## _cr07322

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### Executive Summary — Background and Key Findings
- Dominica recovered from the 2001–02 crisis following a late-2002 reform program supported by the Fund.
- Public finances improved and public debt declined by 30 percentage points of GDP since crisis; public debt remains about 100 percent of GDP.
- Output growth reached a near two-decade high in 2006 and is expected to remain strong; inflation subdued and projected to remain low.
- Substantial progress in indirect tax and social security reforms.
- Key remaining challenges:
  - Reduce public debt ratio (about 100 percent of GDP) to lower vulnerability to external shocks and natural disasters.
  - Strengthen financial sector regulation and supervision, including nonbank institutions.
  - Continue structural reforms to diversify away from the waning banana sector.

### Policy Discussions — Growth and Social Protection Strategy (GSPS)
- GSPS aims for private sector-led growth, poverty reduction, and a primary surplus target of 3 percent of GDP (excluding grants and grant-related spending).
- Mission priorities and recommendations:
  - Strengthen public finance management (especially aid and aid-related spending).
  - Maintain VAT integrity and explore alternatives to the current tax incentive regime.
  - Enhance financial sector regulation and supervision; intensify on-site inspection of banks; create a regulatory and supervisory body for nonbank institutions (credit unions and insurance companies).
  - Prioritize structural reforms: streamline public sector entities; improve contract enforcement and foreclosure arrangements; reform utilities and customs administration.

### Recent Economic Developments — Growth, Inflation, Fiscal and External
- Growth and inflation:
  - Economy grew by an estimated 4 percent in 2006.
  - Annual inflation was 1.6 percent in 2006.
- Fiscal performance (fiscal year 2006/07 preliminary/projections):
  - Primary surplus before grants projected at about 6 percent of GDP for 2006/07.
  - Fiscal table (In percent of GDP; Budget 2005/06; Proj. 2006/07; 2006/07):
    - Primary balance 1/ : 7.3 3.0 5.9
    - Revenues (excl. grants): 33.5 29.3 32.6
    - Nontax revenue: 3.0 2.2 2.8
    - Noninterest expenditures: 26.2 26.3 26.7
    - Wages: 13.3 13.0 12.9
    - Goods and services: 5.8 6.0 6.2
    - Subsidies and transfers: 5.8 5.8 7.1
    - Others 2/: 1.2 1.5 0.5
    - Memorandum items: Overall balance: 3.7 0.6 3.4
    - Total grants received: 7.6 8.6 14.4
  - Note: 1/ Adjusted for grants and grants-related spending. 2/ Including net lending, nongrant-financed investment and statistical discrepancy.
- Grants and aid:
  - Grants for the first nine months of fiscal year reached almost 13 percent of GDP versus a budget projection of 8½ percent and a pre-crisis average of 4½ percent.
  - Surge mainly from one-off EU disbursements and new donors including Venezuela and Trinidad and Tobago.
  - Large proportion of grants saved in bank accounts.
- Financial sector and credit:
  - Bank credit to the private sector rose by 11 percent in 2006.
  - Average lending rates declined by 70 basis points to 9.2 percent during 2006.
  - Credit unions’ deposits amount to about 30 percent of bank deposits.
- External sector:
  - External current account deficit narrowed sharply in 2006; likely to remain large at around 20 percent of GDP in the year cited, covered almost fully by large capital grants and FDI.

### Macroeconomic Outlook and Risks
- Near-term outlook:
  - Growth momentum expected to slow somewhat (closure of a major factory cited) but underlying trend remains above historical average.
  - Public investment expected to remain buoyant, funded by large aid receipts; consumption likely to remain robust.
  - Inflation projected to remain low.
- Medium-term projections and GSPS assumptions:
  - GSPS envisages above-trend output growth of 3 percent per annum.
  - Public investment plays an important role; strategy relies heavily on external grants.
  - Maintaining a primary surplus of 3 percent of GDP would enable gradual reduction in debt-to-GDP ratio and meet ECCB target of 60 percent by 2020.
- Vulnerabilities and stress scenarios:
  - Debt service bunching in 2009−11 and high public debt leave debt dynamics vulnerable.
  - Staff projection: if grants decline to pre-crisis levels and government scales up commercial borrowing, public debt would quickly become unsustainable.
  - Natural disasters remain a major vulnerability, partially mitigated by participation in the Caribbean Catastrophe Insurance Facility.

### Debt Restructuring and Debt Sustainability Analysis (DSA)
- Since June 2004 restructuring offer, 78.5 percent of eligible debt has been restructured.
- DSA baseline assumptions (Box 1, 2007–27):
  - Real GDP growth: 3 percent.
  - Inflation: 1.5 percent per year.
  - Primary balance: 3 percent of GDP.
  - External grants: 8.3 percent of GDP.
  - Annual disbursements of external concessional debt: 1.5 percent of GDP.
  - New domestic financing interest rate: 7 percent.
  - FDI assumed at 8 percent of GDP (2006 level).
- Debt stock (end-2006):
  - Public sector debt: 102 percent of GDP (external: 71 percent of GDP; domestic: 31 percent of GDP).
  - Public sector debt in NPV terms: around 88 percent of GDP; external debt NPV: around 56 percent of GDP.
- Baseline results:
  - Under baseline, public debt would reach 60 percent of GDP by 2017.
- Sensitivity tests and stress scenarios:
  - Scenario A.1: Reversion to ten-year averages (primary deficit of 0.1 percent, growth 0.9 percent) → public debt rises again.
  - Scenario A.2: Maintain 2007 projected fiscal effort (primary balance of 4.8 percent) → public debt declines.
  - Scenario A.3: Growth falls to 2.3 percent per year → debt initially declines then ascends.
  - Decline in external grants stress test (3 percent of GDP decline from 2009) considered under:
    - Partial adjustment: cut investment spending by around 1.5 percent of GDP and borrow more (interest rates +1 percentage point) → debt stabilizes around 62 percent of GDP.
    - No cuts in public investment: financed entirely by higher borrowing (interest rates +2 percentage points) → public debt quickly becomes unsustainable.
  - Natural disaster stress: assumed cost to government 9 percent of GDP over three years and real growth falls to zero over same period; debt increases initially then returns to declining trajectory after reconstruction and growth restoration (mitigation via catastrophe insurance noted).
- Key DSA projected public sector debt path (selected years, percent of GDP):
  - 2004: 116.0; 2005: 108.1; 2006: 102.5; 2007: 95.8; 2008: 91.9; 2009: 87.5; 2010: 83.2; 2011: 79.2; 2012: 75.2; 2017: 57.2; 2027: 23.4.
- External debt (nominal, percent of GDP) projected path (selected years):
  - 2004: 80.6; 2005: 74.8; 2006: 70.9; 2007: 65.2; 2008: 60.5; 2009: 56.3; 2010: 51.4; 2011: 46.9; 2012: 43.0; 2017: 30.6; 2027: 21.1.

### Financial Sector Resilience and Supervision
- Banking indicators:
  - Banks are well capitalized, profitable and liquid with declining NPLs; average NPL ratio remains high by international standards and exceeds ECCB prudential target of 5 percent.
  - Provisioning levels are low partly due to recent write-offs.
- Credit and monetary aggregates:
  - Private sector credit (12-month percent change): 2006: 11.2.
  - Broad money (12-month percent change): 2006: 9.6.
  - Banking system aggregates (end-period, EC$ millions): Broad money 2006: 677.1; Credit to private sector 2006: 516.1; Net foreign assets 2006: 319.0.
- Mission recommendations:
  - Intensify on-site bank inspections; encourage ECCB to strengthen supervision.
  - Establish proper regulatory and supervisory framework for nonbank financial institutions, especially credit unions.
  - Operationalize the Financial Services Unit with adequate resources; amend Cooperative Societies Act and enact insurance legislation.
  - Consider outsourcing supervisory functions to regional bodies as short-term measure and pursue a regional regulatory framework long-term.

### Tax Policy and Indirect Tax Reform
- Indirect tax reform implemented March 2006: new VAT and excise regime replaced multiple taxes.
- Preliminary evidence: new regime boosted indirect revenues.
- VAT performance and statistics (as presented in source):
  - VAT collection first half of 2006/07: 10.4 percent of GDP (much higher than budgeted 8.5 percent of GDP).
  - VAT yield during same period somewhat lower than historical yield of replaced taxes due to weak non-oil imports in 2006.
  - VAT efficiency remains high relative to other small islands, but filing rate declining; registration threshold may be too low.
- Policy guidance:
  - Keep tax cuts modest and revamp tax incentive system (replace tax holidays/exemptions with accelerated depreciation or investment credit).
  - Address low-income and small business concerns via targeted measures (increases in allowances, increases in VAT thresholds).
  - Authorities committed to comprehensive VAT review by September 2007.

### Structural Reforms and Public Investment Management
- Structural constraints: high transportation costs, lack of economies of scale, vulnerability to external shocks; banana sector decline noted.
- Specific reform priorities:
  - Streamline public sector entities along core mandates (port and airport merger, break-up of National Development Corporation into tourism board and investment promotion agency; further restructuring of DEXIA and AID Bank).
  - Improve contract enforcement and foreclosure arrangements; consider additional magistrate courts and streamlined foreclosure procedures.
  - Reform utilities (electricity supply act approved; need functioning utilities commission) and customs (manifest control, appeals rationalization).
  - Improve management of public investment: multiyear budgeting, procurement, auditing, donor coordination; establish an aid-coordination unit in Ministry of Finance.
- Growth and poverty reduction:
  - GSPS envisages growth of 3 percent per annum and prioritizes targeted social programs; authorities to conduct a poverty assessment to inform social safety nets.
  - Dominica Social Security contributes about half of total social spending; contribution increases and reforms underway.

### External Position, Trade and Tourism
- Balance of payments highlights (U.S.$ millions, selected series):
  - Merchandise exports, f.o.b.: 2006: 42.6; 2007: 42.5; 2008 prog.: 44.2; 2009 proj.: 36.4.
  - Merchandise imports, f.o.b.: 2006: 146.6; 2007: 146.8; 2008 prog.: 148.7; 2009 proj.: 154.2.
  - Current account balance (U.S.$ millions): 2006: -63.9; 2007: -58.3; 2008 prog.: -53.7; 2009 proj.: -63.0.
  - Services and travel (exports of services, U.S.$ millions): 2006: 96.2; 2007: 97.9; 2008 prog.: 104.1.
- Competitiveness:
  - REER declined by some 14 percent since end-2000; at end-2006 it was nearly at a 20-year low (index 2000=100).
  - Tourism: stay-over arrivals increased at an average annual rate of 3.7 percent during 2000–06.
- External financing:
  - Current account deficit remains high but financed mainly by capital grants and FDI.
  - Capital and financial account (U.S.$ millions, 2002–2012 series excerpt): 32.1; 22.4; 22.1; 71.0; 62.7; 51.2; 54.2; 63.1; 63.6; 67.7; 68.3; 68.4.

