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OFFICIAL                   08 March, 2018
DOCUMENTS
Dr. Jim Yong Kim
President
The World Bank Group
The World Bank
1818 H Street
NW Washington, DC
20433
USA
Letter of Development Policy
Dear President Kim,
On behalf of the Government and people of Grenada, I write to request the approval of the
"Grenada Blue Growth Development Policy Credit" in support of fiscal sustainability and the
transition to a blue economy. This Letter of Development Policy sets out the Government's
reform programme, which includes policy actions to be supported by the Development Policy
Credit.
Economic Context
Grenada experienced a prolonged period of socioeconomic difficulties in the decade 2003-2012.
The economy was buffeted by consecutive hurricanes in 2004 and 2005, the international food
and fuel price increases of 2007 and the global economic and financial crisis of 2008. The
effects of these exogenous shocks precipitated a period of significant economic weakness,
which became especially acute in 2009-2012. The economy contracted by 6.6 percent in 2009
(the largest ever GDP decline since records began in 1977) and at an annual average rate of 0.3
percent in ensuing three years ending 2012.
The economic depression heightened unemployment, with the rate increasing from 18 percent
in 2005 to 32.2 percent in 2013. Public finances became increasingly strained as the fiscal
imbalances progressively worsened. The primary deficit as a ratio of GDP deteriorated from a
surplus of 2.4 percent in 2004 to a deficit of 3.5 percent in 2013, while public debt rose from
94.2 percent of GDP to 107.8 percent of GDP over the same period. The acute fiscal imbalances
necessitated a restructuring of public debt, which was officially announced by the Government
in March 2014.


Furthermore, in the context of acute macroeconomic weaknesses, financial sector challenges
intensified. The rate of growth in credit to the private sector was on a downward spiral from
2007, becoming negative in 2013, while the non-performing loans ratio reached 13.8 percent at
end-2013, a 7.6 percentage points increase relative to the ratio at end-December 2004. External
imbalances also rose, the financing of which contributed to the build up in external debt from
40.0 percent of GDP in 2007 to 144.5 percent of GDP in 2012.
Grenada's economic and fiscal situation was unsustainable and required urgent and potent
policy correction. Therefore, the Government, in collaboration with its social partners,
developed a comprehensive home-grown structural adjustment programme (HGSAP), which was
completed in November 2013. The HGSAP was officially endorsed by the International
Monetary Fund through a three-year Extended Credit Facility (ECF) programme that commenced
in January 2014. The HGSAP was also supported by other development partners including the
World Bank, the Caribbean Development Bank and the European Union. The broad objectives
of the HGSAP were to restore fiscal and debt sustainability, build resilience, improve
competitiveness and strengthen the financial sector.
Grenada completed six successful reviews of the ECF programme over the period December
2014 to March 2017 and by its official end in May 2017, there had been a marked turnaround in
Grenada's economic and fiscal situation. Economic growth accelerated from 2.4 percent in 2013
to 4.5 percent in 2017 and averaged 4.8 percent over that five-year period. The unemployment
rate fell by 8 percentage points to 23.4 percent over the five-year period and public finances
improved markedly. In 2015, Grenada recorded its first primary surplus in a decade; primary
surpluses were recorded in each year since then, averaging 4.1 percent of GDP over the period
2015-2017. As an upshot, public debt was reduced from its peak of 107.8 percent in 2013 to
81.3 percent in 2017; the successful completion of the debt restructuring exercise also aided the
reduction. Financial sector conditions also improved with the ratio of non-performing loans to
total loans being halved during the five-year period and growth in private sector credit
returning. External imbalances narrowed and the stock of external debt declined by 15.7
percentage points to 127.0 percent over the five-year period.
The Government's Reform Programme
As part of the HGSAP, several reforms (legislative and non-legislative) were implemented to
strengthen public finance; boost economic growth, modernise the public sector, enhance social
protection, and build resilience to environmental shocks.
Public Finance Reforms
* Public Finance Management Act No. 17 of 2015 - In broad terms, the main objectives of
the Act are to strengthen the fiscal framework and improve transparency and
accountability in the management of public finances. The Act came into force in June
2015 and the Regulations were finalised in August 2015.
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*  The Fiscal Responsibility Act No. 29 of 2015 (as amended) - The Act has four main
objectives: (a) transparency in fiscal and financial affairs; (b) full and timely disclosure and
wide publication of financial transactions and decisions; (c) reduction of public debt to a
prudent and sustainable level; and (d) risk monitoring and management. Consistent with
these objectives, rules are legislated for the primary balance, public debt, the wage bill,
primary expenditure, and contingent liabilities related to public-private partnerships. An
independent fiscal oversight body is also legislated. The Act came into force in January
2016 and there have been two amendments since then.
