## 1. Dominica’s Citizenship by Investment (CBI) Program ## Source details **Canonical URL:** [1. Dominica’s Citizenship by Investment (CBI) Program](https://www.imf.org/-/media/files/publications/cr/2024/english/1dmaea2024001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1dmaea2024001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1dmaea2024001-print-pdf.pdf.json) --- ### Context and vulnerability - Dominica has a narrow economic base, exposure to natural disasters (NDs), and reliance on CBI flows, leaving it vulnerable to shocks while limited fiscal space constrains development plans. - Policy responses to repeated shocks since 2015 have depleted fiscal buffers, with a 43½ percentage point increase in the public debt-to-GDP ratio at the pandemic peak. - Implementation of self-insurance initiatives in Dominica’s Disaster Resilience Strategy (DRS) was partially delayed by the pandemic and subsequent supply shocks. - Current development plans heavily rely on CBI inflows to complete potentially transformational infrastructure projects. - Opportunity: the entrenched economic recovery presents a chance to rebuild fiscal buffers consistent with Dominica’s fiscal rule and the broader ECCU regional debt target, while prioritizing reforms to enhance resilient and inclusive growth. ### Recent developments — real, external, fiscal, and financial sectors - Real sector - Real GDP grew by 5.6 percent in 2022 and an estimated 4.7 percent in 2023, returning to pre-pandemic output levels. - Recovery underpinned by wholesale/retail trade, public investment, rebound in tourism (despite reduced airlift), and modest agricultural growth. - Inflation fell from its 2022 peak of 9¾ percent to 2¼ percent (year-on-year) by end of 2023. - Formal labor market recovery has lagged the economic rebound, indicating potential pandemic-induced scarring. - External sector - Current account (CA) deficit widened to 33.7 percent in 2023 due to rising imports supporting large infrastructure projects that only partially offset tourism receipts improvements. - Fiscal sector - Fiscal primary balance improved by 1.3 percentage points to a deficit 4¼ percent of GDP in FY2022/23, reflecting higher CBI revenues mostly offset by weaker grant flows and higher capital spending. - Public debt has fallen 9 ppts from its pandemic peak but remains elevated at 103¼ percent of GDP. - Authorities’ FY2023/24 budget targets a primary surplus of 0.9 percent of GDP relying on revenue measures and expenditure rationalization; year-to-date information suggests underperformance of roughly ½ percent of GDP against the primary surplus target. - PSIP envisions investment spending of over 30 percent of GDP, financed mainly by CBI inflows. - VRF assets amounted to 1.1 percent of GDP as of March 2024; VRF target is 12 percent of GDP at a rate of 1½ percent of GDP annually. DRF intended to be funded by CBI flows with a 1.3 percent of GDP target. - Financial sector - Two banks and six credit unions (CUs) with assets equivalent to around 136 and 64 percent of GDP, respectively. - Banks: well capitalized and liquid with stable low-cost deposits; substantial portion of assets in foreign portfolio holdings; exposure to government declined but remains elevated; NPLs remain elevated and provisioning has fallen below the ECCB’s 60 percent prudential requirement. - CUs: vulnerable with low capital adequacy, elevated NPLs, and declining profitability. - Total private sector credit growth slowed from 4.8 percent in 2022 to 1.5 percent in 2023; nearly half of private-sector credit is provided by CUs. ### Outlook and risks - Growth and inflation projections - Annual real growth projected to average 4½ percent during 2024-25, supported by investments mainly financed by CBI revenues (geothermal plant, new international airport, climate-resilient infrastructure, hotel projects). - Long-term growth projected to converge to around 2 percent as the construction impulse recedes. - Inflation expected to converge to 2 percent (broadly in line with the U.S. price dynamics). - Current account deficit expected to narrow to a norm of 15-16 percent of GDP by 2027-28. - Debt and fiscal outlook - Sustained recovery and gradual consolidation will reduce public debt to under 90 percent of GDP by 2028, maintaining public debt sustainability despite high risk of debt distress. - Outlook predicated on sustained CBI flows, expected to converge to 14.5 percent of GDP over the medium term. - Baseline incorporates a reduction in annual fuel imports used for electricity generation by roughly half once the geothermal powerplant becomes operational in 2026. - Key risks (tilted to the downside) - Geopolitical tensions, volatile commodity prices, abrupt global slowdown, geo-economic fragmentation. - Tighter/volatile global financial conditions raising sovereign borrowing costs and damaging FDI. - Extreme climate events damaging infrastructure and compromising growth. - Domestic risks: fiscal underperformance, lower-than-expected CBI inflows, deterioration in CU asset quality, and delays in social security reform. - Upside possibilities - Better-than-expected returns from runway extension or higher growth in major trading partners could boost tourism exports. ### Box 1 — Role, mechanics, and recent integrity enhancements of Dominica’s CBI program - Program mechanics - Two options to obtain Dominican citizenship: - Contribute US$100,000/applicant to the Economic Diversification Fund (EDF); or - Invest a minimum of US$200,000 in government-approved real-estate projects plus an additional US$25,000/applicant in fees. - Fiscal importance - Dominica’s CBI revenues are the highest among the five ECCU jurisdictions with programs—peaking above 30 percent of GDP in 2022. - CBI inflows have funded most disaster reconstruction and strategic infrastructure projects. - External scrutiny and integrity steps - European Commission, United Kingdom, and United States raised security concerns; OECD cited tax evasion and money laundering risks. UK revoked Dominica’s visa-free access in 2023 on security grounds. - Dominica enhanced CBI regulations (due diligence, information sharing, passport recall powers, agent eligibility), engaged with the U.S./European countries after the 2023 U.S.-Caribbean CBI Roundtable, and in March 2024 joined an MoA with other ECCU CBI jurisdictions to establish common regional standards. ### Policy priorities - Reorient policies to address large fiscal and external imbalances while enhancing the basis for sustained and resilient growth. Priorities include: - Rebuilding fiscal buffers while prioritizing critical investment. - Improving financial intermediation while safeguarding financial stability. - Eliminating structural constraints to investment, employment, and productivity. ### A. Safeguarding fiscal sustainability and rebuilding buffers — scenarios and recommendation - Compliance gap under current policies - Baseline: authorities projected to miss national fiscal rule (NFR) objectives: the primary surplus in 2026 expected to fall short of the minimum 2.0 percent of GDP benchmark by 1¼ ppts and public debt expected to exceed the 60 percent of GDP threshold in 2035 by 6 ppts. - "Minimum" reform (Scenario 1) that attains the primary surplus target would be insufficient to achieve the public debt target. - Accumulating 1½ percent of GDP annually in the VRF as targeted requires additional fiscal effort beyond achieving the fiscal targets. - Staff recommendation (Scenario 2) - Target a primary surplus of 3½ percent of GDP from FY2025/26 onwards (Scenario 2) to ensure compliance with both NFR fiscal objectives and VRF accumulation targets. - Scenario 2 would provide stability and fiscal buffers to absorb shocks including lower CBI inflows. - Rationale - Stronger fiscal consolidation combined with competitiveness-enhancing structural reforms would support external rebalancing; external position assessed to be substantially weaker than fundamentals and desirable policies (see Annex I). ### Box 2 — Illustrative economic adjustment under a strengthened consolidation scenario - Strategy components - Reprioritize policy mix to resolve imbalances without compromising key development priorities. - Package: (i) broaden non-CBI revenues; (ii) streamline spending inefficiencies; (iii) save a greater portion of CBI revenues. - Prioritize completion of key infrastructure investments (international airport, geothermal plant, tourism capacity expansion). - Illustrative fiscal measures and phasing - Adjustment phased evenly over two years, involving measures to broaden the revenue base (EC$10 million) and scale back expenditures (EC$55 million). - Projected macro impacts (illustrative) - Public debt would reach 58.1 percent of GDP by 2035 under the proposed strategy compared with 66 percent under the baseline. - VRF fully capitalized to 12 percent of GDP by 2031 under the proposed strategy versus undercapitalized at 1.1 percent of GDP under the baseline. - Current account would improve by more than 2 percent of GDP relative to the baseline from lower imports related to reprioritization of PSIP outlays. - Growth impact could be minimized (illustrative estimate: 0.1 ppt lower growth relative to the baseline during 2025-26) by preserving key infrastructure investments and clearing government arrears. ### Fiscal consolidation strategy: objective and sequencing - Achieving and sustaining a 3½ percent primary surplus from FY2025/26 onwards would require identifying roughly EC$65 million in measures, phased in over two years. - Staff advocates combining revenue measures to reduce dependence on CBI flows and expenditure reforms that prioritize efficient outlays and protect the most vulnerable. - Policy design should prioritize non-debt creating financing (CBI revenues, grants, concessional lending) and carefully vet concessional loans for economic dividends and debt consistency. ### Revenue-side reforms (menu of options) — IMF staff estimates (two-year cumulative) - Menu highlights - Reintroduce VAT on the fuel surcharge included in electricity prices. - Increase the excise tax on diesel to align with gasoline. - Restore the highway levy tax. - Operationalize tax on idle properties as a step toward property tax regime. - Repeal the stamp duty on outgoing money transfers (assessed as an exchange restriction) in favor of base-broadening reforms. - Eliminate discretionary concession powers; improve data exchange mechanisms; reduce tax arrears (estimated at 17.3 percent of GDP). - Detailed estimated cumulative fiscal savings (over two years; IMF staff estimates): - Revenue measures: 1.1 percent of GDP; EC$20.1 million; 26.1 percent of total - VAT on fuel surcharge (electricity): 0.2 percent of GDP; EC$4.5 million; 5.8 percent of total - Highway levy: 0.1 percent of GDP; EC$1.9 million; 2.5 percent of total - Increase diesel excise tax to match gasoline: 0.2 percent of GDP; EC$4.5 million; 5.9 percent of total - Property/idle tax: 0.0 percent of GDP; EC$0.6 million; 0.7 percent of total - End discretionary import duty exemptions (Cabinet concessions): 0.5 percent of GDP; EC$8.6 million; 11.2 percent of total ### Expenditure-side reforms (menu of options) — IMF staff estimates (two-year cumulative) - Menu highlights - Rationalize recurrent spending, notably goods and services, with a further reduction of ½ percent of GDP recommended (excluding CBI due diligence outlays). - Tariff adjustments on water and sewage and hospital charges to reduce current transfers and ensure SOEs run on commercial terms. - Reform social protection frameworks, re-scale NEP back to original mandate, reassess housing program with means-testing and cost recovery. - Prioritize financing to complete existing key infrastructure projects; strengthen PSIP processes. - Detailed estimated cumulative fiscal savings (over two years; IMF staff estimates): - Expenditure measures: 3.1 percent of GDP; EC$57.0 million; 73.9 percent of total - Rationalize goods and services (excluding CBI due diligence): 0.6 percent of GDP; EC$11.6 million; 15.0 percent of total - Tariff adjustment on water and sewage and hospital services: 0.5 percent of GDP; EC$9.2 million; 12.0 percent of total - Rescaling National Employment Program (decrease by one-third): 0.9 percent of GDP; EC$16.7 million; 21.6 percent of total - Rescaling Housing Program (decrease by one-fifth): 1.1 percent of GDP; EC$19.5 million; 25.3 percent of total - Total (revenue + expenditure): 4.2 percent of GDP; EC$77.1 million; 100.0 percent of total ### Social protection and pensions: targeting and sustainability - Social protection framework is fragmented, largely unconditional, and relatively generous; Dominica’s social assistance spending is roughly twice that of peers in LAC and EMDE groupings. - Priority reforms - Streamline and consolidate social programs; establish a centralized information system/social registry; complete ongoing population census to support targeting. - Pension system - DSS reserves projected to be exhausted by 2063. - Recommended reforms: increase contribution rates, reduce replacement rates, align statutory retirement age for private and public employees at 65 years, and diversify investment portfolio internationally. - Projection and adequacy metrics - DSS reserves were 30 percent of GDP in 2020; projected to be depleted in 2063 and accumulate a deficit of 46 percent of GDP by 2080 (equivalent to a fiscal burden of around 1 percent of GDP a year). - Statutory contribution rate of 15.75 percent (by 2031) is almost 2 percentage points below estimated general average premium (GAP) of 17.6 percent. - PAYG rate estimated at 22.9 percent when reserves depleted in 2063 and projected to increase to 24.4 percent in 2080. ### Financing strategy and authorities’ views - Financing strategy should prioritize non-debt creating flows, saving CBI revenues, grants, and concessional lending vetted for economic dividends and debt consistency. - Authorities agree on the need for further fiscal consolidation; specific views include strengthening non-CBI revenues, achieving efficiencies in public expenditure, adjusting tariffs on water/sewerage, PSIP vetting, auditing the NEP, operationalizing centralized database for social assistance, and reviewing pension options. - Authorities cited a recently negotiated concessional loan with the Saudi Development Fund (SDF) as an example of balancing financing and development needs. ### Financial sector: resilience, supervision, and intermediation - Key actions and recommendations - Reduce balance sheet vulnerabilities and strengthen