## _cr05384 ## Source details **Canonical URL:** [_cr05384](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05384.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05384.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05384.pdf.json) --- ### Executive summary — overall assessment - Dominica recovering from the aftermath of an economic and financial crisis in 2001–02 when output contracted by 10 percent. - Rebound in growth, strong fiscal consolidation, and a collaborative debt restructuring agreement have placed public finances on firmer footing. - Economic growth has increased to over 3 percent a year; real GDP increased in 2004 by an estimated 3.5 percent. - Central government primary balance swung to a surplus of 4½ percent of GDP in 2004/05 (about 4 percent of GDP excluding one-off factors). - Debt stock declined to 117 percent of GDP at end-2004. - Program implementation: all end-June quantitative performance criteria were met (most with large margins); the continuous performance criterion on external arrears was missed; all three structural benchmarks for the fifth review were broadly completed; legislation to introduce a VAT was passed by Parliament. - Agreements reached with creditors holding about 70 percent of the debt eligible for restructuring; issuance of new bonds to all participating creditors not yet completed. - Critical challenge: sustain current growth momentum and address constraints to reduce poverty and unemployment. ### Recent economic developments, outlook, and risks - Output and inflation: - Real GDP: 3.5 percent (2004); staff and authorities expect 3 percent in 2005. - Inflation: declined in 2004 and remained subdued through July 2005; annual inflation expected below 2 percent over the medium term. - External sector and tourism: - Import growth has picked up; increased tourism receipts ameliorated current account impact. - Positive upside potential: nature-based and adventure tourism; potential to export geothermal-based electricity to Guadeloupe and Martinique. - Exchange rate and monetary indicators: - East Caribbean dollar (pegged to the U.S. dollar) real effective depreciation: 7 percent in 2004 and a further 3½ percent through mid-2005. - Credit to the private sector turned positive from mid-2004. - Banking system liquidity remains high; banks increased net foreign asset position; modest reduction in nonperforming loans indicated. - Outlook and risks: - Medium-term GDP growth of some 3 percent per annum is considered feasible; annual inflation subdued at below 2 percent. - Downside risks: bleak prospects for the banana sector; recent rise in oil prices (first round effect on imports in 2005 estimated to be about 2 percentage points of GDP); high vulnerability to natural disasters (example: earthquake last November caused damage estimated at 7 percent of GDP); high debt despite restructuring. ### Fiscal performance and public finances (FY 2004/05 and 2005/06) - FY 2004/05 outcomes: - Revenue collection almost 2 percentage points of GDP higher than previously projected due to arrears collection and windfalls. - Current expenditures exceeded baseline mainly due to an unbudgeted transfer of ¾ percent of GDP for the Caribbean Court of Justice (CCJ). - Primary surplus for the year: 4½ percent of GDP (4 percent excluding one-offs from migrants deposits and the CCJ payment); 2½ percentage points of GDP higher than programmed. - Migrants’ deposits contributed some 1 percent of GDP to fiscal accounts. - FY 2005/06 budget stance: - Mildly expansionary but consistent with further debt consolidation. - Central government primary surplus target: 3 percent of GDP. - Conservative revenue estimates underpin targets; projected increase in grants creates room to increase capital expenditure. - Wage bill: authorities restored the 5 percent cut in public sector wages; intend to reduce the wage bill by 1–1½ percentage points of GDP over the medium term from its current level of 13¾ percent of GDP. - Public Sector Investment Programme (PSIP): focus on human and physical capital, prioritize projects in a multi-year rolling framework; overall PSIP to be limited to around 10 percent of GDP. - Under the program, any additional revenue from migrants’ deposits will not count towards the primary balance target but go towards reducing debt. ### Debt sustainability analysis (DSA) — baseline and sensitivities - Public debt at end-2004: around 116–117 percent of GDP (nonfinancial public sector debt gross: 116.7 percent of GDP). - NPV ratios at end-2004: NPV of public sector debt about 90.0 percent of GDP; NPV of external about 54.6 percent of GDP. - Baseline scenario (2005–2025) assumptions: - GDP growth stays at 3 percent. - Primary balance remains at 3 percent of GDP. - Public enterprises run an overall deficit of 0.5 percent of GDP. - Annual disbursements of external concessional debt reach 1.5 percent of GDP. - New domestic financing at interest rate of 7 percent. - Baseline projections: - Debt remains sustainable under baseline; public debt to GDP ratio projected to reach 60 percent by 2018. - NPV of Debt-to-GDP Ratio (selected years): 83 (2005); 80 (2006); 78 (2007); 75 (2008); 73 (2009); 71 (2010); 59 (2015); 34 (2025). - Sensitivity scenarios: - Scenario A.1 (historical averages: primary deficit 1 percent of GDP and 0.8 percent growth): public debt turns unsustainable (NPV Debt-to-GDP rises to 229 in 2025). - Scenario A.2 (maintain primary surplus around 4.3 percent of GDP): public debt remains sustainable. - Scenario A.3 (growth falls to 2½ percent): indicators show slight upward trend in debt burden due to lower revenues and higher interest costs. - Higher new financing interest rate (12 percent): with baseline growth and surplus debt declines more slowly; with GDP growth at 2 percent public debt stabilizes around 75 percent of GDP; with 1 percent growth public debt returns to an unsustainable path. - Social security (DSS) risks: - DSS deficits projected to begin about 2014 and reserves depleted by about 2025; system’s unfunded liabilities estimated at some 150 percent of 2004 GDP. - Inclusion of DSS deficits under current policies would put the debt path back on an unsustainable trajectory. - Two options to avoid unsustainability: target a primary balance above 3 percent or adjust DSS parameters to eliminate deficits; authorities prefer DSS reforms. ### Debt restructuring and creditor engagement - Debt restructuring process: - December 2003 debt exchange targeted primarily private creditors: claims pre-December 2003 exchanged for three new local currency bonds with coupon 3.5 percent and 10, 20, 30-year maturities with principal reductions of 30, 20, and 0 percent respectively. - Agreements reached with creditors holding just above 70 percent of the debt eligible for restructuring; discussions with three creditors accounting for bulk of remaining unrestructured debt continuing. - Exim Bank of Taiwan Province of China filed suit in New York District Court to recover about US$12 million; implications uncertain. - Authorities deposit interest payments into an escrow account under original and subsequently restructured terms. - Implementation issues: - More than a year after the exchange offer closed in June 2004, issuance of new bonds to all participating creditors not completed. - Legislative changes to allow trading of debentures on the Eastern Caribbean Stock Exchange (ECSE) not yet passed. - Authorities commit to complete issuance shortly and present legislative amendments at next parliamentary sitting (expected in November). - Staff caution: deposits into escrow are positive but do not preclude legal action by creditors while arrears persist. ### Structural reforms, bottlenecks to investment, and policy recommendations - VAT and tax policy: - Legislation to introduce VAT passed; VAT implementation targeted for March 1, 2006 with a standard 15 percent rate and a 10 percent rate for hotel accommodation; switch expected revenue neutral. - Staff estimates foregone customs revenue from incentives in 2004/05 at about 4½ percentage points of GDP; staff view incentives as costly and nontransparent; authorities agreed to comprehensive review of statutory exemptions and to minimize discretionary tax exemptions. - Government decision to publish in the Official Gazette all Cabinet decisions granting new tax and duty concessions, identifying beneficiary and legal basis. - Electricity sector and energy: - DOMLEC’s monopoly should be addressed; authorities plan reforms to establish a regulatory commission and tariffs more reflective of production costs to allow new entrants and tap geothermal potential; parliamentary approval of amendments to the Electricity Supply Act targeted by end-December 2005. - Investment promotion agencies and public enterprises: - Reviews of DEXIA, NDC, and AID Bank to assess need, effectiveness, accountability, and possible streamlining; action plans to be established by end-December 2005. - Plan to create a one-stop investment promotion center (target by end-March 2006). - Land administration: - Absence of a national cadastral survey and nonmandatory land registration; authorities urged to accelerate land registration modernization. - Public sector size and wage bill: - Target to reduce wage bill by 1–1½ percent of GDP from 13¾ percent over the next three years via streamlining, commercialization or privatization of nonessential services. - Immediate measures: outsourcing janitorial and government building security services; streamlining airports and ports authorities. - Public financial management: - Amendments to the Finance Administration Act to institutionalize fiscal discipline, including targeting a primary surplus consistent with reducing public debt while debt stock remains above 60 percent of GDP. - Strengthen cash management, commitments control, medium-term budgeting, and legal/institutional framework for public debt guarantees. - PSIP: - Recommend focusing on projects with high returns, prioritizing within a comprehensive multi-year rolling framework, and sequencing consistent with institutional capacity and flow of funds. ### Financial sector vulnerabilities and supervisory reforms - Banking system: - At end-June 2005, capital adequacy ratios of locally incorporated banks around 19 percent of risk-weighted assets. - Concerns: nonperforming loans some 21 percent of total loans (indicators suggest modest reduction); recent credit expansion concentrated in “personal loans” and “trade” categories. - Staff urged passage of the revised Banking Act to implement recommendations of the 2004 ECCU regional FSAP. - Nonbank financial sector (credit unions): - Weak reporting and regulatory oversight have weakened credit union balance sheets; onsite inspection of Roseau Cooperative Credit Union (RCCU) in May raised concerns. - Financial Services Unit (FSU) to work with RCCU and carry out targeted inspections of remaining 15 credit unions; legislation required to give FSU direct supervisory authority over nonbank financial sector including credit unions, money transfer institutions, and AID Bank (benchmark end-December 2005). - Natural disaster risk: - November 2004 earthquake and mudslides caused damage estimated at around 7 percent of GDP. - Recommendations: better construction standards, improved building codes, greater risk mitigation, consider regional risk pooling of catastrophe insurance. - Staff noted government might consider targeting a stronger primary balance to set aside funds for future disasters. ### Program modalities, conditionality, and reporting - PRGF program status: - All end-June quantitative performance criteria met; continuous criterion on external arrears missed due to brief delay. - Authorities requested waiver for nonobservance of the continuous performance criterion and completion of the fifth review. - Staff recommends completion of the financing assurances review given authorities’ good faith efforts, escrow deposits, and strong reform agenda. - Staff supports granting waiver and extension of repurchase expectations from December 22, 2005 to December 22, 2006; extension would move repurchase expectations totaling SDR 1,268,444 to an obligation basis. - Targets and reporting: - Quantitative program targets set for overall and primary balances, wage bill, arrears accumulation, revenues, primary savings, net credit of banking system, and external debt disbursements with explicit numeric floors and ceilings (examples below reflect programed cumulative balances from June 30, 2005): - Program floors on the overall balance (EC$ millions): End-September 2005 -10.5; End-December 2005 -14.0; End-March 2006 -18.7; End-June 2006 -19.3. - Program floors on central government primary balance (EC$ millions): End-September 2005 2.9; End-December 2005 7.6; End-March 2006 16.2; End-June 2006 23.7. - Program ceilings on central government wage bill (EC$ millions): End-September 2005 27.6; End-December 2005 55.7; End-March 2006 81.4; End-June 2006 106.5. - Ceilings on disbursements of nonconcessional external debt (US$ millions): End-September 2005 2.6; End-December 2005 6.7; End-March 2006 8.3; End-June 2006 10.0. - Regular reporting requirements (monthly and when possible weekly) include central government budgetary accounts; Dominica Social Security Balance Sheet; central government domestic debt data; current grant inflows; stock of unpaid checks and unprocessed claims; project-by-project capital expenditure and financing; debt servicing account balances; total number of exemptions issued; severance and administrative expenditures linked to debt restructuring; monetary survey; imports/exports by product; detailed external debt creditor-by-creditor reports; CPI; real sector indicators; and GDP and balance of payments annually. - Monitoring of discretionary tax exemptions to be continuous. - Structural benchmarks and prior actions: - Prior actions for the fifth review: passage of VAT Act effective March 1, 2006; Cabinet approval of plan to rationalize the wage bill. - Sixth review benchmarks include legislative basis for FSU supervision of NBFIs (end-December 2005), strategic reviews and action plans for AID Bank, DEXIA, and NDC (end-December 2005), parliamentary approval of Electricity Supply Act amendments (end-December 2005), and VAT implementation starting March 1, 2006. - Seventh review benchmarks: Cabinet approval of action plan to eliminate DSS unfunded liabilities (end-March 2006); Parliamentary approval of FAA amendments (end-May 2006); line ministries to submit rolling three-year plans (end-May 2006). ### Data quality and statistical issues - Dominica’s statistical database inadequate for authorities’ needs and Fund surveillance; weakest areas: fiscal accounts, public debt, and balance of payments. - Timeliness and coverage: - CPI provided timely; ECCB compiles semi-annual GDP estimates with one-quarter lag; employment data very limited; no official producer price or private sector wage data; results of 2001 population census not yet published. - Balance of payments compiled annually and not in BPM5 format; errors and omissions have at times reached 12 percent of GDP. - Government finance statistics: - Central government operations data incomplete; some operations occur outside consolidated fund; PSIP data not timely; no consolidated nonfinancial public sector data. - No government finance data reported to STA for IFS or GFS Yearbook. - Monetary statistics: - Compiled monthly by ECCB but coverage needs improvement; monetary survey excludes credit unions accepting demand deposits; steps underway to collect credit union data. - External debt: - Ministry of Finance maintains external loan database; consolidation between Treasury and Debt Unit databases lacking; monthly creditor payment information not fully available, impeding arrears compilation. - Table of Common Indicators: selective entries indicate monthly reporting of many monetary and banking series with latest observations June–July 2005; revenue/expenditure data latest observations 2004 or Jul. 2005 for central government. ### Social and poverty concerns, education and migration - Growth potential and poverty: - Simple regressions predict per capita income growth in range 2¾−6 percent; realized rate 1990−2003 about 1½ percent. - As of 2002: unemployment 25 percent of labor force; poverty 33 percent of population. - Large public investment historically did not yield sustained growth; migration and loss of human capital undermine potential. - Education and migration policy: - Loss of nurses to U.S. and U.K. strained services; authorities see scope to expand nurse training, possibly as export sector, subject to full cost recovery to limit budgetary implications. - Authorities seek to increase remittances and investment from the Diaspora; initial steps include commissioning a report by Dominicans in the Diaspora. ### Program appraisal and IMF Executive Board conclusions - Staff and Executive Board assessment: - Dominica made commendable progress under the PRGF-supported program; strong policies contributed to a remarkable turnaround. - Directors urged continued fiscal discipline, structural reforms to remove investment bottlenecks, completion of debt restructuring, and prompt action on DSS reforms. - Staff supports completion of financing assurances review and granting requested waiver for nonobservance of continuous performance criterion on external arrears given minor temporary nature of deviation. - Staff supports extension of repurchase expectations and conclusion of the fifth review given solid program implementation: all-but-one performance criteria observed, most by large margins. *Source: IMF staff report content provided.