The fiscal situation in 2006 and beyond for Grenada remains difficult, as expenditure needs will remain high and donor aid to the hurricane-ravaged island begins to diminish.
That's the prognosis of New York-based Standard & Poors which recently put out a bulletin on the island.
The report which was obtained by GRENADA TODAY pointed out that the Keith Mitchell-led New National Party (NNP) government will be challenged to find internal sources for increasing its fiscal revenue.
It said that one of the problems for the regime would be to address "long outstanding structural rigidities of the fiscal accounts - such as cutting tax exemptions like Customs revenue foregone due to import-tax exemptions.
As a public service, GRENADA TODAY highlights some of the observations made by Standard & Poors:
The destruction caused by Hurricane Ivan cost the economy an estimated 200% of GDP.
Over 90% of the housing stock has been damaged; most agricultural crops, including nutmeg production - one of the pillars of the economy have been decimated; and 80% of hotel room stock has been impacted.
As a result, real GDP growth contracted by 3% in 2004, a sharp decline from the initially expected 4% growth that year.
With the start of the reconstruction activity and some (albeit slow and uneven) recovery in the agricultural and tourism sectors, real GDP growth rebounded to an estimated 1.5% in 2005.
Specifically, in the agricultural sector, farmers switched to short-term crops as the prospects for nutmeg and cocoa remained bleak.
Unfortunately, damage from Hurricane Emily (estimated at 13% of GDP) held back the upturn in the sector. Overall, no significant growth in the agricultural sector is expected until 2009.
In the tourism sector, while the cruise ship arrivals rebounded quickly, stay-over arrivals were quite low despite the returrn of most airlines and occupancy rates were as low as 30% in 2005.
Some delays in reopening can be attributed to the timing of the insurance flows. However, as two big hotels are scheduled to reopen in early 2006, occupancy rates are expected to rise.
With the ultimate goal to reach pre-hurricane 70%-80% occupancy by mid-2007 (in large thanks to the hosting of the 2007 World Cup Cricket tournament), part of the lackluster rebound of the sector can be traced to inadequate marketing efforts to reverse the image of Grenada as a hurricane-shattered island with closed hotels.
This is expected to gradually change as hotels reopen, new ones are built, and the tourism-related infrastructure is restored.
The construction boom continues and contributes to almost all aspects of the Grenadian economy (i.e. housing, tourism, retail, education).
The housing stock is being gradually rebuilt, with significant assistance from Venezuela and China.
One of the larger projects in 2006 will be construction of a new, U.S$40 million, PRC-funded (Mainland China), stadium to host the cricket matches in 2007.
Real GDP growth is estimated at 6% in 2006 (5.5% on a per capital basis, on the back of intensified construction activity, tourism rebound, and continued gains in the retail and financial sectors.
With significant infrastructure needs (hence, the high level of construction activity) and good tourism prospects, Grenada should be able to sustain real growth of 4% over the medium term. However, this forecast remains vulnerable to weather-and tourism related shocks.
Hurricane Ivan seriously dented Grenada's fiscal accounts. Domestic revenue collection was close to zero in the last quarter of 2004, immediately following the hurricane.
On the other hand, the capital spending needs increased dramatically in the wake of the physical infrastructure's devastation.
The resulting fiscal gap has been partially closed with promptly disbursed international grants (7.6% of GDP and 23% of revenue).
As a result, 2004 ended with a central government deficit of 2.8% of GDP, or a 0.4% surplus for the general government (including the social security surplus).
Current revenue collection started to normalize in 2005, benefiting from both one-off tax payments and increased duties from reconstruction material imports.
Overall, current revenue stood at 28% of GDP, in line with the pre hurricane levels, and was up 18% compared with 2004.
At the same time, current expenditure fell by 10% compared with 2004 due to the nonpayment of interest on Grenada's defaulted obligations.
On the other hand, capital spending rose by close to 120% compared with 2004, to 16% of GDP.
In nominal terms, capital expenditure was over 50% higher than the average spending rate over the past five years.
The resulting fiscal gap of EC$145 million was closed by the combination of grants (EC$141 million) and loans.
Overall, the central government deficit stood at just 0.3% of GDP in 2005.
Including the social security surplus of 3% the general government deficit recorded a surplus of 2.7% of GDP.
The fiscal situation in 2006 and beyond remains difficult, as expenditure needs will remain high and donor aid is likely to diminish.
Hence, Grenada will be challenged to find internal sources for increasing its fiscal revenue.
In addition to returning the country to a sustainable economic footing, this will require addressing long-outstanding structural rigidities of the fiscal accounts - such as cutting tax exemptions (e.g. Customs revenue foregone due to import-tax exemptions is estimated at 11% of GDP), improving tax administration, and ultimately revamping the tax system by introducing a VAT (currently planned for 2008) The fiscal measures budgeted for 2006 include the imposition of a national reconstruction levy (to yield roughly EC%10.5 million per year), fuel pricing adjustment (EC$16 million-EC$20 million per year), and other measures to improve tax collection.
Overall, central and general government deficits are projected at 3.1% and 0.5% of GDP, respectively, for 2006.
The fiscal accounts continue to suffer from large statistical discrepancies between the recorded fiscal balances and their financing.
Specifically, net debt accumulation significantly exceeds recorded central government balances.
The statistical discrepancies amount to as much as 4.7% of GDP, and averaged 2.3% of GDP between 2000- 2004.
The ensuing weakness of fiscal data reporting hampers both credit analysis and the sovereign's creditworthiness.
High government debt, standing at 128% of GDP in 2005 (108% on a net basis) remains a significant constrain on the sovereign rating.
The debt restructuring completed in November 2005 did not include the write-off of any debt, but rather extended the maturity and reduced the interest cost on roughly US$261 million of the government's commercial obligations.
As a result, the maturity of 44% of Grenada's debt has been extended to 2025, while debt-servicing savings should total US$135 million over the next 10 years.
In particular, interested payments have been reduced to 2.5% of GDP (or 6% of revenue) in 2006, compared with 6.4% before the restructuring (or 17% of revenue in 2004).
The government is also approaching its official creditors to request additional debt relief.
Given the favorable maturity and cost profile, the liquidity pressures from debt servicing should be minimal over the medium term.
