## 1dmaea2023001 ## Source details **Canonical URL:** [1dmaea2023001](https://www.imf.org/-/media/files/publications/cr/2023/english/1dmaea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1dmaea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1dmaea2023001.pdf.json) --- ### Fiscal stance, consolidation needs, and public investment - Recent shocks: tropical storm Erika (2015), hurricane Maria (2017), COVID-19, and Russia’s war in Ukraine left Dominica with the largest public debt ratio in the region. - Public investment and resilience agenda: - Investments in resilient infrastructure rose to 26 percent of GDP in the last fiscal year. - Government increased asset holdings to 2 percent of GDP in the Vulnerability and Resilience Fund (VRF). - Government signed a catastrophe-contingent loan agreement (Cat DDO) with the World Bank and launched a parametric insurance instrument for the private sector. - Reliance on Citizenship-by-Investment (CBI) revenues: - CBI inflows neared 30 percent of GDP. - CBI resources financed airport-related contracts and cleared some contractor arrears. - Short-term fiscal pressures from key projects: - International airport: estimated total cost of 59 percent of 2022 GDP (intensified in FY22/23, expected to continue until FY25/26). - Geothermal infrastructure: about 25 percent of GDP in investments over the next three years, of which half are publicly financed. - Recent fiscal outcomes and projections: - Primary deficit rose to 6.2 percent in FY21/22. - Gross public debt stands at over 106 percent of GDP. - Primary fiscal deficit projected to fall to 2 percent of GDP in FY22/23. - Public debt projected to decline to 97.7 percent of GDP in FY22/23 and to slowly decline thereafter with gradual fiscal consolidation. - Policy priorities: - Mobilize tax revenue by reducing tax expenditures and improving tax administration. - Reduce the wage bill and rationalize inefficient current spending. - Strengthen social protection systems through better targeting. - Prioritize capital spending on growth-enhancing projects that also build resilience to natural disasters. ### Growth outlook and structural transformation - Recent growth and drivers: - After contracting nearly 17 percent in 2020, economy expanded by 6.9 percent in 2021 and 5.7 percent in 2022, driven by construction of climate-resilient infrastructure, new hotels, tourism rebound, and higher agricultural output. - Inflation rose to an estimated 7.5 percent in 2022. - Near- and medium-term projections: - Real GDP growth projected to moderate from 5.7 percent in 2022 to 4.7 percent in 2023, converging to 2.7 percent trend growth over the medium term. - Inflation expected to ebb to 6.2 percent in 2023, and to recede towards 2.0 percent afterwards. - Long-term benefits of infrastructure: - Airport expected to expand tourism exports; geothermal project expected to lower oil imports and support resilience. - Short-term growth effects significant though tempered by a low estimated short-term multiplier; public debt ratio worsens in the projection horizon initially but permanent benefits to growth expected to broaden fiscal space. ### External sector and balance of payments - External pressures and developments: - Fuel imports rose to a historical peak of 8.5 percent of GDP in 2022 (3 percentage points more than in 2019). - Current account deficit (CA) estimated to have remained elevated at over 26.2 percent of GDP in 2022. - Main financing sources: CBI, Grants and FDI. - REER depreciated by a cumulative 7 percent in 2021–22. - Staff assessment: - External position assessed to be substantially weaker than level consistent with medium-term fundamentals and desirable policy settings. - Outlook: - Lower global fuel prices and transition to renewable energy expected to halve global fuel import bill over the medium term. - Services balance expected to improve with tourism expansion; import of investment goods expected to wane along with public investment. - Current account expected to increase towards its norm by 2025–26. ### Financial sector, credit, and stability - Banking and credit unions: - Banks remain well capitalized and liquid but experienced a drop in 2022 reflecting losses on overseas investments and operational costs related to the purchase of Royal Bank of Canada by the National Bank of Dominica (NBD). - Provisioning efforts continue; banks now attaining the ECCB 2022 target but still lag regional peers. - NBD is currently the only locally incorporated bank (with 75 percent of assets as of 2022Q4). - Asset quality and NPLs: - Banks’ NPLs at 14 percent of total loans—significantly above the ECCB’s prudential limit of 5 percent. - ECCB requirement: 60 percent NPL provisioning in 2022 and 100 percent for “Loss” loans by 2024. - Credit unions: - Recapitalization plans brought capital ratios generally above 5 percent, although below the 10 percent 2026 target for major credit unions. - NPLs in credit unions continued to grow in 2022 following expiry of loan moratoria. - Private sector credit: - Private sector credit remains subdued; most bank lending since the pandemic has gone to the public sector. - Structural constraints expected to limit private sector credit pickup to only a gradual increase. - Financial stability risks: - Risks remain contained due to capital buffers and liquidity, but strains persist, including legacy insurance sector claims due to hurricane Maria and potential government contingent costs up to 0.5 percent of GDP. ### Implementation status, risks, and institutional agenda - Implementation progress: - Progress on resilience-building: vaccination campaign, expanded health care capacity, key infrastructure construction, accumulation of disaster-specific financial buffers. - Progress on financial sector reforms: capitalization of credit unions and NPL provisioning at NBD advancing; FSU resources expanded. - Gaps: fiscal consolidation slower than anticipated; modernization of financial regulatory frameworks still pending; actions to promote formalization of the economy remain limited. - Major risks: - Continued volatility in CBI revenues constitutes a source of external vulnerability. - High commodity prices and fuel supply disruptions pose inflation and external risks. - Large public investment program consumes a large portion of fiscal space and raises short-term financing needs. - Institutional and structural reform priorities: - Leverage the forthcoming ECCU regional credit bureau, modernize insolvency laws, streamline regulatory requirements for business loans. - Advance transition to renewable (geothermal) energy. - Improve connectivity and integration of tourism with other sectors. - Address informality, and invest in skills and digitalization. ### Major risks to the outlook (selected) - Global shocks that could worsen supply constraints, renew pressure on commodity prices, and harm global growth; examples include escalation of the war in Ukraine, heightened financial stress, or increased protectionism. - Climate-related risks: intensification of natural disasters could bring large output and capital losses, weakening balance sheets and raising sustainability and financial stability risks. - CBI revenue volatility: - Lower-than-expected CBI revenue would hamper consolidation efforts and investment execution plans. - Sustained higher CBI revenue could allow faster implementation of resilience and growth enhancing projects, boost economic activity, and/or buildup of fiscal buffers. - Financial/operational risks: a stall in fiscal consolidation could impair the financial system, and disruption of correspondent bank relationships (CBR) could threaten trade and growth. ### Key infrastructure project scenarios (selected projections) - Real GDP (percent) — Baseline outlook: 2022 5.7; 2023 4.7; 2024 4.6; 2025 4.2; 2026 2.9; 2027 2.7; 2028 2.7 - No new airport scenario: 2022 5.3; 2023 4.3; 2024 4.2; 2025 4.0; 2026 2.6; 2027 2.4; 2028 2.4 - No geothermal project scenario: 2022 5.7; 2023 3.7; 2024 3.7; 2025 3.4; 2026 2.1; 2027 2.7; 2028 2.7 - Central Government Debt (% of GDP) — Baseline outlook: 2022 97.6; 2023 93.5; 2024 91; 2025 90.3; 2026 90.1; 2027 89.5; 2028 89 - No new airport scenario: 2022 97.2; 2023 92.5; 2024 89.5; 2025 88.3; 2026 87.4; 2027 87.1; 2028 86.7 - No geothermal project scenario: 2022 98.3; 2023 92.3; 2024 88.2; 2025 85.8; 2026 83.3; 2027 82.5; 2028 81.6 - Current Account (% of GDP) — Baseline outlook: 2022 -26.2; 2023 -25.2; 2024 -17.7; 2025 -15.9; 2026 -14.3; 2027 -12.8; 2028 -11.1 ### Policy recommendations (fiscal consolidation, buffers, and public investment) - Consolidation need: - Projected fiscal balances would result in a shortfall of 2½ percent of GDP to comply with the 2 primary balance in 2026 required by the National Fiscal Rule. - Staff recommendation: additional consolidation equivalent to a cumulative 2½ percent of GDP by 2026. - Under current policies, public debt would reach the regional target of 60 percent of GDP only in 2040; 5 years after the 2035 goal. - Composition of consolidation: - Revenue measures: eliminate PIT exemptions, review tax incentives (VAT, custom duties, CIT), strengthen tax administration, and foster compliance. - Spending measures: reduce the wage bill (currently above 11 percent of GDP) through civil service reform and rationalization of allowances; contain pension spending by raising the minimum pensionable (early retirement) age; undertake a spending review to rationalize inefficient programs. - Prioritization of public investment: re-prioritize PSIP within fiscal constraints, giving priority to growth-enhancing projects (transition to geothermal energy and airport). - Buffers and insurance: - Allocate higher share of CBI revenue to disaster insurance and debt amortization ex-ante. - DRS advice: a self-insurance fund (VRF) with 12 percent of GDP in savings is appropriate; current VRF stock is 2 percent of GDP; staff advised increasing annual contributions though contributions have remained stable at 0.4 percent of GDP. - Consolidation quantified in non-CBI terms: - A 5 percent of GDP improvement is currently expected