GRENADA – An International Monetary Fund (IMF) mission led by Ms. Nita Thacker of the IMF’s Western Hemisphere Department visited Grenada during February 1-10 to conduct the fifth review of the government’s home-grown economic program supported by an IMF financial arrangement under the Extended Credit Facility (ECF, formerly called the PRGF) and to discuss a successor three-year arrangement.
The mission met with Finance Minister Nazim Burke, Permanent Secretary Timothy Antoine, other senior government officials, representative of the Official Opposition, and representatives of the business and financial community and labor unions. The mission thanks the authorities for their warm hospitality and close cooperation it received during its stay in Grenada.
The following statement was issued today by the IMF mission led by Ms. Thacker:
“Grenada has been hit hard by the global economic slowdown with the two mainstays of the economy – tourism and foreign direct investment (FDI) – weakening significantly. Real gross domestic product is estimated to have declined by 7.7 percent in 2009, after 2.2 percent growth in 2008. Tourism dropped by about 13 percent year-on-year and FDI-related construction is estimated to have contracted by about 50 percent for the year, although the pace of decline slowed in the last quarter of 2009, reflecting an uptick in FDI inflows. Prices fell by 2.4 percent in the 12 months to December 2009, reflecting weak domestic demand and lower international food and fuel prices.
“While economic activity is expected to improve in 2010, the recovery is likely to be very slow, reflecting the gradual improvement in source countries – in particular, the US and UK. Continued growth in the agricultural sector and some recovery of FDI-financed construction activity are expected to raise growth to 0.8 percent in 2010. However, there are downside risks to this outlook, if weakness in advanced economies continues to adversely affect tourism and FDI.
“Despite these difficult circumstances, all but two of the targets under the current program were met. The primary deficit (excluding grants) was higher-than-expected, reflecting increased spending on goods and services and higher spending on social assistance programs. The government was late with a few external debt service payments to its official creditors, but has subsequently taken steps to ensure timely payments.
“Progress on the structural front was more promising. The value added tax (VAT) to broaden the tax base and enhance the efficiency of tax collection was introduced on February 1, 2010, as initially planned. The government is also working with the Organization for Economic Co-operation and Development (OECD) to revise the Public Procurement Act in line with international best practices and establish a Public Procurement Department.
“The mission reached agreement in principle on a new three-year arrangement that would be supported under the IMF’s Extended Credit Facility, which has replaced the Poverty Reduction and Growth Facility. The government’s key objectives in the new program are: ensuring fiscal and debt sustainability by placing the debt-to-GDP ratio on a firm downward trajectory; reducing vulnerabilities in the financial system and strengthening the supervision of the nonbank financial sector; generating high and sustainable growth through structural reforms that will encourage private sector-led growth; and reducing poverty by creating more effective social safety nets.
“The medium-term fiscal program is underpinned by the need to achieve fiscal and debt sustainability. In light of the difficult economic environment, the fiscal adjustment will be phased in. On the revenue side, the government will focus on improving compliance and simplifying tax collections. The VAT is expected to enhance the coverage and buoyancy of the tax system, and other post-VAT measures are also being considered to improve revenue performance, including facilitating voluntary compliance by continuing the taxpayer education and service program; implementing enforcement programs to deal promptly with non-filers and stop-filers; and developing audit capacity. On the expenditure side, the government plans to control current expenditures by containing the wage bill, reducing the spending on goods and services by improving procurement procedures and reducing waste, and improving the efficiency of social spending. These measures will make room for higher capital spending over the medium-term to improve the productive capacity of the economy and place growth on a sustained upward trajectory.
“The government is working to improve the supervision of the nonbank financial sector through the Grenada Authority for the Regulation of Financial Institutions (GARFIN). Insurance sector supervision will be enhanced under the new Insurance Act, through onsite supervision and enforcement of statutory fund requirements. GARFIN is also working to improve the supervision of credit unions, building societies, pension funds, and money service businesses. In partnership with the other Eastern Caribbean Currency Union (ECCU) governments, the authorities are working toward creating a new company to take over the ECCU operations of the British American Insurance Company, in line with the recommendations of the judicial managers, who assessed the company to be insolvent.
“The government has set out an ambitious agenda for structural reforms. This includes an updated technology infrastructure for customs which in combination with the new Customs Act will speed processing times while improving enforcement. Other reforms, including a separate Registrar of Companies and Intellectual Property, are intended to reduce the time required to incorporate a company and to start a business. The Lands and Deeds Registry will expedite the transfer of property, and an additional Civil Court will reduce the delays at courts and enhance contract enforcement.
“The recently completed Country Poverty Assessment reveals that 38 percent of population lived below the poverty line in June 2008, even before the crisis hit and the unemployment rate reached levels now believed to be about 30 percent. In this context, the government plans to further strengthen and rationalize the social safety net. The government is preparing a full Poverty Reduction Strategy Paper (PRSP), developing a measure of social spending to monitor efforts to protect the most vulnerable groups, and establishing a central registry of beneficiaries.
“The staff team thanks the Grenadian government officials for their close cooperation and looks forward to a continued constructive dialogue on the economic challenges and opportunities facing Grenada. Upon the team’s return to Washington, it will prepare the necessary documentation for presentation to the IMF’s Executive Board to consider Grenada’s request to complete the fifth review and to approve a new arrangement under the Extended Credit Facility. The mission wishes the authorities success in their endeavors and is encouraged by their commitment to undertake reforms to improve the prospects for its population.”
