Press Release No. 17/47

IMF Staff Completes 2016 Article IV Mission to The Dominican Republic

February 13, 2017

• The Dominican economy is in a cyclically strong position, with activity expanding at an average pace of 7 percent over the past three years.

• The fiscal position needs to be decisively strengthened to maintain sustainability in the face of increasing risks.

• Ambitious structural reforms remain critical to securing better longer-term growth and social outcomes in a fragile external environment.

An International Monetary Fund (IMF) mission led by Aliona Cebotari visited Santo Domingo during January 31–February 10, 2017, to conduct Article IV Consultation discussions. The mission met with government and Central Bank officials, think tanks, and the private sector. It exchanged views on economic developments and outlook, as well as policy challenges going forward. At the end of the visit, Ms. Cebotari issued the following statement:

‘The Dominican economy is in a cyclically strong position. With activity expanding at an average pace of 7 percent over the past three years, the economy is operating above potential, while positive supply shocks are muting inflationary pressures and strengthening the external position. Sustained strong growth and prudent policies of the past several years helped improve social indicators and build up confidence.

“Growth is projected to remain healthy while tapering off towards potential and inflation is expected to pick up towards target. Domestic demand will continue to drive growth, buoyed by recovering real incomes, growth in the U.S., and strong investment. Growth is expected to slow towards the potential rate of around 5 percent from 2017 onward, as both external and domestic financing conditions tighten. The recovery in fuel prices will push inflation to target and will widen the current account moderately during 2017.

“Risks around this baseline outlook are balanced. Key risks stem from the uncertainty surrounding the economic and policy outlook for the external trading partners, notably the U.S., the outlook for oil prices, higher than expected global interest rates and the ensuing dollar appreciation.

“The fiscal position needs to be decisively strengthened to maintain sustainability in the face of increasing risks. The government has improved the fiscal position in the face of increasing spending pressures, through overall expenditure restraint and a strong revenue administration effort. Nevertheless, large projected deficits for the consolidated public sector (including financial and non-financial public sector) would generate both sustainability and debt affordability pressures, especially in light of the tightening global financing conditions. A strong fiscal adjustment would be needed to secure debt sustainability, with a larger consolidation effort in the near term warranted by the still favorable economic conditions. The consolidation should be underpinned by a comprehensive reform to broaden the very narrow tax base, simplify the tax system and make it more equitable. This should go along with reforms to address the fiscal drag of the electricity sector and increase spending efficiency.

“Adopting a robust medium-term fiscal framework would ensure that annual fiscal policies are consistent with sustainability objectives. The medium-term fiscal framework should be anchored on a medium-term debt-to-GDP ratio and operationalized through a fiscal rule to deliver the debt target. Integrating fiscal responsibility objectives in the framework could further cement fiscal discipline.

“The tightening bias of monetary policy is appropriate, and progress towards a more flexible exchange rate framework should continue. Given upside risks to the inflation outlook stemming from global financial conditions, monetary policy is appropriately leaning towards tightening. We welcome the authorities’ commitment to continue to build up reserve buffers in the face of increased uncertainty, with foreign exchange interventions limited to smoothing excessive volatility. Staff strongly supported the authorities’ plans to move towards a progressively more flexible exchange rate, through building up market infrastructure and instruments to facilitate such a transition.

“Ongoing reforms to strengthen the macro-financial framework will help entrench financial stability. Financial soundness indicators for the banking system remain strong, and the authorities are appropriately focusing on addressing gaps in the regulation and supervision of nonbanks. Completing reforms that will address the gaps identified in the context of the recent Global Forum evaluation on tax transparency and those that could arise in the context of the upcoming Financial Action Task Force of Latin America evaluation on anti- anti-money laundering and combating the financing of terrorism will be important in preserving the integrity of the financial system. Staff supported the monetary authorities’ efforts to strengthen the macro-prudential framework through bolstering capacity to monitor and address systemic risks, further developing stress testing capacity and preparing financial stability reports.

“Ambitious structural reforms remain critical to securing better longer-term growth and social outcomes in a fragile external environment. The government’s reform agenda appropriately focuses on improving educational outcomes, boosting housing supply and strengthening social safety nets. At the same time, the dividend from the higher growth has accrued unevenly and significant bottlenecks to higher productivity and longer-term growth remain:

• Ongoing discussions on the electricity pact provide a unique opportunity to address the governance challenges, infrastructure gaps and pricing policies in the electricity sector, one of the major drags on growth.

• Other reforms that would preserve incentives for investment and improve the business environment include strengthened institutions and governance, increased predictability of the tax system, and continued public investment in infrastructure.

• Policies to boost employment—through improved labor markets, graduation from safety nets into labor force, and skill development and retooling through vocational training— would directly support government’s poverty-reduction objectives.

• Social protection could also be strengthened through expanded coverage of social insurance, addressing challenges in the public healthcare system, and policies to encourage formalization.

  “We would like to thank the authorities and counterparts at think tanks, private sector, and other organizations for the engaging discussions and hospitality.”