## _cr04144

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---

### Recent developments
- Political
  - Sudden death of Prime Minister Charles on January 6, 2004; Parliament appointed Mr. Roosevelt Skerrit as new prime minister.
  - Only marginal cabinet changes; national elections expected by January 2005.
  - Prime Minister Skerrit reiterated commitment to the program in the attached letter of intent.
- Macroeconomic conditions and outlook
  - After an economic contraction of almost 10 percent in 2001–02, the economic decline appears to have ended.
  - Real GDP was flat in 2003 (the revised program for 2003 assumed real GDP could fall by 1–3 percent).
  - Signs of modest recovery in manufacturing, construction, and tourism; banana sector production lower.
  - Buoyant tax collections and rapid import growth; exports (except for bananas) beginning to rebound.
  - Credit to the private sector continues to contract, though at a slower rate.
- Inflation
  - Inflation rose from ½ percent in 2002 to just under 3 percent in 2003.
  - Main causes: tax measures in the 2003/04 budget and electricity tariff adjustment in August 2003 (following elimination of duty-free concessions to the electricity company).
- Program performance and external support
  - Performance under the program strengthened since modification of the Stand-By Arrangement (SBA) in July 2003.
  - All performance criteria under the PRGF-supported program for end-December 2003 were observed; overall fiscal target observed with large margins.
  - Overall fiscal position roughly in balance in the second half of 2003.
  - External disbursements and commitments (US$ millions): IMF: 5.6 / 4.7 / 0.9; Barbados 2/: 4.7 / 4.7 / --; Trinidad and Tobago 2/: 4.0 / 4.0 / --; European Union: 3.3 / 3.3 / --; World Bank: 3.0 / 3.0 / --; CDB: 3.0 / 2.0 / 1.0; Bahamas: 1.5 / 1.5 / --; ECCB: 1.0 / 1.0 / --; Total: 26.1 / 24.2 / 1.9.
  - Note: 1/ Preliminary as of end-January 2004. 2/ Bond roll over.
- Market and banking reaction
  - Deposits stable domestically; no pressures on domestic banks.
  - Regionally, no evidence of financial turbulence related to debt strategy announcement.
  - Some creditors disappointed but recognize unsustainable debt situation; acknowledgements of transparency and inter-creditor equity in Dominica’s approach.

### Policy discussions — overall assessment and macro framework
- Overall assessment
  - Broad agreement program is achieving goals; authorities committed to program and medium-term objectives of restoring growth and sustainability.
  - Authorities expect unemployment-related poverty to decline with economic recovery.
- Macroeconomic framework
  - Authorities consider it premature to change macroeconomic framework despite stronger-than-envisaged performance.
  - Agreement that price adjustments since August 2003 had temporary impact on measured inflation; inflation objective of 1½ percent for 2004 remains feasible.
- Selected macro indicators (SBAPRGF Prog. 1/Est.Prog., 2002–2004)
  - GDP growth: -4.7 (2002); -1 to -3 (2003); 0.0 (2003 Est.); 1.0 (2004 Prog.)
  - Inflation: 0.5 (2002); 0.5 (2003); 2.9 (2003 Est.); 1.5 (2004 Prog.)
  - Current account/GDP: -15.0 (2002); -15.1 (2003); -16.9 (2003 Est.); -15.4 (2004 Prog.)
  - Structural primary balance (percent of GDP, fiscal year): -4.5 (2002); -3.0 (2003); -2.0 (2003 Est.); 0.5 (2004 Prog.)
  - Overall fiscal balance (percent of GDP, fiscal year): -7.1 (2002); -7.7 (2003); -5.5 (2003 Est.); -5.5 (2004 Prog.)
  - Public debt (NFPS): 111.5 (2002); 113.6 (2003); 114.6 (2003 Est.)

### Fiscal policy — findings, risks, and near-term outlook
- End-2003 fiscal overperformance
  - Attributed to higher-than-anticipated revenues (including tax arrears collection) and temporary expenditure compression.
  - Staff estimates for FY 2003/04: there will be a small primary surplus, consistent with the program.
  - For the first half of 2004 fiscal targets remain comfortably feasible though margins likely to narrow.
- Key revenue risks
  - Significant collection of tax arrears cannot be sustained as the stock of tax arrears has declined to low levels.
  - Projected gains in nontax revenues may not materialize due to dispute with the largest telephone company over license fees after telecommunications liberalization.
- Key expenditure risks
  - Budgetary sequestration on goods and services produced temporary savings; legally authorized expenditure limits likely to be used once allocations assigned to spending units.
- 2004/05 budget stance
  - Authorities reaffirm commitment to a primary surplus of ½ percent of GDP.
  - Budget expected to be submitted to parliament in mid-June.
  - Agreed fiscal measures amount to 2½ percent of GDP.
  - Program adjustor for up to 1 percent of GDP for investment outlays will no longer apply after June 2004.

### Tax exemptions — performance, findings, and actions
- Performance and institutional issues
  - Progress in reducing tax exemptions in line with program, but mechanisms for granting exemptions need improvement despite creation of a committee to oversee approvals.
  - Distinction between discretionary and statutory tax exemptions sometimes blurred; committee recommendations against exemptions were in several cases legally challenged and reversed.
  - Authorities to present solutions in the comprehensive review of discretionary and statutory tax exemptions expected by June (benchmark under the program).
  - Note: only a few discretionary tax exemptions were given under the narrow program definitions (see Technical Memorandum of Understanding, IMF Country Report No. 04/6); measure adopted in December 2003 to comply with prior action for PRGF approval.
- Box 1 — findings and fiscal impact
  - Average effective tax rate on consumption of non-oil products (ratio of revenues to consumption) was about 6 percent over the last three years, vs statutory consumption tax rate of 25 percent.
  - Revenue loss from indirect tax concessions at the border estimated at 5 percent of GDP (equivalent to about 30 percent of tax revenue collected on international transactions).
  - Revenue foregone from concessions under the Fiscal Incentives Act (consumption tax, import duties, other border taxes) comprised 1.4 percent of GDP in 2003.
  - Exemptions are scattered across over 10 different pieces of legislation; entitlement often requires minister or cabinet approval, complicating administration and monitoring.
  - Administrative challenges: Ministry of Finance reviews about 40 applications for tax exemptions every month; few staff are fully familiar with relevant legislation; NDC rarely follows up on exemptions and enforcement of income statement submissions by enterprises with tax holidays is weak.

### Monetary and financial sector issues
- Monetary conditions and policy
  - Liquidity in banking system remains abundant; needs close monitoring.
  - Role of government on monetary policy limited within currency union.
  - Authorities support FSAP recommendations to strengthen ECCB’s regulatory and enforcement powers.
  - Deposits growing; liquidity ample as credit demand weak; higher deposits invested abroad, increasing banks’ net foreign asset position.
  - Banking system capital not expected to be eroded by the debt restructuring.
  - Authorities see scope for ECCB to ease its minimum deposit rate to facilitate recovery and reduce capital inflows; current ECCB minimum deposit rate creates a floor on interest rates amid historically low U.S. rates, creating positive spread that encourages capital inflows and may create a recessive bias.
- FSAP principal findings (Box 2 — financial sector)
  - Commercial banks
    - “An unacceptably high” level of nonperforming loans; weakest banks (on ECCB’s watch list) account for approximately 41 percent of banking assets.
    - Quality of capital uncertain due to under provisioning of nonperforming loans, recording of accrued interest on government loans in arrears as income, and assignment of zero risk weights to public sector loans in arrears.
    - Weaknesses in regulatory and supervisory framework; need to strengthen ECCB on- and off-site monitoring and supervisory enforcement powers.
  - NBFI and offshore banks
    - Supervision of NBFIs currently responsibility of individual registrars of cooperatives; supervisory framework lacks harmonization.
    - Offshore banks regulated by individual ministries of finance; effective regulation hampered by data constraints and weak inspection programs.
  - Main FSAP recommendations
    - ECCB priorities: reprioritize resources to focus on regulation and supervision of domestic banks, develop structured supervision tailored to institutional risk, strengthen prudential regulations (set minimum capital commensurate with risks; revise guidelines on accrual of interest; provide regulations on market risk), mitigate union-wide risks posed by government bank borrowing by assigning risk-weights and requiring provisioning on nonperforming government debts, and strengthen early warning systems and an operational crisis contingency framework.
    - Regulatory architecture refinements: proposal to establish a Single Regulatory Unit within each country to supervise NBFIs and offshore banks (except large institutions of potential systemic importance); strengthen insurance regulation via increased cross-border regulatory cooperation.
    - Example of a large institution: Roseau Co-operative Credit Union in Dominica, with assets of approximately EC$170 million.

