## 1dmaea2022001 - 2021. The output decline, driven by a sharp reduction in tourism and related sectors, was

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### Recent developments and 2020–21 impact
- Real GDP declined by 11 percent in 2020; output recovered partially in 2021, growing 3.7 percent.
- Output decline driven by a sharp reduction in tourism receipts and lockdown measures; containment supported by:
  - health spending,
  - social transfers,
  - public investment resilient to natural disasters.
- Public investment peaked at 26.5 percent of GDP in FY2020/21 (an annual increase of over 17 percentage points), mostly allocated to resilient infrastructure and hotel construction.
- Citizenship by Investment (CBI) revenue reached 29.5 percent of GDP in FY2020/21 and financed much of the public investment.
- Tax revenue fell sharply while health spending and social transfers increased, causing large fiscal deficits in 2020 and 2021.
- Central government debt (including guaranteed) rose to an estimated 106.0 percent of GDP in 2020 (from 94.2 percent in 2019) and was 100.9 percent of GDP in 2021.
- Overall fiscal balance: a deficit of 7.2 percent of GDP in FY2020/21.
- Financing in FY2020/21 included:
  - official loans of 4 percent of GDP,
  - aid by debt service relief of 1 percent of GDP (27 percent of the FY2020/21 debt service) under the G20’s DSSI.
- IMF support:
  - Fund disbursed SDR 10.28 million (US$14 million; 89.39 percent of quota) under the Rapid Credit Facility (RCF) in 2020.
  - Fund-wide SDR allocation provided Dominica with SDR 11 million (US$15.65 million), retained as international reserves.
- An ECCU-wide moratorium on loan repayments extended to March 2022 (from September 2021); domestic regulator extended loan moratorium to credit unions.

### External sector and balance of payments
- Current account deficit remained high at around 30.0 percent of GDP in 2020–21 (Table 1: -30.0 percent in 2020; -31.4 percent in 2021).
- Exports of goods and services: 20.2 percent of GDP in 2020; 20.0 percent of GDP in 2021.
- Imports of goods and services: 57.6 percent of GDP in 2020; 52.8 percent of GDP in 2021 — imports elevated by public investment and commodity prices despite private demand decline.
- Net imputed international reserves (end-year, millions of U.S. dollars): 176.4 in 2020; 165.7 in 2021.
- Months of imports of goods and services: 6.8 in 2020; 6.5 in 2021.
- REER: depreciated in 2020 and 2021; 2021 staff estimates REER overvalued by 4.1 percent.
- External position (2021 staff estimates): assessed moderately weaker than the level consistent with medium-term fundamentals and desirable policies.

### Financial sector and stability
- Financial sector remained liquid and stable during the pandemic, but Non-Performing Loans (NPLs) remain above prudential benchmarks.
- Loan service moratoria authorized by banks and credit union regulators supported firms and households, containing portfolio deterioration.
- Long-standing sectoral vulnerabilities persist: high NPLs and capital adequacy gaps.
- Directors welcomed banks’ plans to strengthen capital buffers and meet increasing loan-loss provisioning requirements.
- Non-bank sector risks: credit unions under-capitalized and a source of vulnerability.
- ECCB safeguards assessment (finalized August 2021): strong external audit and financial reporting; recommended legal reforms for operational autonomy and project-governance framework for DCash issuance.

### Outlook and risks
- Medium-term growth expected to recover, underpinned by:
  - return of tourism,
  - expanding hotel capacity,
  - high public investment in resilient infrastructure financed by CBI revenue.
- GDP projected to reach the pre-pandemic level by 2023.
- Risks skewed to the downside and include:
  - renewed worldwide and domestic Covid-19 contagion waves,
  - CBI revenue and/or official financing below projected levels, slowing public investment and activity,
  - weakness in the financial sector, particularly credit unions,
  - slow vaccination rates due to hesitancy and global contagion dynamics.

### Fiscal stance and policy recommendations
- Maintain momentum on fiscal consolidation given increased public debt during the pandemic.
- Key policy recommendations:
  - Continue implementation of fiscal reforms committed under the RCF disbursement, including on income tax, additional streamlining of discretionary tax exemptions, and a property tax.
  - Prioritize expenditure measures to increase government efficiency: civil service reform, better targeting of social transfers, reassess pension sustainability.
  - Reprioritize CBI revenue: allocate more to financial insurance and debt service to reduce public debt and enhance near-term protection against natural disasters.
  - Advance institutional fiscal reform to support fiscal and debt sustainability.
  - Introduce reforms to reduce economic informality.
  - Address financial risks by enforcing NPL reduction and capitalization of banks and non-banks.
  - Save part of CBI revenue for self-insurance against natural disasters and public debt reduction; consider additional insurance as part of a layered insurance framework.
  - Improve tax administration and broaden the tax base.
  - Strengthen AML/CFT framework to minimize risk to correspondent banking relationships.

### Fiscal consolidation progress and reform actions
- Progress under the RCF disbursement commitments:
  - Limits on discretionary tax exemptions on imports established.
  - Preparations to simplify income tax by including a presumptive tax (government intends to pass in FY2022).
  - Property tax reform enacted to incentivize use of idle property in prime urban areas.
  - Strengthened collection of tax arrears with improved auditing capacity and collection effort.
- Some temporary tax exemptions offset savings (e.g., VAT exemption on hatching eggs, residential income tax in 2021, tax deductions for interest on student loans, home insurance and health insurance premiums effective 2022).
- Pension contribution phased increases: Dominica Social Security (DSS) implementing 0.25 percent per year and retirement age increase from 60 to 65 years by 6 months per year until 2035.
- Civil service reform under preparation with CARICAD support.
- Estimated cumulative savings of the fiscal consolidation plan: declined by 0.6 percent of GDP to 5.1 percent over a five-year period.

### Collapse in tourism exports, public investment, and implications
- External current account deficits over 30 percent of GDP in 2020 and 2021.
- Tourism receipts estimated to fall by an additional 0.5 percent of GDP in 2021 due to contagion spikes.
- Continued public investment push projected to increase imports of goods and services, widening the current account deficit.
- External financing needs expected to be covered by official lending, CBI revenue, and FDI; no significant decline in imputed net international reserves expected under the regional currency board arrangement.
- Large public investment program includes a new international airport estimated at 65 percent of GDP (baseline assumes execution over 6 years due to capacity constraints) and projects on roads, resilient housing, new hospital and health centers, geothermal plant, resilient water and sewage network, industrial park, and schools.
- Public investment plan expected to boost GDP growth to a 5 percent average in the medium term.
- Despite high CBI revenue in baseline, progress on debt reduction limited due to prioritization of public investment; baseline takes 5 years to return to pre-pandemic debt ratio.

### Public debt, DSA findings, and scenarios
- Public debt (incl. guaranteed, percent of GDP): 2019: 94.2; 2020: 106.0; 2021: 100.9; 2022 (proj): 100.3.
- DSA baseline projections:
  - Primary surplus reaches 3.6 percent of GDP by 2029; public debt trends downward to 60 percent of GDP by 2035 under baseline with fiscal consolidation.
- Scenario without fiscal consolidation:
  - Public debt would exceed 140 percent of GDP by 2035 (assumes public investment remains at high baseline level and deficit financed with external public debt).
- DSA stress tests include a customized “Catastrophic Climate Event” (Category 5 hurricane) scenario, historical and extreme shocks; financial market contingent liability included at 7.0 percent of GDP.
- Debt carrying capacity: Composite Index (CI) indicates “Medium” rating; CI index reported as 3.02 (medium debt carrying capacity).
- Public debt remains sustainable only conditional on fiscal consolidation, sound recovery, and continued CBI inflows; Dominica remains at high risk of debt distress.

### Resilience financing and Vulnerability and Resiliency Fund (VRF) recommendations
- Total cost of resilience estimated at $2.8 billion, about 5-times Dominica’s GDP.
- Recommendation: prudent use of windfall CBI revenue while maintaining institutional fiscal reform; increase allocation of CBI revenue to disaster insurance and debt service; maintain consolidation with focus on expenditure efficiency; develop budgetary and PFM practices to implement Fiscal Responsibility Act.
- Suggested VRF allocation priorities:
  - (i) a saving fund for self-insurance: 12 percent of the large stock of government deposits from CBI revenue plus 1.5 percent of GDP per year;
  - (ii) net public debt repayments for the next budget cycle (while public debt above regional ceiling of 60 percent, targeting below the ceiling);
  - (iii) investment in resilient infrastructure financed by remaining CBI revenue after funding self-insurance and net debt payments.
- Insurance layering framework:
  - Layer 1: VRF savings for recurrent but less damaging disasters.
  - Layer 2: CCRIF with re-calibrated triggers and higher disbursement per event.
  - Layer 3: State-contingent debt instruments for extreme events (consider fiscal constraints).
- VRF calibration target: coverage equivalent to 99 percent of the estimated fiscal cost of natural disasters.
- Trade-off: reallocating CBI revenue to VRF would reduce fiscal space for public investment and result in an estimated reduction in the level of GDP of about 4 percentage points in the medium term relative to the baseline (assuming no natural disasters), but would better support debt sustainability and reduce borrowing after disasters.

### Financial sector reforms and credit unions
- ECCB provisioning requirement: 60 percent NPL provisioning in 2022 and 100 percent by 2024.
- Based on 2021: Q2 NPL ratio of 14.2 percent:
  - domestic banks would need to increase provisioning by 55 percent in 2022 (equivalent to 1.6 percent of GDP and near 20 percent of capital) relative to 2021: Q2 value.
  - domestic banks would need to increase provisioning by 160 percent by 2024 (3 percent of GDP and near 60 percent of capital) relative to 2021: Q2 value.
- Capitalization plan options: loan-by-loan workouts, capital calls, profits’ retention (no dividend distribution); fiscal cost for public ownership institutions could be up to about 2.5 percent of GDP.
- Credit unions:
  - Total credit union assets were 62 percent of GDP as of 2020: Q2.
  - Total deposits at 56 percent of GDP as of 2020: Q2.
  - Some entities below capital adequacy requirement of 10 percent.
  - NPLs at 7 percent of total loans, with loan-loss provisioning at 85 percent (sector data show variation).
  - Non-bank regulator should be endowed with additional human and financial resources and independence from the Ministry of Finance.
- Stress testing and supervision: regulatory authorities should stress test credit unions and insurance companies; evaluate liquidity assistance options; modernize foreclosure legislation to facilitate NPL resolution.

### Risks matrix — key entries (RAM)
- Global / External Risks:
  - Uncontrolled Covid-19 local outbreaks and subpar/volatile growth — Relative Likelihood: High; Impact/Time Horizon: Medium / ST / MT; Policy Response: reinstate pandemic relief measures if needed; public education on vaccines; secure vaccine supplies (COVAX).
  - Global resurgence of Covid-19 — Relative Likelihood: Medium; Impact/Time Horizon: Medium / ST / MT; Policy Response: widen fiscal space and intensify medical preparedness.
  - De-anchoring of inflation expectations in the U.S. — Relative Likelihood: Medium; Impact/Time Horizon: Medium / ST / MT; Policy Response: tighten financial conditions.
  - Rising commodity prices amid volatility — Relative Likelihood: Medium; Impact/Time Horizon: Medium / ST / MT; Policy Response: strengthen export competitiveness; adopt alternative energy plans.
- Structural risks:
  - Intensified geopolitical tensions — Relative Likelihood: High; Impact/Time Horizon: Medium / ST / MT; Policy Response: boost employment and export competitiveness.
  - Cyber-attacks — Relative Likelihood: Medium; Impact/Time Horizon: Low / ST / MT; Policy Response: strengthen cybersecurity and contingency plans.
- Domestic risks:
  - Lower-than-expected CBI revenues or official financing — Relative Likelihood: Medium; Impact/Time Horizon: Medium / ST / MT; Policy Response: rationalize spending and mobilize other revenue sources.
  - Higher frequency/severity of natural disasters related to climate change — Relative Likelihood: Medium; Impact/Time Horizon: High / ST / MT; Policy Response: implement Disaster Resilience Strategy; accelerate resilient infrastructure and renewable energy transition.

