IMF Executive Board Completes Final Review Under the Stand-By Arrangement with the Dominican Republic

Press Release No. 08/17
February 4, 2008

The Executive Board of the International Monetary Fund (IMF) on January 30, 2008 completed the eighth and final review of the Dominican Republic's economic performance under the 36-month Stand-By Arrangement and approved the disbursement of an amount equivalent to SDR 77.05 million (about US$122.3 million), which will fully disburse the total amount available under the arrangement. The Stand-By Arrangement was approved on January 31, 2005 (see Press Release No. 05/18) for SDR 437.8 million (about US$695.1 million) and extended to January 30, 2008 in February 2007 (see Press Release No. 07/25).

Directors commended the Dominican Republic authorities for the country's recovery from the 2002-2004 crisis. Prudent macroeconomic policies in a favorable external environment have restored confidence and delivered strong macroeconomic performance, with rapid GDP growth and single-digit inflation. Monetary policy has been skillfully managed and structural reforms have strengthened the policy framework.

The Executive Board also approved requests for five waivers of nonobservance of performance criteria related to the non-financial public sector overall surplus, the accumulation of external arrears, the consolidated public-sector primary surplus for 2008, congressional approval of monetary and financial law amendments, and implementation of the treasury single account.

Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chairman, made the following statement:

"The Dominican Republic's recovery from the 2002-04 financial crisis has been impressive. The authorities are to be commended for their prudent macroeconomic and financial policies under the Fund-supported arrangement, which have helped to restore confidence and deliver rapid economic growth, single-digit inflation, declining debt ratios, a robust external position, and a strengthened financial sector.

"The medium-term outlook is positive, and has been enhanced with the activation of the Dominican Republic-Central America Free Trade Agreement and the new economic partnership agreement with the European Union. Continued prudent macroeconomic and financial policies, against the background of a strengthened structural framework and these new trade agreements, should help the country reach its long-term growth potential, while lowering the external current account deficit. The managed float exchange rate regime is serving the country well, and the continued build-up of international reserves provides welcome insurance against external shocks.

"Key structural reforms have significantly strengthened the policy framework. New laws and regulations have revamped fiscal management institutions and procedures, allowing for better planning and control of fiscal spending and indebtedness. Electricity theft and fraud has been criminalized, which will help reduce the electricity sector's need for budgetary support. The law mandating the central bank recapitalization should strengthen the central bank's financial independence, accountability, and credibility. Banking regulation has been bolstered by a risk-based, consolidated approach to supervision.

"Maintaining fiscal consolidation and single-digit inflation during the upcoming electoral period will require control of public spending, and readiness to tighten monetary policy promptly should the need arise. Over the medium term, it is important to have increased, better targeted, and more efficient social spending. To ensure that adequate resources are available for critical social goals, it seems desirable to limit energy subsidies, reform the tax system, and broaden the tax base, including by rationalizing tax exemptions. Further efforts over the medium term will also be needed to ensure primary surpluses that enable the reduction of the public debt burden to the pre-crisis level.

"The Executive Board regrets the misreporting of data on external arrears in 2007 which led to non-complying purchases by the Dominican Republic under the Stand-By Arrangement, and a breach of obligation under Article VIII, Section 5. Taking into account the corrective actions the authorities have taken following these events, to ensure that external arrears and misreporting do not recur, the Executive Board agreed that no further action is required at this juncture. At the same time, the need for the authorities to comply strictly with reporting requirements to the Fund was emphasized," Mr. Portugal said.



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