## 1domea2021001 — Dominican Republic (IMF staff report excerpts) ## Source details **Canonical URL:** [1domea2021001 — Dominican Republic (IMF staff report excerpts)](https://www.imf.org/-/media/files/publications/cr/2021/english/1domea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1domea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1domea2021001.pdf.json) --- ### Recent developments, outlook, and recovery drivers - GDP contracted by "6.7 percent" in 2020; by 2021Q1, GDP expanded by "3 percent" year-on-year and activity in most sectors recovered to pre-pandemic levels. - Sectors: agriculture, construction, manufacturing surpassed pre-pandemic levels by end-2020; tourism not expected to fully recover until 2023. - Vaccination progress: "5.7 million" people with at least one dose (domestic campaign noted earlier); vaccination coverage as of June 23: "66.8 percent" of the adult population received at least one dose; "37.4 percent" fully vaccinated; authorities target immunizing "70 percent" of the population by September 2021 and "7.8 million" immunized people—over 70 percent of the population—by year-end. - Inflation: accelerated in the second half of 2020; consumer price inflation (e.o.p.) series: 1.2 3.7 5.6 4.5 4.0 4.0 4.0 4.0 4.0 (historical and projected). - Exchange rate: depreciation in early 2020 pushed core inflation up; slight peso appreciation in early 2021 reduced inflationary pressures; exchange rate used as shock absorber with two-sided interventions as volatility subsided. - External sector: current account deficit increased from 1.3 to 2 percent of GDP; more than fully financed by resilient FDI; remittances grew robustly (Workers' remittances, net as percent of GDP: 6.4, 6.8, 7.1, 7.4, 9.9, 10.1, 9.6, 9.2, 8.7, 8.3, 7.9 for 2016–2026). - Reserves: Net international reserves (NIR) end-2020 at US$10,752 million and stood at 81 percent of the ARA metric (72 percent in 2019); gross reserves (US$ million) projection series: 7,627 8,781 10,752 11,602 12,484 13,393 14,369 15,420 16,549 (projection years 2016–2026 shown in source). - Market access and debt issuance: government issued global bonds throughout 2020 (including in Dominican pesos) and in January 2021 issued US$ 2.5 billion to finance the 2021 budget; authorities bought back bonds maturing in 2021–2025 to extend maturities. ### Quantitative outlook and key macro projections - GDP growth (series shown in source): 7.0 5.1 -6.7 5.5 5.0 5.0 5.0 5.0 5.0. - Consumer price inflation (e.o.p.) series: 1.2 3.7 5.6 4.5 4.0 4.0 4.0 4.0 4.0. - Central government (percent of GDP): - Revenue: 14.2 14.4 14.2 14.9 14.1 14.2 14.3 14.3 14.3. - Expenditure: 16.4 16.6 22.1 18.3 17.3 17.1 17.1 17.0 17.0. - Consolidated public sector: - Overall balance (percent of GDP): -3.4 -3.3 -9.0 -4.9 -4.0 -3.8 -3.6 -3.5 -3.5. - Debt (percent of GDP): 50.1 53.2 71.1 67.9 66.9 65.7 64.4 63.1 61.9. - Balance of payments (percent of GDP): Current account: -1.5 -1.3 -2.0 -1.6 -1.5 -1.7 -1.9 -2.0 -2.1. - Selected Balance of Payments levels (US$ million): Current account: -815 (2016), -133 (2017), -1,322 (2018), -1,188 (2019), -1,541 (2020), -1,348 (2021), -1,364 (2022), -1,664 (2023), -1,957 (2024), -2,291 (2025), -2,535 (2026). - Foreign direct investment, net (US$ million): 2,407 (2016), 3,571 (2017), 2,535 (2018), 3,021 (2019), 2,678 (2020), 2,886 (2021), 3,105 (2022), 3,331 (2023), 3,574 (2024), 3,835 (2025), 4,116 (2026). - Gross international reserves (Table 6 memorandum, US$ million): 11,602; 12,484; 13,393; 14,369; 15,420; 16,549 for projection years 2021–2026. ### Fiscal policy stance, measures, and recommendations - Overarching stance: withdraw COVID support while balancing support for growth and vulnerable populations and securing fiscal sustainability; speed of fiscal adjustment guided by policy space and prioritization to improve quality of spending. - Short-term fiscal measures (2021 highlights): - Emergency outlays in 2021 expected to be about 40 percent of the amount spent in 2020—focused on extension of income and employment support and health spending (including vaccination). - One-off revenue projected for close to one percent of GDP from the concession of a recently-built electricity generation plant (Punta Catalina). - Investment to concentrate on high impact projects—including low-cost housing—and rely further on public-private partnerships. - Strict control of non-priority spending to protect critical spending. - Overall, the primary deficit excluding one-off revenues will fall by about 3½ percent of GDP to reach a broadly neutral position. - Social programs and targeting: - Quedate en Casa merged with Comer es Primero to create Supérate from May 2021; Supérate monthly transfers of RD$1,650 covering 1.3 million households (up from 800 thousand under Comer es Primero pre-COVID). - Emergency spending composition for 2021 (percent of GDP): Total 1.3; Key social programs 0.7 (Quedate en Casa / Supérate 0.7; FASE 0.1); Health spending 0.5 (Vaccines 0.4; PCR tests and other 0.1). - Fiscal framework and governance reforms: - Recommendation to enact a fiscal responsibility law (FRL) with a medium-term debt target and fiscal rules. - Revenue administration reforms and short- and medium-term actions (registry review, focus on large taxpayers and illicit trade, expand electronic tax receipt pilot to 100 largest taxpayers, restart audits of high-risk taxpayers, develop risk-based tax debt management). - Public finance management enhancements: SIGEF reporting, budget report on fiscal risks, improved multi-year and results-based budgeting, strengthened procurement due diligence and transparency portal, audit reports of COVID-related expenditures in second half of 2021. - Tax policy: exemptions close to 5 percent of GDP (two-thirds associated with consumption taxes); authorities assessing gradual reforms and a fiscal pact to simplify the tax system and revise exemptions. - Electricity sector reforms: - Transfers to the electricity sector ~1 percent of GDP in 2020 and expected to be reduced by half. - Generation shifting away from expensive oil to cheaper sources (gas, coal); governance enhancements to liquidate CDEEE and transfer policymaking; document defining electricity pact measures to be finished by end-June. ### Debt dynamics, stress tests, and alternative reform scenario - 2020 debt increase drivers (exact contributions): COVID-driven primary deficit, growth, real interest rate, and exchange rate collectively accounted for 13.3 percent of GDP; pre-financing the 2021 deficit by 1.6 percent of GDP; residual 3 percent of GDP likely NFPS deposits and BCRD certificates issuance. - Baseline consolidated public debt projection: decline to almost 60 percent of GDP by 2026 (series in source shows consolidated public sector debt: 50.1 53.2 71.1 67.9 66.9 65.7 64.4 63.1 61.9). - Effective nominal interest rate projected: 8.6 percent in 2020; 7.5 in 2021–22; 8.2 percent by 2026 (other tables show slightly varying paths by scenario). - Sovereign spreads and ratings: credit spread of 282 basis points (as of May 18, 2021); Moody’s Ba3 (stable as of March 26, 2021); S&P and Fitch BB- (outlooks revised to negative in 2020). - Alternative staff scenario (reforms and debt dynamics): - Revenue mobilization: reduce tax exemptions to increase collection by one percentage point of GDP by 2024. - Electricity reforms: move to cost-recovery tariffs and revise subsidy policies (excluding BONOLUZ transfers) yielding ½ percent of GDP in fiscal savings. - Impact: reduce consolidated public sector deficit to less than 2 percent of GDP by 2026 and public debt to pre-pandemic levels. ### Financial sector resilience, measures, and exit sequencing - Financial system performance (2020): - Total assets of deposit-taking institutions increased by almost 20 percent; deposits increased by 26 percent. - Loan portfolio increased by 1 percent; loan-to-deposits ratio below 1. - Regulatory capital to risk-weighted assets: 21.1 (financial system, 2020); commercial banks: 18.7 (2020). - NPLs to total loans: 1.9 (2020); Loan provisions to NPLs (financial system): 203.9 (2020); commercial banks loan provisions to NPLs: 216.9 (2020). - Return on average assets: 1.8 (2020); Liquid funds to deposits: 30.5 (financial system), 30.7 (commercial banks). - Emergency measures in 2020: - Policy rate reduced by 150 basis points from 4.5 to 3 percent. - REPO facility rate cut from 6.0 to 3.5 percent. - Overnight deposit rate reduced from 3.0 to 2.5 percent. - Reserve requirements reduced up to RD$36 billion (about 0.8 percent of GDP) — equivalent to a 3¼ percent reduction in reserve requirements; freed resources earmarked for credits capped at 8 percent for up to 4 years. - New repo windows for RD$55 billion (about 1.2 percent of GDP) for targeted on-lending. - Collateralized liquidity window for DR$125 billion (about 2.75 percent of GDP). - Provided US$0.6 billion (about ¾ percent of GDP) through repo operations and FX reserve requirements relaxation. - Exit sequencing and safeguards: - As regulatory flexibility (credit risk classification) expires, anticipate deterioration in reported asset quality; prepare with increased provisioning and continued supervision. - Available excess capital above the 10 percent minimum sufficient to absorb provisioning needs under stressed assumptions. - Banks allowed to gradually build provisions during a transition period until end-2023; banks using transition subject to dividend restrictions. - Exit strategy must be based on intensive monitoring, asset quality transparency, and targeted supervisory responses to maintain solvency without undermining lending capacity. ### Central bank recapitalization, governance, and FX policy - Central bank recapitalization: - New legal amendment (approved by the senate and under consideration by the lower chamber) targets gradual recapitalization of the BCRD via a trust fund mechanism to replace existing certificates as they mature; treasury to be sole beneficiary receiving remaining liabilities. - Arrangement includes governance representation (treasury, BCRD, independent member), transparency rules, and biannual reviews of issuance strategy. - Safeguards assessment (January 2021) recommended legislative reforms to strengthen governance, institutional autonomy, independent oversight, accountability, and alignment with international reporting standards; early steps for IFRS implementation and audit enhancements in progress. - Exchange rate and reserves: - Reserve coverage increased to 81 percent of the IMF ARA metric (72 percent in 2019); if regime classified as flexible, reserves would be about 119 percent of the ARA metric. - FX interventions were double-sided in 2020 with net sales exceeding purchases by US$5 billion; authorities pursued two-sided interventions to prevent excessive volatility. - Recommendation: continue reserve accumulation and exchange rate flexibility with interventions focused on limiting excess volatility; develop intervention rules and communicate objectives to improve FX market performance. ### External sector assessment and risks - Current account: 2 percent of GDP deficit in 2020; historical average CA ~3.5 percent of GDP. - NIIP: declined to -75 percent of GDP in 2020 from -63 percent in 2019; projected improvement to -58 percent by 2026. - External debt (percent of GDP): baseline series 41.9 (2017), 40.2 (2018), 41.9 (2019), 56.4 (2020), 55.3 (2021), 53.7 (2022), 52.3 (2023), 50.9 (2024), 49.1 (2025), 47.4 (2026). - Stress tests: - Standardized 30 percent exchange rate depreciation is the most important risk, yielding a significant increase in external debt ratio. - Under a combined shock, external debt and financing needs rise markedly compared with baseline. - Reserve adequacy: NIR end-2020 US$10.7 billion (14 percent of GDP); coverage ratios well above traditional metrics (months of prospective imports, broad money, ST debt). - Policy recommendation: timely publication of FX interventions and communication of objectives to support precautionary buffer build-up. ### Social