oversight, particularly for CUs. - Banks: step-up provisioning to meet ECCU requirements; expedite long-dated NPL disposal; manage foreign portfolio and public-sector credit exposures. - Credit Unions and FSU: strengthen CU supervision and regulation; grant FSU statutory independence; require capital restoration plans; strengthen resolution frameworks; participate in ECCB-led RSSB; regularize data sharing with ECCB. - Structural impediments: operationalize regional credit bureau; develop movable collateral framework; enhance ECPCGC support to MSMEs; modernize foreclosure and bankruptcy legislation. - AML/CFT and CBI: improve vetting of CBI applicants, governance, and transparency; use FIU database for CBI agent evaluation; bolster FSU resources and seek IMF technical assistance for digital asset business supervision. ### Structural reforms to boost sustainable, inclusive, and resilient growth - Climate resilience and recovery - CRRP prioritizes roads, bridges, water systems, houses, medical clinics, and emergency shelters. - Geothermal plant expected to be completed next year (first phase operational early 2026), with spillovers for growth and external rebalancing. - Multi-layered insurance strategy: World Bank catastrophe-contingent loan window (US$20 million), Caribbean Catastrophe Risk Insurance Facility (US$30 million), VRF capitalization (EC$0.5 million/month), Flexible Hurricane Protection program via CUs. - Business environment and labor market - Improve public service access, streamline regulations, digitalize government services, integrate agriculture with tourism, and address labor market frictions (EPL, informality, emigration, skills mismatches). - Recommendations: review employment protection legislation, explore targeted unemployment insurance (UI), improve vocational education and training, tailor social programs to tackle non-economic barriers to employment. - Data and institutional capacity - CSO capacity constraints hamper timely compilation of GDP, CPI, and labor force surveys. - PFM and tax administration weaknesses—opaque recording of CBI flows and capacity constraints—challenge planning and efficient use of CBI flows. - Recommended capacity development: resume CPI compilation, update Supply-Use Table, operationalize Tourism Satellite Account, GDP rebasing, informal sector survey, complete census, strengthen Treasury processes and PFM. ### Geothermal transition: macro effects and scenarios - Baseline assumption: completion of the first phase of the energy transition in 2026, after which roughly half of the country’s electricity demand supplied by geothermal sources. - Fuel-import and CA implications - Decline in fuel imports implies a structural improvement in the CA deficit of around 1 ppt of GDP relative to a hypothetical scenario without geothermal production (year 2026-2030). - Ramp-up to 20 megawatts under second phase (not in current baseline) could further improve the CA by 1 ppt of GDP from 2031. - Transportation sector accounts for roughly two-thirds of current oil imports (or nearly 5 percent of GDP), constraining potential gains. - Scenarios: electricity cost reduction and GDP impact (Staff calculation) - Scenario A (Less Optimistic): Reduction in Electricity Cost: 10 (In Percent); GDP Impact: 0.4 (in percent) - Scenario B (Central): Reduction in Electricity Cost: 15 (In Percent); GDP Impact: 0.7 (in percent) - Scenario C (More Optimistic): Reduction in Electricity Cost: 20 (In Percent); GDP Impact: 1.0 (in percent) - Projected current account paths (percent of GDP) 2026–2035 - With Geothermal Project: - 2026: -17.7; 2027: -15.8; 2028: -13.4; 2029: -13.3; 2030: -12.0; 2031–35*: -10.6 - Without Geothermal Project: - 2026: -18.1; 2027: -16.6; 2028: -14.4; 2029: -14.3; 2030: -13.0; 2031–35*: -12.4 - Difference (With minus Without): - 2026: 0.5; 2027: 0.8; 2028: 1.1; 2029: 1.0; 2030: 1.0; 2031–35*: 1.8 - *Assumption: geothermal production ramps up to 20 megawatts a year starting in 2031; constant 10 megawatts first five years phased-in over three years. - Long-term productivity - Empirical reference: Chailloux and others (2024) find a renewable transition could increase TFP growth by 2.5 percentage points on average after 5 years; if fully realized, long-term growth could double to 4 percent. - Caveats: realization depends on complementary structural policies, financial intermediation, labor market reforms, business environment improvements, and data/ modelling limitations. ### External sector assessment (Annex I) — salient points - Overall: Dominica’s external position in 2023 is estimated to be substantially weaker than implied by fundamentals and desirable policies. - 2023 CA deficit: 33.7 percent of GDP (from 26.7 percent in 2022); model norm corresponds to a deficit of 15.7 percent of GDP implying a CA gap in excess of 18.4 percent of GDP. - NIIP: -56.9 percent of GDP in 2022 (estimate largely unchanged in 2023). - Asset/liability composition (2023): - 52.7 percent of assets held by deposit-taking institutions other than the central bank. - Currency and deposits: 52.8 percent of total assets. - Reserve assets: 22.6 percent of total assets. - Nearly half of liabilities pertain to FDI (close to 82 percent of GDP); one-third are general government loans and debt securities. - Financing: CA deficit in 2023 largely financed with CBI revenues; FDI averaged 6.7 percent of GDP since Hurricane Maria (3.3 percent in 2023); CBI revenues averaged 32 percent of GDP during 2020-2022 and reached 36.6 percent of GDP in FY2022/23. - Reserves: imputed reserves cover 4.8 months of imports and 30 percent of broad money in 2023 (exceed typical benchmarks of 3 months and 20 percent). - Policy responses recommended: fiscal consolidation, earmark CBI revenue to resilience projects, increase VRF and DRF allocations, competitiveness reforms, broaden export base, advance renewable energy. ### Debt Sustainability and Stress Tests (DSA and Annex VII) - Debt and risk classification - Dominica’s debt is sustainable but the country remains at high risk of debt distress with elevated public and external debt. - Public debt peaked at 112.5 percent of GDP in 2020; declined to 103.3 percent of GDP in FY2022/23. - Composite indicator (CI) score: 3.01 implying a medium debt carrying capacity. - Risk ratings: Risk of external debt distress: High; Overall risk of debt distress: High. - Baseline and scenarios - Baseline projects public debt to fall under sustained recovery and consolidation but insufficient to meet 60 percent of GDP regional target by 2035. - Contingent liability calibration: financial market contingent liability shock set at 7 percent of GDP (above default 5 percent) to account for ND and financial sector weaknesses. - Customized “Catastrophic Climate Event” scenario assumes Category 5 hurricane in late 2024 with large GDP, export, and revenue declines and large rehabilitation spending. - Selected DSA outcomes and stress tests (selected entries) - Public sector debt: 2022: 103.3 percent of GDP; projected to fall to 89.6 percent of GDP by 2028. - Total contingent items reported as 9.0 percent of GDP. - Baseline PV of Debt-to-GDP ratio (Table 4 baseline row examples): 2023: 68; 2024: 62; 2025: 60; 2026: 59; 2027: 58; 2028: 55. - Alternative scenario A1 (historical averages) PV of Debt-to-GDP: 2024: 67; 2025: 69; 2026: 72; 2027: 74; 2028: 76. - Catastrophic Climate Event (A2) PV of Debt-to-GDP: 2024: 78; 2025: 80; 2026: 81. - Key recommendations from DSA - Sustain fiscal consolidation and implement fiscal rule. - Secure concessional financing terms and multilateral/bilateral support. - Reprioritize CBI revenues toward VRF and DRF and accelerate debt repayments. - Build fiscal reserves and execute resilient development to reduce future reconstruction spending. - Monitor financial stability of local bondholders, particularly DSS, given bank- and non-bank-sovereign nexus risks. ### Macro projections and selected indicators (highlights and exact figures as in source) - Real GDP (annual percent change, selected): 2022: 5.6; 2023: 4.7; 2024: 4.6; 2025: 4.3; 2026: 3.3; 2027: 2.9; long-term: 2.0. - Consumer prices (period average): 2022: 7.7; 2023: 3.5; 2024: 2.8; 2025: 2.1; 2026–2029: 2.0. - Current account balance (in millions of U.S. dollars): 2019: -233.2; 2020: -188.6; 2021: -182.6; 2022: -162.0; 2023: -221.9; 2024: -153.2; 2025: -149.0; 2026: -140.1; 2027: -131.8; 2028: -116.9; 2029: -121.7. - Citizenship-by-Investment (in percent of GDP): 2019: 12.1; 2020: 31.3; 2021: 29.2; 2022: 36.6; 2023: 18.0; 2024: 15.4; 2025–2029: 14.5. - Central government revenue (Millions of Eastern Caribbean dollars): 2019: 595.9; 2020: 845.2; 2021: 922.2; 2022: 1,060.2; 2023: 803.0; 2024: 812.5; 2025: 841.1; 2029: 1,000.7. - Central government Citizenship-by-Investment (Millions of Eastern Caribbean dollars): 2019: 182.4; 2020: 448.0; 2021: 458.6; 2022: 625.3; 2023: 331.0; 2024: 304.2; 2025: 301.8; 2029: 364.7. - Public sector debt (in millions of Eastern Caribbean dollars): 2019: 1,471; 2020: 1,608; 2021: 1,703; 2022: 1,764; 2023: 1,798; 2024: 1,949; 2029: 2,205. ### Data gaps, capacity development, and surveillance notes - Data gaps: public debt information (PetroCaribe estimates US$51 million, 8.1 percent of GDP as of FY2022/23), GDP expenditure components, labor market data, climate data, details on CBI revenue including number of passports and origin country. - CPI production suspended since February 2021; preliminary price information compiled since January 2023; CPI reporting expected to resume in 2024. - Balance of Payments and fiscal reporting do not fully capture CBI; ECCB uses cash-based fiscal data on CBI flows subject to estimation/classification risks. - Corrective actions: CARTAC assistance to resume CPI and GDP compilation, update SUT, operationalize Tourism Satellite Account, implement BOP recommendations, resume labor force statistics; advocacy for transparency standards on CBI revenues (publish revenue and expenditure breakdowns; number and national origin of applications and issued passports). ### Overarching policy recommendations (condensed) - Implement a comprehensive and balanced consolidation strategy to: - Achieve and sustain a primary surplus of 3½ percent of GDP from FY2025/26 onwards (identify roughly EC$65 million phased over two years). - Broaden the non-CBI revenue base and protect priority investment while streamlining spending. - Accumulate VRF and DRF balances and prioritize non-debt creating financing. - Strengthen financial sector supervision (especially CUs), operationalize regional credit bureau, modernize foreclosure/bankruptcy laws, and integrate climate risk into supervision. - Complete geothermal transition and resilient infrastructure investments to reduce external imbalances and lower energy import bills. - Strengthen AML/CFT, CBI vetting, and transparency in line with CFATF findings and MoA regional commitments. - Enhance statistical and PFM capacity for evidence-based policymaking. *Source: IMF staff report chapter — “Dominica’s Citizenship by Investment (CBI) Program.”* ### 1. Dominica’s Citizenship by Investment (CBI) Program ___________________________________________ 7 ### 1. Dominica’s Citizenship by Investment (CBI) Program ### Context - Dominica has a narrow economic base, exposure to natural disasters (NDs), and reliance on CBI flows, leaving it vulnerable to shocks while limited fiscal space constrains development plans. - Policy responses to repeated shocks since 2015 have depleted fiscal buffers, with a 43½ percentage point increase in the public debt-to-GDP ratio at the pandemic peak. - Implementation of self-insurance initiatives in Dominica’s Disaster Resilience Strategy (DRS) was partially delayed by the pandemic and subsequent supply shocks. - Current development plans are heavily reliant on CBI inflows to complete potentially transformational infrastructure projects. - The entrenched economic recovery presents an opportunity to rebuild fiscal buffers consistent with Dominica’s fiscal rule and the broader ECCU regional debt target, while prioritizing reforms to enhance resilient and inclusive growth. ### Recent developments — real, external, fiscal, and financial sectors - Real sector - Real GDP grew by 5.6 percent in 2022 and an estimated 4.7 percent in 2023, returning to pre-pandemic output levels. - Recovery underpinned by robust wholesale/retail trade, an ambitious public investment plan, a rebound in tourism (despite reduced airlift), and modest growth in agricultural output. - Inflation fell from its 2022 peak of 9¾ percent to 2¼ percent (year-on-year) by end of 2023. - Formal labor market recovery has lagged the economic rebound, indicating potential pandemic-induced scarring. - External sector - Current account (CA) deficit widened to 33.7 percent in 2023 due to rising imports supporting large infrastructure projects that only partially offset tourism receipts improvements. - Fiscal sector - Fiscal primary balance improved by 1.3 percentage points to a deficit 4¼ percent of GDP in FY2022/23, reflecting higher CBI revenues mostly offset by weaker grant flows and higher capital spending. - Public debt has fallen 9 ppts from its pandemic peak but remains elevated at 103¼ percent of GDP. - Authorities’ FY2023/24 budget targets a primary surplus of 0.9 percent of GDP, relying on revenue measures (taxing idle properties, excises on alcohol and tobacco, stamp duty on outbound money transfers, license fees for financial institutions and CBI agents), rationalizing public wages and recurrent expenditures, and reducing arrears. - The Public Sector Investment Program (PSIP) envisions investment spending of over 30 percent of GDP, financed mainly by CBI inflows. - A Debt Repayment Fund (DRF) was established to complement the Vulnerability Risk and Resilience Fund (VRF). As of March 2024, VRF assets amounted to 1.1 percent of GDP; VRF target is 12 percent of GDP at a rate of 1½ percent of GDP annually. The DRF is intended to be funded by CBI flows with a 1.3 percent of GDP target. - Year-to-date information for FY2023/24 suggests the authorities are likely to underperform the primary surplus target by roughly ½ percent of GDP. - Financial sector - Financial landscape: two banks and six credit unions (CUs) with assets equivalent to around 136 and 64 percent of GDP, respectively. - Banks remain well capitalized and liquid with stable low-cost deposits; substantial portion of assets invested in foreign portfolio holdings. - Banks’ exposure to government has declined but remains elevated regionally; bank NPLs remain elevated and provisioning