Grenada: Final Statement from the Article IV M…
(MENAFN-Caribbean News Global)
UNITED STATES / GRENADA – Grenada’s tourism-dependent economy has been hit hard by the COVID-19 pandemic. The authorities’ decisive policy response, backed by the policy space created by past fiscal prudence, has helped contain the spread of the virus, protect lives and livelihoods, and pave the way for a gradual recovery. Immediate priorities are to accelerate immunization and provide time-limited budget support.
Once the recovery is firmly in place, fiscal buffers should be rebuilt, including returning to fiscal rules in 2023 while reorganizing spending to make room for the investments needed to build resilience to climate change. Prospects for growth and job creation would be enhanced by increasing the domestic added value of tourism, including by strengthening links with the agricultural sector, investing in skills development and training, and switching to renewable energy.
Grenada has put in place a strong fiscal and public health response to the pandemic. While the government’s early lockdown in spring 2020 contained the number of COVID-19 cases, the impact on the economy was severe. Real GDP shrank 14% in 2020 as tourism-related businesses slumped 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 budgetary rules in 2020-2021 in order to increase health, social and investment expenditure. At the same time, loan moratoriums and regulatory forbearance have supported credit supply and mitigated the impact of the pandemic on Grenada’s financial system.
The economy is recovering. Real GDP is estimated to have grown by 5.6% in 2021. Overnight tourist arrivals increased sharply in the last months of 2021, but remained only 25% of pre-crisis levels for the whole year. Construction and agriculture, however, rebounded more quickly. The fiscal balance excluding interest payments is estimated to have maintained a surplus of around 2% of GDP and public debt has fallen to 70% of GDP in 2021. Real GDP is expected to grow by 4.3% in 2022.
The risks to the outlook are significant. The main risk is a more protracted pandemic, with implications for overseas tourism and education. Accelerating the pace of vaccination would significantly mitigate this risk and reduce the potential for serious illness and death that could be associated with the new variants. Rising 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 domestic liquidity and affect credit supply. Natural disasters continue to be an ever-present risk. On the positive side, effectively deploying public investment and accelerating the introduction of growth-enhancing reforms would support a stronger recovery.
Supporting recovery and building resilience
Continued fiscal support in 2022 will help strengthen the recovery and ease the burden of the pandemic on vulnerable households. The authorities rightly triggered the escape clause in the fiscal rules for the third year allowing the 2022 budget to provide much-needed support to economic activity. Targeted social spending will help vulnerable people and address potential scars. In addition, the budgetary relief measures have helped to mitigate the impact on households of the rise in the cost of living. However, it will be important to ensure that these tax relief measures are temporary.
The government should be able to return to fiscal rules in 2023 while continuing to support sustainable development and building resilience. Fiscal rules helped ensure fiscal credibility and ensure debt sustainability, which gave the government significant leeway when the pandemic hit. Recent increases in public investments, particularly those aimed at building resilience to climate change, should be maintained. Securing concessional financing and mobilizing domestic resources to finance these expenditures will be important. Finally, in the coming years, the government should design and implement a comprehensive pension reform (including an increase in contributions and a gradual increase in the retirement age) in order to improve the financial situation of the pension system. retirement.
It is possible to increase the efficiency of public spending. Efforts are underway to improve the implementation of public investment projects while reducing costs and fiscal risks. Implementation of the 2017 Civil Service Management Reform Strategy would improve the quality of public service delivery. Finally, better targeting and coordination between ministries, including through a comprehensive database of beneficiaries, would increase the impact of existing social assistance programs.
The current conjuncture offers an opportunity to carefully reconsider the design of the fiscal framework. The framework should focus on medium-term debt anchoring and could be simplified while ensuring a predictable return to the targeted debt path after an unexpected shock. The framework should be part of a realistic and credible medium-term macro-fiscal framework. The roles and responsibilities of the Budget Accountability Oversight Committee could be strengthened in assessing budget plans and performance and the conditions for activating the escape clause. Finally, fiscal transparency would be enhanced through the timely publication of audited public sector financial statements, audited COVID-related expenditures, and SOE reports.
Supporting growth and creating jobs
Given a potentially long-lasting reduction in demand for cruises, the government should aim to facilitate a shift in the tourism model towards transient tourists. The national added value of the tourism sector can be enhanced by working with local producers to align production with the demands of hotels and restaurants. Diversification of tourism revenue can be achieved by increasing the number of flights, leveraging the presence of Saint George University to provide health services to visitors, and advancing investment in fishing and tourism businesses. ecotourism.
The implementation of Grenada’s disaster resilience strategy should be given high priority. The establishment of a registry of public assets should help prioritize expenditures for the maintenance of resilient critical infrastructure. Working with the private sector to enforce building codes and expand insurance coverage, particularly catastrophe risk insurance, will help respond 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). Inputs from the Citizenship by Investment (CBI) program can be used to accelerate resilience building and developments in other sectors, such as agribusiness and ICT, to promote growth and job creation. jobs.
Grenada can reduce its carbon footprint and strengthen its external position by switching to renewable energy and investing in energy conservation . This can be supported by regulatory adjustments, changes to building standards and incentives to invest in renewable energy. It will also be important to assess and mitigate any impact resulting from this energy transition on the poor and vulnerable.
Strengthen financial stability
The financial sector has weathered the pandemic well. Non-performing loans from credit unions increased to 7.4% of total loans at the end of 2021, but those from banks remain low. However, there is a risk that asset quality will deteriorate, especially as loan moratoriums and regulatory forbearance expire. Banks have complied with recently revised ECCB guidelines 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, especially for the insurance sector.
Supervision of credit unions needs to be strengthened. Although smaller than banks, credit unions have grown rapidly and are highly concentrated. The local financial regulator has appropriately increased the frequency and intensity of supervision of credit unions. Efforts should continue to ensure that 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-money laundering and counter-terrorist financing (AML/CFT) framework will be key to reducing the risks to correspondent banking relationships. To strengthen financial integrity, Grenada has designated the ECCB as the competent AML/CFT authority for banks. Cooperation between the Grenada Authority for the Regulation of Financial Institutions, the Grenada Financial Intelligence Unit and the ECCB can be strengthened. In addition, the due diligence of the CBI program should remain strong.
Data quality and timeliness need to be improved to help inform government and private sector planning. Data provision is broadly adequate for monitoring, but has significant gaps. CARTAC provided technical assistance on national accounts, consumer price index and external sector statistics. However, improvements are still possible with regard to the collection of high-frequency indicators, the publication of consolidated financial statements of public enterprises and the 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. Replenishing the workforce and investing in training should be a priority going forward.
Legal disclaimer: MENAFN provides the information “as is” without warranty of any kind. We assume no responsibility for the accuracy, content, images, videos, licensing, completeness, legality or reliability of any information in this article. If you have any complaints or copyright issues related to this article, please contact the provider above.