policy, human capital, and structural priorities - Poverty and social impacts: - Poverty rate halved between 2010 and 2018; pandemic increased poverty—Ministry estimates poverty rose from 21 percent to 23.4 percent in 2020; IDB projection increase of 6.3 percentage points after accounting for remittances and government support measures. - Emergency programs (2020) raised social benefits from 1.3 percent of GDP in 2019 to 4.1 percent of GDP in 2020. - Social program reforms: - Supérate consolidates Quedate en Casa and Comer es Primero with monthly transfers of RD$1,650 to 1.3 million households. - Targeting improvements recommended: Single Beneficiary System (SIUBEN) transformation into Universal Social Registry, remove nonpoor beneficiaries gradually, develop monitoring procedures. - Consider instituting unemployment insurance and strengthen pension systems as automatic stabilizers. - Education and health: - Education: public spending nearly doubled to over 4 percent of GDP in 2013; PISA outcomes low; expansion of teaching hours and skills alignment with private sector recommended. - Health: Family Health Insurance coverage increased from 79 percent in 2019 to 92 percent in October 2020; child immunization improved dramatically; remaining challenges in maternal and infant programs and prenatal screening (only 38 percent undergo regular prenatal screening). - Gender and inclusion: - High gender inequality; UNDP Gender Inequality Index ranks Dominican Republic among highest in region; policy agenda includes expanding shelters, support for female entrepreneurs, legal reforms, and targeted measures to reduce adolescent pregnancies. - Climate and disaster risk: - Frequency of natural disasters increased; losses about ½ percent of GDP per year on average historically; NDC-2020 commitments include emissions reduction of 27 percent by 2030. - Recommendations: accelerate National Climate Action Plan, invest in resilient infrastructure, consider risk-transfer instruments and pooled insurance schemes. ### Risks, scenarios, and policy responses (high-level) - Main global risks: asynchronous vaccine deployment, prolonged pandemic, faster containment, sharp rise in global risk premia, intensified geopolitical tensions, de-globalization, cyber-attacks, and climate-related disasters. - Domestic risks: delays in reforms could hamper consolidation and growth; timely reforms could raise potential growth and lower risk premia. - Risk matrix responses include: prioritize health and social spending, liquidity support, extend regulatory flexibility with transparency, anchor fiscal framework (FRL), accelerate structural reforms, continue reserve accumulation, and enhance disaster resilience. - Public debt risk profile: - Average maturity 12.7 years (up from 7.4 years in 2013); share of short-term debt 2.5 percent; share of foreign-currency denominated debt 75.6 percent; share held by non-residents 57 percent. - Stochastic simulations: 66 percent probability debt remains below 70 percent of GDP under symmetric scenario; 45 percent under asymmetric adverse scenario. ### Staff appraisal and recommended sequencing - Staff view: recovery well underway but risks elevated; recommended sequencing: - Short-term: strengthen policy frameworks and governance without affecting growth—enact fiscal responsibility legislation; recapitalize central bank to enhance independence and reduce quasi-fiscal losses. - Medium-term: revenue mobilization via broadening tax base and revising exemptions; electricity sector reforms to create fiscal space while protecting investment and social spending. - Structural reforms: improve social programs focused on labor market insertion, education support, climate adaptation, reduce regulatory burden, modernize labor code, narrow skills gaps, and address logistics bottlenecks and gender inequality. - Next Article IV consultation advised on the standard 12-month cycle. *Source: IMF staff report (content unit 1domea2021001).* ### 2021. The staff comprised Esteban Vesperoni (head), Pamela Madrid, ### BUILDING ON STRONG FUNDAMENTALS ### Recent developments, outlook, and risks - Pandemic impact and recovery - GDP contracted by 6.7 percent in 2020, weighed down by services; other sectors (agriculture, construction, manufacturing) surpassed pre-pandemic levels by end-2020. - By 2021Q1, GDP expanded by 3 percent year-on-year and activity in most sectors recovered to pre-pandemic levels. - Tourism is not expected to fully recover until 2023; arrivals are increasing faster than in peers. - Inflation and monetary developments - Inflation accelerated in the second half of 2020, growing since June at an above target (4±1 percent) pace driven by supply shocks (food and oil). - Exchange rate depreciation in early 2020 pushed core inflation up; a slight peso appreciation in early 2021 reduced inflationary pressures. - External sector and reserves - Current account deficit increased from 1.3 to 2 percent of GDP. - The current account was more than fully financed by resilient FDI. - Net international reserves (NIR) stood at 81 percent of the ARA metric and surpassed individual benchmarks. - Market access and public debt - The country issued global bonds throughout 2020 (including in Dominican pesos) and in January 2021 issued US$ 2.5 billion to finance the 2021 budget. - Authorities bought back bonds maturing in 2021–2025 to extend maturities and reduce short-term financing needs. - Financial sector resilience - Total assets of deposit-taking institutions increased by almost 20 percent; deposits increased by 26 percent. - Regulatory flexibility and central bank liquidity support allowed banks to refinance or restructure loans; reported substandard loans increased only marginally and capital adequacy improved. - Some deterioration in reported asset quality is expected as regulatory flexibility expires; banks increased provisioning, leading to slight decline in profitability in 2020. - Vaccination and recovery drivers - Domestic vaccination campaign had covered 5.7 million people with at least one dose. - Authorities target 7.8 million immunized people—over 70 percent of the population—by year-end. - US spillovers, strong foreign investment, remittances, and resumed construction projects support recovery. ### Quantitative outlook (selected figures from staff projections and recent data) - Historical and projected GDP growth and inflation (series shown in source): - GDP growth: 7.0 5.1 -6.7 5.5 5.0 5.0 5.0 5.0 5.0 - Consumer price inflation (e.o.p.): 1.2 3.7 5.6 4.5 4.0 4.0 4.0 4.0 4.0 - Government finances (central government; in percent of GDP): - Central government revenue: 14.2 14.4 14.2 14.9 14.1 14.2 14.3 14.3 14.3 - Central government expenditure: 16.4 16.6 22.1 18.3 17.3 17.1 17.1 17.0 17.0 - Consolidated public sector overall balance: -3.4 -3.3 -9.0 -4.9 -4.0 -3.8 -3.6 -3.5 -3.5 - Consolidated public sector debt: 50.1 53.2 71.1 67.9 66.9 65.7 64.4 63.1 61.9 - Balance of payments: - Current account: -1.5 -1.3 -2.0 -1.6 -1.5 -1.7 -1.9 -2.0 -2.1 - Foreign direct investment: -3.0 -3.4 -3.4 -3.4 -3.4 -3.4 -3.4 -3.4 -3.4 - Gross reserves (US$ million): 7,627 8,781 10,752 11,602 12,484 13,393 14,369 15,420 16,549 ### Policy discussions and recommendations - Overarching stance - Withdrawal of COVID support should balance supporting growth and vulnerable populations with securing fiscal sustainability. - Speed of fiscal adjustment should be guided by policy space and prioritization to improve quality of spending, including better targeting of social support. - Strengthening fiscal framework and governance can build consensus for reforms to increase fiscal space once the pandemic subsides. - Short-term fiscal policy - Fiscal program envisages withdrawal of fiscal support while protecting social and health spending. - One-off revenue projected for close to one percent of GDP from the concession of a recently-built electricity generation plant (Punta Catalina). - Emergency outlays in 2021 expected to be about 40 percent of the amount spent in 2020—focused on extension of income and employment support and health spending (including vaccination). - Investment to concentrate on high impact projects—including low-cost housing—and rely further on public-private partnerships. - Strict control of non-priority spending to protect critical spending. - Overall, the primary deficit excluding one-off revenues will fall by about 3½ percent of GDP to reach a broadly neutral position. - Social programs and targeting - Quedate en Casa will be merged with Comer es Primero to create Supérate from May 2021, improving targeting through a better beneficiary registry and provisions for insertion into formal labor markets. - Emergency spending composition for 2021 (in percent of GDP): Total 1.3; Key social programs 0.7 (Quedate en Casa / Supérate 0.7; FASE 0.1); Health spending 0.5 (Vaccines 0.4; PCR tests and other 0.1). - Monetary and liquidity measures in 2020 (as implemented) - Policy rate reduced by 150 basis points from 4.5 to 3 percent. - REPO facility rate cut from 6.0 to 3.5 percent. - Overnight deposit rate reduced from 3.0 to 2.5 percent. - Reserve requirements reduced up to RD$36 billion (about 0.8 percent of GDP) — equivalent to a 3¼ percent reduction in reserve requirements; freed resources earmarked for credits capped at 8 percent for up to 4 years. - New repo windows for RD$55 billion (about 1.2 percent of GDP) for targeted on-lending. - Collateralized liquidity window for DR$125 billion (about 2.75 percent of GDP) to fund lending to the productive sector, micro enterprises, and households. - Provide US$0.6 billion (about ¾ percent of GDP) through repo operations and FX reserve requirements relaxation. - Financial sector and prudential sequencing - As regulatory flexibility (notably on credit risk classification) expires, anticipate some deterioration in reported asset quality; prepare with increased provisioning and continued supervision. - Maintain measures that support financial intermediation as corporations rebuild balance sheets. - Structural priorities - Pursue fiscal and electricity sector reforms and measures to enhance governance and the business climate to accelerate debt consolidation and potential growth. - Improve transparency, efficiency, and expenditure controls to increase fiscal space for critical spending. ### Risks and scenarios - Main risks (Annex II) - COVID-19: Prolonged pandemic or slower vaccine deployment could deter growth and weaken the external position; faster global containment could provide positive spillovers. - External risks: Tighter financial conditions, higher commodity prices (including oil), de-globalization, extreme weather events, and cyberattacks could negatively affect growth and external position; stronger-than-expected US spillovers could be positive. - Domestic risks: Timely implementation of reforms could raise potential growth and lower risk premia; delays would hamper consolidation. - Staff view versus authorities - Authorities view the recovery as dynamic, forecasting 5½–6 percent growth for 2021 (staff forecast noted as conservative relative to this range). - Authorities expect inflation to return to the target range by end-2021 and see export performance, remittances, and FDI supporting the external position. *DOMINICAN REPUBLIC — INTERNATIONAL MONETARY FUND (staff report excerpt).