* Public Debt Management Act No. 28 of 2015 (as amended) - The Act updates the
legislative framework for the management of public debt to be consistent with achieving
the requirements of the Fiscal Responsibility Act. The Act provides the legislative
support to: (a) increase the efficiency of debt management; (b) better balance the costs
and risks trade-offs of public sector borrowing; and (c) support the development of the
domestic debt market. The Act was brought into force in June 2015 and there has been
one amendment since then. The Regulations were finalised in August 2016.
* Public Procurement and Disposal of Property Act No. 39 of 2014 (as amended) - The Act
outlines clear policy and procedures for the disposal of Government's assets to improve
transparency and accountability. The Act came into force in August 2014 and has been
amended once. The Regulations were completed in September 2015.
*  Tax Administration Act No. 14 of 2016 - The main objectives of the Act are to strengthen
the operation of tax administration and procedures in Grenada's tax laws and balance
the powers of the Inland Revenue Division with the rights of taxpayers. The Act applies
to all of the inland taxes. It was brought into force in May 2016.
* Customs Act No. 9 of 2015 (as amended) - The broad aims of the Act are to strengthen
Customs administration, streamline the tax incentive regime and improve risk
management, among other objectives. The Act came into force in February 2015 and
there have been three amendments since then. The Regulations were finalised in
January 2018.
*  Tax Incentives Legislations: Several Tax Acts were amended in 2016, with a view to
reducing/eliminating the discretionary granting of incentives, as well as incentivising
investment and/or activity in certain priority sectors. Amendments were made to the
Income Tax Act, the VAT Act, the Excise Tax Act, the Property Transfer Tax Act and the
Stamp Tax Act.
* Revenue-mobilisation measures - The main revenue reform was the reduction (effective
January 2014) of the minimum income tax threshold from $60,000 to $36,000 annually
and the introduction of a three-tiered marginal rate structure featuring: (i) a zero percent
for persons with annual incomes of $36,000 or less; (ii) a 15.0 percent rate for persons
with annual incomes between $36,001 and $60,000; and (iii) a 30.0 percent for income
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earners above $60,000. Government lowered the rate for income earners in the
$36,001-$60,000 tax bracket to 10.0 percent, effective January 2017.  Other
revenue-enhancing measures that took effect in 2015 included increases in the Petrol
Tax and the Annual Stamp Tax, as well as the broadening of the VAT base to include all
forms of accomodations.
* Attrition Policy - With the expressed aims of controlling personnel expenditure and
reducing the size of the public sector, an attrition policy was introduced in which no
more than 3 persons were replaced for every 10 persons who retired from or exited the
Public Service. The attrition policy was developed in 2013 following consultations with
the Trade Unions and social partners.
* Public Enterprise Reforms - In 2015, comprehensive reforms were implemented to
(i) improve the oversight and monitoring of state-owned enterprises and statutory
bodies; and (ii) strengthen their reporting regimes. The reforms are geared at enhancing
operational efficiency, reducing fiscal risks, and improving overall governance. A new
Performance Management Framework, which aims to support improved management
and disclosure of financial and non-financial information and data, was implemented in
2016. A new dividends policy was also introduced in 2016.
Growth-Enhancing Reforms
With a view to laying a stronger foundation for growth and job creation over the medium term,
important reforms were undertaken to improve the doing business environment and strengthen
labour market conditions.
With respect to the doing business environment, the Government passed legislation to reform
the electricity sector, with the core objectives of: (i) reducing the high cost of electricity to help
lower overall business costs; (ii) diversifying the country's energy mix; and (iii) improving the
regulatory framework for the sector. The liberalisation of the electricity sector is expected to
boosts Grenada's growth and competitiveness and expand opportunities for renewable energy
production. The Public Utilities Regulatory Commission Act (2016) and the Electricity Supply Act
(2016) were brought into force in August 2016.
The amendment to the Investment Act of 2014, coupled with the amendments to individual Tax
Acts made in 2015, were aimed at streamlining investment procedures, with a view to improving
the business environment and enhancing Grenada's attractiveness as an investment destination.
Additionally, the Grenada Industrial Development Corporation was strategically restructured to
strengthen Grenada's investment readiness through improved investment facilitation and
promotion. A new Bankruptcy and Insolvency Act was brought into force in August 2016, which
is expected to modernise the legislative framework related to bankruptcy and insolvency of
individuals and companies and by extension, improve the doing business environment.
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Regarding labour market reforms, amendments were made to the 2006 Labour Code with the
expressed objectives of promoting workers' rights, encouraging greater workforce participation,
fostering good labour relations, and establishing protocols for workplace safety. These are all
consistent with increasing labour productivity and by extension, economic growth and
development.