### Data, Statistics, and Surveillance
- Data provision adequate for surveillance but weaknesses in coverage, timeliness and dissemination.
- Priority improvements: national accounts (tourism, agriculture, labor statistics), fiscal accounts, balance of payments.
- National accounts and CPI details:
  - GDP estimates available about four months after year-end; CPI compiled with a two-month lag (weights from 1997/1998 Household Expenditure Survey).
  - Program to develop supply and use table (SUT); CARTAC mission scheduled in July 2007.
- Table of common indicators: various data items received through March/April/May 2007 at frequencies indicated in source.
- Debt sustainability and statistical work:
  - DSA prepared July 2, 2007; debt-related vulnerabilities and stress-test results summarized above.

### Fund Relations, Technical Assistance, and Coordination with Other Donors
- Fund relations (As of April 30, 2007):
  - Quota: 8.20 (SDR Million) — 100.00 percent of quota.
  - PRGF Arrangements: 7.69 (SDR Million) — Amount Approved 7.69 — Amount Drawn 7.69 (Approval Date 12/29/03 — Expiration Date 12/28/06).
  - Stand-By Arrangements and historical arrangements listed with amounts drawn as in source.
  - Exchange rate arrangement: member of ECCU; EC$ pegged to U.S. dollar at EC$2.70 per U.S. dollar since July 1976.
- Technical assistance:
  - CARTAC and Fund missions on tax policy and administration, public finance management, social security reform; FAD, MCM, MFD, LEG assistance cited with missions and years in source.
- World Bank and CDB relations:
  - World Bank Base Case lending scenario and ongoing projects listed (IDA allocations, CCRIF participation, telecommunications, Growth and Social Protection TA project).
  - CDB approvals and major projects (loan amounts and undisbursed figures) provided as in source.

### Staff Appraisal and Executive Directors’ Conclusions
- Achievements:
  - Macroeconomic stability restored; fiscal consolidation and debt restructuring moved debt trajectory toward sustainability.
  - Substantial progress in indirect tax and social security reforms.
  - Economy poised to maintain above-trend growth with low inflation if reforms continue.
- Policy assessment and key recommendations:
  - Maintain fiscal policy consistent with primary surplus target of 3 percent of GDP.
  - Smooth spending of scaled-up budgetary aid; save some aid to substitute expensive borrowing and reduce debt.
  - Improve budget management and capital expenditure execution; strengthen aid coordination and predictability.
  - Enhance financial sector supervision, pursue tax incentive revamp, and prioritize structural reforms (public sector entities, contract enforcement, utilities, customs).
  - Undertake a poverty assessment and improve economic and social statistics.
- Consultation cycle proposal:
  - Next Article IV consultation proposed on a standard 12-month cycle.

*Source: _cr07322 — IMF staff report excerpts and informational annexes as provided.*

### Executive Summary ......................................................................................................

### Executive Summary

### Background
- Dominica has recovered remarkably from the 2001–02 crisis and its near-term outlook is positive.
- Authorities undertook a bold economic reform program in late 2002, supported by the Fund, to restore debt sustainability and pave the way for sustained growth and poverty reduction.
- Performance under the program was exemplary: public finances improved considerably and public debt declined sharply.
- Output growth exceeded the historical average, reaching a near two-decade high in 2006, and is expected to remain strong.
- Inflation has been subdued and is projected to remain low.
- Substantial progress has been made in indirect tax and social security reforms, as well as in other reform areas.
- Key remaining challenges:
  - maintaining sound fiscal policies to continue to reduce the public debt ratio, which is still high at about 100 percent of GDP and renders the economy vulnerable to external shocks, particularly natural disasters and abrupt declines in aid;
  - strengthening the resilience of the financial sector, which has contributed to the strong post-crisis recovery and yet remains weakly regulated and supervised;
  - continuing structural reforms to help diversify the economy further away from the waning banana sector and find new growth drivers.

### Policy discussions (Growth and Social Protection Strategy—GSPS)
- The authorities have embarked on a comprehensive reform program embodied in the Growth and Social Protection Strategy (GSPS).
- Key elements include structural reforms to foster private sector-led growth and reduce poverty while maintaining prudent fiscal policy, including attaining a primary surplus target of 3 percent of GDP.
- Mission endorsement and emphasized priorities:
  - strengthen public finance management (especially aid and aid-related spending), maintain the integrity of the value-added tax (VAT), and explore alternatives to the current tax incentive regime;
  - enhance financial sector regulation and supervision, including intensifying on-site inspection of banks and creating a fully-functioning regulatory and supervisory body over nonbank financial institutions (in particular credit unions and insurance companies);
  - prioritize structural reforms: streamline public sector entities along their core mandates; improve contract enforcement and foreclosure arrangements; reform the utilities and customs administration.

### Introduction / Recent program context
- Dominica fully recovered from the 2001–02 crisis following the late-2002 reform strategy supported by the Fund.
- The fiscal primary surplus in 2005/06 was some 10 percentage points of GDP higher than in 2000/01, and public debt declined by 30 percentage points of GDP.
- Political support for structural reforms remains unabated; the government increased its majority in the 2005 elections and implemented reforms including nominal wage cuts and stabilization levies.
- After the PRGF-supported program ended in December (year implicit in source), the authorities publicly launched the GSPS and are conducting public consultations on a possible successor Fund program.
- Fund technical assistance active through CARTAC, particularly in tax policy and administration, public finance management, and social security reform.

### Recent Economic Developments — Key findings and statistics
- Growth and inflation:
  - The economy grew by an estimated 4 percent last year, the strongest in nearly two decades, driven by tourism and buoyant construction.
  - Annual inflation was 1.6 percent in 2006.
- Fiscal performance (fiscal year 2006/07 preliminary/projections):
  - Primary surplus before grants is projected at about 6 percent of GDP for 2006/07, even after a 3 percent increase in base salaries introduced later in the fiscal year.
  - Fiscal table highlights (In percent of GDP; labels as in source):
    - Primary balance 1/ : 7.3 3.0 5.9  (Budget 2005/06; Proj. 2006/07; 2006/07)
    - Revenues (excl. grants): 33.5 29.3 32.6
    - Nontax revenue: 3.0 2.2 2.8
    - Noninterest expenditures: 26.2 26.3 26.7
    - Wages: 13.3 13.0 12.9
    - Goods and services: 5.8 6.0 6.2
    - Subsidies and transfers: 5.8 5.8 7.1
    - Others 2/: 1.2 1.5 0.5
    - Memorandum items: Overall balance: 3.7 0.6 3.4
    - Total grants received: 7.6 8.6 14.4
  - Note: 1/ Adjusted for grants and grants-related spending. 2/ Including net lending, nongrant-financed investment and statistical discrepancy.
- Grants and aid:
  - Grants have more than doubled the pre-crisis level: Dominica received grants of almost 13 percent of GDP for the first nine months of this fiscal year, compared with a budget projection of 8½ percent and the average pre-crisis level of 4½ percent.
  - The surge is mainly due to one-off disbursements from the European Union (EU) and new donors, including Venezuela and Trinidad and Tobago.
  - A large proportion of the grants has been saved in bank accounts, reflecting limited implementation capacity and authorities’ commitment to sound spending.
- Financial sector and credit:
  - Bank credit to the private sector rose by 11 percent in 2006, the highest in 15 years.
  - Average lending rates declined by 70 basis points to 9.2 percent during 2006.
  - Bank lending remains concentrated in consumer loans, particularly mortgages.
  - Credit unions’ deposits amount to about 30 percent of bank deposits.
- Banking prudential indicators:
  - Banks are well capitalized, profitable and liquid with declining nonperforming loans (NPL).
  - The average NPL ratio remains high by international standards and exceeds the ECCB prudential target of 5 percent.
  - Provisioning levels are low in part due to recent write-offs.
- External sector:
  - The external current account deficit narrowed sharply in 2006, mostly reflecting stronger tourism receipts.
  - The deficit is likely to remain large at around 20 percent of GDP this year, but continues to be covered almost fully by large capital grants and foreign direct investment.
- Debt restructuring:
  - Since the offer of restructuring terms in June 2004, 78.5 percent of eligible debt has been restructured.
  - Negotiations with nonparticipating creditors continue and have proven challenging in some cases.

### Structural reforms and institutional issues
- Progress:
  - Contribution rate for Dominica Social Security was raised by 1 percentage point in March and set to be raised further in coming years as part of comprehensive reform.
  - Authorities started to merge the port and airport authorities and to break up the National Development Corporation into a tourism board and an investment promotion agency.
- Remaining institutional weaknesses:
  - Supervision of the nonbank financial sector remains weak; credit unions are under-regulated despite systemic importance.
  - A near-insolvent Agricultural and Industrial Development Bank (AID) remains to be rehabilitated.
  - Weak supervision largely reflects resource constraints and delays in enacting key regulatory legislation; a draft law providing regulatory and supervisory power to the Financial Service Unit has recently been submitted to parliament.

### Macroeconomic Outlook and Risks
- Near-term outlook:
  - Growth momentum expected to slow somewhat (in part due to the closure of a major factory) but underlying trend will remain above the historical average.
  - Public investment expected to remain buoyant, funded by large aid receipts; consumption likely to remain robust, partly supported by increases in public sector wages.
  - Tourism momentum expected to be sustained; agricultural and fishery improvements anticipated but will take time to materialize.
  - Inflation projected to remain low.
- Medium-term prospects and policy assumptions:
  - The GSPS envisages above-trend output growth of 3 percent per annum and gradual reductions in unemployment and poverty, underpinned by structural reforms and prudent fiscal policy.
  - Public investment to play an important role; strategy relies heavily on external grants to avoid an increase in public debt.
  - Maintenance of the primary surplus at 3 percent of GDP, as envisaged in the GSPS, will bring about a gradual reduction in the debt-to-GDP ratio and enable Dominica to meet the ECCB target for the debt ratio (60 percent by 2020).
- Vulnerabilities:
  - Debt dynamics remain vulnerable to external shocks due to bunching of debt service payments in 2009−11 and high public debt.
  - Staff projections show that if the government reacts to a decline in grants to their pre-crisis level by scaling up commercial borrowing, public debt would quickly become unsustainable.
  - Natural disasters remain a main source of vulnerabilities, although somewhat mitigated by Dominica’s recent participation into the Caribbean Catastrophe Insurance Facility of the World Bank.

