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Grenada

Author(s):
International Monetary Fund
Published Date:
March 2009
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I. Recent Developments and Outlook

1. Grenada launched its home-grown economic reform program with the 2006 budget. Its key objectives were to sharply reduce public debt; to reinvigorate growth through structural reforms; to reduce vulnerabilities; and to further the nation’s social development agenda. It has made progress including conducting successful commercial and Paris Club debt restructurings, moving ahead with fiscal reforms, and addressing weaknesses in the financial system, including an unregulated bank. There have also been important setbacks, namely fiscal slippages during 2006–07 and the first half of 2008, difficulties in prioritizing capital spending, delays in improvements to the business climate and reforming investment incentives, and further issuance of tax holidays.

A. Recent Developments

2. A new government was elected on July 8, 2008 with a strong mandate. The National Democratic Congress (NDC) won 11 of 15 parliamentary seats, coming to power after 13 years in opposition. Its strong mandate should help create an environment conducive for reform. The new government is committed to the successful implementation of the PRGF-supported program.

3. The slowing global economy and financial turmoil have already begun to affect Grenada. Tourist stayover arrivals declined 4.4 percent during January-September 2008 after a strong Cricket World Cup related performance during the first half of 2007. Temporary disruptions in tourism airlift capacity, including the collapse of two airlines, and slowing global demand have weakened tourism receipts in the third quarter of 2008. Several major FDI-financed tourism investment projects have been put on hold due to financing difficulties. However, thus far the financial system has been largely unaffected by the global financial turmoil.

4. The external current account deficit is expected to narrow slightly in 2008, mainly reflecting a slowdown in economic activity. During 2006–08, the real effective exchange rate has remained broadly unchanged while the improvements in the terms of trade in 2006–07 have been reversed in 2008.

Grenada: Stayover Arrivals, 2005–2008

(Annual percentage change)

Sources: ECCB; and Fund staff calculations.

5. Inflation has risen markedly. High world food and fuel prices pushed the 12-month inflation rate to 8.2 percent in September 2008.1 However, core inflation (excluding food and energy) was 2.3 percent in the same period (Figure 1).

Figure 1.Grenada: Inflation Developments

Sources: 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.

2/ Prices implied by the automatic pricing mechanism and assuming the EC$3 per gallon specific fuel tax was in place.

6. To mitigate the large increases in world fuel prices, the government reduced the fixed tax on gasoline from EC$3 to EC$2 per gallon in May 2008 and did not employ the automatic fuel price mechanism in July and September 2008. Lack of passthrough led to arrears to fuel importers whose margins were eroded with respect to the level anticipated in the automatic fuel price mechanism. The government reinstated the automatic mechanism and the EC$3 per gallon fuel tax in October 2008.

7. The banking system, which is dominated by subsidiaries of international banks, has remained resilient thus far. It appears to be weathering well the global financial turmoil, closure of Capital Bank, and freezing of assets of an unregulated investment scheme.2 The growth rate of credit to the private sector slowed to 9 percent through September 2008. The ratio of nonperforming loans to total loans remained low at 3.5 percent at end-June 2008, and liquidity and capital adequacy ratios remained adequate (Figure 2). Some foreign commercial banks report a tightening of credit standards.

Grenada: Contribution to Overall Inflation, by Sector, 2002–Sept. 2008

(End-of-period 12-month inflation, in percent)

Sources: Grenada Central Statistics Office; and Fund staff calculations.

Figure 2.Grenada: Banking System Vulnerabilities

Sources: ECCB; and Fund staff calculations.

B. Outlook

8. The slowing global economy and financial turmoil have weakened the economic outlook. Real GDP is projected to grow by 1.6 percent in 2008, lower than the 3.7 percent projected earlier. Tourism demand is expected to weaken further, notwithstanding new daily direct airline service from the United States and indications that new airlines will replace two that ceased operations. Several major tourism investment projects are reporting difficulties in securing financing, and remittances are expected to slow down sharply. Output growth is expected to remain low at 1.6 percent in 2009. Annual inflation is projected at 7.8 percent in 2008 and to decline to 4 percent in 2009 owing to lower global commodity prices. The banking sector is expected to remain resilient, notwithstanding the international financial turmoil, and based on the performance to date of their primarily Canadian parent banks.

II. Performance Under the Program

9. Quantitative performance criteria on the central government primary balance at end-June 2008 and on nonaccumulation of external arrears were missed. The end-June primary deficit excluding grants was 3.6 percent of annual GDP, exceeding the program target of 2.8 percent of GDP,3 driven mainly by capital spending overruns of 2.5 percent of GDP (Figure 3) and unbudgeted retroactive wage payments of 0.4 percent of GDP.4 The capital spending overruns reflected spending pressures in the period before the elections and measures to alleviate the negative external commodity price shocks.5 The overall deficit was financed primarily with divestment proceeds. Administrative delays led to small late external debt service payments in several cases.6 All other quantitative performance criteria and the indicative target on net credit to the public sector were met.

Figure 3.Grenada: Fiscal Sector Indicators

(In percent of GDP)

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

1/ For the primary balance excluding grants, the target is adjusted.

2/ Adjusted based on revised projections for grants, concessional loans, and bank restructuring costs.

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

10. While the end-June performance criterion on domestic arrears was met, subsequently some pre-election spending was left unpaid, giving rise to new domestic arrears.7 These arrears declined from EC$27 million (1.5 percent of GDP) at end-2007 to EC$12 million (0.7 percent of GDP) at end-June 2008. However, arrears rose back to EC$29 million (1.6 percent of GDP) at end-September, reflecting the aging of arrears on pre-election spending.8

11. Observance of structural benchmarks has been delayed. Cabinet approval of legislation on investment incentives has been delayed by the change in government, but is now expected to take place in December.9 An action plan to improve Doing Business Indicators and a Customs Fraud Control Plan were delayed due to difficulties with external consultants. Problems in securing technical assistance hindered the drafting of planning regulations.

Status of Structural Benchmarks Under the Program
Target DateStatus
On Investment Act, amended Income Tax
Act, and drafts to repeal tax incentives legislation, update with final policy decisions and obtain Cabinet approvalSept. 2006Not met
Develop an action plan with measures to improve Doing Business IndicatorsAug. 2008Not met
Bring into force new planning regulationsJuly 2008Not met
Develop and begin implementing a customs Fraud Control Plan and sign an MoU on information sharing between customs and Inland RevenueSept. 2008Partially met. MoU signed in November 2008

12. Progress was made with resolving Capital Bank. On September 18, 2008, the authorities revoked the bank’s license, and, acting on the recommendation of the Eastern Caribbean Central Bank (ECCB), reappointed a receiver. On November 13, the authorities petitioned the High Court for liquidation of the bank. Several investors are still interested in some form of asset purchase and assumption of liabilities.

III. Policies for the Remainder of 2008 and for 2009

13. The key goals for the program remain achieving fiscal and debt sustainability, stimulating private sector-led growth and poverty reduction through structural reforms, and reducing financial sector vulnerabilities. The new government has responded prudently to the significant policy challenges it has faced since taking office. In the context of large fiscal overruns in the first half of 2008, policy discussions focused on the government’s strong remedial measures, which are already beginning to bear fruit, and the 2009 budget in the context of a medium-term framework for fiscal and debt sustainability. Other key topics were fiscal reforms including a VAT, and further steps toward resolving Capital Bank.

A. Fiscal Policies and Debt Sustainability

14. Fiscal policy for the remainder of 2008 is designed to address slippages which occurred in the first half of the year. The authorities have put in place a series of strong remedial measures, which imply an adjustment in the primary balance of four percentage points of annual GDP from the first to the second half (see text table). These measures include:

  • Issuing a finance circular in September 2008 to limit capital expenditure in the second half of 2008 to 2.8 percent of annual GDP (prior action);10
  • Bringing forward to September 20 the date after which no new commitments for nonessential expenditure items can be made;
  • Reinstating the EC$3 per gallon gasoline tax and full passthrough of world prices under the automatic price mechanism in October 2008, implying an 18 percent price increase;
  • Delaying repeal of the National Reconstruction Levy (NRL) until 2009;11
  • Beginning the rationalization of social spending programs; and
  • Committing to resolving Capital Bank with limited direct costs to the budget.
Fiscal Developments in 2006–09(In percent of GDP)
2008
20062007First HalfSecond HalfFull year2009
ActualPrel.Prog. 1/Prel.Prog.Rev.Prog.Rev.Proj.Rev.
Total revenues and grants33.627.214.114.714.815.328.930.028.329.3
Of which:
Revenues24.926.112.613.212.612.425.325.625.725.3
Grants8.71.11.51.52.22.93.74.42.63.9
Total expenditures40.035.316.019.317.014.933.034.229.030.4
Current expenditures21.221.710.911.712.512.123.423.819.921.3
Of which:
Interest payments2.12.31.41.11.41.52.82.62.52.9
Bank restructuring0.00.00.00.01.50.01.50.00.00.0
Capital expenditures18.813.65.17.64.52.89.610.49.09.1
Primary balance (excluding grants) 2/−13.0−6.9−2.0−5.0−3.0−1.0−5.0−6.0−0.7−2.2
Overall balance (including grants) 2/−6.4−8.2−1.9−4.6−2.20.4−4.1−4.2−0.6−1.1
Sources: Ministry of Finance; and Fund staff estimates and projections.

Not adjusted.

Measured above the line.

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

Not adjusted.

Measured above the line.

15. The new government has also limited its spending plans in 2008 to include only two new programs. To help mitigate the impact of high food and fuel prices, households will be allowed to import two barrels of foodstuffs duty-free until end-December 2008 with expected foregone revenue of EC$2.6 million (0.1 percent of GDP). The government has also introduced a free textbook scheme, which is expected to cost around EC$5 million (0.3 percent of GDP) in 2008.

16. Fiscal measures have already begun to bear fruit, based on preliminary data. The pace of capital spending during August–October 2008 fell to EC$13 million per month, down from EC$22 million per month during January–July 2008. Goods and services spending has also slowed down, while transfers and subsidies still need to be brought down.

