Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 87023-GD

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A PROPOSED CREDIT

IN THE AMOUNT OF SDR 9.7 MILLION (EQUIVALENT TO US$15 MILLION) TO

GRENADA

FOR THE

FIRST PROGRAMMATIC RESILIENCE BUILDING

DEVELOPMENT POLICY CREDIT

June 11, 2014

Poverty Reduction and Economic Management Caribbean Countries Management Unit Latin America and the Caribbean Region

This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information.

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GRENADA - GOVERNMENT FISCAL YEAR

January 1 – December 31

CURRENCY EQUIVALENTS

(Exchange Rate Effective as of April 30, 2014)

Currency Unit US$1.00 = EC$2.70

ABBREVIATIONS AND ACRONYMS

AG Auditor General BAICO British American Insurance Company CARICOM Caribbean Community CAS Country Assistance Strategy CCRIF Caribbean Catastrophic Risk Insurance Facility CCT Conditional Cash Transfer CDB Caribbean Development Bank CDF Comprehensive Debt Framework CGF Caribbean Growth Forum CIDA Canadian International Development Agency CLICO Colonial Life Insurance Company CPA Country Poverty Assessment CPI Consumer Price Index DOA Director of Audit DPA Department of Public Administration DPC Development Policy Credit DRFI Disaster Risk Financing and Insurance ECCU Eastern Caribbean Currency Union ECCB Eastern Caribbean Central Bank ECERA Eastern Caribbean Energy Regulatory Authority ECF Extended Credit Facility EU European Union FDI Foreign Direct Investment GARFIN Grenada Authority for the Regulation of Financial Institutions GDP Gross Domestic Product GEF Global Environmental Facility GIDC Grenada Industrial Development Corporation GLCI Grenadian Living Conditions Indicator GoG Government of Grenada HIPC Heavily Indebted Poor Countries HR Human Resources IBRD International Bank for Reconstruction and Development ICR Implementation Completion Report ICT Information and Communications Technology IDA International Development Association IDB Inter-American Development Bank IDF Institutional Development Fund IFC International Finance Corporation IFI International Financial Institutions IMF International Monetary Fund

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LAC Latin American and Caribbean LDP Letter of Development Policy MDRI Multilateral Debt Relief Initiative MNIB Marketing and National Importing Board MoF Ministry of Finance MoSDH Ministry of Social Development and Housing MoT Ministry of Tourism NIS National Insurance Scheme NNP New National Party NPL Non-Performing Loan OECS Organization of Eastern Caribbean States PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PPD Public Private Dialogue PPP Public Private Partnership PSIA Poverty and Social Impact Analysis RDVRP Regional Disaster Vulnerability Reduction Project REER Real Effective Exchange Rate RGSM Regional Government Securities Market RPS Regional Partnership Strategy SDR Special Drawing Rights SEED Support for Education, Empowerment and Development SME Small and Medium Enterprises SNAP Safety Nets Advancement Project SSNA Social Safety Nets Assessment UK United Kingdom UNDP United Nations Development Program UNEP United Nations Environment Program US United States WB World Bank

Vice President: Jorge Familiar Country Director: Sophie Sirtaine Sector Director: J. Humberto Lopez Sector Manager: Auguste Tano Kouame Lead Economist and Sector Leader: Francisco Galrao Carneiro Task Team Leaders: Rei Odawara and Hannah Nielsen

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GRENADA

FIRST PROGRAMMATIC RESILIENCE BUILDING

DEVELOPMENT POLICY CREDIT

TABLE OF CONTENTS

1. INTRODUCTION AND COUNTRY CONTEXT ............................................................................... 1

2. MACROECONOMIC POLICY FRAMEWORK ............................................................................... 3

2.1. RECENT ECONOMIC DEVELOPMENTS ................................................................................ 3

2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ........................................ 5

2.3. IMF RELATIONS ........................................................................................................................ 7

3. THE GOVERNMENT’S PROGRAM .................................................................................................. 7

4. THE PROPOSED OPERATION .......................................................................................................... 7

4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION ......................... 7

4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS ................................ 8

4.3. LINK TO CAS AND OTHER BANK OPERATIONS .............................................................. 22

4.4. CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS ................ 23

5. OTHER DESIGN AND APPRAISAL ISSUES ................................................................................. 24

5.1. POVERTY AND SOCIAL IMPACT ......................................................................................... 24

5.2. ENVIRONMENTAL ASPECTS ................................................................................................ 25

5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS ............................................................ 26

5.4. MONITORING AND EVALUATION ...................................................................................... 27

6. SUMMARY OF RISKS AND MITIGATION ................................................................................... 27

ANNEXES

Annex 1: Policy and Results Matrix ........................................................................................................... 30 Annex 2: Letter of Development Policy ..................................................................................................... 35 Annex 3: Government Finances (additional tables) .................................................................................... 42 Annex 4: Disaster Risk Financing and Insurane (DRFI) Framework ......................................................... 44 Annex 5: Debt Sustainability Analysis ....................................................................................................... 45 Annex 6: Conditionality under the IMF Program ....................................................................................... 48 Annex 7: Fund Relations Annex ................................................................................................................. 49 Annex 8: Map of Grenada ........................................................................................................................... 51

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ACKNOWLEDGMENTS

This credit was prepared by a multisector team led by Rei Odawara and Hannah Nielsen (Task Team Leaders). The team included Jorge Araujo, Sarah Berger, Nicholas Callender, Caroline Cerruti, Keren Charles, Alberto Criscuolo, Stefano Curto, Lea R. Gimenez Duarte, Oscar Anil Ishizawa Escudero, Ana Mie Horigoshi, David I, Svetlana Klimenko, Diana Mercedes Lachy Castillo, Mark Lambrides, Justin T. Locke, Irina Luca, Helen Mary Martin, Marta Elena Molares-Halberg, Edith Riguru Mwenda, Victor Ordonez, Elizaveta Perova, Nathalie Picarelli, Svetlana Proskurovska, Chandra Shekhar Sinha, Bianca Ingrid Sylvester, Sona Varma, Thomas Vis, Sashana Whyte and Asha Williams. The Peer Reviewers were Zafer Mustafaoglu, Deryck Brown and Damien Shiels. The team gratefully acknowledges the support and guidance provided by Sophie Sirtaine, J. Humberto Lopez, Francisco Galrao Carneiro, Auguste Tano Kouame and Alessandro Legrotaglie.

Finally, the World Bank team would like to express its gratitude for the collaboration of the Government of Grenada in the preparation of this Development Policy Credit.

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SUMMARY OF PROPOSED CREDIT AND PROGRAM

GRENADA

FIRST PROGRAMMATIC RESILIENCE BUILDING DEVELOPMENT POLICY CREDIT

Borrower Grenada Implementation Agency

Ministry of Finance, Planning, Economic Development, Trade, Energy and Cooperatives

Financing Data

IDA Credit Terms: Regular IDA terms (40 years to maturity, including 10 years of grace period). The Service Charge payable by the Recipient is equal to three-fourths of one percent (3/4 of 1%). The Maximum Commitment Charge Rate is one-half of one percent (1/2 of 1%) per annum. The commitment currency is SDR and the payment currency is United State Dollar. Amount: SDR 9.7 million (US$15 million equivalent)

Operation Type Programmatic (1st of 3 operations), single tranche

Pillars of the Operation And Program Development Objective(s)

The Program Development Objective of the proposed DPC series is to support the Government of Grenada to implement a program of policy and institutional reforms to (i) create conditions for private investment in a sustainable manner, (ii) support improved public sector management and better targeting of social safety net programs, (iii) enhance resilience against natural disasters, and (iv) facilitate debt portfolio restructuring and enhance debt management.

Result Indicators (Target year: 2016)

• Increase in tourist receipts (baseline (2013) = EC$307 million, target (2016) = 8 percent increase).

• Increase in total output of commercialized agricultural estates (baseline (2013) = 350 tons, target (2016) = 100 percent increase).

• Increase in the number of farmers serviced by MNIB (baseline (2013) = 1,623, target (2016) = 3,000).

• Reduction of clearance time of border control procedures by half (baseline (2013) = approximately six working days, target (2016) = approximately three working days).

• Increase in the share of PPP projects under development that are proceeding according to the processes and requirements defined in the PPP policy (baseline (2013) = 0 percent, target (2016) = 100 percent).

• Implementation of a new mechanism for electricity tariff setting (baseline (2013) = there is no existing electricity tariff setting mechanism, target (2016) = a new electricity tariff setting mechanism is implemented).

• Better alignment of the government employment structure with the recommendations of the HR audits (baseline (2013) = functions and tasks in government entities are not aligned with the recommendations of the HR audits, target (2016) = functions and tasks in government entities that employ at least 70 percent of the total government workforce as well as HR and payroll information are aligned with the recommendations of the HR audits).

• Increase in the number of public entities that publish annual performance reports (baseline (2013) = no public entity published annual performance reports, target (2016) = at least three ministries publish annual performance reports).

• Increased transparency of public procurement and confidence of the private sector in the system (baseline (2013) = contract awards are not published, target (2016) = contract awards consistent with the new procurement law are published.

• Reduction of the share of NPLs in the total loan portfolio of banks (baseline

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(2013) = 9 percent, (2016) = 5 percent). • Increase in the number of social programs using a targeting tool to identify

beneficiaries (baseline (2013) = 0, target (2016) = 3). • Increase in the proportion of new public/commercial buildings and private

housing built in safe, regulated areas, in accordance with regulatory acts (baseline (2013) = 0 percent, target (2016) = 50 percent).

• Increase in the percentage of engineers registered (baseline (2013) = 0 percent, target (2016) = 40 percent).

• Decrease of the share of debt with a maturity of less than 90 days (baseline (2013) = 17 percent, target (2016) = 10 percent).

Overall risk rating

The overall risk of achieving the objectives of this DPC is high. Risks to achieving the expected development results are mainly associated with potential shocks, including natural disasters, a deterioration of global economic conditions, domestic policy slippages which may threaten the stability of macroeconomic framework, the sustainability of Grenada’s debt dynamics, and fiscal consolidation efforts which may set back the reform program. Other risks relate to a potential weakening of political commitment and limited institutional capacity. The government is making efforts to manage these risks through focusing its policy actions on reducing vulnerabilities and fiscal prudence to create fiscal space and reduce fiscal deficits to regain buffers for potential shocks. Despite all the actions being taken to mitigate the risks, some risks will continue to persist.

Operation ID P147152

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IDA PROGRAM DOCUMENT FOR A PROPOSED CREDIT TO GRENADA

1. INTRODUCTION AND COUNTRY CONTEXT

1. As a small, open and highly indebted middle-income island state, Grenada faces significant systemic vulnerabilities and structural challenges. Due to a combination of high exposure to natural disasters, its small size and limited diversification, Grenada is very vulnerable to external shocks. Continued low growth and weak dynamism of the private sector have contributed to high debt levels. In addition, there has been an overreliance on public expenditure to respond to shocks and stimulate growth, and the fiscal management framework has not emphasized fiscal discipline and expenditure efficiency. The resulting lack of fiscal space and the weak institutional capacity has limited the government’s ability to mitigate the social impact of crises and to protect the poor and the vulnerable.

2. While social indicators have historically been strong, poverty appears to have worsened according to the most recent data. The latest Country Poverty Assessment (CPA), conducted by the Caribbean Development Bank (CDB) in 2008, showed that around 38 percent of the population in Grenada was deemed to be poor, 2.4 percent of whom were indigent or extremely poor. Poverty is particularly prevalent among the less educated, the unemployed and households headed by an unmarried person. With a Gini coefficient of 0.37, inequality in the country was comparatively low relative to both the remaining OECS member states and the LAC1 average. The previous analysis conducted by the CDB2 in 1999 revealed that the poverty rate was 32.1 percent and the indigence rate was 12.9 percent. These indicate that the poverty rate increased by around 17 percent, while the indigence level fell by more than 80 percent between 1998 and 2008.3 With GDP having declined a cumulative 5.7 percent since 2008, the incidence of poverty is unlikely to have improved since the last CPA.

3. Notwithstanding the increase in the poverty rate, Grenada has shown improvement in some social areas. The share of the population which is malnourished decreased by 40 percent from 30.6 percent in 1999 to 17.9 percent in 2011 and the under-5 mortality rate (per 1,000 live births) decreased from 15.7 in 2000 to 12.8 in 2011. Net enrollment rates in primary and secondary education are currently high and the literacy rate increased compared to 2002. Although at primary level, the ratio of female to male enrollment was at parity in 2010, at secondary and tertiary level boys are at a disadvantage. Gender disparities are also present in employment, with women disadvantaged among adults, and men among youth. However, progress has been made in the reduction of adolescent pregnancy, highly associated with social vulnerability, with the adolescent fertility rate (births per 1,000 women aged 15-19) declining steadily in the last decade.

4. A new government was elected in 2013, which aims to implement a renewed reform agenda. In general elections held on February 19, 2013, the New National Party (NNP) won all 15 constituencies and its leader became the new Prime Minister. The NNP returned to power 1 The Gini coefficient of the LAC region declined from 0.549 in 2005 to 0.529 in 2009. 2 The CDB (1999) “Poverty Assessment Report-Grenada”. 3 Given the unavailability of disaggregated poverty and socio-economic data, it is at this stage not possible to undertake a proper evidence-based analysis of shared prosperity and about the effectiveness of national and regional policies to reduce poverty and support shared prosperity.

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after having lost the elections in 2008 and retaining only four seats in the previous parliament. The new government is aiming to implement substantive reforms in tax and public administration, and has reached out to the International Financial Institutions (IFIs) to jointly develop these reforms. The government recognizes the importance of committing to a long-term reform agenda to address the country’s systemic vulnerabilities.

5. At the request of the Grenadian authorities, this DPC series is, therefore, designed to strengthen the country’s resilience against these vulnerabilities and support the government’s objective of promoting sustained economic growth, restore fiscal and debt sustainability and advance the nation’s social development agenda. The operation supports the Government of Grenada’s (GoG’s) plan for the New Economy and is based on the Comprehensive Debt Framework (CDF, Box 1), designed to address debt sustainability in the Caribbean. The proposed DPC series supports four broad policy areas defined in the CDF: (1) creating conditions for private investment in a sustainable manner; (2) supporting improved public sector management and better targeting of social safety net programs; (3) enhancing resilience against natural disasters; and (4) facilitating debt portfolio restructuring and improved debt management. The proposed amount for the first credit (DPC1) is US$15 million. Given the limited resources and capacity of the country, the DPC series focuses on selective, but strategic, issues that support the GoG’s program.

Box 1. The World Bank Comprehensive Debt Framework (2010)

Many developing small states are indebted at levels that can become detrimental for their growth and development prospects. In 2010, public debt indicators in the eight most indebted Caribbean countries (C-8) – Organization of Eastern Caribbean States (OECS), Belize and Barbados – were among the highest in the world. Moreover, the share of domestic financing had grown in recent years as countries sought alternative sources of borrowing. On average, 45 percent of public financing of the C-8 countries came from domestic sources in 2010.

Because of poor fiscal management and frequent natural disasters, Caribbean countries often face high financing needs. Moreover, because of their middle-income status, these countries have limited access to concessional funding and fall outside the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). Thus, their continued need for financing is met through additional borrowing largely at market rate, creating risks of a vicious cycle of high debt and low growth.

At the request of the Heads of Government of CARICOM countries, the WB therefore developed the Comprehensive Debt Framework at that time to address the challenge of high debt levels facing many small states, especially the Caribbean countries. The framework acknowledges that growth cannot be achieved without fiscal prudence and vice versa and that the challenges the region is facing are severe and cannot be solved by fiscal adjustments and debt restructuring alone, but require structural reforms. These structural reforms are needed to create conditions for economic growth so that debt reduction is not achieved at the expense of economic growth but rather leads to a virtuous cycle of lower debt and faster economic growth.

