Grenada: Staff concluding statement of the 2022 Article IV Mission

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USA / GRENADA – Grenada’s tourism-dependent economy was hit hard by the COVID-19 pandemic. The authorities’ decisive policy response supported by the policy space that was created from past fiscal prudence, has helped contain the spread of the virus, protect lives and livelihood, and pave the way for a gradual recovery. The immediate priorities are to accelerate vaccination and provide time-bound fiscal support.

Once the recovery is firmly in place, fiscal buffers should be rebuilt, including by returning to the fiscal rules in 2023 while reprioritizing spending to make space for needed investments in building resilience to climate change. Prospects for growth and job creation would be strengthened by enhancing the domestic value-added of tourism, including through strengthening agricultural sector linkages, investing in skills development and training, and shifting toward renewable energy.

Grenada put in place a strong fiscal and public health response to the pandemic. While the government’s early lockdown in the Spring of 2020 contained the number of COVID-19 cases, the impact on the economy was severe. Real GDP shrank by 14 percent in 2020 as tourism-related activities collapsed and in-person classes at Saint George’s University were suspended. To counter the social and economic effects of the pandemic, the government suspended its fiscal rules in 2020-2021 in order to increase health, social, and capital expenditure. At the same time, loan moratoria and regulatory forbearance have supported credit provision and mitigated the impact of the pandemic on Grenada’s financial system.

The economy is recovering. Real GDP is estimated to have expanded by 5.6 percent in 2021. Stay-over tourist arrivals picked up strongly in the last months of 2021 but remained at only 25 percent of pre-crisis levels for the year as a whole. Construction and agriculture did, though, rebound faster. The fiscal balance excluding interest payments is estimated to have maintained a surplus of around 2 percent of GDP and public debt declined to 70 percent of GDP in 2021. Real GDP is projected to expand by 4.3 percent in 2022.

Risks to the outlook are significant. The main risk is a more prolonged pandemic, with implications for tourism and offshore education. Accelerating the pace of vaccination would substantially mitigate this risk and lessen the potential for serious illness and loss of life that could be associated with new variants. Higher food and oil prices and prolonged supply chain disruption could lead to further increases in inflation, including through second-round effects. Tighter global financial conditions could reduce liquidity domestically and affect credit provision. Natural disasters continue to be an ever-present risk. On the positive side, the effective deployment of public investment and accelerating the introduction of growth-enhancing reforms would both support a stronger recovery.

Supporting the recovery and building resilience

Continuing to provide fiscal support in 2022 will help strengthen the recovery and lessen the burden of the pandemic on vulnerable households. The authorities have rightly triggered the escape clause for the fiscal rules for the third year allowing the 2022 budget to provide essential support to economic activity. Targeted social spending will assist the vulnerable and address potential scarring. Additionally, measures to provide fiscal relief have helped mitigate the impact on households of rising living costs. It will be important, though, to ensure these fiscal relief measures are temporary.

The government should be able to return to the fiscal rules in 2023 while continuing to support sustainable development and resilience building. The fiscal rules have been instrumental in providing fiscal credibility and ensuring debt sustainability which gave the government significant room to maneuver when the pandemic hit. Recent increases in public investment, particularly those targeted at building resilience to climate change should be sustained. It will be important to secure concessional financing and mobilize domestic resources to fund these outlays. Finally, in the coming years, the government should design and implement a comprehensive pension reform (including an increase in contributions and a phased raise of the retirement age) so as to improve the financial position of the pension system.

There is scope to increase the efficiency of public spending. Efforts are underway to improve the implementation of public investment projects while reducing costs and lessening fiscal risks. Implementing the 2017 Public Service Management Reform Strategy would increase the quality of public service delivery. Finally, better targeting and enhanced coordination across ministries, including through a comprehensive database of beneficiaries, would increase the impact of the existing 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 anchor and could be simplified while ensuring a predictable return to the targeted debt path after an unanticipated shock. The framework should be embedded within a realistic and credible medium-term macro-fiscal framework. The roles and responsibilities of the Fiscal Responsibility Oversight Committee could be strengthened in assessing fiscal plans and performance and conditions for activating the escape clause. Finally, fiscal transparency would be enhanced by timely publishing audited financial statements of the public sector, audited COVID-related spending, and reports of state-owned enterprises (SOEs).

Sustaining growth and creating jobs

Given a potentially long-lasting reduction in the demand for cruises, the government should aim to facilitate a shift in the tourism model toward stay‑over tourists. Domestic value added of the tourism sector can be strengthened by working with local producers to align output with the demands of hotels and restaurants. A diversification of tourism revenues 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 receive a high priority. The establishment of a public asset registry should help prioritize maintenance spending on critical resilient infrastructure. Working with the private sector to enforce building codes and broaden insurance coverage, particularly catastrophe risk insurance will help in responding to natural disasters. The legislative framework for 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). The Citizenship-by- Investment (CBI) Program inflows can be used to ramp up resilience building and developments in other sectors, such as agri-business and ICT, to promote growth and job creation.

Grenada can reduce its carbon footprint and strengthen its external position by shifting to renewables and investing in energy conservation. This can be supported by regulatory adjustments, changes to construction standards, and incentives to invest in renewables. It will also be important to assess and mitigate any resulting impact of this energy transition on the poor and vulnerable.

Bolstering financial stability

The financial sector has weathered the pandemic well. Nonperforming loans in credit unions rose to 7.4 percent of total loans in end-2021 but those among banks remain low. However, there is a risk that asset quality may deteriorate, including as loan moratoria and regulatory forbearance expire. Banks have met the ECCB’s recently-revised guidance on loss provisioning, but credit unions need to increase their provisioning. Given the country’s vulnerability to natural disasters and climate change, there is a need to strengthen the monitoring of climate-related financial stability risks, particularly for the insurance sector.

The oversight of credit unions needs to be strengthened. Despite being smaller than banks, credit unions have grown rapidly and are highly concentrated. The local financial regulator has appropriately enhanced the frequency and intensity of monitoring of credit unions. Efforts should continue to ensure there are routine stress tests, governance is strengthened, capital requirements are increased, and more granular data is collected and published.

Continued efforts to strengthen the anti-monetary laundering and combating financing of terrorism (AML/CFT) framework will be critical to lessen risks to correspondent banking relationships. To strengthen financial integrity, Grenada has designated the ECCB as the competent AML/CFT authority for banks. Cooperation between Grenada Authority for the Regulation of Financial Institutions, Grenada’s Financial Intelligence Unit, and the ECCB can be increased. Also, due diligence of the CBI program should remain robust.

Data issues

Data quality and timeliness need to be enhanced to help inform government and private sector planning. Data provision is broadly adequate for surveillance but has important shortcomings. 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 as well as turnover in the statistics office. Rebuilding staffing levels and investing in training should be a priority going forward.

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