Press Release No. 09/334

Press Release No.09/334
September 28, 2009

Mr. Philip Young, head of an International Monetary Fund (IMF) staff team visiting Grenada, issued the following statement in St. George’s on September 25, 2009:

“An IMF staff team visited Grenada during September 21-25 to conduct discussions on the 2009 Article IV Consultation and the fourth review of the government’s home-grown economic program that is supported by the IMF’s Poverty Reduction and Growth Facility. The team held productive discussions with Finance Minister Nazim Burke, Permanent Secretary Timothy Antoine, other senior government officials, representatives of the Official Opposition, and representatives of the business and financial community, and trade unions. Staff from the Eastern Caribbean Central Bank participated. Discussions focused on measures to cope with the global crisis, medium-term fiscal policies and debt sustainability, financial system vulnerabilities, and the outlook for growth and foreign direct investment (FDI).

“Grenada, like the rest of the Eastern Caribbean Central Union and the Caribbean, has been hit hard by the global economic downturn—a negative shock more devastating than the recent hurricanes in terms of employment and growth. Economic activity is slowing faster than expected just a few months ago, reflecting the severe drag of the global crisis on tourism receipts, FDI, and remittances. Almost all FDI-financed tourism projects remain on hold. Real GDP is expected to decline by over 6 percent in 2009. The decline in growth is expected to be less severe in 2010, but still negative or close to zero. Consumer prices are expected to decline slightly during 2009, reflecting falling world food and fuel prices. Unemployment is estimated to be as much as 30 percent. Some 38 percent of the population is below the poverty line.

“The authorities are to be commended for their strong economic and financial management of the Grenadian economy during these turbulent times. Policies have put particular emphasis on protecting employment opportunities and mitigating the impact of the shock on the most vulnerable members of society, while still aiming to keep the economy on a path toward debt sustainability.

“The authorities have made significant progress in implementing their economic program. Based on the information received to date, almost all quantitative targets for end-June 2009 appear to have been met. As the economy has slowed, a substantial revenue shortfall has led to underexecution of the capital spending program. The government has sought to address the tight financing situation through a syndicated loan from commercial banks and requests for budgetary support from the World Bank, the Caribbean Development Bank, and the European Union.

“Structural reforms are also proceeding, in some cases with modest delays. Preparations to introduce a VAT by February 2010—the centerpiece of the structural reform program—are on track. The government expects in the near future to complete the Country Poverty Assessment,to begin implementing a customs Fraud Control Plan, to submit an Excise Bill to Parliament, and to adopt transitional procedures for bonded warehouses. The Government of Grenada has enacted the law creating a new Public Procurement Authority (PPA) and appointed its head, although the PPA is not yet fully operational.

“The Article IV Consultation discussions focused on three areas: fiscal policies and debt sustainability, financial system vulnerabilities, and the medium-term outlook for growth and FDI.

“Restoring fiscal and debt sustainability will hinge upon a balanced mix of revenue and expenditure measures in the medium term. The introduction of a VAT and a market-based property tax would need to be complemented by wage restraint, greater efficiency of spending on goods and services, improved targeting of transfers, and prioritization of capital spending.

“The banking sector has remained resilient, despite the drop in activity, but the collapse of the Trinidad and Tobago-based CL Financial Group has increased financial uncertainty. The staff team supports the regional approach to this problem, and in particular the appointment of a judicial manager for the British American Insurance Company. These developments have underscored the need to further strengthen nonbank financial sector supervision. The IMF team recognizes the efforts of the Grenada Authority for the Regulation of Financial Institutions (GARFIN) to improve the supervision of the non-bank financial sector and supports the authorities’ efforts to build GARFIN’s capacity.

“The outlook for the next several quarters has deteriorated given the difficult external environment. Tourism and related FDI, which were expected to be the principal drivers of economic growth, are not likely to recover to pre-crisis levels in the near term. The staff team encouraged the government to push ahead with structural reforms to improve the business environment and to boost the diversity of exports.

“The staff team thanks the Grenadian government officials for their close cooperation and looks forward to a continued constructive dialogue on the economic challenges facing Grenada. Upon the team’s return to Washington, it will prepare the necessary documentation for presentation to the IMF’s Executive Board to consider Grenada’s request to complete the fourth review and the 2009 Article IV Consultation.”