WASHINGTON, USA -- The International Monetary Fund (IMF) on Thursday issued a concluding statement following the 2016 Article IV consultation visit and fourth review under the extended credit facility (ECF) extended to Grenada.
Since the last Article IV consultation in June 2014, Grenada has made major strides toward restoring fiscal and external sustainability. Economic activity has picked up, debt has been reduced, and the balance of payments position has strengthened. The government has also pushed through important legislative reforms to build a fiscal framework that will lock-in fiscal discipline over the long term.
As the country heads into the last year of its ECF-supported program, renewed policy resolve will be essential to secure lasting success of the home-grown program and broaden the reach of its benefits.
The key priorities in 2016 include execution of the budget in line with program commitments and the new Fiscal Responsibility Act (FRA); focused reforms to ensure prudent and sustainable management of the public sector wage bill; application of the new system to register beneficiaries for social assistance; and follow through on growth-enhancing reforms in the areas of business facilitation and labor legislation.
Solid performance in 2015 under the ECF-supported program
1. Activity in 2015 remained robust. Fueled by growth in agriculture, tourism and construction, the economy is estimated to have expanded by 4.6 percent. Grenada experienced deflation of 1.3 percent (annual average) in 2015 due mostly to lower energy prices. The external current account deficit fell to an estimated 15.1 percent of GDP in 2015 from a peak of 23.2 percent in 2013 on the back of stronger tourism receipts and lower international oil prices. The current account deficit was adequately financed by tourism-related FDI and private capital inflows, and foreign reserves rose to 6 months of imports at end-2015. The real effective exchange rate has appreciated by 3.6 percent since mid 2014 due to the rise in the U.S. dollar, but this was partly offset by relatively lower domestic price inflation in Grenada.
2. Fiscal performance under the ECF-supported program was strong in 2015. The government met all quantitative performance criteria at end December. Stronger activity, recent revenue measures, and improvements in tax administration contributed to higher revenue collections, and current expenditure was contained. The primary surplus (fiscal balance excluding interest payments) is estimated at 2.2 percent of GDP (including Citizenship-by-Investment revenues). The government cleared all budget expenditure arrears in 2015, completing a key step to restore liquidity and confidence in the domestic economy. After intense efforts, Grenada concluded several important debt restructuring agreements in 2015. Public debt as a percentage of GDP was reduced from a peak of 107 percent in 2013 to 92.7 percent at end 2015.
3. Spending on the social program SEED was lower than hoped. Implementing the new beneficiary processing system under SEED has taken longer than expected so spending in 2015 was below the December program indicative floor. The government is working to transfer all beneficiaries into the new system and make it fully operational in 2016. Monthly outlays on the SEED program during the last quarter of 2015 were at levels consistent with achieving the program floor for 2016, but allocation of benefits should be assessed with the new targeting tool and be targeted to the households where it is most needed.
4. Unemployment remains too high and credit growth weak. With stronger activity and confidence, more Grenadians are actively seeking work. While positive, this increase in the participation rate offset the impact of new job creation, leaving unemployment stubbornly high at 30 percent, as suggested by preliminary results from the 2015 Labor Force Survey. Private credit growth also remains weak. While interest rates have fallen since the reduction in the savings deposits rate floor in 2015, bank lending to the private sector contracted again in 2015. This is attributed to banks’ ongoing efforts to strengthen balance sheets and tighter loan conditions. Some of the slack has been met by credit unions, where loans grew by 18 percent in 2015.
5. The outlook for 2016 remains broadly positive. Growth is expected to moderate to a more sustainable pace of 3 percent as the rate of expansion in agriculture and tourism moderates. Inflation is expected to fall again in 2016 owing mostly to low energy prices. Risks to the outlook are roughly balanced, with upside risks related to low world oil prices, possible stronger tourism inflows and higher Citizenship-by-Investment program proceeds offset by downside risks arising from natural disasters, concerns about the potential impact of the Zika virus on tourism, and the appreciation of the U.S. dollar, among other things. Staff estimates potential growth in Grenada at about 2.5 percent annually, suggesting that a bigger policy effort is needed to increase output capacity in the country and to foster broader based growth that will raise employment opportunities for Grenada’s jobless.
The home grown program is at an important juncture
6. The budget outlook for 2016 has little room for maneuver. While the projected primary surplus is forecast to meet the nominal target for 2016 under the ECF-supported program, there is no margin for error. Staff project that the primary surplus will fall below the floor of 3.5 percent of GDP set in the FRA, a target which is required by the law until public debt is reduced to 55 percent of GDP. The deviation from the FRA is expected to be temporary, driven by expenditure related to restructuring of state enterprises, and the primary surplus is projected to reach 3.5 percent of GDP in the subsequent year. Staff urges the government to ensure that the primary surplus in 2016 is in line with the FRA targets and to safeguard the credibility of the rules-based fiscal policy framework.
