Grenada Updating Economic Memorandum
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ReportNo. 6292-GRD Grenada UpdatingEconomic Memorandum Public Disclosure Authorized September5,1986 LatinAmerica and the CaribbeanRegional Office FOR OFFICIAL USE ONLY Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Documentof theWorld Bank Thisdocument has a restricteddistribution and may be used by recipients onlyin the performanceof theirofficial duties. Its contentsmay not otherwise bedisclosed without World Bank authorization. CURRENCYEQUIVALENTS Cur-encyUnit: East CaribbeanDollar (EC$) Followingits creationin 1965, the East Caribbeandollar was t.ed to the pound sterlingat a rate of .1.00- EC$4.8. In July 1976,the link with sterlingwas broken,and the EC$ was peggedto the US dollarat the rate of US$1.00 = EC$2.70. Since July 1976 EC$1.00 = US$0.37 or US$1.00 = EC$2.70 FOR OmCIL USEONLY PREFACEAND ABSTRACT This reportreviews recent economic develoiments and the main policy issueqin Grenada. (A more detailedanalysis of the development issuesand performanceis containedin "Grenada- EconomicMemorandum," ReportNo. 5606-GRD,May 10, 1985.) The economyof Grenadaperformed better than expectedin 1935, with GDP growingby 3.7%, followinglow or negativegrowth rates in the previousthr'se yoars. This growthwas the resultof increasesin tourism, manufacturingand governmentservices. Externalgrants, mostly from USAID, amountedto US$29milliorn, equivalent to one-thirdof GDP. These grants coveredthe balanceof paymentsdeficit and financedthe publicsector investmentprogram in full. In order to adjustto the expecteddrop in aid flows,the Governmenthas adopteda comprenensivetax reformprogram and intendsto trim its currentexpenditures through a major labor retrenchment.A growth rate of 4-5% a year is feasiblefor the economy over the medium term and Grenadashould be able to sustainthe necessary borrowing,including a modest amountat non-concessionalterms, if exports continueto rise as in 1985,and if the publicsector succeeds in increasingits savings. Thisdocument has a restricteddistribution and may be used by recipientsonly in the performance of theirofficial duties. Its contentsmay not otherwisebe disclosedwithout World Bank authorization. This reportis based upon the work of an IBRDmission to Grenada in Harch 1986 led by Mr. N. R.rachandran.The mission includedMr. D. Yuravlivker(IBRD), Mis. Velasco (IBRD),Hr. Byam (WNM), Mr. Ramsaran (consultant)and Mr. Joefield-Napier(CDB). UNDP (Barbados)contributed to the preparationof the TechnicalCooperation Program included in this report. GRENADA TABLE OF CONTENTS Pane COUNTRY DATA--GRENADA SUMMARY AND MAIN ISSUES.................................. *........ i-iii I. Recent Economic Developments................................... II. Public Sector Finance Issues................................... 2 II'. Balance of Payments........ ......... IV. Stctor Policy Issues.................. V. Public Sector InvestmentProgram (PSIP), 1986-88 ...............8 VI. Technical Cooperation Program................................ 11 VII. Medium-term Policies and Prospects,**#-# .................. ANNEX I: DevelopmentPolicyIssues................................14 ANNEX II: Public Sector Investment Program and Technical Assistance Programs .........................17 ANNEX III: Macroeconomic Projections........... * .............. 38 STATISTICAL APPENDIX.................................. 4 Page 1 of 2 COUNTRYDATA - GRENADA AREA POPULATION DENSITY 300 km2 98,000(end 1984) 820 per km2 Rat. of Growth:-0.X7 (from 1970-84) 480 p'r km2 of Arable Land POPULATIONCHARACTERISTICS 1984 HEALTH1979 CrudeBirth Rate (per1,000) 80.8 Population per Physician 481.0 Crude Death Rate (per 1,000) 7.9 Population per Hospital Bed 170.0 InfantMortality (per 1,000 livebirths) 10.8 INCOMEDISTRIBUTION DISTRIBUTIONOF LAND OWNERSHIP(1971) X of NationalIncome, Highest Quintile X Owned by Top IOX of Owners 48.4 LowestQuintile X Owned by LowestIOX of Owners 1.0 ACCESSTO PIPEDWATER 1976 ACCESSTO ELECTRICITY(1978) X of Population- Urban 100.0 X of Population,total 7a.0 - Rural 77.0 NUTRITION1977 EDUCATION1979 CalorieIntake as X of Requirements 88.0 AdultLiteracy Rate X 97.0 Per CapitaPrA.ein Intake (gr./day) 67.0 PrimarySchool Enrollment % 108.0 ONP PER CAPITAIN 1984: US1880a/ GROSSDOMESTIC PRODUCT IN 1984 ANNUALRATE OF GROWTH (X. constant prices) USS Min. X 1980-82 1983 1984 1985 (08t. (JP at MarketPrices 89.7 100.0 6.6 -2.9 2.0 8.7 Cross DomesticInvestment 29.6 82.9 84.6 -16.2 -13.8 12.0 Gross DomesticSaving -2.4 -2.7 CurrentAccount Balance -20.8 -22.8 Exportof Coods,NFS 40.3 44.9 -1.5 1.6 3.9 28.4 Importsof Goods,NFS 70.7 78.8 12.0 -4.4 -4.7 -15.4 OUTPUT1984 ValueAdded LaborForce (1981) US8 Min X Thousands X Agriculture 16.2 18.0 8.0 28.8 Industry 12.0 18.4 4.9 17.8 Other 81.6 68.6 14.9 t3.6 Total 89.7 100.0 27.8 100.0 CENTRALGOVERNMENT FINANCE EC MIln. X of CDP 1985 1986 1982 1988 1984 (Prel.) 1982 1988 1984 (Prel.) CurrentReceipts 74.4 81.8 87.4 100.4 84.4 86.6 36.0 38.8 CurrentExpenditures 71.6 74.4 88.8 98.6 88.1 83.5 86.6 87.9 CurrentSurplus 6/ 2.8 6.9 1.1 1.8 1.8 8.1 0.4 0.7 CapitalExpenditures 103.8 92.2 67.9 80.0 49.2 42.8 27.9 81.4 ExternalBorrowing (net) c/ 68.9 67.3 50.0 55.7 29.7 32.1 2010 21.4 a/ Atlas method, revised national accounts. c/ Includoeexternal capital grant$. k/ Beforeexternal budgetary assistance. .. Not applicable. 12age 2 of 2 COUNTRYDATA - GRENADA MONEY,CREDIT AND PRICES 19g0 1961 1962 1983 1984 Moneyand QuasiMoney 186.2 146.1 168.0 152.2 194.0 BankCredit to PublicSector 14.2 17.9 48.8 64.8 40.6 BankCredit to PrivateSector 84.4 87.8 89.7 89.0 80.2 Moneyand QuaslMoney as % of GDP 77.6 68.8 39.9 67.9 71.9 GeneralPrite Index 186.2 161.8 174.4 186.1 195.7 (1979-100) AnnualX Changs In: GeneralPrice Index 21.2 18.8 7.8 6.1 6.7 Bank Creditto Pub. Sector -28.7 26.1 172.6 12.3 -26.9 Bank Creditto Priv.Sector 16.7 8.4 2.7 -0.8 -9.9 BALANCEOF PAYMENTS(USS millions) MERCHANDISEEXPORTS (AVERAGE 1981-1988) 1981 1982 1988 1984 US1 mn. X Exportsof Goods,NFS 89.6 88.2 38.9 40.8 Cocoa 5.2 27.6 Importsof Goods,NFS 70.2 77.6 74.2 70.7 Nutmeg 8.1 18.6 ResourceGap Bananas 8.4 18.1 (deficit -) -80.6 -89.4 -85.4 -80.4 Mace 0.8 4.2 FreshFruit 2.1 11.2 FactorPayments (net) 0.8 -0.2 -0.2 -1.8 Clothing 2.1 11.1 Net Transfers 10.4 11.0 13.8 11.7 Other 2.1 11.2 Balance--Current Account -28.4 -88.7 -29.0 -20.8 Total 18.8 199.9 Net MLT Borrowing 7.6 9.5 14.7 8.8 Disbursement 8.2 10.1 16.2 6.8 EXTERNALDEBT, DECEMBER 81. 1984 Amortization 0.7 098 1.1 8.0 USIMIn. PublicDebt, incl.Guarantoed !