Mission Concluding Statement 

Grenada Staff Concluding Statement of the 2024 Article IV Mission

June 20, 2024

Washington, DC: Grenada’s economy is experiencing sustained, strong growth supported by buoyant tourism. A surge in citizenship-by-investment (CBI) revenue has resulted in a large budget surplus, an increase in government deposits, and lower public debt. The key fiscal policy priorities are to improve the management of these potentially volatile CBI revenues, contain the growth of recurrent expenditures, and strengthen public financial management. Rising risks in the non-bank financial system call for better data collection, greater supervisory oversight, and regional supervisory cooperation. Reducing Grenada’s dependency on imported fossil fuels, boosting competitiveness, and investing in climate resilience are essential to increase long-term growth.

Strong tourism has bolstered growth. Grenada’s economy is estimated to have expanded by 4.4 percent in 2023, supported by among-the-fastest growth in stayover arrivals in the Caribbean and a continued uptick in spending per tourist. Construction activity moderated as major capital projects were brought to completion and new projects linked to the recent surge in CBI were slow to execute.[1] Inflation declined to 2.2 percent at end-2023 as food and fuel price pressures eased. The current account deficit is estimated to have narrowed reflecting the increase in tourism receipts. Strong CBI revenues resulted in a large 2023 fiscal surplus of 8 percent of GDP, higher government deposits of 17 percent of GDP, and a decline in the public debt to 75 percent of GDP. Financial system conditions remain stable with banks registering high levels of liquidity and modest levels of non-performing loans.

Growth is projected to decelerate in the coming years as capacity constraints weigh on tourism growth and investment. The economy is projected to grow 3.9 percent in 2024, bolstered by another strong year of tourism activity. As hotels are already close to their high-season capacity limits, growth is projected to gradually slow to 2.7 percent over the medium term. The outlook is sensitive, though, to the level of CBI inflows, the degree to which those flows finance new growth-enhancing investment and the progress in completing the current pipeline of hotel projects (including non-CBI financed ones). The clearing of the large backlog of CBI applications from the recent surge is projected to result in a large 2024 budget surplus of 9.5 percent of GDP and further accumulation of government deposits. The CBI revenues are thereafter expected to normalize to pre-surge levels. Nonetheless, sustained lower primary surpluses anchored in the government’s fiscal rules framework are projected to support a gradual reduction of public debt to the 60 percent of GDP target by the end of the decade.

The recent heightened international scrutiny over CBI programs represents a risk to this important source of income. Other important downside risks include a slowdown in key tourist source markets, global commodity price volatility and the ever-present threat of natural disasters. The high level of government deposits and a falling debt-to-GDP ratio provide an important buffer against unanticipated shocks.

Strengthening Public Finances

The potential swings in CBI revenue warrant continued careful management of public finances. Given the authorities’ cautious treatment of CBI revenues, the expected normalization of CBI revenue appears manageable. Nonetheless, the uncertainty over the size of future inflows underscores the need to contain growth in expenditures. Greater prioritization over budget outlays and putting in place measures to improve tax administration and raise tax revenues (e.g. through adjusting the gasoline tax in context of instituting a symmetric pass-through formula for gasoline prices) would prepare the economy well for potential CBI shortfalls. Development of a social protection policy, establishment of a central beneficiary registry and the planned introduction of cashless payments would improve targeting and oversight of social benefits and create scope to phase out subsidies to cooking gas. Continued focus and commitment to the CBI program integrity and full implementation of Grenada’s related regional commitments will be important to mitigate potential risks to its revenue.

A more coherent and transparent framework for managing CBI revenues would strengthen budget and investment planning. Clearer recording of CBI flows in the budget and transferring all CBI revenues into the National Transformation Fund (NTF) would bring the government’s CBI resources under a unified framework. Given the volatility in CBI revenues, a rules-based mechanism should be put in place that allows for annual transfers from the NTF to the budget. This would reduce uncertainty over budget revenue and guide the degree to which CBI inflows should be saved or used to finance fiscal spending. Applying the primary balance rule to a definition that is based on the NTF transfer (rather than the CBI inflow) would provide for a more predictable annual budget constraint. All NTF assets should be externally managed under a clearly specified investment policy and subject to a strong transparency and accountability framework, with operationalization of regular financial reporting on the size, asset allocation and performance of the NTF.

Improvements are needed to public investment management. This includes enhancing the procurement process and upgrading the framework for public-private partnerships. To ease execution constraints, there is a need to strengthen project planning and selection and improve capacity in project management, monitoring and ex-post reviews of performance. An earlier (e.g. mid-year) publication of the medium-term fiscal framework would strengthen its role in providing top-down guidance for the budget process and in determining the potential envelope for spending.

