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Grenada

Author(s):
International Monetary Fund
Published Date:
November 2008
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I. Program context

A. Recent Developments and Outlook

1. Economic performance has in many respects been positive:

  • Economic growth has rebounded. Growth in 2007 rose to 4.3 percent, driven by tourism, the Cricket World Cup (CWC), and expansion of an offshore university.

Contribution to GDP Growth

(In percent)

Sources: Grenada authorities; ECCB; and Fund staff estimates.

1/ Includes wholesale and retail trade, hotels and restaurants, and half of transport.

2/ Includes St. Georges University.

  • The external current account improved marginally in 2007, and strong FDI inflows provided ample financing. Growth in stayover arrivals of 9 percent helped offset the large shortfall in external grants and decline in transfers. Moreover, competitiveness appears to have improved recently, based on indirect indicators (Figure 1).

Figure 1.Grenada: Competitiveness Indicators

Sources: Grenada authorities; ECCB; Caribbean Tourist Organization; and Fund staff calculations.

1/ An increase (decrease) indicates an appreciation (depreciation).

2/ The sharp movements in the competitor-based real exchange rate in 2002–04 were largely driven by the Dominican Republic’s peso.

Grenada: Stayover Arrivals, 2005-2007

(Annual percentage change)

Source: ECCB; and Fund staff calculations.

  • The financial soundness indicators of the regulated banking system remain satisfactory. The capital adequacy ratio was 15.6 percent at end-2007 and the ratio of nonperforming loans to total remained low at 3.5 percent. Deposits grew 11.5 percent during 2007 and credit expanded at 15.1 percent, driven by tourism and personal loans (Figure 2).

Figure 2.Grenada: Banking System Vulnerabilities 1/

Sources: ECCB; and Fund staff calculations.

1/ Prudential indicators are reported by commercial banks, with infrequent onsite verification by the ECCB.

2/ ECCB data for 2007 as of September 2007.

  • There was important progress on structural reforms. The government appointed a receiver for Capital Bank, the unregulated bank, in February 2008. Parliament approved the Executive Agencies Bill to allow creation of a land agency, and the government adopted a comprehensive business plan for customs reforms and took steps toward stronger building standards.

Grenada: Monetary Aggregates,2001-2007

(In percent)

Source: ECCB; and Fund staff calculations.

2. There are, however, some areas of concern:

  • Annual inflation has increased sharply, reaching 8.7 percent in April 2008, reflecting rising world food and fuel prices and U.S. dollar depreciation (Figure 3).
  • Fiscal performance deteriorated further in 2007 despite delays in reaching agreement on a public service wage path.1 The slippages largely reflect very high capital expenditure notwithstanding a substantial shortfall (5 percent of GDP) in grants (which had been projected optimistically), and to a lesser extent higher transfers to vulnerable groups. Nevertheless, strong growth helped reduce the debt-to-GDP ratio from 117 percent at end-2006 to 112 percent at end-2007 (Figures 4 and 5).2

Figure 3.Grenada: Inflation Developments

Source: Grenada authorities; Bloomberg; ECCU; IMF, International Financial Statistics; IMF, World Economic Outlook; and Fund staff calculations.

1/ Tradables comprise food, alcoholic drinks and tobacco, fuel and light, clothing and footwear, household and furniture equipment. Non-tradables include medical care and expenses, education, personal services, housing and utilities, and transportation and communication.

Figure 4.Grenada: Fiscal Sector Indicators

(In percent of GDP)

Sources: Grenada authorities; ECCU country authorities; and Fund staff estimates.

1/ Adjusted.

2/ Includes 11.4 percent of GDP paid in 2002 to extinguish lease arrangements.

Figure 5.Grenada: Economic Developments

Sources: Grenada authorities; and Fund staff estimates.

Fiscal Developments in 2005–08(In percent of GDP)
200620072008
2005Prog.ActualBudgetPrel.BudgetProg.
Total revenues and grants34.833.333.732.827.331.528.9
Of which
Revenues24.325.825.027.026.226.025.2
Grants10.57.48.75.81.15.53.7
Total expenditures34.335.240.135.335.836.332.9
Current Expenditures20.421.021.321.522.222.723.4
Of which
Interest2.02.22.12.22.32.72.8
Bank restructuring0.00.00.00.00.00.01.5
Capital expenditures13.914.218.813.813.713.69.6
Primary balance (excluding grants)-8.0-7.1-13.0-6.0-7.3-7.6-5.0
Overall balance (including grants)0.5-1.9-6.4-2.4-8.5-4.6-4.1
Sources: Ministry of Finance; and Fund staff estimates and projections.
Sources: Ministry of Finance; and Fund staff estimates and projections.

3. The political environment for reform is challenging. The government has a one-vote majority in the Parliament. The Prime Minister has recently called general elections for July 8, 2008.

B. Program Performance

4. The fiscal position in 2006 deteriorated markedly relative to the program (Figure 4). The quantitative performance criterion on the central government primary balance (excluding grants) was missed by 1.2 percent of GDP at end-June 2006, largely due to capital expenditure overruns associated with higher-than-anticipated reconstruction costs. The resulting overall deficit was financed in part through domestic arrears and a drawdown of deposits, implying that the indicative target on net bank credit to the public sector was missed by a substantial margin.

5. Implementation of the structural reform program was uneven.

  • Solid progress was made on fiscal measures—the National Reconstruction Levy (NRL), the flexible fuel pricing mechanism, and the enhanced collection of tax arrears—and steps to reduce vulnerabilities with the establishment of the single regulatory agency for nonbank financial institutions, the Grenada Authority for the Regulation of Financial Institutions (GARFIN), and signing up for the World Bank’s risk insurance facility (CCRIF).
  • The authorities met four of seven structural benchmarks, three with delay. The biggest stumbling block was on tax concessions. The two benchmarks on legislative action regarding tax concessions have been modified and postponed to December 2008.
Status of Structural Benchmarks Under the Program
Target DateStatus
Stop granting or extending tax holidaysJan. 2006Not met
Agree on public service wage path for 2006–08Apr. 2006Met in January 2008 (except teachers)
Initiate work to strengthen PSIP processJun. 2006Met in July 2006
Publish information on new tax concessionsJun. 2006Met in Sep. 2006
Amend the Income Tax ActJun. 2006Not met
Repeal tax incentives legislationJun. 2006Not met
Initiate comprehensive customs reformsAug. 2006Met

II. Policy Discussions

The authorities underscored their commitment to the program and were eager to move ahead with the needed actions to put the program back on a solid footing.

6. Economic growth in 2008 is expected to decline somewhat reflecting a less benign external environment. Growth is projected to fall to 3.7 percent, notwithstanding a pick-up in foreign direct investment. Average inflation is expected to rise to 7.8 percent during 2008 reflecting further increases in world food and fuel prices.

A. Restoring Fiscal and Debt Sustainability

7. The authorities recognized that corrective action was needed to compensate for the expenditure overruns in 2006 and 2007. To reduce the projected overall fiscal deficit for 2008, the authorities have agreed to keeping expenditure below budgeted levels.3 Much of the reduction will fall on capital expenditure, which would fall from the budgeted 13.6 percent of GDP to 9.6 percent of GDP and reflect a more realistic projection of grants. A reduction in capital spending toward historical levels is appropriate as the post-hurricane reconstruction is nearly complete. The Ministry will improve control of current and capital expenditure by reviewing proposals to spend above budget allocations before they go to Cabinet, under a new policy that limits the use of special warrants. The authorities have also identified contingent measures to reduce spending if needed to meet program targets. These include limiting grants and subventions while protecting transfers to vulnerable groups, improved targeting, and further rationalizing capital spending. In light of these corrective actions, the authorities request a waiver of the missed June 2006 performance criterion on the primary balance excluding grants.

8. The authorities have implemented several policies to mitigate the impact of high fuel and food prices costing around 1.2 percent of GDP. These new measures include: an emergency food basket distribution scheme, increases in transfers to needy elderly persons, expansion of a free transport program for students, suspension of the Common External Tariff on nine basic items, and removal of the customs service charge on selected staples. The mission supported these efforts, also stressing improved targeting. There could be pressure for further government response given continued high food prices.

9. The 2008 program is fully and sustainably financed, allows for a gradual clearance of arrears, and is consistent with debt sustainability. The targeted overall deficit of 4.1 percent of GDP, including estimated bank restructuring costs of 1.5 percent of GDP, envisages a substantial fiscal adjustment relative to 2007. As the deficit will be financed largely by the sizable divestment proceeds expected during 2008, the fiscal program would allow for a reduction of public sector debt of 5.6 percentage points of GDP.4 This would include lowering the expensive overdraft and clearing expenditure arrears. The authorities have already made progress with their fiscal program so far in 2008, using divestment proceeds amounting to 1.5 percent of GDP in the first quarter of 2008 to more than fully finance the overall deficit of 1.2 percent of GDP, allowing for a small net repayment of debt. They will, however, need to slow the pace of capital spending to meet their fiscal targets.

10. The overarching objective remains placing debt on a sustainable trajectory. The authorities are now aiming to achieve the 60 percent debt-to-GDP ratio by 2018, two years ahead of the ECCB’s regional target date.5 While the 2007 Article IV active scenario envisaged achievement of this target four years earlier, the delay reflects fiscal slippages and larger PetroCaribe concessional borrowing related to higher fuel prices.6 A share of PetroCaribe’s disbursements is being placed in a special account to repay related obligations and the remainder is being transferred to the budget. To ensure sufficient funds for repayment, staff proposed a higher share for the special account than the authorities were planning; the authorities are considering this proposal as they define their investment strategy. Half of divestment proceeds would be used to pay down debt.

11. Efforts have been stepped up to reform tax administration and improve tax collection, and important tax reforms are planned. Improved collection of tax arrears is expected to yield 0.6 percent of GDP in 2008, and customs reforms are moving forward. A cadastral survey is expected to be completed this year, and the new property assessments applied from 2010. The authorities plan to announce a date for introduction of a VAT after the elections, and have agreed that VAT-related measures would then be included as structural conditionality (Table 2, supplementary Memorandum of Economic Policies (MEP)).

