On May 18, 2016 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Grenada and the fourth review of Grenada’s performance under a program supported by a three-year arrangement under the Extended Credit Facility (ECF). The completion of the review enables the disbursement of the equivalent of SDR 2 million (about US$2.8 million), bringing total resources made available to Grenada under the ECF arrangement to the equivalent of SDR 10.04 million (about US$14.1 million).
The Grenadian authorities continue to deliver a strong track record of program implementation and results. All performance criteria for end-December 2015 were met and most structural benchmarks for the fourth review were met on time or with minor delays, with timely corrective actions taken for two unmet benchmarks.
Growth prospects and fiscal sustainability are improving as the authorities’ home grown adjustment program enters its third year. Real GDP is estimated to have expanded by 4.6 percent in 2015, with strong growth in agriculture and tourism, as well as a rebound in construction. Growth is projected to moderate to 3 percent in 2016. The fiscal performance turned Grenada’s primary balance from deficit to surplus for the first time in a decade and together with debt restructuring agreements reached with both external and domestic creditors, Grenada is making progress on fiscal and debt sustainability. The debt-to-GDP ratio declined from 107 percent in 2013 to 94 percent in 2015 and is projected to continue its downward path going forward.
The 2016 budget aims to complete the programmed fiscal adjustment in support of meeting medium term debt targets, while focusing on structural reforms to promote economic growth and lower unemployment.
Since the onset of the program, there has been progress with structural fiscal reforms, including strengthened tax administration, improved public finance management, an overhaul of the tax incentives regime, and a new rules-based fiscal policy framework, which now need to be made fully effective. The authorities are working to reform management of the public sector wage bill to ensure sustainable personnel expenditure. In addition, reforms to improve the investment and business climate and modernize the labor market are also proposed to unlock growth potential and lower unemployment.
Following the Executive Board’s discussion on Grenada, Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, said:
“Grenada’s performance under its Fund-supported home-grown program remains satisfactory. The government is on track to complete the programmed fiscal adjustment and its structural reform agenda. The initial dividends from the program are emerging, as economic activity has picked up and the external position strengthened. The government’s economic strategy going forward should focus on promoting broad-based growth and lowering unemployment while maintaining fiscal discipline in the context of its strengthened fiscal policy framework.
“Grenada has made significant progress toward restoring debt sustainability, supported by budget discipline and steps toward a comprehensive debt restructuring. As wage and spending pressures are rising, the program is at an important juncture and continued policy resolve is essential to secure lasting success and to safeguard the credibility of the new rules-based policy framework.
“The Grenadian authorities have pushed through important legislative reforms aimed at locking in fiscal discipline over the long term. Grenada has made significant progress improving public finance management, strengthening the fiscal policy framework, and overhauling the tax incentive regime. The next step is to implement the new legislations, with high priority on reforms to strengthen management of the public wage bill, tax administration, and public debt management.
“To improve Grenada’s competitiveness and growth potential, priorities should focus on removing impediments to private sector activity and strengthening labor market skills and mobility. To protect the most vulnerable, the government has safeguarded total social spending, but needs to follow through on its stated goals of improving the targeting and effectiveness of this spending.
“Financial stability has improved, but continued efforts to strengthen the banking system are critical to enabling it to contribute more effectively to private sector growth. A proactive approach should be taken to address remaining vulnerabilities in the banking sector.”
Executive Board Assessment2
Executive Directors welcomed the strong economic recovery and the significant improvements in fiscal and external balances and debt reduction. Directors commended the authorities for steadfast implementation of their home-grown program, notably the successful fiscal consolidation. They stressed, however, that remaining challenges call for continued policy resolve in order to achieve the objectives of restoring debt sustainability, boosting medium-term growth prospects, and strengthening financial stability.
Directors noted that downside risks to the outlook persist, and called for prioritizing structural reforms to promote growth and job creation. In particular, they encouraged the authorities to implement reforms to remove impediments to private sector activity, and improve labor market skills, matching and mobility. They supported a proactive approach to focus training on skills needed by the market, and at the same time improve productivity and reduce structural unemployment.
Directors commended the authorities for the fiscal adjustment achieved thus far. In particular, they welcomed the primary surplus achieved in 2015 through important progress on tax policy and administration reforms and expenditure rationalization. Directors encouraged the authorities to safeguard this progress with strict budget execution and adherence to the new rules-based fiscal framework, while maintaining growth.
Directors commended the authorities’ steadfast implementation of their ambitious legislative reform agenda. They welcomed the impressive progress to overhaul the fiscal framework, reform the tax incentive regime, strengthen tax administration, and improve the monitoring and accountability of parastatal entities. Going forward, priority should be given to implementation of these reforms. Directors stressed that additional efforts are needed to strengthen public debt management and management of the public sector wage bill, as well to improve tax administration.
Directors welcomed the progress made to implement the country’s new growth and poverty reduction strategy. They underscored that close integration with the budget is needed to maximize the impact on competitiveness and growth. Directors urged the authorities to take steps to improve the targeting of the social safety net, as anticipated under the program, to protect the most vulnerable during fiscal adjustment and to ensure a lasting success of the program. Implementation of the Support for Education, Employment and Development (SEED) was encouraged.
Directors welcomed the authorities’ continued efforts to strengthen financial stability. They encouraged measures to address remaining vulnerabilities in the financial system while minimizing fiscal costs. Directors shared the view that a stronger banking system would contribute more effectively to private sector investment and growth. They called for continued efforts to strengthen regulation and supervision of the nonbank financial sector, as well as to enhance the AML/CFT framework.
Directors acknowledged the progress made to restore debt sustainability under the ECF-supported program and underscored the need to complete the comprehensive debt restructuring. They stressed the importance of maintaining fiscal discipline over the medium term with the aim of meeting long-term debt reduction goals.