On 7 February, Grenada marked 40 years of independence. It may be independent from Britain, but it is very far from being out of the clutches of international lenders following its March 2013 default on US$257m of foreign and local debt.
A US$193m bond maturing in 2025 is currently trading at 32 cents to the dollar, and creditors are losing patience with the government’s reluctance to start “good faith” negotiations.
Meanwhile the International Monetary Fund (IMF) has been looking in depth at reasons behind the failure of its 2006-2010 and 2010-2013 programmes.
The IMF attributes the failure of its programmes to a combination of unfortunate external factors coupled with a lack of commitment from Grenada, but the IMF also accepts that “more emphasis should have been given to growth-inducing measures”.
The two IMF programmes were the US$15.2m 2006-11 Poverty Reduction and Growth Facility (PRGF) and its successor US$13.3m 2010-13 Extended Credit Facility.
Grenada’s turn to the IMF is usually seen as a consequence of hurricanes Ivan and Emily which hit the island in 2004 and 2005, which indeed it largely was. However, there had also been a significant build-up in debt following the slowdown in economic growth in 2000.
From 1980-1999 Grenada experienced a relatively healthy average annual growth rate of 4.5% which pushed its per capita income into the upper-middle-income group. To counteract the slowdown since 2000, Grenada followed an expansionary fiscal policy which in turn led to a rapid build-up of debt. By 2002, interest payments had doubled relative to 1999.
Then came the events of 11 September 2001 which hit the tourism industry badly; the 2004 and 2005 hurricanes which resulted in damage estimated at 200% of GDP; and then, of course, there was the global financial crisis of 2008. In short, Grenada has suffered from a decade-long battering from external shocks.
But the IMF’s point is that Grenada has not helped itself, and governments of both main parties have been to blame.
The now-ruling New National Party (NNP) led by Prime Minister Keith Mitchell was in power from 1995 until July 2008 and was therefore complicit in the run-up of debt after 2000 and in the poor implementation of the initial IMF programme. However, this poor implementation continued under the National Democratic Congress (NDC) government that held power from July 2008 until February 2013.
Almost everything that could go wrong did go wrong. The two IMF programmes were based on growth projections of 6.5% in 2006 and 5% in 2007 to be followed by five years of 4% growth up until 2012.
In the event, Grenada did not even get close to this, recording a -4.0% contraction in 2006, a bounce back of 6.1% growth in 2007, and then 0.9% growth in 2008, -6.6% contraction in 2009, -0.5% contraction in 2010, 0.8% growth in 2011, and (in 2012) a further decline of -1.8%.
Given this seriously off-target growth outcome it is not surprising that Grenada missed its debt targets as well. The 2006 IMF arrangement looked for an underlying adjustment in the primary fiscal balance amounting to 4.5 percentage points of GDP and a decline in the debt ratio to 60% by 2015. The 2010 programme looked for a surplus in the primary fiscal balance by 2011 and a reduction in the debt ratio to 60% of GDP by 2020.
The effect on debt levels of the well-below target growth performance was compounded by an expansionary fiscal policy in 2011, and by end of 2012, public-sector debt was 108% of GDP. The March 2013 announcement of a “comprehensive and collaborative” debt restructuring was inevitable.
In the IMF’s January 2014 post-mortem on its recent engagement with Grenada, it maintains that its focus on the fiscal area was “probably appropriate” given the country’s unsustainable debt and large fiscal deficits, however it does also admit that “more emphasis should have been given to growth-inducing measures”.
But this is not a complete let-out for Grenada’s two political parties. For instance, the IMF points out that of 31 structural measures established as conditions for the two programmes, “less than one-third (were) met on schedule, and nearly 40% (were) never…achieved”.
Other criticisms include high spending by the NNP government in the run-up to the July 2008 general election and “unbudgeted retroactive wage payments”.
Under the 2010-13 programme, which was supervised by the NDC government, while targets were largely met for the first review, by the time of the second review the government was indicating an intention to pursue a debt restructuring programme and “subsequently the programme could not be brought back on track because the authorities decided to undertake fiscal stimulus measures in the face of continued weak growth and a complicated political situation (thin parliamentary majority) ahead of elections”.
One point on which Grenada does get praise is the introduction of VAT in 2010. The IMF describes this as “a major and durable success of the 2006-2010 programme”. But the praise is diluted by the observation that the yield from VAT “has been eroded by the practice of granting ever-expanding exemptions”.
For instance, in 2010, the NDC government granted general VAT exemptions for the tourism and construction sectors. Halting this practice is seen as a priority for future programmes.
So where to now? The IMF says that “bold strategies” are essential, by which it does not mean higher government spending to promote growth. It says that a future programme should focus on a “few key macro-critical reforms” and should be based on more realistic growth forecasts.
Growth-related reforms, it says, “should be front and centre”. These reforms should be targeted towards improving the climate for business and regulatory reforms “that are macro-critical”.
Fiscal adjustment, however, will be unavoidable – as will be debt restructuring, as has been apparent since the March 2013 default, when Prime Minister Keith Mitchell announced: “It is now time for Grenada to confront the fact that it cannot continue to pay its debts on current terms, and that the restoration of growth requires the debt overhang to be resolved. We need a fresh start, and it is therefore imperative that we approach our creditors promptly to discuss an orderly restructuring of our liabilities.”
The problem is that the government has been in no hurry to negotiate seriously with its creditors, and this month they began to show signs of running out of patience.
On 7 February, a committee said to be representing 75% of Grenada’s foreign and local creditors sent a letter to the government complaining that its consistent requests for meetings were being turned down; “strongly objecting” to this approach; and demanding an early beginning to “good faith” negotiations.
(Reproduced from the Latin American newsletter)