## _cr10135 — Executive Summary & Program Highlights ## Source details **Canonical URL:** [_cr10135 — Executive Summary & Program Highlights](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10135.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10135.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10135.pdf.json) --- ### Backdrop and recent developments (2003–H1 2009) - 2003 financial crisis (fraud-ridden banks) led to generalized loss of confidence and a major bailout that doubled public debt. - SBA (2003–05) went off-track; confidence improved after President Fernández took office mid-2004 and under a new SBA (2005–08) that stabilized the economy. - 2008–H1 2009 macro outcomes: - Real GDP: grew 5¼ percent in 2008; decelerated to 1½ percent in H1 2009 (yoy). - Inflation: headline rose to 15 percent (yoy) in August 2008, fell to 4½ percent in December 2008, and turned negative at –1½ percent (yoy) in September 2009; cumulative inflation in first 9 months of 2009 amounted to 4⅓ percent. - Core inflation: 9¼ percent (yoy) in August 2008; 8½ percent in December 2008; about 3 percent in September 2009. - Monetary policy: tightening in 2008; loosening in 2009. - Fiscal: consolidated public deficit more than doubled to 4½ percent of GDP in 2008; fell to about 3 percent of GDP in H1 2009 (annualized) due to financing constraints and expenditure cuts. - Tax collections: declined by 1½ percent of GDP in 2008; tax revenues declined further in H1 2009 (over 10 percent in real terms). - Electricity subsidies: almost 2¾ percent of GDP in 2008; current spending increased by 1¼ percent of GDP in 2008 mostly from untargeted electricity subsidies. - External current account: deteriorated to almost 10 percent of GDP in 2008; improved to about 6 percent of GDP in 2009 as import demand fell and terms of trade improved. ### SBA request and program objectives - Authorities request: 28-month SBA for SDR 1,094.5 million (500 percent of quota). - Main objectives: - Pursue short-term countercyclical policies (Q4 2009 to H1 2010) to mitigate the downturn. - Strengthen medium-term fiscal and debt sustainability after mid-2010. - Reduce vulnerabilities exposed during the global crisis and lay foundations for gradual recovery and sustained growth. - Program design: - Part of Fund purchases directed to the budget; remaining to support central bank international reserves. - Countercyclical policies are main focus in about 30 percent of program time (Q4-2009 to Q2-2010); sustainability issues dominate remaining 70 percent (Q3-2009 to Q1-2012). ### Monetary stance, exchange rate, and reserves - Policy rate: - Tightened by 200 basis points to 9½ percent during 2008. - Reduced by 550 basis points to 4 percent by end-September 2009. - Reserve requirements: reduced from 20 to 17½ percent. - Money and credit: - Money supply contracted 7½ percent in 2008; central bank moved to easy money in 2009; monetary aggregates beginning to expand. - Additional liquidity has not yet translated into private credit growth; banks hoarding liquidity. - Money multipliers fell in 2008 and reversed trend in 2009. - International reserves and exchange rate: - Gross international reserves: about US$2½ billion at end-2008 (about 2¼ months of imports). - Peso depreciation: about 3 percent (yoy) at end-2008; further depreciated by 1½ percent in first three quarters of 2009. - Central bank smoothed FX fluctuations and kept NIR broadly unchanged; FX reserve requirements broadly unchanged. - Program allows a reduction in NIR of about US$350 million in 2009 (partly due to use of US$300 million of Fund resources for budgetary support). ### Financial system soundness and crisis preparedness - Banking system: - Banks remain well-capitalized, liquid and profitable; profitability reduced somewhat in H1 2009. - NPLs: rose to 4½ percent in August 2009 from just below 4 at end-2008. - Capital adequacy ratio: 15 percent. - Stress test: some banks accounting for 20 percent of system assets would need additional capital under an unlikely 5 percent contraction scenario. - FSAP Update (Feb/Mar 2009): significant improvements since 2003, but shortcomings remain in regulation, supervision, and accounting standards. - Crisis management recommendations: - Establish legal powers (e.g., SB “cease and desist”) and better specify LOLR assistance terms. - Conduct crisis simulation exercises to identify coordination and systemic gaps. - Abstain from forbearance; allow temporary relaxation of certain loan risk classification requirements to lapse at end-2009. ### Fiscal stance, targets, and recommendations - Short-term/fiscal impulse: - 2009 budget consistent with consolidated fiscal deficit of 3⅓ percent of GDP. - Without adequate financing, budget deficit could be as low as 2½ percent of GDP (highly procyclical), implying negative fiscal impulse of around 1 percent of GDP. - Recommendation: relax fiscal stance remainder of 2009 and part of 2010, then begin consolidation once world economy strengthens and output gap begins to close. - Fiscal stimulus: loosening of policies as much as 2 percent of GDP in Q4 2009 compared to passive scenario (or 1¼ percent relative to 2009 budget); overall public sector deficit about 4½ percent of GDP for 2009. - Estimated fiscal impulse for 2009: almost 1 percent of GDP; supportive stance continued H1 2010 with envisaged fiscal stimulus of as much as 2 percent of GDP in 2010. - Medium-term consolidation: - Beginning H2 2010 switch to fiscal moderation: consolidated fiscal deficit for 2010 as a whole to fall to 4 percent. - Targets: consolidated primary fiscal balance in 2010; consolidated primary surplus of 1 percent of GDP in 2011 and 2 percent in 2012 and later. - Measures to achieve consolidation: - Strengthen tax and customs administrations and streamline large tax exemptions by 1½ percent of GDP. - Eliminate untargeted electricity subsidies (about 1 percent of GDP). - Wage moderation (about ½ percent of GDP). - Fiscal projections (program table highlights): - Primary fiscal balance1/ (percent of GDP): 2008 1/-1.3; 2009 -0.8; 2010 0.0; 2011 1.0; 2012 2.0. - Overall fiscal balance1/ (percent of GDP): 2008 -4.6; 2009 -4.5; 2010 -4.0; 2011 -3.0; 2012 -2.0. - Public sector debt (percent of GDP): 2008 35.5; 2009 39.0; 2010 40.3; 2011 40.2; 2012 38.7. - Notes: 1/ Consolidated public sector. ### External position, financing, and reserve adequacy - Current account (percent of GDP): 2008 -9.7; 2009 -6.2; 2010 -6.0; 2011 -4.8; 2012 -4.0. - External financing requirements: - 2009 external financing requirements: US$3.4 billion (private sector US$1.5 billion; public sector borrowing US$1.6 billion; the Fund US$0.3 billion). - 2010 financing requirements: US$3.9 billion (private sector US$1.5 billion; public indebtedness US$2.0 billion; the Fund US$0.4 billion). - SBA composition and coverage: - SBA: SDR 1,094.5 million (500 percent of quota) with 10 quarterly purchases; about ¼ devoted to budgetary support (SDR 300 million) and remaining ¾ (SDR 795 million) to support central bank reserves. - Fund purchases under the SBA estimated to cover about 25 percent of balance of payments need in 2009–10; SBA expected to catalyze multilateral financing covering almost 75 percent of the BOP need. - Reserve adequacy (Box 5): - Gross international reserves: 4¾ percent of GDP in 2001; 1¾ percent in 2003; 7½ percent in 2007; moderate loss in 2008. - Jeanne (2007) model: optimal reserves rose to 14 percent of GDP during 2002 crisis; fell to 9 percent in 2008. - Without SBA the gap between optimal and actual reserves would be about 6½ percent of GDP in 2010–2012; with the program gap would be less than 2 percent of GDP. - Program allows transitory shortfalls in programmed external financing up to US$300 million with corresponding adjustments to NDA and NIR. ### Structural reform agenda and benchmarks - Monetary framework: - Recommendation to introduce a full-fledged inflation targeting regime; intermediate steps include establishing credible medium-term inflation objective, commit to price stability, strengthen communication, increase transparency, and enhance accountability. - Authorities committed to inflation objectives currently between 6 and 7 percent. - Plan to formally adopt inflation targeting regime in early 2012; plan to be created by June 2010. - Central bank recapitalization: - Law enacted July 2007 envisaged recapitalization of about 20 percent of GDP over 10 years (avg. 2 percent of GDP per year); authorities propose amending law to allow recapitalization over 15 years. - Box 3 facts: central bank capital eroded to estimated minus 20 percent of GDP at end-2005; law mandates budgetary transfers rising from 0.5 percent of GDP in 2007 to 1.5 percent in 2017. - Staff supports modified recapitalization but cautions further delays could erode credibility. - Electricity sector reform (targets and measures): - Electricity sector absorbs significant subsidies and is a major source of fiscal inflexibility. - Footnote: government spent 2¾ percent of GDP in electricity subsidies in 2008 (about US$1.2 billion). - Objectives: generate/distribute electricity at competitive prices, eliminate indiscriminate subsidies, increase cost recovery. - Measures include: (i) criminalize electricity theft; (ii) revise contracts between generators and public distributors; (iii) automatically adjust consumer tariffs to reflect costs; (iv) improve governance of public corporation and distributors; (v) disconnect subsidies from distributors’ losses; (vi) restructure distribution companies to lower operational costs and target investment. - Structural benchmark: present a strategy paper on electricity sector reform to eliminate untargeted subsidies by end-December 2009. - Distribution losses and non-technical losses are very high: distributional losses 53 (Dominican Republic) vs 15 (LAC and Caribbean) in 2005; non-technical losses about 42 percent. - Tax administration and PFM: - Measures to improve collections without changing tax rates: approve new customs code; implement new organizational structures; strengthen audit; modernize and simplify customs procedures. - Authorities to design plan to strengthen customs and internal tax collections and rationalize tax exemptions by March 2010 (technical assistance requested). - Financial sector / supervision: - Structural benchmark: March 2010 — develop strategy to deepen risk-based supervision and achieve compliance with Basel core principles by 2012 (technical assistance requested). - Elimination of forbearance on regulatory requirements emphasized. - Domestic capital markets: - By September 2010 design plan to develop capital markets, adopt debt management strategy, and reduce country risk perception. - Social safety nets: - Government committed to increase expenditures for education and health by ¾ percent of GDP a year during 2010–12. - Increase CCT coverage by 70,000 families and increase transfer to some 45,000 families already covered by the program by December 2009. ### Macroeconomic outlook, scenarios, and key projections - Growth path assumptions: - 2009: between ½ and 1½ percent - 2010: 2–3 percent - 2011 and beyond: 6 percent - Output gap: - About 2½ percent above potential in 2008. - Staff projects output gap negative by 3 percent by end-2009, bottoming at -5 percent around mid-2010 (authorities agreed). - Output gap expected to disappear by 2014. - Inflation targets and expectations: - Official central bank objective: 6–7 percent for 2009–10. - Staff expectation: inflation to fall gradually to 3 percent over the medium-run. - Key macro projections (selected exact table values): - Real GDP: 2008 5.3; 2009 ½-1½; 2010 2-3; 2011 6.0; 2012 6.0. - Inflation (e.o.p.): 2008 4.5; 2009 6-7; 2010 6-7; 2011 4.0; 2012 3.0. - Money supply: 2008 -7.5; 2009 12.1; 2010 8.8; 2011 10.8; 2012 10.5. - External current account (percent of GDP): 2008 -9.7; 2009 -6.2; 2010 -6.0; 2011 -4.8; 2012 -4.0. - Public sector debt (percent of GDP): 2008 35.5; 2009 39.0; 2010 40.3; 2011 40.2; 2012 38.7. - Medium-term baseline scenario: - Economy to recover by 2011 and grow at average 6 percent thereafter. - Inflation to align around 3 percent. - Consolidated public sector to generate primary fiscal surplus of 2 percent of GDP by 2012. - Public debt to rise to 40 percent of GDP in 2010–11, fall to 35 percent by 2014, and to 30 percent by 2020 under the program. ### Risks and vulnerabilities - Risks tilted to the downside and include: - Slower or stalled global recovery reducing tourism receipts and exports; opening financing gaps and pressure on currency. - Large exchange rate movements affecting dollarized balance sheets, consumption and growth. - Tighter external financing and higher spreads impairing ability to finance fiscal deficit, forcing procyclical adjustment. - Large negative output gap and high unemployment worsening bank asset quality. - Spread of A-H1N1 influenza further depressing tourism demand. - Political and social risks: congressional elections in mid-2010 could pressure spending; social tensions could shift resources from capital to current spending. - Specific vulnerability indicators: - Sovereign spreads: under 300 basis points at end-2007; over 1700 basis points at end-2008; hovered around 800–900 basis points in first three quarters of 2009; fell below 450 basis points by early-October 2009 on news of possible Fund arrangement. ### Program modalities, monitoring, and safeguards - SBA modalities: - 28-month SBA for SDR 1,094.5 million (500 percent of quota) with 10 quarterly purchases. - Program to cover BOP needs and increase gross international reserve coverage to 3 months of imports by 2012. - Financing composition (selected exact figures): - Budgetary support: SDR 300 million (SDR 200 million available in 2009 and SDR 100 million in 2010). - Remaining SDR 795 million to support international reserves. - Fund expected to cover about 12½ percent of financing needed for the fiscal impulse. - Monitoring and safeguards: - Update safeguards assessment of BCRD initiated and to be completed by first program review. - Inter-institutional task force with central bank, ministry of finance, and ministry of economy to monitor implementation. - Program monitoring group to meet every other week via video conference. - Quantitative performance criteria and targets (selected, preserving source precision): - Net international reserves (floor, US$ millions): End-December 2009 1815; End-March 2010 1715; End-June 2010 1665; End-September 2010 1715; End-December 2010 1815. - Net domestic assets (ceiling): values include 65.0 and 80.0 (as listed). - NDA ceilings (RD$ billions, outstanding stock): End-October 2009 48; End-November 2009 58; End-December 2009 68; ... End-September 2010 (performance criterion) 65; ... End-December 2010 (performance criterion) 80. - Fiscal cumulative flows from December 2008 (RD$ billions): Overall balance of central administration (floor) End-December 2009 -51.5; End-March 2010 -68.0; End-June 2010 -83.0; End-September 2010 -91.0; End-December 2010 -98.5. ### Staff assessment and recommendations (staff position) - Staff supports the authorities’ request for the new SBA, viewing it as striking a good balance between short-term countercyclical support and medium-term sustainability and structural reforms. - Key staff recommendations: - Implement fiscal stimulus in 2009 and H1 2010 targeted to social and capital spending; allow automatic stabilizers to work while pursuing tax compliance measures and rationalizing exemptions. - Continue flexible monetary and exchange rate policy; be prepared to allow more exchange rate flexibility if balance-of-payments pressures arise. - Deepen structural reforms: tax administration, electricity reform, central bank recapitalization, adoption of inflation targeting, strengthening bank supervision, and development of domestic capital markets. - Maintain close monitoring of financial sector; avoid regulatory forbearance. - Prioritize early implementation of structural measures to secure medium-term fiscal consolidation and debt sustainability. ### Selected key statistics and indicators (preserved values from source) - SBA: SDR 1,094.5 million; 28-month duration; 500 percent of quota. - GDP per capita (2008 PPP, US$): 5,122. - Population (2009 estimate, millions): 10.110. - Main exports: tourism, textiles, nickel. - Poverty: about a third of population in poverty; extreme poverty rate (2006) 13.1. - Life expectancy at birth (2008): 73.3 years. - Adult literacy rate (2007): 95.1 percent. - Monetary policy: policy rate lowered by 550 basis points to 4 percent (2009); reserve requirements lowered by 250 basis points to 17.5 percent. - Inflation: 0.3 