Statement by Thomas A. Bernes, Executive Director for Grenada Executive Board Meeting

Grenada's economic performance in recent years has been positive owing to the government's strategy of focusing on promoting private investment. The IMF staff commends the government for its commitment to maintaining fiscal prudence, and pursuing reforms aimed at creating an environment that is conducive for foreign investment. Addressing the revenue weakness by initiating a review of exemptions is required. One of the weaker aspects of fiscal policy in Grenada is debt management. Available indicators appear to point to a broadly sound domestic banking system.

Abstract

Grenada's economic performance in recent years has been positive owing to the government's strategy of focusing on promoting private investment. The IMF staff commends the government for its commitment to maintaining fiscal prudence, and pursuing reforms aimed at creating an environment that is conducive for foreign investment. Addressing the revenue weakness by initiating a review of exemptions is required. One of the weaker aspects of fiscal policy in Grenada is debt management. Available indicators appear to point to a broadly sound domestic banking system.

Overview

1. My Grenadian authorities are very appreciative of the opportunity for consultations with staff, are in broad agreement with their analysis and findings and found their advice to be timely and beneficial. Real growth has been among the strongest in the sub-region, particularly over the last four years, and the unemployment rate has declined by about 6 percentage points to 11 percent. Given Grenada's small size and population of just 100,000, and vulnerability to external shocks, my authorities are focused on the need for structural reform to develop a business-friendly environment. This will require that capacity be strengthened and it is heartening that the staff report suggests options for doing so, taking into consideration the unique circumstances of the island.

Background

2. Grenada is a significant producer of spices (33 percent of the world's production) and thus was not as vulnerable as other islands in the sub-region to the loss of preferential markets in Europe for bananas and sugar. Nevertheless, the authorities set about restructuring the banana industry when it became clear that preferential markets were eroding. Grenada is now the smallest producer of bananas in the sub-region. Its very small sugar cane crop is used for rum production. A successful attempt was made to diversify into services, including offshore financial services, and quick action has been taken to develop the regulatory and supervisory framework, but this will be an on-going process.

3. During 2000, the Grenadian economy continued to exhibit strong growth and exports of spices benefited from higher prices. But recently there has been a downturn in tourism which partly reflects the recent loss of some air links and the re-routing of a major cruise line. There has also been a more general slowdown in the sub-region due to the weaker international outlook as well as some slowing of the offshore financial services business.

4. Fiscal management remained tight in 2000 and there have been ongoing efforts to strengthen tax administration. Thus, there was growth in property tax and corporation tax, reflecting the growth of the economy. The surplus on the current account increased from 4.8 percent to 6 percent but the overall deficit remained just over 3 percent of GDP reflecting higher spending on infrastructure. During the first quarter of 2001 some categories of revenue slowed and the authorities responded by restraining recurrent expenditure and expenditure on a few capital items not related to capital projects.

Policy Issues

5. The main challenge of the authorities is to sustain and build on the achievements of the past. There are three pillars of the broad economic strategy: a) fiscal consolidation to create leverage for infrastructure development and poverty alleviation; b) structural reform to strengthen the environment for private investment so that unemployment can be reduced, and c) capacity building, with technical assistance as necessary.

Fiscal Policy

6. Fiscal management improved during 2000 with a current account surplus of 6 percent of GDP and an overall fiscal deficit of 3 percent of GDP. There are, however, some downside risks to tax buoyancy in the medium term, particularly if the slowdown in growth and revenue becomes more entrenched. There are also indications that growth in the sub-region will slow in 2001. It will therefore be important to strengthen the revenue base. The authorities are keen to implement a value-added tax but this will require technical assistance and should be implemented as part of a regional approach.

7. The authorities are aware of the need to develop a more streamlined and transparent system of concessions (allowances) but this is a complex undertaking which will require technical assistance. The current framework extends to utilities, educational, religious and other establishments. The incentive framework is quite generous and rolling it back is also hinged on the need to harmonise incentives in the sub-region. An important starting point lies in reducing the allowance on vehicles but allowances for capital development will be retained.

8. The authorities are keen to reform the civil service subject to the necessary technical assistance. A strategy of outsourcing some services has already been put in place and this has facilitated a reduction in public sector employment. Some workers have formed cooperatives providing services not only to government but to the private sector as well. The wages bill has fallen significantly as a result but wage rates are compressed and this makes it difficult for the public sector to attract or retain trained professionals.

9. The emphasis on private sector development which creates employment and takes pressure off the Government has served Grenada well and will be continued. It is also planned to stimulate small business development, agricultural diversification, and agro-processing using inputs from local farmers. It is important to develop secondary products from the vital nutmeg sector and continued foreign inflows will be needed to finance investment projects, civil service reform, and upgrade capacity.

