Grenada, Covid-19 and debt – Eurodad
This blog is part of a series of articles that Eurodad produces in collaboration with our global partners on the implementation of the Debt Service Suspension Initiative (DSSI), supplementing and updating the report “Shadow report on the limitations of the G20 Debt Service Suspension Initiative “: Emptying the Titanic with a Bucket?” published in October 2020. Over the next few months, we will be publishing a variety of articles covering DSSI implementation issues and the situation debt in several countries of the South Today we are shining the spotlight on Grenada.
Caribbean countries are in the eye of the debt hurricane, the climate and the Covid-19 crisis. The confluence of high debt levels, climate vulnerabilities and the considerable impact of the pandemic on tourism dependent countries represents an existential threat to the region. Grenada is a perfect illustration of these dynamics. The tiny Caribbean nation exemplifies the need for systemic solutions that address the complex development challenges faced by Small Island Developing States (SIDS).
The health and social consequences of the pandemic
The Covid-19 has had a limited impact on the health of the population of Grenada. The government has closed the country to international commercial traffic between March and August 2020. These first measures made it possible to control the number of cases. By the time the local airport reopened, there had been a total of 24 cases of Covid-19 reported. The opening of borders was necessary to support tourism, which represents 80 percent of exports of the country and 57% of its economy. This decision resulted in a substantial increase in the number of cases in December 2020. At least one recourse is believed to have been behind a cluster of cases on the island.
Covid-19 cases reached 134 during the first week of January 2021 (of which 65% were confirmed positive in December 2020). In response, the government adopted a curfew and closed Grenada’s borders to travelers from the UK in December 2020. These measures have helped slow the spread of the virus on the island.
The economic impacts of the virus, on the other hand, have been devastating. To cope with the impact of the pandemic in 2020, the government has put in place an emergency relief program worth 2 percent of gross domestic product (GDP), equivalent to $ 23 million. Measures including payroll support – with a focus on tourism-related activities, expansion of government employment programs, deferred tax collection and increased health spending.
The emergency measures were implemented in the aftermath of a painful fiscal adjustment process triggered by a Debt crisis in 2013. As part of an International Monetary Fund (IMF) program, public spending rose from 29.2 to 21.6% of GDP between 2014 and 2019. As a result of the reductions, health spending fell from 2.2 to 2.0% of GDP between 2014 and 2017 (latest year for which data is available). This left the healthcare sector with limited resources to contain the pandemic, when it arrived.
In addition, austerity measures aimed at stabilizing debt levels have left the people of Grenada in a vulnerable situation. Before the pandemic, 32 percent of the population lived in poverty. This represents the highest poverty rate in the Eastern Caribbean. Unemployment rate reached 15.2% in 2019. The difficulties encountered by the population of Grenada are increasing due to the current crisis. A survey by the World Food Program (WFP) showed that 40 percent of respondents across the country were skipping meals. Extreme poverty is expected to increase by 2.4 to 18.4 percent, while the unemployment rate is expected to reach a staggering level 48 percent in 2020.
The challenges facing the local population are compounded by the environmental vulnerabilities that characterize the Caribbean. Grenada has been besieged by tropical storms in recent decades. The cumulative damage caused by these storms amounts to 157% of GDP between 1980 and 2015. The impact was severe enough to nullify any gains in economic growth made during the same period. The catastrophic effect of these events is illustrated by the damage caused by Hurricane Ivan in 2004. The storm destroyed 90% of the available housing and caused damage estimated at 200% of GDP. The humanitarian emergency caused by the hurricane triggered a sovereign debt default shortly after.
As the intensity and frequency of tropical storms increase due to climate change, the risks that the people of Grenada face become existential in nature. The country’s reduced ability to protect itself from this threat and the long-term consequences of the pandemic are exacerbated by its public debt problems.
Grenada’s debt yoke
Grenada has experienced two serious debt crises since the turn of the millennium. The first default was triggered by the impact of Hurricane Ivan in 2004, described above. A second default occurred in 2013 after years of moderate growth and insufficient debt relief following the previous crisis. The country agreed to implement a long-term IMF adjustment program and parallel debt restructuring in 2015. Ongoing fiscal consolidation was briefly interrupted by the pandemic, but is expected to resume shortly in order to free up resources to service the debt. Over the next three years, the country is expected to cut spending by 6.8 percent of GDP, equivalent to 3.1 times its public health budget.
The expected scale of the cuts will be directly linked to the daunting post-pandemic debt challenges Grenada faces. The economy is expected to contract by 12% in 2020. In turn, public debt is expected to increase by 59 to 73.5% of GDP between 2019 and 2021. On average, 29% of government revenue will be needed over the next three years to cover public debt service. This will allow the country to avoid another default, but the costs to the population are high. Debt service leaves insufficient resources to guarantee the socio-economic rights of the people of Grenada. For every US dollar invested in public education and health care, the government is expected to pay US $ 1.80 to its creditors in 2021.
In this context, the international support given to Grenada in the context of the Covid-19 crisis is not up to the challenges the country is facing. In April 2020, Grenada was authorized to receive an emergency loan from the IMF and was invited to participate in the G20 Debt Service Suspension Initiative (DSSI). In the first case, the country received a loan through the IMF’s Rapid Credit Facility (RCF) for $ 22.4 million. In the latter case, the country was able to suspend bilateral debt payments until US DOLLARS $ 9 million in 2020, according to World Bank data.
The lack of involvement of multilateral and private creditors clearly undermined the potential support provided by the G20 DSSI. Eurodad estimates that the country had to pay the two groups of creditors a total of US $ 51 million in public debt service in 2020. Thus, more than double the resources provided by the IMF ended up being used to pay. other creditors instead of supporting the emergency. pandemic response. Grenada has about US $ 30 million in external debt payments due between January and June 2021. Only 15% of that amount, or about US $ 4.6 million, is eligible for a temporary moratorium under the extension. of the DSSI approved by the G20 last October.
Grenada’s future looks bleak. The prospects for a strong recovery are directly linked to the fate of the tourism industry. In the absence of an ambitious economic diversification strategy supported by the international community, a slow recovery in the number of tourist arrivals over the next few years could force the country to embark on an additional IMF program. This will inevitably result in further austerity measures. Even if the country manages to escape this outcome, Grenada and the rest of the Caribbean will still be one hurricane from a humanitarian catastrophe.
This dynamic underscores the need for enhanced multilateral support to SIDS that takes into account the particular challenges these countries face. The actions required include the implementation of timely and sufficient debt relief measures, particularly following extreme weather events, the introduction of a multilateral debt settlement mechanism and compliance with climate finance commitments by advanced economies to support climate vulnerable countries.
This blog was written by Jubilee Caribbean in collaboration with Eurodad