* ### Executive Summary....................................................................................................... ### _cr05384 - Executive Summary ### Executive summary — overall assessment - Dominica is recovering from the aftermath of an economic and financial crisis in 2001–02 when output contracted by 10 percent. - With a rebound in economic growth, strong fiscal consolidation, and a collaborative debt restructuring agreement, public finances are now on a firmer footing. - Economic growth has increased to over 3 percent a year. - The central government primary balance has swung to a surplus of 4½ percent of GDP in 2004/05 (about 4 percent of GDP excluding one-off factors). - The debt restructuring process coupled with fiscal consolidation allowed the debt stock to decline to 117 percent of GDP at end-2004. - Program implementation has been solid and staff recommends completion of the financing assurances review: - All end-June quantitative performance criteria were met, most with large margins. - The continuous performance criterion on external arrears was missed. - All three structural benchmarks for the fifth review have been broadly completed. - Legislation to introduce a VAT was recently passed by Parliament. - Agreements have been reached with creditors holding about 70 percent of the debt eligible for restructuring; discussions with nonparticipating creditors continue and the authorities are depositing interest payments into an escrow account under the restructured terms. Issuance of new bonds to all participating creditors has yet to be completed. - The critical challenge is sustaining the current growth momentum and addressing constraints to reduce poverty and unemployment. ### Introduction — political and program context - The incumbent administration won another five-year term in the May 2005 general elections. - The Fund has supported the authorities’ reforms since 2002 initially through a Stand-By Arrangement (SBA) and since end-2003 through a PRGF arrangement. - In the attached letter of intent and supplementary memorandum of economic policies (MEP), the authorities outline policies for the coming months and request a waiver for nonobservance of a performance criterion for completion of the fifth review under the PRGF. ### Background and perspective — roots of the crisis and structural features - The 2001–02 crisis originated in expansionary fiscal policies of the preceding decade; by 2001 the government faced a liquidity crisis. - Contributory shocks included a severe drought and the September 2001 terrorist attacks. - Public spending peaked at 38 percent of GDP in 1999/00. - The primary balance swung sharply into deficit, reaching 8½ percent of GDP in 1999/00. - Dominica’s economy is highly dependent on agriculture (banana production in particular); agriculture’s decline in the 1990s contributed to weaker growth relative to other ECCU countries. - Migration and limited tourism diversification capacity have compounded growth challenges. - The stabilization program supported by an SBA in 2002/03 underperformed: - Economic growth in 2002 was much weaker (-4½ percent) than envisaged under the SBA (-½ percent). - The overall deficit target for 2002/03 was 1½ percent of GDP worse than budgeted. - Arrears to private creditors continued to accumulate. ### Recent developments and performance under the program (mid-2003 onward) - A more focused adjustment strategy adopted in mid-2003, and supported by the SBA and a PRGF since December 2003, focused on an orderly adjustment, reinvigorating growth, and a debt strategy for medium-term sustainability. - Fiscal consolidation: - A central government primary balance of 3 percent of GDP was established as the objective. - The primary balance moved from an average deficit of 1½–2 percent of GDP in 2001–03 to a surplus of 4½ percent of GDP in 2004/05. - Revenue measures broadened the tax base and improved tax efficiency; the economic recovery increased revenue-to-GDP ratio. - The wage bill, which at 17 percent of GDP was one of the largest in the region, has been reduced by more than 3 percentage points. - Nongrant financed investment spending has also been scaled back. - Debt restructuring: - With the debt-to-GDP ratio approaching 130 percent, authorities concluded in December 2003 that debt was unsustainable. - The December 2003 debt exchange offer targeted primarily private sector creditors. - Claims issued prior to December 2003 were to be exchanged for three new local currency denominated bonds carrying a coupon rate of 3.5 percent with 10, 20 and 30-year maturities, and principal reductions of 30, 20, and 0 percent, respectively. - The debt stock declined to 117 percent of GDP at end-2004. - Structural reforms: - Legislation to introduce a VAT was passed by Parliament. - Progress on other structural reforms has been slower than hoped, reflecting limited implementation capacity and difficulties in building consensus. - Program performance: - Program implementation since the introduction of the PRGF has been solid. - All end-June quantitative performance criteria were met; the continuous performance criterion on external arrears was missed. - The authorities requested a waiver for nonobservance of a performance criterion for completion of the fifth review. ### Key vulnerabilities and policy challenges going forward - Major challenges identified: - Poor prospects for the banana sector. - Rising oil prices. - High vulnerability to natural disasters. - Continued high debt level and large unfunded liabilities in the social security system. - Structural rigidities constraining private sector-led growth. - Policy focus: - The authorities’ program for 2005/06 has a stronger emphasis on structural reforms. - The forthcoming Growth and Social Protection Strategy document represents an important step forward. - Sustaining growth momentum and ensuring progress in lowering poverty and unemployment will require decisive action. _Italic: Source: Executive Summary, _cr05384 - Executive Summary_ ### 10. Recent economic developments have been favorable: ### _cr05384 - 10. Recent economic developments have been favorable: ### Recent economic developments and output - Real GDP increased in 2004 by an estimated 3.5 percent. - Staff and the authorities expect real GDP growth to reach 3 percent in 2005 (albeit subject to downside risks). - Inflation declined in 2004 and has remained subdued through July 2005, despite the pass through of higher energy prices to consumers. - Import growth has picked up, mirroring the domestic recovery; increased tourism receipts ameliorated the current account impact, with merchandise exports broadly unchanged. - Banana production, total manufactured production, and imports of construction materials are presented in output indices (quarterly series through Q1 2005) in the source charts. ### Financial intermediation and monetary developments - Credit to the private sector turned positive from mid-2004 after a contraction that started in mid-2001. - Banking system liquidity remains high, partly due to strengthened fiscal accounts and growing deposits. - Banks have increased their net foreign asset position in recent months. - The debt restructuring had a very limited effect on banks’ balance sheets. - Indicators suggest a modest reduction in nonperforming loans. - The East Caribbean dollar (pegged to the U.S. dollar) depreciated in real effective exchange rate (REER) terms by 7 percent in 2004 and by a further 3½ percent through mid-2005. ### Fiscal performance (FY 2004/05) - Revenue collection was almost 2 percentage points of GDP higher than previously projected, reflecting arrears collection and windfall gains. - Current expenditures exceeded the baseline program target mainly due to an unbudgeted transfer of ¾ percent of GDP required for the establishment of the regional Caribbean Court of Justice (CCJ). - Delays in project execution and donor disbursement produced significant shortfalls in capital spending. - Primary surplus for the year was 4½ percent of GDP (4 percent excluding the one-offs from migrants deposits and the CCJ payment), which was 2½ percentage points of GDP higher than programmed. - The fiscal accounts benefited from some 1 percent of GDP in migrants’ deposits (proceeds required of regional migrants, forfeited when they fail to return). ### Performance relative to program targets - All end-June quantitative performance criteria were met, most with large margins (Table 5). - The continuous performance criterion on the nonaccumulation of external arrears was missed due to a brief delay in servicing a government guaranteed loan. ### Structural reforms and transparency - All three structural benchmarks for the fifth review were broadly completed, although proposals to amend the Finance Administration Act were finalized without numerical targets. - The government decided to publish in the Official Gazette all Cabinet decisions granting new tax and duty concessions, identifying the beneficiary as well as its legal basis. - With parliamentary approval of the VAT and excise tax legislations, substantial progress has been made towards the introduction of a VAT on March 1, 2006. - The authorities agreed to undertake strategic reviews of DEXIA, the National Development Cooperation (NDC), and AID Bank and establish implementation action plans by end-December 2005. ### Debt restructuring - Agreements have been reached with creditors holding just above 70 percent of the debt eligible for restructuring. - Discussions with three creditors that account for the bulk of remaining unrestructured debt are continuing. - The Exim Bank of Taiwan Province of China recently filed suit in a New York District Court to recover its claim (about US$12 million); implications remain uncertain. - Authorities have continued to deposit into an escrow account interest accrued under the original terms until the date the exchange offer was closed, and under the restructured terms subsequently. ### Outlook and risks - Staff and the authorities updated the medium term macroeconomic framework, with broad agreement that annual GDP growth of some 3 percent should be feasible over the medium term and annual inflation would remain subdued at below 2 percent. - External current account is expected to improve over the medium term. - Strong growth in tourism receipts is expected to continue in the near term; merchandise exports (niche agricultural products) are expected to strengthen in the outer years. - Import growth, after rising sharply this year reflecting higher private and public investment, is expected to slow somewhat. - Positive upside potential: nature-based and adventure tourism, and potential to export geothermal-based electricity to Guadeloupe and Martinique. - Downside risks: bleak prospects for the banana sector following EU reforms; recent rise in oil prices (first round effect on imports in 2005 estimated to be about 2 percentage points of GDP); high vulnerability to natural disasters; high debt despite restructuring. - A natural disaster example: an earthquake last November caused damage estimated at 7 percent of GDP. ### Growth potential and poverty concerns - Simple growth regressions predict per capita income growth for Dominica in the range of 2¾−6 percent; realized rate during 1990−2003 was about 1½ percent. - A World Bank cross-Caribbean study suggests that reducing government consumption could raise annual real GDP growth to 2.9 percent if government consumption decreased to the 75th percentile ranking in the Latin America and Caribbean region. - As of 2002: unemployment at 25 percent of the labor force and poverty at 33 percent of the population. - Large past public investment did not yield sustained growth; loss of human capital through migration has undermined growth potential. ### Bottlenecks to investment and recommended reforms - Electricity sector: DOMLEC’s monopoly should be addressed. Authorities plan reforms by the end of this year to establish a regulatory commission and institute a tariff structure more reflective of production costs (MEP ¶10) to allow new entrants and tap geothermal potential. - Investment promotion agencies: Review needed for DEXIA, NDC, and AID Bank to assess need for three institutions, effectiveness, accountability, and possible streamlining. DEXIA’s monopoly on rice and sugar importation is questionable. NDC’s investment approval process is slow and uncertain; AID Bank’s balance sheet needs closer scrutiny. - Land administration: Absence of a national cadastral survey; land registration not mandatory nor comprehensive. Authorities urged to accelerate modernization of land registration. - The authorities agreed to undertake strategic reviews of the three public sector investment promotion agencies and to establish implementation action plans by end-December 2005 (MEP ¶10). ### Tax incentives and revenue structure - Staff estimates foregone customs revenue from incentives in 2004/05 at about 4½ percentage points of GDP. - Staff view: incentives are costly, administratively burdensome, nontransparent, and have limited apparent benefits in attracting FDI. - The authorities noted regional competition pressures and argued some costs may be overstated if imports would not have existed absent concessions. - Authorities agreed to undertake a comprehensive review of statutory exemptions (MEP ¶20) and to keep recourse to discretionary tax exemptions to a minimum. *Source: _cr05384 - 10. Recent economic developments have been favorable.