IMF Urges Grenada To Tighten Fiscal Reins

by Amanda Banks, Tax-News.com, London

03 August 2005

The International Monetary Fund has praised the efforts of the Grenadian government and people to rebuild the country after it was devastated by Hurricane Ivan in September 2004, although it has warned that more drastic measures are needed on the fiscal front to increase tax collection.

The IMF's annual report on the Grenadian economy noted that one month after Hurricane Ivan struck, the authorities announced public debt to be unsustainable, leading to missed interest payments in December 2004 on two large international bonds. Grenada was subsequently downgraded to 'selective default' by Standard & Poor's, and in January 2005, the country hired legal and financial advisors to assist in the formulation of a comprehensive debt-reduction strategy.

Nonetheless, the IMF noted that inflation has remained low and stable within the framework of the currency board arrangement. The inflation rate has averaged 2 percent over the past 15 years and the annual inflation rate in April 2005 was 1.8 percent.

Prudential indicators of the domestic banking sector have generally compared favourably with Eastern Caribbean Currency Union (ECCU) averages, with the ratio of nonperforming loans to total loans being the lowest in the region at 4.5 percent at end-2003. After Ivan struck, banks granted moratoria on loans, sharply increased loan loss provisions, and assessed loan-by-loan credit quality. The share of nonperforming loans in the total rose to 5.8 percent at end-March 2005.

Given the impact of Ivan on the economy, the IMF Directors praised the authorities' actions to maintain fiscal discipline in 2004 while outlining an agenda for reconstruction and reform. However, the report observed that the fiscal situation remains "challenging." Directors noted that the economy contracted by 3 percent last year and is expected to recover only slowly over the course of this year. The external current account deficit is expected to deteriorate, the government faces large financing gaps, and the public debt stock stands at a very high level. In the absence of an official financing package, the IMF said that a sharp fiscal adjustment would be needed in order to restore external viability.

The report commended the government for the measures proposed in the 2005 budget, in particular the public consultations conducted by the government in recent weeks which could result in the adoption of a special levy on incomes. Nevertheless, most Directors noted that further fiscal effort would be required beyond the measures announced in the 2005 budget and called on the government to reduce tax concessions and strengthen tax audits and collection.

The IMF also called upon the authorities to closely monitor the health of the financial sector and urged Grenada to work with the Eastern Caribbean Central Bank (ECCB) to ensure that there is effective supervision of the banking sector, including through onsite inspections.

The authorities' efforts to improve the legislative framework for financial system regulation and supervision and their intention to strengthen regulation of the insurance industry were welcomed by the IMF.

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