PROGRAM INFORMATION DOCUMENT (PID) APPRASIAL STAGE Report No.:AB7571 Operation Name First Programmatic Resilience Building Development Policy Credit Region Latin America and Caribbean Country Grenada Sector Central Government Administration (100%) Operation ID P147152 Lending Instrument Development Policy Lending Borrower(s) Government of Grenada Implementing Agency Ministry of Finance, Planning, Economy, Energy and Cooperatives Government of Grenada St. George’s, Grenada Tel: (473) 440-2928 Date PID Prepared May 17, 2014 Date of Appraisal May 8, 2014 Estimated Date of Board June 30, 2014 Approval Key development issues and rationale for Bank involvement As a small, open and highly indebted middle-income island state, Grenada faces significant systemic vulnerabilities and structural challenges. Between 2009 and 2012, the country suffered a deep recession as tourism revenues and foreign direct investment flows collapsed subsequent to the global financial crisis. GDP contracted by a cumulative 8.2 percent during this period. Economic activity finally started to recover in 2013, with a GDP growth rate of 1.5 percent, the best performance since 2007. Following the global crisis and deteriorating macroeconomic situation, Grenada’s public debt increased sharply in 2012 and continued to worsen, culminating in the announcement of a restructuring of the public debt in March 2013. The public debt-to-GDP ratio increased from 100.9 percent of GDP in 2010 to 113.4 percent of GDP by end-2013. 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. While social indicators have historically been strong, poverty has worsened over the last decade. At this stage, the limited availability of disaggregated poverty and socio-economic data does not allow to measure the effectiveness of national and regional policies to reduce poverty and support shared prosperity. The latest Country Poverty Assessment, conducted by the Caribbean Development Bank in 2008, showed that around 38 percent of the population in 1 Grenada was poor, 2.4 percent of whom were indigent or extremely poor. Inequality in the country was low relative to both the remaining OECS member states and the LAC average, with a Gini coefficient of 0.37. Compared to the previous analysis conducted in 1998, the poverty rate has increased by around 17 percent, while the indigence level fell by more than 80 percent between 1998 and 2008. Notwithstanding the increase in the poverty rate, Grenada has shown improvement in some social areas such as the percentage of the malnourished population (decreased from 30.9 percent in 1999 to 17.9 percent in 2011), the under-5 mortality rate (decreased slightly from 15.7 percent in 2000 to 12.8 percent in 2011), the net enrollment level in primary and secondary education (above 90 percent for boys and girls), and the literacy rate (98 percent in 2011 compared to 94 percent in 2002). In response to the challenges faced by the country over the past several years, the Government outlined the New Economy initiative in the 2013 budget speech, which includes the strategy for growth, fiscal sustainability, social development and debt management. The initiative emphasizes tourism, agriculture and fisheries, energy development, including renewable energies, and a dynamic export sector as drivers of future economic growth, and address public sector management, vocational training, sustainable development, and private sector development, including promoting micro and small businesses through the development of ICT as well as improving competitiveness as a central part of the plan. In order to overhaul the tourism sector, as part of the growth strategy, the Government has developed the Tourism Strategic Plan for 2011-2014, which 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. In addition, to improve trade logistics, the Government adopted a computerized customs management system (ASYCUDA World) at end- 2010 that allows a web-based submission of customs declaration. The strategy for fiscal sustainability focuses on the Government moving from a deficit position on its primary balance to a surplus position, with the aim of putting the high debt- to-GDP ratio on a downward path. This will require an increased tax effort as well as increased efficiency of Government expenditures, including managing the wage bill and reducing wastage in the spending system. The Government has shown continuous efforts to improve public services. During 2012-2013, the Government implemented human resource 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. In addition, the Department of Public Administration has been working to improve the quality of personnel records and align those with the payroll records. Lastly, the Cabinet Office has led a strategic planning initiative and has introduced performance agreements between the government and senior officials over the recent years. The strategy for debt management is to first address the debt overhang through a comprehensive and collaborative debt restructuring. The Government has launched debt restructuring talks with private creditors in March, which will be continued in the coming months. On debt-related capacity building, several initiatives have been undertaken with the assistance of the Eastern Caribbean Central Bank’s Debt Management Advisory Services, which 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 staff. The strategy for social development and empowerment of