through 2026 (mostly from less public investment, higher tax revenue and less public consumption). - 8 p.p. would be needed to meet the fiscal targets, bringing the non-CBI primary balance (including ND costs) to -12 percent of GDP. - This corresponds to a non-CBI recurrent primary balance of -3.4 percent of GDP in 2026 (from -9.5 in 2022), compared to a baseline projection of -6.1 percent of GDP. - If investment is to be unaffected by consolidation, fiscal reforms should generate 3.3 percent of GDP in cumulative savings. ### Social protection and targeting - Current coverage and spending: - World Bank estimate: about 30 percent of poor households are covered by the UCT scheme; social pensions leave about 40 percent of elderly uncovered. - Prior to hurricane Maria, Dominica spent about 2 percent of GDP in social assistance. - Social protection costs totaled 3.6 percent of GDP in FY21/22; resilient housing provision added a further 1.8 percent of GDP. - Recommendation: use proxy-targeting and build a comprehensive social registry using the population census. ### Financial intermediation, inclusion, and regulatory priorities - Financial sector structure and metrics: - Overall financial sector assets exceed 200 percent of GDP. - Banks’ private sector credit is less than 50 percent of GDP and 40 percent of assets. - Total loans represent less than 60 percent of deposits. - Credit to the public sector accounts for about 17 percent of the banking-sector assets. - Banks invest a large share of assets in overseas deposits and traded securities, making Dominica’s banking system a net foreign creditor. - The government’s development bank (AID) plays a prominent role in extending credit to MSMEs. - Financial inclusion and private credit constraints — recommended actions: - Encourage use of the ECCU regional credit bureau and registry. - Modernize insolvency laws. - Streamline required documentation for business loans and facilitate MSME access to regional partial credit guarantee scheme (ECPCGC). - Use credit scores for individuals who are also entrepreneurs as proxies for their businesses where appropriate; provide training on business development and financial statements. - Supervisory capacity and capitalization: - National (non-bank) supervisor should pursue capitalization of systemic credit unions to meet regulatory requirements. - Allocate further resources to the national supervisor and consider statutory independence from the Ministry of Finance. - Introduce enforcement mechanisms to improve supervision. - Further capitalization of banks may be needed to cushion the impact of the 100 percent loan loss provisioning target for 2024 set by the ECCB; possible measures include loan restructurings, sales of impaired assets to ECAMC, and capital calls (with potential fiscal costs). - Climate-related financial resilience: - Develop reporting structures for granular monitoring of physical climate risks and conduct risk assessments and stress tests accounting for natural disasters. - Transition to geothermal energy expected to generate over 70Gw per year; enough to cover domestic energy demand currently served by diesel-based electricity generation and could later be expanded for export capacity. - Strengthen regulatory framework for energy use/efficiency and SOE governance to facilitate transition. - Crypto assets and digital asset oversight: - Dominica enacted the Virtual Assets Business Law in June 2022; the Law designates the FSU as the relevant supervisory authority. - FSU’s resources and capacity need reinforcement; authorities seek IMF technical assistance. ### Article IV timing, real sector, and selected fiscal/external figures - Next Article IV recommended on a standard 12-months cycle. - Real sector developments: - Construction and real estate led growth in 2021; tourism was the main driver in 2022. - Selected contributions to 2021 real GDP growth (percent): Agriculture, livestock, and fishing: 2.30; Other sectors: 0.29; Manufacturing: -0.19; Construction: 0.63; Housing, real estate, finance, and trade: 1.53; Key tourism-related industries: 0.20; Public administration and public services: 0.87; Taxes net of subsidies: 1.25. - Selected contributions to 2022 real GDP growth (percent): Agriculture, livestock, and fishing: 0.17; Other sectors: 0.43; Manufacturing: 0.02; Construction: 0.30; Housing, real estate, finance, and trade: 1.69; Key tourism-related industries: 2.38; Public administration and public services: 0.04; Taxes net of subsidies: 0.65. - Selected fiscal figures (percent of GDP unless otherwise specified): - Revenue: 44.7 (2018), 39.6 (2019), 58.9 (2020), 56.9 (2021), 42.7 (2022), 43.5 (2023), 41.8 (2024), 40.7 (2025), 40.5 (2026), 40.4 (2027), 40.3 (2028) - Taxes: 27.7 (2018), 24.1 (2019), 23.3 (2020), 21.2 (2021), 20.1 (2022), 21.9 (2023), 22.2 (2024), 22.1 (2025), 21.8 (2026), 21.7 (2027), 21.6 (2028) - Primary balance: -16.2 (2018), -6.0 (2019), -5.5 (2020), -6.2 (2021), -0.5 (2022), -0.1 (2023), 0.9 (2024), 0.7 (2025), 0.9 (2026), 1.3 (2027), 1.2 (2028) - Primary balance, excluding CBI: -29.4 (2018), -18.1 (2019), -36.9 (2020), -34.9 (2021), -18.5 (2022), -17.1 (2023), -14.2 (2024), -13.3 (2025), -13.1 (2026), -12.8 (2027), -12.8 (2028) - Overall balance: -18.1 (2018), -8.5 (2019), -7.7 (2020), -8.7 (2021), -4.0 (2022), -4.2 (2023), -3.2 (2024), -2.9 (2025), -2.4 (2026), -1.9 (2027), -1.9 (2028) - Central government debt (incl. guaranteed): 85.6 (2018), 97.7 (2019), 112.5 (2020), 106.3 (2021), 97.6 (2022), 93.5 (2023), 91.0 (2024), 90.3 (2025), 90.1 (2026), 89.5 (2027), 89.0 (2028) - External sector highlights: - Current account balance: -43.7 (2018), -35.6 (2019), -35.4 (2020), -27.6 (2021), -26.2 (2022), -25.2 (2023), -17.7 (2024), -15.9 (2025), -14.3 (2026), -12.8 (2027), -11.1 (2028) - Exports of goods and services: 28.2 (2018), 34.5 (2019), 18.9 (2020), 22.2 (2021), 25.4 (2022), 27.7 (2023), 31.2 (2024), 33.7 (2025), 33.9 (2026), 34.2 (2027), 35.3 (2028) - Imports of goods and services: 75.7 (2018), 69.7 (2019), 60.2 (2020), 55.4 (2021), 56.8 (2022), 58.6 (2023), 54.8 (2024), 55.3 (2025), 54.0 (2026), 52.8 (2027), 52.3 (2028) - External debt (gross): 102.1 (2018), 84.9 (2019), 102.6 (2020), 82.9 (2021), 77.9 (2022), 74.3 (2023), 72.3 (2024), 72.1 (2025), 72.7 (2026), 73.9 (2027), 75.0 (2028) - NIIP: -55.6 (2022); Gross Assets: 112.3; Debt Assets: 74.4; Gross Liabilities: -167.9; Debt Liabilities: -83.9 - Imputed reserves: $165.2 (2021) to $166.6 (2022); reserve coverage: 5.6 months of imports and 31 percent of broad money. ### Geothermal development prospects - Laudat’s production site could be leveraged to build additional 50 MW in generation capacity at a later stage. - Northern Industrial Scale Green Hydrogen Geothermal Development potential: 200–400 MW. - Implications: new geothermal capacity envisaged primarily for export markets; combination of Laudat incremental 50 MW and northern 200–400 MW represents material potential expansion targeted at green energy exports. ### Debt coverage, DSA assumptions, and financing - Public and total external debts estimated at 106.3 and 82 percent of GDP respectively, in 2021. - Central government direct debt accounts for over 80 percent of total public debt. - Outstanding debt to Petrocaribe estimated at 6 percent of the total debt stock as of 2021. - Two thirds of PPG debt is external; 90 percent of external PPG debt is owed to official bilateral and multilateral creditors. - World Bank holds 29 percent of the total external public debt stock. - Domestic debt accounted for 35 percent of total public sector debt as of June 2022. - Macro forecasts and fiscal assumptions: - GDP expected to recover at an average growth rate of 3.9 percent in FY 22–27. - Long-term potential growth rate projected to converge to 2.7 percent after 2026. - Primary balance (including ND costs) expected to increase from -6.2 percent of GDP in FY21/22 to -0.3 percent in the medium term. - Projection assumes fiscal consolidation measures (excluding investment changes) generating cumulative savings of 3.4 percent of GDP during 2023–28. - Fiscal deficit includes an annualized cost of ND of 1.5 percent of GDP. - CBI revenue projections: - Projected to remain buoyant but decline from close to 30 percent of GDP in FY21/22 to 18 percent of GDP in FY 22/23, tapering to 14 percent of GDP by 2025. - CBI reached 29.4 percent of GDP in FY21/22. - Official external financing projected at 4 percent of GDP in the medium term (2024–26) and 2 percent of GDP in the long term (after 2026). ### Alternative scenarios, stress tests, and debt sustainability findings - DSA includes six standardized and a contingent liability stress test; financial market contingent liability set at 7.0 percent of GDP in calibration. - Customized “Catastrophic Climate Event” scenario assumes a Category 5 hurricane in the second half of 2023 with sharp declines in GDP, exports, and revenues and large rehabilitation expenditure. - External DSA findings: - PV of external public debt-to-GDP on a declining trend in the near term and remains below the medium debt carrying capacity threshold through 2032 in baseline. - Breaches the threshold by a large margin under the catastrophic climate event and the most extreme shock. - Debt service-to-exports ratio above the threshold in 2023 but stays below after 2024 except in the most extreme shock. - Overall assessment for external debt: risk of external debt distress is assessed as high. - Public debt DSA: - Under baseline, public debt assessed sustainable but remains at high risk of debt distress. - Current consolidation plus CBI inflows lead to declining public debt but insufficient to reach 60 percent of GDP by 2035. - Sensitivity examples (selected exact figures): - Baseline total public debt (percent of GDP) 2022–32: 70 67 64 63 62 61 60 59 57 55 53 - Baseline PV of debt-to-GDP series (public debt) 2022–32: 137 128 126 127 126 124 122 120 118 113 110 - Catastrophic Climate Event PV of debt-to-GDP (public debt) 2022–32: 137 192 183 182 179 171 158 156 154 149 145 - Staff recommendations to enhance resilience: - Reprioritize CBI revenues