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Grenada

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

1. Grenada has made good progress with its home-grown economic program, which was launched with the 2006 budget and is supported by the PRGF. However, the sharp slowdown in global growth and the continuing global financial crisis have had a large adverse impact on growth, the external position, and fiscal revenue. As a result, it has been necessary to revise the policy framework for 2009 to address these challenges, while maintaining the key objectives of reducing public debt, reinvigorating growth through structural reforms, reducing vulnerabilities, and furthering the nation’s social development agenda.

A. Recent Developments

2. Economic growth has declined sharply reflecting the global slowdown. Real GDP growth slowed to 0.3 percent in 2008, from 4.5 percent in 2007, as tourism receipts and FDI weakened. Tourist stayover arrivals declined by about 5 percent in 2008. Almost all FDI-financed tourism investment projects have been put on hold due to financing difficulties, and as a result, the construction sector, which accounted for about 10 percent of real GDP in 2007, contracted by more than 14 percent in 2008. Some large employers and many hotels have laid off or are rotating staff.1

Grenada: Stayover Arrivals, 2006Q1–2008Q4

(Annual percentage change)

Sources: ECCB; and Fund staff calculations.

3. The external current account deficit increased slightly in 2008 due to high world fuel and food prices and lower tourism receipts and exports, which were partially offset by increased official grants. The real effective exchange rate appreciated by 6½ percent through December 2008, reflecting the appreciation of the U.S. dollar, to which the Eastern Caribbean dollar is pegged, against other major currencies.

4. Inflation declined to 2.8 percent by March 2009, after peaking at 9.3 percent in July 2008. The inflation path reflects the trajectory of world fuel and food prices and the dominant weight of these items in the CPI. Core inflation (excluding food and energy) was only 1.5 percent through March 2009 (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. Nontradables 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.

Grenada: Contribution to Overall Inflation, by Sector, 20027–2008

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

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

5. The difficulties of the Trinidad and Tobago-based CL Financial Group have increased financial sector uncertainty. The group has a number of linkages to the Grenadian economy, including the presence of two insurance subsidiaries which have been offering deposit-like products to individuals and public and private entities, and majority ownership of Republic Bank Limited.2 There is some public concern about delays in payments on policies, and the government has asked policy holders to avoid seeking early surrenders. The exposure of the insurance subsidiaries to policy and deposit holders in the Eastern Caribbean Currency Union (ECCU) region amounts to about EC$2 billion (around 15 percent of ECCU GDP).3 This development is worrisome in the context of other events which have adversely affected financial sector confidence, including the failure of Capital Bank, an unregulated bank, and of SGL Holdings, an investment scheme promising unusually high returns. Grenada appears not to have any direct exposure to the Stanford Financial Group.

6. The banking system, which is dominated by subsidiaries of international banks, has remained resilient. Private sector credit growth slowed to 9.3 percent at end-February 2009, reflecting weaker economic activity. As of end-December 2008, the ratio of nonperforming loans (NPLs) to total loans remained low at 3.5 percent, and liquidity and capital adequacy ratios were also adequate (Figure 2). However, banks report increases in NPL ratios in the first quarter of 2009, as some nonresident and resident borrowers are experiencing repayment difficulties.

Figure 2.Grenada: Banking System Vulnerabilities

Sources: ECCB; and Fund staff calculations.

7. The government increased the frequency of adjustments in retail fuel prices from an eight-week to a four-week cycle in order to reduce the magnitude of each adjustment. The government also recently cleared arrears to fuel importers resulting from incomplete passthrough of world fuel prices in 2007-08 through an arrangement under which 50 percent of the fuel tax was remitted back to importers.

B. Outlook

8. The global economic slowdown has severely weakened Grenada’s economic outlook. Real GDP is projected to decline by 0.7 percent in 2009, lower than the earlier projection of 1.6 percent growth, and the risks are to the downside.4 Stayover arrivals are expected to decline further, by about 10 percent, and remittances are likely to slow down sharply. Difficulties in securing financing for major projects will lower FDI inflows markedly, resulting in a further sharp contraction of the construction industry. Annual inflation is projected to fall to 2.1 percent by end-2009 as lower world fuel and food prices are passed through. The current account deficit is expected to narrow sharply, notwithstanding a decline in tourism receipts, reflecting lower fuel and food prices and lower FDI-related imports, while the overall balance is projected to deteriorate significantly. Although the banking sector is expected to remain resilient, there is continuing uncertainty over how developments with CL Financial Group will affect Grenada.

II. Performance Under the Program

9. All end-December 2008 quantitative performance criteria were met, reflecting the strong remedial measures put in place in the second half of 2008. In particular, the authorities met the target on the primary deficit excluding grants, which fell from EC$88 million (5.1 percent of GDP) in the first half of 2008 to EC$41 million (2.4 percent of GDP) in the second half.5 A major effort was made to lower expenditure arrears, which fell from EC$33 million (1.9 percent of GDP) at end-June 2008, before the change in government, to EC$9.7 million (0.6 percent of GDP) at end-December 2008. Furthermore, the government was able to roll over late principal payments, which helped to reduce arrears older than 60 days to only EC$8.4 million (0.5 percent of GDP), meeting this performance criterion by a significant margin.

10. A major component of the fiscal adjustment was the reduction in capital expenditure by 3 percentage points of GDP in the second half of the year. This expenditure category accounts for one-third of total spending and has been difficult to control. Despite this adjustment, capital expenditure of EC$215 million (12.5 percent of GDP) in 2008 was still higher than the programmed EC$184 million (10.7 percent of GDP). Revenue in the second half of the year exceeded projections by 0.6 percent of GDP, due to the strong performance of income and profits taxes.

11. Meeting some structural benchmarks is taking longer than envisaged. The structural performance criterion on initiating reorganization or liquidation of Capital Bank was met in November 2008, which is a step toward resolving a longstanding financial sector issue. The bank’s owner was arrested in March 2009 on charges of fraudulent breach of trust. A Debt Management Unit was established in the Ministry of Finance in January 2009 to improve the effectiveness of and develop a strategy for debt management. The authorities submitted the new VAT Bill to Parliament in April, and plan to submit the Excise Bill in August 2009 rather than in April as previously envisaged. The benchmark on submitting investment incentives legislation6 was missed due to the time needed to consult stakeholders, while the benchmark on completing a Country Poverty Assessment (CPA) has been delayed reflecting the time needed to complete the technical work and drafting of the report. These measures are important to improve the business environment and to lay the groundwork for a full PRSP, respectively. A tax holiday was issued to a call center in February 2008.7

Status of Structural Benchmarks Under the Program
Target DateStatus
Reorganize or initiate liquidation of Capital BankNovember 2008Performance criterion. Met
Submit investment incentives legislationDecember 2008Benchmark. Not met
Complete the Country Poverty AssessmentDecember 2008Benchmark. Not met
Establish a Debt Management UnitFebruary 2009Benchmark. Met
Submit new VAT and Excise BillsApril 2009Benchmark. Partially met

III. Policies for 2009

12. The government’s economic strategy is focused on coping with the shock to tourism and FDI while laying the groundwork for broad-based growth. Policy discussions focused on adapting the fiscal framework to reflect the reality of reduced revenue and financing. Staff supported the authorities’ planned measures to address the shock, but stressed that fiscal and debt dynamics should be monitored closely to ensure a sustainable trajectory. Other key policy issues discussed were fiscal and institutional reforms, plans to enhance the business environment, and financial sector vulnerabilities.

A. Fiscal Policies and Debt Sustainability

13. The outlook for budgetary financing in 2009 has deteriorated. Divestment proceeds from a luxury hotel project—the expected main financing source for the 2009 budget—will not materialize this year. The projection for trade-related taxes has been revised downward by 19 percent, which is in line with the shortfall in the first quarter of 2009. In addition, PetroCaribe-related grants will also fall sharply reflecting: (i) lower fuel prices; (ii) a lower share of imports financed under the agreement when the diesel price is below US$100 per barrel; and (iii) the decision to transfer 35 percent rather than 65 percent of amounts financed to the budget as grants.8

14. The government has adopted a two-pronged strategy to address the shock to tourism and FDI, which emphasizes the need for early intervention and fiscal adjustment:

  • First, within a tighter budget envelope, capital spending programs providing the greatest economic stimulus will be accelerated. The Cabinet has selected a list of priority government and state-owned enterprise projects, taking into account employment generation potential, geographic distribution, and economic visibility. The government will also seek to expedite approvals needed for private sector projects. Reflecting financing constraints, including limited divestment proceeds, the capital spending target has been lowered to EC$160 million (8.9 percent of GDP).9 The government will also shift from a system of quarterly to monthly allocations to ministries as an expenditure control mechanism to help ensure that the target is met.
  • Second, the government will undertake targeted social spending to mitigate the impact of the economic slowdown on the employment and incomes of vulnerable groups.10 The public assistance program has been streamlined to remove ineligible individuals, while new qualified persons have been added, and a road maintenance program will provide direct support to poor households. These initiatives are expected to cost EC$6 million (0.3 percent of GDP), which is incorporated in the fiscal program.

The mission supported the strategy of accelerating high impact capital spending within a tighter budget envelope, in light of the limited room for maneuver. It also welcomed the progress in streamlining transfers, and the emphasis on targeted relief to vulnerable groups using the tools available.

Fiscal Developments in 2006-09(In percent of GDP)
2008
20062007First HalfSecond HalfFull year2009
ActualActualPrel.Prog.Prel.Prog.Prel.Prog.Proj.
Total revenue and grants33.627.215.115.716.230.831.330.726.7
Revenue24.926.113.512.813.426.326.927.024.2
Grants8.71.11.63.02.74.54.33.62.5
Total expenditure40.035.319.815.317.235.137.033.031.6
Current expenditure21.221.712.012.412.524.424.523.022.7
Of which
Interest2.12.31.21.51.42.72.63.13.0
Capital expenditure18.813.67.82.94.710.712.510.08.9
Primary balance (excluding grants) 1/-13.0-6.9-5.1-1.0-2.4-6.1-7.5-2.9-4.4
Overall balance (including grants) 1/-6.4-8.2-4.70.4-1.0-4.3-5.7-2.4-4.9
Sources: Ministry of Finance; and Fund staff estimates and projections.

