Written by on May 23, 2018

May 22, 2018

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

The IMF staff team visited Grenada during May 2-15 for the 2018 Article IV consultation and held productive discussions with the Grenadian authorities, business community, and social partners.

Grenada’s economy made important strides in recent years, achieving an impressive debt reduction of 37 percentage points of GDP since 2013, improving the framework for fiscal policy, strengthening the financial system, upgrading governance, and creating a better business environment. The authorities are to be commended for continued progress in these areas while collaboratively consulting with social partners. The focus now should turn toward making growth more broad-based, raising potential growth, further reducing unemployment, and efficiently using the hard-earned fiscal space to make the economy more prosperous and resilient to economic shocks and natural disasters.

Recent Developments and Outlook
1. The Grenadian economy grew by an estimated 4½ percent in 2017, driven by strong activity in construction, tourism, and education sectors. Weather-related weaknesses in agriculture have, however, been a headwind. Unemployment, while falling, remains high (23.6 percent in 2017). Inflation is low, falling below 1 percent, supported by the peg to the US dollar. The 2017 current account deficit increased by 3½ percentage points of GDP to 6¾ percent of GDP, reflecting rapid import growth. FDI is estimated at 8½ percent of GDP, driven by tourism and proceeds from the Citizenship-by-Investment (CBI) program. Bank credit has recently shown signs of incipient growth as non-performing loans continue to decrease helped by economic growth and increase in property prices. In contrast, credit union lending (which now makes up a quarter of total credit), grew briskly by some 20 percent.

2. The fiscal situation improved further in 2017, with the government over-performing the targets of the Fiscal Responsibility Law (FRL). The primary surplus increased to 5¾ percent of GDP (the FRL floor is 3½ percent of GDP) supported by buoyant tax revenues due to the strong economy, improved tax administration, and better compliance. Recurrent spending was contained, while targeted social spending was, appropriately, increased. However, a shortfall in grant financing and bottlenecks in project execution combined to keep capital outlays well below budgeted levels. Public debt fell to 71 percent of GDP at end-2017 (from 82 percent of GDP in 2016) reflecting the strong fiscal position, the completion of the final phase of bond restructuring, and the lowering of interest costs from restructuring some of the expensive domestic debt. Progress has also been made in addressing external and domestic arrears, but negotiations with three bilateral creditors aimed at fully regularizing arrears have yet to be concluded.

3. Staff’s outlook anticipates continued compliance with the FRL and further progress on supply-side reforms. In 2018 and 2019, the economy is projected to grow by 3½ percent benefiting from supportive global economic conditions, continued strength in construction, and a tourism sector that has shown itself to be competitive within the ECCU. Thereafter, growth is expected to ease to the long-term potential rate of 2¾ percent. Inflation should edge up in 2018 reflecting recent global energy price increases, but stabilize at 2 percent in the medium term. The primary fiscal surplus is expected to remain high in the near term, supporting rapid debt reduction, although once the public debt ratio falls below 55 percent of GDP (projected for 2020), the FRL would allow for a reduction in the surplus. The external current account deficit is projected to increase to 7 percent of GDP in 2018 mostly from recent increases in energy costs, but would decline thereafter as the energy prices moderate.

4. There are two-sided external risks linked to uncertainty about the growth outlook for advanced economies, potential shifts in global financial conditions, and CBI inflows. A recently-announced natural gas discovery could represent a positive impetus if it proves to be commercially viable. On the other hand, pressures on correspondent banking relationships could affect financial inter-mediation, and natural disasters are an ever-present risk for Grenada. An adverse court judgment in the Grenlec power company case could potentially have fiscal implications as could the realization of fiscal risks from the Petrocaribe arrangement. The potential implementation of new initiatives on health care and pensions, the forthcoming cycle of public wage negotiations, and the availability of financing could all pose downside risks to the fiscal outlook if not properly managed.

Fiscal policies
5. Maintaining the FRL’s rules-based framework is essential to support policy credibility and economic growth. Compliance with the FRL has been key to the public debt reduction, strengthening confidence and building credibility. The Law has also underpinned advances in accountability and transparency including: the recently-created fiscal responsibility oversight committee (FROC); an improved presentation of the 2018 budget; and the publication of a statement of fiscal risks and a fiscal compliance report.

