It is not often that a tiny country can show the world how best to deal with an intractable problem but Grenada might just be doing that. Like all great ideas, it is an essentially simple one: that all creditors sit down together to negotiate a debt restructuring-with a substantial reduction, a biblical ‘debt jubilee’-in an effort to prevent the country of 100,000 people sinking under the weight of constantly borrowing more to pay off old loans.
With the country’s national debt soaring to $2.2bn (the World Bank put gross domestic product at $790m in 2012), Grenada in effect defaulted on its debt in March for the second time since 2004 (after coming perilously close last year). Moody’s credit-rating agency warned that the ‘distress’ threatened to spill over to other countries in the Eastern Caribbean Currency Union, Caribbean 360 reported.
The economy was severely affected by the global financial crisis, which devastated tourism. With exports largely dependent on nutmeg and mace, Grenada was already struggling to recover from the devastation wrought by Hurricanes Ivan and Emily in 2004 and 2005, which caused damage worth twice the GDP, according to theInternational Monetary Fund. Following a debt restructuring in 2005 and the IMF’s usual prescription of cutting government expenditure and raising new taxes, GDP was shrinking by an annual average of -1.2% between 2008 and 2012. As Caribbean News Now noted: ‘The annual growth assumption that underpinned Grenada’s 2005 debt restructuring … was 4.7% per annum.’ With the government prevented from counter-cyclical spending to help the feeble economy, the ranks of unemployed swelled to one in three Grenadians.
Higher interest rates tied to previous restructuring agreements contributed to a 12.7% jump in Caribbean debt from 2008 to 2011, the IMF said. Grenada’s debt, Bloomberg reported in May, had risen above the 93% ratio that forced Cyprus to seek a European Union-brokered bailout. It may reach 109% this year.
Keith Mitchell, now prime minister for the fourth time after his election win in February, was also prime minister from 1995 to 2008, and more than a little implicated in the accumulation of that debt (he also held the portfolios of finance, trade and industry for much of that time). Under Mitchell-who ‘astutely balanced neo-liberal principles, technocratic leadership and populism’, according to the Grenadian academic Wendy Grenade in The Round Table-the country embarked on a construction spree, with new roads, a stadium, ministerial buildings, a further education complex and schools, and a modernised fish market being built in the decade since the 2003 election. Between 2001-08, Grenade notes, the debt-to-GDP ratio nearly doubled, from 44.7% to 83.5%.
‘The global financial crisis has taken a heavy toll on the country, and aggravated the severe debt overhang that continues to weigh down our economy,’ said Mitchell in March. ‘It is now time for Grenada to confront the fact that it cannot continue to pay its debts on current terms, and that the restoration of growth requires the debt overhang to be resolved. We need a fresh start, and it is therefore imperative that we approach our creditors promptly to discuss an orderly restructuring of our liabilities.’
Grenada’s proposal is to negotiate a debt reduction with all its creditors-private, multilateral and government. The plan has come largely from the Conference of Churches in Grenada, which made nine recommendations:
- A comprehensive approach to restructuring debt.
- Assessment by impartial experts of Grenada’s need for debt relief.
- Parliamentary approval by both houses.
- Debt to be cancelled if it exceeds sustainable levels under the Heavily Indebted Poor Countries (HIPC) Initiative (though the World Bank classifies Grenada as an upper middle-income state, thereby disqualifying it).
- A safety cushion in debt relief to be provided above the HIPC limit, given the islands’ vulnerability to natural disasters, such as hurricanes, and external shocks, such as the 2007 financial crisis.
- A prominent mediator to oversee a debt conference in Grenada attended by all creditors.
- Debt relief to be aimed at socio-economic development of the poorest.
- Financial aid and political support for its renegotiation strategy to be sought from sympathetic governments, ‘such as Norway and Germany’, and international organisations.
- Greater accountability and transparency to be ensured, through consultation with civil society, in managing public expenditure.
Writing in the Guardian, Jürgen Kaiser, research fellow at the German Debt Network, and Tim Jones, of the Jubilee Debt Campaign, suggest that if successful the proposal could have implications for billions of people. ‘As there is no standard rules-based procedure for resolving sovereign debt crises, the Grenadian finance ministry, which has fewer staff and technical capacities than a treasurer in a medium-sized municipality in the US, has to negotiate with all its creditors in parallel, a tricky process. Bondholders are dispersed all over the world. Multilateral institutions have a policy of not negotiating their claims at all. And while governments sometimes reduce debts, there is no procedure to do so.
‘The last comprehensive debt reduction deal we know of was the cancellation of much of Germany’s debt in 1953, which resulted in annual debt payments falling to less than 3% of export revenues. Grenada’s payments are more than 20% of export revenues.’
A crucial element of the Grenadian proposal is that an independent body should assess how sustainable the debt is. As Kaiser and Jones point out, the IMF is both creditor and adjudicator.
The US invasion of Grenada to overthrow the radical New Jewel Movement government in 1983 was meant to turn the Caribbean nation into a model free market state. As the neo-liberal experiment with the islands’ fragile economy unravels, it would be fitting for Grenada to become an exemplar of how small states can surmount their debt pile.