Press Information Notice: IMF Concludes Article IV Consultation with the Dominican Republic

September 17, 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 August 21, 1997 concluded the 1997 Article IV consultation1 with the Dominican Republic.


Over the period 1990–95, and notwithstanding slippages associated with presidential elections in mid-1994, much progress was made in strengthening the public finances; tightening credit and wage policies; reducing exchange, price, and financial distortions; opening the economy; and normalizing relations with external creditors. As a result, inflation was reduced from 80 percent during 1990 to about 9 percent during 1995; real GDP, after falling by almost 6 percent in 1990, grew on average by 4¼ percent a year in 1991–95 led by strong growth in free trade zone manufacturing, construction, energy production, communications and tourism related services; and the external current account swung from a deficit of over 2 percent of GDP in 1990 to a slight surplus in 1995. Gross official reserves remained at the equivalent of around one and one-half months of imports for most of this period; the external public debt as a share of GDP was more than halved during 1990–95, to 33 percent. The unemployment rate declined from about 20 percent in 1991–93 to about 16 percent in October 1995 despite increases in the participation rate partly associated with increased rural-urban migration.

Economic performance was broadly satisfactory in 1996. Inflation fell to 4 percent aided by exchange rate stability, while strong real domestic demand contributed to a 7 percent increase in real GDP growth. The external current account balance swung to a deficit equivalent to 1¾ percent of GDP, but strong private capital inflows helped maintain the overall balance of payments in approximate equilibrium. The growth of domestic demand was fueled by a rapid growth of credit to the private sector and an increase in government capital outlays. The consolidated public sector deficit (including quasi-fiscal operations) widened from about 1.1 percent of GDP in 1995 to 1.7 percent of GDP in 1996, largely financed by an accumulation of domestic arrears. In 1996, market exchange rates fluctuated within a narrow range, despite uncertainty associated with the presidential elections of that year. In late December 1996, the official exchange rate was devalued by almost 10 percent; as a result, the spread between the official and interbank exchange rates has been reduced from an average of about 6 percent during 1996 to less than 1 percent so far in 1997. In real effective terms, the peso appreciated by 2½ percent during 1996.

The new administration of President Fernández, which took office in August 1996, advocates the implementation of prudent macroeconomic policies and fundamental structural reforms in the areas of taxes; the civil service and government administration; the public enterprises; social security; public education; external trade; and financial intermediation. In mid-1997, the Congress approved a law to reform and privatize the public enterprises, giving a strong boost to the administration’s agenda.

In 1997, current public expenditures are expected to rise sharply, reflecting large increases in government wages and pensions, and continued support to loss-making public enterprises. However, due to strong increases in tax collections (mainly associated with increases in fuel taxes in late 1996 and ongoing improvements in tax administration) and expected cuts in capital expenditures, the consolidated public sector deficit could fall to near ½ percent of GDP. At the same time, credit policy has been tightened, and the growth of money and credit to the private sector is expected to slow in line with the expected growth of activity and prices during the year. Biannual private wage increases are expected to be broadly consistent with productivity increases, as well as price and exchange rate stability.

Output is expected to grow by about 6½ percent in 1997, led by strong growth in tourism related services and private construction activity, while inflation is expected to increase to around 7½ percent mainly reflecting the increases in fuel taxes and the official exchange rate devaluation of late last year. The external current account deficit is expected to remain below 2 percent of GDP, as continued strong import growth would be offset by higher net exports from free trade zones and a surge in tourism receipts. Reflecting increased private capital inflows, an overall balance of payments surplus is anticipated, which would allow the import coverage of gross international reserves to remain about constant.

Executive Board Assessment

Executive Directors commended the authorities for the progress made in the last several years in strengthening the public finances, tightening credit and wage policies, and implementing structural reforms. In their view, those policies had contributed to the strong output growth and moderation of inflation of recent years. While expressing concern over the weakening of the public finances and the widening of the external current account deficit in 1996, as well as the continued low level of official international reserves, they welcomed the signs of improvement in the fiscal picture in 1997.

