payment beyond contractual grace period; arrears excluded if a clearance framework is agreed or a debt restructuring is actively pursued in good faith.
- Ceiling on non‑concessional external borrowing (continuous):
  - Applied to contracting or guaranteeing by the central government of medium- and long-term external debt (maturity greater than one year).
  - Excludes borrowing from Caribbean Development Bank and the RGSM.
  - A debt is non-concessional if the grant element (NPV relative to face value) is less than 35 percent using a discount rate of 5 percent.
- Definition of domestic arrears (ceiling on stock of central government domestic arrears):
  - Sum of: (i) verified invoices unpaid beyond contractual or 60 days; (ii) unpaid wages, pensions, or transfers pending longer than 60 days; (iii) pending interest and amortization on domestic debt beyond grace period. Arrears excluded if covered by a clearance or rescheduling framework.

*Source: Excerpts from the Memorandum of Economic and Financial Policies and Technical Memorandum of Understanding (TMU) in the referenced IMF programme documentation.*

### 12.      Net increase in debt contracted or guaranteed by the central government is defined as

### Net increase in debt contracted or guaranteed by the central government is defined as

### Definition of net increase in debt contracted or guaranteed
- Net increase in debt contracted or guaranteed by the central government is issuance minus repayments of debt contracted or guaranteed by the central government and approved by Parliament by each relevant date.
- For the purposes of the programme, such debt will be considered to have been contracted as of the date when both:
  - (1) an agreement to provide such a lending facility or guarantee has been concluded and signed; and
  - (2) the proposed borrowing or guarantee has been approved by Parliament, in the case of external debt.
- The ceiling excludes debt instruments to be issued as part of the process of debt restructuring.

### Treatment of Public-Private Partnerships (PPP)
- Where the government facilitates the financing of PPP projects by concessionaires, the debt of the central government will be increased by the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.

### Adjustments to the ceiling on debt contracted or guaranteed
- The ceiling on the debt contracted or guaranteed by the central government will be adjusted as follows:
  - Upward by the amount paid by the government to reimburse the policy holders of the failed regional insurance companies BAICO and CLICO, less the grant-financed share of these payments.
  - Upward to a maximum amount of 5 percent of GDP to accommodate PPP related expenditures.

### Data sources and monitoring of debt contracting
- The data used to monitor debt contracting will be provided by the DMU, after reconciliation with the Accountant General’s office, on a monthly basis.

### Floor on Social Spending by the Central Government
- Social spending of the central government will only include the expenditures incurred by central government towards the SEED programme (support for education empowerment and development).
- This will be reported by the Ministry of finance on a quarterly basis.

### Memorandum item: Wage Bill Target
- The wage bill of the central government will include the expenditures incurred by the central government towards the payment of wages, salaries and personnel allowances and excludes one-off retroactive wage payments.
- This will be reported by the ministry of finance on a quarterly basis.

### Memorandum item: Public Employment
- Public employment of the central government will include the established (permanent) and unestablished (temporary) workers.
- This will be reported by the ministry of finance on a quarterly basis.

### Execution of Prior Actions (selected fiscal measures and approval instruments)
- Personal income tax:
  - Reduce threshold to EC$36,000, with a marginal rate of 15 percent on income up to EC$60,000 — Ministerial order
  - Widen the income and withholding tax base to winnings from lotteries and games of chance — Act of Parliament
- Corporate income tax:
  - Reduce tax rebate to manufacturers from 10% to 5% of gross sales, creditable against non-VAT liabilities only — Act of Parliament
- Property tax:
  - Increase rate on both buildings and land to 0.25 percent in 2014 and to 0.5 percent in 2016 — Ministerial order
- Value-added tax:
  - Reduce the list of exempt items (non-basic foods, private accommodations) — Act of Parliament
  - Restore 15 percent rate on construction materials — Ministerial order
  - Increase VAT paid by St. George's University from 5 to 15 percent — Act of Parliament
- Excises:
  - Excise tax of 5 percent on motor vehicle parts; Tires; Batteries; motor oil; luxury goods — Act of Parliament
  - Increase the excise tax on alcohol and tobacco products (10 percent) — Act of Parliament
- Customs exemptions:
  - Halve customs exemptions to GRENLEC; statutory bodies; St. George's University; returning nationals — Act of Parliament
- Other:
  - Increase in customs service charge from 5% to 6% — Act of Parliament
  - Increase fees for motor vehicle license, professional licenses, and gun license — Ministerial order
- Budget appropriation:
  - Issue a cabinet conclusion on committing spending only up to the programmed ceilings — Cabinet decision
  - Issue budgetary ceilings in line with the programmed spending targets and only one quarter ahead — Cabinet decision

