Grenada TABLE 1: GDP ESTIMATES,

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1 Grenada 1. RECENT ECONOMIC PERFORMANCE A. Overview Economic activity in Grenada expanded at a moderate pace in 27. Real GDP is estimated to have increased by 3.1%, a great improvement on the decline of 2.4% 1 / in 26 (Table 1). Robust growth in the service sectors (including a further strengthening in the tourism sector); output expansion in manufacturing; and the continued gradual recovery of agricultural production were the main factors contributing to overall economic growth. As the economy continues to recover from damage caused by hurricanes Ivan and Emily, 2 / this outturn signals a return to more stable and broad-based growth, underpinned by recovering levels of productive activity and increases in tourism-related private direct investment. This contrasts with the unsustainable and unsteady growth performance of the previous two years. In 25, growth had surged to 11%, infl u enced by the sizeable amount of post-hurricane reconstruction work undertaken in that year, before declining in 26 as reconstruction activity wound down. Prior to the hurricanes impact, Grenada s growth performance had been robust (with the exception of 21), averaging 6% between 1997 and 24, more than double the ECCU s average of 2.5%. Economic expansion in 27 generated positive spill-overs to the broader economy, including employment generation and a boost to government s revenues. Grenada, however, continues to grapple with macroeconomic and structural imbalances. The country s fi s cal and external positions have weakened as a direct result of the residual effects of the extensive hurricane damage sustained in 24. Meanwhile, a growing dependence on tourism earnings; the slow recovery in agriculture; and a high level of public indebtedness (114% of GDP in 27) 3/ continue to engender high vulnerability to shocks. During 27, the current account deficit improved as a result of rising tourism receipts. However, the visible trade deficit widened, exacerbated by growing import payments. Sharply rising fuel and food import prices contributed to the higher import bill, placing additional demands on Grenada s ability to cover its import expenditures, while adding to local infl a tionary pressures. Consumer price inflation accelerated to a high of 7.4% at year end (point-to-point) principally because of higher domestic fuel, transportation, electricity and food prices (Figure 1). In the wake of the increased economic hardships brought about by spiralling prices, there were indications of substantial wage pressures for higher settlements, especially within the public sector. However, even while GOGR proposed measures to curb TABLE 1: GDP ESTIMATES, 22-7 Item p GDP, market price ($ mn) Per capita GDP, market price 4,224 4,623 4,463 5,23 5,266 5,626 Real GDP Growth (%) (5.7) 11. (2.4) 3.1 Source: ECCB; Central Statistical Office (CSO), Grenada. P : Provisional estimates 1: CDB estimate 1 / Revised from a provisional growth estimate of 2%. 2 / Hurricanes Ivan (24) and Emily (25). 3 / CDB estimate Grenada CDB Annual Economic Review 27 73

2 Figure 1: GDP Growth and Inflation Percent Inflation rate (Avg) Growth rate Inflation rate (end of period) Source: CSO, Grenada. the rise in prices and to cushion its adverse effects, especially on the most vulnerable, low and fixed incomeearning households, there was little progress at arriving at a consensus on outstanding wage negotiations for civil servants for the period Central Government s overall fi s cal balance remained in deficit at 7.7% of GDP in 27, notwithstanding gains in revenue which boosted recurrent savings to 5.1% of GDP. Although public spending fell off commensurate with lower reconstruction spending in 27, Central Government s total expenditure continued to outpace budgetary resources. Grant inflows fell significantly lower than anticipated, while the authorities failed to realise the full value of debt instruments issued on the Regional Government Securities Market (RGSM). In light of these shortfalls, banking system credit to the public sector increased during the year. With the foregoing fi s cal outturn, progress at reducing fiscal imbalances, and restoring fiscal and debt sustainability as part of the authorities macroeconomic policy reform has been substantially less than expected. Fiscal consolidation is the primary policy focus of Grenada s three-year International Monetary Fund-supported Poverty Reduction and Growth Facility (PRGF) approved in 26 to support Grenada s growth recovery and debtreduction objectives. B. Sectoral Performance (i) Tourism Value-added in the hotels and restaurants sub-sector, an indicator of the level of tourism activity, is estimated to have increased by 1%, compared with growth of 5.6% in 26, continuing the sector s recovery after hurricane Ivan. Since contracting to a low of 3.7% of GDP in 25, the sector s contribution has moved closer in line with its pre-hurricane contribution of 8% of GDP. Since the hurricanes, there has been substantial investment in the reconstruction and expansion of hotel Figure 2: Visitor Arrivals and Expenditures 3, 25, 2, 15, 1, 5, Jan- Sept 26 Stay-over Cruise Expenditure (RHS) Source: Grenada Board of Tourism Jan- Sept $ Mn 74 CDB Annual Economic Review 27 Grenada