7. The government has made progress implementing structural reforms, though the pace has been slower than envisioned. In particular:
a. Passage of the Tax Administration Act, due at end-November 2015, was accomplished in early 2016 after a short delay.
b. The Large-Medium and Small Taxpayers Units within IRD, due to be operational by end-2015, were made operational in early 2016. Staff welcomes the efforts by the government to push forward with these two reforms.
c. Putting into force the full tax incentive regime, due at end-December 2015, has been delayed and the legislation has undergone various amendments. While broadly consistent with the intent of the original drafts, the amendments to the tax incentive regime could have revenue implications that will need to be monitored closely.
The policy resolve and commitment demonstrated so far are still needed
IMF staff is confident that the government’s commitment to program goals remains strong. It is worth noting that a key element of the success so far stems from cooperation with the social partners which has contributed to strong program ownership and shared sacrifice.
In addition, over the past 18 months, the government has advanced an impressive agenda of legislative reforms in several areas, particularly to build a fortified, durable fiscal policy framework. Looking ahead, a reinvigorated focus on program priorities may be needed to maintain momentum and importantly, to bring the benefits of reform and the sacrifices made thus far to a broader swath of the population.
8. The government’s strong record of budget discipline under the home grown program will need to continue in order to achieve medium-term debt targets. Staff urges the government to continue with the strict budget management and execution displayed during the program so far to ensure appropriate tradeoffs and cover potential shortfalls in expected grants.
Mounting expenditure pressures will need to be carefully managed in the context of a durable fiscal framework to preserve the gains made thus far. Moreover, in the event that revenues do not meet expectations, the government will need to implement one or more of the contingent fiscal measures agreed under the program to ensure that programmed fiscal targets are met.
9. Renewed energy is needed to push through priority structural reforms. In addition to putting into force the tax incentive regime, tax administration act, and the chart of accounts, the key structural reforms for 2016 comprise a revised Labor Code, new GIDC Act, strengthening public debt management, reforms on the management of the public sector wage bill (see below), and steps to remove impediments to private sector activity.
On the latter, staff is preparing a study on Grenada’s performance in the World Bank’s Doing Business Index and shared the findings with officials and representatives from the private sector. The government agreed with Fund staff on specific areas needing urgent attention and that could deliver the biggest return in the short term. These include establishing accurate information about property records, streamlining property registration processes, simplifying customs procedures, strengthening building quality control and regulation, and looking to promote a regional solution where possible, for example a region-wide credit registry.
Recent reforms to strengthen tax administration and insolvency legislation should reduce business costs related to delays, although stakeholders in the country pointed to inefficiencies in the judicial system that act as important delays and costs to doing business.
10. Staff places the highest priority in 2016 on reforms to improve management of the public sector wage bill. As noted in earlier Reviews, this reform is essential to safeguard fiscal progress made so far. In the first phase of consolidation, short term control measures -- wage freeze and attrition -- ―were important tools to meet urgent spending pressures. However these methods are not sustainable, can lead to pent up wage demands, and affect the quality and delivery of public services.
Moreover, the fiscal burden of the existing automatic increments system is unsustainable. Staff recommends the government focus specifically on strengthening the mechanism to manage the wage bill in a way that is fiscally prudent and permits flexibility within the wage envelope. The system should include pay and grading reform, compensation related to performance and market comparators, and systematic indicators to guide regular wage negotiations based on established parameters like productivity growth, inflation and cost of living adjustments.
IMF experts from the Fiscal Affairs Department are available to provide technical assistance to help prepare a focused strategy that could be submitted to Cabinet by midyear and implemented in 2016. This reform will be critical for informing the government’s position in discussions with labor unions and would complement the work underway to prepare a new Public Service Bill. It would also improve the effectiveness of public goods and services -- key to private sector growth.
11. Staff is reviewing developments in the tourism sector and labor market with the aim of identifying pro-growth reforms in these sectors. We will review Grenada’s tourism performance in the regional context, and take stock of changes in the labor market with the aim of findings ways to lower structural unemployment. Staff will prepare recommendations on labor market policies that could strengthen skills matching, improve demand and supply links, and promote human capital development. The report and studies will be released at the conclusion of the Fourth Review before end-June.