THE Grenada government has been strongly advised to rethink plans to seek a US$107 million loan from China to finance the construction of a 100-room luxury hotel in the island.

The International Monetary Fund (IMF) has told the country that a loan of that magnitude, which translates into 17 per cent of the country's GDP, could jeopardise debt sustainability.

The lending agency offered that advice in its 'Staff Report for the 2009 Article IV Consultation, Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility'.

The authorities in Grenada are seeking the concessional loan from the Export-Import Bank of China for the project that is a joint venture with private investors, but the IMF said it is not the right move.

"In order for such a project to be a sound investment for the government, it would need an objective and outside assessment, substantial equity participation from private investors, and shared risks amongst all parties," it said.

The authorities are consulting with the International Finance Corporation (IFC) -- a World Bank group which finances private sector investment, mobilises capital in the international financial markets, and provides advisory services to businesses and governments in developing countries -- for an objective assessment of the economic and financial return from such a loan.

But the IMF says that "given the uncertain prospects for the tourism sector at this juncture, building a 100-plus room hotel is an inherently risky venture".

"In view of the above, staff is not proposing to accommodate this loan under the program ceiling on bilateral concessional debt," the lending agency added.

In its report, the IMF also pointed out that economic activity in Grenada is slowing significantly, reflecting the drag of the global crisis on tourism receipts, foreign direct investment (FDI), and remittances.

"Tourist stayover arrivals fell 18 per cent in the first eight months of 2009 compared to the same period in 2008. Almost all FDI-financed construction of tourism projects has been put on hold, owing to financing difficulties and uncertain prospects," it pointed out.

The Washington-based institution also noted that the weak economy has led to rising unemployment, while poverty remains widespread in Grenada.

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