towards VRF contributions and paying down debt (or saving into the Debt Repayment Fund). - With sustained consolidation, fiscal rule implementation, and concessional financing, external and overall debt are sustainable but remain at high risk of distress. ### Implementation of past Fund advice (selected) - Vaccination campaign: vaccine coverage at 53 percent of the target population; digital vaccination card available; expanded health care capacity including new ND resilient hospital with ICU, operating theatre, dialysis unit. - VRF savings: government saving EC$0.5 million per month in the VRF; cumulative stock stands at EC$15 million. - Fiscal measures: - Tax on idle properties introduced; presumptive tax postponed. - Civil service review finishing with CARICAD support; tighter rules for compensation implemented. - Centralized public procurement system planned. - Financial sector recommendations: - 60 percent NPL provisioning target by 2022 achieved. - FSU working with credit unions to enhance capitalization; all credit unions above 5 percent capital and aiming for 10 percent by 2026. - Draft regulatory bills prepared (foreclosure legislation under consideration; credit unions draft bill not yet submitted to parliament). - FSU staff increased by two and TA being sought. - Informality and data: - Land transfer fees reduced in 2022–23 budget. - Digitalization part of PSIP; population census ongoing with expected conclusion in mid-2023. ### Selected key quantitative highlights (preserved exactly as in source) - Infrastructure spending: 26 percent of GDP (last fiscal year). - VRF assets holdings: 2 percent of GDP. - IMF Rapid Credit Facility disbursement (2020): equivalent of SDR 10.28 million (US$14 million; 89.39 percent of quota). - GDP growth: - nearly 17 percent in 2020; 6.9 percent in 2021; 5.7 percent in 2022; projected 4.7 percent in 2023; trend 2.7 percent medium term. - Inflation: estimated 7.5 percent in 2022; projected 6.2 percent in 2023; recede towards 2.0 percent afterwards. - CBI inflows: nearing 30 percent of GDP. - Primary deficit: 6.2 percent in FY21/22; projected to fall to 2 percent of GDP in FY22/23. - Gross public debt: over 106 percent of GDP; projected 97.7 percent of GDP in FY22/23. - Fuel imports: 8.5 percent of GDP in 2022. - Current account deficit: over 26.2 percent of GDP in 2022. - REER depreciation: cumulative 7 percent in 2021–22. - Banks’ NPLs: 14 percent of total loans (ECCB prudential limit: 5 percent). - Airport total cost: 59 percent of 2022 GDP. - Geothermal investment: 25 percent of GDP over the next three years (half publicly financed). - Potential government contingent costs from insurance claims: could reach 0.5 percent of GDP. *Source: IMF staff report on Dominica, May 18, 2023.* ### 2035. This should be underpinned by efforts to (i) mobilize tax revenue by reducing tax ### 1dmaea2023001 - 2035. This should be underpinned by efforts to (i) mobilize tax revenue by reducing tax ### Fiscal stance, consolidation needs, and public investment - Recent fiscal pressure reflects four large shocks in less than a decade: tropical storm Erika (2015), hurricane Maria (2017), COVID-19, and Russia’s war in Ukraine, leaving Dominica with the largest public debt ratio in the region. - Public investment and resilience agenda: - Investments in resilient infrastructure rose to 26 percent of GDP in the last fiscal year. - Government increased asset holdings to 2 percent of GDP in the Vulnerability and Resilience Fund (VRF). - The government signed a catastrophe-contingent loan agreement (Cat DDO) with the World Bank and launched a parametric insurance instrument for the private sector. - Reliance on Citizenship-by-Investment (CBI) revenues: - CBI inflows neared 30 percent of GDP. - CBI resources financed airport-related contracts and cleared some contractor arrears. - Short-term fiscal pressures from key projects: - International airport: estimated total cost of 59 percent of 2022 GDP (intensified in FY22/23, expected to continue until FY25/26). - Geothermal infrastructure: about 25 percent of GDP in investments over the next three years, of which half are publicly financed. - Recent fiscal outcomes and projections: - Primary deficit rose to 6.2 percent in FY21/22. - Gross public debt stands at over 106 percent of GDP. - Primary fiscal deficit projected to fall to 2 percent of GDP in FY22/23. - Public debt projected to decline to 97.7 percent of GDP in FY22/23 and to slowly decline thereafter with gradual fiscal consolidation. - Policy priorities emphasized: - Mobilize tax revenue by reducing tax expenditures and improving tax administration. - Reduce the wage bill and rationalize inefficient current spending. - Strengthen social protection systems through better targeting. - Prioritize capital spending on growth-enhancing projects that also build resilience to natural disasters. ### Growth outlook and structural transformation - Recent growth and drivers: - After contracting nearly 17 percent in 2020, economy expanded by 6.9 percent in 2021 and 5.7 percent in 2022, driven by construction of climate-resilient infrastructure, new hotels, tourism rebound, and higher agricultural output. - Inflation rose to an estimated 7.5 percent in 2022. - Near- and medium-term projections: - Real GDP growth projected to moderate from 5.7 percent in 2022 to 4.7 percent in 2023, converging to 2.7 percent trend growth over the medium term. - Inflation expected to ebb to 6.2 percent in 2023, and to recede towards 2.0 percent afterwards. - Long-term benefits of infrastructure: - Airport expected to expand tourism exports; geothermal project expected to lower oil imports and support resilience. - Short-term growth effects significant though tempered by a low estimated short-term multiplier; public debt ratio worsens in the projection horizon initially but permanent benefits to growth expected to broaden fiscal space. ### External sector and balance of payments - External pressures and developments: - Fuel imports rose to a historical peak of 8.5 percent of GDP in 2022 (3 percentage points more than in 2019). - Current account deficit (CA) estimated to have remained elevated at over 26.2 percent of GDP in 2022. - Main financing sources: CBI, Grants and FDI. - REER depreciated by a cumulative 7 percent in 2021–22. - Staff assessment: - External position assessed to be substantially weaker than level consistent with medium-term fundamentals and desirable policy settings. - Outlook: - Lower global fuel prices and transition to renewable energy expected to halve global fuel import bill over the medium term. - Services balance expected to improve with tourism expansion; import of investment goods expected to wane along with public investment. - Current account expected to increase towards its norm by 2025–26. ### Financial sector, credit, and stability - Banking and credit unions: - Banks remain well capitalized and liquid but experienced a drop in 2022 reflecting losses on overseas investments and operational costs related to the purchase of Royal Bank of Canada by the National Bank of Dominica (NBD). - Provisioning efforts continue; banks now attaining the ECCB 2022 target but still lag regional peers. - NBD is currently the only locally incorporated bank (with 75 percent of assets as of 2022Q4). - Asset quality and nonperforming loans: - Banks’ NPLs at 14 percent of total loans—significantly above the ECCB’s prudential limit of 5 percent. - ECCB requirement: 60 percent NPL provisioning in 2022 and 100 percent for “Loss” loans by 2024. - Credit unions: - Recapitalization plans brought capital ratios generally above 5 percent, although below the 10 percent 2026 target (regulatory minimum) for major credit unions. - NPLs in credit unions continued to grow in 2022 following expiry of loan moratoria. - Private sector credit: - Private sector credit remains subdued; most bank lending since the pandemic has gone to the public sector. - Structural constraints expected to limit private sector credit pickup to only a gradual increase. - Financial stability risks: - Risks remain contained due to capital buffers and liquidity, but strains persist (e.g., legacy insurance sector claims due to hurricane Maria and potential government contingent costs up to 0.5 percent of GDP). ### Implementation of recommendations, risks, and institutional agenda - Implementation status: - Progress on resilience-building: vaccination campaign, expanded health care capacity, key infrastructure construction, accumulation of disaster-specific financial buffers. - Progress on financial sector reforms: capitalization of credit unions and NPL provisioning at NBD advancing; FSU resources expanded. - Gaps: fiscal consolidation slower than anticipated; modernization of financial regulatory frameworks still pending; actions to promote formalization of the economy remain limited. - Major risks identified: - Continued volatility in CBI revenues constitutes a source of external vulnerability. - High commodity prices and fuel supply disruptions pose inflation and external risks. - Large public investment program consumes a large portion of fiscal space and raises short-term financing needs. - Institutional and structural reform priorities: - Address longstanding constraints to private sector credit by leveraging the forthcoming ECCU regional credit bureau, modernizing insolvency laws, and streamlining regulatory requirements for business loans. - Advance transition to renewable (geothermal) energy. - Improve connectivity and integration of tourism with other sectors. - Address informality, and invest in skills and digitalization. ### Key quantitative highlights (preserved exactly as in source) - Infrastructure spending: 26 percent of GDP (last fiscal year). - VRF assets holdings: 2 percent of GDP. - IMF Rapid Credit Facility disbursement (2020): equivalent of SDR 10.28 million (US$14 million; 89.39 percent of quota). - GDP growth: - nearly 17 percent in 2020; 6.9 percent in 2021; 5.7 percent in 2022; projected 4.7 percent in 2023; trend 2.7 percent medium term. - Inflation: estimated 7.5 percent in 2022; projected 6.2 percent in 2023; recede towards 2.0 percent afterwards. - CBI inflows: nearing 30 percent of GDP. - Primary deficit: 6.2 percent in FY21/22; projected to fall to 2 percent of GDP in FY22/23. - Gross public debt: over 106 percent of GDP; projected 97.7 percent of GDP in FY22/23. - Fuel imports: 8.5 percent of GDP in 2022. - Current account deficit: over 26.2 percent of GDP in 2022. - REER depreciation: cumulative 7 percent in 2021–22. - Banks’ NPLs: 14 percent of total loans (ECCB prudential limit: 5 percent). - Airport total cost: 59 percent of 2022 GDP. - Geothermal investment: 25 percent of GDP over the next three years (half publicly financed). - Potential government contingent costs from insurance claims: could reach 0.5 percent of GDP. *Source: IMF staff report on Dominica, May 18, 2023.