The Keith Mitchell-led government in St. George’s is confident of reducing the island’s mammoth national debt of EC$2.4 billion.
The 18-month old administration has signed off on a deal with the Washington-based International Monetary Fund (IMF) to address the severe fiscal situation facing the country including one of the highest debt stock in the Eastern Caribbean.
Most of Grenada’s debts were built up during the 1995-2008 period of a previous Mitchell government which had embarked upon as massive borrowing and spending spree on a number of non-productive projects.
Opponents have blamed the government for giving away millions in a number of failed projects such as the guarantee given to American investor E.J Miller for the Ritz Carlton hotel at Mt. Hartman, the Call Centre and the planned Marketing & National Importing Board project for the Lagoon in St. George’s.
Since its return to power in February 2013, the cash-strapped Mitchell administration has been forced to default on payments to the island’s major overseas creditors.
As part of the recent “Letter of Intent” signed with the IMF by Prime Minister and Minister of Finance, Dr. Mitchell, the East Caribbean island outlined its policies for tackling Grenada’s heavy debt stock.
The following extract was taken from the signed document:
Debt Restructuring and Financing Assurances
The second pillar of the fiscal programme is addressing the debt overhang through a comprehensive debt restructuring.
While the fiscal consolidation outlined would set debt on a firmly downward path, it will not be sufficient to bring a lasting solution to the negative effects of the debt overhang that continue to stifle government finances and the economy.
Accordingly, the Government announced on March 8, 2013 that it will undertake a “comprehensive and collaborative” restructuring of the public debt; this will supplement the fiscal consolidation in reducing debt to reach the ECCU-wide debt target of 60 percent of GDP by 2020.
The scope of the anticipated debt restructuring will be comprehensive, covering all public and publicly guaranteed debt with the exception of loans from multilateral institutions and Treasury bills issued on the regional government securities market (RGSM) in order to limit the impact on the regional economy.
The Government has contracted financial and legal advisors and is working with them and creditors to advance the debt restructuring process.
With the assistance from financial advisors, the Government has developed a strategy for engaging with private and bilateral official creditors to achieve both cash flow relief and materially reduce the overall stock of debt.
The Government has met with the commercial bondholders to begin discussing Grenada’s payment capacity and provide detailed macroeconomic and debt information.
The economic program outlined in this memorandum will be the basis for discussions over appropriate restructuring terms, which got underway in March 2014.
The Government also plans to request financing assurances from the Paris Club before the IMF’s Executive Board meeting on the program request.
We will also continue to engage our bilateral non-Paris Club creditors to regularize existing arrears and restructure debt.
In this regard, agreements to reschedule arrears have already been reached with the OPEC Fund and with Kuwait, which enabled them to make new disbursements to finance existing infrastructure projects.
Multilateral creditors will also contribute to support our adjustment program. In addition to the assistance we are seeking from the IMF, both the World Bank and the Caribbean Development Bank (CDB) are preparing new lending programs for Grenada, with expected cumulative disbursements of US$30 million each during the three years of the arrangement.
The European Union also plans to resume its grant support for Grenada once an IMF program is in place.
After accounting for expected financial support from our official creditors, the remaining financing gap is estimated at about US$350 million in 2014-17.
About two thirds of this residual financing gap will be closed through the regularization of existing arrears during the upcoming debt negotiations, with the remaining one third closed through the restructuring of future maturities.
Consistent with the financing envelope of the programme, making satisfactory progress in the negotiations with the creditors will be a prior action through:
(i) initiating the negotiation phase of the restructuring with private and bilateral official creditors,
(ii) seeking agreement on a debt restructuring consistent with closing the financing gap under the program and reducing debt to 60 percent of GDP by 2020;
(iii) obtaining financing assurances from the Paris Club; and
(iv) developing a credible timetable for advancing the restructuring discussions with private creditors through mid-2014.
Before the Board discussion of the program request, we will also issue a supplementary Letter of Intent with an update on the progress made in the debt restructuring negotiations and will provide adequate financing assurances.