Press Information Notice: IMF Concludes Article IV Consultation with Dominica

June 27, 1997

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

The IMF Executive Board on May 23, 1997 concluded the 1997 Article IV consultation1 with Dominica.

Background

Dominica's economic performance worsened in the first half of the 1990s relative to the second half of the 1980s when the IMF had provided assistance under the Structural Adjustment Facility. The average annual rate of growth of real GDP in Dominica was around 2 percent in 1991­95, reflecting mainly lower public investment in infrastructure, structural impediments to faster diversification of the production base, and the adverse effects of a series of natural calamities such as hurricanes, droughts and wind storms. In 1996, real GDP grew by 3 percent, led by a recovery in banana and manufacturing production and a continued expansion of tourism and communications. Unemployment reportedly has risen in recent years, while inflation has remained low mainly because of the monetary discipline associated with Dominica's membership in the regional currency union. After narrowing in the period 1991­93, the external current account deficit widened to 19 1/2 percent of GDP by 1995 reflecting largely a pick up in investment-related imports and a sharp decline in banana exports. However, the external current account deficit declined to 12 percent of GDP in 1996, owing to lower imports and an increase in receipts from exports of goods and services.

Public sector saving declined from an annual average of about 8 percent of GDP in 1986­90 to about 3 percent of GDP in 1995/96, owing to sluggish revenue performance, sharp increases in current expenditure by the central government, and large losses of the Dominica Banana Marketing Corporation. Lower public sector saving and weak implementation capacity were among the principal factors that prevented a greater utilization of project-related foreign assistance. Public investment fell from an annual average of 15 1/2 percent of GDP in 1986­90 to about 11 1/2 percent of GDP in 1995/96, while the overall deficit of the public sector (after grants) increased from an average of near zero in 1986­90 to about 1 percent of GDP in 1995/96.

Preliminary data indicate that the government current account (on a cash basis) shifted from near balance in the first half of 1995/96 to a deficit of EC$7.5 million (2.4 percent of GDP) in the first half of 1996/97. This weakening reflected a large increase in the wage bill resulting from the wage settlement for the period 1994/95­1996/97 and an unanticipated increase in nonestablished employment to repair roads damaged by the hurricanes in early 1995/96 (the wage bill averaged 15 percent of GDP in recent years).

Executive Board Assessment

Executive Directors noted that the rate of growth of real GDP had fallen in Dominica in the first half of the 1990s, as a result of natural disasters, lower investment, and structural rigidities. Directors stressed the urgent need to pursue policies to improve growth performance and reduce unemployment, while maintaining low inflation and strengthening the external position. They emphasized the need to diversify the economy, improve infrastructure, raise public saving, and make solid progress with structural reform. While recognizing the value of consensus, Directors urged the authorities to move ahead with the reform program, particularly in the areas of fiscal consolidation, price decontrol, privatization, civil service reform, and trade liberalization.

To strengthen the public finances Directors urged the authorities to widen the revenue base, reduce tax exemptions, improve tax administration, and introduce user fees for public services. The authorities also would need to restrain expenditure, particularly by freezing the wage bill. Directors stressed the importance of focusing the three-year public sector investment program on economic infrastructure and improving project implementation capacity.

In the context of the common fixed exchange rate under the Eastern Caribbean Central Bank, Directors urged the authorities to continue with policies to raise productivity and control costs, particularly in the banana sector, in order to preserve Dominica's competitiveness.

In order to improve the quality and timeliness of data for economic management, the authorities would need to strengthen the central statistical office and continue to work closely with the regional organizations that help compile data.

Dominica: Selected Economic Indicators
(Annual percent change unless otherwise noted)
  1991 1992 1993 1994 1995 Prel.
1996
Domestic economy  
  Nominal GDP at market prices 8.8 6.5 4.6 8.1 2.6 2.8
  Real GDP at factor cost 2.2 2.7 1.9 2.1 1.8 3.2
  Consumer price index (average) 5.5 5.5 1.6 0 1.3 1.7
  Gross national saving 1 10.2 13.2 11.3 10 11.5 14.8
External economy  
  Export volume -6.2 4 -6.1 -13.2 -6.3 18.2
  Import volume -8.5 -3.9 0.4 1 2.5 -4.8
  Current account balance 1 -18.1 -12.8 -11.8 -18.2 -19.3 -12
  Overall balance1 2.5 1.6 -0.7 -2.2 4 -0.2
  External debt1 51.3 49.7 45.9 44.7 45.1 43.7
  Debt-service ratio (in percent
    of exports of goods and services,
    plus net current private		 5.4 5.9 6.6 7.1 7.3 7.1
  Gross reserves (in months of imports
    of goods and services)2		 1.7 1.9 2 1.4 1.8 2
  Real effective exchange rate
    (depreciation -)		 -0.3 4.8 1.8 -7 -4 2.4
Financial variables  
  Nonfinancial public sector balance
    (after grants)1, 3		 -6.7 -2.4 -0.1 -2.5 -1.5 -1.1
  Public sector saving1, 3 3.4 4.1 2 0.1 2.9 3.1
  Broad money4 18.8 12.8 -5.1 4 23.1 2
  Interest rate (three month deposit
    rate for commercial banks)5		 4.2 3.3 3.1 4.5 5.4 5.4
Sources: Eastern Caribbean Central Bank; and IMF
staff estimates.
1In percent of GDP.
2Refers to Dominica's share in imputed reserves at the Eastern Caribbean Central Bank.
3Refers to fiscal years ending June 30.
4Money and quasi-money.
5End of period.
1Under Article IV of the IMF's Article of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's 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 directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.

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