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Grenada

Author(s):
International Monetary Fund
Published Date:
July 1995
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I. The Domestic Economy

In the last ten years, the structure of Grenada’s economy has evolved from almost exclusive dependence on the production of traditional agricultural products (nutmeg, mace, bananas, and cocoa) to an economy increasingly reliant on a growing tourism sector which has developed tentative links with domestic agriculture and services industries.

1. Overall trends in output and demand

Since 1990, real GDP growth has slowed considerably from the annual growth rate of 6.5 percent which was sustained over the period 1986-90. Real GDP grew by 3.6 percent in 1991 and slowed further to 1.2 and 0.9 percent in 1992 and 1993, respectively. Preliminary estimates for 1994 suggest that growth may have recovered somewhat, to about 2.5 percent (Table 1).

Table 1.Grenada: Real GDP by Economic Activity
1990199119921993Est.

1994
(In millions of Eastern Caribbean dollars at 1990 Prices)
GDP at constant factor cost477.8495.1501.0505.7518.2
Agriculture64.062.560.858.758.9
Crops51.449.347.244.944.9
Livestock, fishing, and forestry12.613.213.613.814.0
Livestock3.43.53.63.73.7
Fishing7.47.88.08.18.3
Forestry1.81.92.02.02.0
Mining and quarrying2.12.42.52.42.5
Electricity and water18.019.520.521.021.9
Manufacturing31.333.236.935.133.7
Construction34.637.034.834.136.1
Wholesale and retail trade56.157.058.159.360.5
Hotels and restaurants27.730.335.540.848.6
Transport and communications96.1106.2110.0111.2115.4
Finance and housing60.462.363.664.865.8
Banking and insurance37.239.140.441.242.1
Real estate and housing23.223.223.223.623.7
Government services101.6100.294.995.993.9
Other services14.214.514.814.915.0
Less: imputed service charge28.329.931.332.333.9
(Annual percentage changes)
GDP at constant factor cost5.23.61.20.92.5
Agriculture-1.9-2.3-2.7-3.50.3
Crops-3.3-4.0-4.3-5.0
Livestock, fishing, and forestry4.74.53.11.51.2
Livestock3.73.53.10.60.5
Fishing5.14.93.11.41.7
Forestry5.35.03.24.1
Mining and quarrying1.014.72.1-4.05.1
Electricity and water6.78.05.02.74.0
Manufacturing5.15.811.4-5.0-4.0
Construction-3.47.1-6.1-2.06.0
Wholesale and retail trade5.21.62.01.92.0
Hotels and restaurants15.09.217.315.119.1
Transport and communications6.210.53.61.13.7
Finance and housing3.13.12.11.91.5
Banking and insurance3.15.13.31.92.1
Real estate and housing3.1-0.22.00.5
Government services9.5-1.3-5.31.0-2.0
Other services1.91.92.00.70.9
Less: imputed service charge-2.45.54.73.25.1
Sources: Ministry of Finance (Central Statistical Office); and staff estimates.
Sources: Ministry of Finance (Central Statistical Office); and staff estimates.

The weak growth performance since 1990 reflected largely a continuous contraction in agricultural output, which declined each year from 1989 to 1993. In addition, the construction industry experienced a major contraction in 1992 due to the sharp fall in public investment. In 1993, output declined in the mining and quarrying, construction, and manufacturing sectors as well as in agriculture. In contrast, the hotel and restaurant sector has exhibited strong growth since the late 1980s, with real value added growing by 13.8 percent, on average, each year since 1989.

Since 1990, and with the exception of 1991, gross domestic expenditure has declined continuously, from 117.4 percent of GDP in 1990 to 112.1 percent of GDP in 1994. The decline in the period 1990-92 reflected a lowering of government spending, in particular a sharp fall in investment from 10.1 percent of GDP in 1991 to 4.1 percent of GDP in 1992, as the public sector reduced capital spending in the face of a sharp reduction in external support for its investment program (Table 2).

Table 2.Grenada: Aggregate Domestic Expenditure at Current Prices
1990199119921993Est.

1994
(In millions of Eastern Caribbean dollars)
Gross domestic expenditure706.9791.5784.3823.5847.4
Consumption expenditure467.9525.7557.0571.0581.0
Private sector344.9411.8438.7457.7462.2
General government123.0113.9118.3113.3118.8
Gross domestic investment238.0265.8227.3252.3266.4
Private sector171.4199.7199.5198.5185.5
Direct investment34.841.272.146.431.1
Other136.6158.5127.4152.1154.5
Public sector67.666.127.853.880.9
Goods and nonfactor service balance-104.5-134.2-105.1-106.9-91.5
Exports of goods and nonfactor services295.8308.8321.6344.3405.8
Imports of goods and nonfactor services400.4443.1426.7451.2497.3
GDP at market prices602.4657.2679.2716.6755.9
Net indirect taxes124.6128.4126.2133.6134.2
Indirect taxes128.8133.2130.4137.8136.7
Subsidies4.24.84.24.22.5
GDP at factor cost477.8528.8553.0553.0621.7
(In Percent of GDP at market prices)
Gross domestic expenditure117.4120.4115.5114.9112.1
Consumption expenditure77.780.082.079.776.9
Private sector57.362.764.663.961.1
General government20.417.317.415.815.7
Gross domestic investment39.740.433.535.235.2
Private sector28.430.429.427.724.5
Public sector11.210.14.17.510.7
Goods and nonfactor services balance-17.4-20.4-15.5-14.9-12.4
Exports of goods and nonfactor services49.147.047.348.053.7
Imports of goods and nonfactor services66.567.462.863.065.8
GDP at market prices100.0100.0100.0100.0100.0
Net indirect taxes20.719.518.618.617.8
Indirect taxes21.420.319.219.218.3
Subsidies0.70.70.60.60.6
GDP at factor cost79.380.581.481.482.2
Sources: Ministry of Finance (Central Statistical Office); and staff estimates.
Sources: Ministry of Finance (Central Statistical Office); and staff estimates.

Since 1992 government investment has increased, but outlays on consumption have continued to decline, reflecting a wage freeze and a retrenchment exercise in the civil service as well as efforts to control outlays on goods and services. As a result, government consumption declined by nearly 5 percentage points of GDP during the period under review, to about 16 percent of GDP in 1994.

Private expenditure, which in the past displayed considerable year-to-year variations, has declined slowly since 1992. Traditionally the movements in private sector consumption and investment have mirrored the movement in the prices of the major agricultural exports, as lower prices for traditional exports reduce household incomes and tends to lower business confidence. Thus, the decline in private consumption since 1992 reflected, in part, the fall in prices for cocoa, nutmeg, and mace as well as the impact of the wage freeze in the public service during this period. Private sector investment, which had peaked at around 30 percent of GDP in 1991 and 1992 fell to below 25 percent of GDP in 1994 as major hotel projects were completed and business confidence had yet to recover fully after the weakening of the public finances and the consequent loss of external support earlier in the 1990s.

With the strengthening of the public finances and the recovery of external support after 1992, public investment began to recover, to over 10.7 percent of GDP in 1994. This compensated for the decline in private sector investment during the year and gross domestic investment remained at around 35.2 percent of GDP, the same level as in 1993. At the same time, the reliance on external savings to help finance domestic investment declined as the external current account deficit fell from over 13 percent of GDP in 1990 to around 6 percent of GDP in 1994. On this basis, gross national savings increased by over 2 percentage points of GDP over the period, to 29 percent of GDP in 1994, albeit after showing some year-to-year variations.

2. Sectoral developments

a. Agriculture

The agricultural sector’s contribution to the GDP has declined continuously since the late 1980s. In 1990, the sector accounted for 13.4 percent of GDP, but its contribution fell to 11.3 percent of GDP in 1994. The principal reason for this fall has been lower production of Grenada’s traditional export crops (nutmeg, mace, bananas, and cocoa) due to the effects of both natural disasters (tropical storms, crop diseases, and droughts) and low or falling international prices of these commodities (Table 4).

Table 3.Grenada: Savings and Investment
1990199119921993Prel.

1994
(In millions of Eastern Caribbean dollars)
Gross domestic savings1/134.5131.6122.2145.7174.9
Transfers from abroad58.761.670.264.572.1
Net official0.3-2.20.3-3.82.2
Net private58.463.769.968.369.9
Net factor payments-32.9-20.3-18.4-25.4-28.4
Gross national savings2/160.2172.9174.0184.8218.6
Private sector157.0153.5151.6149.5190.1
Public sector3.219.422.435.328.5
Gross domestic investment239.1266.0227.2252.3266.1
Private sector171.5199.9199.4198.5185.2
Public sector67.666.127.853.880.9
Resource balance 3/-78.9-93.4-53.2-67.5-47.5
Foreign savings 4/78.893.253.267.547.5
Total savings239.1266.0227.2252.3266.1
(In percent of GDP market prices)
Gross domestic savings22.320.018.020.323.1
Gross national savings26.626.325.625.828.9
Private sector26.123.422.320.925.2
Public sector0.53.03.34.93.8
Foreign savings13.114.27.89.46.3
Total savings39.740.533.535.235.2
Gross domestic investment39.740.533.535.235.2
Private sector28.530.429.427.724.5
Public sector11.210.14.17.510.7
(As percent of gross domestic investment)
Gross national savings67.065.076.673.282.2
Private sector65.757.766.759.371.4
Consolidated public sector1.37.39.915.210.7
Foreign savings33.035.023.426.817.9
Sources: Ministry of Finance; and staff estimates.

Domestic saving is defined as the difference between GDP and total consumption.

Gross national saving is defined as domestic saving plus transfers from aboard less factor payments.

The resource balance is the difference between gross national savings and gross domestic investment and indicates domestic absorption.

Foreign savings is the balance of payments on current account, with sign reversed.

Sources: Ministry of Finance; and staff estimates.

Domestic saving is defined as the difference between GDP and total consumption.

Gross national saving is defined as domestic saving plus transfers from aboard less factor payments.

The resource balance is the difference between gross national savings and gross domestic investment and indicates domestic absorption.

Foreign savings is the balance of payments on current account, with sign reversed.

Table 4.Grenada: Output and Prices of Major Agricultural Crops
19901991199219931994
(In Eastern Caribbean dollars per pound)
Producer prices
Banana0.30.30.30.30.3
Cocoa1.61.81.81.51.7
Nutmeg3.03.01.00.60.6
Mace5.25.02.31.82.6
(In thousands of pounds)
Output
Banana17,455.015,607.214,059.110,983.610,037.7
Cocoa4,148.43,065.53,588.63,480.52,492.7
Nutmeg5,807.85,800.35,148.14,820.43,955.5
Mace537.0451.1301.2192.9204.0
(Annual percentage change)
Producer prices
Banana
Cocoa12.5-16.713.3
Nutmeg-23.1-66.7-40.0
Mace-8.8-3.8-54.0-21.744.4
Output
Banana-10.3-10.6-9.9-21.9-8.6
Cocoa29.1-26.117.1-3.0-28.3
Nutmeg-14.1-0.1-11.2-6.4-17.9
Mace-27.8-16.0-33.2-36.05.6
Sources: Ministry of Finance (Central Statistical Office); Banana Cooperative Society; Cocoa Association; and Cooperative Nutmeg Association.
Sources: Ministry of Finance (Central Statistical Office); Banana Cooperative Society; Cocoa Association; and Cooperative Nutmeg Association.

Production of nutmeg and mace has shown a continuous decline since 1990, falling by 29 percent and 62 percent, respectively, over the period to 1994. This reflected a precipitous fall in prices for both crops (by some 80 percent over a few years through 1993), because of a major increase in supply of nutmeg on the world market, after the 1987 breakdown of the agreement between Indonesia and Grenada to control the world nutmeg market. In 1994, production of nutmeg and mace declined again as a result of a drought, but the international price for mace improved significantly and stabilized in the case of nutmeg. Nutmeg exports increased substantially in 1994 as stocks were drawn down from approximately 11 million pounds in 1993, to 9.5 million pounds in 1994.

Banana production in Grenada has declined steadily since 1988. In 1994, production amounted to less than half of the total produced in 1988 and exports were approximately 6 percent lower than in 1993. The fall in exports in 1994 reflected mainly the impact of the drought on banana production; prices, on the other hand, rose to EC$0.55 per pound, from EC$0.45 per pound in 1993.

In 1993 and 1994, banana production declined despite the expansion in acreage under cultivation. The Belvedere Plantation, which accounts for approximately 17 percent of total banana production, added 170 acres of the crop in 1993, another 50 acres during 1994, and plans to add an additional 50 acres in 1995. The authorities continue to encourage the expansion of banana production to take advantage of Grenada’s quota allocation in the E.U. market, which at 14,000 long tons, has remained in excess of the country’s exports in the past several years. Although there are approximately 1,000 registered banana growers in Grenada, only 350 are active. It is estimated that 75 percent of the active growers cultivate bananas on land of two acres or less and it is estimated that growers produce roughly seven tons per acre, a little less than the ten tons per acre average, for Windward Islands producers.

The other major traditional crop, cocoa, has also experienced declines in output since 1992. In this sector there are roughly 5,500 active growers, a large number of which are small farmers. The steady decline in output reflects the limited capital resources available to the small farmers which has constrained investment in this sector over the last several years. As a result, production techniques are relatively inefficient and labor productivity is low.

b. Manufacturing

The manufacturing sector in Grenada is small and primarily geared to the production of light manufacturing goods such as beverages (beer, malt, rum, soft drinks), paint and varnishes, garments, flour, animal feed, and toilet paper. Although most of the manufactured goods are for the domestic market, some products, such as garments, toilet paper, and paint are exported to other countries in the CARICOM region, the European Union (EU), and the United States. Most of the production activities are located near or in the Frequent Industrial Park, located close to the Point Salines International Airport. Value added in the manufacturing sector declined in both 1993 and 1994 and the sector accounted for 7.7 percent of GDP in the latter year.

Since 1990, the composition of the manufacturing sector has changed as production of beverages has fallen steadily while the output of paint and animal feed increased markedly. Beverage production fell as the production of beer declined by 24 percent, due to competition from regional producers and smuggling. In October 1993, some protection was provided to the beer industry in the form of import quotas on beer and malt from regional producers, and a tax was imposed on nonreturnable bottles (imported bottles). In 1994, the Government divested all of its remaining ownership in the local brewery.

Growth in the manufacturing sector is hampered by several factors: the lack of an adequate domestic capital market, competition from imports as CARICOM’s Common External Tariff (CET) is reduced, and high wages relative to those in competitor countries such as Mexico and the Dominican Republic. In recent years, some manufacturing activities have moved their operations to the latter countries. In the last two years, however, there has been some development of a data processing industry in Grenada. While this activity is in its infancy, the authorities hope that the development of this industry will provide an alternative to the declining manufacturing sector.

The Industrial Development Corporation (IDC) was established in 1985 to help attract new investment by providing a range of services to prospective investors, including the recommendation of various incentives for approved projects. 1/ Under the Fiscal Incentives Act of 1974 and the Hotels Aid Act of 1954, the incentive system consists of a variety of concessions on taxes and import duties including: (1) tax holidays for seven to ten years to manufacturing enterprises depending on the amount of value added generated locally, (2) a waiver of import duties on plant, equipment, machinery, and raw materials, and (3) in certain cases a waiver of 50 percent of import duties on commercial vehicles.

d. Construction

The performance of the construction sector was generally weak during the period 1990-92, reflecting mainly the cutback in public investment during those years. However, there was some increase in activity in 1991, reflecting the rebuilding activity that took place after the island was struck by hurricane Hugo. During 1993 the sector began to recover on the strength of increased public investment, some renewed activity in residential construction and the construction of two new hotels. Much of the residential construction that has taken place over the last several years has been financed by remittances from abroad. In 1994 construction recovered strongly and real value added increased by 6 percent reflecting a further increase in public sector investment and some renovation activity in the hotel sector.

3. Prices and labor market developments

Inflation in Grenada, as measured by the consumer price index (CPI), has remained below 4 percent a year since 1990 (Table 7). Given that Grenada is a small, open economy, price developments are greatly influenced by changes in the prices of imported goods. Food and beverages, housing, and services are the items which have the largest weights in the CPI, and since 1990 the prices of all three have remained largely stable, except for a sharp upturn in housing costs in 1992. Over the same period, the prices of some goods, such as fuel and electricity, have fallen reflecting the fall in the international price of refined petroleum products over the period.

Table 5.Grenada: Output and Prices of Selected Manufactured Products(Value in millions of Eastern Caribbean dollars; volume in thousand units; and unit values in Eastern Caribbean cents)
19901991199219931994
Beer
Value7,314.47,101.87,750.15,343.15,588.5
Volume (bulk gal.)457.1443.9484.4345.8349.3
Unit value16.016.016.016.016.0
Malt
Value1,320.91,304.82,540.62,218.82,022.4
Volume (bulk gal.)76.281.5158.9138.7126.4
Unit value17.316.016.016.016.4
Stout
Value2,398.52,681.82,368.91,506.62,242.4
Volume (bulk gal.)92.3103.191.157.986.2
Unit value26.026.026.026.026.0
Rum
Value3,493.54,018.26,405.55,130.7
Volume (proof gal.)76.888.3140.8112.8
Unit value45.545.545.545.5
Cigarettes
Value1,698.51,737.21,833.81,669.21,386.0
Volume (cartons)110.2101.590.092.577.0
Unit value15.417.120.418.018.0
Soft drink
Value8,152.28,235.110,189.28,922.28,200.0
Volume (cases)452.9457.5475.0495.7455.6
Unit value18.018.021.518.018.0
Flour
Value8,099.79,491.69,569.09,239.9
Volume (lbs.)16,791.418,429.616,758.015,365.7
Unit value0.50.50.60.6
Feed
Value2,560.52,854.33,982.74,411.8
Volume (lbs.)6,080.97,225.38,692.19,727.2
Unit value0.40.40.50.5
Paint, varnishes, etc,
Value2,529.63,342.03,219.73,903.1
Volume (US Gal)123.5141.7132.8151.0
Unit value20.523.624.225.8
Toilet paper
Value3,734.73,947.22,912.42,490.72,665.0
Volume (Pkt. of 50)110.8116.1102.995.8102.5
Unit value33.734.028.326.026.0
Sources: Ministry of Finance (Central Statistical Office); and staff estimates.
Sources: Ministry of Finance (Central Statistical Office); and staff estimates.
Table 6.Grenada: Retail Prices of Petroleum Products
December 31
19901991 1/199219931994
(In Eastern Caribbean dollars per imperial gallon for gasoline, diesel, and kerosene; per pound for LPG)
Gasoline6.55.46.05.75.6
Import cost, c.i.f.2.72.02.42.12.0
Taxes2.51.82.02.02.0
Margins1.31.61.61.61.6
Diesel6.44.85.04.74.4
Import cost, c.i.f.3.22.12.22.01.8
Taxes2.01.21.21.21.1
Margins1.31.51.61.51.5
Kerosene4.93.53.73.53.4
Import cost, c.i.f.3.32.22.32.12.0
Taxes0.30.10.10.10.1
Margins1.31.21.31.31.3
LPG1.41.11.12.41.2
Import cost, c.i.f.0.70.50.50.50.5
Taxes0.30.20.21.50.1
Margins0.30.30.30.30.4
Delivery charge0.10.10.10.10.2
(In percent of total retail price)
Gasoline
Import cost, c.i.f.41.737.040.036.835.7
Taxes38.033.333.735.135.7
Margins20.329.726.928.128.6
Diesel
Import cost, c.i.f.49.444.144.542.640.9
Taxes31.225.123.125.525.0
Margins19.530.832.131.934.1
Kerosene
Import cost, c.i.f.67.761.962.260.058.8
Taxes4.93.12.92.92.9
Margins25.435.034.937.138.2
LPG
Import cost, c.i.f.49.344.445.220.841.7
Taxes19.915.516.662.58.3
Margins23.530.929.112.533.3
Delivery charge7.49.19.14.216.7
Source: Ministry of Finance (Energy Unit).

With the advent of the Common External Tariff on May 1, 1991, the duty on petroleum products was removed and the value added tax on gasoline and diesel was increased from 30 to 52 percent.

Source: Ministry of Finance (Energy Unit).

With the advent of the Common External Tariff on May 1, 1991, the duty on petroleum products was removed and the value added tax on gasoline and diesel was increased from 30 to 52 percent.

Table 7.Grenada: Consumer Price Index
Weights1990199119921993Prel.

1994
I. Period Averages
(1987 = 100)
All items100.0112.8115.8120.2123.6126.7
Food and beverages38.7119.3121.9122.4127.4134.0
Tobacco and alcohol2119.1121.4125.5127.8124.3
Clothing and footwear5.2102.3107.5111.0111.6114.9
Housing17.3106.2105.2121.5123.0123.5
Fuel and light3.9118.2113.2109.5109.4106.7
Furniture and appliances2.7107.3109.7113.1117.7120.1
Transport9.1116.9124.8125.6130.3133.9
Household supplies5.6109.9116.0120.7122.3122.7
Other services15.5108.3116.2121.8125.2126.4
(Percentage change)
All items2.82.63.82.82.6
Food and beverages4.92.20.44.15.2
Tobacco and alcohol1.71.93.41.8-2.6
Clothing and footwear4.35.13.30.53.0
Housing-0.915.51.20.4
Fuel and light9.1-4.3-3.3-0.1-2.5
Furniture and appliances3.12.33.14.12.0
Transport4.06.80.73.72.7
Household supplies-1.25.54.01.40.3
Other services1.47.34.92.71.0
II. Last Month of Period
(1987 = 100)
All items100.0115.1116.2121.6125.8128.2
Food and beverages38.7121.6120.9124.3132.8137.8
Tobacco and alcohol2.0120.1122.3127.9127.5124.6
Clothing and footwear5.2106.8109.7111.2113.3114.3
Housing17.3105.7105.2122.8123.3124.1
Fuel and light3.9129.6112.7110.3105.7108.0
Furniture and appliances2.7109.9114.3113.2122.0118.2
Transport9.1118.3125.5125.5131.9132.5
Household supplies5.6111.8119.1122.9121.8121.4
Other services15.5112.2118.4124.0125.3127.1
(Percentage change)
All items3.71.04.63.51.9
Food and beverages5.1-0.62.86.83.8
Tobacco and alcohol1.11.84.6-0.3-2.3
Clothing and footwear9.22.71.41.90.9
Housing-0.8-0.516.70.40.6
Fuel and light17.4-13.0-2.1-4.22.2
Furniture and appliances4.04.0-1.07.8-3.1
Transport1.66.15.10.5
Household supplies0.56.63.1-0.8-0.3
Other services5.95.64.71.01.4
Source: Ministry of Finance (Central Statistical Office).
Source: Ministry of Finance (Central Statistical Office).