Table 1.Grenada: Selected Economic and Financial Indicators, 2004–09
Rank in UNDP Human Development Index82Infant mortality rate per ’000 births (2005)17
out of 177 countries (2007/08)Adult illiteracy rate in percent (2004)4
Life expectancy at birth in years (2004)73Poverty headcount index (2000)32
GDP per capita in US$ (2006)5,428
2006Est.Proj.
20042005Prog.Prel.200720082009
(Annual percentage change; unless otherwise specified)
National income and prices
Real GDP-6.411.56.5-1.14.33.74.2
GDP deflator4.54.64.63.13.56.04.7
Consumer prices
End-of-year2.56.22.01.77.46.23.9
Period average2.33.54.64.23.97.84.5
External sector
Exports of goods-17.6-12.40.6-1.749.2-18.42.6
Imports of goods-0.132.1-3.4-0.73.911.87.8
Merchandise export volume 1/-42.8-21.4-0.6-14.741.2-16.4-0.6
Merchandise import volume 1/-12.420.3-5.0-10.7-6.40.98.3
Current account balance (including grants; in percent of GDP)-9.7-31.4-32.8-33.1-32.6-36.4-35.1
Terms of trade (deterioration -)-1.13.45.50.5-5.82.9
Real effective exchange rate (end of period, depreciation -)-3.65.6-4.60.0
Banking system
Net foreign assets 2/24.9-12.0-2.2-7.5-1.1-0.31.8
Net domestic assets 2/-7.210.910.18.412.08.87.2
Of which
Credit to public sector (net) 2/-6.8-0.90.00.21.61.3-0.6
Credit to private sector 2/5.16.28.59.212.57.47.8
Money and quasi-money (M2)17.8-1.07.80.911.08.59.1
Weighted average deposit rate (in percent)2.82.83.03.0
Weighted average lending rate (in percent)10.010.29.79.6
(In percent of GDP)
Central government finances 3/
Total revenue and grants30.834.833.333.727.328.928.2
Of which
Grants7.010.57.48.71.13.72.6
Total expenditure33.434.335.240.135.832.928.9
Current expenditure26.020.421.021.322.223.419.9
Of which
Salaries and allowances11.910.110.810.09.710.19.3
Capital expenditure7.413.914.218.813.79.69.0
Bank restructuring0.00.00.00.00.01.50.0
Primary balance (excluding grants)-3.6-8.0-7.1-13.0-7.3-5.0-0.7
Primary balance (including grants)3.42.50.3-4.3-6.2-1.31.9
Current balance-2.23.84.93.74.11.85.8
Overall balance (including grants)-2.60.5-1.9-6.4-8.5-4.1-0.6
Public and publicly guaranteed debt (end-period)121.3111.2117.0117.2112.0106.598.7
(In millions of U.S. dollars)
Nominal GDP466.6549.4562.1604.9657.3716.9
Sources: Ministry of Finance; Eastern Caribbean Central Bank; United Nations, Human Development Report 2007/08; World Bank, WDI 2007; and Fund staff estimates and projections.

Does not include goods procured in ports by carriers.

As a percent of broad money at the beginning of the year.

Measured using above-the-line information.

Sources: Ministry of Finance; Eastern Caribbean Central Bank; United Nations, Human Development Report 2007/08; World Bank, WDI 2007; and Fund staff estimates and projections.

Does not include goods procured in ports by carriers.

As a percent of broad money at the beginning of the year.

Measured using above-the-line information.

Table 2a.Grenada: Medium-Term Central Government Finances, 2005–09(In millions of Eastern Caribbean dollars, unless noted otherwise)
2007
2006Active

(IMF Country

Report No.

08/351)
20082009
2005Prog.ActualBudgetPrel.BudgetProg.Proj.
Total revenue and grants515.7505.6511.9536.4483.3445.8558.8512.6546.8
Total revenue360.1392.8379.7441.2427.7428.5461.1447.6496.9
Current revenue359.8392.3379.6441.1427.6428.4461.0447.5496.8
Tax revenue344.0362.1353.5407.5387.7402.8423.4414.3460.2
Taxes on income and profits57.767.256.065.265.374.873.878.985.1
Taxes on property15.417.122.632.131.029.027.728.030.8
Taxes on domestic goods and services 1/60.069.069.0115.369.971.395.678.7118.9
Taxes on international transactions 1/210.9208.9205.9194.9221.7227.7226.3228.6225.3
Nontax revenue15.830.126.033.639.925.637.633.236.6
Capital revenue0.30.50.10.10.10.10.10.10.1
Grants 2/155.6112.8132.295.255.617.397.765.050.0
Total expenditure508.9534.2608.9576.2464.4585.2644.6584.7559.3
Current expenditure303.0318.1323.1350.7335.2362.1402.8414.7385.1
Current primary expenditure273.1285.1291.6314.1297.2324.0355.0365.7336.2
Salaries and allowances150.3164.1152.5167.2164.9158.4188.9179.6179.6
Wages and salaries134.7145.2135.3147.3147.2140.7167.5160.2161.1
Personnel allowances15.618.917.119.917.717.721.419.418.5
Goods and services68.258.471.169.566.784.677.575.570.0
Interest 3/29.933.031.636.638.038.147.849.148.9
Domestic15.89.39.912.211.713.018.419.618.3
Foreign14.023.721.624.426.325.129.429.430.6
Transfers and subsidies54.662.668.077.465.681.088.683.686.6
Bank restructuring 4/0.00.00.00.00.00.00.027.00.0
Capital expenditure206.0216.1285.8225.5129.2223.1241.8170.0174.2
Current balance56.874.256.590.492.466.362.532.8111.7
Primary balance (excluding grants)-119.0-108.5-197.6-98.41.3-118.6-135.7-88.1-13.6
Primary balance (including grants)36.64.4-65.4-3.256.9-101.4-38.0-23.136.4
Overall balance (excluding grants)-148.8-141.5-229.2-135.0-36.7-156.7-179.2-137.1-62.4
Overall balance (including grants)6.7-28.7-97.0-39.818.9-139.4-81.5-72.1-12.5
Statistical discrepancy-42.50.0-27.80.00.08.10.00.00.0
Financing35.828.7124.730.7-18.9131.381.572.112.5
Net external financing69.461.154.5-5.3-36.140.2-6.344.4-26.6
Net amortization25.761.154.8-5.3-38.140.5-6.344.4-26.6
Disbursements40.083.273.826.046.962.726.770.946.7
Amortization-14.3-22.0-19.0-31.3-84.9-22.2-33.0-26.5-73.3
Change in government assets43.70.0-0.30.00.0-0.30.00.00.0
Net domestic financing-32.2-32.530.20.0-59.269.730.0-19.8-32.0
ECCB (net)-0.6-31.5-5.80.0-15.012.60.00.00.0
Commercial banks (net) 5/-31.60.033.50.0-22.854.430.0-8.8-32.8
Domestic debt0.0-1.02.50.0-21.42.70.0-11.00.8
Divestment/privatization proceeds0.00.08.835.9107.336.057.257.073.5
Expenditure arrears 6/-1.40.031.20.0-30.8-14.60.0-9.4-2.4
o/w: excluding arrears from debt exchange-1.40.026.60.0-26.2-19.20.0-14.0-7.0
Memorandum items:
Nominal GDP (market prices)1,4831,5181,5181,6331,6331,6331,7751,7751,936
Stock of expenditure arrears 6/20.651.837.227.825.4
o/w: excluding arrears from debt exchange20.647.228.014.07.0
Sources: Ministry of Finance; and Fund staff estimates and projections.

The shift from taxes on international transactions to taxes on domestic goods and services reflects the assumed introduction of VAT in late 2009.

Includes the transfer to the budget of PetroCaribe financing beyond that needed to repay related debt.

The 2008 budget figures are adjusted to include interest arrears to nonparticipating creditors in the debt exchange.

Preliminary estimate.

Excludes commercial bank holdings of government paper, which are shown in the following line.

After 2005, includes EC$4.6 million arrears each year on interest to nonparticipating creditors in the debt exchange.

Sources: Ministry of Finance; and Fund staff estimates and projections.

The shift from taxes on international transactions to taxes on domestic goods and services reflects the assumed introduction of VAT in late 2009.

Includes the transfer to the budget of PetroCaribe financing beyond that needed to repay related debt.

The 2008 budget figures are adjusted to include interest arrears to nonparticipating creditors in the debt exchange.

Preliminary estimate.

Excludes commercial bank holdings of government paper, which are shown in the following line.

After 2005, includes EC$4.6 million arrears each year on interest to nonparticipating creditors in the debt exchange.

Table 2b.Grenada: Medium-Term Central Government Finances, 2005–09(In percent of GDP, unless noted otherwise)
2007
2006Active

(IMF Country

Report No.

08/351)
20082009
2005Prog.ActualBudgetPrel.BudgetProg.Proj.
Total revenue and grants34.833.333.732.829.627.331.528.928.2
Total revenue24.325.925.027.026.226.226.025.225.7
Current revenue24.325.825.027.026.226.226.025.225.7
Tax revenue23.223.923.325.023.724.723.923.323.8
Taxes on income and profits3.94.43.74.04.04.64.24.44.4
Taxes on property1.01.11.52.01.91.81.61.61.6
Taxes on domestic goods and services 1/4.04.54.57.14.34.45.44.46.1
Taxes on international transactions 1/14.213.813.611.913.613.912.812.911.6
Nontax revenue1.12.01.72.12.41.62.11.91.9
Capital revenue0.00.00.00.00.00.00.00.00.0
Grants 2/10.57.48.75.83.41.15.53.72.6
Total expenditure34.335.240.135.328.435.836.332.928.9
Current expenditure20.421.021.321.520.522.222.723.419.9
Current primary expenditure18.418.819.219.218.219.820.020.617.4
Salaries and allowances10.110.810.010.210.19.710.610.19.3
Wages and salaries9.19.68.99.09.08.69.49.08.3
Personnel allowances1.11.21.11.21.11.11.21.11.0
Goods and services4.63.94.74.34.15.24.44.33.6
Interest 3/2.02.22.12.22.32.32.72.82.5
Domestic1.10.60.70.70.70.81.01.10.9
Foreign0.91.61.41.51.61.51.71.71.6
Transfers and subsidies3.74.14.54.74.05.05.04.74.5
Bank restructuring 4/0.00.00.00.00.00.00.01.50.0
Capital expenditure13.914.218.813.87.913.713.69.69.0
Current balance3.84.93.75.55.74.13.51.85.8
Primary balance (excluding grants)-8.0-7.1-13.0-6.00.1-7.3-7.6-5.0-0.7
Primary balance (including grants)2.50.3-4.3-0.23.5-6.2-2.1-1.31.9
Overall balance (excluding grants)-10.0-9.3-15.1-8.3-2.2-9.6-10.1-7.7-3.2
Overall balance (including grants)0.5-1.9-6.4-2.41.2-8.5-4.6-4.1-0.6
Statistical discrepancy-2.90.0-1.7-1.70.00.00.00.00.0
Financing2.41.98.21.9-1.28.04.64.10.6
Net external financing4.74.03.6-0.3-2.22.5-0.42.5-1.4
Net amortization1.74.03.6-0.3-2.32.5-0.42.5-1.4
Disbursements2.75.54.91.62.93.81.54.02.4
Amortization-1.0-1.5-1.3-1.9-5.2-1.4-1.9-1.5-3.8
Change in government assets2.90.00.00.00.00.00.00.00.0
Net domestic financing-2.2-2.12.00.0-3.64.31.7-1.1-1.7
ECCB (net)0.0-2.1-0.40.0-0.90.80.00.00.0
Commercial banks (net) 5/-2.10.02.20.0-1.43.31.7-0.5-1.7
Domestic debt0.0-0.10.20.0-1.30.20.0-0.60.0
Divestment/privatization proceeds0.00.00.62.26.62.23.23.23.8
Expenditure arrears 6/-0.10.02.10.0-1.9-0.90.0-0.5-0.1
o/w: excluding arrears from debt exchange-0.10.01.80.0-1.6-1.20.0-0.8-0.4
Memorandum items:
Nominal GDP (market prices, EC$ millions)1,4831,5181,5181,6331,6331,6331,7751,7751,936
Stock of expenditure arrears 6/1.43.42.31.61.3
o/w: excluding arrears from debt exchange1.43.11.70.80.4
Sources: Ministry of Finance; and Fund staff estimates and projections.

The shift from taxes on international transactions to taxes on domestic goods and services reflects the assumed introduction of VAT in late 2009.

Includes the transfer to the budget of PetroCaribe financing beyond that needed to repay related debt.

The 2008 budget figures are adjusted to include interest arrears to nonparticipating creditors in the debt exchange.

Preliminary estimate.

Excludes commercial bank holdings of government paper, which are shown in the following line.