has fallen below the ECCB’s 60 percent prudential requirement. - CUs vulnerable with low capital adequacy, elevated NPLs, and declining profitability. - Total private sector credit growth slowed from 4.8 percent in 2022 to 1.5 percent in 2023; nearly half of private-sector credit is provided by CUs. ### Outlook and risks - Growth and inflation projections - Annual real growth projected to average 4½ percent during 2024-25, supported by investments in agricultural and key infrastructure projects mainly financed by CBI revenues (geothermal production plant, a new international airport, climate-resilient infrastructure and hotel projects). - Long-term growth projected to converge to around 2 percent as the construction impulse recedes. - Inflation expected to converge to 2 percent (broadly in line with the U.S. price dynamics). - Current account deficit expected to narrow to a norm of 15-16 percent of GDP by 2027-28. - Debt and fiscal outlook - Sustained economic recovery and gradual fiscal consolidation will reduce public debt to under 90 percent of GDP by 2028, maintaining public debt sustainability despite high risk of debt distress. - Outlook predicated on sustained CBI flows, expected to converge to 14.5 percent of GDP over the medium term. - Baseline incorporates a reduction in annual fuel imports used for electricity generation by roughly half once the geothermal powerplant becomes operational in 2026. - Key risks (tilted to the downside) - Heightened geopolitical tensions, volatile commodity prices, abrupt global slowdown, and geo-economic fragmentation could disrupt tourism exports and external competitiveness. - Tighter/volatile global financial conditions could trigger asset rebalancing, raise sovereign borrowing costs, damage FDI inflows, and create financing challenges. - Extreme climate events could severely damage infrastructure and compromise growth. - Domestic risks: fiscal underperformance, lower-than-expected CBI inflows, deterioration in CU asset quality, and delays in social security reform could jeopardize infrastructure completion, growth, and debt dynamics. - Upside possibilities - Better-than-expected returns from runway extension or higher growth in major trading partners could boost tourism exports. ### Box 1 — Role, mechanics, and recent integrity enhancements of Dominica’s CBI program - Program mechanics - Two options to obtain Dominican citizenship: - Contribute US$100,000/applicant to the Economic Diversification Fund (EDF); or - Invest a minimum of US$200,000 in government-approved real-estate projects plus an additional US$25,000/applicant in fees. - Fiscal importance - Dominica’s CBI revenues are the highest among the five ECCU jurisdictions with programs—peaking above 30 percent of GDP in 2022. - CBI inflows have funded most disaster reconstruction and strategic infrastructure projects to boost resilient and inclusive growth. - External scrutiny and risks to flows - European Commission, United Kingdom, and United States raised security concerns citing lack of transparency and perceived weak vetting processes; OECD cited tax evasion and money laundering risks. - These concerns threaten short-term visa-free access to third-party countries (including the Schengen area). The United Kingdom revoked Dominica’s visa-free access in 2023 on security grounds. - Integrity-strengthening steps undertaken - Dominica enhanced CBI regulations to improve: (i) due diligence and vetting systems; (ii) information sharing frameworks; (iii) passport recall powers; and (iv) eligibility criteria for authorized agents. - Dominica engaged with the United States and European countries following the 2023 U.S.-Caribbean CBI Roundtable where six enhancement principles were agreed. - In March 2024, Dominica joined other ECCU CBI jurisdictions in signing a Memorandum of Agreement (MoA) establishing common regional standards to raise transparency, information exchange, regulatory oversight, due diligence and intelligence systems, and coordination on pricing to avoid revenue-erosive race-to-the-bottom practices. ### Policy discussions — priorities - Reorient policies to address large fiscal and external imbalances while enhancing the basis for sustained and resilient growth. Priorities include: - Rebuilding fiscal buffers while prioritizing critical investment. - Improving financial intermediation while safeguarding financial stability. - Eliminating structural constraints to investment, employment, and productivity to strengthen competitiveness. ### A. Safeguarding fiscal sustainability and rebuilding buffers — scenarios and recommendations - Compliance gap under current policies - Under current policies (baseline), authorities projected to miss national fiscal rule (NFR) objectives: the primary surplus in 2026 is expected to fall short of the minimum 2.0 percent of GDP benchmark by 1¼ ppts and public debt expected to exceed the 60 percent of GDP threshold in 2035 by 6 ppts. - Achieving the "minimum" reform (Scenario 1) that only attains the primary surplus target would be insufficient to achieve the public debt target. - Accumulating 1½ percent of GDP annually in the VRF as targeted requires additional fiscal effort beyond achieving the fiscal targets. - Staff recommendation (Scenario 2) - Target a primary surplus of 3½ percent of GDP from FY2025/26 onwards (Scenario 2) to ensure compliance with both the NFR fiscal objectives and VRF accumulation targets. - Scenario 2 would provide stability and fiscal buffers to absorb shocks including lower CBI inflows. - Rationale - Stronger fiscal consolidation combined with competitiveness-enhancing structural reforms would support rebalancing of the external position, assessed to be substantially weaker than suggested by fundamentals and desirable policies (see Annex I). ### Box 2 — Economic adjustment under a strengthened consolidation scenario (illustrative) - Strategy components - Reprioritize policy mix to resolve economic imbalances without compromising key development priorities for resilient growth. - Package of consolidation measures to: (i) broaden non-CBI revenues; (ii) streamline spending inefficiencies; and (iii) save a greater portion of CBI revenues. - Prioritize completion of key infrastructure investments (international airport, geothermal plant, tourism capacity expansion). - Illustrative fiscal measures and phasing - Adjustment phased evenly over two years, involving measures to broaden the revenue base (EC$10 million) and scale back expenditures (EC$55 million). - Projected macro impacts (illustrative) - Public debt would improve substantially, reaching 58.1 percent of GDP by 2035 under the proposed strategy compared with 66 percent under the baseline. - VRF would be fully capitalized to the targeted 12 percent of GDP by 2031 under the proposed strategy versus undercapitalized at 1.1 percent of GDP under the baseline. - Current account would improve by more than 2 percent of GDP relative to the baseline from lower imports related to reprioritization of PSIP outlays, implying an earlier convergence to its estimated norm by two years. - Growth impact could be minimized (illustrative estimate: 0.1 ppt lower growth relative to the baseline during 2025-26) by (i) preserving key infrastructure investments expected to drive growth; and (ii) clearing more government arrears to suppliers, supporting activity and largely offsetting consolidation growth effects. *Source: IMF staff report chapter — “Dominica’s Citizenship by Investment (CBI) Program.”* ### 9. A comprehensive and balanced consolidation strategy would include reforms to ### 9. A comprehensive and balanced consolidation strategy would include reforms to ### Fiscal consolidation strategy: overall objective and sequencing - Achieving and sustaining a 3½ percent primary surplus from FY2025/26 onwards would require identifying roughly EC$65 million in measures, phased in over two years. - Staff advocates a combination of revenue measures to reduce the dependence on CBI flows and expenditure reforms that both prioritize efficient outlays with clear economic dividends and protect the most vulnerable. - Policy design should prioritize non-debt creating financing (CBI revenues, grants, concessional lending) and carefully vet concessional loans for economic dividends and consistency with debt objectives, given Dominica’s high risk of debt distress. ### Revenue-side reforms (menu of options) - Reintroduce VAT on the fuel surcharge included in electricity prices. - Increase the excise tax on diesel to align with that of gasoline. - Restore the highway levy tax. - Operationalize the tax on idle properties as a first step toward a comprehensive property tax regime. (Note: A comprehensive property tax is not feasible in the short- to medium-term given inadequate administrative infrastructure and capacity constraints.) - Repeal the stamp duty on outgoing money transfers (assessed as an exchange restriction) in favor of more substantive base-broadening tax reform measures, including rationalizing PIT exemptions and fully eliminating duty exemptions on the importation of vehicles. - Strengthen transparency and accountability of exemption frameworks by eliminating discretionary concession powers. - Improve data exchange mechanisms between government units (including via dedicated digitalization/IT systems) to enhance tax administration and compliance and reduce sizable tax arrears (estimated at 17.3 percent of GDP). - Detailed estimated cumulative fiscal savings (over two years; IMF staff estimates): - Revenue measures: 1.1 percent of GDP; EC$20.1 million; 26.1 percent of total - VAT on fuel surcharge (electricity): 0.2 percent of GDP; EC$4.5 million; 5.8 percent of total - Highway levy: 0.1 percent of GDP; EC$1.9 million; 2.5 percent of total - Increase diesel excise tax to match gasoline: 0.2 percent of GDP; EC$4.5 million; 5.9 percent of total - Property/idle tax: 0.0 percent of GDP; EC$0.6 million; 0.7 percent of total - End discretionary import duty exemptions (Cabinet concessions): 0.5 percent of GDP; EC$8.6 million; 11.2 percent of total ### Expenditure-side reforms (menu of options) - Continue rationalizing recurrent spending, notably goods and services, with a further reduction of ½ percent of GDP recommended to restore comparability with the pre-Hurricane Maria average (adjusted for CBI due diligence outlays that should be preserved). - Tariff adjustments on key services—notably water and sewage and hospital charges—to reduce current transfers and ensure key state-owned entities (SOEs) run on commercial terms. - Reform social protection frameworks to enhance efficiency and sustainability, including re-scaling the National Employment Program (NEP) back to its original mandate (skills training). - Reassess the scale of the ambitious housing program on a needs basis given the current fiscal context, integrating means-testing and cost recovery components into various schemes. - Prioritize financing flows to complete existing key infrastructure projects; strengthen PSIP processes to ensure prioritization of projects with the greatest economic return without compromising broader fiscal and external objectives. - Detailed estimated cumulative fiscal savings (over two years; IMF staff estimates): - Expenditure measures: 3.1 percent of GDP; EC$57.0 million; 73.9 percent of total - Rationalize goods and services (excluding CBI due diligence): 0.6 percent of GDP; EC$11.6 million; 15.0 percent of total - Tariff adjustment on water and sewage and hospital services: 0.5 percent of GDP; EC$9.2 million; 12.0 percent of total - Rescaling National Employment Program (decrease by one-third): 0.9 percent of GDP; EC$16.7 million; 21.6 percent of total - Rescaling Housing Program (decrease by one-fifth): 1.1 percent of GDP; EC$19.5 million; 25.3 percent of total - Total (revenue + expenditure): 4.2 percent of GDP; EC$77.1 million; 100.0 percent of total ### Social protection and pensions: targeting, sustainability, and reforms - Dominica’s social protection framework is fragmented across sectors and ministries, largely unconditional, and relatively generous from an expenditure standpoint. - Dominica’s social assistance spending is roughly twice that of its peers in the Latin America and the Caribbean (LAC) region and the wider emerging market and developing economies (EMDE) grouping, even though per capita income is modestly lower than that in EMDEs and LAC by around 5 and 30 percent, respectively. - Priority reforms: - Streamline and consolidate social programs to reduce overlap and tailor assistance to the most vulnerable households. - Establish a centralized information system or unified database (social registry) to maintain accurate records of beneficiaries, track support, and identify gaps or duplications in coverage. - Complete the ongoing population census to support a comprehensive social registry and better targeting. - Pension system: - Dominica’s pension system is projected to exhaust its reserves by 2063. - Additional reforms needed: increase contribution rates, reduce replacement rates, align the statutory retirement age for both private and public employees at 65 years, and diversify the system’s investment portfolio towards international markets. - Note: Excludes NEP and housing project expenditures in social assistance comparisons. ### Financing strategy and authorities’ views - Financing strategy should prioritize non-debt creating flows, continuing to prioritize saving CBI revenues, grants, and concessional lending vetted for economic dividends and debt consistency. - Authorities agreed on the need for further fiscal consolidation and will carefully consider the proposed consolidation options; they have initiated reforms in several priority areas. - Authorities’ specific views include: - Importance of strengthening non-CBI revenues and base-broadening measures, to be considered in FY2024/25 budget deliberations. - Commitment to achieving efficiencies in public expenditure; SOEs should be run on commercial terms where possible. - Tariffs on water and sewerage have been adjusted; fees for specialized health services are under review. - PSIP expenditures are carefully vetted based on economic return; programs should be effectively targeted. - An audit of the NEP is underway to inform reforms. - Authorities are seeking to operationalize a centralized database system for social assistance reform and are reviewing pension options, including aligning retirement age economy-wide. - Authorities continue to prioritize non-debt or concessional financing and cited a recently negotiated