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IMF reports on Grenadian economy

Prime Minister Dr Keith Mitchell with IMF Deputy Managing Director Tao Zhang and other members of the visiting IMF team in 2019

The Washington-based International Monetary Fund (IMF) has told the Keith Mitchell-led government in the Botanical Gardens that the Grenadian economy is recovering gradually from the effects of the coronavirus pandemic but still faces significant downside risks.

The fund has just released its report following an assessment of the economic performance of the island since the pandemic struck just over two years ago.

In its report obtained by THE NEW TODAY, the IMF indicated that real GDP is projected to expand by 3.6 percent in 2022 but issues at the international level could affect that badly.

It said: “Higher food and oil prices and supply chain disruptions – especially from the war in Ukraine – could lead to further increases in inflation, while a more prolonged pandemic could harm the recovery of tourism and offshore education.”

The fund praised government’s fiscal and public health responses to the pandemic as it “helped mitigate the impact on Grenada’s tourism-dependent economy and its people.”

“The government rightly suspended its fiscal rules in 2020-2022 and increased health, social, and capital expenditure. The external position in 2021 was weaker than the level implied by fundamentals and desirable policies,” said the IMF report.

As a public service, THE NEW TODAY reproduces some of the highlights of the report from the fund:-

The authorities broadly agreed that the financial sector is stable and sound, though credit unions require greater attention.

While they remain vigilant, particularly regarding asset quality, the authorities noted that the improving economic backdrop should provide sufficient cushion to avoid a sharp rise in delinquency.

Given the adequate provisioning and capital for banks and largest credit unions, the expiration of loan moratoria was expected to be accommodated smoothly. Insurers are solvent and comply with regulatory requirements.

GARFIN elaborated that the slight delay in the passage of the standardized regulations for credit unions was due to another round of consultations to increase uniformity across jurisdictions. Although the latest version maintains the authorities’ preferred definition of institutional capital, the proposed regulations are consistent with staff recommendations.

Developing capacity on assessing climate risks for the financial sector is a priority and work on improving crisis preparedness is ongoing.

DATA ISSUES
Data quality and timeliness should be enhanced to help inform government and private sector planning. Data provision is broadly adequate for surveillance but has important weaknesses.

CARTAC has provided technical assistance on national accounts, consumer price index, and external sector statistics. There is room for further improvement, though, in the collection of high frequency indicators, publication of consolidated financial statements of SOEs, and preparation of balance of payments data.

The compilation of statistics has been negatively affected by mobility restrictions during the pandemic and turnover in the statistics office. Rebuilding staffing levels and investing in training should be a priority going forward.

STAFF APPRAISAL
The authorities’ fiscal and public health responses to the pandemic have helped mitigate the impact on Grenada’s tourism-dependent economy and its people.

The government rightly suspended its fiscal rules in 2020-2022 and increased health, social, and capital expenditure. The external position in 2021 was weaker than the level implied by fundamentals and desirable policies.

Public debt is assessed sustainable although Grenada is found to be “in debt distress” due to its outstanding arrears to official bilateral creditors.

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The economy is recovering gradually but faces significant downside risks. Real GDP is projected to expand by 3.6 percent in 2022. Higher food and oil prices and supply chain disruptions – especially from the war in Ukraine – could lead to further increases in inflation, while a more prolonged pandemic could harm the recovery of tourism and offshore education.

The immediate policy priorities are to accelerate vaccination and provide time-bound fiscal support. It will be important to allow higher international food and energy costs to pass through to domestic prices alongside targeted support to protect the vulnerable.

Temporary direct support could also be considered for micro-, small-, and medium-sized firms that are most affected by rising energy costs.

Barring unforeseen events, the fiscal rules should come back into force starting 2023 to ensure fiscal credibility and sustainability. To sustain the recent increase in public investment in resilient infrastructure, it will be important to secure concessional financing and mobilise domestic resources.

The government should implement a comprehensive pension reform to improve the financial position of the pension system. The efficiency of public spending can be strengthened, through better public investment management, an accelerated implementation of the 2017 Public Service Management Reform Strategy, and better targeting of social assistance programs.

The current conjuncture provides an opportunity to carefully reconsider the design of the fiscal framework. The framework should be centered on the medium-term debt ceiling, with fewer overlaps in numerical rules, and with clear procedures to return to the targeted debt path following an unanticipated shock.

It should also provide stronger incentives for revenue mobilisation to create greater space for social and capital spending. Transparency would be enhanced by timely publishing public sector and SOE audited financial statements.

The government should aim to facilitate a shift in the tourism model toward higher value-added. This can be achieved by working with local producers to align output with the demands of hotels and restaurants.

A diversification of the sources of tourism can be achieved by increasing the number of flights, leveraging the presence of Saint George’s University to offer health services to visitors, and advancing investments in fishing and eco-tourism ventures.

Implementing Grenada’s Disaster Resilience Strategy should continue to receive a high priority. The establishment of a public asset registry will help prioritise critical maintenance spending.

Working with the private sector to broaden insurance coverage – particularly catastrophic risk insurance – will help in responding to natural disasters.

The legislative framework for the Disaster Risk Management Act should be finalized and a “risk map” for hydro-meteorological and geological hazards should be developed to help guide scenario planning and disaster response.

To increase its competitiveness, Grenada should accelerate the shift to renewable energy. This can be supported by regulatory adjustments, changes to construction standards, and incentives to invest in renewables.

To address the long-standing skills mismatch, the authorities should continue to provide training programs and improve their effectiveness.

The financial sector has weathered the pandemic well. Banks have increased their loss provisioning to meet the ECCB revised guidelines. Nonetheless, asset quality could deteriorate following the expiration of loan moratoria and regulatory forbearance. Provisioning in the credit union sector ought to be increased and supervisory oversight should be strengthened.

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