* ### 13. Risks to the outlook stem from global economic uncertainty, climate change, and ### 13. Risks to the outlook stem from global economic uncertainty, climate change, and volatility of CBI revenues ### Major risks to the outlook - Global shocks that could worsen supply constraints, renew pressure on commodity prices, and harm global growth: - An escalation of the war in Ukraine, heightened financial stress, or increased protectionism. - These could disrupt Dominica’s incipient recovery of the tourism sector and stress its external position. - Climate-related risks: - Intensification of natural disasters (ND) could bring large output and capital losses, weakening balance sheets and raising sustainability and financial stability risks. - CBI (Citizenship by Investment) revenue volatility: - Lower-than-expected CBI revenue would hamper consolidation efforts and investment execution plans. - Sustained higher CBI revenue could allow faster implementation of resilience and growth enhancing projects, boost economic activity, and/or buildup of fiscal buffers. - Financial/operational risks: - A stall in fiscal consolidation could impair the financial system, given exposure to the sovereign. - A disruption of correspondent bank relationships (CBR)—due to poor governance perceptions or an interruption of CBI programs—could constitute a threat to trade and growth. ### Box 1 — Key infrastructure projects: effects on public and external balances (selected projections) - Real GDP (percent) - Baseline outlook: 2022 5.7; 2023 4.7; 2024 4.6; 2025 4.2; 2026 2.9; 2027 2.7; 2028 2.7 - No new airport scenario: 2022 5.3; 2023 4.3; 2024 4.2; 2025 4.0; 2026 2.6; 2027 2.4; 2028 2.4 - No geothermal project scenario: 2022 5.7; 2023 3.7; 2024 3.7; 2025 3.4; 2026 2.1; 2027 2.7; 2028 2.7 - Central Government Debt (% of GDP) - Baseline outlook: 2022 97.6; 2023 93.5; 2024 91; 2025 90.3; 2026 90.1; 2027 89.5; 2028 89 - No new airport scenario: 2022 97.2; 2023 92.5; 2024 89.5; 2025 88.3; 2026 87.4; 2027 87.1; 2028 86.7 - No geothermal project scenario: 2022 98.3; 2023 92.3; 2024 88.2; 2025 85.8; 2026 83.3; 2027 82.5; 2028 81.6 - Current Account (% of GDP) - Baseline outlook: 2022 -26.2; 2023 -25.2; 2024 -17.7; 2025 -15.9; 2026 -14.3; 2027 -12.8; 2028 -11.1 - No new airport scenario: 2022 -25.8; 2023 -23.9; 2024 -16.4; 2025 -14.5; 2026 -12.9; 2027 -12.3; 2028 -11.7 - No geothermal project scenario: 2022 -26.2; 2023 -23.3; 2024 -14.1; 2025 -12.1; 2026 -10.6; 2027 -11.4; 2028 -11.6 - Note: "Long term GDP impacts are only partially captured for 'No airport' scenario and not estimated for 'No geothermal' scenario." ### Risk Assessment Matrix (Box 2) — selected entries and policy responses - Conjunctural/global risks (relative likelihood and impact/time horizon) - Intensification of regional conflict(s): Relative Likelihood High; Impact/Time Horizon Medium ST/MT. - Policy response: Provide temporary and targeted fiscal support to affected households and sectors, within a sustainable medium-term fiscal plan. - Abrupt global slowdown or recession: Relative Likelihood Medium; Impact/Time Horizon Medium ST/MT. - Policy response: Provide temporary fiscal support to affected sectors (mostly tourism) within a sustainable medium-term fiscal plan; intensify efforts to diversify economic activity and export base. - Commodity price volatility: Relative Likelihood Medium; Impact/Time Horizon Medium ST/MT. - Policy response: Reduce reliance on imported commodities (fuels) through investments in alternative energy sources; provide targeted social assistance to the poor while allowing pass-through of price signals. - Systemic financial instability: Relative Likelihood Medium; Impact/Time Horizon Medium ST/MT. - Policy response: Tighten supervision and macroprudential policies if needed; strengthen AML/CFT frameworks; pursue fiscal consolidation to aid domestic financial stability. - Structural risks - Deepening geo-economic fragmentation: Relative Likelihood High; Impact/Time Horizon Medium ST/MT. - Policy response: Boost efforts to increase employment and productivity, foster regional integration, and strengthen export competitiveness. - Cyberthreats: Relative Likelihood Medium; Impact/Time Horizon Low ST/MT. - Policy response: Strengthen Cybersecurity measures and contingency plans, especially for key infrastructure and institutions. - Extreme climate events: Relative Likelihood Medium; Impact/Time Horizon High ST/MT. - Policy response: Continue implementing the DRS, accelerate construction of resilient infrastructure and transition to local, renewable energy sources. - Domestic risks - Lower than expected CBI revenues or official financing; disruption of CBRs: Relative Likelihood Medium; Impact/Time Horizon Medium ST/MT. - Policy response: Rationalize spending and mobilize revenue from other sources; ex-ante build fiscal buffers to enhance resilience to ND and fiscal shocks and strengthen governance frameworks to protect the integrity of the CBI program. - RAM probability definitions (staff subjective assessment) - "low" indicates a probability below 10 percent; "medium" a probability between 10 and 30 percent; and "high" a probability between 30 and 50 percent. ### Policy discussions and recommended actions - Fiscal consolidation, buffers, and public investment prioritization - Fiscal consolidation has been slower than anticipated; currently planned measures will be insufficient to comply with the national fiscal rule. - Projected fiscal balances would result in a shortfall of 2½ percent of GDP to comply with the 2 primary balance in 2026 required by the National Fiscal Rule. - Staff recommendation: additional consolidation equivalent to a cumulative 2½ percent of GDP by 2026. - Under current policies, public debt would reach the regional target of 60 percent of GDP only in 2040; 5 years after the 2035 goal. - Meeting the national fiscal rule (primary balance floor of 2 percent of GDP when public debt surpasses 60 percent of GDP) requires stronger consolidation and strengthened public financial management (medium-term budget planning, fiscal reporting, independent monitoring). - Consolidation composition: - Revenue measures: eliminate PIT exemptions, review tax incentives (VAT, custom duties, CIT), strengthen tax administration, and foster compliance (given large and rising tax arrears). - Spending measures: reduce the wage bill (currently above 11 percent of GDP) through civil service reform and rationalization of allowances; contain pension spending by raising the minimum pensionable (early retirement) age; spending review to rationalize inefficient programs. - Prioritization of public investment: re-prioritize PSIP within fiscal constraints, giving priority to growth-enhancing projects (transition to geothermal energy and airport). - Buffers and insurance: - Allocate higher share of CBI revenue to disaster insurance and debt amortization ex-ante to bolster resilience and reduce debt sustainability risks. - DRS advice: a self-insurance fund (VRF) with 12 percent of GDP in savings is appropriate; current VRF stock is 2 percent of GDP; staff advised increasing annual contributions though contributions have remained stable at 0.4 percent of GDP. - Consolidation quantified in non-CBI terms - Given high uncertainty over CBI revenue, consolidation can be measured by change in the non-CBI primary balance. - A 5 percent of GDP improvement is currently expected through 2026 (mostly from less public investment, higher tax revenue and less public consumption). - 8 p.p. would be needed to meet the fiscal targets, bringing the non-CBI primary balance (including ND costs) to -12 percent of GDP. - This corresponds to a non-CBI recurrent primary balance of -3.4 percent of GDP in 2026 (from -9.5 in 2022), compared to a baseline projection of -6.1 percent of GDP. - If investment is to be unaffected by consolidation, fiscal reforms should generate 3.3 percent of GDP in cumulative savings. - Social protection and targeting - Strengthen social protection through better targeting to preserve social resilience amid shocks and consolidation: - Dominica’s social assistance relies on unconditional cash transfers (UCT), social pensions for all persons over 65 who do not receive social security pensions, generalized subsidies, and specific programs. - World Bank estimate: about 30 percent of poor households are covered by the UCT scheme; social pensions leave about 40 percent of elderly uncovered. - Prior to hurricane Maria, Dominica spent about 2 percent of GDP in social assistance. - Social protection costs totaled 3.6 percent of GDP in FY21/22; resilient housing provision added a further 1.8 percent of GDP. - Recommendation: use proxy-targeting (e.g., contingent on family structure or other household characteristics) and build a comprehensive social registry using the population census. - Authorities’ views (summary) - Authorities broadly share staff’s assessment but expect higher CBI inflows in FY22/23 supporting larger infrastructure investments and potentially a more favorable sovereign debt outlook. - Authorities view CBI revenue as primarily reserved to finance resilient infrastructure investments, saving to the VRF, and debt amortization; a part was used to finance social support during the pandemic. - Authorities committed to prudent