After 2005, includes EC$4.6 million arrears each year on interest to nonparticipating creditors in the debt exchange.

Sources: Ministry of Finance; and Fund staff estimates and projections.

The shift from taxes on international transactions to taxes on domestic goods and services reflects the assumed introduction of VAT in late 2009.

Includes the transfer to the budget of PetroCaribe financing beyond that needed to repay related debt.

The 2008 budget figures are adjusted to include interest arrears to nonparticipating creditors in the debt exchange.

Preliminary estimate.

Excludes commercial bank holdings of government paper, which are shown in the following line.

After 2005, includes EC$4.6 million arrears each year on interest to nonparticipating creditors in the debt exchange.

12. The authorities are also continuing efforts to improve fiscal transparency. They will continue to publish information on tax concessions, and obtain public enterprises’ audited accounts within four months after the close of the fiscal year.

13. The government is considering a concessional loan from the Export-Import Bank of China to finance the construction of a port and marina. The size of the project has not yet been finalized, but could cost as much as US$85 million (13 percent of GDP). The staff cautioned that such a large loan would put the objective of restoring debt sustainability at risk. The Debt Sustainability Analysis shows that the risk of debt distress remains high and there is limited room to borrow, even on concessional terms. The authorities stated that they will continue to explore private sector financing for components of the project. If a feasibility study now underway (conducted by a Chinese firm) does not point to positive net benefits, they will restructure the project before proceeding, and will seek a high level of concessionality.7 The program will incorporate a new performance criterion with a ceiling on bilateral concessional external debt that will not accommodate the proposed loan at this stage. The ceiling would be revised upward later should the authorities proceed with a loan that does not jeopardize debt sustainability.

B. Reducing Financial Sector Vulnerabilities

14. In response to the rapidly deteriorating financial condition of the unregulated bank, the government appointed a receiver on February 15, 2008. The bank (Capital Bank) was highly illiquid and unable to honor deposit withdrawals. The bank has not been in the formal clearing and payments system, and there has been no evidence of contagion. The receiver’s report indicates that the bank appears to be insolvent. Total deposits are around EC$21.8 million (1.2 percent of GDP), excluding related party deposits and a large deposit—which is offset by a large investment—and around 70 percent of the 5,800 depositors are small depositors. At least 54 percent of the bank’s loan portfolio (to a related party) is nonperforming.

15. The process of bank resolution has been hampered by several legal challenges to the receivership. The Minister of Finance proposed reorganization of Capital Bank to the High Court on April 14. On May 7, the High Court ruled in favor of the bank’s owner and revoked the receivership. The government has obtained a stay of this decision, and has filed an appeal; the receiver will remain in place pending the outcome of the Appeals Court. On May 14, the bank owner was arrested on charges stemming from an ongoing investigation by the Financial Intelligence Unit.

16. The authorities have been working on a resolution strategy that protects depositors’ interests while minimizing the fiscal cost of bank resolution. This process may continue to be slowed if legal battles are drawn out. On the positive side, several investors have expressed interest in some form of asset purchase and assumption of liabilities. The government’s participation in the restructuring could cost as much as EC$27 million (1.5 percent of GDP) based on the size of the asset deficiency in the bank and other costs; government may also entertain requests for tax credits on portfolio losses, or placement of government deposits. An MCM technical expert has been advising the government on bank resolution. Resolution of the bank through reorganization or starting the process of liquidation is a performance criterion for November 2008. The feasibility of this target depends on how quickly legal difficulties can be surmounted. The government is also considering a transfer of small deposits (under EC$500) to another financial institution.

17. The authorities are committed to improving regulation and supervision of the non-bank financial sector. GARFIN has begun offsite monitoring of credit unions and building societies, and will start offsite monitoring of insurance companies in 2008, following amendment of the GARFIN Act in March 2008.

18. GARFIN is also addressing the problem of unregulated investment schemes; two public warnings have been issued. If the Eastern Caribbean Securities Regulatory Commission determines that the schemes do not fall under its jurisdiction, or does not make a decision by end-June 2008, GARFIN will act to prevent the existing scheme from taking in new deposits or apply for a cease and desist order from the High Court.

C. Moving Forward with the Structural Reform Program

19. Structural reform measures in 2008 will focus on enhancing the investment climate, reform of the tax concessions regime, and customs reforms—to improve competitiveness and promote private-sector led growth.

  • To improve the Doing Business Indicators (Figure 6), the authorities will develop an action plan by August 2008 to strengthen specific indicators (benchmark). With World Bank assistance, work is ongoing to make the Grenada Industrial Development Corporation a one-stop shop for investors. The newly created Ministry of Economic Development and Planning will facilitate timely approval of investment projects.
  • Legislation to amend the Income Tax Act, introduce a new Investment Act, and repeal the tax incentives legislation is well advanced and will be submitted to Parliament by December 2008 (Table 2, supplementary MEP). Delays in enacting this legislation have stemmed from the time needed to clarify policy issues and from capacity constraints. The new legislation will provide capital write-offs (a form of investment tax credit) rather than tax holidays.
  • Customs reforms will focus on risk management, anti-smuggling and fraud detection. Information sharing with Inland Revenue will also be enhanced, which will facilitate the VAT down the line.

Figure 6.Grenada: Doing Business Indicators, 2008 1/

Source: World Bank, Doing Business Indicators (2008).

Note: Antigua and Barbuda (ATG), Dominica (DMA), Grenada (GRD), Jamaica (JMA), St. Kitts and Nevis (KNA), St. Lucia (LCA), Trinidad and Tobago (TTO) and St. Vincent and the Grenadines (VCT).

1/ Smaller numbers represent greater ease in doing business. The indicators are comparable across 178 countries.

2/ An overall indicator that captures the regulatory costs of doing business.

3/ Measures the steps, time, and cost involved in registering property.

4/ Measures the flexibility of working hours, restrictions on holiday work, firing costs; and the difficulty of hiring and firing workers.

5/ Measures the efficiency of contract enforcement by following the evolution of a sale of goods dispute and tracking the time, cost, and number of procedures involved from the moment the plaintiff files the lawsuit until actual payment.

6/ Measures the effectiveness of collateral and bankruptcy laws in facilitating lending; the scope, access, and quality of credit information; and the coverage of public credit registries and private credit bureaus.

7/ Measures the procedures, time, and cost involved in launching a commercial or industrial firm with up to 50 employees and start-up capital of 10 times the economy’s per-capita gross national income.

20. Grenada’s PRSP is expected to be completed in November 2009, with support from the World Bank. In their PRSP preparation status report (which the authorities have submitted separately) the authorities note that the PRSP will build on the findings of the ongoing Country Poverty Assessment, which is expected to be completed in December 2008. The PRSP will facilitate restructuring of some existing social, employment and poverty reduction programs.

III. Program Issues

A. Program Design

21. Monitoring modalities remain unchanged, while conditionality has been brought in line with implementation capacity. As a prior action for completion of the review, the authorities have appointed a receiver for the unregulated bank. Quantitative and structural performance criteria and benchmarks are being proposed through December 2008 as shown in Tables 1 and 2 of the attached supplementary MEP. A new ceiling on bilateral concessional debt has been added. The nonconcessional debt ceiling only accommodates a US$3 million loan from the U.S. Export-Import Bank to finance community lighting, for which plans are already advanced.

22. Reflecting the delay in completing the first review, the authorities have requested that the PRGF arrangement be extended by one year, with remaining disbursements rephased. The frontloading of disbursements would reflect significant progress on the unregulated bank and with initial structural reforms.

23. The authorities have requested an augmentation (12.5 percent of quota) of the access under the PRGF arrangement to help mitigate the adverse effects of increases in world food and fuel prices. These price increases since 2007 are projected to raise total imports by up to US$52.2 million (7.8 percent of GDP) in 2008, of which three quarters will be for fuel. PetroCaribe concessional borrowing will finance half the cost of diesel imports. Overall, the balance of payments is expected to post a deficit of 0.7 percent of GDP, compared with earlier projections of a small surplus. To help cushion the balance of payments impact, the authorities have requested an additional SDR 0.73 million to be disbursed at the completion of the first review and the remaining SDR 0.73 million at the completion of the second review. The augmentation would bring total access under the program to 102.5 percent of quota, higher than the norm for first-time users of the PRGF of 90 percent of quota, but well below the maximum limit of 140 percent (Table 8). The amount of the augmentation does not materially worsen Grenada’s debt profile or its capacity to repay the Fund.

Table 3.Grenada: Summary Accounts of the Banking System, 2004–09
Prel.Projections
200420052006200720082009
(In millions of Eastern Caribbean dollars, end of period)
I. Consolidated Banking System
Net foreign assets709.0531.6421.5405.6400.6433.5
Net domestic assets775.1937.41,060.91,239.11,383.31,512.4
Net credit to the public sector-18.6-32.0-29.0-5.516.66.7
Central government71.615.144.3111.3103.468.5
Nonfinancial public enterprises 1/-185.0-108.7-173.1-116.8-86.8-61.8
Credit to private sector996.71,088.31,223.91,409.21,531.31,670.3
Other-203.0-118.9-134.0-164.6-164.6-164.6
Liabilities to private sector (M2)1,484.11,469.01,482.41,644.71,783.91,945.9
Money340.5315.3309.5355.8386.6421.7
Quasi-money1,143.71,153.71,172.91,288.91,397.31,524.2
II. Eastern Caribbean Central Bank
Imputed net international reserves328.6254.4269.4298.2306.7340.8
Net domestic assets-1.1-1.7-7.65.051.759.4
Base money327.6252.7261.9303.2358.4400.2
Currency held by the public102.1105.3104.5107.8117.1127.7
Commercial bank reserves225.5147.5157.4195.5241.3272.5
III. Commercial Banks
Net foreign assets380.4277.2152.0107.493.992.6
Net claims on ECCB223.3134.2152.3175.0174.2197.6
Net domestic credit777.6952.41,073.61,254.51,398.71,527.8
Net credit to the public sector-18.1-30.3-21.4-10.511.61.7
Credit to private sector996.71,088.31,223.91,409.21,531.31,670.3
Other Items (net)-214.6-119.7-128.9-144.2-144.2-144.2
Liabilities to the private sector1,381.31,363.81,377.91,536.91,666.81,818.1
(12-month change in percent of M2 at the beginning of the period)
Consolidated banking system
Liabilities to private sector17.8-1.00.911.08.59.1
Net foreign assets24.9-12.0-7.5-1.1-0.31.8
Net domestic assets-7.210.98.412.08.87.2
Credit to private sector5.16.29.212.57.47.8
Loans/deposits ratio (in percent)57.666.073.275.9
Sources: Eastern Caribbean Central Bank; and Fund staff estimates and projections.

Includes the National Insurance Scheme.

Sources: Eastern Caribbean Central Bank; and Fund staff estimates and projections.

Includes the National Insurance Scheme.