Public Sector Reforms
The Public Service Management Reform Strategy 2017 - 2019 was approved by Cabinet in
March 2017. The core objectives of the Strategy are to: (i) re-engineer the Public Service to
strengthen the machinery of Government towards greater effectiveness and efficiencies;
(ii) deploy and utilise human resources in the most optimal manner; (iii) pursue a strategic
compensation management policy that is consistent with fiscal sustainability; and (iv) integrate
Information and Communication Technology to enhance service delivery and create efficiencies
in various Government operations. The Strategy is currently being implemented.
Social Protection Reforms
Grenada's flagship social protection programme- the Support for Education, Empowerment and
Development Programme (SEED) was reformed in 2016. A new Management Information
System and a beneficiary targeting instrument were introduced in 2016. The systematic
means-testing approach has allowed new participants to be entered into the SEED Programme,
while those assessed as being ineligible have been transitioned out of the programme. The
means-testing approach has increased the efficiency of Government's social spending, as well as
its overall social protection and social safety net system.
Resilience Building Reforms
Important reforms were undertaken to build resilience to climate change and environmental
shocks. The National Climate Change Policy for Grenada, Carriacou and Petite Martinique 2017-
2021 and the National Adaptation Plan for Grenada, Carriacou and Petite Martinique 2017-2021
were completed in 2017. The overriding objectives of these strategic policy documents are to
build climate resilience and facilitate climate-smart development.
The Physical Planning and Control Act No. 23 of 2016 (as amended), which came into force in
August 2016 provides the institutional and regulatory framework for the development of land
and the construction of buildings. Accordingly, its provisions are intended to bolster the
resilience of Grenada's social and economic infrastructure to natural hazards and climate change
risks. The Act was amended once since coming into force.
Grenada also developed a Blue Growth Master Plan and established a Blue Innovation Institute
to preserve and enhance the quality and health of coastal ecosystems. Furthermore, key Marine
Protected Areas have also been identified. Additionally, important projects were developed and
implemented to enhance resilience at the community level with a focus on climate-smart
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agriculture, rain water harvesting, recycling, renewable energy options and alternative
livelihoods. Currently, a limited number of public investment project proposals are being
screened for climate change risks using the CCORAL tool. We are working towards having 60.0
percent of all public infrastructure project proposals undergo advanced screening for climate
change risks by 2020.
In January of this year, Cabinet approved a policy to ban the importation of non-biodegradable
products to facilitate optimal conditions for ecosystem restoration, rehabilitation and recovery.
A ban on Styrofoam containers is to be effective as of August 1, 2018, while a ban on other
non-biodegradable products is to take effect from February 1, 2019.
Fiscal Reform Outcomes to Date
Not only have there been marked improvements in key economic, fiscal and social indicators,
but there have also been improvements in the institutional arrangements and systems that
support public financial management.
In relation to revenue, the Inland Revenue Division was restructured, with a view to enhancing
revenue administration, taxpayer compliance and collections. A Large and Medium-size
Taxpayer Services Unit, as well as a Small Taxpayers Service Unit were established and became
operational in January 2016. This administrative enhancement, coupled with strong economic
activity has underpinned the robust growth in current revenue, which averaged 11.7 percent
over the period 2015-2017.
With regards to expenditure, it declined by an annual average rate of 1.7 percent over the
period 2015-2017. Aiding the expenditure containment has been the tight controls placed on
the size of the Civil Service and by extension, the wage bill. Public employment (established and
un-established workers plus other project employees) fell from 7,755 at end-December 2013 to
6,486 at end-September 2017.
In keeping with the Government Finance Statistics Manual 2014, the annual Budgets for 2017
and 2018 were prepared in the new Chart of Accounts format. Additionally, the 2017 and 2018
Budgets were prepared within the context of the rules-based fiscal framework and the actual
fiscal outturns in 2016 and 2017 were in line with the fiscal rules. Furthermore, the Fiscal
Responsibility Oversight Committee became operational in August 2017 and its inaugural
compliance report was laid in Parliament on November 27, 2017.
Government's Commitment
Notwithstanding the completion of the HGSAP, the Government remains committed to the
principles of sound fiscal and economic management and will continue the implementation of
policy and institutional reforms. The Government is particularly committed to deepening the
reform agenda to accelerate inclusive growth, expand opportunities for empowerment and
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employment, enhance public sector efficiency and effectiveness, reduce vulnerabilities, and
strengthen resilience to economic and environmental shocks.
Continued financial and technical support from the World Bank and other development partners
is vital for the sustainability of reforms and to ensure that additional development dividends
accrue to the people of Grenada over the medium-to-long term. Therefore, we trust that this
request will receive the endorsement of the World Bank's Board of Directors.
Yours faithfully,
Dr. The      onourable Keith C. Mitchell
PRIME MINISTER AND MINISTER OF FINANCE
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