The IMF and a Tale of Two Governments

William Joseph

by William Joseph

The latest IMF assessment of the Grenada economic situation is both revealing and disturbing to those who understand what they are reading. But we must help others to understand fully what is being said.

Actually, the Statement contains serious indictments of both the current Administration and the former NDC Administration on their respective stewardship of the Grenada economy. Notwithstanding, our deeper purpose is not to stick ourselves to any blame game.

Let us begin with a simple exposure of the timeline indicated in the Executive Board’s Statement. It points out that between 2006 and 2011 Grenada received US$28 million in IMF assistance under two arrangements (most of the money was disbursed to the NDC Administration):

I.           Poverty Reduction and Growth Facility (“increased twice and extended before it concluded in 2010”)

II.          Extended Credit Facility (2010–13).

The IMF states that the ECF was put on hold (by the Ministry of Finance) in mid–2011. Simultaneously, the Ministry informed the IMF that it intended to pursue a debt restructuring. The net effect was that the ECF “went off track”.

 

The Meaning of Things

So we are understanding here that the Ministry of Finance abandoned the ECF. Presumably, there were good reasons to justify that decision. Of course, the Ministry of Finance did not speak openly or at all about this matter. Similarly, the public was never told of their intention to seek to restructure the debt. This is interesting since the matter of debt servicing was known to be a burden on the Treasury and a big limitation on the Government’s ability to undertake capital works to grow the economy. In fact, the level at which the Government was servicing the debt was the subject of significant public criticism. However, many did not appear to understand the importance of so doing and the consequences of not adequately servicing the debt.

The fact that the arrangement went “off track” meant that there was no money coming in from the IMF.  But, alarmingly, there were no alternative institutional or other sources of funds arranged by the Ministry of Finance to compensate for that loss! Simply put, the Ministry of Finance decided to function with less revenue, and with no corresponding adjustment to the expenditure side. The consequences were obvious. Furthermore, it would appear that there was no serious effort even to commence a debt restructuring process. So there may be a strong temptation to ask a question or two about the management of the economy from 2010-2012.

Finally, with respect to the NDC Government, the Statement makes reference to “uncertain ownership”. This phrase simply reflects the division problem that afflicted the Government such that it lacked the strength and credibility to deal responsibly with the IMF. It may also refer to a lack of broad-based consensus in Grenada on the program.

Turning to the NNP Administration, one must note the following references:

I.            “Strong prior actions” means that before any assistance program could be advanced and finalised, Government has to put specific measures in place that would build credibility. So the IMF is saying that the measures such as set out in the 2014 budget (as distinct from the Letter of Intent) are not capable of providing the level of credibility required. Therefore, the Government will have to go back to the drawing board to revamp certain of its budgetary proposals to the satisfaction of the IMF, in order to get the much-needed assistance. In other words, the anticipated money from the IMF and other donors may not be available to Government as early as they had expected it.

II.            “Fiscal adjustment and reform, possibly including debt restructuring…”is saying that debt restructuring is conditional (not assured) and will not happen in isolation of evidence of other important actions by the Government, particularly in the area of fiscal management. Implicit in this also is the consideration that if the “strong prior actions” on these fronts were to bear fruit, debt restructuring may not be necessary because now the economy would be able to service the debt. So it is evident that the process will not commence with debt restructuring! This scenario would put in abeyance, if not an end, the hopes of receiving a principal haircut of whatever magnitude.

III.            One is left to wonder whether the Finance officials really paid attention to the nature and direction of the views expressed by IMF staff in the months leading up to the presentation of the 2014 budget. Indeed, it would appear that the import of the stance taken by the creditors in response to Government’s announcement to default on the payment of its debts was lost on the regime. The old saying that “when you can’t hear you go feel” is today still true. Seemingly, the self-acclaimed “Home-grown Program” may well have flattered to deceive!

 

Two Governments Indicted

Thus far, the current regime clearly has not got it right. The last regime was unable to get it right. From a historical perspective, the record shows that certain dubious, irresponsible and wasteful decisions taken during 1995 -2008 resulted in a steep escalation of the debt without productive capacity to produce revenues to service the debt. Then, during 2008-13, political infighting robbed the Government of the strength it needed to tackle the severe economic problems. Under the weight of an unsustainable debt servicing burden and policy inertia the public finances collapsed completely by 2012.

Truth be told, had the NDC retained power itself would now be leading Grenada into a structural adjustment program. Recall that the Ministry of Finance had signalled this to the IMF back in 2011 (above). There are simply no other options. Those who speak for the NDC on the economy, but do not concede these facts are really stretching the limits of transparency. They will do well to learn that the most critical standard of opposition politics is ‘credibility’. Additionally and in truth, there is really little that the new regime has done since coming into Office that one can say has landed Grenada in economic difficulties. Put differently, the Grenada economy of 2013–14 is the same economy produced by policies, policy failures and policy inertia during 1995-2012. So that regime change is the only new feature in the economic management space.

 

A Way Forward                

Taken together and reflecting on the substance or lack thereof during the recent budget debate, on the pure economic issues, it is not unreasonable to conclude that both political parties, though having useful ideas, are not adequately primed to get the economy going again so that the people could prosper. We have seen above that both contributed to the problem, arguably, one more than the other.

But we have to look ahead and act with urgency. Our caution is that political action based on the current economic and financial difficulties, though attractive to some, will not be in Grenada’s best interest. If one is seeking to make a case that the current regime should be punished for its conduct over its earlier thirteen-year term of Office and its excessive and irresponsible promises to the electorate ahead of the 2013 General Elections, one is really seeking to obtain State power by default, whereas advocating the need for a ‘National Development Agenda’ should be the priority at this time. The best contribution the NNP and the NDC could make to Grenada in this period is to remove the politics from the problems of the economy.

One is satisfied that the capabilities and resources are available to Grenada to help find solutions to its problemsA National Economic Development Symposium may be a useful first step towards building consensus and providing the country with a serious development plan that is party neutral.  It cannot be difficult to attract local, regional and other Economists of stature, Development Thinkers, Financial Experts, other professionals, as well as business people, NGOs, Churches, etc.to get the work done.

‘Rabble, rabble politics’ and ‘borrow, beg and spend’ financial models have had their day and the Nation has been left carrying a near empty economic basket! We have an opportunity not to exchange the political pack, per se, but to change political thinking, alter the mix and ‘nail down’ a serious development pact on behalf of the people of Grenada, Carriacou and Petite Martinique.

The time has come for a responsible public conversation about the future of the country. The ‘budget by budget’ approach won’t cut it. This would be the correct complement to the “LONGER-TERM PROGRAM ENGAGEMENT FOR GRENADA” that the IMF Executive Board is about to ‘impose’.  One implication of the IMF’s stance is that Grenada must now clarify itself on the details of the ‘LONGER-TERM PROGRAM’ and re-work its own Home-Grown Program. Accordingly, it may be prudent now to extend the adjustment period so as to reduce the burden on taxpayers which could otherwise generate unwanted social unrest. Such course of action would be one way of taking the politics out of the problems of the economy, as we search for lasting solutions in the best interest of the people. 

 

 

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