Price controls are imposed on a limited number of consumer items in the form of maximum markups at both the wholesale and retail levels. The majority of goods subject to the markups consist of grocery items and includes toilet paper, rice, shoes, toothpaste, cheese, chicken, and milk. The maximum markup allowed to distributors ranges from 7.5 percent to 15 percent, while the maximum markups at the retail level range from 10 percent to 70 percent, with most goods subject to a 15 percent markup. Other types of goods subject to price control include glass, nails, paints, hosiery, and drugs. These goods are subject to maximum markups at the retail level of between 15 and 40 percent.

Official labor market data are not readily available in Grenada. However, central government wages have remained unchanged since 1992 when an 11 percent increase was awarded. Government wage increases are usually negotiated for a period of two to three years and have tended to contain a retroactive component. At present the Government and trade unions representing the civil service are negotiating a new wage contract for the period 1993-45. In the private sector, available information suggests that wage increases in 1993 and 1994 were in the range of 4 to 6 percent, which is lower than the average increases of 8 percent over the period from 1988 to 1992. The higher wage increases in the late 1980s and the early 1990s reflect the relatively stronger growth of the economy in that period compared with the period 1992-94.

Little information exists on the level of unemployment in Grenada. The 1993 labor survey suggested an unemployment rate in the range of 13 to 15 percent. In 1994, the contraction in the agricultural sector and retrenchment in the civil service may have contributed to an increase in the unemployment rate. On the other hand, there has been strong growth in the tourist industry, which may have helped absorb a part of the labor released from these sectors.

4. Poverty and poverty alleviation programs

Despite the relatively high levels of unemployment in Grenada, there are few overt manifestations of poverty. Indeed, until recently when the Central Statistical Office (CSO) launched initial survey in 1994, there has been no official attempt to measure the incidence of poverty. The findings of this survey remain unpublished and the CSO is at present reviewing both the methodology and the results. This notwithstanding, there are annual provisions in the budget to provide support for those members of the population deemed to be in need.

The existing programs are administered by four government ministries, namely the Ministry of Social Affairs, the Ministry of Education, the Ministry of Labor, and the Ministry of Health. The majority of the programs are run by the Ministry of Social Affairs and includes the following:

(a) Support for the operation of 5 government-owned and 11 privately run day-care centers for children below the age of 5 years.

(b) Support for the operation of eight homes for the aged and three privately run homes for orphaned, abused, or handicapped children.

(c) A fund for the provision of financial assistance for necessitous persons. This fund is used to aid victims of fire, flood, or other natural disasters and is administered on a case-by-case basis.

(d) A welfare allowance for the aged which is granted to any citizen over the age of 60 years with no visible means of financial support.

(e) Small grants to several youth rehabilitation centers and nongovernment organizations such as the Blind Welfare Association and the Red Cross and a special fund for the burial of indigent persons.

The Ministry of Education operates two programs; the first is a school books and uniform program and the second is the school feeding program. The school books and uniform program provides benefits to students who are deemed to be needy after a screening process established between the school officials and the ministry. The school feeding program provides lunch and a daily snack to all primary and pre-primary schools in the island. At the secondary school level, only those students who attend government secondary schools receive the school lunches.

The Ministry of Labor runs a skills training program throughout the year for unemployed persons in the age group 13-25. The ministry also receives an annual allocation to promote income-generating projects for the unemployed by providing start-up financing for small projects, particularly in the area of arts and crafts.

The Ministry of Health provides free weekly clinics in each of the districts in the country. The services provided at these clinics come from a small group of medical and dental professionals, most of whom are volunteers, while the Government provides the facilities of the district medical offices, the relevant medication, and sometimes transport facilities for the volunteers.

II. The Public Sector

1. Overall trends

During the period 1987-89, the overall balance (after grants) of the consolidated public sector 1/ deteriorated steadily, driven largely by the overall deficit of the Government, which increased from 5.6 percent of GDP in 1986 to 9.3 percent in 1989. The weakening of the Government’s fiscal position reflected the impact of the 1986 tax reform which abolished income taxes but was not supported by strong compensating revenue measures or efforts to constrain or reduce overall expenditures.

Since 1990, however, the savings of the public sector have improved, rising from 0.5 percent of GDP in 1990 to 3.8 percent of GDP in 1994 (Table 8). The improved savings performance reflected, in the main, an improvement in government savings which rose from minus 3 percent of GDP in 1990 to 1.6 and 0.1 percent of GDP in 1993 and 1994, respectively. In a similar manner, the overall balance of the public sector improved from a deficit of 7.7 percent of GDP in 1990, to a deficit of 0.4 percent of GDP in 1994, as the overall deficit of the Government, fell from 9.7 percent of GDP in 1990, to near zero in 1991 and 1992, before rising again to a deficit of 2.3 percent of GDP in 1994.

Table 8.Granada: Operations of the Consolidated Public Sector
1990199119921993Est.

1994
(In millions of Eastern Caribbean dollars)
Total revenue and grants187.3212.4204.3239.1236.0
Current revenue168.9184.8190.0203.4205.1
Capital revenue0.80.10.20.9-
Current grants2.53.52.97.5
Capital grants15.127.410.631.923.4
Total expenditure and divestment Proceeds233.7232.1184.1222.1239.1
Current expenditure165.7165.5167.5168.3176.6
Capital expenditures67.666.126.653.880.9
Of which: public enterprises10.98.37.222.322.3
Divestment proceeds0.40.5-11.3-18.4
Public sector saving3.219.322.535.128.4
Central Government-17.9-3.1-3.311.00.9
Public enterprises7.98.311.99.814.1
National Insurance Scheme13.214.213.814.313.5
Overall balance before grants-61.5-47.29.6-14.8-26.5
Overall balance after grants-46.4-19.720.217.1-3.2
Central Government-58.3-35.1-1.0-1.3-17.4
Public enterprises0.63.69.24.34.2
National Insurance Scheme11.311.812.114.110.1
Financing46.419.7-20.2-17.13.2
External (net)36.48.7-1.1-1.819.0
Net loan receipts19.94.4-4.1-1.720.1
Exceptional financing19.413.88.4
Net change in Government external arrears16.54.33.0-0.1-1.1
Rescheduling and debt relief-19.4-13.8-8.4
Domestic (net)10.95.4-19.1-15.3-15.8
Commercial banks2.88.9-20.2-4.1-6.2
ECCB1.61.2-2.7-6.7-5.1
Net nonbank financing1.02.4-5.024.4-7.1
Exceptional financing49.9
Net change in government domestic arrears4.6-1.58.7-28.92.6
Rescheduling and debt relief-49.9
(In percent of GDP at current market prices)
Total revenue end grants31.132.330.133.431.2
Total revenue28.228.128.028.527.1
Current revenue28.028.128.028.427.1
Current grants0.40.50.41.0
Capital grants2.24.01.64.43.1
Total expenditure and divestment proceeds38.835.327.131.031.6
Current expenditure27.525.224.723.523.4
Capital expenditures and divestment proceeds11.310.12.47.58.3
Of which: fixed investment11.210.14.17.510.7
Public sector savings0.52.93.34.93.8
Central Government-3.0-0.5-0.51.60.1
Public enterprises1.31.31.81.41.9
National Insurance Scheme2.22.22.02.01.8
Public sector overall balance before grants-10.2-7.21.4-2.1-3.5
Public sector overall balance after grants-7.7-3.03.02.4-0.4
Central Government-9.7-5.3-0.2-0.2-2.3
Public enterprises0.10.61.30.60.6
National Insurance Scheme1.91.81.82.01.3
Financing7.73.0-3.0-2.40.4
External (net)5.91.3-0.2-0.22.5
Of which: change in central government new arrears2.70.70.4-0.1
Domestic (net)1.71.7-2.8-2.1-2.1
Of which: change in central government new arrears0.9-0.21.3-11.00.3
Sources: Ministry of Finance: and staff estimates.
Sources: Ministry of Finance: and staff estimates.

The fall in the overall deficit of the Central Government between 1990-92 was due largely to a reduction in capital expenditure, which fell from an average of 15 percent of GDP in the 1986-89 period to an average of 7 percent of GDP in the period 1990-92. Current expenditures of the Central Government which averaged 27.3 percent of GDP in the 1986-89 period also declined, but less dramatically, to average 26 percent of GDP in the 1990-92 period.

The reduction in public sector capital expenditure from 1990 to 1992, reflected a sharp reduction in external financial support for the public sector investment program, as donors and creditors reacted to the growing fiscal imbalances and the accumulation of external arrears which began in the late 1980s. In response, the authorities launched their own structural adjustment program (SAP) in 1992. The SAP was designed to improve revenue performance through improvements in tax administration, a reduction in tax and duty exemptions, particularly to state enterprises, the introduction of four progressive rates of taxation within the existing debt-service levy and a broadening of the base of the value-added tax. At the same time, efforts were made to control and reduce current expenditure and to normalize relations with external creditors.

As a result of the policies implemented under the structural adjustment program, savings of the Central Government rose from minus 0.5 percent of GDP in 1992 to 0.1 percent in 1994. Principally responsible for this improvement was the reduction in current expenditures from 23.9 percent of GDP in 1992 to 22.5 percent of GDP in 1994. The improvement in the level of savings was supplemented by receipts from privatization and an increase in foreign capital grants, and resulted in an improvement in central government capital expenditure from 3.1 percent of GDP in 1992 to 7.8 percent of GDP in 1994 (Table 11).

2. Central government operations

a. Revenue

In the years following the 1996 tax reform, total revenue and grants of the Central Government, as a proportion of GDP, never regained its pre-1986 levels of over 50 percent of GDP. Despite the introduction of various tax measures, current revenue to GDP remained around an average of 24 percent of GDP in the period 1986-91 (Table 10). 1/ This inability to raise the revenue-to-GDP ratio, despite changes in tax rates and the introduction of new taxes reflected the tendency for many new taxes to be offset by new exemptions and the fact that the frequency of tax changes led to a growing incidence of avoidance and to problems of administration as the tax system grew progressively more complex.

Table 9.Grenada: Finances of the Central Government(In millions of Eastern Caribbean dollars)
1990199119921993Est.

1994
Total revenue and grants160.8184.2170.8192.4193.0
Current revenue and grants146.6157.9162.7176.3178.7
Capital revenue and grants14.226.38.116.114.4
Current revenue144.1157.9159.2173.3171.1
Tax revenue131.7141.4144.8155.2154.1
Nontax revenue12.416.514.418.117.0
Capital revenue0.80.10.20.9
Grants15.926.211.418.121.9
Current grants2.53.52.91.5
Capital grants13.426.27.915.214.4
Total expenditure and net lending219.1219.4171.8193.7210.5
Current expenditures162.0161.1162.5162.2170.2
Personal expenditure82.583.389.087.485.0
Salaries and wages77.977.483.282.079.7
Allowances4.65.95.95.45.3
Goods and services71.360.160.656.565.0
Other goods and services38.127.826.723.531.1
Pensions10.49.614.013.114.4
National Insurance Scheme2.42.82.62.42.7
Interest payments20.419.917.317.416.8
Domestic12.513.813.313.613.7
Of which: arrears4.92.56.2
Foreign7.96.14.03.83.1
Of which: arrears6.02.92.00.60.3
Transfers and subsidies8.217.712.818.320.3
Transfers abroad2.18.62.86.75.3
Domestic transfers6.19.110.011.614.9
Capital expenditures and divestment proceeds57.158.39.331.540.2
Of which: capital formation56.757.820.631.558.7
Current balance-17.9-3.1-3.311.20.9
Overall balance (before grants)-71.7-61.3-9.0-16.5-31.8
Overall balance (after grants)-58.3-35.1-1.0-1.3-17.4
Financing58.335.01.01.317.4
Total external financing (including arrears)36.59.00.5-0.616.7
External financing (net)20.04.7-2.5-0.517.8
External loans35.018.07.77.826.5
Amortization15.013.310.28.38.7
Exceptional financing19.413.88.4
Net change in arrears16.54.33.0-0.1-1.1
Debt relief-13.8-8.4
Rescheduled interest/principal-19.4
Domestic financing (net)21.826.10.61.90.8
Domestic loans17.227.1-8.230.8-1.9
Financial system (net)4.29.8-22.4-0.9-2.5
ECCB (net)1.61.2-2.7-6.7-5.1
Net borrowings from commercial banks2.68.6-19.75.82.6
Nonfinancial system (net)13.017.914.331.70.7
National Insurance Scheme9.69.09.828.1
Other domestic borrowing3.48.94.53.60.7
Exceptional financing49.9
Sale of assets0.1
Rescheduled debt and debt relief-49.9
Change in arrears 1/4.6-1.58.7-28.92.6
Sources: Ministry of Finance; and staff estimates.

Domestic arrears also includes the annual float.

Sources: Ministry of Finance; and staff estimates.

Domestic arrears also includes the annual float.

Table 10.Grenada: Central Government Revenue and Grants
19901991Est.

1992
19931994
(In millions of Eastern Caribbean dollars)
Total revenue and grants160.8184.2170.8192.4193.0
Total revenue144.9158.0159.4174.3171.1
Current revenue144.1157.9159.2173.3171.1
Tax revenue131.7141.4144.8155.2154.1
Taxes on income and profits11.227.133.738.937.8
Individuals10.512.013.7
Companies0.11.0
Business levy11.121.923.123.521.1
Other5.20.12.43.0
Taxes on property2.83.03.84.43.7
Property tax1.31.42.22.12.0
General and sewerage rates0.10.2
Inheritance tax0.10.10.8
Land transfer tax1.41.41.31.51.7
Taxes on domestic transactions17.822.622.323.125.2
VAT/consumption tax12.213.212.212.413.8
Stamp duty1.83.02.22.12.7
Motor vehicle tax1.81.41.61.81.7
Licences2.03.74.04.14.7
Airline ticket tax1.11.61.21.3
Other (including cruiseship tax)0.10.81.41.0
Taxes on international transactions100.088.784.988.987.4
Import duty36.328.225.721.822.5
VAT/consumption tax54.250.148.353.854.9
Petrol tax0.61.71.51.92.1
Exports duty0.3
Petroleum profit tax0.1
Foreign exchange tax8.98.79.05.10.5
Customs services charge6.37.5
Nontax revenue12.416.514.418.117.0
Airport dues0.50.5
Post office2.43.43.74.12.9
Dividends4.13.43.14.43.7
ECCB profits1.83.52.13.53.3
Rents and interest income0.20.40.30.80.7
Fees and service charges2.12.83.22.63.0
Miscellaneous taxes1.93.01.92.22.7
Capital revenue0.80.10.20.9
Total grants15.926.211.418.121.9
Current grants2.53.52.97.5
Capital grants13.426.27.915.214.4
(In Percent of GDP)
Total revenue and grants26.728.025.126.825.2
Current revenue23.924.023.424.222.6
Tax revenue21.921.521.321.720.4
Taxes on incase and profits1.94.15.05.45.0
Taxes on property0.50.50.60.60.5
Taxes on domestic transactions3.03.43.33.23.3
Taxes on international transactions16.613.512.512.411.6
Of which:
Import duty6.04.33.83.03.0
VAT/consumption tax9.07.67.17.57.3
Nontax revenue2.12.52.12.52.2
Capital revenue0.10.1
Total grants2.64.01.72.52.9
Current grants0.40.50.41.0
Capital grants2.24.01.22.11.9
Sources: Ministry of Finance; and staff estimates.
Sources: Ministry of Finance; and staff estimates.

The structural adjustment program adopted in 1992 began with additional efforts at revenue enhancement, including the restructuring of the debt-service levy through the introduction of four progressive rates, the expansion of the value-added tax to include previously exempt items, and the removal of exemptions from import duties previously granted to most statutory bodies. As a result, in 1992 taxes on income and profits increased by about 1 percentage point of GDP to 5.0 percent of GDP. However, the slowdown in the economy and weaknesses in tax administration resulted in a fall in taxes on international trade and nontax revenue by 1.2 percentage points of GDP and current revenue fell from 24 percent of GDP in 1991 to 23.4 percent of GDP in 1992.

In 1993 the Government introduced only one new tax measure, a 2.5 percent customs service charge on all imports, and instead focused its efforts on streamlining the tax system, improving tax administration, finalizing plans for the reintroduction of a comprehensive income tax system, and on the completion of a new cadastral survey. On July 1, 1993 the authorities introduced the revised CARICOM External Tariff (CET) which resulted in the maximum tariff rate falling from 45 to 35 percent and at the same time the 12 different rates of the VAT on imports were consolidated into four. In addition, efforts at strengthening tax administration began to show some results and current revenue in 1993 reached 24.2 percent of GDP, compared with 23.4 percent of GDP in 1992.

The tax reform efforts continued into 1994 with the reduction of the VAT on certain imported consumer goods from 25 to 15 percent, a similar reduction on imported wine and spirits, and the lowering of the VAT on cigarettes and cigars from the “luxury rate” of 55 percent to 15 percent. The purpose of these reductions was the lower domestic retail prices of these goods in order to discourage the substantial trade in the smuggling of these items. The authorities also abolished the 2.5 percent tax on foreign exchange sales.

In October 1994 legislation for the reintroduction of taxes on incomes and profits was approved by the Parliament. The new legislation became effective on January 1, 1995 and will be applied retroactively from January 1, 1994. The new system retains the income ranges and tax rates for personal income established under the debt-service levy, but incorporates a new 30 percent tax bracket for income earners in excess of EC$50,000 per annum. 1/ In order to broaden the base of the new tax, various forms of income (such as management fees, interest earnings, royalty, and dividend receipts) which were previously excluded from debt-service levy are now included as taxable income of individuals. The business levy was replaced by a new corporate income tax consisting of two rates: 30 percent on profits of less than EC$45,000 per annum and 35 percent on profits in excess of EC$45,000. In 1995 these rates will be combined into a single rate of 30 percent. In addition, new rates of taxation were introduced with respect to property taxes.

Despite these efforts, current revenue fell to 22.6 percent of GDP in 1994, from 24.2 percent of GDP in 1993. This reflected slippages in enforcement with respect to the business levy due to the late posting of assessments to taxpayers, the abolishment of the foreign exchange tax, and lower receipts from post office sales and property taxes.

b. Expenditure

Current expenditure has declined almost steadily from approximately 27 percent of GDP in 1990 to 22.6 percent of GDP in 1993 (Table 11). This reflected the efforts, begun in 1991, to reduce the size of the civil service through selected retrenchment and also the imposition of a wage freeze that took effect in 1992, the year in which the authorities launched their 1992-94 structural adjustment program. Since 1992 the Ministry of Finance has also strengthened its control over all expenditure associated with the operations of government ministries.

Table 11.Grenada: Central Government Expenditure
1990199119921993Est.

1994
(In millions of Eastern Caribbean dollars)
Total expenditure and net lending219.1219.4171.8193.7210.5
Current expenditures162.0161.1162.5162.2170.2
Personnel expenditure82.583.389.087.485.0
Salaries and wages77.977.483.282.079.7
Allowances4.65.95.95.45.3
Goods and services71.360.160.656.565.0
Of which:
Supply and overheads38.127.821.320.221.7
Retirement benefits10.49.614.013.114.4
NIS contributions2.42.82.62.42.7
Other goods and services (including road maintenance)5.43.49.5
Interest payments20.419.917.317.416.8
Domestic12.513.813.313.613.7
Of which: arrears5.12.92.00.6
Foreign7.96.14.03.83.1
Of which: arrears4.96.2
Transfers and subsidies8.217.712.818.320.3
Transfers abroad2.18.62.86.75.3
Domestic transfers6.19.110.011.614.9
Capital expenditures and net lending57.158.39.331.540.2
Capital formation56.757.820.631.556.5
Capital transfers2.2
Net lending0.40.5-11.3-18.4
(In percent of GDP)
Total expenditure and net lending36.433.425.327.027.8
Current expenditures26.924.523.922.622.5
Personnel expenditure13.712.713.112.211.2
Salaries and wages12.911.812.211.410.5
Allowances0.80.90.90.80.7
Goods and Services11.89.18.97.98.6
Of which:
Supply and overheads6.34.23.12.82.9
Retirement benefits1.71.52.11.81.9
NIS contributions0.40.30.40.30.4
Other goods and services (including road maintenance)0.80.51.3
Interest payments3.43.02.52.42.2
Domestic2.12.12.01.91.8
Of which: arrears0.80.40.30.1
Foreign1.30.90.60.50.4
Of which: arrears0.80.40.9
Transfers and subsidies1.42.71.92.62.7
Transfers abroad0.31.30.40.90.7
Other transfers and subsidies1.01.41.51.62.0
Capital expenditures and net lending9.58.91.44.45.3
Capital formation9.48.83.04.47.5
Capital transfers0.3
Net lending0.10.1-1.7-2.4
Sources: Ministry of Finance; and staff estimates.
Sources: Ministry of Finance; and staff estimates.