3 plant. Three years into the rebuilding process, most properties have re-opened, returning accommodation offerings at the start of the 27 winter season to the level that existed prior to September 24. Concomitant with these developments has been a gradual recovery in the number of visitors to Grenada. For the first nine months of 27, visitor arrivals stood at 281,511, representing an increase of 2% over the similar period of 26. Stay-over arrivals totalled 99,723, an increase of 9.7%. With the exception of the Caribbean Region and Canada, arrivals from all other source markets improved, led by a 35.8% increase from the UK. Stay-over arrivals from the UK market, accounting for 24.9% of total stay-overs, remained for an average of 1 nights. The decline in the US dollar (to which the Eastern Caribbean dollar is pegged) against the Euro in 27, would have enhanced the country s attractiveness as a tourist destination to UK and other European visitors. Arrivals from the Caribbean, representing 22.6% of total market share, declined as a result of higher intra-regional airfares. In addition to an upgraded room stock, Grenada s good stay-over performance has benefited from its hosting of six CWC Super 8 matches in April Figure 3: Sectoral GDP, Cruise arrivals also improved, increasing by 26.1% during the nine months to September 27. The marketing of Grenada as a cruise destination, concomitant with initiatives to improve port facilities; berthing arrangements; and visitor facilities, bore fruit as the country reaped the benefits from an expanded cruise itinerary for the 27/8 winter season with additional new ships visiting the island. To September, the number of cruise ship calls grew to 185 from 154 in 26. (ii) Agriculture Output in the agriculture sector increased in real terms by 4.2% in 27, infl u enced by favourable weather, improved prices, as well as GOGR s initiatives to boost crop recovery. Total output of traditional crops, namely banana, cocoa, nutmeg and mace, improved by 27.5% from 1.5 tns in 26 to 1.9 tns in 27, continuing the post-hurricane recovery in annual production. Crop output, however, remains well below the pre-hurricane annual average output of 4.5 tns attained in 2 and 23. Growth (%) Agriculture Construction Hotels & Restaurants Overall GDP Combined Services Source: CSO, Grenada. Figure 4: Major Agricultural Crops (Purchases) kilograms 3,5. 3,. 2,5. 2,. 1,5. 1, Banana Cocoa Nutmeg Mace Source: CSO, Grenada. Grenada CDB Annual Economic Review 27 75

4 Government continued to implement the Agricultural Enterprise Development Programme started in 26 to support the sector s recovery. Under this initiative, 256 farmers have benefited from soft loans granted to support the purchase and distribution of fertiliser, irrigation equipment and other farm supplies. (iii) Construction Value-added in the construction sector is estimated to have declined by 5%, compared with a 3.1% decline in 26. During the year, major work on several public sector construction projects wound down, including the rebuilding of the sports stadium as well as road rehabilitation which were completed in the early part of 27, in time for the hosting of CWC. Work on the new general hospital slowed significantly due to the slower-than-expected receipt of grant funds from the Government of Venezuela. The government s Housing Recovery Programme continued with the start-up of site preparation and installation services (including road and drainage alignment and sewerage lines at Soubise and Mt. Gay) in preparation for housing construction. For the private sector, commercial and residential activity was buoyed by continuing construction of residential housing; hotel and marina development; and student accommodation at the St. George s University campus. (iv) Other Sectors Manufacturing activity increased by 4.5% in response to a boost in consumption of beverages such as beer, soft drink, malt and stout generated as a result of the expansion in tourism, and from CWC-related activities. Similarly, these factors would have been partly responsible for an increased demand for other economic services including transportation which grew by 9.6%, as well as electricity and water; communications; and banking and insurance services, which increased by 1%, 6%, and 5.5%, respectively. C. Prices, Wages and Employment Rising global oil and food prices added momentum to domestic inflationary pressures during 27, influenced, in part, by the full pass-through of increases in international crude oil prices to local retail prices. The 12-month end-december inflation rate, as measured by the CPI, accelerated to 7.4% from 1.7% during 26 (Table 2). At this rate, inflation rose well above the longterm trend rate of 2%. Inflation last spiked to 6.2% in 25 when