IMF Concludes Article IV Consultation with Grenada

On July 5, 2000, the Executive Board concluded the Article IV consultation with Grenada.¹

Background

Following a period of virtual stagnation during the late 1980s and early 1990s, the Grenadian economy began to recover in 1995 in response to generally prudent macroeconomic policies and progress in implementing reforms in the public sector and the trade system. Real GDP growth, which was negligible during 1991-93, rose to an average of 3½ percent a year in 1995-97, and accelerated to an estimated 7-8 percent in 1998-99, based on the implementation of large infrastructural projects, and a pickup in demand in the agriculture, manufacturing, construction, and services sectors—particularly tourism, communications and financial services. The economic recovery was accompanied by decreases in unemployment and inflation, and by a marked increase in real incomes. However, social indicators in Grenada remain among the least favorable in the Caribbean region, with 32 percent of the population considered poor.

Imports associated with the implementation of the above-mentioned projects led to a marked widening of the external current account deficit from 7 percent of GDP in 1994-95 to 28 percent of GDP in 1999. Exports have performed well over the past two years reflecting the windfall gains from the increased price of nutmeg as well as output from a new manufacturing plant that exports electronic components to the U.S. market. Exports of tourism and other services have also registered strong growth. The deficits on current account were financed by inflows of foreign direct investment, official grants and (largely concessionary) loans, and commercial borrowing by the private sector.

The upturn in economic activity contributed to a pickup in the rate of growth of private sector deposits in 1999, while the growth rate of net domestic assets slowed in line with an improvement in fiscal performance, and an easing of credit to the private sector following two years of very strong expansion. Consequently, banking system liquidity increased, and the banks' net foreign asset position strengthened.

During 1995-97, the economic recovery was accompanied by a deterioration in the fiscal position. The deficit of the central government (after grants) widened from less than 1 percent of GDP in 1995 to 6 percent in 1997 as the authorities embarked on an ambitious capital investment program, while at the same time reducing the income tax and raising civil servants' salaries by an average of more than 8 percent in real terms a year in 1996-97. The deficit narrowed to 3 percent and 2½ percent of GDP, respectively, in 1998 and 1999, while central government savings rose sharply to 4½ percent of GDP in 1999, reflecting improved revenue administration, increased fees from offshore financial companies, and efforts to limit the growth of current expenditure. The civil service wage bill rose by an average of less than 4 percent a year during 1998-99 (owing, in part, to a freeze on hiring), and declined to just over 12 percent of GDP, from 13 percent of GDP in 1997. Capital expenditure increased from an average of 9 percent of GDP in 1996-98 to 10½ percent in 1999, reflecting improvements in infrastructure (roads, the port, and health and education facilities), as well as repair and rehabilitation work late in the year following the damage caused by hurricane Lenny.

In the area of structural reform, emphasis in the public sector has been placed on privatization, civil service reform, and on converting selected government agencies into autonomous bodies run on commercial lines. Also, the sugar factory is targeted for privatization, the government retains only minority shares in two commercial banks, and the post office has been converted into an independent, commercial agency. Restructuring the civil service and basing salaries on performance have proved to be difficult, but discussions with the labor unions on these issues are continuing. In the financial sector, the Grenada International Financial Services Authority commenced full operations in January this year, and has started to monitor more closely the operations of the offshore companies. In addition, anti-money laundering legislation came into effect in April 2000; work on the legislative and regulatory framework for a regional capital market for ECCB member countries is being finalized; and a regional stock exchange is scheduled to begin operations in July 2000. In the external sector, the final phase of tariff reductions under the regional common external tariff agreement was completed on January 1, 2000. Most import tariff rates range from 5 percent to 15 percent.

Executive Board Assessment

Directors commended the Grenadian authorities for pursuing policies that have helped to achieve an economic recovery, accompanied by a reduction in unemployment and low inflation. Directors observed, however, that despite these achievements and a recent upturn in per-capita incomes, rates of both unemployment and poverty remain high. They, therefore, welcomed the government's decision to place poverty alleviation at the forefront of its economic program, and expressed support for the strategy that is based on sustaining economic growth and job creation through sound fiscal policies, increased private investment, a revitalization of agriculture and the rural economy, and reforms aimed at improving the efficiency of the public sector.

Directors noted that, in light of the currency union arrangement within the Eastern Caribbean Central Bank (ECCB), fiscal policy has a key role to play in maintaining macroeconomic stability and generating resources to ensure adequate social services and safety nets for the poor. While they welcomed the recent increase in central government saving, Directors said that sustaining a sound fiscal position over the medium term would require continued efforts, including the introduction of a value-added tax and a strengthening of tax compliance. They recommended that measures on the expenditure side focus on limiting the growth of the wage bill, exercising tighter control over government procurement, and avoiding recourse to commercially-financed lease-to-own projects by the public sector.

Directors noted the favorable prospects for increased private investment in tourism, and observed that new investments in other sectors would depend on progress in further divestment of state-owned assets. They also noted that the public sector should not undertake projects that could better be left to the private sector. An adequately-trained work force also is essential, and Directors welcomed the authorities' commitment to provide increased budgetary resources this year for education, skills training, and computerization in schools. In the public sector, Directors encouraged the authorities to press forward with their plan to introduce a civil service pay system based more closely on performance. They also welcomed the authorities' efforts, hopefully with World Bank support, to restructure the civil service.

Directors encouraged the authorities to take steps to improve supervision of offshore banking and other financial transactions, and welcomed the establishment of the Grenada International Financial Services Authority. In particular, it is essential to ensure that the nature and scope of these activities, as well as Grenada's legal and regulatory frameworks, are consistent with international standards. Given the government's limited resources, Directors recommended that prompt approaches be made for technical assistance in these areas to international or regional organizations, bilateral donors, and the ECCB. Directors also expressed concern with the quality of information on the financing of the large current account deficits in recent years-particularly with regard to the substantial size of largely unidentified private capital inflows, and the difficulties experienced in reconciling debt stocks and flows. Directors urged the authorities to work promptly, in collaboration with the ECCB staff, to clarify the nature and origin of these capital inflows.

Directors observed that continued weaknesses in Grenada's statistical base adversely affect the authorities' ability to monitor and analyze macroeconomic developments, and to take timely action to maintain stability and growth. They recommended that the authorities seek technical assistance to improve the scope and timeliness of statistics, and to ensure that adequate resources are made available to the statistics office.