The International Monetary Fund (IMF) Monday said the Grenada economy grew by 4.5 per cent last year, driven by strong activity in construction, tourism, and education sectors.
In a statement the Washington-based financial institution said weather-related weaknesses in agriculture have, however, been a headwind.
It said unemployment, while falling, remains high at 23.6 per cent in 2017, while inflation is low, falling below one per cent supported by the peg to the US dollar.
The IMF said the 2017 current account deficit increased by 3.5 percentage points of gross domestic product (GDP) to 6¾ per cent of GDP, reflecting rapid import growth.
The Washington-based financial institution said that foreign direct investment (FDI) is estimated at 8.5 per cent of GDP, driven by tourism and proceeds from the Citizenship-by-Investment (CBI) programme.
It said bank credit has recently shown signs of incipient growth as non-performing loans continue to decrease helped by economic growth and increase in property prices. In contrast, credit union lending – which now makes up a quarter of total credit -, grew briskly by some 20 per cent.
The IMF said that the fiscal situation improved further in 2017, with the government over performing the targets of the Fiscal Responsibility Law (FRL).
It said the primary surplus increased to 5.75 per cent of GDP supported by buoyant tax revenues due to the strong economy, improved tax administration, and better compliance. Recurrent spending was contained, while targeted social spending was, appropriately, increased.
However, a shortfall in grant financing and bottlenecks in project execution combined to keep capital outlays well below budgeted levels. Public debt fell to 71 per cent of GDP at end-2017 reflecting the strong fiscal position, the completion of the final phase of bond restructuring, and the lowering of interest costs from restructuring some of the expensive domestic debt.
The IMF said progress has also been made in addressing external and domestic arrears, but negotiations with three bilateral creditors aimed at fully regularizing arrears have yet to be concluded.
The IMF said that in 2018 and 2019, the economy is projected to grow by 3.5 per cent benefiting from supportive global economic conditions, continued strength in construction, and a tourism sector that has shown itself to be competitive within the Eastern Caribbean Currency Union (ECCU).
“Thereafter, growth is expected to ease to the long-term potential rate of 2.75 per cent. Inflation should edge up in 2018 reflecting recent global energy price increases, but stabilize at two per cent in the medium term.”
The IMF said that the primary fiscal surplus is expected to remain high in the near term, supporting rapid debt reduction, although once the public debt ratio falls below 55 per cent of GDP, projected for 2020, the FRL would allow for a reduction in the surplus.
The IMF said the external current account deficit is projected to increase to seven per cent of GDP in 2018 mostly from recent increases in energy costs, but would decline thereafter as the energy prices moderate.
The IMF said that there are two-sided external risks linked to uncertainty about the growth outlook for advanced economies, potential shifts in global financial conditions, and CBI inflows.
It said a recently-announced natural gas discovery could represent a positive impetus if it proves to be commercially viable.
On the other hand, pressures on correspondent banking relationships could affect financial intermediation, and natural disasters are an ever-present risk for Grenada.
“An adverse court judgment in the GRENLEC power company case could potentially have fiscal implications as could the realization of fiscal risks from the Petrocaribe arrangement.
“The potential implementation of new initiatives on health care and pensions, the forthcoming cycle of public wage negotiations, and the availability of financing could all pose downside risks to the fiscal outlook if not properly managed.”