Measured above the line.

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

Measured above the line.

15. In addition, the government is considering providing temporary assistance to support the tourism sector.11 This could include increasing the budget for marketing and airline support by up to EC$10 million (0.6 percent of GDP), and the provision of temporary tax relief on hotels’ food imports. The mission recommended that the government choose measures that are time bound and have limited fiscal impact. The marketing and airline support, which the authorities classify as capital expenditure, would need to be accommodated by cutting some other projects.

16. The government recognizes the seriousness of fiscal challenges in 2009, and is undertaking adjustment measures:

  • On the revenue side: maintaining the specific fuel tax of EC$3 per gallon; and enhancing use of tax enforcement measures, including garnishing income and seizing assets, following completion of the tax amnesty at end-April.12 The mission noted the potential adverse impact of any further extensions to the tax amnesty on the credibility of the tax system.
  • On the expenditure side: freezing wages for public service workers;13 targeting capital expenditure as described above; and increasing the efficiency of spending on goods and services, supported by the new Waste Reduction Unit.

17. These developments have necessitated a revision in the fiscal framework for 2009. Given the size of the shortfall in revenue, the measures described above will not be sufficient to meet the end-June 2009 target for the primary balance excluding grants. The government has proposed increasing the primary deficit excluding grants target for end-June from EC$28 million (1.6 percent of GDP) to EC$53 million (2.9 percent of GDP), while proposing an end-November target of EC$78 million (4.3 percent of GDP).14 This target would still imply an adjustment in the below-the-line primary deficit of nearly 2 percentage points of GDP from 2008 to 2009. The government plans to maintain domestic arrears older than 60 days close to the low level achieved at the end of 2008.

18. The government has sought additional budget financing to cover the remaining gap after the expenditure reductions. In addition to arranging a syndicated loan from domestic commercial banks, the government has approached the Caribbean Development Bank (CDB) and World Bank for budgetary support loans.15 Staff is supporting the authorities’ request to raise the concessionality of borrowing from the CDB, and will coordinate with the CDB and World Bank on reform programs attached to the loans.

19. The debt-to-GDP ratio is not expected to fall below 60 percent by the ECCB’s target date of 2020. Under the revised framework with lower GDP growth and higher debt financing, the debt-to-GDP ratio is not expected to reach 60 percent until 2024. According to the updated Debt Sustainability Analysis (DSA) (Supplement 1), Grenada’s debt trajectory has deteriorated since the previous DSA, and Grenada remains at high risk of debt distress. The debt service burden will increase in 2009, reflecting the end of the grace period on obligations to commercial banks restructured in 2005, and the step up in the interest rate from 1 to 2.5 percent on restructured debt to other parties.

Grenada: Evolution of Debt-to-GDP Ratio

(In percent)

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

1/ Based upon the second review trajectory for GDP.

20. The government is considering a US$50–80 million (7–12 percent of GDP) concessional loan from the Export-Import Bank of China to build a luxury hotel in a joint venture, which they may structure as a public-private partnership (PPP).16 The authorities believe that government intervention to move this project forward is necessary to stimulate economic activity in the short run and to boost the economy in the long run. The mission noted that such a PPP, which would atypically be primarily government financed, carried operational and commercial risks in an area typically left to the private sector. The mission noted that with an already high debt level (108.6 percent of GDP at end-2008), such a large loan would undermine the authorities’ debt reduction objective. The DSA indicates that an US$80 million loan would increase the present value of the debt-to-GDP ratio by around 5 percentage points in the medium-term (2009–14), even assuming the project led to higher growth. The program’s ceiling on bilateral concessional borrowing does not accommodate this loan.

B. Structural Reforms

21. The government intends to move forward with structural reforms, while sharpening their focus in light of capacity constraints. These reforms are important not only to overcome the economic crisis in the near term but also to lay the basis for long-term sustained growth by improving competitiveness and promoting private sector-led growth. Major areas of structural reforms are tax and customs reform, enhancing the business environment, improving economic management, and laying the groundwork for a comprehensive poverty reduction strategy.

Structural Benchmarks for the Fourth Review
Target DateStatus
Recruit and begin training staff and adopt transitional procedures for bonded warehousesMay 2009Benchmark
Complete the Country Poverty AssessmentAugust 2009Proposed Benchmark
Submit the new Excise Bill to ParliamentAugust 2009Proposed Benchmark
Develop and begin implementing a customs Fraud Control PlanAugust 2009Benchmark
Establish a Public Procurement AuthoritySeptember 2009Benchmark
Appoint a separate Registrar of CompaniesOctober 2009Proposed Benchmark
  • The mission welcomed the planned introduction of a VAT in February 2010, which is expected to improve the efficiency of the tax system as it has in other ECCU countries. The authorities have finalized the policy issues, and also begun work on public awareness and education. They plan to recruit and begin training staff, and to adopt transitional procedures for bonded warehouses by May 2009. They are drawing on CARTAC technical assistance on implementation. The new VAT and Excise Bills are expected to be passed by Parliament in May and August 2009, respectively. The mission urged the authorities to adhere to the established schedule for VAT implementation.
  • Work toward introducing a market-based property tax now underway will also enhance revenue and the effectiveness of the tax system. The cadastral survey, which will provide the basis for reassessing the value of property, is expected to be completed in the near future. The introduction of new valuations may be delayed until January 2011 to avoid introducing two major tax reforms in the same year.
  • The customs Fraud Control Plan, to be developed and implemented by August 2009, is an important part of the customs reform strategy. This plan will lay the basis for risk-based inspections, which together with a new information technology system planned for 2010, will improve customs revenue and efficiency. The plan is part of a broader strategy to enhance the efficiency and effectiveness of the Ports and Customs Authorities, as discussed in a recent national consultation.
  • The government is developing an action plan to improve Doing Business Indicators, with technical assistance from the World Bank. Five priority areas have been identified: starting a business, trading across borders, paying taxes, registering property, and enforcement of contracts. Appointment of a separate Registrar of Companies, which is expected to be an important component of a one-stop shop for business start-ups, has been identified as a structural benchmark to be completed by October 2009 for the fourth review.
  • The Country Poverty Assessment (CPA) will provide essential information to improve targeting of social programs, and to develop a comprehensive poverty reduction strategy. A summary of key findings was submitted to Cabinet in May 2009, and the structural benchmark on completing the CPA has been rephased for August 2009. The authorities will build on this assessment, together with an earlier National Development Strategy, to finalize a full PRSP by November 2009.
  • A major reform of the Ministry of Finance is aimed at improving the capacity for economic management. The new Debt Management Unit is already making progress with plans to improve debt monitoring and the capacity to assess debt sustainability. The new Private Sector Development Office has also reinvigorated efforts to improve the business environment. A Waste Reduction Unit has recently been established to reduce wasteful spending. Plans are also underway to create a Division of Economic Management and Planning to sharpen the analytical underpinnings of the policy framework and a Public Procurement Authority to enhance the quality, integrity, and transparency of public procurement.

22. The resolution of Capital Bank will proceed once the High Court has ruled on the legal challenges by the bank’s owner. The authorities are appropriately considering options to address the owner’s legal challenges. The delay in resolving the bank partly reflects weaknesses in the legal framework and the court’s limited experience with such cases. Given the passage of time and the diminution of assets, the mission recommended that the government proceed immediately to liquidate the bank once the legal obstacles are overcome.

23. The authorities are working to address financial sector uncertainty stemming from the intervention of CL Financial Group. Regional leaders have moved to establish a “Liquidity Support Fund” for British American Insurance, an insurance subsidiary of CL Financial Group, and to coordinate regional information sharing and response planning.17 In addition, the Grenada Authority for the Regulation of Financial Institutions (GARFIN) has prohibited the two insurance subsidiaries of CL Financial Group operating in Grenada from offering deposit-like products with high interest rates. Parliament is expected to pass the new Insurance Act by end-June 2009, and its consideration has been expedited in light of the circumstances.

24. The global and regional financial turmoil have heightened the need to further strengthen nonbank financial sector regulation and supervision. GARFIN is continuing efforts to develop its capacity, with assistance from CARTAC, and is enhancing legislation, producing regulations, and developing and implementing supervisory practices. It is tightening supervision over credit unions, and has pursued a strategy of consolidation to create a sector with fewer, stronger institutions. The government submitted the Money Services Act to Parliament in March 2009, and plans to submit the Cooperative Societies Act in June 2009.

IV. Program Issues

A. Program Design

25. The attached Letter of Intent and accompanying Supplementary Memorandum of Economic Policies outline the authorities’ policy objectives for the remainder of 2009. They have proposed relaxing the end-June 2009 performance criterion on the primary balance excluding grants. Quantitative performance criteria for end-June and end-November 2009 and structural measures are shown in Table 1 and 2 of Attachment II. The authorities expect to complete the benchmark for the third review on submitting investment incentives legislation by end-May. The benchmarks on submitting the new Excise Bill to Parliament and completing the Country Poverty Assessment have been rephased to August 2009.