### External issues, debt restructuring, and program financing
- Financing and debt strategy
  - Program financing assurances hinge on successful comprehensive debt restructuring.
  - Staff estimates enough resources to cover financing needs through late-March or early-April; residual financing gap of US$21 million for the rest of 2004 expected to be covered by debt restructuring (IMF Country Report No. 04/6).
  - Authorities expect to finalize consensual debt restructuring by early-April while servicing obligations in the interim.
  - Debt restructuring process progressing: roadshow January 19–23; options to creditors in mid-March with aim of finalizing by early-April; contacts with Paris Club Secretariat and preliminary contacts with the United Kingdom and France.
  - Staff did not include a debt sustainability scenario in this report because debt negotiations not concluded; staff concurs debt situation is not sustainable (IMF Country Report No. 04/6). Significant debt reduction in net present value terms likely required; staff will present debt sustainability analysis once restructuring terms are known.
- Debt burden and composition (end-December 2003)
  - Nonfinancial public sector debt (gross): EC$829.2 / US$292.4 / 114.6% of GDP / Share of Total Debt: 100.0.
  - Domestic debt: EC$182.4 / US$67.5 / 26.5% of GDP / Share of Total Debt: 22.0.
  - External debt: EC$646.8 / US$224.9 / 88.1% of GDP / Share of Total Debt: 78.0.
  - External debt composition (end-2003): Multilateral EC$309.4 (CDB EC$192.5; World Bank EC$71.8; IMF EC$20.0); Bilateral EC$138.8 (France EC$31.1; Taiwan EC$32.1; United Kingdom EC$27.6; Others EC$48.1); Commercial EC$182.4 (Citicorp EC$45.5; Royal Merchant Bank EC$82.6).
- Program financing and IMF arrangements
  - Schedule of Purchases under SBA and PRGF (U.S.$ millions and percent of quota): Total purchases: US$15.46 / SDR10.66 / 130.0 percent of quota.
  - SBA component: US$4.31 / SDR2.97 / 36.3 percent of quota.
  - PRGF component: US$11.15 / SDR7.69 / 93.8 percent of quota.
  - Quota (in millions): 11.89 / 8.20 / 100.0 percent.
  - PRGF review: IMF Executive Board completed the first review under the SDR 7.69 million PRGF arrangement for Dominica on March 24, 2004; completion makes SDR 308,000 immediately available and would bring total disbursements under the arrangement to SDR 2.67 million.

### Structural reform agenda, technical assistance, and conditionality
- Overview and coordination
  - The reform agenda is heavy and requires significant technical assistance, primarily on fiscal issues.
  - A donors’ meeting in Roseau on February 5 was held to coordinate technical assistance across agencies.
  - Donors acknowledged the agenda is ambitious though the number of benchmarks was low; providing assistance on short notice will be difficult.
  - Authorities appointed an official to coordinate assistance and liaise with aid agencies.
- Consolidated reform areas, benchmarks, and lead assistance
  - 1. Public Sector Reform — Benchmark (March) — Reduce wage bill 10% in two years; EU; WB.
    - Objective: Reduce the wage bill by 10 percent in nominal terms over the next two fiscal years (through labor retrenchment).
    - Timing: Reform needs to be ready by June 2004 to be implemented with the 2004/05 budget.
    - Benchmark: Conduct a study by end-March 2004 outlining the process to achieve a 5 percent reduction in the wage bill for 2004/05.
    - Assistance: EU financing two resident experts and providing a grant of US$8 million to finance severance packages; World Bank and DFID providing technical assistance and coordination support.
  - 2. Tax Policy — Benchmark (June) — Rationalize tax exemptions; IMF; EU.
    - Objective: Rationalize tax exemptions and incentives to broaden the tax base.
    - Benchmark: Conduct a review of all statutory and discretionary tax exemptions by end-June 2004.
  - 3. Pension Reform — Benchmark (June) — Increase retirement age for public servants to 60 years; IMF; UNDP; CARTAC.
    - Objective: Review the financial position of the social security system and increase the retirement age of civil servants from 55 to 60 years.
    - Benchmark: Submit legislation to parliament to increase retirement age by end-June 2004.
  - 4. Tax System — Benchmark (September) — Introduce the VAT by FY 2005/06; CARTAC; IMF.
    - Objective: Preparatory work for introduction of the VAT by FY 2005/06.
    - Benchmark: Approval by cabinet of key parameters for the VAT by end-September 2004.
  - 5. Budgetary Procedures — Performance Criterion (July) — Budget consistent with program and 3-year budget; DFID; CIDA; CARTAC.
    - Structural performance criterion: Approval of a 2004/05 budget consistent with the program by end-July 2004.
  - 6. Fiscal Responsibility Law — Measure — Guide fiscal policy over business cycle; IMF; CARTAC.
    - FRL initially scheduled for 2005/06 but advanced to 2004/05 to increase credibility for the debt deal and reduce political uncertainty.
  - 7. Institutional Strengthening — Benchmark (September) — Improve framework for electricity sector; World Bank.
    - Objective: Improve the regulatory framework for electricity supply.
    - Benchmark: Adoption of amendments to the regulatory framework by end-September 2004.
- Staff appraisal: priorities and risks
  - Performance to date: Program had a good start with continued strong performance following modification of the SBA in July 2003; all performance criteria and benchmarks observed since then.
  - Key priorities: Implementation of the debt strategy; continuation of fiscal consolidation (primary surplus of ½ percent of GDP for 2004/05 and primary surplus of 3 percent of GDP by 2006/07); public sector reform; prioritization and timely, coordinated technical assistance.
  - Risks: Financing assurances at risk if debt restructuring not completed; political uncertainty (possible elections in January 2005); legal challenges to prior measures; capacity constraints risking nonimplementation.
  - Staff recommendation: Given strong performance and observance of performance criteria, staff supports completion of the first review and the financing assurances review under the PRGF and disbursement of the second loan under the PRGF.