The framework is structured around four pillars to address the structural interdependent causes of high debt and low growth in small island states: (Pillar 1) creating conditions for private investment in a sustainable manner; (Pillar 2) supporting improved public sector management and better targeting of social safety net programs; (Pillar 3) enhancing resilience to natural disasters; and (Pillar 4) facilitating debt portfolio restructuring and improved debt management.

6. The DPC series is part of a multi-donor effort to support key reforms in Grenada. Specifically, the series will complement a 36-month Extended Credit Facility (ECF) by the IMF, which is expected to be approved in June 2014. While the IMF program will focus on short-term fiscal consolidation, the DPC series supports the longer-term policies of the Grenadian Government to build resilience against systemic vulnerabilities. Similarly, a programmatic

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lending program by the CDB, which is expected to be approved in July 2014, is closely aligned with the DPC series.

2. MACROECONOMIC POLICY FRAMEWORK

2.1. RECENT ECONOMIC DEVELOPMENTS

7. Between 2009 and 2012 the country suffered one of the worst recessions in decades. Tourism revenues and foreign direct investment (FDI) flows collapsed subsequent to the global financial crisis and GDP contracted by a cumulative 8.2 percent during this period. The hotels and restaurants sector, a proxy for tourism, contracted by 4.1 percent; the transportation and communications sector, which accounts for approximately 14 percent of GDP, declined by 13.9 percent; and the wholesale and retail sector also declined by 7.6 percent. Consumer price index (CPI) inflation increased and reached 3.5 percent at end-2011, amid a price hike in the communications sector, but declined to 1.8 percent at end-2012. The current account deficit remained large at 19.2 percent of GDP in 2012 and as FDI dried up, its financing relied more heavily on debt-related flows, including increases in banks’ foreign liabilities. The fiscal deficit reached 5.2 percent of GDP in 2009 and continued to remain high in the following years.

8. The economy started to recover in 2013. Economic activity increased by 1.5 percent in 2013, the best performance since 2007. The leading contributing sector was construction, which recorded a growth of 20.0 percent following six consecutive years of decline. The boost in the construction sector was primarily due to the major construction work that was undertaken on the Sandals La Source Project, the NIS Building, the Feeder Roads Project, the Bacolet Bay Project and private home construction. Prices declined, with inflation, measured by the CPI (end-of-period), reaching -1.2 percent in 2013 compared to an inflation rate of 1.8 percent in the previous year, as nominal pressures receded after one-off increases in fuel and food prices during the first half of the year. On the other hand, tourism is estimated to have declined by 4.0 percent. External imbalances persisted; the current account deficit deteriorated further in 2013 to 27.1 percent of GDP, reflecting an increase in imports and a decrease in current transfers.

9. The fiscal position deteriorated sharply in 2012 and continued to worsen in 2013. The overall public deficit increased from 3.1 percent of GDP in 2010 to 5.4 and 7.1 percent of GDP in 2012 and 2013 respectively, as the authorities extended temporary tax breaks for the business sector resulting in significant revenue shortfalls. The primary deficit (incl. grants) reached 2.0 percent of GDP in 2012 and further increased to 3.7 percent of GDP in 2013. With net external transfers being negative due to lower than expected external disbursements and shortfalls in revenues, the authorities had to issue significant amounts of short-term government paper to meet financing needs. Domestic unpaid claims also increased and the government accumulated some arrears vis-à-vis external creditors.

10. Matching the deterioration of the macroeconomic situation, Grenada’s public debt increased sharply in 2012 and continued to worsen in 2013, culminating in the announcement of a restructuring of the public debt in March 2013. The public debt-to-GDP ratio increased significantly since 2010, from 97.6 percent to 110.0 percent by end-2013. Domestic public debt fell to 22.8 percent of GDP in 2008 but has since picked up to 37.2 percent of GDP in 2013 increasing the exposure to domestic banks. External debt also increased between 2010 and 2013, moving from 69.5 percent of GDP in 2010 to 72.8 percent of GDP in 2013. In

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addition, external debt service has significantly picked up, especially to commercial creditors, putting upward pressure on interest rates. The unsustainability of the public debt and a solvency crisis led Grenada’s government to announce a “comprehensive and collaborative restructuring of its public debt” in March 2013 (Box 2). Following the announcement, on March 15, 2013, the GoG defaulted on coupon payments due on its US and EC dollars bonds maturing in 2025. Creditor meetings to discuss the debt exchange offer have been launched in March 2014 and the GoG has released an update on the debt restructuring process, including two indicative debt restructuring options for the EC dollar bonds, proposing either a 50 percent or 60 percent face value reduction coupled with different modalities.

Box 2. Grenada Announced a Debt Restructuring in March 2013

On March 8, 2013, Grenada’s new government announced a “comprehensive and collaborative restructuring of the public debt”, and subsequently, on March 15, 2013, defaulted on coupon payments due on its U.S. and EC dollars bonds with maturity in 2025. Since announcing the default, several discussions have taken place with creditors, which, however, have been put on hold until the discussions with the IMF on the ECF program are concluded.

The authorities have calculated that in the best case scenario, with a 60 percent discount on the bond’s face value (a step down coupon of 5 to 3 percent, and a 30 year maturity), debt levels will remain above 80 percent of GDP. The GoG is therefore seeking ways to also restructure the domestic debt. While the regional government securities market (RGSM) debt will not be restructured (US$110 million), approximately US$200 million are held in local issue for which a 50-70 percent face value cut is targeted. Of these locally issued instruments, two-thirds are held by the National Insurance Scheme (NIS), with the remaining share being held by Petrocaribe (Venezuela).

Currently, the GoG also faces domestic arrears of US$50 million that it is trying to service. Positively, since announcing the restructuring, two T-bills in the RGSM have been issued, which were over-subscribed and achieved a lower interest rate of 5.4 percent.

11. The appreciation of Grenada’s real effective exchange rate (REER) caused a loss of competitiveness. Grenada participates in the Eastern Caribbean Currency Union (ECCU); its currency is therefore pegged to the US dollar. A minimum savings deposit rate is set by the Eastern Caribbean Central Bank (ECCB) while the lending rates are market determined. This arrangement contributed to the relatively stable interest rate environment. However, most REER measures point to some deterioration in competitiveness, resulting from food and fuel price driven terms of trade shocks. With inflation in Grenada trending down to levels below that of its trading partners, the REER is set to continue appreciating.

12. The financial and banking sector in Grenada remain fragile. As in other OECS countries, the financial sector in Grenada has been under stress since the collapse of systemic insurers BAICO and CLICO International Life Barbados (CIL) in 2009. Grenada’s banking sector comprises a total of 5 banks, one domestic bank and 4 foreign banks. The domestic bank, whose assets represented 28.3 percent of GDP as of end-2012, faces similar problems as other OECS domestic banks with increasing non-performing loans (NPLs), insufficient provisioning, declining earnings and capital. The domestic bank is also exposed to Grenada’s sovereign debt with holdings representing about 22 percent of its reported capital. As a result of the downturn in the economy during 2009 and 2010, NPLs in the banking sector overall increased and most of the banks experienced losses. Weak economic conditions and increasing NPLs make credit institutions wary about lending, and access to credit for small and medium enterprises (SMEs) has reportedly tightened.

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2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

13. Growth is expected to pick up in the medium term fueled by a stronger performance in tourism and larger FDI inflows. Preliminary estimates from the IMF indicate that the economy is likely to pick up steadily over the medium term with a continued recovery in the tourism sector and FDI inflows. External imbalances are projected to narrow gradually as exports are expected to recover, resulting in a decline in the current account deficit over the medium term. The expected improvement in the current account will be on account of a recovery in nutmeg exports and tourism receipts, as well as the compression of imports in the public sector. Grenada’s economic prospects, however, depend heavily on the external environment, particularly on economic developments in its main trading partners. While the fiscal consolidation measures can be expected to have a dampening effect on growth in the short run, IMF estimates indicate that the drag on the economy will be limited by the high openness of the economy and will be offset by the recovery of financing flows from Grenada’s main trading partners. The reduction in capital spending foreseen in 2015 compared to 2014, needs to be considered taking into account the exceptionally high spending levels in 2014.

14. Inflation is projected to remain subdued in the face of weak domestic demand and moderate commodity inflation. Following a decline by 1.2 percent in 2013 (end of period), with tapering food and commodity prices, inflation is expected to pick up gradually over the medium term, to about 2 percent, due to higher imported inflation.

15. The medium-term fiscal and debt outlook is predicated on adopting the needed fiscal consolidation measures agreed on under the IMF ECF. In 2014, Grenada’s fiscal balance is projected to further deteriorate due to retroactive payments to public officers and to reach a deficit of 6.0 percent of GDP, while the primary deficit is projected to reach 2.4 percent of GDP (Table A-1 in Annex 3). The situation is expected to reverse in 2015 with the government targeting a primary surplus of at least 1.5 percent of GDP annually for the next few years. The IMF program focuses on fiscal sustainability and inclusive growth through macroeconomic stabilization and structural reforms. Starting from a lower than budgeted primary deficit in 2013, a fiscal adjustment effort of 7.5 percent of GDP will lead to a return to a primary surplus of 3.5 percent of GDP by 2016, thereby reaching a sustainable debt level in the long term. Structural measures that will support the consolidation efforts will include tax and expenditure measures, debt restructuring, structural fiscal reforms and the strengthening of financial regulation and supervision (see Annex 6). The implementation of these measures will lead to a significant decline in financing needs in the next years (Table A-2 in Annex 3). The current outlook assumes the full implementation of the fiscal consolidation efforts over the next three years, but not the effects of the debt restructuring process, which would further improve fiscal and debt dynamics.

16. Debt levels are expected to decline, but remain high. According to the joint WB and IMF’s recent debt sustainability analysis (DSA), assuming fiscal consolidation, but no debt restructuring, the debt-to-GDP ratio under the baseline scenario is projected to fall slightly starting in 2015 and decline continuously thereafter. However, debt levels remain high and this projection is sensitive to negative developments in the global economy, natural disasters and further slippage in the fiscal account. The DSA indicates that under this baseline scenario, the present value of the external debt-to-GDP, debt-to-exports and debt service-to-exports ratios are likely to exceed their thresholds by 2034. Debt levels remain highly vulnerable to external and

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policy shocks, which could make debt ratios unsustainable in the long run. As the fiscal consolidation will not be sufficient to reduce debt to sustainable levels in the long run, the debt restructuring will be a necessary next step. Assuming a haircut of 50 percent of the outstanding debt in addition to the fiscal consolidation, debt levels could reach the ECCU wide target of 60 percent by 2020 (see Annex 5).

Table 1. Grenada: Key Macroeconomic Indicators

Est. Projection 2009 2010 2011 2012 2013 2014 2015 2016 Annual percentage change, unless otherwise indicated Real Economy Real GDP -6.6 -0.5 0.8 -1.8 1.5 1.1 1.2 1.7 CPI (end-of-period) -2.3 4.2 3.5 1.8 -1.2 1.7 1.6 2.0

Percent of GDP, unless otherwise indicated Fiscal Accounts Expenditures 28.0 27.8 28.3 26.1 28.5 30.9 27.6 25.8 Revenues 22.8 24.6 23.6 20.8 21.5 24.9 24.9 24.8 General Government Balance -5.2 -3.1 -4.7 -5.4 -7.1 -6.0 -2.7 -1.0 Primary Balance -3.0 -1.0 -2.2 -2.0 -3.7 -2.4 1.3 3.5

Selected Monetary Accounts Annual percentage change, unless otherwise indicated Broad Money 3.3 0.4 1.0 0.9 4.0 1.4 … … Credit to non-government sectors 4.1 5.2 2.1 0.2 -5.5 1.0 …

…

Balance of Payments Percent of GDP, unless otherwise indicated Current Account Balance -22.2 -22.1 -21.8 -19.2 -27.1 -23.8 -20.4 -19.0 Imports 46.8 49.2 50.8 49.4 57.3 54.7 50.8 49.1 Exports 27.6 28.2 30.0 30.7 31.5 32.9 33.1 33.5 Foreign Direct Investment 13.3 7.8 5.5 3.9 13.9 7.9 7.0 7.5 Gross International Reserves (in months of imports) 3.6 3.1 3.2 2.6 3.5 3.7 3.6 3.5 External Debt (public and publicly guaranteed) 64.5 69.5 69.2 68.3 72.8 69.4 70.7 69.5 Terms of Trade -19.2 -21.0 -20.8 -18.7 -25.8 -21.8 -17.7 -15.7 Exchange Rate 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7

Memorandum items: Nominal GDP (EC$ million) 2082 2082 2102 2164 2197 2265 2338 2437 Nominal GDP (US$ million) 771 771 779 802 814 839 866 903 Source: IMF and WB Staff calculations

17. Grenada’s macroeconomic policy framework is deemed adequate for the purposes of this development policy operation. The GoG’s policies are calibrated to accommodate a gradual but sustained recovery of the real sector coupled with a strong fiscal consolidation adjustment supported by the IMF program. The strategy for fiscal sustainability, however, hinges on the government moving from a primary deficit to a primary surplus aimed at putting the high debt on a downward path. This will require an increased tax effort as well as increased efficiency of government expenditure including managing the wage bill and reducing wastage in the system. The strategy for debt management is to first address the debt overhang that continues to place a serious drag on growth through a comprehensive and collaborative debt restructuring.

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The fiscal strategy, although a necessary condition for putting the debt on a downward path, is not a sufficient condition to bring a lasting solution to the negative effects of the debt overhang.

2.3. IMF RELATIONS

18. The GoG has reached a staff-level agreement with the IMF on a 36-month ECF arrangement, expected to be considered by the Board in June 2014. The arrangement is expected to give the GoG access to of 120 percent of its quota (SDR14 million, about US$21.7 million at current exchange rates) and some front-loading in the first year. The previous ECF program expired in March 2013.

3. THE GOVERNMENT’S PROGRAM

19. In the 2013 budget presentation, the GoG outlined the foundation for a New Economy in response to the challenges faced by the country over the past several years. The elements of the New Economy outlined in the 2013 budget speech are built around strategies for economic growth, fiscal sustainability, social development and debt management. The key issues to be addressed in the New Economy are fiscal and debt sustainability, public sector management, vocational training, sustainable development and the private sector as the key driver of growth.

20. The strategy for growth, embedded in the plan for the New Economy, emphasizes tourism, agriculture and fisheries, energy development (including renewable energy), and a dynamic export sector as drivers of future economic growth. Promoting micro and small businesses through the development of information and communications technology (ICT) as well as improving competitiveness is a central part of the plan. The government’s goal is to create policies that will facilitate the transformation of Grenada’s economy from “Old” to “New” to meet the twin challenges of continued high unemployment and low economic growth.

21. The strategy for social development and empowering the population is built around the formation of human capital and greater social inclusion. This strategy outlined in the 2013 budget speech aims to improve training and employment opportunities for the youth, facilitate better access and quality of education, improve health care services and facilities and provide affordable housing to low income families. A further strengthening of the flagship social safety net program “Support for Education, Empowerment and Development” (SEED) is envisaged as well to ensure that the benefits provided under the program reach the neediest.

4. THE PROPOSED OPERATION

4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION

22. This is the first of three lending operations in a programmatic series. The proposed DPC series supports selected reforms of the government‘s broader plans under the New Economy initiative. Specifically, the measures address four key policy areas consistent with the CDF (Box 1). DPC1 supports important initial reforms which are the first step towards broader structural reforms in the second and third operation. Over time, these reforms will help create the needed fiscal space to maintain and increase investments in infrastructure and human capital to support sustained growth.