### Key statistics (selected, exact values from Table 1 and source tables)
- Real GDP growth: 2019: 7.5; 2020: -11.0; 2021: 3.7; 2022 (proj): 7.6.
- Nominal GDP growth: 2019: 9.1; 2020: -11.6; 2021: 6.8; 2022 (proj): 10.3.
- Consumer prices (period average): 2020: -0.7; 2021: 3.0; 2022 (proj): 2.5.
- Central government revenue (percent of GDP): 2020: 55.5; 2021: 49.9; 2022 (proj): 46.5.
- Central government taxes (percent of GDP): 2020: 21.9; 2021: 21.3; 2022 (proj): 23.0.
- Central government non-tax revenue (percent of GDP): 2020: 31.3; 2021: 26.3; 2022 (proj): 21.2.
- Central government expenditure (percent of GDP): 2020: 62.7; 2021: 59.3; 2022 (proj): 48.4.
- Primary balance (percent of GDP): 2020: -5.2; 2021: -7.4; 2022 (proj): 0.3.
- Primary balance, excluding CBI (percent of GDP): 2020: -34.7; 2021: -31.9; 2022 (proj): -18.7.
- Overall balance (percent of GDP): 2020: -7.2; 2021: -11.0; 2022 (proj): -1.8.
- Central government debt (incl. guaranteed, percent of GDP): 2019: 94.2; 2020: 106.0; 2021: 100.9; 2022 (proj): 100.3.
- External debt (gross, percent of GDP): 2020: 106.1; 2021: 101.9; 2022 (proj): 100.8.
- Current account balance (percent of GDP): 2020: -30.0; 2021: -31.4; 2022 (proj): -28.7.
- Exports of goods and services (percent of GDP): 2020: 20.2; 2021: 20.0; 2022 (proj): 27.4.
- Imports of goods and services (percent of GDP): 2020: 57.6; 2021: 52.8; 2022 (proj): 56.2.
- Net imputed international reserves (end-year, millions of U.S. dollars): 2020: 176.4; 2021: 165.7; 2022 (proj): 183.8.
- Population (2020): Total 71,991; Annual rate of growth (percent) -1.8.
- Nominal GDP (EC$ millions): 2020: 1,469; 2021: 1,569; 2022 (proj): 1,730.
- Current account balance (percent of GDP) — longer projection: 2026 (projected): -14.7 percent of GDP.
- Public debt trajectory (public debt 2/ percent of GDP): 2019 94.2; 2020 106.0; 2021 100.9; 2022 100.3; 2023 97.5; 2024 94.3; 2025 92.0; 2026 90.8.
- Public Capital Expenditure (percent of GDP): 2019 9.3; 2020 26.3; 2021 24.9; 2022 15.4; 2023 14.9; 2024 14.9; 2025 13.9; 2026 12.9.
- NIIP (percent of GDP, 2021 key figures): NIIP: -65.9; Gross Assets: 103.9; Debt Assets: 70.0; Gross Liabilities: -169.8; Debt Liabilities: -81.3.
- Reserve adequacy: reserves equal "11.7 percent of broad money"; imputed SDR allocation received "11.022 million SDRs (about US$15.5 million)".

### Implementation of past Fund advice (summary)
- Revenue and tax policy: limits on discretionary tax exemptions implemented; income tax reform with presumptive tax advanced; property tax preparation advanced; FAD TA expected early 2022.
- Expenditure efficiency: civil service reform under preparation; targeting of social transfers improved; pension actuarial assessment planned in 2022 (delayed by pandemic).
- CBI revenue management: government saved resources in the VRF in 2020 and 2021; intends to increase VRF savings once economy recovers.
- Financial sector: banks preparing to increase provisioning to 100 percent of NPLs by 2024; partial progress in credit union capitalization; non-bank regulator remains part of Ministry of Finance though new staff hired.
- Statistics and TA: STA and CARTAC technical assistance delivered; improvements in national accounts, BOP, and government finance compilation ongoing.

*Source: IMF staff report for the 2021 Article IV consultation (Dominica). January 18, 2022.*

### 2021. The output decline, driven by a sharp reduction in tourism and related sectors, was

### 1dmaea2022001 - 2021. The output decline, driven by a sharp reduction in tourism and related sectors, was

### Recent developments and 2020–21 impact
- Real GDP declined by 11 percent in 2020.
- Output recovered partially in 2021, growing 3.7 percent, supported by construction activity and the retail sector.
- The output decline was driven by a sharp reduction in tourism receipts and lockdown measures; the fall was contained by:
  - health spending,
  - social transfers,
  - public investment resilient to natural disasters.
- Public investment peaked at 26.5 percent of GDP in FY2020/21 (an annual increase of over 17 percentage points), mostly allocated to resilient infrastructure and hotel construction.
- Citizenship by Investment (CBI) revenue reached 29.5 percent of GDP in FY2020/21 and financed much of the public investment.
- Tax revenue fell sharply while health spending and social transfers increased, causing large fiscal deficits in 2020 and 2021.
- Central government debt (including guaranteed) rose to an estimated 106.0 percent of GDP in 2020 (from 94.2 percent in 2019) and was 100.9 percent of GDP in 2021 (Table 1).
- The overall fiscal balance showed a deficit of 7.2 percent of GDP in FY2020/21.
- Financing in FY2020/21 included:
  - official loans of 4 percent of GDP,
  - aid by debt service relief of 1 percent of GDP (27 percent of the FY2020/21 debt service) under the G20’s Debt Service Suspension Initiative (DSSI).
- The Fund disbursed the equivalent of SDR 10.28 million (US$14 million; 89.39 percent of quota) under the Rapid Credit Facility (RCF) in 2020.
- The Fund-wide Special Drawing Rights (SDR) allocation provided Dominica with SDR 11 million (US$15.65 million), retained as international reserves.
- An ECCU-wide moratorium on loan repayments was extended to March 2022 (from September 2021); the domestic regulator extended the loan moratorium to credit unions.

### External sector and balance of payments
- Current account deficit estimate remained high at around 30.0 percent of GDP in 2020–21 (Table 1 shows -30.0 percent in 2020 and -31.4 percent in 2021).
- Exports of goods and services fell to 20.2 percent of GDP in 2020 and 20.0 percent in 2021.
- Imports of goods and services were 57.6 percent of GDP in 2020 and 52.8 percent in 2021, with imports elevated by public investment and commodity prices despite a decline in private demand for imports.
- Net imputed international reserves (end-year, millions of U.S. dollars): 176.4 in 2020; 165.7 in 2021.
- Months of imports of goods and services: 6.8 in 2020; 6.5 in 2021.

### Financial sector and stability
- The financial sector remained liquid and stable during the pandemic, but Non-Performing Loans (NPLs) remain above prudential benchmarks.
- Loan service moratoria authorized by banks and credit union regulators supported firms and households, containing deterioration in portfolio performance.
- Long-standing sectoral vulnerabilities persist, including high non-performing loans and capital adequacy gaps.
- Directors welcomed banks’ plans to strengthen capital buffers to meet increasing loan-loss provisioning requirements.
- For the non-bank sector, Directors highlighted the importance of addressing capital and liquidity requirements and strengthening supervision.
- Risks to financial stability remain prominent in the non-banking sector (credit unions are noted as under-capitalized and a source of vulnerability).

### Outlook and risks
- Medium-term growth is expected to recover, underpinned by:
  - return of tourism,
  - expanding hotel capacity,
  - high public investment in infrastructure resilient to natural disasters financed by CBI revenue.
- GDP is projected to reach the pre-pandemic level by 2023.
- Risks are skewed to the downside and include:
  - renewed worldwide and domestic Covid-19 contagion waves,
  - CBI revenue and/or official financing below projected levels, slowing public investment and economic activity,
  - weakness in the financial sector, particularly the credit unions, amplifying downside risks,
  - slow vaccination rates due to hesitancy and ongoing global contagion dynamics.

### Fiscal stance and policy recommendations
- Given the increase in public debt during the pandemic, maintain momentum on fiscal consolidation.
- Main policy recommendations summarized:
  - Continue implementation of fiscal reforms committed to in the Rapid Credit Facility (RCF) disbursement, including on income tax, additional streamlining of discretionary tax exemptions, and a property tax.
  - Prioritize expenditure measures to increase government efficiency, including a civil service reform, better targeting of social transfers, and reassess pension sustainability.
  - Reprioritize the use of CBI revenue with more allocation to financial insurance and debt service to reduce public debt and enhance near-term protection against natural disasters.
  - Advance institutional fiscal reform to support fiscal and debt sustainability.
  - Introduce reforms to reduce economic informality.
  - Address long-standing financial risks by enforcing NPLs’ reduction and capitalization of banks and non-banks.
  - Save part of CBI revenue for self-insurance against natural disasters and public debt reduction; consider securing additional insurance as part of a layered insurance framework to help cover losses in case of large and extreme disasters.
  - Improve tax administration and broaden the tax base.
  - Strengthen AML/CFT framework to minimize risk to correspondent banking relationships.

### Key statistics (selected, exact values from Table 1)
- Real GDP growth: 2019: 7.5; 2020: -11.0; 2021: 3.7; 2022 (proj): 7.6.
- Nominal GDP growth: 2019: 9.1; 2020: -11.6; 2021: 6.8; 2022 (proj): 10.3.
- Consumer prices (period average): 2020: -0.7; 2021: 3.0; 2022 (proj): 2.5.
- Central government revenue (percent of GDP): 2020: 55.5; 2021: 49.9; 2022 (proj): 46.5.
- Central government taxes (percent of GDP): 2020: 21.9; 2021: 21.3; 2022 (proj): 23.0.
- Central government non-tax revenue (percent of GDP): 2020: 31.3; 2021: 26.3; 2022 (proj): 21.2.
- Central government expenditure (percent of GDP): 2020: 62.7; 2021: 59.3; 2022 (proj): 48.4.
- Primary balance (percent of GDP): 2020: -5.2; 2021: -7.4; 2022 (proj): 0.3.
- Primary balance, excluding CBI (percent of GDP): 2020: -34.7; 2021: -31.9; 2022 (proj): -18.7.
- Overall balance (percent of GDP): 2020: -7.2; 2021: -11.0; 2022 (proj): -1.8.
- Central government debt (incl. guaranteed, percent of GDP): 2019: 94.2; 2020: 106.0; 2021: 100.9; 2022 (proj): 100.3.
- External debt (gross, percent of GDP): 2020: 106.1; 2021: 101.9; 2022 (proj): 100.8.
- Current account balance (percent of GDP): 2020: -30.0; 2021: -31.4; 2022 (proj): -28.7.
- Exports of goods and services (percent of GDP): 2020: 20.2; 2021: 20.0; 2022 (proj): 27.4.
- Imports of goods and services (percent of GDP): 2020: 57.6; 2021: 52.8; 2022 (proj): 56.2.
- Net imputed international reserves (end-year, millions of U.S. dollars): 2020: 176.4; 2021: 165.7; 2022 (proj): 183.8.
- Population (2020): Total 71,991; Annual rate of growth (percent) -1.8.
- Nominal GDP (EC$ millions): 2020: 1,469; 2021: 1,569; 2022 (proj): 1,730.

*Source: IMF staff report for the 2021 Article IV consultation (Dominica). January 18, 2022.*

### 6. The collapse in tourism exports and

### 6. The collapse in tourism exports and the increase in public investment

### Collapse in tourism exports and current account impact
- External current account deficits reached record-highs of over 30 percent of GDP in 2020 and 2021.
- The external current account deficits were partially cushioned by a reduction in imports of goods and services associated with the decline in income and aggregate demand.
- In 2021, tourism receipts are estimated to fall by an additional 0.5 percent of GDP with the spike in contagions and a full-year impact on the sector.
- Continued public investment push is projected to increase imports of goods and services, causing further widening of the current account deficit.

### External financing, reserves, and exchange rate
- External financing needs are projected to be covered by official lending, CBI revenue, and foreign direct investment—no significant decline on imputed net international reserves is expected given the regional currency board arrangement, maintaining high reserve coverage.
- The real effective exchange rate (REER) depreciated in 2020 and 2021 driven by an increase in foreign inflation in fuel and food items; based on 2021 staff estimates, the REER was estimated to be overvalued by 4.1 percent.
- The external position (2021 staff estimates) is assessed moderately weaker than the level consistent with medium-term fundamentals and desirable policies.

### Fiscal consolidation progress and reforms
- Progress achieved under the RCF disbursement commitments:
  - Establishing limits on discretionary tax exemptions on imports.
  - Advancing preparations to simplify the income tax by including a presumptive tax (government intends to pass in FY2022).
  - Enacting a property tax reform to incentivize the use of idle property in prime urban areas.
  - Strengthening collection of tax arrears with improved auditing capacity and collection effort.
- These savings have been offset by transitory tax exemptions to support the recovery (includes exemptions of VAT on hatching eggs, residential income tax in 2021, tax deductions for interest on student loans, and home insurance and health insurance premiums that will take effect in 2022).
- Remaining reforms planned or under consideration:
  - Updated analysis of pension system sustainability planned by early 2022; Dominica Social Security (DSS) currently implementing a phased increase in pension contributions of 0.25 percent per year and an increase in the retirement age from 60 to 65 years by 6 months per year until 2035.
  - Civil service reform under preparation with support of CARICAD to increase public workforce efficiency.
  - Introduction of a solid waste charge is unlikely to be pursued.
  - Reduction of the preferential rate on diesel would be considered later once the economy has recovered.
- Estimated cumulative savings of the fiscal consolidation plan have declined by 0.6 percent of GDP to 5.1 percent over a five-year period.

### Banking sector and financial stability
- Banking sector remained stable and liquid, supported by the debt service moratorium authorized by the Eastern Caribbean Central Bank (ECCB).
- Bank deposits remained steady; system liquidity supported by loan moratoriums and supervisory flexibility, including a temporary classification freeze for loans under moratoria.
- Key financial indicators and risks:
  - Non-performing loans (NPLs) of 14 percent of total loans as of 2021: Q3.
  - Loan loss provisions remain low despite high NPLs.
  - ECCB authorized extension of loan service moratoria by six months to March 2022.
  - The bulk of the loan portfolio is no longer under moratorium.
  - Purchase of two foreign banks by a consortium of indigenous banks (including Dominica National Bank) has concentrated 73 percent of the banks’ loans.
- Safeguards assessment of the ECCB (finalized August 2021):
  - Found strong external audit and financial reporting practices aligned with international standards.
  - Recommended legal reforms to strengthen operational autonomy and to enhance project-governance framework for DCash issuance.