### Selected macroeconomic and fiscal statistics (as presented)
- Real GDP (factor cost): 2000: 1.4; 2001: -4.2; 2002: -4.7; 2003: 0.0; 2004 Prog: 1.0.
- Consumer prices (end of period): 2000: 1.1; 2001: 1.9; 2002: 0.5; 2003: 2.5; 2004 projection: 2.9; medium-term: 1.5.
- Broad money (M2) annual percent changes: 2000: 0.6; 2001: 7.4; 2002: 8.5; 2003: 3.0; 2004 projection: 1.0.
- Total revenue and grants (EC$ millions): FY2000/01: 271.5; 2001/02: 209.7; 2002/03: 224.1; 2003/04 (Proj/Rev): 237.2/237.8/233.8/234.8.
- Wages and salaries (EC$ millions): 2000/01: 116.2; 2001/02: 116.5; 2002/03: 116.1; 2003/04 projections: 108.6–103.2.
- Capital expenditure and net lending (EC$ millions): 2000/01: 120.2; 2001/02: 39.6; 2002/03: 34.7; 2003/04 projections: 48.6–57.8.
- Overall balance (EC$ millions): 2000/01: -78.8; 2001/02: -59.5; 2002/03: -37.2; FY2003/04 overall balance: around -39.2 to -39.7.
- Nonfinancial public sector debt (gross): 2000: 87.4; 2001: 95.4; 2002: 111.5; 2003: 114.7; 2004 projection: 114.7.

### External sector and balance of payments (selected)
- Merchandise exports, f.o.b. (U.S.$ millions): 2000: 54.7; 2001: 44.4; 2002: 42.8; 2003: 40.0; 2004 projection: 41.1; revision: 41.2.
- Merchandise imports, f.o.b. (U.S.$ millions): 2000: 130.4; 2001: 115.3; 2002: 101.4; 2003: 106.4; 2004 projection: 111.5; 2003 revision: 112.5.
- Current account balance (U.S.$ millions): 2000: -52.5; 2001: -47.6; 2002: -37.0; 2003 projection: -42.1; 2003 revision: -42.8; 2004 projection: -39.1.
- Net international reserves (U.S.$ millions; end-of-period, imputed at ECCB): 29.0; 30.4; 33.6; 45.1; 45.1; 45.4.

### Relations with multilateral partners and donor support
- CDB
  - CDB approved loans and grants for Dominica totaling approximately US$140.1 million; US$136.5 million represented loans aimed at boosting real sector activity and infrastructure.
  - Dominica: cumulative total credit approved (US$ millions): 1999: 96.21; 2000: 113.20; 2001: 118.63; 2002: 128.01; 2003: 136.18.
  - Outstanding debt to CDB (US$ millions): 1999: 44.69; 2000: 51.41; 2001: 60.39; 2002: 65.02; 2003: 71.50.
- World Bank
  - Bank-Fund collaboration areas: financial sector, medium-term structural reform agenda, and technical assistance jointly with CARTAC.
  - Ongoing projects (total commitments approximately US$7.5 million): OECS Telecommunications Reform Program (loan US$6.0 million; Dominica’s share US$1.2 million); OECS Emergency Recovery Project — World Bank assistance US$21 million for sub-regional program, including US$3.2 million for Dominica.
  - Upcoming: Economic Recovery Support Operation — adjustment operation for US$3.1 million; approved January 29, 2004.

### Staff and Executive Director statements (key points)
- IMF Deputy Managing Director Agustín Carstens emphasized: inflation remains low; need to persevere with fiscal consolidation, implement comprehensive reform agenda, and restructure external debt to restore sustainable growth; fiscal sustainability requires downsizing the civil service, rationalizing the pension system, streamlining tax exemptions, introducing the value added tax, implementing the Fiscal Responsibility Law, and improving the budgetary framework.
- Executive Director statement (March 24, 2004): Dominica’s debt burden nearly 115 percent of GDP and assessed as unsustainable; overriding immediate-term priority is to decisively resolve the debt overhang problem; exchange offer to private creditors to be made shortly; authorities hopeful a comprehensive debt deal can be finalized by mid April but recognize risk that agreement may fall short of restoring sustainability.
- Government letter (March 8, 2004): economic decline appears arrested and incipient recovery underway; tax collections stronger than anticipated; all performance criteria for end-December 2003 under the PRGF-supported program have been observed; request completion of the first review under the PRGF.

*Source: _cr04144 - IMF Country Report excerpt and associated staff material.*

### 1.     Tax     Exemptions ..............................................................................................

### _cr04144 - 1.     Tax     Exemptions ..............................................................................................

### Recent Developments
- Political:
  - Sudden death of Prime Minister Charles on January 6, 2004; Parliament appointed Mr. Roosevelt Skerrit as new prime minister.
  - Only marginal cabinet changes; national elections expected by January 2005.
  - Prime Minister Skerrit reiterated commitment to the program in the attached letter of intent.

- Macroeconomic conditions and outlook:
  - After an economic contraction of almost 10 percent in 2001–02, the economic decline appears to have ended.
  - Real GDP was flat in 2003 (the revised program for 2003 assumed real GDP could fall by 1–3 percent).
  - Signs of modest recovery in manufacturing, construction, and tourism; banana sector production lower.
  - Buoyant tax collections and rapid import growth; exports (except for bananas) beginning to rebound.
  - Credit to the private sector continues to contract, though at a slower rate.

- Inflation:
  - Inflation rose from ½ percent in 2002 to just under 3 percent in 2003.
  - Main causes: tax measures in the 2003/04 budget and electricity tariff adjustment in August 2003 (following elimination of duty-free concessions to the electricity company).

- Program performance and external support:
  - Performance under the program strengthened since modification of the Stand-By Arrangement (SBA) in July 2003.
  - All performance criteria under the PRGF-supported program for end-December 2003 were observed; overall fiscal target observed with large margins.
  - Overall fiscal position roughly in balance in the second half of 2003.
  - Approval of the PRGF catalyzed significant external resources: EU disbursed about US$1 million; CDB disbursed US$1 million; World Bank approved ERSO loan on January 29, 2004; Fund to make available US$0.5 million upon completion of this review.
  - Debt restructuring process progressing: roadshow January 19–23; options to creditors in mid-March with aim of finalizing by early-April; contacts with Paris Club Secretariat and preliminary contacts with the United Kingdom and France.

- Market and banking reaction:
  - Deposits stable domestically; no pressures on domestic banks.
  - Regionally, no evidence of financial turbulence related to debt strategy announcement.
  - Some creditors disappointed but recognize unsustainable debt situation; acknowledgements of transparency and inter-creditor equity in Dominica’s approach.

- External support table (Committed / Disbursed / Balance) — in millions of U.S. dollars:
  - IMF: 5.6 / 4.7 / 0.9
  - Barbados 2/: 4.7 / 4.7 / --
  - Trinidad and Tobago 2/: 4.0 / 4.0 / --
  - European Union: 3.3 / 3.3 / --
  - World Bank: 3.0 / 3.0 / --
  - CDB: 3.0 / 2.0 / 1.0
  - Bahamas: 1.5 / 1.5 / --
  - ECCB: 1.0 / 1.0 / --
  - Total: 26.1 / 24.2 / 1.9
  - Note: 1/ Preliminary as of end-January 2004. 2/ Bond roll over.

- Macroeconomic framework (selected indicators, SBAPRGF Prog. 1/Est.Prog., 2002–2004):
  - GDP growth: -4.7 (2002); -1 to -3 (2003); 0.0 (2003 Est.); 1.0 (2004 Prog.)
  - Inflation: 0.5 (2002); 0.5 (2003); 2.9 (2003 Est.); 1.5 (2004 Prog.)
  - Current account/GDP: -15.0 (2002); -15.1 (2003); -16.9 (2003 Est.); -15.4 (2004 Prog.)
  - Structural primary balance (percent of GDP, fiscal year): -4.5 (2002); -3.0 (2003); -2.0 (2003 Est.); 0.5 (2004 Prog.)
  - Overall fiscal balance (percent of GDP, fiscal year): -7.1 (2002); -7.7 (2003); -5.5 (2003 Est.); -5.5 (2004 Prog.)
  - Public debt (NFPS): 111.5 (2002); 113.6 (2003); 114.6 (2003 Est.) ; ...

