Grenada: Staff Concluding Statement of the 2018 Article IV Mission
IMF News, May 22, 2018
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- Published: May 22, 2018
Recent developments and outlook
- Economy and sectors
- The IMF staff team visited Grenada during May 2-15 for the 2018 Article IV consultation.
- The Grenadian economy grew by an estimated 4½ percent in 2017, driven by construction, tourism, and education.
- Weather-related weaknesses in agriculture were a headwind.
- Labor and prices
- Unemployment was 23.6 percent in 2017.
- Inflation is low, falling below 1 percent, supported by the peg to the US dollar.
- External sector and investment
- The 2017 current account deficit increased by 3½ percentage points of GDP to 6¾ percent of GDP, reflecting rapid import growth.
- FDI is estimated at 8½ percent of GDP, driven by tourism and proceeds from the Citizenship-by-Investment (CBI) program.
- Credit and financial intermediation
- Bank credit has recently shown signs of incipient growth as non-performing loans continue to decrease.
- Credit union lending (which now makes up a quarter of total credit) grew briskly by some 20 percent.
- Fiscal position and public debt
- The primary surplus increased to 5¾ percent of GDP (the FRL floor is 3½ percent of GDP) in 2017.
- Public debt fell to 71 percent of GDP at end-2017 (from 82 percent of GDP in 2016).
- Shortfalls in grant financing and bottlenecks in project execution kept capital outlays well below budgeted levels.
- Progress has been made on external and domestic arrears, though negotiations with three bilateral creditors remain incomplete.
- Outlook and projections
- Staff projects growth of 3½ percent in 2018 and 3½ percent in 2019, easing thereafter to a long-term potential rate of 2¾ percent.
- Inflation should edge up in 2018 but stabilize at 2 percent in the medium term.
- The primary fiscal surplus is expected to remain high near term, supporting rapid debt reduction; once the public debt ratio falls below 55 percent of GDP (projected for 2020), the FRL would allow for a reduction in the surplus.
- The external current account deficit is projected to increase to 7 percent of GDP in 2018 mostly from recent increases in energy costs, then decline as energy prices moderate.
- Risks and contingencies
- Two-sided external risks: uncertainty about advanced economies, potential shifts in global financial conditions, and CBI inflows.
- A recent natural gas discovery could be positive if commercially viable.
- Downside risks include pressures on correspondent banking relationships, natural disasters, an adverse court judgment in the Grenlec case, fiscal risks from the Petrocaribe arrangement, potential new initiatives on health care and pensions, public wage negotiations, and financing availability.
Fiscal policies
- Importance of the FRL
- Maintaining the FRL’s rules-based framework is essential for credibility and growth.
- Compliance with the FRL helped achieve the public debt reduction and improved accountability and transparency (creation of FROC, improved 2018 budget presentation, publication of a statement of fiscal risks and a fiscal compliance report).
- Strengthening FRL implementation (recommended actions)
- Further clarify the FRL’s remaining ambiguities and ensure consistency with other laws.
- Closely monitor 2018 budget execution to ensure conformity with all FRL rules.
- Improve budget implementation, notably for projects funded by grants.
- Transition when debt falls below 55 percent of GDP
- Prepare carefully for a responsible recalibration of the FRL’s rule-based parameters to allow gradual and capacity-consistent use of fiscal space.
- The IMF can provide technical advice to map options and trade-offs.
- Structural fiscal reforms and public management (recommended priorities)
- Accelerate implementation of the 2017-19 Public Sector Management Reform Strategy; underpin FRL’s 9 percent of GDP wage bill ceiling in upcoming wage negotiations.
- Broaden use and reporting of quantitative performance targets and output indicators for ministries.
- Overhaul public investment management to address institutional problems in project implementation, land securing, project management, and technical support (particularly engineering).
- Establish and monitor a physical asset registry to facilitate management of government investments.
- Address future aging costs and potential costs from new health care and pension initiatives within the fiscal framework; pursue parametric pension reforms identified in recent actuarial reviews.
- Improve targeting of social assistance by integrating programs outside the core SEED program into the comprehensive targeting system using the Grenada Living Conditions Index.
- Continue SOE and Statutory Body reforms, include key performance indicators in reporting, and proceed to review tariffs and fees to reflect cost recovery and investment needs.
- Strengthen revenue mobilization and administrative efficiency at the Inland Revenue Division (IRD) and Customs and Excise Division (CED): address staffing constraints; improve human resource, risk management, compliance, and enforcement systems; reduce outstanding tax arrears and enforce clearance procedures; replace outdated IRD technologies.
- CED to lead implementation of the WTO’s Trade Facilitation Agreement and fully deploy the automated system for customs data; increase communication with importers to enhance customs clearance efficiency.