17. The government has developed a revised fiscal framework for 2008, in light of slippages in the first half and unbudgeted retroactive wage payments agreed for the second half. The sharp fiscal adjustment now underway in the second half is ambitious, and implies an overall surplus in the second half (see text table above). In light of this strong adjustment, the government has requested increasing the primary deficit (excluding grants) target for end-December 2008 from EC$90 million (5.1 percent of GDP) to EC$110 million (6.2 percent of GDP) and increasing the domestic arrears target to EC$25 million at end-December 2008, which would still imply a reduction from the level at end-September 2008 of EC$29 million. The change in the primary balance target represents a net relaxation of EC$34 million (1.9 percent of GDP), adjusting for lower projected bank restructuring costs and higher projected grants.

18. The new government has emphasized its overarching policy objective of placing debt on a sustainable trajectory. In this regard:

  • The authorities are proceeding cautiously on the proposed loan from the Export-Import Bank of China to build a port and marina. The current government has indicated that it may consider a significantly smaller concessional loan of around US$5 million (0.8 percent of GDP) to finance a much smaller marina, but this will not move ahead in the first half of 2009.12
  • The authorities have adopted a prudent approach to managing the resources from the PetroCaribe Initiative. The authorities will continue setting aside 35 percent of PetroCaribe’s concessional financing in a special account in 2008 to provide funds for repayment while transferring the remainder to the budget as grants. They will raise the share set aside to 40 percent starting from January 2009.13

19. The draft 2009 budget envisages strong fiscal consolidation to support the authorities’ objective of securing debt sustainability. A primary fiscal deficit of 2.2 percent of GDP would be consistent with shifting gradually to small overall surpluses, which are needed to achieve debt sustainability.14 Less than half of the divestment proceeds from the Four Seasons Project, which are expected to total EC$45 million (2.3 percent of GDP), will be used to finance the 2009 fiscal deficit, while the rest will be used to reduce expensive debt and arrears. Lower privatization proceeds for 2009 than previously projected15 would delay reaching the 60 percent debt-to-GDP target by one year to 2019, still one year ahead of the ECCB’s 2020 benchmark for the region.

20. External grants represent an important revenue source for the budget in 2008–09. The primary sources of grants in these years are PetroCaribe, the European Union, and CARICOM. Any shortfall in grants would have a significant impact on the budget outlook. Should grants be lower than projected by more than EC$10 million, the authorities’ program envisages a corresponding reduction in the primary deficit excluding grants, through various contingency measures.

21. The planned fiscal consolidation is supported by an increased tax effort as well as rationalization and reallocation of spending to priority areas. The priority areas include continuing ongoing internationally funded capital projects, revitalizing agriculture, moving forward with housing programs and with community development. On the revenue side, the budget framework anticipates maintaining the EC$3 per gallon fixed fuel tax with full passthrough, repeal of the NRL, and intensification of successful efforts to collect tax arrears, while providing a tax amnesty through March 2009 (see below). On the expenditure side, it anticipates reaching agreement on a wage path for 2009–11,16 budgeting capital expenditure at 9 percent of GDP, reducing spending on goods and services reflecting lower fuel prices and through efficiency gains and waste reduction; and reducing spending on transfers and subsidies through rationalization of social programs, while protecting transfers to vulnerable groups.

22. In November 2008, the authorities announced a tax amnesty with the objective of bringing taxpayers back into the tax net. The mission noted the unfavorable international experience with tax amnesties in terms of future compliance and revenue collection. It recommended alternatives, including improving the tax administration’s detection and enforcement powers, establishing appropriate interest penalty regimes, and establishing an effective and fair payment installment program for taxpayers. The authorities consider that the tax amnesty will complement their successful efforts to collect tax and nontax arrears. Given the authorities’ decision to pursue an amnesty, the mission supported plans to strengthen their powers to seize assets, garnish income, and link eligibility for government services to tax compliance.

23. Major institutional changes in the Ministry of Finance will support the government’s fiscal and structural reform objectives. The new Waste Reduction Unit is expected to realize savings on fuel and on fleet insurance for government vehicles and on electricity costs. The government plans to create a database of transfer recipients shared among spending units as a basis for reviewing the eligibility of recipients and rationalizing social programs. A new Debt Management Unit (structural benchmark) will coordinate the screening of new borrowing proposals, including analysis of the economic benefits and the impact on debt sustainability. This unit will also seek to address administrative delays that led to small late external debt service payments in 2008. The Ministry has also created a new Office of Private Sector Development, which aims to enhance the government’s dialogue with the private sector and to work with the Grenada Industrial Development Corporation (GIDC) to improve the investment and business environment.

B. Structural Reforms

24. The government has defined a focused agenda of structural reforms, centered on reforming tax and customs, enhancing the business environment and improving economic and financial management.

  • The authorities intend to introduce a VAT by early 2010 and have recommenced preparatory work. To provide sufficient time for stakeholders to prepare for the tax, the authorities plan to announce the introduction date in the December budget speech. They will draw on CARTAC technical assistance and submit VAT and excise tax bills to Parliament by April 2009 (proposed structural benchmark). A Memorandum of Understanding between the Customs and Inland Revenue Departments which was signed in November 2008 will facilitate implementation of the VAT.
  • The new government places a high priority on improving the business environment and is committed to creating a more transparent and nondiscretionary system for investment incentives. The new legislation will provide capital write-offs (a form of investment tax credit) rather than tax holidays. The draft legislation has been expanded to an Investment Code, including administrative procedures, investors’ rights and legal requirements for investments, as well as the investment incentives framework. The new government may need more time to consult with stakeholders and for this reason may be slightly delayed in meeting the December 2008 structural benchmark.
  • The Country Poverty Assessment (CPA) is expected to provide information to help improve targeting of social programs, and to develop a full PRSP report. Because of the time needed to meet with stakeholders, completion of the CPA (December 2008 structural benchmark) may also be delayed.

25. The authorities intend to complete the following structural benchmarks for the second review, but with a delay: the action plan to improve the Doing Business Indicators, Cabinet approval of new investment legislation, and the customs Fraud Control Plan.17 However, given difficulties in securing technical assistance and the improvement in construction practices since Hurricanes Ivan and Emily in 2004–05, the authorities propose to drop the benchmark on implementing planning regulations from the program.

26. The government is proceeding promptly with the resolution of Capital Bank, and intends to minimize costs to the government. Drawing on the recommendations from the receiver and following consultation with the ECCB, the Minister of Finance petitioned the High Court for liquidation of the bank on November 13, 2008, thus meeting a structural performance criterion for November 2008. The government intends to limit direct costs to the budget from the resolution, and has stated publicly that it does not intend to compensate depositors. The government would entertain requests by potential investors for indirect support such as tax credits or placement of government deposits, which would have a limited fiscal impact.

27. Further strengthening of nonbank financial sector regulation and supervision is taking place, which is of heightened importance given the global financial turmoil. The Grenada Authority for the Regulation of Financial Institutions (GARFIN) is enhancing legislation for insurance companies, credit unions, and money service providers; producing regulations; and developing and improving supervisory practices, including reporting and off- and on-site monitoring. CARTAC is continuing to provide assistance. Grenada undertook its AML/CFT assessment under the Caribbean Financial Action Task Force in October 2008.

C. Program Monitoring, Risks and Financing Assurances

28. The attached Letter of Intent and accompanying supplementary Memorandum of Economic Policies outline the authorities’ policy objectives for the remainder of 2008 and for 2009. As a prior action for the second review, the authorities have issued a finance circular to reduce capital spending. They have requested relaxing the end-December 2008 performance criteria on the primary fiscal balance and domestic arrears on the basis of an ambitious but feasible fiscal adjustment in the second half of the year. Quantitative performance criteria and structural measures for the remainder of 2008 and for 2009 are shown in Tables 1 and 2 of Attachment I. The authorities expect to complete benchmarks for the second review on developing an action plan to improve Doing Business Indicators and on sending investment legislation to Cabinet with a delay but these have not been rephased as they are subsumed in subsequent benchmarks. The authorities request dropping the benchmark on implementing planning regulations, as described above, and rephasing the benchmark on the customs Fraud Control Plan.