* ### 21. The authorities intend to strengthen policies on education and migration. The ### 21. The authorities intend to strengthen policies on education and migration. The ### Education and migration - Loss of a substantial number of nurses in recent years, to the U.S. and U.K., in particular, has strained local medical services delivery. - Authorities see scope for expanding the training of nurses in the near term, perhaps with private-sector interest, to a full-fledged export sector. - Staff saw merit in this initiative, but noted the need to limit the budgetary implications by obtaining full cost recovery. - Authorities are keen to increase remittances and investment from Dominica’s Diaspora to offset the ‘brain drain.’ - Initial steps taken: commissioning a report by Dominicans in the Diaspora on how best the government can facilitate remittances and investment. ### C. Fiscal Policy and Debt Sustainability — Medium-term context - Debt sustainability analysis: a 3 percent of GDP central government primary surplus being targeted under the program would ensure a gradual decline in debt, provided growth remains at current levels and Dominica Social Security’s (DSS) finances are improved. - Sensitivities highlighted: - If a primary surplus of just 2 percent of GDP were targeted, the debt to GDP ratio would remain above 80 percent through 2015. - An average growth performance of 1–2 percent during the projection period would result in a very gradual decline in public debt. - Inclusion of DSS deficits projected under current policies would put the debt path back on an unsustainable trajectory. - Two options to avoid unsustainability: - Target a primary balance above 3 percent; or - Adjust parameters of the social security system to eliminate DSS deficits. - Authorities prefer addressing DSS deficits through reforms rather than targeting a permanently higher primary surplus; mission supported this approach. ### FY 2005/06 budget - Budget stance: mildly expansionary but consistent with further debt consolidation (MEP ¶11–13). - Central government primary surplus target: 3 percent of GDP. - Fiscal choices: - Conservative revenue estimates underpin targets. - Projected increase in grants creates room to increase capital expenditure, including road repairs following last year’s earthquake. - Current expenditure contained: noninterest outlays held constant in real terms; wage bill broadly unchanged as a ratio to GDP. - Priority on capital projects within a tight overall expenditure envelope to support growth. - Wage bill and public sector employment: - Authorities restored the 5 percent cut in public sector wages introduced in the 2003/04 budget. - Authorities intend to reduce the wage bill by 1–1½ percentage points of GDP over the medium term from its current level of 13¾ percent of GDP (MEP ¶16). - This target to be realized principally through streamlining, commercializing or privatizing nonessential services. - To ensure adherence in 2005/06, government initiated outsourcing of janitorial and government building security services and streamlining of airports and ports authorities (MEP ¶16). - Public Sector Investment Program (PSIP): - Effective implementation is a major challenge given its size and capacity constraints. - Recommend focusing PSIP sectoral composition on investments in human and physical capital. - Recommend prioritizing projects in a comprehensive multi-year rolling framework and sequencing in line with institutional capacity and flow of funds. - Authorities noted greater flexibility in the use of grant funds from donors would improve PSIP execution. - Program note: Under the program, any additional revenue from migrants’ deposits will not count towards the primary balance target, but go towards reducing debt. ### Dominica Social Security (DSS) - Key priority: addressing precarious DSS finances. - FAD/World Bank technical assistance mission findings: - As the pension system matures and the ratio of contributors declines, DSS will start to run deficits (by about 2014) and eventually deplete its reserves (by about 2025). - System’s unfunded liabilities are estimated at some 150 percent of 2004 GDP. - Adjustments to consider: - Gradual reduction in benefits; - Raising the statutory retirement age; - Increasing the contribution rate; - Diversifying the investment portfolio. - Staff stressed early initiation of reforms to avoid abrupt and drastic changes later. - Authorities have undertaken to review reform options in a timely way (MEP ¶15). ### Other fiscal pressure points — institutional strengthening - Fiscal Responsibility Law: - Authorities intend to institutionalize fiscal discipline and plan to amend the existing Finance Administration Act (FAA) (MEP ¶17). - Work at an advanced stage; authorities stress need for wider public consultation before finalization. - Strengthening public expenditure management: - Progress: reconciling bank accounts; improving coverage, reporting and monitoring of expenditures; all government bank accounts now captured in the general ledger. - Remaining needs: establish robust cash management system; effectively control commitments; initiate a medium-term budgeting framework for ministries. - Note: Weaknesses in monitoring domestic arrears highlighted by a recent incident where government only recently acknowledged a claim for about EC$2 million. - Strengthening legal and institutional framework for public debt guarantees: - Current procedures unsystematic and delinked from other economic objectives; few safeguards on financial soundness of underlying borrowing. - Ministry of finance, with staff assistance, working to strengthen framework to include: - Ascertaining financial soundness of borrower and borrowing plan; - Consistency with medium-term debt sustainability; - Transparency and parliamentary oversight in granting guarantees; - Monitoring financial condition of borrower for duration of guarantee. ### Debt restructuring - Process slow: more than a year after the exchange offer formally closed in June 2004, issuance of new bonds to all participating creditors not yet completed. - Legislative changes to allow bonds to be traded on the Eastern Caribbean Stock Exchange (ECSE) not yet passed by Parliament. - Authorities attribute delays to technical problems, limited domestic expertise, and difficulties soliciting responses from nonparticipating (and some participating) creditors. - Commitments by authorities: - Complete issuance of new bonds to all participating creditors shortly; - Present legislative amendments at next parliamentary sitting (expected in November) to allow ECSE trading of the bonds (MEP ¶7). - Authorities treating outstanding principal amounts as if restructured and continuing to make deposits into an escrow account as payments fall due. - Late August: received communication from one of three remaining large nonparticipating creditors; hopeful of further progress. - Staff caution: payments into escrow underscore positive approach but do not preclude risk of legal action by creditors as long as arrears are being incurred. ### D. Addressing Vulnerabilities - Financial system monitoring: - Banking system largely unaffected by debt restructuring and appears broadly sound. - At end-June 2005, capital adequacy ratios of locally incorporated banks were some 19 percent of risk-weighted assets. - Banking system’s liquidity and profitability on the increase. - Concerns remain on credit risk assessment: nonperforming loans, while declining, are some 21 percent of total loans. - Recent credit expansion concentrated in “personal loans” and “trade” categories; staff queried whether personal loans were for business purposes and whether regulatory asymmetries exist for business versus personal loans. - Authorities note some personal loans may be used for business, possibly reflecting banks’ requests for personal collateral. - Staff urged authorities to pass without delay the revised Banking Act to implement recommendations of the 2004 ECCU regional FSAP. - Nonbank financial sector (credit unions): - Vulnerabilities due to poor reporting practices and weak regulatory oversight have weakened credit union balance sheets. - Onsite inspection of Roseau Cooperative Credit Union (RCCU) in May raised concerns about level of nonperforming assets, account handling practices and audit quality. - Financial Services Unit (FSU) working with RCCU and expected to carry out targeted inspections of remaining 15 credit unions (MEP ¶10). - Legislation required to provide FSU legal authority to directly supervise nonbank financial sector, including credit unions, money transfer institutions, and the AID Bank. - Natural disaster vulnerability: - November 2004 earthquake and mudslides had a large economic cost—estimated at around 7 percent of GDP—including through the fiscal accounts. - Recommend better construction standards for roads and buildings and greater risk mitigation. - Improved building codes not yet legislated; not all government buildings and structures are insured. - Staff noted government might consider targeting a stronger primary balance to set aside funds for future disasters; authorities see merit but feel additional fiscal adjustment would be problematic now. - Authorities looking to participate in initiatives for regional risk pooling of catastrophe insurance. ### V. Program modalities - 2005/06 program places stronger emphasis on structural reforms to reinvigorate growth. - Prior actions implemented for fifth review: - Parliamentary approval of VAT legislation; - Cabinet approval of a plan to rationalize the wage bill and ensure its consistency with the budgetary envelope. - Implementation delays: two other structural benchmarks initially envisaged for end-September now expected by end-December (MEP Table 2). - In attached LOI and MEP, authorities: - Establish quantitative performance criteria for end-December 2005 and end-June 2006 test dates, and indicative targets for end-September 2005 and March 2006; - Outline structural reform agenda for remainder of 2005 and first months of 2006 (Table 9); - Request a waiver for nonobservance of the continuous performance criteria on external payments arrears. - Authorities request extension of repurchase expectations from December 22, 2005 to December 22, 2006 (LOI ¶4). - Original SBA projected BOP deficit of 2.1 percent of GDP and current account deficit of 12.9 percent of GDP for 2005. - Current projections show larger deficits: approximately 3.1 percent for overall balance of the BOP and 19.2 percent (17 percent on a cash basis) for the current account. - Staff supports extension given fragile external accounts. - Extension would move repurchase expectations totaling SDR 1,268,444 to an obligation basis, with each amount falling due exactly one year after the expectation date (Table 10). ### VI. Other issues - Statistical weaknesses: - Dominica’s statistical databases remain weak; substantial improvements needed for effective surveillance. - Dominica participates in the General Data Dissemination System (GDDS); metadata highlights weaknesses and improvement proposals. - Mission recommended priority improvements in quality and timeliness of debt data and more frequent surveys of living conditions. - Banana preferences and trade policy: - Authorities expressed grave concern about planned erosion of banana preferences and adverse effects on the economy. - Reiterated commitment to regional integration through OECS and CARICOM and intent to use CARICOM’s regional negotiating machinery. - Government revising tariff regime to ensure compliance with CARICOM’s harmonized tariff schedule and to remove import licensing requirements still in place. - Labor market data gaps: - Last labor force survey carried out in 1999 (new one underway). - Little information on incomes. - Current labor code largely outdated, with minimum wage levels well below prevailing levels. ### VII. PRSP status report - Growth and Social Protection Strategy (GSPS) preparation nearing completion. - Draft GSPS circulated for comment at donors’ conference in Roseau in June; revised draft being prepared. - After final public consultations, document expected to be presented to Cabinet for adoption later this year. - Staff called on authorities to finalize GSPS as soon as possible to guide new PSIP projects. - Authorities confident sectoral strategies and FY 2005/06 PSIP are consistent with GSPS. ### VIII. Staff appraisal - Assessment: Dominica has made commendable progress under the PRGF-supported program. - Outcomes cited: - Strong policies pursued by authorities contributed to a remarkable turnaround in the economy’s fortunes. - Economic growth has resumed, financial intermediation has recovered, and tax revenues have been buoyant. - Buoyant tax revenues allowed the program’s medium-term primary surplus objective to be realized sooner than expected. *Source: IMF staff report content provided.* ### 40. Staff also welcomes the stronger foundation that is being laid for public finances. ### 40. Staff also welcomes the stronger foundation that is being laid for public finances. ### Public finance reforms and transparency - Adoption of VAT and excise tax legislation in early September should allow the introduction of VAT in March 2006. - VAT introduction expected to widen the tax base and improve its structure and efficiency. - Government decision to publish Cabinet decisions on tax concessions noted as an important step to improve transparency of public finances. - Conditional recommendation: Provided amendments to the FAA include firm guidelines on targeting a primary fiscal surplus consistent with reducing the public debt stock to a prudent level, the scope for repeating the mistakes that caused debt to explode in the 1990s will have been minimized. ### Remaining threats to fiscal sustainability and growth durability - Public debt, while trending downward, remains very high. - Large projected deficit of the social security system identified as a threat to public finance. - Exogenous shocks, including natural disasters, remain an ever-present risk that will affect durability of the economic recovery and sustainability of public finances. - Key aspects of the Article IV consultation focused on policies to remove impediments to growth and address remaining threats to public finances. ### Removing investment bottlenecks (policy priorities) - Central plank: remove bottlenecks impeding higher private investment. - Immediate priority reforms (given limited implementation capacity): - Amend the Electricity Supply Act at the earliest opportunity to allow new entrants into the market. - Enhance the enabling environment for private sector investment, including rationalizing the operations of the three investment promotion agencies with a view to creating a one-stop investment promotion center. - Adopt at the earliest opportunity a program to modernize and ensure comprehensive coverage of land registration. - Longer-term point: such structural reforms will do more to stimulate private sector–led growth than seeking to attract investment through tax incentives. - Concern: recent rise in the number of discretionary tax incentives is described as very disappointing; use of such incentives should be sharply curtailed going forward. ### Fiscal policy stance and public expenditure efficiency - Staff welcomes the 2005/06 budget which targets a primary surplus that balances further debt reduction with reinstating the 5 percent cut in public wages introduced in 2003/04. - Recommendation: continue targeting a primary surplus of at least 3 percent of GDP to ensure a reduction in the debt stock to more manageable levels. - Desirable objective: aiming to reduce debt to 60 percent of GDP over the next decade would be highly desirable. - Efficiency measures recommended: - Further streamline public sector employment. - Limit the PSIP to well-targeted projects with high returns. - Rationalize aggressively the structure and functions of ministries and departments to be consistent with medium-term reductions in the wage bill. - Staff