- Design further revenue reforms centered on base-broadening, increasing fairness, and simplifying the tax system; apply these principles if corporate and personal tax rates are lowered as announced in the 2018 budget speech.
- Improve transparency by: strengthening FROC’s capacity and its envisioned memorandum of understanding with the Ministry of Finance; better accounting for public debt and contingent liabilities (including Petrocaribe); and improving mechanisms for recording and saving CBI inflows for future contingencies.
- Near-term public debt priorities
- Resolve remaining bilateral debt arrears.
- Undertake active asset/liability management to minimize cost of existing debt.
- Strictly adhere to payment schedules for all debts and contribution payment liabilities.
Financial sector
- Key observations
- A sound financial system is key to sustainable growth.
- Banks maintain relatively solid capital buffers and non-performing loans are decreasing.
- Rapid lending growth in credit unions and the situation of insurance companies warrant close monitoring.
- Forthcoming prudential regulations on provisioning and valuation for banks by the ECCB and introduction of IFRS9 would pose additional capital requirements on financial institutions.
- Supervision and oversight (recommended actions)
- Upgrade financial oversight, particularly for nonbanks under the local regulator.
- Enhance monitoring and oversight capacity of GARFIN by collecting more granular loan data and undertaking regular stress testing.
- Accelerate ECCU regional harmonization of non-bank financial sector regulations.
- Ensure compliance with AML/CFT regulations to safeguard access to cross-border payments.
- Proposed legislation to formalize annual registration of entities for AML/CFT purposes should help capture risks early.
- Correspondent banking
- Banks have not had a meaningful loss of correspondent banking relationships (CBRs), but non-bank financial institutions face risks of losing access to bank payment systems due to AML/CFT concerns.
Supply-side reforms
- General assessment
- Recovery has been positive but not sufficiently broad-based; growth has been underpinned mainly by construction and tourism.
- High unemployment and external deficits point to productivity and competitiveness challenges.
- Further improvement in business climate and institutional implementation capacity is required to boost inclusive, job-rich growth and resilience.
- Inclusive growth and planning
- The 2014-18 Growth and Poverty Reduction Strategy is expiring; a successor medium-term plan should operationalize progress toward the 2030 Development Plan and provide strategic direction with time-bound deliverables.
- Sectoral policy priorities
- Tourism: enhance links with medical tourism, agri-tourism, sports and maritime tourism; extend new hotel development to the North.
- Agriculture: improve land use policies, infrastructure, logistics, and market access (including to hotels and ports).
- Energy: prepare a suitable framework to manage potential oil and natural gas resources if the discovery proves significant; accelerate and incentivize renewable energy development (wind, geothermal, solar).
- Blue economy: advance the blue growth agenda to maximize ocean-based opportunities for structural transformation.
- Competitiveness and business environment (recommended actions)
- Target policies to raise productivity and reduce economic costs (notably energy and telecommunications).
- Ensure nominal wage growth in public and private sectors is appropriately contained and maintain a prudent overall fiscal position in line with the FRL.
- Enhance corporate governance and transparency, develop a credit registry, increase access to finance, and improve property rights and land titling to catalyze financing of growth.
- Employment, education, and skills
- Address skills mismatches by upgrading education and training tailored to private sector job creation:
- Increase focus in primary education on weak mathematics and English scores.
- Give greater priority to vocational education and ease the school-to-work transition.
- Provide flexible training aligned with emerging employment opportunities in construction and hotels.
- Leverage the presence and expansion of St. George’s University.
- Climate resilience
- Increase resilience to ensure durability of growth; commendable steps taken include creation of a Ministry dedicated to climate resilience, adoption of an Updated National Climate Change Policy, National Adaptation Plan, and Integrated Coastal Zone Management Act.
- Grenada’s planned participation in the IMF’s Climate Change Policy Assessment initiative will help solidify international leadership in this area.
Mission engagement
- Meetings and participants
- The team met with the Prime Minister and Minister of Finance and Energy, Dr. The Right. Hon. Keith C. Mitchell; the Minister of Works Hon. Gregory Bowen; the Minister for the Climate Resilience, the Environment, Forestry, Fisheries, and Information Hon. Simon Stiell; the Permanent Secretary of the Ministry of Finance, Ophelia Wells-Cornwall; other officials; representatives of the private sector and labor.
- A representative from the Eastern Caribbean Central Bank and the Caribbean Development Bank accompanied the team.
- Closing note
- The mission expressed gratitude for the warm welcome and constructive discussions with Grenadian authorities, private sector, labor, civil society, and financial institutions.
Source: IMF staff concluding statement of the 2018 Article IV mission (May 22, 2018), International Monetary Fund.