/ 48.2 OfficialGrants 12.6 16.9 10.1 24.8 Non-GuaranteedPrivate Debt - Other Capital(Not) 1.8 4.8 2.6 .6 TotalOutstanding & Disbursed - OverallBalance -8.6 -3.6 -2.8 8.7 DEBTSERVICE RATIO FOR 1984!I / Public Debt, ncl. Guaranteed 18.0 Non-guaranteedPrivate Debt TotalOutstanding A Disbursed - RATE OF EXCHANGE IBRD/IDALENDING (April 1985) mIn. USS): IBRD IDA SinceJuly 1976 US81.00= ECS2.70 1.00 * US80.87 Outstanding,nl. Undisbursed 6.0 I/ncludes debt due to IMF. / Ratioof debtservice to exportsof goodsand non-factorservices. SUMMARYAND MAIN ISSUES i. The Grenadianeconomy continued to recoverin 1985,with GDP growthestimated at 3.7%, up from 2% in 1984. The main sourcesof growth were tourism,manufacttring and governmentservices. Consumerprices rose by 2% in 1985, about one-halfthe rate for 1984. The level of unemployment remainshigh, around25-27%, and the problemis acute amongwomen. The Government'sstrategy is to increasethe absorptionof workers in the operationof hotels,in small farms and in lightmanufacturing industries. ii. The fiscaloutturn for 1985 shows a small surpluson the current accountand an overalldeficit of EC$58.7million (23% of GDP), compared with a deficitof EC$38.2million for 1984. This largerdeficit is attributableto lower currentbudgetary grants and highercapital expenditures.For 1986 an even largerdeficit is projected--EC$82.8 million--largelyas a resultof a rise in capitalexpenditures. An unfinancedgap of about EC$20 million is likelyto emerge,and the problem could persistin the medium term, given the expectedscaling down of USAID budgetaryassistance. How expenditureswill be restrainedto meet this contingencyis one of the centralissues in Grenada. iii. The highlightof the 1986 budget is the far-reachingreform of the tax system,with the repealof most existingtaxes, including the income tax. This reformis based on an extensivestudy of governmentrevenues. Its objectiveis to improvethe resourcemobilization of the public sector. Substitutingfor the abolishedtaxes, a value-addedtax, a companylevy and a modifiedland value taxes have been introduced,but the coverageof these new taxes is not fully determined. Exemptions,most notablyfor hotels, are likelyto contributeto a revenueshortfall; more exemptionswould clearlyerode the revenuebase further. In that case, the financinggap could be over EC$25 millionin 1986. Moreover,the financinggap could be even largerif the Governmentdoes not implementits internal reorganizationplan, the savingsfrom which are alreadyincluded in the budget. There is an urgentneed to monitorfiscal performance and take remedialmeasures if the reformeffort is to be successful. In the area of state enterprises,continued progress is neededin the divestitureof selectedenterprises. In the key publicutilities--water, electricity and telephone--acow-ion problem is their rate structure. The peak-loadpricing principleshould be appliedas widely as possibleto rationalize consumptionand providefor furtherexpansion of the system. In telephone and water supplyservices, there is a need for increasedmetering of consumers. iv. Grenada'sbalance of paymentscontinues to be characterizedby a persistentdeficit in the currentaccount (30% of GDP in 1985),and it is still being sustainedby relativelyhigh levelsof officialgrants. These are, however,expected to declinein the years ahead,a trend that will call for a compensatingrise in export earningsand tourism,in current transfersand in privateforeign investment.