fuel prices were adjusted to reflect market prices (following the introduction of the flexible pricing mechanism in October 25), and last rose to doubledigits in The average measure of inflation during 27 ended lower at 3.9%, reflecting the decelerating trend during 26 and the first half of 27, as prices had stabilised from earlier post-hurricane effects, as well as from the significant spike in 25 that resulted from the introduction of the flexible fuel-pricing mechanism. Increases in the sub-indices for Food and Drinks; Fuel and Light; Transportation and Communications were mainly responsible for the overall movement in the CPI. For Grenada, a 12% rise in the heavily-weighted Food sub-index (weighted at 36.7 out of 1) contributed as much as 61% to the overall inflation outcome. Food items affected by price hikes included: fl o ur (27.4%); biscuits (27.9%); and powdered milk (74%). The Fuel and Light sub-index which incorporates the cost of electricity, kerosene fuel, charcoal and cooking gas, increased by 11.5%. However, given the smaller relative weight assigned to this sub-group (5.5%), its direct contribution to the overall inflation outcome was significantly lower at 6.7%. The increase in the Transportation and Communication sub-index contributed 1.3% to the overall inflation outcome. Figure 5: GDP Shares by Sector 27 Construction. 11% Distribution. 8% Manufacture. 6% Mining. 1% Hotels & Restaurants. 6% Transport. 14% Agriculture. 6% Other Services. 35% Government. 13% Source: CSO, Grenada. 76 CDB Annual Economic Review 27 Grenada

5 TABLE 2: COMPARATIVE INFLATION RATES, 26 AND 27 (END OF YEAR) CPI Categories Food Alcoholic Drink & Tobacco Clothing, Footwear & Accessories.2.5 Accommodation Fuel & Light Household Furniture & Furnishings.5.1 Medical Care & Health Expenses Transportation & Communication Education Personal Services..9 Other Expenses All Items Source: CSO, Grenada In an unsettled industrial climate in 27, demands for higher wages heightened as public sector workers sought, among other things, to prevent eroding purchasing power arising from the increased cost of living. Wage negotiations, which have been ongoing since 26, remained unresolved as most public workers rejected the government s offer. For 26, GOGR offered increases of 6%, 4% and 3% for workers earning under $683 monthly; from $683 to $1,214; and $1,214 and above, respectively. For the years 27, 28 and 29, the proposed wage rates offered were 5%, 4% and 3%, respectively. The last wage contract ended in 25. Data on wage increases in the private sector were not available. Official employment data were not available for 27. Indications from the net increase in contributors to the National Insurance Scheme suggest, however, that employment expanded. Job growth was likely to have been realised in the tourism industry and other service sectors, based on the expansion in activity in those areas. D. Fiscal Policy and Debt Operations Fiscal operations generated a recurrent surplus of $3.3 mn, (5.1% of GDP) and an overall deficit after grants of $45.9 mn, (7.7% of GDP). (Table 3; Figure 4). The widening of the fiscal deficit stemmed from government s large expenditures during the year, and was not in line with the government s medium-term stability commitment to reduce its fiscal imbalance in 27. In 27, fiscal revenues increased by 12.8% to $158.7 mn, stemming from the expanding economy; higher collection of import duties; and one-off proceeds from land divestments. Tax revenue increased by 15.3% to $143.9 mn as a result of an increased intake from TABLE 3: SUMMARY OF CENTRAL GOVERNMENT OPERATIONS, 25-7 (% GDP) Fiscal Item Preliminary 27 Total Revenues Grants Total Expenditure Of which Recurrent Expenditure Capital Expenditure Fiscal Balances: Recurrent (before grants) Primary (before grants) Primary (after grants) Overall (after grants) Financing: External Domestic Unidentified Source: MOF, Grenada Grenada CDB Annual Economic Review 27 77

6 the National Reconstruction Levy and the Petrol levy introduced in 26. The higher intake was also attributable to an increased collection of tax arrears as a result of government s establishment of a collections unit early in the year to reduce outstanding tax arrears. Taxes on international transactions raised $84.3 mn, accounting for 58.6% of tax revenues, 14% of GDP. During the year government delayed the introduction of a value-added tax that was initially scheduled to be implemented in 27 as part of measures to improve the tax regime. Recurrent expenditures increased by 12.2% to $128.4 mn. In addition to higher spending on goods and services (by 2%), current transfers increased (by 11%), reflecting spending on safety nets for poor and vulnerable groups. Interest payments also increased (by 24%), reflecting higher domestic and external borrowings, as well as debt service associated with Paris Club debt successfully rescheduled during 26. Capital expenditure, while high, was reined in from $15.8 mn to $82.6 mn. Deficit financing was secured through the domestic banking