### Policy Discussions

- Overall assessment:
  - Broad agreement program is achieving goals; authorities committed to program and medium-term objectives of restoring growth and sustainability.
  - Authorities expect unemployment-related poverty to decline with economic recovery.

- A. Macroeconomic Framework
  - Authorities consider it premature to change macroeconomic framework despite stronger-than-envisaged performance.
  - Agreement that price adjustments since August 2003 had temporary impact on measured inflation; inflation objective of 1½ percent for 2004 remains feasible.

- B. Fiscal Policy — findings and near-term outlook
  - End-2003 fiscal overperformance attributed to higher-than-anticipated revenues (including tax arrears collection) and temporary expenditure compression.
  - Staff estimates for FY 2003/04: there will be a small primary surplus, consistent with the program.
  - For the first half of 2004 fiscal targets remain comfortably feasible though margins likely to narrow.
  - Key revenue risks:
    - Significant collection of tax arrears cannot be sustained as the stock of tax arrears has declined to low levels.
    - Projected gains in nontax revenues may not materialize due to dispute with the largest telephone company over license fees after telecommunications liberalization.
  - Key expenditure risks:
    - Budgetary sequestration on goods and services produced temporary savings; legally authorized expenditure limits likely to be used once allocations assigned to spending units.
  - 2004/05 budget:
    - Authorities reaffirm commitment to a primary surplus of ½ percent of GDP.
    - Budget expected to be submitted to parliament in mid-June.
    - Agreed fiscal measures amount to 2½ percent of GDP.
    - Program adjustor for up to 1 percent of GDP for investment outlays will no longer apply after June 2004.

- B. Tax exemptions — performance and actions
  - Progress in reducing tax exemptions in line with program, but mechanisms for granting exemptions need improvement despite creation of a committee to oversee approvals.
  - Distinction between discretionary and statutory tax exemptions sometimes blurred; committee recommendations against exemptions were in several cases legally challenged and reversed.
  - Authorities to present solutions in the comprehensive review of discretionary and statutory tax exemptions expected by June (benchmark under the program).
  - Note: only a few discretionary tax exemptions were given under the narrow program definitions (see Technical Memorandum of Understanding, IMF Country Report No. 04/6); measure adopted in December 2003 to comply with prior action for PRGF approval.

- C. Monetary issues
  - Liquidity in banking system remains abundant; needs close monitoring.
  - Role of government on monetary policy limited within currency union.
  - Authorities support FSAP recommendations to strengthen ECCB’s regulatory and enforcement powers.
  - Deposits growing; liquidity ample as credit demand weak; higher deposits invested abroad, increasing banks’ net foreign asset position.
  - Banking system capital not expected to be eroded by the debt restructuring.
  - Authorities see scope for ECCB to ease its minimum deposit rate to facilitate recovery and reduce capital inflows; current ECCB minimum deposit rate creates a floor on interest rates amid historically low U.S. rates, creating positive spread that encourages capital inflows and may create a recessive bias.

- D. External issues and debt restructuring
  - Program financing assurances hinge on successful comprehensive debt restructuring.
  - Staff estimates enough resources to cover financing needs through late-March or early-April; residual financing gap of US$21 million for the rest of 2004 expected to be covered by debt restructuring (IMF Country Report No. 04/6).
  - Authorities expect to finalize consensual debt restructuring by early-April while servicing obligations in the interim.
  - Authorities urged to follow strict borrowing policies post-restructuring to preserve sustainability; prioritize public investment projects with high social returns.
  - Staff did not include a debt sustainability scenario in this report because debt negotiations not concluded; staff concurs debt situation is not sustainable (IMF Country Report No. 04/6). Significant debt reduction in net present value terms likely required; staff will present debt sustainability analysis once restructuring terms are known.

- E. Structural reform
  - Public sector investment program implementation rate strong; accelerated public investment (mostly financed with external grants and soft loans) helped recovery.
  - Program allows public investment to be 1 percent of GDP higher than budgeted up to a maximum of 8 percent of GDP; this is likely to materialize.
  - Fiscal focus will shift to a primary balance objective to allow higher public sector investment while requiring offset by higher revenues or lower current expenditures.

*Source: _cr04144 - 1.     Tax     Exemptions (IMF Country Report excerpt).*

### 20.      The heavy structural reform agenda that needs to be implemented in the next

### 20. The heavy structural reform agenda that needs to be implemented in the next few months

### Overview and coordination of technical assistance
- The reform agenda is heavy and requires significant technical assistance, primarily on fiscal issues.
- A donors’ meeting in Roseau on February 5 was held to coordinate technical assistance across agencies.
- Donors acknowledged the agenda is ambitious though the number of benchmarks was low; providing assistance on short notice will be difficult.
- The authorities are committed to the reform agenda and have appointed an official to coordinate assistance and liaise with aid agencies.
- Donors and agencies agreed to try to provide the required assistance so agreed reforms can be implemented.

### Public sector reform
- Objective: Reduce the wage bill by 10 percent in nominal terms over the next two fiscal years (through labor retrenchment).
- Timing: Reform needs to be ready by June 2004 to be implemented with the 2004/05 budget.
- Benchmark: Conduct a study by end-March 2004 outlining the process to achieve a 5 percent reduction in the wage bill for 2004/05.
- Assistance:
  - European Union (EU): financing two resident experts and providing a grant of US$8 million to finance severance packages for retrenched workers.
  - World Bank (WB) and United Kingdom Department for International Development (DFID): providing technical assistance and coordination support.
- Importance: Described as perhaps the single most important reform, integrating key structural and macroeconomic areas.

### Tax policy and tax system reform
- Objective (tax policy): Rationalize tax exemptions and incentives to broaden the tax base.
- Benchmark (tax policy): Conduct a review of all statutory and discretionary tax exemptions by end-June 2004.
- Lead assistance (tax policy): Fund (IMF) is taking the lead in providing advice; EU will provide some assistance.
- Objective (tax system): Preparatory work for introduction of the VAT by FY 2005/06.
- Benchmark (tax system): Approval by cabinet of key parameters for the VAT by end-September 2004.
- Assistance (tax system): CARTAC and FAD are taking the lead; IMF also involved.
- Timing: Budget for 2004/05 will announce adoption of the VAT the following fiscal year; preparatory work already well advanced.

### Pension reform
- Objective: Review the financial position of the social security system and increase the retirement age of civil servants from 55 to 60 years.
- Benchmark: Submit legislation to parliament to increase retirement age by end-June 2004.
- Assistance: IMF (FAD) is taking the lead and preparing a policy note; UNDP will provide support; CARTAC organizing a seminar in April.

### Budgetary procedures and Fiscal Responsibility Law (FRL)
- Budgetary procedures objective: Design a 2004/05 budget consistent with the program and introduce three-year rolling budgetary projections.
- Structural performance criterion: Approval of a 2004/05 budget consistent with the program by end-July 2004.
- Assistance: DFID leading on three-year projections and cash management; CIDA and CARTAC providing additional support.
- FRL objective: Guide fiscal policy over the business cycle and prevent unsustainable debt accumulation.
- Scheduling: FRL initially scheduled for 2005/06 but advanced to 2004/05 to increase credibility for the debt deal and reduce political uncertainty.
- Assistance: IMF mission coordinating efforts and providing advice; CARTAC expected to be involved.