### Programme reporting requirements — fiscal, financial, real, external, and debt data (selected items)
- Frequency, reporting deadlines, and responsible agencies for key indicators include (exact phrasing preserved):
  - Central Government budget and outturn — Monthly — 30 days after the end of month — AG/Budget Office
  - Grants — Monthly — Same as above — AG
  - Budgetary grants — Monthly — Same as above — AG
  - Project grants — Monthly — Same as above — AG
  - Spending on SEED program — Monthly — Same as above — AG
  - Employment data for established and un-established workers — Quarterly — 30 days after the end of quarter — AG
  - Financial statements of all statutory bodies — Annually — Within 12 months after year end — AG
  - Change in the stock of domestic arrears — Monthly — 30 days after the end of month — AG
  - Unpaid claims — Monthly — Same as above — AG
  - Interest arrears — Monthly — Same as above — AG
  - Consolidated balance sheet for all credit unions — Monthly — 30 days after the end of quarter — GARFIN
  - Consolidated balance sheet for all insurance companies — Quarterly — By the end of subsequent quarter — GARFIN
  - Updates on annual National Accounts: by sector — Annually — Within 6 weeks after availability — CSO/MOF
  - Tier 1 high frequency indicators — Monthly — 60 days after the end of month — CSO/MOF
  - Tier 2 high frequency indicators — Monthly — 6 weeks after the end of quarter — CSO/MOF
  - Balance of Payments data — Annually — Within 3 months after year end — CSO/MOF
  - Details of exports breakdown — Quarterly — By the end of subsequent quarter — Customs Dept.
  - Details of imports breakdown — Quarterly — Same as above — Customs Dept.
  - Details of tourism data — Quarterly — Same as above — CSO
  - Customs revenue foregone — Monthly — 30 days after the end of month — Customs Dept.
  - CPI — Monthly — Same as above — CSO
  - External and domestic debt and guaranteed debt (by creditor) — Monthly — 30 days after the end of month — DMU
    - Disbursements — Monthly — Same as above — DMU
    - Amortization — Monthly — Same as above — DMU
    - Interest payments — Monthly — Same as above — DMU
    - Stock of external debt — Monthly — Same as above — DMU
    - Stock of domestic debt — Monthly — Same as above — DMU
    - Arrears on interest and principal — Monthly — Same as above — DMU
  - Financial statement of Petrocaribe Grenada — Monthly — Same as above — DMU/AG
  - Gross receipts from divestment — Monthly — Same as above — Budget Office
  - Exceptional domestic financing — Monthly — Same as above — DMU
  - Proceeds from bonds issued abroad — Monthly — Same as above — DMU
  - Copies of any new loan agreements — As occurring — DMU

* _cr14196 - 12.      Net increase in debt contracted or guaranteed by the central government is defined as_

### Appendix II. Supplementary Letter of Intent

### Appendix II. Supplementary Letter of Intent

### Progress on debt restructuring negotiations
- Date of letter: June 12, 2014.
- Government reports steady progress with its debt restructuring process.
- Early March 2014: Government and advisors met in Miami with a committee comprising holders of a majority of the US dollar bonds due 2025 to discuss:
  - the medium-term macroeconomic framework of the proposed programme;
  - measures to address current macroeconomic imbalances;
  - aspects of Grenada’s expected payment capacity during the life of the programme and beyond.
- Since the Miami meetings: weekly calls have been held with the committee and its advisors to discuss technical matters relating to the restructuring.
- The Government has executed a non-disclosure agreement (NDA) with the committee’s advisors to facilitate exchange of detailed information.
- The committee has indicated it will soon be in a position to begin discussing precise terms of the proposed restructuring and is expected to shortly execute its own NDA with the Government.

