The Mt Hartman area has cost the taxpayers millions as government under the former New National Party (NNP) administration of Dr. Keith Mitchell had to repay a multi-million dollar loan that was guaranteed to U.S Investor E.J Miller who drew down on the money and soon disappeared.
The following extracts were taken from the most recent report issued by the Washington-based International Monetary Fund (IMF) on the performance of the Grenadian economy.
“Grenada remains in public debt distress solely due to longstanding unresolved arrears to official bilateral creditors of about US$37.6 million (3.1 percent of GDP) as of end 2022.
However, public debt is assessed as sustainable reflecting favorable projected debt dynamics from substantial fiscal surpluses that are supported by the return to the fiscal rule in 2023.
Public debt rose to 71.4 percent of GDP in 2020 from 58.5 percent in 2019, due to the pandemic-induced collapse in GDP. As tourism and offshore education sectors, as well as construction activity rebound, public debt resumed its pre-pandemic downward trend in 2021 and reached an estimated 64.6 percent of GDP in 2022, with a further decline expected in 2023.
Going forward, continued adherence to the fiscal responsibility framework and regularization of arrears will be needed to maintain a sustainable debt trajectory and upgrade the risk rating.
Even though the public debt[1]to-GDP ratio does not breach its threshold under the baseline scenario, the present value of the external debt-to-GDP ratio and the external debt service-to-revenue ratio marginally breach the thresholds.
Public debt should be further reduced to create a buffer that will allow Grenada to better weather the extensive external shocks and natural disasters, as underscored by the stress test scenarios.
Public debt in this DSA is defined as the sum of central government debt (including arrears on principal and interest and overdue membership fees to international organizations) and government-guaranteed debt.
It does not include non-guaranteed debt of state-owned enterprises (SOEs) and limited liability companies, notably PDV Grenada’s debt on account of the Petrocaribe arrangement.
Based on the determination that the Government of Grenada is not responsible for the debt but only for its shares in the company, the Petrocaribe debt has not been included in the stock of central government debt.
Until recently, gaps and time lags in the public enterprises’ reporting hampered the complete coverage of public sector debt.
Substantial improvement in the comprehensiveness and timeliness of SOE debt data has been made recently, but an expansion of the perimeter to the public sector is still unfeasible because of the lack of consolidated debt data in the public sector.
The authorities plan to amend the Fiscal Responsibility Act (FRA) in the second half of 2023, which will broaden the coverage of public debt to include debt of all state-owned enterprises (SOEs) and statutory bodies as well as public private partnership related liabilities (PPP).
The stock of non-guaranteed SOE debt is substantial, estimated at 16.2 percent of GDP in 2022, and is reflected in the contingent liability stress test.
The bulk of this stock (10.8 percent of GDP) is accounted for by PDV Grenada’s total debt. The current stock of PPP capital remains zero, and thus the related contingent liability shock is set to zero.
The FRA puts a cap on PPP-related government liabilities at 5 percent of GDP. Contingent liabilities from financial markets are set at the minimum value of 5 percent of GDP, which represents the average cost to the government of a financial crisis in low-income.
As reported in the 2014 staff report for the approval of the ECF arrangement, PDV Grenada is a limited liability company with the government’s share of 45 percent and Venezuela’s PDVSA’s share of 55 percent.
The DSA takes a conservative approach towards the public enterprise debt. For example, a substantial “haircut” on Petrocaribe debt was granted to St. Vincent and the Grenadines in 2018.
Moreover, the existing debt of the central government to PDV Grenada of 2.9 percent of GDP is not subtracted from the possible contingent liability.
Besides the cap on PPP-related liabilities, the FRA includes a target (at or below 55 percent of GDP) and three operational rules (i.e., primary balance at or above 3.5 percent of GDP, real primary expenditure growth at or below 2 percent per year, and wage bill at or below 9 percent of GDP), among other requirements.
External and total public debt rose sharply in 2020 but have since declined. Prior to the pandemic, Grenada’s public debt declined significantly from 94.3 percent of GDP in 2014 to 58.5 percent of GDP in 2019, on the back of solid growth averaging 4.5 percent and robust primary surpluses averaging 4.7 percent of GDP in the same period.
Total external debt rose in 2020–21 driven by external public debt dynamics. Public debt rose in 2020 to 71.4 percent of GDP due to the collapse in GDP but also to a smaller primary balance surplus.
Public debt resumed its earlier downward trend in 2021 and reached an estimated 64.6 percent of GDP at end-2022. At the same time, the composition of debt shifted further towards external sources reflecting continued support from multilateral organizations.
There were no significant changes in the average maturity of either external or domestic debt. In 2020, Grenada benefited from a deferral of debt service of US$1.4 million or 0.1 percent of GDP under the G20 Debt Service Suspension Initiative.
The assumed 5 percent of GDP of liabilities is expected to cover potential cost to the state if credit risks in credit unions continue to worsen (latest numbers suggest that credit union NPLs were 1.1 percent of GDP in 2022).
The authorities continue to make efforts to resolve the remaining external arrears. These arrears are a legacy from the 2014 debt restructuring, reflecting arrears to non-Paris Club holdouts, commercial creditors, and international organizations.
In October 2022, the Government of Grenada reached a repayment agreement with the State of Libya on the US$5 million in debt arrears owed. Arrears of about US$37.6 million owed to non-Paris Club official bilateral creditors including Trinidad and Tobago and Algeria remain to be regularised.
The authorities reported progress in advancing negotiations with Trinidad and Tobago, for which high-level discussions have taken place and an escrow account was opened to deposit payments.
Limited progress has been made on clearing the arrears with Algeria. Commercial arrears purport overwhelmingly to holdouts of the 2012 USD restructured bonds. The authorities continue to engage commercial creditors to reach a resolution. Arrears have increased due to the accrual of interest.
Most portfolio characteristics of Grenada’s debt continued to improve. Consistent with their debt strategy and in line with commitments from development partners, the authorities are seeking to shift towards largely concessional external debt.
The average time to maturity has been stable at around 10 years for external debt. Average time to re-fixing of the external debt portfolio increases marginally to 9.9 years, and the average effective interest rate on all central government debt declined from 2.8 to 2.5 percent in 2022.
As expected from the financing structure, the share of external debt held by multilateral creditors increased to 67.3 percent in 2022 from 64.7 percent in 2021. Furthermore, the government of Grenada is committed to a non-concessional borrowing ceiling, of US$80 million, between July 1, 2022–June 30, 2023.
Portfolio risks, while declining, remain. The interest rate is subject to a moderate risk with an average time to re-fixing of 9.2 years for the entire portfolio in which 24 percent of the portfolio is subject to a change in interest rates in one year.
This risk resides predominantly in the domestic portfolio in which 30.5 percent of this debt is subject to re-fixing in one year, which could lead to higher interest cost given the higher interest rate environment.
Nevertheless, the re-fixing risk from the domestic portfolio is likely small given the strategy to shift to concessional financing in the next few years.
The current portfolio is subject to only moderate foreign exchange risk as most of foreign currency debt is denominated in U.S. dollars to which the EC dollar is pegged.”