Table 4.Grenada: Summary Balance of Payments, 2004–13
Prov.Projections
2004200520062007200820092010201120122013
(In millions of U.S. dollars)
Current account balance-45.3-172.3-185.9-197.0-239.4-251.7-251.2-239.7-236.7-231.2
Exports (f.o.b.) 1/37.532.932.348.239.340.442.846.951.456.5
Imports (f.o.b.)-226.2-298.7-296.6-308.3-344.8-371.6-377.6-388.9-407.2-425.8
Services (net)65.520.631.452.557.279.792.4110.7130.2147.0
Of which:
Travel (net)75.369.188.5121.9127.2149.8165.2183.0201.9221.9
Income (net)-54.1-30.7-31.2-33.4-37.2-41.2-47.8-48.3-52.0-50.7
Transfers (net) 2/132.0103.678.343.946.141.038.939.940.841.8
Capital and financial account71.2179.2193.8189.5234.9261.0225.8234.3241.3224.1
Capital account (transfers) 2/22.022.723.524.219.820.620.621.522.523.6
Financial account49.1156.5170.4165.3215.1240.4205.2212.8218.8200.5
Of which:
Public sector borrowing68.318.528.424.746.439.134.436.738.718.8
Of which:
Public sector amortization-17.0-9.0-10.7-11.9-13.5-30.8-21.0-23.6-25.9-28.8
Direct investment (net)65.070.285.2137.0157.4208.5167.3175.1182.8189.8
Portfolio investment (net)30.017.8-0.70.69.39.810.411.011.712.4
Other investments (net)-44.859.068.214.915.513.914.113.611.58.3
Net errors and omissions24.5-50.5-15.919.30.00.00.00.00.00.0
Overall balance50.4-43.7-8.011.8-4.59.2-25.4-5.44.7-7.1
Available financing-50.443.78.0-11.84.5-9.225.45.4-4.77.1
Change in imputed reserves-38.527.5-5.6-10.7-3.1-12.622.55.6-4.27.5
IMF purchases and disbursements4.30.02.30.08.15.12.50.00.00.0
IMF repurchases and repayments0.00.0-1.6-2.2-1.7-2.20.0-0.2-0.5-0.5
Exceptional financing 3/0.00.013.01.21.10.50.40.00.00.0
Other-16.216.2-0.1-0.10.00.00.00.00.00.0
Memorandum item:
External public sector debt415.6437.0457.2478.8511.8520.1533.5546.6559.4549.4
(In percent of GDP)
Current account balance-9.7-31.4-33.1-32.6-36.4-35.1-32.5-28.9-26.7-24.4
Trade balance-40.4-48.4-47.0-43.0-46.5-46.2-43.4-41.2-40.1-39.0
Exports of goods8.06.05.78.06.05.65.65.75.86.0
Imports of goods-48.5-54.4-52.8-51.0-52.5-51.8-48.9-46.9-45.8-45.0
Service, income, and transfers30.717.014.010.410.011.110.812.313.414.6
Of which
Travel (net)16.112.615.720.219.420.921.422.122.723.4
Capital and financial account15.332.634.531.335.736.429.328.227.223.7
Public sector net borrowing-0.21.73.12.15.01.21.71.61.4-1.1
Direct investment13.912.815.222.724.029.121.721.120.620.1
Overall balance10.8-8.0-1.42.0-0.71.3-3.3-0.60.5-0.7
External public and publicly guaranteed debt89.179.581.379.277.972.569.165.963.058.0
(Annual percentage change)
Exports of goods-17.6-12.4-1.749.2-18.42.66.29.59.69.8
Imports of goods-0.132.1-0.73.911.87.81.63.04.74.6
Travel (net)-20.5-8.328.137.74.417.710.310.810.49.9
Sources: Eastern Caribbean Central Bank (ECCB); Ministry of Finance; and Fund staff estimates and projections.

Re-exports increased sharply in 2007 due to the Cricket World Cup.

Reflects the reclassification of budget grants from capital account transfers to current account transfers.

Includes amounts rescheduled under the May 2006 Paris Club agreement.

Sources: Eastern Caribbean Central Bank (ECCB); Ministry of Finance; and Fund staff estimates and projections.

Re-exports increased sharply in 2007 due to the Cricket World Cup.

Reflects the reclassification of budget grants from capital account transfers to current account transfers.

Includes amounts rescheduled under the May 2006 Paris Club agreement.

Table 5.Grenada: Public Sector Debt, 2007(Year end, in millions of U.S. dollars)
Percent of
StockTotal DebtGDP
Public sector debt 1/677.6100.0112.0
Central government debt603.289.099.7
Central-government guaranteed debt53.98.08.9
Other public sector debt20.53.03.4
External debt478.870.779.2
A. Central government437.164.572.3
1. Multilateral154.822.925.6
CDB95.014.015.7
IDA35.05.25.8
IBRD12.01.82.0
IMF7.61.11.3
Other multilateral5.20.80.9
2. Official bilateral82.912.213.7
Paris Club19.32.83.2
Belgium7.31.11.2
France4.30.60.7
Russian Federation0.20.00.0
United Kingdom4.60.70.8
United States2.90.40.5
Non-Paris Club63.69.410.5
Kuwait17.82.62.9
Taiwan Province of China20.33.03.3
Trinidad and Tobago17.02.52.8
Venezuela2.90.40.5
Other bilateral5.60.80.9
3. Commercial, total199.429.433.0
Restructured bonds193.528.632.0
Unrestructured bonds5.80.91.0
B. Central government guaranteed21.33.13.5
Of which:
Paris Club7.81.11.3
C. Other public sector20.53.03.4
Domestic debt198.729.332.9
A. Central government166.124.527.5
Restructured Bonds68.110.111.3
Unrestructured bonds8.51.31.4
Treasury bills28.94.34.8
Commercial bank loans22.43.33.7
Overdraft9.01.31.5
Domestic arrears13.82.02.3
Compensation claims14.82.22.4
Other0.60.10.1
B. Central-government guaranteed32.64.85.4
Memorandum item:
Nominal GDP604.9
Sources: Grenada authorities; and Fund staff estimates.

Includes central government liabilities to the National Insurance Scheme.

Sources: Grenada authorities; and Fund staff estimates.

Includes central government liabilities to the National Insurance Scheme.

Table 6.Grenada: Vulnerability Indicators, 2004–07
Est.
2004200520062007
Real sector indicators
Real GDP growth (percent)-6.411.5-1.14.3
CPI inflation (period average, in percent)2.33.54.23.9
Financial sector indicators
Total capital asset ratio of banks (locally incorporated)14.915.317.515.6
of which: Tier 1 capital10.512.713.213.3
Liquid assets/total assets44.337.331.529.2
Liquid assets/current liabilities48.240.034.632.3
Total loans/total deposits57.666.073.275.9
Net liquid assets/total deposits44.235.428.626.4
Nonperforming loans/total loans6.05.53.73.5
Locally incorporated banks7.16.84.73.4
Foreign banks4.43.52.43.5
Provisions for loan losses/nonperforming assets81.979.467.456.7
Locally incorporated banks63.060.751.546.4
Foreign banks127.8134.6114.671.2
Gross government claims/total assets11.311.211.611.9
FX deposits/total deposits5.67.85.87.7
Net foreign currency exposure/capital (locally incorporated banks)221.4138.4101.465.8
Contingent liabilities/capital (locally incorporated banks)67.778.772.285.8
Ratio of bank’s before-tax profits to average assets (percent)0.50.72.52.1
Broad money (percent change, 12-month basis)17.8-1.00.911.0
Private sector credit (percent change, 12-month basis)6.89.212.515.1
U.S. treasury bill rate (percent per annum)1.43.23.23.2
Treasury bill rate (percent per annum) 1/6.06.06.56.5
External sector indicators
Exchange rate (per US$, end of period)2.72.72.72.7
REER appreciation (percent change on 12-month basis, end of period)-3.65.6-4.60.0
Exports of goods (percent change, 12-month basis)-17.6-12.4-1.749.2
Imports of goods (percent change, 12-month basis)-0.132.1-0.73.9
Travel receipts (gross, percent change, 12-month basis)-18.7-5.631.527.2
Current account balance (percent of GDP)-9.7-31.4-33.1-32.6
Capital and financial account balance (percent of GDP)15.332.634.531.3
FDI inflows (percent of GDP)13.912.815.222.7
Gross international reserves of the ECCB (in US$ millions)632.4600.8696.0764.5
Gross international reserves in months of current year imports in ECCU countries4.83.93.83.7
Gross international reserves to broad money in ECCU countries (percent)20.420.418.618.6
Public gross external debt (in US$ million)415.6437.0457.2478.8
Public gross external debt to exports of goods and services (percent)45.753.450.137.9
Public gross external interest payments to exports of goods and services (percent)13.96.57.56.3
Public gross external amortization payments to exports of goods and services (percent)8.76.06.65.7
Public gross external interest payments to fiscal revenue (percent)18.75.06.48.0
Public gross external amortization payments to fiscal revenue (percent)11.74.75.77.2
Gross external financing requirement (in percent of GDP)13.333.035.034.5
(In percent of GDP)
Public sector indicators
Central government overall balance (after grants)-2.60.5-6.4-8.5
Public and publicly-guaranteed gross external debt89.179.581.379.2
Sources: Ministry of Finance; Eastern Caribbean Central Bank; and Fund staff estimates and projections.

Rate on one-year treasury bills.

Sources: Ministry of Finance; Eastern Caribbean Central Bank; and Fund staff estimates and projections.

Rate on one-year treasury bills.

Table 7.Grenada: Millennium Development Goals, 1990–2005
19901994199720002005
Goal 1. Eradicate extreme poverty and hunger
Population below $1 a day (percent)
Poverty gap at $1 a day (percent)
Percentage share of income or consumption held by poorest 20 percent
Prevalence of child malnutrition (percent of children under 5)
Population below minimum level of dietary energy consumption (percent)
Goal 2. Achieve universal primary education
Net primary enrollment ratio (percent of relevant age group)85.883.9 1/
Primary completion rate, total (percent of relevant age group)73.793.0 2/
Percentage of cohort reaching grade 5 (percent)79.03/
Youth literacy rate (percent ages 15–24)
Goal 3. Promote gender equality
Ratio of girls to boys in primary and secondary education (percent)97.0102.0
Ratio of young literate females to males (percent ages 15–24)
Share of women employed in the nonagricultural sector (percent)38.238.540.341.342.7
Proportion of seats held by women in national parliament (percent)20.026.726.7
Goal 4. Reduce child mortality
Immunization, measles (percent of children under 12 months)85.087.092.092.099.0 1/
Infant mortality rate (per 1,000 live births)30.026.021.017.0 1/
Under 5 mortality rate (per 1,000)37.033.026.021.0 1/
Goal 5. Improve maternal health
Maternal mortality ratio (modeled estimate, per 100,000 live births)
Births attended by skilled health staff (percent of total)100.0100.0
Goal 6. Combat HIV/AIDS, malaria and other diseases
Prevalence of HIV, total (percent ages 15–49)
Contraceptive prevalence rate (percent of women ages 15–49)
Number of children orphaned by HIV/AIDS
Goal 7. Ensure environmental sustainability
Forest area (percent of total land area)12.012.012.0
Nationally protected areas (percent of total land area)
GDP per unit of energy use (PPP $ per kg oil equivalent)
CO2 emissions (metric tons per capita)1.21.72.12.02.2 3/
Access to an improved water source (percent of population)97.095.0 1/
Access to improved sanitation (percent of population)97.096.0 1/
Access to secure tenure (percent of population)
Goal 8. Develop a global partnership for development
Youth unemployment rate (percent of total labor force ages 15–24)27.045.031.531.5
Fixed line and mobile telephones (per 1,000 people) 3/178.3242.3301.1352.0719.0 1/
Internet users (per 1,000 people)0.00.010.041.0182.0 3/
Personal computers (per 1,000 people)127.1155 1/
Source: World Development Indicators database.

Data as of 2004.

Data as of 2003.