### Indicative restructuring options and bondholder feedback
- The Government published indicative restructuring options for its EC dollar bond due 2025, involving face value reductions of 50-60 percent.
- Feedback indicates bondholders broadly understand that Grenada’s projected payment capacity will not permit the Government to offer softer restructuring terms.
- The government has already received indications from some creditors that they would accept the 60 percent haircut option once the offer is formally launched.
- Target launch timing for the formal offer: third quarter of 2014.

### Engagement with official bilateral creditors
- The Government has written to the Paris Club in advance of the formal request for financing assurances.
- Grenada stands ready to approach the Paris Club to negotiate treatment of its arrears and future maturities as soon as invited by the Club following IMF Executive Board approval of the proposed programme.
- The Government has written to non-Paris Club official bilateral creditors, updating them on programme objectives and requesting support through comprehensive restructuring of their claims.
- Specific creditor engagement: Taiwan — Government submitted a restructuring proposal closely mirroring the options for the EC dollar bond due 2025; active discussions ongoing; both sides focused on reaching an amicable and sustainable agreement outside legal channels, though a legal process is ongoing.

### Engagement with domestic creditors
- Negotiations have begun with key domestic creditors, including commercial bank lenders and large holders of Treasury Bills not listed on the Regional Government Securities Market (RGSM).
- Government intention: apply restructuring terms similar to those proposed for the EC dollar bonds due 2025 to all domestic obligations other than:
  - overdrafts;
  - RGSM-listed Treasury Bills;
  - some categories of domestic arrears.

### Policy orientation, commitments, and outlook
- Government emphasizes commitment to:
  - achieving a comprehensive and collaborative debt restructuring to restore fiscal sustainability and secure needed financing;
  - adhering to principles of good faith negotiations with creditors and equitable treatment among diverse creditor groups.
- With current progress, the government envisages making significant headway in the debt restructuring by end-2014.

*Source: Appendix II. Supplementary Letter of Intent (June 12, 2014).*

### 1. Regional  connectivity  infrastructure  component  will  address  the:  (i)  physical  connectivity

### Regional connectivity infrastructure component will address the: (i) physical connectivity

### Program components
- 1. Regional connectivity infrastructure component will address the:
  - (i) physical connectivity infrastructure including submarine cable infrastructure, terrestrial broadband backbone fiber networks and terrestrial or submarine cross-border links, leveraging government networks as needed, and national and regional Internet Exchange Points (IXPs), and
  - (ii) enabling environment that would ensure Public Private Partnership in the ownership, management and competitive access to the infrastructure.
- 2. ICT-led innovation component will support activities that will leverage the regional broadband infrastructure to foster growth of the regional IT/IT Enabled Services (ITES) industry.
- 3. Implementation support component will support implementation, institutional and capacity building as well as monitoring and evaluation.
- 4. A fourth component aimed at improving government and private sector efficiency and transparency by leveraging the regional broadband infrastructure towards the delivery of a wide variety of e-services.

### Non-lending activities: Caribbean Growth Forum (CGF) and economic work
- Caribbean Growth Forum (CGF)
  - Launched nationally in Grenada on December 11, 2012.
  - Led by the World Bank, the Inter-American Development Bank, and the Caribbean Development Bank, in collaboration with DFID and CIDA.
  - Objective: identify policies and initiatives to induce growth and create jobs through analytical work, knowledge exchange and inclusive dialogue.
  - CGF national chapters launched in 12 Caribbean countries, including all six OECS countries.
  - CGF discussions in Grenada covered strengthening the investment climate, logistics and connectivity, and skills and productivity.
- Economic and Sector Work: Completed, ongoing and planned analytical/advisory activities include:
  - “Towards a New Agenda for Growth” – OECS growth and competitiveness study (2005)
  - OECS Skills Enhancement Policy Note (2006)
  - Caribbean Air Transport Report (2006)
  - Regional study on Crime, Violence, and Development: Trends, Costs, and Policy Options in the Caribbean (2007)
  - OECS Private Sector Financing Study (2008)
  - OECS Tourism Backward Linkages Study (2008)
  - “Caribbean – Accelerating Trade Integration: Policy Options for Sustained Growth, Job Creation and Poverty Reduction” (2009)
  - Study on the Nurse Labor & Education Markets in the English-Speaking CARICOM (2009)
  - Caribbean Regional Electricity Supply Options: Toward Greater Security, Renewable and Resilience (2011)
  - “The Growing Burden of Non-Communicable Diseases in the Eastern Caribbean” (2011)

