Press Release No. 09/98

Press Release: Statement by an IMF Staff Mission to Grenada

March 30, 2009

Ms. Catherine Pattillo, head of an International Monetary Fund (IMF) staff mission to Grenada, issued the following statement in St. George’s on March 24, 2009:

“An IMF mission visited Grenada during March 16-25 to conduct discussions for the third review of the government’s home-grown economic program that is supported by the IMF’s Poverty Reduction and Growth Facility (PRGF). The mission had a constructive dialogue with Prime Minister Tillman Thomas, Finance Minister Nazim Burke, Permanent Secretary Timothy Antoine and other senior government officials, and representatives of public enterprises and the private sector. Staff from the Caribbean Development Bank (CDB) and the Eastern Caribbean Central Bank (ECCB) participated. Discussions focused on recent economic developments, fiscal performance, progress with the government’s economic and structural reform agenda, and a policy framework for the remainder of 2009 taking into account the deteriorating global environment. In this connection, the authorities have requested an augmentation of access under the PRGF, leading to a higher disbursement, which will be considered by the IMF’s Executive Board.

“Economic growth has decelerated sharply due to the global economic slowdown. Real GDP is estimated to have grown by around 0.3 percent in 2008 as weakened global demand dampened tourism receipts. Work on most foreign direct investment (FDI)-financed tourism projects has been put on hold, resulting in a marked slowing of construction activity. Real GDP is expected to contract by 0.7 percent in 2009 as the impact of the global downturn takes full effect, by lowering tourism receipts, FDI, and remittances. Inflation, after peaking at 8.3 percent in July 2008, fell to 5.2 percent at end-December 2008, associated with declining world fuel and food prices, and is expected to decline further in 2009.

“Reflecting the strong measures taken after the new government took office in July 2008, the authorities have made significant progress with their economic program, including a sizeable improvement in the fiscal balance. The mission welcomed the government’s success in bringing down the large stock of unpaid claims (domestic arrears). However, performance on the primary fiscal balance appears to have fallen slightly short of target, reflecting significant but less than full progress in improving the control of capital expenditure and lags in the passthrough of lower world fuel prices. In this regard, we welcome recent efforts by the government to amend the petrol tax law to permit adjustment of fuel prices every 4 weeks. Given the impact of the global slowdown on Grenada’s economy, the authorities have reprioritized the capital expenditure program for 2009 to provide the greatest stimulus to economic activity, and have started to undertake well-targeted spending to protect vulnerable groups. A set of priority projects is being selected and the public assistance program will be expanded. The mission supports the authorities’ efforts to facilitate major private investment projects that would help stimulate economic activity.

“The mission agreed with the government on the importance of a more focused fiscal program in 2009 to address the adverse effects of the global economic slowdown. Given Grenada’s high public debt burden, which constrains the ability to respond to exogenous shocks, placing debt firmly on a downward path must remain the priority, particularly through determined efforts at fiscal consolidation. The mission welcomed the planned introduction of the VAT on February 1, 2010, which will lay the foundation for a broader tax base that will enhance revenues. Following the completion of the tax amnesty, the authorities plan appropriately to enhance the use of tax enforcement measures. On the expenditure side, the main challenges are a prudent public sector wage policy, implementing strictly the refocused capital expenditure program, and rationalizing social programs for better targeted spending to protect vulnerable groups. Furthermore, the establishment of a Waste Reduction Unit and Public Procurement Authority will facilitate improvement in the efficiency of government spending.

“The authorities have also made some progress with structural reforms to support improved economic management, and promote a foundation for broad-based growth. A Debt Management Unit was established in the Ministry of Finance in January 2009 and it is expected to improve the effectiveness of and develop a strategy for debt management. The new draft Investment Act is in the final stages of review, which will provide a transparent and level regime for domestic and foreign investors and replace tax holidays with investment allowances. The authorities are also implementing a customs reform plan, developing an action plan to improve Grenada’s Doing Business Indicators, and are completing the Country Poverty Assessment, with support from the CDB. On the latter, the government intends to use the findings to strengthen its strategy to reduce poverty and improve social indicators.

“On the issue of Capital Bank International Ltd, the authorities petitioned the High Court for liquidation in November 2008, following consultation with the ECCB. Pending legal issues have delayed the resolution of the bank.

“Overall, the government has made significant efforts to strengthen implementation of the economic and structural reform program supported by the PRGF arrangement. The mission welcomed the authorities’ commitment to addressing the challenges of the adverse external environment, and to strong and sound economic and fiscal management. IMF staff will continue to work closely with the authorities to assist them in such efforts, including through technical assistance, and supporting the government’s efforts to mobilize donor support. Upon return to Washington, the IMF mission will prepare the necessary documentation for the IMF Executive Board to consider Grenada’s request to complete the third review.

“The mission thanks the Grenadian government officials for their close cooperation and looks forward to a continued constructive dialogue on the economic challenges facing Grenada.”