Statement at Donor Meeting

Donors' Conference on Grenada
Statement by Ratna Sahay
Assistant Director, Western Hemisphere Department
International Monetary Fund
October 4, 2004

1. Prime Minister Mitchell, other distinguished Prime Ministers, the donor community, ladies and gentlemen. In view of the vast devastation inflicted by Hurricane Ivan, we are here today to discuss the current situation, prospects, and financing needs for Grenada. An IMF team has just returned from Grenada and we would like to share with you our experience and assessment.

2. The devastation we saw was very severe and widespread. It was as if the hurricane had left no stone unturned. Virtually every house and school is damaged or destroyed. The hilly landscape and the sidewalks are strewn with debris and broken power lines. The damage to housing, schools, hospitals, businesses, and infrastructure is estimated by the Organization of Eastern Caribbean States (OECS) to be at least US$815 million, close to double GDP.

3. Tourism and agriculture, the two major sources of foreign exchange earnings, were also hit hard: most tourism facilities cannot be reopened until the high season is over, while the nutmeg plantations, the principal export commodity, have been largely destroyed and will take 7-10 years to recover. In 2004, the loss of tourism export receipts alone is likely to exceed US$35 million, or nearly 8 percent of the projected GDP for 2004. Despite some import compression in the rest of the year, the external current account deficit is now anticipated to widen to nearly 40 percent of GDP. While the hotels are largely covered by insurance, the restaurants, taxi drivers, tour operators, craftsmen, and hotel employees have lost their main source of livelihood.

4. The economy was earlier projected to grow by 4-5 percent in 2004, but now is projected to contract by 3 percent. A small recovery in 2005 can be anticipated, but this largely depends on the pace at which reconstruction projects can be implemented. The disruption to the economy will cause a temporary, but sharp, rise in unemployment, that could reach nearly 30 percent of the labor force. Some of this labor will likely be employed in the reconstruction.

5. The fiscal situation is extremely difficult. The authorities are now hard pressed to meet current fiscal obligations, including wage payments. Limits on overdraft facilities with local commercial banks are being reached quickly. The customs building was destroyed, and even though temporary offices have been set up, administrative capacity has weakened. Moreover, much of the tax base has disappeared and unanticipated expenditures, such as infrastructure repairs and protection of vulnerable groups, have risen. Arrears on payments to creditors are mounting.

6. Public debt levels are now projected to rise to 125 percent of GDP at end-2004. The government has indicated that, to the extent possible, it will continue normal servicing of its debt obligations. However, the government's financial resources are very limited given the difficult fiscal situation. To this end, the authorities have issued a press release indicating their intent to seek a cooperative solution with creditors. The authorities are rightly proud of their strong record in meeting their obligations to creditors and are determined to maintain good relations in these difficult times.

7. A very large financing gap remains, even after taking into account grants and concessional loans that are already committed for the remainder of the year. Preliminary estimates suggest that the post-hurricane fiscal (and balance of payments) financing gap for the remainder of 2004 is nearly US$40 million, or about 9 percent of GDP. In view of the intense budgetary pressures, the authorities are streamlining non-essential expenditures and have already redirected US$6 million in capital expenditures from existing projects to more pressing reconstruction and rehabilitation needs. Following two years of primary surpluses, a primary deficit of nearly 7 percent of GDP is now projected for 2004. The overall fiscal deficit (after grants) will rise from about 5 percent of GDP in 2003 to more than 13 percent in 2004. Immediate financial support is needed to fill this gap to prevent a further deepening of the crisis.

8. Prior to being hit by Hurricane Ivan, Grenada was making steady progress in reducing its fiscal imbalances and stabilizing its public debt levels. The primary fiscal balances had improved significantly in 2003, and were expected to remain in surplus in 2004. Through 2003 and 2004, the tax base was broadened and tax and import duty exemptions further curtailed. A comprehensive review of tax policy and administration was conducted and preparations for introducing the VAT by January 2006 were underway. The VAT was a cornerstone of the authorities' medium term fiscal strategy designed to address the high debt level. In fact, this strategy was approved by the Cabinet just the day before Hurricane Ivan hit. These commendable efforts by the authorities have now been undermined by the unanticipated shock.

9. Listening to earlier presentations, there appears to be small differences in the estimates of the damage and future prospects—but this is inevitable given the complexity of the situation and uncertainty going forward. The key message in all presentations, however, is clear: the situation is very difficult and substantial financial support from the international community is urgently needed, both to expedite Grenada's recovery and to avoid a deeper human and economic tragedy. This support is essential not only for the immediate post hurricane relief work and the reconstruction effort in the next several months, but also to address the fiscal situation by providing budgetary support and finding a cooperative solution to the large debt problem. In light of the scale of the devastation and in view of Grenada's already high debt burden, we believe there is a persuasive case for donors to give grants. The IMF will be assisting the authorities as much as possible within its mandate, especially to help maintain macroeconomic stability at this critical time.