## 1. Real Sector Developments

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### Context and structural backdrop
- Growth performance and policy anchors:
  - The Dominican Republic (DR) has averaged 5 percent growth over the last two decades supported by inflation targeting, a medium-term fiscal framework, and macro-financial stability.
  - The authorities enacted a fiscal responsibility law (FRL) in July 2024.
- Structural challenges:
  - Slowing working age population growth.
  - High vulnerability to natural disasters.
  - Electricity distribution inefficiencies.
  - Need to increase productivity and female labor force participation (FLFP).

### Recent developments and near-term outlook
- Growth and labor market:
  - Real GDP growth slowed in 2023 due to tight financial conditions, weaker export demand, and transient idiosyncratic factors, but rebounded in 2023H2.
  - Between January and June 2024, annual GDP growth (versus same period in 2023) averaged 5.1 percent.
  - Unemployment at 5.3 percent; employment reached pre-pandemic levels driven by formal sector expansion; real hourly wages increased by around 9½ percent.
- Inflation and monetary policy:
  - Inflation converged to the 4 percent (±1pp) target in 2023 and has remained around target since; headline inflation slightly below 4 percent since February 2024 and core inflation at 4.0 percent.
  - BCRD reduced its monetary policy rate (MPR) from 8.5 percent in May 2023 to 7.0 percent in November 2023 and then kept it on hold since end-2023.
- Exchange rate, FX interventions, and reserves:
  - Exchange rate: depreciated by 3.3 percent in 2023 and an additional 2.5 percent between January and July 20, 2024.
  - FX interventions (FXIs) were used to smooth volatility; FXIs drained some liquidity contributing to higher interbank rates and slowed credit growth.
  - From mid-July 2024, BCRD extended the Repo window maturity from 7 to 28 days, approved a reverse auction for repurchasing BCRD securities, and relaxed provision requirements.
  - Gross international reserves (GIR) increased to US$15.7 billion by mid-July 2024 and are expected to close around these levels by end-2024 (around 90 percent of the ARA metric). Table projections list GIR (US$ million): 2024 = 15,464; 2025 = 15,660; 2026 = 16,883.
- Fiscal and debt management:
  - Fiscal deficit widened to 3.3 percent of GDP in 2023; 2024 budget limits deficit to 3.1 percent.
  - 2023 spending increase financed by one-off revenues; current spending rose mainly due to higher interest expenses and policy priorities.
  - NFPS consolidated public sector debt ratio rose in 2023 but projected to decline in 2024 supported by lower domestic rates, higher growth, and primary balances.
  - Authorities published a 2024-2028 debt management strategy and a green, social and sustainable bond framework; sovereign issuances included US$750 million green bond and US$1.8 billion peso-linked issuance.
- External sector:
  - Current account (CA) deficit narrowed from 5.6 percent of GDP in 2022 to 3.6 percent in 2023; CA deficits fully financed by FDI.
  - Reserves adequacy: 98.9 percent in 2022 fell to 94.8 percent of the ARA metric in 2023 (when computed with M2); alternative M3 calculation was 88.4 percent for 2023.
- Financial sector:
  - Credit growth rose in 2023 but risk indicators remained benign; stressed NPL ratio at historically low levels.
  - Credit-to-GDP among the lowest in the region with room for financial inclusion.
  - Banking sector capital ratio (CAR) stood at 17.6 percent as of March 2024; ROE above 26 percent.
  - FX lending risks contained with most borrowers hedged; unhedged borrowers 27 percent as of end March 2024 versus 33 percent in March 2023.

### Projections and medium-term outlook
- Growth and inflation:
  - Real GDP growth projected at 5.1 percent in 2024 and at long-term trend thereafter (projection sequence shows 5.0–5.1 percent in the medium term).
  - Consumer price inflation forecast around the 4 percent (±1pp) target; end-of-period inflation table: 2024 = 4.0 percent; 2025–2029 = 4.0 percent.
- Fiscal trajectory and debt:
  - Staff projections align with the 2025 budget lines and the FRL, envisaging a fiscal deficit of 3.1 percent in 2025 followed by real primary spending consolidation.
  - Consolidated public sector debt projected (percent of GDP): 2023 = 59.3; 2024 = 58.4; 2025 = 57.4; 2026 = 56.1; 2027 = 54.4; 2028 = 52.7; 2029 = 50.6; 2030 = 49.0; 2031 = 47.4; 2032 = 45.7; 2033 = 44.2.
- External outlook:
  - CA deficit projected to converge gradually to around 2¾ percent of GDP over the medium term.
  - FDI expected to fully finance CA deficits and support reserve accumulation; Net International Reserves projections (USD million): 2024 = 15,464; 2025 = 15,660; 2026 = 16,883; 2027 = 17,617; 2028 = 18,617; 2029 = 19,673; 2030 = 20,778.

### Key risks and vulnerabilities
- Downside external risks:
  - Tighter-for-longer U.S. monetary policy could reduce FDI, trigger capital outflows, and weaken exports, tourism and remittances.
  - Commodity price volatility, regional conflict spillovers, and extreme global climate events could raise inflation and hit vulnerable populations.
  - Extreme local weather events could damage agricultural production, tourism, exports, and delay reforms (e.g., Electricity Pact), weakening the fiscal position.
- Upside policy-led scenarios:
  - Successful implementation of the FRL, tax reform, and faster recapitalization of the BCRD through bonds could lower risk premia.
- Systemic assessment:
  - Overall systemic risks appear contained: broadly balanced external sector, negative output gap, sound financial sector, high international reserves, reserve funds for deposit guarantees and banking resolution, and market access.
  - Remaining risks: high share of central government external bonds and foreign currency debt.

### Policy recommendations and near-term policy mix
- Near-term policy mix:
  - Continue fiscal consolidation to rebuild buffers and ensure debt sustainability, aligning with the FRL and 2025 budget policy lines.
  - Pursue monetary policy normalization, limit FXIs and liquidity interventions to large shocks.
  - Allow greater exchange rate flexibility to absorb shocks while protecting inflation credibility.
- Structural and medium-term priorities:
  - Full implementation of FRL; pursue tax reform to durably raise revenues.
  - Strengthen monetary frameworks, central bank autonomy, and exchange rate flexibility.
  - Continue financial regulatory upgrades toward Basel II/III and IFRS9; expand macroprudential toolkit.
  - Advance structural reforms to increase competitiveness, productivity, FLFP, and infrastructure resilience (including electricity distribution efficiency and climate adaptation).
  - Rebuild foreign reserves and pursue debt management to extend maturities and improve currency composition.

---

### Fiscal outlook and 2024 reformulated budget
- Overall deficit target: 3.1 percent of GDP.
- Reformulated budget revised revenues up to 16.4 percent of GDP to support electricity and fuel subsidies, health, housing programs, and police reform.
- Advanced concession revenues (about 0.6 percent of GDP) will be used for capital spending.
- Continued BCRD recapitalization transfers of 0.6 percent of GDP are included in projections.
- 2025 planned measures:
  - Reducing 10 percent of recurrent spending.
  - Ensuring close links with results-based plans.
  - Lowering capital spending.
- Medium-term expenditure framework:
  - Consolidation led by lower current transfers, wage bill restraint, and contained investment and social spending.
  - Keep real primary spending from growing above 3 percent.
- Latest MT policy lines project:
  - Overall deficit to decline to 2.1 by 2028.
  - Primary balance increasing to 1.5 percent of GDP.
  - General government debt-to-GDP to reach the 40 percent debt anchor by 2035, per the FRL.
- Budgetary central government figures (percent of GDP, selected series):
  - Revenue series: 16.0 16.4 16.3 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2
  - Expenditure series: 19.1 19.5 19.4 18.3 18.3 17.9 18.1 17.6 17.8 17.3 17.4 17.1
  - Interest series: 3/ 3.5 3.5 3.4 3.7 3.5 3.6 3.6 3.6 3.5 3.6 3.5 3.4
  - Overall BCG balance series: -3.1 -3.1 -3.1 -3.1 -3.1 -2.8 -2.8 -2.4 -2.5 -2.1 -2.2 -1.9
  - Primary balance series: 0.4 0.4 0.4 0.6 0.5 0.9 0.7 1.2 1.0 1.5 1.3 1.5
  - Memo NGDP (RD$ bln.): 7,411 7,447 7,453 8,133 8,149 8,881 8,907 9,698 9,725 10,590 10,619 11,595
  - Real primary spending growth (percent) series: 3.0 6.1 6.4 -1.4 -2.2 2.9 3.0 2.9 3.0 2.9 3.0 3.0
  - Capital spending series: 2.7 2.7 2.6 2.2 2.2 2.2 2.2 2.2 2.2 2.1 2.1

### Subsidies, targeting, and staff recommendations
- Cost of subsidies: around 1½ percent of GDP since 2021.
- Electricity subsidies recently: between 0.6 and 1.3 percent of GDP annually.
- Staff recommendations:
  - Aim for more targeted measures given spending rigidities and tight fiscal envelope, especially reducing electricity subsidies.
  - Enhance framework to smooth price shocks while mitigating impact on the most vulnerable, including by strengthening targeted cash-transfers (¶28).
  - Reducing electricity subsidies is key to fiscal consolidation and requires further progress with the Electricity Pact (¶28).

### Managing the monetary policy easing/normalization cycle
- Rationale and guidance:
  - Continued monetary policy normalization warranted given headline (core) inflation below (at) target, well-anchored expectations, and a negative output gap.
  - Pace of normalization should be calibrated to reflect inflation impacts from recent exchange rate depreciation and liquidity measures.
  - Allow greater exchange rate flexibility to help transmit monetary policy and preserve reserves.
  - Limit FXIs and liquidity measures to large shocks absent financial stability concerns or unanchored inflation expectations.
  - Deepen FX market and expand hedging mechanisms to support monetary policy transmission.
  - With reserves below 100 percent of the ARA metric, room for continued gradual reserve accumulation exists.
- Communication:
  - BCRD has improved communications including publishing biannual Monetary Policy Reports; suggested enhancements include producing alternative scenarios and increasing report frequency.

### Monetary/Central Bank governance and recapitalization
- Implementation of the 2021 safeguards assessment is ongoing; further steps needed to strengthen BCRD autonomy and governance.
- Outstanding recommendations: increase institutional, financial, and personal autonomy through legal reforms, adopt IFRS, and recapitalize the central bank.
- Fund TA assessed recapitalization needs; authorities envisage increasing transfers to the BCRD (beyond current transfers of 0.6 percent of GDP) while keeping spending and debt in line with the FRL.
- BCRD balance sheet metrics and recapitalization context (selected):
  - Excess liquidity absorbed by BCRD securities: 14 percent of GDP in 2022.
  - Recurring interest expense losses: 1.5 percent of GDP in 2022.
  - Accounts receivable from the government: 10 percent of GDP as of 2022.
  - Components of BCRD balance sheet (DOP billion, chart entries): Claims on financial intermediaries, 95; Equity, -60; Recapitalization instruments, 132; Accounts receivable from Government, 625; Securities issued, 870; Foreign liquid assets, 403; Currency in circulation, 252; Domestic deposits of financial institutions, 207; Investments in international institutions, 306; Other assets, 174; Other liabilities, 287; Foreign currency deposits of financial institutions, 179.
- MCM TA recommendations:
  - Increase transfers to 0.9%/1% of GDP to achieve policy solvency by 2029; transfers via interest on marketable bonds preferred to increase credibility.
  - Effects: additional CG securities issuance of 0.3-0.4 percent of GDP required; could reduce BCRD securities issuance and fragmentation, improving liquidity and the Treasury yield curve.
  - Current transfers of 0.6% GDP insufficient to restore policy solvency within a decade per the 2023 TA.

### Financial sector frameworks and supervision
- Soundness and reform priorities:
  - FSIs indicate sound system; risk levels low/moderate.
  - Key reforms: adopt heightened prudential rules (liquidity, market, operational risk), capital buffer requirements (conservation, countercyclical, systemically important), macroprudential and resolution tools, converge to IFRS9 and Basel II/III.
  - Roadmap for IFRS9 and Basel II/III implementation in progress; Fund TA provided.
- Savings and Loans Cooperatives:
  - Require regulatory/supervisory modernization; reforms under consideration include prudential measures aligned with banking standards, improved data collection, and risk-based supervision.
- Stress testing (selected results):
  - Solvency stress test: pre-shock CAR (Top 20 DTIs) 17.4 percent; combined credit, interest rate and FX shocks lower CAR to 12.8 percent (change -4.6 percentage points).
  - Recapitalization need: <0.3 percent of GDP.
  - Consolidated contingency and Bank Consolidation Funds: USD 1,155 million (Contingency Fund USD 434.2 million; Bank Consolidation Fund USD 722.5 million) — three times the amount estimated through the stress test.
  - Implication: banking sector expected to remain above the 10 percent minimum regulatory CAR after severe combined shocks; recapitalization needs limited.

### Structural reforms, electricity sector, and social policy
- Electricity sector:
  - Distribution losses increased to 36 percent in 2023.
  - Subsidies high at 1.1 percent of GDP.
  - Drivers: rising demand (high temperatures), drought (reduced hydro), increased illegal connections, weak metering, frozen tariffs.
  - Progress under the 2021 Electricity Pact: authorities estimate over 70 percent of actions implemented; Integrated Loss Reduction Plans published; procurement and installation of smart meters underway; NCRE share increased from 10.4 percent in 2022 to 11.4 percent in 2023; about 2,900 MW new installed capacity expected over the medium term with over half from NCRE.
  - Recommendation: fully implement Electricity Pact, strengthen distribution companies’ finances, diversify electricity matrix, and reduce carbon footprint in line with the NDC.
- Social programs and poverty:
  - Poverty declined driven by improved labor market outcomes; social assistance coverage and targeting remain limited.
  - Authorities expanding programs (Superate's main programs) and planning universal healthcare expansion.
  - Recommendations: strengthen SIUBEN universal registry for better targeting; ensure programs like Alimentate or Bonoluz reach eligible households during price spikes or tariff adjustments.

### Female employment, productivity, and macro gains
- Potential gains from closing gender gaps:
  - EG tool estimates overall potential GDP gains of 15.3 percent of GDP from closing gender gaps in employment, hours, and pay.
  - Decomposition: 10.1 percentage points from reducing the employment rate gap; 3.5 percentage points from reducing the working hours gap; 1.7 percentage points from reducing the wage gap.
  - Female labor market participation in the DR is 40 percent, about 70 percent of male participation; fully closing the participation gap could increase GDP by 17-19 percent.
- Early marriage impacts:
  - Prevalence (2019): around 9 percent of women aged 20-24 married before age 15; 32 percent married before age 18.
  - Estimated impact on real GDP per capita growth from reducing early marriage: 0.3 percent if reduced to LAC average; 1.3 percent if completely eliminated.
- Policy priorities to realize gains:
  - Reduce teenage pregnancy and early marriage; increase secondary completion; expand care systems; incentivize formalization in services; enforce PLANEG III measures.