fiscal management in line with national and regional fiscal rules, plan to streamline inefficient recurrent spending, strengthen tax collection, and mobilize new tax and non-tax revenue sources. - The PSIP program is refocusing towards job creation and activity goals (e.g., new airport and modernization of the agricultural sector); discussions underway to review water and sewerage charges. ### Financial intermediation and stability - The financial system has ample liquidity, but intermediation is constrained by high NPLs and undercapitalization in the large credit union sector. - Economic uncertainty and informality weigh on credit to businesses and households. - Policy priorities: fiscal prudence and stronger supervisory and regulatory frameworks to ensure financial stability. *DOMINICA — INTERNATIONAL MONETARY FUND* ### 21. While overall financial sector assets exceed 200 percent of GDP, the system has played a ### 1dmaea2023001 - 21. While overall financial sector assets exceed 200 percent of GDP, the system has played a ### Financial sector structure and key metrics - Overall financial sector assets exceed 200 percent of GDP. - Banks’ private sector credit is less than 50 percent of GDP and 40 percent of assets. - Total loans represent less than 60 percent of deposits. - Credit to the public sector accounts for about 17 percent of the banking-sector assets. - Banks invest a large share of assets in overseas deposits and traded securities, making Dominica’s banking system a net foreign creditor. - Credit unions’ liquid assets are deposited at the NBD, yet their balance sheets remain strained. - The government’s development bank (AID) has played a prominent role in extending credit to MSMEs. ### Financial inclusion and private credit constraints — recommended actions - Encourage financial institutions to leverage the just created ECCU regional credit bureau and registry. - Modernize national insolvency laws. - Streamline the required documentation for business loans, while encouraging formalization and ensuring that risks are appropriately managed. - Facilitate small businesses’ access to the regional partial credit guarantee scheme (Eastern Caribbean Partial Credit Guarantee Corporation, ECPCGC). - Use credit scores for individuals who are also entrepreneurs as a proxy for their business where appropriate. - Provide training on business development and preparation of financial statements to facilitate MSMEs’ access to credit. ### Supervisory capacity, capitalization, and regulatory measures - The national (non-bank) supervisor should continue to pursue capitalization of systemic credit unions to meet regulatory requirements. - Allocate further resources to the national supervisor and consider statutory independence from the Ministry of Finance to strengthen supervisory effectiveness and compliance. - Introduce enforcement mechanisms to improve supervision. - Further capitalization of banks may be needed to cushion the impact of the 100 percent loan loss provisioning target for 2024 set by the ECCB; possible measures include: - Loan restructurings to normalize debt service. - Further sales of impaired assets to the Eastern Caribbean Asset Management Corporation (ECAMC). - Capital calls (with potential fiscal costs). ### Climate-related financial resilience - National supervisory frameworks should account for climate-related risks by: - Developing reporting structures for granular monitoring of physical climate risks and relevant transmission channels. - Conducting risk assessments and stress tests accounting both for the frequency/severity of natural disasters and mitigating factors. - Developing regulatory measures to support climate risk-aware lending practices and avoid concentration of exposure. - The transition to geothermal energy is expected to generate over 70Gw per year; enough to cover domestic energy demand currently served by diesel-based electricity generation and could later be expanded for export capacity. - The switch to geothermal is expected to lower very high electricity tariffs, reduce exposure to international fuel price volatility, and reduce carbon emissions. Strengthening the regulatory framework—including general energy use/efficiency requirements and governance of relevant SOEs—could facilitate the transition. ### Crypto assets and digital asset oversight - Dominica enacted the Virtual Assets Business Law in June 2022, paving the way for the introduction of a crypto currency in the future. - The Law designates the FSU as the relevant supervisory authority. - FSU’s resources and capacity need to be reinforced to enable effective oversight and address emerging risks. - Authorities seek IMF technical assistance to enhance the regulatory and supervisory framework for digital asset businesses. ### Authorities’ views (summarized) - Authorities broadly concur with recommended policies to promote credit and financial stability but attribute low private sector credit mainly to low demand. - They highlight benefits from banks’ use of ECAMC and ECPCGC to dispose NPLs and de-risk SME lending. - The government continues to enable credit to MSMEs through AID and expects the ECCU credit bureau to further promote private sector credit. - Given high liquidity in the financial sector, public credit is not seen to crowd out private financing; overall private sector demand for credit is assessed to be low, partly because a significant share of investments is financed through CBI. - Authorities agree on strengthening national supervisor capacity but consider statutory independence unnecessary, asserting the national supervisor de facto operates independently. ### Macroeconomic and fiscal recommendations linked to financial stability - Fiscal consolidation is recommended to safeguard room for climate resilience investments and ensure compliance with the regional debt target: - A consolidation path in line with the national fiscal rule—raising the primary balance to 2 percent of GDP by 2026—is necessary to ensure convergence to the 60 percent public debt target by 2035. - The plan should be underpinned by a sizeable improvement of non-CBI fiscal balances while protecting investment and other priority programs. - Mobilize tax revenue by streamlining tax incentives, reviewing PIT allowances, and strengthening tax administration and compliance risk management. - Reverse the reduction of VAT on electricity as international fuel prices moderate and revise motor vehicle licenses up to compensate losses from the foregone highway levy. - Reduce the wage bill through civil service reform; streamline pension spending (including reforms aimed at increasing the minimum retirement age); and strengthen the financial position of the publicly-owned water and sewage public company through higher tariffs that better reflect cost recovery. - Prioritize medium-term public investment toward projects with greatest productivity (e.g., the geothermal plant and new airport). - Allocate a higher share of CBI revenue, including all unexpected windfalls, to disaster insurance and debt amortization. ### Structural reforms to support growth, resilience, and inclusion - Strengthen efforts to support diversification and integration of the tourism sector, including enhancing flight connectivity and upgrading airport infrastructure. - Support expansion of hotel capacity and product offers into new markets with targeted advertising. - Explore synergies between tourism and the local agricultural sector to reduce costs and move up the value chain. - Address informality, enhance human capital through professional training, and invest in digitalization to boost productivity. - Facilitate land registration and upgrade social registries to help mobilize credit and formalize the economy. - Expand the parametric insurance scheme (Flexible Hurricane Protection) for quick automatic payouts to small farmers/fishermen and households after major storms/hurricanes. ### Institutional development, data, and AML/CFT - Continue progress on strengthening the AML/CFT framework to address concerns expressed in 2022 and to implement CFATF’s fourth round mutual evaluation recommendations. - Designating the ECCB as the AML/CFT supervisor for banks in Dominica is a positive step. - Improve and timely publish statistics: national accounts, CPI, Balance of Payments, and employment statistics require increased resources for the Statistics Office and better data sourcing and methodologies. - Complete the ongoing population census to ensure consistency of macro statistics and strengthen social protection systems. - Improve treasury operations, debt management, and public investment management to support budget execution and implementation of Dominica’s national fiscal rule. - Strengthen the internal tax revenue office capacity, auditing, compliance risk management processes, and refocus analysis of tax arrears toward newer and/or larger cases. *Source: IMF staff report content provided in the supplied PDF excerpt* ### 44. It is recommended that the next Article IV consultation takes place on the standard 12- ### 1dmaea2023001 - 44. It is recommended that the next Article IV consultation takes place on the standard 12- ### Article IV timing - It is recommended that the next Article IV consultation takes place on the standard 12-months cycle. ### Real sector developments - Construction and real estate led growth in 2021, while tourism was the main driver in 2022. - Tourism recovery has been lagging peers in the ECCU, albeit from a lower pre-COVID base. - Fuel and food price inflation is estimated to have subsided in end 2022, but core inflation remains elevated. - GDP growth is in line with regional peers, as is estimated inflation in 2022. - Selected contributions to 2021 real GDP growth (percent): - Agriculture, livestock, and fishing: 2.30 - Other sectors: 0.29 - Manufacturing: -0.19 - Construction: 0.63 - Housing, real estate, finance, and trade: 1.53 - Key tourism-related industries: 0.20 - Public administration and public services: 0.87 - Taxes net of subsidies: 1.25 - Selected contributions to 2022 real GDP growth (percent): - Agriculture, livestock, and fishing: 0.17 - Other sectors: 0.43 - Manufacturing: 0.02 - Construction: 0.30 - Housing, real estate, finance, and trade: 1.69 - Key tourism-related industries: 2.38 - Public administration and public services: 0.04 - Taxes net of subsidies: 0.65 ### Fiscal sector developments - The fiscal balance has been improving since the COVID-19 shock, but the public debt ratio remains above pre-COVID levels and is one of the highest among peers. - CBI revenue has been larger than tax revenue in the last two fiscal years. - Capital spending declined moderately in the last fiscal year, while recurrent expenditures increased at the margin. - Nearly 40 percent of public debt is held by the systemic National Bank of Dominica. - SOEs debt has been stable at around 20 percent of GDP. - Selected fiscal figures (percent of GDP unless otherwise specified): - Revenue: 44.7 (2018), 39.6 (2019), 58.9 (2020), 56.9 (2021), 42.7 (2022), 43.5 (2023), 41.8 (2024), 40.7 (2025), 40.5 (2026), 40.4 (2027), 40.3 (2028) - Taxes: 27.7 (2018), 24.1 (2019), 23.3 (2020), 21.2 (2021), 20.1 (2022), 21.9 (2023), 22.2 (2024), 22.1 (2025), 21.8 (2026), 21.7 (2027), 21.6 (2028) - Primary balance: -16.2 (2018), -6.0 (2019), -5.5 (2020), -6.2 (2021), -0.5 (2022), -0.1 (2023), 0.9 (2024), 0.7 (2025), 0.9 (2026), 1.3 (2027), 1.2 (2028) - Primary balance, excluding CBI: -29.4 (2018), -18.1 (2019), -36.9 (2020), -34.9 (2021), -18.5 (2022), -17.1 (2023), -14.2 (2024), -13.3 (2025), -13.1 (2026), -12.8 (2027), -12.8 (2028) - Overall balance: -18.1 (2018), -8.5 (2019), -7.7 (2020), -8.7 (2021), -4.0 (2022), -4.2 (2023), -3.2 (2024), -2.9 (2025), -2.4 (2026), -1.9 (2027), -1.9 (2028) - Central government debt (incl. guaranteed): 85.6 (2018), 97.7 (2019), 112.5 (2020), 106.3 (2021), 97.6 (2022), 93.5 (2023), 91.0 (2024), 90.3 (2025), 90.1 (2026), 89.5 (2027), 89.0 (2028) ### External sector developments - The REER depreciated due to higher imported commodity prices (REER depreciated by 2.8 percent in 2022, and by a cumulative 10 percent since end-2019). - A persistently large trade balance accounts for most of the current account (CA) deficit, while the services balance turned positive again in 2022. - Goods imports fell in 2020-21 due to demand compression. Exports of primary and manufactured goods have kept up during the pandemic. - CBI is the main source of external financing. - Private external debt is subsiding, but public external debt stabilized at high levels. - Selected balance of payments and external figures (percent of GDP unless otherwise specified): - Current account balance: -43.7 (2018), -35.6 (2019), -35.4 (2020), -27.6 (2021), -26.2 (2022), -25.2 (2023), -17.7 (2024), -15.9 (2025), -14.3 (2026), -12.8 (2027), -11.1 (2028) - Exports of goods and services: 28.2 (2018), 34.5 (2019), 18.9 (2020), 22.2 (2021), 25.4 (2022), 27.7 (2023), 31.2 (2024), 33.7 (2025), 33.9 (2026), 34.2 (2027), 35.3 (2028) - Imports of goods and services: 75.7 (2018), 69.7 (2019), 60.2 (2020), 55.4 (2021), 56.8 (2022), 58.6 (2023), 54.8 (2024), 55.3 (2025), 54.0 (2026), 52.8 (2027), 52.3 (2028) - Capital and financial account: 38.7 (2018), 37.7 (2019), 33.2 (2020), 27.5 (2021), 26.3 (2022), 25.3 (2023), 17.8 (2024), 16.1 (2025), 14.4 (2026), 12.9 (2027), 11.2 (2028) - FDI: 14.1 (2018), 10.3 (2019), 4.3 (2020), 6.1 (2021), 6.6 (2022), 6.4 (2023), 4.8 (2024), 4.6 (2025), 4.5 (2026), 4.5 (2027), 4.5 (2028) - Capital grants: 26.5 (2018), 9.8 (2019), 20.2 (2020), 22.2 (2021), 24.4 (2022), 14.6 (2023), 12.8 (2024), 11.6 (2025), 9.9 (2026), 7.7 (2027), 7.5 (2028) - External debt (gross): 102.1 (2018), 84.9 (2019), 102.6 (2020), 82.9 (2021), 77.9 (2022), 74.3 (2023), 72.3 (2024), 72.1 (2025), 72.7 (2026), 73.9 (2027), 75.0 (2028) - Net international investment position (NIIP) and 2022 stock measures (percent of GDP): - NIIP: -55.6 (2022) - Gross Assets: 112.3 - Debt Assets: 74.4 - Gross Liabilities: -167.9 - Debt Liabilities: -83.9 - Current account developments (2022): - Estimated CA deficit fell to 26.2 percent of GDP in 2022, from 26.7 percent of GDP in 2021. - Increase of tourism exports worth 7.7 percent of GDP was the main driver of the CA improvement. - CA model: CA Norm = -15.2 percent of GDP; Adjusted CA = -22.8 percent of GDP; CA Gap = -7.5 percent of GDP. - REER model signals: CA model implies REER overvaluation of 22 percent; IREER model indicates 9.8 percent undervaluation. ### External assessment, reserves, and financing - Overall assessment: Dominica’s estimated external position in 2022 is substantially weaker than the level implied by fundamentals and desirable policies. - Vulnerabilities: High commodity prices, late re-opening due to COVID-19, vulnerability to natural disasters, and high dependency on commodity imports raise external sustainability risks. - Financing composition and trends: - FDI averaged 8.3 percent of GDP since hurricane Maria (6.6 percent of GDP in 2022). - CBI revenues have been consistently above 12 percent of GDP since Maria and close to 30 percent of GDP in the last two fiscal years. - FX intervention and reserves: - Imputed reserves marginally increased from $165.2 in 2021 to $166.6 in 2022. - Estimated imputed reserves cover 5.6 months of imports and 31 percent of broad money, exceeding benchmarks of 3 months of imports and 20 percent of broad money. ### Policy recommendations (external sector & resilience) - Continue to earmark CBI revenue to spending on resilience building projects and increase the allocation to the government’s self-insurance fund (VRF) and to debt amortization. - Pursue fiscal consolidation in line with the ECCU’s regional debt target and Dominica’s national fiscal rule. - Implement reforms to improve competitiveness, broaden the export base, and advance the transition to renewable energy generation, reducing reliance on imported fossil fuels. ### Banking and financial sector developments - While starting to decline, Non-Performing Loans remain elevated, but banks remain well-capitalized. - Credit to private sector grew, but primarily on account of lending for construction activities. - Despite the pandemic, deposits have remained steady amidst low deposit rates. - Liquidity is steady and above the ECCU average. - Selected banking indicators (2013–22): - Regulatory capital ratio: 13.1 (2013), 11.9 (2014), 12.9 (2015), 15.0 (2016), 13.3 (2017), 12.5 (2018), 13.9 (2019), 18.9 (2020), 19.1 (2021), 15.9 (2022) - Nonperforming loans to total gross loans: 13.9 (2013), 14.2 (2014), 15.1 (2015), 14.5 (2016), 17.4 (2017), 17.0 (2018), 12.2 (2019), 15.0 (2020), 14.4 (2021), 13.8 (2022) - Return on Assets: -0.1 (2013), -0.1 (2014), 0.1 (2015), 0.8 (2016), -1.5 (2017), -0.8 (2018), 2.9 (2019), 0.9 (2020), 0.2 (2021), -0.9 (2022) - Liquid Assets to Short-term liabilities: 42.0 (2013), 47.5 (2014), 53.9 (2015), 61.2 (2016), 70.5 (2017), 61.7 (2018), 53.2 (2019), 56.8 (2020), 53.1 (2021), 55.6 (2022) ### Annex I — Impact of Russia’s War in Ukraine on Dominica - Main channels of impact: disruptions in commodity markets, slowdown in global growth, limited financial linkages. - Commodity prices: Dominica fully relies on imported fuels to produce about 70 percent of its electricity. Higher global energy prices pushed average inflation up to 7.5 percent in 2022 from 1.6 percent in 2021, despite temporary fuel price subsidies and waiving of custom duties, which fiscal cost rose to just under half a percentage of GDP. The rise in global food prices passed through due to imports of processed foods. - Tourism: Slower global growth, particularly in the European region, hindered pickup in tourist arrivals; late reopening further negatively impacted tourism recovery relative to peers. - Financial conditions: Tightening of financial conditions due to inflationary pressures and uncertainty. Dominica is relatively isolated from international financial markets; sovereign external debt is mostly concessional, private sector does not rely on foreign funding. Lending and deposit rates have remained low. Domestic banks (NBD) faced losses on large foreign investments; foreign-owned banks could face liquidity constraints. - Note on subsidy cost estimates: Preliminary estimates pointed to a 3 percent of GDP annualized cost; fuel price policies were implemented for 6 months only, and the cost of subsidies was somewhat lower than initially envisaged. *Source: Dominica — IMF staff report (selected tables, figures, and annexes).* ### Annex III . Implementation of Fund’s Past Policy Advice ### Annex III . Implementation of Fund’s Past Policy Advice ### Strengthening the COVID-19 vaccination campaign - Recommendation: Continue to contain the pandemic and support recovery by sound public communication and education campaigns to address vaccine hesitancy and building additional health care centers. - Implementation / Findings: - Vaccine coverage is now at 53 percent of the target population. - A digital vaccination card is available. - The authorities have expanded health care capacity with a new (ND resilient) hospital including services such as an ICU, an operating theatre and a dialysis unit. ### Maximizing the efficiency of CBI revenue allocation - Recommendation: Save a portion of CBI revenue to help (i) better balance public investment needs with fiscal resilience and debt sustainability goals, and (ii) reduce policy procyclicality and output volatility. - Implementation / Findings: - The government is saving EC$0.5 million per month in the VRF, which cumulative stock stands at EC$15million. - A portion of CBI revenue was used for clearance of government arrears in FY21/22. ### Implementing fiscal consolidation - Revenue measures - Recommendation: Implement tax reform to raise revenue without increasing the burden of tax administration or discouraging private investment. - Implementation / Findings: - A tax on idle properties was introduced in the budget. - Implementation of the presumptive tax was postponed to the next fiscal year. - Expenditure measures - Recommendation: Implement cost-saving expenditure efficiency measures. - Implementation / Findings: - The government is finishing