system, external loans and debt issues on the RGSM. Grenada s RGSM issues were, however, heavily undersubscribed. Of the $27.8 mn issued, GOGR realised $14.5 mn, of which $9.3 mn was used to roll-over a maturing treasury bill. With higher borrowings, Central Government s debt obligations rose by 6.3% to $588.2 mn. The domestic debt component rose by $13.9 mn to $86.7 mn, while government s external debt liabilities expanded by $11.7 mn to $51.6 mn, 86% of Central Government s debt. Including government guarantees, the total public debt amounted to $674.3 mn (113 % of GDP), up from $638.3 mn (113.7% of GDP) in 26 (Figure 5). In April, the international rating agency, Standard and Poor s, (S&P), citing concerns about fiscal sustainability; an increase in debt-related vulnerabilities; and a weakening in priorities linked to debt repayment, lowered Grenada s long-term sovereign credit rating to CCC+, down from B-. In defending its Current Bal Overall Bal Primary Bal Revenue Expenditure Figure 6: Fiscal Indicators, % GDP Bonds 42% Source: MOF, Grenada Figure 7: Public Debt Indicators, % Debt/GDP Bank Loans 5% Treasury Bills 4% Debt Service to Revenue (RHS) Source: MOF, Grenada Figure 8: Total Public Debt by Type 27 Source: MOF, Grenada Bilateral 12% Others 16% Multilateral 21% 78 CDB Annual Economic Review 27 Grenada

7 downgrade, the rating agency pointed to a deteriorating debt payment culture, demonstrated by recurring delays in domestic debt payments, amid rising fiscal pressures. Grenada had defaulted on the payment of $2.3 mn of its unrestructured domestic debt due on June 3 to one domestic commercial bank. On account of corrective action taken by GOGR to improve debt payment management, S&P subsequently reversed its action, restoring a B- rating. Grenada s international credit rating (of BB- ) was downgraded to Selective Default after the hurricanes when the Government was unable to meet all of its debt service obligations. The rating was subsequently upgraded to B- after successful debt restructuring in October 25. reflective of the expansion in activities in those sectors. The largest increase in credit was, however, for personal use for home construction and renovation. F. External Sector Grenada s BOP position is likely to have deteriorated in 27. Although net inflows on the services account would have recovered, refl e cting the expansion in net travel receipts, (in line with the growth in visitor arrivals), larger outflows as a result of increased import payments probably countered this, and resulted in a widening of the current account deficit. Additionally, net inflows on the capital and financial accounts are likely to end lower Figure 9: Total Public Debt ($ mn) External Domestic Guarantees Source: MOF, Grenada E. The Banking System Developments in the banking system were marked by robust growth in monetary liabilities, and domestic credit in 27. The pace of broad money growth, M 2, accelerated to 8.2% (to November), up from.9% during 26. Foreign direct investment inflows associated with hotel development, and the general expansion in economic activities, led to a continued accumulation of privately held deposits 3 (up by 9.4%) in the commercial banking system. Concomitantly, there was a 15.1% expansion in overall domestic credit, reflecting increased borrowings by the private sector and Central Government. Private sector credit grew by 11.6%, mirroring increases to both households and businesses. Net banking credit to government more than doubled from $13.8 mn to $31.3 mn, comprising both an increase in credit and a reduction of bank deposit balances. Loans for agriculture and tourism increased, 3 / Business fi rms and private individuals. in 27. Although direct investment inflows have increased, this is likely to be offset by lower offi c ial loans and transfers. For the first nine months of 27, the trade deficit had widened by $24.6 mn to $252.1 mn. Import payments totalling $284.3 mn, were $37.1 mn ahead of payments incurred for the same nine months of 26. Although export receipts increased by 64.7 %, these amounted to only $32.1 mn, 11.3% of total imports. Moreover, these receipts primarily reflected a large increase (196.2%) in the value of re-exports of machinery and transport equipment (valued at $17.2 mn), previously imported for construction projects, including CWC-related activities. Earnings from agricultural exports totalled $6.9 mn for January to September, 22.3% higher than earnings in the nine months of 26, but well below pre-hurricane levels. Between 22 and 23, agricultural export earnings averaged $17.8 mn per annum. Earnings from cocoa exports more than tripled due to higher volume and more favourable prices resulting from disruptions to Grenada CDB Annual Economic Review 27 79

