IMF Executive Board Concludes 2009 Article IV Consultation with the Dominican Republic

Public Information Notice (PIN) No. 09/128
November 16, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On November 9, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the 2009 Article IV consultation with the Dominican Republic.1

Background

The Dominican economy has been adversely affected by the global crisis. Output has been below potential as real Gross Domestic Product (GDP) growth is decelerating rapidly from over 5 percent in 2008 to an estimated 0.5 to 1.5 percent in 2009. Inflation has fallen rapidly to -0.3 percent year-over-year in October 2009 as the supply shocks of last year have unwound. The external current account deficit is estimated to be around 6 percent of GDP in 2009, about 4 percentage points lower than in 2008, as imports have fallen more than exports, tourism and remittances. The banking system has withstood the global crisis and remains liquid, well-capitalized and profitable.

Monetary authorities have responded to the crisis in a timely manner, but fiscal policy has been constrained by a lack of external financing. The Central Bank lowered its policy interest rate by 550 basis points to 4 percent during 2009, and reserve requirements were also lowered by 250 basis points to 17.5 percent. Following a relaxed stance in 2008, fiscal policy has been tight in the first 3 quarters of 2009, as a decline in tax revenues of 10 percent to September (with respect to January–September 2008) was met with a larger decline in expenditures. The deficit of the consolidated public sector was about 2 percent of GDP during the first three quarters of 2009, or around 1 percentage point of GDP lower than during the first three quarters of 2008.

Structural impediments in the fiscal and electricity sector put a heavy burden on public finances. There is a risk that the decline in tax revenues observed in 2008-09 (of more than 10 percent) may be partly related to undue use of tax exemptions contained in competitiveness laws. Serious structural weaknesses continue to leave the state-owned electricity distribution companies with large losses. Untargeted subsidies to cover these losses remain a drain on public finances, absorbing over one percent of GDP in 2009. Notwithstanding these subsidies, the quality of service to citizens in the electricity sector remains very poor.

The authorities’ program aims to limit the effects of the global slowdown on the economy while establishing the conditions for robust and sustainable growth. The program is expected to catalyze financing from multilaterals for the conduct of a countercyclical fiscal policy in the short term, while monetary policy will remain flexible to respond to the liquidity needs of the economy. The medium-term program calls for a gradual fiscal consolidation to ensure sustainability as the economic activity rebounds. International reserves will also be increased to comfortable levels as the exchange rate is gradually made more flexible and the Central Bank adopts a full-fledged inflation targeting regime in the medium-term. The authorities’ program also aims to address fiscal impediments, especially in the area of revenue collection, and to eliminate untargeted electricity subsidies. The authorities‘ economic program is supported by a Stand-By Arrangement with the IMF, which was alslo approved by the Executive Board on November 9 (see Press Release 09/393).

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They noted that the global economic recession has significantly weakened the Dominican economy, with growth declining markedly in 2009. Inflation has remained subdued and the current account deficit narrowed. Directors welcomed the authorities’ economic program, which aims at returning the economy to its high, sustainable growth path, through flexible, countercyclical policies in the short run, and pursuing over the medium term a fiscal consolidation strategy and an ambitious structural reform agenda.

Directors supported the temporary fiscal stimulus in 2009-10, including the full play of automatic stabilizers, in light of well below potential output and as financing constraints are relieved. Fiscal policy could be relaxed as additional external financing is secured, targeting investment projects with high social returns while strengthening social safety nets. At the same time, Directors called on the authorities to follow through on their commitment to medium-term sustainability by shifting to a fiscal consolidation effort beginning in the second half of 2010. Work should start promptly on the planned structural measures, in particular improvements in tax administration, with Fund technical assistance, and on the elimination of untargeted electricity subsidies. The finalization and implementation of a comprehensive plan to address structural impediments in the electricity sector also remain a high priority.

Directors welcomed the flexible implementation of monetary policy, with a timely shift to an accommodative stance in 2009 to stimulate economic activity. While this stance remains appropriate at present, Directors noted the limited scope for further reducing policy interest rates, as well as banks’ high liquidity preference. Directors encouraged the monetary authorities to remain vigilant and stand ready to withdraw liquidity gradually as private credit picks up. They commended the authorities for the progress in strengthening the central bank as an effective monetary authority, and stressed the importance of proceeding with the recapitalization plan to enhance its credibility further.

Directors welcomed the monetary authorities’ commitment to a flexible exchange rate, and took note of the staff assessment that the real effective exchange rate is broadly in line with fundamentals. Given the relatively low level of international reserves, gradually introducing more flexibility within the current managed floating regime would help cushion potential external shocks. Consideration would also need to be given to continued strengthening of the monetary anchor, and Directors supported the authorities’ intention to move to an inflation-targeting regime once the supporting institutional framework has been put in place.

Directors welcomed significant improvements in the regulation, supervision, and financial strength of the banking system. As a result of previous reforms, the Dominican banking system remains liquid, solvent, and profitable, despite the global credit crunch. Directors emphasized the need to continue monitoring the system closely and stand ready to take necessary measures to prevent systemic problems. They encouraged the authorities to advance the implementation of risk-based consolidated bank supervision and regulation, and to formulate strategies for domestic capital market development and debt management.

Dominican Republic: Selected Economic Indicators

 

Main export products: tourism, textiles, nickel.