### Institutional strengthening
- Objective: Improve the regulatory framework for electricity supply.
- Benchmark: Adoption of amendments to the regulatory framework by end-September 2004.
- Assistance: World Bank is taking the lead in technical assistance.

### Consolidated list of technical reform areas, conditionality, objectives, and assistance (as presented)
- 1. Public Sector Reform — Benchmark (March) — Reduce wage bill 10% in two years — EU; WB
- 2. Tax Policy — Benchmark (June) — Rationalize tax exemptions — IMF; EU
- 3. Pension Reform — Benchmark (June) — Increase retirement age for public servants to 60 years — IMF; UNDP; CARTAC
- 4. Tax System — Benchmark (September) — Introduce the VAT by FY 2005/06 — CARTAC; IMF
- 5. Budgetary Procedures — Performance Criterion (July) — Budget consistent with program; and 3-year budget — DFID; CIDA; CARTAC
- 6. Fiscal Responsibility Law — Measure — Guide fiscal policy over business cycle — IMF; CARTAC
- 7. Institutional Strengthening — Benchmark (September) — Improve framework for electricity sector — WB

### Staff appraisal: progress, priorities, and risks
- Performance to date:
  - Program had a good start with continued strong performance following modification of the Stand-By Arrangement in July 2003.
  - All performance criteria and benchmarks have been observed since then, including those covered under the first PRGF review.
  - Encouraging developments: bottoming out of the economy, recovery in tax collections, and regained control over the budgetary process.
- Key priorities:
  - Implementation of the debt strategy remains top priority to secure required financing and regain sustainability.
  - Continuation of fiscal consolidation is key: authorities committed to a primary surplus of ½ percent of GDP for the 2004/05 budget and to reach a primary surplus of 3 percent of GDP by 2006/07.
  - Public sector reform is the critical structural issue; requires careful coordination across managerial, legal, and compensation aspects; authorities hold weekly monitoring meetings.
  - Prioritization of tasks and timely, coordinated technical assistance is indispensable given capacity constraints.
- Risks:
  - Financing assurances under the program are at risk if debt restructuring is not completed.
  - Political uncertainty (possible elections in January 2005).
  - Legal challenges to prior measures (e.g., the 5 percent wage cut of last July) and potential future legal challenges.
  - Need to establish priorities in the structural agenda to avoid nonimplementation risk.
- Staff recommendation:
  - Given strong performance, observance of all performance criteria, expectations that future targets will be achieved, requests for technical assistance, and good-faith negotiations with creditors, staff supports completion of the first review and the financing assurances review under the PRGF and disbursement of the second loan under the PRGF.

### Box 1 — Tax exemptions: findings and fiscal impact
- Average effective tax rate on consumption of non-oil products (ratio of revenues to consumption) was about 6 percent over the last three years, vs statutory consumption tax rate of 25 percent.
- Revenue loss from indirect tax concessions at the border estimated at 5 percent of GDP (equivalent to about 30 percent of tax revenue collected on international transactions).
- Revenue foregone from concessions under the Fiscal Incentives Act (consumption tax, import duties, other border taxes) comprised 1.4 percent of GDP in 2003.
- Exemptions are scattered across over 10 different pieces of legislation; entitlement often requires minister or cabinet approval, complicating administration and monitoring.
- Administrative challenges: Ministry of Finance reviews about 40 applications for tax exemptions every month; few staff are fully familiar with relevant legislation; NDC rarely follows up on exemptions and enforcement of income statement submissions by enterprises with tax holidays is weak.

### Box 2 — FSAP Principal Findings and Key Recommendations (financial sector)
I. Principal Findings
- Commercial banks:
  - “An unacceptably high” level of nonperforming loans; weakest banks (on ECCB’s watch list) account for approximately 41 percent of banking assets.
  - Quality of capital uncertain due to under provisioning of nonperforming loans, recording of accrued interest on government loans in arrears as income, and assignment of zero risk weights to public sector loans in arrears.
  - Weaknesses in regulatory and supervisory framework; need to strengthen ECCB on- and off-site monitoring and supervisory enforcement powers.
- Nonbank financial institutions (NBFI) and offshore banks:
  - Supervision of NBFIs currently responsibility of individual registrars of cooperatives; supervisory framework lacks harmonization.
  - Offshore banks regulated by individual ministries of finance; effective regulation hampered by data constraints and weak inspection programs.

II. Main Recommendations
- ECCB priorities:
  - Reprioritize resources to focus on regulation and supervision of domestic banks, especially on-site inspection.
  - Develop structured supervision tailored to institutional risk.
  - Strengthen prudential regulations: set minimum capital commensurate with risks; revise guidelines on accrual of interest; provide regulations on market risk.
  - Mitigate union-wide risks posed by government bank borrowing by assigning risk-weights and requiring provisioning on nonperforming government debts.
  - Strengthen early warning systems and create an operational crisis contingency framework endorsed by all members.
- Regulatory architecture refinements:
  - Proposal to establish a Single Regulatory Unit within each country to supervise NBFIs and offshore banks (except large institutions of potential systemic importance).
  - Strengthen insurance regulation via increased cross-border regulatory cooperation.
- Example of a large institution: Roseau Co-operative Credit Union in Dominica, with assets of approximately EC$170 million.

Sources: Dominican authorities and Fund staff.

### 2003. Limits on banking  system net credit to the central

### _cr04144 - 2003. Limits on banking system net credit to the central

### Performance Criteria and Indicative Targets
- Performance criteria will be monitored on a continuous basis.
- Limits on banking system net credit to the central government will be adjusted downward to the extent that external nonproject financing exceeds programmed amounts.
- External arrears accumulated prior to the Executive Board discussion on July 25th were waived; no arrears have been accumulated since then.
- Table references (timing in 2003): July 31, September 30, December 31.

### Structural Performance Criteria and Benchmarks (through December 2004)
- Prior Action — Tax policy: Significant reduction of discretionary tax exemptions. — Status: Done.
- Civil service reform — Study outlining the process for reduction in the wage bill for FY2004/05 by 5 percent through attrition. — Date: End-March 2004. — Category: Benchmark. — Status: In progress.
- Tax policy and administration — Conduct a review of all statutory tax exemptions to assess effectiveness and prevent abuses. — Date: End-June, 2004. — Category: Benchmark. — Status: In progress.
- Pension reform — Submit legislation to Parliament proposing a phased increase in the retirement age for public employees to 60 years. — Date: End-June, 2004. — Category: Benchmark. — Status: In progress.
- Budget approval — Approval of FY2004/05 budget, consistent with the program. — Date: End-July 2004. — Category: Performance Criterion. — Status: In progress.
- Tax policy — Announcement in the budget for FY2004/05 the adoption of the VAT by mid-2005; Cabinet approval of key parameters. — Date: End-September 2004. — Category: Benchmark. — Status: In progress.
- Institutional strengthening — Improve the regulatory framework for electricity supply following TA recommendations. — Date: End-September 2004. — Category: Benchmark. — Status: In progress.

### Macroeconomic Outcomes and Projections (selected indicators)
- Real GDP (factor cost): 2000: 1.4; 2001: -4.2; 2002: -4.7; 2003 (Prog/Est): -1.0 / 0.0 / 0.0 / 1.0 (table formatting preserved from source).
- GDP deflator (factor cost): 2000: 0.6; 2001: 1.2; 2002: -0.4; 2003–2004 projections: 1.5, 1.5.
- Nominal GDP (at factor cost): 2000: 2.0; 2001: -3.0; 2002: -5.1; 2003–2004 projections: 0.5, 1.5, 2.6.
- Consumer prices (end of period): 2000: 1.1; 2001: 1.9; 2002: 0.5; 2003: 2.5; 2004 projection: 2.9; medium-term: 1.5.