percent year-over-year in October 2009. - Electricity subsidies: 2¾ percent of GDP in 2008; untargeted subsidies absorb over 1 percent of GDP in 2009. - Gross official reserves (selected years): 2,251 (2006); 2,946 (2007); 2,662 (2008); 2,566 (2009); 2,942 (2010); 3,914 (2011); 4,506 (2012). - Net international reserves (selected years): 1,788 (2006); 2,395 (2007); 2,165 (2008); 1,815 (2009); 1,815 (2010); 2,296 (2011); 2,833 (2012). - Public sector debt (percent of GDP, selected): 39.5 (2006); 35.8 (2007); 35.5 (2008); 39.0 (2009); 40.3 (2010); 40.2 (2011); 38.7 (2012). *Source: IMF staff report excerpt — _cr10135 (Executive Summary and selected sections)._* ### EXECUTIVE SUMMARY ### _cr10135 - EXECUTIVE SUMMARY ### Backdrop - A financial crisis in 2003 (fueled by the failure of several fraud-ridden banks) led to a generalized loss of confidence and a major bailout that doubled public debt. - An SBA (2003-05) went quickly off-track. - Confidence improved after President Fernández took office in mid-2004 and his new administration designed a strong economic program supported by another SBA (2005-08) that successfully stabilized the economy. - President Fernández was re-elected in 2008 and continued with broadly adequate macro policies but the global financial crisis is threatening growth prospects and stability. ### 2008 Article IV - The last consultation was concluded in January 2008. - Directors commended the authorities for the impressive recovery from the 2003 financial crisis. - Main policy challenge identified: better target social spending while generating primary fiscal surpluses to lower public debt to pre-crisis levels. ### Developments (2008–first half 2009) - Output and demand: - The economy grew 5¼ percent in 2008, but decelerated to 1½ percent in the first half of 2009 (year-on-year). - The rapid deceleration resulted from the global credit crunch, weak external demand, and a procyclical fiscal policy. - Near stagnation was driven by lower external and domestic demand with exports, private investment and public spending showing the largest deceleration. - The slowdown was broad based, with manufacturing, trade and financial services being the most affected. - Inflation: - Headline inflation rose to 15 percent (yoy) in August 2008, then fell to 4½ percent in December 2008. - Inflation turned negative at –1½ percent (yoy) in September 2009; cumulative inflation in the first 9 months of 2009 amounted to 4⅓ percent. - Core inflation rose to 9¼ percent (yoy) in August 2008 and fell to 8½ percent in December 2008; core inflation fell further to about 3 percent in September 2009. - Disinflation reflected the unwinding of supply shocks (food and fuel) and the cooling economy. - Monetary policy: - Monetary policy switched from a tightening cycle in 2008 to a loosening stance in 2009. - Fiscal position: - Fiscal policy was expansionary in 2008 and the consolidated public deficit more than doubled to 4½ percent of GDP in 2008 (including the quasi-fiscal deficit of the central bank). - The deficit fell to about 3 percent of GDP in the first half of 2009 (on an annual basis) due to financing constraints and expenditure cuts. - Tax collections declined by 1½ percent of GDP in 2008 due to one-off extraordinary capital gains tax in 2007 and the introduction of exemptions; non-tax revenues fell significantly due to a decline in royalties from the main nickel mine. - Tax revenues declined further in the first half of 2009 (over 10 percent in real terms). - Current spending increased by 1¼ percent of GDP in 2008, mostly from higher untargeted electricity subsidies that amounted to almost 2¾ percent of GDP. - During the first half of 2009, current expenditures fell by 7 percent in real terms and capital expenditures fell even more due to tight financing. - External sector: - The external current account deteriorated to almost 10 percent of GDP in 2008 due to higher food and fuel prices. - The current account improved in the first half of 2009 as import demand fell and the terms of trade improved. ### Policy stance and staff recommendations - Authorities intend to implement a strong macroeconomic program and a well-balanced structural reform agenda to face the adverse external environment. - Staff stressed the need to enhance mechanisms to respond to the global financial crisis and recommended: - A fiscal stimulus in 2009 and the first half of 2010. - Continuation of a flexible monetary and exchange rate policy. - Deepening structural reforms to secure macroeconomic stability. ### SBA Request - Authorities are requesting a 28-month SBA for SDR 1,094.5 million (500 percent of quota). - Main objectives of the program: - Pursue short-term countercyclical policies (from the last quarter 2009 to the first half 2010) to mitigate the drastic economic downturn. - Strengthen medium-term fiscal and debt sustainability after mid-2010. - Reduce vulnerabilities exposed during the global crisis and lay foundations for a gradual recovery and sustained growth. - Successful implementation of a Fund-supported program is expected to unlock significant financing from other multilateral sources. ### Discussions and missions - Discussions took place during August 24-28 in Washington and September 4-17, 2009 in Santo Domingo. - The mission met with Central Bank Governor Valdez, Finance Minister Bengoa, Economy Minister Montás, senior government officials, representatives of the banking community, and the private sector. - The staff team: A. Santos (head), G. Bannister, M. Dehesa, A. Alichi (all WHD), K. Hosono (SPR), and M. Cortes (MCM). J. Estrella (OED) participated in the meetings. *Source: _cr10135 - EXECUTIVE SUMMARY* ### 6. Monetary stance. Monetary policy has been largely countercyclical, switching form a ### _cr10135 - 6. Monetary stance. Monetary policy has been largely countercyclical, switching form a ### Monetary stance and policy evolution - Monetary policy has been largely countercyclical, switching from a tightening cycle in 2008 when supply shocks (food and fuel) threatened to spill over to other prices, to a loosening stance in 2009 when inflation was controlled and the economy was softening. - Monetary policy has been expansive in 2009 in response to lower inflationary pressures and slower economic activity, but credit has not picked up as demand remains dampened. ### Interest rates and reserve requirements - The overnight deposit rate—the main policy rate—was tightened by 200 basis points to 9½ percent during 2008. - The policy was reversed in 2009 and the overnight rate has been reduced by 550 basis points to 4 percent by end-September 2009. - Reserve requirements were also reduced from 20 to 17½ percent. ### Money growth and bank intermediation - Money supply contracted 7½ percent in 2008; currency in circulation remained almost flat in 2008. - The central bank moved to an “easy money” policy in 2009; monetary aggregates are beginning to expand again. - Additional liquidity has not yet translated into further credit to the private sector as banks and firms have acted cautiously against increased market uncertainties. - Money multipliers, which fell in 2008, reversed trend in 2009. - Real lending and deposit rates fell in early 2009, but are reverting back. - Deposits rebounded after the drop due to the crisis, but credit remains low as banks continue hoarding liquidity. - Banks' net position with BCRD increased as an indicator of flight to quality due to the crisis. ### Exchange rate and reserves - Gross international reserves of the central bank stood at about US$2½ billion at end-2008 (about 2¼ months of imports of goods and nonfactor services). - The Dominican peso depreciated about 3 percent against the U.S. dollar at end-2008 (yoy). - During the first three quarters of 2009, the level of international reserves was relatively stable and the exchange rate depreciated further by 1½ percent against the U.S. dollar. - The central bank has smoothed fluctuations in the exchange rate, keeping NIR broadly unchanged. - FX reserves requirements have remained broadly unchanged as the FX deposit base remained stable. - Net FX operations remained broadly unchanged as some of the 2008 losses were recovered in 2009 through limited intervention. ### Financial system soundness - Banks remain well-capitalized, liquid and profitable, but profitability reduced somewhat in the first half of 2009 due to precautionary liquidity holdings and weak private credit demand. - Non-performing loans remain low but banks are concerned about a possible deterioration of asset quality as economic activity remains weak. - FSAP Update mission (February 2009) found significant improvements in prudential regulation and supervision since the 2003 crisis but noted shortcomings in regulation, supervision and accounting standards. - A stress test indicated that some banks (accounting for 20 percent of the system’s assets) would need additional capital under the unlikely scenario in which the economy contracts by 5 percent. - The banking system is well-capitalized and liquid, but nonperforming loans have slightly increased, provisioning weakened, and profitability suffered as a result of the recent global financial crises. ### External accounts - The external position weakened due to diverse and recurrent external shocks. - Current account: a severe deterioration in the terms of trade in 2008 (due to higher food and fuel prices) and a fiscal expansion led to a sharp increase in imports and doubled the external current account deficit to nearly 10 percent of GDP. - In 2009, recovery in the terms of trade (with import prices falling faster than export prices) and depressed domestic demand improved the external current account deficit to about 6 percent of GDP. - Financial account: the large current account imbalance of 2008 was financed by record high foreign direct investment (FDI) and additional public borrowing, limiting reserve loss to some US$300 million in 2008 (less than 1 percent of GDP). - The financial account surplus is projected to be smaller in 2009 due to lower private flows as external financial conditions deteriorated. - Sovereign spreads rose from under 300 basis points at end-2007 to over 1700 basis points at end-2008; spreads hovered around 800-900 basis points for most of the first three quarters of 2009, then fell to below 450 basis points by early-October 2009 on news of a possible Fund arrangement. ### Outlook and risks - Outlook: prospects for the last quarter of 2009 and 2010 are not encouraging given continued negative impact of the global crisis and weak external and domestic demand. - The economy is expected to bottom out at the end of 2009 and growth is expected to bounce back gradually in 2010, although it will remain below potential until 2014. - Tourism is likely to be depressed in the short-run; the one-off increase in tourist arrivals in Q2 (due to the A-H1N1 influenza virus scare in Mexico) is not likely to be repeated. - Risks: vulnerability to external shocks with risks tilted to the downside. - A slower or stalled global recovery could reduce tourism receipts and exports, open a financing gap in the balance of payments, and put pressure on the currency. - Large movements in the exchange rate could affect dollarized household and corporate balance sheets, impacting consumption and growth. - Tighter external financing and higher spreads could impair the ability to finance a larger fiscal deficit, forcing an early procyclical fiscal adjustment and depressing private sector confidence. - A large negative output gap and high unemployment could further impact bank asset quality and stress particular banks. - Spread of A-H1N1 influenza could further depress tourism demand. ### Output gap and policy implications - Output gap: standard estimates indicate output was about 2½ percent above potential in 2008. - With growth projected between ½ and 1½ percent in 2009, staff estimates the output gap will be negative by 3 percent by end-2009, bottoming out at -5 percent around mid-2010; the authorities agreed with that assessment. - The emergence of a negative output gap calls for more supportive countercyclical policies. ### Fiscal stance and recommendations - Consolidated fiscal deficit: the 2009 budget is consistent with a consolidated fiscal deficit of 3⅓ percent of GDP. - In the absence of adequate financing, the budget deficit could be as low as 2½ percent of GDP, implying a highly procyclical response; staff estimates this would entail a negative fiscal impulse of around 1 percent of GDP. - Recommendation: relax the fiscal stance in the remainder of 2009 and part of 2010, then begin fiscal consolidation once the world economy strengthens and the output gap begins to close. - Automatic stabilizers: allow them to work, but maintain tax revenue through a tax compliance strategy, improved tax and customs administration, and rationalization of tax exemptions (some revenue decline in 2008-09 may be related to tax evasion and abuses tied to tax exemptions in competitiveness laws). - Discretionary policy: increases in spending should focus on social expenditures to protect the poor and on capital expenditures for higher fiscal multipliers. - Electricity sector transfers will absorb over 1 percent of GDP in 2009; electricity reform is crucial to free up resources for social and infrastructure investments. ### Monetary easing and operational guidance - Limited scope for further cutting of the policy rate given aggressive cuts in the first three quarters of 2009. - Rapid reduction in policy rates resulted in real short-term interest rates (ex-ante) of about zero for 2009-10. - Further easing through interest rates may not successfully boost the real economy because of strong liquidity preference by banks and low demand for credit. - Further easing could compromise exchange rate stability and international reserves. - Central bank should satisfy additional demand for liquidity but remain vigilant and stand ready to gradually withdraw liquidity once demand for private credit picks up. - The monetary authority broadly agreed and stressed their track record of timely policy stance switches. ### Exchange rate management guidance - Authorities have conducted policies aiming at relative stability of the currency under a managed floating regime; the peso has been weakening gradually since late-2008 while remaining broadly in line with fundamentals. - The central bank intervenes frequently with small amounts to reduce exchange rate variability and ensure smooth functioning of the FX market, in the context of stable foreign reserves. - Staff does not view currency mismatches as a valid argument to prevent further exchange rate flexibility. - Recommendation: the central bank should be prepared to allow more flexibility in the exchange rate, especially if weaker global environment causes further pressures on the balance of payments. - The authorities agreed and noted the peso has recently fluctuated more due to market forces and that the peso is in line with fundamentals. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 18. Rationale. Given the disruptive and costly financial crisis of 2003, staff emphasized ### 18. Rationale. ### Financial sector strengthening - Given the disruptive and costly financial crisis of 2003, staff emphasized the importance of continuing strengthening the financial sector to ensure the efficient and sustainable intermediation of financial savings in the economy. - Authorities acknowledged significant institutional strengthening since the 2003 crisis, in particular the improvement in prudential regulations and the strategy to recapitalize the Central Bank. ### Credit flow - Credit to the private sector has been the weakest in many years as a result of the economic slowdown, bank’s risk aversion, stringent credit policies, and the global credit crunch. - Staff recommendations: - Maintain the lower reserve requirements to facilitate a higher supply of credit in the economy. - Authorities’ observations: - Credit conditions have started to improve, with lending rates falling ten percentage points since the beginning of the year accompanying the decline in the policy rate. - Authorities considered that they still need to maintain an expansive policy stance. ### Crisis management framework - FSAP Update mission assessment: the crisis management framework is broadly appropriate, with room for improvements. - Identified legal and operational gaps: - Powers of the Superintendence of Banks (SB) to issue “cease and desist” orders could be established in law. - Terms for the provision of lender of last resort (LOLR) assistance could be better specified. - Recommendation: conduct crisis simulation exercises to identify gaps, including on coordination arrangements, since the framework is largely untested, particularly regarding the application of the Systemic Risk Law. ### Financial soundness - Indicators: - NPLs ratio rose to 4½ percent in August 2009 from just below 4 at end-2008. - Capital adequacy ratio of 15 percent. - Assessment: - Some financial soundness indicators have shown a moderate deterioration, but the system remains well capitalized and sufficient to withstand stress associated with a more pronounced downturn. - Policy guidance: - Continue close monitoring. - Authorities should abstain from adopting forbearance of their norms and regulations. - Temporary removal of certain loan risk classification requirements introduced early in the year should be allowed to lapse at end-2009. ### Central Bank recapitalization - Legislative background: - Legislation enacted in July 2007 to gradually recapitalize the BCRD; a capitalization of about 20 percent of GDP was expected to be done in 10 years (an average transfer of 2 percent of GDP per year). - Implementation problems: - Government fell behind in covering interest payments, partly reflecting a sharp drop in tax revenues and limited ability to access domestic capital markets. - Staff stance: - Support for authorities’ plan to keep the spirit of the recapitalization plan but amend the law to allow recapitalization over 15 (rather than 10) years. - Caution that further delays could seriously erode the credibility of the central bank. - Box 3 key facts: - Central bank capital eroded to an estimated minus 20 percent of GDP at end-2005. - The law mandates budgetary transfers to cover interest on recapitalization bonds rising from 0.5 percent of GDP in 2007 to 1.5 percent of GDP in 2017. - Authorities are considering extending the recapitalization period by up to 5 years, concluding no later than 2021. - Extension would delay unwinding of the stock of BCRD certificates, result in higher quasi-fiscal losses compared to the original plan, and may undermine credibility and the switch to inflation targeting. - It is critical that BCRD’s ability to implement monetary policy not be encumbered by, for example, requiring prior consultation of government agencies on the interest cost. ### Medium-Term Structural Policies #### Fiscal issues - Staff requirement: - Annual consolidated public sector primary surpluses of about 2 percent of GDP are needed over the medium-term to put the public debt-to-GDP ratio on a declining path and ensure debt sustainability. - Policy priorities: - Review and strengthen tax policy, revenue administration, and public financial management. - Tax policy measures include: avoid abuse from recent tax incentives; strengthen criteria for eligibility of tax benefits on investment; review appropriateness of tax rates; rationalize tax exemptions. - Improve customs administration, including updating the customs code and related legislation. - Operationalize public financial management framework: fully implement the treasury single account system and a medium-term budget framework. - Address problems of the electricity sector on the expenditure side. #### Monetary anchor - Current situation: - Considerable work is needed to establish a proper monetary anchor; confusion exists about the anchor followed by the central bank and the risk of pursuing multiple objectives. - Recommendation: - Introduce a full-fledged inflation targeting regime to clarify objectives and policy instruments. - Continue recapitalization (even in modified form) to strengthen central bank credibility. - Intermediate steps: establish a credible medium-term inflation objective, commit to price stability, strengthen communication policy, increase transparency, and enhance accountability. - Authorities’ position: - Committed to their inflation objectives (currently between 6 and 7 percent) and acknowledged benefits of an inflation targeting regime. #### Electricity bottlenecks - Fiscal impact: - Electricity sector is a major source of inflexibility for macroeconomic policy given significant public subsidies it absorbs each year. - Footnote statistic: - The government spent 2¾ percent of GDP in electricity subsidies in 2008, or about US$1.2 billion. - If these resources were to be allocated each year as transfers to the poor (about 750,000 families), each family would have received US$130 a month. - Structural reform objectives: - Generate and distribute electricity at a competitive price, eliminate indiscriminate subsidies, and increase cost recovery. - Reform measures needed: - (i) Enforce criminalization of electricity theft. - (ii) Revise and make more transparent contracts between generators and public-sector owned distributors. - (iii) Automatically adjust consumer tariffs to reflect costs. - (iv) Improve governance of the public corporation and the distributors. - (v) Disconnect the amount of subsidies to distributors from their losses to encourage efficiency. - (vi) Restructure public sector distribution companies to lower operational costs and target investment for higher efficiency and capacity. #### Growth impediments - World Bank Doing Business 2010 findings: - Overall ease of doing business ranking improved to 86 from 102 the previous year (out of 183 countries). - Improvement mostly due to adoption of a new company law strengthening investor security through greater corporate disclosure, director liability, and shareholder access to information. - Remaining impediments: - Ease of starting and closing a business and registering property. - Regional comparisons: - Dominican Republic compares favorably to Latin America average rank 106 and is similar to Caribbean region average rank 83. - Staff identification: - High cost of borrowing as an impediment to growth and private investment. - Authorities’ commitment: - Intend to work with World Bank staff to continue improving these indices. #### Poverty alleviation - Current status: - Poverty is still above pre-2003 crisis levels; about a third of the population is considered to live in poverty. - Inequality remains entrenched. - Some progress in reducing urban poverty, less in rural areas. - Spending for human development remains below regional averages and tends to be procyclical. - Social program recommendations: - Expand and improve the conditional cash transfer (CCT) program (Solidaridad): expand coverage, enhance targeting, institutional organization, and identification of beneficiaries. - Strengthen the conditional aspect of the CCT to improve health and nutrition indicators. - Strengthen the fully subsidized health insurance regime (covers 1¼ million individuals) and increase its coverage to reduce out-of-pocket expenditures among the poorest, to implement mandates of the universal health insurance laws. - Authorities’ stance: - Agreed with assessment and reiterated commitment to implement policies to alleviate poverty, including under the Solidaridad program. ### III. THE 2009-12 ECONOMIC PROGRAM #### Goals and program design - Request: - Authorities are requesting a 28-month SBA for 500 percent of quota (SDR 1,094.5 million) to support their economic program and unlock multilateral financing. - Program objectives: - Pursue a countercyclical policy at the beginning of the program and then switch focus to sustainability and structural issues in the remaining period. - Financing allocation: - Part of the Fund purchases will be directed to the budget to satisfy the public sector’s external need. - Program also attempts to meet a large international reserve accumulation need at the central bank coming from the relatively low level of reserves and uncertain external conditions. - Design intent: - Address macroeconomic deficiencies and institutional weaknesses identified in the Article IV consultation. - Refocus technical assistance to achieve structural reforms under the program. - Timing note (footnote): - Broadly speaking, the program will cover 10 quarters (from 2009:Q4 to 2010:Q1). Countercyclical policies will be the main policy issue in about 30 percent of the time covered by the program (Q4-2009 to Q2-2010), whereas sustainability issues will be the main policy concern in the remaining 70 percent of the time (Q3-2009 to Q1-2012). *Excerpt from _cr10135 (IMF staff report).* ### 29. Macroeconomic framework. The recovery of the world economy is likely to be slow ### Macroeconomic framework. The recovery of the world economy is likely to be slow ### Growth, inflation, and external position - Growth assumptions and path: - 2009: between ½ and 1½ percent - 2010: 2-3 percent - 2011 and beyond: 6 percent - Output gap: - Negative output gap expected to reach its highest level around mid-2010 (about 5 percent) - Inflation: - Official central bank objective: 6-7 percent for 2009-10 - Staff expectation: inflation is expected to fall gradually to 3 percent over the medium-run - External current account: - Expected to reach 6 percent in 2009-10 and moderate to 4 percent over the medium-term - Public debt: - Fiscal consolidation efforts will reduce the debt to GDP ratio to 35 percent by 2014 (MEFP ¶ 7-9) - Key macro projections (from program projection table; annual percent change or percent of GDP as presented): - Real GDP: 2008 5.3; 2009 ½-1½; 2010 2-3; 2011 6.0; 2012 6.0 - Inflation (e.o.p.): 2008 4.5; 2009 6-7; 2010 6-7; 2011 4.0; 2012 3.0 - Money supply: 2008 -7.5; 2009 12.1; 2010 8.8; 2011 10.8; 2012 10.5 - External current account (percent of GDP): 2008 -9.7; 2009 -6.2; 2010 -6.0; 2011 -4.8; 2012 -4.0 - Primary fiscal balance1/ (percent of GDP): 2008 1/-1.3; 2009 -0.8; 2010 0.0; 2011 1.0; 2012 2.0 - Overall fiscal balance1/ (percent of GDP): 2008 -4.6; 2009 -4.5; 2010 -4.0; 2011 -3.0; 2012 -2.0 - Public sector debt (percent of GDP): 2008 35.5; 2009 39.0; 2010 40.3; 2011 40.2; 2012 38.7 - Sources: Dominican authorities; and staff estimates; 1/ Consolidated public sector ### Fiscal policy: short-term support and medium-term consolidation - Program objectives: - Short-run: support aggregate demand and limit foregone output via countercyclical policy - Medium-run: achieve a primary fiscal surplus to ensure debt sustainability by tightening stance - Short-term countercyclical measures: - Fiscal expansion accommodated in Q4 2009 and H1 2010 to address the growing output gap - Relaxation of policies as much as 2 percent of GDP in Q4 2009 compared to a passive scenario (or 1¼ percent of GDP compared to the 2009 budget) - Overall public sector deficit of about 4½ percent of GDP for 2009 as a whole - Estimated fiscal impulse for 2009: almost 1 percent of GDP - Continued supportive stance in H1 2010; program envisages a fiscal stimulus of as much as 2 percent of GDP in 2010 - Cumulative fiscal targets for 2009 and 2010 to allow carry-over of stimulus if Q4 2009 measures are not fully implemented - Medium-term consolidation: - Beginning H2 2010 the policy will switch to fiscal moderation; consolidated fiscal deficit for 2010 as a whole will fall to 4 percent - Targets: consolidated primary fiscal balance in 2010; consolidated primary surplus of 1 percent of GDP in 2011 and 2 percent in 2012 and later years - Overall improvement of over 3 percent of GDP during the program (from a consolidated primary deficit of almost 1 percent of GDP in 2009) - Measures to achieve consolidation (authorities’ plan): - Strengthening tax and customs administrations and streamlining large tax exemptions by 1½ percent of GDP - Eliminating untargeted electricity subsidies (about 1 percent of GDP) - Wage moderation (by about ½ percent of GDP) - Fiscal response context and calculations (Box 4 and fiscal impulse table): - 2008: non-energy primary deficit increased by 1.8 percent of GDP of which 1.7 percent was due to fiscal impulse - Passive scenario for 2009: primary balance would have risen by 0.6 percent of GDP, fiscal impulse contractionary by 1.2 percent of GDP - With Fund-supported program: loosening of fiscal policy for 2009 of 1.6 percent of GDP, of which 0.9 percent of GDP due to fiscal impulse - Dominican Republic: Fiscal Impulse Calculations (in percent of GDP) excerpts: - Primary balance (A) 2008 1/ 1.6; 2009 2.2; 2010 0.0; 2011 0.4 - Cyclically adjusted primary balance (B) 2008 1/ 1.3; 2009 2.5; 2010 0.4; 2011 1.2 - Cyclical primary balance (C) 2008 1/ 0.4; 2009 -0.3; 2010 -0.3; 2011 -0.7 - Fiscal impulse (∆B) 2008 -1.7; 2009 1.2; 2010 -0.9; 2011 0.8 - Output gap (percent of potential) 2008 2.5; 2009 -2.5; 2010 -2.5; 2011 -5.1 - Memorandum: Energy subsidies 3.2; 1.3; 1.1; 0.8 (years as in table) - Financing of higher fiscal deficit in 2009: - To be financed by disbursements from the World Bank, IDB and IMF and placements in domestic bond market - Fund staff estimate: proposed fiscal policy for 2009 will inject a fiscal impulse of almost 1 percent of GDP, within regional norms ### IMF budgetary support and financing - Rationale for IMF budget support: - Public sector balance of payments need is difficult to satisfy because: (i) tight global credit conditions and limited market access; (ii) Central Bank Law prohibits public financing by the central bank; (iii) domestic public bond market at an early stage - Arrangements and amounts: - About ¼ of the SBA will be devoted to budgetary support: SDR 300 million (SDR 200 million available in 2009 and SDR 100 million in 2010) - Remaining ¾ (SDR 795 million) will support the international reserve position of the central bank - Fund expected to cover about 12½ percent of the financing needed for the fiscal impulse - Public Sector Borrowing Requirements table highlights (In billions of U.S. dollars): - PSBR Requirements: 2.8; 2.6; 3.0 (periods shown) - NFPS Deficit: 1.4; 1.2; 1.8 - Amortizations: 1.0; 1.3; 0.9 - Financing sources (total 2.8; 2.6; 3.0): External 1.9; 2.1; 2.9 - Budget support: 1.1; 0.6; 1.3 (composition: World Bank 0.4; IDB 0.4; IMF 0.3; CAF 0.0) - Domestic financing and project financing also listed in the table ### Monetary policy and reserve management - Immediate monetary objective: - Support aggregate demand via countercyclical policy while ensuring inflation declines gradually; base money used as the anchor - Liquidity measures: - Central bank reduced reserve requirements - Central bank prepared to expand currency issue by as much as 12 percent in 2009 and 8 percent in 2010 (assuming some 2009 injection is reversed in 2010) - Growth of base money will be much lower in 2009 than in previous years due to reserve requirement reduction increasing the money multiplier, but will recover in 2010 - Net domestic assets (NDA): - Central bank intends a relatively accommodative policy for rest of 2009 and most of 2010 to restore private credit - No NDA ceiling for 2009 or H1 2010; NDA ceiling set for September and December 2010 when credit conditions expected to normalize - Central bank satisfying higher liquidity demand through reduction in reserve requirements and expansion of NDA for 2009 and 2010 (MEFP ¶ 19) - Net international reserves (NIR): - Program allows for a reduction in NIR of about US$350 million in 2009 - Part of decline due to use of US$300 million of Fund resources for budgetary support to pay government debt service in Q4 2009 - For 2010, NIR expected to remain flat for the year as a whole (despite government’s use of US$150 million of Fund resources for budget support) while allowing moderate use of reserves in H1 2010 (MEFP ¶ 18) - NIR expected to rise after 2010 as external and credit conditions normalize - Monetary program projections (In percent of base money the previous period): - Base Money: 2008 9.8; 2009 0.4; 2010 8.9; 2011 12.0; 2012 12.0 - Net domestic assets: 2008 13.8; 2009 7.8; 2010 8.9; 2011 0.0; 2012 0.0 - Net international reserves: 2008 -4.1; 2009 -7.5; 2010 0.0; 2011 12.0; 2012 12.0 ### Reserve adequacy (Box 5) - Historical and modeled adequacy: - Gross international reserves: 4¾ percent of GDP in 2001; 1¾ percent of GDP in 2003; increased to 7½ percent of GDP in 2007; moderate loss in 2008 - Jeanne (2007) insurance model results: - Optimal level of reserves rose to 14 percent of GDP during the 2002 crisis and fell to 9 percent of GDP in 2008 - Actual reserves are below the optimal level needed to withstand shock equivalent to all short-term external debt and foreign currency deposits - Projected impact of SBA: - Without an SBA the gap between optimal and actual reserves would have been around 6½ percent of GDP in 2010-2012 - With the proposed program the gap would be less than 2 percent of GDP - Cross-country comparisons (selected metrics for 2008): - Dominican Republic: In Months of Imports 1/ 1.8; Percent of Broad money 22.2; Percent of Reserve Money 54.3; Percent