* ### 17. Central bank forward guidance points to a supportive monetary policy stance. The ### 17. Central bank forward guidance points to a supportive monetary policy stance. The ### Monetary policy stance and inflation - Monetary policy stance expected to remain accommodative in the short term, coupled with liquidity support. - Impact of supply shocks should recede in the second half of 2021. - Remaining output gap and anchored inflation expectations within the inflation target band should help bring down inflation. - Continued monetary support is warranted as long as inflation expectations remain well-anchored and inflation returns to the target range as supply shocks dissipate in the fall. ### Fiscal policy balance and social protection (Key measures in 2021) - Withdrawal of fiscal support is a prudent response to place public debt on a downward trajectory, while protection of social spending and monitoring of inflation are critical. - Social programs: - Quedate en Casa: Extended until April 2021. Recipients will thereafter receive benefits under the Superate program. - Superate: From May 2021, replaces Quedate en Casa/Comer es Primero. Monthly transfers will be of RD$1,650 and will cover 1.3 million households (up from 800 thousand under Comer es Primero pre-COVID). - FASE I: Extended to April 2021. Covers workers with suspended labor contracts (transfers up to 70 percent of formal wages, minimum of RD$5,000 and maximum of RD$8,500). - Assistance fund for tourism sector: From May to July 2021. Covers suspended workers of the tourism sector, and workers of particular categories of the sector. Monthly transfers will be between RD$5,000 to RD$8,500 (up to 70 percent of the last reported salary). ### Fiscal consolidation and debt outlook - A return to the pre-pandemic fiscal position will ensure that the consolidated public sector debt gradually converges to close to 60 percent of GDP by 2026 and remain sustainable, but subject to higher risks from debt levels and vulnerable to growth shocks (Annex III). - Given the fiscal tightening, continued monetary support is warranted while inflation expectations remain well-anchored. - Authorities: Control of non-priority spending and fiscal space due to conservative revenue assumptions (tax collection through April is above budget targets). ### Improving the fiscal framework and governance - A fiscal responsibility law (FRL) with a medium-term debt target and fiscal rules is recommended to anchor medium-term fiscal policies and signal commitment to fiscal sustainability. - Continued efforts to improve fiscal governance and transparency: - Revenue administration reforms and short-term actions with Fund technical assistance: reviewing the registry and risk profiles, focusing on large taxpayers and illicit trade, expanding an electronic tax receipt pilot project to the 100 largest taxpayers, restarting audits of high-risk taxpayers, and developing risk-based projects on tax fraud. - Medium-term reforms: establish more robust risk-based tax debt management, compliance risk management and an enhanced audit function. - Enhancing public finance management: plan approved to make public administration more efficient; president instructed all public entities to report spending through SIGEF; budget now includes a report on fiscal risks; multi-year and results-based budgeting were improved. - Strengthening procurement and accountability: enhanced due diligence of suppliers with identification of ultimate beneficiaries; bi-annual internal audits of delivery performance; a special fraud unit at the Comptroller General; a new monitoring system and a transparency portal providing information on transaction amounts, status of contracts, individual suppliers and contract details; audit reports of COVID-related expenditures will take place in the second half of 2021. - Staff encourages publication of suppliers’ beneficial ownership in the transparency portal. ### Debt and cash management - Authorities conducted the first global debt management operation, lengthening maturities and reducing costs, and are conducting regular and transparent domestic auctions. - Plans to further develop domestic government securities markets, seek opportunities to reduce interest costs, and continue to improve risk management. - Progress made to control use of lines of credit and arrears and to improve cash management. ### Tax policy and revenue mobilization - Broadening the tax base by reducing tax exemptions would help secure sustainability and create fiscal space. - Exemptions are close to 5 percent of GDP, but two-thirds are associated with taxes on consumption. - Authorities assessing reforms to be implemented gradually and called on the Economic and Social Council to discuss a fiscal pact to simplify the tax system and revise existing exemptions. ### Electricity sector progress and fiscal implications - Progress areas: - Generation moving away from expensive oil-based generation to cheaper sources, notably to gas but also coal. - Governance enhancements: decree that, once fully implemented, will liquidate CDEEE, transfer policy making to the Ministry of Mines and Energy, and strengthen the regulatory body. - Operational cost reductions, including financial costs through better liquidity management that avoids arrears to generators. - An investment plan being defined to reduce transmission losses. - Transfers to the electricity sector stood at about 1 percent of GDP in 2020 and are expected to be reduced by half. - Remaining needs: address below-cost tariffs, poorly targeted subsidies, and reduction of non-technical electricity losses. A document defining specific measures within the electricity pact should be finished by end-June. ### Alternative staff scenario on reforms and debt dynamics - Two elements in the alternative scenario: - Revenue mobilization efforts to reduce tax exemptions that will gradually increase collection by one percentage point of GDP by 2024. - Gradual move to cost-recovery tariffs and revision of subsidy policies on high consumption—excluding BONOLUZ transfers to low-income families—that would yield ½ percent of GDP in fiscal savings, eliminating transfers to the electricity sector over the medium term. - Impact: - Would reduce the consolidated public sector deficit to less than 2 percent of GDP by 2026, and public debt to pre-pandemic levels. ### Financial sector measures and resilience - Emergency measures in 2020: - Lower reserve requirements and BCRD’s emergency liquidity windows allowed banks to refinance about 12 percent of their loan portfolio, in particular to SMEs. - Regulatory flexibilization allowed banks to benefit from lower risk weights and provisioning rates when using the emergency facilities. - Asset quality barely changed in 2020, but deterioration expected to become visible in regulatory reporting as emergency measures expired at end-March 2021 and corporations report 2020 financials. - System-level buffer: - Available excess capital—above the 10 percent minimum requirement—is high enough to absorb potential increases in provisioning needs, even under stressed assumptions. - Banks will be allowed to gradually build provisions during a transition period until end-2023. Banks using the transition period will be subject to dividend restrictions. - Exit strategy from emergency forbearance must be based on intensive monitoring, asset quality transparency, and targeted measures; supervisory responses should be targeted to maintain solvency without undermining the banking system’s capacity to support the recovery. ### Central bank recapitalization and safeguards - A new legal amendment (approved by the senate and under consideration by the lower chamber) targets a gradual recapitalization of the BCRD via a trust fund mechanism to replace existing certificates as they mature, unloading the BCRD balance sheet; the treasury will be the only beneficiary, receiving the remaining liabilities. - The arrangement includes governance representation of the treasury, BCRD, and an independent member elected jointly, transparency rules, and biannual reviews of the issuance strategy. - Recapitalization is critical to strengthen the central bank’s financial and institutional independence and can potentially reduce risk premia on bond issuances. - Safeguards assessment (January 2021) recommended legislative reforms to strengthen governance, institutional autonomy, independent oversight of the board, improved accountability and transparency, alignment of audit and financial reporting with international standards, early steps for IFRS implementation and enhancements to the auditing process are in progress. ### Exchange rate policy and reserves - Exchange rate flexibility and further accumulation of reserves can continue buffering the shock and preserving confidence and stability. - Reserve coverage has increased to 81 percent of the IMF’s reserve adequacy (ARA) metric (72 percent in 2019). - Authorities pursued two-sided interventions to prevent excessive volatility; the new foreign exchange trading platform was key to channel orderly interventions. - Continued reserve accumulation and exchange rate flexibility with interventions focused on limiting excess volatility recommended. - Development of intervention rules and proper communication of objectives would help improve FX market performance. ### Regulatory agenda and medium-term reforms - Medium-term regulatory agenda should realign the framework with best practices: banking resolution and the financial safety net, the Basel framework, international accounting standards, the macroprudential toolkit, and stress-testing capabilities. - For credit and savings cooperatives—total assets of about 2 percent of GDP—adequate regulation and supervision arrangements need to be put in place. - These reforms should be restarted once the economic recovery has firmly taken hold, not postponed until after the phase-out period. *Source: IMF staff report (content unit 1domea2021001 - 17).* ### 33. The authorities highlighted the importance of monetary policy support. They see ### The authorities highlighted the importance of monetary policy support ### Monetary policy, exchange rate, and central bank governance - Continued accommodative policy is seen as important to providing certainty and supporting the recovery while maintaining close monitoring of inflation. - BCRD recapitalization is described as "of the essence"; discussions on the way forward continue. - Authorities committed to letting the exchange rate reflect fundamentals while avoiding excess volatility and see trends in capital flows as favorable to continue building buffers. - The electronic exchange trading platform for foreign exchange has made the FX market more efficient. - The BCRD plans to further increase transparency by communicating interventions rules going forward, as the pandemic recedes. - Authorities are reviewing recommendations in the safeguards assessment to further strengthen central bank governance. ### Financial regulatory exit strategy and supervision - Authorities are closely monitoring exit from regulatory flexibility and moving closer to international standards is on the agenda. - The exit strategy aims to provide banks room to gradually close provisioning gaps while avoiding premature tightening of credit conditions. - Banks—large ones in particular—have voluntarily increased provisions. - Over the medium term, authorities intend to: - Better align financial regulation and supervision with more advanced Basel and international accounting standards. - Introduce macroprudential tools and best practices for stress testing and other analytical tools. - Consider Fund TA support to advance this agenda. - Authorities are working on strengthening the AML/CFT and consumer protection frameworks and agreed on the need to enhance regulation and supervision of financial cooperatives. ### Inclusive growth and structural bottlenecks - Despite improvements, enhancing the business climate remains a post-pandemic policy priority; Dominican Republic gained four notches in one year in the World Economic Forum Global Competitiveness assessment (improvements in ICT adoption, financial system depth and stability, business dynamism and innovation capacity). - Structural bottlenecks identified: - Product and labor market reforms: reduce transport and logistics costs, improve sea and air transport facilities, modernize the labor code (a multisectoral dialogue for broader labor and social security reform was launched by the president in May). - Reliable electricity provision: recent steps reduced exposure to volatile oil prices and reduced electricity generation prices; plans to invest in transmission to reduce service disruptions