             

GDP per capita (U.S. dollars, 2008 PPP)

5,122  

Income share by highest

Population (millions, 2009 estimate)

10.1  

10 percent (percent, 2006)              39.0

Life expectancy at birth (years, 2008)

73.3  

Extreme poverty rate (2006)            13.1

Under 5 mortality rate (per thousand, 2008)

31  

Adult literacy rate (percent, 2007)     95.1

 
        Projections    
  2006 2007 2008 2009 2010 2011 2012
 

National accounts and prices

             

Nominal GDP (RD$ billion)

1,190 1,364 1,576 1,648 1,811 2,015 2,211

Dollar GDP (US$ billion)

35.3 41.0 45.5 45.5 47.8 52.2 56.5

Real GDP

10.7 8.5 5.3 0.5-1.5 2-3 6.0 6.0

Consumer price index (period average)

7.6 6.1 10.6 1.5-2.5 6-7 5.0 3.5

Consumer price index (eop)

5.0 8.9 4.5 6-7 6-7 4.0 3.0

Exchange rate (RD$/US$ - period average)

33.7 33.3 34.6

Exchange rate (RD$/US$ - eop)

33.8 34.3 35.5
               

Social Indicators

           

Unemployment rate (in percent)

16.4 15.6 14.0

Households below the poverty line (in percent)

             
               

Public finances 1/

             

Central government primary balance

0.2 1.7 -1.5 -1.1 -0.4 0.6 1.6

Total revenues (including grants)

16.2 17.6 15.8 14.0 14.5 15.3 15.7

Primary spending

16.0 15.8 17.4 15.1 14.9 14.7 14.1

Interest expenditure

1.4 1.6 1.7 2.0 2.2 2.2 2.2

Nonfinancial public sector overall balance

-0.9 0.1 -3.3 -3.1 -2.6 -1.6 -0.6

Quasi-fiscal balance of the central bank

-2.2 -1.8 -1.3 -1.4 -1.4 -1.4 -1.4

Consolidated public sector balance

-3.1 -1.7 -4.6 -4.5 -4.0 -3.0 -2.0

Of which: primary balance

0.4 1.8 -1.3 -0.8 0.0 1.0 2.0
               

Total public debt

39.5 35.8 35.5 39.0 40.3 40.2 38.7

Of which: foreign currency denominated

20.6 19.0 17.1 19.2 20.1 19.3 18.1
               

Money and credit

             

Liabilities to private sector (M3)

12.7 16.0 8.8 11.5 6.4 12.0 12.0

Currency issue

7.0 16.4 0.3 12.5 8.0 12.0 12.0

Deposits

4.5 17.0 10.7 12.0 10.2 12.0 12.0

Net domestic assets of the banking system

11.5 13.0 16.8 16.3 7.3 10.9 11.0

Credit to the private sector

14.3 26.3 8.8 6.0 11.9 12.0 12.0

M3, in percent of GDP

37.1 37.5 35.3 37.7 36.5 36.7 37.5
               

Balance of payments

             

Current account

-1,288 -2,096 -4,414 -2,814 -2,891 -2,524 -2,285

Merchandise trade balance

-5,564 -6,437 -9,174 -6,881 -7,107 -7,076 -7,353

Exports

6,610 7,160 6,782 5,272 5,796 6,738 7,447

Imports

-12,174 -13,597 -15,955 -12,154 -12,903 -13,814 -14,800

Of which: oil and gas

-2,788 -3,224 -4,241 -2,640 -3,220 -3,402 -3,552

Services and transfers (net)

4,276 4,341 4,759 4,067 4,216 4,552 5,068

Of which: interest on public debt 2/

-396 -428 -372 -442 -553 -604 -668

Capital and financial account

1,598 2,359 4,008 2,135 2,891 3,004 2,822

Of which: foreign direct investment

1,528 1,579 3,076 1,966 1,863 1,993 2,116

Errors and omissions

-147 357 104 359 0 0 0

Overall balance

164 620 -303 -320 0 481 537

Of which: change in NIR (increase -)

-268 -607 230 350 0 -481 -537
               

Current account (in percent of GDP)

-3.6 -5.1 -9.7 -6.2 -6.0 -4.8 -4.0

Exports of goods (in US$, annual percentage chg)

7.6 8.3 -5.3 -22.3 9.9 16.2 10.5

Imports of goods (in US$, annual percentage chg)

23.3 11.7 17.3 -23.8 6.2 7.1 7.1
               

International reserve position and external debt

             

Gross official reserves

2,251 2,946 2,662 2,566 2,942 3,914 4,506

(in months of imports) 3/

1.8 2.0 2.3 2.1 2.3 2.8 3.0

Net international reserves 4/

1,788 2,395 2,165 1,815 1,815 2,296 2,833

Outstanding external public debt, in percent of GDP

20.0 18.0 16.5 17.6 18.1 17.6 16.5

Oil price (WEO) (US$/bbl)

64.3 71.1 97.0 61.5 76.5 79.5 81.0
 

Sources: Dominican authorities; World Bank; and Fund staff estimates.
1/ Fiscal projections include unidentified measures.
2/ Includes interests on loans and bonds.
3/ In relation to imports of goods and nonfactor services of the following year.
4/ The projections for 2009-12 assume that all prospective purchases under the proposed SBA will be made to meet the gross reserves objectives of the balance of payments projections.


1 Under 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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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