The International Monetary Fund (IMF) has recommended that the Government of Grenada return to the fiscal rules used to manage the country’s finances before the onset of the novel coronavirus.
The recommendation follows the completion of a staff report in April and an Article IV consultation with government officials in May.
Enshrined in the Fiscal Responsibility Act, 2015, the fiscal rules guide the fiscal adjustment and reforms under and after the IMF’s Extended Credit Facility-supported programme, which began in 2014. The fiscal rules effectively help Grenada to reduce its debt and deficit while creating room to earn revenues and build up its financial reserves.
However, the fiscal rules can be suspended in the event of severe adverse shocks, including a pandemic, an epidemic, a natural disaster, or a financial crisis.
To this end, the Government of Grenada, in 2020, triggered the escape clause under the Act at the onset of the novel coronavirus pandemic as a fiscal response to support the livelihoods of residents and economic recovery of the country. It has since continued its fiscal management under the escape clause, but has informed the IMF that it will return to the rules in 2023.
According to the IMF, “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.”
The fund further outlined that the authorities’ policy response helped reduce the blow of the pandemic through containment measures, increased health and social spending, and an expanded public investment programme. However, the central government’s debt rose and the current account deficit widened as a result.
In this regard, the fund noted, “Barring unforeseen events, the fiscal rules should come back into force starting 2023 to ensure fiscal credibility and sustainability. To sustain the recent increase in public investment in resilient infrastructure, it will be important to secure concessional financing and mobilise domestic resources.”
But while the Government of Grenada has heeded the call of the IMF to return to fiscal rules, it is contemplating an amendment to the Fiscal Responsibility Act, 2015 “to best support the country’s sustainable development”.
The IMF outlined that Government officials “welcomed the discussion on the strategy and options to amend the FRF and expressed strong interest in receiving capacity development support from the fund in this regard.
“There was broad agreement on the need to make further progress on structural fiscal reforms,” the fund added.
In addition, the Government has indicated that it 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.
But the language of the communication has caused some Grenadians to question if the Government will head back to the IMF for another programme or facility.
In fact, one citizen in Grenada told the Jamaica Observer, “People are tight-lipped about the recent statement by the IMF. Perhaps there is something they’re not saying [because] we are due for elections soon.”
The Grenadian also shared a press release in which the Grenadian Union of Teachers, Public Workers Union, and Grenada Technical and Allied Workers Union expressed concerns about “the intentions of the IMF” in engaging a matter surrounding a pension ruling.
At the same time, the unions do not believe they are being adequately furnished with enough information about dicussions taking place between the Government and the IMF.
“The unions noted that, while the Government has publicly appointed a committee to respond within three months, unknowing to us, they have engaged the IMF on this matter and have provided relevant information to the IMF that they have not shared with the unions,” the release said in part.
Of note, IMF directors in their communication with the Grenada Government noted that there are potential fiscal risks from the recent court ruling on public pensions and underscored the need to ensure the sustainability of the FRF.
“The Government should implement a comprehensive pension reform to improve the financial position of the pension system,” the IMF staff report recommended.