Via IMF (Den Internationale Valutafond)

Grenada: Staff Concluding Statement of the 2019 Article IV Mission

May 28, 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.


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.

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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


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


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.


A scaling-up of public productive spending should have a substantial
payoff for sustained growth, if it is supported by capacity

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.

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Moderate changes to the FRL and other elements of the fiscal framework
could facilitate high-quality spending while further improving debt

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.


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)
  • 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.
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Other policies


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.


Improving the business environment and labor market institutions should
help make private sector growth more broad-based, resilient, and

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.

IMF Communications Department

PRESS OFFICER: Randa Elnagar

Phone: +1 202 623-7100Email: