Grenada, Covid-19 and debt
While Covid-19 has had a limited impact on the health of Grenada's population, the economic impact of the virus has been devastating.
This blog is part of a series of articles that Eurodad is producing in collaboration with our global partners on the implementation of the Debt Service Suspension Initiative (DSSI), complementing and updating the report "Shadow report on the limitations of the G20 Debt Service Suspension Initiative: Draining out the Titanic with a bucket?" published in October 2020. Over the coming months, we will publish a variety of articles covering issues related to the implementation of the DSSI and the debt situation in several countries in the global south. Today we turn the spotlight on Grenada.
Caribbean countries are in the eye of the hurricane of debt, climate and the Covid-19 crisis. The confluence of high debt levels, climate vulnerabilities and the substantial impact of the pandemic on tourism-dependent countries represents an existential threat to the region. Grenada is a perfect illustration of these dynamics. The small Caribbean nation illustrates the need for systemic solutions that address the complex developmental challenges faced by Small Island Developing States (SIDS).
The health and social consequences of the pandemic
Covid-19 has had a limited impact on the health of Grenada’s population. The government closed the country to international commercial traffic between March and August 2020. These initial measures kept the number of cases under control. By the time the local airport reopened, there had been a total of 24 cases of Covid-19 reported. Opening the borders was required to support tourism, which accounts for 80 per cent of the exports of the country and 57 per cent of its economy. This decision led to a substantial increase in the number of cases in December 2020. At least one resort was alleged to have been the source of a cluster of cases on the island.
Covid-19 cases reached 134 in the first week of January 2021 (65 per cent of which were confirmed positive during December 2020). In response, the government enacted a nightly curfew and closed Grenada’s borders to travellers from the UK in December 2020. These measures have helped to slow down the spread of the virus on the island.
The economic impacts of the virus, on the other hand, have been devastating. To tackle the impact of the pandemic in 2020, the government rolled out an emergency relief programme worth 2 per cent of Gross Domestic Product (GDP), equivalent to US$ 23 million. Measures included payroll support – with an emphasis on tourism-related activities, expansion of government employment programmes, deferred tax collection and increased health care expenditure.
The emergency measures were implemented in the aftermath of a painful process of fiscal adjustment triggered by a debt crisis in 2013. Under an International Monetary Fund (IMF) programme, government expenditures declined from 29.2 to 21.6 per cent of GDP between 2014 and 2019. As a consequence of the cuts, health care spending declined from 2.2 to 2.0 per cent of GDP between 2014 and 2017 (the latest year for which data is available). This left the health care sector with limited resources to contain the pandemic, when it arrived.
Furthermore, austerity measures designed to stabilise debt levels left the population of Grenada in a vulnerable situation. Before the pandemic, 32 per cent of the population lived in poverty. This represents the highest poverty rate in the Eastern Caribbean. The unemployment rate reached 15.2 per cent in 2019. Hardships faced by the population of Grenada are on the rise as a result of the current crisis. A World Food Programme (WFP) survey showed that 40 per cent of the country’s respondents were skipping meals. Extreme poverty is expected to increase from 2.4 to 18.4 per cent, while the unemployment rate is set to reach a staggering 48 per cent in 2020.
The challenges faced by the local population are heightened by the environmental vulnerabilities that characterise the Caribbean. Over the last few decades, Grenada has been besieged by tropical storms. Cumulative damage caused by these storms amounted to 157 per cent of GDP between 1980 and 2015. The impact has been severe enough to off-set all the gains from economic growth achieved 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 per cent of available housing and caused damage estimated at 200 per cent of GDP. The humanitarian emergency caused by the hurricane triggered a sovereign debt default shortly afterwards.
As the intensity and frequency of tropical storms increases due to climate change, the risks faced by the population of Grenada become existential in nature. The reduced capacity of the country 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 undergone two severe debt crises since the turn of the millennium. The first debt default was triggered by the impact of Hurricane Ivan in 2004, described above. A second default took place in 2013 after years of subdued growth and insufficient debt relief following the previous crisis. The country agreed to implement a long-term IMF adjustment programme and a parallel debt restructuring in 2015. The ongoing fiscal consolidation was briefly interrupted by the pandemic but is projected to resume shortly in order to free up resources to enable debt servicing. Over the next three years, the country is expected to slash expenditures by 6.8 per cent of GDP, equivalent to 3.1 times its public health care budget.
The anticipated magnitude of the cuts will be directly related to the daunting post-pandemic debt problems faced by Grenada. The economy was projected to contract by 12 per cent in 2020. In turn, public debt is projected to increase from 59 to 73.5 per cent of GDP between 2019 and 2021. On average, 29 per cent of government revenues will be required over the next three years to cover public debt service. This will allow the country to avoid another default, but the costs for the population are stark. Debt service leaves insufficient resources to guarantee the socio-economic rights of Grenada’s population. For each US dollar invested in public education and health care, the government is projected to pay US$ 1.80 to its creditors in 2021.
Against this backdrop, international support provided to Grenada in the context of the Covid-19 crisis is not commensurate with the challenges faced by the country. In April 2020, Grenada was approved to receive an emergency loan from the IMF and was invited to participate in the G20 Debt Service Suspension Initiative (DSSI). In the case of the former, the country received a loan through the IMF’s Rapid Credit Facility (RCF) for US$ 22.4 million. In the case of the latter, the country was able to suspend bilateral debt payments for up to US$ 9 million in 2020, according to World Bank data.
Lack of participation by multilateral and private creditors clearly undermined the potential support provided by the G20 DSSI. Eurodad estimates that the country had to pay both 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 response to the pandemic. Grenada has around US$ 30 million in external debt payments due between January and June 2021. Only 15 per cent of this, around US$ 4.6 million, is eligible for a temporary moratorium under the DSSI extension approved by the G20 last October.
The future of Grenada looks bleak. Prospects of a strong recovery are directly related to the fate of the tourism industry. In the absence of an ambitious strategy for economic diversification supported by the international community, a slow recovery in the number of tourist arrivals over the coming years may force the country to enter into an additional IMF programme. This will inevitably translate into further austerity measures. Even if the country manages to escape this outcome, Grenada and the rest of the Caribbean will always be one hurricane away from a humanitarian disaster.
This dynamic highlights the need for enhanced multilateral support for SIDS that takes into account the special challenges faced by these countries. Measures required include the implementation of timely and sufficient debt relief measures, especially following extreme climate events, the introduction of a multilateral debt work-out mechanism and the fulfillment of climate finance commitments by advanced economies to provide support for climate-vulnerable countries.
This blog has been authored by Jubilee Caribbean in collaboration with Eurodad