Data as of 2002.

Source: World Development Indicators database.

Data as of 2004.

Data as of 2003.

Data as of 2002.

Table 8.Grenada: Proposed Reviews and Disbursements Under the PRGF Arrangement, 2006–10
DateConditionsDisbursementPercent of QuotaDisbursement date
April 2006Board approval of PRGF arrangementSDR 1.56 million13.33April 28, 2006
June 2008Observance of end-June 2006 performance criteria, completion of first review and adopt conditions for second year of the arrangementSDR 2.98 million 1/25.48July 8, 2008 2/
October 2008Observance of end-June 2008 performance criteria and completion of second reviewSDR 2.41 million 1/20.61October 15, 2008 2/
April 2009Observance of end-December 2008 performance criteria, completion of third review, and adopt conditions for third year of the arrangementSDR 1.68 million14.36April 15, 2009 2/
October 2009Observance of end-June 2009 performance criteria and completion of fourth reviewSDR 1.68 million14.36October 15, 2009 2/
April 2010Observance of end-December 2009 performance criteria and completion of fifth reviewSDR 1.68 million14.36April 15, 2010 2/
TotalSDR 11.99 million102.50
Source: Fund staff.

Assumes frontloading, as well as augmentation of access of 12.5 percent of quota (SDR 1.46 million), phased equally over the two disbursements expected in 2008.

Expected date of disbursement.

Source: Fund staff.

Assumes frontloading, as well as augmentation of access of 12.5 percent of quota (SDR 1.46 million), phased equally over the two disbursements expected in 2008.

Expected date of disbursement.

24. With the proposed augmentation, the program would be fully financed for 2008. The authorities intend to clear or restructure by end-2008 the remaining EC$10.9 million arrears on maturing unrestructured domestic debt to the nonbank public, incurred in June 2007.

B. Program Risks and Financing Assurances

25. The program is subject to a variety of risks. These include:

  • There is significant uncertainty over costs of and legal hurdles to bank restructuring.
  • Difficulties in expenditure control—particularly in an election year—or another natural disaster could impede fiscal adjustment.
  • The possible large loan from China’s Export-Import Bank could undermine debt sustainability.
  • Capacity constraints could complicate structural reforms.

The program’s design addresses these risks through a capped adjustor on bank restructuring costs, tighter controls on special warrants, a new ceiling on bilateral concessional borrowing, and a realistic timetable for structural reforms.

26. The authorities are continuing to make best efforts to conclude bilateral agreements with the Russian Federation and non-Paris Club creditors and good faith efforts to reach a collaborative agreement with nonparticipating external commercial creditors. They have signed all but one of the Paris Club bilateral agreements and are working to reach agreement with non-Paris Club creditors on outstanding debt. The government is seeking an out-of-court settlement with Export-Import Bank of Taiwan Province of China (the loan is equivalent to 3.3 percent of GDP).

IV. Staff Appraisal

27. Considerable progress has been made with the program. The authorities have introduced politically difficult but critically important fiscal measures; begun strengthening tax and customs administration; improved transparency; initiated a range of reforms, with a unifying theme of enhancing the investment environment and reducing vulnerabilities; and mobilized donor support to finance reconstruction.

28. However, program implementation was poor, mainly because of large fiscal slippages and difficulties in securing a legal basis to address the unregulated bank. These difficulties were partly a result of underestimating the costs of reconstruction following the hurricanes and initial problems with the authorities’ first PRGF Arrangement, including limited implementation capacity.

29. While recognizing these challenges, the government has underscored its commitment to putting the program on a solid footing. This has been evidenced by the prior action in the financial sector and the agreement to reduced government expenditure in 2008 underpinning this first review. The authorities have also worked closely with staff to develop a revised, realistic timetable for the fiscal and structural reform programs, and are determined to implement them on a timely basis.

30. Fiscal consolidation remains essential to achieving debt sustainability. The medium-term fiscal framework is ambitious, and budgetary discipline will be crucial, as the room for maneuver is small, especially if there were another exogenous shock. For 2008, the focus on reducing capital expenditure toward historical levels is appropriate, as the post-hurricane reconstruction is nearly complete. The authorities are taking needed steps to improve expenditure control and prioritization of capital projects. On the revenue side, the key needed reforms are the market-based property tax, and setting a date for introduction of the VAT, following the elections.

31. The delay in the date by which Grenada reaches the targeted 60 percent debt-to-GDP ratio until 2018 underscores the risks to the authorities’ plans to restore debt sustainability. The authorities’ plan to use half of expected divestment proceeds to reduce expensive debt is welcome. Staff cautioned that the authorities should carefully consider plans for a potential large loan from China’s Export-Import Bank, which could, depending on the loan size and concessionality, undermine their program’s objective of securing debt sustainability. The authorities’ continued exploration of private sector financing for the project is appropriate, as is their intention to share the feasibility study.

32. Staff welcomes the authorities’ difficult decision to appoint a receiver for the unregulated bank, and their appeal of the recent revocation of the receivership by the High Court. While legal obstacles may slow the process, the authorities are committed to deal with these challenges and to work to resolve the bank in a way that appropriately minimizes fiscal costs while protecting depositors. Reorganization, with a clear regulatory strategy, or initiating liquidation will be a structural performance criterion for November 2008.

33. With investors’ high level of interest in Grenada at present, this is an opportune time to push through the reforms to improve the investment climate. The planned shift from tax holidays to capital write-offs, while unlikely to produce much new revenue in the near future, will improve incentives for new investment. This is a difficult step in the context of regional competition for investment.

34. The program places great emphasis on reducing vulnerabilities. The authorities’ strategy to reduce natural disaster-related risks is welcome. It includes strengthening Building Code enforcement, enacting a new Insurance Act, and participating in the CCRIF. On the financial sector, building GARFIN’s capacity and moving resolutely to address risks from unregulated investment schemes will be important.

35. Notwithstanding the risks described above, staff supports the authorities’ requests for a waiver for the missed performance criterion, completion of the first review, rephasing of disbursements and extension of the PRGF arrangement through April 2010, augmentation, and completion of the financing assurances review. The authorities are determined to pursue the policies envisaged in the program. Staff support for the requests reflects the authorities’ fiscal corrective action, appointment of a receiver for the unregulated bank, initial progress with structural reforms, the burden of food and fuel price shocks, and the authorities’ best efforts with bilateral creditors and good faith efforts with nonparticipating external commercial creditors.

Table 9.Grenada: Indicators of Capacity to Repay the Fund, 2006–15 1/
Projections
2006200720082009201020112012201320142015
Fund obligations based on existing credit
(in millions of SDRs)
Principal1.11.51.11.50.00.20.30.30.30.3
Charges and interest0.30.30.10.10.00.00.00.00.00.0
Fund obligations based on existing and prospective credit
(in millions of SDRs)
Principal1.11.51.11.50.00.20.30.61.62.2
Charges and interest0.30.30.10.10.10.10.10.10.10.1
Total obligations based on existing and prospective credit
In millions of SDRs1.41.71.21.60.10.20.40.71.62.3
In millions of US$2.02.71.92.50.10.40.61.12.63.6
In percent of exports of goods and services1.21.30.91.10.10.10.20.30.71.0
In percent of debt service 2/8.710.66.24.70.51.52.02.55.26.5
In percent of GDP0.40.40.30.30.00.00.10.10.30.3
In percent of Imputed Net International Reserves2.02.41.72.00.10.40.61.22.73.7
In percent of quota11.614.910.313.30.72.13.35.913.919.6
Outstanding Fund credit
In millions of SDRs6.34.98.410.312.011.811.510.99.47.1
In millions of US$9.57.713.316.318.918.718.217.214.811.3
In percent of exports of goods and services5.93.76.47.17.56.86.15.34.33.0
In percent of debt service 2/41.530.443.031.378.072.058.638.829.720.2
In percent of GDP1.71.32.02.32.52.32.01.81.51.1
In percent of Imputed Net International Reserves9.56.911.712.918.319.117.818.215.311.5
In percent of quota54.041.571.988.1102.5101.198.593.279.960.9
Net use of Fund credit (millions of SDRs)0.5-1.54.31.91.7-0.2-0.3-0.6-1.6-2.2
Disbursements1.60.05.43.41.70.00.00.00.00.0
Repayments and Repurchases1.11.51.11.50.00.20.30.61.62.2
Memorandum items:
Exports of goods and services (in millions of US$)162.3209.0208.2230.6251.1274.4299.4326.4347.6369.8
Debt service (in millions of US$) 2/22.925.230.952.124.326.031.144.549.855.6
Nominal GDP (in millions of US$)562.1604.9657.3716.9771.8829.7888.0946.71,004.21,065.3
Imputed Net International Reserves (in millions of US$)99.8110.4113.6126.2103.898.1102.394.896.998.0
Quota (millions of SDRs)11.711.711.711.711.711.711.711.711.711.7
Source: IMF staff estimates and projections.

Assumes prospective PRGF disbursements of SDR 5.39 million in 2008, SDR 3.36 million in 2009, and SDR 1.68 million in 2010.

Total debt service includes IMF repurchases and repayments.

Source: IMF staff estimates and projections.

Assumes prospective PRGF disbursements of SDR 5.39 million in 2008, SDR 3.36 million in 2009, and SDR 1.68 million in 2010.

Total debt service includes IMF repurchases and repayments.

Annex I—Summary of Appendices

Fund Relations

Grenada’s outstanding purchases as of end-May 2008 amounted to SDR 3.75 million (32.08 percent of quota). Grenada is a member of the Eastern Caribbean Central Bank (ECCB), which manages monetary policy and the exchange system for its eight members. The common currency, the Eastern Caribbean dollar, has been pegged to the U.S. dollar at the rate of EC$2.70 per U.S. dollar since July 1976. The last Article IV consultation was concluded by the Executive Board on September 26, 2007 (IMF Country Report No. 08/351). The next Article IV consultation is expected to take place in August 2009. CARTAC, MCM, and FAD have provided extensive technical assistance. An updated safeguards assessment of the ECCB was undertaken in July 2007 and has not noted any new significant vulnerabilities.

Relations with the World Bank Group8

In September 2005, the Eastern Caribbean Sub-Region Country Assistance Strategy (CAS) for FY 2006–09 was presented to the Board of the World Bank. The strategy supports the sub-region’s development agenda through two main pillars: (1) stimulating growth and improving competitiveness; and (2) reducing vulnerability, by promoting greater social inclusion and strengthening disaster risk management. There are eight active World Bank projects in Grenada for a net commitment of approximately US$46.61 million: OECS E-government for Regional Integration Program, Grenada Technical Assistance Project, Telecommunications and ICT Development, Public Sector Modernization, Education Reform Project, HIV/AIDS Prevention and Control, the Hurricane Ivan Emergency Project, and the Caribbean Catastrophe Risk Insurance Facility.

Relations with the Caribbean Development Bank9

Grenada continued to receive special financing from the Caribbean Development Bank (CDB) for projects intended to facilitate the recovery and reconstruction process; to build capacity; and to assist with poverty reduction. The financing apportioned to Grenada incorporates a blend of the Bank’s Special Development Funds (SDF) and ordinary capital resources, designed to yield a concessionary grant element of 35 percent. The main activities include the school rehabilitation and reconstruction project, Project Management Training, and a Country Poverty Assessment.

Statistical Issues

Grenada participates in the Fund’s General Data Dissemination System (GDDS). Although data provision is sufficient for program monitoring, significant improvement is needed to facilitate effective surveillance by addressing weakness in coverage, timeliness and frequency of data.