### Report on Policy Discussions — Priority policy recommendations (summarized)
- Fiscal sustainability:
  - Maintain prudent fiscal policy and achieve the primary surplus target of 3 percent of GDP envisioned in the GSPS to gradually reduce the debt-to-GDP ratio.
  - Strengthen public finance management, particularly aid and aid-related spending; maintain VAT integrity; explore alternatives to the current tax incentive regime.
- Financial sector resilience:
  - Enhance financial sector regulation and supervision: intensify on-site inspection of banks; establish a fully-functioning regulatory and supervisory body over nonbank financial institutions (credit unions and insurance companies).
  - Address supervision resource constraints and expedite enactment of regulatory legislation for the Financial Service Unit.
- Structural reforms to foster growth and reduce poverty:
  - Prioritize structural reforms: streamline public sector entities along core mandates; improve contract enforcement and foreclosure arrangements; reform utilities and customs administration.
  - Continue social security reform (including staged contribution increases) and implement institutional reorganizations (port/airport merger; restructuring of the National Development Corporation).

*Source: _cr07322 - Executive Summary*

### 17.      Against this background, policy discussions centered on the medium-term

### Against this background, policy discussions centered on the medium-term

### A. Ensuring Fiscal Sustainability
- Mission view: the authorities’ medium-term fiscal framework is "a sound and coherent strategy" but fiscal flexibility remains limited due to high debt and large investment needs under the GSPS.
- Aid surge concerns:
  - Recent surge in aid is large and its levels and volatility point to unsustainability of the surge.
  - Mission recommendation: save aid in excess of budgeted amounts; prudent fiscal policy to smooth budget execution in the event of aid shortfalls.
- Fiscal targets and recommendations:
  - Fiscal framework envisages a primary surplus of 3 percent of GDP (excluding grants and grant-related spending).
  - Mission recommended meeting the 3 percent primary surplus target and managing aid prudently.
  - Recommended policy actions: keep current expenditures under control; maintain revenue strength; improve management of aid and aid-related investment.
- Authorities’ stance:
  - Reaffirmed commitment to the 3 percent primary surplus target.
  - Indicated saving would be sought from nonwage current spending if necessary.
  - Scoping for modest tax reductions given strong revenue performance and indirect tax reform.
  - After five years of nominal wage freeze, consensus to compensate public employees adequately; mission cautioned wage increases must be consistent with fiscal framework.
- Near-term risks to fiscal stance:
  - Tax revenues likely to fall relative to GDP as the VAT refund process normalizes and the effect of the factory closure filters through the economy.
  - Primary surplus likely to decline next year under existing policies though target may be met by a narrow margin.
  - Mission emphasis: do not undermine underlying revenue strength; scope for modest reductions in income taxes, particularly for low-income brackets; keep deviation in the wage bill to a minimum.
- Tax incentives and VAT:
  - Income tax yields are very low due to a myriad of tax incentives centered on tax holidays and exemptions.
  - Mission advised exploring alternatives such as investment credit, accelerated depreciation, or expenditure commitment in lieu of tax concessions.
  - Authorities committed to publish government decisions on tax concessions and cost estimates where possible.
  - VAT performance: accounts for one third of tax revenues; mission stressed maintaining VAT integrity and improving revenue administration.
  - Options to address small business and low-income concerns: improve refund arrangements, raise the VAT threshold, or increase income tax allowances.
  - Authorities committed to undertake a comprehensive review of the VAT by September 2007.
- Public investment and aid management:
  - Public investment represents about 40 percent of total investment in Dominica, with two thirds of it financed by aid.
  - Public investment in Dominica is far less productive than in countries in other regions.
  - Mission recommended establishing an aid-coordination unit within the Ministry of Finance to integrate aid administration, planning and monitoring of aid-financed expenditure.
  - Further progress needed in multiyear budgeting, procurement, auditing, and donor coordination; enactment of the Financial Administration Act would help.
  - Donors should improve predictability of aid and streamline disbursement procedures.
- Social security reform and debt restructuring:
  - Social security reform adopted mid-2006; implementation began early 2007 and includes gradual increases in contribution rates and retirement ages, changes in accrual rules and benefit formula.
  - Government paid off contribution arrears amounting to 5 percent of GDP in 2003.
  - Consideration to increase the fund’s overseas investments by up to 5 percent of its portfolio.
  - Mission urged continued good-faith debt restructuring efforts, including payments into escrow and discussions with holdout creditors; authorities may close negotiations if progress is limited.

### B. Strengthening Resilience of the Financial Sector
- Credit expansion and supervision:
  - Recent credit expansion reflects stronger domestic activity but rapid pace raises concerns about credit quality and potential weakening of lending standards.
  - Low levels of loan loss provisions noted as a risk.
  - Mission suggested encouraging the ECCB to strengthen supervision, in particular intensify on-site inspection.
  - Need for closer coordination among supervisory bodies regionally and eventual establishment of a regional framework for consolidated supervision.
- Nonbank financial institutions:
  - Weak oversight of nonbank financial institutions, particularly credit unions, is a matter of concern given their systemic importance.
  - Priority to establish a proper regulatory and supervisory framework for credit unions.
  - Progress needed in rehabilitating the AID Bank and improving its supervision.
  - Mission welcomed enactment of the Financial Services Unit Act and urged rapid operationalization with adequate resources and supporting legislation (amend Cooperative Societies Act, new insurance legislation).
  - Regional approach to regulation and supervision would be useful given extensive regional financial linkages and resource constraints.
- Authorities’ response:
  - Agreed that further progress is needed; prioritize ensuring the Financial Services Unit is fully functioning.
  - Lack of resources and expertise is the biggest challenge; authorities considering outsourcing part of supervisory functions to other regional regulatory bodies.
  - Regulatory framework for credit unions must be harmonized with the Caribbean Confederation of Credit Unions’ position.

### C. Fostering Growth and Reducing Poverty
- Structural constraints and sector outlook:
  - Dominica faces challenges from high transportation costs and lack of economies of scale; economy is vulnerable to external shocks.
  - Closure of a multinational’s factory exemplifies vulnerability; net effect of the closure is limited to an estimated 2.5 percent of total exports of goods and services in 2008 due to high import content.
  - Banana sector outlook challenging due to erosion of trade preferences; Fair Trade organic niche could support the sector.
  - Tourism promising but sensitive to external factors.
- Policy and reform priorities to sustain growth:
  - Continue diversification to nonbanana crops and improve productivity via better marketing and quality control.
  - Reforms needed in public entities, judiciary, utilities, and customs.
  - Specific areas:
    - Public sector entities: streamline along core mandates; DEXIA, the AID Bank, and the National Development Corporation (NDC) have not fully fulfilled mandates; NDC restructuring has started but further progress needed, especially restructuring DEXIA which remains in a large loss and competes with private sector.
    - Contract enforcement and foreclosure arrangements: Dominica is among the weakest in dispute settlement and foreclosure arrangements, hindering business transactions and raising borrowing costs; authorities considering additional magistrate courts, streamlined foreclosure arrangements, and facilitation of summary proceedings.
    - Utilities reform: electricity tariffs among the highest in the region in part due to an outdated regulatory system; recently approved electricity supply act important but a properly functioning utilities commission is needed without delay.
    - Customs reform: modernize operations, introduce manifest control, rationalize appeals process, and improve efficiency and processing time as recommended by a recent FAD/CARTAC mission.
- Competitiveness:
  - CPI-based real effective exchange rate declined since 2001, reaching at end-2006 its lowest level in nearly 20 years (Index 2000=100 series noted).
  - Relative price stability and depreciation of the EC dollar against currencies of trading partners have improved competitiveness; weakening of real exchange rate could help narrow the current account deficit.
- Poverty reduction strategy:
  - The GSPS is coherent and balanced, recognizing roles of sustained economic growth and fiscal soundness and emphasizing targeted social programs.
  - Strategy prioritizes interventions with immediate and direct impact on the most vulnerable.
  - Authorities committed to undertake a poverty assessment in the year to help design efficient social safety nets.
  - Dominica Social Security accounts for about half of total social spending; ongoing reform should help provide secure resources for social spending over the long term.

### V. STAFF APPRAISAL
- Achievements and outlook:
  - Post-2001/02 reform efforts have established macroeconomic stability; fiscal consolidation contributed to strong output growth and, together with debt restructuring, moved debt trajectory toward sustainability.
  - Continuation of sound fiscal policy is critical to debt sustainability and external stability.
  - Substantial progress in structural reforms, notably indirect tax and social security reforms.
  - Economy poised to maintain above-trend growth, sustained by sound policy and structural reforms; despite near-term softening from a factory closure, underlying growth is expected to remain above the historical average with successful reform implementation.
  - Steady growth with low inflation will help achieve poverty reduction and job creation objectives.
- Policy assessment and recommendations:
  - Authorities commended for commitment to maintain a fiscal policy geared to a primary surplus target of 3 percent of GDP to gradually reduce the debt ratio and to pursue structural reforms for private sector-led growth.
  - On the recent surge in budgetary aid: welcome but likely unsustained; authorities appropriate to smooth spending, save some aid to substitute expensive borrowing and reduce debt.
  - Need to improve budget management, especially capital expenditure, to use aid efficiently, transparently, and consistently with macro objectives.
  - IMF and donors to continue providing technical assistance through CARTAC.