In 1994 the authorities continued the process of down sizing the civil service, maintained tight control over expenditure, and kept the wage freeze in effect. At end-1994 the total number of persons employed in the civil service stood at 5,455 compared with 6,633 persons at end-June 1991. The authorities intend to reduce the current level of employment by an additional 200 persons by end-1995, mostly through attrition. At the same time, efforts are being made to eliminate a number of vacant positions in the civil service and limit recruitment. In 1994 the authorities also attempted to induce certain employees to take early retirement by reducing the time necessary to qualify for a full pension from 33.3 years of continuous service to 26.6 years.

However, the retrenchment exercise received a setback during 1994 in the form of a court ruling that affected the method of calculating pension and gratuities of permanent civil service employees. 1/ In light of the financial costs associated with the court’s ruling it is most likely that the majority of the reductions in personnel in the future will take place largely through attrition or through the removal of “unestablished” (i.e., temporary) staff. Despite the increase in pension and gratuity payments during the year, current expenditure continued its downward trend, falling to 21.9 percent of GDP by end 1994.

In contrast, government capital expenditure, which fell from 9.4 percent of GDP in 1990 to 2.9 percent of GDP in 1992, began to recover in 1993 and reached 7.8 percent of GDP in 1994, financed by increased external support, improved savings, and divestment receipts. However, although the implementation rate of the public sector investment program (PSIP) has improved, constraints remain in the form of delays in document preparation, insufficient counterpart financing associated with temporary cash flow constraints of the Government, and, in some cases, slow response by some donor or creditor agencies.

The reduction in current expenditure, coupled with the relative stability in current revenue during the period 1990-93 resulted in the savings of the Government rising steadily from minus 3.0 percent of GDP in 1990 to 1.6 percent of GDP in 1993, before declining to 0.1 percent of GDP in 1994. During this period, the overall balance (after grants) of the Government also improved, as the deficit fell from 9.7 percent of GDP in 1990 to a deficit of 2.3 percent of GDP in 1994.

3. Financing

In the period 1986-90 the government deficit was financed, for the most part, by accumulating both domestic and external arrears. As a consequence, foreign loans and grants decreased steadily between 1990 and 1992. In 1993 foreign loan disbursements increased substantially, reflecting growing confidence by external creditors and donors in the policy actions taken under the SAP, with respect to fiscal consolidation, project implementation within the PSIP, and the repayment of external arrears. With respect to the latter, the Government reduced the stock of external arrears from a peak of 9.8 percent of GDP in 1990 to 3.1 percent of GDP at end-1994.

As government savings improved in 1992, the recourse to bank credit was reduced substantially, and remained low in the following two years. With respect to domestic arrears, in 1993 the Government eliminated its outstanding arrears to the National Insurance Scheme (NIS) through the issue of government bonds of varying maturities to the value of approximately EC$78 million. The bond issue covered the elimination of contribution arrears for 1991-92 (EC$10.8 million), interest arrears on previously issued bonds (EC$17.3 million), and consolidated all previous bonds, debentures, and loans outstanding (EC$49.9 million). In addition, for the first time since the establishment of the NIS in 1983, the Government paid its contributions in cash and on a timely basis. Efforts have also been made to eliminate the past tendency to build up arrears to the domestic private sector in the face of cash-flow constraints. These arrears have consisted of temporary, but lengthy, delays on payments to suppliers and late payments on interest or principal due on government bonds. Current evidence suggests that the authorities have reduced the level of these arrears and have become current with respect to the servicing of domestic obligations.

With the resumption of external support, external loan disbursements grew from a low of approximately EC$8 million in 1992 to EC$26 million in 1994. However, in the near term the authorities expect that external support will be shifted toward grants and that the share of loan financing will decline.

4. The National Insurance Scheme (NIS)

The NIS is funded by both employers and employees who each pay equal contributions of 4 percent of an employee’s gross salary, not exceeding EC$1,250 a month. Additional revenue is generated from returns of the investment portfolio of the NIS. The NIS has always generated cash surpluses despite the fact that, from inception and until 1993, government contributions have been in arrears. Over time, the Government has reduced its arrears by issuing bonds which by 1992 represented close to 90 percent of the investment portfolio of the NIS. Other areas of investment include housing loans, either directly to individuals or through the National Housing Authority.

By 1994 the NIS, through aggressive marketing of mortgages, had reduced the proportion of government debt in its investment portfolio to slightly below 80 percent. In order to lower further the proportion of government bonds in its investment portfolio, the NIS is exploring the possibility of swapping parcels of government land for some of its holding of bonds. The lands would be developed and sold commercially.

In 1994 the trend of current account surpluses continued, with a surplus of EC$13.5 million (approximately 1.8 percent of GDP) (Table 12). The overall balance, however, deteriorated somewhat from nearly 2 percent of GDP in 1993 to under 1.5 percent of GDP because of higher capital expenditure associated with the costs of computerization of the accounts of the NIS.

Table 12.Grenada: Operations of the National Insurance Scheme(In millions of Eastern Caribbean dollars)
199019911992Prov. 1993Est.

1994
Current revenue16.918.618.920.319.9
Contributions from Government4.85.55.14.95.4
Government share2.42.82.62.42.7
Employee share2.42.82.62.42.7
Other contributions7.67.98.49.19.0
Other4.55.17.46.35.5
Current expenditure3.74.45.16.06.4
Of which:
Wages and salaries0.81.01.01.01.0
Goods and services0.40.60.71.11.3
Current balance13.214.213.814.313.5
Capital expenditure1.92.41.70.23.4
Overall balance11.311.812.114.110.1
Financing-11.3-11.8-12.1-14.1-10.1
External (net)
Domestic (net)-11.3-11.8-12.1-14.1-10.1
Commercial banks-0.60.70.4-6.7-2.0
Other financial institutions-2.0-3.2-3.7-3.9-8.1
Central Government-9.6-9.0-9.8-5.0
Nonfinancial public enterprises0.8-0.31.1-0.6
Other0.10.1-0.12.1
Source: National Insurance Scheme.
Source: National Insurance Scheme.

5. The nonfinancial public enterprises

Since 1990 the five major public sector enterprises (excluding the NIS) have generated surpluses on both their current account and overall balances, with the former being consistently in excess of 1 percent of GDP since 1991. During this period, however, the financial performance of the National Water and Sewerage Authority (NAWASA) and the Marketing and National Importing Board (MNIB) began to weaken. With respect to the MNIB, improved management practices and better strategies with respect to domestic and external markets has led to a strengthening of its financial position, resulting in a small surplus in its operation in 1993. In contrast, the situation of NAWASA has deteriorated further as legal action by its major client has hampered efforts to impose and collect increased water rates, and the resulting cash-flow constraint has hindered the authority’s ability to carry out badly needed maintenance on aging capital stock. More importantly, a rapidly growing tourist industry and a falling water table require substantial and immediate capital investments in water production, storage, and distribution.

The public enterprises receive little in the form of budgetary transfers but some are granted exemptions from the payment of a variety of taxes. Despite the 1992 effort to end tax and duty exemptions for public enterprises, many exemptions remain; some are due to prior legal contracts (such as the ten-year tax holiday given to the Sugar Factory), or to reinstatement of the old exemptions, as in the case of the Grenada Electricity Services Company (GRENLEC). In 1992, GRENLEC’s duty exemptions on all imports for current operations was removed, except for existing exemptions on fuel and lubricants. In 1994, the contract authorizing the sale of 50 percent of the company to a foreign investor, reinstated all the exemptions that were revoked in 1992.

Public enterprises whose accounts are not consolidated with the rest of the public sector include the Airport Authority, the Model Farms Corporation, and the Gravel, Concrete, and Emulsion Products Corporation. The latter was formed in 1992 when the Government merged two enterprises into one company; in the same year the Public Transport Corporation was closed. In 1994 two additional state corporations were formed. One company is for the specific purpose of constructing the new offices of the Ministry of Finance in 1995. The purpose of creating a new corporation was to avoid the cumbersome tendering and procurement procedures that would have affected the project if the Ministry of Works was the project manager. The second company was formed to consolidate all the solid waste removal activities provided by the government into one entity which will offer waste removal services at commercial rates.

6. Divestment

In the period 1984-93, the Government reduced the number of the nonfinancial public enterprises from 27 to 8 through a program of divestment. During 1994 the Government sold 50 percent of the Grenada Electricity Services Company and its remaining 30 percent shareholding in the brewery for EC$15.5 and EC$2.9 million, respectively. Negotiations to sell the Central Garage, which was closed in 1992, are continuing and in late 1994 the authorities entered into an agreement with a foreign firm to lease the emulsion and rock asphalt assets of the Concrete, Gravel, and Emulsions Corporation. In October 1994 the authorities announced their intention to sell another 40 percent of the remaining shares in GRENLEC for an additional EC$15-17 million. The completion of this sale is expected in 1995.

7. The public sector investment program

The PSIP anticipates total expenditure of EC$266.0 million for the period 1994-96 (Table 14). Approximately 66 percent of total PSIP expenditure will be spent on infrastructure (transport and water and sewerage in particular) and agriculture.

In 1994, total PSIP expenditure continued its upward trend rising to approximately 10.7 percent of GDP. This compares favorably with 1993 when the PSIP expenditures rose to 7.5 percent of GDP from 4.1 percent of GDP realized in 1992. In 1994, the main transportation projects consisted of repaving the eastern main road and the rebuilding of a substantial number of secondary roads, with many of the latter being completed by year end. As part of the arrangement for the sale of GRENLEC, both the Government and the foreign investor, WRP Ltd., invested EC$10 million in a new 4.5 megawatt generating plant which was installed in the last quarter of the year. Also in 1994, NAWASA launched its emergency program designed to tackle the problem of water shortages, especially during the dry season, through the construction of larger storage tanks, additions to its fleet of water tankers, and the metering of the largest users of water.

Table 13.Grenada: Finances of Five Selected Public Enterprises(In millions of Eastern Caribbean dollars)
199019911992Prov. 1993Est.

1994
I. Consolidation of Five Public Enterprises
Current revenue60.063.768.674.473.5
Current expenditure 1/-52.1-55.4-56.6-64.6-59.4
Current surplus/deficit (-)7.98.311.99.814.1
Capital transfers from Government0.60.80.70.64.0
Capital expenditure-9.0-5.9-5.5-22.1-18.9
Overall balance before grants-0.63.27.1-11.7-0.8
External grants1.20.42.016.05.0
Overall surplus/deficit (-)0.63.69.24.34.2
Financing-0.6-3.6-9.24.34.2
External (net)-0.2-0.3-1.6-1.22.3
Domestic (net)-0.4-3.4-7.6-3.2-6.5
Commercial banks0.8-0.3-0.8-3.2-6.7
Other 2/-1.3-3.1-6.80.2
II. Grenada Electricity Services
Current revenue26.328.530.035.435.4
Current expenditure 1/-20.8-22.7-23.4-29.6-25.4
Current surplus/deficit (-)5.55.86.65.89.9
Capital transfers from Government4.0
Capital expenditure-3.7-4.5-1.7-4.0-7.2
Overall balance before grants1.81.34.91.86.8
External grants
Overall surplus/deficit (-)1.81.24.91.86.8
Financing-1.8-1.2-4.9-1.8-6.8
External (net)0.4-0.7-1.2-0.6-0.6
Domestic (net)-2.2-0.5-3.7-1.2-6.2
Commercial banks0.2-0.4-0.9-5.9
National Insurance Scheme-0.4-0.8-2.2-0.3-0.3
Other 2/-1.8-1.2
III. Grenada Ports Authority
Current revenue3.53.94.65.53.2
Current expenditure 1/-2.5-2.8-2.8-3.2-1.7
Current surplus/deficit (-)0.91.21.82.31.5
Capital transfers from Government0.10.10.20.3
Capital expenditure-0.8-0.8-0.2-0.1
Overall balance before grants0.30.41.72.41.5
External grants
Overall surplus/deficit (-)0.30.41.72.41.5
Financing-0.3-0.4-1.7-2.4-1.5
External (net)-0.3-0.3-0.3-0.3-0.3
Domestic (net)-0.1-1.4-2.0-1.1
Commercial banks-0.1-0.3-1.4-1.8-1.5
Other 2/0.10.2-0.30.3
IV. National Water and Sewerage Authority3/
Current revenue6.98.211.210.311.8
Current expenditure 1/-6.2-6.5-7.3-9.1-9.9
Current surplus/deficit (-)0.71.73.91.21.9
Capital transfers from Government0.40.80.50.3
Capital expenditure-1.8-0.8-2.4-17.0-11.9
Overall balance before grants-0.71.72.1-15.5-10.0
External grants1.20.52.016.05.0
Overall surplus/deficit (-)0.52.24.10.6-5.0
Financing-0.5-2.2-4.1-0.65.0
External (net)-0.3-0.2-0.4-0.33.2
Domestic (net)-0.2-2.0-3.7-0.31.8
Commercial banks0.1-0.10.1-0.70.8
Other 1/-0.3-1.9-3.80.41.0
V. Marketing and National Importing Board
Current revenue16.915.915.415.715.5
Current expenditure 1/-16.8-16.8-16.4-15.8-15.0
Current surplus/deficit (-)-1.0-1.0-0.10.5
Capital transfers from Government
Capital expenditure-1.60.5-0.6-0.10.1
Overall balance before grants-1.5-0.5-1.6-0.20.7
External grants
Overall surplus/deficit (-)-1 5-0.5-1.6-0.20.7
Financing1.50.51.60.2-0 7
External (net)1.00.3
Domestic (net)1.5-0.51.30.2-0.6
Commercial banks0.3-0.11.00.1
Other 2/1.2-0.40.30.2-0.7
VI. Grenada Sugar Factory
Current revenue6.57.27.47.57.6
Current expenditure 1/-5.7-6.6-6.8-6.8-7.3
Current surplus/deficit (-)0.70.60.60.60.2
Capital transfers from Government
Capital expenditure-1.1-0.4-0.6-0.8
Overall balance before grants-0.40.3-0.20.3
External grants
Overall surplus/deficit (-)-0.40.3-0.20.3
Financing0.4-0.30.2-0.3
External (net)
Domestic (net)0.4-0.30.2-0.3
Commercial banks0.50.1-0.2
Other 2/-0.1-0.20.10.1-0.1
Sources: Annual financial statements of individual enterprises; Ministry of Finance; and staff estimates.

Excludes depreciation.

Includes accumulated losses and gains for each year.

Formerly the Central Water Commission.

Sources: Annual financial statements of individual enterprises; Ministry of Finance; and staff estimates.

Excludes depreciation.

Includes accumulated losses and gains for each year.

Formerly the Central Water Commission.

Table 14.Grenada: Public Sector Investment Program, 1994-96
1994199519961994-96
(In millions of Eastern Caribbean dollars)
Total69.789.3107.5266.4
Economic sectors18.635.619.173.2
Agriculture14.521.912.548.8
Manufacturing mining and quarrying3.89.56.619.8
Tourism0.44.24.6
Infrastructure43.735.062.8141.6
Transportation and communication22.320.435.177.8
Power10.910.9
Water and sewerage6.714.727.749.1
Housing3.73.7
Social services4.812.119.636.4
Education2.87.86.116.7
Health and the environment1.03.610.615.2
Other social services1.00.82.84.5
Other Investment2.66.66.015.2
Total investment69.789.3107.5266.4
Total Financing69.789.3107.5266.4
External52.974.393.8221.1
Domestic16.814.913.645.4
(In percent of Public Sector Investment Program)
Economic sectors26.739.817.727.5
Agriculture20.724.511.618.3
Manufacturing mining and quarrying5.410.66.17.4
Tourism0.54.71.7
Infrastructure62.739.258.553.1
Transportation and communication32.122.832.729.2
Power15.64.1
Water and sewerage9.716.425.818.4
Housing5.41.4
Social services6.813.618.213.7
Education4.08.75.76.3
Health and the environment1.44.09.95.7
Other social services1.40.82.61.7
Other investment3.87.45.65.7
Total investment100100100100
Total financing100100100100
External75.983.387.383.0
Domestic24.116.712.717.0
Total PSIP in percent of GDP9.211.012.4
Sources: Ministry of Finance; and staff estimates.
Sources: Ministry of Finance; and staff estimates.

In an effort to improve both monitoring and the preparation of the PSIP, the Ministry of Finance formed two committees in 1994. One committee, consisting of the Permanent Secretaries of the Ministry of Finance and the ministries responsible for project implementation, is in charge of policy formulation and direction. The second committee of senior technicians is responsible for the preparation, implementation, and coordination of projects. While an improvement in the rate of capital spending has been achieved, poor communication with respect to the commencement and/or termination of projects as well as slow progress reports on ongoing projects continue to present serious difficulties in measuring, on a timely basis, the level of expenditure under the PSIP. In addition, the practice of donor agencies providing financing directly to government ministries or agencies allows these agencies to incur capital expenditure outside of the accounting framework of the Ministry of Finance. In an effort to improve the record on project implementation, and consistent with the aim to promote private sector development, the authorities have indicated a willingness to award contracts to private sector firms to carry out some projects that would normally have been executed by the Ministry of Works.

III. Financial Intermediation 1/

1. Overall developments

The rate of growth of money and quasi-money decelerated from approximately 11 percent in 1990 to 7 percent in 1993 (Table 15). This slowdown was broadly in line with the declining rate of income growth during this period. At the same time, the growth in credit to the private sector increased to 10.4 percent in 1993 from an average of 6.4 percent in the previous three years. In 1992 net credit to the public sector declined, and as a consequence the net foreign assets of the banking system increased substantially (by nearly US$10 million); in 1993, however, foreign assets remained relatively unchanged at US$23 million, as growth of money and quasi-money slowed.

Table 15.Grenada: Monetary Survey
December 31December 31 1/
199019911992199319931994
(In millions of Eastern Caribbean dollars)
Net foreign assets42.037.163.763.464.5105.7
Net imputed reserves47.548.169.968.868.882.7
Banks’ net foreign assets-5.5-11.0-6.1-5.3-4.323.0
Net domestic assets286.7309.0311.2337.4388.6397.6
Net credit to the public sector72.981.356.145.746.333.0
Central Government67.477.254.853.955.252.7
Credit from ECCB36.537.735.028.328.323.2
Credit from commercial banks30.939.519.825.626.929.4
National Insurance Scheme-3.3-2.6-2.2-8.8-8.8-10.8
Nonfinancial public enterprises8.96.73.50.6-0.1-8.9
Net credit to other financial institutions-21.5-22.1-16.3-19.0-19.9-23.7
Credit to private sector270.2287.5315.0353.9400.8413.0
Other assets (net)-35.0-37.6-43.6-43.2-38.7-24.7
Money plus quasi-money328.7346.1375.0400.9453.1503.3
Money82.780.7100.9104.3108.8123.0
Quasi-money246.0265.4274.0296.6344.3380.4
(Percentage change) 2/
Net foreign assets4.6-1.57.7-0 19.1
Net domestic assets6.46.80.67.02.0
Net credit to the public sector1.12.5-7.3-2.8-2.9
Central Government1.43.0-6.5-0.2-0.6
National Insurance Scheme-0.10.20.1-1.8-0.4
Nonfinancial public enterprises-0.1-0.7-0.9-0.8-2.0
Credit to private sector6.05.37.910.42.7
Other assets (net)-0.8-1.0-1.70.13.1
Money plus quasi-money11.05.38.36.911.1
Sources: Eastern Caribbean Central Bank; and staff estimates.

Includes the assets and liabilities of the Grenada Coperative Bank which were added to the monetary statistics of the ECCB in early 1993.

In relation to money and quasi-money at the beginning of the period.

Sources: Eastern Caribbean Central Bank; and staff estimates.

Includes the assets and liabilities of the Grenada Coperative Bank which were added to the monetary statistics of the ECCB in early 1993.

In relation to money and quasi-money at the beginning of the period.

In 1994, financial savings increased in terms of GDP as money and quasi-money rose by 11 percent; however, as the rate of credit expansion to the private sector declined and the public sector continued to reduce it’s bank debt, the net foreign assets increased significantly (by US$15 million). The fall in interest rates that had begun in 1991 continued through 1994 reflecting the banking system’s ample liquidity.

2. The banking system

a. ECCB operations

Grenada is one of the eight members of the Eastern Caribbean Central Bank (ECCB), 2/ which exercises full central banking powers, regulates commercial banking activity, and issues the common currency, the Eastern Caribbean dollar. Since its establishment in 1983, the ECCB has pursued well-balanced policies aimed at building up the foreign exchange cover for the Eastern Caribbean dollar (which is now well in excess of the level required by its charter), 3/ and observing the statutory limits on credit to member governments. These limits on credit permit the ECCB to: (a) hold treasury bills of member countries for up to 10 percent of a member’s current revenue, (b) hold other securities issued by member governments for up to a total of 15 percent of its currency in circulation and other demand liabilities, (c) provide temporary advances to any member in any financial year up to but not exceeding 5 percent of that member’s average annual cur-rent revenue in the preceding three years, and (d) hold bonds issued by any development finance corporation in any member country up to 2.5 percent of that member’s average annual current revenue over the preceding three years. The ECCB also has imposed (and maintained unchanged since 1984) a 6 percent reserve requirement on commercial banks in the region. In order to help member banks manage their liquidity, the ECCB introduced in 1986 an inter-bank money market facility for the placement and transfer of short-term funds, 1/ and in 1988 it established a market for the discounting and rediscounting of treasury bills. 2/ Furthermore, by the end of 1991 all ECCB members had adopted a Uniform Banking Act (UBA) which served to simplify and standardize the ECCB’s regulatory and supervisory procedures.