Table 1.Grenada: Selected Economic and Financial Indicators, 2006–10Rank in UNDP Human Development Index out of 179 countries (2008)86Infant mortality rate per ‘000 births (2006)16Life expectancy at birth in years (2006)68Adult illiteracy rate in percent (2004)4GDP per capita in US$ (2007)5,737Poverty headcount index (2000)32Est.Prog. 1/Prel.Prog. 1/Proj.Proj.20062007200820092010(Annual percentage change; unless otherwise specified)National income and pricesReal GDP-2.34.51.60.31.6-0.71.0GDP deflator3.93.46.24.77.35.52.8Consumer pricesEnd-of-year1.77.46.25.23.22.12.2Period average4.23.97.88.04.02.32.9External sectorExports of goods-1.726.0-18.4-19.02.6-0.89.5Imports of goods-0.810.63.03.5-0.3-22.24.2Merchandise export volume 2/-14.725.7-16.7-6.6-1.4-13.41.7Merchandise import volume 2/-10.73.1-11.80.011.7-9.34.6Current account balance (including grants; in percent of GDP)-33.4-41.9-31.8-42.3-30.5-32.0-30.3FDI (net, in percent of GDP)15.928.719.725.223.115.316.7Real effective exchange rate (end of period, depreciation -)-4.60.2…6.6………Banking systemNet foreign assets 3/-7.5-9.51.3-3.6-3.3Net domestic assets 3/8.412.07.213.27.74.65.5Of whichCredit to public sector (net) 3/-0.31.6-2.01.0-0.11.90.0Credit to private sector 3/9.212.55.59.37.82.75.4Money and quasi-money (M2)0.911.06.13.79.01.02.2Weighted average deposit rate (in percent)3.03.0…3.2………Weighted average lending rate (in percent)9.79.6…9.2………(In percent of GDP)Central government finances 4/Total revenue and grants33.627.230.831.330.726.728.4Of whichGrants8.71.14.54.33.62.52.9Total expenditure40.035.335.137.033.031.631.2Current expenditure21.221.724.424.523.022.721.5Of whichSalaries and allowances10.09.711.611.610.710.510.4Capital expenditure18.813.610.712.510.08.99.7Primary balance (excluding grants)-13.0-6.9-6.1-7.5-2.9-4.4-2.8Primary balance (including grants)-4.3-5.8-1.6-3.20.8-1.90.2Current balance3.74.41.82.44.01.54.0Overall balance (including grants)-6.4-8.2-4.3-5.7-2.4-4.9-2.7Public and publicly guaranteed debt (end-period)116.7111.5110.1108.6105.1109.4108.9(In millions of U.S. dollars)Nominal GDP564.4607.9638.5638.5668.8668.8694.4Sources: Ministry of Finance; Eastern Caribbean Central Bank; United Nations, Human Development Report 2008; World Bank, WDI 2007; and Fund staff estimates and projections.

Corresponds to the staff supplement in IMF Country Report No. 09/95 with all ratios expressed relative to the revised GDP.

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 2.Grenada: Central Government Finances, 2006-09(In millions of Eastern Caribbean dollars)
2008
ActualActualPrel.Prog. 1/Prel.Prog. 1/Prel.Prog. 1/Proj.
20062007First HalfSecond HalfFull Year2009
Total revenue and grants511.9445.8260.0271.2278.8531.2538.8553.6482.6
Total revenue379.7428.5233.0220.0231.6453.0464.5488.1437.1
Current revenue379.6428.4232.9220.0231.5452.9464.4488.0437.0
Tax revenue 2/353.5402.8212.6203.2221.1415.9433.8455.1405.6
Taxes on income and profits56.074.840.541.454.181.894.681.881.7
Taxes on property22.629.017.87.88.125.726.027.830.3
Taxes on domestic goods and services69.071.342.432.736.375.078.785.882.4
Taxes on international transactions205.9227.7112.0121.4122.6233.3234.6259.7211.2
Nontax revenue26.025.620.316.810.437.030.632.931.4
Capital revenue0.10.10.10.00.00.10.10.10.1
Grants 3/132.217.327.051.247.378.274.365.545.5
Total expenditure608.9579.7341.1264.0296.7605.0637.7596.1570.5
Current expenditure323.1356.6206.8214.3216.1421.0422.8416.1410.3
Current primary expenditure291.6318.5186.7188.0192.0374.7378.7360.0355.9
Salaries and allowances152.5158.497.4101.9103.4199.3200.8193.6189.8
Wages and salaries135.3140.786.990.793.0177.6180.0166.6162.8
Personnel allowances17.117.710.511.210.321.720.827.027.0
Goods and services71.179.137.437.647.275.084.777.273.5
Interest 4/31.638.120.126.324.146.344.256.154.4
Domestic9.913.05.113.312.018.417.120.418.7
Foreign21.625.115.013.012.127.927.135.735.7
Transfers and subsidies68.081.051.948.541.3100.493.289.292.6
Capital expenditure285.8223.1134.349.780.6184.0214.9180.0160.2
Current balance56.571.826.15.815.531.941.671.926.6
Primary balance (excluding grants)-197.6-113.1-88.1-17.6-41.0-105.7-129.1-51.9-79.0
Primary balance (including grants)-65.4-95.9-61.033.56.3-27.5-54.813.6-33.5
Overall balance (excluding grants)-229.2-151.2-108.1-43.9-65.1-152.0-173.2-108.0-133.5
Overall balance (including grants)-97.0-133.9-81.17.3-17.8-73.8-98.9-42.5-87.9
Statistical discrepancy-20.82.624.8-24.8-3.20.021.60.00.0
Financing124.7131.356.217.621.073.877.342.587.9
Net external financing54.540.23.542.140.645.644.111.358.4
Net amortization54.840.52.342.137.844.440.111.358.4
Disbursements73.862.718.152.747.570.965.738.785.8
Amortization-19.0-22.2-15.9-10.6-9.7-26.5-25.6-27.4-27.4
Change in government assets-0.3-0.31.20.02.81.24.00.00.0
Net domestic financing23.269.7-2.0-40.3-1.5-42.3-3.5-10.922.5
ECCB (net)-5.812.6-0.40.42.60.02.30.00.0
Commercial banks (net) 5/26.554.45.5-36.83.7-31.39.2-11.717.1
Domestic debt2.52.7-7.2-3.9-7.8-11.0-14.90.85.4
Of which: Banking system1.50.0-0.41.33.30.92.90.84.7
Divestment/privatization proceeds8.836.047.72.72.650.450.344.62.4
Expenditure arrears 6/31.2-14.67.113.0-20.820.1-13.7-2.44.6
Of which: Excluding arrears from debt exchange26.6-19.24.810.7-23.115.5-18.3-7.00.0
Memorandum items:
Nominal GDP (market prices)1,5241,6411,7241,7241,7241,7241,7241,8061,806
Stock of expenditure arrears 6/51.837.244.327.823.557.323.554.928.1
Of which: Excluding arrears from debt exchange47.228.032.814.09.743.59.736.59.7
Sources: Ministry of Finance; and Fund staff estimates and projections.

Corresponds to the staff supplement in IMF Country Report No. 09/95 with all ratios expressed relative to the revised GDP.

VAT will be introduced on February 1, 2010.

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.

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

Includes EC$4.6 million arrears each year from 2005 onwards on interest to nonparticipating creditors in the debt exchange.

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

Corresponds to the staff supplement in IMF Country Report No. 09/95 with all ratios expressed relative to the revised GDP.

VAT will be introduced on February 1, 2010.

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.

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

Includes EC$4.6 million arrears each year from 2005 onwards on interest to nonparticipating creditors in the debt exchange.

Table 2a.Grenada: Central Government Finances, 2006-09(In percent of GDP, unless noted otherwise)
2008
ActualActualPrel.Prog. 1/Prel.Prog. 1/Prel.Prog. 1/Proj.
20062007First HalfSecond HalfFull Year2009
Total revenue and grants33.627.215.115.716.230.831.330.726.7
Total revenue24.926.113.512.813.426.326.927.024.2
Current revenue24.926.113.512.813.426.326.927.024.2
Tax revenue 2/23.224.512.311.812.824.125.225.222.5
Taxes on income and profits3.74.62.32.43.14.75.54.54.5
Taxes on property1.51.81.00.50.51.51.51.51.7
Taxes on domestic goods and services4.54.32.51.92.14.44.64.84.6
Taxes on international transactions13.513.96.57.07.113.513.614.411.7
Nontax revenue1.71.61.21.00.62.11.81.81.7
Capital revenue0.00.00.00.00.00.00.00.00.0
Grants 3/8.71.11.63.02.74.54.33.62.5
Total expenditure40.035.319.815.317.235.137.033.031.6
Current expenditure21.221.712.012.412.524.424.523.022.7
Current primary expenditure19.119.410.810.911.121.722.019.919.7
Salaries and allowances10.09.75.65.96.011.611.610.710.5
Wages and salaries8.98.65.05.35.410.310.49.29.0
Personnel allowances1.11.10.60.70.61.31.21.51.5
Goods and services4.74.82.22.22.74.44.94.34.1
Interest 4/2.12.31.21.51.42.72.63.13.0
Domestic0.70.80.30.80.71.11.01.11.0
Foreign1.41.50.90.80.71.61.62.02.0
Transfers and subsidies4.54.93.02.82.45.85.44.95.1
Capital expenditure18.813.67.82.94.710.712.510.08.9
Current balance3.74.41.50.30.91.82.44.01.5
Primary balance (excluding grants)-13.0-6.9-5.1-1.0-2.4-6.1-7.5-2.9-4.4
Primary balance (including grants)-4.3-5.8-3.51.90.4-1.6-3.20.8-1.9
Overall balance (excluding grants)-15.0-9.2-6.3-2.5-3.8-8.8-10.0-6.0-7.4
Overall balance (including grants)-6.4-8.2-4.70.4-1.0-4.3-5.7-2.4-4.9
Statistical discrepancy-1.40.21.4-1.4-0.20.01.30.00.0
Financing8.28.03.31.01.24.34.52.44.9
Net external financing3.62.40.22.42.42.62.60.63.2
Net amortization3.62.50.12.42.22.62.30.63.2
Disbursements4.83.81.13.12.84.13.82.14.7
Amortization-1.2-1.4-0.9-0.6-0.6-1.5-1.5-1.5-1.5
Change in government assets0.00.00.10.00.20.10.20.00.0
Net domestic financing1.54.2-0.1-2.3-0.1-2.5-0.2-0.61.2
ECCB (net)-0.40.80.00.00.20.00.10.00.0
Commercial banks (net) 5/1.73.30.3-2.10.2-1.80.5-0.60.9
Domestic debt0.20.2-0.4-0.2-0.5-0.6-0.90.00.3
Of which: Banking system0.10.00.00.10.20.00.20.00.3
Divestment/privatization proceeds0.62.22.80.20.22.92.92.50.1
Expenditure arrears 6/2.0-0.90.40.8-1.21.2-0.8-0.10.3
Of which: Excluding arrears from debt exchange1.7-1.20.30.6-1.30.9-1.1-0.40.0
Memorandum items:
Nominal GDP (market prices, EC$ millions)1,5241,6411,7241,7241,7241,7241,7241,8061,806
Stock of expenditure arrears 6/3.42.32.63.31.43.31.43.01.6
Of which: Excluding arrears from debt exchange3.11.71.92.50.62.50.62.00.5
Sources: Ministry of Finance; and Fund staff estimates and projections.