strongly welcomes the government’s objective of a smaller, more efficient and better paid public service. ### Social security system (DSS) vulnerabilities - Large unfunded social security liabilities jeopardizing debt sustainability need decisive and prompt action. - The time when DSS will start to incur deficits is described as not far off. - Urgent recommendation: expedite the review and implementation of reform options to address looming DSS deficits. - Given vulnerability to natural disasters, recommendation: initiate international diversification of DSS’s portfolio at the earliest opportunity. ### Political mandate and other reform priorities - Renewed political mandate provides an unparalleled window of opportunity to advance reforms. - Recent reforms addressed adverse output effects from large fiscal deficits and arrears. - Remaining priorities: - Remove remaining impediments to higher economic growth. - Reduce threats to public finance. - Address vulnerabilities in the financial sector by strengthening regulatory oversight of nonbank institutions. ### Monetary and exchange rate arrangement - Assessment: the current monetary and exchange rate arrangement has served Dominica well. - Staff concurs that the framework needs to remain the bulwark around which economic policies should be based. - The regional currency board arrangement provided remarkable exchange rate and price stability despite frequent and large adverse shocks. - Recent depreciation of the U.S. dollar in recent years has helped move the real exchange rate well within a manageable range. ### Data, financing assurances, and program implementation - Progress noted in provision of core statistics to the Fund; data deficiencies continue to hamper surveillance. - Encouragement to improve data quality, in particular on national accounts and government finances. - Recommendation: completion of the financing assurances review is warranted given: - Authorities’ good faith efforts in seeking collaborative settlements with the remaining private nonparticipating creditor. - Best efforts to reach agreement with the remaining bilateral creditors. - Willingness to continue depositing payments into an escrow account. - Strong reform agenda being pursued. - Risk note: risks to Fund resources will remain until the debt restructuring process is completed and all external arrears are eliminated; Fund support is critical to the success of the authorities’ program and justifies completion of the financing assurances review. ### Specific staff supports and conclusions - Staff supports granting the requested waiver for the nonobservance of the continuous performance criterion on the nonaccumulation of external payments arrears in light of the minor and temporary nature of the deviation. - Staff supports the authorities’ request to extend the repurchase expectations, noting: - Despite recent improvement in economic conditions, Dominica’s external position remains weak. - Repayment on an expectation basis of the purchases made under the 2002 SBA would impose undue hardship and heighten risks to the current PRGF arrangement. - Staff supports the conclusion of the fifth review as program implementation has been solid: - All-but-one performance criteria under the arrangement have been observed, most by large margins. - While significant risks remain, the authorities’ commitment to implementing the policies envisaged under the program should help maintain a satisfactory performance. *Source: IMF staff report excerpts.* ### 50. It is recommended that the next Article IV consultation with Dominica be held under ### _cr05384 - 50. It is recommended that the next Article IV consultation with Dominica be held under ### Article IV consultation recommendation - It is recommended that the next Article IV consultation with Dominica be held under the 24-month cycle, in accordance with the provisions of Decision No. 12794-(02/76) of July 15, 2002. ### Selected economic indicators (2001–2006; annual percent change unless otherwise specified) - Real GDP (factor cost): -4.2; -4.7; 0.0; 3.5; 2.5; 3.1; 3.0 - GDP deflator (factor cost): 1.2; -0.4; 1.7; 1.2; 1.5; 1.5; 1.5 - Nominal GDP (at factor cost): -3.0; -5.1; 1.7; 4.7; 4.1; 4.5; 4.5 - Nominal GDP at market prices: -2.7; -3.7; 2.4; 5.0; 3.9; 4.3; 4.4 - Consumer prices (end of period): 1.1; 0.4; 2.9; 0.8; 1.5; 1.5; 1.5 ### Money and credit (changes relative to stock of M2 at beginning of period) - Net foreign assets of the banking system 2/: 6.6; 19.3; 17.3; 8.1; 4.1; 4.1; 5.5 - Net domestic assets of the banking system 2/: 0.9; -10.8; -16.4; -2.1; 1.4; 1.9; 0.6 - Net credit to the nonfinancial public sector 2/: 5.6; -5.4; -4.3; -5.1; 0.1; 0.2; -1.7 - Credit to the private sector 2/: -3.1; -1.3; -2.3; 4.3; 4.8; 5.1; 4.1 - Liabilities to the private sector (M2): 7.4; 8.5; 1.0; 5.9; 5.5; 6.0; 6.1 ### External sector (U.S. dollars, unless otherwise specified) - Merchandise exports, f.o.b. (annual percent change): -18.9; -1.8; -6.0; 3.0; 6.9; 5.2; 5.0 - Merchandise imports, f.o.b. (annual percent change): -11.3; -11.5; 9.3; 13.5; 3.7; 8.6; 4.0 - Real effective exchange rate (end-of-period; depreciation -) 3/: 3.7; -6.3; -6.7; -7.0; ...; -3.5; ... - Merchandise exports, f.o.b. (in millions of U.S. dollars): 44.4; 43.6; 41.0; 42.2; 45.2; 44.5; 46.7 - Merchandise imports, f.o.b. (in millions of U.S. dollars): 115.7; 102.4; 111.8; 126.9; 131.6; 137.8; 143.2 - Current account balance (in millions of U.S. dollars): -48.9; -34.7; -33.6; -46.7; -42.4; -54.3; -51.8 - Capital account balance 4/ (in millions of U.S. dollars): 50.3; 46.9; 35.0; 20.9; 32.7; 45.4; 43.6 - Overall balance (in millions of U.S. dollars): 1.5; 12.1; 1.4; -25.7; -9.7; -8.8; -8.2 ### Central government fiscal indicators (percent of GDP; fiscal year July–June basis where noted) - Savings: -3.0; -0.6; 8.7; 7.6; 8.1; 7.4; 8.2 - Primary: 2.4; 5.1; 14.6; 13.8; 14.0; 13.1; 13.1 - Grants: 1.7; 4.5; 8.8; 5.9; 6.2; 8.1; 8.1 - Capital expenditure and net lending: 5.7; 5.1; 10.1; 8.5; 11.0; 10.1; 10.1 - Primary balance: -2.1; -1.6; 5.6; 4.4; 3.0; 3.0; 3.0 - Overall balance: -8.6; -5.4; -1.3; -0.6; -2.5; -2.5; -1.7 - Nonfinancial public sector debt (gross) Total: 93.7; 127.2; 130.6; 116.7; ...; 109.1; 103.9 - External: 67.5; 79.9; 84.4; 81.2; ...; 81.1; 77.6 - Domestic: 26.2; 47.3; 46.2; 35.5; ...; 28.0; 26.3 ### Balance of payments highlights and projections (2002–2010; selected years) - Current account balance (in percent of GDP): -34.7; -33.6; -46.7; -42.4; -54.3; -51.8; -50.5; -48.9; -47.6; -45.9 - Trade balance (in millions of U.S. dollars): -58.7; -70.8; -84.6; -86.4; -93.3; -96.5; -98.4; -100.2; -102.4; -104.6 - Exports (f.o.b.) 2/ (in millions of U.S. dollars): 43.6; 41.0; 42.2; 45.2; 44.5; 46.7; 49.1; 51.5; 54.1; 56.8 - Bananas: 8.1; 5.9; 7.2; ...; 7.2; 7.5; 7.8; 8.2; 8.5; 8.9 - Imports (f.o.b.) (in millions of U.S. dollars): 102.4; 111.8; 126.9; 131.6; 137.8; 143.2; 147.5; 151.8; 156.5; 161.4 - Services balance (in millions of U.S. dollars): 26.0; 32.8; 40.0; 47.8; 45.1; 47.3; 50.1; 53.1; 56.2; 59.3 - Exports of services (in millions of U.S. dollars): 79.7; 77.3; 86.3; 107.2; 95.5; 99.6; 104.0; 108.5; 113.3; 118.3 - Travel (in millions of U.S. dollars): 45.7; 52.3; 60.1; 68.7; 65.6; 68.5; 71.5; 74.6; 77.9; 81.3 - Net income (in millions of U.S. dollars): -18.4; -12.1; -21.8; -20.9; -22.0; -20.2; -20.6; -20.9; -21.4; -21.5 - Interest payments (public sector; percent of exports of goods and nonfactor services): -8.8; -8.0; -8.6; -9.0; -10.7; -8.4; -8.3; -8.1; -8.0; -7.5 - Net current transfers (in millions of U.S. dollars): 16.4; 16.6; 19.8; 17.1; 15.9; 17.6; 18.4; 19.2; 20.0; 20.9 - Private: 12.6; 12.4; 18.4; 16.9; 17.0; 17.7; 18.5; 19.3; 20.1; 21.0 - Public: 3.8; 4.2; 1.4; 0.2; -1.1; -0.1; -0.1; -0.1; -0.1; -0.1 - Capital and financial account (in millions of U.S. dollars): 32.1; 22.4; 23.0; 32.7; 45.4; 43.6; 50.4; 47.5; 43.8; 52.1 - Overall balance (in millions of U.S. dollars): 12.1; 1.4; -25.7; -9.7; -8.8; -8.2; -0.1; -1.3; -3.8; 6.2 - Net international reserves (percent of GDP change): -12.1; -1.4; 10.3; -0.4; -5.3; -2.1; -4.9; -3.2; -3.5; -3.9 ### Central government: Summary accounts (2000/01–2005/06; EC$ millions and percent of GDP) - Total revenue and grants (EC$ millions): 271.5; 209.7; 224.1; 285.9; 291.3; 292.0; 287.0; 294.2 - Current revenue (EC$ millions): 200.5; 197.1; 191.9; 221.8; 229.2; 245.7; 237.2; 229.3 - Grants (EC$ millions): 68.0; 11.8; 30.9; 63.2; 59.6; 44.3; 47.3; 63.4 - Total expenditure (EC$ millions): 350.3; 269.3; 261.3; 295.2; 317.5; 296.3; 306.4; 313.5 - Current expenditure (EC$ millions): 230.1; 229.7; 226.6; 223.1; 226.7; 232.9; 222.2; 234.8 - Wages and salaries (EC$ millions) 4/: 116.2; 116.5; 116.1; 104.2; 102.7; 102.0; 99.7; 106.5 - Interest (EC$ millions): 36.0; 36.9; 37.6; 41.7; 43.8; 43.9; 42.4; 43.0 - Capital expenditure and net lending (EC$ millions): 120.2; 39.6; 34.7; 72.1; 90.9; 63.5; 84.2; 78.7 - Overall balance (EC$ millions): -78.8; -59.5; -37.2; -9.3; -26.3; -4.3; -19.3; -19.3 - Financing (EC$ millions): 60.1; 51.3; 48.7; 1.6; 29.0; 11.3; 19.3; 19.3 - Net foreign financing (EC$ millions): 42.7; 25.6; 44.9; 47.3; 16.9; 19.6; 12.5; 22.3 - Net domestic financing (EC$ millions): 17.4; 25.7; 3.8; -45.7; 12.1; -8.3; 6.8; -3.0 - Total revenue and grants (percent of GDP): 37.6; 30.2; 32.7; 40.0; 39.4; 39.1; 37.4; 37.7 - Total expenditure (percent of GDP): 48.5; 38.8; 38.2; 41.3; 42.9; 39.6; 39.9; 40.2 - Overall balance (percent of GDP): -10.9; -8.6; -5.4; -1.3; -3.5; -0.6; -2.5; -2.5 - Memorandum items: - Capital expenditure less total grants (EC$ million): 42.9; 30.2; 4.0; 11.8; 34.7; 22.8; 39.5; 17.9 - Savings (incl. grants): 5.3; -3.0; -0.6; 8.7; 8.4; 7.6; 8.1; 7.4 - Primary balance (incl. grants) 6/: -3.3; -2.1; -1.6; 5.6; 2.0; 4.4; 3.0; 3.0 - Nominal GDP at market prices (EC$ millions): 722.4; 693.7; 684.8; 714.4; 740.0; 747.6; 767.5; 780.2 ### Banking system and monetary authorities (selected, 2002–2006; EC$ millions, end of period) - I. Consolidated banking system and monetary authorities: - Net foreign assets: 193.8; 289.0; 333.7; 357.7; 357.5; 391.6 - Net domestic assets: 355.4; 265.5; 253.6; 261.7; 264.8; 268.8 - Net credit to the nonfinancial public sector: 74.8; 51.1; 23.0; 23.6; 24.1; 13.6 - Credit to the private sector: 433.2; 420.6; 444.7; 472.9; 474.7; 500.2 - Broad money 3/: 549.2; 554.5; 587.4; 619.5; 622.4; 660.4 - II. Operations of the monetary authorities: - Imputed net international reserves: 117.8; 118.7; 90.8; 91.8; 105.0; 110.8 - Monetary base: 129.9; 125.7; 116.8; 119.7; 123.7; 131.3 - III. Commercial banks: - Net foreign assets: 79.0; 170.4; 242.9; 265.9; 252.5; 280.8 - Net claims on ECCB: 98.2; 85.6; 73.8; 78.8; 78.9; 84.4 - Net domestic assets: 336.6; 264.3; 233.1; 235.8; 251.9; 254.5 - Private sector deposits 3/: 513.7; 520.3; 549.8; 580.6; 583.4; 619.7 - IV. Consolidated banking system (annual percentage change): - Credit to the private sector: -1.4; -2.9; 5.7; 6.3; 6.7; 5.4 - Private sector deposits: 7.6; 1.3; 5.7; 6.1; 12.7; 6.2 - Broad money: 8.5; 1.0; 5.9; 5.5; 6.0; 6.1 - Interest rates (commercial banks; end-of-period, percent per annum): - Deposits (three-month time—maximum rate): 6.0; 6.0; 3.0; ......... - Lending minimum rate: 8.5; 8.0; 7.5; ......... - Lending maximum rate: 20.8; 18.2; 18.2; ......... ### Quantitative performance criteria and indicative targets (selected items; EC$ millions) - Central government primary balance (PC): Program -3.0; Adjusted -3.0; Actual 0.2; Excess (+)/Shortfall (-) 3.2 - Central government wage bill: Program 27.0; Adjusted 27.0; Actual 25.3; Excess (+)/Shortfall (-) 1.7 - Banking system net credit to central government: Program 3.0; Adjusted 6.7; Actual 4.0; Excess (+)/Shortfall (-) 2.6 - Net changes in central government arrears to private domestic parties: Program 15.0; Adjusted 15.0; Actual 3.2; Excess (+)/Shortfall (-) 11.8 - Disbursement of central government or central government guaranteed external nonconcessional debt with maturity of at least one year: Program 4.0; Adjusted 4.0; Actual 2.9; Excess (+)/Shortfall (-) 1.1 - Central government and central government guaranteed external payments arrears: Program 0.0; Adjusted 0.0; Status: Not met / Met as specified in table for various dates - Central government overall balance: Program -16.7; Adjusted -16.7; Actual -13.3; Excess (+)/Shortfall (-) 3.4 - Central government revenues: Program 48.7; Adjusted 48.7; Actual 55.4; Excess (+)/Shortfall (-) 6.7 - Central government primary savings: Program 4.1; Adjusted 4.1; Actual 12.3; Excess (+)/Shortfall (-) 8.2 ### Structural benchmarks and status of reforms (selected) - Finalize proposals for amending the Finance Administration Act, to implement a Fiscal Responsibility Law: Benchmark July 2005 — Completed - Approval of the 2005/06 budget, with a primary balance target consistent with the PRGF program: Benchmark August 2005 — Completed - Financial sector reforms: On-site inspection of Roseau Credit Union and follow-up on findings/remedial measures: Benchmark June 2005 — Completed - Establish legislative basis for the FSU to supervise insurance companies, and regulate all NBFIs and AID Bank: Benchmark End-September 2005 — Ongoing - Cabinet approval of action plans for DEXIA and NDC, addressing their reorganization and cost effectiveness: Benchmark End-September 2005 — Pending ### Medium-term macroeconomic framework (2000–2010; percent of GDP unless otherwise specified) - GDP at constant (1990) prices (annual percent change): 1.4; -4.2; -4.7; 0.0; 3.5; 2.5; 3.1; 3.0; 3.0; 3.0; 3.0; 3.0 - Implicit GDP deflator (factor cost): 0.6; 1.2; -0.4; 1.7; 1.2; 1.5; 1.5; 1.5; 1.5; 1.5; 1.5; 1.5 - Gross domestic investment: 27.7; 25.4; 20.9; 25.4; 28.9; 22.1; 24.9; 26.7; 27.7; 27.7; 27.7; 27.7 - Public: 18.6; 15.0; 7.5; 9.4; 11.8; 13.1; 9.9; 10.7; 10.7; 10.7; 10.7; 10.7 - Private: 9.1; 10.3; 13.4; 16.0; 17.1; 9.0; 15.0; 16.0; 17.0; 17.0; 17.0; 17.0 - Gross national saving 2/: 12.0; 13.6; 15.3; 19.7; 21.6; 15.0; 12.5; 18.2; 20.4; 21.6; 22.6; 23.7 - Public: 3.7; 3.6; 0.0; 5.9; 10.8; 10.0; 8.4; 8.6; 9.0; 9.2; 9.5; 9.6 - Private: 8.3; 10.0; 15.3; 13.8; 10.8; 5.0; 4.1; 9.6; 11.4; 12.3; 13.2; 14.1 - Savings investment balance: -15.7; -11.8; -5.6; -5.7; -7.3; -7.1; -12.4; -8.5; -7.3; -6.1; -5.0; -4.0 - Memorandum items: Nonfinancial public sector debt (total percent of GDP): 86.2; 93.7; 127.2; 130.6; 116.7; ...; 109.1; 103.9; 99.5; 95.3; 91.1; 87.1 ### Financial and external vulnerability indicators (2000–2005) - Broad money (percent change, 12-month basis): 0.6; 7.4; 8.5; 1.0; 5.9; 6.0 - Private sector credit (percent change, 12-month basis): 8.2; -3.2; -1.4; -2.9; 5.7; 6.7 - Unsatisfactory assets/total loans 1/: 17.4; 22.6; 19.2; 21.7; 22.5; 20.5 - Provision for loan losses/total loans 1/: 7.0; 6.8; 7.0; 7.6; 7.3; 6.0 - Total capital/risk weighted assets (locally incorporated banks) 1/: 30.8; 35.4; 34.1; 28.5; 23.0; 18.7 - Exports of goods and services (percent change, 12-month basis in U.S. dollars): -7.9; -16.9; 2.7; -4.0; 8.7; 8.8 - Imports of goods and services (percent change, 12-month basis in U.S. dollars): 1.4; -9.5; -5.8; 0.2; 10.8; 8.6 - Current account balance (percent of GDP): -19.7; -18.7; -13.8; -13.0; -17.2; -19.2 - Net official reserves (U.S. dollars millions; end of period): 29.0; 30.4; 43.6; 44.0; 33.6; 38.9 - Public sector external debt (percent of GDP): 56.4; 67.5; 79.9; 84.4; 81.2; 81.1 - External debt (end of period) to exports of goods and services (percent): 105.1; 147.1; 163.4; 184.2; 171.1; 163.9 - REER appreciation (end of period; depreciation -): 4.8; 3.7; -6.3; -6.7; -7.0; -3.5 ### PRGF disbursements and Fund relations (selected) - Table 9 schedule and conditional disbursements under the PRGF arrangement are reported in the document (disbursement amounts and conditions detailed in the source