The Fiscal Responsibility Oversight Committee (FROC) set up by the Grenada government and headed by one of its former diplomats Dr. Angus Friday has painted a glowing picture of the management of the economy under the coronavirus pandemic by the Keith Mitchell-led ruling New National Party (NNP) administration.
In his first report presented as head of the body, the Dr. Friday-led committee said the Authorities “were visionary for having included an Escape Clause in the FRA (Fiscal Responsibilty Act) which could be triggered by a declaration of a state of emergency from a public health epidemic.
According to the report, released to the local media, 2020 was an exceptional year for Grenada’s economy as the Covid-19 pandemic led to a downturn in domestic economic activity and a suspension of fiscal rules and targets in the FRA.
It said that progress made since the end of the Homegrown Structural Adjustment Programme of 2014-2016 and the implementation of the FRA from January 2016, enabled the Government to quickly cushion the effects of Covid-19.
The report stated that economic growth is expected to resume from 2021 but there are significant downside risks that can cause the recovery to be weaker than anticipated.
“The pandemic can have lasting effects on Grenada, and it is therefore necessary that policy actions build growth that is resilient and transformative,” it said.
As a public service, THE NEW TODAY has decided to focus on some of the major highlights in the report from Dr. Friday-led committee:-
Prior to March of 2020, Grenada experienced seven (7) successive years of growth averaging 4.5%. However, as a result of Covid-19, the economy was set to contract by as much as 12.2%.
In March of 2020, measures to contain the spread of Covid-19 began unfolding in Grenada. While the Grenada Government had not yet officially released revised macroeconomic forecasts for 2020-2022, the IMF and the World Bank provided initial predictions that real GDP growth in 2020 would fall by 8.0% and 7.3% respectively in Grenada.
Based on this, as well as discussions held then with the MPU, the FROC concluded then that a sharp contraction of 12.2% was possible.
Additionally, at that time, the Committee agreed with the MPU, that the original forecast for 2020 of 4.5% real GDP growth4 be downgraded and the Escape Clause in the FRA be activated.
Today, the pandemic continues to impact all aspects of lives and livelihoods. Its pervasive nature led to a downturn in global and domestic economic activity. Moreover, in Grenada Covid-19 led to the suspension of the fiscal rules and targets, in what was the fifth year of implementation of the fiscal responsibility legislation.
Covid-19 led to a worldwide recession, meaning that the majority of economies across the globe experienced two consecutive quarters of decline in 2020. Most economies across the world experienced an annual contraction of more than 3.0%.
Overall, the global economy is estimated to have contracted by 3.5 % in 2020 (IMF World Economic Outlook Update January 2021). All major trading partners of Grenada experienced declines, namely the USA (-3.4 %), UK (-10.0 %), Canada (-5.5 %), and the Euro Area (-7.2 %).
The Eastern Caribbean Currency Union, of which Grenada is a member country, recorded an estimated contraction of 16.2% (ECCB5). Another regional organisation, the Caribbean Development Bank, reported an average rate of economic decline of 12.8 % among its nineteen (19) borrowing member countries.
The recession was accompanied by both challenges and opportunities. On the upside,global commodity prices, particularly for oil, were lower and there was acceleration in digital transformation leading to productivity and efficiency benefits.
On the downside, there were worldwide increases in unemployment, public debt burdens, poverty, and inequality. There were renewed concerns about rising food insecurity and lower inflows of remittances.
Disruptions in the global supply chain impacted trade, businesses activity and consumption.
It was totally unexpected that a public health pandemic in 2020 would have broken Grenada’s track record of successive years of economic growth.
Commendably, the Authorities were visionary for having included an Escape Clause in the FRA which could be triggered by a declaration of a state of emergency from a public health epidemic.
In essence, a major public health issue had always been considered by the Authorities as a potential downside risk not only to growth but also towards meeting the fiscal rules and targets of the FRA.
As the Covid-19 epidemic evolved into a pandemic in 2020, Grenada experienced rising challenges in the real sector, more significantly a double digit decline estimated at 12.2 %. This was the deepest fall, based on the historical records of real GDP from 1988.
