IMF Grenada: Staff Concluding Statement of the 2019 Article IV Mission

GRENADA: Staff Concluding Statement of the 2019 Article IV Mission

May 8, 2019

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments. 

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Growth has remained strong, reflecting external tailwinds and the fruits of past reforms. The outlook is promising, but is subject to downside risks. The focus of policy should shift toward making growth more sustainable, resilient, and inclusive. Fiscal policy should balance further progress in debt reduction against a gradual use of well-earned fiscal space to close the country’s infrastructure and resilience gaps, in tandem with capacity and efficiency improvements to bolster the impact on growth.Policies to enhance resilience to climate change and natural disasters should be fully integrated into a credible medium-term fiscal framework. Continued progress in financial sector oversight, structural reforms, economic governance, and data provision is necessary to support and enhance sustainable growth .

Developments and outlook

1. The Grenadian economy continues to grow robustly. GDP expanded by 4¼ percent in 2018, driven by strong activity in construction and tourism. Unemployment has been falling, but remains high at 21.7 percent as of mid-2018. Inflation has remained low. After trending down for several years, bank credit growth has turned positive with continued improvements in asset quality, while lending by credit unions has continued to expand rapidly. The external current account deficit likely narrowed in 2018 due to strong tourism receipts, but remains elevated at around 11 percent of GDP. Robust FDI flows, including from the citizenship-by-investment (CBI) program, are financing the external deficit while supporting economic growth.

2. Adherence to the fiscal responsibility framework has enabled further debt reduction . The key targets under the Fiscal Responsibility Law (FRL) are estimated to have been met. The fiscal surplus increased further in 2018, reflecting a combination of strong revenues and the FRL-mandated expenditure restraint. The public wage bill has been contained by the attrition policy, although several strategic exemptions and relaxations have recently been introduced to this policy. Low execution of grant financing and institutional bottlenecks in project execution combined to keep capital outlays subdued at 2¾ percent of GDP. Central government debt fell from 70 to 63½ percent of GDP in 2018, but arrears to certain bilateral creditors remain to be regularized. This measure of debt excludes non-guaranteed debt of public enterprises of around 3.4 percent of GDP and the debt to Petrocaribe (some 11½ percent of GDP). The improved debt situation has helped lower interest rates and boost access to concessional financing. Robust CBI inflows have helped channel sizable resources to the contingency fund that could be used for mitigating the effects of natural disasters.

3. Economic prospects are promising, but risks are tilted to the downside.

· Growth is set to remain solid in 2019, but is projected to ease somewhat over the medium-term, consistent with a waning of FDI-driven construction. The fiscal position is projected to loosen in line with the FRL’s provisions that take effect after public debt falls below 55 percent of GDP, and should provide some support to the economy.

· External risks are mainly on the downside, and are centered on prospects for U.S. growth and global financial conditions. Domestic risks are two-way. On the one hand, the use of the fiscal space for productive investment could improve growth. On the other hand, boosting public spending, without reforms aimed at improving efficiency and productivity, could undermine long-term growth. Other risks include the loss of corresponding banking relationships, damaging natural disasters, pension settlements or other spending that could breach the FRL, and regional risks due to spillovers from Venezuela.

Fiscal policy

4. The FRL has been successful in guiding fiscal policy to date, but its next phase of implementation should strike a proper balance between fiscal prudence and much-needed increases in productive spending. The government’s 3-year medium-term fiscal framework charts a policy course of continued large primary surpluses through 2021. However, once the public debt ratio reaches 55 percent of GDP, the FRL allows scope for recalibrating the primary balance target to stabilize debt at that level. An effective and prudent use of fiscal space could maximize the economy’s productive potential and resilience to shocks. However, if the fiscal space is used to finance unproductive spending, it could fuel debt sustainability concerns.

5. Grenada’s infrastructure and resilience gaps are key priorities that need to be addressed with the increased resource envelope. Public capital spending has been particularly low in recent years. The authorities’ assessments of infrastructure and maintenance needs call for substantially raising investment spending. In addition, significant advances are being made in understanding Grenada’s resilience-building needs and benefits, in the context of large expected losses from climate change. The ongoing climate change policy assessment (CCPA) has documented progress to date and laid out a comprehensive approach to address climate risks. It has identified the need for additional resilience-related investment of up to 3 percent of GDP annually over the next 10 years, some of which will need to be financed by domestic resource mobilization to back-stop and catalyze external concessional financing.

6. A scaling-up of public productive spending should have a substantial payoff for sustained growth, if it is supported by capacity improvements. The outcomes would crucially depend on specific policies and absorptive capacity improvements in public spending. Pro-actively pursuing capacity improvements (including in hiring and training professional staff and project prioritization and screening) in parallel with using the fiscal space to address infrastructure and resilience-building objectives would improve the quality and resilience of the public capital stock. Staff analysis indicates a substantial payoff of this investment for economic growth, both due to higher production and reduced losses from natural disaster and climate change events. Such investment spending could be supported by moderate increases in essential current spending and well-targeted increases in expenditures for social protection.