### Money, Banking, and Monetary Aggregates
- Net foreign assets of the banking system (change relative to M2): 2000: -12.8; 2001: 6.6; 2002: 19.9; 2003: 4.0; 2004 projection: 16.9; 2003 revision: -3.7.
- Net domestic assets of the banking system (change relative to M2): 2000: 13.4; 2001: 0.9; 2002: -11.3; 2003: -1.0; 2004 projection: -15.9; 2003 revision: 6.8.
- Net credit to the nonfinancial public sector (change relative to M2): 2000: 5.7; 2001: 5.6; 2002: -7.0; 2003: 0.1; 2004 projection: -5.9; 2003 revision: 5.9.
- Credit to the private sector (change relative to M2): 2000: 7.3; 2001: -3.1; 2002: -1.3; 2003: -0.8; 2004 projection: -2.3; 2003 revision: 2.4.
- Broad money (M2) annual percent changes: 2000: 0.6; 2001: 7.4; 2002: 8.5; 2003: 3.0; 2004 projection: 1.0; 2003 revision: 3.1.

### Fiscal Accounts (central government; selected levels in EC$ millions and percent of GDP)
- Total revenue and grants (EC$ millions): FY2000/01: 271.5; 2001/02: 209.7; 2002/03: 224.1; 2003/04 (Proj/Rev): 237.2/237.8/233.8/234.8 (table formatting preserved).
- Current revenue (EC$ millions): 2000/01: 200.5; 2001/02: 197.1; 2002/03: 191.9; 2003/04 projections around 196.3–207.3; FY2004/05 nominal: 200.2.
- Total expenditure (EC$ millions): 2000/01: 350.3; 2001/02: 269.3; 2002/03: 261.3; 2003/04 projections: 276.3–274.5.
- Wages and salaries (EC$ millions): 2000/01: 116.2; 2001/02: 116.5; 2002/03: 116.1; 2003/04 projections: 108.6–103.2.
- Interest (EC$ millions): 2000/01: 36.0; 2001/02: 36.9; 2002/03: 37.6; 2003/04 projections: 40.5–43.1.
- Capital expenditure and net lending (EC$ millions): 2000/01: 120.2; 2001/02: 39.6; 2002/03: 34.7; 2003/04 projections: 48.6–57.8.
- Overall balance (EC$ millions): 2000/01: -78.8; 2001/02: -59.5; 2002/03: -37.2; FY2003/04 overall balance: around -39.2 to -39.7.
- As percent of GDP: Total revenue and grants: 37.6; 30.2; 32.7; 34.2; 34.0; 32.6; 32.5 (multi-year values preserved). Overall balance: -10.9; -8.6; -5.4; -5.6; -5.5; -5.5; -5.5.

### Banking System Summary (end-of-period EC$ millions)
- Consolidated banking system: Net foreign assets: 65.2 (2000); 96.1 (2001); 196.7 (2002); 289.4 (Proj 2003); 225.8 (Rev); 268.6 (Proj 2004).
- Broad money: 471.0 (2000); 506.0 (2001); 549.2 (2002); 554.5 (Proj 2003); 583.3 (Rev); 571.6 (Proj 2004).
- Net credit to the nonfinancial public sector: 75.8 (2000); 102.3 (2001); 66.8 (2002); 34.6 (Proj 2003); 67.3 (Rev); 67.3 (Proj 2004).
- Commercial banks: Private sector deposits (EC$ millions): 435.6 (2000); 477.4 (2001); 513.7 (2002); 520.3 (Proj 2003); 545.5 (Rev); 536.3 (Proj 2004).
- Interest rate spreads (commercial banks, end-of-period): Deposits (3-month time—maximum rate) 6.0 (various years); Lending minimum and maximum rates reported (e.g., minimum lending rate 9.5–9.6; maximum rate 20.8–18.2 across years).

### External Sector and Balance of Payments (U.S. dollars and percent of GDP)
- Merchandise exports, f.o.b. (U.S.$ millions): 2000: 54.7; 2001: 44.4; 2002: 42.8; 2003: 40.0; 2004 projection: 41.1; revision: 41.2.
- Merchandise imports, f.o.b. (U.S.$ millions): 2000: 130.4; 2001: 115.3; 2002: 101.4; 2003: 106.4; 2004 projection: 111.5; 2003 revision: 112.5.
- Current account balance (U.S.$ millions): 2000: -52.5; 2001: -47.6; 2002: -37.0; 2003 projection: -42.1; 2003 revision: -42.8; 2004 projection: -39.1.
- Current account balance (percent of GDP): -19.5; -18.2; -15.0; -16.7; -16.9; -15.0 (multi-year sequence).
- Net international reserves (U.S.$ millions; end-of-period, imputed at ECCB): 29.0; 30.4; 33.6; 45.1; 45.1; 45.4.

### Public and External Debt
- Nonfinancial public sector debt (gross): 2000: 87.4; 2001: 95.4; 2002: 111.5; 2003: 114.7; 2004 projection: 114.7; 2003 revision: 114.6.
- External public debt: 2000: 59.1; 2001: 71.0; 2002: 84.1; 2003: 89.8; 2004 projection: 88.1.
- Nonfinancial public sector debt structure at end-December 2003 (EC$ millions / US$ millions / percent of GDP / share of total debt):
  - Domestic debt: EC$182.4 / US$67.5 / 26.5% / Share of Total Debt: 22.0.
  - External debt: EC$646.8 / US$224.9 / 88.1% / Share of Total Debt: 78.0.
  - Total: EC$829.2 / US$292.4 / 114.6% of GDP / Share of Total Debt: 100.0.
- External debt composition (end-2003): Multilateral EC$309.4 (CDB EC$192.5; World Bank EC$71.8; IMF EC$20.0); Bilateral EC$138.8 (France EC$31.1; Taiwan EC$32.1; United Kingdom EC$27.6; Others EC$48.1); Commercial EC$182.4 (Citicorp EC$45.5; Royal Merchant Bank EC$82.6).

### Vulnerability and Financial Indicators
- Unsatisfactory assets/total loans (percent): 1999: 17.9; 2000: 17.4; 2001: 22.6; 2002: 19.2; 2003: ...; 2004 projection: 22.2.
- Total capital/risk weighted assets (locally incorporated banks): 1999: 38.2; 2000: 30.8; 2001: 35.4; 2002: 34.1; 2004 projection: 29.3.
- External public debt service (percent of exports of goods and nonfactor services): 1999: 7.4; 2000: 10.8; 2001: 12.3; 2002: 20.9; 2003: 20.9; 2004 projection: 14.5.

### Balance of Payments—Key Components (selected, U.S.$ millions)
- Services balance: 2000: 37.1; 2001: 25.0; 2002: 25.2; 2003: 29.7; 2004 projection: 32.3; 2003 revision: 35.7.
- Net income: 2000: -32.0; 2001: -19.2; 2002: -20.1; 2003 projection: -17.2; 2003 revision: -20.1; 2004 projection: -17.9.
- Net current transfers: 2000: 18.1; 2001: 17.5; 2002: 16.4; 2003: 16.2; 2004 projection: 12.9; 2003 revision: 14.5.
- Capital and financial account: 2000: 53.2; 2001: 41.2; 2002: 27.3; 2003 projection: 18.8; 2004 projection: 15.9; 2003 revision: 13.5.
- Overall balance (U.S.$ millions): -2.2 (2000); 1.9 (2001); 11.4 (2002); 1.5 (2003 prog); -24.4 (2003 est); -25.6 (2003 rev).