concessional loan with the Saudi Development Fund (SDF) as an example of balancing financing considerations and development needs. ### Financial sector: balance sheet resilience, supervision, and intermediation - Reduce balance sheet vulnerabilities and strengthen oversight, particularly for credit unions (CUs), given their importance in Dominica’s financial system. - Banking sector: - Opportunity for banks to step-up provisioning with ECCU requirements and expedite long-dated NPLs disposal. - Vigilant risk management of growing foreign portfolios and public-sector credit exposures is important to mitigate shocks to banks’ profitability and public finance. - Credit Unions (CUs) and FSU: - Strengthen and modernize CU supervision and regulation, including granting the national financial services unit (FSU) statutory independence and increased risk-based supervision. - FSU should advocate sound underwriting practices, proper classification, and provisioning; CUs lacking capital should submit credible, time-bound restoration plans. - Strengthen national resolution frameworks for CUs with timely regulatory actions. - Participate in ECCB-led regional standards-setting body (RSSB) for CUs and other NBFIs and regularize data sharing with the ECCB. - Consider enhancing internal auditing capacity and board member qualifications; larger CUs would benefit from dedicated risk managers and annual on-site examinations. - Integrate climate risks into national supervisory frameworks for enhanced financial resilience. - Structural constraints to private credit: - Ongoing modest recovery in credit has been supported by increased lending from CUs; post-pandemic bank lending dominated by credit to government. - Operationalization of the regional credit bureau should streamline lending and enhance credit quality. - Development of a movable collateral framework could ease credit-access constraints. - Eastern Caribbean Partial Credit Guarantee Corporation (ECPCGC) could further support MSMEs in meeting documentation and collateral requirements. - Modernize national foreclosure and bankruptcy legislation to facilitate NPL resolution. - AML/CFT and CBI program frameworks: - Scope to improve AML/CFT and CBI frameworks and strengthen supervision of digital asset businesses. - Authorities have set up a working group to address CFATF Mutual Assessment findings, including inadequate vetting of CBI applicants, governance weaknesses, and lack of transparency regarding CBI beneficiary information. - Encourage strengthened safeguards in risk assessment/management, vetting, and transparency; utilize the Financial Intelligence Unit database for evaluating CBI agent applicants. - Explore opportunities to standardize best practices and enhance regional information sharing; monitor new crypto assets for integrity and cybersecurity. - Bolster FSU resources and capacity to address these risks and seek IMF technical assistance to enhance regulatory and supervisory framework for digital asset businesses including for AML/CFT. - ECCB governance: - ECCB has taken steps to address most 2021 safeguards recommendations, but scope remains to strengthen governance arrangements through legal reforms to further strengthen ECCB operational autonomy and align its Agreement Act with leading practices; related safeguards recommendations remain pending. - Authorities’ views on financial sector reforms: - Broad concurrence with policies to enhance financial intermediation. - Emphasized legacy public sector exposure and a trend decline in credit to government. - Argued public credit is not crowding out private credit given ample liquidity; pointed to structural constraints and low demand for credit. - Support for operationalization of the ECCU credit bureau and regional PCGS innovations to boost MSME finance. - Support for modernizing CU regulation; expectation for CUs to reach 10 percent capital adequacy by 2026. - Support for RSSB initiative for CUs, with emphasis on communication with members and retention of ECCU jurisdictional oversight responsibilities. - Noted efforts to implement CFATF recommendations, including increased staffing. ### Structural reforms to boost sustainable, inclusive, and resilient growth - Climate resilience and recovery: - Climate Resilience and Recovery Plan (CRRP) prioritizes infrastructure in roads and bridges, water systems, houses, medical clinics, and emergency shelters. - Transition to a fully renewable energy production mix is on track, with a geothermal energy production plant expected to be completed next year, with positive spillovers for growth and external rebalancing. - Financial resilience via a multi-layered insurance strategy under the Disaster Resilience Strategy: World Bank catastrophe-contingent loan window (US$20 million), Caribbean Catastrophe Risk Insurance Facility (US$30 million), capitalization of the Vulnerability and Resilience Fund (EC$0.5 million/month), and a Flexible Hurricane Protection program (voluntary parametric insurance available through CUs). - Improve the business environment to enhance private sector role: - Improve public service access, streamline regulations, reduce compliance costs to reduce informality and foster MSME growth. - Upgrade government services with digital technology and complement with digital training for government staff and the general public. - Integrate the sizable agricultural sector with the tourism industry to grow agricultural processing and move up the value chain. - Labor market reforms: - Dominica’s growth decelerated from an average of 3 percent during 2000-08 to below 1 percent in the decade before the pandemic, largely reflecting shrinking total factor productivity and weakening contributions from labor and human capital. - Longstanding labor market frictions: rigid hiring/firing practices, high informality rates, limited economic diversification, emigration of skilled workers, and skills and competency mismatches. - Recommendation to recalibrate labor market policy across several dimensions: - Labor market institutions: Review and recalibrate employment protection legislation (EPL) and link EPL stringency to the buildup of the benefit system. Explore the introduction of a targeted unemployment insurance (UI) scheme; reduce uncertainty about dismissal costs/duration as a less distortionary form of protection than high severance. - Youth gaps: Improve educational attainment, including vocational education and training; collaborate with development partners; review education programs to strengthen employability; tailor social programs to tackle non-economic barriers to employment, particularly among boys. - Note on data constraints: - Absence of recent labor force data in Dominica seriously constrains evidence-based labor market policy recommendations. *Source: 1dmaea2024001-print-pdf - 9. A comprehensive and balanced consolidation strategy would include reforms to* ### 25. The authorities highlighted ongoing efforts to improve climate resilience and promote ### 25. The authorities highlighted ongoing efforts to improve climate resilience and promote ### Climate resilience, diversification, and digitalization - Authorities report steady implementation of the CRRP and commitment to timely completion of key infrastructure projects, notably the geothermal transition and international airport. - Sixteen innovation hubs have been created around the country to improve government services delivery and offer digital technology training. - Authorities emphasize sectoral integration, particularly between agriculture and tourism, to help achieve the goal of tripling agriculture’s GDP footprint by 2030. - Agriculture programs are being implemented to bolster climate resilient practices and youth participation. ### Labor market, education, and social policy - Persistent labor market frictions, skills mismatches, and emigration pressures are identified as constraints on employment and growth potential. - Educational reform, including modernizing curricula and enhanced training programs, is prioritized; the NEP is highlighted as important in this context. - Gender gaps are not seen as a pressing issue given high female participation and representation across the labor force. - A UI framework is being developed and will be informed by an International Labor Organization (ILO)-sponsored feasibility study. ### Institutional strengthening and data challenges - Data provided to the Fund is adequate for surveillance but has shortcomings complicating analysis and policy advice (Annex VII). - Shortcomings largely stem from binding resource constraints within the Central Statistical Office (CSO) in staffing and overall funding, impacting timely compilation of GDP figures and causing prolonged disruptions in the production of CPI and execution of Labor Force Surveys. - Weaknesses in PFM and tax administration frameworks—including opaque recording of CBI flows, outmoded frameworks, and capacity constraints—pose challenges to economic planning and efficient use of CBI flows. - Cash management challenges have required the use of costly overdraft facilities and produced a backlog of unpaid cheques; strengthened Treasury processes (IT systems, sharing latest cash forecasts, accounting practices) could alleviate pressures. Authorities’ views and capacity development needs - Bolstering institutional capacity is a priority requiring sustained capacity development (CD). - The CSO is benefiting from Fund/CARTAC assistance to improve national accounts and price compilation. - Additional CD needs highlighted: update the supply-use table, operationalize a tourism satellite account framework, complete the GDP rebasing, and conduct a survey to assess the informal sector. - The census is to be completed by end-year to inform policy deliberations. - Efforts to enhance PFM: a committee for regular financial oversight of public entities, a semi-annual reporting framework within the CBI unit, and CD recommendations to strengthen Treasury functions are under review. - Authorities noted regulatory modifications in late 2023 to address third-party security concerns and regional commitments under recently signed MoA commitments to enhance integrity of the CBI regime through common due diligence, pricing, and disclosure standards. ### Macroeconomic developments and outlook (Staff appraisal) - Dominica experienced a series of external shocks; fiscal buffers were depleted and debt peaked at 112½ percent of GDP in 2020. - Post-disaster reconstruction and development infrastructure needs (funded by robust CBI inflows) widened the current account deficit. - Recent economic strengthening: Real GDP grew by 5.6 percent in 2022 and an estimated 4.7 percent in 2023, returning to pre-pandemic output levels. - Growth is expected to average 4½ percent during 2024-25 as stayover tourism returns to pre-pandemic levels, agriculture expansion initiatives take hold, and priority infrastructure projects advance. - Transition to geothermal energy, the new international airport and hotel projects, and resilient infrastructure projects are expected to yield long-term growth dividends and reduce external imbalances. - Public debt is set to decline in coming years, albeit slowly, supported by consolidation of public finances. ### Fiscal consolidation recommendations - More ambitious fiscal consolidation is needed to achieve objectives under Dominica’s fiscal rule and adequately self-insure against disaster (ND) risks. - Staff recommends identifying roughly EC$65 million in fiscal consolidation measures, phased in over two years, to attain and sustain a primary surplus of 3.5 percent of GDP from FY2025/26 onwards. - Consolidation should be underpinned by a sizeable improvement in non-CBI fiscal balances while protecting investment and priority programs to safeguard growth and vulnerable populations. - Recommended revenue-side measures: - Streamline tax incentives. - Reintroduce VAT on the fuel surcharge included in electricity prices. - Equalize diesel and gasoline excise rates. - Strengthen tax administration and compliance management. - The stamp duty on outbound money transfers is assessed as an exchange restriction; authorities have not requested approval and staff does not recommend it. It should be repealed in favor of less distortive measures to mobilize revenues and broaden the non-CBI tax base. - Expenditure-side priorities: - Preserve the decline in the public wage bill. - Rationalize inefficient spending and prioritize PSIP outlays on projects with clear economic returns. - Pursue tariff adjustments on key public services to strengthen SOEs’ financial position and reduce contingent liability risks and current transfers. - Reassess the NEP from a cost-benefit standpoint. ### Social protection and demographic pressures - The social protection framework is fragmented, reflecting capacity constraints and widespread informality that hamper conventional income-based targeting. - Priority actions: - Streamline and consolidate programs to reduce overlap and tailor assistance to the most vulnerable. - Operationalize a centralized information system or unified database to track support and identify gaps. - Use the completion of the ongoing population census to support establishment of a comprehensive social registry. - Pursue a package of parametric reforms to safeguard the long-term viability of the national pension scheme as demographic pressures rise. ### Financial sector reforms and supervision - Addressing structural impediments to financial intermediation that constrain private sector credit remains a priority. - Operationalization of the regional credit bureau should streamline lending and enhance credit quality. - Introducing a movable collateral framework could ease credit-access constraints. - Enhancements to the Eastern Caribbean Partial Credit Guarantee Corporation could better support MSMEs. - Modernizing national foreclosure and bankruptcy legislation is critical for resolving NPLs. - Supervisory recommendations: - Grant FSU statutory independence from the Ministry of Finance to improve effectiveness and support risk-based supervision. - Pursue sound underwriting practices, proper asset classification and provisioning, and require CUs with capital shortfalls to submit credible restoration plans. - Participate in ECCB-led initiatives (e.g., establish a Regional Standards Setting Body for non-bank financial institutions, regularize data sharing). - Integrate climate risks into supervisory frameworks. ### Structural reforms and ongoing institutional reform priorities - Structural reforms to modernize the economy should support sustainable, inclusive, and resilient growth: - Geothermal transition is pivotal for climate mitigation, competitiveness, and reducing external imbalances. - Support initiatives for the agricultural sector and broaden the export base, exploring synergies with tourism. - Reform the business environment to reduce administrative costs and labor market frictions, addressing skills mismatches. - Continue institutional reforms to mitigate risks and support economic policymaking: - Strengthen AML/CFT legislation and procedures in line with the latest CFATF mutual evaluation report to protect correspondent bank relationships and the CBI program’s integrity. - The MoA between ECCU countries with CBI programs to establish common standards on pricing, information sharing, transparency, and due diligence is a welcome step. - Address weaknesses in statistical compilation, tax administration, and PFM frameworks—including under-developed internal CBI reporting systems—that complicate policy management. - Strengthen institutional capacity in statistical compilation and PFM processes for medium-term budgeting, fiscal reporting, treasury operations, and public investment management. *Source: 1dmaea2024001-print-pdf - 25.