Press Release No. 05/232

Press Release: IMF Executive Board Completes First and Second Reviews and Financing Assurances Review Under the Stand-By Arrangement for the Dominican Republic

October 18, 2005

The Executive Board of the International Monetary Fund (IMF) has completed the first and second reviews of a 28-month SDR 437.8 million (about US$ 631.7 million ) Stand-By Arrangement with the Dominican Republic approved on January 31, 2005 (see Press Release No. 05/18), and granted waivers for the nonobservance of the continuous performance criterion on the non-accumulation of new external payments arrears and of seven structural performance criteria for the period end-February 2005 to end-July 2005. The Executive Board also granted a waiver of applicability for the end-September 2005 quantitative performance criterion on the balance of the non-financial public sector. In addition, the Board completed a review of the country's financing assurances¹.

Completion of the reviews will enable the Dominican Republic to draw immediately up to an amount equivalent to SDR 96.32 million about US$ 139.0 million).

Following the Board's discussion of the Dominican Republic on October 17, Mr. Agustín Carstens, Deputy Managing Director and Acting Chair made the following statement:

"The Dominican Republic authorities' strong macroeconomic policies under the Fund-supported economic program have resulted in a significant improvement in economic conditions, including rapid economic growth, low inflation, and higher international reserves. The fiscal balance has improved, creating the basis for the achievement of the program's objectives for 2005. The authorities should continue monitoring expenditure closely in order to facilitate the transition to the more ambitious fiscal objectives for 2006.

"Looking ahead, several challenges need to be addressed to consolidate the progress made thus far. The timely passage of the tax reform legislation is essential to maintain the revenue base in light of the expected revenue losses following the implementation of Dominican Republic-Central American Free Trade Agreement and the elimination of the foreign-exchange commission and the financial transactions tax. The tax reform will also improve the equity and efficiency of the tax system. On the expenditure side, the authorities will need to maintain strong discipline by restraining public sector wages, limiting the earmarking of revenue, and prioritizing investment spending.

"Subsidies to the electricity sector will need to be substantially reduced. To address the weak performance of this sector, the authorities have appointed private managers for state-owned distributors, who will implement much-needed reforms to increase the cash recovery indices of distributors and rationalize staffing levels.

"The central bank has been successful in quickly bringing down inflation and restoring the credibility of monetary policy. The central bank needs to continue improving monetary policy management and communication.

"The authorities have made significant progress in restructuring the external debt with minimum disruption to market relationships. Their market-friendly approach in conducting the successful debt exchange and in discussing debt restructuring with private creditors will help promote renewed access to international capital markets.

"In the structural area, challenges for 2006 include the introduction of reforms to address a wide range of governance and transparency weaknesses in the fiscal, monetary and banking sectors. Approval of proposed legislation to overhaul public sector financial management procedures and centralize fiscal functions in one cabinet post will be key to address institutional weaknesses that presently hinder the planning and execution of fiscal policy. Plans to strengthen the central bank will improve its ability to conduct an independent monetary policy aimed at keeping inflation low. Progress already achieved in the banking regulatory framework will need to be complemented by further strengthening bank supervision. Implementation of consolidated accounting and supervision will be key to ensure adequate capitalization levels in the banking sector," Mr. Carstens said.