### Credit unions sector
- Large and macro-critical sector but undercapitalized:
  - Total credit union assets were 62 percent of GDP as of 2020: Q2.
  - Total deposits at 56 percent of GDP as of 2020: Q2.
  - Some entities are below the capital adequacy regulatory requirement of 10 percent.
  - NPLs at 7 percent of total loans, with loan-loss provisioning at 85 percent.
  - Pandemic impact muted in data due to a moratorium granted by the non-bank regulator that expired in September 2021.

### Macroeconomic outlook and public investment
- Recovery assumptions and major projects:
  - Economy projected to recover gradually; output projected to return to the 2019 level by 2023.
  - Baseline includes a significant upward revision of CBI revenue compared to the 2020 RCF projection.
  - Projected increase in public investment of 16 percent of GDP on average through 2022–26.
  - Largest project: construction of a new international airport at an estimated cost of 65 percent of GDP, planned within the next 3–4 years; baseline assumes execution over 6 years due to capacity constraints.
  - Other projects: roads, resilient housing, new hospital and health centers, geothermal electricity plant, resilient water and sewage network, industrial park, and schools.
- Growth and debt trajectory:
  - Public investment plan expected to push GDP growth to a 5 percent average in the medium term.
  - Despite high CBI revenue in the baseline, progress on debt reduction remains limited due to prioritization of public investment, taking 5 years to return to pre-pandemic debt ratio.
  - Baseline assumes continued progress on fiscal consolidation; contractionary impact of consolidation expected to be more than compensated by public investment with a larger fiscal multiplier.

### Projections and key macro figures (selected)
- Current account balance:
  - 2020: -30.0 percent of GDP
  - 2021: -31.4 percent of GDP
  - 2022 (projected): -28.7 percent of GDP
  - 2026 (projected): -14.7 percent of GDP
- Public debt and fiscal balances (selected rows from Dominica: Macroeconomic Outlook table):
  - Public debt 2/: 2019 94.2; 2020 106.0; 2021 100.9; 2022 100.3; 2023 97.5; 2024 94.3; 2025 92.0; 2026 90.8 (percent of GDP)
  - Public Capital Expenditure 2/: 2019 9.3; 2020 26.3; 2021 24.9; 2022 15.4; 2023 14.9; 2024 14.9; 2025 13.9; 2026 12.9 (percent of GDP)
  - Real GDP 1/: 2019 4/7.5-11.0 3.7.7.6.5.4.4.1.2.5 (table formatting preserved in source — interpret as series provided in source)
- Specific projection highlights:
  - In 2022, the current account deficit is projected to narrow to 28.7 percent of GDP, and to decline towards 14.7 percent of GDP by 2026.
  - Gross financing needs (EC Million) and financing structure entries are presented in the source tables (total available financing — loan disbursements — shown as multilateral and domestic financing lines).

### Alternative scenarios and long-term debt outlook
- Baseline with fiscal consolidation:
  - Primary surplus reaches 3.6 percent of GDP by 2029.
  - Public debt trends downward to 60 percent of GDP by 2035.
- Scenario without progress on fiscal consolidation:
  - Public debt would exceed 140 percent of GDP by 2035.
  - Scenario assumes public investment remains at the high baseline level and the fiscal deficit is financed with external public debt.
- The baseline projection takes 14 years to reach the regional debt ceiling of 60 percent of GDP by 2035 (regional debt target postponed by 5 years to 2035 in February 2021).

### Risks to the outlook and financial stability
- Main downside risks:
  - Prolonged pandemic with slower recovery in tourism and a decline in CBI revenue.
  - Additional waves of Covid-19 contagion, sharp rise in global risk premia, oil market volatility, rising protectionism, and natural disasters (with higher severity due to climate change).
  - Lower-than-projected CBI revenue or official financing would reduce fiscal space for public investment, slowing growth and worsening the debt-to-GDP trajectory.
  - Capacity constraints could delay fiscal consolidation and investment execution.
- Financial stability risks:
  - Large and undercapitalized credit union sector could suffer capital losses that affect connected banks.
  - Delayed economic recovery and unwinding of pandemic policies could stress the financial sector, straining liquidity and eroding asset quality.
  - Disruption of correspondent bank relationships (CBRs) remains a threat to trade and growth (no loss of CBRs in 2020 and 2021).
  - Contingent fiscal liabilities from financial sector stress could increase public debt further and reduce fiscal space for investment.
- Upside possibilities:
  - Higher CBI revenue could push the economy above the baseline if used to finance additional public investment.
  - Faster recovery of tourism if the Covid-19 pandemic is controlled globally and domestically.

*Source: IMF staff estimates and projections as presented in the chapter "6. The collapse in tourism exports and the increase in public investment."*

### Box 1. Risk Assessment Matrix

### Box 1. Risk Assessment Matrix

### Conjunctural shocks and scenarios — Global / External Risks
- Uncontrolled Covid-19 local outbreaks and subpar/volatile growth (↓)
  - Relative Likelihood: High
  - Impact / Time Horizon: Medium / ST / MT
  - Policy Response: If needed, reinstate pandemic relief measures while designing/communicating a medium-term plan to preserve fiscal sustainability. Continue the public education campaign to address vaccine hesitancy. Work to secure vaccine supplies from producers, particularly COVAX.
- Global resurgence of the Covid-19 pandemic (↓)
  - Relative Likelihood: Medium
  - Impact / Time Horizon: Medium / ST / MT
  - Policy Response: Widen fiscal space and intensify medical preparedness for an increase in cases, including those of new variants.
- Disorderly transformations (↓)
  - Relative Likelihood: Medium
  - Impact / Time Horizon: Medium / ST / MT
  - Description: Covid-19 triggers structural transformations, but reallocation of resources impeded by labor market rigidities, debt overhangs, and inadequate bankruptcy resolution frameworks; withdrawal of Covid-19-related policy support undermines growth and increases unemployment; adjustments in global value chains and reshoring shift production.
  - Policy Response: Provide fiscal support to affected sectors within a sustainable medium-term fiscal plan.
- De-anchoring of inflation expectations in the U.S. leads to rising core yields and risk premia (↓)
  - Relative Likelihood: Medium
  - Impact / Time Horizon: Medium / ST / MT
  - Description: Fast recovery in demand (supported by excess private savings and stimulus policies), combined with Covid-19-related supply constraints, leads to sustained above-target inflation and de-anchoring of expectations; Fed signals earlier tightening; market repositioning leads to front-loaded tightening of financial conditions and higher risk premia for credit, equities, and emerging and frontier market currencies.
  - Policy Response: Tighten financial conditions.
- Widespread social discontent and political instability (↓)
  - Relative Likelihood: Medium
  - Impact / Time Horizon: Low / ST / MT
  - Description: Withdrawal of pandemic-related policy support results in unemployment and, amid increasing prices of essentials, hurts vulnerable groups, often exacerbating pre-existing inequities.
  - Policy Response: Provide fiscal support to affected sectors within a sustainable medium-term fiscal plan.
- Rising commodity prices amid bouts of volatility (↓)
  - Relative Likelihood: Medium
  - Impact / Time Horizon: Medium / ST / MT
  - Description: Commodity prices increase by more than expected against a weaker U.S. dollar, post-pandemic pent-up demand and supply disruptions, and accelerated plans for renewable energy adoption; uncertainty leads to bouts of volatility, especially in oil prices.
  - Policy Response: Redouble efforts to strengthen export competitiveness and continue plans to move towards adopting alternative energy supply options.

### Structural risks
- Intensified geopolitical tensions and security risks (↓)
  - Relative Likelihood: High
  - Impact / Time Horizon: Medium / ST / MT
  - Description: Geopolitical tensions cause economic/political disruption, disorderly migration, higher volatility in commodity prices (if supply is disrupted), and lower confidence, with spillovers.
  - Policy Response: Boost efforts to increase employment and strengthen export competitiveness.
- Cyber-attacks (↓)
  - Relative Likelihood: Medium
  - Impact / Time Horizon: Low / ST / MT
  - Description: Attacks on critical infrastructure, institutions, and financial systems could trigger systemic financial instability or widespread socio-economic disruptions and remote work interruptions.
  - Policy Response: Strengthen Cybersecurity measures and contingency plans, especially for key infrastructure and institutions.

### Domestic Risks
- Lower than expected CBI revenues or official financing (↓)
  - Relative Likelihood: Medium
  - Impact / Time Horizon: Medium / ST / MT
  - Description: For example, owing to capacity constraints in project execution; disruption of correspondent bank relationships (CBRs) remains a threat to trade and growth.
  - Policy Response: Rationalize spending and mobilize revenue from other sources.
- Higher frequency and severity of natural disasters related to climate change (↓)
  - Relative Likelihood: Medium
  - Impact / Time Horizon: High / ST / MT
  - Description: Cause severe damage to smaller economies susceptible to disruptions. A sequence of severe events in large economies reduces global GDP and raises commodity price levels and volatility (low probability).
  - Policy Response: Continue implementing the Disaster Resilience Strategy, accelerate construction of resilient infrastructure and transition to local, renewable energy sources.

### Notes on the RAM
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path.
- Relative likelihood categories: “low” indicates a probability below 10 percent, “medium” indicates a probability between 10 and 30 percent, and “high” indicates a probability between 30 and 50 percent.
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities.
- Conjunctural shocks and scenario risks may materialize over a shorter horizon (between 12 and 18 months). Structural risks remain salient over a longer horizon.

### Fiscal Policy: Sustaining Investment in Resilience to Natural Disasters — Key findings and policy recommendations
- Overall recommendation:
  - Prudent use of windfall CBI revenue while maintaining progress on institutional fiscal reform to better address risks to the outlook and support execution of the government’s development plan to build resilience to natural disasters.
  - This involves: (i) increasing the allocation of CBI revenue to disaster insurance and debt service; (ii) maintaining progress on the fiscal consolidation plan with more focus on expenditure efficiency measures; and (iii) further developing budgetary and public financial management practices for effective implementation of the Fiscal Responsibility Act.
- Cost and scale of resilience:
  - The total cost of resilience is $2.8 billion, about 5-times Dominica’s GDP.
  - Implication: It will take many years of sustained high investment rates to achieve a critical mass of physical resilience.
- Reallocation of CBI revenue recommendations:
  - Use a share of CBI revenue for financial resilience and debt service.
  - Near-term government saving in the Vulnerability and Resiliency Fund (VRF) could provide a buffer against additional health costs in case of recurrent Covid-19 contagion bouts.
  - Given the long horizon to build resilience, reprioritize CBI revenue with higher allocations to financial resilience and debt service.
- Suggested allocation priorities for VRF:
  - (i) a saving fund for self-insurance against natural disasters (12 percent of the large stock of government deposits from CBI revenue plus 1.5 percent of GDP per year);
  - (ii) net public debt repayments for the next budget cycle (while public debt is above the regional ceiling of 60 percent, targeting a level below the ceiling);
  - (iii) investment in resilient infrastructure financed by the CBI revenue remaining after funding for self-insurance and net debt payments.
  - Relative to the baseline and assuming no natural disasters, this allocation would reduce fiscal space for public investment, resulting in an estimated reduction in the level of GDP of about 4 percentage points in the medium term, but would better support debt sustainability by reducing the need to borrow after natural disasters and by accelerating public debt reduction.
- Insurance layering framework recommendations:
  - Self-insurance in the VRF should be topped up with additional coverage for large and extreme disasters as part of a layered insurance framework:
    - Layer 1: VRF savings to cover more recurrent but less damaging disasters.
    - Layer 2: Caribbean Catastrophe Risk Insurance Facility (CCRIF) with re-calibrated triggers to more severe disasters and higher disbursement per event.
    - Layer 3: State-contingent debt instruments for extreme events, with due consideration to fiscal constraints given their cost.
  - The VRF calibration targets coverage equivalent to 99 percent of the estimated fiscal cost of natural disasters.
- Fiscal consolidation and expenditure efficiency:
  - Maintaining progress on the fiscal consolidation plan is important to increase government efficiency and create additional fiscal space for the disaster resilience plan.
  - Prioritize cost-saving expenditure and efficiency measures: civil service reform; better targeting of social transfers; review of pension contributions to ensure sustainability.
  - Measures to reduce informality and increase the tax base: Fund staff estimates indicate that 46 percent of the Dominica economy is informal. Suggested actions include ensuring registration with the DSS of workers employed in public investment projects and introducing the presumptive tax.
- Growth and distribution effects:
  - Staff analysis with a fiscal policy model calibrated to the Dominica economy indicates that fiscal consolidation to create fiscal space for investment in resilient infrastructure would increase output and employment if it relies on saving from recurrent spending.
  - Combined with better targeting of social transfers, the model suggests fiscal consolidation would reduce income inequality and improve social resilience.
  - Model simulations indicate a natural disaster hitting Dominica after 10 years of resilient investment would contain output loss and income inequality if fiscal consolidation prioritizes transfer efficiency and contains public wage spending with civil service reform.
- Institutional fiscal reforms and fiscal rule:
  - Approval of the fiscal rule in December 2021 includes: a ceiling on the primary fiscal balance; a public debt target consistent with the regional commitment; and escape clauses including for natural disasters and pandemics.
  - Specifics: The primary fiscal balance has to reach surplus of 2 percent of GDP by 2026, and to remain above that level afterwards when the debt to GDP ratio is above 60 percent. When the cumulative difference between the actual primary balance and the target is greater than 2 percent of GDP, a corrective action needs to be taken to reduce the difference to 0 within 3 years, with at least one third adjustment in first year.
  - Effective implementation would benefit from strengthening Public Financial Management (budget planning and preparation, enhancing fiscal reporting, improving internal auditing and treasury operations including bank account reconciliation and payments’ digitalization).
  - Further strengthen the rule by establishing mechanisms to monitor implementation—including more specificity on correction mechanisms for deviations and an independent fiscal council to monitor compliance (which could be established at a regional level).
  - Publication of fiscal data would strengthen transparency and accountability.
- Other ongoing reforms to support the rule:
  - New Public Procurement and Disposal of Public Property Act submitted to Cabinet.
  - Framework to monitor state-owned enterprises to identify contingent liabilities and support fiscal planning.
  - Budget process improvements to ensure realistic projection of revenue, spending and financing consistent with fiscal rule targets.
  - Revenue administration reforms (with CARTAC support) include a 20-month action plan addressing TADAT assessment weaknesses: start a compliance improvement plan for large and medium-sized taxpayers and high-risk sectors; improve the audit program focusing on large taxpayers and less pandemic-impacted industries; select audit cases based on assessed risk; focus on high frequency taxes such as PAYE and VAT; increase audit coverage using issue-oriented audits; ensure auditors are trained in analyzing financial data.
- Authorities’ views:
  - Government agreed to prioritize expenditure efficiency measures and intends to increase tax revenue without weakening the business environment.
  - Committed to prepare civil service reform and increase efficiency of social transfers with better targeting and design to avoid duplication and abuse.
  - Intends to review pension contributions and benefits if needed after actuarial review planned in 2022.
  - On revenue, intends to improve revenue collection by expanding the tax base and avoid introduction of new taxes to favor the business environment.
  - Committed to improving tax compliance by strengthening collection of tax arrears and tax administration to ensure accurate reporting and improve auditing.