### Debt consolidation across sectors and baseline debt projections
- Debt coverage and composition:
  - CPS includes NFPS plus the central bank due to quasi-fiscal losses; NFPS debt accounts for around 3/4 of total CPS debt.
  - Most reported debt is CG, followed by BCRD debt; large share in foreign currency and held by marketable external private investors under foreign law.
  - Average remaining maturity increased from around 9 years in 2018 to almost 11 years as of end-2023.
- Baseline public debt path (percent of GDP, selected):
  - Public debt: 2023: 59.3; 2024: 58.4; 2025: 57.4; 2026: 56.1; 2027: 54.4; 2028: 52.7; 2029: 50.6; 2030: 49.0; 2031: 47.4; 2032: 45.7; 2033: 44.2.
  - Primary deficit series (percent of GDP): 2023: -0.4; 2024: -0.7; 2025: -0.7; 2026: -1.0; 2027: -1.3; 2028: -1.4; 2029: -1.7; 2030: -1.4; 2031: -1.4; 2032: -1.4; 2033: -1.4.
  - Gross financing needs (GFNs, percent of GDP): 2023: 13.0; 2024: 8.4; 2025: 7.7; 2026: 7.2; 2027: 8.8; 2028: 8.5; 2029: 5.6; 2030: 7.4; 2031: 7.3; 2032: 5.2; 2033: 7.0.
- Drivers and realism:
  - 2023 debt increase driven largely by the real interest rate and increase in BCRD securities; growth and a small CPS primary surplus were offsets.
  - Projections assume zero pre-financing and gradual consolidation consistent with the FRL.
  - Medium-term risk assessment: debt module signal = Moderate; GFN module = Low; Overall medium-term risk = Low.
  - Prob. of missed crisis, 2024-2029, if stress not predicted: 9.1 pct; Prob. of false alarms, 2024-2029: 48.9 pct.

### External sector assessment and reserves
- External position and CA:
  - Estimated external position in 2023 broadly in line with fundamentals.
  - CA deficit narrowed from 5.8 percent of GDP in 2022 to 3.6 percent in 2023; cyclically adjusted CA estimated at -3.7 percent of GDP; EBA-lite CA norm -3.9 percent; CA gap 0.3 percent of GDP.
- NIIP and external debt:
  - NIIP at end-2023: -57.6 percent of GDP; Gross liabilities 87.3 percent of GDP; Debt liabilities 29.0 percent of GDP; Gross assets 29.8 percent of GDP; Debt assets 1.3 percent of GDP.
  - Total external debt rose to 43 percent of GDP driven by sovereign bonds, short-term central bank liabilities, and private sector debt.
- Reserves and FX interventions:
  - GIR increased to US$15.5 billion at end-2023; GIR projections and series: 8,782; 10,752; 12,943; 14,441; 15,464; 15,660; 16,883; 17,617; 18,617; 19,673; 20,778 (selected years).
  - Reserve adequacy indicators at end-2023: Months of imports 5.2; Months excluding FTZ 6.0; Broad money to reserves ratio 45.6; Short-term debt to reserves ratio 260.2; IMF ARA Metric 94.8.
  - FX interventions: net FXI represented US$0.2 billion in net sales in 2023 compared to US$1.8 billion net purchases in 2022.

### Debt affordability and sovereign spreads
- Empirical determinants of spreads:
  - Regression results highlight significance of institutional quality, VIX, US 10-year yields, primary balance, interest payments to revenue, foreign currency debt, and real GDP growth.
  - Selected coefficients (natural log of EMBI spread): Credit Rating -0.206***; VIX 0.034***; 10-year US Treasury yields 0.152***; Primary balance -0.016**; Interest payments to revenue 0.027***; Foreign currency debt 0.011**; Real GDP growth -0.021***; Government effectiveness -0.388***; Rule of law -0.410***.
- Policy implications:
  - Further increasing fiscal revenues and reducing foreign currency debt can lower spreads.
  - Continued improvements in institutional quality (government effectiveness, rule of law, political stability) can materially lower sovereign borrowing costs.

### Natural real interest rates
- Range estimates: between 1 and 3 percent.
- Methods and central estimates (most recent):
  - Univariate: 1.66 (most recent); UIP: 2.13; Taylor rules: 1.75; LW: 1.55; LW with spillovers: 1.88; FPAS: 0.92.
  - Synthesis: current natural rate estimated in the range of 0.9 and 2.1, clustered around 1¾ percent.
- Policy stance:
  - Real interest rate was 2.9 percent in December 2023, suggesting monetary policy was somewhat restrictive under average estimates; semi-structural methods imply ex-ante real rate exceeded natural rate by around 100-150 basis points in December 2023.

### Data adequacy and capacity development
- Overall judgment: data provided to the Fund is adequate for surveillance though with shortcomings (Annex XIV).
- Key gaps and timeliness issues:
  - National accounts rebasing to 2018 underway (expected second half of 2024).
  - Monthly external trade released quarterly; quarterly external sector accounts published with a four-month lag.
  - Coverage gaps in nonfinancial private sector transactions in the financial account and IIP statistics.
  - Government finance coverage: central government aggregates available; rest of NFPS above-the-line data incomplete.
  - FSIs: good coverage for banking sector; FSIs on non-financial corporates and households not available; real estate data lacking.
- Capacity development (Annex III):
  - Continued Fund CD across revenue and customs administration, PFM, financial sector supervision, monetary and fiscal frameworks, and statistics.
  - Priorities May 2024–April 2025 include fiscal and tax administration risk analysis, fiscal reporting quality, fiscal transparency, asset/liability management, Basel II/III roadmap updates, IFRS9 scheduled for fiscal year 2025, and a climate diagnostic assessment.

_Excerpted and summarized from IMF staff report — 1. Real Sector Developments (extract)._

### 1. Real Sector Developments ____________________________________________________________________ 21

### 1. Real Sector Developments

### Context and structural backdrop
- The Dominican Republic (DR) has averaged 5 percent growth over the last two decades supported by inflation targeting, a medium-term fiscal framework, and macro-financial stability.
- The authorities enacted a fiscal responsibility law (FRL) in July 2024.
- Structural challenges highlighted: slowing working age population growth, high vulnerability to natural disasters, electricity distribution inefficiencies, and the need to increase productivity and female labor force participation (FLFP).

### Recent developments and near-term outlook
- Growth and labor market
  - Real GDP growth slowed in 2023 due to tight financial conditions, weaker export demand, and transient idiosyncratic factors, but rebounded in 2023H2.
  - Between January and June 2024, annual GDP growth (versus same period in 2023) averaged 5.1 percent.
  - Labor market: unemployment at 5.3 percent; employment reached pre-pandemic levels driven by formal sector expansion; real hourly wages increased by around 9½ percent.
- Inflation
  - Inflation converged to the 4 percent (±1pp) target in 2023 and has remained around target since, with headline inflation slightly below 4 percent since February 2024 and core inflation at 4.0 percent.
- Monetary policy and exchange rate
  - BCRD gradually reduced its monetary policy rate (MPR) from 8.5 percent in May 2023 to 7.0 percent in November 2023.
  - Exchange rate: depreciated by 3.3 percent in 2023 and an additional 2.5 percent between January and July 20, 2024.
  - Foreign Exchange Interventions (FXIs) were used to smooth volatility; FXIs drained some liquidity contributing to higher interbank rates and slowed credit growth.
  - From mid-July 2024, BCRD extended the Repo window maturity from 7 to 28 days, approved a reverse auction for repurchasing BCRD securities, and relaxed provision requirements.
- Fiscal developments
  - Fiscal deficit widened to 3.3 percent of GDP in 2023 to support the economy; the 2024 budget limits the deficit to 3.1 percent.
  - 2023 spending increase financed by one-off revenues; current spending rose mainly due to higher interest expenses and policy priorities.
  - Real primary spending slowed as lower energy prices reduced subsidies.
- Debt management and bond operations
  - NFPS debt ratio rose in 2023 but is projected to decline in 2024 supported by lower domestic rates, higher growth, and primary balances.
  - Authorities published a 2024-2028 debt management strategy and a green, social and sustainable bond framework.
  - Sovereign issuances: US$750 million green bond for climate-related projects; US$1.8 billion peso-linked issuance to finance the budget and buy-back US$1 billion of bonds maturing in 2025.
- External sector
  - Current account (CA) deficit narrowed from 5.6 percent of GDP in 2022 to 3.6 percent in 2023 driven by import compression, lower energy prices, and record travel receipts.
  - CA deficits were fully financed by foreign direct investment (FDI).
  - Gross international reserves (GIR) increased to US$15.7 billion by mid-July 2024 and are expected to close around these levels by end-2024 (around 90 percent of the ARA metric).
  - Reserves adequacy metric: 98.9 percent in 2022 fell to 94.8 percent of the ARA metric in 2023 (when computed with M2); alternative calculation under M3 was 88.4 percent for 2023.
- Financial sector
  - Credit growth rose in 2023 but risk indicators remained benign; stressed NPL ratio at historically low levels.
  - Credit-to-GDP remains among the lowest in the region with room for further financial inclusion.
  - Banking sector capital ratio stood at 17.6 percent as of March 2024.
  - Profitability: ROE above 26 percent.
  - FX lending risks contained with most borrowers hedged.
  - Staff and authorities’ stress tests (Annex XII) indicate the banking sector can absorb a range of shocks without material aggregate capitalization impact.

### Projections and medium-term outlook
- Growth and inflation
  - Real GDP growth is projected at 5.1 percent in 2024 and at its long-term trend thereafter (table shows a sequence of 5.0–5.1 percent in the medium term).
  - Consumer price inflation is forecast around the 4 percent (±1pp) target (table: e.o.p. inflation 2024 = 4.0 percent, 2025–2029 = 4.0 percent).
- Fiscal trajectory
  - Staff projections align with the 2025 budget lines and the FRL, envisaging a fiscal deficit of 3.1 percent in 2025 followed by real primary spending consolidation consistent with the FRL.
  - Consolidated public sector debt projected to decline over the medium term in staff projections (table: consolidated public sector debt 2023 = 59.3 percent; projections show a gradual decline thereafter).
- External outlook
  - CA deficit projected to converge gradually to around 2¾ percent of GDP over the medium term.
  - FDI should fully finance CA deficits and, together with other official inflows, support continued reserve accumulation.
  - Gross international reserves are expected to remain broadly adequate over the medium term (table lists GIR projections: 2024 = 15,464 US$million; 2025 = 15,660; 2026 = 16,883; and rising thereafter).

### Key risks and vulnerabilities
- Near-term downside risks tilted to external factors (Annex II):
  - Tighter-for-longer U.S. monetary policy could reduce FDI, trigger capital outflows, and weaken demand for exports, tourism and remittances.
  - Commodity price volatility, regional conflict spillovers, and extreme global climate events could raise inflation and hit vulnerable populations.
  - Extreme local weather events could damage agricultural production, tourism, exports, and delay reforms (e.g., Electricity Pact), weakening the fiscal position.
- Upside policy-led scenarios:
  - Successful implementation of the FRL, tax reform, and faster recapitalization of the BCRD through bonds could lower risk premia.
- Systemic assessment
  - Systemic risks appear contained given a broadly balanced external sector, negative output gap, sound financial sector, high international reserves, reserve funds for deposit guarantees and banking resolution, and market access.
  - Remaining risks stem from high share of central government external bonds and foreign currency debt.

### Policy recommendations and near-term policy mix
- Near-term policy mix should:
  - Continue fiscal consolidation to rebuild buffers and ensure debt sustainability, aligning with the FRL and 2025 budget policy lines.
  - Pursue monetary policy normalization, limiting FXIs and liquidity interventions to large shocks.
  - Allow greater exchange rate flexibility to absorb shocks while protecting inflation credibility.
- Structural and medium-term priorities:
  - Enhance fiscal frameworks (full implementation of FRL, pursue tax reform).
  - Strengthen monetary frameworks and exchange rate flexibility.
  - Continue financial regulatory upgrades to latest standards.
  - Advance structural reforms to increase competitiveness, productivity, FLFP, and infrastructure resilience, including electricity distribution efficiency and climate change adaptation.
  - Rebuild foreign reserves and pursue debt management to extend maturities and improve currency composition.

*Source: IMF staff report — 1. Real Sector Developments (extract).*

### 13. The 2024 reformulated budget submitted to Congress in July continues to target a

### 13. The 2024 reformulated budget submitted to Congress in July continues to target a

### Fiscal outlook and 2024 reformulated budget
- Overall deficit target: 3.1 percent of GDP.
- Reformulated budget revised revenues up to 16.4 percent of GDP to support electricity and fuel subsidies, health, housing programs, and police reform.
- Advanced concession revenues (about 0.6 percent of GDP) will be used for capital spending.
- Continued BCRD recapitalization transfers of 0.6 percent of GDP are included in projections.

### 2025 budget policy lines and medium-term projections
- 2025 planned measures:
  - Reducing 10 percent of recurrent spending.
  - Ensuring close links with results-based plans.
  - Lowering capital spending.
- Medium-term (MT) expenditure framework:
  - Consolidation led by lower current transfers, wage bill restraint, and contained investment and social spending.
  - Keep real primary spending from growing above 3 percent.
- Latest MT policy lines project:
  - Overall deficit to decline to 2.1 by 2028.
  - Primary balance increasing to 1.5 percent of GDP.
  - General government debt-to-GDP to reach the 40 percent debt anchor by 2035, per the FRL.
- Staff projections assume spending in line with the FRL.

### Budgetary central government figures (selected table excerpts; percent of GDP unless otherwise specified)
- Revenue row (series): 16.0 16.4 16.3 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2
- Expenditure row (series): 19.1 19.5 19.4 18.3 18.3 17.9 18.1 17.6 17.8 17.3 17.4 17.1
- Interest (series): 3/ 3.5 3.5 3.4 3.7 3.5 3.6 3.6 3.6 3.5 3.6 3.5 3.4
- Overall BCG balance (series): -3.1 -3.1 -3.1 -3.1 -3.1 -2.8 -2.8 -2.4 -2.5 -2.1 -2.2 -1.9
- Primary balance (series): 0.4 0.4 0.4 0.6 0.5 0.9 0.7 1.2 1.0 1.5 1.3 1.5
- Memo: NGDP (in RD$ bln.) series: 7,411 7,447 7,453 8,133 8,149 8,881 8,907 9,698 9,725 10,590 10,619 11,595
- Real primary spending growth (percent) series: 3.0 6.1 6.4 -1.4 -2.2 2.9 3.0 2.9 3.0 2.9 3.0 3.0
- Capital spending (series): 2.7 2.7 2.6 2.2 2.2 2.2 2.2 2.2 2.2 2.1 2.1

Notes from the table:
- 1/ As percent of respective budget or PL.
- 2/ PL from June 2024. Real primary growth is relative to initial budget.
- 3/ Budgets and MTFFs include estimated interest due in January of following year.
- 4/ One-off spending financed by extra-ordinary or advanced revenues.

### Subsidies, targeting, and fiscal recommendations
- Temporary fuel price freezes and other subsidies helped keep inflation in-check and minimize the impact on households.
- Cost of subsidies: around 1½ percent of GDP since 2021.
- Electricity subsidies recently: between 0.6 and 1.3 percent of GDP annually.
- Staff recommendations:
  - Aim for more targeted measures given spending rigidities and tight fiscal envelope, especially reducing electricity subsidies.
  - Enhance framework to smooth price shocks while mitigating impact on the most vulnerable, including by strengthening targeted cash-transfers (¶28).
  - Reducing electricity subsidies is key to a fiscal consolidation that allows for adequate levels of social and capital spending; requires further progress with the electricity pact (¶28).