6. Nonetheless, there is scope to strengthen implementation of the FRL including by: (i) further clarifying the FRL’s remaining ambiguities and ensuring consistency with other laws; (ii) closely monitoring the 2018 budget execution to ensure that it conforms to all FRL rules; and (iii) improving budget implementation, notably for projects funded by grants.

7. Careful preparation is needed for a responsible transition to the next phase of the FRL. When the debt falls below the target of 55 percent debt to GDP the FRL, as drafted, envisions a recalibration of the rule-based parameters that would allow for a relaxation of the fiscal rules. It would be desirable that any effort to use that fiscal space be gradual and consistent with the country’s fiscal needs and absorptive capacity. The IMF can provide technical advice in the coming months to map out options and trade-offs in recalibrating the rule-based framework.

8. Structural fiscal reforms are essential to support fiscal goals and to create an environment for more vibrant, job-rich, and inclusive growth.
• The FRL’s 9 percent of GDP wage bill ceiling and the forthcoming cycle of wage negotiations should be underpinned by the government’s 2017-19 Public Sector Management Reform Strategy. The implementation of that strategy needs to be accelerated. Broadening the use of, and increasing the reporting of, quantitative performance targets and output indicators of ministries would improve transparency and accountability and encourage efficiency.
• Public investment management would benefit from an overhaul, particularly to address institutional problems in project implementation (including weaknesses in securing land), improve project management, and ensure adequate support by technical (particularly engineering) services and personnel. Establishing and monitoring of a physical asset registry would facilitate management of government investments.
• Addressing future aging costs, including those that may arise from new policy initiatives on health care and pensions, and couching those costs firmly within the existing fiscal framework represents an important area for future work. The authorities’ continued commitment to the FRL’s rules as guiding principles for tackling such costs is encouraging. However, a comprehensive approach should be pursued, including addressing the existing imbalances in the pension system through parametric reforms that have been identified in recent actuarial reviews.
• The targeting of social assistance programs to the poor and vulnerable could be further enhanced by integrating certain social assistance programs that are currently outside of the scope of the core SEED program within the comprehensive targeting system established for the SEED program, drawing on data from the Grenada Living Conditions Index.
• Continued reforms of State-Owned Enterprises (SOEs) and Statutory Bodies are needed to further strengthen productivity and effectiveness and minimize fiscal risks. The inclusion of key performance indicators in the reporting requirements is commendable. The second phase of reform—to review the tariffs and fees of SOEs to reflect cost recovery and investment needs—should proceed expeditiously.
• Revenue mobilization and administrative efficiency of the Inland Revenue Division (IRD) and Customs and Excise Division (CED) could be strengthened by addressing staffing constraints and putting in place better human resource and risk management, compliance, and enforcement systems. Reducing the stock of outstanding tax arrears, aggressively enforcing procedures for their clearance, and replacing the outdated technologies used by the IRD are key tasks. The CED should take the lead in identifying priorities and implementing the WTO’s Trade Facilitation Agreement. There is significant scope to enhance efficiency in customs clearance by increasing communication with importers and fully deploying the automated system for customs data.
• In line with prior technical advice from the IMF, further revenue reforms should be centered on the principles of base-broadening, increasing fairness, and simplifying the tax system. These principles should also apply in the context of the potential lowering of the corporate and personal tax rates whose possibility was announced in the 2018 budget speech.
• Improvements in transparency are crucial to underpin efficient and responsible fiscal policy. For this, it would be essential to (i) strengthen the FROC’s capacity, including in the context of the envisioned memorandum of understanding between the FROC and the Ministry of Finance; (ii) better account for public debt and contingent liabilities (including those from the Petrocaribe arrangement); and (iii) further improve mechanisms for recording and saving the proceeds of CBI inflows to address future contingencies.

9. While Grenada’s public debt situation has greatly improved, the government should step up work to capitalize on these gains. Priorities include: (i) resolving remaining bilateral debt arrears; (ii) more actively undertaking asset/liability management so as to minimize the cost of existing debt; and (iii) continuing to strictly adhere to the payment schedule for all debts and contribution payment liabilities.

