The International Monetary Fund (IMF) stated on Thursday that Grenada’s economy is experiencing “sustained, strong growth” supported by a robust tourism sector, projecting nearly four per cent growth for this year.
Additionally, the Washington-based financial institution noted that a surge in Citizenship by Investment (CBI) revenue has resulted in a large budget surplus, increased government deposits, and lower public debt.
Under the CBI, foreign investors obtain Grenadian citizenship in exchange for substantial investments in the country’s socio-economic development. The IMF, which conducted a mission to Grenada earlier this month, emphasized the need for improved management of these potentially volatile CBI revenues, containment of recurrent expenditure growth, and enhanced public financial management.
The IMF also highlighted rising risks in the non-bank financial system, urging better data collection, increased supervisory oversight, and regional cooperation in supervision.
“Reducing Grenada’s dependency on imported fossil fuels, enhancing competitiveness, and investing in climate resilience are crucial to achieving long-term growth,” the IMF added.
The IMF reported that Grenada's economy expanded by an estimated 4.4 per cent last year, supported by one of the fastest growth rates in stayover arrivals in the Caribbean and increased spending per tourist. Construction activity slowed as major capital projects concluded, and new projects linked to the recent CBI surge were delayed.
Inflation decreased to 2.2 per cent by the end of last year as pressures on food and fuel prices eased. The current account deficit is estimated to have narrowed due to increased tourism receipts.
“Strong CBI revenues resulted in a substantial fiscal surplus of eight per cent of GDP in 2023, higher government deposits equivalent to 17 per cent of GDP, and a decline in public debt to 75 per cent of GDP. Financial conditions in the banking sector remain stable, with high liquidity levels and modest levels of non-performing loans.”
The IMF said growth is projected to decelerate in the coming years as capacity constraints weigh on tourism growth and investment.
It said the economy is projected to grow 3.9 per cent this year bolstered by another strong year of tourism activity and that as hotels are already close to their high-season capacity limits, growth is projected to gradually slow to 2.7 per cent over the medium term.
“The outlook is sensitive, though, to the level of CBI inflows, the degree to which those flows finance new growth-enhancing investment and the progress in completing the current pipeline of hotel projects including non-CBI financed ones.
“The clearing of the large backlog of CBI applications from the recent surge is projected to result in a large 2024 budget surplus of 9.5 per cent of GDP and further accumulation of government deposits.
“The CBI revenues are thereafter expected to normalize to pre-surge levels. Nonetheless, sustained lower primary surpluses anchored in the government’s fiscal rules framework are projected to support a gradual reduction of public debt to the 60 per cent of GDP target by the end of the decade,” the IMF said.
It noted that the recent heightened international scrutiny over CBI programmes represents a risk to this important source of income and that other important downside risks include a slowdown in key tourist source markets, global commodity price volatility and the ever-present threat of natural disasters.
The Washington-based financial institution said that the high level of government deposits and a falling debt-to-GDP ratio provide an important buffer against unanticipated shocks.
It said the potential swings in CBI revenue warrant continued careful management of public finances.
The IMF said given the authorities’ cautious treatment of CBI revenues, the expected normalization of CBI revenue appears manageable.
“Nonetheless, the uncertainty over the size of future inflows underscores the need to contain growth in expenditures. Greater prioritization over budget outlays and putting in place measures to improve tax administration and raise tax revenues -through adjusting the gasoline tax in context of instituting a symmetric pass-through formula for gasoline prices – would prepare the economy well for potential CBI shortfalls.”
The IMF said development of a social protection policy, establishment of a central beneficiary registry and the planned introduction of cashless payments would improve targeting and oversight of social benefits and create scope to phase out subsidies to cooking gas.
It said that continued focus and commitment to the CBI program integrity and full implementation of Grenada’s related regional commitments will be important to mitigate potential risks to its revenue.
“A more coherent and transparent framework for managing CBI revenues would strengthen budget and investment planning. Clearer recording of CBI flows in the budget and transferring all CBI revenues into the National Transformation Fund (NTF) would bring the government’s CBI resources under a unified framework.
“Given the volatility in CBI revenues, a rules-based mechanism should be put in place that allows for annual transfers from the NTF to the budget. This would reduce uncertainty over budget revenue and guide the degree to which CBI inflows should be saved or used to finance fiscal spending.
“Applying the primary balance rule to a definition that is based on the NTF transfer – rather than the CBI inflow – would provide for a more predictable annual budget constraint. All NTF assets should be externally managed under a clearly specified investment policy and subject to a strong transparency and accountability framework, with operationalization of regular financial reporting on the size, asset allocation and performance of the NTF.”
The IMF said that improvements are needed to public investment management, adding this includes enhancing the procurement process and upgrading the framework for public-private partnerships.
It said to ease execution constraints, there is a need to strengthen project planning and selection and improve capacity in project management, monitoring and ex-post reviews of performance.
An earlier publication of the medium-term fiscal framework would strengthen its role in providing top-down guidance for the budget process and in determining the potential envelope for spending.
“Well-coordinated implementation of ongoing public sector reforms will help improve administrative efficiency and the fiscal outlook. The carefully sequenced regularization of public sector workers can help address persistent public administration capacity constraints.”
The IMF said completion of the ongoing public service functional review would help ensure new appointments are well-aligned with public service priorities and can also help inform staff retraining needs.
It said the planned establishment of a new, defined-contribution public sector pension scheme for new and regularized hires is important to avoid adding to the fiscal liability from the existing defined benefit plan.
“Recent parametric pension reforms of the National Insurance Scheme, including the phased increases in the contribution rates and pensionable age, should help reduce the system’s actuarial imbalances. Nonetheless, additional efforts are needed to incentivize longer periods of contributions, increase participation of self-employed workers, and ensure benefits are based on career-average wages.”
The IMF has told Grenadian authorities there is a need to address vulnerabilities within the financial sector.
It said credit union lending practices and asset quality warrant close monitoring and that targeted supervisory measures have facilitated a reduction in non-performing loans and improved provisioning.
“Given the resumption of rapid credit union lending growth, these steps should be complemented with improved reporting requirements to strengthen supervisors’ ability to monitor asset quality and forbearance practices, ensure adequate risk management practices, and respond quickly in the event of a worsening in credit quality.
“Impaired asset treatment and provisioning requirements should be more closely aligned to those for banks and enforcement of these standards should be strengthened. This would prepare Grenada’s credit union sector for the planned adoption of common minimum standards for Eastern Caribbean Currency Union (ECCU) countries. The stress testing of credit unions should continue to be improved and supervisory resources increased to reflect the credit unions’ increasing systemic significance.”
The IMF said property insurance premiums have come under pressure from ongoing re-evaluation of climate risks by global reinsurers.
“This is likely to exacerbate the degree of under-insurance and increase credit risks for lenders, calling for improved supervisory data collection and analysis that can also inform quantification of contingent government obligations.
“Oversight of reinsurance risks in cross-jurisdictional insurance companies calls for close regional supervisory cooperation,” it said, adding that “continued efforts are also needed to improve access to credit.
“Government assistance to small businesses in formulating their business strategies, maintaining records, and fulfilling other loan requirements would be valuable. The credit reporting bureau will also facilitate credit access by reducing information asymmetries and the cost of due diligence,” the IMF added.
It said strengthening the anti-money laundering and combating the financing of terrorism (AML/CFT) framework will strengthen financial integrity and help protect correspondent banking relationships.