10. The authorities are keen to improve social conditions and alleviate poverty. However, the study by the CDB in 1998 estimated poverty to be approximately 32 percent. This figure appears overstated given the declining trend in unemployment over the past five years (from 26.7 percent in 1994 to 11 percent at the end of 2000). There is a need for a mechanism to regularly monitor the poverty situation in Grenada.

11. The rate of implementation of the PSIP significantly improved in 2000 with a rate of 72 percent up from 58 percent in the previous year. This accelerated rate of implementation had a very positive impact on economic activity. The economy grew by 6 percent.

Debt management

12. The external public debt at 28 percent is manageable and no new commercial debt has been contracted thus far for 2001. The authorities are committed to addressing the administrative, technical, and statistical aspects of debt management. The main problem is systemic and includes the difficulty of retaining trained personnel. Thus, a two-week ECCB course for technicians will be conducted in July to upgrade capacity in the use of the CSDRMS debt management software. In addition, a working group has been created in the Ministry of Finance and efforts are on-going to update the debt registry with inclusion of data from statutory corporations.

Tourism

13. In the medium term it is planned to implement strategies to improve nature, sports, and events tourism and educate school children and the general population to the sector's importance. The vital tourism product also requires attention to urban renewal, upgrading of infrastructure and the quality of attractions and strengthening of the link between tourism and the agricultural sector. But the loss of airlift and cruise capacity is a major setback. The new National Indicative Programme with the European Union will focus on tourism, specifically, training and infrastructural development.

Divestment & Commercialisation

14. The authorities remain committed to the divestment or commercialisation of public assets. In May 2001, an agreement was signed for the privatization of the Sugar Factory. It is considered prudent to commercialise rather than privatise entities such as the hospital, community college, and printery. There have been unexpected delays related to legal and administrative hurdles, the negotiations process, and difficulties in finding willing buyers for some public assets.

Financial Sector

15. The banking system is broadly sound under the supervision of the East Caribbean Central Bank (ECCB) and the authorities are aware of the need to strengthen weaknesses in monitoring and supervision of all commercial banks. Also assistance is being obtained from the Caribbean Development Bank (CDB) to restructure the development bank.

16. The authorities are upgrading capacity to monitor and supervise the offshore financial sector with the close cooperation of the ECCB and the Fund. A mission from the Fund's MAE department visited Grenada in January 2001 to assist the authorities in preparing a self-assessment and Price Waterhouse has recently been commissioned to perform audits of offshore entities.

17. The capacity of the Grenada International Financial Services Agency (GIFSA) has been strengthened with the increase in staff from 5 to 20. The due diligence process has been revamped and thus far this year licenses of 23 offshore banks and licenses of 2 offshore trust companies have been revoked. There has also been significant progress in developing statistics on licensing of offshore entities. GIFSA participated in the financial self-assessment workshop at the ECCB in March and also attends on-going meetings of CFATF.

18. There is also an on-going effort to upgrade relevant legislation. In 2001 the Mutual Legal Assistance in Criminal Matters Treaty (Government of Grenada and Government of the United States of America), and the Extradition Treaty (Government of Grenada and Government of the USA) were enacted to document understandings previously negotiated. In addition, an amendment of the International Business Companies Act (being drafted) will impose constraints on the disposal of bearer shares. An amendment to the Offshore Banking Act last month will restrict GIFSA from promoting offshore business so that it can concentrate on its core supervisory responsibility.

19. On June 12, 2001, the authorities issued a comprehensive set of anti-money laundering guidelines at all financial institutions including commercial banks, offshore banks, insurance companies, credit unions, and money transfer agencies.

20. The authorities accept in principle the desirability of integrated supervision of onshore and offshore financial institutions. In this regard there will continue to be close collaboration between the revamped GIFSA and the ECCB. However, the modalities are still being worked out subject to consideration of capacity and the evolution of sub-regional arrangements.

Technical Assistance

21. The authorities have been engaged in upgrading weaknesses in the statistical base and recently, Grenada completed requirements for participation in the Fund's General Data Dissemination System (GDDS). There is also an ongoing programme of technical assistance from the Caribbean Development Bank (CDB) to facilitate institutional strengthening in various government agencies, training for small and micro enterprises, project preparation and pre-feasibility studies, and consultancy services for the small hotels sector. The authorities also want to train professionals to support the privatisation process (mainly in IT and Accounts). The new Caribbean Technical Assistance Center (CARTAC) will also be another avenue through which technical assistance can be provided.

The Road Ahead

22. Grenada has benefited from sound macroeconomic policies and its commitment to structural reform to facilitate a private sector-led growth path. It is important to sustain this momentum in order to provide resources to alleviate poverty and reduce unemployment. In this regard, Grenada continues to benefit from the fixed exchange rate as an ECCB member. Other sub-regional approaches, particularly in the areas of health, VAT, harmonisation of fiscal incentives, trade policy, and financial supervision will continue to be explored.