Table 1.Grenada: Selected Economic and Financial Indicators, 2005–09Rank in UNDP Human Development Index out of 177 countries (2007/08)82Infant mortality rate per '000 births (2005)17Life expectancy at birth in years (2004)73Adult illiteracy rate in percent (2004)4GDP per capita in US$ (2006)5,482Poverty headcount index (2000)322006Est.200820092005Prog.Prel.2007Prog.Rev.Proj.Rev.(Annual percentage change; unless otherwise specified)National income and pricesReal GDP11.06.5−2.34.53.71.64.21.6GDP deflator5.34.63.93.46.06.24.77.3Consumer pricesEnd-of-year6.22.01.77.46.26.13.93.2Period average3.54.64.23.97.87.84.54.0External sectorExports of goods−12.40.6−1.749.2−18.4−18.42.62.6Imports of goods32.1−3.4−0.73.911.83.07.82.8Merchandise export volume 1/−21.4−0.6−14.741.2−16.4−16.7−0.6−1.4Merchandise import volume 1/20.7−5.0−10.4−5.90.9−11.88.312.4Current account balance (including grants; in percent of GDP)−31.1−32.8−32.9−32.4−36.4−31.8−35.1−31.5Terms of trade (deterioration -)3.7…5.91.1−5.8−9.62.911.3Real effective exchange rate (end of period, depreciation -)5.9...−4.60.2…………Banking systemNet foreign assets 2/−12.0−2.2−7.5−1.1−0.3−1.11.82.0Net domestic assets 2/10.910.18.412.08.87.27.27.0Of whichCredit to public sector (net) 2/−0.90.00.21.61.3−2.0−0.6−0.7Credit to private sector 2/6.28.59.212.57.45.57.87.8Money and quasi-money (M2)−1.07.80.911.08.56.19.19.0Weighted average deposit rate (in percent)2.8…3.03.0…………Weighted average lending rate (in percent)10.2…9.79.6…………(In percent of GDP)Central government finances 3/Total revenue and grants34.533.233.627.228.930.028.229.3Of whichGrants10.47.48.71.13.74.42.63.9Total expenditure34.035.140.035.332.934.228.930.4Current expenditure20.320.921.221.723.423.819.921.3Of whichSalaries and allowances10.110.810.09.710.111.39.310.0Capital expenditure13.814.218.813.69.610.49.09.1Bank restructuring0.00.00.00.01.50.00.00.0Primary balance (excluding grants)−8.0−7.1−13.0−6.9−5.0−6.0−0.7−2.2Primary balance (including grants)2.40.3−4.3−5.8−1.3−1.61.91.8Current balance3.84.93.74.41.81.85.84.0Overall balance (including grants)0.4−1.9−6.4−8.2−4.1−4.2−0.6−1.1Public and publicly guaranteed debt (end-period)110.3116.5116.7111.5106.5107.298.7101.2(In millions of U.S. dollars)Nominal GDP553.9…564.4607.9657.3655.9716.9715.1Sources: 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, 2006–09(In millions of Eastern Caribbean dollars)
2008
20062007First HalfSecond HalfFull year2009
ActualPrel.Prog.Prel.Prog.Rev.BudgetProg.Rev.Proj. 1/Rev.
Total revenue and grants511.9445.8250.2260.0262.4271.2558.8512.6531.2546.8565.1
Total revenue379.7428.5223.8233.0223.8220.0461.1447.6453.0496.9489.0
Current revenue379.6428.4223.7232.9223.7220.0461.0447.5452.9496.8488.8
Tax revenue 2/353.5402.8207.1212.6207.1203.2423.4414.3415.9460.2448.2
Taxes on income and profits56.074.839.540.539.541.473.878.981.885.177.2
Taxes on property22.629.014.017.814.07.827.728.025.730.830.8
Taxes on domestic goods and services69.071.339.442.439.432.795.678.775.0118.986.2
Taxes on international transactions205.9227.7114.3112.0114.3121.4226.3228.6233.3225.3254.0
Nontax revenue26.025.616.620.316.616.837.633.237.036.640.7
Capital revenue0.10.10.00.10.00.00.10.10.10.10.1
Grants 3/132.217.326.427.038.651.297.765.078.250.076.1
Total expenditure608.9579.7283.9341.1300.9264.0644.6584.7605.0559.3587.2
Current expenditure323.1356.6193.9206.8220.9214.3402.8414.7421.0385.1412.2
Current primary expenditure291.6318.5169.3186.7196.3188.0355.0365.7374.7336.2356.1
Salaries and allowances152.5158.489.897.489.8101.9188.9179.6199.3179.6193.6
Wages and salaries135.3140.780.186.980.190.7167.5160.2177.6161.1166.6
Personnel allowances17.117.79.710.59.711.221.419.421.718.527.0
Goods and services71.179.137.837.437.837.677.575.575.070.075.0
Interest 4/31.638.124.520.124.526.347.849.146.348.956.1
Domestic9.913.09.85.19.813.318.419.618.418.320.4
Foreign21.625.114.715.014.713.029.429.427.930.635.7
Transfers and subsidies68.081.041.851.941.848.588.683.6100.486.687.5
Bank restructuring 5/0.00.00.00.027.00.00.027.00.00.00.0
Capital expenditure285.8223.190.0134.380.049.7241.8170.0184.0174.2175.0
Current balance56.571.829.926.12.95.862.532.831.9111.776.6
Primary balance (excluding grants)−197.6−113.1−35.5−88.1−52.5−17.6−135.7−88.1−105.7−13.6−42.1
Primary balance (including grants)−65.4−95.9−9.1−61.0−13.933.5−38.0−23.1−27.536.434.0
Overall balance (excluding grants)−229.2−151.2−60.1−108.1−77.1−43.9−179.2−137.1−152.0−62.4−98.2
Overall balance (including grants)−97.0−133.9−33.7−81.1−38.57.3−81.5−72.1−73.8−12.5−22.1
Statistical discrepancy−27.82.60.024.80.0−24.80.00.00.00.00.0
Financing124.7131.333.756.238.517.681.572.173.812.522.1
Net external financing54.540.222.23.522.242.1−6.344.445.6−26.62.7
Net amortization54.840.522.22.322.242.1−6.344.444.4−26.62.7
Disbursements73.862.735.418.135.452.726.770.970.946.730.1
Amortization−19.0−22.2−13.2−15.9−13.2−10.6−33.0−26.5−26.5−73.3−27.4
Change in government assets−0.3−0.30.01.20.00.00.00.01.20.00.0
Net domestic financing30.269.7−10.8−2.0−9.1−40.330.0−19.8−42.3−32.0−22.7
ECCB (net)−5.812.60.0−0.40.00.40.00.00.00.00.0
Commercial banks (net) 6/33.554.4−10.85.52.0−36.830.0−8.8−31.3−32.8−23.5
Domestic debt2.52.70.0−7.2−11.0−3.90.0−11.0−11.00.80.8
Of which: Commercial banks1.50.00.0−0.40.91.30.00.90.90.80.8
Divestment/privatization proceeds8.836.027.047.730.02.757.257.050.473.544.6
Expenditure arrears 7/31.2−14.6−4.77.1−4.713.00.0−9.420.1−2.4−2.4
Of which: Excluding arrears from debt exchange26.6−19.2−7.04.8−7.010.70.0−14.015.5−7.0−7.0
Memorandum items:
Nominal GDP (market prices, EC$ millions) 8/1,5241,6411,7711,7711,7711,7711,7711,7711,7711,9311,931
Stock of expenditure arrears 7/51.837.232.544.327.857.327.857.325.454.9
Of which: Excluding arrears from debt exchange47.228.021.032.814.043.514.043.57.036.5
Sources: Ministry of Finance; and Fund staff estimates and projections.

See IMF Country Report No. 08/357.

Assumes that VAT is not introduced in 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 two lines.

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

All GDP ratios are based upon the most recent GDP projections.

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

See IMF Country Report No. 08/357.

Assumes that VAT is not introduced in 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 two lines.

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

All GDP ratios are based upon the most recent GDP projections.

Table 2b.Grenada: Medium-Term Central Government Finances, 2006–09(In percent of GDP, unless noted otherwise)
2008
20062007First HalfSecond HalfFull year2009
ActualPrel.Prog.Prel.Prog.Rev.BudgetProg.Rev.Proj. 1/Rev.
Total revenue and grants33.627.214.114.714.815.331.628.930.028.329.3
Total revenue24.926.112.613.212.612.426.025.325.625.725.3
Current revenue24.926.112.613.212.612.426.025.325.625.725.3
Tax revenue 2/23.224.511.712.011.711.523.923.423.523.823.2
Taxes on income and profits3.74.62.22.32.22.34.24.54.64.44.0
Taxes on property1.51.80.81.00.80.41.61.61.51.61.6
Taxes on domestic goods and services4.54.32.22.42.21.85.44.44.26.24.5
Taxes on international transactions13.513.96.56.36.56.912.812.913.211.713.2
Nontax revenue1.71.60.91.10.90.92.11.92.11.92.1
Capital revenue0.00.00.00.00.00.00.00.00.00.00.0
Grants 3/8.71.11.51.52.22.95.53.74.42.63.9
Total expenditure40.035.316.019.317.014.936.433.034.229.030.4
Current expenditure21.221.710.911.712.512.122.723.423.819.921.3
Current primary expenditure19.119.49.610.511.110.620.020.621.217.418.4
Salaries and allowances10.09.75.15.55.15.810.710.111.39.310.0
Wages and salaries8.98.64.54.94.55.19.59.010.08.38.6
Personnel allowances1.11.10.50.60.50.61.21.11.21.01.4
Goods and services4.74.82.12.12.12.14.44.34.23.63.9
Interest 4/2.12.31.41.11.41.52.72.82.62.52.9
Domestic0.70.80.60.30.60.81.01.11.00.91.1
Foreign1.41.50.80.80.80.71.71.71.61.61.9
Transfers and subsidies4.54.92.42.92.42.75.04.75.74.54.5
Bank restructuring 5/0.00.00.00.01.50.00.01.50.00.00.0
Capital expenditure18.813.65.17.64.52.813.79.610.49.09.1
Current balance3.74.41.71.50.20.33.51.81.85.84.0
Primary balance (excluding grants)−13.0−6.9−2.0−5.0−3.0−1.0−7.7−5.0−6.0−0.7−2.2
Primary balance (including grants)−4.3−5.8−0.5−3.4−0.81.9−2.1−1.3−1.61.91.8
Overall balance (excluding grants)−15.0−9.2−3.4−6.1−4.4−2.5−10.1−7.7−8.6−3.2−5.1
Overall balance (including grants)−6.4−8.2−1.9−4.6−2.20.4−4.6−4.1−4.2−0.6−1.1
Statistical discrepancy−1.80.20.01.40.0−1.40.00.00.00.00.0
Financing8.28.01.93.22.21.04.64.14.20.61.1
Net external financing3.62.41.30.21.32.4−0.42.52.6−1.40.1
Net amortization3.62.51.30.11.32.4−0.42.52.5−1.40.1
Disbursements4.83.82.01.02.03.01.54.04.02.41.6
Amortization−1.2−1.4−0.7−0.9−0.7−0.6−1.9−1.5−1.5−3.8−1.4
Change in government assets0.00.00.00.10.00.00.00.00.10.00.0
Net domestic financing2.04.2−0.6−0.1−0.5−2.31.7−1.1−2.4−1.7−1.2
ECCB (net)−0.40.80.00.00.00.00.00.00.00.00.0
Commercial banks (net) 6/2.23.3−0.60.30.1−2.11.7−0.5−1.8−1.7−1.2
Domestic debt0.20.20.0−0.4−0.6−0.20.0−0.6−0.60.00.0
Of which: Commercial banks0.10.00.00.01.70.10.00.00.00.00.0
Divestment/privatization proceeds0.62.21.52.7−0.30.23.23.22.83.82.3
Expenditure arrears 7/2.0−0.9−0.30.4−0.40.70.0−0.51.1−0.1−0.1
Of which: Excluding arrears from debt exchange1.7−1.2−0.40.30.00.60.0−0.80.9−0.4−0.4
Memorandum items:
Nominal GDP (market prices, EC$ millions) 8/1,5241,6411,7711,7711,7711,7711,7711,7711,7711,9311,931
Stock of expenditure arrears 7/3.42.31.82.51.63.21.63.21.32.8
Of which: Excluding arrears from debt exchange3.11.71.21.90.82.50.82.50.41.9
Sources: Ministry of Finance; and Fund staff estimates and projections.