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23. The preparation of this DPC series was informed by the lessons learnt from the performance of previous WB programs. The 2011 Implementation Completion Report (ICR) for the Economic and Social Development Policy Loan and Credit (P117000), approved by the board in April 2010, highlighted that a programmatic approach, which supports a multi-stage program with a longer-term horizon, could have had stronger development impact than a stand-alone one year program. The 2011 ICR also indicated that, in small states, due to limited implementation capacity, the program needs to be relatively simple and selective and should be followed up by intensive technical assistance and support during the implementation phase to enhance sustainability of the reform program in the medium term. Furthermore, the policy matrix should be concise with few clearly defined measures and indicators, critical for the performance of the program and within the control of the government. Based on these lessons learnt, the proposed DPC series is designed as programmatic, focusing on the areas that have been identified as critical under the CDF and which are implementable in the envisaged time frame. Consistent with the selectivity objective, the number of prior actions and triggers for the program has been kept to a minimum.

24. Technical assistance support is planned in selected areas related to this DPC series. These areas include public procurement, public sector modernization, PPP policy, the banking sector, debt management, social safety nets, disaster risk management and the energy sector. The WB has received an IDF grant to support audit, accountability and public procurement of selected OECS (a total of US$400,000). This IDF grant has been provided to CARCOSAL. The WB will support and supervise the implementation of various activities, including procurement systems reform to be conducted by CARCOSAL. Grenada will be one of the pilot countries for this work. In addition, technical assistance will be provided by the IMF, EU, and CDB, complementing the efforts of the WB. In particular, the CDB has agreed to provide technical assistance to jointly support the policies and reforms, which are the focus of this DPC series.

25. Based on the GoG’s program, analytical work by the WB and the lessons learned, the Program Development Objective of the proposed DPC series is to support the Government of Grenada to implement a program of policy and institutional reforms. These reforms will aim to (i) create conditions for private investment in a sustainable manner, (ii) support improved public sector management and better targeting of social safety net programs, (iii) enhance resilience against natural disasters, and (iv) facilitate debt portfolio restructuring and enhance debt management.

4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS

PRIOR ACTIONS AND RESULTS

PILLAR 1: CREATING CONDITIONS FOR PRIVATE INVESTMENT

26. Like some of its counterparts in the OECS, Grenada places a high priority on private sector-led growth. A key challenge in facilitating the development of the private sector the OECS is to shift the focus from a subsidy-driven policy to one that provides an attractive investment climate for potential investors. This can be achieved through a mix of economy-wide investment climate reforms in the areas of trade, and SME development, along with industry-specific policy interventions in priority sectors.

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Objective 1.1: Strengthening the Institutional Governance Framework for the Tourism Sector

27. Tourism is the most important economic activity in Grenada, and it remains the sector with the strongest opportunities in the short to medium term to create jobs, increase income and foreign exchange earnings for inclusive growth. Tourism accounts for more than 25 percent of GDP and almost 24 percent of employment. To overhaul the tourism sector, the GoG has developed the Tourism Strategic Plan for 2011-2014. This strategy constitutes the basis of policy in the medium term as it focuses on infrastructure planning, working through national and regional tourism clusters to improve and expand product standards, and include the small enterprises in the overall strategic effort. Key objectives include increases in tourist arrivals, length of stay, receipts and employment in the sector. Niche markets in yachting, cruise tourism, diving, agro tourism and cultural heritage will be targeted. Other initiatives will include improving the product, infrastructure, marketing, investment and financing policy, stakeholder consultation, increasing national consciousness and ensuring that the islands of Carriacou and Petite Martinique are fully included in national initiatives.

28. However, the absence of a governance mechanism for the development of the sector, including an effective public private dialogue (PPD) with the private sector, impedes the development of a shared and holistic tourism vision and of a common implementation strategy4. In this respect, the establishment of an institutional framework for the governance of the tourism sector remains a policy priority which can be addressed with the adoption of the Tourism Authority Bill, envisioning the creation of a new national tourism organization with stakeholder participation including the private sector. The Grenada Tourism Authority is expected to be established to help build consensus on how to move the sector forward and to create the appropriate environment for attracting new FDI to the sector.

• DPC1 Prior Action #1: The Recipient’s Parliament has enacted the Grenada Tourism Authority Act, establishing the institutional framework for the governance of the tourism sector.

• DPC2 Indicative Trigger #1: The new Tourism Authority has established a regulatory framework and organizational structure, which includes a permanent Public Private Dialogue (PPD) platform to ensure the design and implementation of a shared tourism policy.

• DPC3 Indicative Trigger #1: The Tourism Authority’s Strategic Marketing and Product Development Policy are formally approved by the Tourism Authority Board and by Cabinet.

29. Results. In the medium term, these measures are expected to reinvigorate the tourism sector and support broader linkages of the sector with local SMEs and agribusinesses. Specifically, it is expected that receipts from tourism increase by 8 percent by 2016 from a base of EC$307 million in 2013.

4 According to an assessment of the MoT, the implementation of the Tourism Strategic Plan for 2011-2014 has shown minimal progress, which is primarily attributable to the lack of institutional coordination that the establishment of the new Grenada Tourism Authority will help overcome.

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Objective 1.2: Improving the Productivity and Competitiveness of the Agribusiness Sector

30. The GoG is committed to increasing the value addition of the agribusiness sector, the level of sophistication of its food processing industry, and backward linkages between tourism and agriculture. The GoG recognizes the need to strengthen the export competitiveness of the key agricultural products of Grenada, with a focus on cocoa and nutmeg5. In this respect, 1) the persistence of loss-making government-owned agricultural estates, which, if commercialized and professionally managed, could boost agricultural productivity and help improve the fiscal and debt outlook, and 2) the Marketing and National Importing Board (MNIB) which does not provide information and marketing services on a voluntary and pro-competitive basis, and could play a pivotal role in strengthening the linkages between the tourism and agribusiness sectors6 by enabling farmers to meet the volumes, product quality, and safety standards demanded by the hospitality industry, constitute critical policy challenges that the GoG needs to meet if the agricultural/agribusiness sector is to develop.

• DPC1 Prior Action #2: The Recipient has (a) appointed a committee for the commercialization of selected estates of the Recipient, and (b) approved the criteria for the commercialization of such estates.

• DPC2 Indicative Trigger #2: The policy to commercialize government-owned agricultural estates is implemented for at least 3 of the government-owned agricultural estates.

• DPC3 Indicative Trigger #2: Cabinet approval of the reform of the MNIB, transforming the MNIB into a service provider of market information, product quality and standards, logistics and aggregation services, on a voluntary and pro-competition basis.

31. Results. In the medium term, these measures are expected to contribute to improve productivity and competitiveness of the agribusiness sector in Grenada by injecting private capital in and potentially bringing improved technology to otherwise loss-making government agricultural estates7, enabling an open and long-term strategic decision-making process in the governance of key agricultural industries, modernizing the role of MNIB as a service provider, establishing the regulatory framework on product safety and quality of exports. Specifically, it is expected that the total output of the commercialized agricultural estates will increase by 100 percent in 2016 from 350 tons in 2013. The transformation of MNIB will lead to an increase in the number of farmers serviced by MNIB from a baseline of 1,623 in 2013 to 3,000 in 2016.

5 The Grenada Small Farmers Vulnerability Reduction Initiative of the ARD Department of the LAC Region of the World Bank provides a promising approach of how significant productivity increases can be achieved in the cocoa and nutmeg sectors by working with industry associations, such as the Grenada Cocoa Association and the Grenada Cooperative Nutmeg Association, and the MNIB, as service providers on a voluntary and pro-competitive basis. 6 It has been estimated that on average only 58 percent of tourism expenditures filter to the local economy in the OECS. With the exception of the service sector, where 90 percent of services are provided by locals, there is a high percentage of imports into the islands for tourism consumption - particularly in the areas of meat, dairy, vegetables, fruits and manufactured goods. 7 The IFC Investment and Public Private Partnership Teams are being consulted regularly during the process to benefit from their extensive experience in this area.

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Objective 1.3: Strengthening the Business Environment through Improved Trade Logistics

32. Generating investment requires a good investment climate that fosters productive private ventures by removing unjustified costs, risks, and barriers to competition. Enterprise surveys in the Caribbean have shown that foreign investors perceive most components of the investment climate as very important to their investment decisions, but pay particular attention to infrastructure and the policy and legal environment. Indeed, the Caribbean Growth Forum (CGF) process underlined the need for further progress. To help improve productivity and encourage diversification in Grenada, specific aspects of the investment climate need to be strengthened, with a focus on improving trade logistics, property transfer procedures, and a more conducive regulatory environment for SMEs. This is confirmed by the overall weak positioning in absolute terms (107) of Grenada on the composite Ease of Doing Business indicator, and by the relative slippage by 5 ranks from 102 in 2013 to 107 in 2014, according to the WBG Doing Business Report in 2014. In particular, the business environment has worsened in areas related to Starting a Business, Registering Property, and Trading Across Borders.

33. The GoG recognizes the importance of strengthening the business environment and is committed to implement a series of economy-wide investment climate reforms. In particular, the GoG intends to adopt a new Customs Act8 and ensure that all technical border control agencies process 80 percent of trade transactions through ASYCUDA World as a way to improve trade logistics regulation9.

• DPC1 Prior Action #3: The Recipient’s Customs Bill establishing inter alia: (a) procedures for electronic processing of trade transactions, (b) procedures for record keeping and audit powers by the Customs and Excise Division of the Ministry of Finance, and (c) accountability procedures and delegation of authority in decision making, has been submitted to Parliament.

• DPC2 Indicative Trigger #3: The GoG has enhanced border agency coordination by: (1) having all technical border control agencies processing trade transactions through ASYCUDA World, and (2) establishing a single payment point for the private sector to comply with all border agencies whose revenues are transferred to the GoG’s consolidated fund.

34. Results. By the end of this DPC series, these measures are expected to reduce the time and costs required to comply with import-export procedures. The implementation of ASYCUDA World enables the lodgment of declarations through a web-enabled processing system reducing the need for traders to physically visit Customs. As such, efficiencies are expected in overall trade transaction processing time and cost for businesses. Overall, since transactions processed through ASYCUDA World are expected to be processed more efficiently than under the current system, an increase in the volume of transactions processed through ASYCUDA World will automatically lead to a reduction in clearance times. Specifically, it is

8 The new Customs Act moves Grenada’s legislation to be in line with international good practice and enables the establishment of a modern customs administration through modern risk management, electronic processing, record keeping and audit powers, self-assessment, and clear accountability and adequate delegation of authority among others. 9 Customs administration is also expected to benefit from increased customs control (and capabilities) which in the long run would lead to increased compliance and revenue collection.

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expected that the clearance time of border control procedures is reduced by half from approximately 6 working days in 2013 to approximately 3 working days in 2016.

Objective 1.4: Promoting New Investments under a Public-Private Partnership Policy (PPP) and Institutional Framework

35. The GoG intends to make increasing use of PPPs to mobilize private investment in improved infrastructure and public services—and recognizes the value of doing so under a well-defined policy and institutional framework. The CGF process highlighted several opportunities in key sectors to use PPPs to improve the delivery of public services and create investment opportunities—particularly in infrastructure (transport, energy), health care, and tourism. However, to move forward with successful PPP projects, government agencies need to understand PPPs and how they may be able to use them to achieve their policy objectives, and the GoG needs to develop clear processes and responsibilities for managing PPPs.

36. To this end, the GoG aims to start reforms in the short term by introducing a policy framework for PPPs. This framework will consist of a PPP policy, based on good practice in the Caribbean region and internationally, that will set out clear guiding principles and processes by which PPPs will be identified, and institutional responsibilities for developing a PPP pipeline and implementing PPP projects. Going forward, the GoG will then take measures to implement this policy in practice— including setting up institutional arrangements for the PPP program in the MoF to prepare PPPs, in collaboration with the Grenada Industrial Development Corporation (GIDC) and line ministries; and ensuring that all PPP projects (whether originating from government or from unsolicited proposals from the private sector) are implemented according to the policy. In parallel, the GoG will ensure that processes and policies are in place for managing the fiscal implications of PPP projects. In the future the PPP framework may be legally established through a dedicated PPP law based on the PPP policy, and supported by detailed regulation.

• DPC2 Indicative Trigger #4: Cabinet has approved a policy framework for PPPs, which is immediately applicable to all investment projects.

• DPC3 Indicative Trigger #3: The Ministry of Finance (MoF) has established an institutional framework for PPPs, including a designated team within the MoF with responsibility for PPPs and processes and policies for managing the fiscal implications of PPPs.

37. Results. These indicative triggers are expected to contribute to creating an enabling environment for private investment in improved infrastructure through PPPs that achieves value for money for the government and service users. Specifically, it is expected that by end-2016, all investment projects (100 percent) under development follow the processes and requirement defined in the PPP policy compared to none (0 percent) in 2013.

Objective 1.5: Strengthening the Policy and Regulatory Environment for the Energy Sector

38. High fossil fuel dependence in the electricity sector of Grenada is a major impediment to development and economic growth. Small scale of production and dependence on imported diesel for generation contribute to high costs of electricity. The high costs reduce the competitiveness of enterprises and increase the burden on the poor. The dependence on diesel for

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power generation exposes Grenada to oil price volatility and contributes to climate change. Promoting renewable energy generation will help to diversify the country's energy generation matrix, reduce its exposure to high and volatile oil prices, may increase the reliability and climate resilience of the power sector, and also support its transition toward a green economy. The increase in efficiency of electricity use will improve enterprise competitiveness and lower the exposure to high energy prices. The objective of the GoG is, therefore, threefold: (1) to reduce electricity tariffs, (2) to incentivize investment in renewable energy, and (3) to progress toward a low carbon economy. The GoG adopted the National Energy Policy: A low carbon development strategy for Grenada, Carriacou, and Petite Martinique in 2011 which outlines a twenty year vision for achieving its goals for the energy sector. The government seeks to achieve these objectives within a commercial and legislative framework that is competitive, liberalized and attracts independent power producers. The form of this framework is currently being explored and may involve legislative amendments, including amendments to the Electricity Supply Act and provision for the role of a Public Utilities Commission in regulating tariffs.

39. The policy and regulatory environment, therefore, needs to be improved to ensure improvements in energy efficiency and greater use of renewables. In this context, the GoG is participating in setting up a regional regulator (Eastern Caribbean Energy Regulatory Authority, ECERA) through the use of an IDA credit. Some actions would need to be taken, however, before the establishment of ECERA. The government recognizes that the establishment of ECERA is intended to contribute to improved public confidence in electricity sector governance through more independent advice on electricity tariffs and tariff-related decision making process and that it will lead to an improved climate for investment in the region's electricity sector. This would facilitate the implementation of renewable energy projects and possibly future cross border electricity exchanges and island interconnections, as well as operating efficiency of the electricity sector. However, there is an urgency to take concrete action to address Grenada’s energy sector challenges prior to and independent of the establishment of ECERA, given the present impact of high and volatile electricity tariffs on Grenada’s competitiveness, the community and the renewable energy investment pipeline, inter alia.

40. To this end, this operation intends to support the GoG in developing a policy for independent regulation and a roadmap for regulatory/legislative changes that will be required in Grenada to facilitate an independent regulator. These triggers do not depend on regional commitments, but only relate to actions taken by the GoG.

• DPC2 Indicative Trigger #5: Cabinet has approved the policy for the amendment to the Electricity Supply Act based on the adopted policy changes towards a competitive cost of electricity.

• DPC3 Indicative Trigger #4: Cabinet has approved the policy for independent regulation of the energy sector, including defining the role and function of ECERA or an independent regulator such as the Public Utilities Commission (PUC) in case ECERA is not fully functional.