Corresponds to the staff supplement in IMF Country Report No. 09/95 with all ratios expressed relative to the revised GDP.

VAT will be introduced on February 1, 2010.

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

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

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

Includes EC$4.6 million arrears each year from 2005 onwards on interest to nonparticipating creditors in the debt exchange.

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

Corresponds to the staff supplement in IMF Country Report No. 09/95 with all ratios expressed relative to the revised GDP.

VAT will be introduced on February 1, 2010.

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

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

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

Includes EC$4.6 million arrears each year from 2005 onwards on interest to nonparticipating creditors in the debt exchange.

26. The authorities have requested an augmentation (37.5 percent of quota) of the access under the PRGF Arrangement to help mitigate the adverse effects of the tourism and FDI shock. Tourism receipts and FDI are expected to fall by US$16 million (3 percentage points of GDP) and US$59 million (10 percentage points of GDP), respectively (see text table). Exports and private transfers are also projected to decline. The reduction in imports due to exogenous factors, on account of lower FDI (US$42 million) and of lower food and fuel prices (US$16 million), will not fully offset these projected declines, giving rise to a financing gap of US$11.6 million. To cushion the balance of payments impact, the authorities have requested that an additional SDR 4.39 million (around US$6.5 million) be disbursed at the conclusion of the third and fourth reviews in equal amounts.18 This augmentation would increase access from 102.5 to 140 percent of quota, which would be in line with the new access norm for first-time PRGF users.19

Grenada: Estimated Net Impact of Tourism and FDI Shock
20082009Difference
(In millions of U.S. dollars)
Current account-269.9-214.155.8
Of which:
(A) Exports33.032.7-0.3
(B) Imports-339.5-264.175.4
Of which:
(C) FDI-related (both fuel and nonfuel)41.8
(D) Fuel and food (price effect)16.1
(E) Endogenous adjustment17.4
(F) Travel (net)112.096.1-16.0
Of which: Receipts128.6112.1-16.5
(G) Private transfers19.217.4-1.9
Capital and financial account 1/257.9182.7-75.3
(H) Of which: Direct investment (net)161.2102.3-58.9
Overall balance-12.0-31.5
Financing12.019.8
Of which:
Change in imputed reserves6.410.3
Requested augmentation6.5
(I) Gross impact (A+F+G+H)-77.0
(J) Net impact (I+C+D)-19.1
Memorandum items:(In percent of GDP)
Central government operations
Total revenue and grants31.326.7-4.5
Of which: Current revenue26.924.2-2.7
Total expenditure37.031.6-5.4
Overall balance-5.7-4.90.9
Financing
Of which:
Net external financing2.62.3
Net domestic financing-0.21.2
Requested augmentation1.0
Source: Grenada authorities; and Fund staff estimates.

Includes net errors and omissions.

Source: Grenada authorities; and Fund staff estimates.

Includes net errors and omissions.

B. Program Risks and Financing Assurances

27. The program faces significant risks, notwithstanding the authorities’ demonstrated policy commitment. A more pronounced and prolonged global slowdown could further reduce tourism demand and FDI inflows, which would deepen the economic downturn and lower revenue; lower donor grants and increased financial sector vulnerability are additional risks. The program incorporates adjustors on grants and on insurance sector support, as well as a more focused structural agenda. The authorities are committed to taking contingent measures if needed to reduce spending, including limiting transfers. The possible US$50–80 million (7–12 percent of GDP) concessional loan from the Export-Import Bank of China, which is now being considered, has not been accommodated under the program’s ceiling on the contracting and guaranteeing of bilateral concessional external debt.

28. The authorities have approached the Paris Club for an extension of the 2006-08 debt rescheduling treatment to include 2009. An extension would be useful in the tight external financing environment. The authorities are continuing to seek a settlement with the Export-Import Bank of Taiwan Province of China on terms comparable to that provided by the Paris Club. The authorities are also continuing to make best efforts to conclude the remaining bilateral Paris Club agreement with the Russian Federation and to offer those nonparticipating creditors in the 2005 commercial debt exchange who come forward the same terms as received by other participants in the exchange. The authorities have cleared all but EC$1 million in arrears on unrestructured domestic debt to the nonbank public incurred in June 2007, while there are EC$1.7 million arrears on 90-day treasury bills held by domestic commercial banks.

V. Staff Appraisal

29. Grenada, like the rest of ECCU and the Caribbean, has been hit hard by negative spillovers from the global economic downturn. Its financial system has come under pressure, primarily through the nonbank sector. The very high debt levels in the context of the regional currency board arrangement greatly constrain policy responses to the downturn.

30. The government is approaching these challenges with a strong resolve. After the strong fiscal adjustment in the second half of 2008 and progress with structural reforms, Grenada is now better placed to weather the difficult period ahead. The government is applying the same determination in 2009 in its response to the shock to tourism and FDI buffeting the country.

31. Staff welcomes the government’s steps to address the worsened circumstances. The government is reducing capital spending, imposing a wage freeze, and increasing the efficiency of spending on goods and services in response to significant revenue shortfalls. At the same time, it is seeking to get the greatest economic stimulus possible within the tighter budget envelope by accelerating a list of priority projects. The fiscal framework accommodates additional targeted transfers to assist vulnerable segments of the population. In light of the risks to these groups, staff has underscored the need to complete the Country Poverty Assessment without further delay.

32. The ambitious program of fiscal reform is moving forward. Introduction of a VAT will enhance the coverage and buoyancy of the tax system. It will be important to continue with the thorough approach being taken with preparations, and passage of new VAT and Excise Bills will be a crucial step. Progress with the cadastral survey is laying the basis for a market-based property tax, which has appropriately been delayed until January 2011 to avoid taking on two major tax reforms in the same year.

33. Improving economic management through institutional reform at the Ministry of Finance is a welcome priority. Notable progress has already been made by the new Debt Management Unit and Private Sector Development Office. The creation of a Waste Reduction Unit, a Division of Economic Management and Planning, and the planned Public Procurement Authority are also welcome innovations.

34. Caution is warranted regarding the possible loan from the Export-Import Bank of China to build a luxury hotel. While acknowledging the authorities’ desire to stimulate the economy, staff has cautioned that a loan of this magnitude would undermine progress toward debt sustainability and entails significant implementation risks.

35. Improving tax enforcement and detection powers is essential following completion of the tax amnesty. The government decided to extend the tax amnesty to end-April only for those who had already approached the government by end-March but needed more time to complete the administrative process. Staff welcomes the tax administration’s plans to employ their capacity to garnish income and to seize assets.

36. The authorities need to carefully monitor financial sector vulnerabilities. The banking sector has remained resilient. However, concerns regarding CL Financial Group, which follow upon past difficulties of Capital Bank and an unregulated investment scheme, could pose a risk to confidence in the financial system. Staff welcomes the close cooperation among regional governments to address the troubled CL Financial Group. The government’s decisions to revoke Capital Bank’s license and to petition the High Court for liquidation are laudable, and the government should proceed directly to liquidation once the court permits. GARFIN needs to continue improving its capacity for nonbank financial supervision and regulation.

37. The deteriorating environment has heightened program risks. Key risks include the potential of a deeper and more prolonged global downturn, uncertainty regarding CL Financial Group, and the possible large loan from the Export-Import Bank of China. The government has responded prudently thus far to the first risk by prioritizing spending plans, enhancing efforts to protect vulnerable groups, and identifying contingent measures. The program’s design seeks to address risks, through the identification of contingent fiscal measures, the ceiling on bilateral concessional debt, and adjustors on grants and on insurance sector support.

38. Notwithstanding these risks, staff supports the authorities’ requests for completion of the third review and financing assurances review, for modification of a quantitative performance criterion, and for augmentation. The government has shown an impressive commitment to its program. Staff supports the government’s efforts, while underscoring the need for perseverance and caution as pressures intensify.

Figure 3.Grenada: Fiscal Sector Indicators

(In percent of GDP)

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

1/ Measured below the line.

2/ The target for the primary balance excluding grants is adjusted based on the outturn for grants, concessional loans, and bank restructuring costs.

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

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, 2008 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 tax payments for a manufacturing company in a year, time required to comply with profit taxes, consumption taxes and labor taxes, and total tax rate.

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, 2006–10
JuneDec.Proj.
20062007200820092010
(In millions of Eastern Caribbean dollars, end of period)
Net foreign assets421.5405.6344.6248.8187.5130.2
ECCB (imputed reserves)269.4298.2306.3281.0253.2241.4
Commercial banks152.0107.438.3-32.2-65.7-111.2
Net domestic assets1,060.91,239.11,349.11,456.91,534.91,629.2
Public sector credit (net)-36.0-12.5-2.54.436.336.8
Central government37.3104.3109.1118.7140.6141.1
ECCB-7.55.04.76.46.46.4
Commercial banks44.999.3104.4112.3134.2134.7
Net credit to rest of public sector-73.3-116.8-111.6-114.3-104.3-104.3
National Insurance Scheme-86.6-112.5-119.5-135.1-130.1-130.1
Other13.2-4.37.920.725.725.7
Credit to private sector1,223.91,409.21,440.11,562.81,608.91,702.7
Net credit to nonbank financial institutions-23.3-27.23.2-14.0-14.1-14.0
Other items (net)-103.7-130.4-91.6-96.2-96.2-96.2
Broad money1,482.41,644.71,693.81,705.71,722.41,759.4
Money309.5355.8358.0338.6336.8335.4
Currency in circulation104.5107.8106.0103.4102.8102.4
Demand deposits205.0248.0252.0235.2234.0233.0
Quasi-money1,172.91,288.91,335.81,367.11,385.61,424.0
Time deposits201.2254.1281.6281.3283.1295.7
Savings deposits894.9914.2967.3977.31,002.71,025.0
Foreign currency deposits76.9120.786.9108.699.7103.3
(Annual percentage change)
Net foreign assets-20.7-3.8-19.4-38.7-24.6-30.6
Net domestic assets13.216.819.017.65.36.1
Credit to private sector12.515.114.810.93.05.8
Broad money0.911.08.53.71.02.2
Money-1.915.07.2-4.8-0.5-0.4
Quasi-money 1/1.79.98.86.11.32.8
(Percent contribution compared to M2 at the beginning of the year)
Net foreign assets-7.5-1.1-3.7-9.5-3.6-3.3
Net domestic assets8.412.06.713.24.65.5
Public sector credit (net)-0.31.60.61.01.90.0
Of which: Central government1.54.50.30.91.30.0
Credit to private sector9.212.51.99.32.75.4
Net credit to nonbank financial inst.0.4-0.31.90.80.00.0
Other items (net)-0.9-1.82.42.10.00.0
Memorandum item:
Income velocity 2/1.21.21.21.11.11.1
Sources: ECCB; Ministry of Finance and Planning; and Fund staff estimates.