### Managing the monetary policy easing/normalization cycle
- Rationale:
  - Timely and decisive monetary policy tightening alongside exchange rate appreciation and clear communication of the inflation objective helped bring inflation to its target range and anchor expectations.
  - Continued monetary policy normalization warranted given headline (core) inflation below (at) target, well-anchored inflation expectations, and a negative output gap.
- Guidance:
  - Pace of normalization should be carefully calibrated to reflect inflation impacts from recent exchange rate depreciation and liquidity provision measures.
  - Allowing further exchange rate flexibility can help transmit monetary policy more effectively and preserve reserve buffers.
  - FX interventions (FXIs) and liquidity measures should be limited to large shocks that destabilize hedging and financing premia, absent financial stability concerns or unanchored inflation expectations.
  - Deepening the FX market and expanding hedging mechanisms would better support monetary policy transmission.
  - With reserves below 100 percent of the ARA metric, there is room for continued gradual reserve accumulation.
- Communication:
  - BCRD has improved communications, including publishing biannual monetary policy (MP) Reports; further enhancements could include production of alternative scenarios and increasing the number of MP reports.

### Authorities’ views (summarized)
- Committed to maintaining macroeconomic stability, keeping inflation around target, and rebuilding buffers.
- Agreed broadly with staff on careful calibration of monetary policy normalization; emphasized role of liquidity measures.
- Noted increased exchange rate flexibility since start of MPR normalization and its role as a shock absorber.
- Concurred on need to continue building external buffers related to the ARA metric but noted international reserves exceed all traditional metrics and can impact the quasi-fiscal deficit.
- Noted Congress’ approval of the FRL as fundamental to fiscal reforms and that the 2025 budget policy line provides a global spending ceiling in line with the FRL.
- Agreed reducing electricity subsidies is key and are improving management and increasing investment in the sector; open to future tariff adjustments per the Electricity Pact and expansion of the BonoLuz program to protect the most vulnerable.

### Strengthening fiscal framework and public financial management (PFM)
- Implementing the FRL and draft regulation to ensure 2025 budget and MT projections consistent with FRL; plan to establish an independent fiscal council.
- Need for comprehensive fiscal reform to durably raise revenues (broadening tax base, removing exemptions), improve tax administration and spending efficiency, and support faster central bank recapitalization.
- Upgrade frameworks for tax incentives and subsidies by establishing clear economic benefit criteria and strengthening cost-benefit methodology.

Revenue administration (selected actions):
- E-invoicing law (32-23) being implemented with phased compliance: large national firms by May 2024; large local firms by May 2025; remaining firms by May 2026.
- Property valuation norm updated; efforts to strengthen tax registry, management of tax debts, tax risk control, and fiscal fraud reduction with a new Tax Crime Investigation Unit attached to the Public Prosecutor Office.
- Recommendation: pass an Amended Title I to strengthen powers and sanctions to further reduce tax evasion.

PFM improvements and recommendations:
- 2023 PIMA and C-PIMA noted strengthening of public investment management and identified areas for improvement: strategic plans including climate change, procurement best practices for public trusts, PPPs and SOEs, and enhancement of fiscal and disaster risk management.
- Procurement reforms: Regulation 416-23 and Circular require public trusts to align procurement to updated standards and processes; interoperability with SIGEF has halved bidding process times.
- Authorities should continue enhancements to strategic planning, oversight of non-budgetary entities, SOEs (especially electricity companies), PPPs and long-term contracts; government financial statistics; and risk monitoring and management.

Debt management:
- Authorities proactively reducing debt risks with plans to increase multilateral and bilateral funding, domestic market issuance, and further develop the domestic market, supported by further recapitalization of the central bank.
- Working to make the peso clearable internationally to increase investor access and lower interest costs.

### Monetary/Central Bank governance and recapitalization
- Implementation of the 2021 safeguards assessment is ongoing; further steps needed to strengthen BCRD autonomy and governance.
- Outstanding recommendations include increasing institutional, financial, and personal autonomy through legal reforms, adopting IFRS, and recapitalizing the central bank.
- Fund TA assessed BCRD recapitalization needs and needed legal reforms; authorities envisage increasing transfers to the BCRD (beyond current transfers of 0.6 percent of GDP) while keeping spending and debt in line with the FRL.
- Balance sheet requires further strengthening; authorities exploring modalities consistent with the FRL and best PFM practices.

### Financial sector frameworks and supervision
- Financial Soundness:
  - FSIs appear sound and risk levels low/moderate.
  - Key risk indicators and supervision are based on outdated Basel and financial reporting standards.
- Priority reforms:
  - Apply heightened prudential rules (liquidity, market, operational risk) tailored to local specificities.
  - Adopt capital buffer requirements (conservation, countercyclical, systemically important banks buffer).
  - Implement macroprudential and resolution tools.
  - Converge towards international accounting standards (IFRS9) and Basel II/III.
- Authorities have received Fund TA and are working on a roadmap for IFRS9 and Basel II/III implementation.

Savings and Loans Cooperatives:
- Require a more effective regulatory and supervisory framework; existing framework dates to the 1960s.
- Reforms under consideration include introducing prudential measures aligned with banking sector standards, improving data collection, and implementing a risk-based supervisory approach.

### Authorities’ views on reforms and transparency
- Committed to comprehensive fiscal reform to increase revenues and rationalize public spending.
- Working on public administration reform to improve spending efficiency—reduce number of public institutions, avoid duplication, strengthen mandates and capacities, and improve coordination.
- Working on communication strategy and await Fund staff’s assessment of the tax reform after announcement.
- Committed to further improving transparency and adopting best international practices.

*Source: IMF staff report excerpt (DOMINICAN REPUBLIC).*

### 28. The DR continues to implement its ambitious structural reform agenda to support

### The DR continues to implement its ambitious structural reform agenda to support

### Governance and public administration
- Recent efforts reflected in recent WGIs and credit rating agencies’ recently improved outlooks.
- Removal from the US Trade Representative intellectual property (IP) watch list could support investment in IP-sensitive sectors such as semi-conductors.
- President prioritized a Constitutional reform to:
  - formalize the public prosecutor’s independence (making selection free of political interests); and
  - create a Ministry of Justice to allow the prosecutor to focus on investigations.
- Public administration actions:
  - Comptroller General announced strict compliance with Law 311-14 on asset declarations.
  - Chamber of Accounts granted more autonomy and powers following passage of Law 18-24, which also creates the National Control and Supervision System.
- Further governance-enhancing steps noted as beneficial:
  - recovery of illicitly diverted public funds; and
  - passage and implementation of the strengthened procurement law (currently with the Chamber of Deputies following approval by the Senate in July 2024).

### Anti-money laundering and combating the financing of terrorism (AML/CFT)
- Authorities continue to address technical compliance and effectiveness weaknesses identified in their 2018 Mutual Evaluation.
- Recent improvements include:
  - obtaining certification to comply with ISO standards on anti-bribery management system;
  - updating national risk assessments (expected by year-end);
  - enhancements to the sanctioning regime (including for the insurance sector); and
  - improvements to the quality of suspicious transaction reports.
- Support from the financial analysis unit (UAF) and the Superintendency of Banks (SIB) is helping supervision and implementation of AML standards by credit and savings cooperatives, although more work is needed.
- Authorities are drafting legislation and regulations to improve the sector’s macroprudential and AML standards in line with Law 155-17 and best international practices.

### Productivity, logistics, and export performance
- Notable improvements to become a regional logistic hub and foundation for nearshoring:
  - increased connectivity and domestic linkages (port-airport infrastructure and PPPs);
  - development of new FTZ parks; and
  - trade facilitation improvements, including the “Release in 24-Hour” program.
- Education outcomes are gradually catching up with peers (years of schooling, PISA-scores).
- Further reforms recommended to boost competitiveness and attract semiconductors:
  - reduce skills mismatch to enhance human capital;
  - update the Labor Code; and
  - advance the 2030 Innovation and Digital Agenda to attract and develop the semi-conductor industry and increase DR contribution in global value chains.

### Female employment
- Sustained improvements noted, with potentially sizable gains from increasing female labor market participation (Annex VIII).
- Recent policies to close gender gaps include:
  - special programs to support female entrepreneurs (including financing);
  - ongoing efforts to legally recognize domestic workers through the Labor Code; and
  - provision of expanded care services.

### Financial inclusion
- National Strategy for Financial Inclusion (2022-2030) provides coordination framework.
- Strategy aim: increase ownership of at least one financial product in 2030 to 65 percent (55 percent in 2023).

### Electricity sector
- Key quantitative facts:
  - Electricity distribution losses increased to 36 percent in 2023.
  - Subsidies remained high at 1.1 percent of GDP.
- Drivers of losses and subsidies: rising demand (high temperatures), a drought (reduced hydro generation), increased illegal connections, weak metering systems, and electricity tariffs remaining frozen.
- Progress under the 2021 Electricity Pact (EP):
  - authorities estimate that over 70 percent of actions have been implemented (Annex I);
  - updates to estimates of reference tariffs based on updated distribution costs; and
  - increasing the share of non-conventional renewable energy sources.
- Outside EP: authorities developing regulation for battery storage to ensure power reliability.
- Recommendation: continue efforts to fully implement the Electricity Pact and strengthen distribution companies’ finances, diversify the electricity matrix, and reduce the carbon footprint in line with the NDC.

### Social programs and poverty
- Poverty has continued to decline, driven by improved labor market outcomes.
- Social assistance is less impactful due to incidence and coverage limitations.
- Authorities’ actions:
  - enhance social programs with increased support under Superate's main programs;
  - plan expansion of universal healthcare.
- Recommendations:
  - strengthen the universal registry (SIUBEN) for better targeting during natural disasters;
  - ensure programs like Alimentate or Bonoluz reach eligible households in case of food price spikes or electricity tariff adjustments.
- Selected indicators and visual references from source (no values invented beyond source figures).

### Climate change and mitigation actions
- Authorities working on updating nationally determined contributions (NDC):
  - expected to be ready in February and published in December 2025, respectively.
- Preliminary estimates of NDC implementation cost:
  - increase from US$17.6 billion to US$36 billion, explained by reevaluation of adaptation costs and broadened gases coverage.
- Timing and legislation:
  - slight delay in reporting progress on emission reductions and approval/implementation of the Climate Change Framework Law; authorities hope project prioritized once legislature commences.
- Financing and strategy:
  - DR accessing the Climate Investment Fund (CIF) to provide a roadmap for energy sector decarbonization, including decommissioning coal-fired power plants.
  - authorities progressing on climate-related classification in the budget to identify public sector interventions.

### Data quality, Fund relations, and authorities’ views
- Data quality is broadly adequate for surveillance but has shortcomings (Annex XIV).
- Fund capacity development (CD) has supported data enhancements; authorities aim to:
  - adhere to the Special Data Dissemination Standard (SDDS) standards;
  - set concrete calendars for publication of key releases;
  - improve timeliness and coverage of external sector data; and
  - update the national accounts’ base year (expected in the coming months).
- Authorities emphasized:
  - commitment to improving governance and public institutions;
  - importance of Constitutional reform to limit potential indefinite extension of presidential term limits and formalize Attorney General independence;
  - on-going implementation of ISO anti-bribery and compliance standards at Ministries;
  - approval by the Senate in July 2024 of the new Procurement Law (pending further legislative steps).
- Meta 2036 objective: double the size of the economy, especially by developing the semi-conductor industry and leveraging manufacturing base, strategic location, and logistic hub qualities.
- Social priorities highlighted:
  - reduce female labor market gap in 10 years; and
  - expand universal health care.
- Financial innovation: BCRD authorized a domestic bank to issue gender bonds to provide long-term financing to SMEs led by women.

### Fund assessment and staff appraisal — outlook and policy priorities
- Fund relations and repayment capacity:
  - Dominican Republic has adequate capacity to repay the Fund.
  - RFI exposure risks are low; scheduled RFI repayments do not exceed 1 percent of exports or 1½ percent of reserves going forward.
  - Authorities maintained the 2021 SDR general allocation as international reserves.
- Macroeconomic outlook:
  - Real GDP growth projected around its long-term trend of 5 percent in 2024 and thereafter.
  - Inflation projected around its (4±1 percent) target.
  - Current account deficit expected to be fully financed by FDI and projected to gradually narrow over the medium term.
- Near-term downside risks include:
  - tighter for longer monetary policy in the U.S.;
  - intensification of regional conflicts; and
  - extreme local weather events.
- Policy recommendations and priorities:
  - Monetary policy and exchange rate:
    - maintain macroeconomic and financial stability, including further flexibility of the exchange rate;
    - continue monetary policy normalization given remaining slack and inflation within target range;
    - expedite recapitalization of the central bank to reinforce autonomy;
    - deepen the FX market, expand hedging mechanisms, and limit FXIs to large shocks to support exchange rate flexibility;
    - continue reserve accumulation to increase buffers.
  - Fiscal policy:
    - remain focused on rebuilding buffers and critical spending needs;
    - implement the fiscal responsibility law to anchor medium-term policies;
    - pursue gradual fiscal consolidation to place debt on a firmly downward path and build fiscal buffers;
    - implement integral fiscal reform to durably raise revenues (eliminate tax exemptions and expand the tax base) and improve spending efficiency (especially reduce electricity sector subsidies and untargeted transfers);
    - reallocate savings to development spending, including disaster-resilient infrastructure to promote inclusive growth.
  - Financial sector:
    - continue modernization of financial and prudential regulatory framework;
    - expand the macroprudential toolkit and close supervisory gaps (including for savings and loans cooperatives);
    - continue close monitoring for vulnerabilities amid higher for longer interest rates and prior credit growth increases.
  - Structural and institutional reforms:
    - continue to improve public institutions and the business climate to sustain investment and growth;
    - enhance public financial management and revenue administration;
    - advance education and labor market reforms, improve social outcomes, and implement climate adaptation and mitigation policies.

*Source: IMF country report content provided.*

### 39. It is recommended that the next Article IV consultation take place on the standard

### 1domea2024001-print-pdf - 39. It is recommended that the next Article IV consultation take place on the standard

### Recommendation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Real sector: developments and drivers
- Growth outperformed regional peers in recent years; Real GDP growth (selected projections/points shown):
  - Real GDP projections (selected years): 5.1, 5.0, 5.0, 5.0, 5.0 (as displayed in the projections row).
- Recent rebound led by:
  - Construction, free trade zones, and services.
  - Strong tourist arrivals supporting services.
- Contributions to real GDP growth (2022Q1–2024Q1 shown): Net exports, Consumption, Investment, Inventories (charted as percent, Y/Y).
- Economic Activity Index (2019Q1 = 100, seasonally adjusted) components tracked: Total, Construction, Local manufacturing, Free trade zones, Services (series through 2024Q2).
- Tourism arrivals (air travel) measured as percentage of same month in 2019: Dominican Republic (DOM) among comparators (DOM, CRI, JAM, MEX).
- Labor market:
  - Employment and participation recovered from the pandemic shock.
  - Employment growth relatively broad based across sectors.
  - Labor force indicators charted: Unemployed, Employed, Female employment rate, LFPR, Informality rate (levels and percent shown).

