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IMF Concludes Article IV Consultation With Grenada

by Robert Lee,, London

01 November 2007

The International Monetary Fund recently announced that it had concluded its Article IV consultation with Grenada.

The consultation found that Grenada's economy has rebounded after the devastating impact of Hurricanes Ivan and Emily, with the recovery centered on reconstruction and 2007 Cricket World Cup (CWC) preparations.

Real GDP growth averaged 7% per year during 2005-06, and is projected at about 3% in 2007, and 4% beyond, reflecting a further strengthening of tourism, the recent initiation of several major tourism projects, and a gradual recovery of agriculture. Inflation has remained low, buttressed by the regional currency board arrangement.

It also revealed that solid progress has been made with fiscal measures, including the introduction of the National Reconstruction Levy, the adoption of an automatic fuel pricing mechanism, strengthened collection of tax arrears, and work toward implementing a VAT. Important steps have also been taken to reduce vulnerabilities, such as participating in the Caribbean Catastrophe Risk Insurance Facility and taking steps toward giving the Building Code force of law.

However, other structural reforms have suffered delays, including legislative action to reform the tax concessions regime, creating a one-stop shop for investors, strengthening the capacity to evaluate and prioritize capital projects, and modernizing the public sector.

The IMF Executive Board stated that:

"Directors welcomed Grenada's strong economic rebound in the aftermath of hurricane devastation and the broadly favorable economic prospects, with major tourism investments under way and the gradual recovery of the agricultural sector. At the same time, substantial challenges remain, in particular the weak fiscal position and high debt levels, which erode the room for maneuver in the event of further external shocks. The debt situation would remain unsustainable if current fiscal policies were continued. Against that background, Directors agreed that the authorities' home-grown reform program focuses appropriately on achieving fiscal and debt sustainability, durable high growth, poverty alleviation, and the mitigation of vulnerabilities."

"Directors welcomed the steps that have been taken by the authorities to place Grenada's fiscal position on a more solid footing, including the implementation of an automatic mechanism for setting fuel prices and a broadly-based National Reconstruction Levy. They noted, however, that further fiscal consolidation will be key to placing debt on a sustainable trajectory. Spending restraint will be needed, including on capital expenditure and the public sector wage bill. The expected divestment proceeds should be used to pay down expensive debt, rather than to finance additional budgetary expenditures. Directors called on the authorities to explore a regional solution to the current counter-productive tax abatement competition among Caribbean countries."

The Board's assessment continued:

"Directors considered that external competitiveness appears adequate, with Grenada's share of the regional tourism market increasing. Fiscal consolidation will help sustain competitiveness and support the regional currency board arrangement."

"Directors commended the authorities for strengthening the financial system's supervisory framework, as evidenced by the establishment of a single regulatory agency for nonbank institutions. They supported plans to address regulatory gaps in the insurance sector and bring all nonbank financial entities under the regulatory agency's oversight. Directors called on the authorities to bring the unregulated commercial bank under proper supervision without delay."

"Directors welcomed the efforts being made by the authorities to enhance the business climate and improve competitiveness, including through the recently developed national export strategy, the one-stop shop being established for investors, and other measures to reduce business costs. They encouraged the authorities to accelerate the implementation of these and other aspects of their structural reform agenda, including moving ahead with reforms to arrangements governing tax concession."

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