*Source: Box 1. Risk Assessment Matrix, 1dmaea2022001*

### 26. The government  also

### 26. The government  also

### Reserving CBI revenue for self‑insurance and debt repayment
- The government agreed with the recommendation to reserve part of buoyant CBI revenue for self-insurance against natural disasters and debt repayment.
- They indicated plans to move in this direction once the economic and fiscal pressures posed by the pandemic abate.
- They intend to increase contributions to the Vulnerability and Resilience Fund (VRF) for self-insurance against natural disasters, and to avoid the use of CBI revenue on recurrent spending—which was not feasible in the pandemic.
- Authorities remarked that some of the CBI revenue has already been used in the past to service public debt.
- Staff appraisal: Saving a portion of CBI revenue would help better balance public investment needs with fiscal resilience and debt sustainability goals; CBI revenue was described as record-high at 30 percent of GDP (used to finance public investment).

### Strengthening the domestic banking sector to meet provisioning requirements
- A plan for domestic banks’ capitalization is needed to cushion the provisioning targets set by the ECCB, and in the large credit unions sector.
- ECCB announced the requirement of 60 percent NPLs provisioning in 2022 and of 100 percent by 2024.
- Based on 2021: Q2 data with an NPL ratio of 14.2 percent:
  - domestic banks would have to increase provisioning by 55 percent in 2022 (an amount equivalent to 1.6 percent of GDP and near 20 percent of capital) relative to the 2021: Q2 value.
  - domestic banks would have to increase provisioning by 160 percent by 2024 (3 percent of GDP and near 60 percent of capital) relative to the 2021: Q2 value.
- The possible increase in NPLs with the expiration of the loan moratorium would add to this need.
- Capitalization plan should consider a wide menu of options and a prioritized timetable, including loan-by-loan workouts and capital calls—which would imply a fiscal cost for institutions with public ownership of up to about 2.5 percent of GDP.
- Feasible measures include profits’ retention through no distribution of dividends and capital calls as needed.
- Authorities should closely monitor risks associated with the recent acquisition of Royal Bank of Canada’s local branch by the NBD, which increased NBD’s market share to 73 percent of total loans.

### Credit unions, insurance sector, and non‑bank financial institutions (NBFIs)
- Long-standing plans to modernize the regulation of credit unions should be advanced in the near term.
- The regulator should enforce a plan to bring all credit unions’ capital above the regulatory minimum and prepare other structural reforms to support financial stability.
- Authorities should evaluate options to provide liquidity assistance to the sector given size and macro criticality—assets of credit unions and insurance companies exceed 75 percent of GDP, and credit unions deposit their liquid assets at the National Bank.
- The non-bank regulator should be endowed with additional human and financial resources, and a structure independent of the Ministry of Finance to strengthen supervision effectiveness and help accelerate compliance.
- Capitalization of credit unions and regulatory progress are critical to support private sector growth and reduce the risk of government support after a shock, thereby improving the public debt outlook.
- Legacy weaknesses in the insurance sector should be addressed without fiscal cost.

### Loan moratoria, foreclosure legislation, and NPL resolution
- While loan moratorium and restructuring helped maintain financial stability, a plan for their normalization should be prepared on a loan-by-loan basis.
- Foreclosure legislation should be reviewed to facilitate the resolution of new and longstanding NPLs, to become effective once the economy recovers from the pandemic.
- National Bank should continue engaging with the Eastern Caribbean Asset Management Corporation to dispose NPLs.
- Loan loss provisioning should internalize a slow recovery and the risks to the outlook.
- Modernization of foreclosure legislation could facilitate seizing collateral and aid NPLs’ resolution.

### Stress testing and supervision
- National regulatory authorities should stress test credit unions and insurance companies in light of the risks to the outlook.
- In light of risks to NBFIs, the authorities should evaluate options to provide liquidity assistance to the sector.
- Additional human and financial resources, and independence from the Ministry of Finance, would strengthen supervision effectiveness and accelerate compliance.

### AML/CFT framework and correspondent banking relationships
- Continued progress in strengthening the AML/CFT framework is important to minimize risks to correspondent banking relationships.
- Dominica completed its third-round mutual evaluation process with the Caribbean Financial Action Task Force during 2008–14 and has since addressed most identified deficiencies; a reevaluation is planned in 2022.
- With legislative amendments in 2020, Dominica designated the ECCB as the competent authority for AML/CFT regulation and supervision of the banking sector.
- Strengthening resources and independence of the national regulator will help address weaknesses in oversight of NBFIs and non-financial businesses, especially risk assessment capacity.
- Meeting the RCF commitment to Maintain high due-diligence standards of the CBI program will strengthen AML/CFT integrity given the program’s significant contribution to government revenues.
- Dominica plans to adopt the digital currency launched by the ECCB in 2020 (DCash); DCash transactions will be limited to registered participants with a Dwallet, with potential to reduce ML/TF vulnerability if use becomes relatively widespread.

### Addressing economic informality
- Estimates indicate that about 46 percent of the economy is informal (on the high end of the ECCU).
- High informality complicated targeting and effectiveness of social assistance during the pandemic because informal workers are often not registered in government systems.
- Policy options to incentivize formalization include:
  - a reduction in the cost of land registration to formalize ownership;
  - digitalization of government services to facilitate registration in government systems;
  - improve access to online services.
- Updating the population database would help targeting and efficiency of social assistance.
- Formalization reforms would enhance private sector efficiency, support investment by facilitating access to credit with proof of collateral and income, and strengthen fiscal performance by broadening the tax base.
- Authorities expect that the presumptive tax and the 2022 census will help improve registration and provide data to address informality.

### Economic statistics and technical assistance
- Improvement of statistics is a priority, especially national accounts and the balance of payments.
- Main needs: enforcement of data submission deadlines, training, and additional resources to the statistics office.
- Authorities requested Fund technical support and valued CARTAC’s technical assistance on economic statistics; they seek additional resources to improve quality and reduce publication lags affected by pandemic mobility and lockdown restrictions.

### Staff appraisal: macroeconomic impact, outlook, and policy priorities
- Covid-19 impact:
  - GDP contracted by 11 percent in 2020 and is expected to post a modest recovery of 3.7 percent in 2021.
  - CBI revenue financed large public investment and was record-high at 30 percent of GDP.
  - Public debt peaked at 106 percent of GDP in 2020 with higher official borrowing, despite large CBI revenue.
  - Current account deficit remained abnormally high in 2020 at 30 percent of GDP and is estimated to reach 31.4 percent of GDP in 2021.
- Financial sector:
  - Remained liquid and stable during the pandemic, but NPLs are above prudential benchmarks: banks in the range of 11–14 percent of loans and credit unions 10–17 percent of loans (prudential benchmark is 5 percent in both sectors).
  - Banks have prepared plans to increase provisioning to 100 percent of NPLs by 2024.
- Near-term priorities:
  - Containing the pandemic and supporting recovery via public communication and education to address vaccine hesitancy and building additional health care centers.
- Growth outlook:
  - Promising, supported by large public investment program and projected gradual recovery in tourism with added hotel capacity.
  - Key projects: a new international airport; housing resilient to natural disasters; roads; a resilient water and sewage network; increase in hospital capacity (including a new hospital financed by the People’s Republic of China); an industrial park for agriculture processing; a geothermal electricity plant.
  - These projects will accelerate near-term growth during construction and increase potential output long-term.
- Fiscal policy and reforms:
  - The recent Parliament approval of a fiscal rule will strengthen debt sustainability and support achievement of the regional public debt ceiling of 60 percent of GDP by 2035.
  - Government has established limits on discretionary tax exemptions; advanced preparations of an income tax reform including a presumptive tax; studying a property tax reform.
  - Government intends to avoid additional new taxes or charges to maintain a favorable environment for private investment.
  - An actuarial analysis of the pension system by the Dominica Social Security (DSS) was planned by early 2022 (delayed due to covid mobility restrictions) and could trigger parametric amendments if needed.
  - Introduction of a solid waste charge could be delayed or reconsidered; reduction of the preferential rate on diesel could become effective once the economy has recovered.
- Expenditure efficiency:
  - Prioritize cost-saving measures: civil service reform including review of allowances, better targeting of social transfers (national census planned in 2022 to update Ministry of Social Services’ database).
  - Measures to reduce informality and increase the tax base, including registration with the DSS of workers employed in public investment projects and introduction of the presumptive tax.
  - Further steps to improve public investment efficiency and procurement recommended.
- External position:
  - In 2021, the estimated external position was moderately weaker than the level consistent with medium-term fundamentals and desirable policy settings.
  - External sustainability depends on successful structural reforms, resilient infrastructure, fiscal consolidation supported by windfall CBI revenue for debt reduction, while remaining at risk of recurrent natural disasters and CBI revenue volatility.

*Source: IMF staff report (chapter text).*

### 46. It is recommended that the next Article IV consultation takes place on the standard

### 1dmaea2022001 - 46. It is recommended that the next Article IV consultation takes place on the standard 

### Economic performance
- GDP is estimated to have contracted by 11 percent as tourism arrivals collapsed.
- 2020 Real GDP growth: -11.0 percent.
- Banking sector credit to the private sector and deposits are growing.
- Inflation has picked up, driven by food and gas prices.
- CPI Inflation, by Major Component (Percent change, y-o-y): series shown for All items, Food, Core CPI (chart referenced).
- Contributions to Growth of Stay-Over-Visitor Arrivals by Country (Percent, y-o-y): country contributions include US, Canada, UK, Caribbean, Other, Total (chart referenced).
- Commercial Banks' Total Loans and Deposits (Indices, 2014=100): time series from 2014 to 2021 (chart referenced).

### External sector
- An increase in foreign inflation resulted in a depreciation of the real exchange rate.
- Goods exports contracted due to international restrictions; goods imports decreased sharply as domestic demand and tourism declined.
- Current account deficit contracted due to the fall in imports.
- Citizenship-by-Investment (CBI) increased to record high levels, helping to finance public investment and containing the increase in public debt.
- Nominal and Real Effective Exchange Rates: Dominica REER and NEER indexed (January 2005 = 100) (chart referenced).
- Current Account Deficit and Financing (Percent of GDP): financing components include FDI, Grants, Public Sector, Commercial banks, Other, Total Balance (chart referenced).
- Goods Export by Major Components (Percent of GDP): Chemicals and Related Products; Machinery and Transport Equipment; Manufactured Goods and Materials; Mineral Fuels and Crude Materials; Animals, Food & Beverages and Tobacco (chart referenced).
- Goods Import by Major Components (Percent of GDP): same component breakdown (chart referenced).
- Citizenship-by-Investment Program (Million USD): time series showing increase to record levels (chart referenced).
- External Debt (Percent of GDP, left; Millions USD, right): Private sector, Public sector, Imputed reserves (chart referenced).

### Fiscal sector
- Government spending in resilient infrastructure increased sharply, largely financed with CBI revenue.
- Even as primary balance improved, public debt went up; the external component is significant and public corporations’ debt also contributes to general government indebtedness.
- Composition of Public Sector Debt, end June 2021 (In percent of total): CDB 22%; Other IFI 14%; Bilateral 11%; Banks and others 22%; Domestic 40%.
- Debt of Public Corporations (Percent of GDP, fiscal year): time series shown (chart referenced).
- Public Debt and Fiscal Primary Balance (Percent of GDP, fiscal year): public debt increasing while primary balance (w/ fiscal buffer) shown (chart referenced).