### Fiscal developments and outlook
- 2023 fiscal developments:
  - Increase in budgetary central government deficit contained by one-off receipts, allowing an increase in capital spending.
  - 2023 public sector debt increased due to higher deficits and higher-than-expected exchange rate depreciation.
  - Energy subsidies decreased in 2023 and are projected to gradually decline over the medium term in line with lower world prices and the electricity pact.
  - Re-capitalization transfers to the BCRD continued; stock of BCRD securities increased more than the deficit given still restrictive MPR.
- Consolidation and risks:
  - Continued consolidation expected to support a declining debt path.
  - Exposure to FX risk and external markets remains elevated despite lower recent FX debt emissions.
- Key fiscal figures (percent of GDP and projections):
  - Consolidated Public Sector Overall Balance (selected series): -3.3, -9.0, -3.7, -3.6, -4.0, -4.0, -3.8, -3.3, -3.0, -2.8, -2.2 (2019–2029 row).
  - Electricity and fuel subsidies (percent of GDP) and Brent oil prices (RHS) charted (series 2014–2029 projections shown).
  - Central Bank Quasi-Fiscal Deficit (percent of GDP) components: quasi-fiscal deficit after transfer, recapitalization transfers, stock of BCRD securities (RHS) with historical series and projections through 2029.
  - Public Sector Consolidated Debt distribution by borrower (percent of GDP) and by currency with share of external debt (percent of total, RHS) tracked through 2029.
  - Central Government components of overall balance (percent of GDP): Interest payments, Capital expenditures, Primary expenditures, Extraordinary revenue, Ordinary revenue, Overall balance (series 2019–2029).

### Monetary policy and inflation
- Policy actions and rates:
  - BCRD began normalizing the MPR in May 2023 but has kept it on hold since end-2023.
  - Monetary policy rate and market rates charted (Monetary policy rate, Weighted average lending rate, Weighted average deposit rate).
- Credit, liquidity, and reserves:
  - Private sector credit growth rose in response to 2023 liquidity measures and GDP rebound, but has recently eased.
  - Excess reserves at the BCRD in FX remain significant.
  - Banks’ legal reserves for deposits denominated in national currency slightly exceed required levels.
- Inflation dynamics:
  - Headline and core inflation declined rapidly in 2023 and remain within the target range.
  - 24 months inflation expectations firmly anchored.
  - Food and energy price shocks were key drivers of headline inflation.
- Selected numeric indicators:
  - Inflation target range, inflation expectations (24 months; median), core inflation, and headline inflation plotted (annual percent changes).
  - Legal reserves (DOP Billion) shown as Required and Excess series (2019–2024).

### Exchange rate, sovereign spreads, and reserves
- Foreign exchange market and interventions:
  - BCRD interventions remained two-sided in 2023 with sales dominating so far in 2024.
  - Dominican Peso depreciated in response to interest rate differentials with the U.S. at historical lows.
  - Daily FX volatility remained contained as BCRD smoothed peso depreciation.
- Sovereign spreads and reserves:
  - Sovereign spreads have continued to decline despite recent increases in Latin America and emerging markets (EMBIG series).
  - International reserves rose to historically high levels in 2023 and remain broadly adequate in 2024.
  - Traditional adequacy indicators are above benchmark metrics.
- Reserve adequacy indicators (estimates at end-2023, relative to benchmarks):
  - Months of imports, Months of imports excluding FTZ, Broad money to reserves ratio, S.T. debt to reserves ratio, IMF ARA Metric values (charted; Dominican Republic 2023 versus benchmarks and 2022).

### External sector: current account, financing, and FDI
- Current account and financing:
  - Current account deficit narrowed in 2023 due to favorable terms of trade, import compression, and strong tourist arrivals.
  - Current account remains fully financed by net FDI.
- FDI and remittances:
  - FDI by sector, 2023 (percent of total): Tourism 27, Energy 24, Commerce 16, Real estate 14, Free trade zones 8, Mining 6, Others 5 (bar breakdown shown).
  - Remittance receipts slowed from 2020–21 peaks but remain above pre-pandemic levels.
- Trade composition and trends:
  - Total imports decelerated in 2023; capital goods imports remained steady (3-month moving averages, USD million).
  - Exports fell in 2023 due to weak external demand and capacity issues in mining but are recovering (3-month moving averages, USD million).
- Balance of payments key figures (millions of US dollars and percent of GDP; selected):
  - Current Account (USD million): -1,188; -1,337; -2,685; -6,549; -4,376; -4,251; -4,608; -4,666; -4,608; -4,675; -4,947 (2019–2029).
  - Net International Reserves (USD million): 8,781; 10,752; 12,943; 14,437; 15,458; 15,653; 16,876; 17,611; 18,610; 19,666; 20,771 (2019–2029).
  - Exports, f.o.b. and Imports, f.o.b. series with gold and oil breakdowns provided.

### Financial sector: structure, soundness, and credit
- Financial sector composition:
  - Financial intermediaries composition, 2023: AFP (Pension funds) 86.8, Securities intermediation 0.5, AIRAC cooperatives 5.5, Insurance 3.8, Others 3.4 (percent of total assets).
  - Deposit Taking Institutions (DTIs) composition, 2023: Banks 87.8, Credit unions 9.7, Savings and loans associations 1.8, Public banks 0.6, Credit corporates 0.1 (percent of total assets).
  - Sector dominated by 47 DTIs; banks account for 88 percent of total DTI assets; top 5 banks account for 79 percent of DTI assets (concentration noted).
- Asset growth, liquidity, and capital:
  - Total assets (DOP million) and Y/Y growth plotted through 2023.
  - Liquid assets to deposits have been decreasing as deposits have increased as a share of total funding.
  - Solvency: Capital Adequacy Ratio (CAR) for banks and financial system tracked; CAR stabilized around pre-pandemic level in 2024.
- Credit, quality, and provisioning:
  - Credit growth rebounded strongly in 2023; credit quality improving after a spike in 2021 driven by pandemic-related restructurings.
  - Banks are reducing excess provisioning given credit quality improvements.
  - Foreign currency loans remain stable and below historical levels; about 40 percent of foreign currency loans are fully hedged.
  - Collateralization and LTV: 64 percent of all credits collateralized; loans with real estate collateral have relatively low LTV ratios.
- Banking system summary (selected series, billions of Dominican Pesos, 2019–2029 projections):
  - Gross Loans Portfolio (DOP million, and percent growth) series shown (mortgages, commercial, consumption, credit cards).
  - Financial soundness indicators (selected end-of-year percent series, 2013–2023):
    - NPLs to total loans: 2.2, 1.5, 1.7, 1.7, 1.9, 1.6, 1.6, 1.9, 1.3, 1.0, 1.0 (2013–2023).
    - Loan provisions to NPLs and provisioning to distressed assets series documented.
    - Return on average assets and equity series provided.

### Key macroeconomic and social indicators (selected from Table 1)
- Population (millions, 2023): 10.7
- GDP per capita (2023, U.S. dollars): 11,372
- Quota: 477.4 millions SDRs / 0.10% of total
- Poverty (2021, share of population): 23.9
- Unemployment rate (2023, percent): 5.3
- Adult literacy rate (percent, 2022): 95.5
- Nominal GDP (RD$ billion, selected years): 4,562; 4,457; 5,393; 6,261; 6,820; 7,453; 8,149; 8,907; 9,725; 10,619; 11,595
- GIR (in millions of US dollars, selected years): 8,782; 10,752; 12,943; 14,441; 15,464; 15,660; 16,883; 17,617; 18,617; 19,673; 20,778
- Consolidated public sector debt (percent of GDP, selected): 53.3; 71.1; 62.2; 58.8; 59.3; 58.4; 57.4; 56.1; 54.4; 52.7; 50.6
- Current account (percent of GDP, selected): -1.3; -1.7; -2.8; -5.8; -3.6; -3.4; -3.4; -3.2; -3.0; -2.8; -2.8

### IMF-related financing indicators (Table 6)
- Indicators of Fund credit, 2024–29 (Millions of SDRs / percent of quota):
  - Existing and Prospective drawings (RFI): 119.3 (2024) and 50.0, 0.0, 0.0, 0.0, 0.0 (2025–2029 as displayed).
  - Amortization: 238.7, 119.4, 0.0, 0.0, 0.0, 0.0 (2024–2029).
  - Total Debt Service (SDR millions): 270.8, 141.9, 20.3, 20.3, 20.3, 20.3 (2024–2029).
  - Outstanding Stock (SDR millions): 119.4 (2024) and 0.0 for 2025–2029.
  - Memorandum items: Exports of goods and services (USD million): 25,169; 25,843; 27,825; 29,965; 32,307; 34,687 (2024–2029). GDP (USD million): 113,873; 119,966; 127,356; 136,300; 145,936; 156,480 (2024–2029).
  - Quota: 477.4 (constant across projection years).

*Source: IMF staff calculations and national authorities as presented in the content unit.*

### Annex I. Implementation of Past Fund Advice

### Annex I. Implementation of Past Fund Advice

### Transversal / Cross Sector: Electricity, Social Transfers, Energy Transition
- Continue with electricity sector reforms under the Electricity Pact to reduce fiscal losses, ¶2, 15, 28.
  - Status: Ongoing.
  - Integrated Loss Reduction Plans have been published.
  - Investments to upgrade power lines and the procurement and installation of smart meters are underway.
  - "Over 70 percent" of the outlined actions underpinning the Electricity Pact have been implemented, including on governance of the sector and increasing the share of non-conventional renewable energy sources.
  - A study to update the power marginal cost has been completed.
  - A technical study to set the technical tariffs and adjustments to the reference tariffs is awaiting public consultation.
  - A draft study to update the regulation related to the quality of the electricity transmission service is under review.
  - An Energy Harmonization Law is currently under discussion by Congress to strengthen sector regulation.
  - Open competitive bidding has been established for new generation projects.
  - Electricity tariffs remain frozen until further notice.
- Continue improving targeted social transfers, ¶15, 28.
  - Status: Ongoing.
  - The number of beneficiaries increased in 2023.
  - Authorities continue to work on updating the universal registry database (SIUBEN).
- Continue enhancing efficiency and transitioning away from fossil fuels, ¶15, 28.
  - Status: Ongoing.
  - The share of non-conventional renewable sources (NCRE) increased from 10.4 percent in 2022 to 11.4 percent in 2023.
  - Around 2,900 MW in new installed capacity is expected over the medium term, over half of which will come from NCRE.
  - Investments to enhance efficiency in the electricity distribution grid and public lighting are underway.

### Fiscal
- Establish a fiscal responsibility framework to anchor medium-term policies, ¶1, 9, 14, 20.
  - Status: Completed.
  - The FRL was approved by Congress on July 24, 2024.
- Create policy space through revenue mobilization, ¶21, 22.
  - Status: Ongoing.
  - The tax to GDP ratio has increased including due to customs and tax administrations reforms including the implementation of the e-invoicing law (32-23), the use of non-intrusive technology, risk-based audits and the implementation of Authorized Economic Operators (OEAs), among others.
  - Authorities are working on a norm to update property valuation and are undertaking efforts to improve the tax registry, tax risks and controls and to reduce fiscal fraud alongside the Public Prosecutor.
  - With the re-election of President Abinader, a tax reform (as part of a broader Fiscal Pact which will include an updated Title I of the Tax code) is expected to be submitted in September. The president has started discussion with opposition parties on a Fiscal Pact.
- Continue to enhance Public Financial Management (PFM), ¶22.
  - Status: Ongoing.
  - Supported by Fund and other development partners' TA, authorities are strengthening PFM, including GFS, investment management methodologies, and procurement, both practices and the framework, with submission of a strengthened Procurement Law to Congress.
  - A revised debt management strategy has been published.
- Implement a medium-term fiscal consolidation plan through: (¶15, 20, 21, 22, 28).
  - Elements: Increased revenue mobilization; enhanced public spending efficiency including by rationalizing existing subsidies while strengthening the social safety net; reduced electricity sector losses and transfers to the distribution companies.
  - Status: Ongoing.
  - Subsidies fell in response to lower energy prices; authorities expect subsidies to decrease further and expect further gains in public spending efficiency as part of the planned comprehensive fiscal reform.
  - Electricity sector loss reduction measures are underway under the Electricity Pact.

### Monetary and Financial
- Continue building reserve buffers and allow greater exchange rate flexibility to play shock absorbing role ¶4, 7, 17.
  - Status: Ongoing.
  - The BCRD continued to build reserves in 2023 while allowing greater exchange rate flexibility.
  - Reserves stood at 94.8 percent of the ARA metric in 2023.
  - The 2024 BCRD’s Monetary Program envisages a gradual reserve accumulation over the medium-term to maintain an adequate level of reserves.
- Further enhance the FX market transparency and performance through well-communicated intervention rules, deepening and expansion of hedging mechanism, ¶4, 7, 17.
  - Status: Ongoing.
  - The BCRD has allowed greater exchange rate flexibility by allowing the exchange rate to depreciate.
  - FXI increased following the start of the MPR normalization amid depreciation pressures.
  - Authorities noted a continued improvement of their exchange rate platform, including ongoing progress made to capture small transactions.
- Continue improving Monetary Policy communication, ¶17.
  - Status: Ongoing.
  - Authorities are considering increasing the frequency of their Monetary Policy Report from semi-annual to quarterly.
  - They are receiving Fund TA to support preparation and possible publication of alternative scenarios.
- Continue implementing the Safeguard Assessment’s recommendations to enhance BCRD’s financial and institutional autonomy, ¶21, 23.
  - Status: Ongoing.
  - An MCM-LEG mission provided options to ensure policy solvency; authorities have requested further TA to help implement the recommendations and are considering further Fund TA to support drafting of a new Monetary and Financial Law.
- Maintain enhanced monitoring of the financial system. Continue transition to Basel II/III and IFRS standards and upgrade banking resolution and financial safety net, ¶24-25.
  - Status: Ongoing.
  - Authorities maintain enhanced monitoring of the financial system and are working on a roadmap for the implementation of Basel II/III and IFRS standards.
  - Formulating regulations to strengthen supervision (AML-CFT and IRFS implementation) at the IDECOOP with support from the SIB and UAF; making improvements to the sanctioning regime.

### Structural Reforms
- Continue structural reforms to strengthen: Competitiveness; Governance; Labor market reforms; Electricity sector reform; Financial inclusion, ¶28.
  - Status: Ongoing.
- Competitiveness
  - Improvements via enhanced trade facilitation: 24/7 customs services, cargo release in 24 hours, transport infrastructure, and quality of logistic services.
  - Implementation of the "Zero Bureaucracy" initiative to strengthen regulatory quality and streamline regulatory processes.
- Governance
  - Recent gains reflected in improved WGIs.
  - May 2024: DR removed from the US Trade Representative (USTR)’s Watch List regarding IP rights adequacy and effectiveness due to increasing enforcement actions and transparency.
  - Passage of Law 18-24 to modernize and strengthen the Chamber of Accounts and create the National Control and Supervision System.
  - Ongoing implementation of ISO anti-bribery and compliance standards at Ministries; prosecution of high-level corruption cases; strengthened procurement practices; strengthened Procurement Law in Congress; Executive Branch working on a Constitutional reform to increase the independence and effectiveness of the Public Prosecutor.
- Labor market
  - Ongoing efforts: “RD Trabaja” to incentivize incorporation of young workers; STEM-oriented scholarships to address skills mismatch.
  - A pilot program to evaluate reduction in hours in the work week completed in 2024, suggesting positive effects on productivity and mental health.
  - Policies to close gender gaps: support for female entrepreneurs, subsidized housing to women, procurement law modifications to incentivize state suppliers that are female-led SMEs, expansion of the Extended School Day Program (JEE), efforts to legally recognize domestic workers and expand care services through modernization of the Labor Code (expected to be discussed in Congress during 2024).
  - 2023: Comprehensive Early Childhood Care Centers (CAIPI) opened 23 new centers covering around 4,700 children between 1-3 years old.
  - Additional 3,000 new rooms for 75,000 children between 3-5 years old are expected to operate in 2024-25.
  - Preliminary studies in the context of the National Care Policy suggest care services could create between 79,000 and 285,000 new jobs and could allow between 48,000 to 85,000 women to leave care duties and search for jobs.
- Electricity sector (structural aspects)
  - NCRE installed capacity doubled from 555 MW in 2020 to 1,122 MW in 2023.
  - Share of NCRE in electricity generation increased from 10.4 percent in 2022 to 11.4 percent in 2023.
  - Ongoing efforts to reduce distribution companies’ losses include purchase and beginning of installation of smart meters and open competitive bidding for all public contracts for generation expansion.
- Financial inclusion
  - Increase of 4 percentage points in the percentage of adults that own at least one financial product in 2023 from 51 percent in 2019.
  - Progress towards implementation of the Digital Signature which could facilitate access of around 2.8 million Dominicans overseas to domestic financial products and services.
  - Program "PYMES+" led by the Ministry of Industries and the private sector to provide SMEs access to financial education and digitalization.