and meet demand. - Getting credit: strengthen movable collateral laws and credit information systems; authorities are authorizing a third credit bureau and amending a transitory clause of the Law on Real Estate Guarantees, to be implemented in 2023. - Skills gap: private company surveys to identify required skills and expanded school hours as first steps to align education with labor market needs (see Annex IV). - Governance and institutions: reduce regulatory compliance burden, foster policy independence from political pressures, control corruption; government appointed a new Attorney General and is strengthening the AML/CFT framework. ### Climate change, AML/CFT, and social policy priorities - Climate vulnerabilities: - Frequency of natural disasters has increased since the early 2000s, with losses of about ½ percent of GDP per year on average. - Climate strategy guided by NDC-2020, prioritizing water and food security, health, resilient cities, ecosystems, coastal-marine resources, and tourism. - Greenhouse emissions reduction plan: 27 percent by 2030 (covers energy, transportation, agriculture, waste management); underpinned by private sector support and development partner assistance. - A recently issued US$100 million "green bond" received the first Climate Bond certification in the country. - AML/CFT progress and priorities: - 2019 Enhanced Follow-up Report highlighted significant progress on technical compliance: enhanced securities exchange firms’ due diligence, enhanced due diligence for insurance sector, audit systems in cooperatives sector, improved functionality of the Financial Intelligence Unit. - Since then, progress on registering and training "obligated reporters" in the nonfinancial sector and using financial intelligence to prosecute crimes involving a broader list of predicate offenses. - National Risk Assessment update began in March 2021 with World Bank support to expand coverage of DNFBPs, including casinos and credit cooperatives. - Reform priorities: improve risk-based supervisory frameworks for DNFBPs; use preventive measures (customer due diligence, electronic suspicious transaction reporting, recordkeeping); strengthen financial intelligence, capacity for financial investigations, interagency cooperation; enforce greater transparency on ultimate beneficial ownership information. - Social policy: - Between 2010 and 2018, the poverty rate was halved by strong growth and targeted policy action. - The pandemic increased the poverty headcount, exacerbated the gender gap, and disrupted academic programs. - Authorities implemented temporary targeted programs to support basic needs and employment and expanded healthcare coverage. - As emergency programs unwind, reforms to make social support balanced and well targeted while prioritizing employment, education, health and social equity outcomes are emphasized. - Authorities committed to addressing weaknesses in education quality, skill gaps, and gender inequality; improving social programs through better targeting and increased emphasis on labor market insertion is critical. ### Fund relations, outlook, and staff appraisal - Fund relations and debt service capacity: - The Dominican Republic has adequate capacity to repay the Fund; sound debt service track record and low risks from RFI exposure. - DSA shows debt to be sustainable and the country has capacity to repay the Fund, with scheduled RFI repayments at no point exceeding 1.4 percent of exports or 2.4 percent of reserves. - Staff appraisal highlights: - Pandemic interrupted a growth spell but policy response was decisive: increased health expenditures and social transfers, targeted tax relief, tax deferrals in 2020, swift vaccination starting early 2021; central bank lowered policy rate and expanded liquidity; Monetary Board introduced prudential flexibility. - Growth outlook: economy expected to grow by 5½ percent in 2021 and gradually close the output gap, including as tourism recovers. - Inflation: supply shocks have driven inflation up in recent months, but anchored inflation expectations and the temporary nature of the shocks should allow inflation to converge to the target over the policy horizon. - External position: broadly in line with fundamentals; current account deficit increased modestly as weak tourism receipts were partially offset by remittances and exchange rate buffering; remained fully financed by resilient FDI; international reserves increased strongly. - Fiscal policy: withdrawal of fiscal support is guided by available policy space to place public debt on a downward trajectory; staff welcomes authorities’ decision to protect social and health spending through strict controls of non-priority spending and improved targeting with renewed focus on labor market insertion. - Financial sector: regulatory response to pandemic appropriate; financial system resilient and continues to support the economy. Exit strategy from temporary regulatory forbearance is well designed and should remain based on intensive monitoring, asset quality transparency, and targeted measures. - Recommended reform sequencing and priorities: - Short-term: strengthen policy frameworks and governance without affecting growth—fiscal responsibility legislation to anchor medium-term policies; recapitalization of the central bank to enhance independence and reduce quasi-fiscal losses. - Medium-term: revenue mobilization through broadening the tax base and revising tax exemptions; further electricity sector reforms to create fiscal space while protecting investment and social spending. - Structural reforms to foster inclusive growth: make social programs more effective and focused on labor market insertion and education support; adapt and mitigate climate change risks; reduce regulatory burden through more effective public institutions; modernize the labor code for flexible and formal work arrangements; narrow skills gaps; address business practices that thwart competitiveness—especially in logistics—and social issues such as rural poverty and gender inequality. - Institutional note: - It is recommended that the next Article IV consultation takes place on the standard 12-month cycle. *Source: 1domea2021001 - 33.* ### 14.7 percent in June 2020 (y/y). ### 1domea2021001 - 14.7 percent in June 2020 (y/y) ### External sector developments and foreign exchange - "14.7 percent in June 2020 (y/y)." - With high BCRD FX sales, but since July FXI became two-sided again as FX volatility subsided. - International reserves increased, in part due to government placement of eurobonds and IFI disbursements. - Sovereign spreads have returned to pre-COVID levels and remain in line with peers. - BCRD FX interventions (net purchases >0, net sales <0) shown across sampling dates; chart range illustrated net FX sales and purchases between -300 and 700 (millions USD) and Official ER, peso per USD (RHS). - Coefficient of Variation: US Dollar Exchange Rates — DOM max-min range presented in chart series (no numerical summary beyond chart). - Gross International Reserves (chart series) shown with Reserve requirements and Other components (in million USD). - Gross International Reserves (Table 6 memorandum): 11,602; 12,484; 13,393; 14,369; 15,420; 16,549 (US$ million) for projection years 2021–2026 (as listed). ### Current account, financing, and external flows - Current account deficit is relatively low and more than financed by net FDI. - Current account (Table 4, levels, US$ million): -815 (2016), -133 (2017), -1,322 (2018), -1,188 (2019), -1,541 (2020), -1,348 (2021), -1,364 (2022), -1,664 (2023), -1,957 (2024), -2,291 (2025), -2,535 (2026). - Current account (Table 4, percent of GDP): -1.1, -0.2, -1.5, -1.3, -2.0, -1.6, -1.5, -1.7, -1.9, -2.0, -2.1 (2016–2026). - Foreign direct investment, net (US$ million): 2,407 (2016), 3,571 (2017), 2,535 (2018), 3,021 (2019), 2,678 (2020), 2,886 (2021), 3,105 (2022), 3,331 (2023), 3,574 (2024), 3,835 (2025), 4,116 (2026). - Services, net and Travel, net highlighted as significant contributors to net inflows (chart series, percent of GDP). - Remittances: remittance receipts grow robustly; Workers' remittances, net as percent of GDP: 6.4, 6.8, 7.1, 7.4, 9.9, 10.1, 9.6, 9.2, 8.7, 8.3, 7.9 (2016–2026). ### Foreign exchange market operations and exchange rate - The exchange rate has helped buffer the shock, with interventions to smooth volatility. - Foreign Exchange Intervention (FX purchases, FX sales, Net FXI) plotted as percent of GDP in chart series. - Nominal depreciation of the Dominican Peso vs. US Dollar: sample data points shown with Apr-11 through Apr-21 index series; specific datapoints in chart include Aug-13, 9.7; Aug-14, 1.5; Apr-19, 2.2; Jun-20, 14.7. - BCRD interventions: FX purchases, FX sales, and net FX sales series presented (millions USD). ### Financial sector developments - DTIs are dominated by banks, with the top 5 accounting for almost 75 percent of the assets. - The loan portfolio increased by 1 percent, while total assets increased almost 20 percent in 2020. - The asset growth was mainly financed by deposits, resulting in a loan-to-deposits ratio of below 1 (chart series in million Dominican pesos). - As a result of capital conservation and supported by regulatory flexibilization, the capital ratio increased to 21.1 percent. - With borrowers reporting their 2020 financials and the end of regulatory flexibility, the impact on asset quality is expected to become only visible in the first half of 2021. - Banks (large ones in particular) have increased the provisioning coverage ratio; DTIs can fall back on excess capital if needed. - Market composition and assets charts display Total assets, Loans, Securities, Cash or near cash, and Other assets (2016–2020, in million Dominican pesos). Key financial system indicators (Table 5, end of year, percent): - Financial system regulatory capital to risk-weighted assets: 21.1 (2020). - NPLs to total loans (financial system): 1.9 (2020). - Loan provisions to NPLs (financial system): 203.9 (2020). - NPLs net of provisions to net worth (financial system): -11.8 (2020). - Return on average assets (financial system): 1.8 (2020). - Liquid funds to deposits (financial system): 30.5 (2020). Commercial banks (Table 5, selected): - Regulatory capital to risk-weighted assets: 18.7 (2020). - NPLs to total loans: 1.9 (2020). - Loan provisions to NPLs: 216.9 (2020). - Return on average assets: 1.8 (2020). - Liquid funds to deposits: 30.7 (2020). ### Public sector accounts and fiscal outlook - Central Government revenue and expenditure (Table 2a, percent of GDP): Revenue 13.9 (2016), 14.0 (2017), 14.2 (2018), 14.4 (2019), 14.2 (2020), 14.9 (2021), 14.1 (2022), 14.2 (2023), 14.3 (2024), 14.3 (2025), 14.3 (2026). - Central Government expenditure (percent of GDP): 17.0 (2016), 17.1 (2017), 16.4 (2018), 16.6 (2019), 22.1 (2020), 18.3 (2021), 17.3 (2022), 17.3 (2023), 17.1 (2024), 17.1 (2025), 17.0 (2026). - Consolidated Public Sector Debt (percent of GDP, memorandum): 46.2 (2016), 48.5 (2017), 50.1 (2018), 53.2 (2019), 71.1 (2020), 67.9 (2021), 66.9 (2022), 65.7 (2023), 64.4 (2024), 63.1 (2025), 61.9 (2026). - Consolidated public sector overall balance (percent of GDP): -4.0 (2016), -4.0 (2017), -3.4 (2018), -3.3 (2019), -9.0 (2020), -4.9 (2021), -4.0 (2022), -3.8 (2023), -3.6 (2024), -3.5 (2025), -3.5 (2026). - Central Bank quasi-fiscal balance (percent of GDP): -1.3 (2016), -1.2 (2017), -1.1 (2018), -1.0 (2019), -1.4 (2020), -1.3 (2021), -0.9 (2022), -0.8 (2023), -0.8 (2024), -0.8 (2025), -0.8 (2026). Key fiscal levels (Table 2b, in billion Dominican Pesos): - Central Government revenue (2016–2021 sample): 484 (2016), 531 (2017), 601 (2018), 657 (2019), 632 (2020), 731 (2021). - Central Government expenditure (2016–2021 sample): 592 (2016), 649 (2017), 693 (2018), 757 (2019), 985 (2020), 901 (2021). - Nominal GDP (billion DR$): 3,487 (2016), 3,803 (2017), 4,236 (2018), 4,562 (2019), 4,457 (2020), 4,911 (2021), 5,362 (2022), 5,852 (2023), 6,386 (2024), 6,972 (2025), 7,612 (2026). ### Banking system summary and balance of payments highlights - Table 3 presents banking system aggregates (in billions of Dominican pesos): Net foreign assets, Net domestic assets, Net credit to the nonfinancial public sector, Credit to the private sector, Capital and accumulated surplus, Liabilities to the private sector, Deposits, Broad money (M3), and M3 Velocity (ratio of GDP to M3) across 2017–2026 projections. - Table 4 Balance of Payments (key items, US$ million): Exports f.o.b. 9,840 (2016), 10,135 (2017), 10,638 (2018), 11,193 (2019), 10,297 (2020), 11,216 (2021). Imports f.o.b. 17,399 (2016), 17,734 (2017), 20,197 (2018), 20,268 (2019), 17,047 (2020), 19,835 (2021). - Services, net and Income, net series provided; primary and secondary income and their contributions to the current account displayed in percent of GDP. ### Indicators of Fund credit and debt service - Table 6 (Indicators of Fund Credit, in millions of SDRs and memorandum items): Existing and Prospective drawings (RFI) 477.4 (in percent of quota) 100.0 (2021). - Amortization schedule includes 119.4 and 238.7 in projected years. - Total debt service (SDR terms and percent of exports/GDP/GIR) detailed in Table 6. - Outstanding stock (SDR): 477.4 (2021), 477.4 (2022), 358.1 (2023), 119.4 (2024), 0.0 (2025 onward) as listed. - Memorandum items: Exports of goods and services (US$ million): 18,174 (2021), 19,966 (2022), 22,020 (2023), 24,443 (2024), 26,856 (2025), 29,667 (2026). GDP (US$ million): 85,042 (2021), 91,508 (2022), 98,169 (2023), 105,318 (2024), 113,024 (2025), 121,300 (2026). US$/SDR exchange rate: 1.43 (across projection years). *Sources: National authorities, Bloomberg, IMF WEO, and IMF staff calculations.