41. Results. These indicative triggers are expected to contribute to a fully functioning independent energy regulatory authority that serves to regulate the electricity sector in Grenada. There is currently no energy regulatory body in Grenada, and sound regulation is expected to help establish the conditions for greater efficiency of utility operations, greater

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development and use of renewable energy and energy efficiency systems, and ultimately, lead to the reduction of electricity tariffs. Specifically, it is expected that by 2016 a new mechanisms for electricity tariff setting has been implemented, which currently does not exist.

PILLAR 2: SUPPORTING FISCAL CONSOLIDATION THROUGH REDUCING FISCAL, FINANCIAL

AND SOCIAL VULNERABILITY

42. Both debt sustainability and growth are linked to the issue of strengthened fiscal management, low financial sector risks and reduced social vulnerability. While the IMF Program is effectively supporting the fiscal consolidation effort, the objective of the program supported by this DPC series is to address structural reforms in the area of fiscal management that would consolidate these reforms and facilitate future fiscal sustainability. This DPC series will also support reforms of the banking sector to lower financial sector risks. The series furthermore addresses critical reforms of the social safety nets that will improve the targeting and sustainability of the different programs.

Objective 2.1: Promoting the Effectiveness and Efficiency of the Public Sector through Public Service Modernization

43. While the share of the public sector employment appears reasonable against international comparison, Grenada’s public sector performance has suffered from inefficient staff allocation, the lack of skilled public servants, outdated human resource management procedures, and weak accountability for results. Adjustments in staffing and relative wages, with stricter control of new employment are needed to limit the growth of the wage bill, which reached 10.3 percent of GDP in 2013, representing 39 percent of current government expenditure. The government should aim at improving the quality of its human resources management as well as accountability for results. During 2012-2013, the government implemented human resource (HR) audits in three ministries and one department, with the objective to align public sector positions and employee skills with the functions and programs for which these organizations are responsible. The implementation of recommendations of HR audits is pending. The Department of Public Administration (DPA) is working to improve the quality of personnel records and align those with the payroll records. The Cabinet Office has led a strategic planning initiative and has introduced performance agreements between the government and senior officials over the recent years. This creates a mechanism for identifying key strategic objectives and holding public officials accountable for attaining the government’s strategic goals. Gradually, the focus on results should lead to better allocation of expenditure to meet important government goals.

44. This DPC series, therefore, supports two dimensions of government modernization: (i) improving management of public employment, and (ii) introducing formal accountability for results in the public administration. The government will create a framework for public sector modernization by approving a policy for 2014-2016 that would help optimize the public employment and personnel expenditure by aligning the staffing structures with the functions and tasks of government entities that stem from their strategic plans and legal framework, strengthen management and control system, especially in the areas of appointments and payroll management, and formalize accountability for achieving agreed results. The Public Sector Modernization Policy will also include measures aimed at reducing the workforce by implementing an attrition policy, as well as monitoring the process of staff reallocation from low

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to high demand activities and support development of adequate skills among public employees. This program further supports the government’s initiative of introducing annual accountability for results in the form of publicly available reports for the past performance and the use of public funds in achieving agreed program results. The DPA will coordinate and monitor the internal realignment of public employment in the focus ministries/departments, which include the Ministry of Education, in line with the findings and recommendations of the HR audits, and will evaluate the fiscal and performance impacts of staff optimization and attrition measures.

Management of public employment

• DPC1 Prior Action #4: The Recipient has endorsed a public sector modernization policy establishing inter alia procedures for: (a) strategically realigning public employment; (b) strengthening management of selected agencies; and (c) developing a results focus in planning and budgeting.

• DPC2 Indicative Trigger #6: Public employment structures in three ministries and one government department have been aligned with the functions and tasks of government entities in line with the recommendations of the HR audit conducted in 2010-2013.

• DPC3 Indicative Trigger #5 A public employment policy in the education sector has been approved aiming at optimizing the employment structure, and initial recommendations of the 2014 Organizational Assessment have been implemented.

Accountability for results in the public administration

• DPC 2. Indicative Trigger #7. Government has approved a regulation defining rules and procedures for producing and publishing public annual performance reports.

45. Results. By the end of the series, the measures supported under the proposed program are expected to contribute to the alignment of public sector employment with functions and tasks in the key government entities that employ at least 70 percent of the total government workforce, thus, leading to greater efficiency of the public sector. These measures will contribute to the reduction of the size of the public sector wage bill as a share of GDP, as agreed under the IMF program. The DPA will produce and submit to Cabinet an analysis of the workforce optimization derived from the HR data, using as a baseline HR records of February 2014. It is also expected that by the end of the series, the GoG will have introduced a mechanism of accountability for results for public entities and the public will have access to annual reports detailing the performance of public entities for at least 3 ministries.

Objective 2.2: Strengthening Public Procurement Systems

46. Since the promulgation of the 2007 Public Procurement and Contract Administration Act that was meant to update the former financial regulations governing procurement after independence, the procurement reform has lost its momentum. The government identified as main causes the cost associated with the implementation of the new law and the inability to attract funds from donors for this undertaking. Hence, except for establishing the new position of Chief Procurement Officer in charge of overseeing the procurement systems and the reform agenda, the other elements of the institutional procurement framework provided for under the 2007 law have not yet been put in place. Under these circumstances, public procurement continued to operate under the pre-2007 institutional framework with the process driven by Cabinet orders. The bulk of procurement for capital works and ICT projects is handled

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by the Ministry of Works which has the needed capacity to conduct open tendering for complex contracts and has significant experience in implementing internationally financed projects. Procurement in other ministries seems to be rather small in scale and requests for quotations is largely used.

47. To address these weaknesses, the GoG has been working on amending the related aspects of the legislation to make them suitable to Grenada's conditions. Hence, while preserving the functions addressed under the 2007 law, the new approach tries to build those functions into existing institutions and mechanisms rather than creating new dedicated corporate bodies or mechanisms to handle them. The new procurement law will be tailored to Grenada's conditions by: (i) formalizing procurement while adopting appropriate procedures such as centralized procurement, framework contracts or emergency procedures to address rapid response situations; (ii) strengthening the oversight and appeal mechanisms; (iii) promoting the dissemination of opportunities and results of procurement and improving private sector access; and (iv) setting up the procurement institutions that build as much as possible on the existing PFM structures to minimize cost to the country. These reforms will help increase transparency and strengthen the confidence of the private sector and citizenry in general in the public procurement systems. The government plans to use this opportunity to make the systems less bureaucratic and more results and value for money oriented so that the government can purchase better quality of goods and services at competitive prices. This approach seems appropriate given that Grenada is a relatively small island country with limited resources currently implementing a stringent fiscal adjustment program.

• DPC2 Indicative Trigger #8: A new public procurement law, consistent with good international practice, has been submitted to Parliament.

• DPC3 Indicative Trigger #6: Procurement regulations are approved by Cabinet and the institutional setup for the implementation of the procurement law is in place.

48. Results. By the end of the series, these reforms are expected to lead to increased transparency of public procurement and higher confidence of the private sector in the procurement system. Specifically, in 2016, contract awards will be consistent with the new procurement law and will be published, which is not the case in the baseline year of 2013.

Objective 2.3: Improving Financial Sector Stability through Improved Regulation and Supervision

49. Grenada has significantly improved the supervision of the non-bank sector over the past years, while the banking sector has been affected by the global crisis and the absence of a strong recovery. The country has been at the forefront of regional efforts to strengthen regulation and supervision of the insurance sector after the British American Insurance Company (BAICO)/Colonial Life Insurance Company (CLICO) insurance crisis in 2009. Grenada is the OECS country where institutions are the most exposed to BAICO and CLICO. Currently, all insurance companies are complying with statutory funds provisions that require them to locally hold liquid assets to cover policyholders’ liabilities. On the credit union sector, the local non-bank supervisor Grenada Authority for the Regulation of Financial Institutions (GARFIN) has intensified its supervision since its creation in 2007 and the consolidation of insurance companies has taken place under more stringent supervision. However, on the banking sector

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side, as a result of the global crisis, non-performing loans in the ECCU region have increased by about 250 percent from the level in 2008 and the ECCB had to intervene in four banks.

50. The GoG is committed to support regional efforts to strengthen banking regulation and supervision to bolster the ECCB’s resolution powers and strengthen the loan classification and provisioning requirements. To this end, the government will reach an understanding with the ECCB on strengthening the financial position of the commercial banks in Grenada, which would include undertaking a comprehensive and independent valuation of the assets of the weak banks before end-September 2014 unless undertaken as part of regional efforts. Based on the findings of the valuation, the government will discuss with the ECCB how to address its results within recapitalization or resolution plans.

• DPC2 Indicative Trigger #9: The GoG has undertaken a comprehensive and independent valuation of the assets of the weak banks.

51. Results: Since banking regulation and supervision and the framework for bank resolution are regional, results will mostly hinge on the implementation of regional reforms. If these are effectively implemented throughout 2014-2015, it is expected that by DPC2, weak banks in Grenada would be in the process of being restructured and cleaned up of their non-performing loans, and therefore the share of non-performing loans in the total loan portfolio of banks in the country would decrease significantly from 9 percent in 2013 to the ECCB target of 5 percent in 2016.

Objective 2.4: Strengthening Social Safety Nets

52. The 2009 Social Safety Net Assessment (SSNA) showed that while Grenada has a large number of social protection programs, challenges remain in terms of coverage, effectiveness, and coordination. While there are over 30 social protection programs in Grenada, a number of them have weak targeting mechanisms and cover a very low percentage of poor and vulnerable households. Duplication of services and inefficiencies in spending were also identified. Building on the recommendations from the SSNA, in 2011, the government consolidated three of its top cash transfers programs and created the conditional cash transfer (CCT) program ‘Support for Education Empowerment and Development’ (SEED). Over the past year, the Ministry of Social Development and Housing (MoSDH) has been working on the development of a robust targeting mechanism to re-certify existing beneficiary households and identify potential new beneficiary households. The targeting instrument, the Grenadian Living Conditions Indicator (GLCI), has been designed and is currently being tested. Application of the mechanism to the database of existing households is expected to happen no later than May 2014.10 However, given that the application of a targeting instrument often has political and financial implications, a phased plan is being defined to ensure that the appropriate steps are taken to facilitate the smooth removal of ineligible households.

53. In line with the SEED Program as well as the tools being developed under the program, the GoG recently articulated a Social Safety Net Policy Framework. The framework provides policy guidelines for operationalizing the recommendations from the SSNA 10 Eventually, the country aims to identify existing and newly vulnerable households after a disaster as part of the CCT programs using the existing safety nets. The SEED program, however, is currently not in a condition to do that, given that the program is still relatively week in design and needs to be improved.

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as well as strengthening social safety nets overall. The five objectives of the framework include: (i) strengthening the systematic production and use of evidence on poverty and vulnerability for better policy design and programming (research, monitoring and evaluation); (ii) increasing the poverty reduction focus through social safety net policy design and programming; (iii) undertaking social and legal reforms to improve access to services for the poor and vulnerable; (iv) helping families achieve economic independence; and (v) ensuring an efficient, effective, transparent, participative and accountable social protection service delivery (modernizing systems and building capacity.

• DPC1 Prior Action #5: The Recipient has adopted a policy framework for the strengthening of the design and programming of the Recipient’s social safety nets.

• DPC2 Indicative Trigger #10: The Recipient has established eligibility criteria for application of the targeting instrument and started its implementation.

54. Results. By the end of the series, the SEED Program is expected to better target the poor and vulnerable households and the MoSDH is expected to use a unique targeting instrument to more objectively identify beneficiaries under its social programs that are aimed at benefitting poor and vulnerable populations. Specifically, by 2016, 3 programs are expected to use the targeting tool to identify beneficiaries compared to none in 2013.

PILLAR 3: ENHANCING RESILIENCE AGAINST NATURAL DISASTERS

55. Grenada is among the countries in the world most exposed to multiple natural hazards11. The island is exposed to a high level of risk to hydrometeorological (high wind/excess rainfall/hurricanes and drought) and geophysical hazards (seismic/volcanic/tsunami), which have significant negative impacts on its economic stability. An estimated 52.7 percent of Grenada’s GDP is at risk from two or more hazards, while approximately 52.1 percent of the population is exposed to risk of mortality from two or more hazards.12 Damages estimated in the aftermath of Hurricane Ivan (2004), for example, were approximately 200 percent of the country’s GDP. Between 1992 and 2011, Grenada experienced average annual losses of 9.5 percent of GDP13. More broadly in the Eastern Caribbean region, over the past 50 years, approximately US$3 billion in losses are attributed to the consequences of natural hazards (see Figure 1 in Annex 4). Following a disaster event, significant capital expenditures for repairing and reconstructing damaged public/state-owned infrastructure are required. These expenditures have a significant fiscal impact on state finances – particularly when the state is pressured to cover implicit liabilities such as low income-housing.

56. There is, therefore, an urgent need for the GoG to better understand its fiscal exposure to natural disasters and develop a comprehensive disaster risk management strategy including a risk reduction and risk financing strategy. Currently, Grenada has in place some basic financial protection instruments against disasters such as the pooled insurance mechanism offered through membership in the Caribbean Catastrophic Risk Insurance Facility (CCRIF) and insurance coverage for select public buildings. There is no assessment of the vulnerability of public infrastructure to natural hazards. The existing financial protection 11 Global Facility for Disaster Reduction and Recovery (GFDRR), Grenada: Country Note, 2010. 12 Dilley, M. et al. “Natural Disasters Hotspots: A Global Risk Analysis”, Disaster Risk Management Series No. 5, 2005. Table 1.1b and Table 7.2b. 13 Global Climate Risk Index 2013, Germanwatch, November 2012. http://germanwatch.org/en/download/7170.pdf.

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instruments are not built in a comprehensive strategy. Additionally, in terms of information, there is a general lack of consolidated and detailed records of the total fiscal cost and economic losses of past disaster events in Grenada. A more concrete understanding of contingent liabilities to natural disasters through an analysis of its disaster risk profile will allow the government to move towards cost-effective financial protection measures which would contribute not only to mitigate fiscal volatility following a disaster event but also to better attend to the population and accelerate reconstruction after a disaster. This strategy will allow the GoG to reduce its fiscal vulnerability to natural disasters and better manage their impacts. An improved physical regulatory system (zoning, building code, physical planning laws, etc.) as well as the effective physical reduction of vulnerability in the country will contribute to significantly reduce the impact of disasters on public finances.

57. Policy actions supported under Pillar 3 would: (1) facilitate and improve the capacity of GoG to reduce disaster risk through the improvement of the physical and disaster risk management regulatory systems; and (2) begin the development of a comprehensive disaster risk financing strategy (see Box 3 in Annex 4) designed to smooth out the fiscal impact of catastrophic events.

Objective 3.1: Reducing the Risk to External Natural Hazard Shocks through a Strengthened Physical Planning Regulatory System

58. Short- and medium-term policy measures to strengthen the physical planning regulatory system are included under this DPC series. The approval of different acts would result in better suited design standards for roads, bridges and buildings for both domestically funded and externally funded infrastructure works, formalize the contractor registration process—thereby improving domestic competitiveness on bidding processes, and improve land use zoning processes and planning. Collectively, investments in these activities would result in significant improvements in the quality of the built environment and reduce risk to natural hazards.

• DPC1 Prior Action #6: The Recipient’s Cabinet has approved (a) the Grenada Building Code and the Grenada Building Guidelines; and (b) the Physical Planning and Development Control Bill, 2014, for submission to Parliament.

• DPC1 Prior Action #7: The Recipient’s Architects (Registration) Bill and the Engineers Registration Bill establishing respectively procedures for the professional practice of architects and engineers in the Recipient’s territory, have been submitted to Parliament.