*Source: IMF staff report content unit _cr07322 - 17. Against this background, policy discussions centered on the medium-term*

### 37.      Tax cuts, while justifiable, need to be modest and accompanied by revamping

### 37.      Tax cuts, while justifiable, need to be modest and accompanied by revamping

### Tax policy and indirect tax reform
- Findings:
  - The successful indirect tax reform provides modest scope for tax reductions, without jeopardizing the primary surplus target.
  - Some tax incentives are unavoidable to attract investment and create jobs given intense tax competition in the region.
  - The current system, centered on tax holidays and exemptions, needs to be replaced with more efficient schemes.
- Policy recommendations:
  - Keep tax cuts modest.
  - Revamp the tax incentive system without undermining the integrity of the VAT by replacing tax holidays and exemptions with more efficient schemes such as:
    - accelerated depreciation
    - investment credit
  - Address legitimate concerns about low-income earners and small businesses with targeted measures such as:
    - increases in allowances
    - increases in VAT thresholds

### Box 1 — Dominica: Reform of Indirect Taxes
- Findings:
  - Dominica introduced a new VAT and excise duty regime in March 2006 to replace the sales, consumption, hotel occupancy and entertainment tax.
  - Preliminary evidence suggests that the new regime boosted indirect revenues.
  - VAT collection in the first half of 2006/07 was much higher (10.4 percent of GDP) than budgeted (8.5 percent of GDP) although the buoyancy is likely to decline somewhat in the future with the normalization of VAT refund arrangements.
  - The VAT yield during the same period was somewhat lower than the historical yield of the replaced taxes due to weak non-oil imports in 2006.
  - VAT efficiency, measured as the VAT share in GDP divided by the standard rate, remains high relative to other small islands, but the filing rate is steadily declining.
  - There is room for improving VAT audit and refund management.
  - Experience indicates the registration threshold may be too low, making the tax costly to administer.
- Key statistics and reported figures (as presented in the source):
  - “FY2004/05   FY2005/06FY2006/07
     Indirect taxes 2/10.611.511.8
     Old indirect taxes 2/10.611.5-
     VAT--10.4
     New excises--1.4
     Petroleum excise2.42.22.7
     Total13.013.714.6”
  - “(As a percentage of GDP for the first half of a fiscal year) 1/”
  - VAT efficiency defined in source: “VAT efficiency is defined as the ratio of VAT revenues to GDP for 2002 divided by the standard rate.”

### Financial sector supervision
- Findings:
  - Recent improvements in banking prudential indicators are welcome.
  - Rapid credit expansion and low provisioning, together with strong competition from loosely-regulated nonbank financial institutions, warrant enhanced supervision over the entire financial sector.
  - Given extensive regional financial linkages and the lack of supervisory expertise, outsourcing part of supervisory functions to a regional pool is being considered as a short-term solution.
- Policy recommendations / institutional scenarios:
  - Enhance supervision across the entire financial sector, including nonbank financial institutions.
  - Consider outsourcing part of supervisory functions to a regional pool in the short term.
  - Seek a long-term solution through the creation of a regional regulatory body in the context of ongoing regional integration initiatives.

### External competitiveness and sector outlook
- Findings:
  - Dominica’s external competitiveness remains broadly appropriate.
  - The real effective exchange rate is the lowest in nearly 20 years, supported by fiscal consolidation and the EC dollar depreciation against the currencies of trading partners.
  - Other indicators (tourism cost indices and recent developments in the tourism sector) suggest the real exchange rate level is broadly competitive and the exchange regime, if supported by sound fiscal policy, continues to serve Dominica well.
- Sectoral notes:
  - Dominica’s export sector has been in transition since the early 1990s as the high-cost banana sector has been shrinking amid global trends of trade liberalization.
  - Diversification to nonbanana production will likely continue, though specialization in the Fair Trade niche could provide support.
  - Tourism is likely to maintain its expansion, supported by recent promotional efforts and new investment, and the opening of a new off-shore medical school is expected to be supportive.
  - Manufacturing’s future is more uncertain due to structural impediments including a small domestic market and high transportation costs, though the sector may retain niche roles in regional markets with deepening Caribbean trade integration.
- Key statistic:
  - “stay-over arrivals increased at an average annual rate of 3.7 percent during 2000–06”

### Managing an aid surge (Box 2)
- Findings:
  - Scaled-up aid flows can cause upward pressure on the real exchange rate if not handled by proper macroeconomic policies; debt sustainability could be jeopardized if the aid is volatile and comes in the form of debt.
  - Aid flows can strain administrative capacity, fragment budgetary procedures, and encourage rent-seeking behavior.
  - Dominica’s policy response to a recent aid surge helped boost private sector activity.
  - Budgetary aid inflows rose by about 4 percent of GDP over the 2002–05 period.
  - The authorities’ efforts led to an even larger improvement in the budget balance; the government saved more than the aid surge, reflecting concern about restoring fiscal and debt sustainability.
  - The external current account showed little improvement as the private sector increased its absorption, almost fully offsetting the rise in public savings without raising inflation or appreciating the currency.
- Comparative pattern (as reported in the source):
  - Ethiopia and Ghana neither absorbed nor spent in response to an aid surge, leading to accumulation of international reserves without raising demand pressure.
  - Mozambique, Tanzania, and Uganda spent incremental aid without fully absorbing it, helping build up international reserves but at the risk of real exchange rate appreciation.
- Reported empirical measures (as in source):
  - Fiscal Spending Ratio 3/
  - External Absorption Ratio 3/

### Structural reforms and public investment management
- Findings:
  - Continued progress in structural reforms is critical for private-sector led growth.
  - Structural factors such as high transportation costs and the lack of economies of scale will continue to pose a challenge.
- Policy recommendations:
  - Government should pursue structural reforms including:
    - reforms of public entities
    - reforms of utilities
    - reforms of the judiciary
    - reforms of customs
  - Improve management of public investment programs to enhance private-sector productivity and facilitate diversification away from the waning banana sector.

### Data, statistics, and surveillance
- Findings:
  - Data provision for surveillance purposes is adequate, but weaknesses remain in coverage, timeliness and dissemination.
  - Ongoing economic transformation from agriculture to services increases the importance of improved statistics.
- Policy priorities:
  - Give priority to compilation of national account statistics, in particular:
    - tourism statistics
    - agriculture statistics
    - labor statistics
  - Improve dissemination of intra-year fiscal statistics.

### Consultation cycle
- Proposal:
  - It is proposed that the next Article IV consultation with Dominica take place on the standard 12-month cycle.

*IMF staff report content (excerpts as provided).*

### 2.2 percent for the broader Caribbean region (World

### _cr07322 - 2.2 percent for the broader Caribbean region (World

### Tourism and competitiveness
- Tourism growth for the broader Caribbean region: "2.2 percent for the broader Caribbean region (World Tourism Organization)".
- World Travel and Tourism Council tourism competitiveness indicators "rank Dominica well compared to other Caribbean destinations."
- Tourism is a dominant export component in the period 1995–2006 (chart labels: Tourism, Manufactured goods, Bananas).

### Exchange rate and real effective exchange rate (REER)
- "The EC dollar is broadly competitive, as in real effective terms it is nearly at a 20-year low."
- "Its real effective rate has declined by some 14 percent since end-2000, reflecting relative domestic price stability and its depreciation against the currencies of appropriately weighted trading partners."
- Note on weights: "The weights used in these calculations are based on 1999–2001 data, and differ from those used in previous consultation reports ... The weights have been further adjusted to capture an ongoing structural change, and so differ from those published in IFS."
- Dominica's REER performance (index, 2000=100) shown alongside ECCU REER and Dominica NEER (chart timeline Jan-87 to Jan-07).

### External position and financing
- "Although Dominica’s current account deficit remains high, it improved substantially in 2006 and continues to be financed mainly by capital grants and FDI."
- Balance of payments highlights (millions of U.S. dollars):
  - Merchandise exports, f.o.b.: 2002: 43.6; 2003: 41.0; 2004: 42.8; 2005: 43.0; 2006: 42.6; 2007: 42.5; 2008 prog.: 44.2; 2009 proj.: 36.4.
  - Merchandise imports, f.o.b.: 2002: 102.4; 2003: 111.8; 2004: 127.8; 2005: 145.9; 2006: 146.6; 2007: 146.8; 2008 prog.: 148.7; 2009 proj.: 154.2.
  - Current account balance (U.S.$ millions): 2002: -34.7; 2003: -33.6; 2004: -46.9; 2005: -83.8; 2006: -63.9; 2007: -58.3; 2008 prog.: -53.7; 2009 proj.: -63.0.
- Balance of payments medium-term projections (U.S.$ millions):
  - Current account balance (2002–2012): -34.7; -33.6; -46.9; -83.8; -63.9; -58.3; -53.7; -63.0; -65.2; -64.6; -64.8; -64.9.
  - Trade balance (2002–2012): -58.7; -70.8; -84.9; -102.9; -104.0; -104.3; -104.6; -117.8; -122.2; -126.2; -130.9; -135.5.
  - Exports (f.o.b.) (2002–2012): 43.6; 41.0; 42.8; 43.0; 42.6; 42.5; 44.2; 36.4; 37.8; 39.2; 40.7; 42.4.
  - Imports (f.o.b.) (2002–2012): 102.4; 111.8; 127.8; 145.9; 146.6; 146.8; 148.7; 154.2; 160.0; 165.5; 171.5; 177.9.
- Services and travel (exports of services, U.S.$ millions): 2002: 79.7; 2003: 77.3; 2004: 86.3; 2005: 83.5; 2006: 96.2; 2007: 97.9; 2008 prog.: 104.1; 2009 proj.: 110.4; 2010 proj.: 114.1; 2011 proj.: 119.9; 2012 proj.: 125.9.
- Net income and transfers (2002–2012, U.S.$ millions):
  - Net income: -18.4; -12.1; -21.8; -33.9; -21.5; -21.6; -22.4; -23.7; -24.1; -24.4; -24.9; -25.6.
  - Net current transfers: 16.4; 16.6; 19.8; 21.5; 18.0; 22.1; 22.1; 23.0; 24.1; 25.1; 26.3; 27.5.
- Capital and financial account (2002–2012, U.S.$ millions): 32.1; 22.4; 22.1; 71.0; 62.7; 51.2; 54.2; 63.1; 63.6; 67.7; 68.3; 68.4.
  - Financial account, private sector direct investment (2002–2012): 11.4; 19.8; 18.0; 18.0; 24.0; 24.1; 25.3; 26.3; 27.5; 28.7; 30.0; 31.4.
- Overall balance (U.S.$ millions): 12.1; 1.4; -25.7; -8.3; -1.2; 6.6; 0.5; 0.1; -1.6; 3.1; 3.5; 3.6.