the population aims to improve 2 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. The Government recently articulated a Social Safety Net Policy Framework which provides guidelines for operationalizing the recommendations from the 2009 Social Safety Net Assessment as well as strengthening social safety nets overall. A further strengthening of the flagship social safety net program “Support for Education, Empowerment and Development� is envisaged as well to ensure that the benefits provided under the program reach the neediest. Proposed 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. Preliminary Description The proposed DPC is the first in a programmatic series of three DPCs. The operation is structured around four pillars, namely (1) Creating conditions for private investment; (2) Supporting improved public sector management, better targeting of social safety net programs and reduced vulnerability of the financial sector; (3) Enhancing resilience against natural disasters; and (4) Facilitating debt portfolio restructuring and improved debt management. The first pillar supports economy-wide investment climate reforms, particularly in the area of trade and Public-Private Partnerships, along with industry-specific policy interventions in priority sectors such as tourism, agribusiness, and energy sectors. These measures are expected to stimulate private sector-led growth and economic diversification. The second pillar supports structural reforms in the area of fiscal management, the financial sector and social safety nets, which include public service modernization, improvements in the regulation and supervision of the financial sector, and better targeting mechanisms for social safety net programs. These reforms will help the Government strengthen fiscal management, and lower financial sector risks, and reduce social vulnerability. The third pillar supports the Government’s efforts to reduce both its physical and fiscal vulnerability to natural disasters and better manage its impacts through a development of a national Disaster Risk Financing and Insurance framework with the aim of the improvement of the physical planning regulatory system and the development of a comprehensive risk financing strategy. These measures are expected to improve the government’s fiscal management of natural disasters and capacity to effectively allocate resources and monitor investments following a disaster event, by identifying cost-effective financial protection measures and insurance instruments. The fourth pillar supports the Government’s efforts to strengthen institutional capacity on debt management, through the development of an in-house detailed Medium-Term Debt Management Strategy, aligned with budget discussions to give a clear signal to markets and creditors of the country’s medium-term commitment to its debt management strategy. These measures are 3 expected to lead to changes in the debt portfolio that will contribute to the long-term debt sustainability of Government operations. Poverty and Social Impacts and Environment Aspects Poverty and Social Impacts The poverty and social impact of the policy measures supported by this this DPC series is expected to be positive or neutral; 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. 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. The impact of 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 will 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. Environmental Aspects The specific policies supported by this DPC series are not expected to have significant negative impacts on the environment, forests, or other natural resources. Selected reforms supported under Pillar 3 will contribute to an improved regulatory framework with a positive impact on environmental management. 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. 4 Risks and Risk Mitigations 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 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. The results supported by this DPC series face the following risks: 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. Mitigation. 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 IMF program and financing are expected to provide an improved macroeconomic framework, and hence mitigate macroeconomic risks. The Bank is coordinating this DPC series closely with the IMF program. 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, 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. Mitigation. To mitigate these risks, the government, as part 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. 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. Mitigation. To mitigate these risks, the government is focusing selectively on reforms for which a strong political 5 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. 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. Mitigation. To mitigate risks associated with GoG’s limited institutional capacity, 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. Financing Source: ($million) Borrower 0 International Development Association 10 Total 10 Contact point World Bank Contact: Rei Odawara Title: Economist Tel: (202) 458-9356 Email: rodawara@worldbank.org Borrower Contact: Mr. Timothy Antoine Title: Permanent Secretary, Ministry of Finance Tel: (473) 440-2928 Email: timothy.antoine@gov.gd 6 For more information contact: The Info Shop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop 7