• DPC2 Indicative Trigger #11: The Revised Road Traffic Bill has been approved by the Recipient’s Cabinet.

• DPC3 Indicative Trigger #7: Enforcement mechanisms have been approved by Cabinet to support regulatory and physical planning, design standards and construction practices policies.

59. Results. By the end of this DPC series, these measures are expected to lead to a constructive environment that is more resilient to natural disasters and better adapted to climate change, and a more professional (and more competitive) construction sector. Specifically, it is expected that (i) the proportion of new public/commercial buildings and private housing built in safe regulated areas in accordance with regulatory acts has increased from 0 in

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2013 to 50 percent in 201614, and (ii) the percentage of registered engineers has increased from 0 in 2013 to 40 percent in 201615.

PILLAR 4: FACILITATING DEBT PORTFOLIO RESTRUCTURING AND IMPROVED DEBT

MANAGEMENT

Objective 4.1: Strengthening the Institutional Debt Management Capacity and Facilitating Debt Portfolio Restructuring 60. At 110 percent of GDP at end 2013, Grenada’s debt to GDP ratio is among the highest in the world. In addition, the government’s cash flows have come under severe pressure as the deteriorating fiscal position dried up multilateral financing and domestic banks have reached their limits on government exposure. During 2011 and 2012, most of the financing needs have been met through nonmarket placement of government paper with the national pension fund and the PetroCaribe, borrowing from the ECCB and arrears (both external and domestic).

61. To complement the steps taken by the GoG on debt restructuring, measures supported under this DPC series will focus on strengthening capacity to ensure medium-term debt sustainability. On debt management-related capacity building, several initiatives have been undertaken with the assistance of the ECCB’s Debt Management Advisory Services. Some of the initiatives include debt record validations, development of guarantee guidelines, setting up of the front- middle- and back-offices and comprehensive training and skill building activities for debt management staff. Hence, efforts are being carried out to bolster institutional capacity on debt management. This DPC series will focus on consolidating the advancements. The next milestone for debt management in Grenada is the development of an in-house detailed Medium-Term Debt Management Strategy (MTDS), aligned with budget discussions to give a clear signal to markets and creditors of the country’s medium-term commitment to its debt strategy. The MTDS will allow the government to identify how costs and risks vary with the composition of the debt by using scenario analysis and to achieve a desired composition of the debt portfolio, which captures the government’s preferences with regard to the tradeoff. A Procedures Manual will be developed to accompany the MTDS and to help achieve its objectives.16

• DPC2 Indicative Trigger #12: The Recipient’s Cabinet has approved a Medium-Term Debt Management Strategy.

• DPC3 Indicative Trigger #9: A Procedures Manual accompanying the MTDS has been adopted by the Recipient’s MoF.

62. Results. By the end of this DPC series, these measures are expected to lead to changes in the debt portfolio that will contribute to long-term debt sustainability of 14 The Ministry of Public Works approves about 60 applications for public/commercial buildings and private housing per month. Approximately 300-400 plans move forward into construction per year. The number of accepted plans is not expected to decrease with new regulatory acts. 15 The pool of possible registered engineers on island is limited to around 50. 40% of these engineers undergoing formal registration by 2016 would indicate significant progress. 16 The Procedures Manual will document the procedures used by the officers of the Debt Management Unit of the MoF to manage public debt, and guides them in performing their day-to-day duties in relation to debt data recording, debt reporting and the information flows between the various bodies within the MoF involved in public debt. The content of the manual is expected to follow closely international best practices in public debt management.

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government operations. Specifically, it is expected that the share of debt with a maturity of less than 90 days decreases from 17 percent in 2013 to 10 percent in 2016.

ANALYTICAL UNDERPINNINGS

63. The Bank has undertaken extensive analytical work and policy dialogue in the policy areas and prior actions supported by the proposed operation. The policy actions supported under this first programmatic DPC are grounded on analytical evidence; selected findings from the relevant analytical studies are outlined in Table 3 below.

Table 3: DPO Prior Actions and Analytical Underpinnings Prior actions Analytical Underpinnings

Pillar 1: Promoting Private Sector-led Growth Prior Action #1: The Recipient’s Parliament has enacted the Grenada Tourism Authority Act, establishing the institutional framework for the governance of the tourism sector.

Report No. 44060-LAC, OECS, Increasing Linkages of Tourism with Agriculture, Manufacturing and Service Sectors (2008)

Prior Action #2: The Recipient has (a) appointed a committee for the commercialization of selected estates of the Recipient, and (b) approved the criteria for the commercialization of such estates.

Report No. 31863-LAC, OECS, Towards a New Agenda for Growth (2005); Report No. 31725-LAC, A Time to Choose: Caribbean Development in the 21st Century (2005); Caribbean Growth Forum, Grenada Chapter, Investment Climate Working Group (March, 2013)

Prior Action #3: The Recipient’s Customs Bill establishing inter alia: (a) procedures for electronic processing of trade transactions, (b) procedures for record keeping and audit powers by the Customs and Excise Division of the Ministry of Finance, and (c) accountability procedures and delegation of authority in decision making, has been submitted to Parliament.

Report No. 31725-LAC, A Time to Choose: Caribbean Development in the 21st Century (2005)

Pillar 2- Reducing Fiscal, Financial and Social Vulnerability Prior Action #4: The Recipient has endorsed a public sector modernization policy establishing inter alia procedures for: (a) strategically realigning public employment; (b) strengthening management of selected agencies; and (c) developing a results focus in planning and budgeting.

HR Audits, Bank staff analysis, and agreements reached between the Department of Public Administration and Bank staff; Report No. 31863-LAC, OECS, Towards a New Agenda for Growth (2005)

Prior Action #5: The Recipient adopted a policy framework for the strengthening of the design and programming of the Recipient’s social safety nets.

Social Safety Net Assessment (2009); Tailoring Social Protection to Small Island Developing States, Lessons Learned from the Caribbean (2013)

Pillar 3: Building Resilience to Natural Disasters Prior action #6: The Recipient’s Cabinet has approved (a) the Grenada Building Code and the Grenada Building Guidelines; and (b) the Physical Planning and Development Control Bill, 2014, for submission to Parliament. Prior action #7: The Recipient’s Architects (Registration) Bill and the Engineers Registration Bill establishing respectively procedures for the professional practice of architects and engineers in the Recipient’s territory, have been submitted to Parliament.

CDKN Guide: Tackling Exposure, Placing disaster risk management at the hard of national economic and fiscal policy (2012); WPS5429 – Financial protection of the state against natural disasters (Ghesquierre and Mahul, 2010); Global Facility for Disaster Reduction & Recovery (GFDRR) Grenada Country Note (2010); WPS5232 – Assessing the Financial Vulnerability to Climate-Related Natural Hazards (Mechler et al., 2010); IMF WP/09/159 – Macroeconomic Fluctuations in the Caribbean: the Role of Climatic and External Shocks (Sosa and Cashin, 2009); WPS5956 – Fiscal Implications of Climate Change (Bones et al., 2012).

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4.3. LINK TO CAS AND OTHER BANK OPERATIONS

64. The proposed DPC series is envisaged in the Progress Report of the Regional Partnership Strategy (RPS) for the OECS (Report No. 66577-LAC), presented to the Board in April 2012. This DPC series will influence RPS expected outcomes in all of the identified categories: (a) improving fiscal and debt sustainability; (b) protecting and improving human capital; (c) strengthening climate resilience; (d) strengthening the domestic financial sector; (e) and improving access to quality services for a more competitive environment. Through a number of complementary interventions, all of these areas are addressed by the four pillars of the CDF. The RPS aligns with government objectives and aims to provide Grenada with flexible, demand-driven and focused support to achieve its development goals. Shared objectives between the government and the Bank include fostering economic growth to generate greater opportunity for all with the help of more transparent, effective and efficient institutions.

65. Pillar 2 of this operation is closely linked to the Safety Nets Advancement Project (SNAP). Currently, the WB is supporting the SNAP, whose objectives are to (i) strengthen the basic architecture of the consolidated Conditional Cash Transfer (CCT) program and the capacity of the MoSDH to implement it; (ii) improve coverage of poor households receiving cash transfers; and (iii) improve education outcomes of poor children and health monitoring of vulnerable households. The SNAP is unique in that most of the Credit follows the WB’s new Program for Results framework, where disbursements are tied to meeting specific, technical milestones that support the development and implementation of a robust and transparent CCT program. The SNAP will continue to serve as an entry point to provide relevant technical assistance, while the proposed operation will strengthen the government’s approach to delivering social safety net programs to poor and vulnerable households in Grenada.

66. The Public Sector Modernization Agenda builds on the recently completed Bank’s supported operations. An Institutional Development Fund (IDF, P117873) ‘Strengthening Personnel Expenditure Management’ closed at the end of 2012. The IDF supported government capacity building in personnel expenditure management. The DPA has conducted HR and expenditure review and generated reports with recommendations on improving the staffing in the pilot ministries/departments. The second objective of the IDF was to strengthen the capacity of the Cabinet Office in coordinating the government planning process. Presently, the DPA coordinates a group of trained and experienced in conducting HR analysis personnel, who are tasked with scaling up the administration’s coverage with HR audits and supporting ministries and agencies in developing job descriptions. The HR audit of the Ministry of Education, the biggest employer, initially planned as IDF activity had not been completed, but this task is continued by the DPA under the present DPC series. Similarly, the focus on strengthening accountability for results is a direct outgrowth of the IDF program which helped to set in place the capacity for strategic planning, identifying and monitoring results and introducing performance agreements.

67. The reforms supported by the energy sector component are closely linked to the ECERA Project through the use of IDA credit. The ECERA Project is comprised of 2 parts: (i) setting up ECERA (to conclude in FY 2015) and (ii) operationalizing ECERA for the first 3 years. Activities will be geared towards establishing and implementing appropriate power sector regulations for each participating country, developing new licensing recommendations and publishing cost reflective and performance based tariffs. In addition to the traditional role of

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regulation, including ensuring proper management and operation of the utility and tariff oversight and setting, ECERA seeks to facilitate a greater role for renewable energy in generation and improved energy efficiency.

68. The Grenada DPC series will directly complement the Regional Disaster Vulnerability Reduction Project (RDVRP), which has been under implementation in Grenada since 2011. The RDVRP is a US$26.2 million project that aims to reduce the physical vulnerability of the country through risk reduction and climate change adaptation activities which include a combination of civil works, capacity building, and institutional development activities. This DPC series will complement the physical investments and technical assistance financed under the RDVRP through building financial resilience to natural disasters that would protect public expenditures for goods/services as well as investments in human capital, stimulate private-sector led growth and contribute to fiscal and debt sustainability. The RDVRP will also provide the technical assistance necessary to support prior actions and triggers proposed under Pillar 3 of this DPC series.

4.4. CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS

CONSULTATIONS

69. The proposed DPC series supports specific reforms of the GoG under the “New Economy Initiative” and to this extent has benefited extensively from consultation with the stakeholders in the economy. As with all legislative measures and reforms in Grenada, the new GoG’s program was subject to a thorough consultation process with social partners, civil society and groups likely to be impacted. The consultation process is an important institutional feature of Grenada’s process of government. Specifically, the Prime Minister chairs a monthly meeting of the Committee of Social Partners which includes the private sector, the labor unions, entrepreneurs, government officials, churches and non-governmental organizations to discuss issues affecting the economy and possible solutions. Where viable, these suggestions are incorporated in the formulation of policies, laws and strategies for the economy. In addition, other methods of consultations include public hearings, ad-hoc meetings on specific topics, citizen’s panels, surveys, consultations through electronic means (e.g., government websites) and the media.

70. The authorities have consulted with a wide range of stakeholders on the specific measures supported by this DPC series. In particular, on the actions related to private sector development the measures support the findings of the consultative process of National Chapter of the CGF in Grenada. These included stakeholders from all sectors of government, the private sector and civil society, and the concluding recommendations are available online.

COLLABORATION WITH OTHER DEVELOPMENT PARTNERS

71. The content of this DPC series is aligned with the programs of the active development partners in the country in order to provide complementary support to ongoing reforms. Grenada is well served by several bilateral and multilateral agencies. Together with the European Union (EU), the Canadian International Development Agency (CIDA), the UK Department for International Development (DFID), the US Agency for International Development (USAID), the Pan-American Health Organization (PAHO) and the CDB (which in

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addition to its own resources lends IDB funds), the Bank is an active participant in the Eastern Caribbean Donor Group to improve donor coordination. The Bank and the government are keen on donor coordination and are aware of the importance of creating synergies for reforms. In particular, the Bank and the IMF have collaborated closely in the preparation of this operation, and the proposed prior actions are designed to complement the work of the IMF’s program. The Bank has also collaborated with the CDB and invited it and the ECCB to participate in all missions so far related to this operation.

5. OTHER DESIGN AND APPRAISAL ISSUES

5.1. POVERTY AND SOCIAL IMPACT

72. The poverty and social impact of the policy measures supported by this DPC series is expected to be positive or neutral. Some of the proposed measures will have a direct positive effect, while the benefit of others will only be evident indirectly. Given the limited available data on poverty, with the last CPA having been conducted by the CDB in 2008, primarily qualitative instead of quantitative analysis has been used for the PSIA. If more data becomes available in the span of the DPC series, a more detailed analysis can be carried out. The supported policy measure address vulnerabilities of different parts of the economy and are meant to contribute to poverty reduction and shared prosperity. While the fiscal consolidation could dampen growth in the short run and thereby potentially impact growth, the economy is expected to recover quickly and benefit from the recovery of financial flows to its main trading partners through the economy’s high openness. The concrete impact on poverty cannot be assessed due to the limited availability of data.

73. The policy measures supported under Pillar 1 are expected to have a neutral or positive poverty and social impact. An improved functioning of the commercial estates is likely to increase employment and possibly the income of the employed staff. However, a plan by the government regarding employment changes in the context of the commercialization is not yet available. The Tourism Authority Act can be expected to improve linkages between agriculture and tourism, thereby increasing the revenue of agricultural producers, offering new employment possibilities and reducing poverty.

74. The impact of the reforms supported under Pillar 2 is expected to be positive in the medium to long term. While the approval of the Public Sector Modernization Policy and the Social Safety Net Policy Framework does not have an immediate impact on poverty, their implementation can be expected to have a direct positive impact. Particularly, the implementation of the Social Safety Net Policy Framework will contribute to an improved approach to the delivery of social safety nets and is meant to ensure that Grenada’s poor and vulnerable population receives adequate assistance. The expected outputs include, for example, the development of different social protection programs, the consolidation of existing programs, improved access to health care and an improvement in the delivery of health care programs, and increased training and employment initiatives for the youth. Regarding the implementation of the Public Sector Modernization Policy, public employment will be strategically realigned through attrition. This can be expected to create fiscal space to provide more social services to Grenada’s poor and vulnerable population in the medium and long term.

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75. Similarly to Pillar 2, the reforms supported under Pillar 3 and 4 are expected to be neutral in the short term, but have a positive impact in the long term. A safer construction of roads, bridges and buildings, which is more resilient to natural disasters, will prevent the loss of lives and destruction of property, thereby having a positive impact on the livelihood of the population exposed to natural shocks. Building financial resilience to natural disasters is likely to free up fiscal space for spending that could contribute to the reduction of poverty. Similarly, a decreased debt level would reduce interest payments and fiscal pressure on the government budget.