Key fiscal figures (Table 1, selected):
- 2020 Nominal GDP (Millions of E.C. dollars): 1,663.
- 2020 Nominal GDP (Millions of U.S. dollars): 616.
- 2020 U.S. dollars per capita: 8,553.
- Central government revenue (2019): 843.2 (millions EC$).
- Citizenship-by-Investment revenues (other nontax revenue, 2019): 448.0 (millions EC$).
- Central government debt (incl. guaranteed), 2020: 106.0 (percent of GDP).
- External debt (gross) 2020: 106.1 (percent of GDP).

### Monetary sector
- Non-Performing Loans increased markedly in 2020.
- Credit to private sector grew, primarily on account of lending for construction activities.
- Banks remain well-capitalized; deposits have remained steady amidst low deposit rates.
- Liquidity steady and close to the ECCU average; foreign assets have remained steady, foreign liabilities have declined.
- Commercial Banks' Capital Adequacy (Regulatory Capital/Risk Weighted Assets; percent): series shown with regulatory minimum (chart referenced).
- Commercial Banks Private Credit by Economic Activity (Percent, contribution to growth): construction & land development major contributor (chart referenced).
- Net Foreign Assets of Commercial Banks (Millions of EC$): series shown (chart referenced).

Selected monetary and banking statistics (Table 4, selected):
- Net foreign assets (end-period, millions EC$): 2016: 1,090; 2017: 1,437; 2018: 1,182; 2019: 879; 2020: 992; 2021: 962; projected 2026: 1,065.
- Money and quasi-money (M2, end-period, millions EC$): 2016: 1,375; 2017: 1,622; 2018: 1,645; 2019: 1,542; 2020: 1,389; projected 2026: 1,780.
- Real credit to the private sector (Table 1, annual percent change): 2019: 10.4; 2020: -1.3; 2021: 1.0; projected 2026: 2.5.
- ECCB policy rate (end-period rates): historical values shown, e.g., 2016: 6.5; 2017: 6.5; 2018: 6.5; later periods include 2.0 (chart/table referenced).
- Time deposit rate and demand deposit rate: time series provided (chart/table referenced).

### Social and economic indicators (Table 1 highlights)
- Area (sq. km.): 754.
- Population (2020) Total: 71,991; Annual rate of growth (percent): -1.8; Density (per sq. km.): 95.5.
- Adult literacy rate (percent, 2016): 94.
- Life expectancy at birth (years, 2016): 76.
- Infant mortality (per thousand live births, 2016): 12.38.
- Unemployment rate (2016): 23.
- Nominal GDP (EC$ millions) time series (2016–2021): 1,556; 1,457; 1,524; 1,663; 1,469; 1,569.
- Net imputed international reserves: end-year (millions of U.S. dollars) 2016: 220.9; 2017: 210.9; 2018: 189.2; 2019: 166.2; 2020: 176.4; 2021: 165.7; projected 2026: 211.2.
- Months of imports of goods and services: 2016: 8.0; 2017: 7.9; 2018: 5.4; 2019: 4.2; 2020: 6.8; 2021: 6.5; projected 2026: 5.7.

### Central government operations (Tables 2a and 2b, selected)
- Revenue (millions EC$): 2019: 843.2; 2020: 822.8; 2021: 835.3; projected 2026: 945.0.
- Taxes (millions EC$): 2019: 363.0; 2020: 333.3; 2021: 351.6; projected 2026: 529.8.
- Citizenship-by-Investment revenues (millions EC$): 2016: 491.2; 2017: 315.4; 2018: 208.3; 2019: 182.4; 2020: 448.0; 2021: 404.0; projected 2026: 314.8.
- Expenditure (millions EC$): 2019: 952.8; 2020: 978.7; 2021: 868.3; projected 2026: 975.3.
- Net lending/borrowing (incl. ND cost, millions EC$): 2019: -128.1; 2020: -109.6; 2021: -155.9; projected 2026: -30.3.
- Primary balance (millions EC$): 2019: -90.9; 2020: -79.3; 2021: -122.3; projected 2026: 14.3.
- Primary balance (excl. CBI) (millions EC$): 2019: -273.3; 2020: -527.2; 2021: -526.3; projected 2026: -300.5.
- Central government debt (millions EC$): 2016: 212; 2017: 301; 2018: 443; 2019: 546; 2020: 524; projected 2026: 452.
- Public sector debt (millions EC$): 2016: 1,134; 2017: 1,221; 2018: 1,348; 2019: 1,475; 2020: 1,610; projected 2026: 2,036.
- Public sector debt (percent of GDP) (Table 2b): 2016: 75.3; 2017: 81.9; 2018: 84.6; 2019: 94.2; 2020: 106.0; projected 2026: 90.8.

### Balance of payments (Table 3, selected)
- Current account balance (millions of U.S. dollars): 2016: -44.2; 2017: -46.2; 2018: -239.1; 2019: -233.2; 2020: -163.0; 2021: -182.2; projected 2026: -119.8.
- Current account balance (percent of GDP): 2016: -7.7; 2017: -8.6; 2018: -42.4; 2019: -37.9; 2020: -30.0; 2021: -31.4; projected 2026: -14.7.
- Exports of goods and services (millions of U.S. dollars): 2019: 215.3; 2020: 109.9; 2021: 116.1; projected 2026: 303.9.
- Tourism exports (millions of U.S. dollars): 2016: 197.5; 2017: 160.9; 2018: 88.4; 2019: 144.8; 2020: 43.3; 2021: 43.8; projected 2026: 202.9.
- Imports of goods and services (millions of U.S. dollars): 2019: 480.5; 2020: 313.2; 2021: 307.1; projected 2026: 443.5.
- Net imputed international reserves (Millions of U.S. dollars): 2016: 220.9; 2017: 210.9; 2018: 189.2; 2019: 166.2; 2020: 176.4; 2021: 165.7; projected 2026: 211.2.
- Gross external debt (percent of GDP): 2016: 86.7; 2017: 87.7; 2018: 100.4; 2019: 93.5; 2020: 106.1; projected 2026: 92.6.

### Banking system summary (Table 4, selected)
- Net foreign assets (millions EC$): 2016: 1,090; 2017: 1,437; 2018: 1,182; 2019: 879; 2020: 992; 2021: 962; projected 2026: 1,065.
- Money and quasi-money (M2, millions EC$): 2016: 1,375; 2017: 1,622; 2018: 1,645; 2019: 1,542; 2020: 1,389; projected 2026: 1,780.
- Private sector credit (millions EC$): 2016: 798; 2017: 785; 2018: 773; 2019: 727; 2020: 725; projected 2026: 901.
- Broad money (12-month percentage change): 2016: 6.0; 2017: 18.0; 2018: 1.4; 2019: -6.3; 2020: -9.9; projected 2026: 4.6.
- Non-Performing Loans (Commercial banks; percent of total loans): increased in 2020 (chart referenced).
- Commercial Banks' Capital Adequacy (Regulatory Capital/Risk-Weighted assets; percent): series shown with regulatory minimum (chart referenced).

*Source: IMF staff compilation from the provided Dominica chapter (figures, tables, and text as presented).*

### Annex I. Implementation of Fund’s Past Policy Advice

### Annex I. Implementation of Fund’s Past Policy Advice

### Revenue measures and tax policy reform
- Recommendation: Implement a tax policy reform and restructure tax incentives to maximize returns while minimizing revenue loss through discretionary concessions, with prioritized allocation to support investment, job creation, and social needs.
  - Actions:
    - In 2021, the government established limits on discretional tax exemptions on imports and collection of tax arrears.
    - Advanced stage of an income tax reform including:
      - a presumptive tax to the corporate income tax (CIT) framework to widen the income tax base and reduce informality;
      - a property tax to incentivize the use of idle property in prime urban areas.
    - FAD TA is expected to be completed in early 2022, on time to be introduced in the FY2022/23 budget.

- Recommendation: Implement additional revenue measures, including: (i) increasing pension contributions and retirement age; (ii) introducing cost-recovery fees on public health services; and (iii) applying a solid waste charge.
  - Actions:
    - Authorities are on track on the parametric reform of pension contributions, which are increased by 0.25 percent per year, and the retirement age.
    - Acceleration with faster increase in contributions and retirement age was discarded due to social resistance and the transitory nature of the yield.
    - Dominica Social Security is set to conduct an actuarial assessment in the first quarter of 2022, after which it plans to adjust pension contributions.
    - Cost recovery fees on health services and the solid waste charge have been deprioritized due to low revenue potential and increased tax administration burden from limited capacity.

- Recommendation: Increase tax auditing resources to boost revenue.
  - Actions:
    - In 2021, authorities increased tax audits in customs to improve importers’ compliance.
    - The government received FAD TA on tax audit in August 2021.

### Expenditure measures and public sector efficiency
- Recommendations: Prioritize expenditure efficiency measures, including:
  - (i) curbing wage bill growth below nominal GDP in the long term;
  - (ii) implementing a civil service reform, including public employment reclassification and rationalization of allowances;
  - (iii) increasing the efficiency of transfers with better targeting and design;
  - (iv) identifying nonpriority projects in the public sector investment plan of about 5 percent of GDP;
  - (v) reviewing pension contributions and benefits to ensure long-term sustainability after an actuarial update planned in 2022;
  - (vi) maximizing social transfers targeting with proxy means testing and better household and social information systems.
- Actions:
  - Authorities agreed on these recommendations.
  - Civil service reform is under preparation with technical support from CARICAD.
  - Increase in efficiency of transfers aided by data to be collected in a census planned in early 2022.
  - Several capital projects not related to rehabilitation and reconstruction of critical infrastructure have been discontinued after hurricane Maria and will be scrutinized to identify additional efficiency savings.
  - Social transfers through targeting proxy improved during Covid-19.
  - Review of pension contributions and benefits has been delayed due to the pandemic.

### Maximizing the efficiency of CBI revenue allocation
- Recommendation: Allocate a portion of CBI revenue to the Vulnerability and Resiliency Fund (VRF) for self-insurance against natural disasters.
  - Actions:
    - The government saved resources in the VRF in 2020 and 2021, albeit in amounts that are below requirements considering the large potential damage of natural disasters.
    - Government confirmed intention to increase VRF savings in line with Fund staff recommendations once the economy recovers from the covid pandemic.

- Recommendation: Top self-insurance in the VRF with additional coverage for large and extreme disasters as part of a layered insurance framework.
  - Actions:
    - Government increased coverage with CCRIF, financed with grants from Canada.
    - Will continue to review trigger thresholds to target coverage under less frequent but more damaging natural disasters as VRF savings increase over time.

- Recommendation: Passing of a Fiscal Responsibility Law (FRL).
  - Actions:
    - Parliament approved an FRL in October 2021, with technical support from the World Bank and Fund staff.

### Addressing potential risks in the financial sector
- Recommendation: Central Bank authorities to closely monitor risk of increase in NPLs and provisioning requirements, including after expiration of moratoria.
  - Actions:
    - To comply with ECCB requirement, banks prepared plans to increase provisioning to 100 percent of NPLs by 2024.
    - Adoption of IFRS9 standards in 2018 facilitated provisioning increases.
    - Most loans under moratoria have currently normalized.
    - ECCB approved acquisition of the Royal Bank of Canada’s Dominica branch by the National Bank of Dominica (NBD), which now has a market share of 73 percent of total loans; potential risks may emerge due to interconnectedness with the largest credit unions with liquid assets in the form of deposits at the NBD.

- Recommendation: Intensify surveillance in the credit union sector; move the non-bank financial institutions regulator outside the Ministry of Finance and endow with own revenue resources to ensure independence.
  - Actions:
    - Partially adopted: the non-bank regulator remains part of the Ministry of Finance.
    - New staff hired to strengthen surveillance capacity.
    - Progress made to increase capital in one institution via voluntary capital calls; other credit unions considering similar steps.

### Strengthening the Covid-19 vaccination campaign
- Recommendation: Continue maximizing the effort to increase vaccination.
  - Actions:
    - Government continues public communication and education campaigns to address vaccine hesitancy.
    - Building additional health care centers considered critical for possible contagion outbreaks.

### Improving data and statistics
- Recommendation: Strengthen data compilation, quality, and timeliness.
  - Actions:
    - Staff at the National Statistics Office and the Ministry of Finance have received TA from STA and CARTAC on methodological compilation and improvement of macroeconomic statistics.

---

### Annex II. External Sector Assessment (selected findings)

### Overall assessment and economic developments
- Overall Assessment: In 2021, Dominica’s external position was estimated to be moderately weaker than the level consistent with medium-term fundamentals and desirable policy settings.
- Economic developments:
  - GDP is estimated to have contracted by 11 percent in 2020 and is expected to have a modest recovery of 3.7 percent in 2021.
  - Construction grew strongly due to large public investment in housing and resilient infrastructure financed with record-high CBI revenue of 30 percent of GDP.
  - Public debt increased to 106 percent of GDP in 2020.
  - Current account deficit is estimated to have widened to 30 percent of GDP in 2020.