* ### 38. It is recommended that the next Article IV consultation takes place on the standard ### 1dmaea2024001-print-pdf - 38. It is recommended that the next Article IV consultation takes place on the standard 12-months cycle. ### Recommendation - It is recommended that the next Article IV consultation takes place on the standard 12-months cycle. ### Real Sector Developments - Tourism played the leading role in 2022 growth; total arrivals have fully recovered, with an increased share of cruise arrivals that has potential long-term implications given larger multipliers from stayover tourism. - Wholesale/retail trade and tourism were the main drivers in 2023. - 2023 saw a marked decline in fuel and core price inflation with food inflation remaining elevated. - From a regional standpoint, Dominica’s growth is below the ECCU average, which has contributed to relatively subdued inflation. - Real GDP (annual percent change, at market prices): 2019: 1/5.5-16.6; 2020: 6.9; 2021: 5.6; 2022: 4.7; 2023: 4.6; 2024: 4.3; 2025: 3.3; 2026: 2.9; 2027: 2.9; 2028: 2.4. ### External Sector Developments - The REER stabilized in 2023 as domestic inflation started to catch up with rising foreign inflation. - The external position deteriorated in 2023 on account of a growing trade deficit and slowing service balance growth. - High commodity prices, re-opening of the economy, and continued infrastructure projects led to sustained high imports, while exports of primary and manufactured goods saw lackluster growth. - CBI continues to be the main source of external financing. - While public external debt is trending down, it remains elevated. - Current account balance (in millions of U.S. dollars): 2019: -233.2; 2020: -188.6; 2021: -182.6; 2022: -162.0; 2023: -221.9; 2024: -153.2; 2025: -149.0; 2026: -140.1; 2027: -131.8; 2028: -116.9; 2029: -121.7. - Net imputed international reserves (Millions of U.S. dollars): 2019: 166.2; 2020: 165.6; 2021: 165.2; 2022: 182.3; 2023: 164.2; 2024: 169.7; 2025: 180.0; 2026: 191.7; 2027: 203.4; 2028: 216.1; 2029: 228.4. - Gross external debt (in percent of GDP) 6/: 2019: 90.2; 2020: 108.0; 2021: 87.3; 2022: 97.3; 2023: 92.6; 2024: 97.9; 2025: 91.6; 2026: 92.2; 2027: 91.1; 2028: 88.4; 2029: 83.7. ### Fiscal Sector Developments - The fiscal balance has been improving moderately since the pandemic, but the public debt ratio remains elevated and is one of the highest among peers, well above the ECCU regional target of 60 percent of GDP. - Volatile and uncertain CBI flows have exceeded tax revenue in the last three fiscal years, supporting an increase in capital spending while recurrent expenditures have fallen moderately. - More than 35 percent of public debt is held by the systemically important National Bank of Dominica. - Debt of SOEs has been declining in recent years. - Central government revenue (in percent of GDP): 2019: 39.6; 2020: 59.1; 2021: 58.8; 2022: 62.1; 2023: 43.5; 2024: 41.2; 2025: 40.3; 2026: 40.0; 2027: 40.0; 2028: 39.9; 2029: 39.7. - Central government debt (incl. guaranteed) (percent of GDP): 2019: 97.7; 2020: 112.5; 2021: 108.5; 2022: 103.3; 2023: 97.5; 2024: 98.8; 2025: 95.9; 2026: 93.8; 2027: 91.7; 2028: 89.6; 2029: 87.4. - Primary balance (percent of GDP): 2019: -6.1; 2020: -5.4; 2021: -5.6; 2022: -4.3; 2023: 0.4; 2024: 0.7; 2025: 0.8; 2026: 0.9; 2027: 1.1; 2028: 1.2; 2029: 1.5. - Primary balance, excluding CBI (percent of GDP): 2019: -18.2; 2020: -36.7; 2021: -34.8; 2022: -40.9; 2023: -17.6; 2024: -14.7; 2025: -13.7; 2026: -13.6; 2027: -13.4; 2028: -13.3; 2029: -13.0. - Overall balance (percent of GDP): 2019: -8.6; 2020: -7.5; 2021: -8.2; 2022: -7.2; 2023: -3.8; 2024: -3.4; 2025: -2.9; 2026: -2.7; 2027: -2.2; 2028: -2.0; 2029: -1.5. - Citizenship-by-Investment (CBI) (in percent of GDP): 2019: 12.1; 2020: 31.3; 2021: 29.2; 2022: 36.6; 2023: 18.0; 2024: 15.4; 2025: 14.5; 2026: 14.5; 2027: 14.5; 2028: 14.5; 2029: 14.5. ### Banking Sector Developments - Since the pandemic, banks remain well capitalized and enjoy a high degree of liquidity, benefiting from a stable deposit base with low interest rates. - Despite improving asset quality, the NPL ratio remains elevated. - Credit to the private sector remains lackluster, while foreign assets exhibit a modest increasing trend. - Selected indicators (Commercial Banks, 2013–2023): - Regulatory capital ratio: 2013: 8.45; 2014: 8.65; 2015: 3.38; 2016: 8.75; 2017: 8.13; 2018: 7.64; 2019: 7.58; 2020: 8.19; 2021: 8.48; 2022: 8.17; 2023: 8.47. - Nonperforming loans to total gross loans: 2013: 7.59; 2014: 8.78; 2015: 40.93; 2016: 14.53; 2017: 15.06; 2018: 13.89; 2019: 12.70; 2020: 15.31; 2021: 16.79; 2022: 14.61; 2023: 13.41. - Return on Assets: 2013: 0.92; 2014: 0.91; 2015: 1.16; 2016: 1.30; 2017: 0.77; 2018: 0.43; 2019: 0.84; 2020: 1.00; 2021: 0.79; 2022: 0.46; 2023: 0.48. - Liquid Assets to Total Assets: 2013: 4.62; 2014: 5.83; 2015: 15.23; 2016: 10.12; 2017: 18.08; 2018: 16.86; 2019: 12.09; 2020: 14.06; 2021: 15.71; 2022: 16.95; 2023: 10.13. ### Credit Union Developments - Asset growth has moderated while asset quality has deteriorated; NPLs are unevenly distributed with three CUs having elevated NPL ratios. - Loans and deposits in percent of total assets are stable, but capital at the aggregate level remains weak and is unevenly distributed, with low capital adequacy among major CUs. - Deposits/Loans ratio and liquidity are relatively stable, but profitability is volatile and on a declining trend. - Selected indicators (Credit Unions, 2013–2023): - Regulatory capital ratio 1/: 2013: 13.11; 2014: 11.91; 2015: 12.90; 2016: 15.61; 2017: 13.31; 2018: 12.50; 2019: 13.90; 2020: 18.90; 2021: 18.30; 2022: 15.90; 2023: 27.51. - Nonperforming loans to total gross loans: 2013: 13.9; 2014: 14.2; 2015: 15.1; 2016: 14.5; 2017: 17.4; 2018: 17.0; 2019: 12.2; 2020: 15.0; 2021: 15.7; 2022: 13.8; 2023: 12.9. - Return on Assets: 2013: -0.1; 2014: -0.1; 2015: 0.1; 2016: 0.8; 2017: -1.5; 2018: -0.8; 2019: 2.9; 2020: 0.9; 2021: 0.2; 2022: -0.9; 2023: 0.94. - Liquid Assets to Total Assets: 2013: 36.9; 2014: 39.8; 2015: 46.9; 2016: 54.5; 2017: 62.5; 2018: 56.3; 2019: 46.7; 2020: 48.9; 2021: 46.1; 2022: 48.1; 2023: 50.45. ### Selected Economic Indicators and Projections (Highlights) - Area (sq. km.): 754. - Adult literacy rate (percent, 2016): 94. - Population (2022) total: 72,737; annual rate of growth (percent): 0.4; density (per sq. km.): 96.5. - Gross Domestic Product (2022) Millions of E.C. dollars: 1,640; Millions of U.S. dollars: 607; U.S. dollars per capita: 8,351. - Consumer prices (period average): 2019: 1.5; 2020: -0.7; 2021: 1.6; 2022: 7.7; 2023: 3.5; 2024: 2.8; 2025: 2.1; 2026: 2.0; 2027: 2.0; 2028: 2.0; 2029: 2.0. - Imports of goods and services (percent of GDP): 2019: 71.0; 2020: 60.0; 2021: 56.5; 2022: 57.8; 2023: 62.9; 2024: 57.9; 2025: 58.4; 2026: 56.7; 2027: 55.5; 2028: 54.6; 2029: 54.1. - Exports of goods and services (percent of GDP): 2019: 33.1; 2020: 19.6; 2021: 21.2; 2022: 28.7; 2023: 28.1; 2024: 33.9; 2025: 36.3; 2026: 36.7; 2027: 37.4; 2028: 38.8; 2029: 38.2. - Trade balance (percent of GDP): 2019: -42.5; 2020: -34.1; 2021: -32.6; 2022: -34.4; 2023: -38.7; 2024: -35.3; 2025: -35.9; 2026: -34.0; 2027: -32.7; 2028: -31.7; 2029: -31.1. ### Balance of Payments (Highlights) - Exports of goods and services (in millions of U.S. dollars): 2019: 202.7; 2020: 98.6; 2021: 117.7; 2022: 174.0; 2023: 185.1; 2024: 240.2; 2025: 273.4; 2026: 291.0; 2027: 311.2; 2028: 339.2; 2029: 349.3. - Tourism (in millions of U.S. dollars): 2019: 135.3; 2020: 34.9; 2021: 25.2; 2022: 75.2; 2023: 94.8; 2024: 129.6; 2025: 155.8; 2026: 167.3; 2027: 181.5; 2028: 203.1; 2029: 207.2. - Imports of goods and services (in millions of U.S. dollars): 2019: 434.4; 2020: 302.3; 2021: 313.7; 2022: 351.0; 2023: 414.1; 2024: 409.7; 2025: 440.1; 2026: 449.6; 2027: 462.4; 2028: 477.4; 2029: 494.0. - Capital transfers (in millions of U.S. dollars): 2019: 59.8; 2020: 115.7; 2021: 161.4; 2022: 131.0; 2023: 177.6; 2024: 54.7; 2025: 81.4; 2026: 71.5; 2027: 55.7; 2028: 56.6; 2029: 81.6. - Capital transfers of which Citizenship By Investment (in millions of U.S. dollars): 2019: 72.3; 2020: 116.7; 2021: 167.9; 2022: 200.7; 2023: 177.1; 2024: 117.6; 2025: 112.2; 2026: 114.7; 2027: 120.5; 2028: 126.3; 2029: 132.1. ### Central Government: Statement of Operations (Highlights) - Revenue (in millions of Eastern Caribbean dollars): 2019: 595.9; 2020: 845.2; 2021: 922.2; 2022: 1,060.2; 2023: 803.0; 2024: 812.5; 2025: 841.1; 2026: 878.5; 2027: 922.3; 2028: 962.5; 2029: 1,000.7. - Taxes (in millions of Eastern Caribbean dollars): 2019: 363.0; 2020: 333.3; 2021: 350.2; 2022: 380.9; 2023: 403.9; 2024: 435.4; 2025: 462.2; 2026: 480.1; 2027: 504.1; 2028: 524.6; 2029: 542.8. - Citizenship-by-Investment (in millions of Eastern Caribbean dollars): 2019: 182.4; 2020: 448.0; 2021: 458.6; 2022: 625.3; 2023: 331.0; 2024: 304.2; 2025: 301.8; 2026: 317.3; 2027: 333.1; 2028: 348.8; 2029: 364.7. - Expenditure (in millions of Eastern Caribbean dollars): 2019: 725.2; 2020: 952.8; 2021: 1,051.0; 2022: 1,183.7; 2023: 873.5; 2024: 879.9; 2025: 901.8; 2026: 938.0; 2027: 973.5; 2028: 1,009.6; 2029: 1,039.3. - Net acquisition of nonfinancial assets (in millions of Eastern Caribbean dollars): 2019: 147.3; 2020: 400.0; 2021: 421.1; 2022: 601.1; 2023: 251.0; 2024: 233.2; 2025: 234.8; 2026: 237.9; 2027: 245.9; 2028: 251.1; 2029: 250.0. - Primary balance (in millions of Eastern Caribbean dollars): 2019: -92.1; 2020: -77.2; 2021: -87.6; 2022: -74.2; 2023: 7.4; 2024: 13.8; 2025: 15.9; 2026: 19.7; 2027: 24.7; 2028: 28.9; 2029: 37.3. - Primary balance (excl. CBI) (in millions of Eastern Caribbean dollars): 2019: -274.4; 2020: -525.2; 2021: -546.3; 2022: -699.5; 2023: -323.7; 2024: -290.5; 2025: -285.9; 2026: -297.6; 2027: -308.5; 2028: -319.9; 2029: -327.4. - Public sector debt (in millions of Eastern Caribbean dollars): 2019: 1,471; 2020: 1,608; 2021: 1,703; 2022: 1,764; 2023: 1,798; 2024: 1,949; 2025: 2,003; 2026: 2,060; 2027: 2,113; 2028: 2,163; 2029: 2,205. *Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); donor organizations; and Fund staff estimates and projections.* ### Annex I . External Sector Assessment ### Annex I . External Sector Assessment ### Overall Assessment and Potential Policy Responses - Overall assessment: Dominica’s external position in 2023 is estimated to be substantially weaker than the level implied by fundamentals and desirable policies. - Current account (CA) deficit widened to 33.7 percent in 2023 from 26.7 percent in the previous year. - Drivers: improvements in tourism receipts were more than offset by an increase in imports from the construction of large infrastructure projects. - Medium-term outlook: imbalances are expected to decline over the medium term, but vulnerability to natural disasters and high dependency on commodity imports raise external sustainability risks. - Potential policy responses: - Pursue fiscal consolidation in line with the ECCU’s regional debt target and Dominica’s national fiscal rule. - Earmark CBI revenue to high-quality resilience building projects. - Increase allocation to the government’s self-insurance fund (VRF) and to external debt amortization. - Implement reforms to improve competitiveness, broaden the export base, and advance transition to renewable energy generation to reduce reliance on imported fossil fuels. - Combined fiscal consolidation and competitiveness-enhancing structural reforms are critical to strengthen resilience and bring the external sector back to balance. ### Foreign Assets and Liabilities: Position and Trajectory - Net international investment position (IIP): -56.9 percent of GDP in 2022 and estimated to have remained mostly unchanged in 2023. - Financing of CA deficit in 2023 was largely with CBI revenues. - Asset composition in 2023: - 52.7 percent of assets held by deposit-taking institutions other than the central bank. - Currency and deposits: 52.8 percent of total assets. - Equity and fund shares: 4.9 percent of total assets. - Reserve assets: 22.6 percent of total assets. - Liability composition in 2023: - Nearly half of obligations pertain to FDI (close to 82 percent of GDP). - One-third are general government loans and debt securities. - Assessment: - Large share of FDI and concessional (long maturity) loans to the general government mitigate potential risks. - Near-term public external debt service at 4-5 percent of GDP. - Minimal change in the NIIP in 2022-23 does not constitute a significant concern for external debt sustainability. - Expected improvement in the current account over the medium term is expected to stabilize the NIIP. - 2023 (Percent of GDP) key figures: - NIIP: -56.4 - Gross Assets: 117.9 - Debt Assets: 86.2 - Gross Liab.: -174.2 - Debt Liab.: -94.4 ### Current Account - 2023 CA deficit: 33.7 percent of GDP (from 26.7 percent of GDP in 2022). - Drivers: worsening balances in goods and services trade, plus slightly lower income and transfer balances. - Trade balance deterioration due to lackluster goods exports growth and relatively larger increases in goods imports related to ongoing large infrastructure construction. - Tourism exports: continue to grow, albeit at a slower pace than expected; gradual recovery of stay-over arrivals. - Expected adjustment: CA adjustment expected to resume in 2024 and beyond due to: - Improved tourism exports (including