Balancing the books: Grenada tackles its national debt

Neil Ford

National debt is running at more than 100 per cent of GDP and unemployment is high. But recovery is on the horizon, with the tourism sector ripe for development 

In common with most other countries in the region, the economy of Grenada is shaped by its geography. On the positive side of the equation, its topography and climate allow the cultivation of high-value crops and provide the perfect setting for a holiday destination. Yet the island nation’s small size poses a series of problems that are typical of micro-states: a narrow economic base, high per capita running costs for all institutions and a lack of diplomatic muscle in international affairs. 

The climate also has a negative impact on the country’s two main sectors: agriculture and tourism. Hurricane damage is a fact of life in the region but hurricanes Ivan in 2004 and Emily one year later both had a substantial impact on the economy. Both events deterred visitors and destroyed crops – indeed Ivan is estimated to have knocked seven per cent off the GDP in 2004, although the international community did provide some donor support. 

As ever with tourist destinations, international crises such as the 2001 9/11 terrorist attacks in the USA and the global economic crisis of 2008-09 also deterred visitors. This string of setbacks has helped to create the biggest economic challenge facing Grenada – the national debt. 

Successive governments had largely balanced their budgets until the turn of the new millennium, albeit with some limited donor support. However, the debt has grown over the past 12 years to reach EC$2.3 billion (US$862 million) by April this year, equivalent to 108 per cent of GDP. Most of this is either bilateral debt or owed to multilateral financial organisations, including the World Bank and Caribbean Development Bank. 

Debt restructuring in the wake of hurricane Ivan failed to solve the problem and repayments comprise a massive 41 per cent of this year’s state budget at EC$465 million (US$169 million) a year. Difficulties with the national debt came to a head in April, when the government defaulted on its EC$193 million 2025 bond. 

New Prime Minister Keith Mitchell promised: “It is now time for Grenada to confront the fact that it cannot continue to pay its debts on current terms, and that the restoration of growth requires the debt overhang to be resolved. We need a fresh start, and it is therefore imperative that we approach our creditors promptly to discuss an orderly restructuring of our liabilities.” 

The government hopes to reach a compromise with creditors in the near future, although any debt reduction is likely to be dependent on cuts to state spending. However, the economy is already fairly open and many state-owned enterprises were sold off in the past, so there is unlikely to be any clamour for privatisation, particularly as the World Bank and the International Monetary Fund (IMF) are now less prescriptive in their solutions for economic ill health than in the past. 

Anaemic economic growth over several years has reined in government revenues and prevented the erosion of the debt, although the economic picture is not entirely dire. Inflation has been under control for many years, partly because monetary policy is free from direct political interference as it is managed by the Eastern Caribbean Central Bank. 

Unemployment stands at about a third of the working age population and, in common with many other islands in the Caribbean, emigration – particularly to the USA and UK – acts as a safety valve on the population. The large overseas population of Grenadians helps to support the island economy through overseas remittances. 

The big question is which sector can deliver the desperately needed economic growth. Agriculture is unlikely to be the answer. The World Trade Organization ended the country’s privileged export of agricultural goods to Europe a decade ago, although Grenada remains the world’s second largest producer of nutmeg, after Indonesia. Other export crops include cocoa, bananas and cloves but there is limited scope for expansion because of the lack of spare land. 

In early November, the government announced plans to secure geographical indications (GIs) from the World Intellectual Property Organization for its key agricultural exports. A government spokesperson said: “It is the hope of the organisers that these products, especially Grenada’s nutmeg and cocoa which already have international reputations for top quality, will get the necessary support from stakeholders in the agriculture and tourism sectors.” GIs can help in marketing higher quality products. 

The most obvious source of growth, however, is the tourist sector. Although Grenada boasts many of the same attractions as other island nations in the region, less investment has been put into developing tourist infrastructure and attracting foreign visitors than in neighbouring islands. With just 1,500 beds on the main island of Grenada, the tourist sector is nothing like as developed as on Barbados or Jamaica, for instance, although about 300,000 visitors arrive at St George’s on cruise ships during the peak season between December and April. Nevertheless, the industry now generates more foreign currency income than agriculture. 

Perhaps the country’s biggest selling point is the very fact that development has been limited and the government has pledged to ensure that further development will be slow and steady. It is also keen to ensure that visitors become involved in the local culture, rather than allowing tourism to dictate local cultural development. 

Expansion through small hotels, rather than large resorts, would seem the obvious way to keep this balance. This strategy also encourages visitors to explore the island’s main attractions, such as Grand Etang Forest and the two-mile sands of Grand Anse Beach, rather than staying within their resorts. A marina for super yachts is planned, although this too is designed to ensure that tourists move around the island on their own, interacting with locals as they go. 

Grenada’s problems are not uncommon in the region. An IMF report published earlier this year, entitled ‘Caribbean Small States: Challenges of High Debt and Low Growth’, highlights a dangerous combination that threatens many of Grenada’s neighbours. There is already some limited manufacturing on the island, including that of electronic goods, which could be expanded, but ministers concede that tourism offers the best economic hope for the future. 

Combining rapid growth and increased employment on the one hand, while also ensuring slow, considered development on the other will not be easy, however.


About the author:

Neil Ford is an independent consultant and journalist, focusing on international affairs, particularly in developing countries


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