*Source: Annex I. Implementation of Past Fund Advice, IMF staff report.*

### Annex III. Summary of Capacity Development (CD) Strategy

### Annex III. Summary of Capacity Development (CD) Strategy

### Overview
- The Dominican Republic continues to significantly benefit from Fund CD.
- CD delivery takes place through a mix of short-term HQ expert missions and visits from regional advisors based in the IMF Regional Technical Assistance Center for Central America, Panama, and the Dominican Republic (CAPTAC-DR).
- Recent and forthcoming CD has focused on revenue and customs administration, public investment governance, financial sector supervision, monetary and fiscal policy frameworks, and statistical data reporting.
- Partner collaboration has been strong, particularly with the World Bank and the IDB.

### Key Areas of Focus
- Revenue and Customs Administration:
  - Recent missions supported the internal tax administration (DGII) in measuring the impact and strengthening their reform program on tax compliance within the context of the authorities’ own 2021–24 strategic plan which includes electronic invoicing implementation.
  - CAPTAC-DR assisted the customs administration (DGA) in aligning its strategic plan with the authorities’ priorities (including on strengthening the country’s position as a logistics hub, strengthening governance arrangements, and risk analysis).
- Public Financial Management (PFM):
  - CAPTAC-DR experts continue to work with the Treasury to strengthen the cash programming model and active cash management to avoid arrears, minimize the cost of liquidity and enable active cash management to speed up payments.
  - Two missions supported the authorities’ plan for the introduction of a FRL: the first, a FAD PFM diagnostic mission, focused on assessing the capacity to implement a medium-term fiscal framework to support a planned FRL; the second provided considerations, options, and the calibration of fiscal rules. It also supported the drafting of the FRL, approved by Congress in July 2024.
  - In fiscal year 2024, the Ministry of Finance received assistance on enhancing coverage of fiscal risks (using FRAT) and a public investment management assessment (PIMA), which included a C-PIMA, providing recommendations across the budget cycle as well as transversally.
- Financial Sector Supervision and Regulation:
  - Strategic objective: bolster tailored implementation of financial supervision and regulation according to international best practices, emphasizing risk-based supervision, cross-border consolidated supervision, and adoption of prudential criteria based on IFRS and Basel II/III standards.
  - Recent TA assisted the authorities in developing a roadmap for the implementation of the Basel II/III framework over the next few years and on implementing risk-based financial supervision.
- Monetary and Fiscal Policy Frameworks:
  - ICD TA missions to the central bank focused on strengthening the monetary policy framework.
  - The central bank (BCRD) is receiving ongoing TA from ICD to help develop an enhanced Forecasting Policy and Analysis System (FPAS) based on a new semi-structural Forecasting Model of Internal and External Balance (FINEX).
  - The TA project seeks to build capacity, streamline the central bank’s policy decision-making process, and improve external communications as the FPAS is incorporated into the BCRD’s monetary policy decisions.
  - Since fiscal year 2023, ICD technical assistance has been provided to the staff of the General Direction of Analysis and Fiscal Policy in the Ministry of Finance to develop an FPP-based projections tool driven by a semi-structural model to provide comprehensive inputs for the preparation of the Medium-Term Fiscal Framework, the analysis of strategic fiscal policy options and the assessment of macroeconomic risks with fiscal impact.
- Central Bank Operations and Sustainability:
  - Strategic objective: help the BCRD enhance its operations and support its independence through ensuring the sustainability of its balance sheet.
  - MC-led TA missions have supported the BCRD’s Office of Risk Management in reviewing its guidelines for risk tolerance to adopt international best practices, focusing on: (i) metrics used; (ii) risk thresholds; (iii) roles and responsibilities; and (iv) policies for reviews.
  - An MCM-led mission (together with the LEG and IT departments) supported the BCRD in the exploration of a retail Central Bank Digital Currency (CBDC), evaluating the potential impact on the monetary policy transmission mechanism, financial stability, payment systems, the CBDR’s balance sheet as well as its potential legal and AML/CFT implications.
  - An MCM-led mission (together with the LEG department) examined the health of the BCRD’s balance sheet, provided a range of options to restore the policy solvency of Central Bank, and reviewed and proposed amendments to the legal framework underpinning the BCRD’s financial autonomy.
- Government Finance Statistics:
  - TA missions resulted in the publishing of monthly budgetary central government data fully aligned with the latest international standards (GFSM 2014), based on joint work between the MOF and the central bank.
  - TA underpinned the publication of quarterly General Government (GG) data.
  - Ongoing TA is being provided on the expansion of coverage (to NFPS) and timeliness of CG data, while also reducing above and below-the-line data discrepancy.
  - Improvements are being made in data sources and consolidation; TA is also focused on improving public sector debt data (including sectorization of some units, notably trust funds, and accrual of interest and nominal value of debt).
- Real Sector Statistics:
  - A national accounts rebasing project to 2018 is in progress, for which a Household Income and Expenditure Survey was conducted during 2018/19.
  - CAPTAC-DR has continued to provide capacity development to the BCRD in line with the needs for the national accounts rebasing project on high frequency indicators (QGDP and IMAE).
  - The GDP rebasing project is expected to be in the second half of 2024.

### CD Priorities Going Forward (May 2024–April 2025)
- Continue to support:
  - Fiscal and tax administration risks analysis.
  - Tax administration effectiveness.
  - Improvements to the quality of fiscal reporting.
  - Fiscal transparency (through a Fiscal Transparency Evaluation).
  - Asset and liability management.
  - Development of macroeconomic frameworks at the BCRD and Ministry of Finance (including improvements to forecasting and analysis models).
- Financial sector and regulatory priorities:
  - Support on updates to the roadmap for the Basel II/III.
  - Operational, market and liquidity risk.
  - Accounting and prudential provisioning regulatory guidelines.
  - Review of drat regulation and guidelines on cybersecurity risks.
  - IFRS 9 has been scheduled for fiscal year 2025.
- Climate and disaster resilience:
  - The Fund will undertake a climate diagnostic assessment to support the authorities in their climate commitments.

*Source: IMF staff.*

### 5. Debt consolidation across sectors:

### 5. Debt consolidation across sectors:

### Debt coverage and disclosures
- Debt coverage is broad across sectors: includes the central government (CG), the rest of the budgetary non-financial sector, and the central bank’s quasi-fiscal debt (mostly a legacy of the 2003 banking crisis) which should eventually be absorbed by the CG through recapitalization.
- In instruments, coverage equals the sum of NFPS securities and loans; plus public electricity distribution companies’ arrears over 45 days (currently not part of official statistics when they’ve existed); plus Central Bank (BCRD) securities debt, net of recapitalization bonds issued by the central government and held by the central bank (as indicated in the intra-government debt holdings table).
- Most reported debt is of the CG, followed by BCRD debt; the rest of NFPS securities and loan debt is minimal.
- Reported government guarantees of private debt are immaterial.
- Debt of public trusts and accounts payable (besides electricity sector arrears) are not included.
- The rest of the NFPS cannot issue debt beyond a fiscal year without authorization of the Ministry of Finance or Congress.
- Authorities are receiving Fund technical assistance on public debt statistics to improve coverage, basis of recording, and valuation.

*Source: IMF staff calculations.*

### Public debt structure indicators and commentary
- Debt composition highlights:
  - Most debt is in foreign currency and held by the market (marketable).
  - Large share held by external private investors in DR global sovereign bonds and thus under foreign law.
  - Foreign-currency marketable debt increased sharply in 2020 (large external sovereign bond issuance for COVID spending), declined until 2023, and increased marginally in 2023.
  - Projected gradual decrease in foreign-currency share as government plans to issue more DOP-linked external bonds (trade-off: higher interest costs versus lower FX risk).
- BCRD quasi-fiscal debt:
  - Largely legacy of the 2003 banking crisis; market counterpart is BCRD securities mostly held by commercial banks, followed by domestic pension funds (AFPs).
- Domestic market development:
  - Authorities are developing the domestic securities market; domestic issuances have increased in frequency and regularity since 2022.
  - Central Government issued a green-bond at end-June 2024 (with World Bank technical assistance), which was well-received.
- NFPS maturity:
  - NFPS debt is mostly long-term.
  - Average remaining maturity increased from around 9 years in 2018 to almost 11 years as of end-2023, reflecting active debt management to extend maturities and reduce rollover risk.

*Source: IMF staff calculations.*

### Baseline scenario (consolidated public sector, percent of GDP)
- CPS composition and dynamics:
  - CPS includes NFPS plus the central bank due to quasi-fiscal losses.
  - NFPS debt accounts for around 3/4 of total CPS debt.
  - NFPS GFNs decline from 6 percent in 2023 to a range of 4-5 percent of GDP over the medium-term, aided by pro-active debt management since 2021.
- Public debt path (selected entries, percent of GDP):
  - Public debt: 2023: 59.3; 2024: 58.4; 2025: 57.4; 2026: 56.1; 2027: 54.4; 2028: 52.7; 2029: 50.6; 2030: 49.0; 2031: 47.4; 2032: 45.7; 2033: 44.2.
  - Change in public debt: 2023: 0.5; 2024: -0.8; 2025: -1.0; 2026: -1.4; 2027: -1.7; 2028: -1.7; 2029: -2.1; 2030: -1.6; 2031: -1.6; 2032: -1.6; 2033: -1.5.
  - Contribution of identified flows: 2023: 0.1; 2024: -1.0; 2025: -1.0; 2026: -1.3; 2027: -1.5; 2028: -1.7; 2029: -2.0; 2030: -1.7; 2031: -1.6; 2032: -1.6; 2033: -1.5.
  - Primary deficit: 2023: -0.4; 2024: -0.7; 2025: -0.7; 2026: -1.0; 2027: -1.3; 2028: -1.4; 2029: -1.7; 2030: -1.4; 2031: -1.4; 2032: -1.4; 2033: -1.4.
  - Noninterest revenues: constant at 15.7 for 2023 then 16.3 in 2024 then 15.2 thereafter (15.2 for 2025–2033).
  - Noninterest expenditures: 2023: 15.4; 2024: 15.7; 2025: 14.5; 2026: 14.2; 2027: 13.9; 2028: 13.8; 2029: 13.5; 2030: 13.8; 2031: 13.9; 2032: 13.8; 2033: 13.8.
  - Real interest rate and relative inflation: 2023: 2.2; 2024: 2.6; 2025: 2.6; 2026: 2.5; 2027: 2.5; 2028: 2.4; 2029: 2.3; 2030: 2.2; 2031: 2.1; 2032: 2.1; 2033: 2.0.
  - Real growth rate: 2023: -1.4; 2024: -2.9; 2025: -2.8; 2026: -2.8; 2027: -2.7; 2028: -2.6; 2029: -2.5; 2030: -2.4; 2031: -2.3; 2032: -2.3; 2033: -2.2.
  - Gross financing needs: 2023: 13.0; 2024: 8.4; 2025: 7.7; 2026: 7.2; 2027: 8.8; 2028: 8.5; 2029: 5.6; 2030: 7.4; 2031: 7.3; 2032: 5.2; 2033: 7.0.
    - Of which debt service: 2023: 13.3; 2024: 9.1; 2025: 8.4; 2026: 8.2; 2027: 10.0; 2028: 9.9; 2029: 7.4; 2030: 8.8; 2031: 8.7; 2032: 6.6; 2033: 8.3.
    - Local currency GFNs: 2023: 10.4; 2024: 6.3; 2025: 5.9; 2026: 4.5; 2027: 6.9; 2028: 7.2; 2029: 4.3; 2030: 6.1; 2031: 6.4; 2032: 3.6; 2033: 5.8.
    - Foreign currency GFNs: 2023: 3.0; 2024: 2.8; 2025: 2.6; 2026: 3.7; 2027: 3.2; 2028: 2.7; 2029: 3.0; 2030: 2.7; 2031: 2.3; 2032: 3.0; 2033: 2.5.
- Macroeconomic assumptions (memo):
  - Real GDP growth: 2023: 2.4; 2024: 5.1; 2025–2033: 5.0 (annual).
  - Inflation (GDP deflator): 2023: 6.4; 2024: 3.9; 2025–2033: 4.1/4.0 (2025: 4.1; 2026–2033: 4.0).
  - Nominal GDP growth: 2023: 8.9; 2024: 9.3; 2025–2033: 9.3/9.2 (2025–2026: 9.3; 2027–2033: 9.2).
  - Effective interest rate: 2023: 9.1; 2024: 7.9; 2025–2033: 7.9/7.8 (2025–2032: 7.9; 2033: 7.8).
- Drivers and interpretation:
  - Slight increase in debt in 2023 driven largely by the real interest rate; real exchange rate had smaller impact.
  - Residual largely driven by increase in BCRD securities exceeding quasi-fiscal deficit (due to still restrictive monetary policy rate).
  - Growth remained the most important offset to higher real interest and exchange rates; small CPS primary surplus also helped.
  - In the projection period, debt expected to continue declining due to growth in line with potential, inflation around target, and increasing primary surpluses per authorities' MTFF and recently adopted FRL.
  - Real interest rate costs increased since COVID lows (2021); external rates remain elevated but domestic interest rates and external spreads have improved.