- Potential policy responses:
  - Prioritize allocation of CBI revenue for public investment while keeping the government saving fund as a self-insurance buffer for natural disasters and external debt service.
  - Accelerate structural reforms to improve private sector competitiveness and the business environment.

### Foreign assets and liabilities: position and trajectory
- Background:
  - NIIP deficit increased from minus 50.2 percent of GDP in 2020 to minus 65.8 percent of GDP in 2021.
  - In 2020, on the asset side, other investment (mostly currency and deposits) and reserve assets were the largest assets, at 83.5 percent and 51.7 percent of the NIIP, respectively.
  - On the liability side, FDI and other investment (mostly currency and deposits) were the largest liabilities, at 134.5 and 114.4 percent of NIIP, respectively.
  - Most external debt is in the form of loans, particularly long-term general government loans (89.3 percent of loans), and currency and deposits (16.5 percent of other investment).

- Assessment:
  - Large share of FDI liabilities mitigates potential risks.
  - Deterioration of the NIIP in 2021 does not constitute a significant concern for external debt sustainability.
  - Expected improvement in the current account in 2022 will likely stabilize the NIIP.

- Key 2021 NIIP figures (percent of GDP):
  - NIIP: -65.9
  - Gross Assets: 103.9
  - Debt Assets: 70.0
  - Gross Liabilities: -169.8
  - Debt Liabilities: -81.3

### Current account
- Background:
  - Estimated current account deficit increased from 30 percent of GDP in 2020 to 31.4 percent of GDP in 2021.
  - From 2020 to 2021:
    - Drop in tourism receipts accounted for 0.5 percentage points of GDP.
    - Lower imports contributed 4.7 percentage points of GDP.
    - Higher public transfers contributed 2 percentage points of GDP.
    - High CBI revenue totaled 24.5 percent of GDP, but was 5 percentage points of GDP lower than in 2020.

- Assessment:
  - External position was moderately weaker than consistent with fundamentals.
  - Persistence of large current account deficits mainly explained by Covid impact on tourism.
  - According to the CA model, the REER gap was of 4.10 percent while the IREER model indicates a REER gap of 0.13 percent.
  - Adjusted CA: -20.0
  - CA Norm (from model): -18.7
  - CA Gap: -1.3
  - Relative policy gap: 2.0
  - Elasticity: -0.32

### Real exchange rate (REER)
- Background and assessment:
  - In 2021, the REER depreciated by 2.7 percent.
  - NEER appreciated by 1.4 percent.
  - REER estimated to be overvalued by 4.10 percent.
  - Comparison with other Caribbean tourism-based countries suggests an improvement of about 5.9 percent in Dominica’s competitiveness.

### Capital and financial accounts; FX intervention and reserves
- Background:
  - Dominica has heavily relied on FDI to finance the external saving-investment imbalance.
  - CBI inflows averaged 22.1 percent of GDP from 2016 to 2021, including 24.5 percent of GDP in 2020.

- Assessment:
  - Current account deficits financed mostly by FDI, use of government deposits from CBI revenue, other investment (currency and deposits) and portfolio investment.

- Reserves:
  - Imputed reserves decreased by 5.7 percent, from US$176.4 million in 2020 to US$166.3 million in 2021.
  - Imputed reserves covered 6.5 months of imports.

*Source: Annex I. Implementation of Fund’s Past Policy Advice; Annex II. External Sector Assessment*

### 11.7 percent of broad money, which exceeds the typical benchmark of 3 months of imports but is below the

### 1dmaea2022001 - 11.7 percent of broad money, which exceeds the typical benchmark of 3 months of imports but is below the

### Reserve adequacy and external buffers
- Reserves equal "11.7 percent of broad money", which:
  - "exceeds the typical benchmark of 3 months of imports"
  - is "below the 20 percent of broad money benchmark."
- With the IMF membership-wide SDR allocation in 2021, Dominica received "11.022 million SDRs (about US$15.5 million)". The government "has not made a final decision on the use of the SDR allocation."
- ECCB reserve framework:
  - The ECCB mandate is to "maintain a foreign exchange cover of 60 percent of total demand liabilities."
  - Imputed reserves of each ECCB member are calculated as "the difference between the member’s reserve money and net domestic assets."
- Limitations: "Information on short term debt and other liabilities is unavailable" so assessments against composite ARA metrics "cannot be computed."

### Balance of payments and IIP data coverage and adjustments
- Official balance of payments and IIP data are available only until 2020. The assessment uses "2021 staff estimates" and "will be updated once official data are released."
- The ESA model includes a Covid-19 cyclical adjustor; for Dominica the entirety of the adjustment used the "Covid-19 tourism adjustor", yielding "a total adjustment of 12.9 percent of GDP."
- Assessment subject to uncertainty from "previous major external shocks (Hurricane Maria), subsequent data updates, and the 2021 Covid-19 tourism adjustors."

### Debt sustainability and fiscal outlook
- Debt assessment summary:
  - "Dominica’s debt is sustainable, but the country remains at high risk of debt distress with elevated levels of public and external debt."
  - Public debt peaked at "106 percent of GDP in 2020."
  - Authorities committed to a fiscal consolidation plan (from the 2020 IMF Rapid Credit Facility Disbursement) intended to put debt on a downward trajectory and "bring the debt-to-GDP ratio below the regional debt target of 60 percent of GDP by 2035."
- Conditional outlook:
  - Execution of the fiscal consolidation plan, "a sound recovery from the pandemic and continued CBI inflows," would put public and external debt on a sustainable path.
- Main downside risks:
  - "a more prolonged impact of the COVID-19 pandemic resulting in slower growth and weaker tourism-related revenue,"
  - "natural disasters,"
  - "weaker than projected revenues from the Citizenship-by-Investment program."
- Risk ratings from the Joint Bank-Fund DSA (January 27, 2022):
  - "Risk of external debt distress High"
  - "Overall risk of debt distress High"
  - "Granularity in the risk rating Sustainable"
  - "Application of judgement No"
- CI index: "The CI index for Dominica is 3.02 (medium debt carrying capacity) and is calculated based on data from the October 2021 WEO and the WB CPIA 2020 data."

### Data adequacy, statistical issues, and reporting gaps
- General: Data provision has shortcomings due to "capacity constraints in the statistical agency, and collection at the regional level." Data are "broadly adequate for surveillance" but limitations constrain analysis and policy formulation.
- Specific gaps and needs:
  - Need for more timely and improved data on "fiscal accounts, labor, agriculture, and the balance of payments."
  - Quarterly national accounts: CSO produces annual GDP (production and expenditure approaches) at 2006 prices; efforts to develop quarterly GDP since 2012 have had "minimal" progress due to staff and source data limitations.
  - CPI: Compiled monthly; weights based on the "2008/09 Household Income and Expenditure Survey (HIES)" with base period "June 2010." No official producer price data. Shortage of staff limits development of XMPIs.
  - Government finance statistics: Timeliness and quality affected by capacity problems. Monthly data exist but "show some important shortcomings." Reconciliation needed between "Inland Revenue Department, Customs, and the Treasury monthly." Capital expenditure reporting is fragmented and subject to continuous revisions. No consolidated nonfinancial public-sector data; data for Dominica Social Security and public enterprises obtained directly with "frequent delays and omissions." No government finance data reported to STA for IFS or GFS Yearbook.
  - Monetary and financial statistics: Monthly monetary statistics compiled and reported to the Fund by the ECCB since July 2006 using SRFs. Institutional coverage incomplete historically (mortgage companies, finance companies, building societies, and credit unions excluded), but "in 2020 the ECCB implemented a new chart of accounts for commercial banks" addressing some issues. Close coordination between the ECCB and single regulatory unit is "crucial."
  - External sector statistics: ECCB releases annual BOP and IIP statistics based on BPM6 since 2017. Travel credits sourced from visitor expenditure surveys. Further work required to reassess ratios used to estimate insurance and freight charges for goods imported.
  - Public and private external debt data: Debt unit maintains detailed public and publicly guaranteed external debt database (using "CS-DRMS") and reports to World Bank QEDS. "Data on private sector external debt stocks are not available, other than from the monetary survey, in the case of the commercial banks."
- Data dissemination and standards:
  - Dominica participates in the enhanced GDDS ("e-GDDS since September 2000") but "has not fully implemented the e-GDDS as it does not have a National Summary Data Page (NSDP)."
  - A Data ROSC for the monetary sector was conducted in 2007 covering ECCB and ECCU members.

### IMF relations, financial position, and technical assistance
- Membership and IMF financial position (as of December 31, 2021):
  - Quota "11.50" (SDR Million), "100.00 percent of Quota"
  - Fund holdings of currency "11.49" (SDR Million), "99.93 percent"
  - Reserve Tranche Position "0.01" (SDR Million), "0.08 percent"
  - SDR Department net cumulative allocation "18.86" (SDR Million), "100.00 percent"
  - SDR holdings "11.05" (SDR Million), "58.61 percent of Allocation"
  - Outstanding Purchases and Loans: "RCF Loans 15.41 133.96" (SDR Million; Percent of Quota)
- Overdue obligations and projected payments to the Fund (based on existing use of resources and present holdings of SDRs):
  - Forthcoming principal payments: "2022 1.44", "2023 1.23", "2024 1.23", "2025 2.26", "2026 2.06" (SDR Million)
  - Charges/Interest each year "0.01" (SDR Million) for 2022–2026
  - Total payments: "2022 1.44", "2023 1.24", "2024 1.24", "2025 2.26", "2026 2.06" (SDR Million)
- Exchange rate arrangement: Dominica participates in a currency union (ECCU) with the Eastern Caribbean dollar pegged at "EC$2.70 per U.S. dollar since July 1976." Dominica has accepted obligations of Article VIII, Sections 2, 3, and 4.
- Safeguards: A full safeguards assessment of the ECCB was completed in August 2021; findings:
  - ECCB "has maintained strong external audit and financial reporting practices" and improved "capacity of the internal audit function."
  - Recommended legal reforms to strengthen ECCB operational autonomy and align its Agreement Act with leading practices.
  - The issuance of digital currency (DCash) "introduces new risks" requiring additional controls and oversight; recommendations made to enhance project-governance framework.
- Technical assistance: Dominica has received significant TA from CARTAC and the IMF across multiple areas (PFM, revenue administration, financial sector, statistics, macro programming). Examples include:
  - PFM missions spanning June 2013–November 2021 covering cash flow forecasting, bank reconciliation, procurement, internal audit, PFM legislation, and strengthening internal audit.
  - Revenue administration missions spanning June 2013–October 2021 covering tax and customs administration, risk management, PAYE audit training, DMS and LMTS, large and medium taxpayer functions, TADAT assessment, and arrears management.
  - Financial sector missions spanning December 2013–January 2019 covering insurance supervision, consolidated supervision, risk-based supervision, stress-testing for credit unions, crisis management for non-bank sector, and macroprudential frameworks for SIFIs.
  - Statistical missions spanning May 2013–August 2021 covering national accounts, IIP, balance of payments, and BOP CARTAC/STA missions.
- Financial sector assessments and AML/CFT:
  - FSAP: Joint IMF/World Bank FSAP missions in 2003; FSSA discussed May 5, 2004.
  - AML/CFT: Last assessment by CFATF in 2009. Dominica has taken steps to strengthen the framework but "has not yet been assessed against the prevailing 2012 FATF standard."

*Prepared by the staffs of the International Monetary Fund and the International Development Association. Dominion-specific data and assessments reflect the content of the informational annex as of January 18, 2022 and the Joint Bank-Fund DSA dated January 27, 2022.*

### 1.      Public sector debt includes central government direct and guaranteed debt. Dominica’s

### 1dmaea2022001 - 1.      Public sector debt includes central government direct and guaranteed debt. Dominica’s

### Coverage and composition of public sector debt
- Public sector debt includes central government direct and guaranteed debt.
- Dominica’s public and total external debts are estimated at 106 and 105 percent of GDP respectively, in 2020.
- Central government direct debt accounts for over 80 percent of total public debt.
- Guaranteed debts are directed to State Owned Enterprises (SOEs), including borrowing under the Petrocaribe arrangement with Venezuela.
- Public and Publicly Guaranteed (PPG) external debt is mostly owed to multilateral creditors.
- The National Bank of Dominica and the Dominica Social Security are the main domestic creditors.
- Recent measures to improve coverage and timeliness of debt reporting include:
  - Introducing an annual Debt Policy Review (DPR), including loan guarantees under the 2019 DPR.
  - Submitting the DPR to Parliament.
  - Publishing the DPR on the Ministry of Finance website.
- SOE’s non-guaranteed debts, which are mostly domestic and mainly from National Bank of Dominica, the Agricultural and Industrial Development Bank of Dominica, and the Dominica Social Security, are not included in the public debt stock but are expected to be small relative to their guaranteed part.
- SOEs are not permitted to borrow externally without government guarantees.
- It is expected that all SOE debts will be included in the public debt with progress on monitoring the SOEs under the Public Procurement and Disposal of Public Property Act.
- There are no Public-Private Partnerships in Dominica; therefore no related contingent liability has been included.
- There is no borrowing by local/state governments and no borrowing by the central bank on behalf of the government.
- External debt is defined using a residency criterion; there is no material difference between defining external debt on the residency or currency basis.
- The financial market contingency liability included is above the default to account for enhanced risk from natural disasters.