of GDP 5.8 - Regional average (2008): In Months of Imports 2.8; Percent of Broad money 26.6; Percent of Reserve Money 110.9; Percent of GDP 12.3 - Source: International Financial Statistics; and Fund staff estimates - 1/ In months of 2008 imports of goods and services *Italic: Extracted from IMF staff report: _cr10135 - 29. Macroeconomic framework. The recovery of the world economy is likely to be slow_* ### 32. Exchange rate policy. While the exchange rate has depreciated gradually in the recent ### _cr10135 - 32. Exchange rate policy. While the exchange rate has depreciated gradually in the recent ### Exchange rate policy - The exchange rate has depreciated gradually in the recent past. - The central bank is prepared to conduct a more flexible policy, especially if there are significant changes in market fundamentals or market pressures beyond those envisaged in the program. - The central bank will intervene in the foreign exchange market only to prevent wide swings in the exchange rate due to bulky or seasonal transactions (MEFP ¶ 18). ### External issues and balance of payments - Current account deficit projections: - The external current account deficit is projected to decline to around 6 percent of GDP in 2009-10 and then will continue declining during the rest of the program period. - Adjustment driven by gradual recovery of the global economy and expected recoveries in exports, tourism, remittances, resumption of nickel exports, and projected start of gold exports in 2011. - External financing requirements and coverage: - For 2009, external financing requirements are expected to amount to US$3.4 billion, to be covered mostly by: - private sector sources: US$1.5 billion - public sector borrowing: US$1.6 billion (the bulk from multilateral sources) - the Fund: US$0.3 billion - For 2010, financing requirements increase to US$3.9 billion, expected to be covered broadly by: - private sector flows: US$1.5 billion - public indebtedness: US$2.0 billion (including a bond placement for US$0.6 billion) - the Fund: US$0.4 billion - Once a proper adjustment period is allowed, fundamentals are expected to strengthen and the external debt-to-GDP ratio will return to a declining path (see Appendix I). - Program table (Dominican Republic: Balance of Payments, In percent of GDP) — Program / Projection by year: - Current Account: -9.7 (2008), -6.2 (2009), -6.0 (2010), -4.8 (2011), -4.0 (2012) - Exports: 14.9 (2008), 11.6 (2009), 12.1 (2010), 12.9 (2011), 13.2 (2012) - Imports: -35.1 (2008), -26.7 (2009), -27.0 (2010), -26.5 (2011), -26.2 (2012) - Other: 10.5 (2008), 8.9 (2009), 8.8 (2010), 8.7 (2011), 9.0 (2012) - Capital Account: 9.0 (2008), 5.5 (2009), 6.0 (2010), 5.8 (2011), 5.0 (2012) - Public sector (net): 1.7 (2008), 2.0 (2009), 2.8 (2010), 1.6 (2011), 0.5 (2012) - Private sector (net) 1/: 7.4 (2008), 3.4 (2009), 3.2 (2010), 4.2 (2011), 4.5 (2012) - Overall Balance: -0.7 (2008), -0.7 (2009), 0.0 (2010), 0.9 (2011), 1.0 (2012) - Footnote: External financing is on track to meet program projections for 2009; public sector borrowing through end-October 2009 is estimated at about US$1.0 billion following IDB approval of budgetary support loans of US$0.5 billion in late October. The World Bank’s Board is scheduled to discuss two policy development loans for US$0.3 billion in mid-November. ### Adjustor for external financing shortfalls - Program will accommodate transitory shortfalls in programmed external financing for up to US$300 million. - Both the program ceiling on net domestic assets and the program floor on net international reserves of the central bank will be adjusted accordingly (see Technical Memorandum of Understanding, Attachment 3). ### Institutional strengthening — tax administration - To reverse the decline in tax collections of 2008-09, measures identified to improve collections without changing tax rates or policy include: - approving a new customs code and related legislation; - implementing a new organizational structure for the customs and the tax administrations; - strengthening the audit function; - modernizing and simplifying customs procedures. - Authorities will design a plan to strengthen customs and internal tax collections by reinforcing tax administration and rationalizing tax exemptions by March 2010. - Authorities request technical assistance from the Fund for plan design. - Once designed, implementation will occur in the context of the program and key measures will become future structural benchmarks (MEFP ¶ 21-23). ### Institutional strengthening — financial sector and Basel principles - Elimination of forbearance on regulatory requirements is key to strengthen credibility. - Superintendence of Banks (SB) has issued most necessary regulations for risk-based supervision; additional efforts needed for complete implementation. - Authorities will develop a comprehensive framework for information and supervisory-practices exchange. - Authorities will develop, by March 2010, a plan to achieve compliance with all of the Basel core principles for effective supervision by 2012. - Authorities request Fund technical assistance for this purpose. Implementation will proceed within the program and key steps will become structural benchmarks (MEFP ¶ 24). ### Institutional strengthening — inflation targeting framework - Authorities have been successful in controlling inflation but will strengthen institutions and procedures to better anchor inflationary expectations. - Authorities will create a plan by June 2010 to formally adopt an inflation targeting regime in early 2012. - Authorities request Fund technical assistance. Implementation will become structural benchmarks for the remainder of the program (MEFP ¶ 24). ### Institutional strengthening — electricity sector reform - Authorities intend to eliminate indiscriminate electricity subsidies by 2012. - Authorities are creating a commission led by the minister of economy to oversee reform. - Authorities will present a strategy paper on electricity sector reform to eliminate untargeted subsidies by end-December 2009; will request technical assistance from the IDB and the World Bank. - Box 6 summary — Structural issues in the electricity sector: - Distribution losses are very high by regional standards; non-technical losses are about 40 percent (theft more than 30 percent). - Contributing factors: restrictive contracts between generators and distributors, weak tariff structure (adjustment mechanism not automatic), badly designed subsidy structure (non-focused subsidies, moral hazard), low operating efficiency, weak financial planning. - Medium-term policy recommendations include: implement electricity theft criminalization law; install and protect meters; design fixed-price contracts for hard-to-monitor users; rationalize contracts between distributors and generators; make tariff changes automatic to reflect costs; phase out non-focused subsidies and replace with targeted ones (started with elimination of PRA and introduction of BONOLUZ); improve operational management and governance; revamp payment system to minimize arrears to generators. - Regional electricity distribution indicators, 2005 (Dominican Republic vs LAC and Central Caribbean) — select figures: - Distributional losses (%): Dominican Republic 53; LAC and Caribbean 15; Central America 16; Caribbean 12 - Technical losses: Dominican Republic 10; LAC and Caribbean 8; Central America 8; Caribbean 7 - Non-technical losses: Dominican Republic 42; LAC and Caribbean 7; Central America 8; Caribbean 5 - Residential tariff (US$/MWh): Dominican Republic 140; LAC and Caribbean 122; Central America 112; Caribbean 232 - Industrial tariff (US$/MWh): Dominican Republic 14697 10122 9 (table formatting preserved as in source) - Operational efficiency: Residential connections/employee: Dominican Republic 21 946; LAC and Caribbean 9510; Central America 10173 - Electricity sold/employee (MWh): Dominican Republic 86 225; LAC and Caribbean 6829; Central America 69901 - Sources for box: World Bank; and Fund staff calculations. ### Institutional strengthening — domestic capital markets - To reduce borrowing costs and foster private investment, authorities will design by September 2010 a plan to: - develop capital markets; - adopt a debt management strategy; - reduce the perception of country risk and borrowing costs, including by greater communication with international capital market participants. - Implementation will become structural benchmarks for the remainder of the program (MEFP ¶ 27). ### Social safety net reinforcement - Authorities intend to strengthen social safety nets and conditional cash transfer (CCT) programs amid deteriorating economic conditions. - Government committed to increase expenditures for education and health by ¾ percent of GDP a year during 2010-12. - Government will increase coverage of the CCT program by 70,000 families and increase the transfer to some 45,000 families already covered by the program by December 2009 (MEFP ¶ 28). ### Medium-term scenario (surveillance) - Baseline scenario assumptions and projections: - Economy expected to recover by 2011 and to grow at the average rate of 6 percent thereafter. - Output gap expected to disappear by 2014. - Under baseline, inflation will come down gradually to align with world inflation and will stay at around 3 percent. - Fiscal consolidation efforts completed by 2012; consolidated public sector will generate a primary fiscal surplus of 2 percent of GDP. - Public debt path: - Public debt will go up to 40 percent of GDP in 2010-11 - Public debt will come down to 35 percent by 2014 - Public debt will be 30 percent by 2020 - External adjustment: higher oil prices and export rebound reduce external current account deficit to about 4 percent of GDP, mostly financed with private flows (especially FDI). ### Program modalities — access and financing composition - Proposed arrangement: - 28-month SBA amounting to SDR 1,094.5 million (500 percent of quota), with 10 quarterly purchases. - Designed to fully cover balance of payments needs and increase gross international reserve coverage to 3 months of imports by 2012. - Fund purchases under the SBA estimated to cover about ¼ of the balance of payments need in 2009-10. - SBA expected to catalyze disbursements from other international financial institutions that together will cover almost ¾ of the balance of payments need in the same period (remaining amounts via sovereign bond placement and SDR allocation). - Balance of payments need table (In billions of U.S. dollars) — Sources of BOP Need / Projection: - Sources of BOP Need: 1.4 (2009 Program), 1.5 (2010 Projection), 0.9 (2011), 0.2 (2012) - Current account deficit: 2.8 (2009 Program), 2.9 (2010 Projection), 2.5 (2011), 2.3 (2012) - Private capital account 1/: -1.3 (2009 Program), -1.5 (2010 Projection), -2.4 (2011), -2.5 (2012) - Public capital account 1/2/: -0.1 (2009 Program), -0.4 (2010 Projection), -0.4 (2011), -0.3 (2012) - Reserve accumulation: -0.1 (2009 Program), 0.4 (2010 Projection), 1.0 (2011), 0.6 (2012) - IMF repurchases: 0.0 (2009), 0.1 (2010), 0.2 (2011), 0.1 (2012) - Financing of BOP Need: 1.4 (2009), 1.5 (2010), 0.9 (2011), 0.2 (2012) - SDR allocation: 0.3 (2009), 0.0 (2010), 0.0 (2011), 0.0 (2012) - IMF (SBA): 0.3 (2009), 0.5 (2010), 0.7 (2011), 0.2 (2012) - World Bank: 0.4 (2009), 0.2 (2010), 0.1 (2011), 0.0 (2012) - IDB: 0.4 (2009), 0.2 (2010), 0.1 (2011), 0.1 (2012) - Sovereign bond: 0.0 (2009), 0.6 (2010), 0.0 (2011), 0.0 (2012) - Notes: 1/ Autonomous capital inflows are recorded as a negative BOP need. 2/ Ex-ante (i.e. excludes disbursements to cover the BOP need). ### Program modalities — safeguards, monitoring, and governance - Safeguards assessment: - An update safeguards assessment of the Banco Central de la Republica Dominicana has been initiated in accordance with Fund policy and is expected to be completed by the time of the first program review. - Working groups: - Authorities will create an inter-institutional task force with staff from the central bank, the ministry of finance, and the ministry of economy to monitor program implementation and report to policy makers. - A program monitoring group consisting of members of staff and authorities will meet every other week through video conference to ensure implementation and early identification of problems. ### Miscellaneous issues - Capacity to repay the Fund: - Despite rather low NIR, capacity to repay the Fund is strong. - Repurchase burden remains at a comfortable level; DSA suggests public debt (about 35 percent) will increase through 2012 and then decline. - Dominican Republic’s debt burden is one of the lowest in the region (even after the SBA purchases). - Government is fully committed to macroeconomic stability and prudent policies and has never had arrears to the Fund. - Post program monitoring (PPM): - At last SBA review in January 2008, Fund credit outstanding was 190 percent of quota; PPM was required in August 2008. - First PPM review completed in January 2009; second review expected 6 months later. - Access limits modified in March 2009 raised threshold for PPM to 200 percent of quota. - Given the new SBA request, no further PPM is warranted. - Exchange system: - Dominican Republic has accepted the obligations of Article VIII, sections 2, 3, and 4, and does not have restrictions on payments and transfers for current international transactions nor multiple currency practices. - Statistical issues: - Dominican Republic subscribes to the General and Special Data Dissemination Standards. - Data are generally adequate for surveillance and program monitoring, but improvements needed in: timeliness of fiscal data; accuracy of imports data; expanding private capital flows databases; measurement of credit of cooperatives; activities of offshore branches and subsidiaries of financial groups. - A Report on the Observance of Standards and Codes (ROSC) on statistical issues was presented to the IMF Executive Board in 2006. ### Staff appraisal — key judgments - The Dominican economy was hit by exogenous shocks: food and fuel price shock in 2008, and the global financial crisis in 2009. - Monetary policy response: tightened in 2008 to contain inflation, then loosened in 2009 as the economy softened. - Fiscal policy response: fiscal authority faced inflexibilities; price rigidities magnified electricity subsidies in 2008; lack of financing led to an inadequate procyclical budgetary stance for the first 3 quarters of 2009 (repeating 2008 pattern). - Program assessment: the authorities’ program adopts a more flexible and countercyclical policy response while providing an exit strategy to reduce public indebtedness and return to long-term sustainability. *Source: IMF staff report content provided in the input.