GRENADA plans to commence talks with its creditors to restructure its EC$2.2- billion public debt.
Rising interest payments in the face of falling revenue and a high wage bill has prompted the government to miss an interest payment due this month.
It is the second time that it has been faced with an interest payment that it couldn't meet within the last six months, although back in September, when the Government felt it couldn't find the funds to pay the coupon on a US$193-million bond, due in 2025, it eventually paid the money before the grace period expired.
"Grenada, with much effort, was able to borrow the required USEC$4.4 million from local sources on a short-term basis," said Keith Mitchell, Grenada's prime pinister and pinister of finance.
But now, borrowing is not an option, and the Government has already said it doubts that it can find the funds to meet the payment.
The problem stems from prolonged economic contraction over the last four years and interest rate that keeps rising on debt, which was restructured in 2005.
Both the US-dollar and EC-dollar bonds are based on step-up coupon structures. The coupons, which started at one per cent in September 2005 and which are due for payment in March and September each year, increased from 2.5 per cent to 4.5 per cent in September 2011.
They are scheduled to step up again, to six per cent September, and then again in 2015, 2017 and 2018, when the rate stops moving at nine per cent.
In other words, interest payments climbed from EC$54 million in 2011 to EC$75 million last year, and is projected to jump to EC$100 million next year, after the rate is increased again this September.
The 2005 restructuring was predicated on Grenada seeing 4.7 per cent annual growth going forward, especially after hurricanes Ivan and Emily devastated the Island.
Instead, the country contracted by an average of 1.2 per cent a year from 2008 to 2012, primarily as a result of the global financial crisis.
"The global financial crisis has taken a heavy toll on the country, and aggravated the severe debt overhang that continues to weigh down our economy," said Mitchell. "It is now time for Grenada to confront the fact that it cannot continue to pay its debts on current terms, and that the restoration of growth requires the debt overhang to be resolved. We need a fresh start, and it is therefore imperative that we approach our creditors promptly to discuss an orderly restructuring of our liabilities."
Tax levels in Grenada is at approximately 20 per cent of GDP, while the debt is closing on to 90 per cent of economic output.
Government revenue has been recovering since 2009, when it tanked, but it still remained below 2008 levels up to 2011, while for the eights months to August 2012 it totalled was EC$273 million, or EC$10 million lower than the comparative period in 2011.
The VAT, which replaced the General Consumption Tax (GCT), Airline Ticket Tax, and the Motor Vehicle Purchase Tax in 2010 and which was performing well up to 2011 when it increased by 14 per cent to EC$160 million, or 38 per cent of revenue, was down by EC$5 million during the first eight months of last fiscal year.
Coroprate tax fell by EC$4 million, which accounted for the rest of the decline in revenue for the review period.
The Government has had to cut capital expenditure -- it fell from EC$88 million for the first eight months of 2011 to EC$65 million in the same period last year -- but the wage bill is high.
After jumping by 27 per cent in 2008 and by another 10 per cent by 2011, wages were slightly lower for January to August 2012 than the corresponding period in 2011, but it represented 55 per cent of total revenue.