5.2. ENVIRONMENTAL ASPECTS

76. The specific policies supported by this DPC series are not expected to have significant negative impacts on the environment, forests, or other natural resources. The government is making efforts to strengthen systems for environmental management. The government has devised programs and policies to assess and manage potential adverse effects on the environment. Internationally, the government has committed to the Convention on Biological Diversity, and regionally it has committed to the Cartagena Convention and the St. George’s Declaration of Principles for Environmental Sustainability revised in 2006. Under this Declaration, Grenada has committed to the strengthening of the national agencies with environmental responsibilities and the full integration of national environmental priorities into institutional and legal frameworks that include specific provisions for enforcement and financing their implementation. These measures address the challenge of limited institutional capacity, which is due to various factors, including lack of human and financial resources as well as poor coordination between various line agencies.

77. Several initiatives are being implemented aimed at conserving biodiversity. The government has also prepared a National Biodiversity Strategy and Action Plan and has recognized the importance of Protected Areas (PAs) as a means to conserve biodiversity. In 2008, along with other countries in the region and their international partners, the OECS countries launched the Caribbean Challenge which aims to protect and ensure the effective management of PAs. Several projects and activities aiming to conserve the key ecosystems are being implemented, including the GEF/UNDP supported Sustainable Management of the Shared Marine Resources of the Caribbean Large Marine Ecosystem and Adjacent Regions Project, the GEF/UNEP supported Integrating Watershed and Coastal Area Management Project, and the GEF/WB supported OECS Protected Areas and Associated Sustainable Livelihoods Project. To address institutional capacity constraints, one of the objectives of the WB/GEF OECS Sustainable Financing and Management of Eastern Caribbean Marine Ecosystems Project is to establish a system of long-term financing mechanisms to sustainably fund protected areas in Grenada and also support efforts to harmonize policy, legal and institutional frameworks in Grenada and other OECS participating states.

78. Selected reforms supported by this DPC series are likely to contribute to an improved regulatory framework with a positive impact on environmental management, if properly implemented. Particularly, as a result of the regulatory acts adopted under Pillar 3 and the subsequent regulatory enforcement, environmental impact assessments would be required by law before physical works could commence. This would result in the mitigation of environmental impacts associated with publicly and privately financed civil works projects. Under the Pilot Program for Climate Resilience, the government holds annual consultations with

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stakeholders around various issues pertaining to disaster risk management (DRM) and climate resilience. These consultations include discussions on, inter alia: (i) national policy on DRM and climate resilience; (ii) the impacts on socio-economic conditions and the environment; and (iii) changes as a result of DRM and climate resilience activities under the World Bank Regional Disaster Vulnerability Reduction Project and other initiatives.

5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS

79. Overall, the fiduciary risk to this operation arising from Grenada’s public financial management (PFM) system, use of budget resources, and foreign exchange environment as controlled by the ECCB is moderate. The GoG is making progress in improving public financial management system to mitigate fiduciary risks. The budget is made publicly available. However, there still remain a number of weaknesses, especially in the area of strategic sector planning, budget execution and public procurement, financial reporting and internal audit. A comprehensive assessment of Grenada PFM systems using the public accountability and financial assessment (PEFA) framework was carried out in 2010. Following this assessment a comprehensive PFM action plan was prepared and used by the GoG to design and implement a broad set of PFM reforms.

80. The budget system is based on consistent administrative and economic classifications that broadly reflect IMF’s Government Finance Statistical Manual (GFSM) published in 1986 and the United Nation’s Classifications of Functions of Government Manual (COFOG). Projections of revenues and recurrent expenditures included to the annual budget are close to actual amounts. However, predictability and controls in budget execution have been limited. Monthly budget execution reports are prepared by the budgeting department, with the bulk of information generated directly from the SmartStream.

81. The internal audit unit located within the Accountant General’s department has made some progress in recent years; however, it still lacks an established legal framework. Internal audit work is based on annual plans; however, it also accommodates ad hoc requests. It is primarily focused on compliance reviews and assessment of processes and controls. Prepared reports are submitted to the Accountant General, who then shares them with the Permanent Secretary of the MoF. The most recent Annual Statements of Account (SOA) of government covering all central government entities date back to 2010. The 2011 and 2012 statements are now being completed and expected to be presented to the Director of Audit (DOA) by May 2014. Grenada has a functioning public financial accountability and assurance mechanism for the legislature and the public. A comprehensive annual audit of the government’s SOA is carried out by DOA.

82. Foreign exchange management system. As a member of the ECCU, Grenada has the East Caribbean dollar (EC$) as its currency; the currency is managed by the ECCB, which holds its member countries’ pooled foreign exchange reserves. ECCB operates a currency board-type system in which it holds 100 percent backing in foreign exchange for its note issue. The IMF completed a Safeguard Assessment on April 16, 2012 and did not identify any significant safeguards risks. The ECCB has well established procedures that ensure the integrity of its operation. It also has in place a well-functioning internal audit department, and its accounts are audited by an independent external auditor. The Board of Directors of the ECCB has an Audit sub-committee of the Board, which provides oversight of the financial management and control environment.

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83. Disbursement and Auditing Arrangements. The proposed credit will follow the Bank’s disbursement procedures for development policy support. Credit proceeds will be disbursed once evidence of fulfillment with prior actions (Annex 1) has been accepted and a satisfactory macroeconomic framework has been maintained. The Bank would disburse the credit proceeds, denominated in US dollars, into Grenada’s foreign exchange reserves account at the ECCB. The ECCB would then immediately credit Grenada’s account at the ECCB with a corresponding equivalent amount in EC$ which would become available to Grenada to finance budgeted expenditures. Given that the fiduciary environment at the ECCB is adequate, no specific audit of the deposit account will be required, but the WB reserves the right to request such audit. If the proceeds of the loan are used for ineligible purposes as defined in the Loan Agreement, the Bank will require the Borrower to promptly, upon notice from the Bank, refund an amount equal to the amount of said payment to the Bank. Amounts refunded to the Bank upon such request shall be cancelled. The administration of this credit will be under the responsibility of the MoF of Grenada. Within 30 days of this funds transfer, the GOG via the MoF will accordingly provide the Bank with a written confirmation of the amounts deposited into their foreign account at the ECCB.

5.4. MONITORING AND EVALUATION

84. Monitoring, Evaluation and Results Framework. The MoF will be responsible for coordinating actions among other concerned ministries and agencies. A number of other agencies are involved in the implementation of the reform program being supported by this DPC series, including MoSDH, the Ministry of Agriculture, Lands, Forestry, Fisheries and the Environment, the MoT, the DPA and the Ministry of Works. As part of the preparation process, the Bank has discussed with the relevant institutions the importance of the development of a monitoring and evaluation process to ensure adequate feedback to policy makers. Monitoring and evaluation is traditionally a weak area in the small island economies including Grenada but there is strong understanding of the need to strengthen such mechanisms. The government and the Bank have agreed on a results framework, which is described in Annex 1, which includes indicators to be assessed at the end of the program supported by this DPC series. These indicators represent, therefore, the agreed benchmarks for future evaluation of the program supported by this DPC series. The Bank will maintain a dialog with counterparts in the MoF on monitoring and evaluating the results of the reforms supported with this DPC series.

6. SUMMARY OF RISKS AND MITIGATION

85. The overall risk of achieving the objectives of this DPC series is high. Risks to achieving the expected development results are mainly associated with potential shocks, including natural disasters, a deterioration of global economic conditions, domestic policy slippages, which may threaten the stability of the macroeconomic framework, the sustainability of Grenada’s debt dynamics, and fiscal consolidation efforts and set back the reform program. Other risks relate to a potential weakening of political commitment and limited institutional capacity.

86. The Bank will work closely with development partners, the IMF particularly, to support the government’s efforts to manage these risks. Strong coordination between development partners could help the government try to minimize identified risk and continued progress with reform actions through: i) ensuring consistency in dialogue regarding economic

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and public finance issues; ii) supporting the mobilization of required technical assistance at appropriate times; and iii) achieving consistency and complementarities across elements of the reform agenda supported by various development partners.

87. The results supported by this DPC series face the following risks:

88. Macroeconomic Risks: The challenge of maintaining macroeconomic stability in the face of uncertain global developments, especially in the euro zone and the US, to which Grenada is highly exposed, is a high risk. A lower than anticipated global recovery would suppress a revival in tourism, remittances, GDP growth and FDI, exacerbating the already acute external financing gap and making the fiscal adjustment more difficult at a time when the fiscal position remains stretched and high public debt overhangs the economy. Tapering of Fed quantitative easing may add further stress on the external account, debt sustainability, and financial and banking sector.

89. While external shocks are difficult to mitigate in the short run, the government seeks to manage these risks through focusing its policy actions on reducing vulnerabilities and fiscal prudence. The government is taking measures to create fiscal space and reduce fiscal deficits so as to regain buffers for potential shocks. The government program supported by the IMF and financing are expected to result in an improved macroeconomic framework, and hence contribute to mitigation of macroeconomic risks. The Bank is coordinating this DPC series closely with the IMF-supported program.

90. Natural Disaster Risks: Another overarching risk that could affect the outcomes of this operation is Grenada’s exposure to natural disasters, such as hurricanes and tropical storms. Natural disasters can seriously impact this operation by severely affecting the productive sectors of the economy, such as agriculture and tourism where the DPC series is supporting a number of policy reforms, and communities and households. Natural disasters can also hamper reforms and add pressure on the fiscal position, exacerbate existing expenditure pressures, redirecting public resources away from long-run development plans and increasing indebtedness. They can also divert scarce government administrative capacity towards emergency operations.

91. The government, with the support of this operation, is strengthening its capacity to respond to an adverse natural event, evaluate the impact of a disaster, and at the same time protect fiscal stability through risk-financing tools (risk sharing, risk pooling, contingent financing, and catastrophe-related bonds and insurance, for example). In case such events nevertheless materialize, its damage to the major private sector enterprises would be partly covered by their own insurance. The CCRIF, in which Grenada participates, would help to offset financing costs in the case of a significant disaster.

92. Governance and Political Risks: The reforms included in the government program are ambitious and will require steady political commitment; any slippage on the reform agenda or lack of political commitment could compromise the objectives of the program. While the current administration has the commitment and sufficient political support at the moment to implement critical reforms supported by this operation, this might change were another major natural disaster to hit the country or in the case that economic activity remains sluggish longer than expected due to an unfavorable external environment. Under these circumstances, the commitment and support for reform efforts could be compromised.

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93. The government is focusing selectively on reforms for which a strong political consensus already exists across the political spectrum, confirmed by extensive consultations with stakeholders from both government and private sector, and by having laid down the foundation and building blocks to expedite the reform program over the medium term.

94. Implementation Capacity Risks: Limited institutional capacity for implementing reforms reflects absence of technical expertise in some areas given the small pool of human resources in this small country. While by regional standards Grenada’s institutional and technical capacity is considered relatively robust, the limited number of technical staff in several core ministries may pose implementation risks. The political economy risk (highlighted before) can be exacerbated by limited institutional capacity in some sector ministries, which can limit the effectiveness, the pace and progress of reforms. Likewise, limited fiscal resources could hinder the full execution and roll out of the strategy and action plans supported by this DPC series.

95. All development partners are working closely with government by selecting a limited number of key reform actions to prevent overspreading of scarce capacity; providing technical assistance to support the implementation of policy actions; coordinating and, when possible, consolidating their interventions to minimize the burden on the administration. In this context, the government has carefully selected a limited number of policy actions that are key priorities to the government. The implementation requirements for each action were discussed at length, to ensure that expectations regarding the timeframes for implementation are realistic.

96. Despite all the actions being taken to mitigate the risks, some risks will continue to persist; and the overall risk of not achieving the objectives of this DPC series remains high. However, the risks are outweighed by the potential gains from implementing the program of policy and institutional reforms supported by the DPC as laid out in the Program Document.

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ANNEX 1: POLICY AND RESULTS MATRIX

Prior actions and Triggers Results (December 2016) Prior Actions under DPC 1 Triggers for DPC 2 Triggers for DPC 3

Pillar 1: Creating conditions for private investment in a sustainable manner Tourism Sector Development

Prior action #1: The Recipient’s Parliament has enacted the Grenada Tourism Authority Act, establishing the institutional framework for the governance of the tourism sector.

Evidence: Publication in the Recipient’s Government Gazette on December 31, 2013; Act No. 42 of 2013 came into force on January 2, 2014.

(Indicative) Trigger #1: The new Tourism Authority has established a regulatory framework and organizational structure, which includes the establishment of a permanent Public Private Dialogue (PPD) platform to ensure the design and implementation of a shared tourism policy.

(Indicative) Trigger #1: The Tourism Authority’s Strategic Marketing and Product Development Policy are formally approved by the Tourism Authority Board and by Cabinet.

Increase in tourist receipts Baseline (2013): EC$ 307 million Target (2016): 8 percent increase

Agribusiness Sector Development

Prior action #2: The Recipient has appointed a committee for the commercialization of selected estates of the Recipient, and (b) approved the criteria for the commercialization of such estates.

Evidence: (a) Cabinet Conclusion No. 807 dated July 1, 2013; and (b) Cabinet Conclusion No. 1237 dated September 2013; both as referred to in the Memorandum from the Recipient’s Permanent Secretary Ministry of Agriculture, Lands, Forestry, Fisheries and the Environment furnished to the Association on May 9, 2014.

(Indicative) Trigger #2: The policy to commercialize government-owned agricultural estates is implemented for at least 3 of the government-owned estates.

(Indicative) Trigger #2: Cabinet approval of the reform of the MNIB, transforming the MNIB into a service provider of market information, product quality and standards, logistics and aggregation services, on a voluntary and pro-competition basis.

Increase in total output of commercialized agricultural estates Baseline (2013): 350 tons Target (2016): 100 percent increase Increase in the number of farmers serviced by MNIB Baseline (2013): 1,623 Target (2016): 3,000

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Trade logistics

Prior action #3: The Recipient’s Customs Bill establishing inter alia: (a) procedures for electronic processing of trade transactions, (b) procedures for record keeping and audit powers by the Customs and Excise Division of the Ministry of Finance, and (c) accountability procedures and delegation of authority in decision making, has been submitted to Parliament on May 9, 2014.

Evidence: The Bill has been submitted to Parliament on May 9, 2014, as per the terms of the Recipient’s Parliamentary Order No. 2 of the same date.

(Indicative) Trigger #3: The Recipient has enhanced border agency coordination by: (1) having all technical border control agencies processing trade transactions through ASYCUDA World, and (2) establishing a single payment point for the private sector to comply with all border agencies whose revenues are transferred to the Recipient’s consolidated fund.

Reduction of the clearance time of border control procedures by half. Baseline (2013): approximately six working days Target (2016):approximately three working days

Public Private Partnerships [no prior action]

(Indicative) Trigger #4: Cabinet has approved a policy framework for PPPs, which is immediately applicable to all investment projects.

(Indicative) Trigger #3: The MoF has established an institutional framework for PPPs, including a designated team within the MoF with responsibility for PPPs and processes and policies for managing the fiscal implications of PPPs.

Increase in the share of PPP projects under development that are proceeding according to the processes and requirements defined in the PPP Policy. Baseline (2013): 0 percent Target (2016): 100 percent

Energy Sector [no prior action]

(Indicative) trigger #5: Cabinet approval of the policy for the amendment to the Electricity Supply Act based on the adopted policy changes towards a competitive cost of electricity.

(Indicative) Trigger #4: Cabinet approval of the policy for independent regulation of the energy sector, including defining the role and function of ECERA or an independent regulator such as the Public Utilities Commission (PUC) in case ECERA is not fully functional.

Implementation of a new mechanism for electricity tariff setting. Baseline (2013): There is no existing electricity tariff setting mechanism. Target (2016): New electricity tariff setting mechanism is implemented.