* ### 50. Fiscal. An adequate fiscal response is the centerpiece of the program, which aims at ### Fiscal. An adequate fiscal response is the centerpiece of the program, which aims at pursuing expansive policies in 2009-10. ### Fiscal - The Fund-supported program will catalyze financing from multilateral development banks and international capital markets. - The program’s fiscal stimulus is appropriate to cushion the economy from the effects of the weak global economy and facilitate recovery in the second half of 2010. - Implementation will be challenging; authorities’ access to domestic and international bond markets depends on establishing a credible track record early in the program with well-targeted expenditures (predominantly in capital and social spending). - Implementation of fiscal structural reforms and the electricity reform is critical to achieve fiscal targets after 2010: - Objective: bring the primary fiscal balance up to 2 percent of GDP. - Intended outcome: ensure sustainability and lower the debt-to-GDP ratio over the medium term. - Authorities have signaled commitment to these reforms and are advised to begin them as early as possible to reap benefits later in the program. ### Monetary - The central bank is rapidly becoming a flexible monetary institution capable of timely policy action. - Policy management in 2008 and 2009 shows significant progress since 2003. - The exchange rate pass-through to prices remains high in the Dominican Republic. - The central bank should gradually introduce more exchange rate flexibility to avoid conveying that the monetary anchor is the exchange rate, particularly given the relatively low level of gross international reserves by regional and international standards. - The authorities’ program offers an opportunity to strengthen the policy framework and credibly introduce an inflation targeting regime. - Dollarization remains a challenge and is expected to decline gradually as the policy framework is strengthened. - It is important that the government finalize the recapitalization of the central bank, even if under a modified schedule that would require 15 rather than 10 years. ### Financial - The FSAP update indicates significant improvements in regulation, supervision, and financial strength of the banking system. - During a global credit crunch, Dominican banks remain liquid, solvent and profitable. - Continued close monitoring of the banking system is important, with preparedness to take necessary measures to prevent systemic problems. ### External - External shocks have generated large balance of payments needs that are being covered by this program. - Strong implementation of the program is necessary to avoid compromising secured financing. - The current account deficit is expected to remain high at about 6 percent of GDP in 2009-10 and will continue to be a source of vulnerability, especially if oil prices increase beyond program projections. - Timing of the rebound in tourism is an additional concern: - While the world economy is expected to continue with a shallow recovery in 2010, tourism demand may take longer to pick up due to potential tourists’ high indebtedness, reductions in wealth, or job losses in their home countries. - Medium-term outlook is more positive: - The Dominican Republic is believed to have relatively large mining reserves of gold likely to attract large direct foreign investment, which in turn will generate significant foreign exchange. - NIR accumulation will become significant after 2010, which would help reduce vulnerabilities further. ### Structural - The structural reform agenda is described as adequate, ambitious and diverse. - The agenda balances fiscal, financial, growth and poverty concerns. - The approach emphasizes ownership by having authorities design plans and strategies they will implement. - Proper implementation will require a high degree of coordination among different policymakers. - The inter-institutional working group in Santo Domingo provides an opportunity to identify problems ahead of time and ensure proper implementation. ### Vulnerabilities - Risk that authorities implement the first phase of the program (countercyclical policy) but not the second part (sustainability issues). - Authorities are stated to be fully committed to implementing the whole program to reap reform benefits. - Program difficulty and required high level of coordination create a risk of capacity constraints. - Early development of strategy papers for structural reform implementation is key to avoid slippages. - Additional risks: - Economic: global recovery may be softer or the world economy may deteriorate further. - Political: congressional elections in mid-2010 may pressure the government to spend beyond program projections. - Social: tensions and pressures to increase current spending may compromise capital expenditures and program objectives. - Importance of government communication: success depends on authorities’ determination to implement reforms and their ability to communicate policies and persuade stakeholders of the policies’ merits. *Excerpt from IMF staff report content unit.* ### 56. Staff position. On program issues, staff supports the authorities request for a new SBA. ### _cr10135 - 56. Staff position. On program issues, staff supports the authorities request for a new SBA. ### Staff position and surveillance - Staff supports the authorities request for a new SBA. - The authorities’ program "strikes a good balance between short-term business cycle considerations and medium-term structural and sustainability issues." - "Achieving the ambitious objectives of the program will require sustained efforts on the part of the authorities and the full support of the international community." - On surveillance, staff proposes that "the next Article IV consultation take place within the 24-month cycle subject to the provisions of the decision on Article IV consultation cycles." ### Key macroeconomic and social indicators (selected) - Main export products: tourism, textiles, nickel. - GDP per capita (U.S. dollars, 2008 PPP): 5,122 - Population (millions, 2009 estimate): 10.110 - Income share by highest 10 percent (percent, 2006): 39.0 - Life expectancy at birth (years, 2008): 73.3 - Extreme poverty rate (2006): 13.1 - Under 5 mortality rate (per thousand, 2008): 31 - Adult literacy rate (percent, 2007): 95.1 ### National accounts and prices (annual / period data) - Nominal GDP (RD$ billion): 1,190; 1,364; 1,576; 1,648; 1,811; 2,015; 2,211 - Dollar GDP (US$ billion): 35.3; 41.0; 45.5; 45.5; 47.8; 52.2; 56.5 - Real GDP (annual percent change): 10.7; 8.5; 5.3; 0.5; -1.5; -2-3?6.0 (source table shows " -2-36.0.6.0" formatting; preserve original context ambiguity) - Consumer price index (period average): 7.6; 6.1; 10.6; 1.5; -2.5; 6-75.0?3.5 (table contains formatting irregularities) - Consumer price index (eop): 5.0; 8.9; 4.5; 6-7?6-74.0?3.0 (table contains formatting irregularities) - Exchange rate (RD$/US$ - period average): 33.7; 33.3; 34.6 - Unemployment rate (percent): 16.4; 15.6; 14.0 ### Public finances (selected, in percent of GDP) - Central government primary balance: 0.2; 1.7; -1.5; -1.1; -0.4; 0.6; 1.6 - Total revenues (including grants): 16.2; 17.6; 15.8; 14.0; 14.5; 15.3; 15.7 - Primary spending: 16.0; 15.8; 17.4; 15.1; 14.9; 14.7; 14.1 - Interest expenditure: 1.4; 1.6; 1.7; 2.0; 2.2; 2.2; 2.2 - Consolidated public sector balance: -3.1; -1.7; -4.6; -4.5; -4.0; -3.0; -2.0 - Total public debt: 38.3; 35.8; 35.5; 39.0; 40.3; 40.2; 38.7 - Of which: foreign currency denominated: 20.6; 19.0; 17.1; 19.2; 20.1; 19.3; 18.1 ### Money and credit (selected) - Liabilities to private sector (M3): 12.7; 16.0; 8.8; 11.5; 6.4; 12.0; 12.0 - Credit to the private sector: 14.3; 26.3; 8.8; 6.0; 11.9; 12.0; 12.0 - M3, in percent of GDP: 37.1; 37.5; 35.3; 37.7; 36.5; 36.7; 37.5 ### Balance of payments and external position (selected, in millions of US$ unless indicated) - Current account: -1,288; -2,096; -4,414; -2,814; -2,891; -2,524; -2,285 - Merchandise trade balance: -5,564; -6,437; -9,174; -6,881; -7,107; -7,076; -7,353 - Exports: 6,610; 7,160; 6,782; 5,272; 5,796; 6,738; 7,447 - Imports: -12,174; -13,597; -15,955; -12,154; -12,903; -13,814; -14,800 - Services and transfers (net): 4,276; 4,341; 4,759; 4,067; 4,216; 4,552; 5,068 - Gross official reserves: 2,251; 2,946; 2,662; 2,566; 2,942; 3,914; 4,506 - Net international reserves: 1,788; 2,395; 2,165; 1,815; 1,815; 2,296; 2,833 - Outstanding external public debt, in percent of GDP: 20.0; 18.0; 16.5; 17.6; 18.1; 17.6; 16.5 - Oil price (WEO) (US$/bbl): 64.37; 71.19; 97.06; 61.57; 76.57; 79.58; 81.0 ### Fiscal accounts (selected tables, percent of GDP and RD$ billions) - Total revenue and grants (percent of GDP): 17.6; 15.8; 15.3; 13.9; 10.4; 14.0; 3.5; 7.2; 10.8; 14.5; 14.5; 15.3; 15.7 (table spans multiple columns/periods) - Tax revenues (percent of GDP): 16.0; 15.0; 14.8; 13.6; 10.1; 13.6; 3.4; 7.0; 10.5; 14.4; 14.7; 15.1 - Primary balance (percent of GDP): 1.7; -1.5; 0.6; 0.9; 0.3; -1.1; -0.6; -1.1; -0.8; -0.4; 0.6; 1.6 - Interest (percent of GDP): 1.6; 1.7; 2.4; 2.0; 1.4; 2.0; 0.3; 0.6; 1.3; 2.2; 2.2; 2.2 - Consolidated public sector balance (percent of GDP): -1.7; -4.6; -3.3; -2.5; -2.1; -4.5; -1.3; -2.5; -3.2; -4.0; -3.0; -2.0 ### Public sector financing and gross financing requirements (US$ millions) - Gross Financing Requirements, annual (projection line): 2,758 (annual 2009); seasonal/projected quarterly flows listed (e.g., Q1 522; Q2 334; Q3 402; Q4 1,500) - Non-Financial Public Sector Deficit (quarterly/annual sample): annual 1,411 - Amortizations (annual): 1,049 (2009); 1,337; 1,342; 1,111 (projections) - Financing sources (annual sample): External financing 1,892; Project financing 533; Petrocaribe 240; Domestic financing 866; Bonds, banking system, arrears, other items shown in quarterly detail ### Monetary authority and banking system (selected) - Monetary base (RD$ billions): (Sep 2007) 121.9; (Dec 2007) 133.8; (Mar 2008) 120.0; (Jun 2008) 134.3; (Sep 2008) 127.0; (Dec 2008) 127.7; projections for 2011 163.8; 2012 183.4 - Net international reserves (US$ millions): 2,394.9; 2,165.4; 2,241.7; 1,815.4; 1,715.4; 1,665.4; projections 2,295.9; 2,832.9 - M3 (RD$ billions): 511.9; 556.9; 592.8; 620.8; 617.4; 613.5; projections 739.6; 828.1 - Banking system indicators (percent): - Capital adequacy: Net worth to total assets 10.0; 9.5; 9.7; 8.7; 9.2 - NPLs to total loans: 4.5; 4.0; 3.5; 4.3; 4.1 - Loan growth: 24.7; 27.1; 15.3; 16.5; 15.0 - Return on average assets: 1.9; 2.0; 2.1; 0.3; 0.7 ### Balance of payments and external financing (selected projections and components) - External financing requirement (annual, projections): Financing requirement 4,739; 3,384; 3,901; 4,247; 3,802 - Current account deficit (annual, projections): 4,414; 2,814; 2,891; 2,524; 2,285 - Foreign Direct Investment, net (annual, projections): 3,076; 1,966; 1,863; 1,993; 2,116 - Net Fund purchases (projections, Table 9): -422; 543; 764; 915; 6 (annual sequence for projections) ### SBA schedule of reviews and purchases (Table 11) - Board approval: March 15, 2010 — Amounts: 0.00; 200.00; 200.00; 91.4 (table shows breakdown) - First review: June 15, 2010 — 54.27; 25.00; 79.27; 36.2 (end-December 2009 performance criteria) - Second review: September 15, 2010 — 54.27; 25.00; 79.27; 36.2 (end-March 2010 performance criteria) - Third review: December 15, 2010 — 54.26; 25.00; 79.26; 36.2 (end-June 2010 performance criteria) - Fourth review: March 15, 2011 — 84.45; 25.00; 109.45; 50.0 (end-September 2010 performance criteria) - Fifth to Tenth reviews and purchases continue with scheduled amounts culminating in totals: - Total (Central Bank + Ministry of Finance): 794.50; 300.00; 1094.50; 500.0 (Table reports "Total 794.50 300.00 1094.50 500.0") ### Indicators of capacity to repay the Fund (selected, Table 12) - Fund repurchases and charges (in millions of SDRs): 119.2; 35.3; 105.5; 123.8; 87.4; 183.1; 366.9 - Fund credit outstanding (in millions of SDRs): 319.6; 488.9; 739.9; 1,066.9; 1,104.1; 935.1; 579.3 - In percent of quota: 146.0; 223.4; 338.0; 487.4; 504.4; 427.2; 264.7 - Gross international reserves (millions of U.S. dollars): 2,662; 2,566; 2,942; 3,914; 4,506; 4,857; 4,999 ### Medium-term scenario (Table 13, 2006–14 projections, selected) - Real GDP growth (percent): 10.7; 8.5; 5.3; 0.5; 2.5; 6.0; 6.0; 6.0; 6.0 - CPI inflation, end of period (percent): 5.0; 8.9; 4.5; 6.0; 4.0; 3.0; 3.0; 3.0; 3.0 - Nominal GDP (billions of U.S. dollars): 35.3; 41.0; 45.5; 45.5; 47.8; 52.2; 56.5; 61.1; 66.1 - Gross investment (percent of GDP): 18.3; 18.8; 18.2; 16.8; 17.3; 18.4; 18.4; 18.4; 18.4 - National Savings (percent of GDP): 14.6; 13.6; 8.5; 10.6; 11.3; 13.6; 14.4; 14.3; 14.6 - Public sector overall balance (percent of GDP): -1.2; -1.6; -4.6; -4.5; -4.0; -3.0; -2.0; -2.0; -2.0 - Public external debt (percent of GDP): 20.0; 18.0; 16.5; 17.6; 18.1; 17.6; 16.5; 13.4; 14.1 *Sources: Dominican authorities; World Bank; and Fund staff estimates (as presented in the source content).* ### ANNEX I: SUMMARY OF ANNEXES ### ANNEX I: SUMMARY OF ANNEXES ### Fund relations - As of end-September 2009, outstanding obligations to the Fund amounted to SDR 288.94 million (132 percent of quota), remaining from the latest Fund Stand-By Arrangement (SDR 437.8 million) approved January 31, 2005. - The last Article IV consultation was concluded on January 30, 2008; the First Post-Program Monitoring Review was concluded on January 12, 2009. - Technical assistance: FAD, MCM and STA have provided substantial technical assistance since 2004. - Financial sector assessments: - An FSAP Update was conducted in March 2009 (original FSAP in 2001). - A safeguards assessment of the Central Bank of the Dominican Republic (BCRD) was completed in 2005; an updated assessment will be completed before the first review under the proposed arrangement. - The 2005 safeguard assessment noted implementation of a number of recommendations from earlier assessments, but identified vulnerabilities mainly in internal controls over reporting of monetary data to the IMF, financial reporting and external audit. - The Dominican Republic has not yet ratified the Fourth Amendment. ### Relations with the World Bank Group - As of September 30, 2009 total World Bank loan commitments amounted to US$326.2 million, of which US$234 million remained to be disbursed. - Loan portfolio composition: ten loans — seven for investment, two for Technical Assistance, and an Emergency Recovery Loan. - Two Development Policy Loans (DPLs) recently negotiated (Public Finance and Social Sector; and Performance and Accountability of Social Sectors) — congressional ratification expected before the end of 2009. - Portfolio performance: disbursement ratio at 14 percent as of October 2009, above the regional (Latin America and the Caribbean) average. ### Relations with the Inter-American Development Bank (IDB) - As of October 9, 2009 the IDB’s loan portfolio amounted to US$604.7 million, of which $303.1 was undisbursed. - On October 21, 2009 the IDB approved a Financial Emergency Loan to support a Fiscal Strengthening Program for US$500 million, of which US$300 million will be disbursed in 2009 and the remainder in 2010. - The IDB is in final stages of designing the IDB Country Strategy for 2009-2012. ### Statistical issues - Economic data reported to the Fund are generally adequate for surveillance purposes, but some weaknesses are being addressed with STA technical assistance. - The Dominican Republic has participated in the General Data Dissemination System (GDDS) since November 2005. ### Appendix 1 — Debt Sustainability Analysis: External debt (summary) - Assessment: External debt appears sustainable in the medium-term, although external debt-to-GDP ratio is expected to increase in the short-term as growth slows and sizable public external borrowing takes place. - Medium-term adjustment drivers: - Recovery of tourism and remittances with the global economy. - Exports grow as benefits of CAFTA-DR and foreign direct investment in mining begin to bear fruit. - Prudent fiscal and monetary policies and structural reforms under the program. - Financing outlook: Foreign direct investment and support from official creditors expected to be sufficient to finance the reduced external current account deficit over the medium-term. Key baseline external debt figures (external debt in percent of GDP) - 2006: 24.9 - 2007: 25.2 - 2008: 25.1 - 2009: 26.9 - 2010: 28.4 - 2011: 28.9 - 2012: 27.9 - 2013: 26.5 - 2014: 24.7 Selected external-debt flows and ratios (exact values) - Change in external debt (2006–2014): 2.9; 0.4; -0.2; 1.9; 1.5; 0.4; -1.0; -1.4; -1.8 - Current account deficit, excluding interest payments (2006–2014): 2.0; 3.3; 8.0; 4.9; 4.6; 3.4; 2.5; 2.5; 2.4 - Net non-debt creating capital inflows (negative) (2006–2014): -4.4; -3.9; -6.7; -4.4; -3.9; -3.8; -3.9; -4.0; -3.8 - External debt-to-exports ratio (in percent) (2006–2014): 78.7; 86.7; 97.4; 122.6; 129.1; 127.6; 121.3; 116.4; 109.7 - Gross external financing need (in billions of US dollars) (2006–2014): 2.4; 3.0; 5.7; 4.1; 4.1; 4.0; 3.8; 4.3; 4.6 - Gross external financing need (in percent of GDP) (2006–2014): 6.8; 7.3; 12.4; 9.0; 8.7; 7.7; 6.7; 7.0; 7.0 Key macroeconomic assumptions underlying baseline (selected series) - Real GDP growth (in percent) (2006–2014): 10.7; 8.5; 5.3; 0.5; 2.5; 6.0; 6.0; 6.0; 6.0 - GDP deflator in US dollars (change in percent) (2006–2014): -4.9; 7.1; 5.5; -1.3; 3.1; 3.2; 2.1; 2.0; 2.0 - Nominal external interest rate (in percent) (2006–2014): 8.0; 8.6; 7.3; 5.4; 5.9; 5.7; 5.6; 6.5; 6.0 - Growth of exports (US dollar terms, in percent) (2006–2014): 10.9; 6.9; -1.8; -15.4; 6.0; 12.4; 9.8; 7.0; 7.1 - Growth of imports (US dollar terms, in percent) (2006–2014): 21.2; 11.7; 15.8; -21.6; 5.1; 6.9; 6.9; 7.3; 7.4 ### Appendix 1 — Debt Sustainability Analysis: Public debt (summary) - Assessment: Despite temporary run-up in public debt due to the crisis, program fiscal policy will result in a declining public debt-to-GDP ratio in the medium-term. - Fiscal path assumptions: - Primary deficit of the consolidated public sector of 0.8 percent of GDP in 2009, gradually moving to a primary surplus of 2 percent of GDP by 2012, and remaining at this level thereafter. - Public debt projections under those assumptions: - Public debt-to-GDP would rise to 40 percent by 2010-11, but fall back to end-2008 level of 35 percent of GDP by 2014. - Maintaining a primary surplus of 2 percent of GDP, and assuming average real GDP growth of 6 percent and inflation around 3 percent, public