Including resident foreign currency deposits.

Nominal GDP at market prices divided by liabilities to the private sector.

Sources: ECCB; Ministry of Finance and Planning; and Fund staff estimates.

Including resident foreign currency deposits.

Nominal GDP at market prices divided by liabilities to the private sector.

Table 4.Grenada: Summary Balance of Payments, 2006–14
Projections
2006 1/2007 1/Est. 2008200920102011201220132014
(In millions of U.S. dollars)
Current account-188.4-254.6-269.9-214.1-210.7-219.9-228.8-229.7-239.6
Trade balance-264.1-287.2-306.5-231.4-239.5-257.0-272.2-288.8-315.4
Exports (f.o.b.) 2/32.340.733.032.735.840.545.450.856.7
Imports (f.o.b.)-296.4-327.9-339.5-264.1-275.3-297.5-317.6-339.6-372.1
Of which: Mineral fuels-43.6-53.6-73.3-33.0-39.4-44.8-49.6-53.4-55.5
Travel (net)88.2116.7112.096.1104.2115.7130.5150.7177.0
Other services (net)-59.4-80.2-81.5-74.8-73.4-73.9-78.6-83.5-90.4
Income (net)-31.4-34.7-37.5-34.9-35.9-38.7-42.8-42.9-46.1
Transfers (net)78.330.743.630.933.934.034.334.935.4
Capital and financial account198.4248.4273.8182.7203.7221.5232.2233.0245.8
Capital account (transfers)23.524.119.819.820.120.721.622.722.0
Financial account175.0224.2254.0162.9183.6200.7210.6210.3223.8
Public sector borrowing26.127.435.230.233.923.224.215.516.0
Public sector amortization-9.1-9.7-10.3-11.6-13.8-11.1-13.9-17.1-13.4
Direct investment (net)89.8174.2161.2102.3115.8137.2148.8157.2166.5
Portfolio investment (net)-0.7-1.09.39.810.010.410.911.411.9
Change in NFA of commercial banks46.316.551.712.416.919.718.920.922.2
Other investments (net)22.616.86.919.820.921.221.722.420.6
Net errors and omissions-5.119.3-15.90.00.00.00.00.00.0
Overall balance5.013.0-12.0-31.5-6.91.53.43.36.3
Available financing-5.0-13.012.019.86.9-1.5-3.4-3.3-6.3
Change in imputed reserves-5.6-10.76.410.34.4-1.3-2.9-2.9-3.3
IMF purchases and disbursements2.30.08.511.82.60.00.00.00.0
IMF repurchases and repayments-1.6-2.2-2.9-2.20.0-0.2-0.5-0.5-3.0
Other-0.1-0.10.00.00.00.00.00.00.0
Financing gap 3/11.6
(In percent of GDP)
Current account-33.4-41.9-42.3-32.0-30.3-29.9-29.4-27.8-27.4
Trade balance-46.8-47.2-48.0-34.6-34.5-35.0-35.0-35.0-36.0
Exports of goods5.76.75.24.95.25.55.86.26.5
Imports of goods-52.5-53.9-53.2-39.5-39.6-40.5-40.8-41.2-42.5
Travel (net)15.619.217.514.415.015.816.818.320.2
Other services (net)-10.5-13.2-12.8-11.2-10.6-10.1-10.1-10.1-10.3
Income and current transfers (net)8.3-0.71.0-0.6-0.3-0.6-1.1-1.0-1.2
Capital and financial account35.240.942.927.329.330.129.828.228.1
Public sector3.02.93.92.82.91.61.3-0.20.3
Private sector32.137.939.024.526.428.528.528.427.8
Of which: Direct investment (net)15.928.725.215.316.718.719.119.019.0
Overall balance0.92.1-1.9-4.7-1.00.20.40.40.7
External public and publicly guaranteed debt81.078.779.279.980.277.474.369.965.8
(Annual percentage change)
Exports of goods-1.726.0-19.0-0.89.513.012.112.111.5
Imports of goods-0.810.63.5-22.24.28.16.76.99.6
Travel (net)27.432.3-4.0-14.38.511.012.815.517.4
Memorandum items:(In millions of U.S. dollars)
External public and publicly guaranteed debt457.2478.7506.0534.1556.8568.6578.4576.4576.0
Sources: Eastern Caribbean Central Bank (ECCB); Ministry of Finance; and Fund staff estimates and projections.

Incorporates revised historical data from the ECCB.

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

Includes proposed augmentation (US$6.5 million) and possible reschedulings from the Paris Club and Taiwan POC (US$5.1 million).

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

Incorporates revised historical data from the ECCB.

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

Includes proposed augmentation (US$6.5 million) and possible reschedulings from the Paris Club and Taiwan POC (US$5.1 million).

Table 5.Grenada: Public Sector Debt, 2008(Year end, in millions of U.S. dollars)
Percent of
StockTotal DebtGDP
Public sector debt 1/693.3100.0108.6
Central government debt600.386.694.0
Central-government guaranteed debt54.87.98.6
Other public sector debt38.25.56.0
External debt506.073.079.2
Central government445.864.369.8
Multilateral167.124.126.2
CDB100.214.415.7
IDA36.05.25.6
IBRD11.51.71.8
IMF13.01.92.0
Other multilateral6.50.91.0
Official bilateral79.311.412.4
Paris Club17.92.62.8
Belgium7.31.01.1
France4.30.60.7
Russian Federation0.20.00.0
United Kingdom3.30.50.5
United States2.90.40.5
Non-Paris Club61.48.99.6
Kuwait18.52.72.9
Taiwan Province of China20.32.93.2
Trinidad and Tobago17.12.52.7
Other bilateral5.60.80.9
Commercial, total199.428.831.2
Restructured bonds193.527.930.3
Unrestructured bonds5.80.80.9
Central government guaranteed22.03.23.4
Of which
Paris Club6.00.90.9
Other public sector 2/38.25.56.0
Domestic debt187.327.029.3
Central government154.522.324.2
Restructured Bonds68.19.810.7
Unrestructured bonds2.80.40.4
Treasury bills29.14.24.6
Commercial bank loans21.83.13.4
Overdraft13.72.02.1
Domestic arrears3.60.50.6
Compensation claims14.82.12.3
Other0.60.10.1
Central-government guaranteed32.84.75.1
Memorandum item:
Nominal GDP638.5
Sources: Grenada authorities; and Fund staff estimates.

Includes central government liabilities to the National Insurance Scheme.

Includes Petro Caribe-related borrowing

Sources: Grenada authorities; and Fund staff estimates.

Includes central government liabilities to the National Insurance Scheme.

Includes Petro Caribe-related borrowing

Table 6.Grenada: Reviews and Disbursements Under the PRGF Arrangement, 2006–10
DateConditionsDisbursementPercent of QuotaAvailability date
April 2006Board approval of PRGF arrangementSDR 1,560,00013.3April 15, 2006
July 2008Observance of end-June 2006 performance criteria, completion of first review and adopt conditions for second year of the arrangementSDR 2,980,00025.5July 15, 2008
December 2008Observance of end-June 2008 performance criteria and completion of second reviewSDR 2,410,00020.6October 15, 2008
June 2009Observance of end-December 2008 performance criteria, completion of third review, and adopt conditions for third year of the arrangementSDR 3,875,000 1/33.1April 15, 2009
October 2009Observance of end-June 2009 performance criteria and completion of fourth reviewSDR 3,875,000 1/33.1October 15, 2009
April 2010Observance of end-November 2009 performance criteria and completion of fifth reviewSDR 1,680,00014.4February 28, 2010
TotalSDR 16,380,000140.0
Source: Fund staff.

Includes proposed augmentation of 37.5 percent of quota (SDR 4,390,000) phased equally between these two disbursements.

Source: Fund staff.

Includes proposed augmentation of 37.5 percent of quota (SDR 4,390,000) phased equally between these two disbursements.

Table 7.Grenada: Indicators of Capacity to Repay the Fund, 2007–16 1/(In millions of SDRs, unless otherwise indicated)
Projections
2007200820092010201120122013201420152016
Fund obligations based on existing credit1.71.91.20.00.20.40.31.41.41.3
Repurchases and repayments1.51.81.10.00.20.30.31.41.41.2
Charges and interest0.30.10.10.00.00.00.00.00.00.0
Fund obligations based on existing and prospective credit1.71.91.20.10.20.40.42.03.33.2
Repurchases and repayments1.51.81.10.00.20.30.32.03.33.1
Charges and interest0.30.10.10.10.10.10.10.10.10.1
Fund obligations based on existing and prospective credit
In millions of U.S. dollars2.73.11.80.10.40.60.63.25.24.9
In percent of exports of goods and services1.41.71.10.10.20.30.31.21.91.7
In percent of debt service 2/10.510.15.00.51.31.71.25.68.26.6
In percent of GDP0.40.50.30.00.10.10.10.40.60.5
In percent of Imputed Net International Reserves2.43.01.90.10.40.60.63.25.14.8
In percent of quota14.816.510.00.72.13.33.317.428.527.1
Outstanding Fund credit (end of period)
In millions of SDRs4.98.415.116.716.616.316.014.010.77.6
In millions of U.S. dollars7.713.123.526.125.825.324.921.816.711.9
In percent of exports of goods and services4.17.414.615.013.511.910.38.06.14.0
In percent of debt service 2/30.443.164.7100.888.772.350.038.426.215.9
In percent of GDP1.32.13.53.83.53.33.02.51.81.2
In percent of Imputed Net International Reserves6.912.625.029.228.527.125.822.016.511.5
In percent of quota41.571.9128.8143.1141.8139.1136.5119.891.865.1
Net use of Fund credit-1.53.66.71.7-0.2-0.3-0.3-2.0-3.3-3.1
Disbursements0.05.47.81.70.00.00.00.00.00.0
Repayments and Repurchases1.51.81.10.00.20.30.32.03.33.1
Memorandum items:
Exports of goods and services (in millions of US$)188.1176.8160.2173.8191.6213.1240.8273.7275.9293.7
Debt service (in millions of US$) 2/25.230.436.325.929.235.149.857.565.676.3
GDP (in millions of US$)607.9638.5668.8694.4734.6778.6825.1875.3928.5985.0
Imputed Net International Reserves (in millions of US$)110.4104.193.889.490.793.696.599.3101.1102.9
Quota11.711.711.711.711.711.711.711.711.711.7
Source: Fund staff estimates and projections.