### Financial relations and projects
- Summary of operations (original principal, undisbursed balance, disbursed) for select operations:
  - IDA 44520 2,400,000.00 843.98 2,316,596.02
  - IDA 49350 2,800,000.00 2,278,034.25 502,893.75
  - IDA 49850 10,000,000.00 7,541,923.90 2,036,828.1
  - TF 11131 8,200,000.00 6,803,997.68 1,396,002.32
  - IDA 49930 5,000,000.00 2,984,109.91 1,959,762.09
  - IDA 51190 10,000,000.00 9,837,473.92 204,766.08
  - TOTAL 28,400,000.00 19,608,909.72 8,212,082.28
  - (Project labels in source: Grenada Safety Net Advancement Project; Caribbean Regional Communications Infrastructure Program; OECS E-Government for Regional Integration Program; Eastern Caribbean Energy Regulatory Authority (ECERA) Project; OECS Disaster Vulnerability Reduction Project)
  - Note: *Amounts may not add up to Original Principal due to changes in the SDR/USD exchange rate since signing
- Disbursements and Debt Service (Calendar Year, in millions of U.S. dollars)
  - Period 2004–2014**: Disb. Amt. 3.79 2.91 6.38 3.99 10.24 3.36 3.62 10.67 1.67 3.88 6.27
  - Repay Amt. 0.10 0.39 0.77 1.45 1.57 1.71 1.81 2.03 2.02 1.97 2.09
  - Net Amt. 3.69 2.52 5.61 2.54 8.67 1.65 1.81 8.64 -0.35 1.91 4.18
  - Charges 0.37 0.42 0.50 0.66 0.71 0.56 0.46 0.36 0.36 0.33 0.29
  - Fees 0.06 0.06 0.10 0.07 0.05 0.29 0.28 0.31 0.35 0.34 0.37
  - **Data as of March 6, 2014.
- Relations with the Caribbean Development Bank (CDB) (As of March 1, 2014)
  - CDB approved US$176.8 million (net) in loans, contingent loans, equity and grants to the Government of Grenada since commencement of operations; representing 6.6% of total approvals to CDB’s borrowing member countries.
  - CDB’s 2014–18 assistance framework priorities include:
    - (i) Improved macroeconomic management (Policy-Based Loan of US$30 million requested)
    - (ii) Increased access to high quality education and training
    - (iii) Improved access by the poor to basic infrastructure and services through community-driven development (BNTF Seventh program)
    - (iv) Enhanced social policy/social protection and research (Gender Policy, new poverty assessment)
    - (v) Improved environmental sustainability and land use management
    - (vi) Enhanced energy efficiency and renewable energy development
    - (vii) Improved economic infrastructure (redevelopment of the town of Grenville)
  - Major projects under implementation:
    - Grenville Market Square Development
    - Schools Rehabilitation and Reconstruction Project II
    - Market Access and Rural Enterprise Development (jointly funded with IFAD)

- Grenada: Loan Disbursement (In millions of U.S. dollars)
  - 2009–2013:
    - Net Disbursement 7.83 5.52 0.41 0.83 (0.22)
    - Disbursement 11.51 9.65 5.00 4.70 6.70
    - Amortization 3.68 4.13 4.59 3.87 6.92
    - Interest and charges 3.29 3.23 3.11 2.38 4.39
    - Net resource flow 4.54 2.29 (2.70) (1.55) (4.61)

### Statistical issues and data adequacy (As of May 31, 2014)
- General: Data provision has some shortcomings, but is broadly adequate for surveillance.
- National Accounts:
  - A rebased GDP series (base year 2006) released in October 2010 with CARTAC assistance improved coverage, data sources, and methodology.
  - Weaknesses: GDP by expenditure not available at constant prices; current price data unreliable due to gross capital formation estimation weaknesses; private final consumption expenditure estimated as a residual.
- Prices and high frequency statistics:
  - Regular data: consumer prices, retail sales, imports of construction material, water and electricity production.
  - 2010 CPI revisions met international standards; new CPI basket based on 2007/08 HIES; recommendation to conduct HIES on a five-year cycle instead of ten-year.
  - Producer prices, export and import price indices not available.
- Labor statistics:
  - Labor Force Survey completed in 2013; population census in 2011.
  - Regular wage and unemployment data largely unavailable; partial data exist from the National Insurance Scheme.
- Government finance statistics:
  - Central government reporting improved with monthly data provided to ECCB, IMF in Fund economic classification format with lags of about 4–6 weeks.
  - Challenges: inaccurate composition of public expenditure (many current items classified as capital); donor-financed capital spending data often unavailable until year-end; limited coverage of rest of public sector; no consolidated public sector accounts.
  - New Public Finance Management Act of 2007 requires public enterprises to submit audited financial statements within four months after the close of the financial year.
- Monetary statistics:
  - Compiled by the ECCB monthly and reported to the Fund; broadly adequate for surveillance.
- Balance of payments:
  - ECCB compiles annual BOP using CSO information; reported to IMF for IFS and BOP Yearbook.
  - Data primarily from establishment surveys with poor response rates; merchandise trade statistics available quarterly by SITC and more reliable.
  - Need enhanced data sources and better compilation, especially for remittances, tourism spending and FDI; recommendation to compile quarterly BOP and annual international investment position.
- External and domestic debt statistics:
  - Central government external debt database comprehensive with detailed disbursements and debt service including projections.
  - Detailed domestic securities database maintained by RGSM.
  - No reliable data on future projections for privately placed domestic instruments; limited data on government-guaranteed debt and public enterprise debt; no data on private external debt.
- Data Standards and Quality:
  - Grenada has participated in the Fund’s General Data Dissemination System since March 2001, but most metadata have not been updated since late 2002.
- Reporting to STA:
  - IFS page includes exchange rates, international liquidity, monetary statistics, prices, balance of payments, national accounts, and population.
  - Authorities do not report fiscal data for publication in IFS; ECCB provides data for Balance of Payments Yearbook.
  - Grenada has not provided fiscal data for presentation in the GFS Yearbook; ECCB disseminates Grenada’s quarterly GFS data in its Economic and Financial Review.
- Table of Common Indicators Required for Surveillance (As of March 31, 2014) — selected entries:
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation Dec 2013; Date received Feb 2014; 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 Dec 2013; Date received Feb 2014; Frequency of Data M; Frequency of Reporting M, with 2- to 3-month lag; Frequency of publication A/Q.
  - Revenue, Expenditure, Balance and Composition of Financing - Central Govt.: Date of latest observation Mar 2014; Date received May 2014; Frequency of Data M; Frequency of Reporting M, with 1- to 2-month lag; Frequency of publication A.
  - Gross External Debt: Date of latest observation Dec 2013; Date received Mar 2014; Frequency of Data M; Frequency of Reporting M, with 2- to 3-month lag; Frequency of publication A.
  - Notes: 1 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA). 2 Grenada is in the Eastern Caribbean Currency Union (EC dollar pegged to U.S. dollar). 7 Public external debt only.

### IMF Executive Board decision and program summary (Press Release No. 14/310, June 26, 2014)
- IMF Executive Board approved a three-year SDR 14.04 million (about US$21.7 million, 120 percent of quota) arrangement under the Extended Credit Facility (ECF) for Grenada and concluded the 2014 Article IV consultation.
- The approval enables the immediate disbursement of an amount equivalent to SDR 2.04 million (about US$3.2 million).
- Main objectives of the ECF-supported economic program:
  - Improve competitiveness and medium-term growth prospects.
  - Restore fiscal and debt sustainability.
  - Strengthen financial stability.
- Fiscal and reform priorities:
  - Reforms to raise growth: improve price competitiveness and the business environment.
  - To put public debt on a downward path: implement fiscal consolidation, debt restructuring and fiscal structural reforms.
  - Financial sector reforms to ensure solvency and strengthen regulation and supervision.
  - Increase spending on social support programs, supported by minimum spending levels to protect the vulnerable.
- Executive Board statement highlights:
  - Grenada made important progress addressing its fiscal crisis following a protracted recession.
  - Challenges remain: vulnerable growth outlook, high debt levels and financing needs, weakened financial system.
  - Success depends on full reform implementation, broad social support, and assistance from development partners.
  - A significant fiscal adjustment is needed; achieving targeted primary surplus requires a combination of revenue increases and expenditure cuts while strengthening revenue mobilization and enhancing the social safety net.
  - Consolidation should be complemented by comprehensive debt restructuring and stronger fiscal institutions.
  - Structural reforms should focus on improving the business environment, reducing electricity costs, and removing other obstacles to growth.
  - Authorities committed to participating in a regional strategy to strengthen the financial system coordinated by the Eastern Caribbean Central Bank.
- Economic backdrop and recent performance:
  - Grenada’s economy faced significant headwinds after a decade of natural disasters and economic shocks leading to a deep crisis by 2011-12.
  - Economic activity declined by over 8 percent of GDP from peak to trough (2008-12) as tourism and construction collapsed.
  - After almost four years of decline, real GDP grew by 1.5 percent.