debt would gradually be 30 percent of GDP by 2020. Key baseline public sector debt figures (in percent of GDP) - Public sector debt (2006–2014): 39.5; 35.8; 35.5; 39.0; 40.3; 40.2; 38.7; 37.1; 35.1 - Foreign-currency denominated share (2006–2014): 20.0; 18.0; 16.5; 17.6; 18.1; 17.6; 16.5; 15.3; 14.1 - Change in public sector debt (2006–2014): 0.0; -3.8; -0.3; 3.5; 1.3; -0.1; -1.5; -1.7; -1.9 - Primary deficit (2006–2014): -0.4; -1.8; 1.3; 4.5; 4.0; 3.0; 2.0; 2.0; 2.0 - Revenue and grants (in percent of GDP) (2006–2014): 16.2; 17.6; 15.8; 14.0; 14.5; 15.3; 15.7; 15.7; 15.7 - Primary (noninterest) expenditure (in percent of GDP) (2006–2014): 15.8; 15.8; 17.1; 18.5; 18.5; 18.3; 17.7; 17.7; 17.7 - Public sector debt-to-revenue ratio (2006–2014): 243.7; 203.2; 224.3; 278.9; 278.1; 262.6; 246.7; 236.0; 223.7 - Gross financing need (in percent of GDP) (2006–2014): 4.6; 3.0; 8.8; 10.6; 12.5; 9.5; 7.6; 7.3; 7.3 - Gross financing need (in billions of U.S. dollars) (2006–2014): 1.6; 1.2; 4.0; 4.8; 6.0; 4.9; 4.3; 4.5; 4.8 Key macro-fiscal assumptions underlying baseline (selected series) - Real GDP growth (in percent) (2006–2014): 10.7; 8.5; 5.3; 0.5; 2.5; 6.0; 6.0; 6.0; 6.0 - Average nominal interest rate on public debt (in percent) (2006–2014): 9.7; 9.9; 10.7; 10.9; 11.3; 11.0; 10.9; 11.3; 11.8 - Inflation rate (GDP deflator, in percent) (2006–2014): 5.4; 5.7; 9.8; 4.0; 7.1; 5.0; 3.5; 3.0; 3.0 - Growth of real primary spending (deflated by GDP deflator, in percent) (2006–2014): 20.8; 8.3; 13.9; 8.7; 2.6; 4.8; 2.5; 6.0; 6.0 - Primary deficit (repeat) (2006–2014): -0.4; -1.8; 1.3; 4.5; 4.0; 3.0; 2.0; 2.0; 2.0 ### Bound tests and shock scenarios (summary) - External debt: - A combined shock to interest rates, real GDP growth and the external current account deficit of 1/4 of a standard deviation around historical averages would bring external debt-to-GDP to 32 percent in 2012 before falling in 2013. - A one-time 30 percent real depreciation in 2010 would increase external debt to 41 percent of GDP and public debt to 50 percent of GDP in that year, but they would fall to 30 and 45 percent respectively by 2014. - Public debt: - A similar combined shock to public debt (interest rates, real GDP and the primary deficit at 1/4 of a standard deviation around historical averages) would bring the public debt-to-GDP ratio to 44 percent in 2013 before beginning to fall in 2014. - Additional bound-test details presented in Appendix Figures: - Individual shocks include permanent one-half standard deviation shocks (figures and scenarios reported in the Appendix Figures). - Alternative scenarios include: baseline, historical averages, combined shocks, non-interest current account shock, growth shock, primary balance shock, interest rate shock, one-time real depreciation of 30 percent, and contingent liabilities shocks. *Source: ANNEX I: SUMMARY OF ANNEXES (IMF staff report content as provided).* ### 1. After emerging from the 2003 financial crisis as one of the fastest growing economies ### _cr10135 - 1. After emerging from the 2003 financial crisis as one of the fastest growing economies ### Recent macroeconomic developments (2008–2009) - 2008 shocks and outcomes: - Sharp deterioration in the terms of trade in the first half of 2008 due to falling nickel and rising food and energy prices. - External current account deficit and inflation increased sharply in early 2008. - Fiscal position deteriorated mostly due to measures to alleviate shocks for vulnerable groups, generating higher energy and food subsidies. - Monetary policy was tightened to address emerging inflationary pressures. - In the second half of 2008 the global financial crisis hit: bank lending came to a halt and international trade slowed. - Growth slowed to 5.3 percent for 2008 (compared to almost 9 percent for 2007). - Inflation fell to 4.5 percent in 2008, after reaching a high of 15 percent year-on-year in August 2008. - The exchange rate depreciated moderately by 3.5 percent against the US dollar in 2008. - 2009 developments: - Growth reached 1.4 percent in the first half of 2009, compared to a fall of 1 percent in Latin America as a whole, mainly due to expansion of agriculture. - Inflation decelerated to –0.5 percent year-on-year in August 2009; core inflation remained around 5 percent. - Policy interest rate (overnight) was lowered by 550 basis points to 4 percent in the first eight months of 2009. - Reserve requirements were lowered to promote bank lending; bank lending began to recover in Q2 2009. - Tax revenues fell by 11 percent in the first semester of 2009. - Primary expenditure fell by more than 10 percent compared to 2008 in the first semester of 2009. - Consolidated public sector primary balance for the first half of 2009 was zero. - External current account deficit narrowed to around 3.5 percent of GDP on an annual basis in the first half of 2009 (from 10 percent of GDP in 2008). - International reserves fell by about $150 million (about 6 percent) in the first half of 2009. - Nominal exchange rate depreciated by about 3 percent in the first half of 2009. ### Medium-term macro-framework (2009–2012) — objectives and projections - Program objectives: - Implement counter-cyclical policy: expansionary fiscal stance and accommodative monetary position in the short-run, with gradual fiscal consolidation starting mid-2010. - Implement structural reforms to increase potential growth and sustain expansion. - Structural agenda (main elements): - Institutional reforms to strengthen public financial management and adopt a medium-term expenditure framework. - Improve tax collections via better tax administration, enforcement of fuel tax legislation, and limiting tax exemptions and incentives. - Electricity sector reform to improve distribution efficiency, eliminate indiscriminate subsidies, and ensure financial viability. - Monetary and financial sector reforms including: - Technical adjustments to the ongoing recapitalization of the central bank through amendments to the law while maintaining the spirit of the original draft. - Enhancing banking supervision. - Implementation of an inflation targeting framework. - Strategy for local debt markets and public debt management to improve access to longer-term financing and lower cost of finance. - Growth and inflation projections: - Output growth estimated at 0.5 to 1.5 percent in 2009. - Recovery to 2.5-3.5 percent in 2010 as fiscal stimulus takes effect. - Real GDP growth expected to recover to its potential of 6 percent in 2011 and beyond. - Inflation for 2009-10 expected to remain within the central bank target range of 6-7 percent, falling gradually to 3 percent over the medium-term. - External sector projections: - External current account deficit expected to fall to around 6 percent for 2009-10. - Medium-term external current account deficit expected to fall gradually to around 4 percent of GDP. - Public debt and fiscal targets: - Program aims for a primary fiscal deficit of the consolidated public sector of 0.8 percent of GDP in 2009, consistent with an overall deficit of 4.5 percent of GDP. - For 2010, consolidated primary fiscal balance targeted at zero. - Primary surplus of the combined public sector targeted at 1 percent of GDP in 2011 and 2 percent of GDP in 2012 and beyond. - Overall public debt expected to increase from 35 percent of GDP in 2008 to 40 percent of GDP in 2011, then fall to 35 percent of GDP by 2014 and continue declining thereafter. ### Fiscal policy for 2009–2010 (measures and financing) - Monitoring and coordination: - Government to establish an inter-institutional task force with staff from the Central Bank, the Ministry of Finance, and the Ministry of Economy to monitor program implementation. - 2009 fiscal stance and composition: - Countercyclical fiscal policy: loosening of expenditures (predominantly capital and social). - Increase fiscal deficit of central government by about 1.2 percent of GDP (from 1.9 percent of GDP in the original budget) to 3.1 percent of GDP in 2009. - Primary fiscal balance to move from a surplus of 0.6 percent of GDP in the 2009 budget to a primary deficit of about 1.1 percent of GDP in the program. - Estimated fiscal impulse of about 0.9 percent of GDP for 2009 (excluding interest payments and transfers related to the energy sector). - 2010 target: overall deficit of central government of 2.6 percent of GDP, consistent with a primary deficit of 0.4 percent of GDP. - Revenue measures (expected yields and actions): - Rationalization and better implementation of Law 112-00 on hydrocarbon taxation and Law 557-05 (article 23) to improve tax collections and transfer administration to DGII — expected yield 0.2 percent of GDP. - Additional revenue-enhancing measures could yield 0.3 percent of GDP a year and include: - Transfer to DGII collection of taxes under Law 112-00 on fossil fuels until new hydrocarbon law approved. - Control of underinvoicing and contraband of fuel products via an inter-institutional committee (Decree 369-09). - Introduction of an information system (impresoras fiscales) to register cash transactions in commercial establishments. - Simplification of tax procedures for small and medium-sized enterprises. - Review and elimination of tax exemptions that do not conform with objectives of the legislation. - Expenditure priorities and targets: - Prioritize public investment and social spending. - Central government wages and salaries expected to decline gradually after reaching about 4 percent of GDP in 2009. - Transfers to CDEEE reduced from 2.7 percent of GDP in 2008 to 1.1 percent of GDP in 2009 and no more than 0.8 percent of GDP in 2010. - Capital spending targets: 4 percent of GDP in 2009 and 5 percent in 2010. - Financing requirements and composition: - 2009 gross public sector borrowing requirement about US$2.8 billion, or around 6 percent of GDP (US$700 million higher than original budget). - 2009 planned multilateral financing: US$350 million from the World Bank, US$450 million from the IDB, and US$300 million from IMF resources for the budget. - Complementary financing for 2009: US$250 million from Petrocaribe and around US$550 million of project financing; remainder from domestic bank loans and domestic bond market. - 2010 gross public sector borrowing requirement about US$2.6 billion, or around 5.5 percent of GDP. - 2010 financing mix: project financing US$700-800 million; multilateral budgetary support some US$550 million (US$250 million from IDB, US$150 million from World Bank, and US$150 million from IMF); Petrocaribe US$240 million; expected US$100 million from sale of state assets; planned international bond placement US$500-600 million; remainder from domestic bank loans and domestic bond market. ### Monetary and exchange rate policy (2009–2010) - Monetary stance: - Central bank to maintain an accommodative monetary policy stance to support fiscal expansion while safeguarding inflation objective of 6-7 percent for 2009-10. - Limited scope for further monetary easing after 550 basis points reduction to 4 percent. - Exchange rate and reserves: - Managed floating exchange rate regime to be maintained. - Gross international reserves reached a record level in 2007, fell significantly in 2008 and early 2009. - Reserves to be replenished gradually; by end-2010 expected to recover the level of 2007. - Authorities consider programmed reserve accumulation consistent with very limited FX market intervention to avoid undue pressures on exchange rate as economy recovers. - Credit and monetary programming: - Short-term program does not contemplate using traditional limits on net domestic assets to avoid restraining central bank support for bank credit growth. - Traditional programming ceiling on net domestic assets to be reincorporated as recovery takes hold in second half of 2010. - Monetary program envisions relatively large growth of currency issue in 2009 to satisfy banks’ demand for liquidity. - Private sector credit expected to grow around 5 percent per year for 2009-10, before recovering to historical levels subsequently. ### Structural reforms for 2009–10 (objectives and main measures) - Overall objective: - Safeguard medium-term fiscal sustainability while strengthening institutional framework for financial stability and sustainable growth. - Government seeks to reduce debt-to-GDP ratio to the 25-30 percent of GDP range in the medium-term; requires sustained primary surpluses on the order of 2 percent of GDP for the combined public sector. - Tax administration and public financial management: - Higher integration between DGII and Customs for information exchange. - No planned changes in tax rates to achieve fiscal objective. - Structural benchmark: design of a tax administration strategy to be developed with IMF technical assistance by March 2010. - Measures to strengthen institutional capacity of tax and customs authorities, audit and control procedures, and a plan to rationalize tax exemptions. - Improve budgetary procedures and expenditure control at commitment level for all government levels, including: - Include job structure and number of positions in each budgetary chapter. - Better programming and execution of expenditures. - Procedures to monitor budgets of decentralized agencies, municipalities and public enterprises. - Improve coverage and implementation of the single treasury account; consolidate receipts of municipalities and other public institutions as well as international aid and loans. - Exchange loans from multilateral financial institutions in foreign exchange for local currency at the central bank to contribute to strengthening international reserves. - Practice of budgetary advances to be severely restricted. - Financial sector reform (overview): - Strengthen institutional framework for financial stability (detailed financial sector measures begin after page break in source). *Source: _cr10135 - 1. After emerging from the 2003 financial crisis as one of the fastest growing economies* ### 24. Financial sector reform is essential to support the recovery of economic activity by ### _cr10135 - 24. Financial sector reform is essential to support the recovery of economic activity by ### Financial sector reform: objectives and program elements - Purpose: facilitate the intermediation of credit, lower risk and avoid financial turbulence. - Main elements: - Preparation for implementation of an inflation targeting framework by early 2012 to strengthen the credibility of monetary policy and anchor inflationary expectations in the context of a more flexible exchange rate. - Elements include: strengthening an integrated process for macroeconomic monitoring, forecasting, and policy formulation to enable a shift in the basis for policy decisions to the medium-term outlook for inflation and growth. - Strengthened communication strategy to promote understanding of the new policy framework and the basis for policy decisions. - Structural benchmark: June 2010 — formulation of a plan detailing roll-out of these elements over the next two years. - Recapitalization of the central bank (BCRD) in line with the objectives of the BCRD Capitalization Law to enhance the credibility of monetary policy and support adoption of inflation targeting while supporting gradual reduction in reserve requirements and build-up of international reserves. - Government plans to submit to Congress a limited set of amendments to the law including technical adjustments and lengthening recapitalization period from 10 to 15 years. - Strengthening banking supervision consistent with the recent update to the Financial Sector Assessment Program (FSAP). - Structural benchmark: March 2010 — develop a strategy to deepen and widen the implementation of risk-based supervision. - Strategy components: strengthen capacity to assess banks’ management and risk-management policies and practices; develop comprehensive risk profiles of banks; introduce supporting changes to the organizational structure of the Superintendence of Banks. - Objective: preserve and strengthen financial sector resilience, improve compliance with the Basel Core Principles for Effective Banking Supervision, and enable effective consolidated supervision. ### Recovery and growth enhancement: priorities and electricity-sector reform - Policy rationale: adopt measures to safeguard the economic recovery and strengthen growth prospects; key areas include electricity sector reform and measures to reduce the external perception of country risk and the cost of borrowing. - Electricity sector reform program (to be formalized by December 2009 — structural benchmark): - Tariff adjustments and implementation of a more flexible tariff system to cover costs