In particular, the UBA raised the capital requirements for banks, set limits on unsecured loans at 15 percent of the banks’ total loan portfolio, and required local publication of financial results. As noted above, Grenada’s imputed share in the net international reserves of the ECCB remained virtually unchanged in 1993, but increased by more than 20 percent (to EC$82.7 million) in 1994 (Table 16). This increase reflected a rise in the ECCB’s liabilities to the private sector (currency in circulation in Grenada), an increase in the ECCB’s net liabilities to the commercial banks, and a fall in the net credit outstanding to the Government of Grenada. The decline in ECCB’s net credit to the Government in 1994 stemmed from a drop in short-term credit (treasury bills and temporary advances) with debentures and other long-term claims on government remaining relatively unchanged.

Table 16.Grenada: Operations of the Eastern Caribbean Central Bank
December 31December 31 1/
199019911992199319931994
(In millions of Eastern Caribbean dollars)
Net (imputed) international reserves2/47.548.169.968.868.88.7
Net claims on commercial banks-45.9-45.4-58.2-51.0-51.0-54.2
Claims1.10.5.0.5
Loans0.1
Long-term loans1.0
Balances with banks0.50.5
Liabilities47.045.458.251.551.554.2
Currency12.213.610.517.017.015.2
Statutory reserves 3/22.323.326.230.330.3
Statutory deposits0.70.70.1
Currant deposits 3/3.95.416.21.01.033.5
Fixed deposits8.63.15.42.52.55.4
Net domestic assets36.537.735.027.927.923.2
Net credit to central government36.537.735.028.328.323.2
Short-term credit13.314.514.75.95.92.3
Temporary advances2.64.39.02.62.6
Treasury bills10.710.25.73.33.32.3
Debentures6.66.63.76.66.66.6
Other claims16.616.616.615.915.915.6
Central government sinking funds deposits
Central government other deposits-1.1
Net credit to rest of public sector
Credit to private sector
Net unclassified assets-0.4-0.4
Currency in circulation38.140.446.745.745.751.8
Estimated notes issued47.450.753.858.958.963.0
Estimated coins issued2.93.33.43.73.74.0
Currency held by banks (-)12.213.610.517.017.015.2
Sources: Eastern Caribbean Central Bank; and commercial banks.

Includes the assets and liabilities of the Grenada Coperative Bank which were added to the monetary statistics of the ECCB in early 1993.

Refers to the imputed share of Grenada in the international reserves of the ECCB.

Statutory reserves were classified with current deposits as of 1994.

Sources: Eastern Caribbean Central Bank; and commercial banks.

Includes the assets and liabilities of the Grenada Coperative Bank which were added to the monetary statistics of the ECCB in early 1993.

Refers to the imputed share of Grenada in the international reserves of the ECCB.

Statutory reserves were classified with current deposits as of 1994.

b. Commercial banks

The commercial banking sector in Grenada comprises two banks that are branches of foreign-owned banks, a foreign-owned locally incorporated bank, 3/ the cooperative bank, and a state-owned bank.

The growth in bank deposits decelerated from 9.7 percent in 1990 to about 6 percent on average in the two subsequent years (Table 17). At the same time, the growth in credit to the private sector also slowed, and as the net credit outstanding to the public sector dropped by a substantial amount in 1992, the net foreign assets of the banks increased significantly. The strong deposit growth in 1994 (10.8 percent) reflected a turnaround in economic activity and was led by strong growth in tourism and an increase in remittances from Grenadian nationals living abroad. With respect to remittances, a large number of expatriate Grenadians are reaching retirement age, and in light of the signs of economic recovery, many have been making arrangements for their eventual return to Grenada. In both 1993 and 1994, funds were shifted into savings deposits as time deposit rates fell below the 4 percent legal minimum on savings deposits.

Table 17.Grenada: Consolidated Accounts of the Commercial Banks(In millions of Eastern Caribbean dollars)
December 31December 31 1/
199019911992199319931994
Net foreign assets-5.5-11.0-6.1-5.3-4 323.0
Foreign assets50.048.775.491.096.3134.1
Foreign currency holdings5.33.52.23.23.23.0
Claims on ECCB area banks7.15.122.717.817.827.7
Claims on banks abroad26.930.440.953.353.365.1
Other10.79.89.616.722.038.4
Foreign liabilities55.559.781.696.3100.6111.1
Balances due to ECCB area banks0.20.31.50.70.70.5
Balances due to banks abroad5.64.015.920.320.321.6
Nonresident deposits48.554.363.875.279.588.8
Other1.21.20.50.10.10.3
Net position with ECCB45.343.155.448.053.054.6
Claims on ECCB45.543.155.548.253.154.6
Currency holdings12.213.610.514.917.015.2
Statutory reserves 2/22.224.126.428.630.8
Statutory deposits0.1
Current deposits 1/2.02.89.91.92.629.1
Fixed deposits and call accounts9.02.78.82.72.710.4
Liabilities to ECCB-0.2-0.2-0.1-0.1
Net domestic assets250.8273.6279.0312.5358.7374.0
Net credit to the public sector36.548.825.517.717.89.7
Not credit to Government30.939.519.825.626.929.4
Treasury bills11.411.912.012.912.911.7
Other securities13.513.59.111.713.117.2
Loans and advances15.718.313.412.512.514.1
Deposits-9.7-4.2-14.7-11.5-11.5-13.6
Net credit to National Insurance Scheme-3.3-2.6-2.2-8.8-8.8-10.8
Loans, advances, and investments0.20.2
Deposits-3.3-2.8-2.4-8.8-8.8-10.8
Net credit to statutory bodies8.96.73.50.6-0.1-8.9
Loans, advances, and investments12.811.09.49.79.76.7
Deposits-3.9-4.3-5.9-9.1-9.8-15.6
Not credit to other financial institutions-21.5-22.1-16.3-19.0-19.9-23.7
Loans, advances, and investments0.40.32.24.34.84.2
Deposits-21.8-22.5-18.5-23.3-24.7-27.9
Credit to private sector270.2287.5315.0353.9400.8413.0
Interbank float-2.8-7.0-11.0-2.02.2
Claims8.95.44.63.613.113.9
Liabilities-8.9-8.1-11.6-14.6-15.2-11.7
Net unclassified assets-34.5-32.6-33.8-28.8-38.2-27.4
Liabilities to the private sector290.6305.7328.3355.2407.4451.6
Demand deposits44.640.354.358.663.171.2
Savings deposits158.6172.2173.7200.4233.0267.8
Time deposits80.883.990.482.597.694.7
Foreign currency deposits6.79.39.913.813.817.9
Loans/deposits ratio (in percent) 3/88.689.585.587.387.784.3
Liquidity ratio (in percent) 4/16.215.421.118.418.725.6
Source: Eastern Caribbean Central Bank.

Includes the assets and liabilities of the Grenada Coperative Bank which were added to the monetary statistics of the ECCB in early 1993.

Statutory reserves were classified with current deposits as of 1994.

Loans and advances, treasury bills, investments, and commercial bills discounted divided by total deposits (domestic and foreign).

Cash, current and fixed deposits at the ECCB, and claims on domestic and foreign banks divided by deposits, borrowing from the ECCB, and balances due to domestic and foreign banks.

Source: Eastern Caribbean Central Bank.

Includes the assets and liabilities of the Grenada Coperative Bank which were added to the monetary statistics of the ECCB in early 1993.

Statutory reserves were classified with current deposits as of 1994.

Loans and advances, treasury bills, investments, and commercial bills discounted divided by total deposits (domestic and foreign).

Cash, current and fixed deposits at the ECCB, and claims on domestic and foreign banks divided by deposits, borrowing from the ECCB, and balances due to domestic and foreign banks.

The strong growth in financial savings in 1994 was not absorbed by a corresponding increase in domestic credit. Credit to the private sector rose by 3 percent and the public sector reduced its net indebtedness to the commercial banks by EC$8.3 million (45 percent of the outstanding amount). As a result, the net foreign assets of the banks increased substantially, by about US$10 million. The sluggish growth of credit to the private sector in 1994 reflected, to some extent, the repayment of some credits by agricultural associations and farmers, a high proportion of foreign financing of newly established hotels, and increased provisions against bad debts. The fall in net credit to the public sector in 1994 was largely accounted for by increased deposits by the NIS and the public enterprises. Given the low level of credit demand, the commercial banks channeled substantial resources abroad. The loan-to-deposits ratio, which had averaged about 88 percent over 1990-93, fell to 84 percent by end-1994 reflecting, not only increased liquidity, but also the use of additional funds for loan-loss provisions and for the construction of bank office buildings.

The sectoral distribution of commercial bank credit in Grenada shows that around 48 percent is outstanding to the business sector, 43 percent to the household sector (mostly for house and land purchases), and 9 percent to the public sector (Table 18). In 1994, loans and advances outstanding to both the public sector and businesses declined by 3-4 percent, while those to households (especially for house and land purchases) increased by 5 percent. Within the business sector, virtually only credit for construction and land development increased (by 38 percent), reflecting mainly increased activity in commercial office building and extensive renovations to plant and equipment in the hotel industry.

Table 18.Grenada: Distribution of Commercial Bank Loans and Advances
1990199119921993 1/1994 1/
(In millions of Eastern Caribbean dollars)
Total309.8327.0348.2455.3454.6
Public sector28.130.526.142.040.6
Government and public enterprises, n.i.e.13.817.411.612.317.6
Public utilities 2/14.313.114.429.723.0
Businesses166.8176.4198.1225.3217.0
Agriculture and fisheries7.98.511.413.47.1
Manufacturing and mining24.726.437.729.726.7
Distributive trades69.371.068.579.472.2
Tourism and entertainment30.292.532.152.751.6
Transport14.113.515.320.420.0
Construction and land development10.813.315.216.022.1
Professional and other services8.19.314.510.913.1
Financial institutions1.62.03.52.84.2
Households114.9120.0123.9188.0197.0
House and land purchases72.170.667.1105.1117.3
Durable consumer goods16.216.117.819.518.4
Other26.633.239.163.461.3
(In Percent of total)
Public sector9.19.37.59.28.9
Government and public enterprises, n.i.e.4.45.33.32.73.9
Public utilities4.64.04.16.55.1
Businesses53.854.056.949.547.7
Agriculture and fisheries2.62.63.52.91.16
Manufacturing and mining8.08.110.86.55.9
Distributive trades22.421.720.917.415.9
Tourism and entertainment9.89.99.811.611.4
Transport4.64.14.44.54.4
Construction and land development3.54.14.43.54.9
Professional and other services2.62.84.22.42.9
Financial institutions0.50.61.00.60.9
Households37.136.735.641.343.3
House and land purchases23.321.619.323.125.8
Durable consumer goods5.24.95.14.34.0
Other8.610.211.213.913.5
Source: Ministry of Finance (Central Statistical Office).

Including the Grenada Cooperative Bank’s operations which were added to ECCB monetary statistics starting 1993.

Includes in 1994 EC$19.8 million in credit to public utilities which the ECCB had reclassified as credit to the private sector.

Source: Ministry of Finance (Central Statistical Office).

Including the Grenada Cooperative Bank’s operations which were added to ECCB monetary statistics starting 1993.

Includes in 1994 EC$19.8 million in credit to public utilities which the ECCB had reclassified as credit to the private sector.

Most deposit interest rates remain freely determined, except for a 4 percent minimum on savings deposits imposed by the ECCB since January 1985. In addition, the Grenadian Government sets a 16 percent ceiling on commercial bank lending rates (Table 19). Grenadian banks increased their deposit rates in 1989-90, but rates fell by about 2 percentage points in the subsequent two years, as the growth in commercial bank lending fell. Banks remained liquid and the downward pressure on rates continued in 1993 and 1994. The prime rate fell by 1/2 percentage point in 1993 to 10 percent and remained unchanged in 1994, while the average rate on six-month deposits fell by 1/4 percentage point in 1993 and a further 1/2 percentage point in 1994, to 3 percent.

Table 19.Grenada: Structure of Commercial Banks Interest Rates
Time Deposits
Period endedSavings Deposits3 months6 months12 monthsPrime LendingOther Lending Rates
December
19884.0-5.04.0-5.04.0-5.54.0-6.010.5-10.510.5-15.0
19894.0-5.04.0-6.04.0-6.54.0-7.010.5-10.510.5-15.0
19904.0-5.04.0-7.04.0-7.54.0-8.010.5-10.510.5-15.0
19914.0-5.04.0-6.04.0-6.54.0-7.010.5-10.510.5-15.0
19924.0-5.02.0-5.02.0-5.52.5-6.010.5-10.510.5-16.0
19934.0-5.01.5-6.01.5-5.51.5-6.010.0-10510.0-16.0
19944.0-5.01.5-4.01.5-4.51.5-6.510.0-10.510.5-16.0
1993
March4.0-5.02.0-5.02.0-5.52.5-6.010.5-10.510.5-16.0
June4.0-5.01.5-5.01.5-5.51.5-6.010.5-10.510.5-16.0
September4.0-5.01.5-6.01.5-5.51.5-6.010.0-10.510.0-16.0
December4.0-5.01.5-6.01.5-5.51.5-6.010.0-10.510.0-16.0
1994
March4.0-5.51.5-4.01.5-4.51.5-5.510.0-10.510.0-16.0
June4.0-5.51.5-4.01.5-4.51.5-5.510.0-10.510.0-16.0
September4.0-5.31.5-4.01.5-4.51.5-5.510.0-10.510.0-16.0
December4.0-5.51.5-4.01.5-4.51.5-6.510.0-10.510.5-16.0
Source: Eastern Caribbean Central Bank.
Source: Eastern Caribbean Central Bank.

3. Nonbank financial institutions

For the purpose of this report, the nonbank financial sector consists of the state-owned Grenada Development Bank (GDB), a number of credit unions, a building and loan association, and a number of insurance companies. Statistical information is available only with respect to the financial operations of the GDB (Table 20).

Table 20.Grenada: Accounts of the Grenada Development Bank(In millions of Eastern Caribbean dollars)
1990199119921993Sept.

1994
Net claims on commercial banks3.93.73.92.02.0
Claims3.93.73.92.02.0
Liabilities..........
Net domestic assets31.032.434.136.437.4
Net credit to Central Government2.02.02.03.73.7
International airport bonds1.51.51.51.51.5
Treasury bills0.50.50.50.50.5
Liberty Club1.71.7
Government capital contributions-5.7-6.8-7.1-7.1-8.4
Credit to private sector33.033.834.633.835.4
Net unclassified assets1.73.34.66.06.7
Medium- and long-term liabilities34.936.037.937.440.9
Caribbean Development Bank24.524.924.423.923.9
Other10.311.113.514.517.0
Source: Grenada Development Bank.
Source: Grenada Development Bank.

The GDB is the principal source of medium- and long-term development financing. The GDB obtains most of its resources from the Caribbean Development Bank (CDB) and the European Investment Bank (EIB). Following a period of rapid increase in the late 1980s, the growth of GDB’s lending slowed sharply in 1991-92, and declined in 1993, mainly as a result of a high loan delinquency and a lack of funding from the CDB and EIB. In 1994, the lending recovered somewhat (to about EC$37 million), following reorganization of the bank’s management and financial structure recommended by the CDB. Although the GDB’s lending has traditionally concentrated on housing, tourism (hotels and guest houses), and agriculture, an increasing share has gone to manufacturing, home mortgages, medical services, and day-care centers in recent years. Most recently, the GDB has also intermediated EC$1.1 million of student loans from NIS. Interest rates charged by GDB follow guidelines established by CDB for various sectors; in 1994 these rates averaged 9.5 percent for agricultural loans and 11 percent for loans to other sectors.

IV. The External Sector

1. Balance of payments

a. Overall developments

The external current account deficit, which had widened to US$34.5 million (14 percent of GDP) in 1991, fell steadily to US$25 million (9.4 percent of GDP) in 1993, as a fall in the prices of traditional agricultural exports, particularly nutmeg and mace, was more than offset by the growth in receipts from tourism (Table 21). Over the same period, the capital account surplus remained relatively unchanged at around US$30 million, but the composition of inflows changed drastically as private sector investment rose sharply in 1992 at a time when public sector disbursements fell steeply as external donors and creditors reduced their support for the public sector investment program.

Table 21.Grenada: Summary Balance of Payments
1990199119921993Est.

1994
(In millions of U.S. dollars)
Current account balance-29.2-34.5-19.7-25.0-17.7
Exports, f.o.b.27.924.921.521.523.2
Imports, c.i.f.-125.5-138.7-130.2-138.0-152.0
Services46.656.562.967.584.3
Tourism receipts61.866.671.078.796.6
Interest payments-4.1-2.3-2.5-2.5-2.1
Other (net)-11.0-7.7-5.6-8.6-10.1
Transfers21.822.826.023.926.8
Private transfers (net)21.623.625.925.325.9
Official transfers (net)0.1-0.80.1-1.40.8
Capital account25.130.829.129.519.9
Capital grants5.310.13.911.88.7
Public sector borrowing (net)7.31.6-1.5-0.67.4
Drawings 1/13.06.72.92.910.7
Obligations (-) 1/-5.6-5.0-4.4-3.5-3.2
Commercial batiks-2.92.0-1.8-0.7-10.1
Private capital14.517.028.419.013.8
Errors and omissions0.42.3-2.3-4.93.4
Overall balance-3.7-1.47.0-0.45.6
Financing3.71.4-7.00.4-5.6
Change in imputed ECCB reserves-2.1-0.2-8.10.4-5.2
Other (includes IMP) 2/-0.6
Rescheduled arrears
Extraordinary financing0.37.25.13.1
Change in arrears6.1-5.6-4.0-3.5
ECCB reserves in months of imports1.71.52.42.22.4
(In percent of GDP)
Current balance-13.1-14.2-7.8-9.4-6.3
Trade balance-43.7-46.8-43.2-43.9-46.0
Exports12.510.28.68.18.3
Imports56.257.051.852.054.3
Tourism receipts27.727.328.229.634.5
Official net borrowing3.30.7-0.6-0.22.7
Private direct investment6.57.011.37.24.9
Overall balance-1.7-0.62.8-0.12.0
Sources: Statistical Office, Ministry of Finance; and staff estimates.

Does not include the US$2.5 million bridge financing operation with Crown Agents in 1994.

Includes change in government foreign assets.

Sources: Statistical Office, Ministry of Finance; and staff estimates.

Does not include the US$2.5 million bridge financing operation with Crown Agents in 1994.

Includes change in government foreign assets.

In the period 1990-93, new external payment arrears continued to accumulate. However, in 1991 arrears to Plessey Airports Ltd. were rescheduled and in 1992 US$5.1 million of debt owed to the former German Democratic Republic was canceled. As a result, the stock of arrears fell from a peak of US$ 21.9 million in 1990 to US$12.3 million in 1993 (Table 29).

In 1994 the external current account deficit declined sharply to US$17.6 million (6.3 percent of GDP) from US$25 million (9.4 percent of GDP) in 1993, aided by a strong increase (22.7 percent) in travel receipts (Table 22). However, the trade balance continued to worsen, with imports driven by increases in public investment and further growth of the tourist trade. Though export prices for cocoa, nutmeg, and mace recovered and the volume of fish exports increased in 1994, overall exports grew only moderately, by about US$1.7 million which, given Grenada’s small export base, implied an increase of 8 percent over 1993 (Table 23).

Table 22.Grenada: Balance of Payments(In millions of U.S. dollars)
1990199119921993Est.

1994
Current account balance-29.2-34.5-19.7-25.0-17.7
Trade balance-97.6-113.8-108.6-116.5-128.7
Exports, f.o.b.27.924.921.521.523.2
Imports, c.i.f.125.5138.7130.2138.0150.9
Imports in trade returns109.0117.2106.6117.1133.0
Unrecorded imports16.521.523.620.919.0
Services balance46.656.562.967.584.3
Receipts84.292.4101.0108.8130.2
Travel61.866.671.078.796.6
Other nonfactor19.922.926.527.330.5
Private19.122.125.626.229.3
Medical school2.12.22.22.32.4
Airline and shipping3.45.55.64.74.9
Other13.614.417.819.221.9
Communication6.67.98.99.311.4
Insurance2.82.83.51.31.4
Other4.23.75.48.79.1
Official0.80.80.91.21.2
Investment income2.42.83.32.73.0
ECCB profits1.21.21.21.31.4
Other interest profits and dividends1.21.62.11.41.5
Other factor income0.10.10.10.10.1
Payments37.535.838.041.345.8
Travel4.74.93.74.15.1
Other nonfactor18.120.524.125.027.1
Private16.017.821.619.621.4
Airline and shipping6.56.86.96.67.2
Other9.510.914.713.014.2
Communication2.83.63.43.53.7
Insurance3.95.17.25.35.8
Other 1/2.72.34.14.34.7
Official2.12.72.45.45.7
Investment income14.310.09.811.913.2
Direct investment8.45.86.17.28.9
Official4.12.32.52.52.1
Commercial banks1.00.91.11.11.1
Other0.81.11.11.2
Other factor income0.40.40.50.40.4
Private transfers21.623.625.925.325.9
Credit26.827.829.228.830.6
Debit5.24.23.33.53.7
Official transfers0.1-0.8-0.1-1.40.8
Credit0.91.31.12.8
Debit0.80.81.22.52.0
Capital account balance25.130.829.129.519.9
Capital grants5.310.13.911.88.7
Public sector net borrowing7.31.6-1.5-0.67.4
Drawings13.06.72.92.910.7
Amortization5.65.04.43.53.2
Commercial banks-2.92.0-1.8-0.7-10.1
Assets-3.60.5-9.9-1.0-2.3
Liabilities-0.8-1.6-8.1
Net inward private investment14.517.028.419.013.8
Direct investment12.915.326.717.211.5
Equity8.911.919.911.66.0
Retained earnings2.01.41.91.11.1
Land sales0.71.54.44.04.0
Other1.20.40.50.50.5
Other private capital2/1.61.71.81.82.4
Errors and omissions0.42.3-2.3-4.93.4
Overall balance-3.7-1.47.0-0.45.6
Financing3.71.4-7.00.4-5.6
IMF position, net-0.6
Change in imputed ECCB rosary’s-2.1-0.2-8.10.4-5.2
Rescheduled arrears7.2
Extraordinary financing0.35.13.1
Change in arrears6.1-5.6-4.0-3.5
New arrears6.11.61.30.60.5
Debt relief-7.2
Sources: Statistical Office, Ministry of Finance; and staff estimates.

