Grenada's economy has made a "remarkable recovery" after the unprecedented devastation caused by Hurricanes Ivan and Emily, led by reconstruction activity, Cricket World Cup (CWC) preparations, and the recovery of the tourism sector, the International Monetary Fund said in its review of the jurisdiction's economy.
The IMF Article IV report stated that Grenada's real GDP growth averaged 7% per year during 2005-06, while inflation has fallen markedly, from a high of 5.8% (on a year-on-year basis) in late 2005 to only 2.2% by April 2007.
"This impressive rebound is a testament to the combined efforts of the Grenadian people, the government, and the creditor and donor communities," Nancy Wagner, head of an International Monetary Fund (IMF) staff mission to Grenada, said in a statement.
Ms Wagner's statement continued:
"In the aftermath of the hurricanes' destruction, the government recognized that public debt was unsustainable and initiated a collaborative debt restructuring process (now largely completed). They also launched a home-grown comprehensive medium-term reform program, with the key objectives of sustaining high economic growth, restoring fiscal and debt sustainability, reducing vulnerabilities, and alleviating poverty."
Wagner noted that progress has been made on each of these objectives of the reform program:
"The IMF mission commends the government for its progress with these important elements of its reform program," Wagner stated.
However, the IMF cautioned that "substantial challenges" remain, particularly on the fiscal and debt fronts.
"The 2006 fiscal outturn was worse than expected. Spending on goods and services was greater than projected, reflecting higher utility costs and transfers to households. Government investment reached 20% of GDP, about 5 percentage points higher than envisaged, on the back of higher-than-expected costs for reconstruction and preparations for the CWC. These expenditure overruns led to a primary deficit almost 7 percentage points of GDP higher than targeted. As a result, the debt-to-GDP ratio increased from 121% at end-2005 to 126% by end-2006."
The statement went on to note that:
"Data through the first half of 2007 indicate that fiscal slippages have continued this year, with capital expenditure outpacing grant financing owing to substantial shortfalls in grants relative to pledges. On present policies, the overall fiscal deficit could reach 3.5% of GDP this year."
"Grenada's current public debt level remains high, reducing the country's flexibility to respond to future shocks, such as natural disasters. Placing debt firmly on a sustainable trajectory will require a determined effort, all the more so in light of the fiscal slippages. With reconstruction almost completed, capital spending in 2007 and beyond should be brought in line with identified financing. In this regard, the IMF mission encourages the government to enhance their capacity with intensive training in prioritization and implementation of the public sector investment program, to strengthen their procedures for cash management and expenditure control, and to avoid unsustainable financing sources such as the overdraft facility, the drawdown of bank deposits, or the accumulation of domestic arrears. The mission urges the trade unions and government to contain wage growth in line with consumer price inflation as an important step in addressing the difficult fiscal situation. The possibility of substantial divestment or privatization proceeds would allow the government to begin decisively tackling the rising debt ratio by paying down the most expensive debt."
"The pace of structural reforms also needs to be accelerated to consolidate the growth momentum and to allow Grenada to compete effectively in the challenging external environment. The current strong investor interest in Grenada provides an opportune time to undertake improvements in the business environment. The IMF mission encourages the government to push ahead with creating a one-stop shop for investors, facilitating land transactions, adopting the new Investment Act (including reforming the regime for tax concessions), and implementing the action plan to address the deficiencies identified in the World Bank's "Doing Business Indicators" report. Other critical reforms — introducing VAT, strengthening tax administration, modernizing the public sector, enhancing the financial sector's regulatory framework, and using the forthcoming PRS to integrate and prioritize the social development agenda within the budget framework — will ultimately ensure Grenada's future economic success."
The statement concluded:
"The IMF mission is grateful to the Grenadian government officials and the other stakeholders in the economy for the constructive dialogue that enhanced its understanding of the economic challenges facing Grenada. The mission wishes the people of Grenada great success in their efforts. Grenada's future looks promising, indeed."
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