Incorporates proposed augmentation of 37.5 percent of quota.

Total debt service including the Fund.

Source: Fund staff estimates and projections.

Incorporates proposed augmentation of 37.5 percent of quota.

Total debt service including the Fund.

Table 8.Grenada: Vulnerability Indicators, 2004-08
2004200520062007Est. 2008
Real sector indicators
Real GDP growth (percent)-5.711.0-2.34.50.3
CPI inflation (period average, in percent)2.33.54.23.98.0
Financial sector indicators
Total capital asset ratio of banks (locally incorporated)14.915.317.515.615.1
Of which: Tier 1 capital10.512.713.213.313.0
Liquid assets/total assets44.337.331.529.224.1
Liquid assets/current liabilities48.240.034.632.326.7
Total loans/total deposits57.666.073.275.980.0
Net liquid assets/total deposits44.235.428.626.419.8
Nonperforming loans/total loans6.05.53.73.53.5
Locally incorporated banks7.16.84.73.43.5
Foreign banks4.43.52.43.53.4
Provisions for loan losses/nonperforming assets81.979.467.457.744.9
Locally incorporated banks63.060.751.548.333.3
Foreign banks127.8134.6114.671.263.0
Gross government claims/total assets11.311.211.611.912.7
FX deposits/total deposits5.67.85.87.76.9
Net foreign currency exposure/capital (locally incorporated banks)221.4138.4101.465.747.1
Contingent liabilities/capital (locally incorporated banks)67.778.772.285.868.2
Ratio of bank’s before-tax profits to average assets (percent)0.50.72.52.11.9
Broad money (percent change, 12-month basis)17.8-1.00.911.08.5
Private sector credit (percent change, 12-month basis)6.89.212.515.110.9
U.S. treasury bill rate (percent per annum)1.43.24.84.51.5
Treasury bill rate (percent per annum) 1/6.06.06.56.56.3
External sector indicators
Exchange rate (per US$, end of period)2.72.72.72.72.7
REER appreciation (percent change on 12-month basis, end of period)-3.55.9-4.60.26.6
Exports of goods (percent change, 12-month basis)-17.6-12.4-1.726.0-19.0
Imports of goods (percent change, 12-month basis)-0.132.1-0.810.63.5
Travel receipts (gross, percent change, 12-month basis)-18.7-5.430.827.7-2.9
Current account balance (percent of GDP)-9.0-31.3-33.4-41.9-42.3
Capital and financial account balance (percent of GDP)24.035.335.240.942.9
Net FDI inflows (percent of GDP)13.912.715.928.725.2
Gross international reserves of the ECCB (in US$ millions)632.4600.8696.0764.5759.0
Gross international reserves in months of current year imports in ECCU countries4.83.93.83.73.5
Gross international reserves to broad money in ECCU countries (percent)20.417.918.618.617.9
Public gross external debt (in US$ million)415.6437.0457.2478.7506.0
Public gross external debt to exports of goods and services (percent)44.853.049.941.944.8
Public gross external interest payments to exports of goods and services (percent)13.76.57.57.28.9
Public gross external amortization payments to exports of goods and services (percent)8.66.04.98.47.4
Public gross external interest payments to fiscal revenue (percent)17.55.16.05.86.2
Public gross external amortization payments to fiscal revenue (percent)11.04.73.96.85.2
Gross external financing requirement (in percent of GDP)12.632.935.043.543.9
(In percent of GDP)
Public sector indicators
Central government overall balance (after grants)-2.60.4-6.4-8.2-5.7
Public and publicly-guaranteed gross external debt88.678.981.078.779.2
Sources: Ministry of Finance; Eastern Caribbean Central Bank; and Fund staff estimates and projections.

Rate on one-year treasury bills

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

Rate on one-year treasury bills

Annex: Summary of Appendices

Fund Relations

Grenada’s outstanding purchases as of end-April 2009 amounted to SDR 8.05 million (68.78 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 September 2009. CARTAC, MCM, FAD, and LEG have provided extensive technical assistance. A safeguards assessment was completed in 2007, and concluded that the ECCB continues to have appropriate control mechanisms in place.

Relations with the World Bank Group20

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 nine active World Bank projects in Grenada for a net commitment of approximately US$48.5 million.

Relations with the Caribbean Development Bank21

Grenada, since Hurricane Ivan in 2004, continues to benefit from special financing from the Caribbean Development Bank (CDB), designed to yield a concessionary grant element of 35 percent. These loans offer longer maturities and grace periods, as well as lower interest rates than those applied in the Bank’s ordinary operations. Recently approved activities include the rockfall and landslip project, institutional strengthening, the school rehabilitation and reconstruction project, and project management training.

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 weaknesses in coverage, timeliness and frequency of data.

Attachment I: Letter of Intent

St. George’s, Grenada

May 19, 2009

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. Strauss-Kahn:

We have made significant progress with our economic program since the second review of our arrangement under the PRGF in December 2008. Implementing the large fiscal adjustment in the second half of 2008 was challenging, but we are as a result better placed to deal with global turbulence. In light of the sharp slowdown in global growth and the continuing global financial crisis, we have decided to review our policy framework for 2009.

The attached Supplementary Memorandum of Economic Policies (SMEP) discusses progress in implementing our PRGF-supported program, and outlines policies, objectives, and macroeconomic framework for 2009 and beyond. It gives priority to mitigating the impact of the global economic slowdown, putting our debt on a sustainable trajectory, undertaking reforms to improve the business environment, and strengthening our capacity for economic and fiscal management.

Reflecting the strong measures taken after our government took office in July 2008, we have met all of our end-December 2008 quantitative performance criteria, and in particular met our target on domestic arrears older than 60 days by a large margin. We were able to reduce our primary deficit excluding grants from 5.1 percent of GDP in the first half of the year to 2.4 percent in the second half. Given the significant downward revision in projected revenues for 2009, we are proposing to revise the end-June 2009 target for the primary balance excluding grants.

Regarding the resolution of Capital Bank, the High Court has not yet acted on our petition for liquidation on November 13, 2008, pending several legal challenges by the bank’s owner. Once the court has ruled on these challenges and on the liquidation petition, we will move rapidly to resolve the bank through liquidation.

We have also made significant progress with other structural reforms. We have announced an introduction date for the VAT of February 1, 2010, which will allow sufficient time for businesses, consumers, and the government to prepare, and we will soon begin our public education campaign. In addition, in January 2009 we established a Debt Management Unit in the Ministry of Finance, which aims at improving the effectiveness of and developing a strategy for our debt management.

We are considering seeking a US$50–80 million (7–12 percent of GDP) concessional loan from the Export-Import Bank of China to build a luxury hotel in a joint venture, although this loan is not accommodated under our program ceiling on bilateral concessional debt. We have given no further consideration to a loan for a marina and port project. We have asked the Paris Club to grant an extension of debt relief for 2009 in line with the debt relief that the Paris Club extended in 2006-08. We have also 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.

Even with our ongoing efforts explained in detail in the attached SMEP, the global downturn is expected to have large adverse effects on economic activity and the external position of Grenada in 2009. To support our adjustment, we request an augmentation of access under the PRGF-supported program of 37.5 percent of quota, corresponding to SDR 4.39 million, to be disbursed at the conclusion of the third and fourth reviews.

The attached SMEP presents our policies for 2009 and beyond. Proposed quantitative performance criteria and indicative targets are indicated in Table 1 of the SMEP, and proposed structural benchmarks 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 third review under the PRGF arrangement and financing assurances review and the release of the associated disbursement in an amount equivalent to SDR 3.875 million.