*Source: IMF staff calculations.*

### Realism of baseline assumptions
- Historical forecast track record:
  - No change relative to 2023 Article IV.
  - Staff public debt projections and Stock-Flow Adjustment (SFA) have been relatively more optimistic.
  - Staff real rate minus real growth (r-g) differential driver has tended to be pessimistic (staff more conservative on growth and interest rates).
- Reasons for projection differences:
  - Additional issuances (pre-financing/over-financing for liquidity buffers) not captured by previous staff deficit projections and the COVID shock.
  - Lack of data on accounts payable; staff include electricity distribution arrears (over 45 days) in debt coverage that may be known with lags.
  - CPS includes central bank securities (proxy for quasi-fiscal debt), which may increase for monetary/liquidity management reasons beyond quasi-fiscal deficit implied changes.
- Arrears and liquidity:
  - Going forward, electricity-sector arrears over 45 days are not expected to continue due to an authority mechanism to prevent such arrears.
  - Forecast errors for quasi-fiscal debt likely to continue, as BCRD securities may increase for monetary/liquidity reasons.
  - Projections assume zero pre-financing/increasing liquidity buffers; in high interest-rate context, authorities could use available deposits.
- Projection drivers and ranks:
  - Projections show greater impact of real growth in the next 5 years (past 5 years included 2020 pandemic shock that reduced average growth to 4.3 percent versus pre-pandemic long-term average of 5 percent used in projections).
  - No positive output gaps in the medium-term per staff growth realism tool.
  - Envisaged increase in the primary balance is an important debt reduction driver; projected primary balance percentile rank below the 75th percentile and in line with authorities’ MTFF and adopted FRL.
- Electricity reform and risks:
  - Projections driven by lower electricity subsidies (WEO baseline energy price assumptions), projected reduced distribution losses (from investments and management), and future higher tariffs under the Electricity Pact (agreed in 2021).
  - Downside risks: projected lower subsidies could be reversed.
  - Upside risks: more and cheaper renewable energy could reduce subsidies (supported by World Bank DPLs).
  - Adoption of FRL (passed by Congress in July) could improve credibility of consolidation; fiscal reform (tax reform and increased spending efficiency) would further boost credibility.
- Interest rates and spreads:
  - Interest rates in 2024 have declined and further declines expected (consistent with global rates).
  - Continued increases in primary surplus and declines in debt burden (and foreign-currency debt share) should support lower spreads, further aided by FRL adoption.
  - Risk that spreads may rise due to geopolitical environment, uncertainties, or delayed/poorly implemented reforms.
- Forecasted 3-year CPS debt reduction:
  - At the 70th percentile relative to peers — relatively elevated but below the Dominican Republic’s maximum 3-year change.
  - Fiscal adjustment realism: 58th percentile rank for a realistic/feasible 3-year cyclically adjusted fiscal adjustment, well below maximum 3-year change.
  - Fiscal adjustment is in line with authorities’ MTFF anchored by FRL.

*Source: IMF staff calculations.*

### Medium-term risk assessment
- Overall signals:
  - Debt module: moderate risk.
  - GFN module: low risk.
  - Overall medium-term risk signal: low.
- Debt fanchart diagnostics:
  - Initial debt levels moderate; high probability of stabilization; terminal debt level not high (debt projected to continue declining).
  - Banking crisis scenario triggered by recent credit growth, but impact considered too large given:
    - Current sound state of the banking sector.
    - Existence of bank-funded deposit guarantee and resolution funds.
    - Dominican Republic’s credit-to-GDP well below median.
  - Natural disaster shock: debt would be somewhat higher but remain below the 2020 peak and expected to be financeable (including access to World Bank’s CAT-DDO).
- GFN tool diagnostics:
  - Low risk due to relatively low average GFNs in baseline (including NFPS debt and BCRD securities amortizations) and levels of bank claims/dependence (most debt is longer-term external bonds held by international private investors).
  - Shock scenario is strong due to dependence on external private creditors (assumes limited rollover by these creditors and need to rely on short-term domestic bank financing).
  - Natural disaster: GFN would rise then decline (remaining slightly above baseline due to higher debt but below recent peaks); financing available from CAT-DDO.
- Key metrics (percent of GDP or indices):
  - Fanchart width (percent of GDP): 46.5 0.7.
  - Probability of debt non-stabilization (percent): 7.1 0.1.
  - Terminal debt-to-GDP x: 29.3 0.6.
  - Debt fanchart index (DFI): 1.4 → Risk signal: Moderate.
  - Average baseline GFN (percent of GDP): 7.7 2.6.
  - Initial banks' claims on the gen. govt (pct bank assets): 8.4 2.7.
  - Chg. in banks' claims in stress (pct banks' assets): 6.1 2.1.
  - GFN financeability index (GFI): 7.4 → Risk signal: Low.
  - Medium-term index: Low risk.
  - Final assessment metrics:
    - Prob. of missed crisis, 2024-2029, if stress not predicted: 9.1 pct.
    - Prob. of false alarms, 2024-2029, if stress predicted: 48.9 pct.

*Source: IMF staff calculations.*

### Long-term risk analysis and climate adaptation scenarios
- Long-term projections:
  - In all scenarios GFN and debt ratio remain moderate or low.
  - Worst projected outcome: baseline with t+5 and debt stabilizing primary balance (DSPB) — GFNs and debt stay in moderate range rather than declining as in baseline with t+5 (which assumes continuous fiscal consolidation).
  - Given proposed fiscal rule would imply a DSPB only once GG debt declines to 40 percent of GDP, a more realistic scenario may be the historical 10-year average; this nonetheless implies GFNs would remain relatively low.
- Climate adaptation scenarios:
  - Standardized adaptation scenario incurs higher adaptation costs (0.7 percent of GDP) versus a baseline without such costs, increasing debt and GFN.
  - Customized adaptation scenario (based on Annex VIII for the 2023 AIV) accounts for resilient investment raising long-term growth by 0.13% per year and producing a LT fiscal gain (primary balance impact lower by 0.02% GDP versus the standardized scenario).
  - DR is updating its NDC action plan and estimated costs; authorities are improving analysis of fiscal risks from natural disasters to better calibrate baselines and adaptation benefits.
- Overall long-term risk indication:
  - Under standardized and customized scenarios, debt and GFN remain on a downward path, with adaptation scenarios showing higher near-term costs but potential long-term growth and fiscal benefits.

*Source: IMF staff calculations.*

_Excerpted and summarized from IMF staff calculations in the chapter "5. Debt consolidation across sectors."_

### Annex V. External Sector Assessment

### Annex V. External Sector Assessment

### Overall Assessment
- The estimated external position of the Dominican Republic in 2023 remained broadly in line with the level implied by fundamentals and desirable policies.
- The Current Account (CA) deficit narrowed significantly in 2023 driven by:
  - import compression associated to the slowdown in domestic economic activity;
  - lower energy prices that narrowed the trade deficit;
  - a stronger surplus in the service account stemming from record travel receipts.
- Gross international reserves increased further in 2023 and are at broadly adequate levels given they greatly exceed all traditional metrics despite falling short of the IMF’s ARA metric.

### Potential Policy Responses
- Gradually continue building external buffers to shield the country against future external shocks, including:
  - continuing to build upon the current broadly adequate level of international reserves;
  - greater exchange rate flexibility.
- Data-dependent monetary policy normalization to lessen potential risks to capital outflows.
- Gradual fiscal consolidation to reduce risk premia, narrow the external current account deficit, and strengthen the external position.

### Foreign Assets and Liabilities: Position and Trajectory
- Background and recent developments:
  - As of end-2023, Net International Investment Position (NIIP) weakened slightly to -57.6 percent of GDP.
  - The weakening was largely driven by an increase in external debt in the form of portfolio investments and direct investments (FDI) on the liabilities side which exceeded increases in other investments by other sectors and reserve assets on the asset side.
  - Nonetheless, the NIIP has improved by over 18 percentage points of GDP since 2020.
  - Total external debt rose to 43 percent of GDP driven by sovereign bonds placed in capital markets, short-term debt liabilities by the Central Bank, and private sector debt (banks and other sectors).
  - Exchange rate depreciation also contributed to the increase in external debt.
  - Active debt management operations have helped reduce exchange rate and rollover risks by extending maturity and strengthening the currency composition of the debt profile (i.e., issuance of domestic currency-denominated debt at longer maturity).
- Medium-term projection:
  - NIIP is projected to improve gradually driven by increases in external assets associated with growing direct investments and other investments.
- Assessment:
  - The NIIP has improved since 2020 and is projected to further improve over the medium-term supported by the steady increase in foreign assets and the expected improvement in the current account.
  - The substantial share of FDI on the liabilities side mitigates potential risks.
  - The Dominican Republic’s NIIP is deemed sustainable.
- Key 2023 figures (percent of GDP):
  - NIIP: -57.6
  - Gross Assets: 29.8
  - Debt Assets: 1.3
  - Gross Liabilities: 87.3
  - Debt Liabilities: 29.0

### Current Account
- Background and developments:
  - CA deficit narrowed from 5.8 percent of GDP in 2022 to 3.6 percent of GDP in 2023.
  - Factors: declining global energy prices, strong tourism activity, and soft import demand associated with the slowdown in domestic economic activity.
  - The CA deficit was fully financed by FDI while portfolio investments—largely in the form of long-term sovereign bonds—contributed to the accumulation of reserves.
- Assessment and EBA-lite estimates for 2023:
  - Cyclically adjusted CA is estimated at -3.7 percent of GDP (after accounting for cyclical contributions and terms of trade).
  - The 2023 EBA-lite estimates a CA norm of -3.9 percent of GDP.
  - Estimated CA gap: 0.3 percent of GDP (Adjusted CA -3.7 versus Adjusted CA Norm -3.9).
- Table 1 summary (EBA-Lite Model Estimates for 2023, percent of GDP):
  - CA-Actual: -3.6
  - Cyclical contributions (from model): (-)0.2
  - Natural disasters and conflicts: (-)-0.1
  - Adjusted CA: -3.7
  - CA Norm (from model): -3.9
  - Adjustments to the norm: (+)0.0
  - Adjusted CA Norm: -3.9
  - CA Gap: 0.3
  - o/w Relative policy gap: 2.2
  - Elasticity: -0.2
  - REER Gap (in percent): -1.5 (CA model), -14.6 (REER model 1), 0.0 (ES model)

### Real Exchange Rate
- Background:
  - After average annual appreciation of 6.4 percent in 2021-2022, the Real Effective Exchange Rate (REER) depreciated by 2.6 percent as of end-2023.
  - Depreciation driven by faster convergence of inflation to the target range in the Dominican Republic compared to the U.S., improving external competitiveness.
  - Exchange rate vis-à-vis the U.S. dollar depreciated by 3.3 percent reflecting increased demand for foreign exchange toward year-end in response to uptick in imports in H2 2023.
  - Nominal Effective Exchange Rate depreciated slightly by -0.6 percent.
- Assessment:
  - The EBA-Lite REER model estimates a gap of -14.6 percent (undervaluation) in 2023 driven mainly by a large residual which limits the assessment.
  - The External Sustainability (ES) model suggests no REER overvaluation nor undervaluation, implying the NIIP is sustainable.
  - Based on an elasticity of -0.2 of the trade balance to the REER, the CA model estimates a REER undervaluation of -1.5 percent.
  - Staff assesses the REER gap in 2023 to be -1.5 percent, considering all estimates and uncertainties.

### Capital and Financial Accounts: Flows and Policy Measures
- Background and structure of flows:
  - Capital flows to the Dominican Republic are mainly private, exceeding 60 percent over the last three years.
  - External financing sources (e.g., FDI and market access) remained healthy and stable in 2023.
  - The current account deficit was fully financed by FDI (100 percent).
  - Active debt management operations in 2023-2024 (placement of domestic currency international bonds) and buybacks over the last four years helped improve the risk profile by reducing exchange rate and rollover risks of government debt.
- Outlook and assessment:
  - Going forward, and in line with improvements in the rule of law and control of corruption, FDI and portfolio investments are expected to continue financing the current account deficit.
  - External sustainability is supported by a solid financing structure: inflows dominated by FDI and long-term debt flows; outflows largely consist of public debt amortization.
  - Recent active debt management operations (longer maturity and domestic currency denominated debt) have strengthened the public sector external debt profile.

### FX Intervention and Reserves Level
- Background and levels:
  - Gross international reserves (GIRs) increased to US$15.5 billion at end-2023.
  - Reserves exceed traditional metrics:
    - 5¼ months of prospective imports of goods and services;
    - 12.7 percent of GDP;
    - covering 2.6 times short-term debt;
    - over two fifths of broad money.
  - GIRs stood at 95 percent of the IMF’s ARA metric, 21½ percentage points above the three-year average prior to the pandemic.
  - FX intervention (FXI) by the BCRD remains double sided and at around 5¼ percent of total market transactions (down from 9.5 percent of transactions in 2020).
  - Net FXI represented US$0.2 billion in net sales in 2023 compared to US$1.8 billion net purchases in 2022, helping to smooth the nominal depreciation of the currency.
- Assessment:
  - The level of reserves is assessed as broadly adequate exceeding traditional metrics.
  - Reserves stood at 94.8 percent of the IMF’s ARA metric for non-floating exchange rate regime in 2023.
  - Reserves averaged 96½ percent of the non-floating (“floating”) ARA metric in 2021-23.
- Reserve adequacy indicators (estimates at end-2023, relative to benchmarks) highlighted:
  - Months of imports: 5.2
  - Months of imports excluding FTZ: 6.0
  - Broad money to reserves ratio: 45.6
  - Short-term debt to reserves ratio: 260.2
  - IMF ARA Metric (RHS): 94.8

_Annex V. External Sector Assessment (excerpt)._

### Annex VII. Debt Affordability and Sovereign Spreads

### Annex VII. Debt Affordability and Sovereign Spreads

### Background and motivation
- Debt affordability relates to the level and risk profile of debt, interest rates (cost of borrowing), and the ability and willingness to generate revenues to pay debt (including by having strong, resilient growth and institutions).
- Spreads (measured by JP Morgan’s Emerging Markets Bond Index, EMBI) reflect the market’s pricing of default risk and are influenced by:
  - Domestic fundamentals (fiscal, macroeconomic, institutional).
  - Global factors such as financial conditions and investor uncertainty (typically proxied by the VIX).
- Spreads can fluctuate even if fundamentals remain unchanged; sovereigns with lower credit ratings often exhibit greater dispersion in spreads and are more negatively impacted by global factors.

### Debt affordability in the Dominican Republic (DR)
- Constraints and vulnerabilities:
  - Debt affordability remains constrained despite good market access and moderate overall debt levels (in line with EM peers).
  - Key constraints include relatively low revenues and high interest costs.
  - Debt exposure to exchange rate fluctuations is elevated given relatively high stocks of external and FX debt.
- Recent improvements:
  - DR fundamentals have improved in recent years, notably in institutions.
  - Strong, resilient growth and improving institutions have helped reduce spreads in recent years.
  - Institutions contributed to a third of the predicted EMBI spread for the DR between 2012 and 2019.
  - Since 2019, the contribution from institutions is around 8 percent of the predicted EMBI spreads (reflecting improvement in government effectiveness and rule of law, as well as political stability).

### Sovereign spreads and fundamentals (empirical model)
- Methodology:
  - A fixed effects panel regression across up to 76 emerging and developing economies (2002–2022), excluding outliers with EMBI spreads generally above 2,000 basis points.
  - Dependent variable: natural logarithm of EMBI spread (yearly average per country).
  - Global factors: VIX and US 10-year yield (time fixed effects may capture additional global variation).
  - Fundamental factors include:
    - Fiscal variables: general government debt, primary balance, interest payments to revenue, foreign currency debt.
    - Macroeconomic variables: real GDP growth and inflation.
    - Institutional variables: control of corruption, government effectiveness, political stability and absence of violence, rule of law (World Bank WGI estimates).
- Theoretical basis:
  - Arbitrage condition equating expected return on risky debt with risk-free return, with probability of default p; spread s derived from logs of model including risk-free rate and determinants of p.
  - Model specification includes country fixed effects (Υi) and time fixed effects (τt).