a civil service review with support from CARICAD, but it might result in higher wages. - Tighter rules for compensation were put in place (for example, stricter conditions to compensate travel costs). - Recommendation: Improve the public investment efficiency and procurement. - Implementation / Findings: - The government plans to implement a centralized public procurement system. ### Debt sustainability - Recommendation: Monitor state-owned enterprises to identify contingent liabilities and take measures to help their financial positions. Return to periodic assessments of the pension system to keep track of its sustainability and to address long-term contingent liabilities. - Implementation / Findings: - The review of water and sewerage tariffs is on track, which will help the financial position of the public water company. - The actuarial analysis of the pension system by the Dominica Social Security, which was delayed due to mobility restrictions during the pandemic, has been completed but not yet published. - The additional increase in pension contribution rates (beyond the schedule already under implementation) is no longer expected. ### Addressing potential risks in the financial sector - Recommendation: Strengthen banks’ provisions to meet ECCB targets (60 percent by 2022 and 100 percent of loss loans by 2024). - Implementation / Findings: - The 60 percent of NPL provisioning target by 2022 has been achieved. - Recommendation: Bring credit unions’ capital above the regulatory minimum. - Implementation / Findings: - The FSU is working with credit unions to enhance capitalization. - All credit unions are currently above 5 percent capital and continue to bring capital ratio to 10 percent by 2026. - Recommendation: Modernize foreclosure legislation. - Implementation / Findings: - Yet under consideration. - Recommendation: Modernize regulatory framework for of credit unions. - Implementation / Findings: - A draft bill has been prepared but has not yet been submitted to parliament. - Recommendation: Enhance human/financial resources and independence of supervisory agency (FSU). - Implementation / Findings: - The government hired two new staffers at the FSU and is seeking TA to support its capacity. - Recommendation: Further strengthen the AML/CFT framework to minimize risks to CBRs. - Implementation / Findings: - The CFAFT assessment on AML/CFT was conducted in 2022 and the report is coming up in mid-2023. ### Address economic informality to promote efficiency and resilience, and broaden the tax base - Recommendation: Incentivize formalization of workers and small businesses, e.g., by reducing land registration costs; digitalizing government services and registration in government systems; and improving internet connectivity. Update the population database to help targeting and efficiency of social assistance. - Implementation / Findings: - Land transfer fees were reduced in the 2022–23 budget. - Digitalization is part of the government’s investment priorities, as reflected in the PSIP. - A population Census is being conducted, with expected conclusion in mid-2023. *Annex III . Implementation of Fund’s Past Policy Advice — IMF content unit* ### 4. Dominica may also tap into geothermal resources to export green energy in the ### 4. Dominica may also tap into geothermal resources to export green energy in the future ### Geothermal development prospects - Laudat’s production site could be leveraged to build additional 50 MW in generation capacity at a later stage. - Most of such energy production would thus be catered to external markets, possibly to neighboring countries. - The government has recently signed a framework agreement with a foreign decarbonization projects developer for the establishment of an Industrial Scale Green Hydrogen Geothermal Development in the northern part of the country. - The northern project has potential generation capacity of 200–400 MW, primarily for exporting. ### Implications highlighted in the source - New geothermal capacity is envisaged primarily for export markets rather than domestic consumption. - The combination of incremental capacity at Laudat (50 MW) and the northern Industrial Scale Green Hydrogen Geothermal Development (200–400 MW) represents a material potential expansion of Dominica’s generation capacity targeted at green energy exports. ### Key statistics - Additional potential from Laudat: 50 MW - Northern Industrial Scale Green Hydrogen Geothermal Development potential: 200–400 MW *Source: DOMINICA — STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (May 18, 2023).* ### 1. Public sector debt includes central government direct and guaranteed debt. Dominica’s ### 1dmaea2023001 - 1. Public sector debt includes central government direct and guaranteed debt. Dominica’s ### Debt coverage and composition - Public and total external debts are estimated at 106.3 and 82 percent of GDP respectively, in 2021. - 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. - Outstanding debt to Petrocaribe is estimated at 6 percent of the total debt stock as of 2021. - Public and Publicly Guaranteed (PPG) external debt is mostly owed to multilateral creditors. - National Bank of Dominica (NBD) and Dominica Social Security (DSS) are the main domestic creditors. - 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; no material difference between residency or currency basis definitions. - SOE non‑guaranteed debts (mostly domestic: NBD, AID, DSS) are not included in the public debt stock and are expected to be small compared to their guaranteed part. - Other 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 under the Public Procurement and Disposal of Public Property Act. - Recent reporting improvements: annual Debt Portfolio Review (DPR); inclusion of loan guarantees under the 2019 DPR; DPR submission to Parliament and publication on the Ministry of Finance website. ### Contingent liabilities and stress-test calibration - Contingent Liability stress test calibrated to capture risks not in the baseline. - No Public-Private Partnerships in Dominica; PPP-related contingent liability not included (PPP shock listed as 0.0). - Financial market contingent liability shock calibrated at 7 percent of GDP (default is 5 percent of GDP; 7.0 used here). - Reason for higher financial shock: potential higher fiscal costs of strengthening financial sector balance sheets after a natural disaster, undercapitalization of non-bank financial institutions, and high non-performing loans in Dominica. - Table calibration items (as presented): - Other elements of general government not captured: 0.0 percent of GDP - SoE's debt (guaranteed and not guaranteed): 2.0 percent of GDP - PPP: 0.0 - Financial market: 7.0 percent of GDP - Total (2+3+4+5): 9.0 percent of GDP ### Background on debt dynamics and shocks - Successive natural disasters (ND), Tropical storm Erika in 2015 and hurricane Maria in 2017, led to large revenue declines and sizeable reconstruction expenditure needs. - Public debt rose from an average of 72 percent of GDP in 2012–15 to 98 percent of GDP by 2019. - Pandemic effects: output contraction of 5.9 percent in FY20/21 and debt-to-GDP ratio reaching 113 percent. - Debt-to-GDP ratio came down to 106 percent in FY21/22 mostly due to high nominal output growth. - Primary deficits remained elevated due to support measures (transfers and subsidies) for pandemic and the war in Ukraine. - High reconstruction-imports: import bill exceeded 70 percent of GDP in 2018 and 2019. - PPG external debt ratio increased sharply during the pandemic and remained elevated in 2021–22 due to reliance on concessional financing. ### Creditors and financing structure - Dominica has no access to international financial markets; it borrows mainly from official creditors. - Two thirds of PPG debt is external; 90 percent of external PPG debt is owed to official bilateral and multilateral creditors. - World Bank is the largest creditor, holding 29 percent of the total external public debt stock. - Largest bilateral creditor: Venezuela’s Petrocaribe; followed by the Government of China and the French Development Agency. - Additional external financing sourced via bonds purchased by regional commercial banks, insurance companies, and pension funds. - Domestic financing primarily from direct credits from the NBD and local debt holders (mainly DSS). - As of June 2022, domestic debt accounted for 35 percent of total public sector debt. - Increased reliance on domestic financing since hurricane Maria, including overdraft facility use, notably in 2018–19. ### Macro forecasts, fiscal assumptions, and key parameters - Baseline built on June 2023 IMF Article IV Staff Report. - Growth projections include permanent output loss due to the pandemic and a boost from a large public investment plan. - GDP expected to recover at an average growth rate of 3.9 percent in FY 22–27, reflecting execution of public investment and tourism recovery. - Long-term (after 2026) potential growth rate projected to converge to 2.7 percent. - Real GDP: rebound of 6.9 percent in 2021; projected growth of 5.7 percent in 2022. - Inflation: estimated to have peaked at 7.5 percent in 2022; converging to 2 percent in the medium term. - Fiscal position: - Primary balance (including ND costs) expected to increase from -6.2 percent of GDP in FY21/22 to -0.3 percent in the medium term. - Projection assumes fiscal consolidation measures (excluding investment changes) generating cumulative savings of 3.4 percent of GDP during 2023–28. - Fiscal deficit includes an annualized cost of ND of 1.5 percent of GDP. - CBI revenue: - Projected to remain buoyant but decline from close to 30 percent of GDP in FY21/22 to 18 percent of GDP in FY 22/23, tapering to 14 percent of GDP by 2025. - CBI reached 29.4 percent of GDP in FY21/22. - CBI expected to be earmarked to public investment, debt amortization, and accumulation of savings. - Grants projected at 2.4 percent of GDP (historical average). - Balance of Payments: - Current account (CA) deficit improved to 27.6 percent of GDP in 2021 and to 26.2 percent of GDP in 2022. - CA deficit