Includes fees and commissions and various nonfactor services associated with investment projects.

Represents home construction and other investment by Grenadian repatriates.

Sources: Statistical Office, Ministry of Finance; and staff estimates.

Includes fees and commissions and various nonfactor services associated with investment projects.

Represents home construction and other investment by Grenadian repatriates.

Net external support for the public sector (net borrowing and capital grants) registered a significant increase rising to US$16.2 million in 1994, from US$11.2 million in the previous year, reflecting a recovery in public sector investment. Investment in tourism and related activities and the associated capital inflow declined in 1994 after two years of robust foreign investment in the hotel industry. Furthermore, the commercial banks increased their net foreign assets by US$10.1 million in 1994.

In all, the capital account surplus declined to approximately US$20 million in 1994 from nearly US$30 million in 1993 but, given the even stronger reduction in the current account deficit, the overall balance posted a surplus of US$5.6 million (2 percent of GDP) as opposed to a small deficit of 0.1 percent of GDP in 1993. This surplus provided for an increase of US$5.2 million in Grenada’s imputed reserves and a reduction in the stock of external arrears by US$0.4 million through cash payments. An additional US$3.1 million of arrears were eliminated through debt restructuring.

b. Merchandise trade

The steady decline in export receipts since 1989 was stemmed in 1993 and exports increased in 1994, driven by a price recovery of Grenada’s traditional exports, bananas, nutmeg, mace, and cocoa (Table 23). While the volume of nutmeg and mace exports increased, the shipments of bananas and cocoa declined. Moreover, the volume of fresh fruits and vegetables exported also suffered a setback as growers increasingly turned to catering to the domestic market which was buoyed by the growth in tourism. Fish exports, which had doubled in 1993, remained unchanged in 1994, while manufacturing exports declined with the garment industry continuing its downward trend.

Table 23.Grenada: Merchandise Exports, f.o.b.
199019911992Est.

1993
Proj.

1994
(Values in millions of U.S. dollars volumes in millions of pounds and unit values in U.S. dollars per pound)
Total exports27.924.921.521.523.2
Re-exports4.93.13.24.04.5
Domestic exports23.021.818.417.518.8
Banana
Value3.93.72.91.82.1
Volume16.915.313.911.09.9
Unit value0.20.20.20.20.2
Cocoa
Value2.63.12.63.13.3
Volume3.23.52.93.53.2
Unit value0.80.90.90.91.0
Nutmeg
Value6.73.52.32.13.9
Volume3.93.24.04.16.3
Unit value1.71.10.60.50.6
Mace
Value1.21.00.60.60.6
Volume0.40.50.40.60.6
Unit value2.71.81.51.01.0
Fresh fruit and vegetables
Value0.91.81.51.50.7
Clothing
Value1.21.70.70.50.3
Fish
Value1.71.81.92.42.5
Other
Value4.95.15.85.65.5
(Percentage change)
Total exports-1.9-10.6-13.6-0.18.0
Banana
Value-2.2-4.9-23.1-36.814.7
Volume-10.9-9.5-9.6-20.8-9.7
Unit value3.5-20.227.0
Cocoa
Value5.016.9-14.618.15.5
Volume7.87.1-17.322.9-9.4
Unit value12.5-3.716.5
Nutmeg
Value-34.3-47.3-34.6-9.485.1
Volume1.4-18.624.23.753.7
Unit value-35.2-35.3-47.3-12.720.4
Mace
Value-46.0-15.3-40.5-6.611.6
Fresh fruit and vegetables
Value-22.4106.1-13.7-1.2-55.0
Clothing
Value57.547.0-60.7-31.7-29.7
Fish
Value-17.88.95.024.03.4
Other
Value14.85.613.9-4.2-2.4
Sources: Statistics Department, Ministry of Finance; growers’ associations and staff estimates.
Sources: Statistics Department, Ministry of Finance; growers’ associations and staff estimates.

Nutmeg prices, which had declined steadily since the 1989-90 collapse of the marketing arrangement with Indonesia and had plummeted to an all-time low in 1993, recovered substantially in 1994, increasing by about 20 percent over its 1993 level. Moreover, the volume exported grew by 54 percent, principally through the drawdown of stocks. Mace prices also increased sharply in 1994, largely in response to increased demand in the European market. The higher export price for mace elicited only a small increase in production as the harvest was affected by drought conditions during the year. This notwithstanding, the export value of mace increased by 12 percent in 1994.

The drought also affected banana production, and shipments declined by 9 percent in 1994, despite efforts at planting additional acreage during 1993 and 1994. Consequently, Grenada’s banana exports, at 9,900 tons, remained far short of its EU preferential quota of 31,000 tons in 1994. Prospects for increases in the volume of banana exports are good with the ongoing expansion of the Belvedere and Dougalston estates, and the introduction of a regional marketing board (WIBDECO).

With a fall in cocoa production due to the drought, the volume of cocoa exports declined by 9 percent in 1994 after having increased by 23 percent in 1993. However, as world prices recovered by 16.5 percent, the value of cocoa exports increased by about 5.5 percent in 1994, considerably less than the 18 percent increase registered in 1993. While cocoa production has been declining since 1988, the Cocoa Association expects to stabilize the production level at 3.1 million pounds a year by using Stabex and other external grants for price support and technical assistance.

Following a large increase in 1993, exports of fish leveled off in 1994. The fishing industry is embarking on a large expansion involving the construction of an onshore processing plant, to be completed in 1995, and a large expansion of its trawler fleet.

Imports grew by 9.4 percent in 1994 reflecting largely an increase in the demand for consumer goods to support the growing tourist industry and imports associated with increases in public investment and private construction. In fact, merchandise imports outpaced the growth in GDP, rising to 54 percent of GDP in 1994 from 52 percent of GDP in 1993 (Table 24). In 1994, the merchandise terms of trade registered an improvement for the first time since 1988 (Table 25). This reflected a 12.7 percent increase in export prices, mainly of nutmeg, mace, and cocoa, as noted above, which helped the terms of trade to increase by 8.4 percent.

Table 24.Grenada: Merchandise Imports, c.i.f.
1990199119921993 1/Est.

1994 1/
(In millions of U.S. dollars)
Total imports125.5138.7130.2138.0150.9
Recorded imports109.0117.2106.6117.1131.9
Food27.628.027.5
Beverages and tobacco2.42.12.1
Crude materials4.03.03.0
Fuel7.48.68.6
Animal and vegetable oils0.40.40.4
Chemicals9.810.010.0
Manufactured goods20.523.720.4
Machinery and transport equipment24.428.424.2
Miscellaneous manufactured goods12.313.010.4
Unrecorded imports16.521.523.620.919.0
(In percent of GDP)
Total imports56.257.051.852.053.9
(In percent of recorded imports)
Food25.423.925.8
Beverages and tobacco2.21.82.0
Crude materials3.62.62.8
Fuel6.87.48.1
Animal and vegetable oils0.40.40.4
Chemicals9.08.59.4
Manufactured goods18.820.219.1
Machinery and transport equipment22.424.222.7
Miscellaneous manufactured goods11.311.19.8
(Percentage change)
Total imports7.710.6-6.16.09.4
Recorded Imports8.07.6-9.19.912.7
Food7.61.2-1.7
Beverages and tobacco9.4-13.90.4
Crude materials9.6-24.2-0.4
Fuel26.816.1-0.5
Animal and vegetable oils-3.93.6-5.3
Chemicals2.31.8-
Manufactured goods-5.915.7-13.9
Machinery and transport equipment18.616.2-14.7
Miscellaneous manufactured goods11.55.5-20.1
Unrecorded imports5.830.39.8-11.4-9.1
Sources: Statistics Department, Ministry of Finance; and staff estimates.

In 1992 the Customs Department began to use a computerized version of the ASYCUDA system to register all imports. Since then the CSO has experienced great difficulty in converting the computerized output of the customs into the classification used by the CSO. As a result disaggregated data on imports have not been available since 1993.

Sources: Statistics Department, Ministry of Finance; and staff estimates.

In 1992 the Customs Department began to use a computerized version of the ASYCUDA system to register all imports. Since then the CSO has experienced great difficulty in converting the computerized output of the customs into the classification used by the CSO. As a result disaggregated data on imports have not been available since 1993.

Table 25.Grenada: Terms of Trade(Includes 1980 = 100)
1990199119921993Est.

1994
Agricultural commodities
Bananas87.387.390.472.191.6
Cocoa76.485.985.982.796.4
Nutmeg63.240.821.518.822.6
Mace53.436.630.219.820.8
Nontraditional agricultural103.3102.4104.0102.1114.3
Manufacturing116.5112.7113.3107.3111.5
Total merchandise exports 1/86.378.973.666.975.3
Percentage change-12.0-8.7-6.6-9.112.6
Tourism index 2/116.4117.9121.6120.7125.1
Percentage change6.71.23.2-0.73.6
Export prices (composite index) 3/105.9104.2104.8101.9107.7
Percentage change0.6-1.60.6-2.85.7
Import prices 4/116.5112.7113.3107.3111.5
Percentage change8.2-3.20.5-5.33.9
Merchandise terms of trade74.169.965.062.467.6
Percentage change-18.7-5.7-7.1-4.08.4
Total terms of trade 5/90.992.492.595.096.6
Percentage change-7.11.70.12.71.7
Sources: Ministry of Finance; and staff estimates.

Weighted by the share of each component in total in 1990.

Based on growth rates of hotel room rates and private sector wages.

Weighted by the average shares in exports of goods and tourism (35 percent for merchandise, 65 percent for tourism).

Based on export unit values of Grenada partner suppliers, weighted by Grenada’s imports.

Includes tourism.

Sources: Ministry of Finance; and staff estimates.

Weighted by the share of each component in total in 1990.

Based on growth rates of hotel room rates and private sector wages.

Weighted by the average shares in exports of goods and tourism (35 percent for merchandise, 65 percent for tourism).

Based on export unit values of Grenada partner suppliers, weighted by Grenada’s imports.

Includes tourism.

c. Services and transfers

The surplus on the services balance, aided by an increasingly dynamic tourism sector, rose to US$84 million in 1994, a 25 percent increase from 1993. Tourism receipts, which increased by more than 20 percent in 1994 to an estimated US$97 million, was more than four times the amount of merchandise exports. The strong growth in tourist traffic in 1994 followed a largely stagnant season in 1992 and slow growth in 1993 as the main markets in North America and Europe emerged from the recession; the number of tourists from other Caribbean countries fell in 1993. The number of stayover visitors, who are the mainstay of this industry, increased by 18.5 percent in 1994 to about 92,000 while the number of cruise ship passengers reached 200,000 (Table 27). The increase in the number of stayover tourists was helped by the completion of two new hotels including an all-inclusive resort in 1993. By the beginning of 1994, the hotel capacity in Grenada had been increased to about 1,500 rooms.

Table 26.Grenada: Direction of Trade 1/
19901991
(In millions of Eastern Caribbean dollars)
Domestic exports (f.o.b.)62.158.8
CARICOM countries16.219.0
Barbados2.32.5
Trinidad7.37.1
St Lucia3.14.4
Other3.55.0
Canada1.30.7
United States4.17.7
Germany4.45.9
Netherlands13.95.1
United Kingdom13.811.8
Rest of World8.48.6
Total imports, c.i.f.294.2316.5
CARICOM countries72.574.7
Barbados9.811.1
Trinidad46.250.3
St Lucia4.63.6
Other11.99.7
Canada13.916.5
United States87.298.9
Germany3.53.9
Netherlands7.31.7
United Kingdom42.943.7
Japan20.922.3
Rest of world46.154.7
(In percent)
Domestic exhorts (f.o.b.)100.0100.0
CARICOM countries26.132.3
Barbados3.74.2
Trinidad11.812.1
St Lucia5.07.4
Other5.68.6
Canada2.11.2
United States6.713.0
Germany7.110.0
Netherlands22.38.8
United Kingdom22.220.0
Rest of world13.514.7
Total imports, c.i.f.100.0100.0
CARICOM countries24.623.6
Barbados3.33.5
Trinidad15.715.9
St Lucia1.51.1
Other4.03.1
Canada4.75.2
United States29.631.2
Germany1.21.2
Netherlands2.50.5
United Kingdom14.613.8
Japan7.17.1
Rest of world15.717.3
Sources: Statistics Department, Ministry of Finance.

Data for 1992 onwards are unavailable.

Sources: Statistics Department, Ministry of Finance.

Data for 1992 onwards are unavailable.

Table 27.Grenada: Selected Tourism Data
1990199119921993Est.

1994
Total arrivals (thousands)265.2288.0290.6301.8317.6
Stayover visitors65.869.171.977.892.2
United States22.323.624.430.430.5
Canada4.34.64.24.25.0
West Indies17.515.115.813.714.7
United Kingdom9.110.710.311.217.7
Germany3.14.45.46.07.3
Other9.410.711.812.317.0
Cruiseship passengers183.2196.1195.9200.1200.8
Nonresident Grenadians16.216.015.716.216.7
Volume of tourism (thousand days)815.2834.3838.2862.3977.6
Stayover visitors506.7517.9524.8560.7669.8
Cruiseship passengers146.5156.9156.7140.0140.6
Nonresident Grenadians162.0159.5156.7161.6167.3
Weighted daily expenditure per visitor (U.S. dollars)76.680.685.691.298.8
Stayover visitors106.5112.5119.1124.2130.2
Cruiseship passengers35.136.037.338.439.4
Nonresident Grenadians20.621.121.922.523.1
Total expenditure (millions of U.S, dollars)62.467.371.878.796.6
Stayover visitors54.058.362.569.787.2
Cruiseship passengers5.15.65.95.45.5
Nonresident Grenadians3.33.43.43.63.9
(Percentage share of stayover visitors)
United States33.934.234.039.133.0
Canada6.66.75.85.45.4
West Indies26.721.822.017.616.0
United Kingdom13.915.414.314.419.2
Germany4.66.37.57.77.9
Other14.315.516.415.818.4
(Annual percentage changes)
Total arrivals (thousands)40.18.60.93.85.3
Stayover visitors (thousands)25.64.94.18.218.6
Total expenditure (millions of U.S. dollars)28.87.86.79.622.8
Volume of tourism (days)21.22.30.52.913.4
Sources: Grenada Tourist Board; Ministry of Finance; and staff estimates.
Sources: Grenada Tourist Board; Ministry of Finance; and staff estimates.

Net investment income consists primarily of interest payments on official debt and dividends on foreign direct investment. While interest payments on official debt have stabilized around US$2 million a year, the large expansion of the hotel industry in recent years has resulted in increased transfers of earnings abroad.

d. Capital account

Grenada has received considerable net capital inflows since 1990. As noted above, the fall in external financing of the PSIP in 1992 was largely compensated by an increase in private investment flows, much of which was associated with the construction of two major hotels. With the completion of the hotel projects in 1993, direct investment flows declined in 1994 to about US$14 million, about half the amount realized in 1992. However, the slowdown in private capital flows was more than offset by the recovery in public sector borrowing and official capital transfers, related to the large increase in PSIP outlay in 1994. Net public sector borrowing which had been negative in 1992 and 1993 posted a surplus of US$7.4 million in 1994. A significant capital account development was the US$10 million increase in the net foreign assets of the commercial banks in 1994 as domestic credit expansion slowed. In all, net capital inflows fell by about US$10 million to approximately US$20 million in 1994.

Grenada’s public sector external debt grew to US$91.9 million in 1994 from US$87.6 million in 1993 (Table 28) largely due to the increase in public sector borrowing to finance the PSIP. During 1994, the authorities continued their efforts to reduce external payments arrears, which at the end of 1994 were US$3.5 million less than a year earlier (of which US$3.1 million reflected debt restructuring) (Table 29). Consequently, the stock of arrears were reduced to 9.5 percent of total debt in 1994. Outstanding public debt at the end of 1994 stood at 32.8 percent of GDP, almost the same level attained in 1993. Debt-service obligations as a percent of exports of goods and nonfactor services was unchanged at 3.9 percent from 1993 to 1994.

Table 28.Grenada: External Public Debt by Creditor(In millions of U.S. dollars)
19901991199219931994
Total debt (end of period)1/96.3101.991.087.691.9
Central government debt77.184.473.968.772.0
Official creditors55.262.156.667.871.0
Caribbean Development Bank16.418.819.820.621.7
OPEC Fund3.73.13.12.62.5
United Kingdom5.58.98.117.917.0
Government of Algeria1.01.01.11.21.3
European Investment Bank0.50.50.50.72.8
German Democratic Republic 2/5.65.7
Government of Libya5.05.05.05.05.0
IBRD/IDA5.36.86.77.27.2
International Fund for Agricultural Development (IFAD)1.71.71.72.21.4
Government of Taiwan10.010.010.210.010.0
Venezuelan Investment Fund (VIF)0.50.50.40.41.6
Commercial creditors21.922.317.41.00.9
United Kingdom20.421.116.3
Cable and Wireless4.43.53.0
Plessey Airports, Ltd. 3/16.017.713.3
Bank of Brazil0.10.10.1
Capital Bank of Washington0.40.40.40.50.4
Metex0.80.60.60.50.5
Bank of Nova Scotia, Plessey loan0.2
Government-guaranteed debt19.217.517.118.919.9
Official borrowing18.616.616.618.719.8
Caribbean Development Bank14.511.911.613.714.4
Export Development Corporation of Canada
Canadian International Development Agency
Commonwealth Development Corporation, U.K.0.20.1
European Investment Bank3.94.64.95.55.3
Commercial borrowing0.60.90.50.20.1
Barclays Bank0.60.90.50.20.1
Canada (Northern Telecom)
Sources: Ministry of Finance; annual statements of the public enterprises; and staff estimates.

Outstanding debt figures include valuation adjustments of exchange rate changes and other stock adjustments.

The outstanding amount of this debt was canceled in early 1992 following a payment of US$1.1 million.

Arrears on this loan were rescheduled in late 1991.

Sources: Ministry of Finance; annual statements of the public enterprises; and staff estimates.

Outstanding debt figures include valuation adjustments of exchange rate changes and other stock adjustments.

The outstanding amount of this debt was canceled in early 1992 following a payment of US$1.1 million.

Arrears on this loan were rescheduled in late 1991.

Table 29.Grenada: Arrears on External Public Debt(In millions of U.S. dollars)
19901991199219931994
PrincipalInterestTotalPrincipalInterestTotalPrincipalInterestTotalPrincipalInterestTotalPrincipalInterestTotal
Total debt16.15.821.913.23.216.410.51.912.310.81.512.37.90.98.8
Official creditors11.52.413.912.62.715.39.81.311.210.31.311.67.40.78.1
Caribbean Development Bank0.10.20.30.30.20.50.10.20.30.10.20.3
OPEC Fund2.30.42.72.40.42.82.80.43.22.80.33.1
United Kingdom0.10.10.20.20.80.81.21.21.61.6
Algeria0.60.41.00.60.41.00.60.51.10.60.51.20.60.61.3
German Democratic Republic 1/3.11.34.43.61.55.1
Libya5.05.05.05.05.05.05.05.05.0
IBRD/IDA0.2
IFAD0.20.10.30.40.20.60.40.20.60.50.20.70.10.3
VIF0.10.10.10.10.10.20.10.10.2
Commercial creditors4.63.48.00.60.51.10.60.51.20.50.20.70.50.20.6
Metex0.20.10.30.40.20.60.40.20.70.50.20.70.50.20.6
Plessey Airport Ltd. 2/4.23.07.2
Other0.20.30.50.20.30.50.20.30.5
Sources: Ministry of Finance; Annual Statements of the public enterprises; and staff estimates.

The outstanding amount of this debt was cancelled in early 1992 following a negotiated one-time payment of US$ 1.1 million.

Arrears oo this loan were rescheduled in lat. 1991.

Sources: Ministry of Finance; Annual Statements of the public enterprises; and staff estimates.

The outstanding amount of this debt was cancelled in early 1992 following a negotiated one-time payment of US$ 1.1 million.

Arrears oo this loan were rescheduled in lat. 1991.

The Caribbean Development Bank (CDB) remained the largest external creditor, accounting for about 39 percent of the public debt. Taiwan, Republic of China, the United Kingdom, and the European Union were the other major creditors. Most of Grenada’s medium- and long-term debt contracted in 1993 and 1994 were on concessional terms.

3. Exchange and trade system

The currency of Grenada is the E.C. dollar which has been fixed in terms of the U.S. dollar at US$1=EC$2.7 since 1976. The real effective exchange rate has moved largely in parallel with that of the U.S. dollar, reflecting the dominant position of the United States among Grenada’s partner countries. Accordingly, the E.C dollar experienced a sharp appreciation in real effective terms through the mid-1980s and in the past five years it has remained about 10 percent more appreciated than in the beginning of the 1980s (Chart 1).

CHART 1Grenada Exchange Rate Indices, 1980-95

(1980=100)

Source: IMF, Information Notice System.

1/ An Increase represents on appreciation.

Grenada maintains a relatively open trade and exchange regime except for the requirements of import licenses for a limited number of commodities. The import license regime is geared to favoring imports from CARICOM partners, especially the countries in the Organization of Eastern Caribbean States (OECS). The import-licensing system has several categories. While there is a 100 percent restriction on importing poultry products, high proof spirits and galvanized sheets from non-CARICOM countries, commodities such as fruits and vegetables, wheat flour products, beer, cigarettes, and aerated beverages are subject to priority sourcing from the members of the OECS and the less-developed CARICOM countries. Some chemical products such as paint and varnish, consumer durables like refrigerators, freezers, and stoves can be procured from non-CARICOM countries if unavailable within the region. One exchange control remains, consisting of an indicative limit on foreign exchange for private travel on a per person, per calendar year basis. However, bonafide requests above this limit are routinely approved without delay. Grenada plans to introduce the second phase of the CARICOM Common External Tariff in 1995.