See IMF Country Report No. 08/357.

Assumes that VAT is not introduced in 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 two lines.

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

All GDP ratios are based upon the most recent GDP projections.

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

See IMF Country Report No. 08/357.

Assumes that VAT is not introduced in 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 two lines.

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

All GDP ratios are based upon the most recent GDP projections.

29. The new authorities have demonstrated strong policy commitment but significant risks still lie ahead. Socioeconomic tensions could emerge in the current difficult external environment characterized by financial turmoil and slower economic activity. Further exogenous shocks could deepen the economic downturn and worsen the fiscal position, through: (i) deterioration of the terms of trade, including further oil and food price shocks; (ii) additional airlift disruption or declines in tourism demand; (iii) tightening financing conditions for the FDI projects; and (iv) lower grants and remittances. Capacity constraints could delay structural reforms in the short run. The program’s design addresses the latter three risks through an adjustor on grants and divestment proceeds and a realistic timetable for undertaking the structural measures. The authorities are committed to taking contingent measures if needed to reduce spending, including limiting transfers.

30. The authorities have approached the Paris Club asking for an extension of the 2006–08 treatment to include 2009. The authorities are also seeking an out-of-court settlement with the Export-Import Bank of Taiwan Province of China providing for debt relief on terms comparable to that provided by the Paris Club. These efforts would yield debt service savings of around US$5 million (0.7 percent of GDP) in 2009. Concurrently, the authorities are continuing to make best efforts to conclude the remaining bilateral Paris Club agreement with the Russian Federation. The authorities have continued to offer those nonparticipating creditors in the 2005 commercial debt exchange who have come forward the same terms as received by other participants in the exchange. The authorities have cleared or restructured all but EC$1.1 million (0.1 percent of GDP) arrears on unrestructured domestic debt to the nonbank public incurred in June 2007, but incurred new arrears on 90-day treasury bills held by domestic commercial banks which stood at EC$3.4 million (0.2 percent of GDP) at end-October 2008. They intend to clear these arrears by end-2008.

31. The quality and availability of statistical data for program monitoring are adequate and improving. The coverage of fiscal data is currently limited to the central government; technical assistance through CARTAC is helping improve standardized reporting of government financial operations.

IV. StafF Appraisal

32. The economic outlook has weakened. As a small, open economy, Grenada is particularly vulnerable to external shocks from the global economic slowdown and financial turmoil as well as volatile world food and fuel prices. Deteriorating external financial conditions are adversely affecting FDI-financed projects while the accompanying global economic slowdown is starting to affect remittances and tourism demand.

33. Program implementation has been uneven. Reflecting measures to alleviate negative external commodity price shocks, spending pressures in the run up to the July elections, and unbudgeted retroactive wage payments, fiscal performance in the first half of 2008 deviated from the program projections. The July 2008 elections and change of government as well as difficulties with external consultants also delayed the structural reform agenda. By contrast, the new authorities took positive steps on Capital Bank, exercised restraint on the proposed China loan, and are addressing fiscal slippages in the second half of the year, showing a strong commitment to the program.

34. The new government has taken decisive action to correct fiscal slippages. It has already implemented several difficult measures, including issuing a finance circular to sharply cut capital expenditure, raising gasoline prices by 18 percent, and delaying repeal of the NRL—a key campaign promise—until 2009. The proposed revised end-2008 performance criteria on the primary balance and on domestic arrears are feasible, while reflecting an ambitious adjustment in the second half of the year. The 2009 budget, which represents the new government’s first opportunity to set the direction of fiscal policy, will improve the quality of expenditure while targeting a primary deficit consistent with the government’s objective of reducing debt.

35. Restoring debt sustainability remains the centerpiece of the authorities’ program. Staff welcomes the authorities’ caution in moving ahead with a loan from China’s Export-Import Bank and urges them to maximize the level of concessionality and private financing for the project if it proceeds. Their decision to increase the share of PetroCaribe financing set aside to provide for repayment is also welcome. In addition, creation of a Debt Management Unit will improve the assessment of proposals for new borrowing.

36. Staff welcomes the authorities’ intention to introduce a VAT. The date for VAT implementation should reflect the need for thorough preparation, particularly in light of the previous failed attempt at VAT introduction. Passage of the new VAT and excise tax laws, with a sound rate and exemption structure, will be an important step.

37. Improving tax enforcement and detection powers will minimize the risk that the recently announced tax amnesty would undermine future compliance and revenue collection. The authorities expect some short-term revenue boost beyond their successful efforts to collect tax arrears. The staff support the authorities’ plans to improve their ability to garnish income, to seize assets, and to link eligibility for government services to tax compliance.

38. Going forward, it will be important that the authorities take advantage of their strong political mandate to move decisively ahead with structural reforms. Staff welcomes the decision to reorganize the Ministry of Finance to strengthen policy planning and implementation. The completion of a Country Poverty Assessment will lay the groundwork for elaboration of a Poverty Reduction Strategy (PRS). The need for a new investment tax concessions regime is demonstrated by the ad hoc decision to grant a tax holiday just before elections. Customs reforms can contribute to lowering import costs and inflation while efforts to improve Doing Business Indicators should help foster private sector-led growth.

39. Staff welcomes the authorities’ decision to revoke Capital Bank’s license, to reappoint the receiver, and to petition the High Court for liquidation. The decision to resolve the bank in a manner that limits direct fiscal costs is appropriate. In the absence of further legal obstacles, liquidation should move forward without delay.

40. The banking sector has remained resilient thus far, notwithstanding the recent adverse domestic and external developments. The banking system has not been affected by the closure of Capital Bank and an unregulated investment scheme, and is weathering well the global financial turmoil. Staff has encouraged the authorities to remain in close contact with the ECCB to ensure effective onsite and offsite examinations that would detect and address any banking sector problems that may arise.

41. GARFIN’s progress in improving nonbank financial supervision and regulation needs to be continued, particularly in light of the global financial turmoil. Grenada was the first ECCU Fund-member to establish a single regulatory unit, and it has set an ambitious agenda to build its capacity and to address regulatory gaps. Careful monitoring of the insurance sector is warranted in the current global environment.

42. The quality of statistics is improving in areas that are critical for program monitoring. The coverage of fiscal data could be expanded to include public corporations and the National Insurance Scheme.

43. The program is fully and sustainably financed, allowing for a gradual clearance of domestic arrears. Staff welcomes the authorities’ continued efforts to regularize financial relations with Grenada’s external creditors.

44. Nevertheless, program risks remain significant. Financial turmoil and the global economic slowdown are expected to lead to weaker tourism demand, FDI, and remittances, and could also negatively affect grants. The government intends to take contingent fiscal measures if needed to ensure success of the program, including limiting transfers.

45. Notwithstanding the risks described above, staff supports the authorities’ requests for completion of the second review and financing assurance review, for waivers, and for modification of quantitative performance criteria. In response to the spending overruns in the first half of 2008, the new government has shown steadfast commitment to the program including taking strong remedial measures, such as issuing a finance circular to sharply reduce capital expenditure. The fiscal outturn for the third quarter shows that the measures are already beginning to bear fruit. Staff supports the request to modify the end-2008 performance criteria on the primary balance and domestic arrears, but has emphasized the need to stay the course to meet the revised targets.

Figure 4.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.

Figure 5.Grenada: Doing Business Indicators, 2009 1/

Source: World Bank, Doing Business Indicators (2009).

Note: Antigua and Barbuda (ATG), Dominica (DMA), Grenada (GRD), Jamaica (JAM), 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 181 countries covering the period June 2007 to June 2008. 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 procedural requirements, time, and cost involved for trading a standard shipment of goods by ocean transport for a medium-sized domestically-owned private firm with 60 employees located in the economy's most populous city.

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.