projected to steadily decline but remain above 10 percent of GDP until 2028. ### Financing assumptions and debt projections (selected figures) - Official external financing projected at 4 percent of GDP in the medium term (2024–26) and 2 percent of GDP in the long term (after 2026). - DSA financing assumptions for multilateral borrowing examples: - World Bank: grace period 10 years, maturity 40 years, interest 1.28 percent. - CDB: 10-year grace, 20-year maturity, interest 2.5 percent. - Other multilateral: 5 years grace, 10-year maturity, interest 2 percent. - Domestic borrowing assumptions in the DSA: - Medium term: 0 years grace, 5-year maturity, 7 percent interest rate. - Long term: 7-year maturity assumption to reflect strategy to extend maturity to 9 years. - Gross financing needs and sources (selected fiscal-year figures from table, in US$ million, fiscal years July–June): - Gross Financing needs 2022–2027: 599, 277, 777, 779, 78, (2027 entry presented) - Overall deficit 2022–2026: 384, 337, 373, 352, 32 (table formatting preserved as in source) - CBI revenue (percent of GDP) in IMF Staff Projections table: 28.6, 18.0, 17.0, 15.0, 14.0, 14.0 (years aligned in table) - Public Capital Expenditure (percent of GDP) in IMF Staff Projections table: 26.2, 12.8, 13.6, 11.8, 11.3, 10.9 (years aligned in table) - Current account balance (percent of GDP) in IMF Staff Projections table: -27.6, -26.2, -25.2, -17.7, -15.9, -14.3 (years aligned in table) ### DSA realism tools and classification - Debt dynamics driven by unexpected shocks: back-to-back ND and the pandemic produced higher-than-expected primary deficits and lower GDP growth. - DSA realism tools affected by substantial growth volatility related to the pandemic; relations between public investment and real GDP growth differ from historical relations due to ND and pandemic shocks. - Indicative debt thresholds determined by a “Medium” debt carrying capacity rating. - Composite Index (CI) score uses 10-year averages across 5 years historical and 5 years projections, and the corresponding CPIA. - The rating remains unchanged from the previous DSA; import coverage of reserves supports the rating. *Source: IMF staff (content unit 1dmaea2023001).* ### 13. Both external and public debt analysis consider standard-DSA alternative scenarios to ### 13. Both external and public debt analysis consider standard-DSA alternative scenarios to ### Alternative scenarios and stress tests - The DSA includes six standardized and a contingent liability stress test. - The financial market contingency liability is included at 7 percent of GDP, above the default of 5 percent of GDP, to account for the risk from ND. - A customized “Catastrophic Climate Event” scenario assumes the reoccurrence of a Category 5 hurricane in the second half of 2023 and: - Assumes declines in real GDP, exports, and revenues in line with those following hurricane Maria. - Assumes a considerable increase in expenditure in rehabilitation, with a slower pace of recovery to account for more binding financing constraints. - CI indicator inputs: October 2022 WEO and 2021 CPIA data. ### External DSA: key findings and projections - The PV of external public debt-to-GDP and PV of debt-to-exports ratios are close to thresholds for countries of medium debt carrying capacity in the baseline. - PV of external public debt-to-GDP: - On a declining trend in the near term. - Remains below the medium debt carrying capacity threshold through 2032 in the baseline. - Breaches the threshold by a large margin under the catastrophic climate event and the most extreme shock (reduction in exports to one standard deviation below historical average). - PV of external public debt-to-exports: - Falls below the threshold throughout the projection horizon in baseline. - Goes well above the threshold under the most extreme export shock. - Debt service to exports ratio: - Above the threshold in 2023 due to exports below pre-pandemic levels. - Stays below its threshold after 2024 in all scenarios except the most extreme shock. - Debt service in relation to revenue remains below the threshold for all shocks. - Residuals: - High historically and peak in 2019; decline consistently through the projection period. - Largely explained by use of government deposits derived from CBI revenues and changes in private external debt. - Residuals become smaller as use of deposits declines from 2023 onwards. - Overall assessment for external debt: risk of external debt distress is assessed as high, driven by baseline breaches from a high starting debt stock and reinforced by alternative scenarios (historical and catastrophic climate shock). ### Public debt sustainability and baseline assessment - Under the baseline, public debt is assessed sustainable but remains at high risk of debt distress. - Current fiscal consolidation plan plus continued CBI inflows lead to a declining public debt trajectory but: - Insufficient to reach the regional debt target of 60 percent of GDP by 2035. - Key metrics remain elevated over most of the horizon due mainly to higher initial debt ratio from large downward revisions to 2019–20 growth rates. - Public and publicly guaranteed (PPG) debt: - PPG debt remains high and above the threshold under the baseline over the horizon. - PV of total public-sector debt-to-GDP remains above the benchmark throughout the projection period. - All shocks result in large breaches of the benchmark. - Debt service-to-revenue ratios: - Increase in the near term due to slow tax revenue recovery after the pandemic, but decline afterwards. ### Sensitivity analysis highlights (selected exact figures from tables) - External debt indicators (PV of debt-to-GDP ratio, PV of debt-to-exports ratio, debt service-to-exports ratio, debt service-to-revenue ratio) are projected across 2022–32 with scenarios; examples from Table 7: - Baseline PV of debt-to-GDP ratio series (2022–32): 36 33 32 31 31 32 33 34 34 34 33 - Catastrophic Climate Event PV of debt-to-GDP: 36 46 47 50 53 57 61 67 72 77 81 - Baseline PV of debt-to-exports ratio series (2022–32): 15 21 24 10 4 9 5 9 5 6 9 10 (context: table rows reflect multiple indicators; consult source figures) - Public debt indicators (selected from Table 9): - Baseline total public debt (percent of GDP) 2022–32: 70 67 64 63 62 61 60 59 57 55 53 - Baseline PV of debt-to-GDP series (public debt) 2022–32: 137 128 126 127 126 124 122 120 118 113 110 - Catastrophic Climate Event PV of debt-to-GDP (public debt) 2022–32: 137 192 183 182 179 171 158 156 154 149 145 - Baseline Debt Service-to-GDP Ratio series (2022–32): 6.7 11.6 10.3 9.7 9.6 9.7 9.6 9.0 8.7 8.4 8.0 - Thresholds and breach indicators: - External-P/G benchmark threshold shown as 40 (Table 7 threshold row). - Total public debt benchmark: 55 (Table 9). - A bold value in tables indicates a breach of the threshold/benchmark. ### Risk rating, vulnerabilities, and policy recommendations - Stress tests omit important mitigating factors not internalized in the standardized framework: - Resilience to natural disasters: large investments in physical and social resiliency reduce future rehabilitation and reconstruction spending and may lower fiscal deficits and debt financing needs after ND in the long run. - Fiscal buffers: large government deposits from CBI revenue financed deficits since 2015; build-up of savings in the Vulnerability and Resilience Fund (VRF) for self-insurance will cushion financial impacts of catastrophic climate events. - Staff recommendation: reprioritize CBI revenues towards enhancing VRF contributions and paying down debt (or saving into the Debt Repayment Fund) to reduce borrowing needs following extreme climate shocks and lower outstanding debt stock. - Non-resident deposits: - Nearly 20 percent of the stock of external debt, equivalent to about 19 percent of GDP, are non-resident deposits held in the banking sector. - These deposits enhance external debt stability due to low rollover risk and increase imputed international reserves under the regional currency board arrangement. - With sustained fiscal consolidation, implementation of the fiscal rule, and continued concessional financing, external and overall debt are sustainable but remain at high risk of distress. - Planned VRF accumulation will help protect debt service capacity and resilience to ND. - Execution of the government development plan centered on ND resilience will reduce reconstruction spending after ND, contain output losses, and stimulate long-term output and employment. - Staff recommendations to enhance VRF contributions and pay down debt with CBI revenues would further enhance sustainability. - Macro-framework risks to projections: - CBI inflow projections: downside risk if third-nation travel restrictions reduce the value of Dominican passport; upside risk exists as staff projections are conservative relative to recent historical patterns (unprecedented inflows in 2020 and 2021). - Slower tourism recovery may pressure GDP growth and worsen debt dynamics; Dominica’s reliance on tourism is lower relative to other regional countries. - External grants projected conservatively and have upside risk. - Market risks contained: nearly 90 percent of debt portfolio is fixed interest; currency risks limited by currency board and USD/EC dollar dominance. - Increased reliance on domestic borrowing (2018–21) heightened risks to public debt: - Higher domestic borrowing raised domestic debt service burdens and underscores threat to financial stability due to bank- and non-bank-sovereign nexus. - Domestic debt service spikes in 2023 but moderates thereafter. - Authorities should closely monitor financial stability of local bond holders, particularly the DSS. - Stress tests highlight exposure to a catastrophic climate event as the main risk that could render debt unsustainable, reinforcing the need for fiscal consolidation, fiscal rule implementation, and continued concessional external support. *Source: IMF staff estimates and projections as presented in the Dominica DSA chapter.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1dmaea2023001.pdf_