IMF Praises Grenada's Economy, But Urges Tax Reforms

by Robert Lee, Tax-News.com, London

25 July 2001

An Article IV Consultation, conducted by the International Monetary Fund (IMF), examining Grenada's economic performance has led them to conclude that although the country's economy had improved significantly in recent years, it was necessary for the government to introduce a package of tax reforms in order to maintain its stability.

According to the IMF, the strong growth in economic activity was accompanied by a fairly robust expansion in banking system deposits, as well as in credit - mainly for construction and consumer goods. The increase in credit, coupled with the sharp growth in imports, associated with a pickup in infrastructure and tourism projects, led to a doubling of the external current account deficit to almost 16 percent of GDP in 2000, which was financed by direct investment, and grants and loans associated with the public investment program.

In the second half of 2000, the Grenada International Financial Services Authority (GIFSA) introduced measures designed to correct weaknesses in the regulation and supervision of offshore financial institutions that were revealed in the wake of the failure of the largest offshore bank, and the subsequent closure of several others. The IMF stated that the key measures include (i) audits of all offshore banks by an international firm; (ii) improved staffing to facilitate on-site inspections and closer monitoring; and (iii) proposals for changes in legislation to address weaknesses in the legal framework. Furthermore, during the first half of 2001, a self assessment exercise for the offshore financial services sector was initiated, with the assistance of the Fund and the Eastern Caribbean Central Bank (ECCB).

The IMF directors warned that it would be difficult for the Grenadian government to maintain such a strong fiscal position in 2001 because of emerging revenue weaknesses and increasing rigidities in expenditure. They noted that there was a recent slowdown of revenue that largely appeared to reflect the erosion of the tax base due to decisions to make wide-ranging concessions and exemptions to various industries.

The IMF concluded with the statement: 'Directors therefore recommended that the government begin promptly to review all exemptions, and phase out those which are no longer consistent with government policy. In particular, they urged the authorities to discontinue the discretionary nature in which concessions are granted, as it creates distortions, lacks transparency, and makes revenue administration unduly complex. It was suggested that, in view of the prevalence of similar tax incentives throughout the ECCB area, the government might propose a region-wide reappraisal and harmonization of these incentives, possibly as part of a joint initiative to reform the tax systems based on the introduction of a common value-added tax.'

Recommended