Table 3.Grenada: Summary Accounts of the Banking System, 2004–09
Prel.Projections
2004200520062007June 2008Sept. 200820082009
(In millions of Eastern Caribbean dollars, end of period)
I. Consolidated Banking System
Net foreign assets709.0531.6421.5405.6344.6325.2387.6422.5
Net domestic assets775.1937.41,060.91,239.11,349.11,377.11,357.11,479.7
Net credit to the public sector−18.6−32.0−29.0−5.54.57.4−38.9−51.6
Central government71.615.144.3111.3116.1129.080.958.2
Nonfinancial public enterprises 1/−185.0−108.7−173.1−116.8−111.6−121.6−119.9−109.9
Credit to private sector996.71,088.31,223.91,409.21,440.11,489.01,499.51,634.9
Other−203.0−118.9−134.0−164.6−95.4−119.3−103.5−103.5
Liabilities to private sector (M2)1,484.11,469.01,482.41,644.71,693.81,702.31,744.71,902.2
Money340.5315.3309.5355.8358.0344.9350.2381.8
Quasi-money1,143.71,153.71,172.91,288.91,335.81,357.41,394.51,520.4
II. Eastern Caribbean Central Bank
Imputed net international reserves328.6254.4269.4298.2306.3271.1289.2289.2
Net domestic assets−1.1−1.7−7.65.04.7−2.65.05.0
Base money327.6252.7261.9303.2311.0268.5294.2294.2
Currency held by the public102.1105.3104.5107.8106.096.8106.1115.7
Commercial bank reserves225.5147.5157.4195.5205.0171.7188.1178.6
III. Commercial Banks
Net foreign assets380.4277.2152.0107.438.354.198.4133.3
Net claims on ECCB223.3134.2152.3175.0204.2175.3191.3181.8
Net domestic credit777.6952.41,073.61,254.51,345.31,376.11,348.91,471.5
Net credit to the public sector−18.1−30.3−21.4−10.5−0.210.1−44.0−56.7
Credit to private sector996.71,088.31,223.91,409.21,440.11,489.01,499.51,634.9
Other Items (net)−214.6−119.7−128.9−144.2−94.6−123.0−106.7−106.7
Liabilities to the private sector1,381.31,363.81,377.91,536.91,587.81,605.51,638.61,786.5
(12-month change in percent of M2 at the beginning of the period)
Consolidated banking system
Liabilities to private sector17.8−1.00.911.08.56.76.19.0
Net foreign assets24.9−12.0−7.5−1.1−5.31.4−1.12.0
Net domestic assets−7.210.98.412.013.85.47.27.0
Credit to private sector5.16.29.212.58.37.75.57.8
Loans/deposits ratio (in percent)57.666.073.275.975.8
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, 2005–13
Prov.Projections
200520062007200820092010201120122013
(In millions of U.S. dollars)
Current account−172.3−185.9−197.0−208.8−225.4−237.5−241.4−253.5−257.7
Trade balance−265.9−264.3−260.1−278.2−286.0−289.1−298.3−313.4−327.0
Exports (f.o.b.) 1/32.932.348.239.340.442.946.851.055.7
Imports (f.o.b.)−298.7−296.6−308.3−317.6−326.3−332.0−345.1−364.4−382.7
Of which: Mineral fuels−56.8−117.7−129.6−184.6−127.9−146.8−162.0−174.8−184.4
Travel (net)69.188.5121.9126.1127.8139.9153.9169.1185.6
Other services (net)−48.4−57.1−69.4−65.5−67.1−72.4−78.1−83.9−89.7
Income (net)−30.7−31.2−33.4−37.2−41.2−44.5−47.9−54.8−56.6
Transfers (net)103.678.343.946.141.028.629.029.429.9
Capital and financial account179.2193.8189.5198.7216.9246.3253.5260.2241.2
Capital account (transfers)22.723.524.219.820.621.322.323.324.3
Financial account156.5170.4165.3178.9196.3225.0231.2236.9216.9
Public sector borrowing18.526.124.738.829.533.838.841.018.8
Public sector amortization−9.0−9.1−9.7−10.6−11.6−12.1−19.8−23.5−27.5
Direct investment (net)70.285.2137.0125.9154.7178.8187.5196.2204.9
Portfolio investment (net)17.8−0.70.69.39.810.411.011.712.4
Other investments (net)59.068.912.615.513.914.113.611.58.3
Net errors and omissions−50.5−15.919.30.00.00.00.00.00.0
Overall balance−43.7−8.011.8−10.1−8.68.812.06.7−16.6
Available financing43.78.0−11.810.13.4−8.8−12.0−6.716.6
Change in imputed reserves27.5−5.6−10.73.30.0−11.8−11.8−6.217.0
IMF purchases and disbursements0.02.30.08.55.12.60.00.00.0
IMF repurchases and repayments0.0−1.6−2.2−2.9−2.20.0−0.2−0.5−0.5
Exceptional financing 2/0.013.01.21.10.50.40.00.00.0
Other16.2−0.1−0.10.00.00.00.00.00.0
Possible reschedulings 3/5.1
Memorandum items:
External public and publicly guaranteed debt 2/437.0457.2478.8513.8540.3565.0583.8600.8591.6
(In percent of GDP)
Current account−31.1−32.9−32.4−31.8−31.5−31.0−29.3−28.8−27.5
Trade balance−48.0−46.8−42.8−42.4−40.0−37.7−36.2−35.6−34.8
Exports of goods5.95.77.96.05.65.65.75.85.9
Imports of goods−53.9−52.6−50.7−48.4−45.6−43.3−41.9−41.4−40.8
Travel (net)12.515.720.119.217.918.218.719.219.8
Other services (net)−8.7−10.1−11.4−10.0−9.4−9.4−9.5−9.5−9.6
Income and current transfers (net)13.28.31.71.40.0−2.1−2.3−2.9−2.8
Capital and financial account32.334.331.230.330.332.130.829.525.7
Public sector1.73.02.54.32.52.82.32.0−0.9
Private sector30.631.328.726.027.829.328.527.626.6
Overall balance−7.9−1.41.9−1.5−1.21.11.50.8−1.8
External public and publicly guaranteed debt 2/78.981.078.878.375.673.670.968.263.0
(Annual percentage change)
Exports of goods−12.4−1.749.2−18.42.66.29.28.99.3
Imports of goods32.1−0.73.93.02.81.73.95.65.0
Travel (net)−8.328.137.73.41.49.410.09.99.8
Sources: Eastern Caribbean Central Bank (ECCB); Ministry of Finance; and Fund staff estimates and projections.

Re-exports increased sharply in 2007 upon completion of construction related to the 2007 Cricket World Cup.

Includes amounts rescheduled under the May 2006 Paris Club agreement.

Possible reschedulings from the Paris Club and Taiwan Province of China.

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

Re-exports increased sharply in 2007 upon completion of construction related to the 2007 Cricket World Cup.

Includes amounts rescheduled under the May 2006 Paris Club agreement.

Possible reschedulings from the Paris Club and Taiwan Province of China.

Table 5.Grenada: Reviews and Disbursements Under the PRGF Arrangement, 2006–10 1/
DateConditionsDisbursementPercent of QuotaAvailability date
April 2006Board approval of PRGF arrangementSDR 1.56 million13.33April 15, 2006
July 2008Observance of end-June 2006 performance criteria, completion of first review and adopt conditions for second year of the arrangementSDR 2.98 million25.48July 15, 2008
December 2008Observance of end-June 2008 performance criteria and completion of second reviewSDR 2.41 million20.61October 15, 2008
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
October 2009Observance of end-June 2009 performance criteria and completion of fourth reviewSDR 1.68 million14.36October 15, 2009
April 2010Observance of end-December 2009 performance criteria and completion of fifth reviewSDR 1.68 million14.36March 31, 2010
TotalSDR 11.99 million102.50
Source: Fund staff.

Reflects 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.

Source: Fund staff.

Reflects 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.

Table 6.Grenada: Indicators of Capacity to Repay the Fund, 2007–15 1/(In millions of SDRs unless otherwise indicated)
Projections
200720082009201020112012201320142015
Fund obligations based on existing credit1.71.91.60.10.20.40.41.01.0
Repurchases and repayments1.51.81.50.00.20.30.30.90.9
Charges and interest0.30.10.10.10.10.10.10.00.0
Fund obligations based on existing and prospective credit1.71.91.60.10.30.40.41.62.3
Repurchases and repayments1.51.81.50.00.20.30.31.62.2
Charges and interest0.30.10.10.10.10.10.10.10.1
Fund obligations based on existing and prospective credit
In millions of US$2.73.12.40.10.40.60.62.63.6
In percent of exports of goods and services1.31.51.10.10.20.20.20.81.0
In percent of debt service 2/10.510.16.70.51.31.71.24.55.6
In percent of GDP0.40.50.30.00.00.10.10.30.3
In percent of Imputed Net International Reserves2.42.92.30.10.30.50.63.49.3
In percent of quota14.816.513.40.72.13.33.314.019.7
Outstanding Fund credit (end of period)
In millions of SDRs4.98.410.312.011.811.511.29.77.4
In millions of US$7.713.116.118.718.418.017.515.011.6
In percent of exports of goods and services3.76.37.58.07.26.55.84.73.4
In percent of debt service 2/30.443.144.372.263.351.235.126.418.2
In percent of GDP1.32.02.22.42.22.01.91.51.1
In percent of Imputed Net International Reserves6.912.215.016.815.914.816.320.029.9
In percent of quota41.572.088.2102.6101.298.595.982.663.5
Net use of Fund credit−1.53.61.91.7−0.2−0.3−0.3−1.6−2.2
Disbursements0.05.43.41.70.00.00.00.00.0
Repayments and Repurchases1.51.81.50.00.20.30.31.62.2
Memorandum items:
Exports of goods and services (in millions of US$)209.0208.3215.6233.2254.4277.3302.0322.0342.6
Debt service (in millions of US$) 2/25.230.436.225.929.135.049.856.963.7
GDP (in millions of US$)607.9655.9715.1767.3823.7880.9938.8995.91056.4
Imputed Net International Reserves (in millions of US$)110.4107.1107.1110.9116.2121.1107.575.038.7
Quota11.711.711.711.711.711.711.711.711.7
Source: Fund staff estimates and projections.

Assumes prospective disbursements of SDR 2.41 million in December 2008 and SDR 1.68 million in April 2009, October 2009 and April 2010.

Total debt service including debt service to the Fund.

Source: Fund staff estimates and projections.

Assumes prospective disbursements of SDR 2.41 million in December 2008 and SDR 1.68 million in April 2009, October 2009 and April 2010.

Total debt service including debt service to the Fund.

Table 7.Grenada: Vulnerability Indicators, 2004–07
200420052006Est.

2007
Real sector indicators
Real GDP growth (percent)−5.711.0−2.34.5
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 assets81.979.467.457.7
Locally incorporated banks63.060.751.548.3
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)221.4138.4101.465.7
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)1.43.24.84.5
Treasury bill rate (percent per annum) 1/6.06.06.56.5
External sector indicators
Exchange rate (per US$, end of period)2.72.72.72.7
REER appreciation (percent change on 12-month basis, end of period)−3.55.9−4.60.2
Exports of goods (percent change, 12-month basis)−17.6−12.4−1.749.2
Imports of goods (percent change, 12-month basis)−0.132.1−0.73.9
Travel receipts (gross, percent change, 12-month basis)−18.7−5.631.527.2
Current account balance (percent of GDP)−9.6−31.1−32.9−32.4
Capital and financial account balance (percent of GDP)15.232.334.331.2
FDI inflows (percent of GDP)13.930.631.328.7
Gross international reserves of the ECCB (in US$ millions)632.4600.8696.0764.5
Gross international reserves in months of current year imports in ECCU countries4.83.93.83.8
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)45.553.049.937.7
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)8.76.05.64.6
Public gross external interest payments to fiscal revenue (percent)18.75.06.48.0
Public gross external amortization payments to fiscal revenue (percent)11.74.74.85.9
Gross external financing requirement (in percent of GDP)13.332.734.634.0
(In percent of GDP)
Public sector indicators
Central government overall balance (after grants)−2.60.4−6.4−8.2
Public and publicly-guaranteed gross external debt88.678.981.078.8
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.