The Authorities should be commended for the measures taken to ensure that the number of confirmed Covid-19 cases was contained at 130 confirmed cases and 1 death for the year.
Fiscal savings and external funding were mobilised from the World Bank (IDA) and IMF (Rapid Credit Facility) during 2020 to finance safety nets to jump start the economic recovery.
Progress made since the 2014-2016 Homegrown Structural Adjustment Programme and the FRA, placed Grenada in a better position to deal with the shock of the pandemic.
While real economic activity declined, inflationary pressures eased and unemployment rose in Grenada. With the loss of almost 14,000 jobs due to the sudden drastic decline in tourism activity, the unemployment rate rose to 28.4% in the second quarter of 2020, from 15.6% in the third quarter of 2019.
A comparison of the trade data for the first half of 2020 (the latest period for which data is available) relative to the first half of 2019, showed:
(i) the value of imports decreased by 20.2% to $506m due to volume or value changes in the importation of commodities, machinery & transport equipment, mineral fuel and lubricants; and
(ii) the value of total exports fell by 55.3% to $21.2m reflecting declines in agriculture and manufacturing exports. Figures 1.4 to 1.6 provide an overview of the key setbacks in the real economy of Grenada due to Covid-19.
Assessment of Real Sector Forecasts
In the 2020 Economic Review & Medium-Term Outlook, economic growth is projected at an average rate of 4.6% during 2021-2023. This differs slightly from the IMF which predicts average growth of 4.4%.
Of note, the Authorities predict a sharp recovery of 6.0% in 2021, and a deceleration in growth to 4.8% and 3.0% in 2022 and 2023 respectively.
The IMF, however, predicts a softer recovery of 3.0% in 2021, an accelerated uptake in 2023 of 5.1 %, and stabilization to 5.0 % in 2023 (Figure 1.7). The Authorities based their medium-term growth forecasts on the view that there would be no additional lockdowns at home; the mass resumption of face-to-face classes for SGU students; increasing commercial activity, especially construction and agriculture; good weather; and a worldwide economic recovery.
The medium-term forecasts for inflation are generally similar, except that those of the IMF have less fluctuation and an increasing trend throughout the years.
Like the growth projection, the inflation projections are highly uncertain and depend on global developments.
The FROC assesses that 6.0% growth for 2021 is optimistic, and the local economy needs additional policy support and effective immunization to make this a reality.
There are a number of reasons why the FROC is cautiously optimistic. Firstly, vaccination of more than 50.0% of the population may take until the third quarter of the year, which could perhaps delay the economic recovery.
Secondly, rising infections in 2021 can lead to curfews and protocols being reintroduced this year, which would see a softer recovery.
Thirdly, a mass resumption of face-to-face classes for SGU students will not take place until August 2021, thus delaying the resumption of local activity that heavily relies on the presence of the students.
Fourthly, tourism will be affected by re-emerging and new restrictions on travelers. Various forecasts indicate that a recovery in global tourism will take place during 2023-2024.
Moreover, there is much uncertainty surrounding the IMF’s forecast for the global economy to grow by 5.5 %11, and much will depend on the pace of global containment of the virus, as well as effective policy actions and immunisations across the world.
The key ones are listed below:-
- A delayed global economic recovery;
- Continued low rate of implementation of the PSIP;
- Additional deferments by SGU of on campus learning;
- Adverse weather including an active hurricane season; and
- Unplanned or unbudgeted spending or contingent liabilities that can reallocate spending from required growth enhancing reforms.
The pandemic brought challenges and opportunities to Grenada during the year under review. The country should leverage the upside risks such as digital transformation and seek opportunities to diversify the economy.
It is important that Grenada examines the future of trade and tourism while determining how it can diversify and increase its resilience as we enter the post Covid-19 period.
Stronger and more resilience will help to support fiscal and debt sustainability. Also, fiscal responsibility is crucial in dealing with challenges requiring public sector support for the economy.