tables). - Appendix I — Fund Relations (As of August 31, 2005): - Quota: 8.20 (SDR Million); Percent of Quota: 100.00 - Fund holdings of currency: 11.16 (SDR Million); 136.15 percent of quota - Net cumulative SDR allocation: 0.59 (SDR Million); Percent of Allocation: 100.00 - PRGF Arrangements outstanding: 4.21 (SDR Million); Percent of Quota: 51.28 - Stand-By Arrangements outstanding: 2.97 (SDR Million); Percent of Quota: 36.25 - Latest PRGF: Approval Date 12/29/03; Expiration Date 12/28/06; Amount Approved 7.69 (SDR Million); Amount Drawn 4.21 (SDR Million) - Projected payments to the Fund on an obligation basis (SDR Million) forthcoming 2005–2009: - Principal: 0.26; 1.10; 1.23; 0.38; 0.50 - Charges/Interest: 0.04; 0.13; 0.08; 0.05; 0.04 - Total: 0.30; 1.23; 1.31; 0.43; 0.54 - Exchange rate arrangement: Dominica is a member of the Eastern Caribbean Currency Union; Eastern Caribbean dollar pegged to the U.S. dollar at EC$2.70 per U.S. dollar since July 1976. - Safeguards Assessment: On-site safeguards assessment of the ECCB completed February 20, 2003; concluded appropriate mechanisms in place and proposed measures substantially implemented. - Article IV consultation: Last Article IV consultation concluded August 28, 2002; Dominica is on a 24-month cycle. - Technical assistance: MFD and FAD missions provided assistance on AML/CFT, tax policy and administration, VAT implementation, urban property taxation, and expenditure control; CARTAC complemented assistance. - FSAP: Joint IMF/World Bank FSAP missions September 1–19 and October 20–31, 2003; FSSA discussed May 5, 2004. ### World Bank relations (Appendix II; as of August 31, 2005) - World Bank: Part of Country Assistance Strategy (CAS) for the Eastern Caribbean (OECS) sub-region covering FY 2002–06; proposed new commitments around US$110 million for five OECS borrowing member states. - Ongoing World Bank projects in Dominica (total commitments approx. US$7.5 million): - OECS Telecommunications Reform Program: Dominica’s share US$1.2 million (part of US$6.0 million loan). - OECS Emergency Recovery Project: Dominica’s share US$3.2 million (part of US$21 million program). - Negative pledge update: Dominica remains ineligible for new Bank lending operations due to apparent violation of negative pledge clauses under earlier IBRD loans; government continuing efforts to resolve issue. - Analytical and advisory services: Country Financial Accountability Assessment, Social Protection Review, Country Procurement Assessment, Public Expenditure Review; technical assistance in petroleum, electricity and financial sectors. - Financial relations (gross disbursements and debt service during fiscal year; in millions of U.S. dollars): Total disbursements 1998–2004: 1.9; 1.4; 2.1; 0.5; 1.7; 2.7; 4.0; ...; Repayments and net disbursements series as presented in the source. ### Caribbean Development Bank (CDB) relations (Appendix III; as of August 31, 2005) - CDB approved loans totaling US$143.7 million, of which US$10.1 million are undisbursed. - July 2004: CDB approved exceptional financial assistance of a US$6.4 million grant in support of Dominica's stabilization and reform program, and a combination of interest rate reduction and extension of maturities on existing concessionary loans. - Total operation resulted in a reduction in Dominica's debt service estimated at US$13.2 million in NPV terms as at June 30, 2004. ### Millennium Development Goals indicators (selected; years indicated in table) - Net primary enrollment ratio (percent of relevant age group): 82.9; 79.3; 81.3 - Primary completion rate, total (percent of relevant age group): 93; 98; 91 - Proportion of seats held by women in national parliament (percent): 10.0; ...; 9.0; 9.0; 19.0 - Immunization, measles (percent of children ages 12–23 months): 88; 99; 99; 99; 99; 99 - Infant mortality rate (per 1,000 live births): 19; 17; ...; 14; 12 - Under 5 mortality rate (per 1,000): 23; 20; ...; 16; 14 - Access to an improved water source (percent of population): 97.0 (2003) - Access to improved sanitation (percent of population): 83.0 (2003) - Aid per capita (current US$): 272.8; 237.2; 202.2; 213.5; 153.5 - Debt service (percent of exports): 6.0; 7.0; 7.0; 7.0; 13.0 - Fixed line and mobile phone subscribers (per 1,000 people): 163.8; 228.0; 263.4; 309.8; 423.9 - Internet users (per 1,000 people): ...; 5.1; 26.4; 77.8; 160.3 - Sources: World Development Indicators database, April 2005. *Source: IMF staff report as presented in the provided content unit.* ### 1. Seventh Consolidated Line of Credit—to assist DAIDB in continuing to finance its lending ### 1. Seventh Consolidated Line of Credit—to assist DAIDB in continuing to finance its lending programme in the following areas: Agricultural and Industrial Credit, Housing and Student Loans. ### Project approvals, disbursements, and undisbursed balances - Seventh Consolidated Line of Credit (DAIDB): US$7.0 million approved; US$1.5 million undisbursed. - Upgrading of Ecotourism Sites: US$3.1 million approved; US$0.6 million undisbursed. - Student Loan Scheme (Seventh Loan) (DAIDB): US$7.0 million approved; US$3.0 million undisbursed. - Shelter Development Project: US$2.3 million approved; US$1.6 million undisbursed. - Roseau Water and Sewerage Project: US$10.0 million approved and disbursed. - OECS Solid Waste Management Project: US$1.4 million approved; US$1.1 million undisbursed. - Caribbean Court of Justice: US$2.2 million approved and disbursed. ### Dominica: Loan Disbursement (In millions of U.S. dollars; as at June 30, 2005) - 2001 - Net disbursement: 10.50 - Disbursement: 13.20 - Amortization: 2.70 - Interest and charges: 1.76 - Net resource flow: 8.74 - 2002 - Net disbursement: 3.66 - Disbursement: 6.25 - Amortization: 2.59 - Interest and charges: 1.90 - Net resource flow: 1.76 - 2003 - Net disbursement: 8.46 - Disbursement: 11.26 - Amortization: 2.80 - Interest and charges: 2.03 - Net resource flow: 6.43 - 2004 - Net disbursement: 10.39 - Disbursement: 20.61 - Amortization: 10.22 - Interest and charges: 2.25 - Net resource flow: 8.14 - 2005 - Net disbursement: 1.29 - Disbursement: 2.32 - Amortization: 1.03 - Interest and charges: 1.20 - Net resource flow: 0.09 ### Key program correspondence and requests - Government letter dated September 8, 2005 (Roseau, Dominica) to IMF Managing Director Rodrigo de Rato: - Requests waiver for nonobservance of the continuous performance criterion on external payments arrears and completion of the fifth review of the PRGF programme and release of associated disbursement. - Requests extension of repurchase expectations arising in the one-year period commencing on December 22, 2005 totaling SDR 1,268,444, to be made on an obligations basis starting on December 22, 2006. --- ### Statistical issues and data quality ### Overview - Dominica’s statistical database is described as inadequate for both meeting the authorities’ needs and Fund surveillance. - Weaknesses identified in coverage, accuracy and reliability, frequency, and timeliness. - Weakest areas: fiscal accounts, public debt, and the balance of payments. - Authorities began participation in the General Data Dissemination System (GDDS) in September 2000; metadata and plans posted on the IMF’s DSBB. ### Real sector - CPI data: provided on a timely basis. - ECCB compiles semi-annual GDP estimates, available with a one-quarter lag. - Estimated annual nominal GDP and constant 1990 prices (by activity): available within a few months of year-end. - Employment data: very limited. - No official data on producer prices or wages in the private sector. - Results of the 2001 population census: not yet published. ### Government finance - Statistical capacity problems affect timely production of quality government finance statistics. - Data subject to frequent revisions due in part to omissions and misclassifications. - Central government operations data incomplete; some operations undertaken outside the consolidated fund, including certain investment spending, loan and grant receipts, and on-lending and transfers to public enterprises. - Capital expenditure recorded by the Treasury must be supplemented with additional donor financing information because Public Sector Investment Program (PSIP) data are not timely. - PSIP reporting delays reportedly stem from reporting delays from line ministries. - No consolidated nonfinancial public sector data; data for the rest of the public sector (Dominica Social Security and public enterprises) must be obtained directly from each entity during Fund Article IV missions. - Limited financing data available; concerns remain about under-recording of government commitments despite progress on government debt measurement. - Ongoing initiatives to strengthen expenditure management, including an effort to automate expenditure execution: - New automation technology to be fully installed in all line ministries in 2004. - Once installed, all local purchase orders (LPOs) will be entered and tracked electronically; automatic commitments charged against specific budget allocations once LPOs are generated electronically. - All ministries and suppliers will be compelled to use the new system following automation completion. - No government finance data reported to STA for publication in International Financial Statistics (IFS) or Government Finance Statistics (GFS) Yearbook. - Technical assistance received from the United Kingdom’s Department for International Development (DIFID) on cash management and from CARTAC on monitoring the stabilization program and treasury accounting. ### Monetary statistics - Monetary statistics compiled by ECCB on a monthly basis and reported regularly to the Fund, though coverage needs improvement. - Banking statistics do not explicitly capture loans from ECCB’s fiscal reserve tranche to the government. - Monetary survey excludes accounts of credit unions that accept demand deposits; ECCB is taking steps to collect credit union data. - Data on activities of offshore banks are not reported to the Fund. ### Balance of payments - Balance of payments data compiled by ECCB on an annual basis and not reported in the format recommended in the fifth edition of the IMF’s Balance of Payments Manual. - Timeliness improved recently but data suffer from exceptionally high and volatile errors and omissions, at times reaching levels of 12 percent of GDP. ### External debt - Ministry of finance maintains a database on public and publicly-guaranteed external loans with detailed and reasonably current information on disbursements, debt service, and debt stocks. - Treasury maintains data on bonds placed abroad. - The two government agencies do not consolidate databases to provide a comprehensive external debt picture. - External debt data are deficient; debt stock cannot be accurately measured. - Monthly information on payments by creditor (actual and scheduled) is not fully and readily available, impeding compilation of up-to-date information on arrears. ### Table of Common Indicators Required for Surveillance (As of September 14, 2005) — selected entries - Dominica is a member of the Eastern Caribbean Currency Union; common currency (E.C. dollar) pegged to the U.S. dollar at US$1=EC$2.70. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: latest observation June 2005; date received 8/25/05; frequency: M; reporting frequency: M; publication frequency: Q. - Reserve/Base Money: latest observation Jul. 2005; date received 8/22/05; frequency: M; reporting frequency: M; publication frequency: Q. - Broad Money: latest observation Jul. 2005; date received 8/22/05; frequency: M; reporting frequency: M; publication frequency: Q. - Central Bank Balance Sheet: latest observation June 2005; date received 8/19/05; frequency: M; reporting frequency: M; publication frequency: Q. - Consolidated Balance Sheet of the Banking System: latest observation Jul. 2005; date received 8/15/05; frequency: M; reporting frequency: M; publication frequency: Q. - Interest Rates: latest observation June 2005; date received 8/15/05; frequency: Q; reporting frequency: Q; publication frequency: Q. - Consumer Price Index: latest observation July 2005; date received 8/25/05; frequency: M; reporting frequency: M; publication frequency: M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: latest observation 2004; date received 06/10/05; frequency: A; reporting frequency: A; publication frequency: A. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: latest observation Jul. 2005; date received 8/24/05; frequency: M; reporting frequency: M; publication frequency: A. - Stocks of Central Government and Central Government-Guaranteed Debt: latest observation Jul. 2005; date received 8/24/05; frequency: M; reporting frequency: M; publication frequency: A. - External Current Account Balance: latest observation 2004; date received 03/15/05; frequency: A; reporting frequency: A; publication frequency: A. - Exports and Imports of Goods and Services: latest observation June 2005; date received 08/24/05; frequency: M; reporting frequency: Q; publication frequency: A. - GDP/GNP: latest observation 2004; date received 03/15/05; frequency: A; reporting frequency: A; publication frequency: A. - Gross External Debt: latest observation Jul. 2005; date received 8/24/05; frequency: M; reporting frequency: M; publication frequency: A. --- ### Supplementary Memorandum of Economic Policies (selected outcomes, objectives, and reforms) ### Background and objectives - Economy recovering from the 2001–02 crisis caused by public debt build-up. - Economic reform strategy four elements: - Achieve agreement with remaining nonparticipating creditors (creditor participation past 70 percent). - Fiscal stance consistent with reducing public debt burden to sustainable levels. - Fiscal reforms to improve transparency and effectiveness of tax regime and budgetary process. - Improve enabling environment for private sector investment; enhance public service efficiency and re-orient Public Sector Investment Programme toward physical and human capital. ### Performance under the programme (macroeconomic outcomes) - Output growth in 2004 estimated at some 3½ percent. - Credit growth: accelerated to an annual growth of 7 percent in 2004. - Inflation: averaged 1½ percent in 2004. - Export growth: some 9 percent in 2004. - Imports: surged reflecting recovery and higher energy prices. - First half of 2005: same broad trends evident. ### Programme performance and structural benchmarks - All but one performance criterion for the fifth review met; nonobservance due to a temporary delay (about a week) in debt service payment by DOMLEC on a government-guaranteed loan. - Primary balance in FY 2004/05: 4.4 percent of GDP, about 2½ percent above target. - Margin on the wage bill performance criterion: less than EC$1 million. - Structural benchmarks for the fifth review observed: - On-site inspection of Roseau Cooperative Credit Union completed; concerns about nonperforming assets, account-handling practices, and audit quality flagged. - Amendments to the Finance Administration Act prepared for Cabinet and public discussion in May; proposals for numerical targets prepared in August and submitted to Cabinet; public consultation began in September. - 2005/06 budget approved by Parliament on August 4, with a primary balance target consistent with the programme. ### Additional structural reforms and actions - Publication of all Cabinet decisions granting new tax and duty concessions in the Official Gazette; concessions granted in 2004/05 sent to publishers in August; going forward publication monthly with one month lag; published material to identify beneficiary and legal basis for concession. - Public expenditure management: - Main government account being reconciled monthly. - All transactions captured in the general ledger; opening balances to be adjusted by end-December. - All local purchase orders now generated electronically. - Public enterprises and statutory bodies: - Submit audited financial accounts for year ending 2004 for AID Bank, DOWASCO, and DEXIA by end-2005. - Accounts for the NDC to be prepared for audit by end-December and submitted to Parliament early in 2006. - Dominica Social Security (DSS) review (IMF/World Bank technical assistance): - Review completed in June. - Study shows pension system’s finances are on a highly unsustainable trajectory. - Study identified reforms which, if implemented promptly, can address the threat to public finances. *Source: _cr05384 - 1. Seventh Consolidated Line of Credit—to assist DAIDB in continuing to finance its lending programme in the following areas: Agricultural and Industrial Credit, Housing and Student Loans.