Directors emphasized the importance of the consolidation of fiscal and monetary discipline, together with prudent wage policies and the deepening of structural reforms, to reduce inflationary pressures, strengthen confidence in macroeconomic management, and improve the economy’s growth prospects. In that context, Directors welcomed the steps taken thus far in 1997 to raise government revenue and restrain spending and were encouraged by the reduction in the consolidated public sector deficit in the first half of the year. They strongly urged the authorities to take further steps aimed at raising revenues and cutting expenditures to eliminate the remaining fiscal deficit for the year as a whole. In that regard, some Directors expressed concern about the reduction in productive capital expenditure at the expense of increases in wages, subsidies, and transfers to public enterprises. They also emphasized the importance of increasing the transparency of public sector operations through the progressive elimination of domestic arrears, the transfer of the central bank’s quasi-fiscal operations to the central government budget, and the modernization of budgetary and expenditure control processes.

Directors noted that fiscal adjustment, the planned divestment of certain public sector assets, and increased resort to external borrowing at appropriate terms would allow a reduction of domestic interest rates—with a crowding-in of private investment—and some rebuilding of official international reserves. Directors urged further efforts to secure congressional passage of the long overdue modernization of the monetary and financial code, which is essential to further strengthen the supervision and prudential regulation of the financial system, as well as to improve the effectiveness of monetary policy.

Directors considered that, in view of the substantial progress that had been made toward exchange rate unification since late last year and the continuing foreign exchange market stability, a favorable opportunity existed for establishing a fully unified flexible exchange rate policy. Some Directors expressed concern over the consistency of the relatively fixed exchange rate and the mix of fiscal and monetary policies and encouraged a greater degree of flexibility in exchange rate management and a rebuilding of official international reserves.

Directors encouraged the authorities in their efforts to eliminate the remaining quantitative import restrictions and narrow tariff dispersion, while removing the remaining discrimination against imports contained in domestic indirect taxes. One Director emphasized the need for further progress toward a prompt resolution of the outstanding disputes on the public sector’s external debt-service payments.

Directors supported the authorities’ pursuit of a broad range of structural adjustment measures. Directors were encouraged particularly by the recent enactment of the law for restructuring public enterprises, which allowed for the privatization of most enterprises, and they welcomed the authorities’ determination to press for congressional approval of tax and trade reforms and a comprehensive reform of the social security system in the upcoming legislative session. At the same time, they encouraged the authorities to accelerate the planned restructuring of the government and civil service, as well as the granting of concessions to the private sector for infrastructure development and services. Directors also highlighted the importance of the ongoing reform of the public education system aimed at increasing employment growth and improving economic opportunities. Directors emphasized that major actions in all these areas would help improve the delivery of public services, free up resources that could be redirected to the fulfillment of social needs, and enhance the prospects for continued price stability and output growth.

Directors also encouraged the authorities in their efforts to improve the timeliness and quality of their economic and financial statistics.

Dominican Republic: Selected Economic and Financial Indicators

  1992 1993 1994 1995 Prel.

  In percent
Domestic economy  
    Change in real GDP 8.0 3.0 4.3 4.8 7.3
    Unemployment rate 20.3 19.9 16.0 15.8 16.7
    Consumer prices (end of year) 5.2 2.8 14.3 9.2 3.9
  In millions of U.S. dollars2
External economy  
    National exports, f.o.b. 637 600 737 905 962
    National imports, f.o.b. 2,785 2,722 2,900 3,200 3,647
    Free trade zones (net) 467 613 698 733 841
    Tourism receipts 1,029 1,235 1,418 1,552 1,755
    Transfers (net) 898 883 964 988 1,082
    Current account balance -582 -213 66 10 -232
    Direct investment 180 183 190 235 249
    Capital account balance 490 235 -408 118 236
    Gross official reserves 490 646 259 390 375
    Current account balance (in percent of GDP) -6.5 -2.2 0.6 0.1 -1.7
         of which: non-oil sector 4.6 -1.0 2.5 5.5 5.1
    Change in real effective exchange rate
       (in percent)3
4.8 2.1 6.1 4.1 2.5
  In percent2
Financial variables  
    Consolidated public sector balance (in percent of GDP) 1.6 -0.8 -4.5 -1.1 -1.7
         of which: quasi-fiscal losses 0.0 0.0 -0.8 -0.4 -0.6
    Change in broad money4 27.1 28.1 8.9 19.5 18.6
    Interest rate5 17.6 6.5 17.9 13.1 13.9

Sources: Central Bank of the Dominican Republic; and Fund staff estimates.

1IMF staff estimates.
2Unless otherwise noted.
3(+) = appreciation
4Money and quasi-money equal to currency in circulation, demand deposits and time and savings deposits.
5Interest on certificates of deposits with up to 180 days maturity.

1Under Article IV of the IMF’s Articles 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 prepare 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. In this PIN, the main features of the Board’s discussion are described.


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