Table 1.Grenada: Quantitative Performance Criteria and Indicative Targets, 2008-09
2009
End-Dec. 2008End-MarchEnd-JuneEnd-Sept.End-Nov.
Prog.AdjustedActualProg. 1/Prog.Prop.Proposed 1/Proposed
Performance Criteria:(In millions of Eastern Caribbean dollars)
Central government primary balance excluding grants (floor) 2/3/-110.0-110.0-107.5-14.0-28.0-52.5-67.8-77.9
Stock of central government domestic arrears (ceiling)25.025.08.420.015.015.013.512.5
(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) 2/4.04.00.04.04.04.04.04.0
Stock of external short term debt (ceiling) 4/0.00.00.00.00.00.00.00.0
Contracting and guaranteeing of bilateral concessional external debt by the central government with maturity of at least one year (ceiling) 2/5/0.00.00.00.00.00.00.00.0
Central government or guaranteed external arrears accumulation (ceiling) 4/0.00.00.00.00.00.00.00.0
Indicative Target:(In millions of Eastern Caribbean dollars)
Change in net credit of the banking system to the public sector (ceiling) 2/3/24.045.016.90.00.026.931.935.2

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
Third Review
Reorganize or initiate liquidation of Capital BankNovember 2008Performance criterion. MetTo increase confidence in the financial system by having a clear bank resolution strategy
Submit to Parliament the Investment Act, the amended Income Tax Act, and repeal of tax incentivesDecember 2008Benchmark. Not metTo improve the investment climate and reform the tax concessions regime
Complete the Country Poverty AssessmentDecember 2008Benchmark. Not metTo strengthen the ability of the government to develop effective and well-targeted poverty reduction measures
Establish a Debt Management Unit at the Ministry of FinanceFebruary 2009Benchmark. MetTo enable more effective debt management including better monitoring of payment obligations and effective debt sustainability analysis
Submit new VAT and Excise Bills to ParliamentApril 2009Benchmark. Partially metTo increase the efficiency and effectiveness of revenue collection
Fourth Review
Recruit and begin training staff and adopt transitional procedures for bonded warehousesMay 2009BenchmarkTo ensure smooth implementation of the VAT
Submit new Excise Bill to ParliamentAugust 2009Proposed benchmarkTo increase the efficiency and effectiveness of revenue collection
Complete the Country Poverty AssessmentAugust 2009Proposed benchmarkTo strengthen the ability of the government to develop effective and well-targeted poverty reduction measures
Develop and begin implementing a customs Fraud Control PlanAugust 2009BenchmarkTo enhance customs administration and revenue collection for sustainable financing of the budget
Establish a Public Procurement AuthoritySeptember 2009BenchmarkTo enhance transparency and governance in procurement and facilitate donor monitoring
Appoint a separate Registrar of CompaniesOctober 2009Proposed benchmarkTo further improve the investment climate

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 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 faithfully,

________/s/________

Honorable V. Nazim Burke

Minister for Finance

Attachment II: Supplementary Memorandum of Economic Policies

1. Grenada’s economic strategy is focused on coping with external shocks while laying the groundwork for broad-based economic growth. Achieving these goals will require implementing policies to address the impact of the global economic slowdown and financial spillovers; putting public finances and debt 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 sets forth these economic objectives in greater detail and our plan for achieving them.

I. Recent Developments and Outlook

2. Economic growth has decelerated sharply reflecting the global slowdown. Real GDP growth slowed to 0.3 percent in 2008, from 4.5 percent in 2007, reflecting weakening tourism receipts and FDI. Inflation fell to 2.8 percent by March 2009, after peaking at 9.3 percent in July 2008, reflecting the passthrough of declining world fuel and food prices.

3. External conditions are placing pressure on the balance of payments. Stayover arrivals declined by 5 percent in 2008 after strong Cricket World Cup-related performance in 2007, and the decline is expected to be more pronounced in 2009. Weaker tourism receipts and FDI turned the overall balance of payments into deficit in 2008.

4. Looking forward, real GDP is now expected to decline by 0.7 percent in 2009, as a result of a deeper and more prolonged global slowdown. Stayover arrivals are expected to decline further, by about 10 percent, and private remittances are also expected to decline. The current account balance will narrow sharply as tourism receipts and FDI continue to fall, while the overall balance is projected to deteriorate further.

5. The banking sector, which is dominated by subsidiaries of international banks, has continued to remain resilient notwithstanding the global financial turmoil. Private sector credit growth slowed to 9.3 percent at end-February, reflecting the weaker economic activity. As at end-December 2008, the ratio of nonperforming loans to total loans remained low at 3.5 percent. However, banks report increases in the ratio in 2009, as some nonresident and resident borrowers are experiencing repayment difficulties.

6. The financial difficulties of the Trinidad and Tobago-based CL Financial Group are creating significant uncertainties. The group has a number of linkages to the Grenadian economy, significantly through the presence of insurance subsidiaries which have been offering deposit-like products. Available information suggests that Grenada does not have any direct exposure to the Stanford Financial Group.

II. Program Performance

7. We met all of our end-2008 quantitative program targets. We were able to reduce our primary deficit excluding grants (measured above-the-line) from EC$88 million (5.1 percent of GDP) in the first half of the year to EC$41 million (2.4 percent of GDP) in the second half. The improvement was a reflection of the strong measures we put in place in the second half of 2008, including a finance circular issued in September 2008 to limit capital expenditure, bringing forward the date after which expenditure commitments for nonessential expenditures could not be made, and reinstating the EC$3 per gallon fuel tax and the automatic fuel price mechanism in October 2008.

  • Capital expenditure of EC$215 million (12.5 percent of GDP) in 2008 was higher than the programmed EC$184 million (10.7 percent of GDP). Nevertheless, we were able to reduce capital expenditure by 3 percentage points of GDP in the second half of the year.
  • We achieved a current surplus of 2.4 percent of GDP (above the line) for 2008, higher than the program target of 1.8 percent of GDP. The second half-year revenue outturn exceeded projections by 0.6 percent of GDP.
  • The overall balance narrowed sharply (below the line) in the second half of the year. We lowered expenditure arrears from EC$33 million (1.9 percent of GDP) at end-June 2008 to EC$9.7 million (0.6 percent of GDP) at end-2008. We also rolled over late principal payments on treasury bills. Together, this reduced arrears older than 60 days to only EC$8.4 million (0.5 percent of GDP), meeting this performance criterion by a significant margin.

8. We have made significant progress with structural reforms, but the implementation of some of our structural benchmarks for the third review will be delayed.

  • We petitioned the High Court for liquidation of Capital Bank on November 13, 2008 (performance criterion), acting on the recommendation of the receiver and following consultation with the ECCB. However, the High Court has not yet acted on our petition pending several legal challenges by the bank’s owner.
  • We established a Debt Management Unit in the Ministry of Finance in January 2009 (structural benchmark), which we expect will improve the quality of our debt management and our capacity to critically assess proposals for further borrowing.
  • We have announced an introduction date for the VAT of February 1, 2010. We have set up all implementation committees and finalized policy issues, and are beginning the public education campaign, and working on updating the tax administration information system. We submitted the VAT Bill to Parliament in April 2009, and expect to submit the new Excise Bill in August 2009 (proposed structural benchmark).
  • The Office of Private Sector Development has spearheaded the work of a multi-sectoral Investment Policy Review Committee on the new draft Investment Act. The IMF Legal Department and the International Finance Corporation (IFC) provided technical assistance on the legislation, which will provide a transparent and level regime for domestic and foreign investors and replace tax holidays with investment allowances. We plan to submit the new Investment Act, the amended Income Tax Act, and repeal of tax incentives to Parliament by end-May 2009 (structural benchmark).
  • As a result of delays in completing the technical work and report compilation, we are proposing to push back the expected completion date for the Country Poverty Assessment until August 2009 (proposed structural benchmark).

III. Policies for 2009

9. We remain committed to strong, sound economic and fiscal management. Our policy framework is aimed at reducing our high public debt levels, primarily through fiscal consolidation. Addressing the adverse effects of the global economic slowdown is a near-term priority. Enhancing the business and investment environment, in partnership with the private sector, is a key objective. A major restructuring in the Ministry of Finance to support these objectives is underway, which has included establishment of a Waste Reduction Unit, a Division of Economic Planning and Management, and, as noted above a Debt Management Unit and an Office of Private Sector Development.

10. To address the impact of the global slowdown on our economy, we will accelerate capital spending programs that provide the greatest stimulus to economic activity and will undertake well-targeted spending to protect vulnerable groups. A set of priority projects, approved by Cabinet, has been selected, based on the criteria of highest employment generation potential, equitable geographic distribution, economic visibility to boost confidence and availability of funding. However, given the more constrained financing outlook, our revised target for capital expenditure will be EC$160 million (8.9 percent of GDP). The public assistance program will be expanded, and a new road maintenance and debushing program (EC$4 million), which will provide a direct safety net for poor households, will be implemented in August and December 2009. Other recurrent expenditure would remain within budgeted levels.

11. We are considering special temporary measures to help the tourism sector weather the adverse external shock. This could include an additional allocation of EC$10 million to the Ministry of Tourism for marketing and airline support, and would be partly offset by expenditure savings elsewhere. We are also considering some temporary reductions in taxes on hotels’ food imports, which would have a limited fiscal impact.

12. Total revenue and grants for 2009 are now projected to be lower than budgeted as a result of the changed global environment. The sharp decline in imports has already reduced revenue from import-related taxes. In addition, PetroCaribe grants are projected to fall sharply in 2009, reflecting lower world fuel prices, the lower share of the fuel import bill which is financed concessionally, and our decision to transfer 35 percent rather than 65 percent of the amounts financed to the budget as grants.

13. To achieve our fiscal objectives for 2009, we plan to undertake the following fiscal measures:

  • Maintaining the specific fuel tax at EC$3 per gallon and continuing application of the automatic fuel price adjustment mechanism.
  • Intensifying the successful program of collecting tax and nontax arrears and enhancing use of tax enforcement measures including garnishing income and seizing assets, following the completion of the tax amnesty, which yielded EC$7.5 million (0.4 percent of GDP). The tax amnesty was extended from end-March to end-April only for taxpayers who had already applied by the end of March. We have also reestablished the Tax Tribunal, a specialized court to hear tax cases.
  • Freezing wages for public service workers in 2009, except for the police, for whom an agreement had been completed in 2008.
  • Targeting capital expenditure of EC$160 million (8.9 percent of GDP), and minimizing use of special warrants. Capital spending will, however, be slightly frontloaded in the first half of the year, in order to accelerate the stimulus to economic activity.
  • Reducing spending on goods and services to EC$74 million (4.1 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.
  • Reviewing eligibility for public assistance, while increasing the monthly transfer from EC$150 to EC$200 per month and accommodating increased demand for assistance in the difficult economic environment. This would entail a net increase in transfers and subsidies of EC$2 million (0.1 percent of GDP).

14. Nevertheless, given the significant downward revision in projected revenues, it will not be possible to meet our target for end-June 2009 through deeper cuts in capital expenditure. Further cuts would jeopardize our medium-term growth objectives and the social consensus for reform. Therefore, we propose to revise the target for the primary deficit (excluding grants) for end-June 2009. The targeted deficit would be increased from EC$28 million (1.6 percent of GDP) to EC$53 million (2.9 percent of GDP). We are committed to meeting our revised program target and will take offsetting measures as needed in case of further shortfalls in revenue. We are also proposing an end-November 2009 target of EC$78 million (4.3 percent of GDP) in line with this framework.

