November 19, 2004
| Public Affairs | Media Relations | |||
|---|---|---|---|---|
| E-mail: | publicaffairs@imf.org | E-mail: | media@imf.org | |
| Fax: | 202-623-6278 | Phone: | 202-623-7100 | |
1. Prime Minister Mitchell, distinguished guests from the donor community, ladies and gentlemen: it is a pleasure to be back in St. George's and to see the country getting back on its feet after the devastation inflicted by Hurricane Ivan that we saw during our trip in September. We are particularly impressed by the determination of the government and the people of Grenada to restore normalcy to their lives—schools have been reopened, a massive clean-up of the debris has taken place, and electricity is being restored.
2. In the past two months, the IMF team has been working closely with the Grenadian government, and we are here today to update the macroeconomic outlook we had presented in Washington D.C. at the first donor conference on October 4. We would also like to reflect on the medium-term challenges facing Grenada.
3. Prior to Hurricane Ivan, the government was making progress to restore fiscal sustainability and spur growth. The primary fiscal balance registered a surplus in 2003—for the first time in nearly a decade—and was projected to remain in surplus in 2004. The government had conducted a comprehensive review of tax policy and administration, and had taken steps to curtail exemptions. Preparations had begun to re-introduce a value-added tax (VAT) by January 2006. A medium-term fiscal strategy to bring debt down to more manageable levels had been approved by the Cabinet. Real GDP was projected to grow by over 4 percent in 2004.
4. These commendable efforts were set back by Hurricane Ivan. Real GDP is now projected to decline by 3 percent in 2004. The overall fiscal deficit in 2004, as a share of GDP, was projected at less than 5 percent before the hurricane struck—it is now expected to exceed 9 percent. The loss of foreign exchange earnings from tourism and agricultural products is also anticipated to be high, about 6 percent of GDP.
5. The government has responded swiftly to these challenges. Nonessential budgetary expenditures have been streamlined and US$15 million (nearly 3 percent of GDP) of capital expenditures have been reoriented from existing projects to more pressing reconstruction and rehabilitation needs. The Customs' collection system, including physical infrastructure which was heavily damaged, is being restored. Efforts are also being made to ensure that insurance claims are processed efficiently.
6. In anticipation of the donor flows and the large reconstruction needs, the authorities have set up the Agency for Reconstruction and Development, headed by Sir Alister McIntyre. A Reconstruction Fund will be established by an Act of Parliament and will be subject to independent audits. These two steps will go a long way in providing reassurance to the donor community that inflows will be channeled efficiently and transparently. We strongly encourage the government to reflect the financial operations of the Agency transparently in the government's budget.
7. It is encouraging to note that the government has already received significant support from regional, bilateral, and multilateral donors. In this context, we are pleased to report that on Monday, November 15, the IMF approved US$4.4 million for Grenada under the IMF's emergency assistance policy for natural disasters. The money approved is available immediately to help meet the country's needs. Total budgetary support from donors so far, combined with the government's other actions that I described earlier, has closed the budgetary gap for 2004. This is good news.
8. Focusing on 2005, even though a small recovery is anticipated, the outlook remains difficult. Most tourism facilities will miss the current high season. As we all know, nutmeg, cocoa and other crops have been largely destroyed and it will take time to either restore their production or redirect agriculture to alternate crops. It is no surprise therefore that the tax base will recover only gradually. At the same time, expenditure needs have risen as the regular functions of government will have to be supplemented by rehabilitation and reconstruction expenses and increased outlays for protection of vulnerable groups. At the last donors' meeting on October 4, the financing gap for 2005 had been estimated at 10 percent of GDP. Since then there have been further donor pledges, and if these are fully disbursed, the gap will narrow to about 2 percent of GDP.
9. Looking now to the medium-term, ensuring sustainability would require a well-designed and comprehensive macroeconomic framework. The authorities have expressed their intention to work closely with the IMF in developing this framework, which would include growth-enhancing structural reforms, fiscal consolidation, and a debt strategy. Fiscal consolidation would include both strengthening revenues and further streamlining expenditures. They have indicated areas for mobilizing revenues, and stated their intention to reduce government guarantees and cut costs in the public sector. In addition, they intend to rationalize the tax incentive regime, which should help create a level playing field for private sector activities.
10. Nevertheless, financing gaps for 2006 and 2007 remain large—in excess of 6 percent of GDP—even after assuming strong policy efforts. Closing these gaps would require further support from the international community. The authorities have recognized that the high level of public debt, at nearly 120 percent of GDP, is unsustainable under the current circumstances. They issued a press release on October 1 seeking the cooperation of creditors as a critical element of their debt strategy which is aimed at returning the country to a position of economic stabilization and debt sustainability. They have started the process of contacting official bilateral creditors and will approach their private creditors for a cooperative solution to their debt problems after they have secured the services of professional legal and financial advisors.
11. There is a long road ahead in rebuilding Grenada and helping it realize its growth potential. The steps taken by the government and the support from the international community are a promising start. But three aspects are needed to complete this task: first, that the government implements strong policies; second, that the reconstruction effort is carried out transparently and efficiently; and third, that donors and creditors continue to provide the requisite support. Thank you.