of generation and distribution. - Gradually eliminate the generalized electricity subsidy by 2012 and focus subsidies on the poor. - Reduce technical losses and improve metering to reduce electricity theft. - Improve management of distribution companies. - Create a special account to implement government payments to generation and distribution companies. - Implement an external audit of the finances of the government distribution companies, and the corporate unit. - Develop a plan to invest in new generation and distribution capacity. - Complementary reform: structural benchmark for September 2010 — develop a strategy to strengthen public debt management and the development of local debt markets to enhance access to longer term financing and improve sovereign creditworthiness and credit rating of Dominican Republic sovereign bonds. ### Social safety net measures - Rationale: worsening economic conditions have increased pressures on vulnerable groups, especially the poor and unemployed. - Program commitments: - Increase coverage of the conditional cash transfer program by 70,000 families living in extreme poverty. - Increase the payment to over 45,000 families already covered by the program. - Increase government spending in health and education by 0.75 percent of GDP a year in 2010-12 to: - increase coverage of the public health system to include unemployed and people living in extreme poverty and strengthen preventive medical care; and - increase the number of classrooms and improve maintenance of existing schools. - Structural benchmark: end-December 2009 — increase the permanent coverage of the conditional cash transfer program by 70,000 families living in extreme poverty. ### Other issues - Government has no external arrears. - Government will regularize all outstanding domestic arrears, including those with electricity generators, by using available financial mechanisms before the end of the year. ### Quantitative performance criteria and targets (selected, as reported) - Fiscal targets (cumulative flows from December 2008, in billions of RD$): - Overall balance of the central administration (floor) — performance criteria and program projections: - End-December 2009 (performance criterion) -51.5 - End-March 2010 (performance criterion) -68.0 - End-June 2010 (performance criterion) -83.0 - End-September 2010 (performance criterion) -91.0 - End-December 2010 (performance criterion) -98.5 - Overall balance of the consolidated public sector (floor): - End-December 2009 (performance criterion) -74.5 - End-March 2010 (performance criterion) -97.5 - End-June 2010 (performance criterion) -119.5 - End-September 2010 (performance criterion) -133.0 - End-December 2010 (performance criterion) -147.0 - Monetary targets: - Net international reserves (floor) (in millions of US$): - End-December 2009 (performance criterion) 1815 - End-March 2010 (performance criterion) 1715 - End-June 2010 (performance criterion) 1665 - End-September 2010 (performance criterion) 1715 - End-December 2010 (performance criterion) 1815 - Net domestic assets (ceiling): 65.0 and 80.0 (as listed in the Monetary Targets row) - TMU definitions and measurement rules (selected): - Overall balance of the central government measured from “below the line” as the change in the central government’s net financial position (assets minus liabilities). - Revenues recorded when funds are deposited in the Treasury account; revenues include grants. Central government expenditures recorded on an accrual basis; interest payments recorded on a due basis. - Uses of funds that will not affect the deficit and will be recorded below the line in 2009: - (i) clearance of central government domestic arrears incurred before end-December 2008; - (ii) amortization of loans and bonds; - (iii) bonds issued for the recapitalization of the Central Bank and Banco de Reservas; - (iv) other arrears with suppliers incurred by end-December 2008. - Consolidated NIR definition: gross international reserves less reserve liabilities (including debt with the IMF and short-term foreign-currency-denominated liabilities). Gross international reserves include gold (valued in dollars at end-2008 prices), cash, deposits abroad (excluding funds used as collateral), holdings of SDRs, and the IMF reserve position. - To meet the NIR performance criterion, the 5-day average of daily consolidated NIR values (last five working days of each relevant month) must be above the floor. - Consolidated NIR targets adjusted by surplus (shortfall) in program disbursements up to US$300 million. - Central Bank net domestic assets (NDA) defined as monetary base minus Consolidated NIR; to meet the NDA ceiling the 5-day average of daily NDA values must be below the ceiling. - For accounting, dollar accounts converted to pesos at RD$36.5 per dollar. - External program disbursements (cumulative flows from December 2008, in million US$): - End-October 2009 80 - End-November 2009 519 - End-December 2009 819 - End-May 2010 1079 - End-June 2010 1079 - End-July 2010 1229 - End-December 2010 1244 *Source: _cr10135 - 24. Financial sector reform is essential to support the recovery of economic activity by* ### 5. Targets on the Net Domestic Assets ### 5. Targets on the Net Domestic Assets ### NDA Ceilings (Outstanding stock, In billions of DR$) - End-October 2009 (program projection) 48 - End-November 2009 (program projection) 58 - End-December 2009 (program projection) 68 - End-January 2010 (program projection) 67 - End-February 2010 (program projection) 66 - End-March 2010 (program projection) 64 - End-April 2010 (program projection) 65 - End-May 2010 (program projection) 66 - End-June 2010 (program projection) 67 - End-July 2010 (program projection) 66 - End-August 2010 (program projection) 67 - End-September 2010 (performance criterion) 65 - End-October 2010 (program projection) 70 - End-November 2010 (program projection) 75 - End-December 2010 (performance criterion) 80 ### NDA Adjustment Rules - NDA targets will be adjusted upward (downward) for any increase (decrease) in reserve requirement deposits (encaje) associated with peso deposits at the central bank. - NDA targets will be adjusted downward (upward) by the surplus (shortfall) in program disbursements up to US$300 million. ### Ceiling on the Accumulation of Arrears of Public Electricity Distributors with Generators - The government will regularize all outstanding domestic arrears (as defined in section IA above) with electricity generators using the available financial mechanisms before the end of the year. - Arrears to private energy generating companies are defined as the balance of current invoices for energy sales to electricity distribution companies for which no payment has been made within 45 days following the contractual due date. ### Continuous Ceiling on the Gross Accumulation of Public Sector External Arrears - The central government and any other entity of the nonfinancial public sector, as defined above, as well as the central bank, will not incur new arrears in the payment of their external obligations at any time during the program. - Arrears are defined as a delay in the payment of contractual obligations beyond the grace period set in the respective loan or debt contracts or 30 days in case the grace period is not specified. ### Information Requirements — Daily - Deposits in the banking system, exchange rate in the official and free markets, interest rates on bank loans and deposits, Consolidated NIR, currency in circulation, deposits held by financial institutions at the central bank, excess reserves of the banking sector in local and foreign currency, liquidity assistance to banks, central bank certificates, and all other remunerated liabilities of the central bank. - Deposit of, and liquidity assistance to, troubled institutions, by institution. - Central bank purchases and sales of foreign currency. - Central bank intervention operations in domestic currency, including results of auctions of central bank paper (interest rates, details of bids, including minimum and maximum rates, volumes, and maturities). ### Information Requirements — Monthly - Tax collection and expenditure of the central government, with a lag of no more than two weeks after the closing of each month. - Starting in September 2009, revenue, expenditure, and financing of the nonfinancial public sector, including decentralized agencies and public enterprises of the previous month. - Saving-investment account of the central government. - Net financial position of the central government (as defined in section I.A.) with a lag of no more than two weeks after the end of each month. - Central government’s domestic interest, contractually due in the period and effectively paid, with a lag of no more than two weeks after the end of each month. - Authorizations and stock of administrative debt, including the economic classification of the expenditure that has been financed with such debt, with a lag of no more than two weeks after the end of each month. - Value of outstanding checks issued by the Treasury with a lag of no more than two weeks after the end of each month, starting in September 2009. - Legal measures that affect the revenue of the central government (tax rates, import tariffs, exemptions, etc). - In-kind capital expenditure statistics. - Balance sheet of the central bank, Banco de Reservas, and deposit money banks (cable file). - Balance sheet of the central bank excluding operations related to the recapitalization of the central bank and quasi fiscal. - Quasi-fiscal balance of the central bank. - Stock of central bank certificates, notes and bills each by type of holder. - Maturity of certificates, detailing amortizations in the following 12 months (i.e., following the end of the current month). - Public external debt service for the preceding month and revised monthly projections for the forthcoming year, with a lag of no more than two weeks. - Monthly external public disbursements and revised monthly projections for the forthcoming year, with a lag of no more than two weeks. - Monthly contracting of external public debt and monthly stock of contracted, but not disbursed external public debt, with projections of the stock of debt contracted, but not disbursed for the forthcoming year. - Foreign exchange cash flow of the central bank (la balanza cambiaria). - Electricity sector collections, losses, cash recovery index and central government transfers to the electricity sector, according to the following definitions: - Collection rate: is defined as the ratio between the electricity invoices effectively paid (collected) and electricity invoices issued by electricity distributors in any given period. - Loss rate: is defined as the ratio between electricity lost and electricity purchased by electricity distributors in any given period. Electricity lost is the difference between electricity invoiced and electricity purchased. - Central government transfers to the electricity sector: is the sum of all transfers to the sector from the central government, including remaining PRA subsidies, FETE (Fondo de Estabilización de la Tarifa Eléctrica) and transfers to electricity companies, and all payments related to Bono Luz. - The CDEEE will provide on a monthly basis (with a maximum 21-day lag) information on the arrears the generation companies accumulate with the CDEEE on energy purchases and transmission fees. - Price of each fuel as set in the contracts for the purchase of electricity by each distributor and CDEEE from each producer for the next 6 months for coal and 3 months for other fuels. - Purchases of electricity by each of the three distibutors and CDEEE from each generator. This includes quantity of electricity purchased (in KWh) and the unit price of each fuel charged by type of fuel and the quantity used in electricity generation. In addition report the quantity and unit price of electricity purchased by each distributor and CDEEE in the spot market. ### Information Requirements — Quarterly - Revised balance of payments outturn for the preceding quarter and quarterly projections for the forthcoming year, with a lag of no more than four weeks. - Revised estimates of the stock of short-term and medium- and long-term public external debt, by creditor, at the end of quarter, with a lag of no more than four weeks. - Stock of public sector domestic debt, including public sector debt in the electricity sector. - Stock of avales and any other guarantees or contingent liabilities of the public sector. - Revised estimates of the quarterly disbursements, debt service and stocks of short-term and medium- and long-term private external debt, by debtor, at the end of quarter, with a lag of no more than two weeks. - Stock of public external late payments and arrears (program definition), by debtor and creditor, with details on new arrears incurred in the last month and clearance of old arrears, with a lag of no more than 5 working days. - Stock of domestic arrears, starting with figures for December 2008, with details on new arrears incurred in the period and clearance of old arrears. *International Monetary Fund — Staff Report for the 2009 Article IV Consultation and Request for a Stand-By Arrangement – Informational Annex* ### 2. As of October 2009 the Bank is close to approving a Fiscal Strengthening Program ### _cr10135 - 2. As of October 2009 the Bank is close to approving a Fiscal Strengthening Program ### Bank financing and planned investment projects - The Bank is close to approving a Fiscal Strengthening Program (US$500 million) with additional disbursements in two tranches: - US$300 million in 2009 - US$200 million in 2010 - For 2010 the Bank will work on the preparation of three investment projects: - Second phase of the Program to Support an Agricultural Competitive Transition (US$30 million) - Education Decennial Plan Support Program (US$39 million) - Second phase of a Social Protection Program (US$35 million) - The Bank is in the final stages of designing the IDB Country Strategy for the period 2009-2012. ### General issues and data adequacy for surveillance - Data provision has some shortcomings, but is broadly adequate for surveillance. - The authorities are working to correct weaknesses in their statistical database. - The country has participated in the General Data Dissemination System (GDDS) since November 2005. ### Findings from the 2005 data ROSC and subsequent technical assistance - The statistical system is highly centralized in the Central Bank of the Dominican Republic (BCRD). - Legal framework: - Adequate for monetary and balance of payments statistics - Not adequate for other macroeconomic statistics - Macro statistics generally need closer alignment with current international methodologies; source data need further development. - Statistical techniques are broadly adequate, except: - Significant shortcomings of the consumer price index (weights and reference periods not aligned). - Periodicity and timeliness meet or exceed GDDS recommendations. - Revision analysis and studies are generally absent or not disseminated. ### Real sector statistics - GDP data: - Five STA missions (January 2002 to April 2004) assisted BCRD with quarterly GDP estimates and updating the base year to 1991. - A new series for 1991–2003 was published in July 2004 but was not immediately incorporated into official quarterly GDP figures. - Revised annual and quarterly series for 1991–2005 were released on March 16, 2006. - The revised GDP estimates are, on average, 17 percent higher than the previous ones. - The new base year of 1991 is already outdated; international guidelines recommend updating the base year at least every five years. - CPI data: - CPI weights are based on the 1997–98 household expenditure and income survey and need updating. - The 2005 data ROSC noted needs for appropriate adjustments for seasonal and missing price imputations, changes in product specifications and quality, and new products. - CPI also needs to take into account imputed rent for owner-occupied dwellings and dwellings used by third parties without payment. - Other real sector issues: - Data are not always reported for IFS with required timeliness and have weak coverage of major real sector indicators. - No available series for producer prices and wages (except minimum wages). - Quarterly and annual industrial production data are posted on the central bank’s website. ### Government finance statistics (GFS) - Significant shortcomings identified by April 2002 and August 2005 missions: - Legislation does not clearly define responsibility for collecting, compiling, and disseminating GFS. - Data sources and data collection procedures