*International Monetary Fund*

### 2013. Economic slack and tight monetary conditions have driven the economy into

### 2013. Economic slack and tight monetary conditions have driven the economy into

### Economic conditions and inflation
- CPI declined by 1.2 percent in 2013.
- Current account deficit widened to 27.1 percent of GDP in 2013 from 19.2 percent in 2012 due to a sharp increase in imports related to a resort construction project.
- Private credit declined by 5 percent in 2013.

### Fiscal position and public debt
- Public debt reached about 110 percent of GDP at end-2013.
- The weak fiscal position stoked financing pressures; unable to secure financing, the government announced on March 8, 2013 that it would undertake a “comprehensive and collaborative” restructuring of its public debt.
- To address the fiscal crisis, authorities initiated fiscal adjustment in the 2014 budget and approved a large package of revenue measures needed for the targeted consolidation.
- Debt restructuring negotiations are underway with many creditor groups, with significant headway in restructuring expected before end-2014.
- Table memo: Assumes an adjustment of 7.5 percent of GDP during 2014-16 but no debt restructuring.

### Financial sector and credit conditions
- Financial sector balance sheets are strained by impaired assets, curtailing the supply of credit and slowing the recovery.
- Asset-quality problems in the banking system constrain credit growth; an asset quality review of Grenada’s banking system, supported by proactive resolution and recapitalization plans, was welcomed by Directors.
- Need to continue to address weaknesses in the nonbank sector, including through improvements to the regulatory framework.

### Near-term outlook and risks
- Pace of economic recovery expected to be modest, at about 1½ percent a year during 2014-17, supported in part by easing of government financing constraints as the fiscal crisis is gradually resolved.
- Recovery will be held back by:
  - Drag of fiscal adjustment.
  - Weak credit growth as banks repair balance sheets.
- Inflation expected to remain subdued in line with weak demand.
- Risks to the outlook are high, including:
  - Faltering confidence if progress is not made soon in addressing the fiscal crisis.
  - Continued weak global recovery (on which Grenada depends for tourism).
  - Potential natural disasters.

### Executive Board Assessment — observations and policy priorities
- Directors observed:
  - Grenada’s economic recovery remains fragile with serious headwinds.
  - Unemployment is elevated, debt levels are high, and financing needs are large.
  - Weak competitiveness is hampering growth.
  - Financial sector is burdened by nonperforming assets.
- Directors underscored the importance of strong commitment and full implementation of the Fund-supported economic program, aiming to:
  - Restore fiscal sustainability.
  - Boost competitiveness, jobs and growth.
  - Strengthen the financial sector.
- Directors noted the critical role of financial and technical assistance from development partners and the need for social consensus on reform priorities.
- Key policy recommendations emphasized by Directors:
  - Place public-debt-to-GDP ratio on a firm downward path toward the regional target through:
    - Front-loaded budgetary consolidation.
    - Ambitious fiscal reforms.
    - A comprehensive debt restructuring.
  - Targeted strengthening of the primary fiscal balance to balance reducing debt pressures with managing the drag on the economy.
  - Further revenue and expenditure measures, including:
    - Recent measures to reduce the personal income tax threshold and broaden the tax base (welcomed).
    - Additional efforts to reduce the public wage bill.
    - Measures to curb tax evasion.
    - Strengthening social safety nets while protecting growth-enhancing capital investments.
  - Strengthen fiscal framework:
    - Adopt fiscal responsibility legislation to anchor policy decisions and promote transparency and accountability.
    - Reforms in public financial management to improve budgetary control.
    - Rationalization of the civil service to increase efficiency.
    - Improvements to debt management and tax administration reforms.
  - Continue to engage with creditors in good faith to complete restructuring and regularize arrears to official creditors in a timely manner.
  - Support structural reforms to enhance competitiveness and the business climate, prioritizing:
    - Reforms to reduce energy costs.
    - Streamlining tax incentives.
    - Liberalizing key sectors.