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Background — Current Account, Trade, and Real Exchange Rate - Current account (CA) deficit in 2020: 2 percent of GDP. - CA in 2018 and 2019: 1.5 and 1.3 percent of GDP, respectively. - Historical average CA: around 3.5 percent of GDP. - 2020 drivers: collapse in tourism (second quarter), lower oil imports, strong remittances, and gold exports. - Trade and CA outlook: trade deficit projected to widen slightly as activity recovers; exports (particularly from free trade zones) and tourism expected to rebound; FDI expected to remain around 3–4 percent of GDP over the medium term. - Remittances: contributed to partly offsetting tourism collapse in 2020. - Real effective exchange rate (REER): average REER depreciated by 12 percent in 2020, reflecting nominal depreciation against the U.S. dollar; nominal exchange rate depreciated by 10 percent between end-December 2019 and end-June 2020. ### Capital and Financial Flows; International Investment Position - Net FDI inflows in 2020: US$2.7 billion (3.4 percent of GDP); 2019: US$3 billion. - Net portfolio inflows in 2020: US$5.7 billion (versus US$2.2 billion in 2019); expected to moderate over next two years. - NIIP (Net International Investment Position): declined to -75 percent of GDP in 2020 from -63 percent of GDP in 2019; deterioration mainly due to public borrowing in global markets to finance pandemic-related spending. - NIIP projection: improvement to -58 percent by 2026 under baseline projections. - External debt: increased in 2020 by 14 percent of GDP (temporary); public sector external debt ≈ three-quarters of total in 2020; private external debt mostly corporate. - External debt baseline level (Table A1.1): 56.4 percent of GDP in 2020; projected decline to 47.4 percent of GDP by 2026. ### Assessment of External Position - Overall assessment for end-2020: broadly in line with fundamentals and desirable policy settings; external position assessed to be aligned with medium-term fundamentals and desirable policies in 2020. - EBA-lite (current account) results: - Underlying current account gap: 0.5 percent of GDP. - COVID-19 adjustors applied for 2020: remittances (-0.16 percent of GDP), oil trade balance (-0.97 percent of GDP), tourism collapse (1.99 percent of GDP). - Additional adjustment for temporary/statistical factors: -0.4 percent of GDP (includes boost in remittances related to U.S. immigration policy uncertainty). - EBA-lite places REER undervaluation at 3 percent. - External Stability (ES) approach: suggests sustainability; NIIP weakening in 2020 considered mainly temporary; projections consistent with gradual reduction in external liabilities and regained sustainability. - REER approach: multilaterally consistent estimates indicate an exchange rate undervaluation of 45 percent, but staff notes the gap is driven by a large residual and places greater weight on the current account approach. ### Reserve Adequacy and Foreign Exchange Intervention - Net international reserves (NIR) end-2020: increased by 22 percent to US$10.7 billion (14 percent of GDP). - NIR coverage relative to IMF ARA metric: - NIR stood at 81 percent of the applicable metric at end-2020 (de facto crawl-like regime classification). - NIR coverage in 2019: 72 percent. - If regime classified as flexible, reserves would amount to about 119 percent of the ARA metric. - Reserve coverage and traditional metrics: coverage ratios well above traditional metrics (months of prospective imports, broad money, and short-term debt on remaining maturity basis). - Additional reserves needed to reach IMF reserve-metric of 100: table reports values (example trends shown) — staff notes reserves better aligned with IMF reserve adequacy metric than in the past. - Foreign exchange (FX) intervention in 2020: - FX interventions increased amid high FX market volatility. - Interventions were double-sided; overall net sales exceeded purchases by US$5 billion in 2020. - At crisis outset there were FX sales while allowing depreciation; in second half of 2020 authorities bought reserves amid inflows; purchases were sterilized. - Policy recommendation regarding FX transparency: markets would benefit from more transparent FX intervention — timely publication of interventions and communication of objectives — to support continued precautionary buffer build-up. ### External Debt Sustainability and Stress Tests - External debt dynamics: staff consider the 2020 increase temporary with projections indicating substantial reduction to 47 percent of GDP by 2026. - Medium-term resilience: external debt sustainability assessment shows resilience to several shocks, but the most important risk identified is a standardized shock of a 30 percent exchange rate depreciation, which results in a significant increase in the external debt ratio. - External debt and financing needs (Table A1.1 snapshot): - Baseline external debt: 41.9 (2017), 40.2 (2018), 41.9 (2019), 56.4 (2020), 55.3 (2021), 53.7 (2022), 52.3 (2023), 50.9 (2024), 49.1 (2025), 47.4 (2026) — (in percent of GDP). - Change in external debt (row 2): 0.1 (2017), -1.7 (2018), 1.7 (2019), 14.5 (2020), -1.1 (2021), -1.6 (2022), -1.4 (2023), -1.4 (2024), -1.9 (2025), -1.7 (2026). - Gross external financing need (in billions of US dollars): 3.5 (2016), 4.2 (2017), 3.5 (2018), 5.0 (2019), with projected increases toward 6.2 (2026) (table provides multi-year series). - Stress test scenarios (selected outcomes from Figure A1.1 and text): - Interest-rate shock, CA shock, growth shock, combined shock, and a one-time 30 percent real depreciation were analyzed. - A 30 percent real depreciation yields a marked increase in external debt ratio (depicted in figure; baseline 47 percent by 2026 vs much higher under the 30 percent depreciation scenario). - Key macroeconomic assumptions underlying baseline (selected): - Real GDP growth: -6.7 percent in 2020; projected 4.1 percent in 2021 and 5.0 percent from 2023 onward. - Nominal external interest rate: 4.5 percent in 2020; projected 3.8 percent in 2021 and rising gradually thereafter. - Growth of exports (US$ terms): -29.6 percent in 2020; projected 2.4 percent in 2021 and higher growth in ensuing years. *Source: Annex I. External Sector Assessment, IMF staff calculations and national authorities.* ### Annex II. Risk Assessment Matrix ### Annex II. Risk Assessment Matrix ### Global Risks — summary of material risks and policy responses - Unexpected shifts in the Covid-19 pandemic (Asynchronous progress; limited access to, and longer-than-expected deployment of, vaccines in some countries) - Relative Likelihood: Medium - Expected Impact: Medium/Downside - Key implications: - Could interrupt the reopening, weakening demand for contact intensive services, slowing growth and improvement of balance sheets and fiscal accounts. - A longer than expected deployment of vaccines globally could dampen the recovery of tourism, weaken the external position, lead to slower growth, higher risk premiums, depreciation and some loss in reserves, further limiting policy space. - Policy responses: - Prioritize fiscal spending towards more health and social benefits. - Continue with liquidity support targeted to the most severely affected sectors. - Extend regulatory flexibility to allow the most affected sectors to re-finance loans while ensuring transparency and monitoring of banks' financial positions. - Anchor the fiscal framework to signal commitment to reducing debt in the medium-term. - Unexpected shifts in the Covid-19 pandemic (Prolonged pandemic) - Relative Likelihood: Medium - Expected Impact: High/Downside - Key implications: - Constrains recovery including tourism; recovery slower and narrower (more based on merchandise trade growth). - Constrains improvements in balance sheets and fiscal accounts; leads to tighter financial conditions (higher risk premium), limits policy space. - Could exacerbate social outcomes gaps in education, health and poverty; constrain future growth and worsen inequality. - Policy responses: - Prioritize fiscal spending and anchor the fiscal policy framework to signal commitment to reducing debt gradually in the medium-term. - Accelerate structural reforms to reduce scarring, strengthen competitiveness, and maintain exchange rate flexibility. - Unexpected shifts in the Covid-19 pandemic (Faster containment) - Relative Likelihood: Medium - Expected Impact: High/Upside - Key implications: - Faster containment would allow for a faster and more broad-based recovery, with services and tourism accelerating versus the baseline. - Faster strengthening in balance sheets and improvement in fiscal accounts; could lead to lower risk-premia and a stronger exchange rate. - Policy responses: - Depending on the impact on inflation, monetary policy may need to be tightened sooner. - Emergency support measures (liquidity assistance and regulatory flexibility) can be withdrawn sooner. - Sharp rise in global risk premia - Relative Likelihood: Medium - Expected Impact: Medium/Downside - Key implications: - Abrupt change in global risk appetite could lead to sudden sharp increases in global interest rates from decompression of risk premia, pressuring sovereign financing costs, the exchange rate, and the fiscal position. - Policy responses: - Strengthen the fiscal position, including by anchoring the fiscal framework and reforming the electricity sector. - Review public debt management to access less costly financing while containing financing risks by increasing domestic sources. - Continue building reserve buffers and tighten monetary policy if needed. - Intensified geopolitical tensions and security risks - Relative Likelihood: High - Expected Impact: Medium - Key implications: - Oil supply and demand shocks may cause large and persistent price swings; fuel prices may rise above current expectations, reducing real income, decreasing demand and output and widening the external current account and fiscal deficits. - Policy responses: - In the short-term, assess potential second-round effects on inflation and inflation expectations and adjust the monetary policy stance if needed. - Continue electricity sector reforms to limit the negative impact of higher oil prices on the fiscal position, while using fiscal space to mitigate social impacts. - Structural risks: Accelerating de-globalization - Relative