need further development. - Analytical framework for compiling GFS is not fully aligned with international guidelines. - Lack of formal procedures to coordinate information exchange among GFS compilers. - Absence of an integrated financial management system supporting GFS compilation. - Actions taken: - 2002 mission prepared an action plan and a bridge table between budgetary and GFSM 2001 classifications. - 2005 mission found SSF staff insufficient and GFS coverage incomplete. - April/May 2007 statistics mission assisted BCRD and SSF in improving collection, compilation, and reporting of GFS on accrual and cash bases based on GFSM 2001. - BCRD compiles and disseminates annual GFS data published in the Government Finance Statistics Yearbook. - Regional efforts: - Country participating in a regional harmonization project for Central America, Panama, and the Dominican Republic (CAPDR). - A June 2009 mission provided further assistance and helped improve annual accrual-based data. ### Monetary and financial statistics - Issues affecting monetary statistics reported to WHD: - Lack of sufficient detail for proper sectorization and classification of financial instruments. - Concepts and principles for valuation, classification, and sectorization inconsistent with internationally accepted methodology. - Institutional and instrument coverage not comprehensive. - Reporting system lacks a consistent methodology. - Actions and status: - April 2003 and July 2004 missions began developing an integrated database based on the Monetary and Financial Statistics Manual methodology. - Remaining problems include lack of data on financial cooperatives and offshore operations of resident banks. - The country began reporting monetary data to STA in SRFs in August 2007; SRF-based data used for national publications since July 2009. - SRFs overcome many prior shortcomings but lack of data on financial cooperatives and offshore operations remains. - SRFs developed under a regional harmonization project that ended in December 2008. ### External sector statistics - Balance of payments statistics compiled according to BPM5 since February 1997. - Coverage problems remain for imports, capital transfers, income, and the financial account, causing large errors and omissions. - Three technical assistance missions during 2002–04 assisted BCRD in improving balance of payments statistics and preparing International Investment Position (IIP) data, now available up to 2007. - A follow-up mission in August 2007 focused on sample surveys and techniques to improve compilation of direct investment, portfolio investment, other nonfinancial private sector assets and liabilities, and domestically issued public debt held by nonresidents. - A 15-month action plan with recommendations for improving balance of payments and IIP statistics was prepared in consultation with BCRD. - Compilation of external accounts complies with GDDS in terms of periodicity and timeliness. ### Data dissemination - Authorities publish quarterly reports on economic developments containing preliminary data on: - Real GDP, consumer prices, interest rates, exchange rates, balance of payments, exports and imports, operations of the central government, and the banking system. - Quarterly Bulletin of the BCRD contains more detailed sectoral information but is sometimes published with delays. - BCRD website presents selected data on a relatively timely basis. ### Table of Common Indicators Required for Surveillance (Memo Items as of October 6, 2009) - Exchange Rates - Date of latest observation: Oct 2009 - Date received: 10/2/09 - Frequency of Data: D - Frequency of Reporting: D - Frequency of Publication: M - International Reserve Assets and Reserve Liabilities of the Monetary Authorities - Date of latest observation: Oct 2009 - Date received: 10/2/09 - Frequency of Data: D - Frequency of Reporting: D - Frequency of Publication: M - Reserve/Base Money - Date of latest observation: Oct 2009 - Date received: 9/18/09 - Frequency of Data: D - Frequency of Reporting: D - Frequency of Publication: M - Data Quality – Methodological Soundness: LNO, O, LO, LO - Data Quality – Accuracy and Reliability: LO, O, O, O, LO - Broad Money - Date of latest observation: Oct 2009 - Date received: 9/18/09 - Frequency of Data: M - Frequency of Reporting: M - Frequency of Publication: M - Central Bank Balance Sheet; Consolidated Balance Sheet of the Banking System - Date of latest observation: Oct 2009 - Date received: 9/18/09 - Frequency of Data: M - Frequency of Reporting: M - Frequency of Publication: M - Interest Rates - Date of latest observation: Agust 2009 - Date received: 9/20/09 - Frequency of Data: D - Frequency of Reporting: D - Frequency of Publication: M - Consumer Price Index - Date of latest observation: August 2009 - Date received: 9/19/09 - Frequency of Data: M - Frequency of Reporting: M - Frequency of Publication: M - Data Quality – Methodological Soundness: O, O, O, O - Data Quality – Accuracy and Reliability: O, LNO, LNO, O, LO - Revenue, Expenditure, Balance and Composition of Financing – Central Government - Date of latest observation: June 2009 - Date received: 8/30/09 - Frequency of Data: M - Frequency of Reporting: M - Frequency of Publication: M - Data Quality – Methodological Soundness: LO, NO, LO, LO - Data Quality – Accuracy and Reliability: LNO, O, LO, O, LNO - External Current Account Balance - Date of latest observation: 2008 - Date received: 3/27/09 - Frequency of Data: Q - Frequency of Reporting: Q - Frequency of Publication: Q - Data Quality – Methodological Soundness: O, LO, LO, LO - Data Quality – Accuracy and Reliability: LO, O, LO, LO, NO - GDP/GNP - Date of latest observation: 2009 Q2 - Date received: 9/15/09 - Frequency of Data: Q - Frequency of Reporting: Q - Frequency of Publication: Q - Data Quality – Methodological Soundness: LNO, LO, LNO, LO - Data Quality – Accuracy and Reliability: LNO, LO, LNO, O, LNO - International Investment Position - Date of latest observation: 2008 - Date received: 5/5/09 - Frequency of Data: Q - Frequency of Reporting: I - Frequency of Publication: I ### Statement by the IMF Staff Representative on the Dominican Republic — Recent developments (as of November 9, 2009) - Overall: Recession continues; economic activity remains weak; no pressure on domestic prices; sharp contraction in trade and taxes ongoing. - Aggregate demand: - Non-oil imports fell by almost 25 percent in the first half of 2009 (yoy) and continued to fall at the same rate in the third quarter. - Exports fell by over 35 percent in the first half of 2009 (yoy) and 30 percent in the third quarter. - Electricity consumption was down 8 percent to August 2009 (yoy). - Travel arrivals: fell 3½ percent in the first half of 2009 (yoy), expanded by 1½ percent in the third quarter (yoy). - Inflation: - Headline inflation for October 2009 was 0.2 percent. - 12-month rate: -0.3 percent. - Cumulative inflation in the year: 4.5 percent. - Monetary policy: - Monetary council met on October 30 and decided to leave interest rates unchanged. - Growth of monetary aggregates and private credit remains low. - Foreign exchange market: - Dominican peso stayed flat with respect to the U.S. dollar in October 2009, after having depreciated only 3 percent in the previous 12 months. - Central Bank had virtually no intervention in October (net sales of US$75 million). - Fiscal position: - Preliminary information indicates overall revenues fell by 10 percent in the period January-September 2009 (yoy). - Fall in revenues matched by similar fall in expenditures: current expenditure down 2 percent and capital expenditure down over 30 percent. ### Debt issues (Statement by IMF Staff Representative) - No sovereign arrears to external creditors. - Authorities are carrying out an inventory of claims to ensure accuracy of the debt reporting system. - Clearance of arrears: - In October 2009, authorities settled arrears to external creditors for some US$16 million outstanding as of end-September 2009. - Payments: about US$2½ million mostly to suppliers and about US$13½ million reconciled and securitized with PDVSA following the principles of the 2005 Caracas accord. - Potential claims on the government: - An American company has threatened to sue the Dominican government in U.S. courts for US$100 million for breach of a contract signed in 2002 on a housing project never carried out. - Heir of a former owner of several companies expropriated in the early 1960s during the Trujillo administration is seeking compensation; claimant asserts value could be over US$1 billion. - Debt verification: - Authorities conducting an exercise to verify amounts in debt reporting systems. - System shows unverified claims for about US$6 million to several foreign suppliers of the public electricity corporation (CDEEE) from the late 1980s with incomplete and partly inconsistent records. - If verification determines these claims are not valid, staff will propose to remove them from the debt reporting system. *Source: _cr10135 - 2. As of October 2009 the Bank is close to approving a Fiscal Strengthening Program* ### 0.3 percent year-over-year in October 2009 as the supply shocks of last year have unwound. ### _cr10135 - 0.3 percent year-over-year in October 2009 as the supply shocks of last year have unwound. ### Overview - Inflation: 0.3 percent year-over-year in October 2009 as the supply shocks of last year have unwound. - External current account deficit: estimated to be around 6 percent of GDP in 2009, about 4 percentage points lower than in 2008, as imports have fallen more than exports, tourism and remittances. - Banking system: has withstood the global crisis and remains liquid, well-capitalized and profitable. ### Macroeconomic developments and outlook - Real GDP growth: 0.5 (2009 projection, table shows "0.5-1.5" for 2009); projections show 2-3 (2010), 6.0 (2011), 6.0 (2012). - Consumer price index (period average): 1.5-2.5 (2009), 6-7 (2010), 5.0 (2011), 3.5 (2012). - Consumer price index (eop): 6-7 (2009), 6-7 (2010), 4.0 (2011), 3.0 (2012). - Exchange rate (RD$/US$ - period average): 33.7 (2006), 33.3 (2007), 34.6 (2008). - Unemployment rate: 16.4 (2006), 15.6 (2007), 14.0 (2008). - Current account (in percent of GDP): -3.6 (2006), -5.1 (2007), -9.7 (2008), -6.2 (2009), -6.0 (2010), -4.8 (2011), -4.0 (2012). ### Fiscal and monetary policy response - Central Bank policy rate: lowered by 550 basis points to 4 percent during 2009. - Reserve requirements: lowered by 250 basis points to 17.5 percent. - Fiscal developments: following a relaxed stance in 2008, fiscal policy was tight in the first 3 quarters of 2009. - Tax revenues: decline of 10 percent to September (with respect to January–September 2008). - Consolidated public sector deficit: about 2 percent of GDP during the first three quarters of 2009, or around 1 percentage point of GDP lower than during the first three quarters of 2008. - Executive guidance: monetary policy flexible/accommodative in 2009, limited scope for further interest rate cuts, authorities urged to remain vigilant and withdraw liquidity gradually as private credit picks up. ### Structural impediments and public finances - Fiscal risks from structural impediments in fiscal and electricity sectors. - Revenue concerns: decline in tax revenues observed in 2008-09 (of more than 10 percent) may be partly related to undue use of tax exemptions contained in competitiveness laws. - Electricity sector: state-owned electricity distribution companies have large losses; untargeted subsidies to cover these losses absorb over one percent of GDP in 2009; quality of service remains very poor. - Public debt and balances (selected table entries): - Total public debt: 39.5 (2006), 35.8 (2007), 35.5 (2008), 39.0 (2009), 40.3 (2010), 40.2 (2011), 38.7 (2012). - Consolidated public sector balance: -3.1 (2006), -1.7 (2007), -4.6 (2008), -4.5 (2009), -4.0 (2010), -3.0 (2011), -2.0 (2012). - Central government primary balance: 0.2 (2006), 1.7 (2007), -1.5 (2008), -1.1 (2009), -0.4 (2010), 0.6 (2011), 1.6 (2012). - Total revenues (including grants): 16.2 (2006), 17.6 (2007), 15.8 (2008), 14.0 (2009), 14.5 (2010), 15.3 (2011), 15.7 (2012). - Primary spending: 16.0 (2006), 15.8 (2007), 17.4 (2008), 15.1 (2009), 14.9 (2010), 14.7 (2011), 14.1 (2012). - Interest expenditure: 1.4 (2006), 1.6 (2007), 1.7 (2008), 2.0 (2009), 2.2 (2010), 2.2 (2011), 2.2 (2012). - Quasi-fiscal balance of the central bank: -2.2 (2006), -1.8 (2007), -1.3 (2008), -1.4 (2009), -1.4 (2010), -1.4 (2011), -1.4 (2012). ### IMF-supported program: Stand-By Arrangement (SBA) - SBA approval: Executive Board approved a 28-month Stand-By Arrangement on November 9, 2009. - SBA amount: SDR 1,094.5 million (about US$1.7 billion); 500 percent of quota requested. - Program objectives: - Short-term: conduct countercyclical policies at the beginning of the program (including last quarter 2009 and first half 2010) to mitigate the drastic economic downturn. - Medium-term: implement actions to address debt and fiscal sustainability issues starting mid-2010, and pursue an ambitious structural reform agenda. - Expected effects: catalyze financing from multilaterals, bolster confidence, create space for adequate fiscal response. - Program design and conditionalities: - Countercyclical fiscal stimulus in 2009-10, including full play of automatic stabilizers, targeted to investment projects with high social returns and strengthening social safety nets as financing constraints ease. - Gradual fiscal consolidation beginning in the second half of 2010 to ensure sustainability. - Measures to improve revenue collection and eliminate untargeted electricity subsidies. - Finalization and implementation of a comprehensive plan to address structural impediments in the electricity sector. - Monetary policy: remain flexible to respond to liquidity needs, build international reserves, gradually make the exchange rate more flexible, and move to a full-fledged inflation targeting regime in the medium term. - Central bank recapitalization plan to enhance credibility. ### Executive Board assessment and recommendations - Overall assessment: Directors agreed with staff appraisal; noted significant weakening of the Dominican economy in 2009, subdued inflation, and a narrowed current account deficit. - Support for policies: - Supported temporary fiscal stimulus in 2009-10 while financing constraints are relieved. - Called for fiscal relaxation as additional external financing is secured, with a shift to fiscal consolidation beginning in the second half of 2010. - Urged prompt work on planned structural measures, in particular improvements in tax administration with Fund technical assistance, and elimination of untargeted electricity subsidies. - Emphasized need to finalize and implement a comprehensive plan for electricity sector structural impediments. - Monetary and financial sector recommendations: - Welcomed flexible monetary policy and shift to accommodative stance in 2009. - Noted limited scope for further policy rate reductions and banks' high liquidity preference; urged vigilance and readiness to withdraw liquidity gradually as private credit picks up. - Commended progress in strengthening the central bank and stressed importance of recapitalization plan. - Welcomed commitment to a flexible exchange rate and eventual move to inflation targeting once institutional framework is in place. - Encouraged continued monitoring of the banking system, advancement of risk-based consolidated bank supervision and regulation, and formulation of strategies for domestic capital market development and debt management. ### Key quantitative indicators (selected, preserving source precision) - Inflation: 0.3 percent year-over-year in October 2009. - Policy interest rate reduction: 550 basis points to 4 percent (2009). - Reserve requirement reduction: 250 basis points to 17.5 percent (2009). - Decline in tax revenues: 10 percent to September (January–September 2008 vs January–September 2009). - Untargeted electricity subsidies: absorb over one percent of GDP in 2009. - Stand-By Arrangement: SDR 1,094.5 million (about US$1.7 billion); 28-month duration; approved November 9, 2009. - Oil price (WEO): 64.3 (2006), 71.1 (2007), 97.0 (2008), 61.5 (2009), 76.5 (2010), 79.5 (2011), 81.0 (2012). - Gross official reserves: 2,251 (2006), 2,946 (2007), 2,662 (2008), 2,566 (2009), 2,942 (2010), 3,914 (2011), 4,506 (2012). - Net international reserves: 1,788 (2006), 2,395 (2007), 2,165 (2008), 1,815 (2009), 1,815 (2010), 2,296 (2011), 2,833 (2012). *Summary based solely on the provided IMF content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10135.pdf_