IMF Executive Board Approves US$15.2 Million PRGF Arrangement for Grenada

Press Release No. 06/75
April 18, 2006

The Executive Board of the International Monetary Fund (IMF) has approved a three-year arrangement for Grenada under the Poverty Reduction and Growth Facility (PRGF) in a total amount equivalent to SDR 10.53 million (about US$15.2 million) to support the government's comprehensive medium-term economic reform program. An initial disbursement of SDR 1.56 million (about US$2.2 million) under the arrangement will become available immediately.

The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

Following the Executive Board discussion on Grenada, on April 17, 2006, Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, said:

"A modest economic recovery is underway in Grenada from the devastating effects of Hurricanes Ivan in 2004 and Emily in 2005. Economic growth rebounded in 2005, following a decline in 2004, with brisk activity in the construction sector offsetting the slowdown in agriculture and tourism. Near-term growth prospects are encouraging, reflecting ongoing construction activity and the expected recovery in tourism. While a substantial increase in domestic fuel prices led to an increase in inflation in 2005, second-round price increases have been limited and price rises are expected to moderate in the coming months.

"With reconstruction activity broadly on-track, the Grenadian authorities have turned their attention to the longer term challenges that the country faces. These include alleviating poverty, promoting sustained high economic growth, restoring fiscal and debt sustainability, as well as reducing vulnerabilities to extreme weather events and financial sector developments. The Fund welcomes the government's commitment to address these challenges through a comprehensive medium-term reform program.

"The 2006 budget has been used to launch this reform program. The program aims to sharply reduce public debt from its present high level to some 60 percent of GDP by 2015. To this end, a primary surplus (excluding grants) of 2.5 percent of GDP will be targeted, beginning in 2008. The shift in the fiscal stance that this requires will be phased in over the next three years so as to accommodate large reconstruction-related spending needs in 2006 and 2007. The fiscal adjustment will be evenly distributed between revenues and expenditure measures. Importantly, these fiscal reforms make room for increased social expenditure, particularly with a view to addressing the social needs arising from the dislocation caused by the hurricanes and higher energy prices.

"The authorities' reform program also aims to address the other economic challenges the country faces. To raise growth potential, improvements in the investment climate are planned, including a transparent and investor-friendly framework and the removal of regulatory barriers. Relatedly, the process through which investors acquire land will be simplified greatly, by ensuring that land controlled by the government is made available through open and well-publicized auctions. To reduce vulnerabilities in the financial sector, the program includes measures to strengthen the regulatory framework.

"The authorities' comprehensive program is promising. With steadfast implementation, growth and poverty reduction will be enhanced, the resilience of Grenada's economy to shocks will improve, and debt and fiscal sustainability will be restored," Mr. Carstens said.

ANNEX

Recent economic developments

Grenada is recovering from a series of exogenous shocks in recent years. In September 2004, Hurricane Ivan caused unprecedented damage of 200 percent of GDP, and recovery efforts were set back in July 2005, when Hurricane Emily struck, causing additional damage estimated at 12 percent of GDP. In conjunction with earlier shocks—the September 11 attacks in the United States set off a sharp drop in tourism and tropical storm Lili in 2002 depressed agricultural exports—these events have hampered effective policy implementation and caused output to fluctuate sharply in recent years. High international oil prices contributed to further hardship.

Economic growth has rebounded to an estimated 1.5 percent in 2005 after a drop of 3 percent in 2004, with brisk activity in the construction sector offsetting the slowdown in agriculture and tourism. Near-term growth prospects are good with GDP potentially expanding by more than 5 percent in 2006 and 2007, reflecting ongoing construction activity and the expected recovery in tourism. Following a 45-percent increase in domestic fuel prices, inflation reached 6 percent at the end of 2005. Second-round price increases have, however, been limited and inflation is expected to decline in the coming months

The shocks have exacerbated the already tenuous fiscal situation marked by large fiscal imbalances and growing public debt, and amplified the need for reforms to reduce vulnerabilities. The large-scale physical reconstruction effort currently underway needs to be accompanied by fiscal consolidation to reduce public indebtedness.

Program summary

The government has used the 2006 budget to launch a comprehensive medium-term economic reform program with the strategic objectives to promote sustained high economic growth, restore fiscal and debt sustainability, reduce vulnerabilities, and alleviate poverty.

Fiscal reforms are at the heart of the authorities' program with the aim to sharply reduce public debt from its present inordinately high level of 128 percent of GDP at end-2005 to a more prudent level. To this end, the program targets a central government primary surplus (excluding grants) of 2.5 percent of GDP by 2008, which would enable the debt-to-GDP ratio to decline gradually to 60 percent. This shift in fiscal stance will be phased in over the next three years to accommodate the large reconstruction-related spending needs in 2006 and 2007, and will be underpinned by structural fiscal measures already identified in the program.