### Fiscal consolidation and public finances
- Fiscal consolidation is explicitly credited with playing "a role in maintaining external competitiveness."
- "Dominica’s real effective exchange rate has depreciated more than those in most of the other ECCU countries, largely reflecting fiscal consolidation in Dominica."
- Central government accounts (selected, in percent of GDP and EC$ millions):
  - Total revenue and grants (EC$ millions): 2002: 224.1; 2003: 285.9; 2004: 292.0; 2005: 325.0; 2006: 320.1; 2006/07 prog.: 346.7; 2007/08 proj.: 328.6.
  - Current revenue (EC$ millions): 2002: 191.9; 2003: 221.8; 2004: 245.7; 2005: 263.2; 2006: 248.1; 2006/07 prog.: 271.3; 2007/08 proj.: 271.5.
  - Grants (EC$ millions): 2002: 30.9; 2003: 63.2; 2004: 44.3; 2005: 60.3; 2006: 70.5; 2006/07 prog.: 74.6; 2007/08 proj.: 67.3.
  - Total expenditure (EC$ millions): 2002: 261.3; 2003: 295.2; 2004: 298.7; 2005: 315.3; 2006: 306.8; 2006/07 prog.: 318.7; 2007/08 proj.: 321.6.
  - Overall balance (EC$ millions): -37.2; -9.3; -6.6; 9.6; 13.3; 28.0; 7.0.
  - Overall balance (percent of GDP): -5.4; -1.3; -0.9; 1.2; 1.6; 3.4; 0.8.
  - Primary balance (percent of GDP): -1.6; 5.4; 3.5; 7.3; 4.0; 5.9; 3.0.
  - Overall balance excluding grants (percent of GDP): -9.9; -10.1; -6.8; -6.4; -6.9; -5.6; -5.7.
- Government financing and debt:
  - Financing (EC$ millions): 48.7; 2.7; 17.2; -14.8; -13.3; -28.1; -7.0.
  - Net foreign financing (EC$ millions): 44.9; 47.3; 25.8; 9.1; 0.0; -7.9; -7.8.
  - Net domestic financing (EC$ millions): 3.8; -44.5; -8.6; -23.9; -13.2; -20.1; 0.8.
  - Nonfinancial public sector debt (percent of GDP, memorandum): 2002: 130.8; 2003: 130.8; 2004: 116.0; 2005: 108.1; 2006: 101.4; 2007 prog.: 102.5; 2008 proj.: 95.8; 2009: 91.9; 2010: 87.5; 2011: 83.2; 2012: 79.2.

### Real economy and projections
- Real GDP growth (factor cost, annual percentage change):
  - 2002: -5.1; 2003: 0.1; 2004: 3.0; 2005: 3.3; 2006: 4.1; 2007 prog.: 4.0; 2008 proj.: 3.2; 2009 proj.: 2.8.
- GDP deflator (factor cost, annual percentage change):
  - 2002: -0.2; 2003: 0.9; 2004: 2.1; 2005: 1.5; 2006: 1.2; 2007 prog.: 1.9; 2008 proj.: 1.8; 2009 proj.: 1.1.
- Consumer prices (end of period, annual percentage change):
  - 2002: 0.4; 2003: 2.9; 2004: 0.8; 2005: 2.7; 2006: 2.0; 2007 prog.: 1.6; 2008 proj.: 1.5; 2009 proj.: 1.5.

### Financial and banking sector indicators
- Broad money (percent change, 12-month basis): 2001: 7.4; 2002: 8.5; 2003: 1.0; 2004: 5.9; 2005: 6.7; 2006: 9.6.
- Private sector credit (percent change, 12-month basis): 2001: -3.2; 2002: -1.4; 2003: -2.9; 2004: 7.1; 2005: 6.0; 2006: 11.2.
- Banking system balance-sheet aggregates (end-period, EC$ millions):
  - Broad money: 2002: 549.2; 2003: 554.5; 2004: 587.4; 2005: 627.0; 2006: 677.1; 2006 prog.: 687.2; 2007 proj.: 728.6; 2008 proj.: 759.0.
  - Credit to the private sector (end period): 2002: 433.2; 2003: 420.6; 2004: 450.7; 2005: 477.8; 2006: 516.1; 2006 prog.: 531.2; 2007 proj.: 565.6; 2008 proj.: 593.3.
  - Net foreign assets (consolidated banking system): 2002: 193.8; 2003: 289.0; 2004: 333.7; 2005: 286.8; 2006: 319.0; 2006 prog.: 397.2; 2007 proj.: 427.8; 2008 proj.: 411.7.

### Vulnerabilities and memoranda
- External vulnerability indicators (percent of GDP or as specified):
  - Current account balance (percent of GDP): 2002: -18.7; 2003: -13.7; 2004: -13.0; 2005: -17.3; 2006: -29.5; 2006 est.: -19.4 (two series presented in tables).
  - Net official reserves (U.S.$ millions, end period): 2002: 30.4; 2003: 43.6; 2004: 44.0; 2005: 33.6; 2006: 37.6; 2007 est.: 51.9.
  - External public debt (percent of GDP): 2002: 67.5; 2003: 79.6; 2004: 84.6; 2005: 80.6; 2006: 74.8; 2006 est.: 70.9.
  - External debt (end period) to exports of goods and nonfactor services (percent): 2001: 147.1; 2002: 163.4; 2003: 184.2; 2004: 169.5; 2005: 168.0; 2006: 153.2.
  - REER appreciation (end of period; depreciation -): 2001: 0.8; 2002: -3.2; 2003: -1.9; 2004: -6.0; 2005: 1.9; 2006: -2.6.

*Source: Staff Report for the 2007 Article IV Consultation—Informational Annex, Prepared by the Western Hemisphere Department, July 2, 2007.*

### Appendix I. Dominica: Fund Relations

### Appendix I. Dominica: Fund Relations (As of April 30, 2007)

### I. Membership status
- Joined 12/12/78; Article VIII

### II. General Resources Account — Quota and holdings
- Quota: 8.20 (SDR Million) — 100.00 percent of quota
- Fund holdings of currency: 9.24 (SDR Million) — 112.71 percent of quota
- Reserve position in Fund: 0.01 (SDR Million) — 0.11 percent of quota

### III. SDR Department
- Net cumulative allocation: 0.59 (SDR Million) — 100.00 percent of allocation
- Holdings: 0.07 (SDR Million) — 11.10 percent of allocation

### IV. Outstanding purchases and loans
- PRGF Arrangements: 7.69 (SDR Million) — 93.76 percent of quota
- Stand-By Arrangements: 1.05 (SDR Million) — 12.81 percent of quota

### V. Latest financial arrangements (SDR Million)
- PRGF: Approval Date 12/29/03 — Expiration Date 12/28/06 — Amount Approved 7.69 — Amount Drawn 7.69
- Stand-by: Approval Date 08/28/02 — Expiration Date 01/02/04 — Amount Approved 2.97 — Amount Drawn 2.97
- SAF: Approval Date 11/26/86 — Expiration Date 11/25/89 — Amount Approved 2.80 — Amount Drawn 2.80
- Stand-by: Approval Date 07/18/84 — Expiration Date 07/17/85 — Amount Approved 1.40 — Amount Drawn 0.97
- EFF: Approval Date 02/06/81 — Expiration Date 02/05/84 — Amount Approved 8.55 — Amount Drawn 8.55

Projected payments to the Fund on an obligation basis (SDR Million)1:
- Principal:
  - 2007: 0.82
  - 2008: 0.23
  - 2009: 0.50
  - 2010: 0.72
  - Forthcoming 2011: 1.07
- Charges/Interest:
  - 2007: 0.09
  - 2008: 0.07
  - 2009: 0.06
  - 2010: 0.06
  - 2011: 0.05
- Total:
  - 2007: 0.91
  - 2008: 0.30
  - 2009: 0.56
  - 2010: 0.78
  - 2011: 1.13

1 Based on existing use of resources and present holdings of SDRs.

### VI. Exchange rate arrangement
- Dominica is a member of the Eastern Caribbean Currency Union, with a common central bank (the Eastern Caribbean Central Bank) and currency (the Eastern Caribbean dollar).
- Since July 1976, the Eastern Caribbean dollar has been pegged to the U.S. dollar at the rate of EC$2.70 per U.S. dollar.

### VII. Safeguards Assessment
- The Eastern Caribbean Central Bank (ECCB), of which Dominica is a participating government, is subject to a full safeguards assessment.
- A safeguards assessment was completed in 2003 and concluded that the ECCB had in place appropriate mechanisms to manage resources, including Fund disbursements, and that the vulnerabilities that remained do not present an undue risk.
- The assessment proposed specific measures to address vulnerabilities, which have been substantially implemented by the ECCB.
- An update safeguards assessment is currently being completed; the update assessment has not noted any new significant vulnerabilities.

### VIII. Article IV consultation
- The last Article IV consultation was concluded by the Executive Board on October 25, 2005; relevant documents are IMF Country Report No. 05/384 and IMF Country Report No. 05/383.
- Dominica is on a 24-month cycle.

### IX. Technical assistance
- January 2007: FAD and Caribbean Regional Technical Assistance Center (CARTAC) mission on revenue administration and tax policy.
- 2006: MCM mission on drafting an action plan for AID Bank.
- 2005: MCM mission on strengthening the supervisory framework for AML/CFT in the nonbank sector.
- FAD missions have provided technical assistance on tax policy and administration, and social security reform. Most recent missions include:
  - Pension reform options (2005)
  - TA on fiscal responsibility laws (2004)
  - VAT implementation (1999)
  - Urban property taxation (1997)
  - Tax policy and administration, and expenditure control (1995)
- Technical assistance from MFD and FAD has complemented assistance provided by CARTAC in Barbados.
- LEG has been providing assistance with the drafting and interpretation of the VAT legislation.

### X. FSAP
- A joint IMF/World Bank team assessed the financial sector of the ECCB member states in two missions—September 1–19 and October 20−31, 2003.
- Principal objectives: assist authorities in assessing development needs and opportunities for the financial sector; identify potential vulnerabilities of financial institutions and markets to macroeconomic shocks; and identify risks to macroeconomic stability from weaknesses in the financial sector.
- A detailed assessment of the AML/CFT regimes of Dominica was conducted in September 2003 by the Caribbean Financial Action Task Force (CFATF).
- The Financial System Stability Assessment (FSSA) was discussed by the Executive Board on May 5, 2004, and subsequently published on the IMF’s external website, including the Report on the Observance of Standards and Codes (ROSC) on Banking Supervision.

*Appendix I. Dominica: Fund Relations (As of April 30, 2007).*

### Appendix II. Dominica: World Bank Relations (As of May 31, 2007)

### The World Bank role in Dominica
- The Bank will continue to collaborate with the Fund and other donors in supporting the authorities’ efforts in stabilizing macroeconomic conditions and in implementing the Government’s Growth and Social Protection Strategy.
- The Bank will lead policy dialogue on key structural reforms: public sector reform, regulatory framework for electricity, social protection, and environment for private sector development.

### Bank–Fund collaboration
- Continued collaboration on the financial sector, medium-term structural reform agenda, and technical assistance to Dominica on macroeconomic management issues jointly with CARTAC.