32

Pillar 2: Supporting improved public sector management, better targeting of social safety net programs and reduced vulnerability of the financial sector Management of Public Employment

Prior action #4: The Recipient has endorsed a public sector modernization policy establishing inter alia procedures for: (a) strategically realigning public employment; (b) strengthening management of selected agencies; and (c) developing a results focus in planning and budgeting.

Evidence: Cabinet Conclusion No. 1748 dated December 16, 2013, as referred to in the Memorandum from the Recipient’s Permanent Secretary-AG Department of Public Administration furnished to the Association on May 9, 2014.

(Indicative) Trigger #6: Public employment structures in three ministries and one government department have been aligned with the functions and tasks of government entities in line with the recommendations of the HR audit conducted in 2010-2013.

(Indicative) Trigger #5: A public employment policy in the education sector has been approved aiming at optimizing the employment structure and initial recommendations of the 2014 Organizational Assessment have been implemented.

Better alignment of the government employment structure with the recommendations of the HR audits. Baseline (2013): Functions and tasks in government entities are not aligned with the recommendations of the HR audits. Target (2016): Functions and tasks in government entities that employ at least 70 percent of the total government workforce as well as HR and payroll information are aligned with the recommendations of the HR audits.

Accountability for Results in the Public Administration [no prior action]

Indicative Trigger #7: Cabinet has approved a regulation defining rules and procedures for producing and publishing public annual performance reports.

Increase in the number of public entities that publish annual performance reports. Baseline (2013): No public entity publishes annual performance reports. Target (2016): At least three ministries publish annual performance reports.

Procurement [no prior action]

(Indicative) Trigger #8: A new public procurement law, consistent with good international practice, has been submitted to Parliament.

(Indicative) Trigger #6: Procurement regulations are approved by Cabinet and the institutional setup for the implementation of the procurement law is in place.

Increased transparency of public procurement and confidence of the private sector in the system. Baseline (2013): Contract awards are not published. Target (2016): Contract awards consistent with the new procurement law are published.

Financial Sector Development [no prior action]

(Indicative) Trigger #9: The Recipient has undertaken a comprehensive and independent valuation of the assets of the weak banks.

Reduction of the share of NPLs in the total loan portfolio of banks. Baseline (2013): 9 percent Target (2016): 5 percent

33

Social Safety Nets

Prior action #5: The Recipient adopted a policy framework for the strengthening of the design and programming of the Recipient’s social safety nets.

Evidence: Cabinet Conclusion No. 861 dated July 8, 2013 as referred to in the Memorandum from the Recipient’s Permanent Secretary, Ministry of Social Development furnished to the Association on May 13, 2014.

(Indicative) Trigger #10: The Recipient established eligibility criteria for application of the targeting instrument and started its implementation.

Increase in the number of social programs using the targeting tool to identify beneficiaries. Baseline (2013):0 Target (2016): 3

Pillar 3: Enhancing resilience against natural disasters Prior action #6: The Recipient’s Cabinet has approved (a) the Grenada Building Code and the Grenada Building Guidelines; and (b) the Physical Planning and Development Control Bill, 2014, for submission to Parliament.

Evidence: Cabinet approval on May 19, as referred to in Memoranda from the Recipient’s Secretary to the Cabinet furnished to the Association on May 19, 2014. Prior action #7: The Recipient’s Architects (Registration) Bill and the Engineers Registration Bill establishing respectively procedures for the professional practice of architects and engineers in the Recipient’s territory, have been submitted to Parliament.

Evidence: The Bills have been submitted to Parliament on March 6, 2014, as per the terms of the Recipient’s Parliamentary Order No. 1 of the same date.

(Indicative) Trigger #11: Revised Road Traffic Bill has been approved by Cabinet.

(Indicative) Trigger #7: Enforcement mechanisms have been approved by Cabinet to support regulatory physical planning, design standards and construction practices policies.

Increase in the proportion of new public/commercial buildings and private housing built in safe regulated areas, in accordance with regulatory acts. Baseline (2013):0 percent Target (2016): 50 percent Increase in the percentage of engineers registered. Baseline (2013): 0 percent Target (2016): 40 percent

34

Pillar 4: Facilitating debt portfolio restructuring and enhancing debt management. [no prior action] (Indicative) Trigger #12:

Cabinet has approved a Medium-Term Debt Management Strategy.

(Indicative) Trigger #8: A Procedures Manual accompanying the MTDS has been adopted by the MoF.

Decrease of the share of debt with a maturity of less than 90 days. Baseline (2013): 17 percent Target (2016): 10 percent

35

ANNEX 2: LETTER OF DEVELOPMENT POLICY

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Letter of Devc.>lopment Polin

\Jii\IS I H\ 01- H~.\ 'CE \:-ID El'iERGY

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first Progrnmnuttic Rcyilicncc Building Ucvelooment Polin • Cn•dit

May 13, 2014

Dr. Jim Yong Kim

President

World Bank

Washington DC 20433 UNJTEQ STATES OF AMERICA

Dear Dr. Kim

The Government ~f Grenada welcomes the technical assistance and financial support

of the World Bank as we imptemenl our Homegrown Programme of Fiscal Adjustment

and Reforms. The key objectives and reforms are sal oul in the 2014 Budget Statement,

which I delivered to the Parliament on December 10, 2013. They are to boost growth

and job creation; improve fiScal suslainabitily; and improve debt suslainability.

Bqclwrnuyd

Grenada's economy was among the hardesl-hil by lhe global financial crisis, wfth Gross

Domestic Producl iGDP) contracting by 6. 7 percent in 2009 and then contracting by an

additional 0 .1 percent in aggregate in real terms over the subsequenl four years.

The recenl slowdown has been associated with an extremely high unemploymenl

rate that is now estimated at around 33.5 percent down from more than 40 percent

al lhe end of 2012. Unemployment is particularly acute among younger persons, with

more than half of our youth of working age currently unemployed. Such a longstanding

dislocalion has pl;;ced pressure on the Government to expand socia safety nels and

Tel· (473) J""0-213 H·H

36

public sector employment.

The inability of the economy to grow and generate jobs is believed to be !he result

of several interrelated factors including: an adverse external environment resulting a

stalled recovery period after Hurricane Ivan and precipitous decline of foreign direct

inveslment: weak competitiveness due to limited transport and hotel infrastructure:an

inability to provide a meaningful counter-cyclical fiscal response due to limited fiscal

space and a significant decline in foreign grants and concessionallending.

On assuming office in late February 2013, our Government reoognized the need to

take a proactive approach to address Grenada's unsustainable public finances. In

our 2013 Budget Statement, Government outlined the elements for a New Economy

in direct response to the challenges faced by Grenada. Consistent with the first two

elements (fiscal and debt sustainability), we have now designed a comprehensive

Homegrown Programme of Fiscal Adjustment and Reforms reflecting shared sacrifice

of all stakeholders, lessons learned from previous Fund programmes, and the need to

ensure broad-based support for implementation.

The Government's Homegrown Programme has three pillars that, together. are

expected to generate meaning1uf, inclusive, and sustainable economic growth:

1. A bold attempt to redirect economic activity away from the public sector through a

correction of the fiscal deficit and an overhaul of inefficient revenue and expenditure drivers;

2. Structural reforms to ensure fiscal discipline going forward, and to promote an

environment in which the private sector can invest with confidence: and

3. Measures to strengthen financial system stability.

Together with a comprehensive restructuring of the public sector debt, these three

pillars are intended to place Grenada's public finances firmly on a sustainable footing.

thereby resto:ing confidence following the most difficult period in Grenada's economic

history.

Furthermore, Grenada has just prepared a Growth and Poverty Reduction Strategy for

the period 2014-2018.

2

37

Structural :Reforms to Support Growth and Achieve Fiscal and Debt Sustalnoblllty

The Grenadian economy has suffered severely as a result of the recession of the last

few years. As a small open economy with a high debt burden, continued low growth

and a limite<l p private sector, the need to complement our efforts at achieving fiscal

and debt sustainability with an appropriate package of structural refonns aime<l at

transfonning Grenada's economy is crucial. With the support of this Credit, Grenada

is expected to address four main pillars which directly impact our ultimate goals of

sustained growth, debt and fiscal sustainability, job creation and poverty reduction. These are:

Improved cond itions for private investment;

Enhanced fiscal consolidation through the improvements in public sector

management and more efficient safety net programmes and reduced vulnerability of the financial sector;

Enhanced preparedness against natural disasters; and

lmprove<l debt sustainability through debt restructuring and enhanced debt management.

(f) lmprq••edCqnditiOII$ for Private Investment

The Government is committe<l to strengthening the role of the private sector to lead

economic growth and development.ln so doing, we have decided to focus on two of the

main growth sectors identified in the Growth and Poverty Re<luction Strategy, tourism

and agriculture.Government has moved to modernize and strengthen the institutional

frameworfl for the tourism sector by establishing the Grenada Tourism Authority.

In the case Qf agri-business, the fundamental objective is to improve the productivity

and competitiveness of the agri-business sector. In this regard we have taken

steps to begin the process of oommercializing our Government Estates. However

the development of the Agribusiness sector also demands a greater role for the

Marketing and National Importing Board (MNIB). Indeed. given the high risk nature of

3

38

Agribusiness, the sector requires a transfonnational agent like the MNIB to help our

farmers by providing the requisite market intelligence and markets tor their output.

The 2014 Ease of Doing Business Report of 2014 ranked Grenada at 107 in the world

compared to its rank of 102 in the report of 2013. This slippage was attributed largely to

the areas of business startup, registering property and trading across borders.

Strengthening the business environment to encourage more local and foreign dtrect

investment is an urgent priority. In this regard, the development of public private

partnerships (PPPs) is essential to push Grenada on an upward growth trajectory and

we are seeking the assistance of the World Bank in the area of PPP's to address our

critical infrastructure deficit. Grenada is also looking to the Bank for support with a

policy framework, a legal framework and the development of capacity to handle PPPs.

(2~nh:mcing fiscal consolidation through th~ improvements in public sector m~nagement and more dficirnr safety net progrumm('s and n:.•duced vulnerability of the firulncial sector;

improving PuiJ/ic Sector i\fanaf(ement

As part of Government's drive to achieve fiscal sustainability, it must address its

expenditure on salaries and wages. Expenditure reform measures announced in

the 2014 Budget Statement are to be driven by a reduction in the wage bill to nine

percent of GOP by 2016, from a projected 10.3 percent in 2013 (excluding retroactive

payments). This is expected to be done by implementing the following measures:

a) The nominal wage bill will be capped through 2016 at December 2013 levels (excluding retroactive payments).

b) Only a third of departing employees are to be replaced; and a public service review

will be used to further streamline the workforce.

c) Non-personnel expenditure will be reduced by 20%.

The reform programme needed to complement this strategy requires Government to

fully adopt the Public Sector Modernization Policy aimed at strategically realigning

public employment. strengthening management of selected agencies and developing a

result oriented focus in planning and budgeting.

4

39

Additionally improving the system of accountability in the Public Service by ensuring

the system is supported by appropriate rules and procedures for perlormance reporting

must also be addressed.

A framework lor publiC procurement will be developed. In this regard, Parliament a new

Procurement Bill is before Parliament and will replace the 2007 Public Procurement and

Contract Administration Act

Beller Taryerwg qfS«'«l s~,tco· \ers

The most recent Country Poverty Assessment (CPA). undertaken by the Canbbean

Development Bank in 2008, showed that around 38 percent of the population in

Grenada was deemed to be poor, 2.4 percent of who were indigent or extremely

poor. Poverty is particularly prevalent among the less educated, the unemployed and

female-headed households. Government has tried to address these issues through

the use of a number of social assistance programmes; however, we contmue to be challenged 111 terms of the coverage, coordmation and overall efficiency of these

multiple programmes.

In this regard our reform agenda for social safety nets seeks to Implement a Safety

Nets framework to strengthen the policy design and programming to ensure greater

effectiveness and coverage.

Fitmndal Srrwr Stqluhtr

The Government will lake a proactive approach to ensunng the contonued stabll1ty of

the financial system, and will support ongoing regiOnal effons to strengthen f1nanetal

regulation and supervision

The Eastern Caribbean Contra! Bank has assessed the impact of the debt restructuring

on banking Industry capitalization needs. Consistent with the decisions of the Monetary

Council, the regulatory frameworks for both the baking and non-banking sector will be

strengthened .

(3) Enhonclng Pr"pllrtdncss Agoinst Nnrurul Olsu.rc.-.

As one of the countries In the world exposed to multiple natural diSasters. Grenada

needs to be vigilant In mitigating the risk assOCiated with such d isasters. In 2004.

!he Country suffered severely from the effects of Humcane Ivan wh1ch d1d damage

5

40

amounting to over 200 per cent of Gross Domestic Product. Before Grenada cculd

reccver. hurricane Emily also ravaged lhe north of the island in 2005.

Consequently, there is an urgent need to develop a ccmprehensive disaster risk

management strategy and to mitigate some of the risks associated with the fiscal

exposure of natural disasters on Grenada.

Reducing the risk associated with natural disasters for Grenada will require us to also

strengthen the Physical Planning Regulatory System by Implementing legislation and

regulations to support infrastructural development in the ccuntry.

(4) Facilitating Debt Portfolio Restructuri ng And Enhancing Ocbt Management

In March 2013, Government announced its intention to undertake a collaborative and comprehensive debt restructuring.

Debt Restructuring Advisers have been retained and we are in dialogue with our

creditors to find an appropriate solution to our current debt overhang. Earlier this

month, Grenada began to make offers to our creditors consistent with the structural

adjustment programmer approved by the IMF. These offers are for a 50-60% pnncipal

write-down.

The debt restructuring process aims to replace once-and-for-all an unsustainable

debt service profile with one that is in line with Grenada's payment capacity, thereby

restoring viability to the public finances.

In O(d~r to achieve debt sustainability. WG must strengthen our debt management

framework. The reform programmer intends to utilize the Medium Term Debt

Management Strategy Framework as developed by the World Bank, to devise a comprehensive plan to actively manage our entire debt portfolio. In addition, we also

see the need to strengthen our in-house debt management capacity by addressing

some structural deficiencies through initiatives like the introduction of a procedures

manual for deht management in keeping with international best practice.

Grwerument's Commitmem

6

41

Government has commenced working on several of the initiatives identified in this

letter. The Tourism Authority Act has already been passed and the Authority

commenced operations in January 2014.

The tender process for the commercialization of Government estates has already

begun. Bids have been received and awards will be made soon.

Grenada appreciates the partnership of the World Bank for its Homegrown Programme,

the development of the new economy and its drive to achieving debt sustainability, fiscal

sustainability and growth.

We look forward to the successful implementation of Grenada's refonm agenda.