### Petrocaribe and SOE notes
- Estimation of borrowing under Petrocaribe is based on the terms under its original loan agreement.
- Debt service payments to Petrocaribe have been cancelled or rescheduled in recent years; outstanding debt to Petrocaribe is estimated at 8.5 percent of the total debt stock as of 2020.
- Non-guaranteed SOE debt is collateralized against assets of the SOE.
- Debt service-to-revenue ratios may be biased favorably given incomplete coverage of SOE debt stock (i.e. non-guaranteed SOE debts) but complete coverage of SOE revenues in the fiscal accounts.

### Contingent liability calibration (text table summary)
- Default shock for other elements of general government not captured in central government: 0.0 percent of GDP (used for the analysis).
- SoE's debt (guaranteed and not guaranteed by the government) default value: 2.0 percent of GDP (default 1/; used for the analysis 2.0 percent of GDP).
- PPP default: 0.0 percent of PPP stock.
- Financial market contingent liability: default minimum 5 percent of GDP; used in Dominica 7.0 percent of GDP to account for hurricane's impact on financial institutions.
- Total (2+3+4+5) (in percent of GDP): 9.0 percent of GDP.

### Background on debt dynamics and recent history
- Successive natural disasters have put public debt on an upward trajectory, peaking in the aftermath of the Covid-19 pandemic.
- Tropical storm Erika in 2015 and Hurricane Maria in 2017 caused large declines in public revenue and sizeable reconstruction expenditures.
- Average public debt rose from 72 percent of GDP in 2012–15 to 94 percent of GDP by 2019.
- The onset of the pandemic produced an output contraction of 4.1 percent in FY 2020–21, resulting in the debt-to-GDP ratio reaching 106 percent.
- Strong CBI revenues provided significant financing for reconstruction efforts and contained the fiscal deficit despite rising debt.

### Drivers of external debt increases
- External debt rose due to persistent current account deficits from large reconstruction needs, contained by high CBI revenue.
- Public and private investments in reconstruction after Hurricane Maria led to steep import increases in 2018–2019, with imports exceeding 50 percent of GDP in both years.
- The pandemic reduced the import bill via lower economic activity in 2020, but the sharp GDP contraction kept the CA deficit significantly higher than the pre-Maria average in percent of GDP terms.
- Increased reliance on concessional financing for the pandemic translated into a steep increase in the PPG external debt in 2020.

### Creditor composition and market access
- Dominica has no access to international financial markets and borrows mainly from official creditors, constraining debt accumulation.
- Two thirds of Dominica’s debt is external; 90 percent of the PPG external debt is owed to official bilateral and multilateral creditors.
- Caribbean Development Bank holds 20 percent of the total external public debt stock.
- Petrocaribe (Venezuela) is the largest bilateral creditor, followed by the French Development Agency and the Government of China.
- Additional external financing is obtained through bonds purchased by regional commercial banks and insurance companies and pension funds.
- Domestic financing comes primarily through direct credit from the National Bank of Dominica and local debt holders, mainly the Dominica Social Security.
- Reliance on domestic debt increased with larger direct borrowing from the National Bank of Dominica during FY 2017–18 and increased use of their overdraft facility, notably in 2018–19.

### Assumptions underpinning debt sustainability forecasts
- Forecasts assume steady CBI revenue inflows which contribute to growth recovery through public investment.
- CBI revenue projected to taper from a 30 percent of GDP outturn in 2020 to 14 percent of GDP by 2026.
- In FY 2020–21, CBI revenues increased 145 percent year-on-year despite the pandemic; 2021 data indicates a similar outturn for the current fiscal year.
- CBI revenue is expected to finance an ambitious public investment budget, including a new international airport and geothermal electricity generation plant.
- Official external financing projected at 5 percent of GDP in the medium term (2024–26) and 4 percent of GDP in the long term (after 2026), in line with the historical average of 4 percent of GDP in 2012–14.
- Long-term growth projections and fiscal parameters incorporate the long-term impact of natural disasters.

### Growth, output, and investment projections
- The output decline during the pandemic is followed by a projected recovery with an average growth of 5.5 percent in 2021–26.
- Without the public investment boost, output would show a permanent loss of about 10 percent relative to the counterfactual level without the impact of the pandemic.
- In the long term, after 2026, output is projected to gradually decline and converge to a potential growth rate of 1.5 percent.

### Key macro assumptions and fiscal framework (baseline scenario)
- Fiscal consolidation plan: cumulative savings of 5.1 percent of GDP during 2022-26; plan identified prior to Covid-19 and adjusted for evolving circumstances.
- Revenue measures: streamlining discretionary tax exemptions, income and property tax reform, containment of recurrent spending; aided by Parliament approval of a Fiscal Responsibility Act in December 2021.
- Expenditure measures: civil service reform (with CARICAD support), better targeting of social transfers (aided by national census planned in 2022), review of pension contributions (actuarial assessment planned in 2022).
- Baseline assumes execution of fiscal consolidation leading to a primary surplus by 2023.
- CBI revenue in baseline: 25 percent of GDP in 2021, tapering to 14 percent of GDP by 2026.
- Grants projected at 2.3 percent of GDP.
- Real GDP: 2020 estimated decline of 11 percent in 2020; growth rebound in 2021 driven by expanded public sector investment portfolio.
- New international airport estimated cost: 65 percent of GDP; government plans execution within the next 3–4 years; baseline assumes execution over 6 years given capacity constraints and fiscal space.
- Public investment plan expected to push GDP growth to a 5 percent average in the medium term.
- Government intends to accumulate savings in the Vulnerability and Resiliency Fund (VRF) for self-insurance against natural disasters.
- Inflation projected to rise to 3 percent in 2021 and converge to 2 percent in the medium term.
- Current account deficit: deteriorated to about 30 percent of GDP in 2020; projected at 30 percent of GDP in 2021 as import growth accelerates due to large public investment projects; projected to decline in the medium term but remain above single-digit averages in 2013–17.

### Financing conditions and constraints
- Dominica projected to obtain financing from multilateral lenders and domestic borrowing, with negligible borrowing from other sources.
- Multilateral financing expected to contribute the bulk of external financing in the medium term for resilience-building projects and fiscal institutions.
- Domestic debt mostly held by the National Bank of Dominica and the Dominica Social Security; domestic debt issued in relatively favorable terms.
- Borrowing from Dominica Social Security has reached prudential limits; further borrowing limited under current repayment schedule.
- The G20’s Debt Service Suspension Initiative (DSSI) repayment schedule is reflected in the DSA assumptions.
- The DSA and baseline macroframework assume authorities do not use their SDR allocation.

### Government financing needs and sources (text table summary, US$ million, fiscal years July–June)
- Gross financing needs: 2021 307; 2022 969; 2023 474; 2024 446; 2025 446; 2026 (not shown).
- Overall deficit: 2021 59; 2022 232; 2023 263; 2024 383; 2025 625.
- Primary deficit: 2021 45; 2022 89; 2023 20; 2024 18; 2025 7.
- Interest: 2021 12; 2022 15; 2023 17; 2024 17; 2025 17.
- External debt (new): 2021 467; 2022 888.
- Domestic debt (new): 2021 99; 2022 109; 2023 99; 2024 9; 2025 (not shown).
- Principal repayments: 2021 133; 2022 346; 2023 312; 2024 92; 2025 8.
- External financing (gross financing sources): 2021 276; 2022 850; 2023 434; 2024 304; 2025 42.
- Multilateral financing (component): 2021 276; 2022 850; 2023 434; 2024 304; 2025 42.
- World Bank (WB) pipeline: annual numbers in table include 15, 48, 35, 30, 28, 29 (as shown in the table).
- Caribbean Development Bank (CDB) pipeline: 7, 20, 15, 13, 12, 13 (as shown in the table).
- Domestic financing (gross financing sources): 2021 41; 2022 119; 2023 194; 2024 44; 2025 4.
- Other debt creating flows (use of deposits): 2021 -4; 2022 123; 2023 -2; 2024 -2; 2025 1; 2026 -19; 2027 -6 (as shown in table footers where applicable).

### DSA realism tools and model caveats
- Results from applying DSA Realism Tools are affected by substantial growth volatility related to the pandemic.
- Real GDP growth paths implied from fiscal multipliers significantly diverge from baseline growth projections.
- Fiscal multipliers are not expected to produce accurate projections in the context of rebound from a pandemic and a primary surplus financed by large CBI revenues which allow much higher public investment.
- The projected relation between public investment and real GDP growth differs substantially from the historical relation due to unexpected shocks from the pandemic and natural disasters in 2015 and 2017, which delink growth from fiscal spending.

*Italicized source: IMF staff report material from the Dominica DSA (text and tables as provided).*

### 10.      Indicative debt thresholds in this DSA are determined by the “Medium” rating of

### Indicative debt thresholds in this DSA are determined by the “Medium” rating of Dominica’s debt carrying capacity

### Debt carrying capacity and Composite Index (CI)
- The “Medium” rating of Dominica’s debt carrying capacity is based on the Composite Index (CI) score, which assumes debt distress risk is determined by:
  - quality of institutions (World Bank Country Policy and Institutional Assessment (CPIA) score),
  - country-specific factors such as economic growth, reserves level, and remittances.
- The CI calculation is based on 10-year averages of the variables, across 5 years of historical data and 5 years of projection, and the corresponding CPIA.
- The CI indicator is calculated based on data from the October 2021 WEO and the WB CPIA 2020 data.
- Text Table entries (preserved as in source):
  - Country Dominica
  - Country Code321
  - Debt Carrying CapacityMedium
  - Final Classification based on current vintage Medium
  - Classification based on the previous vintage Medium
  - Classification based on the two previous vintages Medium
  - 3.022.992.87
  - APPLICABLEAPPLICABLE

### Debt instrument assumptions used in the DSA
- World Bank financing in the projection period:
  - grace period of 10 years,
  - maturity of 40 years,
  - interest 0.75 percent.
- CDB financing:
  - 5-year grace,
  - 25-year maturity,
  - 1 percent interest rate.
- Other multilateral borrowing:
  - 5 years grace,
  - 30-year maturity,
  - 1 percent interest rate.
- Domestic borrowing (National Bank of Dominica overdraft converted into long term bonds):
  - medium term: 0 years grace, 5-year maturity, 5 percent interest;
  - long term: 7 year maturity (authorities’ medium term strategy to extend debt maturity to 9 years is noted; DSA remains more conservative).
- Dominica requested an extension on the repayment schedule till December 2021; DSA incorporates extensions only where creditor agreements have been finalized.

### Applicable external debt burden thresholds (as presented)
- EXTERNAL debt burden thresholds / TOTAL public debt benchmark (preserved text and numeric values):
  - PV of debt in % of 55
  - PV of total public debt in percent of GDP Exports180 GDP40
  - Debt service in % of Exports15
  - Revenue18

### Scenarios and stress tests in the external and public debt analysis
- The DSA includes six standardized stress tests and a contingent liability stress test.
- Financial market contingency liability is included at 7 percent of GDP, above the default of 5 percent of GDP, to account for natural disaster risk and potential higher fiscal costs for strengthening financial sector balance sheets given undercapitalization of non-bank financial institutions and high non-performing loans.
- A customized “Catastrophic Climate Event” scenario assumes:
  - reoccurrence of a Category 5 Hurricane in the second half of 2022,
  - declines in real GDP, exports, and revenues in line with those following hurricane Maria,
  - considerable increase in expenditure in rehabilitation,
  - slower pace of recovery to account for more binding financing constraints.
- Historical scenario and an extreme shock scenario (reduction in exports to one standard deviation below historical average) are also considered.

### Baseline projections and key debt dynamics
- External public debt-to-GDP and debt-to-exports ratios:
  - PV of external public debt-to-GDP is on a declining trend and falls below the “medium” carrying capacity threshold by 2025 in the baseline.
  - The threshold is breached by a large margin under the Catastrophic Climate Event and the most extreme exports shock.
  - PV of external public debt-to-exports falls below the threshold more rapidly and is relatively more immune to a catastrophic climate event, but the most extreme exports shock causes significant deterioration.
  - Both PV external debt-to-GDP and PV debt-to-exports remain close to the thresholds in the medium term, implying high risk of breaching under downside shocks.
  - The historical scenario shows a more rapid decline in the debt-to-GDP ratio in initial years but a similar trajectory subsequently.
- Debt service metrics:
  - Debt service metrics are on a declining trend and remain below the threshold for most of the projection period.
  - Debt service to exports ratio remains below threshold from 2023 in all scenarios except the most extreme shock.
  - Debt service to revenue remains below threshold for all shocks.
- Public (PPG) debt:
  - Under the baseline, public debt is assessed to be sustainable but remains at high risk of debt distress.
  - The PV of total public-sector debt-to-GDP ratio remains above the corresponding benchmark until well into the projection period, declining below the benchmark by 2029.
  - All shocks result in large breaches of the benchmark.
  - Debt service-to-revenue ratios increase in the near-term due to projected revenue losses during the pandemic and then decline.
  - Domestic debt service spikes in 2023 but moderates thereafter.