* ### 7. We remain committed to engaging our creditors in good faith negotiations. We ### _cr05384 - 7. We remain committed to engaging our creditors in good faith negotiations. We ### Creditor engagement and debt restructuring - Signed agreements with all domestic creditors, including DSS. - Continued payments on the new restructured terms into an escrow account on behalf of remaining external nonparticipating creditors. - Expectation to shortly pass legislation to allow debentures issued to participating creditors to be traded on the Eastern Caribbean Stock Exchange (ECSE). ### Growth and Social Protection Strategy (GSPS) - Government finalizing its growth and social protection strategy (GSPS) paper to guide policies over the medium term. - Objective: make the private sector the engine of economic growth, with government in a facilitating role; social protection to reduce vulnerabilities during adjustment. - Medium-term growth expectation: “around 3 percent per annum over the medium term.” - Short-term social policy: strengthen social safety nets by ensuring better targeting. ### Key growth sectors and initiatives - Identified sectors: tourism, energy, services, agriculture, light manufacturing, and offshore education. - Untapped potential: heritage, health, and ecotourism — focus on infrastructure and product development to facilitate private investment. - Geothermal development: - Working with potential investors to tap geothermal resources for export and domestic demand. - Expectation: “a substantial lowering of the cost of electricity over the medium term” to spur light manufacturing, including agro-processing. - Agriculture: tourism and agro-processing to increase demand; targeting niche markets including regional exports. - Offshore education: potential for further development and stronger links with domestic economy. - Telecommunications liberalization: potential for development of related services. - Overall expectation: private-sectorable reforms and investments support the projected “around 3 percent per annum” growth and reductions in unemployment and poverty incidence. ### Enabling environment and immediate reforms - Parliamentary approval targeted (by end-December, 2005) for amendments to the Electricity Supply Act and related legislation to: - Demonopolize the sector, allow new entrants, establish a regulatory commission, and set tariffs more reflective of production costs and economic circumstances. - Support geothermal exploitation, export earnings, and reduced vulnerability to high oil prices. - Financial sector measures: - Steps by end-October 2005 to allow the FSU (with external technical assistance) to conduct an on-site inspection of AID Bank (by end-March 2006). - Memorandum of understanding signed with Roseau Cooperative Credit Union (RCCU); FSU to ensure adoption of measures by end-December to bring RCCU into full regulatory compliance. - Public sector entities review: - Complete strategic reviews and establish action plans (by end-December 2005) for AID Bank, DEXIA and NDC to enhance efficiency, streamline functions, and improve accountability. - Reviews will consider the justification for continued existence of these agencies in a private-sector-led growth context. - Plan to establish a one-stop shop to streamline business establishment processes by end-March 2006. - Administrative simplification: - Streamlining paperwork and import requirements; publish requirements on government websites. - Encourage Diaspora investment. ### 2005/06 Budget macro framework and targets - Growth assumption: “sustained at 3 percent this year and next.” - Inflation expectation: “1½ percent in 2005/06.” - Fiscal stance: - Budget targets a primary surplus of “3 percent of GDP” for 2005/06, broadly in line with 2004/05. - Rationale: reduce high debt burden to sustainable levels while weighing near-term investment needs. - Key budget measures and implications: - VAT expected to come into effect on “March 1, 2006”; switch from consumption and sales taxes to VAT expected to be revenue neutral. - Restoration of a previously legislated “5 percent cut in civil servants wages” implies a wage bill of “some 13.7 percent of GDP.” (text also references current level of “13¾ percent of GDP”) - State college to be treated as independent from the budget starting FY 2005/06, with support limited to an explicit transfer. - Public Sector Investment Programme (PSIP) to be kept consistent with implementation capacity and focused on highest return projects. - Budget-support grants in excess of programmed amounts to be used to pay down debt and build bank balances. - Next review to reassess revenues/expenditures and revisit fiscal targets as appropriate. ### Structural fiscal reforms — pensions and DSS - Pension system vulnerabilities: - Number of pensioners per contributor expected to increase from “0.23 in 2004” to “0.32 in 2020” and “0.78 by 2050.” - Net present value (NPV) of unfunded liabilities of DSS estimated at “more than 150 percent of GDP.” - Without corrective measures: DSS cash flows to turn negative in “2014” and reserves depleted by “2025.” - Reform approach: - Prepare an action plan (by end-December 2005) to eliminate DSS unfunded liabilities; have plan approved by Cabinet (by end-March 2006). - Reform options to adjust: replacement rate, contribution rate, number of years over which average earnings are calculated, and retirement age — with the reform strategy to consider the appropriate balance. - Gradual international diversification of DSS’s portfolio to be undertaken. - Interim step: regularized financial relations between central government and DSS, including finalizing the debt restructuring agreement in “September 2005.” ### Public sector size, wage bill, and employment reforms - Objective: a relatively smaller, more efficient, and better paid public service aligned with private-sector-led growth. - 2005/06 measures to focus civil service on core activities: - Outsourcing janitorial and government building protection services and streamlining airport and ports authorities. - Hope that initial redundancy costs will be grant-financed from the EU’s Framework of Mutual Obligations. - Steps to reduce overtime pay at Customs. - Additional measures: - Review scope for streamlining, commercializing, or privatizing other services. - Target to reduce the wage bill by “1–1½ percent of GDP” from its current level of “13¾ percent of GDP” over the next three years. - Establishment, Personnel and Training Division review on public service reform to be completed by “end-February” to address unfilled positions and eliminate unnecessary ones. - Future wage and salary increases to be consistent with progress in reducing the wage bill. ### Public financial management and legislative reforms - Finance Administration Act (FAA) amendments: - Plan to obtain Cabinet approval of FAA amendments by “end-November 2005” and parliamentary approval in early 2006. - Amendments to: - Outline an objective to reduce public debt to prudent levels. - Note that government will target a primary surplus consistent with reducing public debt annually while debt stock remains above “60 percent of GDP”—the ECCB benchmark. - Require comprehensive explanation in annual budget documents when not targeting such a primary surplus and outline policies to return to target within the shortest possible timeframe. - Government commitment to aim for a “3 percent of GDP primary surplus” in the budget; deviations require comprehensive explanation and policy plan to return to target. ### Budget and debt management improvements - With CARTAC assistance, introduce medium-term budgeting for line ministries to minimize ad hoc fiscal shifts and strengthen expenditure controls. - Adopted guidelines for government guarantees to ensure debt sustainability and prevent excessive off-budget liabilities. ### VAT introduction and tax exemptions review - VAT implementation preparations: - Draft VAT and Excise Tax Laws expected to be approved by Parliament in August (prior action). - Implementing regulations to be finalized soon after. - VAT design: two rates — a standard “15 percent” rate and a “10 percent” rate for hotel accommodation; zero rating and exemptions kept to a minimum. - Organizational and staffing issues resolved; IT infrastructure to be tested and put in place by “end-October 2005.” - Ensure VAT refunds can be made on a timely basis. - Comprehensive review of statutory tax exemptions to be completed by “end-December” to consider justification for statutory and nonstatutory concessions and repeal unnecessary ones. ### Public Sector Investment Programme (PSIP) - PSIP for 2005/06 broadly consistent with the Growth and Social Protection Strategy (GSPS). - Government to ensure balance between investments in economic sectors and economic and social infrastructure. - Nongrant financed capital spending strictly limited to levels consistent with agreed macroeconomic parameters. - Overall PSIP to be limited to “around 10 percent of GDP” consistent with implementation capacity. ### Program conditionality and timetable (structural benchmarks and prior actions) - Prior Actions for Fifth Review: - Passage by Parliament and enactment into law of a VAT Act effective “March 1, 2006.” - Approval by Cabinet of an implementation plan to rationalize the wage bill. - Sixth Review (structural benchmarks, deadlines): - Establish legislative basis for the Financial Services Unit (FSU) to supervise insurance companies and regulate all nonbank financial institutions, including the Agriculture and Industrial Development Bank (end-December, 2005). - Complete strategic review and establish action plans for Aid Bank, DEXIA and NDC (end-December, 2005). - Parliamentary approval of amendments to the Electricity Supply Act and related legislation (end-December 2005). - Complete review of streamlining government ministries and departments (end-February 2006). - Implementation of VAT starting “March, 1 2006” (structural performance criterion). - Seventh Review: - Cabinet approval of action plan to eliminate unfunded DSS liabilities (end-March 2006). - Parliamentary approval of FAA amendments as described (end-May, 2006). - Line ministries to submit rolling three-year expenditure plans (end-May, 2006). *Source: Dominica government letter and IMF staff memorandum (text as provided).* ### 2. The Dominican authorities are committed to transmit to the Fund staff the best data ### 2. The Dominican authorities are committed to transmit to the Fund staff the best data ### Data reporting and definitions - All revisions or expectations thereof shall be promptly reported to the Fund staff. - Variables for monitoring performance criteria that are not explicitly defined are consistent with the Government Financial Statistics (GFS). - For variables omitted from the TMU but relevant for program targets, the authorities shall consult with Fund staff on appropriate treatment based on GFS principles and Fund program practices. ### I. FISCAL TARGETS #### A. Indicative Target on the Overall Balance of the Central Government - Overall balance measured from the financing side as the sum of net domestic borrowing plus net external borrowing. - Net domestic financing components: - (i) Net domestic bank financing measured by change in domestic banking system credit to the central government net of deposits, as reported by consolidated balance sheet of monetary authorities and commercial banks, including special tranches from the ECCB and excluding net changes in (a) “double signature accounts” and (b) the deposits of the cash grants from the People’s Republic of China. - (ii) Net nonbank financing: net changes in holdings of government securities by nonbanks, and net borrowing from nonbank institutions. - (iii) Change in stock of domestic arrears of the central government defined as net changes in unpaid checks issued, unprocessed claims, pending invoices, plus accrued interest payments, and other forms of expenditures recorded above the line but not paid. - (iv) Gross receipts from divestment. - (v) Financing from debt restructuring measured as domestic debt service payments (principal and interest) on a due basis less actual debt service payments. - (vi) Any other exceptional financing. - Treasury bills recorded at face value, except those held by the banking system which will be recorded on a purchase price basis. - Net external financing components: - (i) Disbursements of project and nonproject loans, including securitization, but excluding the use of IMF resources. - (ii) Proceeds from bonds issued abroad. - (iii) Exceptional financing (rescheduled principal and interest), net changes in cash deposits held outside domestic banking system. - (iv) Net changes in short-term external debt. - (v) Any change in arrears on external interest payments and other external expenditures recorded above the line but not paid. - (vi) Financing from debt restructuring measured as external debt service payments (principal and interest) on a due basis less actual debt service payments. - (vii) Any other exceptional financing. - Less (viii) Payments of principal on current maturities for bonds and loans on a due basis but excluding the use of IMF resources, including any prepayment of external debt. - Programmed amounts of debt service on a due basis (In millions of Eastern Caribbean dollars; cumulative flows from June 30, 2005): - End-September 2005: External Interest Payments 8.3; External Amortization Payments 3.2; Domestic Interest Payments 5.1; Domestic Amortization Payments 0.9 - End-December 2005: External Interest Payments 11.5; External Amortization Payments 13.2; Domestic Interest Payments 10.1; Domestic Amortization Payments 1.7 - End-March 2006: External Interest Payments 19.7; External Amortization Payments 16.1; Domestic Interest Payments 15.2; Domestic Amortization Payments 2.9 - End-June 2006: External Interest Payments 22.8; External Amortization Payments 20.4; Domestic Interest Payments 20.2; Domestic Amortization Payments 3.5 - Program floors on the overall balance (In millions of Eastern Caribbean dollars; cumulative balance from June 30, 2005): - End-September 2005 (indicative target) -10.5 - End-December 2005 (indicative target) -14.0 - End-March 2006 (indicative target) -18.7 - End-June 2006 (indicative target) -19.3 - Adjustors to the floor on the overall balance: - (i) Upward to the extent budgetary grants exceed programmed amounts. Budgetary grants defined as grant receipts not earmarked for capital outlays, including drawdown of deposits of the cash grants from China. Programmed budgetary grants for fiscal year 2005/06: EC$2.6 million by end-September 2005; EC$3.8 million by end-December 2005; EC$5.0 million by end-March 2006; EC$6.2 million by end-June 2006. (Upward adjustment means lower deficit.) - (ii) Downward by the amount severance payments