The Executive Board of the International Monetary Fund (IMF) has approved a three-year SDR 14.04 million (about US$21.7 million, 120 percent of quota) arrangement under the Extended Credit Facility (ECF) for Grenada and concluded the 2014 Article IV consultation.
The approval enables the immediate disbursement of an amount equivalent to SDR 2.04 million (about US$3.2 million).
The main objectives of the authorities’ ECF-supported economic program are to improve competitiveness and medium-term growth prospects, restore fiscal and debt sustainability and strengthen financial stability.
Reforms to raise Grenada’s growth prospects will focus on improving price competitiveness and the business environment.
To put public debt on a firm downward path, a comprehensive strategy consisting of fiscal consolidation, debt restructuring and fiscal structural reforms is being implemented.
Planned reforms to the financial sector will ensure the system’s solvency and strengthen regulation and supervision.
The authorities’ program also envisions an increase in spending on social support programs, supported by minimum spending levels to protect those most vulnerable to the changes.
Following the Executive Board’s discussion on Grenada, David Lipton, Deputy Managing Director and Acting Chair, made the following statement:
“Grenada has made important progress in addressing its fiscal crisis, following a protracted economic recession and a difficult social environment. The authorities have taken wide-ranging measures to reduce the fiscal deficit and are negotiating in good faith with creditors to restructure the public debt. The challenges ahead remain significant, with a vulnerable growth outlook, high debt levels and financing needs, and a weakened financial system.
“The authorities’ ambitious economic program, supported by the Fund, focuses on restoring fiscal sustainability as an immediate priority, strengthening competitiveness and growth prospects, and securing financial stability. The success of the program hinges critically on full implementation of the reforms by the authorities, broad social support, and assistance from Grenada’s development partners.
“A significant fiscal adjustment is needed to strengthen confidence and put public indebtedness on a sustainable path. Achieving the targeted primary surplus requires a carefully calibrated combination of revenue increases and expenditure cuts. The authorities are committed to strengthening revenue mobilization and enhancing the social safety net to protect the most vulnerable.
“Consolidation efforts to reduce public debt to sustainable levels need to be complemented by a comprehensive debt restructuring. Upgrading the institutional framework for fiscal policy will be important to lock in the gains from these combined efforts.
“Improving Grenada’s competitiveness and the employment outlook is key to growth and prosperity. Structural reforms focus on improving the business environment, reducing electricity costs, and removing other obstacles to growth.
“The authorities are committed to participating in the comprehensive regional strategy to strengthen the financial system, coordinated by the Eastern Caribbean Central Bank. Accelerated efforts are necessary to ensure that banks can provide credit needed for the Grenadian economy.”
The Executive Board also completed the 2014 Article IV consultation with Grenada.
Grenada’s economy continues to face significant headwinds after a decade of natural disasters and economic shocks coalesced into a deep economic crisis by 2011-12. Economic activity declined by over 8 percent of GDP from peak to trough (2008-12) as tourism and construction collapsed. After almost four years of decline, real GDP grew by 1.5 percent in 2013. Economic slack and tight monetary conditions have driven the economy into deflationary territory, with the consumer price index (CPI) declining by 1.2 percent in 2013. The current account deficit widened to 27.1 percent of GDP in 2013 from 19.2 percent in 2012 due to a sharp increase in imports related to a resort construction project.
The economic recovery continues to be held back by a deep fiscal crisis and weak financial balance sheets. Public debt reached about 110 percent of GDP at end-2013, in part reflecting attempts to run countercyclical fiscal policies since the outset of the global crisis. The weak fiscal position stoked financing pressures and, unable to secure financing, the government announced on March 8, 2013 that it would undertake a “comprehensive and collaborative” restructuring of its public debt. Financial sector balance sheets have also been increasingly strained by impaired assets, curtailing the supply of credit and slowing the already weak economic recovery. Private credit declined by 5 percent in 2013.
To address the fiscal crisis, the authorities have initiated fiscal adjustment as part of their 2014 budget, and have subsequently approved a large package of revenue measures needed for the targeted consolidation. Debt restructuring negotiations are currently underway with many creditor groups, with significant headway in restructuring expected before end-2014.
The pace of economic recovery is expected to be modest over the near term, at about 1½ percent a year during 2014-17, supported in part by an easing of government financing constraints as the fiscal crisis is gradually resolved. Nevertheless, a faster recovery will likely be held back by the drag of the fiscal adjustment and the weak credit growth as banks repair their balance sheets. In line with weak demand, inflation is expected to remain subdued. Risks to the outlook are high, stemming in particular from faltering confidence if progress is not made soon in addressing the fiscal crisis, from a continued weak global recovery (on which Grenada depends for tourism) and from potential natural disasters.
Executive Board Assessment
Executive Directors observed that Grenada’s economic recovery remains fragile and continues to face serious headwinds, while policy space is limited. Unemployment is elevated, debt levels are high, and financing needs are large. Directors also noted that weak competitiveness is hampering growth and the financial sector is burdened by nonperforming assets.
Against this backdrop and given significant downside risks, Directors underscored the importance of strong commitment and full implementation of the Fund-supported economic program, which aims to restore fiscal sustainability, boost competitiveness, jobs and growth, and strengthen the financial sector. Financial and technical assistance from Grenada’s development partners, as well as social consensus on reform priorities, is critical to achieving macroeconomic stability and development goals.
Directors stressed the urgency of placing the public-debt-to-GDP ratio on a firm downward path toward the regional target, through front-loaded budgetary consolidation, ambitious fiscal reforms, and a comprehensive debt restructuring. They agreed that the targeted strengthening of the primary fiscal balance appropriately balances the need to reduce debt pressures with managing the drag on the economy. Directors welcomed measures recently taken to reduce the personal income tax threshold and broaden the tax base. They stressed that further efforts are needed to reduce the public wage bill, curb tax evasion, and strengthen social safety nets, while protecting growth-enhancing capital investments.
Directors emphasized that a strengthened fiscal framework will be important to sustain consolidation gains and enhance fiscal discipline. The adoption of fiscal responsibility legislation will better anchor policy decisions, and promote transparency and accountability. Directors also highlighted as priority areas reforms to public financial management to improve overall budgetary control, rationalization of the civil service to increase its efficiency, improvements to debt management, and tax administration reforms.
Directors agreed that a lasting solution to the public debt overhang requires a debt restructuring. They supported the authorities’ comprehensive and collaborative approach, and welcomed progress in negotiations thus far. Directors urged the authorities to continue to engage with creditors in good faith and complete the restructuring and regularize arrears to official creditors in a timely manner.
Directors welcomed the authorities’ active participation in the regional strategy to strengthen financial stability. They looked forward to the asset quality review of Grenada’s banking system, supported by proactive resolution and recapitalization plans that would limit contingent fiscal costs. Directors stressed the need to continue to address weaknesses in the nonbank sector, including through improvements to the regulatory framework.
Directors supported the structural reform agenda aimed at enhancing competitiveness and the business climate, which would facilitate internal devaluation. They considered that priority should be given to reforms to reduce energy costs, streamline tax incentives, and liberalize key sectors.