### Program Financing and IMF Arrangements
- Schedule of Purchases under SBA and PRGF (U.S.$ millions and percent of quota): Total purchases: US$15.46 / SDR10.66 / 130.0 percent of quota.
- SBA component: US$4.31 / SDR2.97 / 36.3 percent of quota.
- PRGF component: US$11.15 / SDR7.69 / 93.8 percent of quota.
- Quota (in millions): 11.89 / 8.20 / 100.0 percent.

### Indicators of Capacity to Repay the Fund (2003–08 projections)
- Fund repurchases and charges (SDRs): 2003: 0.1; 2004: 0.1; 2005: 0.4; 2006: 1.2; 2007: 1.3; 2008: 0.4.
- Fund credit outstanding (SDRs): 2003: 5.3; 2004: 6.6; 2005: 8.8; 2006: 9.3; 2007: 8.1; 2008: 7.7.
- Fund credit outstanding (U.S.$ millions): 2003: 7.5; 2004: 9.8; 2005: 13.1; 2006: 13.9; 2007: 12.1; 2008: 11.5.
- Exports of goods and services (U.S.$ millions, memorandum): 2003: 125.9; 2004: 131.4; 2005: 139.1; 2006: 146.4; 2007: 151.8; 2008: 157.4.

### Medium-Term Projections (selected)
- GDP at constant (1990) prices: 2001: -4.2; 2002: -4.7; 2003: 0.0; 2004–2006 projections: 1.0; 2.0; 2.0.
- Gross domestic investment (percent of GDP): 2001: 21.2; 2002: 10.6; 2003 projection: 14.4; 2004–2006 projections: 16.4; 16.9; 17.9.
- Gross national saving (percent of GDP): 2001: 3.0; 2002: -4.3; 2003 projection: -2.5; 2004–2006 projections: 1.4; 4.7; 8.7.
- Overall balance (after grants, percent of GDP): 2001: -8.6; 2002: -5.4; 2003: -5.5; 2004–2006 projections: -5.5; -4.2; -3.3.
- Public sector debt (percent of GDP): 2001: 95.4; 2002: 111.5; 2003: 114.6; medium-term entries not shown (…).

### Fund Relations and Institutional Notes (as of January 31, 2004)
- Membership: Joined 12/12/78; Article VIII.
- Quota: 8.20 (SDR million) — 100.00 percent of quota.
- Fund holdings of currency: 11.16 (SDR million) — 136.15 percent of quota.
- PRGF Arrangements outstanding: 2.36 (SDR million) — 28.76 percent of quota.
- Stand-by arrangements outstanding: 2.97 (SDR million) — 36.25 percent of quota.
- Latest financial arrangements: PRGF approved 12/29/03 (expiration 12/28/06; amount approved SDR7.69; amount drawn 2.36). Stand-By approved 08/28/02 (expiration 01/02/04; amount approved SDR2.97; amount drawn 2.97).
- Projected obligations to the Fund (obligation basis): 2004 total: 0.08 (SDR million); 2005 total: 0.34; 2006 total: 1.17; 2007 total: 1.28; 2008 total: 0.41.
- Exchange rate arrangement: Dominica is a member of the Eastern Caribbean Currency Union; EC$ pegged to the U.S. dollar at EC$2.70 per U.S. dollar since July 1976.
- Safeguards assessment: ECCB full safeguards assessment completed on February 20, 2003; appropriate mechanisms to manage resources found in place; implementation of proposed measures in progress.
- Article IV consultation: Last concluded August 28, 2002 (IMF Country Report Nos. 02/223 and 02/224). Dominica on the standard 24-month cycle.
- Technical assistance: FAD missions on tax policy and administration, VAT implementation (2002 and 1999), urban property taxation (1997), and expenditure control (1995).
- FSAP: Joint IMF/World Bank financial sector assessment for ECCB member states carried out in two missions—September 1–19 and October 20–31.

*Source: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections (as presented in the source document)._

### 2003.  The principal objective of the missions was to assist the authorities in assessing the

### _cr04144 - 2003.  The principal objective of the missions was to assist the authorities in assessing the

### Relations with the Caribbean Development Bank (CDB)
- CDB has approved loans and grants for Dominica totaling approximately US$140.1 million.
- Of this amount US$136.5 million represented loans aimed at boosting real sector activity (agriculture, manufacturing and tourism) and improving road access, sea defenses and other physical infrastructure.
- A large portion of loans to the productive sector was channeled to the private sector through the Dominica Agricultural, Industrial and Development Bank (DAIDB).
- In 2003, CDB completed a detailed poverty assessment in Dominica to inform Government strategic interventions aimed at sustained poverty reduction.
- CDB, in collaboration with other development partners, provided critical budget support through an Economic Stabilization Loan to facilitate an orderly adjustment process and allow formulation of a longer-term structural adjustment strategy.
- Ongoing capital projects financed by CDB include:
  - Fourth Consolidated Line of Credit
  - Roseau Water and Sewerage Project
  - Seventh Consolidated Line of Credit
  - OECS Solid Waste Project
  - Eco-tourism project
  - Seventh Consolidated Line of Credit to DAIDB for on-lending to the productive sectors and to students

- Dominica: Financial Relations with CDB (In millions of U.S. dollars)
  - Cumulative Total Credit Approved: 1999: 96.21; 2000: 113.20; 2001: 118.63; 2002: 128.01; 2003: 136.18
  - Cumulative Disbursements: 1999: 72.79; 2000: 82.73; 2001: 94.56; 2002: 101.54; 2003: 110.58
  - Disbursements: 1999: 5.51; 2000: 9.94; 2001: 11.83; 2002: 6.98; 2003: 9.04
  - Outstanding Debt: 1999: 44.69; 2000: 51.41; 2001: 60.39; 2002: 65.02; 2003: 71.50
  - Amortization: 1999: 2.73; 2000: 2.73; 2001: 2.70; 2002: 2.59; 2003: 2.79
  - Interest: 1999: 1.14; 2000: 1.35; 2001: 1.61; 2002: 1.89; 2003: 2.01

### Relations with the World Bank
- The World Bank will continue to collaborate with the Fund and other donors to support stabilization, restart economic growth, and reduce poverty; lead policy dialogue on key structural reforms including public expenditure, public sector reform, social protection, and environment for private sector development.
- Bank-Fund collaboration areas: financial sector, medium-term structural reform agenda, and technical assistance jointly with CARTAC.
- Bank Group strategy: Country Assistance Strategy (CAS) for the Eastern Caribbean (OECS) sub-region covers FY 2002–06 and proposes new commitments of around US$110 million for the five OECS borrowing member states.
- Main CAS goals: reduce income insecurity and vulnerability; build human and institutional capacity.
- Ongoing projects (total commitments approximately US$7.5 million):
  - (i) OECS Telecommunications Reform Program (loan US$6.0 million; Dominica’s share US$1.2 million) — approved FY 1998.
  - (ii) OECS Emergency Recovery Project — World Bank assistance US$21 million for sub-regional program, including US$3.2 million for Dominica — approved FY 2002.
- Upcoming projects:
  - Economic Recovery Support Operation—adjustment operation for US$3.1 million; approved by Board of Directors on January 29, 2004.
  - Dominica component of the Caribbean HIV/AIDS Prevention and Control Project expected to be presented for approval in FY 2005.
- Analytical and Advisory Services in FY 2003: Dominica-specific Country Financial Accountability Assessment, Country Procurement Assessment Report, Social Protection Review; public expenditure review underway in context of OECS Analysis of Fiscal Issues; technical assistance on petroleum, electricity and financial sectors.
- Key Bank research and TA program elements:
  - Bank-wide program on small states and vulnerability issues (macroeconomic volatility, income security, catastrophic insurance, natural hazard risk mitigation, institutional arrangements for environmental management in the OECS, measurement of poverty and social welfare).
  - Study of Growth and Competitiveness in the OECS scheduled for completion during FY 2005.
  - Ongoing Financial Sector Assessment Program (FSAP) in collaboration with the IMF.