from expansion in capacity). - Public investment related imports normalizing from earlier peaks. - Fuel imports for electricity generation decline after the geothermal powerplant comes into production in 2026. - Assessment: - Persistently large CA deficits since 2017’s hurricane Maria due to curtailment of tourism and subsequent reconstruction and resilience building efforts. - CA model norm corresponds to a deficit of 15.7 percent of GDP, implying a CA gap relative to actual in excess of 18.4 percent of GDP. - Policy contributions to the gap pertain mostly to external factors (e.g., increased fiscal deficit and public health spending from trading partners). - A higher current account is necessary to stabilize Dominica’s NIIP (-56.4 percent of GDP) and meet external debt service payments. ### Real Exchange Rate (REER) - Background: - REER depreciated in 2020-21 as foreign prices increased faster than those in Dominica; depreciation trend reversed in mid-2022 as domestic prices started to catch up. - REER depreciated by less than 1 percent in 2023, ending the year close to the level in end-2019. - Assessment: - CA model approach implies a 61.8 percent overvaluation of the REER. - IREER model indicates only 1.0 percent overvaluation. - Divergence partly explained by CA model not accounting for the temporary nature of elevated import flows associated with large CBI-financed disaster reconstruction and strategic infrastructure investments (including transition to geothermal energy). - Other competitiveness measures do not suggest a large misalignment: - Goods terms of trade and Dominica’s real exchange rate against key trading partners remained relatively stable over the past decade. - Speed of post-pandemic tourism recovery was in line with peers: total tourism arrivals recovered beyond pre-pandemic levels; cruise arrivals outpaced peers; stayover arrivals lagged due to reduced airlift. - Competitiveness challenges: elevated input prices such as electricity and labor costs. - Ongoing energy transition reform effort is expected to partially alleviate high input costs. ### Capital and Financial Accounts: Flows and Policy Measures - Historical financing: - Dominica has historically relied on FDI and, more recently, CBI revenues to finance external deficits. - FDI averaged 6.7 percent of GDP since hurricane Maria (3.3 percent of GDP in 2023). - CBI revenues have been consistently above 11.8 percent of GDP during the same period, rising to around 30 percent of GDP during 2021-23. - Assessment: - FDI and concessional lending to the government likely to remain stable sources of external financing. - CBI revenue could prove volatile. - If CBI is earmarked to public investment (large import component), a fall in CBI could be partially mitigated by lower imports. - Public investment could strengthen external balance via improved tourism capacity and lower energy imports. - Lower-than-expected CBI flows could jeopardize completion of key projects and weaken the external balance. ### FX Intervention and Reserves Level - Reserve position in 2023 estimated to have remained broadly stable, increasing marginally in nominal terms (from US$182.3 in 2022 to US$164.2 in 2023). - As an ECCU member, Dominica operates under a quasi-currency board arrangement; foreign assets and liabilities of the ECCB cannot be directly assigned to an individual country, so the imputed reserves method is used as a proxy for net foreign assets held at the ECCB. - 2023 SDR allocation to Dominica: 11.5 million SDRs (about US$15.4 million) has been kept at the ECCB as a liquidity buffer. - Assessment: - Estimated imputed reserves cover 4.8 months of imports and 30 percent of broad money in 2023. - These coverage levels exceed typical benchmarks of 3 months of imports and 20 percent of broad money. - Note: Information on short term debt and other liabilities is unavailable; consequently assessments against other reserve adequacy metrics such as the IMF’s composite Assessment Reserve Adequacy (ARA) metric cannot be computed. *Source: Annex I . External Sector Assessment (selected excerpts).* ### Annex IV. The Social Security Scheme in Dominica ### Annex IV. The Social Security Scheme in Dominica ### Overview and key challenges - The Dominica Social Security (DSS) scheme is a defined benefits pay-as-you-go system covering employed and self-employed persons, with benefits financed by contributions on employment earnings up to a wage ceiling paid by employers, employees, and self-employed persons. - Major pressures: - Low growth and population aging leading to a shrinking contribution base and high old-age dependency ratio. - Dominica’s share of population aged 65 and older is expected to reach levels comparable to OECD countries, with subdued long-term growth relative to emerging market economies (EMEs). - DSS characterized by relatively generous pension parameters: low contribution rates and high and front-loaded accrual rates compared to OECD countries. - Statutory retirement age is 65 years broadly, but a lower statutory retirement age of 60 years applies to public servants, requiring an unfunded bridge pension that adds to fiscal pressures and inequities. ### Reserves projection and implications of current reforms - Authorities endorsed a package of parametric reforms in 2006; some measures took effect in subsequent years (examples provided by the authorities): - Reduction of the accrual rate to 1 percent and maximum accrual rate to 60 (from 70) in 2008. - Retirement age rose to 65 in 2021. - Contribution rates scheduled to reach 15.75 percent only in 2031. - Projected fiscal outcomes on current policies: - DSS reserves were 30 percent of GDP in 2020. - DSS reserves are expected to be depleted in 2063. - After depletion, reserves are projected to accumulate a deficit of 46 percent of GDP by 2080 (equivalent to a fiscal burden of around 1 percent of GDP a year). - Assessment note: actuarial balance may differ from future reserves depending on assumptions, but both help explain the relative severity of the scheme’s financial situation. ### Contribution adequacy and intergenerational equity - Comparison of statutory contribution rate with metrics of sustainability: - Dominica’s statutory contribution rate of 15.75 percent (by 2031) is almost 2 percentage points below the estimated general average premium (GAP) of 17.6 percent. - The pay-as-you-go (PAYG) rate is estimated at 22.9 percent when reserves are fully depleted in 2063 and projected to increase to 24.4 percent in 2080. - Implication: the statutory contribution rate is too low to cover paid benefits, creating intergenerational inequities; the later needed adjustments are implemented, the larger they must be to ensure sustainability and improve intergenerational equity. ### Recommended comprehensive parametric reforms - Recommended directions to ensure a financially sustainable, fair, and efficient pension scheme: - Increase contribution rates by around 2 percentage points to better align with OECD norms. - Reduce both the accrual and replacement rates closer to OECD and EME averages to prevent depletion of reserves. - Shift from a front-loaded accrual rate during the vesting period to a uniform accrual rate to incentivize longer careers. - Align the statutory retirement age for both private and public employees at 65 years to allow the costly and inequitable bridge pension framework to be phased out, improving sustainability and equity. *Source: Annex IV. The Social Security Scheme in Dominica.* ### 0.4 percent (Scenario A) and 1.0 percent (Scenario C) respectively. ### 1dmaea2024001-print-pdf - 0.4 percent (Scenario A) and 1.0 percent (Scenario C) respectively. ### Near- and Medium-Term Macroeconomic Effects of the Geothermal Transition - Baseline assumption: completion of the first phase of the energy transition in 2026, after which roughly half of the country’s electricity demand would be supplied by geothermal sources. - Fuel-import and current account (CA) implications: - The decline in fuel imports implies a structural improvement in the CA deficit of around 1 ppt of GDP relative to a hypothetical scenario without geothermal energy production (Table A2, year 2026-2030). - A further ramp-up of geothermal production to 20 megawatts under the second phase (not embedded in the current baseline) could further improve the CA by 1 ppt of GDP from 2031. - Potential CA gains from either phase would be constrained by the transportation sector’s heavy reliance on fossil fuel, which accounts for roughly two-thirds of current oil imports (or nearly 5 percent of GDP). - In the longer run, as Dominica becomes a regional energy exporter in the third phase, cheaper electricity generation may accelerate the transition to electric vehicles and bolster potential CA gains further. - Notes on electricity pricing and modelling assumptions: - The final electricity price is subject to many factors: power plant operating costs, transmission and distribution system maintenance costs, storage and battery costs, and regulation. - Implicit assumption: either linear separability of electricity in the production function, or that capital and labor can scale up accordingly. - The analysis does not account for the possible emergence of new industries. ### Scenario Outcomes: Electricity Cost Reductions and GDP Impact - Scenarios and corresponding assumptions / impacts: - Scenario A (Less Optimistic): - Reduction in Electricity Cost (In Percent): 10 - GDP Impact (in percent): 0.4 - Scenario B (Central): - Reduction in Electricity Cost (In Percent): 15 - GDP Impact (in percent): 0.7 - Scenario C (More Optimistic): - Reduction in Electricity Cost (In Percent): 20 - GDP Impact (in percent): 1.0 - Source: Staff calculation. ### Current Account: Projected Effects (2026–2035) - Projected CA paths (in percent of GDP): - With Geothermal Project: - 2026: -17.7 - 2027: -15.8 - 2028: -13.4 - 2029: -13.3 - 2030: -12.0 - 2031–35*: -10.6 - Without Geothermal Project: - 2026: -18.1 - 2027: -16.6 - 2028: -14.4 - 2029: -14.3 - 2030: -13.0 - 2031–35*: -12.4 - Difference (With minus Without): - 2026: 0.5 - 2027: 0.8 - 2028: 1.1 - 2029: 1.0 - 2030: 1.0 - 2031–35*: 1.8 - *Assumption: geothermal production ramps up to 20 megawatts a year starting in 2031. - Note: Assuming constant geothermal electricity production at 10 megawatts per year for the first five years, gradually phased-in the first three years. ### Long-Term Impact on Productivity and Potential Growth - Mechanisms for long-run productivity gains: - Improved labor productivity (e.g., automation). - Better allocation of capital and labor toward more energy-efficient sectors. - Economic diversification, including new energy-intensive sectors and energy-export potential. - Empirical estimate referenced: - Based on a panel of 116 countries (2000–2019), Chailloux and others (2024) find that a renewable energy transition along the lines envisioned by Dominica could increase total factor productivity (TFP) growth by 2.5 percentage points on average after 5 years. - If potential TFP gains are fully realized, long-term growth could effectively double to 4 percent. - Caveats and prerequisites: - Whether the economy can fully achieve increased potential depends on many factors. - Structural policies recommended to complement the energy transition: - Enhance financial market intermediation. - Strengthen the labor market. - Improve the business environment. - Considerable uncertainty remains due to data limitations, simplifying assumptions, and missing general-equilibrium considerations; future work to develop a general equilibrium model is planned. ### Data Issues and Surveillance-Relevant Limitations - Data adequacy and gaps: - Public debt information used by staff includes debt to Venezuela under the PetroCaribe facility (estimated as 51 million US dollars, 8.1 percent of GDP as of FY2022/23), differing from official statistics. - Other data gaps: GDP components on the expenditure side, labor market data, climate data, details on CBI revenue including number of passports issued and origin country. - CPI production was suspended since February 2021 due to system failures; preliminary price information compiled since January 2023 is under review; CPI reporting expected to resume in 2024. - External sector statistics: capital and financial account flows do not adequately capture CBI; ECCB uses cash-based fiscal data on CBI flows subject to estimation/classification risks. - Fiscal sector: reporting frameworks not fully integrated; scope to improve transparency of CBI-related flows; publicly accessible debt information is hard to find systematically. - Monetary and financial sectors: historical data adequate for surveillance; provision of information for credit unions (CUs) has improved. - Corrective actions and capacity development priorities: - Ongoing CARTAC support to resume CPI compilation and reporting; GDP compilation; update Supply-Use Table (SUT) and operationalize a Tourism Satellite Account framework; implement Balance of Payments recommendations; resume preparation of labor force/employment statistics. - Advocacy for transparency standards on CBI revenues similar to other ECCU jurisdictions (publishing CBI revenues and expenditure breakdowns; number and national origin of applications and issued passports). *Source: 1dmaea2024001-print-pdf (staff calculations, annexes, and related text).