Attachment I. Letter of Intent

St. George’s, Grenada

June 20, 2008

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. Strauss-Kahn:

Since the approval of the PRGF arrangement in April 2006, the economy has continued its recovery from the devastating effects of Hurricanes Ivan and Emily. Our medium-term prospects appear bright, with a number of major tourism projects underway and others in the pipeline. These achievements have been possible thanks to the sacrifice and efforts of the people of Grenada, and with strong support from donors and creditors.

Our Letter of Intent and the Memorandum of Economic Policies (MEP) of March 21, 2006, requesting an arrangement under the Fund’s Poverty Reduction and Growth Facility (PRGF), outlined the government’s strategy under its home-grown medium-term reform program to enhance growth, alleviate poverty, maintain macroeconomic stability, and reduce vulnerabilities. While the broad objectives and policies for the duration of our economic program remain unchanged from those detailed in the MEP, we have further refined these policies in the context of this first review of the program.

We have made solid progress on fiscal measures, including introducing the politically difficult National Reconstruction Levy, adopting a flexible fuel pricing mechanism, and enhancing our efforts to collect tax arrears. All quantitative performance criteria for end-June 2006 were met, except for the performance criterion on the central government primary balance. As the result of pressing capital spending needs to complete the reconstruction and to achieve our developmental goals, capital expenditure exceeded the targeted level. As a result, this performance criterion and the indicative target on net credit to the public sector at end-June 2006 were missed. Accordingly, we request a waiver for the missed performance criterion. We have adopted a more realistic target for capital spending and tighter expenditure controls for 2008.

We have also made progress with our structural agenda on customs reform, the Public Sector Investment Program (PSIP), and transparency with respect to tax concessions. However, we have needed more time to enact new legislation regarding investment incentives in light of our recent experience with major projects and other policy issues which took time to clarify.

In regard to our aim to reduce vulnerabilities, we have taken steps to mitigate the risks posed by a small unregulated bank by appointing a receiver and are appealing the High Court’s decision that the appointment of the receiver was unlawful. Notwithstanding legal obstacles, we are developing a plan to resolve the bank.

We have maintained our best efforts to complete the restructuring of our bilateral debt. We will continue good faith efforts to reach collaborative agreements with the few remaining nonparticipating commercial creditors.

The deterioration in Grenada’s terms of trade caused by higher world food and oil prices will raise the import bill significantly in 2008. To help facilitate the adjustment while addressing our additional balance of payments needs, the government requests an augmentation of access under the arrangement in an amount equivalent to SDR 1.46 million (12.5 percent of quota).

Grenada remains committed to the program, and the attached supplement to our MEP presents our policies for 2008 and beyond. These policies are designed to consolidate the gains we have made so far and establish the basis to maintain the growth momentum. Proposed quantitative performance criteria and indicative targets are indicated in Table 1 of the Supplementary MEP; the proposed structural benchmarks and performance criteria are indicated in Table 2. We are committed to working to achieve these program targets, including the fiscal targets. On this basis, the Government of Grenada hereby requests the completion of the first review under the PRGF arrangement and the release of the associated disbursement under the arrangement. Given the delay in completing the first review, we also request an extension of our PRGF arrangement by one year and a rephasing of remaining disbursements. We request the second disbursement, with the augmentation, of an amount equivalent to SDR 2.98 million.

The government will continue to provide the Fund with such information as the Fund may request in connection with progress in implementing the economic and financial policies. The government believes that the policies and measures set forth in our previous MEP and the attached Supplementary MEP will achieve the program’s objectives. The government also stands ready to take additional policy measures as appropriate to ensure the attainment of these objectives. We will consult with the Fund on the adoption of these measures, and in advance of revisions to the policies contained in the MEP, in accordance with the Fund’s policies on such consultations. The second review under the PRGF arrangement is expected to be completed by October 15, 2008 and the third review by April 15, 2009.

The government authorizes the Fund to make public the contents of this letter and the attached supplement to the MEP, as well as the accompanying staff report, to facilitate wider access to our policies and to signal the seriousness of our commitment to the program to civil society and the international community.

Yours sincerely,

__________/s/___________

Honorable Keith Mitchell

Prime Minister and Minister of Finance

Supplementary Memorandum of Economic Policies

1. Grenada has made important progress in implementing its economic program set forth in our Memorandum of Economic Policies (MEP) dated March 21, 2006. Our home-grown economic reform program continues to focus on promoting sustained high economic growth by improving the climate for private investment, putting public finances on a sustainable trajectory; reducing vulnerabilities; and alleviating poverty through more effective social development programs and safety nets. This supplementary MEP refines and updates these policies in the context of the first review of this program.

I. Performance under the Program

2. Economic growth has rebounded and prospects are favorable. Real GDP growth increased to 4.3 percent in 2007, driven by tourism. Looking forward, several major tourism sector projects are coming on-stream. The external current account deficit narrowed during 2007, reflecting an increase in tourism receipts, underpinned by 9 percent growth in stayover visitor arrivals. Annual inflation has increased sharply to an annual average of 3.9 percent in 2007, reflecting the pass-through of rising world fuel and food prices.

3. We have introduced a number of fiscal reforms to strengthen revenue collection:

  • National Reconstruction Levy (NRL)—we introduced this politically difficult measure in 2006 as part of the effort of the Grenadian people to share the burden of filling the large financing gaps which emerged in the aftermath of the hurricanes. The NRL has been streamlined somewhat from that envisaged in our March 2006 MEP.
  • Automatic fuel pricing mechanism—we adopted this mechanism in October 2006, with adjustments of fuel prices every eight weeks and a specific tax of EC$3 per gallon, taking advantage of falling international prices at the time to reduce the initial impact on the population. This approach allows us to isolate fiscal revenue from fluctuations in international oil prices.
  • Collection of tax arrears—we created a unit in Inland Revenue to focus on the collection of tax arrears that collected EC$9 million during 2007.

4. The fiscal position nevertheless deteriorated in 2006, despite a delay in reaching agreement with public service unions on a wage increase, as a result of capital expenditure overruns. Capital expenditure needed for reconstruction and to achieve our developmental goals was much higher-than-anticipated. In view of these needs, the Cabinet issued special warrants to increase expenditure beyond budgeted levels. As a result, the end-June 2006 performance criterion on the central government primary balance and the indicative target on the change in net credit of the banking system to the public sector were missed by about 1.2 percent and 0.5 percent of GDP,1 respectively. Moreover, the overall deficit for 2006 increased to 6.4 percent of GDP (8.2 percent based on below-the-line financing data) compared with 1.9 percent under the program. Ultimately, this additional expenditure had to be financed with unsustainable sources, in particular, overdrafts and the drawdown of bank deposits.

5. Fiscal slippages continued into 2007. The overall deficit was 8.5 percent of GDP in 2007 (8.0 percent of GDP below the line), despite delay in reaching agreement on a public service wage path. This compares with a deficit of 2.4 percent of GDP in the 2007 budget. The slippages largely reflect maintaining capital expenditure notwithstanding a substantial shortfall (4.7 percent of GDP) in grants. The shortfall in grants (mostly capital grants) stemmed from: implementation difficulties; overestimation of funds expected in 2007 from a multiyear project; and EU grants held up by delay in completing the first PRGF review. Financing the higher-than-expected fiscal deficit required a drawdown of deposits and partial drawdown of a new EC$25 million syndicated loan facility from the five banks operating in Grenada. We were able to reduce expenditure arrears by EC$19 million.

6. We have taken measures to improve control of expenditure commitments. Procedures are now in place for the Ministry of Finance to review proposals for additional spending before they go to Cabinet, thereby strengthening the ministry’s oversight over the budget process. In addition, the Cabinet changed its policy in January 2008 in order to limit use of special warrants.

7. While some progress has been made with our structural reform agenda, we have nevertheless experienced some delays in the implementation of our structural benchmarks for the first review (see text table).

Status of Structural Benchmarks Under the Program
Target DateStatus
Stop granting or extending tax holidaysJan. 2006Not met
Agree on public service wage path for 2006–08Apr. 2006Met in January 2008 (except teachers)
Initiate work to strengthen PSIP processJun. 2006Met in July 2006
Publish information on new tax concessionsJun. 2006Met in Sep. 2006
Amend the Income Tax ActJun. 2006Not met
Repeal tax incentives legislationJun. 2006Not met
Initiate comprehensive customs reformsAug. 2006Met
  • Several structural benchmarks have been met: We have initiated work to strengthen planning and implementation of the Public Sector Investment Program, with assistance from the Caribbean Development Bank (CDB). We have also initiated comprehensive reforms to the Customs Administration, contracting PricewaterhouseCoopers to assist with this effort. In addition, starting in September 2006, information on all new concessions has been made available on the web site of the Grenada Industrial Development Corporation (GIDC). Agreement with public service unions on the 2006–08 wage path was delayed by their concerns on the measurement of inflation; we reached agreement in January 2008 with public service workers except teachers, who account for 38 percent of the wage bill.
  • However, other structural benchmarks have not yet been met: To strengthen the environment for investment, we intend submit to Parliament legislation to repeal the current incentives legislation and to amend the Income Tax Act over the course of this year. We have, however, granted tax holidays on five occasions: (i) a request for a tax holiday was made in 2005 by a local hotel undergoing extensive reconstruction in the aftermath of the hurricanes, but was only addressed in April 2006; and on the basis of the regional competition for large investments, (ii) tax holidays were subsequently granted in 2006 for Port Louis, in 2007 for the Mt. Hartman (based upon a 2004 agreement) and Levera projects, and in 2008 for the Century project (based upon a 2003 agreement).

8. Looking ahead, the outlook is favorable. Economic growth is projected to remain fairly strong at 3.7 percent in 2008, stimulated by the initiation of several major private sector tourism projects. Our plans, as outlined below, should ensure that our fiscal program for 2008 is in line with debt sustainability and fully financed in a sustainable manner.

9. We remain committed to engaging our external commercial creditors in good faith negotiations. In February 2007, we issued a press release inviting the few remaining nonparticipating creditors in the debt exchange to come forward and accept the terms and conditions offered to other commercial creditors. We have signed bilateral rescheduling agreements under the Paris Club Agreed Minute with Belgium, France, the United Kingdom, and the United States, and are in contact with the Russian Federation to reach agreement on rescheduling terms. We are in negotiations with the Export-Import Bank of Taiwan Province of China to resolve a lawsuit filed against Grenada related to outstanding debt.

II. Policies During 2008

A. Fiscal Policy

10. Our 2008 fiscal program targets an overall deficit of 4.1 percent of GDP. This deficit, along with appropriately prudent fiscal policy in the coming years, will accommodate capital expenditure needed to complete the reconstruction and address pressing development needs, while allowing us to reach our debt target of 60 percent of GDP by 2018, two years ahead of the revised ECCB benchmark date. We will need to reduce capital expenditure relative to the approved 2008 budget to ensure that the fiscal program is financed in a sustainable manner, while reducing expenditure arrears.

Spending

11. Capital expenditure will fall from the unusually high levels in 2006 and 2007—18.8 percent and 13.7 percent of GDP respectively—to 9.6 percent of GDP in 2008. This decline reflects completion of the new cricket stadium financed by China in 2006 and the gradual completion of the reconstruction effort. We are committed to achieving our fiscal targets, primarily by reducing capital expenditure below the currently budgeted ratio of 13.6 percent of GDP. This will require exerting tight control over expenditures after last year’s large overrun (see below). This targeted level of capital expenditure would be lowered further, however, if grants or divestment proceeds fail to materialize as projected. Conversely, this level could be raised if grants, concessional financing, or divestment proceeds were greater than currently projected. If divestment proceeds exceed the projected amount, we would use half of the additional financing to lower our debt.

