Statement by Ms. Louise Levonian, Executive Director and Mr. Mike Sylvester, Advisor June 12, 2019

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Grenada

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Grenada

Our Grenadian authorities are committed to delivering robust, inclusive, and sustained growth. They welcome the assessment of recent economic developments within the context of the 2019 Article IV Consultation, which showed further progress toward realizing this goal. They remain cognizant of the many development challenges confronting Grenada related to its small size, openness, narrow economic base, and high susceptibility to natural disasters and climate change. In this context, our authorities reiterate their commitment to implement prudent macroeconomic policies and reforms to further advance their development agenda. They highly value the Fund’s continued engagement and technical assistance and look forward to their constructive engagement in the future.

Recent Developments, Outlook, and Policies

Real GDP and Inflation

Economic activity in Grenada accelerated in 2018 and unemployment declined further. Real GDP expanded by almost 5 percent last year on the back of strong tourism and construction activities, buttressed by favorable external conditions and dividends from past reforms. This latest growth performance means that Grenada’s economy has grown robustly at an average of 5 ½ percent since 2014 and remains one of the fastest growing economies in the Caribbean region. There was further progress in reducing unemployment, with the rate falling from 23 ½ percent in 2017 to 21 ¾ percent by mid-2018.

Our authorities broadly share staff’s growth outlook but are slightly more optimistic. Staff projects growth to moderate toward potential over the medium term, with risks, on balance, tilted to the downside. While our authorities anticipate some moderation in growth over the medium term, they are slightly more optimistic than staff and foresee a higher growth trajectory on the basis of ongoing and planned public and private sector investments.

Inflation is expected to remain low and stable. For the second year in a row, the overall change in the consumer price index (period average) remained under 1.0 percent following a pickup in 2016. Going forward, inflation is expected to average around 1.9 percent per annum.

To further support growth and reduce unemployment, our authorities remain committed to accelerating structural reforms. In this regard, they will intensify efforts to further improve the business climate, boost labor market productivity, and support diversification and rural development. Our authorities’ reform agenda will be further informed by the forthcoming 2020–35 Development Plan, which is being developed with broad stakeholder involvement.

Fiscal and Debt

Grenada’s fiscal position has further strengthened under its fiscal responsibility framework. The overall surplus rose from 3.0 of GDP in 2017 to 4.8 percent of GDP in 2018, reflecting a combination of strong revenue performance and expenditure restraint. The strengthened fiscal position further helped to reduce debt vulnerabilities. Public sector debt, excluding non-guaranteed debt of SOEs and the debt of Petrocaribe, fell from 70 to 63 ½ percent of GDP in 2018 and is on track to reach the FRL debt target of 55 percent of GDP by 2020 and the Eastern Caribbean Currency Union (ECCU) debt target of 60 percent of GDP this year, well ahead of the 2030 deadline. Our authorities will continue to reach out to the three bilateral creditors with a view to regularizing the remaining 1.6 percent of GDP in outstanding debt arrears.

Our authorities are committed to fiscal and debt sustainability and underscore the importance of the Fiscal Responsibility Law (FRL) in continuing to guide fiscal policy. Grenada’s rules-based fiscal framework provides an important anchor for sound fiscal policy and has contributed to sustained debt reduction. Our authorities will continue to evaluate all spending decisions, including those related to pension and health care reform, within this framework. Having said that, our authorities recognize the need to strengthen the FRL to support the closing of critical infrastructure and resilience gaps, while at the same time, reinforcing fiscal sustainability. In this context, they are highly appreciative of the Fund’s recent TA on strengthening the FRL, which should help inform modifications to the current framework.

Our authorities concur with staff’s assessment on the need for further fiscal reforms to anchor improvements in government efficiency, implementation capacity, and policy inclusiveness. This is critical to ensure that available fiscal space is efficiently utilized to support growth and resilience building. Accordingly, our authorities will redouble their efforts to implement the Public Sector Modernization Strategy, strengthen institutional capacity to implement projects, further improve the oversight and management of SOEs, and better target social assistance, among other key areas.

Financial Sector

The financial sector has seen further strengthening but warrants close monitoring. Our authorities take positive note of staff’s assessment that financial soundness indicators, such as capital adequacy, asset quality, and provisioning, continue to improve. Also, they welcome the positive turnaround in private sector credit, which is essential to support growth. At the same time, they are aware that further strengthening of the regulatory and supervisory framework is necessary to safeguard financial sector stability. They concur with staff on the need to closely monitor potential risks associated with the growing property market and the rapid expansion of credit union lending as well as concentration risks from Scotiabank’s decision to sell some its banking operations across the Caribbean.

Our authorities welcome the Fund’s continued support in helping its members address the risk of the withdrawal of correspondent banking relationships (CBRs). Loss of CBRs remains a major concern as the realization of this risk could be very disruptive and damaging to trade and financial flows. Our authorities continue to collaborate with the Eastern Caribbean Central Bank (ECCB) and other institutions to further strengthen their supervisory and regulatory frameworks, including the AML/CFT regime, to help mitigate this risk. They urge the Fund to remain engaged on this important issue. Relatedly, our authorities welcome the removal of Grenada from the EU’s gray list as a non-cooperative tax jurisdiction and remain committed to complying with all international standards on taxation. However, they expressed concerns that the recurring and incremental nature of such requirements are burdensome and serve to divert scarce financial and human resources from other critical priorities.

Building Resilience

Building resilience to natural disasters and climate change is a top priority for our authorities. Alongside efforts to create fiscal space, they currently save a portion of their Citizenship-By-Investment (CBI) proceeds for disaster-related impacts and have drafted regulations for the operationalization of a contingency fund for natural disasters. Also, they have been successful in incorporating disaster relief provisions (“hurricane clauses”) in some of their loan instruments and have continuously purchased coverage under the regional catastrophic insurance pool facility, CCRIF SPC. Furthermore, our authorities have been upscaling investments in climate-resilient infrastructure with support from donors. Additionally, to coordinate efforts around building resilience, they have established a dedicated Ministry of Climate Resilience.

Greater donor support is essential for bolstering resilience efforts. Our authorities broadly support the assessment and recommendations of the Climate Change Policy Assessment (CCPA). They particularly welcome the conclusion that they have been making significant strides to counter climate change but meeting the daunting challenges will require domestic policy actions and sustained international support. Significant donor support is needed to complement domestic efforts, given Grenada’s small size and limited resources. Our authorities have been making deliberate efforts to mobilize resources, including climate funds, but continue to face significant hurdles. They continue to call on the international community for support in unlocking grants, concessionary loans, and technical support, to scale up ex-ante resilience building.

Going forward, our authorities will continue to press ahead with efforts to realize the benefits of a more resilient economy. To support their efforts, they welcome the increased focus by the Fund, including staff’s recent analytical work on building ex-ante resilience in the ECCU. They further welcome the recent Staff Paper on building resilience in developing countries vulnerable to large natural disasters, which recommended the development of a three-pillar disaster resilience strategy (DRS) covering structural resilience, financial resilience, and ex-post disaster/social resilience. They are highly appreciative of the tremendous effort of the Fund and the Bank in undertaking Grenada’s CCPA. They are also pleased to be selected as one of the pilots for the DRS and look forward to the next steps. They look forward to greater collaboration between the Fund and other institutions to support resilience building efforts in members states vulnerable to natural disasters.

Conclusion

Our authorities are determined to build on the current momentum of strong economic growth and fiscal prudence. They are committed to sound macroeconomic management and structural reforms. They will continue to highly value the support of the Fund and other partners in supporting their development priorities.