Financial sector
10. A sound financial system is key to sustainable growth. There is scope to upgrade financial oversight, particularly for the nonbanks, which are under the purview of the local regulator. While banks (which are supervised at the ECCU level) maintain relatively solid capital buffers and their non-performing loans continue to decrease, the rapid lending growth in credit unions and the situation of insurance companies both warrant close monitoring with a view to assessing and pre-empting emerging financial stability risks. Furthermore, the forthcoming new prudential regulations on provisioning and valuation for banks by the ECCB and introduction of IFRS9 would pose additional requirements on the capital of financial institutions.
11. There is need to enhance monitoring and oversight capacity of the nonbank financial regulator (GARFIN), including by collecting more granular loan data and undertaking regular stress testing. The ECCU is taking steps toward the regional harmonization of regulations of the non-bank financial sector and an acceleration of this process would help reduce potential financial stability risks.
12. Ensuring compliance with AML/CFT regulations at all levels is critical for Grenada’s continued stable access to cross-border payments. While banks in Grenada have not had a meaningful loss of correspondent banking relationships (CBRs), there are risks that non-bank financial institutions may lose access to bank payments systems due to AML/CFT concerns. A proposed legislation to formalize the annual registration of entities for AML/CFT purposes will be helpful in capturing risks early.

Supply-side reforms
13. While the recent recovery has been a very positive development, growth has not been sufficiently broad based, being underpinned mainly by construction activity and tourism. Also, high unemployment and external deficits indicate that productivity and competitiveness remain pressing issues. Further improvement in the business climate and institutional implementation capacity are needed to boost inclusive growth, employment, and resilience to shocks along the following dimensions:
• Inclusive growth policies. The 2014-18 Growth and Poverty Reduction Strategy is set to expire and its implementation has been slower than expected. The strategy should be followed by a successor medium-term plan that would operationalize progress toward the long-term 2030 Development Plan. The latter is being elaborated, drawing on the Sustainable Development Goals. The plans should provide strategic direction and specific, time-bound deliverables.
• Sectoral policies. There is scope for better capitalizing on Grenada’s comparative advantage in a range of areas:
(i) tourism, by further enhancing its links with other sectors (medical tourism, agri-tourism, and sports and maritime tourism) and realizing ongoing efforts to extend new hotel development to the North;
(ii) agriculture, whose productivity would benefit from better land use policies, infrastructure, logistics, and enhanced market access (including to hotels and ports);
(iii) energy: the recent oil and natural gas discovery, if significant, would require a suitable framework to manage these resources, while development of renewable energy (particularly wind, geothermal, and solar) should be accelerated and incentivized;
(iv) blue economy: the government is encouraged to push ahead with its blue growth agenda to maximize the significant opportunities that the ocean offers to support Grenada’s structural transformation.
• Competitiveness. Policies should be targeted at raising productivity, reducing economic costs (notably in energy and telecommunications sectors), ensuring that growth in nominal wages in both public and private sectors is appropriately contained, and maintaining a prudent overall fiscal position (in line with the FRL).
• Business environment. Enhancing corporate governance and transparency, developing a credit registry, further enhancing access to finance, and improving property rights and registration, including in land titling, would catalyze the financing of growth and development.
• Employment. Addressing pronounced skills mismatches in the labor market requires upgrading education and training programs and tailoring them to sustainable private sector job creation. There is a need for (i) increased focus of primary education on weak mathematics and English scores; (ii) greater priority for vocational education, as well as efforts to ease the school-to-work transition; (iii) flexibility in training to better mirror emerging employment opportunities, including in the rapidly expanding construction and hotel sectors; and (iv) leveraging the presence and ongoing expansion of St. George’s university.
• Climate resilience. Increasing resilience will be key to the durability of economic growth and development in Grenada. The authorities should be commended for pro-active leadership on those issues, including at the Caribbean-wide level. The recent creation of a new Ministry dedicated to climate resilience, adoption of an Updated National Climate Change Policy, National Adaptation Plan, and Integrated Coastal Zone Management Act, and Grenada’s planned participation in the IMF’s Climate Change Policy Assessment initiative will all help solidify the country’s international leadership positions in this area.

The team met with the Prime Minister and Minister of Finance and Energy, Dr. The Right. Hon. Keith C. Mitchell; the Minister of Works Hon. Gregory Bowen; the Minister for the Climate Resilience, the Environment, Forestry, Fisheries, and Information Hon. Simon Stiell, the Permanent Secretary of the Ministry of Finance, Ophelia Wells-Cornwall; other officials, representatives of the private sector, and labor. A representative from the Eastern Caribbean Central Bank and the Caribbean Development Bank accompanied the team during the visit.

We are grateful for the warm welcome extended to us by the Grenadian authorities and representatives of private sector, labor, civil society, and financial institutions, and for the very constructive discussions.

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