### Key regression results (selected coefficients and diagnostics)
- Coefficients (natural log of EMBI spread; robust standard errors; country and time fixed effects). Significance levels: ***p<0.01, **p<0.05, *p<0.1.
  - Credit Rating (Average credit rating): -0.206***
  - VIX (index): 0.034*** (another specification shows 0.038*** and 0.039***; one specification shows 0.023)
  - 10-year US Treasury yields (percent): 0.152*** (other specifications: 0.092, 0.110, 0.076)
  - General government debt: 0.002, 0.002, -0.001 (not significant)
  - Primary balance: -0.016**, -0.012*, -0.012**
  - Interest payments to revenue: 0.027***, 0.026***, 0.029***
  - Foreign currency debt: 0.011**, 0.009*, 0.011**
  - Real GDP (y/y growth): -0.021***, -0.018***
  - Inflation (y/y average): 0.009***, 0.003
  - Government effectiveness (estimate): -0.388***
  - Political stability and absence of violence (estimate): -0.130***
  - Rule of law (estimate): -0.410***
- Model fit and sample:
  - R-squared values reported: 0.76, 0.76, 0.29, 0.32, 0.49
  - F-test values reported: 83.6, 83.6, 49.4, 50.5, 43.9
  - Observations: 963, 963, 980, 978, 918

### Interpretation and implications for the Dominican Republic
- Drivers of spreads (summary of empirical findings):
  - Higher primary balance and higher real GDP growth are associated with lower spreads.
  - Higher interest payments to revenue and higher foreign currency debt ratios increase spreads.
  - General government debt is not significant once debt-carrying capacity and composition are accounted for (e.g., interest payments to revenue; foreign currency debt).
  - Institutional quality indicators (WGI estimates) are highly significant and negative—better institutional quality leads to lower spreads.
- Quantified implications for the DR:
  - Institutions accounted for about one-third of the predicted EMBI spread for the DR between 2012 and 2019.
  - Institutions account for around 8 percent of predicted EMBI spreads since 2019.
  - Fiscal factors are the overall main driver of spreads, accounting on average for 69 percent of the predicted spreads between 2012–2022.
- Policy-relevant conclusions:
  - Further increasing fiscal revenues and reducing foreign currency debt could help reduce spreads and improve debt affordability.
  - Continued improvements in institutional quality (government effectiveness, rule of law, political stability) can materially lower sovereign borrowing costs.

*Source: Annex VII. Debt Affordability and Sovereign Spreads (excerpt).*

### 6. Similar estimates are obtained when using the EG tool.

### 1domea2024001-print-pdf - 6. Similar estimates are obtained when using the EG tool.

### Potential output gains from closing labor market gender gaps
- The EG tool estimates overall potential GDP gains of 15.3 percent of GDP from closing gender gaps in employment, hours, and pay.
- Decomposition of the 15.3 percent total:
  - 10.1 percentage points from reducing the employment rate gap.
  - 3.5 percentage points from reducing the working hours gap.
  - 1.7 percentage points from reducing the wage gap.
- Key labor-market differentials cited (2019):
  - Female employment rate: 48 percent; male employment rate: 75 percent.
  - Overall unemployment rate: female 8 percent versus male 4 percent.
  - Female unemployment by basic education: 10 percent versus male 4 percent (around 2.5 times higher).
  - Women work fewer hours than men in specific occupations: 10 hour less per week in trades and 9 hour less per week in sales.
- Heterogeneity across sectors: potential gains from sectoral reallocation can account for around one third of the overall potential gains.
- Equity gains associated with closing the unemployment gap are small per the EG methodology but likely represent a lower bound given data limitations in the informal sector.
- Methodological note: the EG tool uses a shift-share technique and assumes wages reflect the marginal product of labor. Counterfactual GDP is computed as 퐿퐿퐿퐿푃푃
  퐶퐶
  =
  ∑ ∑
  �퐿퐿
  퐹퐹
  푔푔
  ×푒푒
  푔푔
  �× s
  푔푔,표표
  ×ℎ
  푔푔,표표
  ×푤푤
  푔푔,표표표표푔푔
  , where l = {female, male}, o = {elementary, sales, trades}, 퐿퐿퐹퐹
  푔푔
  ×푒푒
  푔푔
  is the number of people employed by gender, s
  푔푔,표표
  is the gender share in each occupation, and ℎ
  푔푔,표표
  and 푤푤
  푔푔,표표
  are hours worked and hourly earnings by gender and occupation, respectively. The method computes total gains by assuming the floor of each labor market measure equals that of men.

### Early marriage and growth impacts
- Prevalence (DR, 2019):
  - Around 9 percent of women aged 20-24 were married before the age of 15.
  - 32 percent of girls are married before the age of 18.
- Estimated impact on real GDP per capita growth from reducing early marriage (following Mitra et al. (2020)):
  - 0.3 percent if early marriages fall to the average level in LAC.
  - 1.3 percent if early marriages are completely eliminated.
- The DR has the highest prevalence of early marriage in LAC, concentrated among poorer, less educated girls and in rural areas.

### Barriers to female labor force participation (FLFP) and policy priorities
- Key identified constraints on FLFP:
  - Higher rates of teenage pregnancy and early marriage.
  - Lower secondary education completion rates.
  - Home and care responsibilities.
  - Higher informality and lower wages for female employment.
  - Social norms and potential discrimination.
- National strategy: Plan Nacional de Igualdad y Equidad de Género 2020-2030 (PLANEG III) — objectives organized in seven themes: education, health, economic independence, political representation, gender inequality and the environment, gender violence, and technologies for woman independence.
- Policy recommendations and ongoing programs:
  - Increase secondary school completion to raise labor force participation and earnings.
  - Programs being implemented (diagnosed in PLANEGIII) include enforcement of Law 1-21 on child marriage, expansion of schooling programs (Aprende and Avanza), scaling-up life skills programs (Girls Club), extension of PRONAISA, introduction of Sexual and Reproductive Health education at all school levels, and the Cabinet for Children and Adolescents (GANA) created in 2020.
  - Enforcement and social-norms change are emphasized given that outlawing early marriage (since 2021) may be insufficient alone.
  - Expand access to care services to support women's ability to stay in the labor force and work more hours; pre-primary enrollment lags peers and the Extended School Day (JEE) program has had incomplete implementation.

### Education, unemployment and labor-market outcomes
- Female secondary school completion: described as higher than regional average historically but stagnated and partially reversed by COVID; current female secondary completion is around the median of the sample (ample room for improvement).
- Educational composition of employed labor force (selected findings):
  - The share of employed women with tertiary education is significantly higher than males.
  - The share of women with secondary education is slightly lower than males.
- Unemployment differentials by education level (2019):
  - Female overall unemployment: 8 percent; male overall unemployment: 4 percent.
  - Female unemployment with basic education: 10 percent; male: 4 percent.
  - Female unemployment at intermediate and advanced levels: around two times that observed among males.
- Policy implication: bringing more educated females into employment could increase productivity and wages if barriers such as discrimination and social norms are addressed.

### Quantified macroeconomic implications and conclusions
- Female labor market participation in the DR is 40 percent, about 70 percent of male labor market participation.
- Estimated macro gains:
  - Fully closing the gender gap in labor force participation could increase DR’s GDP by 17-19 percent.
  - Reducing early marriage could increase GDP per capita growth by 0.3-1.3 percent.
- Policy priorities to realize gains:
  - Continue efforts to reduce teenage pregnancy and early marriage.
  - Increase secondary school completion rates.
  - Expand care systems and incentivize formalization in the service sector.
  - Strengthen programs and enforcement under PLANEG III to shift social and gender norms and improve enforcement of legal changes.

### Fiscal Responsibility Law (FRL) — key features (Annex IX)
- Purpose: strengthen the medium-term fiscal framework (MTFF), increase credibility of consolidation plans, provide flexibility for shocks.
- Key elements:
  - Debt anchor: a debt ceiling on the General Government debt-to-GDP ratio of 40 percent, to be reached by December 31, 2035. (Art. 4)
  - Operational (expenditure) rule: during transition, GG primary expenditure growth constrained to 3 percent plus annual inflation; once the debt target is reached, primary expenditure (primary balance) calibrated annually to be consistent with not breaching the debt ceiling going forward. Public investment must be budgeted in line with the National Public Investment Plan and the expenditure ceiling. (Art. 5)
  - Modification of expenditure rule: expenditure ceiling may be adjusted in case of permanent, structural tax increases as long as primary spending remains consistent with the medium-term debt limit; MoF must present a report to Congress detailing the change. (Art. 5)
  - Escape clause (suspension triggers): Executive decree may suspend the rule for no longer than one budget cycle in case of (i) calamities resulting in emergency and increased expenditures of at least 0.3 percent of GDP; or (ii) economic recession (defined as negative growth in current year or a growth forecast of less than 1 percent). (Art. 10)
  - Correction mechanism: following a breach or suspension, time-bound adjustment within 3 years with at least 1/3 adjustment per year. (Art. 10)
- Reinforcements to MTFF and transparency:
  - Medium-term projections: annual MTFF to include fiscal projections for the following 4 years consistent with meeting the fiscal rule; in case of breach/suspension, MTFF must include a Correction Plan. (Art. 7, Art. 9)
  - Increased transparency: MoF to provide reports to Congress on compliance and fiscal risks alongside the budget; publish quarterly reports on spending, revenues and overall financing. (Art. 11, Art. 12)
  - Fiscal Responsibility Supervisory Committee: Executive may create a committee to supervise rule compliance and prepare an annual report on rule compliance. (Art. 13)

*Source: IMF staff calculations and analysis as presented in the supplied content unit.*

### 6. The FRL is broadly aligned with previous IMF recommendations. The debt ceiling of

### 6. The FRL is broadly aligned with previous IMF recommendations. The debt ceiling of

### Fiscal Rule Framework (FRL) assessment
- The debt ceiling of 40 percent of GDP constitutes a prudent debt anchor for the Dominican Republic that ensures that under varying shocks, debt would remain below a 70 percent of GDP threshold (for possible debt distress).
- The expenditure rule balances the trilemma of sustainability, stabilization and simplicity—without this balance, fiscal rules often fail to achieve their objectives.
- The escape clause and correction mechanism are well-defined.

*Prepared observations reference Annex IX of Country Report 22/217.*

### Annex X. BCRD Recapitalization — overview
- The BCRD’s recapitalization need is largely a legacy of the 2003 banking crisis and of the 2007 Recapitalization Law not achieving its objective.
- Government transfers since 2008 were made but the transfer levels envisaged in the 2007 law were not fully met; current transfer levels imply a long time until solvency can be achieved.
- Recent Fund TA recommended a faster recapitalization, ideally via marketable bonds, to increase the certainty of achieving solvency over a reasonable timeframe.
- Recapitalization via marketable bonds would entail higher CG debt and interest expense (and capital transfers in case of recapitalization via bonds)—these would need to be kept in line with the recently adopted fiscal rule.
- Potential benefits of debt issuance: a more liquid government securities market, a more robust yield curve and potentially lower borrowing rates.
- Operational benefit: the BCRD would be able to focus on managing short-term liquidity (maintaining interbank rates within the MPR corridor), reducing volatility in the money market and enhancing MPR transmission.

### A. Status of the Recapitalization and BCRD’s Balance Sheet at End 2022 — key statistics and observations
- Excess liquidity absorbed by BCRD securities: 14 percent of GDP in 2022.
- Recurring interest expense losses: 1.5 percent of GDP in 2022.
- Accumulated losses booked in non-interest earning accounts receivable from the government: 10 percent of GDP as of 2022.
- Components of BCRD Balance Sheet (DOP billion; as presented in chart):
  - Claims on financial intermediaries, 95
  - Equity, -60
  - Recapitalizations instruments, 132
  - Foreign currency deposits of financial institutions, 179
  - Other assets, 174
  - Domestic deposits of financial institutions, 207
  - Investments in international institutions, 306
  - Currency in circulation, 252
  - Foreign liquid assets, 403
  - Other liabilities, 287
  - Accounts receivable from Government, 625
  - Securities issued, 870
- Note: 2022 was the starting point used by the 2023 MCM TA mission.

- Historical recapitalization transfers and issuance:
  - A total of RD$132 billion in recapitalization bonds were issued to the BCRD between 2008-2014, whereas the 2007 recapitalization law had authorized up to RD$320 billion.
  - Transfers were cut to 0.2 percent of GDP during the COVID shock (only interest on the recap bonds was paid); transfers were increased to 0.6 percent of GDP since 2022.

- Central Bank quasi-fiscal indicators and trends (selected reported figures):
  - Quasi-fiscal deficit, after transfer: time series presented for 2006–2023 and projections 2024(p)–2029(p) with the stock of BCRD securities (RHS).
  - Breakdown of central bank income and expenses for 2017–2022 shows interest and operating components with highlighted figures (e.g., notable shares such as 68.9, 71.7, 71.8, 74.4, 79.9, 94.9 in income series; and 3.4, 6.0, 7.2, 7.8, etc., in expense series as shown in charts).

### B. Achieving Central Bank Policy Solvency — findings, projections, and recommendations
- Definition: Policy solvency is the state in which the CB can achieve its policy objectives while maintaining a sustainable equity trajectory—i.e., operational profits (realized earnings) exceed operational costs.
- 2023 MCM TA mission conclusions:
  - Current transfers of 0.6% GDP are insufficient to restore policy solvency within a decade—net income (including with continued government transfers) would only be positive by 2036.
  - Projections subject to high uncertainty (subject to annual budget appropriations given only a portion of this income is from the issued recapitalization bonds).
- Recommendations:
  - Transfers be increased to 0.9%/1% of GDP to achieve policy solvency (positive realized net income) by 2029 to reduce risks to the BCRD balance sheet.
  - Transfers be ideally increased via interest on (marketable) bonds issued directly to the BCRD—this would represent a more credible commitment, increasing certainty of achieving policy solvency by 2029 and reducing fragmentation of the public debt market.

- Effects of higher transfers:
  - Higher transfers (cash or interest) would reduce annual losses and accounts receivable.
  - Additional CG securities issuance required to cover increased deficit would equal the amount of increased transfers (0.3-0.4 percent of GDP), reducing BCRD securities issuance by an equivalent amount and marginally reducing public securities market fragmentation.
  - Amount of BCRD securities maturing over the medium-term: 4-6 percent of GDP per year. If CG securities replaced maturing BCRD securities, fragmentation could decline faster, potentially increasing liquidity of the CG securities market, allowing for a more robust Treasury yield curve and lower financing costs (from lower liquidity premiums).
  - Operational benefit: BCRD could focus on fine-tuning liquidity in the interbank market, improving monetary transmission and reducing BCRD interest expenses, which could further reduce accounts receivable and positively impact policy solvency.

- BCRD equity projections (DOP Billions) scenarios illustrated (series shown 2023–2034):
  - Baseline transfers: 0.6 percent GDP
  - Assumption 1: 1.0 percent GDP
  - Assumption 2: 0.9 percent GDP
  - Chart values show equity path from -24 to 62 to negative and then recovery across years as depicted.