Well-coordinated implementation of ongoing public sector reforms will help improve administrative efficiency and the fiscal outlook. The carefully sequenced regularization of public sector workers can help address persistent public administration capacity constraints. Completion of the ongoing public service functional review would help ensure new appointments are well-aligned with public service priorities and can also help inform staff retraining needs. The planned establishment of a new, defined-contribution public sector pension scheme for new and regularized hires is important to avoid adding to the fiscal liability from the existing defined benefit plan. Recent parametric pension reforms of the National Insurance Scheme —including the phased increases in the contribution rates and pensionable age—should help reduce the system’s actuarial imbalances. Nonetheless, additional efforts are needed to incentivize longer periods of contributions, increase participation of self-employed workers, and ensure benefits are based on career-average wages.

Addressing Financial Sector Vulnerabilities

Credit union lending practices and asset quality warrant close monitoring. Targeted supervisory measures have facilitated a reduction in non-performing loans and improved provisioning. Given the resumption of rapid credit union lending growth, these steps should be complemented with improved reporting requirements to strengthen supervisors’ ability to monitor asset quality and forbearance practices, ensure adequate risk management practices, and respond quickly in the event of a worsening in credit quality. Impaired asset treatment and provisioning requirements should be more closely aligned to those for banks and enforcement of these standards should be strengthened. This would prepare Grenada’s credit union sector for the planned adoption of common minimum standards for ECCU countries. The stress testing of credit unions should continue to be improved and supervisory resources increased to reflect the credit unions’ increasing systemic significance.

Property insurance premiums have come under pressure from ongoing re-evaluation of climate risks by global reinsurers. This is likely to exacerbate the degree of under-insurance and increase credit risks for lenders, calling for improved supervisory data collection and analysis that can also inform quantification of contingent government obligations. Oversight of reinsurance risks in cross-jurisdictional insurance companies calls for close regional supervisory cooperation.

Continued efforts are also needed to improve access to credit. Government assistance to small businesses in formulating their business strategies, maintaining records, and fulfilling other loan requirements would be valuable. The credit reporting bureau will also facilitate credit access by reducing information asymmetries and the cost of due diligence.

Strengthening the AML/CFT framework will strengthen financial integrity and help protect correspondent banking relationships. The authorities recently approved four pieces of legislation to address compliance deficiencies identified by the 2022 CFATF Mutual Evaluation Report. However, continued progress is needed.  This includes implementing the authorities’ commitment to facilitate the verification of beneficial ownership, mitigate the misuse of legal persons, updating the National Risk Assessment to include the CBI program, and training of money laundering reporting and compliance officers.

Advancing Structural Reforms to Boost Growth and Resilience

Accelerating the transition to renewable energy would lower greenhouse gas emissions and reduce the economy’s susceptibility to global fuel price shocks. Recent updates to the regulatory framework for the electricity sector are welcome and the planned solar project could materially boost renewable energy production. However, larger-scale investments will be needed to meet the authorities’ ambitious renewable energy goals (including in moving ahead with the planned geothermal project) and this may also require further improvements to the regulatory framework and the National Energy Plan. Support for transitioning to renewables power generation and expanding grid capacity and storage should be prioritized. Funding the transition will require increased efforts to attract private financing and access donor-based financing (including by gaining accreditation with the Green Climate Fund).

Policies to boost labor market efficiency and maximize tourism revenue would help lift long-term growth. Investments in youth training and developing digital tools to match employers with employees should be scaled up, particularly given the recent introduction of unemployment insurance. The existing employment protection legislation should also be reviewed to ensure the level of protection is not undermining labor market flexibility. Promoting transparent pay and expanding access to care facilities and childcare to reduce the burden of family duties for women would help increase labor force participation, as will the planned extension of maternity leave and the introduction of paternity leave. Efforts to boost off-season tourism stayovers should continue to be deepened, particularly given the binding capacity constraints in the high season. Higher agricultural productivity and greater resilience of crops to adverse weather events would allow domestic food production to increase the value added from tourism.

The continued implementation of Grenada’s Disaster Resilience Strategy should remain a key priority. The improved financing outlook—including a US$100 million loan from the Saudi Fund for Development—provides an opportunity to implement recommended measures to boost resilience against climate risks. Measures to identify and address potential bottlenecks, including improving the planning process and reducing staffing shortages would help speed up implementation.

Data Issues

Better statistics are needed to support evidence-based policymaking. The resumption of the labor force survey is welcome, and Grenada stands out in publishing granular CBI data. However, other projects have seen repeated delays including the 2022 Census, an update of the CPI weights, and a revamp of the website of the Central Statistics Office. Improving the quality of high frequency indicators and ensuring their timely dissemination would also be a valuable step forward. Staffing shortages and turnover are an important constraint on data quality and dissemination and need to be urgently addressed.

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The IMF mission team thanks the Grenadian authorities and other counterparts for their warm hospitality and constructive discussions.

[1] Applicants to the CBI program can choose to either contribute to the National Transformation Fund or to invest in a government-approved real estate projects such as hotels and resorts.