Yours faithfully

7

42

ANNEX 3: GOVERNMENT FINANCES

Table A-1. Grenada: Key Fiscal Indicators 1/

Est. Proj. 2009 2010 2011 2012 2013 2014 2015 Overall balance -5.2 -3.1 -4.7 -5.4 -7.1 -6.0 -2.7 Primary balance -3.0 -1.0 -2.2 -2.0 -3.7 -2.4 1.3 Total Revenue and Grants 22.8 24.6 23.6 20.8 21.5 24.9 24.9 Tax Revenue 17.5 18.7 18.4 17.9 17.2 18.7 19.9 Taxes on goods and services 6.9 8.2 8.3 8.1 7.8 8.2 8.9 Taxes on income and profits 4.2 3.8 3.5 3.5 3.0 3.4 3.6 Taxes on property 0.9 0.8 0.7 0.8 0.7 1.0 1.1 Taxes on international trade 5.4 5.9 5.9 5.6 5.7 6.1 6.4 Non-Tax Revenue 2.0 1.9 1.8 1.7 2.9 1.6 1.6 Grants 3.3 4.0 3.4 1.1 1.4 4.6 3.3 Total Expenditure and net lending 28.0 27.8 28.3 26.1 28.5 30.9 27.6 Current expenditure 20.4 20.5 20.5 21.1 21.2 21.4 20.0 Wages and salaries 9.2 9.4 11.0 10.5 11.1 11.1 9.7 Pensions and NIS contributions 2.0 2.0 1.9 2.0 2.1 2.3 2.1 Goods and services 4.1 5.2 3.6 4.0 3.5 3.3 3.2 Transfers 2.9 1.7 1.5 1.2 1.2 1.1 1.1 Interest Payments 2.2 2.2 2.5 3.4 3.4 3.6 4.0 Domestic 1.1 1.3 1.2 External 2.3 2.2 2.4 Capital expenditure and net lending 7.6 7.3 7.8 5.0 7.3 9.5 7.5 Grant-financed 1.1 2.2 3.1 1.1 1.4 4.6 3.3 Non-grant Financed 6.5 5.1 4.6 3.9 5.9 4.9 4.3 Public Debt 91.7 97.6 100.9 103.1 110.0 111.5 110.1 External 64.5 69.5 69.2 68.3 72.8 69.4 70.7 Domestic 27.2 28.1 31.7 34.8 37.2 42.1 39.4 Source: IMF and WB Staff Calculation 1/ Assumes fiscal adjustment but no debt restructuring

43

Table A-2. Grenada: Medium-Term Central Government Financing Projections (US$ millions)

2013 2014 2015 2016

A. Primary balance 1/ -29.8 -20.5 11.5 31.7

B. Total interest 27.9 30.0 35.2 40.8 Existing debt at end-2013 27.9 30.0 23.0 27.7

Official 5.2 5.6 5.3 5.0 External commercial 8.9 11.6 11.6 15.5 Domestic 2/ 13.8 12.8 6.1 7.2

New debt incurred after-2013

12.3 13.2

C. Overall balance -57.7 -50.5 -23.7 -9.1

D. Amortizations 122.6 155.9 81.7 112.5 Existing debt at end-2013 122.6 155.9 20.4 39.2

Official 17.6 16.8 17.9 18.9 External commercial 0.0 0.0 0.0 0.0 Domestic 2/ 105.0 139.1 2.5 20.2

New debt incurred after-2013

61.3 73.3 Assumed clearance of arrears 20.9 20.9

E. Arrears payable from previous years 3/ 77.5 103.0

F. Gross financing requirement (C+D+E) 257.9 309.3 105.5 121.6

G. Financing sources (gross) 257.9 73.8 88.5 90.9 Official (existing pipeline) 39.5 7.2 9.8 0.2 Domestic (rollover) 105.0 40.4 52.4 64.4 Domestic (new) 95.9 0.0 7.4 7.4 Accumulation of arrears 3/ 107.5

H. Financing gap 0.0 230.5 17.0 30.7 Exceptional financing 31.2 26.2 26.3

IMF 6.2 6.2 6.3 World Bank 15.0 10.0 10.0 CDB 10.0 10.0 10.0

Remaining gap 4/ 204.3 0.0 4.4 Source: Country authorities and Fund staff estimates; 1/ The primary surpluses projected for 2017-20 include revenue from the future Citizenship by Investment program; 2/ Includes EC$ portion of the 2025 bond.; 3/ For illustrative purposes, assumes equal repayment of total arrears through 2020. The arrears comprise of past due debt service to Paris Club and non-Paris Club creditors, past due interest on external commercial debt, and arrears to domestic suppliers and statutory bodies; 4/ Gap to be closed through regularization of arrears and restructuring of eligible debt.

44

ANNEX 4: Disaster Risk Financing and Insurance (DRFI) Framework

Figure A4.1: Count of disasters

Source: EM-DAT

Figure A4.2: Damage from disasters (US$ million)

Source: EM-DAT

Box 3. The Disaster Risk Financing and Insurance (DRFI) Framework

In the past 10 years, disaster losses worldwide have increased from less than US$50 billion to over US$350 billion. 2011 saw record losses from disasters with estimated costs of up to US$380 billion. This upward trend is exacerbated by growing urbanization, environmental degradation, and an increase in the frequency and severity of hydro-meteorological events due to climate change. Developing countries are particularly vulnerable to natural disasters and do not have adequate resources to dedicate to reducing asset exposure or to effectively respond to an emergency. As a result, natural disasters place a significant fiscal burden on governments of developing countries.

DRFI can be broadly defined as the tools and strategies to increase financial resilience against natural disasters. The development of a DRFI Framework aims at helping developing countries increase their financial and fiscal financial resilience against natural disasters within the broader disaster risk management and climate change adaptation agenda. There are two components to the DRFI Framework: (1) sovereign disaster risk financing, and (2) catastrophe risk market development.

To achieve financial resilience, the DRFI Framework builds upon a risk-layering, bottom-up approach. The layered approach moves through lower, intermediate, and higher layers of risk that correspond to varying degrees of disaster frequency and severity. The financial mechanisms include a combination of retention instruments such as reserves and contingency budgets to finance lower layers consisting of recurrent losses; budget reallocation and contingent credit for the intermediate layers; and a combination of retention and risk transfer mechanisms to cede higher layers to reinsurance and capital markets.

0

10

20

1961 -1970

1971 -1980

1981 -1990

1991 -2000

2001 -2010

Source: EM-DAT

$0

$500

$1,000

$1,500

1961 -1970

1971 -1980

1981 -1990

1991 -2000

2001 -2010

45

ANNEX 5: DEBT SUSTAINABILITY ANALYSIS

A5.1. This annex presents a public sector debt and external debt sustainability analysis for Grenada using both a deterministic model and stochastic simulations, based on macroeconomic assumptions for the next years. The baseline projections of the debt to GDP ratio are based on macroeconomic assumptions consistent with the medium-term macroeconomic framework envisaged in Table 1. The baseline scenario assumes an average annual real GDP growth rate of 1.7 percent and an average annual inflation rate of 2.0 percent over the period 2013 to 2018. The primary budget deficit is assumed to average 1.5 percent of GDP between 2013 and 2018 and the interest rate on public debt 3.5 percent. Thereafter, growth is expected to increase to an annual average of 2.5 percent and inflation to increase slightly to an annual average of 2.7 percent between 2019 and 2033. The DSA as the macroeconomic projections presented in section 2.2 assume the implementation of the fiscal consolidation efforts, but not the completion of the debt restructuring process.

A5.2. Under the baseline scenario, debt is projected to start decreasing in 2015, but remain unsustainable in the long term without the full implementation of the debt restructuring. Total public debt is forecasted to increase further in 2014, reaching 111.5 percent of GDP, while external debt will decrease slightly to 69.4 percent of GPD (Figure A5.1). By 2018, external debt is projected to have declined to 66.0 percent of GDP and total public debt to 96.9 percent of GDP, following the successful implementation of the government’s fiscal consolidation program. These levels, however, still remain over the debt levels recorded in 2009; it is forecasted that only after 2020 debt levels have dropped to pre-2010 figures. In present value terms, debt under the baseline scenario also declines continually stays only slightly above the threshold of 40 percent of GDP (for external debt) and 56 percent of GDP (for public debt) in 2034, i.e. at the end of the considered time period.

Figure A5.1: Debt-to-GDP ratio (nominal) for public and external debt under the baseline scenario

Source: IMF

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

perc

ent o

f GDP

Public sector debt of which: foreign currency denominated debt

46

A5.3. A sensitivity analysis indicates that Grenada remains vulnerable to shocks in external and policy variables. The impact of different shocks has been evaluated, assuming lower growth, a higher primary balance or a one-time currency depreciation. The most extreme impact on debt levels results from a one-time 30 percent real depreciation in 2014. Under this scenario, external debt peaks at 85 percent of GDP and public debt at 127 percent of GDP (in present value terms) in 2015 before declining continuously in the following years (Figure A5.2 and A5.3).

Figure A5.2: Debt-to-GDP ratio (present value) for external debt under different scenarios

Source: IMF

Figure A5.3: Debt-to-GDP ratio (present value) for public debt under different scenarios

Source: IMF

A5.4. Grenada has presented two indicative debt restructuring options to the affected creditors in April 2014. The two options do not constitute an offer at this stage, but are intended as the type of restructuring terms the Government believes are required to bridge the multi-year financing gaps that have been identified in the latest medium-term macroeconomic projections. The terms of the two options are summarized below:

Table A-3: Grenada’s indicative debt restructuring options

Source: Government of Grenada

A5.5. According to the IMF, debt levels can be brought below 60 percent of GDP by 2020, but the participation rate of creditors is critical. One of the scenarios simulated by the IMF, which assumes a 50 percent principal nominal haircut on all eligible debt, while maintaining the original final maturities and interest rates, but accelerating principal repayment, will be consistent with bringing debt below 60 percent of GDP by 2020. This outcome, however, will depend on the participation rate. If only a share of the affected creditors participates in the restructuring, the debt stock would fall proportionately less. Under a second scenario (assuming

30

50

70

90

110

130

150

170

2014 2019 2024 2029 2034

perc

ent o

f GDP

Baseline Historical scenarioMost extreme shock Threshold

30

50

70

90

110

130

150

2014 2019 2024 2029 2034

perc

ent o

f GDP

Baseline Most extreme shockHistorical scenario Public debt benchmark

HaircutPrincipal payments

MaturityGrace period

Interest rate

Interest arrears

Option 1 60%Equal

installments15 years 0 6.5%

60% reduction, 40% capitalized

Option 2 50%Increasing

installments20 years 2 5%

50% reduction, 50% capitalized

Indicative Restructuring Options

47

only a 30 percent haircut, but otherwise similar conditions), the debt stock would fall significantly, but would not reach 60 percent of GDP in 2020, which is the regional target for that year.

Table A-4: Public Debt to GDP in 2020 under Different Participation Rate in Debt Restructuring

Source: IMF

Participation Rate 100% 80% 70% 50% Scenario 1 (50 percent haircut) 57.4 62.1 65.2 71.3 Scenario 2 (30 percent haircut) 72.1 74.1 75.9 79.5

48

ANNEX 6: CONDITIONALITY UNDER THE IMF PROGRAM

Box 4. Structural Conditionality under the IMF Program, 2014-2017

The IMF program contains the following prior actions and structural benchmarks:

Prior actions

• Fiscal outcomes for 2013 (primary balance) in line with the 2013 budget. • Safeguarding program-consistent budget execution in 2014 through (i) cabinet conclusion on committing only

up to the programmed ceiling; and (ii) reduced one-quarter ahead appropriation. • Parliamentary approval of fiscal adjustment measures for the program. • Consistent with the financing envelope of the program, satisfactory progress in negotiations with the creditors. • Cabinet decision to eliminate the tax collector’s bonus on interest from tax arrears.

Structural benchmarks

• Parliamentary approval of the revised PFM legislation (August 31, 2014). • Cabinet approval of a strategic plan for statutory bodies (October 31, 2014). • Parliamentary approval of the revised Investment Promotion Act (November 30, 2014). • Parliamentary approval of the revised legislation on tax incentive regime (November 30, 2014). • Parliamentary approval of the umbrella legislation for the fiscal policy framework (December 31, 2014).

49

ANNEX 7: FUND RELATIONS ANNEX

Grenada—Assessment Letter for the World Bank May 27, 2014

1. Most recent Article IV consultation. The most recent Article IV consultation was concluded in July 2012, with Directors emphasizing the need for a vigorous domestic policy response to improve weakening competitiveness and foster private-sector-led growth, while undertaking the needed consolidation to ensure fiscal sustainability. Directors acknowledged the challenge of achieving lasting fiscal consolidation while protecting the fragile recovery, and stressed the need to protect social spending and public investment, while focusing the adjustment efforts on widening the revenue base and streamlining current spending.

2. Recent engagement. On January 13, 2014, the IMF Executive Board discussed Grenada’s Ex Post Assessment (EPA), a requirement for Board approval of new arrangements with countries under longer-term program engagement with the Fund. The EPA concluded that overall economic performance under the Fund-supported programs had proved uneven, and the key program objectives of securing a sustainable fiscal position and a higher growth path had largely been missed. The IMF Executive Board highlighted the importance of choosing program objectives that are consistent with extensive capacity and institutional constraints and the critical need of securing program ownership by country authorities. The IMF Executive Board also agreed that a new program should support urgently needed fiscal consolidation, promote faster and more inclusive growth, and focus on a few macro-critical reform. In February 2014, the authorities and Fund staff have reached understandings on macroeconomic policies for the period 2014-2017 that could be supported by a Fund arrangement. Discussions for the 2014 Article IV consultation were also held recently.

3. Recent developments. The economy appears to have bottomed out in 2013 with a massive private construction project and a strong performance in the offshore education sector. Growth is estimated at about 1½ percent in 2013, but unemployment remains high and inflation has been on a declining trend over the past two years and is now hovering in deflation territory. Over the past few years, the fiscal situation deteriorated rapidly, with the overall deficit reaching 7 percent of GDP in 2013 and driving public debt up to 115 percent of GDP. The government’s cash flows have come under severe pressure even following the cessation of debt service payments in early 2013, as a result of the deteriorating fiscal position.

4. Debt restructuring. Faced with a severe fiscal crisis, the newly elected government announced on March 8, 2013 that it will seek a “comprehensive and collaborative” restructuring of its public debt. The government is in discussions with the creditor groups, including through the creditor representative committee. In early April 2014, the government published restructuring scenarios for a first group of creditors, which are indicative of the restructuring terms that the government is seeking to bridge its multi-year financing gaps and achieve a meaningful debt reduction.

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5. Proposed new program. The authorities have requested support for their proposed new program through a three-year Extended Credit Facility arrangement in the amount equivalent to SDR14.04 million (about US$21.9 million or 120 percent of Grenada’s quota). The proposed program will aim at putting public debt on a sustainable downward path, while implementing structural measures to boost growth and safeguarding the social safety net. The authorities are already implementing reforms, which is a testament to their strong commitment to the proposed program.

• Macroeconomic outlook. The pace of recovery in the near term is expected to be modest, at

1.2-1.7 percent, supported by spillovers from recovering sectors and the easing of government financing constraints. A faster recovery will be held back by the drag of the fiscal adjustment in 2014-16 and the likely weak credit growth as banks repair their balance sheets. Over the longer-term, growth is projected to recover steadily as domestic and external conditions normalize. Inflation is projected to remain subdued in the near-term in the face of weak demand, and to remain in line with imported inflation over the medium-term. The external current account deficit is projected to narrow over the medium-term as public demand eases and competitiveness improves.

• Fiscal policies. The cornerstone of the proposed program is a strong fiscal adjustment

aimed at achieving a primary fiscal surplus of 3.5 percent of GDP by 2016, focused on curbing current spending, including the wage bill, and widening the revenue base, while maintaining space for infrastructure spending and social safety nets. Ambitious public financial management reforms will support the durability of the adjustment.

• Debt restructuring. The fiscal adjustment is to be complemented by a comprehensive

debt restructuring, which will aim to secure meaningful debt reduction, address financing shortfalls, and put Grenada’s public debt firmly on a downward path to the ECCU regional target of 60 percent of GDP by 2020. The debt restructuring is critical for fiscal sustainability.

• Structural reforms will be critical in boosting competitiveness and hence medium-term

growth. Grenada’s potential output lost significant ground in the past decade due to weak competitiveness and structural bottlenecks. Reforms will focus on removing constraints to growth through the liberalization of the renewable energy and other strategic sectors, improving the investment environment, and putting in place the legal infrastructure for public private partnerships.

• Financial sector. The proposed program will also focus on the health of the financial

sector, to ensure that the impact of the debt restructuring on the financial system is contained, the solvency of the system is safeguarded and its regulation and supervision are strengthened.

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