*Prepared by Pamela Madrid and Cecilia Melo.*

### Annex XI. Natural Real Interest Rates in the Dominican Republic — headline results
- Range: Estimates point to a range of between 1 and 3 percent for the Dominican Republic’s real natural interest rate.
- Methods used: direct, univariate, and semi-structural methods (including Laubach and Williams (LW), UIP, Taylor-rule variants, FPAS, univariate filters, and LW augmented with international (US) spillovers).
- Data: Quarterly data from 2005 to 2023 for the Dominican Republic and the US (real GDP, inflation, monetary policy rates). Inflation expectations from Consensus Economics used to compute the observed real rate; FPAS uses model-consistent expectations.
- Central estimate (most recent estimates, averages across methods):
  - Univariate: 1.66 (most recent) ; 0.86 (historical) ; [0.39, 2.25] most recent range
  - UIP: 2.13 (most recent) ; 1.32 (historical) ; [1.16, 3.09] most recent range
  - Taylor rules: 1.75 (most recent) ; 0.86 (historical) ; [1.58, 1.95] most recent range
  - LW: 1.55 (most recent) ; 1.53 (historical) ; [0.40, 2.79] most recent range
  - LW augmented with International Spillovers: 1.88 (most recent) ; 1.83 (historical) ; [0.44, 2.92] most recent range
  - FPAS: 0.92 (most recent) ; 2.01 (historical)
- Synthesis:
  - Estimates suggest the current natural rate of interest is in the range of 0.9 and 2.1, clustered around 1¾ percent.
  - UIP estimates are the highest, largely driven by country risk premium estimates.
  - LW specifications suggest a cluster in the range of 1.5 to 2 percent.
  - FPAS provides the lowest estimate.
- Time pattern:
  - The natural rate slightly decreased since 2005, with a moderate increase since 2020.
  - LW specifications indicate the natural rate remains close to its historical average around 1.5 and 3 percent.
  - Median natural rate increased by around 50 basis points between 2020 and 2023 according to LW-based assessments.
- Policy stance:
  - Based on Consensus Forecasts and the Central Bank’s Monthly Survey, the real interest rate was 2.9 percent in December 2023, suggesting monetary policy was somewhat restrictive under all average estimates.
  - Semi-structural methods suggest the difference between the (median) natural rate and the ex-ante real rate of interest was around 100-150 basis points in December 2023 for most estimates, although higher for the FPAS model.

*Prepared by Diego Calderon.*

*International Monetary Fund — Dominican Republic (country report annexes).*

### 11. Direct methods are derived from the UIP condition. The UIP equation follows 1 +푆푆

### 11. Direct methods are derived from the UIP condition. The UIP equation follows 1 +푆푆

### UIP condition and risk-premium estimation
- UIP equation (as presented): 1 +푆푆푡푡UIP = (1 +푖푖푡푡푈푈푈푈/1 +휋휋푡푡+1푒푒)⋅(푒푒푡푡+1푒푒/ 푒푒푡푡)⋅�1 +휌휌푡푡푗푗�.
- Definitions in the equation:
  - 푖푖푡푡푈푈푈푈: US nominal interest rate.
  - 푒푒푡푡: nominal bilateral exchange rate (DOP/US).
  - 푒푒푡푡+1푒푒 and 휋휋푡푡+1푒푒: period t expectations for the nominal exchange rate and inflation in the following period.
  - 휌휌푡푡푗푗: estimate of the country risk premium according to method j = {퐺퐺푙푙퐹퐹푑푑, 푝푝푙푙푙푙푖푖퐹퐹푦푦, 퐿퐿퐿퐿}.
- Risk-premium estimation methods:
  - Bond estimates: from domestic and US bond yields data.
  - Policy estimates: 5-year rolling average computed directly from the UIP condition.
  - LW estimates: use the point-estimate for the natural rate in the US from the Federal Reserve Bank of New York based upon the LW methodology.

### Deposit Taking Institutions (DTIs): sector structure and soundness (key statistics)
- Banking sector size: represents 52 percent of GDP as of May 2024.
- Number of active DTIs: 46 (Commercial Banks 17; Savings and Loans Associations 10; Savings and Credit Banks 13; Credit Corporations 4; Public Financial Intermediation Entities 2).
- Total credit to the private sector: about 28 percent of GDP.
- Top-20 DTIs account for about 95 percent of all DTI assets.
- Concentration: 3 largest banks account for about 70 percent of DTI assets; 10 largest banks account for about 90 percent of DTI assets.
- Savings and Credit Cooperatives: estimated to represent less than 9 percent of all DTI assets.
- Asset composition (DTIs considered in stress test): credit 54.7 percent of assets; securities 25.1 percent of assets.
- Loan allocation: commercial lending 53 percent of total loans; consumer lending 24 percent; mortgages 18 percent.
- Dollarization of loan book: about 22 percent of total credit as of March 2024.
- Unhedged borrowers: 27 percent as of end March 2024 versus 33 percent in March 2023.
- Loan-to-value ratio: 40.8 percent.
- Solvency ratio (CAR) based on Basel I: 17.6 percent as of March 2024 (increasing from 16.1 percent in December 2023 due to retained earnings).
- Stressed NPL ratio (broadest definition): 6.2 percent as of March 2024 (peak 12.9 percent in May 2021).

### Solvency stress test: design and calibrated shocks
- Time horizon: one-year.
- Credit risk shock calibration:
  - Growth-at-risk scenario assumes a 4.4 percent drop in GDP, higher unemployment, and elevated interest rates.
  - Includes: (i) a conservative provisioning assumption; (ii) system-wide proportional increase in stressed NPL ratio from 6.2 percent to 11.4 percent; (iii) adverse classification of the largest exposure in each DTI’s loan portfolio.
  - Individual impacts on average CAR from these three credit shocks: -0.2, -1.0 and -0.8 percentage points respectively.
  - Combined credit shocks lower capital adequacy from 17.4 to 15.4 percent (for the subset reported).
- Interest rate risk shock:
  - Assumes an increase of 200 basis points.
  - Channels affected: (i) interest rate margin (gap between interest sensitive assets and liabilities); (ii) repricing of all securities at mark-to-market (MtM); (iii) stock impact from securities repricing.
  - Simulated net interest income (+0.2 percentage points) and valuation losses on sovereign bond holdings (-3.2 percentage points) on CAR.
  - Combined interest rate risk shocks lower capital adequacy from 17.4 to 14.4 percent.
- FX risk shock:
  - Assumes a 20 percent nominal depreciation of the bilateral exchange rate with the US dollar.
  - Direct FX impact on capitalization: -0.7 percentage points.
- Note on securities valuation: all securities classified as tradable and valued MtM for the exercise (conservative assumption versus IFRS segmentation into MtM and HtM).

### Solvency stress test: combined results and fiscal buffers
- Combined effect of credit, interest rate, and FX shocks (including profits mitigation):
  - Pre-shock CAR (Top 20 DTIs): 17.4 percent.
  - Post-shock CAR (Top 20 DTIs): 12.8 percent.
  - CAR change: -4.6 percentage points.
  - Recapitalization need: <0.3 percent of GDP.
- Contingency and Bank Consolidation Funds:
  - Consolidated balances up to USD 1,155 million (sum of funds).
  - As of April 2024: Contingency Fund USD 434.2 million; Bank Consolidation Fund USD 722.5 million.
  - These consolidated balances exceed by three times the amount estimated through the stress test.
- Implication: banking sector expected to remain above the 10 percent minimum regulatory CAR after severe combined shocks; recapitalization needs would remain extremely limited.

### Drivers of potential growth: methodology and findings
- Methodology: Production Function Approach (PFA) with a Cobb-Douglas production function; labor share 훼 = 65 percent.
  - Potential output (log) ynp = 훼∗ep + 훼∗lp + (1− 훼)∗k where lp is potential labor input and k is log observed capital stock (assumed fully utilized).
  - Potential labor input disaggregated into Working Age Population (WAP), Labor Force Participation Rate (LFPR), and employment rate (1 − broad unemployment rate UNR).
  - Potential WAP estimated as Hodrick-Prescott trend of historical data plus five years of forecasted growth from the Office of National Statistics (ONE).
  - Potential unemployment rate (NAIRU) estimated by a multivariate filter (MVF).
  - Labor efficiency and LFPR cyclically adjusted prior to filtering following Chalaux and Guillemette (2019).
- Estimated potential output growth: around 5 percent (Figure 1 shows potential output growth reaching 5 percent in 2027 after a significant drop in 2020).
- Main drivers of potential growth:
  - Labor efficiency and employment are the main contributors.
  - Employment growth sustained by increasing LFPR; staff project LFPR contribution to match rates observed between 2010 and 2019 (assumed feasible if recent improvements in female market labor participation continue).
- Demographics and contributions:
  - Population growth slowdown: preliminary Census 2022 results point to reduction from 1.21 percent in 2010 to 1.11 percent in 2022.
  - Population ageing: population over 60 years old represented 8.6 percent in 2010 and 13.3 percent in 2022.
  - Projected contribution from WAP to employment growth shows slight decline; potential contribution from lower unemployment expected to gradually close as gap to NAIRU narrows.
- Capital stock contribution:
  - Small reduction in the contribution from the capital stock to potential GDP growth.
  - Capital projected using IMF staff forecasts of real gross fixed capital formation with depreciation computed using a quadratic estimation.
  - Given ongoing structural reforms, current projections considered conservative with upside risks from expected FDI.

*DOMINICAN REPUBLIC  INTERNATIONAL MONETARY FUND*

### Annex XIV. Data Issues

### Annex XIV. Data Issues

### Data Adequacy Assessment for Surveillance
- Overall judgment: The data provided to the Fund is adequate for surveillance.
- Sectoral assessments (as reported in the questionnaire heatmap):
  - National Accounts: B A B B B B B
  - Prices: Coverage B A B B A; Consistency B B; Frequency and Timeliness A A A C B
  - Government Finance Statistics: Granularity (operations / public debt) top cell shown; Coverage B B A B A; Consistency B B A; Frequency and Timeliness C
  - External Sector Statistics: Coverage B B; Consistency B B; Frequency and Timeliness A
  - Monetary and Financial Statistics: Granularity top/bottom cells shown; Coverage B B; Consistency B; Frequency and Timeliness A
  - Inter-sectoral Consistency: Median Rating B
- Data Quality Characteristics summary:
  - Granularity 3/ noted for government finance statistics and monetary and financial B26.
  - Questionnaire-based assessments follow standardized scoring (see IMF Review of the Framework for Data Adequacy Assessment for Surveillance, January 2024, Appendix I).

### Changes since the last Article IV consultation
- Since November 2018:
  - Authorities are working (with help from STA and CAPTAC-DR) on the rebase of the national accounts and expect to complete the rebasing to 2018 during the second half of 2024.
  - Government statistics (above and below the line) have been published based on GFSM 2014.
  - Authorities are working with STA on steps required to adhere to SDDS.
- Participation/coverage:
  - Dominican Republic participates in the Enhanced General Data Dissemination System (e-GDDS) and publishes the data on its National Summary Data Page since February 2019.

### Data Gaps, Shortcomings, and Rationale for Staff Assessment
- Timeliness and frequency issues:
  - Monthly external trade data are only released every three months as a whole quarter.
  - Quarterly external sector accounts data are published four months after the end of the quarter.
  - Improving timeliness of monthly external trade and quarterly external sector accounts data would further support surveillance.
- National accounts:
  - Base year currently based on 2007; rebasing to 2018 is underway (see Changes since the last Article IV consultation).
- External sector coverage gaps:
  - Some coverage gaps in recording of nonfinancial private sector transactions in the financial account of the BOP, particularly related to private sector external debt transactions and positions which also impact IIP statistics.
- Government finance coverage:
  - Aggregate and consolidated data are available for the central government.
  - Balance of the Rest of the Non-Financial Public Sector is estimated only from the financing side; above-the-line data coverage on local governments and some non-central government entities is incomplete and not timely.
- Financial Soundness Indicators (FSIs) and other financial data:
  - Dominican Republic participates in the IMF’s Financial Soundness Indicators (FSIs) database with comprehensive data for the banking system and for individual banks and very good coverage of core FSIs.
  - FSIs on non-financial corporates and households are not available.
  - Data on real estate markets is lacking.
- Overall note:
  - Data provided to the Fund has some shortcomings that somewhat hamper surveillance, but are judged broadly adequate for macroeconomic and financial analyses.

### Corrective Actions and Capacity Development Priorities
- Requests by country team to authorities:
  - Publish external sector statistics (monthly and quarterly) more timely.
  - Provide FSIs to the Fund.
- Technical assistance and capacity development:
  - Authorities have been receiving CD from STA and CAPTAC-DR (Annex III) on various issues including on rebasing the national accounts to 2018 and expanding coverage and timeliness of their public sector.

### Table of Common Indicators Required for Surveillance — Data Provision and Timeliness (selected points)
- As of July 22, 2024: table entries list Date of Latest Observation, Date Received, Frequency of Data, Frequency of Reporting, Expected Frequency, Expected Timeliness for a range of indicators including:
  - Exchange Rates
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities 1/
  - Reserve/Base Money
  - Broad Money
  - Central Bank Balance Sheet 5 (including currency and maturity composition)
  - Consolidated Balance Sheet of the Banking System
  - Interest Rates 2 (both market-based and officially determined)
  - Consumer Price Index
  - Revenue, Expenditure, Balance and Composition of Financing 3 — General Government 4
  - Revenue, Expenditure, Balance and Composition of Financing 3 — Central Government
  - International Investment Position
  - Stocks of Central Government and Central Government-Guaranteed Debt 5
  - External Current Account Balance
  - Exports and Imports of Goods and Services
  - GDP/GNP
  - Gross External Debt
- Frequency and timeliness codes explained in table notes:
  - (“D”) daily; (“W”) weekly or with a lag of no more than one week after the reference date; (“M”) monthly or with lag of no more than one month after the reference date; (“Q”) quarterly or with lag of no more than one quarter after the reference date; (“A”) annual.; ("SA") semiannual; ("I") irregular; ("NA") not available or not applicable; and ("NLT") not later than.
- Footnotes from the table:
  - 1 Includes reserve assets pledged or otherwise encumbered, as well as net derivative positions.
  - 2 Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
  - 3 Foreign, domestic bank, and domestic nonbank financing.
  - 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
  - 7 Encouraged frequency and timeliness under the e-GDDS and required frequency and timeliness under the SDDS and SDDS Plus. Flexibility options or transition plans used under the SDDS or SDDS Plus are not reflected.

### Data Provision to the Fund and Main Data Sources
- Data provision status: As of July 22, 2024, entries documented in the Table of Common Indicators (see Table 3).
- Main websites of data providers:
  - Central Bank of the Dominican Republic: https://www.bancentral.gov.do/ (national accounts; CPI; Monthly Indicator of Economic Activity (IMAE); balance of payments; international reserves; interest rates; monetary and financial indicators; tourism statistics; labor and employment; exchange rates)
  - Ministry of Finance: https://www.hacienda.gob.do/ (fiscal accounts; central government budget)
  - Ministry of Economy, Planning and Development: https://mepyd.gob.do/ (household income and expenditure survey; poverty and inequality; construction sector statistics)
  - Public Debt Office of the Treasury: https://www.creditopublico.gob.do/ (public debt)
  - Superintendency of Banks: https://sb.gob.do/ (banks balance sheets and income statements; Financial Soundness Indicators)
  - National Statistics Office: https://www.one.gob.do/ (population and social indicators; Producer price index)

*Source: 1domea2024001-print-pdf - Annex XIV. Data Issues*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1domea2024001-print-pdf.pdf_