Grenada: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, June 20, 2024
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- Published: June 20, 2024
Macroeconomic overview and outlook
- Grenada’s economy is estimated to have expanded by 4.4 percent in 2023, supported by buoyant tourism and rising spending per tourist.
- Inflation declined to 2.2 percent at end-2023 as food and fuel price pressures eased.
- Current account deficit is estimated to have narrowed reflecting the increase in tourism receipts.
- Financial system conditions remain stable with banks registering high levels of liquidity and modest levels of non-performing loans.
- Growth projections:
- 3.9 percent in 2024, bolstered by another strong year of tourism activity.
- Gradual slowdown to 2.7 percent over the medium term as capacity constraints weigh on tourism growth and investment.
- Outlook sensitivities and risks:
- The outlook is sensitive to the level of CBI inflows, the degree to which those flows finance new growth-enhancing investment, and progress in completing the pipeline of hotel projects.
- Downside risks include a slowdown in key tourist source markets, global commodity price volatility, natural disasters, and heightened international scrutiny of CBI programs.
Citizenship-by-Investment (CBI) revenues and fiscal position
- 2023 outcomes:
- Large 2023 fiscal surplus of 8 percent of GDP driven by strong CBI revenues.
- Higher government deposits of 17 percent of GDP.
- Decline in public debt to 75 percent of GDP.
- 2024 projection:
- Clearing of the large backlog of CBI applications is projected to result in a large 2024 budget surplus of 9.5 percent of GDP and further accumulation of government deposits.
- Medium-term fiscal trajectory:
- CBI revenues are expected to normalize to pre-surge levels after 2024.
- Sustained lower primary surpluses anchored in the government’s fiscal rules framework are projected to support a gradual reduction of public debt to the 60 percent of GDP target by the end of the decade.
- Policy priorities related to CBI:
- Improve management of potentially volatile CBI revenues through clearer recording of CBI flows in the budget and transferring all CBI revenues into the National Transformation Fund (NTF).
- Establish a rules-based mechanism allowing annual transfers from the NTF to the budget; apply the primary balance rule to a definition based on the NTF transfer (rather than the CBI inflow).
- Ensure all NTF assets are externally managed under a clearly specified investment policy and subject to strong transparency and accountability with regular financial reporting on size, asset allocation and performance.
Strengthening public finances and public investment management
- Fiscal and expenditure management recommendations:
- Contain growth in recurrent expenditures and prioritize budget outlays given uncertainty over future CBI inflows.
- Improve tax administration and raise tax revenues (for example, through adjusting the gasoline tax in context of instituting a symmetric pass-through formula for gasoline prices).
- Develop a social protection policy, establish a central beneficiary registry, and introduce cashless payments to improve targeting and oversight of social benefits and create scope to phase out subsidies to cooking gas.
- Complete and operationalize the CBI program integrity commitments and full implementation of Grenada’s related regional commitments.
- Public investment management:
- Enhance the procurement process and upgrade the framework for public-private partnerships.
- Strengthen project planning and selection, improve capacity in project management, monitoring and ex-post reviews of performance.
- Publish the medium-term fiscal framework earlier (e.g. mid-year) to provide top-down guidance for the budget process and determine the potential envelope for spending.
- Public sector reform measures:
- Continue well-coordinated implementation of ongoing public sector reforms, including careful sequencing of regularization of public sector workers and completion of the public service functional review.
- Establish a new defined-contribution public sector pension scheme for new and regularized hires to avoid adding to fiscal liabilities from the existing defined benefit plan.
- Build on recent parametric pension reforms of the National Insurance Scheme — including phased increases in the contribution rates and pensionable age — while taking additional steps to incentivize longer contribution periods, increase participation of self-employed workers, and ensure benefits are based on career-average wages.
Financial sector vulnerabilities and supervision
- Credit unions:
- Rapid credit union lending growth requires close monitoring of lending practices and asset quality.
- Targeted supervisory measures have reduced non-performing loans and improved provisioning, but improved reporting requirements and stronger enforcement are needed.
- Impaired asset treatment and provisioning requirements should be more closely aligned to those for banks.
- Stress testing of credit unions should be improved and supervisory resources increased to reflect their growing systemic significance.
- Insurance and reinsurance risks:
- Property insurance premiums under pressure from re-evaluation of climate risks by global reinsurers, likely exacerbating under-insurance and increasing credit risks for lenders.
- Improved supervisory data collection and analysis is needed to inform quantification of contingent government obligations.
- Oversight of reinsurance risks in cross-jurisdictional insurance companies calls for close regional supervisory cooperation.
- Access to credit:
- Government assistance to small businesses for business strategies, records, and loan requirements would help improve access.
- The credit reporting bureau will facilitate credit access by reducing information asymmetries and the cost of due diligence.
- AML/CFT framework:
- Authorities recently approved four pieces of legislation to address compliance deficiencies identified by the 2022 CFATF Mutual Evaluation Report.
- Continued progress required, including facilitating verification of beneficial ownership, mitigating misuse of legal persons, updating the National Risk Assessment to include the CBI program, and training of money laundering reporting and compliance officers.
Structural reforms for growth and resilience, and climate priorities
- Energy transition and climate resilience:
- Accelerating the transition to renewable energy would lower greenhouse gas emissions and reduce susceptibility to global fuel price shocks.
- Recent updates to the regulatory framework for the electricity sector are welcome; the planned solar project could materially boost renewable energy production.
- Larger-scale investments, including moving ahead with the planned geothermal project, and further improvements to the regulatory framework and the National Energy Plan are needed.
- Priorities include support for transitioning to renewables power generation, expanding grid capacity and storage, attracting private financing, and accessing donor-based financing (including by gaining accreditation with the Green Climate Fund).
- The improved financing outlook — including a US$100 million loan from the Saudi Fund for Development — provides an opportunity to implement recommended measures to boost resilience against climate risks.
- Labor market and tourism:
- Scale up investments in youth training and develop digital tools to match employers with employees, particularly given the recent introduction of unemployment insurance.
- Review employment protection legislation to ensure protection does not undermine labor market flexibility.
- Promote transparent pay, expand access to care facilities and childcare, extend maternity leave and introduce paternity leave to increase labor force participation, especially for women.
- Deepen efforts to boost off-season tourism stayovers given high-season capacity constraints.
- Increase agricultural productivity and crop resilience to allow domestic food production to increase the value added from tourism.
Data and statistical capacity
- Data needs and constraints:
- Resumption of the labor force survey is welcome; Grenada publishes granular CBI data.
- Other projects have faced repeated delays including the 2022 Census, an update of the CPI weights, and a revamp of the website of the Central Statistics Office.
- Improve the quality and timely dissemination of high frequency indicators.
- Staffing shortages and turnover are an important constraint on data quality and dissemination and need to be urgently addressed.
Source: Grenada: Staff Concluding Statement of the 2024 Article IV Mission (June 20, 2024).