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Thin cut to debt leaves Grenada caught out

Deal with private lenders will only reduce debt by 20%.

St George's, the capital of Grenada. Photo: Katchooo/Flickr

St George’s, the capital of Grenada. Photo: Katchooo/Flickr

Grenada has reached a deal with private bondholders to reduce debt owed to them by up to half over the next two years, dependent on the country completing a programme with the International Monetary Fund.

Along with an agreement to cut in half the country’s debt to Taiwan, Grenada’s foreign debt will fall from around $670 million to $520 million, as much of it is actually owed to public institutions such as the Caribbean Development Bank. Furthermore, the deal with the bondholders will mean Grenada’s debt payments will increase, as it has been in default to the private sector since 2013.

Interest payments on the debt the Caribbean country has now agreed to pay will total 7% a year, plus extra revenues from a scheme to invest funds in Grenada.

A substantial amount of Grenada’s debt is owed to multilateral institutions such as the Caribbean Development Bank, World Bank and International Monetary Fund. There is also debt owed to the UK ($3 million) and a few other western countries, which have so far refused any debt cancellation.

Following work by the Grenada Conference of Churches, in 2013, the government of Grenada called for a conference to be held with all its creditors to agree reduction of debt to a sustainable level. However, multilateral institutions in particular refused to negotiate on the debt owed to them. Instead, piecemeal deals are now being reached with individual lenders. Debt payments will continue to take up a large amount of the government’s budget, and more negotiations on the debt could once again be needed in just a few years, even if the economy does well.

An assessment by the IMF at the end of 2014 said that if Grenada paid its debt in full this would mean debt payments of 20% of government revenue between now and 2020, rising to over 30% in the 2020s. If debt payments fall in line with the reduction in total debt, this will still mean payments taking up 15% of government revenue between now and 2020, and around 25% in the 2020s.

Moreover, these IMF assessments were based on Grenada’s economy growing 2.5% a year, double the historical rate, and the island nation not suffering from any economic shocks such as hurricanes or falls in tourism revenue. Unfortunately, such shocks are all too common in Grenada’s history.

One clause in the new contracts with the private bondholders which has been suggested is a ‘hurricane clause’ to allow for suspension of payments if Grenada is hit by a devastating hurricane, as it was in 2004. This has been agreed in principle, but not finalised, and it is unclear what circumstances would lead to it being triggered.


Countries

Grenada, Taiwan, Province Of China
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