8 global supplies. Nutmeg earnings, which represent approximately 7% of agriculture export earnings, however, declined.(figure 1). 2. MAJOR POLICY ISSUES A. Fiscal Stability Continuing fiscal expansion has contributed to Grenada s deteriorating fiscal performance. To restore fi s cal stability, the government adopted a fiscal strategy, as part of a broader medium-term economic reform programme for the period 26-8, aimed at gradually improving the fiscal balance to a primary surplus of 2.5% of GDP in 28. This was viewed as a necessary step toward improving the debt position, and for reducing it in line with the ECCU s debt-to-gdp target ratio of 6%. Two years into this programme, the fiscal imbalance has increased and GOGR continues to face a significant challenge to consolidate its fiscal position. The continuing high expenditure growth financed by higher borrowings, arrears accumulation, and the sale of public assets has slowed progress towards debt sustainability, which will be necessary to re-invigorate and sustain longer-term growth. The medium-term fiscal consolidation strategy provides a credible framework to improve the fiscal position, progress towards debt sustainability, and achieve greater consistency with the agreed regional fi s cal convergence framework (in relation to fi s cal and debt parameters) that supports the monetary policy objectives of the ECCU. Moreover, the fiscal reform programme provides a strong policy anchor for government, performance-linked donor budgetary support, as well as new opportunities for bilateral Paris Club debt rescheduling after 28. There is urgent need, however, for the authorities to implement the adjustment programme. A key challenge for GOGR will be to strengthen fi s cal discipline, notably through greater expenditure prioritisation and spending restraint, in order to keep spending more in line with available resources. As part of expenditure reduction efforts, the authorities have indicated their intention to cap capital expenditures at 1% of GDP, and to tighten expenditure controls to keep growth in recurrent spending in line with inflation. Critical to this outcome, the authorities will also need to focus on improving the budget process as well as compliance with internal control systems and procedures. These measures would strengthen the platform for fiscal planning and management; promote more effective cash management; and, in turn, minimise short-term borrowing requirements. Stronger internal controls would also facilitate greater consistency of expenditure in accordance with budget priorities, as well as more effective monitoring of expenditure and revenue receipts to ensure greater conformity with planned, budgeted objectives. In relation to revenue adjustment, GOGR has introduced a number of enhancement measures, and is expected to introduce VAT early in 28. VAT is expected to emerge as a dynamic component of tax revenue. B. Sustaining Economic Growth Although the Grenada economy is exhibiting early signs of recovery, real output still lags behind prehurricane levels in the two leading foreign exchange Figure1: Major Agriculture Exports ($ ) 15, 1, 5, BANANAS COCOA NUTMEG MACE Source: CSO, Grenada 8 CDB Annual Economic Review 27 Grenada

9 generating sectors - agriculture and tourism. A significant level of replacement investment in the tourism sector after the hurricanes has resulted in considerable product upgrade and renewal. More recently, this has been complemented by the start-up of a number of up-scale high end tourism development projects. With these developments, strong growth in tourism activity is expected to continue. On the downside, the growing reliance on tourism earnings has increased the country s economic vulnerability to future shocks. Recovery in export agriculture is expected to be protracted, given the slow pace of crop replanting to date and the long gestation required (8 to 1 years) for nutmeg maturation. The slow pace of recovery in agriculture has contributed to rural stagnation, and an unbalanced recovery between urban and rural areas in Grenada, as well as widening inequalities, as agricultural workers have been displaced, highlighting the importance of reviving agricultural productivity and output. To sustain economic growth, increase job creation and poverty reduction, government s long-term development strategy would need to give focus to further diversifying the country s export base, and deepening the export mix within sectors through encouraging new business and product development. As part of this challenge, accelerating the pace of agriculture restoration should be viewed as critical to complement tourism growth, moreso given its significance as a platform for facilitating rural development and poverty reduction. Perhaps more critical is the need to modernise and revamp the agriculture sector, as part of a broader rural development strategy, as in its present form the sector is unlikely to play a key role in sustaining economic expansion. Revitalising agriculture as a sustainable economic activity will require a strategy that re-orients the sector from largely rain-fed, low productive activity, to more efficient and modern, higher value-added modes of production. To that end, Government has begun to implement a newly-developed National Export