Likelihood: Medium - Expected Impact: Medium/Downside - Key implications: - Escalating and sustained trade actions threaten global trade, creating uncertainty about growth and adverse confidence effects. - Policy responses: - Continue structural reforms to strengthen external competitiveness and maintain exchange rate flexibility. - Structural risks: Cyber-attacks on critical infrastructure, institutions, and financial systems - Relative Likelihood: Medium - Expected Impact: High/Downside - Key implications: - Breach of critical financial and commercial digital infrastructure or broader institutions can trigger systemic financial instability or widespread socio-economic disruptions. - Policy responses: - Improve legal, institutional, and strategic frameworks. - Devise a centralized plan and cross-sector common rules to combat cyberattacks. - Structural risks: Higher frequency and severity of natural disasters related to climate change - Relative Likelihood: Medium/Low - Expected Impact: Medium/Downside - Key implications: - Hurricanes, earthquakes, floods and droughts can result in important economic, social and fiscal costs. - Policy responses: - Accelerate implementation of the National Climate Action Plan. - Build structural and financial resilience, including through disaster insurance. ### Domestic Risks and reform upside - Domestic reforms - Relative Likelihood: High - Expected Impact: High/Upside - Key implications: - Timely structural reforms could improve confidence, increase near-term growth momentum, raise potential growth and equity. - Fiscal reforms could reduce the NFPS deficit, lower the sovereign risk premium and increase fiscal space in the medium-term. - Policy responses: - Stand ready to adjust monetary, financial and fiscal policies as needed, including the pace of withdrawal of emergency support measures. - Build buffers more rapidly. ### Public Debt Sustainability — key findings, projections, and risks - Debt definition and context - Public debt defined as the sum of consolidated debt of the non-financial public sector (NFPS) and central bank (BCRD) debt net of recapitalization bonds issued by the central government and held by the central bank. - Including BCRD debt intends to capture debt issued as a consequence of the BCRD’s financial support to failed banks during the 2003 financial crisis. - 2020 debt increase drivers (exact contributions) - The increase in 2020 debt levels largely reflects the impact of the COVID crisis on the primary deficit, growth, the real interest rate, and the exchange rate—collectively accounting for 13.3 percent of GDP. - The increase is also related to the authorities’ decision to pre-finance the 2021 deficit—by 1.6 percent of GDP. - The remaining residual—3 percent of GDP—is likely explained by an increase in NFPS deposits and BCRD certificates issuance not related to the quasi-fiscal deficit. - BCRD certificates increase was the equivalent of 2.2 percent of GDP, while the BCRD’s quasi-fiscal deficit was 1.3 percent of GDP. - Baseline debt projections - Consolidated public debt-to-GDP ratio is projected to decline to almost 60 percent of GDP by 2026. - The primary deficit in 2020 was 4.3 percent of GDP. - The primary balance is projected to increase to an average 1.1 percent in the medium-term (2023–26), in line with the pre-pandemic level in 2019. - Debt-stabilizing primary deficit is 0.6 percent. - Sovereign yields and interest rates - Credit spread of 282 basis points relative to U.S. Treasury Bonds (as of May 18, 2021). - Effective nominal interest rate projected path: - 8.6 percent in 2020 - 7.5 in 2021–22 - 8.2 percent by 2026 - Rating agencies: Moody’s at Ba3 (stable outlook as of March 26, 2021); S&P and Fitch at BB- (outlooks revised to negative in 2020). - Government placed $2.5 billion in January 2021 at yields similar to January 2020; the issue was four times over-subscribed. - Bond placements and debt management (selected items from 2020-21) - Examples of placements and terms (as reported): - $1 billion, 10 years, 4.5% - $1.5 billion, 40 years, 5.875% - $1.8 billion, 12 years, 4.875% - $1.7 billion, 40 years, 6.25% - RD$17.5 billion ($0.3 billion), 6 years, 10% - $1.3 billion, 12 years, 4.875% - In December 2020, the government completed an external debt management operation that reduced debt service by US$1.1 billion over 2021-25. The operation reopened the 2032 global bonds, with a debt exchange for four different U.S. dollar bonds maturing between 2021 and 2025. - 1/ Issued to buy back bonds maturing in 2021-2025: $0.4 billion in both 2021 and 2022; and $0.2 billion in both 2024 and 2025. - Gross financing needs and benchmarks - Gross financing needs remain well below the early warning benchmark over the medium term (i.e., 15 percent of GDP). - Gross financing needs in 2026 increase relative to prior years due to higher external and domestic bond amortizations. - The authorities plan a domestic debt management operation to further extend maturities and smooth needs. - Public debt risk profile (end-2020 NFPS characteristics) - Average maturity: 12.7 years (up from 7.4 years in 2013). - Share of short-term debt: 2.5 percent. - Share of foreign-currency denominated debt: 75.6 percent. - Share of floating rate debt: 15.9 percent (down from 20 percent in 2018). - Domestic debt (31 percent of NFPS debt): - Average maturity: 7.4 years. - Low share at floating rates: one percent. - About 20 percent in foreign currency. - 90 percent held by residents. - Share of public debt held by non-residents: 57 percent of total consolidated debt (above the upper benchmark of 45 percent). - Rollover risk mitigated by longer maturity—14.3 years—with 11 percent held by official creditors. - Heat map and net debt considerations - Pre-financing of the 2021 budget pushed public debt above 70 percent of GDP in 2020—subtracting NFPS deposits in the central bank, consolidated public sector debt would be below this level. - Staff projections imply the 70 percent threshold would not be crossed in the baseline over the projection period. - Using net debt, debt level risks would be depicted differently: moderate (yellow) risks only under the real GDP growth shock, and low risk (green) in all other scenarios. ### Realism of Baseline and stochastic assessments - Forecast biases and realism checks - Growth: Staff’s growth forecasts tended to be lower than actual outcomes during 2011-19, with a median forecast error of 0.28 percentage points; forecast bias has generally decreased in recent years. - Inflation: Forecasts tended to be downward biased until 2016; bias has declined significantly since 2016. - Fiscal adjustment: Large fiscal adjustment in 2021-22 reflects normalization of revenues, reduced COVID-related expenditures, and commitment in the 2021 budget to cut other spending. - The Dominican Republic ranks at the 59th percentile in terms of the 3-year average level of cyclically-adjusted primary balance (CAPB) during the forecast horizon among other debt market-access countries. - The Dominican Republic ranks at the 11th percentile in terms of the 3-year fiscal adjustment (driven by the unprecedented 2020 shock). - Stochastic simulations and probabilities - Fan charts: - Under the symmetric scenario, there is a 66 percent probability that debt will remain below the 70 percent of GDP benchmark for emerging economies over the medium term. - Under the asymmetric (adverse) scenario (which assumes no positive shocks to the primary balance), debt would remain below the 70 percent of GDP benchmark with a 45 percent probability. *Source: Annex II. Risk Assessment Matrix; Annex III. Public Debt Sustainability Assessment.* ### 11. Debt remains sustainable; risks have increased due to higher debt levels but are ### 11. Debt remains sustainable; risks have increased due to higher debt levels but are ### Debt outlook and fiscal assumptions - Public debt is projected to decline as the fiscal position gradually returns to pre-pandemic levels—a primary balance of around 1 percent, against a debt-stabilizing balance of -0.6 percent— aided by the recovery. - Main risk to the debt outlook: delays in the recovery. - Mitigant: moderate gross financing needs over the projection horizon. - Baseline projections (selected values from IMF staff table): - Nominal gross public debt: 44.1 (2019), 53.2 (2020), 71.1 (2021), 67.9 (2022), 66.9 (2023), 65.7 (2024), 64.4 (2025), 63.1 (2026), 61.9 (projection units: percent of GDP). - Public gross financing needs: 7.6 (2019), 6.7 (2020), 11.2 (2021), 6.3 (2022), 7.0 (2023), 8.5 (2024), 6.6 (2025), 6.7 (2026), 10.0 (projection units: percent of GDP). - Real GDP growth (in percent): 5.7 (2019), 5.1 (2020), -6.7 (2021), 5.5 (2022), 5.0 (2023), 5.0 (2024), 5.0 (2025), 5.0 (2026). - Inflation (GDP deflator, in percent): 4.5 (2019), 2.5 (2020), 4.7 (2021), 4.5 (2022), 4.0 (2023), 4.0 (2024), 4.0 (2025), 4.0 (2026). - Effective interest rate (in percent): 8.8 (2019), 8.9 (2020), 8.6 (2021), 7.5 (2022), 7.6 (2023), 7.6 (2024), 7.8 (2025), 7.8 (2026). - Change in gross public sector debt (cumulative): 1.6 (2019), 3.2 (2020), 17.9 (2021), -3.2 (2022), -1.0 (2023), -1.2 (2024), -1.3 (2025), -1.3 (2026), -1.2 (projection), -9.2 (cumulative). - Identified debt-creating flows (cumulative): 1.2 (2019), 0.8 (2020), 14.9 (2021), -3.1 (2022), -1.7 (2023), -1.8 (2024), -1.9 (2025), -2.1 (2026), -1.8 (projection), -12.4 (cumulative). - Primary deficit (in percent of GDP): 0.9 (2019), -1.1 (2020), 4.3 (2021), 0.1 (2022), -0.7 (2023), -0.9 (2024), -1.1 (2025), -1.2 (2026), -1.3 (projection), -5.1 (cumulative). - Primary (noninterest) revenue and grants: 14.1 (2019), 14.4 (2020), 14.2 (2021), 14.9 (2022), 14.1 (2023), 14.2 (2024), 14.3 (2025), 14.3 (2026), 14.3 (projection), 86.1 (cumulative). - Primary (noninterest) expenditure: 15.0 (2019), 13.3 (2020), 18.5 (2021), 14.9 (2022), 13.4 (2023), 13.3 (2024), 13.2 (2025), 13.1 (2026), 13.1 (projection), 81.0 (cumulative). ### Stress tests and alternative scenarios - Individual shocks: - Debt-to-GDP ratio is not expected to breach the 70 percent benchmark under stress tests, with the exception of a real growth shock. - One-standard deviation negative real GDP growth shock in 2022-23: - Debt would increase to a maximum of 74.9 percent of GDP by 2023 before declining to 71.1 percent by 2026. - This is 9.8 percent of GDP higher than under a no-shock scenario. - Alternative scenario where growth falls to the 2011-20 historical growth of 4.1 percent (includes COVID growth shock of -6.7 percent and compares with a pre-COVID historical growth rate of 5.6 percent): debt exceeds the 70 percent benchmark. - For most stress tests and alternative scenarios, gross-financing needs stay below the benchmark of 15 percent. - Combined shock: - Combines largest effects of individual shocks (real GDP growth, inflation, primary balance, exchange rate, and interest rate). - Under the combined shock: - Debt would increase to a maximum of 81.5 percent of GDP. - Gross financing needs would increase to a maximum of 14.2 percent of GDP. - Contingent liability shock (natural disaster added by staff): - Scenario assumptions: - Disaster with a 100-year return period and a 10 percent of GDP economy-wide loss. - Government responsibility assumed at 15 percent of the economy-wide loss = 3 percent of GDP. - Disaster effect on growth: -0.5 percentage points in the first year, with a rebound of 0.3 percentage points the following year due to reconstruction activity. - Under this scenario: - Debt would increase to 68.8 percent of GDP in 2022 before declining to 63.6 percent in 2026. - Additional stress-test outputs (from staff figures): - Combined shock yields maximum gross nominal public debt of 81.5 percent of GDP in the scenario. - Most stress scenarios keep public gross financing needs under the 15 percent benchmark; combined shock raises gross financing needs to 14.2 percent of GDP (maximum). ### Debt profile and market vulnerabilities - Debt profile highlights: - High share of public debt held by non-residents. - Mitigant: much of this is long-term debt and a significant amount is held by official creditors. - Risk-assessment indicators and thresholds (as referenced in staff heat maps and captions): - Gross financing needs benchmark: 15 percent of GDP. - Debt burden benchmark: 70 percent of GDP. - Bond spread bands referenced: 200 and 600 basis points. - External financing requirement benchmarks: 5 and 15 percent of GDP. - Change in share of short-term debt thresholds: 0.5 and 1 percent. - Public debt held by non-residents thresholds: 15 and 45 percent. - Foreign-currency denominated debt share thresholds: 20 and 60 percent. - Market perception and ratings shown in staff table (selected entries): - EMBIG (bp): 282 (as of dates in staff table). - Ratings: - Moody’s: Ba3 / Ba3 (foreign/local). - S&P: BB- / BB- (foreign/local). - Fitch: BB- / BB- (foreign/local). ### Social policy and COVID-19 impacts (Annex IV highlights) - Development context: - National Development Strategy under Law 1-12 extends to 2030 and focuses on five objectives: (i) reducing poverty, (ii) enhancing competitiveness and providing jobs, (iii) promoting sustainable growth, (iv) achieving resilience to climate change, and (v) enhancing institutional capacity. - Between 2010 and 2019, per capita income rose from US$5,689 to US$8,596. - Poverty rates dropped from 35.4 percent to 21 percent between 2010 and 2019; extreme poverty nearly eradicated. - UNDP income inequality coefficient: 30.4 (Dominican Republic) versus 34.9 (Latin America and the Caribbean average). - Median age: 28; fertility rate: 2.36 births per woman. - Impact of COVID-19: - Estimated increase in poverty rate due to pandemic ranges between 0.8 and 8.9 percentage points (from various methodologies). - IDB projection: increase in poverty rate of 6.3 percentage points after accounting for remittances and government support measures—equivalent to an additional 677,000 people falling below the poverty threshold. - Ministry of the Economy, Planning and Development estimates: - Poverty rate increased from 21 percent to 23.4 percent in 2020—268,515 people shifted into poverty. - Government transfers and social assistance prevented poverty rates from rising to 29.1 percent, saving 594,745 people from dropping below the national poverty threshold. - Extreme poverty may have increased from 2.7 percent to 5.2 percent absent support but instead rose to 3.5 percent according to same estimates. - Sectors disproportionately affected: trade and hospitality, social services, manufacturing, and construction—impacting low- and middle-income workers and urban/peri-urban areas more. - Women disproportionately impacted via increased caregiving pressures, higher incidence of domestic violence, and retrenchment in earnings. - Social policy response and transition: - Temporary support programs have been gradually merged into a new social assistance program, Supérate, which provides a monthly transfer of RD$1,650 (about US$29) to facilitate transition into the labor market and support consumption. - Targeted employment support programs are being considered for tourism sector workers as the FASE employment support program is eliminated. _Italic: Source: IMF staff (Dominican Republic Country Report excerpts as provided)._ ### 7. The healthcare sector has shown significant ### 7. The healthcare sector has shown significant ### Healthcare improvements - Children’s immunization rates have risen dramatically: from 23 percent of one-year-olds missing the diphtheria, tetanus and poliomyelitis (DTP) vaccine and 21 percent missing the measles vaccine in 2008 (2010 UNDP Human Development Report) to 1 percent and 4 percent in 2019, respectively. - Adult mortality rates were reduced substantially: from 212 (female) and 377 (male) per 1000 adults in 2008 (2010 UNDP Human Development Report) to 115 (female) and 197 (male) per 1000 adults in 2019. - The COVID-19 vaccination campaign demonstrated the authorities’ commitment to public health policy, including a transparent communication campaign and commendable vaccine procurement efforts. - Family Health Insurance coverage increased from 79 percent of the population in 2019 to 92 percent in October 2020 through a mass enrollment program; the system is expected to move into a contributive regime from the subsidized regime as employment prospects and incomes recover. ### Remaining health challenges and policy implications - Infant mortality rates are fairly high compared to peers, and life expectancy is below the regional average, especially among males. - Key healthcare challenges (Pan American Health Organization): weaknesses in maternal and infant programs (reducing mortality rates for children under five and mothers) and broader health insurance coverage to ensure more comprehensive access to healthcare. - Prenatal screening uptake is low: only 38 percent of Dominican women undergo regular prenatal screening throughout pregnancy. - Policy implication: a more comprehensive cross-sectoral policy is needed to advance maternal and infant health progress. ### Education: progress and shortcomings - Illiteracy rate: 7% among the population aged 15 and over in 2015. - Public spending on education nearly doubled in 2013 (to over 4 percent of GDP). - Expected years of schooling are on par with regional averages. - Academic outcomes remain poor: - Dominican students’ PISA scores are some of the lowest among the 79 participating countries, especially in mathematics and science. - 2018 PISA results showed retrenchment in academic performance in reading—and to a lesser extent, mathematics—since 2015. - Dropout rates are high compared to peers. - Policy initiatives and recommendations: - Surveys of private-sector agencies on required skills to align curricula with labor market needs. - Expansion of teaching hours from five to eight to enhance learning and provide meals. - Further priorities: enhance teacher training and recruitment, decentralize public school management, leverage technological solutions, align educator incentives with outcomes, upgrade infrastructure, and promote community involvement. ### Social safety nets: pandemic response and efficiency needs - Expansion during pandemic: - Spending on social benefits rose from 1.3 percent of GDP in 2019 to 4.1 percent of GDP in 2020. - The flagship Progresando con Solidaridad program (since 2012) provides targeted subsidies and conditional transfers; 67 percent of beneficiaries are women. - Emergency programs and amounts (table summary): - Quédate en Casa: Paying RD$5,000 (about US$86) per month to the most vulnerable households, with additional RD$2,000 (about US$35) for qualifying low-income families. - 1,550,576 households - RD$75,601 / US$1,339 - 1.68 (Expenditure % GDP) - Employee Solidarity Assistance Fund (FASE) I and II: Paying families of formal workers who were laid off up to 70 percent of last official payroll wages (minimum of RD$5,000 or US$86, up to RD$8,500 or US$145). - 846,343 workers - RD$46,585 / US$825 - 1.04 (Expenditure % GDP) - PA ́TÍ: Paying independent (informal) workers RD$5,000 (about US$86) a month, with additional allowances for healthcare workers, the military and the police. - 200,000 workers - RD$7,409 / US$131 - 0.17 (Expenditure % GDP) - Targeting and efficiency issues: - The Dominican Republic reported some of the highest leakages in targeted spending in the region. - Recommendation: promote use of the Single Beneficiary System (SIUBEN) (being transformed into a Universal Social Registry of Households and a Single Registry of Beneficiaries), remove nonpoor beneficiaries gradually as the economy recovers, and develop monitoring procedures. - Consider instituting unemployment support (legal basis exists but no implementation plan) and strengthening pension systems to act as automatic stabilizers. ### Phasing down temporary support - As temporary benefits are withdrawn and social transfers are centralized in Supérate, adequate targeted support should continue, commensurate with the pace of recovery, to prevent retrenchments in consumption support and social wellbeing. - Critical policy point: timing of support withdrawal needs careful assessment to avoid premature disruptions. ### Gender: constraints and policy measures - High gender inequality: - UNDP Gender Inequality Index places the Dominican Republic among the highest in the region (behind only Haiti, Guatemala and Guyana). - Political representation: 24 percent of Parliament seats held by women. - Highest share of adolescent births in the region and one of the highest maternal mortality ratios. - Consequences: - Adolescent births, limited childcare options, domestic care burdens, and gender stereotyping limit women’s education, lifetime earnings, labor force participation, and access to financial services. - Occupational segregation: women largely employed in services—health services (77%), education (67%), tourism (59%), others (69%)—with high self-employment (25%) and domestic service (13%). - Legal protection effectiveness concerns: - Family violence cases are frequently dismissed by law enforcement; perpetrators may be released on bail when injuries heal within 10 days. - Policy agenda and initiatives: - Stricter enforcement of existing laws, access to health and childcare, workplace regulations allowing flexible hours and part-time work. - Ministry of Women initiatives: - Expand number of women’s shelters from 3 to 12. - Programs to support female entrepreneurs and provide subsidized housing to women (additional subsidies for single mothers and low-income). - Modify procurement law to include state suppliers that are female-led SMEs. - Revise Civil Code to protect women from gender-based, economic and political violence. - Promote the Gender Equality Seal (UNDP) — voluntary certification requiring about 18 months to complete. - To address adolescent pregnancies and maternal mortality: - Prioritize 21 municipalities with highest adolescent birth rates. - Draft legal amendments to eliminate authorizations for child marriage and permit preventive abortions in three exceptional cases: pregnancy resulting from rape/incest, elevated maternal health risk, and non-viable fetus. - Update health service protocols and prenatal screenings, and community education on pregnancy risks. ### Rural-urban poverty: divergent impacts and policy responses - Urbanization and pandemic effects: - About 82 percent of the Dominican population is estimated to live in an urban setting. - Up to three-fourths of the population transitioning from middle class to vulnerable and from vulnerable to poor due to the pandemic may reside in urban areas (Acevedo et al.). - Official monetary poverty statistics: - Urban general poverty rate increased to 23.2 percent in 2020 (from 20 percent in 2019). - Rural general poverty rate decreased to 24 percent in 2020 (from 25.4 percent in 2019). - Real household income dropped by 12.7 percent in cities compared to 2019; income decline in rural zones was approximately 1.5 percent. - Social transfers and remittances had larger mitigating impacts in rural areas. - Policy implications: - Centralize beneficiary system (SIUBEN), modernize the labor code, and adapt to natural disaster risks. - Target rural policies to expand skills, education, agricultural productivity, and connectivity to markets. - Target urban policies to improve housing, sanitation, safety, training, and job opportunities. ### Climate vulnerability, adaptation, mitigation, and fiscal resilience - Climate risk overview: - Global Climate Risk Index (GCRI 2017): Dominican Republic is the eleventh country most vulnerable to extreme weather events. - Estimated annual damages from natural disasters between 1950 and 2014 amounted to around 0.5 percent of GDP; projected to increase to between 0.6 and 0.8 percent of GDP under different climate change scenarios (Acevedo 2016). - Authorities launched NDC-2020: 37 adaptation and 42 mitigation policy options. - Adaptation priorities (NDC-2020 and National Climate Action Plan): - Water security, food