and administrative expenditures linked to the debt restructuring operations exceed the grants targeted to these programs. - (iii) Upward by the amount received from Security Bond forfeitures. - The program assumes that EC$4.8 million will be received from EU STABEX 1998/99/00 to cover severance payments and other already identified projects. #### B. Performance Criterion on the Central Government Primary Balance - Primary balance defined as central government overall balance (financing side) plus domestic and external interest payments on a due basis. Interest payments do not include interest paid by the central government on behalf of other parties. - Program floors on central government primary balance (In millions of Eastern Caribbean dollars; cumulative balance from June 30, 2005): - End-September 2005 (indicative target) 2.9 - End-December 2005 (performance criterion) 7.6 - End-March 2006 (indicative target) 16.2 - End-June 2006 (performance criterion) 23.7 - The same adjustors described for the overall balance apply to the primary balance. Performance Criterion on the Central Government Wage Bill - Wage bill measured as total expenditure of central government on wages and salaries net of wage refunds, including acting allowances, special duty allowances, responsibility allowances, subsistence allowances, employer contribution to Dominica Social Security; excluding retirement benefits, severance payments, or other related one-off payments (accumulated leave). Ceiling excludes wage-related transfers to schools, the National Development Corporation, and local governments. - Program ceilings on central government wage bill (In millions of Eastern Caribbean dollars; cumulative flows from June 30, 2005): - End-September 2005 (indicative target) 27.6 - End-December 2005 (performance criterion) 55.7 - End-March 2006 (indicative target) 81.4 - End-June 2006 (performance criterion) 106.5 #### C. Performance Criterion on Central Government Arrears Accumulation to Domestic Private Parties - Net changes defined as changes in sum of pending payments by government for goods and services already purchased from domestic private parties, and pending unpaid checks for payments into escrow account for debt restructuring. - Private domestic parties exclude DOWASCO, Dominica Social Security, National Development Corporation, Dominica Broadcasting Corporation, DEXIA, and the Ports Authority. - Measure used: unpaid checks issued and pending invoices for which payment is overdue. - Program ceilings on arrears accumulation to domestic private parties (In millions of Eastern Caribbean dollars; cumulative flows from June 30, 2005): - End-September 2005 (indicative target) 4.0 - End-December 2005 (performance criterion) 8.0 - End-March 2006 (indicative target) 8.0 - End-June 2006 (performance criterion) 8.0 #### D. Indicative Targets on Revenues of the Central Government - Revenues defined as tax collections and nontax revenues reported in treasury accounts (economic classification), excluding: (i) revenues from the economic citizenship program, (ii) foreign and domestic grant receipts, (iii) repayment of loans, (iv) wage refunds, (v) privatization receipts; includes income tax refunds. Capital revenues excluded. - Program floors on revenues (In millions of Eastern Caribbean dollars; cumulative flows from June 30, 2005): - End-September 2005 (indicative target) 52.9 - End-December 2005 (indicative target) 111.1 - End-March 2006 (indicative target) 171.9 - End-June 2006 (indicative target) 230.8 #### E. Indicative Targets on Primary Savings of the Central Government - Primary savings measured on an accrual basis (including unpaid checks issued and unprocessed invoices) and defined as central government revenue before grants minus current noninterest expenditure. Adjustors described earlier apply. - Program ceilings on primary savings (In millions of Eastern Caribbean dollars; cumulative flows from June 30, 2005): - End-September 2005 (indicative target) 5.5 - End-December 2005 (indicative target) 14.0 - End-March 2006 (indicative target) 27.3 - End-June 2006 (indicative target) 38.9 Monitoring discretionary tax exemptions - Discretionary tax exemptions defined as tax exemptions granted under Sections 6(2) and 31 of the Consumption Order Act, Section 26 of the Sales Tax Act, Section 60 of the Customs (Control and Management) Act, Section 25(2) of the Income Tax Act, or remissions of tax under Section 109 of the Income Tax Act (except where the Comptroller certifies the tax to be remitted is uncollectible). - The number of discretionary tax exemptions will be monitored on a continuous basis. ### II. MONETARY TARGETS #### A. Performance Criterion on the Net Credit of the Banking System to the Central Government - Net credit defined as in paragraph 5 (see net domestic financing components). - Program ceilings on net credit of the banking system to the central government (In millions of Eastern Caribbean dollars; cumulative flows from June 30, 2005): - End-September 2005 (indicative target) 3.0 - End-December 2005 (performance criterion) -0.1 - End-March 2006 (indicative target) -6.4 - End-June 2006 (performance criterion) -13.6 - Ceiling adjusted upward (downward) to the extent actual interest payments are higher (lower) than programmed amounts on a cash basis. - Programmed amounts of interest payments on a cash basis (In millions of Eastern Caribbean dollars; cumulative flows from June 30, 2005): - End-September 2005: Total Interest Payments 5.0; Domestic Interest Payments 2.7; External Interest Payments 2.3 - End-December 2005: Total Interest Payments 8.8; Domestic Interest Payments 4.5; External Interest Payments 4.3 - End-March 2006: Total Interest Payments 13.9; Domestic Interest Payments 7.2; External Interest Payments 6.6 - End-June 2006: Total Interest Payments 17.8; Domestic Interest Payments 9.1; External Interest Payments 8.7 ### III. EXTERNAL SECTOR TARGETS #### A. Performance Criterion on Disbursements of Nonconcessional External Central Government or Central Government Guaranteed Debt with Maturity of at Least One Year - Disbursements monitored monthly by the Accountant General’s office. Central government and central government guaranteed debt includes debt contracted or guaranteed by the central government. - Program ceilings on disbursements (In millions of U.S. dollars; cumulative flows from June 30, 2005): - End-September 2005 (indicative target) 2.6 - End-December 2005 (performance criterion) 6.7 - End-March 2006 (indicative target) 8.3 - End-June 2006 (performance criterion) 10.0 - “Debt” definition follows point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), August 24, 2000), including loans, suppliers’ credits, and leases; arrears, penalties, and judicially awarded damages arising from contractual obligations that constitute debt are debt. Failure to make payment on an obligation not considered debt (e.g., payment on delivery) will not give rise to debt. - Nonconcessional debt defined as debt with grant element of less than 35 percent (net present value relative to face value), based on currency- and maturity-specific Commercial Reference Rates (CIRR) published monthly by the OECD. - For loans with maturity at least 15 years: 10-year average commercial interest reference rates used. - For loans with shorter maturities: 6-month average CIRRs used. - Margins added to both averages for differing repayment periods: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15–19 years; 1.15 percent for 20–29 years; 1.25 percent for 30 years or more. - Limit excludes disbursements of short-term import-related debts, use of Fund resources, and refinancing operations. #### B. Performance Criterion on Net Changes in Outstanding Stock of Short-Term External Debt with Original Maturity of Less than One Year Contracted or Guaranteed by the Central Government - Short-term external debt outstanding defined as debt with original maturity of less than one year contracted or guaranteed by the central government, excluding normal import-related credits. - No short-term external debt with original maturity of less than one year will be contracted or guaranteed by the central government. This ceiling will be monitored on a continuous basis. #### C. Performance Criterion on Nonaccumulation of Central Government and Central Government Guaranteed External Payment Arrears - External payment arrears defined as overdue payments (principal or interest) on debt contracted or guaranteed by the central government. - Program excludes: (i) debt claims irrevocably tendered in the debt exchange closed on September 31, 2005 (the "Debt Exchange”), (ii) debt claims eligible to participate but not tendered, and (iii) debt claims of official bilateral creditors under rescheduling or refinancing negotiation. Does not include outstanding subscription payments to regional and international organizations for which understandings will be reached to ease payment obligations consistent with the program. - No external payment arrears of the central government and central government guaranteed debt will be allowed in the program. This ceiling will be monitored on a continuous basis. ### IV. STRUCTURAL CONDITIONALITY (Structural benchmarks unless otherwise indicated) - Prior Actions for the Fifth Review: - Passage by Parliament and enactment into law of a VAT Act with an effective date of March 1, 2006. - Approval by Cabinet of an implementation plan to rationalize the wage bill. - Sixth Review: - Establish legislative basis for the Financial Services Unit (FSU) to supervise insurance companies and regulate all nonbank financial institutions, including the Agriculture and Industrial Development Bank (end-December, 2005). - Complete strategic review and establish action plans for the operations of Aid Bank, DEXIA and NDC, to enhance efficiency, streamline functions and improve accountability (end-December, 2005). - Parliamentary approval of amendments to the Electricity Supply Act and related legislation (end-December 2005). - Complete review by end-February 2006 the streamlining of the structure and functioning of government ministries and departments, with a view to further reducing wage bill over the following three years. - Implementation of VAT starting March, 1 2006 (structural performance criterion). This is understood to mean that the first tax period for which the VAT law would apply starts on March 1, 2006 or earlier. - Seventh Review: - Cabinet approval of action plan to eliminate the unfunded liabilities of DSS (end-March 2006). - Parliamentary approval of amendments to the Finance Administration Act as described in paragraph 17 of the SMEP (end-May, 2006). - Line ministries to submit rolling three-year expenditure plans (end-May, 2006). *Source: _cr05384 - 2. The Dominican authorities are committed to transmit to the Fund staff the best data* ### 32. Regular reporting on a monthly basis (and when possible weekly) will include the ### _cr05384 - 32. Regular reporting on a monthly basis (and when possible weekly) will include the ### Regular reporting requirements - Regular reporting on a monthly basis (and when possible weekly) will include the items listed below. - All information will be reported to Fund staff within three weeks of the end of each month. ### Monthly reporting — Fiscal sector (items i–ix) - (i) Central government budgetary accounts. - (ii) Dominica Social Security Balance Sheet, showing amounts receivable from central government for contributions and interest. - (iii) Central government domestic debt data. - (iv) Current grant inflows. - (v) Stock of unpaid checks issued and stock of unprocessed claims due and invoices pending. - (vi) Capital expenditure (project by project) and composition of financing, including revised projections for the remainder of the fiscal year. - (vii) Balances in the debt servicing account linked to the Royal Merchant Bank Bond Issue. - (viii) Total number of exemptions issued (by type of exemption). - (ix) Severance payments and administrative expenditures linked to the debt restructuring operations, and details about how they were financed. ### Monthly reporting — Financial sector (item x) - (x) Monetary survey for Dominica as prepared by the Eastern Caribbean Central Bank, including balances in central government double signature accounts. ### Monthly reporting — External and real sectors (items xi–xvii) - (xi) Imports and exports data by product. - (xii) Detailed (creditor by creditor) external debt report from the Debt Unit in the Ministry of Finance and Planning, showing fiscal year-to-date disbursements, amortization, interest payments, and outstanding stocks, for the central government, public enterprises and AID Bank. - (xiii) Total disbursements/grant receipts, monthly, disaggregated into: (a) budgetary support (by type—either loans or external “bonds” and/or other securities); (b) project loans; (c) budgetary grants; and (d) project grants. - (xiv) Stock of external payment arrears of the NFPS, including amortization and interest payment arrears, and supplier arrears for the central government, public enterprises, and AID Bank. - (xv) Copies of loan agreements for any new loans contracted, including financing involving the issue of government paper, and of any renegotiated agreements on existing loans. - (xvi) Consumer price index. - (xvii) Real sector indicators. ### Annual and other reporting - Annual reporting will include: - (xviii) GDP and its components. - (xix) Balance of payments accounts. - Other reporting will include reports of legislative changes pertaining to economic matters. ### Public Debt Sustainability Analysis — Overview - The DSA uses the debt sustainability analysis template for low-income countries and was conducted jointly by Fund and Bank staff. - Staff conclusion: while Dominica’s public debt is sustainable at current output growth rates and fiscal stance, there are risks of future debt distress if these variables weakened. Deficits expected in Dominica’s social security system (DSS) starting in 2014 pose an additional challenge. ### Dominica’s public debt situation at end-2004 (key figures) - Public debt after restructuring: around 116 percent of GDP. - External public debt: around 81 percent of GDP. - Net present value (NPV) to GDP ratios: approximately 90 percent for total public debt and 54 percent for external public debt. - Creditors composition: - Around 47 percent of GDP owed to multilateral creditors (with the Caribbean Development Bank holding almost two thirds of this). - External debt with bilateral creditors: approximately 19 percent of GDP. - Debt to commercial creditors: around 16 percent of GDP. - Domestic debt composition: - About 15 percent of GDP owed to Dominica’s Social Security System (DSS). - 20 percent of GDP owed to commercial banks, the ECCB, and corporations. - Undisputed interest arrears: approximately 0.4 percent of GDP. - Restructuring target: NPV to face value reduction of 50 percent; creditors representing about 70 percent of eligible debt have agreed. ### Baseline scenario (2005–2025) — main assumptions - GDP growth stays at 3 percent. - The primary balance of the central government remains at 3 percent of GDP over the projection period. - Public enterprises run an overall deficit of 0.5 percent of GDP. - Annual disbursements of external concessional debt reach 1.5 percent of GDP. - New domestic financing obtainable at an interest rate of 7 percent. ### Baseline scenario — projections and interpretation - Under the baseline scenario (Table 1a), all indicators of debt burden show Dominica’s debt remains sustainable. - The debt service to revenue ratio temporarily shows an upward trend and then a decline starting in 2014; the initial upward trend is mainly caused by