GRENADA EXPECTING LOWER GROWTH

UNCLAS GRENADA 000144

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON PGOV EAGR SOCI GJ
SUBJECT: GRENADA EXPECTING LOWER GROWTH


1. (SBU) Summary: Grenada's Ministry of Finance painted a
somber picture of the country's economic situation in recent
discussions. Grenada is still suffering the aftereffects of
Hurricanes Ivan (2004) and Emily (2005) with high debt and an
underprepared tourist industry. The international economic
slowdown is expected to have a negative impact on the tri-island
state, as tourism arrivals and remittances are expected to drop
in 2009. Revenues are weak and will drop further after December
31 when the 3 percent national reconstruction levy (NRL)
automatically expires. To address this, the government says it
intends to implement a value added tax (VAT) in October 2009.
Despite the strain, the government promised to maintain
International Monetary Fund discipline and hopes for an
extension of Paris Club relief. End summary.

DIFFICULT TIMES AHEAD


2. (U) Services account for 88 percent of the Grenadian economy,
followed by 6 percent in light manufacturing, 5 percent in
agriculture, and 1 percent in mining/quarrying. Tourism has
replaced nutmeg as the primary foreign exchange earner, followed
by remittances and light manufacturing. The GOG predicts that,
because of the world-wide economic slowdown, there will be fewer
remittances sent to Grenadians, fewer tourism arrivals, lower
and/or slow foreign direct investment, and less access to credit
from the banking system in 2009. As a result, projected
economic growth for 2009 is 1.6 percent. Inflation is expected
to be lower than in 2008 (8.6 percent),but still uncomfortably
high at around 6.7 percent. Inflation for food remains at about
15 percent and is expected to remain at that level.


3. (U) Rebuilding the country's infrastructure after the double
whammy of Hurricanes Ivan (2004) and Emily (2005) has resulted
in a 109 percent debt to gross domestic product (GDP) ratio.
The demise of the nutmeg industry following Ivan left the GOG
scrambling to find alternative sources of foreign exchange.
Although the government intends to rebuild nutmeg production,
the reality is that it will take eight to fifteen years for
newly planted trees to mature and bear at pre-hurricane levels.


4. (SBU) Revenues will drop in 2009 as the 3 percent national
reconstruction levy (NRL),introduced after Hurricane Ivan to
help rebuild, expires on December 31, 2008. The government
promised on November 4 that it will finally implement value
added tax (VAT) in October 2009 to replace the general
consumption tax (GCT). The irony is that the previous
government tried to implement VAT in October 2007 and was
stymied by the political maneuvering of the opposition (now in
power).

COMMENT


5. (SBU) The loss of nutmeg as the major foreign exchange earner
when Hurricane Ivan destroyed the majority of the nutmeg trees
in 2004 (as well as most other vegetation),continues to bedevil
the island. However, agriculture has been a dying sector in
Grenada for many years, as too few young Grenadians are entering
the profession to replace retiring farmers.


6. (SBU) Grenada has never focused as seriously on tourism as
other Caribbean islands. The quality of the product varies
wildly and pricing has little to do with reality: extremely
primitive facilities charge the same high rates as more
sophisticated and better managed ones. Local hotel and
restaurant owners do not work together to market the island,
leaving an obvious major potential source of tourism - the
United States - virtually untapped. Changing this lackadaisical
attitude is increasingly urgent if tourism is to succeed in
Grenada.


7. (SBU) Remittances are vitally important to the local economy
and also an incentive to some to not work. A sizeable
percentage of apparently unemployed Grenadians choose not to
join the labor market because they get enough money from
relatives to live on and to buy the latest razor cell phones and
designer knock-off clothing. Some families send barrels, not
cash, with clothing or electronic goods, which the recipient
sells on the street. Two barrels a year can enable someone to
scrape by. While there is unemployment in Grenada, there is a
difference between those who want work but cannot find it due to
lack of skills or education and those who choose not to work.
Should the global economic downturn last too long and impact
expatriate Grenadians enough that they reduce the assistance
they send home, this latter group of Grenadians could become
increasingly desperate and look to a strapped government for
assistance.

MCISAAC