12. We have identified specific contingent measures to reduce spending if needed to meet our targets. These include limiting grants and subventions while protecting transfers to vulnerable groups, improved targeting, and further rationalizing capital spending.

13. The 2008 budget provided room for an increase in public sector wages in line with inflation. As noted above, in January 2008, we reached agreement with public service workers (except teachers) unions on a wage path for 2006–08 in line with inflation and intend to reach agreement with teachers on the same terms. The budget also incorporates lump sum payment of retroactive increases for 2006 and 2007, which will be paid by August 2008. We have commissioned a pay and grade study, financed by a grant from the CDB, to examine options for bringing the pay of public servants in line with that of the private sector, with a report expected by August 2008. We will seek agreement on a wage path for 2009–11 that is in line with inflation.

Revenues

14. We have delayed introduction of a VAT until after elections, which are due by April 2009. The January 2007 VAT White Paper announced a rate of 15 percent, with a special rate of 10 percent for hotels. Once we have set a date for VAT implementation, a number of preparatory measures will be needed, including preparing facilities for the VAT staff and operations, passing VAT and Excise Tax Laws, recruiting staff, upgrading relevant IT modules, and adopting transitional procedures for bonded warehouses.

15. We will continue to employ the automatic fuel pricing mechanism adopted in October 2006, which incorporates adjustments every eight weeks. This new price mechanism allows us to delink fuel tax revenues from fluctuations in international prices. The new mechanism has been fully implemented since October 2007. We will ensure that domestic fuel prices will continue to be revised every eight weeks in line with changes in international prices.

16. We have recently created a unit in Inland Revenue focused on the collection of tax arrears. This unit is expected to collect about EC$12 million during 2008 and will also guard against the accumulation of further arrears in the future. The Ministry of Finance is also taking steps to improve the collection of nontax arrears, including dividends, licenses, and rent.

Fiscal reforms

17. We have drafted a new Investment Act that will provide capital write-offs rather than tax holidays and ensure a transparent nondiscretionary process for granting tax concessions. The delay in submitting this legislation to Parliament reflected the need to clarify several policy issues. In particular, we decided to grant additional tax holidays as noted above that were already in the pipeline, and to make the new regime available to all eligible investments rather than only those above a threshold. Following final drafting by the Ministry of Legal Affairs and Cabinet approval, the legislation will be submitted to Parliament by December 2008.

18. We have gained significant momentum with customs reforms. We prepared a comprehensive business plan for customs reform in February 2008. The key elements of this plan are a fraud control plan, improving customs systems and procedures, upgrading information technology, and reducing customs clearance times. By September 2008, we will sign a memorandum of understanding on information sharing between Inland Revenue and Customs, and adopt a Fraud Control Program (benchmark). The ASYCUDA computer system, which had been out of service since the hurricanes, resumed operation in February 2007. With the assistance of the World Bank, we plan to move to ASYCUDA World by end-2009, which will improve the interface between Customs and IRD. We are also taking measures to reduce customs clearance from 4 to 1½ days over the next three years.

19. We will enhance our in-house capability to prioritize capital expenditure. The CDB has provided training to staff from the Ministry of Finance and line ministries to strengthen our implementation of our Public Sector Investment Program (PSIP) and plans to provide us with further technical assistance to increase our capability to evaluate projects. We will utilize our strengthened capacity in implementation of the PSIP process during the preparation of the 2009 budget.

20. We will continue to enhance our control over expenditure commitments. We reduced unpaid claims from EC$47 million (3.1 percent of GDP) at end-2006 to EC$28 million (1.7 percent) at end-2007 and intend to reduce these arrears by half by end-2008. To control expenditure, the Ministry of Finance will carefully review proposals to increase spending before they go to Cabinet and strictly apply the new policy limiting special warrants. In addition, we will ensure that the approval of the Public Tender Board chaired by the Ministry of Finance is obtained for any tender over EC$100,000.

21. We will complete the cadastral survey in August 2008 as a basis for reassessing the value of property. Because the last assessment was in 1994, a move to market valuation could raise substantial revenue without changing rates. Based on a sales analysis, we have established average land and property values by region. We will enact a law to allow Inland Revenue to adjust valuations between cadastral surveys. The new valuations would be applied beginning January 1, 2010.

22. We will redouble efforts to improve fiscal transparency. We will disseminate quarterly information on the overall fiscal situation and gross financing needs starting July 2008, and publish information on public enterprise finances. In line with the new Public Financial Management Act of May 2007, we will require public enterprises to submit audited financial statements four months after the close of the financial year, as required by law. We remain committed to ensure that all expenditures are reported on the budget. Recruitment of new staff and training for the Audit Department is underway. We will continue to publish newly granted or extended tax concessions.

Financing

23. Our revised fiscal program for 2008 is now fully financed in an sustainable manner. In light of our aim to achieve debt sustainability and reduce vulnerabilities, we will refrain from use of nonconcessional external financing (performance criterion) and avoid reliance on the overdraft facility or arrears. We will clear or restructure remaining EC$10.9 million arrears on unrestructured domestic debt to the nonbank public by end-2008.

24. We plan an ambitious divestment program for 2008 which will allow us to reduce public and publicly guaranteed debt from 112 percent of GDP at end-2007 to 106.5 percent at end-2008. We received EC$27 million (1.5 percent of GDP) in January 2008 from the sale of land for the Four Seasons project and expect the remaining EC$50 million (2.8 percent of GDP) at the end of the year or in early 2009. We have also announced plan to sell two-thirds of our shares in Cable and Wireless to the public in two equal lots, the first of which is expected to yield EC$50 million. The timing and terms of the second lot would depend on the experience with the first lot.

25. We began importing diesel fuel under the PetroCaribe Agreement in October 2007, via a new state-owned company PetroCaribe Grenada Ltd. Based on May 2008 oil prices, this Agreement could provide concessional financing on the order of 2.5 percent of GDP per year. In light of Grenada’s high public debt levels, we will ensure that this additional financing is managed conservatively and does not contribute to concerns about debt sustainability. In particular, PetroCaribe Grenada will set aside in a special account (invested in interest-bearing assets) an amount sufficient to service the loan. The remainder would be transferred to the budget to finance social programs. Moreover, retail fuel and electricity prices would continue to reflect world prices and would not be reduced as a result of the PetroCaribe Agreement.

26. We are improving our capability to monitor economic developments and program performance. We have put in place a system for monthly monitoring of below-the-line financing of the central government overall balance, and will update this on a monthly basis. To this end, we will ensure the consistency of Ministry of Finance and ECCB data on the position of the government with the banking system.

27. We are considering applying for a concessional loan of around US$85 million (13 percent of GDP) from the Export-Import Bank of China to finance a state agency’s construction of a port and marina.2 We will continue to explore private sector financing for the project. We intend to share the feasibility study with the IMF, as well as the World Bank or the Caribbean Development Bank. Should the study not point to positive net benefits of the project, we would plan to restructure the project before proceeding. We will continue to consult with the Fund staff and will seek a high level of concessionality if we proceed with the loan.

B. Structural Policies

28. A key objective of our program is to improve the investment climate, taking advantage of recently gained momentum with foreign-financed projects:

  • As we noted above, we expect to submit the new investment legislation to Parliament by December 2008.
  • A key objective of structural reforms is to improve Grenada’s Doing Business Indicators. We are developing a action plan to improve specific indicators, by August 2008 (benchmark). Three priority areas have been identified: starting a business, registering property, and facilitating trade. Once specific outcome targets have been identified, we will add one of these as a benchmark.
  • We still intend to make the Grenada Industrial Development Corporation (GIDC) a one-stop shop for investors. However, while the bulk of work on the legal framework has been completed, the process is proving more complex than initially expected, and we are utilizing technical assistance to accomplish this goal. In particular, we will prepare a comprehensive investment strategy by November 2008. In 2009, we will work toward establishing an Investment Facilitation Network, an IT platform which will facilitate communications between all impacting organizations involved in investment and project approval. At the same time, we will work toward strengthening the capacity of the GIDC, Planning Approval, and other associated agencies, a process which will be facilitated by the Ministry of Economic Development and Planning created in 2007 with oversight for all of the above agencies. Ultimately, this should substantially reduce the time required to move from an initial project request to approval.
  • To facilitate land transactions, we will upgrade the land registry, moving to a fully computerized system, to allow public access, as indicated in ¶14 of our March 21, 2006 MEP. However, we have revised the date for completing this action from end-2006 to 2010, reflecting delays due to the adoption of a new technical approach. We will also continue our work toward establishing a new land agency, with the assistance of the World Bank, following passage of the Executive Agencies Act in February 2008.

29. To reduce vulnerabilities to natural disasters, we will work toward giving the Building Code force of law. As a step forward in mandating the Code and associated Guidelines, we brought into force a Construction Quality Assurance Mechanism in November 2007, which involves contractors, engineers, architects, and financial institutions working together. This mechanism entails training, certification, and procedures to assist all stakeholders to ensure that buildings are built to the required standards. We will bring into force the new planning regulations by July 2008, after amending the revised National Development and Control Act (structural benchmark).

30. We have signed up for the World Bank’s Caribbean Catastrophe Risk Insurance Facility. As a participant in this facility, we began purchasing parametric insurance beginning in June 2007 that pays the government a predetermined amount in case of hurricane or earthquake. The World Bank will pay Grenada’s insurance premium in the first year and half the premium for the next two years.

31. We have prepared a final draft of our National Export Strategy, which has been approved by Cabinet. The Organization of American States has funded the Export Competency Development Strategy for a two-year period. The World Bank is collaborating with the Ministry of Economic Development and Planning to assist with establishing a Trade Information Network and strengthening the Bureau of Standards. We plan to adapt draft model legislation for the National Export Council. We have negotiated more airlift for passengers and products to North America.

32. As a key objective of our economic reform program, we will remain focused on reducing poverty and supporting the most vulnerable of our citizens. During 2008, we plan to maintain the measures introduced with the 2006 budget to cushion the impact of fuel price increases on vulnerable groups: (i) an increase in the monthly transfer to needy elderly persons to EC$150, and (ii) temporary subsidization of the increase in bus fares for tertiary students. To address the high costs of imported foods, following the CARICOM decision, we have suspended for one year the Common External Tariff on the following products: cooking oil, baby formula, baking powder and yeast, and dried breakfast cereals. We have put in place margin controls on the same products and have waived the customs service charge on the import of bulk milk by the Marketing and National Importing Board.

33. We are also preparing a full PRSP, as follow-up to the interim PRSP at the time of the PRGF program approval. We had experienced some delays in undertaking an updated Country Poverty Assessment (CPA), implying that we were unable to meet our original goal of completing the full PRSP by October 2007. This poverty assessment, with the assistance of the CDB, is now underway, with results expected by end-December 2008 (benchmark). Thus, we will work with the World Bank, with the aim of finalizing the full PRSP by November 2009. We have separately provided a PRSP Preparation Status Note.