15. We plan to keep the stock of domestic arrears older than 60 days close to the low level achieved at end-2008. These arrears declined from EC$29 million (1.7 percent of GDP) at end-September 2008 to EC$8.4 million (0.5 percent of GDP) at end-2008.

16. We have decided to increase the frequency of adjustments in retail fuel prices from an eight-week to a four-week cycle to reduce the magnitude of each adjustment. It will also limit periods of margin losses or gains by fuel importers which are ultimately borne by the budget. We have cleared arrears to fuel importers resulting from incomplete passthrough of world fuel prices in 2007-08 through an agreement with these importers under which we remitted back 50 percent of the fuel tax to reduce these claims. We do not expect to accumulate any further arrears to importers through consistent use of the automatic fuel price mechanism.

17. Our fiscal program for 2009 is fully financed. Divestment proceeds from the Four Seasons hotel project, which would have been the main source of financing projected for 2009, will not be received this year in the adverse global environment for financing and tourism. We have requested that the Paris Club extend the debt relief that it extended in 2006-08 through 2009. We have also approached the World Bank and Caribbean Development Bank for budget support during 2009–10 seeking a high level of concessionality to support our adjustment to the external shock to tourism and foreign direct investment. In addition, we are negotiating an EC$20 million percent of GDP) loan from a consortium of commercial banks. We also intend to limit recourse to expensive sources of financing, such as the overdraft facility. We now expect to reach the 60 percent debt-to-GDP target by 2024, four years after the ECCU’s 2020 benchmark for the region.

18. 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.

19. We are laying the foundation for a broadening of the tax base beginning in 2010. The VAT, which will be introduced in February 2010, is a broader and more efficient tax and, as in other ECCU countries, we would expect to see revenue gains of 0.5 to 1 percent of GDP. The VAT will have a 15 percent rate for goods and services, with a limited list of basic food items and chronic disease drugs zero-rated, and a 10 percent rate for hotel accommodation. We are also moving toward introduction of a market-based property tax. We completed the cadastral survey in December 2008, except in Carriacou, as a basis for reassessing the value of property. The new valuations would be applied in January 2011.

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

  • We will develop and 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.
  • A summary of key findings of the Country Poverty Assessment (CPA) was submitted to Cabinet in May 2009, and we expect to complete the assessment in August 2009. The CPA will provide information to help improve targeting of social programs. We will build on this assessment, together with our earlier National Development Strategy, to finalize a full PRSP by November 2009.
  • Preparations to introduce a VAT are proceeding well. We have already begun efforts on public awareness and education. We plan to recruit and begin training staff and to adopt transitional procedures for bonded warehouses by May 2009. CARTAC is providing technical assistance on implementation, drawing on the successful experiences in other ECCU countries.
  • We are developing an action plan to improve Doing Business Indicators, with technical assistance from the World Bank, to improve the business and investment environment. Five priority areas have been identified, and objectives determined: starting a business, trading across borders, paying taxes, registering property and enforcement of contracts. Appointment of a separate Registrar of Companies, an important component of a one-stop shop for business start-up, has been identified from the Action Plan as a structural benchmark for the fourth review (October 2009).
  • We plan to establish a Public Procurement Authority by September 2009 as mandated by Parliament, 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, Prevention of Corruption, Public Finance Management, Audit, and Public Procurement and Contract Administration Acts. 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.

21. The resolution of Capital Bank will proceed once the High Court has ruled on the legal challenges by the bank’s owner. We petitioned the High Court for liquidation on November 13, 2008, following consultation with the ECCB. We have stated publicly that we do not intend to compensate depositors. We intend to proceed directly to liquidation as soon as the court permits.

22. We are considering seeking a US$50–80 million (7–12 percent of GDP) concessional loan from the Export-Import Bank of China to build a luxury hotel in a joint venture with private investors. Currently this loan is not accommodated under our program ceiling on bilateral concessional debt through the end of 2009. We may propose to revise upward our program’s ceiling on bilateral concessional borrowing for a project that does not jeopardize debt sustainability and has significant net positive benefits. We have not given further consideration to a loan for a marina and port project.

23. We are prudently managing the concessional financing from PetroCaribe. In January 2009, we increased the share of PetroCaribe financing set aside in the special account to ensure sufficient funds for repayment from 35 to 65 percent, with the remainder transferred to the budget as grants. PetroCaribe Grenada Ltd. will begin repaying the long-term debt obligations to PDVSA in October 2009 when the two-year grace period on the first borrowing expires.

24. We are continuing best efforts to conclude bilateral agreements with Paris Club (the Russian Federation) and non-Paris Club creditors. We will continue to seek an out-of-court settlement with the Export-Import Bank of Taiwan Province of China, and pursue 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 million arrears on unrestructured domestic debt to the nonbank public incurred in June 2007 and there are EC$1.7 million arrears on 90-day treasury bills held by domestic commercial banks.

Program Monitoring

25. We are improving our capability to monitor economic developments and program performance. We have designated a Ministry of Finance official as the PRGF program coordinator, 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.

IV. Other Issues

Reducing Financial Sector and Natural Disaster Vulnerabilities

26. We intend to continue monitoring the impact of developments with the troubled Trinidad and Tobago-based CL Financial Group. We are determining the economy’s exposure to the subsidiaries Clico Life Insurance and British American Insurance. An appropriate regional approach is being taken to assessing the liquidity and solvency positions of the companies, and to developing a resolution plan that will contribute to maintaining confidence in the financial system while limiting the costs for the governments.

27. We are continuing with efforts to strengthen nonbank financial sector supervision by the Grenada Authority for the Regulation of Financial Institutions (GARFIN). We are building its capacity while 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. We submitted the Money Services and Insurance Acts to Parliament in March 2009, and will submit the Cooperative Societies Act in June 2009.

28. We will continue to participate 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. The CDB has agreed to provide support for the remaining half of the premium payments for the year beginning June 2009.

Fiscal transparency

29. We are continuing our efforts to improve fiscal transparency. We will begin disseminating to the public quarterly information with a lag of one quarter on the overall fiscal situation and gross financing needs starting May 2009 and publishing information on public enterprise finances. In line with the new Public Finance Management Act of 2007, we will require public enterprises to submit audited financial statements within four months after the close of the financial year. We will continue to publish newly granted or extended tax concessions on a quarterly basis.

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 TMUs of June 20, November 26, and December 9, 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 SMEP, will be interpreted, except as follows:

Table 1.Programmed Disbursements of Concessional Loans and Grants, 2009(In millions of Eastern Caribbean dollars, cumulative)
2000
End-Mar.

Prel.
End-June

Prog.
End-Sept.

Prog.
End-Nov.

Prog.
Concessional loans2.09.113.632.8
Grants disbursements3.416.925.342.7
Divestment proceeds0.01.21.82.2

The end-June and end-November 2009 targets for the primary balance excluding grants and for net credit to the public sector will be revised downward and upward respectively by the amount of support to the insurance sector, with a maximum adjustment of EC$5 million.

Substitute Table 1 in the TMU with the following table:

1

The authorities estimate that the unemployment rate was around 25 percent in 2008 (based on preliminary data from the Country Poverty Assessment), and they project that it will rise significantly in 2009.

2

There was a mini-run on Republic Bank’s Carriacou branch after Trinidad and Tobago announced the intervention of CL Financial Group, but the situation quickly stabilized.

3

See Eastern Caribbean Currency Union—Staff Report for the 2009 Discussion on Common Policies of Member Countries, (IMF Country Report No. 09/175).

4

The sustained growth of the offshore university and the agriculture sector are expected to support output growth, though the weights of those sectors in real GDP are relatively small.

5

The target is measured below the line; the improvement measured above the line was not as large.

6

LEG has provided technical assistance on drafting.

7

Refraining from issuing further tax holidays was a benchmark for the first review, which was missed.

8

Staff had previously recommended that the state-owned company PetroCaribe Grenada Ltd. increase the share of PetroCaribe financing set aside in a special account to pay debt service; the larger share now being set aside will be more than sufficient. The mission noted the need to limit government exposure of the special account.

9

Based on preliminary data, capital spending in the first quarter slowed sharply to EC$23 million or EC$92 million (5.1 percent of GDP) at an annual rate, reflecting the tight financing situation.

10

Together with the World Bank, the authorities are developing an aggregate measure of social spending. Preliminary Fund staff calculations indicate that recurrent social spending in 2009 (including transfers to households, education, health, housing, community development, and youth programs) is expected to remain around the same share of GDP as in 2008, while social sector capital project spending will decline, in line with the overall lower capital expenditure as a share of GDP and reflecting the authorities’ efforts to improve the efficiency of social spending.

11

A recent communiqué of the Organization of the Eastern Caribbean States (OECS) and the Eastern Caribbean Central Bank (ECCB) Monetary Council supported the introduction of measures to provide short-term relief. Grenada may face pressure to match incentives provided by its regional competitors.

12

The tax amnesty was extended from end-March to end–April only for taxpayers who had already applied by the end of March. It has yielded EC$7.5 million, nearly EC$9 million less than targeted, although the amount collected may increase. The government has also reestablished the Tax Tribunal, a court specialized in hearing tax issues.

13

A new public sector wage agreement for 2009–11 had been due for negotiation.

14

An end-November target for the performance criterion will allow sufficient time to complete the fifth review before the end of the PRGF arrangement on April 16, 2010.

15

The fiscal framework assumes that during 2009–10, Grenada will receive US$12 million in budgetary support from the CDB and US$8 million from the World Bank.

16

The legal and regulatory framework to facilitate a PPP would need to be enhanced. The government is not actively considering a possible loan to build a marina and port.

17

The ECCU members’ joint contribution to the Fund would be US$10 million. Regional leaders, together with the ECCB, are working out the modalities for this contribution. The program incorporates an adjustor on the primary fiscal balance and net credit targets for potential insurance sector support.

18

The remainder of the gap would be filled by possible reschedulings from the Paris Club and Taiwan Province of China.

19

See Press Release No. 09/138.

20

Adapted from text prepared by World Bank staff in April 2009.

21

Adapted from text prepared by Caribbean Development Bank staff in April 2009.

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