IMF executive board concludes 2022 Article IV consultation with Grenada

USA / GRENADA – On May 4, 2022, the executive board of the International Monetary Fund (IMF) concluded the Article IV consultation with Grenada.

Grenada’s tourism-dependent economy was hit hard by the pandemic, with a decline in real output of 14 percent in 2020. Growth in 2021 is estimated to have partly recovered to 5.6 percent, driven by construction and agriculture. The authorities’ policy response helped mitigate the pandemic’s impact through containment measures, increased health and social spending, and an expanded public investment program. Central government debt rose and the current account deficit widened. The financial sector has so far weathered the crisis well.

Economic growth is expected to continue into 2022, though at a slower pace of 3.6 percent, on the back of construction activity, the gradual pickup in tourist arrivals, and the recovery in offshore education. The war in Ukraine affects Grenada primarily through higher commodity prices and represents a significant headwind to the outlook. The major risks to the outlook are a further rise in global commodity prices, which could lead to further increase in inflation, and/or a more prolonged pandemic, with implications for recovery in tourism-related activities.

The government is committed to a return to the fiscal rules in 2023, after triggering the escape clause in 2020–22 to allow for counter-cyclical fiscal policy. It is also weighing the options of amending its fiscal responsibility law to best support the country’s sustainable development. The government is seeking international support to facilitate the implementation of its Disaster Resilience Strategy and a transition towards renewable energy, critical for enhancing resilience to natural disasters and economic competitiveness.

Executive board assessment

Executive directors agreed with the thrust of the staff appraisal. They commended the authorities’ timely response to the pandemic, facilitated by past fiscal prudence, that helped mitigate its impact on Grenada’s tourism-dependent economy. Directors noted that while the near-term outlook is favorable, it remains subject to significant downside risks, including from the impact of the war in Ukraine on food and commodity prices, and potential worsening of the trajectory of the pandemic. They agreed that the immediate policy priorities are to accelerate vaccination and provide time-bound fiscal support for the most vulnerable. Implementing reforms targeted at building resilience to climate change and increasing economic diversification will also be necessary to promote higher and more inclusive long-term growth.

Directors agreed that triggering the escape clause under the fiscal responsibility framework (FRF) for the third time was appropriate given the still difficult economic situation. However, they encouraged a timely return to fiscal rules and a strengthening of the FRF over time – supported by the Fund’s technical assistance – to help underpin fiscal credibility and debt sustainability and better support the country’s development needs. Directors stressed the importance of securing concessional financing and mobilizing domestic resources to strengthen resilience-building investments and welcomed the continuing efforts to increase spending efficiency and transparency. They also noted the potential fiscal risks from the recent court ruling on public pensions and underscored the need to ensure the system’s sustainability.

Directors agreed that the financial sector has been resilient in the face of the pandemic shock. However, they noted that asset quality should be monitored closely as loan moratoria and regulatory forbearance expire. Directors called for increased provisioning and strengthened supervisory oversight of credit unions. They also underscored the need for further strengthening of the AML/CFT framework also to help maintain correspondent banking relationships.

Directors welcomed the authorities’ commitment to implement their Disaster Resilience Strategy to strengthen Grenada’s resilience to climate change and transition towards renewable energy. To further increase competitiveness and boost growth, Directors encouraged the authorities to increase the value-added in tourism through deeper linkages across sectors, diversify tourism sources, and improve cost competitiveness. Addressing long-standing labor skills mismatches should also be prioritized.