Annex I—Summary of Appendices

Fund Relations

Grenada’s outstanding purchases as of end-October 2008 amounted to SDR 6.37 million (54.43 percent of quota). Grenada is a member of the 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 did not note any new significant vulnerabilities.

Relations with the World Bank Group1

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$47.56 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 Bank2

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.

Notes

ATTACHMENT I. LETTER OF INTENT

St. George’s, Grenada

November 26, 2008

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. Strauss-Kahn:

Our government, which took office in July 2008, has a strong commitment to the PRGF-supported program. The attached Supplementary Memorandum of Economic Policies (SMEP) reviews the progress under the PRGF-supported program implementation, and outlines the government’s policies and objectives and macroeconomic framework for the remainder of 2008 and beyond. It emphasizes putting our debt on a sustainable trajectory, undertaking reforms to improve the business environment, and reforming our capacity for fiscal management.

Owing to negative shocks and spending pressures in the run up to the July elections, we were unable to meet two out of six of the quantitative performance criteria (on the primary balance excluding grants and external arrears) for the second review. We have taken strong remedial measures to address the fiscal slippages and to bring down the stock of domestic arrears by issuing in September a finance circular (a prior action for completion of the second review) that would sharply restrict capital spending in the fourth quarter of the year. We have also recently selected an expert with professional experience to head the new Debt Management Unit in the Ministry of Finance. Reflecting overruns in the first half, we have revised our end-2008 program targets for the primary balance excluding grants and for domestic arrears. On this basis, we request waivers for the missed performance criteria.

We are making progress with the resolution of a small unregulated bank and in September 2008 revoked its license and reappointed the receiver under a different section of the Banking Act. On November 13, we petitioned the High Court to liquidate the bank at the recommendation from the receiver and following consultation with the ECCB.

We have made limited progress with other structural reforms. We signed a memorandum of understanding on information sharing between the Customs and Inland Revenue Departments in November 2008. There were delays in developing an action plan to improve Doing Business Indicators, and obtaining Cabinet approval for reforms to investment incentives, and developing and implementing a customs Fraud Control Plan. Looking forward, we intend to submit investment incentives reforms and new VAT and Excise bills to Parliament, and to establish the Debt Management Unit.

With regard to the proposed large loan from the Export-Import Bank of China to build a port and marina, we are proceeding cautiously and would consider a loan of around US$5 million for a small marina project, but the project will not go forward in the first half of 2009. 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. We have approached our Paris Club creditors to seek debt relief for 2009 in line with the debt relief that the Paris Club extended in 2006–08.

Proposed quantitative performance criteria and indicative targets are indicated in Table 1 of the SMEP; 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 second review under the PRGF arrangement and financing assurances review and the release of the associated disbursement in an amount equivalent to SDR 2.41 million. We also request revision of the end-December targets for the primary balance excluding grants and for domestic arrears.

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 SMEP 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 and SMEP, in accordance with the Fund’s policies on such consultations. The fourth review under the PRGF arrangement is expected to be completed by October 15, 2009 and the fifth review by March 31, 2010.

The government authorizes the Fund to make public the contents of this letter and the attached SMEP, 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 Nazim Burke

Minister of Finance, Planning, Economy, Energy, Foreign Trade and Cooperatives

Attachment II. Supplementary Memorandum of Economic Policies

1. Our economic strategy aims at promoting sustained high economic growth by putting public finances on a sustainable trajectory; improving the climate for private investment; reducing vulnerabilities; and alleviating poverty through more effective social safety nets. This supplement to our Memorandum of Economic Policies dated March 21, 2006 MEP sets forth these economic objectives in greater detail and our plan for achieving them.

V. Recent Developments

2. The economic outlook has deteriorated reflecting the global slowdown. Growth is expected to slow to 1.6 percent during 2008. Inflation has been on an upward trend, reaching 8.2 percent in the 12 months to September 2008, mainly reflecting the impact of rising world fuel and food prices. Excluding food and fuel, inflation was 2.3 percent in the same period.

3. External conditions are placing pressure on the balance of payments. Stayover arrivals declined by 4.4 percent during January–September 2008 after strong Cricket World Cup-related performance in the first half of 2007, and are expected to slow further in the fourth quarter. Work on several FDI-financed tourism projects has been put on hold, due to financing difficulties. A U.S. airline began providing daily direct service to Grenada from Miami in November, and we have made some progress in attracting new airlines to take the place of two airlines that collapsed.

4. The banking sector, which is dominated by subsidiaries of international banks which pool resources, is expected to remain resilient notwithstanding the closure of the unregulated bank, the freezing of assets of an unregulated investment scheme, and adverse global conditions. Private sector credit growth has declined in recent months reaching 9 percent through September 2008, partly reflecting the slowdown in economic activity and remittances.

VI. Program Performance

5. Reflecting the negative external shocks, spending pressures in the run up to the July elections, and unbudgeted retroactive wage payments, fiscal performance in the first half of 2008 deviated from the program projections. The end-June primary deficit excluding grants (below-the-line) was 3.6 percent of annual GDP, exceeding the program target (reflecting adjustors) of 2.8 percent of GDP. Divestment proceeds financed most of the overall deficit.

  • Capital expenditure of 7.6 percent of annual GDP was significantly higher than the programmed 5.1 percent of GDP. The overrun mainly reflected pre-election spending pressures, and included many nonrecurrent spending programs in the capital budget. Expenditure on some projects exceeded annual budgeted amounts.
  • The outturn for the current balance was slightly worse than programmed. The first half-year revenue outturn exceeded projections by 0.6 percent of GDP. This was largely due to overperformance on the consumption tax, which offset the impact of the reduction in May 2008 of the specific tax on gasoline from EC$3 to EC$2 per gallon. Current expenditure exceeded projections by 0.8 percent of GDP, due to unbudgeted retroactive wage payments and higher-than-expected transfers and subsidies.
  • Several small external debt service payments were paid with a slight delay, due to administrative difficulties. These late payments breached our continuous zero ceiling on external payment arrears.

6. We have made less progress with structural reforms than expected, and the implementation of most of our structural benchmarks for the second review will be delayed. These delays largely reflect the change in government and schedule slippages by external consultants.

  • On customs reforms, we signed a memorandum of understanding on information sharing between Customs and Inland Revenue in November 2008. This will facilitate implementation of the planned VAT. We have yet not developed and implemented a Fraud Control Plan, due to difficulties with external consultants.
  • We are working to complete an action plan to improve Doing Business Indicators.
  • We have been unable to develop planning regulations by the scheduled date, given problems with securing technical assistance. Given these difficulties and the improvement in construction practices since Hurricanes Ivan and Emily in 2004–05, we propose to drop this benchmark from the program.
  • On the investment incentives legislation, a new Investment Policy Review Committee, approved by Cabinet and comprised of representatives from the GIDC, private sector, and the government, will review policy issues for the new Investment Code. Some revisions may result, but the main aspects of the framework—provision of capital write-offs rather than tax holidays as a transparent, nondiscretionary process for granting incentives—will remain. We have requested technical assistance from the IMF Legal Department—which is planned for December—in drafting sections of the new Investment Code.
  • Furthermore, we reduced the fixed fuel tax from EC$3 to EC$2 per gallon in May 2008 and did not employ the automatic fuel price adjustment mechanism in July and September 2008. As a result, the government accumulated arrears to fuel price importers whose margins were eroded.

VII. Policies for the Remainder of 2008 and Through 2009

7. We are committed to strong, sound economic and fiscal management. We intend to work to reduce our high public debt levels, through a determined effort, particularly at fiscal consolidation. Enhancing the business and investment environment, in partnership with the private sector is a key objective. We are committed to achieving these objectives, including through implementation of our PRGF-supported program. The institutional framework to support reforms and changes in the culture of economic management are being supported by a major restructuring in the Ministry of Finance. The restructuring will include establishing Debt Management Unit, a Waste Reduction Unit, a Public Procurement Authority, and an Office of Private Sector Development.

Program Objectives for the Third Review

8. We have undertaken strong remedial measures to address the fiscal slippages and accumulation of domestic arrears in the first half of 2008.

  • The Ministry of Finance, with approval from Cabinet, issued a finance circular in September 2008 that would limit capital expenditure in the second half of 2008 to EC$50 million (2.8 percent of GDP), including through delaying until 2009 large locally-funded projects.
  • We brought forward to September 20 the date after which no new commitments for nonessential expenditure items can be made.
  • In October 2008, we also reinstated the EC$3 per gallon fuel tax and resumed full passthrough of world fuel prices using the automatic mechanism. As a consequence, domestic retail gasoline prices increased from EC$13.26 to EC$15.65 per gallon.
  • We have decided to resolve Capital Bank in a way that limits direct costs to the budget, and will not use the bank restructuring reserve of EC$27 million (1.5 percent of GDP).

While these measures imply substantial adjustment in the second half, given expenditure overruns by the previous government, our target for the primary deficit (excluding grants) will be increased to EC$110 million (6.2 percent of GDP). This implies a relaxation of EC$36 million (2.0 percent of GDP) relative to the original program target, also adjusting for lower-than-expected bank restructuring costs and higher-than-expected grants. We are committed to meeting our revised program target and will take offsetting measures as needed in case of shortfalls in revenue and grants.