features of the debt restructuring (CDB grant covering interest and amortization in 2005 and 2006, and a repurchase clause increasing amortization starting in 2009). - Projection: Dominica would reach a public debt to GDP ratio of 60 percent by 2018. ### Sensitivity analysis — growth and primary balance (Scenarios A.1–A.3) - Scenario A.1: If primary balance and economic growth return to their averages of the last ten years (a 1 percent of GDP primary deficit and 0.8 percent growth), then public debt turns unsustainable. - Scenario A.2: If Dominica keeps the fiscal effort made during last year (a primary surplus of around 4.3 percent of GDP), public debt remains sustainable. - Scenario A.3: If growth falls to 2½ percent per year, most indicators of debt burden present a slight upward trend due to lower fiscal revenues and higher interest expenditures (new nonconcessional financing interest rate 7 percent vs. current average interest rates around 2.8 percent for external debt and 5 percent for domestic debt). ### Social Security (DSS) implications - DSS currently running surpluses, but deficits are expected to emerge starting in 2014 and grow continuously over time. - A World Bank/FAD technical assistance mission visited in June 2005 to assess DSS and propose reforms. - Scenario with government transfers to cover DSS deficits starting in 2014: public debt to GDP initially declines (reaching around 60 percent in 2020) but then starts to increase again as DSS deficits grow. ### Sensitivity to interest rates - Consideration of new financing interest rate reaching 12 percent (5 percentage points above baseline): - With other baseline assumptions (3 percent GDP growth and 3 percent primary surplus), public debt remains sustainable but declines more slowly. - With GDP growth at 2 percent, public debt stabilizes at around 75 percent of GDP at the end of the projection period. - With GDP growth at 1 percent, public debt returns to an unsustainable path. ### Natural disaster stress test - Fifth bound test in Table 2a: Dominica’s debt would remain sustainable after a natural disaster that increased the debt to GDP ratio by 10 percent in 2006. - Note: ECCU Selected Issues Paper (2004) reports a median public debt increase of 6.5 percent of GDP over three years after a large natural disaster (sample of 12 events); the shock used here is larger. ### Selected quantitative entries from Table 1a (percent of GDP and related) - Public sector debt (end-2004): 116.7 (in percent of GDP). - Public sector debt (2002–2004): 127.2 (2002), 130.6 (2003), 116.7 (2004). - NPV of public sector debt (2004): 90.0 (in percent of GDP). - NPV of external (2004): 54.6 (in percent of GDP). - NPV of public sector debt-to-revenue ratio (2004): 169.1 (in percent). - Debt service-to-revenue ratio (2004): 14.3 (in percent). - Gross financing need (2004): 2.6 (in percent of GDP). - Real GDP growth (2004): 3.5 (in percent). - Average nominal interest rate on forex debt (2004): 4.0 (in percent). - Average real interest rate on domestic currency debt (2004): 1.4 (in percent). - Grants (revenue component, example 2004): 6.1 (in percent of GDP). - Identified debt-creating flows (2004): -11.6 (in percent of GDP). - Residual, including asset changes (2004): -2.4 (in percent of GDP). ### Table 2a — Sensitivity results (selected outcomes for key indicators) - NPV of Debt-to-GDP Ratio (baseline trend, selected years): 83 (2005), 80 (2006), 78 (2007), 75 (2008), 73 (2009), 71 (2010), 59 (2015), 34 (2025). - Alternative scenario A.1 (historical averages) NPV of Debt-to-GDP: 83 (2005), 86 (2006), 90 (2007), 94 (2008), 99 (2009), 104 (2010), 133 (2015), 229 (2025). - Debt Service-to-Revenue Ratio (baseline, selected years): 11 (2005), 12 (2006), 14 (2007), 13 (2008), 15 (2009), 15 (2010), 14 (2015), 10 (2025). - NPV of Debt-to-Revenue Ratio (baseline, selected years): 175 (2005), 169 (2006), 165 (2007), 160 (2008), 155 (2009), 150 (2010), 126 (2015), 72 (2025). *Source: IMF staff and World Bank/Fund joint analysis as presented in the Attachment III DSA and reporting requirements included in Attachment II of the source document.* ### Introduction ### _cr05384 - Introduction ### Status of the I-PRSP and Growth and Social Protection Strategy (GSPS) - The Government of the Commonwealth of Dominica (GOCD) submitted its Interim Poverty Reduction Strategy Paper (I-PRSP) in December of 2003. - The GOCD envisaged the GSPS would be finalized by the end of 2004; substantial progress was made but the GSPS had not yet been completed at the time of this report. - GOCD reasons for additional time: - The GSPS is intended to guide medium-term policy and must "cover all of the areas that are relevant for its reform agenda." - An extensive consultation process was undertaken, including focus group discussions and a donors meeting held in June 2005. - Current timeline: GSPS in the process of finalization and expected to be submitted to the Boards of the Bank and Fund by the end of "this year" (as stated in the source). ### Issues Raised in the Joint Staff Assessment and GOCD Responses - Macroeconomic stability - Measures taken to improve the primary balance and pursued collaborative debt restructuring to put public finances on a firmer footing. - Fiscal structural reforms under consideration or enacted - Amendments to the Finance Administration Act to ensure fiscal responsibility in the future. - Legislation passed to allow the introduction of a Value Added Tax in March of 2006. - Reforms on the expenditure side, including continued rationalization of public wages. - Sectoral strategies to enhance growth - Adoption of a national tourism policy to set the medium-term policy agenda. - With World Bank technical assistance, review of the Electricity Supply Act to modify it to allow exploitation of geothermal energy (with potential for export to neighboring islands). - Oversight of the development of a water industry with potential to export bulk and bottled water. - Social protection - With IMF and World Bank technical assistance, assessment of unfunded liabilities of the social security system, which "will start to run deficits starting in 2014 as population aging puts pressure on the system." - Analysis of HIV/AIDS and the situation of the Carib community; specific strategies to be presented in the final GSPS. - Structural reform agenda - Final GSPS will contain a much more detailed structural reform agenda reflecting consultation results and technical assistance. ### New Timeline - After reviewing consultation recommendations in the first half of 2005, GOCD expected to finalize the GSPS "shortly, and on the outside by the end of the year." ### IMF Article IV Consultation — Background and Recent Performance - IMF Executive Board concluded the Article IV consultation with Dominica on October 14, 2005. - Recent crisis history and stabilization - Dominica experienced an economic and financial crisis in 2001–02 when output contracted by 10 percent. - Crisis origins: expansionary fiscal policies in the preceding decade, deteriorating primary balance, rapid public debt accumulation, rapid accumulation of mostly domestic arrears, financing only at high interest rates by 2001, liquidity crisis, severe drought affecting agriculture, and September 2001 terrorist attacks impacting tourism. - Stabilization program initiated in mid-2002 focused on orderly adjustment, strengthening public finances, and reinvigorating growth. - With debt-to-GDP approaching 130 percent, authorities launched a debt exchange offer in December 2003. - IMF support: initially through a Stand-By Arrangement (SBA) and since end-2003 through a PRGF arrangement. - Economic outcomes - "Economic growth has recovered to over 3 percent a year and is set to record the second straight year of above average growth in 2005." - Inflation declined in 2004 and remained subdued in 2005 despite higher energy prices. - Central government primary balance swung to a surplus of 4½ percent of GDP in 2004/05, driven by higher revenues and lower spending. - Debt stock declined to 117 percent of GDP at end-2004 (after restructuring and consolidation). - Progress on structural reforms has been slower than expected due to limited implementation capacity and difficulties in building consensus. - External and financial sector developments - Import growth robust due to recovery; current account impact partially offset by increased tourism receipts. - Credit to the private sector has been growing from mid-2004 after contracting since early 2001. - Private sector deposits grew moderately; net lending to government fell; net foreign assets of commercial banks increased substantially. - Prudential indicators for banking asset quality broadly unchanged. - Poverty and unemployment remain serious concerns. ### Executive Board Assessment — Key Messages and Recommendations - Overall appraisal - Directors commended authorities for successful implementation of the economic program supported by the PRGF arrangement since end-2003 and the remarkable rebound since 2001−02. - Recovery attributed to strong policies pursued by the authorities. - Fiscal policy and public debt - Directors noted strong improvement in public finances and restoration of confidence. - Urged continued fiscal discipline and consolidation; target maintaining a primary surplus of 3 percent of GDP or higher to reduce debt to "at least 60 percent of GDP over the next decade." - Welcomed VAT and excise tax legislation to allow a VAT effective March 1, 2006, and publication of tax concession information to improve transparency. - Emphasized boosting efficiency of government spending, streamlining public sector employment, limiting public investment program to well-targeted projects with high returns. - Supported objective of a smaller, more efficient, and better paid public service, recognizing need for rationalization of ministries and departments. - Debt restructuring - Commended collaborative agreements with creditors and depositing payments to nonparticipating creditors into an escrow account. - Concern about delays in reaching agreement with remaining hold-out creditors; urged timely engagement and completion of issuance of new bonds and legislative changes to make bonds tradable on the Eastern Caribbean Securities Exchange. - Structural reforms to sustain growth - Called for deepening structural reforms to remove investment bottlenecks. - Noted potential in the energy sector and benefits of liberalizing the electricity market to allow new entrants. - Saw merit in rationalizing investment promotion agencies into a one-stop center and modernizing land registration for comprehensive coverage. - Observed that creating a more enabling business environment would, over time, attract investment and stimulate private sector-led growth more effectively than reliance on tax incentives; regionally, a cooperative approach to tax incentives preferred over competitive solutions. - Social and financial vulnerabilities - Urged policies to better prepare for exogenous shocks, including natural disasters. - Stressed need to address large unfunded liabilities of the social security system; recommended early and significant reform actions. - Noted vulnerabilities in the financial sector and scope to strengthen regulatory oversight of nonbank institutions; supported IMF technical assistance for AML/CFT supervisory framework in nonbank sector. - Recommended closer scrutiny of new bank lending to reduce nonperforming loans. - Statistical capacity - Encouraged authorities to improve the quality of core statistics for effective surveillance. - Call for international support - Directors called on the international community to support Dominica’s reform effort, "not least through speedy disbursement of already promised funds." ### Selected Economic Indicators (as presented) - Annual percentage change, Real sector: - Real GDP: 2002 -4.7; 2003 0.0; 2004 3.5; 2005 3.1 - GDP deflator: 2002 -0.4; 2003 1.7; 2004 1.2; 2005 1.5 - Consumer prices, end of year: 2002 0.4; 2003 2.9; 2004 0.8; 2005 1.5 - Public finances (In percent of GDP, fiscal year basis beginning July 1): - Central government overall balance 1/: 2002 -5.4; 2003 -1.3; 2004 -0.6; 2005 -2.5 - Central government primary balance 1/: 2002 -1.6; 2003 5.6; 2004 4.4; 2005 3.0 - Revenue and grants 1/: 2002 32.7; 2003 40.0; 2004 39.1; 2005 37.7 - Expenditure and net lending 1/: 2002 38.2; 2003 41.3; 2004 39.6; 2005 40.2 - Total public sector debt: 2002 127.2; 2003 130.6; 2004 116.7; 2005 109.1 - External sector (In percent of GDP, unless otherwise indicated): - Current account balance: 2002 -13.8; 2003 -13.0; 2004 -17.2; 2005 -19.2 - Trade balance: 2002 -23.3; 2003 -27.4; 2004 -31.2; 2005 -33.0 - Travel receipts: 2002 18.1; 2003 20.2; 2004 22.2; 2005 23.2 - Exports, f.o.b. (percentage change): 2002 -1.8; 2003 -6.0; 2004 3.0; 2005 5.2 - Imports, f.o.b. (percentage change): 2002 -11.5; 2003 9.3; 2004 13.5; 2005 8.6 - Real effective exchange rate (percentage change) 2/: 2002 -6.3; 2003 -6.7; 2004 -7.0 - External public sector debt (end of period): 2002 79.9; 2003 84.4; 2004 81.2; 2005 81.1 - Money and credit (Annual percentage change; changes relative to broad money at the beginning of the period): - Net foreign assets 3/: 2002 19.3; 2003 17.3; 2004 8.1; 2005 4.1 - Net domestic assets 3/: 2002 -10.8; 2003 -16.4; 2004 -2.1; 2005 1.9 - Private sector credit 3/: 2002 -1.3; 2003 -2.3; 2004 4.3; 2005 5.1 - Broad money: 2002 8.5; 2003 1.0; 2004 5.9; 2005 6.0 - Notes accompanying table: - Sources: Dominican authorities; Eastern Caribbean Central Bank; and IMF staff estimates. - 1/ Data are on a fiscal year basis, beginning July 1 of the year shown. - 2/ End of period (depreciation -). - 3/ Changes relative to broad money at the beginning of the period. ### PRGF Fifth Review and IMF Financial Actions - On October 14, 2005 the IMF Executive Board completed the fifth review of Dominica's performance under its three-year PRGF arrangement and completed Dominica’s financial assurances review. - Waiver approved for the non-observance of a continuous performance criterion on nonaccumulation of external payments arrears. - Repayment expectations - Approved a one-year extension of Dominica's repayment expectations to the IMF in a total amount equivalent to SDR 1.3 million (about US$1.8 million) arising from December 22, 2005 through December 22, 2006; repayments now fall due exactly one year after these dates. - Disbursement and totals - As a result of the fifth review, Dominica could draw an amount equivalent to SDR 1.2 million (about US$1.7 million) under the PRGF arrangement. - This would bring total disbursements to SDR 5.4 million (about US$7.7 million). - The three-year PRGF arrangement was approved on December 29, 2003 for an amount equivalent to SDR 7.7 million (about US$11.1 million). - Executive Board statement by Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, highlighted: - The "remarkable turnaround" and need to continue reform agenda to address remaining vulnerabilities. - Importance of continued fiscal surpluses to reduce public debt, with an "ideal" aim to reduce debt-to-GDP ratio to at least 60 percent over the next decade. - Need to finalize debt restructuring and reach agreements with remaining nonparticipating creditors. - Structural reform priorities: social security reform to address large unfunded liabilities; electricity market reform to allow new entrants; rationalization of investment promotion agencies; modernization of land registration; strengthening regulatory oversight to reduce financial sector vulnerabilities. - Importance of international community support. *Public Information Notice (PIN) No. 05/149; Press Release No. 05/227* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05384.pdf_