Strategy geared to diversify and expand export growth. Added to this, a national strategy for modernising agriculture was articulated in October 27. To sustain economic expansion, new sources of growth will also need to be nurtured by expanding the non-farm rural economy; promoting small and medium-sized enterprises; tapping information and communications technology niches; and enhancing investment opportunities by boosting labour productivity and competitiveness through re-training. A challenge for GOGR will be to accelerate planned structural reforms to improve the business environment to allow Grenada to compete more effectively. As part of this planned reform agenda, the authorities expect to create a more efficient investment promotion agency; modernise the Customs Department for greater trade facilitation; simplify tax administration processes; and modernise the registry for property and companies to enable easier property and business registration. Many of the above required policy reforms geared to buttress investment and growth are fully articulated in Grenada s 1-year National Strategic Development Plan (NSDP) , launched in 27 to chart the next phase of the country s development. The outcome of a local undertaking in the aftermath of the hurricanes, the plan represents a response to the growing recognition for the need to embrace a more strategic approach to development planning. This development plan builds on the existing medium-term reform policy pillars of growth, stability and vulnerability reduction, adopted in 26 as part of government s reform programme to improve macro fundamentals. Implementation, however, has been slow and uneven. C. Poverty Reduction and Human Development Poverty assessments indicate poverty of over 3% in Grenada. Despite the country s economic progress and social development gains over the past two decades, development policy has been less effective in reducing poverty, and addressing deficiencies in human development. Government s poverty programmes have neither been sufficiently targeted, nor designed in a manner to assist the poor to break the cycle of poverty. Meanwhile, weak education outcomes and inflexible labour markets highlight inadequate human development and labour absorption policies and strategies. In the aftermath of the 24 hurricane, increased remittances provided some cushion against income shocks caused by Ivan. However, the economic dislocation, particularly in agriculture, has increased pressures on rural incomes. Inadequate human resource development and educational attainments have been linked empirically to high poverty outcomes within the Caribbean. In Grenada, about 64% of the population has had no formal education certification. While the access rate at the pre-primary level is increasing (coverage is about 9%), and net enrolment level at the primary level is above 9%, access at secondary and post-secondary levels is still limited. About 25% of students leaving primary school have no access to secondary school education. Poor exam passes highlight low education quality and achievement levels. The data show that Grenadian pupils tend to score lower at the secondary education examinations than their OECS counterparts. Low pass rates in secondary education examinations disqualify most from accessing post-secondary education, and result in the low level of certification in the labour force. Grenada CDB Annual Economic Review 27 81

10 Less than 5% of the population has received tertiary education. Inadequate teacher qualification remains endemic, and is one of the main reasons behind poor learning outcomes. In 23/4, of 547 secondary school teachers, 85 or 16% were university graduates. Of these, only 38 were trained teachers. Improved access to education and enhanced certification, and the adoption of strategies for upskilling and re-tooling the human capital base will be key to achieving poverty reduction in Grenada. Cognisant of the significant role of human capital for economic and social transformation, GOGR has a number of initiatives in place to improve the responsiveness of the education system. Focus is being placed on increasing access and participation through the expansion of physical facilities; improving the teaching service; and improving quality, relevance and governance of the sector. Efforts through education to reduce poverty should also be complemented by initiatives to enhance the relevance, targeting and overall effectiveness of Grenada s social development policy. GOGR s social development and poverty reduction strategies will be informed by an updated poverty assessment that was initiated in PUBLIC SECTOR INVESMENT PROGRAMME The Government s 1-year development plan builds on its medium-term policy pillars of growth and stability, and poverty reduction. The NSDP articulates eight strategic outcomes: An economically transformed country and people-centred development; A socially strengthened and cohesive society supported by educated, trained and creative human capital; A culturally aware society