Press Release No. 08/320

Press Release: IMF Executive Board Concludes Second Review under the PRGF Arrangement with Grenada and Approves US$3.66 Million Disbursement

December 12, 2008

The Executive Board of the International Monetary Fund (IMF) today completed the second review of Grenada's economic performance under the Poverty Reduction and Growth Facility (PRGF) and approved the disbursement of an amount equivalent to SDR 2.41 million (about US$3.66 million).

In completing the review, the Executive Board also approved the request for waivers and modification of performance criteria as well as the Financing Assurances Review. The waived quantitative performance criteria related to the end-June primary balance of the central government (which was missed by 0.8 percent of GDP) and to external payments arrears (reflecting some small late payments).

The three-year PRGF arrangement with Grenada was originally approved for a total amount equivalent to SDR 10.53 million (about US$ 15.97 million) on April 17, 2006 (see Press Release No. 06/75). In July 2008, the Executive Board approved a one-year extension of the PRGF arrangement to 2010. It further approved the rephasing of the remaining disbursements and augmented the arrangement by SDR 1.46 million (about US$2.21 million) to a total of SDR 11.99 million (about US$18.19 million) to help mitigate the impact of food and fuel price shocks (see Press Release No. 08/169).

Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chairman, said:

"The Grenadian authorities are committed to implementing fully their program of economic reform, which is being supported by a PRGF arrangement. Against the backdrop of a difficult external environment, they are strengthening macroeconomic management and have developed a well-focused structural reform agenda.

"The new government has already taken significant remedial measures to correct the fiscal slippages which occurred in the first half of 2008 and to restore fiscal and debt sustainability. In particular, the authorities have reduced capital expenditure, reinstated the fuel tax, passed through to consumers the full impact of changes in global oil prices, and delayed until 2009 the repeal of the National Reconstruction Levy (NRL). The draft 2009 budget aims to improve the quality of expenditure while targeting a primary deficit consistent with the government's objective of reducing the public debt burden.

"Restoring fiscal and debt sustainability remains the centerpiece of the authorities' program, and the overall deficits targeted for 2008 and 2009 are consistent with this. Their intention to proceed cautiously in contracting a large potential external loan is welcome.

"The government will introduce a VAT at an appropriate date so as to allow time for thorough preparation. Passage of the VAT and excise tax laws with effective tax rate and exemption structures will be key. Improving tax enforcement and capabilities to detect evasion will minimize the risk that the recently announced tax amnesty will undermine future compliance and revenue collection.

"The government took the welcome decision to revoke Capital Bank's license, reappoint its receiver, and petition the High Court for its liquidation. The authorities intend to resolve Capital Bank with limited direct costs to the budget.

"The banking system remains sound and resilient. In light of the global financial turmoil, it will be important to further improve the supervision and regulation of the nonbank financial sector. Important steps have already been taken to issue a cease-and-desist order against an unregulated investment scheme.

"The authorities intend to utilize their strong political mandate to push through structural reforms. Their efforts will focus on improving the system for investment incentives and the business environment; reforming the tax and customs regimes; and strengthening economic management in the Ministry of Finance. The authorities will work to complete a Country Poverty Assessment, which will provide information to enable a better targeting of social programs and help lay the foundation for a Poverty Reduction Strategy (PRS)," Mr. Portugal said.