* ### Annex VII. Table 3. Dominica: Table of Common Indicators Required for Surveillance ### Annex VII. Table 3. Dominica: Table of Common Indicators Required for Surveillance (As of May 2024) ### Key debt sustainability findings and risk assessment - 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 trajectory: - Public debt peaked at 112.5 percent of GDP in 2020. - Public debt declined to 103.3 percent of GDP in FY2022/23. - Baseline outlook: - The baseline assumes public debt to continue to fall over the medium and long run. - Current policies are insufficient to meet the regional debt target of 60 percent of GDP by 2035. - The present value of the public debt ratio remains above the benchmark for a protracted period, signaling persistent risks. - Main downside risks to the debt sustainability outlook: - Slower global growth and associated spillovers to tourism. - Further natural disaster (ND) shocks. - Weaker than projected revenues from the Citizenship-by-investment (CBI) program. - Recommended complementary measures to secure sustainability: - Implementation of fiscal consolidation consistent with national fiscal rule. - Savings under dedicated risk management funds—Vulnerability Risk and Resilience Fund (VRF) and Debt Repayment Fund (DRF). - Reforms to expand tourism capacity and reduce energy imports. - Ensure proper earmarking of CBI inflows. ### Debt sustainability metrics and classifications - Composite indicator (CI) and capacity: - Dominica’s score in the Composite indicator (CI) is 3.01 which implies a medium debt carrying capacity. - The CI is calculated based on data from the October 2023 WEO and the 2022 CPIA data. - Risk ratings (Joint Bank-Fund DSA): - Risk of external debt distress: High - Overall risk of debt distress: High - Granularity in the risk rating: Sustainable - Application of judgement: No ### Public debt coverage and composition - Public sector debt definition and composition: - Public sector debt includes central government direct and guaranteed debt of both external and domestic debt. - Central government direct debt accounts for about 84 percent of total public debt. - Guaranteed debts are directed to State Owned Enterprises (SOEs), including borrowing under the Petrocaribe arrangement with Venezuela. - Creditor composition: - Public and Publicly Guaranteed (PPG) external debt is mostly owed to multilateral creditors. - The National Bank of Dominica (NBD) and the Dominica Social Security (DSS) are the main domestic creditors. - SOE debt treatment and reporting improvements: - SOE’s non-guaranteed debts (mostly domestic and from NBD, Agricultural and Industrial Development (AID) Bank of Dominica, and DSS) are not included in the public debt stock but expected to be small relative to their guaranteed part. - Other SOEs are not permitted to borrow externally without government guarantees. - It is expected that all SOE debts (both guaranteed and non-guaranteed) will be included in the public debt with progress on monitoring the SOEs under the Public Procurement and Disposal of Public Property Act. - Recent measures to improve coverage and timeliness of debt reporting include introducing an annual Debt Portfolio Review (DPR), including loan guarantees under the 2019 DPR, submitting the DPR to Parliament and publishing the DPR on the Ministry of Finance website. ### IMF relations and financial position (as of March 31, 2024) - Membership and Article status: - Joined: December 12, 1978; Article VIII. - General Resources Account: - Quota: 11.50 (SDR Million) 100.00 (%Quota) - IMF's Holdings of Currency (Holdings Rate): 11.49 (SDR Million) 99.93 (%Quota) - Reserve Tranche Position: 0.01 (SDR Million) 0.08 (%Quota) - SDR Department: - Net cumulative allocation: 18.86 (SDR Million) 100.00 (%Allocation) - Holdings: 7.86 (SDR Million) 41.67 (%Allocation) - Outstanding Purchases and Loans: - RCF Loans: 12.74 (SDR Million) 110.78 (%Quota) - Latest financial commitments — Arrangements (Date of Expiration / Amount Approved / Amount Drawn): - ECF: Dec 29, 2003 / Dec 28, 2006 / 7.69 / 7.69 (SDR Million) - Stand-By: Aug 28, 2002 / Jan 02, 2004 / 3.28 / 2.97 (SDR Million) - SAF: Nov 26, 1986 / Nov 25, 1989 / 2.80 / 2.80 (SDR Million) - Outright Loans (Date of Commitment / Date Drawn/Expired / Amount Approved / Amount Drawn): - RCF: Apr 28, 2020 / Apr 30, 2020 / 10.28 / 10.28 (SDR Million) - RCF: Oct 28, 2015 / Nov 05, 2015 / 6.15 / 6.15 (SDR Million) - RCF: Jan 11, 2012 / Jan 18, 2012 / 2.05 / 2.05 (SDR Million) - Overdue obligations and projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Principal: 2024 1.23; 2025 2.26; 2026 2.06; 2027 2.06; 2028 2.06 - Charges/Interest: 2024 0.34; 2025 0.45; 2026 0.45; 2027 0.45; 2028 0.45 - Total: 2024 1.57; 2025 2.71; 2026 2.51; 2027 2.51; 2028 2.51 ### Exchange rate arrangement and monetary framework - Exchange rate arrangement: - The exchange rate arrangement is a currency board. - Dominica participates in a currency union with seven other members of the Eastern Caribbean Currency Union (ECCU) and has no separate legal tender. - Monetary policy and the exchange system is managed by the Eastern Caribbean Central Bank (ECCB), which operates like a quasi-currency board, maintaining foreign exchange backing of its currency and demand liabilities of close to 100 percent. - The Eastern Caribbean dollar has been pegged to the U.S. dollar at the rate of EC$2.70 per U.S. dollar since July 1976. - Dominica has accepted the obligations of Article VIII, Sections 2(a), 3, and 4 of the IMF’s Articles of Agreement. - Dominica maintains a system free of multiple currency practices. - Exchange restriction noted: - On January 1, 2024, Dominica introduced a 2 percent stamp tax on all outbound money transfers sent through money transfer companies (MTCs) under the Act to Amend the Stamp Tax. Said tax gives rise to an exchange restriction, since it applies to all outbound money transfers sent via MTCs, including payments of international current transactions, as defined under the Fund’s Articles of Agreement. ### Safeguards, Article IV, and technical assistance - Safeguards assessment: - Under the Fund's safeguards policy, the ECCB is subject to a full safeguards assessment on a four-year cycle. - An update assessment of the ECCB, finalized in August 2021, found strong external audit and financial reporting practices aligned with international standards. - All but one safeguards recommendation have been implemented, including further improvements in internal audit capacity and risk management. - The outstanding recommendation on legal reforms to align the Agreement Act with leading practices is a work in progress. - Article IV Consultation: - The last Article IV consultation was concluded by the Executive Board on June 5, 2023. - Dominica is on a 12-month cycle. - Technical assistance highlights (selected areas and missions): - Public Financial Management (PFM) missions: multiple missions from June 2013 through March 2024 addressing cash flow forecasting, bank reconciliation, procurement, internal audit, treasury function review, Chart of Accounts, and other PFM reforms. - Revenue administration missions: numerous missions from June 2013 through March 2024 on tax and customs administration, audit capacity, PAYE, valuation procedures, taxpayer services strategy, TADAT assessment, post-TADAT implementation, VAT gap estimates, and TRACKER tool implementation. - Financial sector missions: missions from December 2013 through January 2019 and beyond on insurance supervision, offshore bank review, consolidated and risk-based supervision, stress-testing for credit unions, crisis management for non-bank sector, and macroprudential regulation of SIFIs. - Economic and financial statistics missions: missions from May 2013 through July 2023 and October 2023 on national accounts, balance of payments statistics and IIP, external sector statistics, GDP diagnostics, and improving the Consumer Price Index. - Macroeconomics and programming analysis: missions from November 2013 through May 2021 on macroeconomic frameworks, forecasting, and coordination of macro programs. - AML/CFT: - Dominica designated the ECCB as the competent authority for AML/CFT regulation and supervision in the banking sector in 2020, while the government (Financial Intelligence Unit and Financial Services Unit) retains responsibility regarding all other sectors. - The last assessment of Dominica’s AML/CFT regime was conducted by the Caribbean Financial Action Task Force (CFAFT) in August 2022; the evaluation report was to be discussed during the CFAFT plenary scheduled for May 28, 2023. *Source: Annex VII. Table 3. Dominica: Table of Common Indicators Required for Surveillance (As of May 2024) — STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX.* ### 2. The Contingent Liability stress test has been calibrated to reflect risks associated with ### 2. The Contingent Liability stress test has been calibrated to reflect risks associated with ### Contingent liability calibration and key assumptions - No Public-Private Partnerships in Dominica; therefore no related contingent liability included. - Financial market contingent liability shock calibrated at 7 percent of GDP (higher than the 5 percent of GDP default) to account for potentially higher fiscal costs of strengthening financial sector balance sheets in the event of a natural disaster given undercapitalization of non-bank financial institutions and high non-performing loans in Dominica. - Estimated borrowing under Petrocaribe is based on the terms under its original loan agreement; authorities contend to have been granted debt relief by Venezuela, including the cancellation of debt service payments from 2018 (a pattern that may continue). Outstanding debt to Petrocaribe is estimated at 8.1 percent of the total debt stock as of 2022. - 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. ### Coverage of public sector debt (selected points) - Central government: covered. - Guarantees (to other entities in the public and private sector, including to SOEs): covered. - Non-guaranteed SOE debt: included in analysis as 1/2 percent of GDP (reported as 2.0 percent of GDP in a coverage table). - Financial market default value: default 5 percent of GDP; adjusted to 7.0 percent of GDP in Dominica due to hurricane's impact on financial institutions. - Total contingent items (2+3+4+5) reported as 9.0 percent of GDP. ### Background on debt dynamics and composition - Public debt rose from an average of 70 percent of GDP in 2014–15 to 112.5 percent of GDP by 2020, driven by Tropical storm Erika (2015), hurricane Maria (2017), and the pandemic. - Public debt declined to 103.3 percent of GDP by FY2022/23. - Total external debt was 65.8 percent of GDP in FY2022/23. - Public external debt peaked at 70.9 percent of GDP in 2020; total external debt peaked at 106.2 percent of GDP. - Public external debt declined by almost 5 percent of GDP by FY2022/23. - Private external debt declined moderately by around 6 percent of GDP to 29.2 percent of GDP in FY2022/23 compared to FY2020/21. - Two thirds of Dominica’s public debt is external; more than 90 percent owed to official bilateral and multilateral creditors. - World Bank holds 36 percent of total external public debt stock (almost one-quarter of total public debt). - Petrocaribe is the largest bilateral creditor, followed by the Government of China and the French Development Agency. - As of June 2023, domestic debt accounted for 36 percent of total public sector debt. - Domestic financing comes primarily through direct credit from the NBD and local debt holders, mainly the DSS. ### Background on macro forecasts and fiscal assumptions - Real GDP growth projections: - Real GDP grew 5.6 percent in 2022 and estimated to have expanded 4.7 percent in 2023. - Output growth expected to taper to 2.4 percent by 2029 and converge to 2.0 in the longer term. - Annual real growth projected to average 4.4 during 2024-25; long-term convergence to 2 percent. - Table (selected cells) Real GDP: 2022 5.6, 2023 4.7, 2024 4.6, 2025 4.3, 2026 3.3, 2027 2.9 (2024 Article IV column); and 2022 5.7, 2023 4.7, 2024 4.6, 2025 4.2, 2026 2.9, 2027 2.7 (2023 Article IV column). - Inflation: - 2022 peak 8.7 percent y-o-y; 2023 2.3 percent y-o-y. - Expected to converge to 2 percent by 2025 and to 2 percent in the medium-term. - Table (selected cells) Inflation (eop): 2022 8.7, 2023 2.3, 2024 2.2, 2025 2.0, 2026 2.0, 2027 2.0 (2024 Article IV column). - Fiscal position: - Primary balance improved by 1.3 percentage points to a deficit 4.3 percent of GDP in FY2022/23. - Consolidation fell short by 3.8 percent of GDP in FY2022/23 compared to the 2023 Article IV report. - Overall fiscal balance table (selected cells, 2024 Article IV): 2022 -7.2, 2023 -3.8, 2024 -3.4, 2025 -2.9, 2026 -2.7, 2027 -2.2. - CBI revenue: - Average 32 percent of GDP during 2020-2022. - CBI reached 36.6 percent of GDP in FY2022/23. - Baseline assumes further tapering and stabilization of CBI revenues over the long-term at 14.6 percent of GDP. - FY2023/24 projection conservatively assumes CBI revenue declines to 18 percent of GDP. - Table (selected cells, CBI revenue 2024 Article IV): 2022 36.6, 2023 18.0, 2024 15.4, 2025 14.5, 2026 14.5, 2027 14.5. - Public capital expenditure (selected cells, 2024 Article IV): 2022 35.7, 2023 13.8, 2024 12.0, 2025 11.4, 2026 11.0, 2027 10.8. - Current account balance (selected cells, 2024 Article IV): 2022 -26.7, 2023 -33.7, 2024 -21.7, 2025 -19.8, 2026 -17.7, 2027 -15.8. - Grants projected at 1.5 percent of GDP. - Official external financing projected at 7 percent of GDP in the medium term (2024–2 5) and 3 percent of GDP in the longer term. - Recent financing: negotiated a US$41 million loan from the Saudi Development Fund (SDF) on concessional terms (1.5 percent interest rate, with 28 years maturity/8 years grace); baseline assumes full disbursement in next fiscal year (FY2024/25). - DSA and baseline assume authorities opt not to draw on their SDR allocation. ### DSA assumptions on financing and domestic borrowing - Domestic borrowing assumptions (DSA): - Medium term: 0 years grace, 5-year maturity, 7 percent interest on domestic borrowing from NBD (overdraft converted to long-term bonds). - Long term: domestic borrowing assumed to have 7-year maturity (authorities’ medium term strategy to extend debt maturity to 9 years). - World Bank financing in projection period assumed: 10 years grace, 40 years maturity, 1.3 percent interest. - CDB financing assumed: 10-year grace, 20-year maturity, 2.5 percent interest. - Other multilateral borrowing assumed: 5 years grace, 10-year maturity, 2 percent interest. - Baseline assumes partial use of deposits. - G20’s Debt Service Suspension Initiative (DSSI) repayment schedule is reflected in DSA assumptions. ### DSA realism tools, shocks, and scenario design - DSA realism tools results affected by substantial growth volatility due to pandemic and natural disasters. - Debt dynamics driven by unexpected shocks; back-to-back natural disasters and the pandemic resulted in higher-than-expected primary deficits and GDP contraction, increasing debt/GDP ratio. - A newly agreed loan from SDF leads to further increase in debt-to-GDP ratio starting from 2024. - Country classification: - Country: Dominica; Country Code 321. - Debt Carrying Capacity: Medium. - Final Classification based on current vintage: Medium (unchanged from previous vintages). - CI score numbers shown: 3.01, 2.99, 3.04 (three vintages listed). - Indicative external and public debt thresholds for Medium capacity: - PV of debt in % of GDP: 55 - PV of total public debt in percent of GDP: 40 - Exports: 180 (PV of debt in % of exports threshold) - Debt service in % of exports: 15 - Debt service in % of revenue: 