APPENDIX 1: Tax Reform in Grenada 1986-94

1. The 1986 tax reform

In 1986 the Government of Grenada embarked upon a comprehensive tax reform that would abolish all income taxes and create a tax system based on indirect taxes, with a value-added tax at the center of the new system.

At its introduction at the beginning of 1986, it replaced the former system of approximately 36 different taxes on income, consumption, external trade, and property with seven major taxes. These included a value-added tax on imports and domestic goods and the common external tariff (CET) of the CARICOM. The former purchase tax on motor vehicles was retained, while the tax on gasoline, property taxes, and the foreign exchange tax were also retained, but modified.

The new system shifted the tax burden to taxes on international transactions, which increased from an average of 13 percent of GDP in the period 1981-85 to 16 percent of GDP in 1986. At the same time, taxes on income fell dramatically to 1.7 percent of GDP, and taxes on domestic transactions also declined, from an average of 9 percent of GDP in the previous five years to 4.6 percent of GDP in 1986. Thus, the most immediate impact of the tax reform was a fall in tax revenue from around 31 percent of GDP in the period 1981-85 to 27 percent of GDP in 1986 (Tables 1 and 2).

The fall in tax collections also reflected difficulties encountered in the administration of the new system and political opposition to the tax on gasoline and the modified land-value tax, which delayed the passage of legislation with respect to these two taxes.

The authorities concluded, on the basis of their experience with the new tax system in its first year of operation, that revenue-raising instruments were too few and too narrowly focused, and that further action was needed to strengthen the revenue position.

2. Adjustments to the new system in 1987-89

In 1987, the authorities introduced the business levy, raised the foreign exchange tax, passed the modified property tax, levied an airport surcharge, and made several changes to the VAT.

The efforts to improve the revenue situation, however, were soon shaped by other events which included a sharp decline in external support and the bunching of external debt repayments. The fall in external financial support was originally due to the completion of large projects such as the airport, but subsequently it also reflected poorly defined PSIP programs, and a growing concern among donors and creditors about both Grenada’s fiscal imbalances and the accumulation of external payments arrears. The external debt payments which fell due during this period consisted of short-term commercial credits for construction of the airport as well as other short-term debt incurred by the People’s Revolutionary Government in the early 1980s.

Thus, what began in 1987 as an effort to amend the new tax structure to improve revenue collection, quickly turned into a pressing search for new sources of revenue and led to a series of ad hoc adjustments to the t system in the period 1987-89 when some 15 amendments were made to the VAT alone. These amendments raised the number of VAT rates from one, at inception of the tax in 1986, to three by 1987, and more than seven by 1989. In addition, the list of exempt items was adjusted each year. Moreover, the changes in the system were not always orderly; for example, in 1989 there were seven amendments to the VAT, on seven different ocassions during the year affecting rates and exemptions, as well as a shift in the point of collection (collection of VAT on imports was shifted from the Inland Revenue Department to the Customs Department). Similar ad hoc changes were made to property taxes, the business levy, and the foreign exchange tax.

The frequent changes in the tax system represented not only the Government’s search for new sources of revenue, it also reflected the growing influence of various interest groups which lobbied for, and regularly obtained, special waivers and exemptions. In addition, the proliferation of tax changes created difficulties for the enforcement agencies which had limited personnel resources, yet needed to keep abreast of the constantly changing legislation. Moreover, at various times hastily prepared legislation led to legal challenges which in turn stalled or delayed implementation of tax measures. As a consequence, tax evasion increased in light of the limited capacity for surveillance and enforcement at the customs and inland revenue departments. In addition, the tendency to place high taxes on imported consumer items gave a boost to the traditional smuggling trade that existed on the island of Carricou. This further undermined the ability to both enforce and police changes to the VAT on imports.

In the end, the many changes in the tax system led to a fall in revenue from 26.8 percent of GDP in 1986 to 23.2 percent in 1989. While taxes on international transactions had been raised from 13 percent of GDP in 1985 to 16 percent in 1986, by 1989 that ratio was back to the 1985 level, and domestic taxation which had been slashed from 22 percent of GDP in 1985 to 7 percent of GDP in 1986 had crept up by only 1 percentage point of GDP by 1989. The fiscal deficit (after grants) widened in the period 1986-89, reflecting not only the fall in revenue, but also a sharp fall in external grant support and an increase in current spending in 1989 (mostly reflecting a 49 percent pay increase to the civil service in that year).

3. Efforts to restore fiscal stability in 1990-91

The erosion of the Government’s finances during the period 1986-89 led the authorities to look for stronger efforts on both the revenue and expenditure side. In 1990 the debt-service levy, a form of taxation on personal income, was introduced. The levy was placed on all wages and salaries (including overtime pay, bonuses, and gratuities), in excess of EC$1,000 per month, and was charged at a fixed rate of 10 percent. In addition, in 1990 and 1991 the business levy was tightened by limiting allowances and deductions, a cruise ship passenger tax was introduced, property tax rates were raised, and the common external tariff (CET) of the CARICOM was put into effect. Adjustments to the VAT continued, with the aim of increasing existing rates and subjecting new items to this tax.

As a result of these actions, the ratio of current revenue to GDP improved from 23.3 percent in 1989 to 24.1 percent in 1990 but slipped to 23.5 percent by 1992 as enforcement efforts were weakened, when a fire at the Ministry of Finance destroyed almost all of the country’s tax records in 1990. Over this period, however, the efforts at reducing current expenditures began to bear fruit, and government savings improved. The overall budget deficit also declined to near zero in 1992 and 1993, but this was due to substantial cuts in capital formation which fell from 9.4 percent of GDP in 1990 to 3.1 percent of GDP in 1993.

By 1992, six years after the 1986 reforms, the Grenadian authorities found that the constant changes to the tax system had diluted, if not reversed, the thrust of the reforms instituted in 1986, and had done so in a manner that was ad hoc and uncoordinated. More importantly, the frequent amendments to the tax system had failed to provide a strong revenue base, had undermined the predictability of government finances, weakened the confidence of the domestic private sector, complicated the task of the tax administration, and alienated donors and external creditors. In response, the authorities, with the help of the ECCB and several regional institutions, launched a structural adjustment program in 1992.

4. The tax system at the start of the 1992 Structural Adjustment Program (SAP)

When the authorities decided to launch their 1992 structural adjustment program, the existing tax structure consisted of four broad areas of taxation: taxes on income and profits, taxes on domestic transactions, taxes on international transactions, and property taxes. A fifth and integral part of the tax system was the system of tax exemptions. The reforms introduced in 1986 and subsequent changes to the tax system had resulted in certain shifts in Grenada’s tax structure. Taxes on income and profits had fallen from an average of 9 percent of GDP during 1981-85, to an average of about 2 percent of GDP in the period 1987-90, before rising to 4.1 percent of GDP in 1991, due to the introduction of the debt-service levy in 1990. Property taxes and nontax revenue, on the other hand, had jointly never exceeded 5 percent of GDP since 1986.

In the period 1986-91, the taxes on domestic and international transactions provided an average of 77 percent current revenue, with taxes on international transactions being the single largest contributor to current revenues (Table 3). In this period, taxes on international trade averaged 60.5 percent of current revenue compared with an average of 36 percent in the years 1981-85. As a proportion of tax revenue, taxes on international trade averaged approximately 68 percent of revenue generated in the period 1986-91. In contrast, taxes on domestic transactions fell from an average of 25.3 percent of current revenue in the period 1981-85, to an average of 16.5 percent of current revenue in the years 1986-91. The largest revenue source in taxes on domestic transactions taxes was the domestic VAT which has yielded around 2.3 percent of GDP on average since 1987 despite frequent adjustments. It is estimated that 60 percent of domestic VAT collections originates from the service sector consisting of the banks, insurance, and telecommunications companies, while the hotel and restaurants and the manufacturing sectors each contribute an additional 20 percent of receipts. From its inception, however, domestic VAT collections have been affected by the Inland Revenue Department’s limited manpower resources for proper surveillance and enforcement and weak sanctions for infringements.

More importantly, certain distinct patterns emerged during both 1986-89 and 1990-92. In the first year of each period, tax revenue proved responsive to large discrete adjustments in the major taxes, particularly import duties and the external VAT. However, in the immediate period after the adjustments, tax revenue from international transactions, as a proportion of GDP, begins to decline. Moreover, despite the relatively high rates of taxes on imports, total taxes on imports (total of the VAT on imports together with import duties) has remained consistently below 5 percent of total imports, since 1986. These results reflected both the existence of substantial exemptions in the tax system as well as the tendency for new exemptions to follow closely on the heels of almost all new revenue-raising measures. To a lesser extent it also reflected the presence of trade diversion through an increase in smuggling. As the buoyancy of the tax system was eroded through the use of exemptions, the Government had to resort to frequent rate adjustments to maintain its revenue base.

Despite the significant impact of tax concessions in terms of revenue forgone, there has only been one effort to assess the cost of these concessions to the Treasury. In 1991, the Central Statistical Office together with the Industrial Development Corporation attempted to identify both the value of imports affected by the granting of concessions and incentives and the loss of revenue to the Treasury. Unfortunately the exercise, which was carried out to determine a new policy on concessions, covered only the years 1990 and 1991; with very rough estimates for 1992. Moreover, once the original exercise was completed, manpower constraints together with difficulties experienced by the CSO with the new customs classifications for imports, hampered any furthur work on the exercise. On the other hand, the IDC has kept, since 1992, a record of the value of duty and VAT exemptions granted annually to companies operating under its concessions.

Value of Goods Subject to Concessions by Type of Concession
(In millions of Eastern Caribbean dollars)
19901991Est. 199219931994
Tariff concessions43.741.536.2
CRICOM imports (exempt from duty)41.647.742.6
Government ministries11.516.511.0
Civil servants0.10.20.1
Statutory bodies and embassies46.149.639.6
Fiscal incentives29.157.455.0
Actual revenue loss as calculated by the IDC4.218.5 1/16.18.1
Value of goods under concessions172.1212.9184.6
Estimated loss of revenue56.673.1
Value of recorded imports294.3316.4287.8
Value of goods under concessions as a proportion of imports58.567.364.1
Estimated loss of revenue as a proportion of GDP9.411.1
Despite its severe limitation, the above tabulation illustrates the constraints that the systems of concessions has been placing on the Grenadian economy. In 1990 taxable imports (total imports less imports not subject to VAT and import duty) stood at approximately 41 percent of total imports. This subsequently slipped to 33 percent of total imports by 1991. The revenue loss was estimated at approximately 9.4 and 11.1 percent of GDP in 1990 and 1991, respectively, and this represented approximately 39 per-cent and 46 percent of current revenue collected in those two years. In 1991 a revised policy on concessions was put in place (see Appendix II); however, the revised policy, which stripped the public sector enterprises of all of their duty-free priviliges (except those granted by legislature), was quickly compromised by revisions which allowed the enterprises to apply for duty-free exemptions on a “case-by-case” basis. It should be noted that the revenue loss indicated above does not include the loss of revenue from tax holidays granted to various enterprises. The IDC data for the period 1992-94 shows a rapid fall-off of revenue loss due to incentives; this, however, reflects the reduction in investment after the completion of the two hotels in 1993 and the closure of several manufacturing firms.

IDC figures for 1991 cover October through December only.

IDC figures for 1991 cover October through December only.

5. Tax policies under the SAP 1992-94

When the authorities introduced their 1992-94 structural adjustment program, the primary objective was a restoration of fiscal discipline through the strengthening of revenue and a reduction in expenditure. Revenue generation was to be improved through the broadening the tax base and improving tax administration. Expenditure reduction was to be achieved by supplementing the wage freeze policy introduced in 1991 with a program aimed at reducing the civil service by 1,200 persons between 1992 and 1994 and tightening controls on all nonwage current expenditures. The overall aim was to improve government savings to an average of 3 percent of GDP in order to provide counterpart financing, encourage higher levels of donor support, and raise the level of capital expenditure and improve the growth prospects of the economy. The tax policy under the SAP focused on only three things:

a. A strengthening of revenue generation by replacing the flat 10 percent rate of the debt-service levy with a system of four progressive rates ranging from 0-25 percent. Extension of the VAT to include previously exempt items, especially foodstuff. Exemptions from the airline ticket tax and property in excess of 1/4 acre were removed, as were import duty exemptions for state enterprises and statutory bodies and the cruise ship passenger levy was increased.

b. A halt to the past trend of continous descrete adjustments to the tax system with a moratorium being placed on the introduction of new taxes (other than those imposed at the beginning of 1992) or substantial amendments to existing taxes until the completion of a comprehensive tax review study.

c. A comprehensive review of Grenada’s tax system. The latter was lauched in mid-1992 and the report was given to the authorities in September of the same year. The authorities accepted the recommendations of the report and had originally intended to implement the major measures suggested in the report in 1993. The report recommended action be taken to:

(1) Strengthen tax administration in the Inland Revenue Department through computerization of information on the tax base, improve the audit capability of the division, speed up the ajudication process, and increase the penalties for tax avoidance and fraud.

(2) Strengthen Customs’ administration through the modernization of the system of valuation, simplyfing customs forms and procedures and improving the mangerial skills of the senior staff of the Customs Department.

(3) Restructure the system of incentives particularly with respect to the granting of tax holidays and the system of granting descretionary tax exemptions.

(4) Reorganize the system of indirect taxation to lower the rates and broaden the tax base. Excessively high rates on imports and unequal treatment of domestic and imported goods needed to be addressed.

(5) Reintroduce taxes on income, restructure corporate taxation, and rationalize the existing system of innumerable taxes and licences that generated little revenue. The latter had proved to be costly and difficult to enforce and represented nuisance taxes on the population.

As a consequence of the revenue and expenditure policies introduced in 1992, current revenue to GDP rose from 23.4 percent in 1992 to 24.2 percent in 1993, before slipping back to 22.6 percent in 1994.

6. Tax reform revisited 1994

In 1994, comprehensive tax reform was enacted. The reforms sought to lower prices by reducing the relatively high rates of indirect taxes and broaden the base for individual and corporate income taxes by widening the definition of taxable earnings. At the same time, and in order to discourage avoidance and impart greater equity in the system, the number of exemptions and or allowances were kept to a minimum. The major measures were the following:

a. Taxes on income and profits were formally reintroduced and the business levy and debt-service levy were abolished.

b. The definition of personal income was broadened, to include interest income, dividend earnings, and lump sum payments such as gratuities.

c. Allowances under the personal income tax were minimal with limited deductions for self, spouse, and no more than three children.

d. The name of the value-added tax was changed to the consumption tax (which is what the tax had become by 1987) and rates of consumption taxes were reduced on both domestic and external transactions. The lower rates were in keeping with the authorities’ efforts to reduce the levels of protection, reduce domestic prices, and eliminate the trade distorting influences that had arisen in the past, by placing different rates of internal and external VAT on similar manufactured goods.

e. The reforms of 1994 also lowered the gap between the top rates of taxation on personal income and corporate profits, from the wide spread that existed between the business levy and the debt-service levy.

f. The new legislation also contained higher penalties for tax avoidance and fraud and increased the tools available for tax administration by granting both the Inland Revenue and the Customs Department wider powers to levy against the assets of delinquent taxpayers.

g. In addition, the authorities have increased the number of persons in the Inland Revenue Department and have sought the help of bilateral donors in respect of the provision of technical and personnel services in restructuring both the Customs and Inland Revenue Departments.

The estimates for the 1995 budget were the first to be calculated under the new tax regime and indicated that current revenue would decline slightly from 22.6 percent of GDP in 1994 to 22.3 percent of GDP in 1995. Both the budget and the budget debate that followed revealed certain inherent weaknesses in the new system that need to be addressed in the short and medium term.

The slight decline in revenue and the stagnation in central government savings in the 1995 budget are reflective of two things. The first is that the tax-reducing measures had a greater impact than the measures to broaden the tax base. In the old tax system, the high rates of indirect taxation were necessary to compensate for the erosion of the tax base through the existence of numerous exemptions and fiscal incentives. The new system has lowered indirect taxation without there being an equally strong effort to broaden the tax base by reducing the existing level of exemptions. As a consequence, the revenue-generating aspect of the reforms remains weak. For example, the tax base for corporate taxation will remain largely of its traditional mixture of retail firms, banks, and insurance companies while most of the manufacturing entities and the hotel and tourist-related enterprises continue to enjoy relatively lengthy tax holidays. As a result, tourism, which has become the major growth industry in Grenada, will remain largely outside of the tax net. On the other hand, the broadening of the concept of personnal income applied to such a small percentage of tax payers that the expected increase in revenue was negigible. It is clear, therefore, that the tax reform process can only go forward with a comprehensive reform of the existing system of exemptions.

The second and equally important reason is the various amendments made to the new tax system during the 1995 budget debate. In the debate, the authorities made concessions by removing both the withholding tax on dividend payments to foreigners and the tax on interest. An additional concession was the decision to include a new allowance for interest payments on mortgages. The authorities also agreed to lift the maximum number of children claimed as dependents from three to an unlimited number. These amendments to the new tax measures, in the face of special interest demands and pressures, can be seen as a reminder of a past trend that needs to be care fully monitored if the new system is to remain free of some of the difficulties experienced in the previous attempt at tax reform.

7. Conclusions

Grenada has once again embarked on a process of reforming its tax system to improve the revenue yield, make the system more equitable and transparent, restore stability and predictability in the system, and improve efficiency by eliminating tax-induced distortions. The basic principles of the new system, namely to reduce the rates of taxes and widen the tax base, are generally sound, but the lessons of the first attempt at tax reform should play a pivotal role in the current reform effort. These lessons are:

(a) Tax reform must always be comprehensive. In the 1986 reform the inadequate revenue response led to lopsided concentration of effort on new revenue-raising measures while efforts to rein in current expenditure remained unexplored until 1991. The new attempt at tax reform is taking place at a time when efforts at expenditure reform (through the civil service evaluation exercise and “value for money” studies on various current expenditure items at ministerial level) are being implemented or studied and this augurs well for the future provided this link between the tax base and the Government’s spending priorities are maintained.

(b) The quickest way to destabilize a tax system is by frequent unpredictable discretionary changes. The three immediate consequences of this are the loss of predictability in government revenue, the undermining of private sector confidence, and the complications associated with administering the changes.

(c) Once the tax system is perceived as open to the influence of specific interest groups, the pressures for equal access to special treatment will undermine the principles of equity and transparency, complicate the administration, and ultimately constrain the revenue-generating capacity in the system.

(d) The broadening of the tax base and the maintenance of large areas of economic activity exempt from taxation are incompatible objectives.

Annex Tax Changes 1986-94

1. 1986

a. Repeal of various taxes

Effective March 1, taxes on income, profit, exports, hotel occupancy, entertainment, tickets, telecommunications, petroleum (increased profit margin), and consumption were repealed as were the stamp duty on imports, the export duty, the international airport levy, and the package tax.

b. Value-added tax

On March 13, a 20 percent value-added tax was introduced.

On April 11, the list of exempted goods and services was expanded to include additional basic food items and hotel accommodations.

On July 21, the VAT was amended to 8 percent on sales of locally manufactured goods.

On December 1, the VAT for insurance companies was fixed at 5 percent on premium income.

c. Petrol tax

Effective March 14, the petrol tax was introduced with a rate of EC$0.50 per gallon on imported petroleum products.

d. Foreign-exchange tax

On March 14, the rate of the foreign-exchange tax was reduced from 5 percent to 2 percent.

e. Business levy

On April 11, a 10 percent tax on annual operating receipts of all business firms was introduced. On July 21, the expenses not to be reduced from income were specified. There was no collection under this tax in 1987.

2. 1987

a. Property tax

On January 16, a real property tax of 1/2 percent of the market value of land and buildings, including improvements to such property, was introduced.

b. Land-transfer tax

On March 27, a 5 percent land-transfer tax was imposed on sales of land where the vendor was a Grenadian national. At the same time, the transfer tax payable by vendors who were non-nationals was reduced from 15 percent to 10 percent.

c. Value-added tax

Effective March 2, the VAT for the banking system was set at 20 percent on noninterest income.

On March 27, the VAT on domestically produced beer and soft drinks was increased from 8 percent to 20 percent.

On October 2, the VAT on raw-material imports for use in the manufacturing of finished products was set at 8 percent.

Effective December 31, imports by the agricultural commodity associations shown to be intended for quality improvements in the growing or packaging of bananas, cocoa, or nutmeg were exempted from payment of the VAT.

d. Business levy

On March 27, the business levy was amended and the new rate of 2.5 percent was applied to gross sales less VAT.

On November 27, the business levy was amended further to include the Grenada Banana Cooperative Society, the Grenada Cocoa Association, and the Grenada Cooperative Nutmeg Association.

e. Airport service charge

Effective July 31, an airport service charge of EC$25 was introduced.

f. Foreign-exchange tax

On October 2, the foreign-exchange tax was increased from 2 percent to 5 percent.