### Overall risk assessment and vulnerability factors
- Overall risk of external debt distress:
  - Based on baseline threshold breaches in the near term, the risk of external debt distress is assessed as high.
  - Baseline breaches stem mainly from high initial debt stock; alternative scenarios (historical and catastrophic climate shock) reinforce this conclusion.
- Overall risk of public debt distress:
  - Under baseline, public debt is sustainable but at high risk of debt distress.
  - Fiscal consolidation plan plus continued robust CBI inflows support a declining public debt trajectory, but key sustainability metrics remain elevated and sensitive to stress scenarios.
- Important mitigating factors omitted from standardized stress tests:
  - Resilience to natural disasters: large investments in resilient physical and social infrastructure (which underpinned large fiscal deficits in FY 2018–19 and FY 2019–20) reduce future rehabilitation and reconstruction spending and may lower long-term fiscal deficits and debt financing parameters used in stress tests.
  - Fiscal buffers: large government deposits from buoyant CBI revenue have financed fiscal deficits since 2015; accumulation of savings in the Vulnerability and Resiliency Fund (VRF) for self-insurance against natural disasters will cushion catastrophic events.
- Non-resident deposits and reserves:
  - Nearly 20 percent of the stock of external debt, equivalent to about 19 percent of GDP, is composed of non-resident deposits held in the banking sector.
  - These deposits (typically Dominican nationals abroad) enhance stability of external debt due to low rollover risk and increase imputed international reserves under the regional currency board arrangement.
- Market and currency risk:
  - Nearly 90 percent of the debt portfolio consists of fixed interest debt.
  - Currency risks are limited by the currency board arrangement and external debt being dominated by USD and EC dollar debt.

### Policy recommendations and authorities’ actions
- Fiscal consolidation and financing:
  - Sustained progress on the fiscal consolidation plan and continued pursuit of concessional financing terms make external and overall debt sustainable but at high risk of distress.
  - Planned accumulation of a liquid fiscal reserve in the VRF will help protect debt service capacity and resilience to natural disasters.
  - Execution of the government development plan centered on building resilience to natural disasters will strengthen debt sustainability by reducing reconstruction spending, containing output and employment losses, and increasing long-term output via investment and employment.
  - Staff recommends reprioritizing CBI revenues towards enhancing VRF contributions and paying down debt to reduce borrowing needs following extreme climate shocks and lower outstanding debt stock.
- Domestic borrowing and financial stability:
  - Increased reliance on domestic borrowing during 2018–20 heightened public debt risks; higher domestic debt increased debt service burdens and underscores financial stability risks from the bank- and non-bank-sovereign nexus.
  - Authorities should closely monitor financial stability of local bondholders, particularly Dominica Social Security.
  - Continued multilateral and bilateral concessional support and adherence to fiscal consolidation commitments (including the 2020 RCF disbursement conditions) are important to avoid debt unsustainability if catastrophic climate shocks materialize.

*Source: IMF DSA content for Dominica (excerpt provided).*

### 22.      The authorities highlighted the direct link between climate change, cost of building

### 22.      The authorities highlighted the direct link between climate change, cost of building resilience and Dominica’s debt trajectory

### Authorities' assessment and fiscal strategy
- Authorities agree with staff assessment that public debt is at high risk of distress.
- Authorities view Dominica’s debt problems as deriving from an external shock in 2017 which claimed over 200 percent of 2016 GDP in damages, followed by an unprecedented pandemic in 2020.
- Despite repeated shocks, Dominica has not faltered on its debt repayments to its creditors and is not seeking debt forgiveness.
- Authorities expressed confidence in their ability to meet the regional debt target of 60 percent of GDP by the extended deadline of 2035, supported by:
  - a strong fiscal saving plan under execution;
  - institutional fiscal reforms, including a fiscal rule passed in December 2021.

### Debt dynamics and key metrics (selected figures as reported)
- Public debt increased to 106.0 percent of GDP at end-2020 (from 94.2 percent in 2019).
- Public sector debt (historical/projections excerpt): 84.6 (2018); 94.2 (2019); 106.0 (2020); 101.3 (2021); 100.5 (2022); projections show decline toward 70.7 (2031) and 47.1 (2041).
- External debt (nominal, percent of GDP excerpt): 98.3 (2018); 95.9 (2019); 104.8 (2020); 100.2 (2021); 99.5 (2022); projected 91.4 (2026); 74.8 (2031); 42.9 (2041).
- PV of PPG external debt-to-GDP ratio (selected projection figures): 48.2; 45.6; 44.2; 42.4; 40.6; 39.5; 39.3; 32.7; 20.1 (table excerpt).
- Gross external financing need (Million of U.S. dollars): 186.3 (2018); 226.7 (2019); 158.0 (2020); 161.3 (2021); 170.0 (2022); projected 105.6 (2026); 74.3 (2031); 41.7 (2041).
- Key macroeconomic assumptions (selected):
  - Real GDP growth (in percent): 5.6 (2018); -2.1 (2019); -4.1 (2020); 5.7 (2021); 6.4 (2022); 5.0 (2023); projections down to 1.5 (2031).
  - Nominal dollar GDP growth: 6.9 (2018); -1.7 (2019); -3.0 (2020); 8.6 (2021); 8.8 (2022); 7.0 (2023); projections include 3.5 (2031).
  - Effective interest rate (percent): 1.8 (2018); 1.5 (2019); 1.4 (2020); 1.6 (2021); 1.5 (2022); 1.5 (2023); projected 1.3 (2041) in table.
- Public sector DSA indicators (selected):
  - PV of public debt-to-GDP ratio (selected projection figures): 87.6; 82.5; 78.0; 73.2; 68.9; 65.4; 63.0; 47.2; 30.9.
  - Debt service-to-revenue and grants ratio (selected): 12.9; -4.8; 8.0; 9.6; 15.5; 18.8; 15.2; 14.4; 13.7; 9.8; 9.6.
  - Gross financing need (selected): 21.5; 3.1; 10.1; 13.1; 9.6; 11.3; 10.5; 9.6.

### Stress tests, scenarios, and vulnerability analyses
- Sensitivity analysis highlights vulnerability to catastrophic climate events:
  - In Table 2 (PPG external debt, PV of debt-to-GDP ratio), the "Catastrophic Climate Event" scenario yields much higher PV of debt-to-GDP outcomes compared with baseline (e.g., entries showing sharp increases in many projection years).
- Bound tests and tailored tests show:
  - Real GDP growth shocks, primary balance shocks, exports shocks, and combinations can materially breach thresholds.
  - Natural disaster shocks are treated as customized scenarios to mimic Hurricane Maria impacts.
- The DSA notes the residuals are mostly explained by the use of government deposits derived from CBI revenues and changes in privately held external debt.

### COVID-19 response and recent economic developments
- Economic impacts:
  - GDP is estimated to have declined 11 percent in 2020.
  - A modest recovery of 3.7 percent is estimated for 2021.
  - Consumer prices: declined 0.7 percent in 2020; recorded 3.0 percent in 2021.
  - An overall fiscal deficit of 7.2 percent of GDP was recorded in fiscal year 2020/21.
- Pandemic response measures:
  - Health: revamped health services; new facilities for COVID-positive people; purchase of protective and medical equipment; free quarantine facilities for local patients; quarantine arrangements for visitors testing positive; widespread testing at no cost.
  - Economic: extension of tax filing period; tax waivers, deferrals, incentives; elimination of import duties and VAT on cleaning and health products; unemployment benefits via Social Security; maintenance of social transfers; support for ECCU-wide moratorium on loan repayments.
- Financing for pandemic response:
  - The Fund disbursed the equivalent of SDR 10.28 million (US$14 million; 89.39 percent of quota) under the Rapid Credit Facility (RCF) in 2020.
  - Additional concessional resources were obtained from the World Bank (WB), the Caribbean Development Bank (CDB), and the OPEC Fund.
- Authorities’ public health objective:
  - Aim to vaccinate 70 percent of the population aged 18 and older; vaccine hesitancy is a major challenge and authorities are working with social groups and civil society to increase uptake.

### Financial sector and other vulnerabilities
- Banking sector measures mitigated pandemic impact; sector remained stable and liquid.
- Vulnerabilities exist in the non-bank sector, especially among credit unions, some of which are under-capitalized.
- Overall, the level of non-performing loans is high and will need to be addressed.
- Large current account deficits exceeding 30 percent of GDP were recorded in 2020.

*Sources: Country authorities; and staff estimates and projections contained in the provided document.*

### 2021. These outcomes are largely as a result of the declines in the tourism sector and

### 1dmaea2022001 - 2021. These outcomes are largely as a result of the declines in the tourism sector and

### Economic Outlook
- Growth projections:
  - Growth of 7.6 percent is projected in 2022 on the assumption that the health situation will improve, the tourism sector will re-emerge, and robust implementation of large public sector investment projects will take place.
  - Growth over the medium term (2023 to 2025) will average five percent per annum.
- Inflation:
  - Inflation is projected at 2.5 percent in 2022 and two percent in the medium term.
- External sector:
  - The current account deficit is expected to reduce to 28.7 percent of GDP in 2022 and to fall progressively to 14.7 percent of GDP by 2026.
- Risks:
  - Risks to the economic outlook are tilted to the downside, with the trajectory of recovery subject to the path of the pandemic.

### Fiscal Policy
- Immediate priorities:
  - Bolster the post pandemic recovery while starting the process of fiscal consolidation.
  - Fiscal relief measures will remain in place where necessary until the recovery firmly takes root.
  - Focus will shift to rebuilding fiscal buffers into the medium term and advancing reforms to support fiscal and debt sustainability.
- Debt and fiscal rules:
  - Authorities have signed on the ECCU target of a debt to GDP ratio of 60 percent by 2035 and are committed to reaching this target.
  - The approval of the fiscal rule in December 2021 is highlighted as a most important step giving credibility to the commitment to achieve the debt target.
  - Elements of the fiscal rules include establishing the primary fiscal balance as an operational target and inclusion of contingent clauses in debt agreements, including for natural disasters and pandemics.
- Disaster impact and buffers:
  - Hurricane Maria (2017) resulted in loss and damage equivalent to 226 percent of GDP.
  - Initial spending for hurricane Maria rehabilitation was financed mostly by drawing down buffers accumulated from revenues raised under the Citizenship By Investment Program (CBIP).
  - Authorities established a Vulnerability and Resiliency Fund (VRF) for self-insurance against natural disasters; this Fund is complementary to participation in the Caribbean Catastrophe Risk Insurance Facility (CCRIF).
- Fiscal consolidation plan:
  - Proposed phased fiscal consolidation plan of 5.1 percent of GDP, to be executed over five years.
  - Measures include amendments to the income tax regime, additional streamlining of discretionary tax exemptions, introduction of a property tax, public sector reform, better targeting of social transfers, and a review of the social security pension system to ensure it remains sustainable and funded.
- Public investment program and financing:
  - Ambitious public investment program includes construction of an international airport, a geothermal plant and resilient housing, and rehabilitation of major road infrastructure.
  - Climate Resilient Execution Agency of Dominica (CREAD) established to spearhead project implementation and address bottlenecks.
  - Revenues from the CBIP are critical: to finance the public sector investment program, fund the VRF, and pay down debt.

### Financial Sector
- Stability and supervisory actions:
  - Maintaining financial sector stability remains crucial to support economic recovery.
  - The sector has weathered the pandemic well and is broadly sound.
  - Authorities support banks’ plans to strengthen capital buffers and to increase provisioning to 100 percent of NPLs by 2024, as set by the ECCB.
- Market structure and supervision:
  - Following the purchase of the Dominica branch of the Royal Bank of Canada, the National Bank of Dominica now accounts for 73 percent of total loans.
  - Enhanced supervision for this entity is necessary.
- Non-bank sector and regulator capacity:
  - Authorities support measures to address shortcomings in the non-bank sector, especially within the credit union sector.
  - Capacity of the Financial Services Unit (FSU), the non-bank regulator, is being strengthened to improve surveillance and equip staff to provide guidance on increasing capital, addressing NPLs, and preparation of crisis management plans.
- AML/CFT:
  - Dominica made legislative changes to designate the ECCB as the competent authority for AML/CFT regulation and supervision of the banking sector in 2020.
  - The National Risk Assessment (NRA) was recently completed and the report is being finalized.
  - The Caribbean Financial Action Task Force (CFATF) is engaging Dominica in preparation for the fourth-round mutual evaluation, with the expectation that the report will be presented to the plenary session of the CFATF in November 2022.

### Structural Reforms
- Climate resilience and disaster preparedness:
  - Dominica is highly susceptible to natural disasters and the impacts of climate change; authorities have focused on “climate proofing” new infrastructure since announcing plans to make Dominica the first climate resilient nation.
  - Access to financing for climate mitigation remains a challenge.
  - A Disaster Resilience Strategy (DRS), prepared with assistance of the Fund, is in place to assist authorities in seeking financing for activities.
- Business environment:
  - Authorities will continue to pursue policies aimed at improving the business environment.

### Concluding Remarks
- Pandemic and policy stance:
  - The ongoing pandemic poses an immense challenge for service-based economies; risks are tilted to the downside and the longer the pandemic lasts, the deeper the impact.
  - Authorities adopted a strategy to accelerate implementation of public sector investment projects to spur economic activity and create direct and indirect employment opportunities.
  - Near-term priority is to protect lives and livelihoods and to protect past economic and social gains.
  - Authorities acknowledge the need to rebuild buffers and consolidate the fiscal position to achieve durable and inclusive growth.

*Source: IMF country report content provided in the input.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1dmaea2022001.pdf_