- Financial Relations: Gross Disbursements and Debt Service During Fiscal Year (In millions of U.S. dollars)
  - Total disbursements by year: 1997: 0.5; 1998: 1.9; 1999: 1.4; 2000: 2.1; 2001: 0.5; 2002: 1.7; 2003: 2.7; 2004: 3.1
  - Repayments by year: 1997: 0.1; 1998: 0.1; 1999: 0.1; 2000: 0.1; 2001: 0.1; 2002: 0.1; 2003: 0.3; 2004: 0.6
  - Net disbursements by year: 1997: 0.5; 1998: 1.8; 1999: 1.3; 2000: 1.9; 2001: 0.4; 2002: 1.6; 2003: 2.3; 2004: 2.5
  - Cancelled by year: 1997: 0.0; 1998: 0.0; 1999: 0.0; 2000: 0.0; 2001: 0.0; 2002: 1.0; 2003: 2.3; 2004: 0.0
  - Interest and fees by year: 1997: 0.1; 1998: 0.1; 1999: 0.1; 2000: 0.2; 2001: 0.3; 2002: 0.3; 2003: 0.3; 2004: 0.4

### PRGF Review and Program Performance
- IMF Executive Board completed the first review under the SDR 7.69 million (about US$11.3 million) PRGF arrangement for Dominica on March 24, 2004.
- Completion of the reviews makes SDR 308,000 (about US$455,000) immediately available and would bring total disbursements under the arrangement to SDR 2.67 million (about US$3.9 million).
- Current PRGF arrangement approved on December 29, 2003 for a period of three years.
- PRGF loan terms: annual interest rate of 0.5 percent; repayable over 10 years with a 5 ½-year grace period on principal payments.
- IMF Deputy Managing Director Agustín Carstens emphasized:
  - Inflation remains low and there are indications of an early recovery of economic activity.
  - Need to persevere with fiscal consolidation, implement comprehensive reform agenda, and restructure external debt to restore sustainable growth.
  - Fiscal targets observed with wide margins, but outturns reflect special budgetary developments not expected to be sustained.
  - Authorities preparing a budget for FY 2004/05 with front-loaded measures to improve fiscal balance.
  - Fiscal sustainability requires downsizing the civil service, rationalizing the pension system, streamlining tax exemptions, introducing the value added tax, implementing the Fiscal Responsibility Law, and improving the budgetary framework.
  - Authorities plan a comprehensive review of tax exemptions by end-June 2004.
  - Emphasis on structural reforms to improve investment climate, competitiveness, deregulation, and financial sector strengthening.
  - Continued substantial reliance on timely and coordinated technical assistance; reforms must be properly prioritized and sequenced.
  - Authorities negotiating external debt restructuring based on international best practices; rigorous debt management policy needed to prevent re-emergence of debt sustainability problems.
  - Structural reform agenda to be implemented alongside the Interim Poverty Reduction Strategy Paper; full PRSP expected by end-2004.

### Government Letter and Program Implementation (March 8, 2004)
- Government reports:
  - Sharp economic decline of last few years appears arrested and incipient recovery underway.
  - Tax collections stronger than anticipated; expenditures kept in check.
  - Market sentiment strengthened; liquidity in financial system adequate; deposits growing.
  - Exports in several industries recovering; imports remain strong.
  - All performance criteria for end-December 2003 under the PRGF-supported program have been observed.
  - Request completion of the first review under the PRGF.
- Debt strategy progress:
  - Road show conducted in January to seek creditors’ support.
  - Engaged CDB with a specific debt restructuring proposal.
  - Expect to present concrete restructuring proposals to creditors by mid-March and finalize restructuring by early-April.
- Donors’ meeting in Roseau in early-February 2004 to brief donors and coordinate technical assistance.
- Government reaffirms commitment to policies in letter and memorandum of economic policies of December 10, 2003.

### Debt Restructuring (Executive Director Statement, March 24, 2004)
- Dominica’s debt burden stands at nearly 115 percent of GDP and is assessed as unsustainable.
- Overriding immediate-term priority: decisively resolve the debt overhang problem.
- Exchange offer to be made available to private creditors shortly; negotiations with CDB, private and bilateral creditors proceeding.
- Authorities hopeful a comprehensive debt deal can be finalized by mid April but recognize risk that agreement may fall short of restoring sustainability.
- Continued support from the international community, particularly bilateral creditors, critical to secure restructuring terms consistent with program sustainability assumptions.

### Fiscal Adjustment (Executive Director Statement)
- Government committed to moving to a 3 percent primary surplus in 2006/07.
- Achievement of this would constitute an overall 7½ percent swing in the structural primary balance since the predecessor SBA in 2002.
- Authorities are on track to post a ½ percent primary surplus in FY2004.
- Fiscal package emphasizes expenditure measures to secure permanent gains:
  - Maintain an expenditure freeze on non-interest current spending.
  - Increase retirement age.
  - Decrease the wage bill by 5 percent based on reductions in number of employees.
  - Intend to reduce public wage bill by a total of 10 percent in the next two fiscal years through comprehensive public sector reform.
  - These measures are in addition to a 5 percent nominal wage cut introduced in the 2003/04 budget.
- Revenue side: progress made to eliminate discretionary tax exemptions; authorities to present possible solutions in June and would welcome input from FAD.

### Financial Sector and Monetary Issues
- Preserving domestic financial sector stability through the debt restructuring period is a key priority.
- Market reaction to debt announcement has been benign; liquidity remains abundant; domestic bank deposits stable; no evidence of regional financial turbulence.
- Restructuring of domestic bank claims is part of the debt strategy, with attention to avoid excessive erosion of balance sheets.
- Authorities endorse regional FSAP recommendations to strengthen ECCB prudential regulations and monitoring.
- Government actions:
  - Divested majority share of the National Commercial Bank (now renamed the National Bank of Dominica).
  - Reduced the number of government-appointed Directors on its board to improve governance.
  - Working on a strategy for a new round of on-site inspections of systemically important non-bank financial institutions.
- Monetary policy constraints due to participation in the Eastern Caribbean Currency Union; authorities propose eliminating the ECCB’s minimum savings deposit rate and will raise the issue at the next ECCB monetary council meeting.

### Structural Reform Agenda
- Structural reform agenda tied to fiscal objectives, including pension and public sector reform.
- Authorities also intend to:
  - Introduce a VAT as early as 2005 to increase tax system efficiency.
  - Strengthen budgetary procedures using three-year rolling budgetary projections.
  - Bring forward the introduction of a fiscal responsibility law to guide policy over the business cycle and safeguard fiscal sustainability.

### Conclusion
- Dominica has made strides in reorienting fiscal policy and advancing structural reform to restore macroeconomic stability, producing early dividends and strengthening commitment to the PRGF reforms.
- Authorities will continue consultations with civil society and stakeholders to finalize the Poverty Reduction Strategy Paper.
- Government expresses gratitude to the IMF and donor community for timely financial support and technical assistance.

*Source: IMF staff report material and attached Government correspondence and statements (as provided in the supplied content).*

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