C. Financial Sector

34. We have enacted the Grenada Authority for the Regulation of Financial Institutions (GARFIN) legislation to help safeguard the soundness of Grenada’s financial sector. This legislation became effective in September 2006 and GARFIN began operation in February 2007, bringing together under one supervisory authority a wide range of financial institutions, including, among others, credit unions, cooperatives, and insurance and offshore companies. We will ensure that the insurance sector, which is offering deposit interest rates above those of commercial banks, follows sound practices and does not pose risks to the financial system, insurance holders, and deposit holders. We intend to enact a new Insurance Act by end-2008.

35. GARFIN has made progress on the regulation and supervision of nonbank financial institutions. It has set up a reporting system and begun offsite monitoring of credit unions and building and loan societies; the same process will be undertaken for insurance companies in 2008. For the offshore sector, GARFIN will remove inactive International Business Corporations from the register by May 2008. The amended GARFIN Act came into force in March 2008, making GARFIN the registrar and supervisor of insurance companies and broadening the definition of money services under its jurisdiction. Several pieces of legislation are slated for submission to Parliament in 2008, including the Cooperatives Society Act, and Money Services Act. The Offshore Banking Act took effect in December 2007.

36. We are also addressing the problem of unregulated investment schemes by issuing a public warning on the risks of such schemes and a financial advisory indicating which schemes are operating without a license. If the Eastern Caribbean Securities Regulatory Commission (ECSRC) determines that the scheme does not fall under its jurisdiction, or does not make a decision by end-June 2008, GARFIN will act to prevent the scheme from taking in new client deposits or applying for a cease and desist order from the High Court under the amended GARFIN Act.

37. In response to the rapidly deteriorating financial condition of the unregulated bank, we appointed a receiver on February 15, 2008. The bank was highly illiquid and unable to honor deposit withdrawals, and there had been increasing evidence that the bank was likely insolvent. We obtained a court order to appoint the receiver. The Eastern Caribbean Central Bank (ECCB) had reiterated its recommendation to revoke the bank’s license, while urging action to safeguard the interests of the depositors.3 There has been no contagion to the regulated banking system (the bank is not in the formal clearing and payments system) and contagion is unlikely. There is no systemic risk as the bank accounts for a small share of the banking system.

38. We are determined to move forward to resolve the bank, notwithstanding legal difficulties. On May 7, the High Court ruled in favor of the bank’s owner and found the appointment of the receiver unlawful. We have obtained a stay of this decision and have filed an appeal; the receiver will remain in place pending the outcome of the Appeals Court.

39. We have maintained a clear communications strategy regarding the bank. We indicated that while the government is prepared to work with depositors, it cannot commit to compensating depositors until the plan for resolving the bank is in place. We are considering, however, transferring small deposits (under EC$500) to another financial institution. We will refrain from compensating related party depositors. Preliminary indications suggest that total deposits are around EC$21.8 million (1.2 percent of GDP), excluding a large deposit—which is offset by a large investment, and related party deposits, and that around 70 percent of the 5,800 deposits are small deposits. In addition, 54 percent of the bank’s loan portfolio (to a related party) is reportedly nonperforming. The receiver’s report indicates that the bank appears to be insolvent.

40. Our strategy to resolve the bank will protect depositors while minimizing costs to the government. In consultation with the ECCB, we developed a plan for resolution of the bank that was submitted to the High Court on April 14, 2008. The process has been, and may continue to be slower than we anticipated, due to legal challenges. On the positive side, several investors have expressed interest in some form of asset purchase and assumption of liabilities. Reorganization or initiating the process of liquidation of the bank would be a performance criterion for November 2008.

Table 1.Grenada: Quantitative Performance Criteria and Indicative Targets, 2006 and 2008
End-June 2006End-Dec. 2006
Adjusted

Target
ActualAdjusted

Target
ActualProposed 2008 Targets
End-JuneEnd-Sept. 1/End-Dec.
Performance Criteria:(In millions of Eastern Caribbean dollars)
Central government primary balance excluding grants (floor) 2/3/-73.3-92.2-129.4-224.1-45.0-67.5-90.0
Stock of central government domestic arrears (ceiling)22.00.822.07.015.011.07.0
(In millions of U.S. dollars)
Contracting and guaranteeing of nonconcessional external debt by the central government with maturity of at least one year (ceiling) 2/16.00.016.03.94.04.04.0
Stock of external short term debt (ceiling) 4/0.00.00.00.00.00.00.0
Contracting and guaranteeing of bilateral concessional external debt by the central government with maturity of at least one year (ceiling) 2/5/0.00.00.0
Central government or guaranteed external arrears accumulation (ceiling) 4/0.00.00.00.00.00.00.0
Indicative Target:(In millions of Eastern Caribbean dollars)
Change in net credit of the banking system to the public sector (ceiling) 2/3/0.07.6-30.53.012.018.024.0

Indicative target.

Cumulative.

See the TMU and supplementary TMU for a description of adjustors.

To be monitored on a continuous basis.

Excludes PetroCaribe.

Indicative target.

Cumulative.

See the TMU and supplementary TMU for a description of adjustors.

To be monitored on a continuous basis.

Excludes PetroCaribe.

Table 2.Grenada: Proposed Structural Measures
Target DateComment
Initial Reforms for the First Review
Appoint a receiver for the unregulated bankPrior Action. Met in February 2008
Prepare a comprehensive business plan for customs reform 1/May 2008Met in February 2008
Reach agreement on public service wage path for 2006–08 1/June 2008Partially met in January 2008.

Rephased from April 2006
Submit Executive Agency Bill to Parliament, as a step toward establishing a new land agency 1/August 2008Enacted in February 2008
Second Review
Develop an action plan to improve Doing Business Indicators 2/August 2008Benchmark
Bring into force new planning regulations, as a first step toward giving the Building Code force of lawJuly 2008Benchmark
Develop and begin implementing a customs Fraud Control Plan and sign an MoU on information sharingSeptember 2008Benchmark
On Investment Act, amended Income Tax Act, and drafts to repeal tax incentives legislation, update with final policy decisions and obtain Cabinet approvalSeptember 2008Benchmark
Third Review
Reorganize or initiate liquidation of Capital BankNovember 2008Performance criterion
Submit to Parliament the Investment Act, the amended Income Tax Act, and repeal of tax incentivesDecember 2008Benchmark. Rephased from June 2006
Complete the Country Poverty AssessmentDecember 2008Benchmark
VAT-Related Measures 3/
Complete update of SIGTAS with VAT returns and refunds processing modules
Enact new VAT and Excise Laws
Recruit and begin training staff and adopt transitional procedures for bonded warehouses, to ensure smooth implementation of the VAT

The authorities proposed that two of these three measures would be completed.

Three priority areas have been identified. Once specific outcome targets (for example reducing by a specified amount the number of steps required to start a business) have been identified, one of these will be added as a benchmark for the third review.

Once the timing of VAT implementation is decided, these measures would be included as structural conditionality for future reviews.

The authorities proposed that two of these three measures would be completed.

Three priority areas have been identified. Once specific outcome targets (for example reducing by a specified amount the number of steps required to start a business) have been identified, one of these will be added as a benchmark for the third review.

Once the timing of VAT implementation is decided, these measures would be included as structural conditionality for future reviews.

attachment iii. Supplementary Technical Memorandum of Understanding

The Technical Memorandum of Understanding associated with the LOI and MEP of March 21, 2006 remains the operative document for monitoring and reporting requirements and for defining how the quantitative performance criteria and indicative targets, specified in Table 1 of the supplementary MEP, will be interpreted, except for the specific changes in the following:

Section I. In paragraph 4, delete “nonfinancial” and replace the “and Grenada International Financial Services Authority” with the “Grenada Authority for the Regulation of Financial Institutions, and the National Insurance Scheme”.

Section II. Replace paragraph 10 with “The floor on the central government primary balance excluding grants will be adjusted as follows:

  • (i) downward1 to the extent that grants exceed programmed amounts, as specified in Table 1 below.
  • (ii) upward to the extent that grants fall short of the programmed amounts, as specified in Table 1 below, by more than EC$10 million through end-June or after.
  • (iii) downward to the extent that concessional financing from multilateral development banks exceeds programmed amounts, as specified in Table 1.
  • (iv) upward by an amount equivalent to 50 percent of the shortfall of divestment proceeds from the programmed amount, as specified in Table 1.
  • (v) downward by an amount equivalent to 50 percent of divestment proceeds in excess of EC$57 million, with a maximum adjustment of EC$32 million. The remaining excess divestment proceeds will be used to pay down debt, targeting more expensive debt first.
  • (vi) upward to the extent that bank restructuring costs fall short of the programmed amount, as specified in Table 1.
Table 1.Programmed Disbursements of Concessional Loans and Grants, Divestment Proceeds, and Bank Restructuring Costs, 2008(In millions of Eastern Caribbean dollars, cumulative)
Q1Q2Q3Q4
ActualProg.Prog.Prog.
Concessional loans5.314.228.537.4
Grants disbursements15.526.454.165.0
Divestment proceeds27.027.057.057.0
Bank restructuring costs0.00.027.027.0

Section III. Add “(as specified in Table 1)” at the end of paragraph 12, point (ii).

Section V.A. Replace paragraph 17 with “Excluded from the ceiling are credits from the IMF and credits on concessional terms.”

Insert a new section as follows:

“V. C. Performance Criterion on Bilateral Concessional Debt with an Original Maturity of At Least One Year Contracted Or Guaranteed by the Central Government

With the definitions given in Section V. A., there will be a ceiling on the contracting or guaranteeing of official bilateral concessional debt, excluding PetroCaribe-related debt.”

1Agreement was reached in January 2008 with public service workers except teachers. The saving for 2007 as a result of this delay was 0.4 percent of GDP.
2The ratio declined eight percentage points because of nominal GDP growth; debt creating financing was only three percentage points, as the remainder of the below-the-line deficit was financed by non-debt creating divestment proceeds and drawdown of deposits. Note that all GDP ratios in this report are based on a revised GDP series (see footnote 6).
3The mission to conduct the second review will discuss the nature of a finance circular or other fiscal measures best suited to aid in meeting the program’s fiscal targets.
4Divestment proceeds have been received from the sale of land to a tourism project, and around 1.7 percent of GDP is expected in 2008 from sale of government shares in a telecommunications company.
5Achieving this target will require a reduction in the overall deficit (including grants) of two percentage points of GDP in 2009 (excluding bank restructuring costs). Further proceeds from divestments that began in 2008, expected to amount to around 3.8 percent of GDP in 2009, would fully finance the deficit. The expected introduction of the VAT and a market-based property tax in 2010 would improve the overall deficit by another percentage point of GDP.
6Since the 2007 Article IV consultation (IMF Country Report No. 08/351), the authorities have revised GDP upward to incorporate the contribution of St. George’s University, the largest private employer in Grenada, with a revision for 2006 of 7 percent. Under the 2007 Article IV active scenario, and with the revised GDP, the 60 percent of GDP target would be reached in 2014, rather than 2017 as reported in the Article IV staff report based on the previous GDP series.
7Based on preliminary information, the grant element would be 37 percent.
8Adapted from text prepared by World Bank staff in April 2008.
9Adapted from text prepared by the Caribbean Development Bank staff in May 2008.
1In 2007, we revised GDP upward to incorporate the contribution of St. George’s University, the largest private employer in Grenada. The revision for 2006 was an increase of 7 percent. All GDP ratios below reflect this upward revision.
2The amount of the loan has not yet been finalized.
3An ECCB representative observed the initial phase of the receivership.
1Downward adjustment means a higher deficit; upward implies a lower deficit.

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