with synergies between culture and the economy; Improved governance and democratic environment, enhancing possibilities for peace and security; Environmental considerations integrally linked to national development; A developed youth sector capable of participating in and benefiting from national development; Gender equity in promoting human rights; and Institutional frameworks appropriate to a transformed society and economy. The strategy document s planning framework identifies a number of priority programme areas, deemed as strategic to the realisation of Grenada s vision of national development. Economy and Poverty, one of the programme areas, identifies initiatives to improve productivity and competitiveness; enhance productive activities and exports; develop human resource capital; improve macroeconomic management; facilitate investment promotion; and encourage rural development and poverty reduction. Public sector investment priorities in Grenada broadly align with the government s identified goals and priorities, albeit weaknesses in project cycle management, and in particular, the absence of rigorous investment analyses to guide project selection continue to undermine effective resource allocation decisions. Over the past decade, the authorities have pursued one of the highest levels of capital expenditure in the OECS countries (averaging over 13%) as a basis for facilitating private sector-led economic growth and development (although this would also have been driven by the need to rebuild immediately after the hurricanes). To that end, expenditures on Economic Services (agriculture, tourism, and economic and physical infrastructure (for example, transportation) have tended to account for the larger spending allocations. In 27, this was moderated somewhat by the winding down of reconstruction activities, as well as by higher allocations to social services, including education and housing. (Figure 11). Figure 11: PSIP by Sectors, 27 Sports 1% Public Services 12% Other 11% Agriculture 7% Housing 12% Education 9% Transportation 29% Tourism 1% 82 CDB Annual Economic Review 27 Grenada

11 4. MEDIUM-TERM ECONOMIC PROSPECTS With increasing inflation and significant structural hurdles to overcome in order to strengthen macroeconomic and output performance, Grenada s medium-term prospects remain uncertain. With agricultural recovery remaining a key challenge, tourism activity is likely to remain the main impetus for growth, although early signs of a possible US recession marked by the sub-prime mortgage crisis; the volatility of financial markets; and a weakening of the labour market could diminish the sector s performance. Growth will be supported as well by a rebound in construction associated with, inter alia, the start-up of major new hotel development projects. Growth should be bolstered also by an increase in housing starts related to new housing units donated by the governments of the People s Republic of China and of Venezuela, as well as related public sector infrastructural works. Rising world food prices are likely to remain a renewed source of inflation pressures in Grenada, as with other countries in the Region that are heavily dependent on imported foods. Beyond the externally driven price pressures, the expected introduction of VAT in 28 will also add to inflation. With strong global demand and the shifting balance in the world s food supply in response to developments in the energy market, and specifically the influence of changes in demand for bio-fuel usage, rising grain prices are unlikely to ease in the short-term. Government has signalled its intention to implement a number of initiatives to reduce inflationary pressures in 28, including the removal of import taxes on certain basic food items. These measures, in the event of a continuing increase in international prices, should reduce the pass-through of imported inflation and help to moderate domestic prices. Apart from these strategies, increases in domestic agriculture food production and consumption should also be encouraged. GOGR s fiscal performance remains of particular concern. In what is likely to be an election year, total expenditure is budgeted to increase by 13.9%. Of this, capital expenditure is estimated at $241.8 mn (15% of GDP), exceeding the 1% of GDP cap recommended by the IMF. However, the overall deficit is programmed to narrow to 5% of GDP. GOGR expects higher revenues to be generated from VAT implementation, as well as a significantly higher inflow of grant fi n ancing. Sixty-two million ($62 mn) in grant proceeds are expected from the Venezuelan Petro Caribe arrangement; the EDF; and the Government of Venezuela. Meanwhile, government expects to return to the RGSM throughout the year to secure additional financing. Against the backdrop of high inflation, and given the possibility of slippages relating to higher-than-budgeted wage settlements, and further delay to VAT implementation, fi s cal discipline will be vital but difficult to achieve. Grenada CDB Annual Economic Review 27 83