3.1988

a. Property tax

On March 25, the real property tax was amended to allow for different tax rates on property. Where the value of a property exceeded EC$30,000, the first EC$30,000 of value of the principal residence on the property was exempt from property tax. For properties valued at less than EC$30,000, the tax rate was set to vary according to statutory order. Valuation lists were to be made available on May 1 of each year and to have effect from January 1 of that year.

b. Value-added tax

On March 25, the VAT on imports was amended to 20 percent of the c.i.f. plus duty, including a 5 percent surcharge added to the sale value at both wholesale and retail operations. The VAT on services was set at 5 percent, all chicken products were exempted from the VAT, and a 10 percent VAT was introduced on the cost of food and beverages in hotels and restaurants.

c. Business levy

On March 25, the business levy was amended to be 2 1/2 percent of gross trading receipts (net of VAT) or 33 1/3 percent of net profits, whichever is greater. In addition, a late payment fee of 1 1/2 percent per month was introduced. Businesses incorporated outside of Grenada are exempt from the business levy. In order to ease the burden of the new taxes, the authorities simultaneously increased the prices of all price-controlled goods (except those with a markup in excess of 10 percent) by an additional 2 1/2 percent.

d. Foreign company levy

On March 25, the Business Levy Principal Act was amended to include an annual 35 percent levy on net profits of companies incorporated outside of Grenada.

e. Licenses, fees, and miscellaneous taxes

On March 11, the license for selling tobacco products was increased to EC$25 while the license for selling cigars and cigarettes increased to EC$10.

On March 25, the following additional taxes were introduced:

  • (1) Taxes on motor vehicles were increased to 10-20 percent of the market value for cars and 7 1/2 percent for commercial and other vehicles.
  • (2) Liquor licenses were increased to EC$250 for establishments within a town or in a one-mile radius of the town limits. For establishments outside the one-mile radius the license would cost EC$150.
  • (3) Existing licenses between EC$2.50 and EC$10.00 were raised to EC$10.00 and EC$25.00, respectively.
  • (4) The Trade Licenses Law of 1980 was repealed.
  • (5) Postage rates were raised across all types of postage with domestic mail increasing from EC$0.10 to EC$0.15 for the first ounce.

d. Import duties

On March 25, a 10 percent surcharge was imposed on the c.i.f. value of all dutiable goods imported (or taken out of bond for consumption) from outside the CARICOM.

e. Foreign-exchange tax

Effective February 12, transactions of the Grenada Development Bank with the European Investment Bank were exempted from the foreign-exchange tax.

On June 17, transactions by any person or corporation approved under the Hotel Ordinance were exempted from the foreign-exchange tax.

4. 1989

a. Inland VAT

On February 28, the VAT on hotel room occupation was set at 8 percent retroactive to January 1, 1989.

Effective May 8, inland VAT was shifted from the wholesale and retail levels to the importer and manufacturer levels. The rates remained unaffected.

In addition, locally produced goods which were similar to goods imported from CARICOM countries became liable to a 10 percent VAT (list of the goods affected is set out in Schedule 5 of the Value Added Tax (Amendment) Act 1989).

With effect from May 8, cheese, margarine, and sardines were added to the zero-rated list while macaroni, spaghetti, and similar locally manufactured products were dropped from the zero-rated list.

Effective May 8, VAT on all imports to the local manufacturing process was abolished and a mechanism was introduced to allow the refund of VAT for locally produced imports including services.

On May 16, the VAT for food and beverages in hotels and restaurants was changed to 8 percent.

Effective August 25, inland VAT on all locally manufactured goods (including goods similar to those imported from CARICOM countries) was raised to 15 percent. The collection of VAT on imports was shifted to the Customs Department.

b. Import duties

Effective May 8, import duties on imported goods purchased locally by approved enterprises were abolished and a mechanism was set up to refund import duty that may be collected on such imports.

c. Import surcharge

Effective May 8, the tax rate on extra-regional brewery products was raised from 10 percent to 25 percent and the rate on extra-regional cigarettes raised from 10 percent to 35 percent. In addition the rate of 10 percent on beef (salted or in brine), butter, cheese, margarine, and sardines was rescinded.

d. VAT on imports

Effective May 8, the VAT rate on goods imported from CARICOM countries was reduced from 20 percent to 10 percent. At the same time, imported goods purchased locally by approved enterprises were exempted from VAT and a mechanism was introduced to allow the refund of the VAT that may be collected on such imports.

Effective August 25, inland VAT on imports was abolished and the VAT collection was consolidated in the Customs Department. The VAT on imports was set at a rate of 30 percent except for goods imported from CARICOM countries and manufactured goods similar to those produced in Grenada which was set at a rate of 15 percent.

e. Motor vehicle tax

Effective May 8, motor vehicle tax was reduced by 5 percentage points for each category of vehicles, e.g., the tax on private cars was reduced from a range of 10-20 percent to a range of 5-15 percent.

f. Foreign-exchange tax

With effect from May 8, the exemption from foreign-exchange tax which applied to approved enterprises only was extended to purchases by all manufacturers. At the same time, the exemption provided to medical drugs was extended to health services provided that the need for such expenditure is certified by a medical practitioner.

g. Fiscal Incentive Act

Effective May 8, approved enterprises would be granted maximum tax holidays.

5. 1990

a. Payroll taxes

On December 31, a 10 percent tax, (“national debt-service levy”) was introduced with effect from January 1, 1991 on all wages and salaries above EC$1,000 per month, including overtime payments, bonuses, and gratuities.

b. Property tax

On December 17, the real property tax was modified to provide for a tax rate of 1/2 of 1 percent of the assessed value of property of an acre or less on which a building stands and 1/5 of 1 percent of the assessed value of all other property.

c. Business levy

On May 23, the business levy was amended with retroactive effect from January 1, 1989 to limit allowances or deductions for any personal emolument above EC$60,000.

On December 31, the business levy was amended with effect from January 1. 1991 to eliminate the option of taxing gross sales receipts instead of net annual profits. The rate of the levy on net annual profits was differentiated (30 percent on the first EC$50,000 of profits and 40 percent thereafter) and the number of deductions was reduced. A transitional provision was enacted for the 1990 payment. A significant number of public and private enterprises were exempted from the business levy.

d. Value-added tax (VAT)

On December 31, the VAT on overseas telephone calls was raised from 5 percent to 10 percent.

e. Other taxes

On December 31, the ticket tax of 1980 was amended to re-enact the tax at a rate of 10 percent of the value of each airline ticket purchased in Grenada and on tickets purchased overseas for travel originating in Grenada. Students, pensioners, and persons accorded diplomatic privileges were exempted.

On May 25, a cruise-ship visitor levy was introduced at US$1.00 per head, with effect from July 1, 1991.

6. 1991

a. Property tax

On June 5 the real property tax was modified with retroactive effect from January 1, 1991, to exempt the first EC$30,000 of the value of a principal residence and to tax all land at 1/5 of 1 percent of the assessed value with the first 1/4 acre on which a principal residence is located exempt from tax.

b. Import duty

On December 31, 1990 Grenada enacted the CARICOM Common External Tariff (CET). Full implementation of the CET depends on the enforcement of the Rules of Origin and the GATT Valuation Code.

On January 18, the Customs Act was amended to provide a schedule (Valuation Code) defining the value of dutiable goods.

On April 29, the Statutory Rules and Orders (SRO) No. 6 were enacted, with effect from May 1, setting the minimum rates of ad valorem import duties, in conformity with the CET. The new common minimum rates remain in the previous range of 5 to 45 percent, but the rates applied to specific products are generally higher under the new tariff than were Grenada’s previous rates. SRO No. 8 also defines the list of goods which Grenada may exempt from duty under the CET, including the right to refuse to grant full duty exemption for any goods eligible under SRO No. 8 and to instead apply a level of import tariff on such goods not higher than that provided in the Schedule of Tariff Rates. The latter provision limits substantially the extent of change from Grenada’s previous duty-exemption list. Moreover, the Minister of Finance may provide specific exemptions on a case-by-case basis. In cases where the rate of the import duty has been raised to a level considered socially equitable, the rates for the same goods under the import VAT and surcharge have been lowered to offset the impact.

On May 26, the Statutory Rules and Orders (SRO) No. 10 of 1991 were enacted with effect from June 1, 1991, establishing the CET Origin of Goods Regulations.

On August 29, the CET was amended to alter the rates of more than 40 categories of import items. The effect of the changes was to lower the average rate applicable.

c. Value-added tax on, imports

On June 19, the value-added tax was amended to revise the rates of import value-added tax on beef, ham, chicken and turkey, rum, gasoline, diesel fuel, motor vehicles, new and used spare parts for motor vehicles, and lumber. As a percentage of the c.i.f. value plus the import duty, the new rates ranged from 20 to 62.5 percent. For fuel imports the Act took effect on April 21, and for all other products on June 21.

On September 19, the value-added tax was amended to clarify that any imported goods or service upon which the customs duty is paid is likewise subject to the VAT on imports. In practice, the change extends the coverage of the VAT on imports to items previously not subject to it.

d. Customs duty surcharge

On June 19, the surcharge was amended under SRO No. 12 to replace one of the schedules of items covered by the surcharge by another group of items, including meat, poultry, butter, cheese, sardines, rum, several categories of motor vehicles, new and used motor vehicle tires, and lumber.

e. License fees

On February 12, the Motor Vehicles and Road Traffic Act was amended to increase the fee for driving and learners’ permits from EC$30.00 each to EC$60.00 each.

f. Other taxes

On January 2, birth and death certificate fees were raised. The new range of fees is from EC$0.50 to EC$10.00.

On May 27, the ticket tax was amended to exempt persons traveling for emergency medical reasons.

On September 19, the levy on cruise-ship visitors was increased from US$1.00 per head to US$2.00 per head with effect from January 1. 1992.

7. 1992

a. Debt-service levy

On March 1, the debt-service levy was amended with effect from January 1, 1992 to replace the previous unitary rate of 10 percent with progressive rates as follows:

Up to $10,000 annual incomes0 percent
$10,001 - $20,00010 percent
$20,001 - $36,00020 percent
Over $36,00025 percent

b. Value-added tax

On March 1, a value-added tax of 5 percent was imposed on various commodities previously exempted from VAT including sugar, breakfast cereals, rice, milk (condensed and evaporated), chicken parts, sardines, cheese, and chilled and frozen vegetables.

c. Property tax

On March 1, the property tax was modified to provide for exemption of the first EC$25,000 of land attached to a house rather than the first 1/4 acre, and to raise the exemption for one’s principal residence from EC$30,000 to EC$40,000.

d. Ticket tax

On March 1, the ticket tax was amended to remove the exemption for students travelling abroad on vacation; students on study travel are still exempted.

e. Import taxes

On July 28, exemptions from import taxes for most statutory bodies were removed; however, GRENLEC fuel imports continue to be exempt. In addition, various exemptions remain for many organizations and individuals. GRENTEL, the telephone company privatized by the Government in 1989, continues to be exempt from all import duties until the year 2005.

8. 1993

a. Extra regional customs surcharge

On December 30, 1992 it was announced that the 10 percent extra regional customs charge would be removed with effect from January 1, 1993.

b. Customs service charge

With effect from January 1, a customs service charge of 2.5 percent was placed on all imports. However, the imports of GRENTEL remained exempt from this tax as specified in a 1989 ACT under which the company was incorporated. This Act exempts GRENTEL from payment of all forms of import duties until 2005.

c. Foreign-exchange tax

With effect from January 1, the foreign-exchange tax was reduced from 5.0 percent to 2.5 percent and all exemptions to the tax were eliminated.

d. Annual stamp tax

The annual stamp tax which became effective on January 1, 1992 was not implemented that year. With effect from January 1, 1993 collections for both the current and previous years were to be effected. (The difficulties with respect to the legal interpretation of various aspects of the annual stamp tax, which had delayed its implementation in 1992, persisted into 1993. The issues were resolved in the first half of the year and notices of assessment began to be posted to taxpayers from July 1993.)

e. Property tax

The Property Tax Roll was updated to include approximately 3000 properties that were previously not included.

f. The Common External Tariff

On July 1, 1993, the revised Common External Tariff was introduced which reduced the maximum tariff rate from 45 to 35 percent.

g. Value-added tax

Also on July 1, 1993, the VAT on imported goods which consisted of 12 different rates was reduced to a regime of 4 rates. The existing rates are: zero-rated items, two rates of 15 and 25 percent, respectively, and a “luxury rate” of 55 percent. In order to compensate for the expected losses from the reduction in other taxes the number of zero-rated items were reduced and certain goods were reclassified and subjected to higher VAT rates.

9. 1994

a. Personal income tax

In the last quarter of 1994 the Parliament approved a new income tax law which will replace the current taxes on income and profits known as the debt-service levy and business levy, respectively. The new system was made rtroactive and applied to the income of individuals and corporations earned from January 1, 1994. The important features of the system were the following:

(1) Each taxpayer is treated independently, there is no aggregation of the income of married persons.

(2) Individual income subject to taxation includes, in addition to employment income, interest income, rental income, business profits (sole traders), and dividends.

(3)All taxpayers are entitled to certain basic allowances, given by a credit method at a 10 percent rate. The allowances are the following:

Individual taxpayer$10,000Credit1,100
Dependent spouse$ 1,500Credit150
Dependent child$ 1,000Credit100
(Maximum of three children)($ 3,000)(300)

(4)The tax on personal income consists of four progressive bands:

10 percent - on income upto EC$20,000

20 percent - on income from EC$20,001 to EC$35,000

25 percent - on income from EC$35,001 to EC$50,000

30 percent - on income over EC$50,000

b. Withholding tax

A withholding tax of 10 percent applies to bank interest in excess of EC$50 per month and on all dividends. Since gross income will include both interest and dividends, the withholding tax will be offset against the tax liability of the individual.

c. Corporation tax

The business levy was replaced by the corporation tax which for income year 1994 is as follows:

30 percent on profits of EC$45,000 or less

35 percent on profits over EC$45,000.

The intention is to consolidate the rates into a single rate of 30 percent in 1995.

d. Property tax

The existing rates of 0.2 percent for land and 0.5 percent for buildings were consolidated into a single rate of 0.2 percent on the value of the property (house and land). The previous deductions of EC$25,000 for land and EC$40,000 on occupied buildings was replaced by a deduction of $100,000 in respect of the value of the property.

e. Value-added tax

The value-added tax (external and domestic VAT) was renamed as a general consumption tax. Before the legislation was finalized in late 1994, the following changes were made to the existing value-added tax system;

(1) External VAT. The VAT on certain imported household items such as washing machines, ovens, and electrical appliances was reduced from 25 to 15 percent. A similar reduction was applied to other consumer products such as wine and spirits, while microcomputers were zero rated. At the upper range of the VAT system, the luxury rate of 55 percent on cigarettes and cigars was reduced to 15 percent.

(2) Domestic VAT. After the presentation of the 1994 budget, the Government attempted to introduce a change in the domestic VAT to reduce the rate on domestically produced manufactured goods from 15 to 10 percent. This was done through a Standing Rule and Order (SRO) in February 1994. However, the legislation necessary to give validity to the SRO was not passed until October. In the interim, some manufacturers lowered their rates while others refused to do so in the absence of the relevant legislation.

f. The foreign-exchange tax

This tax was abolished with effect from January 1, 1994.

g. Fees and licenses

A substantial amount of “nuisance licenses” were abolished, e.g., licenses for bicycles, carts, radios, dogs, etc., and licenses for the establishment and conducting of personal or corporate services were increased.

Table 1.Grenada: Central Government Fiscal Operations(In percent of GDP)
19861987198819891990199119921993Est.

1994
Proj. 1995
Total revenue and grants45.226.826.227.626.728.025.126.825.529.2
Revenue26.823.024.523.324.124.023.524.322.623.4
Grants18.43.91.64.42.64.01.72.52.95.8
of which: capital grants12.22.81.41.12.24.01.22.11.95.2
Total expenditure and divestment proceeds50.736.735.436.036.433.425.327.027.829.2
Current expenditures28.827.023.830.026.924.523.922.622.521.7
Wages, salaries, and allowances14.913.112.516.513.712.713.112.211.211.0
Other current expenditures13.914.011.313.513.211.810.810.411.310.7
Capital expenditure and divestment proceeds21.99.711.76.09.58.91.44.45.37.5
Capital formation21.49.211.25.99.48.83.04.47.89.2
Net lending/divestment proceeds0.50.50.40.10.10.1-1.7-2.4-1.7
Current account balance-2.1-4.10.7-6.8-3.0-0.50.51.6.0.11.6
Overall balance before capital grants-17.7-12.6-10.7-9.5-11.9-9.3-1.3-2.3-4.2-5.2
Overall balance after grants-5.6-9.9-9.3-8.4-9.7-5.3-0.2-0.2-2.3
Financing
Central government5.69.99.35.09.75.30.20.22.3
External (net)-0.36.3-0.3-0.63.30.7-0.4-0.12.4-0.5
Net change in external arreras1.81.71.62.52.70.70.4-0.1-0.3
Domestic (net)4.11.98.03.03.64.00.10.30.10.8
Sources: Ministry of Finance; and staff extimates.
Sources: Ministry of Finance; and staff extimates.
Table 2.Grenada: Total Revenue and Grants
1981-1985198519861987198819891990199119921993Est.

1994
Proj. 1995
(In millions of Eastern Caribbean dollars)
Total revenue and grants135.3187.7158.2121.0130.5155.5160.8184.2170.8192.4193.0236.2
Total revenue81.8103.393.8103.6122.4130.8144.9158.0159.4174.3171.1189.1
Current revenue81.8103.393.7103.5122.2130.6144.1157.9159.2173.3171.1189.1
Tax revenue71.992.179.291.4106.9118.7131.7141.4144.8155.2154.1168.5
Taxes on income and profits20.322.25.98.410.012.111.227.133.738.937.840.5
Taxes on property1.12.21.31.62.74.12.83.03.84.43.75.7
Taxes on domestic transactions20.733.516.017.422.727.017.822.622.323.125.227.3
Of which:
VAT/consumption tax4.110.315.819.612.213.212.212.413.813.5
Stamp duty4.71.82.53.21.83.02.22.12.72.0
Taxes on international transactions29.834.256.064.071.575.5100.088.784.988.987.494.9
Of which:
Import duty20.422.128.230.236.328.225.721.822.525.5
VAT/consumption tax27.834.832.234.154.250.148.353.854.957.0
Foreign exchange tax4.44.49.29.88.98.79.05.10.5
Customs services charge6.37.510.5
Nontax revenue9.811.214.512.115.311.912.416.514.418.117.020.6
Capital revenue0.10.10.10.20.20.80.10.20.9
Total grants53.684.464.417.48.124.715.926.211.418.121.947.1
Current grants11.424.921.84.91.018.42.53.52.97.55.1
Capital grants32.259.542.612.57.16.313.426.27.915.214.442.0
(In percent of GDP)
Total revenue and grants58.572.345.226.826.227.626.728.025.126.825.529.2
Current revenue35.639.826.823.024.523.223.924.023.424.222.623.4
Tax revenue31.335.522.620.321.421.121.921.521.321.720.420.8
Taxes on income and profits8.98.61.71.92.02.21.94.15.05.45.05.0
Taxes on property0.50.90.40.40.50.70.50.50.60.60.50.7
Taxes on domestic transactions8.912.94.63.94.54.83.03.43.33.23.33.4
Of which: VAT/consumption tax1.22.33.23.52.02.01.81.71.81.7
Taxes on international transactions13.013.216.014.214.313.416.613.512.512.411.611.7
Of which:
Import duty5.84.95.75.46.04.33.83.03.03.23.03.2
VAT/consumption tax7.97.76.56.19.07.67.17.57.37.0
Foreign exchange tax1.21.21.01.81.71.51.31.30.70.7
Nontax revenue4.34.34.12.73.12.12.12.52.12.52.22.6
Capital revenue0.10.1
Total grants22.932.518.43.91.64.42.64.01.72.52.95.8
Current grants4.89.66.21.10.23.30.40.50.41.00.6
Capital grants18.122.912.22.81.41.12.24.01.22.11.95.2
Sources: Ministry of Finance; and staff estimates.
Sources: Ministry of Finance; and staff estimates.
Table 3.Grenada: Tax and Nontax Revenue as a Proportion of Total Revenue
1981-1985198519861987198819891990199119921993Est.

1994
Proj.1995
(In millions of Eastern Caribbean dollars)
Total revenue and grants135.3187.7158.2121.030.5155.5160.8184.2170.8192.4193.0236.2
Total revenue81.8103.393.8103.6122.4130.8144.9158.0159.4174.3171.1189.1
Current revenue81.8103.393.7103.5122.2130.6144.1157.9159.2173.3171.1189.1
Tax revenue71.992.179.291.4106.9118.7131.7141.4144.8155.2154.1168.5
Taxes on income and profits20.322.25.98.410.012.111.227.133.738.937.840.5
Taxes on property1.12.21.31.62.74.12.83.03.84.43.75.7
Taxes on domestic transactions20.733.516.017.422.727.017.822.622.323.125.227.3
Of which:
VAT/consumption tax4.110.315.819.612.213.212.212.413.813.5
Stamp duty4.71.82.53.21.83.02.22.12.72.0
Taxes on international transactions29.834.256.064.071.575.5100.088.784.988.987.494.9
Of which:
Import duty20.422.128.230.236.328.225.721.822.525.5
VAT/consumption tax27.834.832.234.154.250.148.353.854.957.0
Foreign exchange tax4.44.49.29.88.98.79.05.10.5
Customs services charge6.37.510.5
Nontax revenue9.811.214.512.115.311.912.416.514.418.117.020.6
Capital revenue0.10.10.10.20.20.80.10.20.9
(As a percentage of current revenue)
Current revenue100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Tax revenue87.989.284.588.387.590.991.489.691.089.690.189.1
Taxes on income and profits24.821.56.38.18.29.37.817.221.222.422.121.4
Taxes on property1.32.11.41.62.23.21.91.92.42.52.23.0
Taxes on domestic transactions25.332.417.116.818.620.612.314.314.013.314.714.5
Of which:
VAT/consumption tax4.410.112.915.08.58.47.77.18.17.1
Taxes on international transactions36.433.159.861.858.557.869.456.253.451.351.150.2
Of which:
Import duty21.821.423.123.225.217.916.112.613.113.5
VAT/consumption tax29.733.626.426.137.631.730.331.132.130.1
Foreign exchange tax4.74.37.57.56.25.55.73.00.3
Nontax revenue12.010.815.511.712.59.18.610.49.110.59.910.9
(Percentage changes)
Real GDP9.89.32.45.85.23.61.20.92.53.0
GDP at current market prices12.115.810.712.77.19.13.35.55.57.1
Tax revenue-14.015.417.011.011.07.42.37.2-0.79.3
Taxes on domestic transactions-52.28.830.518.7-34.0.27.1-1.23.29.38.4
Imports of goods and services19.28.2-1.216.97.710.5-6.16.09.36.9
Taxes on international trade63.714.311.75.632.4-11.2-4.34.7-1.78.6
VAT/consumption tax34.3-11.86.866.8-11.1-6.521.64.99.4
Import duties8.327.67.220.1-22.4-8.8-15.33.313.4
External VAT and import duties as percent of imports5.54.64.53.64.43.23.12.82.52.3
Sources: Ministry of Finance; and staff estimates.
Sources: Ministry of Finance; and staff estimates.
Fiscal Incentives and Tax Concessions in Grenada

Fiscal incentives in Grenada are administered under the Fiscal Incentives Act of 1974 and the Hotels Aid Act No. 138 of 1954.

