Statement by the IMF Mission to GrenadaPress Release No. 12/198
May 30, 2012
An International Monetary Fund (IMF) mission led by Ms. Nita Thacker visited Grenada during May 7–17 for the 2012 Article IV consultation. This consultation is a bilateral discussion which the IMF typically has with its members, once a year. During this Consultation, a staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. The mission met with Finance Minister Nazim Burke, Permanent Secretary Timothy Antoine, other senior government officials, the opposition leader and members of his team, representatives of the business and financial sectors, and labor unions. At the end of the mission, Ms. Thacker issued the following statement:
“Following two years of consecutive decline, there are signs that a fragile recovery may be underway. Real GDP grew by 1.1 percent in 2011 and is expected to reach 1½ percent in 2012, on the back of a continued growth in agriculture and a gradual recovery in tourism stay-over arrivals. Inflation is expected to stay broadly stable at about 3 percent in 2012. However, the fiscal situation deteriorated in 2011, in part, reflecting revenue shortfalls due to the extension of various temporary tax exemptions. Private sector credit growth remains sluggish as banks continue to remain cautious and tighten lending standards given the increase of nonperforming loans. The current account deficit is expected to remain around 25 percent of GDP, reflecting high food and fuel prices. Looking ahead, significant downside risks remain. These include the high public sector debt level and budget financing constraints, high current account deficits and net external liabilities, and financial sector vulnerabilities, including potential spillovers from the region.
“Discussions focused on three policy areas: (i) restoring sustained growth and generating employment; (ii) resuming fiscal consolidation to put debt on a firm downward trajectory and to build a growth-oriented budget; and (iii) strengthening the financial sector. Ambitious reforms in these areas are essential to create jobs, boost medium term growth, and reduce poverty.
“Grenada faces a sizeable competitiveness gap. During the past years, increases in production costs—including from higher energy costs and wages, and lower productivity—have put downward pressure on profit margins and stifled investment. Achieving higher growth and sustained employment generation will therefore require the steadfast implementation of key structural reforms. Some measures for improving the business climate, including implementation of ASYCUDA World, have been implemented. Other key reforms that need to be implemented include wage discipline to reflect productivity combined with efforts to enhance labor skills, improving flexibility of labor and product markets, facilitating access to credit, fostering small enterprise development, addressing high energy costs by using alternative sources, better exploiting the linkages between the agricultural and tourism sectors, and more effective monitoring and implementation of efficiency-enhancing reforms at state-owned enterprises.
“On the fiscal front, the high public sector debt combined with budgetary rigidities and limited sources of financing are key challenges and underscore the urgent need for more lasting and significant fiscal consolidation. The authorities are committed to generating primary surpluses of at least 1½-2 percent of GDP over the medium term to put debt on a sustained downward trajectory and achieve debt sustainability through a combination of revenue and expenditure measures. Addressing existing budgetary rigidities on current spending, in particular with respect to the high wage bill, will strengthen the budget’s pro-growth orientation and create space for capital expenditure. On the revenue side, reducing and streamlining tax incentives and exemptions could generate fiscal space for much-needed investments in infrastructure and other development priorities to ensure sustained growth and create buffers against future shocks.
“Ongoing efforts to strengthen the financial sector could benefit from further improvements in monitoring and forceful action to address weakening of credit portfolios, low profitability, and the rising level of nonperforming loans, both at banks and credit unions. Potential spillovers from regional financial markets should continue to be monitored.
“Upon its return to Washington, the mission will prepare a report, to be discussed by the IMF's Executive Board, tentatively scheduled for July 2012. The mission thanks the authorities for their warm hospitality, candid discussions, and close cooperation during its stay in Grenada. The mission also thanks all other stakeholders for taking the time to discuss various issues.”