### Bank Group strategy (Eastern Caribbean Sub-Region CAS, FY2006–09)
- Two main pillars:
  1. Stimulating growth and improving competitiveness
  2. Reducing vulnerability by promoting greater social inclusion and strengthening disaster risk management
- Recognizing OECS countries’ high debt ratios, Bank activities will focus on leveraging available donor grant financing.
- Indicative Base Case lending scenario for the four OECS blend countries: about US$51.3 million in IDA resources for FY2006–09, including an IDA Regional allocation of US$15.2 million for two regional projects:
  - US$14 million for Catastrophe Risk Insurance
  - US$3.2 million for Infrastructure and Utilities Reform
- Planned lending to Dominica under the Base Case: US$10.2 million

### Ongoing World Bank projects in Dominica
- (i) OECS Telecommunications and ICT Development Project (approved September 2005)
  - Objectives: improve access, quality, and use of telecommunications and ICT services for socio-economic development in the OECS.
  - Four components: strengthen national and regional regulatory frameworks and promote competition; review universal access policy and establish a Universal Service Fund (USF); improve growth and competitiveness in ICT-enabled services via broadband; ensure project management and administration.
  - Dominica’s share of the US$2.7 million loan: US$0.54 million.
- (ii) OECS Catastrophe Insurance Project (CCRIF) (approved January 2007)
  - World’s first multi-country catastrophe insurance pool.
  - Bank approved a US$4.5 million IDA credit for Dominica to finance their contribution to the fund over three years.
  - The Facility enables governments to purchase catastrophe insurance coverage against major earthquakes or hurricanes.
  - CCRIF pools country-specific risks to achieve a substantial reduction in premium cost of 45–50 percent.
- (iii) Growth and Social Protection Technical Assistance Project
  - Objectives: enhance public sector capacity for focused reforms to improve service delivery; create institutional and policy framework to facilitate private sector-led growth; strengthen capacity to plan and administer social protection programs for equitable distribution of benefits from growth.
  - Five components: public sector modernization support; investment climate improvement; regulatory reform for the energy sector and alternative energy development framework; improvement of social safety net programs; project management.
  - Total project cost: US$2.6 million — World Bank providing US$1.45 million; EU providing US$0.58 million of grant financing.

### Economic and sector work
- Completed analyses: public sector capacity in the OECS (Institutional and Organizational Capacity Review), OECS Procurement Assessment Review, OECS Financial Accountability Assessment, Infrastructure Services Studies.
- Joint FSAP with IMF completed in early 2004.
- OECS study on Growth and Competitiveness completed.
- Ongoing work: review of large-scale energy options under the Energy Sector Management Assistance Program; Caribbean Air Transport Rationalization report.
- For Dominica specifically: Analysis of Fiscal Issues examining management and allocation of public expenditure.
- Planned analytical/advisory activities supporting CAS pillars: Caribbean Skills and Curriculum Study, Caribbean Financial Sector and Regulation report, OECS Private Sector Financing Study, Caribbean Social Protection Strategy Review, regional study on Crime and Violence.

### Financial relations: gross disbursements and debt service during fiscal year (In millions of U.S. dollars; data as of May 31, 2007)
- Total disbursements:
  - 2000: 2.1
  - 2001: 0.5
  - 2002: 1.7
  - 2003: 2.7
  - 2004: 4.3
  - 2005: 1.7
  - 2006: 0.0
  - 2007: 1.2
- Repayments:
  - 2000: 0.1
  - 2001: 0.1
  - 2002: 0.1
  - 2003: 0.3
  - 2004: 0.6
  - 2005: 0.7
  - 2006: 0.8
  - 2007: 1.0
- Net disbursements:
  - 2000: 1.9
  - 2001: 0.4
  - 2002: 0.6
  - 2003: 2.3
  - 2004: 3.7
  - 2005: 1
  - 2006: -0.8
  - 2007: 0.2
- Cancelled:
  - 2000: 0
  - 2001: 0
  - 2002: 1
  - 2003: 2.3
  - 2004: 0
  - 2005: 0
  - 2006: 0
  - 2007: 0
- Interest and fees:
  - 2000: 0.2
  - 2001: 0.3
  - 2002: 0.3
  - 2003: 0.3
  - 2004: 0.4
  - 2005: 0.4
  - 2006: 0.38
  - 2007: 0.3

*Appendix II. Dominica: World Bank Relations (As of May 31, 2007).*

### Appendix III. Dominica: Relations with the Caribbean Development Bank (CDB) (As February 28, 2007)

### CDB approvals and focus
- As at end-February 2007, CDB had approved loans totalling US$148.9 million, of which US$10.2 million are undisbursed.
- CDB operations focus on critical infrastructure projects in the road subsector, projects to boost tourism activity, and building IT-related capacity in the public sector.
- No new projects were approved in 2006.

### Major projects under implementation
1. Seventh Consolidated Line of Credit — to assist DAIDB in continuing to finance its lending program (Agricultural and Industrial Credit, Housing, Student Loans).
   - Approved: US$7.0 million
   - Undisbursed: US$1.5 million
2. Upgrading of Ecotourism Sites — construction of access roads, reception centres, related infrastructure, and site trails at five major tourism sites.
   - Approved: US$3.1 million
   - Undisbursed: US$0.6 million
3. Student Loan Scheme (Seventh Loan) — provide DAIDB with resources to continue financing student loan programme.
   - Approved: US$7.0 million
   - Undisbursed: US$2.3 million
4. Shelter Development Project — establish a framework for developing the shelter sector on a sustainable basis with emphasis on low-income households.
   - Approved: US$2.3 million
   - Undisbursed: US$1.6 million
5. Road Improvement Project — improve safety, decrease vehicular operating costs, and improve access to tourism sites.
   - Approved: US$5.5 million
   - Disbursements made to date: no disbursements

### Dominica: Loan disbursement (In millions of U.S. dollars)
- Net disbursement:
  - 2001: 10.50
  - 2002: 3.66
  - 2003: 8.46
  - 2004: 10.39
  - 2005: 3.99
  - 2006: 0.91
- Disbursement:
  - 2001: 13.20
  - 2002: 6.25
  - 2003: 11.26
  - 2004: 20.61
  - 2005: 6.34
  - 2006: 2.14
- Amortization:
  - 2001: 2.70
  - 2002: 2.59
  - 2003: 2.80
  - 2004: 10.22
  - 2005: 2.35
  - 2006: 1.23
- Interest and charges:
  - 2001: 1.76
  - 2002: 1.90
  - 2003: 2.03
  - 2004: 2.25
  - 2005: 2.44
  - 2006: 1.54
- Net resource flow:
  - 2001: 8.74
  - 2002: 1.76
  - 2003: 6.43
  - 2004: 8.14
  - 2005: 1.55
  - 2006: -0.63

*Appendix III. Dominica: Relations with the Caribbean Development Bank (CDB) (As February 28, 2007).*

### Appendix IV. Dominica: Statistical Issues

### Appendix IV. Dominica: Statistical Issues

### Overview
- Data provision for surveillance purposes is adequate, but weaknesses remain in coverage, accuracy, frequency, and timeliness.
- Priority improvements: compilation and dissemination of national accounts, in particular tourism, agriculture and labor statistics.
- Significant weaknesses remain in the compilation of fiscal accounts and the balance of payments.
- Dominica participates in the General Data Dissemination System; metadata for national accounts, external sector and government finance statistics have not been updated since December 2002.

### Real sector
- Annual nominal GDP data:
  - Compiled using the production and the expenditure approaches.
  - Estimates by economic activity compiled using production approach at 1990 prices.
  - GDP estimates available about four months after the end of the year.
  - Data are revised frequently and usually finalized with a two-year lag following completion of the National Accounts Survey.
- Improvement program:
  - Program to develop supply and use table (SUT).
  - CARTAC mission scheduled in July 2007 to examine GDP compilation.
  - Authorities intend a comprehensive assessment of GDP methodology and data, with ECCB assistance, in late 2007.
- Price and labor statistics:
  - CPI data compiled with a two-month lag; weights based on the 1997/1998 Household Expenditure Survey.
  - Program to develop export and import price indices (XMPIs) exists, but staff shortages limit CPI methodology development and likelihood XMPIs will be developed in the near future.
  - Data on employment are limited; no official data on producer prices or wages in the private sector.
  - Results of the 2001 population census have not yet been published.

### Government finance
- Timeliness and quality issues:
  - Statistical capacity problems affect timely production of quality government finance statistics.
  - Data subject to frequent revisions stemming in part from omissions and misclassifications.
  - Central government operations data are incomplete and require supplementation from external sources.
- Coverage gaps:
  - Some operations undertaken outside the consolidated fund (certain investment spending, loan and grant receipts, on-lending and transfers to public enterprises).
  - Capital expenditure data recorded by the Treasury must be supplemented with additional donor financing information; PSIP data are not timely.
  - Delays in PSIP reporting reportedly stem from reporting delays from line ministries.
- Ongoing initiatives:
  - Efforts to strengthen expenditure management and minimize reporting problems.
  - Automation of expenditure execution process: new automation technology installed in all line ministries in 2005.
    - All local purchase orders (LPOs) are generated electronically and tracked.
    - Commitments are charged against a specific budget allocation once LPOs are generated.
    - All ministries and suppliers compelled to use the new system.
- Financing and consolidation:
  - Only limited financing data available.
  - Progress made in improving measurement of government's debt, but concerns about under-recording of government commitments remain.
  - Authorities do not provide consolidated nonfinancial public sector data; data for Dominica Social Security and public enterprises must be obtained directly from each entity during Fund Article IV missions.
  - No government finance data are reported to STA for publication in the International Financial Statistics (IFS) or the Government Finance Statistics (GFS) Yearbook.

### Monetary statistics
- Compiled and reported to the Fund by the ECCB on a monthly basis based on a standardized report form since July 2006.
- Institutional coverage needs improvement by including accounts of mortgage companies, building societies, credit unions, and insurance companies.
- Close coordination between the ECCB and the single regulatory unit (which supervises financial corporations other than those licensed under the Banking Act) is crucial.

### Balance of payments
- Compiled by the ECCB on an annual basis but not reported in the format recommended in the fifth edition of the IMF’s Balance of Payments Manual.
- Data reported to STA are becoming more timely but still suffer from relatively numerous and volatile errors and omissions.

### 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.
- Databases are not consolidated, requiring further adjustments to measure total debt stock.
- Recommendation: information on payments by creditor (actual and scheduled) should be available to compilation agencies at least on a monthly basis to produce timely debt stock data.