1. Incentives under the Fiscal Incentives Act

Under this Act, benefits are granted to enterprises with a minimum local value added of 40 percent, except in cases where a lower value added is stipulated in the CARICOM rules of origin. The benefits include:

a. A tax holiday period which guarantees a waiver of payment of the business levy (now called corporation tax) for the identified period of time for each of the following category of enterprises:

  • (1) Enterprises with a local value added of 40-50 percent: seven years.
  • (2) Enterprises with a local value added of 50 percent or more: ten years.
  • (3) Enterprises with export earnings of 60 percent or more of sales will be granted an additional five years.
  • (4) For enclave enterprises, provided that the enterprise is producing exclusively for export to countries outside of the CARICOM: 15 years.

b. A waiver of import duties on plant, equipment, machinery, spare parts, raw materials, packaging, and building material.

c. A waiver of 50 percent of import duties on commercial vehicles for the transportation of goods.

2. Incentives under the Hotels Aid Act

Under this Act, relief is granted in respect of customs duties to persons who incur expenditure for the purpose of constructing or equipping a hotel in Grenada. A hotel is defined as a building or group of buildings containing no less than ten rooms to be used for the accommodation of guests. The concessions under this Act are:

a. Waiver of duties on building material and articles of hotel equipment for constructing and equipping of a hotel prior to its opening for business.

b. Complete or partial exemption from payment of taxes on income derived from the operation of a hotel for a period not exceeding ten years.

Both Acts mentioned above are administered by the Grenadian Industrial Development Corporation (IDC). After evaluating a proposed project the IDC submits to the Cabinet its recommendations for the approval of the project including whatever exemptions are deemed necesssary for the commencement of the investment. On ocassion, the Ministry of Finance has made its own recommendations to the Cabinet, with respect to incentives to be given to projects that were not evaluated by IDC.

3. Exemptions granted under the Customs Ordinance Act

In addition to the above-mentioned legal framework for the granting of concessions, the Government, through the Customs Ordinance Act, grants concessions to public enterprises, statutory boards, civil servants, embassies, and a variety of nongovernment bodies on—what has been generally acknowledged as—a random and ad hoc basis. Before 1991, each ministry would bring to Cabinet its own projects and proposals for exemptions.

In 1991 a cabinet committee to determine a policy on concessions was established and the recommendations of the committee were accepted and introduced during the same year. The new policy centralized the approval process, so that all inquiries for tax and duty exemptions are now presented to the Cabinet only through the Ministry of Finance. In addition, the policy on tax and duty concessions for various categories of applicants was restructured as follows:

a. State enterprises and statutory bodies

All commercially oriented state corporations and statutory bodies are required to pay full duties and taxes, except where exempt by previous law. However, special consideration is given to requests from these organizations for exemptions on goods associated with major capital investments and a case-by-case approach is used to deal with requests for concessions on imports associated with current expenditure.

b. Churches and schools

Duty and tax concessions of 100 percent on external donations of food, building materials, etc., are given to churches. A concession of 50 percent of taxes and duty liable is given for the importation of organs, keyboards, amplifiers, cars, etc., for church organizations. Concessions to schools for printed matter, educational products, etc., are limited to 50 percent of the value of duty or taxes to be paid.

c. Nongovernmental organizations, including sporting organizations

For nongovernmental organizations a 100 percent duty and tax concessions are granted for inputs into projects initiated and maintained by these organizations, excluding taxes on vehicles and office furniture. With respect to sporting organizations, full concessions are given only to “special projects” of the National Association of Sports Organizations while concessions of 50 percent on taxes and duties liable may be granted to the importation of equipment by clubs supported by or affiliated with the National Association.

d. Cooperatives

Production cooperatives (excluding the statutory associations of the nutmeg, banana, and cocoa industries) are granted concessions of 100 percent of duty and taxes on imports of plant and equipment. Financial and service cooperatives, however, have to pay full duty and taxes. Commodity boards are to be granted full concessions only if the investment is considered to improve output and marketing directly.

e. Farmers and fishermen

A concession of 25 percent of the duty liable is granted on motor vehicles, boats, and boat engines. Most other agricultural inputs, including inputs for fishing, are duty free.

f. Civil servants and returning residents

Civil servants who are designated travelling officers are allowed a 50 percent concession on taxes and duty to be paid on the purchase of a new vehicle. However, if this vehicle is sold within a five-year period, the taxes and duty exempted must be paid to the Treasury before the vehicle can be sold. For returning residents there is an exemption of 60 percent of the duty and taxes liable on the importation of a motor vehicle that must be at least one year old. If such a vehicle is sold within three years of its entry into Grenada, the full duty shall be paid by the original importer.

Environmental Issues: National and Regional Environmental Plans 1/

Grenada is faced with several environmental problems characteristic of a small island developing state. The country’s major environmental concern is resource degradation caused by the intensity and misuse of natural resources in the key economic sectors of agriculture and tourism. For instance, increased banana cultivation on steep slopes and marginal land in recent years has contributed to soil erosion and landslides, while growth in tourism and other related economic activities (e.g., sand mining for hotel building) has intensified pressures on land use and solid-waste management. The latter problem has also been exacerbated by changing consumption patterns and the consequent increase in per capita solid waste output, and in the proportion of nonbiodegradable and metallic substaines in total garbage.

1. National Environmental Action Plan

In order to tackle the problem of environmental degradation and help ensure sustainable economic growth, the Government of Grenada formulated a National Environmental Action Plan (NEAP) in the context of a regional Environment Initiative undertaken by the Caribbean Group for Cooperation in Economic Development (CGCED) in June 1992. Grenada’s NEAP was prepared in collaboration with the World Bank, the Caribbean Conservation Association (CCA), the Grenadian private sector, and several nongovernmental organizations, notably the Agency for Rural Transformation (ART).

In its NEAP as well as its 1994-96 medium-term economic strategy, the Government of Grenada has recognized the following environmental priorities for immediate attention: solid waste management, water supply and liquid waste management, land use management, coastal zone management, water pollution, forestry and protected areas, and natural and man-made hazards. Several initiatives have been undertaken in the past two to three years to deal with Grenada’s major environmental concerns. These initiatives consist of the following three-to-five-year projects: (a) a Land Use and Integrated Watershed Management project (US$1.5 million) to develop a land zoning scheme and a water catchments protection plan; (b) the Carriacou Land Use and Forest Management project (US$0.7 million) to improve livestock management and production and reduce soil degradation; (c) a project for Forest Management and Institutional Strengthening of Forestry (US$1.4 million); (d) a project for the Development of National Parks (US$0.2 million) and (e) the Perseverance Sanitary Landfill Project (US$1.1 million) to accommodate projected waste, discontinue the use of wet land for waste disposal, and upgrade collection sites.

Grenada’s NEAP also suggests a number of economic policies in order to stimulate the sustainable use of natural resources and protect the environment. These policies include: (a) raising charges for water supply (presently at 55 percent of cost) in order to discourage waste of water and raise funds needed for maintenance and capital expenditure; (b) imposing adequate charges for refuse collection (presently provided free by the Government) to defray the cost of solid and liquid waste disposal 1/ ; (c) continuing with the government policy of charging entry fees to national parks and the museum and using the proceeds for the maintenance and upgrading of facilities; and (d) reviewing the existing tax on solar units in order to discourage the use of fossil fuels and promote the use of renewable energy sources.

To strengthen the institutional framework of environmental management, the NEAP also proposes that (a) the Ministry of Finance, Planning and Development be designated as the body responsible for the management and planning of all environmental matters; (b) that a government commission on sustainable development be established and charged with the coordination of the Government’s long-term strategy on environmental management and planning, and, (c) that the proposed Commission would act in an advisory capacity to the Government on all matters related to the environment with the secretariat of the commission housed in one of the divisions of the Ministry of Finance, Planning and Development. The NEAP also urges that the existing public awareness programs regarding environmental issues be strengthened by promoting greater community participation and public consultations.

2. Regional environmental action

Grenada has also taken part in regional environmental projects, mainly in the areas of solid waste disposal, and the control of marine pollution and conservation of marine resources. To alleviate the problem of solid waste disposal, Grenada is at present participating in a regional World Bank/OECS Solid Waste Management Project to construct sanitary landfills, and expand or upgrade waste collection and transportation facilities. Under this project, over US$2.3 million will be spent to develop waste treatment and disposal sites in Grenada and Carriacou. The project is jointly financed by the Government of Grenada, the World Bank Global Environmental Facility, the European Investment Bank, and the Caribbean Development Bank.

Grenada also has signed the Cartagena Convention of 1983 and its Protocol concerning cooperation in Combating Oil Spills. The Convention provides the legal framework for the United Nations Environmental Program (UNEP)/Caribbean Environmental Program. Other areas of regional environmental action in which Grenada participates include: (a) preparing system plans for parks and protected areas, (b) monitoring and alleviating the impact of climate changes, including through a project funded by the USAID’s Environmental Control and Resources Management Department and the United Nations Development Program (UNDP)/United Nations Center for Human Settlements (UNCHS), (c) enhancing public awareness through education and training in environmental matters, (d) harmonizing environmental legislation, and (e) building up the regional capacity for environmental assessment and control with assistance from the Caribbean Environmental Health Institute (CEHI).

Developments in the Traditional Export Sectors and Tourism

1. Bananas

The volume of banana production and exports have declined steadily since the early 1980s. While total exports in 1984 stood at 18.4 thousand tons, in 1994 this figure had declined to 9.9 thousand tons. Until 1993, most of Grenada’s banana exports were to the United Kingdom where they were accorded preferential access. Unable to take advantage of the favorable exchange rate movements in the mid to late 1980s when the pound sterling appreciated against the E.C. dollar, Grenada was the only OECS country experiencing a decline in banana exports in this period. The decline reflected the spread of the Moko disease, competition with nutmeg cultivation during its heyday, shortages of skilled labor, and rising agricultural wages (banana cultivation being more labor intensive than other crops), uncertainties regarding the continuation of preferential access to the U.K. market in the period after the advent of a single European market in 1993, and weaknesses in the services provided by the Grenada Banana Cooperative Society (GBCS) which resulted in higher unit costs of marketing and transport as output fell.

With the unification of the European market, export prices fell sharply (by almost 20 percent) in 1993 but recovered somewhat in 1994. The new preferential quota for Grenadian banana exports was set at 31,000 tons though current production is well below this level. In order to address the problems facing the sector, the GBCS has initiated a multi-faceted strategy to improve production, productivity, and marketing and which focuses on the development of estates to expand the acreage of bananas under cultivation. so as to increase the level of exports toward its quota limit. The plan to increase production focuses on developing the Belvedere Estate which, when completed, would add about 350 acres to the production of bananas. In 1994, about 50 acres were brought under cultivation and the estate contributed 17 percent to the total banana production. The GBCS is also developing the Dougalston Estate which, upon completion, would add another 200 acres. The immediate target of this expansion in acreage is to fill one half of Grenada’s quota by 1996, i.e., about 15,000 tons.

Related measures adopted by GBCS have been the use of Stabex funds to finance laboratories, replanting schemes to eradicate the Moko disease, and to pay higher price support to growers in order to increase productivity. The GDCS expects to improve productivity to about 20-22 tons per acre. Furthermore, the GBCS has renegotiated its contract with GEEST Lines (which has enjoyed virtual monopoly in the marketing of bananas produced in the Eastern Caribbean).. Under the new contract, the GBCS would have to sell 78 percent of their exports to GEEST and can sell the remaining to any other party. Also, GEEST would be responsible for the marketing of bananas in the United Kingdom and Europe. As part of its new strategy, the GBCS, along with other banana growers in the Caribbean, is actively involved in establishing a regional marketing board (WIBDECO).

While the GBCS’s short-term objective is to fill its existing E.U. quota, efforts are also being made to raise productivity and improve competitiveness with respect to lower-cost banana-producing countries in Latin America.

2. Cocoa

Like bananas, cocoa production has been on the decline since the early 1980s. This fall in production has been caused largely by a secular decrease in the average size of farms due to increased fragmentation of land holdings and a lack of investment in production units. Very few large plantations remain, with most of the production being carried on in snail family labor-based farms. Moreover, cocoa produced in Grenada is of the fine flavor variety, with a limited world market (at present fine flavor cocoa makes up about 8 percent of the world market). In 1994, as world chocolate consumption outpaced cocoa production, export prices registered an increase of about 16.5 percent over 1992-93 prices. Moreover, fine flavor cocoa did in fact fetch a substantial premium in 1993-94. While the average price in London auctions was around £739 per metric ton (MT), the price for fine flavor cocoa was about £1,315 per MT.

In order to consolidate these price gains, the Grenada Cocoa Association (GCA) has concentrated on stabilizing production around 3.2 million pounds. However, Grenada remains a high-cost producer compared with its competitors (Cote’d Ivoire, Jamaica, and Trinidad and Tobago) in the niche market for fine flavor cocoa. Furthermore, with the increasing concentration in the chocolate industry, manufacturers have been moving into the production of more standardized and bulk products. For such types of chocolate production fine flavor cocoa is an expensive input. Moreover, in light of the higher cocoa prices there has been increased pressure in the European Union for the harmonization of the 5 percent allowance of the use of Cocoa Butter Equivalents (CBE) in the production of chocolate. Such a measure, if adopted, would put downward pressure on international prices. With the possible decline in the world demand for fine flavor cocoa, Grenada’s cocoa exports are likely to remain modest in the future, unless the industry, through dramatic adjustments, forays into the production of bulk cocoa at a cost of production that is competitive.

3. Nutmeg and mace

Nutmeg and mace exports had accounted for about 66 percent of exports of traditional crops in 1987-89 before declining dramatically to 37 percent in 1991-94 following the collapse of the marketing arrangement with Indonesia in 1990. Grenada, whose share is about 25 percent, together with Indonesia dominate about 95 percent of the world trade in nutmeg and mace. All of Grenada’s nutmeg and mace are grown by medium and small holders and marketed through the Grenada Cooperative Nutmeg Association (GCNA). In 1987, GCNA joined its Indonesian counterpart, ASPIN, to form a cartel, selling all their nutmeg through a single foreign spice trading firm, CATZ. World market prices for nutmeg tripled in the 1987-88 season. Following the price increase, production increased dramatically in the face of a decline in world demand. To maintain the high price in the world market, CATZ did not purchase the increased volume of nutmeg. GCNA, abiding by the cartel decision, accumulated large stocks and drew on its financial reserves to maintain producer prices. However, in Indonesia producers bypassed ASPIN and reached the world market through alternative marketing agencies. This had two major repercussions. In Indonesia, ASPIN lost credibility with its members, and world prices collapsed. Since the Indonesian costs of production were much lower, their producers survived this collapse in prices. On the other hand, even with the premium for the relatively better quality of nutmeg, the costs of production were too high for the Grenadian farmers to maintain the level of production at the lower prices. Moreover, with increased costs associated with the maintenance of the large accumulated stocks, GCNA had no recourse but to cut the advance prices to farmers. Producer prices dropped by about a third by 1992 over 1990 prices. By 1990 the cartel was formally abandoned.

Given the specific climatic and soil conditions required for the cultivation of nutmeg and the long gestation period required, the cartel was relatively well protected from increased production in Sri Lanka and Brazil, its two main competitors. The increase in production in Indonesia and Grenada that followed the formation of the cartel occurred because growers in these countries were able to increase harvesting. Moreover, the short-term elasticities of substitution for nutmeg and mace were estimated to be low. However, a number of factors worked against the success of the cartel. The price that was set by CATZ was out of line even in the short term and with a single marketing agency, the monopoly rents were essentially being shared with the marketing firm. Further, the concentration on the cartel and the hope of sustained high prices delayed decisions of the GCNA with respect to investing in processing facilities to obtain higher value added from its product. The emphasis on renewing the cartel agreement with ASPIN, even though ASPIN’s control over the Indonesian producers had declined considerably, prevented GCNA from adopting immediate measures to alleviate the situation.

In the 1993-94 marketing period, a 20 percent increase in the price of nutmeg enabled the GCNA to reduce its stocks and recapture lost markets; however, it is unlikely that Grenada would be able to regain its cartel-era position in the nutmeg market. However, with the setting up of processing units, albeit on a small scale, to produce higher value-added derivatives from nutmeg and mace, the industry is expected to consolidate the losses made in the immediate period after the collapse of the cartel and remain viable.

4. Tourism

The tourism sector has assumed the leading role in the development of the economy of Grenada as well as being the major source of foreign exchange earnings. Tourism earnings have increased 55 percent from US$62.4 in 1990 to US$96.7 million in 1994. The contribution of the tourism sector to GDP has nearly doubled from 5.8 percent of GDP in 1990 to 9.4 percent in 1994. This growth in tourism’s GDP was all the more critical since it took place against the backdrop of declining production of traditional agricultural crops, bananas, nutmeg, mace, and cocoa.

The major contribution to this upsurge comes from stayover tourists. The number of stayover tourists, while growing from 65.8 thousand in 1990 to 92.2 thousand in 1994, a 40 percent increase, also underwent important changes in its composition (Table 1). In 1990, 26.7 percent of the stayover visitors arrived from points in the West Indies, 13.9 percent arrived from the United Kingdom, and 4.6 arrived from Germany. By 1994, the composition had shifted to 19.2 percent from the United Kingdom, 7.9 percent from Germany, with visitors from the West Indies accounting for only 16 percent of the stayovers. Throughout this period, the share of stayover visitors arriving from the United States remained roughly constant at 33 percent while the estimated average daily expenditure of stayover visitors increased from US$107 in 1990 to US$130 in 1994.

During this period, the hotel industry not only expanded its capacity but upgraded its facilities with private financing from abroad. By the end of 1994, the total number of available rooms stood at 1428, with about 2,700 available beds. Among the 24 hotels registered with the Grenada Hotel Association (GHA) in 1994 are the Grenada Renaissance Hotel (186 rooms), the La Source Hotel (an all-inclusive resort with 100 rooms), and the Rex Grenadian Hotel (212 rooms) which cater to the upper end of the market.

An important factor behind the growth in the hotel industry has been the tax incentives and other benefits provided by the Government to this sector. The Industrial Development Corporation (IDC) is charged with facilitating new investment in the sector, and makes recommendations for the granting of concessions provided to the hotels under the Hotel Aid Act of 1954. 1/ In addition to concessions granted under the Hotels Aid Act, individual hotels have negotiated other concessions which have included exemption from paying import duties on all imports as well as extensions or favorable adjustments to the exemption from income taxes, after the original tax-exempt period granted to the investor had passed.

Also instrumental in the growth in tourism has been the improvement in access to Grenada with the completion of the Point Salines International Airport in the mid-1980s. Efforts by the Grenada Board of Tourism to strengthen its presence in the European market through more frequent promotional activities, such as utilizing trade conventions, also aided the development of the sector.

The other significant segment of the market is the cruiseship sector. The number of cruiseship passengers who visited Grenada in 1994 totaled 200,000. With major repairs expected to be completed on the docks in St. George’s by 1995 and planned construction of new port facilities, it is expected that this segment of the market will continue to expand.

In comparison with one of its major competitors, St. Lucia, the size of Grenada’s tourist industry is small both in terms of stayover tourists as well as cruiseship passengers (Table 2). Both St. Lucia and Grenada market their product for tourists in the moderately priced range of the market. Although wages in Grenada are consistently lower than St. Lucia, this cost advantage has been outweighed by Grenada’s relatively underdeveloped infrastructure, which hampers the quality and reliability of many public services, and the tourist industry in Grenada has lagged behind that of St. Lucia. Barbados does not compete directly with Grenada in the stayover market as Barbados attracts mainly the upper end of the tourist market and has many more luxury hotels than Grenada. Recently, however, Grenada has sought to acquire a small share of this upper part of the market with the opening of the Rex Grenadian and La Source hotels.

The tourist industry in Grenada is almost akin to an enclave industry, albeit with increasing linkages to the domestic economy, mainly through wages for local workers, local purchases both by the tourists as well the hotel industry, and the payment of taxes. However, given the nominal peg of the E.C. dollar to the U.S. dollar and the predominance of middle-income tourists from North America and Europe, the industry remains vulnerable not only to movements in the relative exchange rate between the U.S. dollar and other European currencies but also to income volatility in these countries.

The services provided by the sector represent a “traded service”, which requires that the authorities pursue sound macroeconomic policies that can sustain the competitiveness of the tourist industry. In this context, improvements in public services such as health, the water supply, and roads have spillover effects in that they support further development of the industry.

Table 1.Grenada: Profile of the Tourist Industry in Grenada
19901991199219931994
Total tourist arrivals (in thousands) 1/265.2288.0290.6301.8317.6
Stayover visitors (in percent of total stayovers)
United States33.934.234.039.133.0
Canada