Abstract
Request for Disbursement Under the Rapid Credit Facility; Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for Grenada;
Grenada
Our Grenadian authorities would like to thank management and staff for the timely response to their request for emergency support under the Rapid Credit Facility (RCF). They would also like to thank Executive Directors for their recent decision to enhance the emergency financing toolkit in response to the COVID-19 pandemic, which has enabled Grenada to access 100 percent of quota (about US$22.3 million). Our authorities view the decision to augment access under the emergency financing facilities as both timely and appropriate considering the unprecedented nature of this crisis. They urge strong support from the Fund and other development partners in helping its membership address the significant social and economic fallout from the unfolding COVID-19 crisis.
Impact of the COVID-19 Pandemic on Grenada
Prior to the onset of the COVID-19 global pandemic, the Grenadian economy was performing strongly. During 2014–19, real GDP growth has averaged almost 5 percent and the outlook for 2020 was broadly favorable, with growth estimated to settle around 3 percent. During the same period, inflation remained low and stable and the unemployment rate declined by almost 50 percent from 28.9 percent to 15.2 percent. Alongside the strong growth performance, Grenada’s fiscal position strengthened considerably, backed by its rules-based fiscal responsibility framework. Public debt as a percentage of GDP declined by some 49 percentage points to 59 percent of GDP by the end of 2019, achieving the target of 60 percent of GDP established by the Monetary Council of the ECCU, 11 years ahead of the 2030 deadline. Our Grenadian authorities were also making good progress in building up the country’s resilience to natural disasters and climate change shocks. On the external account, while the current account deficit remained large at around 16 percent of GDP during the period, it was adequately financed from external sources. Furthermore, Grenada’s reserves have remained adequate (above the benchmark of 3 months of import cover).
As a small, vulnerable, tourism-dependent state, the COVID-19 pandemic has dealt a serious blow to the economy of Grenada. The tourism and offshore education sectors, which account for over 50 percent of the country’s GDP and the lion share of employment, have altogether halted with the shutdown of borders and other containment measures. Further, foreign direct investment (FDI) and remittances are expected to be severely impacted. As a result, Grenada is expected to see a large chunk of its GDP wiped out as well as a worsening of its external position. For the month of April, so far, our authorities have seen a precipitous decline in revenues while spending pressures continue to mount. Staff projects that GDP will decline by some 9.2 percent in 2020 and the subsequent recovery to be quick and robust. Staff is also projecting large fiscal financing and BOP needs. While our authorities broadly share staff’s assessment, they are more pessimistic than staff about the scale and magnitude of the fallout from the pandemic. In their view, current estimates may grossly understate the full magnitude of the impact considering the significant uncertainty around the unfolding catastrophe. Our authorities are also projecting a more gradual recovery. In this context, additional emergency support may be critical.
Policy Response to the COVID-19 Pandemic
Our authorities’ response to limit the health impact of the COVID-19 pandemic has been swift. Even before the first COVID-19 case was confirmed on the island, our authorities moved aggressively to prevent the virus from reaching Grenada’s shores, including by instituting travel restrictions on selected destinations, implementing detection protocols at ports of entry, and launching a COVID-19 awareness campaign. To prepare for a possible outbreak, our authorities reallocated resources to facilitate emergency health spending and closed all educational institutions. After the first case was confirmed on March 22, 2020, our authorities intensified measures to contain the spread of the virus, including issuing emergency orders restricting movement on non-essential travel within the country. Subsequently, our authorities instituted a 21-day lockdown (currently underway) aimed at reducing community spread of the virus.
In addition, after wide-ranging consultations with key stakeholders, our authorities launched an economic stimulus package to help cushion the impact of the crisis on households and businesses. The support is expected to be temporary and is targeted at those most affected by the fallout from the crisis. Furthermore, our authorities have reprioritized the 2020 budget to boost social programs and capital spending to mitigate the impact of COVID-19 on the economy.
To accommodate the additional spending in the face of the precipitous decline in revenues, our authorities invoked the Escape Clause pursuant to Article 10 of the Fiscal Responsibility Law (FRL) to allow for a relaxation of the fiscal stance for the fiscal year 2020 in the first instance. Accordingly, the primary balance is expected to move from a surplus of 6.8 percent of GDP in 2019 to a deficit of -0.7 percent of GDP in 2020. Public debt as a percentage of GDP is expected to rise by approximately 10 percentage points to around 69 percent of GDP.
Prudent management of scare resources is critical during this unprecedented period. Our authorities intend to drawdown some of their fiscal buffers to close a portion of the financing gap. Our authorities are hopeful that their regional and international partners will help meet the additional financing needs in the form of grants, concessional loans, and debt relief. Our authorities wish to reiterate their liquidity management strategy, which focuses on prioritizing government’s liquidity up until end-2020 to finance outlays envisioned under the 2020 budget, the additional spending needs related to COVID, spending on additional significant adverse shocks (e.g., a natural disaster), and to defer less urgent spending for the post-emergency period.
Medium-term Policies
Our authorities are fully committed to pursuing sound macroeconomic policies and reforms to promote robust, sustained, and inclusive growth; create fiscal space and build buffers against external shocks; and strengthen financial sector stability and resilience. In this regard, fiscal prudence will remain a top priority for our authorities. Once the pandemic abates and there is a significant economic recovery, the suspension of the fiscal rules will be lifted, and our authorities will resume policies to put debt back on a downward trajectory and to rebuild and expand fiscal buffers. Moreover, our authorities will continue to build on the progress made in regularizing outstanding arrears to official bilateral creditors. Our authorities are eager to resume work on the development of their disaster resilience strategy (DRS) with staff’s support. They believe that the proposed DRS should be expanded in its scope to include medical emergencies, such as COVID-19.
Conclusion
The COVID-19 pandemic is eroding the hard-won gains achieved by the Grenadian authorities in the recent past. Our authorities have deployed the limited tools at their disposal, but these tools are clearly insufficient. To mount a decisive and comprehensive response, they need a level of support that far exceeds what is currently available from domestic sources. In this context, our authorities would highly value the support of the Fund, in particular, a disbursement under the RCF, and other development partners. Financing from the Fund would also play a catalytic role in mobilizing the much-needed support from other donors.