### Table of Common Indicators Required for Surveillance (As of June 6, 2007) — selected entries
- Exchange Rates: Fixed Rate — NA / NA / NA / NA
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: March 2007; Date received 4/22/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication Q
- Reserve/Base Money: March 2007; Date received 4/22/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication Q
- Broad Money: March 2007; Date received 4/22/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication Q
- Central Bank Balance Sheet: March 2007; Date received 45/22/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication Q
- Consolidated Balance Sheet of the Banking System: March 2007; Date received 4/22/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication Q
- Interest Rates: March 2007; Date received 4/22/07; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q
- Consumer Price Index: March 2007; Date received 4/22/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Revenue, Expenditure, Balance and Composition of Financing – General Government: 2006; Date received 05/8/07; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: April 2007; Date received 5/22/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication A
- Stocks of Central Government and Central Government-Guaranteed Debt: March 2007; Date received 5/07/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication A
- External Current Account Balance: 2005; Date received 10/13/06; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A
- Exports and Imports of Goods and Services: March 2007; Date received 5/07/07; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication A
- GDP/GNP: 2006; Date received 05/02/07; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A
- Gross External Debt: March 2007; Date received 5/7/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication A

### Debt Sustainability Analysis — key findings (DSA prepared July 2, 2007)
- Assessment summary:
  - Dominica has improved its debt sustainability outlook since the last Article IV consultation, primarily due to stronger than expected fiscal performance and output growth, initiation of a reform to the pension system, and recent participation in the Caribbean Catastrophe Insurance Facility.
  - Large risks remain: debt remains high and the country is exposed to potentially large shocks (including volatility of aid flows, natural disasters).
- I. Introduction:
  - Debt restructuring started in 2004 reduced debt face value and improved terms of a large portion of existing debt.
  - Central government primary balance had been in deficit since 1997 but exhibited sound surpluses in the last three years in the context of a PRGF program concluded in December 2006.
  - Government started implementation of Growth and Social Protection Strategy (GSPS).
- II. Underlying DSA assumptions:
  - Baseline parameters consistent with authorities' GSPS projections and with staff projections in the 2005 Article IV DSA.
  - Box 1. Baseline Macroeconomic Assumptions (2007–27):
    - Real GDP growth projected at 3 percent.
    - Inflation projected to remain low (1.5 percent per year).
    - 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.
    - External grants assumed to remain at 8.3 percent of GDP.
    - Annual disbursements of external concessional debt reach 1.5 percent of GDP.
    - New domestic financing projected available at an interest rate of 7 percent.
    - Current account deficit assumed to remain high in transition period (2007–12), gradually falling thereafter; FDI assumed to remain at the 2006 level (8 percent of GDP).
- III. Evaluation of public sector debt sustainability:
  - As of end-2006 public sector debt stood at 102 percent of GDP:
    - External debt: 71 percent of GDP.
    - Domestic debt: 31 percent of GDP.
  - External debt composition:
    - Multilateral creditors: around 43 percent of GDP (Caribbean Development Bank holds around two thirds of that).
    - Bilateral creditors: around 16 percent of GDP.
    - Commercial creditors: around 12 percent of GDP.
  - Domestic creditors:
    - Dominica Social Security: around 13 percent of GDP.
    - A commercial bank with a significant government stake: significant share.
  - NPV measures:
    - Public sector debt in NPV terms: around 88 percent of GDP.
    - External debt NPV: around 56 percent of GDP.
    - Note: simulations assume hold-out creditors take the intermediate bond with a hair-cut of 20 percent; discount rate for NPV calculations is 5 percent.
- Baseline scenario results:
  - Under the baseline scenario (Table 1a.), all indicators show progressive improvement.
  - Debt service to revenue ratio temporarily increases then declines in 2011; remains high for several years, calling for continued fiscal discipline.
  - Under baseline, Dominica would reach a public debt to GDP ratio of 60 percent by 2017 (the guidance of the ECCB).
- Alternative scenarios and stress tests:
  - Economic growth and primary balance are key drivers of the debt path and are subject to large exogenous shocks (volatility of grants, foreign growth).
  - Sensitivity analysis (Table 1b.):
    - Scenario A.1: If primary balance and growth revert to ten-year averages (primary deficit of 0.1 percent and annual growth of 0.9 percent), public debt starts rising again.
    - Scenario A.2: If fiscal effort projected for 2007 (primary balance of 4.8 percent) is maintained, public debt stays on a declining path.
    - Scenario A.3: If growth falls to 2.3 percent per year, debt initially declines but later returns to an ascending path.
  - Importance of sustaining growth: public debt remains on a declining path if Dominica maintains a primary balance of 3 percent of GDP even if growth declines to 1 percent annually.
- Box 2. External shocks and growth:
  - Dominica vulnerable to hurricanes, banana price volatility, aid volatility, and lack of economies of scale.
  - Staff VAR analysis: a 1 percentage point shock to U.S. output affects Dominica output roughly by the same magnitude; more than half of Dominica's growth volatility can be explained by growth volatility of its main trading partners.
  - Typical shocks:
    - Annual banana prices shock: about 14 percentage points affects Dominica GDP by ¾–1 percentage point over a year or two.
    - Aid inflows shock: about 2¾ percent of GDP affects Dominica GDP by ¾–1 percentage point over a year or two.
- Decline in external grants stress test:
  - External grants expected to reach around 8 percent of GDP in fiscal year 2006–07, around 3 percentage points above historical average.
  - Stress test: 3 percent of GDP decline in external aid from 2009 analyzed under two scenarios:
    - Partial adjustment: government cuts investment spending by around 1.5 percent of GDP and finances the rest with larger borrowing (increase in borrowing assumed to increase interest rates by 1 percentage point).
    - No cuts in public investment: aid decline financed entirely via higher borrowing, which increases interest rates by 2 percentage points.
  - In both scenarios, new borrowing is assumed to be domestic.

*Appendix IV. Dominica: Statistical Issues — IMF staff summary (from _cr07322 - Appendix IV. Dominica: Statistical Issues).*

### 9.      As the figure illustrates, under the no adjustments scenario, public debt quickly starts

### _cr07322 - 9.      As the figure illustrates, under the no adjustments scenario, public debt quickly starts

### Debt scenarios and trajectory
- Under the no adjustments scenario, public debt quickly starts rising again due to the cascading effects of rising debt and higher refinancing rates.
- Under the partial adjustment scenario, the debt to GDP ratio stabilizes at around 62.

### Other shocks and their impacts
- Natural disasters:
  - Produce an initial increase in debt but the latter returns to a declining trajectory after growth is restored and fiscal costs of reconstruction have ended.
  - Assumption: the shock costs the government 9 percent of GDP over a three-year period (thus exhausting the primary surpluses assumed under the baseline scenario) and causes real growth to decline to zero over the same period.
  - Note: This shock is costlier than the standard shock reported in IMF Country Report No. 04/335. The actual impact could be lower given Dominica’s participation in the Caribbean Catastrophe Insurance Facility, which has lowered the costs of catastrophe insurance and is expected to mitigate fiscal costs in the event of extreme hurricanes.
  - Measured as grants spent, in line with IMF Country Report No. 05/384.
- Interest rate shocks:
  - Have little impact on Dominica’s public debt path because most of its debt, including domestic debt, has fixed interest rates.
- Depreciation of the U.S. dollar against other major currencies:
  - Would have a modest balance sheet effect on Dominica’s public debt.
  - Currency composition of external debt: around 70 percent denominated in the U.S. dollar, 19 percent in SDR (where the U.S. dollar weigh is about 50 percent), around 4 percent denominated in the Euro. The rest is denominated in the EC dollar and other currencies that are pegged to the U.S. dollar.

### Evaluation of external debt sustainability
- Public-sector dominance:
  - Dominica’s external debt is mostly owed by the public sector, since private sector borrowing takes place with domestic commercial banks; therefore the external DSA largely mirrors the public sector DSA.
- Baseline path:
  - External debt remains on a declining path in the baseline scenario (Table 2a.).
  - Indicators that do not decline continuously are those related to the share of external debt service as a percent of exports and public sector revenues; both increase up to 2010 as a consequence of the features of the debt restructuring and then start declining.
  - Closure of operations of a large foreign manufacturing company contributes to the increase of debt service as a share of exports.
  - Large residuals observed in the first five years of the projections period reflect assumptions regarding temporary financing of part of the current account deficit by a reduction in banks’ and private agents’ net foreign assets.
- Sensitivity tests:
  - Show a picture similar to the public debt DSA (Table 2b.).
  - Scenario A.1 (key variables returning to historical averages): external debt would return to an ascending path, as lower grants, lower FDI, and lower growth would push external debt up.
  - Scenario A.2 (higher interest rates): do not significantly impact external debt paths as in the baseline Dominica faces low financing needs.

### Conclusions and comparison with the 2005 Article IV consultation DSA
- Improvements since 2005 Article IV consultation:
  - Dominica has improved its debt sustainability outlook since the previous Article IV consultation (2005), mostly due to stronger than projected fiscal performance and economic growth.
  - Public debt for end-2007 is currently projected at 96 percent of GDP, which is 3.5 percentage points lower than the projections made in the last Article IV consultation.
  - Dominica has introduced a reform to its pension system targeting a main vulnerability identified in the 2005 consultation.
  - Dominica joined the Caribbean Catastrophe Insurance Facility, reducing debt-related vulnerabilities.
- Remaining vulnerabilities:
  - Public debt is high (over 100 percent of GDP), giving the government little room to maneuver in case of unforeseen events.
  - There is a bunching of payments between 2009 and 2011.
  - The arrival of new grants is uncertain.
  - The country is exposed to external shocks and natural disasters.

*Source: IMF country report content provided.*

### 16.      The government’s medium-term reform strategy, which appropriately envisages the

### 16.      The government’s medium-term reform strategy, which appropriately envisages the

### Fiscal strategy and assessment
- The government’s medium-term fiscal policy aims at achieving a primary surplus target of 3 percent of GDP.
- The strategy is intended to bring about a gradual reduction in the debt ratio and reduce debt-related vulnerabilities via positive impact on economic growth.
- Executive Directors agreed that the government’s medium-term primary surplus target of 3 percent of GDP was consistent with reducing vulnerabilities.
- Central government primary balance trajectory and related historical/projection figures:
  - Primary deficit / primary balance rows in Table 1a report values including: -4.4, -4.5, -6.9, 0.1, 5.3, -4.8, -3.3, -3.2, -3.2, -3.2, -3.1, -3.5, -3.0, -3.1, -3.1 (as shown in table).
- Revenue and grants: 48.7, 48.9, 50.1, 49.4, 48.7, 49.6, 50.1, 50.1, 50.1, 50.1, 50.1 (percent of GDP as in table).
- Primary (noninterest) expenditure: 44.4, 44.4, 43.1, 44.7, 45.5, 46.4, 46.9, 46.9, 47.0, 47.0, 46.9 (percent of GDP as in table).