18 ### Scenarios and stress tests - The DSA includes six standardized scenarios and a contingent liability stress test. - Financial market contingent liability included at 7 percent of GDP (above default 5 percent) to account for ND risk and fiscal costs of strengthening financial sector balance sheets. - A customized “Catastrophic Climate Event” scenario added, which assumes: - Reoccurrence of a Category 5 hurricane in the second half of 2024. - Declines in real GDP, exports, and revenues in line with those following hurricane Maria. - Considerable increase in rehabilitation expenditure. - Slower pace of recovery to account for more binding financing constraints. ### External DSA key findings - Dominica’s external position described as highly vulnerable. - PV of external public debt-to-GDP is very close to the threshold for “medium” debt carrying capacity by 2024 under the baseline. - The PV of external public debt-to-GDP breaches the threshold by a large margin under: - The “Catastrophic Climate Event” scenario. - The most extreme shock scenario of a reduction in exports to one standard deviation below its historical average. - PV of external public debt to exports falls below threshold throughout the baseline projection but goes well above threshold under the most extreme export shock. - Historical scenario: similar initial trajectory in debt-to-GDP but leads to higher debt accumulation in the medium term; for debt-to-exports, stays below threshold until 2029 and exceeds the threshold thereafter. *Source: 1dmaea2024001-print-pdf - 2. The Contingent Liability stress test has been calibrated to reflect risks associated with* ### 15. Strong policy implementation will secure that debt service metrics are put on a ### 15. Strong policy implementation will secure that debt service metrics are put on a ### Debt service trends and projection outcomes - Debt service to exports ratio remains below threshold from 2025 in all scenarios barring the most extreme shock. - Debt service to revenue remains below the threshold for all shocks. - Residuals are high in the historical period and peak in 2021 but decline consistently throughout the projection period; the residual is mostly explained by the use of government deposits derived from CBI revenues, and they become smaller as the use of deposits becomes lower from 2023 onwards. - Under the baseline scenario, public debt is assessed to be sustainable but remains at high risk of debt distress. - Baseline fiscal consolidation combined with continued CBI inflows results in a declining public debt trajectory but is insufficient to reach the regional debt target of 60 percent of GDP by 2035. ### Risk assessment and stress-test results - Based on threshold breaches under the baseline, the risk of external debt distress is assessed as high; breaches are mainly due to a high debt stock as a starting point. - Alternative scenarios (historical and catastrophic climate shock) result in breaching of thresholds for most debt indicators in the projection. - PPG debt remains high and above the threshold under the baseline over the horizon; all shocks result in large breaches of the benchmark. - Debt service-to-revenue ratios increase in the near-term due to slow recovery in tax revenue following the pandemic but decline afterwards. - Increased reliance on domestic borrowing heightened risks to public debt; domestic debt service spikes in 2023 but moderates thereafter. - The stress tests omit mitigating factors that cannot be internalized, notably: - Resilience to natural disasters: large recent investments in physical and social resiliency may reduce future rehabilitation and reconstruction spending after natural disasters and climate shocks. - Fiscal buffers: large government deposits from buoyant CBI revenue have financed fiscal deficits since 2015; planned accumulation of VRF and DRF balances will cushion shocks. ### Vulnerabilities, buffers, and macro risks - Around 12 percent of the stock of public external debt is composed of non-resident deposits held in the banking sector; these deposits lower rollover risk and increase imputed international reserves under the regional currency board arrangement. - CBI inflow projections are subject to downside risk if travel restrictions reduce the value of holding a Dominican passport; CBI also has upside risk (materialized during 2020-22). - Slower than expected recovery of stay-over tourism may weigh on GDP growth and debt dynamics, though Dominica’s reliance on tourism is lower relative to regional peers. - Natural disasters are a major downside risk that could severely damage infrastructure, compromise growth, and lead to a large increase in debt. - Market risks are contained: nearly 90 percent of the debt portfolio consists of fixed interest debt; currency risks are limited by the currency board arrangement and dominance of USD and EC dollar debt. - The authorities’ intention to enhance VRF contributions and pay down debt via the DRF would further enhance debt sustainability by reducing borrowing needs after extreme climate shocks and lowering the outstanding debt stock. ### Policy recommendations and actions - Sustain progress on the fiscal consolidation plan and implement the fiscal rule. - Secure concessional financing terms and continued multilateral and bilateral support on concessional terms. - Reprioritize CBI revenues toward enhancing VRF contributions and paying down debt via the DRF (staff recommendation). - Accumulate a liquid fiscal reserve in the VRF and accelerate debt repayments via the DRF to protect debt service capacity and resilience to natural disasters. - Execute the government development plan centered on building resilience to natural disasters to: - reduce reconstruction spending after disasters; - contain output and employment losses with resilient structures; - increase long-term output by stimulating investment and employment, including by reducing out-migration. - Closely monitor financial stability of local bondholders, particularly DSS, given bank- and non-bank-sovereign nexus risks. ### Key quantitative indicators (selected, as presented) - Residual behavior: Residual 3/ -23.4-37.2-6.2-30.0-7.1-17.4-9.7-9.5-8.9-7.920.1-12.3-10.9 - PV of PPG external debt-to-GDP ratio: ......34.832.936.334.135.636.637.736.930.7 - PV of PPG external debt-to-exports ratio: ......126.7121.5110.496.499.5100.599.4104.256.9 - PPG debt service-to-exports ratio: 21.821.517.717.513.010.68.57.97.26.77.2 - PPG debt service-to-revenue ratio: 7.18.28.011.210.89.67.97.57.16.310.7 - Gross external financing need (Million of U.S. dollars): 182.1176.4167.9224.6142.1133.7119.0107.989.983.3-37.1 - Real GDP growth (in percent): -5.96.25.24.74.43.83.12.92.72.32.00.33.1 - Effective interest rate (percent): 1.51.51.91.81.81.81.81.81.92.72.71.82.1 - Government revenues (excluding grants, in percent of GDP): 56.853.261.042.239.838.938.638.638.537.836.1 - Memorandum: PV of external debt 8/ ......65.061.565.260.060.860.158.049.947.3 - Thresholds and sensitivity highlights from Table 2: Baseline public and PPG debt series show values that breach thresholds under alternative and catastrophic scenarios (see table entries under A1, A2, B tests, C tests; threshold lines at 40 and 180 as shown). *Source: IMF staff estimates and projections as presented in the Dominica DSA chapter.* ### 2. Primary balance171311109888878 ### 2. Primary balance171311109888878 ### Debt dynamics and fiscal projections - Public sector debt: 2022: 103.3 percent of GDP; projected to fall to 89.6 percent of GDP by 2028. - External debt (of which): 2020: 70.9; 2021: 70.2; 2022: 65.8; 2023: 62.7; 2024: 67.9; 2025: 64.8; 2026: 66.0; 2027: 66.6; 2028: 67.4; 2033: 63.3; 2043: 61.4. - Change in public sector debt: 2020: 14.8; 2021: -4.0; 2022: -5.2; 2023: -5.6; 2024: -4.1; 2025: -2.5; 2026: -1.5; 2027: -1.9; 2028: -1.7; 2033: -2.2; 2043: 12.1. - Identified debt-creating flows (sum): 2020: 11.8; 2021: -3.1; 2022: -3.3; 2023: -3.5; 2024: -2.6; 2025: -2.2; 2026: -1.5; 2027: -1.8; 2028: -1.8; 2033: -2.2; 2043: 10.9. - Primary (noninterest) expenditure: 2020: 64.6; 2021: 64.4; 2022: 66.9; 2023: 43.2; 2024: 40.6; 2025: 39.6; 2026: 39.2; 2027: 38.0; 2028: 38.8; 2033: 37.0; 2043: 35.6. - Revenues and grants: 2020: 59.2; 2021: 58.8; 2022: 62.6; 2023: 43.7; 2024: 41.3; 2025: 40.4; 2026: 40.1; 2027: 40.2; 2028: 40.0; 2033: 39.3; 2043: 37.5. - Residuals note: public sector deposits from CBI revenues stood at 11 percent of GDP at end-2020. ### Key macroeconomic assumptions and outcomes - Real GDP growth: 2022: 5.2; 2023: 4.7; 2024: 4.4; 2025: 3.8; 2026: 3.1; long-term projection: 2 percent. - Growth narrative in text: estimated 4.7 percent in 2023; expected to expand by 4.6 percent in 2024 then converge to 2 percent in the long-term. - Inflation (GDP deflator): 2022: 3.5 percent (table); inflation fell from 9.75 percent during 2022 to 2.25 percent in 2023 and is expected to converge to 2 percent in the medium-term (text). - Current account: widened to 33.7 percent of GDP in 2023; expected to narrow to 15.8 percent of GDP by 2027 (text). - Average nominal interest rate on external debt (in percent): 2020: 1.5; 2021: 1.5; 2022: 1.6; 2023: 2.0; 2024: 2.0; 2025: 2.0; 2026: 2.0; 2027: 2.0; 2028: 2.0; 2033: 2.8; 2043: 2.4. ### Sensitivity analysis and stress tests (selected outcomes) - Baseline PV of Debt-to-GDP ratio (Table 4 baseline row): 2023: 68; 2024: 62; 2025: 60; 2026: 59; 2027: 58; 2028: 55; 2029: 53; 2030: 51; 2031: 50; 2032: 49; 2033: 50. - Alternative scenario A1 (historical averages) PV of Debt-to-GDP: 2023: 68; 2024: 67; 2025: 69; 2026: 72; 2027: 74; 2028: 76; 2029: 78; 2030: 81; 2031: 84; 2032: 87; 2033: 90. - Alternative scenario A2 (Catastrophic Climate Event) PV of Debt-to-GDP: 2023: 68; 2024: 78; 2025: 80; 2026: 81; 2027: 78; 2028: 73; 2029: 71; 2030: 69; 2031: 68; 2032: 66; 2033: 66. - Bound test B1 (Real GDP growth): PV of Debt-to-GDP rises markedly across horizon (examples): 2024: 75; 2025: 92; 2026: 100; 2027: 107; 2028: 114; 2033: 147. - Total public debt benchmark used in sensitivity tables: 55 (constant across years in Table 4). ### Fiscal policy actions and recommendations (authorities’ positions) - Authorities acknowledge need for further fiscal consolidation to rebuild buffers and comply with fiscal responsibility rules. - Revenue measures under consideration: reintroduction of the VAT on the fuel surcharge; align excise tax for diesel with that for gasoline; broaden revenue base. - Expenditure measures under consideration: rationalize transfers to SOEs; institute cost recovery policies for public services (hospital, water company); streamline goods and services spending; strengthen targeting of social spending and create centralized database management for social safety nets. - Specific new revenue measure: a new water guarantee charge effective from June 1, 2024 to support water company operations. - Pension system: authorities reviewing options including possible alignment of retirement age to ensure long-term viability. - Authorities note the recommendation from the Article VIII exchange restriction assessment to repeal the new stamp duty on outgoing money transfers and will deliberate. ### Financial sector, AML/CFT, and CBI program - Financial sector priorities: minimize balance sheet risks; enhance oversight of non-bank financial institutions (NBFIs), especially credit unions; strengthen risk-based supervision and ensure capital adequacy of credit unions. - Authorities view the Financial Services Unit (FSU) as operating autonomously in practice and do not see need to grant statutory independence. They support establishing common minimum regulatory standards for NBFIs and welcome the Eastern Caribbean Currency Union Regional Standards Setting Body. - Structural intermediation constraints: private sector credit driven by credit unions; banks’ public sector exposure from legacy loans is declining; policy support for regional credit bureau and Eastern Caribbean Partial Credit Guarantee Corporation to help MSMEs. - AML/CFT progress: legislative and regulatory changes, staff capacity building, improved domestic cooperation, new Virtual Assets legislation (no digital assets businesses currently allowed), working group to implement CFATF Mutual Evaluation recommendations. - CBI program: integral to development and climate resilience; new CBI regulations implemented; Memorandum of Agreement signed with three other regional countries to strengthen program integrity. ### Climate resilience, infrastructure, and structural reforms - Climate Resilience and Recovery Plan (CRRP) actions: develop climate resilient infrastructure (roads, bridges, water systems, houses, schools, emergency shelters, medical facilities); build Vulnerability Risk and Resilience Fund (VRRF); participate in insurance packages. - Renewable energy transition: geothermal energy production plant construction expected to be completed within the coming year and become operational by early 2026; at initial transmission capacity the plant will supply approximately half of the country with renewable energy; additional financing required to build transmission lines to supply the entire country. - Structural reforms to boost growth: establish sixteen innovation hubs for digital training and improved service delivery; implement agricultural programs for climate-resilient practices and youth participation; prioritize educational reform to address skills mismatches and emigration. ### Institutional capacity and data - Authorities welcome capacity support from CARTAC to strengthen Central Statistical Office (CSO) real sector data and close data gaps. - Authorities seek capacity development support to strengthen Public Financial Management (PFM) practices and enhance FSU capacity. ### Risks and outlook summary (authorities’ statement) - Recent shocks: extreme weather events, the pandemic, Russia’s war in Ukraine, and the Israel/Gaza conflict have had severe impacts. - Growth recovery: real GDP growth rebounded to pre-pandemic levels with 5.6 percent in 2022 and an estimated 4.7 percent in 2023; expected 4.6 percent in 2024, long-term 2 percent. - Downside risks: climate shocks, global instability, uncertainty in Citizenship by Investment (CBI) flows — a vital revenue source. - Upside potential: completion of geothermal plant, new international airport, hotels, marina, and agriculture initiatives could stimulate growth beyond projected 2 percent. *Sources: Country authorities; and staff estimates and projections.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1dmaea2024001-print-pdf.pdf_