Press Release: IMF Staff Statement at the Conclusion of the Article IV Consultation Discussions with Dominica

June 22, 2005

An International Monetary Fund (IMF) staff mission issued the following statement today in Roseau:

"An IMF staff mission headed by Mr. Sanjaya Panth is visiting Dominica from June 8-23, 2005 to conduct the 2005 Article IV Consultation discussions and review performance under the Fund supported program.1 The mission has received excellent cooperation from the government and benefited from constructive discussions and exchange of views with the Cabinet, the Coordinator of the Stabilization Programme, the Acting Financial Secretary, other senior government officials, representatives of the private sector, labor unions, and civil society. The discussions are taking place against the backdrop of favorable economic conditions and have focused on consolidating the realized gains in stabilization, addressing emerging vulnerabilities and establishing the basis for sustained economic growth.

"The economic recovery in Dominica is solidly on track. The increase in real GDP during 2004—by an estimated 3½ percent—was exceptionally broad-based, with transportation, agriculture, manufacturing and construction all performing robustly. While there has been some weakening of agriculture recently, available information suggests that other sectors of the economy continue to perform well—services, in particular, received a boost from the on-site filming of a major Hollywood production earlier this year. Overall, output expansion is set to exceed the historical average of about 2 percent for the second straight year in 2005.

"Overall, policy implementation has remained strong thus far in 2005. All quantitative targets for March under the Fund-supported program were met, in most cases with large margins. The authorities have, however, experienced difficulties more recently in containing the central government wage bill and there is a risk that the ceiling for this fiscal year may be exceeded. Progress is being made in implementing structural measures under the program, albeit with delays in some cases, including on account of limited technical capacity. The latter is an area where donors can play a vital role in supporting the reform efforts of the government by providing necessary assistance.

"With the resolute implementation of strong macroeconomic policies in recent years, economic stabilization has so far been achieved and should be maintained. The economic rebound is a testament to this accomplishment. The emphasis should now shift decidedly to policies necessary to sustain high economic growth going forward. Raising the economy's growth potential is an integral element of the strategy, which will also help in maintaining macroeconomic stability—and importantly, will be critical to reducing poverty and unemployment. The mission discussed ways to raise the economy's medium-term growth prospects, including by increasing the efficiency of public expenditures; reforming the tax system; enhancing regional cooperation and integration; and strengthening the investment climate in the potential growth sectors of the economy—eco-tourism and geo-thermal energy.

"The mission also discussed plans for the budget for fiscal year 2005/06 and the medium term. The authorities are targeting a central government primary surplus (the overall balance minus interest costs) of 3 percent of GDP for FY 2005/06. A still higher primary balance would be prudent given the vulnerability to natural disasters and the looming deficits of the social security system, but this needs to be weighed carefully against the near-term investment demands. The authorities have indicated that they plan to reinstate in the budget for FY 2005/06 the wage cut introduced in 2003. However, rigidities in public employment inhibit the reallocation of funds across expenditure categories required to increase the efficiency of government expenditures, and also limit the room for maneuverability necessary to attract and retain a well-qualified civil service. Accordingly, as part of the budget process, the authorities will need to design and implement a plan to shed excess employment and boost the efficiency of the civil service across a number of ministries.

"As regards the medium-term, the debt restructuring that is underway should, together with continued strong fiscal performance, significantly reduce the central government's debt burden over time. However, the recent study carried out by the government with assistance from the IMF and World Bank showed that the finances of the social security system are unsustainable without reform; and natural disasters, such as the earthquake in 2004, argue for creating additional room in the budget for contingencies. Accordingly, the mission proposed that steps be taken to address the structural problems of the social security system, or consider a larger medium-term primary surplus target, or both. The authorities are advised to embark during the new fiscal year on a reform of the social security system—the aforementioned study also identified measures that, if implemented promptly, can address this weakness in public finances.

"An overarching medium-term policy framework will be contained in the Growth and Social Protection Strategy Paper (GSPSP) that the authorities are preparing. The GSPSP, when finalized, will provide the appropriate vehicle around which all Dominicans can engage in continuing to address the economic challenges confronting the country. The IMF mission wishes the government and the people of Dominica every success in their endeavor to maintain stabilization, raise economic growth, and reduce poverty and unemployment."

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with member countries, usually every year. A staff team visits the country, collects economic and financial information, and discusses with the country's authorities economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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