### Debt dynamics and sustainability baseline
- Public sector debt (percent of GDP) path in Table 1a:
  - 2004: 116.0; 2005: 108.1; 2006: 102.5; 2007: 95.8; 2008: 91.9; 2009: 87.5; 2010: 83.2; 2011: 79.2; 2012: 75.2; 2017: 57.2; 2027: 23.4.
- Of which foreign-currency denominated (percent of GDP):
  - 2004: 80.6; 2005: 74.8; 2006: 70.9; 2007: 65.2; 2008: 60.5; 2009: 56.3; 2010: 51.4; 2011: 46.9; 2012: 43.0; 2017: 30.6; 2027: 21.2.
- Change in public sector debt (percent of GDP): -14.8, -7.8, -5.7, -6.7, -3.9, -4.4, -4.3, -4.1, -3.9, -3.5, -3.4 (as in table).
- Identified debt-creating flows (percent of GDP): -12.0, -9.1, -9.1, -6.7, -3.9, -4.4, -4.3, -4.1, -3.9, -3.5, -3.4.
- Automatic debt dynamics (percent of GDP): -2.1, -2.1, -2.9, -1.9, -0.7, -1.2, -1.1, -0.9, -0.8, -0.4, -0.3.
  - Contribution from interest rate/growth differential: -2.1, -2.7, -3.0, -2.1, -1.3, -1.4, -1.3, -1.2, -1.0, -0.6, -0.4.
  - Contribution from average real interest rate: 1.8, 1.0, 1.2, 1.1, 1.4, 1.2, 1.2, 1.3, 1.3, 1.2, 0.4.
  - Contribution from real GDP growth: -3.9, -3.7, -4.1, -3.1, -2.6, -2.7, -2.5, -2.4, -2.3, -1.8, -0.8.
- Other identified debt-creating flows (percent of GDP): -5.6, -2.5, 0.8, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0.
  - Privatization receipts (negative): 0.0, -2.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0.
  - Recognition of implicit or contingent liabilities: -0.9, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0.
  - Debt relief (HIPC and other): -4.6, -0.6, 0.8, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0.
- Residual, including asset changes (percent of GDP): -2.8, 1.3, 3.4, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0.
- NPV of public sector debt (percent of GDP): 35.4, 93.3, 87.7, 82.8, 80.1, 76.8, 73.6, 70.4, 67.3, 52.1, 20.9.
  - Of which foreign-currency denominated (percent of GDP): 0.0, 60.0, 56.1, 52.2, 48.8, 45.6, 41.7, 38.2, 35.1, 25.5, 18.6.
- Gross financing need (percent of GDP): 6.7, 0.5, -0.9, 1.5, 3.0, 3.4, 4.4, 4.2, 3.8, 1.0, -1.0.

### External debt and external-sector indicators (Table 2a highlights)
- External debt (nominal, percent of GDP): 80.6, 74.8, 70.9, 65.2, 60.5, 56.3, 51.4, 46.9, 43.0, 30.6, 21.1.
- Change in external debt (percent of GDP): -4.0, -5.8, -3.9, -5.7, -4.7, -4.2, -4.9, -4.4, -3.9, -1.7, -0.3.
- Identified net debt-creating flows (percent of GDP): 0.3, 12.8, -1.2, -0.8, 2.4, 1.4, 0.1, -0.5, -3.1, -1.9, -0.8.
- Noninterest current account deficit (percent of GDP): 14.1, 27.9, 17.8, 14.9, 6.0, 15.5, 17.6, 17.5, 16.7, 16.1, 13.5.
- Exports (percent of GDP): 47.5, 44.5, 46.6, 46.9, 44.7, 44.2, 44.3, 44.3, 44.5, 44.5, 44.5.
- Imports (percent of GDP): 64.1, 69.7, 66.1, 63.8, 63.6, 63.2, 62.5, 62.0, 61.5, 61.1, 62.0.
- Net FDI and capital grants (negative = inflow, percent of GDP): -12.7, -13.2, -16.3, -12.5, 4.0, -15.7, -15.0, -15.9, -16.3, -16.3, -16.3.
- Endogenous debt dynamics contributions (percent of GDP): -1.2, -2.0, -2.7, -0.7, -0.2, -0.3, -0.3, -0.3, -0.3, -0.2, 0.0.
  - Contribution from nominal interest rate: 3.2, 1.5, 1.6, 1.4, 1.6, 1.4, 1.3, 1.2, 1.0, 0.7, 0.7.
  - Contribution from real GDP growth: -2.4, -2.6, -2.8, -2.1, -1.8, -1.7, -1.6, -1.5, -1.3, -0.9, -0.6.
- NPV of external debt (percent of GDP) projections: 56.1, 52.2, 48.8, 45.6, 41.7, 38.2, 35.1, 25.5, 18.5 (as shown).
- Debt service-to-exports ratio (percent): 20.7, 12.6, 8.6, 9.8, 10.3, 10.4, 12.1, 11.1, 10.0, 5.5, 3.6.
- Total gross financing need (billions of U.S. dollars): 30.6, 58.0, 16.7, 14.1, 23.7, 21.6, 20.7, 17.7, 6.3, 3.9, 6.1.

### Sensitivity analysis and stress tests (Table 1b, Table 2b, Figures)
- Baseline and alternative scenarios for NPV of debt-to-GDP, NPV of debt-to-revenue, and debt service ratios are reported for 2007–27.
- Selected scenario outcomes (NPV of debt-to-GDP ratios indicated in Table 1b / Figure 1):
  - Baseline series (example values shown in Table 1b rows): 83, 80, 77, 74, 70, 67, 52, 21 (as displayed in the tabular blocks).
- Bound tests include shocks such as:
  - B1: Real GDP growth at historical average minus one standard deviation in 2008–09.
  - B2: Primary balance at historical average minus one standard deviation in 2008–09.
  - B3: Combination of B1–B2 using one half standard deviation shocks.
  - B4: One-time 30 percent real depreciation in 2008.
  - B5: 10 percent of GDP increase in other debt-creating flows in 2008.
- Figures illustrate trajectories under:
  - Baseline, Most extreme stress test, Sustaining 2007 fiscal stance for NPV of debt-to-GDP ratio, NPV of debt-to-revenue ratio, and Debt Service-to-Revenue Ratio.
- Sensitivity to aid flows: scenarios include No adjustment (aid decline addressed by more borrowing) and Partial adjustment (aid decline addressed partly by spending cuts).

### Key macroeconomic and financial assumptions (preserved from tables)
- Real GDP growth (in percent): 3.0, 3.3, 4.0, 0.9, 3.1, 3.2, 2.8, 3.0, 3.0, 3.0, 3.0, 3.0, 3.0, 3.0, 3.0.
- Average nominal interest rate on forex debt (in percent): 3.9, 2.0, 2.2, 3.5, 1.2, 2.1, 2.5, 2.5, 2.4, 2.4, 2.3, 2.4, 2.3, 3.2, 2.5.
- Average real interest rate on domestic currency debt (in percent): 0.7, 3.5, 3.2, 5.8, 3.4, 3.2, 3.5, 3.2, 3.3, 3.5, 3.7, 3.4, 4.0, 3.0, 3.8.
- Inflation rate (GDP deflator, in percent): 2.1, 1.5, 1.9, 1.5, 0.9, 1.8, 1.1, 1.5, 1.5, 1.5, 1.5, 1.5, 1.5, 1.5, 1.5.
- Real exchange rate depreciation (in percent, + indicates depreciation): 0.0, 0.8, 0.1, 0.3, 1.0, 0.2 (as reported in table).
- Grant element of new external borrowing (in percent): 17.9 repeated across projection years where shown.

### IMF Executive Board assessment and policy recommendations
- Executive Directors commended Dominica for restoring macroeconomic stability and reversing the debt build-up while sustaining above-trend growth; 2006 real GDP growth reached 4 percent.
- Directors welcomed the surge in budgetary aid and encouraged smoothing the spending of scaled-up aid over time and using some resources to substitute expensive borrowing and reduce debt.
- Policy recommendations and priorities voiced by Directors:
  - Continue with the strategy of smoothing aid spending and substituting borrowing to reduce debt.
  - Improve budget management, particularly capital expenditure, to ensure aid is used efficiently and transparently and consistent with macroeconomic objectives.
  - Ensure modifications of indirect taxes improve efficiency and sustain fiscal consolidation; tax cuts should be modest and accompanied by revamping tax incentives; Fund technical assistance offered for reforming tax incentives.
  - Enhance financial sector supervision in light of rapid credit expansion, low provisioning, and competition from loosely-regulated nonbank financial institutions; consider delegating supervisory functions over nonbanks to other regional regulatory bodies.
  - Prioritize structural reforms to reduce the cost of doing business and foster private sector-led growth, including streamlining public sector entities, improving contract enforcement and foreclosure arrangements, and reforming utilities and customs administration.
  - Undertake a poverty assessment to design efficient and well-targeted social safety nets.
  - Continue improving the quality of economic and social statistics.

### Recent macroeconomic context and selected indicators (PIN and table highlights)
- 2006 outcomes and 2007 outlook:
  - Real GDP growth: 4 percent in 2006 and expected to remain above trend in 2007.
  - External current account deficit: around 20 percent of GDP in 2007, financed mainly by FDI and large capital grants.
  - Central government primary surplus, before grants, projected to reach 5.9 percent of GDP in 2006/07.
  - Grants received reached almost 13 percent of GDP for the first nine months of 2006/07 (noted in narrative).
- Monetary and banking sector:
  - Private credit expanded by 11 percent in 2006.
  - Nonperforming loans remain high; loan loss provisioning low by international standards.
- Selected table (Dominica: Selected Economic Indicators) key figures:
  - Primary balance (including grants): 5.4, 3.5, 7.3, 4.0, 5.9, 3.0 (annual series as shown).
  - Overall balance (including grants): -1.3, -0.9, 1.2, 1.6, 3.4, 0.8.
  - Nonfinancial public sector debt (gross, percent of GDP): Total 130.8, 116.0, 108.1, 101.4, 102.5, 95.8 (series by year as shown).
  - External public debt (percent of GDP): 84.6, 80.6, 74.8, 70.8, 70.8, 65.2 (series by year as shown).
  - Current account balance (percent of GDP): -13.0, -17.3, -29.5, -21.3, -19.4, -17.0 (series by year as shown).
  - External public debt service (percent of exports of goods and nonfactor services): 19.5, 20.7, 17.5, 13.1, 13.0, 9.5.

*Source: IMF staff estimates, projections, and Public Information Notice (PIN) No. 07/105, August 16, 2007.*

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