9. Nevertheless, recurrent expenditures for the second half are expected to remain high relative to the program target, on account of:

  • The projection for payments for salaries and allowances in the second half has been raised to reflect retroactive payments to teachers of EC$10.3 million.
  • The projection for transfers and subsidies has been revised upward to reflect the impact of retroactive wage increases on pensions, and the difficulty of tightening social programs while the cost of living was rising rapidly.

10. Within the budget envelope described above, we have undertaken urgent measures to mitigate the rising costs of living. Households will be allowed to import two barrels of foodstuffs duty-free until end-December 2008 with expected foregone revenue of EC$2.6 million (0.1 percent of GDP). We have also introduced a free textbook program at a cost of EC$5 million (0.3 percent of GDP) (classified under capital expenditure).

11. We plan to reduce the large stock of domestic arrears older than 60 days. These arrears declined from EC$27 million (1.5 percent of GDP) at end-2007 to EC$12 million (0.7 percent of GDP) at end-June 2008, but rose back to EC$29 million (1.6 percent of GDP) at end-September 2008. We intend to reduce these arrears to EC$25 million by end-2008. We have accumulated arrears to fuel importers resulting from incomplete passthrough of world fuel prices during recent years and have reached an agreement with these importers under which we agreed to remit back 50 percent of the fuel tax to reduce these claims, which we expect to clear in 2009. We do not expect to accumulate further arrears to importers in light of full passthrough of world fuel prices.

12. We intend to proceed with introduction of a VAT. We have reconstituted the VAT team and resumed preparatory work. We plan to announce in the December budget speech an introduction date that will allow sufficient time to allow businesses, consumers and government to prepare. The introduction date will be within the period October 2009 to February 2010. We will submit VAT and Excise bills to Parliament by April 2009 and recruit and begin training staff and adopting transitional procedures for bonded warehouses by May 2009. These will constitute structural benchmarks for the third and fourth reviews respectively. We have asked CARTAC to provide technical assistance building on earlier work.

13. We intend to accelerate structural reforms focusing on tax and customs reform, economic management, and laying the groundwork for a poverty reduction strategy.

  • We will begin implementing a customs Fraud Control Plan by August 2009. This will provide for risk profiles as a basis for risk-based inspections, in conjunction with the introduction of ASYCUDA World.
  • We are also moving forward with our work related to the new investment legislation and in this regard we have established a new Investment Policy Review Committee to review the legislation with stakeholders.
  • Completing the Country Poverty Assessment (CPA) becomes more important as we consider ways to mitigate the impact of food and fuel shocks on vulnerable groups. The CPA will provide information to help improve targeting of social programs, and to develop a poverty reduction strategy that will be reflected in a full PRSP report. We will work with the World Bank, with the aim of finalizing the full PRSP by November 2009.
  • We also plan to set up a new Debt Management Unit. The unit would improve debt recording, evaluate proposed external and domestic borrowing, develop a debt management strategy and undertake debt sustainability analysis. Technical assistance on the structure and operation of the unit will be requested from the IMF.

14. We will proceed promptly with the resolution of Capital Bank, while minimizing costs to the government. The process has been delayed by legal challenges by the bank’s owner and the High Court’s decision to revoke the appointment of the receiver. On September 18, 2008, we dropped our appeal of that decision, and revoked the bank’s license and reappointed the receiver under a different a section of the Banking Act on the recommendation of the ECCB. We petitioned the High Court for liquidation on November 13, acting on the recommendation of the receiver and following consultation with the ECCB. The government will not provide any cash injection during the resolution but would entertain requests by potential investors for indirect support such as tax credits or placement of government deposits.

15. We intend to proceed cautiously regarding a possible concessional loan from the Export-Import Bank of China to build a port and marina. The previous government had considered a proposal of up to US$85 million (13 percent of GDP). Such a large loan could, depending on its concessionality, undermine our objective of restoring debt sustainability. We would consider a smaller loan of around US$5 million for a small marina project which would not go forward in the first half of 2009. If we proceed we will seek a high level of concessionality and explore nonguaranteed private sector co-financing.

16. In light of Grenada’s high public debt levels, we will prudently manage PetroCaribe concessional financing. We will set aside 35 percent of PetroCaribe financing in the special account to ensure sufficient funds for repayment, and in January 2009 will raise this share to 40 percent. The remainder would be transferred to the budget as grants. We intend to broaden the range of fuel products imported under PetroCaribe as we develop the necessary infrastructure.

17. We have approached our Paris Club creditors to seek debt relief for 2009 in line with the debt relief that the Paris Club extended in 2006–08. We are continuing best efforts to conclude bilateral agreements with Paris Club (the Russian Federation) and non-Paris Club (Taiwan Province of China) creditors. We are seeking an out-of court-settlement with the Export-Import Bank of Taiwan Province of China. We are pursuing good faith efforts to reach a collaborative agreement with Grenada’s external commercial creditors that did not participate in the 2005 debt exchange. We have cleared or restructured all but EC$1.1 million arrears on unrestructured domestic debt to the nonbank public incurred in June 2007. However, we incurred new arrears on 90-day Treasury bills held by domestic commercial banks, which stood at EC$3.4 million at end-October 2008, and will complete clearing these arrears by the end of 2008.

Program Objectives for the Fourth Review

18. Our 2009 budget will continue with fiscal consolidation needed to achieve debt sustainability. An primary deficit target of 2.2 percent of GDP would be consistent with shifting gradually to small overall surpluses, in line with the objective of securing debt sustainability. Privatization proceeds expected from the Four Seasons project (EC$45 million or 2.3 percent of GDP) will be used to finance this deficit and to reduce expensive debt and arrears. We now expect to reach the 60 percent debt-to-GDP target by 2019, still one year ahead of the ECCB’s 2020 benchmark for the region. Our framework anticipates the following policies:

  • Maintaining the fuel tax at EC$3 per gallon and continuing application of the automatic fuel price adjustment mechanism.
  • Repealing from January 2009 the National Reconstruction Levy, a levy which was put in place in 2006 for period of 3–5 years, with a cost of EC$10 million (0.5 percent of GDP).
  • Intensifying the successful program of collecting tax and nontax arrears (which is expected to yield around EC$12 million or 0.7 percent of GDP in 2008), while providing a tax amnesty through March 2009 in tandem with strengthened powers for seizing assets, garnishing income, and linking eligibility for government services to tax compliance.
  • Reaching agreement on a wage path for public service workers for 2009–11 in line with projected inflation while taking into account the loss of national income from higher world fuel and food prices. We will also utilize the findings from the 2008 pay and grade study financed by the CDB.
  • Adjusting travel allowances for public service workers, which had not been adjusted since 1990, at a cost of EC$6.5 million (0.3 percent of GDP).
  • Targeting capital expenditure of EC$175 million (9.1 percent of GDP), and minimizing use of special warrants.
  • Reducing spending on goods and services to EC$75 million (0.4 percent of GDP), through bulk procurement internally and in cooperation with other ECCU members. The new Waste Reduction Unit in the Ministry of Finance is expected to achieve savings on fuel for government vehicles, fleet insurance and electricity costs.
  • Reducing spending on transfers and subsidies to EC$87 million (0.5 percent of GDP). The first stage of rationalization of social programs would yield savings of around EC$4 million (0.2 percent of GDP), while protecting transfers to vulnerable individuals. Any increase in the monthly transfer to the elderly from EC$150 per month would be financed by rationalization and would not increase the total cost of the assistance.

19. The government believes that the policies and measures set forth above will be sufficient to achieve our fiscal targets. We would undertake contingent measures if needed to reduce spending, including limiting grants and subventions while protecting vulnerable groups, and further rationalizing capital spending.

20. Our structural reform agenda will continue to focus on improving tax revenue policy, enhancing the business environment, and upgrading public financial management.

  • A key objective is to improve Grenada’s Doing Business Indicators. We are developing an action plan to improve specific indicators. Three priority areas have been identified: starting a business, registering property and facilitating trade. We will use the action plan to identify specific outcome targets and add one of these as a benchmark for fourth review.
  • On tax policy, preparatory steps for introducing VAT (recruiting and training staff and adopting transitional procedures for bonded warehouses) will be the focus in 2009. In addition, we will move toward introducing a market-based property tax. We will complete the cadastral survey in December 2008 as a basis for reassessing the value of property. The new valuations would be applied beginning January 1, 2010.
  • We plan to establish a Public Procurement Authority by September 2009, in order to realize gains in efficiency, uniformity of procedures, and savings for government purchases. We intend to implement several pieces of public financial management legislation enacted in 2007–08, including the Integrity in Public Life, Anticorruption, Public Financial Management, Audit, and Public Procurement and Contract Administration Acts. The latter provides for the establishment of a public procurement authority that would provide a framework for the procurement of all government purchases. We will also work with the World Bank to establish bulk procurement procedures with another OECS country, extending the existing successful procedure with pharmaceuticals to other products such as textbooks, agricultural inputs, fleet insurance and tires.

Program Monitoring

21. We are improving our capability to monitor economic developments and program performance. We will designate a Ministry of Finance official as the coordinator of Grenada’s PRGF-supported program, with responsibility for overseeing the monitoring of macroeconomic and structural program targets. We have put in place a system of monthly monitoring of domestic arrears and below-the-line financing of the central government overall balance, and will update this on a monthly basis.

VIII. Other Issues

Reducing Financial Sector and Natural Disaster Vulnerabilities

22. The Eastern Caribbean Securities and Regulatory Commission (ECSRC) issued cease and desist orders in May against two unregulated investment schemes in Grenada, one of which was already operating. We will not compensate investors in the scheme, which has not made payments since July. The scheme invested through an offshoot of a Jamaican scheme whose assets were frozen by the Turks and Caicos law enforcement authorities in July. The Grenada Authority for the Regulation of Financial Institutions (GARFIN) will continue efforts to advise the public to invest only with licensed institutions, and will continue to advise any new parties interested in setting up a foreign exchange trading scheme not to start operations unless they are licensed by the ECSRC.

