Press Release No. 05/227

Press Release: IMF Executive Board Completes Fifth Review of Dominica's PRGF Arrangement, Approves US$1.7 Million Disbursement

October 17, 2005

The Executive Board of the International Monetary Fund (IMF) has completed the fifth review of Dominica's performance under its three-year Poverty Reduction and Growth Facility (PRGF) arrangement. The Board also completed Dominica's financial assurances review, which is required in accordance with the IMF Guidelines on Conditionality to ensure adequate safeguards of IMF resources, and approved a waiver for the non-observance of a continuous performance criterion on nonaccumulation of external payments arrears.

Additionally, the Executive Board approved a one-year extension of Dominica's repayment expectations to the IMF in a total amount equivalent to SDR 1.3 million (about US$1.8 million) arising from December 22, 2005 through December 22, 2006. The repayments will now fall due exactly one year after these dates.

As a result of the Executive Board's completion of the fifth review, Dominica can draw an amount equivalent to SDR 1.2 million (about US$1.7 million) under the PRGF arrangement, which will bring total disbursements to SDR 5.4 million (about US$7.7 million). The Executive Board approved Dominica's three-year PRGF arrangement on December 29, 2003 (see Press Release No. 03/228) for an amount equivalent to SDR 7.7 million (about US$11.1 million).

Following the Executive Board's discussion of Dominica on October 14, Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, made the following statement:

"The Dominican economy has achieved a remarkable turnaround since the low-point of 2001-02, and is now set to record the second straight year of above average growth. The recovery is to a large extent a reflection of the authorities' successful implementation of their economic program and the resulting restoration of confidence. Continued progress with the reform agenda is essential to sustain the current momentum and address remaining vulnerabilities in the economy.

"The clearest evidence of the success of Dominica's adjustment program has been the marked strengthening of public finances. As a result, the public debt burden has been set on a downward course. Recent legislative changes will boost the efficiency of tax collection and increase the transparency of public finances.

"Public debt is still high, however, and fiscal policy will need to remain geared towards further debt reduction. The 2005/06 budget targets a primary surplus that appropriately balances the need to reduce debt with the need to reinstate the 5 percent cut in public wages introduced in the 2003/04 budget. Looking ahead, it will be important to continue targeting fiscal surpluses consistent with the objective of reducing debt to a more manageable level, including by a focused effort on containing the government's wage bill. Ideally, the aim should be to reduce the debt-to-GDP ratio to at least 60 percent over the next decade, which would provide an anchor for public expectations and improve the credibility of fiscal policy.

"Finalizing the debt-restructuring process will also help provide clarity to the debt issue. Dominica has made commendable progress in reaching collaborative agreements with most creditors, and continues to demonstrate good faith by depositing payments to nonparticipating creditors into escrow accounts under the restructured terms. It is a concern that agreements with the remaining nonparticipating creditors have not yet materialized. Although there appears to be progress in most cases, the recent actions by one outstanding creditor is unfortunate. As a result, continued efforts will be needed to reach a collaborative agreement and hence to complete the debt restructuring process in a timely fashion.

"A fundamental challenge going forward is to underpin the current growth momentum with further progress on structural reforms. Addressing remaining risks to public finances will be critical, including those from the large unfunded liabilities of the social security system. Removing bottlenecks that are impeding private investment should also be a high priority. This calls for reforming the electricity market to allow new entrants, rationalizing the existing investment promotion agencies, and modernizing the land registration process to ensure comprehensive coverage. Indeed, over time, such reforms to create a more enabling business environment are more likely to stimulate private sector led growth than the current reliance on tax incentives. Reducing financial sector vulnerabilities by strengthening regulatory oversight will also be important for maintaining macroeconomic stability.

"The Dominican authorities are seeking to bring all the different elements of the reform agenda together in their forthcoming Growth and Social Protection Strategy document. The premise is that progress in lowering unemployment and reducing poverty will depend critically on consolidating gains made in macroeconomic stabilization and on fostering a more conducive business environment. With the rebound in economic activity, the government is in a good position to carry out an ambitious reform agenda that will have a lasting impact on the economy. The international community, in turn, should actively support the authorities' efforts and objectives," Mr. Carstens said.