### Selected economic and financial indicators (highlights from table)
- Real GDP: -0.5 (2010), 0.8 (2011), -1.8 (2012), 1.5 (2013), 1.1 (2014 proj.), 1.2 (2015 proj.)
- Nominal GDP: 0.0 (2010), 1.0 (2011), 2.9 (2012), 1.5 (2013), 3.1 (2014 proj.), 3.2 (2015 proj.)
- Consumer prices, end of period: 4.2 (2010), 3.5 (2011), 1.8 (2012), -1.2 (2013), 1.7 (2014 proj.), 1.6 (2015 proj.)
- Consumer prices, period average: 3.4 (2010), 3.0 (2011), 2.4 (2012), 0.0 (2013), 1.6 (2014 proj.), 1.7 (2015 proj.)
- Output gap (percent of potential GDP): -1.8 (2010), -1.4 (2011), -3.5 (2012), -2.6 (2013), -2.2 (2014 proj.), -2.0 (2015 proj.)
- Central government revenue: 24.6 (2010), 23.6 (2011), 20.8 (2012), 21.5 (2013), 24.9 (2014 proj.), 24.9 (2015 proj.)
- Taxes: 18.7 (2010), 18.4 (2011), 17.9 (2012), 17.2 (2013), 18.7 (2014 proj.), 19.9 (2015 proj.)
- Grants: 4.0 (2010), 3.4 (2011), 1.1 (2012), 1.4 (2013), 4.6 (2014 proj.), 3.3 (2015 proj.)
- Expenditure: 27.8 (2010), 28.3 (2011), 26.1 (2012), 28.5 (2013), 31.0 (2014 proj.), 27.9 (2015 proj.)
- Primary balance: -1.0 (2010), -2.2 (2011), -2.0 (2012), -3.7 (2013), -2.4 (2014 proj.), 1.3 (2015 proj.)
- Overall balance: -3.1 (2010), -4.7 (2011), -5.4 (2012), -7.1 (2013), -6.0 (2014 proj.), -3.0 (2015 proj.)
- Public debt (incl. guaranteed): 97.6 (2010), 100.9 (2011), 103.1 (2012), 109.8 (2013), 111.3 (2014 proj.), 110.2 (2015 proj.)
- Current account balance: -22.1 (2010), -21.8 (2011), -19.2 (2012), -27.1 (2013), -23.8 (2014 proj.), -20.6 (2015 proj.)
- Exports of goods and services: 28.2 (2010), 30.0 (2011), 30.7 (2012), 31.5 (2013), 32.9 (2014 proj.), 33.1 (2015 proj.)
- Imports of goods and services: 49.2 (2010), 50.8 (2011), 49.4 (2012), 57.3 (2013), 54.7 (2014 proj.), 50.8 (2015 proj.)
- External debt (gross): 124.7 (2010), 137.4 (2011), 144.6 (2012), 155.5 (2013), 160.0 (2014 proj.), 163.2 (2015 proj.)
- Nominal GDP (EC$ million): 2,082 (2010), 2,102 (2011), 2,164 (2012), 2,197 (2013), 2,265 (2014 proj.), 2,338 (2015 proj.)
- Nominal GDP (US$ million): 771 (2010), 779 (2011), 802 (2012), 814 (2013), 839 (2014 proj.), 866 (2015 proj.)
- Financing gap: To be closed through IMF and other IFIs financing and debt restructuring; entries in table: ... 15.5 4.3

*Source: IMF staff report excerpt as provided in the content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14196.pdf_