7. Moderate changes to the FRL and other elements of the fiscal framework could facilitate high-quality spending while further improving debt sustainability. First, targeting a safer debt level of below the FRL’s current ceiling (55 percent of GDP) and shifting to a broader coverage of public debt (to include non-guaranteed SOE debt) would support a proper balance between fiscal prudence and upscaling productive spending. Second, the analysis of fiscal risks in budget documents should be strengthened—notably to analyze and internalize fully the impact of natural disasters, climate change, and long-term aging—along with a comprehensive assessment of public enterprises, public-private partnerships, and other contingent liabilities. Third, the primary expenditure rule could be re-framed to simplify its operation and facilitate resilience-building objectives. However, prior to making any changes to the fiscal rule, significant enhancements should be made to boost capacity to implement resilience-related spending and improve the classification criteria and institutional accountability framework. The provisions of the medium-term debt management strategy that public capital spending be financed only from concessional sources should be reinforced. The changes to the FRL should be carefully prepared to allow sufficient time for fully-consistent implementation.

8. Extensive “second-generation” reforms should anchor improvements in the spending structure and implementation capacity in the following areas.

  • Public service and wage bill. The pace of implementation of the 2017-19 Public Management Reform Strategy has been slower than anticipated.Functional reviews, development of performance indicators, and payroll audits of ministries should be accelerated. Given the delays in these reforms, prudent wage setting parameters should be agreed for the new 2020-22 bargaining cycle.
  • Public investment management. The new institutional structure for coordinating capital projects that was created in early-2019 has yet to be tested. In any case, planning and implementation of public investment projects should be improved across the board, through better screening and design of projects, enhanced project management capacity, fuller information on inventory and valuation of public assets, continued improvements in public procurement, and more rigorous project prioritization criteria.
  • Public enterprises. The oversight committee for advising SOE operations should be re-activated and progress in adjusting tariffs to reflect cost recovery and investment needs should be followed through in the water sector and implemented in other sectors.
  • Social assistance. Social protection programs should be strengthened and consolidated around the Support for Education, Empowerment, and Development (SEED) program.
  • Pensions. The immediate costs of public pensions and health care initiatives should be contained and spillovers for increases in future spending limited through parametric reforms. The reforms to raise social security contribution rates initially from 9 to 11 percent and gradually increase general retirement age from 60 to 65 should be followed through as part of a package of measures to contain the costs of aging as well as insure the viability of the national insurance scheme and sustainability of pension benefits.

Other policies

9. Financial sector policies need to monitor potential imbalances to solidify the sector’s contribution to growth. In the banking sector, the impact on competition and corresponding banking relationships from the envisaged sale of Scotiabank should be analyzed and monitored. The rapid expansion of lending by credit unions should be matched by strengthening their oversight, data provision, and capital buffers. Growing property markets and proliferation of non-bank financial intermediaries raise the need for a full assessment of risks, including by monitoring systemic financial institutions, analyzing interconnectedness, and collecting better property market data. New accounting (IFRS9) and bank valuation and provisioning standards call for careful implementation strategies. The capacity of GARFIN and its coordination with ECCB and ECCU’s peer regulators should be further strengthened, with a view to continually harmonizing oversight of non-banks. This is particularly important for the insurance sector, which has extensive cross-border linkages. Strict compliance with AML/CFT standards and due diligence requirements should help to forcefully pre-empt any related concerns, as well as risks to correspondent banking relationships.

10. Improving the business environment and labor market institutions should help make private sector growth more broad-based, resilient, and job-intensive. Grenada’s Doing Business rankings continue to denote sizable gaps in the processing of construction permits, property and land registration, trading across borders, and investor protection. Ongoing efforts to close gaps through digitalization of procedures should be intensified. Further steps are needed, notably to reduce high port charges and other export/import costs and dismantle monopolies on export/import of certain products. Recent progress in promoting links between tourism and other sectors (agriculture) should be further enhanced and expanded by improving conditions for medical, sports, and educational tourism. The operationalization of the public utilities regulatory commission should be used as an opportunity to unlock investment in renewables. Improved labor market institutions are needed to match job opportunities with Grenada’s still-young labor force. Upgrading education, existing training programs, and employment matching services (through well-functioning central depository of labor market data) should help tap this potential.

11. Grenada could benefit from integrated strategies that leverage further improvements in operational planning, statistics, governance, and implementation capacity. Grenada’s forthcoming 2020-35 development plan should be supported by successor medium-term plans to operationalize progress, secure financing, and ensure implementation. A national Disaster Resilience Strategy could target comprehensive improvements in resilient infrastructure, financial protection, and post-disaster response. The strategy could act as a platform for coordinated action and support from development partners. All these plans should rely on the development of strong monitoring and evaluation systems and improved statistics, with the overdue update of social data being essential to the design of inclusive growth policies. These steps require improved economic governance and better coordination between all government’s agencies.

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