In regard to structural policies, the first year of the program targets measures to improve the investment climate, and the second and third years are expected to focus on improving the flexibility of the labor and financial markets.

Furthermore, the authorities are committed to reducing vulnerabilities from extreme weather events and weaknesses in the regulatory framework of the financial sector. The recent hurricanes suggest that steps are required to better enforce building standards as well as increase insurance coverage. In the financial sector, while the banking system appears to have coped with recent shocks, and there is a need to enhance the regulatory framework for non-bank financial institutions.

The fiscal measures under the program make room for increased social spending in support of the authorities' social development agenda. Although Grenada is considered to be broadly on track to meet the Millennium Development Goals, challenges remain. In the near term, a range of programs will address the social needs arising from the dislocation caused by the hurricanes. For the long term, reducing poverty is contingent on reducing unemployment, as highlighted in the government's poverty eraduication strategy, recently submitted to the Executive Boards of the IMF and World Bank as the country's interim Poverty Reduction Strategy Paper (PRSP).


Table 1. Grenada: Selected Economic and Financial Indicators, 2003-08
             

Rank in UNDP Human Development Index out of 177 countries (2004)

66

Infant mortality rate per '000 births (2003)

18

Life expectancy at birth in years (2003)

65

Adult illiteracy rate in percent (2001)

4

GDP per capita in US$ (2004)

4,620

Poverty headcount index (2000)

32

      Est. Projections
  2003 2004 2005 2006 2007 2008

(Annual percentage change; unless otherwise specified)
             

National income and prices

           

Real GDP

5.8 -3.0 1.5 6.5 5.0 4.0

GDP deflator

1.3 2.7 3.5 4.6 2.0 2.0

Consumer prices

           

End-of-year

1.6 2.5 6.0 2.0 2.0 2.0

Period average

2.2 2.3 3.5 4.6 2.0 2.0
             

External sector

           

Exports, f.o.b.

7.1 -24.8 -14.6 0.6 -8.2 16.7

Imports, c.i.f.

25.9 3.3 22.6 -3.4 4.2 5.7

Export volume 1/

-2.0 -25.6 -23.5 -0.6 -10.0 17.1

Import volume 1/

11.6 -8.6 11.7 -5.0 4.3 5.7

Current account balance (including grants; in percent of GDP)

-33.2 -13.5 -37.1 -32.8 -28.0 -26.7

Terms of trade (deterioration -)

-3.2 -10.6 1.7 -0.5 2.0 -0.4

Real effective exchange rate (end of period, depreciation -)

-8.5 -4.6 5.2 ... ... ...
             

Banking system

           

Net foreign assets 2/

5.8 17.9 -19.4 -2.2 -2.0 -2.5

Net domestic assets 2/

2.2 -0.2 19.0 10.1 7.7 7.3

Of which

           

Credit to public sector (net) 2/

2.3 -6.7 -0.8 0.0 0.0 0.0

Credit to private sector 2/

3.1 5.0 6.2 8.5 7.7 7.7

Money and quasi-money (M2)

8.0 17.7 -0.4 7.8 5.7 4.8

Weighted deposit rate (in percent per year) 3/

3.4 2.8 2.8 ... ... ...

Weighted lending rate (in percent per year) 3/

12.4 10.0 10.2 ... ... ...
(In percent of GDP)
             

Central government finances

           

Total revenue and grants

34.5 33.1 39.1 36.1 31.5 31.9

Of which

           

Grants

6.9 7.5 11.0 8.0 2.7 2.5

Total expenditure

39.3 35.9 38.9 38.1 31.6 28.8

Current expenditure

24.3 27.9 23.5 22.7 21.6 20.6

Of which

           

Salaries and allowances

10.9 12.7 11.8 11.7 11.1 10.6

Capital expenditure

15.0 8.0 15.4 15.4 10.0 8.2

Primary balance (after grants)

0.4 3.7 2.4 0.3 2.1 5.0

Current balance

3.2 -2.4 4.6 5.3 7.2 8.6

Overall balance (after grants)

-4.8 -2.8 0.2 -2.0 -0.1 3.0
             

Public sector total debt (end-period) 4/

110.0 129.5 128.0 126.7 117.8 107.3
             
(In millions of U.S. dollars; unless otherwise specified)
             

Gross international reserves of the ECCB, end-of-period

539.9 632.4 600.7 ... ... ...

In percent of broad money in all ECCU countries

19.8 20.4 20.1 ... ... ...

Nominal GDP

443.7 436.8 474.0 519.3 558.9 596.5
             

Sources: Ministry of Finance; Eastern Caribbean Central Bank; United Nations, Human Development Report 2004; World Bank, WDI 2005; and IMF staff estimates and projections.

1/ Does not include goods procured in ports by carriers.

2/ As a percent of broad money at the beginning of the year.

3/ Break in the data series in 2003.

4/ Includes central government debt, government-guaranteed debt, and nonguaranteed public enterprise debt.



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