23. We intend to further strengthen nonbank financial sector regulation and supervision, with continued technical assistance from CARTAC. GARFIN, which has authority over insurance, nonbank financial institutions, money services, and international financial services, is pursuing an ambitious agenda of enhancing legislation, producing regulations, and developing and implementing supervisory practices (reporting, offsite and onsite monitoring) for each type of institution. The Money Services, Insurance, and Cooperative Society Acts will be submitted to Parliament in the first half of 2009.

24. We will continue participation in the World Bank’s Caribbean Catastrophic Risk Insurance Facility. In June 2007, we began purchasing parametric insurance that pays the government a predetermined amount in case of hurricane or earthquake. An IDA credit has financed Grenada’s insurance premium in the first two years and half the premium for the next year. We intend to seek donor support for the remaining half of the premium payments beginning in June 2009.

Fiscal transparency

25. We are continuing our efforts to improve fiscal transparency. We will disseminate to the public quarterly information with a lag of one quarter on the overall fiscal situation and gross financing needs starting May 2009 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 will continue to publish newly granted or extended tax concessions within a month of granting these.

Table 1.Grenada: Quantitative Performance Criteria and Indicative Targets, 2008–09
End-June 2008End-Sept. 20082009
Unadjusted TargetAdjusted TargetPrel.Unadjusted Target 1/Adjusted TargetPrel.End-Dec. 2008End-March Proposed 1/End-June Proposed
TargetProposed
Performance Criteria:(In millions of Eastern Caribbean dollars)
Central government primary balance excluding grants (floor) 2/3/−45.0−49.8−63.3−67.5−50.8−84.5−90.0−110.0−11.3−22.5
Stock of central government domestic arrears (ceiling)15.015.012.411.011.028.97.025.020.015.0
(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) 2/4.04.00.04.04.00.04.04.04.04.0
Stock of external short term debt (ceiling) 4/0.00.00.00.00.00.00.00.00.00.0
Contracting and guaranteeing of bilateral concessional external debt by the
central government with maturity of at least one year (ceiling) 2/5/0.00.00.00.00.00.00.00.00.00.0
Central government or guaranteed external arrears accumulation (ceiling) 4/0.00.00.40.00.00.00.00.00.00.0
Indicative Target:(In millions of Eastern Caribbean dollars)
Change in net credit of the banking system to the public sector (ceiling) 2/3/12.014.29.918.031.112.924.024.00.00.0

Indicative target.

Cumulative within each calendar year.

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

To be monitored on a continuous basis.

Excludes PetroCaribe.

Indicative target.

Cumulative within each calendar year.

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

To be monitored on a continuous basis.

Excludes PetroCaribe.

Table 2.Grenada: Structural Measures
Target DateCommentMacroeconomic Criticality
Second Review
Issue a finance circular reducing capital expenditure to EC$184 million.September 2008Prior action. MetTo address fiscal slippages in the first half of 2008
Develop an action plan to improve Doing Business IndicatorsAugust 2008Benchmark. Not metTo create a more enabling environment for doing business by first identifying key stepsto reduce bottlenecks identified in the World Bank's 2007 Doing Business Indicators
Bring into force new planning regulations, as a first steptoward giving the Building Code force of lawJuly 2008Benchmark. Not metTo reduce the vulnerability of the economy to natural disasters
Develop and begin implementing a customs Fraud Control Planand sign an MoU on information sharingbetween customs and Inland RevenueSeptember 2008Benchmark. Partially met. MoUsigned November 2008To enhance customs administration and revenue collection for sustainablefinancing of the budget
On Investment Act, amended Income Tax Act, and drafts torepeal tax incentives legislation, update with finalpolicy decisions and obtain Cabinet approvalSeptember 2008Benchmark. Not metTo improve the investment climate and to reform the tax concessions regime
Third Review
Reorganize or initiate liquidation of Capital BankNovember 2008Performance criterion. MetTo increase confidence in the financial system by having a clear bank resolutionstrategy
Submit to Parliament the Investment Act, the amended Income Tax Act, and repeal of tax incentivesDecember 2008BenchmarkTo improve the investment climate and reform the tax concessions regime
Complete the Country Poverty AssessmentDecember 2008BenchmarkTo strengthen the ability of the government to develop effective andwell-targeted poverty reduction measures
Establish a Debt Management Unit at the Ministry of FinanceFebruary 2009Proposed benchmarkTo enable more effective debt management including better monitoring ofpayment obligations and effective debt sustainability analysis
Submit new VAT and Excise bills to ParliamentApril 2009Proposed benchmarkTo increase the efficiency and effectiveness of revenue collection
Fourth Review
Recruit and begin training staff and adopt transitionalprocedures for bonded warehousesMay 2009Proposed benchmarkTo ensure smooth implementation of the VAT
Develop and begin implementing a customs Fraud Control PlanAugust 2009Proposed benchmarkTo enhance customs administration and revenue collection for sustainablefinancing of the budget
Establish a Public Procurement AuthoritySeptember 2009Proposed benchmarkTo enhance transparency and governance in procurement and facilitatedonor monitoring
Implement a measure to be identified from the Action Planto improve Doing Business Indicators 1/To be specifiedBenchmark to be specifiedTo further improve the investment climate

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, a specific benchmark will be proposed at the time of the third review as a benchmark for the fourth review.

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, a specific benchmark will be proposed at the time of the third review as a benchmark for the fourth review.

Attachment III. Supplementary Technical Memorandum of Understanding

The Technical Memorandum of Understanding (TMU) associated with the LOI and MEP of March 21, 2006, as modified by the Supplemental TMU of June 20, 2008, 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 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$45 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) downward to the extent that bank restructuring costs exceed the programmed amount, as specified in Table 1, with a maximum adjustment of EC$7 million.”

Section III. Replace paragraph 12 with

“The ceiling on net credit of the banking system will be adjusted by the amount of required counterpart financing as follows:

  • (i) Upward to the extent that grants fall short of programmed amounts in Table 1 up to a limit of EC$10 million;
  • (ii) Upward to the extent that concessional financing falls short of programmed amounts in Table 1.”

Section IV. Replace the last sentence of paragraph 14 with

“The performance criterion on domestic arrears older than 60 days will not be monitored continuously but on an outstanding stock basis at the specified test dates.”

Table 1.Programmed Disbursements of Concessional Loans and Grants and Bank Restructuring Costs, 2008–09(In millions of Eastern Caribbean dollars, cumulative)
20082009
Q4

Prog.
Q1

Prog.
Q2

Prog.
Q3

Prog.
Q4

Prog.
Concessional loans49.02.44.77.19.4
Grants disbursements78.215.531.060.676.1
Divestment proceeds50.40.00.00.044.6
Bank restructuring costs0.00.00.00.00.0
1/

Adapted from text prepared by World Bank staff in November 2008.

2/

Adapted from text prepared by the Caribbean Development Bank staff in October 2008.

1/

Although retail fuel prices were not adjusted in July and September 2008, there was full passthrough of international fuel prices to electricity prices.

2/

The Eastern Caribbean Securities and Regulatory Commission issued cease and desist orders in May 2008 against two unregulated investment schemes in Grenada, one of which was already operating. That scheme invested through an offshoot of a Jamaican scheme, the assets of which were frozen by the Turks and Caicos law enforcement authorities in July 2008.

3/

The program target was EC$49.8 million reflecting adjustors for grants and concessional financing; see Table 1 of the supplementary MEP. The target, which is measured below-the-line, was missed by less than the amount of the spending overruns measured above-the-line, reflecting the large statistical discrepancy.

4/

The government reached agreement in June 2008 on a wage path for teachers. The wage increases were higher than budgeted, but in line with inflation and with the terms agreed with other public service workers in January 2008.

5/

Some nonrecurrent spending programs (such as the food basket program) are classified as capital spending.

6/

The two largest cases of external arrears amounted to US$0.4 million.

7/

For program purposes, domestic arrears are only those older than 60 days, in line with the program’s performance criterion.

8/

The government has acknowledged arrears to fuel importers as of end-June 2008 resulting from incomplete pass-through of world fuel prices and has reached an agreement with these importers under which the government will remit back 50 percent of the fuel tax until these claims are satisfied.

9/

A major investment project received a tax holiday just prior to the elections.

10

A large growth impact is not expected from the reduction toward pre-hurricane levels of capital expenditure, which includes significant amounts of misclassified current expenditure. Furthermore, the growth impact of capital expenditure in the Eastern Caribbean has historically been limited; see S. Roache, “Public Investment and Growth in the Eastern Caribbean,” IMF Working Paper 07/124.

11

The NRL was put in place in 2006 for period of 3–5 years.

12

The original proposal was for US$85 million (13 percent of GDP). The authorities have shared the project feasibility study with World Bank and Fund staffs, although they are now considering a much smaller project.

13

PetroCaribe provides concessional financing (two years grace, 25 years maturity, and 1 percent interest) for a share of diesel imported which depends on international prices. The projected transfer to the budget is EC$29 million (1.6 percent of GDP) in 2008 and EC$20 million (1.0 percent of GDP) in 2009. The lower transfer in 2009 reflects lower projected diesel imports, as well as the lower share that is financed with diesel prices below the equivalent of US$100 per barrel.

14

The authorities have proposed quantitative performance criteria for end-June 2009 consistent with the draft budget.

15

The lower projection of privatization proceeds for 2008 and 2009 reflects difficulties in selling shares in a telecommunications company.

16

Wages and allowances are projected to fall by 1.3 percentage points of GDP in 2009, reflecting large retroactive wage payments in 2008. Nominal wages excluding retroactive payments are expected to increase by 4 percent in 2009 for public service workers excluding the police, assuming an agreement is reached that takes into account expected inflation, while recognizing the unavoidable impact on real incomes of higher world food and fuel prices.

17

The authorities intend to complete the action plan on Doing Business Indicators by May 2009, at which point one measure will be selected as a benchmark for the fourth review. Cabinet approval of new investment legislation will take place before its submission to Parliament. The authorities expect to begin implementing a customs Fraud Control Plan by August 2009.

1/

Downward adjustment means a higher deficit; upward implies a lower deficit.

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