security, health, resilient cities, ecosystems, coastal-marine resources, and tourism. - Watershed management, sustainable agriculture, coastal area management, energy efficiency, nonconventional energy sources, and cleaner transportation. - Longer-term strategies: green infrastructure investment, coastal use, and sustainable agriculture. - Mitigation commitments and measures: - Dominican Republic’s contribution to global greenhouse emissions is about 0.06 percent of the global total. - Committed to reducing emissions by 27 percent by 2030. - Priority actions: better statistics and indicators, improved compliance with regulations, creation of integrated waste management, promotion of conservation culture, rebalancing energy matrix towards sustainable sources, and approval of draft legal frameworks (water law, territorial ordinance law, law on integrated waste management). - Proposal to convert the coal-powered Punta Catalina plant to natural gas and remove coal ash from the dump site. - Agreement with the World Bank’s Forest Carbon Partnership Facility expected to reduce 5 million tons of forest-related carbon emissions by 2025 by fighting deforestation and forest degradation. - Disaster insurance and fiscal preparedness: - Financial instruments: sovereign self-insurance (fiscal buffers), risk-transfer vehicles to capital markets (e.g., catastrophe bonds), and pre-arranged contingent loans from international financial institutions or central banks. - Recommendation: consider no parametric insurance coverage, indemnity insurance for public assets, and pooled insurance schemes (weigh payouts vs. premiums). - Invest in resilient infrastructure and contingency planning; operationalize a Directorate of risk management at the Ministry of the Environment. - Energy policy and subsidies: - Electricity consumption continues to be subsidized, representing a drag on fiscal resources. - Recommendation: review electricity tariff structure to cover generation, transmission and distribution costs; depoliticize energy price-setting; diversify away from hydrocarbons; emphasize energy efficiency and conservation. - Distortionary energy subsidies should be eliminated with carefully targeted mitigation measures to protect vulnerable populations. - Carbon taxation is not contemplated by the authorities at this point. *Source: Dominican Republic — chapter content provided in the supplied PDF excerpt.* ### Conclusions ### Conclusions ### Impact of the COVID-19 pandemic - The COVID-19 pandemic has exacerbated many long-standing social issues and tested the soundness and resilience of existing public policies, social support strategies, and development targets. - In the Dominican Republic, the pandemic caused some retrenchment in poverty, especially in urban settings, which was partially offset by a package of mitigating measures introduced by the government. - The pandemic provided an opportunity to expand health insurance coverage and introduce temporary employment support. - The Deferred Drawdown Option (Cat DDO) with the World Bank, a US$150 million contingent line of credit for disasters and pandemic risks, was triggered and fully disbursed in March 2020 and formally closed in February 2021. - The country retains a parametric contingent line of credit with IDB of US$300 million, which was partially triggered in the context of the COVID-19 pandemic. - The Cat DDO and the IDB parametric contingent line of credit, along with bonds on local and international markets, were the main externally sourced financial instruments to face the pandemic and remain immediately available options in case of adverse natural disaster or health events. ### Social support systems and near-term policy priorities - As temporary income support measures are gradually withdrawn, withdrawal needs to be carefully paced and well targeted. - Social support systems should: - Reduce systemic leakages. - Improve coordination to remain sustainable. - Consideration should be given to implementing other income-stabilizing mechanisms, such as unemployment insurance. - Temporary employment support introduced during the pandemic should be phased appropriately to avoid abrupt income shocks. ### Human capital, inclusion, and long-term competitiveness - To enhance long-term competitiveness and social stability and to unleash the country’s full growth potential, it is important to: - Enhance educational outcomes. - Strengthen maternal and early childhood health programs. - Improve women’s economic opportunities. ### Climate, disaster risk, and resilience - The Dominican Republic’s physical and human resources require protection from natural disaster risks through sound cross-sectoral climate-change adaptation and mitigation policies. - Greater preparedness and risk management instruments remain important given the country’s exposure to natural disasters and climate risks. ### Fiscal and governance implications of the post-pandemic period - The post-pandemic future will likely require: - A greater degree of regional cooperation. - Increased policy transparency. - Greater spending efficiency, given the rising debt burden. *Source: Conclusions, Staff Report for the 2021 Article IV Consultation — Informational Annex (Dominican Republic).* ### 2021. The recovery is well underway despite heightened uncertainty. After a real GDP ### 1domea2021001 - 2021. The recovery is well underway despite heightened uncertainty. After a real GDP ### Macro outlook and recovery - Real GDP contracted "6.7 percent" in 2020. - The monthly indicator of economic activity (IMAE) registered a year-on-year growth of "47.1 percent" in April 2021, driven primarily by construction activities, tourism, and mining. - Central Bank liquidity facilities equivalent to "about 5 percent of GDP" supported credit growth and private-sector capital expenditure resumption. - Government continuing support to vulnerable families and displaced workers and expected to start several infrastructure projects during the second half of the year. - Vaccination progress as of June 23: - "66.8 percent" of the adult population received at least one dose. - "37.4 percent" have been fully vaccinated. - Authorities' immunization goal: immunize "70 percent" of the population by September 2021. ### External position and tourism - Over "390 thousand" nonresident arrivals in May 2021, representing three-quarters of May 2019 total visitors. - Tourism receipts expected to accelerate in the second half of 2021 as vaccine rollouts progress in the US, Canada, and Europe. - Remittances inflows grew by "60.5 percent (year-on-year)" during January-May 2021, helping offset weak tourism activity and higher oil prices. - Current account deficit expected to remain around "1½ percent of GDP" in 2021. ### Inflation outlook - Inflation reached "10.5 percent" in May 2021, primarily reflecting a temporary statistical rebound from a low comparison base (monthly CPI inflation was negative between February and May 2020). - Inflation is expected to dissipate gradually after June and converge back to the "3-5 percent" target range by the last quarter of 2021. - Imported price pressures intensified as international oil prices rose; supply-side shocks expected to dissipate during the second half of the year. ### Fiscal policy: response and medium-term stance - Emergency fiscal package amounted to "3.3 percent of GDP", including assistance to "1.5 million" vulnerable households, social transfers, and tax deferrals. - Fiscal deficit rose to "7.9 percent of GDP" in 2020, causing a sizeable increase in public debt. - Through April 2021: - Fiscal policy characterized by more moderate expenditure growth and tax revenues above target. - Budget execution reduced financing needs by controlling non-priority spending while maintaining emergency health and social support. - Authorities stand ready to boost social and health spending beyond budgeted amounts if necessary. - Plans for second half of 2021 include several public infrastructure projects under public-private partnerships. - Overall fiscal performance remains consistent with the "3.0 percent of GDP" target deficit set in the National Budget for 2021. - Authorities emphasize fiscal sustainability and public financial management: - Commitment to introduce fiscal responsibility legislation linked to a credible medium-term fiscal framework. - Plans for comprehensive fiscal reform to expand the tax base, streamline exemptions, and reduce tax evasion once recovery is more entrenched. ### Monetary policy and financial stability - Central Bank provided monetary stimulus by reducing the policy interest rate and implementing liquidity support. - Liquidity provision program (established March 2020) channeled "DOP 215 billion (approximately 5 percent of GDP)" through repurchase agreements, reserve requirement reductions and the Rapid Liquidity Facility. - Credit growth expanded "9.2 percent (year-on-year)" in April 2021. - Over "DOP 192 billion" in new credit, refinanced loans, and debt restructuring schemes provided to households, SMEs and other firms. - Monetary policy stance expected to remain accommodative until recovery takes hold and inflation converges to target. - International reserves equivalent to "15 percent of GDP" or "7.5 months of imports" provide external buffers. - Exchange rate has been used as a shock absorber; real exchange rate remained broadly in line with fundamentals. Central Bank has used foreign exchange interventions and plans to increase transparency by communicating intervention rules going forward. - Electronic exchange trading platform has increased efficiency; CAPTAC-DR provided technical assistance. - Financial system resilience: - Banks are well-capitalized with adequate liquidity and profitability. - Regulatory flexibilization, lower reserve requirements, and macro-financial measures supported the system. - Superintendency of Banks prepared to monitor exit from regulatory forbearance with supplementary indicators to ensure asset quality transparency. - Authorities working to strengthen AML/CFT and consumer protection frameworks; building on strong technical compliance with FATF recommendations. - Commitment to align financial regulation with international standards and enhance regulation and supervision of financial cooperatives. ### Structural reforms and governance - National Development Strategy anchors a bold structural reform agenda covering education, fiscal, electricity, and labor reforms. - Education pact (law in 2013) raised public investment in education from "2 percent of GDP" to "4 percent of GDP"; current focus on education quality, skill gaps, and teachers’ human capital. - Electricity pact signed in February 2021 to modernize and reform the sector. - Authorities expect to resume discussions on fiscal pact and labor and social security reforms when the crisis abates and are implementing initiatives to improve the business climate. - Climate change considered macro-critical; authorities working on a comprehensive strategy to boost climate resilience, reduce emissions and enhance natural resources management. - Electricity sector reform priorities: - National Pact for the Reform of the Electricity Sector to strengthen transparency, efficiency, and institutional framework. - State holding company CDEEE undergoing liquidation to improve governance and promote private sector participation. - Power generation matrix diversifying away from oil toward renewable sources. - Governance and rule of law: - Independent attorney general appointed and legal/operational capacity of the justice system strengthened. - Anti-corruption investigations intensified against former and current high-level officials. - 2021 Capacity to Combat Corruption (CCC) Index noted the Dominican Republic had by far the greatest score improvement. - Creation of the Cabinet for Transparency, Prevention, and Control of Public Expenditures supports inter-institutional coordination on governance issues. *Source: 1domea2021001* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1domea2021001.pdf_