Public Information Notices
Dominican Republic and the IMF
IMF Concludes Article IV Consultation with Dominican Republic
On August 6, 1999, the Executive Board concluded the Article IV consultation with Dominican Republic.1
Since 1992, the Dominican Republic has achieved an extended period of high real GDP growth and low inflation by implementing sound macroeconomic policies, adopting important structural reforms, and normalizing relations with external creditors. Annual real GDP growth has averaged over 6 percent; inflation has been held to single digits; and the consolidated public sector and external current account deficits have narrowed substantially. The current account deficit was more than financed by foreign direct investment, allowing for a gradual buildup in official international reserves in recent years. Importantly, external public sector debt fell from 72 percent of GDP at end-1990 to 22 percent of GDP at end-1998, and all external arrears were normalized.
In October 1998, the IMF Executive Board approved a request for emergency assistance in an amount equivalent to SDR 39.7 million (25 percent of the Dominican Republic's quota at the time). In the wake of damage caused by Hurricane Georges, the Dominican Republic also received some temporary debt relief from bilateral creditors, as well as emergency loans from the World Bank and the Inter-American Development Bank.
Preliminary data for 1998 indicate that real GDP growth slowed modestly to an estimated 7.3 percent. The 12-month inflation rate accelerated to 7.8 percent by end-1998, reflecting in part a sharp rise in prices driven by hurricane-related shortages of food and building supplies during the fourth quarter. The consolidated public sector deficit widened to 2, percent of GDP in 1998, partly as a result of reconstruction expenditures. The external current account deficit rose to 2.2 percent of GDP in 1998, largely reflecting imports associated with rising foreign direct investment (FDI). Net capital inflows increased to over US$700 million in 1998 (mainly because of FDI), allowing net international reserves to rise by about US$100 million. At end-1998, gross official international reserves amounted to the equivalent of 0.9 months of next year's imports of goods and services and 12 percent of broad money.
So far this year, the economy has continued to perform well. Real GDP growth was 6.0 percent in the first half of the year (over the corresponding period a year ago); and the 12-month inflation rate fell to 6.4 percent by June 1999, from 7.8 percent at end-1998. Fiscal and monetary policies were tightened in early 1999. Interest rates increased and the peso stabilized, after depreciating by 3 percent against the U.S. dollar during the first two months of the year. Net international reserves rose by US$37 million in the first half of the year.
The authorities' program for 1999 aims at returning the economy to its path of sustainable economic growth and low inflation, in particular by accelerating the pace of structural reform. Real GDP growth is realistically projected by the authorities to remain strong at 7 percent, and a prudent monetary policy aims at lowering inflation to 5 percent. Net international reserves are programmed to increase by at least US$60 million. The consolidated public sector deficit is programmed to narrow substantially to 0.3 percent of GDP, while the external current account deficit is projected to widen to 3.3 percent of GDP, largely reflecting increased FDI (and associated imports) following the private capitalization of public enterprises (whereby a private company purchases 50 percent equity ownership, and receives management control). The authorities intend to reduce the fiscal deficit in 1999 with a view to building up government deposits in anticipation of larger-than-usual debt-service payments to bilateral creditors in 2000 and helping to clear domestic arrears.
The structural reform process gained momentum in the first half of 1999. The capitalization of the state-owned flourmill (Molinos Dominicanos) was completed in February; distribution and generation units of the Dominican Electricity Corporation were capitalized in April and May; and concessions were granted for operating and upgrading four international airports. The government is also planning to lease the 10 sugar mills owned by the state sugar company in September 1999.
Executive Board Assessment
Executive Directors commended the authorities for having maintained strong growth and relatively low inflation, despite the damage to the economy inflicted by Hurricane Georges. Directors noted that the prudent macroeconomic policies and international financial support had helped minimize the impact of the hurricane. Directors stressed that maintaining monetary and fiscal discipline, particularly in the run-up to the presidential election in May 2000, and accelerating the pace of structural reforms were essential to lay the foundation for sustained economic growth.
Directors welcomed the authorities' commitment to narrow the consolidated public sector deficit in 1999 and achieve equilibrium in the fiscal accounts in the medium term. They welcomed the measures already in place to control the public sector wage bill and to impose strict limits on noninterest expenditures. Directors underscored the need to make progress on the planned comprehensive review of public expenditure and to reallocate expenditure, notably towards social sector and poverty alleviation. Regarding revenue measures, Directors encouraged the authorities to seek prompt approval of the pending tax and tariff reform, and to allow domestic fuel prices to adjust automatically to changes in costs.On monetary policy, Directors encouraged an increasing reliance on indirect monetary policy instruments, which they saw as requiring parallel efforts to strengthen domestic financial markets. They urged the authorities to make greater use of open market operations, and supported efforts to enhance central bank independence and credibility. Directors welcomed the progress that the authorities were making in improving financial supervision and regulations, and encouraged the authorities to continue in their efforts in this area, including through a tightening of prudential guidelines.
Regarding the external position, Directors considered that a strengthening of the foreign reserve position should be an important policy goal. Directors advised the authorities to refrain from exchange market intervention, except for smoothing seasonal fluctuations and dampening excessive volatility. They urged the authorities to unify the exchange markets as quickly as possible, which would remove an existing multiple currency practice.
In the area of structural reforms, Directors welcomed the recent private capitalization of the state-owned electricity corporation and the progress being made in removing nontariff barriers. They observed that, while progress had been made in reducing the restrictiveness of the trade regime, the effective rate of protection remained relatively high for the region. Directors encouraged the authorities to push forward with social security reform and with reform of civil service and government institutions.
|Dominican Republic: Selected Economic and Financial Indicators|
|Real economy (change in percent, unless otherwise indicated)|
|CPI (end of period)||14.3||9.2||3.9||8.4||7.8|
|Open unemployment rate (average, in percent)||16.0||15.8||16.7||15.9||14.3|
|Gross national savings (percent of GDP)||21.1||20.2||19.5||21.0||23.6|
|Gross national investment (percent of GDP)||23.8||21.7||21.1||22.0||25.8|
|Financial indicators (change in percent, unless otherwise indicated)|
|Credit to the private sector||14.0||20.1||27.4||29.0||20.5|
|Liabilities to the private sector||11.1||21.0||19.9||23.5||20.6|
|Deposit rate (90-days, period average)||13.6||15.8||13.8||13.3||17.0|
|Lending rate (91-180 days, period average)||28.0||30.8||24.8||21.3||26.6|
|Public finance (percent of GDP)|
|Central government balance||-3.3||0.2||-1.7||-1.4||-1.6|
|Consolidated public sector balance1||-4.1||-1.0||-1.8||-2.1||-2.5|
|External public debt||36.6||32.9||28.3||23.3||22.3|
|External sector (in millions of US$)|
|National exports (f.o.b.)||736||872||946||1,017||889|
|National imports (c.i.f.)||2,992||3,164||3,581||4,192||4,897|
|Free trade zone exports (net)||805||901||961||1,180||1,400|
|(in percent of GDP)||-2.6||-1.5||-1.6||-1.1||-2.2|
|Gross official reserves||259||390||375||415||513|
|Real effective exchange rate|
|(percent change, appreciation +)||6.2||4.2||2.6||4.3||-5.4|
Sources: Central Bank of the Dominican Republic; and IMF staff estimates.
1Including quasi-fiscal operations.
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 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. In this PIN, the main features of the Board's discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT